Capacity and Legality Statute of Frauds

Drafting TipsClass 2

An illegal contract is void

A contract is illegal if: ◦It violates a federal or state statute◦It violates public policy

Many statutes prohibit certain contracts or contract terms

Some of these are:◦Gambling statutes◦Insurance statutes and regulations◦Usury statutes◦Consumer protection statutes◦Statutes protecting vulnerable

individuals

Gambling is authorized or criminalized by RCW 9.46.◦Certain kinds of gambling activities are

authorized. Some Bingo Fishing Derby Charitable chance State lottery

Tribal Gaminghttp://apps.leg.wa.gov/RCW/default.aspx?cite=9.46

Life insurance ◦Requires insured to have an insurable

interest in the subject of the policy

◦The objection to these policies “was not the temptation to murder but the fact that such wagers came to be regarded as mischievous kind of gaming.”

◦ In re Estate of D’Agosto, 134 Wn. App. 390 (2006)

Usury laws prohibit charging excess interest on loans.◦Excess interest is generally defined in

the statute.

Washington’s usury statute is RCW 19.52◦Although limits are set on certain loans, many

others are exempt from the usury rates. http://apps.leg.wa.gov/RCW/default.aspx?cite=19.52.020

◦RCW 19.52.030 permits enforcement of usurious contracts, but only allows the creditor to collect the principal – less twice the interest paid and minus the accrued but unpaid interest. Attorneys fees and costs also are assessed against the creditor.

Statutes to Protect the Public: Only licensed practitioners/providers may enforce a contract

Regulatory or Revenue Statutes: Contract with an unlicensed individual is generally enforceable.

If there is no statute that prohibits what a court determines to be offensive contract terms, the court may refuse to enforce the contract if, based on common law principles, it violates “public policy"

Restraint of Trade◦Free trade is the basis of the American

economy and any bargain not to compete is suspect and, generally, unenforceable. There are two common exceptions: Sale of a business Employment

The buyer of an existing business may ask the seller to agree not to compete with the business. This agreement is enforceable if it is reasonable:◦In Time◦Geographic Area◦Scope of Activity

A noncompetition clause in a contract for employment is generally enforceable if it is essential to the employer, fair to the employee, and harmless to the general public.

Washington courts will enforce noncompete clauses if they are validly formed (i.e., supported by consideration), are of legitimate concern to employer’s business, and are reasonable as to ◦Time◦Geographic limits◦Scope of Activity

Labriola v. Pollard Group, Inc., 152 Wn.2d 828 (2004)

Basically a contract that releases one of the parties from liability if the other party is injured.

Generally unenforceable only if:◦Attempts to avoid liability for intentional

torts or gross negligence◦Parties have greatly disparate bargaining

power◦Clause is not clearly written or visible

Exculpatory clauses in contracts for bailments are generally enforceable - if they are reasonable, clear and obvious

An unconscionable contract is one that the court refuses to enforce because of fundamental unfairness.◦A contract is unconscionable if it one that

“no man in his senses and not under delusion would make . . . and no honest and fair man would accept.”

Legal ability to enter into a contract. Courts presume the existence of contractual capacity.

The bases for showing lack of capacity to enter into a contract are:◦Minority◦Intoxication◦Mental incompetence

What is a minor? – In most states the age of majority for contracting is 18 years old.◦RCW 26.28.015(4) (A person age 18

years shall be deemed to be of full age for the purpose of entering into any legal contractual obligation and to be legally bound thereby to the full extent as any other adult person.)

A minor may disaffirm – or rescind – the contract ◦If the disaffirmance is timely and◦If the minor returns the consideration

received – to the extent possible.

After becoming an adult, the minor may ratify the contract. If the contract is ratified, it is enforceable.

A contract with a person who has a mental impairment is governed by the same principles that apply to a contract with a minor – the incapacitated person may either disaffirm the contract or ratify it.

The general rule is that intoxication is not a defense to enforcement of a contract.

However, if intoxication results in an inability to have the requisite mental capacity to make a contract, then the contract is voidable.◦This is a very high burden.

A party may use the excuse of intoxication to avoid a contract only if he can show:◦He was so intoxicated at the time of

entering into the contract that he could not understand the nature of his transaction and

◦The other party had reason to know that this was the case.

A court may refuse to enforce a contract if the assent to the agreement was not genuine. Genuine assent may be lacking because of ◦Misrepresentation and Fraud◦Mistake◦Undue influence◦Duress

Fraud is the intentional misrepresentation of material facts under circumstances in which the defrauding party expects the other party to rely on the misrepresentation to that party’s detriment. There must be proof of:◦Misrepresentation of a material fact◦An intent to deceive◦Justifiable reliance on the deception

Concealment is an intentional fraud plus an overt act designed to further the fraud, such as hiding a flaw in property for sale.

Concealment is more than just nondisclosure.

Misrepresentation is the unintentional deception of another party.

Contracts based on innocent misrepresentation are voidable.◦The deception must involve a material fact◦The fact must be within the exclusive

knowledge of the person making the misrepresentation and not reasonably available to party deceived.

There are two kinds of mistakes◦Bilateral (or mutual) ◦Unilateral

Exists where there is a confidential or fiduciary relationship between the contracting parties and where one of the parties is in a position of trust or domination.

The complaining party must show (1) that the other abused his or her position of trust to (2) influence the vulnerable party to enter into the contract.

If a party enters into a contract involuntarily – because the party was forced to agree – the contract is voidable at the option of the party who was coerced.

Duress must be so great that the party coerced lost his or her ability to make a free choice.

Some contracts are required to be in writing to be enforceable:◦Interests in land◦Made by an executor of an estate◦To pay the debt of another◦Cannot be performed in one year◦Made in consideration of marriage◦For sale of goods worth more than $500

We have a number of statutes that require contracts to be in writing.◦ RCW 19.36.010 (General statute)◦ RCW 64.04.020 (Deeds)◦ RCW 62A.2-201 (Sale of goods over

$500)◦ RCW 62A.2A-201 (Lease of goods over

$1000)

The contract or memorandum of contract ◦Must be signed by the party to be

charged (i.e., the party resisting enforcement)

◦Must state with reasonable certainty The names of the parties The subject matter of the agreement All essential terms and promises

If an agreement violates the statute of frauds it is unenforceable.

Exceptions:◦Full performance by one of the parties◦Partial performance by the person

seeking enforcement (payment of part of the price, moving onto land, making improvements)

◦Promissory Estoppel◦Admission the contract was made

Once written, the contract defines the relationship between the parties.

If reduced to a signed, written document, intended to be the final, complete expression of the agreement, the parties generally will not be able to use extrinsic evidence to “explain” what they intended the contract to mean.

When two parties make an integrated contract, neither one may use parol or extrinsic evidence to contradict, vary or add to its terms.◦Unless: The court determines the written

agreement is incomplete or ambiguous The contract was modified or The evidence is used to prove a defense.

How do courts interpret contracts?

Frigaliment Importing v. B.N.S. Int’l Sales

◦ http://www.youtube.com/watch?v=h_oMjHsmZ24&eurl=http://lawprofessors.typepad.com/contractsprof_blog/2009/01/i-am-chicken-he.html

Don’t be afraid to start with a form Use simple (non-legal) language Be consistent throughout the contract

Make sure all essential terms are included in the contract

Review for inconsistencies and ambiguities

Review for contradictions

The contract should be clear to the contracting parties.

It should be complete. The terms and methods of enforcement should be clear.