Business Law (part 14)

Capacity to Contract

 by

 Charles Lamson

 For an agreement to be enforceable at law, all parties must have the legal and mental capacity to contract. This means that the parties must have the ability to understand that a contract is being made, have the ability to understand its general nature, and have the legal competence to contract. The general rule is that the law presumes that all parties have this capacity. This means that anyone alleging incapacity must offer proof of incapacity to overcome that presumption.

However, in the eyes of the law some parties lack such capacity because of age, physical condition, or public policy. Among those whom the law considers to be incompetent, at least to some degree, are minors, mentally incompetent persons, intoxicated persons, and convicts.

Minors

The common law rule that persons under 21 years of age are minors has been abolished by most of the states. Most states have enacted statutes making persons competent to contract at 18 years of age, and a few set the age at 19. In some states, all married minors are fully competent to contract. And still other states minors in business for themselves are bound on all their business contracts.

Contracts of Minors

Almost all of a minor's contracts are voidable at the minor's option. That is, if a minor so desires, the minor can avoid the contract. If a minor wishes to treat a contract made with an adult as valid, the adult is bound by it. An adult cannot avoid a contract on the ground that the minor might avoid it. If a contract is between two minors, each has the right to void it. Should the minor die, the personal representative of the minor's estate may void the contract that the minor could have voided.

Firms that carry on business transactions in all the states must know the law dealing with minors in each state. Mail-order houses and correspondence schools are particularly susceptible to losses when dealing with minors. The significance of the law is that, with but few exceptions, people deal with minors at their own risk. The purpose of the law is to protect minors from unscrupulous adults, but in general the law affords the other party no more rights in scrupulous contracts than in unscrupulous ones. The minor is the sole judge as to whether a voidable contract will be binding.

Contracts that Cannot Be Avoided

Although most contracts made by minors are voidable, a few are not. These include contracts for necessaries, business contracts, and other specially enforced contracts such as student loan agreements.

Contract of minors for necessaries. If a minor contracts for necessaries, the contract is voidable, but the minor is liable for the reasonable value. Necessaries include items required for a minor to have a reasonable standard of living that are not provided by the minor's parents or guardian. The dividing line between necessaries and luxuries is often a fine one. Historically necessaries included food, clothes, and shelter. With the raising of standards of living, courts now hold that necessaries also include medical services such a surgery, dental work, and medicine; education through high school or trade school, and in some cases through college; working tools for a trade and other goods that are luxuries to some people but not necessary to others because of peculiar circumstances. 

Disaffirmance. The term disaffirmance means the repudiation of a contract; that is, the election to avoid it or set it aside. A minor has the legal right to disaffirm a voidable contract at any time during minority or within a reasonable time after becoming of age. In some states, if the minor has received no benefits under the contract disaffirmance does not have to be within a reasonable time. If the contract is wholly executory, a disaffirmance completely nullifies the contract. 

Upon electing to disaffirm contracts, minors must return whatever they may have received under the contract, provided they still have possession of it. The fact that the minor does not have possession of the property, however, regardless of the reason, does not prevent the exercise of the right to disaffirm the contract. In most jurisdictions, an adult may not recover compensation from a minor who returns the property in damaged condition.

If an adult purchases personal property from a minor, the adult has only a voidable title to the property. If the property is sold to an innocent third party before the minor disaffirms the contract, the innocent third-party obtains good title to the property. However, the minor may recover from the adult the money or the value of property received from the third party. Statutes in some states make minors contracts void, not merely voidable. In these states, disaffirmance is not necessary.

Ratification. A minor may ratify a voidable contract only after attaining majority. Ratification means indicating one's willingness to be bound by promises made during minority. It is in substance a new promise and may be oral, written, or merely implied by conduct.

After majority is reached, silence ratifies an executed contract.

A minor cannot ratify part of a contract and disaffirm another part; all or none of it must be ratified. Ratification must be made within a reasonable time after reaching majority. A reasonable time is a question of fact to be determined in light of all surrounding circumstances.

Minor's Business Contracts. Many states, either by special statutory provision or by court decisions, have made a minor's business contracts fully binding. If a minor engages in business or employment in the same manner as a person having legal capacity, contracts that arise from such business or employment cannot be set aside.

Other Enforceable Contracts. A number of states prevent a minor from avoiding certain specified contracts. These contracts include educational loan agreements, contracts for medical care, contracts made with court approval or in performance legal duty, and contracts involving bank accounts.

Contracting Safely with Minors

Since in general it is risky to deal with minors, every businessperson must know how to be protected when contracting with minors. The safest way is to have an adult (usually a parent or guardian) join in the contract as a cosigner with the minor. This gives the other party to the contract the right to sue the adult who cosigned. A merchant must run some risks when dealing with minors. If a sale is made to a minor, the minor may avoid the contract and demand a refund of the purchase price years later. Since few minors exercise this right, businesspersons often run the risk of contracting with minors rather than seeking absolute protection against lost.

Minors' Torts

As a general rule, a minor is liable for torts as fully as an adult is. If minors misrepresent their age, and the adults with whom they contract rely upon the misrepresentation to their detriment, the minors have committed a tort (a wrongful act or an infringement of a right (other than under contract) leading to civil legal liability). The law is not uniform throughout the United States as to whether or not minors are bound on contracts induced by misrepresenting their age. In some states, when sued, they cannot avoid their contract if they fraudulently misrepresented their age. In some states they may be held liable for any damage to or deterioration of the property they received under the contract. If minors sue on the contract to recover what they paid, they may be denied recovery if they misrepresented their age. 

Mentally Incompetent Persons

A number of reasons Beyond a person's control result in mental incompetence. These include insanity or incompetence as a result of stroke, senile dementia, and retardation. In determining a mentally incompetent person's capacity to contract, the intensity and duration of the incompetency must be determined. In some state, if a person has been formally adjudicated incompetent, contracts made by the person are void without regard to whether they are reasonable or for necessaries. Such a person is considered incapable of making a valid acceptance of an offer no matter how fair the offer is. When a person has been judicially declared insane and sanity is later regained and the court officially declares the person to be competent, the capacity to contract is the same as that of any other normal person.

If a person is incompetent but has not been so declared by the court, then the person's contracts are voidable, not void. Like a minor, the person must pay the reasonable value of necessaries that have been supplied. Upon disaffirmance (declaration that a voidable contract is void), anything of value received under the contract and which the person still has must be returned.

A person who has not been declared by a court to be insane and has only intervals of insanity or delusions can make a contract fully as binding as that of a normal person if it is made during a sane or lucid interval. The person must be able to understand that a contract is being made.

Intoxicated Persons

People may also put themselves in a condition that destroys contractural capacity. Contracts made by people who have become so intoxicated that they cannot understand the meaning of their act are voidable. Upon becoming sober, such persons may affirm or disaffirm contracts they made while drunk. If one delays unreasonably in disaffirming a contract made while intoxicated, however, the right to have the contract set aside may be lost. 

That a contract is foolish and would not have been entered into if the party had been sober does not make the contract voidable.

A person who has been legally declared to be a habitual drunkard cannot make a valid contract but is liable for the reasonable value of necessaries furnished. If a person is purposely caused to become drunk in order to be induced to contract, the agreement will be held invalid.

The rule regarding the capacity of an intoxicated person also applies to people using drugs.

Convicts

Although many states have repealed their former laws restricting the capacity of a convict (one convicted of a major criminal offense, namely, a felony or treason) to contract, some jurisdictions still have limitations. These range from depriving convicts of rights as needed to provide for the security of the penal institutions in which they are confined and for reasonable protection of the public, to classifying convicts as under a disability, as are minors and insane persons. In these instances, the disability lasts only as long as the person is imprisoned or supervised buy parole authorities.  

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS., 69-76*

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