Capacity and Voidability

Incapacity to Contract

Capacity and Voidability

The law of contracts opens its treatment of capacity with a statement about who can be bound at all: no one is bound by contract who lacks legal capacity to incur at least voidable contractual duties.¹ Capacity, in this sense, is the legal ability to take on a contractual duty by one's own promise. Section 12 adds that capacity may be partial and may depend on the nature of the transaction or on other circumstances, so a court can find that a person is able to handle one deal and unable to handle another.² The words "at least voidable" set a floor. A person who can incur voidable duties may be held to the bargain unless that person chooses to escape it, because a voidable contract is one in which a party holds the power to undo the legal relations it created.³ A person who cannot incur even voidable duties is not bound at all.

Subsection (2) supplies the starting point for every capacity problem. A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties by doing so, unless that person falls into one of four listed conditions.⁴ Those conditions are guardianship, infancy, mental illness or defect, and intoxication.⁵ In each one, the outward act of agreeing may fail to reflect real judgment, or a court or legislature has already decided that it does. Each condition has its own rule, its own test, and its own consequence for the contract, and later parts of this chapter take them one at a time.

The presumption in favor of capacity, together with a short list of exceptions, answers a practical problem. A person dealing with another can observe words and conduct but cannot inspect the mind behind them. If every adult's promise could be set aside by asking afterward whether that adult's judgment was sound, no one could safely rely on a bargain, and the people who most need to enter agreements would find fewer willing counterparties. Keeping the exceptions narrow and specific prevents them from swallowing the rule, while the exceptions themselves protect people whose assent is an unreliable signal of what they actually decided.

That balance between stability for those who rely on a deal and protection for those who cannot responsibly make one drives every category of incapacity. Two preliminary tasks come first. The next subsection takes up the presumption of capacity and the weight it carries when someone challenges a contract. After that, the vocabulary of void, voidable, and unenforceable gets its own treatment, because each later category of incapacity is described in those terms.

Presumption of Capacity

The starting rule sits in the second subsection of § 12. A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties by doing so, unless that person falls within one of the listed conditions.⁶ A natural person is a human being, as opposed to a corporation or other organization, and manifesting assent means signaling agreement outwardly through words or conduct. Because the rule treats full capacity as the default, a court begins by treating an adult's apparent agreement as binding, and it does not ask the party seeking enforcement to prove that the other side was of sound mind. The four conditions listed at the opening of this chapter are exceptions to that starting point, so a person who invokes one of them is asking the court to depart from the ordinary assumption.

Capacity itself is a legal qualification, such as legal age or soundness of mind, that gives a person the power to enter a binding relation in the way a normal adult can.⁷ Since the presumption favors capacity, the work of displacing it falls on the party who wants out of the contract. Adults are generally assumed to have capacity, and a party who wishes to refute that assumption must come forward with evidence of incapacity.⁸ Placing the burden there matches it to access. The counterparty saw a signature and an apparently ordinary exchange, while the person claiming impairment, along with family members and treating physicians, controls the history and the records that show what that person's condition actually was. The later treatment of mental illness returns to how that proof is made.

The presumption also limits what counts as rebuttal. The test is whether a person has the capacity to make responsible decisions, not whether the decisions the person made were in fact responsible, so an adult keeps the right to behave foolishly or irrationally without being treated as incapacitated.⁹ That statement comes from the law of guardianship, where a court decides whether to appoint a guardian, but the restraint carries over naturally to contracts. A bargain that looks unwise gives no reason, standing alone, to doubt the capacity of the person who made it, and the same is true of advanced age, frailty, or a diagnosis, because the law looks for an actual loss of mental capacity.

Once other evidence of impairment is in the record, the same lopsided price changes its role. It remains unwise, and it also becomes one fact among several from which a court may infer that the person could not manage the transaction. That inference leads to the second point in § 12(1): capacity to contract may be partial, and its existence for a particular transaction may depend on the nature of the transaction or on other circumstances.¹⁰ Capacity is therefore measured against the deal in front of the court, and a person can have it for one agreement and lack it for another.

In Krasner v. Berk a landlord sought to hold a physician to a lease and a related agreement the physician had signed after his medical practice had already been curtailed, and the physician defended on the ground that he lacked the mental capacity to make them.¹¹ The evidence of understanding was mixed. He read the agreement before signing and called it fair, and four months later he dictated a letter of complaint to the landlord that showed some grasp of the lease terms. Within two weeks of signing, however, he consulted a doctor who specialized in brain disease, and within six months that doctor advised him to give up the practice of medicine.¹² The court said the record would support a finding that he had testamentary capacity, which is the mental ability needed to make a valid will, as distinguished from capacity to contract.¹³ It still left standing the trial judge's finding that he was not competent to make this agreement, which was an improvident one for a doctor about to consider giving up his practice.

The reason for measuring capacity transaction by transaction is that impairment comes in degrees. If the law attached a single label to a person, a court would face two poor choices. It could bind someone with a failing mind to a deal far beyond what that person can grasp, because the person still manages daily life, or it could strip a person of the power to make simple purchases that the person understands perfectly well. Asking whether this person, with this condition, could take part in this kind of transaction avoids both results. On an exam stem that supplies a diagnosis, the usual trap is to conclude from the label alone that the person lacked capacity; the analysis has to connect the condition to the transaction actually at issue.

Void, Voidable, Unenforceable

Three labels describe what becomes of a contract when something is wrong with it, and capacity problems are easier to solve once each label is held apart from the others. The one that matters most here is voidable. A voidable contract is one in which one or more parties have the power, by a manifestation of election, to avoid the legal relations the contract created, or, by ratification of the contract, to extinguish that power of avoidance.¹⁵ Two powers sit inside that definition. The power to avoid is exercised by electing, which means signaling through words or conduct a choice to undo the deal. The power of ratification runs the other way: when the holder affirms the contract, the option to escape is gone and the bargain becomes fixed. Until one of those two things happens, the contract exists and carries legal effect, and that is what separates a voidable contract from a void one.

Incapacity usually produces this middle result. Where the incapacity is only partial, the contract is voidable at the option of the impaired party.¹⁶ The power of avoidance resides only in the protected person, or in heirs, administrators, and executors who step into that person's place, and an adult who dealt with someone lacking capacity cannot avoid the contract on that ground.¹⁷ The reason follows from what the defense is for. Capacity rules exist to shield a person whose assent was an unreliable signal of real judgment. If the competent counterparty could invoke the other side's impairment, the rule would hand an exit to the party who needed no protection, and the protected person would lose every deal that was in fact a good one.

The two-party structure of a contract explains how one side can hold an election while the other is held fast. A contract requires at least two parties, a promisor and a promisee.¹⁸ A defect in capacity is a fact about one of those parties and does not travel to the other. The counterparty with full capacity made a genuine promise, and that promise stays binding while the impaired party decides whether to keep the exchange or undo it. The result is an asymmetry, with one party bound and the other holding an option. The asymmetry has a practical cost, because adults often decline to deal with a protected person who cannot give legal assurance that the deal will stand.¹⁹

The second version of that scene shows that the power to avoid is an option and carries no duty to use it. Because the defense is protective, the party who has it may assert it or may instead enforce the contract against the other side, and if the holder does avoid, each side has a restitution claim against the other for any benefit previously conferred.²⁰ How far that restitution claim reaches differs from one category of incapacity to the next, and the later sections on minors and mental illness take it up. Two errors recur on exam stems. One is to read voidable as meaning the impaired person is released automatically, when release happens only if that person elects it. The other is to let the competent counterparty raise the defense, which the structure above forbids.

A void contract sits at the opposite end. Where incapacity is total, any manifestation of intent to enter a bargain is a nullity and the purported agreement is void, and the standard example is a person whose property is under guardianship by reason of an adjudication of mental defect, whose attempted contracts, and attempts to contract with that person, produce no contract.²¹ Void means the law never gave the promise legal effect, so no election is needed to escape it and nothing exists to ratify. The law has moved toward voidability wherever it can. Infants' contracts were once treated as void in certain transactions, such as agreeing to be a surety, and it is now almost everywhere agreed that even those transactions are merely voidable.²² Voidability lets the protected person judge whether a particular deal is worth keeping, whereas a void rule would shut that person out of beneficial bargains. Guardianship is therefore the major void exception, and the section on it comes later, while the other categories of incapacity yield voidable duties.

The third label is the narrowest and shows up least in capacity problems. An unenforceable contract is one for whose breach neither damages nor specific performance is available, yet which is recognized in some other way as creating a duty of performance, although there has been no ratification.²³ That definition speaks to remedies. Voidable describes who holds a power to change the legal relations, while unenforceable describes which court remedies are closed. A voidable contract that has not been avoided remains enforceable by either side, and a void contract produces no duty at all, so an unenforceable contract occupies a different position: some duty is acknowledged, and the usual ways of compelling it are unavailable. On a capacity question, the efficient sequence is to ask first whether the incapacity is total, which points to void, or partial, which points to voidable, and to reserve unenforceable for a stem that speaks of remedies being unavailable.