Chapter 12 - Capacity and Legality

Introduction
●​ Law presumes that parties have the requisite contractual capacity to enter into a contract
●​ Persons who do not have this capacity are:
○​ Minors
○​ Insane persons
○​ Intoxicated persons
●​ A contract to perform an illegal act is called an illegal contract
○​ Are void contracts

Minors
●​ A person who has not reached the age of majority
○​ Does not have the maturity, experience, or sophistication needed to enter into
contracts
●​ Many states have enacted statutes that specify the age of majority
○​ Generally 18 years of age for both males and females
●​ Any age below the statutory age of majority is called the period of minority

Key Issues Relating to Minors and Contracts

●​ Infancy doctrine: Doctrine that allows minors to disaffirm (cancel) most contracts they
have entered into with adults
●​ Disaffirmance: The act of a minor to rescind a contract under the infancy doctrine
○​ Can be done orally, in writing, or by the minor’s conduct
●​ Duties of restoration and restitution
○​ Duty of restoration: A minor is obligated only to return the goods or property he or
she has received from the adult in the condition it is in at the time of
disaffirmance
○​ Duty of restitution: If a minor has transferred money, property, or other valuables
to the competent party before disaffirming the contract, that party must place the
minor in status quo
●​ Ratification: The act of a minor after the minor has reached the age of majority by which
he or she accepts a contract entered into when he or she was a minor
●​ Parents’ liability for their children’s contracts
○​ Parents owe a legal duty to provide food, clothing, shelter, and other necessaries
of life for their minor children
○​ Parents are liable for their children’s contracts for necessaries of life if they have
not adequately provided such items
●​ Parental duty of support terminates if a minor becomes emancipated
●​ Emancipation: Act of process of a minor voluntarily leaving home and living apart from
his or her parents
 ●​ Necessaries of life: Food, clothing, shelter, medical care, and other items considered
necessary to the maintenance of life
○​ Minors must pay the reasonable value of necessaries of life for which they
contract
●​ Special Types of Minors’ Contracts
○​ Many states have enacted statutes making certain contracts enforceable against
minors. Including:
■​ Medical, surgical, and pregnancy care
■​ Psychological counseling
■​ Health insurance
■​ Life insurance
■​ The performance of duties related to stock and bond transfers, bank
accounts, etc.
■​ Student loans

Mentally Incompetent Persons

●​ Law protects people suffering from substantial mental incapacity from enforcement of
contracts
●​ To be relieved of duties under a contract, law requires a person to have been legally
insane at the time of entering the contract
○​ Legal insanity: State of contractual incapacity, as determined by law
●​ Standards concerning contracts of mentally incompetent persons
○​ Adjudged insane: Declared legally insane by a proper court or administrative
agency
■​ A contract entered into by a person adjudged insane is void
○​ Insane, but not adjudged insane: Being insane but not having been adjudged
insane by a court or an administrative agency
■​ A contract entered into by such person is generally voidable
■​ Insane persons are liable in quasi contract to pay the reasonable value for
the necessaries of life they receive

Intoxicated Person
●​ A person who is under contractual incapacity because of ingestion of alcohol or drugs to
the point of incompetence
○​ The contract is not voidable by the other party if that party had contractual
capacity
●​ Under the majority rule
○​ Contract is voidable only if the person was so intoxicated when the contract was
entered into that he or she was incapable of understanding or comprehending the
nature of the transaction

Lawful and Illegal Contracts

●​ Lawful contract: Contract that has a lawful object
●​ Illegal contract: Contract that has an illegal object
 ○​ Such contracts are void
●​ Contracts Contrary to Law
○​ Both federal and state legislatures have enacted statutes that prohibit certain
types of conduct
○​ Contracts to perform activities that are prohibited by statute are illegal contracts
●​ Usury Laws
○​ Law that sets an upper limit on the interest rate that can be charged on certain
types of loans
○​ Lenders who charge a higher rate than the state limit are guilty of usury
○​ Intended to protect unsophisticated borrowers from loan sharks and others who
charge excessively high rates of interest
●​ Contracts to Commit Crimes
○​ Contracts to commit criminal acts are void
○​ If the object of a contract becomes illegal after the contract is entered into
because the government has enacted a statute that makes it unlawful, the parties
are discharged from the contract
■​ The contract is not an illegal contract unless the parties agree to go
forward and complete it
●​ Contracts in Restraint of Trade
○​ Contracts like agreements to collude and reduce competition in markets
●​ Contracts Contrary to Public Policy
○​ Contract that has a negative impact on society or that interferes with the public’s
safety and welfare
■​ Immoral contract: contract whose objective is the commission of an act
that society considers immoral
●​ Gambling Statutes
○​ All states prohibit or regulate gambling, wagering, lotteries, and games of chance
via gambling statutes
■​ States provide various criminal and civil penalties for illegal gambling
○​ Indiana Gaming Regulatory Act (IGRA)
■​ The law establishes a framework for permitting and regulating NAtive
AMerican gambling casinos