Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights...

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Chapter 16 Chapter 16 Capacity and Capacity and Legality Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Transcript of Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights...

Page 1: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 16Chapter 16Capacity and Capacity and

LegalityLegality

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Page 2: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Contractual Capacity Contractual Capacity (Definition):(Definition):

Mental ability to understand rights and Mental ability to understand rights and obligations established by contract, obligations established by contract,

with the presumptive ability to with the presumptive ability to understand how to comply with terms understand how to comply with terms

of agreementof agreement

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Page 3: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Contractual CapacityContractual Capacity

General Rule of Law: Natural persons General Rule of Law: Natural persons over the age of majority (18 in most over the age of majority (18 in most states) are presumed to have the full states) are presumed to have the full legal capacity to enter into binding legal capacity to enter into binding

legal contractslegal contracts

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Page 4: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Individuals Who Have Only Individuals Who Have Only Limited Capacity to ContractLimited Capacity to Contract

MinorsMinors

Those suffering from mental deficiency Those suffering from mental deficiency that renders them incapable of that renders them incapable of understanding the nature and obligations understanding the nature and obligations of contractsof contracts

Those who are intoxicatedThose who are intoxicated

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Page 5: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Rules Regarding Minor’s “Contractual Power Rules Regarding Minor’s “Contractual Power of Avoidance”of Avoidance”

Disaffirmance (“Power of Avoidance”): Minors’ right, Disaffirmance (“Power of Avoidance”): Minors’ right, until reasonable time after reaching age of majority, until reasonable time after reaching age of majority, to disaffirm/avoid their contractsto disaffirm/avoid their contracts

To exercise right, minor need only demonstrate, To exercise right, minor need only demonstrate, through words and/or actions, intent to rescind through words and/or actions, intent to rescind contractcontract

Minor must return any consideration received (if Minor must return any consideration received (if still in minor’s possession/control), regardless of still in minor’s possession/control), regardless of conditioncondition

Even if consideration damaged/destroyed, other Even if consideration damaged/destroyed, other party has no recourse against minorparty has no recourse against minor

Rules designed to discourage competent parties Rules designed to discourage competent parties from entering into contracts with minorsfrom entering into contracts with minors

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Page 6: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Exceptions to Minor’s Right to Exceptions to Minor’s Right to Disaffirm ContractDisaffirm Contract

Contract for Necessaries (Definition): Contracts that Contract for Necessaries (Definition): Contracts that supply minor with basic necessities of lifesupply minor with basic necessities of life

Examples: food, clothing, shelter, basic medical servicesExamples: food, clothing, shelter, basic medical services

Ratification (Definition): Acceptance of terms of contract Ratification (Definition): Acceptance of terms of contract (entered into as a minor) after reaching age of majority(entered into as a minor) after reaching age of majority

Express Ratification: Occurs when, after reaching age of Express Ratification: Occurs when, after reaching age of majority, individual states (either orally or in writing) that majority, individual states (either orally or in writing) that he/she intends to be bound by contract entered into while a he/she intends to be bound by contract entered into while a minorminor

Implied Ratification: Occurs when former minor takes action Implied Ratification: Occurs when former minor takes action after reaching age of majority consistent with intent to ratify after reaching age of majority consistent with intent to ratify contract contract

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Page 7: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Parental Liability for Minors’ Contracts, Parental Liability for Minors’ Contracts, Necessaries, and TortsNecessaries, and Torts

General Rule: Parents not liable for contracts General Rule: Parents not liable for contracts entered into by their minor childrenentered into by their minor children

Exception: Contracts for necessariesException: Contracts for necessaries

General Rule: Parents not liable for torts General Rule: Parents not liable for torts committed by their minor childrencommitted by their minor children

Exception: Failure to properly supervise child, Exception: Failure to properly supervise child, subjecting others to unreasonable risk of harm subjecting others to unreasonable risk of harm from the childfrom the child

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Page 8: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Individuals Having No Capacity to Individuals Having No Capacity to ContractContract

Those adjudicated insaneThose adjudicated insane

Those adjudicated habitually intoxicatedThose adjudicated habitually intoxicated

Those with appointed legal guardiansThose with appointed legal guardians

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Page 9: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Rules Regarding IntoxicationRules Regarding Intoxication

General Rule: Contracts made by intoxicated General Rule: Contracts made by intoxicated persons are voidablepersons are voidable

If intoxication merely causes person to exercise If intoxication merely causes person to exercise poor judgment, contract not voidable unless other poor judgment, contract not voidable unless other party unfairly capitalized on the impaired judgmentparty unfairly capitalized on the impaired judgment

When intoxicated person becomes sober, contract When intoxicated person becomes sober, contract can be ratified or disaffirmed; however, courts will can be ratified or disaffirmed; however, courts will liberally interpret behavior that seems likes liberally interpret behavior that seems likes ratification once intoxicated person becomes soberratification once intoxicated person becomes sober

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Page 10: Chapter 16 Capacity and Legality Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Illegal ContractsIllegal Contracts

Contracts with no legal purpose and/or subject matterContracts with no legal purpose and/or subject matter

Example: Agreement to commit crime/tortExample: Agreement to commit crime/tort

Contracts violating statute(s) and/or “public policy”Contracts violating statute(s) and/or “public policy”

Example: Usurious loan agreement (loan contract Example: Usurious loan agreement (loan contract exceeding state-imposed maximum interest rate)exceeding state-imposed maximum interest rate)

Example: Unconscionable contract (Agreement so Example: Unconscionable contract (Agreement so unfair that it is “void of conscience”)unfair that it is “void of conscience”)

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