CONTRACTS II
BODIE
SPRING 2012
§ 12. Capacity To Contract
(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. 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.
(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
(d) intoxicated.
§ 13. Persons Affected By Guardianship
A person has no 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.
§ 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, 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.
(2) 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.
§ 16. Intoxicated Persons
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.
Class:
Bright Line Rules: §14 – secondary characteristic that is easy to define and then based rule off of that (make bright lines into equitable standards by introducing exceptions – 2 for infancy)
– K is voidable if under 18 (bright line)
Equitable Standards: §15/16: focus on purpose of regulation
Void Voidable
Infancy
Under the age of “reason” (four years or less?)
Restatement § 14: under 18 (or under 21: Kiefer)
Mental Incompetence
Without capacity for rational action; a person non compo menti
Restatement § 15: (1) unable to understand OR (2) unable to act and other party has reason to know
Intoxication
Blacked out; not capable of rational thought
Restatement § 16: unable to understand or unable to act and other party has reason to know
Duress
Restatement § 174: “physically compelled”
– gun to head
Restatement § 175: “improper threat”
– I will shoot you
Void: k that doesn’t exist, wiping the k out
Voidable: a k that exists, but a party that is protected by its voidability chooses to void the k (divorce: marriage exists until then)
Kiefer v. Fred Howe Motors: 20 year old buying car: Infancy
– Bright line is 21, so let him off
– Use bright line bc equitable standard of maturity is arbitrary and would not promote administrative efficiency (however, was married, had kid, and full time job)
Exceptions to infancy rule:
1. Necessities: Items needed for everyday life (hamburger or apt)
2. Misrepresentation about age: Car dealer can look at license
Ortelere v. Teachers’ Retirement Board: Teacher takes bad retirement plan
– Difference b/n ability to understand and ability to act
– §15 – ability to understand cognitive aspect of k, but unable to act in way that is rationale (psychosis)
– Also, other party needs to know or have reason to know (leave of absence)
– Bc couldn’t act and D knew, P wins
Duress and Undue Influence
§ 174. When Duress By Physical Compulsion Prevents Formation Of A Contract
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.
§ 175. When Duress By Threat Makes A Contract Voidable
(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transa
sion at unusual time; 2. Unusual place; 3. Demand that business finished at once; 4. Extreme emphasis on consequences of delay; 5. Use of multiple dominant persuaders and one servient party; 6. Absence of third party advisors (lawyer); 7. No time to consult
– Undue influence is milder than duress, and requires D in position of power (bosses) and P is susceptible (mental anguish of charges)
– P was so dominated as to prevent exercise of independent judgment
– D’s could have won if cooling off period and lawyer present
Illegality and Public Policy
§ 178. When A Term Is Unenforceable On Grounds Of Public Policy
(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.
(2) In weighing the interest in the enforcement of a term, account is taken of
(a) the parties’ justified expectations,
(b) any forfeiture that would result if enforcement were denied, and
(c) any special public interest in the enforcement of the particular term.
(3) In weighing a public policy against enforcement of a term, account is taken of
(a) the strength of that policy as manifested by legislation or judicial decisions,
(b) the likelihood that a refusal to enforce the term will further that policy,
(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and
(d) the directness of the connection between that misconduct and the term.
§ 179. Bases Of Public Policies Against Enforcement
A public policy against the enforcement of promises or other terms may be derived by the court from
(a) legislation relevant to such a policy, or
(b) the need to protect some aspect of the public welfare, as is the case for the judicial policies against, for example,
(i) restraint of trade (§§ 186-188),
(ii) impairment of family relations (§§ 189-191), and
(iii) interference with other protected interests (§§ 192-196, 356).
