August 9, 2002BUSINESS LAW (Ms. Hawkins)1 CHAPTER 9: LEGAL CAPACITY TO CONTRACT Chapter 10 covers the contractual requirement of capacity: 9-1 Contractual

August 9, 2002 BUSINESS LAW (Ms. Hawkins) 1

CHAPTER 9: LEGAL CAPACITY TO CONTRACT

Chapter 10 covers the contractual requirement of capacity:

►9-1 Contractual capacity of individuals and organizations

► 9-2 Limits on the rights of those without capacity capacity



Hot Debate (Page 142)

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. 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 $5000.



Hot Debate (Page 142)

1. Can Simon prevent Angela from carrying out the terms of the contract? Why or why not?

2. Can Angela be held liable for the magazine’s losses? Why or why not?

Yes. A parent has the legal responsibility to supervise his or her minor, dependent children and this includes control over employment contracts.

Because Angela lied, and because she was engaged in a trade (modeling), she may be liable for the loss to the modeling agency.


CHAPTER 9: LAW OF CAPACITY

Some Terms To Know

► Minor-minors are under the age of majority, which is 18 in most states. ► Contractual Capacity-this is the ability to understand that a contract is being made and its general meaning.► Minors, mentally incapacitated, and intoxicated persons lack contractual capacity.



Capacity RightsThere are two basic protections granted to those who lack contractual capacity:

►Disaffirmance (primary protection)►Purchase of necessaries



Capacity Rights…Disaffirmance is refusal to be bound by a previous legal commitment. It is the primary protection granted to those who lack contractual capacity.

The other party may or may not get back their consideration in the transaction.

Consideration is what a person demands (something of value) and generally must receive in order to make her or his promise legally binding.

Example: If a minor buys and wrecks an ATV, they could disaffirm the contract, recover any payments made, and the dealer would only recover the damaged ATV.



Capacity RightsPurchase of Necessaries is the second basic protection granted to those who lack capacity:

►When protected parties buy necessaries (to maintain life and lifestyle) they only have pay fair market value rather than the contracted price. ►When protected parties buy non-necessaries (luxuries), they must pay the contracted price OR opt to disaffirm the contract.



What’s Your Verdict? (Page 143)--

Susan, age 16, walked into a fur shop out of curiosity and became enthralled with the idea of owning a fur jacket. A persuasive sales lady told her she would be able to use it for the rest of her life and that it was good investment. Her aunt had recently died and willed her enough for the jacket. A week later, she realized that at this time in her life she didn’t have a use for a fur jacket.



What’s Your Verdict? (Page 143)--Can Susan get her money back?

►Yes. Susan purchased a non-necessary and could disaffirm by returning the jacket and requesting her money back. ►After the age of majority, the power to disaffirm is cut off if the person ratifies the contract (if they act in a manner that would suggest they intend to be bound by the contract).



What’s Your Verdict? (Page 145)

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 Krohn hold the minors liable for the rent?

►No. Garcia and Wesley are minors who already have the adequate shelter provided by their parents. Therefore the apartment would not be necessary in their case, and they could disaffirm this contract for a non-necessary.



Minors

The law refers to people under 18 as minors, infants, or those being under the age majority.

The age of majority is 17 in the state of Georgia.



Minors

When can minors be bound by contracts?

After the age of majority, the power to disaffirm is cut off if the person ratifies the contract.

Minors are bound to their contracts if they are emancipated.



EmancipationEmancipation is the severing of the child-parent relationship (no obedience, no support).

► Formal emancipation occurs by court decree. ► Informal emancipation arises from the conduct of the minor and the parent:

1. Mutual agreement to cease support

2. Minor marries3. Minor moves out4. Minor joins military

5. Minor gives birth6. Minor works full-time



Emancipation…Some states give full contractual capacity to emancipated youths, and some don’t.

(http://www.jlc.org/home/mediacenter/factsheets/emancipUSA.html)

Some states with no emancipation status include Arizona, Arkansas, Georgia, Delaware, District of Columbia, Minnesota, Mississippi, Nebraska, New Jersey, New York, Ohio, South Carolina…



Mental Incapacity

►The test for mental incapacity is whether the party understands the consequences of his or her contractual acts. ► If a judge rules that a person is insane, this person has a complete lack of capacity.



Mental Incapacity…

►People with severe mental illness, severe mental retardation, or severe senility lack capacity. ► Abnormal intellectual performance is generally determined by an intelligence quotient (IQ) test. Mental retardation is divided into mild (IQ: 50 to 70) or severe (IQ: < 50). Severe mental retardation is subdivided into moderate, severe, and profound.



Intoxication

►Intoxication can arise from using alcohol, drugs, or inhaling glue or aerosols.

► Many courts only allow disaffirmance for those who were so intoxicated that they did not know they were contracting.

www.famous.nl/site278/index.jsp?USMID=184




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?

►No. Caryn was acting outside her scope of authority as a grocery store checker. Unless the organization authorized her to, Caryn cannot contract for the store.



What’s Your Verdict? (Page 147, Bottom)Lamon, a minor, bought a diamond engagement ring and a necklace for his fiancée, Morgan. He paid for the items in weekly installments of $10. On the day Lamon achieved majority, he and Morgan quarreled. Morgan returned the ring to Lamon but refused to part with the necklace.

Can Lamon return the ring to the jeweler and receive a refund for the ring and necklace?



What’s Your Verdict? (Page 147, Bottom)►Can Lamon return the ring to the jeweler and receive a refund for the ring and necklace? ►Yes. He returned everything still in his possession.►This is an example of Loss of Value, where if minors are unable to return exactly what was received under the contract, they can still get back everything they gave.► Can Moran keep the necklace?► Yes. It was a gift not connected with the proposed marriage..



What’s Your Verdict? (Page 147 Top)

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 topay $50 a month on the unpaid balanceuntil the debt was paid. After making four payments, two of which were made after he reached the age of majority, Beach decided to disaffirm the contract and return the equipment.



What’s Your Verdict? (Page 147 Top)►Can Beach do this? ► No. He can’t disaffirm because he ratified the contract by making payments after reaching majority.

► After attaining capacity, a person may ratify the contract made while under an incapacity.



Exceptions to Disaffirmance

► Court-approved contracts (actors) ► Major commitments (military, ed loans)► Banking contracts (deposits/withdrawals)► Certain life insurance contracts► Work-related contracts► Sale of Realty (cannot disaffirm until after achieving majority)► Apartment Rental (even if the apartment is not a necessary in a few states)



Misrepresenting Your Age

► In most states, minors who lie about their age may disaffirm their contracts.► However, these minors may be held liable for the tort of false representation.► Minors are liable for their torts and delinquent or criminal conduct.



What’s Your Verdict? (Page 148, Bottom)

Ron, a mature-looking minor, lied about his age when he bought an extensive wardrobe of clothing from 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 $785 contract. He then became bored with the wardrobe and returned it to the store and demanded the return of all payments.



What’s Your Verdict? (Page 148, Bottom)

► Must the store return Ron’s money?► Yes. Ron is within his rights as a minor to disaffirm the contract.► But his act was also a tort (fraud). Therefore, in most states, the store could hold back from the refund an amount sufficient to cover the decrease in value of the wardrobe as returned. In other words, they may be able to get damages suffered.



Documents

August 9, 2002BUSINESS LAW (Ms. Hawkins)1 CHAPTER 9: LEGAL CAPACITY TO CONTRACT Chapter 10 covers the contractual requirement of capacity: 9-1 Contractual