Pace University New York Business Law Worksheet

Capacity andGenuine Assent
Contractual Capacity
1 Contractual Capacity (1 of 12)
1a Contractual Capacity Defined
− Ability to understand that a contract is being made and its general meaning
− The person does not need to understand its full legal meaning
− Status Incapacity: minors do not have the legal capacity to contract
− Factual Incapacity: mental incompetence due to drugs, alcohol, illness or
age
1 Contractual Capacity (2 of 12)
1b Minors
− Who is a minor? Anyone under 18
− Minor’s Power to Avoid Contracts: with certain exceptions, contracts are
voidable at the election of the minor
− What Constitutes Avoidance? Minor may disaffirm by any expression or act
inconsistent with the continuing validity of the contract
1 Contractual Capacity (3 of 12)
1b Minors (continued)
− Time for Avoidance: may disaffirm during minority and for a time after
attaining majority; after that, a contact is deemed ratified and cannot be
avoided
− Minor’s Misrepresentation of Age: generally does not affect power to
disaffirm
1 Contractual Capacity (4 of 12)
1b Minors (continued)
− Restitution by Minor After Avoidance
▪
Original Consideration Intact; minor must return what was received or offer to do so
(restore the status quo ante)
▪
Original Consideration Damaged or Destroyed; minor can still disaffirm and return
what remains
1 Contractual Capacity (5 of 12)
1b Minors (continued)
− Recovery of Property by Minor on Avoidance
▪
Other party must return money and property received from the minor
▪
If property was sold, minor receives money
1 Contractual Capacity (6 of 12)
1b Minors (continued)
− Contracts for Necessaries
▪
Minors can disaffirm contract but must pay for furnished necessities
▪
What Constitutes Necessaries? Things needed for sustenance of human life (includes
health, education and comfort)
▪
Liability of Parent or Guardian: parents are liable for medical care, but child can be
held responsible if parents do not pay
1 Contractual Capacity (7 of 12)
1b Minors (continued)
− Ratification of Former Minor’s Voidable Contract
▪
A former minor cannot disaffirm a contract that has been ratified after reaching
majority
▪
What Constitutes Ratification? Any words or conduct manifesting an intent to be
bound
▪
Form of Ratification: written, in some states
▪
Time for Ratification: only after obtaining majority
1 Contractual Capacity (8 of 12)
1b Minors (continued)
− Contracts That Minors Cannot Avoid
▪
Statutes in many states do not allow a minor to avoid educational loans & several
types of contracts including those related to medical care, business, legal duties, bank
accounts, insurance, and stocks
1 Contractual Capacity (9 of 12)
1b Minors (continued)
− Liability of a Third Person for a Minor’s Contract
▪
Liability of Parent: ordinarily parents are not liable but may be if the child is acting as
the parent’s agent
▪
Liability of Cosigner: the cosigner is bound independently of the minor
1 Contractual Capacity (10 of 12)
1c Mentally Incompetent Persons
− Effect of Incompetency
▪
May generally avoid a contract in the same way as a minor
▪
Upon becoming competent, the contract can either be ratified or disaffirmed
▪
Current trend is to treat contracts as binding when terms are reasonable and the
person is unable to restore the other party to status quo ante
1 Contractual Capacity (11 of 12)
1c Mentally Incompetent Persons (continued)
− Appointment of Guardian
▪
If a guardian has been appointed, a contract made by the incompetent person preappointment may be ratified or perhaps disaffirmed by the guardian
▪
After the appointment, a contract made is void, not merely voidable
1 Contractual Capacity (12 of 12)
1d Intoxicated Persons
− If the degree of intoxication is such that the person does not understand
that a contract is being made, the contract is voidable by the intoxicated
person for a reasonable period of time
Mistake
2 Mistake (1 of 2)
2a Unilateral Mistake
− A mistake that is unknown to other party doesn’t affect the contract
− The party that made the mistake may avoid a contract if the other party
knew or should have known about the mistake
2b Mutual Mistake
− The adversely affected party may void the contract
2 Mistake (2 of 2)
2c Mistake in the Transcription or Printing of the Contract:
Reformation
− If parties make an oral agreement, and there are mistakes in the typing of
the written agreement, the aggrieved party may petition a judge to reform
the contract based on the true intent of the parties
Deception
3 Deception (1 of 5)
3a Intentional Misrepresentation
− Where a party is induced into making a contract, the element of assent is
missing
3b Fraud
− Material misrepresentation of fact with (1) knowledge of falsity or reckless
indifference to truth (2) intent that listener relied on it, (3) listener does rely,
and (4) as a result the listener is harmed
3 Deception (2 of 5)
3b Fraud (continued)
− Statement of Opinion or Value
▪
Not regarded as fraudulent unless the speaker knows of facts that make the opinion
false
▪
Assertions of present facts that are not true can be fraudulent
3 Deception (3 of 5)
3b Fraud (continued)
− Justifiable Reliance on Statement
▪
Fraudulent statements have no importance unless the other person relies on them;
when statements are so extravagant that reasonable persons would not rely on them,
fraud cannot be asserted
▪
Purchasers cannot assert reliance on statements that contradict terms of the written
contract
3 Deception (4 of 5)
3b Fraud (continued)
− Proof of Harm: the injured party must prove harm in order to recover
damages
3c Negligent Misrepresentation
− Similar to fraud except it is based on a negligently made false statement
− Contract is voidable by innocent party
3 Deception (5 of 5)
3d Nondisclosure
− General Rule of Nonliability: there is no legal duty to volunteer information
to the other party
− Exceptions
▪
Unknown defect or condition
▪
Confidential relationship
▪
Active concealment
Pressure
4 Pressure (1 of 2)
4a Undue Influence
− Influence asserted upon a person by someone who dominates that person
− Assumed by law when the dominating person obtains any benefit from a
contract with the dominated person
4 Pressure (2 of 2)
4b Duress
− Physical Duress: when a person makes a contract to avoid harm due to
violence or the threat of violence; the agreement is voidable at the victim’s
election
− Economic Duress: when one is induced by a wrongful act or threat of
another to make a contract that deprives one of the exercise of his/her own
free will
Summary
Now that the lesson has ended, you should have learned how to:
• Define contractual capacity.
• Explain the extent and effect of avoidance of a contract by a minor.
• Distinguish unilateral mistakes and mutual mistakes.
• Explain the difference between intentional misrepresentation, negligent
misrepresentation, and puffery.
• Explain the difference between undue influence and duress.
Consideration
General Principles
1 General Principles (1 of 4)
1a Consideration Defined and Explained
− Bargained-for Exchange
▪
Consideration is what each party gives up in making an agreement
▪
Something of value must be given or promised in return for the performance of
promise of another
− Benefit-Detriment Approach
▪
A benefit received by the promisor or detriment incurred by the promisee
1 General Principles (2 of 4)
1b Gifts
− Promises to make a gift are unenforceable because they lack
consideration
− Charitable subscriptions are binding to the extent the donor reasonably
should have known the charity was relying on the promise
− Love and affection are not consideration for a contract
1 General Principles (3 of 4)
1c Adequacy of Consideration
− Courts do not ordinarily consider the adequacy of consideration given as it
is up to parties to decide if each is getting a fair return
− The fact that the consideration is disappointing does not affect the binding
character of the contract
1 General Principles (4 of 4)
1d Forbearance as Consideration
− Refraining from an act can be consideration
1e Illusory Promises
− If a promise is no obligation or apparent obligation, the contract fails
▪
Cancellation Provisions: does not make the promise illusory
▪
Conditional Promise: depends on the occurrence of a specified condition to be valid
Special Situations
2 Special Situations (1 of 4)
2a Preexisting Legal Obligation
− Avoidance Promising (or refraining) to do what has already been agreed to
is not legal consideration
− Completion of Contract: promises in the first contract are not binding
▪
Good Faith Adjustment: enforceable with the original contract in extraordinary
circumstances
▪
Contract for Sales of Goods: modifications in good faith are binding
2 Special Situations (2 of 4)
2a Preexisting Legal Obligation (continued)
− Compromise and Release of Claims: a promise to pay part is not
consideration for a promise to discharge the balance
− Part-Payment Checks: when a good faith dispute about the amount exists
and a debtor tenders a check saying “paid in full,” cashing the check
discharges the debt
2 Special Situations (3 of 4)
2a Preexisting Legal Obligation (continued)
− Composition of Creditors: group of creditors agree to accept partial
payment in full settlement of debt
2 Special Situations (4 of 4)
2b Past Consideration
− Past consideration is no consideration
2c Moral Obligation
− Promises based upon moral obligation are not enforceable
Exceptions to the Laws of
Consideration
3 Exceptions to the Laws of Consideration
3a Exceptions to Consideration
− Charitable Subscriptions: reliance on a pledge in undertaking a project is a
substitute for consideration
− Uniform Commercial Code: abolishes the requirement of consideration in
some cases
− Promissory Estoppel: if reliance and detriment, promisor is prevented from
claiming promise is unenforceable
Summary
Now that the lesson has ended, you should have learned how to:
• Explain what constitutes consideration.
• Distinguish between a “preexisting legal obligation” and “past
consideration”.
• Explain why promises based on moral obligations lack consideration.
• List the exceptions to the requirement of consideration.
• Explain the “fundamental idea” underlying promissory estoppel.