Chapter 18: Contractual Capacity and Genuine Assent

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Chapter 18: Contractual Capacity and
Genuine Assent
Alan Moran, David Niese, Mark Schafer, Juan Camacho, Megan McLaughlin, Andrew Hansen
I.
Contractual Capacity
A. Definition of Capacity
When forming a contract, the ability to enforce that contract is contingent with multiple
aspects of the contract. These include the contract’s offer and acceptance, whether proper
consideration has been given, the intention to create a contract, and legal capacity of the person
signing the contract. Capacity is the ability to incur legal obligations and acquire legal rights
(Mallor et al). These rights pertain to people who enter into legally binding contracts and may
allow them to sue or be sued in their own name (BusinessDictionary.com). Sometimes, capacity
can be obvious as in minority. At other times, it is subjective as in cases of mental capacity in
which the court must determine whether capacity existed. It is important to note that even if
both members entering into the contract would typically have capacity, no legal contract can be
made for any tortuous, criminal, or anti-statutory agreement between them (Wiziq.com).
Contractual capacity is intended to allow certain persons the ability to avoid or escape the
conditions of a contract if they meet certain criteria. These requirements were created by law as
a means of protecting certain individuals deemed unfit to have entered into that contract. In
some instances, should the capacity of one or more of the contractually bound parties be
impaired, they would have the option to void or enforce the contract, but would not be obligated
to do so. This would be considered a voidable contract. There are other situations in which a
person entering a contract has no option to execute or void the contract. In these cases, the
contract is automatically void and cannot be executed. An example of a void contract would be a
party adjudicated to be mentally incompetent, or if they were impaired to the extent that they
could not possibly have given consent to the contract, such as being unconscious or under duress.
A. Minor’s Contracts
Chapter 18: Contractual Capacity and Genuine Assent
Page 1
In most states, the age of majority, or the age where a person has capacity is 18 years of age.
All states now have statutes that declare at least some contracts to be voidable when made to a
minor. Delaware and Nebraska both have an age of majority of 19. In Mississippi, it is 21.
Before 1971 the age of majority for most states was 21 years of age. However, after the 26th
Amendment to the Constitution in 1971, the voting age was lowered to 18, creating a shift in
public policy favoring 18 as the age of majority. Table 1 shows exceptions to the age of 18
serving as the age of majority statutorily by each state (About.com).
State
Age of Majority
Alabama
19
Arkansas
18 or graduation from high school, whichever is later
Delaware
19
Mississippi
21
Nebraska
19
Nevada
18, or if still in high school at 18, 19 or graduation, whichever
comes sooner
Ohio
18 or graduation from high school, whichever comes first
Tennessee
18 or graduation from high school, whichever is later
Utah
18 or graduation from high school, whichever is earlier
Virginia
18 or graduation from high school, whichever is latest
Wisconsin
18, or if still in high school at 18, 19 or graduation, whichever
comes sooner
Table 1: Majority Age by State
Chapter 18: Contractual Capacity and Genuine Assent
Page 2
A minor’s lack of capacity stems largely from inexperience relative to an adult. As a
result, the law is designed to protect the minor from being taken advantage of by an adult. A
contract agreed upon by a minor is voidable, and the minor has the right to rescind from or
disaffirm the contract. The option to disaffirm a contract due to a lack of capacity may only be
enforced by the minor or a legal representative or
guardian, and the disaffirmance does not need to be
Dodson v. Shrader’s Auto Sales
done in writing. The only requirement to disaffirm
is that the minor communicate in some meaningful
824 S.W.2d 545 (TN 1992)
way such as orally or in writing that they wish to
disaffirm the contract. However, if a legal adult
enters into a contract with a minor, they must
Case Facts: 16 year-old Dodson purchased
execute their end of the contract should the minor
a used truck from Shrader’s for $4,900.
desire.
B. Misrepresentation of Age
Historically, the rules regarding
misrepresentation of age were that even if a minor
had lied about their age, they would still not have
capacity in regards to the contract, meaning the
contract is still voidable. The idea being that lying
about something should not grant additional rights
or obligations to a person. For example, if Joe
Dealer sells a car to Bryce Buyer who is under the
majority age based on Bryce telling Joe that he is
over 18 when he is not, the contract would most
likely be voidable. This will typically still hold up
even if the minor has materially altered the vehicle
or severely depreciated the vehicle. Some states
have altered this rule against the minor.
Furthermore, it is possible for the adult to sue the
minor for fraud. The age of minority for contracts
does not apply to torts such as fraud.
C. Time to Disaffirm
There are circumstances that arise in which
the minor becomes the majority age and is bound
by the terms of the contract. If, for a reasonable
time after turning 18 they have not rescinded the
contract made as a minor, the contract will no
longer be voidable. The general rule that courts will
look to is whether the party involved received
sufficient benefit from the contract. If they
Chapter 18: Contractual Capacity and Genuine Assent
After nine months, the truck developed a
mechanical problem, but Dodson lacked
funds for repair and drove the truck until
the engine “blew up.” It was parked in his
parents’ front yard where it was later
struck by a hit-and-run driver. The truck’s
value now equaled $500. Dodson sued
Shrader’s to disaffirm the purchase
agreement.
Holding: Dodson was allowed to rescind
the contract and the court ordered
Shrader’s to reimburse Dodson $4,900.
Shrader’s appealed the decision.
Result of Appeal: The court decided a
minor’s full purchase price recovery is
subject to a deduction from use,
depreciation, or deterioration of the item in
possession by the minor. NOTE: Most
states do not use this rule.
Reasoning: When the minor has not been
taken advantage of in any way, and the
contract is fair and reasonable, the minor
should not be able to recover the full
purchase price. Consideration must be
given for the decline in value in the
minor’s possession. Dodson’s contract is
still voidable and the minor has the right to
disaffirm, but in the state of Tennessee,
Dodson owes restitution to Shrader’s for
the decline in the truck’s value.
Page 3
received some sort of benefit as a minor, they only have a short while after reaching the age of
majority before they will no longer be able to disaffirm. Other instances of valid contracts
include if the minor signs an expressed reaffirmance after they become of majority age or if they
continue to make payments on the consideration given to them by the contract.
D. Revocation
If the minor decides to void the contract, he must return the consideration that he has
received to the greatest possible extent. If there is damage to the consideration, then the minor is
still entitled to receive all consideration that he has given to the obligor in most states. This
means that if a minor has entered into a contract to buy a motorcycle and badly scratches it, he is
still entitled to return the motorcycle for all of his money back. This is the rule in most states
including Missouri. Some states, however, would subtract the amount of damage from what the
minor can recover.
E. Emancipation
Emancipation is the legal release by a court of the responsibilities and liabilities of a
parent towards their child, and the release of control of the minor by the parent. The
requirements to emancipate vary from state to state, but may include things like marriage, a
degree, or proof of sufficient financial independence. However, ultimately it is the decision of
the courts to emancipate a minor. Although, emancipation does not grant the minor capacity, it
will expand the definition for what qualifies as a necessity. The emancipated minor will be
liable for the fair market price of essentials such as food, clothing, shelter, and medical expenses.
This means that he has a quasi contract in which he will only be liable for those necessaries that
are of fair market value.
F. Exceptions
In certain circumstances other than emancipation, the minor will not be able to rescind
the contract. These include court approved contracts, stock transfers, bond transfers, bail bonds,
military enlistments, and paternity lawsuits. These contracts are not voidable. Typically
contracts made with minors for necessaries such as food and clothing cannot be voided. This
ensures that minors will not be turned down for basic needs of survival simply because the seller
is afraid of the minor getting his money back. Any other statutory exceptions as determined state
by state will also be defenses against minor’s contracts. A couple notable ones in some states
include student loans and insurance contracts. Finally, many states do not allow minors to
repudiate contracts for real estate until the minor has reached the age of majority (Chicago
Family Law).
G. Mentally Impaired
Similar rationale is used for limiting the capacity of the mentally impaired, as is used for
minors. The general belief is that someone who is in some significant way mentally impaired
Chapter 18: Contractual Capacity and Genuine Assent
Page 4
will be unable to properly act in their own best interest. Because of this, contracts made by the
mentally impaired may be either void or voidable by courts.
In order for the mentally impaired to enter into a contract, it must be done by a court
appointed guardian, who is in charge of their
livelihood. Contracts made by a mentally ill person
Taylor vs. Avi
who has a legally appointed guardian are void. If a
S. Ct. Pennsylvania 1979
mentally impaired person does not have a guardian
and he or she does not understand what a contract
is, then the contract is voidable. This is usually the
Case Facts: Mrs. Taylor attempted to
case unless a court order otherwise specifies that the
void a release she had signed after
mentally impaired person does have capacity.
being in a car accident stating that her
Incapacity must generally be determined by
memory had been impaired.
ascertaining whether the person has sufficient
cognitive process to understand the extent of the
contract into which they are entering. The contract
Holding: The contract between Taylor
will be voidable if the person is deemed to be
and Avi is binding.
unable to act in a reasonable manner and the other
party involved has sufficient reason to know. For
example, the family of an Oregon man who had
Reasoning: Failure of memory does not
been diagnosed with Alzheimer’s disease was
prove incapacity unless it is to the
successful in voiding contracts that he had made to
extent that it otherwise would seem
buy seven cars with one dealer in the same month.
impractical. A simple lapse of memory
He was obviously deemed by the court to be
does not give means to void a contract.
mentally incompetent to have made the contracts (Pennsylvania Fiduciary Litigation).
There is however a possibility that they may be held liable for damages or use to a greater
extent than a minor unless the other party involved was aware of their mental impairment at the
time of signing the contract. If not, the mentally impaired party must be returned to the same
position they were before the creation of the contract. This is intended to prevent people from
taking advantage of the mentally impaired.
Additional precautions have been taken for people whom the courts have adjudicated to
be incompetent that make any contracts that they should enter into as void, not voidable. If
however, the person is adjudicated as incompetent after the signing of the contract, the contract
is merely voidable, at the wish of either the mentally impaired party who signed the contract, or
their legal guardian.
H. Alcohol Intoxication
When an obligee is intoxicated while making a contract, the contract is considered valid
unless one of the parties is exceptionally drunk. Exceptionally drunk usually means the
Chapter 18: Contractual Capacity and Genuine Assent
Page 5
Lucy vs. Zehmer
S. Ct. Virginia 1954
Case Facts: Zehmer became intoxicated at
a bar and sold a piece of land to Lucy for
$50,000. The sale was written on a note
declaring “I do hereby agree to sell W.O.
Lucy the Ferguson Farm for $50,000
complete.” The next day Zehmer
contended that he lacked capacity to make
a contract due to intoxication and the sale
was only in jest.
Holding: The contract between Zehmer
and Lucy was binding.
intoxicated party can’t remember making the contract
or was deemed to have been so drunk that he made a
contract that he most likely would not have otherwise.
This could include a written contract for someone to
mow your lawn for $10,000 when the very intoxicated
offeror just made the contract because he wanted to
make a point that the offeree never mows lawns. In
other situations, the intoxicated party is not so lucky.
I. Aliens (non citizens)
Aliens are generally allowed to make contracts
with U.S. citizens. But, if the U.S. is at war, citizens
of the country with whom the U.S. is at war with
cannot sue for breach of contract. For example, if an
American made a contract with a Mexican, and the
United States declared war with Mexico, hence the
American breached the contract; the Mexican could
not sue the American.
Reasoning: The plaintiff’s defense of
J. Convicts
intoxication as well as declaring the
contract a jest was rejected on the basis
Convicts are allowed to make contracts unless
that the contract was a major business
the contract is inconsistent with their sentence. For
transaction. Zehmer also was not declared
example, suppose a convict is serving a life sentence,
to be intoxicated enough to lack the
the convict cannot make a contract to work with a
capacity to bear knowledge of the
company when life sentence is over. Furthermore,
contract, as he drove his wife home later
that night. Furthermore the contract had
convicts are not allowed to make contracts that will
been in writing, signed by both parties,
allow them to profit from their convictions (book
and Lucy had already secured funds for
deals, movie rights, etc.) For example, O.J. Simpson
the farm deeming it as a serious business
wrote a book
in by
theboth
aftermath
transaction
made
parties.of his famous murder trial named If I Did It, and would not have
been able to profit from the sales due to a conviction in the civil case. (Wikipedia.com)
K. Married Women (and Men)
Married women are allowed to make contracts without the husband’s signature.
However, a signature is required from both the husband and the wife when signing a realty
contract. Before women had substantial rights in U.S. society, wives were not allowed to make
contracts without their husband’s approval. This, obviously, would now be considered gross
discrimination and wives can make the same contracts as their husbands without their approval.
Chapter 18: Contractual Capacity and Genuine Assent
Page 6
However, many states make both married men and women sign real estate contracts when they
are selling because of the presumption that they both own the property together.
II.
Genuine Assent
Another way that a person may avoid being
liable to a contract is if they did not Genuinely Assent
to, or genuinely agree to the contract. Reasons that a
person may agree to a contract but not genuinely assent
to the contract would be a mistake, misrepresentation,
undue influence or concealment. If there is a lack of
genuine assent, the contract may be void or voidable
depending on which state.
A. Mistake
Under certain circumstances, if there is a
misunderstanding of a fact or facts that are material in
nature, the contract may be voidable.
1. Unilateral Mistake of Fact
A unilateral mistake is a mistake made by one
of the parties involved. As a general rule, a mistake
made by one party will be valid. The reasoning for this
rule is that a single party in a contract should be
responsible for being aware of the terms in which they
are bound. If on the other hand the other party knew of
the mistake or if there is a computational error, the
contract will then be voidable. An example would be if
a company was bidding out a construction job, and a
vendor puts in a bid for $500,000, which is only enough
to cover cost of materials, and would not include labor
or profit. In this case the contract would be voidable if
the other party should have realized that the bid was far
too low for this kind of contract. However, many courts
rule that if one side is mistaken about a fact and the other
side knows it, the contract may be voidable.
2. Bilateral Mistake of Fact
Chapter 18: Contractual Capacity and Genuine Assent
Wells Fargo Credit Corp. v. Martin
605 So.2d 531 (1992)
District Court of Appeals of Florida
Case Facts: Wells Fargo foreclosed
on a house owned by Mr. and Mrs.
Clevenger. At the foreclosure sale,
Wells Fargo was represented by a
paralegal who had attended more
than 1000 similar sales. The
handwritten instruction sheet told
the paralegal to start the bid at
$115,000, the tax-appraised value of
the house.
However,
the firstCorp.
“1” v.
Konic
International
was Spokane
so close to
the
$
sign
that
the Inc.
Computer Services,
paralegal misread the starting bid as
$15,000 instead.
The932
house
was
708 P.2d
(1985)
sold for Court
$20,000
to
Harley
Martin.
of Appeals of Idaho
Wells Fargo sued to have the sale
cancelled based on its unilateral
Case Facts: Young, an employee of
mistake.
Spokane contacted Konic to
purchase
a surge
protector
for
Holding:
The
trial court
held for
Spokane.
Young
talked
to
Martin. Wells Fargo appealed.a Konic
salesman who said the surge
protector
costThe
“fifty-six
Appeal
result:
District twenty.”
Court of
Young
understood
thistrial
to mean
Appeals agreed with the
court
$56.20. However, the Konic
above.
salesman actually meant $5,620.
When Konic
the invoice
to
Reasoning:
Thesent
District
Court felt
Spokane,
mistake
that
the sale the
of the
house was realized
valid
despite
and Spokane
the unilateral
returned
mistake
the surge
made
byprotector
the WellstoFargo
agent.
Konic.
Konic sued for
the purchase price.
Holding: Court ruled in favor of
Spokane.
Reasoning: Both parties had
different meanings for the phrase
“fifty-six twenty.” As a result,
there
Page
7
was no contract between Konic and
Spokane. Note: some courts would
rule this as a bilateral mistake or a
misunderstanding.
Bilateral Mistakes are mistakes of facts made by both parties. Should this be the case,
the contract is voidable, and either party involved has the option to rescind on the contract if a
party makes a mistake and the other party realizes it. An example of this would be if a kid walks
into baseball card store. He asks the price of a Nolan Ryan rookie card. The inexperienced clerk
looks at card and mistakenly thinks it is a reproduction and sells it to the kid for $12.00 instead
of the appropriate price of $1,200 on the tag. The owner later finds out and wants to cancel the
deal. He would be able to do so because the kid and clerk were both mistaken about the amount
the card is worth.
B. Mistake of Value
If there is a mistake by one or both parties as to the value of an asset involved in a
contract, then the contract will still generally be valid. This would be the case if a person owning
a historic piece of furniture sold it to a buyer for a very low price. Simply because the seller
does not know that the furniture is very valuable does not give him right to rescind the contract if
he later finds out. For instance, suppose that Neil finds a painting in his attic, has no use for it,
and sells it for $50. Later, Neil discovered the painting was created by a famous modern artist
with a market value of $500,000. Neither Neil nor the buyer of the painting knew of its true
value at the time of purchase. Despite the mistake of value, Neil cannot recover the painting.
C. Mistake of Law
Mistakes of law occur when one or both the parties involved in a contract do not
understand the legal implications of their actions. Under these circumstances, the contract is still
normally considered valid, because it is presumed that people know the law.
D. Misunderstanding
A misunderstanding is a special type of mistake where two parties are not “on the same
page.” In other words, the parties are thinking of two different things. This can be used as a
defense against the formation of the contract. For some courts the contract is void because no
agreement had been reached. For others, the contract is voidable by either party.
E. Fraud
Should a person enter into a contract under false pretenses, they did not genuinely assent
to the contract. In order to prove fraud, there must be a (1) misrepresentation of a material fact
regarding the contract, (2) an intent to deceive (can either be intentional or the speaker has no
idea what he is talking about), (3) information that the innocent party had reasonably relied on,
and (4) resulting in injury. If the innocent party is only looking for rescission of the contract,
they generally do not need to prove damages. However, this would qualify as an intentional tort,
and so punitive damages may also be claimed, but proof of damage must be supplied by the
victim. Fraud makes the contract voidable by the victim.
Chapter 18: Contractual Capacity and Genuine Assent
Page 8
F. Concealment
A merchant selling goods is assumed to be selling them in good working order, unless the
items are marked as being sold “as is”. Failure to do so will make a contract voidable. An
example would be if a car dealer knew that a used car needed a new transmission, but said
nothing about it in the sale. This rule does not, however, apply to someone selling who is not a
merchant unless they are actively making an effort to conceal facts from the consumer. This
would occur if a non merchant selling his house covered up termite infestation with paint to
conceal the damage. In this case, active concealment constitutes fraud and the contract would be
voidable and punitive damages may be attained.
G. Innocent Misrepresentation
If one party makes a statement they believe to be
true that materially would have affected the terms of the
contract, they have made an innocent misrepresentation.
This may result in the contract being voidable by the
other party. If however, the misrepresentation is
negligent in nature due to that party’s failure to exercise
due care in ascertaining information, the
misrepresentation may result in fraud.
H. Duress
Duress would be another claim against a contract.
If the person signs a contract out of fear of physical
injury, or under circumstances that may constitute
blackmail, such as impending litigation, or turning
evidence over to the police, the contract would be
considered voidable. It is also possible that a person may
be under economic duress, and due to financial situations
would have no choice but to enter into the contract. In
this case the contract would typically be valid as in
settlements of lawsuits.
Chapter 18: Contractual Capacity and Genuine Assent
Barton vs. Armstrong
1975
Case Facts: Armstrong, a chairman
of an Australian company,
threatened to kill Barton, who was
managing director of the same
company, if Barton did not buy
shares of stock at a price that was
very favorable to Armstrong.
Holding: The contract was void.
Reasoning: The court found that
duress was present in Barton’s
decision and Armstrong had to
prove that no threats had been
made to persuade Barton.
Armstrong failed to provide proof
that the decision was not made
under duress.
Page 9
I. Undue Influence
If one party uses their relationship with the other
party to form terms of a contract that are unfair, the contract
may be voidable due to the undue influence that was
exercised over them during negotiation. If a trusted friend of
the family, or an attorney were to persuade a person into a
contract that they otherwise would not have been inclined to
enter into, then they may have a claim against the contract,
and it may not be enforceable.
J. Reformation
If an error regarding the contract is made that is only
clerical, the court may make the correction. For example,
assume that a lease for an apartment was signed for $40,000.
The lease should obviously be for $400.00, so the courts
would make the correction. This would not constitute
voiding the contract.
James E. Ross, Respondent v.
John M. Conway et al., Appellants
No. 13341
Supreme Court of California,
Department Two
92 Cal.632; 28 P. 785; 1892 Cal.
LEXIS 771
Case Facts: When Ross’s mother
was very ill and dependent on
Conway, a priest, she left real
estate to Conway and his church.
The priest suggested the use of a
certain attorney and what terms
should be included in the mother’s
will. Before this occurred, the
majority of her real estate was
assigned to Ross, her sole heir.
Ross’s mother died two days after
the new will became effective.
Ross sued the priest for undue
influence.
Holding: The court ruled in favor
of Ross.
Reasoning: Due to the
confidential relationship the priest
held towards Ross’s mother, the
lack of independent advice
provided, and because Ross’s
mother did not understand the
result and effect of her actions, the
court found that the priest had
undue influence over Ross’s
mother. As a result, the will could
be cancelled.
Chapter 18: Contractual Capacity and Genuine Assent
Page 10
Genuine Assent
Binding of Contract
Unilateral Mistake
Usually Valid-(unless the
other party knows)
Bilateral Mistake
Voidable
Mistake of Value
Valid
Mistake of Law
Valid
Misunderstanding
Void
Fraud
Void
Concealment
Voidable
Innocent
Misrepresentation
Voidable
Duress
Voidable
Economic Duress
Valid
Undue Influence
Voidable
Reformation
Corrected, Valid
Bibliography
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Chapter 18: Contractual Capacity and Genuine Assent
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