Saudi Electronic University Ahmed Contract Discussion

Chapter 16
Capacity and Legality
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 16 Case Hypothetical and Ethical Dilemma
Before her recent accident, eighty-two-year-old Lily Ledbetter was her own chauffeur. She used to drive
an automobile to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water
aerobics, grocery shopping, bill-paying, and family get-togethers.
One day, Lily decided to purchase a new automobile. Although her fifty-year-old son Ron suggested that
he accompany her to the car dealership, she refused, reminding him that she was fully capable of taking
care of her own responsibilities. With the “wind of independence at her back,” Lily entered the
dealership, Bjorn Fjord Motors, alone.
After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan,
Lily drove away in her rapidly-depreciating asset. Five miles down the road, the steering wheel detached
from the steering column (the steering wheel literally came off in her hands) and Lily crashed into a
culvert. She sustained severe personal injuries, including (but not limited to) a broken left leg, a broken
pelvis, a collapsed lung, and numerous lacerations to her face. Her attending physicians agree that Lily
will never be able to drive an automobile again.
Lily has since sued Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc. (the
dealership) for personal injury. Both companies have filed answers denying liability on the basis of an
exculpatory clause included in Lily’s purchase contract. The exculpatory clause states that neither Fjord
Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a customer or any other third party for a defect
in the Fjord Mastodon that results in personal injury and/or economic harm. Both companies have also
filed motions for judgment on the pleadings, requesting that the court summarily dismiss both causes of
action against Fjord Motors, Inc. and Bjorn Fjord Motors, Inc. on the basis of the contract’s exculpatory
clause.
Should the court grant the defendants’ requests for judgment on the pleadings? Is the exculpatory clause
enforceable against Lily Ledbetter?
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Chapter 16 Case Hypothetical and Ethical Dilemma
Tommy McCartney is a sixteen-year-old high school student. He has worked forty hours per
week at the local convenience store over the last year, and has diligently saved $6,000 for the
purchase of his first car.
While visiting a local car dealership, Tommy finds the “car of his dreams,” a used yellow
Camaro. Tommy walks into the dealership, announces to the dealership owner that he is
“ready to buy,” negotiates $6,000 as the purchase price, and leaves the dealership a proud car
owner.
Over the course of the next six months, Tommy drives the Camaro eight thousand miles,
wears the tires thin, dents the left front fender, and regrets his purchase. He realizes that in
two short years college will beckon, and he knows that his parents cannot afford to pay for his
higher education. In short, he wants his money back.
On a Saturday morning, Tommy returns to the car dealership, walks into the sales office, and
hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles, and then
his look turns stern, saying “Son, I don’t owe you anything. You’ve just learned a lesson in
the ‘School of Hard Knocks.’ The car is still yours, and the money is still mine!”
Who will prevail? Is it legal and/or ethical to allow Tommy to escape his contractual
obligations?
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Contractual Capacity
(Definition):
Mental ability to understand rights and obligations
established by contract, with the presumptive ability
to understand how to comply with terms of
agreement
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Contractual Capacity
General Rule of Law: Natural persons over the age
of majority (18 in most states) are presumed to have
the full legal capacity to enter into binding legal
contracts
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Individuals Who Have Only Limited Capacity
to Contract
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Minors
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Those suffering from mental deficiency that renders
them incapable of understanding the nature and
obligations of contracts
◼
Those who are intoxicated
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Rules Regarding Minor’s “Contractual Power of Avoidance”
Disaffirmance (“Power of Avoidance”): Minors’ right, until reasonable
time after reaching age of majority, to disaffirm/avoid their contracts
◼
◼
◼
◼
To exercise right, minor need only demonstrate, through words
and/or actions, intent to rescind contract
Minor must return any consideration received (if still in minor’s
possession/control), regardless of condition
Even if consideration damaged/destroyed, other party has no
recourse against minor
Rules designed to discourage competent parties from entering into
contracts with minors
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Exceptions to Minor’s Right to Disaffirm Contract
◼
Contract for Necessaries (Definition): Contracts that supply minor with basic
necessities of life
◼
◼
Examples: food, clothing, shelter, basic medical services
Ratification (Definition): Acceptance of terms of contract (entered into as a
minor) after reaching age of majority
◼
Express Ratification: Occurs when, after reaching age of majority, individual
states (either orally or in writing) that he/she intends to be bound by contract
entered into while a minor
◼
Implied Ratification: Occurs when former minor takes action after reaching age
of majority consistent with intent to ratify contract
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Parental Liability for Minors’ Contracts, Necessaries,
and Torts
◼
General Rule: Parents not liable for contracts entered into by
their minor children
◼
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Exception: Contracts for necessaries
General Rule: Parents not liable for torts committed by their
minor children
◼
Exception: Failure to properly supervise child, subjecting
others to unreasonable risk of harm from the child
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Individuals Having No Capacity to Contract
◼
Those adjudicated insane
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Those adjudicated habitually intoxicated
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Those with appointed legal guardians
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Rules Regarding Intoxication
◼
General Rule: Contracts made by intoxicated persons are
voidable
◼
If intoxication merely causes person to exercise poor judgment,
contract not voidable unless other party unfairly capitalized on
the impaired judgment
◼
When intoxicated person becomes sober, contract can be ratified
or disaffirmed; however, courts will liberally interpret behavior
that seems likes ratification once intoxicated person becomes
sober
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Illegal Contracts
◼
Contracts with no legal purpose and/or subject matter
◼
◼
Example: Agreement to commit crime/tort
Contracts violating statute(s) and/or “public policy”
◼
Example: Usurious loan agreement (loan contract exceeding stateimposed maximum interest rate)
◼
Example: Unconscionable contract (Agreement so unfair that it is “void
of conscience”)
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