Contracts Capacity and Legality The Statute of Frauds Drafting Tips Class 2
Legality of the Contract • A contract that is illegal is void and unenforceable. • A contract may be illegal because • It violates a federal or state statute • It violates public policy • Generally, a court will not intercede to assist either party to an illegal agreement – even if its refusal leaves one party obviously shortchanged.
Surrogate Parenting A surrogate parenting contract entered into for compensation, whether executed in the state of Washington or in another jurisdiction, shall be void and unenforceable in the state of Washington as contrary to public policy. RCW 26.26.240
Health Club Contracts Any contract for health studio services which does not comply with the provisions of [RCW 19.142] or in which a buyer waives any provision of [RCW 19.42] is void and unenforceable as contrary to public policy. RCW 19.142.090
Motor Vehicle Dealers Notwithstanding the provisions of a franchise agreement or other provision of law to the contrary, the venue for a cause of action . . . in which the parties are a manufacturer or distributor and one or more motor vehicle dealers, the venue is the state of Washington. . . . [A]ny provision . . . that requires [otherwise] is void and unenforceable. RCW 46.96.240
Gambling • Contracts on gambling debts • A gambling contract is illegal unless it is specifically authorized by statute. • Unless authorized by statute, a contract on a gambling debt is unenforceable.
Gambling in Washington • Gambling is authorized or criminalized by RCW 9.46. • Certain kinds of gambling activities are authorized. • Some Bingo • Fishing Derby • Charitable chance • State lottery • Tribal Gaming
Non-Contractual Remedies • Some gambling losses are recoverable. All persons losing money or anything of value at or on any illegal gambling games shall have a cause of action to recover from the dealer or player winning, or from the proprietor for whose benefit such game was played or dealt, or such money or things of value won, the amount of the money or the value of the thing so lost. RCW 4.24.070
Insurance • Life insurance • Generally anyone taking out a life insurance policy on the life of another person must have an insurable interest in that person. • The reason these policies are against public policy is that they are considered gambling. The objection “was not the temptation to murder but the fact that such wagers came to be regarded as mischievous kind of gaming.” In re Estate of D’Agosto, 134 Wn. App. 390 (2006)
Usurious Contracts • Usury laws prohibit charging excess interest on loans. • Excess interest is generally defined in the statute.
Usury in Washington • Washington’s usury statute is RCW 19.52. • Although limits are set on certain loans, many others are exempt from the usury rates. • RCW 19.52.030 permits enforcement of usurious contracts, but only allows the creditor to collect the principal – less twice the interest paid and minus the accrued but unpaid interest. Attorneys fees and costs also are assessed against the creditor.
Licensing Statutes • If a license is required in order to protect the public from unauthorized practitioners, any contract made by the unlicensed individual is unenforceable. • If the requirement is merely to raise or regulate government revenues (such as licensing of liquor stores), then a contract with an unlicensed individual is generally enforceable.
Public Policy Violations • Sometimes there is no statute that prohibits offense contract terms. • Court may refuse to enforce a contract if, based on common law principles, it violates public policy.
Restraint of Trade • Restraint of Trade • Free trade is the basis of the American economy and any bargain not to compete is suspect and, generally, unenforceable. There are two common exceptions: • Sale of a business • Employment
Sale of a Business • The buyer of an existing business may ask the seller to agree not to compete with the business. This agreement is enforceable if it is reasonable: • In Time • Geographic Area • Scope of Activity
Employment Clauses • A noncompetition clause in a contract for employment is generally enforceable if it is essential to the employer, fair to the employee, and harmless to the general public.
Washington Law • Washington courts will enforce noncompete clauses if they are validly formed (i.e., supported by consideration), are of legitimate concern to employer’s business, and are reasonable as to • Time • Geographic limits • Scope of Activity Labriola v. Pollard Group, Inc., 152 Wn.2d 828 (2004)
Unconscionable Contracts • An unconscionable contract is one that the court refuses to enforce because of fundamental unfairness. • A contract is unconscionable if it one that “no man in his senses and not under delusion would make . . . and no honest and fair man would accept.”
Washington Law • Washington recognizes two categories of unconscionability in contracts. • Substantive unconscionabilityalone will invalidate a contract or term of a contract. • The court has not yet decided whether procedural unconscionability (a contract of adhesion) – on its own – will support a claim of unconscionability. Adler v. Fred Lind Manor, 153 Wn.2d 331 (2004)
Substantive Unconscionability • Substantive unconscionability involves those cases where a clause or term in the contract is alleged to be one-sided or overly harsh. These contracts are often described as • Shocking to the conscience • Monstrously harsh and • Exceedingly calloused
Procedural Unconscionability • Procedural unconscionability is the lack of a meaningful choice, considering all the circumstances, including: • Manner in which the contract was entered into • Whether the party had a reasonable opportunity to understand the terms • Whether important terms where hidden in a maze of fine print
Exculpatory Clauses • Basically a contract that releases one of the parties from liability if the other party is injured. “I agree to hold each and every person harmless in the event that I am injured in any way or for any reason or cause, including but not limited to acts that are negligent, intentional or otherwise.” (Yikes!)
Exculpatory Clauses • Generally unenforceable only if: • It attempts to exclude an intentional tortious act or gross negligence; • The affected activity is in the public interest (medical care, public transportation, essential services); • The parties have greatly disparate bargaining power; • The clause is not clearly written or visible.
Contractual Capacity • Legal ability to enter into a contract. • Courts presumethe existence of contractual capacity.
Lack of Contractual Capacity • As a general rule, a valid contract is not formed unless both parties are legally competent to understand the nature of the agreement at the time the contract is entered into. • The presumption that the parties to a contract are competent means the burden of proving incompetence is on the party asserting it.
Contractual Capacity • The bases for showing lack of capacity to enter into a contract are: • Minority • Intoxication • Mental incompetence
Contracts with Minors • Most contracts with minors are binding but voidable by the minor – the person lacking capacity to contract. • The rule is for the protection of minors. An adult who enters into a contract with a minor is bound by the contract, if the minor chooses to enforce it.
What is a Minor? • In most states the age of majority for contracting is 18 years old. • RCW 26.28.015(4) (A person age 18 years shall be deemed to be of full age for the purpose of entering into any legal contractual obligation and to be legally bound thereby to the full extent as any other adult person.)
Disaffirmance by the Minor • A minor may disaffirm – or rescind – the contract • If the disaffirmance is timely and • If the minor returns the consideration received – to the extent possible.
Washington Law “A minor is bound, not only by contracts for necessaries, but also by his other contracts, unless he disaffirms them within a reasonable time after he attains his majority, and restores to the other party all money and property received by him by virtue of the contract, and remaining within his control at any time after attaining his majority.” RCW 26.28.030
Limitations on Disaffirmance • Necessities • Generally a minor will not be able to disaffirm a contract for “necessaries” – or those things that are essential for living. • Food • Clothing • Shelter • Medical care
Washington Law “No contract may be disaffirmed in cases where on account of the minor’s own misrepresentations as to his majority, or from his having engaged in business as an adult, the other party had good reasons to believe the minor capable of contracting.” RCW 26.28.040
Timing • A minor must disaffirm a contract during minority or within a reasonable time of turning 18.
Ratification • After becoming an adult, the minor may ratify the contract. If the contract is ratified, it is enforceable.
Intoxication • The general rule is that intoxication is not a defense to enforcement of a contract. • However, if intoxication results in an inability to have the requisite mental capacity to make a contract, then the contract is voidable. • This is a very high burden.
Intoxication • A party may use the excuse of intoxication to avoid a contract only if he can show: • He was so intoxicated at the time of entering into the contract that he could not understand the nature of his transaction and • The other party had reason to know that this was the case.
Washington Law • Mere intoxication does not per se render a contract inoperative. • Mere undue excitement or intellectual limitation caused by liquor, which prevents one from giving a proposed contract all the consideration he might otherwise give it, is not sufficient to render the contract voidable.
Washington Law “To render a contract voidable, the intoxication must be so deep and excessive as to deprive one of his powers of reason, memory, and judgment, and to have impaired his faculties to such an extent as to render him incapable of appreciating the consequences of his acts.” Ex parte Burns, 194 Wash. 293 (1938)
Mental Impairment • A contract with a person who has a mental impairment is governed by the same principles that apply to a contract with a minor – the incapacitated person may either disaffirm the contract or ratify it.
Disaffirmance • If a mentally impaired person disaffirms a contract, he or she must make restitution and return any benefit from the contract to the other party.
Other Defenses • A court may refuse to enforce a contract if the assent to the agreement was not genuine. • Genuine assent may be lacking because of • Mistake • Misrepresentation • Undue influence • Duress
Fraud/Misrepresentation • Fraud is the intentional misrepresentation of material facts under circumstances in which the defrauding party expects the other party to rely on the misrepresentation to that party’s detriment. There must be proof of: • Misrepresentation of a material fact • An intent to deceive • Justifiable reliance on the deception
Concealment of Material Fact • Concealment is an intentional fraud plus an overt act designed to further the fraud, such as hiding a flaw in property for sale. • Concealment is not just nondisclosure.
Remedy for Fraud • A contract may be rescinded for fraud or purposeful concealment.
Innocent Misrepresentation • Misrepresentation is the unintentional deception of another party. • Contracts based on innocent misrepresentation are voidable. • The deception must involve a material fact • The fact must be within the exclusive knowledge of the person making the misrepresentation and not reasonably available to party deceived.
Mistake • There are two kinds of mistakes • Bilateral (or mutual) and • Unilateral
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 generally voidable by the injured party.
Unilateral Mistake • Only one of the parties is entering the contract based on a mistaken assumption about a material fact. • The unilateral mistake has no effect on enforceability. If a party fails to learn or understand the facts before entering into the contract, he or she is out of luck. • Exception: Court may not enforce it if: • The other party knew of the mistake • Enforcement would be unconscionable
Undue Influence • Undue influence may exist where there is a confidential or fiduciary relationship between the contracting parties and where one of the parties is in a position of trust or domination. • In order to prove undue influence, the complaining party must show that the other abused his or her position of trust to influence the vulnerable party to enter into the contract. • A contract entered into under undue influence is voidable.