Chapter 13
Capacity and Genuine Assent
Twomey, Business Law and the
Regulatory Environment (14th Ed.)
Defenses to Formation [13-1]
Aliens
Outmoded
Married Persons
Lack of
Contractual
Capacity
Status Incapacity
Minors
Factual Incapacity
Intoxication
Mental
Unilateral Mistake
No, unless reliance on statement
Mutual Mistake
Law - No
Mistake
Possible
Grounds
for
Avoiding
Contract
Expectations - No
Deception
Duty
Nondisclosure
Statute
Fraud
Intent to Conceal
Undue Influence
Physical
Duress
Economic
Pressure
(c) 2000 West Legal Studies
Material Fact - Yes
Innocent
Misrepresentation
Chapter 13
2
Avoidance of Contract
Lack of
Contractual
Capacity
Status Incapacity
Factual Incapacity
Unilateral Induced by
or Known to Other Party
Mistake
Mutual Mistake
Possible
Grounds
for
Avoiding
Contract
Innocent
Misrepresentation
Deception
Nondisclosure
Fraud
Undue Influence
Pressure
Duress
(c) 2000 West Legal Studies
Chapter 13
Physical
Economic
3
Possible Remedies for Lack of
Genuine Agreement [13-2]
Deception
Pressure
Mistake
There is NOT a
genuine agreement
of the parties
Damages
Recession
Reformation
(c) 2000 West Legal Studies
Chapter 13
4
Chapter 13 Summary
An agreement that otherwise appears to be a
contract may not be binding because one of the
parties lacks contractual capacity. In such a case,
the contract is ordinarily voidable at the election
of that party who lacks contractual capacity. In
some cases, the contract is void.
(c) 2000 West Legal Studies
Chapter 13
5
Chapter 13 Summary [2]
Ordinarily, contractual incapacity is the inability,
for mental or physical reasons, to understand
that a contract is being made and to understand
its general terms and nature. This is typically the
case when it is claimed that incapacity exists
because of insanity or intoxication. The
incapacity of minors arises because society is
discriminating in favor of that class to protect
them from unwise contracts.
(c) 2000 West Legal Studies
Chapter 13
6
Chapter 13 Summary [3]
In most states today, the age of majority is 18.
Minors can avoid most contracts. If a minor
received anything from the other party, the minor,
on avoiding the contract, must return what had
been received from the other party if the minor still
has it.
(c) 2000 West Legal Studies
Chapter 13
7
Chapter 13 Summary [4]
When a minor avoids a contract for a necessary,
the minor must pay the reasonable value of any
benefit received. The concept of a necessary has
expanded.
(c) 2000 West Legal Studies
Chapter 13
8
Chapter 13 Summary [5]
Only minors are liable for their contracts. Parents
of a minor are not liable on the minor’s contracts
merely because they are the parents. Frequently, an
adult will enter into the contract as a co-party of
the minor and is then liable without regard to
whether the minor has avoided the contract.
(c) 2000 West Legal Studies
Chapter 13
9
Chapter 13 Summary [6]
The contract of an insane person is voidable to
much the same extent as the contract of a
minor. An important distinction is that if a
guardian has been appointed for the insane
person, a contract made by the insane person is
void and not merely voidable.
(c) 2000 West Legal Studies
Chapter 13
10
Chapter 13 Summary [7]
An intoxicated person lacks contractual capacity
to make a contract if the intoxication is such that
the person does not understand that a contract is
being made. The consent of a party to an
agreement is not genuine or voluntary in certain
cases of mistake, deception, or pressure. When
this occurs, what appears to be a contract can be
avoided by the victim of such circumstances or
conduct.
(c) 2000 West Legal Studies
Chapter 13
11
Chapter 13 Summary [8]
As to mistake, it is necessary to distinguish
between unilateral mistakes that are unknown to
the other contracting party and those that are
known. Mistakes that are unknown to the other
party usually do not affect the binding character
of the agreement. A unilateral mistake of which
the other contracting party has knowledge or has
reason to know makes the contract avoidable by
the victim of the mistake.
(c) 2000 West Legal Studies
Chapter 13
12
Chapter 13 Summary [9]
The deception situation may be one of innocent
misrepresentation, nondisclosure, or fraud.
Innocent misrepresentation generally has no
effect on the binding quality of an agreement,
although there is a trend to recognize it as a
ground for avoiding the contract.
(c) 2000 West Legal Studies
Chapter 13
13
Chapter 13 Summary [10]
A few courts allow recovery of damages. When
one party to the contract knows of a fact that has a
bearing on the transaction, the failure to volunteer
information about that fact to the other contracting
party is called nondisclosure.
(c) 2000 West Legal Studies
Chapter 13
14
Chapter 13 Summary [11]
When concealment goes beyond mere silence
and consists of actively taking steps to hide the
truth, the conduct may be classified as fraud
rather than nondisclosure. There is a growing
trend to hold fine-print clauses not binding on
the theory that they are designed to hide the
truth from the other contracting party.
(c) 2000 West Legal Studies
Chapter 13
15
Chapter 13 Summary [12]
Consumer protection statutes often outlaw
fine-print clauses by requiring particular
contracts or particular clauses in contracts to be
printed in type of a specified size. A statement
of opinion, value, or law cannot ordinarily be
the basis for fraud liability, although it can be
when the maker of the false statement claims
to be an expert on the particular subject matter
and is making the statement as an expert.
(c) 2000 West Legal Studies
Chapter 13
16
Chapter 13 Summary [13]
The free will of a person, essential to the
voluntary character of a contract, may be lacking
because the agreement had been obtained by
pressure. This may range from undue influence
through the array of threats of extreme economic
loss (called economic duress) to the threat of
physical force that would cause serious personal
injury or damage to property (called physical
duress).
(c) 2000 West Legal Studies
Chapter 13
17
Chapter 13 Summary [14]
The mere fact that one party to the contract has
great bargaining power and offers the other party a
printed contract on a take-it-or-leave-it basis (an
adhesion contract) does not prove that the
agreement was not voluntary. However, some
courts have held that in such cases the agreement
is not voluntary if the weaker party cannot obtain
the desired goods or services elsewhere.
(c) 2000 West Legal Studies
Chapter 13
18
Chapter 13 Summary [15]
When the voluntary character of an agreement
has been destroyed by mistake, deception, or
pressure, the victim may avoid or rescind the
contract or may ratify the contract and obtain
money damages from the wrongdoer. When the
mistake consists of an error in putting an oral
contract in writing, either party may ask the
court to reform the writing so that it states the
parties’ actual agreement.
(c) 2000 West Legal Studies
Chapter 13
19