9
CHAPTER
Legal Capacity to Contract
9-1 Contractual Capacity of
Individuals and Organizations
9-2 Limits on the Rights of Those
Without Capacity
9-1 Contractual Capacity of
Individuals and Organizations
GOALS
 Identify parties who lack contractual
capacity
 Explain the role of capacity in
organizations
FOCUS
 Have you ever tried to get out of a
contract because you were young and
inexperienced in the matter?
 Did you know that you had a legal
right to disaffirm contracts made
while you were still in your minority?
Debate questions


When John turned 16 he received a new car for a birthday present. The
same month he responded to a magazine ad from a “club” offering his
choice of 10 music CDs for only one penny. His response included his
address and correct age. The ad noted that in return for this bargain,
anyone who subscribed to it would have to buy one CD at full price for
the next six months. The 10 CDs arrived and John ignored any further
letters from the club. The next month, however, he received a CD and
a bill of $23.99 from the club. John ignored the fill and filed the CD in
the back of his CD stack. Over the next several months, John
continued to receive a CD a month and a notice of an ever-increasing
amount owed to the club. Finally, when the bill reached over $200,
John talked to his dad about the situation. His dad, a lawyer, wrote a
letter for John telling the club that the sender was canceling the
contract and would send back any CDs previously received if the club
would pay for postage. John signed the letter and sent it. The club
didn’t respond but the CDs and bills stopped coming.
1. Which party or parties has acted improperly in a legal sense?
Explain
Debate questions

The law acts to protect the minor. John also could have
demanded and would be legally entitled to receive his penny
back. The law places the burden on the party contracting with
the minor to effectuate (to do, cause, or accomplish
something) the return of whatever goods are still available for
such, in this case by supplying the return postage.
What is Capacity?
 Contractual capacity – is the ability to
understand the consequences of a contact.
(They possess the ability to understand)
 Does not mean that they understand the actual
terms of the contract
 The law presumes that an adult has
contractual capacity.
Parties with Special contractual
rights?
 Those who lack capacity are minors, the
intoxicated and mentally incapacitated.
 Minors are defined as under the age of
majority. (This is the age at which a
person is entitled to the management of his
or her own affairs.)
 Most states age of 18, Some are 19 or 21.
 Minor – person who has not reached the age of
majority.
 Minority – ends the day before the birthday of
the age set as the age of majority.
Protection form those who lack
Capacity?
 Disaffirmance – a refusal to be bound by a
previous legal commitment. (contracts are
considered voidable)
 When a contract is disaffirmed the
protected party is to receive back anything
they put into the contract. The other party
may or may not get back their
consideration.
Protection form those who lack
Capacity?
 Most people would not then contract with
these protected people therefore there is
another protection.
 When protected parties purchase things
classified as necessary things they are legally
allowed to contract.
 When the “Protected” contract for necessary
items they must pay a reasonable value even if
they disaffirm the contract.

Example:
Protection form those who lack
Capacity?
 Example:
 Susan, 16, purchased a fur coat for $5000. she
could disaffirm the contract, however, she would
still be req2uired to pay the cost of a good cloth
coat (approx. $200) if she chose to keep the
coat. Receiving only $200 for a $5000 coat is
considered punishment for taking advantage of
a minor.
Minors
 Minors’ contracts are considered voidable. They may
disaffirm for a reasonable length of time after achieving
their majority.
 After the age of majority the ability to disaffirm stops
immediately if the person ratifies the contract.
 Ratification – acting toward the contract as thought one
intends to be bound by it. (Cannot happen before age of
majority).
 Emancipated minors may be bound by their contracts.
(severing of a child-parent relationship)
Emancipation
 Formal – occurs when court decrees the minor
emancipated.
 Informal arises from any of the following:






The parent and minor agree that the parent will cease
support.
The minor marries
The minor moves out of the family home.
The minor becomes a member of the armed forces.
The minor gives birth.
The minor undertakes full-time employment.
 Each state is different on how they treat emancipated
minors.
Mentally Incapacitated

Less precisely defined

a person lacks the ability to understand the consequences of
his or her contractual acts.

This includes people with severe mental illness, severe mental
retardation or severe senility.

Judge can rule that a person is permanently insane, therefore
forever lacking capacity

Rule surrounding necessaries apply to the mentally
incapacitated.

If a judge rules that you were insane when a contract was
made then the contract is voidable
The Intoxicated
 Drugs and alcohol.
 Courts usually only allow disaffirmance for intoxication
for those who are so intoxicated they do not know they
are contracting.
 Stricter standard for this because intoxication is a
voluntary act.
 If a judge holds that a person is in a permanent state of
alcoholism (unable to turn down drink or drug when
offered), that person’s contracts are considered void. In
several states still referred to as “habitual drunkard”
Question:
 What three classifications of
individuals lack contractual capacity?
 Minors, Mentally incapacitated and
the intoxicated.
Who has contractual capacity in
organizations?
 Scope of authority – within the range of acts the
organization has authorized him or her to do.
 If someone has capacity it is said to be within their scope
of authority.
 Capacity to Contract is created when:


The employer tells an employee that they are authorized to
bind the organization.
When the organization leads others to believe that a person
has certain authority. (Such as job titles).
 A person acting outside the scope of their authority
generally are personally liable when the organization
isn’t.
Question:
 In what two ways is capacity to contract on behalf of an
organization created?
 Can come from a delegation of authority or from an aura
of apparent authority created or allowed by the business.
Cases

Clare was age 17, a minor in her state, when she bought a
week’s worth of groceries at the local supermarket. Later she
discovered she spent too much money and was going to be
over her weekly budget. So she took the groceries back and
asked for her money back. If she sues, will she get her money
back?
 No, Clare purchased necessaries so
she cannot disaffirm.
Cases

Tanya, a minor, was the daughter of a construction worker.
When se was 17, she bought an evening gown for $400.00 to
wear to a school dance. After the dance, Tanya decided she
didn’t like the dress and returned it asking for the money back.
Is she legally entitled to the money?
 Yes, the gown was probably not a
necessary item for Tanya.
Cases

Janice had been drinking all afternoon before she whet into a used car
lot. When signed a contract to purchase a two year old car for as
much as it would cost for the same model new. She sought to
disaffirm the contract based on intoxication. At the trial, she testified
that, at the time of purchase, she knew she was buying a car but could
not understand any of the terms of the contract. Will the court hold
her to the terms of the contract?
 Yes. The only thing required to hold a
person who is voluntarily intoxicated to a
contract is a showing that they knew they
were making a contract. The same hold
true for marriage contracts.
9-2
Limits on the Rights of
Those Without Capacity
GOALS
 Recognize the time frame during
which a contract can be disaffirmed
 Identify contracts that cannot be
disaffirmed
 Discuss the effects of
misrepresentation of age on
contractual responsibilities
FOCUS
 Explain the following quote from Benjamin
Cardozo, Associate Justice of the U.S.
Supreme Court, 1932–1938.
Liberty of contract is not an absolute
concept. It is relative to many conditions of
time and place and circumstance.
WHEN CAN DISAFFIRMANCE OF
A CONTRACT OCCUR?
 Any time while still under the
incapacity
 Within a reasonable time after
attaining capacity
AFTER ATTAINING CAPACITY
 A person may ratify the contract while
under an incapacity.
 Ratification – action by the party
indicating intent to be bound by the
contract.
 Giving a new promise to perform as
agreed.
 any act that clearly indicated the party’s
intention to be bound. (Like making
payment.)
Question:
 While still a minor, Beach bought a stereo system on
credit from McReam’s Electonic Cloud for $500.
Beach paid $100 down and promised to pay $50 a
month on the unpaid balance until the debt was paid.
After making four payments, two of which were made
after he reached the age of majority. Beach decided
to disaffirm the contract and return the equipment.
 The two payments made after he reached majority
would be considered a ratification of the contract.
Therefore Beach cannot disaffirm.
WHAT MUST BE DONE UPON
DISAFFIRMANCE?

When a minor disaffirms, anything of value the minor
received and still has must be returned. The minor is then
entitled to get back everything that was given to the other
party.

Loss of value – In most states if minors are unable to return
exactly what was received they can still get back
everything. Even if it is used or damaged.


In some states, however, it must be returned exactly in the
same condition and if not the minor must pay the difference.
Obligations of party with capacity – usually this party
cannot either enforce nor avoid all or any part of a contract
for goods or services that are not necessaries against a
party lacking capacity.
DISAFFIRMANCE TIMELINE
When can a person who lacks
contractual capacity disaffirm a
contract?
Can occur anytime until capacity is gained or regained. It also
can occur during a reasonable period of time beyond the
attaining of capacity to allow the person in question to review
her or his contracts to see which ones to ratify and which to
disaffirm.
Question:
 Upon graduation from high school,
Robinson, age 17, began a business doing
electrical work. He bought $375 in tools
from Muller. The venture was a
disappointing failure. Discouraged after a
month, Robinson asked Muller to take back
the tools and to return his $375 payment.
 Robinson would not be able to avoid his
contract if he lived in a state with a workrelated contracts law.
CONTRACTS THAT CANNOT BE
DISAFFIRMED
 Most of these reasons vary from state to state,
however, they were put into place because people
would not contract with minors if they were not
available.
 Court-approved contracts – in all states minors
cannot void these.
 Major commitments – contracts to enlist in the armed
services or for educational loans. Marriage contracts
also.
 Banking contracts – in most states permitted to make
deposits and withdrawals.
CONTRACTS THAT CANNOT BE
DISAFFIRMED
 Insurance contracts – in ½ states minors cannot
disaffirm life insurance contracts.
 Work-related contracts – in most states minors who
engage in a business or trade cannot disaffirm
agreements involving their business.
 Sale of realty – in some states if you sell or borrow
against real estate it cannot be disaffirmed.
 Apartment rental – in a few states a lease of an
apartment cannot be disaffirmed even if the
apartment is not necessary.
Which contracts that cannot be
disaffirmed apply in all 50 states?
disaffirmance of court-approved contracts
and major commitments
Question:

Ron, a mature-looking minor lied about his age when he bought an
extensive wardrobe of clothing from the Casuals Shop. Ron
showed his older brother’s driver’s license as identification. He
also used his brother’s name on the installment contract. By
October, Ron had paid $325 on the $785 contract. He then
became bored with the wardrobe and returned it to the store and
demanded the return of all payments? Must the store return his
money?

Ron is within his rights as a minor to disaffirming the contract.
However, he also committed the tort of fraud. Therefore in most
states the Casuals Shop probably could hold back form the refund
an amount of money sufficient to cover the decrease in value of
the wardrobe as returned. Or the store could hold back the full
amount if nothing was returned. Ron could be held liable in
damages for deceiving the seller. These damages could exceed the
price of the goods he lied to get.
CONTRACTUAL EFFECT OF
MISREPRESENTING AGE
 The minor could be held liable for the
tort of false representation.
 Party to the contract may collect
damages
 Minor still may be able to disaffirm
contract
If minors lie about their age, what
happens in most states with
regard to their ability to disaffirm
contracts for goods and services
that are not necessaries?
Even if minors lie about their age, they still may
disaffirm their contracts for goods or services
that are not necessary.
Question:
 Richard bought car insurance while he was
16. He had a perfect driving record until he
reached the age of majority, 21, in his
state. The day after his birthday, Richard
disaffirmed the insurance contract and
asked for the return of his payments. In
most states would he be legally entitled to
the money?
 No, in most states, insurance contracts
cannot be disaffirmed by a minor.
Question:
 Linda subscribed to a “Book of the Month”
program on her sixteenth birthday. She
received monthly books from the publisher
until her twenty-first birthday. She
continued receiving books for another six
months, and then attempted to disaffirm.
Will she succeed?
 No, Linda’s conduct in accepting the books
for six months is probably ratification which
eliminates her right to disaffirm.
Question:
 In Juan’s state, the age of majority is 21.
Three weeks after his eighteenth birthday.
Juan joined the Marine Corp. After two
weeks of boot camp, he decided he didn’t
like the lifestyle. He told the Marines he
was disaffirming his contract to join. Will
he succeed?
 No, contracts to enlist in the armed forces
cannot be disaffirmed by a minor.
Question:
 Beverly was 14 when she bought a used motorcycle
that wouldn’t run. Beverly made repairs and got it
going. She rode it illegally for more than six months.
Then a leak developed in a gas line and the bike
caught fire. it was a total loss. Beverly returned the
burned-out motorcycle to the seller and asked for all
her money back. Will she succeed?
 Yes, on disaffirmance, the minor is generally obligated
only to return that much of the consideration as she
possess (here the burned-out motorcycle)