b. Valid Contracts If a mentally incompetent person understands the nature and effect of entering into a certain contract, the contract will be valid. II. LEGALITY A. CONTRACTS CONTRARY TO STATUTE 1. Contracts to Commit a Crime A contract to commit a crime is illegal. If the contract is rendered illegal by statute after it has been entered into, the contract is discharged. 2. Usury Every state sets rates of interest charged for loans (exceptions are made for certain business deals). Charging a higher rate is usury—most states limit the interest that may be collected on the contract to the lawful maximum. Federal law limits the interest and fees on credit cards. 3. Gambling All states regulate gambling (any scheme that involves distribution of property by chance among persons who pay for the chance to receive it). 4. Online Gambling Federal law bars electronic payments, such as credit-card transactions, to online gambling sites. 5. Licensing Statutes In some states, the lack of a required business or professional license bars the enforcement of work-related contracts. a. Illegal Contracts If a licensing statute’s purpose is to protect the public from unauthorized practitioners, a contract with an unlicensed individual is illegal. b. Enforceable Contracts If the purpose of the statute is to raise revenue, a contract entered into with an unlicensed practitioner is enforceable. B. CONTRACTS CONTRARY TO PUBLIC POLICY 1. Contracts in Restraint of Trade Competition in the economy is favored so contracts that restrain trade or violate an antitrust statute (see Chapter 47) are prohibited.
a. Covenant Not to Compete This is enforceable if it is reasonable, determined by the length of time and the size of the area in which the party agrees not to compete. b. Reformation of an Unreasonable Covenant Not to Compete A court may reform an unreasonable covenant not to compete by converting its terms into reasonable ones and enforcing the covenant.
- Fall '08
- Business Law Outlines, mentally incompetent, Disaffirmance