assignment worksheet 12 3 contractual capacity

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Chapter 8 – Capacity

Learning Objectives

After studying this chapter, you should be able to:

• Explain the element of contractual capacity.
• Identify when a contract is voidable or void due to lack of capacity.
• Apply the sword and shield doctrine.

8.1 General Perspectives on Capacity

Contractual capacity refers to the legal ability of an individual or entity to enter into a binding contract and be held legally responsible for their actions and obligations under that contract. It is an important principle in contract law as it ensures that contracts are entered into voluntarily and that all parties involved are capable of understanding and fulfilling their contractual obligations. Capacity is necessary for a legally binding contract.

Most people who enter contracts have capacity. Because of that, and to avoid having to prove one’s capacity every single time they wish to enter a contract, capacity is presumed unless there is something about the person or the transaction that calls capacity into question. In instances where capacity is questioned, it is possible to have either limited capacity (also called limited competency ) , or be incapable of contracting at all due to a lack of capacity, or incompetency .

The rule of contractual capacity is important because it helps to protect individuals who may be vulnerable or not fully capable of making informed decisions. M inors , people with mental disabilities, and individuals who are under the influence of drugs or alcohol may not have the capacity to fully understand the terms of a contract or the consequences of entering into it. By requiring that parties have the legal capacity to enter into a contract , the law seeks to prevent unfair contracts where one party may take advantage of the other party’s lack of understanding of the legal consequences of an agreement. Further, requiring capacity to enter a contract helps to ensure that the terms of the contract are understood and agreed upon by both parties. Since a contract is a meeting of the minds, i f someone lacks mental capacity to understand what they are agreeing to , i t is unreasonable to hold that person to the consequences of the contract . At common law there are various classes of people who are presumed to lack the requisite capacity to fully understand the consequences of a contract . These include infants ( minors ), the mentally ill, and the intoxicated. This Chapter will review each of these in turn.

8.2 Minors (or “Infants”)

The general rule.

Minors – persons younger than eighteen years of age in most states – may only enter into voidable contracts . This is because minors do not have full legal capacity to enter into contracts. Minors can enter into most contracts, but they can avoid their contracts, up to and within a reasonable time after reaching majority, while the other contracting party with full contractual capacity cannot. The idea is that minors do not stand on an equal footing with adults, and it is unfair to require them to abide by contracts made when they have immature judgment.

For example, suppose a 16-year-old enters into a contract to purchase a new phone from a mobile phone company. Since the 16-year-old is a minor and not yet legally capable of entering into a contract, the contract is voidable. This means that the 16-year-old has the option to either affirm the contract or void it. If the 16-year-old decides to go ahead with the purchase, the contract will be binding on the mobile phone company. However, if the 16-year-old chooses to avoid the contract, they will be released from any obligations or liabilities that may have arisen from the contract, and they will be entitled to a refund if they have already made any payments. This is called disaffirming a contract. To disaffirm a contract means to repudiate or reject a contract that has been previously entered into.

Most people will recognize the 16-year-old in the above example as a minor . But legal term infant is also used to describe the 16-year-old contracting party above. The words minor and infant are mostly synonymous, but there are some differences between the terms. Historically speaking, in a state where the legal age to drink alcohol is twenty-one, a twenty-year-old would be a minor, but not an infant, because infancy is under eighteen. A seventeen-year-old may avoid contracts (usually), but an eighteen-year-old, while legally bound to his contracts, cannot legally drink alcohol. This is why some states use the term infant for one who may avoid his contracts even though, of course, in everyday terms we think of an infant as a baby.

In nearly all U.S. states, an 18-year-old may assent to a binding contract, but there may still be some exceptions associated with age. For those under twenty-one, there may also be legal impediments to holding certain kinds of jobs, and agreeing to certain kinds of contracts, marrying, leaving home, and drinking alcohol. There is no uniform set of rules since each state can make their own laws in these areas. Because of these ambiguities, contracting adults like landlords or creditors may still require parents to co-sign contracts for a young adult over the age of 18. This is lawful, but is often unnecessary.

The exact day of “majority” – the day on which the limitations on contracting as a minor or infant vanish – can also vary. The old common-law rule put it on the day before the twenty-first birthday. Many states have changed this rule so that majority commences on the day of the eighteenth birthday. For the most part, the remainder of this Chapter will use the word minor to describe a contracting party under the age of 18. This is consistent with the law in New Jersey, where by statute an individual under the age of 18 is defined as an infant, and therefore lacks the legal capacity to contract.

Even though a minor lacks the legal capacity to contract, the minor’s contract is not automatically invalid. Instead, the minor has the right to choose to either affirm the contract or void it which makes the minor’s contract voidable. This means that despite having limited competence minors can enter contracts, but most of those contracts can be avoided, or disaffirmed, without any reason for doing so other than the party is a minor. If a lawsuit about the contract was filed, the minor would claim the defense of infancy, and this defense would be sufficient unless there are other reasons why the contract could not be disaffirmed. Should the adult wish to get out of the contract, they cannot make the same claim. The adult cannot seek to disaffirm the contract; only the minor can.

When a minor disaffirms a contract, the minor has the legal right of a minor to walk away from a contract and be released from any obligations or liabilities arising from it. In addition, the minor is restored to their original position, meaning that they would be entitled to the return of any consideration, without the responsibility of being liable for damages under the contract. A minor need only return whatever part of the consideration in the contract that they still have. So, if the 16-year-old in our example above opts to disaffirm their purchase of the new phone one month after entering the contract, the minor may disaffirm. The minor would be entitled to the return of any down payment or other fees paid for the phone. The minor will return the phone but would not be liable for any damage done to the phone while it was in the minor’s possession, even if the phone was broken. This is called the general rule of law pertaining to contracts entered into by minors. This means that the majority of states, but not all, follow this rule.

Exceptions to the Minor’s Right to Disaffirm

There are several exceptions and limitations to the minor’s right to disaffirm. These are discussed below.

Duty to Return Consideration Received

As we explored under the general rule, when a minor disaffirms a contract their own obligation would be to return an item of consideration if that item is still in the minor’s possession. For instance, the minor would have to return the untouched groceries in a contract with a grocery store. Under the general rule, if some of the groceries were already eaten, there would be nothing to return and thus the minor would not be liable for the value of the groceries that were consumed. Some courts, however, have required more from the minor when necessary to avoid injustice to the adult. Suppose that our 16-year-old minor that purchased the cell phone decided to disaffirm their purchase after dropping and breaking the phone. There are some courts that would limit what the minor could receive in disaffirming the contract. For example, a c ourt could determine that the minor should not receive full value back for the phone , but instead receive only that value associated with the (wrecked) phone at the time of the disaffirmance. Since this is contrary to the general rule, it is called the “ minority rule ” of law, where minority here means that less than half of the states follow this rule. On this area of law, New Jersey is in the minority, typically requiring that a minor return all of the consideration (or the value of that consideration) that was received in order to disaffirm .

Necess aries

A necessary is a basic need of life such as food, clothing, shelter and basic medical services. This has historically been the definition at common law. In recent years, however, the courts have expanded the concept so that in many states today, necessities include property and services that will enable a person to earn a living and to provide for those dependent on them.

When a contract with a minor is for an item that is a necessary, an exception to the general rule that minors can disaffirm their contracts is that minors are generally liable for the reasonable cost of necessities. The reason behind this change from the general rule that minors may disaffirm without further obligation is that denying minors a full right of contract for necessaries would actually harm minors, not protect them. The minor will not be obligated to perform the contract so technically the minor can still disaffirm. However, the minor will be responsible to the other party for the reasonable value of the contracted necessary. For example, suppose a minor enters into a contract with a grocery store to purchase food items where the food qualifies as a necessary. If the minor later disaffirms the contract, they will not be liable for the contract price of the food items if they have not been consumed or used by the minor. Those items can be returned, which is required under the general rule. However, if the minor has already consumed or used the food items, and those food items are necessaries, the minor is responsible for the reasonable cost of the food items. The requirement that the minor be liable for the reasonable value of the necessary is rooted in the theory of quasi contract , which was explored in an earlier Chapter.

So, how does this rule protect minors? Since the rule provides protection to the seller of the necessary, in this case the food, that seller will want to sell to minors that need food for nourishment, because the seller does not risk the harsh consequences of the general rule.

Nonvoidable Contracts

There are some contracts that are considered nonvoidable . The contracts that are nonvoidable can vary by state, and can include contracts such as insurance, education or medical care, bonding agreements, stocks, or bank accounts , and child support agreements. The rationale behind making these contract nonvoidable is this: if a contract is voidable it is a disincentive to an adult party to contract with a minor (or other party that lacks capacity) since there is a risk that the minor will disaffirm the contract in the future. Many sellers simply will not take that risk and instead refuse to contract with minors completely. There are certain types of contracts, though, that we want to be available to minors and so making those contracts nonvoidable encourages these types of contracts with minors. For example, it is beneficial both to a minor and to society that the minor receive an education. Education can be expensive, and so to help assure that education loans are available to minors, the right of the minor to disaffirm that loan in the future is limited or eliminated.

Misrepresentation of Age

A minor that misrepresents their age in order to enter a contract may be limited in their ability to later disaffirm that contract. Typically, an adult that simply thought that the minor was over the age of 18 could not raise that as a defense to the minor’s attempt to disaffirm the contract. This is true even if the adult’s belief that the minor was older was reasonable. Importantly, the minor must affirmatively misrepresent their age. Even so, this limitation on disaffirmance will depend on the state. A Michigan statute, for instance, prohibits an infant from disaffirming if he has signed a “separate instrument containing only the statement of age, date of signing and the signature.” And some states estop him from claiming to be an infant even if he less expressly falsely represented himself as an adult. Estoppel is a refusal by the courts on equitable grounds to allow a person to escape liability on an otherwise valid defense; unless the infant can return the consideration, the contract will be enforced. It is a question of fact how far a non-express (an implied) misrepresentation will be allowed to go before it is considered so clearly misleading as to stray into the prohibited area. Some states hold the infant liable for damages for the tort of misrepresentation, but others do not. As William Prosser, the noted torts scholar, said of cases paying no attention to an infant’s lying about his age, “The effect of the decisions refusing to recognize tort liability for misrepresentation is to create a privileged class of liars who are a great trouble to the business world.”

Tort Connected with a Contract

Although the lack of contractual capacity can protect a minor from a contract by permitting the minor to disaffirm, this same rule does not extend to other areas of the law. Recall that minors can be liable for their torts (e.g., assault, trespass, nuisance, negligence) . So, if there is also a tort claim connected with a contract involving a minor, the minor can be liable for the tort unless the tort suit is only an indirect method of enforcing the contract. For example, Tandy, who is 16, agrees to mow the neighbor’s lawn for $50. The neighbor pays Tandy up front. Tandy can disaffirm this contract because Tandy is a minor. If Tandy doesn’t mow the lawn, the neighbor could not sue for fraud because that would be an indirect attempt to enforce the contract. However, let’s say that while mowing the lawn, Tandy accidentally damages the neighbor’s flower bed with the lawnmower. The neighbor could then sue Tandy for the tort of negligence, which is a civil wrong resulting from a failure to exercise reasonable care.

Ratification

When a minor becomes an adult (i.e., reaches the age of majority when the “disability” that rendered the party of limited contractual capacity has been lifted) there are two options for an existing contract. The party to the contract can disaffirm that contract up to a reasonable period of time after reaching the age of majority, where what is reasonable will depend on the circumstances. Or, the contract can be ratified. Ratification take s place upon accepting or confirming a contract that was originally voidable because a party lacked contractual capacity.

For example, suppose a minor signs a contract to buy a car, but the contract is voidable due to the minor’s age. Once the minor reaches the age of majority, they may ratify the contract, thereby making it legally binding. They may ratify the contract by sending a letter to the seller of the car letting them know they intend to ratify the contract. This is express ratification . Or, they may ratify the contract by doing nothing to disaffirm it while continuing to drive the car. This is implied ratification . Express ratification occurs when a party explicitly confirms or approves the previously voidable contract. Implied ratification, on the other hand, occurs when a party behaves in a manner consistent with accepting a contract, or in a manner inconsistent with disaffirming the contract. Both express and implied ratification have the effect of making the previously voidable contract legally binding.

Activity 8A

You be the Judge

In the case of Hojnowski v. Vans Skate Park , the New Jersey Supreme Court heard a dispute involving the enforceability of a liability waiver signed by a parent on behalf of their minor child. The plaintiffs were the parents of a 12-year-old child who was injured at Vans Skate Park that had signed a n extensive liability waiver and exculpatory clause when enrolling their child in a skateboarding program. This waiver was signed prior to the Plaintiffs having any access to the Skate Park.

While skating at the park on a later date, t he child suffered a broken femur allegedly due to the conduct of a much more aggressive skater , of whose conduct the parents had already complained . Under t he waiver the parents agreed that neither they, nor the child, would hold Vans Skate Park liable in case of an injury. In addition, the parents agreed that if there were a dispute between the parties that it would be submitted to arbitration, and not heard through the court system. The child did not sign the waiver.

Parents sued the Skate Park on their own behalf and for their child, alleging various tort claims, and the Skate Park defended the lawsuit stating that the parental waiver was an agreement between the parties that (1) limited the Skate Park’s liability, and (2) required the arbitration of any disputes between the parties. The case made its way to the New Jersey Supreme Court which ruled in favor of the plaintiffs in part stating that parental waivers of a child’s future claims for injuries in recreational activities are unenforceable. The Court held that parents cannot bind their children to contractual provisions that waive the child’s rights to sue for injuries caused by the negligence of others. The decision in this case established an important precedent in New Jersey, indicating that liability waivers signed by parents on behalf of their minor children in recreational activities are generally unenforceable. However, the Court did find that the agreement to arbitrate claims was enforceable so that the Hojnowskis must use arbitration to pursue their claims.

Question: Would having the child sign the waiver themselves change the outcome of this case? Why or why not?

Question: Even though the Court found that the parental waiver in this case was unenforceable, it still found that the parent could bind the child to use arbitration for the resolution of the dispute. Why do you think these matters were treated differently?

Read about this case on Google Scholar.

8.3 Persons Who Are Mentally Incapacitated

Mental incapacity can result from mental illness, physical illness, or deficiency, and may have the effect of causing full incompetence , limited competence , or have no impact on contractual capacity at all. As an initial determination, the impact of the illness or deficiency on the ability of the party to understand the legal consequences of entering into a contract should be reviewed. A person who has an illness or deficiency that does not impact the ability to understand the legal consequences of a contract would not qualify for mental incapacity, and therefore could enter a valid contract.

When a person is suffering from an illness or deficiency that prevents them from understanding the legal consequences of entering a contract, a contract entered during this time period is voidable due to limited competence. The time period to avoid the contract would be during the contract or when capacity is restored. For this limitation on competency, it is more likely that avoiding a contract will occur once the deficiency is lifted, restoring mental understanding. A disaffirmance may also take place by a  guardian , if a court appoints a guardian and a voidable contract exists at that time of appointment.

When a person that is suffering from an illness or deficiency is adjudicated to be fully incompetent in a court proceeding, any further efforts of that person to enter a contract will result in a void contract . In this situation, a guardian will be appointed to proceed with contracting for the incompetent party in the future.

For example, suppose a seller diagnosed with a mental illness agrees to sell their property to a buyer. Even though the seller has a diagnosis, this contract will be valid unless the mental illness has impacted the seller’s ability to understand the legal consequences of the contract. If the seller, due to their mental illness, cannot understand the legal consequences of the contract, the contract may be considered voidable. The seller would be able to disaffirm the contract. Similarly, the buyer may not be able to enforce the contract and may have to return any money or property received from the seller. If the seller has been adjudicated incompetent in a Court proceeding, the contract would be void. This means that the guardian responsible for making decisions on the seller’s behalf could avoid the contract.

As in the situation with a minor, if the contract was for a necessity, the other party may have a valid claim against the estate of the one who is mentally incapacitated in order to prevent unjust enrichment. In any case, when a contract is disaffirmed, the mentally incapacitated person must return any property in their possession to the other contracting party. I f the contract was fair and the other party had no knowledge of the mental illness, the court has the power to order other relief.

Activity 8B

Case Debate: Protection or Oppression? #FreeBritney

Britney Spears, a well-known pop singer, was placed under a conservatorship (or guardianship) in 2008. This is a legal arrangement where a guardian (conservator) is appointed to manage the personal and financial affairs of an individual (conservatee) who is deemed to lack the contractual capacity to make such decisions and enter contracts.

The conservatorship was established following a series of highly publicized personal and legal challenges in Britney Spears’ life. The conservatorship was implemented due to concerns about Britney Spears’ contractual capacity. It brought into question whether she had the legal capacity to enter into contracts and fully understand the implications and consequences of her agreements. Under the conservatorship, her father, Jamie Spears, initially served as the conservator, with control over her finances, career decisions, and personal life. A professional conservator, Jodi Montgomery, was later appointed as a temporary replacement for Jamie Spears to handle Britney’s personal affairs.

Despite being under a conservatorship, Britney Spears had a successful show in residency in Las Vegas from December 2013 to December 2017. Widely regarded as a successful venture for Britney Spears both artistically and commercially, Britney demonstrated her talent, professionalism, and ability to deliver captivating performances on stage.

The conservatorship remained in place for many years, even wh ile Britney Spears sought review of the conservatorship express ing her desire to end the conservatorship and regain control over her life and finances. At various times while the conservatorship was in place, Britney Spears’ fans and the media questioned the conservatorship and its impact on her life. In 2019, the “#FreeBritney” movement gained momentum, with supporters advocating for an end to the conservatorship and greater transparency about Spears’ well-being.

In June 2021, Britney Spears made a statement during a court hearing, expressing her desire to terminate the conservatorship. She revealed details about the restrictive nature of the arrangement, claiming that she had been subjected to abuse, forced medication, and denial of personal freedoms. Eventually the conservatorship was dissolved and currently Britney Spears has regained full contractual capacity.

Question: C ontractual capacity is intended to provide legal protections to those that do not understand the legal consequences of their contracts and to safeguard individuals from the consequences of contracting with unscrupulous adults. With such a safeguard available for those with limited capacity, why isn’t this enough protection for incompetent adults. In other words, what is the purpose of having a separate action where a Court could find a party incompetent and completely remove their right to contract and appoint a guardian?

Question: One of the justifications for continuing a guardianship is that the guardianship is working. When this is the perception, it can be very difficult for the party adjudicated incompetent to show that they can handle their own affairs. So, a guardianship that is working perpetuates the guardianship itself. When should a guardianship or conservatorship end? When should it have ended in the Britney Spears case?

Question: Should there be limits on guardianships as they pertain to contractual rights and obligations? What is the best way to balance the right to contract with the well-being of the individual subject to limitations imposed by a Court?

Debate the Case: Find and review two resources dealing with the #FreeBritney movement. Do you think that the Britney Spears conservatorship was a necessary safeguard or an infringement on the right to contract?

8.4 Persons who are Intoxicated

People who are intoxicated at the time of entering a contract may have limited competency if the nature of their intoxication rendered the person unable to understand the nature and consequences of a contract. Intoxication could be the effect of alcohol, drugs, or other intoxicating substances, and could be voluntary or involuntary.

If a person is so drunk that he has little awareness of his acts, and if the other person knows this, any contract that results is voidable. Should the intoxicated person disaffirm the contract when regaining competency, he is obligated to refund the consideration to the other party unless he dissipated it during his drunkenness. If the other person is reasonably unaware of his intoxicated state, however, an offer or acceptance of fair terms would be upheld by most courts.

If a person is only partially inebriated and has some (but not a full) understanding of his actions, courts will review factors in determining whether the transaction would be voidable or valid, for example, whether the other party induced the drunkenness, the adequacy of the consideration exchanged, and whether the transaction is one which a reasonably competent person might have made.

A person who was intoxicated at the time he made the contract may nevertheless subsequently ratify it. Thus, where a party, several times involuntarily committed for alcoholism, executed a promissory note in an alcoholic stupor but later, while sober, paid the interest on the past-due note, he was denied the defense of intoxication; the court said he had ratified his contract. In any event, intoxication is a disfavored defense on public policy grounds.

Cameron v. Power Co. , 50 S.E. 695 (N.C. 1905)

This action was brought to recover damages for the breach of a contract whereby the plaintiff agreed to sell and the defendant to buy a Corliss engine. … The defendant in its

answer [to the complaint] admitted that its president had signed a contract, and pleaded specially that at the time of signing it he was so drunk that he did not have sufficient mental capacity to contract with the plaintiff for the engine. The court, without objection, submitted only one issue to the jury, which is as follows: “What damage, if any, is the plaintiff entitled to recover of the defendant?” The jury answered “Nothing.” Judgment was entered accordingly.

The question presented for our consideration arises upon an exception to the charge of the court regarding the drunkenness of the plaintiff’s agent and its sufficiency to avoid the contract.

We have examined the charge of the court with care and cannot find that his Honor said anything not in strict accordance with the law, as we now declare it to be. He charged the jury as follows: “The mere fact that the defendant’s president was drinking was not sufficient, but the jury must find that he was so intoxicated that he could not understand the nature and scope of what he was doing. If the jury find from the greater weight of the testimony that the agent was drinking, it would not be sufficient to invalidate the contract, but if the jury find that the defendant’s president, at the time he signed the contract or order for the engine, was so drunk as to be incapable of knowing the effect of what he was doing, then the contract or order would not be binding upon the defendant. Whether or not he was so intoxicated as to render him incompetent to contract is a question for the jury upon all the evidence.” We think this was a clear and sufficient exposition of the law applicable to the facts of the case. What the judge said in his reference to the nature of the transaction in which the agent was engaged and its importance or magnitude … was evidently intended to point what he had already said as to the true test of mental capacity, and to impress upon them, as an essential condition of the validity of the contract, that the agent of the defendant at the time he signed the paper must have been sober enough to understand the nature of the transaction and

the effect or consequence of his act, and not that he must have been able to act with wisdom or discretion.

Case Questions

• The Court notes that the question of competency in this case is one for the jury to consider based on the evidence in the case. What type of evidence would you expect to see in a case where capacity is being challenged?
• If the Court found that the Plaintiff’s agents were too intoxicated to understand the legal consequences of the transaction, what would happen to the underlying contract in the case?  Would there be damages?
• In this case, the intoxication was voluntary.  Do you think that the case would have turned out differently if the intoxication was involuntary?  Why or why not?

8.5 The Sword and Shield Doctrine

Throughout the Chapter, we’ve explored ways a person with limited competency can seek to avoid unwanted contracts. As stated previously, the purpose of allowing disaffirmance in these cases is to protect people with limited competency from being taken advantage of, much like a “shield.”

The sword and shield doctrine is a legal principle that pertains to the use of a contract’s terms as both a sword to enforce the contract and a shield to defend against claims under the contract. The “sword” aspect of the doctrine refers to the use of a contract’s terms by a party seeking to enforce the contract. This means that a party can use the terms of the contract to compel the other party to perform their obligations under the contract. The “shield” aspect of the doctrine, on the other hand, refers to the use of a contract’s terms as a defense against claims under the contract. This means that a party can use the terms of the contract to defend against claims made by the other party under the contract.

In cases of capacity , the sword and shield doctrine can be used to protect the interests of parties who lack contractual capacity, such as minors or individuals with mental disabilities.

The shield aspect of the doctrine can be used to defend against claims under a contract made by a party who lacks contractual capacity. For example, if a minor enters into a contract to purchase a car and the car is defective, the minor can use the shield aspect of the doctrine to defend against the seller’s claim for payment by arguing that they lacked contractual capacity to enter into the contract and are therefore not bound by its terms. This is possible even if the minor would seek to keep the car if it were not defective, thus minority is a shield.

The sword aspect of the doctrine can also be used by a party who lacks contractual capacity to enforce the terms of a contract that are beneficial to them. For example, if a minor enters into a contract to sell their artwork, and the buyer fails to make payment as required by the contract, the minor can use the sword aspect of the doctrine to compel the buyer to make payment as required by the contract.

At the same time, a sword has two sides, and some courts have reviewed attempts to disaffirm contracts through this doctrine, finding in some cases that the person with limited competency is using their right to disaffirm to achieve an unfair advantage over a competent adult in a contract. For example, suppose a 16-year-old minor signs a contract with an adult to buy a car. The minor then decides to disaffirm the contract having already driven the car for several months and causing damage to it. The adult may ask the court to review the circumstance of the disaffirmance to see if the minor is unfairly using this right to avoid paying for the damages they caused to the car while they were using it.

In such cases, the court may review the circumstances surrounding the disaffirmance to determine if the minor is attempting to take advantage of the adult (using disaffirmance as a sword) or if they have a legitimate reason to avoid the contract (a shield). If the court finds that the person with limited competence is unfairly using the ability to disaffirm, the court could rule in favor of the adult and hold the minor responsible for any damages they caused under the contract.

In general, the sword and shield doctrine is meant to balance the interests of parties in contractual dealings and ensure that both parties are held to the same standard of performance. However, in cases where one party lacks contractual capacity, the doctrine must be applied in a way that considers the particular circumstances of that party and their intentions in disaffirming a contract.

Activity 8C

Which is Which?

Activity 8D

What’s your Verdict?

Video games are popular, as are in-app purchases within them. Should minors be able to disaffirm in-app video game purchases? Does it matter if the funding for the purchase originated from the minor’s own money, or from the parent? Explain your position using the information discussed in this Chapter.

End of Chapter Exercises

• Langstraat was seventeen when he purchased a motorcycle. When applying for insurance, he signed a “Notice of Rejection,” declining to purchase uninsured motorist coverage. He was involved in an accident with an uninsured motorist and sought to disaffirm his rejection of the uninsured motorist coverage on the basis of infancy. May he do so?
• Ivar, an infant, bought a used car—not a necessity—for $9,500. Seller took advantage of Ivar’s infancy: the car was really worth only $5,500. Can Ivar keep the car but disclaim liability for the $4,000 difference?
• If Ivar bought the car and it was a necessity, could he disclaim liability for the $4,000?
• If Ivar bought the car, and subsequently drove the car while it was having mechanical difficulties, resulting in blowing out the engine, can Ivar disaffirm the car? If so, will he have any liability in doing so? Under what theory?
• Alice Ace found her adult son’s Christmas stocking; Mrs. Ace herself had made it fifty years before. It was considerably deteriorated. Isabel, sixteen, handy with knitting, agreed to reknit it for $100, which Mrs. Ace paid in advance. Isabel, regrettably, lost the stocking. She returned the $100 to Mrs. Ace, who was very upset. May Mrs. Ace now sue Isabel for the loss of the stocking (conversion) and emotional distress?

Dodson v. Shrader , 824 S.W.2d 545 (Tenn. 1992).

First State Bank of Sinai v. Hyland, 399 N.W.2d 894 (S.D. 1987).

Gastonia Personnel Corp. v. Rogers , 172 S.E.2d 19 (N.C. 1970).

Hojnowski v. Vans Skate Park , 187 N.J. 323, 901 A.2d 381 (2006)

N.J.S.A. 9:17B-1

Albert, Clark, Guide to New Jersey Contract Law, NJICLE

William L. Prosser, Handbook of the Law of Torts, 4th ed. (St. Paul, MN: West, 1971), 999.

Restatement (Second) of Contracts, Section 13.

Restatement (Second) of Contracts, Section 16(b).

the legal ability of an individual or entity to enter into a binding contract and be held legally responsible for their actions and obligations under that contract

a determination by a court that a person has the capacity to manage some but not all of his activities

the condition of lacking the ability to handle one's affairs due to mental or physical incapacity

someone under legal age, which is generally 18, except for certain purposes such as drinking alcoholic beverages.

A person under the age of 18

a contract that may become unenforceable by one party but can be enforced by the other

to take action to void a voidable contract

to repudiate or reject a contract that has been previously entered into

less than half the states follow this rule

a basic need of life such as food, shelter and basic medical services

an obligation imposed by a judge to prevent injustice and thus not a contract

not capable of being made void

a bar or obstruction which precludes a person from asserting a right or prevents one from denying a fact

confirmation of an action which was not pre-approved and may not have been authorized

when a party explicitly confirms or approves the previously voidable contract

when a party behaves in a manner consistent with accepting a contract or in a manner inconsistent with disaffirming the contract

an inability through mental illness or significant cognitive impairment to carry on the everyday affairs of life or to care for one's person or property with reasonable discretion

a person who has been appointed by a judge to take care of a minor child or incompetent adult (both called "ward") personally and/or manage that person's affairs

an agreement that is lacking one or more of the legal elements of a contract

a legal principle that pertains to the use of a contract's terms as both a sword to enforce the contract and a shield to defend against claims under the contract

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The Law Dictionary for Everyone

Contractual Capacity

The law recognizes the need for a minimum mental capacity, or ability to understand the ramifications of a contract or legal agreement in order for such an agreement to be legal and binding. While several classes of people considered to lack sufficient mental capacity to make legally binding agreements, argument may be successfully made to the court for other circumstances in which a signor to an agreement should be deemed unable to sign. To explore this concept, consider the following contractual capacity definition.

Definition of Mental Capacity

• The degree of understanding and ability to comprehend and remember a situation in which one finds oneself; understanding the purpose and consequences of an act or transaction to which one agrees or enters into.
• The minimum degree of understanding required by law to for an individual to be charged with responsibility for an act or transaction.

Assessment of Contractual Capacity

The law typically recognizes three classes of individuals who are, in general, not regarded as having a great enough understanding or mental capacity to be bound by a legal contract or agreement. These individuals without contractual capacity include:

• Mentally impaired or incompetent person – any individual in a state of arrested or incomplete mental development, which may include impairment of intelligence and social functioning.
• Minors – any individual under the legal age of 18 years
• Intoxicated persons, or persons under the influence of any substance – any individual who has ingested, or is otherwise subject to the influences of, alcohol, drugs, medications, or other substances, whose judgment may be impaired.

Invalidating a Contract Lacking Contractual Capacity

Contracts entered into by a party who lacks contractual capacity are voidable, and a void contract cannot be enforced. Contracts entered into by minors are never binding, allowing the minor to cancel the contract, or fail to fulfill his obligations under the contract, without consequence.

Generally speaking, invalidating a contract lacking contractual capacity may occur when (1) a party to the contract completely lacked an understanding of the contract, or (2) the party lacked a clear understanding of the consequences of entering into the contract. Not all mental and psychological impairments signify a lack of capacity to enter into legally binding agreements. The burden of proof that a party to a contract actually lacked contractual capacity falls on that party or his legal representative.

Understanding When a Contract is Voidable

With the exception of minors, a party to a contract later deemed to lack contractual capacity is not automatically relieved of his duties under the contract. The court will often take into consideration all of the circumstances under which the contract was entered into. For example, a contract is potentially voidable if one party was intoxicated or under the influence of drugs at the time the agreement was made and the document signed. The intoxicated party may, at a later time, have the right to void the contract, especially if the other party knew he was impaired at the time of the agreement, or had the intent to take advantage of the intoxicated party.

Drugs, Alcohol, and Mental Capacity

An individual under the influence of alcohol, street drugs, or certain prescription medications cannot legally enter into a contract or give their consent for any action. Even if it is not obvious to others that a person is intoxicated or impaired, they are often unable to think clearly or reasonably, communicate their intentions clearly, or recognize problematic or dangerous situations. In addition to contributing to a lack of contractual capacity, drugs, alcohol, and prescriptions are also considered to render an individual unable to give consent for medical care or sexual acts.

Developmental Disabilities

While many individuals considered to have developmental or intellectual disabilities, sometimes referred to as “mental retardation,” live on their own and hold jobs, a great deal of effort goes into adapting to an independent lifestyle. Whether or not such an individual has the mental capacity to enter into a legally binding contract is a matter taken seriously, and considered on a case-by-case basis by the courts. Some individuals with developmental disabilities have a guardian or conservator who is allowed to make legal decisions and sign legally binding documents on behalf of the disabled person.

Related Legal Terms and Issues

• Intoxicated – A state in which an individual’s normal ability to act or make reasonable decisions is inhibited by drugs or alcohol.
• Consent – To agree, approve, permit, comply, or yield
• Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself, as in a contract.

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What is contractual capacity?

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Contracts can affect everyone - but not everyone can bind themselves, or their company, to a contract. So what is contractual capacity, who has it, who doesn’t, and what are its implications?

Let’s find out in this Juro explainer.

What is contractual capacity? (Definition)

Contractual capacity is the ability of an individual to enter into a binding legal contract, and in so doing expose themselves (or their company, if they have signatory authority ) to the obligations and consequences that flow from the contract.

Contractual capacity is key element of a contract, along with core concepts like offer, acceptance, consideration and so on. Specifically, in the US, the requirements without which a contract is not legally binding are:

• Consideration
• Contractual capacity

If one of these is missing, you may have a simple agreement rather than a contract (read about the difference between an agreement and a contract ).

Contractual capacity is important because not everyone should have the ability to bind themselves to a series of legal obligations. A breach of contract that fails to honor those obligations can result in legal action and a range of remedies.

So when might a person intending to enter into a contract actually lack capacity to do so?

A person lacks contractual capacity if …

There are two main ways that someone might lack contractual capacity.

1. Lacking mental ability

The first is to do with their mental ability to understand the contract and its consequences. This means someone can lack capacity by:

👶 Being a minor

Although a minor can enter into some contracts legally, they are also afforded some special legal protection that entitles them to either void a contract or choose to enforce it.

In the US, those under the age of 18 (in most states) are minors, which means they can void most contracts they sign up to.

There are some exceptions to this (this is not legal advice!), such as contracts for entering into education, or contracts for necessities that are deemed as having fair terms.

One of the most common tests is whether or not the contract is deemed to be benefitting the minor. If it is, it's likely that the contract will be regarded as fair and therefore can't be voided. However, if a contract's terms aren't particularly beneficial to the minor (or fair), the contract is more likely to be voidable.

It's also worth noting that when minors reach the age of majority and become adults, they may lose the ability to void the contract altogether. This is because they are no longer perceived to be a minor by the law and thus they are bound by contracts in the same way that fully consenting adults are.

🧠 Lacking mental capacity

Another instance where an individual may lack contractual capacity is if they are lacking mental capacity.

This means that individuals suffering from certain mental illnesses or psychological conditions can often void a contract (or have their guardian do so) if they are regarded as mentally incompetent.

Different states have different tests for this. However, many states rely on the "appreciate effects" test to calculate mental and therefore contractual capacity. This means that they try to evaluate whether or not the individual was capable of understanding what they were involved in and whether they could recognize the effects of that relationship.

Regardless of how each state decides to measure mental incompetence, the final decision is typically taken by the court.

🍺 Being intoxicated

Being intoxicated can also ‍ enable a party to void the contract, but under exceptional circumstances, rather than being the rule. 

When assessing whether the intoxication can negate contractual capacity, the court will look at the severity of the intoxication and the counterparty's knowledge of this intoxication.

Generally speaking, the intoxication must be quite severe for a contract to be voidable, and the intoxicated party must try to rescind the contract within a reasonable period of regaining their full consciousness and recognising their mistake in entering the contract. Failing this, the contract will likely remain enforceable.

2. Lacking signatory authority

The second way, and the most common in a business context, is that the individual signing a contract was not an authorised signatory (i.e. they lacked signatory authority ).

Not every employee of a company is empowered to sign business contracts on behalf of their employer. This power is usually reserved for directors of the company, and delegated from the board of directors by passing a resolution during a board meeting.

If someone without signatory authority signs a significant contract on their business’ behalf, and they lacked contractual capacity, it’s likely this contract would be difficult to enforce. In this scenario, it’s a good idea to re-send the contract and ensure that the right signatory is asked to sign.

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