1. Legal Capacity to Contract
Ch 9

2. Contractual Capacity of Individuals and Organizations

3. What is Capacity?
Certain parties to contracts are assumed by the law to lack the maturity and experience to protect their self-interests in contractual negotiations.
The law grants the parties special contractual protections designed to keep them from being cheated due to their lack of contractual capacity
Contractual Capacity - the ability to understand the consequences of a contract.
Note: does not require that a person understand the actual terms of the contract which may be written in legal terms.
Examples:
Minors - individuals under the age of majority to contract
The Intoxicated
Mental Impaired

4. Protections for Those Who Lack Capacity
Contracts of most parties who lack capacity are considered voidable.
The primary protection granted to those who lack contractual capacity is disaffirmance.
Disaffirmance - contract law means a refusal to be bound by a previous legal commitment.
When a protected party disaffirms a contract, by law they are to receive back whatever they put into the contract. The other party may not get back their consideration.

5. What Happens when Minors Contract for Necessities?
Necessities include:
Food, clothing, and shelter
They must pay at least reasonable value for the necessaries even if they disaffirm the actual purchase contract.
Ex. A minor buys a fur coat to wear during a cold winter for $5000.
Minor disaffirms the contract
Minor may keep the fur coat but still is responsible for $200 (the cost of a cloth coat)
Store is punished with a loss of $4800 for selling such an expensive coat to a minor who is unable to pay.

6. Minors
May disaffirm contracts while minor AND during a reasonable time after achieving majority.
The power to disaffirm a contract after reaching majority age can be cut off if the person ratifies the contract.
Ratification - acting toward the contract as through one intends it to be
Minors may still be liable for the contract if they are emancipated.
Emancipation - severing of the child-parent relationship

7. The Intoxicated
When a person is under the influence of using legal or illegal drugs.
Once a person meets this limit, they are considered under the same incapacity as one who is mentally impaired (one who does not understand the consequences of the contract).
Courts must have documentation of the severity of the intoxication to the fact that a person has no knowledge that they are even entering into a contract.

8. Who has Contractual Capacity in Organizations?
Some people who work for a business or organization have the capacity to bind the organization/business to contracts.
They are said to have scope of authority
Within range of contractual acts for which the organization has authorized him/her to be responsible.
Capacity to contract can be created when the employer tells an employee that they are authorized to bind the organization.
Can be assumed because of their job title
When doing business with an organization, it is important to ensure that the person signing the contract has the scope of authority to bind the organization.

9. Who has Contractual Capacity in Organizations?
When doing business with an organization, it is important to ensure that the person signing the contract has the scope of authority to bind the organization.
If a person acts outside the scope of authority can become personally liable when the organization isn’t.

10. Limits on the Rights of Those Without Capacity

11. When Can Disaffirmance Occur and What Must Be Done at That Time?
Disaffirmance - Refusal t be bound by a previous commitment.
Ratification - action by the party indicating intent to be bound by the contract
Ratification may consist of either
Giving a new promise to perform as agreed
Any act (including payments) that clearly indicates the party’s intention to be bound

12. What Must Be Done Upon Disaffirmance
Loss of Value
If minors are unable to return exactly what was received under the contract, they can still get everything they gave the seller back.
This includes damaged, lost, consumed, or destroyed goods
Some states require the goods must be returned in same condition as when it was received
If this cannot happen then the minor must pay the difference or the amount can be deducted from the refund
Obligations of Party with Capacity
Should not sell to parties without capacity
Take the risk of refunding sale (with or without the return of goods sold)

13. What Must Be Done Upon Disaffirmance
Court- Approved Contracts
Minors cannot void contracts issued or approved by the court
Major Commitments
Contracts to enlist in the armed forces and contracts for student loans cannot be disaffirmed.
Marriage contracts of minors cannot be disaffirmed
Financial obligations stemming from bankruptcy cannot be discharged.
Banking Contracts
Minors can make deposits into banks
Minors can make withdrawals

14. What Must Be Done Upon Disaffirmance
Insurance Contracts
Minors cannot disaffirm contracts of insurance
Work-Related Contracts
Minors who engage in a business or trade cannot disaffirm agreements involving the business.
Sale of Realty
A minor who owns real property and sells it or borrows money against it cannot disaffirm until they reach age of majority
Apartment Rental
Lease cannot be disaffirmed even if apartment is a necessity. (few states - not all)

15. Contractual Effect of Misrepresenting Age
Minors who misrepresent their age may still disaffirm their contracts.
They can be held liable for the tort of misrepresentation
Companies or individuals may collect money from a minor for damages suffered because of the minor’s fraud.