Legality, Consent, and Writing

1. Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide. CHAPTER 10 Legality, Consent, and Writing

2. Quote of the Day “A verbal contract isn’t worth the paper it’s written on.” Samuel Goldwyn, Hollywood producer

3. Legality • A contract that is illegal is void and unenforceable. For example… • A gambling contract is illegal unless it is specifically authorized by state statute. • A court will not assist either party in an illegal agreement, even if its refusal leaves one party clearly shortchanged.

4. Restraint of Trade • To be valid, an agreement not to compete must be ancillary to a legitimate bargain. • Sale of a Business • When a noncompete agreement is ancillary to the sale of a business, it is enforceable if reasonable in time, geographic area, and scope of activity. • Employment • A noncompete clause in an employment contract is generally enforceable only to the extent necessary to protect trade secrets, confidential information and customer lists developed over an extended period.

5. Exculpatory Clauses Part of a contract that attempts to release you from liability for injury to another party. • Generally unenforceable when • it attempts to exclude an intentional tort or gross negligence. • the affected activity is in the public interest, such as medical care, public transportation, or some essential service. • the parties have greatly unequal bargaining power. • it is not clearly written and readily visible.

6. Unconscionable Contracts • An unconscionable contract is one that a court refuses to enforce because of fundamental unfairness. • The two factors that most often led a court to find unconscionability were: • oppression -- meaning that one party used its superior power to force a contract on the weaker party; and • surprise --meaning that the weaker party did not fully understand the consequences of its agreement.

7. Capacity • Capacity is the legal ability to enter into a contract. • Minors (under age 18) and those with mental impairment usually lack capacity. • A voidable contract may be canceled by the party to the contract who lacks capacity. • In some cases, lack of capacity creates a void contract.

8. Minors • Disaffirmance • A minor generally may disaffirm a contract; that is, he may notify the other party he refuses to be bound by the agreement. • The minor also has the option of filing a suit to rescind the contract, that is, to have a court formally cancel it. • Restitution • A minor who disaffirms a contract must return the consideration he has received, to the extent he is able.

9. Mentally Impaired Persons • Definition • A person with mental illness or defect, who is unable to understand the nature and consequences of a transaction. • Generally creates only a voidable contract. • Intoxication • When an intoxicated person makes a contract, it is voidable.

10. Misrepresentation and Fraud • Innocent misrepresentation • means the owner believes the statement to be true and has a good reason for that belief. • Fraudulent misrepresentation • means the owner knows that the statement is false.

11. Misrepresentation and Fraud • To rescind a contract based on misrepresentation or fraud, a party must show three things: • (1) there was a false statement of fact; • Puffery (exaggerated “sales talk”) is not a statement of fact. • (2) the statement was fraudulent or material; and • (3) the injured person justifiably relied on the statement.

12. Plaintiff’s Remedy for Misrepresentation or Fraud • If the maker’s statement is fraudulent, the injured party generally has a choice of rescinding the contract or suing for damages.

13. Special Problem: Silence • Nondisclosure of a fact is misrepresentation only when disclosure is necessary: • To Correct a Previous Assertion • To Correct a Basic Mistaken Assumption • To Correct a Mistaken Understanding about a Writing (such as a deed) • In A Relationship of Trust • When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly.

14. Mistake -- Bilateral • A bilateral mistake occurs when both parties negotiate based on the same factual error. • If the parties contract based on an important factual error, the contract is voidable by the injured party. • Conscious Uncertainty • No rescission is allowed where one of the parties knows she is taking a risk.

15. Mistake -- Unilateral • Sometimes only one party enters a contract under a mistaken assumption, a situation called unilateral mistake. • to rescind for unilateral mistake, a party must demonstrate that she entered the contract of a basic factual error and that either: • (1) enforcing the contract would be unconscionable or • (2) the nonmistaken party knew of the error.

16. The Statute of Frauds • Many agreements are unenforceable, unless it, or some memorandum of it, is in writing and signed. • Agreements that must be in writing are those: • For any interest in land • That cannot be performed within one year • To pay the debt of another • Made by an executor of an estate • Made in consideration of marriage; and • For the sale of goods over $500

17. Agreement for Interest in Land • A contract for interest in land must be in writing to be enforceable. • Exception: Full Performance by the Seller • Exception: Part Performance by the Buyer • the buyer of land may be able to enforce an oral contract if she paid part of the price and either entered the land or made improvements to it.

18. Agreements That Cannot Be Performed Within One Year • Unenforceable unless in writing. Promise to Pay Debt of Another • When one person agrees to pay the debt of another as a favor to that debtor, it is called a collateral promise and must be in writing.

19. Promise Made by an Executor of an Estate • An executor’s promise to use her own funds to pay a debt of the deceased must be in writing to be enforceable. Promise Made in Consideration of Marriage • Unenforceable unless in writing.

20. What the Writing Must Contain • The contract or memorandum must be signed by the defendant, and • It must state with reasonable certainty: • the name of each party • the subject matter of the agreement, and • all of the essential terms and promises.

21. Sale of Goods -- UCC §2-201(1) - The Basic Rule • A contract for sale of goods worth $500 or more is not enforceable unless there is some writing, signed by the defendant, indicating that the parties reached an agreement.

22. Electronic Contracts • In this age of Internet commerce, the rules of contracting have to be interpreted in light of the technology. • Is an e-mail sufficient to be a writing? • Is an electronic signature sufficient? • However, the essential questions are still the same: • Did the parties intend to make a deal? • What were the terms? • Is there evidence that they both agreed?

23. Electronic Contracts • The Uniform Electronic Transaction Act (UETA) – adopted in 48 states • declares that a contract or signature may not be denied enforceability simply because it is in electronic form. • The Electronic Signatures in Global and National Commerce Act (E-Sign). • Federal statute, also declares that contracts will not be denied enforcement simply because they are in electronic form, or signed electronically.

24. Parol Evidence • Parol evidence refers to anything (apart from the written contract itself) that was said, done, or written before the parties signed the agreement or as they signed it. • Integrated contract means a writing that the parties intend to be their final, complete expression of their agreement.

25. The Parol Evidence Rule • When two parties make an integrated contract, neither one may use parol evidence to contradict, vary, or add to its terms.

26. “The parties to disputes very often could have avoided litigation with a few carefully crafted sentences. It is worth the time and effort to write them.”