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dynamic business law essentials 3e 2016 chapter 11

Chapter 11
Capacity and Legality

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2016 McGraw-Hill Education.  All rights reserved.

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Chapter 11 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?

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 11 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?

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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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

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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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

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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Individuals Who Have Only Limited
Capacity to Contract
•Minors
•Mentally Incapacitated Persons
•Intoxicated Persons

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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
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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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

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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Exceptions to Minor’s Right to Disaffirm
Contract (Continued)
•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
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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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
-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
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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Individuals Having No Capacity to
Contract
•Those adjudicated insane
•Those adjudicated habitually intoxicated
•Those with appointed legal guardians

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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 state-imposed maximum
interest rate)
-Example: Unconscionable contract (Agreement
so unfair that it is “void of conscience”)
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Procedural Versus Substantive
Unconscionability
•Procedural Unconscionability-Relates to conditions
that would impair one party’s understanding of a
contract/contract terms
-Example: Adhesion contract (Contract created by
a party and presented to other party on a “take-itor-leave-it” basis)
•Substantive Unconscionability-Involves overly harsh
or lopsided substance in a contract
-Example: Contract in which one party has little to
no legal recourse
© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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Effect of Illegal Agreement
General Rule: When an agreement is
illegal, the contract is void

© 2013 The McGraw-Hill Companies, Inc. All rights reserved.

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