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“An unconscionable contract is one which no man in his senses, not under delusion,
would make, on the one hand, and which no fair and honest man would accept on the
other.”
Fuller, Chief Justice
I. Teacher to Teacher Dialogue
This chapter embarks upon the third and fourth of the four elements of contract—capacity
and legality. What is interesting about these two elements, as compared to mutual assent and
consideration, is that they are both rooted in common sense as opposed to appearing to be merely
ritualistic. I like to tell my students that the common law should be well grounded in common
sense if it is to be workable in our day-in, day-out affairs. Those two elements fit that notion quite
have tried! We all readily understand the self-evident and common sense basis of having legality
as one of the elements of a contract. The more difficult aspect in teaching this element surrounds
issues of collateral or incidental illegality as illustrated by the problems involving regulatory
versus revenue raising licensure. In addition, contracts which appear legal on their face, such as a
aspects of these materials.
Contracts are important. Personal and business success is measured in large part by how well
a person can provide for his or her own best interests in contracts. A disadvantageous contract can
lead to personal and business disasters such as bankruptcies, loss of credit worthiness, and
criminal violations. Because of the possible severe consequences, the fabric of contract law is
state constitutions. Before this legally sanctioned right is limited, such limitations must be
justified on the basis of sound public policy. An important area of concern in the law of contract
capacity limitation is found in the public policies that seek to protect certain individuals from
sometimes-harsh results of contracts. Even though protection can sometimes be seen as a
CAPACITY AND LEGALITY
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Capacity and Legality
97
of necessities and certain statutorily recognized areas such as insurance and military enlistment,
these contracts may be enforceable against a minor. But as a matter of public policy, the general
rule is that the minor is allowed, for his or her own protection, to legally avoid the consequences
of contractual entanglement. This avoidance is not always a free ride. If there is misrepresentation
excusing someone from the binding effects of a contract based on simple ignorance. If that were
the case, courts would surely be even more inundated than they already are. What this area of law
is concerned about is a real lack of capacity to protect oneself. Because contract results can be
harmful, a lack of a mental ability to protect one’s self-interest is considered fatal to the contract
process.
understand the material elements of the transactions. The burden of proof is on the person raising
the issue of limited capacity, and courts will look at those issues on a case-by-case basis. Simple
ignorance, emotional weakness, or a predilection for doing stupid things is not sufficient grounds
for avoidance of a contract. As with minors, contracts with persons of limited capacity can be
All contracts have a “hidden” third party which is the larger society represented by the courts. If
A and B have a dispute about what the contract terms really provided, where must they ultimately
turn to get an answer? Courts are the designated agents of the larger society, C, whose job it is to
provide a resolution of the problem between A and B.
basis for its existence.
When a court examines an agreement for its legality component, there are three key questions
it asks:
1. Is this agreement illegal per se?
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public policy?
3. If there is an element of illegality or violation of public policy, is it a material aspect of this
contract, or is the problem incidental or collateral to the agreement?
The first question is really the easiest to answer. If the agreement calls for an illegal act on its
The second question is much more difficult to answer in that public policy is a moving target.
Courts look at the reality of these agreements, even if they appear legal on their faces. For
example, a simple buy-sell agreement looks perfectly legal. But what if the agreement is designed
The third area of concern goes to the issue of enforceability once the problem area is
identified. Not all illegalities are fatal to the entire contract. If a court finds that the illegality or
II. Chapter Objectives
1. Define and describe the infancy doctrine.
2. Define legal insanity and intoxication and explain how they affect contractual capacity.
III. Key Question Checklist
Under what public policy is there a limitation of capacity to contract?
IV. Text Materials
Introduction
The law presumes that people have the requisite capacity to enter into a contract, but
Minors
The most prevalent age of majority is 18 years of age for both males and females. Any age below
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99
Infancy Doctrine – This doctrine gives a minor the right to disaffirm most contracts that they
Disaffirmance – Minors can disaffirm contracts at any time within a reasonable period after
Minor’s Duty of Restoration and Restitution – Generally, 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
If a minor has transferred consideration—money, property, or other valuables—to a
competent party before disaffirming the contract, that party must place the minor in status quo. If
Ratification – If the minor does not disaffirm the contract within a reasonable period of reaching
Parent’s Liability for Their Children’s Contracts – Parents are liable for their children’s
contracts for necessaries of life if they have not adequately provided such items. The parental
Necessaries of Life – Minors are obligated to pay for the necessaries of life that they contract for,
Contemporary Environment: Special Types of Minors’ Contracts
agreements, contracts to support children, etc.
Mentally Incompetent Persons
To be relieved of his or her duties under a contract, a person must have been legally insane at the
Adjudged Insane – An adjudged insane person is declared insane legally by a proper court or
administrative agency. A contract entered into by a person adjudged insane is void.
Insane, but Not Adjudged Insane – If no formal ruling has been made about a person’s sanity
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person is insane but not adjudged insane—any contract entered into by this person is voidable by
the insane person.
Intoxicated Persons
Legality
A contract with an illegal object is void and therefore unenforceable. These contracts are called
illegal contracts.
are illegal contracts.
Case 12.1 Illegal Contract: Ford Motor Company v. Ghreiwati Auto
2013 U.S. Dist. Lexis 159470 (2013), United States District Court for the Eastern District of
Michigan
in Syria.
Issue: Did the executive order make the dealership contract illegal?
Decision: Yes, and Ford terminated the agreement.
Ethics Questions: No. A rescission of the contract may have permitted a reimbursement.
Contracts to Commit a Crime – These contracts are void.
Gambling Statutes – All states either prohibit or regulate gambling, wagering, lotteries, and
games of chance via gambling statutes.
Ethics: Illegal Gambling Contract
Ryno owned an automobile dealership. Tyra was considering purchasing a BMW from him. Ryno
suggested a double-or-nothing coin flip, which Tyra won. Ryno gave the keys and title to Tyra,
but later sued for ownership. The court held that when Tyra won the coin toss and Ryno
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Contracts Contrary to Public Policy – These contracts are void. An example would be immoral
contracts.
Special Business Contracts and Licensing Statutes
Licensing Statutes – Each state has enacted laws that require the licensing of people
participating in certain professions, like attorneys, doctors, and accountants. Regulatory statutes
are enacted to protect the public, while revenue-raising statutes are enacted to raise money for the
government.
Case 12.2 Release Contract: Lin v. Spring Mountain Adventures, Inc.
2010 U.S. Dist. Lexis 136090 (2010), United States District Court for the Eastern District of
Pennsylvania
Facts: Lin fell while skiing but had signed a liability release as to the equipment associated with
Issue: Is the release enforceable?
Decision: Yes.
Ethics Questions: If we do not hold parties to be responsible for documents they do not read,
then, no one has responsibility to behave as an adult in our society. Plus, parties might fib and
say they didn’t read something and therefore, it should not count against them.
Business Environment: Covenants Not to Compete
Unconscionable Contracts
The courts will generally enforce contracts whose object is lawful if the elements for the
formation are met. However, if the contract is so oppressive or manifestly unfair that they are
unconscionability.
Critical Legal Thinking – Unconscionability. I would say that just about every contract of
adhesion is unconscionable. It should not be all that difficult for courts to uncover
unconscionability so long as the evidence necessary is presented to the court.
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Case 12.3 Unconsionable Contract: Stoll v. Xiong
buyers barely spoke English.
Issue: Is the litter clause unconscionable?
Decision: The court of appeals affirmed the trial court’s finding that the litter provision of the
land sale contract was unconscionable and unenforceable. The seller gouged the buyer on the
price of the property and added a clause the buyers could not read.
V. Key Terms and Concepts
Adjudged insane—A person who has been adjudged insane by a proper court or
females.
Competent party’s duty of restitution—If a minor has transferred money, property, or other
valuables to the competent party before disaffirming the contract, that party must place the
minor back into status quo.
Contract in restraint of trade—A contract that unreasonably restrains the trade.
will not engage in a similar business or occupation within a specified geographical area for a
specified time following the sale of the business or termination of employment.
Disaffirm—The act of a minor to rescind a contract under the infancy doctrine. Disaffirmance
may be done orally, in writing, or by the minor’s conduct.
minor in status quo.
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 (subject to several
exceptions), even if the item has been consumed, lost, or destroyed or has depreciated in
value by the time of disaffirmance.
parents.
Exculpatory clause—A contractual provision that relieves one (or both) parties to the contract
from tort liability for ordinary negligence.
Gambling statutes—Statutes that make certain forms of gambling illegal.
Illegal contract—Ilegal contracts are void.
immoral by society.
In pari delicto—When both parties are equally at fault in an illegal contract.
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regulating Native American gaming casinos.
Infancy doctrine—A doctrine that allows minors to disaffirm (cancel) most contracts they
have entered into with adults.
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 person is generally
government prior to engaging in a specified occupation or activity.
Minor—A person who has not reached the age of majority.
Necessaries of life—Parents owe a legal duty to provide food, clothing, shelter, and other
necessaries of life for their minor children.
minority.
Quasi-contract—When a seller enters into a contract with a minor, the seller’s recovery is
Ratification—The act of a minor after the minor has reached the age of majority by which he
or she accepts a contract entered into when he or she was a minor.
the government.
Unconscionable contract—A contract that courts refuse to enforce in part or at all because it
is so oppressive or manifestly unfair as to be unjust.
Usury law—A law that sets an upper limit on the interest rate that can be charged on certain
types of loans.
