Chapter 14 CONTRACTS: CAPACITY AND GENUINE ASSENT

1. Chapter 14CONTRACTS: CAPACITY AND GENUINE ASSENT

2. Contractual Capacity • 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. • Status Incapacity. • Factual Incapacity.

3. Contractual Capacity • 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.

4. Minors • Minors can avoid most contracts. • Must be within reasonable time. • Minor must return what had been received from the other party if the minor still has it. • Minor must pay the reasonable value of a necessary. • Restitution by Minor after Avoidance. • Original Consideration Intact. • Original Consideration Damaged/Destroyed.

5. Minors • Recovery of Property. • Contracts for Necessaries. • Ratification of Minor’s Voidable Contract. • No Special Form of Ratification. • Reasonable time after Emancipation. • Contracts The Minors Cannot Avoid. • Educational loans, medical care, court-approved, bank accounts, insurance policies.

6. Mentally Incompetent Persons • The contract of an MI 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 MI person, a contract made by the insane person is void (not merely voidable).

7. Intoxicated Persons • 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.

8. Unilateral Mistake • Contracts may be avoided due to mistake by one or both of the parties. • Unilateral Mistake. • Mistake unknown to the other party usually does not affect the binding character of the agreement. • A mistake known to the other contracting party makes the contract avoidable by the victim of the mistake.

9. Mutual Mistake • Mutual Mistake: When both parties are mistaken about a basic, material fact of the contract, the adversely affected party may avoid the contract. • Reformation for Mistake in Transcription or Printing of the Contract.

10. Deception • Innocent misrepresentation: there is a trend to allow it as a ground for avoiding the contract. • Fraud: When concealment goes beyond silence and consists of actively hiding the truth, the conduct is fraud rather than nondisclosure. • Statements of Opinion are not fraud. • Contract is voidable by the innocent person.

11. Deception • Nondisclosure. • General Rule: There is no legal duty to volunteer information to the other party. • Exceptions: • Serious Defect that could not be discovered. • Confidential Relationship. • Active Concealment.

12. Pressure • The free will of a person, essential to the voluntary character of a contract, is lacking if the agreement is obtained by pressure. Contract is voidable. • Undue influence: where the beneficiary of the contract is in a position of extreme power over the maker of the contract. • Duress: • Physical Duress: Threat of physical force that would cause serious personal injury or damage to property. • Economic Duress: against free will.

13. Review Lack of Contractual Capacity Status Incapacity Minors Factual Incapacity Intoxication Mental Unilateral Induced by/Known to Other Party Mistake Possible Grounds for Avoiding Contract Mutual Mistake Innocent Misrepresentation Nondisclosure Deception Fraud Undue Influence Physical Pressure Duress Economic