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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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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
