This Document Contains Chapters 13 to 14 Chapter 13 ILLEGAL BARGAINS Violations of Statutes [13-1] Licensing Statutes [13-1a] Gambling Statutes [13-1b] Usury Statutes [13-1c] Sunday Statutes [13-1d] Violations of Public Policy [13-2] Common Law Restraint of Trade [13-2a] Sale of a Business Employment Contracts Exculpatory Clauses [13-2b] Unconscionable Contracts [13-2c] Tortious Conduct [13-2d] Corrupting Public Officials [13-2e] Effect of Illegality [13-3] General Rule: Unenforceability [13-3a] Exceptions [13-3b] Party Withdrawing before Performance Party Protected by Statute Party Not Equally at Fault Excusable Ignorance Partial Illegality Restitution [13-3c] Cases in This Chapter Alcoa Concrete & Masonry v. Stalker Bros. Payroll Advance, Inc. v. Yates Anderson v. McOskar Enterprises, Inc. Bagley v. Mt. Bachelor, Inc. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Identify and explain the types of contracts that may violate a statute and distinguish between the two types of licensing statutes. • Describe when a covenant not to compete will be enforced and identify the two situations in which these types of covenants most frequently arise. • Explain when exculpatory agreements, agreements involving the commitment of a tort, and agreements involving public officials will be held to be illegal. • Distinguish between procedural and substantive unconscionability. • Explain the usual effects of illegality and the major exceptions to this rule. TEACHING NOTES An essential requirement for an agreement to be enforceable is that its objective be legal. An unenforceable agreement is one that a court will not compel the parties to perform. When such an agreement is presented to a court for enforcement, the court will generally leave the parties where it finds them. A. VIOLATIONS OF STATUTES An agreement declared illegal by statute will not be enforced by the courts. Example: wagering or gambling agreements are specifically declared unenforceable in most states. *** Chapter Outcome *** Identify and explain the types of contracts that may violate a statute and distinguish between the two types of licensing statutes. 13-1a Licensing Statutes Require a license for those in certain trades, professions, or businesses, such as lawyers, doctors, teachers, accountants, brokers, plumbers, and contractors. In some cases, a person who has failed to comply with a licensing requirement may not recover for services rendered; usually depends on whether the license is regulatory or for revenue. A regulatory license is a measure designed to protect the public against unqualified persons (such as in law or medicine); a person usually cannot recover for professional services unless he has the required regulatory license. A revenue license, on the other hand, is issued to raise money; agreements for unlicensed services are enforceable. CASE 13-1 ALCOA CONCRETE & MASONRY v. STALKER BROS. Court of Special Appeals of Maryland, 2010 993 A.2D 136, 191 MD. APP. 596 http://scholar.google.com/scholar_case?case=16829939965873776087&q=993+A.2d+136&hl=en&as_sdt=2,34 Rodowsky, J. *** At issue is whether a home improvement general contractor is contractually obligated to pay a subcontractor who was not licensed under ***, either at the time of entering into the subcontract or when the subcontract was properly performed, but who was licensed when this suit was brought. The subcontractor is the appellant, Alcoa Concrete and Masonry, Inc. (Alcoa or the Subcontractor). The general contractor is Stalker Brothers, Inc. (Stalker or the General Contractor), ***. Alcoa initiated this action on September 30, 2008, in the Circuit Court for Montgomery County. Summary judgment was granted to the appellees [Stalker] ***. The president of Alcoa affirmed that Alcoa and Stalker had done business from 2004 through 2007. In 2004, all of Alcoa's invoices were fully and timely paid. When payments in 2005 became less regular, Stalker promised to pay Alcoa when a building owned by the Brothers was sold, but full payment was not made. Alcoa continued to perform subcontract work for Stalker based on an agreement that the General Contractor would pay Alcoa $1,500 per week against invoices for past work and new work. In November 2006, Alcoa performed the cement and masonry work for Stalker on the "Cahill" job, in which Stalker represented there was sufficient profit to pay Alcoa for that subcontract and for the entire past due balance, but an indebtedness remained. In the summer of 2007, Stalker ceased paying Alcoa entirely. Alcoa claims $53,000 plus interest and attorney's fees. Appellees, through Donald Stalker's affidavit, assert that every subcontract performed by Alcoa for Stalker was "residential home improvement work" in Maryland, i.e., done pursuant to a home improvement contract between the owner(s) of a residence and Stalker. Alcoa does not dispute that statement of fact. Appellees moved for summary judgment on a number of grounds, but the circuit court granted the motion solely on the ground that the series of subcontracts were illegal and could not be enforced. The circuit court accepted appellees' argument that was based upon a venerable line of Maryland cases dealing with licensing and that is illustrated in the home improvement field principally by Harry Berenter, Inc. v. Berman, [citation]. In essence, these cases initially inquire whether the purpose of a business licensing statute is to raise revenue or to protect the public. If the purpose is the former, courts will enforce a contract for compensation for business activity that requires a license, even if made by an unlicensed person. But, if the purpose of the licensing requirement is to protect the public, then the Maryland cases relied upon by the appellees do not enforce contracts made by unlicensed persons who seek compensation for business activity for which a license is required. *** Maryland appellate decisions have applied the revenue/regulation rule in a number of contexts. All of the cases under the Act have dealt with the contractor-owner relationship. The members of the public who were protected by the regulatory licensing requirement were the owners of the home. This Court recently again has held, applying Harry Berenter, that a contract between the owner of the improved premises and an unlicensed contractor would not be enforced. [Citation.] * * * * * * Our review fails to disclose any Maryland appellate decision directly answering whether the regulatory license rule applied in Harry Berenter, declaring unenforceable a home improvement contract between an owner and an unlicensed contractor, applies to a subcontract between a licensed contractor and an unlicensed subcontractor. Harry Berenter does recognize that, pursuant to provisions of the Act * * * , the failure to comply with certain formal contractual requirements in a home improvement contract does not invalidate the contract. [Citation.] * * * The authors of Corbin on Contracts, after reviewing the revenue/regulatory rule, state: Even when the purpose of a licensing statute is regulatory, courts do not always deny enforcement to the unlicensed party. The statute clearly may protect against fraud and incompetence. Yet, in very many cases the situation involves neither fraud nor incompetence. The unlicensed party may have rendered excellent service or delivered goods of the highest quality. The noncompliance with the statute may be nearly harmless. The real defrauder may be the defendant who will be enriched at the unlicensed party's expense by a court's refusal to enforce the contract. Although courts have yearned for a mechanically applicable rule, most have not made one in the present instance. Justice requires that the penalty should fit the crime. Justice and sound policy do not always require the enforcement of licensing statutes by large forfeitures going not to the state but to repudiating defendants. In most cases, the statute itself does not require such forfeitures. The statute fixes its own penalties, usually a fine or imprisonment of a minor character with a degree of discretion in the court. The added penalty of unenforceability of bargains is a judicial creation. In many cases, the court may be wise to apply this additional penalty. When nonenforcement causes great and disproportionate hardship, a court must avoid nonenforcement. * * * After the decision in Harry Berenter, in which the Court relied in part on the Restatement of Contracts, the American Law Institute adopted Restatement (Second) of Contracts (1981). Section 178 states a more flexible approach to enforceability than the rigid revenue/regulatory dichotomy. Section 178 reads: When a Term Is Unenforceable on Grounds of Public Policy (1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms. (2) In weighing the interest in the enforcement of a term, account is taken of (a) the parties' justified expectations, (b) any forfeiture that would result if enforcement were denied, and (c) any special public interest in the enforcement of the particular term. (3) In weighing a public policy against enforcement of a term, account is taken of (a) the strength of that policy as manifested by legislation or judicial decisions, (b) the likelihood that a refusal to enforce the term will further that policy. (c) the seriousness of any misconduct involved and the extent to which it was deliberate, and (d) the directness of the connection between that misconduct and the term. We find no indication in the Act or in the Maryland cases that a policy of the Act is to protect general contractors from unlicensed subcontractors. Consequently, the fact that the Act is a regulatory measure does not bar Alcoa from recovering on its subcontracts. *** Accordingly, we shall reverse the judgment of the Circuit Court for Montgomery County and remand this action for further proceedings, not inconsistent with this opinion. 13-1b Gambling Statutes Contracts found to be in violation of a gambling statute are void. Insurance contracts do not fall under gambling statutes except where the person taking the policy does not have an insurable interest in the property or individual being insured. So-called futures contracts are not considered gambling despite the element of chance involved in establishing the future price. 13-1c Usury Statutes Laws establishing a maximum rate of permissible interest for which a lender and borrower of money may contract. A lender violating a usury statute may forfeit both principal and interest, only the interest, or only the interest in excess of the maximum permitted. In some states, the amount forfeited is a multiple (double or treble) of the interest charged. General usury statutes have traditionally been interpreted to exempt credit terms granted by vendors. The majority of states have enacted installment loan laws, which permit eligible lenders to charge a higher rate of interest than would otherwise be permissible under the applicable general interest statutes. 13-1c Sunday Statutes Common law does not prohibit entering into contracts on Sunday. Some states have legislation, Blue Laws, modifying this common law rule and prohibiting certain types of commercial activity on Sunday. Blue laws usually do not apply to activities of "necessity" and "charity." 13-2 VIOLATIONS OF PUBLIC POLICY This is a judicially created approach aimed at voiding contracts considered by the courts not to be in the public interest. Courts take a broad view when considering public policy arguments directed at private contract relationships. Contracts raising questions of public policy include agreements that (1) restrain trade, (2) exempt or exculpate a party from liability for his own tortious conduct, (3) are unconscionable, (4) involve tortious conduct, (5) tend to corrupt public officials or impair the legislative process, (6) tend to obstruct the administration of justice, or (7) impair family relationships. This section will focus on the first five of these types of agreements. *** Chapter Outcome *** Describe when a covenant not to compete will be enforced and identify the two situations in which these types of covenants most frequently arise. 13-2a Common Law Restraint of Trade Since the public benefits from vigorous commercial competition, contracts that unreasonably restrain trade are illegal. However, where the restraint is a secondary provision in the contract and protects the promisee’s property interest and is reasonable, it will be allowed. Sale of a Business — Buyers of a business often incorporate into the sales contract a covenant restricting the seller’s ability to compete. If the covenant is reasonable as to the geographic area and the time period, the courts will generally uphold it. Employment Contracts — Restrictive covenants in employment contracts will be upheld where the employee is still under contract. Upon termination of the contract by the employee, courts apply a reasonableness test in deciding whether the restriction is permissible. In such a situation, an employer will have to demonstrate that the restriction is necessary to protect his legitimate interests. CASE 13-2 PAYROLL ADVANCE, INC. v. YATES Missouri Court of Appeals, 2008 270 S.W.3d 428 http://scholar.google.com/scholar_case?case=12029870438647495616&q=270+S.W.3d+428&hl=en&as_sclt=2,22 Barney, J. Payroll Advance, Inc. (“Appellant”) appeals from the judgment of the trial court entered in favor of Barbara Yates (“Respondent”) on Appellant’s petition for injunctive relief and breach of contract of an “Employment Agreement” (“the Employment Agreement”) which contains a covenant not to compete. * * * * * * [T]he record reveals that Appellant, a foreign corporation, is licensed to transact business in the State of Missouri and has numerous locations throughout the state, including a branch located in Kennett, Missouri. [Footnote: Appellant is “a payday loan company. [It] gives loans to clients out in the community.” As best we discern the record, loans are made for short periods of time at high rates of interest. Appellant’s manager testified that a payday loan company such as Appellant’s is not like a bank because banks “normally [do not do] short-term loans.” She also distinguished Appellant’s entity from a title loan company or a debt consolidation concern.] It is customary for each of Appellant’s branch offices to employ a sole employee at each branch and that sole employee is typically referred to as the manager of that particular branch. In June of 1998, Respondent was hired as the manager of the branch office in Kennett. On November 19, 1999, as a condition of her continued employment, Appellant presented Respondent with the Employment Agreement which included * * *, a provision entitled “NON-COMPETE” (“the covenant not to compete”). This provision set out: [Respondent] agrees not to compete with [Appellant] as owner, manager, partner, stockholder, or employee in any business that is in competition with [Appellant] and within a 50 mile radius of [Appellant’s] business for a period of two (2) years after termination of employment or [Respondent] quits or [Respondent] leaves employment of [Appellant]. Respondent was employed with Appellant from June of 1998 through November 8, 2007, when Respondent was apparently fired for cause. Approximately thirty-two days after being terminated by Appellant, Respondent became employed with Check Please, one of the approximately fourteen other payday loan establishments in the area. At Check Please, Respondent performed basically the same duties such as office management and customer care as she had when employed with Appellant. On February 7, 2008, Appellant filed its “First Amended Petition for Injunctive Relief and Breach of Contract.” In this petition, Appellant brought Count I for injunctive relief to prevent Respondent from soliciting its clients for her new employer, and to stop her from using client information she purportedly obtained from her time with Appellant. Count II of the petition was for damages for breach of contract for violation of the covenant not to compete together with attorney fees and costs. * * * On February 14, 2008, the trial court entered its judgment which found “[n]o evidence exists that, following [Appellant’s] termination of [Respondent’s] ten year period of employment, [Respondent] removed any customer list or other documents from [Appellant’s] place of business [or] … made any personal or other contact with any previous or present customer of [Appellant’s] business or intends to do so.” The trial court further determined that that if the covenant not to compete was enforced as requested, Respondent will be prohibited from engaging in employment with any payday loan business in at least 126 cities situated in Missouri, Arkansas and Tennessee ([p]resumably [Respondent] also would be prohibited from such employment within a 50-mile radius of [Appellant’s] 17 other locations scattered throughout the State of Missouri. Further, [Respondent] arguably also would be prohibited from employment at a bank, savings and loan company, credit union, pawn shop or title-loan company within such geographical areas….) Accordingly, in its discretion, the trial court found “the above result would be unreasonable under the facts and circumstances of the particular industry, agreement, and geographic location here involved.” The trial court then ruled in favor of Respondent and against Appellant. The trial court also denied Respondent’s request for attorney’s fees and costs. This appeal followed. * * * “Generally, because covenants not to compete are considered to be restraints on trade, they are presumptively void and are enforceable only to the extent that they are demonstratively reasonable.” [Citations.] “Noncompetition agreements are not favored in the law, and the party attempting to enforce a noncompetition agreement has the burden of demonstrating both the necessity to protect the claimant’s legitimate interests and that the agreement is reasonable as to time and space.” [Citation.] There are at least four valid and conflicting concerns at issue in the law of non-compete agreements. First, the employer needs to be able to engage a highly trained workforce to be competitive and profitable, without fear that the employee will use the employer’s business secrets against it or steal the employer’s customers after leaving employment. Second, the employee must be mobile in order to provide for his or her family and to advance his or her career in an ever-changing marketplace. This mobility is dependent upon the ability of the employee to take his or her increasing skills and put them to work from one employer to the next. Third, the law favors the freedom of parties to value their respective interests in negotiated contracts. And, fourth, contracts in restraint of trade are unlawful. [Citation.] “Missouri courts balance these concerns by enforcing non-compete agreements in certain limited circumstances.” [Citation.] “Non-compete agreements are typically enforceable so long as they are reasonable. In practical terms, a non-compete agreement is reasonable if it is no more restrictive than is necessary to protect the legitimate interests of the employer.” [Citation.] Furthermore, “[n]on-compete agreements are enforceable to the extent they can be narrowly tailored geographically and temporally.” [Citation.] Lastly, it is not “necessary for the employer to show that actual damage has occurred, in order to obtain an injunction. The actual damage might be very hard to determine, and this is one reason for granting equitable relief.” [Citation.] Here, viewing the evidence in a light most favorable to the trial court’s holding, [citation], it is clear the trial court took umbrage with the covenant’s restrictive provisions and geographical limitations on Respondent’s [Yates’] ability to find employment. * * * The question of reasonableness of a restraint is to be determined according to the facts of the particular case and hence requires a thorough consideration of all surrounding circumstances, including the subject matter of the contract, the purpose to be served, the situation of the parties, the extent of the restraint, and the specialization of the business. * * * Here, the covenant not to compete grandly declares that Respondent cannot “compete with Appellant [Payroll] as owner, manager, partner, stockholder, or employee in any business that is in competition with [Appellant] and within a 50 mile radius of [Appellant’s] business….” (Emphasis added.) There was evidence from Appellant’s representative at trial that Appellant has seventeen branch offices in Missouri and still other locations in Arkansas. If this Court interprets the plain meaning of the covenant not compete as written, the covenant not to compete would prevent Respondent not only from working at a competing business within 50 miles of the branch office in Kennett, Missouri, but Respondent would also be barred from working in a competing business within 50 miles of any of Appellant’s branch offices. Under this interpretation, Respondent would be greatly limited in the geographic area she could work. Additionally, the covenant not to compete bars Respondent from working at “any business that is in competition with [Appellant].” Yet, it fails to set out with precision what is to be considered a competing business and certainly does not specify that it only applies to other payday loan businesses. In that Appellant is in the business of making loans, it could be inferred that in addition to barring Respondent’s employment at a different payday loan establishment the covenant not to compete also bars her from being employed anywhere loans are made including banks, credit unions, savings and loan organizations, title-loan companies, pawn shops, and other financial organizations. Such a restraint on the geographic scope of Respondent’s employment and upon her type of employment is unduly burdensome and unreasonable. [Citation.] * * * Appellant’s second point relied on asserts the trial court erred in denying its petition because [t]he trial court erroneously applied the law in failing to modify the covenant not to compete to a geographic scope it found to be reasonable in that the court found the geographic scope to be unreasonable for the payday loan industry but failed to modify the covenant not to compete to reflect a geographic scope that would be reasonable and enforceable. * * * This Court “recognize[s] that an unreasonable restriction against competition in a contract may be modified and enforced to the extent that it is reasonable, regardless of the covenant’s form of wording.” * * * Having reviewed the record in this matter, it appears the record is devoid of a request by Appellant for modification of the covenant not to compete either in its pleadings, at trial, or in its motion for new trial before the trial court. It is settled law that “‘appellate courts are merely courts of review for trial court errors, and there can be no review of matter which has not been presented to or expressly decided by the trial court.’” [Citation.] * * * The judgment of the trial court is affirmed. 13-2b Exculpatory Clauses Contractual provisions excusing a party from liability for his own tortious conduct are generally disfavored by the courts because they violate public policy. If it is clearly written, an exculpatory clause may excuse one party's negligent conduct, though this is usually carefully scrutinized by the court. CASE 13-3 ANDERSON v. MCOSKAR ENTERPRISES, INC. Court of Appeals of Minnesota, 2006 712 N.W.2d 796 http://scholar.google.com/scholar_case?case=14986343261318628809&q=712+N.W.2d+796&hl=en&as_sdt=2,10 Shumaker, J. Respondent McOskar Enterprises, Inc. owns and operates a fitness and health club in Monticello known as “Curves for Women.” [Plaintiff/] Appellant Tammey J. Anderson joined the club on April 2, 2003. As part of the registration requirements, Anderson read an “AGREEMENT AND RELEASE OF LIABILITY,” initialed each of the three paragraphs in the document, and dated and signed it. The first paragraph purported to release Curves from liability for injuries Anderson might sustain in participating in club activities or using club equipment: In consideration of being allowed to participate in the activities and programs of Curves for Women® and to use its facilities, equipment and machinery in addition to the payment of any fee or charge, I do hereby waive, release and forever discharge Curves International Inc., Curves for Women®, and their officers, agents, employees, representatives, executors, and all others (Curves® representatives) from any and all responsibilities or liabilities from injuries or damages arriving [sic] out of or connected with my attendance at Curves for Women®, my participation in all activities, my use of equipment or machinery, or any act or omission, including negligence by Curves® representatives. The second paragraph provided for Anderson’s acknowledgment that fitness activities “involve a risk of injury” and her agreement “to expressly assume and accept any and all risks of injury or death.” After completing the registration, Anderson began a workout, primarily with machines, under the supervision of a trainer. About 15 or 20 minutes later, having used four or five machines, Anderson developed a headache in the back of her head. She contends that she told the trainer, who suggested that the problem was likely just a previous lack of use of certain muscles and that Anderson would be fine. Anderson continued her workout and developed pain in her neck, shoulder, and arm. She informed the trainer but continued to exercise until she completed the program for that session. The pain persisted when Anderson returned home. She then sought medical attention, eventually had a course of physical therapy, and, in June 2003, underwent a cervical diskectomy. She then started this lawsuit for damages, alleging that Curves had been negligent in its acts or omissions during her workout at the club. Curves moved for summary judgment on the ground that Anderson had released the club from liability for negligence. The district court agreed and granted the motion. Anderson challenges the court’s ruling on appeal. * * * It is settled Minnesota law that, under certain circumstances, “parties to a contract may, without violation of public policy, protect themselves against liability resulting from their own negligence.” [Citation.] The “public interest in freedom of contract is preserved by recognizing [release and exculpatory] clauses as valid.” [Citation.] Releases of liability are not favored by the law and are strictly construed against the benefited party. [Citation.] “If the clause is either ambiguous in scope or purports to release the benefited party from liability for intentional, willful or wanton acts, it will not be enforced.” [Citation.] Furthermore, even if a release clause is unambiguous in scope and is limited only to negligence, courts must still ascertain whether its enforcement will contravene public policy. On this issue, a two-prong test is applied: Before enforcing an exculpatory clause, both prongs of the test are examined, to-wit: (1) whether there was a disparity of bargaining power between the parties (in terms of a compulsion to sign a contract containing an unacceptable provision and the lack of ability to negotiate elimination of the unacceptable provision) … and (2) the types of services being offered or provided (taking into consideration whether it is a public or essential service). [Citation.] The two-prong test describes what is generally known as a “contract of adhesion,” more particularly explained in Schlobohm: It is a contract generally not bargained for, but which is imposed on the public for necessary service on a “take it or leave it” basis. Even though a contract is on a printed form and offered on a “take it or leave it” basis, those facts alone do not cause it to be an adhesion contract. There must be a showing that the parties were greatly disparate in bargaining power, that there was no opportunity for negotiation and that the services could not be obtained elsewhere. [Citation.] * * * * * * There is nothing in the Curves release that expressly exonerates the club from liability for any intentional, willful, or wanton act. Thus, we consider whether the release is ambiguous in scope. * * * Anderson argues that the release is ambiguous because it broadly exonerates Curves from liability for “any act or omission, including negligence…” * * * * * * The vice of ambiguous language is that it fails precisely and clearly to inform contracting parties of the meaning of their ostensible agreement. Because ambiguous language is susceptible of two or more reasonable meanings, each party might carry away from the agreement a different and perhaps contradictory understanding. In the context of a release in connection with an athletic, health, or fitness activity, the consumer surely is entitled to know precisely what liability is being exonerated. A release that is so vague, general, or broad as to fail to specifically designate the particular nature of the liability exonerated is not enforceable. [Citation.] * * * It is clear from this release that Anderson agreed to exonerate Curves from liability for negligence, that being part of the express agreement that Anderson accepted and it is solely negligence of which Curves is accused. The unmistakable intent of the parties to the Curves agreement is that Curves at least would not be held liable for acts of negligence. * * * * * * Even if a release is unambiguously confined to liability for negligence, it still will be unenforceable if it contravenes public policy. Anderson contends that the Curves contract is one of adhesion characterized by such a disparity in bargaining power that she was compelled to sign it without any ability to negotiate. But her argument is unpersuasive in view of the Schlobohm holding that “an adhesion contract is … forced upon an unwilling and often unknowing public for services that cannot readily be obtained elsewhere.” [Citation.] It is, according to Schlobohm, a contract “imposed on the public for necessary service on a ‘take it or leave it’ basis.” Schlobohm involved a “gym or health spa” known as Spa Petite. Similar to Curves, it offered fitness services and required members to sign a contract that provided for a release of liability for negligence. The supreme court found no disparity in bargaining power between Spa Petite and the litigating member; found that there had been no showing that the spa’s services were necessary or that they could not have been obtained elsewhere; and found that health and fitness clubs ordinarily are not within the public-service or public-necessity classification that make their services of great public importance and necessary for the public to obtain. Even if there was a disparity of bargaining ability here—which has not been demonstrated—there was no showing that the services provided by Curves are necessary and unobtainable elsewhere. * * * The Curves release did not contravene public policy, and we adopt the supreme court’s conclusion in Schlobohm: “Here there is no special legal relationship and no overriding public interest which demand that this contract provision, voluntarily entered into by competent parties, should be rendered ineffectual.” [Citation.] * * * The district court did not err in granting respondent’s motion for summary judgment on the ground that appellant signed and agreed to a release of respondent’s liability for negligence. We affirm. *** Chapter Outcome *** Distinguish between procedural and substantive unconscionability. 13-2c Unconscionable Contracts The court may refuse to enforce an unconscionable, or unfair, contract or any part that it finds to be unconscionable. Procedural unconscionability is discovered by scrutinizing the contract for the presence of “bargaining naughtiness.” In other words, was the negotiation process fair? Substantive unconscionability relates to the actual terms of a contract; includes oppressive or grossly unfair provisions such as exorbitant prices or unfair exclusions. Some courts hold that in order for a contract to be unenforceable both substantive and procedural unconscionability must be present. Nevertheless, they need not exist to the same degree; the more oppressive one is the less evidence of the other is required. CASE 13- 4 SANCHEZ v. WESTERN PIZZA ENTERPRISES, INC. Court of Appeal, Second District, California, 2009 90 Cal.Rptr.3d 818, 172 Cal.App.4th 154 http://scholar.google.com/scholar_case?case=18161264297915300969&q=172+Cal.App.4th+154&hl=en&as_sdt=2,10 Croskey, J. [Octavio Sanchez works as a delivery driver at a Domino’s Pizza restaurant owned by Western Pizza. He drives his own car in making deliveries. His hourly wage has ranged from the legal minimum wage to approximately $0.50 above minimum wage. Western Pizza reimburses him at a fixed rate of $0.80 per delivery regardless of the number of miles driven or actual expenses incurred. Sanchez brought this class action against Western Pizza alleging that the flat rate at which drivers were reimbursed for delivery expenses violated wage and hour laws and that the drivers were paid less than the legal minimum wage. BAGLEY v. MT. BACHELOR, INC. Supreme Court of Oregon, 2014 356 Or. 543, 340 P.3d 27 Brewer, J. [Bagley, a highly skilled and experienced snowboarder, purchased a season pass from Mt. Bachelor. Upon purchasing the season pass, plaintiff executed a written “release and indemnity agreement” that defendant required of all its patrons. That season pass agreement provided, in pertinent part: In consideration of the use of a Mt. Bachelor pass and/or Mt. Bachelor’s premises, I/we agree to release and indemnify Mt. Bachelor, Inc., its officers and directors, owners, agents, landowners, affiliated companies, and employees (hereinafter ‘Mt. Bachelor, Inc.’) from any and all claims for property damage, injury, or death which I/we may suffer or for which I/we may be liable to others, in any way connected with skiing, snowboarding, or snowriding. This release and indemnity agreement shall apply to any claim even if caused by negligence. The only claims not released are those based upon intentional misconduct. *** By my/our signature(s) below, I/we agree that this release and indemnity agreement will remain in full force and effect and I will be bound by its terms throughout this season and all subsequent seasons for which I/we renew this season pass. *** On November 18, 2005, plaintiff began using the pass/ lift ticket, which stated, in part: “Read this release agreement “In consideration for each lift ride, the ticket user releases and agrees to hold harmless and indemnify Mt. Bachelor, Inc., and its employees and agents from all claims for property damage, injury or death even if caused by negligence. The only claims not released are those based upon intentional misconduct.” Further, the following sign was posted at each of defendant’s ski lift terminals: “YOUR TICKET IS A RELEASE “The back of your ticket contains a release of all claims against Mt. Bachelor, Inc. and its employees or agents. *** ” Beginning on November 18, 2005, plaintiff used his season pass to ride defendant’s lifts at least 119 times over the course of twenty-six days that he spent snow-boarding at the ski area. On February 16, 2006, while snowboarding over a human-made jump in defendant’s “air chamber” terrain park, plaintiff sustained serious injuries resulting in his permanent paralysis. Bagley sued Mt. Bachelor ski area for negligence in the design, construction, maintenance, and inspection of the jump. The trial court granted operator’s motion for summary judgment, which was based on an affirmative defense of release. In its summary judgment motion, defendant asserted that plaintiff “admittedly understood that he [had] entered into a release agreement and was snowboarding under its terms on the date of [the] accident.” Defendant argued that the release conspicuously and unambiguously disclaimed its future liability for negligence, and that the release was neither unconscionable nor contrary to public policy under Oregon law, because “skiers and snowboarders voluntarily choose to ski and snowboard and ski resorts do not provide essential public services.” In his cross-motion for partial summary judgment, plaintiff asserted that the release was unenforceable because it was contrary to public policy and was “both substantively and procedurally unconscionable.” The trial court rejected plaintiff’s public policy and unconscionability arguments, reasoning that “[s]now riding is not such an essential service which requires someone such as [p]laintiff to be forced to sign a release in order to obtain the service.” Accordingly, the trial court granted summary judgment in defendant’s favor and denied plaintiff’s cross-motion for partial summary judgment. The Court of Appeals affirmed.] The parties’ dispute in this case involves a topic—the validity of exculpatory agreements— that this court has not comprehensively addressed in decades. Although the specific issue on review—the validity of an anticipatory release of a ski area operator’s liability for negligence—is finite and particular, it has broader implications insofar as it lies at the intersection of two traditional common law domains—contract and tort—where, at least in part, the legislature has established statutory rights and duties that affect the reach of otherwise governing common law principles. It is a truism that a contract validly made between competent parties is not to be set aside lightly. [Citations.] As this court has stated, however, “contract rights are [not] absolute; *** [e]qually fundamental with the private right is that of the public to regulate it in the common interest.” [Citation.] That “common,” or public, interest is embodied, in part, in the principles of tort law. As a leading treatise explains: It is sometimes said that compensation for losses is the primary function of tort law * * * [but it] is perhaps more accurate to describe the primary function as one of determining when compensation is to be required. * * * One way in which courts have placed limits on the freedom of contract is by refusing to enforce agreements that are illegal. [Citations.] In determining whether an agreement is illegal because it is contrary to public policy, “[t]he test is the evil tendency of the contract and not its actual injury to the public in a particular instance.” [Citation.] The fact that the effect of a contract provision may be harsh as applied to one of the contracting parties does not mean that the agreement is, for that reason alone, contrary to public policy, particularly where “the contract in ques¬tion was freely entered into between parties in equal bargaining positions and did not involve a contract of adhesion, such as some retail installment contracts and insurance policies.” [Citation.] *** [C]ourts determine whether a contract is illegal by determining whether it violates public policy as expressed in relevant constitutional and statutory provisions and in case law, [citation], and by considering whether it is unconscionable. *** *** [T]his court often has relied on public policy considerations to determine whether a contract or contract term is sufficiently unfair or oppressive to be deemed unconscionable. [Citations.] *** Unconscionability may be procedural or substantive. Procedural unconscionability refers to the conditions of contract formation and focuses on two factors: oppression and surprise. [Citation.] Oppression exists when there is inequality in bargaining power between the parties, resulting in no real opportunity to negotiate the terms of the contract and the absence of meaningful choice. [Citations.] Surprise involves whether terms were hidden or obscure from the vantage of the party seeking to avoid them. [Citation.] Generally speaking, factors such as ambiguous contract wording and fine print are the hallmarks of surprise. In contrast, the existence of gross inequality of bargaining power, a take-it-or-leave-it bargaining stance, and the fact that a contract involves a consumer transaction, rather than a commercial bargain, can be evidence of oppression. Substantive unconscionability, on the other hand, gen¬erally refers to the terms of the contract, rather than the circumstances of formation, and focuses on whether the substantive terms contravene the public interest or public policy. [Citation.] Both procedural and substantive deficiencies—frequently in combination—can preclude enforcement of a contract or contract term on unconscionability grounds. Restatement §208 comment a. Identifying whether a contract is procedurally unconscionable requires consideration of evidence related to the specific circumstances surrounding the formation of the contract at issue. By contrast, the inquiry into substantive unconscionability can be more complicated. To discern whether, in the context of a particular transaction, substantive concerns relating to unfairness or oppression are sufficiently important to warrant interference with the parties’ freedom to contract as they see fit, courts frequently look to legislation for relevant indicia of public policy. When relevant public policy is expressed in a statute, the issue is one of legislative intent. [Citation.] In that situation, the court must examine the statutory text and context to determine whether the legislature intended to invalidate the contract term at issue. [Citation.] Frequently, however, the argument that a contract term is sufficiently unfair or oppressive as to be unenforceable is grounded in one or more factors that are not expressly codified; in such circumstances, the common law has a significant role to play. * * * This court has considered whether enforcement of an anticipatory release would violate an uncodified public policy in only a few cases. *** [This] court has not declared such releases to be per se invalid, but neither has it concluded that they are always enforceable. Instead, the court has followed a multi-factor approach: Agreements to exonerate a party from liability or to limit the extent of the party’s liability for tortious conduct are not favorites of the courts but neither are they automatically voided. The treatment courts accord such agreements depends upon the subject and terms of the agreement and the relationship of the parties. [Citation.] * * * *** [R]elevant procedural factors in the determination of whether enforcement of an anticipatory release would violate public policy or be unconscionable include whether the release was conspicuous and unambiguous; whether there was a substantial disparity in the parties’ bargaining power; whether the contract was offered on a take-it-or-leave-it basis; and whether the contract involved a consumer transaction. Relevant substantive considera-tions include whether enforcement of the release would cause a harsh or inequitable result to befall the releasing party; whether the releasee serves an important public interest or function; and whether the release purported to disclaim liability for more serious misconduct than ordinary negligence. Nothing in our previous decisions suggests that any single factor takes precedence over the others or that the listed factors are exclusive. Rather, they indicate that a determination whether enforcement of an anticipatory release would violate public policy or be unconscionable must be based on the totality of the circumstances of a particular transaction. *** * * * *** [O]ur analysis leads to the conclusion that permitting defendant to exculpate itself from its own negligence would be unconscionable. *** important procedural factors supporting that conclusion include the substantial disparity in the parties’ bargaining power in the particular circumstances of this consumer transaction, and the fact that the release was offered to plaintiff and defendant’s other customers on a take-it-or-leave-it basis. There also are indications that the release is substantively unfair and oppressive. First, a harsh and inequitable result would follow if defendant were immunized from negligence liability, in light of (1) defendant’s superior ability to guard against the risk of harm to its patrons arising from its own negligence in designing, creating, and maintaining its runs, slopes, jumps, and other facilities; and (2) defendant’s superior ability to absorb and spread the costs associated with insuring against those risks. Second, because defendant’s business premises are open to the general public virtually without restriction, large numbers of skiers and snowboarders regularly avail themselves of its facilities, and those patrons are subject to risks of harm from conditions on the premises of defendant’s creation, the safety of those patrons is a matter of broad societal concern. The public interest, therefore, is affected by the performance of defendant’s private duties toward them under business premises liability law. In the ultimate step of our unconscionability analysis, we consider whether those procedural and substantive considerations outweigh defendant’s interest in enforcing the release at issue here. Restatement (Second) of Con¬tracts §178 comment b (“[A] decision as to enforceability is reached only after a careful balancing, in the light of all the circumstances, of the interest in the enforcement of the particular promise against the policy against the enforcement of such terms.”) Defendant argues that, in light of the inherent risks of skiing, it is neither unfair nor oppressive for a ski area operator to insist on a release from liability for its own negligence. *** Defendant’s arguments have some force. After all, skiing and snow boarding are activities whose allure and risks derive from a unique blend of factors that include natural features, artificial constructs, and human engagement. It may be difficult in such circumstances to untangle the causal forces that lead to an injury-producing accident. Moreover, defendant is correct that several relevant factors weigh in favor of enforcing the release. *** [T]he release was conspicuous and unambiguous, defendant’s alleged misconduct in this case was negligence, not more egregious conduct, and snow-boarding is not a necessity of life. That said, the release is very broad; it applies on its face to a multitude of conditions and risks, many of which (such as riding on a chairlift) leave defendant’s patrons vulnerable to risks of harm of defendant’s creation. Accepting as true the allegations in plaintiff’s com-plaint, defendant designed, created, and maintained artificial constructs, including the jump on which plaintiff was injured. Even in the context of expert snow-boarding in defendant’s terrain park, defendant was in a better position than its invitees to guard against risks of harm created by its own conduct. A final point deserves mention. It is axiomatic that public policy favors the deterrence of negligent conduct. *** As the parties readily agree, the activities at issue in this case involve considerable risks to life and limb. Skiers and snowboarders have important legal inducements to exercise reasonable care for their own safety by virtue of their statutory assumption of the inherent risks of skiing. By contrast, without potential exposure to liability for their own negligence, ski area operators would lack a commensurate legal incentive to avoid creating unreasonable risks of harm to their business invitees. [Citation.] Where, as here, members of the public are invited to participate without restriction in risky activities on defendant’s business premises (and many do), and where the risks of harm posed by operator negligence are appreciable, such an imbalance in legal incentives is not conducive to the public interest. Because the factors favoring enforcement of the release are outweighed by the countervailing considerations that we have identified, we conclude that enforcement of the release at issue in this case would be unconscionable. And, because the release is unenforceable, genuine issues of fact exist that preclude summary judgment in defend¬ant’s favor. The decision of the Court of Appeals is reversed. The judgment of the trial court is reversed and the case is remanded to that court for further proceedings. *** Chapter Outcome *** Explain when exculpatory agreements, agreements involving the commitment of a tort, and agreements involving public officials will be held to be illegal. NOTE: The answer to the first part of this “Chapter Outcome” is found above. 13-2d Tortious Conduct An agreement requiring a person to commit a tort is an illegal agreement and is unenforceable. This type of agreement is considered to be contrary to public policy. 13-2e Corrupting Public Officials Agreements that may adversely affect the public interest through the corruption of public officials or the impairment of the legislative process are unenforceable. *** Chapter Outcome *** Explain the usual effects of illegality and the major exceptions to this rule. 13-3 EFFECT OF ILLEGALITY 13-3a General Rule: Unenforceability With few exceptions, illegal contracts are unenforceable. Neither party may recover under an illegal agreement where both parties are in pari delicto (in equal fault). 13-3b Exceptions Recovery of payments may be permitted by one party who must fit one of these categories: Party Withdrawing Before Performance — May recover whatever was contributed, as long as the party has not committed serious misconduct. Party Protected by Statute — Usually designed to protect person in the position of one party. Party Not Equally at Fault — Such as when one party engages in fraud, duress or undue influence. Excusable Ignorance — Such as when one party has no reason to know of circumstances or minor legislation which makes the agreement illegal. Partial Illegality — Either: the contract is made completely illegal by the illegal part, and therefore is unenforceable, or, if it is possible to separate the illegal from the legal, the legal part will be enforced. 13-3c Restitution The Restatement of Restitution provides that a person who renders performance under an agreement that is illegal or otherwise unenforceable for reasons of public policy may obtain restitution from the other party, as necessary to prevent unjust enrichment, if the allowance of restitution will not defeat or frustrate the policy of the underlying prohibition. However, a claim in restitution is not allowed if it is foreclosed by the claimant’s inequitable conduct. Chapter 14 CONTRACTUAL CAPACITY Minors [14-1] Liability on Contracts [14-1a] Dissaffirmance Restitution Ratification Liability for Necessaries [14-1b] Liability for Misrepresentation of Age [14-1c] Liability for Tort Connected with Contract [14-1d] Incompetent Persons [14-2] Person Under Guardianship [14-2a] Mental Illness or Defect [14-2b] Intoxicated Persons [14-3] Cases in This Chapter Berg v. Traylor In re The Score Board, Inc. Zelnick v. Adams First State Bank of Sinai v. Hyland Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain how and when a minor may ratify a contract. • Describe the liability of a minor who (1) disaffirms a contract or (2) misrepresents his age. • Define a “necessary” and explain how it affects the contracts of a minor. • Distinguish between the legal capacity of a person under guardianship and a mentally incompetent person who is not under guardianship. • Explain the rule governing an intoxicated person’s capacity to enter into a contract and contrast this rule with the law governing minors and incompetent persons. TEACHING NOTES A binding promise or agreement requires that the parties to the agreement have contractual capacity. Persons who are legally limited in their capacity to contract include minors, incompetent persons, and intoxicated persons. 14-1 MINORS A person who is under the age of majority (usually 18 years). *** Chapter Outcome *** Explain how and when a minor may ratify a contract. Describe the liability of a minor who (1) disaffirms a contract or (2) misrepresents his age. 14-1a Liability on Contracts A minor’s contract, whether executory or executed, is usually voidable at his or his guardian’s option. Disaffirmance — either express or implied, as long as it shows an intention not to be bound. A minor may disaffirm most contracts at any time before reaching the age of majority, and in some cases within a reasonable time after reaching the age of majority, if she did not first ratify the contract after she came of age. Ratification — After a minor becomes of age, she may choose to adopt or ratify a contract, which makes the contract binding ab initio (from the beginning). NOTE: See textbook discussion of a minor’s right to disaffirm and recover property that has already been sold to a second buyer. CASE 14-1 BERG v. TRAYLOR Court of Appeal, Second District, Division 2, California, 2007 148 Cal.App.4th 809, 56 Cal.Rptr.3d 140 http://scholar.google.com/scholar_case?case=1540939777753786246&q=56+Cal.Rptr.3d + 140&hl=en&as_sclt=2,22 Todd, J. Appellants Meshiel Cooper Traylor (Meshiel) and her minor son Craig Lamar Traylor (Craig) appeal the judgment confirming an arbitration award in favor of Craig’s former personal manager, respondent Sharyn Berg (Berg), for unpaid commissions under a contract between Berg, Meshiel and Craig and unrepaid loans from Berg. * * * On January 18, 1999, Berg entered into a two-page “Artist’s Manager’s Agreement” (agreement) with Meshiel and Craig, who was then 10 years old. Meshiel signed the agreement and wrote Craig’s name on the signature page where he was designated “Artist.” Craig did not sign the agreement. Pursuant to the agreement, Berg was to act as Craig’s exclusive personal manager in exchange for a commission of 15 percent of all gross monies or other consideration paid to him as an artist during the three-year term of the agreement, as well as income from merchandising or promotional efforts or offers of employment made during the term of the agreement, regardless of when Craig received such monies. The agreement expressly provided that any action Craig “may take in the future pertaining to disaffirmance of this agreement, whether successful or not,” would not affect Meshiel’s liability for any commissions due Berg. The agreement also provided that any disputes concerning payment or interpretation of the agreement would be determined by arbitration in accordance with the rules of Judicial Arbitration and Mediation Services, Inc. (JAMS). * * * On or about June 13, 2001, Craig obtained a recurring acting role on the Fox Television Network show “Malcolm in the Middle” (show). On September 11, 2001, four months prior to the expiration of the agreement, Meshiel sent a certified letter to Berg stating that while she and Craig appreciated her advice and guidance, they no longer needed her management services and could no longer afford to pay Berg her 15 percent commission because they owed a “huge amount” of taxes. On September 28, 2001, Berg responded, informing appellants that they were in breach of the agreement. * * * In 2004, Berg filed suit against Meshiel and Craig for breach of the agreement, breach of the implied covenant of good faith and fair dealing, breach of an oral loan agreement, conversion and declaratory relief. * * * * * * The arbitration hearing commenced on February 7, 2005. * * * Though Meshiel and Craig’s counsel failed to appear at the hearing, Meshiel personally appeared with Craig’s talent agent, Steven Rice. Craig did not appear. * * * On February 11, 2005, the arbitrator issued his award, which was served on the parties on February 14, 2005. * * * The arbitrator awarded Berg commissions and interest of $154,714.15, repayment of personal loans and interest of $5,094, and attorney fees and costs of $13,762. He also awarded Berg $405,000 “for future earnings projected on a minimum of 6 years for national syndication earnings,” and stated that this part of the award would “vest and become final, as monies earned after February 7, 2005, become due and payable.” * * * [The defendants then filed a petition with the State trial court to vacate the arbitration award. Following a hearing, the trial court trial court entered a judgment in favor of Berg against Meshiel and Craig consistent with the arbitrator’s award.] * * * Simply stated, one who provides a minor with goods and services does so at her own risk. [Citation.] The agreement here expressly contemplated this risk, requiring that Meshiel remain obligated for commissions due under the agreement regardless of whether Craig disaffirmed the agreement. Thus, we have no difficulty in reaching the conclusion that Craig is permitted to and did disaffirm the agreement and any obligations stemming therefrom, while Meshiel remains liable under the agreement and resulting judgment. Where our difficulty lies is in understanding how counsel, the arbitrator, and the trial court repeatedly and systematically ignored Craig’s interests in this matter. From the time Meshiel signed the agreement, her interests were not aligned with Craig’s. That no one—counsel, the arbitrator, or the trial court—recognized this conflict and sought appointment of a guardian ad litem for Craig is nothing short of stunning. It is the court’s responsibility to protect the rights of a minor who is a litigant in court. [Citation.] * * * “As a general proposition, parental consent is required for the provision of services to minors for the simple reason that minors may disaffirm their own contracts to acquire such services.” [Citation.] According to Family Code section 6700, “a minor may make a contract in the same manner as an adult, subject to the power of disaffirmance”. * * * In turn, Family Code section 6710 states: “Except as otherwise provided by statute, a contract of a minor may be disaffirmed by the minor before majority or within a reasonable time afterwards or, in case of the minor’s death within that period, by the minor’s heirs or personal representative.” Sound policy considerations support this provision: The law shields minors from their lack of judgment and experience and under certain conditions vests in them the right to disaffirm their contracts. Although in many instances such disaffirmance may be a hardship upon those who deal with an infant, the right to avoid his contracts is conferred by law upon a minor “for his protection against his own improvidence and the designs of others.” It is the policy of the law to pro¬tect a minor against himself and his indiscretions and immaturity as well as against the machinations of other people and to discourage adults from contracting with an infant. Any loss occasioned by the disaffirmance of a minor’s contract might have been avoided by declining to enter into the contract. [Citation.] Berg offers two reasons why the plain language of Family Code section 6710 is inapplicable, neither of which we find persuasive. First, she argues that a minor may not disaffirm an agreement signed by a parent. * * * [This is not in accord with the law as stated in numerous cases.] Second, Berg argues that Craig cannot disaffirm the agreement because it was for his and his family’s necessities. Family Code section 6712 provides that a valid contract cannot be disaffirmed by a minor if all of the following requirements are met: the contract is to pay the reasonable value of things necessary for the support of the minor or the minor’s family, the things have actually been furnished to the minor or the minor’s family, and the contract is entered into by the minor when not under the care of a parent or guardian able to provide for the minor or the minor’s family. These requirements are not met here. The agreement was not a contract to pay for the necessities of life for Craig or his family. While such necessities have been held to include payment for lodging [citation] and even payment of attorneys’ fees [citation], we cannot conclude that a contract to secure personal management services for the purpose of advancing Craig’s acting career constitutes payment for the type of necessity contemplated by Family Code section 6712. Nor is there any evidence that Meshiel was unable to provide for the family in 1999 at the time of the agreement. As such, Family Code section 6712 does not bar the minor’s disaffirmance of the contract. No specific language is required to communicate an intent to disaffirm. “A contract (or conveyance) of a minor may be avoided by any act or declaration disclosing an unequivocal intent to repudiate its binding force and effect.” [Citation.] Express notice to the other party is unnecessary. [Citation.] We find that the “Notice of Disaffirmance of Arbitration Award by Minor” filed on August 8, 2005 was sufficient to constitute a disaffirmance of the agreement by Craig. * * * We find that Craig was entitled to and did disaffirm the agreement which, among other things, required him to arbitrate his disputes with Berg. On this basis alone, therefore, the judgment confirming the arbitration award must be reversed. * * * Appellants do not generally distinguish their arguments between mother and son, apparently assuming that if Craig disaffirms the agreement and judgment, Meshiel would be permitted to escape liability as well. But a disaffirmance of an agreement by a minor does not operate to terminate the contractual obligations of the parent who signed the agreement. [Citation.] The agreement Meshiel signed provided that Craig’s disaffirmance would not serve to void or avoid Meshiel’s obligations under the agreement and that Meshiel remained liable for commissions due Berg regardless of Craig’s disaffirmance. Accordingly, we find no basis for Meshiel to avoid her independent obligations under the agreement. The judgment is reversed as to Craig and affirmed as to Meshiel. CASE 14-2 IN RE THE SCORE BOARD, INC. United States District Court, D. New Jersey, 1999 238 B.R. 585 http://scholar.google.com/scholar_case?case=9690754193230293303&q=238+B.R.+585+&hl=en&as_sdt=2,34 Irenas, J. During the Spring of 1996, Appellant Kobe Bryant (“Bryant”), then a seventeen-year old star high school basketball player, declared his intention to forego college and enter the 1996 lottery draft of the National Basketball Association. On May 8, 1996, The Score Board Inc. (“Debtor”), then a New Jersey based company in the business of licensing, manufacturing and distributing sports and entertainment-related memorabilia, contacted Bryant’s Agent, Arn Tellem (“Tellem” or “Agent”) in anticipation of making a deal with Bryant. * * * In early July 1996, after the above [initial] negotiations, Debtor prepared and forwarded a signed written licensing agreement (“agreement”) to Bryant. The agreement granted Debtor the right to produce licensed products, such as trading cards, with Bryant’s image. Bryant was obligated to make two personal appearances on behalf of Debtor and provide between a minimum of 15,000 and a maximum of 32,500 autographs. Bryant was to receive a $2.00 stipend for each autograph, after the first 7,500. Under the agreement, Bryant could receive a maximum of $75,000 for the autographs. In addition to being compensated for the autographs, Bryant was entitled to receive base compensation of $10,000. Moreover, Debtor agreed to pay Bryant $5,000, of the $10,000, within ten days following receipt of the fully executed agreement. Finally, Bryant was entitled to a $5,000 bonus if he returned the agreement within six weeks. Bryant rejected the above agreement, and on July 11, 1996, while still a minor, Bryant made a counter-offer (“counter-offer”), signed it and returned it to Debtor. The counter-offer made several changes to Debtor’s agreement, including the number of autographs. Bryant also changed the amount of prepaid autographs from 7,500 to 500. Balser claimed that he signed the counter-offer and placed it into his files. The copy signed by Debtor was subsequently misplaced, however, and has never been produced by Debtor during these proceedings. Rather, Debtor has produced a copy signed only by Bryant. On August 23, 1996, Bryant turned eighteen. Three days later, Bryant deposited a check for $10,000 into his account from Debtor. On or about September 1, 1996, Bryant began performing his obligations under the agreement, including autograph signing sessions and public appearances. He subsequently performed his contractual duties for about a year and a half. By late 1997, Bryant grew reluctant to sign any more autographs under the agreement and his Agent came to the conclusion that a fully executed contract did not exist. By this time, Tellem became concerned with Debtor’s financial condition because it failed to make certain payments to several other players. Debtor claims that the true motivation for Bryant’s reluctance stems from his perception that he was becoming a “star” player, and that his autograph was “worth” more than $2.00. * * * On March 17, 1998, Debtor sent Bryant a check for $1,130 as compensation for unpaid autographs. Bryant alleges that he was entitled to $10,130, not $1,130. The Bankruptcy Court found that Bryant was owed $10,130 and the check for $1,130 was based on a miscalculation. On March 18, 1998, Debtor filed a voluntary Chapter 11 bankruptcy petition. On March 23, 1998, Tellem returned the $1,130 check upon learning of Debtor’s financial trouble. Included with the check was a letter that questioned the validity of the agreement between Bryant and Debtor. * * * On April 20, 1998, Tellem stated that no contract existed because the counter-offer was never signed by Debtor and there was never a meeting of the minds. Tellem added that the counter-offer expired and that Kobe Bryant withdrew from the counter-offer. Subsequently, Debtor began to sell its assets, including numerous executory contracts with major athletes, including Bryant. Bryant argued that Debtor could not do this, because he believed that a contract never existed. In the alternative, if a contract was created, Bryant contended that it was voidable because it was entered into while he was a minor. * * * On December 21, 1998, the Honorable Gloria M. Burns ruled in her memorandum opinion that Debtor accepted Bryant’s counter-offer and, therefore, a valid contract existed between Bryant and Debtor. In the alternative, the Bankruptcy Court held that even if Bryant’s counter-offer was not signed by Debtor, the parties’ subsequent conduct dem-onstrated their acceptance of the contractual obligation by performance, thereby creating an enforceable contract. Judge Burns denied Bryant’s claims of mutual mistake, infancy and his motion for stay relief. * * * On February 2, 1999, the Bankruptcy Court entered its final orders: (1) granting Debtor’s motion to assume its executory contract with Bryant and assign it to Oxxford; and (2) overruling Bryant’s objection to the sale. Bryant challenges the Bankruptcy Court’s finding that he ratified the agreement upon attaining majority. Contracts made during minority are voidable at the minor’s election within a reasonable time after the minor attains the age of majority. [Citations] The right to disaffirm a contract is subject to the infant’s conduct which, upon reaching the age of majority, may amount to ratification. [Citation.] “Any conduct on the part of the former infant which evidences his decision that the transaction shall not be impeached is sufficient for this purpose.” [Citation.] On August 23, 1996, Bryant reached the age of majority, approximately six weeks after the execution of the agreement. On August 26, 1996, Bryant deposited the $10,000 check sent to him from Debtor. Bryant also performed his contractual duties by signing autographs. The Bankruptcy Court did not presume ratification from inaction as Bryant asserts. It is clear that Bryant ratified the contract from the facts, because Bryant consciously performed his contractual duties. Bryant asserts that he acted at the insistence of his Agent, who believed that he was obligated to perform by contract. Yet, neither Bryant nor his Agent disputed the existence of a contract until the March 23, 1998, letter by Tellem. That Bryant may have relied on his Agent is irrelevant to this Court’s inquiry and is proper evidence only in a suit against the Agent. To the contrary, by admitting that he acted because he was under the belief that a contract existed, Bryant confirms the existence of the contract. Moreover, it was Bryant who deposited the check, signed the autographs, and made personal appearances. For the above reasons, Bryant’s appeal of the Bankruptcy Court’s orders finding that a valid and enforceable contract exists is denied. *** Chapter Outcome *** Define a “necessary” and explain how it affects the contracts of a minor. 14-1b Liability for Necessaries Contractual incapacity does not excuse a minor from an obligation to pay a reasonable value for necessaries —things that supply his personal needs, such as food, shelter, medicine, and clothing. CASE 14-3 ZELNICK v. ADAMS Supreme Court of Virginia, 2002 263 Va. 601, 561 S.E.2d 711 http://scholar.google.com/scholar_case?case=13963993610436500611&q=561+S.E.2d+711+&hl=en&as_sdt=2,34 Lemons, J. In this appeal, we consider whether a contract for legal services entered into on behalf of a minor is voidable upon a plea of infancy or subject to enforcement as an implied contract for necessaries and, if enforceable, the basis for determining value of services rendered. Facts and Proceedings Below Jonathan Ray Adams (“Jonathan”) was born on April 5, 1980, the natural child of Mildred A. Adams (“Adams” or “mother”) and Cecil D. Hylton, Jr. (“Hylton” or “father”). Jonathan’s parents were never married to each other. On September 8, 1995, after highly contested litigation, an agreed order (“paternity order”) was entered in Dade County, Florida, establishing Hylton’s paternity of Jonathan. Jonathan’s grandfather, Cecil D. Hylton, Sr. (“Hylton Sr.”), died testate [with a will] on August 25, 1989. His will established certain trusts and provided that the trustees had sole discretion to determine who qualified as “issue” under the will. The will created two separate trusts for Hylton Sr.’s grandchildren: the First Grandchildren’s Charitable Trust and the Second Grandchildren’s Charitable Trust (“the trusts”). Hylton Sr.’s grandchildren and great grandchildren would potentially receive distributions from the trusts in the years 2014 and 2021. * * * On July 11, 1996, Adams met with an attorney, Robert J. Zelnick (“Zelnick”), about protecting Jonathan’s interest as a beneficiary of the trusts. She had received information leading her to believe that distributions were being made from the trusts to some of Hylton Sr.’s grandchildren. Adams told Zelnick that she contacted Jonathan’s father about these alleged distributions, but she had not received a response from him. Adams explained that she had also contacted the law firm that had prepared Hylton Sr.’s will and the trustees, and no one would provide her any information about the distributions or whether the Estate would recognize Jonathan as a beneficiary. * * * Adams explained that she could not afford to pay Zelnick’s hourly fee and requested legal services on her son’s behalf on a contingency fee basis. At the conclusion of the meeting, Zelnick told Adams that he was unsure whether he would take the case, but that he would investigate the matter. Zelnick next spoke with Adams during a telephone conversation on July 18, 1996. He informed her that he had obtained a copy of the will and reviewed it, and that he was willing to accept the case “to help her have Jonathan declared a beneficiary of the estate.” Adams went to Zelnick’s office the next day, July 19, 1996, where Zelnick explained that the gross amount of the estate was very large. According to Zelnick, he “wanted to make sure that she had some understanding of the size of the estate before she entered into this agreement.” * * * On July 19, 1996, Adams signed a retainer agreement (“the contract”) for Zelnick’s firm to represent Jonathan on a one-third contingency fee basis “in his claim against the estate of Cecil D. Hylton.” In May 1997, Zelnick filed a bill of complaint for declaratory judgment, accounting and other relief on Jonathan’s behalf to have Jonathan recognized as the grandchild and “issue” of Hylton Sr. for the purposes of the will and trusts. * * * A consent decree was entered on January 23, 1998, which ordered that Jonathan was “declared to be the grandchild and issue of Cecil D. Hylton” and was “entitled to all bequests, devises, distributions and benefits under the Last Will and Testament of Cecil D. Hylton and the trusts created thereunder that inure to the benefit of the grandchildren and issue of Cecil D. Hylton.” In March 1998, Jonathan’s father brought a bill of complaint for declaratory judgment against Adams and Zelnick, on Jonathan’s behalf, to have the contract with Zelnick declared void. Upon reaching the age of majority, Jonathan filed a petition to intervene, wherein he disaffirmed the contract. * * * On April 6, 2000, Jonathan filed a motion for summary judgment. He asserted that the contract was “void as a matter of law” because it was not a contract for necessaries. Jonathan argued that the 1997 suit was unnecessary due to the Florida paternity decree which conclusively established Hylton’s paternity. He further argued that the 1997 suit was unnecessary because the trusts could not distribute any funds until the years 2014 and 2021 and the issue was not “ripe for determination.” Finally, Jonathan claimed that the contingency fee agreement was unreasonable. The trial court granted Jonathan’s motion for summary judgment and ruled that the contingency fee agreement was void. The trial court held that the contract was not binding on Jonathan because he was “in his minority” when the contract was executed. Furthermore, according to the trial court, the doctrine of necessaries did not apply to the contract “because the matter could have been adjudicated after the majority of [Jonathan], who was within a few years of his majority at the time that all of this came out.” Nonetheless, the trial court held that Zelnick was entitled to a fee under the theory of quantum meruit. * * * Zelnick testified that he spent approximately 150 to 200 hours on the case, and that in 1996–1997, his hourly rate was $200 an hour. * * * The trial court entered judgment in favor of Zelnick in the amount of $60,000. * * * Both Zelnick and Jonathan have appealed the judgment of the trial court. * * * Analysis * * * Under well and long-established Virginia law, a contract with an infant is not void, only voidable by the infant upon attaining the age of majority. [Citation.] This oft-cited rule is subject to the relief provided by the doctrine of necessaries which received thorough analysis in the case of Bear’s Adm’x v. Bear, [citation]. In Bear, we explained that when a court is faced with a defense of infancy, the court has the initial duty to determine, as a matter of law, whether the “things supplied” to the infant under a contract may fall within the general class of necessaries. [Citation.] The court must further decide whether there is sufficient evidence to allow the finder of fact to determine whether the “things supplied” were in fact necessary in the instant case. If either of these preliminary inquiries is answered in the negative, the party who provided the goods or services to the infant under the disaffirmed contract cannot recover. If the preliminary inquiries are answered in the affirmative, then the finder of fact must decide, under all the circumstances, whether the “things supplied” were actually necessary to the “position and condition of the infant.” If so, the party who provided the goods or services to the infant is entitled to the “reasonable value” of the things furnished. In contracts for necessaries, an infant is not bound on the express contract, but rather is bound under an implied contract to pay what the goods or services furnished were reasonably worth. [Citation.] “Things supplied,” which fall into the class of necessaries, include “board, clothing and education.” [Citation.] Things that are “necessary to [an infant’s] subsistence and comfort, and to enable [an infant] to live according to his real position in society” are also considered part of the class of necessaries. [Citation.] * * * Certainly, the provision of legal services may fall within the class of necessaries for which a contract by or on behalf of an infant may not be avoided or disaffirmed on the grounds of infancy. Generally, contracts for legal services related to prosecuting personal injury actions, and protecting an infant’s personal liberty, security, or reputation are considered contracts for necessaries. [Citation.] “Whether attorney’s services are to be considered necessaries or not depends on whether or not there is a necessity therefor. If such necessity exists, the infant may be bound. * * * If there is no necessity for services, there can be no recovery” for the services. [Citation.] The Supreme Court of Appeals of West Virginia recently addressed this issue in a paternity action against the estate of an infant’s father, brought by the infant’s mother on the infant’s behalf. [Citation.] The court held that contracts for legal services by infants should be regarded as contracts for necessaries in some instances because “if minors are not required to pay for legal representation, they will not be able to protect their various interests.” [Citation.] Other states have also broadened the definition of “necessaries” to include contracts for legal services for the protection of an infant’s property rights. * * * * * * The ultimate determination is an issue of fact. The trier of fact must conclude that “under all the circumstances, the things furnished were actually necessary to the position and condition of the infant * * * and whether the infant was already sufficiently supplied.” [Citation.] If the contract does not fall within the “general classes of necessaries,” the trial court must, as a matter of law, sustain the plea of infancy and permit the avoidance of the contract. Similarly, if the contract does fall within the “general classes of necessaries,” but upon consideration of all of the circumstances, the trier of fact determines that the provision of the particular services or things was not actually necessary, the plea of infancy must be sustained. Where there is a successful avoidance of the contract, the trial court may not circumvent the successful plea of infancy by affording a recovery to the claimant on the theory of quantum meruit. However, if the plea of infancy is not sustained, the claimant is not entitled to enforcement of the express contract. Rather, as we have previously held, “even in contracts for necessaries, the infant is not bound on the express contract but on the implied contract to pay what they are reasonably worth.” [Citation.] * * * Upon review of the record, we hold that the * * * reason stated by the trial court for holding that the necessaries doctrine did not apply, namely that the contract “was conducted while he was in his minority and he’s not bound by that,” is an error of law. We hold that a contract for legal services is within the “general classes of necessaries” that may defeat a plea of infancy. * * * * * * The trial court’s determination that the necessaries doctrine did not apply was made upon motion for summary judgment filed by Jonathan. Nowhere in Jonathan’s motion for summary judgment is the issue raised that the services were unnecessary at the time rendered. * * * Although Jonathan argues that the services were not necessary at all because he alleges that the Florida litigation resolved the question of his inclusion as a beneficiary under the will of Hylton Sr., the timing of the services was not even mentioned as an issue, much less as a reason for granting summary judgment. * * * Because the trial court erred in its determination, on this record, on summary judgment, that the doctrine of necessaries did not apply, we will reverse the judgment of the trial court and remand for further proceedings, including the taking of evidence on the issue of the factual determination of necessity “under all of the circumstances.” Consistent with this opinion, should the trial court upon remand hold that the doctrine of necessaries does not apply because the evidence adduced does not support the claim, the contract is avoided and no award shall be made. Should the trial court upon remand hold that the evidence is sufficient to defeat Jonathan’s plea of infancy, the trial court shall receive evidence of the reasonable value of the services rendered. * * * Reversed and remanded. 14-1c Liability for Misrepresentation of Age Most states allow a minor who lies about her age to nevertheless disaffirm a contract, but either (a) require restitution or (b) allow the defrauded party to recover damages against the minor in tort. Some states, however, prohibit disaffirmance if a minor misrepresents her age and the adult, in good faith, reasonably relies on the misrepresentation. 14-1d Liability for Tort Connected with Contract A minor who commits a tort that is so greatly interwoven with and connected to a contract may not be liable for the results of his tortious conduct. If the minor violates the contract in committing the tort, it may be possible to recover damages from the tort without enforcing the contract. *** Chapter Outcome *** Distinguish between the legal capacity of a person under guardianship and a mentally incompetent person who is not under guardianship. 14-2 INCOMPETENT PERSONS 14-2a Person Under Guardianship Contracts made by a person placed under guardianship by court order are void. A party dealing with an individual under guardianship may be able to recover the fair value of any necessaries provided. 14-2b Mental Illness or Defect A contract entered into by a mentally incompetent person (one who is unable to understand the nature and consequences of his acts) is voidable. Some states and the Restatement also recognize mental incompetence if the mental condition impairs a person’s ability to act in a reasonable manner and the contract is grossly unfair. Like minors and persons under guardianship, an incompetent person is liable for necessaries furnished him on the principle of quasi contract, the amount of recovery being the reasonable value of the goods or services. *** Chapter Outcome *** Explain the rule governing an intoxicated person's capacity to enter into a contract and contrast this rule with the law governing minors and incompetent persons. 14-3 INTOXICATED PERSONS A contract entered into by an intoxicated person is voidable if the unintoxicated party has reason to know that, because of intoxication, the other person is unable to understand the nature and consequences of his actions or is unable to act in a reasonable manner. Like incompetent persons, intoxicated persons are liable in quasi contract for necessaries furnished during their incapacity. CASE 14-4 FIRST STATE BANK OF SINAI v. HYLAND Supreme Court of South Dakota, 1987 399 N.W.2d 894 http://scholar.google.com/scholar_case?case=9646538788520684587&q=399+N.W.2d+894&hl=en&as_sclt=2,34 Henderson, J. [Randy Hyland, unable to pay two promissory notes due September 19, 1981, negotiated with The First State Bank of Sinai (Bank) for an extension. The Bank agreed on the condition that Randy’s father, Mervin, act as cosigner. Mervin, a good customer of the Bank, had executed and paid on time over sixty promissory notes within a seven-year period. Accordingly, the Bank drafted a new promissory note with an April 20, 1982, due date, which Randy took home for Mervin to sign. On April 20, 1982, the new note was unpaid. Randy, on May 5, 1982, brought the Bank a check signed by Mervin to cover the interest owed on the unpaid note and asked for another extension. The Bank agreed to a second extension, again on the condition that Mervin act as cosigner. Mervin, however, refused to sign the last note; and Randy subsequently declared bankruptcy. The Bank sued Mervin on December 19, 1982. Mervin responded that he was not liable since he had been incapacitated by liquor at the time he signed the note. He had been drinking heavily throughout this period, and in fact had been involuntarily committed to an alcoholism treatment hospital twice during the time of these events. In between commitments, however, Mervin had executed and paid his own promissory note with the Bank and had transacted business in connection with his farm. The trial court held that Mervin’s contract as cosigner was void due to alcohol-related incapacity, and the Bank appealed.] Historically, the void contract concept has been applied to nullify agreements made by mental incompetents who have contracted * * * after a judicial determination of incapacity had been entered. [Citations.] * * * Mervin had numerous and prolonged problems stemming from his inability to handle alcohol. However, he was not judicially declared incompetent during the note’s signing. * * * Contractual obligations incurred by intoxicated persons may be voidable. [Citation.] Voidable contracts (contracts other than those entered into following a judicial determination of incapacity) * * * may be rescinded by the previously disabled party. [Citation.] However, disaffirmance must be prompt, upon the recovery of the intoxicated party’s mental abilities, and upon his notice of the agreement, if he had forgotten it. [Citation.] * * * A voidable contract may also be ratified by the party who had contracted while disabled. Upon ratification, the contract becomes a fully valid legal obligation. [Citation.] Ratification can either be express or implied by conduct. [Citations.] In addition, failure of a party to disaffirm a contract over a period of time may, by itself, ripen into a ratification, especially if rescission will result in prejudice to the other party. [Citations.] Mervin received both verbal notice from Randy and written notice from Bank on or about April 27, 1982, that the note was overdue. On May 5, 1982, Mervin paid the interest owing with a check which Randy delivered to Bank. This by itself could amount to ratification through conduct. If Mervin wished to avoid the contract, he should have then exercised his right of rescission. We find it impossible to believe that Mervin paid almost $900 in interest without, in his own mind, accepting responsibility for the note. His assertion that paying interest on the note relieved his obligation is equally untenable in light of his numerous past experiences with promissory notes. * * * We conclude that Mervin’s obligation to Bank is not void. * * * Mervin’s obligation on the note was voidable and his subsequent failure to disaffirm (lack of rescission) and his payment of interest (ratification) then transformed the voidable contract into one that is fully binding upon him. We reverse and remand. NOTE: See Figure 14-1 for the voidability of contracts by persons lacking contractual capacity. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637
Close