1. Law for Business and Personal Use © Thomson South-Western CHAPTER 9 Legal Capacity to Contract 9-1Contractual Capacity of Individuals and Organizations 9-2Limits on the Rights of Those Without Capacity

2. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 2 9-1 9-1Contractual Capacity of Individuals and Organizations GOALS Identify parties who lack contractual capacity Explain the role of capacity in organizations

3. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 3 FOCUS Have you ever tried to get out of a contract because you were young and inexperienced in the matter? Did you know that you had a legal right to disaffirm contracts made while you were still in your minority?

4. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 4 WHAT IS CAPACITY? Contractual capacity is the ability to understand the consequences of a contract. This does not require that a person understand the actual terms of the contract.

5. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 5 WHAT IS CAPACITY? Protections for those who lack capacity Minors Those mentally incapacitated The intoxicated

6. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 6 Intoxicated Using alcohol, drugs or inhaling products such as glue or aerosols.

7. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 7 Mentally Incapacitated A person lacks the ability to understand the consequences of his or her contractual acts.

8. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 8 CAPACITY Disaffirmance—a refusal to be bound by a previous legal commitment. Ratification—acting toward the contract as though one intends to be bound by it. Can never occur before the age of majority. Emancipation—the severing of the child-parent relationship.

9. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 9 Emancipation Formal—occurs when a court decrees the minor emancipated. Informal—arises from the conduct of the minor and the parent. Minor marries Minor moves out Minor give birth Minor undertakes full-time job Parent & minor agree parent will cease support

10. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 10 What three classifications of individuals lack contractual capacity?

11. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 11 The three classifications are minors, the mentally incapacitated, and the intoxicated.

12. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 12 WHO HAS CONTRACTUAL CAPACITY IN ORGANIZATIONS? Scope of authority Employer grants authority to employee Assumption of authority based on job title Workers acting outside the scope of their authority generally are personally liable when the organization isn’t.

13. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 13 In what two ways is capacity to contract on behalf of an organization created?

14. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 14 Capacity to contract on behalf of the organization can come from a delegation of authority or from an aura of apparent authority created or allowed by the business.

15. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 15 9-2 9-2Limits on the Rights of Those Without Capacity GOALS Recognize the time frame during which a contract can be disaffirmed Identify contracts that cannot be disaffirmed Discuss the effects of misrepresentation of age on contractual responsibilities

16. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 16 FOCUS Explain the following quote from Benjamin Cardozo, Associate Justice of the U.S. Supreme Court, 1932–1938. Liberty of contract is not an absolute concept. It is relative to many conditions of time and place and circumstance.

17. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 17 WHEN CAN DISAFFIRMANCE OCCUR? Any time while still under the incapacity Within a reasonable time after attaining capacity

18. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 18 WHAT MUST BE DONE UPON DISAFFIRMANCE? Loss of value Obligations of party with capacity

19. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 19 DISAFFIRMANCE TIMELINE

20. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 20 When can a person who lacks contractual capacity disaffirm a contract?

21. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 21 Disaffirmance can occur at any time until capacity is gained or regained. It also can occur during a reasonable period of time beyond the attaining of capacity to allow the person in question to review her or his contracts to see which ones to ratify and which to disaffirm.

22. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 22 CONTRACTS THAT CANNOT BE DISAFFIRMED Court-approved contracts Major commitments Banking contracts Insurance contracts Work-related contracts Sale of realty Apartment rental

23. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 23 Which contracts that cannot be disaffirmed apply in all 50 states?

24. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 24 The states are uniform in disallowing disaffirmance of court-approved contracts and major commitments such as enlisting in the armed services, contracting for education loans, and marriage contracts.

25. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 25 CONTRACTUAL EFFECT OF MISREPRESENTING AGE Other party to the contract may collect damages Minor still may be able to disaffirm contract

26. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 26 If minors lie about their age, what happens in most states with regard to their ability to disaffirm contracts for goods and services that are not necessaries?

27. Law for Business and Personal Use © Thomson South-Western Chapte r 9 Slide 27 Even if minors lie about their age, they still may disaffirm their contracts for goods or services that are not necessaries.