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Capacity to Contract

PA ET RHC 14

No brilliance is needed in the law. Nothing but common sense, and relatively clean fingernails.

John Mortimer

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Learning Objectives

• Explain concept of capacity• List the classes of persons without

capacity and the effect on a contract

• Describe the rights to disaffirm or ratify and duties of disaffirmance

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• A person must have the ability to give consent before he can be legally bound to an agreement, thus capacity is the ability to incur legal obligations and acquire legal rights

Definition

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• Groups lacking capacity:– Minors– Those suffering a mental disability– Those who are intoxicated

• Effect -- a person who contracts without the requisite capacity may avoid the contract at his/her option

The Lack of Capacity

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• Right to avoid a contract is disaffirmance– Only the minor may avoid the contract

• Example of disaffirmance:– Woodman v. Kera LLC: Parent or guardian

cannot contractually bind a minor ward.

• If minor wants to affirm the contract, adult party must perform

Minor’s Right to Disaffirm

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• Minors may not avoid contracts if statutory exception exists – Marriage, educational loans, insurance

• Emancipation of minor from parents does not give minor capacity to contract

• Minor’s power to avoid contracts does not end on day he/she reaches age of majority, but continues for reasonable time thereafter

Details About Disaffirmance

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• Ratification occurs when a person who reaches majority indicates that he/she intends to be bound by a contract made while still a minor – May be express or implied by conduct

Ratification

Joining ROTC during high school indicates intent to serve

in the military as an adult

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• Each party has duty to return to the other any consideration (money, goods) that the other has given

• If the consideration given by the adult has been lost, damaged, destroyed, or depreciated in value, courts are split on whether the minor party must make restitution to the adult party

Duties Upon Disaffirmance

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• Disaffirming minors are required to pay reasonable value for necessaries (required for survival) furnished to them– Quasi-contractual theory

• Example: Young v. Weaver– Was the apartment really a

necessity for Young?

Duties Upon Disaffirmance

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• Like minors, people who suffer from a mental illness or defect are disadvantaged in their ability to protect their interests in the bargaining process, thus contract law makes their contracts void or voidable

• Test: Did the person have sufficient mental capacity to understand the nature and effect of the contract?

Capacity & Mental Impairment

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• If a contract is voidable due to mental impairment, the person may:– Disaffirm the contract– Once he/she regains capacity, ratify the

contract

• Upon disaffirmance, consideration must be returned and the person is liable for reasonable value of any necessaries

Right to Disaffirm or Ratify

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Rogers v. Household Life Insurance Company• Facts & Opinion:

– Alan Rogers diagnosed with Alzheimer’s and dementia; his son, Jason, was appointed guardian (no limitations on guardianship power)

– May 2007, Jason assisted Alan with online application for life insurance offered by HLIC• Application did not inquire about health status

– HLIC approved application and premium paid– June 2007, Alan died and HLIC argued it was not

obligated to perform since Alan’s incapacity rendered contract void under Idaho law

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Rogers v. Household Life Insurance Company• Idaho Supreme Court Ruling:

– Idaho statute declares a person adjudicated as incapacitated to lack contractual capacity as a matter of law, but Jason claims contract is merely voidable

– Legislative purpose and statute’s plain meaning leads to conclusion that appointment of guardian with full powers represents judicial finding that the ward lacks capacity to contract as a matter of law

– District court properly granted HLIC's motion for summary judgment

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• Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process

• Note: courts are not sympathetic!

Contracts of Intoxicated Persons

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Test Your Knowledge

• True=A, False = B– Capacity is the ability to know the

details of the legal rights in a contract

– Ratification is the actual signature on the written contract

– Disaffirmance is the right to avoid a contract due to incapacity

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• True=A, False = B– A minor’s right to disaffirm a

contract ends on the day the minor achieves the age of majority

– Intoxicated persons are always allowed to disaffirm a contract

– Persons with a mental incapacity may disaffirm a contract, but cannot ratify the contract

Test Your Knowledge

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• Multiple Choice– The “benefit rule” states that

when a minor disaffirms a contract: a) They have no further dutiesb) Recovery of the full purchase price is

subject to deduction for the minor’s use of the merchandise

c) They have the duty to return the subject goods

Test Your Knowledge

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• Multiple Choice– Ted just turned 17 years old. Emancipated

from his parents, Ted bought a car from CarCo. Two weeks after he bought the car, Ted damaged it. Ted returned the vehicle to CarCo asking for a full refund. CarCo must: a) Give Ted back the full amountb) Pay Ted only the present value of the car c) Pay Ted the purchase price less the

current value of the car

Test Your Knowledge

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Thought Question

• The requirement of capacity is rooted in ancient law. Should the law continue to protect minors and intoxicated persons? Why or why not?