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CHAPTER 14
CAPACITY AND LEGALITY
ANSWERS TO CRITICAL THINKING QUESTIONS
IN THE FEATURE
MANAGERIAL STRATEGY—BUSINESS QUESTIONS
1A. If you are running a business, why would you opt to include overly broad waivers
in your contracts with consumers? Even if you know that a court might throw out an overly
broad waiver as unconscionable, you might still include it in your standard form contracts. The
2A. Under what circumstances would you, as a business owner, choose to
aggressively defend your business against a customer’s liability lawsuit? Business
owners choose to aggressively defend liability lawsuits when they are certain that the customer
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 14.1—CRITICAL THINKING
LEGAL ENVIRONMENT
Could PAK Foods successfully contend that S.L.’s minority does not bar enforcement of
2 UNIT THREE: CONTRACTS AND E-CONTRACTS
ETHICAL
Is it fair that a minor can work for an employer yet not be bound by a contract with the
employer? Why or why not? It could be argued either way—from perspective of the
employer or the minor. It is not fair because every adult who works at the same KFC is bound
by the arbitration clause they signed with PAK Foods, whereas minors like S.L. are not. A
CASE 14.2—CRITICAL THINKING
LEGAL ENVIRONMENT
In Tennessee, at common law, unlicensed contractors had no right to recover anything
on their contracts. The Contractors Licensing Act changed this rule to permit unlicensed
contractors to recover documented expenses proven by clear and convincing evidence.
Why? The Tennessee legislature changed the state’s common-law rule that prohibited
unlicensed contractors from recovering anything on their contracts. Under the Contractors
Licensing Act, an unlicensed contractor can recover documented expenses proven by clear and
CHAPTER 14: CAPACITY AND LEGALITY 3
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that McNatt had held a valid contractor’s license when he entered into the
contract with Vestal but that the license had expired while he was overseeing the
construction of Henderson Villa. Would the result in that case have been different?
CASE 14.3—LEGAL REASONING QUESTIONS
1A. When do courts enforce exculpatory clauses? Courts enforce exculpatory clauses if
they are reasonable, do not violate public policy, and do not protect parties from liability for
intentional misconduct. The language used must not be ambiguous, and the parties need to be
2A. What are the specific requirements for an exculpatory clause to be enforceable in
Missouri? To be enforceable in Missouri, an exculpatory clause must contain clear,
unambiguous, unmistakable, and conspicuous language to release a party from his or her future
negligence. The exculpatory language must effectively notify a party that he or she is releasing
3A. Was the exculpatory clause at issue in this case enforceable? Why or why not?
Yes, the court held that the exculpatory clause at issue in this case was enforceable. The clause
released “any Event sponsors and their agents and employees” from liability for future
4 UNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Capacity
Yes, she could enter the contract but as a minor could later disaffirm it. A minor can enter into
any contract an adult can, provided that that contract is not one prohibited by law for minors
(such as the sale of alcoholic beverages). A contract entered into by a minor is voidable at the
2A. Disaffirmance or ratification
She disaffirmed it by filing a suit against the race organizers. A minor may disaffirm a contract at
any time by expressing an intent in words or conduct not to be bound. Filing a suit would
3A. Age of majority
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
4A. Implied contract
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.
CHAPTER 14: CAPACITY AND LEGALITY 5
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
After agreeing to an exculpatory clause or purchasing some item, 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
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Joan, who is sixteen years old, moves out of her parents’ home and signs a lone-
year lease for an apartment at Kenwood Apartments. Joan’s parents tell her that she can
return to live with them at any time. Unable to pay the rent, Joan moves back to her
parents’ home two months later. Can Kenwood enforce the lease against Joan? Why or
2A Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a
passenger caused by the airline’s negligence. If the cause of an accident is found to be
the airline’s negligence, can it use the clause as a defense to liability? Why or why not?
6 UNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
14-1A. Covenants not to compete
Contracts in restraint of trade are usually illegal and unenforceable. An exception to this rule
applies to a covenant not to compete that is ancillary to certain types of business contracts in
which some fair protection is deemed appropriate (such as in the sale of a business). The
covenant, however, must be reasonable in terms of time and area to be legally enforceable. If
either term is excessive, the court can declare that the restraint goes beyond what is necessary
14-2A. Capacity
Contracts made by mentally incompetent persons can be void, voidable, or valid. The chief
circumstance on which this status depends is whether a court has judged a person incompetent.
A contract is void if a court has previously determined that a person is mentally incompetent and
has appointed a guardian for the person. A contract is voidable, and may be disaffirmed, if a
CHAPTER 14: CAPACITY AND LEGALITY 7
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
14–3A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Unconscionable contracts or
clauses
In this case, the agreement that restricted the buyer’s options for resolution of a dispute to
arbitration and limited the amount of damages was both procedurally and substantively
unconscionable. Procedural unconscionability concerns the manner in which the parties enter
14–4A . Mental incompetence
No. Contracts made by mentally incompetent persons can be void, voidable, or valid. Mentally
incompetent persons not previously so adjudged by a court may enter voidable contracts if they
do not know they are entering into a contract or if they lack the mental capacity to comprehend
its subject matter, nature, and consequences. Whenever there is no prior adjudication of mental
incompetence, most courts examine whether the party was able to understand the nature,
14–5A. Licensing statutes
Whether a contract with an unlicensed person is legal and enforceable depends on the purpose
of the statute. If the purpose is to protect the public from unauthorized practitioners, then a
contract involving an unlicensed practitioner is generally illegal and unenforceable.
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
14–6A. Minors
No, a minor does not so lack the capacity to contract that he or she cannot enter into a binding
settlement without court approval. The general rule is that a minor can enter into any contract an
adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or
alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of
14–7A. Adhesion contracts
Desgro’s complaint was filed too late—the contract’s twelve-month limit was enforceable.
Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by
one party to the other or otherwise impose limitations on claims and disputes. Many businesses
use such contracts. Life insurance policies, residential leases, loan agreements, and
employment agency contracts are often standard-form contracts. To avoid enforcement of the
14–8A. Legality
An exculpatory clause releases a party from liability for injury or damage. A court may refuse to
enforce an exculpatory clause when the parties are seen to possess unequal bargaining
power—in a case involving an employment contract, for example. A business that offers non-
essential services is not considered to be at a relative advantage in bargaining strength, so
anyone contracting for its services is thought to do so voluntarily, making an exculpatory clause
potentially enforceable as a part of the deal. This is especially likely if the clause is
14-9A. A QUESTION OF ETHICS—Covenants not to compete
(a) The appellate court did not uphold the non-compete clause because it was invalid
and unenforceable because it contained no time or territorial limitations.
(b) Quite clearly, Coleman had converted funds that were in a joint account that the
company and Coleman had used. Therefore, it was reasonable for the court to require return of
these funds.
10 UNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
14–10A. Covenants not to compete
(a) A covenant not to compete can be part of an employment contract. Such an
(b) A covenant not to compete that does not protect a legitimate business interest or
restrains trade and is contrary to public policy.
(c) A covenant not to compete clause would be unreasonable if there are no limits to
