Privity is another component of every contractual relationship because it determines who may legally assert the rights under the contract (or be legally bound by its obligations). Before we consider how those rights may be asserted, there are three important matters to consider regarding privity.
2.1 Capacity
We touched briefly on the subject of capacity in Chapter 1, where we considered why a court might find that a contract was void ab initio, even where offer, acceptance, and consideration are present. What follows is a more detailed review of capacity, based on what we now understand about privity.
2.1a Individuals
Most everyone can be a party to a contract, which is to say, most everyone can legally bind themselves to contractual terms. The “freedom to contract” is a cornerstone of most democracies and market economies. Where that freedom is restricted by law (e.g., in the case of guaranteeing a minimum wage), it is usually done in the form of restricting contractual terms and not the persons who can enter into contracts.
That being said, there are two notable classes of persons whom the law says cannot be legally bound by a contract, even if they have entered into it knowingly. These are minors and those who lack the mental capacity to contract. It is important for you to recognize the legal risks of doing business (from the point of view of contracting) with persons who belong to these classes.
Minors
A minor, generally speaking, is anyone younger than the age of 18 years old. (Note: the age of majority can vary by jurisdiction.) Most jurisdictions have laws that a contract entered into with a minor will not be enforceable because, in the eyes of the law, such persons generally lack the maturity and knowledge to protect themselves from unscrupulous commercial behaviour. The one exception to that rule is where a minor enters into a contract for necessaries. In some cases, the law will enforce a contract for necessaries against a minor (or his or her parents or guardians).
For example, if you sell a video game to a minor and, after having discussed it with his parents, they determine that he cannot really afford that purchase, the minor will be able to return the game and receive his money back from you. There is no meaningful sense in which a video game can be considered a necessary so it is likely that no court would enforce the contract (to purchase the video game) against the minor.
Needless to say, there are standards of reasonableness that a court will consider. For example, the minor wouldn’t be allowed by a court to come back to you six months later and demand his money back. Too much time will have passed.
Suppose, however, that the minor had purchased food or clothing instead of a video game. These, it could reasonably be argued, are necessaries. We require food and clothing to survive. Then again, are a bottle of soda and a baseball cap necessaries? They may simply be momentary indulgences, despite the fact that they are otherwise food and clothing. A court could overturn a contract for the sale of even those 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