Contract Defenses: Incapacity and Illegality

Incapacity and Illegality

            In this presentation, we will discuss two defenses to contract formation: incapacity and illegal contracts.

Incapacity to Contract

Three categories of people can avoid contact obligations based on incapacity in some cases:

-          minors

-          vulnerable parties, and

-          intoxicated people.

Minors

            Until a minor reaches the age of majority, many contracts he or she enters into are voidable.[1] Even if the contract is voidable, the contract is enforceable if the minor ratifies it after reaching the age of majority, meaning that she expresses acquiescence to the agreement.[2] Ratification can be implied from the circumstances. For example, in Fletcher v. Marshall, a minor tenant signed a lease, but continued to pay rent after turning eighteen years old. The court held that by paying rent after turning eighteen, the tenant had ratified the original lease and that incapacity was therefore no bar to enforcement.[3]

If a minor wants to disaffirm a contract upon attaining the age of majority, 18 in most states, he must do so within a reasonable time after reaching the age of majority. For example, returning a previously purchased car two weeks after turning 18 was soon enough to qualify as a disaffirmation.[4] The minor had the right to disaffirm even though the car had decreased in value, which illustrates that parties contract with minors at their own risk.

While minors can void agreements they enter into with adults, the adults do not have the same options. This is why, for example, credit card companies, no matter how desperate they are for customers, will not issue credit cards to minors.

While minors can disaffirm most contracts that they make, there are some exceptions. Minors can be held responsible for contracts to purchase goods or services that are necessary for their health and sustenance, such as contracts for medical care, shelter and food.[5] Moreover, certain stated do not allow disaffirming certain other contracts. For example, in Hawaii, minors cannot disaffirm arbitration provisions in employment contracts.[6]

Vulnerable Parties

            A contract may also be unenforceable when the contracting party is either unable to understand the nature and consequences of the transaction or is unable to act in a reasonable manner. These circumstances may be products of mental illness, age or other infirmity. These contracts are voidable only by the infirm party.

If the other party had no reason to know of the infirmity, a court can enforce the agreement to the extent necessary to avoid injustice. For example, if a seemingly competent (but in fact, incompetent) person contracts to purchase a car, she can void the contract. However, if the car has decreased in value while held by the incompetent party, a court may require a refund of only the car’s current value.[7]

Intoxicated People

            Intoxicated people also can potentially avoid contract formation due to lack of capacity if the other contracting party knows or should know that the intoxication is so severe that he is unable to understand the nature and consequences of the contract or is unable to act in a reasonable manner. As in the case of minors, intoxicated people can later ratify a contract, when they become sober. Failure to disaffirm within a reasonable time after becoming sober or conduct that indicates acquiescence to the contract also counts as ratification.[8]

Illegality

Another way to invalidate contract formation is to claim contract illegality, which arises when the contract has illegal consideration, such as when a murderer promises to kill someone for another party in exchange for $50,000.[9]

Contracts that provide for illegal consideration are void. The contract is void if the contemplated action is illegal in the jurisdiction in which it is to be performed. The subject matter need not be criminal or immoral; it needs only be unlawful. For example, a contract to build a home where the construction would violate local zoning ordinances is void.

Incapacity to contract and illegality are two of the most well-known caveats to contract enforceability. These defenses help prevent injustice that could result from contract enforceability that would violate public policy.