1. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. Twomey & Jennings BUSINESS LAW Chapter 14 Capacity and Genuine Assent Chapter 14 Capacity and Genuine Assent

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 2 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. 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.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 3 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. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 4 Possible Grounds for Avoiding Contract Minors Intoxication Mental Status Incapacity Factual Incapacity Lack of Contractual Capacity Innocent Misrepresentation Nondisclosure Fraud Deception Physical Economic Undue Influence Duress Pressure Mutual Mistake Mistake Unilateral Induced by/Known to Other Party Grounds to Avoid Contracts

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 5 Incapacity of Minors Minors can avoid most contracts. –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. Minors can avoid most contracts. –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. Schmidt v Prince George’s Hospital (2001) Is a minor responsible for her medical expenses?

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 6 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. 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.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 7 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.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 8 MistakeMistake 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. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 9 MistakeMistake Mutual Mistake: When both parties are mistaken about a basic, material fact of the contract, the adversely affected party may avoid the contract. Mattson v Rachetto (1999) Should Ignorance of the Law be an Excuse to Avoid a Contract? Reformation for Mistake in Transcription or Printing of the Contract.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 10 DeceptionDeception 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 not fraud. 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 not fraud. Tschira v Willingham (1998) Watch Out! Some People Have a Lot Nerve.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 11 DeceptionDeception 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. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 12 PressurePressure 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). 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).

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW Twomey Jennings 1 st Ed. 13 Possible Remedies for Lack of Genuine Agreement MistakePressure Avoidance or Rescission Reformation Damages Deception NO Genuine Agreement of the Parties