Capacity and Consent

Capacity

Capacity is the legal ability to enter into a contract.

Minors

A minor is someone who is under the age of 18.

NOTE:Minors lack legal capacity. Therefore, they can create only voidable contracts.

A voidable contract may be canceled only by the party lacking capacity. The other party has no such right.

Disaffirmance

The minor who wishes to escape a contract can disaffirm it, that is, notify the other party that he (minor) refuses to be bound by the agreement.

Disaffirmance forms:

  • Notify the other party, orally or in writing,
  • Rescind the contract – have a court formally cancel the contract, or
  • Simply refuse to perform his obligations under the contract

Restitution

A minor who disaffirms a contract must return the consideration he has received to the extent he is able. If minor is not able to return the consideration, he’s still entitled to his money back.

Restoring the other party to its original position is called restitution.

Exception (in some states): Fully Executed Contracts

Some states consider disaffirmance as injustice to honest retailers. These states make distinction between executory and executed contracts.

For executory contracts (those that are not fully executed), all states agree that the minor can disaffirm.

For executed contracts (those that are fully executed), some states allow disaffirmation only if the minor is able to restore the other party, that is, to return the consideration.

Timing of Disaffirmance/Ratification

A minor who turns 18 may still disaffirm the contract within reasonable time.

The voidable contract becomes fully enforceable if the minor who turns 18 ratifies the contract. Ratification can be done by any words or actions indicating an intention to be bound to the contract.

Exception: Necessaries

A necessary is something to the minor’s life and welfare.

On a contract for necessaries, the minor must pay for the value of the benefit received.

Necessaries are food, clothing, housing (if no parents’ housing), and medical care.

Exception: Misrepresentation of Age

If the minor lies about his age:

  • Some states still allow disaffirmation
  • Other states disallow disaffirmation. Their argument is that the law has to protect childhood innocence, not calculated deceit.

Mentally Impaired Persons

A person is mentally impaired if by reason of mental illness or defect he is unable to understand the nature and consequences of the transaction.

A party suffering a mental impairment generally created only a voidable contract.

The law presumes that an adult is mentally competent. There is a difference between mental impairment and mental incompetence.

Intoxication

Same rules apply to cases of drugand alcohol intoxication – contracts are voidable.

Restitution

A mentally infirm party who seeks to void a contract must make restitution. If restitution is impossible, the court does not rescind the agreement, because unlike minority mental impairment is hard to prove.

Reality of Consent

There are four claims that parties make when trying to rescind a contract based on lack of valid consent: (1) misrepresentation or fraud, (2) mistake, (3) duress, and (4) undue influence.

Misrepresentation and Fraud

Misrepresentation occurs when a party to a contract says something that is factually wrong.

Example:“The house has no termites.”

If the owner of the house believes his claim, we have an innocent misrepresentation. If the house owner knows that the statement is false, we have fraudulent misrepresentation.

Fraud is a material misrepresentation of a fact upon which we rely on our detriment.

To rescind a contract based on misrepresentation or fraud, a party must show 3 things:

  • There was a false statement or fact,
  • The statement was fraudulent or material,
  • The injured party justifiably relied on the statement

NOTE:We can sue for misrepresentation or fraud only the party that makes the false statement.

Example:In a company acquisition the books are wrong. We can sue our financial advisors, not the management of the acquired company.

Element One: False Statement or Fact

False statement or fact does not necessarily mean a lie. It could come from bad information source.

An opinion is not a statement or fact.

Puffery is a statement when a reasonable person would realize that it is a sales pitch, representing an exaggerated opinion of the seller. For example, “This book is the most amazing one you’ll ever read!”

Puffery is not a statement or fact. It is an opinion. We cannot sue for puffery.

Element Two: Fraud or Materiality

A statement is fraudulent if the maker intends to induce the other party to contract, either knowing that his words are false or uncertain that they are true.

A statement is material if the maker expects the other party to rely on the words in reaching the agreement.

Difference between Fraud and Misrepresentation
False Statement / Owner’s belief / Legal Result / Explanation
“The heating system is perfect.” / Owner knows this is false. / Fraud. / Owner knew the statement was false and intended to induce the buyer into contract.
“The house is built on solid bedrock.” / Owner had no idea what was under the surface. / Fraud. / Owner was not sure that the statement was true and intended to induce the buyer into contract.
“The roof is only six years old.” / Owner has a good reason to believe the statement is true. / Material misrepresentation. / Owner acted in good faith, but statement is material, because owner expects buyer to rely on it.
“The pool is 30 feet long.” / Owner has a good reason to believe the statement is true. / Not a material misrepresentation. / This is a misrepresentation, but it is not material – reasonable buyer would not make a decision based on a one-foot error of the pool length.

Element Three: Justifiable Reliance

The reliance must be justifiable, that is, reasonable.

A party to a contract has not duty to investigate the other party’s factual statement.

Remedy for Misrepresentation or Fraud

If the maker’s statement is fraudulent, the injured party generally has a choice rescinding the contract or suing for damages.

Sales of Goods

When the contract is for sale of goods, UCC §2-721 permits a party to rescind a contract and then sue for damages, whether the misrepresentation was innocent or fraudulent.

Special Problem: Silence

Caveat emptor – let the buyer beware.

Nondisclosure of facts amount to misrepresentation only in four cases:

  • When disclosure is necessary to correct a previous assumption
  • Where disclosure would correct a basic mistaken assumption that the other party is relying upon
  • Where disclosure would correct the other party’s mistaken understanding about a writing, or
  • Where there’s a relationship of trust between the two parties. (When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly.)

Mistake

Bilateral Mistake

Bilateral mistakeis when both parties negotiate based on the same factual error.

If the parties make a contract based on an important factual error, the contract is voidable by the injured party.

Conscious Uncertainty – No rescission is permitted when one of the parties knows he’s taking on a risk.That is, he realized that there’s an uncertainty about the quality of the thing being exchanged.

Unilateral Mistake

Unilateral mistake is when one of the parties enters a contract under a mistaken assumption.

To rescind for a unilateral mistake, a party must demonstrate that he entered a contract because of basic factual error and that either (1) enforcing the contract would be unconscionable or (2) the non-mistaken party new of the error.

Duress

True consent is also lacking if one party agrees to enter a contract under duress.

If one party makes an improper threat that causes the victim to enter into a contract, and the victim had no reasonable alternative, the contract is voidable.

A threat to file a lawsuit is only improper where there is no basis for the suit and its only purpose would be to harass.

Economic Duress

Economic duress is hard to distinguish from hard competition.

When looking for economic duress, analyze the case for these factors:

  • Acts that have no legitimate business purpose
  • Greatly unequal bargaining power
  • An unnaturally large gain for one of the parties
  • Financial distress for one of the parties

Undue Influence

Undue influence is observed when one party takes advantage of a position of power over another.

To prove undue influence and rescind the contract, the injured party has to demonstrate:

  • A relationship between the two parties, either of trust (e.g., priest/member of parish) or of domination (e.g., parent/child), AND
  • Improper persuasion by the stronger party