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Unformatted text preview: Chapter 14 CONTRACTS: CAPACITY AND GENUINE ASSENT Contractual Capacity 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. Status Incapacity. Factual Incapacity. 2 Contractual Capacity 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. Incapacity may be due to: being a minor. Insanity. Intoxication. 3 Minors Minors can avoid most contracts. Must be within reasonable time. Minor must return what had been received from the other party if the minor still has it. Minor must pay the reasonable value of a necessary. Restitution by Minor after Avoidance. Original Consideration Intact. Original Consideration Damaged/Destroyed. 4 Minors Recovery of Property. Contracts for Necessaries. Ratification of Minor's Voidable Contract. No Special Form of Ratification. Reasonable time after Emancipation. Contracts The Minors Cannot Avoid. Educational loans, medical care, court-approved, bank accounts, insurance policies. 5 Mentally Incompetent Persons The contract of an MI 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 MI person, a contract made by the insane person is void (not merely voidable). 6 Intoxicated Persons 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. 7 Unilateral Mistake Contracts may be avoided due to mistake by one or both of the parties. Unilateral Mistake. Mistake unknown to the other party usually does not affect the binding character of the agreement. A mistake known to the other contracting party makes the contract avoidable by the victim of the mistake. 8 Mutual Mistake Mutual Mistake: When both parties are mistaken about a basic, material fact of the contract, the adversely affected party may avoid the contract. Reformation for Mistake in Transcription or Printing of the Contract. 9 Deception Innocent misrepresentation: there is a trend to allow it as a ground for avoiding the contract. Fraud: When concealment goes beyond silence and consists of actively hiding the truth, the conduct is fraud rather than nondisclosure. Statements of Opinion are not fraud. Contract is voidable by the innocent person. 10 Deception Nondisclosure. General Rule: There is no legal duty to volunteer information to the other party. Exceptions: Serious Defect that could not be discovered. Confidential Relationship. Active Concealment. 11 Pressure The free will of a person, essential to the voluntary character of a contract, is lacking if the agreement is obtained by pressure. Contract is voidable. Undue influence: where the beneficiary of the contract is in a position of extreme power over the maker of the contract. Duress: Physical Duress: Threat of physical force that would cause serious personal injury or damage to property. Economic Duress: against free will. 12 Review Lack of Contractual Capacity Status Incapacity Factual Incapacity Unilateral Induced by/Known to Other Party Mutual Mistake Innocent Misrepresentation Deception Nondisclosure Fraud Undue Influence Pressure Duress Minors Intoxication Mental Possible Grounds for Avoiding Contract Mistake Physical Economic 13 ...
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