Contractual Capacity of Individuals and Organizations

1. Contractual Capacity of Individuals and Organizations Bartek, Thompson, Bond, Meanix

2. What is Capacity, you ask? • Contractual Capacity- defined by the law to mean the ability to understand the consequences of a contract. • Some people have special contractual rights due to lack of capacity; for example- • Minors • The intoxicated • The mentally incapacitated

3. Minority • For contract law purposes minors are defined as anyone under the age of majority. • The age of majority, meaning someone is permitted to handle his own affairs, is 18 in most states. • Anyone younger is considered a minor. • Minority ends the day before the birthday of the age set for majority.

4. Protection for those who Lack Capacity • Disaffirmance- It is the primary protection for those who lack contractual capacity. • It is the refusal to be bound by a previous legal commitment, and the one who lacked capacity is legally able to get back what he put in to the contract. • Another protection given to those who lack capacity such as minors is the right to purchase necessaries- the things need to maintain life. • When the protected make contracts for necessaries they must at least pay a reasonable value for them if they disaffirm the actual purchase contract.

5. Minors • The contracts made by minors are considered voidable • Minors may disaffirm contracts during their minority or for a reasonable length of time after becoming part of majority (18 in most states) • Ratification- the acting toward the contract as though one intends to be bound by it • Minors can be bound to contracts if they are emancipated.

6. Emancipation • Emancipation-is the severing of parent-child relationship and state may require loss of capacity protection • Formal emancipation is when the court decrees the minor is emancipated • Informal emancipation occurs when • The parent and minor agree that their will be no more parental support. • The minor gets married. • The minor moves out. • The minor joins the army. • The minor gives birth. • The minor undertakes full time employment.

7. The Mentally Incapacitated • Mental Incapacity- under contract law, meaning someone lacks the ability to understand the consequences of his contractual acts. • These people include, those with mental illness, mental retardation, severe senility, or if they are ruled permanently insane • All contracts executed by this person are void. However, rules surrounding necessaries apply to the insane person.

8. CASE • Emily was 88 years old when she contracted to sell her family home to her daughter Gail for about 15 percent of its value. At the time, she was suffering from advanced Alzheimer’s disease and didn’t understand the consequences of the transaction. Two months later Emily died. Her will provided for all her property to be split equally among her four children. The children sued to have the deed set aside. Is the contract voidable?

9. ANSWER • Yes, because Emily lacked the mental capacity when she deeded the home to Gail.

10. The Intoxicated • Can arise from using alcohol or drugs such as marijuana or crack cocaine or inhaling glue. • Most courts are reluctant to consider an intoxicated person’s contracts voidable because this would allow disaffirmance for intoxication even though it may injure an innocent person. • If the judge sees that a person is an alcoholic those persons contracts are considered voidable. • http://www.youtube.com/watch?v=5dBM4o6AXXs&feature=relatedLES 306 Business Law- Contractual Capacity

11. Contractual capacity in organizations • Scope of authority- the capacity one has within the range of acts the organization has authorized him or her to do. • Capacity is also created when the organization leads others to believe that someone has a certain authority. • Capacity to contract can be created when the employer tells an employee that they are authorized to bind the organization • When doing business with organizations it is important to ensure that the person signing the contract has the scope of authority to bind the organization.

12. What your verdict? • Alicia was a wholesaler of flowers. Her friend Caryn worked at a grocery store as a checker. One day Alicia stopped by during Caryn’s break and asked if she could sell her flowers through that store. Caryn said yes and signed a contract to purchase ten dozen roses for the store. When Alicia tried to deliver the roses they were refused by the store and Alicia sued. Is the store bound by Caryn’s contract?

13. ANSWER • The store is not bound by the contract but Caryn may be liable to Alicia for the lost profit on the sale of roses.