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Capacity of Organizations to Contract

An organization is a social unit of people organized to continuously pursue collective goals and control their own performance.  Organizations affect and are affected by the environment beyond their boundaries.

A voluntary unincorporated association or a voluntary organization is a group of people who unite together for a common goal.  Generally, a voluntary organization does not have a separate legal personality.[i] Therefore, a voluntary organization has no capacity to enter into a contract.[ii] Accordingly, an organization that has no authority to make a contract cannot ratify a contract.[iii] If a statute considers a voluntary association a legal entity, then the association possesses the power to make and ratify contracts.[iv]

When a contract is made by officers or agents of a voluntary unincorporated organization, it has no binding effect on the organization.  However, under certain circumstances, contracts can be enforced against its officers, agents, or members.[v]

When a person voluntarily deals with an organization as a legal entity capable of making contracts and receives money or valuables from the organization, the person is legally estopped from denying the legal personality of the organization.  The person cannot deny the validity of a contract made with the organization on the ground that the association is not a legal person and has no capacity to make contracts.[vi]

[i] Phoenix Ins. Co. v. Burkett, 72 Mo. App. 1 (Mo. Ct. App. 1897)

[ii] Newton County Farmers’ & Fruit Growers’ Exchange v. Kansas C. S. R. Co., 326 Mo. 617 (Mo. 1930)

[iii] Elk Valley Coal Co. v. Thompson, 150 Ky. 614 (Ky. 1912)

[iv] Forest City Mfg. Co. v. International Ladies’ Garment Workers’ Union, 233 Mo. App. 935 (Mo. Ct. App. 1938)

[v] Shortlidge v. Gutoski, 125 N.H. 510 (N.H. 1984)

[vi] Reding v. Anderson, 72 Iowa 498 (Iowa 1887)


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