13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Click your mouse anywhere on the screen when you are ready to advance the text within each slide. After the starburst appears behind the blue triangles, the slide is completely shown. You may click one of the blue triangles to move to the next slide or the previous slide. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 “I am not young enough to know everything.” J.M. Barrie, British playwright 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Capacity is the legal ability to enter into a contract. Minors (anyone under age 18) lack legal capacity. A voidable contract may be canceled by the party to the contract who lacks capacity. In some cases, lack of capacity creates a void contract. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Disaffirmance • A minor generally may disaffirm a contract; that is, he may notify the other party he refuses to be bound by the agreement. • The minor also has the option of filing a suit to rescind the contract, that is, to have a court formally cancel it. Restitution • A minor who disaffirms a contract must return the consideration he has received, to the extent he is able. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Timing • Minors may disaffirm a contract up to a reasonable time after turning 18, unless they ratify the contract after turning 18. Necessaries • A necessary is something essential to the minor’s life and welfare. • On a contract for necessaries, a minor must pay for the value of the benefit received. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Misrepresentation of Age • Some states will not allow a minor to disaffirm if he has lied about his age. • Other states allow the minor to receive only the value of the returned goods. 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Definition • A person with mental illness or defect, who is unable to understand the nature and consequences of a transaction. • Generally creates only a voidable contract. Intoxication • When an intoxicated person makes a contract, it is voidable. Restitution • A mentally infirm party who seeks to void a contract must make restitution. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Innocent misrepresentation • means the party believes the statement to be true and has a good reason for that belief. Fraudulent misrepresentation • means the party knows that the statement is false. 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. To rescind a contract based on misrepresentation or fraud, a party must prove three elements: • (1) there was a false statement of fact; – Puffery (exaggerated “sales talk”) is not a statement of fact. • (2) the statement was fraudulent or material; and • (3) the injured person justifiably relied on the statement. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 If the maker’s statement is fraudulent, the injured party generally has a choice of rescinding the contract or suing for damages. Sale of Goods • UCC §2-721 permits a party to rescind a contract and then sue for damages whether the misrepresentation was fraudulent or innocent. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Silence is misrepresentation only when disclosure is necessary: • To correct a previous assertion • To correct a basic mistaken assumption – A seller must report any known latent defect that the buyer is not expected to discover himself. • To correct a mistaken understanding about a writing • In a relationship of trust – When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 A bilateral mistake occurs when both parties negotiate based on the same factual error. • If the parties contract based on an important factual error, the contract is voidable by the injured party. Conscious Uncertainty • No rescission is allowed where one of the parties knows she is taking a risk. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Sometimes only one party enters a contract under a mistaken assumption, a situation called unilateral mistake. • to rescind for unilateral mistake, a party must demonstrate that she entered the contract of a basic factual error and that either – (1) enforcing the contract would be unconscionable or – (2) the nonmistaken party knew of the error. Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 If one party makes a threat that causes the victim to enter into a contract, with no reasonable alternative, the contract is voidable. 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. In analyzing a claim of economic duress, courts look at these factors: • Acts that have no legitimate business purpose • Greatly unequal bargaining power • An unnaturally large gain for one party • Financial distress for one party 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. To prove, one must demonstrate: • A relationship between the two parties either of trust or of domination, and • Improper persuasion of the stronger party 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Essentials of Business Law -- 4th Edition © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.