This document discusses contractual capacity and the capacity of minors to enter into contracts. It defines key concepts like capacity, disaffirmation, and emancipation. It provides examples of types of contracts that minors can void, like executory contracts, and contracts they are liable for, like necessaries. The document also discusses other capacity issues like mental impairment, intoxication, and ratification. It examines cases related to minors' contracts and restrictions on agreements that are considered unlawful.

1. Chapter 10
Contractual Capacity
10-1

2. Contractual Capacity
• Capacity
– the legal ability to enter into a contractual
relationship
• Rebuttable presumption
– Presumption of capacity can be attacked by defending
party
• Disaffirm – to negate or back out of a contract
10-4

3. Minors’ Rights and Obligations
• When a minor indicates by a statement or act an
intent not to live up to a contract, that minor is
entitled to a return of everything given to the
other party
– Often, even if property is damaged/destroyed
– Some jurisdictions allow for deductions due to
damage
10-5

4. Case Study
– Dodson v. Shrader (Tenn. 1992):
» Dodson, 16 years old, bought a truck from Shrader
($4,900).
» Nine months later, the truck started having problems.
Truck taken to shop and problem diagnosed as burnt
valve.
» Dodson had no money to fix it, so he drove it until it blew
up.
» Dodson then attempted to return truck and get money
back because he is a minor. Shrader refuses.
» Dodson sues Shrader
» While at trial, truck hit in Dodson’s yard by hit-and-run
driver, truck valued now at ~$500.
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5. Case Study
» Dodson v. Shrader (Tenn. 1992):
» Court holds that in contract entered into by a minor, if
such contract was not unreasonable, no undue influence
was used, the minor purchased and paid for the product,
and used it for a period of time, the product may be
returned but the purchase price can be discounted by
the use and damage to the item.
10-7

6. Definition of Minority
• Minority
– Under common law, was a term that described persons who
had not yet reached the age of 21 years
– Over time, has been lowered to 18 (in U.S.), with some
exceptions
– Age of majority by state
• In some states, a person becomes an adult at the
beginning of the day before his or her 18th birthday
10-8

7. Emancipation and Abandonment
• In some jurisdictions, minors who become
emancipated, that is, no longer under the control
of their parents, are responsible for their
contracts
• This responsibility means that they cannot void a
contract, despite their apparent minority
10-9

8. Emancipation in North Carolina
Article 35.
Emancipation.
§ 7B-3500. Who may petition.
Any juvenile who is 16 years of age or older and who has resided in the same county in North
Carolina or on federal territory within the boundaries of North Carolina for six months next
preceding the filing of the petition may petition the court in that county for a judicial decree of
emancipation. (1979, c. 815, s. 1; 1998-202, s. 6.)
§ 7B-3501. Petition.
The petition shall be signed and verified by the petitioner and shall contain the following
information:
(1)
The full name of the petitioner and the petitioner's birth date, and state and county of
birth;
(2)
A certified copy of the petitioner's birth certificate;
(3)
The name and last known address of the parent, guardian, or custodian;
(4)
The petitioner's address and length of residence at that address;
(5)
The petitioner's reasons for requesting emancipation; and
(6)
The petitioner's plan for meeting the petitioner's needs and living expenses which plan
may include a statement of employment and wages earned that is verified by the petitioner's
employer. (1979, c. 815, s. 1; 1998-202, s. 6.)
§ 7B-3502. Summons.
A copy of the filed petition along with a summons shall be served upon the petitioner's parent,
guardian, or custodian who shall be named as respondents. The summons shall include the time
and place of the hearing and shall notify the respondents to file written answer within 30 days
after service of the summons and petition. In the event that personal service cannot be obtained,
service shall be in accordance with G.S. 1A-1, Rule 4(j). (1979, c. 815, s. 1; 1998-202, s. 6.)
§ 7B-3503. Hearing.
10-10

9. Misrepresentation of Age
• Minors sometimes lie about their age when
making a contract
• Despite this misrepresentation of age, most
states will allow the minor to disaffirm or get out
of the contract
10-11

10. Contractual Capacity of Minors
• Executory contracts (those that have not been
fully performed by both parties) may be
repudiated by a minor at any time
• A promise to deliver goods or render services at
some future time need not be carried out by the
minor who decides not to do so
10-12

11. Contracts for Necessaries
• Necessaries
– Goods and services that are essential to a minor’s
health and welfare
• In general, if a minor makes a contract for
necessaries, he/she will be liable for the fair value
of those necessaries
10-13

12. Other Contracts Not Voidable
• Minors may not:
– disaffirm a valid marriage (reader friendly)
– repudiate an enlistment contract in the armed forces
based on a claim of incapacity to contract
– repudiate payments for inoculations and vaccinations
required for attendance at a university or college or
required in securing a visa for travel in certain foreign
lands
– Disaffirm student loan contract if 17 or over (in NC)
• Minors in NC
10-14

13. Other Contracts Not Voidable
• Shield or Sword Doctrine
– Minor exploits a law designed to serve as his/her
shield and turns it into a sword with which he/she
causes harm
• Voidable Contracts and Innocent 3rd Parties
– Under UCC, innocent 3rd parties protected
10-15

14. Ratification of Minors’ Contracts
• Ratification (affirmance)
– The willingness to abide by contractual obligations
– Done only after reaching age of majority
– Can be express or implied
• Disaffirmance
– Backing out of a contract made during minority once
majority is reached
10-16

15. Other Capacity Problems
• Persons Mentally Impaired
– Voidable if the impairment is so severe that it robs the
person of the ability to understand the nature,
purpose, and effect of the contract
• Persons Legally Insane
– A person declared insane by competent legal
authority is denied the right to enter contracts
– Would result in a void contract
10-17

16. Other Capacity Problems
• Persons Drugged or Intoxicated
– May be voidable if intoxication is to the point that the
contracting party has lost the ability to understand
the obligations of the contract, or if can prove the
other person was aware and took advantage of their
drunken state
10-18

17. Agreements to Engage in Unlawful Activity
• A contract may include:
– a valid offer,
– an effective acceptance,
– mutual assent,
– competent parties, and
– valid consideration
– and still be invalid because the agreement involves
doing something illegal
10-19

18. Agreements to Engage in Unlawful Activity
• The court will leave the parties to an illegal
agreement where they placed themselves.
• If it is still executory, the court will not order it
performed or award damages for breach of
contract.
• If it has been executed, the court will not award
damages or assist in having it annulled.
10-20

19. Agreements Made Illegal Under Statutory Law
• These activities include:
–usurious agreements
–wagering agreements
–unlicensed agreements
–unconscionable agreements
–Sunday (Sabbath) agreements
10-21

20. Usurious Agreements
• Usury
– Charging more interest than allowed by law
• Special statutes, however, allow small loan
companies, pawn shops, and other lending
agencies that accept high-risk applicants for
credit to charge a higher rate of interest
10-22

21. Usury in North Carolina
Example Payday
Lending APRs
10-23

22. Wagering Agreements
• Any agreement or promise concerning a wager or
some other form of gambling is invalid and may
not be enforced
• Exceptions made when bets are placed legally
(state lottery, horse racing, church/charity bingo,
legal casinos)
• Even if gambling is legal in your state, probably
still illegal to borrow money for gambling
10-24

23. Wagering Agreements
• Theresa Sokaitis v. Rose Bakaysa
– Splitting contract, notarized
– Rose wins $500,000, splits with brother instead of
Theresa
– Sues for breach of contract
– First court agrees with Rose (summary judgment)
– Appellate court reverses
– Connecticut Supreme Court affirms Appellate Court’s
ruling
– At trial, court finally decides in favor of Rose
10-25

24. Unlicensed Agreements
• Certain businesses and professions must be
licensed before they are allowed to operate
legally
• Reasons for requiring licensing:
– To protect the public
– To raise revenue (proceeds often fund regulation)
10-26

25. Unlicensed Agreements
• Courts distinguish between licenses purely for
revenue and those for public protection
– If license required only for revenue, lack of license
won’t necessarily void contract
– If license for public protection, contract will most
likely be void
10-27

26. Unconscionable Agreements
• A court will not enforce a contract or any part of a
contract that it regards as unconscionable.
• An agreement is considered unconscionable if its
terms are so grossly unfair that they shock the
court’s conscience.
10-28

27. Sunday Agreements
• State statutes and local ordinances regulate the
making and performing of contracts on Sunday
• Usually called blue laws
• Blue laws wiki
10-29

28. Sunday Agreements
If local laws prohibit Sunday business, two rules
are usually observed:
1. Agreements made on Sunday or any other day
requiring performance on Sunday may be ruled
invalid
2. Agreements made on Sunday for work to be
done or goods to be delivered on a business day
are valid and enforceable
10-30

29. Agreements Contrary to Public Policy
• Public policy
– the general legal principle that says no one should be
allowed to do anything that tends to injure the public
at large.
– Any action that tends to harm the health, safety,
welfare, or morals of the people
10-31

30. Agreements Contrary to Public Policy
•
•
•
•
•
Obstructing justice
Interfering with public service
Defrauding creditors
Escaping liability
Restraining trade
10-32

31. Agreements to Obstruct Justice
• Agreements to obstruct justice include:
– agreements to protect someone from arrest
– to suppress evidence
– to encourage lawsuits
– to give false testimony
– to bribe a juror
– promising not to prosecute
– promising not to serve as a witness at trial
10-33

32. Agreements Interfering with Public Service
• Agreements interfering with public service
are illegal and void.
– agreements to bribe or interfere with public
officials
– to obtain political preference in appointments
to office
– to pay an officer for signing a pardon
– to illegally influence a legislature for personal
gain
10-34

33. Agreements to Defraud Creditors
• Agreements that tend to remove or weaken the
rights of creditors, are void as contrary to public
policy
ex: transferring/destroying/hiding assets to
hinder a creditor’s claim on them.
10-35

34. Agreements to Escape Liability
• Exculpatory agreement
– States that one of the parties, generally the one who
wrote the contract, will not be liable for any economic
loss of physical injury even if that party caused the
loss or injury.
• Exculpatory clauses are often not sufficient to
release a party from his/her own negligence
10-36

35. Agreements in Restraint of Trade
• Restraint of trade
– A limitation on the full exercise of doing business with
others
• Agreements that:
– Remove competition
– Deny services to the public that they would otherwise
have
– Result in higher prices and resulting hardship
10-37

36. Agreements to Suppress Competition
• Any agreement made with the intent of
suppressing competition, fixing prices, and the
like is void as an illegal restraint of trade
• Rule of reason standard
– such agreements are enforceable when they do not
unreasonably restrict businesses from competing with
one another
10-38

37. Contracts Related to Copyright Infringement
• Copyright
– designed to protect the rights that attach to an
artistic, literary, or musical work.
• A copyright holder is given the exclusive right to
reproduce, publish, and sell a work that is set in a
tangible medium of expression
10-39

38. Contracts Related to Copyright Infringement
• Contributory copyright infringement.
– Illegal for one party to provide a way for a second
party to violate the copyright rights of a third party,
even if the provider of the means does not itself
violate the original copyright
• Fair use
– Copying permitted for criticism, comment, news
reporting, teaching, scholarship, research
10-40

39. Capitol v. Thomas
Thomas suspected of sharing 1,702 songs online via Kazaa,
plaintiffs seeking damages for only 24 (is “making available” the
same as “distributing”?
• Capitol offers $5,000 settlement, Thomas declines
• First trial (2007), Thomas ordered to pay $222,000
• Court grants new trial due to error in jury instructions
• Before 2nd trial, Capitol offers $25,000 settlement agreement,
Thomas again declines
• At 2nd trial, jury awards Capitol $1,920,000, judged reduced
to $54,000
• 3rd trial, jury awards $1,500,000, judge reduces again to
$54,000
• Appellate court reinstates award of $222,000
10-41

40. Sale of Business
• When a business is sold, it is common practice for
the agreement to contain covenants that restrict
the seller from entering the same type of
business.
• Such restrictive covenants in a contract for the
sale of a business will be upheld by the court if
they are reasonable in time and geographical
area.
10-42

41. Restrictive Employment Covenants
• An employment contract that limits a worker’s
employment options after leaving her or his
present job
– “Non-competes”
• Must be reasonable with regard to:
– Type of work
– Length of time
– Geographic area
10-43

42. Nondisclosure Agreements
• Nondisclosure agreement
– requires employees to promise that if they leave their
job they will not reveal any confidential trade secrets
• Court will step in to prevent information from being
revealed or used if . . .
10-44

43. Trade Secrets
(1) the information revealed was actually a trade secret
(2) the information was crucial to the running of the
employer’s business
(3) the employer had the right to use the trade secret
(4) the former employee came into possession of the
trade secret while in a position of trust and confidence
and in such a way that it would be unfair for the former
employee to disclose that trade secret in a way that
would hurt his or her former employer.
10-45

44. Consequences of Illegality
• In Pari Delicto (in equal fault) Contracts
– When both parties to an illegal agreement are equally
wrong in the knowledge of the operation and effect of
their contract
– Court will not aid either party or award any damages
• When not in pari delicto
– Relief given, if sought, to the more innocent party
10-46

45. Illegality in Entire Agreement
• If the legal part of a contract can be removed
from the illegal part, without changing the
essential nature of the contract, then agreement
is said to be divisible.
– Court can enforce the legal part/parts
• If not, contract is indivisible, and entire
agreement is void
10-47

46. Question?
What is an example of a capacity problem?
A. Persons Mentally Impaired
B. Persons Legally Insane
C. Persons Drugged or Intoxicated
D. All of the above
10-48

47. Question?
What is the legal ability to enter into a contractual
relationship?
A. Capacity
B. Contractualability
C. Affirmation
D. Competence
10-49

48. Question?
What is the willingness to abide by contractual
obligations?
A. Ratification
B. Authorization
C. Confirmation
D. Authentication
10-50

49. Question?
Minors who become _________ are no longer
under the control of their parents.
A. Competent
B. Considerate
C. Emancipated
D. Open
10-51

50. Question?
What term describes persons who have not yet
reached the age of 21 years?
A. Majority
B. Minority
C. Mainstream
D. Competent
10-52

51. Question?
____________ are those goods and services that
are essential to a minor’s health and welfare.
A. Needs
B. Wants
C. Requirements
D. Necessaries
10-53