major defenses to contract formation: incapacity, illegality, unconscionabilyt, fraud & duress, mistake, SOF
Avoidance of Contracts individuals in certain protected classes are legally incapable of incurring binding contractual obligations. timely assertion of this defense by a promisor makes the contract voidable at his election.
Capacity to Contract: Infancy, Mental Incompetence
§12-Capacity to Contract
(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties(a duty you may void) there are 3 categories of contracts. enforceable, voidable, void. if you cannot make at least a voidable contract you cant make a contract. extreme cases! it is a contract if it is voidable. not a contract if it is void. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances (so while u may be able to contract in certain circumstances u might not be in others)
(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is
(a) under guardianship, or
(b) an infant, or
(c) mentally ill or defective, or
§13-Persons Affected by Guardianship (incapacity prevents the formation of a contractso would this be void?a person under guardianship cannot have even voidable contractual duties)A person has not capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.
§14-Infants-Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday. (17years and 364 days old-u can no longer void contracts for infancy. if sued upon a contract, an infant may defend on the ground of infancy without returning the consideration received.)
Note: a contract entered into between an infant and an adult is voidable by the infant but binding on the adult. **an infant may affirm, choose to be bound by his contract, upon reaching majority. he affirms either expressly or by conduct, failing to disaffirm the contract within a reasonable time after reaching majority. may disaffirm at anytime during his infancy or within a reasonable time after turning 18.
Exceptions: Infant cannot choose to avoid contract entered into by him for necessities (bound to pay reasonable value of necessities. what a necessity is depends on the infant’s station in life. infant can disaffirm contracts for necessaries, but he’ll be liable for the value-not necessarily the price of any necessaries furnished to him.) and statutory exceptions (insurance contracts, student loan contracts, etc). duties the law would require the infant to perform even w/o the contract. public policy. infant must make restitution(return whatever he received under the contract if he still has it in his possesion) review insurance and student loans stuff on page 473. someone who is emancipated has a greater need. good for minors to be able to make contracts. but it makes it so people do not want to contract with them. homeless. emancipated.
Example: If a minor who has purchased an item subsequently sells the item to a friend and then disaffirms his original contract, he has to return what we received from his friend. If one doesn’t have the consideration anymore because he sold it, he has to return the purchase price. What if i pay for it in full? and then ruin it? and then want to disaffirm the contract?
Bowling v. Sperry (1962)
16year old boy (larry bowling)wants to disaffirm his contract for the purchase of an automobile. Drove car several times in a week and found main bearing was burned out. Larry brought the car back, disaffirmed the contract, and demanded return of his money. Sperry refused. Lawsuit followed. Only matter at issue is whether the car was a necessary. Irrelevant that larry returned car in worse shape then he received it. Irrelevant that his Aunt and grandmother accompanied him, or even paid for some of it. Receipt was in Larry’s name alone. Contract was squarely between a minor and an adult. Whether goods are necessaries is a matter of law and burden is on Sperry. While every high school boy wants a car of his own, and many of them own autos which under given circumstances may be considered as necessaries, we do not consider the car in this case so vital to Larry’s existence that it would be classified as a necessary. Sperry didn’t show he needed it for work. Larry often bummed rides to work. Larry said he only used car for pleasure during time he had the car. do you think if sperry could have proven he used the car for work the court would have held differently? NO. because we can argue all day along about the necessity of items!!! questions you should be asking are, do you actually need it? can u live without it? so even if u use it, it does not make it a necessity.
-minor is obliged to return what he or she still has. no obligation to account for use or depreciation or to return an equivalent of what as received. requirement of restoration, not restitution.
-amount of time depends. no hard and fast rule.
-minor is held by a promise implied by law, and not strictly speaking on his actual promise…He is liable to pay only what the necessaries were reasonably worth, and not what he may improvidently have agreed to pay for them.” Trainer v. Trumbull. Recovery is limited to unjust enrichment.
-misrepresentation of age!-different states have different rules.
Problem: The Case of the Bold Graduates.
-depends on whether court goes with the bright-line rules or equitable standards. should we look at circumstances?
-on june 15, two seventeen-year old boys, decide to rent apartments, finds jobs. and sign a year lease with a $250 monthly rental, plus a security deposit of $250. they paid 1st month and security deposit. vacated on july 15th and demanded return of all monies paid. were they entitled to repayment? based on sperry case, this house was not a necessity. parents said they could come back whenever. if u are kicked out of house, no other place to live, that is a necessary. parents said they could come back whenever they wanted.
-sign another one-year lease(monthly rental of $400 plus $400 security deposit). demand return for all payments made. landlord refused. he said they were accountable for damages that would be sustained. what circumstances do we look at here? it is a necessary, because u might not be able to go to school and live at home. if their parents lived close to the school it might not be a necessary. has nothing to do with whether you actually use the necessary for its necessary purpose. it must be an actual necessary for you.
Jacobs, children and the Law: Rights and Obligations
-a minor’s emancipation effectively grants the minor the “capacity” to contract while at same time removing the minor’s ability to avoid contracts entered into after his/her emancipation.
-even unemancipated minors may be considered competent to enter into specific types of contracts and be liable for their breach.
MENTAL INCOMPETENCE-one whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative. he may also affirm when lucid or by legal rep. as in case of infants, mental incompetents are liable in quasi-contract for necessities furnished to them.
§15-Mental Illness or Defect
(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction (so even if other party doesn’t realize he has a mental defect-mental capacity, IQ, comprehension, ability to understand consequences), or
(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition. (testimony for example.)in relation to the transaction? compulsiveness. OCD, bipolar-buying 1,000 shirts…they might have reason to know u are acting unreasonable in relation to transaction. why would anyone need to purchase 1,000 of the same shirts of the same color. so if he acts in a reasonable manner in relation to the transaction…
Ortelere v. Teachers’ Retirement Bd., (page 474)….in New York the test for contractual incapacity includes not only those who do not understand the nature and consequences of their actions, but those “whose contracts are merely uncontrolled reactions to their mental illness.”
(2) exception-Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.
Note: common rule is that incompetent should be able to avoid the contract providing he can restore the other party to his pre-contract position. rule depends on whether other party acted in “good faith”.
Example: If one has not been adjudged incompetent, but he is mentally ill, and he enters into a contract he may disaffirm the contract if he is able to make restitution (return the goods). Issue is voidability of contracts when the other party has already performed. If the other party didnt take advantage of the incompetent and had no reason to know of the incompetence, the contract is only voidable if the incompetent can make restitution. But, if the incompetency is obvious, restitution need not be bade if the goods ahve been used up. An incompetent is free to void a contract if the other side has yet to perform.
a mental incompetent may disaffirm any contract so long as the other side has not provided the goods or services yet. if the other side has performed: (1) and the other side didnt’ take advantage of the infirm and they had not reason to know of the infirmity-the contract is only voidable if the infirm can make restitution (that is, give back the consideration) (2) and the infirmity would be obvious to a reasonable person-the infirm has not obligation to make resititution if the consideration is consumed or dissipated.
Bodie’s summary of Mental Capacity Exception §15(2)
• fair terms
• other party without knowledge of mental illness
• avoidance unjust because
• performance (whole or part)
• circumstances have changed
public policy concerns of §15.
1. protection of justifiable expectations and of the security of transactions
2. protection of persons unable to protect themselves against imposition.
§16. Intoxicated Persons-seen as less excusable than mental illness
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction
Notes: where there is some understanding of the transaction despite intoxication, avoidance depends on a showing that the other party induced the drunkenness or that the consideration was inadequate or that the transaction departed from the normal pattern of similar transactions; if the particular transaction in its result is one which a reasonably competent person might have made, it cannot be avoided.
Note2: one who is so intoxicated as not to understand the nature and significance of his promise may be held to have made only a voidable promise if the other party had reason to know of the intoxication. intoxicated person may affirm contract upon recovery. may be quasi-contractual recovery for necessities furnished during period of incapacity.
no specific exception in 16 that applies in 15. which makes it easier for for a mentally incompetent person to void a contract. FAIRNESS exception is for those who didnt know and if u acted in good faith….what about the exception in 15? they would probably know if u are wasted. and u are responsible for your behavior…we are not going to allow u to trump rights of an innocent 3rd party. if u are drunk we are going to require that other party be taking advange of u for u to get out of it. when does alcoholism become a mental illness. (15(b)-unable to act in a reasonable manner. so if i do not know u are wasted i cannot be held responsible for the bargain you entered into.
Heights Realty, Ltd. v Philips (1988) (page 475)
Heights Realty filed a complaint seeking commission for having performed under terms of contract by providing a buyer to purchase Gholson’s property. Gholson did not accept offer above the asking price. District Court found Gholson lacked mental capacity to have validly executed listing contract and entered judgment in favor of Philips (conservator of Gholson’s estate). The law presumes every person is competent and to show the contrary the burden of proof rests on person asserting lack of capacity. If incompetency of a general permanent nature has been shown to exist for a period of time prior to execution of instrument under attack, it is presumed to continue until there is a showing by the person relying on the validity of that instrument that proves existence of a lucid interval time of its execution. court considers physical condition, adequacy of consideration, weakness of mind as judged by all other acts within a reasonable time prior and subsequent to the act in question. Conflicting evidence regarding her lucidity. Substantial evidence was presented from which trial court could conclude Gholson lacked mental capacity to enter into exclusive listing agreement. Thus, Heights Realty should have known she lacked mental capacity. if person is mentally incompetent contract is voidable. u dont need to know whether she is mentally incompetent. i made a real estate contract on fair terms and she does not want to give me my commission. u could argue fairness exception. realtor could have argued. fair terms, i performed in whole. realtor should have made that argument. conflicting medical testimony. when is it reasonable to rely.
Case Notes: “Where a person has some understanding of a particular transaction which is affected by mental illness or defect, the controlling consideration is whether the transaction in its result is one which a reasonably competent person might have made” 15, comment b.
-what if conservator had agreed to offer? is she like a guardian? would it have been ok? yes. unless they are mentally incompetent.
-Beavers v. Weatherly, 299 S.E.2d 730 (1983) PAGE 479!!!!-guardian didnt have authority to take over property. he did not have authority to sell on his behalf. he has to undo the deal. incompetent person should not have to bear the brunt even over 3rd person. maybe unjust enrichment.
held that: (1) deeds executed by incompetent person to guardian in his individual capacity were void; (2) third person took no title under deed from guardian in his individual capacity; (3) if third party was entitled to restitution it was from guardian and not from incompetent’s estate; and (4) third party could be entitled to recover value of improvements he made on premises to extent that value exceeded amount of profits sought by incompetent’s new guardian.
Ervin v. Hosanna Ministry, Inc. (1995)(page 483)
so when looking at intoxication when does it qualify as a mental illness? some of the time? all the time? court probably thought waiver was unfair. detox before signing.
Plaintiffs allege “negligence on the part of Hosanna for its failure to maintain its premises in reasonably sa
take as to basic assumption-they both thought the cow was barren.
-material effect-barren cow vs. cow with calf materially effects contract
-seller was not bearing the risk.
Lenawee County Board of Health v. Messerly (1982) (503)
Carl and Nancy Pickles purchased 600 sq. foot land upon which was located a three-unit apt. building from William and Martha Messerly. Lenawee County condemned property and obtained permanent injunction which prohibits human habitation on premises until defective sewage system is brought into conformance. Issue: Whether appelles(Pickles) should prevail in their attempt to avoid this land contract on basis of mutual mistake and failure of consideration. Rationale: Rescission is not available to relieve a party who has assumed the risk of loss in connection with the mistake. court need not grant rescission in every case in which the mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties. in cases of mistake by two equally innocent parties, we are required, in the exercise of our equitable powers, to determine which blameless party should assume the loss resulting from the misapprehension they shared. There was some agreed allocation of the risk to the vendees(purchaser) by the incorporation of an “as is” clause into contract…purchaser has examined this property and agrees to accept same in its present condition. parties themselves assigned the risk of loss to Mr. and Mrs. Pickles. While the parties were mistaken as to the income producing capacity of the property in question (mutual mistake of fact), we must determine legal significance. A court need not grant rescission in every case in which mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties. When two blameless parties are involved, we are required to determine which blameless party should assume the loss. If the “as is” clause is to have any meaning at all, it must be interpreted to refer to those defects which were unknown at time contract was executed. parties themselves assigned risk of loss to Pickles.Holding: Parties did entertain a mutual misapprehension of fact, but that circumstance of this case do not warrant rescission. mistake will be hard to show. sherwood logic is not all that tight. who is bearing the risk. the nature of the thing. did parties contemplate that one side woud bear the risk that one thing might happen. fraud-failure to disclose concerns.
1. Were you assuming the risk? is the risk outside the norm? Beachcomber-neither contemplated there would be fraud there and risk was not assigned. .
2. u can rescind unless u bear the risk!!!!! basic assumption, material,….. AND BEAR THE RISK.
3. Pickles assumed the risk in the contract.
Problems: Cases of Unknown Oil Deposits, Mestrovic’s Drawings, and Unknown Injuries (page 511)
-no meetings of minds as to these particular drawings
a. oil deposits-Tetenman v. Epstein, 66 Cal.App. 745, 226 P. 966 (1924). Farmer agreed to sell forty acres of land to neighbor for $40,000. before closing it was discovered the land contained valuable oil deposits, which fact if known at time of contracting, would have justified price of $400,000. Does vendor have case for rescission? Lenawee argues-who bears the risk of this event/problem? it wasn’t a mistake because possibility of oil was not even considered.
• BASIC ASSUMPTION(reasonable expectations) + MUTUAL EFFECT+ BEARS THE RISK i am confused about the outcome here. i had a hard time reading the case!
b. Wilkin v. 1st Source Bank, 548 N.E.2d 170 (Ind.App.1990)
• 1st source bank (exectuor of Mestrovic will) entered into contract to sell family home to Wilkins
• After closing, wilkins complained premises were left in cluttered condition and needed extensive cleaning
• bank proposed they would arrange to have cleaning done or Wilkins oculd clean house and retain any items of personal property which remained.
• Who gets artwork???? noone knew it was there. court found for Bank!. Bank successfully argued that no one expected these valuable drawings, and the Estate should get the benefit of these items.” There’s some justification for that. But I agree that the contract says the Wilkins can keep any items they find, and to me, that means any items. he bank clearly gave up its right to all items if the Wilkins cleaned the house themselves. So it seems unfair that Wilkins lose out for completing their end of the contract.
c. Obatain v. StateFarm, 1997 WL 208959 (Del.Ch.1997) and Gortney v. Norfolk & Western Ry. Co., 216 Mich.App. 535, 549 N.W.2d 612 (1996)
• O injured in accident at work
• employer’s insurance company admitted liability and paid doctors bills in full
• O signed release of all claims for personal injuries known or unknown
• later, O became seriously ill due to internal trauma
• O claims release should be set aside for mutual mistake.
Obatain-we need to know what they thought injuries were.
Gortney-state failed to establish mutual mistake in order to vitiate effect of general release.
We don’t protect bad bargains! what about public policy and mutual mistake? seems crazy she cant get money for internal trauma? It seems purpose was to avoid any “bad claims” made later on? it is not a mistake because purpose was to transfer the risk to the victim.! whole point of contract was to say u might have internal injuries, u are going to take the risk. the contract transferred the risk. even though neither party, knew, at the point of contract. we will pay u larger fee upfront.
Comment: Reformation for Mistake in Expression (511) (equitable remedies)
• reformation is designed to restore the efficacy of a writing which does not reflect the earlier agreement of the parties, frequently oral, which they apparently intended to be reflected in the writing
• ultimate objective of P is to enforce the writing as reformed
• P must show that parties had actually reached agreement over term at issue, that both intended the term to be included in a subsequent writing, and because of “mutual mistake” in expression, the term was not included
• Treadaway v. Camellia Convalsescent Hospitals (43. Cal.App.3d 189, 118 Cal. Rptr. 341 (1974)
• if “mutual” mistake is in formulation rather than expression of the agreement, the proper remedy is rescission rather than reformation of the contract