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📄 Contracts Unit 4 – Capacity to Contract

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9 Introduction to Contract Law

Learning Objectives

After completing the material in this chapter, you should be able to do the following:

• Understand what role contracts play in society today
• Understand what a contract is
• Understand the sources of contract law
• Identify the required elements of a contract: agreement, consideration, legality, and capacity
• Identify common problems with contracts, such as undue influence and fraud
• Understand the circumstances when a contract needs to be in writing to be enforceable
• Identify the remedies for breach of contract

The two legal cornerstones of business relationships are contract and tort. Although both involve the concept of duty, creation of the duty differs in a manner that is important to business. The parties create contract duties through a bargaining process. The key element in the process is voluntary consent; individuals are in control of a situation because they have the freedom to decide whether to enter into a contractual relationship. Tort duties, in contrast, are obligations the law imposes, whether or not the parties desire. Together, voluntary obligations in contract and involuntary obligations in tort are the foundational aspects of the common law of business.

General Perspectives on Contracts

• Understand the role of contract in society: it moves society from status to contract.
• Know the definition of a contract.
• Recognize the sources of contract law: the common law, the UCC, and the Convention on the International Sale of Goods—a treaty (the CISG).
• Understand some fundamental contract taxonomy and terminology.

The Role of Contract in Society

Contract is probably the most familiar legal concept in our society because it is so central to a deeply held conviction about the essence of our political, economic, and social life. In common parlance, the term is used interchangeably with agreement, bargain, undertaking, or deal; but whatever the word, it embodies our notion of freedom to pursue our own lives together with others. Contract is central because it is the means by which a free society orders what would otherwise be a jostling, frenetic anarchy. So commonplace is the concept of contract—and our freedom to make contracts with each other—that it is difficult to imagine a time when contracts were rare, an age when people’s everyday associations with one another were not freely determined. Yet in historical terms, it was not so long ago that contracts were rare, entered into if at all by very few. In historical societies and in the medieval Europe from which our institutions sprang, the relationships among people were largely fixed; traditions spelled out duties that each person owed to family, tribe, or manor. Though he may have oversimplified, Sir Henry Maine, a nineteenth-century historian, sketched the development of society in his classic book Ancient Law . As he put it:

(F)rom a condition of society in which all the relations of Persons are summed up in the relations of Family, we seem to have steadily moved towards a phase of social order in which all these relations arise from the free agreement of Individuals. . . . Thus the status of the Slave has disappeared—it has been superseded by the contractual relation of the servant to his master. . . . The status of the Female under Tutelage . . . has also ceased to exist. . . . So too the status of the Son under Power has no true place in the law of modern European societies. If any civil obligation binds together the Parent and the child of full age, it is one to which only contract gives its legal validity…. If then we employ Status, agreeably with the usage of the best writers, to signify these personal conditions [arising from ancient legal privileges of the Family] only, we may say that the movement of the progressive societies has hitherto been a movement. [1]

This movement was not accidental. It went hand-in-glove with the emerging industrial order; from the fifteenth to the nineteenth centuries, as England, especially, evolved into a booming mercantile economy with all that that implies—flourishing trade, growing cities, an expanding monetary system, commercialization of agriculture, mushrooming manufacturing—contract law was created of necessity.

Contract law did not develop, however, according to a conscious, far-seeing plan. It was a response to changing conditions, and the judges who created it frequently resisted, preferring the quieter, imagined pastoral life of their forefathers. Not until the nineteenth century, in both the United States and England, did a full-fledged law of contracts arise together with modern capitalism.

Contract Defined

As usual in the law, the legal definition of “contract” is formalistic. The Restatement says: “A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” [2] Similarly, the Uniform Commercial Code says: “‘Contract’ means the total legal obligation which results from the parties’ agreement as affected by this Act and any other applicable rules of law.” [3] A short-hand definition is: “A contract is a legally enforceable promise.”

Economic View of Contract Law

In An Economic Analysis of Law (1973), Judge Richard A. Posner (a former University of Chicago law professor) suggests that contract law performs three significant economic functions. First, it helps maintain incentives to individuals to exchange goods and services efficiently. Second, it reduces the costs of economic transactions because its very existence means that the parties need not go to the trouble of negotiating a variety of rules and terms already spelled out. Third, the law of contracts alerts the parties to trouble spots that have arisen in the past, thus making it easier to plan the transactions more intelligently and avoid potential pitfalls.

Sources of Contract Law

There are four basic sources of contract law: the Constitution, federal and state statutes, federal and state case law, and administrative law. For our purposes, the most important of these, and the ones that we will examine at some length, are case law [4] and statutes.

Case (Common) Law and the Restatement of Contracts

The Restatement of Contracts won prompt respect in the courts and has been cited in innumerable cases. The Restatements are not authoritative, in the sense that they are not actual judicial precedents, but they are nevertheless weighty interpretive texts, and judges frequently look to them for guidance. They are as close to “black letter” rules of law as exist anywhere in the American legal system for judge-made (common) law.

Statutory Law: The Uniform Commercial Code

Common law contract principles govern contracts for real estate and for services, obviously very important areas of law. But in one area the common law has been superseded by an important statute: the Uniform Commercial Code (UCC), the modern American state statutory law governing commercial transactions, especially Article 2 [6] , which deals with the sale of goods (movable, tangible items). Briefly put, the UCC is a model law developed by the American law Institute and the National Conference of Commissioners on Uniform State Laws; it has been adopted in one form or another in all fifty states, the District of Columbia, and the American territories. Before the UCC was written, commercial law varied, sometimes greatly, from state to state. This first proved a nuisance and then a serious impediment to business as the American economy became nationwide during the twentieth century.

The UCC provides a flexible and yet highly technical framework for sale of goods that will, for large part, be beyond the scope of this chapter. The text will note some cases when substantial and important differences exist between the common law (services and real estate) and the UCC (sale of goods). For example, under the common law offer must meet acceptance exactly for a contract to be formed, while the UCC is much more flexible, which reflects commercial practice in which offered terms and conditions often don’t match terms and conditions in acceptances. [7]

The Convention on Contracts for the International Sale of Goods

A Convention on Contracts for the International Sale of Goods (CISG)An international body of contract law. was approved in 1980 at a diplomatic conference in Vienna. (A convention is a preliminary agreement that serves as the basis for a formal treaty.) The Convention has been adopted by several countries, including the United States.

The Convention is significant for three reasons. First, the Convention is a uniform law governing the sale of goods—in effect, an international Uniform Commercial Code. The major goal of the drafters was to produce a uniform law acceptable to countries with different legal, social and economic systems. Second, although provisions in the Convention are generally consistent with the UCC, there are significant differences. For instance, under the Convention, consideration (discussed below) is not required to form a contract and there is no Statute of Frauds (a requirement that some contracts be evidenced by a writing to be enforceable—also discussed below). Finally, the Convention represents the first attempt by the US Senate to reform the private law of business through its treaty powers, for the Convention preempts the UCC if the parties to a contract elect to use the CISG. [8]

Basic Contract Taxonomy

Contracts are not all cut from the same die. Some are written, some oral; some are explicit, some not. Because contracts can be formed, expressed, and enforced in a variety of ways, a taxonomy of contracts has developed that is useful in lumping together like legal consequences. In general, contracts are classified along these dimensions: explicitness, mutuality, enforceability, and degree of completion. Explicitness is concerned with the degree to which the agreement is manifest to those not party to it. Mutuality takes into account whether promises are exchanged by two parties or only one. Enforceability is the degree to which a given contract is binding. Completion considers whether the contract is yet to be performed or the obligations have been fully discharged by one or both parties. We will examine each of these concepts in turn.

Explicitness

Express contract.

An express contract [9] is one in which the terms are spelled out directly; the parties to an express contract, whether written or oral, are conscious that they are making an enforceable agreement. For example, an agreement to purchase your neighbor’s car for $500 and to take title next Monday is an express contract.

Implied Contract

An implied contract [10] is one that is inferred from the actions of the parties. Although no discussion of terms took place, an implied contract exists if it is clear from the conduct of both parties that they intended there be one. A delicatessen patron who asks for a “turkey sandwich to go” has made a contract and is obligated to pay when the sandwich is made. By ordering the food, the patron is implicitly agreeing to the price, whether posted or not.

Contract Implied in Law: Quasi-contract

Both express and implied contracts embody an actual agreement of the parties. A quasi-contract [11] , by contrast, is an obligation said to be ‘‘imposed by law” in order to avoid unjust enrichment of one person at the expense of another. In fact, a quasi-contract is not a contract at all; it is a fiction that the courts created to prevent injustice. Suppose, for example, that a carpenter mistakenly believes you have hired him to repair your porch; in fact, it is your neighbor who has hired him. One Saturday morning he arrives at your doorstep and begins to work. Rather than stop him, you let him proceed, pleased at the prospect of having your porch fixed for free (since you have never talked to the carpenter, you figure you need not pay his bill). Although it is true there is no contract, the law implies a contract for the value of the work.

The garden-variety contract is one in which the parties make mutual promises. Each is both promisor and promisee; that is, each pledges to do something and each is the recipient of such a pledge. This type of contract is called a bilateral contract. [12] But mutual promises are not necessary to constitute a contract. Unilateral contracts [13] , in which only one party makes a promise, are equally valid but depend upon performance of the promise to be binding. If Charles says to Fran, “I will pay you five dollars if you wash my car,” Charles is contractually bound to pay once Fran washes the car. Fran never makes a promise, but by actually performing she makes Charles liable to pay. A common example of a unilateral contract is the offer “$50 for the return of my lost dog.” Frances never makes a promise to the offeror, but if she looks for the dog and finds it, she is entitled to the $50.

Enforceability

Not every agreement between two people is a binding contract. An agreement that is lacking one of the legal elements of a contract is said to be void [14] —that is, not a contract at all. An agreement that is illegal—for example, a promise to commit a crime in return for a money payment—is void. Neither party to a void “contract” may enforce it.

By contrast, a voidable contract [15] is one that is unenforceable by one party but enforceable by the other. For example, a minor (any person under eighteen, in most states) may “avoid” a contract with an adult; the adult may not enforce the contract against the minor, if the minor refuses to carry out the bargain. But the adult has no choice if the minor wishes the contract to be performed. (A contract may be voidable by both parties if both are minors.) Ordinarily, the parties to a voidable contract are entitled to be restored to their original condition. Suppose you agree to buy your seventeen-year-old neighbor’s car. He delivers it to you in exchange for your agreement to pay him next week. He has the legal right to terminate the deal and recover the car, in which case you will of course have no obligation to pay him. If you have already paid him, he still may legally demand a return to the status quo ante (previous state of affairs). You must return the car to him; he must return the cash to you.

A voidable contract remains a valid contract until it is voided. Thus, a contract with a minor remains in force unless the minor decides he does not wish to be bound by it. When the minor reaches his majority, he may “ratify” the contract—that is, agree to be bound by it-in which case the contract will no longer be voidable and will thereafter be fully enforceable.

An unenforceable contract [16] is one that some rule of law bars a court from enforcing. For example, Tom owes Pete money, but Pete has waited too long to collect it and the statute of limitations has run out. The contract for repayment is unenforceable and Pete is out of luck, unless Tom makes a new promise to pay or actually pays part of the debt. (However, if Pete is holding collateral as security for the debt, he is entitled to keep it; not all rights are extinguished because a contract is unenforceable.)

Degree of Completion

An agreement consisting of a set of promises is called an executory contract [17] before either promise is carried out. Most executory contracts are enforceable. If one promise or set of terms has been fulfilled—if, for example, John had delivered the wheat to Humphrey—the contract is called partially executed. [18] A contract that has been carried out fully by both parties is called an executed contract. [19]

Finally, the common law recognizes contracts that are “substantially” performed. If one party to a contract performs in a way that doesn’t precisely fulfill the contract, but fulfills its essential terms, the common law would require the other party perform. For example, if someone building a house for another installed the cabinets incorrectly, the buyer would still need to pay for the house. The buyer could then claim damages or require the builder to fix the cabinets. The UCC has a different rule for buying goods: sellers are bound by the “perfect tender” rule, which requires that buyers receive exactly what they ordered or they may reject the good.

Key Takeaways

Contract is the mechanism by which people in modern society make choices for themselves, as opposed to being born or placed into a status as is common in feudal societies. A contract is a legally enforceable promise. The law of contract is the common law (for contracts involving real estate and services), statutory law (the Uniform Commercial Code for contract involving the sale or leasing of goods), and treaty law (the Convention on the International Sale of Goods). Contracts may be described based on the degree of their explicitness, mutuality, enforceability, and degree of completion.

• What did Sir Henry Maine mean when he wrote of society’s movement “from status to contract?
• Are all promises “contracts”?
• What is the source of law for contracts involving real estate? For contracts involving the sale of goods?
• In contract taxonomy, what are the degrees of explicitness, mutuality, enforceability, and of completion?
• Why might it make sense for the law to have a doctrine like “substantial performance”?

Contract Formation

• Understand the elements of common-law contracts: mutuality of agreement (offer and acceptance), consideration, legality, and capacity.
• Learn when a contract must be in writing—or evidenced by some writing—to be enforceable.

Although it has countless wrinkles and nuances, contract law asks two principal questions: did the parties create a valid, enforceable contract? What remedies are available when one party breaks the contract? The answer to the first question is not always obvious; the range of factors that must be taken into account can be large and their relationship subtle. Since people in business frequently conduct contract negotiations without the assistance of a lawyer, it is important to attend to the nuances to avoid legal trouble at the outset. Whether a valid enforceable contract has been formed depends in turn on whether:

• The parties reached an agreement (offer and acceptance);
• Consideration was present (some “price was paid for what was received in return);
• The agreement was legal;
• The parties entered into the contract with capacity to make a contract; and
• The agreement is in the proper form (something in writing, if required).

The Agreement: Offer and Acceptance

The core of a legal contract is the agreement between the parties. Although agreements may take any form, including unspoken conduct between the parties, they are usually structured in terms of an offer and an acceptance. Note, however, that not every agreement, in the broadest sense of the word, need consist of an offer and acceptance, and it is entirely possible, therefore, for two persons to reach agreement without forming a contract. For example, people may agree that the weather is pleasant or that it would be preferable to go out for Chinese food rather than seeing a foreign film; in neither case has a contract been formed. One of the major functions of the law of contracts is to sort out those agreements that are legally binding—those that are contracts—from those that are not.

The Restatement (Second) of Contracts defines agreement as a “manifestation of mutual assent by two or more persons to one another.” [20] The UCC defines agreement as “the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance.” [21] The critical question is what the parties objectively said or did, not what they subjectively thought they said or did.

The distinction between objective and subjective standards crops up occasionally when one person claims he spoke in jest. The vice president of a manufacturer of punchboards, used in gambling, testified to the Washington State Game Commission that he would pay $100,000 to anyone who found a “crooked board.” Barnes, a bartender, who had purchased two that were crooked some time before, brought one to the company office, and demanded payment. The company refused, claiming that the statement was made in jest (the audience before the commission had laughed when the offer was made). The court disagreed, holding that it was reasonable to interpret the pledge of $100,000 as a means of promoting punchboards:

(I)f the jest is not apparent and a reasonable hearer would believe that an offer was being made, then the speaker risks the formation of a contract which was not intended. It is the objective manifestations of the offeror that count and not secret, unexpressed intentions. If a party’s words or acts, judged by a reasonable standard, manifest an intention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real but unexpressed state of the party’s mind on the subject. [22]

An offer is a manifestation of willingness to enter into a bargain such that it would be reasonable for another individual to conclude that assent to the offer would complete the bargain. Offers must be communicated and must be definite; that is, they must spell out terms to which the offeree can assent.

To constitute an agreement, there must be an acceptance of the offer. The offeree must manifest his assent to the terms of the offer in a manner invited or required by the offer. If the offer says “accept in skywriting at noon”, then the only way to accept the offer is to hire an airplane. If the offeror specifies no particular mode, then acceptance is effective when transmitted as long as the offeree uses a reasonable method of acceptance. It is implied that the offeree can use the same means used by the offeror or a means of communication customary to the industry. For example, the use of the postal service was so customary that acceptances are considered effective when mailed, regardless of the method used to transmit the offer. Indeed, the so-called “mailbox rule” (the acceptance is effective upon dispatch) has an ancient lineage, tracing back nearly two hundred years to the English courts. [23]

Consideration

Not every agreement forms a contract. One way in which agreements fail to become contracts is because they lack consideration . Consideration is the quid pro quo (something given or received for something else) between the contracting parties in the absence of which the law will not enforce the promise or promises made. Consider the following three “contracts”:

• Betty offers to give a book to Lou. Lou accepts.
• Betty offers Lou the book in exchange for Lou’s promise to pay $15. Lou accepts.
• Betty offers to give Lou the book if Lou promises to pick it up at Betty’s house. Lou accepts.

The question is which, if any, is a binding contract? In American law, only situation 2 is a binding contract, because only that contract contains a set of mutual promises in which each party pledges to give up something to the benefit of the other. [24]

The existence of consideration is determined by examining whether the person against whom a promise is to be enforced (the promisor [25] ) received something in return from the person to whom he made the promise (the promisee [26] ). That may seem a simple enough question. But as with much in the law, the complicating situations are never very far away. The “something” that is promised or delivered cannot just be anything: a feeling of pride, warmth, amusement, friendship; it must be something known as a legal detriment [27] —an act, a forbearance, or a promise of such from the promisee. The detriment need not be an actual detriment; it may in fact be a benefit to the promisee, or at least not a loss. At the same time, the “detriment” to the promisee need not confer a tangible benefit on the promisor; the promisee can agree to forego something without that something being given to the promisor. Whether consideration is legally sufficient has nothing to do with whether it is morally or economically adequate to make the bargain a fair one. Moreover, legal consideration need not even be certain; it can be a promise contingent on an event that may never happen. Consideration is a legal concept, and it centers on the giving up of a legal right or benefit.

Consideration has two elements. The first, as just outlined, is whether the promisee has incurred a legal detriment. (Some courts—although a minority—take the view that a bargained-for legal benefit to the promisor is sufficient consideration.) The second is whether the legal detriment was bargained for : did the promisor specifically intend the act, forbearance, or promise in return for his promise? Applying this two-pronged test to the three examples given at the outset of the chapter, we can easily see why only in the second is there legally sufficient consideration. In the first, Lou incurred no legal detriment; he made no pledge to act or to forbear from acting, nor did he in fact act or forbear from acting. In the third example, what might appear to be such a promise is not really so. Betty made a promise on a condition that Lou come to her house; the intent clearly is to make a gift. Betty was not seeking to induce Lou to come to her house by promising the book.

There is a widely recognized exception to the requirement of consideration. In cases of promissory estoppel, the courts will enforce promises without consideration. Simply stated, promissory estoppel [28] means that the courts will stop the promisor from claiming that there was no consideration. The doctrine of promissory estoppel is invoked in the interests of justice when three conditions are met: (1) the promise is one that the promisor should reasonably expect to induce the promisee to take action or forbear from taking action of a definite and substantial character; (2) the action or forbearance is taken; and (3) injustice can be avoided only by enforcing the promise.

Timko served on the board of trustees of a school. He recommended that the school purchase a building for a substantial sum of money, and to induce the trustees to vote for the purchase, he promised to help with the purchase and to pay at the end of five years the purchase price less the down payment. At the end of four years, Timko died. The school sued his estate, which defended on the ground that there was no consideration for the promise. Timko was promised or given nothing in return, and the purchase of the building was of no direct benefit to him (which would have made the promise enforceable as a unilateral contract). The court ruled that under the three-pronged promissory estoppel test, Timko’s estate was liable. [29]

In general, illegal contracts are unenforceable. Thus, one can think of “legality” as being a required element of a contract, along with agreement, consideration, and capacity. As illegality is also a defense to a contract, we cover it later in the chapter.

Capacity issues often arise when contracting with minors. The general rule is that persons younger than eighteen can avoid their contracts.

Although the age of majority was lowered in most states during the 1970s to correspond to the Twenty-sixth Amendment (ratified in 1971, guaranteeing the right to vote at eighteen), some states still put the age of majority at twenty-one. Legal rights for those under twenty-one remain ambiguous, however. Although eighteen-year-olds may assent to binding contracts, not all creditors and landlords believe it, and they may require parents to cosign. For those under twenty-one, there are also legal impediments to holding certain kinds of jobs, signing certain kinds of contracts, marrying, leaving home, and drinking alcohol. There is as yet no uniform set of rules. The exact day on which the disability of minority vanishes also varies. The old common law rule put it on the day before the twenty-first birthday. Many states have changed this rule so that majority commences on the day of the eighteenth (or twenty-first) birthday.

A minor’s contract is voidable, not void. A child wishing to avoid the contract need do nothing positive to disaffirm; the defense of minority to a lawsuit is sufficient. Although the adult cannot enforce the contract, the child can (which is why it is said to be voidable, not void).

When the minor becomes an adult, she has two choices: she may ratify the contract or disaffirm [31] it. She may ratify explicitly; no further consideration is necessary. She may also do so by implication—for instance, by continuing to make payments or retaining goods for an unreasonable period of time. (In some states, a court may ratify the contract before the child becomes an adult. In California, for example, a state statute permits a movie producer to seek court approval of a contract with a child actor in order to prevent the child from disaffirming it upon reaching majority and suing for additional wages. As quid pro quo, the court can order the producer to pay a percentage of the wages into a trust fund that the child’s parents or guardians cannot invade.) If the child has not disaffirmed the contract while still a minor, she may do so within a reasonable time after reaching majority.

In most cases of disavowal, the only obligation is to return the goods (if he still has them) or repay the consideration (unless it has been dissipated). However, in two situations, a minor might incur greater liability: contracts for necessities and misrepresentation of age.

Contract for Necessities

At common law, a “necessity” was defined as an essential need of a human being: food, medicine, clothing, and shelter. In recent years, however, the courts have expanded the concept, so that in many states today necessities include property and services that will enable the minor to earn a living and to provide for those dependent on him. If the contract is executory, the minor can simply disaffirm. If the contract has been executed, however, the minor must face more onerous consequences. Although he will not be required to perform under the contract, he will be liable under a theory of “quasi-contract” for the reasonable value of the necessity.

Misrepresentation of Age

In most states, a minor may misrepresent his age and disaffirm in accordance with the general rule, because that’s what kids do, misrepresent their age. That the adult reasonably believed the minor was also an adult is of no consequence in a contract suit. But some states have enacted statutes that make the minor liable in certain situations. A Michigan statute, for instance, prohibits a minor from disaffirming if he has signed a “separate instrument containing only the statement of age, date of signing and the signature:” And some states “estop” him from claiming to be a minor if he falsely represented himself as an adult in making the contract. “Estoppel” is a refusal by the courts on equitable grounds to listen to an otherwise valid defense; unless the minor can return the consideration, the contract will be enforced.

Contracts made by a mentally incompetent or highly intoxicated person are also said to have been made by a person lacking capacity. In general, such contracts are voidable by the person when capacity is regained (or by the person’s legal representative if capacity is not regained).

As a general rule, a contract need not be in writing to be enforceable. An oral agreement to pay a high-fashion model $1 million to pose for a photograph is as binding as if the language of the deal were printed on vellum and signed in the presence of twenty bishops. For centuries, however, a large exception has grown up around the Statute of Frauds [32] , first enacted in England in 1677 under the formal name “An Act for the Prevention of Frauds and Perjuries.” The purpose of the Statute of Frauds is to prevent the fraud that occurs when one party attempts to impose upon another a contract that did not in fact exist.

The Statute of Frauds requires that certain kinds of contracts be in writing to be enforceable. These include:

• Contracts to convey an interest in land (such as sale of a home);
• Contracts that are impossible to fulfill within one year (such as a contract entered July 1, for employment beginning August 1 and lasting a year);
• Contracts in which the consideration is marriage;
• Contracts to pay another’s debt; and
• Under the UCC, contracts for sale of goods for at least $500 (and lease of goods of at least $1,000).

Again, as may be evident from the title of the act and its requirements, the general purpose of the law is to provide evidence, in areas of some complexity and importance, that a contract was actually made. To a lesser degree, the law serves to caution those about to enter a contract and “to create a climate in which parties often regard their agreements as tentative until there is a signed writing.” [33]

There are many exceptions to the Statute of Frauds. For example, under the UCC, custom goods manufactured, such as with the logo of another company, would be evidence of the agreement, as it is unlikely someone would produce custom goods without an agreement. If the parties have began to perform according to the oral agreement, it would also be hard to deny the contract exists, at least as to what has been performed. For contracts to pay another’s debt, if the primary purpose for which the agreement was made was to benefit the guarantor, then again an exception applies. These are just several examples, and so one should research the law carefully before trying to back out of a contract for Statute of Frauds concerns. Of course, it would be prudent to render the agreement in writing to begin with!

Parol Evidence

Unlike Minerva sprung forth whole from the brow of Zeus in Greek mythology, contracts do not appear at a stroke memorialized on paper. Almost invariably, negotiations of some sort precede the concluding of a deal. People write letters, talk by telephone, meet face-to-face, send e-mails, and exchange thoughts and views about what they want and how they will reciprocate. They may even lie and cajole in duplicitous ways, making promises they know they cannot or will not keep in order not to kill the contract talks. In the course of these discussions, they may reach tentative agreements, some of which will ultimately be reflected in the final contract, some of which will be discarded along the way, and some of which perhaps will not be included in the final agreement but will nevertheless not be contradicted by it. Whether any weight should be given to these prior agreements is a problem that frequently arises.

The rule at common law is this: a written contract intended to be the parties’ complete understanding discharges all prior or contemporaneous promises, statements, or agreements that add to, vary, or conflict with it.

The rule applies to all written contracts, whether or not the Statute of Frauds requires them to be in writing. The Statute of Frauds gets to whether there was a contract at all; the parol evidence rule says, granted there was a written contract, does it express the parties’ understanding? But the rule is concerned only with events that transpired before the contract in dispute was signed. It has no bearing on agreements reached subsequently that may alter the terms of an existing contract.

Exceptions to the Parol Evidence Rule

Despite its apparent stringency, the parol evidence rule does not negate all prior agreements or statements, nor preclude their use as evidence. A number of situations fall outside the scope of the rule and hence are not technically exceptions to it, so they are better phrased as exemptions (something not within the scope of a rule).

If the parties never intended the written contract to be their full understanding—if they intended it to be partly oral—then the rule does not apply. If the document is fully integrated, no extrinsic evidence will be permitted to modify the terms of the agreement, even if the modification is in addition to the existing terms, rather than a contradiction of them. If the contract is partially integrated, prior consistent additional terms may be shown. It is the duty of the party who wants to exclude the parol evidence to show the contract was intended to be integrated. That is not always an easy task. To prevent a party later from introducing extrinsic evidence to show that there were prior agreements, the contract itself can recite that there were none. Here, for example, is the final clause in the National Basketball Association Uniform Player Contract: “This agreement contains the entire agreement between the parties and there are no oral or written inducements, promises or agreements except as contained herein.” Such a clause is known as a merger or integration clause.

When the parties orally agree that a written contract is contingent on the occurrence of an event or some other condition (a condition precedent [34] ), the contract is not integrated and the oral agreement may be introduced. The classic case is that of an inventor who sells in a written contract an interest in his invention. Orally, the inventor and the buyer agree that the contract is to take effect only if the buyer’s engineer approves the invention. (The contract was signed in advance of approval so that the parties would not need to meet again.) The engineer did not approve it, and in a suit for performance, the court permitted the evidence of the oral agreement because it showed “that in fact there never was any agreement at all.” [35] Note that the oral condition does not contradict a term of the written contract; it negates it. The parol evidence rule will not permit evidence of an oral agreement that is inconsistent with a written term, for as to that term the contract is integrated.

Third-Party Rights

Assigning rights.

Contracts create rights and duties. By an assignment [36] , an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person (assignee); the obligee then becomes an assignor (one who makes an assignment). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden her, increase her risk, or otherwise diminish the value to her of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. A common example of this last point are prohibitions against subletting commonly found in leases–subletting is assigning the contractual right of occupancy.

An assignment of rights effectively makes the assignee stand in the shoes of the assignor. [37] She gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee.

Delegating Duties

To this point, we have been considering the assignment of the assignor’s rights (usually, though not solely, to money payments). But in every contract, a right connotes a corresponding duty, and these may be delegated. A delegation is the transfer to a third party of the duty to perform under a contract. The one who delegates is the delegator. Because most obligees are also obligors, most assignments of rights will simultaneously carry with them the delegation of duties. Unless public policy or the contract itself bars the delegation, it is legally enforceable.

An obligor who delegates a duty (and becomes a delegator) does not thereby escape liability for performing the duty himself. The obligee of the duty may continue to look to the obligor for performance unless the original contract specifically provides for substitution by delegation. This is a big difference between assignment of contract rights and delegation of contract duties: in the former, the assignor is discharged (absent breach of assignor’s warranties); in the latter, the delegator remains liable. The obligee (again, the one to whom the duty to perform flows) may also, in many cases, look to the delegatee, because the obligee becomes an intended beneficiary of the contract between the obligor and the delegatee.

Third-Party Beneficiaries

The general rule is this: persons not a party to a contract cannot enforce its terms; they are said to lack privity [38] , a private, face-to-face relationship with the contracting parties. But if the persons are intended to benefit from the performance of a contract between others, then they can enforce it: they are intended beneficiaries.

For example, a contract to paint one’s house cannot be enforced by a neighbor–the neighbor might benefit from an increased home value due to your house looking maintained, but this benefit is only incidental . In contrast, a contract between A and B to deliver insurance proceeds to C would be enforcable by C. C is an intended, rather than merely incidental, beneficiary of the contract.

• What are the required elements of a contract?
• When was the Statute of Frauds first enacted, by whom, and why?
• Basically, what does the Statute of Frauds require? How does it interact with the Parol Evidence Rule?

Defenses and Interpretations

• Understand problems with voluntary consent, such as fraud, mistake, duress, and undue influence
• Understand when courts will choose not to enforce contracts for public policy reasons, such as unconscionability.
• Understand implications of illegal contracts.
• Understand rules for resolving ambiguity in contracts

Because contracts are voluntary agreements the law will enforce, the common law developed a variety of doctrines that responded to situations in which someone was not truly free to enter into the contract, or to situations in which courts felt it unfair to enforce the agreement. In this section we will study these doctrines.

Misrepresentation is a statement of fact that is not consistent with the truth. If misrepresentation is intentional, it is fraudulent misrepresentation; if it is not intentional, it is nonfraudulent misrepresentation, which can be either negligent or innocent.

In further taxonomy, courts distinguish between fraud in the execution and fraud in the inducement. Fraud in the execution occurs when the nature of the document itself is misrepresented. For example, Alphonse and Gaston decide to sign a written contract incorporating terms to which they have agreed. It is properly drawn up, and Gaston reads it and approves it. Before he can sign it, however, Alphonse shrewdly substitutes a different version to which Gaston has not agreed. Gaston signs the substitute version. There is no contract. There has been fraud in the execution.

Fraud in the inducement is more common. It involves some misrepresentation about the subject of the contract that induces assent. Alphonse tells Gaston that the car Gaston is buying from Alphonse has just been overhauled—which pleases Gaston—but it has not been. This renders the contract voidable.

Nondisclosure

A passive type of concealment is nondisclosure. Although generally the law imposes no obligation on anyone to speak out, nondisclosure of a fact can operate as a misrepresentation under certain circumstances. This occurs, for example, whenever the other party has erroneous information where the nondisclosure amounts to a failure to act in good faith, or where the party who conceals knows or should know that the other side cannot, with reasonable diligence, discover the truth.

In a remarkable 1991 case out of New York, a New York City stockbroker bought an old house upstate (basically anyplace north of New York City) in the village of Nyack, north of New York City, and then wanted out of the deal when he discovered—the defendant seller had not told him—that it was “haunted.” The court summarized the facts: “Plaintiff, to his horror, discovered that the house he had recently contracted to purchase was widely reputed to be possessed by poltergeists [ghosts], reportedly seen by defendant seller and members of her family on numerous occasions over the last nine years. Plaintiff promptly commenced this action seeking rescission of the contract of sale. Supreme Court reluctantly dismissed the complaint, holding that plaintiff has no remedy at law in this jurisdiction.”

The high court of New York ruled he could rescind the contract because the house was “haunted as a matter of law”: the defendant had promoted it as such on village tours and in Reader’s Digest . She had concealed it, and no reasonable buyer’s inspection would have revealed the “fact.” The dissent basically hooted, saying, “The existence of a poltergeist is no more binding upon the defendants than it is upon this court.” [39]

Statement Made False by Subsequent Events

If a statement of fact is made false by later events, it must be disclosed as false. For example, in idle chatter one day, Alphonse tells Gaston that he owns thirty acres of land. In fact, Alphonse owns only twenty-seven, but he decided to exaggerate a little. He meant no harm by it, since the conversation had no import. A year later, Gaston offers to buy the “thirty acres” from Alphonse, who does not correct the impression that Gaston has. The failure to speak is a nondisclosure—presumably intentional, in this situation—that would allow Gaston to rescind a contract induced by his belief that he was purchasing thirty acres.

Statements of Opinion

An opinion, of course, is not a fact; neither is sales puffery. For example, the statements “In my opinion this apple is very tasty” and “These apples are the best in the county” are not facts; they are not expected to be taken as true. Reliance on opinion is hazardous and generally not considered justifiable.

If Jack asks what condition the car is in that he wishes to buy, Mr. Olson’s response of “Great!” is not ordinarily a misrepresentation. As the Restatement puts it: “The propensity of sellers and buyers to exaggerate the advantages to the other party of the bargains they promise is well recognized, and to some extent their assertions must be discounted.” [40] Vague statements of quality, such as that a product is “good,” ought to suggest nothing other than that such is the personal judgment of the opinion holder.

Despite this general rule, there are certain exceptions that justify reliance on opinions and effectively make them into facts. Merely because someone is less astute than the one with whom she is bargaining does not give rise to a claim of justifiable reliance on an unwarranted opinion.

In discussing fraud, we have considered the ways in which trickery by the other party makes a contract void or voidable. We now examine the ways in which the parties might “trick” themselves by making assumptions that lead them mistakenly to believe that they have agreed to something they have not. A mistake is “a belief about a fact that is not in accord with the truth.” [41]

Mistake by One Party

Unilateral mistake.

Where one party makes a mistake, it is a unilateral mistake. [42] The rule: ordinarily, a contract is not voidable because one party has made a mistake about the subject matter (e.g., the truck is not powerful enough to haul the trailer; the dress doesn’t fit).

If one side knows or should know that the other has made a mistake, he or she may not take advantage of it. A person who makes the mistake of not reading a written document will usually get no relief, nor will relief be afforded to one whose mistake is caused by negligence (a contractor forgets to add in the cost of insulation) unless the negligent party would suffer unconscionable hardship if the mistake were not corrected. Courts will allow the correction of drafting errors in a contract (“reformation”) in order to make the contract reflect the parties’ intention. [43]

Mutual Mistake

In the case of mutual mistake [44] —both parties are wrong about the subject of the contract—relief may be granted.

The Restatement sets out three requirements for successfully arguing mutual mistake. [45] The party seeking to avoid the contract must prove that

• the mistake relates to a “basic assumption on which the contract was made,”
• the mistake has a material effect on the agreed exchange of performances,
• the party seeking relief does not bear the risk of the mistake.

Basic assumption is probably clear enough. In the famous “cow case,” the defendant sold the plaintiff a cow—Rose of Abalone—believed by both to be barren and thus of less value than a fertile cow (a promising young dairy cow in 2010 might sell for $1,800). [46] Just before the plaintiff was to take Rose from the defendant’s barn, the defendant discovered she was “large with calf”; he refused to go on with the contract. The court held this was a mutual mistake of fact—“a barren cow is substantially a different creature than a breeding one”—and ruled for the defendant. That she was infertile was “a basic assumption,” but—for example—that hay would be readily available to feed her inexpensively was not, and had hay been expensive, that would not have vitiated the contract.

Material Effect on the Agreed-to Exchange of Performance

“Material effect on the agreed-to exchange of performance” means that because of the mutual mistake, there is a significant difference between the value the parties thought they were exchanging compared with what they would exchange if the contract were performed, given the standing facts. Again, in the cow case, had the seller been required to go through with the deal, he would have given up a great deal more than he anticipated, and the buyer would have received an unagreed-to windfall.

Party Seeking Relief Does Not Bear the Risk of the Mistake

Assume a weekend browser sees a painting sitting on the floor of an antique shop. The owner says, “That old thing? You can have it for $100.” The browser takes it home, dusts it off, and hangs it on the wall. A year later a visitor, an expert in art history, recognizes the hanging as a famous lost El Greco worth $1 million. The story is headlined; the antique dealer is chagrined and claims the contract for sale should be voided because both parties mistakenly thought they were dickering over an “old, worthless” painting. The contract is valid. The owner is said to bear the risk of mistake because he contracted with conscious awareness of his ignorance: he knew he didn’t know what the painting’s possible value might be, but he didn’t feel it worthwhile to have it appraised. He gambled it wasn’t worth much, and lost.

Duress and Undue Influence

When a person is forced to do something against his or her will, that person is said to have been the victim of duress. There are two types of duress: physical duress and duress by improper threat.

Physical Duress

If a person is forced into entering a contract on threat of physical bodily harm, he or she is the victim of physical duress. It is defined by the Restatement (Second) of Contracts in Section 174: “If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.” A contract induced by physical violence is void. [47]

Duress by Economic Threat

The second kind of duress is duress by economic threat ; it is more common than physical duress. Here the perpetrator threatens the victim economically, who feels there is no reasonable alternative but to assent to the contract. It renders the contract voidable. This rule contains a number of elements.

First, the threat must be improper. Second, there must be no reasonable alternative. If, for example, a supplier threatens to hold up shipment of necessary goods unless the buyer agrees to pay more than the contract price, this would not be duress if the buyer could purchase identical supplies from someone else. Third, the test for inducement is subjective. It does not matter that the person threatened is unusually timid or that a reasonable person would not have felt threatened. The question is whether the threat in fact induced assent by the victim. Such facts as the victim’s belief that the threatener had the ability to carry out the threat and the length of time between the threat and assent are relevant in determining whether the threat did prompt the assent.

There are many types of improper threats that might induce a party to enter into a contract: threats to commit a crime or a tort (e.g., bodily harm or taking of property), to instigate criminal prosecution, to instigate civil proceedings when a threat is made in bad faith, to breach a “duty of good faith and fair dealing under a contract with the recipient,” or to disclose embarrassing details about a person’s private life.

Jack buys a car from a local used-car salesman, Mr. Olson, and the next day realizes he bought a lemon. He threatens to break windows in Olson’s showroom if Olson does not buy the car back for $2,150, the purchase price. Mr. Olson agrees. The agreement is voidable, even though the underlying deal is fair, if Olson feels he has no reasonable alternative and is frightened into agreeing. Suppose Jack knows that Olson has been tampering with his cars’ odometers, a federal offense, and threatens to have Olson prosecuted if he will not repurchase the car. Even though Olson may be guilty, this threat makes the repurchase contract voidable, because it is a misuse for personal ends of a power (to go to the police) given each of us for other purposes. If these threats failed, suppose Jack then tells Olson, “I’m going to haul you into court and sue your pants off.” If Jack means he will sue for his purchase price, this is not an improper threat, because everyone has the right to use the courts to gain what they think is rightfully theirs. But if Jack meant that he would fabricate damages done him by a (falsely) claimed odometer manipulation, that would be an improper threat. Although Olson could defend against the suit, his reputation would suffer in the meantime from his being accused of odometer tampering.

Undue Influence

The Restatement of Contracts (Second) characterizes undue influence as “unfair persuasion.” [48] It is a milder form of duress than physical harm or threats. The unfairness does not lie in any misrepresentation; rather, it occurs when the victim is under the domination of the persuader or is one who, in view of the relationship between them, is warranted in believing that the persuader will act in a manner detrimental to the victim’s welfare if the victim fails to assent. It is the improper use of trust or power to deprive a person of free will and substitute instead another’s objective. Usually the fact pattern involves the victim being isolated from receiving advice except from the persuader. Falling within this rule are situations where, for example, a child takes advantage of an infirm parent, a doctor takes advantage of an ill patient, or a lawyer takes advantage of an unknowledgeable client. If there has been undue influence, the contract is voidable by the party who has been unfairly persuaded. Whether the relationship is one of domination and the persuasion is unfair is a factual question. The answer hinges on a host of variables, including “the unfairness of the resulting bargain, the unavailability of independent advice, and the susceptibility of the person persuaded.” [49]

Illegal contracts

Contracts that violate a statute.

Any bargain that violates the criminal law—including statutes that govern extortion, robbery, embezzlement, forgery, some gambling, licensing, and consumer credit transactions—is illegal. Thus determining whether contracts are lawful may seem to be an easy enough task. Clearly, whenever the statute itself explicitly forbids the making of the contract or the performance agreed upon, the bargain (such as a contract to sell drugs) is unlawful. But when the statute does not expressly prohibit the making of the contract, courts examine a number of factors.

Unconscionable contracts

Courts may refuse to enforce unconscionable contracts, those that are shockingly one-sided, unfair, the product of unequal bargaining power, or oppressive; a court may find the contract divisible and enforce only the parts that are not unconscionable.

The common-law rule is reflected in Section 208 of the Restatement: “If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.”

Unconscionability may arise procedurally or substantively. A term is procedurally unconscionable if it is imposed upon the “weaker” party because of fine or inconspicuous print, unexpected placement in the contract, lack of opportunity to read the term, lack of education or sophistication that precludes understanding, or lack of equality of bargaining power. Substantive unconscionability arises where the affected terms are oppressive and harsh, where the term deprives a party of any real remedy for breach. Most often—but not always—courts find unconscionable contracts in the context of consumer transactions rather than commercial transactions. In the latter case, the assumption is that the parties tend to be sophisticated businesspeople able to look out for their own contract interests.

Specific contractual pitfalls

Courts have long held that public policy disfavors attempts to contract out of tort liability. Exculpatory clauses that exempt one party from tort liability to the other for harm caused intentionally or recklessly are unenforceable without exception. A contract provision that exempts a party from tort liability for negligence is unenforceable under two general circumstances: (1) when it “exempts an employer from liability to an employee for injury in the course of his employment” or (2) when it exempts one charged with a duty of public service and who is receiving compensation from liability to one to whom the duty is owed. [50] Contract terms with offensive exculpatory clauses may be considered somewhat akin to unconscionability.

Another broad area in which public policy intrudes on private contractual arrangements is that of undertakings between couples, either prior to or during marriage. Marriage is quintessentially a relationship defined by law, and individuals have limited ability to change its scope through legally enforceable contracts. Moreover, marriage is an institution that public policy favors, and agreements that unreasonably restrain marriage are void. Thus a father’s promise to pay his twenty-one-year-old daughter $100,000 if she refrains from marrying for ten years would be unenforceable. However, a promise in a postnuptial (after marriage) agreement that if the husband predeceases the wife, he will provide his wife with a fixed income for as long as she remains unmarried is valid because the offer of support is related to the need.

Finally, a promise by an employee not to compete with his or her former employer is scrutinized carefully by the courts, and an injunction [52] will be issued cautiously, partly because the prospective employee is usually confronted with a contract of adhesion [53] and is in a weak bargaining position compared to the employer, and partly because an injunction might cause the employee’s unemployment. Many courts are not enthusiastic about employment noncompete agreements. The California Business and Professions Code provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” [54] As a result of the statute, and to promote entrepreneurial robustness, California courts typically interpret the statute broadly and refuse to enforce noncompete agreements. Other states are less stingy, and employers have attempted to avoid the strictures of no-enforcement state rulings by providing that their employment contracts will be interpreted according to the law of a state where noncompetes are favorably viewed.

Ways to resolve ambiguity

As any reader knows, the meaning of words depends in part on context and in part on the skill and care of the writer. As Justice Oliver Wendell Holmes Jr. once succinctly noted, “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” [55] Words and phrases can be ambiguous, either when they stand alone or when they take on a different coloration from words and phrases near them. A writer can be careless and contradict himself without intending to; people often read hurriedly and easily miss errors that a more deliberate perusal might catch. Interpretation difficulties can arise for any of a number of reasons: a form contract might contain language that is inconsistent with provisions specifically annexed; the parties might use jargon that is unclear; they might forget to incorporate a necessary term; assumptions about prior usage or performance, unknown to outsiders like judges, might color their understanding of the words they do use. Because ambiguities do arise, courts are frequently called on to give content to the words on paper.

Courts attempt to give meaning to the parties’ understanding when they wrote the contract. The intention of the parties governs, and if their purpose in making the contract is known or can be ascertained from all the circumstances, it will be given great weight in determining the meaning of an obscure, murky, or ambiguous provision or a pattern of conduct. A father tells the college bookstore that in consideration of its supplying his daughter, a freshman, with books for the coming year, he will guarantee payment of up to $350. His daughter purchases books totaling $400 the first semester, and he pays the bill. Midway through the second semester, the bookstore presents him with a bill for an additional $100, and he pays that. At the end of the year, he refuses to pay a third bill for $150. A court could construe his conduct as indicating a purpose to ensure that his daughter had whatever books she needed, regardless of cost, and interpret the contract to hold him liable for the final bill.

The policy of uncovering purpose has led to a number of tools of judicial interpretation:

• More specific terms or conduct are given more weight than general terms or unremarkable conduct. Thus a clause that is separately negotiated and added to a contract will be counted as more significant than a standard term in a form contract.
• A writing is interpreted as a whole, without undue attention to one clause.
• Common words and terms are given common meaning; technical terms are given their technical meaning.
• In the range of language and conduct that helps in interpretation, the courts prefer the following items in the order listed: express terms, course of performance, course of dealing, and usage of trade.
• If an amount is given in words and figures that differ, the words control.
• Writing controls over typing; typing controls over printed forms.
• Ambiguities are construed against the party that wrote the contract.

For an example of resolving ambiguity by construing against, the drafter, the Cases section below gives an example from golf: does a hole in one on the seventeenth round, played on the eighth hole, count as the eighth hole? [56]

• Why do courts fairly frequently have to interpret the meaning of contracts?
• Henrioulle was an unemployed widower with two children who received public assistance from the Marin County (California) Department of Social Services. There was a shortage of housing for low-income residents in Marin County. He entered into a lease agreement on a printed form by which the landlord disclaimed any liability for any injury sustained by the tenants anywhere on the property. Henrioulle fractured his wrist when he tripped on a rock on the common stairs in the apartment building. The landlord had been having a hard time keeping the area clean. Is the disclaimer valid? Explain.
• A parking lot agreement says the parking lot is “not responsible for loss of contents or damage to the vehicle.” Is that acceptable? Explain.
• Why is relief usually not granted for unilateral mistakes? When is relief granted for them?
• How is duress different from undue influence?
• If a contract has no procedural problems, should it ever be found substantively unconscionable?

Remedies for Breach of Contract

• Know the types of damages: compensatory and punitive.
• Understand specific performance as a remedy.
• Understand restitution as a remedy.
• Recognize the interplay between contract and tort as a cause of action.

Monetary awards (called “damages”), specific performance, and restitution are the three principle remedies when a contract is broken or “breached”.

In view of the importance given to the intention of the parties in forming and interpreting contracts, it may seem surprising that the remedy for every breach is not a judicial order that the obligor carry out his undertakings. But it is not. Of course, some duties cannot be performed after a breach: time and circumstances will have altered their purpose and rendered many worthless. Still, although there are numerous occasions on which it would be theoretically possible for courts to order the parties to carry out their contracts, the courts will not do it. In 1897, Justice Oliver Wendell Holmes, Jr., declared in a famous line that “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it.” By that he meant simply that the common law looks more toward compensating the promisee for his loss than toward compelling the promisor to perform—a person always has the power, though not the right, to breach a contract. Indeed, the law of remedies often provides the parties with an incentive to break the contract. In short, the promisor has a choice: to perform or pay. The purpose of contract remedies is, for the most part, to compensate the non-breaching party for the losses suffered—to put the non-breaching party in the position he, she, or it would have been in had there been no breach.

This is very different than tort law! Tort law looks backward , to put the injured party in the same position as if the tort had not occurred. Contract law looks forward to put the injured party in the same position as if the contract had been fulfilled. These are called “expectation damages.” If giving expectation damages is impossible, such as if they cannot be calculated, [57] the law might then look backward and put the parties in the same position as if the contract had not been entered.

Compensatory Damages

One party has the right to damages [58] (money) when the other party has breached the contract unless, of course, the contract itself or other circumstances suspend or discharge that right. Compensatory damages is the general category of damages awarded to make the non-breaching party whole.

Consequential Damages

A basic principle of contract law is that a person injured by breach of contract is not entitled to compensation unless the breaching party, at the time the contract was made, had reason to foresee the loss as a probable result of the breach. The leading case, perhaps the most studied case in all the common law, is Hadley v. Baxendale , decided in England in 1854. Joseph and Jonah Hadley were proprietors of a flour mill in Gloucester. In May 1853, the shaft of the milling engine broke, stopping all milling. An employee went to Pickford and Company, a common carrier, and asked that the shaft be sent as quickly as possible to a Greenwich foundry that would use the shaft as a model to construct a new one. The carrier’s agent promised delivery within two days. But through an error the shaft was shipped by canal rather than by rail and did not arrive in Greenwich for seven days. The Hadleys sued Joseph Baxendale, managing director of Pickford, for the profits they lost because of the delay. In ordering a new trial, the Court of Exchequer ruled that Baxendale was not liable because he had had no notice that the mill was stopped:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. [59]

This rule, it has been argued, was a subtle change from the earlier rule that permitted damages for any consequences as long as the breach caused the injury and the plaintiff did not exacerbate it. But the change was evidently rationalized, at least in part, by the observation that in the “usual course of things,” a mill would have on hand a spare shaft, so that its operations would not cease. [60]

This sub-set of compensatory damages is called consequential damages [61] —damages that flow as a foreseeable consequence of the breach. For example, if you hire a roofer to fix a leak in your roof, and he does a bad job so that the interior of your house suffers water damage, the roofer is liable not only for the poor roofing job, but also for the ruined drapes, damaged flooring and walls, and so on.

Whether consequential damages are allowed under the contract is the source of much litigation. The UCC provides an extensive set of rules for sale of goods to determine whether sellers’ disclaimers or buyers’ inclusion of these terms in contracts are binding. This kind of dispute is called a “battle of the forms.”

Nominal Damages

If the breach caused no loss, the plaintiff is nevertheless entitled to a minor sum, perhaps one dollar, called nominal damages. When, for example, a buyer could purchase the same commodity at the same price as that contracted for, without spending any extra time or money, there can be no real damages in the event of breach.

Incidental Damages

Suppose City College hires Prof. Blake on a two-year contract, after an extensive search. After one year the professor quits to take a job elsewhere, in breach of her contract. If City College has to pay $5000 more to find a replacement for year, Blake is liable for that amount—that’s compensatory damages. But what if it costs City College $1200 to search for, bring to campus and interview a replacement? City College can claim that, too, as incidental damages [62] which include additional costs incurred by the non-breaching party after the breach in a reasonable attempt to avoid further loss, even if the attempt is unsuccessful.

Punitive Damages

Punitive damages [63] are those awarded for the purpose of punishing a defendant in a civil action, in which criminal sanctions may be unavailable. They are not part of the compensation for the loss suffered; they are proper in cases in which the defendant has acted willfully and maliciously and are thought to deter others from acting similarly. Since the purpose of contract law is compensation, not punishment, punitive damages have not traditionally been awarded, with one exception: when the breach of contract is also a tort for which punitive damages may be recovered. Punitive damages are permitted in the law of torts (in most states) when the behavior is malicious or willful (reckless conduct causing physical harm, deliberate defamation of one’s character, a knowingly unlawful taking of someone’s property), and some kinds of contract breach are also tortuous—for example, when a creditor holding collateral as security under a contract for a loan sells the collateral to a good-faith purchaser for value even though the debtor was not in default, he has breached the contract and committed the tort of conversion. [64] Punitive damages may be awarded, assuming the behavior was willful and not merely mistaken.

Punitive damages are not fixed by law. The judge or jury may award at its discretion whatever sum is believed necessary to redress the wrong or deter like conduct in the future. This means that a richer person may be slapped with much heavier punitive damages than a poorer one in the appropriate case. But the judge in all cases may remitA judicial reduction in the amount of a damage award (the noun is remission). (lower) some or all of a punitive damage award if he or she considers it excessive.

Punitive damage claims have been made in cases dealing with the refusal by insurance companies to honor their contracts. Many of these cases involve disability payments, and among the elements are charges of tortious conduct by the company’s agents or employees. California has been the leader among the state courts in their growing willingness to uphold punitive damage awards despite insurer complaints that the concept of punitive damages is but a device to permit plaintiffs to extort settlements from hapless companies. Courts have also awarded punitive damages against other types of companies for breach of contract.

Specific Performance

Liquidated Damages

In order to limit risk in contracts, many contractual drafters choose to include “liquidated damages” clauses. These are statements in the contract that spell out what damages will be if the contract is broken. This makes the damages certain, which lowers risk for the contracting parties. For example, in a contract for sale of a home, a party might lose their “ready money” if they back out of the agreement without cause.

Courts will uphold these clauses so long as they are reasonable, e.g., in the range of what actual damages might be. If the liquidated damages clause is unreasonably large, courts will not enforce it as a penalty. After all, if a liquidated damages clause was large enough, and courts chose to enforce it, the law would be favoring a regime of specific performance (as parties would always find it worthwhile to fulfill contracts rather than efficiently breach). For example, a liquidated damages clause of $10,000,000 on the sale of a $100,000 home would is excessive. If a court chose to enforce a clause like that, the parties would essentially be forced to perform.

Restitution

As the word implies, restitution [66] is a restoring to one party of what he gave to the other. Therefore, only to the extent that the injured party conferred a benefit on the other party may the injured party be awarded restitution.

If the claimant has given the other party a sum of money, there can be no dispute over the amount of the restitution interest. Tom gives Tim $100 to chop his tree into firewood. Tim repudiates. Tom’s restitution interest is $100. But serious difficulties can arise when the benefit conferred was performance. The courts have considerable discretion to award either the cost of hiring someone else to do the work that the injured party performed (generally, the market price of the service) or the value that was added to the property of the party in breach by virtue of the claimant’s performance. Mellors, a gardener, agrees to construct ten fences around Lady Chatterley’s flower gardens at the market price of $2,500. After erecting three, Mellors has performed services that would cost $750, market value. Assume that he has increased the value of the Lady’s grounds by $800. If the contract is repudiated, there are two measures of Mellors’s restitution interest: $800, the value by which the property was enhanced; or $750, the amount it would have cost Lady Chatterley to hire someone else to do the work. Which measure to use depends on who repudiated the contract and for what reason.

Tort vs. Contract Remedies

Frequently a contract breach may also amount to tortious conduct. A physician warrants her treatment as perfectly safe but performs the operation negligently, scarring the patient for life. The patient could sue for malpractice (tort) or for breach of warranty (contract). The choice involves at least four considerations:

• Statute of limitations. Most statutes of limitations prescribe longer periods for contract than for tort actions.
• Allowable damages. Punitive damages are more often permitted in tort actions, and certain kinds of injuries are compensable in tort but not in contract suits—for example, pain and suffering.
• Expert testimony. In most cases, the use of experts would be the same in either tort or contract suits, but in certain contract cases, the expert witness could be dispensed with, as, for example, in a contract case charging that the physician abandoned the patient.
• Insurance coverage. Most policies do not cover intentional torts, so a contract theory that avoids the element of willfulness would provide the plaintiff with a surer chance of recovering money damages.
• What are compensatory damages?
• When is specific performance an appropriate remedy? Will it be used to require a person to perform a service (such as properly repair a leaky roof)?
• When is restitution used?
• How could a breach of contract also be a tort, and when is one cause of action chosen over the other?
• What is the purpose of punitive damages?
• What advantage is there in allowing parties to breach contracts?

Grove v. Charbonneau Buick-Pontiac, Inc.

240 N.W.2d 853

Supreme Court of North Dakota.

March 24, 1976.

This is an appeal from the decision of the Stark County District Court awarding to Lloyd B. Grove damages equivalent to the value of the automobile which was offered by Charbonneau Buick-Pontiac, Inc. as a prize in a golf contest.

The Dickinson Elks Club conducted its annual Labor Day Golf Tournament on September 1 and 2, 1974. Posters were placed at various locations in the area announcing the tournament and the prizes to be awarded to the flight winners and runners-up. Included in the posters was an offer by Charbonneau of a 1974 automobile “to the first entry who shoots a hole-in-one on Hole No. 8.” This offer was also placed on a sign on the automobile at the tournament. Grove testified that he learned of the tournament from a poster placed at the Williston golf course. He then registered for the tournament and paid his entry fee.

The Dickinson golf course at which the tournament was played has only 9 holes, but there are 18 separately located and marked tee areas so that by going around the 9-hole course twice the course can be played as an 18-hole golf course. The first nine tees are marked with blue markers and tee numbers. The second nine tees are marked with red markers and tee numbers. Because of this layout of the course, the tee area marked “8” and the tee area marked “17” are both played to the eighth hole. The tee area marked “17” lies to one side of tee area “8” and is approximately 60 yards farther from the hole.

Grove scored his hole-in-one in hole No. 8 on the first day of the tournament while playing from the 17th tee in an 18-hole match. He had played from the 8th tee previously on the same match and had scored a 3 on the hole.

Grove claimed he had satisfied the requirements of the offer and was entitled to the prize. Charbonneau refused to award the prize, claiming that Grove had not scored his hole-in-one on the 8th hole, as required, but had scored it on the 17th hole.

The trial court found that Grove had performed all of the conditions set out in the offer by Charbonneau so that there was a completed contract which Charbonneau had unlawfully breached by failing to donate the car. The court awarded damages to Grove of $5,800.00, plus interest.

Charbonneau claims the evidence was insufficient to support the trial court’s finding that Grove had properly accepted and performed in accordance with the offer made by Charbonneau so as to impose a contractual duty upon Charbonneau to deliver the automobile or in the alternative be liable for damages. He also claims the trial court applied the wrong rule of law and that the findings of fact are clearly erroneous.

… Rewards and prizes are governed by the general rules of contract. There must be a genuine offer and an acceptance. To collect a prize, the person must perform all of the requirements of the offer in accordance with the published terms in order to create a valid and binding contract under which he may be entitled to the promised award.

… In Schreiner v. Weil Furniture Co. , 68 So.2d 149 (La.App.1953), the court stated it is a well settled proposition of law that where there is a dispute over what the terms of a contract are or what the stipulations mean the document must be interpreted against the one who has prepared it, and applied such rule to an offer of a prize made to the public. The Schreiner case involved a “count-the-dots” contest where certificates worth money-off on the purchase of a television were awarded. The plaintiff won and a dispute developed as to what prizes were to be awarded under the rules of the contest. The court held that it was the duty of the defendant to explain the contest so that the public would not be misled.

[W]e believe the rule on ambiguous contracts applies to this case, and therefore any language of this contract which is not clear and definite or in which an uncertainty exists as to its meaning must be interpreted most strongly against Charbonneau.

Our research disclosed only one case in which the court dealt with a hole-in-one question, but in a different setting. The Supreme Court of Nevada, in Las Vegas Hacienda v. Gibson , 77 Nev. 25, 359 P.2d 85 (1961),1 had under consideration the question whether or not the offer and promise to pay an award to a person who, having paid fifty cents for an opportunity to make a hole-in-one, actually did make a hole-in-one, constituted wagering on the contention that a hole-in-one was a game of chance rather than a game of skill and that on such basis the offer or promise was invalid.

The court concluded that the contract or offer was valid and enforceable, and then stated as follows:

 “Whereas we have concluded that the contract does not involve a gaming transaction, consideration of appellant’s second assignment of error that the lower court erred in finding that the shooting of a ‘hole in one’ was a feat of skill, becomes unnecessary. We do wish to state, however, that the record contains sufficient evidence to sustain the court’s finding in this regard. Appellant insists, however, that the testimony of one Capps, a golf professional, precludes such a finding. He testified that luck is a factor in all holes in one where skill is not always a factor. He further testified that `a skilled player will get it (the ball) in the area where luck will take over more often than an unskilled player.'”

The crucial or pivotal point in this case rests upon the meaning of the language “a hole-in-one on Hole No. 8,” where the 9-hole golf course was converted to or used as an 18-hole course without adding any additional holes. Does this language, “on Hole No. 8,” refer to the actual, physical designation of the hole, which is generally identified with the number on the flagstick, or does it refer to the hypothetical number given to the hole because of the sequence in which it is “played”? If it is the latter, the 8th hole could also become the 17th hole in the second round of an 18-hole game of golf where the course is played around twice to make an 18-hole course out of a 9-hole course. The term could also mean the 8th hole in sequence of play regardless of the actual physical identification of the hole; as an example, if a player were to start his game with or on hole No. 2 (actually so marked) the 8th hole in sequence would be the 9th hole (actually so marked). The 8th hole under this concept would change depending upon the actual numerical designation of the hole from which the player started. …

By interpreting and construing the ambiguous provisions of the offer most strongly against the party who caused them as set out in § 9-07-19, NDCC, and as announced in case law developed on this subject, we construe it to mean that an entrant in the golf tournament who had paid the fee and who during regular tournament play drives the ball in one stroke into hole No. 8 from either the 8th or 17th tee has made a hole-in-one on hole No. 8, and has met the conditions of the offer and is entitled to the award or the equivalent in money damages.

The judgment of the district court is affirmed.

• If the rules of golf had spoken clearly to this situation, would the case have come out differently?
• How could the sponsors of the golf tournament better protect themselves in the future?

Objective Intent

Leonard v. pepsico.

88 F.Supp.2d 116 (1999)

KIMBA M. WOOD, District Judge. Plaintiff brought this action seeking, among other things, specific performance of an alleged offer of a Harrier Jet, featured in a television advertisement for defendant’s “Pepsi Stuff” promotion. Defendant has moved for summary judgment pursuant to Federal Rule of Civil Procedure 56. For the reasons stated below, defendant’s motion is granted.

This case arises out of a promotional campaign conducted by defendant, the producer and distributor of the soft drinks Pepsi and Diet Pepsi. The promotion, entitled “Pepsi Stuff,” encouraged consumers to collect “Pepsi Points” from specially marked packages of Pepsi or Diet Pepsi and redeem these points for merchandise featuring the Pepsi logo. Before introducing the promotion nationally, defendant conducted a test of the promotion in the Pacific Northwest from October 1995 to March 1996. A Pepsi Stuff catalog was distributed to consumers in the test market, including Washington State. Plaintiff is a resident of Seattle, Washington. While living in Seattle, plaintiff saw the Pepsi Stuff commercial that he contends constituted an offer of a Harrier Jet.

Because whether the television commercial constituted an offer is the central question in this case, the Court will describe the commercial in detail. The commercial opens upon an idyllic, suburban morning, where the chirping of birds in sun-dappled trees welcomes a paperboy on his morning route. As the newspaper hits the stoop of a conventional two-story house, the tattoo of a military drum introduces the subtitle, “MONDAY 7:58 AM.” The stirring strains of a martial air mark the appearance of a well-coiffed teenager preparing to leave for school, dressed in a shirt emblazoned with the Pepsi logo, a red-white-and-blue ball. While the teenager confidently preens, the military drumroll again sounds as the subtitle “T-SHIRT 75 PEPSI POINTS” scrolls across the screen. Bursting from his room, the teenager strides down the hallway wearing a leather jacket. The drumroll sounds again, as the subtitle “LEATHER JACKET 1450 PEPSI POINTS” appears. The teenager opens the door of his house and, unfazed by the glare of the early morning sunshine, puts on a pair of sunglasses. The drumroll then accompanies the subtitle “SHADES 175 PEPSI POINTS.” A voiceover then intones, “Introducing the new Pepsi Stuff catalog,” as the camera focuses on the cover of the catalog.

The scene then shifts to three young boys sitting in front of a high school building. The boy in the middle is intent on his Pepsi Stuff Catalog, while the boys on either side are each drinking Pepsi. The three boys gaze in awe at an object rushing overhead, as the military march builds to a crescendo. The Harrier Jet is not yet visible, but the observer senses the presence of a mighty plane as the extreme winds generated by its flight create a paper maelstrom in a classroom devoted to an otherwise dull physics lesson. Finally, the Harrier Jet swings into view and lands by the side of the school building, next to a bicycle rack. Several students run for cover, and the velocity of the wind strips one hapless faculty member down to his underwear. While the faculty member is being deprived of his dignity, the voiceover announces: “Now the more Pepsi you drink, the more great stuff you’re gonna get.”

The teenager opens the cockpit of the fighter and can be seen, helmetless, holding a Pepsi. “[L]ooking very pleased with himself,” the teenager exclaims, “Sure beats the bus,” and chortles. The military drumroll sounds a final time, as the following words appear: “HARRIER FIGHTER 7,000,000 PEPSI POINTS.” A few seconds later, the following appears in more stylized script: “Drink Pepsi — Get Stuff.” With that message, the music and the commercial end with a triumphant flourish. Inspired by this commercial, plaintiff set out to obtain a Harrier Jet. Plaintiff explains that he is “typical of the ‘Pepsi Generation’ … he is young, has an adventurous spirit, and the notion of obtaining a Harrier Jet appealed to him enormously.” (Pl. Mem. at 3.) Plaintiff consulted the Pepsi Stuff Catalog. The Catalog features youths dressed in Pepsi Stuff regalia or enjoying Pepsi Stuff accessories, such as “Blue Shades” (“As if you need another reason to look forward to sunny days.”), “Pepsi Tees” (“Live in ’em. Laugh in ’em. Get in ’em.”), “Bag of Balls” (“Three balls. One bag. No rules.”), and “Pepsi Phone Card” (“Call your mom!”). The Catalog specifies the number of Pepsi Points required to obtain promotional merchandise. (See Catalog, at rear foldout pages.) The Catalog includes an Order Form which lists, on one side, fifty-three items of Pepsi Stuff merchandise redeemable for Pepsi Points. Conspicuously absent from the Order Form is any entry or description of a Harrier Jet. The amount of Pepsi Points required to obtain the listed merchandise ranges from 15 (for a “Jacket Tattoo” (“Sew `em on your jacket, not your arm.”)) to 3300 (for a “Fila Mountain Bike” (“Rugged. All-terrain. Exclusively for Pepsi.”)). It should be noted that plaintiff objects to the implication that because an item was not shown in the Catalog, it was unavailable.

The rear foldout pages of the Catalog contain directions for redeeming Pepsi Points for merchandise. (See Catalog, at rear foldout pages.) These directions note that merchandise may be ordered “only” with the original Order Form. The Catalog notes that in the event that a consumer lacks enough Pepsi Points to obtain a desired item, additional Pepsi Points may be purchased for ten cents each; however, at least fifteen original Pepsi Points must accompany each order. Although plaintiff initially set out to collect 7,000,000 Pepsi Points by consuming Pepsi products, it soon became clear to him that he “would not be able to buy (let alone drink) enough Pepsi to collect the necessary Pepsi Points fast enough.” Reevaluating his strategy, plaintiff “focused for the first time on the packaging materials in the Pepsi Stuff promotion,” and realized that buying Pepsi Points would be a more promising option. Through acquaintances, plaintiff ultimately raised about $700,000.

Plaintiff’s understanding of the commercial as an offer must … be rejected because the Court finds that no objective person could reasonably have concluded that the commercial actually offered consumers a Harrier Jet.

In evaluating the commercial, the Court must not consider defendant’s subjective intent in making the commercial, or plaintiff’s subjective view of what the commercial offered, but what an objective, reasonable person would have understood the commercial to convey. See Kay-R Elec. Corp. v. Stone & Webster Constr. Co. , 23 F.3d 55, 57 (2d Cir.1994) (“[W]e are not concerned with what was going through the heads of the parties at the time [of the alleged contract]. Rather, we are talking about the objective principles of contract law.”).

What kind of act creates a power of acceptance and is therefore an offer? It must be an expression of will or intention. It must be an act that leads the offeree reasonably to conclude that a power to create a contract is conferred. This applies to the content of the power as well as to the fact of its existence. It is on this ground that we must exclude invitations to deal or acts of mere preliminary negotiation, and acts evidently done in jest or without intent to create legal relations .

Plaintiff’s insistence that the commercial appears to be a serious offer requires the Court to explain why the commercial is funny. Explaining why a joke is funny is a daunting task; as the essayist E.B. White has remarked, “Humor can be dissected, as a frog can, but the thing dies in the process….”

First, the commercial suggests, as commercials often do, that use of the advertised product will transform what, for most youth, can be a fairly routine and ordinary experience. The military tattoo and stirring martial music, as well as the use of subtitles in a Courier font that scroll terse messages across the screen, such as “MONDAY 7:58 AM,” evoke military and espionage thrillers. The implication of the commercial is that Pepsi Stuff merchandise will inject drama and moment into hitherto unexceptional lives. The commercial in this case thus makes the exaggerated claims similar to those of many television advertisements: that by consuming the featured clothing, car, beer, or potato chips, one will become attractive, stylish, desirable, and admired by all. A reasonable viewer would understand such advertisements as mere puffery, not as statements of fact ….

Second, the callow youth featured in the commercial is a highly improbable pilot, one who could barely be trusted with the keys to his parents’ car, much less the prize aircraft of the United States Marine Corps. Rather than checking the fuel gauges on his aircraft, the teenager spends his precious preflight minutes preening. The youth’s concern for his coiffure appears to extend to his flying without a helmet. Finally, the teenager’s comment that flying a Harrier Jet to school “sure beats the bus” evinces an improbably insouciant attitude toward the relative difficulty and danger of piloting a fighter plane in a residential area, as opposed to taking public transportation.

Third, the notion of traveling to school in a Harrier Jet is an exaggerated adolescent fantasy. In this commercial, the fantasy is underscored by how the teenager’s schoolmates gape in admiration, ignoring their physics lesson. The force of the wind generated by the Harrier Jet blows off one teacher’s clothes, literally defrocking an authority figure. As if to emphasize the fantastic quality of having a Harrier Jet arrive at school, the Jet lands next to a plebeian bike rack. This fantasy is, of course, extremely unrealistic. No school would provide landing space for a student’s fighter jet, or condone the disruption the jet’s use would cause.

Fourth, the primary mission of a Harrier Jet, according to the United States Marine Corps, is to “attack and destroy surface targets under day and night visual conditions.” United States Marine Corps, Factfile: AV-8B Harrier II (last modified Dec. 5, 1995) . Manufactured by McDonnell Douglas, the Harrier Jet played a significant role in the air offensive of Operation Desert Storm in 1991. See id. The jet is designed to carry a considerable armament load, including Sidewinder and Maverick missiles. See id. As one news report has noted, “Fully loaded, the Harrier can float like a butterfly and sting like a bee — albeit a roaring 14-ton butterfly and a bee with 9,200 pounds of bombs and missiles.” Jerry Allegood, Marines Rely on Harrier Jet, Despite Critics, News & Observer (Raleigh), Nov. 4, 1990, at C1. In light of the Harrier Jet’s well-documented function in attacking and destroying surface and air targets, armed reconnaissance and air interdiction, and offensive and defensive anti-aircraft warfare, depiction of such a jet as a way to get to school in the morning is clearly not serious even if, as plaintiff contends, the jet is capable of being acquired “in a form that eliminates [its] potential for military use.”

Fifth, the number of Pepsi Points the commercial mentions as required to “purchase” the jet is 7,000,000. To amass that number of points, one would have to drink 7,000,000 Pepsis (or roughly 190 Pepsis a day for the next hundred years — an unlikely possibility), or one would have to purchase approximately $700,000 worth of Pepsi Points. The cost of a Harrier Jet is roughly $23 million dollars, a fact of which plaintiff was aware when he set out to gather the amount he believed necessary to accept the alleged offer. Even if an objective, reasonable person were not aware of this fact, he would conclude that purchasing a fighter plane for $700,000 is a deal too good to be true.

In sum, there are three reasons why plaintiff’s demand cannot prevail as a matter of law. First, the commercial was merely an advertisement, not a unilateral offer. Second, the tongue-in-cheek attitude of the commercial would not cause a reasonable person to conclude that a soft drink company would be giving away fighter planes as part of a promotion. Third, there is no writing between the parties sufficient to satisfy the Statute of Frauds.

For the reasons stated above, the Court grants defendant’s motion for summary judgment. The Clerk of Court is instructed to close these cases. Any pending motions are moot.

• Based on the results in this case, what are the “elements” of a joke, such that it is not a contractual offer?
• Can humor ever be part of a contractual offer? Give an example.

Lucy v. Zehmer

84 S.E.2d 516 (Va. 1954)

Buchanan, J.

This suit was instituted by W. O. Lucy and J. C. Lucy, complainants, against A. H. Zehmer and Ida S. Zehmer, his wife, defendants, to have specific performance of a contract by which it was alleged the Zehmers had sold to W. O. Lucy a tract of land owned by A. H. Zehmer in Dinwiddie county containing 471.6 acres, more or less, known as the Ferguson farm, for $50,000. J. C. Lucy, the other complainant, is a brother of W. O. Lucy, to whom W. O. Lucy transferred a half interest in his alleged purchase.

The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

The answer of A. H. Zehmer admitted that at the time mentioned W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.…

In his testimony Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done.…

If it be assumed, contrary to what we think the evidence shows, that Zehmer was jesting about selling his farm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows that Lucy did not so understand it but considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as on himself. The very next day he arranged with his brother to put up half the money and take a half interest in the land. The day after that he employed an attorney to examine the title. The next night, Tuesday, he was back at Zehmer’s place and there Zehmer told him for the first time, Lucy said, that he wasn’t going to sell and he told Zehmer, “You know you sold that place fair and square.” After receiving the report from his attorney that the title was good he wrote to Zehmer that he was ready to close the deal.

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and a good faith sale and purchase of the farm.

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

At no time prior to the execution of the contract had Zehmer indicated to Lucy by word or act that he was not in earnest about selling the farm. They had argued about it and discussed its terms, as Zehmer admitted, for a long time. Lucy testified that if there was any jesting it was about paying $50,000 that night. The contract and the evidence show that he was not expected to pay the money that night. Zehmer said that after the writing was signed he laid it down on the counter in front of Lucy. Lucy said Zehmer handed it to him. In any event there had been what appeared to be a good faith offer and a good faith acceptance, followed by the execution and apparent delivery of a written contract. Both said that Lucy put the writing in his pocket and then offered Zehmer $5 to seal the bargain. Not until then, even under the defendants’ evidence, was anything said or done to indicate that the matter was a joke. Both of the Zehmers testified that when Zehmer asked his wife to sign he whispered that it was a joke so Lucy wouldn’t hear and that it was not intended that he should hear.

The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.

“ The law, therefore, judges of an agreement between two persons exclusively from those expressions of their intentions which are communicated between them. .” [Citation]

An agreement or mutual assent is of course essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind.

So a person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement.

Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.…

Reversed and remanded.

• What objective evidence was there to support the defendants’ contention that they were just kidding when they agreed to sell the farm?
• Suppose the defendants really did think the whole thing was a kind of joke. Would that make any difference?
• As a matter of public policy, why does the law use an objective standard to determine the seriousness of intention, instead of a subjective standard?
• It’s 85 degrees in July and 5:00 p.m., quitting time. The battery in Mary’s car is out of juice, again. Mary says, “Arrgh! I will sell this stupid car for $50!” Jason, walking to his car nearby, whips out his checkbook and says, “It’s a deal. Leave your car here. I’ll give you a ride home and pick up your car after you give me the title.” Do the parties have a contract?

Consideration: Preexisting Obligation

Denney v. reppert.

432 S.W.2d 647 (Ky. 1968)

R. L. Myre, Sr., Special Commissioner.

The sole question presented in this case is which of several claimants is entitled to an award for information leading to the apprehension and conviction of certain bank robbers.…

On June 12th or 13th, 1963, three armed men entered the First State Bank, Eubank, Kentucky, and with a display of arms and threats robbed the bank of over $30,000 [about $208,000 in 2010 dollars]. Later in the day they were apprehended by State Policemen Garret Godby, Johnny Simms and Tilford Reppert, placed under arrest, and the entire loot was recovered. Later all of the prisoners were convicted and Garret Godby, Johnny Simms and Tilford Reppert appeared as witnesses at the trial.

The First State Bank of Eubank was a member of the Kentucky Bankers Association which provided and advertised a reward of $500.00 for the arrest and conviction of each bank robber. Hence the outstanding reward for the three bank robbers was $1,500.00 [about $11,000 in 2010 dollars]. Many became claimants for the reward and the Kentucky State Bankers Association being unable to determine the merits of the claims for the reward asked the circuit court to determine the merits of the various claims and to adjudge who was entitled to receive the reward or share in it. All of the claimants were made defendants in the action.

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum and Jewell Snyder were employees of the First State Bank of Eubank and came out of the grueling situation with great credit and glory. Each one of them deserves approbation and an accolade. They were vigilant in disclosing to the public and the peace officers the details of the crime, and in describing the culprits, and giving all the information that they possessed that would be useful in capturing the robbers. Undoubtedly, they performed a great service. It is in the evidence that the claimant Murrell Denney was conspicuous and energetic in his efforts to make known the robbery, to acquaint the officers as to the personal appearance of the criminals, and to give other pertinent facts.

The first question for determination is whether the employees of the robbed bank are eligible to receive or share in the reward. The great weight of authority answers in the negative. [Citation] states the rule thusly:

‘To the general rule that, when a reward is offered to the general public for the performance of some specified act, such reward may be claimed by any person who performs such act, is the exception of agents, employees and public officials who are acting within the scope of their employment or official duties. *.’…

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum, and Jewell Snyder were employees of the First State Bank of Eubank. They were under duty to protect and conserve the resources and moneys of the bank, and safeguard every interest of the institution furnishing them employment. Each of these employees exhibited great courage, and cool bravery, in a time of stress and danger. The community and the county have recompensed them in commendation, admiration and high praise, and the world looks on them as heroes. But in making known the robbery and assisting in acquainting the public and the officers with details of the crime and with identification of the robbers, they performed a duty to the bank and the public, for which they cannot claim a reward.

The claims of Corbin Reynolds, Julia Reynolds, Alvie Reynolds and Gene Reynolds also must fail. According to their statements they gave valuable information to the arresting officers. However, they did not follow the procedure as set forth in the offer of reward in that they never filed a claim with the Kentucky Bankers Association. It is well established that a claimant of a reward must comply with the terms and conditions of the offer of reward. [Citation]

State Policemen Garret Godby, Johnny Simms and Tilford Reppert made the arrest of the bank robbers and captured the stolen money. All participated in the prosecution. At the time of the arrest, it was the duty of the state policemen to apprehend the criminals. Under the law they cannot claim or share in the reward and they are interposing no claim to it.

This leaves the defendant, Tilford Reppert the sole eligible claimant. The record shows that at the time of the arrest he was a deputy sheriff in Rockcastle County, but the arrest and recovery of the stolen money took place in Pulaski County. He was out of his jurisdiction, and was thus under no legal duty to make the arrest, and is thus eligible to claim and receive the reward. In [Citation] it was said:

‘It is well established that a public officer with the authority of the law to make an arrest may accept an offer of reward or compensation for acts or services performed outside of his bailiwick or not within the scope of his official duties. .’…

It is manifest from the record that Tilford Reppert is the only claimant qualified and eligible to receive the reward. Therefore, it is the judgment of the circuit court that he is entitled to receive payment of the $1,500.00 reward now deposited with the Clerk of this Court.

The judgment is affirmed.

• Why did the Bankers Association put the resolution of this matter into the court’s hands?
• Several claimants came forward for the reward; only one person got it. What was the difference between the person who got the reward and those who did not?

EBWS, LLC v. Britly Corp.

928 A.2d 497 (Vt. 2007)

Reiber, C.J.

The Ransom family owns Rock Bottom Farm in Strafford, Vermont, where Earl Ransom owns a dairy herd and operates an organic dairy farm. In 2000, the Ransoms decided to build a creamery on-site to process their milk and formed EBWS, LLC to operate the dairy-processing plant and to market the plant’s products. In July 2000, Earl Ransom, on behalf of EBWS, met with Britly’s president to discuss building the creamery.…In January 2001, EBWS and Britly entered into a contract requiring Britly to construct a creamery building for EBWS in exchange for $160,318.…The creamery was substantially completed by April 15, 2001, and EBWS moved in soon afterward. On June 5, 2001, EBWS notified Britly of alleged defects in construction. [EBWS continued to use the creamery pending the necessity to vacate it for three weeks when repairs were commenced].

On September 12, 2001, EBWS filed suit against Britly for damages resulting from defective design and construction.…

Following a three-day trial, the jury found Britly had breached the contract and its express warranty, and awarded EBWS: (1) $38,020 in direct damages, and (2) $35,711 in consequential damages.…

…The jury’s award to EBWS included compensation for both direct and consequential damages that EBWS claimed it would incur while the facility closed for repairs. Direct damages [i.e., compensatory damages] are for “losses that naturally and usually flow from the breach itself,” and it is not necessary that the parties actually considered these damages. [Citation]. In comparison, special or consequential damages “must pass the tests of causation, certainty and foreseeability, and, in addition, be reasonably supposed to have been in the contemplation of both parties at the time they made the contract.”

…The court ruled that EBWS could not recover for lost profits because it was not a going concern at the time the contract was entered into, and profits were too speculative. The court concluded, however, that EBWS could submit evidence of other business losses, including future payment for unused milk and staff wages.…

At trial, Huyffer, the CEO of EBWS, testified that during a repairs closure the creamery would be required to purchase milk from adjacent Rock Bottom Farm, even though it could not process this milk. She admitted that such a requirement was self-imposed as there was no written output contract between EBWS and the farm to buy milk. In addition, Huyffer testified that EBWS would pay its employees during the closure even though EBWS has no written contract to pay its employees when they are not working. The trial court allowed these elements of damages to be submitted to the jury, and the jury awarded EBWS consequential damages for unused milk and staff wages.

On appeal, Britly contends that because there is no contractual or legal obligation for EBWS to purchase milk or pay its employees, these are not foreseeable damages. EBWS counters that it is common knowledge that cows continue to produce milk, even if the processing plant is not working, and thus it is foreseeable that this loss would occur. We conclude that these damages are not the foreseeable result of Britly’s breach of the construction contract and reverse the award.…

[W]e conclude that…it is not reasonable to expect Britly to foresee that its failure to perform under the contract would result in this type of damages. While we are sympathetic to EBWS’s contention that the cows continue to produce milk, even when the plant is closed down, this fact alone is not enough to demonstrate that buying and dumping milk is a foreseeable result of Britly’s breach of the construction contract. Here, the milk was produced by a separate and distinct entity, Rock Bottom Farm, which sold the milk to EBWS.…

Similarly, EBWS maintained no employment agreements with its employees obligating it to pay wages during periods of closure for repairs, dips in market demand, or for any other reason. Any losses EBWS might suffer in the future because it chooses to pay its employees during a plant closure for repairs would be a voluntary expense and not in Britly’s contemplation at the time it entered the construction contract. It is not reasonable to expect Britly to foresee losses incurred as a result of agreements that are informal in nature and carry no legal obligation on EBWS to perform. “[Parties are not presumed to know the condition of each other’s affairs nor to take into account contracts with a third party that is not communicated.” [Citation] While it is true that EBWS may have business reasons to pay its employees even without a contractual obligation, for example, to ensure employee loyalty, no evidence was introduced at trial by EBWS to support a sound rationale for such considerations. Under these circumstances, this business decision is beyond the scope of what Britly could have reasonably foreseen as damages for its breach of contract.…

In addition, the actual costs of the wages and milk are uncertain.…[T]he the milk and wages here are future expenses, for which no legal obligation was assumed by EBWS, and which are separate from the terms of the parties’ contract. We note that at the time of the construction contract EBWS had not yet begun to operate as a creamery and had no history of buying milk or paying employees. Thus, both the cost of the milk and the number and amount of wages of future employees that EBWS might pay in the event of a plant closure for repairs are uncertain.

Award for consequential damages is reversed.…

• Why, according to EBWS’s CEO, would EBWS be required to purchase milk from adjacent Rock Bottom Farm, even though it could not process this milk?
• Surely it is well known in Vermont dairy country that dairy farmers can’t simply stop milking cows when no processing plant is available to take the milk—the cows will soon stop producing. Why was EBWS then not entitled to those damages which it will certainly suffer when the creamery is down for repairs?
• Britly (the contractor) must have known EBWS had employees that would be idled when the creamery shut down for repairs. Why was it not liable for their lost wages?
• What could EBWS have done at the time of contracting to protect itself against the damages it would incur in the event the creamery suffered downtime due to faulty construction?

Summary and Exercises

In this chapter we have seen that two fundamental sources of contract law are the common law as developed in the state courts and as summarized in the Restatement (Second) of Contracts, and the Uniform Commercial Code for the sale of goods.

Sales law is a special type of contract law, governed by Article 2 of the UCC. Article 2 governs the sale of goods only, defined as things movable at the time of identification to the contract for sale. When the goods are “sold” incidental to a service, the courts do not agree on whether Article 2 applies. For two categories of goods, legislation specifically answers the question: foodstuffs served by a restaurant are goods; blood supplied for transfusions is not.

Types of contracts can be distinguished along these axes: (1) express and implied, including quasi-contracts implied by law; (2) bilateral and unilateral; (3) enforceable and unenforceable; and (4) completed (executed) and uncompleted (executory). To understand contract law, it is necessary to master these distinctions and their nuances.

In order to determine whether a valid, enforceable contract exists, the following questions must be answered: (1) Did the parties reach an agreement? (2) Was consideration present? (3) Was the agreement legal? (4) Did the parties have capacity to make a contract? (5) Was the agreement in the proper form?

If a contract is formed, the law provides additional ways to ensure that a true “meeting of the minds” occurred. Doctrines such as fraud, duress, mistake and undue influence provide remedies. The law also provides ways to avoid contracts against public policy, such as overly broad exculpatory contracts or contracts so unfair they shock the conscience of the court.

Remedies available against someone who breaches a contract include damages, specific performance, and restitution. Frequently the party who is not in breach must choose between tort and contract remedies.

• Rachel entered into a contract to purchase a 2004 Dodge from Hanna, who lived in the neighboring apartment. When a dispute arose over the terms of the contract, Hanna argued that, because neither she nor Rachel was a merchant, the dispute should be decided under general principles of common law. Rachel, on the other hand, argued that Hanna was legally considered to be a merchant because she sold the car for profit and that, consequently, the sale was governed by the Uniform Commercial Code. Who is correct? Explain.
• On November 26, Joe wrote to Kate offering to purchase a farm that she owned. Upon receiving the letter on November 28, Kate immediately sent Joe a letter of acceptance. However, shortly after mailing the letter, Kate had second thoughts and called Joe to advise him that she was rejecting his offer. The call was made before Joe received the letter of acceptance. Has a contract been formed? Why?
• On a busy day just before April 15, Albert Accountant received a call from a local car dealer. The dealer said, “Hi, Mr. Accountant. Now, while you have income from doing clients’ taxes, I have an excellent offer for you. You can buy a new Buick Century automobile completely loaded for $36,000. Al, I know you’re busy. If I don’t hear from you by the end of the day, I’ll assume you want the car.” Albert, distracted, did not respond immediately, and the dealer hung up. Then followed an exhausting day of working with anxiety-ridden tax clients. Albert forgot about the conversation. Two days later a statement arrived from the dealer, with instructions on how Albert should pick up the car at the dealership. Is there a contract? Explain.
• Bert purchased Ernie’s car. Before selling the car, Ernie had stated to Bert, “This car runs well and is reliable. Last week I drove the car all the way from Seattle to San Francisco to visit my mother and back again to Seattle.” In fact, Ernie was not telling the truth: he had driven the car to San Francisco to visit his paramour, not his mother. Upon discovery of the truth, may Bert avoid the contract? Why?
• Langstraat was seventeen when he purchased a motorcycle. When applying for insurance, he signed a “Notice of Rejection,” declining to purchase uninsured motorist coverage. He was involved in an accident with an uninsured motorist and sought to disaffirm his rejection of the uninsured motorist coverage on the basis of infancy. May he do so?
• Richard promised to have Darlene’s deck awning constructed by July 10. On June 20, Darlene called him and asked if he could get the job done by July 3, in time for Independence Day. Richard said he could, but he failed to do so, and Darlene had to rent two canopies at some expense. Darlene claims that because Richard breached his promise, he is liable for the cost of awning rental. Is she correct—was his promise binding? Why?
• After taking a business law class at State U, Elke entered into a contract to sell her business law book to a classmate, Matthew, for $45. As part of the same contract, she agreed to prepare a will for Matthew’s mother for an additional $110. Elke prepared the will and sent the book to Matthew, but he refused to pay her. Is she entitled to any payment? Explain.
• Sara Hohe, a fifteen-year-old junior at Mission Bay High School in San Diego, was injured during a campus hypnotism show sponsored by the PTSA as a fund-raiser for the senior class. Hypnotism shows had been held annually since 1980, and Sara had seen the previous year’s show. She was selected at random from a group of many volunteers. Her participation in the “Magic of the Mind Show” was conditioned on signing two release forms. Hohe’s father signed a form entitled “Mission Bay High School PTSA Presents Dr. Karl Santo.” Hohe and her father both signed a form titled “Karl Santo Hypnotist,” releasing Santo and the school district from all liability. During the course of the show, while apparently hypnotized, Hohe slid from her chair and also fell to the floor about six times and was injured. She, through her father, then sued the school district. The Hohes claimed the release was contrary to public policy; the trial court dismissed the suit on summary judgment. Was the release contrary to public policy? Decide.
• Plaintiff Irma Kozlowski cohabited with Defendant Thaddeus Kozlowski for fifteen years without marriage. She repeatedly asked him specifically about her financial situation should he predecease her, and he assured her—she said—that he would arrange to provide for her for the rest of her life. She had provided the necessary household services and emotional support to permit him to successfully pursue his business career; she had performed housekeeping, cleaning, and shopping services and had run the household and raised the children, her own as well as his. When they separated and she was “literally forced out of the house,” she was sixty-three years old and had no means or wherewithal for survival. When she sued, he raised the Statute of Frauds’ one-year rule as a defense. Is the defense good?
• Owner of an auto repair shop hires Contractor to remodel his shop but does not mention that two days after the scheduled completion date, Owner is to receive five small US Army personnel carrier trucks for service, with a three-week deadline to finish the job and turn the trucks over to the army. The contract between Owner and the army has a liquidated damages clause calling for $300 a day for every day trucks are not operable after the deadline. Contractor is five days late in finishing the remodel. Can Owner claim the $1,500 as damages against Contractor as a consequence of the latter’s tardy completion of the contract? Explain.
• Calvin, a promising young basketball and baseball player, signed a multiyear contract with a professional basketball team after graduating from college. After playing basketball for one year, he decided he would rather play baseball and breached his contract with the basketball team. What remedy could the team seek? Louie, an adult, entered into a contract to sell a case of scotch whiskey to Leroy, a minor. Is the contract void or voidable? Explain.
• Consider the XKCD comic below. Could someone be bound by this type of agreement?

Self-Test Questions

1. An implied contract (a) must be in writing (b) is one in which the terms are spelled out (c) is one inferred from the actions of the parties (d) is imposed by law to avoid an unjust result (e) may be avoided by one party. 2. The Convention on Contracts for the International Sale of Goods is (a) an annual meeting of international commercial purchasing agents. (b) contract law used in overseas US federal territories (c) a customary format or template for drafting contracts (d) a kind of treaty setting out international contract law, to which the United States is a party (e) the organization that develops uniform international law. 3. Consideration (a) can consist of a written acknowledgment of some benefit received, even if in fact the benefit is not delivered (b) cannot be nominal in amount (c) is a bargained-for act, forbearance, or promise from the promisee (d) is all of the above 4. True of False: An example of valid consideration is a promise

Self-Test Answers

• Sir Henry Maine, Ancient Law (1869), 180–82. ↵
• Restatement (Second) of Contracts, Section 1. ↵
• Section 1-201(11). ↵
• Law decided by judges as recorded and published in cases. ↵
• An organized codification of the common law of contracts. ↵
• That part of the Uniform Commercial Code dealing with the sale of goods. ↵
• We will visit two areas of the UCC in depth later in this text. First, the law of warranty in the following chapter is drawn from the UCC. Second, the law of secured transactions covered in the last chapter of the text. ↵
• So yes, the parties may contract for which form of contract law applies to their agreement! ↵
• A contract in words, orally or in writing. ↵
• A contract not expressed by inferred from the parties’ actions. ↵
• A contract imposed on a party when there was none, to avoid unjust enrichment. ↵
• A contract where each party makes a promise to the other. ↵
• A contract that is accepted by the performance of the requested action, not by a promise. ↵
• An agreement that never was a contract. ↵
• A contract that can be annulled. ↵
• A contract for which the non-breaching party has not remedy for its breach. ↵
• A contract that has yet to be completed. ↵
• A contract in which one party has performed, or partly performed, and the other has not. ↵
• A contract that has been completed. ↵
• (Section 3) ↵
• (Section 1-201(3)) ↵
• Barnes v. Treece , 549 P.2d 1152 (Wash. App. 1976). ↵
• Adams v. Lindsell , 1 Bamewall & Alderson 681 (K.B. 1818). ↵
• The question of what constitutes a binding contract has been answered differently throughout history and in other cultures. For example, under Roman law, any contract that was reduced to writing was binding, whether or not there was consideration in our sense. Moreover, in later Roman times, certain promises of gifts were made binding, whether written or oral; these would not be binding in the United States. And in the Anglo-American tradition, the presence of a seal was once sufficient to make a contract binding without any other consideration. In most states, the seal is no longer a substitute for consideration, although in some states it creates a presumption of consideration. The Uniform Commercial Code has abolished the seal on contracts for the sale of goods. ↵
• The one who makes a promise. ↵
• The one to whom a promise is made. ↵
• The giving up by a person of that which she had a right to retain. ↵
• To be prohibited from denying a promise when another has subsequently relied upon it. ↵
• Estate of Timko v. Oral Roberts Evangelistic Assn. , 215 N.W.2d 750 (Mich. App. 1974). ↵
• The mental state of mind sufficient to understand that a contract is made and its consequences. ↵
• To legally disavow or avoid a contract. ↵
• A rule requiring that certain contracts be evidenced by some writing, signed by the person to be bound, to be enforceable. ↵
• Restatement (Second) of Contracts Chapter 5, statutory note. ↵
• A term in a contract that something has to happen before the obligation to perform the contract ripens. ↵
• Pym v. Campbell , 119 Eng. Rep. 903 (Q.B. 1856). ↵
• The passing or delivering by one person to another of the right to a contract benefit. ↵
• An assignee takes no greater rights than his assignor had. ↵
• The relationship of the immediate parties to a contract, a “private” relationship, as between retailer and customer. ↵
• Stambovsky v. Ackley , 169 A.D.2d 254 (N.Y. 1991). ↵
• Restatement (Second) of Contracts, Section 168(d). ↵
• Restatement (Second) of Contracts, Section 151. ↵
• A mistake made by one party to a contract; relief is not usually granted. ↵
• Sikora v. Vanderploeg , 212 S.W.3d 277 (Tenn. Ct. App. 2006). ↵
• Erroneous belief shared and relied on by both parties to a contract for which a court often grants relief. ↵
• Restatement (Second) of Contracts, Section 152. ↵
• Sherwood v. Walker , 33 N.W. 919 (1887). ↵
• There is different authority on physical violence as a threat or a physical action that actually forces a contractual action. For our purposes, all forms of physical threat make a contract void. ↵
• Restatement (Second) of Contracts, Section 177. ↵
• Restatement (Second) of Contracts, Section 177(b). ↵
• Restatement (Second) of Contracts, Section 195. ↵
• Henrioulle v. Marin Ventures, Inc. , 573 P.2d 465 (Calif. 1978). ↵
• A judicial order directing a person to stop doing that which he or she should not do. ↵
• A contract presented to the offeree to take or leave without bargaining. ↵
• California Business and Professions Code, Section 16600. ↵
• Towne v. Eisner , 245 US 418, 425 (1917). ↵
• Grove v. Charbonneau Buick-Pontiac, Inc. , 240 N.W.2d 853 (N.D. 1976). ↵
• Such as a contract to start a new business, in which nobody knows how well the new business would have performed. ↵
• Money paid by one party to another to discharge a liability. ↵
• Hadley v. Baxendale (1854), 9 Ex. 341, 354, 156 Eng.Rep. 145, 151. ↵
• R. J. Danzig, “Hadley v. Baxendale: A Study in the Industrialization of the Law,” Journal of Legal Studies 4, no. 249 (1975): 249. ↵
• Damages that flow as a foreseeable but indirect result of the breach of contract. ↵
• Money paid to the non-breaching party in an attempt to avoid further loss on account of the breach. ↵
• Money awarded to the non-breaching party in excess of any loss suffered to punish the breaching party. ↵
• The wrongful taking of someone’s property by another; the civil equivalent of theft. ↵
• An order directing a person to deliver the exact property (real or personal) that she contracted to sell to the buyer. ↵
• To restore to one party what was delivered to the other. ↵

Business Law: A Risk Management Approach Copyright © 2022 by Jeff Lingwall is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Capacity to Contract

One of the most essential elements of a valid contract is the competence of the parties to make a contract . Section 11 of the Indian Contract Act, 1872 , defines the capacity to contract of a person to be dependent on three aspects; attaining the age of majority, being of sound mind, and not disqualified from entering into a contract by any law that he is subject to. In this article , we will look at all aspects in a detailed manner.

According to Section 11, “ Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject. ”

So, we have three main aspects:

• Attaining the age of majority
• Being of sound mind
• Not disqualified from entering into a contract by any law that he is subject to

Source: Pixabay

1] Attaining the Age of Majority

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. For the purpose of entering into a contract, even a day less than this age disqualifies the person from being a party to the contract. Any person, domiciled in India, who has not attained the age of 18 years is termed as a minor.

Let’s look at certain laws governing a minor’s agreement:

A Contract made with a Minor is Void

Since any person less than 18 years of age does not have the capacity to contract, any agreement made with a minor is void ab-initio (from the beginning).

Example, Peter is 17 years and 6 months old. He needs some money to go on vacation with his friends . He approached a moneylender and borrows Rs 25,000. As security, he signs some papers mortgaging his laptop and motorcycle. Six months later, when he attains the age of majority, he files a suit declaring that the mortgage executed by him when he was a minor is void and should be cancelled. The Court agrees and relieves Peter of all liability to repay the loan .

Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the contract is void ab-initio. And, a void agreement cannot be ratified.

A Minor can be a Beneficiary of a Contract

While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian Partnership Act, 1932 , also specifies that while a minor cannot become a partner in the partnership firm , the benefits of the firm can be extended to him.

Example, Peter lends some money to his neighbour, John and asks him to mortgage his house as security. John agrees and the mortgage deed is made favouring Peter’s 10-year-old son – Oliver. John fails to repay the loan and Peter, as the natural guardian of Oliver, files a suit against John to recover his money. The Court holds the case since a minor can be a beneficiary of a contract.

A Minor is always given the Benefit of being a Minor

Even if a minor falsely represents himself as a major and takes a loan or enters into a contract, he can plead minority. The rule of estoppel cannot be applied against a minor. He can plea his minority in defence.

Contract by Guardian

Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the minor. Such a contract, which the guardian enters into, for the benefit of the minor, can also be enforced by the minor.

However, guardians cannot bind a minor by a contract for buying immovable property. But, a contract entered into by a certified guardian of a minor, appointed by the Court, with approval from the Court for the sale of a minor’s property can be enforced.

A minor cannot be declared insolvent as he cannot avail debts . Also, if some dues are pending from the properties of the minor and he is not personally liable for the same.

Joint contract by a Minor and an Adult

In case of a joint contract between an adult and a minor, executed by the guardian on behalf of the minor, the liability of the contract falls on the adult.

2] Person of Sound Mind

According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a person is said to be of sound mind if he is capable of understanding the contract and being able to assess its effects upon his interests.

It is important to note that a person who is usually of an unsound mind, but occasionally of a sound mind, can enter a contract when he is of sound mind. No person can enter a contract when he is of unsound mind, even if he is so temporarily. A contract made by a person of an unsound mind is void.

3] Disqualified Persons

Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.

Solved Question on Capacity to Contract

Q1. Rajiv has been in the lunatic asylum for 10 years. The doctors say that he is improving and there are times when he communicates and behaves like a normal person. Also, he is 25 years old. Does Rajiv have the capacity to contract?

Ans: Rajiv has attained the age of majority. Also, the doctors state that he is of a sound mind for intervals of time. Hence, he can enter into a contract during the period when his mind is sound, i.e when he has the capacity to contract.

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Indian Contract Act 1872: Part II

• Who Performs the Contract?
• Expressly Void Agreements
• Legality of Object and Consideration
• Quasi Contract
• Contingent Contracts
• Liquidated Damages and Penalty
• Performance of Reciprocal Promise
• Suit for Damages
• Anticipatory and Actual Breach of Contract
• Discharge of a Contract

4 responses to “Discharge of a Contract”

K and A had entered into a contract where K was to supply 50,000 phones to A within 2 months from the date of signing of contract. K was to procure the phones from China and deliver the same to A. The rate of the phone was Rs. 5000/- a piece (inclusive of all taxes and duties). At the time of the execution of the contract, the duty was at 5% (five percent). Immediately after the execution of the Agreement, India had increased the duties to 1000% (one thousand percent). Therefore, K was finding it difficult to sell the phones at the price agreed earlier. In the circumstances, kindly advise:

a. How can K discharge such a contract?

b. How can A enforce such a contract?

K can “Discharge of Contract” Under Impossibility of performance, during post-contractual impossibility While the following conditions are satisfying The act should have become impossible after the formation of the contract. 2. The impossibility should have been caused by a reason of some event which was beyond the control of the promissory. 3. The impossibility must not be the result of some act or negligence of the promisor himself.

K can discharge the contract by imposibility or frustration due to unseen changes

In light of the case of registered trustees of the cashew nuts industry development fund V cashew nuts board of Tanzania,civil appeal no:18 of 2001 court of appeal of Tanzania at Dar es saalam (unreported) and the cashew nuts industry act no 18 of 2009. Explain the parties to an agency (name of parties) it provided case and the way in which it was created

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Capacity to Contract Means: Everything You Need to Know

Capacity to contract means a party has the legal ability to enter into a contract. 3 min read

Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a person has to be competent as defined by law. Someone's capacity is determined by whether or not they have reached the age of majority and if they are mentally capable of understanding the applicable contract terms.

A contract must contain these six elements:

• Consideration

Who Doesn't Meet Criteria for Capacity

Some people lack the capacity to enter into a legally binding contract:

• Minors: In general, anyone under 18 years old lacks capacity. If he or she does enter into a contract before they turn 18, there is usually the option to cancel while he or she is still a minor. There are some exceptions to this rule, however. Minors are allowed to enter into contracts for purchasing various necessities like clothing, food, and accommodations. Some states allow people under 18 to obtain bank accounts, which often carry strict terms and stipulations.
• Mental Incapacitation: If a person is not cognitively able to understand his or her responsibilities and rights under the agreement, then they lack the mental capacity to form a contract. Many states define mental capacity as the ability to understand all terms of the contract, while a handful of others use a motivational test to discern whether someone suffers from mania or delusions.
• Intoxication: Someone who is under the influence of drugs or alcohol is generally believed to lack capacity. If someone voluntarily intoxicated themselves, the court may order the party to uphold the obligation. This is tricky because many courts have also agreed a sober party shouldn't take advantage of an intoxicated person.

Contracts made with people who don't have legal capacity are voidable. The other person has the right of rescission, the option to void the contract and all related terms and conditions. Courts may opt to void or rescind a contract if one of the parties lacked legal capacity. If the court voids the contract, it will attempt to put all parties back in the position they were in before the agreement, which may involve returning property or money when feasible.

Capacity of Companies

Companies also have to have capacity when entering into an agreement. If they don't, there can be serious consequences, particularly regarding guarantees. There are similarities across legal systems and jurisdictions when it comes to the general rules that govern the legal capacity of companies. For example, the legal theory that a business has a separate legal personality is recognized in both civil and common law jurisdictions. This means that as a defined legal person, a company has the capacity to enter into a contract with other parties and can be held liable for its actions.

Civil Law Countries

The United States isn't the only country that recognizes this legal concept. For example, France, a civil law country, has also adopted this idea. Legal capacity regarding entities was recently reformed by Ordinance n°2016-131, which went into effect in 2016. Under French Civil Code Article 1147, a company's lack of capacity is a grounds for relative nullity, a defense that can be invoked by the aggrieved party to void the contract. In this case, the aggrieved party would be the company. Furthermore, Article 1148 allows French companies who lack capacity to contract to legally enter into contracts that are day-to-day acts which are authorized by usage or legislation.

In Spain, there is a special relationship with church and state. As a result, the church is governed by elements of a specific concordat: Spanish Civil Code Article 37, which says that companies enjoy “civil capacity.”

Common Law Countries

In common law countries, a company's capacity is limited by the company's memorandum of association. This document contains the clause that describes the commercial activities the business is involved in, thereby delineating the company's capacity.

Under the ultra vires doctrine, a business cannot do anything beyond what is allowed by its statement of objects. The ultra vires doctrine was initially seen as a necessary measure to protect a company's shareholders and creditors. This doctrine gave rise to what's known as the constructive notice rule, which states that any third party that entered into a contract with another company must have been knowledgeable of that business's objects clause.

If you need help with what capacity to contract means, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

• Capacity in Contract Law
• Lack of Capacity
• What Does Capacity To Contract Mean
• Mental Capacity to Contract
• Contractual Capacity
• What Does Capacity Mean in a Contract: Everything to Know
• Legal Contract Age By State
• Contract Capacity
• How Is A Contract Formed
• Competent Parties to a Contract: What You Need to Know

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Understanding Capacity to Contract: A Fundamental Legal Principle

Home » Blog » Civil Law » Contract Law » Understanding Capacity to Contract: A Fundamental Legal Principle

In the legal world, the concept of Capacity to Contract stands as a cornerstone, ensuring that business and personal agreements are both fair and enforceable. This principle is pivotal in protecting individuals and entities by ensuring that only those who possess a full understanding of their actions and the implications thereof can be legally bound by contracts. Capacity to Contract delves into various factors including age, mental state, and legal status, which collectively determine an individual’s or entity’s ability to enter into binding agreements.

The Legal Framework Surrounding Contractual Capacity

Contractual capacity is governed by a myriad of laws and regulations that outline who is eligible to enter contracts and under what conditions. Generally, adults of sound mind are recognized as having full capacity to engage in contracts. However, exceptions exist, such as for minors, individuals with mental impairments, and those under significant influence, whose ability to understand and consent to contracts is legally diminished.

Age and Contractual Capacity: Navigating the Limitations

One of the most straightforward limitations on contractual capacity relates to age. In many jurisdictions, individuals under the age of 18 are considered minors and have limited capacity to contract. Contracts entered into by minors are often voidable at the minor’s discretion, providing a protective measure against exploitation and rash decision-making. However, for necessities—goods and services essential for living—minors’ contracts may remain binding to ensure their access to fundamental needs.

Mental Capacity and Understanding Contracts

Mental capacity to contract requires that an individual can understand the terms and implications of the agreement. Legal systems place great importance on protecting those who cannot fully grasp the nature of their actions due to mental illness or impairment. Contracts involving individuals without the requisite mental capacity can be deemed void or voidable, depending on the circumstances and evidence of the individual’s understanding.

The Influence of Intoxication on Contractual Decisions

Intoxication from drugs or alcohol can impair judgment and understanding, affecting an individual’s capacity to contract. If it can be demonstrated that one party was unable to comprehend the nature of the contract due to intoxication, and the other party took unfair advantage of this state, the contract may be declared voidable by the impaired party once sobriety is regained.

Protecting Rights Through Capacity to Contract

Understanding and respecting the Capacity to Contract is essential for both personal and business relationships. It ensures that all parties entering into agreements do so with full awareness and consent, thereby safeguarding against legal disputes and the potential invalidation of contracts. For businesses, thorough vetting of contractual parties and their capacity to engage legally can prevent costly legal challenges and promote ethical practices.

Complexities of Contractual Capacity

The principle of Capacity to Contract plays a vital role in the fabric of legal transactions, serving as a safeguard for fair dealing and the enforcement of agreements. By navigating the complexities of contractual capacity with diligence and ethical consideration, individuals and businesses can secure their operations and foster trust in their contractual relationships.

Practical Examples and Legal Consequences

Understanding Capacity to Contract through practical examples illuminates its importance in everyday transactions. For instance, a contract signed by a minor for a non-essential luxury item can be contested and potentially voided, highlighting the protective mechanisms in place for those with limited capacity. Similarly, agreements made by individuals under undue influence or duress showcase the law’s role in ensuring free and informed consent in contractual obligations.

Legal consequences of engaging in contracts without the necessary capacity can be severe. Contracts deemed voidable can lead to legal disputes, financial losses, and damage to reputation. Businesses must exercise due diligence in assessing the capacity of contracting parties to avoid such pitfalls. This includes verifying age, mental state, and understanding of the contract terms, ensuring all parties are competent to enter the agreement.

Jurisdictional Variations in Contractual Capacity

Jurisdictional differences play a significant role in how Capacity to Contract is interpreted and enforced. While the general principles remain consistent—protecting those who are vulnerable—specific age limits, definitions of mental capacity, and exceptions vary. For example, some jurisdictions may allow minors to enter into certain types of contracts, such as employment agreements, under specific conditions. Businesses operating across borders must be acutely aware of these variations to ensure compliance and protect their contractual interests.

Strategies for Ensuring Enforceable Agreements

To mitigate the risks associated with Capacity to Contract , individuals and businesses can adopt several strategies. These include:

• Conducting thorough due diligence before signing agreements to confirm all parties have the legal capacity.
• Seeking legal advice when entering complex contracts or dealing with parties who may lack capacity.
• Using clear and understandable language in contracts to ensure all parties fully comprehend the terms and implications.
• Implementing safeguards , such as witness signatures and legal counsel, especially when contracting with individuals who might be at the edge of capacity thresholds.

Empowering Businesses and Individuals Through Legal Awareness

At its core, the principle of Capacity to Contract empowers businesses and individuals by fostering a legal environment based on mutual understanding, consent, and fairness. Educating oneself about the nuances of contractual capacity, staying informed about legal changes, and consulting with legal professionals when in doubt, can enhance the integrity and enforceability of contractual agreements. This not only protects legal rights but also promotes trust and reliability in personal and business relationships.

Conclusion: The Pillar of Fair and Informed Agreements

In conclusion, Capacity to Contract is a fundamental legal doctrine that ensures the integrity and fairness of the contracting process. By understanding and adhering to the principles of contractual capacity, parties can enter into agreements with confidence, knowing their rights are protected, and their obligations are clear. As the legal landscape continues to evolve, staying informed and vigilant about capacity issues remains crucial for anyone engaging in contractual agreements.

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Capacity and Competency to Contract under Indian Contract Act

• Contract Act Blogs
• January 31, 2021

As per Section 11, competency to contract for any person is as follows:- Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions:

• It must be made by free consent of the parties .
• The parties must be competent to contract.
• It must be made for a lawful consideration and with a lawful object.
• It should not have been expressly declared as void by law .

Also, there must be consensus ad idem or identity of minds in the sense that parties have agreed about the subject matter of the contract at the same time and in the same sense, as evidenced by offer and acceptance(Section 13). It has been observed that the agreement must import an intention to create a legal relationship between the parties and that agreements relating to social matters are not enforceable by law. [1]

Competency to Contract under Indian Contract Act

As per Section 11, competency to contract for any person is as follows:-

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Age of majority

In India the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age. Except when a guardian of a minor’s person or property has been appointed by the court, in such case it is 21. [2]

Competency to Contract: Position of Minor’s Agreement

Effects of minor’s agreement.

1. No estoppel against minor:  There can be no estoppel against a minor i.e., if a minor by misrepresenting his age induces another to contract with him, then also he cannot be made liable.

2. No liability in contract or in tort arising out of contract:  A minor is incapable of giving consent, and the nature of the minor’s agreement is a nullity and cannot be enforced. [3]

3. Doctrine of Restitution:  If an infant by misrepresenting his age, obtains property or goods, then he can be compelled to restore it, but only so long as the same is traceable in his possession, this is called the equitable Doctrine of Restitution. Where the infant has converted or sold the goods, he cannot make to repay the value of goods as that would lead to enforcing a void contract. When the infant has obtained the cash instead of goods, then in this case again the Doctrine of Restitution is not applied. [4]

In  Mohori Bibee v. Dharmodas Ghosh [7] , a minor Dharmodas Ghosh mortgaged his immovable property to Brahmo Dutt a money lender to secure a loan of Rs. 20,000. The actual amount was not paid by the plaintiff as he paid Rs. 8000 only and refused to pay the rest amount. Minor’s mother said that his son is not liable to pay the sum as he was a minor. The privy council held that the minor contract is void and accordingly the Brahmo Dutt’s appeal was dismissed.

An agreement entered into by a minor is altogether void

Contract with or by a minor is altogether void. The Indian Contract Act simply says that only a person who is a major jas the competency to contract. The main reason for holding a minor’s agreement void is that a minor is incapable of giving a promise imposing a legal obligation.

Minor can be a beneficiary

Though a minor does not have the competency to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him. A minor cannot become a partner in a partnership firm. However, he may, with the consent of all partners, be admitted to the benefits of a partnership (Section 30 of the Indian Partnership Act, 1932).

Minor can always plead minority

A minor’s contract being void, any money advanced to a minor on a promissory note or otherwise cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, it will not stop him from pleading his minority in a suit to recover the amount and the suit will be dismissed.

But where a minor had fraudulently mortgaged and sold certain properties, the Court held that on the cancellation of the agreement at the instance of the minor the lender and purchaser must be compensated.

Ratification on attaining majority is not allowed

As a minor’s agreement is void he cannot validate it by ratification on attaining a majority. For instance, a minor borrows money and executes a promissory note. On attaining majority, he executes a fresh promissory note in substitution of the one executed as a minor.

The second promissory note is also void being without consideration. But a person who supplies necessaries of life to a minor or to one whom the minor is legally bound to support, according to his situation in life, is entitled to be reimbursed from the property of the minor not on the basis of any contract but on obligation resembling a contract. However, a minor’s property is liable for necessaries and no personal liability is incurred by him.

Contract by a guardian – how far enforceable

Though a minor’s agreement is void, his guardian can under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor, which is within his competency to contract and which is for the benefit of the minor, there will be a valid contract which a minor can enforce. For instance, a guardian can make an enforceable contract of marriage for a minor.

But all contracts made by a guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to bind the minor by a contract for the purchase of immovable property. But a contract entered into by a certified guardian (appointed by the court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforceable by either party to the contract.

Competency to Contract: Persons of unsound mind

The agreement with a person of unsound mind in India is void. According to Section 12 of the Indian Contract Act, a person is said to be of a sound mind if, at the time of making the contract, the person is able to understand the contract and is capable of making a rational decision considering the effects of the same.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Persons of unsound mind include an idiotic, lunatic and intoxicated person.

Sound Mind:

A person is said to be of sound mind for the purpose of making a contract if at the time when it is, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

A person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. Similar is the case with a person who is generally of sound mind but occasionally of unsound mind.

Contract by a person of unsound mind

A person of unsound mind too, under the Indian Contract Act, is incapable of entering into a contract. Although a contract by a person who is not of sound mind is void, such a person can enter into a valid contract during an interval of lucidity. The test of unsoundness of mind is whether or not the person is capable of understanding the business and of forming a rational judgment as to its effect upon his interest. Idiots, lunatics and drunken persons are examples of those having an unsound mind.

The presence or the absence of the capacity mentioned in this section at the time of the making the contract is in all cases a question of fact. Where a person is usually of sound mind, the burden of proving that he was of unsound mind at the time of execution of a document lies on him who challenges the validity of the contract.

Illustrations :

A patient in a lunatic asylum, who is at intervals of sound mind my contract during such intervals. The liability for necessaries of life supplied to person of unsound mind is the same as for minors (section 68).

Competency to Contract: Persons disqualified by law

Apart from minors and persons of unsound mind, there are also other persons such as Foreign sovereigns, convicts, alien enemies, insolvents and so on who are disqualified from contracting partly or wholly and do not have the competency to contract. Therefore, contracts by such persons are void.

Contract by disqualified persons

Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such a person are void. If by any provincial legislation, a person is declared disqualified proprietor, he do not competency to contract to enter into any contract in respect of the property.

Illustrations

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.

(c) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

 (d) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Section 64: Consequences of rescission of voidable contract

“When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.”

Section 2(i)  defines a voidable contract as “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others is a voidable contract”. It means that a contract which can be terminated or continued only on the option of one party is a voidable contract.

Section 64 states that if a person on whose option the contract is voidable rescinds the contract, then he must restore the benefit he has received from the other party in the contract and the other party is not obliged to perform any promise it had promised to perform in the contract as a promisor.

Case Law: In Sinaya Pillai Vs Muniswami Iyyer ,  [5] it was postulated that; “This principle is acknowledged in section 64 of the Indian Contract Act and generally by the Indian Courts as Courts of Equity and good conscience.”

The Indian Contract Act only provides for the restoration received by the party rescinding the voidable contract, whereas under The Specific Relief Act, there is a provision for the payment of compensation to which the other party may require. This provision of The Specific Relief Act is more logical as compared to the provision in Section 64.

For example: X has received a loan from Y on a voidable contract. It is not enough to only return the amount borrowed by X but he should also pay some interest to Y on account of the benefit obtained on such a transaction. It is suggested to amend Section 64 to bring it in line with the provisions of The Specific Relief Act but strangely the Law Commission recommended no change in it.

Section 33 in The Specific Relief Act, 1963

33. Power to require benefit to be restored or compensation to be made when an instrument is cancelled or is successfully resisted as being void or voidable.—

(1)  On adjudging the cancellation of an instrument, the court may require the party to whom such relief is granted, to restore, so far as may be any benefit which he may have received from the other party and to make any compensation to him which justice may require.

(2)  Where a defendant successfully resists any suit on the ground—

(a) that the instrument sought to be enforced against him in the suit is voidable, the court may if the defendant has received any benefit under the instrument from the other party, require him to restore, so far as may be, such benefit to that party or to make compensation for it;

(b)  that the agreement sought to be enforced against him in the suit is void by reason of his not having been competency to contract under section 11 of the Indian Contract Act, 1872 (9 of 1872), the court may, if the defendant has received any benefit under the agreement from the other party, require him to restore, so far as may be, such benefit to that party, to the extent to which he or his estate has benefited thereby.

Section 65 of The Indian Contract Act, 1872

The obligation of the person who has received an advantage under a void agreement, or contract becomes void.

When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it.  When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.”

Illustrations:

(a)  A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.”

Section 68: Claim for necessaries supplied to person incapable of contracting, or on his account

“If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of a such incapable person.” [6]

(a)  A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

 (b)  A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

Under section 68, any person would be entitled to reimbursement out of the minor’s estate for necessities supplied to him or to his family. Necessaries also include goods and services. If the minor had obtained payment fraudulently by concealment of age, he may be compelled to restore the payment, but he cannot be compelled for an identical sum, if any, as it would amount to enforcing a void contract.

Thus, for a valid contract, capacity to contract is an essential element and for that, Section 11 of the Contract Act defines the persons who are eligible for contract i.e. competent to contract or who can enter into the contract. A person incompetent to contract like a minor, unsound mind and persons disqualified by law are not eligible to contract and a contract with such type of person is unenforceable by law.

For more articles on Law of Contracts, Click Here.

For law notes, click here..

[1] Indian Contract Act, 1872 (No. 9 of 1872)

[2] The Majority Act, 1875 (No. 9 of 1875)

[3] Avtar Singh, Contract & Specific Relief, Page- 158, 12 th  Edition, EBC Publishing (P) Ltd.

[4] https://indiankanoon.org/doc/1164247/

[5] 22. Mad. 289,291.

[6]  https://indiankanoon.org/doc/1164247/

[7] (1903) 30 Cal 539 (Pc)

This article is contributed by Sunita Basak is a student at University of Engineering and Management, Kolkata.

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Legal capacity to contract: all you need to know

This article has been written by Husain Rizvi pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho

This article has been edited and published by Shashwat Kaushik .

Table of Contents

Introduction

A contract is a legally binding agreement between two or more parties that creates legal obligations between them. Such obligations play an extremely crucial role in facilitating transactions, defining relationships, and providing a legal framework for various agreements in both personal and business contexts. Legal capacity to contract shall refer to the legal ability of an entity or an individual to enter into a valid contract that carries legal obligations, rights, and responsibilities. The concept of legal capacity involves the mental and legal competence necessary for parties to understand the terms and conditions of a contract, make informed decisions regarding the same, and be held accountable for their contractual obligations. Legal capacity to contract  stands as a prime doctrine that upholds the functioning of contractual relationships within the ambit of law. In the intricate tapestry of business transactions, personal agreements, and professional dealings, the concept of legal capacity stands as a cornerstone, ensuring the fairness and enforceability of contracts. Legal capacity is a crucial concept in various areas of law, including contract law, family law, and property law. However, this article will be zeroing in on the legal capacity to contract specifically. That being said, the focal point shall be to present an overview of legal capacity with respect to contracts, its types, the evolution of legal capacities, and global perspectives on legal capacity to contract.

Overview of legal capacity within the context of contracts

In the complex landscape of contract law, the concept of legal capacity stands as an important determinant of the enforceability of contracts. Legal capacity addresses the principle question of whether the parties involved in a contract possess the requisite mental and legal competence to enter into binding agreements. This nuanced concept explores various cognitive abilities, age considerations, and freedom from coercion that reinforces the capacity of individuals and entities to navigate through the terrain of contractual relationships. 

One can say that legal capacity serves as a protective shield, and helps in ensuring that the parties willingly, knowingly, and autonomously undertook contractual obligations. This protective aspect is deeply rooted in the balance between the autonomy of individuals to engage in contractual relationships and the need for safeguards to prevent exploitation or any unfair practices.

It can be stated that legal capacity within the context of contracts provides a deeper understanding of the equilibrium that ensures the fairness and integrity of contractual relationships. The interplay of legal doctrines, ethical considerations, and practical implications emphasises the pivotal role that legal capacity plays in shaping the landscape of contract law.

Categories of legal capacities to contract

Legal capacities to contract are contingent in nature, meaning they depend on the fulfilment of certain conditions. Legal capacities may range from mental capacity to age related capacity or even intoxication. Such legal capacities have been mentioned and described in detail below:

Mental competence

Mental competence can be deemed the foundational element of legal capacity to contract. It refers to the cognitive abilities of an individual. In context with a contract, it refers to the ability to understand the nature of a contract and its implications before entering into it. Mental capacity is closely tied to soundness of mind, therefore, an individual must be in the right mental state to grasp the terms and conditions, legal obligations, risks and benefits of the contract. Any contracts entered into by individuals who are of unsound mind may be deemed voidable. Therefore, an individual is expected to be capable of making well-informed and voluntary decisions when entering into a contract.

Age competence

Age competence can be referred to as the age of maturity that is required to enter into a valid contract. The age of maturity is a threshold defined by legal systems, which is an age when an individual is considered to be mature enough to enter into a valid contract. Various jurisdictions may have a different age of majority. In India, it happens to be 18 years in a normal case; however, it is 21 years if a guardian has been appointed by the court. Any individual below the age of maturity is to be considered a minor. Any contracts that are entered into by a minor shall be legally void. The idea behind the age of maturity is not based on numerical aspects; rather, it indicates that an individual below the age of maturity is simply not experienced enough to actually grasp the implications and obligations of a contract; therefore, a minor will not be able to make well-informed decisions, hence why contracts entered by minors are stated as void.

Intoxication

In cases of intoxication, an individual’s cognitive abilities to understand the nature of a contract can be significantly impacted in a negative way. An individual under the influence of alcohol, drugs or any other substance may not be able to comprehend the obligations and implications of a contract before entering into it; therefore, it may affect their judgement in such an altered state. Contracts that are entered into by an intoxicated individual are often considered void in nature. This means the said individual, upon becoming sober, has the option to void the contract. Also, to disaffirm the contract, the intoxicated party must notify the other party about the same within a reasonable period of time after becoming sober.

Corporate capacity

It refers to a corporate entity’s ability to enter into a business contract. Corporate capacity includes both the expressed and implied powers of a corporation. These powers must be abided by foundational documents like the MOA and AOA of the corporation; therefore, all the contracts that the corporation enters must be within the scope of the corporation’s operations as defined in its documents. Any contracts that may fall outside its domain may be deemed ultra vires and could be declared void. Ultra vires refers to operations undertaken by the corporation that are outside of its powers. It can be stated that the aforementioned foundational documents of a corporation play a significant role in establishing its corporate capacity.

Bankruptcy is a legal status that is entered by an individual or entity when they are unable to fulfil their financial obligations. Upon filing for bankruptcy, an automatic stay may be implemented. This shall halt all the legal actions and provide debtors with a temporary reprieve. However, it is important to note that bankruptcy doesn’t automatically regard an existing contract as void; instead, it affects the ability of the debtor to meet financial obligations.

Legal guardianship

Legal guardianship is a legal arrangement established by courts to provide protection and make decisions for individuals who may be incapable of decision-making due to being a minor or disabled. The guardian is granted decision-making authority by the court. However, such authority is limited to only areas such as personal care, healthcare and finance related matters. Therefore, the scope of legal guardianship is very well defined by the courts, and decisions shall not land outside these domains mentioned above. Additionally, the decisions are supposed to be in the best interest of the individual in question, and any contract entered into on behalf of the individual shall be in their best interest.

Violation of a public policy

Public policy represents the standards that a society deems fair, and they are in the general interest of the public. Contracts that violate such fundamental standards may be considered contrary to public policy. Contracts involving illegal activities, fraud, or any actions considered harmful to the public fall into the category of violating public policy. Such contracts are typically deemed unenforceable by courts; therefore, they are considered either void or voidable. A void contract is fundamentally flawed; however, a voidable contract may be set aside at the option of the innocent party.

Consequences of lacking legal capacity

Consequences of lacking legal capacity to contract:

• Void Contracts: Contracts entered into by individuals lacking legal capacity are generally void or voidable. Void contracts are considered legally ineffective from the outset, while voidable contracts may be challenged and potentially annulled.
• Misrepresentation and undue influence: Parties who enter into contracts with individuals lacking legal capacity may be liable for fraud, misrepresentation, or undue influence. They may be held responsible for taking advantage of the vulnerable party’s inability to make informed decisions.
• Protection of minors and vulnerable adults: Legal capacity restrictions aim to protect minors and vulnerable adults from making unwise or harmful contractual decisions. It ensures that contracts involving such individuals are entered into with the necessary safeguards and protections.
• Legal representation: Individuals lacking legal capacity may require legal representation or assistance from guardians, conservators, or attorneys. This representation helps ensure that their rights and interests are adequately protected.

Evolution of legal capacity to contract

Over the course of centuries, the legal capacity to contract has evolved and been modified by assorted legal and economic changes. Below are various occurrences that have contributed to the advancement of legal capacity within the relevant timeline:

Early common law

The concept of legal capacity to contract has substantially embedded roots throughout the common law. Although the concept transformed in the later years, even the early common law recognised the significance of free will and mental competence. That being said, parties were required to have a mutual understanding of the nature of the contract they were entering into; moreover, individuals were also expected to have adequate cognitive ability to comprehend the future implications and obligations that may arise after entering into the said contract.

Formalism of contract

During the 17th and 18th centuries, law was more focused on formalising contract requirements, highlighting the significance of written agreements and legal formalities. However, mental capacity and freedom will still remain fundamental considerations in determining the validity and enforceability of contracts.

Doctrine of Laissez-Faire

The doctrine of laissez-faire was introduced in the 18th century, although it gained prominence during the 19th century. The term “laissez-faire” is French, which means “leave it alone.” It emphasises minimal government interference. It states that governments should refrain from interfering in economic affairs and allow the markets to operate without any kind of undue regulation. Under this doctrine, even courts were reluctant to interfere with contracts, assuming that parties entered into agreements voluntarily.

Age requirements

By the 19th century, legal orders, specifically from England, embraced a more formalistic approach to contract law. Legal systems increasingly formalised the age at which individuals were considered adults with full contractual capacity.

Legal reforms in the modern era

The 20th century witnessed legal reforms that further refined the already existing rules regarding contractual capacity. Laws protecting vulnerable groups, such as minors and individuals with mental incapacity, were enacted by countless jurisdictions, along with protective legislation being introduced to address imbalances in bargaining power.

Global perspective on legal capacities to contract

United nations convention’s take on contracts for the international sale of goods (cisg).

Contracts for international sale of goods (CISG) happen to be significant international treaties. It lays down a set of rules for the formation of contracts between the buyer and seller in international transactions. It mainly focuses on commercial transactions and its principles can influence the capacity of contracts related to considerations on a global level.

United Nations Convention on the Rights of the Child (CRC)

The CRC stands for the Convention on the Rights of the Child. It is concerned with establishing the rights of children in the formation of a contract that involves minors. It sheds light on the protection of the rights of children, including their right to participate in decision-making as well, which may have implications for matters related to the formation of a contract.

International Trade Practices and Standards

International trade practices tend to have a lot of influence on trade practices, as norms tend to be different from country to country. This is particularly relevant to sectors where global trade plays a crucial role. International trade standards may include uniformity in relations, industry norms, and recognition of cultural and legal differences, which play an important role in overall overseas transactions.

Relevant case laws

Mohori bibee vs. dharmodas ghose (1903) , background of the case.

In this case, Dharmodas Ghose, who was a minor, mortgaged his property to a person named Brahmo Dutta. When Ghose later tried to void the contract, the court’s judgement was in his favour.

Judgement of the Court

The lower courts in India ruled in favour of Ghose, holding that Mohori Bibee was liable for the debt because she had represented herself as an adult. However, on appeal to the Privy Council, the highest court of appeal for India at the time, the decision was reversed. The Privy Council held that a minor’s contract is void ab initio , regardless of whether the minor misrepresented their age.

The court reasoned that minors are not legally competent to enter into binding contracts, and any attempt to do so is void from the outset. This principle is based on the idea that minors are not fully capable of understanding the legal consequences of their actions and are therefore in need of protection from exploitation.

The Mohori Bibee case established the principle of void ab initio for minor’s contracts in India, and this principle has been consistently upheld in subsequent rulings. It has important implications for both minors and adults who enter into contracts with minors. Minors are protected from being held liable for debts or obligations that they incurred while they were minors, even if they misrepresented their age. Adults, on the other hand, must exercise caution when entering into contracts with minors, as they may not be able to enforce the contract if the minor later repudiates it.

Nash vs. Inman (1908)

Background: In this case law, clothes were supplied to the defendant by the claimant, the clothing included 11 fancy waistcoats in total. However, the defendant happens to be a minor in this scenario, a Cambridge undergraduate to be exact, and he refused to pay for the clothing, simply stating that he doesn’t need them anymore.

Judgement: Here, the defendant was already indeed supplied with clothing, however, it doesn’t amount to any kind of necessity; moreover, Nash, the waistcoat maker, could not sue Inman because having eleven waistcoats is not a necessity, furthermore, since the defendant is a minor in this case as well, similarly to the previous judgement that we discussed earlier, here too, it was held that there’s no valid contract of sale to begin with.

Soundararajan vs. Ramaiah (1985)

Soundararajan vs. Ramaiah is a landmark case in Indian contract law. It was decided by the Supreme Court of India in 1985. The case involved a dispute between two parties, Soundararajan and Ramaiah, over a contract for the sale of a house.

Facts of the case

• Soundararajan, the plaintiff, entered into a contract to purchase a house from Ramaiah, the defendant, for a purchase price of Rs. 100,000.
• The contract was subject to the condition that Soundararajan would obtain a loan from a bank to finance the purchase.
• Soundararajan applied for a loan, but his application was rejected.
• Soundararajan then informed Ramaiah that he was unable to obtain the loan and that he was rescinding the contract.
• Ramaiah refused to accept the rescission and filed a suit for specific performance of the contract.

Issues involved in the case

• Whether the contract was voidable due to the failure of the condition precedent (obtaining the loan).
• Whether Soundararajan was entitled to rescind the contract.
• Soundararajan argued that the contract was voidable because the condition precedent (obtaining the loan) had not been fulfilled. He also argued that he was entitled to rescind the contract because the failure of the condition precedent was not due to any fault on his part.
• Ramaiah argued that the contract was not voidable because the condition precedent was not a condition precedent to the formation of the contract. He also argued that Soundararajan was not entitled to rescind the contract because he had not given Ramaiah a reasonable opportunity to cure the breach of contract.
• The Supreme Court held that the contract was voidable because the condition precedent (obtaining the loan) had not been fulfilled.
• The Court also held that Soundararajan was entitled to rescind the contract because the failure of the condition precedent was not due to any fault on his part.

In conclusion, we can state that the concept of legal capacity to contract is a crucial aspect of contract law that tends to ensure the fairness of a contract. Moreover, legal capacities are present in various categories, as discussed earlier in this article, and they may be distinct in nature on the basis of circumstances. The evolution of this concept happened over centuries due to the transformations in legal norms at an international level. However, the key elements of legal capacity, including age, mental competence, and adherence to public policy, are recognised by all the jurisdictions worldwide, as discussed earlier. After navigating through the categories of the concept of legal capacity to contract, it can be concluded that the concept continues to evolve and is strongly influenced by technological advancements and cultural shifts. Nonetheless, the final agenda remains the same, that is to ensure that parties entering into contracts possess enough cognitive abilities and mental competence to understand the implications and consequences of entering into a contract.

• https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/capacity-to-contract/
• https://www.nolo.com/legal-encyclopedia/lack-capacity-to-contract-32647.html
• https://www.lawbite.co.uk/resources/blog/what-is-capacity-in-contract-law
• https://www.vedantu.com/commerce/capacity-to-contract
• https://study.com/academy/lesson/legal-capacity-to-enter-a-contract-definition-examples.html
• https://blog.ipleaders.in/capacity-contract-ica-1872/
• https://www.indiafilings.com/learn/capacity-to-contract/
• https://lawbhoomi.com/capacity-to-contract-under-indian-contract-act/

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Chapter 8 – Capacity

Learning Objectives

After studying this chapter, you should be able to:

• Explain the element of contractual capacity.
• Identify when a contract is voidable or void due to lack of capacity.
• Apply the sword and shield doctrine.

8.1 General Perspectives on Capacity

Contractual capacity refers to the legal ability of an individual or entity to enter into a binding contract and be held legally responsible for their actions and obligations under that contract. It is an important principle in contract law as it ensures that contracts are entered into voluntarily and that all parties involved are capable of understanding and fulfilling their contractual obligations. Capacity is necessary for a legally binding contract.

Most people who enter contracts have capacity. Because of that, and to avoid having to prove one’s capacity every single time they wish to enter a contract, capacity is presumed unless there is something about the person or the transaction that calls capacity into question. In instances where capacity is questioned, it is possible to have either limited capacity (also called limited competency ) , or be incapable of contracting at all due to a lack of capacity, or incompetency .

The rule of contractual capacity is important because it helps to protect individuals who may be vulnerable or not fully capable of making informed decisions. M inors , people with mental disabilities, and individuals who are under the influence of drugs or alcohol may not have the capacity to fully understand the terms of a contract or the consequences of entering into it. By requiring that parties have the legal capacity to enter into a contract , the law seeks to prevent unfair contracts where one party may take advantage of the other party’s lack of understanding of the legal consequences of an agreement. Further, requiring capacity to enter a contract helps to ensure that the terms of the contract are understood and agreed upon by both parties. Since a contract is a meeting of the minds, i f someone lacks mental capacity to understand what they are agreeing to , i t is unreasonable to hold that person to the consequences of the contract . At common law there are various classes of people who are presumed to lack the requisite capacity to fully understand the consequences of a contract . These include infants ( minors ), the mentally ill, and the intoxicated. This Chapter will review each of these in turn.

8.2 Minors (or “Infants”)

The general rule.

Minors – persons younger than eighteen years of age in most states – may only enter into voidable contracts . This is because minors do not have full legal capacity to enter into contracts. Minors can enter into most contracts, but they can avoid their contracts, up to and within a reasonable time after reaching majority, while the other contracting party with full contractual capacity cannot. The idea is that minors do not stand on an equal footing with adults, and it is unfair to require them to abide by contracts made when they have immature judgment.

For example, suppose a 16-year-old enters into a contract to purchase a new phone from a mobile phone company. Since the 16-year-old is a minor and not yet legally capable of entering into a contract, the contract is voidable. This means that the 16-year-old has the option to either affirm the contract or void it. If the 16-year-old decides to go ahead with the purchase, the contract will be binding on the mobile phone company. However, if the 16-year-old chooses to avoid the contract, they will be released from any obligations or liabilities that may have arisen from the contract, and they will be entitled to a refund if they have already made any payments. This is called disaffirming a contract. To disaffirm a contract means to repudiate or reject a contract that has been previously entered into.

Most people will recognize the 16-year-old in the above example as a minor . But legal term infant is also used to describe the 16-year-old contracting party above. The words minor and infant are mostly synonymous, but there are some differences between the terms. Historically speaking, in a state where the legal age to drink alcohol is twenty-one, a twenty-year-old would be a minor, but not an infant, because infancy is under eighteen. A seventeen-year-old may avoid contracts (usually), but an eighteen-year-old, while legally bound to his contracts, cannot legally drink alcohol. This is why some states use the term infant for one who may avoid his contracts even though, of course, in everyday terms we think of an infant as a baby.

In nearly all U.S. states, an 18-year-old may assent to a binding contract, but there may still be some exceptions associated with age. For those under twenty-one, there may also be legal impediments to holding certain kinds of jobs, and agreeing to certain kinds of contracts, marrying, leaving home, and drinking alcohol. There is no uniform set of rules since each state can make their own laws in these areas. Because of these ambiguities, contracting adults like landlords or creditors may still require parents to co-sign contracts for a young adult over the age of 18. This is lawful, but is often unnecessary.

The exact day of “majority” – the day on which the limitations on contracting as a minor or infant vanish – can also vary. The old common-law rule put it on the day before the twenty-first birthday. Many states have changed this rule so that majority commences on the day of the eighteenth birthday. For the most part, the remainder of this Chapter will use the word minor to describe a contracting party under the age of 18. This is consistent with the law in New Jersey, where by statute an individual under the age of 18 is defined as an infant, and therefore lacks the legal capacity to contract.

Even though a minor lacks the legal capacity to contract, the minor’s contract is not automatically invalid. Instead, the minor has the right to choose to either affirm the contract or void it which makes the minor’s contract voidable. This means that despite having limited competence minors can enter contracts, but most of those contracts can be avoided, or disaffirmed, without any reason for doing so other than the party is a minor. If a lawsuit about the contract was filed, the minor would claim the defense of infancy, and this defense would be sufficient unless there are other reasons why the contract could not be disaffirmed. Should the adult wish to get out of the contract, they cannot make the same claim. The adult cannot seek to disaffirm the contract; only the minor can.

When a minor disaffirms a contract, the minor has the legal right of a minor to walk away from a contract and be released from any obligations or liabilities arising from it. In addition, the minor is restored to their original position, meaning that they would be entitled to the return of any consideration, without the responsibility of being liable for damages under the contract. A minor need only return whatever part of the consideration in the contract that they still have. So, if the 16-year-old in our example above opts to disaffirm their purchase of the new phone one month after entering the contract, the minor may disaffirm. The minor would be entitled to the return of any down payment or other fees paid for the phone. The minor will return the phone but would not be liable for any damage done to the phone while it was in the minor’s possession, even if the phone was broken. This is called the general rule of law pertaining to contracts entered into by minors. This means that the majority of states, but not all, follow this rule.

Exceptions to the Minor’s Right to Disaffirm

There are several exceptions and limitations to the minor’s right to disaffirm. These are discussed below.

Duty to Return Consideration Received

As we explored under the general rule, when a minor disaffirms a contract their own obligation would be to return an item of consideration if that item is still in the minor’s possession. For instance, the minor would have to return the untouched groceries in a contract with a grocery store. Under the general rule, if some of the groceries were already eaten, there would be nothing to return and thus the minor would not be liable for the value of the groceries that were consumed. Some courts, however, have required more from the minor when necessary to avoid injustice to the adult. Suppose that our 16-year-old minor that purchased the cell phone decided to disaffirm their purchase after dropping and breaking the phone. There are some courts that would limit what the minor could receive in disaffirming the contract. For example, a c ourt could determine that the minor should not receive full value back for the phone , but instead receive only that value associated with the (wrecked) phone at the time of the disaffirmance. Since this is contrary to the general rule, it is called the “ minority rule ” of law, where minority here means that less than half of the states follow this rule. On this area of law, New Jersey is in the minority, typically requiring that a minor return all of the consideration (or the value of that consideration) that was received in order to disaffirm .

Necess aries

A necessary is a basic need of life such as food, clothing, shelter and basic medical services. This has historically been the definition at common law. In recent years, however, the courts have expanded the concept so that in many states today, necessities include property and services that will enable a person to earn a living and to provide for those dependent on them.

When a contract with a minor is for an item that is a necessary, an exception to the general rule that minors can disaffirm their contracts is that minors are generally liable for the reasonable cost of necessities. The reason behind this change from the general rule that minors may disaffirm without further obligation is that denying minors a full right of contract for necessaries would actually harm minors, not protect them. The minor will not be obligated to perform the contract so technically the minor can still disaffirm. However, the minor will be responsible to the other party for the reasonable value of the contracted necessary. For example, suppose a minor enters into a contract with a grocery store to purchase food items where the food qualifies as a necessary. If the minor later disaffirms the contract, they will not be liable for the contract price of the food items if they have not been consumed or used by the minor. Those items can be returned, which is required under the general rule. However, if the minor has already consumed or used the food items, and those food items are necessaries, the minor is responsible for the reasonable cost of the food items. The requirement that the minor be liable for the reasonable value of the necessary is rooted in the theory of quasi contract , which was explored in an earlier Chapter.

So, how does this rule protect minors? Since the rule provides protection to the seller of the necessary, in this case the food, that seller will want to sell to minors that need food for nourishment, because the seller does not risk the harsh consequences of the general rule.

Nonvoidable Contracts

There are some contracts that are considered nonvoidable . The contracts that are nonvoidable can vary by state, and can include contracts such as insurance, education or medical care, bonding agreements, stocks, or bank accounts , and child support agreements. The rationale behind making these contract nonvoidable is this: if a contract is voidable it is a disincentive to an adult party to contract with a minor (or other party that lacks capacity) since there is a risk that the minor will disaffirm the contract in the future. Many sellers simply will not take that risk and instead refuse to contract with minors completely. There are certain types of contracts, though, that we want to be available to minors and so making those contracts nonvoidable encourages these types of contracts with minors. For example, it is beneficial both to a minor and to society that the minor receive an education. Education can be expensive, and so to help assure that education loans are available to minors, the right of the minor to disaffirm that loan in the future is limited or eliminated.

Misrepresentation of Age

A minor that misrepresents their age in order to enter a contract may be limited in their ability to later disaffirm that contract. Typically, an adult that simply thought that the minor was over the age of 18 could not raise that as a defense to the minor’s attempt to disaffirm the contract. This is true even if the adult’s belief that the minor was older was reasonable. Importantly, the minor must affirmatively misrepresent their age. Even so, this limitation on disaffirmance will depend on the state. A Michigan statute, for instance, prohibits an infant from disaffirming if he has signed a “separate instrument containing only the statement of age, date of signing and the signature.” And some states estop him from claiming to be an infant even if he less expressly falsely represented himself as an adult. Estoppel is a refusal by the courts on equitable grounds to allow a person to escape liability on an otherwise valid defense; unless the infant can return the consideration, the contract will be enforced. It is a question of fact how far a non-express (an implied) misrepresentation will be allowed to go before it is considered so clearly misleading as to stray into the prohibited area. Some states hold the infant liable for damages for the tort of misrepresentation, but others do not. As William Prosser, the noted torts scholar, said of cases paying no attention to an infant’s lying about his age, “The effect of the decisions refusing to recognize tort liability for misrepresentation is to create a privileged class of liars who are a great trouble to the business world.”

Tort Connected with a Contract

Although the lack of contractual capacity can protect a minor from a contract by permitting the minor to disaffirm, this same rule does not extend to other areas of the law. Recall that minors can be liable for their torts (e.g., assault, trespass, nuisance, negligence) . So, if there is also a tort claim connected with a contract involving a minor, the minor can be liable for the tort unless the tort suit is only an indirect method of enforcing the contract. For example, Tandy, who is 16, agrees to mow the neighbor’s lawn for $50. The neighbor pays Tandy up front. Tandy can disaffirm this contract because Tandy is a minor. If Tandy doesn’t mow the lawn, the neighbor could not sue for fraud because that would be an indirect attempt to enforce the contract. However, let’s say that while mowing the lawn, Tandy accidentally damages the neighbor’s flower bed with the lawnmower. The neighbor could then sue Tandy for the tort of negligence, which is a civil wrong resulting from a failure to exercise reasonable care.

Ratification

When a minor becomes an adult (i.e., reaches the age of majority when the “disability” that rendered the party of limited contractual capacity has been lifted) there are two options for an existing contract. The party to the contract can disaffirm that contract up to a reasonable period of time after reaching the age of majority, where what is reasonable will depend on the circumstances. Or, the contract can be ratified. Ratification take s place upon accepting or confirming a contract that was originally voidable because a party lacked contractual capacity.

For example, suppose a minor signs a contract to buy a car, but the contract is voidable due to the minor’s age. Once the minor reaches the age of majority, they may ratify the contract, thereby making it legally binding. They may ratify the contract by sending a letter to the seller of the car letting them know they intend to ratify the contract. This is express ratification . Or, they may ratify the contract by doing nothing to disaffirm it while continuing to drive the car. This is implied ratification . Express ratification occurs when a party explicitly confirms or approves the previously voidable contract. Implied ratification, on the other hand, occurs when a party behaves in a manner consistent with accepting a contract, or in a manner inconsistent with disaffirming the contract. Both express and implied ratification have the effect of making the previously voidable contract legally binding.

Activity 8A

You be the Judge

In the case of Hojnowski v. Vans Skate Park , the New Jersey Supreme Court heard a dispute involving the enforceability of a liability waiver signed by a parent on behalf of their minor child. The plaintiffs were the parents of a 12-year-old child who was injured at Vans Skate Park that had signed a n extensive liability waiver and exculpatory clause when enrolling their child in a skateboarding program. This waiver was signed prior to the Plaintiffs having any access to the Skate Park.

While skating at the park on a later date, t he child suffered a broken femur allegedly due to the conduct of a much more aggressive skater , of whose conduct the parents had already complained . Under t he waiver the parents agreed that neither they, nor the child, would hold Vans Skate Park liable in case of an injury. In addition, the parents agreed that if there were a dispute between the parties that it would be submitted to arbitration, and not heard through the court system. The child did not sign the waiver.

Parents sued the Skate Park on their own behalf and for their child, alleging various tort claims, and the Skate Park defended the lawsuit stating that the parental waiver was an agreement between the parties that (1) limited the Skate Park’s liability, and (2) required the arbitration of any disputes between the parties. The case made its way to the New Jersey Supreme Court which ruled in favor of the plaintiffs in part stating that parental waivers of a child’s future claims for injuries in recreational activities are unenforceable. The Court held that parents cannot bind their children to contractual provisions that waive the child’s rights to sue for injuries caused by the negligence of others. The decision in this case established an important precedent in New Jersey, indicating that liability waivers signed by parents on behalf of their minor children in recreational activities are generally unenforceable. However, the Court did find that the agreement to arbitrate claims was enforceable so that the Hojnowskis must use arbitration to pursue their claims.

Question: Would having the child sign the waiver themselves change the outcome of this case? Why or why not?

Question: Even though the Court found that the parental waiver in this case was unenforceable, it still found that the parent could bind the child to use arbitration for the resolution of the dispute. Why do you think these matters were treated differently?

Read about this case on Google Scholar.

8.3 Persons Who Are Mentally Incapacitated

Mental incapacity can result from mental illness, physical illness, or deficiency, and may have the effect of causing full incompetence , limited competence , or have no impact on contractual capacity at all. As an initial determination, the impact of the illness or deficiency on the ability of the party to understand the legal consequences of entering into a contract should be reviewed. A person who has an illness or deficiency that does not impact the ability to understand the legal consequences of a contract would not qualify for mental incapacity, and therefore could enter a valid contract.

When a person is suffering from an illness or deficiency that prevents them from understanding the legal consequences of entering a contract, a contract entered during this time period is voidable due to limited competence. The time period to avoid the contract would be during the contract or when capacity is restored. For this limitation on competency, it is more likely that avoiding a contract will occur once the deficiency is lifted, restoring mental understanding. A disaffirmance may also take place by a  guardian , if a court appoints a guardian and a voidable contract exists at that time of appointment.

When a person that is suffering from an illness or deficiency is adjudicated to be fully incompetent in a court proceeding, any further efforts of that person to enter a contract will result in a void contract . In this situation, a guardian will be appointed to proceed with contracting for the incompetent party in the future.

For example, suppose a seller diagnosed with a mental illness agrees to sell their property to a buyer. Even though the seller has a diagnosis, this contract will be valid unless the mental illness has impacted the seller’s ability to understand the legal consequences of the contract. If the seller, due to their mental illness, cannot understand the legal consequences of the contract, the contract may be considered voidable. The seller would be able to disaffirm the contract. Similarly, the buyer may not be able to enforce the contract and may have to return any money or property received from the seller. If the seller has been adjudicated incompetent in a Court proceeding, the contract would be void. This means that the guardian responsible for making decisions on the seller’s behalf could avoid the contract.

As in the situation with a minor, if the contract was for a necessity, the other party may have a valid claim against the estate of the one who is mentally incapacitated in order to prevent unjust enrichment. In any case, when a contract is disaffirmed, the mentally incapacitated person must return any property in their possession to the other contracting party. I f the contract was fair and the other party had no knowledge of the mental illness, the court has the power to order other relief.

Activity 8B

Case Debate: Protection or Oppression? #FreeBritney

Britney Spears, a well-known pop singer, was placed under a conservatorship (or guardianship) in 2008. This is a legal arrangement where a guardian (conservator) is appointed to manage the personal and financial affairs of an individual (conservatee) who is deemed to lack the contractual capacity to make such decisions and enter contracts.

The conservatorship was established following a series of highly publicized personal and legal challenges in Britney Spears’ life. The conservatorship was implemented due to concerns about Britney Spears’ contractual capacity. It brought into question whether she had the legal capacity to enter into contracts and fully understand the implications and consequences of her agreements. Under the conservatorship, her father, Jamie Spears, initially served as the conservator, with control over her finances, career decisions, and personal life. A professional conservator, Jodi Montgomery, was later appointed as a temporary replacement for Jamie Spears to handle Britney’s personal affairs.

Despite being under a conservatorship, Britney Spears had a successful show in residency in Las Vegas from December 2013 to December 2017. Widely regarded as a successful venture for Britney Spears both artistically and commercially, Britney demonstrated her talent, professionalism, and ability to deliver captivating performances on stage.

The conservatorship remained in place for many years, even wh ile Britney Spears sought review of the conservatorship express ing her desire to end the conservatorship and regain control over her life and finances. At various times while the conservatorship was in place, Britney Spears’ fans and the media questioned the conservatorship and its impact on her life. In 2019, the “#FreeBritney” movement gained momentum, with supporters advocating for an end to the conservatorship and greater transparency about Spears’ well-being.

In June 2021, Britney Spears made a statement during a court hearing, expressing her desire to terminate the conservatorship. She revealed details about the restrictive nature of the arrangement, claiming that she had been subjected to abuse, forced medication, and denial of personal freedoms. Eventually the conservatorship was dissolved and currently Britney Spears has regained full contractual capacity.

Question: C ontractual capacity is intended to provide legal protections to those that do not understand the legal consequences of their contracts and to safeguard individuals from the consequences of contracting with unscrupulous adults. With such a safeguard available for those with limited capacity, why isn’t this enough protection for incompetent adults. In other words, what is the purpose of having a separate action where a Court could find a party incompetent and completely remove their right to contract and appoint a guardian?

Question: One of the justifications for continuing a guardianship is that the guardianship is working. When this is the perception, it can be very difficult for the party adjudicated incompetent to show that they can handle their own affairs. So, a guardianship that is working perpetuates the guardianship itself. When should a guardianship or conservatorship end? When should it have ended in the Britney Spears case?

Question: Should there be limits on guardianships as they pertain to contractual rights and obligations? What is the best way to balance the right to contract with the well-being of the individual subject to limitations imposed by a Court?

Debate the Case: Find and review two resources dealing with the #FreeBritney movement. Do you think that the Britney Spears conservatorship was a necessary safeguard or an infringement on the right to contract?

8.4 Persons who are Intoxicated

People who are intoxicated at the time of entering a contract may have limited competency if the nature of their intoxication rendered the person unable to understand the nature and consequences of a contract. Intoxication could be the effect of alcohol, drugs, or other intoxicating substances, and could be voluntary or involuntary.

If a person is so drunk that he has little awareness of his acts, and if the other person knows this, any contract that results is voidable. Should the intoxicated person disaffirm the contract when regaining competency, he is obligated to refund the consideration to the other party unless he dissipated it during his drunkenness. If the other person is reasonably unaware of his intoxicated state, however, an offer or acceptance of fair terms would be upheld by most courts.

If a person is only partially inebriated and has some (but not a full) understanding of his actions, courts will review factors in determining whether the transaction would be voidable or valid, for example, whether the other party induced the drunkenness, the adequacy of the consideration exchanged, and whether the transaction is one which a reasonably competent person might have made.

A person who was intoxicated at the time he made the contract may nevertheless subsequently ratify it. Thus, where a party, several times involuntarily committed for alcoholism, executed a promissory note in an alcoholic stupor but later, while sober, paid the interest on the past-due note, he was denied the defense of intoxication; the court said he had ratified his contract. In any event, intoxication is a disfavored defense on public policy grounds.

Cameron v. Power Co. , 50 S.E. 695 (N.C. 1905)

This action was brought to recover damages for the breach of a contract whereby the plaintiff agreed to sell and the defendant to buy a Corliss engine. … The defendant in its

answer [to the complaint] admitted that its president had signed a contract, and pleaded specially that at the time of signing it he was so drunk that he did not have sufficient mental capacity to contract with the plaintiff for the engine. The court, without objection, submitted only one issue to the jury, which is as follows: “What damage, if any, is the plaintiff entitled to recover of the defendant?” The jury answered “Nothing.” Judgment was entered accordingly.

The question presented for our consideration arises upon an exception to the charge of the court regarding the drunkenness of the plaintiff’s agent and its sufficiency to avoid the contract.

We have examined the charge of the court with care and cannot find that his Honor said anything not in strict accordance with the law, as we now declare it to be. He charged the jury as follows: “The mere fact that the defendant’s president was drinking was not sufficient, but the jury must find that he was so intoxicated that he could not understand the nature and scope of what he was doing. If the jury find from the greater weight of the testimony that the agent was drinking, it would not be sufficient to invalidate the contract, but if the jury find that the defendant’s president, at the time he signed the contract or order for the engine, was so drunk as to be incapable of knowing the effect of what he was doing, then the contract or order would not be binding upon the defendant. Whether or not he was so intoxicated as to render him incompetent to contract is a question for the jury upon all the evidence.” We think this was a clear and sufficient exposition of the law applicable to the facts of the case. What the judge said in his reference to the nature of the transaction in which the agent was engaged and its importance or magnitude … was evidently intended to point what he had already said as to the true test of mental capacity, and to impress upon them, as an essential condition of the validity of the contract, that the agent of the defendant at the time he signed the paper must have been sober enough to understand the nature of the transaction and

the effect or consequence of his act, and not that he must have been able to act with wisdom or discretion.

Case Questions

• The Court notes that the question of competency in this case is one for the jury to consider based on the evidence in the case. What type of evidence would you expect to see in a case where capacity is being challenged?
• If the Court found that the Plaintiff’s agents were too intoxicated to understand the legal consequences of the transaction, what would happen to the underlying contract in the case?  Would there be damages?
• In this case, the intoxication was voluntary.  Do you think that the case would have turned out differently if the intoxication was involuntary?  Why or why not?

8.5 The Sword and Shield Doctrine

Throughout the Chapter, we’ve explored ways a person with limited competency can seek to avoid unwanted contracts. As stated previously, the purpose of allowing disaffirmance in these cases is to protect people with limited competency from being taken advantage of, much like a “shield.”

The sword and shield doctrine is a legal principle that pertains to the use of a contract’s terms as both a sword to enforce the contract and a shield to defend against claims under the contract. The “sword” aspect of the doctrine refers to the use of a contract’s terms by a party seeking to enforce the contract. This means that a party can use the terms of the contract to compel the other party to perform their obligations under the contract. The “shield” aspect of the doctrine, on the other hand, refers to the use of a contract’s terms as a defense against claims under the contract. This means that a party can use the terms of the contract to defend against claims made by the other party under the contract.

In cases of capacity , the sword and shield doctrine can be used to protect the interests of parties who lack contractual capacity, such as minors or individuals with mental disabilities.

The shield aspect of the doctrine can be used to defend against claims under a contract made by a party who lacks contractual capacity. For example, if a minor enters into a contract to purchase a car and the car is defective, the minor can use the shield aspect of the doctrine to defend against the seller’s claim for payment by arguing that they lacked contractual capacity to enter into the contract and are therefore not bound by its terms. This is possible even if the minor would seek to keep the car if it were not defective, thus minority is a shield.

The sword aspect of the doctrine can also be used by a party who lacks contractual capacity to enforce the terms of a contract that are beneficial to them. For example, if a minor enters into a contract to sell their artwork, and the buyer fails to make payment as required by the contract, the minor can use the sword aspect of the doctrine to compel the buyer to make payment as required by the contract.

At the same time, a sword has two sides, and some courts have reviewed attempts to disaffirm contracts through this doctrine, finding in some cases that the person with limited competency is using their right to disaffirm to achieve an unfair advantage over a competent adult in a contract. For example, suppose a 16-year-old minor signs a contract with an adult to buy a car. The minor then decides to disaffirm the contract having already driven the car for several months and causing damage to it. The adult may ask the court to review the circumstance of the disaffirmance to see if the minor is unfairly using this right to avoid paying for the damages they caused to the car while they were using it.

In such cases, the court may review the circumstances surrounding the disaffirmance to determine if the minor is attempting to take advantage of the adult (using disaffirmance as a sword) or if they have a legitimate reason to avoid the contract (a shield). If the court finds that the person with limited competence is unfairly using the ability to disaffirm, the court could rule in favor of the adult and hold the minor responsible for any damages they caused under the contract.

In general, the sword and shield doctrine is meant to balance the interests of parties in contractual dealings and ensure that both parties are held to the same standard of performance. However, in cases where one party lacks contractual capacity, the doctrine must be applied in a way that considers the particular circumstances of that party and their intentions in disaffirming a contract.

Activity 8C

Which is Which?

Activity 8D

What’s your Verdict?

Video games are popular, as are in-app purchases within them. Should minors be able to disaffirm in-app video game purchases? Does it matter if the funding for the purchase originated from the minor’s own money, or from the parent? Explain your position using the information discussed in this Chapter.

End of Chapter Exercises

• Langstraat was seventeen when he purchased a motorcycle. When applying for insurance, he signed a “Notice of Rejection,” declining to purchase uninsured motorist coverage. He was involved in an accident with an uninsured motorist and sought to disaffirm his rejection of the uninsured motorist coverage on the basis of infancy. May he do so?
• Ivar, an infant, bought a used car—not a necessity—for $9,500. Seller took advantage of Ivar’s infancy: the car was really worth only $5,500. Can Ivar keep the car but disclaim liability for the $4,000 difference?
• If Ivar bought the car and it was a necessity, could he disclaim liability for the $4,000?
• If Ivar bought the car, and subsequently drove the car while it was having mechanical difficulties, resulting in blowing out the engine, can Ivar disaffirm the car? If so, will he have any liability in doing so? Under what theory?
• Alice Ace found her adult son’s Christmas stocking; Mrs. Ace herself had made it fifty years before. It was considerably deteriorated. Isabel, sixteen, handy with knitting, agreed to reknit it for $100, which Mrs. Ace paid in advance. Isabel, regrettably, lost the stocking. She returned the $100 to Mrs. Ace, who was very upset. May Mrs. Ace now sue Isabel for the loss of the stocking (conversion) and emotional distress?

Dodson v. Shrader , 824 S.W.2d 545 (Tenn. 1992).

First State Bank of Sinai v. Hyland, 399 N.W.2d 894 (S.D. 1987).

Gastonia Personnel Corp. v. Rogers , 172 S.E.2d 19 (N.C. 1970).

Hojnowski v. Vans Skate Park , 187 N.J. 323, 901 A.2d 381 (2006)

N.J.S.A. 9:17B-1

Albert, Clark, Guide to New Jersey Contract Law, NJICLE

William L. Prosser, Handbook of the Law of Torts, 4th ed. (St. Paul, MN: West, 1971), 999.

Restatement (Second) of Contracts, Section 13.

Restatement (Second) of Contracts, Section 16(b).

the legal ability of an individual or entity to enter into a binding contract and be held legally responsible for their actions and obligations under that contract

a determination by a court that a person has the capacity to manage some but not all of his activities

the condition of lacking the ability to handle one's affairs due to mental or physical incapacity

someone under legal age, which is generally 18, except for certain purposes such as drinking alcoholic beverages.

A person under the age of 18

a contract that may become unenforceable by one party but can be enforced by the other

to take action to void a voidable contract

to repudiate or reject a contract that has been previously entered into

less than half the states follow this rule

a basic need of life such as food, shelter and basic medical services

an obligation imposed by a judge to prevent injustice and thus not a contract

not capable of being made void

a bar or obstruction which precludes a person from asserting a right or prevents one from denying a fact

confirmation of an action which was not pre-approved and may not have been authorized

when a party explicitly confirms or approves the previously voidable contract

when a party behaves in a manner consistent with accepting a contract or in a manner inconsistent with disaffirming the contract

an inability through mental illness or significant cognitive impairment to carry on the everyday affairs of life or to care for one's person or property with reasonable discretion

a person who has been appointed by a judge to take care of a minor child or incompetent adult (both called "ward") personally and/or manage that person's affairs

an agreement that is lacking one or more of the legal elements of a contract

a legal principle that pertains to the use of a contract's terms as both a sword to enforce the contract and a shield to defend against claims under the contract

Business Law I Copyright © 2024 by Melanie Morris is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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CAPACITY TO THE CONTRACT

Published by admin on september 6, 2024 september 6, 2024.

This article is written by Saloni Chandar Patil of 7 th Semester of Adv. Balasaheb Apte College of Law, an intern under Legal Vidhiya

Table of Contents

The concept of capacity to contract is a fundamental principle in contract law, determining whether a party is legally capable of entering into a binding agreement. This article search through the complexities of capacity to contract, exploring the each different factors that affect an individual’s or entity’s ability to form a valid contract. The discussion encompasses the legal frameworks governing capacity, including age, mental capacity, intoxication, and duress, as well as the implications of incapacity on contractual validity. The article also examines the nuances of capacity in specific contexts, such as business transactions, consumer contracts, and international agreements. By providing a thorough examination of capacity to contract, this article aims to clarify the legal landscape and offer practical guidance for contracting parties, legal practitioners, and scholars alike.

Capacity, Contract, Agreement, Minor, Age, Mental capacity, Intoxication

Introduction

“The capacity to enter into legally binding contracts is a fundamental aspect of personal and commercial relationships. However, not all persons have the legal capacity to enter into contracts, rendering their agreements invalid or voidable. The ability of a contract refers to human legal abilities to conclude a forced contract that requires a combination of mental, emotional, and legal abilities. This important concept understands the contract obligations and guarantees that only those who can defend are responsible. In this article, we delve deeper into the complexities of capacity to contract and explore the key elements, exceptions and implications of this important legal principle. We consider the various factors that determine capacity, including age, mental health and intoxication, and the consequences of entering into a contract with a person who does not have capacity. Understanding the complexities of contract law allows individuals and businesses to navigate the complexities of contract law with confidence and clarity.

What is Contract?

In ordinary terms, Contract means agreement by parties or agreement between persons. It is expected to fulfill the commitment by the parties who enter into contract. The Indian Contract Act provides a required legal framework for contract. “ Jus In Personam ” and not “ Jus In Rem ” are created by law of contract. This means that the right created is against a specified party and not against the world at large’ [1]

Section 2(h) [2] defines contract as a agreement that is enforced by law. As per Section 2(e) [3] an agreement is an consideration of every promise or set of reciprocal promises. While Section 2 (b) [4] , states that acceptance of Proposal is a Promise. It could also be said that- Acceptance of Proposal is an Agreement.

Thus, when a agreement is enforced by law, after the proposal is made by one the parties and accepted by the party to whom the proposal is made is called as contract between the parties. The parties involved in making a proposal and in acceptance of proposal are the parties to the contract.

Who can enter into a Contract?

The ‘competent’ parties can enter into a valid contract as per Section 10 of Indian Contract Act,1872. As per Section 10 [5] , the agreements are contract if they are made by parties who are competent to contract by getting their free consent , with a lawful object and for a lawful consideration and are not hereby expressly declared void.

Competency of Parties

The Section 11 [6] give category for a person to be competent for contract. A person can be competent to the contract if they have attained the age of majority , the person who is of sound mind and the person who is not Disqualified by the law he is subject to.  The persons who are incompetent to the contract are-

• Persons of unsound mind,
• Persons Disqualified by Law.

[A] Minors Agreement:

To attain the age of majority is one of the main factors to enter into a Contract. As per Section 3 [7] of the Indian Majority Act, 1875 ; the age of majority for an individual is 18 years , a person who has not completed the age of 18 is a minor . The exception to the above rule is – where a trustee or guardian has been appointed in respect to minor’s property [8] under ‘Guardian and Wards Act, 1890’ . Here the age of majority will be on completing the age of 21 years.

Rules regarding minor’s agreement are as follows:

• Minor’s agreement is void -ab-initio :

Lawfully, the agreement made by a minor is  void from the initial stage of the agreement itself. This contract owns no legal weightage or legal meaning from initial stage or negotiation taken towards its proposed making. This contract can not be technically entered into but it is even void.

In the case of Mohori Bibee v/s Dharmodas Ghosh [9] , the court stated that, a minor agreement is not only void but ‘ void- ab- initio’. No legal action could be taken against the minor to make her liable in any circumstances even if the dealing were in a negotiation stage or preliminary. Therefore, the money lender was obliged to return her property papers and could not demand refund of money advanced.

In another case of Raj Rani v/s Prem Adib [10]  , the court held that  the minor and her father could not sue on promise. However, in some cases, the contacts which are to benefit of minor and under which minor is not required to bear any obligation may be enforced. However, the category of the beneficial contract does not include ordinary trade contracts which would still be void.

• No rule of estoppel in case of minor’s agreement:

Estoppel is a legal doctrine that prevents a person from contradicting their own previous actions or statements, or from arguing facts that are contrary to their past claims. However, in the case of a minor’s agreement (contract entered into by someone under the age of majority, typically 18), estoppel does not apply.

The reasons for such restrictions are that, firstly the Minors are not considered to have the legal capacity to enter into contracts, so they cannot be estopped from denying or avoiding their agreements. Secondly, the law aims to protect minors from exploitation and unfair agreements. Allowing estoppel to apply would undermine this protection. And lastly, the Estoppel against a minor’s agreement would go against public policy, which favors the protection of vulnerable individuals like minors.

The consequences are , that a minor can avoid or repudiate their agreement at any time, even after reaching the age of majority and the other party cannot use estoppel as a defense against the minor’s avoidance or repudiation of the agreement. This rule ensures that minors are protected from unfair agreements and can avoid or repudiate contracts entered into without proper understanding .

In the case of , Leslie v/s Sheil [11] , a minor misrepresented himself as an adult by lying about his age and obtained loan from money lender. The contention of the money lender that the doctrine of estoppel would apply and hence the minor should be made responsible was rejected by court stating that the doctrine of estoppel shall not apply in case of minor’s agreement.

• No rectification of minor’s agreement:

Rectification is an  remedy by which the court can correct the fault of expression where a written document does not match the parties’ intention. However, in the case of a minor’s agreement (contract entered into by someone under the age of majority, typically 18), rectification is not available.The reasons for not permitting the rectification of contract are, that the Minors are not considered to have the legal capacity to enter into contracts, so their agreements cannot be rectified. Minor’s agreements are voidable at the option of the minor, and rectification would undermine this protection. Allowing rectification would potentially force minors to be bound by agreements they did not fully understand or intend to enter into.

• No liability in tort :

The Minors cannot be held liable in tort as the agreement by minor is devoid of all legal effects. Even if such a tort is directly connected with the contract.

• Doctrine of restitution:

When a minor enters into an agreement, they are not bound by its terms. The doctrine of restitution aims to prevent unjust enrichment, where the minor would retain benefits without paying for them. Restitution is limited to the actual benefits received by the minor, not the full contract value. The minor is not required to compensate the other party.

 For example, A minor buys goods, but then repudiates the contract. They may be required to return the goods or pay for their value. Or a minor receives money under an agreement, but then repudiates it. The money may be required to be returned. .

The doctrine of restitution aims to strike a balance between protecting minors from unfair agreements and preventing unjust enrichment. It ensures that minors do not retain benefits without paying for them, while also not being bound by agreements they did not fully understand or intend to enter into.

• Contract by the guardian on behalf of the minor:

A guardian can enter into a contract on behalf of a minor, but such contracts are subject to certain rules and limitations. The legal authority is required for the guardian to perform on behalf of the minor. The contract must be for the benefits of minor and, not for the personal gain of the guardian. The contract must be necessary and suitable for the minor’s needs. In some cases, court approval may be required for the contract. The contract may be rejected or confirmed when the minor reaches the age of majority.

• Exception to minor’s agreement:

A minor may be admitted to the benefits of a partnership firm. However, he can, under no circumstances, be made to share the losses or liability of the firm. Here, it is to be noted that a minor cannot be one of the parties who get together and form a partnership business. There has to be an existing partnership in which the minor is admitted .

 A minor may be appointed as an agent to act on behalf of another or represents him in dealings with third parties. The person who appoints him is known as the principal. If the act is authorized, the principal is bound to it. If the act is unauthorized , the principal is not bound to it.  However, the agent is not liable to any unauthorized act of the principal or third party to the contract.

A minor can be a beneficiary or a transferee under a contract.

A minor’s property may be liable for necessaries supplied. This is a Quasi contract.

[B] Persons of unsound mind:

The person need to be of sound mind in order to enter into a contract. The person of unsound mind cannot be stated in a exact way. There are various meanings, categories and definitions of insanity. It is necessary to possess stable mental capacity or ability in order to enter into a contract. According to Section 12 [12] , In order to make a contract, a person is considered to be of sound mind if he is capable of understanding the terms and conditions of the contract, and forms a rational judgement. The definition of unsound mind includes,- a lunatic, idiot, or a person in state of intoxication at the time of entering into the contract. However, a person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind; while a person who is usually of sound mind but occasionally of unsound mind, may not make a contract when he is in unsound mind.

[C] Person Disqualified by Law:

The categories of persons who may be said to be disqualified by law from contracting are –

• Insolvent Persons
• Convicted Criminals
• Alien Enemies – It could be a person, firm or body corporate belonging to a country which is at war with our country.
• Foreign sovereigns, ambassadors and representatives of international bodies such as United Nations or International Red Cross.

In conclusion, capacity to contract is a essential component of contract law, ensuring that only those with the required lawful capacity can enter into binding agreements. Through this article, we have explored the various aspects of capacity, including the legal frameworks, factors affecting capacity, and specific contexts. It is clear that capacity to contract is not a forthright concept, and its refinement require detailed consideration.

As the legal landscape continues to evolve, it is essential to remain vigilant in ensuring that contracting parties possess the necessary capacity. By doing so, we can prevent potential disputes, protect vulnerable individuals, and maintain the integrity of the contracting process.

Eventually,  understanding capacity to contract is important for those who are involved in forming or enforcing contracts. By grasping the complexities of this concept, we can navigate the intricacies of contract law with confidence and certainty, fostering a more just and equitable legal environment for all.

• THE INDIAN CONTRACT ACT, 1872.
• THE INDIAN MAJORITY ACT, 1875.
• THE GUARDIAN AND WARDS ACT, 1890.
• Dr. Krishna Shetty, The Simplest Book on Contract law, p. 1, (Naveen Publications)
• Contract and Specific Relief Act – Avtar Singh , 10 th Edition (Eastern Book Company)
• Contract 1 and Specific Relief Act – Dr. S. K. Kapoor ( Central Law Agency)
• Law of contract, Ritu Gupta (Lexis Nexus)
• Indian Kanoon

[1] Dr. Krishna Shetty, The Simplest Book on Contract Law, p. 1, (Naveen Publications )

[2] THE INDIAN CONTRACT ACT, 1872, § 2(h), No. 9, Act of Parliament,1872 ( India)

[3] THE INDIAN CONTRACT ACT, 1872, § 2(e), No. 9, Act of Parliament,1872 ( India)

[4] THE INDIAN CONTRACT ACT, 1872, § 2(b), No. 9, Act of Parliament,1872 ( India)

[5] THE INDIAN CONTRACT ACT, 1872, § 10, No. 9, Act of Parliament,1872 ( India)

[6] THE INDIAN CONTRACT ACT, 1872, § 11, No. 9, Act of Parliament,1872 ( India)

[7] THE INDIAN MAJORITY ACT, 1875, § 03, No. 9 , Act of Parliament,1875 (India)

[8] THE GUARDIAN AND WARDS ACT, 1890; No. 8, Act of Parliament, 1890 ( India)

[9] Mohori Bibee V/S Dharmodas Ghosh,  ILR (1903) 30 Cal 539 (Pc)

[10] Raj Rani v/s Prem Adib, (1949)51BOMLR256, AIR 1949 BOMBAY 215

[11] Leslie Ltd. V Sheill (1914) 3 K.B.607.

[12] THE INDIAN CONTRACT ACT, 1872, § 12, No. 9, Act of Parliament,1872 ( India)

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.

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Minor's Capacity to Contract

• Offer and Acceptance
• Intention to create a legal relationship
• Lawful Consideration
• Competent parties
• Free consent
• Lawful Object
• Not being expressly declared void
• Persons of unsound mind, and
• Persons disqualified from law to which they are the subject.
• The age of majority is generally eighteen years except for the cases where a guardian of person, property, or both have been appointed by the court, in which case the age of majority is twenty-one years
• Formally, the age of attaining majority was 21 years in England. Now, as per the Family Law Reform Act, 1969, a minor is a person under the age of eighteen years
• Earlier, a minor was referred to as an infant but this act changes this term to minor

Effects Of Minor's Agreement

No estoppel against minor, no liability arising in contract or tort, doctrine of restitution, amended provisons of the specific relief act.

• Where a void or voidable contract has been canceled at the instance of a party, he may be required to repay the benefits he/she has received under the contract and also make necessary compensation to the other party
• the other party was a aware of the infancy so that he was not deceived
• the other party has been apart in his dealings with the minor
• where weather minor had misrepresented his age but the other party was so zealous to enter into a transaction that the fault representation exerted no influence on him
• where the other party lays no material before the court for coming to the conclusion that justice requires return of the money paid to the minor.

Beneficial Contract

• If a minor has advanced mortgage money and there is a mortgage in his favour, he can sue for enforcement of the contract
• Similarly, a minor can sue on a Promissory Note executed in his favour.
• A contract for the marriage of a minor is also prima facie for his or her benefit. The contract of marriage cannot be enforced against the minor.
• A minor can also be supplied with necessaries suited to his condition in life  (e.g., food, lodging, education) and the supplier of such necessaries is entitled to be reimbursed from the property of the minor.
• A lease to a minor is void.

Contract Of Marriage

Contracts of apprenticeship, trade contracts not included in beneficial contracts, option to retire from the beneficial contract on majority, ratification, liability for neccssaries, necessaries.

• The contract must be for the goods reasonably necessary for his reasonable existence
• He must not already have a sufficient supply of the necessities

Nature Of Liability

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• Capacity to Contract

What is Capacity to Contract?

The primary element of a valid partnership contract is the capability or eligibility of partners to form a business agreement. The capacity to contract here means the legal ability of an individual or an entity to enter into a partnership. According to business law, the partner must be competent and fulfill the specified criteria before signing a contract.

Section 11 of the Indian Contract Act, 1972 details the capacity in contract law. It defines the ability to form contracts based on three aspects. They are as follows.

Attaining specified age

Being of sound mind

Not be disqualified from entering into a contract on the basis of any law he is subjected to

Apart from contractual capacity, partnership contracts must also include the following.

Consideration

The meaning of contractual capacity can be understood in detail through norms and examples.

Refer to the official website of Vedantu for a detailed explanation.

Detailed Explanation of Capacity to Contract in a Business

Given below is a thorough explanation of the contractual norms to judge an individual’s capacity to enter into a contract.

1. Attaining the Age of 18

A minor does not hold the capacity of holding a contract in business. Any agreement made with a minor in business is void ab-initio, which means ‘from the beginning’. If any person aged below 18 years enters into a contract, he cannot ratify the agreement even when he turns 18. This means that an invalid agreement can never be ratified.

Minor being a Beneficiary in a Contract.

Even though a minor is prohibited from entering a contract, he can register himself as a beneficiary of an agreement. Section 30 of the Indian Partnership Act, 1932 mentions that a minor cannot participate as a partner in the business, but he can enjoy the benefits earned by the firm.

A Minor always enjoys the benefits of being a Minor

A minor gets to enjoy some extra benefits in business. This contractual benefit needs to be explained in terms of the capacity to contract with examples. For instance, if a minor pretends to be a major and enters into a contract, he can later plead the minority through some simple formalities. The rule of estoppel is not applicable to a minor.

Contract through the means of a Guardian

In some cases, a guardian can enter into a valid business contract on behalf of a minor individual. Here, the guardian has no right to bind a minor to buy any immovable property under the contract. However, with proper certification and approval, the minor’s property can be sold when required. 

According to business law, a minor cannot be declared insolvent at any point in time. Even if the minor owes some dues to the firm, he will not be held personally liable for it.

Mutual contract by a Minor and an Adult individual

When a joint contract is signed between a minor and major, it has to be done in the presence of the minor’s guardian. In such contracts, the liability of the contract is held by the adult.

2. An individual has to be of Sound Mind

Section 12 of the Indian Contract Act (1872) necessitates a person to be of sound mind, have a complete understanding of the contract terms and conditions, and hold the ability to judge its impact on his interests.

Here, the capacity of parties to the contract also applies to an individual who is usually of unsound mind and occasionally in sound mind. However, in this case, the contract has to be signed when he is in a state of complete soundness. A contract made by an individual of unsound mind shall be considered as null and void according to capacity law definition.

A person under the influence of any sort of intoxication is considered incapable of entering into a contract. Such individuals can make a contract only when they are sober and have a complete understanding of the contractual terms.

3. People Disqualified under Law

Other than minors and people of unsound mind, some individuals might be restricted from entering into any contract as well. Such individuals do not hold the capacity to contract under valid business laws. Disqualification under contractual laws could include reasons related to politics, legal status, etc. This could also happen when a person is a foreign sovereign, national enemy, convict, or insolvent.

Alien enemies: people who are having citizenship in countries who don't have cordial relationships with India or in a war situation are called Alien enemies. People signing the contract during a war situation is not encouraged and a contract during a peace situation is valid.

Married women: married women are not allowed to enter a contract regarding their husband’s property.

Pardanashin Women: Pardanashin women who will be under influence are not eligible to be involved in the contract as they cannot understand the contract.

State Ambassadors: The ambassadors are incompetent to contract.

Convict Serving Sentence: People who are on Bail or serving their sentence are not allowed to sign a contract.

Patent Officers: People having patent rights are issued by their owners to them. A patent is a monopoly right given to its owner. Hence patent officers are not allowed to sign the contract.

Legal professionals: People who work as judges, advocates, public prosecutors are not allowed to sign a contract related to their connections.

For example, Advocate has taken a case from a Y person, the legal proceedings are going on. So advocates cannot sign a contract with that person in buying that property.

Insolvent: The insolvent person is allowed to purchase the property but cannot sell his own property.

Company: The company is formed under the law. Different companies are bound by different laws. Here, the company is considered as an artificial person. The company cannot sign contracts outside its limits.

4.Capacity contract limited due to Mental Illness

Persons with mental illness or disorders are also having limited capacity to contract irrespective of age. Some of the instances related to campsity  are listed below-

Intellectual disability: People with intellectual disability are having an exception for capacity to contract, it also includes the severity of the disorder.

Advanced dementia: People suffering from dementia are exempted from involving or signing the contract.

Hallucinations and visions: People who are in hallucination and visualize things without any reference are exempted from signing the contract.

Affective disorders: People having depressions or bipolar disorder will have frequent mood changes. So people with these problems are not allowed to be involved in any contract.

Contracts signed by people with disabilities are considered to be null. Court will determine whether the contract is legal or illegal. To determine, as a part of the process, individuals' mental health is determined. People with stress and are mentally challenged are not allowed to be involved in any contract, if they are involved then it is invalid.

Based on legal capacity, affected people are categorized into different types. They are -

Partial legal incapacity: If a mental disorder or disability is restricted to a certain area and is normal in day-to-day life, then it is partial legal incapacity. For example, hallucinations.

Relative legal incapacity: Relative legal incapacity contradicts Partial legal incapacity. People who can perform normal activities like shopping, reading and cannot do long-term contracts are referred to this.

FAQs on Capacity to Contract

1. How to define contractual capacity?

Contractual capacity meaning in business law is the competence of an individual to enter into a contract. Section 11 of the Indian Contract Act, 1872 clearly defines the capacity to contract. It broadly has three aspects, based on which it judges whether a particular person is capable or eligible enough to become a party to the contract. Firstly if the engaging individuals are mentally sound, secondly those individuals should have passed the age of 18 and lastly, they need to respect the contracting law.

2. What does soundness of mind under capacity to contract mean?

As specified under Section 12 of the Indian Contract Act, it is mandatory for a person to be of sound mind to be able to sign a contract. This means he must be well-aware and have a complete understanding of the contractual terms. Thus, a lunatic or intoxicated person is usually held incapable of entering into a contract. He can make the contract when he is in a sound mind. Refer to the official website of Vedantu or download the app for an elaborate and comprehensive explanation.

3. Do minors have the capacity to contract?

Minors do not enjoy the capacity to contract. A contract with a minor will be considered null and void from the beginning and no one could sue any party engaging in the contract. However, they can join a contract as a beneficiary with proper guidelines. They can enter into the contract under the supervision of a guardian. A joint contract can also be signed between a minor and an adult.

4. How are people disqualified under the law?

The person disqualified by laws is also incompetent to enter into a contract as a minor and person with an unsound mind. Other than minors and people of unsound minds, some individuals might be restricted from entering into any contract as well. Such individuals, who are prohibited by law, do not hold the power to enter into a contract under valid business laws. Contractual laws could disqualify a person on various reasons including reasons related to political involvement, legal status, etc.

5. What is the importance of Section 12 of the Indian Contract Act (1872)?

Section 12 of the Indian Contract Act of 1872, makes it necessary for a person to be of sound mind, so he/she has a complete understanding of the contract terms and conditions and holds the ability to judge its impact on his/her life. Here, the capacity of contract of various parties in a contract also applies to an individual who is usually of unsound mind and occasionally in sound mind. However, in this case, the contract has to be signed when he is in a state of complete soundness. A contract made by an individual of unsound mind shall be considered null and void according to capacity law definition.