CHAPTER 13 STUDY GUIDE – CAPACITY AND CONSENT CAPACITY Capacity is the legal ability to enter into a contract.
◦ Minors (under age 18) and those with mental impairment usually lack capacity. A voidable contract may be canceled by the party to the contract who lacks capacity. In some cases, lack of capacity creates a void contract. MINORS Disaffirmance
◦ A minor may disaffirm a contract; that is, he may notify the other party he refuses to be bound by the agreement.
◦ The minor also has the option of filing a suit to rescind the contract; that is, to have a court formally cancel it. Restitution
◦ A minor who disaffirms a contract must return the consideration he has received, to the extent he is able. EXCEPTIONS: Fully Executed Contracts
◦ In some states, minors may not disaffirm fully executed contracts. Timing
◦ Minors may disaffirm a contract up to a reasonable time after turning 18, unless they ratify the contract after turning 18. NOTE: In some states, minors still responsible for restitution of the benefit received. Similarly, if contract provided for necessities of life, most states will require the minor to reimburse the other party for the reasonable value of the benefits received. MENTAL INCAPACITY Definition
◦ A person with mental illness or defect who is unable to understand the nature and consequences of a transaction.
◦ Generally creates only a voidable contract. Intoxication
◦ When an intoxicated person makes a contract, it is voidable. Restitution
◦ A mentally infirm party who seeks to void a contract must make restitution. MISREPRESENTATION AND FRAUD To rescind a contract based on misrepresentation or fraud, a party must show three things:
◦ (1) there was a false statement of fact; Puffery (exaggerated “sales talk”) is not a statement of fact.
◦ (2) the statement was fraudulent or material; and
◦ (3) the injured person justifiably relied on the statement.
◦ (4) the injured person suffered damages. Remedies: Rescind the contract and/or monetary damages. SILENCE/NONDISCLOSURE Nondisclosure of a fact is misrepresentation only when disclosure is necessary:
◦ To Correct a Previous Assertion
◦ To Correct a Basic Mistaken Assumption A seller must report any known latent defect that the buyer is not expected to discover himself.
◦ To Correct a Mistaken Understanding about a Writing
◦ In A Relationship of Trust When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly. MISTAKE A bilateral mistake occurs when both parties negotiate based on the same factual error.
◦ If the parties’ contract is based on an important factual error, the contract is voidable by the injured party. Sometimes only one party enters a contract under a mistaken assumption, a situation called unilateral mistake.
◦ To rescind for unilateral mistake, a party must demonstrate that she entered the contract of a basic factual error and that either: (1) enforcing the contract would be unconscionable or (2) the non-mistaken party knew of the error. DURESS AND UNDUE INFLUENCE If one party makes a threat that causes the victim to enter into a contract, with no reasonable alternative, the contract is voidable. In analyzing a claim of economic duress, courts look at these factors:
◦ Acts that have no legitimate business purpose
◦ Greatly unequal bargaining power
◦ An unnaturally large gain for one party
◦ Financial distress for one party To prove there has been undue influence, one must demonstrate:
◦ A relationship between the two parties either of trust or of domination, and
◦ Improper persuasion by the stronger party