Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 14 Contracts: Capacity and Genuine Assent Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Contractual Capacity An agreement that otherwise appears to be a contract may not be binding because one of the parties lacks contractual capacity.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 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).

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 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. Deception

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Pressure Duress: –Physical Duress: Threat of physical force that would cause serious personal injury or damage to property. –Economic Duress: against free will.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 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 Review