Chapter 15: Voidable Contracts: Capacity and Consent - Biz Law

When Capacity Might Be an Issue

a voidable contract occurs when the law permits one party (only the party that lacks capacity) to terminate the agreement.

• minor

• intoxication

• mental capacity
  

Capacity - Minors

•a minor is someone under the age of 18

•Because a minor lacks legal capacity, he/she normally can create voidable contract…notice that only the party lacking capacity may cancel agreement.

•Disaffirm:  minors may disaffirm a contract by giving notice they refuse to be bound by agreement.  A minor may disaffirm anytime before 18^th birthday or even shortly after 18^th.  (I know this is weird and seems so broad & not specific)

ØRescind:  minors may even go further….by asking the court to rescind (undo or cancel) a contract that has already been completed•

•Restitution:  restoring injured part to its original position; a minor who disaffirms an agreement must return the consideration she received.

•Ratification (after age 18)… show example in class of how a minor may ratify (ratification) a contract with words or actions indicating they intend to be bound by contract.

disaffirm

minors may disaffirm a contract by giving notice they refuse to be bound by agreement.  A minor may disaffirm anytime before 18^th birthday or even shortly after 18^th.  (I know this is weird and seems so broad & not specific)

Rescind

minors may even go further….by asking the court to rescind (undo or cancel) a contract that has already been completed

Restitution

restoring injured part to its original position; a minor who disaffirms an agreement must return the consideration she received.

Voidable or Valid:

To be voidable, the person must lack sufficient mental capacity to   understand the legal consequences of the agreement. Otherwise, the   contract will be valid.

  If voidable, the party (once sober) can either disaffirm or ratify the   contract within a reasonable time.

Capacity - Mentally Impaired Persons

void - If a court has previously determined that a person is mentally incompetent

voidable - If a court has not previously determined the person to be incompetent but the person was not mentally competent at the time the contract was made (lacked capacity to comprehend the nature, purpose and consequences)

valid - If the person is mentally ill but had capacity at the time the contract was formed.

“Lucid Intervals”

void

If a court has previously determined that a person is mentally incompetent

voidable

If a court has not previously determined the person to be incompetent but the person was not mentally competent at the time the contract was made (lacked capacity to comprehend the nature, purpose and consequences)

valid

If the person is mentally ill but had capacity at the time the contract was formed.

Consent

:  refers to whether a contracting party truly understood contract terms and entered voluntarily

·Four claims where a contract may be rescinded (made voidable) by one party due to lack of consent

(1)Fraud, 2)Mistake, 3)Duress, and 4)Undue Influence

FRAUD occurs when

•When a party to a contract represents something factually wrong…aka an intentional or reckless misrepresentation of fact

(1)Defendant knew statement was false or made statement recklessly without regard to true/false

(2)False statement was material

(3)Injured party justifiably relied on statement

A.Puffery or salesmanship or opinion do not amount to fraud even if they turn out to be false

Innocent misrepresentation is not fraud,silencecould be fraud (depends), see Smiley case in book

Plaintiff’s Remedies for Fraud

(1)In the case of fraud, the injured party generally has a choice of rescinding the contract or suing for damages or, in some cases, doing both.

UCC §2–721 permits a party to both rescind a contract and then sue for damages when fraud is committed.

Babcock v. Engel

LandMark case, pg 360

1. Was Engel so intoxicated that his agreement with Babcock became voidable?

MISTAKE

•Unilateral mistake (voidable by one party),

Mutual mistake (voidable by either party)

Mistake DEFENSES that won’t work: Prediction error, Mistake of value, Conscious uncertainty

DURESS

improper threat or forcing another to enter a contract; to include unequal bargaining power

UNDUE INFLUENCE

•one party is taken advantage of – usually by ‘trusted’ person or improper persuasion

Silence amounts to misrepresentation of the facts (fraud) only in 4 instances:

1.When disclosure is necessary to correct a previous assertion

2.When disclosure would correct a basic mistaken assumption that the other party is making

3.When disclosure would correct the other party’s mistaken understanding about a writing, or

Where there is a relationship of trust between the two parties

mistakes of fact

can cause a contract to be voidable

•Unilateral Mistake (voidable by one party) or Mutual Mistake (voidable by either)

•To rescind for unilateral mistake, the mistaken party must demonstrate that he entered the contract because of a basic factual error and that: a)the nonmistaken party knew or had reason to know of the mistake or, b)the mistake is mathematical or mechanical alone, or c) enforcing the contract would be unconscionable

mistakes of value

usually not a defense

•Concerns a mutual mistake of market value

üor quality of the object of the contract

üOr a prediction error

üOr conscious uncertainty (took on the risk)

üThe contract will still be enforceable

Mutual Mistake: 

occurs when both contracting parties share the same mistake.  If the contract is based on a fundamental factual error by both parties, the contract is voidable by either one. 

Other Issues of Legality

3) undue influence - one party influences another, overcoming their free will

4) duress - use of threats to force a party to enter into a contract. could also include economic duress. threats must be wrongful or illegal.

A voidable contract occurs when

•the law permits one party (only the party that lacks capacity) to terminate the agreement.

What parties lack capacity?: 

•?:  Minors (parties under age 18) and, Mentally Impaired persons (this includes intoxication)

•Key terms for minors:

•Disaffirm:  minors may disaffirm a contract by giving notice they refuse to be bound by agreement.  A minor may disaffirm anytime before 18thbirthday or even shortly after 18th.

•Rescind:  minors may ask court to undo (cancel) a contract that has already been completed

•Restitution:  restoring injured part to its original position; a minor who disaffirms an agreement must return the consideration she received.

•Ratification:  Words or actions indicating an intention to be bound by a contract. A minor’s right to disaffirm ends if she ratifies the contract.

Mentally impaired person: 

•:  usually creates only a voidable contract.  Impaired party has the right to disaffirm.  But impaired may not disaffirm and has then has right to full performance

•Exception:  if person adjudicated incompetent, then all of his future agreements are void.