CHAPTER 12
CONTRACTUAL CAPACITY AND
REALITY OF CONSENT
DAVIDSON, KNOWLES & FORSYTHE
Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
LEGAL CAPACITY

For a contract to be considered valid and
enforceable, the parties must have the legal
ability to bind themselves to the agreement.
 Incapacity is the exception, not the rule.
 Burden of proof regarding incapacity falls
on the party raising it as a defense to
enforce the contract or as basis for
rescission of the contract.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
LEGAL CAPACITY

Law determines contractual capacity by looking at
the relative bargain power of the parties.
 Issues of contractual capacity can arise if contract
involves minors, persons lacking mental capacity,
aliens, convicts, and in some states-married
women.
 Contracts made by these people may be absolutely
void, voidable (the insane), or valid (if lucid when
contract was formed).
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Most states no longer use common law but instead
use statutory law.
– Common Law: anyone under the age of 21.
– Statutory Law: in most states those under the
age of 18.
 Some states allow for termination of infancy status
upon marriage or emancipation.
– Emancipation: free from the control or power
of another.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Disaffirmance/Recission
– To protect minors in dealing with adults, the
law allows minors to disaffirm (avoid) their
contract.
– Except in certain specialized cases.
 Necessaries.
– Disaffirms contract, action results in a voidable
contract.
– The right to disaffirm is absolute and personal
to the minor.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Disaffirmance must be in total to be effective.
 Minor can disaffirm either expressly (verbal or
written) or implied by course of conduct.
– For disaffirmance to be effective, minor must
objectively manifest intent not to be bound by the
contract.

Duty of Restoration: the minor must return to the
adult the property or other consideration that was
the object of the contract.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Rescission: ability to have the contract set
aside.
– Parent or other adult co-sign the contract.

Misrepresentation of Age.
– Minor intentionally misrepresents age.
– The contract can be voided anytime during age
of minority or a reasonable time upon reaching
the age of majority.
– Power of disaffirmance, whether contract is
executory or executed.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Ratification.
– Minor has indicated approval of the contract.
– Minor has indicated an intention to be bound by
the provisions of the contract.
– Takes two separate forms:


Express; or
Implied.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Necessaries.
– Things that directly foster the minor’s well-
being.
– Even is absence of ratification a minor will still
be liable for transactions if the adult provided
the necessaries.
– Rule applied subjectively.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MINORS

Special Statutes.
– State Legislatures make minors liable in a variety
of circumstances according to special statutes.
 Torts and Crimes.
– Law protects adult’s interest when an adult has
suffered losses owing to minor’s torts and crimes.
– Cannot disaffirm unless minor is of tender years
(too young to understand the consequences of
his/her actions).
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
INSANE PERSONS

Lack the capacity to make a binding
contract.
 Person must be so mentally infirm or
deranged.
 Lunacy, mental retardation, senility, alcohol
or drug abuse are irrelevant.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
INSANE PERSONS

Effects of Transactions by Insane Persons.
– Guardian has the legal capacity to contract.
– To disaffirm a contract, person must prove
insanity at the time of contracting.
– To determine if transaction is void, voidable or
enforceable depends on facts.


Contract is absolutely void if court judges insanity.
Insane person regains sanity the person may ratify
contract made during period of insanity.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
INSANE PERSONS

Necessaries.
– Law makes insane persons liable for
necessaries in quasi contract.
– Fewer controversies arise regarding whether
medical or legal services are necessaries.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
INTOXICATED PERSONS

Validity of a contract depends on the degree
of intoxication.
– If intoxication limits mental capacity of the
individual, contract is voidable at the option of
the intoxicated person. If mental capacity is not
affected, contract is valid and enforceable.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
ALIENS

Citizens of a foreign country.
 Depends on treaties between countries and
legal and illegal alien designations.
 Enemy aliens are countries we are officially
at war, and cannot enforce contracts.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
CONVICTS

Person convicted of a felony or treason has
certain contractual disabilities, in many
states.
 Disabilities applicable only during
imprisonment.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MARRIED WOMEN
Under early common law, married women’s
contracts were void.
 Law viewed women as their husbands’
property.
 Reflected in Married Women’s Property
Acts.

– Almost eliminated by all states by statute or
judicial decision.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
THE REQUIREMENT OF
REALITY OF CONSENT

Law has to ascertain whether consent given
by parties is real or whether the facts differ
from those to which the parties have agreed.
 Law requires reality of consent as a
prerequisite to form a contract.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FRAUD

Deliberate misrepresentation of a material
fact with the intent to induce another person
to enter into a contract that will be injurious
to that person.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FRAUD

Elements of Fraud.
– Misrepresentation of a fact.
– Materiality of the fact.
– Defendant commits scienter.
– Intent to deceive.
– Plaintiff relied on the deception.
– Injury or detriment.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FRAUD

Silence.
– At common law mere silence was not fraud.
 Fraud necessitates some sort of overt
communication.
 Cannot be liable for fraud unless said or done
something.
– Modern trend is to reject this idea.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MISREPRESENTATION

Lacks the element of scienter and intent to
deceive.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MISTAKE

Occurs when the parties are wrong about
the existence or absence of a past or present
fact that is material to their transaction.
 Parties must be wrong about material facts.
 Legal mistake not synonymous with
ignorance, inability or inaccurate
judgements relating to value or quality.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
MISTAKE

Unilateral Mistake.
– Only one party is mistaken about a material
fact.

Bilateral Mistake.
– Both parties are in error about the essence of
the agreement.

Reformation.
– Rewrite the contract to reflect the parties actual
intentions.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DURESS

Other party has forced one into the contract
against one’s will.
 Coercion must be extreme that the victim
has lost all ability to assent freely and
voluntarily to the transaction.
– Evidence of physical threats.
– Threats that cause intense mental anguish.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
UNDUE INFLUENCE

Use of relationship of trust and confidence
to extract contractual advantages.
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BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
UNCONSCIONABILITY

May signal a lack of meaningful assent to a
contract.
 May justify a court’s subsequent
intervention on behalf of the injured party.
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