Business Law: Ch 9
Legal Capacity to Contract
What is Capacity
• Contractual Capacity – Ability to understand
the consequences of a contract
– Does not require that a person understand the
actual terms of the contract
Lack Some Capacity
• Three groups lacking some capacity
1. Minors
2. Intoxicated
3. Mentally Impaired
Minors
• Minors – Under the age of majority
– In Ohio the age of majority is 18
– Ends the day before the birthday of the age
Protecting those lacking capacity
• Contracts of those lacking capacity are
voidable
– Disaffirmance – Protection granted to those
lacking capacity
• In contract law it means a refusal to be bound
by a previous legal commitment
• When a protected party disaffirms a contract,
by law the protected party is to receive
whatever they have put into the contract
»The other party may or may not get back
their consideration
Disaffirm
• Example – A protected party bought a fourwheel ATV from a dealership and then
wrecked it. You can disaffirm the contract and
recover any payments made.
– The dealership would only be able to recover the
damaged ATV
Necessities
• Necessities – things needed to maintain life
– The protected must at least pay a reasonable
value for the necessities even if they disaffirm the
actual purchase contract
Minors
• Contracts are considered voidable (may get
out of)
• May also disaffirm for a reasonable length of
time after achieving the age of majority.
• After majority, the power to disaffirm is
immediately cut off if you ratify the contract
• Minors also may find themselves bound to
their contract if they are Emancipated
Emancipated
• Emancipated – Severing the parent-child
relationship
– Ends the duty of the parent to support a child and
the duty of the child to obey their parent
– Upon reaching the age of majority you are
emancipated
Emancipated
• Formal emancipation
– Court decrees the minor emancipated
• Informal emancipated
– Arises from the conduct of the parent and minor
Informal Emancipated
• 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
Mentally Incapacitated
• Mentally Incapacitated - A person lacks the
ability to understand the consequences of his
or her contract
• If permanently Insane – Contract is Void
• Temporary Insane – Contract is Voidable
Intoxicated
• Does the person have the ability to
understand the consequences
• Courts typically allow disaffirmance only for
those who are so temporarily intoxicated that
they do not even know they are contracting
– Stricter because intoxication is a voluntary act
• If a person is in a permanent state of
intoxication – Contract is void
Who has contractual capacity in
organizations
• Scope of Authority – has capacity to contract
• People acting outside the scope of authority,
are personally liable when the organization
isn’t
9-1 Assessment
• Turn to page 161 and complete the 9-1
Assessment Questions
When can disaffirmance occur
• Disaffirmance – can happen:
1. Any time still under the incapacity
2. Within a reasonable time after attaining capacity
• After attaining capacity, a person can ratify
their contract
– Ratification – Action by the party indicating
intent to be bound by the contract
Ratification
• For a minor, ratification must occur after
achieving majority.
• Ratification may consist of:
1. Giving a new promise to perform as agreed
2. Any act (such as making a payment) that clearly
indicates the party’s intention to be bound
What must be done upon disaffirming
• When a minor disaffirms, anything of value
the minor received and still has must be
returned.
• The minor is entitled to get back everything
that was given to the other party.
Contracts that cannot be disaffirmed
• Court approved contracts
• Major commitments – armed services,
educational loans
• Banking contract
• Insurance Contracts
• Work Related Contracts
• Sales of Realty
• Apartment rental
Misrepresenting Age
• Minors who lie about their age may disaffirm
contracts
• However, they are liable for the tort of false
representation
9-2 Assessment
• Turn to page 165 and complete the 8
questions