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LAW FOR BUSINESS AND PERSONAL USE LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING© SOUTH-WESTERN PUBLISHING
Chapter 10Chapter 10 Slide Slide 11
Law of Capacity
10-110-1 Capacity Rights
10-210-2 Limitations on Capacity Rights
CHAPTER 10
Lessons
LAW FOR BUSINESS AND PERSONAL USE LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING© SOUTH-WESTERN PUBLISHING
Chapter 10Chapter 10 Slide Slide 22
Capacity Rights
Identify parties who have contractual capacityIdentify what contracts can be disaffirmedExplain the role of capacity in organizations
LESSON 10-1
GOALS
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WHAT IS CAPACITY?
Contractual capacity is the ability to understand that a contract is being made and its general meaning.
You possess the
A-B-I-L-I-T-Y to understand;
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WHAT IS CAPACITY?
Person doesn’t have to understand the actual terms (written in technical legal terminology)
Person does not need to merely understand the terms
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Parties with special contractual rights
All of these parties are incapacitated:
Minors / intoxicated / mentally incapacitated
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Protections for those who lack capacity
Contracts of most parties who lack capacity are considered voidable.
D I S A F F I R M A N C E – refusal to be bound by a previous legal commitment
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Disaffirmance
Protected party disaffirms contract receives back whatever they have put into the contract
Other party may or may not get back their consideration
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Disaffirmance
i.e. minor buys an ATV from a dealership and then wrecks it.
Minor could disaffirm contract and recover any payments made.
Dealership could only recover the damaged ATV
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Problems with contracting
Legal ability to disaffirm a contractAbility to get back whatever had been
given to the other party
Reluctance to enter into contracts with incapacitated persons
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Another protection --
Applies when protected parties purchase things classified as “necessaries”
Things needed to maintain life – typically food, clothing, and shelter
Must pay a “reasonable value” even if contract is disaffirmed
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Necessaries
Minor buys a $5,000. fur coatDisaffirms contractRequired to pay ???Good cloth coat $200-$300 for fur coat
if she chose to keep itPunishment to seller for taking
advantage of minors in contractual dealings
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MINORS
In most states, people under the age of 18In a few states, age of majority is 19 or 21Also referred to as being in their minority or
under the age of majority Ends the day before the birthday of the
age set as the age of majority
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Minors
Contracts are considered voidableMay disaffirm contracts during their
minorityMay also disaffirm for a reasonable
length of time after achieving their majority
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Age of Majority
After the age of majority, the power to disaffirm is immediately cut off if the person ratifies the contract
Ratification – acting toward the contract as though one intends to be bound by it
Can never occur before the age of majority
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EMANCIPATION
Emancipation is the severing of the child-parent relationship.
Early emancipation Formal emancipation occurs when a court
decrees the minor emancipated.Informal emancipation arises from the
conduct of the minor and the parent.
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EVIDENCE OF INFORMAL EMANCIPATION
The parent and minor agree that the parent will cease support
The minor marriesThe minor moves out of the family homeThe minor joins the armed forcesThe minor gives birthThe minor undertakes full-time
employment
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New Jersey
Termination of support at age of majority or as determined by court Newburgh v. Newburgh, 88 N.J. 529, 443 A.2d 1031 (1982) held that the court has jurisdiction to award a payment of support and expenses of a child attending college even though the child has reached the age of majority.
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MENTAL INCAPACITY
Mental incapacity is much less precisely defined than minority.
The test is whether the party understands the consequences of his or her contractual acts.
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INTOXICATION
Intoxication can arise from using alcohol, from using drugs, or inhaling products such as glue or aerosols.
Many courts are reluctant to allow disaffirmance for intoxication when it may injure another.
Stricter standard because intoxication is a voluntary act
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Temporarily Intoxicated
Being so under the influence of alcohol or drugs that you do not even know that you are entering a contract
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Permanently Intoxicated
Being unable to turn down a drink or drug whenever offered
Often referred to as “habitual drunkard” in several states
Contracts are considered “void”
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WHICH CONTRACTS CAN BE DISAFFIRMED?
Necessaries are goods and services that are reasonably required to maintain a person’s lifestyle.
Non-necessaries are all other goods and services or relative luxuries.
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CAPACITY RIGHTS
NecessariesNon-necessariesDisaffirmanceRatification
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CAPACITY IN ORGANIZATIONS
Some people who work for organizations have the capacity to bind the organizations to contracts.
Capacity to contract can be created when the employer tells an employee that he or she is authorized to bind the organization.
Capacity to contract can be created when an organization leads others to believe that a person has certain authority.
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CAPACITY IN ORGANIZATIONS
If someone has this capacity, it is said to be within his or her scope of authority
LAW FOR BUSINESS AND PERSONAL USE LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING© SOUTH-WESTERN PUBLISHING
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Limitations on Capacity Rights
Identify the time when a contract cannot be disaffirmed
Identify contracts that cannot be disaffirmedExplain the consequences of misrepresenting
age
LESSON 10-2
GOALS
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TIME OF DISAFFIRMANCE
Any time while still under the incapacity (necessaries & goods or services that
are not necessaries)Within a reasonable time after attaining
capacity
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RATIFICATION
Ratification may consist of either of the followingGiving a new promise to perform as agreedAny act (such as making payments to the
seller) that clearly indicates the party’s intention to be bound
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What’s your verdict?
Beach (minor) bought stereo system on credit from McReam’s Electronic Cloud for $500
Beach paid $100 down - $50/mo. payments afterwards
After making 4 payments (2 while minor, 2 while majority) – wants to disaffirm
Can he do so?
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What’s your verdict?
No -- Beach ratified the contract by making payments after reaching majority
Once ratification occurs, it cannot be withdrawn
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TIME
Rights of Minors in Contracts for Goods and Services that are Not Necessaries
TIME
Time Majority or Capacity Attained
Period of Minority Period of Majority
Right to disaffirm Right to disaffirm lastsFor a reasonable length of time after majority
is ottainedRatification cuts off the right to disaffirm
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What must be done upon disaffirmance
Minor disaffirms –
anything of value minor received and still has, must be returned
can return used or damaged goods
Minor then entitled to get back everything that was given to the other party
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RETURN OF GOODSOR SERVICES
Loss of value – Minor can return nothing because goods have
been lost, consumed or destroyedIn some states, minor must return everything in
a condition as good as it was when receivedIf this cannot be done, must pay the difference
in value, or deduct the difference from the amount to be refunded
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Lamon (minor) buys diamond engagement ring & necklace for finacee, Morgan
Weekly installments $1018 – quarreled and Morgan returns ring
but not necklaceCan Lamon return ring & necklace and
receive a full refund?
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In some states --
Morgan – legally keep necklace Lamon – could return the ring and
demand refund for monies paid for necklace & ring most certainly entitled to money paid on
ring ( and in some states – necklace)Why? Necklace is no longer in his
possession
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RETURN OF GOODSOR SERVICES
Obligations of party with capacityCannot enforce nor avoid all or any part of a contract for goods or services that are not necessaries
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WHAT CONTRACTS CANNOT BE DISAFFIRMED?
Court-approved contracts – minors working as actors/actresses, professional sports
Major commitments – enlisting in armed services / educational loans / marriage
Banking contracts – make deposits & withdrawals
Insurance contracts – over ½ states do not allow minors to disaffirm
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Work-related contracts – minors who engage in business or trade
Sale of realty – cannot disaffirm until after achieving majority
Apartment rental – a few states will not allow the minor to disaffirm, even if it’s not a necessary
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MISREPRESENTING YOUR AGE
In most states minors who lie about their age may disaffirm their contracts.
In these states, a minor who gives a false age may be held liable for the tort of false identification