Chapter 12Contracts — Capacity

and Legality

Chapter 12Contracts — Capacity

and Legality

§1: Contractual Capacity§1: Contractual CapacityContractual Capacity.The legal ability to enter into a contractual

relationship.• Full competence.• No competence.• Limited competence.

Legality.The agreement must not call for the

performance of any act that is criminal, tortious, or otherwise opposed to public policy.

MinorsMinors

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.

Minor’s Right to DisaffirmMinor’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.

Minor’s Obligation on Disaffirmance

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.

Misrepresentation of AgeMisrepresentation of AgeRight to Disaffirm.Minor can disaffirm the contract even though

minors age is misrepresented.

Obligation to Restore.Some courts refuse to allow minors to

disaffirm executed contracts unless they can return the consideration received.

Some courts allow the defrauded party to sue the minor for misrepresentation or fraud.

Contracts for NecessariesContracts for NecessariesMinor may disaffirm the contract but remains liable for the reasonable value of the goods.Criteria:Item contracted for must be necessary for the

minor’s subsistence.Value of the necessary must be up to the level

required to maintain a minor standard of living.Minor must not be under the care of parent or

guardian.

Insurance and LoansInsurance and Loans

Insurance. Not viewed as necessaries, so minor can

disaffirm contract and recover all premiums paid.

Loans.Seldom considered to be necessaries.Exception:

• Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

RatificationRatification

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.

Parent’s LiabilityParent’s LiabilityContracts.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.

IntoxicationIntoxicationIntoxicated persons 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.Person may ratify the contract expressly or

impliedly.

Mentally Incompetent PersonsMentally Incompetent PersonsVoid.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.

AliensAliens

Aliens have the same contractual rights as U.S. citizens.

Enemy Alien.

§2: Legality§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.

Contracts Contrary to StatuteContracts Contrary to Statute

Usury.

Gambling.

Sabbath Laws.

Licensing Statutes.

Contracts to Commit a Crime.

Contracts Contrary to Public Policy

Contracts Contrary to Public Policy

Contracts in Restraint of Trade.Unconscionable Contracts or Clauses.Procedural or Substantive Unconscionability.Exculpatory Clauses.Discriminatory Contracts.Contracts for the Commission of a Tort.Contracts Contrary to Public Policy.

Exceptions to the General RuleExceptions 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.

Severable or Divisible Contracts.

Effect of IllegalityEffect of Illegality

Generally, an illegal contract is void.Recovery or enforcement is not permitted because the contract never existed.Exceptions:Justifiable Ignorance of Facts.Members of Protected Class.Contract Illegal Through Fraud, Duress or

Undue Influence.

Case 12.1: Dodson v. Shrader(Minor’s Obligation on Disaffirmance)

Case 12.1: Dodson v. Shrader(Minor’s Obligation on Disaffirmance)

FACTS:16 year-old Dodson bought a used pickup

from Schrader. The truck developed mechanical problems, but Dodson continued to drive it without having it fixed.

The truck became inoperable and was hit while parked in Dodson’s yard.

Dodson sued to refund the price. The trial court ordered the Schraders to

refund the full purchase price to Dodson on Dodson’s delivery of the truck. Schrader’s appealed.

HELD: REVERSED. FOR SHRADER. The court required the seller to be compensated for

the depreciated value of the pickup and remanded the case for a determination of the fairness of the contract and the fair market value of the truck.

Dodson should not to be permitted to recover the amount actually paid without allowing Shrader to be compensated for damage while in Dodson’s possession.

To rule otherwise, explained the court, “can only lead to the corruption of principles and encourage young people in habits of trickery and dishonesty.”

Case 12.1: Dodson v. Shrader(Minor’s Obligation on Disaffirmance)

Case 12.1: Dodson v. Shrader(Minor’s Obligation on Disaffirmance)

Case 12.2: Brunswick v. Guest(Contracts in Restraint of Trade)

Case 12.2: Brunswick v. Guest(Contracts in Restraint of Trade)

FACTS:Guest, a floor covering installer for Brunswick,

signed a covenant not to compete for two years within an eighty-mile radius of Brunswick’s location.

After Guest quit Brunswick, he went to work as an independent flooring contractor.

Brunswick filed a suit in a Georgia state court against Guest. The court ruled in part that the covenant unduly restricted Guest’s right to earn a living. Brunswick appealed.

HELD: AFFIRMED. FOR GUEST.A covenant not to compete may not relate to the

entire area of the employer’s business, unless there is a “legitimate business interest” to be protected.

Brunswick argued that if its employees competed with it, its market share would shrink. “Avoidance of competition *  *  * is not a legitimate business interest.”

Also, the restriction on Guest’s activities was greater than necessary because it covered activities that were “very different” from his work as a floor covering installer.

Case 12.2: Brunswick v. Guest(Contracts in Restraint of Trade)

Case 12.2: Brunswick v. Guest(Contracts in Restraint of Trade)

Case 12.3: Beaver v. Grand Prix Karting(Exculpatory Clauses)

Case 12.3: Beaver v. Grand Prix Karting(Exculpatory Clauses)

FACTS:Beaver signed a clause to participate in the

annual Elkhart Grand Prix, a series of races in Elkhart, Indiana, organized by Grand Prix Karting Association (GPKA)

During a race, a piece of foam padding used as a course barrier was torn from its base and ended up on the track, causing a multi-kart collision severly injuring Beaver.

Beaver sued but GPKA argued the exculpatory clause precluded liability. Trial court found for GPKA and Beaver appealed.

HELD: AFFIRMED. FOR GPKA.Seventh Circuit found Beaver was bound to the

terms of the exculpatory clause. Exculpatory clauses “are governed by the same rules as other contracts.”

The court noted that based on the evidence presented, the jury reasonably concluded that it is the custom and practice of the go kart industry

The jury further reasonably concluded that Beaver was “well aware of this requirement and chose to participate in the 1994 race anyway. *  *  * [T]hese facts sufficiently establish Beaver’s assent to the release.”

Case 12.3: Beaver v. Grand Prix Karting(Exculpatory Clauses)

Case 12.3: Beaver v. Grand Prix Karting(Exculpatory Clauses)