Chapter 10.docx

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15 Apr 2012

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Chapter 10 Contractual defects
A person cannot enter into a contract unless they have the legal power to give consent
(ex. on pg 226)
Capacity is the legal power to give consent
There r 7 groups of persons who may have no capacity or only limited capacity to create
a contract
o Minors
o Mentally disabled persons
o Intoxicated persons
o Corporations
o Associations
o Indian bands & Aboriginal persons
o Public authorities
Personal incapacity
o Minors
Age of majority is the age at which a person is held fully responsible in
Minors r ppl who have not reached the age of majority
Law says every1 under the age of majority lacks capacity
Law protects minors from exploitation & the consequences of their own
inexperience, so it’s important for businesses that transact with minors to
understand how the law operates
A contract is voidable if a minor is entitled to avoid the legal obligations
that it created
Some contracts with minors r voidable not every contract
Voidable contract allows minor to avoid contractual liability
Minor who wants to avoid contractual liability should do asap (ex.
on pg 227)
Once a person reaches the age of majority, they must decide within
a reasonable time whether they want to avoid a contract that they
created as a minor
Minor cannot just take benefit & cancel the contract, minors must
give back any benefits that they received under a contract
There r some contracts that minors cannot avoid such as
Contracts for necessary goods & services such as food, clothing,
education, medical treatment, legal advice & employment which r
to their benefit (Case Brief 10.1 on pg 227)
o Mental incapacity
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Regardless of age, a person may also lack capacity cuz of a lacking
Depends on 2 situations
First, if a court has declared a person to lack mental capacity, their
contracts r void & cannot be enforced at all
Second, even if there is no court declaration, a person may still be
considered mentally incapable if he/she lacks the mental capacity
to contract at the time the contract is formed
o If so, their contracts r voidable
There is an important difference btwn mental incapacity & minors
Minor’s contract is voidable even if the other party was unaware of
the age issue
The contract of a person with a mental incapacity is voidable only
if the other party should have recognized the problem
More on pg 228
But for risk management, employees should be trained to identify possible
problems with mental incapacity persons
o Intoxication
A normal person may enter into a contract while intoxicated (drunk)
That agreement is voidable if 2 conditions r met
First, the person must have been so drunk that they could not
know what they were doing
Second, the other party must have been alerted to that fact
To set aside a contract, intoxicated party must make a quick decision to
avoid a contract once sober, if they don’t, it will be taken as granted that
they agreed to the agreement (Case Brief 10.2 on pg 228)
Business corporations
Corporations r treated as legal persons
Law differentiates btwn chartered corporations & statutory corporations
Chartered corporations r treated the same as individuals who have reached the age of
o If a chartered corporations enters into a contract in violation of its charter, its
charter will be lost but the contract made in breach of the corporate charter will
still be binding
Statutory corporations have a more limited contractual capacity
o Since they r statutory creations, their capacity to contract is limited by the powers
given to them thru legislation
o If statutory corporation gets into a contract in a manner that exceeds its statutory
powers, it acts ultra vires which means beyond the authority
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When a corporation acts ultra vires, it lacks the capacity to contract
These agreements r not binding
Associations r usually unincorporated business organizations including private clubs,
charities & religious societies
Some provinces gives contractual capacity to associations involved in education, religion,
charity & trade unions
These laws define an association’s capacity in the same way as a statutory corporation’s
o If an association attempts to contract outside of those limits, it lacks capacity &
the agreement is ineffective
Although association lacks capacity, 1 of its members may enter into a contract for its
benefit (ex. on pg 230)
Indian bands and Aboriginal persons
1 kind of unincorporated association that does have legal capacity is an Indian band
Indian band is a body of Aboriginal people whose land & money r held by the Crown
o Indian bands have contractual capacity in much the same way as corporations
o They can sue or be sued
Same is not true for Aboriginal persons, there r some restrictions on their capacity to
contract especially in relation to reserve land (ex. on pg 230)
Concept summary 10.1 on pg 230
Public authorities
Many contracts r created on a daily basis by public authorities at the federal, provincial &
municipal levels
A public authority acting on behalf of a governmental body has the capacity to contract
Only limit to contract is the division of powers section of the Constitution Act 1867
o In order to have capacity, action must be consistent with that division of powers
Absence of writing
Certain types of contracts must be evidenced in writing
Statute of frauds
Statute of frauds required some contracts to be evidenced in writing as a way of
reducing the risk of perjury (false swearing) or lying in legal proceedings (events)
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