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THE DEFENCES OF CAPACITY AND ILLEGALITY Class 6 CAPACITY Incapacity • A defence to contract formation. • The law will excuse parties from contractual obligations because they lack the competence to enter into such relations, even if all contractual formalities are present. • Competence means the ability to understand the ramifications of one’s actions. Capacity 1. Minors • A minor is a person who has yet to attain the age of majority in their province (in Ontario it is 18). • General Rule: minors are said not to have the capacity to enter into binding contracts. Capacity - Minors • Specific Rule #1: Contracts generally are not enforceable against a minor. • Specific Rule #2: Contracts are enforceable by a minor against others having contractual capacity. Capacity - Minors Exceptions to Specific Rule #1: 1. Contracts for necessaries (e.g. food, clothing, medicine, legal fees). 2. Beneficial Contracts of Service. Capacity - Minors What happens when a minor reaches the age of majority? 1. Contracts for necessaries and beneficial contracts of service are still binding. 2. Minor remains bound by contracts of a permanent continuous nature unless repudiated. 3. Minor not bound by any other contract entered into as a minor unless ratified – in writing. Capacity 2. Diminished Capacity • The law will not enforce contracts against persons of unsound mind, or who are incapacitated because of alcohol or drugs when they enter the contract. Capacity – Diminished Capacity To prove diminished capacity, the defendant must show: 1. She was unable to make a rational decision at the time of the contract; and 2. The other contracting party knew this. Capacity 3. Other Forms of (In)Capacity • Corporate entities. • Bankrupt debtors. • Labour Unions and other unincorporated entities. • Enemy aliens. • Aboriginal people. ILLEGALITY Illegality • A party may plead that a contract is not enforceable against it because the contract is illegal – illegality is a contractual defence. • The question of legality goes to the object of the contract, not how the contract was formed. Illegality A contract can be illegal if: 1. A statute or common law deems that type of contract to be illegal. 2. The contract offends public policy. Illegality 1. Illegal by Law 1. By statute – e.g. BIA; ITA. 2. By common law: (a) wagering contracts (b) contracts for the purpose of committing a crime or tort. Illegality 2. Contrary to Public Policy Public Policy: A judge-made concept, public policy means that which the Canadian public would accept, or: “would this contract be prejudicial to Canadian society or the administration of justice in Canada?” e.g. Restraint of Trade clauses. Illegality – No-Compete Clauses • (See sample posted at web site.) • Restrictive covenants are prime facie against common law public policy • They will be enforced where: – there is a reasonable need; – consideration is paid; and – they include reasonable limits.
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