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Capacity
◙ Capacity is the legal ability to enter into
a contract.
• Minors (under age 18) and those with
mental impairment usually lack 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.
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.
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.
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.
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.
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.
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.
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.
Special Problem: Silence
◙ Nondisclosure of a fact is misrepresentation only
when disclosure is necessary:
• 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.
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.
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.
Duress / Economic Duress
◙ If one party makes a threat that causes the
victim to enter into a contract, with no
reasonable alternative, the contract is voidable.
◙ 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
Undue Influence
◙ To prove there has been undue
influence, one must demonstrate:
• A relationship between the two parties
either of trust or of domination, and
• Improper persuasion by the stronger
party

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