1. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 9 Legal Capacity to Contract 9-1 9-1Contractual Capacity of Individuals and Organizations 9-2 9-2Limits on the Rights of Those Without Capacity

2. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 2 9-1Contractual Capacity of Individuals and Organizations GOALS Identify parties who lack contractual capacity Explain the role of capacity in organizations

3. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 3 WHAT IS CAPACITY? Protections for those who lack capacity 1.Minors 2.Those mentally incapacitated 3.The intoxicated

4. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 4 CHECKPOINT What three classifications of individuals lack contractual capacity?     

5. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capacity Contractual capacity is defined by the law to mean the ability to understand the consequences of a contract. Age of majority to contract is 18, a few states it is 19 and 21. Minority, or the state of being below the age of majority, end the day before the birthday of the age legally set as the age of majority. Chapter 9 SLIDE 5

6. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capacity Emancipation – is the severing of the child- parent relationship. Minors may find themselves bound to their contracts if they are emancipated Formal emancipation occurs when a court decrees the minor emancipated. Informal emancipation arises from the conduct of the minor and the parent Chapter 9 SLIDE 6

7. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evidence of Informal Emancipation The parent and minor agree that the parent will cease support. The minor marries The minor moves out of the family home The minor becomes a member of the armed forces The minor gives birth The minor undertakes full-time employment. (states differ greatly in their treatment of emancipated minors) Chapter 9 SLIDE 7

8. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 8 WHO HAS CONTRACTUAL CAPACITY IN ORGANIZATIONS? Scope of authority Employer grants authority to employee Assumption of authority based on job title

9. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What’s your verdict? Alexis, 15 was an avid television fan. Combining her Christmas money with the money she received form babysitting, she went to the local electronics store to buy boxed DVD collections of her favorite shows. At the store, a salesperson convinced her to instead buy a new flat-screen tv, capable of showing the upcoming episodes in 3-D. Chapter 9 SLIDE 9

10. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What’s your verdict? Having recently seen several movies in 3-D theaters, she readily agreed. The purchase took nearly all of her money. When she arrived home with the new TV, her brother was astonished and commented that it would be two or three years before 3-D shows were available from the local cable or television stations. Chapter 9 SLIDE 10

11. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What’s your verdict? Alexis realized she had made a bad mistake and wanted to get her money back Can Alexis get her money back? Chapter 9 SLIDE 11

12. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 12 CHECKPOINT What is the legal significance to a business of an employee’s scope of authority? When doing business with organizations, it is important to ensure that the person signing the contract has the scope and authority to bind the organization. People acting outside the scope of their authority generally are personally liable when the organization isn’t.     

13. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 13 9-2Limits on the Rights of Those Without Capacity GOALS Recognize the time frame during which a contract can be disaffirmed Identify contracts that cannot be disaffirmed Discuss the effects of misrepresentation of age on contractual responsibilities

14. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 14 WHEN CAN DISAFFIRMANCE OCCUR AND WHAT MUST BE DONE AT THAT TIME? Any time while still under the incapacity Within a reasonable time after attaining capacity Disaffirmance – means a refusal to be bound by a previous legal commitment. Generally, a person lacking contractual capacity can disaffirm a contract for goods and services that are not necessities. Any time while still under the incapacity OR Within a reasonable time after attaining capacity.

15. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. WHEN CAN DISAFFIRMANCE OCCUR AND WHAT MUST BE DONE AT THAT TIME? Ratification – is action by the party indicating intent to be bound by the contract. For a minor, ratification must occur after achieving majority. Ratification may consist of either of the following: Giving a new promise to perform as agreed OR Any act (such as making payments to the seller) that clearly indicates the party’s intention to be bound Chapter 9 SLIDE 15

16. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 16 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. This is true even if a minor returns used or damage goods. It is also true even if a minor returns nothing because the goods have been lost, consumed or destroyed.

17. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. WHAT MUST BE DONE UPON DISAFFIRMANCE? Obligations of party with capacity Not only can the party lacking capacity generally disaffirm contracts for goods and services that are not necessaries, but should he or she choose to, the party lacking capacity can enforce them against the party with capacity. Generally, the party with capacity can neither enforce against a party lacking capacity nor avoid on the basis of the other party’s lack of capacity all or any part of a contract for goods and services that are not necessities. Chapter 9 SLIDE 17

18. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 18 DISAFFIRMANCE TIMELINE

19. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 19 CHECKPOINT When can a person who lacks contractual capacity disaffirm a contract? Any time while still under the incapacity Within a reasonable time after attaining capacity     

20. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 20 CONTRACTS THAT CANNOT BE DISAFFIRMED Court-approved contracts – In all states minors cannot void any contracts approved for them by a court. Major commitments Armed Forces Marriage Educational Loans Banking contracts – most states, minors are permitted to make deposits in banks.

21. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CONTRACTS THAT CANNOT BE DISAFFIRMED Insurance contracts – more than one-half of the states provide that minors who are over a certain age may not disaffirm certain contracts of insurance. Work-related contracts – In most states minors who engage in a business or trade cannot disaffirm agreements involving their business Chapter 9 SLIDE 21

22. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CONTRACTS THAT CANNOT BE DISAFFIRMED Sale of realty – In some states, a minor who owns real property and sells it or borrows money against it cannot disaffirm until after reaching majority. Apartment rental – In a few states, the lease of an apartment cannot be disaffirmed even if the apartment is not necessary. Chapter 9 SLIDE 22

23. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 23 CHECKPOINT What contracts entered into by minors cannot be disaffirmed in any of the 50 states? Court-approved contracts Major commitments Banking contracts Insurance contracts Sale of realty Apartment rental     

24. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 24 CONTRACTUAL EFFECT OF MISREPRESENTING AGE Other party to the contract may collect damages Minor still may be able to disaffirm contract

25. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 25 CHECKPOINT If minors lie about their age, what happens in most states with regard to their ability to disaffirm contracts for goods and services that are not necessaries?     

26. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 26 PREVENT LEGAL DIFFICULTIES In making contracts... Always observe and remember factors about the other person indicating whether or not they have full contractual capacity. If you are dealing with a representative of a business, ask questions about the person’s ability to bind the organization in contract. Ask for identification for anyone who looks like they are within a decade of the age of majority. Continued on the next slide

27. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. IN THIS CASE Lamon, a minor, bought a diamond engagement ring and necklace for his fiancée, Mary. He paid for the items in weekly installments of $10. One day while still a minor, he and Mary quarreled. Mary returned the ring Mary refused to return the necklace Chapter 9 SLIDE 27

28. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. IN THIS CASE Mary was legally entitled to keep the necklace because it was an ordinary gift not connected with the proposed marriage. Lamon could return the ring to the jeweler and demand a refund of money he had paid for both pieces of jewelry Is Lamon entitled to the money he had paid on the ring? Chapter 9 SLIDE 28

29. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. YES In most states, he is even entitled to what he paid on the necklace, that is because he returned everything that was still in his possession. In some state, 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. In these states, Lamon could be unable to recover the price of the necklace. Chapter 9 SLIDE 29

30. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 30 PREVENT LEGAL DIFFICULTIES If the people you want to contract with have alcohol on their breath, watch for signs of drunkenness. If they display these symptoms and you still want to contract with them, be sure you have a witness or other proof of the fact that they know they are making a contract. Remember the other party in a transaction is seldom primarily concerned with your best interest and generally is not obligated to volunteer information about their capacity. Continued on the next slide

31. LAW for Business and Personal Use © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 SLIDE 31 PREVENT LEGAL DIFFICULTIES When contracting with the elderly, be certain that they can understand the consequences of any contract you enter into with them. If you are a minor, do not misrepresent your age. The consequences may hurt you more than not being allowed to contract.