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IN COLLABORATION WITH

SOUTHERN NEW HAMPSHIRE UNIVERSITY


____________________________________________
BUSINESS LAW [BUS 206]

LECTURE 9
LAW OF CONTRACTS [3]

CONTRACTUAL CAPACITY

An agreement must be made between parties who have the capacity to do so


Parties must truly agree and consented to the contract to be binding

DEFINITION

Contractual Capacity ability to understand that a contract is being made and to


understand its general meaning
Fact that a person does not understand the full legal meaning of a contract does not
mean that contractual capacity is lacking
Presumption everyone has capacity to enter into a contract unless proven
otherwise

(a) Status Incapacity

Some classes of persons lack contractual capacity


Law to protect these classes by giving them the power to get out of unwise
contracts
Minors most important class
Married women have the same contractual capacity as unmarried persons

(b) Factual Incapacity

May exist when because of a mental condition caused by medication, drugs,


alcohol, illness, or age a person does not understand that a contract is being made
or understand its general nature
Mere mental weakness does not incapacitate a person from contracting
Sufficient if the individual has enough mental capacity to understand to a
reasonable extent, the nature and effect of what he is doing Fisher V. Schefers

MINORS

May make contracts Buffington V. State Automobile Mutual Insurance Co (1989)


However law has always treated minors as a class lacking contractual capacity

Who is a minor?

Persons who are under the age of majority (usually 18 years)

Minors Power to Avoid Contracts

Contract made by a minor is voidable at the election of the minor


Minor may affirm or ratify the contract on attaining majority by performing the contract

What Constitutes Avoidance?

Any expression of an intention to repudiate the contract


Any act inconsistent with the continuing validity of the contract

(i) Time For Avoidance

During minority and for a reasonable time after attaining majority


After lapse of a reasonable time contract is deemed ratified and cannot be avoided

(ii) Minors Misrepresentation of Age

Does not affect the minors power to disaffirm the contract


Some states fraud of a minor bars contract avoidance
Some states permit minor to disaffirm but require the minor to pay for any damage
to the property received under the contract
In any case the other party to the contract may disaffirm because of minors fraud

MINORS (contd)
Restitution by Minor After Avoidance

When a minor disaffirms a contract the question what the minor must return to the
other contracting party

(i) Original Consideration Intact

Minor still has what was received from the other party minor on avoiding the
contract - must return it to the other party or offer to do so
i.e. minor must put things back to the original position as it is called restore the
status quo ante

(ii) Original Consideration Damaged or Destroyed

What if minor cannot return what has been received minors right to disaffirm the
contract is not affected
Minor can still disaffirm the contract and is required to return only what remains
The fact that nothing remains / what remains is damaged does not bar the right to
disaffirm the contract
Common law rule minors can refuse to pay for what has been received under a
contract or can get back what had been paid or given even though they do not have
anything to return or return property in a damaged condition

Recovery of Property by Minor on Avoidance

When a minor disaffirms a contract the other party must return the money / property
received
If property sold to third person who does not know the minority minor cannot
get property back
However minor is entitled to recover the propertys monetary value or money
received by the other party

MINORS (contd)
Contract for Necessaries

Minor can disaffirm contract for necessaries but must pay the reasonable value for
furnished necessaries

(i) What Constitutes Necessaries?

Things indispensable or absolutely necessary for the sustenance of human life


Term extends to food, clothing, lodging, health, education and comfort of the minor
Thus, the rental of a house used by a married minor is a necessary

(ii) Liability of Parent or Guardian

When a third person supplies the parents or guardian of a minor with goods or
services that the minor needs the minor is not liable for these necessaries
Why? bcoz contract between third person and parent or guardian of the minor
Common law parent liable for the medical expenses of the minor
Common law child can be held contractually liable for her necessary medical
expenses when parent is unable or unwilling to pay

MINORS (contd)
Ratification of Former Minors Voidable Contract

Former minor cannot disaffirm a contract that has been ratified after reaching majority
Fletcher V. Marshall (1994)

(i) What Constitutes Ratification?

Any words or conduct of the former minor manifesting an intent to be bound by the
terms of a contract made while a minor

(ii) Form of Ratification

No special form is required for ratification of a minors voidable contract


Some states a written ratification or declaration of intention is required

(iii) Time for Ratification

A person can disaffirm a contract any time during minority and for reasonable time
after that
Ratification can be done after attaining majority or else ratification voidable

Contracts That Minors Cannot Avoid

Educational loan statutes in many states deprive a minor from doing this
Medical care
Contract made while running a business
Contract approved by a court
Contract made in performance of a legal duty
Contract relating to bank accounts
Insurance policies

MINORS (contd)
Liability of Third Person For a Minors Contract

Whether parents are bound and whether a person cosigning a minors contract is
bound if the contract is avoided

(i) Liability of Parent

Ordinarily not liable on a contract made by a minor child


May be liable if child acting as the agent of the parent in making the contract
Liable to a seller for the reasonable value of necessaries supplied by the seller to
the child if the parent had deserted the child

(ii) Liability of Cosigner

Cosigner is bound independently of the minor


Consequently if the minor disaffirms the contract, the cosigner remains bound by it
When debt to the creditor is actually paid the obligation of the cosigner is
discharged
If minor disaffirms a sales contract but does not return the goods the cosigner
remains liable for the purchase price

INCOMPETENT PERSONS
MENTALLY INCOMPETENT PERSONS

Mentally disorder person lack capacity to make a contract


Mentally incompetent as to be unable to understand that a contract is being made or
the general nature of the contract lacks contractual capacity

(a) Effect of Incompetency

Incompetent person may avoid a contract same manner as a minor


Upon removal of the disability i.e. competent can either ratify or disaffirm the
contract
Mentally incompetent person or his estates is liable for the reasonable value of all
necessaries furnished that individual
Current trend in the law to treat an incompetent persons contract as binding when
its terms and the surrounding circumstances are reasonable and the person is unable
to restore the other contracting party to the status quo ante

(b) Appointment of Guardian

Contract made by an incompetent person may be ratified / disaffirmed by a court


appointed guardian
Incompetent person cannot make a contract after the appointment of a guardian
otherwise contract void

INTOXICATED PERSONS
INTOXICATED PERSONS

Capacity of a party to a contract and the validity of the contract are not affected by the
partys being impaired by alcohol at the time of making the contract so long as the
party knew that a contract was being made

Degree of intoxication a person does not know that a contract is being made the
contract is voidable by that person same as though the person was insane at the
time and did not know what he or she was doing

Once sober the individual may avoid or rescind the contract

However an unreasonable delay in taking steps to set aside a known contract


entered into while intoxicated may bar the intoxicated person from asserting this right
Diedrich V. Diedrich (1988)

The courts treat impairment caused by the use of drugs the same as impairment
caused by the excessive use of alcohol

CASE STUDY
QUESTION 1
Jaclyn Smith, aged 22, entered into a contract with Conan Company
but later claimed it was not binding because she did not understand
several clauses in the printed contract. Is there a binding contract?

QUESTION 2
Edward made a contract while intoxicated . When he sobered up, he
immediately disaffirmed the contract for lack of capacity as the result
of his intoxication. Mayweather, the other contracting party claimed
that voluntary intoxication cannot void a contract. Could Edward
disaffirm the contract?

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