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Chapter 3 Capacity and legality 
In this chapter, we delve into 

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the concepts of capacity and 
legality, 2 fundamental 

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prerequisites for the formation 
of a valid contract. 

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Understanding these principles 
is crucial because a contract 

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lacking proper capacity or 
legality may be void or 

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voidable, making it 
unenforceable in a court of law.

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Capacity to contract. 
Capacity to contract refers to 

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the legal ability of a party to 
enter into a binding agreement. 

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Not everyone possesses this 
capacity, and the law recognizes

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certain groups as being 
incapable or having limited 

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ability to contract. 
These groups include minors, 

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individuals with mental 
incapacities, and those under 

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the influence of intoxicants. 
Minors. 

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Minors, typically defined as 
individuals under the age of 18,

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generally lack the capacity to 
enter into binding contracts. 

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Contracts entered into by minors
are usually voidable at the 

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minors discretion. 
This means that while a minor 

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can choose to honor the 
contract, they also have the 

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right to disaffirm it, rendering
it unenforceable against them. 

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Key Points Right to Disaffirm 
Definition A minor can disaffirm

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or cancel a contract at any time
before reaching the age of 

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majority or within a reasonable 
time thereafter. 

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To disaffirm a contract, the 
minor must indicate their 

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intention not to be bound by the
agreement, which can be done 

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verbally or through actions. 
Restitution. 

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When a minor disaffirms a 
contract, they must return any 

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goods or benefits received if 
possible. 

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However, they are only required 
to return what remains in their 

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possession or control, and they 
are not liable for any 

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depreciation or damage. 
Example. 

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A 17 year old purchases a car 
before turning 18. 

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The miner decides to return the 
car and disaffirm the contract. 

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The seller must accept the 
return and refund the money, 

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subject to any reasonable wear 
and tear on the car. 

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Ratification Definition. 
Ratification occurs when a 

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miner, upon reaching the age of 
majority, expresses an intention

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to be bound by the contract. 
This can be done explicitly 

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through a statement or 
implicitly through actions such 

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as continuing to abide by the 
contract's terms. 

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Binding effect. 
Once a contract is ratified, it 

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becomes fully enforceable and 
the miner loses the right to 

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disaffirm. 
Example, if the 17 year old 

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keeps the car and continues 
making payments after turning 

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18, this action ratifies the 
contract, making it binding and 

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preventing disaffirmation. 
Exceptions Necessities Contracts

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for necessities like food, 
clothing, and shelter are 

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generally enforceable against 
minors. 

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This exception exists to ensure 
minors have access to essential 

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goods and services. 
Statutory exceptions. 

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Certain jurisdictions may have 
statutory exceptions where 

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specific types of contracts 
entered into by minors are 

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binding. 
Example, a minors lease 

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agreement for an apartment is 
generally enforceable to ensure 

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they have housing. 
Similarly, a contract for 

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essential medical services would
be enforceable. 

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Illustration of minors capacity 
to contract scenario Sarah, a 17

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year old high school student, 
enters into a contract with a 

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phone company to purchase a new 
smartphone with a monthly 

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payment plan. 
After a few months, Sarah 

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decides she no longer wants the 
phone and contacts the company 

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to disaffirm the contract. 
The company must allow her to 

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return the phone and cancel the 
contract, refunding any payments

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made, subject to the phone's 
condition. 

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Exception scenario. 
Alex, also 17, signs a lease for

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an apartment because he needs 
housing while attending school. 

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The landlord cannot void the 
lease based on Alex's age 

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because the lease is for a 
necessity, ensuring Alex has a 

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place to live. 
Individuals with Mental 

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Incapacities Individuals with 
mental incapacities lack the 

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legal capacity to enter into 
binding contracts. 

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A person may be considered 
mentally incapacitated if they 

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are unable to understand the 
nature and consequences of the 

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transaction due to a mental 
condition. 

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Key Points Voidable Contracts 
Contracts entered into by 

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individuals who are mentally 
incapacitated are typically 

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voidable. 
The incapacitated person can 

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disaffirm the contract upon 
regaining capacity or through a 

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legal representative. 
Example. 

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An elderly person with dementia 
signs a contract for home 

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repairs. 
If it is proven that the person 

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did not understand the contract 
due to their mental condition, 

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the contract can be voided. 
Necessities. 

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Similar to minors, contracts for
necessities are generally 

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enforceable against individuals 
with mental incapacities to 

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ensure they have access to 
essential goods and services. 

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Example a contract for necessary
medical treatment for a mentally

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incapacitated person would be 
enforceable. 

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Court adjudicated incapacity. 
If a court has formally declared

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an individual incapacitated and 
appointed a guardian or 

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conservator, any contract 
entered into by the 

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incapacitated person without the
guardians consent is void. 

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Example, A person under legal 
guardianship due to severe 

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mental illness cannot 
independently enter into a valid

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contract. 
Any such contract would be void.

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Individuals under the influence 
of intoxicants. 

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Contracts entered into by 
individuals under the influence 

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of intoxicants, for example 
alcohol, drugs, may be voidable 

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if the person was so impaired 
that they could not understand 

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the nature and consequences of 
the contract. 

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Key Points Voidability The 
impaired individual can void the

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contract upon regaining sobriety
if they can prove that they were

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unable to understand the 
contract due to intoxication. 

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Example A person signs a 
contract while intoxicated and 

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later realizes they did not 
comprehend the agreement. 

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They can seek to void the 
contract upon sobering up. 

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Necessities Contracts for 
necessities are enforceable even

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if the individual was 
intoxicated, ensuring they have 

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access to essential goods and 
services. 

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Example An intoxicated person 
buys food and shelter for the 

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night. 
This contract is enforceable to 

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ensure they have access to 
necessities. 

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Illustration of Intoxicated 
Individuals Capacity to Contract

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Scenario Mark, who is heavily 
intoxicated, agrees to sell his 

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car to a friend for a fraction 
of its value. 

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Once sober, Mark realizes he was
not in a state to make such a 

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decision and seeks to void the 
contract. 

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If he can prove his level of 
intoxication, the contract can 

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be voided. 
Summary of Capacity to Contract 

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Capacity to contract is a 
crucial aspect of contract law, 

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ensuring that parties entering 
into agreements understand the 

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nature and consequences of their
commitments. 

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Certain groups, including 
minors, individuals with mental 

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incapacities, and those under 
the influence of intoxicants, 

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are protected by law to prevent 
exploitation and ensure fairness

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and contractual dealings. 
By recognizing these 

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limitations, the law ensures 
that contracts are made by 

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parties who are fully capable of
understanding and fulfilling 

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their obligations. 
Mental Incapacity Individuals 

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who lack the mental capacity to 
understand the nature and 

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consequences of their actions at
the time of entering into a 

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contract may have their 
agreements deemed voidable. 

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Mental incapacity can result 
from various conditions, 

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including mental illness, 
cognitive impairments, or severe

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intoxication. 
Understanding how mental 

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incapacity effects contractual 
obligations is crucial for 

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ensuring fair and just legal 
practices. 

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Key points one. 
Voidable contracts definition 

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Contracts made by individuals 
who are mentally incapacitated 

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are typically voidable. 
This means that the contract is 

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not automatically void, but can 
be voided at the discretion of 

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the incapacitated person or 
their legal representative. 

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Enforcement The incapacitated 
person can choose to either 

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enforce or void the contract 
upon regaining capacity or 

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through a legal guardian. 
This provision protects 

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individuals who are unable to 
comprehend the terms and 

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implications of the contract due
to their mental state. 

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Example, If someone suffering 
from dementia enters into a 

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contract, their legal guardian 
can later void the contract if 

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it is determined that the 
individual did not understand 

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the agreement. 
For instance, if an elderly 

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person with dementia signs a 
contract to sell their home for 

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far below market value, their 
guardian can nullify the 

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contract to prevent 
exploitation. 2 Necessities 

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Enforceability Similar to 
minors, contracts for 

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necessities entered into by 
mentally incapacitated persons 

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are enforceable to ensure their 
access to essential services and

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goods. 
Necessities include items and 

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services essential for daily 
living, such as food, clothing, 

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shelter, and medical care. 
Rationale This rule ensures that

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mentally incapacitated 
individuals are not deprived of 

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essential needs due to their 
inability to contract. 

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Example A contract for medical 
care for a person with severe 

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mental illness is generally 
enforceable. 

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If a person with severe mental 
illness requires emergency 

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surgery, the contract for 
medical services would be upheld

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to ensure they receive necessary
care. 3 Lucid intervals 

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Definition A person with mental 
incapacity who enters into a 

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contract during a lucid interval
where they are capable of 

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understanding the contract may 
be bound by the contract. 

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Lucid intervals refer to periods
where the individual's mental 

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state temporarily improves to 
the extent that they can 

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understand and engage in 
contractual obligations. 

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Validity Contracts made during 
these periods are generally 

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considered valid because the 
individual possesses the 

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necessary mental capacity at the
time of contracting. 

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Example An individual with 
bipolar disorder enters into a 

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business agreement during a 
period of clear mindedness. 

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The contract may be considered 
valid if the person with bipolar

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disorder has a clear 
understanding of the business 

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terms and consents to them 
during a stable period. 

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The contract is enforceable. 4 
Determination of Mental 

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Incapacity Legal Standard Mental
incapacity is determined based 

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on whether the individual could 
understand the nature and 

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consequences of the contract at 
the time it was made. 

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This evaluation often requires 
medical evidence and may involve

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court proceedings to assess the 
individual's mental state. 

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Burden of Proof. 
The burden of proving mental 

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incapacity typically lies with 
the party seeking to void the 

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contract. 
This proof may include medical 

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records, expert testimony, and 
evidence of the individual's 

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behavior at the time of 
contracting. 

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Example If an individual with 
schizophrenia signs a contract 

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during a psychotic episode, 
their family or legal 

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representative may present 
medical records and expert 

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testimony to demonstrate that 
the individual lack the capacity

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to understand the contracts. 
Terms 5. 

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Legal Guardianship Role of 
Guardians In cases where an 

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individual has been legally 
declared incapacitated, a 

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guardian or conservator is 
appointed by the court to manage

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their affairs. 
The guardian has the authority 

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to enter into or void contracts 
on behalf of the incapacitated 

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person. 
Void Contracts. 

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If a person who has been 
declared incapacitated enters 

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into a contract without the 
guardians consent, the contract 

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is typically void, meaning it 
has no legal effect from the 

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outset. 
Example, A person under legal 

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guardianship due to severe 
mental illness attempts to sell 

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their property without the 
guardians approval. 

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Such a contract would be 
considered void and the 

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transaction would be invalid. 6 
Protecting incapacitated 

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individuals. 
Legal Protections The law 

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provides various protections for
mentally incapacitated 

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individuals to prevent 
exploitation and ensure 

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fairness. 
These include the ability to 

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void unfair contracts and the 
appointment of guardians to 

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oversee their interests. 
Ethical Considerations Beyond 

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legal protections, ethical 
considerations play a 

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significant role in dealings 
with mentally incapacitated 

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individuals. 
Ensuring that they are treated 

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with dignity and respect is 
paramount. 

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Example A company aware of a 
customer's mental incapacity 

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offers a complex financial 
product. 

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Ethical considerations would 
require the company to avoid 

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exploiting the customer's 
condition and ensure full 

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understanding and voluntary 
agreement. 

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Summary of Mental Incapacity 
Mental incapacity effects an 

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individual's ability to enter 
into binding contracts. 

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Contracts made by mentally 
incapacitated persons are 

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generally voidable, providing 
protection against exploitation 

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and unfair agreements. 
However, contracts for 

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necessities are enforceable to 
ensure access to essential goods

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and services during lucid 
intervals. 

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Individuals may enter into valid
contracts if they possess the 

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necessary mental capacity at 
that time. 

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The law offers mechanisms such 
as guardianship and the ability 

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to void contracts to safeguard 
the interests of those with 

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mental incapacities. 
Understanding these principles 

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helps ensure fair treatment and 
legal protection for vulnerable 

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individuals. 
Intoxication contracts entered 

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into by individuals under the 
influence of drugs or alcohol 

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can be voidable if it is proven 
that the intoxicated party was 

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unable to understand the nature 
and consequences of the 

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contract. 
However, the burden of proof 

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lies on the intoxicated party to
show their incapacity at the 

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time of entering into the 
contract. 

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Key Points One Voidability 
definition A contract entered 

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into by an intoxicated person 
can be voided if it can be shown

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that the intoxication prevented 
them from understanding the 

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terms and consequences of the 
agreement. 

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This principle protects 
individuals who were not in a 

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position to make rational 
decisions due to their impaired 

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state. 
Proof of incapacity. 

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The intoxicated party must 
provide evidence that their 

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level of intoxication was severe
enough to impair their ability 

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to understand the contract. 
This may include witness 

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testimonies, medical evidence, 
or other relevant documentation.

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Timing Avoidance. 
The contract can be voided upon 

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the individual regaining 
sobriety. 

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The intoxicated party must act 
promptly to disaffirm the 

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contract once they are no longer
under the influence. 

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Example. 
A person heavily intoxicated at 

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a party signs a contract to sell
their car for a fraction of its 

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value. 
The next day, they realize what 

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they have done and may seek to 
void the contract if they can 

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prove that their level of 
intoxication prevented them from

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understanding the nature and 
terms of the agreement. 2 

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Ratification Definition 
Ratification occurs when the 

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intoxicated party, upon 
regaining sobriety, acts in a 

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way that affirms the contract. 
This can include making 

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payments, delivering goods, or 
any other actions that indicate 

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an intention to be bound by the 
contract. 

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Binding Effect Once the contract
is ratified, it becomes fully 

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enforceable and the intoxicated 
party loses the right to void 

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it. 
Ratification can be explicit 

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through a clear statement or 
implicit through conduct that 

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aligns with fulfilling the 
contract's terms. 

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Example If the intoxicated 
individual, after sobering up, 

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begins to make payments as 
required by the contract or take

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steps to deliver goods, these 
actions indicate ratification. 

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By continuing to perform the 
contract's terms, the individual

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demonstrates acceptance of the 
contract, making it binding. 3 

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Determining Intoxication Legal 
Standard The standard for 

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determining whether a person was
too intoxicated to understand 

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the contract is whether they 
could comprehend the nature and 

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consequences of the transaction.
This is evaluated on a case by 

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case basis considering the 
specific circumstances and the 

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individual's condition at the 
time of contracting. 

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Burden of proof The burden of 
proving incapacity due to 

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intoxication rests with the 
party seeking to void the 

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contract. 
This involves showing that their

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mental faculties were 
sufficiently impaired to prevent

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understanding. 
Example In a court case, the 

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intoxicated party might present 
evidence such as witness 

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statements describing their 
behavior, physical appearance, 

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and actions at the time of 
signing the contract, alongside 

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medical records or expert 
testimony about the effects of 

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the substances consumed. 4 
Impact on Contractual 

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obligations Protection for 
Intoxicated Individuals The law 

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aims to protect individuals who 
are taken advantage of while 

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intoxicated. 
Contracts entered into under 

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such conditions are not 
automatically void, but are 

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voidable at the discretion of 
the intoxicated party. 

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Providing a safeguard against 
exploitation. 

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Responsibility to act Once 
sobriety is regained, the 

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individual must act promptly to 
void the contract. 

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Delaying action or engaging in 
behaviors that affirm the 

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contract may lead to 
ratification, thereby losing the

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option to void the agreement. 
Illustration of intoxications 

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impact on contracts scenario At 
a company party, an employee 

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becomes heavily intoxicated and 
in their impaired state agrees 

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to sell their personal laptop to
a Co worker for $50.00 the next 

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day. 
Upon realizing the absurdity of 

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the deal, the employee can seek 
to void the contract by 

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providing evidence of their 
intoxication and incapacity to 

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understand the transaction. 
If instead, the employee 

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delivers the laptop and accepts 
the $50 after regaining 

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sobriety, this would constitute 
ratification, making the 

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contract binding. 
Summary of Intoxication in 

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Contract law Intoxication can 
significantly impact an 

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individual's capacity to enter 
into a binding contract. 

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If intoxication prevents an 
individual from understanding 

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the nature and consequences of 
the contract, the agreement is 

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voidable. 
The intoxicated party has the 

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right to void the contract upon 
regaining sobriety, provided 

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they can prove their incapacity.
However, if the individual 

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ratifies the contract by 
continuing to perform its terms 

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after sobering up, the contract 
becomes binding. 

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Understanding these principles 
ensures that contractual 

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agreements are fair and that 
individuals are not exploited 

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due to temporary impairments in 
their judgment. 

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Legality of contracts For a 
contract to be enforceable, its 

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purpose and terms must be legal 
and not against public policy. 

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A contract with illegal 
objectives or that contravenes 

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statutory requirements or public
policy is void and 

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unenforceable. 
Contracts contrary to statute. 

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Contracts that violate statutory
law are considered void. 

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These contracts are 
unenforceable because they 

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involve actions or terms that 
are prohibited by law. 

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Such contracts can involve 
illegal activities, failure to 

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comply with licensing 
requirements, or charging 

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interest rates that exceed 
statutory limits. 

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Understanding the nuances of 
contracts contrary to statute is

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essential for ensuring that 
agreements are legally valid and

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enforceable. 
Key points One Illegal 

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activities definition Contracts 
involving illegal activities are

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void because they involve 
actions that are prohibited by 

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law. 
These contracts are 

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unenforceable in court and 
provide no legal recourse for 

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the parties involved. 
Impact The law will not support 

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or enforce agreements that 
involve illegal acts as this 

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would undermine the legal system
and public policy. 

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Example A contract to sell 
illicit drugs is void because 

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the activity itself is illegal. 
If one party agrees to supply 

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illegal drugs to another party 
in exchange for money, the 

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contract is unenforceable. 
Neither party can seek legal 

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enforcement of the contract 
terms in court. 

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Two licensing requirements 
definition. 

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Certain professions require 
licenses to ensure that 

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practitioners meet specific 
standards of competence and 

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integrity. 
Contracts entered into without 

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the required professional 
licenses may be void if the 

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licensing statute is intended to
protect the public impact. 

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Licensing requirements are put 
in place to protect consumers 

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and ensure that services are 
provided by qualified 

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individuals. 
Contracts made by unlicensed 

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practitioners in regulated 
fields are often void to uphold 

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these standards. 
Example A contract for 

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architectural services by an 
unlicensed architect is void in 

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jurisdictions where licensure is
required to protect consumers. 

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If a person hires an unlicensed 
individual to design a building,

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the contract can be declared 
void because the unlicensed 

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practice of architecture poses a
risk to public safety and fails 

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to comply with statutory 
requirements. 3 Usury Laws 

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Definition Usury laws set 
maximum allowable interest rates

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that can be charged on loans to 
protect borrowers from 

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excessively high rates. 
Contracts that charge interest 

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rates exceeding these statutory 
limits are void or subject to 

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00:25:08,600 --> 00:25:13,240
reformation. 
Impact Usury laws prevent 

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lenders from exploiting 
borrowers through exorbitant 

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interest rates. 
Contracts that violate these 

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laws are unenforceable to the 
extent of the excess interest. 

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Example, a loan agreement with 
an interest rate higher than the

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legal maximum is unenforceable 
to the extent of the excess 

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interest. 
For instance, if the legal limit

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is 10% per annum and the loan 
agreement specifies a 20% 

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interest rate, the court may 
reform the contract to reduce 

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the interest rate to the legal 
limit or declare the contract 

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void. 4 Contracts that violate 
public policy Definition 

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00:25:55,480 --> 00:25:58,680
Contracts that are against 
public policy are considered 

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void because they have harmful 
effects on society. 

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00:26:02,840 --> 00:26:06,600
This can include agreements that
interfere with justice, restrict

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personal freedom, or involve 
immoral conduct. 

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00:26:10,920 --> 00:26:15,760
Impact Public policy aims to 
maintain societal standards and 

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moral values. 
Contracts that contradict these 

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00:26:19,800 --> 00:26:22,560
principles are not supported by 
the legal system. 

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00:26:23,920 --> 00:26:27,920
Example, a contract that 
requires one party to commit a 

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00:26:27,920 --> 00:26:33,280
crime or act immorally is void. 
For instance, a contract to 

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bribe a public official is void 
because it undermines the 

399
00:26:36,760 --> 00:26:39,720
integrity of public 
administration and is against 

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public policy. 
Illustration of contracts 

401
00:26:43,400 --> 00:26:47,200
contrary to statute. 
Scenario one. 

402
00:26:47,440 --> 00:26:52,080
Illegal activities. 
Sarah agrees to pay Jake $5000 

403
00:26:52,080 --> 00:26:54,360
to smuggle contraband across the
border. 

404
00:26:54,840 --> 00:26:58,440
This contract is void because 
smuggling contraband is illegal.

405
00:26:59,320 --> 00:27:03,400
If Jake fails to deliver the 
contraband, Sarah has no legal 

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00:27:03,400 --> 00:27:05,320
recourse to enforce the 
agreement. 

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00:27:06,520 --> 00:27:11,320
Scenario Two Licensing 
requirements John hires Emily to

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00:27:11,320 --> 00:27:13,560
perform electrical work on his 
house. 

409
00:27:14,720 --> 00:27:17,880
Emily does not have an 
electrician's license, which is 

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00:27:17,880 --> 00:27:22,040
required by state law. 
The contract is void because 

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00:27:22,040 --> 00:27:25,960
Emily is not licensed and the 
law aims to protect consumers 

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00:27:25,960 --> 00:27:30,280
from unqualified electricians. 
Scenario three. 

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00:27:30,520 --> 00:27:35,040
Usually laws a lender offers a 
borrower a personal loan with an

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interest rate of 25%, while the 
maximum allowable rate by law is

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00:27:39,960 --> 00:27:44,160
15%. 
The contract is unenforceable to

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the extent of the excess 
interest. 

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00:27:47,720 --> 00:27:51,800
The court may adjust the 
interest rate to 15% or declare 

418
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the entire loan agreement void, 
depending on the jurisdictions 

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00:27:55,240 --> 00:27:57,400
approach to usury violations.