Week 3-4

Contracts — Capacity
and Legality
 §1: Contractual Capacity
• Contractual Capacity.
• The legal ability to enter into a contractual
relationship.
• Full competence.
• No competence.
• Limited competence.
• Legality.
• The agreement must not call for the
performance of any act that is criminal,
tortious, or otherwise opposed to public policy.
 Minors
• In most states, a person is no longer a
minor for contractual purposes at the age
18.
• A minor can enter into any contract that
an adult can.
• A contract entered into by a minor is
voidable at the option of that minor.
 Minor’s Right to Disaffirm
• A contract can be disaffirmed at any time
during minority or for a reasonable
period after the minor comes of age.
• Minor must disaffirm the entire contract.
• Disaffirmance can be expressed or
implied.
 Minor’s Obligation on
Disaffirmance
• In most states, minor need only return
the the goods (or other consideration)
subject to the contract, provide the goods
are in the minor’s possession or control.
• In increasing number of states, the minor
must restore the adult to the position held
before the contract was made.
 Misrepresentation of Age
• Right to Disaffirm.
• Minor can disaffirm the contract even though
minors age is misrepresented.
• Obligation to Restore.
• Some courts refuse to allow minors to disaffirm
executed contracts unless they can return the
consideration received.
• Some courts allow the defrauded party to sue
the minor for misrepresentation or fraud.
 Contracts for Necessaries
• Minor may disaffirm the contract but
remains liable for the reasonable value of
the goods.
• Criteria:
• Item contracted for must be necessary for the
minor’s subsistence.
• Value of the necessary must be up to the level
required to maintain a minor standard of living.
• Minor must not be under the care of parent or
guardian.
 Insurance and Loans
• Insurance.
• Not viewed as necessaries, so minor can
disaffirm contract and recover all premiums
paid.
• Loans.
• Seldom considered to be necessaries.
• Exception:
• Loan to a minor for the express purpose of enabling
the minor to purchase necessaries.
 Ratification
• Minor, or after reaching majority,
indicates (expressly or impliedly) an
intention to become bound by a contract
made as a minor.
• Executed v. Executory contracts.
 Parent’s Liability
• Contracts.
• Parents not liable (This is why parents are
usually required to sign any contract made with
a minor).
• Torts (Statutes Vary):
• Minors are personally liable for their own torts.
• Liability imposed on parents only for willful
acts of their minor children.
• Liability imposed on parents for their children
negligent acts that result from their parents’
negligence.
 Intoxication
• Intoxicated persons lack of contractual
capacity at the time the contract is being
made.
• Contract can be either voidable or valid.
• Courts look at objective indications to
determine if contract is voidable.
• If voidable.
• Person has the option to disaffirm.
• Person may ratify the contract expressly or
impliedly.
 Mentally Incompetent Persons
• Void.
• If a person has been adjudged mentally incompetent by
a court of law and a guardian has been appointed.
• Voidable.
• If the person does not know he or she is entering into
the contract or lacks the mental capacity to comprehend
its nature, purpose, and consequences.
• Valid.
• If person is able to understand the nature and effect of
entering into a contract yet lack capacity to engage in
other activities.
• Lucid Interval.
 Aliens
• Aliens have the same contractual rights
as U.S. citizens.
• Enemy Alien.
 §2: Legality
• A contract to do something prohibited by
federal or state statutory law is illegal
and therefore void (never existed).
• Contract that calls for for a tortious act.
• Contract that calls for an act contrary to public
policy.
 Contracts Contrary to Statute
• Usury.
• Gambling.
• Sabbath Laws.
• Licensing Statutes.
• Contracts to Commit a Crime.
 Contracts Contrary
to Public Policy
• Contracts in Restraint of Trade.
• Unconscionable Contracts or Clauses.
• Procedural or Substantive
Unconscionability.
• Exculpatory Clauses.
• Discriminatory Contracts.
• Contracts for the Commission of a Tort.
• Contracts Contrary to Public Policy.
Exceptions to the General Rule
• Justifiable Ignorance of the Facts.
• Members of Protected Classes.
• Withdrawal from an Illegal Agreement.
• Contract Illegal through Fraud, Duress,
or Undue Influence.
• Severable or Divisible Contracts.
 Effect of Illegality
• Generally, an illegal contract is void.
• Recovery or enforcement is not permitted
because the contract never existed.
• Exceptions:
• Justifiable Ignorance of Facts.
• Members of Protected Class.
• Contract Illegal Through Fraud, Duress or
Undue Influence.