PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
5th Edition
by Henry R. Cheeseman
Chapter 10
Capacity and Legality
Slides developed by
Les Wiletzky
Wiletzky and Associates
Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.
Capacity (1 of 2)
 The law presumes that the parties to a
contract have the requisite contractual
capacity to enter into the contract
 Certain persons do not have this capacity:
Minors
 Insane persons
 Intoxicated persons

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Capacity (2 of 2)
 The common law of contracts and many
state statutes protect persons who lack
contractual capacity from having contracts
forced on them
 The person asserting incapacity bears the
burden of proof
 An essential element for the formation of a
contract is the object of the contract be
lawful
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Minors (1 of 2)
 Minors do not always have the maturity,
experience, or sophistication needed to
enter into contracts with adults
 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

The most prevalent age of majority is 18
years of age for both males and females
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Minors (2 of 2)
 Any age below the statutory age of
majority is called the period of minority
 Thus, a minor is:
 A person who has not reached the age of
majority
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The Infancy Doctrine (1 of 4)
 A doctrine that allows minors to disaffirm
(or cancel) most contracts they have
entered into with adults
 Doctrine based on public policy that
reasons that minors should be protected
from unscrupulous behavior of adults
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The Infancy Doctrine (2 of 4)
 Disaffirmance – the act of a minor to rescind a
contract under the infancy doctrine

Disaffirmance may be done orally, in writing, or by the
minor’s conduct
 Competent Party’s Duty of Restitution – if the
minor has transferred consideration to the
competent party before disaffirming the contract,
that party must place the minor in status quo
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The Infancy Doctrine (3 of 4)
 Minor’s Duty of Restoration – a minor is obligated only
to return the goods or property he or she has received
from the adult in the condition it is in at the time of
disaffirmance
 Minor’s Duty of Restitution – most states provide that
the minor must put the adult in status quo upon
disaffirmance of the contract if the minor’s intentional or
grossly negligent conduct caused the loss of value to the
adult’s property
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The Infancy Doctrine (4 of 4)
 Misrepresentation of Age
 Minors who misrepresent their age must
place the adult in status quo if they disaffirm
the contract
 A minor who has misrepresented his or her
age when entering into a contract owes the
duties of restoration and restitution when
disaffirming it
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Ratification
 If a minor does not disaffirm a contract
either during the period of minority or
within a reasonable time after reaching
the age of majority:
The contract is considered ratified (accepted)
 The minor (now an adult) is bound by the
contract
 The right to disaffirm the contract has been
lost

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Necessaries of Life
 Minors are obligated to pay for the
necessaries of life that they contract for:

Food, Shelter, Clothing, Medical Services
 The seller’s recovery is based on the
equitable doctrine of quasi-contract rather
than on the contract itself

The minor is obligated only to pay the
reasonable value of the goods or services
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10 - 11
Parent’s Liability for Their Children’s
Contracts
 Parents owe a legal duty to provide food,
clothing, shelter, and other necessaries of
life for their minor children
 Parents are liable for their children’s
contracts for necessaries of life if they
have not adequately provided such items
 The parental duty of support terminates if
a minor becomes emancipated
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10 - 12
Mentally Incompetent Persons (1 of 4)
 The law protects people suffering from
substantial mental incapacity from
enforcement of contracts against them
 To be relieved of his or her duties under a
contract, the law requires a person to
have been legally insane at the time of
entering into the contract
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Mentally Incompetent Persons (2 of
4)
 Legal Insanity – a state of contractual
incapacity as determined by law
 The law has developed two standards
concerning contracts of mentally
incompetent persons:
1. Adjudged Insane
2. Insane, But Not Adjudged Insane
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Mentally Incompetent Persons (3 of
4)
 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 (4 of
4)
 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 under contractual
incapacity because of ingestion of alcohol
or drugs to the point of incompetence
 Most states provide that contracts entered
into by such intoxicated persons are
voidable by that person
 The contract is not voidable by the other
party if that party had contractual capacity
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Illegality
 One requirement to have an enforceable
contract is that the object of the contract
must be lawful
 Contracts with an illegal object are void
and therefore unenforceable
 There are two key categories of illegality:
Contracts contrary to statutes
 Contracts contrary to public policy

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Contracts Contrary to Statutes
 Federal and state
 Usury Laws
legislatures have
enacted statutes that
prohibit certain types
of conduct
 Contracts to perform
an activity that is
prohibited by statute
are illegal contracts
 Gambling Statutes
 Sabbath Laws
 Contracts to Commit
a Crime
 Licensing Statutes
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

Regulatory Statute
Revenue-Raising
Statute
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Contracts Contrary to Public
Policy
 Contracts that have a
 Immoral Contracts
negative impact on
society or that
interfere with the
public’s safety and
welfare
 Such contracts are
void
 Contracts in Restraint
of Trade
 Exculpatory Clauses
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10 - 20
Covenants Not To Compete
 Covenants not to compete that are
ancillary to a legitimate sale of a
business or employment contract are
lawful if they are reasonable in three
aspects:
1. The line of business protected
2. The geographical area protected
3. The duration of the restriction
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Effect of Illegality
 Since illegal contracts are void, the parties
cannot sue for nonperformance
 The court will generally refuse to enforce
or rescind an illegal contract
 The court will generally leave the parties
where it finds them
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Exceptions to the General Rule
(1 of 2)
Certain situations are exempt from the
general rule of the effect of finding an
illegal contract:
1. Innocent persons who were justifiably
ignorant of the law or fact that made the
contract illegal
2. Persons who were induced to enter into
an illegal contract by fraud, duress, or
undue influence
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Exceptions to the General Rule
(2 of 2)
3. Persons who entered into an illegal
contract withdrawn before the illegal act
is performed
4. Persons who were less at fault than the
other party for entering into the illegal
contract
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Doctrine of Unconscionability (1 of 2)
 Some lawful contracts are so oppressive
or manifestly unfair that they are unjust
 To prevent the enforcement of such
contracts, the courts have developed the
equitable doctrine of unconscionability
 A contract found to be unconscionable
under this doctrine is called an
unconscionable contract, or a contract of
adhesion
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Doctrine of Unconscionability (2 of 2)
 Elements that must be shown to prove
that a contract or clause is
unconscionable:
The parties possessed severely unequal bargaining
power
 The dominant party unreasonably used its unequal
bargaining power
 The adhering party had no reasonable alternative

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Remedies for Unconscionability
 Where a contract or contract clause is
found to be unconscionable, the court
may do one of the following:
Refuse to enforce the contract
 Refuse to enforce the unconscionable clause but
enforce the remainder of the contract
 Limit the applicability of any unconscionable clause so
as to avoid any unconscionable result

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