Business Law: Ch 9

Legal Capacity to Contract

What is Capacity

• Contractual Capacity – Ability to understand the consequences of a contract– Does not require that a person understand the

actual terms of the contract

Lack Some Capacity

• Three groups lacking some capacity1. Minors2. Intoxicated3. Mentally Impaired

Minors

• Minors – Under the age of majority– In Ohio the age of majority is 18– Ends the day before the birthday of the age

Protecting those lacking capacity• Contracts of those lacking capacity are

voidable– Disaffirmance – Protection granted to those

lacking capacity• In contract law it means a refusal to be bound

by a previous legal commitment• When a protected party disaffirms a contract,

by law the protected party is to receive whatever they have put into the contract

»The other party may or may not get back their consideration

Disaffirm

• Example – A protected party bought a four-wheel ATV from a dealership and then wrecked it. You can disaffirm the contract and recover any payments made.– The dealership would only be able to recover the

damaged ATV

Necessities

• Necessities – things needed to maintain life– The protected must at least pay a reasonable

value for the necessities even if they disaffirm the actual purchase contract

Minors

• Contracts are considered voidable (may get out of)

• May also disaffirm for a reasonable length of time after achieving the age of majority.

• After majority, the power to disaffirm is immediately cut off if you ratify the contract

• Minors also may find themselves bound to their contract if they are Emancipated

Emancipated

• Emancipated – Severing the parent-child relationship– Ends the duty of the parent to support a child and

the duty of the child to obey their parent– Upon reaching the age of majority you are

emancipated

Emancipated

• Formal emancipation– Court decrees the minor emancipated

• Informal emancipated– Arises from the conduct of the parent and minor

Informal Emancipated

• 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

Mentally Incapacitated

• Mentally Incapacitated - A person lacks the ability to understand the consequences of his or her contract

• If permanently Insane – Contract is Void• Temporary Insane – Contract is Voidable

Intoxicated

• Does the person have the ability to understand the consequences

• Courts typically allow disaffirmance only for those who are so temporarily intoxicated that they do not even know they are contracting– Stricter because intoxication is a voluntary act

• If a person is in a permanent state of intoxication – Contract is void

Who has contractual capacity in organizations

• Scope of Authority – has capacity to contract• People acting outside the scope of authority,

are personally liable when the organization isn’t

9-1 Assessment

• Turn to page 161 and complete the 9-1 Assessment Questions

When can disaffirmance occur

• Disaffirmance – can happen:1. Any time still under the incapacity2. Within a reasonable time after attaining capacity

• After attaining capacity, a person can ratify their contract– Ratification – Action by the party indicating

intent to be bound by the contract

Ratification

• For a minor, ratification must occur after achieving majority.

• Ratification may consist of:1. Giving a new promise to perform as agreed2. Any act (such as making a payment) that clearly

indicates the party’s intention to be bound

What must be done upon disaffirming

• When a minor disaffirms, anything of value the minor received and still has must be returned.

• The minor is entitled to get back everything that was given to the other party.

Contracts that cannot be disaffirmed

• Court approved contracts• Major commitments – armed services,

educational loans• Banking contract • Insurance Contracts• Work Related Contracts• Sales of Realty• Apartment rental

Misrepresenting Age

• Minors who lie about their age may disaffirm contracts

• However, they are liable for the tort of false representation

9-2 Assessment

• Turn to page 165 and complete the 8 questions