People who are intoxicated often make bad decisions, including signing contracts they may regret when the hangover kicks in. Can they simply claim intoxication and get out of the deal? The short answer: maybe.
One of the four essential elements to the existence of a contract is the capacity of all parties to enter into the contract. Under California law, a “person entirely without understanding” has no capacity to contract. See CC §§38–41. A contract entered into by someone entirely without understanding is void, not merely voidable. Gibson v Westoby (1953) 115 CA2d 273, 276. By contrast, a contract entered into by someone “of unsound mind, but not entirely without understanding” before being adjudged an incompetent is voidable and subject to rescission and return of consideration. CC §39.
Intoxication resulting from the use of alcohol or drugs is a special form of mental incapacity. Historically, courts haven’t looked favorably on claims of intoxication as a defense to contract enforcement, viewing this conduct as a form of voluntary disablement by the affected party that carries with it an assumption of the risk. See Swan v Talbot (1907) 152 C 142, 145.
But courts may refuse to enforce contracts entered into by intoxicated persons as a matter of equity when the consideration given by the other party is grossly inadequate, or may hold that contracts made by intoxicated persons are voidable (not void) on a constructive fraud theory when the other party knew the first party was incapacitated and deliberately procured the contact. As the California Supreme Court stated in Guidici v Guidici (1935) 2 C2d 497, 501:
The rule that the person alleging his incapacity should be bound by his contract because intoxication is his voluntary act was at first relaxed by allowing him to show that his condition was brought about by the other party. But a more rational view now prevails. The law now regards the fact of intoxication and not the cause of it, and regards that fact as affording proof of want of mental capacity.
The Restatement (Second) of Contracts §16 (1981) states that a voidable contract occurs if someone enters into transaction and has reason to know that, because of intoxication, other party is (1) unable to reasonably understand nature and consequences of transaction, or (2) unable to act reasonably in relation to transaction.
If a client comes to you with contract remorse after a drunken deal, your best bet is to focus on whether and how the other party took advantage of the situation. And be sure that your client doesn’t ratify the contract at issue—when a previously intoxicated person has returned to sobriety and ratifies the contract, it’s rendered enforceable.
Get up to speed on all the aspects of capacity to contract in CEB’s California Law of Contracts, chap 2.
Other CEBblog™ you may find useful:
- How to Keep Contracts Out of Court (Part 1)
- Illegal Contracts Are Enforceable. Sometimes.
- When You Can and Can’t E-Sign
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