Chapter 10 Slide 1
CHAPTER 10
Law of Capacity
Lessons
10-1 Capacity Rights
10-2 Limitations on Capacity Rights
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LESSON 10-1
Chapter 10 Slide 2
Capacity Rights
GOALS
 Identify parties who have contractual capacity
 Identify what contracts can be disaffirmed
 Explain the role of capacity in organizations
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Chapter 10 Slide 3
WHAT IS CAPACITY?
Contractual capacity is the ability to
understand that a contract is being made
and its general meaning.
You possess the
A-B-I-L-I-T-Y to understand;
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Chapter 10 Slide 4
WHAT IS CAPACITY?
Person doesn’t have to understand the
actual terms (written in technical legal
terminology)
Person does not need to merely
understand the terms
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Chapter 10 Slide 5
Parties with special
contractual rights
All of these parties are incapacitated:
Minors / intoxicated / mentally incapacitated
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Chapter 10 Slide 6
Protections for those who lack
capacity
Contracts of most parties who lack
capacity are considered voidable.
D I S A F F I R M A N C E – refusal to
be bound by a previous legal
commitment
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Chapter 10 Slide 7
Disaffirmance
Protected party disaffirms contract 
receives back whatever they have put
into the contract
Other party may or may not get back
their consideration
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Chapter 10 Slide 8
Disaffirmance
i.e. minor buys an ATV from a
dealership and then wrecks it.
Minor could disaffirm contract and
recover any payments made.
Dealership could only recover the
damaged ATV
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Chapter 10 Slide 9
Problems with contracting
Legal ability to disaffirm a contract
Ability to get back whatever had been
given to the other party
Reluctance to enter into contracts with
incapacitated persons
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Chapter 10 Slide 10
Another protection -Applies when protected parties
purchase things classified as
“necessaries”
Things needed to maintain life –
typically food, clothing, and shelter
Must pay a “reasonable value” even if
contract is disaffirmed
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Chapter 10 Slide 11
Necessaries
Minor buys a $5,000. fur coat
Disaffirms contract
Required to pay ???
Good cloth coat $200-$300 for fur coat
if she chose to keep it
Punishment to seller for taking
advantage of minors in contractual
dealings
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Chapter 10 Slide 12
MINORS
In most states, people under the age of 18
In a few states, age of majority is 19 or 21
Also referred to as being in their minority or
under the age of majority
Ends the day before the birthday of the
age set as the age of majority
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Chapter 10 Slide 13
Minors
Contracts are considered voidable
May disaffirm contracts during their
minority
May also disaffirm for a reasonable
length of time after achieving their
majority
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Chapter 10 Slide 14
Age of Majority
After the age of majority, the power to
disaffirm is immediately cut off if the
person ratifies the contract
Ratification – acting toward the
contract as though one intends to be
bound by it
 Can never occur before the age of majority
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Chapter 10 Slide 15
EMANCIPATION
Emancipation is the severing of the
child-parent relationship.
Early emancipation
Formal emancipation occurs when a court
decrees the minor emancipated.
Informal emancipation arises from the
conduct of the minor and the parent.
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Chapter 10 Slide 16
EVIDENCE OF INFORMAL
EMANCIPATION
The parent and minor agree that the
parent will cease support
The minor marries
The minor moves out of the family home
The minor joins the armed forces
The minor gives birth
The minor undertakes full-time
employment
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Chapter 10 Slide 17
New Jersey
Termination of support at age of majority
or as determined by court Newburgh v.
Newburgh, 88 N.J. 529, 443 A.2d 1031
(1982) held that the court has
jurisdiction to award a payment of
support and expenses of a child
attending college even though the child
has reached the age of majority.
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Chapter 10 Slide 18
MENTAL INCAPACITY
Mental incapacity is much less precisely
defined than minority.
The test is whether the party
understands the consequences of his or
her contractual acts.
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Chapter 10 Slide 19
INTOXICATION
Intoxication can arise from using
alcohol, from using drugs, or inhaling
products such as glue or aerosols.
Many courts are reluctant to allow
disaffirmance for intoxication when it
may injure another.
Stricter standard because intoxication is
a voluntary act
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Chapter 10 Slide 20
Temporarily Intoxicated
Being so under the influence of alcohol
or drugs that you do not even know that
you are entering a contract
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Permanently Intoxicated
Being unable to turn down a drink or
drug whenever offered
Often referred to as “habitual drunkard”
in several states
Contracts are considered “void”
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Chapter 10 Slide 22
WHICH CONTRACTS
CAN BE DISAFFIRMED?
Necessaries are goods and services
that are reasonably required to maintain
a person’s lifestyle.
Non-necessaries are all other goods
and services or relative luxuries.
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Chapter 10 Slide 23
CAPACITY RIGHTS
Necessaries
Non-necessaries
Disaffirmance
Ratification
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Chapter 10 Slide 24
CAPACITY IN
ORGANIZATIONS
 Some people who work for organizations
have the capacity to bind the organizations to
contracts.
 Capacity to contract can be created when the
employer tells an employee that he or she is
authorized to bind the organization.
 Capacity to contract can be created when an
organization leads others to believe that a
person has certain authority.
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CAPACITY IN ORGANIZATIONS
If someone has this capacity, it is said to
be within his or her scope of authority
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LESSON 10-2
Chapter 10 Slide 26
Limitations on
Capacity Rights
GOALS
 Identify the time when a contract cannot be
disaffirmed
 Identify contracts that cannot be disaffirmed
 Explain the consequences of misrepresenting
age
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TIME OF DISAFFIRMANCE
Any time while still under the incapacity
(necessaries & goods or services that
are not necessaries)
Within a reasonable time after attaining
capacity
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Chapter 10 Slide 28
RATIFICATION
Ratification may consist of either of the
following
Giving a new promise to perform as
agreed
Any act (such as making payments to
the seller) that clearly indicates the
party’s intention to be bound
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Chapter 10 Slide 29
What’s your verdict?
Beach (minor) bought stereo system on
credit from McReam’s Electronic Cloud
for $500
Beach paid $100 down - $50/mo.
payments afterwards
After making 4 payments (2 while minor,
2 while majority) – wants to disaffirm
Can he do so?
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What’s your verdict?
No -- Beach ratified the contract by
making payments after reaching
majority
Once ratification occurs, it cannot be
withdrawn
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Chapter 10 Slide 31
Rights of Minors in Contracts for Goods and Services that are Not Necessaries
Time Majority or
Capacity Attained
TIME
Period of Minority
Right to disaffirm
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TIME
Period of Majority
Right to disaffirm lasts
For a reasonable length
of time after majority
is ottained
Ratification cuts
off the right to
disaffirm
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Chapter 10 Slide 32
What must be done upon
disaffirmance
Minor disaffirms –
 anything of value minor received and
still has, must be returned
 can return used or damaged goods
Minor then entitled to get back everything
that was given to the other party
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Chapter 10 Slide 33
RETURN OF GOODS
OR SERVICES
Loss of value –
Minor can return nothing because goods have
been lost, consumed or destroyed
In some states, minor must return everything in
a condition as good as it was when received
If this cannot be done, must pay the difference
in value, or deduct the difference from the
amount to be refunded
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Lamon (minor) buys diamond
engagement ring & necklace for
finacee, Morgan
Weekly installments  $10
18 – quarreled and Morgan returns ring
but not necklace
Can Lamon return ring & necklace and
receive a full refund?
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In some states -Morgan – legally keep necklace
Lamon – could return the ring and
demand refund for monies paid for
necklace & ring
 most certainly entitled to money paid on
ring ( and in some states – necklace)
Why? Necklace is no longer in his
possession
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Chapter 10 Slide 36
RETURN OF GOODS
OR SERVICES
Obligations of party with capacity
Cannot enforce nor avoid all or any part of
a contract for goods or services that are
not necessaries
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Chapter 10 Slide 37
WHAT CONTRACTS
CANNOT BE DISAFFIRMED?
 Court-approved contracts – minors working
as actors/actresses, professional sports
 Major commitments – enlisting in armed
services / educational loans / marriage
 Banking contracts – make deposits &
withdrawals
 Insurance contracts – over ½ states do not
allow minors to disaffirm
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Work-related contracts – minors who
engage in business or trade
Sale of realty – cannot disaffirm until
after achieving majority
Apartment rental – a few states will not
allow the minor to disaffirm, even if it’s
not a necessary
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Chapter 10 Slide 39
MISREPRESENTING
YOUR AGE
In most states minors who lie about
their age may disaffirm their contracts.
In these states, a minor who gives a
false age may be held liable for the tort
of false identification
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