Capacity and Consent
Business Law and Ethics
Capacity and Consent
Capacity
Capacity is the legal ability to enter into a contract.
Minors
A minor is someone who is under the age of 18.
NOTE:
Minors lack legal capacity. Therefore, they can create only voidable contracts.
A voidable contract may be canceled only by the party lacking capacity. The other party has
no such right.
Disaffirmance
The minor who wishes to escape a contract can disaffirm it, that is, notify the other party
that he (minor) refuses to be bound by the agreement.
Disaffirmance forms:
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Notify the other party, orally or in writing,
Rescind the contract – have a court formally cancel the contract, or
Simply refuse to perform his obligations under the contract
Restitution
A minor who disaffirms a contract must return the consideration he has received to the
extent he is able. If minor is not able to return the consideration, he’s still entitled to his
money back.
Restoring the other party to its original position is called restitution.
Exception (in some states): Fully Executed Contracts
Some states consider disaffirmance as injustice to honest retailers. These states make
distinction between executory and executed contracts.
For executory contracts (those that are not fully executed), all states agree that the
minor can disaffirm.
For executed contracts (those that are fully executed), some states allow disaffirmation
only if the minor is able to restore the other party, that is, to return the consideration.
Timing of Disaffirmance/Ratification
A minor who turns 18 may still disaffirm the contract within reasonable time.
The voidable contract becomes fully enforceable if the minor who turns 18 ratifies the
contract. Ratification can be done by any words or actions indicating an intention to be
bound to the contract.
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Exception: Necessaries
A necessary is something to the minor’s life and welfare.
On a contract for necessaries, the minor must pay for the value of the benefit received.
Necessaries are food, clothing, housing (if no parents’ housing), and medical care.
Exception: Misrepresentation of Age
If the minor lies about his age:
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Some states still allow disaffirmation
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Other states disallow disaffirmation. Their argument is that the law has to protect
childhood innocence, not calculated deceit.
Mentally Impaired Persons
A person is mentally impaired if by reason of mental illness or defect he is unable to
understand the nature and consequences of the transaction.
A party suffering a mental impairment generally created only a voidable contract.
The law presumes that an adult is mentally competent. There is a difference between
mental impairment and mental incompetence.
Intoxication
Same rules apply to cases of drug and alcohol intoxication – contracts are voidable.
Restitution
A mentally infirm party who seeks to void a contract must make restitution. If restitution is
impossible, the court does not rescind the agreement, because unlike minority mental
impairment is hard to prove.
Reality of Consent
There are four claims that parties make when trying to rescind a contract based on lack of
valid consent: (1) misrepresentation or fraud, (2) mistake, (3) duress, and (4) undue
influence.
Misrepresentation and Fraud
Misrepresentation occurs when a party to a contract says something that is factually
wrong.
Example:
“The house has no termites.”
If the owner of the house believes his claim, we have an innocent
misrepresentation. If the house owner knows that the statement is false, we
have fraudulent misrepresentation.
Fraud is a material misrepresentation of a fact upon which we rely on our detriment.
To rescind a contract based on misrepresentation or fraud, a party must show 3 things:
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Business Law and Ethics
There was a false statement or fact,
The statement was fraudulent or material,
The injured party justifiably relied on the statement
NOTE:
We can sue for misrepresentation or fraud only the party that makes the false
statement.
Example: In a company acquisition the books are wrong. We can sue our financial advisors,
not the management of the acquired company.
Element One: False Statement or Fact
False statement or fact does not necessarily mean a lie. It could come from bad information
source.
An opinion is not a statement or fact.
Puffery is a statement when a reasonable person would realize that it is a sales pitch,
representing an exaggerated opinion of the seller. For example, “This book is the most
amazing one you’ll ever read!”
Puffery is not a statement or fact. It is an opinion. We cannot sue for puffery.
Element Two: Fraud or Materiality
A statement is fraudulent if the maker intends to induce the other party to contract, either
knowing that his words are false or uncertain that they are true.
A statement is material if the maker expects the other party to rely on the words in
reaching the agreement.
Difference between Fraud and Misrepresentation
False Statement
Owner’s belief
Legal Result
Explanation
“The heating system
is perfect.”
Owner knows this is
false.
Fraud.
Owner knew the statement was false
and intended to induce the buyer into
contract.
“The house is built on
solid bedrock.”
Owner had no idea
what was under the
surface.
Fraud.
Owner was not sure that the statement
was true and intended to induce the
buyer into contract.
“The roof is only six
years old.”
Owner has a good
reason to believe the
statement is true.
Material
misrepresentation.
Owner acted in good faith, but
statement is material, because owner
expects buyer to rely on it.
“The pool is 30 feet
long.”
Owner has a good
reason to believe the
statement is true.
Not a material
misrepresentation.
This is a misrepresentation, but it is not
material – reasonable buyer would not
make a decision based on a one-foot
error of the pool length.
Element Three: Justifiable Reliance
The reliance must be justifiable, that is, reasonable.
A party to a contract has not duty to investigate the other party’s factual statement.
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Remedy for Misrepresentation or Fraud
If the maker’s statement is fraudulent, the injured party generally has a choice rescinding
the contract or suing for damages.
Sales of Goods
When the contract is for sale of goods, UCC §2-721 permits a party to rescind a contract
and then sue for damages, whether the misrepresentation was innocent or fraudulent.
Special Problem: Silence
Caveat emptor – let the buyer beware.
Nondisclosure of facts amount to misrepresentation only in four cases:

When disclosure is necessary to correct a previous assumption

Where disclosure would correct a basic mistaken assumption that the other party is
relying upon
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Where disclosure would correct the other party’s mistaken understanding about a
writing, or
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Where there’s a relationship of trust between the two parties. (When one party
naturally expects openness and honesty, based on a close relationship, the other
party must act accordingly.)
Mistake
Bilateral Mistake
Bilateral mistake is when both parties negotiate based on the same factual error.
If the parties make a contract based on an important factual error, the contract is voidable
by the injured party.
Conscious Uncertainty – No rescission is permitted when one of the parties knows he’s
taking on a risk. That is, he realized that there’s an uncertainty about the quality of the
thing being exchanged.
Unilateral Mistake
Unilateral mistake is when one of the parties enters a contract under a mistaken
assumption.
To rescind for a unilateral mistake, a party must demonstrate that he entered a contract
because of basic factual error and that either (1) enforcing the contract would be
unconscionable or (2) the non-mistaken party new of the error.
Duress
True consent is also lacking if one party agrees to enter a contract under duress.
If one party makes an improper threat that causes the victim to enter into a contract, and
the victim had no reasonable alternative, the contract is voidable.
A threat to file a lawsuit is only improper where there is no basis for the suit and its only
purpose would be to harass.
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Economic Duress
Economic duress is hard to distinguish from hard competition.
When looking for economic duress, analyze the case for these factors:
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Acts that have no legitimate business purpose
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Greatly unequal bargaining power
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An unnaturally large gain for one of the parties
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Financial distress for one of the parties
Undue Influence
Undue influence is observed when one party takes advantage of a position of power over
another.
To prove undue influence and rescind the contract, the injured party has to demonstrate:
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A relationship between the two parties, either of trust (e.g., priest/member of
parish) or of domination (e.g., parent/child), AND
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Improper persuasion by the stronger party
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