Capacity and Legality

Chapter 12

Capacity

• Contractual capacity – the threshold capacity required by law for a party who enters into a contract to be bound by that contract– Usually assumed

• Minors (voidable)– Can disaffirm a contract by just expressing intent to do so– Can disaffirm until they reach age of majority or a

reasonable amount of time after– Some states just require that merchandise be returned– Others have an additional requirement:

More on Minor Contracts

• Can still disaffirm in some states even if you misrepresent your age

• Other states hold you liable for any torts brought by the other party

• Minor can disaffirm contract for necessities– However, liable for goods used– Three step test 1) item must be necessary for minors

existence 2) level of value must be necessary to sustain social status or way of life 3) minor must not have guardian

– Insurance and Loans may be necessities in some states

Minors Concluded

• Minors allowed to ratify contracts– Ratification – the act of accepting and giving force to

an obligation that previously was not enforceable

• Have reasonable amount of time to disaffirm after reaching age of majority

• Parents – not liable unless it’s a contract for necessities

• Emancipation – divorcing your child

The Intoxicated And The Insane

• Intoxication– General Rule: If a person is sufficiently intoxicated then the

contract is voidable• It does not matter if the intoxication was voluntary• If intoxicated but still able to understand consequences of

actions then its not voidable• Intoxicated person probably has burden of proof

• Mental Insanity– Void – if adjudged mentally insane– Voidable if its proven that the person is mentally

incompetent– Not voidable if you had a lucid moment and have not

been adjudged as being mentally insane by a court

Legality

• Usury– Prohibits contracts that charge an excessive rate

for interest– Penalties vary by state (may lose right to collect

any interest

• Gambling– Varies by state (Most states allow for a tax on

the mathematically challenged aka “The Lottery” )

More On Contracts

• Sunday laws prohibit often prohibit contracting on Sunday– Some states allow an exception for contracts for

necessities

– Often unenforced by authorities

• Licensing Statutes– Have to be licensed to be a doctor , lawyer, c.pa.

• Contracts with unlicensed individuals may still be enforceable in some states

Public Policy

• Public Policy automatically voids contracts such as those selling children– Contracts in restraint of trade

• Usually involve covenant not to compete– Which is a covenant not to build a new store for a period

of time close to the one being sold (has to be reasonable)

• Employment contracts– Important in employment contracts of salespeople

More Public Policy

• Unconscionable Contracts– Has to be a pretty outrageous contract

• Procedural Unconscionability– No time to read the terms– Too much legalese– No time to ask questions

• Substantive Unconscionability– Must “shock the conscious” of the court

Exculpatory Clauses

• A clause that relieves a contracting party from liability in the event of monetary or physical harm– Often seen in employment contracts– $$ limits arise in lease contracts– Can be found as contrary to public policy– Can be used by amusement parks

Effects of Illegality

• Usually the court will just ignore the contract– Thus, if you paid for the prostitute – you are out

of luck because you can’t get your $$ back– Exceptions to the rule

• Ignorant of the facts of illegality– You did not know the goods were stolen

• Members of Protected classes– Eg. Employees who singed exculpatory contracts

More exceptions

• Fraud, duress, or undue influence

• Severable, or Divisable Contracts– If a court can separate the legal and illegal parts

you may be able to recover damages.