quick assignment needed

Contracts: Reality of Consent

CHAPTER 14

“No brilliance is needed in the law. Nothing but common sense, and relatively clean fingernails.”

John Mortimer

© 2019 McGraw-Hill Education.

Learning Objectives

14-1 Explain the concept of capacity to contract.

14-2 List and describe the categories of persons who lack capacity to contract.

14-3 Describe the effect of lack of capacity on a contract.

14-4 Explain the rights and duties of the parties to a contract when there has been disaffirmance because of lack of capacity.

© 2019 McGraw-Hill Education.

What is Capacity?

Capacity means the ability to incur legal obligations and acquire legal rights and duties.

Minors (determined by statute).

Persons suffering from mental illness (if adjudicated then agreement is void).

Intoxicated persons.

Lack of capacity comes as a claim by a plaintiff (seeking restitution) or an affirmative defense to enforcement of a contract. Contract is voidable.

© 2019 McGraw-Hill Education.

Capacity of Minors

A minor has the right to avoid or disaffirm the contract.

The right to disaffirm is personal to the minor (only the minor or her guardian may disaffirm the contract).

If the minor wishes to enforce the contract, the adult party must perform.

© 2019 McGraw-Hill Education.

Minors: J.T. ex rel. Thode v Monster Mountain

Under the common law rule, except for a contract for necessaries, a minor is not liable on any contract he makes and she may disaffirm the same.

The only exceptions to the common law rule involve medical insurance and public policy considerations.

Since J.T. is a minor, the applicable default rule is that any contract made with J.T. is voidable, and his parents’ signature on the release cannot bind him.

© 2019 McGraw-Hill Education.

Capacity of Minors 1

Necessaries are the exception to the minor’s right to disaffirm.

Emancipation is the termination of a parent’s right to control a child and receive services and wages from him. (Majority is usually 18.)

A minor’s power to avoid contracts continues for a reasonable period of time after she reaches majority. If no avoidance there is possibility of ratification (affirming).

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Capacity of Minors 2

Ratification (express or implied by conduct) occurs when a person who reaches majority indicates that he/she intends to be bound by a contract made while still a minor.

Duties Upon Disaffirmance.

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Duties Upon Disaffirmance 1

Each party has a duty to return to the other any consideration (money, goods) that the other has given.

If the consideration given by the adult has been lost, damaged, destroyed, or depreciated in value, courts are split on whether the minor party must make restitution to the adult party.

© 2019 McGraw-Hill Education.

Duties Upon Disaffirmance 2

Disaffirming minors are required to pay reasonable value for necessaries (required for survival) furnished to them.

Necessaries could include: food, clothing, shelter, medical care, tools of the minor’s trade, and basic educational, or vocational training.

Minor may be responsible for reasonable value of necessaries based on Quasi-Contract.

© 2019 McGraw-Hill Education.

Disaffirmance: Zelnick v Adams

Are legal services necessaries?

The minor argued that the attorney’s (Zelnick) legal services were not “actually necessary to the position and condition of the infant at the time rendered.

Zelnick argued his legal services were “in fact necessary” because Jonathan’s issues could only be resolved by litigation.

© 2019 McGraw-Hill Education.

Disaffirmance and Misrepresentation

Historically, a minor’s misrepresentation about his age did not affect his right to disaffirm (nor create any obligation to reimburse the adult for damages or pay for benefits received).

Today:

Some states say the minor is estopped from asserting his infancy as a defense.

Other states say the minor is still responsible for value and may be sued in tort for deceit.

© 2019 McGraw-Hill Education.

Capacity of Mentally Impaired Persons 1

Like minors, people who suffer from a mental illness or defect are disadvantaged in their ability to protect their interests in the bargaining process, thus contract law makes their contracts void or voidable.

Contract is void: a person adjudicated incompetent with a guardian appointed at the time of contract.

Contract is voidable: mental illness established after contract executed.

© 2019 McGraw-Hill Education.

Mental Incapacity: Rogers v Household Life Ins. Co 1

Facts & Opinion:

Alan Rogers diagnosed with Alzheimer’s and dementia; his son, Jason, was appointed guardian (no limitations on guardianship power).

May 2007, Jason assisted Alan with online application for life insurance offered by HLIC. Application did not inquire about health status.

HLIC approved application and premium was paid.

June 2007, Alan died and HLIC argued it was not obligated to perform since Alan’s incapacity rendered contract void under Idaho law.

© 2019 McGraw-Hill Education.

Mental Incapacity: Rogers v Household Life Ins. Co 2

Idaho statute declares a person adjudicated as incapacitated to lack contractual capacity as a matter of law and void, but Jason claims contract is merely voidable.

Legislative purpose and statute’s plain meaning leads to conclusion that appointment of guardian with full powers represents judicial finding that the ward lacks capacity to contract as a matter of law.

District court properly granted HLIC's motion for summary judgment.

© 2019 McGraw-Hill Education.

Capacity of Mentally Impaired Persons 2

Right to Disaffirm.

If a contract is voidable due to mental impairment, the person may disaffirm the contract. But once she regains capacity, she ratifies the contract.

Upon disaffirmance, depending on what the other person know about the incapacity, consideration must be returned and the mentally impaired person may be liable for reasonable value of any necessaries.

© 2019 McGraw-Hill Education.

Contracts of Intoxicated Persons

Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process.

Note: courts are not sympathetic!

© 2019 McGraw-Hill Education.

Test Your Knowledge 1

True=A, False = B

Capacity is the ability to know the details of the legal rights in a contract.

Ratification is the actual signature on the written contract.

Disaffirmance is the right to avoid a contract due to incapacity.

© 2019 McGraw-Hill Education.

Test Your Knowledge 2

True=A, False = B

A minor’s right to disaffirm a contract ends on the day the minor achieves the age of majority.

Intoxicated persons are always allowed to disaffirm a contract.

Persons with a mental incapacity may disaffirm a contract, but cannot ratify the contract.

© 2019 McGraw-Hill Education.

Test Your Knowledge 3

Multiple Choice

The “benefit rule” states that when a minor disaffirms a contract:

They have no further duties.

Recovery of the full purchase price is subject to deduction for the minor’s use of the merchandise.

They have the duty to return the subject goods.

© 2019 McGraw-Hill Education.

Test Your Knowledge 4

Multiple Choice

Ted just turned 17 years old. Emancipated from his parents, Ted bought a car from CarCo. Two weeks after he bought the car, Ted damaged it. Ted returned the vehicle to CarCo asking for a full refund. CarCo must:

Give Ted back the full amount.

Pay Ted only the present value of the car.

Pay Ted the purchase price less the current value of the car.

© 2019 McGraw-Hill Education.

Thought Question

The requirement of capacity is rooted in ancient law. Should the law continue to protect minors and intoxicated persons? Why or why not?

© 2019 McGraw-Hill Education.