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Calvin had been an avid coin collector for many years, and the most valuable coin in his collection was an uncirculated, mint condition, 1943 Lincoln penny made of copper (most pennies made during World War II were made of zinc because copper was needed in the war effort). That penny had a value of between $60,000 and $95,000.
In August of 2017, Calvin had a serious stroke that left him unable to speak or walk, but his doctor assured his family that Calvin would recover over time with intensive therapy.
Calvin was a widower and did not have any children, but he had several nephews who visited him from time to time as he recovered. None of the nephews had any real interest in Calvin’s coin collection. One of Calvin’s nephews, Billy, who visited Calvin more often than the other nephews, sometimes listened to Calvin talk (talking was a part of Calvin’s therapy) about his mounting medical bills and his coin collection, but Billy never showed much interest in the medical bills or the coin collection.
In October, as Calvin’s recovery progressed slowly, Billy visited Calvin and told Calvin that he had been reading about coin collecting, and he realized that Calvin’s collection, especially the 1943 Lincoln copper penny, was valuable, and Billy suggested that Calvin should consider selling the 1943 Lincoln copper penny and use the proceeds to pay his medical bills. Calvin resisted the idea at first, but Billy continued to urge Calvin to sell the penny so that he would not have to worry about the medical bills. Finally, when Billy told Calvin that he would arrange the sale of the penny for a commission of just 5% of the sale price of the penny, Calvin began to think that selling the coin might be a good idea. He was still a little confused about how the sale would work and what Billy would do to make sure that the penny would be sold for the best price. Calvin told Billy that he thought that the penny was worth almost $100,000, but Billy assured Calvin that the market had changed recently, and that the penny was now worth $40,000 to $45,000. Eventually, Calvin allowed Billy to sell the penny for the best price he could get and to take a 5% commission for arranging the sale of the penny. Billy then sold the penny to a friend for $40,000, took his 5% commission, and paid the remainder of the sale price to Calvin.
A few months later, as Calvin continued to recover, he read a story in a coin collecting magazine about how an uncirculated, mint condition, 1943 Lincoln penny made of copper had just sold at auction for more than $100,000, and Calvin began to wonder if Billy had taken advantage of him. Calvin consulted a lawyer and asked the two questions below.
Did he (Calvin) have the mental capacity to enter into the contract when he agreed to let Billy sell the penny? What would he (Calvin) have to prove to show a court that he did not have the necessary mental capacity when he authorized Billy to sell the penny?
Did Billy exert undue influence over Calvin to cause Calvin to enter into the contract that allowed Billy to sell the penny?
UNIT IV STUDY GUIDE
Contracts: Capacity, Legality, and Assent
Course Learning Outcomes for Unit IV
Upon completion of this unit, students should be able to:
4. Describe the circumstances that can affect the enforceability of contracts.
4.1 Explain how the enforceability of a contract can be affected by capacity.
4.2 Recognize how undue influence may affect the enforceability of contracts.
Course/Unit
Learning Outcomes
4.1
4.2
Learning Activity
Unit Lesson
Chapter 11
Unit IV Case Study
Unit Lesson
Chapter 12
Unit IV Case Study
Required Unit Resources
Chapter 11: Capacity and Legality
Chapter 12: Reality of Assent
Unit Lesson
In Unit III, we began a discussion of contracts in general and the first two elements necessary to create a
contract (i.e., agreement and consideration). In this unit, we will look into the other two elements necessary to
create a contract (i.e., capacity and legality) and consider how assent, a genuine intent to enter into a
contract, can determine whether a contract that has all of the required elements can be enforced.
Capacity
In the context of contracts, capacity or contractual capacity refers to the mental ability to understand the
obligations that are imposed on a party to the contract. It seems logical that if a person does not have the
ability to understand what a contract requires, they really should not be required to perform obligations that
they did not know they had assumed. It is important to note, though, that contractual capacity focuses on the
inability to understand contractual obligations, not whether a party actually understands the contractual
obligations they have assumed. For example, if a party just signs a contract without reading it and, therefore,
does not know some of the obligations in the contract, a court will usually not allow that party to cancel the
contract because that is not an inability to understand the obligation in the contract; rather, it is not taking the
opportunity to understand the obligations assumed in the contract.
Questions about contractual capacity fall into one of three categories: minority (in the context of contracts—
someone who is under the age of 18), mental capacity, and intoxication. All of these categories question the
ability of a person to understand their contractual obligations, but each category is founded on a different
reason for the lack of capacity.
BUS 3301, Business Law
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Minority
UNIT x STUDY GUIDE
Title
It is assumed that until a person reaches a certain age, they do not have the experience and understanding to
really appreciate the obligations that they are assuming in a contract. Most states have determined, usually
arbitrarily, that a person is a minor and, therefore, not an experienced and understanding adult until they
reach the age of 18. As a result, the first category in the topic of contractual capacity is minority, being a
person who has not reached the age of majority in the state where they reside (usually 18) and who cannot
make a valid contract. Actually, that is not quite what the law says. The laws say that a person who has not
yet reached the age of majority can make a contract but—except for specific cases—can disaffirm or cancel
that contract. Of course, saying that a minor can enter into a contract but then have the option to cancel the
contract raises further issues. How does a minor cancel a contract? When can a minor cancel a contract?
What happens if a minor makes a contract and then does not cancel the contract? What happens to whatever
the contract was about if the minor cancels the contract?
As might be expected, all of these questions have already arisen and been addressed. A minor can cancel a
contract by notifying the other party to the contract that they are cancelling the contract or by doing any act
that indicates to a reasonable person that they are canceling the contract. A minor can cancel a contract any
time before they reach the age of majority and within a reasonable time after they reach the age of majority. If
a minor makes a contract and continues to perform the obligations under the contract after they reach the age
of majority, then they have ratified the contract, and they remain bound by the terms of the contract.
If a minor cancels a contract, the answer to the question of what happens to whatever the contract was about
is not so clear. Traditionally, the answer was that when the minor canceled the contract, all obligations of all
parties to the contract were canceled, and whatever the contract was about was left where it was when the
contract was canceled. That approach led to an unfair result. For example, a minor buys a car and agrees to
pay the purchase price of the car in monthly payments of $250 for 20 months. The minor takes possession of
the car, makes the required payments for 5 months, and then cancels the contract. That could leave the car in
the possession of the minor and the seller with no car and less money than expected. Therefore, most state
laws provide that if a minor cancels a contract because they are a minor, both parties to the contract must be
put back in the position they were in just before the contract was made. In the previous example, when the
minor canceled the contract, they would have been required to return the car to the seller. When the minor
cancels the contract, the 5 months worth of payments is considered a charge for the use of the car; therefore,
the seller would not have to refund those payments. In most cases, if the car had been damaged, the minor
would also be required to pay the seller for the damage.
Mental Capacity
The second category that considers contractual capacity looks at a party’s actual mental capacity. Does a
party have any condition that deprives them of the mental capacity to understand the obligations that were
assumed when the contract was made? This can be a difficult inquiry because the mental capacity that is
being considered is the mental capacity of the person at the time the contract was made, not the day before
the contract was made or the day after the contract was made. That means that the person’s lack of capacity
does not have to be permanent or long-term; it can be the result of a one-time episode that affects mental
ability or a temporary condition that results in a lack of mental capacity for a period of time.
The easiest case of lack of mental capacity is when a person has been determined by a court to lack mental
capacity, and a guardian for that person has been appointed by the court. In that case, the person who has
been determined to lack mental capacity simply cannot make a contract, and if they do make a contract, that
contract is void, despite what the other party to the contract may or may not have known.
If a person has not been determined to lack mental capacity but actually does lack contractual capacity at the
time the contract was made, the contract is voidable at the election of the person who lacked mental capacity
when the contract was made. That kind of case turns on the ability of the person who claims lack of mental
capacity to convince a court that they did lack mental capacity when the contract was made.
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Intoxication
UNIT x STUDY GUIDE
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The third category that questions contractual capacity is intoxication. If a person is so intoxicated at the time
they make a contract that they could not understand the contractual obligations that they were assuming, they
have the option of voiding the contract. It does not matter how they became intoxicated or what substance
caused them to be intoxicated. If they can convince a court that because of their intoxication they could not
understand the obligations they were assuming when the contract was made, the court will allow them to
cancel the contract.
Legality
The last element of a contract is legality; the object of the contract must be something that is legal and that
does not contravene public policy. It is usually fairly easy to determine if the object of a contract is legal.
Contracts that require the violation of a law are not valid. Likewise, contracts that result in a violation of public
policy are also not valid. It can, however, be more difficult to identify a violation of public policy than to identify
a violation of the law since determining what a public policy prohibits is not always clear. An example of an
agreement that might violate public policy is a contract that prevents someone from carrying on a profession.
Sometimes, when a professional sells their business to someone, the contract for the sale of that business
prohibits the seller from opening a similar business and competing with the buyer of the business. These
contracts are called covenants not to compete, but there are no laws that prohibit such agreements. However,
courts have said that covenants not to compete are valid contracts only if the restrictions on competition are
reasonable as to the length of time the restriction on competition is effective and the geographical area where
the restriction is effective. For example, if a certified public accountant (CPA) sells her accounting practice to
someone, and the sale contract prohibits the selling CPA from ever practicing as a CPA anywhere in the
United States, a court would say that those restrictions are unreasonable and unenforceable even if the
selling CPA agreed to them because the restrictions would prevent that CPA from ever practicing in the
United States.
Assent
Assent is not strictly an element of a contract, but lack of assent can be a reason that a court will not enforce
a contract that includes all of the elements necessary to create a contract. Assent means that the parties to a
contract have knowingly and voluntarily agreed to the terms of the contract and that there is a meeting of the
minds of the parties to the contract.
Questions of whether the parties to the contract assented to the terms of the contract arise in four situations:
if mistakes were made in what the parties thought the contract was about, if one of the parties misrepresented
to the other party what the contract was about, if either of the parties took unfair advantage of the other
party by exercising some influence over the party, and if either of the parties forced the other party to agree to
the contract.
Mistake
Even in a simple contract, the parties to the contract can have a miscommunication, which results in one or
both of the parties being mistaken about the subject or terms of the contract. Generally, a mistake by one
party to the contract, a unilateral mistake, is not enough for a court to void the contract. If there has been a
mistake by both parties to the contract, a mutual mistake, about the subject or material terms of the
contract, a court will invalidate the contract on the theory that if the parties have not really agreed, then there
is not contract.
For example, Bill owns two cars, a Ford and Chevrolet. The cars have similar values. Steve knows that Bill
owns the two cars. Bill offers to sell a car to Steve for $5,000 without specifying which car, but he is intending
to sell the Ford. Steve accepts Bill’s offer, assuming that Bill is offering to sell the Chevrolet, which is the car
Steve wants to buy. Since Bill and Steve think different cars are the subject of the contract, there has been a
mutual mistake, and either Bill or Steve can ask a court to cancel the contract.
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Misrepresentation
UNIT x STUDY GUIDE
Title
If one of the parties to a contract has misrepresented something about the subject of the contract or an
important term of the contract, whether that misrepresentation will result in a court voiding the contract
depends on a few considerations. First, did the party who made the misrepresentation intend that the other
party would act on the misrepresentation and enter into the contract? Second, was the misrepresentation
material—did it involve an aspect of the agreement that would make a difference about whether the other
party would enter into to the contract? If the misrepresentation was material and intentional, a court will
invalidate the contract.
Undue Influence
If one party to a contract has a special relationship with the other party to the contract and uses that special
relationship to induce the other person to enter into the contract, and the contract takes advantage of the
other person, that is defined as duress, and a court will invalidate the contract.
Duress
Finally, if one party to a contract forces the other party, either by physical threats or even economic threats, to
enter into a contract, that is defined as duress, and a court will invalidate the contract.
In determining if a contract is enforceable, the first question is whether the elements of a contract (i.e.,
agreement, consideration, capacity, and legality) are satisfied. If those elements are satisfied, there is a
contract. Even if a contract exists, the question of whether it is enforceable can arise if there is an issue with
assent. If the assent indicated by the parties to the contract is genuine assent, then the contract is
enforceable. If the assent was induced by something like duress or misrepresentation, then the contract is not
real. If the assent to the contract was not real, even if the elements of a contract are present, a court may not
enforce the contract.
Suggested Unit Resources
In order to access the following resource, click the link below.
The following reading was required in Unit III. It might be a good idea to review this reading in this unit as it
will help you with this unit’s assignment as well. This article discusses concerns of fairness as consumers are
constantly made to sign consumer contracts that are long and confusing to non-legal experts.
Benoliel, U., & Becher, S. I. (2019). The duty to read the unreadable. Boston College Law Review, 60(8),
2255–2296.
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=asn&AN=140349133&site=ehost-live&scope=site
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Learning Activities (Nongraded)
UNIT x STUDY GUIDE
Title
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
View the Unit IV Glossary to review key terms presented in
this unit.
Alternate format for Unit IV Glossary
(Photogl, n.d.)
Reference
Photogl. (n.d.). Books on library shelves (ID 20785201) [Photograph]. Dreamstime.
https://www.dreamstime.com/stock-image-books-library-shelves-image20785201
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