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Dynamic business law 4e kubasek 4e CH16

Chapter 16
Capacity and Legality

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education.

• LO16-1: What is the legal effect of a lack of
capacity on a person's ability to enter into
a contract?
• LO16-2: Under what circumstances would
a party have limited capacity to enter into
a contract?
• LO16-3: What is the legal effect of entering
into a contract for an illegal purpose?


Chapter 16 Hypothetical Case 1
• As this chapter indicates, usury occurs when a party

gives a loan at an interest rate exceeding the legal
maximum, and statutes prohibiting usury have been
enacted in virtually every state. The legal maximum
interest rate varies from state to state.
• Should the government regulate the maximum interest
rate charged by lenders to borrowers, or should the
free market dictate the interest rate charged? Without
a usury cap in place, would it be ethical for a lender to
charge whatever level of interest a borrower would be
willing to pay?


Chapter 16 Hypothetical Case 2
• Before her recent accident, 82-year-old Imogen Ledbetter was her own chauffeur. She
used to drive an automobile to fulfill her once-active senior lifestyle, including outings
for bridge tournaments, water aerobics, grocery shopping, bill paying, and family gettogethers.
One day, Ledbetter decided to purchase a new automobile. Although her 50-year-old
son Ron suggested that he accompany her to the car dealership, she refused,
reminding him that she was fully capable of taking care of her own responsibilities.
With the wind of independence at her back, Ledbetter entered the dealership, Bjorn
Fjord Motors, alone.
After negotiating her best deal and signing a contract for the purchase of a new Fjord
Mastodon sedan, Ledbetter drove away in her rapidly depreciating asset. Five miles
down the road, the steering wheel detached from the steering column (the steering
wheel literally came off in her hands) and Ledbetter crashed into a culvert. She
sustained severe injuries, including (but not limited to) a broken left leg, a broken
pelvis, a collapsed lung, and numerous lacerations to her face. Her attending
physicians agree that Ledbetter will never be able to drive an automobile again.


Chapter 16 Hypothetical Case 2
• Ledbetter has since sued Fjord Motors, Inc. (the manufacturer of the sedan)
and Bjorn Fjord Motors, Inc. (the dealership) for personal injury. Both
companies have filed answers denying liability on the basis of an exculpatory
clause included in the purchase contract. The exculpatory clause states that

neither Fjord Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a
customer or any other third party for a defect in the Fjord Mastodon that
results in personal injury and/or economic harm. Both companies have also
filed motions for judgment on the pleadings, requesting that the court
summarily dismiss both causes of action against Fjord Motors, Inc. and Bjorn
Fjord Motors, Inc. on the basis of the contract's exculpatory clause.
• Should the court grant the defendants' requests for judgment on the
pleadings? Is the exculpatory clause enforceable against Imogen Ledbetter?

Contractual Capacity
• Definition:
• Mental ability to understand rights and obligations established by
contract, with the presumptive ability to understand how to
comply with the terms of the agreement

• General Rule of Law: Natural persons over the age of
majority (18 in most states) are presumed to have the full
legal capacity to enter into binding legal contracts
• Those who have limited capacity to contract:
• Minors
• Those suffering from mental deficiency that renders them
incapable of understanding the nature and obligations of
• Those who are intoxicated


Rules of Minor's Contractual
Power of Disaffirmance
• Disaffirmance: Minors' right, until reasonable time after
reaching age of majority, to disaffirm/avoid their
• To exercise right, minor need only demonstrate, through words
and/or actions, intent to rescind contract
• Minor must return any consideration received (if still in minor's
possession/control), regardless of condition
• Even if consideration damaged/destroyed, other party has no
recourse against minor
• Rules designed to discourage competent parties from entering
into contracts with minors

Exceptions to Minor's Right to
Disaffirm Contract
• Contract for necessaries: Contracts that supply minor
with basic necessities of life
• Examples: food, clothing, shelter, basic medical services

• Ratification: Acceptance of terms of contract (entered
into as a minor) after reaching age of majority
• Express ratification: Occurs when, after reaching age of
majority, individual states (either orally or in writing) that
he/she intends to be bound by contract entered into while
a minor
• Implied ratification: Occurs when former minor takes action
after reaching age of majority consistent with intent to
ratify contract


Parental Liability for Minors'
Contracts, Necessaries, and Torts
• General rule: Parents not liable for
contracts entered into by their minor
• Exception: Contracts for necessaries

• General rule: Parents not liable for torts
committed by their minor children
• Exception: Failure to properly supervise child,
subjecting others to unreasonable risk of harm
from the child


Individuals Having No
Capacity to Contract
• Those adjudicated insane
• Those adjudicated habitually intoxicated
• Those with appointed legal guardians


Rules Regarding Intoxication
• General rule: Contracts made by intoxicated
persons are voidable
• If intoxication merely causes person to exercise
poor judgment, contract not voidable unless other
party unfairly capitalized on the impaired
• When intoxicated person becomes sober, contract
can be ratified or disaffirmed; however, courts will
liberally interpret behavior that seems likes
ratification once intoxicated person becomes sober


Illegal Contracts
• Contracts with no legal purpose and/or
subject matter
• Example: Agreement to commit crime/tort

• Contracts violating statute(s) and/or public
• Example: Usurious loan agreement (loan
contract exceeding state-imposed maximum
interest rate)
• Example: Unconscionable contract (agreement
so unfair that it is void of conscience)


Chapter 16 Hypothetical Case 3
• Tom McCartney is a 16-year-old high school student. He has worked 40 hours per week at the local
convenience store over the last year, and has diligently saved $6,000 for the purchase of his first
While visiting a local car dealership, McCartney finds the car of his dreams, a used yellow Camaro.
McCartney walks into the dealership, announces to the dealership owner that he is ready to buy,
negotiates $6,000 as the purchase price, and leaves the dealership a proud car owner.
Over the course of the next six months, McCartney drives the Camaro 8,000 miles, wears the tires
thin, dents the left front fender, and regrets his purchase. He realizes that in two short years
college will beckon, and he knows that his parents cannot afford to pay for his higher education. In
short, he wants his money back.
On a Saturday morning, McCartney returns to the car dealership, walks into the sales office, and
hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles, and then his
look turns stern, saying "Son, I don't owe you anything. You've just learned a lesson at the School
of Hard Knocks. The car is still yours, and the money is still mine!"
• Who will prevail? Is it legal and/or ethical to allow McCartney to escape his contractual


Chapter 16 Hypothetical Case 4
• Molly McIntosh and her husband, Doug Amundsen, recently took a long-awaited
trip to Las Vegas. One evening, they both got very intoxicated and decided, on a
lark, to look at time-share apartments. Sure enough, four hours later, they
walked out of the time-share office with a contract announcing their ownership
(well, part ownership) of a time-share property.
The next morning, McIntosh and Amundsen woke up with no memory of the
prior evening's events. They packed their bags and traveled home.
One week later, McIntosh discovered the contract tucked in a pocket in her
purse. Horrified, McIntosh and Amundsen immediately contacted the office and
demanded that they cancel the contract. The representative they spoke with
chuckled and told them that the deadline for the normal cancellation period for
a time-share contract—five days in Nevada—had come and gone.
• Did McIntosh and Amundsen have capacity to contract at the time they agreed
to buy the property?


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