CONTRACTUAL CAPACITY

As discussed in Chapter 18, minors make voidable contracts, because their age makes them legally
incapable of making a fully binding contract. But age is not the only impediment to contractual capacity.
One can lack the mental capacity to make a contract due to being too drunk (or otherwise under the
influence of drugs) to realize that she or he is making a contract. A judicial declaration of insanity also
makes one incapable of legally entering into a contract.

CONSIDERATION

The key ingredient that, when added to an unenforceable agreement, tums that agreement into

a binding contract is consideration. Consideration is the exchange of benefits and promises-

by the parties to the agreement. It is the cement that binds the parties to the contract. The Latin

phrase describing this concept is quid pro quo, meaning "this for that" or "one thing in return

for another."

Contracts are, in a metaphoric sense, two-way streets, imposing both an obligation to perform (the
duty) and a right to receive (the benefit). Consideration is both sides of that street. By contrast, a
promise to make a gift to someone is unenforceable (a one-way street), because that promise isn't
binding, since the other side hasn't promised something in return. So, if someone isn't bound to keep a
promise, it's because the other side hasn't promised anything in return, and the agreement lacks
consideration. The difference between "Please, take my coat" and "Please take my coat for $100" is
more than a comma. The money in the second sentence represents the other half of the exchange, and
consideration is all about an exchange.
Promising not to do something that one has a right to do is known as forbearance, and it can be
consideration, just as promising to do something that one has a right to do can be consideration. For
example, in exchange for a huge plate of chocolate chip cookies promised by a next-door neighbor, the
other neighbor could promise not to use his charcoal grill to cook hamburgers for a particular week
when the cookie-making neighbor has vegan family members visiting. When one who made the promise
(the promisor) is under no legal obligation to give the

object to the one to whom the promise was made (the promisee), the agreement is a nudum pactum
that is, a barren promise with no consideration. In a bilateral contract, consideration is found in the
promises exchanged by each party. In a unilateral contract, it is found in the promise of one and in the
act or performance of the other,

and, therefore, it does not come about until the act is completed.

In the past, and today in some states, a seal on a contract furnished consideration when

none existed. This mark, impression, the word "seal," or the letters "L.S." are placed on a writ-

ten contract next to the party's signature. "L.S." stands for locus sigilli, which means the place

of the seal.

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86T
Chapter 19 Contract Requirements

Word Wise

One "Locus"; Several "Loci"

Most nouns in the English language form plurals by adding "s" to the singular. However, some nouns
adapted from Latin, Greek, French, or Italian rely on the original language for the plural. Here are some
examples:

Singular locus

medium

datum

Plural

Loci

media

beau

data
beaux

memorandum

criterion,

memoranda

criteria

phenomenon

phenomena.

stimulus

radius

stimuli

radii

Tarva
crisis

matrix

Jarvae crises

matrices

An option contract is a binding promise by an offeror to hold an offer open and requires consideration
from the offeree to make it binding. For instance, someone who wants to buy a home, but does not
immediately know whether financing can be arranged, might offer the seller a sum of money to take the
home off the market to other prospective buyers for, let's say, 30 days, so that bank financing may be
sought. If the seller accepts the money, an option contract has been created (for 30 days). An exception
occurs when a merchant promises in writing to hold an offer open for the sale of goods. This promise by
a merchant (someone, according to the Uniform Commercial Code, who is in the business of buying and
selling goods) is known as a firm offer and requires no consideration to be binding. In a lawsuit, the
defense of lack of consideration refers to a barren promise containing no

consideration in the agreement. In contrast, the defense of failure of consideration refers to a contract
containing consideration that was not in fact given to the party being sued.

Under an equitable doctrine known as promissory estoppel no consideration is neces- sary when
someone makes a promise that induces another's detrimental reliance on the prom- ise and injustice
can be avoided only by enforcing the promise. Suppose that a man works in a catering business and
offers to buy the business when the owner retires. The owner says, "I tell you what, I'll sell it to you," but
she then suggests that the employee get a degree in culinary arts first. So, the employee borrows money
to go to culinary school, which takes a few years. Then, the owner mentions that caterers should
understand business and says, "You'll need to have a business degree, too." So, the employee borrows
more money to earn a business degree and spends more years studying. Then, the owner says that to be
the owner of her catering business, the employee would have to move to the city where the business is
located rather than live in the cheaper town 15 miles away. So, the employee moves to the city,
increasing his housing costs by 30 percent. When the owner finally retires, she refuses to sell her
business to her longsuffering employee. This would likely be a case for promissory estoppel. However,
the damages would be the money lost by the employee in reliance on the promise; it wouldn't be the
forced sale of the business to the employee or what the business is worth.

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Terms Used in Law of Contracts

TERMS IN ACTION

Allen Iverson was one of the most gifted scorers in NBA history, averaging 26.7 points per season over a
13-year career, most of it spent with the Philadelphia 76ers. Iverson won a Rookie of the Year award in
1997 and a Most Valuable Player award in 2001. Iverson's nick- name was "The Answer," and this name
was the source of a breach of contract claim made by one of Iverson's close friends. Jamil Blackmon was
a family friend who had a mentor-like relationship with Iverson when Iverson was still in high school.
Before Iverson went to the University of Georgetown in 1994, Blackmon suggested that Iverson take for
his nickname "The Answer"-as in, Iverson would be the answer to all of the NBA's woes. Iverson loved
the idea and promised Blackmon 25 percent of all of the money that Iverson made from future
merchandising of that nickname. Iverson repeated that promise as he began profiting from using "The
Answer." The promises were repeated through 2001, but never honored, so Blackmon sued Iverson. But
the trial judge dismissed the case in 2003, concluding that there was no consideration for the promise.
As the court examined the allegations made in Blackmon's complaint, Iverson's promises to pay
Blackmon came after Blackmon, in effect, gave him the nickname. There was no exchange, because
promises made after one has al- ready performed are insufficient to create a contract. It was nudum
pactum. Blackmon then refiled his complaint, alleging promissory estoppel, but lost again. No evidence
showed that Blackmon detrimentally and reasonably relied on Iverson's 1994 promise.

Source: Blackmon v. Iverson, 324 F.Supp.2d 602 (E.D. Pa. 2003), affirmed in an unpublished opinion, 317
Fed. Appx. 123 (3rd Cir. 3008)
CONTRACTS REQUIRED TO BE IN WRITING

Although it makes sense to put a contract in writing, the law requires only certain contracts to be in
writing; others are fully enforceable even though they are oral.

Statute of Frauds

Under a rule of law known as the statute of frauds certain contracts must be in writing to be
enforceable. With some variations from state to state, the following contracts must be in writing

to be enforceable:

1. contracts that are not to be completed within a year

2. promises to answer for the debt or default of another

3. contracts for the sale of an interest in real property 4. contracts in which marriage is the consideration
(such as prenuptial agreements)

5. promises by personal representatives of estates to pay debts of the estate personally

6. promises to leave something to someone in a will

7. with four exceptions, contracts for the sale of goods of $500 or more

Requirements of a Writing
The writing that is necessary to satisfy the statute of frauds is called a memorandum. It may consist of
any writing (such as words on a piece of scrap paper, receipt, or check) so long as it

meets the following requirements:

1. identifies the parties to the contract 2. states the terms of the contract

3. identifies the locus of land-that is, the exact parcel of land under contract

4. states the price

5. is signed by the person against whom enforcement is sought

Chapter 19 Contract Requir

If the parties agree, the federal law and many state laws allow contracts to be signed with an e-signature
(electronic signature)-a method of signing an electronic message that identifies the sender and signifies
his or her approval of the message's content.

TERMS IN ACTION

In the world of American contract law, very few cases are more famous than Lucy v. Zehmer. This 1954
case involves the statute of frauds, the unwitting sale of the family farm, and lots of whiskey. It seems
that Mr. and Mrs. Zehmer owned a 471-acre farm in Virginia, a farm that Mr. Lucy wanted for quite
some time. One time, Zehmer reneged on a promise to sell the farm to Lucy for $20,000, because his
promise was oral and real estate contracts need to be in writing to be enforceable. On another occasion,
Lucy came to the restaurant-gasoline station that Zehmer owned, armed with a bottle of whiskey, and
began to drink with Zehmer. While talking about Zehmer's farm, Lucy said to Zehmer, "I bet you
wouldn't take $50,000 for that place." Zehmer responded, "Yes, I would, too; you wouldn't give fifty."
Lucy said that he would, and Zehmer wrote a basic contract on the back of a restaurant check. However,
Lucy noticed that Zehmer wrote "I agree to sell," rather than "We," and the farm was owned by Zehmer
and his wife. So, Zehmer ripped up the paper, wrote it again, and had Lucy's wife-who was actually
working in the res- taurant-sign the document with him and Lucy. You probably know where this is
going. By the time Zehmer realized that he had sold his farm, he cried foul-that he never in- tended to
do such a thing. But Virginia's statute of frauds had been met, and the Virginia Supreme Court failed to
find any substance to Zehmer's claims of lacking contractual capacity to make a contract due to
drunkenness, or his claim that he was just joking when making the contract.

Source: Lucy v Zehmer, 84 5.E.2d 516 (Va. 1954)

Parol Evidence Rule

The law assumes that when a contract is reduced to writing, and signed, all of its terms are contained in
the writing. Consequently, under a special rule of evidence known as the parol evidence rule oral
evidence of prior or contemporaneous negotiations between the parties is not admissible in court to
alter, vary, or contradict the terms of a written agreement. Because of this rule, it is important to include
all terms that are orally agreed upon whenever a contract is reduced to writing. If one believes that he
or she was lied to during negotiations because the con- tract doesn't reflect what was stated by the
other party, the party making the accusation of lying will not be able to testify about what was supposed
to be in the contract.

DEFECTIVE AGREEMENTS

Certain agreements are defective and are therefore not recognized as valid, binding contracts. The most
common of these are agreements involving mutual mistake, fraud, duress, and undue influence.
Unconscionable contracts may also be declared unenforceable by the courts.

Mistake

When both parties are mistaken about an important aspect of an agreement that they entered into, so
that no meeting of the minds occurs, it is known as a bilateral or mutual mistake and the contract is
voidable at the option of either party. In contrast, when only one of the parties makes a mistake, it is
known as a unilateral (one-sided) mistake and the contract cannot be avoided (made void) by the
parties, as a general rule.
Fraud

Fraud (which also exists in tort law, where occasionally it is called deceit) occurs when one party to the
contract makes a misrepresentation of a material, existing fact that the other party to the contract relies
on and thereby suffers damages. If the defrauded party was induced by fraud to enter into the contract,
it is called fraud in the inducement and the contract is voidable at the option of the injured party. If,
conversely, fraud as to the essential nature of the transaction occurred, such as telling a blind man that
he is signing a receipt when it is really a check, it is called fraud in the execution (originally, "fraud in esse
contractus and the contract is void. A defrauded party always has the right to rescind (cancel) the
contract and to return any considera- tion received. Thus, rescission (cancellation) restores the parties
to their original positions. A de- frauded party may choose, instead, to keep the consideration and affirm
(approve) the contract and bring suit for damages.

The elements that must be proved by the party claiming fraud are discussed in more detail in Chapter 16
in the section on fraud.

Duress and Undue Influence

Contracts that are entered into because of duress or undue influence may also be avoided by the injured
party. Duress is the overcoming of a person's free will by the use of an unlawful threat or physical harm.
Undue influence is the overcoming of a person's free will by misusing a position of trust and taking
advantage of the other person who is relying on the trust relationship.

Unconscionable Contracts

Some contracts (or parts of them) are so harshly one-sided and unfair that they as is the op- erative legal
phrase-shock the conscience of the court. Such contracts are considered uncon- scionable by the courts
and will not be enforced. This is because unconscionable contracts (in some cases called adhesion
contracts) are drawn by one party to that party's lopsided benefit and must be accepted as is, on a take-
it-or-leave-it basis if a contract is to result. Sometimes, adhesion contracts fall into this category.
Adhesion contracts often contain boilerplate, which is standardized language commonly used in similar
legal documents. Although no longer de- scriptive of its history, boilerplate is still alive and well, and is
usually found at the end of con- tracts, with such heading titles as "Attorney's Fees," "Waiver," or
"Limitations on Damages." Boilerplate is found in legal form books or stored on law-office computers for
use in the draft- ing of legal documents. Exculpatory clauses (clauses that are used to escape legal
responsibil- ity) are generally used in boilerplate and are looked on with disfavor by courts. However,
such clauses will usually be enforced if they do not offend public policy and if the bargaining power
between the parties is equal.

LEGALITY

To be valid and enforceable, contracts must be about that which is legal to do or perform. Illegal
contracts are void; they have no legal effect. Usury for example, which is the charging of a

higher amount of interest than is allowed by consumer protection law, is illegal in every state. Gambling
is illegal in many states, with exceptions such as state lotteries, horse and dog racing, and bingo. Sunday
contracts are illegal in some states, with certain specific exceptions. Contracts in restraint of trade, such
as agreements not to compete, are also illegal, along with other types of contracts that are opposed to
public policy. Public policy is a doctrine that is often difficult to identify, but it is generally thought to be
underlying, foundational principles that bind various. peoples into a close-knit society. It represents
those ideas that reflect the moral or cultural fabric of a jurisdiction. For instance, a contract prohibiting
someone from marrying is thought to be against public policy.

Except when the parties are not in pari delicto (in equal fault), the court will not aid either party to an
illegal contract. It will leave the parties where they placed themselves.