LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 10 Slide 1 Law of Capacity...

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



Capacity Rights

Identify parties who have contractual capacityIdentify what contracts can be disaffirmedExplain the role of capacity in organizations

LESSON 10-1

GOALS



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;



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



Parties with special contractual rights

All of these parties are incapacitated:

Minors / intoxicated / mentally incapacitated



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



Disaffirmance

Protected party disaffirms contract receives back whatever they have put into the contract

Other party may or may not get back their consideration



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



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



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



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



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



Minors

Contracts are considered voidableMay disaffirm contracts during their

minorityMay also disaffirm for a reasonable

length of time after achieving their majority



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



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.



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



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.



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.



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



Temporarily Intoxicated

Being so under the influence of alcohol or drugs that you do not even know that you are entering a contract



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”



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.



CAPACITY RIGHTS

NecessariesNon-necessariesDisaffirmanceRatification



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.



CAPACITY IN ORGANIZATIONS

If someone has this capacity, it is said to be within his or her scope of authority



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



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



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



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?



What’s your verdict?

No -- Beach ratified the contract by making payments after reaching majority

Once ratification occurs, it cannot be withdrawn



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



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



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



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?



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



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



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



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



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

LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 10 Slide 1 Law of Capacity...

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