Chapter 8Capacity and Consideration

I. Capacity to Contract Void Contracts Voidable Contracts Enforceable Contracts Persons of Unsound Mind Persons Incarcerated

Capacity

Not everyone has the mental capacity to understand that an offer and an acceptance generally forms a binding contract, enforceable in court

Adult – is an individual who is 18 years of age or older

Minor – is an individual who is under 18 years of age

A. Void Contracts

“a minor may make a contract in the same manner as an adult, subject to the power of disaffirmance…” [Family C.§6700]

However, there are 3 types of contracts a minor may not enter into:

1. Give a delegation of power

2. Make a contract relating to real property or any interest therein

3. Make a contract relating to any personal property not in the immediate possession or control of the minor

[Family C.§ 6701]

B. Voidable Contracts

A minor also had the power to DISAFFRIM (void) the contract [Family C.§6700]. To be effective, the disaffirmance must be of the entire contract and not a part of the contract.

Express Disaffirmance Implied Disaffirmance

The minor must return anything received from the other contracting party under the terms of the contract if the minor still has it in his possession

1. Minor as a Buyer of Goods or Services

If a minor purchases a bike for $900, a contract is formed

The contract is subject to disaffirmance at any time while the minor is under 18 years of age

After the minor turns 18, he must bring the bike back within a reasonable period of time if he wishes to disaffirm the contract

2. Ratification If a person after reaching the age of majority

indicates either expressly or impliedly that he is willing to be bound by the contract made while a minor, then he has made a RATIFICATION OF THE CONTRACT

Merchants can refuse to sell to minors because minors lack contractual capacity

3. Minor as a Seller of Goods or Services

If an adult contracts with a minor to purchase a motorcycle for $1,500, and 3 weeks later the minor wants the motorcycle back, must the adult return the motorcycle? Yes.

If a merchant refuses to refund a minor’s money, “minors are not allowed to bring their own lawsuit [Family C.§ 6601]. A minor must convince a parent to bring the lawsuit on his behalf.

4. Consequences of Disaffirmance

The ability of minors to disaffirm a contract appears to give minors an opportunity to impose a severe hardship on merchants or adults who contract with them.

If possible, the minor must return the goods or services contracted for in order to get a return of the price paid

The purpose behind allowing disaffirmance of a contract is to prevent an adult from contracting with a person who does not have the mental capacity to understand what a binding contract is all about

C. Enforceable Contracts A small number of contracts made by any minor

are binding, and minors who are emancipated may make binding contracts like adults.

1. Necessaries

2. Contracts for Medical Treatment

3. Contracts for Attorney’s Fees

4. Contracts for Art, Entertainment, and Professional Sports

5. Plea Bargain

6. Emancipated Minors

D. Persons of Unsound Mind

The second fundamental requirement for capacity to contract is that the contracting parties be of sound mind at the time of contracting

1. Insanity Means No Contractual Capacity (VOID)

2. Contractual Capacity (MAY BE VOIDABLE)

3. Due Process in Competence Determination Act (VOID)

E. Persons Incarcerated A person imprisoned has the right to inherit,

own, sell, or convey real or personal property, including all written and artistic material produced or created by the person during the period of imprisonment

II. Consideration

A. The Concept

Good consideration for a promise is any benefit conferred, or agreed to be conferred, upon the promisor, by any other person to which the promisor is not lawfully entitled

CONSIDERATION means that in order to get something, you have to give up something

To have an enforceable contract, it is necessary that sufficient consideration be present [ CC§ 1550]

Consideration can be as simple as exchanging promises

Bilateral vs. Unilateral consideration

B. Presumption of Consideration

[CC§ 1614-1615]

If the parties to the agreement put that agreement in writing, there is a presumption that consideration exists

A presumption shifts the burden of proof away from the party for whom the presumption exists

C. The Value of Consideration

Consideration does not have to consist of something that has an economical dollar value attached to it

What matters is that the parties exchanged promises that had “value” to them

D. Gifts

“A gift is a transfer of personal property, made voluntarily, and without consideration” [CC§ 1146]

Once a gift is given, it cannot be revoked by the donor [CC§ 1148]

E. When Gifts May Be Revoked

1. Impending Death

2. Gifts in Contemplation of Marriage

F. Unrequested Merchandise

If a seller tries to sell goods or merchandise by actually sending the unordered item to an individual, hoping that they will be paid, it is considered an unconditional gift to the recipient, who has no obligation to pay the sender [CC§ 1584.5]

G. Past Consideration or Moral Consideration

If a promise is made to do or not do something based on an event or situation that has already taken place, that promise is unenforceable

Promises that are based upon the promisor’s feeling of a moral obligation or duty are also NOT enforceable

H. Illusory Promises If it appears that a party has incurred a legal

detriment as a result of the bargain, but upon close scrutiny it is discovered that the party has not changed the legal position at all from what it was prior to the bargain, then the promise is ILLUSORY

I. Needs and Requirements vs. Desires and Wants

Enforceable If you agreed to sell tires to a trucking company at a specific

price in return for which the trucking company agreed to purchase all the tires it NEEDS for one year, there is an enforceable contract. The trucking company gave up it’s legal right to buy tires from someone else for one year.

Unenforceable If you enter into a bargain with a trucking company where you

agree to sell the trucking company tires for a specific price for one year and the trucking company agrees to buy all of the tires that the company may WANT during the next year, no enforceable contracts exists.

J. Pre-Existing Duties – No Consideration For the Agreed Modification

If you signed a contract with a builder to add a room onto your house, he is legally obligated to fulfill his pre-existing duty for the amount originally agreed to. He may not ask for more money. You are not obligated to give more consideration than you already agreed to.

K. Contract Modification Supported By Consideration

The parties to a contract are free to modify that contract, and the modification is enforceable, provided consideration exists

L. Unforeseen Conditions

If, during performance of a contract, the party performing encounters circumstances that were unforeseeable at the time of contracting, which now impose a very substantial hardship on that party to complete performance, he may now ask for additional funds to finish performance. If you agree, he is entitled to the additional funds as long as the condition was UNFORESEEABLE.

M. Pre-Existing Duty to A Third Party

If person “A” has a pre-existing duty, under contract with person “B,” and then a 3rd party (“C”) makes an additional promise to him based on the condition of the original contract, the 3rd party is NOT obligated to fulfill the promise since the person “A” had a pre-existing duty under the original contract with person “B.”

N. Sale of Goods

An agreement modifying a sales contract is binding on the parties to that contract without consideration as long as the modifications are made in good faith [UCC§ 1148]

O. Settlement of Claims

1. Liquidated Debts

2. Accord and Satisfaction

3. Written Release as Full Satisfaction

4. Unliquidated Claim

P. Revival of a Debt Barred By Statute of Limitations

When a debt has been barred by the running of the statute of limitations, that debt becomes unenforceable in court

Q. Promissory Estoppel If the doctrine of promissory estoppel can be applied,

the promisor is prevented from using “no consideration” as a defense when sued on the promise

Chapter Summary

Capacity to Contract Void Contracts Voidable Contracts Enforceable Contracts Persons of Unsound Mind Persons Incarcerated

Consideration The Concept Presumption of Consideration The Value of Consideration Gifts When Gifts May Be Revoked

Unrequested Merchandise Past Consideration or Moral

Consideration Illusory Promises Needs vs. Wants Pre-Existing Duties Contract Modification Unforeseen Conditions Pre-Existing Duty to 3rd Party Sale of Goods Settlement of Claims Revival of a Debt Barred by Statute

of Limitations Promissory Estoppel