Chapter 3 Capacity and legality In this chapter, we delve into
the concepts of capacity and legality, 2 fundamental
prerequisites for the formation of a valid contract.
Understanding these principles is crucial because a contract
lacking proper capacity or legality may be void or
voidable, making it unenforceable in a court of law.
Capacity to contract. Capacity to contract refers to
the legal ability of a party to enter into a binding agreement.
Not everyone possesses this capacity, and the law recognizes
certain groups as being incapable or having limited
ability to contract. These groups include minors,
individuals with mental incapacities, and those under
the influence of intoxicants. Minors.
Minors, typically defined as individuals under the age of 18,
generally lack the capacity to enter into binding contracts.
Contracts entered into by minors are usually voidable at the
minors discretion. This means that while a minor
can choose to honor the contract, they also have the
right to disaffirm it, rendering it unenforceable against them.
Key Points Right to Disaffirm Definition A minor can disaffirm
or cancel a contract at any time before reaching the age of
majority or within a reasonable time thereafter.
To disaffirm a contract, the minor must indicate their
intention not to be bound by the agreement, which can be done
verbally or through actions. Restitution.
When a minor disaffirms a contract, they must return any
goods or benefits received if possible.
However, they are only required to return what remains in their
possession or control, and they are not liable for any
depreciation or damage. Example.
A 17 year old purchases a car before turning 18.
The miner decides to return the car and disaffirm the contract.
The seller must accept the return and refund the money,
subject to any reasonable wear and tear on the car.
Ratification Definition. Ratification occurs when a
miner, upon reaching the age of majority, expresses an intention
to be bound by the contract. This can be done explicitly
through a statement or implicitly through actions such
as continuing to abide by the contract's terms.
Binding effect. Once a contract is ratified, it
becomes fully enforceable and the miner loses the right to
disaffirm. Example, if the 17 year old
keeps the car and continues making payments after turning
18, this action ratifies the contract, making it binding and
preventing disaffirmation. Exceptions Necessities Contracts
for necessities like food, clothing, and shelter are
generally enforceable against minors.
This exception exists to ensure minors have access to essential
goods and services. Statutory exceptions.
Certain jurisdictions may have statutory exceptions where
specific types of contracts entered into by minors are
binding. Example, a minors lease
agreement for an apartment is generally enforceable to ensure
they have housing. Similarly, a contract for
essential medical services would be enforceable.
Illustration of minors capacity to contract scenario Sarah, a 17
year old high school student, enters into a contract with a
phone company to purchase a new smartphone with a monthly
payment plan. After a few months, Sarah
decides she no longer wants the phone and contacts the company
to disaffirm the contract. The company must allow her to
return the phone and cancel the contract, refunding any payments
made, subject to the phone's condition.
Exception scenario. Alex, also 17, signs a lease for
an apartment because he needs housing while attending school.
The landlord cannot void the lease based on Alex's age
because the lease is for a necessity, ensuring Alex has a
place to live. Individuals with Mental
Incapacities Individuals with mental incapacities lack the
legal capacity to enter into binding contracts.
A person may be considered mentally incapacitated if they
are unable to understand the nature and consequences of the
transaction due to a mental condition.
Key Points Voidable Contracts Contracts entered into by
individuals who are mentally incapacitated are typically
voidable. The incapacitated person can
disaffirm the contract upon regaining capacity or through a
legal representative. Example.
An elderly person with dementia signs a contract for home
repairs. If it is proven that the person
did not understand the contract due to their mental condition,
the contract can be voided. Necessities.
Similar to minors, contracts for necessities are generally
enforceable against individuals with mental incapacities to
ensure they have access to essential goods and services.
Example a contract for necessary medical treatment for a mentally
incapacitated person would be enforceable.
Court adjudicated incapacity. If a court has formally declared
an individual incapacitated and appointed a guardian or
conservator, any contract entered into by the
incapacitated person without the guardians consent is void.
Example, A person under legal guardianship due to severe
mental illness cannot independently enter into a valid
contract. Any such contract would be void.
Individuals under the influence of intoxicants.
Contracts entered into by individuals under the influence
of intoxicants, for example alcohol, drugs, may be voidable
if the person was so impaired that they could not understand
the nature and consequences of the contract.
Key Points Voidability The impaired individual can void the
contract upon regaining sobriety if they can prove that they were
unable to understand the contract due to intoxication.
Example A person signs a contract while intoxicated and
later realizes they did not comprehend the agreement.
They can seek to void the contract upon sobering up.
Necessities Contracts for necessities are enforceable even
if the individual was intoxicated, ensuring they have
access to essential goods and services.
Example An intoxicated person buys food and shelter for the
night. This contract is enforceable to
ensure they have access to necessities.
Illustration of Intoxicated Individuals Capacity to Contract
Scenario Mark, who is heavily intoxicated, agrees to sell his
car to a friend for a fraction of its value.
Once sober, Mark realizes he was not in a state to make such a
decision and seeks to void the contract.
If he can prove his level of intoxication, the contract can
be voided. Summary of Capacity to Contract
Capacity to contract is a crucial aspect of contract law,
ensuring that parties entering into agreements understand the
nature and consequences of their commitments.
Certain groups, including minors, individuals with mental
incapacities, and those under the influence of intoxicants,
are protected by law to prevent exploitation and ensure fairness
and contractual dealings. By recognizing these
limitations, the law ensures that contracts are made by
parties who are fully capable of understanding and fulfilling
their obligations. Mental Incapacity Individuals
who lack the mental capacity to understand the nature and
consequences of their actions at the time of entering into a
contract may have their agreements deemed voidable.
Mental incapacity can result from various conditions,
including mental illness, cognitive impairments, or severe
intoxication. Understanding how mental
incapacity effects contractual obligations is crucial for
ensuring fair and just legal practices.
Key points one. Voidable contracts definition
Contracts made by individuals who are mentally incapacitated
are typically voidable. This means that the contract is
not automatically void, but can be voided at the discretion of
the incapacitated person or their legal representative.
Enforcement The incapacitated person can choose to either
enforce or void the contract upon regaining capacity or
through a legal guardian. This provision protects
individuals who are unable to comprehend the terms and
implications of the contract due to their mental state.
Example, If someone suffering from dementia enters into a
contract, their legal guardian can later void the contract if
it is determined that the individual did not understand
the agreement. For instance, if an elderly
person with dementia signs a contract to sell their home for
far below market value, their guardian can nullify the
contract to prevent exploitation. 2 Necessities
Enforceability Similar to minors, contracts for
necessities entered into by mentally incapacitated persons
are enforceable to ensure their access to essential services and
goods. Necessities include items and
services essential for daily living, such as food, clothing,
shelter, and medical care. Rationale This rule ensures that
mentally incapacitated individuals are not deprived of
essential needs due to their inability to contract.
Example A contract for medical care for a person with severe
mental illness is generally enforceable.
If a person with severe mental illness requires emergency
surgery, the contract for medical services would be upheld
to ensure they receive necessary care. 3 Lucid intervals
Definition A person with mental incapacity who enters into a
contract during a lucid interval where they are capable of
understanding the contract may be bound by the contract.
Lucid intervals refer to periods where the individual's mental
state temporarily improves to the extent that they can
understand and engage in contractual obligations.
Validity Contracts made during these periods are generally
considered valid because the individual possesses the
necessary mental capacity at the time of contracting.
Example An individual with bipolar disorder enters into a
business agreement during a period of clear mindedness.
The contract may be considered valid if the person with bipolar
disorder has a clear understanding of the business
terms and consents to them during a stable period.
The contract is enforceable. 4 Determination of Mental
Incapacity Legal Standard Mental incapacity is determined based
on whether the individual could understand the nature and
consequences of the contract at the time it was made.
This evaluation often requires medical evidence and may involve
court proceedings to assess the individual's mental state.
Burden of Proof. The burden of proving mental
incapacity typically lies with the party seeking to void the
contract. This proof may include medical
records, expert testimony, and evidence of the individual's
behavior at the time of contracting.
Example If an individual with schizophrenia signs a contract
during a psychotic episode, their family or legal
representative may present medical records and expert
testimony to demonstrate that the individual lack the capacity
to understand the contracts. Terms 5.
Legal Guardianship Role of Guardians In cases where an
individual has been legally declared incapacitated, a
guardian or conservator is appointed by the court to manage
their affairs. The guardian has the authority
to enter into or void contracts on behalf of the incapacitated
person. Void Contracts.
If a person who has been declared incapacitated enters
into a contract without the guardians consent, the contract
is typically void, meaning it has no legal effect from the
outset. Example, A person under legal
guardianship due to severe mental illness attempts to sell
their property without the guardians approval.
Such a contract would be considered void and the
transaction would be invalid. 6 Protecting incapacitated
individuals. Legal Protections The law
provides various protections for mentally incapacitated
individuals to prevent exploitation and ensure
fairness. These include the ability to
void unfair contracts and the appointment of guardians to
oversee their interests. Ethical Considerations Beyond
legal protections, ethical considerations play a
significant role in dealings with mentally incapacitated
individuals. Ensuring that they are treated
with dignity and respect is paramount.
Example A company aware of a customer's mental incapacity
offers a complex financial product.
Ethical considerations would require the company to avoid
exploiting the customer's condition and ensure full
understanding and voluntary agreement.
Summary of Mental Incapacity Mental incapacity effects an
individual's ability to enter into binding contracts.
Contracts made by mentally incapacitated persons are
generally voidable, providing protection against exploitation
and unfair agreements. However, contracts for
necessities are enforceable to ensure access to essential goods
and services during lucid intervals.
Individuals may enter into valid contracts if they possess the
necessary mental capacity at that time.
The law offers mechanisms such as guardianship and the ability
to void contracts to safeguard the interests of those with
mental incapacities. Understanding these principles
helps ensure fair treatment and legal protection for vulnerable
individuals. Intoxication contracts entered
into by individuals under the influence of drugs or alcohol
can be voidable if it is proven that the intoxicated party was
unable to understand the nature and consequences of the
contract. However, the burden of proof
lies on the intoxicated party to show their incapacity at the
time of entering into the contract.
Key Points One Voidability definition A contract entered
into by an intoxicated person can be voided if it can be shown
that the intoxication prevented them from understanding the
terms and consequences of the agreement.
This principle protects individuals who were not in a
position to make rational decisions due to their impaired
state. Proof of incapacity.
The intoxicated party must provide evidence that their
level of intoxication was severe enough to impair their ability
to understand the contract. This may include witness
testimonies, medical evidence, or other relevant documentation.
Timing Avoidance. The contract can be voided upon
the individual regaining sobriety.
The intoxicated party must act promptly to disaffirm the
contract once they are no longer under the influence.
Example. A person heavily intoxicated at
a party signs a contract to sell their car for a fraction of its
value. The next day, they realize what
they have done and may seek to void the contract if they can
prove that their level of intoxication prevented them from
understanding the nature and terms of the agreement. 2
Ratification Definition Ratification occurs when the
intoxicated party, upon regaining sobriety, acts in a
way that affirms the contract. This can include making
payments, delivering goods, or any other actions that indicate
an intention to be bound by the contract.
Binding Effect Once the contract is ratified, it becomes fully
enforceable and the intoxicated party loses the right to void
it. Ratification can be explicit
through a clear statement or implicit through conduct that
aligns with fulfilling the contract's terms.
Example If the intoxicated individual, after sobering up,
begins to make payments as required by the contract or take
steps to deliver goods, these actions indicate ratification.
By continuing to perform the contract's terms, the individual
demonstrates acceptance of the contract, making it binding. 3
Determining Intoxication Legal Standard The standard for
determining whether a person was too intoxicated to understand
the contract is whether they could comprehend the nature and
consequences of the transaction. This is evaluated on a case by
case basis considering the specific circumstances and the
individual's condition at the time of contracting.
Burden of proof The burden of proving incapacity due to
intoxication rests with the party seeking to void the
contract. This involves showing that their
mental faculties were sufficiently impaired to prevent
understanding. Example In a court case, the
intoxicated party might present evidence such as witness
statements describing their behavior, physical appearance,
and actions at the time of signing the contract, alongside
medical records or expert testimony about the effects of
the substances consumed. 4 Impact on Contractual
obligations Protection for Intoxicated Individuals The law
aims to protect individuals who are taken advantage of while
intoxicated. Contracts entered into under
such conditions are not automatically void, but are
voidable at the discretion of the intoxicated party.
Providing a safeguard against exploitation.
Responsibility to act Once sobriety is regained, the
individual must act promptly to void the contract.
Delaying action or engaging in behaviors that affirm the
contract may lead to ratification, thereby losing the
option to void the agreement. Illustration of intoxications
impact on contracts scenario At a company party, an employee
becomes heavily intoxicated and in their impaired state agrees
to sell their personal laptop to a Co worker for $50.00 the next
day. Upon realizing the absurdity of
the deal, the employee can seek to void the contract by
providing evidence of their intoxication and incapacity to
understand the transaction. If instead, the employee
delivers the laptop and accepts the $50 after regaining
sobriety, this would constitute ratification, making the
contract binding. Summary of Intoxication in
Contract law Intoxication can significantly impact an
individual's capacity to enter into a binding contract.
If intoxication prevents an individual from understanding
the nature and consequences of the contract, the agreement is
voidable. The intoxicated party has the
right to void the contract upon regaining sobriety, provided
they can prove their incapacity. However, if the individual
ratifies the contract by continuing to perform its terms
after sobering up, the contract becomes binding.
Understanding these principles ensures that contractual
agreements are fair and that individuals are not exploited
due to temporary impairments in their judgment.
Legality of contracts For a contract to be enforceable, its
purpose and terms must be legal and not against public policy.
A contract with illegal objectives or that contravenes
statutory requirements or public policy is void and
unenforceable. Contracts contrary to statute.
Contracts that violate statutory law are considered void.
These contracts are unenforceable because they
involve actions or terms that are prohibited by law.
Such contracts can involve illegal activities, failure to
comply with licensing requirements, or charging
interest rates that exceed statutory limits.
Understanding the nuances of contracts contrary to statute is
essential for ensuring that agreements are legally valid and
enforceable. Key points One Illegal
activities definition Contracts involving illegal activities are
void because they involve actions that are prohibited by
law. These contracts are
unenforceable in court and provide no legal recourse for
the parties involved. Impact The law will not support
or enforce agreements that involve illegal acts as this
would undermine the legal system and public policy.
Example A contract to sell illicit drugs is void because
the activity itself is illegal. If one party agrees to supply
illegal drugs to another party in exchange for money, the
contract is unenforceable. Neither party can seek legal
enforcement of the contract terms in court.
Two licensing requirements definition.
Certain professions require licenses to ensure that
practitioners meet specific standards of competence and
integrity. Contracts entered into without
the required professional licenses may be void if the
licensing statute is intended to protect the public impact.
Licensing requirements are put in place to protect consumers
and ensure that services are provided by qualified
individuals. Contracts made by unlicensed
practitioners in regulated fields are often void to uphold
these standards. Example A contract for
architectural services by an unlicensed architect is void in
jurisdictions where licensure is required to protect consumers.
If a person hires an unlicensed individual to design a building,
the contract can be declared void because the unlicensed
practice of architecture poses a risk to public safety and fails
to comply with statutory requirements. 3 Usury Laws
Definition Usury laws set maximum allowable interest rates
that can be charged on loans to protect borrowers from
excessively high rates. Contracts that charge interest
rates exceeding these statutory limits are void or subject to
reformation. Impact Usury laws prevent
lenders from exploiting borrowers through exorbitant
interest rates. Contracts that violate these
laws are unenforceable to the extent of the excess interest.
Example, a loan agreement with an interest rate higher than the
legal maximum is unenforceable to the extent of the excess
interest. For instance, if the legal limit
is 10% per annum and the loan agreement specifies a 20%
interest rate, the court may reform the contract to reduce
the interest rate to the legal limit or declare the contract
void. 4 Contracts that violate public policy Definition
Contracts that are against public policy are considered
void because they have harmful effects on society.
This can include agreements that interfere with justice, restrict
personal freedom, or involve immoral conduct.
Impact Public policy aims to maintain societal standards and
moral values. Contracts that contradict these
principles are not supported by the legal system.
Example, a contract that requires one party to commit a
crime or act immorally is void. For instance, a contract to
bribe a public official is void because it undermines the
integrity of public administration and is against
public policy. Illustration of contracts
contrary to statute. Scenario one.
Illegal activities. Sarah agrees to pay Jake $5000
to smuggle contraband across the border.
This contract is void because smuggling contraband is illegal.
If Jake fails to deliver the contraband, Sarah has no legal
recourse to enforce the agreement.
Scenario Two Licensing requirements John hires Emily to
perform electrical work on his house.
Emily does not have an electrician's license, which is
required by state law. The contract is void because
Emily is not licensed and the law aims to protect consumers
from unqualified electricians. Scenario three.
Usually laws a lender offers a borrower a personal loan with an
interest rate of 25%, while the maximum allowable rate by law is
15%. The contract is unenforceable to
the extent of the excess interest.
The court may adjust the interest rate to 15% or declare
the entire loan agreement void, depending on the jurisdictions
approach to usury violations.