Prepared by Douglas Peterson, Prepared by Douglas Peterson, University of AlbertaUniversity of Alberta 9-9-11

Part 3 – The Law of ContractPart 3 – The Law of Contract

Chapter 9Chapter 9Legal Capacity to Legal Capacity to Contract and the Contract and the

Requirement of LegalityRequirement of Legality

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OverviewOverview

MinorsMinors RepudiationRepudiation RatificationRatification

Drunken and Insane PersonsDrunken and Insane Persons CorporationsCorporations Labour unionsLabour unions Bankrupt personsBankrupt persons

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OverviewOverview

Illegal AgreementsIllegal Agreements Under StatuteUnder Statute Competition ActCompetition Act Administrative ActsAdministrative Acts InsuranceInsurance Unlicensed personsUnlicensed persons

Legality at Common LawLegality at Common Law Public policyPublic policy Restraint in tradeRestraint in trade

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IntroductionIntroduction

CapacityCapacity The ability to enter into a contractThe ability to enter into a contract Not all persons can enter into contractsNot all persons can enter into contracts The law protects those who may lack the ability to The law protects those who may lack the ability to

appreciate the nature of their actsappreciate the nature of their acts Protects those who would not be in an equal bargaining Protects those who would not be in an equal bargaining

positionposition

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Minor/InfantMinor/Infant

A person who has not reached the age of majorityA person who has not reached the age of majority Common law: a person under age of 21Common law: a person under age of 21 Statute: sets the age of majority in each province; some Statute: sets the age of majority in each province; some

it is 18, others 19it is 18, others 19 Public policy says minors should not be bound by their Public policy says minors should not be bound by their

promisespromises Contract is enforceable by the minor but not against the Contract is enforceable by the minor but not against the

minor (voidable at the option of the minor)minor (voidable at the option of the minor)

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Exceptions for MinorsExceptions for Minors

1.1. Contracts for necessariesContracts for necessaries Necessaries: food, clothing, shelter, certain types of Necessaries: food, clothing, shelter, certain types of

transportation, and other necessariestransportation, and other necessaries Minor liable on such contractsMinor liable on such contracts Courts look at:Courts look at:

– social position of minorsocial position of minor– Minor already has an adequate supply of such goodsMinor already has an adequate supply of such goods

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Exceptions for MinorsExceptions for Minors

2.2. Beneficial ContractsBeneficial Contracts Employment or apprenticeship contracts which are Employment or apprenticeship contracts which are

beneficial to the minorbeneficial to the minor Not beneficial if exploitativeNot beneficial if exploitative

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Right of RepudiationRight of Repudiation

Test: Is the contract:Test: Is the contract:1.1. Executed Contact: fully executed by the minor Executed Contact: fully executed by the minor

(enforceable against minor) unless minor was taken (enforceable against minor) unless minor was taken advantage ofadvantage of

2.2. Executory: yet to be performed (may not be Executory: yet to be performed (may not be enforceable against minor)enforceable against minor)

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Effect of RepudiationEffect of Repudiation

Executory contracts Executory contracts For non-necessary goods or servicesFor non-necessary goods or services Can be repudiated at anytime at option of minorCan be repudiated at anytime at option of minor If repudiated minor must return goodsIf repudiated minor must return goods Normal wear and tear to goods is not recoverable by Normal wear and tear to goods is not recoverable by

merchant but deliberate acts by the minor aremerchant but deliberate acts by the minor are Merchant/adult can not sue in tort if an action lies in Merchant/adult can not sue in tort if an action lies in

contractcontract

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Fraudulent Misrepresentation as to AgeFraudulent Misrepresentation as to Age

RuleRule Contract with minors at your perilContract with minors at your peril Must determine age of person you are contracting withMust determine age of person you are contracting with Even a minor who misrepresented their age may be able Even a minor who misrepresented their age may be able

to repudiateto repudiate Criminal law of obtaining goods under false pretenses Criminal law of obtaining goods under false pretenses

may be applicablemay be applicable

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Ratification and RepudiationRatification and Repudiation

RepudiationRepudiation The refusal to perform and agreement or promiseThe refusal to perform and agreement or promise

RatificationRatification The adoption of a contract or act of another party who The adoption of a contract or act of another party who

was not originally bound by the contract or actwas not originally bound by the contract or act

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Ratification and RepudiationRatification and Repudiation

When minor has entered into a contract of a continuing When minor has entered into a contract of a continuing or permanent nature and receives benefits and incurs or permanent nature and receives benefits and incurs obligations:obligations: The contract must be repudiated within a reasonable time The contract must be repudiated within a reasonable time

after attainting the age of majority (or the contract is after attainting the age of majority (or the contract is binding)binding)

Contracts for non-necessaries not of a continuing Contracts for non-necessaries not of a continuing nature:nature: Minor must expressly ratify on attaining the age of Minor must expressly ratify on attaining the age of

majoritymajority

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Statutory ProtectionStatutory Protection

Modification of common lawModification of common law Ratification must be in writing before it will be binding Ratification must be in writing before it will be binding

on the minoron the minor New Brunswick, Newfoundland, Nova Scotia, Ontario, New Brunswick, Newfoundland, Nova Scotia, Ontario,

and Prince Edward Islandand Prince Edward Island British Columbia: minor cannot ratify a contract that British Columbia: minor cannot ratify a contract that

would render it enforceable by the adultwould render it enforceable by the adult Contracts for non-necessaries and debt contracts are Contracts for non-necessaries and debt contracts are

“absolutely void”“absolutely void”

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Minors Engaged in BusinessMinors Engaged in Business

Same rule for minors engaged in business as:Same rule for minors engaged in business as: Sole proprietorSole proprietor Partnership (not liable for debts of partnership incurred Partnership (not liable for debts of partnership incurred

as a minor)as a minor) Must repudiate after attaining age of majority or will be Must repudiate after attaining age of majority or will be

bound (implied ratification if continue to accept benefits bound (implied ratification if continue to accept benefits under the contractunder the contract

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Minors Engaged in BusinessMinors Engaged in Business

Not necessary for a minor to engage in business Not necessary for a minor to engage in business Contracts usually treated as contracts for non-Contracts usually treated as contracts for non-

necessariesnecessaries Voidable at option of the minorVoidable at option of the minor If a minor continues to accept benefits under a contract If a minor continues to accept benefits under a contract

after attaining age of majority, will be boundafter attaining age of majority, will be bound

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Drunken and Insane PersonsDrunken and Insane Persons

Mentally DisabledMentally Disabled If committed – cannot incur any liability (contract is If committed – cannot incur any liability (contract is

void)void) If temporary (as per the rules below)If temporary (as per the rules below)

Temporary Mental ImpairmentTemporary Mental Impairment Physical or mental damagePhysical or mental damage Result of drugs or alcoholResult of drugs or alcohol

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Mental ImpairmentMental Impairment

Rule (same as for a minor)Rule (same as for a minor) Bound in contracts for necessaries Bound in contracts for necessaries Non-necessaries: not bound (voidable at impaired Non-necessaries: not bound (voidable at impaired

persons option) if:persons option) if: Can establish was in such a condition when the contract Can establish was in such a condition when the contract

was entered intowas entered into The other party was aware of the condition when the The other party was aware of the condition when the

contract was entered intocontract was entered into Contract must be repudiated immediately after reaching Contract must be repudiated immediately after reaching

capacity or will be implied ratificationcapacity or will be implied ratification Impaired person can ratify contractImpaired person can ratify contract

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CorporationsCorporations

Types of CorporationsTypes of Corporations Regular Corporations Regular Corporations

Same powers as a natural personSame powers as a natural person Limitations internal bylaws (articles of incorporation) not Limitations internal bylaws (articles of incorporation) not

public knowledgepublic knowledge Special Act Corporations Special Act Corporations

Powers controlled by special actPowers controlled by special act Limitations public knowledge because in a statuteLimitations public knowledge because in a statute

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CorporationsCorporations

Ultra ViresUltra Vires An act that is beyond the legal authority or power of a An act that is beyond the legal authority or power of a

legislature or corporate bodylegislature or corporate body Special Act CorporationsSpecial Act Corporations

Not bound by contracts that are ultra viresNot bound by contracts that are ultra vires Regular CorporationsRegular Corporations

Bound by contracts that are ultra viresBound by contracts that are ultra vires

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Other EntitiesOther Entities

Labour UnionsLabour Unions Ability to enter into contracts (collective bargaining Ability to enter into contracts (collective bargaining

agreements) allowed under labour legislationagreements) allowed under labour legislation Normally would be unenforceableNormally would be unenforceable

Bankrupt PersonsBankrupt Persons Declared bankrupts have limited capacity to contractDeclared bankrupts have limited capacity to contract Until receives discharge can only enter into contracts for Until receives discharge can only enter into contracts for

necessariesnecessaries

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Illegal AgreementsIllegal Agreements

Requirement of Legality: Requirement of Legality: Contracts that offend public good are unenforceableContracts that offend public good are unenforceable Contacts whose purpose may is illegal may be illegal Contacts whose purpose may is illegal may be illegal

and unenforceableand unenforceable Some contracts are only rendered voidable by public Some contracts are only rendered voidable by public

policy or by specific statutespolicy or by specific statutes Voidable if the parties do not comply with statute or the Voidable if the parties do not comply with statute or the

policypolicy

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Legality Under Statute LawLegality Under Statute Law

GenerallyGenerally Illegal contractsIllegal contracts

Agreement to commit a crime (rob, assault, abduct, Agreement to commit a crime (rob, assault, abduct, murder, steal goods, or any other act prohibited by the murder, steal goods, or any other act prohibited by the Criminal Code)Criminal Code)

Embezzlement – when crime discovered a contract by Embezzlement – when crime discovered a contract by employee of restitution in return for not reporting is employee of restitution in return for not reporting is against public policyagainst public policy

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Legality Under Statute LawLegality Under Statute Law

Competition ActCompetition Act Restraint of CompetitionRestraint of Competition

UnenforceableUnenforceable Act covers a number of business practices contrary to Act covers a number of business practices contrary to

public policypublic policy Administrative ActsAdministrative Acts

Workers Competition, land use planning, wagering lawsWorkers Competition, land use planning, wagering laws Contracts in violation of the Act is void and unenforceableContracts in violation of the Act is void and unenforceable

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Legality Under Statute LawLegality Under Statute Law

Insurance PoliciesInsurance Policies Wagers (bets) are unenforceable contracts as a general Wagers (bets) are unenforceable contracts as a general

rulerule Exception is insurance contracts (life insurance)Exception is insurance contracts (life insurance) Requirement: an insurable interestRequirement: an insurable interest

Distinguishes insurance contracts from normal wagersDistinguishes insurance contracts from normal wagers

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Legality Under Statute LawLegality Under Statute Law

Unlicensed PersonsUnlicensed Persons Contracts with unlicensed trades or professions is illegalContracts with unlicensed trades or professions is illegal Purpose is protection of the publicPurpose is protection of the public Must still pay for goods supplied but not for services Must still pay for goods supplied but not for services

renderedrendered Only voidable at option of party who is not the Only voidable at option of party who is not the

tradesperson or professionaltradesperson or professional

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Legality at Common LawLegality at Common Law

Public PolicyPublic Policy The unwillingness of the courts to enforce rights that are The unwillingness of the courts to enforce rights that are

contrary to the general interests of the publiccontrary to the general interests of the public ExamplesExamples

Obstruct justice, injure public service, injure the state, Obstruct justice, injure public service, injure the state, stifle prosecutionstifle prosecution

Contracts for the commission of a tort, immoral actsContracts for the commission of a tort, immoral acts Exorbitant interests ratesExorbitant interests rates Some are merely unenforceable whereas others are Some are merely unenforceable whereas others are

unenforceable and illegalunenforceable and illegal

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Contracts in Restraint of TradeContracts in Restraint of Trade

3 Categories3 Categories1.1. Agreements contrary to the Competition ActAgreements contrary to the Competition Act

2.2. Non competition agreements with the purchase and Non competition agreements with the purchase and sale of a businesssale of a business

3.3. Non competition agreements in employment contractsNon competition agreements in employment contracts

Last 2 dealt with under public policyLast 2 dealt with under public policy

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Sale of a BusinessSale of a Business

Restrictive CovenantRestrictive Covenant A contractual clause limiting future behaviorA contractual clause limiting future behavior Prima facie void as a restraint of tradePrima facie void as a restraint of trade Allowed if the restriction is reasonable as to:Allowed if the restriction is reasonable as to:

1.1. TimeTime2.2. Business restrictedBusiness restricted3.3. Geographical areaGeographical area

Reminder:Reminder:Prima faciePrima facie is a Latin expression meaning "on its first is a Latin expression meaning "on its first

appearance", or "by first instance". It is used in modern legal appearance", or "by first instance". It is used in modern legal English to signify that on first examination, a matter appears to English to signify that on first examination, a matter appears to be self-evident from the facts. In common law jurisdictions, be self-evident from the facts. In common law jurisdictions, prima facieprima facie denotes evidence that (unless rebutted) would be denotes evidence that (unless rebutted) would be sufficient to prove a particular proposition or fact.sufficient to prove a particular proposition or fact.

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Employment AgreementsEmployment Agreements

Non Competition ClausesNon Competition Clauses Treated differently than the sale of a businessTreated differently than the sale of a business Serious consequences of someone not being able to Serious consequences of someone not being able to

earn a livingearn a living Not enforceable unless serious injury to an employer Not enforceable unless serious injury to an employer

can be clearly demonstratedcan be clearly demonstrated Bargaining position at time contract entered into Bargaining position at time contract entered into

(employee seldom in a strong bargaining position)(employee seldom in a strong bargaining position)

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Employment AgreementsEmployment Agreements

ConfidentialityConfidentiality Enforceable more often than non-competitions clausesEnforceable more often than non-competitions clauses Based on duties of employee in the employment Based on duties of employee in the employment

relationship not upon a restraint in traderelationship not upon a restraint in trade Public InterestsPublic Interests

Restrictive covenant against employees who provide an Restrictive covenant against employees who provide an essential service may not be enforceable if would result essential service may not be enforceable if would result in injury to the publicin injury to the public

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SummarySummary

CapacityCapacity Not everyone has the capacity to enter into contractsNot everyone has the capacity to enter into contracts MinorsMinors

Not liable for contracts for non-necessariesNot liable for contracts for non-necessaries Liable for necessaries or beneficial contract of servicesLiable for necessaries or beneficial contract of services

Others – may lack capacityOthers – may lack capacity

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SummarySummary

LegalityLegality Contracts that are illegal in purpose, against statutes, or Contracts that are illegal in purpose, against statutes, or

against public policyagainst public policy Contracts in restraint of trade are usually unenforceable Contracts in restraint of trade are usually unenforceable

unless the restriction is reasonableunless the restriction is reasonable