Chapter Eight | Contractual Capacity

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Contractual capacity is the third element of a valid contract. A contract entered into by a party who lacks the requisite capacity may be either void or voidable. If one of the parties to a contract has been adjudged incompetent or insane by a court after a competency hearing, that contract will nor­mally be judged “void” by the court. In other cases, a party may allege and will have to prove that he or she lacked the ability to enter into a contract for one or more of the following reasons: the con­tract was entered into under the influence of drugs or alco­hol; mental incompetence (perhaps the onset of senility or Alzheim­er’s disease); mental retardation; intoxication; the side effects of medication; temporary delirium deriving from physical injuries sustained in an accident; extreme confusion; etc.
Generally, unless there has been an adjudication of incompetency, contractual capacity is a question of fact for a jury, rather than a question of law to be decided by a judge. In order to set aside a contract on grounds of lack of capacity, it is necessary to show that a party did not “understand the nature or consequences of the transaction” or that “by reason of mental illness or defect… [a party] is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition.”  Thus, upon such a showing, a party may exercise its option to disaffirm or remove him or herself from a contract. The contract is voidable.
One major topic of in the discussion of contractual capacity is a contract entered into by a party considered by the legal system to be a minor or an “infant.”

Minor’s Contracts

Some preliminary considerations are in order. A minor is any person who has not yet attained the required “age of majority” as determined by a given state. This age (usually 18, but in some states the age may still be 21) may or may not be the same age as is the age for voting, getting married, or purchasing or consuming alcoholic beverages. Each state by statute determines its own “age of majority” for entering into a contract.
The word “minor” may be synonymous legally with the word “in­fant.”  In some states, if a minor becomes emancipated (that is, the minor is considered to be “on his own”) that minor will be treated legally as an adult for the purposes of entering into a contract. Minors who might be considered emancipated are those who are married, who are serving in the armed forces, who make signifi­cant incomes (i.e., child stars, like Gary Coleman or Shirley Temple), or who live on their own. Unless adjudicated by a court, emancipation is likewise a question of fact for a jury.
An adult who enters into a contract with a minor has no right to terminate the contract. Only the minor enjoys the right to disaffirm the contract. If both parties to a contract are minors, then each of the minor parties will have the right to disaffirm the contract.
A contract entered into by a minor is thus an example of a voidable contract.

Three Rules of Minor’s Contracts

There are three rules that generally apply to minors’ contracts: the Majority Rule; the New York Rule; and the Third Rule.

Majority Rule

Under the majority rule, still applicable to more than two-thirds of the states, a minor may, at any time prior to reach­ing his/her age of majority, and for a reasonable time thereafter (usually no more than 30 days), disaffirm a contract, return the consideration in his/her possession or under his/her custody control at the time of disaffirmance in whatever form it is currently in, and receive back his/her full consideration. The majority rule provides maximum protection to a minor who has entered into a contract during the period of his or her minority.

New York Rule

Under the New York rule, a minor may disaffirm the contract, but is responsible in either quasi-contract or under a theory of restitution for the deprecia­tion, wear and tear, damage, fair use, or reasonable rental value of the items under his/her care, custody, or control pursuant to the contract. This approach seeks to balance the rights of both parties to the contract.

Third Rule

Under the “third rule,” a minor may only disaffirm a contract if he/she can return the consider­ation in its exact original form. The third rule will normally apply to so-called “lay away” contracts, where goods remain with the seller until they have been fully paid for.
In all cases, no particular form of language or conduct is required to effectuate a disaffirmance as long as the minor makes his or her intention clear.
Read the following case, Harvey v. Hadfield, carefully. Note especially the reasoning cited behind the minors’ contract rules discussed in this case. How do you know which rule a given state will apply to a contract entered into by a minor?
Case Summary

Harvey v. Hadfield

372 P.2d 985 (Utah, 1962)
Plaintiff, a minor, sues by his guardian ad litem to recover $1000 he had advanced under a proposed contract to buy a house trailer. He appeals from an adverse judgment.
Plaintiff, a student attending college turned 19 on October 13, 1959. A few days after his birthday, he quit school and got a job. In the latter part of October, he went to the defendant’s lot and selected a trailer he liked. He told the defendant of the above facts, of his plans to be married and of his desire to buy the trailer. The defendant advised him that he would have to get his father’s signature to get financing through the defen­dant.
Plaintiff responded that he thought he could arrange financing and that he could arrange to raise a thousand dollars as a down payment. He paid $500 on November 13 after having paid $500 on November 6, 1959 and applied to the bank for financing. The bank refused to accept his application for a loan because of his minority and because his father would not sign with him.
After the plaintiff’s plans failed to materialize, he asked the defendant to return his money. Defendant refused but finally did agree to a statement which the plaintiff typed up and which both signed. It released the trailer in question for sale and granted plaintiff $1000 (plus interest) credit on a trailer of his choice next Spring. About February 1, 1960, plaintiff’s attorney sent a letter to the defendant disaffirming the contract and demanding the return of his money. Upon refusal, this suit was com­menced.
Since time immemorial, Courts have quite generally recognized the justice and propriety of refusing to grant enforcement to contracts against minors except for necessities. It is fair to assume that because of their immaturity, they may lack the judgment, experience and will power which they should have to bind themselves to what may turn out to be burdensome and long lasting obligations. Consequently, courts are properly solici­tous of their rights and afford them protection from being taken advantage of by designing persons, and from their own imprudent acts, by allowing them to disaffirm contracts entered into during minority which upon more mature reflection, they conclude are undesirable. *  *  *
Accordingly, adults dealing with minors must be deemed to do so in an awareness of the privilege the law affords the minor of disaffirming his contracts. *  *  *
*  *  * A minor is bound not only for the reasonable value of necessaries but also for his contracts, unless he disaffirms them before or within a reasonable time after he attains his majority and restores to the other party all money or property received by him by virtue of said contracts and remaining in his control at any time after attaining majority.
Defendant advances the following proposition. *  *  * That even if the contract is disaffirmed, he is entitled to an offset of the actual damages he has sustained from the loss of sale of the trailer from the $1000.
Defendant urges that from the fact that plaintiff was “on his own,” working and contemplating marriage, he could reasonably regard him as “engaged in business as an adult” and that he was therefore capable of entering into a binding contract.
The defendant’s position is not sound. *  *  *
Our statute cannot be construed to support the defendant’s contention that the disaffirming party must compensate him for damages he may have incurred.
The code only requires that the minor restore “to the other party all money or property received by him by virtue of said contracts and remaining within his control at any time after attaining his majority.”  The trailer was left in the possession of the defendant. That fulfills the requirement of the statute.
The plaintiff minor having disaffirmed the contract is entitled to the return of his money.
REVERSED.

The Necessaries Doctrine

It is now well settled that a minor is liable for the reasonable value of necessaries furnished him or her under the theory of quasi-contract. While there is no one universally accepted definition, necessaries generally include those items furnished to a minor for his/her “life, health, or safety.”  A list of necessaries (often termed as “necessities” under the common law) might include such items as food, clothing, shelter, medical, and educational expenses.
Two special aspects of the necessaries doctrine must be considered. First, there has been a tendency by courts to expand the category of items that would be considered as necessaries (i.e., items such as life or health insurance, automobiles, sporting goods, audio equipment, a college loan; etc., may be considered as necessaries if these items are used in connection with one of the traditional categories). Second, a court will often look to the value or price of the item in question and the station or status in life of the minor to determine if a contract is for necessaries. Thus, a $25 cloth coat may be a necessary item for all minors; but a $5,000 mink jacket is only likely to be a necessity for someone of unusual means.
Finally, most courts will apply the New York rule to contracts where the minor has been furnished a personal service (i.e., dance or karate lessons; babysitting jobs; employment assistance), on the theory that the minor cannot return the service already rendered to him or her.

Ratification

Ratification is an act or an expression in words by which a minor, after having reached his or her age of majority, indicates an intention to be bound by the contract entered into during minority. An effective ratification cannot take place prior to the attainment of majority.
Ratification may be express, that is, a minor may give actual notice that he or she will be bound to the contract. The notice may come in the form of a letter, a telegram, or a phone call.
Ratification may also be implied from conduct, such as making a payment on account after reaching the age of majority, or retaining or continuing to use property after attaining majority.
Ratification might also result from a minor literally doing nothing after reaching his/her age of majority, although courts remain divided on the issue of silence and its effect on the issue of ratification.

A Minor’s Misrepresentation of Age

Suppose a minor is asked about his/her age. The minor lies (also known as making a misrepresentation) and states that he/she is over the age of majority and is no longer a minor.
According to the majority rule, a minor may still disaffirm the contract, even though he/she has misrepresented his/her age. There are several other rules or variations of the rule that individual jurisdictions may follow. These include:
If a minor misrepresents his or her age, he/she may not disaffirm. Period. This represents the extreme view on the matter and seeks to punish a minor for their misrepresentation.
If a minor misrepresents, he/she will be prohibited (estopped) from using minority as a defense. This view affords practically no protection at all to the minor who has misrepresented his or her age, unless he/she can return the con­sideration “as delivered,” in its exact original form.
Some courts will permit a minor who has misrepresented his/her age to disaffirm, but will then allow the minor to be sued in tort for fraud, resulting in an effective “set-off” of any amount of disaffirmance.
As was noted before, it is important to determine the views of an individual jurisdiction on these matters.

Ethical Considerations

Disaffirmance By A Minor

Larry Derry, who is 16, purchases a car from Cruiser Motors. Larry one night is invited to a party where is has a bit too much to drink. On the way home, he cracks up the car. It is now worthless. Larry now attempts to get his money back, claiming minority as a defense. Should courts continue to protect minors from the consequences of their conduct by relying on common law rules relating to disaffirmance of contracts?

Disaffirmance By Adults

Should the “other party” to a contract (not the minor) be afforded the same opportunity to disaffirm a contract as now possessed by the minor? Under what circumstances?

Entertainment And Sports

Do “minors” who work in show business or sports deserve more protection than others relating to contracts they might enter into?

 

Questions

  1. How can you determine an individual state’s view of necessaries and of the principle of ratification?
Harvey v. Hadfield
  1. What is a guardian ad litem?  When might one be used?
  2. Why do courts refuse to grant enforcement to minors’ contracts?
  3. What happens if an adult claims that he did not know a party was a minor?
  4. When and under what circumstances is a minor liable for a contract?
  5. What rule did the defendant propose?  Was it accepted by the courts?
  6. Why did the defendant urge that the court adopt the view that the plaintiff was “on his own?”
  7. What does it mean to be emancipated?

 

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