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Chapter 13
Contracts: Capacity and Legality

Miller  Cross

BUSINESS LAW
Alternate Edition 12thEd.

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§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.

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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.

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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.

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Minor’s Obligations
on Disaffirmance

  • Majority rule: minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.
  • Minority rule: increasing number of states hold the minor must restore the adult to the position held before the contract was made.

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Exceptions to Minor’s
Right to Disaffirm

  • Misrepresentation of Age.
  • Generally, minor can disaffirm the contract.
  • But some states prohibit disaffirmance and hold the minor liable.
  • Contracts for Necessaries.
  • Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services.

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Exceptions to Minor’s
Right to Disaffirm

  • 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.

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Ratification

  • Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.
  • Executed v. Executory contracts.

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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.

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Intoxication

  • 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 dissaffirmed (voidable):
  • Person has the option to disaffirm, or
  • Person may ratify the contract expressly or impliedly.

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Mental Incompetence

  • 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 lacks capacity to engage in other activities. Lucid Interval.

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§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 a tortious act.
  • Contract that calls for an act contrary to public policy.

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Contracts Contrary to Statute

  • Contracts to Commit a Crime.
  • Usury.
  • Gambling (online).
  • Sabbath (Sunday) Laws.
  • Licensing Statutes.

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Contracts Contrary to Public Policy

  • Contracts contrary to public policy are void.
  • Unconscionable Contracts or Clauses.
  • Procedural or Substantive Unconscionability.
  • Exculpatory Clauses.
  • Discriminatory Contracts.
  • Contracts for the Commission of a Tort.

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Contracts Contrary to Public Policy

  • Contracts in Restraint of Trade
  • Anti-Competitive Agreements are void.

Exception: Covenant not to Compete and Sale of Business.

Exception: Covenant not to Compete in Employment.

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Contracts Contrary to Public Policy

  • Unconscionable Contracts/Clauses.
  • Exculpatory clauses.
  • Other Contracts Contrary to Public Policy.
  • Contracts that promise to discriminate.

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Exhibit 13.1 Unconscionability

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Effect of Illegality

  • Generally, the rule is that the contract is void.
  • Exceptions:
  • 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.

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Exhibit 13.2 Legality

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