Fart 13a

Capacity - Big Picture

The three incapacity doctrines in this chapter: minors, mental incapacity, and intoxication.

Minor (definition)

Under age of capacity; generally a person under 18 years old.

Effect of a minor's contract

Contracts signed by minors are voidable, not void.

Ratification (definition)

Words or actions after majority indicating the former minor wants to keep the contract; gives formal consent as an adult.

Examples of ratification

Continuing to make payments; continuing to use the item/service (e.g., keep driving the financed car); saying/writing "I agree to keep this contract"; failing to disaffirm within a reasonable time after turning 18.

Necessities for minors

Food, clothing, shelter, and sometimes medical care.

"Reasonable time" factors (minor disaffirmance)

(1) Distance/logistics (e.g., returning an item across states), (2) time passed since reaching adulthood, (3) nature of the contract.

Rule: Minor avoiding a contract (timing)

1) A minor can avoid while still a minor. 2) A minor can avoid for a reasonable time after becoming an adult. 3) Unless, as an adult, the former minor ratifies.

To avoid, a minor must...

Return what they still have; explain what happened to what they no longer have; sometimes account for damage/depreciation (especially if they lied about age).

Necessities after contract formed

Avoidance is allowed, but the minor must pay the reasonable value of necessary benefits received.

Overpayment by minor

If overpaid, the minor can avoid and recover the extra money that should not have been paid.

Underpayment by minor

If underpaying on installments, the minor can avoid future payments but still owes the fair value of what was used.

Contracts minors usually cannot avoid

Contracts in the minor's business; obligations related to child support of the minor's child; insurance; bail; student loans.

Mental incapacity (definition - two prongs)

Because of mental illness/defect the person is either (1) unable to understand in a reasonable manner the nature or consequences of the transaction, or (2) unable to act in a reasonable manner with respect to the transaction.

Transaction-specific incapacity

If either prong is satisfied, the person may be mentally incompetent for that specific transaction.

Adjudication (definition)

A court has legally found the person mentally incapacitated/incompetent.

"Knows or should know" (standard)

A reasonable person observing obvious signs (incoherent speech, confusion, erratic behavior) should recognize the individual cannot understand or act reasonably.

Status quo ante (definition)

Restoring things completely to the way they were before the contract (used with mental incapacity remedies).

Void vs. voidable (mental incapacity)

"Void" = no legal effect from the beginning (adjudicated incompetence or the other party knows of incompetence). "Voidable" = valid unless the incompetent party chooses to avoid (competent party unaware and contract is unfair).

Conditions that can cause mental incapacity

Congenital defects in intelligence; accidental brain damage/trauma; organic brain disease; mental illness/psychiatric disorders impairing ability to think/act rationally.

Adjudication process (who files)

A family member or other interested person files a motion/petition requesting adjudication of incompetence.

Adjudication process (hearing)

The court holds a hearing and receives testimony from witnesses (family, neighbors, doctors) about behavior and capacity.

Adjudication process (judge's role)

The judge determines whether the legal definition of mental incompetence is met.

Legal consequences of adjudication

All future contracts are void; the individual permanently loses contractual capacity; a guardian is appointed; public notice is given.

Guardian's authority

Guardian manages the person's affairs and can enter contracts on their behalf.

Notice - Actual

Person is directly informed.

Notice - Constructive

Public notice is published; the law presumes everyone is aware.

Opposing adjudication

Family/other interested parties may oppose; evidence/witnesses may be presented and cross-examined; judge decides the outcome.

Unadjudicated incapacity - Tier 1

If person is adjudicated incompetent ⇒ any subsequent contract is void.

Unadjudicated incapacity - Tier 2

No adjudication, but the competent party knows or should know of incompetence ⇒ the contract is void.

Unadjudicated incapacity - Tier 3 (competent party unaware)

Court evaluates fairness to the incompetent party.

Tier 3 - Unfair contract

Incompetent person may avoid (rescission) and the court uses status quo ante to restore parties.

Tier 3 - Fair contract

Contract is generally valid; some courts require status quo ante if the incompetent seeks avoidance.

Intoxication (general)

The law is harsher because intoxication is voluntary.

Level required for intoxication defense

Must reach the level of mental incapacity (unable to understand the nature/consequences or act reasonably).

Rule when sober party is unaware

If a sober party is unaware of the intoxication, the contract is valid; intoxication alone doesn't let the person avoid.

To later avoid due to intoxication, person must...

(1) Regain sobriety, (2) learn of the contract, and (3) act within a reasonable time to disaffirm.

Failure to act in reasonable time after sobriety

If the intoxicated person does not act promptly after regaining sobriety and learning of the contract, it becomes binding.

Remedies for avoidance (intoxication)

Rescission (cancel the contract) + restitution (return/give back obligations).

Remedy goal in mental incapacity

Status quo ante—restore parties to pre-contract positions when feasible.

Key difference: minors vs intoxication

Both can make contracts voidable, but courts are more protective of minors and less forgiving of voluntary intoxication.

Key difference: adjudicated vs unadjudicated

Mental incapacity that's adjudicated makes future contracts void; unadjudicated cases depend on what the other party knew and the fairness of the deal.

What "void" means

No legal effect from the beginning; neither party can enforce it.

What "voidable" means

Valid unless and until the protected party (minor/incompetent/intoxicated meeting standard) disaffirms.

When former minor loses the right to avoid

When they ratify as an adult (e.g., keep paying, keep using, expressly agree, or fail to disaffirm in a reasonable time after 18).

Minor's duty on avoidance

Return what remains; explain what's gone; sometimes pay for damage/depreciation (esp. if lied about age).

Reasonable-time inquiries (courts ask)

How far/feasible to return? How long since adulthood? What's the contract's nature?

Contracts related to a minor's business

Generally cannot be avoided (public policy favors commercial reliability).

Child-support/insurance/bail/student loans

Typically non-avoidable even by minors.

Organic brain disease (example)

Physical diseases of the brain that impair cognition/decision-making.

Accidental brain damage (example)

Trauma that impairs ability to think or act rationally.

Psychiatric disorders (effect)

May impair a person's ability to think or act rationally, supporting incapacity.

Constructive notice - effect

Once published, the public (including contracting parties) is deemed to know of the adjudication.

If competent party exploits known incompetence

Contract is void due to knowledge/should-have-known standard.

Fairness review purpose (Tier 3)

To protect the incompetent from unfair bargains while preserving fair, arm's-length agreements.

Rescission (definition)

Cancels the contract and attempts to put the parties back to pre-contract status.

Restitution (definition)

Returning benefits or paying the fair value to prevent unjust enrichment when a contract is avoided.