Chapter 18: Contractual Capacity and Genuine Assent
Alan Moran, David Niese, Mark Schafer, Juan Camacho, Megan McLaughlin, Andrew Hansen
I. Contractual Capacity
A. Definition of Capacity
When forming a contract, the ability to enforce that contract is contingent with multiple aspects of the contract. These include the contract’s offer and acceptance, whether proper consideration has been given, the intention to create a contract, and legal capacity of the person signing the contract. Capacity is the ability to incur legal obligations and acquire legal rights (Mallor et al). These rights pertain to people who enter into legally binding contracts and may allow them to sue or be sued in their own name (BusinessDictionary.com). Sometimes, capacity can be obvious as in minority. At other times, it is subjective as in cases of mental capacity in which the court must determine whether capacity existed. It is important to note that even if both members entering into the contract would typically have capacity, no legal contract can be made for any tortuous, criminal, or anti-statutory agreement between them (Wiziq.com).
Contractual capacity is intended to allow certain persons the ability to avoid or escape the conditions of a contract if they meet certain criteria. These requirements were created by law as a means of protecting certain individuals deemed unfit to have entered into that contract. In some instances, should the capacity of one or more of the contractually bound parties be impaired, they would have the option to void or enforce the contract, but would not be obligated to do so. This would be considered a voidable contract. There are other situations in which a person entering a contract has no option to execute or void the contract. In these cases, the contract is automatically void and cannot be executed. An example of a void contract would be a party adjudicated to be mentally incompetent, or if they were impaired to the extent that they could not possibly have given consent to the contract, such as being unconscious or under duress.
A. Minor’s Contracts
In most states, the age of majority, or the age where a person has capacity is 18 years of age. All states now have statutes that declare at least some contracts to be voidable when made to a minor. Delaware and Nebraska both have an age of majority of 19. In Mississippi, it is 21. Before 1971 the age of majority for most states was 21 years of age. However, after the 26th Amendment to the Constitution in 1971, the voting age was lowered to 18, creating a shift in public policy favoring 18 as the age of majority. Table 1 shows exceptions to the age of 18 serving as the age of majority statutorily by each state (About.com).
State / Age of MajorityAlabama / 19
Arkansas / 18 or graduation from high school, whichever is later
Delaware / 19
Mississippi / 21
Nebraska / 19
Nevada / 18, or if still in high school at 18, 19 or graduation, whichever comes sooner
Ohio / 18 or graduation from high school, whichever comes first
Tennessee / 18 or graduation from high school, whichever is later
Utah / 18 or graduation from high school, whichever is earlier
Virginia / 18 or graduation from high school, whichever is latest
Wisconsin / 18, or if still in high school at 18, 19 or graduation, whichever comes sooner
Table 1: Majority Age by State
A minor’s lack of capacity stems largely from inexperience relative to an adult. As a result, the law is designed to protect the minor from being taken advantage of by an adult. A contract agreed upon by a minor is voidable, and the minor has the right to rescind from or disaffirm the contract. The option to disaffirm a contract due to a lack of capacity may only be enforced by the minor or a legal representative or guardian, and the disaffirmance does not need to be done in writing. The only requirement to disaffirm is that the minor communicate in some meaningful way such as orally or in writing that they wish to disaffirm the contract. However, if a legal adult enters into a contract with a minor, they must execute their end of the contract should the minor desire.
B. Misrepresentation of Age
Historically, the rules regarding misrepresentation of age were that even if a minor had lied about their age, they would still not have capacity in regards to the contract, meaning the contract is still voidable. The idea being that lying about something should not grant additional rights or obligations to a person. For example, if Joe Dealer sells a car to Bryce Buyer who is under the majority age based on Bryce telling Joe that he is over 18 when he is not, the contract would most likely be voidable. This will typically still hold up even if the minor has materially altered the vehicle or severely depreciated the vehicle. Some states have altered this rule against the minor. Furthermore, it is possible for the adult to sue the minor for fraud. The age of minority for contracts does not apply to torts such as fraud.
C. Time to Disaffirm
There are circumstances that arise in which the minor becomes the majority age and is bound by the terms of the contract. If, for a reasonable time after turning 18 they have not rescinded the contract made as a minor, the contract will no longer be voidable. The general rule that courts will look to is whether the party involved received sufficient benefit from the contract. If they received some sort of benefit as a minor, they only have a short while after reaching the age of majority before they will no longer be able to disaffirm. Other instances of valid contracts include if the minor signs an expressed reaffirmance after they become of majority age or if they continue to make payments on the consideration given to them by the contract.
D. Revocation
If the minor decides to void the contract, he must return the consideration that he has received to the greatest possible extent. If there is damage to the consideration, then the minor is still entitled to receive all consideration that he has given to the obligor in most states. This means that if a minor has entered into a contract to buy a motorcycle and badly scratches it, he is still entitled to return the motorcycle for all of his money back. This is the rule in most states including Missouri. Some states, however, would subtract the amount of damage from what the minor can recover.
E. Emancipation
Emancipation is the legal release by a court of the responsibilities and liabilities of a parent towards their child, and the release of control of the minor by the parent. The requirements to emancipate vary from state to state, but may include things like marriage, a degree, or proof of sufficient financial independence. However, ultimately it is the decision of the courts to emancipate a minor. Although, emancipation does not grant the minor capacity, it will expand the definition for what qualifies as a necessity. The emancipated minor will be liable for the fair market price of essentials such as food, clothing, shelter, and medical expenses. This means that he has a quasi contract in which he will only be liable for those necessaries that are of fair market value.
F. Exceptions
In certain circumstances other than emancipation, the minor will not be able to rescind the contract. These include court approved contracts, stock transfers, bond transfers, bail bonds, military enlistments, and paternity lawsuits. These contracts are not voidable. Typically contracts made with minors for necessaries such as food and clothing cannot be voided. This ensures that minors will not be turned down for basic needs of survival simply because the seller is afraid of the minor getting his money back. Any other statutory exceptions as determined state by state will also be defenses against minor’s contracts. A couple notable ones in some states include student loans and insurance contracts. Finally, many states do not allow minors to repudiate contracts for real estate until the minor has reached the age of majority (Chicago Family Law).
G. Mentally Impaired
Similar rationale is used for limiting the capacity of the mentally impaired, as is used for minors. The general belief is that someone who is in some significant way mentally impaired will be unable to properly act in their own best interest. Because of this, contracts made by the mentally impaired may be either void or voidable by courts.
In order for the mentally impaired to enter into a contract, it must be done by a court appointed guardian, who is in charge of their livelihood. Contracts made by a mentally ill person who has a legally appointed guardian are void. If a mentally impaired person does not have a guardian and he or she does not understand what a contract is, then the contract is voidable. This is usually the case unless a court order otherwise specifies that the mentally impaired person does have capacity.
Incapacity must generally be determined by ascertaining whether the person has sufficient cognitive process to understand the extent of the contract into which they are entering. The contract will be voidable if the person is deemed to be unable to act in a reasonable manner and the other party involved has sufficient reason to know. For example, the family of an Oregon man who had been diagnosed with Alzheimer’s disease was successful in voiding contracts that he had made to buy seven cars with one dealer in the same month. He was obviously deemed by the court to be mentally incompetent to have made the contracts (Pennsylvania Fiduciary Litigation).
There is however a possibility that they may be held liable for damages or use to a greater extent than a minor unless the other party involved was aware of their mental impairment at the time of signing the contract. If not, the mentally impaired party must be returned to the same position they were before the creation of the contract. This is intended to prevent people from taking advantage of the mentally impaired.
Additional precautions have been taken for people whom the courts have adjudicated to be incompetent that make any contracts that they should enter into as void, not voidable. If however, the person is adjudicated as incompetent after the signing of the contract, the contract is merely voidable, at the wish of either the mentally impaired party who signed the contract, or their legal guardian.
H. Alcohol Intoxication
When an obligee is intoxicated while making a contract, the contract is considered valid unless one of the parties is exceptionally drunk. Exceptionally drunk usually means the intoxicated party can’t remember making the contract or was deemed to have been so drunk that he made a contract that he most likely would not have otherwise. This could include a written contract for someone to mow your lawn for $10,000 when the very intoxicated offeror just made the contract because he wanted to make a point that the offeree never mows lawns. In other situations, the intoxicated party is not so lucky.
I. Aliens (non citizens)
Aliens are generally allowed to make contracts with U.S. citizens. But, if the U.S. is at war, citizens of the country with whom the U.S. is at war with cannot sue for breach of contract. For example, if an American made a contract with a Mexican, and the United States declared war with Mexico, hence the American breached the contract; the Mexican could not sue the American.
J. Convicts
Convicts are allowed to make contracts unless the contract is inconsistent with their sentence. For example, suppose a convict is serving a life sentence, the convict cannot make a contract to work with a company when life sentence is over. Furthermore, convicts are not allowed to make contracts that will allow them to profit from their convictions (book deals, movie rights, etc.) For example, O.J. Simpson wrote a book in the aftermath of his famous murder trial named If I Did It, and would not have been able to profit from the sales due to a conviction in the civil case. (Wikipedia.com)
K. Married Women (and Men)
Married women are allowed to make contracts without the husband’s signature. However, a signature is required from both the husband and the wife when signing a realty contract. Before women had substantial rights in U.S. society, wives were not allowed to make contracts without their husband’s approval. This, obviously, would now be considered gross discrimination and wives can make the same contracts as their husbands without their approval. However, many states make both married men and women sign real estate contracts when they are selling because of the presumption that they both own the property together.
II. Genuine Assent
Another way that a person may avoid being liable to a contract is if they did not Genuinely Assent to, or genuinely agree to the contract. Reasons that a person may agree to a contract but not genuinely assent to the contract would be a mistake, misrepresentation, undue influence or concealment. If there is a lack of genuine assent, the contract may be void or voidable depending on which state.
A. Mistake
Under certain circumstances, if there is a misunderstanding of a fact or facts that are material in nature, the contract may be voidable.
1. Unilateral Mistake of Fact
A unilateral mistake is a mistake made by one of the parties involved. As a general rule, a mistake made by one party will be valid. The reasoning for this rule is that a single party in a contract should be responsible for being aware of the terms in which they are bound. If on the other hand the other party knew of the mistake or if there is a computational error, the contract will then be voidable. An example would be if a company was bidding out a construction job, and a vendor puts in a bid for $500,000, which is only enough to cover cost of materials, and would not include labor or profit. In this case the contract would be voidable if the other party should have realized that the bid was far too low for this kind of contract. However, many courts rule that if one side is mistaken about a fact and the other side knows it, the contract may be voidable.