Contract Law: Defense of Incapacity or Lack of Capacity

Overview of Course Content

• Subject Focus: Contract defenses, specifically incapacity or lack of capacity
• Structure:
  • Contract formation (offer, acceptance, consideration)
  • Defenses (Statute of Frauds, lack of capacity)
  • Contract interpretation, implied terms
  • Breach of contract conditions, repudiation
  • Remedies

Types of Defenses

1. Defenses to Formation: Errors at the contract formation stage (e.g., Statute of Frauds, lack of capacity, coercion).
2. Excuses: Events post-formation excusing performance (e.g., impossibility, frustration of purpose).

Lack of Capacity as a Defense

• Protects individuals incapable of protecting their own interests
• Contract may be void or disaffirmed

Who Lacks Capacity?

1. Minors (Infants): Under 18 years old
2. Mentally Incompetent Persons
3. Intoxicated Persons: If the other party knew or should have known

Consequences of Lack of Capacity

• Right to Disaffirm: Person lacking capacity can exit the contract
• Ratification: Retaining benefits after gaining capacity ratifies the contract
• Necessaries: Contracts for necessities can be disaffirmed, but liable in quasi-contract for value received

Examples & Scenarios

1. Minor Contracts: Only the minor can disaffirm; adult party cannot use minority as defense.
   • E.g., Baby Bob's car washing contract
2. Ratification by Minor: If a minor retains benefits post-majority, they ratify the contract.
   • E.g., Teenage Bob retaining a car
3. Necessaries: Even if disaffirmed, liable for the fair value.
   • E.g., Bob’s rental agreement

What Disaffirmance Entails

• Requires putting parties back to pre-contract positions
• May involve quasi-contract recovery for returned benefits or exchanged value

Specific Rules for Capacity Types

Minors

• Limited quasi-contract liability
• Exceptions if engaged in tortious conduct (e.g., misrepresenting age or intentional damage)

Mentally Incompetent Persons

• Cognitive Test (Majority): Can they understand the nature/consequences?
• Volitional Test (Minority): Can they act reasonably despite understanding?
• Cannot disaffirm if contract performed, no knowledge of incompetence, and fair terms

Intoxicated Persons

• Cognitive Test: Were they unable to understand transaction due to intoxication?
• Other party must know of the intoxication

Next Steps in Course

• Upcoming topics: Duress and undue influence

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