Business Contracts - Need to Order

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					Business Law

    Chapter 6:
Capacity and Legality
• Contracts must have a legal subject in
  order to be enforceable.
  Why is capacity important?
• If a plaintiff seeks to enforce a contract,
  he must prove that the defendant had
  legal capacity to enter into a contract.
         Defining Capacity
• Capacity: Ability to do something, such
  as the mental ability to make a rational
• Capacity is an essential element of a
  contract because it shows that a party
  understood the contractual obligation.
• Capacity refers to a party’s ability to
  understand what is happening, the
  effect of what agreeing to a contract
  means and the ability to exercise free
  will in making this choice.
• Capacity is not the same thing as wise
• A person can exercise poor judgment,
  enter into a contract that is
  disadvantageous, or even make a bad
  bargain, and still have full, legal
  capacity to contract.
  A Short History of Capacity
• Prior to a more enlightened approach to
  law in general and contractual
  obligations in particular, certain classes
  of people were absolutely barred from
  entering into contracts.
       Who May Contract?
• Contracts need at least two parties,
  both of whom have legal capacity.
         Natural Persons
• Any person who is not disqualified for
  some reason can enter into a contract,
  provided that he or she has legal
         Artificial Persons
• Corporations, and some other forms of
  business entities, are considered to be
  artificial persons.
• They can bargain, negotiate and enter
  into contracts.
• Artificial persons have capacity.
        Legal Competency
• To say that a person is legally
  competent is to say that he has the
  ability to know, understand and
  voluntarily engage in actions that can
  affect his interests.
          Age or Infirmity
• The rules of capacity center on a
  person’s age, physical or mental
• When a person falls below a certain age
  level, the law presumes that he or she
  lacks capacity to contract.
           Advanced Age
• No state, for instance, has a rule stating
  that a person above a specific age is
  presumed to be legally incompetent to
  enter into a contract.
• A person’s age is one of the factors that
  a court may take into account when it
  assesses a person’s capacity.
         Physical Infirmity
• A disabled person who has the mental
  capacity to contract may do so,
  regardless of the disability.
• A person may be in such severe pain,
  or under the influence of drugs, that his
  capacity will be affected.
• When a person has been declared
  mentally incompetent, it is common for
  a court to appoint a guardian to
  represent that person.
Partial versus Total Incapacity
• When a person suffers from partial
  incapacity, he or she may still undertake
  a contractual obligation
    Mental Incompetence or
        Mental Illness
• When a person is of lower than average
  intelligence, or suffers from some form
  of mental illness less than legal insanity,
  this person is still entitled to enter into a
The Other Party’s Good Faith
• A party’s good faith does not circumvent
  the rules surrounding capacity.
• Intoxication resembles a form of
• When we say the person has authority
  to enter into a contract it simply means
  that he or she has legal capacity and
  has no legal impediment to becoming a
  party to a contract.
        Apparent authority
• If it appears that a person has the
  authority to make certain commitments
  in a contract, or to act for another, and
  the principal does not negate this
  perception, then the person has
  authority, even though it was never
  officially conferred upon him.
          Actual authority
• When a person has actual authority it is
  usually vested in him through some
  overt action by another.
       Third party contracts
• Third party contracts stem not from their
  involvement in the contract but from the
  fact that they derive some benefit from
  the contract between the other parties.
• Creditor beneficiaries are created
  when a contract’s provisions include a
  promise to satisfy an outstanding debt.
• Anyone who benefits from something or
  who is treated as the real owner of
  something for tax or other purposes.
• In most jurisdictions, a donee-
  beneficiary is created by contract
  provisions that show a clear intention by
  the parties to make a gift to a third
• An assignee-beneficiary is a person or
  entity who will eventually be granted a
  specific right under the contract, such
  as a person who will eventually become
  a party to the contract.
     Legal subject of contract
• A contract is void when the subject of
  the contract is illegal, such as a contract
  to engage in illegal activity or for an
  illegal purpose.
    Contracts that are illegal
      because of subject
• Contracts that involve illegal actions are
  void for a very simple reason.
• If this were not so, then a party seeking
  to enforce the contract could bring an
  action through the court system and
  request that a judge rule on the
      Contracts that are
   unenforceable because of
         public policy
• The general rule followed in all
  jurisdictions is that any contract that
  violates public policy is void and

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