14.1 Capacity, Duress, Undue Influence, Unconscionability, Illegality & Public Policy

14.1 Capacity, Duress, Undue Influence, Unconscionability, Illegality & Public Policy

These defenses concern the parties' ability to consent and the fairness or legality of the bargain. For each, ask whether the contract is void (no contract at all), voidable (the protected party may avoid or ratify it), or unenforceable, and what restitution follows. Mistake and misrepresentation are covered in Section 14.2, and the Statute of Frauds in Section 14.3.

---

1. Capacity Defenses: Minors, Incompetents & Intoxication

A party must possess the legal capacity to bind themselves to a contract.

A. Infancy / Minors (Under Age 18)

• Voidable at Minor's Disaffirmance: Contracts entered into by minors are voidable at the election of the minor. The adult contracting party has no power to void the agreement.
• Timing of Disaffirmance: The minor may disaffirm at any time during minority or within a reasonable time after reaching the age of majority (age 18).
• Ratification: If the minor fails to disaffirm within a reasonable time after reaching age 18, or expressly ratifies the agreement upon turning 18, the contract becomes fully binding.
• Liability for Necessaries (Quasi-Contract): While a minor can disaffirm a contract for "necessaries" (essential food, shelter, clothing, medical care), the minor is liable in restitution (quantum meruit) for the reasonable value of the benefits received, rather than the contract price.

B. Mental Incapacity

• Cognitive Test: The individual is unable to understand in a reasonable manner the nature and consequences of the transaction.
• Volitional Test: The individual understands the transaction but is unable to act in a reasonable manner, and the other party had reason to know of the condition.
• Legal Effect: The contract is voidable by the incapacitated party. However, if a court has previously adjudicated the person mentally incompetent and appointed a legal guardian, any subsequent contract entered into by the ward is completely void.
• Liable in quasi-contract for the reasonable value of necessaries.

C. Intoxication

A contract entered into by an intoxicated person (alcohol or drugs) is voidable only if:

1. The person was unable to understand in a reasonable manner the nature and consequences of the transaction; AND
2. The other party had reason to know of the intoxication.

• The intoxicated person must promptly disaffirm upon recovering sobriety, or the contract is ratified.

---

2. Coercion & Overreaching: Duress, Undue Influence & Unconscionability

A. Duress

• Physical Duress: Compelling assent through physical force or direct threat of physical violence makes the contract completely VOID (Restatement § 174).
• Economic Duress: A contract is voidable if a party's manifestation of assent is induced by an improper threat that leaves the victim with no reasonable alternative (e.g., bad-faith breach of an existing contract where substitute performance is unavailable, threatening financial ruin).

B. Undue Influence (Restatement § 177)

Unfair persuasion of a vulnerable party who is either under the domination of the person exercising persuasion or who, by virtue of a confidential relationship, reasonably believes the person will not act contrary to their welfare (e.g., elderly patient and caretaker, trustee and beneficiary). Contract is voidable.

C. Unconscionability (UCC § 2-302 & Common Law)

A court may refuse to enforce a contract or strike an unconscionable clause to prevent oppression and unfair surprise. Unconscionability is evaluated at the time the contract was made and generally requires both:

1. Procedural Unconscionability: Defects in the bargaining process—gross disparity in bargaining power, contracts of adhesion (take-it-or-leave-it), fine print, convoluted legal jargon, and lack of meaningful choice.
2. Substantive Unconscionability: The actual terms of the agreement are oppressively one-sided, unreasonably harsh, or shock the conscience (e.g., exorbitant pricing, unilateral forfeiture clauses, severe remedy limitations).

D. Illegality and Public Policy

• Contracts contemplating illegal conduct (crimes, torts, statutory violations) are void and unenforceable.
• Covenants Not to Compete: Enforceable only if strictly reasonable in: (1) geographic scope, (2) temporal duration (typically 1–2 years), and (3) necessary to protect a legitimate business interest (trade secrets, client goodwill). Overly broad covenants are struck down or blue-penciled.

---

More on Capacity, Overreaching & Illegality

Minors: Additional Rules

• Returning what remains: A minor who disaffirms must return any consideration still in the minor's possession. Traditionally the minor need not pay for depreciation or use, but a growing number of courts allow the adult to offset the value of use or damage, especially when the minor misrepresented his age.
• Ratification: A contract may be ratified expressly after the minor reaches majority, or by conduct, such as keeping and using the goods and continuing to make payments for more than a reasonable time.
• Statutory exceptions: Many states make certain contracts binding on minors, such as student loans, insurance, and court-approved entertainment or sports contracts.

Duress: Additional Rules

• Improper threats: A threat is improper if it threatens a crime or tort, criminal prosecution, use of civil process in bad faith, or a breach of the duty of good faith under an existing contract (Restatement § 176). A threat to file a lawsuit that the threatening party believes in good faith is valid is not improper.
• Bad-faith demands for more money: A subcontractor's threat to stop delivering needed parts unless the buyer agreed to a large price increase was economic duress when the buyer could not obtain the parts elsewhere in time (Austin Instrument, Inc. v. Loral Corp., N.Y. 1971).
• Third-party duress: If a third party's improper threat induces assent, the contract is voidable unless the other party, in good faith and without reason to know of the duress, gives value or materially relies on the transaction (Restatement § 175(2)).

Unconscionability in Practice

• Classic example: A furniture store's installment contract with a low-income buyer let the store repossess every item ever purchased until the entire balance was paid; the court remanded for consideration of unconscionability (Williams v. Walker-Thomas Furniture Co., D.C. Cir. 1965).
• Procedure: When unconscionability is claimed, the parties must have a reasonable opportunity to present evidence of the commercial setting, purpose, and effect of the contract or clause (§ 2-302(2)).
• Arbitration clauses: Under the Federal Arbitration Act, a state rule that singles out arbitration agreements as unconscionable is preempted (AT&T Mobility LLC v. Concepcion, 2011), but generally applicable unconscionability defenses may still apply.

Illegality and Public Policy

• Knowledge of the other party's illegal purpose: A seller who merely knows that a buyer intends to use goods for an illegal purpose can usually enforce the sale unless the seller facilitates the purpose or the purpose involves serious moral turpitude.
• Exculpatory clauses: Clauses releasing a party from liability for intentional or reckless harm are unenforceable, and releases of liability for negligence are unenforceable when the service involves the public interest, such as hospital care (Tunkl v. Regents of University of California, Cal. 1963).
• Restraints of trade: Noncompetition covenants ancillary to employment are enforced only if reasonable in duration, geography, and scope and necessary to protect legitimate interests such as trade secrets or customer goodwill; courts treat covenants ancillary to the sale of a business more leniently.
• Supervening illegality: If a law enacted after formation makes performance illegal, the duty to perform is discharged (see Section 17.1).

---

Comparison: Void vs. Voidable Defenses