Capacity and Consent

1. Capacity and Consent • One seven year old says to another, “I will give you a $10 if you stick this straw all the way up your nose.” Second child does so. • Offer and acceptance? • Consideration? • Valid contract?

2. Capacity • What is “capacity”? How does it relate to contract law? • Capacity is the legal ability to enter into a contract. • What happens if one party to a contract lacks 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.

3. Minors • Valid contract voidable by minor party (< 18) • Disaffirmance • A minor generally may disaffirm a contract, either by notifying the other party he refuses to be bound by the agreement, or by 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. • What if consideration is destroyed through minor’s negligence? Intentional act?

4. Minors -- Exceptions • 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. • Timing of disaffirmance & Ratification • Minors may disaffirm a contract up to a reasonable time after turning 18, unless they ratify the contract after turning 18.

5. Mentally Impaired Persons • Definition • A person with mental illness or defect, who is unable to understand the nature and consequencesof a transaction. • Impairment must be more than mere eccentricity or volatility. • E.g., insanity, dementia, schizophrenia, severe mental deficiencies. • Generally creates only a voidable contract. • Restitution • A mentally infirm party who seeks to void a contract must make restitution.

6. Mentally Impaired Persons (cont’d) • Intoxication • When an intoxicated person makes a contract, it is voidable. • Must be so intoxicated as to be unable to understand the nature and consequences of the transaction. • Mental Incapacity may be temporary • Senile Not senile Senile • Ratification

7. Illegality • Contracts are not enforceable if they are: • contrary to statutes • contracts to commit crimes • Kunz v. Lobo Lodge • gambling • contrary to “public policy” • What does that mean?

8. Illegality • exculpatory clauses • unconscionable contracts

9. Mistake -- Bilateral • Konic International v. Spokane Computer Services • 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.

10. 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.

11. Other Facts Undermining Consent: 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. • Remedy may depend upon speaker’s intent • Cao v. Nguyen

12. Misrepresentation and Fraud (cont’d) • To rescind a contract based on misrepresentation or fraud, a party must show three things: • (1) there was a false statement of fact; • (2) the statement was fraudulent or material; and • (3) the injured person justifiably relied on the statement.

13. Fraudulent or Material • Fraudulent: without regard to truth or falsity • Seller says “The air conditioning in this house is working fine” knowing that is untrue. • Seller says “This house is built on solid rock” without any reasonable belief that is true. • Material: integral to other party’s agreement • Seller says “This roof is only two years old.” Seller believed that was true, but roof was actually 14 years old (beyond normal useful life of shingles). • What if the roof is two years and three months old?

14. 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.

15. 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.

16. Duress • What does it mean for a contract to be created under “duress”? What sorts of circumstances constitute the sort of duress that would render an otherwise valid contract voidable? • What is “economic duress”? Does economic duress make a contract voidable too? • Totem Marine v. Alyeska

17. Discharge • What does it mean to say that a party to a contract “is discharged”? • Generally, a party is discharged when she has no more duties under a contract. • How does discharge occur? • Either by full performance, or by mutual agreement. • General rule: parties must perform as promised. A breach is a failure to perform as promised. • Continental Dredging v. De-Kaizerized

18. Performance & Breach • Strict Performance • Performance that is exactly what promised; is usually not expected and failure to do so does not cause for discharge. • Substantial Performance • A party that substantially performs its obligations will receive the full contract price, minus the value of any defects. • A party that fails to perform substantially receives nothing on the contract. • Performance that falls short of substantial performance constitutes a material breach of the contract.

19. Performance & Breach (cont’d) In a contract for the construction of a home that specified the size of decorative exposed beams, beams in the finished house are smaller than specified, by 5%? Material breach? How much money does buyer owe builder, if any? What if the beams are load supporting beams? Material breach? How much money does buyer owe builder, if any?

20. Performance & Breach (cont’d) • Whether a breach is material depends upon the circumstances: • I order keg of beer to be delivered “Thursday by 5pm”. Keg arrives at 7pm. • I order keg of beer to be delivered “Thursday in time for my party at 5pm”. • To determine if breach is material, look to: • Whether buyer can use imperfect performance for intended purpose • Whether adjustment to price/damages can remedy the problem • Whether breaching party acted in good faith

21. Performance & Breach (cont’d) • Parties can define terms as essential such that strict performance of those terms is required, and breach of those terms is a material breach. • What if contract for construction of house specifies hardwood floors made of oak, with clear stain. Buyer gets hickory, with oak-colored stain. • Contract specifies that oak floors are an essential element of the contract. • Filing cabinet delivery example. • Conditions vs. essential terms

22. Time of the Essence Clauses • A time of the essence clause will generally make contract dates strictly enforceable. • Merely including a date for performance does not make time of the essence.

23. Breach (cont’d) • Anticipatory Breach • Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the contract. • A delivers widgets to B’s factory weekly; B is obligated to pay monthly for previous month’s deliveries. B’s bank accounts are seized by the court to pay creditors. • A need not make next delivery and may sue for payment for deliveries made, even though time for payment under the contract has not yet arrived. • Norcon v. Niagara Mohawk: demands for assurance of performance

24. Impossibility • When is performance excused due to change in circumstances? That is, must promisor make good on promise (through own or substitute performance), or is s/he excused? • True Impossibility • Something has happened making it utterly impossible to fulfill the promise. • Portrait painter becomes ill and cannot paint your portrait as required by the contract? • Must/can painter provide substitute performance? • House painter can’t paint your house because his employees go on strike? • Must/can painter provide substitute performance?

25. Force Majeure • Spells out the kinds of impossibility that will excuse performance. For example: • Performance under this agreement shall be excused if prevented by unforeseeable acts beyond the parties’ control, including acts of God, acts of a public enemy, labor disputes, fires, insurrections, floods, acts of government. • Parties can define force majeure narrowly or broadly, to include all sorts of disruptions.

26. Frustration of Purpose • Mel Frank Tool & Supply v. Di-Chem • Concert ticket example

27. Breaching the Contract • Someone breaches a contract when he fails to perform a duty without a valid excuse. • A remedy is the method a court uses to compensate an injured party. • An order forcing someone to do something, or refrain from doing something, is an injunction.

28. Compensatory Damages • Compensatory damages are the most common monetary awards. • They generally flow directly from the contract, such as an order to pay what was promised or to pay for expenses caused by the breach. • Serve expectation interest; give parties the direct “benefit of the bargain”. E.g., out of pocket losses; certain profits lost.

29. Consequential Damages • Consequential damages (a/k/a “special damages) are those resulting from the unique circumstances of this injured party. • Plaintiff can recover consequential damages only if the breaching party should have foreseen them.

30. Consequential Damages (cont’d) • Examples: • Damages paid on related contracts • Because damage calculation can be complex, there are companies that specialize in doing the work on behalf of litigants or other interested parties.

31. Law and Equity • Restitution in Cases of a Valid Contract • Restitution is a common remedy in contracts involving fraud, misrepresentation, mistake, and duress. It means giving back the benefits received. • Rescission = undoing the contract

32. Other Equitable Interests • Specific Performance • A court will order the parties to perform the contract only in cases involving the sale of land or some other asset that is unique. • Injunction • An injunction is a court order that requires someone to do something or refrain from doing something.