Capacity to Contract

CHAPTER 13

CAPACITY TO CONTRACT

Outline

I. Introduction

The law uses the word “capacity” to describe a party’s ability to do or perform a legally valid act.

II.Minors' Contracts

A. The Reason for Minors’ Incapacity

Rationale: The contract is only voidable by the minor, that is, only the minor has the right to disaffirm. Adults who contract with minors are bound by the contracts. The rationale is to protect the minor. The minor is given the right to disaffirm (cancel) his/her contracts.

Example: NYC Mgmt. Group Inc. v. Brown-Miller: A minor was allowed to disaffirm a modeling contract even though her mother also signed the contract.

B. Ability to Disaffirm

The Minor may disaffirm during minority or within a reasonable time afterward.

Example:Woodman v. Kera LLC: As a matter of public policy, minors may disaffirm contracts that include waivers of liability (parental preinjury waivers in this case). A parent or guardian cannot contractually bind his minor ward.

C. Ratification

A minor who does not disaffirm within a reasonable time after attaining majority loses the right to disaffirm.

D.The Consequences of Disaffirming

The law continues to protect minors by entitling minors to the return of any consideration they have given the adult party in the contract. The minor must return to the adult any consideration still in the minor’s possession. Under modern trend, minors are entitled to the return of their property and must put the seller in status quo.

E. Barriers to Disaffirmance

Many courts today require the minor to place the adult in status quo in some circumstances in order to ameliorate the harsh effects of the rule that minors lack capacity to contract.

Example: Rimes v. Curb Records: The court found that Rimes, a minor, could not avoid a portion of the contract based on her status as a minor.

F. Emancipation

No formalities are required. A minor may leave the control of their parent by joining the armed services, marrying or leaving the parent’s home.

Example: Sexton v. Sexton: The court found that K.S. was outside the control of her parents and no longer required their care and support. She was emancipated and therefore her father did not owe child support for her.

G. Misrepresentation of Age by Minors

If a minor deceives a contracting adult by misrepresenting his age, many states allow the minor to disaffirm the contract but must put the adult in status quo.

H. Necessaries are those things essential to a minor's welfare. Minors are generally required to pay the reasonable value of necessaries rather than the contract price.

Example: In re the Estate of Reed v. Reed: Medical expenses are necessaries for which a minor can be held liable.

III. Contracts of Mentally Impaired and Intoxicated Persons

A. Theory of Incapacity

People suffering from mental impairment may lack the capacity to contract. Mental impairment can be caused by mental illness, brain damage, retardation, senility or intoxication.

B.The Test of Incapacity

Test of incapacity is whether the party, at the time of contracting, could understand the nature and effect of the contract.

C.The Effect of Incapacity

Contracts are voidable at the election of the party lacking capacity. A contracting party found to have capacity is bound by the contract.

Example: Estate of Prickett v. Womersley: The court found the agreement unenforceable due to Prickett’s incapacity.

D.Necessaries

People lacking capacity are liable for the reasonable value of necessaries just as minors.

E.Right to Disaffirm

People lacking capacity may disaffirm a contract just as minors. If the contracting party with capacity is deemed to have attempted to take advantage of the party lacking capacity, the party lacking capacity need not return them to status quo.

F.Ratification

People who regain their capacity, as when capacity is lost due to intoxication, may ratify their contracts just like minors.

Learning Objectives

1.You should understand the difference between a void and voidable contract.

2.You should understand the right of a minor or one lacking capacity due to mental impairment to disaffirm a contract.

3.You should understand the concept of ratification.

4.You should know why contracts made by minors are voidable, and why these contracts are voidable at the election of the minor, but not at the election of the adult party to the contract.

5.You should understand the time period during which a minor is allowed to disaffirm.

6.You should know the different approaches taken in cases involving the return of consideration by the disaffirming minor where the consideration has been lost, stolen, destroyed, or dissipated.

7.You should know the various ways in which ratification may be accomplished.

8.You should know what "necessaries" are, the rules governing the minor's liability for them, and the reason that contracts for necessaries are not voidable.

9.You should know the test of incapacity usually applied when a party to a contract is alleged to be mentally impaired or intoxicated.

10.You should know when the contracts of the mentally impaired are treated as void rather than voidable.

Learning Hints

1.A contract made by a minor is voidable by the minor but not by the adult. This means that the minor may elect to disaffirm or to ratify the contract.

2. In general, an adult contracts with a minor at his own risk. Generally, a minor is not required to place the adult in status quo (that is, in the same position he would have been had the contract not been executed); this rule, however, has been changed in some states.

3.Except for contracts that affect title to real estate, a minor can disaffirm a contract at any time from the making of the contract until a reasonable time after reaching the age of majority. The amount of reasonable time varies depending upon the terms of the contract.

4.Cases in which the consideration received by the minor has been lost, stolen, destroyed, or dissipated have caused much disagreement concerning the minor's ability to disaffirm. A few states allow the minor to rescind in such cases, but require him to pay the adult party to the contract the reasonable value of the consideration he received.

5.Keep in mind that failure to disaffirm within a reasonable time after reaching the age of majority extinguishes the right to disaffirm, and also constitutes ratification.

6.In order to understand the rule making infants (minors) liable in quasi-contract for necessaries, suppose that a grocery store sells a minor a loaf of bread for $100. The minor will not be able to avoid paying for the bread, but he will only be liable for its reasonable value. This rule encourages adults to provide necessaries to minors, but prevents them from imposing unconscionable bargains on these minors.

7.The bargains of the mentally impaired are void only when a court has previously determined the person to be mentally incompetent. This ruling is very different from the ruling an ordinary court makes in a case where it is alleged that a contract is voidable on the grounds of mental impairment.

8.The level of mental impairment necessary to void a contract varies based on the terms of the contract. A person’s mental ability is contrasted to the complexity of the contract to determine capacity.

9.The rule that contracts of the mentally impaired or intoxicated can be ratified only after the person has regained mental capacity or sobriety reflects the same policy as the rule allowing minors to ratify their contracts only after attaining the age of majority. In each case, the capacity to contract is a precondition to ratification, for surely the person who lacks capacity to contract also lacks the capacity to ratify.

10.A minor who contracts for necessaries is able to disaffirm when he is furnished necessaries by a parent or guardian. In this situation, disaffirmance is permitted because there is no need to ensure that adults will have an incentive to provide necessaries to the minor.

11.While a contract entered into by an intoxicated party may be voidable if the party failed to understand the nature of the agreement, courts generally do not favor releasing a party from an obligation because he was voluntarily intoxicated. Thus, a court may find that the party has ratified the contract if he does not act promptly in notifying the other party of his election to rescind as a result of intoxication.

True-False

In the blank provided, put "T" if the statement is True or "F" if the statement is False.

_____1.Only a minor may rescind a contract by a minor.

_____2.A minor may disaffirm a contract even after attaining majority.

_____3.Any contract by a person who lacks the mental capacity to contract is void, regardless of whether that person has been adjudicated mentally incompetent.

_____4.Today, minors who disaffirm a contract are often required to place the other contracting party in status quo.

_____5.A minor can generally only ratify a contract after attaining majority.

_____6.A minor who misrepresents his age to an adult will be estopped from disaffirming his contract with the adult in some states.

_____7.Emancipation gives the minor the capacity to contract.

_____8.Minors are normally liable for the reasonable value of necessaries provided to them.

_____9.Agreements made by persons who have been adjudicated insane are generally voidable.

_____10.Like minors, people lacking mental capacity can disaffirm their contracts, and on disaffirmance, must return any of the consideration that they still have.

Multiple Choice

Circle the best answer.

1.Which of the following is an example of a void contract?

a.A contract between a minor and another minor.

b.A contract between a minor and an adult who does not know the first party is a minor.

c.A contract between a minor and an adult who knows the first party is a minor.

d.A contract between a person who has been adjudicated mentally incompetent and another party.

2.Jan, who was being treated for manic-depression, a serious mental illness, (but had not been adjudicated incompetent), rented an apartment for herself and her child. Assuming that the apartment is a "necessary:"

a. Jan must pay the contract price for the apartment.

b. Jan must pay the reasonable value of the apartment rental.

c. Jan is not obligated to pay for the apartment unless she chooses to do so.

d. The contract is void.

3.Nan has had a history of mental problems. Nan enters into a contract to buy a series of books advertised on television. Which of the following statements is most accurate?

a.If the court finds that Nan lacked the mental capacity at the time the transaction was made, the contract is probably voidable.

b.The contract is void.

c.If Nan disaffirms the contract, she does not need to return any books she received.

d.The books would likely be classified as necessaries.

4.Billy, a minor, buys a small house. Which of the following statements is true?

a.A minor cannot disaffirm a real estate contract.

b.Billy can ratify this contract before attaining majority.

c.Billy must attain majority before disaffirming a real estate contract.

d.Billy may disaffirm the contract at any time during minority.

5.Generally, a contract entered into by an intoxicated person:

a.Is void.

b.Is voidable under all circumstances.

c.Is voidable only if the intoxicated person lacked mental capacity to contract at the time of entry into the contract.

d.Is illegal.

6.Marty, a minor, trades his Toyota in for a used Honda at Honest Hank’s Used Cars. Hank later sells the Toyota to Millie. After experiencing some difficulties with the Honda, Marty disaffirms the contract. Under the UCC, which of the following statements is not true?

a.Marty can get his Toyota back from Millie.

b.Marty can recover money from Hank, but he cannot recover his Toyota from Millie.

c.Millie must give the car back to Marty and recover her purchase price from Hank.

d.Hank must give Marty reasonable value for the Toyota.

7.Which of the following is true regarding minority?

a.A minor can normally disaffirm a contract during minority and for a reasonable time after attaining majority.

b.An adult can disaffirm a contract with a minor.

c.A minor may ratify a contract while still a minor.

d.Under common law, a minor who disaffirms a contract and who no longer has the consideration given by the adult party must place the adult in status quo.

8.Mona Minor misrepresents her age to Johnson so that Johnson will sell furniture to Mona. Which of the following statements is true?

a.Mona may be estopped from raising the defense of minority.

b.Mona may be allowed to disaffirm the contract, but must place Johnson in status quo.

c.Mona may be able to disaffirm, but she may be liable to Johnson for the tort of deceit.

d.All of the above.

9.Which of the following statements is not true?

a.Emancipation does not normally give the minor the capacity to contract.

b.Minors are generally liable under quasi-contract theory for the reasonable value of necessaries provided to them.

c.Minors are liable for the value of necessaries they have purchased under a contract, but have not received at the time they disaffirm.

d.Some courts today hold that a disaffirming minor must return the adult to status quo.

10.Mike has been adjudicated insane. Which of the following is not true?

a.Contracts made by Mike after the adjudication are void.

b.Contracts made by Mike after the adjudication are voidable.

c.Mike may be liable for the reasonable value of necessaries.

d.Mike’s personal representative may be able to ratify contracts made by Mike.

Short Essay

1.Sally, a minor, buys a car from Bally Motors. After Sally reaches the age of majority, can she still disaffirm the contract?

2.What is the reason for requiring minors to pay on a quasi-contract basis for necessaries furnished to them before they disaffirmed the contract for the necessaries?

3.While Sally is still a minor, she wrecks the car she purchased from Bally. Can she still disaffirm the contract? Must she return Bally to status quo?

4.Rita, a minor, signs a one year lease at Alpine Manor Apartments for $500 per month in rent. Rita lives at Alpine for two months before she disaffirms her lease. Must Rita pay Alpine for the rent? Is this a necessary?

5.Bud is an older person who seems to drift in and out of mental sharpness. Bud contracts to buy a car from Roberts Motors. Discuss Bud’s ability to enter into a contract and whether he would have the ability to void the contract.

6.Sue is a mature looking 17-year-old. She tells Acme she is 18 so that Acme will sell a television to her. Since Sue is a minor who misrepresented her age, can she still disaffirm her contract with Acme?

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