LECTURE NOTES

Chapter 12. Capacity and Legality

Chapter Objectives
Define and describe the infancy doctrine.
Identify contracts that may be disaffirmed by minors.
Explain a minor's obligation to pay for necessaries of life.
Define legal insanity and explain how it affects contractual capacity.
Define intoxication and describe how it affects contractual capacity.
Identify illegal contracts that are contrary to statutes.
Identify illegal contracts that violate public policy.
Describe covenants not to compete and identify when they are unlawful.
Define unconscionable contracts and determine when they are unlawful.

Infancy doctrine
A minor or legal infant is a person who has not reached the age of majority, usually age 18. To protect minors, the law recognizes the infancy doctrine, which allows minors to cancel or disaffirm most contracts they have entered into with adults. The public policy is that minors should be protected from the unscrupulous behavior of adults. A minor may disaffirm a contract orally, in writing, or by the minor's conduct.

Contracts that may be disaffirmed by minors

Minor's obligations to pay for necessaries of life
A minor must pay the reasonable value of food, clothing, shelter, medical care, and other items considered necessary to the maintenance of life. In addition, some statutes require a minor to pay for the following:

Legal insanity and contractual capacity
A objective, cognitive understanding test is used to determine legal insanity. Under this test, a person's mental incapacity must render that person incapable of understanding or comprehending the nature of a legal transaction.

Intoxication and contractual capacity
Most states provide that contracts entered into by intoxicated persons are voidable by the intoxicated person. This includes intoxication because of alcohol or drugs. The contract is not voidable by the other party if that party had contractual capacity.

Illegal contracts that are contrary to statutes
Contracts to perform an activity that is prohibited by statute are illegal contracts. Some examples are:

Illegal contracts that violate public policy
Contracts whose objective is considered immoral by society, such as a contract based on sexual favors, are void.
Contracts that restrain trade can be held to be unlawful as against public policy.

Covenants not to compete
An agreement not to compete is an agreement whereby a person agrees not to engage in a specified business or occupation within a designated geographical area for a specified period of time following the sale. The reasonableness of covenants to compete is examined on a case by case basis.

Exculpatory clauses
An exculpatory clause in a contract relieves one (or both) parties to the contract from tort liability for ordinary negligence. They cannot be used in situations involving willful conduct, intentional torts, fraud, recklessness, or gross negligence.

Effect of illegality in contracts
Generally, courts will refuse to enforce or rescind an illegal contract and will leave the parties where it finds them. There are some exceptions:

Unconscionable contracts
Some contracts are so oppressive or manifestly unfair that they are unjust. Such contracts are called unconscionable contracts or contracts of adhesion. The following are the elements of an unconscionable contract:

If a court finds that a contract is unconscionable, it may refuse to enforce the contract, refuse to enforce the unconscionable clause but enforce the remainder of the contract, or limit the applicability of any unconscionable clause so as to avoid an unconscionable result.

Terms:

Internet Links:
Summaries of contract law, including capacity and legality, can be found at:
Bzone: http://www.bzone.co.nz/legal/0,,1925-1288612,00.html
FindLaw: http://profs.lp.findlaw.com/contracts/index.html
Zlawyer: http://www.zlawyer2b.com/Contract-4-brief.html