business law chapter 6: capacity and legality. introduction contracts must have a legal subject in...
TRANSCRIPT
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Business Law
Chapter 6:
Capacity and Legality
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Introduction
• Contracts must have a legal subject in order to be enforceable.
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Why is capacity important?
• If a plaintiff seeks to enforce a contract, he must prove that the defendant had legal capacity to enter into a contract.
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Defining Capacity
• Capacity: Ability to do something, such as the mental ability to make a rational decision.
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• Capacity is an essential element of a contract because it shows that a party understood the contractual obligation.
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• Capacity refers to a party’s ability to understand what is happening, the effect of what agreeing to a contract means and the ability to exercise free will in making this choice.
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• Capacity is not the same thing as wise choice.
• A person can exercise poor judgment, enter into a contract that is disadvantageous, or even make a bad bargain, and still have full, legal capacity to contract.
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A Short History of Capacity
• Prior to a more enlightened approach to law in general and contractual obligations in particular, certain classes of people were absolutely barred from entering into contracts.
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Who May Contract?
• Contracts need at least two parties, both of whom have legal capacity.
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Natural Persons
• Any person who is not disqualified for some reason can enter into a contract, provided that he or she has legal capacity.
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Artificial Persons
• Corporations, and some other forms of business entities, are considered to be artificial persons.
• They can bargain, negotiate and enter into contracts.
• Artificial persons have capacity.
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Legal Competency
• To say that a person is legally competent is to say that he has the ability to know, understand and voluntarily engage in actions that can affect his interests.
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Age or Infirmity
• The rules of capacity center on a person’s age, physical or mental infirmity.
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Infancy
• When a person falls below a certain age level, the law presumes that he or she lacks capacity to contract.
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Advanced Age
• No state, for instance, has a rule stating that a person above a specific age is presumed to be legally incompetent to enter into a contract.
• A person’s age is one of the factors that a court may take into account when it assesses a person’s capacity.
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Physical Infirmity
• A disabled person who has the mental capacity to contract may do so, regardless of the disability.
• A person may be in such severe pain, or under the influence of drugs, that his capacity will be affected.
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Guardianship
• When a person has been declared mentally incompetent, it is common for a court to appoint a guardian to represent that person.
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Partial versus Total Incapacity
• When a person suffers from partial incapacity, he or she may still undertake a contractual obligation
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Mental Incompetence or Mental Illness
• When a person is of lower than average intelligence, or suffers from some form of mental illness less than legal insanity, this person is still entitled to enter into a contract.
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The Other Party’s Good Faith
• A party’s good faith does not circumvent the rules surrounding capacity.
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Intoxication
• Intoxication resembles a form of insanity.
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Authority
• When we say the person has authority to enter into a contract it simply means that he or she has legal capacity and has no legal impediment to becoming a party to a contract.
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Apparent authority
• If it appears that a person has the authority to make certain commitments in a contract, or to act for another, and the principal does not negate this perception, then the person has authority, even though it was never officially conferred upon him.
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Actual authority
• When a person has actual authority it is usually vested in him through some overt action by another.
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Third party contracts
• Third party contracts stem not from their involvement in the contract but from the fact that they derive some benefit from the contract between the other parties.
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Creditor
• Creditor beneficiaries are created when a contract’s provisions include a promise to satisfy an outstanding debt.
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Beneficiary
• Anyone who benefits from something or who is treated as the real owner of something for tax or other purposes.
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Donee
• In most jurisdictions, a donee- beneficiary is created by contract provisions that show a clear intention by the parties to make a gift to a third party.
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Assignee
• An assignee-beneficiary is a person or entity who will eventually be granted a specific right under the contract, such as a person who will eventually become a party to the contract.
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Legal subject of contract
• A contract is void when the subject of the contract is illegal, such as a contract to engage in illegal activity or for an illegal purpose.
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Contracts that are illegal because of subject
• Contracts that involve illegal actions are void for a very simple reason.
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• If this were not so, then a party seeking to enforce the contract could bring an action through the court system and request that a judge rule on the contract.
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Contracts that are unenforceable because of
public policy• The general rule followed in all
jurisdictions is that any contract that violates public policy is void and unenforceable.