Legal Capacity to Contract

Let’s Review A Legally binding contract requires 6 elements: 1.Offer 2.Acceptance 3.Genuine Agreement 4.Consideration 5.Capacity 6.Legality But, if a genuine agreement is disrupted by fraud, misrepresentation, duress, or undue influence, then the contract may not be considered binding.

Today This chapter deals with MINORS rights and obligations concerning contracts & other contractual capacity rules -Who is a minor? -What contracts are voidable when a minor is a party? -Who else is considered without capacity and can rescind a contract?

Capacity … ability to understand the consequences of a contract 4

Protections for Those Who Lack Capacity In the eyes of the law, minors lack “capacity”, thus are not bound to the contracts they make… (I’ll explain more in a bit)In the eyes of the law, minors lack “capacity”, thus are not bound to the contracts they make… (I’ll explain more in a bit) Minors defined:Minors defined: –18 and younger (minority) –minors have not yet reached the age of majority (18) –minority ends the day before the birthday of the age set as the age of majority Contracts of most parties who lack capacity are considered voidableContracts of most parties who lack capacity are considered voidable 5

Exceptions to the “minor rule” Emancipation- a legal process where a child ages becomes free from the control of his/her parents or legal guardian –Ends the rights of the parents or guardian to the custody, control, services, and earnings of the child –Legally an adult In Michigan, you are automatically emancipated if you: –Get married –Turn 18 years old –Are on active duty with the U.S. military

Emancipation, cont. How to get emancipated –Go to and fill out the emancipation petition form –File the petition in court –Hearing is held –At the hearing the judge will consider ALL of the following: 1.Either your parents do not object to your petition for emancipation or if they do object, they are not providing you with any support 2.You are at least 16 years old 3.You are a Michigan resident 4.You can support yourself financially 5.You have a place to live 6.You understand your rights and responsibilities as an emancipated minor

Emancipation, cont. If you are emancipated you are held fully responsible for all contracts made!

Misrepresentation of Age If you misrepresent your age, you have committed fraud Fraud is a wrongful act, and as such, minors ARE responsible for any wrongful acts committed The other party may sue you for misrepresenting your age IF the party suffered a financial loss from the contract made

Contracts of Minors Voidable contracts- Contracts made my minors are voidable by the minor As a result, minors can disaffirm, or avoid, their contracts if they so choose Disaffirm- show the intent not to live up to the contract by a statement or some other act (example: write a letter) The theory behind this law is to provide young people a second chance when they use poor judgment

Contracts of Minors, cont. Returning the Merchandise- if a minor still has the merchandise he or she received upon entering a contract, that merchandise should be returned when the contract is disaffirmed (in most cases your $ is paid back) Disaffirming the Whole Contract- a minor cannot affirm parts of a contract that are favorable and disaffirm the unfavorable parts Disaffirming Contracts Made With Other Minors- when two minors enter into a contract with each other, both parties have the right to disaffirm the contract

Contracts of Minor’s cont. Ratification of Minors’ Contracts- after reaching the age of majority (18), a person can ratify, or approve, contracts made during minority It can be done: –Orally –Written –By one’s actions - using or selling an item obtained by a contract for a reasonable time after 18 Example: After your 18 th birthday, you continue to make payments on a car you bought when you were 16. You now have entered into a contract by your actions and are now held accountable for paying for the car, even though you were 16 when you bought it.

Contracts for Minors, cont. A minor IS held responsible for the fair value of necessaries Necessaries (necessities)- include food, clothing, shelter, and medical care But if you can prove that it wasn’t necessary, then you can disaffirm the contract Example: You go to the store and purchase a winter coat, hat, and a pair of boots. If these items were things you actually needed, then you would be bound to keep them and pay the fair value for them.

Contracts for Minors, cont. There are some special circumstances in which minors do have the capacity to enter into contracts. In Michigan these include: –Health care –Car Insurance –Life Insurance –Change your name (after 14) –If you want to be adopted (after 14)

Other Contractual Capacity Rules Minors are not the only group that may disaffirm a contract. Other classes of persons are also able to avoid contracts. They are: –Mentally Impaired Persons –Intoxicated Persons In some cases: –convicts –Illegal aliens –In times of war, foreign-born persons who are designated as enemy aliens

People with severe mental illness, severe mental retardation, or severe senility lack capacity. A person who lacks the ability to understand the consequences of his or her contracts lacks capacity. A person ruled as permanently insane has mental incapacity. Mentally Incapacitated 16

Intoxicated Lack Capacity …from using alcohol in forms such as beer or vodka…from using alcohol in forms such as beer or vodka …from using drugs such as marijuana or crack cocaine, or inhaling products such as glue or aerosols…from using drugs such as marijuana or crack cocaine, or inhaling products such as glue or aerosols 17