1. Fundamentals of Business Law
6th Edition
Chapter 9 Contracts: Capacity and Illegality

2. Contractual Capacity Contractual Capacity. Legality.
The legal ability to enter into a contractual relationship.
Full competence.
No competence.
Limited competence.
Legality.
The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

3. Minors
In most states, a person is no longer a minor for contractual purposes at the age 18.
A minor can enter into any contract that an adult can.
A contract entered into by a minor is voidable at the option of that minor.

4. Minor’s Right to Disaffirm
A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.
Minor must disaffirm the entire contract.
Disaffirmance can be expressed or implied.

5. Minor’s Obligation on Disaffirmance
In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control.
In increasing number of states, the minor must restore the adult to the position held before the contract was made.
Case Dodson v. Shrader (1992).

6. Misrepresentation of Age
Right to Disaffirm.
Minor can disaffirm the contract even though minors age is misrepresented.
Obligation to Restore.
Some courts refuse to allow minors to disaffirm executed contracts unless they can return the consideration received.
Some courts allow the defrauded party to sue the minor for misrepresentation or fraud.

7. Contracts for Necessaries
Minor may disaffirm the contract but remains liable for the reasonable value of the goods.
Criteria:
Item contracted for must be necessary for the minor’s subsistence.
Value of the necessary must be up to the level required to maintain a minor standard of living.
Minor must not be under the care of parent or guardian.

8. Ratification
Occurs when a minor indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.
Executed v. Executory contracts.
Emancipation terminates minority status.

9. Parent’s Liability Contracts. Torts (Statutes Vary):
Generally, parents not liable for contracts. (This is why parents are usually required to sign any contract made with a minor).
Torts (Statutes Vary):
Minors are personally liable for their own torts.
Liability imposed on parents only for willful acts of their minor children.
Liability imposed on parents for their children negligent acts that result from their parents’ negligence.

10. Intoxication
Key is whether there was contractual capacity at the time the contract was formed.
Contract can be either voidable or valid.
Courts look at objective indications to determine if contract is voidable.
If voidable.
Person has the option to disaffirm.
Person may ratify the contract expressly or impliedly.

11. Mentally Incompetent Persons
Contract Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.
Contract Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.
Contract Valid: If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

12. Legality
A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).
Contract that calls for for a tortious act.
Contract that calls for an act contrary to public policy.

13. Contracts Contrary to Statute
Usury.
Gambling.
Sabbath Laws.
Licensing Statutes.
Contracts to Commit a Crime.

14. Contracts Contrary to Public Policy
Contracts in Restraint of Trade.
Case Moore v. Midwest Distribution, Inc. (2002).
Unconscionable Contracts or Clauses.
Procedural or Substantive Unconscionability.

15. Contracts Contrary to Public Policy
Exculpatory Clauses.
No liability, regardless of fault.
Generally viewed as unconscionable.
Case Beaver v. Grand Prix Karting Association (2001).
Discriminatory Contracts.
Contracts for the Commission of a Tort.

16. Exceptions to the Illegality Rule
Justifiable Ignorance of the Facts.
Members of Protected Classes.
Withdrawal from an Illegal Agreement.
Contract Illegal through Fraud, Duress, or Undue Influence.
Severable or Divisible Contracts.