Small Business Contracting Basics from Sterling Part Three
- Monday, 09 February 2015 04:47
Who May Enter A Contract Part I
Hello again folks, here we are again with Small Business Contracting Basics. Today we will discuss who or what can enter a contract in California. Last time we addressed the issue of what constitutes a contract in California. Today I will address issue of capacity to contract. Business owners need to be able to understand who (or what) is capable of entering into a contract in order to determine the possible ramifications of contracting with people or entities on the periphery. Remember again this is a very basic overview of the law of contracts and I could go into so much more depth on this particular issue. However barring a full CLE (Continuing Legal Education) class on the issue I believe that this short introduction can answer some basic questions that you may have had regarding the contracts and specifically the legal issue of who may enter a contract. I have split this article into two parts for ease of writing (as I am sure anyone who has gotten this far is well beyond the point of needing help with reading this).
Entering into a contract with a minor (aka a person under 18 years old) has a number of problems for a business. An old adage is that someone who deals with a minor deals at their own peril (true in dating and in contracts). The reason for this is that generally a minor can avoid liability on contracts. However keep in mind that this affects only the ability of a third party trying to enforce a contract against a minor. A minor is still perfectly capable of enforcing a contract against you as a business owner. Therefore, you, as a business owner, are the one who bears essentially all the risk when a contract is entered into with a minor. There are three categories of a contract with a minor (i) contracts that a void with respect to minors, (ii) contracts that a minor can void, (iii) contracts that are actually binding on the minors.
Void contracts (in relation to minors) include contracts to delegate power (i.e. the creation of some kind of agency (sigh yes we will get to that soon)), contracts relating to real property or any interest in it (i.e. land), and contracts relating to personal property not in the minor’s immediate possession (i.e. the right to receive wages or something equivalent). This means that if you desire to do anything that is related to the above purposes you had better make sure that the individual you are trying to contract with is above the age of 18.
Voidable contracts (in relation to minors) (i.e. contracts that the minor can avoid at their discretion) are any contracts that do not fall into any of the other two categories of either void or binding. These contracts can be disaffirmed or affirmed by the minor at their discretion. A minor may essentially not preform the contract and avoid liability for his/her failure to perform the contract.
Contracts that are binding on minors are all of the following, (i) Contracts for necessities that meet the requirements of Family code Section 6712 (I won’t bore you by actually reciting the code section, but do look it up) , (ii) contracts entered into by a minor under express authority or direction of a statute, (iii) certain entertainment contracts that are specifically approved by the family code (make sure to look it up), (iv) contracts entered into on behalf of a minor child by a parent, (v) contracts that have been ratified by a minor after reaching the age of majority ( which is the fancy way of saying 18), and (iv) contracts with emancipated minors. Keep in mind, a minor cannot recover goods that were transferred to an innocent third party purchaser. In English, this means that if you buy a widget from someone who purchased that widget from a minor, the minor will be unable to force the widgets return to them (assuming that you purchased the widget in good faith).
Mentally Challenged Individuals
This is much more of a complicated subject than simple contracts with minors. However, in the spirit of providing you a good overview of the law I will gloss over huge swaths of it so that you can understand just enough. The most general way to think of this is to say that someone who is entirely without understanding or someone who has been determined to be incompetent by a court cannot enter into a contract and any contract entered into with that person is void and therefore totally unenforceable. As an alternative someone who is of unsound mind but not entirely without understanding is voidable and subject to recession (aka cancellation) but then the rescinding party must return the consideration. However, (without going into the complexities) that someone is presumed to be competent to contract and they must provide facts that show their incompetence (assuming they have not been judicially determined to be incompetent). Keep in mind this is a gross oversimplification and this could easily be a whole article in and of itself but a good but of background that might help you.
While most businesses are not going to be entering contracts with intoxicated (typically drunk) individuals, if you own a particular kind of business or run into a strange situation this information could come in handy. Again this could be a whole mini article (and might be in the future because it is fun to think of different scenarios) so keep that in mind. Courts have historically not looked favorably on attempts to use intoxication as a defense to contract claims. Which means that you are slightly safer entering into contracts with people who may be intoxicated (still risky so don’t just go for it). Generally keep in mind that contracts with intoxicated people are still voidable based on the theory of constructive fraud (if one person essentially knew the other was intoxicated and took advantage of the situation to get a favorable contract) or unconscionable (again don’t worry too much about that just yet but it is generally very unfair). As a good rule of thumb, if you can tell that the person is drunk or otherwise under the influence of some intoxicant to the point where you have any doubt as to their ability to make good judgments, it is better to wait. Of course it is also just not a good idea to try and take advantage of someone with a contract period.
Hopefully this has been educational to you as a business owner. Issues of contracting and the ability to enter into a contract are very important to understand when you prepare to enter into a potentially lucrative business venture. No one, and I mean no one, wants to have a contract voided merely because they thought that the person they were contracting with had more authority than they thought. Next time in part two of this article I will describe the agency relationship and the capability of business entities to enter into a contract.