1. Prepared by Douglas Peterson, University of Alberta 9-1 Part 3 – The Law of Contract Chapter 9 Legal Capacity to Contract and the Requirement of Legality

2. © 2006 McGraw-Hill Ryerson Limited 9-2 Overview Minors Minors Repudiation Repudiation Ratification Ratification Drunken and Insane Persons Drunken and Insane Persons Corporations Corporations Labour unions Labour unions Bankrupt persons Bankrupt persons

3. © 2006 McGraw-Hill Ryerson Limited 9-3 Overview Illegal Agreements Illegal Agreements Under Statute Under Statute Competition Act Competition Act Administrative Acts Administrative Acts Insurance Insurance Unlicensed persons Unlicensed persons Legality at Common Law Legality at Common Law Public policy Public policy Restraint in trade Restraint in trade

4. © 2006 McGraw-Hill Ryerson Limited 9-4 Introduction Capacity Capacity The ability to enter into a contract The ability to enter into a contract Not all persons can enter into contracts Not all persons can enter into contracts The law protects those who may lack the ability to appreciate the nature of their acts The law protects those who may lack the ability to appreciate the nature of their acts Protects those who would not be in an equal bargaining position Protects those who would not be in an equal bargaining position

5. © 2006 McGraw-Hill Ryerson Limited 9-5 Minor/Infant A person who has not reached the age of majority A person who has not reached the age of majority Common law: a person under age of 21 Common law: a person under age of 21 Statute: sets the age of majority in each province; some it is 18, others 19 Statute: sets the age of majority in each province; some it is 18, others 19 Public policy says minors should not be bound by their promises Public policy says minors should not be bound by their promises Contract is enforceable by the minor but not against the minor (voidable at the option of the minor) Contract is enforceable by the minor but not against the minor (voidable at the option of the minor)

6. © 2006 McGraw-Hill Ryerson Limited 9-6 Exceptions for Minors 1. Contracts for necessaries Necessaries: food, clothing, shelter, certain types of transportation, and other necessaries Necessaries: food, clothing, shelter, certain types of transportation, and other necessaries Minor liable on such contracts Minor liable on such contracts Courts look at: Courts look at: – social position of minor – Minor already has an adequate supply of such goods

7. © 2006 McGraw-Hill Ryerson Limited 9-7 Exceptions for Minors 2. Beneficial Contracts Employment or apprenticeship contracts which are beneficial to the minor Employment or apprenticeship contracts which are beneficial to the minor Not beneficial if exploitative Not beneficial if exploitative

8. © 2006 McGraw-Hill Ryerson Limited 9-8 Right of Repudiation Test: Is the contract: Test: Is the contract: 1. Executed Contact: fully executed by the minor (enforceable against minor) unless minor was taken advantage of 2. Executory: yet to be performed (may not be enforceable against minor)

9. © 2006 McGraw-Hill Ryerson Limited 9-9 Effect of Repudiation Executory contracts Executory contracts For non-necessary goods or services For non-necessary goods or services Can be repudiated at anytime at option of minor Can be repudiated at anytime at option of minor If repudiated minor must return goods If repudiated minor must return goods Normal wear and tear to goods is not recoverable by merchant but deliberate acts by the minor are Normal wear and tear to goods is not recoverable by merchant but deliberate acts by the minor are Merchant/adult can not sue in tort if an action lies in contract Merchant/adult can not sue in tort if an action lies in contract

10. © 2006 McGraw-Hill Ryerson Limited 9-10 Fraudulent Misrepresentation as to Age Rule Rule Contract with minors at your peril Contract with minors at your peril Must determine age of person you are contracting with Must determine age of person you are contracting with Even a minor who misrepresented their age may be able to repudiate Even a minor who misrepresented their age may be able to repudiate Criminal law of obtaining goods under false pretenses may be applicable Criminal law of obtaining goods under false pretenses may be applicable

11. © 2006 McGraw-Hill Ryerson Limited 9-11 Ratification and Repudiation Repudiation Repudiation The refusal to perform and agreement or promise The refusal to perform and agreement or promise Ratification Ratification The adoption of a contract or act of another party who was not originally bound by the contract or act The adoption of a contract or act of another party who was not originally bound by the contract or act

12. © 2006 McGraw-Hill Ryerson Limited 9-12 Ratification and Repudiation When minor has entered into a contract of a continuing or permanent nature and receives benefits and incurs obligations: When minor has entered into a contract of a continuing or permanent nature and receives benefits and incurs obligations: The contract must be repudiated within a reasonable time after attainting the age of majority (or the contract is binding) The contract must be repudiated within a reasonable time after attainting the age of majority (or the contract is binding) Contracts for non-necessaries not of a continuing nature: Contracts for non-necessaries not of a continuing nature: Minor must expressly ratify on attaining the age of majority Minor must expressly ratify on attaining the age of majority

13. © 2006 McGraw-Hill Ryerson Limited 9-13 Statutory Protection Modification of common law Modification of common law Ratification must be in writing before it will be binding on the minor Ratification must be in writing before it will be binding on the minor New Brunswick, Newfoundland, Nova Scotia, Ontario, and Prince Edward Island New Brunswick, Newfoundland, Nova Scotia, Ontario, and Prince Edward Island British Columbia: minor cannot ratify a contract that would render it enforceable by the adult British Columbia: minor cannot ratify a contract that would render it enforceable by the adult Contracts for non-necessaries and debt contracts are absolutely void Contracts for non-necessaries and debt contracts are absolutely void

14. © 2006 McGraw-Hill Ryerson Limited 9-14 Minors Engaged in Business Same rule for minors engaged in business as: Same rule for minors engaged in business as: Sole proprietor Sole proprietor Partnership (not liable for debts of partnership incurred as a minor) Partnership (not liable for debts of partnership incurred as a minor) Must repudiate after attaining age of majority or will be bound (implied ratification if continue to accept benefits under the contract Must repudiate after attaining age of majority or will be bound (implied ratification if continue to accept benefits under the contract

15. © 2006 McGraw-Hill Ryerson Limited 9-15 Minors Engaged in Business Not necessary for a minor to engage in business Not necessary for a minor to engage in business Contracts usually treated as contracts for non- necessaries Contracts usually treated as contracts for non- necessaries Voidable at option of the minor Voidable at option of the minor If a minor continues to accept benefits under a contract after attaining age of majority, will be bound If a minor continues to accept benefits under a contract after attaining age of majority, will be bound

16. © 2006 McGraw-Hill Ryerson Limited 9-16 Drunken and Insane Persons Mentally Disabled Mentally Disabled If committed – cannot incur any liability (contract is void) If committed – cannot incur any liability (contract is void) If temporary (as per the rules below) If temporary (as per the rules below) Temporary Mental Impairment Temporary Mental Impairment Physical or mental damage Physical or mental damage Result of drugs or alcohol Result of drugs or alcohol

17. © 2006 McGraw-Hill Ryerson Limited 9-17 Mental Impairment Rule (same as for a minor) Rule (same as for a minor) Bound in contracts for necessaries Bound in contracts for necessaries Non-necessaries: not bound (voidable at impaired persons option) if: Non-necessaries: not bound (voidable at impaired persons option) if: Can establish was in such a condition when the contract was entered into Can establish was in such a condition when the contract was entered into The other party was aware of the condition when the contract was entered into The other party was aware of the condition when the contract was entered into Contract must be repudiated immediately after reaching capacity or will be implied ratification Contract must be repudiated immediately after reaching capacity or will be implied ratification Impaired person can ratify contract Impaired person can ratify contract

18. © 2006 McGraw-Hill Ryerson Limited 9-18 Corporations Types of Corporations Types of Corporations Regular Corporations Regular Corporations Same powers as a natural person Same powers as a natural person Limitations internal bylaws (articles of incorporation) not public knowledge Limitations internal bylaws (articles of incorporation) not public knowledge Special Act Corporations Special Act Corporations Powers controlled by special act Powers controlled by special act Limitations public knowledge because in a statute Limitations public knowledge because in a statute

19. © 2006 McGraw-Hill Ryerson Limited 9-19 Corporations Ultra Vires Ultra Vires An act that is beyond the legal authority or power of a legislature or corporate body An act that is beyond the legal authority or power of a legislature or corporate body Special Act Corporations Special Act Corporations Not bound by contracts that are ultra vires Not bound by contracts that are ultra vires Regular Corporations Regular Corporations Bound by contracts that are ultra vires Bound by contracts that are ultra vires

20. © 2006 McGraw-Hill Ryerson Limited 9-20 Other Entities Labour Unions Labour Unions Ability to enter into contracts (collective bargaining agreements) allowed under labour legislation Ability to enter into contracts (collective bargaining agreements) allowed under labour legislation Normally would be unenforceable Normally would be unenforceable Bankrupt Persons Bankrupt Persons Declared bankrupts have limited capacity to contract Declared bankrupts have limited capacity to contract Until receives discharge can only enter into contracts for necessaries Until receives discharge can only enter into contracts for necessaries

21. © 2006 McGraw-Hill Ryerson Limited 9-21 Illegal Agreements Requirement of Legality: Requirement of Legality: Contracts that offend public good are unenforceable Contracts that offend public good are unenforceable Contacts whose purpose may is illegal may be illegal and unenforceable Contacts whose purpose may is illegal may be illegal and unenforceable Some contracts are only rendered voidable by public policy or by specific statutes Some contracts are only rendered voidable by public policy or by specific statutes Voidable if the parties do not comply with statute or the policy Voidable if the parties do not comply with statute or the policy

22. © 2006 McGraw-Hill Ryerson Limited 9-22 Legality Under Statute Law Generally Generally Illegal contracts Illegal contracts Agreement to commit a crime (rob, assault, abduct, murder, steal goods, or any other act prohibited by the Criminal Code) Agreement to commit a crime (rob, assault, abduct, murder, steal goods, or any other act prohibited by the Criminal Code) Embezzlement – when crime discovered a contract by employee of restitution in return for not reporting is against public policy Embezzlement – when crime discovered a contract by employee of restitution in return for not reporting is against public policy

23. © 2006 McGraw-Hill Ryerson Limited 9-23 Legality Under Statute Law Competition Act Competition Act Restraint of Competition Restraint of Competition Unenforceable Unenforceable Act covers a number of business practices contrary to public policy Act covers a number of business practices contrary to public policy Administrative Acts Administrative Acts Workers Competition, land use planning, wagering laws Workers Competition, land use planning, wagering laws Contracts in violation of the Act is void and unenforceable Contracts in violation of the Act is void and unenforceable

24. © 2006 McGraw-Hill Ryerson Limited 9-24 Legality Under Statute Law Insurance Policies Insurance Policies Wagers (bets) are unenforceable contracts as a general rule Wagers (bets) are unenforceable contracts as a general rule Exception is insurance contracts (life insurance) Exception is insurance contracts (life insurance) Requirement: an insurable interest Requirement: an insurable interest Distinguishes insurance contracts from normal wagers Distinguishes insurance contracts from normal wagers

25. © 2006 McGraw-Hill Ryerson Limited 9-25 Legality Under Statute Law Unlicensed Persons Unlicensed Persons Contracts with unlicensed trades or professions is illegal Contracts with unlicensed trades or professions is illegal Purpose is protection of the public Purpose is protection of the public Must still pay for goods supplied but not for services rendered Must still pay for goods supplied but not for services rendered Only voidable at option of party who is not the tradesperson or professional Only voidable at option of party who is not the tradesperson or professional

26. © 2006 McGraw-Hill Ryerson Limited 9-26 Legality at Common Law Public Policy Public Policy The unwillingness of the courts to enforce rights that are contrary to the general interests of the public The unwillingness of the courts to enforce rights that are contrary to the general interests of the public Examples Examples Obstruct justice, injure public service, injure the state, stifle prosecution Obstruct justice, injure public service, injure the state, stifle prosecution Contracts for the commission of a tort, immoral acts Contracts for the commission of a tort, immoral acts Exorbitant interests rates Exorbitant interests rates Some are merely unenforceable whereas others are unenforceable and illegal Some are merely unenforceable whereas others are unenforceable and illegal

27. © 2006 McGraw-Hill Ryerson Limited 9-27 Contracts in Restraint of Trade 3 Categories 3 Categories 1. Agreements contrary to the Competition Act 2. Non competition agreements with the purchase and sale of a business 3. Non competition agreements in employment contracts Last 2 dealt with under public policy Last 2 dealt with under public policy

28. © 2006 McGraw-Hill Ryerson Limited 9-28 Sale of a Business Restrictive Covenant Restrictive Covenant A contractual clause limiting future behavior A contractual clause limiting future behavior Prima facie void as a restraint of trade Prima facie void as a restraint of trade Allowed if the restriction is reasonable as to: Allowed if the restriction is reasonable as to: 1. Time 2. Business restricted 3. Geographical area Reminder: Prima facie is a Latin expression meaning "on its first appearance", or "by first instance". It is used in modern legal English to signify that on first examination, a matter appears to be self-evident from the facts. In common law jurisdictions, prima facie denotes evidence that (unless rebutted) would be sufficient to prove a particular proposition or fact.

29. © 2006 McGraw-Hill Ryerson Limited 9-29 Employment Agreements Non Competition Clauses Non Competition Clauses Treated differently than the sale of a business Treated differently than the sale of a business Serious consequences of someone not being able to earn a living Serious consequences of someone not being able to earn a living Not enforceable unless serious injury to an employer can be clearly demonstrated Not enforceable unless serious injury to an employer can be clearly demonstrated Bargaining position at time contract entered into (employee seldom in a strong bargaining position) Bargaining position at time contract entered into (employee seldom in a strong bargaining position)

30. © 2006 McGraw-Hill Ryerson Limited 9-30 Employment Agreements Confidentiality Confidentiality Enforceable more often than non-competitions clauses Enforceable more often than non-competitions clauses Based on duties of employee in the employment relationship not upon a restraint in trade Based on duties of employee in the employment relationship not upon a restraint in trade Public Interests Public Interests Restrictive covenant against employees who provide an essential service may not be enforceable if would result in injury to the public Restrictive covenant against employees who provide an essential service may not be enforceable if would result in injury to the public

31. © 2006 McGraw-Hill Ryerson Limited 9-31 Summary Capacity Capacity Not everyone has the capacity to enter into contracts Not everyone has the capacity to enter into contracts Minors Minors Not liable for contracts for non-necessaries Not liable for contracts for non-necessaries Liable for necessaries or beneficial contract of services Liable for necessaries or beneficial contract of services Others – may lack capacity Others – may lack capacity

32. © 2006 McGraw-Hill Ryerson Limited 9-32 Summary Legality Legality Contracts that are illegal in purpose, against statutes, or against public policy Contracts that are illegal in purpose, against statutes, or against public policy Contracts in restraint of trade are usually unenforceable unless the restriction is reasonable Contracts in restraint of trade are usually unenforceable unless the restriction is reasonable