CHAPTER 9 Legal Capacity to Contract

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Contractual Capacity – the ability to understand the consequences of a contract Age of Majority to Contract – the age at which a person is entitled to the management of his or her own affairs. The age of majority in most states is 18.The age of majority in most states is 18 Minority – The state of being below the age of majority, ends the day before the birthday of the age legally set as the age of majority. Minor – a person who has not yet reached the age of majority.

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Protections for Those Who Lack Capacity The contracts of most parties who lack capacity are considered voidable The primary protection granted to those who lack contractual capacity is disaffirmance (a refusal to be bound by a previous legal commitment) When the protected party disaffirms a contract, the protected receives back what they put into the contract.

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Protections for Those Who Lack Capacity When a minor (or protected party) contracts for necessaries – things need to maintain life– typically food, clothing and shelter. – The minor is responsible for the reasonable value – Example: Fur Coat

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Minors Minors contracts are considered voidable They may disaffirm contracts during their minority They may also disaffirm contracts for a reasonable length of time after they reach the age of majority. After the age of majority, the power to disaffirm is immediately cut off if the person ratifies the contract.

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Minors Ratification – acting towards the contract as though one intends to be bound by it. Emancipation is the severing of the child-parent relationship. – Formal emancipation occurs when the court decrees the minor emancipated. – Informal emancipation 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

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Those Mentally Incapacitated Under contract law mental incapacity means that a person lacks the ability to understand the consequences of his or her contracts. – severe mental illness – severe mental retardation – senility

9-1 Contractual Capacity of Individuals & Organization What is Capacity? Those Mentally Incapacitated If a judge rules that a person is permanently insane, then he or she is considered by the law to have a complete lack of capacity. All contracts executed by this person are VOID. (with the exception of necessaries) If a judge rules a person temporarily insane, all contracts made by that person during that time are VOIDABLE. When a person returns to full sanity, he or she will have a reasonable time to sort out which contracts are to be avoided.

9-1 Contractual Capacity of Individuals & Organization What is Capacity? The Intoxicated Intoxication can arise from using legal or illegal drugs. If a person’s level of intoxication is high enough, the law holds he loses the capacity to contract. most courts are reluctant to consider a temporarily intoxicated party’s contract voidable

9-1 Contractual Capacity of Individuals & Organization What is Capacity? The Intoxicated courts allow disaffirmance only for those who are so temporarily intoxicated they don’t even know they are contracting. Stricter standards are used because generally intoxication is a voluntary action.

9-2 Limits on the Rights of Those Without Capacity When Can Disaffirmance Occur and What Must Be Done at That Time? A person lacking the capacity to contract can disaffirm a contract: – Disaffirmance: a refusal to be bound by a previous legal commitment. – Any time while still under incapacity – within a reasonable time after attaining capacity

9-2 Limits on the Rights of Those Without Capacity When Can Disaffirmance Occur and What Must Be Done at That Time? After attaining capacity, a person may ratify the contract made 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 (such as making payments to the seller) that clearly indicates the party’s intention to be bound.

9-2 Limits on the Rights of Those Without Capacity What Must Be Done Upon Disaffirmation Loss of Value In most states: minors can get back everything they gave. Even if goods are consumed, damaged or lost. In some sates everything must be returned in a condition as good as it was received. If this cannot be done, the minor must pay the difference in value or have the difference from the amount to be refunded.

9-2 Limits on the Rights of Those Without Capacity What Must Be Done Upon Disaffirmation Obligations of Party With Capacity The party lacking capacity can enforce contracts against the party with the capacity. The party with capacity can neither enforce contracts against the party with capacity nor avoid contracts on the basis of the other party’s lack of capacity.

9-2 Limits on the Rights of Those Without Capacity What Must Be Done Upon Disaffirmation Contracts That Cannot Be Disaffirmed Court-Approved Contracts Court-Approved Contracts – ALL STATES: Minors employed as actors or professional athletes will have their contracts approved by a court. Major Commitments Major Commitments – ALL STATES: contracts to enlist in the armed services, marriage, alimony, child support, educational loans Banking Contracts Banking Contracts – MOST STATES: Minors are permitted to make deposits and make withdrawals

9-2 Limits on the Rights of Those Without Capacity What Must Be Done Upon Disaffirmation Contracts That Cannot Be Disaffirmed Insurance Contracts Insurance Contracts – MORE THAT ½ STATES: Minors cannot disaffirms insurance contracts (health, auto, life) Work-Related Contracts Work-Related Contracts – MOST STATES: Minors who engage in business or trade cannot disaffirm. Sale of Realty Sale of Realty – SOME STATES: Minors who own, sell, or borrow against property cannot disaffirm until after achieving majority. Apartment Rental Apartment Rental – FEW STATES: the lease of an apartment cannot be disaffirmed even if the apartment is not a necessary.

9-2 Limits on the Rights of Those Without Capacity What Must Be Done Upon Disaffirmation Contractual Effect of Misrepresenting Age Minors who lie about their age may still disaffirm their contracts (in most states) Minors are liable for their torts and delinquent or criminal conduct The other party to the contract may collect from a minor any damages suffered from the minor’s fraud.