Chapter 15 - Voidable Contracts: Capacity and Consent

Puffery

"High-Quality", "Expert Workmanship", and "You're in good hands with us" are examples of what?

necessary

A ______________________ is something essential to a minor's life and welfare (i.e. food, clothing, housing, and medical care)

Mutual Mistake

A _________________________________ occurs when both contracting parties share the same mistake. If the contract is based on a fundamental factual error by both parties, the contract is voidable by either one.

Before she reaches 18 years of age and within a reasonable time after turning 18.

A minor may disaffirm a contract anytime before when?

Disaffirm

A minor who wishes to escape from a contract generally may _________________ it; that is, to notify the other party that he refuses to be bound by the agreement.

ratifies

A minor's right to disaffirm a contract ends if he ___________________ the contract.

Voidable

A party suffering a mental impairment usually creates only a ___________________ contract.

mental impairment

A person suffers from a __________________________________ if, by reason of mental illness or defect, he is unable to understand the nature and consequences of the transaction.

Puffery

A statement is _____________________ when a reasonable person would realize that it is a sales pitch, representing the exaggerated opinion of the seller.

Duress (i.e. holding a gun to someone's head)

An improper threat made to force another party to enter into a contract against their will

Minor

Because a ______________ lacks legal capacity, she normally can create only a voidable contract.

Yes, but he is liable for whatever benefit he obtained from the goods while he had them.

Can a minor disaffirm a contract for necessaries and return whatever is unused?

voidable ; binding

Contracts entered into between a minor and an adult are _____________________ by the minor and ____________________ on the adult.

Yes

Does a mentally impaired person have the right to disaffirm a contract, just as a minor can?

A void contract is illegal from the beginning and may not be enforced by either party, while a voidable contract is legal but permits one party to escape, if they wish to do so.

Explain the difference between a void and voidable contract.

The injured party must demonstrate that the statement was material or important. A minor misstatement does not meet this element of fraud. A way to determine this is asking whether the misstatement was likely to influence the decision of the mislead party significantly? If yes, it was material.

Explain the second element of proving fraud: materiality.

In most states, the minor is still entitled to receive all of his money back, A minority of states follow the "status quo rule", which provides that, if a minor cannot return the consideration, the adult or store is only required to return its profit margin to the minor.

How do states deal with restitution if a minor is not able to return the consideration back to the other party because they no longer have it or it has been destroyed?

1. Of course, if there had already been a judicial determination that he was insane, any contract signed would be void. 2. Next, the court will listen to doctors/therapists who have evaluated him and to anyone else who can testify about the party's mental health 3. The court may also look at the contract itself, to see if it is so lopsided that no competent person would agree to it.

How does a court evaluate the mental status of a party to determine if a contract is valid or not?

Most states allow rescission of a contract, but not damages.

How is innocent misrepresentation dealt with?

Depends on state (some states will permit the child to still disaffirm the contract entirely while other states will prohibit the child from disaffirming the contracting upon deceit)

If a minor lies about his age to receive some good or service, can he disaffirm the contract later on and still receive the consideration back?

adjudicated incompetent (a judge has made a formal finding that a person is mentally incompetent and has assigned the person a guardian by court order)

If a person has been __________________________________________, then all of his future agreements are void.

alternative

If one party makes an improper threat that causes the victim to enter into a contract, and the victim had no reasonable ______________________, the contract is voidable.

1. Acts that have no legitimate business purpose 2. Greatly unequal bargaining power 3. An unnaturally large gain for one party 4. Financial distress to one party

In analyzing a claim of economic duress, courts will look at these 4 factors:

Mistake of Fact

Incorrect understanding of a contracts terms at the time the contract is entered

1. Are for necessities 2. Are set by statutes

Minors cannot avoid what 2 contract?

Yes

Must a mentally infirm party who seeks to void a contract make restitution?

Yes, to the extend he is able.

Must a minor who disaffirms a contract return the consideration received back to the other party?

1) Where disclosure is necessary to correct a previous assertion (a party who learns new information indicating that a previous statement is inaccurate must disclose the bad news) 2) Where disclosure would correct a basic mistaken assumption that the other party is relying on (a seller must generally report any latent defect he knows about that the buyer should not be expected to discover himself) 3) Where disclosure would correct the other party's mistaken understanding about a writing 4) Where there is a relationship of trust between the two parties (when one party naturally expects openness and honestly based on a close relationship, the other party must act accordingly)

Nondisclosure of a fact amounts to misrepresentation in these four cases:

Unilateral Mistake

Occurs when only one party enters a contract under a mistaken assumption (the other party is not mistaken)

necessaries

On a contract for _______________________, a minor must pay for the value of the benefit received.

voidable

One who is so intoxicated as not to understand the nature and significance of his promise may be held to have made only a ____________________ promise IF the other party had reason to know of the intoxication (was obvious. If intoxication was not so obvious, the intoxicated party was still likely cognitive of what was happening and the contract will be binding on both parties)

Innocent Misrepresentation

Party making the untruthful representation believed it to be true (all other elements of fraud are present). Results in Rescission, but no damages.

Negligent Misrepresentation

Party making the untruthful representation may have believed it to be true, but a reasonable person in that party's position would have known otherwise. Results in rescission and possibly damages.

Voidable

Problems with capacity or consent make a contract __________________; meaning one party have the option either to enforce or terminate the agreement.

Fraudulent/intentional misrepresentation

Purposely misleading another party. Results in rescission and possible damages

Restitution

Restoring an injured party to its original position

True

T/F: Courts are highly skeptical of intoxication arguments for contracts.

True

T/F: Courts don't like voluntary intoxication cases, but are more likely to accept lack of capacity as a defense if the intoxication is involuntarily (someone was drugged, prescription medication reaction, etc.)

False, they do NOT amount to fraud

T/F: Opinions and "puffery" do amount to fraud.

Fraud

The UCC permits a party to rescind a contract and then sue for damages when _________________ is committed.

Capacity

The legal ability of a party to enter a contract in the first place

"nature of the agreement"

To back out of contract on the grounds of intoxication, you must be able to provide evidence that you did not understand the "______________________________________________________" or the basic deal that you made.

Rescind

To cancel a contract

1. The non-mistaken party knew or had reason to know of the error; or 2. The mistake is mathematical or mechanical alone (clerical error of some sort); or 3. Enforcing the contract would be unconscionable (resulting in exploitation or unfairness)

To rescind a contract for unilateral mistake, the mistaken party must demonstrate that he entered the contract because of a basic factual error and that: (3 things)

1. A relationship between the two parties either of trust or of domination 2. Improper persuasion by the stronger party

What are the 2 elements of undue influence that an injured party must prove?

1. The defendant knew that his statement was false, or that he made the statement recklessly and without knowledge of whether it was false 2. The false statement was material 3. The injured party justifiably relied on the statement

What are the 3 elements that an injured person must show to prove Fraud?

1. Innocent misrepresentation 2. Negligent Misrepresentation 3. Fraudulent/Intentional Misrepresentation

What are the 3 types of misrepresentations?

1. Fraud 2. Mistake 3. Duress 4. Undue Influence

What are the 4 claims that parties make in an effort to rescind a contract based on lack of valid consent?

Injured party generally has the choice of: 1. Rescinding the contract 2. Suing for damages (typically the difference between what the injured party got and what was promised); 3. In some cases, doing both. This option is available in all states when a contract is for the sale of goods (The UCC)

What are the Plaintiff's remedy options in the case for fraud?

If restitution is impossible, the court will not rescind the agreement unless the infirm (impaired) party can show bad faith by the other party. (This is because, unlike minorities, which is generally easy to establish, mental competence may not be as apparent to the other party negotiating)

What if restitution is impossible for a mentally impaired party disaffirming their contract?

When the parties are mistaken as to the identity of the contract's subject matter, the contract is voidable. (ownership, what the actual product is, etc.)

What is a common mutual mistake that is important enough to warrant rescission?

1. Minors 2. Those with mental impairment

What two groups of people usually lack legal capacity?

Voidable Contract

When a contract is voidable, the injured party may choose to terminate it.

No, they should not have justified relying on those fact if it was very evident the person selling was lying. However, a party to a contract has no obligation to investigate the other party's factual statements if they are not blatantly staring the injured party right in the face.

When proving the third element of fraud - justifiable reliance - if the injured party had physically seen the danger done on the good prior to entering a contract, are they able to rescind the contract?

1. Prediction Error (error must be factual, not based on a prediction) 2. Mistake of Value (if both parties are unaware of the value, unfortunately the buyer will reap the benefit) 3. Conscious Uncertainty (where the parties assume the risk of error and realizes there is uncertainty about the quality of the thing being exchanged)

When using the defense of mistake, Courts will not rescind contracts on the basis of what three things?

Undue Influence

Where a party in a dominant position interferes with a subservient party's ability to make their own decision.

Consent

Whether a contracting party truly understood the terms of the contract and whether she made the agreement voluntarily

Because they must prove that the non-mistaken party knew and that the parties had not assumed the risk of error

Why are cases involving a unilateral mistake around the basis of knowledge of error difficult for plaintiffs (the one who was unfairly taken advantage of) difficult to win?

Ratification

Words or actions indicating an intention to be bound by a contract.

Fraud

_________________ begins when a party to a contract represents something that is factually wrong