Chapter 12. Capacity and Legality
Define and describe the infancy doctrine.
Identify contracts that may be disaffirmed by minors.
Explain a minor's obligation to pay for necessaries of life.
Define legal insanity and explain how it affects contractual capacity.
Define intoxication and describe how it affects contractual capacity.
Identify illegal contracts that are contrary to statutes.
Identify illegal contracts that violate public policy.
Describe covenants not to compete and identify when they are unlawful.
Define unconscionable contracts and determine when they are unlawful.
Contracts that may be disaffirmed by minors
A minor or legal infant is a person who has not reached the age of majority, usually age 18. To protect minors, the law recognizes the infancy doctrine, which allows minors to cancel or disaffirm most contracts they have entered into with adults. The public policy is that minors should be protected from the unscrupulous behavior of adults. A minor may disaffirm a contract orally, in writing, or by the minor's conduct.
- If a minor has transferred money, property, or other valuables to the competent party before disaffirming the contract, that party must place the minor in the status quo.
- Generally, 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.
- A minor who represents his or her age when entering into a contract owes a duty of restoration and restitution when disaffirming the contract.
Minor's obligations to pay for necessaries of life
A minor must pay the reasonable value of food, clothing, shelter, medical care, and other items considered necessary to the maintenance of life. In addition, some statutes require a minor to pay for the following:
- Medical, surgical, and pregnancy care
- Psychological counseling
- Health and life insurance
- Performance of duties relating to stock and bond transfers, bank accounts, and the like
- Educational loan agreements
- Contracts to support children
- Contracts to enlist in the military
- Artistic, sports, and entertainment contracts that have been entered into with the approval of the court
Legal insanity and contractual capacity
A objective, cognitive understanding test is used to determine legal insanity. Under this test, a person's mental incapacity must render that person incapable of understanding or comprehending the nature of a legal transaction.
- If a person has been adjudged legally insane, his or her contracts are void. Neither party can enforce them.
- If a person is insane, but not adjudged insane, the contract is voidable by the insane person. The competent party cannot void the contract.
Intoxication and contractual capacity
Most states provide that contracts entered into by intoxicated persons are voidable by the intoxicated person. This includes intoxication because of alcohol or drugs. The contract is not voidable by the other party if that party had contractual capacity.
Illegal contracts that are contrary to statutes
Contracts to perform an activity that is prohibited by statute are illegal contracts. Some examples are:
- Usury lawsusury is an upper limit on the interest rate that can be charged on certain types of loans.
- Gambling lawsall states either prohibit or regulate gambling, wagering, lotteries, and games of chance.
- Sabbath lawsSabbath laws prohibit the carrying on of certain secular activities on Sunday.
- Contracts to commit a crime.
- Licensing statutespracticing certain professions and occupations without a license is illegal.
Illegal contracts that violate public policy
Contracts whose objective is considered immoral by society, such as a contract based on sexual favors, are void.
Contracts that restrain trade can be held to be unlawful as against public policy.
Covenants not to compete
An agreement not to compete is an agreement whereby a person agrees not to engage in a specified business or occupation within a designated geographical area for a specified period of time following the sale. The reasonableness of covenants to compete is examined on a case by case basis.
An exculpatory clause in a contract relieves one (or both) parties to the contract from tort liability for ordinary negligence. They cannot be used in situations involving willful conduct, intentional torts, fraud, recklessness, or gross negligence.
Effect of illegality in contracts
Generally, courts will refuse to enforce or rescind an illegal contract and will leave the parties where it finds them. There are some exceptions:
- Innocent persons who were justifiably ignorant of the law or fact that make the contracts illegal.
- Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence.
- Persons who entered into an illegal contract withdraw before the illegal act is performed.
- Persons who were less at fault than the other party for entering into the illegal contract. When both parties are equally at fault in an illegal contract, they are said to be in pari delicto.
Some contracts are so oppressive or manifestly unfair that they are unjust. Such contracts are called unconscionable contracts or contracts of adhesion. The following are the elements of an unconscionable contract:
If a court finds that a contract is unconscionable, it may refuse to enforce the contract, refuse to enforce the unconscionable clause but enforce the remainder of the contract, or limit the applicability of any unconscionable clause so as to avoid an unconscionable result.
- The parties possessed severely unequal bargaining power.
- The dominant party unreasonably used its unequal bargaining power to obtain oppressive or manifestly unfair contract terms.
- The adhering party had no reasonable alternative.
- adjudged insaneA person who has been adjudged insane by a proper court or administrative agency. A contract entered into by such a person is void.
- competent party's duty of restitutionIf a minor has transferred money, property, or other value to the competent party before disaffirming the contract, that party must place the minor back into status quo.
- contract in restraint of tradeA contract that unreasonably restrains the trade.
- contracts contrary to public policyContracts that have a negative impact on society or interfere with the public's safety and welfare.
- disaffirmanceThe 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.
- emancipationWhen a minor voluntarily leaves home and lives apart from his or her parents.
- exculpatory clauseA contractual provision that relieves one (or both) parties to the contract from tort liability for ordinary negligence.
- gambling statutesStatutes that make certain forms of gambling illegal.
- immoral contractA contract whose objective is the commission of an act that is considered immoral by society
- in pari delictoWhen both parties are equally at fault in an illegal contract.
- infancy doctrineA doctrine that allows minors to disaffirm (cancel) most contracts they have entered into with adults.
- insane, but not adjudged insaneA person who is insane but has not been adjudged insane by a court or administrative agency. A contract entered into by such person is generally voidable. Some states hold that such a contract is void.
- intoxicated personA person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence.
- legal insanityA state of contractual incapacity as determined by law.
- licensing statuteStatute that requires a person or business to obtain a license from the government prior to engaging in a specified occupation or activity.
- minor's duty of restorationAs a general rule 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.
- minorA person who has not reached the age of majority.
- ratificationThe act of a minor after the minor has reached the age of majority by which he or she accepts a contract entered into when he or she was a minor.
- regulatory statuteA licensing statute enacted to protect the public.
- revenue raising statuteA licensing statute with the primary purpose of raising revenue for the government.
- Sabbath lawA law that prohibits or limits the carrying on of certain secular activities on Sundays.
- usury lawA law that sets an upper limit on the interest rate that can be charged on certain types of loans.
Summaries of contract law, including capacity and legality, can be found at: