Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 3 – THE LAW OF CONTRACTS  Chapter 8 – Capacity and the Requirement of Legality Prepared by Douglas H. Peterson, University of Alberta

Copyright © 2004 McGraw-Hill Ryerson Limited 2 CAPACITY AND THE REQUIREMENT OF LEGALITY The Minor or Infant Drunken or Insane Persons Corporations Labor Unions Bankrupt Persons

Copyright © 2004 McGraw-Hill Ryerson Limited 3 CAPACITY AND THE REQUIREMENT OF LEGALITY Enforceability of an Illegal Agreement Legality under Statute Law Legality at Common Law: Public Policy Contracts in Restraint of Trade

Copyright © 2004 McGraw-Hill Ryerson Limited 4 CAPACITY Legal capacity = competence Not everyone permitted to enter into Contracts that would bind them at law Public policy – certain individuals must be protected – inexperience or immaturity Even if agreement meets formal requirements

Copyright © 2004 McGraw-Hill Ryerson Limited 5 THE MINOR OR INFANT Minor/Infant – a person who has not reached the age of majority Age of majority Common law = 21 Provinces – varies (18 or 19) General rule – minors cannot enter into contracts because they lack capacity

Copyright © 2004 McGraw-Hill Ryerson Limited 6 ENFORCEABILITY AND THE RIGHT OF REPUDIATION General Rule: Contracts are enforceable by the minor but not against the minor Minor may repudiate contracts Voidable at option of minor Exceptions: Contracts for necessaries Determined by the social position of the minor in their stage in life Minor not already well supplied with such goods Beneficial contract for services If beneficial to minor and not exploitative

Copyright © 2004 McGraw-Hill Ryerson Limited 7 ENFORCEABILITY AND THE RIGHT OF REPUDIATION Enforceability determined by type of contract Fully executed agreement Bound unless can show taken advantage Excessively high price Can return the goods to the merchant Executory contracts - agreements yet to be fully performed Minor can repudiate if for non-necessary item

Copyright © 2004 McGraw-Hill Ryerson Limited 8 EFFECT OF REPUDIATION Minor may repudiate at their option Minor entitled to return of deposit If minor taken delivery of goods must return goods Adult seller assumes risk of damage to goods Unless damage result of deliberate act of minor Adult may not deduct for reasonable “wear and tear”

Copyright © 2004 McGraw-Hill Ryerson Limited 9 EFFECT OF REPUDIATION Tort versus contract If adult’s action is in contract must sue in contract Cannot change a contract action to a tort action to recover from the minor Unless minor deliberately misrepresented use of goods and goods are damaged Used goods in a way not contemplated by the contract

Copyright © 2004 McGraw-Hill Ryerson Limited 10 FRAUDULENT MISREPRESENTATION AS TO AGE Adult cannot hold minor to a contract if minor misrepresented attainting age of majority Adult may recover goods based on minor’s fraud Criminal law may apply to minor Contracts contrary to public policy will not be allowed by the courts

Copyright © 2004 McGraw-Hill Ryerson Limited 11 RATIFICATION AND REPUDIATION Ratification – the adoption of a contract or act of another by a party who was not originally bound by the contract or act The refusal to perform an agreement or promise Contracts of a continuing or permanent nature Minor must repudiate within reasonable period of time after attaining age of majority or will be bound by it Contracts not of a continuous nature Minor must expressly ratify on attaining the age of majority to be bound by it

Copyright © 2004 McGraw-Hill Ryerson Limited 12 STATUTORY PROTECTION OF MINORS Statute law modified common law rule of ratification New Brunswick, Newfoundland, Nova Scotia, Ontario, P.E.I. Requires ratification to be in writing to be enforceable against minor B.C. – minor cannot ratify a contract if it renders it enforceable by the adult “Absolutely void”

Copyright © 2004 McGraw-Hill Ryerson Limited 13 MINORS ENGAGED IN BUSINESS Employment contracts Enforceable against minor if not onerous or exploitative Minors as sole proprietors General rule still applies – unenforceable against minor Contract with minor one takes the risk

Copyright © 2004 McGraw-Hill Ryerson Limited 14 THE PARENT-INFANT RELATIONSHIP Common law rule – parents not liable for the debts incurred by their children Statutory Modification – “agents of necessity” Minor can pledge parent’ credit to obtain necessaries of life and parents are bound Parents bound by agency if apparent or by conduct

Copyright © 2004 McGraw-Hill Ryerson Limited 15 DRUNKEN AND INSANE PERSONS Rules similar to those of minors Liable for necessaries but not non-necessaries Non-necessaries Not bound if Were incapacitated at time entered into contract Other party was aware of incapacity Contract must be repudiated as soon as person regains capacity Failure to quickly repudiated is implied as affirmation of the contract

Copyright © 2004 McGraw-Hill Ryerson Limited 16 CORPORATIONS A person in the eyes of the law A creature of statute All the same rights to contract as a natural person 2 Types of Corporations Special Act corporations Created under a special act Normal corporations

Copyright © 2004 McGraw-Hill Ryerson Limited 17 CORPORATIONS Special Act Corporations Ultra vires – an act that is beyond the legal authority or power of a legislature or corporate body to commit. If corporation enters into contract beyond their powers granted by legislation it is ultra vires and void Based on principal that everyone is bound to know the law Created under a special act that all are bound to know

Copyright © 2004 McGraw-Hill Ryerson Limited 18 CORPORATIONS Normal Corporations May limit their powers in their articles of incorporation Generally enforceable since other parties not aware of articles of incorporation

Copyright © 2004 McGraw-Hill Ryerson Limited 19 OTHER Labor Unions – no capacity to contract Under specific labor laws Legislation determines interpretation and enforcement of collective agreements through arbitration not through the courts Bankrupt Persons Bankrupt debtors have limited capacity to contract May enter into contracts prior to discharge for necessaries

Copyright © 2004 McGraw-Hill Ryerson Limited 20 ILLEGAL AGREEMENTS Illegal contracts are unenforceable Illegal purpose Unenforceable and illegal Offend public policy Unenforceable Some contracts only void by public policy or by specific statutes

Copyright © 2004 McGraw-Hill Ryerson Limited 21 LEGALITY UNDER STATUTE LAW Illegal contracts Narrow sense – prohibited by criminal code Rob, assault, murder, obtain goods under fraud Courts will not enforce agreements whose purpose is illegal

Copyright © 2004 McGraw-Hill Ryerson Limited 22 LEGALITY UNDER STATUTE LAW Broader Sense – prohibited by statute but not illegal because criminal Competition Act Contrary to public interest Can’t contract in violation of certain Acts Workers compensation, employment standards

Copyright © 2004 McGraw-Hill Ryerson Limited 23 LEGALITY UNDER STATUTE LAW Wagers Unenforceable unless specific legislation has made them enforceable Exception Insurance contracts especially life insurance Unlicensed Trade persons Agreements by unlicensed professionals are unenforceable Other party must pay for materials but not for services

Copyright © 2004 McGraw-Hill Ryerson Limited 24 LEGALITY AT COMMON LAW: PUBLIC POLICY Contracts against public policy are unenforceable Obstruct justice Injure pubic service Injure the state Contracts with enemy aliens Involve commission of a tort Commission of an immoral act Unconscionable rates of interest Excess of 60% interest is a criminal offense

Copyright © 2004 McGraw-Hill Ryerson Limited 25 CONTRACTS IN RESTRAINT OF TRADE 3 Categories Contrary to Competition Act Buy Sell Agreements with restrictive covenants Employer/Employee agreements Contracts in restraint of trade are prima facie unenforceable Prima facie – on first appearance Valid if restraint is reasonable and necessary

Copyright © 2004 McGraw-Hill Ryerson Limited 26 RESTRICTIVE AGREEMENTS: SALE OF BUSINESS Buyer of business is buying the “goodwill” Court reviews if restriction is a restraint in trade Court reviews two matters Geographical restriction Time restriction Test: what is reasonable to protect buyer Severability: unreasonable restriction may be severed from agreement and reasonable restrictions remain

Copyright © 2004 McGraw-Hill Ryerson Limited 27 RESTRICTIVE AGREEMENTS: EMPLOYEES AND EMPLOYERS 2 Types Post employment restrictions Present employment restrictions Post-Employment restrictions Balance between employers right to protect interests and employee’s right to earn a living Courts reluctant to enforce restrictive agreements which deny one right to earn a living Enforced if serious injury to the employer can be clearly demonstrated

Copyright © 2004 McGraw-Hill Ryerson Limited 28 RESTRICTIVE AGREEMENTS: EMPLOYEES AND EMPLOYERS Policy Reasons Employee is in a weaker bargaining position when negotiating the employment agreement Usually standard form contract of employer that employee must accept or reject Economic freedom of employee above that of special interests of employer

Copyright © 2004 McGraw-Hill Ryerson Limited 29 RESTRICTIVE AGREEMENTS: EMPLOYEES AND EMPLOYERS Present Employment Restrictions Restrictions on rights of employees to engage in activities or business in competition with employer Usually enforced by the courts Must not encroach on employee’s personal freedom, are reasonable and necessary

Copyright © 2004 McGraw-Hill Ryerson Limited 30 RESTRICTIVE AGREEMENTS: EMPLOYEES AND EMPLOYERS Confidentiality Agreements Restrictions requiring employees to keep certain information confidential both during employment and after employment Must be reasonable and necessary During employment breach of employment agreement After employment is a restrictive covenant and relevant rules are applied May not be enforceable if deprives community of an essential service A medical specialist

Copyright © 2004 McGraw-Hill Ryerson Limited 31 SUMMARY Must have capacity to contract Some do not because of public policy reasons (for their protection) Minors can repudiate contracts for non-necessaries Other persons lack capacity and various rules established to deal with such persons Contracts which are for an illegal purpose are not enforceable Contracts may be illegal for public policy reasons Contracts in restraint of trade may be unenforceable if they are not necessary or reasonable