Contracts II Outline

CONTRACTS II OUTLINE – SPRING 2014

Professor: Hazel Beh

I. Policing the Bargain

A. Capacity to Contract

1. Minor Incapacity

Infants (Minors) Why protect them (or patronize them)? “He who deals with a minor does it at his own peril and with the attendant risk that the minor may at his election disaffirm the transaction because of his minority.” Keser v. Chagnon, 410 P.2d 637 (Colo. 1966).

What is an infant? At common law, a person was an infant until the age of 21. After the voting age changed to 18, virtually all states changed the age of majority to 18 as well. (per Restatement of Contracts (Second) § 14: Alabama, Nebraska and Wyoming are 19; Mississippi is 21). Query: Does it matter if the infant is mature and intelligent? Should we have a blanket rule?

What is the legal effect on the contract? The contract is “voidable” by the minor. The contract is not voidable by the other party. Query: What can an adult do if he or she finds out that the other contracting party lied about his or her age? Perhaps sue for rescission for fraud.

What can a minor do if he or she improvidently entered a contract? The minor may disaffirm the contract before or after reaching majority. In real estate, however, some jurisdictions hold that a minor may only disaffirm the contract after reaching majority; presumably on the theory that the same infirmity that made the contract voidable should make the disaffirmance voidable as well. The minor must disaffirm the entire contract, not merely the burdensome parts.

How long does the power to disaffirm last after reaching majority? A reasonable time, but this will vary depending on the circumstances. If the minor possesses benefits under the contract, he or she must be prompt in disaffirming the contract. If the contract is still executory, there is less need for a strict demand for promptness. Many courts also consider the effect on the adult caused by the infant’s delays.

Can the infant ratify the contract upon reaching majority? A minor cannot ratify a contract, but a former minor can. After attaining majority, a minor ratifies the contract by promising to perform, or ratification may be implied by conduct. When a minor reaches majority and retains the benefits of the contract or acquiesces for a considerable length of time the minor ratifies the contract.

How does the court fairly sort out the benefits and burdens of contracts that have been partly or fully performed? A minor who is sued on a contract (Minor as Defendant) and asserts incapacity as a defense must, at least, return what remains of the benefits he or she obtained under the contract in order to get out of the remainder of the contract. If the minor received services (so that there is nothing to return) or goods that were dissipated, generally the minor is not accountable for the difference between the value that remains and the original value. A minority rule requires minors to provide restitution based on the reasonable value of the goods or services received.

Can the minor use incapacity as a “sword” by seeking to have money paid returned to him or her? A minor can use incapacity as a “shield” or defense (to avoid paying) or as a “sword” in order to recover payments made already. However, generally, courts are less generous to minors using their incapacity as a sword. This usually comes up when the minor tries to demand the return of payments they already made, as in Dodson v. Shrader. When a minor who has paid up front and received the goods sues to recover payments made, then courts often hold that he or she must return the consideration received and in addition, allow the seller to reduce the money returned by the value of the benefit that the minor has received or the depreciation in the value of the property. On the other hand, if the minor has been extended credit, the minor can disaffirm the remaining debt and merely return the goods in his or her possession.

Perhaps the justification for this distinction has to do with risk allocation. A person extending credit risks not getting paid for a variety of reasons. Sellers demanding cash up front assume less risk because they got paid up-front.

What about minors who misrepresent their age? Courts are divided on this. One approach is to hold that the misrepresentation makes no difference. One approach is to hold that a misrepresentation is a tort and since minors are liable for torts, the aggrieved party is entitled to restitution in full when the contract is avoided. One approach says that a minor misrepresenting his or her age is estopped from using minority as a defense. If an adult discovers the minor misrepresented his or her age, the adult may avoid the contract on the grounds of fraud.

What about emancipated and married minors? Some states, by statute, provide that emancipation (or emancipation by marriage) removes incapacity altogether. Others do not, perhaps concluding that minors who marry have displayed immaturity by virtue of that conduct! FYI, Hawaii has a recent case approving the minority rule but also recognizing Hawaii’s statutory laws authorizing minors to enter into contracts for employment and certain types of medical treatment as exceptions to the minority rule. See Douglass v. Pflueger, 110 Hawai’i 520, 135 P.3d 129 (2006).

Are there any exceptions? A minor will be liable in quasicontract for the reasonable value of “necessaries” according to the traditional rule. The rationale is that this exception exists for the infants own good because if an infant can avoid paying for necessaries, adults won’t deal with them. Douglass v. Pflueger, 110 Hawai’i 520, 135 P.3d 129 (2006), in dicta says contracts for necessaries are binding, without characterizing the obligation as quasicontractual.

What are necessaries? It depends on the circumstances, including the social position and situation of the infant. At the least, it includes necessary food, clothing, and shelter; some courts say that these agreements are binding to the extent that a parent will not or cannot pay. Courts have also included medical care and a minor’s necessary legal services. Educational expenses vary in outcome, with modern cases being broader. Loans to procure necessaries are also necessaries.

What about contracts made by parents that are beneficial for children? Generally, parents are required to provide for their children. Parents have capacity to contract and are liable for their contracts. When a parent makes a contract that benefits a child, the parent is liable, not the child.

Exception: On public policy grounds, many courts hold that a parent (or a child) cannot execute a prospective release for negligence. All those permission slips your parents signed to allow you to go on field trips that also released the sponsor from liability are ineffective in a majority of states!

The rationale: since a parent generally may not release a child’s cause of action after injury, it makes little sense to conclude a parent has authority to release a child’s cause of action prior to an injury. An exculpatory clause that relieves a party from future liability may remove an important incentive to act with reasonable care. These clauses are also routinely imposed in a unilateral manner without any genuine bargaining or opportunity to pay a fee for insurance.

a. Dodson v. Shrader: – Minor Incapacity

Ø 16 year old buys a used truck from owners, then tries to rescind the K and get a full refund of the purchase price after the truck starts having mechanical problems.

Ø Traditional K rule allows a minor to disaffirm or avoid a K even if there has been full performance and the minor cannot return what was received in the exchange.

Ø Infancy doctrine: Minors can void K by returning what is left of purchase. (R14)

Ø Modern trends: Minor entitled to refund with deducation for use.

Ø NEW RULE: Where the minor has not been overreached, and there has been no undue influence, and the K is fair and reasonable, and the minor has actually paid money on the purchase price, and taken and used the thing purchased, the minor cannot recover the amount paid, without allowing the vendor reasonable compensation for use, depreciation, willful or negligent damage to the thing while in minor’s possession.

Ø Why? B/c it’s burdensome for everyone if merchants and business people can’t deal with minors in a safe, reasonable way. B/c minors are allowed to transact a lot of business for themselves before they’re adults; they work and spend money and aren’t questioned.

Ø The rule of depreciation value only applies if the $ was paid up front. If he paid on credit, then sellers can’t get % from him. Only works if the seller is withholding the deprecited $ from what they were already given. In this case, kid paid up front.

Ø Necessaries exception: Kid still lacks capacity, but he still owes for the reasonable $of the services, b/c you want minors to be able to contract for necessary things like food, water, etc. If it was something that parents could/should have bought for you, then it’s not necessary.

Ø Fraud defense is allowed in some jurisdictions, but most courts don’t allow it b/c minors do things like lie about their age, and that’s why they’re protected.

2. Mental Incapacity

§ What constitutes mental incapacity? The Restatement (Second) recognizes two different tests for incapacity.

o 1) Cognitive test: Asks whether the party understood the nature and consequences of the transaction.

o 2) Volitional test: Considers whether the impaired party could control his actions, whether “he is unable to act in a reasonable manner in relations to the transaction and the other party has reason to know of his condition.”

§ This test requires 1) inability to act in a reasonable manner; 2) the other party knows of the mental condition; and 3) the transaction is not one a reasonable person would make.