CHAPTER 12 CONTRACTUAL CAPACITY AND REALITY OF CONSENT DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (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.
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).
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.
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.
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.
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.
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.
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.
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).
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.
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.
INSANE PERSONS • Necessaries. • Law makes insane persons liable for necessaries in quasi contract. • Fewer controversies arise regarding whether medical or legal services are necessaries.
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.
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.
CONVICTS • Person convicted of a felony or treason has certain contractual disabilities, in many states. • Disabilities applicable only during imprisonment.
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.
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.
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.
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.
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.
MISREPRESENTATION • Lacks the element of scienter and intent to deceive.
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.
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.
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.
UNDUE INFLUENCE • Use of relationship of trust and confidence to extract contractual advantages.
UNCONSCIONABILITY • May signal a lack of meaningful assent to a contract. • May justify a court’s subsequent intervention on behalf of the injured party.