328 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
against those of a former employee. What are these rights? A covenant not to compete must balance a former
employee’s right to earn a livelihood with an employer’s right to protect itself from a former employee’s unfair
appropriation of unique business information or customer contacts developed while working for the employer. A
prohibition on a former employee from working for a competitor in any capacity would tip the scale too far in favor of
the employer.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 13.2
Should companies affiliated with CCI be subject to the covenant not to compete? Would it be unethical to impose
such a requirement? Discuss. A contract may bind non-parties such as an intended third party beneficiary, an agent, or
an assignee. But generally contracts do not bind non-parties in the absence of such extraordinary relationships. Thus, in
this case, the arbitrator might legally bind CCI’s agents, employees, or people in active concert or participation with it
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 13.2
Why would a business such as Improv West include a covenant not to compete in such an agreement as the
contract at issue in this case? One significant consideration would be the protection of its trade secrets. Comedy Club
would know much about Improv West’s operations—its costs and profits, its booking procedures and entertainment
contracts, its staffing and supply routines, and so on. An unscrupulous party might take advantage of this information
to compete unfairly.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering the legality of covenants not to compete include the following.
products sales representative from competing with his former employer, a bank, for one year in a seven-county area
CHAPTER 13: CAPACITY AND LEGALITY 329
was “reasonable in terms of time, geography, and types of activity prohibited”).
• Albany Medical College v. Lobel, __ A.D.2d __, 745 N.Y.S.2d 250 (3 Dept. 2002) (a covenant not to compete that
prohibited a medical school professor from competing with the school, which was also a medical practice group, by not
practicing medicine for five years within thirty miles, was “reasonable as to time and area, necessary to protect the
employer’s legitimate interests, not harmful to the public, and not unduly burdensome”).
• Hoff v. Mayer, Brown and Platt, 331 Ill.App.3d 732, 772 N.E.2d 263, 265 Ill.Dec. 225 (1 Dist. 2002) (a covenant not
advancement with the employer: “such provisions restrained competition among employers for talented employees,
and also restricted competition for customers’ business”).
• Ozark Appraisal Service, Inc. v. Neale, 67 S.W.3d 759 (Mo.App. S.D. 2002) (a covenant not to compete that
prohibited an employee from competing with her employer, a real estate appraisal service, for one year within ninety-
five miles, was unenforceable, because the employer breached the parties’ employment agreement ).
• Minnesota Mining And Manufacturing Co. v. Francavilla, 191 F.Supp.2d 270 (D.Conn. 2002) (a covenant not
compete that prohibited an employee from “render[ing] services directly or indirectly in connection with any
Conflicting Product” for two years to “any Conflicting Organization” in any country in which the employer “has a plant”
or “provides a service” was enforceable, because it was “knowingly entered into,” reasonable, not overly broad, “did
not violate the public interest,” etc.
c. Enforcement Problems
The laws governing the enforceability of covenants not to compete vary from state to state. If a
covenant is unreasonable in time or geographic area, to prevent undue hardship courts in some states
convert the terms into reasonable ones and enforce the covenant.
2. Unconscionable Contracts or Clauses
In some circumstances, bargains are so oppressive that a court will relieve an innocent party of part or all of
the contractual duties.
a. Procedural Unconscionability
330 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CASE SYNOPSIS—
Case 13.3: Lhotka v. Geographic Expeditions, Inc.
California-based Geographic Expeditions, Inc. (GeoEx), which guided climbs up Mount Kilimanjaro, required its
customers to sign “an unmodified release form to participate in the expedition.” The form mandated mediation or
arbitration of any dispute in San Francisco and limited damages to the cost of the trip. Jason Lhotka died of an altitude-
related illness on a GeoEx climb. His mother filed a suit in a California state court against GeoEx, alleging fraud and
other causes. GeoEx filed a motion to compel arbitration. The court ruled that the dispute-resolution agreement was
unconscionable. GeoEx appealed.
…………………………………………………………..………………………………………………………….………..
Notes and Questions
Would it be unconscionable for an insurance policy to require arbitration in the first instance and bind the parties
to any award under $15,000, but entitle either party to go to court if an award were greater than $15,000? Yes.
Although such a provision would appear to be equal because either party could appeal a large award, the clause would
be unconscionable because the effect of the clause would be clearly unequal. The insurer could go to court whenever
an award was made in favor of a claimant or insured while a losing claimant or insured would be bound by the award.
The clause would so clearly favor the insurer over the claimant or insured that it would violate notions of due process,
equal protection, justice, and fair play.
would be unfair to customers who might be owed a relatively small sum of money, and it would also serve as a
disincentive for the firm to avoid the type of conduct that might lead to litigation in the first place.
If a “customer agreement” precluded only class litigation and mandated class arbitration, would it be
unconscionable? Probably not. Because customers could combine their resources to obtain redress in an alternative
CHAPTER 13: CAPACITY AND LEGALITY 331
ANSWER TO QUESTIONS AT THE END OF CASE 13.3
1. What did the judge mean when he said that GeoEx’s one–sided arbitration scheme “may well guarantee that
GeoEx wins even if it loses”? The court was referring to a hypothetical outcome that would occur should the case be
2. Did the fact that the terms of the release were nonnegotiable contribute to its procedural unconscionability or its
substantive unconscionability? Explain. The court discussed the nonnegotiability of the release’s terms in the context
of procedural unconscionability. Generally, procedural unconscionability has to do with how a term becomes part of a
contract and the relative bargaining power of the parties. Because the nonnegotiability term was presented on a “take
it or leave it” basis in the release, the customer had no bargaining power. Additionally, GeoEx indicated to Menefee
and her son that other travel companies would require similar release forms.
ENHANCING YOUR LECTURE—
IS IT UNCONSCIONABLE FOR PHYSICIANS
TO PRESCRIBE MEDICATION ONLINE?
Anyone with an e-mail address has undoubtedly received scores of messages offering to sell prescription
medications, such as Viagra, online. In the past, someone who wanted a prescription for a certain medication—
whether it was for allergies, weight loss, or sexual enhancement—had to see a physician and, normally, undergo a
A VIRTUAL DIAGNOSIS
The hallmark of an unconscionable contract is that its terms are so oppressive, one sided, or unfair as to “shock the
332 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
AN EMERGING ISSUE
To date, only a few courts have addressed this issue, and no court as yet has held that prescribing drugs online is
unconscionable. For example, in 2003, in a case before the Kansas Supreme Court, the state attorney general claimed
that it was unconscionable for an out-of-state physician to contract with residents to prescribe drugs via the Internet.
The case involved three Kansas residents, including a minor, who entered contracts on the Web to obtain prescription
weight-loss drugs (Meridia and phentermine).a
FOR CRITICAL ANALYSIS
If the physicians are not deceptive, should the courts allow all types of medications to be prescribed over the
Internet? Why or why not? Might the practice of prescribing medications via the Internet reach the point at which it
“shocks the conscience” of the court?
3. Exculpatory Clauses
Often held to be unconscionable are contract clauses attempting to absolve parties of negligence or other
4. Discriminatory Contracts
The text briefly lists and discusses another type of contract that is illegal on statutory or public policy
grounds—discriminatory contracts.
ENHANCING YOUR LECTURE—
CHAPTER 13: CAPACITY AND LEGALITY 333
FOR SALE:
“THE MOST BEAUTIFUL BABY IN THE WORLD”
Lawrence Schaub, a former windshield repairman in Detroit, Michigan, was facing financial problems. He was out
of work. He was behind in his mobile home payments. He had three children to feed. Desperate to obtain funds, he
decided to sell the youngest of his three children. To that end, he created a videotape titled “The Most Beautiful Baby
in the World” to show to prospective buyers. Unfortunately for Schaub, his babysitter informed the police of his plan,
and he was caught in a “sting” operation when undercover police officers posed as a would-be adoptive family. Schaub
accepted $10,000 from the officers as a down payment on the $60,000 contract price.
THE BOTTOM LINE
Occasionally, bizarre cases such as this one alert state legislatures to loopholes in their laws. Note, though, that
the prosecutors in Schaub’s case found other ways to keep Schaub in jail for a while—at least until his former wife
claimed custody of the children. The prosecutors charged Schaub with child abandonment, driving with a suspended
license, and violating his probation stemming from an earlier drug case.
a. For a summary of Schaub’s actions and the prosecution’s case against him, see M. L. Elrick, “Baby for Sale,” The National Law Journal, September
11, 2000, pp. A1–A2.
C. EFFECT OF ILLEGALITY
In general, an illegal contract is void. Exceptions include—
1. Justifiable Ignorance of the Facts
2. Members of Protected Classes
If a statute is clearly designed to protect a certain class, a member of the class can enforce a contract in
3. Withdrawal from an Illegal Agreement
334 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
4. Contracts Illegal through Fraud, Duress, or Undue Influence
5. Severable, or Divisible, Contracts
If a contract is severable and the illegal portion does not affect the essence of the bargain, the legal portion
can be enforced. A contract is indivisible if the parties intend that each party’s complete performance be
essential, even if the contract contains a number of seemingly separate provisions.
TEACHING SUGGESTIONS
1. A minor’s right to disaffirm a contract is a well-settled principle. It may be pointed out that, nevertheless, few
2. Discuss with students under what circumstances, if any, they believe a minor should be required to make
3. In reading and studying cases, particularly those that involve complex circumstances, your students may find it
helpful to keep in mind that generally a case can have only one of three results:
• The plaintiff proves his or her side of the case and wins.
• The plaintiff fails to prove his or her side of the case and loses.
• The defendant proves his or her side of the case, and the plaintiff loses.
Cyberlaw Link
Are the common law principles relating to contractual capacity more—or less—important in the context of e-
commerce and online contracting than in the context of more traditional circumstances?
1. What is the minor’s right to disaffirm a contract? A minor can make any contract, except one prohibited by law for
2. What is a minor’s obligation on disaffirmance? A duty of restitution arises when a contract has been executed—a
minor can disaffirm but must return whatever he or she received or pay for its reasonable value. Generally, a minor need only
3. What effect does a minor’s misrepresentation of age have on his or her right to disaffirm? In most states, a minor can
disaffirm even if he or she misrepresented his or her age. Also, in some states, a minor will not be liable in tort for
misrepresenting his or her age, because, indirectly, the judgment might force the minor to perform the contract. In many
states, however, under certain circumstances a minor will be bound to a contract despite the misrepresentation. In some
4. What effect does contracting for necessaries have on a minor’s right to disaffirm? A minor who contracts for
necessaries may disaffirm but must pay the reasonable value of whatever he or she receives. A minor is liable only for the
reasonable value of the goods because on disaffirmance there is no contract and thus no contract price. To be liable for
5. What effect does intoxication have on persons’ contractual capacity? The inhibition by alcohol or some other drug of a
person’s capacity to act or think is intoxication. A contract entered into by a person who is intoxicated can be either voidable or
valid. If the person was intoxicated enough to lack mental capacity (that is, so impaired as not to comprehend the
consequences of entering into a contract), the contract is voidable at his or her option. Otherwise, the contract is enforceable.
Many courts look at objective indications to determine whether a contract is voidable because of intoxication rather than
6. When is a contract made by an incompetent person voidable? If a court has not adjudged a person incompetent, any
contract entered into by the person is voidable if the individual does not know that he or she is contracting or lacks the capacity
to comprehend its subject matter, nature, and consequences. This does not include executed contracts, unless the incompetent
7. If it were possible to reform a covenant not to compete, what might be changed, or how might it be redrawn, to be
reasonable? An employer’s legitimate business interests can be adequately protected by a contractual provision prohibiting the
8. What public interest might be injured by an overbroad covenant not to compete? A covenant not to compete should
9. What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be
enforced? An exculpatory clause releases a party from liability in the event of monetary or physical injury, no matter who is at
10. Name and discuss some exceptions to the rule that a court will not enforce an illegal agreement. Members of
protected classes. If a statute is clearly designed to protect a certain class, a member of the class can enforce a contract that
violates the statute. (For example, statutes proscribe excessive working hours, but an employee who works those hours can
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Historically, the principal categories of persons having no capacity or limited capacity to contract were minors, mentally
incompetent persons, and married women. At common law, a married woman had no capacity to contract, although courts of
2. State statutes sometimes authorize the appointment of guardians for non-recovering alcoholics, narcotics addicts,
spendthrifts, and elderly persons and convicts in cases of mental illness. Even without the appointment of a guardian, civil
powers of convicts may be suspended in whole or in part during their incarceration. For some purposes, Native Americans are
treated as wards of the U.S. government under federal law. As with the common law limitation on the contractual capacity of
married women, some students may find one or more of these subjects interesting to investigate.
CHAPTER 13: CAPACITY AND LEGALITY 337
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 3: Joseph Dodson, when he was sixteen years old, bought a used pickup from Schrader’s Auto. The truck
developed mechanical problems, but Dodson continued to drive it without having it fixed. Eventually, it became inoperable
and, while parked in his yard, was hit by another vehicle. Dodson filed suit against to compel a refund of the price. The trial
court ordered the Schraders to refund the full purchase price to Dodson on Dodson’s delivery of the truck. The Schraders
appealed. In Dodson v. Schrader, the Supreme Court of Tennessee adopted a rule that required the seller to be compensated
for the depreciated value of the pickup and remanded the case for a determination of the fairness of the contract and the fair
Conversion can be defined as “the exercise of dominion over property in violation of the rights of the owner or person
entitled to possession.” Could the Schraders have argued successfully that at the time the truck was hit in Dodson’s yard,
Dodson had committed conversion? Probably not. The Schraders were insisting that they did not have to take the truck back.
If that was true, they were not the owners of, nor entitled to possession of, the truck. Until the court decreed return of the
truck and recovery of the consideration paid, Dodson still had title to the vehicle. One cannot be liable for conversion in taking
his own property.
Footnote 4: In March 1996, Harun Fountain was shot. Yale Diagnostic Radiology billed Fountain’s mother, Vernetta
Turner-Tucker, for $17,694, the cost of its services rendered to Fountain, but she did not pay. Instead, in January 2001, Turner-
Tucker filed for bankruptcy. Meanwhile, funds obtained for Fountain’s medical care were deposited in an account, denominated
an “estate,” on his behalf. Yale filed a suit against the estate. When the court refused to order the estate to pay Yale’s bill, Yale
appealed to a state intermediate appellate court, which reversed. The estate appealed. In Yale Diagnostic Radiology v. Estate of
According to what other theories might minors be held liable for the cost of medical services under the doctrine of
necessaries? The court in the Yale case noted, “[S]ome courts have held minors liable only if the creditor can show that the
minor was not living with or being supported by his or her parents at the time the contract arose or the services were rendered,
or, put another way, only if it is shown that the services were furnished on the minor’s credit and not that of his or her parents.
Some courts have held that liability is only established where an express or implied in fact contract arose between the minor
and the creditor. Still other courts have held minors liable after determining that the goods or services rendered were
necessaries, and the minor’s parent or guardian was unwilling or unable to pay for them. Some courts, however, have held
minors liable under the doctrine of necessaries primarily due to the fact that the minor had recovered from a tortfeasor.
What might have happened in future cases if the court had held that there was no implied-in-law contract between
Fountain and Yale Diagnostic Radiology? The court stated that “[t]he present case illustrates the inequity that would arise if no
implied in law contract arose between Fountain and the plaintiff. Fountain was shot in the head at close range and required
emergency medical care. Under such circumstances, a medical services provider cannot stop to consider how the bills will be
338 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
paid or by whom.” This indicates that had the court held otherwise, a medical service provider in a future case might have
waited to render aid until it could be determined who would pay the bill, which of course might be a fatal delay.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. Who has protection under the law relating to contractual capacity and what protection do they have? Special
2. What makes an agreement illegal? What is the effect of an illegal agreement? An illegal agreement is an agreement to
do something that is prohibited by a statute or that is tortious or calls for an action contrary to public policy. A court will refuse
to enforce an illegal agreement. Each party is considered to be equally at fault, and a court will leave the parties as it found
them.
REVIEWING—
CAPACITY AND LEGALITY
Renee Beaver started racing go karts competitively in 2003, when she was fourteen. Many of the races required
her to sign an exculpatory clause to participate, which she or her parents regularly signed. In 2006, she participated in
the annual Elkhart Grand Prix, a series of races in Elkhart, Indiana. During the event in which she drove, a piece of foam
padding used as a course barrier was torn from its base and ended up on the track. A portion of the padding struck
Beaver in the head, and another portion was thrown into oncoming traffic, causing a multikart collision during which
she sustained severe injuries. Beaver filed an action against the race organizers for negligence. The organizers could
not locate the exculpatory clause that Beaver had supposedly signed. Race organizers argued that she must have
signed one to enter the race, but even if she had not signed one, her actions showed her intent to be bound by its
terms. Ask your students to answer the following questions, using the information presented in the chapter.
1. Did Beaver have the contractual capacity to enter a contract with an exculpatory clause? Why or why not? Yes, she
CHAPTER 13: CAPACITY AND LEGALITY 339
entered into by a minor is voidable at the option of that minor. To avoid a contract, a minor need only manifest an
intention not to be bound by it. The minor avoids the contract by disaffirming it. In Beaver’s case, even if she did enter
into a contract with an exculpatory clause, she could avoid the contract later by disaffirming it.
2. Assuming that Beaver did, in fact, sign the exculpatory clause, did she later disaffirm or ratify the contract?
3. Now assume that Beaver stated that she was eighteen years old at the time that she signed the exculpatory clause.
How might this affect Beaver’s ability to disaffirm or ratify the contract? Beaver’s misrepresentation of age would not
usually affect her right to disaffirm the contract. In some jurisdictions, the minor would not even be liable for the tort
of fraudulent misrepresentation, because such a judgment might force the minor to perform the contract. In other
jurisdictions, a minor who has misrepresented his or her age can be bound by a contract under certain circumstances,
4. If Beaver did not actually sign the exculpatory clause, could a court conclude that she impliedly accepted its terms
by participating in the race? Why or why not? Exculpatory clauses found in certain types of agreements, such as those
relating to property leases and employment, are typically not enforced. They may be enforced when the parties
seeking enforcement are not involved in businesses considered important to the public interest. Businesses such as
health clubs, amusement parks, and golf-cart concessions frequently use exculpatory clauses to limit their liability for
patrons’ injuries. In the case of a go-kart race, which is not vital to the public interest, it would be fair to assume that an
exculpatory clause would be enforced. If Beaver knew about the clause and did not indicate that she did not agree with
it, she might be considered by a court to have accepted its terms.
DEBATE THIS:
After agreeing to an exculpatory clause or purchasing some item, such as a computer, minors often seek to avoid
the contracts. Today’s minors are far from naïve and should not be allowed to avoid their contractual obligations.
Today, teenagers, and most certainly, those just under the age of majority, are exposed to what is happening in the
business world on a constant basis because of the ubiquity of media outlets—at home, at school, and everywhere
there is a Wi-Fi connection. When a minor avoids an otherwise valid contract, the seller of the good or service
