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Business Law Chapter 14 Homework New York Connection With Such Infants Attendance

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9 pages
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5443 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 14
Capacity and Legality
INTRODUCTION
Chapter 14 logically follows the material covered in the previous chapters, 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 peopleminors, incompetent persons, and intoxicated personshave 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.
This chapter also discusses how legality affects the validity of a contract. To be enforced in court, a contract
must call for the performance of a legal act. That courts will not enforce contracts that are contrary to state or federal
law or to public policy is a simple concept. To allow a person to profit from his or her wrongdoing is clearly contrary to
the mores of society.
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.
2 UNIT THREE: CONTRACTS AND E-CONTRACTS
A. MINORS
In most states, the age of majority for contractual purposes is eighteen. Some states provide for
the termination of minority on marriage and emancipation.
A minor can enter into any contract that an adult can enter into, except a contract prohibited by law
for minors.
Generally, a contract entered into by a minor is voidable at the minor’s option.
1. Disaffirmance
To avoid a contract, a minor need only manifest intent not to be bound. This may be
expressed by words or conduct. A minor must disaffirm an entire contract.
An adult who enters into a contract with a minor cannot avoid contractual duties unless the
minor opts to avoid the contract.
CASE SYNOPSIS
Case 14.1: PAK Foods Houston, LLC v. Garcia
S.L., a sixteen-year-old minor, worked at a KFC Restaurant operated by PAK Foods Houston, LLC. PAK
Foods’s policy was to resolve any dispute with an employee through arbitration. At the employer’s request,
S.L. signed an acknowledgement of this policy. S.L was injured on the job, and subsequently terminated her
employment. S.L.’s mother Marissa Garcia filed a suit on S.L.’s behalf in a Texas state court against PAK
Foods to recover for the injury. PAK Foods filed a motion to compel arbitration. The court denied the motion.
PAK Foods appealed.
A state intermediate appellate court affirmed the decision of the lower court. A minor may disaffirm a
contract at his or her option. S.L. opted to disaffirm the agreement to arbitrate by terminating her employment
and filing this suit.
..................................................................................................................................................
Notes and Questions
Did S.L. have the contractual capacity to enter into a contract? Why or why not? Yes, she could
enter the contract but as a minor could later disaffirm it. A minor can enter into any contract an adult can,
provided that that contract is not one prohibited by law for minors (such as the sale of alcoholic beverages). A
contract entered into by a minor is voidable at the option of that minor. To avoid a contract, a minor need only
manifest an intention not to be bound by it. The minor avoids the contract by disaffirming it, as in S.L.’s case.
Suppose that S.L. stated she was eighteen years old when she signed the arbitration agreement.
How might this affect her right to disaffirm it? S.L.’s misrepresentation of age would not usually affect her
right to disaffirm a contract. In some jurisdictions, the minor would not even be liable for the tort of fraudulent
misrepresentation, because such a judgment might force the minor to perform the contract. In other jurisdic-
tions, a minor who has misrepresented his or her age can be bound by a contract under certain cir-
cumstances, such as when the contract has been executed and the minor cannot return the consideration
CHAPTER 14: CAPACITY AND LEGALITY 3
received (which had not occurred in this case). Nevertheless, misrepresentation of age generally does not
affect the ability of a minor to disaffirm a contract.
Suppose that Nina, a minor, buys a motorcycle from Buto Motorcycles. She pays $500 as a down
payment and agrees to pay the balance in monthly $100 installments. She uses the motorcycle for a
month and then takes it back to Buto and demands a full refund. Can she get the money back without
accounting for wear and tear on the motorcycle? In most states, the answer would be yes. Generally, to
disaffirm a contract, a minor need only return the goods (or other consideration), if they are still in his or her
ADDITIONAL CASES ADDRESSING THIS ISSUE
Minors’ Capacity to Contract and Disaffirm
Cases involving the capacity of minors to contract and disaffirm include the following.
Dodson v. Schrader, 824 S.W.2d 545 (Tenn. 1992) (minor’s disaffirmance of a used truck purchase
required the seller to be compensated for the depreciated value of the truck, including any damage).
Kelly v. United States, 809 F.Supp.2d 429 (E.D.N.C. 2011) (minor could disaffirm liability waiver that
absolved U.S. Marine Corps. from liability for all injuries arising form participation in activities at training
facility)
Fetters v. Fetters, 26 N.E.3d 1016 (Ind.App. 2015) (unconscionable prenuptial agreement entered into by
minor was voidable at minor’s option)
a. Disaffirmance within a Reasonable Time
A contract can ordinarily be disaffirmed at any time during minority or for a reasonable time
after coming of age.
b. Minor’s Obligations on Disaffirmance
Generally, a minor need only return the goods (or other consideration), if they are still within
his or her control, regardless of their condition. In a few states, minors have a duty to restore
the other party to the position he or she was in before the contract was made.
2. Exceptions to a Minor’s Right to Disaffirm
Marriage contracts and contracts to enlist in the armed servicesCannot be disaffirmed.
Misrepresentation of ageIn many states, this is enough to prohibit disaffirmance.
Business contractsSome states prohibit a minor who engaged in business as an adult from
4 UNIT THREE: CONTRACTS AND E-CONTRACTS
qualifies as a necessary depends on what is needed for the minor’s subsistence and the
minor’s standard of living or financial or social status.
ADDITIONAL BACKGROUND
Exceptions to a Minor’s Right to Disaffirm
Many states have statutes restricting the ability of minors to avoid certain contracts. The following is an
example of a California statute that sets out a number of contracts minors cannot disaffirm in the state.
WEST’S ANNOTATED CALIFORNIA CODES
CIVIL CODE
DIVISION 1. PERSONS
PART 1. PERSONS
§ 36. Minors; contracts not disaffirmable
(a) Contracts not disaffirmable. A contract, otherwise valid, entered into during minority, cannot be
disaffirmed upon that ground either during the actual minority of the person entering into such contract, or at
any time thereafter, in the following cases:
1. Necessaries. A contract to pay the reasonable value of things necessary for his support, or that of his
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 dramatic properties (either tangible or intangible) or any rights therein for use in motion
pictures, television, the production of phonograph records, the legitimate or living stage, or otherwise in the
(B) As used in this paragraph, “artistic or creative services” shall include, but not be limited to, services as an
actor, actress, dancer, musician, comedian, singer, or other performer or entertainer, or as a writer, director,
producer, production executive, choreographer, composer, conductor, or designer.
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
(b) Judicial approval; procedure; extent. The approval of the superior court referred to in paragraphs (2) and
(3) of subdivision (a) may be given upon the petition of either party to the contract or agreement after such
reasonable notice to the other party thereto as may be fixed by said court, with opportunity to such other party
CHAPTER 14: CAPACITY AND LEGALITY 5
to appear and be heard; and its approval when given shall extend to the whole of the 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.
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.
In 1927, a second paragraph was added to the section as follows: “A minor cannot disaffirm a contract
otherwise valid to perform or render services as actor, actress, or other dramatic services where such
contract has been approved by the superior court of the county where such minor resides or is employed.
Such approval may be given on the petition of either party to the contract after such reasonable notice to the
other party thereto as may be fixed by said court, with opportunity to such other party to appear and be
heard.”
In 1931, a proviso was added at the end of the first paragraph “that these things have been actually furnished
to him or to his family.”
The 1941 amendment added to the second paragraph “as participant or player in professional sports,
including, but 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.
The 1963 amendment rewrote provisions of former subsection 2 [now, subd. (a)(2)(A)], which had read: “A
contract or agreement employing such person as, or wherein such person agrees to perform or render
services as, an actor, actress, or other dramatic performer, or as a participant or player in professional sports,
including, but without being limited to, professional boxers, professional wrestlers and professional jockeys,
where such contract or agreement has been approved by the superior court in the county in which such minor
resides or is employed. Such approval may be given upon the petition of either party to the contract or
agreement after such reasonable notice to the other party thereto as may be fixed by said court, with
opportunity to such other party to appear and be heard; and said court shall 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
6 UNIT THREE: CONTRACTS AND E-CONTRACTS
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 to which such person is employed or agrees to render artistic or creative services in motion pictures,
television, the production of phonograph records, the legitimate or living stage, or otherwise in the
entertainment field, including, but without being limited to, services as an actor, actress, dancer, musician,
comedian, singer, or other performer or entertainer, or as a writer, director, producer, production executive,
choreographer, composer, conductor or designer, where such contract or agreement has been approved by
the superior court in the county in which such minor resides or is employed.”; added subds. (a) and (b)
designations; added subd. (a)(2)(ii) [now, subd. (a)(2)(B); added to the end of subd. (a)(3), the words “or, if
the minor neither resides in or is employed in this state, where any party to the 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 subd. (a)(2)(A) “if the contract” for “where such contract” and “if any party” for “where any party”;
substituted in subd. (a)(3) “contract or agreement” for “contractor or agreement”, “if the contract or agreement”
for “where such contract or agreement”, and “if any party” for “where any party”; and substituted in subd. (b)
“the contract or agreement” for “said contract or agreement”.
ADDITIONAL BACKGROUND
Can a Minor Disaffirm a Contract for a Student Loan?
Some states prohibit minors from disaffirming insurance contracts. Others hold that loans for education
or medical care received by minors create binding legal duties that they cannot avoid. The following is an
example of a state statute that regulates student loan contracts.
MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
EDUCATION LAW
CHAPTER 16 OF THE CONSOLIDATED LAWS
TITLE IGENERAL PROVISIONS
ARTICLE 5UNIVERSITY OF THE STATE OF NEW YORK
PART IILIBRARIES
§ 281. Loans and extensions of credit to infants
A contract hereafter made by an infant after he has attained the age of sixteen years in relation to obtaining a
loan or extension of credit from an institution of the university of the state of New York in connection with such
infant’s attendance upon a course of instruction offered by such institution, or from a bank, trust company,
industrial bank or national bank whose principal office is in this state for the purpose of defraying all or a
CHAPTER 14: CAPACITY AND LEGALITY 7
SPECIAL EXHIBIT
Contractual Capacity
The following illustration summarizes the principles of contractual capacity discussed in the text.
EXCEPTIONS
MINORS
• A minor who commits fraud may be denied the
right to disaffirm.
• A minor must return received goods on
disaffirmance or may be liable for their reasonable
MENTALLY
INCOMPETENT
PERSONS
• A mentally incompetent person
CAPACITY
REASONABLE TIME
Contracts entered into by minors,
mentally incompetent persons, or
INCAPACITY
Contracts entered into by minors, mentally
incompetent persons, or intoxicated persons
are in most cases voidable by those persons.
3. Ratification
4. Parents’ Liability
Generally, parents are not liable for their minor children’s contracts. If a parent is a co-party, he or
B. INTOXICATION
Intoxication is a condition in which a person’s capacity to act or think is inhibited by alcohol or some
other drug. Many courts look at objective indications to determine whether a contract is voidable
because of intoxication rather than inquire into a party’s mental state.
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. Sometimes, however, these salespersons must deal with minors and intoxicated persons, both of
whom have limited contractual capacity. Therefore, if you are a retailer, you should make sure that your
employees are acquainted with the law governing minors and intoxicated persons.
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.
In addition, because the law governing minors’ rights varies substantially from state to state, you should
check with your attorney concerning the laws governing disaffirmance in your state. You and those you hire
CHAPTER 14: CAPACITY AND LEGALITY 9
to sell your 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 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
3. When the Contract Will Be Valid
If an incompetent understands the nature and effect of entering into a certain contract, the contract
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 Native American 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
An Indian reservation is land to which the Indians retain their original title or is land that has been set
aside from the public domain for use by a tribe. Most reservations are run by Indians in conjunction with the
federal Bureau of Indian Affairs (BIA). Only the federal governmentnot the stateshas the power to
deprive Indians of their rights in a reservation.
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
Traditional Indian games were not the focus of federal regulations. The federal government has
regulated gambling in Indian country since 1924. In that year, the BIA adopted tribal gaming ordinances
for the purposes of its administrative law courts. Only since 1983 has Indian gaming become a significant
CHAPTER 14: CAPACITY AND LEGALITY 11
billion.b Tribes use these revenues largely for the economic, educational, and health benefit of their
members, constructing roads, schools, medical clinics, and other buildings. The next step is to create a
broader economic foundation.
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
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
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
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.
4. Licensing Statutes
All states require certain professionals to obtain licenses. When a person contracts with an
unlicensed individual, the contract may not be enforceable, depending on the underlying purpose of
the licensing requirement.
CASE SYNOPSIS
Case 14.2: McNatt v. Vestal
Cecil McNatt contracted with Jane Vestal to build Henderson Villa, an assisted living facility, for $1.4
million. Three days later, McNatt formed a joint venture with M.S. Burton Construction Company to build two
assisted living facilities, including Henderson Villa. Burton was licensed under the state’s Contractors
Licensing Act. McNatt was not. During the construction of Henderson Villa, McNatt remained onsite, selecting,
supervising, and paying the subcontractors. Following completion of the project, Vestal refused to pay the
..................................................................................................................................................
Notes and Questions
Should the restrictions on the enforcement of contracts with unlicensed practitioners extend
beyond the performance of professional services to include negotiations to provide the services?
Yes. An offer by an unlicensed practitioner to render such services would be deceptive even if only their
performance were prohibited.
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.
a. Covenants Not to Compete and the Sale of an Ongoing Business

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