CHAPTER 12 CONTRACTUAL CAPACITY AND REALITY OF CONSENT DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

CHAPTER 12 CHAPTER 12 CONTRACTUAL CAPACITY CONTRACTUAL CAPACITY

AND AND REALITY OF CONSENT REALITY OF CONSENT

CHAPTER 12 CHAPTER 12 CONTRACTUAL CAPACITY CONTRACTUAL CAPACITY

AND AND REALITY OF CONSENT REALITY OF CONSENT

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

LEGAL CAPACITYLEGAL CAPACITYLEGAL CAPACITYLEGAL CAPACITY

For a contract to be considered valid and enforceable, the parties must have the legal ability to bind themselves to the agreement.

Incapacity is the exception, not the rule.Burden of proof regarding incapacity falls

on the party raising it as a defense to enforce the contract or as basis for rescission of the contract.

For a contract to be considered valid and enforceable, the parties must have the legal ability to bind themselves to the agreement.

Incapacity is the exception, not the rule.Burden of proof regarding incapacity falls

on the party raising it as a defense to enforce the contract or as basis for rescission of the contract.



LEGAL CAPACITYLEGAL CAPACITYLEGAL CAPACITYLEGAL CAPACITY

Law determines contractual capacity by looking at the relative bargain power of the parties.

Issues of contractual capacity can arise if contract involves minors, persons lacking mental capacity, aliens, convicts, and in some states-married women.

Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when contract was formed).

Law determines contractual capacity by looking at the relative bargain power of the parties.

Issues of contractual capacity can arise if contract involves minors, persons lacking mental capacity, aliens, convicts, and in some states-married women.

Contracts made by these people may be absolutely void, voidable (the insane), or valid (if lucid when contract was formed).



MINORSMINORSMINORSMINORS

Most states no longer use common law but instead use statutory law.– Common Law: anyone under the age of 21.– Statutory Law: in most states those under the

age of 18. Some states allow for termination of infancy status

upon marriage or emancipation.– Emancipation: free from the control or power

of another.

Most states no longer use common law but instead use statutory law.– Common Law: anyone under the age of 21.– Statutory Law: in most states those under the

age of 18. Some states allow for termination of infancy status

upon marriage or emancipation.– Emancipation: free from the control or power

of another.



MINORSMINORSMINORSMINORS Disaffirmance/Recission

– To protect minors in dealing with adults, the law allows minors to disaffirm (avoid) their contract.

– Except in certain specialized cases.Necessaries.

– Disaffirms contract, action results in a voidable contract.

– The right to disaffirm is absolute and personal to the minor.

Disaffirmance/Recission– To protect minors in dealing with adults, the

law allows minors to disaffirm (avoid) their contract.

– Except in certain specialized cases.Necessaries.

– Disaffirms contract, action results in a voidable contract.

– The right to disaffirm is absolute and personal to the minor.



MINORSMINORSMINORSMINORS

Disaffirmance must be in total to be effective. Minor can disaffirm either expressly (verbal or

written) or implied by course of conduct.– For disaffirmance to be effective, minor must

objectively manifest intent not to be bound by the contract.

Duty of Restoration: the minor must return to the adult the property or other consideration that was the object of the contract.

Disaffirmance must be in total to be effective. Minor can disaffirm either expressly (verbal or

written) or implied by course of conduct.– For disaffirmance to be effective, minor must

objectively manifest intent not to be bound by the contract.

Duty of Restoration: the minor must return to the adult the property or other consideration that was the object of the contract.



MINORSMINORSMINORSMINORSRescission: ability to have the contract set

aside.– Parent or other adult co-sign the contract.

Misrepresentation of Age.– Minor intentionally misrepresents age.– The contract can be voided anytime during age

of minority or a reasonable time upon reaching the age of majority.

– Power of disaffirmance, whether contract is executory or executed.

Rescission: ability to have the contract set aside.– Parent or other adult co-sign the contract.

Misrepresentation of Age.– Minor intentionally misrepresents age.– The contract can be voided anytime during age

of minority or a reasonable time upon reaching the age of majority.

– Power of disaffirmance, whether contract is executory or executed.



MINORSMINORS

Ratification.– Minor has indicated approval of the contract.– Minor has indicated an intention to be bound by

the provisions of the contract.– Takes two separate forms:

Express; or Implied.

Ratification.– Minor has indicated approval of the contract.– Minor has indicated an intention to be bound by

the provisions of the contract.– Takes two separate forms:

Express; or Implied.



MINORSMINORS

Necessaries.– Things that directly foster the minor’s well-

being.– Even is absence of ratification a minor will still

be liable for transactions if the adult provided the necessaries.

– Rule applied subjectively.

Necessaries.– Things that directly foster the minor’s well-

being.– Even is absence of ratification a minor will still

be liable for transactions if the adult provided the necessaries.

– Rule applied subjectively.



MINORSMINORS

Special Statutes.– State Legislatures make minors liable in a variety

of circumstances according to special statutes. Torts and Crimes.

– Law protects adult’s interest when an adult has suffered losses owing to minor’s torts and crimes.

– Cannot disaffirm unless minor is of tender years (too young to understand the consequences of his/her actions).

Special Statutes.– State Legislatures make minors liable in a variety

of circumstances according to special statutes. Torts and Crimes.

– Law protects adult’s interest when an adult has suffered losses owing to minor’s torts and crimes.

– Cannot disaffirm unless minor is of tender years (too young to understand the consequences of his/her actions).



INSANE PERSONSINSANE PERSONS

Lack the capacity to make a binding contract.

Person must be so mentally infirm or deranged.

Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant.

Lack the capacity to make a binding contract.

Person must be so mentally infirm or deranged.

Lunacy, mental retardation, senility, alcohol or drug abuse are irrelevant.




Effects of Transactions by Insane Persons.– Guardian has the legal capacity to contract.– To disaffirm a contract, person must prove

insanity at the time of contracting.– To determine if transaction is void, voidable or

enforceable depends on facts. Contract is absolutely void if court judges insanity. Insane person regains sanity the person may ratify

contract made during period of insanity.

Effects of Transactions by Insane Persons.– Guardian has the legal capacity to contract.– To disaffirm a contract, person must prove

insanity at the time of contracting.– To determine if transaction is void, voidable or

enforceable depends on facts. Contract is absolutely void if court judges insanity. Insane person regains sanity the person may ratify

contract made during period of insanity.




Necessaries.– Law makes insane persons liable for

necessaries in quasi contract.– Fewer controversies arise regarding whether

medical or legal services are necessaries.

Necessaries.– Law makes insane persons liable for

necessaries in quasi contract.– Fewer controversies arise regarding whether

medical or legal services are necessaries.



INTOXICATED PERSONSINTOXICATED PERSONSINTOXICATED PERSONSINTOXICATED PERSONS

Validity of a contract depends on the degree of intoxication.– If intoxication limits mental capacity of the

individual, contract is voidable at the option of the intoxicated person. If mental capacity is not affected, contract is valid and enforceable.

Validity of a contract depends on the degree of intoxication.– If intoxication limits mental capacity of the

individual, contract is voidable at the option of the intoxicated person. If mental capacity is not affected, contract is valid and enforceable.



ALIENSALIENSALIENSALIENS

Citizens of a foreign country.Depends on treaties between countries and

legal and illegal alien designations.Enemy aliens are countries we are officially

at war, and cannot enforce contracts.

Citizens of a foreign country.Depends on treaties between countries and

legal and illegal alien designations.Enemy aliens are countries we are officially

at war, and cannot enforce contracts.



CONVICTSCONVICTSCONVICTSCONVICTS

Person convicted of a felony or treason has certain contractual disabilities, in many states.

Disabilities applicable only during imprisonment.

Person convicted of a felony or treason has certain contractual disabilities, in many states.

Disabilities applicable only during imprisonment.



MARRIED WOMENMARRIED WOMEN

Under early common law, married women’s contracts were void.

Law viewed women as their husbands’ property.

Reflected in Married Women’s Property Acts.– Almost eliminated by all states by statute or

judicial decision.

Under early common law, married women’s contracts were void.

Law viewed women as their husbands’ property.

Reflected in Married Women’s Property Acts.– Almost eliminated by all states by statute or

judicial decision.



THE REQUIREMENT OF THE REQUIREMENT OF REALITY OF CONSENTREALITY OF CONSENT

Law has to ascertain whether consent given by parties is real or whether the facts differ from those to which the parties have agreed.

Law requires reality of consent as a prerequisite to form a contract.

Law has to ascertain whether consent given by parties is real or whether the facts differ from those to which the parties have agreed.

Law requires reality of consent as a prerequisite to form a contract.



FRAUDFRAUD

Deliberate misrepresentation of a material fact with the intent to induce another person to enter into a contract that will be injurious to that person.

Deliberate misrepresentation of a material fact with the intent to induce another person to enter into a contract that will be injurious to that person.



FRAUDFRAUD

Elements of Fraud.– Misrepresentation of a fact.– Materiality of the fact.– Defendant commits scienter.– Intent to deceive.– Plaintiff relied on the deception.– Injury or detriment.

Elements of Fraud.– Misrepresentation of a fact.– Materiality of the fact.– Defendant commits scienter.– Intent to deceive.– Plaintiff relied on the deception.– Injury or detriment.



FRAUDFRAUD

Silence.– At common law mere silence was not fraud.

Fraud necessitates some sort of overt communication.

Cannot be liable for fraud unless said or done something.

– Modern trend is to reject this idea.

Silence.– At common law mere silence was not fraud.

Fraud necessitates some sort of overt communication.

Cannot be liable for fraud unless said or done something.

– Modern trend is to reject this idea.



MISREPRESENTATIONMISREPRESENTATION

Lacks the element of scienter and intent to deceive.

Lacks the element of scienter and intent to deceive.



MISTAKEMISTAKE

Occurs when the parties are wrong about the existence or absence of a past or present fact that is material to their transaction.

Parties must be wrong about material facts.Legal mistake not synonymous with

ignorance, inability or inaccurate judgements relating to value or quality.

Occurs when the parties are wrong about the existence or absence of a past or present fact that is material to their transaction.

Parties must be wrong about material facts.Legal mistake not synonymous with

ignorance, inability or inaccurate judgements relating to value or quality.



MISTAKEMISTAKEUnilateral Mistake.

– Only one party is mistaken about a material fact.

Bilateral Mistake.– Both parties are in error about the essence of

the agreement.Reformation.

– Rewrite the contract to reflect the parties actual intentions.

Unilateral Mistake.– Only one party is mistaken about a material

fact.Bilateral Mistake.

– Both parties are in error about the essence of the agreement.

Reformation.– Rewrite the contract to reflect the parties actual

intentions.



DURESSDURESS

Other party has forced one into the contract against one’s will.

Coercion must be extreme that the victim has lost all ability to assent freely and voluntarily to the transaction.– Evidence of physical threats.– Threats that cause intense mental anguish.

Other party has forced one into the contract against one’s will.

Coercion must be extreme that the victim has lost all ability to assent freely and voluntarily to the transaction.– Evidence of physical threats.– Threats that cause intense mental anguish.



UNDUE INFLUENCEUNDUE INFLUENCE

Use of relationship of trust and confidence to extract contractual advantages.

Use of relationship of trust and confidence to extract contractual advantages.



UNCONSCIONABILITYUNCONSCIONABILITY

May signal a lack of meaningful assent to a contract.

May justify a court’s subsequent intervention on behalf of the injured party.

May signal a lack of meaningful assent to a contract.

May justify a court’s subsequent intervention on behalf of the injured party.

Documents

CHAPTER 12 CONTRACTUAL CAPACITY AND REALITY OF CONSENT DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)