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Minors—At common law, the general rule is that a minor may enter into contracts, but those
contracts are voidable at the option of the minor (right to disaffirm). There are some contracts
that minors may not disaffirm. Enlistment contracts and marriage contracts are classic examples
of nonvoidable contracts. After a minor reaches the age of majority, most states provide that the
individual may expressly or implicitly ratify contracts.
Add. Case: Star Chevrolet v. Green (Sup. Ct., Miss., 1985)--Green was 16 when he bought a
car from Star and title was put in his name when he paid the $4,642 purchase price. The car had
serious problems. Green told Star that, as a minor, he was disaffirming the contract and
demanded a refund. Star refused to accept the car unless Green restored it to original condition.
Green sued. Before trial, Green was in an accident. His insurance company paid him $5,100.
Green signed title to the car to the insurance company, which sold the car for $1,500. The court
found for Green and required Star to refund the purchase price. “He who contracts with a minor
does so at his own peril.” Star appealed.
Decision: Affirmed. Upon the disaffirmation of the contract, the minor is entitled to the purchase
Add. Disc. Mentally Impaired and Intoxicated Persons: If a person is intoxicated when a
contract is made, most courts hold that the contract is voidable. Contract law classifies insane
persons as either adjudicated insane or insane in fact. A person is adjudicated insane if a court
rules that the person is not competent to carry on contractual activities—contracts are void. A
person not adjudicated insane but who nonetheless lacks the capacity to enter into a contract is
insane in fact—person has the right to disaffirm a contract.
International Perspective: Problems Enforcing Contracts
A World Bank study looked at the complication ant time required in various countries to bring a
contract enforcement action, and the cost of the litigation as a percentage of the debt in question.
The U.S. has one of the most efficient court systems in the world by this measure. In many
countries the process is twice as long and the cost two to four times as high as in the U.S.
Legality—For a contract to be valid, its subject matter must be lawful. The contract will be
illegal and unenforceable if its subject matter violates a state or federal statutory law or the
common law or is contrary to public policy.
Illegal Agreements—Promises that violate statutes, such a deal to sell heroin, are not recognized
as enforceable contracts.
Add. Case: Vollmer v. Key Financial (Ct. App., Fla., 2002)--Vollmer bought land from Key for
$104,500. Vollmer agreed that $25,000 of the purchase price would be paid by repairing a
seawall on a property owned by Key. Except for repairs to one’s own property, a licensed
contractor must be hired for such work. Vollmer lied to the County and said the work was on his
property, so he was given a permit. Vollmer did the work on the seawall. When Key discovered
this, he sued, seeking rescission of the contract on the basis of illegality because Vollmer was not
licensed to do the work. The trial court rescinded the contract for sale of the property. Vollmer
appealed.
Decision: Reversed. The contract is not illegal. The provision requiring Vollmer to have the
seawall repaired merely stated that Vollmer was required to “pay for permits, supplies and
Unenforceable Contracts—These are contracts that were valid but, because of a subsequent
illegality, will not be enforced by the courts. The passing of a statute that makes previously valid
contracts illegal creates an unenforceable contract.
Contracts Contrary to Public Policy—Some contracts are unenforceable because their subject
matter is contrary to public policy—they are said to have a negative impact on public welfare.
The courts have found some contracts to be illegal on the ground that they are contrary to public
policy.
Exculpatory Agreements. Such agreements release one party from the consequences brought
about by his wrongdoing.
Add. Case: Chicago Steel v. ADT Security (App. Ct., Ill., 2002)--Chicago Steel (CS) had a
contract for ADT to provide an alarm system for its plant. ADT maintained the system and
inspected it four times a year for $3,472. The contract stated that ADT was not an insurer and
was exempt from liability for damage to CS property. It limited ADT’s liability to a maximum of
$1,000. A fire caused substantial damage. CS sued ADT on the basis that the alarm system was
defective, failed to detect the fire, failed to monitor water flow in the sprinkler system, and failed
to signal ADT to call the fire department. The suit was for breach of contract and for negligence.
The trial court dismissed the suit. CS appealed.
Decision: Affirmed. The exculpatory clause precluded CS from claiming negligence and breach
of contract. An exculpatory clause is enforced if: 1) it clearly spells out the intention of the
parties; 2) there is nothing in the social relationship between the parties that suggests it should
Unconscionable Contracts. These are contracts so grossly unfair to one party (normally due to
unfair bargaining power), that the courts in equity will not enforce it.
Add. Case: Jones v. Star Credit (Sup. Ct., N.Y., 1969)--The Jones were welfare recipients who
bought a freezer for $900 from a door-to-door salesman. With credit charges, credit life
insurance, credit property insurance, and sales tax the price was $1,440. At the time of this suit,
the Jones had paid $620 toward the purchase. The freezer had a retail value of $300. The
question was whether this could be considered unconscionable. The trial court stated: “The law
is beginning to fight back against those who once took advantage of the poor and illiterate
without risk of either exposure or interference. From the common law doctrine of intrinsic fraud
we have, over the years, developed common and statutory law which tells not only the buyer but
also the seller to beware. This body of laws recognizes the importance of a free enterprise system
but at the same time will provide the legal armor to protect and safeguard the prospective victim
from the harshness of an unconscionable contract.”
Decision: The contract is unconscionable. The Jones had paid more than $600 toward the
Contracts in Restraint of Trade. Contracts that restrain trade or unreasonably restrict competition
are considered contrary to public policy and are not enforced by the courts. Part of the common
law on this subject became the basis for the antitrust laws. Even if a contract does not violate a
statute, however, it still may be an unenforceable restraint of trade. A covenant not to compete,
for example, may constitute a restraint of trade if it does not meet certain guidelines. The rules
vary quite a bit among the states.
CASE: Arthur J. Gallagher & Co. v. Babcock (5th Cir. 2012)—Babcock, an insurance broker,
sold his brokerage to insurance company Gallagher to help it get established in Louisiana. The
agreement said Babcock would not compete with Gallagher for two years in Louisiana in the
event that Babcock left. Later, Babcock left, took others with him, and went into competition
with Gallagher, immediately taking away some clients. Gallagher sued for breach of
non-competition agreement. Jury awarded Gallagher damages and judge ordered Babcock not to
compete in a certain area. Babcock appealed.
Decision: Affirmed. Such agreements are strictly construed. The restrictions used in this
agreement are generally acceptable. It applies to a specific geographic area and applies to a
Questions: 1. Why would the court limit the application to a few counties, rather than the whole
state?
Apparently the Babcock business purchased by Gallagher was in those parishes; it was not a
state-wide operation, so Gallagher was not buying a state-wide business and the court did not
2. Suppose such non-compete agreements were illegal. Would Gallagher pay Babcock the
same price for his business?
3.
No. Without the non-compete clause, the business would be worth a fraction of what Gallagher
paid. Without it, Babcock could immediately contact former clients and try to regain their
Add. Case: DCS Sanitation Mgmt. v. Castillo (8th Cir., 2006)—DCS, an Ohio company, has
operations in 13 states. It cleans food-processing plants. Employees (Castillo) had to sign
noncompete agreements when they worked for DCS that stated that for one year they would not
work for anyone in competition with DCS within 100 miles of one of its operations. When DCS
lost a contract at a plant in Nebraska to a competitor, the competitor hired some former DCS
employees. DCS sued the employees for breach of contract. The district court held for the
employees. DCS appealed.
Decision: Affirmed. Unreasonable noncompete contracts will not be enforced. This one is too
broad. The 100 miles covers a huge amount of the country and many of the employees have no
Add. Case: General Commercial Packaging v. TPS Package (9th Cir., 1997)--General worked
for various firms. It hired TPS as a subcontractor to help with a large job for Disney. The
contract stated that TPS would not work with Disney for a year after the current contract
without permission from General and, if TPS did, it would give 25 percent of the revenues to
General. TPS ignored this agreement and did work for Disney. General sued TPS for breach of
contract. The trial court held that the contract violated California’s rule against contracts in
restraint of trade. General appealed.
Decision: Reversed. The restriction in California (and some other states) applies only if the
contract were to preclude TPS from doing its trade or business. Here, its contact with Disney
Add. Case: Curtis 1000 v. Suess (7th Cir., 1994)--Suess worked for Curtis selling business forms
in Illinois and Iowa. While at Curtis, he was required to sign covenants not to compete, stating
that he would not call on any customers in his sales territory for two years if he went to work for
a competitor. When he went to work for a competitor, Curtis sued to enforce the covenant; the
district court held it was not supported by consideration. Curtis appealed.
Decision. Affirmed. There were no trade secrets or other confidential information at stake; Suess
only had a list of customers he had cultivated for Curtis. The customers were not
Add. Case: Russo Assoc. v. Cachina (Super. Ct., Conn., 1995)--Russo hired Cachina to work
for Compu-Draft. He signed an employment agreement develop a computer assisted design
(CAD) training course. There was a covenant not to compete for two years within a 75 mile
radius of Fairfield, Connecticut. Later, Compu-Draft unsuccessfully solicited a job from Bristol
Hospital. Cachina helped develop the bid. Cachina left Compu-Draft and joined Data-Draft.
Data-Draft got the Bristol job with a bid identical to the bid submitted by Compu-Draft. Russo
sued Cachina alleging he had breached the covenant not to compete in the employment
agreement. The trial court found the covenant was unreasonable and not enforceable. Russo
appealed.
Decision. Affirmed. The covenant was against public policy and was unenforceable. A covenant
that restricts activities of an employee following employment is valid if the restraint is
reasonable. Factors considered in evaluating a restrictive employment covenant: 1) the length of
time of the restriction; 2) the geographic area covered; 3) the fairness of the protection to the
Add. Case: Fogle v. Shah (Ct. App., Ind., 1989)--The Fogles owned a pension consulting firm.
Shah agreed to pay them $850,000 for the company and $150,000 for a covenant not to compete
for three years in a 12 state area. A year later the Fogles formed a new pension consulting firm,
competing with Shah by contacting former clients. Shah sued. The court granted an injunction
against the Fogles, finding the covenant reasonable. Fogles appealed.
Decision: Affirmed. In this sale of a business, both the geographical restriction and the
three-year time limit were reasonable. “Covenants not to compete in employment contracts are
in restraint of trade and not favored by the law.... On the other hand, covenants involved in the
Reality and Genuineness of Consent—A person may enter into an agreement without full
knowledge of the consequences. Without full knowledge, there is no reality of consent or
genuineness of assent by the parties, and the contract is void or voidable depending upon the
circumstances. If the parties enter into a contract by mutual mistake, the contract may be
voidable. If a person contracts under fraud, deceit, duress, or undue influence, there is a right to
disaffirm the contract.
Add. Case: Sherwood v. Walker (Sup. Ct., Mich., 1887)--Sherwood and Walker agreed to the
sale of a cow for $80. Both parties believed the cow was barren—incapable of producing
offspring. Before the cow was to be delivered, Walker discovered she was pregnant. Thus, it was
worth more than $80. Walker refused to deliver the cow, asserting that the contract was for a
barren cow and not one for one capable of producing offspring. Sherwood sued to enforce the
contract and the lower courts ruled in his favor. Walker appealed.
Decision: Reversed. Because of mutual mistake, the contract was void. “If the mutual mistake
had simply related to the fact whether she was with calf or not for one season, then it might have
been a good sale, but the mistake affected the character of the animal for all time, and for its
Add. Case: North Grand Mall Assoc. v. Grand Center (8th Cir., 2002)--In 1968, North Grand
Mall leased property for 99 years from Grand Center. The lease specified terms of an option to
buy. NGM exercised the option decades later. The issue was the method for computing the price
to buy. The trial court found that the method of computing the price was the result of a mutual
mistake and reformed the contract to use a different method of computation that results in a
higher price. NGM appealed, contending no mutual mistake and it relied on the words in the
lease.
Decision: Reversed. The option states that the price would be computed by dividing the average
sum of the rent for the three lease years prior to the purchase by seven percent. Since the
average rent over the past three years was $35,000, dividing by seven percent gives a purchase
Statutory Exceptions—Some statutes deal with high-pressure selling techniques by
door-to-door salespeople. These “home solicitation” statutes allow contracts to be rescinded if
undue influence or duress can be proved to be the basis for the innocent party’s consent to enter
into the contract. Under federal law, the Federal Trade Commission’s cooling-off rule allows
purchasers of door-to-door sales with a value over twenty-five dollars to rescind the contract if
the rescission is done in writing within three business day.
Fraud and Misrepresentation—Contracts may be disaffirmed due to fraud, misrepresentation,
duress or undue influence; in which cases there was not genuine consent. Duress and undue
influence are not common, but claims of fraud and misrepresentation are. Contracts based on
fraud may be rescinded. If a case is made for damages then plaintiff must show: 1) misstatement
of material fact; 2) scienter (intent to defraud); 3) seller knew or should have known of the false
information; 4) justifiable reliance on the information; 5) privity between parties; 6) proximate
cause; and 7) damages. When fraud is present there may be damages for breach of contract but
also in tort, which allows the possibility of punitive damages. Misrepresentation is usually a
lesser form of fraud; usually material false statements that affect the making of a contract. If
misrepresentation has no impact on the value of a contract, then there are unlikely to be damages.
Add. Case: L&L Doc’s v. Fla. Div. Alcoholic Beverages and Tobacco (Ct. App., Fla., 2004)—
Leuders and Latte (L&L) bought Doc’s Saloon from Carlbob for $125,000. There was a
promissory note secured by the business, which included a liquor license. Doc’s had illegal slots
in it. The cops raided and arrested Latte for illegal gambling. L&L defaulted on the note;
Carlbob sued. L&L claimed Carlbob engaged in fraud by saying the slots were a good income
source and that he cheated on his liquor taxes. The trial court held for Carlbob. L&L appealed.
Decision: Affirmed. The contract did not include the slot machines. Both parties knew the slots
were illegal, or should have known, although L&L pleads ignorance. So there can be no
Add. Case: Johnson v. Davis (Ct. App., Fla., 1997)—Davis agreed to buy Johnson’s home, and
made a $5,000 deposit. After Davis noticed water damage and asked about it, Johnson said it
was from a problem that had been corrected; Davis paid another $26,000 deposit. Later, Davis
saw water coming in the house during a rain storm. His roofer said the problem would cost
$15,000 to repair; Johnson’s roofer said $1,000. Davis sued for rescission of the contract based
on fraud, misrepresentation and breach of contract. Johnson counterclaimed to keep the $31,000
as damages. Trial court held for Davis; Johnson appealed.
Decision: Affirmed. The statement by Johnson about the roof was fraudulent misrepresentation.
Issue Spotter: Are You Due a Commission?
You are probably out of luck. The contract said one year; 18 months was after the year expired.
The courts will stick to the terms of the written contract. Unless you can prove that they actually
agreed to a deal during the one year period, you are out.
Cyberlaw: Digital Signatures and Contracts
Digital signatures, when properly transmitted, are presumed valid to create contracts. The
common law adjusts to allow usage of new modes of communication. The E-Sign Act helped
codify and make uniform the legal standards for digital signatures.
Statutory Exceptions—Some contracts, especially high pressure ones, may be subject to
statutory restrictions such as the FTC’s Cooling-Off Rule that gives three days to void a
door-to-door sales of more than $25.
Contracts in Writing and the Statute of Frauds—Some contracts must be in writing and
signed to be enforceable. Such contracts are subject to the requirements of the Statute of Frauds.
Most states have six types of contracts that are covered by the Statute of Frauds and that must be
in writing:
1. Contracts for the sale of land and real property.
2. Contracts that cannot be performed within one year.
3. Promises to pay the debt of another.
4. Promises by an administrator to personally pay the debts of the estate.
5. Promises made in consideration of marriage.
Add Case: MediaNews Group v. McCarthey (10th Cir. 2007)--McCarthey controlled the stock in the
Kearns-Tribune (KT) Corporation. KT ran the Salt Lake City Tribune newspaper. TCI proposed that KT merge into
TCI, which happened in 1997. Later, TCI merged with AT&T, which did not want the newspaper and sold it to
MediaNews in 2002. McCarthey asserted that when KT merged with TCI in 1997, he was promised the right to buy
the newspaper back. When the paper was sold to MediaNews instead, McCarthey sued for breach. The trial court
dismissed. McCarthey appealed.
Decision: Affirmed. The oral agreement that supposedly granted McCarthey the right to repurchase the newspaper
