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Chapter 10 - Contractual Defects.doc

5 Pages
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Department
Accounting
Course Code
ACC 110
Professor
Marla Spergel

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Chapter 10: Contractual Defects INCAPACITY TO C ONTRACT  A person cannot enter into a contract unless they have the legal power to give consent. To protect specific groups of ppl, the law has drawn a distinction b/t those who have the capacity to contract and those who do not. o Capacity: is the legal power to give consent.  Sometimes the question of capacity depends on a person’s ability to understand the nature & consequences of their actions.  We will consider 7 groups of persons who may have no capacity or only limited capacity to create a contract.  Minors  Associations  Mentally disable persons  Indian Band & Aboriginal ppl  Intoxicated persons  Corporations  Public Authories Personal Incapability Minors  The law distinguishes b/t minors and those who have reached the age of majority. o Age of Majority: is the age at which a person is held fully accountable in law. o Minors: are people who have not reached the age of majority.  The law simply says that everyone under the age of majority lacks capacity. In some jurisdictions (i.e. Alberta, Saskatchewan, Ontario) the age of majority is 18 years.  In other provinces (Newfoundland, New Brunswick, B.C.) the age of majority is 19.  The law’s approach shields minors from exploitation and the consequences of their own inexperience. o Voidable: a contract is voidable if a minor is entitled to avoid the legal obligations that are created.  Only some contracts w/ minors are voidable, not every contract with a minor is void at the onset.  If a contract is voidable, the minor may elect to avoid contractual liability. If so, they are relieved of all future liabilities under the contract.  If a minor wants to void a contract, they should do it asap.  Finally, once a person reaches the age of majority, they must decide, within a reasonable time, whether they want to void a contract that created as a minor.  Minors who elect to avoid a contract must give back any benefits that they received under them.  There are some contracts that minors cannot avoid – contracts for necessary goods & services like food, clothing, education, medical treatment, and legal advice, which are for their benefit.  Minors cannot void contracts of employment that are to their benefit. Mental Incapability  Regardless of age, a person may also lack capacity b/c of a deficient intellect. We need to distinguish 2 situations: i. If a court has declared a person to lack mental capacity, their contracts are void & cannot be enforced at all. ii. Even if there is not court declaration, a person may still be considered mentally incompetent. If so, their contracts are voidable, just as in the case of a minor.  There is an important difference b/t mental incapability 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 incapability is voidable only if the other party should have recognized the problem.  It is sometimes difficult to tell if a person is incapacitated. It requires a careful examination of the circumstances, which may be further complicated by the fact that an incapacitated adult may later regain capacity. Chapter 10: Contractual Defects  As a matter of risk mgt., EEs should be trained to identify potential problems. Intoxication  The rules for drunkenness are similar to those for mental incapacity. An otherwise capable person may enter into a contract while intoxicated.  That agreement is voidable if 2 conditions are met: i. The person must have been so drunk that they could not know or appreciate what they were doing. ii. The other contractual party must have been alerted to that fact.  To set aside a contract, the intoxicated party must make a prompt election to avoid it once sober. A failure to do so will be taken as affirmation of the agreement. Business Corporations  Corporations are treated as legal persons. The law distinguishes b/t chartered corporations and statutory corporations.  In a contractual context, charted corporation are treated the same as individuals who have reached the age or majority. If a charted corporation enters into contracts in breach of its charter, its charter may be forfeited, but the contract made in breach of the corporation will still be binding. o Statutory Corporations: have limited contractual capacity b/c they are statutory creations; their capacity is limited by powers given to them via legislation.  If a statutory corp. attempts to contract in a manner that exceeds its statutory powers (ultra vires – beyond the authority) it lacks the capability to contract. Associations  Capacity issues arise more frequently with another type of business structure – associations. o Associations: are usually unincorporated business organizations (i.e. private clubs, charities, & religious societies) that lack contractual capacity.  Although they share some features with corp., most associations do not enjoy independent legal existence and are thus incapable of contracting.  Some provinces have legislation that gives contractual capacity to associations involved in such activities as education, religion, and charity, sometimes trade unions.  These statutes define an association’s capacity in much the same way as a statutory corporation’s constitution.  B/c an association generally lacks capacity; one of its members may enter into a contract for its benefit. Significantly it is that member who becomes liable under the agreement.  Unlike a corporate officer or director, individuals cannot escape liability simply by stating they were acting on behalf of the association. On the other hand, if your business intends to contract with someone who claims to act on behalf of an association, you can manage risk by ensuring that the association has capacity o that the individual personally has the resources to perform the obligations. Indian Bands & Aboriginal People  One form of unincorporated association that does have legal capacity is an Indian Band. According to the Indian Act, an Indian Band: is a body of Aboriginal people whose land and money are held by the Crown.  Indian bands have contractual capacity in much the same way as corps; they can sue or be sued.  The same is not always true of individual Aboriginal persons who qualify as “Indians” under the Act.  There are some restrictions on their capacity to contract, principally in relations to reserve land. Chapter 10: Contractual Defects  E.g. Property on a reserve cannot be used as security for credit transactions, nor can it be transferred to another member of the band w/o the Crown’s consent. Under Section 28 of the Indian Act, any deed, lease, contract, instrument, document, or agreement purporting to permit a person other than the member of a band to occupy or use reserves, or to reside or otherwise exercise any rights on a reserve, is void, unless approved by the Crown. Public Authorities  Many contracts are created on a daily basis by public authorizes at the federal, provincial, and municipal levels. Generally speaking, a public authority acting on behalf of a gov’t body has the capacity to contract, independent of any specific statutory authority to do so.  In order to have capacity, the action must be consistent with that division of powers. A BSENCE OF W RITING  For most contracts, there are no formal requirements. However, certain types of contracts must be evidence in writing
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