978-0077733711 Chapter 14 Lecture Note

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Chapter 14 – Capacity to Contract

CHAPTER 14

CAPACITY TO CONTRACT

I. OBJECTIVES

This chapter is designed to familiarize students with the circumstances under which a person may

avoid a contract because of lack of capacity. After reading the chapter and attending class, a

student should be able to:

A. Explain the concept of capacity to contract.

B. List and describe the classes of persons who lack capacity to contract.

C. Describe the effect of lack of capacity on a contract.

D. Explain the rights and duties of the parties to a contract when there has been disaffirmance

because of lack of capacity.

II. ANSWER TO INTRODUCTORY PROBLEM

A. Daniel was a minor at the time of contracting. In most states, the fact that he was married and

emancipated would not affect his ability to disaffirm the contract. If he continued driving the

car for more than a reasonable time after his 18th birthday, that could constitute implied

ratification of the contract, which would end his ability to disaffirm. Whether driving the car

for one week after his birthday exceeded a reasonable time is a judgment call.

B. That depends on state law. In some states, courts follow the common law rule that states that

the minor is not obligated to account for damage to the consideration. In others (as seen in the

case described in Ethics in Action on p. 424), minors who damage the consideration are

required to pay for it.

C. Yes, it could. In that case, the car could be considered a necessary, and a minor can be held

responsible for the reasonable value of a necessary (as seen in Zelenick v. Adams on p. 426).

D. Individuals who lack capacity because of mental illness or defect or intoxication can avoid

their contracts, provided that they have not ratified the contract.

E. A good argument can be made that disaffirming without paying for the damage would be

unethical. Daniel gave his promise and it is unlikely that Mattox knew that he was a minor.

Using a rights theory, Mattox’s property right would trump Daniel’s right to avoid a non-

oppressive contract.

III. SUGGESTIONS FOR LECTURE PREPARATION

A. Introduction

1. Explain the concept of capacity. Note the relationship between capacity and the doctrines

previously studied in Chapter 13. Doctrines such as misrepresentation and fraud permit

avoidance of contracts because the circumstances under which the contract was formed

(the bargaining process) indicate a lack of voluntary consent. The law regarding capacity

to contract permits avoidance of contracts when the status or personal characteristics of a

party make it unlikely that he will be able to give voluntary consent. Both doctrines,

however, are designed to police voluntary consent.

2. Describe the classes of persons who are considered to lack capacity to contract.

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Chapter 14 – Capacity to Contract

B. Capacity of Minors

1. Determining Minors’ Lack of Capacity

a. Note how the age of majority has been reduced in relatively recent years. You may

want to discuss why that trend occurred.

b. Point out that the reason minors are deemed to lack capacity is that they are likely to

lack the knowledge, experience, and maturity to protect themselves in contracting

situations. Note, however, that our legal system determines this type of capacity

arbitrarily, on the basis of chronological age, rather than on the basis of an

individual’s actual maturity. Given the broad variations in the age at which people

acquire the traits we refer to as maturity, ask the class why state legislatures have

chosen to adopt an arbitrary standard for determining the age of majority rather than

determining maturity on an individual, case-by-case basis.

Example: Galloway v. Iowa, 790 N.W.2d 252 (Iowa Sup. Ct. 2010) (See also,

Problem Case #6). In this case, in July of 2005, a 14-year-old girl, Taneia Galloway,

while on a field trip with Upward Bound ( a youth outreach program sponsored by

the University of Northern Iowa) was struck by a moving vehicle as she attempted to

cross the street. Prior to Taneia’s departure on said field trip, Taneia’s mother signed

two forms: a “Field Trip Permission Form” and a “Release and Medical Attention”

form. Following the injury, the injured party filed an action against the State;

however, the State was granted a motion for summary judgment, concluding that the

release forms resulted in an enforceable waiver. The Supreme Court of Iowa issued

certiorari to review a rule that had been split among the circuits regarding the public

policy behind the enforcement of pre-injury waivers signed by parents on behalf of

their children.

The majority rule precludes the enforcement of a parent’s preinjury waiver of her

child’s cause of action for injuries caused by negligence. The court noted that “’a

parent’s “interest in the care, custody, and control of [his] children” is “perhaps the

oldest of the fundamental liberty interests recognized by” the United States Supreme

Court.’” [Internal citations omitted] The court acknowledged that parents’ actions

that contradicted their children’s best interests were limited in some circumstances

[i.e., child support cases & receiving payments on behalf of children], those

limitations did not apply to preinjury waivers.

Furthermore, the court differentiated the facts of the case at bar from an adult’s

preinjury release of his claim for his own personal injury. Where a parent waives

liability for her own injuries, the contracts are enforced.

The court ultimately stated the public policy that favors the protection of

vulnerable minor children demands greater insulation. The court went on to say “that

the public policy protecting children from improvident actions or parents . . .

precludes the enforcement of preinjury releases executed by the parents for their

minor children.

2. Minor’s Right to Avoid Contracts

a. Explain that a contract involving a minor is voidable, and that the minor has the right

to avoid the contract by disaffirming it. Note that even completely executed

transactions are voidable.

Examples: Problem Cases #2, 6, and 8.

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Chapter 14 – Capacity to Contract

Woodman v. Kera, LLC (Problem Case 6, p. 432): A five-year-old boy, Trent, had his

birthday party at an indoor play area containing inflatable play equipment. Trent’s

father signed a contract containing a liability waiver on his son’s behalf. Trent was

injured and sued Kera, the operator of the play area. The issue was whether the

liability waiver signed by Mr. Woodman was valid. The court stated that if Trent had

signed the waiver, it clearly would have been voidable. So could the parent bind a

child who would not otherwise be bound? Trent did not have capacity to empower an

agent to act for him, and thus, the father had no authority to waive another’s legal

rights.

Points for Discussion: What are the implications of this decision for businesses that

cater to recreation for children? If liability waivers cannot be enforced, how will the

businesses manage the risk of liability?

b. Note that in most states, persons under the legal age of majority (usually 18) are

deemed to lack capacity to contract even if they are married, self-supporting, living

apart from their parents, or otherwise emancipated. See Problem Case #8. See also

the Galloway case, discussed above.

c. Note that there are some types of contracts that a minor cannot disaffirm, such as

contracts of marriage and contracts to support a child. Some states, by statute, permit

contracts made by infants (such as child actors) to be approved by the court. Once

approved, they cannot be disaffirmed because of infancy.

d. Emphasize that if the minor does not disaffirm the contract, it is as enforceable as any

other contract. (Point out that the adult party cannot enforce the contract against the

minor, but the minor can enforce it against the adult). In addition, the right to

disaffirm is personal to the minor and cannot be exercised by the adult.

Example: Problem Case #9.

e. Ask the class how the minor’s right to avoid contracts operates to discourage adults

from dealing with minors.

f. Note that disaffirmance can be done in any way that communicates that the minor

wants to cancel the contract. (For example, asserting minority as a defense to a

contract action can be disaffirmance).

g. Discuss the time during which a minor may disaffirm his contracts. Discuss the

factors that may be involved in a determination of whether a reasonable time has

elapsed.

Examples: Problem Cases #1 [minor goes into hospital, assuming she is on mother’s

health insurance, mother fails to pay and hospital sues minor for full amount of $12,

144], 2 [minor borrows money from father for college and then fails to repay

afterwards], and 6 [similar to Galloway, and if/when Trent becomes of age, could

potentially confirm the waiver if he himself signed it].

3. Ratification

a. Explain the concept of ratification. It may be helpful for students to think of

ratification as the surrender of the minor’s right to avoid the contract. Explain why

ratification can only be effective when it is done after a person has reached the age of

majority.

b. Discuss how ratification can be expressed in words or implied by the former minor’s

conduct. You may wish to discuss the ratification issue in the Introductory Problem.

Example: Problem Case #2 [repayment of loan for three years may have constituted

ratification].

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Chapter 14 – Capacity to Contract

4. Disposition of Consideration upon Disaffirmance

a. Note that disaffirmance of a partially or fully executed contract is likely to involve

much more complexity than the disaffirmance of an executory contract. If the

contract is executory, the promises are simply canceled. But if the contract is partially

or fully executed, reallocation of money and property is usually necessary.

b. Note the minor’s duty to return consideration in his possession, and the adult’s duty to

return consideration given by the minor.

c. Discuss the problem that occurs when the consideration given by the adult has been

damaged, lost, has depreciated in value, or simply cannot be returned. Is the minor

responsible for paying for the diminution in value? THIS PROBLEM USUALLY

GENERATES MANY STUDENT QUESTIONS AND COMMENTS. The traditional

answer, still followed by the majority of states, is no. For example, a minor could buy

a car on credit, wreck the car, disaffirm the contract, and fulfill his duties by simply

returning the car.

Ethics in Action (p. 424): Is it ever unethical to take advantage of one’s legal rights,

as Dodson did here? Should the Shraders have dealt with a young person without

asking for proof of age? Does the court’s decision do justice between the parties?

Your class will most likely have varying responses to the issues raised.

Additional Examples: Problem Case #5

5. Misrepresentation of Age

a. Discuss the kinds of conduct that would constitute misrepresentation of age. Note

that the concept of misrepresentation here is the same one that students studied

earlier. You may want to review the elements of misrepresentation. Discuss the

problem presented when the representation of age is contained in a form contract

supplied by the adult party. (Such clauses are fairly common in consumer form

contracts). Would a minor’s signature on a contract that contained one of these

clauses really be a misrepresentation of age? Ask students to analyze this by

determining whether all of the elements of misrepresentation would be satisfied in

such a situation.

b. Note that different states treat misrepresentation of age differently. Describe some of

the approaches and explain the policies furthered by the different approaches.

Example: Problem Case #5 [purchaser of a car, who was 20-years-old at the time of

purchase, misrepresented her age and said she was 21. She attempted to disaffirm the

K upon delivery. Purchaser stated that she could disaffirm because she was a minor at

the time of K.]

6. Liability for Necessaries

a. Explain the minor’s liability for necessaries. Discuss the concept of necessaries.

Note that what is a necessary will differ depending on the personal characteristics of

a minor (e.g., emancipated minor vs. minor living with parents).

Examples: Problem Cases #1 and 3.

b. Note that to be a necessary, the item must be something that is not already being

supplied by the infant’s parents or guardian. The fact that the item is something that

people need for basic subsistence would not in itself make the item a necessary.

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Chapter 14 – Capacity to Contract

Problem Case #3: Young v. Weaver (p. 431): Young, age 18, and her friend (also a

minor) decided to move out of their parents’ homes and get an apartment together.

They signed a 9-month lease and paid a security deposit and rent for the time they

lived there. Young had a dog that damaged the apartment. After a month of living in

the apartment, Young moved back in with her parents and did not pay further rent.

The landlord sued Young for rent and for the damage caused by the dog. The trial

court decided in favor of the landlord, holding that the apartment was a necessary.

The appellate court reversed, deciding that the apartment was not a necessary for

Young because her parents were willing and able to provide shelter for her.

Points for Discussion: Note that the age of majority in Alabama is 19. What are the

steps in the court’s “two step” analysis used to determine if a thing is a necessary?

What would the result have been if the court had determined that the apartment was a

necessary—how much would Young be required to pay? Apparently Young does not

even have to pay for the damage her dog caused. Is this a fair outcome? If not, what

is the overarching rationale?

Additional Example: Problem Case #1.

c. CASE: Zelnick v. Adams, 606 S.E.2d 843 (Virginia Sup. Ct. 2009)(p. 426–428).

a. Background: The trust beneficiary filed a bill of complaint against his

attorney stating that the K entered into when beneficiary was a minor was

void. Circuit court award summary judgment to beneficiary but provided

attorney with quantum meruit damages.

b. Issue: Was the contract provided to the infant beneficiary a “necessary”?

c. Holding: No.

d. Analysis:

i. Three prong inquiry into “necessary”?

1. (i) was the “thing” supplied to the infant a “necessary” and

a. As a matter of law, Sup. Ct. held that it was a

necessary.

2. (ii) if so, then is there sufficient evidence to allow finder of

fact to determine things supplied in case were actually

necessaries.

a. Factual Finding: Yes because infant’s status as issue

of Mr. Hylton [the grandfather] for purposes of trust

distributions would not have been resolved without

legal proceedings to compel a resolution.

3. (iii) if (i) & (ii) yes, then were things supplied actually

necessary to position and condition of infant?

a. Factual Finding: No, because by consideration of the

circumstances at the time of rendering the services,

delaying the suit until the infant became an adult

[i.e., 18 years old] would not have compromised his

position.

C. Lack of Capacity Because of Mental Disability

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Chapter 14 – Capacity to Contract

1. Discuss incapacity by reason of mental disability. Note that a wide variety of mental

disabilities (e.g., mental retardation, psychosis, brain damage, senility) would be included

in this category of incapacity.

2. Discuss the traditional cognitive test for mental incapacity.

a. Note that as ideas about human psychology have changed, some courts have adopted

a slightly different test that takes into account not only a person’s knowledge, but also

his ability to control his actions.

Example: Problem Case #7

3. Describe how the status of the contract will differ depending on whether the incapacitated

person was under guardianship (adjudicated “insane”) at the time the contract was made.

Rogers v. Household Life Insurance Company (p. 429): An adult son, Rogers, had been

appointed guardian and conservator for his father, who had Alzheimer’s Disease. Rogers

helped his father complete and submit an online application for life insurance through

HLIC.. The online form didn’t directly ask about dementia or whether the person had

been adjudicated to be incapacitated, so Rogers filled out the form accurately. HLIC

approved the application and Rogers paid the premium. Rogers’ father died from

Alzheimer’s Disease less than a month later. Rogers submitted notice of a claim for the

policy’s $250,000 proceeds. HLIC refused to pay on the ground that Rogers’ father had

been adjudicated mentally incompetent before submitting the application. The issue was

whether the insurance contract was voidable or void. The court noted that guardianship

proceedings are among the types of proceedings in which a finding of incapacity is made.

According to Idaho law, contracts that a person under guardianship makes cannot give

rise to enforceable agreements.

Points for Discussion: Would Rogers have been able to enforce the contract if his father

had not been placed under guardianship? Discuss the ethical implications of the case.

Was Rogers’ application for life insurance for his father ethical? It seems to have been

accurate without being truthful.

Additional Example: Problem Case #7.

4. Note that if a contract is voidable because of a party’s mental incapacity, the incapacitated

person may disaffirm the contract. Upon disaffirmance, he has the same duty of

restoration that the disaffirming minor has. However, unlike the disaffirming minor, the

mentally incapacitated person may have the obligation to reimburse the other party for

damage or depreciation to the consideration if the contract is basically fair and the other

party had no reason to know of the incapacity. Why does the law accord greater solicitude

toward the person who deals fairly with a mentally incapacitated party than it accords to

an adult who deals fairly with a minor?

5. Note that if a mentally incapacitated person later recovers from his incapacity, he can

ratify a contract, just as can a person who reaches the age of majority. As with minors,

ratification can be express or implied by the circumstances.

D. Lack of Capacity Because of Intoxication

Note that intoxication can make a contract voidable on the ground of incapacity, although

commentators sometimes state that courts are less sympathetic about voluntary

intoxication than about mental illness. Discuss the standard for determining when

intoxication is sufficient to cause incapacity.

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Chapter 14 – Capacity to Contract

2. Discuss the Restatement Second standard for incapacity on the ground of intoxication,

requiring that the other party have reason to know that the affected person is so

intoxicated that he cannot understand or act reasonably in relation to the contract.

3. Point out that the person who was intoxicated at the time of contracting runs the risk of

ratification if he does not promptly disaffirm when he regains sobriety.

Example: Problem Case #4 [although the facts deal with the capacity to contract

regarding a diversion agreement, intoxication is a main theme].

IV. RECOMMENDED REFERENCES:

A. Larry A. DiMatteo, Deconstructing the Myth of the “Infancy Law Doctrine:” From Incapacity

to Accountability, 21 OHIO NORTHERN L. REV. 481 (1994).

B. E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS (3d ed. 2004).

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