315
Chapter 13
Capacity and Legality
See Separate Lecture Outline System
INTRODUCTION
Chapter 13 logically follows the material covered in Chapters 11 and 12, which concern determining when an
agreement is reached and if an agreement is supported by legally sufficient consideration. This chapter (and the next chapter)
discusses policies and factors that outweigh the reasons for implementing an agreement. This chapter considers first whether
or not certain people—minors, incompetent persons, and intoxicated persons—have the capacity to contract (that is, the legal
ability to enter into a contractual relationship). The discussion of the capacity of minors to contract may surprise some of your
students. Many may find it hard to believe that sixteen-, seventeen-, and even some eighteen-year-olds may avoid contracts.
Other students are surprised to learn that minors have any contractual capacity at all.
ADDITIONAL RESOURCES—
 VIDEO SUPPLEMENTS 
316 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 13.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
Capacity and Illegality: Exculpatory Clauses—Isn’t it true that most exculpatory clauses aren’t enforced in court?—
Exculpatory clauses are routinely enforced, assuming we are not dealing with exculpatory clauses drafted by common
carriers, or contracting parties who have a public or statutory duty. In upholding an exculpatory clause, the court will
focus on whether the clause is knowingly and voluntarily entered into by both parties.
• Real World Legal
CHAPTER OUTLINE
I. Contractual Capacity
Generally, courts presume that parties to a contract have contractual capacity, but there are some situations in which
capacity is lacking or may be questionable. In some situations, a party may have capacity but also the right to avoid
liability under it.
A. MINORS
In most states, the age of majority for contractual purposes is eighteen. Some states provide for the termination
of minority on marriage. A minor can enter into any contract that an adult can enter into, except a contract
prohibited by law for minors. Subject to exceptions, contracts entered into by a minor are voidable at the option
of the minor.
1. A Minor’s Right to Disaffirm
For a minor to avoid a contract, he or she need only manifest an intent not to be bound. A contract can
2. A Minor’s Obligations on Disaffirmance
Generally, a minor need only return the goods (or other consideration), if they are still within his or her
3. Exceptions to a Minor’s Right to Disaffirm
a. Misrepresentation of Age
In most states, a minor can disaffirm even if he or she misrepresented his or her age. In many states,
(3) whether the minor is under a parent or guardian’s care.
WEST’S ANNOTATED CALIFORNIA CODES
CIVIL CODE
DIVISION 1. PERSONS
PART 1. PERSONS
§ 36. Minors; contracts not disaffirmable
1. Necessaries. A contract to pay the reasonable value of things necessary for his support, or that of his family, entered
2. Artistic or creative services; judicial approval.
(A) A contract or agreement pursuant to which such person is employed or agrees to render artistic or creative
services, or agrees to purchase, or otherwise secure, sell, lease, license, or otherwise dispose of literary, musical or
3. Professional sports contracts; judicial approval. A contract or agreement pursuant to which such person is
employed or agrees to render services as a participant or player in professional sports, including, but without being
limited to, professional boxers, professional wrestlers, and professional jockeys, if the contract or agreement has been
approved by the superior court in the county in which such minor resides or is employed or, if the minor neither
resides in or is employed in this state, if any party to the contract or agreement has its principal office in this state for
the transaction of business.
(b) Judicial approval; procedure; extent. The approval of the superior court referred to in paragraphs (2) and (3) of
notice to the other party thereto as may be fixed by said court, with opportunity to such other party to appear and be
provisions thereof, including, but without being limited to, any optional or conditional provisions contained therein for
1982 Main Volume Credit(s)
(Enacted 1872. Amended by Code Am.1873-74, c. 612, p. 183, § 8; Stats.1927, c. 876, p. 1917, § 1; Stats.1931, c. 1070,
p. 2259, § 3; Stats.1941, c. 734, p. 2251, § 1; Stats.1947, c. 526, p. 1518, § 1; Stats.1963, c. 52, p. 677, § 1; Stats.1974,
c. 771, p. 1692, § 1; Stats.1980, c. 676, § 37.)
HISTORICAL AND STATUTORY NOTES
1982 Main Volume Historical and Statutory Notes
As originally enacted in 1872, § 36 provided that “A minor, or a person of unsound mind of whatever degree, cannot
disaffirm a contract, otherwise valid, to pay the reasonable value of things necessary for his support, or for that of his
family, entered into by him when not under the care of a parent or guardian able to provide for him.”
In 1874, the clause “or a person of unsound mind of whatever degree” was deleted.
The 1941 amendment added to the second paragraph “as participant or player in professional sports, including, but
actress, dancer, musician, comedian, singer, or other performer or entertainer, or as a writer, director, producer,
CHAPTER 13: CAPACITY AND LEGALITY 319
without being limited to, professional boxers, professional wrestlers and professional jockeys”.
The 1947 amendment changed the style of the section by creating a general introductory statement against
disaffirmance and by placing the substance of the former paragraph dealing with necessaries in subsection 1 and the
substance of the former paragraph dealing with particular services in subsection 2. This amendment also enlarged the
scope of subsection 2 to cover agreements and to specify the scope of the court’s jurisdiction in approving a contract or
agreement.
have jurisdiction to approve, and its approval when given shall extend to the whole of said contract or agreement, and
all of the terms and provisions thereof, including, but without being limited to, any optional or conditional provisions
contained therein for extension, prolongation or termination of the term thereof.”; and transferred former provisions
relating to professional sports contracts and judicial approval to new subsections 3 and 4 [now, subds. (a)(3) and subd.
(b)].
The 1974 amendment rewrote subd. (a)(2), which as amended in 1963, had read: “A contract or agreement pursuant
contract or agreement has its principal office in this state for the transaction of business”.
The 1980 amendment designated former subds. (a)(2)(i) and (a)(2)(ii) as subds. (a)(2)(A) and (a)(2)(B); substituted in
or agreement”, and “if any party” for “where any party”; and substituted in subd. (b) “the contract or agreement” for
4. Ratification
5. Parents’ Liability
Generally, parents are not liable for their minor children’s contracts. If a parent is a co-party, he or she may
be liable. Generally, minors are also liable for their own torts unless a parent fails to use proper parental
control.
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SPECIAL EXHIBIT—
Contractual Capacity
The following illustration summarizes the principles of contractual capacity discussed in the text.
• A minor is liable for the reasonable value of necessaries
on disaffirmance.
necessaries on disaffirmance.
of contracting.
CAPACITY
INCAPACITY
Contracts entered into by minors, mentally
incompetent persons, or intoxicated persons
are in most cases voidable by those persons.
CHAPTER 13: CAPACITY AND LEGALITY 321
B. INTOXICATION
1. Disaffirmance
2. Ratification
On sobriety, a contract may be ratified.
ENHANCING YOUR LECTURE—
  SHOULD RETAILERS ENTER INTO CONTRACTS
WITH MINORS AND INTOXICATED PERSONS?
 
Sales personnel, particularly those who are paid on a commission basis, are often eager to make contracts.
CONTRACTS WITH MINORS
If your business involves selling consumer durables, such as furniture or automobiles, your sales personnel must be
careful in forming contracts with minors and should heed the adage, “When in doubt, check.” Remember that a
contract signed by a minor (unless it is for necessaries) normally is voidable, and the minor may exercise the option to
disaffirm the contract. Employees should demand proof of legal age when they have any doubt about whether a
customer is a minor.
products should know, for example, what the consequences will be if a minor has misrepresented his or her age when
forming a sales contract. Similarly, you need to find out whether and in what circumstances a minor, on disaffirming a
contract, can be required to pay for damage to goods sold under the contract.
DEALING WITH INTOXICATED PERSONS
Little need be said about a salesperson’s dealings with obviously intoxicated persons. If the customer, despite
intoxication, understands the legal consequences of the contract being signed, the contract is enforceable.
Nonetheless, it may be extremely difficult to establish that the intoxicated customer understood the consequences of
322 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
entering into the contract if the customer claims that she or he did not understand. Therefore, the best advice is,
“When in doubt, don’t.” In other words, if you suspect a customer may be intoxicated, do not sign a contract with that
customer.
CHECKLIST FOR THE RETAILER
1. When in doubt about the age of a customer to whom you are about to sell major consumer durable goods or
anything other than necessaries, require proof of legal age.
3. Check with an attorney about the laws governing minors’ contracts in your state.
4. Do not sign contracts with intoxicated customers.
C. MENTAL INCOMPETENCE
1. When the Contract Will Be Void
2. When the Contract Will Be Voidable
If a person has not been adjudged incompetent, any contract entered into by the person is voidable if the
3. When the Contract Will Be Valid
If an incompetent understands the nature and effect of entering into a certain contract, the contract is valid,
despite a lack of capacity for other activities. Similarly, an incompetent may have a lucid interval during
which he or she will be considered to have full capacity.
II. Legality
A contract to do something that is prohibited by statute or public policy is illegal and unenforceable.
A. CONTRACTS CONTRARY TO STATUTE
1. Contracts to Commit a Crime
2. Usury
Usury statutes place a ceiling on rates of interest, but there are exceptions to, for example, facilitate
3. Gambling
All states regulate gambling. Nearly all states operate lotteries, allow horse racing, or permit games of
chance (such as bingo) for charitable purposes. A few states allow casino gambling.
ADDITIONAL BACKGROUND—
Gambling on Indian Reservations
Although the status of different Indian tribes and nations in the United States varies, generally, they are not
considered states, territories, or foreign nations in the constitutional sense, but they are considered distinct,
dependent quasi sovereignties. In their local affairs, Indians tribes or nations are granted some of the powers of
sovereign political entities. In the absence of a controlling statute or treaty, Indian affairs are governed by tribal
customs. For instance, private suits against tribal officers are resolved by tribal courts, not by U.S. courts.
An Indian reservation is land to which the Indians retain their original title or is land that has been set aside from
Indian Affairs (BIA). Only the federal government—not the states—has the power to deprive Indians of their rights in a
Nevertheless, Indian rights have always been directly or indirectly dependent on state law. A federal court, for
example, may weigh the interests of a state against tribal interests in determining whether the state may assert
jurisdiction in Indian country. In Indian affairs, then, there are three sets of competing interests: tribal, federal, and
state, or local.
How do these interests balance? In the words of one commentator: “The one sure fact of Indian law is that it is a
fluid concept, subject to few permanent and enduring concepts.”a The same commentator made this prediction for the
future: “Tribal sovereignty . . . is subject to gradual erosion as Indians and non-Indians live closer together, in ever-
increasing numbers.”
On October 17, 1988, President Reagan signed the Indian Gaming Regulatory Act (IGRA).c Under the IGRA, the
National Indian Gaming Commission has the power to regulate the conduct of gambling on Indian lands. At least two of
the five commission members must be members of a federally recognized Indian tribe. The law established three
classes of gambling. Class I includes traditional Indian games, over which the tribes are given exclusive jurisdiction.
Class II includes bingo. Before a tribe can conduct bingo games, the state must not prohibit bingo (although if the state
324 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
permits gambling in any form, bingo is probably ok). Next, a tribe must enact a tribal ordinance regulating the game,
and the ordinance must be approved by the commission. Also, the tribe must obtain a state license.
Class III gambling is gambling in other forms. To conduct Class III gambling, the IGRA requires tribes to adopt a
gaming ordinance, which must be approved by the commission chairman. The tribe and state must then negotiate in
good faith and agree to a compact that would govern the conduct of the games and the allocation of related civil and
or other activities that take place in Indian country. The IGRA also contains provisions for a mediation process to
All gambling revenues must be dedicated only to tribal governmental operations or for the welfare of individual
tribal members, tribal economic development, other charitable organizations, or to help local government agencies
fund their operations. Tribes may make per capita payments to members, subject to some restrictions.
The federal government has exclusive criminal jurisdiction for violations of the act, unless a tribe consents to the
transfer of jurisdiction to a state.
In passing the IGRA, Congress balanced the state concerns of crime prevention with Indian tribes’ historic and
continuing opposition to any imposition of state jurisdiction into tribal lands. “The IGRA gives the tribes a significant
For a recent case discussing the IGRA, the jurisdiction of federal and tribal courts, gambling law, and
telecommunications law, see AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899 (9th Cir. 2002)), a case regarding
whether AT&T was required to provide toll free phone service to an Indian tribe’s gambling lottery offered interstate by
phone.
a. Gary Sokolow, “The Future of Gambling in Indian Country.” 15 Am. Indian L. Rev. 151 (1990).
b. Dick Dahl, “The Gamble that Paid Off,” ABA Journal (May 1995), p. 86.
c. 25 U.S.C. Sections 2701–2721; 18 U.S.C. Sections 1166–1168.
d. Sokolow.
4. Online Gambling
Case 13.1: United States v. $5,976,934.65, Plus Interest Deposited into Royal Bank of Scotland
International
CHAPTER 13: CAPACITY AND LEGALITY 325
William Scott operated World Wide Tele-Sports, an overseas Internet sports betting service. The United States
charged Scott with soliciting and accepting wagers from U.S. residents through illegal offshore Web sites. Unable to
arrest Scott, the government followed some of the proceeds to an account at the Royal Bank of Scotland International
(RBSI) held by Soulbury Limited, a British corporation of which Scott was the majority shareholder. The United States
filed a civil action in a federal district court, seeking the forfeiture of $6,976,934.65 plus interest, from RBSI’s account
with a U.S. bank. Soulbury denied that the funds were linked to Scott and filed a claim for the money. Meanwhile, Scott
…………………………………………………………..…………………………………………….……………………..
Notes and Questions
“Fugitive disentitlement” began as a common law doctrine under which a court could dismiss an appeal in a
criminal case by a defendant who was evading custody. Some courts extended the doctrine to civil cases, including civil
forfeiture actions. In 1996, the United States Supreme Court held that fugitive disentitlement could not be applied in
civil cases. Congress seized the initiative in 2000 to enact the Civil Asset Forfeiture Reform Act, also known as the
fugitive disentitlement statute. Under this statute, a court can dismiss a claim in a civil forfeiture case based on a
defendant’s evasion of a separate criminal proceeding.
Suppose that Scott was not deliberately avoiding criminal prosecution in the United States by declining to enter
the country, but was simply continuing to live abroad. Should the outcome in this case have been different? Yes.
Disentitlement of a claim is a serious step because of its potential consequences. Thus, one of the requirements for the
application of the fugitive disentitlement statute is that the defendant be deliberately avoiding the related criminal
prosecution. Simply being beyond the jurisdiction of a court is not the same as intentionally fleeing custody or evading
prosecution.
Why would the United States Supreme Court have held that the fugitive disentitlement doctrine should not be
applied in civil cases? The Court reasoned that disentitlement must be “a reasonable response to the problems and
326 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO “THE GLOBAL DIMENSION” QUESTION IN CASE 13.1
Does the global reach of the Internet justify a court’s assertion of authority over activities that occur in another
jurisdiction? Why or why not? One reason in favor of the assertion of such authority is the rationale that supports the
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 13.1
Do you think that civil forfeiture statutes, like the one involved in this case, are effective deterrents of future
criminal violations? Explain. Yes. Disentitlement of a claim is a serious step because of its potential consequence—the
5. Licensing Statutes
All states require certain professionals to obtain licenses. When a person contracts with an unlicensed
B. CONTRACTS CONTRARY TO PUBLIC POLICY
1. Contracts in Restraint of Trade
Contracts in restraint of trade (price-fixing agreements, for example) adversely affect the public because
they inhibit competition. Also, they usually violate an antitrust statute (Chapter 46). Excepted are restraints
that are considered reasonable.
CHAPTER 13: CAPACITY AND LEGALITY 327
CASE SYNOPSIS—
Case 13.2: Comedy Club, Inc. v. Improv West Associates
Improv West Associates owns the “Improv” Comedy Club trademark. Improv West granted Comedy Club, Inc. (CCI),
an exclusive license to open four Improv clubs a year in 2001, 2002, and 2003. Their agreement prohibited CCI from
opening any non-Improv comedy clubs “in the contiguous United States” until 2019. CCI failed to open eight clubs by
the end of 2002. Improv West commenced arbitration. The arbitrator’s award stated that CCI had forfeited its right to
open Improv clubs, but that the parties’ agreement had not terminated and the covenant not to compete was
enforceable. A federal district confirmed the award. CCI appealed.
…………………………………………………………..……………………………………………………………………
Notes and Questions
Considering that CCI breached its contract with Improv West, why didn’t the parties simply cancel the contract
altogether? A breach by a party to a contract does not in itself cancel the contract. In this case, neither party sought to
cancel their contract. Both parties had an interest in its continuation. CCI could continue to profit from the use of the
“Impov” mark in association with the clubs that it had already opened, and Improv West could continue to collect
royalties from that use.
Does the Internet affect covenants not to compete? Explain. The Internet could impact the terms that an employer
To determine the enforceability of a covenant not to compete, the courts balance the rights of an employer