4 Intention: Capacity Flashcards
Capacity
Capacity, not whether the parties intend to be bound to the agreement, whether they COULD be bound and have the ability to do so.
To have capacity means: having sufficient mental ability to formulate the requisite ideas so that one can create a disposition.
Capacity is not all or nothing. You can have capacity for one purpose but not another purpose. IE capacity to enter into a marriage but don’t have capacity to create a will
Capacity isn’t a function of mental ability but is also a function of policy
Its a combo of a person’s capacity and ability but also a functinon of policy.
If court says a person “lacks capacity” to protect people and avoid exploitative contracts etc.
IE children have capacity for some contracts but not for others.
Presumption that the parties do have capacity to form requisite intention to enter into the contract unless its brought in question.
General Contractual Rule
Test: able to understand nature and effect of particular transaction
Presumption of legal capacity- Burden of proof falls on person denying capacity.
Exceptions to General contractual rule on capacity
- Corporations
- Mental Incapacity
- Infants
Void Vs Voidable
Contract Void: As if never existed at all
Voidable: Contract still exists but the person who lacks the capacity can rescind or go ahead
Exceptions: Corporations
We say that companies are treated exactly the same as human beings.
And if you look at the legislation, it says that any corporation has the same capacity as a human being.
But the problem is that business people often jump the gun.
So let’s say that I have an idea for a business. And to get this business idea up and running, I have to do two things.
First of all, I have to buy widgets from you. And second of all, because of the risks that we talked about in the last video, I want to make sure that I incorporate before I go into business.
But because I’m not a lawyer, I’m a business person.
I jump the gun. And before I incorporate, I purport, decide a contract with you for the delivery of widgets.
And that contract in which you deliver half a million widgets to me in exchange for two million dollars purportedly is created not between you and me, personally, because I’m concerned about risk management.
Purportedly the contract is created between you and my company.
But The problem is, if I haven’t yet incorporated, if I sign the contract with you before I incorporate it by company, then the company simply can’t have capacity.
And very often we have a question as to who suffers the burden, what happens in that situation.
If you deliver the widgets, you thought you were going to get paid by the company, but it turns out that the contract was created even before I brought the company into existence.
Well, you’ll be protected in one of two ways. As the vendor, you can either sue the company if the company ratified the contract after the fact, which means even though the contract was created before the company came into existence, if the company wants, it can ratify the contract, which is to say it can after the fact simply adopt the contract as a token.
It can sort of fictionalize the matter and pretend to go back in time so that the company, the one that signed the contract with you, it was in a situation where I personally signed the contract with you.
So one possibility is to get paid by the company because the company ratifies after the fact.
The other possibility is that the company won’t ratify after the fact.
You can come after me and sue me personally. Second possibility for a situation where somebody might lack capacity to enter into contract is an adult with a mental incapacity.
Exceptions: Mental Incapacity
And a mental incapacity can arise for a number of reasons.
It might arise from drunkenness or drug induced intoxication.
It might be a mental illness. Or increasingly in a candidate it might simply be extreme age.
And it’s an increasing problem in Canada again as a population ages, and that we have this concern about capacity to contract.
Two possibilities. If an individual has been certified as mentally incapacitated, that is to say if a court has given an order that says, this particular person lacks mental capacity, then any contract that person purports to enter into is simply void.
And we say something is void if it doesn’t actually exist at all.
If the contract is void, it’s utterly non-existent.
Never did exist, never will exist. It’s as if nothing happened at all. So possibility number one is that if a person has been certified as mentally incapacitated, then any contracts are simply void.
That person has no ability whatsoever to enter into an enforceable agreement.
The other possibility is that if the person isn’t certified as mentally incapacitated, but in fact are mentally incapacitated, again by extreme age or by senility or drunkenness or intoxication then the contract isn’t void it’s voidable that’s an important distinction the contract is void it simply doesn’t exist at all for any purposes if the contract is voidable it means that it does exist and it’s a good contract It’s just that the person who suffers the incapacity has the choice as to whether they want to go ahead and perform the contract, or they want to avoid or rescind the contract.
So again, if a person isn’t declared to be mentally incapacitated, then the contract is void, it’s voidable, which means it’s good to go as it is, but the person who suffers the incapacity has the ability, without a reasonable time, to decide whether or not they want to go forward with it, or they want to rescind it, whether they want to get out of it.
Last point though, if a contract is voidable on the basis of mental incapacity, then it can be avoided.
It can be rescinded by the person who suffers the mental incapacity only if at the time that they created the contract with you, you either knew or should have known that they suffered the incapacity.
So again, if a person isn’t certified as mentally incapacitated, but actually are incapacitated, then the contract will be voidable, which allows them to get out of it.
But only if, at the time that the contract is created, you either knew, or as a reasonable person should have known, that they didn’t have legal capacity.
And the question is, why do we have that rule? What’s the point of saying that they can avoid the contract on the basis of their mental incapacity, but only if the other party knew or should have known?
And the explanation, and it becomes increasingly important in Canada, again as we age, is that we don’t want to infantilize seniors.
If we had a rule that said anytime somebody who in fact is incapacitated has the ability to resend the contract or get out of the contract, then you as a vendor probably wouldn’t want to deal with a lot of seniors.
You wouldn’t want to deal with a lot of seniors because even if you think they’re perfectly fine, if it turns out after the fact that they suffer from a mental incapacity, then they can avoid the contract.
They can get out of the deal. And so we want to avoid that. We want to avoid vendors treating older people like infants and not wanting to do business with them at all by having a rule that says the contract is voidable on the basis of the actual incapacity.
But only if the vendor, the person on the other side of the bargain, either knew or should have known at the time of the contract that the person signing didn’t actually have capacity.
Exceptions: Infants
Most contracts ….Presumptive rule: if child enters into the contract, the contract is voidable
Void: any contract not to the infant’s benefit (a doubtful category)
Exception: contract for the necessities of life (apartment, food ,clothing, education, and medical care). This is a policy explanation.
Then we say that those contracts, because they deal with a necessity of life, are always enforceable against the child and the child has no say in the matter.
Once they’ve signed the contract, it’s enforceable in the same way that it would be enforceable against an adult.
From where the point, if it’s dealing with a necessity of life, that even though the child is under 18, the contract is not void, it’s not even voidable, it’s entirely valid, including forceful, and neither side can simply walk away.
And then the final example is another situation where even if the person is under the age of 18, we recognize it as a valid contract that can’t be rescinded.
And that’s the case if you have a contract for employment that on the whole is to the benefit of the child.
So just as we recognize that the child has a capacity for the necessities of life, so too we recognize a child has capacity to enter into a contract that both sides can enforce if it’s an employment contract that generally is for the benefit of the child rather than for the benefit of the employer.
John Tonelli vs. Mike Lalor, May 22, 1986 —hockey player, exercised his right to void the contract for hockey team as he signed as an infant (voidable contract)
John Tonelli vs. Mike Lalor, May 22, 1986 —
And it’s going back now, but if you’re a big hockey fan you might remember the name John Tinelli who was a star teenage hockey player in the 1970s and subsequently won four cups with the Islanders and was MVP of Canada Cup in 1984.
So a remarkably good hockey player. And when he was 16, a child, he signed a contract for three years to play with the Toronto Marlborough’s.
And he fulfilled that contract for two years. But when he turned 18, he had a much better offer from the Houston Arrows of the World Hockey association to pay him half a million dollars.
Can’t play for two teams at the same time. So in order to play for the Houston Arrows, alongside Portie Howe, Portie Howe’s sons, John Tinelli had to be able to get out of the contract, the last year of the contract, that he had signed with the Toronto Marlboro’s.
And he did that by saying that he was incapacitated.
And the Toronto Marlboro’s argued, well, You were a child, presumably you’re incapacitated, but this was a contract of employment.
And the court ultimately sided with John Tinelli because even though it was a contract of employment, the terms were really much more favorable to the team than they were to John Tinelli.
And so it’s a great application of the rule that even an infant can enter into an enforceable employment contract, but it’s enforceable against the infant, only if on the whole the contract is for the infant’s benefit.
If the contract on the whole is for the employer’s benefit, as in the John Tenelli case, and then the child can rescind it, and so John Tenelli decides to walk away from the Toronto Laramurals, grows with the Houston Arrows, ultimately ends up with the Islanders, life turns out splendidly well, not entirely because of the capacity rules, but it certainly helped them along the way.
