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
Mentally disable persons Indian Band & Aboriginal
Corporations Public Authories
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
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
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.
Regardless of age, a person may also lack capacity b/c of a deficient intellect. We need to distinguish
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.
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
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.
Corporations are treated as legal persons. The law distinguishes b/t chartered corporations and
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.
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
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
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
Indian bands have contractual capacity in much the same way as corps; they can sue or be
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.
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