Contractual Capacity

Chapter 13

Limited Capacity

Minors

Incompetent Persons

Intoxication

Mentally Incompetent Persons

Mental Incompetence

Contracts made by persons who are not able to comprehend the subject matter, nature and consequences of their actions, due to mental illness or intoxications are voidable.

If a person has been adjudged incompetent by a court any contract the enter into is void

Minors

Minor: Someone below the age of 18

A minor can enter into any contract that an adult can enter into, as long as it is not prohibited by law.

(for example, the sale of alcoholic beverages).

Minors

A minor can disaffirm a contract by manifesting an intent not to be bound.

A contract can ordinarily be disaffirmed at any time during minority or for a reasonable time after a minor comes of age.

Dissafirmance

A minor can disaffirm a fully executed contract without placing the adult in status quo.

A minor must return goods in their possesion

Exceptions

Misrepresentation of Age Most courts it makes no difference

Some courts prohibit the minor to disaffirm

Some courts allow the minor to diaffirm but allow the adult to sue for damages in tort.

Exceptions / Necessaries

Necessaries are food, clothing, shelter,medicine, and hospital care-whatever a court believes is necessary to maintain a person's status.

A minor may disaffirm a contract for necessaries but will be liable for the reasonable value. (Necessaries must be necessary)

Ratification

When a minor performs acts inconsistent with disaffirmance

or fails to disaffirm an executed contract within a reasonable time after reaching the age of majority.

Legality

A contract to do something that is illegal is void from the outset and unenforceable.

Legality

Contracts may be illegal and void because they are:

Contrary to Statute

or Contrary to Public Policy

Contrary to Statute / Usury

Virtually every state has a statute that sets the maximum rate of interest that can be charged for different types of transactions, including ordinary loans.

A lender who makes a loan at an interest rate above the lawful maximum is guilty of usury.

Contrary to Statute / Usury

In a few states, a usurious loan is a void transaction, and the lender cannot recover either the principal or the interest.

A number of states allow the lender to recover only the principal of a usurious loan along with interest up to the legal maximum.

In other states, the lender can recover the

principal amount of the loan but not the interest

Contrary to Statute / Gambling

All states have statutes that regulate gambling. Traditionally, state statutes have deemed gambling contracts to be illegal and thus void.

Gambling - any scheme that involvesdistribution of property by chance among persons who have paid a valuable consideration for the opportunity (chance) to receive the property.

Gambling is the creation of risk for the purpose of assuming it.

Contrary to StatuteLicensing Statutes.

All states require that members of certain professions or occupations obtain licenses allowing them to practice.

Such as: Physicians, lawyers, real estate brokers, architects, electricians, and stockbrokers

Contrary to StatuteLicensing Statutes

When a person enters into a contract with an unlicensed individual, the contract may or may not be enforceable, depending on the nature of the licensing statute. Regulatory - Contract illegal

Revenue Raising - Contract enforceable

Contracts Contrary to Public Policy / Restraint of Trade

Contracts in restraint of trade (anticompetitive agreements) usually adversely affect the public (which favors competition in the economy) and typically violate one or more federal or state statutes.

Contracts In Restraint of Trade Exception

Covenants not to compete are valid if they are: Ancillary to another contract

Sale of Business Employment Contract

To protect interest created in the contract

No more restrictive than necessary to protect those interests.

Contracts Contrary to Public Policy/Unconscionable Contracts

Contracts which are so unfair that they “Shock the Conscience”

Procedural Unconscionability.

Substantive Unconscionability.

Contracts Contrary to Public Policy/Unconscionable Contracts

Procedural unconscionability has to do with how a term becomes part of a contract. Usually involves:

Inconspicuous print, Unintelligible language

("legalese"), Lack of an opportunity to read the

contract or to ask question Vastly superior bargaining power

(adhesion contracts)

Contracts Contrary to Public Policy/Unconscionable Contracts

Substantive unconscionability characterizes those contracts, or portions of contracts, in which the terms are oppressive or overly harsh.

Contracts Contrary to Public Policy/Exculpatory Clauses.

Clauses that release a party from liability in the event of monetary or physical injury, no matter who is at fault

Exculpatory clauses may be enforced when the parties are private businesses not involved in enterprises considered important to the public interest. (health clubs, amusement parks, skiing facilities, horse-rental concessions, golf-cart concessions, and skydiving organizations.)

Contracts Contrary to Public Policy/Exculpatory Clauses.

Generally, an exculpatory clause will not beenforced if the party seeking its enforcement is involved in a business that is important to the public interest.( public utilities, common carriers, banks)

Exculpatory clauses in rental agreements for commercial property are frequently upheld, but contrary to public policy and illegal and unenforceable when they are included in residential property leases.