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Chapter 10

Chapter 10 Notes


Department
Law and Business
Course Code
LAW 122
Professor
Kernaghan Webb
Chapter
10

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Chapter 10: Contractual Defects
INCAPACITY TO CONTRACT
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.
oCapacity: is the legal power to give consent.
Sometimes the question of capacity depends on a persons 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
Mentally disable
persons
Intoxicated persons
Corporations
Associations
Indian Band &
Aboriginal ppl
Public Authories
Personal Incapability
Minors
The law distinguishes b/t minors and those who have reached the age of majority.
oAge of Majority: is the age at which a person is held fully accountable in law.
oMinors: 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 laws approach shields minors from exploitation and the consequences of their
own inexperience.
oVoidable: 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.
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Chapter 10: Contractual Defects
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 minors 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.
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.
oStatutory 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.
oAssociations: 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 associations capacity in much the same way as a statutory
corporations constitution.
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