Chapter 5: Contract Capacity

1
Chapter 5 Contract Capacity Consideration
2
What Youll Learn

• How to explain the legal concept of minority (p.
  148)
• How to identify the rights of minors in relation
  to contracts (p. 150)

3
What Youll Learn

• How to identify contracts that are voidable by a
  minor (p. 151)
• How a person can ratify a contract made in
  minority (p. 154)

4
What Youll Learn

• How to identify others, besides minors, who can
  rescind contracts (p. 157)

5
Why Its Important
Understanding the rights afforded to minors in
contract law will enable you to exercise your
rights and help others.
6
Section Outline
The Requirement of Capacity
Minors Rights and Obligations
Definition of Minority Misrepresentation of Age
7
Section Outline
Contracts of Minors
Voidable Contracts Ratification of Minors
Contracts Contracts for Necessaries Special
Statutory Rules
8
Section Outline
Other Contractual Capacity Rules
Mentally Impaired Persons Intoxicated
Persons Other Capacity Limitations
9
Pre-Learning Question
What is capacity?
10
The Requirement of Capacity

• Capacity, one of the six elements of a contract,
  is the legal ability to enter a contract.
• Capacity relates directly to the involvement of
  minors in contracts.

11
Minors Rights and Obligations
When people enter into contracts, they are
permitted by law to presume that the other party
or parties have the capacity to contract.
12
Minors Rights and Obligations
This presumption, known as a rebuttable
presumption, can be challenged in court.
13
Minors Rights and Obligations
The presumption of capacity plays a key role in
contracts made by minors because the law permits
minors, within certain limits, to rescind or void
their contracts.
14
Minors Rights and Obligations
The court has established specific standards
regarding who is considered a minor and what the
term minority means.
15
Pre-Learning Question
How would you define a minor?
16
Definition of Minority

• The age of legal adulthood is known as the age of
  majority.
• A person who has not yet reached majority is
  considered a minor and is still in his or her
  minority.

17
Legal Age
In 1972 the voting age was lowered from 21 to 18.
At this time many states lowered the age of
majority from 21 to 18.
18
Legal Age
For many years, the age of majority was also the
age at which a person could begin to buy
alcoholic beverages.
19
Legal Age
Now, however, the age of majority is 18
nationwide, but most states have raised the legal
drinking age to 21.
20
Legal Age
For legal purposes, people turn 18 at the
beginning of the day before their 18th birthday.
21
Emancipation and Abandonment

• Some states have declared that minors who are no
  longer under the control of their parents are
  emancipated.
• This means they are responsible for their
  contracts.

22
Emancipation and Abandonment
A minor who marries or leaves home, giving up all
rights to parental support, is considered
emancipated and is said to have abandoned the
protection afforded him or her as a minor.
23
Misrepresentation of Age

• If a minor claims to be over the age of majority,
  then he or she has committed fraud.
• Fraud is a wrongful act, and minors are
  responsible for their wrongful acts.

24
Misrepresentation of Age
Some states allow the other party to sue a minor
who has misrepresented his or her age for fraud.
Other states do not.
25
Misrepresentation of Age
However, it is illegal to lie about your age in
order to buy age-restricted products, such as
alcohol.
26
Pre-Learning Question
Why would the contracts of minors be different
from the contracts of adults?
27
Contracts of Minors
The law shields minors when they make contracts
to protect them from unscrupulous adults. Minors
may be vulnerable because of

• Immaturity
• Inexperience

• Lack of education
• Naïveté

28
Voidable Contracts
Contracts made by minors are voidable by the
minor. This means that minors may disaffirm, or
avoid, their contracts if they so choose.
29
Voidable Contracts
To disaffirm a contract means to show the intent
not to live up to the contract by a statement or
some other act.
30
Voidable Contracts
By permitting minors to have the privilege of
disaffirming contracts, the law provides young
people with a second chance when they use poor
judgment.
31
Returning the Merchandise
If a minor still has the merchandise he or she
received upon entering a contract, that
merchandise must be returned when the contract is
disaffirmed.
32
Disaffirming the Whole Contract
A minor may not affirm parts of a contract that
are favorable and disaffirm the unfavorable parts.
33
Disaffirming Contracts Made with Other Minors
When two minors enter into a contract with each
other, both parties have the right to disaffirm
the contract.
34
Why does the law shield minors when making
contracts?
35
ANSWER
To protect the minor from an unscrupulous adult
who might take advantage of him or her.
36
Ratification of Minors Contracts
After reaching the age of majority, a person can
ratify, or approve, contracts made during
minority.
37
7.1
Ratification
Offer
Acceptance
A business advertisement in a newspaper can
constitute an offer of sale, even if the
advertisement is aimed toward minors.
1
If a minor agrees to the terms of an offer, then
a voidable contract is created.
2
Reaching Majority
Ratification
When a minor reaches the age of majority, his or
her contracts can be ratified.
3
Using or selling an item obtained by contract for
a reasonable time after reaching the age of
majority has the effect of ratifying the
contract. Ratification can also be accomplished
orally or in writing.
4
38
Contracts for Necessaries

• A minor is held responsible for the fair value of
  necessaries.
• Necessaries, or necessities, include food,
  clothing, shelter, and medical care.

39
Special Statutory Rules

• There are many differences in state statutes
  regarding minors.
• Minors should check the statutes of their own
  state to find out about special contractual
  capacities that they may be allowed.

40
Pre-Learning Question
What other classes of persons may be able to
avoid contracts? Why?
41
Other Contractual Capacity Rules
Other classes of persons are also able to avoid
contracts.

• Mentally impaired persons
• Intoxicated persons

42
Mentally Impaired Persons
Mentally impaired persons also have the right to
disaffirm contracts because they are considered
unable to make sound judgments.
43
Mentally Impaired Persons
Before a guardian is appointed to look after the
affairs of a mentally impaired person, his or her
contracts are voidable.
44
Intoxicated Persons
Persons who are intoxicated by alcohol or drugs
at the time they enter a contract are sometimes
able to disaffirm those contracts.
45
Intoxicated Persons
To disaffirm a contract for this reason, a person
must have been so intoxicated at the time of the
contracting that he or she did not understand the
purpose, nature, or effect of the transaction.
46
Other Capacity Limitations
Other classes of persons lack the capacity to
enter into certain types of contracts.

1. Convictspeople convicted of a crime.

47
Other Capacity Limitations

1. Alienspeople who are living in this country but
   owe their allegiance to another country.
2. Enemy alienscertain foreign-born persons
   designated as such during time of war.

48
Section 7.1 Assessment
Reviewing What You Learned

1. What does it mean to be a minor?

49
Section 7.1 Assessment
Reviewing What You Learned
Answer
A minor is a person who has not yet reached the
age of legal adulthood.
50
Section 7.1 Assessment
Reviewing What You Learned

1. What rights do minors have in relation to
   contracts?

51
Section 7.1 Assessment
Reviewing What You Learned
Answer
Minors may disaffirm, or avoid, the contracts if
they so choose.
52
Section 7.1 Assessment
Reviewing What You Learned

1. What contracts are voidable by a minor?

53
Section 7.1 Assessment
Reviewing What You Learned
Answer
In essence all contracts are voidable by a minor
however, minors may still have some
responsibilities when avoiding contracts and some
states may have special statutory rules regarding
minors and contracts.
54
Section 7.1 Assessment
Reviewing What You Learned
Answer
Upon reaching majority, a person can ratify a
contract by approving of the contract orally, in
writing, or by some action.
55
Section 7.1 Assessment
Critical Thinking Activity Misrepresenting Your
Age
Should the act of misrepresenting your age if you
are a minor be considered fraud? Why or why not?
56
End of Section 7.1
57
Section 8.1
58
What Youll Learn

• How to explain the legal concept of consideration
  (p. 164)
• How to explain the types of consideration (p. 166)

59
What Youll Learn

• How to identify certain problems regarding
  consideration (p. 169)
• How to identify the principles that apply to
  consideration in everyday life (p. 172)

60
Why Its Important
By understanding the concept of consideration,
you will be able to avoid problems that
frequently result when agreements lack this
important contractual element.
61
Section Outline
Requirements of Consideration
The Legal Concept of Consideration The
Characteristics of Consideration
62
Section Outline
Types of Consideration
Money as Consideration Property and Services as
Consideration A Promise Not to Sue Charitable
Pledges
63
Section Outline
Problems with Consideration
Disputed Amounts Undisputed Amounts
Consideration in Your Everyday Life
64
Pre-Learning Question
Why is consideration one of the six elements of a
legally binding contract?
65
Requirements of Consideration

• The law has always refused to enforce most
  gratuitous, or free, agreements.
• Parties to an agreement must surrender something
  of value in exchange for something else of value.

66
Requirements of Consideration
This exchange, or the promise to exchange things
of value, is what binds the parties to each other
in a contractual relationship. This binding
element is known as consideration.
67
Requirements of Consideration
Consideration distinguishes a legally binding
agreement from other types of agreements, such as
social agreements that contain an offer and an
acceptance.
68
The Nature of Consideration
Consideration is the exchange of benefits and
detriments by parties to an agreement.
69
The Nature of Consideration

• A benefit is something that a party was not
  previously entitled to receive.
• A detriment is any loss suffered.

70
8.1
Consideration
71
The Nature of Consideration
There are three types of consideration.

1. Giving up or promising to give up something that
   you have the legal right to keep.

72
The Nature of Consideration

1. Doing something or promising to do something that
   you have the legal right not to do.
2. Not doing something that you have the legal right
   to do, which is known as forbearance.

73
The Characteristics of Consideration
Consideration must involve these key
characteristics

1. Bargained-for exchange
2. Something of value
3. Legal benefits and detriments

74
What is the difference between a benefit and a
detriment?
75
ANSWER
A benefit is something that a party was not
previously entitled to receive, and a detriment
is any loss suffered.
76
Bargained-for Exchange
An agreement involves a bargained-for exchange
when a promise is made in return for another
promise, an act, or a promise not to act.
77
Something of Value

• The law has no specific value requirements on
  consideration.
• All that matters is that the parties agreed
  freely on the value and the price.

78
Something of Value

• Usually the courts will not even consider whether
  the value of the consideration is adequate.
• However, a contract may be deemed unconscionable,
  when the courts believe the consideration is
  completely out of line.

79
Legality of Consideration
The courts require that the consideration
involved in an agreement be legal. If the
consideration is illegal, the contract is invalid.
80
Types of Consideration
These include

• Money
• Property
• Services
• Promises not to sue
• Charitable pledges

81
Money as Consideration
Unless price limits have been placed on certain
transactions by administrative regulations,
legislative fiat, or executive ruling, parties to
a contract are free to exchange any amount of
money that they negotiate.
82
Property and Services as Consideration
Before money was accepted as a medium of
exchange, it was common to use property and
services as consideration.
83
Property and Services as Consideration
Some parties still prefer to engage in barter
agreements that involve goods and services.
84
A Promise Not to Sue
If one party has the right to sue another party
but gives up that right in exchange for something
of value, the court will generally uphold the
exchange as valid consideration.
85
A Promise Not to Sue
Pending lawsuits are frequently settled in this
manner. When a person accepts an offer and
agrees not to sue, he or she is asked to sign an
agreement, which is called a release.
86
Charitable Pledges
Charitable organizations and nonprofit
institutions often depend upon contributions.
This dependency has led the court to enforce
charitable pledges just as if they were contracts.
87
Pre-Learning Question
What do you think happens when the parties to a
contract cannot agree as to the actual amount of
money owed?
88
Problems with Consideration
When parties disagree about the amount of money
that the debtor owes the creditor, a problem has
arisen over the consideration involved.
89
Disputed Amounts
If the parties to a contract cannot agree as to
the actual amount owed, the amount is said to be
in dispute.
90
Disputed Amounts
A dispute can be settled by accord and
satisfaction if the creditor accepts a payment
that is less than the amount due as full payment.
91
Disputed Amounts

• The acceptance by the creditor of less than what
  has been billed to the debtor is accord.
• The agreed-to settlement as contained in the
  accord is the satisfaction.

92
Disputed Amounts
The dispute must be real, must occur in good
faith, and must not be trivial.
93
Undisputed Amounts
If the parties have mutually agreed to a set
amount of money in the contract, then the amount
cannot be disputed.
94
Consideration in Your Everyday Life

• Consideration distinguishes a legally binding
  agreement from all other types of agreements.
• Consideration must be legal.

95
Consideration in Your Everyday Life

• Paying a debt in advance is consideration for
  settling the debt for a lesser amount.
• To be consideration, the act or promise must be
  bargained for.

96
Section 8.1 Assessment
Reviewing What You Learned

1. What is consideration?

97
Section 8.1 Assessment
Reviewing What You Learned
Answer
Exchange or the promise to exchange things of
value in a contract binds parties to each other
in the contractual relationship.
98
Section 8.1 Assessment
Reviewing What You Learned

1. What are the types of consideration?

99
Section 8.1 Assessment
Reviewing What You Learned
Answer
Money, property, services, promises not to sue,
and charitable pledges.
100
End of Section 8.1
101
Section 9.1
102
What Youll Learn

• How to explain what makes a contract illegal (p.
  186)
• How to identify the consequences of illegality in
  relation to contract law (p. 186)

103
What Youll Learn

• How to identify contracts that are illegal by
  statutory law (p. 188)
• How to identify different types of licenses (p.
  191)

104
Why Its Important
By understanding the concept of illegality in
contract law, you will be able to avoid problems
that might arise when you consider entering a
contract.
105
Section Outline
The Nature and Consequences of Illegality
Illegality in Entire Agreement In Pari Delicto
and Divisible Contracts
106
Section Outline
Agreements that Violate Statutes
Civil and Criminal Statutes Usury
Statutes Gambling Statutes Sunday
Statutes Licensing Statutes
107
Pre-Learning Question
What are the consequences of being party to an
illegal contract?
108
The Nature and Consequences of Illegality

• Legality is the last of the six elements that
  make up a valid contract.
• Even if a contract has all the other elements, it
  may still be invalid if it lacks a legal purpose.

109
The Nature and Consequences of Illegality
A contract can be made illegal in many ways. It
may be illegal if it involves an agreement to do
something that violates statutory law.
110
The Nature and Consequences of Illegality
Making the agreement itself could be illegal. For
example, individuals who agree to commit crimes
for a promised consideration are involved in what
criminal law calls conspiracy.
111
Illegality in Entire Agreement
If its impossible to separate a contract into
isolated promises and acts, each of which can be
performed independently of the others, then the
entire contract is rendered illegal.
112
Illegality in Entire Agreement
If any part of the agreement is contaminated by
illegality, a valid contract cannot result.
113
In Pari Delicto and Divisible Contracts
If certain promises and actions in a contract can
be successfully performed by themselves, then the
contract is said to be divisible.
114
In Pari Delicto and Divisible Contracts
In such cases, the courts may enforce those parts
of the agreement that are legal and revoke the
parts that are not.
115
In Pari Delicto and Divisible Contracts
Parties are said to be in pari delicto (in equal
fault) if they both know that the agreement is
illegal. In such cases, the court will aid
neither party.
116
In Pari Delicto and Divisible Contracts
However, if one of the parties is unaware of
wrongdoing, then the parties are not in pari
delicto and courts may grant relief to the
innocent party.
117
Pre-Learning Question
What type of agreements do you think would
violate state statutes?
118
Agreements that Violate Statutes
State legislatures pass laws declaring that
certain types of agreements are illegal and void
because they violate

• Civil and criminal statutes
• Usury statutes

119
Agreements that Violate Statutes

• Gambling statutes
• Licensing statutes
• Sunday statutes

120
Civil and Criminal Statutes

• Agreements that require one party to commit a
  tort or a crime are illegal.
• Agreements to protect one party from the
  consequences of torts or crimes committed are
  also illegal.

121
What does in pari delicto mean and how does it
relate to illegal contracts?
122
ANSWER
It means in equal fault and refers to both
parties of a contract who know that an agreement
is illegal.
123
Usury Statutes
Each state sets a maximum interest rate that
lenders can charge for loans by
statute. Interest is the fee the borrower pays
to the lender for using the money.
124
Usury Statutes
The interest rate the lender and borrower agree
upon must not exceed the maximum rate allowed by
state law. Charging more than the maximum legal
interest rate is usury.
125
Gambling Statutes
State statutes also prohibit gambling
agreementsagreements in which one party wins and
another party loses, even if some skill may be
involved.
126
Gambling Statutes
Gambling agreements include

• Playing cards for money.
• Money wagers or bets on elections or sports
  events.
• Buying tickets in a sports pool.

127
Gambling Statutes
In the past, most states prohibited gambling.
Recently, however, many states changed their
laws to allow some regulated gambling, such as
128
Gambling Statutes

• Betting at racetracks.
• Certain forms of off-track betting.
• State-run lotteries.

129
Gambling Statutes
A lottery is a game that consists of drawing
lots, typically tickets with different
combinations of numbers printed on them, in which
prizes are distributed to the winners among
persons buying a chance.
130
Sunday Statutes

• In some states, it is illegal to make or perform
  contracts on Sunday.
• These are called Sunday statutes or blue laws.
• The statutes vary greatly from state to state.

131
Licensing Statutes
A license is a legal document stating that the
holder has permission from the proper authorities
to carry on a certain trade or profession.
132
Licensing Statutes
All states have statues that require persons to
have a license to practice certain trades or
professions and engaging in such a trade or
profession without a license is illegal.
133
Licensing Statutes

• Some licenses are designed to protect the public
  from dealing with unqualified persons.
• Some state statutes require licenses simply to
  raise revenue.

134
Licensing Statutes
In most states the following trade and
professional workers must be licensed

• Nurses
• Surveyors
• Funeral directors

• Barbers
• Plumbers

135
Section 9.1 Assessment
Reviewing What You Learned

1. What makes a contract illegal?

136
Section 9.1 Assessment
Reviewing What You Learned
Answer
Illegal contracts may be created in many ways. A
contract may be illegal if it involves an
agreement to do something that violates statutory
law.
137
Section 9.1 Assessment
Reviewing What You Learned

1. What are the consequences of illegality in
   relation to contract law?

138
Section 9.1 Assessment
Reviewing What You Learned
Answer
If the contract cannot be separated into isolated
promises and acts that can be performed
independently, the entire contract is rendered
illegal. If any part of the agreement is illegal,
a valid contract cannot result.
139
Section 9.1 Assessment
Reviewing What You Learned
Answer
If the contract is divisible the court may
enforce the legal parts of the agreement and
revoke the illegal parts.
140
Section 9.1 Assessment
Reviewing What You Learned

1. What contracts are illegal by statutory law?

141
Section 9.1 Assessment
Reviewing What You Learned
Answer
Contracts that violate a states civil or
criminal statutes, usury statutes, gambling
statutes, licensing statutes, or Sunday statutes.
142
Section 9.1 Assessment
Reviewing What You Learned

1. What are the different types of licenses?

143
Section 9.1 Assessment
Reviewing What You Learned
Answer
Some licenses raise revenue, other are designed
to protect the public.
144
End of Section 9.1