Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Capacity to Contract

No brilliance is needed in the law. Nothing but common sense, and relatively clean fingernails.

John Mortimer

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

The meaning of capacityThe classes of persons without

capacityThe rights to disaffirm or ratifyThe duties of disaffirmance

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A person must have the ability to give consent before he can be legally bound to an agreement, thus capacity is the ability to incur legal obligations and acquire legal rights

Definition

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Groups lacking capacity: Minors Those suffering a mental disability Those who are intoxicated

Effect -- a person who contracts without the requisite capacity may avoid the contract at his/her option

The Lack of Capacity

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Right to avoid a contract is disaffirmance Only the minor may avoid the contract

Example of disaffirmance: Stroupes v. The Finish Line, Inc.

Court ruled that a minor’s employment contracts, including arbitration agreements, were voidable by the minor

If minor wants to affirm the contract, adult party must perform

Minor’s Right to Disaffirm

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Minors may not avoid contracts if statutory exception exists Marriage, educational loans, insurance

Emancipation of minor from parents does not give minor capacity to contract

Minor’s power to avoid contracts does not end on day he/she reaches age of majority, but continues for reasonable time thereafter

Details About Disaffirmance

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Ratification occurs when a person who reaches majority indicates that he/she intends to be bound by a contract made while still a minor May be express or implied by conduct

Ratification

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Each party has duty to return to the other any consideration (money, goods) that the other has given

If the consideration given by the adult has been lost, damaged, destroyed, or depreciated in value, courts are split on whether the minor party must make restitution to the adult party

Duties Upon Disaffirmance

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Dodson v. Shrader

Facts & Procedural History: Dodson, age 16, bought a truck from the

Shraders Dodson drove truck until engine ruined Dodson contacted Shraders to obtain full refund,

which they refused to make Dodson filed suit Shraders argued for difference between present

value of truck ($500) and purchase price ($4900) Trial court found for Dodson and full refund

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Dodson v. Shrader

Issue & Ruling: Must Dodson make restitution? Purpose of “infancy doctrine” is protect minors

from their own lack of judgment Should not work hardship on innocent merchant

“Benefit Rule” holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise

Reversed and remanded in favor of the Shraders

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Disaffirming minors are required to pay reasonable value for necessaries (required for survival) furnished to them Quasi-contractual theory

Example: Young v. Weaver Was the apartment really

a necessity for Young?

Duties Upon Disaffirmance

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Like minors, people who suffer from a mental illness or defect are disadvantaged in their ability to protect their interests in the bargaining process, thus contract law makes their contracts void or voidable

Test: Did the person have sufficient mental capacity to understand the nature and effect of the contract?

Capacity & Mental Impairment

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If a contract is voidable due to mental impairment, the person may: Disaffirm the contract Once he/she regains capacity, ratify

the contract Upon disaffirmance, consideration

must be returned and the person is liable for reasonable value of any necessaries

Right to Disaffirm or Ratify

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Kenai Chrysler Center, Inc. v. Denison

Facts & Opinion: Developmentally disabled man (David) under

legal guardianship of parents entered into contract to purchase car from auto dealership

Dealership (Kenai) refused repeatedly to take back the car after multiple notifications of David’s incapacity and legally void nature of contract

Parents (Denisons) sued Kenai and trial court held in favor of Denisons; appellate court affirmed that the contract was void as a matter of law

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Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process

Note: courts are not sympathetic!

Contracts of Intoxicated Persons

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Test Your Knowledge

True=A, False = B Capacity is the ability to know the

details of the legal rights in a contract

Ratification is the actual signature on the written contract

Disaffirmance is the right to avoid a contract due to incapacity

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Test Your Knowledge

True=A, False = B A minor’s right to disaffirm a contract

ends on the day the minor achieves the age of majority

Intoxicated persons are always allowed to disaffirm a contract

Persons with a mental incapacity may disaffirm a contract, but cannot ratify the contract

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Test Your Knowledge

Multiple Choice The “benefit rule” states that when a

minor disaffirms a contract: (a) They have no further duties(b) Recovery of the full purchase price is

subjectto a deduction for the minor’s use of the merchandise

(c) They have the duty to return the subject goods

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Test Your Knowledge

Multiple Choice Ted just turned 17 years old. Emancipated

from his parents, Ted bought a car from CarCo. Two weeks after he bought the car, Ted damaged it. Ted returned the vehicle to CarCo asking for a full refund. CarCo must: (a) Give Ted back the full amount(b) Pay Ted only the present value of the car (c) Pay Ted the purchase price less the

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Thought Questions

The requirement of capacity is rooted in ancient law. Should the law continue to protect minors and intoxicated persons? Why or why not?

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