Chapter 012 - Capacity and Legality

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CHAPTER 6
CAPACITY AND
LEGALITY
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Capacity
• Law presumes that parties have contractual
capacity to enter into the contract.
• Certain persons do not have this capacity:
– Minors
– Insane persons
– Intoxicated persons
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Capacity
(continued)
• Common law and many state statutes protect
persons who lack contractual capacity from
having contracts forced on them.
• Person asserting incapacity bears burden of
proof.
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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.
– Generally 18 years of age for both males and
females.
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The Infancy
Doctrine
Ratification
KEY ISSUES RELATING
TO MINORS AND
CONTRACTS
Parents’ Liability
for Their
Children’s
Contracts
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Necessaries of
Life
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Infancy Doctrine
• Minors may disaffirm (cancel) most
contracts they have entered into with
adults.
– Contract is voidable by minor.
– Minor has choice to enforce or disaffirm
contract.
• Public policy of protecting minors from
unscrupulous adults.
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Infancy Doctrine (continued)
• Disaffirmance – minor’s act of rescinding
a contract under infancy doctrine.
– May be done orally, in writing, or by conduct.
– Must be done within reasonable time of
reaching age of majority.
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Infancy Doctrine (continued)
• Parties’ Duties upon Disaffirmance
– Minor must only return the goods or property
received from the adult, in the condition it is in
at the time of disaffirmance.
– Adult has duty of restitution – If minor has
transferred consideration before disaffirming
the contract, adult must place minor in status
quo.
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Infancy Doctrine (continued)
• Minor’s Duty of Restitution – Most states
provide that the minor must place adult in status
quo upon disaffirmance:
– If minor’s intentional or grossly negligent
conduct caused the loss of value to the
adult’s property.
– If minor misrepresented his or her age.
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Ratification
• If minor does not disaffirm during period of
minority or within a reasonable time after
reaching the age of majority:
– Contract is ratified (accepted).
– Minor (now an adult) is bound by contract.
– Right to disaffirm is lost.
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Parent’s Liability for
Children’s Contracts
• Parents owe a legal duty to provide food,
clothing, shelter, and other necessaries of life
for their minor children.
• Parents liable for their children’s contracts
for necessaries if they have not adequately
provided such items.
• Parental duty of support terminates if a minor
becomes emancipated.
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Minor’s Liability for Necessaries
• Minors are obligated to pay for the
necessaries of life.
– Food, shelter, clothing, medical services
• Based on quasi-contract.
– Minor must pay only reasonable value of the
goods or services.
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Minors Cannot Disaffirm
Certain Contracts
• By state statutes
• Typically:
– Medical care
– Health and life insurance
– Educational loan agreements
– Contracts to support children
– Contracts to enlist in military
– Certain sports and entertainment contracts
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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 contract.
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Mentally Incompetent Persons (continued)
•
Legal Insanity – a state of contractual
incapacity as determined by law.
Two standards concerning contracts of
mentally incompetent persons:
•
•
•
Adjudged Insane
Insane, But Not Adjudged Insane
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Mentally Incompetent Persons (continued)
• 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.
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Mentally Incompetent Persons (continued)
• 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.
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Intoxicated Person
• A person who is so intoxicated that he or
she cannot understand nature of
transaction may disaffim.
– Contract is voidable by intoxicated party.
– Contract is not voidable by the other party if
that party had contractual capacity.
• Intoxicated party must return other party to
status quo.
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Illegality
• Contracts with an illegal object are void
and therefore unenforceable.
• Two categories of illegality:
– Contracts contrary to statutes
– Contracts contrary to public policy
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Contracts Contrary to Statutes
• Federal and state
statutes prohibit
certain types of
conduct.
• Contracts to perform
an activity that is
prohibited by statute
are void.
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• Usury Laws
• Contracts to commit
crime
• Gambling Statutes
• Licensing Statutes
– Regulatory Statute
– Revenue-Raising
Statute
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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.
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• Immoral Contracts
• Contracts in Restraint
of Trade
• Exculpatory Clauses
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Effect of Illegality
• Parties cannot sue for nonperformance.
• Court will generally refuse to enforce or
rescind an illegal contract.
• Court will generally leave the parties
where it finds them.
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Exceptions to the General Rule
Court may assist:
• Innocent persons justifiably ignorant of the
law or fact that made the contract illegal.
• E.g., person who bought insurance from
unlicensed company.
• Persons induced to enter into an illegal
contract by fraud, duress, or undue
influence.
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Exceptions to the General Rule (continued)
Court may assist:
• Persons who withdraw before the illegal
act performed.
–
•
E.g., person who hires another to steal trade secret,
but then tells person not to do it.
Persons less at fault than the other
party for entering into the illegal contract.
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Exculpatory Clauses
• Contractual provision relieving a party from tort
liability for ordinary negligence.
• May be found in leases, sales contracts,
service contracts, etc.
• If in contract that affects public interest,
involves essential service, or if protected party
has superior bargaining power, clause is likely
void.
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Covenants Not to Compete
•
Lawful if ancillary to sale of a business
or employment contract and if
reasonable in three aspects:
•
•
•
The line of business protected.
Geographical area.
Duration of the restriction.
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Unconscionability
• Court may not enforce a contract that is so
oppressive or manifestly unfair that it is
unjust.
– Called unconscionable contract, or contract
of adhesion.
– E.g., contract for loan with interest rate of
608%.
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Unconscionability
(continued)
Elements of unconscionable contract:
– The parties possessed severely unequal
bargaining power.
– Dominant party unreasonably used its
unequal bargaining power.
– Adhering party had no reasonable
alternative.
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