Chapter 10 Contractual Defects.docx

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Management (MGS)
Course Code
Professor Rybak

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Chapter 10 Contractual Defects Incapacity to Contract • A person cannot enter into a contract unless they have legal power to give consent. Although a 10 year old may be able to read, understand, and sign a contract they may not be legally bound to it. • Capacity is the legal power to give consent. There are several group of persons who may have no capacity or only limited capacity to create a contract. Personal Incapacity • Minors- Everyone under the age of majority lacks capacity. The age of majority is the age at which a person is held fully accountable in law. Minors are those who are under the age of majority. • Though overprotective, minors lack capacity to enter into legal contracts because the courts want to shield them from exploitation, and the consequences of their own inexperience. • Some contracts are voidable under the minor’s option. A contract is voidable if a minor is entitled to avoid the legal obligations that the contract would have otherwise created. Note that only some contracts with minors are voidable. If the contract is voidable, the minor may choose to avoid contractual liability and if so they are relieved of all future liabilities under the contract. However, if the minor chooses to carry out the contract, the obligations are binding. • Suppose a boy rents a piece of equipment for a year. If he chooses to avoid the contract after two months, he cannot be sued for the remaining 10 months. However, he can be sued for the rent that accumulated before he avoided the agreement. Furthermore, if there is substantial delay, a court may say that the boy affirmed the contract and so lost the right to avoid it. • The ability to avoid certain contracts does not mean that a minor can take the benefit of a contract and then cancel it with impunity. Minors who elect to avoid contracts must give back any benefits that they received under them. • There are some contracts that minors cannot avoid- contracts for necessary goods and services like food, clothing, education, medical treatment, and legal advice, which are to their benefit. • Mental Incapacity- If a person lacks intellect. If a court declares that a person lacks mental capacity then the contract is void and cannot be enforced at all. Second, even if there is no court declaration, a person may still be considered mentally incompetent if he or she lacks the mental capacity to contract at the time the contract is formed. If so their contracts are voidable, just like minors. They can avoid the agreement within a reasonable time of being competent. • There is a difference between mental capacity to contract and minority. A minor’s contract is voidable even if the other party was unaware of the age issue. In contrast, the contract of a person with a mental incapacity is voidable only if the other party should have recognized the problem. • Intoxication- Rules are similar to those who lack mental capacity. The contract is voidable only on two conditions. First, the person must have been so drunk that they could not know or appreciate what they were doing. Second, the other contractual party had to be aware of that fact. To set aside the contract, the intoxicated party must make a prompt election to avoid it once sober. A failure to do so will be taken as affirmation. Associations • Associations are usually unincorporated business organizations that lack contractual capacity. • Some provincial statutes are given to certain associations to allow them to contract. If an association attempts to contract outside of those limits it lacks capacity and its agreement is ineffective. • Since associations lack capacity, one of its members may enter into a contract for its benefit. Significantly, it is that individual member who becomes liable under the agreement. Absence of Writing • Certain type of contracts must be evidenced in writing. The requirements arose from an old piece of English legislation-The Statute of Frauds. Statue of Frauds • Some contracts are in writing to reduce risk of perjury or lying in legal proceedings. The requirement was meant to discourage people from lying about the existence of oral contracts. That rationale is less persuasive today due to electronic communications etc. Types of Contracts that must be in Writing • Guarantees- A guarantee is a contractual promise by a third party called the guarantor, to satisfy a debtor’s obligation if that debtor fails to do so. The bank may refuse to give you a loan unless you find a third party to guarantee repayment. The guarantor does not promise to pay, no matter what. Rather, the guarantor gives a conditional promise. This means that if your mom signs onto the contract, she is required to pay the debt if you fail to do so. • A guarantee is different from an indemnity. An indemnity is an unconditional promise to assume another’s debt completely. This means that the bank may choose to ask for payment from your mother even if they didn’t bother asking you. An indemnity is therefore not a promise to answer for another person’s debt, it is a promise to assume another person’s debt altogether. • Statute of Frauds applies to contracts of guarantee but not to contracts of indemnity. Thus, the bank will not be able to demand payment from the guarantor unless that agreement was evidenced in writing. However, a bank may be able to enforce an indemnity even if the agreement was entirely oral. • Contracts for Sale of Interest in Land- Can only be enforceable unless evidenced in writing. A long term lease of land must be evidenced in writing. • Contracts not to be performed within a Year- of their creation cannot be enforceable unless evidenced in writing. This extends the writing requirement to all sorts of agreements of indefinite duration regardless of their subject matter. However, contrary to the expectations, the courts can usually say that a contract is null if it can be performed within a year. Writing Requirements • If the contract falls within the Statute of Frauds, the court must decide if the writing requirements were satisfied. Form and Content of the Note or Memorandum • Either the contract must be in writing or there must be a note or memorandum that provides evidence of it. The document does not have to take any particular form, but it has to provide evidence of the essential elements of the contract (parties name, subject matter of agreement and price,) and be signed by the party against whom the agreement is being enforced. • The courts are often lenient. They will often let the signature requirement be satisfied by a name on letterhead or invoice. Can also be satisfied by a combination of several documents, even if they do not expressly refer to each other. Effect of non-Compliance • Can use the quantum meruit principle if the contracts are not in writing. Quantum meruit means “what one deserves”. Usually important for oral contracts like sale of goods to another party. Mistake General Principles • Some mistakes occur when an error affects the basic process of contract formation. The mistake may negate the existence of an agreement between the parties. And without an agreement there cannot be a contract. • Other mistakes make it impossible for the object of the contract to be achieved. This affects the existence of the contract’s subject matter. In that case, the contract may be defective. Mistakes Preventing Creation of a Contract • Mistaken Identity- The courts are required to weigh the interests of the seller against those of the innocent purchaser. Mistaken identity will therefore not render a contract defective unless the mistake was known to the other contractual party, and the mistake was material. A material mistake is one that matters to the mistaken party in an important way. • Mistakes about Subject Matter- Some mistakes put the parties at cross purposes and so prevent the formation of a contract. This often occurs when the parties are mutually mistaken about the subject matter of an agreement. • Mistakes Rendering Impossible t
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