10.4: Capacity

LEARNING OBJECTIVES

1. Understand that infants may avoid their contracts, with limitations.
2. Understand that insane or intoxicated people may avoid their contracts, with limitations.
3. Understand the extent to which contracts made by mentally ill persons are voidable, void, or effectively enforceable.
4. Recognize that contracts made by intoxicated persons may be voidable.

Capacity to Contract

A contract is a meeting of minds. If someone lacks the mental capacity to understand what he is assenting to—or that he is assenting to anything—it is unreasonable to hold him to the consequences of his act. At common law there are various classes of people who are presumed to lack the requisite capacity. These include minors (infants), the mentally ill, and the intoxicated.

In this chapter we will see the terms void and voidable used frequently:

1. A void contract is one that never had legal effect. No rights or obligations are created, and neither party can enforce it.
2. A voidable contract is one that is valid and enforceable unless and until the protected party chooses to disaffirm. The protected party may avoid the contract, but the other party cannot.

Minors (Infants)

The General Rule

In most states, a minor (or infant) is a person younger than 18 years old. Minors may avoid (disaffirm) their contracts either while still underage or within a reasonable time after reaching majority. The law presumes minors lack the maturity and judgment of adults, so it protects them from being bound by agreements that may not be in their best interest.

Minors vs. Infants

The words minor and infant are often used interchangeably, but they don’t always mean exactly the same thing:

1. Infant: a person under 18.
2. Minor: a person who has not yet reached the full legal age of majority for all purposes (which may include restrictions above 18, such as drinking at 21).

Age of Majority

• In the 1970s, most states lowered the age of majority from 21 to 18 or 19, following the Twenty-Sixth Amendment, which gave 18-year-olds the right to vote.
• Today, most states recognize 18 as the age of contractual majority.
• Mississippi remains the exception, with 21 as the age of majority.

Voidable, Not Void

A minor’s contract is voidable, not void. This means:

1. The minor can disaffirm the contract.
2. The adult cannot enforce it against the minor.
3. The minor may enforce it against the adult if they choose.

Necessities

Minors are generally liable for the reasonable value of necessities—food, clothing, shelter, medicine, and sometimes goods or services that allow them to earn a living.

Nonvoidable Contracts

Certain contracts cannot be disaffirmed by minors under state statutes, including:

1. Insurance contracts
2. Medical care or education agreements
3. Bank accounts and securities
4. Bonding contracts

Third-Party Rights

A minor loses the power to disaffirm if the rights of an innocent third party have intervened.

Misrepresentation of Age

• General rule: Even if a minor lies about their age, many states still allow disaffirmance.
• Trend: More courts deny disaffirmance where the minor affirmatively misrepresented age.
• Some states impose tort liability for fraudulent misrepresentation of age.

Ratification

When reaching majority, the individual must choose to either:

1. Ratify the contract (by words, conduct, or silence while continuing performance), or
2. Disaffirm it within a reasonable time.

Duty to Return Consideration

• Traditionally, a minor need only return what remains of the goods or consideration.
• Modern approach: Some courts require payment for depreciation or damage if the contract was fair (Dodson v. Shrader, 1992).

Torts Connected with Contracts

Minors are generally liable for torts (assault, negligence, trespass). But if the tort claim is merely a disguised attempt to enforce a contract, it is barred.

Persons Who Are Mentally Ill

Adjudicated vs. Non-Adjudicated Incapacity

1. Adjudicated incapacity: If a court has declared a person incompetent and appointed a guardian, any contract made by the person is void.
2. Non-adjudicated incapacity: Without a court finding, the contract is voidable if the person lacked capacity at the time of contracting.

Legal Tests for Capacity

Under Restatement (Second) of Contracts §15, a contract is voidable if, at the time of contracting:

1. The person was unable to understand the nature and consequences of the transaction (cognitive test), or
2. The person was unable to act reasonably in relation to the transaction, and the other party knew or should have known of the condition (volitional test).

Timing

Capacity is judged at the time the contract was made. Contracts made during lucid intervals are valid and enforceable.

Burden of Proof

The person seeking to avoid the contract must prove incapacity with evidence such as medical testimony, witnesses, or records.

Fairness to Good-Faith Counterparties

Courts consider whether the other party knew or should have known of the incapacity. If the contract was fair and the counterparty acted in good faith, rescission may be conditioned on restitution to prevent unjust enrichment.

Remedies

1. Rescission: The contract may be avoided, provided consideration is returned if possible.
2. Reformation: Courts may reform contracts made during lucid intervals to reflect actual intent.
3. Restitution: Courts often require return of benefits to prevent unjust enrichment.
4. Necessaries: Even if a contract is void or voidable, the person is liable for the reasonable value of necessities like housing, food, or medical care.

Ratification

A person who regains capacity may ratify the contract by continuing performance or affirming it after recovery.

Intoxicated Persons

General Rule

A contract made while intoxicated is voidable if the person was so impaired they could not understand the nature and consequences of the transaction, and the other party knew or should have known of the impairment.

Enforceability

• If the intoxicated person was aware of their actions, the contract is binding.
• If the other party was unaware of the intoxication, and the contract appeared fair, courts may enforce it.

Ratification

An intoxicated person may ratify the contract upon sobering—for example, by making payments or continuing performance.

Remedies

1. Rescission: The intoxicated party may disaffirm the contract once sober, provided they act within a reasonable time.
2. Restitution: Courts often require the intoxicated party to return any benefits received (or pay reasonable value) to prevent unjust enrichment.
3. Necessaries: Even if voidable, the intoxicated person remains liable for the reasonable value of necessities furnished.
4. Protection of Good-Faith Counterparties: If the other party entered into the contract fairly and without knowledge of the intoxication, rescission may be conditioned on compensation.

Policy Note

Courts disfavor intoxication as a defense because individuals are expected to take responsibility for their actions unless impairment was extreme.

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KEY TAKEAWAY

Infants may generally disaffirm their contracts up to the age of majority and within a reasonable time afterward, but the rule is subject to important exceptions: necessities, contracts made nonvoidable by statute, misrepresentation of age, extent of duty to return consideration, ratification, and torts connected with contracts.

Contracts made by persons who are mentally ill or intoxicated are generally voidable once the person regains competency. By contrast, a contract made by someone under guardianship is void, though the estate remains liable for necessities. Contracts entered while mentally ill or intoxicated may also be ratified once capacity is regained.

EXERCISES

1. Ivar, an infant, bought a used car—not a necessity—for $9,500. Seller took advantage of Ivar’s infancy: the car was really worth only $5,500. Can Ivar keep the car but disclaim liability for the $4,000 difference?
2. If Ivar bought the car and it was a necessity, could he disclaim liability for the $4,000?
3. Alice Ace found her adult son’s Christmas stocking; Mrs. Ace herself had made it fifty years before. It was considerably deteriorated. Isabel, sixteen, handy with knitting, agreed to reknit it for $100, which Mrs. Ace paid in advance. Isabel, regrettably, lost the stocking. She returned the $100 to Mrs. Ace, who was very upset. May Mrs. Ace now sue Isabel for the loss of the stocking (conversion) and emotional distress?
4. Why is voluntary intoxication a disfavored defense?