Contracts II: Incapacity

Contracts II Class 7: Incapacity - In Depth Notes

Agenda

• Contracts Roadmap: Overview of key legal concepts and stages involved in contract law.
• Defenses & Excuses: Introduction to legal defenses that can invalidate a contract or excuse a party from liability.
• Remedies for Defenses & Excuses: Legal remedies applicable when defenses or excuses are asserted.
• Incapacity as a Defense: Detailed examination of incapacity, including categories:
• Minority
• Mental Capacity
• Intoxication

Contracts Roadmap

• Key Areas of Contracts:
• **Formation: ** Initial process of creating a valid contract.
• Interpretation & Implied Terms: How terms are understood and which terms might be presumed in contracts.
• Defenses and Excuses: Legal reasons parties can use to avoid contract performance.
• Breach, Conditions, Repudiation: Legal implications when a contract is not upheld or fulfilled.
• Remedies: Legal relief available when contracts are breached.

Defenses & Excuses: An Introduction

• Defenses: Asserted to avoid enforcement of a contract.
• Excuses: Asserted to escape liability for failing to perform contractual duties.

Key Defenses & Excuses Overview

• Incapacity: Lacking the legal ability to enter a contract.
• Misrepresentation & Nondisclosure: False statements or failure to disclose material facts.
• Unconscionability: Contracts that are unjustly one-sided.
• Public Policy & Illegality: Contracts that violate public policy or law.
• Mistake: Errors in the understanding of facts or terms at the time of contract.
• Changed Circumstances: Unforeseen changes impacting contract performance.
• Unenforceable Modifications: Changes made to an agreement that cannot be enforced.

Remedies for Defenses & Excuses

1. Rescission: Cancelling the contract.
2. Restitution: Compensation for benefits conferred.
3. Reformation: Modifying the contract to reflect true intentions.

Capacity to Contract (Defense)

• General Assumption: All persons presumed to have legal capacity to contract unless specified.
• Exceptions: Focus on certain contexts: minors, mental incapacity, intoxication.
• Legal Rationale: Inability to give genuine assent leads contracts to be voidable rather than void.

Capacity to Contract - Key Considerations

• Spotting Issues: Examine facts at contract formation to determine if capacity is lacking due to:

1. Minority: Individual under the age of majority (18).
2. Mental Incapacity: Cognitive impairments.
3. Intoxication: Significant impairment due to substances.

Minors and Incapacity

• Rule: Minor contracts are voidable before reaching age of majority (18) or within a reasonable time thereafter.
• Ratifying Minor Contracts: Minors can ratify contracts upon reaching majority by either express consent or conduct (e.g., retaining benefits).

Exceptions to the Rule

1. Necessities for life (food, clothing, shelter).
2. Misrepresentation of age.
3. Willful damage to property subject to the contract.
4. Statutory exceptions (e.g., student loans, certain employment agreements).

Case Law: Dodson v. Shrader

• Issue: Treatment of considerations exchanged when a minor disaffirms a contract.
• Traditional Rule vs. Modern Rule
• Minor can recover paid consideration but must return any benefits still in their possession.

Mental Incapacity

• Cognitive Test (Majority): Assess if the person understood the nature/consequences of the transaction.
• Volitional Test (Minority): Evaluate if the person could act in a reasonable manner in the transaction, knowing their condition.

Exceptions for Mental Incapacity

• Necessities have been provided under contract terms.
• The contract was executed when the other party was unaware of the party’s mental state.

Case Study: Sparrow v. Demonico

• Examines legal standards regarding mental capacity in contractual agreements.
• Requires medical testimony for incapacity claims and discusses policy implications based on accessibility to proving incapacity.

Intoxication

• Rule: Intoxicated persons unable to reasonably understand the nature and consequences of their actions can void the contract if the other party knew of their condition.
• Exceptions: Contracts for necessities are not voidable, regardless of intoxication.
• Legal view of intoxication recognizes both voluntary and compulsive factors, making it hard to establish intoxication as a defense.