Legal Capacity to Contract. What is Capacity Contractual Capacity – Ability to understand the...

BUSINESS LAW: CH 9

Legal Capacity to Contract

What is Capacity

Contractual Capacity – Ability to understand the consequences of a contractDoes not require that a person understand

the actual terms of the contract

Lack Some Capacity

Three groups lacking some capacity

1. Minors

2. Intoxicated

3. Mentally Impaired

Minors

Minors – Under the age of majorityIn Ohio the age of majority is 18Ends the day before the birthday of

the age

Protecting those lacking capacity Contracts of those lacking capacity are

voidableDisaffirmance – Protection granted to those

lacking capacity○ In contract law it means a refusal to be bound

by a previous legal commitment○ When a protected party disaffirms a contract,

by law the protected party is to receive whatever they have put into the contract

- The other party may or may not get back their consideration

Disaffirm

Example – A protected party bought a four-wheel ATV from a dealership and then wrecked it. You can disaffirm the contract and recover any payments made.The dealership would only be able to

recover the damaged ATV

Necessities

Necessities – things needed to maintain lifeThe protected must at least pay a

reasonable value for the necessities even if they disaffirm the actual purchase contract

Minors

Contracts are considered voidable (may get out of)

May also disaffirm for a reasonable length of time after achieving the age of majority.

After majority, the power to disaffirm is immediately cut off if you ratify the contract

Minors also may find themselves bound to their contract if they are Emancipated

Emancipated

Emancipated – Severing the parent-child relationshipEnds the duty of the parent to support a

child and the duty of the child to obey their parent

Upon reaching the age of majority you are emancipated

Emancipated

Formal emancipationCourt decrees the minor emancipated

Informal emancipatedArises from the conduct of the parent and

minor

Informal Emancipated

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

Mentally Incapacitated

Mentally Incapacitated - A person lacks the ability to understand the consequences of his or her contract

If permanently Insane – Contract is Void Temporary Insane – Contract is Voidable

Intoxicated

Does the person have the ability to understand the consequences

Courts typically allow disaffirmance only for those who are so temporarily intoxicated that they do not even know they are contractingStricter because intoxication is a voluntary act

If a person is in a permanent state of intoxication – Contract is void

Who has contractual capacity in organizations Scope of Authority – has capacity to

contract People acting outside the scope of

authority, are personally liable when the organization isn’t

9-1 Assessment

Turn to page 161 and complete the 9-1 Assessment Questions

9-1 Assessment

1. False

2. True

3. B

4. B

5. False

6. True

9-1 Assessment

7. Probably not. Clare purchased necessaries so she cannot disaffirm. If she paid more than the reasonable value, she would receive the excess back.

8. No. Courts do allow a reasonable period of time after entering majority to evaluate the contracts made during minority. However, five months is far too long. Making her monthly payments beyond a month or two would be ratification.

When can disaffirmance occur

Disaffirmance – can happen:1. Any time still under the incapacity

2. Within a reasonable time after attaining capacity

After attaining capacity, a person can ratify their contract

Ratification – Action by the party indicating intent to be bound by the contract

Ratification

For a minor, ratification must occur after achieving majority.

Ratification may consist of:1. Giving a new promise to perform as

agreed

2. Any act (such as making a payment) that clearly indicates the party’s intention to be bound

What must be done upon disaffirming When a minor disaffirms, anything of

value the minor received and still has must be returned.

The minor is entitled to get back everything that was given to the other party.

Contracts that cannot be disaffirmed Court approved contracts Major commitments – armed services,

educational loans Banking contract Insurance Contracts Work Related Contracts Sales of Realty Apartment rental

Misrepresenting Age

Minors who lie about their age may disaffirm contracts

However, they are liable for the tort of false representation

9-2 Assessment

Turn to page 165 and complete the 8 questions