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

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 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). 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).

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 MINORSMINORS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 MINORSMINORS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 MINORSMINORS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 MINORSMINORS 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 MINORS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 MINORS 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).

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 INSANE PERSONS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 ALIENSALIENS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 CONVICTSCONVICTS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 MARRIED 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 MISREPRESENTATION Lacks the element of scienter and intent to deceive.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 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. 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 DURESS 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.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 UNDUE INFLUENCE Use of relationship of trust and confidence to extract contractual advantages.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 UNCONSCIONABILITY 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.