CHAPTER 12

CONTRACTUAL CAPACITY AND REALITY OF CONSENT

DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

LEGAL 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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

LEGAL 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).
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

Necessaries.
Things that directly foster the minors well-

being. Even is absence of ratification a minor will still be liable for transactions if the adult provided the necessaries. Rule applied subjectively.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MINORS

Special Statutes. State Legislatures make minors liable in a variety of circumstances according to special statutes. Torts and Crimes. Law protects adults interest when an adult has suffered losses owing to minors torts and crimes. Cannot disaffirm unless minor is of tender years (too young to understand the consequences of his/her actions).
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

INSANE 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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

INSANE PERSONS

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.
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2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

INSANE PERSONS

Necessaries.
Law makes insane persons liable for

necessaries in quasi contract. Fewer controversies arise regarding whether medical or legal services are necessaries.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

INTOXICATED 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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

ALIENS

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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

CONVICTS

Person convicted of a felony or treason has certain contractual disabilities, in many states. Disabilities applicable only during imprisonment.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MARRIED WOMEN
Under early common law, married womens contracts were void. Law viewed women as their husbands property. Reflected in Married Womens Property Acts.

Almost eliminated by all states by statute or

judicial decision.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

THE REQUIREMENT OF REALITY 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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

FRAUD

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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

FRAUD

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

FRAUD

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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MISREPRESENTATION

Lacks the element of scienter and intent to deceive.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MISTAKE

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

MISTAKE

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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

DURESS

Other party has forced one into the contract against ones 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.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

UNDUE INFLUENCE

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

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

UNCONSCIONABILITY

May signal a lack of meaningful assent to a contract. May justify a courts subsequent intervention on behalf of the injured party.

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