12 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 12 Capacity and Legality Chapter 12 Capacity and Legality.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 12 - 1

Chapter 12Capacity and Legality

Chapter 12Capacity and Legality


Capacity• The law presumes that the

parties to a contract have the requisite contractual capacity to enter into the contract.

• Certain persons do not have this capacity:– Minors– Insane persons– Intoxicated persons


Capacity (continued)

• The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts forced on them.

• The person asserting incapacity bears the burden of proof.


Minors• Common law defines minors

as:– Females under the age of 18;

and– Males under the age of 21

• Many states have enacted statutes that specify the age of majority.– The most prevalent age of

majority is 18 years of age for both males and females.


Minors (continued)

• Any age below the statutory age of majority is called the period of minority.

• Thus, a minor is:– A person who has not reached

the age of majority.


KEY ISSUES RELATINGKEY ISSUES RELATINGTO MINORS ANDTO MINORS AND

CONTRACTSCONTRACTS

KEY ISSUES RELATINGKEY ISSUES RELATINGTO MINORS ANDTO MINORS AND

CONTRACTSCONTRACTS

The Infancy The Infancy DoctrineDoctrine

RatificationRatification

Parents’ Parents’ Liability for Liability for

Their Children’s Their Children’s ContractsContracts

Necessaries of Necessaries of LifeLife


The Infancy Doctrine• A doctrine that allows

minors to disaffirm (or cancel) most contracts they have entered into with adults.

• Doctrine based on public policy that reasons that minors should be protected from unscrupulous behavior of adults.


The Infancy Doctrine (continued)

• Disaffirmance – the act of a minor to rescind a contract under the infancy doctrine.– Disaffirmance may be done orally,

in writing, or by the minor’s conduct.

• Competent Party’s Duty of Restitution – if the minor has transferred consideration to the competent party before disaffirming the contract, that party must place the minor in status quo.



• Minor’s 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.



• Minor’s Duty of Restitution – most states provide that the minor must put the adult in status quo upon disaffirmance of the contract if the minor’s intentional or grossly negligent conduct caused the loss of value to the adult’s property.



• Misrepresentation of Age– Minors who misrepresent their

age must place the adult in status quo if they disaffirm the contract.

– A minor who has misrepresented his or her age when entering into a contract owes the duties of restoration and restitution when disaffirming it.


Ratification• If a minor does not disaffirm

a contract either during the period of minority or within a reasonable time after reaching the age of majority:– The contract is considered

ratified (accepted).– The minor (now an adult) is

bound by the contract.– The right to disaffirm the

contract has been lost.


Necessaries of Life• Minors are obligated to pay

for the necessaries of life:– Food, Shelter, Clothing, Medical

Services

• The seller’s recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself.– The minor is obligated only to

pay the reasonable value of the goods or services.


Parent’s 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.

• The parental duty of support terminates if a minor becomes emancipated.


Mentally Incompetent Persons

• The law protects people suffering from substantial mental incapacity from enforcement of contracts against them.

• To be relieved of his or her duties under a contract, the law requires a person to have been legally insane at the time of entering into the contract.


Mentally Incompetent Persons (continued)

• Legal Insanity – a state of contractual incapacity as determined by law.

• The law has developed two standards concerning contracts of mentally incompetent persons:

1. Adjudged Insane2. Insane, But Not Adjudged

Insane



• Adjudged Insane– A person who has been

adjudged insane by a proper court or administrative agency.

– A contract entered into by such a person is void.

– Neither party can enforce the contract.



• Insane, But Not Adjudged Insane– A person who is insane but

has not been adjudged insane by a court or administrative agency.

– A contract entered into by such a person is generally voidable.

– The competent party cannot void the contract.


Intoxicated Person• A person who is under

contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence.

• Most states provide that contracts entered into by such intoxicated persons are voidable by that person.

• The contract is not voidable by the other party if that party had contractual capacity.


Illegality• One requirement to have an

enforceable contract is that the object of the contract must be lawful.

• Contracts with an illegal object are void and therefore unenforceable.

• There are two key categories of illegality:– Contracts contrary to statutes– Contracts contrary to public

policy


Contracts Contrary to Statutes

• Federal and state legislatures have enacted statutes that prohibit certain types of conduct.

• Contracts to perform an activity that is prohibited by statute are illegal contracts.

• Federal and state legislatures have enacted statutes that prohibit certain types of conduct.

• Contracts to perform an activity that is prohibited by statute are illegal contracts.

• Usury Laws

• Gambling Statutes

• Sabbath Laws

• Licensing Statutes– Regulatory

Statute– Revenue-

Raising Statute

• Usury Laws

• Gambling Statutes

• Sabbath Laws

• Licensing Statutes– Regulatory

Statute– Revenue-

Raising Statute


Contracts Contrary to Public Policy

• Contracts that have a negative impact on society or that interfere with the public’s safety and welfare.

• Such contracts are void.

• Contracts that have a negative impact on society or that interfere with the public’s safety and welfare.

• Such contracts are void.

• Immoral Contracts

• Contracts in Restraint of Trade

• Exculpatory Clauses

• Immoral Contracts

• Contracts in Restraint of Trade

• Exculpatory Clauses


Effect of Illegality• Since illegal contracts are

void, the parties cannot sue for nonperformance.

• The court will generally refuse to enforce or rescind an illegal contract.

• The court will generally leave the parties where it finds them.


Exceptions to the General RuleCertain situations are exempt from the general rule of the effect of finding an illegal contract:

1. Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal.

2. Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence.


Exceptions to the General Rule (continued)

3. Persons who entered into an illegal contract withdrawn before the illegal act is performed.

4. Persons who were less at fault than the other party for entering into the illegal contract.


Using a Covenant Not to Compete with a Sale of a Business

• Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects:

1. The line of business protected.2. The geographical area

protected.3. The duration of the restriction.


Doctrine of Unconscionability• Some lawful contracts are so

oppressive or manifestly unfair that they are unjust.

• To prevent the enforcement of such contracts, the courts have developed the equitable doctrine of unconscionability.

• A contract found to be unconscionable under this doctrine is called an unconscionable contract, or a contract of adhesion.


Doctrine of Unconscionability (continued)

Elements that must be shown to prove that a contract or clause is unconscionable:

• The parties possessed severely unequal bargaining power.

• The dominant party unreasonably used its unequal bargaining power.

• The adhering party had no reasonable alternative.

12 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 12 Capacity and Legality Chapter 12 Capacity and Legality.

Documents