in this single lesson for unit 13 we will examine the contract defense of lack of capacity specifically we are going to look at the requirement that a person who makes a contract must have legal capacity in general in order for the contract to be enforceable in that regard we are going to consider infants or rather people who are minors that's the old legal term for minors is infants and we will also study mental impairment and when that plays a role in causing lack of capacity now the main rule here is restatement second of contracts section 12 which states the general rule of capacity in subsection 1. no one can be bound by a contract who has not legal capacity to incur at least voidable contractual duties more about voidability in just a moment capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances in general then capacity is required to make a contract but what does that mean subsection 2 gives us a better idea of the categories in which a party might have lack of capacity it reads a natural person that is not a corporation or some sort of business entity who manifests assent to a transaction has full legal capacity to incur contractual duties so there's our presumption that individuals do have capacity thereby unless he is in one of the following four categories a under guardianship which means a judge has appointed a legal guardian to make a decision so that's fairly easy to detect b an infant and that means a minor under the applicable law c mentally ill or defective and those terms certainly have fallen out of favor in recent years but generally they do deal with some sort of mental impairment or d intoxicated by the way that form of intoxicated like we saw in lucy versus zemer is a very high bar to showing lack of capacity so don't ever try to rely on that in your personal life certainly at the moment though we want to look at the capacity issues of infancy or being mentally ill now if a party makes a contract that is voidable what exactly does that mean voidable is a term that comes up in restatement section seven that describes such a contract let's read avoidable contract is one where one or more parties have the power by a manifestation of election to do so to avoid the legal relations created by the contract or by ratification of the contract to extinguish the power of avoidance translation when a contract is voidable at least one party has the power to get out of it maybe both parties but certainly one however that party is not required to get out of the contract the party could decide to go ahead and enforce it maybe it's a beneficial contract we will see how that concept plays out in the odom case in just a moment next let's contrast voidable contracts with the ones that are listed in official comment a called void contracts a void contract is an agreement that can never be enforceable no matter what the law will not enforce it so it is a promise for which the breach of which the law neither gives a remedy nor otherwise recognizes a duty of performance we can't actually call that a legal contract because the word contract means a promise that the law will enforce so a void contract is an agreement but still many times such an agreement is referred to as a contract even though one could argue that it's not for example let's say someone enters into a contract to commit a criminal act maybe kill another person the law will not enforce that contract no matter what the parties agree in contrast voidable contracts merely can be avoided where one party was an infant or where the contract was induced by fraud mistake or duress or where breach of warranty or some other promise justifies the aggrieved party in putting an end to the contract so when one of the parties it's generally the victim party note that it can't be any party it has to be the victim party when one party wants to put an end to the contract we call that disaffirming the contract and the person at that point has the right to avoid enforcement of the contract realize however that a voidable contract is still a good contract unless and until the victim party avoids it we're going to take a look at an example of that in the case of ex parte odom out of alabama from 1988. iris odom when she was 17 years old had a 19 day old son who was seriously ill odom at the time of hospital admission of her very young son sign and signed an inpatient registration form that registration formed obligated iris odum for payment of all hospital expenses it also provided for her payment of the hospital's attorney's fees in the event of collection efforts after odom turned 18 she sought to disaffirm the contract the hospital as you might imagine still wanted to collect based on the contract claim that odom had signed while she was still a minor at age 17. the issue described by the court is whether a minor who executes a contract for a quote necessary is obligated to comply with the express terms of the entire contract including those provisions regarding attorney fees and waiver of personal exemptions so we are going to see what happens in this situation where a minor has made a contract and seeks to disaffirm it now the rule here which is stated very clearly in odom describes items that are known as necessaries and those things that a minor can be legally required to pay for are necessaries what does the court say the general rule is that one contracts of minors are voidable that is the contract may be avoided or ratified at the election of the minor notice that it is the minor's choice in the instant case iris odom disaffirmed or avoided the contract that she had executed with children's hospital so we know the contract is not going to be enforced as such but will odom have to pay anything and the answer will be yes so let's look at the reason why consequently number two at the middle of the paragraph on your screen iris odom's obligation to pay for necessaries i.e the medical services rendered to our infant son is not the result of the express contract between the parties but instead it rises arises from a quasi-contractual relationship created by operation of law which enforces the implied contract to pay so what is that going to mean in this case look at the last sentence therefore number three a minor is not liable on any portion of the contract or for what was agreed to be paid except that the minor is liable for the just value of the necessaries there are these things called necessaries and iris odom will have to pay for them that is not because she is liable under the contract however but because having avoided the contract she still has another basis for liability for the fair market value of the benefits that the hospital provided so we're going to have to think about what a necessary is or what some legal sources call necessity such as the article x served on your screen it states what is pretty much the standard rule on the subject in most states deciding what a necessary is has been characterized by at least one court as a two-step inquiry so what are these two steps first the court must determine as a matter of law that means no jury is involved whether the subject of the contract is generally considered a necessary what fits in that category food and clothing certainly medical care fits within that category that's what happened in the odum case some other expenses like transportation and communication devices may or may not fit but they potentially do but it's a question of law that the judge must decide second step if the subject of the contract can be unnecessary the fact finder and that would be a jury in a jury case must determine whether it actually was a necessity to that specific minor so let's give an example it may well be that a smartphone is an item that is a necessary for a particular miner given her situation in life but that does not mean a seller could enforce a contract against the miner for the most expensive top of the line gadget to come out of apple or samsung a basic budget device may be necessary as compared to the new flagship model but it is the jury who is going to get to decide that that then is our rule on miners we turn now to our second issue dealing with capacity and that is mental capacity so we've seen odom was liable for the fair market value of the services the hospital provided but nothing else under the contract such as attorney's fees now mental capacity occurs when a party is mentally unfit to enter into a contract the well-known case of ortillary versus teachers retirement board will guide our discussion here mrs ordoleri had been an elementary school teacher since 1924 then 40 years later in 1964 she suffered a nervous breakdown and went on a leave of absence she then died in 1965 at the age of 60 and she had been married to her surviving husband for 38 years so what was the issue with mrs ortulari in the lawsuit brought by mr ortulari as the beneficiary he was trying to avoid a contract his wife had entered into the expert witness who diagnosed her when she was still alive had testified saying with her particular ailment she can't think rationally no matter what the situation is they that's people with this illness at least as it was diagnosed in the 1960s will even tell you i used to be able to think of anything and make any decision now they say even getting up i don't know whether i should get up or whether i should stay in bed i don't even know how to make a slice of toast anymore so the psychiatrist here is describing a temporary but seriously debilitating condition today we might equate it with uh clinically diagnosed depression for example and that's what mr ordulary after his wife's death was claiming had caused his wife to make a particular retirement election that excluded him from collecting her teacher's retirement benefits after her death was that true that is actually a matter of some dispute between the majority and the dissent in this case so let's take a look at her mental state closer to the time of her death mrs ordoleri in a letter from february 8 1965 while she was considering whether to change her teacher's retirement benefits or not so that it is paid at a higher amount but one that is good only during her lifetime she asks several very detailed questions about retirement and they're up here on your screen for example what is my average five-year salary what is my maximum allowance what happens if i select option four with the beneficiary who's female 27 years young she asks about making loans on her salary and she has some very specific questions about a loan of five thousand dollars that she wants to get about her total service credit as a teacher and so forth what you should take away is that these are not uninformed questions she was asking at the time of making the election to get the higher monthly amount now as i said the higher monthly amount means it is the the pension would not be paid during the lifetime of both members of the couple but just the just during her lifetime statistically speaking after all that's not an irrational decision to make because the husband would be more likely to die first if you ask a bunch of actuaries or doctors about the thing so the court has to decide under these facts whether mrs ordoleri qualifies as having mental incapacity such that we would avoid her decision or her election to take the higher amount under the contract that's only for one person's life under the traditional rule she clearly does not the court notes here that mental capacity has been measured by what is the so-called cognitive test so what is that test here's the question that we are asked with that test according to the court was the contracting party's mind so affected as to render him holy and absolutely incompetent to comprehend and understand the nature of the transaction if that is the legal test then mr ordulary would lose this case because from the letter we saw mrs ordoleri certainly understood what was going on with the transaction she knew that it was a deal to change the allocation of her retirement benefits to where it would get a higher monthly amount it wasn't as though she did not understand what was at stake the court also says a requirement that the party also be able to make a rational judgment aha concerning the particular transaction qualified the cognitive test this reference to a rational judgment is an extra piece that is about to be added to the test by the new york court of appeals in this case the court decides that insane delusions related to a particular transaction could be good enough to prove lack of capacity the majority then decides to change the law and allow mr ordinary to disaffirm his wife's contract based on her mental incapacity at the time now the dissent in this case says no we can't do that because the traditional law here is the cognitive test the majority in the new york case prevails on this one it says the cognitive rules are too restrictive and rest on a false factual basis so we need to re-examine them this is the court signaling it's going to change the law once it is understood that mrs ordulary was psychotic and could have been incapable of making a voluntary selection of her retirement system benefits then that is enough for her to qualify as not having mental capacity under the new test so the court's saying the science has changed in psychiatry it's no longer the sigmund freud version and we have some better understandings so that brings us importantly to restatement section 15 from which we actually get both rules both the rule that is espoused by the majority and ordinary and the rule that's advocated by the descent under the descents approach in section 15 subsection 1 subsection a is the only way that a party could have mental incapacity that is where he is unable to understand in a reasonable manner the nature and consequences of the transaction if mrs ordulary could not qualify under subsection a however the rule adopted by the new york court of appeals allows for her to be incapacitated based on subsection b mrs ordulary according to the court was mentally incapacitated under what became subsection b because she was unable to act in a reasonable manner in relation to the transaction and the other party in this case the school board or the school district had reason to know of her condition so that is the expanded approach taken by the ordinary court either a or b of restatement section 15 subsection 1 is good enough to prove mental incapacity sufficient to avoid a contract you should know however that the majority of jurisdictions in the united states do not follow the restatement on this one far more typical is a case that's mentioned briefly in your book in a note mcgovern versus commonwealth out of the state of pennsylvania the court there says in the middle of the passage mere mental weakness if it does not amount to inability to comprehend the contract and is unaccompanied by evidence of imposition or undue influence and those are going to relate to other defenses we'll study later that that is insufficient to set aside a contract what pennsylvania is saying here is we follow the cognitive test if you can't even understand the transaction then we'll count you as being mentally incapacitated otherwise we don't care whether you can make a good decision or not you will be bound to your contract because you did understand the decision you are making and as i said that is the majority approach in the united states including here in my home state of texas new york has had an influential rule that does show up in the restatement section 15 but it has not been adopted by most states in the united states they follow the traditional cognitive rule that brings us to the end of our single lesson on capacity to contract in the next lesson we will turn to the famous statute of frauds