CHAPTER 3 CONTRACTUAL CAPACITY

CHAPTER OBJECTIVES

After studying this chapter you will be able to:

1. Define contractual capacity.

2. State the extent and effect of avoidance of a contract by a minor.

3. Define the extent of a minor's liability for necessaries.

4. Compare the liability of third persons with respect to the contract of a minor.

5. List those classes of persons who lack contractual capacity.

6. Solve problems involving the question of contractual capacity.

If society desired to treat all persons as equal, everyone would be able to make a contract and, conversely, all persons would be fully bound by their contracts. Such a rule of law would lay a trap for minors, intoxicated persons, and incompetents, because they would enter into contracts and find themselves bound thereby, even though the contracts were foolish and unwise from the standpoint of their best interests. To prevent this, society departs from the concept of equality and declares that certain persons can not make contracts that will bind them. Thus minors, intoxicated persons, and insane persons may have the right to avoid their contracts. This is described techni­cally as being that they lack contractual capacity.

Historically, married women and aliens were also considered to lack contractual capacity. It should be no surprise that society has moved away from this discriminatory incapacity, and today there are only slight traces of it remaining.

Definition.

Contractual capacity is the ability to understand that a contract is being made and to understand its general nature. The fact that a person does not understand the full legal meaning of a contract does not mean that con­tractual capacity is lacking.

If any party to a contract does not have contractual capacity, the contract is either void or voidable.

Some persons, such as minors, are deemed by the law to lack con­tractual capacity. Ordinarily, however, every party to a contract is presumed to have contractual capacity until the contrary is shown. When there is evi­dence that a party has some illness, the question often arises whether that illness or medication taken for it had impaired the contractual capacity of the party.

Double Aspect of Capacity.

In order to give rise to a contract, all parties to the agreement must have contractual capacity. This has both a negative and a positive aspect.

As to the negative, if capacity is lacking, the contract is voidable and in some instances, is void. As this chapter will show, many concepts of incapacity have been abolished. This is understandable in terms of the growing importance and recognition of the social force of protecting the person. That is, a person is not to be denied the capacity to make a binding contract unless there is some actual physical or mental disability that the law should recognize in order to protect that person. Incapacity based on discrimination against sex, alienage, or as punishment for crime is disappear­ing from the law.

As to the positive aspect, contractual capacity is in most instances the equivalent of freedom of contract. That is, persons with capacity to con­tract may make whatever contract they choose, and the law will not lightly nullify or reject their desires.

FACTS:

Sinclair Oil Corporation obtained a con­tract of insurance from the Columbia Casualty Company to protect it from liability to third persons. An accident occurred in the unloading of a ranker and Sinclair was sued by the injured person for both compensatory and punitive damages. Columbia claimed that the provision of the policy obligating it to pay punitive dam­ages was invalid.

DECISION:

The parties to the contract had con­tractual capacity. They therefore could make any contract that they chose unless there was some principle of law prohibiting the contract. Although there is a conflict of authority as to whether it is against public policy to provide in­surance covering punitive damages, the sounder view is that it is not and therefore the parties could make such a contract as they chose and could make the provision that they did as to punitive damages. [Sinclair Oil Corp. v Colum­bia Gas. Co (Wyo 682 P2d 975 (1984)]

Authors' Comment: Compensatory damages are those which are equal to the loss sustained by the plaintiff and thus compensate for that loss. Punitive damages consist of an additional amount imposed upon the defendant to punish the defendant for highly improper conduct.

Minors.

At common law any person, male or female, under twenty-one years of age was a minor (or an infant). At common law, minority ended the day before the 21st birthday. The "day before the birthday" rule is still fol­lowed, but the 21 years has been reduced to 18 years in most states and to 19 in a few.

Minor's Power to Avoid Contracts.

With exceptions that will be noted later, a contract made by a minor is voidable at the election of the minor. The minor may affirm or ratify the contract upon attaining majority by performing the contract or by an express statement of approval. After so doing, the contract can no longer be avoided.

(a) Minor's Misrepresentation of Age. Generally the fact that the minor has misrepresented age does not affect the minor's power to avoid the contract. A few states hold that such fraud of the minor prevents the minor from avoiding the contract. A few states permit the minor to avoid the contract in such case but require the minor to pay for any damage to the property received under the contract.

In any case, the other party to trie contract may avoid it because of the minor's fraud.

(b) Time for Avoidance. The minor can avoid a contract only dur­ing minority and for a reasonable time after attaining majority. After the lapse of such reasonable time, the contract is deemed ratified and cannot be avoided by the minor. A few states permit the former minor to avoid a wholly executory contract thereafter in the absence of an express affirmance.