Chapter 12

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.
Case 12.1: Dodson v. Shrader
(Minor’s Obligation on Disaffirmance)

FACTS:
16 year-old Dodson bought a used pickup from
Schrader. The truck developed mechanical problems,
but Dodson continued to drive it without having it
fixed.
The truck became inoperable and was hit while parked
in Dodson’s yard.
Dodson sued to refund the price.
The trial court ordered the Schraders to refund the full
purchase price to Dodson on Dodson’s delivery of the
truck. Schrader’s appealed.
 Case 12.1: Dodson v. Shrader
(Minor’s Obligation on Disaffirmance)

HELD: REVERSED. FOR SHRADER.

The court required the seller to be compensated for the
depreciated value of the pickup and remanded the case for a
determination of the fairness of the contract and the fair
market value of the truck.
Dodson should not to be permitted to recover the amount
actually paid without allowing Shrader to be compensated for
damage while in Dodson’s possession.
To rule otherwise, explained the court, “can only lead to the
corruption of principles and encourage young people in habits
of trickery and dishonesty.”
Case 12.2: Brunswick v. Guest
(Contracts in Restraint of Trade)

FACTS:
Guest, a floor covering installer for Brunswick, signed
a covenant not to compete for two years within an
eighty-mile radius of Brunswick’s location.
After Guest quit Brunswick, he went to work as an
independent flooring contractor.
Brunswick filed a suit in a Georgia state court against
Guest. The court ruled in part that the covenant unduly
restricted Guest’s right to earn a living. Brunswick
appealed.
Case 12.2: Brunswick v. Guest
(Contracts in Restraint of Trade)
HELD: AFFIRMED. FOR GUEST.
A covenant not to compete may not relate to the entire
area of the employer’s business, unless there is a
“legitimate business interest” to be protected.
 Brunswick argued that if its employees competed with it,
its market share would shrink. “Avoidance of
competition *  *  * is not a legitimate business interest.”
Also, the restriction on Guest’s activities was greater than
necessary because it covered activities that were “very
different” from his work as a floor covering installer.
Case 12.3: Beaver v. Grand Prix Karting
(Exculpatory Clauses)

FACTS:
Beaver signed a clause to participate in the annual
Elkhart Grand Prix, a series of races in Elkhart, Indiana,
organized by Grand Prix Karting Association (GPKA)
During a race, a piece of foam padding used as a course
barrier was torn from its base and ended up on the track,
causing a multi-kart collision severly injuring Beaver.
Beaver sued but GPKA argued the exculpatory clause
precluded liability. Trial court found for GPKA and
Beaver appealed.
Case 12.3: Beaver v. Grand Prix Karting
(Exculpatory Clauses)

HELD: AFFIRMED. FOR GPKA.

Seventh Circuit found Beaver was bound to the terms
of the exculpatory clause. Exculpatory clauses “are
governed by the same rules as other contracts.”
The court noted that based on the evidence presented,
the jury reasonably concluded that it is the custom and
practice of the go kart industry
The jury further reasonably concluded that Beaver was
“well aware of this requirement and chose to participate
in the 1994 race anyway. *  *  * [T]hese facts
sufficiently establish Beaver’s assent to the release.”