Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

When it comes to legally binding agreements, certain people are always considered to lack the legal ability (or "capacity") to contract. As a legal matter, basically they are presumed not to know what they're doing. These people--legal minors and the mentally ill, for example--are placed into a special category. If they enter into a contract, the agreement is considered "voidable" by them (as the person who lacked capacity to enter the agreement in the first place). Voidable means that the person who lacked capacity to enter the contact can either end the contract or permit it to go ahead as agreed on. This protects the party who lacks capacity from being forced to go through with a deal that takes advantage of his or her lack of savvy.

Let's look at some situations in which a person might lack the legal capacity to enter into a legally binding contract.

Minors Have No Capacity to Contract

Minors (those under the age of 18, in most states) lack the capacity to make a contract. So a minor who signs a contract can either honor the deal or void the contract. There are a few exceptions, however. For example, in most states, a minor cannot void a contract for necessities like food, clothing, and lodging. Also, a minor can void a contract for lack of capacity only while still under the age of majority. In most states, if a minor turns 18 and hasn't done anything to void the contract, then the contract can no longer be voided.

EXAMPLE 

Sean, 17, a snowboarder, signs a long-term endorsement agreement for sportswear. He endorses the products and deposits his compensation for the endorsements for several years. At age 19, he decides he wants to void the agreement to take a better endorsement deal. He claims he lacked capacity when he signed the deal at 17. A court probably will not permit Sean to now void the agreement. For another example of minors entering into contracts, see Nolo's Q&A Is a 15-year-old's contract with a cell phone service valid?

Mental Incapacity

A person who lacks mental capacity can void, or have a guardian void, most contracts (except contracts for necessities). In most states, the standard for mental capacity is whether the party understood the meaning and effect of the words comprising the contract or transaction. This is called the "cognitive" test. Some states use what's called the "affective" test: a contract can be voided if one party is unable to act in a reasonable manner and the other party has reason to know of the condition. And some states use a third measure, called the "motivational" test. Courts in these states measure capacity by the person's ability to judge whether or not to enter

into the agreement. These tests may produce varying results when applied to mental conditions such as bipolar disorder.

EXAMPLE 

Mr. Smalley contracted to sell an invention, and then later claimed that the contract was void because he lacked capacity. Smalley had been diagnosed as manic-depressive and had been in and out of mental hospitals. His doctor stated that Mr. Smalley was not capable of evaluating business deals when he was in a "manic" state. A California Court of Appeals refused to terminate the contract and stated that Smalley, in his manic state, was capable of contracting. "The manic phase of the illness under discussion is not, however, a weakness of mind rendering a person incompetent to contract ." In other words, the Court's view of manic-depression was cognitive--that the condition may have impaired Smalley's judgment but not his understanding.

Alcohol and Drugs

People who are intoxicated by drugs or alcohol are usually not considered to lack capacity to contract. Courts generally rule that those who are voluntarily intoxicated shouldn't be allowed to avoid their contractual obligations, but should instead have to take responsibility for the results of their self-induced altered state of mind. However, if a party is so far gone as to be unable to understand even the nature and consequences of the agreement, and the other (sober) party takes advantage of the person's condition, then the contract may be voidable by the inebriated party.

EXAMPLE 

In the late 19th century, Mr. Thackrah, a Utah resident and owner of $80,000 worth of mining stock, went on a three-month bender. Mr. T's fondness for alcohol was well known, and a local bank hired Mr. Haas to contract with the inebriated Thackrah. Haas did the deal, getting Thackrah to agree to accept $1,200 for his mining stock. When he sobered up (a month later), Thackrah learned that Haas had turned over the mining shares to a local bank (apparently the real culprits in the scheme). Thackrah sued Haas. The case went all the way to the U.S. Supreme Court, which ruled that the agreement was void because the bank and Hass knew that Thackrah had no idea what he was doing when he entered the contract. The bank had to return the shares to Thackrah, less the $1,200 he had already been paid.

by: Rich Stim, Attorney

Lack of capacity. A person must have the legal ability to form a contract in the first place. A person who is unable, due to intoxication or mental impairment, to understand what she is doing when she signs a contract may lack capacity to enter into a contract. In that case, the contract may be unenforceable.

Transcript of UNENFORCEABLE CONTRACTS

UNENFORCEABLE CONTRACTSART. 1403What is the meaning of "unenforceable contracts" ...

Kinds of unenforceable contracts...1. Unauthorized contracts2. Those that do not comply with the statute of frauds3. Those where both parties are incapable of givingART. 1404Unauthorized contracts are governed by article 1317 and the principles of agency in the Title X of this book.ART. 1406When a contract is enforceable, under the Statute of frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under article 1357. (n)are those entered into the name of another person by one who has been given no authority or legal representation or who has acted beyond his powersSTATUTE OF FRAUDS1. History2. Purpose3. ApplicationAgreements within the scope of the STATUTE OF FRAUDS1. Agreement not to be performed within one year from the making thereof

2. Promise to answer for the debt, default, or miscarriage of another.

3. Agreement in consideration of marriage other than mutual promise to marry.

4. Agreement for sale of goods, etc. at price not less than Php500.00

5. Agreement for leasing for a longer period than one year

6. Agreement for the sale of real property, or of an interest therein.

7. Representation as to be credit of a third person.ART. 1405Contracts infringing the Statute of frauds, referred to in No. 2, Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them.Modes of ratification under the Statute.1. by failure to object to the presentation of oral evidence to prove the contract.

2. by acceptance of benefits under the contract.Example:A sale of realty in a private instrument is not valid and enforceable; hence, a public document may be executed so that the sale could be registered. An oral sale of real property is not enforceable; hence, one party cannot compel the other to execute the public document. However, if said oral sale of real property has been ratified, then it is now both valid and enforceable, and a public document may be made so that the sale can be registered.ART. 1407In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effects as if only one of them were incapacitated.If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.Unenforceable contracts cannot be assailed by third persons.

ART. 1408ART. 1423NATURAL OBLIGATIONSObligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.Originated in the Roman law .They are real obligations to which the law denies an action, but which the debtor may perform voluntarily.NATURAL OBLIGATIONSCivil Obligations and Natural ObligationsCivil obligations arise from law, contracts, quasi-contracts, delicts , quasi- delicts (Art. 1157)Natural Obligations are based not on positive law but on equity and natural law.When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered.ART. 1424ART. 1425When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid.ART. 1426When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, not withstanding the fact that he has not been benefited thereby, there is no right to demand the thing or price thus returned.

Restitution by minor after annulmentWhen a contract is annulled, a minor is not obliged to take any restitution except insofar as he has been benefited by the thing or price received by him. ( Art. 1399) However, should be voluntarily return the thing or price received though he has not been benefited thereby, he cannot recover that he has returned.ART. 1427When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. Delivery by minor of money or fungible thing in fulfillment of obligation.By the decree of annulment, the parties, as a general rule, are obliged to make mutual restitution. (Art. 1398.) However, the obligee who has spent or consumed in good faith the money or consumable thing voluntarily paid or delivered by the minor, is not bound to make restitution.ART. 1428When, after an action to enforce a civil obligation has failed, the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered.ART. 1429When a testate or infestate heir voluntarily pays a debt of the descendent exceeding the value of the property which he received by will or by the law of infestacy from estate of the deceased, the payment is valid and cannot be rescinded by the payer.Payment by heir of debt exceeding value of property inherited.- The heir is not personally liable beyond the value of the property he received from the descendent.- But if he voluntarily pays the difference,the payment is valid and cannot be rescinded by him.An heir has a moral duty to perform or pay obligation legally contracted by his dead relatives.ART. 1430When a will is declared void because it has not been executed un accordance with the formalities required by law,but one of the intestate heirs,after the settlement of the debts of the deceased,pays a legacy in compliance with a clause in the defective will,the payment is effective and irrevocable.