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Lessons. CHAPTER 10. Law of Capacity. 10-1 Capacity Rights 10-2 Limitations on Capacity Rights. GOALS. LESSON 10-1. Capacity Rights. Identify parties who have contractual capacity Identify what contracts can be disaffirmed Explain the role of capacity in organizations.
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Lessons Chapter 10 CHAPTER 10 Law of Capacity 10-1 Capacity Rights 10-2 Limitations on Capacity Rights
GOALS Chapter 10 LESSON 10-1 Capacity Rights Identify parties who have contractual capacity Identify what contracts can be disaffirmed Explain the role of capacity in organizations
Chapter 10 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;
Chapter 10 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
Chapter 10 Parties with special contractual rights All of these parties are incapacitated: Minors / intoxicated / mentally incapacitated
Chapter 10 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
Chapter 10 Disaffirmance • Protected party disaffirms contract receives back whatever they have put into the contract • Other party may or may not get back their consideration
Chapter 10 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
Chapter 10 Problems with contracting • Legal ability to disaffirm a contract • Ability to get back whatever had been given to the other party Reluctance to enter into contracts with incapacitated persons
Chapter 10 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
Chapter 10 Necessaries • Minor buys a $5,000. fur coat • Disaffirms contract • Required to pay ??? • Good cloth coat $200-$300 for fur coat if she chose to keep it • Punishment to seller for taking advantage of minors in contractual dealings
Chapter 10 MINORS • In most states, people under the age of 18 • In a few states, age of majority is 19 or 21 • Also referred to as being in their minority or under the age of majority • Ends the daybefore the birthday of the age set as the age of majority
Chapter 10 Minors • Contracts are considered voidable • May disaffirm contracts during their minority • May also disaffirm for a reasonable length of time after achieving their majority
Chapter 10 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
Chapter 10 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.
Chapter 10 EVIDENCE OF INFORMAL 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 joins the armed forces • The minor gives birth • The minor undertakes full-time employment
Chapter 10 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.
Chapter 10 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.
Chapter 10 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
Chapter 10 Temporarily Intoxicated • Being so under the influence of alcohol or drugs that you do not even know that you are entering a contract
Chapter 10 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”
Chapter 10 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.
Chapter 10 CAPACITY RIGHTS • Necessaries • Non-necessaries • Disaffirmance • Ratification
Chapter 10 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.
Chapter 10 CAPACITY IN ORGANIZATIONS • If someone has this capacity, it is said to be within his or her scope of authority
GOALS Chapter 10 LESSON 10-2 Limitations on Capacity Rights Identify the time when a contract cannot be disaffirmed Identify contracts that cannot be disaffirmed Explain the consequences of misrepresenting age
Chapter 10 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
Chapter 10 RATIFICATION Ratification may consist of either of the following • Giving a new promise to perform as agreed • Any act (such as making payments to the seller) that clearly indicates the party’s intention to be bound
Chapter 10 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?
Chapter 10 What’s your verdict? • No -- Beach ratified the contract by making payments after reaching majority • Once ratification occurs, it cannot be withdrawn
Chapter 10 Time Majority or Capacity Attained TIME TIME Rights of Minors in Contracts for Goods and Services that are Not Necessaries Period of Minority Period of Majority Right to disaffirm Right to disaffirm lasts For a reasonable length of time after majority is ottained Ratification cuts off the right to disaffirm
Chapter 10 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
Chapter 10 RETURN OF GOODSOR SERVICES • Loss of value – • Minor can return nothing because goods have been lost, consumed or destroyed • In some states, minor must return everything in a condition as good as it was when received • If this cannot be done, must pay the difference in value, or deduct the difference from the amount to be refunded
Chapter 10 • Lamon (minor) buys diamond engagement ring & necklace for finacee, Morgan • Weekly installments $10 • 18 – quarreled and Morgan returns ring but not necklace • Can Lamon return ring & necklace and receive a full refund?
Chapter 10 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
Chapter 10 RETURN OF GOODSOR SERVICES • Obligations of party with capacity Cannot enforce nor avoid all or any part of a contract for goods or services that are not necessaries
Chapter 10 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
Chapter 10 • 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
Chapter 10 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
