Contracts are “voidable” if one of the parties lacks capacity to enter into the contract. A voidable contract can be undone by the injured party upon request, allowing the unwinding of a bad deal that was entered without a proper “meeting of the minds.” The two major capacity issues arise when the contracting party is either (1) a minor [younger than age 18], or (2) mentally incompetent.
Contracts with Minors
A minor who has entered into a contract can “disaffirm” the contract at any time before they reach the age of majority [18], thereby terminating the contract and returning the central property back to the original owners. Burton v. Anthony, 79 P 185 (Or. 1905). Technically, under ORS 109.520, a person is considered to have reached the age of majority when they are married, so a 17 year old could validly enter a contract to purchase property provided they are or were already married. Richardson’s Guardianship, 64 P 390 (Or 1901). If the minor person induced the contract by misrepresenting or lying about their age, courts in Oregon treat the fraud as a form of estoppel, preventing the minor from disaffirming the contract on the basis of lacking capacity. The minor’s fraud can only be the basis for that estoppel if it was reasonable for the other party to rely on the representation. If a toddler walked up to a Seller and offered to purchase the property, no matter how many times the toddler insisted they were twenty years old, it would be unreasonable to rely on that statement. Emancipated minors are treated as adults for the purposes of contracting.
A minor can disaffirm a contract in various ways, including giving personal notice, returning the consideration, demanding the return of consideration, bringing suit for rescission of the contract, or pleading minority as a defense in a lawsuit over enforcement of the contract. Once disaffirmed, the entire contract is considered void. If the other party under contract with the minor has partially performed the contract, disaffirmance itself will not rescind the contract, the minor will also need to restore any benefits they received back to the other party. Taylor v. Grant, 279 P2d 479 (Or. 1955). If the minor purchased property and it depreciated, the minor has to reasonably compensate the seller for the lost value and any use. Courts have found that a minor can disaffirm a deed within a reasonable time after attaining majority, but the courts are not in agreement as to whether the minor can disaffirm a deed while still a minor. Highland v. Tollisen, 147 P 558 (Or. 1915), 42 Am Jur2d Infants sec. 101. The Highland court ruled that a minor would have 10 years after attaining the age of majority to disaffirm a conveyance of property, but the courts will vary on how much time is given, based on the circumstances undergirding the silence, the minor’s knowledge of their ability to disaffirm, and whether the minor was benefitted or the other party was harmed by the delay. By contrast, a minor can also “ratify” a contract upon reaching the age of majority, thereby locking it in and making it a valid contract; essentially waiving their power to disaffirm. Haldeman v. Weeks, 175 P 445 (Or. 1918). One suggestion often floated when a contracting party is uncertain about another party’s age is to have the young seeming party sign a declaration of majority, taking the question of minority from speculation to express misrepresentation.
Contracts with a Person deemed Mentally Incompetent
When a person enters a contract without the mental ability to understand the nature and consequences of the contract, the contract is treated as voidable. Gore v. Gadd, 522 P2d 212 (Or. 1974). Similar to the situation for minors, the party can disaffirm the contract or can ratify the contract after competency is regained. Oregon law presumes that a person is mentally competent to contract unless the party alleging incompetency can prove it (Cloud v. U.S. National Bank, 280 OR 83, 90 (1997)). The traditional test for mental incompetency is to ask if a person lacks the ability to understand the contract. Gore v. Gadd, 268 Or 527, 528 (1974). Merely failing to make the necessary effort to understand the contract will not result in a person being deemed incompetent, so if someone is willfully ignorant and choosing to avoid information that would have explained the contract, they are not able to disaffirm the contract. The person will also need to have a basic understanding of how the contract affects them, their family, and their property. Dean v. Dean, 70 P 1039 (Or. 1902). If you are seeking to protect a contract from claims of mental incompetence, little things like proof that the contracting party had capacity, witness declarations, or showings that the allegedly incompetent person recalled accurate and detailed information all make it harder to void the contract.
Alternately, there is a test for whether a person is incompetent and unable to make rational judgements, more oriented towards whether a person was contracting while in the middle of a bout of mental illness or extreme pain or intoxication that rendered them incapable of making rational decisions. Cases of manic-depressives or psychotic episodes during contracting can render the contract voidable. The question at play is whether the person was able to reason, exercise judgement, and transact business in an ordinary manner to compete with the other party in the transaction. First Christian Church v. McReynolds, 241 P2d 135 (Or. 1952).
In Oregon, we ask whether the person was mentally incompetent at the time they entered into or created the contract, not if they are presently mentally sound. Lucid intervals can exist during which the person is completely competent to contract and enter into agreements; even if they are incompetent at all other times. If, for example, a person was extraordinarily drunk while attempting to contract, the contract may not be valid. Fagan v. Wiley, 90 P 910 (Or. 1907). Temporary windows of lucidity in the drunkenness will, however, torpedo the claim of incapacity; hence, in Fagan, when the defendant seemed clear of mind and able to negotiate despite being drunk, the court ruled that the level of intoxication was not so great as to render him incompetent.
Similar to contracts with minors, the contract is valid until someone tries to render it void. To do so, all benefits must be returned to the original parties, and depreciation must be compensated. With all that said, if one party suspects or knows of the other’s mental incompetence and attempts to take advantage of it, we do not consider a contract to have been formed, because there is not even the bare appearance of a meeting of the minds. Olshen v. Kaufman, 385 P2d 161 (Or. 1963).