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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 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.
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.
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.
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.
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Notes and Questions
Did S.L. have the contractual capacity to enter into a contract? Why or why not? Yes, she could
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
CHAPTER 14: CAPACITY AND LEGALITY 3
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
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).
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 services—Cannot be disaffirmed.
• Misrepresentation of age—In many states, this is enough to prohibit disaffirmance.
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:
(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
(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
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)
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 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.
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 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 I—GENERAL PROVISIONS
ARTICLE 5—UNIVERSITY OF THE STATE OF NEW YORK
PART II—LIBRARIES
§ 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
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.
MENTALLY
INCOMPETENT
PERSONS
INTOXICATED
PERSONS
• A contract is enforceable
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.
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
3. Ratification
Ratification is an act or an expression in words by which a minor, on or after reaching majority,
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
If a person is intoxicated enough to lack mental capacity, a contract entered into at the time may be
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,
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
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.
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
10 UNIT THREE: CONTRACTS AND E-CONTRACTS
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
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 the public domain for use by a tribe. Most reservations are run by Indians in conjunction with the
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.”
Traditional Indian games were not the focus of federal regulations. The federal government has
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.
12 UNIT THREE: CONTRACTS AND E-CONTRACTS
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
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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
a. Covenants Not to Compete and the Sale of an Ongoing Business
