Chapter 14Chapter 14CONTRACTS: CAPACITY CONTRACTS: CAPACITY

AND GENUINE ASSENTAND GENUINE ASSENT

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Contractual CapacityContractual Capacity

An agreement that otherwise appears to be a An agreement that otherwise appears to be a contract may not be binding because one of the contract may not be binding because one of the parties lacks contractual capacity. parties lacks contractual capacity.

In such a case, the contract is ordinarily In such a case, the contract is ordinarily voidablevoidable at the election of that party who lacks at the election of that party who lacks contractual capacity. In some cases, the contractual capacity. In some cases, the contract is void. contract is void. Status Incapacity.Status Incapacity. Factual Incapacity.Factual Incapacity.

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Contractual CapacityContractual Capacity

Contractual incapacity is the inability, for Contractual incapacity is the inability, for mental or physical reasons, to understand that a mental or physical reasons, to understand that a contract is being made and to understand its contract is being made and to understand its general terms and nature. general terms and nature.

Incapacity may be due to:Incapacity may be due to: being a minor.being a minor. Insanity.Insanity. Intoxication.Intoxication.

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MinorsMinors

Minors can avoid most contracts.Minors can avoid most contracts. Must be within reasonable time. Must be within reasonable time. Minor must return what had been received from the Minor must return what had been received from the

other party if the minor still has it.other party if the minor still has it. Minor must pay the reasonable value of a necessary.Minor must pay the reasonable value of a necessary.

Restitution by Minor after Avoidance.Restitution by Minor after Avoidance. Original Consideration Intact.Original Consideration Intact. Original Consideration Damaged/Destroyed. Original Consideration Damaged/Destroyed.

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MinorsMinors

Recovery of Property.Recovery of Property.Contracts for Necessaries.Contracts for Necessaries.Ratification of Minor’s Voidable Contract.Ratification of Minor’s Voidable Contract.

No Special Form of Ratification.No Special Form of Ratification. Reasonable time after Emancipation.Reasonable time after Emancipation.

Contracts The Minors Contracts The Minors CannotCannot Avoid. Avoid. Educational loans, medical care, court-approved, Educational loans, medical care, court-approved,

bank accounts, insurance policies.bank accounts, insurance policies.

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Mentally Incompetent PersonsMentally Incompetent Persons

The contract of an MI person is voidable to The contract of an MI person is voidable to much the same extent as the contract of a much the same extent as the contract of a minor. minor.

An important distinction is that if a guardian An important distinction is that if a guardian has been appointed for the MI person, a has been appointed for the MI person, a contract made by the insane person is contract made by the insane person is voidvoid (not (not merely voidable).merely voidable).

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Intoxicated PersonsIntoxicated Persons

An intoxicated person lacks contractual An intoxicated person lacks contractual capacity to make a contract if the intoxication is capacity to make a contract if the intoxication is such that the person does not understand that a such that the person does not understand that a contract is being made. contract is being made.

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Unilateral MistakeUnilateral Mistake

Contracts may be avoided due to mistake by Contracts may be avoided due to mistake by one or both of the parties.one or both of the parties.

Unilateral Mistake.Unilateral Mistake. Mistake Mistake unknownunknown to the other party usually does to the other party usually does

not affect the not affect the bindingbinding character of the agreement. character of the agreement. A mistake A mistake knownknown to the other contracting party to the other contracting party

makes the contract makes the contract avoidableavoidable by the victim of the by the victim of the mistake.mistake.

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Mutual MistakeMutual Mistake

Mutual Mistake: When both parties are mistaken Mutual Mistake: When both parties are mistaken about a basic, material fact of the contract, the about a basic, material fact of the contract, the adversely affected party may avoid the contract.adversely affected party may avoid the contract.

• Reformation for Mistake in Transcription or Reformation for Mistake in Transcription or Printing of the Contract.Printing of the Contract.

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Innocent misrepresentation: there is a trend to Innocent misrepresentation: there is a trend to allow it as a ground for avoiding the contract. allow it as a ground for avoiding the contract.

Fraud: When concealment goes beyond Fraud: When concealment goes beyond silence and consists of actively hiding the silence and consists of actively hiding the truth, the conduct is fraud rather than truth, the conduct is fraud rather than nondisclosure. nondisclosure. Statements of Opinion are not fraud.Statements of Opinion are not fraud.

Contract is voidable by the innocent person.Contract is voidable by the innocent person.

DeceptionDeception

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DeceptionDeception

Nondisclosure.Nondisclosure. General Rule: There is no legal duty to volunteer General Rule: There is no legal duty to volunteer

information to the other party.information to the other party. Exceptions:Exceptions:

• Serious Defect that could not be discovered.Serious Defect that could not be discovered.

• Confidential Relationship.Confidential Relationship.

• Active Concealment.Active Concealment.

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PressurePressure

The free will of a person, essential to the voluntary The free will of a person, essential to the voluntary character of a contract, is lacking if the agreement is character of a contract, is lacking if the agreement is obtained by pressure. Contract is obtained by pressure. Contract is voidablevoidable..

Undue influence:Undue influence: where the beneficiary of the contract where the beneficiary of the contract is in a position of extreme power over the maker of the is in a position of extreme power over the maker of the contract.contract.

DuressDuress: : Physical Duress: Threat of physical force that would cause Physical Duress: Threat of physical force that would cause

serious personal injury or damage to property.serious personal injury or damage to property. Economic Duress: against free will.Economic Duress: against free will.

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PossibleGrounds

for AvoidingContract

Minors

Intoxication

Mental

Status Incapacity

Factual Incapacity

Lack of Contractual

Capacity

Innocent

Misrepresentation

Nondisclosure

Fraud

Deception

Physical

Economic

Undue Influence

Duress Pressure

Mutual MistakeMistake

Unilateral Induced by/Known to Other Party

ReviewReview