Chapter 12 Capacity and Legality

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Capacity
The law presumes that the parties to a contract have the requisite contractual capacity to enter into the contract. Certain persons do not have this capacity:
Minors Insane persons Intoxicated persons
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Capacity (continued)
The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts forced on them. The person asserting incapacity bears the burden of proof.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Minors
Common law defines minors as:
Females under the age of 18; and Males under the age of 21

Many states have enacted statutes that specify the age of majority.
The most prevalent age of majority is 18 years of age for both males and females.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Minors (continued)
Any age below the statutory age of majority is called the period of minority. Thus, a minor is:
A person who has not reached the age of majority.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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The Infancy Doctrine

Ratification

KEY ISSUES RELATING TO MINORS AND CONTRACTS Parents Liability for Their Childrens Contracts Necessaries of Life

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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The Infancy Doctrine

A doctrine that allows minors to disaffirm (or cancel) most contracts they have entered into with adults. Doctrine based on public policy that reasons that minors should be protected from unscrupulous behavior of adults.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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The Infancy Doctrine (continued)

Disaffirmance the act of a minor to rescind a contract under the infancy doctrine.
Disaffirmance may be done orally, in writing, or by the minors conduct.

Competent Partys Duty of Restitution if the minor has transferred consideration to the competent party before disaffirming the contract, that party must place the 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman minor in status quo.

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The Infancy Doctrine (continued)

Minors Duty of Restoration 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.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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The Infancy Doctrine (continued)

Minors Duty of Restitution most states provide that the minor must put the adult in status quo upon disaffirmance of the contract if the minors intentional or grossly negligent conduct caused the loss of value to the adults property.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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The Infancy Doctrine (continued)

Misrepresentation of Age
Minors who misrepresent their age must place the adult in status quo if they disaffirm the contract. A minor who has misrepresented his or her age when entering into a contract owes the duties of restoration and restitution when disaffirming it.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Ratification
If a minor does not disaffirm a contract either during the period of minority or within a reasonable time after reaching the age of majority:
The contract is considered ratified (accepted). The minor (now an adult) is bound by the contract. The right to disaffirm the contract has been lost.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Necessaries of Life
Minors are obligated to pay for the necessaries of life:
Food, Shelter, Clothing, Medical Services

The sellers recovery is based on the equitable doctrine of quasi-contract rather than on the contract itself.
The minor is obligated only to pay the reasonable value of the goods or services.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Parents Liability for Their Childrens Contracts Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children. Parents are liable for their childrens contracts for necessaries of life if they have not adequately provided such items. The parental duty of support terminates if a minor 2007 Prentice Hall, Business Law,emancipated. becomes sixth edition, Henry R. Cheeseman

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Mentally Incompetent Persons

The law protects people suffering from substantial mental incapacity from enforcement of contracts against them. To be relieved of his or her duties under a contract, the law requires a person to have been legally insane at the time of entering into the contract.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Mentally Incompetent Persons

(continued)

Legal Insanity a state of contractual incapacity as determined by law. The law has developed two standards concerning contracts of mentally incompetent persons:
1. 2.

Adjudged Insane Insane, But Not Adjudged Insane

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Mentally Incompetent Persons

(continued)

Adjudged Insane
A person who has been adjudged insane by a proper court or administrative agency. A contract entered into by such a person is void. Neither party can enforce the contract.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Mentally Incompetent Persons

(continued)

Insane, But Not Adjudged Insane

A person who is insane but has not been adjudged insane by a court or administrative agency. A contract entered into by such a person is generally voidable. The competent party cannot void the contract.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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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. Most states provide that contracts entered into by such intoxicated persons are voidable by that person. The contract is not voidable by the other party if that 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman party had contractual capacity.

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Illegality
One requirement to have an enforceable contract is that the object of the contract must be lawful. Contracts with an illegal object are void and therefore unenforceable. There are two key categories of illegality:
Contracts contrary to statutes Contracts contrary to public 2007 Prenticepolicy Law, sixth edition, Henry R. Cheeseman Hall, Business

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Contracts Contrary to Statutes

Federal and Usury Laws state Gambling legislatures Statutes have enacted Sabbath Laws statutes that prohibit Licensing certain types Statutes of conduct. Regulatory Statute Contracts to Revenueperform an Raising Statute activity that is prohibited by statute are illegal 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman contracts.

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Contracts Contrary to Public Policy

Contracts that have a negative impact on society or that interfere with the publics safety and welfare. Such contracts are void. Immoral Contracts Contracts in Restraint of Trade Exculpatory Clauses

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Effect of Illegality
Since illegal contracts are void, the parties cannot sue for nonperformance. The court will generally refuse to enforce or rescind an illegal contract. The court will generally leave the parties where it finds them.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Exceptions to the General Rule

Certain situations are exempt from the general rule of the effect of finding an illegal contract: 1. Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal. 2. Persons who were induced to enter into an illegal contract by fraud, duress, 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman or undue influence.

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Exceptions to the General Rule

(continued)

3. Persons who entered into

an illegal contract withdrawn before the illegal act is performed. 4. Persons who were less at fault than the other party for entering into the illegal contract.

2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Using a Covenant Not to Compete with a Sale of a Business

Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in three aspects:
1. 2. 3.

The line of business protected. The geographical area protected. The duration of the restriction.
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2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Doctrine of Unconscionability
Some lawful contracts are so oppressive or manifestly unfair that they are unjust. To prevent the enforcement of such contracts, the courts have developed the equitable doctrine of unconscionability. A contract found to be unconscionable under this doctrine is called an 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman unconscionable contract, or a contract of adhesion.

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Doctrine of Unconscionability
(continued)

Elements that must be shown to prove that a contract or clause is unconscionable: The parties possessed severely unequal bargaining power. The dominant party unreasonably used its unequal bargaining power. The adhering party had no reasonable alternative.
2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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