Capacity and Consent

1. Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide. CHAPTER 14 Capacity and Consent

2. Quote of the Day “I am not young enough to know everything.” J.M. Barrie, British playwright

3. Capacity • Capacity is the legal ability to enter into a contract. • 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.

4. Minors • 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.

5. Minors -- Exceptions • Fully Executed Contracts • In some states, minors may not disaffirm fully executed contracts. • Timing • Minors may disaffirm a contract up to a reasonable time after turning 18, unless they ratify the contract after turning 18.

6. Minors -- Exceptions • 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. • 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.

7. Mentally Impaired Persons • 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.

8. Misrepresentation and Fraud • Innocent misrepresentation • means the owner believes the statement to be true and has a good reason for that belief. • Fraudulent misrepresentation • means the owner knows that the statement is false.

9. Misrepresentation and Fraud • To rescind a contract based on misrepresentation or fraud, a party must show three things: • (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.

10. Plaintiff’s Remedy for Misrepresentation or Fraud • 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.

11. Nondisclosure of a Fact • Is misrepresentation only: • 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.

12. Mistake -- Bilateral • 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.

13. Mistake -- Unilateral • 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.

14. Undue Influence • To prove, one must demonstrate: • A relationship between the two parties either of trust or of domination, and • Improper persuasion of the stronger party Duress • If one party makes a threat that causes the victim to enter into a contract, with no reasonable alternative, the contract is voidable.

15. Economic Duress • 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

16. “Both parties must have the capacity to make a deal, and both must give genuine consent.”