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Chapter 14: Capacity and Genuine Assent. Contractual Incapacity. An agreement that otherwise appears to be a contract may not be binding because one of the parties lacks contractual capacity .
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Contractual Incapacity • An agreement that otherwise appears to be a contract may not be binding because one of the parties lacks contractual capacity. • In such a case, the contract is ordinarily voidable at the election of that party who lacks contractual capacity. In some cases, the contract is void.
Contractual Incapacity • Contractual incapacity is the inability, for mental or physical reasons, to understand that a contract is being made and to understand its general terms and nature. • Incapacity may be due to: • being a minor • insanity • intoxication
Lack of Contractual Capacity Status Incapacity Minors Factual Incapacity Intoxication Mental Unilateral Induced by or Known to Other Party Mistake Possible Grounds for Avoiding Contract Mutual Mistake Innocent Misrepresentation Nondisclosure Deception Fraud Undue Influence Physical Pressure Duress Economic Factors Which May Invalidate Contract
Incapacity of Minors • Minors can avoid most contracts. • The minor, on avoiding the contract, must return what had been received from the other party if the minor still has it. • When a minor avoids a contract for a necessary, (item essential to basic living needs) the minor must pay the reasonable value of any benefit received.
Incapacity Due to Insanity • The contract of an insane person is voidable to much the same extent as the contract of a minor. • An important distinction is that if a guardian has been appointed for the insane person, a contract made by the insane person is void and not merely voidable.
Incapacity Due to Intoxication • An intoxicated person lacks contractual capacity to make a contract if the intoxication is such that the person does not understand that a contract is being made.
Involuntary Agreement • The consent of a party to an agreement is not genuine or voluntary in certain cases of mistake, deception, or pressure. • When this occurs, what appears to be a contract can be avoided by the victim of such circumstances or conduct.
Mistake • Mistakes that are unknown to the other party usually do not affect the binding character of the agreement. • A unilateral mistake of which the other contracting party has knowledge or has reason to know makes the contract avoidable by the victim of the mistake. • When both parties are mistaken about a basic, material fact of the contract, the adversely affected party may avoid the contract.
Deception • Innocent misrepresentation generally has no effect on the agreement, though there is a trend to allow it as a ground for avoiding the contract. • When one party knows of a fact that has a bearing on the transaction, the failure to volunteer that fact is called nondisclosure. • When concealment goes beyond silence and consists of actively hiding the truth, the conduct is fraud rather than nondisclosure. • There is a growing trend to hold fine-print clauses not binding on the theory that they are designed to hide the truth from the other contracting party.
Pressure • The free will of a person, essential to the voluntary character of a contract, is lacking if the agreement is obtained by pressure. • Contracts made under pressure are voidable; this includes: • Undue influence, where the beneficiary of the contract is in a position of extreme power over the maker of the contract • Threats of extreme economic loss (economic duress) • Threat of physical force that would cause serious personal injury or damage to property (physical duress)
Deception Pressure Mistake Avoidance or Rescission Damages Reformation Possible Remedies for Lack of Genuine Agreement There is NOT a genuine agreement of the parties