Inside Contract Law Chapter 4 pt 1

Guardianship and Contractual Capacity

• Guardianship:

  • A contract made by the ward (individual under guardianship) is void.

  • Contracts made by the guardian on behalf of the ward are enforceable against the ward as if the ward had signed them.

  • Guardianship disempowers the ward, removing their ability to enter contracts independently.

  • Guardians act as fiduciaries, placing the interests of the ward above their own.

  • Any misconduct by the guardian constitutes a breach of trust.

• Mental Illness or Defect:

  • Refers to conditions that impair decision-making abilities and are recognized by mental health professionals.

  • These conditions may not always warrant a complete loss of decision-making capability, leading to a contract being voidable if the mental defect was severe enough.

  • Key considerations for evaluating incapacity:

    1. Whether the individual suffered from a mental illness.

    2. Whether they could understand the nature or consequences of the contract.

    3. Whether the illness caused this inability.

    4. Whether the other party knew of the condition.

  • A person may retain the ability to engage in simpler contracts despite being impaired in others.

Misrepresentation

• Definition: Misrepresentation occurs when one party is misled regarding a contract, which can negate assent and render a contract void or voidable.

• Types of Misrepresentation:

  • Fraud in the Execution: Where deception prevents the awareness that a contract is being signed.

  • Fraud in the Inducement: Misrepresentations about the subject matter leading to mistaken valuations.

  • Misrepresentation extends beyond fraud to include innocent misstatements.

Structure of Misrepresentation Defense

1. Elements of Misrepresentation:

   • A misrepresentation must have occurred.

   • It must be either fraudulent or material.

   • The misrepresentation must have induced the assent of the deceived party.

   • There must have been circumstances that justified reliance on the misrepresentation.

Fraudulent or Material Misrepresentation

• To support a misrepresentation defense, an assertion must be:

  • Fraudulent: Made with intent to deceive.

  • Material: Significant enough to affect the contract.

• Material Assertions can induce assent if they:

  1. Are likely to influence a reasonable person's decision.

  2. Are known by the speaker to significantly influence the recipient's decision.

• Case Examples:

  • Halpert v. Rosenthal: Court allowed rescission because the seller believed his misrepresentation about the property being free of termites was material.

Mistake in a Contract

• Definition: Mistakes concerning facts at the time the contract is made can be grounds for defense.

• Types of Mistakes:

  • Unilateral Mistake: Only one party is mistaken, often not a ground for rescission unless the mistake is known to the other party.

  • Mutual Mistake: Both parties are mistaken about a basic assumption of the contract, which can warrant rescission.

  • Basic Assumption Mistakes: Must relate to essential elements of the contract; peripheral mistakes do not allow for rescission.

• Material Effect on the Exchange: A mistake must materially affect the exchange to warrant rescission, causing an imbalance that is unfair to enforce.

• Key Cases:

  • Wood v. Boynton: Mistaken belief about the value of an item resulted in significant disparity between what was exchanged and what was received.

  • Lenawee County Board of Heath v. Messerly: Misunderstanding the condition of property led to a significant misvaluation affecting contract enforceability.