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When Are Contracts Unenforceable?

A contract might be unenforceable despite having all of the usual formalities attached to it. Professor Seth Oranburg discusses a few common scenarios where enforceability would be a problem - if the agreement is in violation of societal interest, if one of the contracting parties is not mentally capable of understanding the implications, and if a party is a minor under the legal age for formal contracts. https://youtube.com/watch?v=ftrAVStM7QI


There are many ways that contracts can appear valid because of superficially having the elements of offer, acceptance and consideration, or some alternative to consideration like promissory restitution or promissory estoppel But these agreements, in fact, are not enforceable at law. The most obvious category of enforceable agreements are the ones that are totally against the public interest. So there are things that are simply wrong for society, such as slavery. Likewise, contracts to sell yourself into slavery are unenforceable. Courts will not honor those agreements, even if you desire them, because they are abhorrent to our social values. Contracts can also be unenforceable, when they're made by someone who doesn't have what we call the capacity to contract. A person might be incapacitated because they have, for example, a schizophrenia and they're not perceiving reality properly. So they enter into a bargain in which they appear to be understanding normally. But they don't actually understand the bargain that they're striking. As a result, that contract fails because the person was incapacitated at the time. Someone who's extremely drunk and signed something without having any knowledge of what they're signing, likewise, did not enter into a voluntary volitional exchange. Remember, the heart of contract law is that by parties entering into bargains that they think rationally will make them better off. That moves society slowly but surely to allocate property to its places of highest value. That will help the property go to its best use and increase the social welfare of the entire society. Well, a person who isn't thinking clearly or isn't perceiving reality is not going to get this sort of result from his or her agreement.. We also have in most states, people who are what we call as a matter of law “infants,” meaning someone under the age of majority. In most places, anyone under the age of 18. People under 18 can only incur voidable obligations, and this is designed to protect young people. However, these statutes can have a negative effect also. Other people are wary about dealing with infants, because at any time, the infant could refuse to honor his or her obligations. So you may have tried to get a lease for a car when you were 16 and just got your driver's license, and found that no car company would make a lease with you. Well, that's because they knew that you could void that lease at any time, which could not work out in their financial interest. So it's a good reminder, we have to be careful about how much we use contract law to protect people because there's always unintended consequences from the law. Once again, we see that the purpose of contract law is to allow people to declare what they value most. By using their faculties of reason, a person can enter into the marketplace and decide how a transaction will improve his or her value. And when a party is not entering into that marketplace with full faculties, either because of young age and not having fully developed or because of being incapacitated for any number of reasons, then this purpose of contract law is not being fulfilled by enforcing that obligation. Such obligations will often be deemed unenforceable.

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