Chapter 12
Contracts — Capacity
and Legality
§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.
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.
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.
Minor’s Obligation on
Disaffirmance
In most states, minor need only return
the the goods (or other consideration)
subject to the contract, provide the goods
are in the minor’s possession or control.
In increasing number of states, the minor
must restore the adult to the position held
before the contract was made.
Misrepresentation of Age
Right to Disaffirm.
Minor can disaffirm the contract even though
minors age is misrepresented.
Obligation to Restore.
Some courts refuse to allow minors to disaffirm
executed contracts unless they can return the
consideration received.
Some courts allow the defrauded party to sue
the minor for misrepresentation or fraud.
Contracts for Necessaries
Minor may disaffirm the contract but
remains liable for the reasonable value of
the goods.
Criteria:
Item contracted for must be necessary for the
minor’s subsistence.
Value of the necessary must be up to the level
required to maintain a minor standard of living.
Minor must not be under the care of parent or
guardian.
Insurance and Loans
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.
Ratification
Minor, or after reaching majority,
indicates (expressly or impliedly) an
intention to become bound by a contract
made as a minor.
Executed v. Executory contracts.
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.
Intoxication
Intoxicated persons 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 voidable.
Person has the option to disaffirm.
Person may ratify the contract expressly or
impliedly.
Mentally Incompetent Persons
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 lack capacity to engage in
other activities.
Lucid Interval.
Aliens
Aliens have the same contractual rights
as U.S. citizens.
Enemy Alien.
§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 for a tortious act.
Contract that calls for an act contrary to public
policy.
Contracts Contrary to Statute
Usury.
Gambling.
Sabbath Laws.
Licensing Statutes.
Contracts to Commit a Crime.
Contracts Contrary
to Public Policy
Contracts in Restraint of Trade.
Unconscionable Contracts or Clauses.
Procedural or Substantive
Unconscionability.
Exculpatory Clauses.
Discriminatory Contracts.
Contracts for the Commission of a Tort.
Contracts Contrary to Public Policy.
Exceptions to the General Rule
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.
Effect of Illegality
Generally, an illegal contract is void.
Recovery or enforcement is not permitted
because the contract never existed.
Exceptions:
Justifiable Ignorance of Facts.
Members of Protected Class.
Contract Illegal Through Fraud, Duress or
Undue Influence.
Case 12.1: Dodson v. Shrader
(Minor’s Obligation on Disaffirmance)
FACTS:
16 year-old Dodson bought a used pickup from
Schrader. The truck developed mechanical
problems, but Dodson continued to drive it without
having it fixed.
The truck became inoperable and was hit while
parked in Dodson’s yard.
Dodson sued to refund the price.
The trial court ordered the Schraders to refund the
full purchase price to Dodson on Dodson’s
delivery of the truck. Schrader’s appealed.
Case 12.1: Dodson v. Shrader
(Minor’s Obligation on Disaffirmance)
HELD: REVERSED. FOR SHRADER.
The court required the seller to be compensated for the
depreciated value of the pickup and remanded the case
for a determination of the fairness of the contract and
the fair market value of the truck.
Dodson should not to be permitted to recover the
amount actually paid without allowing Shrader to be
compensated for damage while in Dodson’s
possession.
To rule otherwise, explained the court, “can only lead to
the corruption of principles and encourage young
people in habits of trickery and dishonesty.”
Case 12.2: Brunswick v. Guest
(Contracts in Restraint of Trade)
FACTS:
Guest, a floor covering installer for Brunswick,
signed a covenant not to compete for two years
within an eighty-mile radius of Brunswick’s
location.
After Guest quit Brunswick, he went to work as an
independent flooring contractor.
Brunswick filed a suit in a Georgia state court
against Guest. The court ruled in part that the
covenant unduly restricted Guest’s right to earn a
living. Brunswick appealed.
Case 12.2: Brunswick v. Guest
(Contracts in Restraint of Trade)
HELD: AFFIRMED. FOR GUEST.
A covenant not to compete may not relate to the
entire area of the employer’s business, unless
there is a “legitimate business interest” to be
protected.
 Brunswick argued that if its employees competed
with it, its market share would shrink. “Avoidance
of competition * * * is not a legitimate business
interest.”
Also, the restriction on Guest’s activities was
greater than necessary because it covered
activities that were “very different” from his work
as a floor covering installer.
Case 12.3: Beaver v. Grand Prix Karting
(Exculpatory Clauses)
FACTS:
Beaver signed a clause to participate in the annual
Elkhart Grand Prix, a series of races in Elkhart,
Indiana, organized by Grand Prix Karting
Association (GPKA)
During a race, a piece of foam padding used as a
course barrier was torn from its base and ended
up on the track, causing a multi-kart collision
severly injuring Beaver.
Beaver sued but GPKA argued the exculpatory
clause precluded liability. Trial court found for
GPKA and Beaver appealed.
Case 12.3: Beaver v. Grand Prix Karting
(Exculpatory Clauses)
HELD: AFFIRMED. FOR GPKA.
Seventh Circuit found Beaver was bound to the
terms of the exculpatory clause. Exculpatory
clauses “are governed by the same rules as other
contracts.”
The court noted that based on the evidence
presented, the jury reasonably concluded that it is
the custom and practice of the go kart industry
The jury further reasonably concluded that Beaver
was “well aware of this requirement and chose to
participate in the 1994 race anyway. * * * [T]hese
facts sufficiently establish Beaver’s assent to the
release.”