2 9-1 Objectives Identify parties who lack contractual capacity Explain the role of capacity in organizations
3 What is Capacity? These parties are said to be incapacitated Some people lack maturity and control to protect themselves in a contract situationContractual capacity – the ability to understand the consequences of a contractCertain parties to a contract have special contractual rights due to lack of such capacity:Age of Majority to contract (age you are allowed to manage yourself)The intoxicated, or intoxication - impaired by use of alcohol, drugs, or inhalantsThe mentally impaired, or mental incapacity – a person lacks the ability to understand the consequences of his/her contractsThese parties are said to be incapacitated
4 What is Capacity?Minor – a person who has not yet reached the age of majorityMinority – state of being below the age of majorityYou actually reach the age of majority the DAY BEFORE your 19th birthday (or the age set as the age of majority)
5 Read GLOBAL ISSUES on p157What is the age a child in Bangladesh can leave school on their own vs the U.S.?What is the minimum age for employment in Armenia?How old does a Japanese female need to be to marry vs male in India?
6 What is Capacity?The contracts of most parties who lack capacity are considered voidableYou may disaffirm the contract. Disaffirmance – a refusal to be bound by a previous legal commitmentThe protected party (minor, intoxicated person, etc.) will receive back whatever they put into the contract.The problem with disaffirmance is that no one will want to contract with minors in the future because they can always get out of itContracts for necessaries cannot be cancelled without paying reasonable value for the items……see next slide
7 What is Capacity?Necessaries – things needed to maintain lifeFoodClothingShelterThis does NOT include non-necessaries!ComputerJewelryiPodIf a protected person contracts then changes their mind, they still need to pay a reasonable value for itemEX: If a minor purchased a fur coat for $5,000 , she could disaffirm the contract BUT is required to pay the cost of a good cloth coat, let’s say $200, if she chose to keep it.
8 What is Capacity?BEWARE ! Minors can find themselves bound to their contracts if they are emancipatedEmancipation – ending the child-parent relationshipThis ends the duty of the parent to support a child and the duty of the child to obey the parentA minor naturally becomes emancipated upon reaching the age of majorityFormal emancipation occurs when a court decrees it
9 What is Capacity?Informal emancipation can arise from the conduct of the minor and parent:The parent and minor agree that the parent will stop supporting the childThe minor marries or moves out on their ownThe minor becomes a member of the armed forcesThe minor gives birthThe minor undertakes full-time employment instead of attending school
10 Who Has Contractual Capacity in Organizations? Some people who work for businesses or other types of organizations have the capacity/ability to bind the organizations to contractsIf someone has this capacity, it is said to be within his/her scope of authority – within the range of authorized contractual acts he/she has been given permission to doPeople acting outside the scope of their authority generally are personally liable when the organization isn’tEX: A shoe salesman can’t enter into a contract with NIKE to purchase $10,000 in shoes over the next year
12 9-2 ObjectivesRecognize the time frame during which a contract can be disaffirmedIdentify contracts that cannot be disaffirmedDiscuss the effects of misrepresentation of age on contractual responsibilities
13 Disaffirming a Contract A person lacking contractual capacity who wants to disaffirm (cancel) a contract must do so:Anytime while still under the incapacity (while still a minor) ORWithin a reasonable time after attaining capacity (becoming legal age)Disaffirmance – a refusal to be bound by a previous legal commitmentAfter attaining capacity, a person may ratify (action by party showing intent to be bound by contract) the contract made while under an incapacityEX: Giving a new promise or an act, such as making pmts to seller on time
14 Contracts that Cannot be Disaffirmed by Minors There are some contracts of minors that are not necessaries that cannot be disaffirmed, these vary by stateCourt-approved contracts – EX: actors have their contracts approved by a court and cannot changeMajor commitments – entering the armed forces or education loansBanking contracts-may make withdrawals and depositsInsurance contracts-minors over a certain age may not disaffirm life insurance contracts
15 Work-related contracts (minors who engage in business cannot disaffirm agreements involving their business)Sale of Realty (a minor who owns real estate and sells it cannot disaffirm until after they reach legal age)Apartment rental (the lease of an apartment cannot be disaffirmed if you are a minor)
16 Contractual Effect of Misrepresenting Age Minors have been known to misrepresent their ages……..NEVER A minor who gives a false age on purpose may be held liable for the tort of false representationMinors are liable for their torts and delinquent or criminal conduct coming out of a contractual transaction