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Management and Organizational Studies 2275A/B Study Guide - Midterm Guide: Non Est Factum, Undue Influence, Promissory Note

Management and Organizational Studies
Course Code
MOS 2275A/B
Study Guide

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Business Law Textbook Notes Chapter #7-8
Chapter #7: Formation of Contracts (Continued)
Some people are more vulnerable than others and thus require special protection from the law
Several categories have been identified as needing protection, and are protected by having their freedom to enter into
contracts limited or eliminated completely
The age of majority varies with the provinces
The general principle is that persons under the age of majority, called infants or minors, are not bound by their agreements,
but the adults with whom they contract are bound
Most problems relating to minors and contracts they have entered into arise in situations involving young people who are
approaching the age of majority
The test for capacity is objective
When an adult deals with a person who is a minor, it does not matter if the adult was under the impression that the other
person was an adult, or even that that person clearly understoof the terms of the contract
The only question is whether the other person was under the statutory age of majority at the time the contract was created
As a general rule, whenever a minor enters into a contract with an adult, the adult is boung by the contract, but the minor
can choose not to be bound by it
*See example page 226
British Columbia follows the Infants Act which states that, in most cases, a contract made by a minor is unenforceable against
him; the minor may, however, enforce the contract against an adult party to the contract the result, then, is the same as in
the provinces which rely on the common law
The Minors’ Property Act allows a court to confirm a contract eneter into by a minor if it believes it is in the best interests of
the child to do so
When dealing with contracts made online, the law with respect to capacity will be determined by the jurisdiction where the
contract is created, which is sometimes not clear; also, there is no way for online merchants t know the personal
characteristics of the parties with whom they are dealing therefore it is important that merchants include appropriate
resitrictions and disclaimers in their online contracts
Necessaries and Beneficial Contracts of Service
o Except in BC, minors are bound by contracts for the acquisition of necessaries and for contracts of service that
benefit the minor
o Necessaries = things required to function in society (ex: food, clothing, lodging, transportation)
o What constitutes a necessary will vary with the particular needs of a minor and her status
o Ex: If the minor is purchasing clothing, but already has a sufficient supply, then that clothing will not be considered
o When a minor is married or living on his own, what constitutes a necessary will be broader than would be the case if
he were single and dependent on his parents
o It is unlikely though, that a car would qualify as a necessary since other forms of transportation are generally
o Minors are bound by contracts for necessaries
o However, even when the subject of the contract is determined to be a necessary, it does not guarantee that the
merchant will get paid full price, as the minor is obligated only to pay a reasonable price for such necessaries
o When a minor borrows money to buy necessaries, there is an obligation to repay the debt only if the funds advanced
are actually used for necessaries
o Government student loans are exceptions, because they are supported by legislation requiring repayment regardless
of what the money is used for and regardless of the age of the borrower
o Minors are bound by contracts of service that substantially benefit them (ex: contracts of employment,
apprenticeship, or service are binding if it can be demonstrated that, taken as a whole, the contract is for the benefit
of the minor)
o If it becomes apparent that the minor is being taken advantage of, or the contract is not in the minor’s best interests,
the minor will not be bound
On Becoming an Adult
o A minor can ratify a contract at the age of majority
o If she ratifies the contract after becoming an adult, she loses the right to avoid the contract ratifying the contract
makes a voidable contract binding
o Ratification can be in writing, or it can be implied

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o Ratification must be complete; a minor cannot affirm the beneficial provisions of the contract and repudiate the rest
o There are certain contracts that a minor must repudiate within a reasonable time after becoming an adult to avoid
obligations (or a failure to repudiate can be evidence of ratification)
o These situations tend to involve contracts through which a minor acquires some interest of a permanent and
continuous nature
o Ex: contracts involving land, shares in corporations, partnerships, and marriage settlements
o Description of contractual relationships:
At the first stage, when the parties have entered into the contract but the minor has not yet obtained any
benefit from it, and has not yet paid, the minor is not bound by the contract this is an “executionary
If the minor has received the goods, but has not yet paid for them, she is not necessarily bound by the
contract this is a “partially executed contract”
When the goods are in the minor’s possession, she will be required to return them or pay for them, and
upon return is entitled to a refund of any money already paid
If the minor has passed the goods on to a third party, or the goods have been destroyed, the merchant will
not be entitled to payment, and the merchant also cannot insist that the party to whom the goods have
been given return them
o When a contract gives no benefit, a minor can escape even an executed contract
o A minor can insist that payment be refunded if there is a total failure of consideration and the minor gained nothing
from the deal
o In general, if the contract is prejudicial to the interests of the minor, it is void
Parents’ Liability
o Parents are not responsible for the torts of their children, nor are they responsible for the contractual obligations of
their children, in the absence of specific legislation creating such a responsibility
o If a minor enters into a contract, she alone is responsible to perform the contract
o The adult contracting with the minor cannot turn to the parents if the minor does not perform as required by the
o Parents can be held liable for their children’s contracts only under specific conditions
o Parents can be held liable when the minor is acting as an agent having the appropriate authority to bind the parent
in contract
o Parents will also be bound if they guarantee the minor’s obligation at the time the contract is entered into
o A guarantee is a written commitment whereby the guarantor agrees to pay the debt is the debtor does not
o Because parents are responsible to provide for their minor children, they can be held responsible by the merchant
for contracts their children enter into for necessaries
Infants’ Liability for Torts
o A minor may be liable in tort law
o A minor is as liable as an adult for torts committed, although th standard of behaviour expected may differ
o The courts will not allow adults to bring a tort action just to get around the incapacity problem in contract law
o If the minor used the subject matter of the contract in a way that would be expected under the contract, then the
adult must sue in contract, not tort, despite the protection given to the minor by the law of contracts
o If the minor used the subject matter of the contract in a way that was not contemplated in the contract, carelessly
causing injury or damage to those goods, the adult would be able to sue for negligence and the minor would not be
protected by the defence of infancy
o *Read example page 230
o The adult cannot circumvent the protection afforded to the minor in contract law by suing in tort instead
o This explains why car rental agencies will not rent to minors, but when a minor misrepresents himself as an adult
and contracts to rent a vehicle, the agency may be able to get damages form the minor by suing for the tort of
fraudulent misrepresentation
o Not are the parents responsible, since parenst are not liable for the torts of their children unless they can be said to
have been negligent in their own right, or when there is a statute in place imposing such lisbaility
Insanity and Drunkenness
Insanity or mental incompetence applies if the person did not understand the nature of the act being performed
The burden of proving incapacity on the basis of insanity or mental incomepetence rests with the person claiming to be
incapacitated that person must lead evidence showing that he did not understand the consequences of his actions
To escape contractual liability on the basis of insanity or mental incompetence, the person (or a representative) must prove
not only insanity or mental incompetence, but also that the person he was dealing with knew, or ought to have known, of the

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A person may be declared mentally incompetent by a court in such cases a trustee will be appointed to handle that
person’s affairs
People who lose their ability to reason through intoxication, whether from alcohol or drugs, are treated in the same was as
people incapacitated by insanity or mental incompetence
For the contract to be avoided, the person must have been so intoxicated that she didn’t know what she was doing, and the
other person must have known, or ought to have known, of the incapacity
The person trying to escape a contract on the basis of drunkenness must also be able to show that, on reaching sobriety, the
ccontract was repudiated
Ex: an intoxicated person who purchases shares is not permitted, on becoming sober, to wait and see whether the stocks go
up or down before repudiating the contract
Hesitation to repudiate makes the contract binding (this requirement of repudiation also applies to insane people who regain
their sanity)
Others of Limited Capacity
In some jurisdictions, corporations can limit their capacity to contract by so stating int heir incorporating documents
Otherwise, corporations incoropoated under these general statutes have “all the power of a natural person” to contract
In those jurisdictions where the capacity of a corporation can be limited, people dealing with those corporations are affected
by that limitation only if they have notice of it
The capacity of Crown corporations and other government bodies is limited by legislation if they have not been given the
capacity to enter into a particular type of contract, any agreemet of that type will be void
When at war, any contract with a resident of an enemy country is void if detrimental to Canada; if not detrimental, the
contract is merely suspended for the duration of the hositlities
Contracts with foreign governemnts may or may not be enforceable
Foreign diplomats have immunity in civil matters, a court will not allow a lawsuit to proceed against such persons, and
their property is immune from seizure; these representatives can waive this immunity, if they wish, but anyone dealing with
persons who have diplomatic immunity ought to be aware of the protection they have been given
Trade unions have the capacity to enter into contracts that relate to their trade union activities
Bankrupts (a person who has made an assignment in bankruptcy or been forced into bankruptcy through a court order
obtained by a creditor, and who has not been discharged from bankruptcy) also have their capacity to contract limited
The capacity of Indians is limited to some extent by the Indian Act
An agreement must be legal and not contrary to public interest to qualify as a binding contract
Contracts involving activities that, while not illegal, are considered immoral or contrary to public interest may also be void
When discussing legality, it is necessary to understand the difference between contracts formed illegally (the contracts itself
is illegal) and contracts performed illegally (the contract is performed in an illegal way)
Contracts Performed Illegally
Lawful contracts performed illegally may be enforced
The response of the courts to the illegal performance of a lawful contract will vary
In making their decisions, the courts will consider many factors, such as the intent of the parties, the actions of the parties,
and public policy
The court may enforce the contract in appropriate circumstances
The illegal performance of a lawful contract often involves a breach of legislation that is regulatory in nature such
legislation may contain provisions declaring that a breach of the legislation will result in the relvant contract being void, or
other specified consequences
The courts will apply these statutorily mandated outcomes whenever a contract is performed contrary to the legislation
Sometimes, however, regulatory legislation does not indicate the result f a violation of the legislation
In such cases, the courts amy make a variety of decisions
They may treat the contract as void but not illegal
They will then restore the parties to their original positions, ordering the return of any deposits advanced and property that
has been transferred
If the illegal performance can be separated from the rest of the performance of the contract, then they may rule that only
that part of the contract is void
If the violation of the legislation is more one of procedure than of substance, the courts may enforce the contract
Contracts Formed Illegally
Illegal contracts are illegal when formed
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