CHAPTER 9 Legal Capacity to Contract

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CHAPTER 9Legal Capacity to Contract

• 9-1 Contractual Capacity of Individuals and
  Organizations
• 9-2 Limits on the Rights of Those Without Capacity

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9-1 Contractual Capacity of Individuals and
Organizations

• GOALS
• Identify parties who lack contractual capacity
• Explain the role of capacity in organizations

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FOCUS

• Have you ever tried to get out of a contract
  because you were young and inexperienced in the
  matter?
• Did you know that you had a legal right to
  disaffirm contracts made while you were still in
  your minority?

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Debate questions

• When John turned 16 he received a new car for a
  birthday present. The same month he responded to
  a magazine ad from a club offering his choice
  of 10 music CDs for only one penny. His response
  included his address and correct age. The ad
  noted that in return for this bargain, anyone who
  subscribed to it would have to buy one CD at full
  price for the next six months. The 10 CDs
  arrived and John ignored any further letters from
  the club. The next month, however, he received a
  CD and a bill of 23.99 from the club. John
  ignored the fill and filed the CD in the back of
  his CD stack. Over the next several months, John
  continued to receive a CD a month and a notice of
  an ever-increasing amount owed to the club.
  Finally, when the bill reached over 200, John
  talked to his dad about the situation. His dad,
  a lawyer, wrote a letter for John telling the
  club that the sender was canceling the contract
  and would send back any CDs previously received
  if the club would pay for postage. John signed
  the letter and sent it. The club didnt respond
  but the CDs and bills stopped coming.
• 1. Which party or parties has acted improperly
  in a legal sense? Explain

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Debate questions

• The law acts to protect the minor. John also
  could have demanded and would be legally entitled
  to receive his penny back. The law places the
  burden on the party contracting with the minor to
  effectuate (to do, cause, or accomplish
  something) the return of whatever goods are still
  available for such, in this case by supplying the
  return postage.

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What is Capacity?

• Contractual capacity is the ability to
  understand the consequences of a contact. (They
  possess the ability to understand)
• Does not mean that they understand the actual
  terms of the contract
• The law presumes that an adult has contractual
  capacity.

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Parties with Special contractual rights?

• Those who lack capacity are minors, the
  intoxicated and mentally incapacitated.
• Minors are defined as under the age of majority.
  (This is the age at which a person is entitled to
  the management of his or her own affairs.)
• Most states age of 18, Some are 19 or 21.
• Minor person who has not reached the age of
  majority.
• Minority ends the day before the birthday of
  the age set as the age of majority.

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Protection form those who lack Capacity?

• Disaffirmance a refusal to be bound by a
  previous legal commitment. (contracts are
  considered voidable)
• When a contract is disaffirmed the protected
  party is to receive back anything they put into
  the contract. The other party may or may not get
  back their consideration.

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Protection form those who lack Capacity?

• Most people would not then contract with these
  protected people therefore there is another
  protection.
• When protected parties purchase things classified
  as necessary things they are legally allowed to
  contract.
• When the Protected contract for necessary items
  they must pay a reasonable value even if they
  disaffirm the contract.
• Example

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Protection form those who lack Capacity?

• Example
• Susan, 16, purchased a fur coat for 5000. she
  could disaffirm the contract, however, she would
  still be req2uired to pay the cost of a good
  cloth coat (approx. 200) if she chose to keep
  the coat. Receiving only 200 for a 5000 coat
  is considered punishment for taking advantage of
  a minor.

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Minors

• Minors contracts are considered voidable. They
  may disaffirm for a reasonable length of time
  after achieving their majority.
• After the age of majority the ability to
  disaffirm stops immediately if the person
  ratifies the contract.
• Ratification acting toward the contract as
  thought one intends to be bound by it. (Cannot
  happen before age of majority).
• Emancipated minors may be bound by their
  contracts. (severing of a child-parent
  relationship)

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Emancipation

• Formal occurs when court decrees the minor
  emancipated.
• Informal arises from any of the following
• 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.
• Each state is different on how they treat
  emancipated minors.

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Mentally Incapacitated

• Less precisely defined
• a person lacks the ability to understand the
  consequences of his or her contractual acts.
• This includes people with severe mental illness,
  severe mental retardation or severe senility.
• Judge can rule that a person is permanently
  insane, therefore forever lacking capacity
• Rule surrounding necessaries apply to the
  mentally incapacitated.
• If a judge rules that you were insane when a
  contract was made then the contract is voidable

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The Intoxicated

• Drugs and alcohol.
• Courts usually only allow disaffirmance for
  intoxication for those who are so intoxicated
  they do not know they are contracting.
• Stricter standard for this because intoxication
  is a voluntary act.
• If a judge holds that a person is in a permanent
  state of alcoholism (unable to turn down drink or
  drug when offered), that persons contracts are
  considered void. In several states still referred
  to as habitual drunkard

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Question

• What three classifications of individuals lack
  contractual capacity?
• Minors, Mentally incapacitated and the
  intoxicated.

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Who has contractual capacity in organizations?

• Scope of authority within the range of acts the
  organization has authorized him or her to do.
• If someone has capacity it is said to be within
  their scope of authority.
• Capacity to Contract is created when
• The employer tells an employee that they are
  authorized to bind the organization.
• When the organization leads others to believe
  that a person has certain authority. (Such as job
  titles).
• A person acting outside the scope of their
  authority generally are personally liable when
  the organization isnt.

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Question

• In what two ways is capacity to contract on
  behalf of an organization created?
• Can come from a delegation of authority or from
  an aura of apparent authority created or allowed
  by the business.

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Cases

• Clare was age 17, a minor in her state, when she
  bought a weeks worth of groceries at the local
  supermarket. Later she discovered she spent too
  much money and was going to be over her weekly
  budget. So she took the groceries back and asked
  for her money back. If she sues, will she get
  her money back?
• No, Clare purchased necessaries so she cannot
  disaffirm.

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Cases

• Tanya, a minor, was the daughter of a
  construction worker. When se was 17, she bought
  an evening gown for 400.00 to wear to a school
  dance. After the dance, Tanya decided she didnt
  like the dress and returned it asking for the
  money back. Is she legally entitled to the
  money?
• Yes, the gown was probably not a necessary item
  for Tanya.

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Cases

• Janice had been drinking all afternoon before she
  whet into a used car lot. When signed a contract
  to purchase a two year old car for as much as it
  would cost for the same model new. She sought to
  disaffirm the contract based on intoxication. At
  the trial, she testified that, at the time of
  purchase, she knew she was buying a car but could
  not understand any of the terms of the contract.
  Will the court hold her to the terms of the
  contract?
• Yes. The only thing required to hold a person
  who is voluntarily intoxicated to a contract is a
  showing that they knew they were making a
  contract. The same hold true for marriage
  contracts.

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9-2 Limits 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

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FOCUS

• Explain the following quote from Benjamin
  Cardozo, Associate Justice of the U.S. Supreme
  Court, 19321938.Liberty of contract is not an
  absolute concept. It is relative to many
  conditions of time and place and circumstance.

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WHEN CAN DISAFFIRMANCE OF A CONTRACT OCCUR?

• Any time while still under the incapacity
• Within a reasonable time after attaining capacity

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AFTER ATTAINING CAPACITY

• A person may ratify the contract while under an
  incapacity.
• Ratification action by the party indicating
  intent to be bound by the contract.
• Giving a new promise to perform as agreed.
• any act that clearly indicated the partys
  intention to be bound. (Like making payment.)

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Question

• While still a minor, Beach bought a stereo system
  on credit from McReams Electonic 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.
• The two payments made after he reached majority
  would be considered a ratification of the
  contract. Therefore Beach cannot disaffirm.

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WHAT MUST BE DONE UPON DISAFFIRMANCE?

• 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.
• Loss of value In most states if minors are
  unable to return exactly what was received they
  can still get back everything. Even if it is used
  or damaged.
• In some states, however, it must be returned
  exactly in the same condition and if not the
  minor must pay the difference.
• Obligations of party with capacity usually this
  party cannot either enforce nor avoid all or any
  part of a contract for goods or services that are
  not necessaries against a party lacking capacity.

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DISAFFIRMANCE TIMELINE
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When can a person who lacks contractual capacity
disaffirm a contract?
Can occur anytime until capacity is gained or
regained. It also can occur during a reasonable
period of time beyond the attaining of capacity
to allow the person in question to review her or
his contracts to see which ones to ratify and
which to disaffirm.
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Question

• Upon graduation from high school, Robinson, age
  17, began a business doing electrical work. He
  bought 375 in tools from Muller. The venture
  was a disappointing failure. Discouraged after a
  month, Robinson asked Muller to take back the
  tools and to return his 375 payment.
• Robinson would not be able to avoid his contract
  if he lived in a state with a work-related
  contracts law.

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CONTRACTS THAT CANNOT BE DISAFFIRMED

• Most of these reasons vary from state to state,
  however, they were put into place because people
  would not contract with minors if they were not
  available.
• Court-approved contracts in all states minors
  cannot void these.
• Major commitments contracts to enlist in the
  armed services or for educational loans.
  Marriage contracts also.
• Banking contracts in most states permitted to
  make deposits and withdrawals.

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CONTRACTS THAT CANNOT BE DISAFFIRMED

• Insurance contracts in ½ states minors cannot
  disaffirm life insurance contracts.
• 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 if you sell or
  borrow against real estate it cannot be
  disaffirmed.
• Apartment rental in a few states a lease of an
  apartment cannot be disaffirmed even if the
  apartment is not necessary.

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Which contracts that cannot be disaffirmed apply
in all 50 states?
disaffirmance of court-approved contracts and
major commitments
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Question

• 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
  brothers drivers license as identification. He
  also used his brothers 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 his money?
• Ron is within his rights as a minor to
  disaffirming the contract. However, he also
  committed the tort of fraud. Therefore in most
  states the Casuals Shop probably could hold back
  form the refund an amount of money sufficient to
  cover the decrease in value of the wardrobe as
  returned. Or the store could hold back the full
  amount if nothing was returned. Ron could be
  held liable in damages for deceiving the seller.
  These damages could exceed the price of the goods
  he lied to get.

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CONTRACTUAL EFFECT OF MISREPRESENTING AGE

• The minor could be held liable for the tort of
  false representation.
• Party to the contract may collect damages
• Minor still may be able to disaffirm contract

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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?
Even if minors lie about their age, they still
may disaffirm their contracts for goods or
services that are not necessary.
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Question

• Richard bought car insurance while he was 16. He
  had a perfect driving record until he reached the
  age of majority, 21, in his state. The day after
  his birthday, Richard disaffirmed the insurance
  contract and asked for the return of his
  payments. In most states would he be legally
  entitled to the money?
• No, in most states, insurance contracts cannot be
  disaffirmed by a minor.

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Question

• Linda subscribed to a Book of the Month program
  on her sixteenth birthday. She received monthly
  books from the publisher until her twenty-first
  birthday. She continued receiving books for
  another six months, and then attempted to
  disaffirm. Will she succeed?
• No, Lindas conduct in accepting the books for
  six months is probably ratification which
  eliminates her right to disaffirm.

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Question

• In Juans state, the age of majority is 21.
  Three weeks after his eighteenth birthday. Juan
  joined the Marine Corp. After two weeks of boot
  camp, he decided he didnt like the lifestyle.
  He told the Marines he was disaffirming his
  contract to join. Will he succeed?
• No, contracts to enlist in the armed forces
  cannot be disaffirmed by a minor.

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Question

• Beverly was 14 when she bought a used motorcycle
  that wouldnt run. Beverly made repairs and got
  it going. She rode it illegally for more than
  six months. Then a leak developed in a gas line
  and the bike caught fire. it was a total loss.
  Beverly returned the burned-out motorcycle to the
  seller and asked for all her money back. Will
  she succeed?
• Yes, on disaffirmance, the minor is generally
  obligated only to return that much of the
  consideration as she possess (here the burned-out
  motorcycle)