CONTRACTUAL CAPACITY [4318]

 

 

    Contractual Capacity: The minimum mental capacity required by law for a party who enters into a contractual agreement to be bound by it. Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts:

 

     Minors: In virtually all states, unmarried persons under the age of eighteen (18) are permitted to enter into any contract an adult can, provided that the contract is not one prohibited by law for minors (e.g., agreement to purchase cigarettes or alcohol). However, unlike those entered into by adults, contracts entered into by minors are generally voidable by the minor.

 

     Mentally Impaired or Incompetent Persons: Like­wise, contracts entered into by persons who are, at the time of contracting, intoxicated [impaired] (voluntarily or not) or mentally incompetent are generally voidable.

 

     Unlike a void contract, which is unenforceable on its face, a voidable contract is presumed to be enforceable but for the presence of some factor -- here, the contractual capacity of one of the parties -- which permits a party lacking capacity to avoid his or her otherwise valid contractual obligations.

 

 


CONTRACTS WITH MINORS 4318.02

 

 

I       Disaffirmance: In order for a minor to avoid a contract, he or she need only manifest an intention not to be bound by it.

 

     This intent to avoid, or “disaffirm,” the contract may be manifested by words or actions.

 

     Generally speaking, a minor may disaffirm a contract at any time during minority or for a reasonable time after the minor comes of age.

 

     When a minor disaffirms a contract, all property that he or she has transferred as consideration can be recovered -- even if it was subsequently transferred to a third party.

 

     Disaffirmance must be timely.

 

     The contract must be disaffirmed in its entirety.

 

     Only the minor has the option of disaffirming his or her contractual obligations; any adult parties to the contract remain bound by it unless released by the minor’s disaffirmance.

 

 

       The Minor’s Obligations on Disaffirmance: Upon disaffirmance, a majority of states require only that the minor return any goods or other consideration in his or her possession.

 

     However, a growing minority of states further requires that the minor take whatever additional steps are required to restore the adult to the position he or she was in prior to entering the contract.

 

 

     Parents’ Liability: As a general rule, parents are not liable for the contracts made by their minor children unless:

 

(1)   one or more parent(s) co-sign the contract, and thereby assume personal liability for its performance, even if their minor child disaffirms the contract; and/or

 

(2)   the minor child committed some wrongful act associated with the contract at the direction of one or both parent(s).

 


 

 

       Misrepresentations Regarding Age: Most states will permit disaffirmance even if the minor misrepresented his or her age when entering into the agreement. However,

 

     some states prohibit disaffirmance in all cases where the minor misrepresented his or her age;

 

     other states prohibit disaffirmance in cases where the minor has engaged in business as an adult;

 

     some courts refuse to allow minors to disaffirm fully performed contracts unless they can return all con­sideration received; and

 

     some courts permit disaffirmance but subject the minor to tort liability for his or her misrepresentation.

 

 

     Liability for Necessaries: A minor who enters into a contract to purchase food, shelter, clothing, medical attention, and/or other goods or services necessary to maintain the minor’s well-being will generally be liable for the reasonable value of those goods and services even if the minor disaffirms the contract.

 

 

 


RATIFICATION 4318.02e

 

 

       Ratification: Accepting and giving legal force to an obligation that previously was (1) not enforceable and/or (2) voidable. Ratification may be either express or implied.

 

       Express Ratification: A person lacking contractual capacity at the time they formed a contract may, upon (re-)gaining the necessary capacity to do so, expressly ratify the contract by stating, orally or in writing, that they intend to be bound by the contract.

 

     Implied Ratification: Likewise, a person lacking contractual capacity at the time they formed a contract may, upon (re-)gaining the necessary capacity to do so, impliedly ratify the contract

 

(1)   by acting in a manner that is clearly inconsistent with disaffirmance or avoidance or,

 

(2)         in the case of a minor, by failing to disaffirm within a reasonable time after reaching the age of majority.

 

 

LEGALITY

 

Contracts Contrary to Statute  4317.03

 

                Usury:  The maximum amount of interest that can be charged on a contract or loan.  In Texas, you can obtain the principal and excess interest, as well as attorney fees.

 

              Gambling:  Here we are talking about the classic gambling we all think about, such as Las Vegas, etc.  We are not talking about “betting” on a day trade, or when someone is going to die if we buy an insurance policy. Sometimes the distinction probably blurs, however.

 

              Sunday Laws: Once it was illegal to contract or sell goods on a Sunday.  For the most part, these types of laws have been unenforced, ignored, or repealed.

 

              Licensing Statutes: You cannot legally perform certain services (thereby contract for them) if you do not have the proper license.  For example,  being a stock broker, CPA, attorney, plumber, taxi driver, etc.  Generally the contract is unenforceable or rescindable. 

 

              Contracts to commit a crime: we usually think of a “hit” when we consider this type of contract, but it can be anything that is illegal against a statute.  For example, an agreement to buy illegal drugs at a certain value, to buy all stolen cars of a particular thief, etc.

 

Contracts Contrary to Public Policy 4317.04

 

                   Contracts in Restraint of Trade: Anti trust regulations usually cover these, but price fixing and other such type of agreements are also included in this problem area.

              Compare, however, that covenants not to compete, which may restrain new businesses from developing, are allowed in one general sense: if you sell a business to someone, a covenant not to compete may be executed to protect the purchaser of the business. Otherwise, if someone sold a store and then opened another one just like it a few blocks away, the old customers would likely return to the old vendor. The general rule is it must be part of the sale of a business. 

              Unconscionable Contracts or Clauses: basically we are talking about an agreement that is so unfair as to be “void of conscience”. 

              Procedural Unconscionablity: Here the classic example is the contract by adhesion, loaded with the legalese no one understands.  Basically a take it or leave it type of situation, which is discussed in another chapter later.

              Substantive Unconscionablity: here we are talking about the specific terms of the so called agreement, such as selling someone an old 286 computer to someone ignorant of computers for $2,500 today! This would “shock the conscience” of the court as well as most folks.

 

              Exculpatory Clauses: here we are talking about writing into a contract the ability for one side to release themselves automatically from any form of liability resulting from an accident, loss of money, or similar such damaging situation no matter who was at fault. Generally these clauses are not enforced and generally these type of clauses are contrary to public policy.  However, not always, like we learn in the law.   Notice, however, we are not talking about the “release” form that is generally enforceable, but is separate and distinct from something in another contract like the exculpatory clauses here.

 

              Other Contracts: examples might be contracts that discriminate on basis of race, creed, national origin, religion, gender and /or age.  Others include requiring someone to perform a tort, interfere with a public official, and or delay prevent or obstruct the legal process.

 

Effect of Illegality

 

Generally, the illegal contract is VOID.  Further, the courts generally  won’t help either party.Of course, there are exceptions:

 

              Justifiable ignorance of the facts:  what do we mean here?  A good example is a transportation company unknowingly transports some illegal materials and incurs costs, etc, and as such should be compensated for their efforts.

 

              Members of protected classes:  Here we are talking about violations of rules and regulations that are to protect specific “classes” of persons.  For example, if you are required to work only so many hours but wind up working additional hours, you are still to be compensated for such excess.  For example, pilots and airline personnel. 

             

              Withdrawal from an illegal contract: Classic example, you wager and put down your bets.  Either side can ask for the money back before the event is concluded, for example a bet on the Super Bowl and repudiating the bet before it begins.

 

              Contract otherwise illegal due to fraud, duress or undue influence: generally the victim can recover for the performance or value of the contract.

 

              Severable (Divisible) Contracts:  generally the court will enforce the legal portion of the divisible contract but not the illegal portion.  If the contract is indivisible, then the entire contract fails.