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Chapter 13 OutlineI. Contractual Capacity

A. Minors

B. Intoxicated Persons

C. Mentally Incompetent Persons

II. Legality

A. Contracts Contrary to Statute

B. Contracts Contrary to Public Policy

C. The Effect of Illegality

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§1: Contractual Capacity

• Contractual Capacity.

The minimum mental capacity required by law for a party who enters into a contract to be bound by it. Certain persons are generally not considered to have sufficient capacity to be bound by their contracts.

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Contractual Capacity

A. Minors

B. Intoxicated Persons

C. Mentally Incompetent Persons

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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.

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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.

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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 : Dodson v. Shrader (1992).6

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Ratification

• Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.

• Executed v. Executory contracts.

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Parent’s Liability• Contracts.

– Parents not liable (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.

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Intoxication• Lack of contractual capacity at the time the

contract is being made.

• 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, or– Person may ratify the contract expressly or

impliedly.

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Mentally Incompetent Persons• Void.

– If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.

• 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.

• Valid.– If person is able to understand the nature and effect of

entering into a contract yet lack capacity to engage in other activities.

– Lucid Interval.

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Legality

A. Contracts Contrary to Statute

B. Contracts Contrary to Public Policy

C. The Effect of Illegality

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§2: 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.

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Contracts Contrary to Statute

• Usury.

• Gambling.

• Sabbath Laws.

• Licensing Statutes.

– Case : RCDI Construction v. Spaceplan (2001).

• Contracts to Commit a Crime.

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Contracts Contrary to Public Policy

• Contracts contrary to public policy are void.

• Unconscionable Contracts or Clauses.

• Procedural or Substantive Unconscionability.

• Exculpatory Clauses.

• Discriminatory Contracts.

• Contracts for the Commission of a Tort.

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Contracts Contrary to Public Policy

1. Contracts in Restraint of Trade

2. Covenants Not to Compete

3. Unconscionable Contracts

4. Exculpatory Clauses

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Contracts Contrary to Public Policy

• Contracts in Restraint of Trade– Anti-Competitive Agreements are void.

• Exception: Covenant not to Compete and Sale of Business.

• Exception: Covenant not to Compete in Employment.

• Unconscionable Contracts/Clauses.– Exculpatory clauses.

– Case : Beaver v. Grand Prix Karting (2001).

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Unconscionable Contracts

• Procedural—one party lacks any meaningful choice regarding terms because of small print, lack of opportunity to read the k, or difficult language.

• Substantive—the k contains terms that deprive one party of the benefit of their bargain or a remedy for breach by the other party.

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Exceptions to the General Rule

• Justifiable Ignorance of the Facts.

• Members of Protected Classes.

• Withdrawal from an Illegal Agreement.

• Contract Illegal through Fraud, Duress, or Undue Influence.

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• Severable or Divisible Contracts.