1. Legal Capacity to Contract
Chapter 9

2. What is Capacity?
Capacity—the ability to understand the consequences of a contract
Does not require that a person understand the actual terms of the contract which may be written in technical legal terminology
Does not require that a person have merely the understanding of the terms

3. Persons who lack capacity
Minors
Under the age of majority (18 in most states)
Intoxicated persons
Mentally incapacitated persons

4. Protections for those that lack capacity
Disaffirmance
Refusal to be bound by a previous legal commitment
By law the protected party is to receive back whatever they put into the contract
The other party may or may not get back their consideration
Example:
Protected party bought a 4-wheeler from a dealership and then wrecked it. He or she can disaffirm the contract and recover any payments made. The dealership would only be able to recover the damaged ATV

5. Protections for those that lack capacity
Necessaries
Protected parties who contract for necessaries— things needed to maintain life--food, clothing, and shelter—must at least pay a reasonable value for the necessaries even if they disaffirm the actual purchase contract
Example:
If a minor purchased a fur coat for $5,000, she could disaffirm the contract. She would still be required to pay the cost of a good cloth coat ($200, a reasonable price) for the fur if she chose to keep it.
The price may seem unfair, but in the eyes of the law, receiving only $200 serves as punishment for contracting with a minor

6. Minors Minors’ contracts are considered voidable
Minors may disaffirm contracts during their minority
Minors may also disaffirm contracts within a reasonable time after achieving their majority
After the age of majority, the power to disaffirm is immediately cut off if the person ratifies a contract
Ratification—acting toward the contract as though one intends to be bound by it
Ratification CAN NEVER occur before the age of majority

7. minors Minors can also be bound to a contract if they are emancipated
Emancipation—severing of the child-parent relationship
Ends the duty to support a child and the duty of the child to obey the parent
Minors are naturally emancipated at the age of majority
Minors can be emancipated formally (through the courts) or informally:
Parent and minor agree that the parent will cease support
Minor marries
Minor moves out of the family home
Minor becomes a member of the armed forces
Minor gives birth
Minor undertakes a full-time job

8. Mentally incapacitated
Mental Incapacitation—a person lacks the ability to understand the consequences of his/her contractual acts
Mental illness
Severe mental retardation
Severe senility
If a judge rules a person permanently insane

9. intoxicated Intoxication—alcohol, drug, or inhalant produced
Courts often refer to the same definition of incapacity as for the mentally impaired
Can the person understand the consequences of their contractual acts
Most courts are reluctant to consider an intoxicated party’s contracts voidable
Allow for diaffirmance for the intoxication even thought it may injure an innocent party
Disaffirmance only allowed for those who are so intoxicated that they don’t know they are contracting
Stricter standard used because intoxication is a voluntary act
If a judge rules someone is in a permanent state of alcoholism, that person’s contracts are considered void

10. Who has contractual capacity in organizations?
Scope of Authority
Within the range of acts the organization has authorized a person to do
Persons with a scope of authority have the capacity to bind the organizations to contracts
Capacity to contract can also be created by:
An employer telling an employee that they are authorized to bind the organization
When the organization leads others to believe that a person has certain authority
Purchasing agent

11. When can disaffirmance occur?
A person lacking contractual capacity can disaffirm a contract for necessaries or goods that are not necessaries:
Any time while still under the incapacity
Within a reasonable amount of time after attaining capacity
After attaining capacity a person may ratify the contract made while under incapacity
Giving a new promise to performs as agreed
Any act that clearly indicates the party’s intention to be bound (making payments to the seller)

12. What must be done upon disaffirmance?
In all states, when a minor disaffirms, anything of value the minor received and still has must be returned—the minor is then entitled to get back everything that was given to the other party
This is true even if a minor returns used or damaged goods
This is true even if a minor returns nothing because the goods have been lost, consumed, or destroyed

13. What must be done upon disaffirmance?
Loss of Value
In most states, if minors are unable to return exactly what was received under the contract, they can still get back everything they gave
In some states, however, a minor must return everything received in a condition as good as it was when it was received—if this cannot be done, the minor must pay the difference in value or deduct the difference from the amount to be refunded
Obligations of Party with Capacity
The party with capacity can neither enforce nor avoid all or any part of a contract for goods or services that are not necessaries against a party lacking capacity

14. Contracts that cannot be disaffirmed
Court Approved Contracts
Minors who are employed as actors/actresses or as professionals in sports
Major Commitments
Contracts to enlist in the armed forces and contracts for educational loans
Marriage contracts
Banking Contracts
Minors are permitted to make deposits in and withdrawals from banks and savings and loan associations

15. Contracts that cannot be disaffirmed
Insurance Contracts
More than ½ of states provide that minors who are over a certain age may not disaffirm certain contracts of life insurance
Work-Related Contracts
In most states, minors who engage in a business or trade cannot disaffirm agreements involving their business
Sale of Realty
In some states, a minor who owns real property and sells it or borrows money against it cannot disaffirm until after achieving majority
Apartment Rental
In a few states, the lease of an apartment cannot be disaffirmed even if the apartment is not a necessary

16. Contractual effect of misrepresenting age
In most states, minors who lie about their age may nevertheless disaffirm their contracts
A minor may be held liable for the tort of false representation
Minors are liable for their torts and delinquent or criminal conduct growing out of a contractual transaction
Typically they still have a right to disaffirm their contracts
The other party may collect from a minor any damages suffered because of the minor’s fraud even though the minor may be able to disaffirm the contract