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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.
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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
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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
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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.