Capacity to Contract

							                                                                             Professor Hazel Glenn Beh
                                                                                           Contracts II
                                          Capacity to Contract
Infants (Minors) Why protect them (or patronize them)? “He who deals with a minor does it at his
own peril and with the attendant risk that the minor may at his election disaffirm the transaction
because of his minority.” Keser v. Chagnon, 410 P.2d 637 (Colo. 1966). Minors and married women
were sometimes regarded as “favorites” because of the protection of incapacity. Do you agree that it
is favored position? (Married women were given the right to contract largely by state statutes
(Married Women’s Acts) in the 1800s). During the years of slavery, they too were denied the capacity
to contract.
What is an infant? At common law, a person was an infant until the age of 21. After the voting age
changed to 18, virtually all states changed the age of majority to 18 as well. (per Restatement of
Contracts (Second) § 14: Alabama, Nebraska and Wyoming are 19; Mississippi is 21). Query: Does
it matter if the infant is mature and intelligent? Should we have a blanket rule?
What is the legal effect on the contract? The contract is “voidable” by the minor. The contract is
not voidable by the other party. Query: What can an adult do if he or she finds out that the other
contracting party lied about his or her age? Perhaps sue for rescission for fraud.
What can a minor do if he or she improvidently entered a contract? The minor may disaffirm the
contract before or after reaching majority. In real estate, however, many states hold that a minor may
only disaffirm the contract after reaching majority; presumably on the theory that the same infirmity
that made the contract voidable should make the disaffirmance voidable as well. The minor must
disaffirm the entire contract, not merely the burdensome parts.
How long does the power to disaffirm last after reaching majority? A reasonable time, but this
will vary depending on the circumstances. If the minor possesses benefits under the contract, he or
she must be prompt in disaffirming the contract. If the contract is still executory, there is less need for
a strict demand for promptness. Many courts also consider the effect on the adult caused by the
infant’s delays.
Can the infant ratify the contract upon reaching majority? A minor cannot ratify a contract, but a
former minor can. After attaining majority, a minor ratifies the contract by promising to perform, or
ratification may be implied by conduct. When a minor reaches majority and retains the benefits of the
contract or acquiesces for a considerable length of time the minor ratifies the contract.
How does the court fairly sort out the benefits and burdens of contracts that have been partly or
fully performed? A minor who is sued on a contract (Minor as Defendant) and asserts incapacity as a
defense must, at least, return what remains of the benefits he or she obtained under the contract in
order to get out of the remainder of the contract. If the minor received services (so that there is
nothing to return) or goods that were dissipated, generally the minor is not accountable for the
difference between the value that remains and the original value. A minority rule requires minors to
provide restitution based on the reasonable value of the goods or services received.
Can the minor use incapacity as a “sword” by seeking to have money paid returned to him or
her? A minor can use incapacity as a shield or defense (to avoid paying) or as a sword in order to
recover payments made already. However, generally, courts are less generous to minors using their
incapacity as a sword. This usually comes up when the minor tries to demand cash they have paid for
something back, as in Dodson v. Shrader. When a minor who has paid cash and received the goods
sues to recover payments, then courts often hold that he or she must return the consideration received
and in addition, allow the seller to reduce the money returned by the value of the benefit that the minor
has received or the depreciation in the value of the property. On the other hand, if the minor has been
extended credit, the minor can disaffirm the remaining debt and merely return the goods in his or her
possession. Is there any justification for this distinction? Perhaps it has to do with risk allocation. A
person extending credit risks not getting paid for a variety of reasons. Sellers demanding cash assume
less risk because they got paid up-front.
What about minors who misrepresent their age? Courts are divided on this. One approach is to
hold that the misrepresentation makes no difference. One approach is to hold that a misrepresentation
is a tort and since minors are liable for torts, the aggrieved party is entitled to restitution in full when
the contract is avoided. One approach says that a minor misrepresenting his or her age is estopped
from using minority as a defense. If an adult discovers the minor misrepresented his or her age, the
adult may avoid the contract on the grounds of fraud.
What about emancipated and married minors? Some states, by statute, provide that emancipation
(or emancipation by marriage) removes incapacity altogether. Others do not, perhaps concluding that
minors who marry have displayed immaturity by virtue of that conduct!
Are there any exceptions? A minor will be liable in quasi contract for the reasonable value of
“necessaries.” The rationale is that this exception exists for the infants own good. If an infant can
avoid paying for necessaries, adults won’t deal with them.
What are necessaries? It depends on the circumstances, including the social position and situation of
the infant. At the least, it includes food, clothing, and shelter. Courts have also included medical care
and a minor’s necessary legal services. Educational expenses vary in outcome, with modern cases
being broader. Loans to procure necessaries are also necessaries.
What about contracts made by parents that are beneficial for children? Generally, parents are
required to provide for their children. Parents have capacity to contract and are liable for their
contracts. When a parent makes a contract that benefits a child, the parent is liable, not the child.
Exception: On public policy grounds, many courts hold that a parent (or a child) cannot execute a
prospective release for negligence. All those permission slips your parents signed to allow you to go
on field trips that also released the sponsor from liability are ineffective in a majority of states! Which
reasoning appeals to you?
        A clear majority of courts treating the issue have held that a parent may not release a minor's
        prospective claim for negligence. [citations omitted]. The rationale employed by these courts
        is aptly summarized in the Washington Supreme Court[:] "Courts often hold that in a
        postinjury setting a parent's signature on a release is ineffective to bar a minor's claims against
        a negligent party." [citation omitted]; see also 59 Am.Jur.2d, Parent and Child § 40, at 183
        (1987) (noting that, absent court appointment, parents have no authority to release or
        compromise claims or causes of action belonging to minors). Based on this premise, …
        "[s]ince a parent generally may not release a child's cause of action after injury, it makes little,
        if any, sense to conclude a parent has authority to release a child's cause of action prior to an
        injury." [citation omitted].
        Having thus agreed … that a parent may not unilaterally release a child's claims after a child's
        injury, we also agree … that a parent does not have the authority to release a child's claims
        before an injury. [W]e see little reason to base the validity of a parent's contractual release of a
        minor's claim on the timing of an injury. Indeed, the law generally treats preinjury releases or
        indemnity provisions with greater suspicion than postinjury releases. An exculpatory clause
        that relieves a party from future liability may remove an important incentive to act with
        reasonable care. These clauses are also routinely imposed in a unilateral manner without any
        genuine bargaining or opportunity to pay a fee for insurance. The party demanding adherence
        to an exculpatory clause simply evades the necessity of liability coverage and then shifts the
        full burden of risk of harm to the other party. Compromise of an existing claim, however,
        relates to negligence that has already taken place and is subject to measurable damages. Such
        releases involve actual negotiations concerning ascertained rights and liabilities. Thus, if
        anything, the policies relating to restrictions on a parent's right to compromise an existing
        claim apply with even greater force in the preinjury, exculpatory clause scenario. Hawkins v.
        Peart, 2001 WL 1326999 (release and parental indemnity signed by parent in favor of stables
        is void as against public policy).
        Or:
        The public as a whole receives the benefit of such waivers so that groups such as Boy and Girl
        Scouts, Little League, and parent-teacher associations are able to continue without the risks
        and sometimes overwhelming costs of litigation. Thousands of children benefit from the
        availability of recreational and sports activities. Those options are steadily decreasing--victims
        of decreasing financial and tax support for other than the bare essentials of an education.
        Every learning experience involves risk. In this instance Hohe agreed to shoulder the risk. No
        public policy forbids the shifting of that burden. Hohe v. San Diego Unified School District,
        274 Cal. Rptr 647 (Cal. App. 1990) (parent’s release of liability and permission for child to
        participate in magic and hypnotism show was valid).
Client Counseling: Problem 8-1. What questions do you have for your client and the minor?
                                           Mental Incapacity
What constitutes mental incapacity? The Restatement (Second) recognizes two different tests for
incapacity.
One is a “cognitive” test, asks whether the party understood the nature and consequences of the
transaction.
The second approach, the “volitional test,” considers whether the impaired party could control his
actions, whether “he is unable to act in a reasonable manner in relations to the transaction and the
other party has reason to know of his condition.” This test requires 1) inability to act in a reasonable
manner; 2) the other party knows of the mental condition; and 3) the transaction is not one a
reasonable person would make.
Query: Which test did the Hauer court use?
Query: If a client reported that he suffered from a bipolar condition and that in an acute manic phase,
he went on a spending spree, which involved exorbitant purchases uncharacteristic of him, which test
would you argue on his behalf for a court to adopt? See Fingerhut v. Kralyn Enterprises, Inc., 337
N.Y.S.2d 394 (N.Y. Super. 1971); Faber v. Sweet Style Mfg. Corp., 242 N.Y.S.2d 763 (N.Y. Super.
1963).
What diseases and medical conditions may result in incapacity? A wide variety of conditions such
as mental retardation, brain injuries, organic brain disease such as dementia, mental illnesses including
depression or psychoses may result in incapacity. But merely having such a condition does not
necessarily mean one is incapacitated.
What is the effect on the contract? The contract is voidable. It may be ratified or disaffirmed by the
incompetent when he or she regains full capacity.
What distinctions in the law are there between infants and incompetents? While a minor can
avoid a contract even if he or she cannot restore the property, a mental incompetent owes more
restitution generally. Farnsworth explains that while the “minor is ordinarily only for the benefits that
remain in the minor’s hands[,] the mental incompetent is generally required, as a condition of relief, to
make restitution in full to the extent of any benefit received.” This is so, even if the benefit cannot be
returned. If the other party has acted unfairly, the court can exercise discretion and not demand full
restitution. Farnsworth, Contracts (3d ed. 1999) § 4.8, at 240.
What about drinking and substance abuse? As you probably already saw in criminal law, the law
does not generally protect voluntary drunks. A contract is voidable when an intoxicated party cannot
understand the nature and consequences of the transaction and the other party is aware of the
intoxication. Compulsive and chronic intoxication and abuse may constitute a mental illness. Also, be
wary of the sober party who takes advantage of a vulnerable drunk. Consider fraud and undue
influence as defenses.
Client Counseling:

                     Oregon auto dealer agrees to pay fines in Alzheimer's case
                                                          By CHRISTY KARRAS, Associated Press
                                                               Published Sunday, August 19th, 2001
PORTLAND, Ore. (AP) - The family of a man with Alzheimer's who was sold seven cars in one
month said they would drop their lawsuit after the auto dealer agreed to pay $120,000 in fines and
restitution.
In an agreement with the attorney general's office, Hillsboro Chrysler Plymouth Jeep Warehouse
agreed to reverse the sales and pay $90,879 to James D. Rickards, 78, who bought the cars in February
and March 2000.
The dealer also paid the Department of Justice $31,000, most of which will go into a consumer
protection fund.
"Families dealing with aging parents have enough challenges without having unscrupulous sales
people prey on their loved ones," Attorney General Hardy Myers said.
Rickards' family agreed to drop a lawsuit. Attorney John Shadden, who now handles Rickards'
financial affairs, said he was satisfied with the deal.
The agreement stops short of saying the dealership violated the law.
Dealership manager Kevin Chimienti said his salespeople not only didn't break the law but didn't
know the victim had bought that many cars.
"We weren't aware we had sold him seven cars. He dealt with different people," Chimienti said.
Rickards, who has no driver's license, traded in two of his own vehicles and bought sports cars and
sport-utility vehicles totaling $244,708.
"This would be hard to explain even for a non-Alzheimer's customer," Myers' spokeswoman Jan
Margosian said. "In every case, he paid more for the car than it was worth."