© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. 1 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. David P. Twomey - Boston College Marianne M. Jennings - Arizona State University David P. Twomey - Boston College Marianne M. Jennings - Arizona State University © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Chapter 14 Capacity and Genuine Assent Chapter 14 Capacity and Genuine Assent

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 A. Contractual Capacity 1. Contractual Capacity Defined 2. Minors 3. Mentally Incompetent Persons 4. Intoxicated Persons

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 A. Contractual Capacity [LO.1-LO.2] 1.Contractual Capacity Defined: –Ability to understand that a contract is being made understand its general meaning. –The fact a person does not understand the full legal meaning of a contract does not mean contractual capacity is missing. –(A) Status Incapacity. Minors do not have the legal capacity to contract. –(B) Factual Incapacity. Mental incompetence due to drugs, alcohol, illness or age. Mere mental weakness does not incapacitate a person from contracting.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 A. Contractual Capacity 2.Minors: –(A) Who is a Minor? Anyone under 18 years of age. –(B) Minor’s Power to Avoid Contracts. With certain exceptions, voidable at the election of the minor. What Constitutes Avoidance? Minor may disaffirm by any expression or act inconsistent with the continuing validity of the contract.What Constitutes Avoidance? Minor may disaffirm by any expression or act inconsistent with the continuing validity of the contract. Time for Avoidance. May disaffirm during minority & for a time after attaining majority. After that a contact is deemed ratified and cannot be avoided. Time for Avoidance. May disaffirm during minority & for a time after attaining majority. After that a contact is deemed ratified and cannot be avoided. Minor’s Misrepresentation of Age. Generally does not affect power to disaffirm. Minor’s Misrepresentation of Age. Generally does not affect power to disaffirm.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 A. Contractual Capacity 2. Minors: –(C) Restitution by Minor After Avoidance. What must the minor return to the other contracting party? Original Consideration Intact. Minor must return what was received or offer to do so. (restore the status quo ante). Original Consideration Intact. Minor must return what was received or offer to do so. (restore the status quo ante). Original Consideration Damaged or Destroyed. Minor can still disaffirm, and return what remains. Original Consideration Damaged or Destroyed. Minor can still disaffirm, and return what remains. – (D) Recovery of Property by Minor on Avoidance. Other party must return money & property received from the minor. If property has been sold, minor is entitled to receive money instead.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 A. Contractual Capacity 2.Minors: –(E) Contracts for Necessaries. Minors can disaffirm contract but must pay for furnished necessities. What Constitutes Necessaries? Things needed for sustenance of human life. Extended to health, education and comfort of the minor. What Constitutes Necessaries? Things needed for sustenance of human life. Extended to health, education and comfort of the minor. Liability of Parent or Guardian. Parents are liable for medical care, but child can be held responsible if parents are unable or unwilling to pay.  Schmidt v. Prince George’s Hospital : Minors may be held liable for necessities when parents are unwilling to pay. Liability of Parent or Guardian. Parents are liable for medical care, but child can be held responsible if parents are unable or unwilling to pay.  Schmidt v. Prince George’s Hospital : Minors may be held liable for necessities when parents are unwilling to pay.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 A. Contractual Capacity 2.Minors: –(F) Ratification of Former Minor’s Voidable Contract. A former minor cannot disaffirm a contract that has been ratified after reaching majority. What Constitutes Ratification? Any words or conduct manifesting an intent to be bound by the terms of the contact. What Constitutes Ratification? Any words or conduct manifesting an intent to be bound by the terms of the contact. Form of Ratification. Generally no special form required but in some states it must be written. Form of Ratification. Generally no special form required but in some states it must be written. Time for Ratification. A contract can only be ratified after obtaining majority. Time for Ratification. A contract can only be ratified after obtaining majority.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 A. Contractual Capacity 2.Minors: –(G) Contracts That Minors Cannot Avoid. Statutes in many states do not allow a minor to avoid educational loans & several types of contracts including those related to medical care, business, legal duties, bank accounts, insurance and stocks. –(H) Liability of a Third Person for a Minor’s Contract. Liability of Parent. Ordinarily parents not liable but may be if the child is acting as the parent’s agent. Liability of Parent. Ordinarily parents not liable but may be if the child is acting as the parent’s agent. Liability of Cosigner. The cosigner is bound independently of the minor. Liability of Cosigner. The cosigner is bound independently of the minor.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 A. Contractual Capacity 3.Mentally Incompetent Persons: –(A) Effect of Incompetency. May generally avoid a contract in the same way as a minor. Upon becoming competent, the contract can either be ratified or disaffirmed. Current trend is to treat contracts as binding when terms are reasonable and the person is unable to restore the other party to status quo ante.  Wilcox Manufacturing Group, Inc. v. Marketing Services of Indiana, Inc.: Acts are subject to ratification or disaffirmation on removal of disability. Since no attempt was made to disaffirm, the contract was ratified by conduct.  Wilcox Manufacturing Group, Inc. v. Marketing Services of Indiana, Inc.: Acts are subject to ratification or disaffirmation on removal of disability. Since no attempt was made to disaffirm, the contract was ratified by conduct.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 A. Contractual Capacity 3. Mentally Incompetent Persons: –(B) Appointment of Guardian. If a guardian has been appointed, a contract made by the incompetent person pre-appointment may be ratified or perhaps disaffirmed by the guardian. After the appointment, a contract made is void, not merely voidable. 4. Intoxicated Persons: – If the degree of intoxication is such that the person does not understand that a contract is being made, the contract is voidable by the intoxicated person but only for a reasonable period of time.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 B. Mistake 5. Unilateral Mistake 6. Mutual Mistake 7. Mistake in the Transcription or Printing of The Contract: Reformation

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 B. Mistake [LO.3] 5.Unilateral Mistake: –A mistake that is unknown to other party doesn’t affect the contract. –Party making a mistake may avoid a contract if the other party knew or should have known about the mistake.  Shurgard Storage Centers v. Lipton-U City LLC: If a material mistake made by one party is known or should be known to the other party, the mistaken party has a right to rescission.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 B. Mistake 6.Mutual Mistake: –When both parties are mistaken about a basic fact, the adversely affected party may void the contract. 7.Mistake in Transcription or Printing of the Contract: Reformation –If parties make an oral agreement, and there are mistakes in the typing of the written agreement, the aggrieved party may petition a judge to reform the contract based on the true intent of the parties.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 C.Deception 8. Intentional Misrepresentation 9. Fraud 10. Negligent Misrepresentation 11. Nondisclosure

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Intentional Misrepresentation. 9.Fraud: –Material misrepresentation of fact with (1) knowledge of falsity or reckless indifference to truth (2) intent that listener rely on it, (3) listener does rely, and (4) as a result the listener is harmed. –(A) Statement of Opinion or Value are generally not regarded as fraudulent unless the speaker knows of facts that make the opinion false. Assertions of present facts that are not true can be fradulent. C. Deception [LO.4]

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Fraud: –(B) Reliance on Statement. Fraudulent statements have no importance unless the other person relies on them. When statements are so extravagant that reasonable persons would not rely on them, fraud cannot be asserted. –Purchasers cannot assert reliance on statements that contradict terms of the written contract.  Novare Group, Inc. v. Sarif: Plaintiffs cannot claim justifiable reliance on representations outside their agreement. –(C) Proof of Harm. The injured party has to prove harm in order to recover damage. C. Deception

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Negligent Misrepresentation: –Similar to fraud except it is based on a negligently made false statement. –Contract is voidable by innocent party. 11.Nondisclosure: –(A) General Rule of Nonliability. There is no legal duty to volunteer information to the other party.  Puget Sound Service Corp. v. Dalarna Management Corp.: Buyer was aware of the problem and burden was on the buyer to ask questions. The law balances caveat emptor with courts standing in loco parentis. C. Deception

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Nondisclosure: –(B) Exceptions to the general rule are: Unknown Defect or Condition. In some states sellers have a duty to disclosure known defects or conditions that are unknown to the other person and unlikely to be discovered. Unknown Defect or Condition. In some states sellers have a duty to disclosure known defects or conditions that are unknown to the other person and unlikely to be discovered. Confidential Relationship. When parties are in a confidential relationship failure to disclose information may be fraudulent. Confidential Relationship. When parties are in a confidential relationship failure to disclose information may be fraudulent. Active Concealment. Physical concealment or recklessly furnishing wrong information is fraud. Active Concealment. Physical concealment or recklessly furnishing wrong information is fraud. C. Deception

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 D. Pressure 12. Undue Influence 13. Duress

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 D. Pressure [LO.5] 12.Undue Influence: –Influence asserted upon a person by someone who dominates that person. –Assumed by law when the dominating person obtains any benefit from a contract with the dominated person.  Fisher v. Schefers : Mere speculation that a person is a “puppet” acting according to another’s wishes is not enough to establish undue influence.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 D. Pressure 13.Duress: –(A) Physical Duress. When a person makes a contact to avoid harm due to violence of the threat of violence. The agreement is voidable at the victim’s election. –(B) Economic Duress. When one is induced by a wrongful act or threat of another to make a contract that deprive one of the exercise of this own free will.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Twomey-Jennings, Anderson’s Business Law and the Legal Environment, 21 st Ed. Twomey – Jennings, Anderson’s Business Law and the Legal Environment, 22 nd Ed. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 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 PartyReview