2. P A R T P A R T Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. P A R T P A R T Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Capacity to Contract PA E TR HC 14 “No brilliance is needed in the law. Nothing but common sense, and relatively clean fingernails.” John Mortimer

5. Learning Objectives  The meaning of capacity  The classes of persons without capacity  The rights to disaffirm or ratify  The duties of disaffirmance 14 - 5

6.  Person must have ability to give consent before being legally bound to agreement, thus capacity is the ability to incur legal obligations and acquire legal rights  A person who contracts without necessary capacity may avoid the contract at his/her option Definition 14 - 6

7.  Status incapacity refers to minors, factual incapacity includes those suffering from a mental disability and intoxicated persons  Contract in which one party lacks capacity is voidable at the option of person lacking capacity  Right to avoid a contract is disaffirmance  Example: Stroupes v. The Finish Line, Inc. The Lack of Capacity 14 - 7

8.  Those who suffer from a mental illness may be disadvantaged in their ability to protect their interests in the bargaining process  Thus, their contracts are void or voidable  Test: Did the person have sufficient mental capacity to understand the nature and effect of the contract? Capacity & Mental Impairment 14 - 8

9.  Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process  Note: courts are not sympathetic! Contracts of Intoxicated Persons 14 - 9

10.  Each party has duty to return to the other any consideration the other has given  The incapacitated may be liable for damages  See Dodson v. Schrader  Incapacitated person generally required to pay reasonable value for necessities (required for survival) furnished to them  Example: Young v. Weaver  Was the apartment a necessity? Duties Upon Disaffirmance 14 - 10

11.  Ratification occurs when a person who reaches majority or is no longer suffering a mental disability or intoxication indicates either expressly or impliedly, that he intends to be bound by a contract made while incapacitated Ratification 14 - 11

12. Test Your Knowledge  True=A, False = B  Capacity is the ability to know the details of the legal rights in a contract  Ratification is the actual signature on the written contract  Disaffirmance is the right to avoid a contract due to incapacity 14 - 12

13. Test Your Knowledge  True=A, False = B  A minor’s right to disaffirm a contract ends on the day the minor achieves the age of majority  Intoxicated persons are always allowed to disaffirm a contract  Persons with a mental incapacity may disaffirm a contract, but cannot ratify the contract 14 - 13

14. Test Your Knowledge  Multiple Choice  The “benefit rule” states that when a minor disaffirms a contract:  (a) They have no further duties  (b) Recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise  (c) They have the duty to return the subject goods 14 - 14

15. Test Your Knowledge  Multiple Choice  Ted just turned 17 years old. Emancipated from his parents, Ted bought a car from CarCo. Two weeks after he bought the car, Ted damaged it. Ted returned the vehicle to CarCo asking for a full refund. CarCo must :  (a) Give Ted back the full amount  (b) Pay Ted only the present value of the car  (c) Pay Ted the purchase price less the current value of the car 14 - 15

16. Thought Questions  The requirement of capacity is rooted in ancient law. Should the law continue to protect minors and intoxicated persons? Why or why not? 14 - 16