Select Page

Contracts II
University of Mississippi School of Law
Case, David W.

Chapter 7- Avoiding Enforcement (Defenses)

Minority and Mental Incapacity (Doctrine of Incapacity)

–          affirmative Cause of Action
–          defense if get sued
–          exception to the idea that the law doesn’t care about unequal bargaining
o   age
o   mental incapacity

Dodson and Shrader
–          16 yr. old π
–          paid $4900 cash for truck
–          wants to rescind the K
o   rescission of K = means put the parties back to where they were before the K was entered into
–          ∆ main objection: can’t return the parties back to their positions, π blew the engine up, vehicle is devalued
o   value of truck at decision: $500
–          Legal rule/Infancy Doctrine:
o   Old rule:
§ if for benefit of minor = good K
§ otherwise = voidable at election of minor
o   Majority and Modern rule:
§ Minor has the right to void a K even if can’t return the adult contracting party to previous state (minor in K = VOIDABLE K, NECESSARILY VOID)
§ Once the minor reaches the age of majority, he has the right to ratify the K
o   If ratify, incapacity goes away (bound by K)
§ If do not disaffirm within a reasonable time after reaching the age of majority, lose the right to disaffirm
·         No disaffirm, do nothing for enough time = ratification
·         Disaffirm within reasonable time = voided the K
o   Minority/Dodson rule:
§ When 1) no overreaching 2) no undue influence 3) K is fair and reasonable 4) minor actually paid $ on purchase price 5) taken and used item
·         à minor can only recover amount $ paid MINUS compensation for use, depreciation, and willful/negligent damage to item
§ OR when 1) fraud or imposition on the part of the seller (OR)
§ K is unfair (OR)
§ Unfair advantage taken of minor to induce purchase
·         à rule doesn’t apply

–          Policy Justification for Infancy doctrine:
o   Worried about minors being taken advantage of by crafty adults
o   Overlooksà crafty teenagers
o   BUT would be difficult to test subjectively if we should protect the particular minor
o   A disadvantage to minors b/c adults might not want to enter into K with minors
o   How are the adults getting badly mistreated? Can’t put the parties back in the positions they were in before the K
o   Almost gives minors a right to incur unjust enrichment/retribution without having to pay
§ Dodson court shows a trend to give the adult a remedy
–          Two options/rules:
o   Benefit rule: minor can recover the full purchase price MINUS the value of the benefit received (minus Value of USE not value of property)
o   Use rule: minor’s recovery of the full purchase price is subject to a deduction for the minor’s use of the consideration he or she received under the contract or for the depreciation or deterioration of the consideration in his or her possession (original value of property minus depreciated value of property)
–          Note 1:
o   The Dodson approach is an application of the minority rule. Seems more fair. BUT the majority allows the minor to void the K even if can’t put the other party back in position before K.
Hauer v. Union State Bank of Wautoma
–          has a loan K but coming in asking for recission
o   wants $30,000 for mutual funds that the bank is holding as collateral for the loan
§ she lives off the proceeds from the mutual fund
§ the man found out from her daughter about her funds
§ she agreed to take out the loan and give it to him
§ use the Cognitive test
o   Competency must be determined on the day she entered into the K
§ Do not care about mental capacity before that or now
§ If there was evidence that the jury could have decided either way, there is nothing for the appeal to do
§ She met her burden of proof that she was under a mental defect, the bank has a problem because they say they didn’t know
·         She gets her collateral back BUT the bank CAN’T get back her loan proceeds
·         Goes to §15, 2) 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
·         The bank’s problem: Shrader called the bank, they warned him not to use her mutual fund as collateral, Shrader mentioned to them that she had a mental defect, the bank KNEW OR SHOULD HAVE KNOWN that she had a mental defectà the bank did NOT act in good faith, lack of good faith = bank can’t void her power of avoidance

–          Rule for Mental Incapacity
o   § 15 of Restatement
§ 1a) Cognitive Test: unable to understand in a reasonable manner the nature and consequences of the transaction OR
§ 1b) Volitional Test: 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 K Is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection1) terminates to the extent that the K 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 3:
o   The difficulties of determining mental competency
o   A person lacks capacity to contract if the person is unable to act in a reasonable manner in the transaction and the other party has reas

Totem would have no choice but to accept a lower amount rather than face bankruptcy
–          No reasonable alternative left to Totem?
o   Legal remedy would have taken too long, immediate and irreparable loss would have resulted
o   Ability to procur what they needed from somewhere else was not available because they needed cash

Was it Alyeska’s fault that Totem was in dire financial straits?
–          argument that it was Totem’s fault: they did not have much capital, not very well run, over-extended themselves
–          argument that it was Alyeska’s fault: part of the reason that Totem was in this situation was the debts incurred for the Alyeska contract, Alyeska was deceptive and problematic at every turn, Alyeska created the situations that put Totem in those hardships
Note 4: Note 6:


1/25/10

Undue Influence
Odorizzi v. Bloomfield School District

Claims:
Duress
Fraud
Mistake
Undue Influence
Court dismisses all except Undue Influence

What are the elements to dismiss the case based on Undue Influence?

1)    Lessened capacity
a.      Undue susceptibility to pressure
b.     Lessened capacity might be due to exhaustion, emotional turmoil, physical, age
2)    Application of excessive pressure by someone in a dominant position over someone in a servient position
a.      Just because someone is gifted with extraordinary powers of persuasion
3)    The Odorizzi case treats this as a balancing test: might have less lessened capacity w/ MORE excessive pressure by someone in a dominant position

Markers of Over-persuasion from the Odorizzi case
1)    discussion of the transaction at an unusual or inappropriate time
a.       apply to this case/in context: come to his house IMMEDIATELY after released from jail, moving very fast, no time to catch his breath from jail
2)    consummation of the transaction in an unusual place
a.       to this case: the school officials came to his house
3)    insistent demand that the business be finished at once
a.      if he didn’t resign at once they would suspend him, make it impossible for him to get another job, if it doesn’t happen NOW- bad things will happen