Capacity and Third-Party Rights

A common trope in television includes a drunk or otherwise intoxicated man who gambles away his business/home/yacht in an attempt to win big. Because a contract requires a meeting of the minds, if the intoxicated man did not understand the terms of the agreement when entering the contract (i.e., pledging his business to stay at the poker table), it's reasonable that in some circumstances we may not hold him to the consequences of his actions. In this section, we will learn when the lack of capacity due to infancy, mental cognition, or intoxication may invalidate an otherwise binding contract. We will then introduce the effect of illegal activity on contract law and finish with a discussion on when third parties, or those not party to the original contract, may have rights or duties under the contract.



Many of us look back on our actions when young and wonder what on earth we were thinking. When I was sixteen, our scout troop was hiking in the High Sierras. On a particularly hot day, we crossed a ridge with a sheer drop into an alpine lake. We were a competitive group and usually tried to one-up each other in our acts of bravery/stupidity. While other boys only talked about it, I jumped. It was a long fall and as I was falling, I had time to think...mostly about how I hoped this lake was deep because if I died up here, my mom would kill me.

The result was a mixed bag. The bad news was that the lake was not particularly deep where I landed. The good news was that the bottom was covered in deep soft mud rather than rock. The bad news was the mud trapped me underwater. Fortunately, I was able to free myself and got to the surface before running out of oxygen. I promised that I would never do something so stupid again, which was true for a couple of days, but that's a different story....

The scientific truth is that humans don't have fully-developed brains until well into their 20s. The law recognizes this fact and protects minors (the law calls them infants, but for our purposes, we will stick with minors) if they enter into contracts before the age of 18. I should point out, however, that banks, landlords, and other potential creditors are still wary of working with 18 year-olds, even though they have the full capacity to contract, and will often require a parent to co-sign. This is because many that have reached the age of majority are still high risk.

If a minor enters a contract, the contract is voidable, not void. This means that a 16-year-old can enter a contract, but can also end the contract at will (known as disaffirmation). In other words, the adult party to the contract cannot enforce the contract, but the minor can choose to do so.

There are some exceptions to this general rule. The first involves contracts for necessities. Minors are generally liable for the costs or fair value of necessities, usually defined as food, medicine, clothing, or shelter. The logic here makes sense. If a minor could terminate these contracts at will, grocery stores or landlords would be hesitant to enter contracts with them, doing more harm than good. Of course, you're probably thinking that this doesn't matter too much given that so many Millennials still live with their parents, with the trend looking likely to continue with GenZ. But minors do still leave the nest early, most often to start college or work while still 17 years-old.

A second exception involves ratification. This occurs when the minor enters a contract while a minor, but then turns 18 years-old and continues under the terms of the agreement. For example, if Jane purchased a car last year and then turned 18 last month, should she make another monthly payment, she would be ratifying the contract and now is bound by the terms. But note that courts allow individuals a "reasonable time" to reject the offer after turning 18. A reasonable time will depend on the circumstances, so if Jane makes a payment the day after she turned 18, she could probably still disaffirm the contract the following day. But attempting to cancel a number of weeks after turning 18, or after making a couple of payments, would probably constitute ratification, meaning she's stuck with the contract.

A final limited exception involves cases where the minor lied about his or her age. Note that we're not talking about 17 year-olds that look 25 and no one asked questions about the age of the parties; in those cases, the minor can always disaffirm the contract. But when a minor claims to be an adult and the adult reasonably believed the misrepresentation to be true, the trend is to deny the minor's attempt to disaffirm the contract. In some states, the minor not only cannot disaffirm the contract but can be held liable for the misrepresentation.

Mental Illness/Insanity

The general rule is that a contract entered by a mentally ill individual is voidable by the person when he or she is no longer mentally ill. This is only true if the mental illness impairs the competence of the person with regard to the specific agreement. Therefore, it is vital to understand whether or not the illness affected the individual's ability to understand the nature and consequences of the transaction. Upon disaffirmation, the mentally ill person must return any property in his or her possession.

By way of example, Carrie Fisher was diagnosed with bipolar disorder. Those with this mental illness may suffer extreme mood swings, from manic periods to depressive periods. During a manic episode, let's imagine that Ms. Fisher did not sleep for three days, imagined herself a real-life Princess Leia, and purchased 3 yachts from a dealer in Miami. A week later, after sleeping and coming back to her normal mental state, she is horrified to find 3 large and expensive yachts in her driveway. In such a situation, she could look them over and decide that yes, she wants to keep them, but more likely will attempt to disaffirm the purchase. If the yacht dealer refuses to take the boats back and give a refund, she would have to bring a lawsuit in court to void the contract and force the dealer to rescind. Ms. Fisher will have to bring in expert witnesses to show that she lacked the capacity to understand the nature and consequences of her acts at the time she entered the contract.

If a person has been found to be insane by a court, then any contract made by that person is void, not merely voidable. In such a setting, the person adjudicated insane will likely have a guardian appointed by the judge. That guardian may disaffirm or affirm the contract on behalf of the insane individual. 


Intoxication refers to individuals suffering the effects of drugs (legal or illegal) or alcohol. For example, if a person is so drunk that he has no awareness of his actions, and if the other party knows this, there is no binding contract. The intoxicated party must return the other party to his or her position before the agreement. Of course, the individual could ratify the contract at a later time once the person is no longer inebriated. If a person is only partially drunk and has some understanding of the agreement, avoidance depends on showing that the other party caused the drunkenness or that the terms are unfair.


A contract must have a lawful purpose or objective. As you might imagine, the courts will not enforce an illegal agreement. If Bill agrees to sell illicit drugs to Ted and then backs out after looking at his CTR ring, you see the absurdity of Ted taking Bill to court to enforce the contract. The effect of this rule is that the illegal agreement is void and the courts will not enforce the contract, even if the wrongdoer benefited to the other party's detriment. An exception, however, involves excusable ignorance. If a woman agrees to marry a man not knowing that he is already married (bigamy is illegal), the marriage is void and she can sue him for damages.

Yet, some agreements aren't obviously illegal. Take, for example, the common employment practice of requiring workers to sign non-competition agreements. While common in Idaho, this same practice violates California law, which states, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." California Business and Professions Code, Section 16600. Therefore, should you sign a non-competition agreement in California, the contract is illegal and void.

Third-Party Rights

Up to this point, we've considered the rights and obligations of the parties to the contract. We will now review the situations in which outsiders, or third-parties, acquire rights or duties.

Assignment of Contract Rights

Contracts create rights and duties. Let's say that you and I contract for the sale of a couch. I'll sell you the couch for $100. But you are not buying the couch for yourself; rather, you pay me the $100 and will give it to your friend, Alice. In this situation, I'm the obligor (I have a duty to give you the couch). You are the obligee because you have the right to receive the couch. Alice is the assignee. You're also an assignor because you are assigning your rights (the couch) to Alice.

An assignee acquires the rights to receive the benefit of the contract. The assignor may assign any right unless:

  1. it would materially change the obligation of the obligor, increase the risk involved, or diminish the value of the contract;
  2. assignment is forbidden by law; or
  3. the contract states that assignment is not allowed.

To create an assignment, the assignor must make the assignment known. It can be created just as contracts are made. Of course, you could assign the benefits of a contract without consideration (a gift), but like most gifts, such an assignment could be revoked at any time. The assignee must accept the assignment, but notice to the obligor is not usually required.

Delegation of Duties

As you know, an agreement carries certain rights and obligations. Using the couch example, I have the right to collect your $100, but also the duty to give you the couch. You have the right to the couch, but also the duty to give me $100. Just as you can assign rights, a party can also delegate duties under a contract. The one who delegates is the delegator. The one to whom the delegation is made is the delegatee.

To use another example, let's say that you will pay me $100 to paint your fence. My duty is to paint the fence. I can delegate that duty to Dan, the delegatee. As you might imagine, because I am having another perform my duties, the law requires a bit more than the assignment of rights discussed above.

This is also a good time to remind you that words matter here. You delegate a duty and assign a right. Saying that you'll delegate a right makes as much as much sense as Napoleon Dynamite.

The obligor who delegates a duty (to become a delegator) does not escape liability for performing. Using the example above, if Dan does not paint your fence, I'm on the hook to do it or to pay you damages. This wouldn't be true if I delegated the duty and then Dan entered into a new contract with you to do it - this is called a novation. But assuming that you don't know about the delegation, I have a responsibility to make sure that Dan does it, or do it myself.

There are a number of non-delegable duties. The first involves personal services. If the contract specifies that I am the only one to perform or the other party expects only me to perform, I can't simply ask someone else to step in. For example, if a client hires me to perform specific legal services that only I know and understand, I can't ask another attorney to do it, much less a non-attorney to perform. If you hire Justin Bieber to jump out of a cake on your mom's birthday, you'd be understandably upset if Nicolas Cage popped out instead. On the other hand, if you hire a contractor to build a house, you'd naturally understand that he or she would subcontract out (delegate) some work such as the electrical or plumbing.

Duties cannot be delegated if the contract forbids it because we respect the parties' agreed upon terms. Finally, public policy may prohibit certain delegations. For example, our senators cannot delegate the duties of their office to their children or even to staff without using the appropriate procedures.

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