Transcript Chapter 14

P A R T
3
Contracts
Introduction to Contracts
The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
P A R T
3
Contracts
Capacity to Contract
Illegality
Writing
Rights of Third Parties
Performance & Remedies
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
14
Capacity to Contract
“No brilliance is need in the law.
Nothing but common sense, and
relatively clean fingernails.”
John Mortimer
Learning Objectives
 The
meaning of capacity
 The classes of persons without capacity
 The rights to disaffirm or ratify
 The duties of disaffirmance
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Definition
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
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The Lack of Capacity
 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
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Minor’s Right to Disaffirm

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
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Details About Disaffirmance
 Minors
may not avoid contracts if
statutory exception exists:

Marriage, educational loans, insurance
 Fact
that a minor is emancipated
(independent from parents) does not
give minor capacity to contract
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Details About Disaffirmance
 An
exculpatory clause (e.g., liability
waiver) signed by a parent does not
necessarily waive the minor’s rights

See Creech v. Melnik
 Minor’s
power to avoid contracts does
not end on day he/she reaches the
age of majority, but continues for a
reasonable period of time afterwards
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Ratification
 Ratification
occurs when a person
who reaches majority indicates that
he/she intends to be bound by a
contract made while still a minor

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May be express or implied by conduct
Duties Upon Disaffirmance
 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
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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



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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
Duties Upon Disaffirmance

Disaffirming minors are
required to pay reasonable
value for necessities
(required for survival)
furnished to them


Underlying theory is quasicontractual
Example: Young v. Weaver

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Was the apartment really a
necessity for Young?
Capacity & Mental Impairment
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?

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Right to Disaffirm or Ratify
 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
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Contracts of Intoxicated Persons
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!

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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
subject to 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:



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(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 current value of
the car
Thought Question
 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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