Contracts II (Bodie_Spring 2009)
1. Avoidance of Contracts
Capacity to Contract: Infancy; Mental Incompetence
Legal capacity of both the offeror and offeree are essential to the formation of a contract (lack of legal capacity = no mutual assent).
Infancy
The contracts of minors are voidable at the option of the minor, although the minor may nevertheless enforce the contract against the adult.
Bowling v. Sperry
16 year old P bought a car from D. When it broke, P returned it and demanded a refund. Court found the contract was voidable and it did matter that an adult was present when he bought the car since the defendant was aware of the minor’s age. Additionally, court found the car was not a necessary.
Necessary = items purchased by a minor that aren’t voidable (food, clothing, shelter, etc.)
Restatement §12 Capacity to Contract
(1) No one can be bound by contract who has not legal capacity to incur at least voidable contracts.
(2) A person has full legal capacity to incur contractual duties unless he is:
Under guardianship
An infant
Mentally ill or defective
Intoxicated
Restatement §14 Infants
Person has capacity to incur only voidable contractual duties until beginning of the day before their 18th birthday.
Misrepresentations of Age
If a minor is silent about her age, the duty rests on the other party to ascertain it.
Note: states have differing approaches ranging from no responsibility to full responsibility for contract in which minor misrepresented his age.
Ratification
A minor cannot affirmatively ratify a contract until he comes of age.
After date of majority, manifestation of intent to be bound by contract will deprive him of further right to avoid contract.
Silence or inaction after attaining majority does not constitute ratification.
Mental Incompetence
A person lack the mental capacity to contract only if his mental processes are so deficient that he lacks understanding of the nature, purpose, and effect of the transaction.
Heights Realty, Ltd. v. Phillips
D was an elderly woman who contracted P to sell her house. When D refused to sell at above listing price, P sued for commission arguing she did all she could do. Court found the P was not entitled to her commission because D was incompetent and therefore any contract she made was voidable at her option.
The court presumes competence, but testimony is capable of providing clear and convincing evidence of incompetence (medical testimony in and of itself is not sufficient).
Ervin v. Hosanna Ministry, Inc.
Jacqueline was admitted to D for alcohol and drug rehabilitation (paid for by P). Jacqueline was injured and P sued D for negligence. D filed a motion for summary judgment arguing Jacqueline signed a release waiving her right to bring suit. Jacqueline did not remember signing a waiver and that if she did, she was in a diminished capacity when she did so. Court found that if Jacqueline was intoxicated or lacked mental capacity as a result of her addictions, then an issue existed as to her assent to the waiver.
Intoxication = inability to understand what is going on as a result of the intoxication
Restatement §13 Guardianship
Person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.
Restatement §15 Mental Illness or Defect
(1) Person incurs only voidable contracts by entering transaction by reason of mental illness or defect if:
He is unable to reasonably understand the nature and consequences of transaction, OR
He is unable to act in a reasonable manner in relation to the contract and the other party has reason to know of condition
(2) Where the contract is made on fair terms and the other party is without knowledge of condition, the power of avoidance 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).
Restatement §16 Intoxication
Person incurs voidable contracts if other party has reason to know of intoxication AND
Person is unable to reasonably understand nature and consequences of transaction, OR
Person is unable to act in a reasonable manner in relation to transaction
What is the difference between Restatement §15 and §16?
Party you are contracting with has to know or have reason to know that the other party is intoxicated (only the case with one prong of §15, but applies to both prongs of §16).
Does it qualify as a mental illness?
Yes = Restatement §15
No = were they actually intoxicated at the time of contracting?
Yes = Restatement §16 = does the other party have reason to know?
No = contract is good
Yes = voidable
No = contract is good
Note: if you have a problem that requires treatment, you may be swaying more towards Restatement §15 rather than §16 (drug and alcohol addictions can be considered forms of mental illness).
Defects in the Bargaining Process
Acts or omissions by one party which seriously dis
ake over the income producing capacity of the property but since in the contract, the buyer assumed the risk of loss by accepting an “as is” clause, so court found for D.
Mutual Mistake Test
Unilateral Mistake Test
Voidable if:
Voidable if:
1. basic assumption
2. material affect
3. injured party doesn’t bear the risk
1. basic assumption
2. material affect
3. injured party doesn’t bear the risk
4. unconscionable, OR caused by another party’s fault
Assumption of Risk
General rule = buyer assumes the risk of purchase.
Beachcomber = parties must be aware of possibility of mistake in order to assume the risk
OneBeacon America Insurance Co. v. Travelers Indemnity Co. of Illinois
Traveler’s sought recovery under a motor vehicle liability policy that OneBeacon had issued to LAI. Traveler’s settled a personal injury suit on behalf of Capform, which had leased the vehicle from LAI. OneBeacon admitted that its policy with LAI could be read to extend coverage to Caform, but that this was not intended and sought reformation to reflect this. Court found OneBeacon met their burden to provide full, clear, and decisive proof of a contrary intent than what was expressed in the written contract (LAI and OneBeacon both agreed the insurance contract was not meant to cover Capform).
Reformation is an equitable remedy designed to reflect the intent of the parties.
Fraud and the Duty to Disclose
In cases where information is available to both parties equally = generally no duty to disclose information.
You can’t mislead someone (especially in negotiation stage)
You can rely on information that only you are privy to, but you cannot speak mistruths
