Fundamentals
of Business Law
6th Edition
Chapter 9
Contracts: Capacity
and Illegality
©2005 by West Legal Studies in Business
A Division of Thomson Learning
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
2
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
3
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
4
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.
• Case 9.1 Dodson v. Shrader (1992).
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
5
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
6
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
7
Ratification
• Occurs when a minor indicates (expressly
or impliedly) an intention to become bound
by a contract made as a minor.
• Executed v. Executory contracts.
• Emancipation terminates minority status.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
8
Parent’s Liability
• Contracts.
– Generally, parents not liable for contracts. (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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
9
Intoxication
• Key is whether there was contractual capacity at
the time the contract was formed.
• 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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
10
Mentally Incompetent
Persons
• Contract Void: If a person has been adjudged mentally
incompetent by a court of law and a guardian has been
appointed.
• Contract 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.
• Contract Valid: If person is able to understand the nature
and effect of entering into a contract yet lack capacity to
engage in other activities.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
11
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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
12
Contracts Contrary
to Statute
•
•
•
•
•
Usury.
Gambling.
Sabbath Laws.
Licensing Statutes.
Contracts to Commit a Crime.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
13
Contracts Contrary
to Public Policy
• Contracts in Restraint of Trade.
– Case 9.2
(2002).
Moore v. Midwest Distribution, Inc.
• Unconscionable Contracts or Clauses.
• Procedural or Substantive Unconscionability.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
14
Contracts Contrary
to Public Policy
• Exculpatory Clauses.
– No liability, regardless of fault.
– Generally viewed as unconscionable.
– Case 9.3 Beaver v. Grand Prix Karting
Association (2001).
• Discriminatory Contracts.
• Contracts for the Commission of a Tort.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
15
Exceptions to the
Illegality 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.
Fundamentals of Business Law
Miller • Jentz 6th Ed.
©2005 by West Legal Studies in Business
A Division of Thomson Learning
16