Capacity to contract - Discharge of Contract, Business Law Video Lecture | Business Law - B Com

chapter 8 is our second chapter on
contracts and we look forward to
studying the next elements of a valid
contract the a-class designation we
looked at agreement in Chapter number
seven and we looked at ways to classify
contracts and this unit we're gonna talk
in this chapter about capacity legality
assent and hopefully form alright and in
particular with form we're basically
going to be talking about whether or not
it has to be in writing and what kind of
writing is sufficient so that's what we
mean by form okay so with capacity as
the first one and that's pretty much the
one we're going to focus on today with
capacity we're going to look at three
main issues with capacity we're gonna
look at minors we're going to look at
eye intoxication and we're gonna look at
mental sanity alright we'll just put it
that way because if you're a minor or if
you're drunk or if you're insane you
cannot have capacity to enter into a
contract we would say that it's a little
bit unfair to bind someone into an
agreement if they are one of these three
things why what why is it unfair what is
it about these this these three here
that makes you think it really wouldn't
be fair for us to hold them to an
agreement if this is their condition
what do you think
exactly they're not going to be able to
comprehend it they can't understand it
now would you say one of those is a
little different than the others well
how do you say kind of depends on the
minor my son is very bright
I taught him at 3 years old how to
incorporate a business I just thought it
would be funny if I had him out on the
road you know and he was just a tiny
little guy and he was always a little
bit you know advanced for his age and
certain terms intellectually and so I I
just taught him the basic steps of how
to incorporate a business and not just
to memorize it I actually taught him the
steps so that if people asked him
questions he could answer a few
rudimentary questions the way so I
dressed him up a little suit and tie to
go with me to some of the things and I'd
say oh it's so easy my son knows how to
do that he's like a toddler as a Tim how
do you incorporate a business and he
would stand there and say well you found
articles of incorporation with the
Secretary of State oh that's cute II
memorized that me yeah but we have to
put in the articles well you're gonna
need the name of the business and you're
gonna need to rattle off registered
agents and all these things and you know
it was pretty pretty interesting so I
have no doubt that my son now who is a
tenth grader but still a minor could
with some teaching fully understand
basic contract and yet the law would say
does it matter
we're strictly going to look at age
magic line 18 anybody below 18 has an
option to avoid the contract anybody
over 18 that's an adult we're gonna
stick it to them okay now intoxication
you could make the same case there and
say that there are certainly levels of
intoxication where someone who's had the
proverbial two drinks you know everybody
that ever got pulled over how many
drinks have you had - they always say
that no matter what how many they
actually had to always say - it's almost
never true I guess it's because after
two you just forget you know
all the other ones you can't remember
the last two but if a guy is not I mean
let's say he's 260 pounds and he's been
drinking all his life
and he has had one beer it's probably
not even affecting him at that point he
could probably understand and we're
gonna see that with intoxication there
is a a different kind of consideration
that has to be taken for that we have to
look at that a little bit differently
because it kind of depends on the
situation the other thing about being
drunk is that the person you're dealing
with may not know that you are drunk
right there might not be any signs that
you are drunk and so not you you
wouldn't do this but you know what I
mean all right
intoxication then the third one mental
sanity where we're looking at the
ability of an individual to process and
understand information and we're going
to look at how that gets treated in the
law as well so first as we look at this
situation with capacity we're saying
this is the legal ability to enter into
a contractual relationship the legal
ability yes we're going to try to find
out your actual capabilities yes we will
but capacity is saying that legally we
are imposing a limitation on what we
will even allow you to enter into if
you're in one of these conditions and
there are levels you have full
competence someone that does not fit any
of these categories most of our all of
you it would be in full competence and
have absolutely no reason to doubt your
capacity then there's all the way to the
other side of the spectrum no capacity
the example I give you here would be
someone who is unconscious right no
capacity we talked about the example of
the car crash in the unconscious person
one of the reasons why we had to have
such a thing as quasi
tract is that it isn't a real contract
because they did not have capacity the
other one would be a baby you know
a baby has no capacity to understand or
communicate their intention and there
have been people that have tried to
enter into contracts on behalf of babies
someone who has been and we'll get to
this in more detail in a moment but
adjudicated by a court as mentally
insane there is such a thing that does
happen if that has happened they have no
competence none whatsoever
all right and then there is such a thing
as limited competence and we do get into
this in cases with minors and especially
in cases with intoxication so let's look
first and mostly this morning at minors
when we're talking about the capacity of
a minor its first very important to
define what is a minor in most states a
person is no longer a minor for
contractual purposes at the age of
eighteen there are some states that
consider someone an adult earlier than
eighteen but I'm not aware of any states
that consider and wait for you to be
considered an adult until after 18 so 18
seems to be the top limit on that and so
by the time someone's 18 we can have
great assurance that they are no longer
considered legally to be a minor but
what about before that
well catch this a minor can enter into
any contract that an adult can they are
legal they are legal we looked in the
last chapter at statuses of contracts
right and we said that there's there's
the legal vs. in legal illegal
there's the valid vs. enforceable vs.
void
right those other kinds of things but
the very first thing we have to look at
is whether or not this contract is a
valid enforceable contract and with a
minor the answer is yes they can enter
into a valid legal contract but you are
standing on a trapdoor
because although it is a valid legal
contract one of the parties and it ain't
you if you're the seller has the option
of getting out of the contract at any
time and for no reason and so you're
sold you sold them something let's say
you own a Game Stop store right you're
gonna be dealing with a lot of minors
okay and they come in and they sell you
their ps3 and you sell them a and
because they're gonna buy a ps4 this is
something that I know a lot about
because I have a junior High's son who's
very into this but Dad you know great
the greatest arguments begin with but
Dad all right and it usually because
devolves into something like because
it's cool you know and that's not a
reason that dad's care about right so
he's gonna have to do a little better
than that but Mike really wants a ps4 so
let's say Mike who is 12 years old
walks into your game stop and he's got
his old ps3 which I've told him don't
sell that Mike you got to hang on to
that thing you know the four may not
play your games you know this kind of
thing but he wants to and he sells it
and he buys a ps4 and 10 games and he
plunks down my credit card okay and you
didn't catch that but you were okay okay
whatever and you he buys it and he comes
home and I see this bundle that he's got
and I said Mike what did you do the
devil made me do it you know whatever he
says an excuse that's the usual excuse a
form of that usually it's his older
brother that's the form of the devil but
that's alright
and so I say you've got no no no no Mike
take that back now let's say you're game
stop has a strict no refund policy
all right and I mean under no
circumstances ever can you make a refund
and so he comes walking back in probably
with me grabbed him by the back of the
neck and he says I need to exchange this
and get my ps3 back and you say sorry
kid no retype it returns no refunds and
I look at you as a lawyer and go this is
gonna be fun I've been waiting for you
buddy
why I know I have a good case why
because he's a minor he can avoid that
whole contract it doesn't matter what
your policy is for returns it doesn't
matter if he doesn't have a receipt
you've got to undo the entire deal when
the minor avoids at his option he's not
saying there was anything wrong with the
product he's not saying that oh I have
to have my receipt it's within the
return period it doesn't have to be
within the return period it just has to
be before he turns 18 and he gets all
his money back and you get the stuff
back and we'll talk in a minute about
the condition you get the stuff back and
so that's what we mean by voidable it's
his option now when he exercises that
option the legal word for that is this
affirm he dis
the contract now he doesn't know that
he's 12 give him a break all right
but he's gonna say something like I want
my money back or whatever and that means
I am disapper now if I'm standing there
I'll say Mike do you disapprove the
contract okay and you'll know the legal
term a contract can be dissin the
minority and we give you a little buffer
after you turn 18 it's almost as if the
law says that
at age 18 the veil lips and you suddenly
understand the world as it truly is your
eyes are opened I mean I'm sure this was
your experience your eyes are opened and
you now realize how stupid you were as a
kid and you immediately realize all
those contracts you entered into or very
bad deals and so you get a little grace
period after you turn 18 to go back and
DISA firm the contracts that you entered
into as a minor kind of makes sense
right if we're gonna operate on this
legal fiction that 18 year olds are
magically adults then why not okay and
they can ride their unicorn into the car
dealership and all the rest of it now he
must when he disappears
dis affirm the entire contract he cannot
say will I like this part where you gave
me the cool stuff I don't like this part
where I had to pay you for it
okay you can't you can't blue line the
contract out and say well this or not
that it's all or nothing and he doesn't
have to say any specific words or legal
language he doesn't have to click his
ruby slippers and say there's no let no
place like home all right it's just
words or conduct express or implied that
indicate he is desiring to exercise his
right of disappearance now as a
shopkeeper
you might wonder okay but sometimes
minors can be a little hard on stuff all
right so let's use an example of a car
now you wouldn't be dumb enough to do
this but some people who had never taken
business law and who found themselves as
car salesmen might might fall into this
mistake and sell a car to a minor
no parents are signing off on it just
the minor and let's say that this minor
walks in and he looks pretty rich you
know his trust fund babies or whatever
these kids that has deep pockets I used
to know kids like that in college not
here mainly at the other place and you
know they had they drove a Mercedes onto
the campus you know they they just
seemed like they had all kinds of money
all the time and you know that's a good
kind of friend to happe cuz hey pizza or
whatever you know I just always have
stuff going for him all right so this
kind of a guy walks onto the car lot and
he wants to buy a brand new Mustang with
the entire package I mean it's a little
gaudy in your taste as a salesman but
he's got the spoilers and the the
special wheels and if there's an upgrade
to buy he wants it now you're kind of
excited right because this is the kind
of guy you've been waiting for he's
stupid enough to won all that stuff and
you're up charging him now you want the
underbody coating right oh yeah for sure
sweet all right that's by the way
nothing all right never do that
and he wants everything upgraded and so
you're making like 60 grand in your own
Commission off of this deal right this
car is worth over $150,000 and by the
time he's all done with so you're pretty
you're pretty excited so you sign him on
the bottom line he drives the car up the
lot there's a there's always a 3-day
kind of grace period right and then that
goes by cuz you're kind of biting your
fingernails like during that entire time
he doesn't come back during the
three-day grace period and so now you're
thinking sweet I actually sold that car
that is awesome you know you get a huge
fat check and the car dealer is happy
and your salesman of the month right
until the next month when Trust Fund
baby decides to drive this sucker back
on the lot and say changed my mind don't
want this vehicle anymore you look at it
seems to be in one piece he flipped you
the car car keys the car we'll get to
that in a minute and he throws you the
keys and you're pretty devastated by
this and you think you can't do that kid
it's beyond the three days I know what
you know about the world but you can't
be returning a car after the three days
it's yours now your problem and he says
no you don't understand my dad's a
lawyer and he told me about this minor
can just affirm thing and what do we do
you say but I was relying on that we
already did we made too bad he is
allowed at any time before he turns 18
you say but I never checked I didn't
know that's your yes your fault that's
your fault
so the minor can return the goods but
let's just change it one little bit
instead of bringing the car back in
perfect working condition which no
teenager would ever do he brings you
back the key and a headlight and puts he
puts the headlight on your desk and you
say what is this and he says well this
is what's left of the Mustang I was
racing and didn't go well
and I flipped the car and the rest of
its this is the only salvageable part
boom and he just puts it down on the
desk you say well I'm not I'm not taking
this back I'm sorry I want all my money
back they say well now listen this
headlight is expensive I'll grant you
that these headlights are about three
hundred and fifty dollars each so I'll
give you 350 dollars back but I'm not
giving you back one hundred and fifty
thousand dollars that you paid for this
car and guess what in most states you do
not as a miner have to give it back in
the condition you got it when you
dissipates all you have to do is return
the item in the condition it currently
is even if it's trashed right so now
what are you going to do as a
salesperson well you're going to cry
okay and maybe you'll take that
headlight and turn it into a trophy or
something as a reminder not to sell to
minors right because that's kind of the
lesson here isn't it isn't that what
you're kind of taking away from this is
I'm not going to sell cars to minors not
at all why because I don't want to stand
on that trapdoor I don't want to be
wondering when or if and what condition
he's going to return this thing and so
most people when it comes to big-ticket
items will not do business with minors
now let's just really put our business
thinking caps on here and lawyers have a
hard time coming up with these ideas but
regular people usually don't so I'm
counting on you here what are some
things that you could do to still make
the sale and maybe protect yourself a
little bit if you're selling cars what
do you think Kristen there you go
let's get your lawyer dad to sign on
here now but can the miners still dis
affirm yes but can the dad no as long as
the dad's like over 18 right so we have
no problem there and at that point we're
in good shape
get up get a parent to sign on
absolutely that would probably be the
number one and almost only assurance
that a shop keeper can get now in in a
minority of states because of the
unfairness of this and because of some
popular cases where it was abused like
what I've described they are changing
the law a little bit and saying there's
a little crack in the door right like
maybe we'll open the door a little bit
to the idea that some minors know more
about what they're doing than others and
if they're just trying to take advantage
then maybe in some states they're saying
that the minor would have to restore the
adult to the pre contract position
that's fancy way of saying bring the car
back in the same condition you bought it
in and if you don't then we reduce the
amount of refund to the actual value of
whatever it was you returned so if you
need to return the car and it wasn't
totaled but all the rubber was burned
off the tie
because of you know burnouts that you've
been doing and it's scratched along the
side and we say okay boy in this
condition this car is only worth about a
hundred and twenty thousand that's what
you would have to give him back that's a
minority view some states are taking
that approach and honestly isn't that
kind of a little more fair a little more
even-handed now because it's only the
minor view it doesn't really lead me to
any different advice to sellers I still
would tell the sellers if you're gonna
sell big-ticket items and take that kind
of risk
get someone else to co-sign on that
particular purchase okay
now let's change it a little bit yes
good is there any point when the seller
can finally have some assurance that
this deal is solid now and it's not
gonna get this affirm only when the kid
turns eighteen and that little grace
period after expires now let's talk
about that grace period for just one
minute before we move on that grace
period expires in one of two ways
one a reasonable amount of time passes
after they turned 18 that's kind of
squishy what's a reasonable amount of
time flow remember in business law when
we say reasonable that's a jury question
for your peers it means we're going to
trial and whatever the jury says is a
reasonable time for guidance purposes it
depends on the item if it's a perishable
item you know like it's it's only good
for so long or if it's a a cheaply made
item or something like that the amount
of time is going to be shorter than
otherwise the second way that that grace
period expires is if you use the product
as an adult if you gain the benefit of
it even one time as an adult then you
are assumed
to have ratified the deal and at that
point the seller is solid okay no longer
voidable after that but beyond that it
goes by the age of the miner reaching
adulthood there is no other time period
that we can look at so what if this guy
comes in to buy the Mustang and he tells
you that he's 21 and he even has a fake
ID it's kind of convincing it has a
little fake mustache on there and you
know he spelled the state wrong but
other than that it's pretty solid and so
you know you did your due diligence
right you tried to confirm that this is
a Mike because you have a sign now and
it's got that little headlight on it and
this little sign that says we do not
sell to minors around here okay we are
anti miners by the way we'll get to age
discrimination later on age
discrimination only applies to old
people they have to be more than 40 I'm
now in that category right
you could discriminate against me on age
it's impossible for me to discriminate
against you on age all right because it
does nothing to do a young age it has to
do with old age so perfectly legal for
you to put a sign in the window that
says we refuse to sell to minors all
right that's okay
and this is why this is why so what if
he lies about it well generally a minor
can still dis affirm even if he lied
about it why why well go back what is
the purpose of this law what is the
purpose of this rule who is this rule
meant to protect sellers no merchants no
minors and so what we're saying is he's
not right in the head so anything he
does doesn't count
you're supposed to protect the minors
it's not up to the minors and what they
do and even if even if it's bad behavior
on their part so in most most states
generally you can still disapper m--
even if he lies about his age and again
there's a minority of states that is
starting to say well that doesn't seem
entirely fair and trying to kind of
crack the door open but again it's not
enough just to say well as long as we
confirmed age then it's okay all right
yes
why can't you rent a car because a lot
of times they want you to be even 25
right that is that has nothing to do
with crock contract ability that has
everything to do with what insurance
which has to do with risk okay that is a
risk management issue not a contract
issue they have decided as a company
people under age 25 are not as a group a
good risk to loan out your car to it's
going to come back messed up and that's
just based on statistics actuarial data
that they have crunched over the years
okay now there is one exception one
exception there is one type of contract
that is always enforceable even against
a minor and in that he cannot disappear
no matter what and that is a contract
for the legal word is necessaries we
turned that word into a noun YZ we put
necessaries what is a necessary well
food shelter clothing that's pretty much
it
so you can sell a minor food clothing or
shelter and they cannot disappear my son
would really argue hard that video games
are in fact necessary but he would not
win that case legally
he would be very passionate about but he
won't won't be correct so vehicles not
on the list right but food clothing
shelter so if a minor shows up hungry
and cold and needs a place to stay you
can sell them food in a hotel room and a
jacket and they can't come back the next
day and say thanks don't need that
anymore
well that'd be kind of interesting with
the hotel room wouldn't you come down in
the morning and say I'm going to
dissipate in your hotel I'd be a great
you can live on that right at least
until you're 18 but that's why in these
cases now think about it why do you
suppose this is an exception why do you
suppose the law puts an exception for
necessaries what was the shopkeepers
reaction to the rule that we first laid
out the sign he puts up is no selling to
minors but when it comes to necessaries
and if we have minors that have been put
out on the street or run away from home
or just have these needs do we want
people to throw up signs that say sorry
we don't do business with minors no the
whole purpose of this law was to protect
minors and so if we don't make this
exception the law we meant to protect
them ends up getting used against them
and so this is a way to carve out a
reasonable exception now notice here
reasonable value you are probably not
only getting DISA firmed but probably
going to jail if you take advantage of a
minor in what you're selling them if you
raise the price oh we have special
pricing for minors and normally this
hotel room is $100 a night for you it's
500 and they don't know what money you
know you got a five-year-old stand in
there I can't imagine why but and he's
peeling off hundred dollar bills because
it doesn't mean anything to him
right and you say okay yeah oh you know
what and did you want the Wi-Fi code
because that's another hundred Oh
okay you can't take advantage of the
minor it has to be your reasonable price
that you are giving them now two things
that people have tried to lever into the
exception to make it wider than it is
the first is insurance and they say oh
okay well insurance is now unnecessary
right the law says no now think about
this insurance everyone would love to be
able to do this with insurance because
insurance that you buy and don't end up
using is basically taking money and
flushing it down the toilet right I mean
you just threw away money and didn't get
anything at all in exchange and so it'd
be great if you knew the future you
would only have to buy insurance when
you actually needed it right but the
thing about most of us is that we don't
know the future and so we are guarding
against the risk that some bad thing
might happen in the future that's what
insurance is all about we'll talk about
it many times throughout the semester
and so you're paying this premium on a
monthly basis so that you can have
coverage under your insurance policy and
as a minor let's say you enter into an
insurance agreement and you pay for
insurance for three years between when
you're fifteen and now you're getting
ready to turn eighteen and you call it
you never had an accident and so you
call up State Farm or whatever and you
say I've decided to disaffected was
fifteen and so if you would go ahead and
refund my premiums that I've paid turns
out I didn't need insurance after all
wouldn't that be great because now they
got to give you all your money back and
you had the benefit of the coverage
during those three years that is
actually the rule that is the rule
insurance can be disappered it can't
that's why you can't get insurance in
the name of a minor the parents always
have to sign on
as Co insured okay so insurance not a
necessary can be disapper what about
loans I want to take out a loan to buy a
car and then I go back and I not only
dis affirm the purchase of the car but I
also want to go back and DISA form the
loan and have you give me all my
payments back and all the interest I
paid as if this contract never happened
most loans are not necessaries and
therefore most loans can be disappered
now the exception would be a loan to buy
a house right because a house is what
shelter and so shelter is necessary if
the loan was to purchase unnecessary
then the loan can't be disarmed either
okay so with loans we look at what was
the purchase for and then that's how we
decide whether or not it can be
disappointing okay all right now we
talked about this
ratification takes place in three three
ways one he can't expressly ratify the
contract upon turning eighteen in other
words I'm now eighteen I am a man and I
affirm all of the contracts that I have
entered into as a minor okay I don't
know many people that do that but if he
did that or sign something to that
effect
that would be intentional ratification
or Express ratification most of the time
it is implied by enjoying the benefit of
the the contract after turning 18 so
that one time you jump in the car and go
now it's yours
you can't go back and disappear or by
the passage of a reasonable time okay
and we call that ratification
ratification and that to answer Zacks
question is the only time once
ratification has taken place as the only
time that the seller can now take a deep
breath of relief and know that it can no
longer be
this affirm okay that's miners miners
now let's talk about intoxication for a
moment with intoxicated persons if they
are to the level where they can no
longer appreciate the legal significance
of their actions in entering into a
contract then we should probably say
that that contract is not valid right
that's just kind of the underlying
principle but there are two issues with
intoxication one 99% of the time that
person did this to themself right I mean
it's very seldom that someone is
intoxicated by accident or by what
someone else did to them it does happen
you hear date rape where there's a drug
put into somebody's drink you hear
things like that and that certainly by
the way takes away their ability to
provide informed consent
that's why sexual activity that takes
place when someone is in a diminished
capacity is a crime because they cannot
exercise consent and so we're looking at
this in a similar way when it comes to
contracts that are entered into so the
first problem is from a fairness
standpoint they did it to themselves if
there was voluntary intoxication the
second problem is as we said before it
can be hard to tell when you're the
other party that someone is past that
level of whatever level that is for them
because it's unique to them right every
person would be different in how they
would respond and how many drinks it
would take to get them past the ability
to truly understand what they were doing
and so instead of looking at
the individual internal like capacity of
the individual and their situation
instead of looking at that legally we
look for objective indications that an
outsider could see so if someone is I
remember watching the Mythbusters once
and that's almost the full extent of my
experience with alcohol is watching
people on TV and being around other
people that have gone that far but I
remember watching once where Jamie and
what's the other guy's name was it Adam
decided to test the differences in how
many drinks it would take to get a
person to a certain level so they were
doing this for science and the one of
them just got quieter he started out
quiet the guy with the moustache you
know Jamie
he started out quiet and he just got
quieter and and he was on the blood
alcohol content way over the legal limit
he couldn't been able to drive or do
anything else but all he did was just
sit there quietly now if you didn't know
that he was like way gone drunk you
wouldn't know because there wasn't any
objective indication of that and you
could have put anything in front of him
and he would have signed it the other
guy just got weird okay he started out
weird and he got even weirder right and
he was sloppy and falling around and
everyone would have known there's
something wrong with that guy he's drunk
okay
the coordination was gone he was same
slurred speech it was very weird that's
the kind of objective indication to
someone else so what you what the law is
trying to do here is prevent people from
being overly taken advantage of that's
the only level of protection we're going
to give to someone if they are
voluntarily intoxicated we will not let
someone take advantage of you if it
should have been obvious to them that
you were inebriated
now here's a real problem and and I'm
talking a bunch of Christian guys and
gals that I hope this won't be your
experience but the truth is that in
business a lot of deals get done over
dinner where they're drinking alcohol
the truth is people will use alcohol on
negotiation ago she ating tactic to try
to reduce the defenses that's another
really good reason not to drink okay
especially in regards to a business deal
because they will use that and your it
does by its nature diminish your
inhibitions including business
inhibitions that you would have add to
certain deals right and so because it's
normal in business for people to have a
drink or two while they're talking and
negotiating a deal the law does not say
does not say that it's invalid that the
contracts are unenforceable if the
person had X number of drinks there's no
way we could do that that's why the law
focuses on objective indications if the
objective indications are there that
this individual was impaired then in
that case it is voidable it's not
illegal it's not void it is voidable and
we only give them until they have
sobered up and realized what they've
done if they don't object immediately
then that's considered to be ratified
and it's no longer voidable okay so
that's how we treat intoxication next
time we come back we'll talk about
mental competence have a great day