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Chapter 10

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  1. Chapter 10 Law of Capacity

  2. 10.1 Capacity Rights • Goals: • *Identify parties who have contractual capacity • *Identify what contracts can be disaffirmed • *Explain the role of capacity in organizations

  3. Debate • Angela was a 17-year –old high school student who, at her boyfriend’s urging, signed a contract to work as a model for a modeling agency. Angela claimed she was 22 years old. She received her first assignment a week later. It involved flying to New York City for a magazine photo shoot. The day before the photo shoot, Angela’s father Simon learned what his daughter had done. Simon called the agency and informed them that Angela would not be at the photo shoot the next day, and that he would not allow his daughter to be a model. As a result, the magazine had to cancel the photo shoot and they lost over $5,000. • Can Simon prevent Angela from carrying out the terms of the contract? Why or why not? • Can Angela be held liable for the magazine’s losses? Why or why not?

  4. Debate 1. Yes, a parent has the legal responsibility to supervise his or her minor, dependent children and this includes control over their employment contracts. 2. Because Angela lied, and because she was engaged in a trade (modeling), she may be liable for the loss to the modeling agency.

  5. Contractual Capacity • Contractual capacity: ability to understand that a contract is being made and its general meaning. • -Adults are presumed to have a contractual capacity. • Parties with special contractual rights: • Minors • Mentally incapacitated • Intoxicated persons

  6. Minors: • Persons under the age of majority • *In most states, people under age of 18 •

  7. Emancipation Emancipation: severing of the child-parent relationship. Ends the duty of the parent to support the child and the duty of the child to obey the parent. Minor naturally becomes emancipated upon reaching the age of majority. Early emancipation: • 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

  8. Discussion *At what age do you think children should be able to work? *Do you think child labor should be regulated by the government? *If so, at what level of government? *Should laws be different based on the type of employment, the age of the child, or the child’s individual situation?

  9. Mental Incapacity • Less defined – test is whether the party understands the consequences of his or her contractual acts • People with severe mental illness, severe mental disability, or severe senility lack capacity. • If a judge rules a person is insane, this person has a complete lack of capacity • All contracts executed by this person are void

  10. 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 other children sued to have the deed set aside because Emily lacked the mental capacity to contract. Emily did not understand the consequences of the transaction. Because this is the requirement for mental capacity, her estate can disaffirm the contract to sell the home.

  11. Intoxication • Being so under the influence of alcohol or drugs that you do not know what you are doing or being so under the influence that you do not understand the consequences of your contractual acts • Intoxication is a voluntary act, so the courts allow disaffirmance only for those who were so intoxicated they did not know they were contracting.

  12. Case Joe drank a six-pack of beer on a Sunday afternoon while watching a pro football game. Joe often drank this much. After the game, Gordon, a real estate agent, came to Joe’s house and presented an offer to buy from someone who had recently viewed his home. The price was $202,000. Joe signed the contract even though he felt a little tipsy. Later, someone offered $230,000. Although Joe had been drinking, he cannot disaffirm the contract based on intoxication. He did not satisfy either court standard for intoxication.

  13. Which Contracts Can be Disaffirmed?

  14. What’s Your Verdict? • Against their parents’ wishes, Garcia and Wesley – both minors – left home. Together they signed a 12-month lease to rent a nearby furnished apartment from Krohn at the bargain price of $350 a month. After three months, the teenagers ran out of money and returned to their homes. Krohn could not find new tenants. • Could he hold the minors liable for the rent?

  15. 2 rights given those who lack capacity • Right to disaffirm contracts for non-necessaries • Right to pay a fair price instead of the contract price for contracts for necessaries. • Necessaries – goods and services reasonably required to maintain a person’s lifestyle – basic food, clothing, shelter, and transportation • Non-necessaries– All other goods and services • -The person must not already possess those goods or services. • In What’s Your Verdict, if the parents of both Garcia and Wesley provided adequate shelter, the apartment would not be a necessary.

  16. Capacity in Organizations

  17. What’s Your Verdict? Alicia was a wholesaler of flowers. Her friend, Caryn, worked for 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 10 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?

  18. -Some people who work for organizations have the capacity to bind the organizations to contracts. If someone has this capacity, it is within his or her scope of authority. -People acting outside the scope of their authority are generally personally liable when the organization isn’t.

  19. 10.2 Limitations on Capacity Rights • Goals: • *Identify the time when a contract cannot be disaffirmed • *Identify contracts that cannot be disaffirmed • *Explain the consequences of misrepresenting age

  20. What’s Your Verdict? • While still a minor, Beach bought a stereo sound system on credit from McReam’s Electronic 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 ofur payments, two of which were made after he reached the age of majority, Beach decided to disaffirm the contract and return the equipment. Can Beach do this?

  21. Generally, a person lacking contractual capacity can disaffirm a contract for non-necessaries 1. Any time while still under the incapacity, or 2. Within a reasonable time after attaining capacity Ratification – action by the party indicating intent to be bound by the contract. For a minor, ratification must occur after achieving majority. Ratification can be: 1. Giving a new promise to perform as agreed, or 2. Any act (such as making payments to the seller) that clearly indicates the party’s intention to be bound. • In What’s Your Verdict, Beach made payments after reaching majority. This act cut off his power to disaffirm. Once ratification occurs, it may not be withdrawn.

  22. Return of Goods and Services • In all states, 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.

  23. What Contracts Cannot be Disaffirmed? -- Vary by State What’s Your Verdict • 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. Must Muller do so?

  24. Contracts that Cannot be Disaffirmed • Court-approved contracts – minors who are employed as actors or actresses or as professionals in sports usually have their contracts approved by a court • Major commitments – contracts to enlist in the armed services, educational loans, marriage • Banking contracts – minors permitted to make deposits and withdrawals • Insurance contracts • Work-related contracts – minors who engage in a business cannot disaffirm agreements involving their business. In What’s Your Verdict – Robinson would not be able to avoid his contract • Sale of realty – minor who owns real property and sells it or borrows money against it cannot disaffirm • Apartment rental – In a few states, the lease of an apartment cannot be disaffirmed even if the apartment is not a necessary.

  25. Misrepresenting Your Age Ron, a mature-looking minor, lied about his age when he bought an extensive wardrobe of clothing form 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 $787 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 the money?

  26. Misrepresenting Your Age -Minors who lie about their age may disaffirm their contract. However, a minor who gives a false age may be held liable for the tort of false representation. -Damages suffered because of the minor’s fraud may be collected. In What’s Your Verdict, Ron is within his rights as a minor in disaffirming the contract, but his act was a tort (fraud). The Casuals Shop could probably hold back from the refund an amount of money sufficient to cover the decrease in value of the wardrobe returned. Ron could be held liable in damages for deceiving the seller, and these damages could exceed the price of the goods he lied to get.

  27. Research About Law • Investigate the effect in your state of using fake identification in contracts to purchase alcohol or tobacco, or for entering age-restricting areas. Summarize your findings in a paragraph. Note especially the effect on the ability to rescind the contract. •

  28. Using a Fake ID:  You can be prosecuted for a number of different crimes for using fake identification.  Since these laws are regulated by state, every state will have its own punishments.  These penalties can run the gamut from being a simple $500 misdemeanor in some states, to being considered criminal impersonation or forgery, both felonies punishable by up to a year and a half in state prison.  If the ID is used to purchase a firearm, it’s a felony in every state, and can get you up to 7 years in prison.