1. Chapter 16 Capacity and Legality Chapter 16: Capacity and Legality
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Overview
LO16-1: What is the legal effect of a lack of capacity on a person's ability to enter into a contract?
LO16-2: Under what circumstances would a party have limited capacity to enter into a contract?
LO16-3: What is the legal effect of entering into a contract for an illegal purpose?

3. Chapter 16 Hypothetical Case 1
As this chapter indicates, usury occurs when a party gives a loan at an interest rate exceeding the legal maximum, and statutes prohibiting usury have been enacted in virtually every state. The legal maximum interest rate varies from state to state.
Should the government regulate the maximum interest rate charged by lenders to borrowers, or should the free market dictate the interest rate charged? Without a usury cap in place, would it be ethical for a lender to charge whatever level of interest a borrower would be willing to pay?
Chapter 16 Hypothetical Case 1: As this chapter indicates, usury occurs when a party gives a loan at an interest rate exceeding the legal maximum, and statutes prohibiting usury have been enacted in virtually every state. The legal maximum interest rate varies from state to state.
Should the government regulate the maximum interest rate charged by lenders to borrowers, or should the free market dictate the interest rate charged? Without a usury cap in place, would it be ethical for a lender to charge whatever level of interest a borrower would be willing to pay?
[Instructor: See Legality in Chapter 16]

4. Chapter 16 Hypothetical Case 2
Before her recent accident, 82-year-old Imogen Ledbetter was her own chauffeur. She used to drive an automobile to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water aerobics, grocery shopping, bill paying, and family get-togethers. One day, Ledbetter decided to purchase a new automobile. Although her 50-year-old son Ron suggested that he accompany her to the car dealership, she refused, reminding him that she was fully capable of taking care of her own responsibilities. With the wind of independence at her back, Ledbetter entered the dealership, Bjorn Fjord Motors, alone. After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan, Ledbetter drove away in her rapidly depreciating asset. Five miles down the road, the steering wheel detached from the steering column (the steering wheel literally came off in her hands) and Ledbetter crashed into a culvert. She sustained severe injuries, including (but not limited to) a broken left leg, a broken pelvis, a collapsed lung, and numerous lacerations to her face. Her attending physicians agree that Ledbetter will never be able to drive an automobile again.
Chapter 16 Hypothetical Case 2: Before her recent accident, 82-year-old Lily Ledbetter was her own chauffeur. She used to drive an automobile to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water aerobics, grocery shopping, bill paying, and family get-togethers. One day, Ledbetter decided to purchase a new automobile. Although her 50-year-old son Ron suggested that he accompany her to the car dealership, she refused, reminding him that she was fully capable of taking care of her own responsibilities. With the wind of independence at her back, Ledbetter entered the dealership, Bjorn Fjord Motors, alone. After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan, Ledbetter drove away in her rapidly depreciating asset. Five miles down the road, the steering wheel detached from the steering column (the steering wheel literally came off in her hands) and Ledbetter crashed into a culvert. She sustained severe injuries, including (but not limited to) a broken left leg, a broken pelvis, a collapsed lung, and numerous lacerations to her face. Her attending physicians agree that Ledbetter will never be able to drive an automobile again.
[Instructor: See Legality in Chapter 16]

5. Chapter 16 Hypothetical Case 2 (cont'd)
Ledbetter has since sued Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc. (the dealership) for personal injury. Both companies have filed answers denying liability on the basis of an exculpatory clause included in the purchase contract. The exculpatory clause states that neither Fjord Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a customer or any other third party for a defect in the Fjord Mastodon that results in personal injury and/or economic harm. Both companies have also filed motions for judgment on the pleadings, requesting that the court summarily dismiss both causes of action against Fjord Motors, Inc. and Bjorn Fjord Motors, Inc. on the basis of the contract's exculpatory clause.
Should the court grant the defendants' requests for judgment on the pleadings? Is the exculpatory clause enforceable against Imogen Ledbetter?
Chapter 16 Hypothetical Case 2: Ledbetter has since sued Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc. (the dealership) for personal injury. Both companies have filed answers denying liability on the basis of an exculpatory clause included in the purchase contract. The exculpatory clause states that neither Fjord Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a customer or any other third party for a defect in the Fjord Mastodon that results in personal injury and/or economic harm. Both companies have also filed motions for judgment on the pleadings, requesting that the court summarily dismiss both causes of action against Fjord Motors, Inc. and Bjorn Fjord Motors, Inc. on the basis of the contract's exculpatory clause.
Should the court grant the defendants' requests for judgment on the pleadings? Is the exculpatory clause enforceable against Imogen Ledbetter?
[Instructor: See Legality in Chapter 16]

6. Contractual Capacity Definition:
Mental ability to understand rights and obligations established by contract, with the presumptive ability to understand how to comply with the terms of the agreement
General Rule of Law: Natural persons over the age of majority (18 in most states) are presumed to have the full legal capacity to enter into binding legal contracts
Those who have limited capacity to contract:
Minors
Those suffering from mental deficiency that renders them incapable of understanding the nature and obligations of contracts
Those who are intoxicated
Contractual capacity is defined as the mental ability to understand rights and obligations established by contract, with the presumptive ability to understand how to comply with the terms of the agreement. As a general rule of law, natural persons over the age of majority (18 in most states) are presumed to have the full legal capacity to enter into binding legal contracts. Individuals who have only limited capacity to contract include minors, those suffering from a mental deficiency that renders them incapable of understanding the nature and obligations of contracts, and those who are intoxicated.

7. Rules of Minor's Contractual Power of Disaffirmance
Disaffirmance: Minors' right, until reasonable time after reaching age of majority, to disaffirm/avoid their contracts
To exercise right, minor need only demonstrate, through words and/or actions, intent to rescind contract
Minor must return any consideration received (if still in minor's possession/control), regardless of condition
Even if consideration damaged/destroyed, other party has no recourse against minor
Rules designed to discourage competent parties from entering into contracts with minors
Disaffirmance refers to the minor's right, until a reasonable time after reaching age of majority, to avoid his or her contractual obligations. To exercise the right of disaffirmance, the minor need only demonstrate, through words or actions, intent to rescind the contract. Upon contractual avoidance, the minor must return any consideration received (if still in the minor's possession or control), regardless of its condition. Even if the consideration is damaged or destroyed, the other party has no legal recourse against the minor. Rules protecting minors from contractual obligations are designed to discourage competent parties from entering into contracts with minors.

8. Exceptions to Minor's Right to Disaffirm Contract
Contract for necessaries: Contracts that supply minor with basic necessities of life
Examples: food, clothing, shelter, basic medical services
Ratification: Acceptance of terms of contract (entered into as a minor) after reaching age of majority
Express ratification: Occurs when, after reaching age of majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a minor
Implied ratification: Occurs when former minor takes action after reaching age of majority consistent with intent to ratify contract
Exceptions to a minor's right to disaffirm a contract includes a contract for necessaries, defined as a contract that supplies the minor with the basic necessities of life. Examples of basic necessities include food, clothing, shelter, and essential medical services. Ratification is another exception to a minor's right to disaffirm contractual obligations. Through ratification, the former minor accepts the terms of a contract entered into as a minor after reaching the age of majority. With express ratification, a former minor states, either orally or in writing, that he or she intends to be bound by the contract entered into while a minor. With implied ratification, the former minor takes action, after reaching the age of majority, consistent with an intent to ratify the contract.

9. Parental Liability for Minors' Contracts, Necessaries, and Torts
General rule: Parents not liable for contracts entered into by their minor children
Exception: Contracts for necessaries
General rule: Parents not liable for torts committed by their minor children
Exception: Failure to properly supervise child, subjecting others to unreasonable risk of harm from the child
As a general rule, parents are not liable for contracts entered into by their minor children. An exception is a contract for necessaries. Also, parents are not generally liable for torts committed by their minor children. An exception is the failure to properly supervise a child, subjecting others to unreasonable risk of harm from the child.

10. Individuals Having No Capacity to Contract
Those adjudicated insane
Those adjudicated habitually intoxicated
Those with appointed legal guardians
Individuals having no capacity to contract include those adjudicated insane, those adjudicated habitually intoxicated, and those with appointed legal guardians.

11. Rules Regarding Intoxication
General rule: Contracts made by intoxicated persons are voidable
If intoxication merely causes person to exercise poor judgment, contract not voidable unless other party unfairly capitalized on the impaired judgment
When intoxicated person becomes sober, contract can be ratified or disaffirmed; however, courts will liberally interpret behavior that seems likes ratification once intoxicated person becomes sober
Generally, contracts made by intoxicated persons are voidable; however, if the intoxication just causes a person to exercise poor judgment, the contract is not voidable unless the other party unfairly capitalized on the impaired judgment. When an intoxicated person becomes sober, the contract can be ratified or disaffirmed; however, courts will fairly liberally interpret behavior that seems likes ratification once the intoxicated person becomes sober.

12. Illegal Contracts
Contracts with no legal purpose and/or subject matter
Example: Agreement to commit crime/tort
Contracts violating statute(s) and/or public policy
Example: Usurious loan agreement (loan contract exceeding state-imposed maximum interest rate)
Example: Unconscionable contract (agreement so unfair that it is void of conscience)
Illegal contracts include contracts with no legal purpose or subject matter. An example is an agreement to commit a crime or tort. Another example of an illegal contract is a contract violating a statute or public policy. Examples include a usurious loan agreement (a usurious loan exceeds a state-imposed maximum interest rate) and an unconscionable contract (an unconscionable agreement is so unfair that it is void of conscience.)

13. Chapter 16 Hypothetical Case 3
Tom McCartney is a 16-year-old high school student. He has worked 40 hours per week at the local convenience store over the last year, and has diligently saved $6,000 for the purchase of his first car. While visiting a local car dealership, McCartney finds the car of his dreams, a used yellow Camaro. McCartney walks into the dealership, announces to the dealership owner that he is ready to buy, negotiates $6,000 as the purchase price, and leaves the dealership a proud car owner. Over the course of the next six months, McCartney drives the Camaro 8,000 miles, wears the tires thin, dents the left front fender, and regrets his purchase. He realizes that in two short years college will beckon, and he knows that his parents cannot afford to pay for his higher education. In short, he wants his money back. On a Saturday morning, McCartney returns to the car dealership, walks into the sales office, and hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles, and then his look turns stern, saying "Son, I don't owe you anything. You've just learned a lesson at the School of Hard Knocks. The car is still yours, and the money is still mine!"
Who will prevail? Is it legal and/or ethical to allow McCartney to escape his contractual obligations?
Chapter 16 Hypothetical Case 3: Tommy McCartney is a 16-year-old high school student. He has worked 40 hours per week at the local convenience store over the last year, and has diligently saved $6,000 for the purchase of his first car. While visiting a local car dealership, Tommy finds the car of his dreams, a used yellow Camaro. Tommy walks into the dealership, announces to the dealership owner that he is ready to buy, negotiates $6,000 as the purchase price, and leaves the dealership a proud car owner. Over the course of the next six months, Tommy drives the Camaro 8,000 miles, wears the tires thin, dents the left front fender, and regrets his purchase. He realizes that in two short years college will beckon, and he knows that his parents cannot afford to pay for his higher education. In short, he wants his money back. On a Saturday morning, Tommy returns to the car dealership, walks into the sales office, and hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles, and then his look turns stern, saying "Son, I don't owe you anything. You've just learned a lesson at the School of Hard Knocks. The car is still yours, and the money is still mine!" Who will prevail? Is it legal and/or ethical to allow Tommy to escape his contractual obligations?
[Instructor: See The Definition of a Contract in Chapter 16]

14. Chapter 16 Hypothetical Case 4
Molly McIntosh and her husband, Doug Amundsen, recently took a long-awaited trip to Las Vegas. One evening, they both got very intoxicated and decided, on a lark, to look at time-share apartments. Sure enough, four hours later, they walked out of the time-share office with a contract announcing their ownership (well, part ownership) of a time-share property.
The next morning, McIntosh and Amundsen woke up with no memory of the prior evening's events. They packed their bags and traveled home.
One week later, McIntosh discovered the contract tucked in a pocket in her purse. Horrified, McIntosh and Amundsen immediately contacted the office and demanded that they cancel the contract. The representative they spoke with chuckled and told them that the deadline for the normal cancellation period for a time-share contract—five days in Nevada—had come and gone.
Did McIntosh and Amundsen have capacity to contract at the time they agreed to buy the property?
Chapter 16 Hypothetical Case 4: Molly McIntosh and her husband, Doug Amundsen, recently took a long-awaited trip to Las Vegas. One evening, they both got very intoxicated and decided, on a lark, to look at time-share apartments. Sure enough, four hours later, they walked out of the time-share office with a contract announcing their ownership (well, part ownership) of a time-share property.
The next morning, McIntosh and Amundsen woke up with no memory of the prior evening's events. They packed their bags and traveled home.
One week later, McIntosh discovered the contract tucked in a pocket in her purse. Horrified, McIntosh and Amundsen immediately contacted the office and demanded that they cancel the contract. The representative they spoke with chuckled and told them that the deadline for the normal cancellation period for a time-share contract—five days in Nevada—had come and gone.
Did McIntosh and Amundsen have capacity to contract at the time they agreed to buy the property?
[Instructor: See Capacity in Chapter 16]