5.2 Capacity, Legality & the Statute of Frauds

An agreement with offer, acceptance, and consideration can still fail if a party lacked the legal ability to contract, if the bargain's purpose is unlawful, or if the Statute of Frauds requires a writing that does not exist. These doctrines determine enforceability and are heavily tested on the NALA CP Knowledge Exam.

Capacity to Contract

Adults are presumed to have capacity, and the party asserting incapacity bears the burden of proof. Three categories matter most.

Minors

Contracts with a minor (in most states, a person under 18) are voidable at the minor's option — not void. The minor may disaffirm at any time during minority and for a reasonable time after reaching majority, and need only return whatever consideration remains in his or her possession; the minor is entitled to a full refund of what was paid, even if the goods are damaged or used up. The adult party, by contrast, is bound unless the minor disaffirms. Upon reaching majority, the minor may ratify the contract — expressly or by conduct such as keeping the goods or continuing payments — and ratification makes the contract fully enforceable. Minors remain liable in quasi-contract for the reasonable value of necessaries (food, shelter, clothing, medical care, and sometimes education or tools of a trade), because the policy of protecting minors does not extend to letting them consume necessities without paying.

Mental Incapacity

A contract of a person with a mental illness or defect is voidable if, because of the condition, the person could not understand the nature and consequences of the transaction (the cognitive test) — or, under the modern rule, could not act reasonably and the other party had knowledge of the condition. If a court has adjudicated the person incompetent and appointed a guardian, the person's contracts are void, and any later agreement must be made by the guardian. Contracts made during a lucid interval are valid. Necessaries are again payable at their reasonable value.

Intoxication

A contract is voidable for intoxication only if the person was so impaired that he or she could not understand the nature and consequences of the transaction and the other party had reason to know of the impairment. A formerly intoxicated person may ratify upon becoming sober, and disaffirmance requires returning any consideration still held.

Legality

An agreement whose formation or performance is criminal, tortious, or contrary to public policy is void — not merely voidable. Courts ordinarily refuse aid to either party and leave them where they find them (the in pari delicto doctrine), although a member of the class the violated statute was designed to protect, or a party who withdrew before the illegal act was performed, may obtain relief. Common illegality categories include agreements to commit crimes or torts; usury (charging interest above the statutory maximum); unlicensed performance where the license is regulatory (designed to protect the public — an unlicensed attorney or contractor cannot enforce a fee agreement) as opposed to merely revenue-raising (a license that only raises money — the contract remains enforceable); and covenants not to compete, which are enforceable only if ancillary to a legitimate transaction (the sale of a business or an employment relationship) and reasonable in duration, geographic scope, and subject matter; unreasonable restraints are void or judicially narrowed. Exculpatory clauses releasing a party from liability for ordinary negligence may be enforced, but never for intentional wrongs or gross negligence, and rarely for providers of essential public services. Under the UCC and the Restatement, a court may also refuse to enforce an unconscionable contract or clause — one combining procedural unconscionability (oppression or unfair surprise, as in a take-it-or-leave-it adhesion contract) with substantive unconscionability (terms so one-sided they shock the conscience); the court may strike the clause, limit it, or refuse the whole contract.

The Statute of Frauds

The Statute of Frauds requires specified contracts to be evidenced by a sufficient writing signed by the party to be charged (the person against whom enforcement is sought). Memorize the categories with the mnemonic MYLEGS:

• M — Marriage: promises made in consideration of marriage, such as prenuptial agreements — but not mutual promises simply to marry.
• Y — Year: contracts that by their terms cannot be performed within one year of the date they are made. The clock runs from formation, and any theoretical possibility of completion within a year takes the contract outside the statute — a lifetime employment contract is outside, because the employee could die within a year.
• L — Land: transfers of interests in real property, including sales, mortgages, easements, and leases longer than one year.
• E — Executor: an executor's or administrator's promise to pay an estate's debts out of the fiduciary's own funds.
• G — Goods of $500 or more: UCC Section 2-201 requires a writing for the sale of goods priced at $500 or more.
• S — Surety: a collateral promise to answer for the debt or default of another. Under the main purpose (leading object) exception, the promise may be oral if the promisor's primary purpose was the promisor's own economic advantage.

The Writing Requirement

At common law the writing must contain the essential terms — parties, subject matter, and price — and the signature (any mark made with intent to authenticate) of the party to be charged; several documents may be read together if they refer to one another. The UCC is more forgiving: a writing sufficient to indicate that a contract for goods has been made and stating the quantity, signed by the party against whom enforcement is sought, will do. Between merchants, a written confirmation that the recipient has reason to know of and does not object to within ten days satisfies the statute against both parties (the merchant's exception).

Exceptions That Permit Enforcement Without a Writing

• Specially manufactured goods not suitable for sale to others, once the seller has substantially begun production
• Judicial admission in pleadings or testimony that a contract was made
• Goods received and accepted or paid for and accepted (enforceable to that extent)
• Part performance of land contracts: payment plus possession plus improvements by the buyer
• Promissory estoppel: foreseeable detrimental reliance that injustice can only be avoided by enforcing the promise

Paralegal Practice Notes

A contract outside the Statute of Frauds is valid but unenforceable — a classic exam distinction between void, voidable, and unenforceable. Paralegals protect clients by reducing real estate, suretyship, and long-term service arrangements to writing, verifying that the party to be charged has signed, and preserving written confirmations in goods transactions so the ten-day objection window can be documented.