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 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.
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 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.
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.
Capacity issues arise more frequently with another type of business structure –
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 association’s capacity in much the same way as a statutory