CHAPTER 9 Legal Capacity to Contract

CHAPTER 9Legal Capacity to Contract 9-1 Contractual Capacity of Individuals and Organizations 9-2 Limits on the Rights of Those Without Capacity

9-1 Contractual Capacity of Individuals and Organizations GOALS • Identify parties who lack contractual capacity • Explain the role of capacity in organizations

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?

Debate questions • When John turned 16 he received a new car for a birthday present. The same month he responded to a magazine ad from a “club” offering his choice of 10 music CDs for only one penny. His response included his address and correct age. The ad noted that in return for this bargain, anyone who subscribed to it would have to buy one CD at full price for the next six months. The 10 CDs arrived and John ignored any further letters from the club. The next month, however, he received a CD and a bill of $23.99 from the club. John ignored the fill and filed the CD in the back of his CD stack. Over the next several months, John continued to receive a CD a month and a notice of an ever-increasing amount owed to the club. Finally, when the bill reached over $200, John talked to his dad about the situation. His dad, a lawyer, wrote a letter for John telling the club that the sender was canceling the contract and would send back any CDs previously received if the club would pay for postage. John signed the letter and sent it. The club didn’t respond but the CDs and bills stopped coming. • 1. Which party or parties has acted improperly in a legal sense? Explain

Debate questions • The law acts to protect the minor. John also could have demanded and would be legally entitled to receive his penny back. The law places the burden on the party contracting with the minor to effectuate (to do, cause, or accomplish something) the return of whatever goods are still available for such, in this case by supplying the return postage.

What is Capacity? • Contractual capacity – is the ability to understand the consequences of a contact. (They possess the ability to understand) • Does not mean that they understand the actual terms of the contract • The law presumes that an adult has contractual capacity.

Parties with Special contractual rights? • Those who lack capacity are minors, the intoxicated and mentally incapacitated. • Minors are defined as under the age of majority. (This is the age at which a person is entitled to the management of his or her own affairs.) • Most states age of 18, Some are 19 or 21. • Minor – person who has not reached the age of majority. • Minority – ends the day before the birthday of the age set as the age of majority.

Protection form those who lack Capacity? • Disaffirmance – a refusal to be bound by a previous legal commitment. (contracts are considered voidable) • When a contract is disaffirmed the protected party is to receive back anything they put into the contract. The other party may or may not get back their consideration.

Protection form those who lack Capacity? • Most people would not then contract with these protected people therefore there is another protection. • When protected parties purchase things classified as necessary things they are legally allowed to contract. • When the “Protected” contract for necessary items they must pay a reasonable value even if they disaffirm the contract. • Example:

Protection form those who lack Capacity? • Example: • Susan, 16, purchased a fur coat for $5000. she could disaffirm the contract, however, she would still be req2uired to pay the cost of a good cloth coat (approx. $200) if she chose to keep the coat. Receiving only $200 for a $5000 coat is considered punishment for taking advantage of a minor.

Minors • Minors’ contracts are considered voidable. They may disaffirm for a reasonable length of time after achieving their majority. • After the age of majority the ability to disaffirm stops immediately if the person ratifies the contract. • Ratification – acting toward the contract as thought one intends to be bound by it. (Cannot happen before age of majority). • Emancipated minors may be bound by their contracts. (severing of a child-parent relationship)

Emancipation • Formal – occurs when court decrees the minor emancipated. • Informal arises from any of the following: • 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. • Each state is different on how they treat emancipated minors.

Mentally Incapacitated • Less precisely defined • a person lacks the ability to understand the consequences of his or her contractual acts. • This includes people with severe mental illness, severe mental retardation or severe senility. • Judge can rule that a person is permanently insane, therefore forever lacking capacity • Rule surrounding necessaries apply to the mentally incapacitated. • If a judge rules that you were insane when a contract was made then the contract is voidable

The Intoxicated • Drugs and alcohol. • Courts usually only allow disaffirmance for intoxication for those who are so intoxicated they do not know they are contracting. • Stricter standard for this because intoxication is a voluntary act. • If a judge holds that a person is in a permanent state of alcoholism (unable to turn down drink or drug when offered), that person’s contracts are considered void. In several states still referred to as “habitual drunkard”

Question: • What three classifications of individuals lack contractual capacity? • Minors, Mentally incapacitated and the intoxicated.

Who has contractual capacity in organizations? • Scope of authority – within the range of acts the organization has authorized him or her to do. • If someone has capacity it is said to be within their scope of authority. • Capacity to Contract is created when: • The employer tells an employee that they are authorized to bind the organization. • When the organization leads others to believe that a person has certain authority. (Such as job titles). • A person acting outside the scope of their authority generally are personally liable when the organization isn’t.

Question: • In what two ways is capacity to contract on behalf of an organization created? • Can come from a delegation of authority or from an aura of apparent authority created or allowed by the business.

Cases • Clare was age 17, a minor in her state, when she bought a week’s worth of groceries at the local supermarket. Later she discovered she spent too much money and was going to be over her weekly budget. So she took the groceries back and asked for her money back. If she sues, will she get her money back? • No, Clare purchased necessaries so she cannot disaffirm.

Cases • Tanya, a minor, was the daughter of a construction worker. When se was 17, she bought an evening gown for $400.00 to wear to a school dance. After the dance, Tanya decided she didn’t like the dress and returned it asking for the money back. Is she legally entitled to the money? • Yes, the gown was probably not a necessary item for Tanya.

Cases • Janice had been drinking all afternoon before she whet into a used car lot. When signed a contract to purchase a two year old car for as much as it would cost for the same model new. She sought to disaffirm the contract based on intoxication. At the trial, she testified that, at the time of purchase, she knew she was buying a car but could not understand any of the terms of the contract. Will the court hold her to the terms of the contract? • Yes. The only thing required to hold a person who is voluntarily intoxicated to a contract is a showing that they knew they were making a contract. The same hold true for marriage contracts.

9-2 Limits 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

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.

WHEN CAN DISAFFIRMANCE OF A CONTRACT OCCUR? • Any time while still under the incapacity • Within a reasonable time after attaining capacity

AFTER ATTAINING CAPACITY • A person may ratify the contract while under an incapacity. • Ratification – action by the party indicating intent to be bound by the contract. • Giving a new promise to perform as agreed. • any act that clearly indicated the party’s intention to be bound. (Like making payment.)

Question: • While still a minor, Beach bought a stereo system on credit from McReam’s Electonic 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. • The two payments made after he reached majority would be considered a ratification of the contract. Therefore Beach cannot disaffirm.

WHAT MUST BE DONE UPON DISAFFIRMANCE? • When a minor disaffirms, anything of value the minor received and still has must be returned. The minor is then entitled to get back everything that was given to the other party. • Loss of value – In most states if minors are unable to return exactly what was received they can still get back everything. Even if it is used or damaged. • In some states, however, it must be returned exactly in the same condition and if not the minor must pay the difference. • Obligations of party with capacity – usually this party cannot either enforce nor avoid all or any part of a contract for goods or services that are not necessaries against a party lacking capacity.

DISAFFIRMANCE TIMELINE

When can a person who lacks contractual capacity disaffirm a contract? Can occur anytime 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.

Question: • Upon graduation from high school, Robinson, age 17, began a business doing electrical work. He bought $375 in tools from Muller. The venture was a disappointing failure. Discouraged after a month, Robinson asked Muller to take back the tools and to return his $375 payment. • Robinson would not be able to avoid his contract if he lived in a state with a work-related contracts law.

CONTRACTS THAT CANNOT BE DISAFFIRMED • Most of these reasons vary from state to state, however, they were put into place because people would not contract with minors if they were not available. • Court-approved contracts – in all states minors cannot void these. • Major commitments – contracts to enlist in the armed services or for educational loans. Marriage contracts also. • Banking contracts – in most states permitted to make deposits and withdrawals.

CONTRACTS THAT CANNOT BE DISAFFIRMED • Insurance contracts – in ½ states minors cannot disaffirm life insurance contracts. • Work-related contracts – in most states minors who engage in a business or trade cannot disaffirm agreements involving their business. • Sale of realty – in some states if you sell or borrow against real estate it cannot be disaffirmed. • Apartment rental – in a few states a lease of an apartment cannot be disaffirmed even if the apartment is not necessary.

Which contracts that cannot be disaffirmed apply in all 50 states? disaffirmance of court-approved contracts and major commitments

Question: • 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? Must the store return his money? • Ron is within his rights as a minor to disaffirming the contract. However, he also committed the tort of fraud. Therefore in most states the Casuals Shop probably could hold back form the refund an amount of money sufficient to cover the decrease in value of the wardrobe as returned. Or the store could hold back the full amount if nothing was returned. Ron could be held liable in damages for deceiving the seller. These damages could exceed the price of the goods he lied to get.

CONTRACTUAL EFFECT OF MISREPRESENTING AGE • The minor could be held liable for the tort of false representation. • Party to the contract may collect damages • Minor still may be able to disaffirm contract

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? Even if minors lie about their age, they still may disaffirm their contracts for goods or services that are not necessary.

Question: • Richard bought car insurance while he was 16. He had a perfect driving record until he reached the age of majority, 21, in his state. The day after his birthday, Richard disaffirmed the insurance contract and asked for the return of his payments. In most states would he be legally entitled to the money? • No, in most states, insurance contracts cannot be disaffirmed by a minor.

Question: • Linda subscribed to a “Book of the Month” program on her sixteenth birthday. She received monthly books from the publisher until her twenty-first birthday. She continued receiving books for another six months, and then attempted to disaffirm. Will she succeed? • No, Linda’s conduct in accepting the books for six months is probably ratification which eliminates her right to disaffirm.

Question: • In Juan’s state, the age of majority is 21. Three weeks after his eighteenth birthday. Juan joined the Marine Corp. After two weeks of boot camp, he decided he didn’t like the lifestyle. He told the Marines he was disaffirming his contract to join. Will he succeed? • No, contracts to enlist in the armed forces cannot be disaffirmed by a minor.

Question: • Beverly was 14 when she bought a used motorcycle that wouldn’t run. Beverly made repairs and got it going. She rode it illegally for more than six months. Then a leak developed in a gas line and the bike caught fire. it was a total loss. Beverly returned the burned-out motorcycle to the seller and asked for all her money back. Will she succeed? • Yes, on disaffirmance, the minor is generally obligated only to return that much of the consideration as she possess (here the burned-out motorcycle)

CHAPTER 9 Legal Capacity to Contract