Chapter 9: Contracts – Consideration, Capacity, and Legality

1. Chapter 9: Contracts – Consideration, Capacity, and Legality

2. Learning Objectives • What is consideration? What is required for consideration to be legally sufficient? • In what circumstances might a promise be enforced despite a lack of consideration? 

3. Learning Objectives • Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract? • Under what circumstances will a covenant not to compete be enforceable? When will such covenants not be enforced? 

4. Learning Objectives • What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced?

5. Consideration • Generally, consideration must have: • “Legally Sufficient Value”  and • a “Bargained-for-Exchange.” 

6. Consideration • Legally Sufficient Value can mean: • Promise, • Performance, or • Forbearance. 

7. Consideration • Bargained-for-Exchange: must provide basis for the bargain. • Something of legal value (a promise, or a performance) must be exchanged between the parties. • The promise must be either legally detrimental to the promisee, or legally beneficial to the promisor.

8. Consideration • Adequacy of Consideration: • Courts typically will not consider. • Law does not protect a person from entering into an unwise contract. • Cases of “shockingly inadequate consideration” may raise a red flags, and be ruled unconscionable.

9. Consideration • Agreements That Lack Consideration. • Preexisting Duty. • Promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. • Unforeseen Difficulties. • Recession and New Contract.

10. Consideration • Agreements That Lack Consideration. • Past Consideration: no consideration because the bargained-for exchange element is missing.

11. Consideration • Agreements That Lack Consideration. • Illusory Promises: promisor has not definitely promised to perform because consideration is lacking, and unenforceable.

12. Consideration • Settlement of Claims. • Accord and Satisfaction. • Settlement for lessor amount; debt must be in dispute. • Liquidated Debts: debt is certain, accord and satisfaction cannot occur. • Unliquidated Debts: amount not settled.

13. Consideration • Settlement of Claims. • Release: Good faith, signed writing, consideration. • Covenant Not to Sue: does not always bar further recovery.

14. Promissory Estoppel • Promissory Estoppel (“detrimental reliance”): • Doctrine applies when a person relies on the promise of another to her legal detriment. • Promisor is “estopped” (precluded) from revoking the promise. 

15. Consideration • Promissory Estoppel. Elements: • Must be definite promise. • Promisee must justifiably rely on the promise. • Reliance is substantial. • Justice will be served by enforcing promise. 

16. Consideration • Promissory Estoppel. • Application of the Doctrine. • CASE 9.1 Harvey v. Dow (2011). What actions or words did Teresa rely on to her legal detriment?

17. Contractual Capacity • Minors: at 18 years, a person is emancipated, and has the legal capacity to enter into any contract that an adult can. • However, a contract entered into by a minor is voidable at the option of that minor, and can be disaffirmed. 

18. Contractual Capacity • Minors. • Disaffirmance. • A contract can be disaffirmed at any time during minority, or for a reasonable period after minor is emancipated. • Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.

19. Contractual Capacity • Minors. • Ratification: when minor reaches the age of majority, he can ratify a contract created while minor. • Parents’ Liability: generally, parents are not liable for minors, except for necessaries.

20. Contractual Capacity • Intoxication. • Lack of capacity at the time the contract is being made. Contract is either voidable or valid, depending on circumstances. • Disaffirmance (voidable). • Ratification: after ‘sobering up.

21. Contractual Capacity • Mental Incompetence. • Void: person is adjudged mentally incompetent by a court of law and a guardian has been appointed. 

22. Contractual Capacity • Mental Incompetence (cont’d). • Voidable: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. 

23. Contractual Capacity • Mental Incompetence (cont’d). • Valid: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).

24. Legality • A contract must be formed for a legal purpose. • A specific clause in contract can be illegal, but rest of contract can be enforceable. • Contract to commit a tortious act is illegal.

25. Legality • Contracts Contrary to Statute. • A contract must be formed for a legal purpose. • A specific clause in contract can be illegal, but rest of contract can be enforceable. • A contract to commit a tortious act is illegal.

26. Legality • Contracts Contrary to Statute. • Any contract prohibited by federal or state statutory law is illegal and therefore void (never existed). • Contracts to Commit a Crime. • Contracts for Usury.

27. Legality • Contracts Contrary to Statute. • Gambling: distribution of property based on chance among persons who have paid valuable consideration. • Licensing Statutes: contract’s enforceability depends on purpose. • CASE 9.2 Sturdza v. United Arab Emirates (2011). Do you think this decision was fair?

28. Legality • Contracts Contrary to Public Policy. • Contracts contrary to public policy are void. • Contracts in Restraint of Trade are generally void. • Exception: Covenant not to Compete and Sale of an Ongoing Business. • Exception: Covenant Not to Compete in Employment.

29. Legality • Unconscionable Contracts or Clauses. • Procedural Unconscionability: inconspicuous print or legalese. • Depends on a party’s lack of knowledge or expertise. • Substantive Unconscionability. • Contracts are oppressive or overly harsh; that deny a remedy for nonperformance.

30. Legality • Unconscionable Contracts or Clauses. • Substantive Unconscionability. • CASE 9.3 Lhotka v. Geographic Expeditions, Inc. (2010). Why was the arbitration clause unenforceable?

31. Legality • Exculpatory Clauses. • Release a party from liability in the event of monetary or physical injury – no matter who is at fault. • Enforceable when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct.

32. Legality • The Effect of Illegality. • Generally, an illegal contract is void. • Both parties are considered to be at fault, and neither party has any rights or duties. • Courts are not generally concerned about unjust enrichment in an illegal contract.

33. Legality • The Effect of Illegality. • Justifiable Ignorance of the Facts. • If one party is ‘innocent’, she can recover if there has been unjust enrichment. • Likewise, if an innocent party has fully performed, courts may enforce the contract against the other party.

34. Legality • The Effect of Illegality. • Members of Protected Classes. • When a statute protects a certain class of people, a member of that class can enforce the contract, even though the other party cannot.

35. Legality • The Effect of Illegality. • Withdrawal from an Illegal Agreement. • If the contract is executory, a party can withdraw from the contract, and recover the performance or its value. 

36. Legality • The Effect of Illegality. • Severable, or Divisible, Contracts. • Distinct parts that can be performed separately, with separate consideration for each part. • Fraud, Duress, or Undue Influence. • Party to an illegal contract may be able to recover if wrongfully induced.