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  • CHAPTER 10 05/19/11
  • CHAPTER 10 05/19/11
  • Chap10

    1. 1. Capacity Rights <ul><li>Identify parties who have contractual capacity </li></ul><ul><li>Identify what contracts can be disaffirmed </li></ul><ul><li>Explain the role of capacity in organizations </li></ul>LESSON 9-1
    2. 2. WHAT IS CAPACITY? <ul><li>Contractual capacity is the ability to understand that a contract is being made and its general meaning. </li></ul><ul><li>Minors, mentally incapacitated, intoxicated persons lack “contractual capacity”. </li></ul>
    3. 3. <ul><li>Under the age of majority – minors are classified under this term. </li></ul><ul><li>The age of majority is 18 in most states. In a few states it is 19 or 21. </li></ul>
    4. 4. WHAT’S YOUR VERDICT? <ul><li>Susan, age 16, walked into a fur shop out of curiosity and became enthralled with the idea of owning a fur jacket. A persuasive sales lady told her she would be able to use it for the rest of her life and that it was a good investment. Her aunt had recently died and willed her enough for the jacket. A week later, she realized that at this time in her life she didn’t have a use for a fur jacket. </li></ul><ul><li>Can Susan get her money back? </li></ul>
    5. 5. Protection for Those Who Lack Capacity <ul><li>The primary protection granted to those who lack contractual capacity is disaffirmance – </li></ul><ul><ul><li>Disaffirmance means a refusal to be bound by a previous legal commitment. </li></ul></ul><ul><ul><ul><li>Suppose a protected party purchased a 4 ATV for a dealership and wrecked it. The party could disaffirm the contract and recover payments. The dealership could only recover damages to the ATV </li></ul></ul></ul>
    6. 6. <ul><li>The problem in given certain parties, the legal ability to disaffirm is that no one wants to contract with them. </li></ul><ul><li>When protected parties purchase things classified as necessaries – things needed to maintain life- (food, shelter…) they must pay a reasonable value for the necessaries even if they disaffirm the actual purchase contract. </li></ul>
    7. 7. Minors <ul><li>Considered voidable </li></ul><ul><li>After the age of majority the contract can still be disaffirmed in a reasonable time period. </li></ul><ul><li>After the age of majority the power to disaffirm is cut off if the person ratifies the contract , or acts as they intend to be bound by the contract – commonly called ratification </li></ul>
    8. 8. Minors <ul><li>Can be bound if they are emancipated – or severing the parent – child relationship. </li></ul><ul><ul><li>Can occur formally or informally – </li></ul></ul><ul><ul><ul><li>Formal is when the court declares it </li></ul></ul></ul><ul><ul><ul><li>Informal is a result of the conduct of the parent and child. </li></ul></ul></ul><ul><ul><ul><ul><li>Parent and child agree to cease support </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Minor marries </li></ul></ul></ul></ul>
    9. 9. Minors Continued <ul><ul><ul><ul><li>Minor moves out of the family home </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Minor becomes a member of the armed forces </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Minor gives birth </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Minor undertakes full-time employment </li></ul></ul></ul></ul><ul><ul><li>States differ greatly in their treatment of emancipated minors. </li></ul></ul>
    10. 10. Those Mentally Incapacitated <ul><li>Under contract law – it means that a person lacks the ability to understand the consequences of his or her contractual acts. </li></ul><ul><ul><li>Sever mental illness, senility, insanity… </li></ul></ul>
    11. 11. The Intoxicated <ul><li>The courts often refer to the same definition of incapacity as for the mentally impaired – can the person understand the consequences? </li></ul><ul><li>However, judges are more reluctant to disaffirm a contract in this case because this is a voluntary act. Only if the person is so intoxicated or in that state in a more permanent habit may they disaffirm a contract </li></ul>
    12. 12. Who has Contractual Capacity in an Organization <ul><li>Some people who work for businesses have the capacity to bind the organizations to contracts. This is called scope of authority </li></ul><ul><li>Capacity to contract can be created when an employer tells an employee that they are authorized to bind the organization. </li></ul>
    13. 13. CAPACITY RIGHTS <ul><li>Necessaries </li></ul><ul><li>Non-necessaries </li></ul><ul><li>Disaffirmance </li></ul><ul><li>Ratification </li></ul>
    14. 14. WHAT’S YOUR VERDICT? <ul><li>Emily was 88 years old when she contracted to sell her family home to her daughter Gail for about 15% of its value. At the time, she was suffering from advanced Alzheimer’s disease. Two months later Emily died. Her will provided for all her property to be split equally among her four children. The other children sued to have the deed set aside because Emily lacked the mental capacity to contract. </li></ul><ul><li>What will be the court decision? Why? </li></ul>
    15. 15. WHAT’S YOUR VERDICT? <ul><li>Against their parent’s wishes Garcia and Wesley—both minors—left home. Together they signed a 12-month lease to rent a nearby-furnished apartment from Krohn at the bargain price of $350 a month. After three months, the teenagers ran out of money and returned to their homes. Krohn could not find new tenants. </li></ul><ul><li>Could Krohn hold the minors liable for the rent? </li></ul><ul><li>Is the apartment a necessity or not? Why or why not? </li></ul>
    16. 16. MINORS <ul><li>In most states, people under the age of 18 </li></ul><ul><li>In a few states, age of majority is 19 or 21 </li></ul><ul><li>Also referred to as being in their minority or under the age of majority </li></ul>
    17. 17. MENTAL INCAPACITY <ul><li>Mental incapacity is much less precisely defined than minority. </li></ul><ul><li>The test is whether the party understands the consequences of his or her contractual acts. </li></ul><ul><li>If a judge rules that a person is insane then they have complete lack of capacity. If so, all contracts are void whether for necessaries or non-necessaries. </li></ul>
    18. 18. INTOXICATION <ul><li>Intoxication can arise from using alcohol, from using drugs, or inhaling products such as glue or aerosols. </li></ul><ul><li>Many courts are reluctant to allow disaffirmance for intoxication when it may injure another. </li></ul><ul><li>This is a stricter standard because intoxication is a voluntary act. </li></ul>
    19. 19. CAPACITY IN ORGANIZATIONS <ul><li>Some people who work for organizations have the capacity (scope of authority) to bind the organizations to contracts. </li></ul><ul><li>Capacity to contract can be created when the employer tells an employee that he or she is authorized to bind the organization. </li></ul><ul><li>Capacity to contract can be created when an organization leads others to believe that a person has certain authority. </li></ul><ul><li>People acting outside their scope of authority may be held personally liable when the organization is not. </li></ul>
    20. 20. WHICH CONTRACTS CAN BE DISAFFIRMED? <ul><li>Necessaries are goods and services that are reasonably required to maintain a person’s lifestyle. </li></ul><ul><li>Non-necessaries are all other goods and services or relative luxuries. </li></ul>
    21. 21. Limits on Rights of Those Without Capacity <ul><li>Identify the time when a contract cannot be disaffirmed </li></ul><ul><li>Identify contacts that cannot be disaffirmed </li></ul><ul><li>Explain the consequences of misrepresenting age </li></ul>LESSON 9-2
    22. 22. TIME OF DISAFFIRMANCE <ul><li>Any time while still under the incapacity </li></ul><ul><li>Within a reasonable time after attaining capacity </li></ul>
    23. 23. WHAT’S YOUR VERDICT? <ul><li>While still a minor, Beach bought a stereo sound system on credit from McReam’s Electronic Cloud for $500. Beach paid $100 down and promised to pay$50 a month on the unpaid balance until the debt was paid. After making four payments, two of which were made after he reached the age of majority, Beach decided to disaffirm the contract and return the equipment. </li></ul><ul><li>Can Beach do this? </li></ul><ul><li>What ramifications can McReam’s Electronic Cloud expect? </li></ul>
    24. 24. RATIFICATION <ul><li>Ratification may consist of either of the following </li></ul><ul><li>Giving a new promise to perform as agreed </li></ul><ul><li>Any act that clearly indicates the party’s intention to be bound </li></ul>
    25. 25. What Must Be Done Upon Disaffirmance? <ul><li>Anything of value that the minor received or has must be returned </li></ul><ul><li>Loss of value – even if the minor can’t return what was received or it is damaged, they can still get back everything they paid in. </li></ul><ul><li>Some states however, everything must be returned as it was received or the minor is responsible for the loss of value. </li></ul>
    26. 26. Obligations of party with capacity <ul><ul><li>The party with capacity can neither avoid all or any part of a contract for non-necessaries with the party lacking capacity. The lacking party can enforce the contraction on the party with capacity. </li></ul></ul>
    27. 27. WHAT CONTRACTS CANNOT BE DISAFFIRMED? <ul><li>Court-approved contracts – if a contract is approved by court they cannot be disaffirmed </li></ul><ul><li>Major commitments – ex. Enlist in the armed services and educational loans. Marriage contract for minors cannot be disaffirmed. </li></ul><ul><li>Banking contracts – </li></ul><ul><li>Apartment rental – in a few states the lease of an apartment cannot be disaffirmed, even if it not a necessary </li></ul>
    28. 28. <ul><li>Insurance contracts – over one-half of states provide that minors who are over a certain age cannot disaffirm life insurance contract </li></ul><ul><li>Work-related contracts – minors cannot disaffirm contracts related to working in a business or organization </li></ul><ul><li>Sale of realty – some states a minor cannot disaffirm until reaching the age of majority </li></ul>
    29. 29. MISREPRESENTING YOUR AGE <ul><li>In most states minors who lie about their age may disaffirm their contracts. </li></ul><ul><li>In these states, a minor who gives a false age may be held liable for the tort of false representation </li></ul>
    30. 30. WHAT’S YOUR VERDICT? <ul><li>Ron, a mature-looking minor, lied about his age when he bought an extensive wardrobe of clothing from the Casuals Shop. Ron showed his older brother’s driver’s license as identification. He also used his brother’s name on the installment contract. By October, Ron had paid $325 on the $785 contract. He then became bored with the wardrobe and returned it to the store and demanded the return of all payments. </li></ul><ul><li>Must the store return the money? </li></ul>
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