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Legal Capacity to Contract

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Presentation on theme: "Legal Capacity to Contract"— Presentation transcript:

1 Legal Capacity to Contract
Chapter 9

2 What is Capacity? Capacity—the ability to understand the consequences of a contract Does not require that a person understand the actual terms of the contract which may be written in technical legal terminology Does not require that a person have merely the understanding of the terms

3 Persons who lack capacity
Minors Under the age of majority (18 in most states) Intoxicated persons Mentally incapacitated persons

4 Protections for those that lack capacity
Disaffirmance Refusal to be bound by a previous legal commitment By law the protected party is to receive back whatever they put into the contract The other party may or may not get back their consideration Example: Protected party bought a 4-wheeler from a dealership and then wrecked it. He or she can disaffirm the contract and recover any payments made. The dealership would only be able to recover the damaged ATV

5 Protections for those that lack capacity
Necessaries Protected parties who contract for necessaries— things needed to maintain life--food, clothing, and shelter—must at least pay a reasonable value for the necessaries even if they disaffirm the actual purchase contract Example: If a minor purchased a fur coat for $5,000, she could disaffirm the contract. She would still be required to pay the cost of a good cloth coat ($200, a reasonable price) for the fur if she chose to keep it. The price may seem unfair, but in the eyes of the law, receiving only $200 serves as punishment for contracting with a minor

6 Minors Minors’ contracts are considered voidable
Minors may disaffirm contracts during their minority Minors may also disaffirm contracts within a reasonable time after achieving their majority After the age of majority, the power to disaffirm is immediately cut off if the person ratifies a contract Ratification—acting toward the contract as though one intends to be bound by it Ratification CAN NEVER occur before the age of majority

7 minors Minors can also be bound to a contract if they are emancipated
Emancipation—severing of the child-parent relationship Ends the duty to support a child and the duty of the child to obey the parent Minors are naturally emancipated at the age of majority Minors can be emancipated formally (through the courts) or informally: Parent and minor agree that the parent will cease support Minor marries Minor moves out of the family home Minor becomes a member of the armed forces Minor gives birth Minor undertakes a full-time job

8 Mentally incapacitated
Mental Incapacitation—a person lacks the ability to understand the consequences of his/her contractual acts Mental illness Severe mental retardation Severe senility If a judge rules a person permanently insane

9 intoxicated Intoxication—alcohol, drug, or inhalant produced
Courts often refer to the same definition of incapacity as for the mentally impaired Can the person understand the consequences of their contractual acts Most courts are reluctant to consider an intoxicated party’s contracts voidable Allow for diaffirmance for the intoxication even thought it may injure an innocent party Disaffirmance only allowed for those who are so intoxicated that they don’t know they are contracting Stricter standard used because intoxication is a voluntary act If a judge rules someone is in a permanent state of alcoholism, that person’s contracts are considered void

10 Who has contractual capacity in organizations?
Scope of Authority Within the range of acts the organization has authorized a person to do Persons with a scope of authority have the capacity to bind the organizations to contracts Capacity to contract can also be created by: An employer telling an employee that they are authorized to bind the organization When the organization leads others to believe that a person has certain authority Purchasing agent

11 When can disaffirmance occur?
A person lacking contractual capacity can disaffirm a contract for necessaries or goods that are not necessaries: Any time while still under the incapacity Within a reasonable amount of time after attaining capacity After attaining capacity a person may ratify the contract made while under incapacity Giving a new promise to performs as agreed Any act that clearly indicates the party’s intention to be bound (making payments to the seller)

12 What must be done upon disaffirmance?
In all states, when a minor disaffirms, anything of value the minor received and still has must be returned—the minor is then entitled to get back everything that was given to the other party This is true even if a minor returns used or damaged goods This is true even if a minor returns nothing because the goods have been lost, consumed, or destroyed

13 What must be done upon disaffirmance?
Loss of Value In most states, if minors are unable to return exactly what was received under the contract, they can still get back everything they gave In some states, however, a minor must return everything received in a condition as good as it was when it was received—if this cannot be done, the minor must pay the difference in value or deduct the difference from the amount to be refunded Obligations of Party with Capacity The party with capacity can neither enforce nor avoid all or any part of a contract for goods or services that are not necessaries against a party lacking capacity

14 Contracts that cannot be disaffirmed
Court Approved Contracts Minors who are employed as actors/actresses or as professionals in sports Major Commitments Contracts to enlist in the armed forces and contracts for educational loans Marriage contracts Banking Contracts Minors are permitted to make deposits in and withdrawals from banks and savings and loan associations

15 Contracts that cannot be disaffirmed
Insurance Contracts More than ½ of states provide that minors who are over a certain age may not disaffirm certain contracts of life insurance Work-Related Contracts In most states, minors who engage in a business or trade cannot disaffirm agreements involving their business Sale of Realty In some states, a minor who owns real property and sells it or borrows money against it cannot disaffirm until after achieving majority Apartment Rental In a few states, the lease of an apartment cannot be disaffirmed even if the apartment is not a necessary

16 Contractual effect of misrepresenting age
In most states, minors who lie about their age may nevertheless disaffirm their contracts A minor may be held liable for the tort of false representation Minors are liable for their torts and delinquent or criminal conduct growing out of a contractual transaction Typically they still have a right to disaffirm their contracts The other party may collect from a minor any damages suffered because of the minor’s fraud even though the minor may be able to disaffirm the contract

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