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

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

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 Stroupes was 16 and worked at The Finish Line, Inc. until she quit alleging sexual harassment. The company tried to compel arbitration under an arbitration clause in the written employment contract. The court stated: “…under Tennessee law, a minor’s employment contracts, including arbitration agreements, are voidable by the minor. The court finds that Lindsey’s employment contract with Finish Line was voidable by Lindsey, and was voided by filing this action.” 14 - 3

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

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

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

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

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 Joseph Dodson, age 16, bought a 1984 Chevrolet truck from Burns and Mary Shrader, owners of Shrader’s Auto Sales, for $4,900 cash. At the time, Burns Shrader, believing Dodson to be 18 or 19, did not ask Dodson’s age and Dodson did not volunteer it. Dodson drove the truck for about eight months, when he learned from an auto mechanic that there was a burned valve in the engine. Dodson did not have the money for the repairs, so he continued to drive the truck without repair for another month until the engine “blew up” and stopped operating. He parked the car in the front yard of his parents’ house. He then contacted the Shraders, rescinding the purchase of the truck and requesting a full refund. The Shraders refused to accept the truck or to give Dodson a refund. Dodson then filed an action seeking to rescind the contract and recover the amount paid for the truck. Before the court could hear the case, a hit-and-run driver struck Dodson’s parked truck, damaging its left front fender. At the time of the circuit court trial, the truck was worth only $500. The Shraders argued that Dodson should be responsible for paying the difference between the present value of the truck and the $4,900 purchase price. The trial court found in Dodson’s favor, ordering the Shraders to refund the $4,900 purchase price upon delivery of the truck. The Tennessee Court of Appeals affirmed this judgment, and the Shraders appealed. 14 - 8

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 Court: “The first of these minority rules is called the “Benefit Rule.” This rule holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise. This rule recognizes that the traditional rule in regard to necessaries has been extended so far as to hold an infant bound by his contracts, where he failed to restore what he has received under them to the extent of the benefit actually derived by him from what he has received from the other party to the transaction. The other minority rule holds that the minor’s recovery of the full purchase price is subject to a deduction for the minor’s “use” of the consideration he or she received under the contract, or for the “depreciation” or “deterioration” of the consideration in his or her possession.” 14 - 9

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? Kim Young contracted as a minor with a friend to lease an apartment from Weaver. The two stayed in the apartment and paid rent for three months. Young moved out near the end of November and returned to live with her parents. Young had a dog that caused damage to the apartment in the amount of $270. Y oung did not pay for this damage before vacating the apartment. Weaver managed to rent the apartment to someone else several months later. Weaver filed a claim against Young in Small Claims, seeking damages for the unpaid rent and the damage done by Young’s dog. The court ruled in favor of Weaver and awarded $1,370 in damages. Young appealed the decision to the Tuscaloosa Circuit Court, which tried the case and also entered a judgment in favor Weaver and awarded him $1,095. Young appealed. Court: “Alabama law, like the law of most other states, provides that persons providing “necessaries” of life to minors may recover the reasonable value of such necessaries irrespective of the existence, or nonexistence, of a voidable contract respecting those necessaries. …Determining whether the subject of a contract is a necessity to a minor entails a two-step analysis…[generally considered a necessity and a necessity to that minor]. …Young’s parents were willing and able to provide lodging for their daughter at the time she rented the apartment from Weaver. Given the authorities cited above and the particular facts of this case, we conclude that the trial court erred in its determination that the apartment in question was a necessity for Young. Therefore, as a minor, Young is not legally bound under the lease agreement. Reversed and remanded in favor of Young.” 14 - 10

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

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

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