Definition

1. Definition • 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 14 - 1

2. The Lack of Capacity • 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 14 - 2

3. Minor’s Right to Disaffirm • Right to avoid a contract is disaffirmance • Only the minor may avoid the contract • Example of disaffirmance: • Stroupes v. The Finish Line, Inc. • Court ruled that a minor’s employment contracts, including arbitration agreements, were voidable by the minor • If minor wants to affirm the contract, adult party must perform 14 - 3

4. Details About Disaffirmance • Minors may not avoid contracts if statutory exception exists: • Marriage, educational loans, insurance • Fact that a minor is emancipated (independent from parents) does not give minor capacity to contract 14 - 4

5. Details About Disaffirmance • An exculpatory clause (e.g., liability waiver) signed by a parent does not necessarily waive the minor’s rights • See Creech v. Melnik • Minor’s power to avoid contracts does not end on day he/she reaches the age of majority, but continues for a reasonable period of time afterwards 14 - 5

6. Ratification • 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 14 - 6

7. Duties Upon Disaffirmance • 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 14 - 7

8. Dodson v. Shrader • Facts & Procedural History: • Dodson, age 16, bought a truck from the Shraders • Dodson drove truck until engine ruined • Dodson contacted Shraders to obtain full refund, which they refused to make • Dodson filed suit • Shraders argued for difference between present value of truck ($500) and purchase price ($4900) • Trial court found for Dodson and full refund 14 - 8

9. Dodson v. Shrader • Issue & Ruling: • Must Dodson make restitution? • Purpose of “infancy doctrine” is protect minors from their own lack of judgment • Should not work hardship on innocent merchant • “Benefit Rule” holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise • Reversed and remanded in favor of the Shraders 14 - 9

10. Duties Upon Disaffirmance • Disaffirming minors are required to pay reasonable value for necessities (required for survival) furnished to them • Underlying theory is quasi-contractual • Example: Young v. Weaver • Was the apartment really a necessity for Young? 14 - 10

11. Capacity & Mental Impairment • 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? 14 - 11

12. Right to Disaffirm or Ratify • 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 14 - 12

13. Contracts of Intoxicated Persons • 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! 14 - 13