apparent necessaries.
The point is, minors do not have the capacity to contract at law (except in very limited circumstances) and persons contracting with minors should be aware that the contract will likely be considered invalid if it is ever brought before a court. In those situations, you are always better off contracting with an adult — the minor’s parents, in our example — who can act on behalf of the minor and legally bind themselves to the obligations they are assuming on his behalf.
Lack of mental capacity
The same caveat that applied to minors applies to persons who lack the mental capacity to contract. Such persons could include the elderly, the infirm, or those with mental challenges. Again, in an effort to protect such persons, the law will not enforce a contract against them.
It is worth noting that the person lacking mental capacity does not have to have been permanently in that state to avoid being bound by a contract. A lack of mental capacity can occur in instances where, at the time of entering into the contract, the person was being threatened (e.g., an “offer you can’t refuse”), under duress (e.g., suffered a recent, devastating personal loss), intoxicated, or otherwise mentally incapacitated.
A typical example is the frenzy that often accompanies the sale of residential condominiums. At one time, it was not unusual for sellers to create “now or never” sales situations in which prospective purchasers would have to decide on the spot and under immense psychological pressure whether they would buy a particular residential condominium. This often created a state of panic in purchasers who would then make decisions without having had the opportunity to properly consider the consequences. Clearly their capacity to contract had been affected. Indeed, so pervasive was that practice among condominium sellers that many jurisdictions enacted legislation that automatically grants a residential condominium purchaser the right to cancel their contract of purchase and sale within a certain number days after signing.
Again, it is important to be aware of the risks of dealing with persons who lack the mental capacity to contract.
2.1b Business entities
To this point, we have used the word “person” in reference to human beings. However, at law, “persons” is a term used more broadly to apply to any legally recognized entity (human beings included) who may be a party to a contract. This includes corporations, partnerships, sole proprietorships, organizations, charities, trusts, and other entities.
It may seem odd to refer to such entities as persons, but that is both common and acceptable in legal circles. That is why, when lawyers speak in terms of the persons who are parties to a contract, they are often referring to business entities as well as individuals.
It probably goes without saying that the concepts of age and mental capacity do not apply in the context of contracting with business entities. Indeed, there is very little at law to restrict the ability of a business entity to contract at all. However, because a business entity cannot literally pick up a pen and sign a contract or walk into a store and buy an item, those contracting with business entities need to exercise a greater deal of caution in determining precisely whom they are dealing with.
This is best considered in connection with a second important matter relating to privity, which is attestation.
2.2 Attestation
How do we know that a party has agreed to legally bind itself to the terms of a contract? Otherwise put, how can we claim privity, either for ourselves or against another person?
The less reliable way is to point to the surrounding circumstances of the contract. If someone walks into your factory and buys a forklift, then the circumstances surrounding the sale of that forklift would tend to suggest that the contract is between your business and that individual.
Suppose the individual was buying the forklift on behalf of a business, Fifi Construction Co.? Who are the parties to the contract then? More to the point, who can you pursue if the installment payments for the forklift cease to be made? Privity says you can only enforce a contract against those who agree to be bound by it and, in this case, it is not clear whom or what that is.
To avoid that situation, parties to a contract often indicate their agreement to be bound by it, in writing, by means of what is called attestation.
Attestation by a party means that the party attesting is identifying itself as the party agreeing to be legally bound. One way to do so is to write the names of the parties at the bottom of the contract and have each of them sign the contract next to their name as evidence they are bound by the agreement. This is the typical contract referred to in common parlance and you now have another indication of why written contracts are preferable to any other kind. As you can see, they provide the best evidence regarding who has privity.
In Chapter 5, you will see that there are several ways to attest to a contract, each specific to the type of person being bound (person meant in the legal sense of individual or business entity).
2.3 Privity and a duty of care
There is a large body of law built around a case decided almost a century ago in Britain, known as the case of the “Paisley Snail.” It is worth briefly considering this case for the effect it has had on the doctrine of privity.
The case involved a woman who had purchased a bottle of ginger beer, which turned out to contain a decomposed snail. Because her contract was with the store where she bought the drink and not with the manufacturer of the ginger beer (i.e., there was no privity between the woman and the manufacturer), the woman could not claim compensation from the manufacturer for her suffering. (See section 3.1 for a detailed discussion of compensation.)
To avoid the apparent injustice that the situation created, the court, hearing the woman’s case, awarded her compensation from the manufacturer in any event and in the process established the legal principle of a duty of care which it said was owed by the manufacturer even in the absence of privity. This decision helped to create the modern law of negligence.
It is not within the scope of this book to examine the law of negligence in relation to contracts, nor is it necessary. Negligence is ultimately a component of tort law which provides remedies for civil wrongs that do not arise out of contractual obligations. Because our focus in this book is on contractual obligations and how to spell them out (literally speaking) we will have to leave discussion of tort law for another occasion.
For now, it is enough to know that the doctrine of privity is still alive and kicking where contractual obligations are concerned. However, there are rare circumstances in which certain types of claims for compensation may be available on the basis of a duty of care owed by one person to another, regardless of any contractual relationship. Those circumstances relate almost exclusively to personal injury (such as what happens when you consume a decomposed snail). They rarely apply to pure economic or monetary losses. Those are the kinds of losses that most often occur in business and, hence, concern us.
For a further discussion of negligence in a contractual setting, see Chapter 7.
3. Breach
To breach a contract is to fail to perform one or more of the obligations it imposes on you, regardless of whether you do so deliberately or inadvertently. You breach a contract when, through your actions or omissions (intentional or otherwise), you prevent the other party from being able to assert or reap the benefit
