Chapter 13: Capacity and Genuine Assent Flashcards
Contractual capacity
The ability to understand a contract is being made and to understand it’s general meaning
Everyone presumed to have capacity unless it is proven that capacity is lacking or there is a status incapacity
Can exist even if party does not completely understand the contract
Status incapacity
Classes of persons declared by law to lack contractual capacity.
Incapacity protects these classes by giving them power to get out of an unwise contract
(Has been used for discriminatory and punative status)
- minors
Peddy v Montgomery
Statute that said married women cannot sell land without husband’s consent deemed unconstitutional due to equal protection under the law
Montgomery made a contract to sell land to Peddy
But her husband did not consent so she didn’t fulfill the contract
Peddy sued
Montgomery claimed the statute
Peddy asserted statute unconstitutional
Factual incapacity
When a person does not have the mental capacity to understand a contract to a reasonable expense due to a mental condition (medication, drugs, alcohol, illness, age.)
Minors
- anyone under 18 years of age (day before birthday rule)
- may make contracts
- contracts voidable (with some exceptions) at the election of a minor
- minor may affirm (ratify) the contract on attaining majority by performance, express approval, or lapse without avoidance
Avoidance
Aka disaffirm
Any expression of an intention to repudiate the contract or any act inconsistent with the continuing validity of the contract
Only applicable during minority and for a “reasonable” time after attaining majority
Minor’s misrepresentation of age
Varies by state
- some states misrepresentation by minor = fraud that bars contract avoidance
- in others can still disaffirm but may have to pay damages
Other party may disaffirm due to the fraud
Restitution by a minor after avoidance
(if minor must return anything to other party)
If original consideration intact: must return or offer to return it or the other party (status quo ante)
If original consideration damaged/destroyed/used up: only required to return whatever remains. (Or nothing. But some trend to limit this)
Recovery of property by minor on avoidance
Other contracting part must return any money or property received or the monetary value of property if property isn’t recoverable
Necessaries
Things indispensable or absolutely necessary for the sustenance of human life
Food Clothing Lodging Health Education Comfort
Contracts for necessaries & minors
A minor can disaffirm a contract for necessaries but must pay the reasonable value for necessaries furnished
- when necessities provided to parent/guardian for minor, minor is not liable (contract between adults)
- medical care: common law says parent is liable but child can be held liable for necessary expenses if parent is unable or unwilling to pay
- minor can bind self in contract for necessaries otherwise may not be able to access
Schmidt v. Prince George’s hospital
- emergency medical care for unidentified 16-yo
- insurance check issued, but used to pay for a car
- minor sued by hospital for costs on attainment of majority
- decision for hospital
- doctrine of necessaries
- parents showed unwilling to pay (using insurance money for car)- so daughter liable
Ratification of a former minor’s voidable contact
Ratification: any words or conduct of the former minor manifesting an intent to be bound by the contract terms. Some states may require written ratification/ declaration
Can only happen after attaining majority or still voidable
Once ratified upon majority the contract cannot them be disaffirmed
Contracts minors may not avoid
Can vary by state statute:
- educational loans
- contracts for medical care
- contracts made while running a business
- contracts approved by a court
- contracts made in performance of a legal duty
- contracts relating to bank accounts, insurance policies, or corporate stock
Liability of a third person for a minors contract
Parent: not generally liable unless child makes contract as agent of parent. Liable for value of necessaries supplied to child deserted by said parent
Cosigner: someone who signs with another to make the contract more acceptable. Bound by contract independently from the minor. If minor disaffirms, cosigner still bound
Mentally incompetent
To rescind a contract made by an incompetent person a guardian must demonstrate that the person was suffering from a mental illness/defect that made them incapable of comprehending the nature of the transaction
If established mentally incompetent may avoid contract in same manner as minor and ratify or disaffirm if later declared competent
Person or their estate is liable for the reasonable value of all necessities furnish
Contract still building if terms and circumstances reasonable and person is unable to restore other party to status quo ante
Mentally incompetent persons with a guardian
Contract made before guardian appointed: guardian may ratify or disaffirm contract
Contract made after guardian appointed: contract is void
Incapacity due to intoxicarion
If the party knows the contact was being made: intoxication does not affect validity of the contract
If so intoxicated that doesn’t know the contact was being made the contract is voidable on becoming sober, but an unreasonable delay before voiding contract may prevent voiding the contact
Excessive intoxication viable defense of casino patron
Impairment by other drugs same treatment
LaBarbera v Wynn Las Vegas
- LaBarbera lost significant money (own + gaming credit) at Wynn casino
- original court judged in favor of casino as voluntary intoxication is not a defence
- appeal resulted in case being remanded for a new trial
- intoxication may render person incomplete
- burden of proof on the person claiming incompetence
Unilateral mistake
Mistake made by one party to a contract
Does NOT affect contract when the mistake is unknown to the other contracting party
Party who made the mistake may avoid the contract if the other party knew/ should have known about the mistake
Mutual mistake of fact or law
When both parties enter into a contract under a mutually mistaken understanding (of fact or law)
Contract voidable by the adversely affected party if the mistake has a material effect on the exchange
Mutual mistake in judgment
Contract is not voidable
Reformation
Remedy by which a written instrument is corrected when it fails to express the actual intent of both parties, because of fraud, accident or mistake
Mistake in transcription or printing of a contract
Parties may petition court to reform document to reflect actual agreement
Must prove that a mistake was made
Shurgard storage centers v. Lipton-U city llc
- agreement regarding lease of a self storage facility with the option to sell
- shurgard (seller) sent an email that included Lipton (buyer) outlining purchase option at an annualized amount
- lease submitted did not contain language about annualized amount, Lipton represented this as a negotiation on his part
- Lipton sought to purchase based on terms in contract
- shurguard rejected offer. Filed suit over misunderstanding in price terms
- judgement for shurguard. Lipton knew, or should have known about the mistake
Contracts made under deception
Means there is no true assent- contract may be voided at innocent party’s option
Tort
Civil wrong that interferes with one’s property or person
Fraud
Making of a false statement of a past or existing fact, with knowledge of it’s falsify or with reckless indifference as to it’s truth, with the intent to cause another to rely thereon, and such person does rely thereon and is harmed thereby
Material misrepresentation of a fact
- with knowledge of it’s falsity/ reckless indifference to truth
- intent that the listener rely on the misrepresented fact
- result that the listener does rely on it
- listener harmed as a consequence
Misrepresentation that would induce a reasonable person to assent to a contract
Puffery
Meaningless superlatives that no reasonable person would take seriously
Fraud vs statement of opinion or value
Generally matters of opinion of value/ opinion about future events not fraud (forecasting not fraud or fact but speculation)
Is fraud if speaker knows of facts that make the opinion false
Cansinos v bank of america
- cansinos home valued at 620k by b of a appraiser in 2005
- took our a mortgage based on the belief that the home value would increase
- home value instead significantly decreased
- cansinos brought fraud action against b of a
- both trial court and appeal court found against the cansinos - market value had just been prediction, not fact, no fraud involved
Justifiable reliance on statement
Fraudulent statement doesn’t matter unless other party relies on it being truthful
- fraud only counts if injured party was specifically relying on fraudulent statement
Disclaimer of reliance clauses
State that no representations have been made to the buyer
Generally buyers cannot assert justifiable reliance on statements by sellers that contradict clear and specific terms of written contracts
Proof of harm
Required for an individual to recover damages from fraud
If can prove may receive coverage of actual losses
Also punative damages if fraud is gross/oppressive
Injuries party can have the court order the recession or cancelation of a contract induced by fraud
Novare group v sarif
- purchasers bought condo units that brokers claimed would have “spectacular views”
- sued when found out the company knew about a development that would block the views
- case unsustainable because written contract clearly stated that views might change over time and included a disclaimer that oral representations could not be relied upoj
Negligent misrepresentation
Speaker failed to exercise due care regarding information communicated to listener (but did not intend to deceive)
If results in harm to the listener contract is voidable by injured party. Actual damages mat be claimed
If fraud is proven(intent) then punative damages could be awarded as well
Suits often claim both fraud and negligent misrepresentation
Nondisclosure
Under certain circumstances nondisclosure may make a contract voidable - mostly cases of active concealment
General rule of liability for nondisclosure
Generally a party has no duty to volunteer information to the other party in the formation of a contract
Exceptions to general rule of nonliability for nondisclosure
Unknown defect or condition: duty in some states for seller who knows of a serious defect or condition to disclose if it is of such a nature that it is unlikely the other person would discover it
Confidential relationship: if parties stand in a confidential relationship failure to disclose information may be fraudulent (attorneys with knowledge material to client’s interest)
Active concealment: hiding information or knowingly supplying wrong information constitutes fraud (includes concealing by action)
Confidential relationshop
Relationship in which, because of the legal status of the parties or their respective physical or mental conditions or knowledge, one party places full confidence and trust in the other
Puget Sound Service Corp v. Dalarna Management
- dalarna Management has building with visible water damage
- building bought by Puget Sound who then sued because Dalarna hadn’t disclosed the extent of the leaks
- judgement for Dalarna - leaks were not concealed, was on the buyer to ask question to ascertain extent of the damage
Pressure
What appears to be agreement may not be voluntary because one party was under undue influence, or physical or economic duress
Undue influence
Influence that is asserted upon another person by one who dominates that person
(Imbalance of power, confidential relationship)
May be apparent that the more helpless party was not exercising free will in making the contract but following the will of another
Undue influence presumed when dominating person obtains benefit from contract made with dominated person. Contract is voidable
Have to determine persuasion vs undue influence/ lack of free will
Moore v. Moore
- parents owned farming operation
- on father’s death mother exploited by her son into contract favorable to son and grandson
- original judgement for son
- appeal judgement for mother
When persons in a confidential relationship enter into a contract the burden rests on the person in whom confidence has been placed (son) to show that transaction was in good faith/ no undue influence
- remanded for bench trial, jury had not been properly instructed
Fisher v. Schefers
- Lentner in nursing home but owned farm
- Schefer visited often in home and convinced him to sell farm, aided in the transaction
- guardian appointed after sale (Fisher) sought to set aside transaction due to undue influence
- judgement for Schefers. No undue influence established, Lentner still acting of own free will
Physical duress
Threat of physical harm to person or property
Contract made to avoid threatened harm is voidable at victim’s election
(Great reluctance is not the same as duress)
Economic duress
Threat of financial loss
Where one in induced by a wrongful act or threat of another to make a contract under circumstances that deprive one of the exercise of one’s own free will
(Holding necessary product hostage)
Duress
Conduct that deprives the victim of free will and generally gives the victim the right to set aside any transaction entered into under such circumstancea
Dementia as incapacity
Will be analyzed situationally: does the signer have sufficient understanding to know what the document is and the effect of the signing? May depend on time of document.
Evidence of capacity must often be reconstructed after the fact
Will is lowest level capacity
Considerations of capacity vs undue influence
In the matter of Agnes D. Rick
Investment account manager administering estate of a widow eventually became attorney-in-fact, executor for her will and trustee for her trust
Widow has diminished cognitive abilities from dementia.
Court took testimony from friends, family, and expert witnesses and eventually determined that she had not had the capacity to agree to the various contracts and that account manager had used position for own benefit
