CH 5: Avoidance of K’s
1. Capacity to contract
2. Defects in Bargaining Agreement
Unilateral and Mutual Mistake
Fraud and the Duty to Disclose
Duress and Undue Influence
1. THE CAPACITY TO CONTRACT
The law generally assumes that all person have the capacity to contract. The two exceptions to this rule are minors and mentally incompetent adults.
A. Mental Incompetents
With regards to incompetents, Incapacity can be invoked even where there was no deception or illegitimate pressure in the formation of the K and it is on fair terms.
B. Mental Incapacity
The mental incapacity of a major is based purely on his subjective attributes.
Mental incompetence is determined AT THE TIME OF CONTRACTING.
The burden lies on the allegedly incompetent party to prove incompetence, and the courts presumption (when dealing with a major) is in favor of capacity.
Usually courts use a balancing test…if the court finds some disturbance in the mind of the party seeking avoidance, it may conclude that the resulting disability is outweighed by the injustice of upsetting a fair k entered into in good faith by the other party.
Heights Realty v. Phillips
-Elderly lady agreed to sell her house with a realty company. The realty company said she was competent and they should be able to recover the amount. Her competency is what is in dispute.
-They consider physical condition, adequacy of consideration, etc. to see if there was a fair deal and also to determine competency.
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… 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 a justice requires.
Intoxication: Incapacity caused by intoxication is viewed less sympathetically. However, courts are aware of the compulsive nature of alcoholism and drug abuse. Furthermore, that degree of inebriation is usually obvious enough to be apparent to the other party, so a strong inference can be drawn that he deliberately took advantage of it. Therefore, despite moral problems the court might have with it, courts do generally permit avoidance on the grounds of incapacity if the level of intox. Is sufficient to deprive him of understanding, and the other party has reason to know this.
Before the age of major the minor does not have the legal capacity to be bound in k, and the k is voidable at the minor’s instance (meaning that the minor may disaffirm it at any time before reaching the age of majority, or within a reasonable time thereafter).
If the minor has not disaffirmed the k by the time that he reaches the age of majority, he may ratify it as a major
Ct. says it is mistake but today is probably would not be considered as such.)
INCORRECT PREDICITION OF FUTURE EVENTS IS NOT A MISTAKE
Fundamental Differences btw. Unilateral and mutual mistakes:
1. Mutual- a mistake is only mutual if it relates to a factual assumption so shared by the parties, that is a joint premise of their bargain.
2. Unilateral- a mistake is unilateral if one party know the true facts and the other does not, but also where both parties may be unaware of the truth, yet the fact in issue affects the decision of only one of the parties and is of no interest or relevance to the other. In other words, although neither party knows the truth, the erroneous fact is a basic assumption of only one of the parties because the other is neutral on it. Ex: A buys land from B, who claims to own it. A hires C to build a house on it. C begins work only to later find out that B did not actually have title to the land. This is not a mutual mistake even though both A and C thought B owned the land. It is unilateral because C does not care who owns it really, he is just building the house…A is the only one it affects.