Chapter 9Legal Capacity to Contract

9-1 OBJECTIVES

1. Identify parties who lack contractual capacity2. Explain the role of capacity in organizations

What is Capacity?

• Some people lack maturity and control to protect themselves in a contract situation

• Contractual capacity – the ability to understand the consequences of a contract

• Certain 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 inhalants– The mentally impaired, or mental incapacity – a person lacks the

ability to understand the consequences of his/her contracts

• These parties are said to be incapacitated

What is Capacity?

• Minor – a person who has not yet reached the age of majority

• Minority – state of being below the age of majority• You actually reach the age of majority the DAY

BEFORE your 19th birthday (or the age set as the age of majority)

Read GLOBAL ISSUES on p157

• What 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?

What is Capacity?

• The contracts of most parties who lack capacity are considered voidable

• You may disaffirm the contract. Disaffirmance – a refusal to be bound by a previous legal commitment– The 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 it

• Contracts for necessaries cannot be cancelled without paying reasonable value for the items……see next slide

What is Capacity?

• Necessaries – things needed to maintain life– Food– Clothing– Shelter

• This does NOT include non-necessaries!– Computer– Jewelry– iPod

• If a protected person contracts then changes their mind, they still need to pay a reasonable value for item

• EX: 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.

What is Capacity?

• BEWARE ! Minors can find themselves bound to their contracts if they are emancipated

• Emancipation – ending the child-parent relationship• This ends the duty of the parent to support a child and

the duty of the child to obey the parent• A minor naturally becomes emancipated upon reaching

the age of majority• Formal emancipation occurs when a court decrees it

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 child– The minor marries or moves out on their own– The minor becomes a member of the armed forces– The minor gives birth– The minor undertakes full-time employment instead

of attending school

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 contracts

• If 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 do

• People 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

9-1 Assessment

Answer questions #1-8

9-2 OBJECTIVES

1. Recognize the time frame during which a contract can be disaffirmed

2. Identify contracts that cannot be disaffirmed3. Discuss the effects of misrepresentation of age on

contractual responsibilities

Disaffirming a Contract

• A person lacking contractual capacity who wants to disaffirm (cancel) a contract must do so:1. Anytime while still under the incapacity (while still a minor)

OR2. Within a reasonable time after attaining capacity (becoming

legal age)

• Disaffirmance – a refusal to be bound by a previous legal commitment

• After 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

Contracts that Cannot be Disaffirmed by Minors

• There are some contracts of minors that are not necessaries that cannot be disaffirmed, these vary by state – Court-approved contracts – EX: actors have their

contracts approved by a court and cannot change– Major commitments – entering the armed forces or

education loans– Banking contracts-may make withdrawals and

deposits– Insurance contracts-minors over a certain age may

not disaffirm life insurance contracts

– 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)

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 representation

• Minors are liable for their torts and delinquent or criminal conduct coming out of a contractual transaction

9-2 Assessment

Answer questions #1-8

Additional Assignments

• Chapter 9 Assessment: #1-11 (write definition and answer) & 20-21

• Attached worksheets