I. AVOIDING Ks
a. Situations where Ks can be avoided:
i. Mental illness
ii. Infancy (18 in NY)
iii. Intoxication
iv. Misrepresentation (fraud)
v. Duress
vi. Unconscionability
b. Incapacity: (Capacity is determined at the time of making the agreement)
i. Contracts entered into by the following persons will be voidable:
1. Minors, Insane persons and intoxicated persons b/c they’re incapable of having the legal power to manifest assent or intend to be bound.
ii. Minors: the Ks of a minor are voidable at the option of the minor, although the minor may nevertheless enforce the K against the adult
1. Exceptions: (1) a K for the sale of necessaries (Minors are always liable for the R value of necessaries such as food, clothing and shelter). (2) If the minor affirms/ratifies the K when he reaches majority.
2. ***If a minor makes a contract then the minor may elect to void (voidable) unless it is a contract for necessaries = the minor may choose to disaffirm the contract but then he will have to provide restoration along with restitution.
3. Determination of a necessary from Bowling v Sperry: minor bought car and then found out that there was a problem with the car. He said fuck it and returned the car the Δ does not want to give the money back.
a. Issue: May a minor rescind a K for the purchase of a car which is not vital to his existence?
b. Holding: YES! The fact that the minor damaged the car is no defense to the suit. The court said that even if the minor did break the car, he does not have to fix the break. However, he has to restore the car
4. Restatement §14: If the infant disaffirms the K he has to return the consideration that he took from the other party. However, if the property is gone then the other party is without remedy in most states.
a. Remedies: Restoration is required but not necessarily at the status quo, unless it is a necessary and they would have to pay restitution for a reasonable amount to make up for the value lost.
5. Burden: is on the infant and the level is that the infant must show the birth certificate
6. Emanuel:
iii. Mental Incapacity:
1. A person is mentally incompetent if: Restatement §15
a. (a) he is unable to understand in a R manner the nature and consequences of the transaction OR
b. (b) he is unable to act in a R manner in relation to the transaction and the other party has reason to know of his condition
c. If the contract is made on fair terms and the other party has no clue about the illness the power of avoidance under the above section 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.
2. Burden: The court presumes that every person is competent. The only way they can void a contract is proving their burden by clear and convincing evidence that they are not competent
3. Tests for Incompetence:
a. Cognitive Test: Cognitive Test: whether a person is capable of understanding in a reasonable manner and the nature of what they are doing and also the effect/consequences of the actions(does not matter whether the other party knows what is going on)
b. Volitional Test: (determines whether a person can control her actions). Whether a party could control her acts AND the other party had reason to know of this, b/c if this she was deemed incompetent.
c. The court can look at certain factors to determine competency:
i. She had a physical condition that might cause mental capacity
ii. Before and after interactions when she made the contract (Whether or not the incapacitated party had a lucid interval)
iii. They will look at the day of the contract: the court will look to see if the incapacitated party had a lucid interval (good day).
iv. Terms of the contract: price – if she has a fair market value of the property; courts usually do not want to look at inadequacy of consideration but they will here. Inadequate consideration alone is not enough; it needs to be with some other incapacitation.
v. Relationship between the parties – if she is an easy victim, they knew each other for awhile (fiduciary relationship), has the trust been betrayed.
iv. Intoxication: voluntary intoxication can count as incapacity if the person did not understand in a R manner the nature and consequences of the transaction OR he is unable to act in a R manner in relation to the transaction. THE OTHER PARTY HAS TO HAVE REASON TO KNOW OF THE INTOXICATION
1. INTOXICATED MUST PROVE THAT HE WAS: 1) drugged up and that 2) the other guy knew about it or had reason to know about it
a. Behavior alone is sufficient to inform the other party
c. MISTAKE: a belief that is not in accordance with the facts (Under K law, there is NO difference between mistake of fact or mistake of law)
i. Mistakes have to do with existing fact not with predi
mutual mistake if:
1. Basic Assumption (central part of the bargain): The mistake must concern a basic assumption on which the K was made;
a. A major mistake as to the quality of the subject matter is a basic assumption
2. Material effect: the mistake must have a material effect on the agreed exchange of performances AND
3. Risk of mistake: the adversely-affected party must not bear the risk of the mistake
b. Neither party assumes the risk when both of them are mistaken about something
c. There are 3 ways to determine who bears the risk:
i. The risk is allocated by the agreement itself;
ii. Traders are aware of their limited knowledge about the item at issue but they treat the limited knowledge of being sufficient;
iii. The risk is allocated by the court on the grounds that it is R under the circumstances.
d. The negligent failure of a party to know or discover facts does not preclude rescission
e. ANALYSIS UNDER §152:
i. First we start with rule of law – mutual mistake has to be of a 1) basic assumption 2) relating to a material effect. Contract is voidable by adversely effected party as long as risk is not on that party
1. Was there a mistake?
2. If yes, was the mistake a basic assumption?
3. If yes, did both parties make the same basic erroneous assumption?
4. If yes, did the adverse party assume the risk of loss?
f. Rule from Sherwood: The mistake must go to the very nature/the essence of the K
g. If there is any doubt in either party’s mind there is no mutual mistake.
d. MISREPRESENTATION/FRAUD/DUTY TO DISCLOSE
i. Misrepresentation: is an assertion that is not in accord with the facts (can be intentional, N, or reckless. DOES NOT HAVE TO BE INTENTIONAL)
1. Must be a misrepresentation of fact and NOT opinion:
ii. 2 KINDS OF FRAUDS:
