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Law for Business and Personal Use © South-Western PublishingLaw for Business and Personal Use © South-Western Publishing

G O A L S

Capacity RightsCapacity Rights

Identify parties who have contractual capacityIdentify what contracts can be disaffirmedExplain the role of capacity in organizations

LESSON 9-1LESSON 9-1


WHAT IS CAPACITY?WHAT IS CAPACITY?

Contractual capacity is the ability to understand that a contract is being made and its general meaning.

Minors, mentally incapacitated, intoxicated persons lack “contractual capacity”.


Under the age of majority – minors are classified under this term.

The age of majority is 18 in most states. In a few states it is 19 or 21.


WHAT’S YOUR VERDICT?WHAT’S YOUR VERDICT?

Susan, age 16, walked into a fur shop out of curiosity and became enthralled with the idea of owning a fur jacket. A persuasive sales lady told her she would be able to use it for the rest of her life and that it was a good investment. Her aunt had recently died and willed her enough for the jacket. A week later, she realized that at this time in her life she didn’t have a use for a fur jacket.

Can Susan get her money back?


Protection for Those Who Protection for Those Who Lack CapacityLack Capacity

The primary protection granted to those who lack contractual capacity is disaffirmance – Disaffirmance means a refusal to be bound

by a previous legal commitment.Suppose a protected party purchased a 4 ATV

for a dealership and wrecked it. The party could disaffirm the contract and recover payments. The dealership could only recover damages to the ATV


The problem in given certain parties, the legal ability to disaffirm is that no one wants to contract with them.

When protected parties purchase things classified as necessaries – things needed to maintain life- (food, shelter…) they must pay a reasonable value for the necessaries even if they disaffirm the actual purchase contract.


MinorsMinorsConsidered voidableAfter the age of majority the contract can

still be disaffirmed in a reasonable time period.

After the age of majority the power to disaffirm is cut off if the person ratifies the contract, or acts as they intend to be bound by the contract – commonly called ratification


MinorsMinors

Can be bound if they are emancipated – or severing the parent – child relationship.Can occur formally or informally –

Formal is when the court declares itInformal is a result of the conduct of the parent

and child. Parent and child agree to cease supportMinor marries


Minors ContinuedMinors Continued

Minor moves out of the family homeMinor becomes a member of the armed forcesMinor gives birthMinor undertakes full-time employment

States differ greatly in their treatment of emancipated minors.



Emily was 88 years old when she contracted to sell her family home to her daughter Gail for about 15% of its value. At the time, she was suffering from advanced Alzheimer’s disease. Two months later Emily died. Her will provided for all her property to be split equally among her four children. The other children sued to have the deed set aside because Emily lacked the mental capacity to contract.

What will be the court decision? Why?



Against their parent’s wishes Garcia and Wesley—both minors—left home. Together they signed a 12-month lease to rent a nearby-furnished apartment from Krohn at the bargain price of $350 a month. After three months, the teenagers ran out of money and returned to their homes. Krohn could not find new tenants.

Could Krohn hold the minors liable for the rent? Is the apartment a necessity or not? Why or why not?


MENTAL INCAPACITYMENTAL INCAPACITY

Mental incapacity is much less precisely defined than minority.

The test is whether the party understands the consequences of his or her contractual acts.

If a judge rules that a person is insane then they have complete lack of capacity. If so, all contracts are void whether for necessaries or non-necessaries.


INTOXICATIONINTOXICATION

Intoxication can arise from using alcohol, from using drugs, or inhaling products such as glue or aerosols.

Many courts are reluctant to allow disaffirmance for intoxication when it may injure another.

This is a stricter standard because intoxication is a voluntary act.


CAPACITY IN CAPACITY IN ORGANIZATIONSORGANIZATIONS

Some people who work for organizations have the capacity (scope of authority) to bind the organizations to contracts.

Capacity to contract can be created when the employer tells an employee that he or she is authorized to bind the organization.

Capacity to contract can be created when an organization leads others to believe that a person has certain authority.

People acting outside their scope of authority may be held personally liable when the organization is not.


WHICH CONTRACTS WHICH CONTRACTS CAN BE DISAFFIRMED?CAN BE DISAFFIRMED?

Necessaries are goods and services that are reasonably required to maintain a person’s lifestyle.

Non-necessaries are all other goods and services or relative luxuries.


G O A L S

Limits on Rights of Limits on Rights of Those Without Those Without CapacityCapacity

Identify the time when a contract cannot be disaffirmed

Identify contacts that cannot be disaffirmedExplain the consequences of misrepresenting

age

LESSON 9-2LESSON 9-2


TIME OF DISAFFIRMANCETIME OF DISAFFIRMANCE

Any time while still under the incapacityWithin a reasonable time after attaining

capacity



While still a minor, Beach bought a stereo sound system on credit from McReam’s Electronic Cloud for $500. Beach paid $100 down and promised to pay$50 a month on the unpaid balance until the debt was paid. After making four payments, two of which were made after he reached the age of majority, Beach decided to disaffirm the contract and return the equipment.

Can Beach do this?What ramifications can McReam’s Electronic Cloud

expect?


RATIFICATIONRATIFICATION

Ratification may consist of either of the following

Giving a new promise to perform as agreed

Any act that clearly indicates the party’s intention to be bound


What Must Be Done Upon What Must Be Done Upon Disaffirmance?Disaffirmance?Anything of value that the minor received or

has must be returnedLoss of value – even if the minor can’t

return what was received or it is damaged, they can still get back everything they paid in.

Some states however, everything must be returned as it was received or the minor is responsible for the loss of value.


Obligations of party with Obligations of party with capacitycapacity

The party with capacity can neither avoid all or any part of a contract for non-necessaries with the party lacking capacity. The lacking party can enforce the contraction on the party with capacity.


WHAT CONTRACTS WHAT CONTRACTS CANNOT BE DISAFFIRMED?CANNOT BE DISAFFIRMED?Court-approved contracts – if a contract is

approved by court they cannot be disaffirmed

Major commitments – ex. Enlist in the armed services and educational loans. Marriage contract for minors cannot be disaffirmed.

Banking contracts – Apartment rental – in a few states the lease of

an apartment cannot be disaffirmed, even if it not a necessary


Insurance contracts – over one-half of states provide that minors who are over a certain age cannot disaffirm life insurance contract

Work-related contracts – minors cannot disaffirm contracts related to working in a business or organization

Sale of realty – some states a minor cannot disaffirm until reaching the age of majority


MISREPRESENTING MISREPRESENTING YOUR AGEYOUR AGE

In most states minors who lie about their age may disaffirm their contracts.

In these states, a minor who gives a false age may be held liable for the tort of false representation



Ron, a mature-looking minor, lied about his age when he bought an extensive wardrobe of clothing from the Casuals Shop. Ron showed his older brother’s driver’s license as identification. He also used his brother’s name on the installment contract. By October, Ron had paid $325 on the $785 contract. He then became bored with the wardrobe and returned it to the store and demanded the return of all payments.

Must the store return the money?

chap10

Health & Medicine

mental capacity

role of capacity

age of majority minors

contract law

complete lack of capacity

afterthe age of majority

actual purchase contract

contractual acts