1. Chapter 12 Capacity and Legality

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Introduction
Law presumes that parties have contractual capacity to enter into the contract
Certain persons do not have this capacity:
Minors
Insane persons
Intoxicated persons
A contract to perform an illegal act is called an illegal contract
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Minors
A person who has not reached the age of majority
Common law defines minors as:
Females under the age of 18
Males under the age of 21
Many states have enacted statutes that specify the age of majority
Generally 18 years of age for both males and females
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Minors
The most prevalent age of majority is 18 years of age for both males and females
Any age below the statutory age of majority is called the period of minority
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5. Minors The Infancy Doctrine Ratification KEY ISSUES RELATING
TO MINORS AND
CONTRACTS
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Parents’ Liability for Their Children’s Contracts
Necessaries of Life
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6. Key Issues Relating to Minors and Contracts
Infancy doctrine: A doctrine that allows minors to disaffirm (cancel) most contracts they have entered into with adults
Disaffirmance: The 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
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7. Key Issues Relating to Minors and Contracts
Minor’s duty of restoration
Duty of restoration: A rule that states that 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
Duty of restitution: A rule that states that 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 status quo
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8. Key Issues Relating to Minors and Contracts
Ratification: The 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
Parents’ liability for their children’s contracts
Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children
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9. Key Issues Relating to Minors and Contracts
Parents are liable for their children’s contracts for necessaries of life if they have not adequately provided such items
The parental duty of support terminates if a minor becomes emancipated
Emancipation: The act or process of a minor voluntarily leaving home and living apart from his or her parents
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10. Key Issues Relating to Minors and Contracts
Necessaries of life: Food, clothing, shelter, medical care, and other items considered necessary to the maintenance of life
Minors must pay the reasonable value of necessaries of life for which they contract
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11. Mentally Incompetent Persons
Law protects people suffering from substantial mental incapacity from enforcement of contracts.
To be relieved of duties under a contract, law requires a person to have been legally insane at the time of entering contract
Legal insanity: A state of contractual incapacity, as determined by law
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12. Mentally Incompetent Persons
Two standards concerning contracts of mentally incompetent persons:
Adjudged insane: Declared legally insane by a proper court or administrative agency
A contract entered into by a person adjudged insane is void
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13. Mentally Incompetent Persons
Insane, but not adjudged insane: Being insane but not having been adjudged insane by a court or an administrative agency
A contract entered into by such person is generally voidable
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Intoxicated Person
A person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence
The contract is not voidable by the other party if that party had contractual capacity
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Intoxicated Person
Under the majority rule
The contract is voidable only if the person was so intoxicated when the contract was entered into that he or she was incapable of understanding or comprehending the nature of the transaction
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Legality
Lawful contract: A contract that has a lawful object
Illegal contract: A contract that has an illegal object.
Such contracts are void
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17. Contracts Contrary to Statutes
Both federal and state legislatures have enacted statutes that prohibit certain types of conduct
Contracts to perform activities that are prohibited by statute are illegal contracts
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Usury Laws
A law that sets an upper limit on the interest rate that can be charged on certain types of loans
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19. Contracts to Commit Crimes
Contracts to commit criminal acts are void
If the object of a contract becomes illegal after the contract is entered into because the government has enacted a statute that makes it unlawful, the parties are discharged from the contract
The contract is not an illegal contract unless the parties agree to go forward and complete it
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Case 12.1 Illegal Contract
Case
Parente v. Pirozzoli
866 A.2d 629, Web 2005 Conn. App. Lexis 25 (2005)
Appellate Court of Connecticut
Issue
Is the partnership agreement an illegal contract that was void and unenforceable by the court?
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Gambling Statutes
Statutes that make certain forms of gambling illegal
States provide various criminal and civil penalties for illegal gambling
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Effect of Illegality
A doctrine that states that the courts will refuse to enforce or rescind an illegal contract and will leave the parties where it finds them
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Effect of Illegality
Persons who can assert an exception from the general rule of the effect of finding an illegal contract
Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal
Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence
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Effect of Illegality
Persons who entered into an illegal contract who withdraw before the illegal act is performed
Persons who were less at fault than the other party for entering into the illegal contract
In pari delicto: A situation in which both parties are equally at fault in an illegal contract
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25. Contracts Contrary to Public Policy
Contract contrary to public policy: A contract that has a negative impact on society or that interferes with the public’s safety and welfare
Immoral contract: A contract whose objective is the commission of an act that society considers immoral
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26. Special Business Contracts and Licensing Statutes
Contract in restraint of trade: A contract that unreasonably restrains trade
Licensing statute: A statute that requires a person or business to obtain a license from the government prior to engaging in a specified occupation or activity
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27. Case 12.2: Licensing Statute
Sturdza v. United Arab Emirates
11 A.3d 251, Web 2011 D.C. App. Lexis 2 (2011)
District of Columbia Court of Appeals
Issue
Does Sturdza’s lack of a District of Columbia’s architects license bar her from recovering damages from UAE?
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28. Special Business Contracts and Licensing Statutes
Exculpatory clause (release of liability clause): A contractual provision that relieves one (or both) of the parties to a contract from tort liability for ordinary negligence
Also known as a release of liability clause
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29. Special Business Contracts and Licensing Statutes
Covenant not to compete (noncompete clause): A contract that provides that a seller of a business or an employee will not engage in a similar business or occupation within a specified geographical area for a specified time following the sale of the business or termination of employment
Also called a noncompete clause
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30. Unconscionable Contracts
Unconscionable contract: A contract that courts refuse to enforce in part or at all because it is so oppressive or manifestly unfair as to be unjust
This doctrine may not be used merely to save a contracting party from a bad bargain
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31. Elements of Unconscionability
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
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32. Elements of Unconscionability
If the court finds that a contract or contract clause is unconscionable, it may
Refuse to enforce the contract
Refuse to enforce the unconscionable clause but enforce the remainder of the contract
Limit the applicability of any unconscionable clause so as to avoid any unconscionable result
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