Contracts/Lack of capacity: Difference between revisions

Template:ConflictLaw The capacity of both natural and artificial persons determines whether they may enter into or make binding dispositions of their rights, such as getting married or merging, entering into contracts, making gifts, or writing a valid will. When the law limits or bars a person from engaging in such activities, attempts to do so are either voidable or void for incapacity. Capacity is an aspect of status and both are defined by a person's personal law:

• for natural persons, the law of domicile or lex domicilii in common law states, and either the law of nationality or lex patriae, or of habitual residence in civil law states;
• for artificial persons, the law of the place of incorporation, the lex incorporationis for companies while other forms of business entity derive their capacity either from the law of the place in which they were formed or the laws of the states in which they establish a presence for trading purposes depending on the nature of the entity and the transactions entered into.

Discussion

As an aspect of the social contract between a state and its citizens, the state adopts a role of protector to the weaker and more vulnerable members of society. In public policy terms, this is the policy of parens patriae. Similarly, the state has a direct social and economic interest in promoting trade so will define the forms of business enterprise that may operate within its territory and lay down rules that will allow both the businesses and those that wish to contract with them a fair opportunity to gain value. This system worked well until social and commercial mobility increased. Now persons routinely trade and travel across state boundaries (both physically and electronically), so the need is to provide stability across state lines given that laws differ from one state to the next. Thus, once defined by the personal law, persons take their capacity with them like a passport whether or however they may travel. In this way, a person will not gain or lose capacity depending on the accident of the local laws, e.g. if A does not have capacity to marry her cousin under her personal law (a rule of consanguinity), she cannot evade that law by travelling to a state that does permit such a marriage (see nullity).

Natural persons

Standardised classes of person have had their freedom restricted. These limitations are justified exceptions to the general policy of freedom of contract and the detailed human and civil rights that a person of ordinary capacity might enjoy. Hence, for example, freedom of movement may be modified, the right to vote may be withdrawn, etc. As societies have developed more equal treatment based on gender, race and ethnicity, many of the older incapacities have been removed. For example, English law used to treat married women as lacking the capacity to own property or act independently of their husbands (the last of these rules was repealed by the Domicile and Matrimonial Proceedings Act 1973 which removed the wife’s domicile of dependency, so that a husband and wife could have different domiciles).

• Infants

The definition of an infant varies, each state reflecting local culture and prejudices in defining the age of majority, marriageable age, voting age, etc. The right to vote in the United States is currently set at 18 years, while the right to buy and consume alcohol is often set at 21 years by U.S. state law. Some laws, such as marriage laws, may differentiate between the sexes and allow women to marry younger. There are instances in which a person may be able to gain capacity earlier than the prescribed time through a process of emancipation. Conversely, many states allow the inexperience of childhood to be an excusing condition to criminal liability and set the age of criminal responsibility to match the local experience of emerging behavioural problems (see doli incapax). For sexual crimes, the age of consent determines the potential liability of adult accused.

As an example of liability in contract, the law in British Columbia provides that an infant is not bound by the contracts he or she enters into except for the purchase of necessaries and for beneficial contracts of service. Infants must pay fair price only for necessary goods and services. In contracts between an adult and an infant, adults are bound but infants may escape contracts at their option (i.e. the contract is voidable). Infants may ratify a contract on reaching age of majority. In the case of executed contracts, when the infant has obtained some benefit under the contract, he/she cannot avoid obligations unless what was obtained was of no value. It should be noted that the British Columbia Infants Act (RSBC 1996 c.223) declares all contracts with infants to be unenforceable, including those for necessities. Upon repudiation of a contract, either party can apply to the court. The court may order restitution, damages, or discharge the contract. All contracts involving the transfer of real estate are considered valid until ruled otherwise.

• Insanity and mental illness

In the Criminal Law, the traditional common law McNaghten Rules excused any person from liability if they did not understand what they were doing or, if they did, that the did not know it was wrong.

• Intoxicated. Contracts entered into while intoxicated are treated like insanity. They must be repudiated as soon as sober.
• Enemy Aliens may have contracts void or suspended in event of outbreak of war.
• Bankrupts: before discharge they must notify creditors, but after discharge they are returned to full capacity. In the United States, some states have spendthrift laws under which an irresponsible spender may be deemed to lack capacity to enter into contracts (in Europe, these are termed prodigality laws).

Business entities

• Corporations. The capacity of corporations depends on the method of incorporation. The capacity of crown corporations are limited by legislation.
• Unions have limited capacity unless the contract relates to union activities.

When a person or entity lacks capacity for any reason, including age, a court may declare that person or entity a ward of the state and grant power of attorney to an appointed legal guardian, administrator, receiver, executor or other similar legal functionary.

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