CHAPTER 4: LEGALITY, FORMALITIES, & CAPACITY Emond Montgomery Publications 1

Chapter 4: Legality, Formalities, & Capacity Learning Outcomes List at least three illegal purposes that can affect the validity of a contract. Explain the difference between an unlawful and an illegal contract, and describe the impact on the remedy available to the parties in the event of a breach. Describe the difference between a simple contract and a formal contract. Describe at least two contract “formalities” and understand how to comply with a requirement for formalities. Emond Montgomery Publications 2

Chapter 4: Legality, Formalities, & Capacity Learning Outcomes (cont’d) Understand why the law requires that contract parties have capacity. Explain at least three factors that may limit a party’s capacity. Understand the legal status of a minor’s contract. Emond Montgomery Publications 3

Introduction A valid contract requires: 1. That the parties had an intention to be legally bound 2. That one party made an offer that the other accepted 3. That there was an exchange of consideration AND … Legality, formality, and capacity Emond Montgomery Publications 4

Legality A contract must have a legal purpose The contract cannot violate any statute The contract cannot violate public policy Contract with an unlawful purpose will be declared void, illegal, or both, but court may award some remedy Contract with unlawful purpose and that is illegal will be deemed void with no remedy Emond Montgomery Publications 5

Legality (cont’d) CONTRACTS THAT VIOLATE STATUTE LAW Wording of the relevant statute will indicate whether a contract that violates a statute is void, or void & illegal 1. Contracts that provide for the performance of prohibited activities are void and illegal Example: agreement to commit murder 2. Contracts that are prohibited agreements are void but not necessarily illegal Example: agreement for the purpose of restricting trade 3. Contracts that do not comply with statutory requirements of certain activities are void but not illegal Example: agreement with an employee not to make a workplace injury claim Emond Montgomery Publications 6

Legality (cont’d) CONTRACTS THAT VIOLATE PUBLIC POLICY Are void and may be illegal Types of contracts that violate public policy include: Contracts that interfere with the administration of justice Contracts that injure the public service Contracts that promote unnecessary litigation Contracts that suppress evidence of crime Contracts involving an agreement to commit a dishonest/immoral act Business contracts containing restrictive covenants Emond Montgomery Publications 7

Legality (cont’d) RESTITUTION: A MODERN APPROACH TO LEGALITY ISSUES Recent court decisions have used the law of restitution to remedy some situations where a contract is considered illegal Under this approach the court will attempt to put a party back in the position he should have been in had the contract not been illegal Restitution has been permitted where: 1. A contract is illegal and granting relief is clearing NOT contrary to public interest, or 2. A party acted in good faith or in justifiable ignorance of whether the contract was legal or illegal Emond Montgomery Publications 8

Form and Writing Requirements FORMAL AND SIMPLE CONTRACTS Contracts can be classified as either: 1. Formal — a contract in writing and sealed by the promisor 2. Simple — not a formal contract (may be oral or in writing) Emond Montgomery Publications 9

Form and Writing Requirements (cont’d) THE STATUTE OF FRAUDS Enacted in 1677 in England to deal with fraudulent claims involving long-term leases and land rights Adopted in Canada and the US during colonial period The Statute of Frauds requires that certain contracts be in writing and signed by the parties Emond Montgomery Publications 10

Form and Writing Requirements (cont’d) THE STATUTE OF FRAUDS (cont’d) The Ontario Statute of Frauds requires that the following types of contracts be signed and in writing: Contracts by a trustee of an estate to pay estate debts Contracts to assume the liabilities of another Contracts for the sale of land or that affect any interest in land Contracts made after attaining the age of majority to ratify debt obligations incurred as a minor Emond Montgomery Publications 11

Form and Writing Requirements (cont’d) TECHNICAL REQUIREMENTS FOR WRITTEN CONTRACTS All written agreements should: Identify the parties to the contract Identify the terms of the contract Be signed by the party whose promise is being enforced Include a printed or stamped signature Emond Montgomery Publications 12

Protecting Weaker Parties Courts have generally taken a “hands-off” approach when interpreting contracts However, the courts will sometimes intervene where parties are clearly unable to protect themselves in the bargaining process Example: one party lacks intellectual capacity, one party acts dishonestly during the bargaining process, etc. Emond Montgomery Publications 13

LEGAL CAPACITY TO CONTRACT Some persons, as a result of their status, are presumed not to have the ability to enter into contracts Two classes of person who lack or have limited capacity to contract are: 1. Minors 2. Persons under mental disability Emond Montgomery Publications 14

MINORS General Rule: contracts with minors are not enforceable against a minor Rationale: minors are presumed to be naïve, inexperienced, and easily taken advantage of At common law, a minor is an individual who is under 21 years of age, however statutes have replaced the common law Example: in Ontario the age of majority is now 18 for the purposes of entering into contracts Emond Montgomery Publications 15

Minors (cont’d) CONTRACTING RIGHTS AND OBLIGATIONS GENERALLY Exception to the general rule: contracts for “necessaries of life” are enforceable, but other contracts are not if the minor repudiates them Contracts by minors that are not for necessaries of life are either void ab initio or voidable at the option of the minor Void ab initio: invalid from the beginning Voidable: declared void at the option of one party to the contract Emond Montgomery Publications 16

Minors (cont’d) ENFORCEABLE CONTRACTS: PURCHASE OF NECESSARIES A minor is liable to pay a reasonable price for goods that are necessaries and that have been sold and delivered to a minor (Ontario Sale of Goods Act) “Necessaries of life” is contextual and depends on the minor’s social and economic class The law will not make a minor pay more than a reasonable price Emond Montgomery Publications 17

Minors (con’t) CONTRACTS FOR NON-NECESSARIES Contracts for non-necessaries are always enforceable by the minor However: If the contract has been been executed the minor may avoid the contract If the contract has been fully executed the contract cannot be set aside BUT the minor may be able to receive a refund If the contract is ongoing the minor can repudiate future liability Emond Montgomery Publications 18

Minors (cont’d) EFFECT OF REACHING THE AGE OF MAJORITY ON MINORS’ CONTRACTS Contracts for necessaries remain valid Contracts for non-necessaries involving an ongoing benefit are valid unless repudiated by the minor Contracts for non-necessaries involving a one-time benefit are invalid unless ratified by the minor Emond Montgomery Publications 19

Minors (cont’d) VOIDABLE ONGOING BENEFIT CONTRACTS FOR NON-NECESSARIES: VALID UNLESS REPUDIATED The consequences of repudiation by a minor are: Contract is enforceable and effective until it is repudiated The minor, upon repudiating the contract, is relieved any obligations under the contract Money paid by the minor before repudiation may not be recoverable The minor may recover property after repudiation is the goods can be restored to the minor Emond Montgomery Publications 20

Minors (cont’d) VOIDABLE ONE-TIME BENEFIT CONTRACTS FOR NON-NECESSARIES: VOID UNLESS RATIFIED Consequences for invalidation through a minor’s failure to ratify: Prior to validation, the minor can enforce the contract against the adult but not vice versa A third party cannot rely on the invalidity of the contract to escape liability If the minor does not ratify she is not liable for future accrued liabilities under the contract If the minor does not ratify, money can be recovered If the minor does not ratify, she must return any goods acquired Emond Montgomery Publications 21

Minors (cont’d) VOID CONTRACTS Consequences of void minor’s contracts The minor is entitled, not being bound, to have all of his money or property returned The adult need not be restored to his pre-contract position Emond Montgomery Publications 22

Minors (cont’d) LAW AFFECTING MINORS IN BRITISH COLUMBIA In BC a minor’s contract is unenforceable against the minor unless one of the following conditions is met: 1. The contract is enforceable under some statute 2. The minor validates the contract on attaining the age of majority 3. The minor wholly or partly performs the contract shortly after attaining the age of majority 4. The contract is not repudiated by the minor within a year of having attained the age of majority Emond Montgomery Publications 23

Capacity of Parties Under Impairment and Persons Under Mental Disability to Contract DRUNKENNESS An intoxicated party may void a contract on the basis of his own intoxication when: 1. He did not know what he was doing as a result of intoxication 2. The sober party was “aware” of his intoxicated state/the intoxicated state can be presumed 3. Upon becoming sober, he promptly repudiated the contract This approach is based on the belief that the sober party may defraud the intoxicated party Emond Montgomery Publications 24

Capacity of Parties Under Impairment and Persons Under Mental Disability (cont’d) MENTAL DISABILITY Some types of mental disability may be sufficient to allow a person to repudiate a contract The individual, as a result of a mental disability, must be unable to manage their own affairs or unable to appreciate the nature and consequences of their actions The courts will look at the following factors when deciding whether to enforce the contract: Knowledge Fairness Emond Montgomery Publications 25