Chapter 13
CAPACITY AND GENUINE ASSENT
RESTATEMENT
Even when the parties have offer and acceptance, their formed contract may not be valid if their assent to the
terms was tainted by issues of capacity, voluntariness or a lack of full information. The law affords parties the
right to have an otherwise validly-formed agreement set aside when one side is able to establish one or more of
the defenses to the requirement that the agreement to contract is genuinely valid. The defenses to formation
include the lack of capacity, mistake as to the contract subject matter, deceit or withholding of information in
negotiations, and pressure of certain degrees during negotiations.
If these defenses are present, then the party who fell victim to these forms of misconduct during formation can
obtain remedies for the misconduct. Those remedies can include damages, rescission of the contract or
reformation of the contract terms.
STUDENT LEARNING OUTCOMES
LO.1: Define contractual capacity.
LO.2: Explain the extent and effect of avoidance of a contract by a minor.
LO.3: Distinguish unilateral mistakes and mutual mistakes.
LO.4: Explain the difference between intentional misrepresentation, negligent misrepresentation, and puffery.
LO.5: Explain the difference between undue influence and duress.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What are the problem areas in determining whether the parties to a contract have genuinely agreed to be
bound by its terms? (LO.1 and LO.2)
2. What are the types of mistakes and are they defenses to contract formation? (LO.3)
3. What are the types of misrepresentations that constitute defenses to contract formation? (LO.4)
4. What are the forms of pressure that preclude validity of a contract? (LO.5)
CHAPTER OUTLINE
I. What are the Problem Areas in Determining Whether the Parties to a Contract Have Genuinely Agreed to be
Bound by its Terms? (See Figure 13-1)
A. Contractual Capacity
1. Ability to understand binding nature of contracts and the nature of the present contract
2. Status incapacity – largely disappearing
3. Factual incapacity
a. Because of mental or physical condition
b. May be due to illness, drugs, alcohol or age
CASE BRIEF: Peddy v. Montgomery
345 So. 2d 988 (Ala. 1991)
FACTS: An Alabama statute provided that a married woman could not sell her land without the consent
of her husband. Montgomery made a contract to sell land she owned to Peddy. Montgomery’s
husband did not consent to the sale. Montgomery did not perform the contract and was sued
by Peddy. The defense was raised that the contract was void and could not be enforced
because of the statute. Peddy claimed that the statute was unconstitutional.
ISSUE: Was the statute unconstitutional?
REASONING: Constitutions, both federal and state, guarantee all persons the equal protection of the law.
Married women are denied this equal protection when they are treated differently than married
men and unmarried females. The fact that such unequal treatment had once been regarded as
proper does not justify its modern continuation.
4. Minors
a. Who is a minor? – generally under age 18; common law age was 21
b. Minor’s power to avoid contracts
i. Minor’s decision
Have your students discuss how to solve the following problem:
Kelly, age fourteen, pays $9 for a compact disc. Kelly takes the disc home, plays it
several times, and realizes that she doesn’t like the music. Kelly takes it back to
the store and asks the owner to refund the purchase price, as it was a contract
Minors are everywhere, with money to spend. How do stores handle situations in which it is
questionable whether the article purchased is a necessity? Answer: The store could refuse
to sell the article or insist on an adult’s signature.
iv. Time for avoidance – during majority or a reasonable time after majority
c. Restitution by minor after avoidance
i. Original consideration intact – minor must return
d. Recovery of property by minor on avoidance
i. Resale by original buyer
e. Contracts for necessaries
i. What constitutes necessaries – because the decision of whether an item is a necessity
depends on the financial and social status, or station in life, of the minor. Have your
ii. Contract with parent or guardian – parent or guardian is liable
f. Ratification of former minor’s voidable contract
i. Ratification is showing an intent to be bound by the contract
CASE BRIEF: Schmidt v. Prince George’s Hospital
784 A. 2d 1112 (Md. 2001)
FACTS: In March of 1997, 16-year-old Michelle Schmidt was injured in an automobile accident and
brought to Prince George’s Hospital. Though her identity and that of her parents were originally
unknown, the hospital provided her with emergency medical care for a brain concussion and
open scalp wound. After her discharge, she had incurred hospital expenses of $1,756.24. Ms.
Schmidt was insured through her father’s insurance company. The insurance company issued a
check to be used to cover medical expenses. However, the funds were not used to pay the
hospital, and were used instead to purchase a car for Ms. Schmidt. After Ms. Schmidt attained
her eighteenth birthday and failed to pay the hospital, it brought suit against her. Ms. Schmidt
defended the suit claiming she was under the disability of minority when she entered into the
implied promise to pay the hospital for the needed medical treatment. The trial court found for
the hospital, and Ms. Schmidt appealed.
ISSUE: Can a child be held contractually liable for necessary medical expenses when the parent is
unable or unwilling to pay?
HOLDING: Yes. The prevailing modem rule is that a minor’s contracts are voidable, except for
necessaries. The doctrine of necessaries states that a minor may be held liable for
necessaries, including medical necessaries, which he or she is afforded when his or her parents
REASONING: The court emphasized a public policy rationale. A hospital may sue a third party tortfeasor for
expenses incurred by a minor whose parents are either unwilling or unable to pay, therefore, the
court reasoned that a child upon attaining adulthood should be responsible for medical
necessaries provided him if his parents are unwilling or unable to pay. The dissenting judges
stress that petitioner’s father was only unwilling to pay the hospital, not unable. The dissent
reasons that such unwillingness by the parents should not render the child liable.
DISCUSSION POINTS: Have the students discuss contracts for necessities involving minors using the Schmidt
v. Prince George’s Hospital case.
g. Contracts that minors cannot avoid
i. Educational loan
ii. Medical care
h. Liability of third person for minor’s contract
i. Liability of parent if parent authorizes
ii. Liability of cosigner
Emphasize that it is in the best interest of an adult or a merchant dealing with a minor to
get an adult into the contract with the minor. Before entering into the contract, the adult or
5. Mentally incompetent persons
a. Effect of incompetency: ordinarily may avoid contract
b. Appointment of guardian
i. Ratification by the guardian of a prior contract
CASE BRIEF: Wilcox Manufacturing, Inc. v. Marketing Services of Indiana, Inc.
832 N.E. 2d 559 (Ind. App. 2005)
FACTS: Wilcox Manufacturing Group, Inc. did business under the name of Superior Automation Co., and
Howard Wilcox served as president of Superior. As part of a loan “Lease Agreement” of $50,000
executed on December 5, 2000, Superior was to repay Marketing Services of Indiana (MSI)
$67,213,80 over the course of sixty months. Wilcox gave a personal guarantee for full and
prompt payment. Wilcox had been a patient of psychiatrist Dr. Shaun Wood since May 21, 1999
and was diagnosed as suffering from bipolar disorder during the period from June 2000 to
January 2001. On June 9, 2000, Wilcox told Dr. Wood he was having problems functioning at
work, and Dr. Wood determined that Wilcox was experiencing lithium toxicity which lasted for
some ten months, during which time he suffered from impaired cognitive functions that limited
his capacity to understand the nature and quality of his actions and judgments. Superior made
monthly payments through to October 28, 2003, and the balance owed at that time was
$33,031.37. MSI sued Wilcox personally and the corporation for breach of contract. The
defendants raise the defense of lack of capacity and contend that they are not liable on the
loan signed by the corporate president when he was incapacitated.
ISSUE: Did Wilcox lack contractual capacity at the time the contract was formed?
REASONING: The acts or deeds of a person of unsound mind whose condition has not been judicially
ascertained and who is not under guardianship are voidable and not absolutely void. The acts
are subject to ratification or disaffirmance on removal of the disability. The latest Wilcox could
have been experiencing the effects of lithium toxicity was October 2001. Wilcox thus regained
his capacity by that date. No attempt was made to disaffirm the contract. Rather, monthly
payments continued to be made for a year and one-half before the payments ceased. The
contract was thus ratified by the conduct of the president of Superior after he recovered his
ability to understand the nature of the contract.
6. Intoxicated persons
Create a hypothetical case involving intoxication or use of controlled substances and the ability to
disaffirm the contract. For example, an individual gets so intoxicated one evening that it isn’t until
the next day that the individual discovers he sold his car to another patron in the bar the evening
before. The question now is whether that individual can avoid the contract with the patron in the bar
for the purchase and sale of the car. It becomes a very interesting question if intoxication removed
II. What are the Types of Mistakes and are They Defenses to Contract Formation?
A. Mistake
1. Unilateral mistake
a. Normally does not affect the contract
2. Mutual mistake
a. Agreement is void if both parties make the same mistake of fact
b. Mistake as to expectations
i. Unless part of the contract, it has no effect on the contract
ii. Mutual mistake of a material fact will allow parties to rescind a contract. Ask the students
CASE BRIEF: Shurgard Storage Centers v. Lipton-U City, LLC
394 F. 3d 1041 (8th Cir. 2005)
FACTS: Lipton-U City, LLC (Lipton) and Shurgard Storage Centers discussed the sale of a self-storage
facility for approximately $7 million. Lipton became concerned about an existing environmental
condition, and as a result the parties agreed to a lease with an option to buy rather than an
outright sale. The contract specified a ten-year lease with an annual rent starting at $636,000
based on a property valuation of $7 million. Section 2.4 of the contract contained the purchase
option. Shurgard representatives circulated an e-mail with a copy to Lipton representatives that
a purchase option price would be based on six months of annualized net operating income.
When the lease was submitted to Lipton, inexplicably any language regarding multiplying by two
or annualizing the net income was omitted. Donn Lipton announced to his attorneys that the
lease reflected his successful negotiation of a purchase option based on six months of
unannualized net operating income. Eight months after signing the lease Lipton sought to
exercise the purchase option under Section 2.4 and stated a price of $2,918,103. Shurgard
rejected the offer and filed suit for rescission citing the misunderstanding about the price terms.
ISSUE: Did Shurgard have a right to rescind the contract under the law of mistake?
REASONING: Under state law, if a material mistake made by one party is known to the other party or is of
such a character or circumstances that the other party should know of it, the mistaken party has
a right to rescission. Lipton knew or should have known of the mistake of the lessor (Shurgard)
in believing that the purchase price would be based on a full year of net operating income rather
than six months of net operating income. Mr. Lipton was notified by e-mail that the six-month
figure was to be annualized, and knew that the property was valued at approximately $7 million.
DISCUSSION POINTS: Have the students discuss unilateral mistakes and their effects on contracts using the
Shurgard Storage Centers v. Lipton-U City, LLC case.
c. Mistake of law; generally, not a defense; a binding contract exists
d. Mistake in transcription or printing of contract
i. Reform is possible (by court)
III. What are the Types of Misrepresentations That Constitute Defenses to Contract Formation?
A. Deception
1. Fraud
a. Statement of opinion or value
i. Ordinarily not fraud
ii. Superior knowledge may constitute fraud. Use the “business will make a profit” example in
iii. Use examples to see whether the students can distinguish between statements of fact and
statements of opinion. Also, emphasize when statements of opinion can be actionable
CASE BRIEF: Cansinos v. Bank of America
169 Cal. Rptr. 3d 619 (Cal. App. 2014)
FACTS: In approximately July 2005 a loan broker and an appraiser working for a subsidiary of
Bank of America appraised the Cansinos home at a fair market value of $620,000. Based on
that appraisal and other representations by lending personnel, the Cansinos elected to
refinance their home with a $496,000 adjustable rate mortgage. Lending personal told them
their home would appreciate and they would be able to sell or refinance the home at a later
date before having to make higher monthly loan payments. In 2010, the Cansinos discovered
that their home was valued between $350,000 and $400,000. Soon thereafter they stopped
making payments on the 2005 loan. As of March 2012, the monthly payments were
approximately $1,960, the balance due on the loan was approximately $626,000, and the fair
market value of the home was approximately $350,000. The trial court dismissed the Cansinos
fraud action against B of A, and they appealed.
ISSUES: Did B of A make an actionable misrepresentation of fact about the future valuation of the home?
Did B of A fraudulently assess the home in 2005?
REASONING: Concerning B of A’s representation on the future appreciation of the Cansinos’ home, such
statements or predictions regarding future events are deemed to be mere opinions which are
not actionable. Any financial market forecast must be regarded not as a fact, but as prediction
or speculation. While the Cansinos state the home was valued between $350,000 and $400,000
in 2010, this does not support their claim that the 2005 appraisal of $620,000 was a
misrepresentation.
b. Reliance on statement and issues in inspection before contracting
CASE BRIEF: Novare Group, Inc. v. Sarif
718 S.E. 2d 304 (Ga. 2011)
FACTS: Sarif and seven other purchasers of condominiums brought an action against
developer and broker alleging fraud and negligent misrepresentation, based on statements
made by the defendants that their views would not be blocked by later development. The
defendants contend that the purchasers were estopped from relying on representation directly
contradicted by clear and explicit terms of a written agreement.
ISSUE: Were the purchasers estopped from relying on representation directly contradicted by
clear and specific terms of a written agreement?
REASONING: Justifiable reliance is an expected element of fraud and negligent misrepresentation claims.
There can be no justifiable reliance in the face of clear and explicit contradictory terms in the
agreement.
AUTHOR’S NOTE: Ultimately, we must convince our students that due diligence mandates that all material
representations inducing a major purchase, be it business or personal, be part of the
parties’ written agreement. And, again remind our students who may work as developers
and brokers that establishing a reputation for ethical conduct leads to commercial success
and personal peace in one’s life.
c. Proof of harm
2. Nondisclosure or silence as misrepresentation
a. General rule of nonliability for failure to disclose
CASE BRIEF: Puget Sound Service Corp. v. Dalarna Management Corp.
752 P. 2d 1353 (Wash. App. 1988)
FACTS: Dalarna Management Corp. owned a building constructed on a pier on a lake. There were
repeated difficulties with rainwater leaking into the building, and water damage was visible in
the interior of the building. Dalarna made a contract to sell the building to Curran. Curran
made several inspections of the building and had the building inspected two times by a licensed
engineer. The engineer reported that there were signs of water leaks. Curran assigned his
contract to Puget Sound Service Corp., which then purchased the building from Dalarna. Puget
Sound spent approximately $118,000 attempting to stop the leaks. Puget Sound then sued
Dalarna for damages, claiming that Dalarna’s failure to disclose the extent of the water leakage
problem constituted fraud.
ISSUE: Is the failure to disclose fraud?
REASONING: Judgment for Dalarna. Curran was aware that there was a water leakage problem, and
therefore the burden was on the buyer to ask questions to determine the extent of the problem.
There was no duty on the seller to volunteer the extent of the water damage merely because it
had been a continuing problem that was more than just a simple leak. This conclusion was
reached by the court because the law “balances the harshness of the former rule of caveat
emptor (let the buyer beware) with the equally undesirable alternative of courts standing in loco
parentis (in the place of a parent) to parties transacting business.”
b. Exceptions
i. Unknown defect or condition – point out that there is apparently a trend toward requiring a
person who knows of a material defect or condition to disclose that information to the other
person under certain circumstances. Ask the students whether they would require
ii. Confidential relationship – if so, there is a duty to reveal anything material to the other
party’s interest
iii. Fine print: many states have statutes mandating disclosure
iv. Active concealment constitutes fraud
IV. What are the Forms of Pressure That Preclude Validity of a Contract?
A. Pressure
1. Undue Influence
a. Confidential relationships presume undue influence
2. Duress
a. Physical duress
Review the basic elements of physical duress and the reason behind letting a person out of a
contract entered into as a result of physical duress. Use the following hypothetical case to
illustrate the problems in determining what is duress:
Obviously, a gun to the head and a threat of death would be duress in entering into a
contract, but what about a threat to shoot a party’s cat if the person did not sign the
contract; cut down a pine tree in the person’s front yard; cut down an oak tree in the
CASE BRIEF: Fisher v. Schefers
656 N.W. 2d 592 (Minn. App. 2003)
FACTS: John Lentner owned the farm adjacent to the Schefers. He moved off the farm to a
nursing home in 1999. In the fall of 2000, Kristine Schefers visited Lentner at the nursing home
some fifteen times, engaging in small talk and watching him play cards. In the spring of 2001,
Lentner agreed to sell his farm to Kristine and her husband, Thomas, for $50,000 plus $10,000
for machinery and tools. Kristine drove Lentner to the bank to get the deed from his safe
deposit box. She also took him to the abstractor who drafted the transfer documents. Soon
after the sale, Earl Fisher was appointed special conservator of Lentner. Fisher sought to set
aside the transaction asserting that Kristine unduly influenced Lentner.
ISSUE: Did Kristine’s repeated visits to the nursing home and her failure to involve Lentner’s
other family members in the transaction unduly influence Lentner?
HOLDING: No. Although the actions of Kristine may be unseemly, they do not rise to the level of
REASONING: Undue influence is shown when the person making the contract ceased to act of his own free
volition and became a mere puppet of the wielder of that influence. Mere speculation alone that
Lentner was a “puppet” acting according to the wishes of Schefers is insufficient to set aside the
sale. Undue influence was therefore not established.
DISCUSSION POINTS: Have the students discuss how undue influence can affect the validity of a contract
using the Fisher v. Schefers case.
b. Economic duress
i. Driving a hard bargain is not economic duress
ii. Threatening non-performance on one contract to gain another is duress
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Mental state necessary to constitute fraud. Yes. The salesperson making the statement that there were no
prior wrecks did not know whether that statement was true or false. Nevertheless, the salesperson made the
2. Avoidance of minor’s contract after damage to consideration; effect of misrepresentation of age. Yes. In a
state that follows the common law rule, neither the damage to the property nor Helen ’s misrepresentation of
3. Nondisclosure; fraudulent concealment; fraud. The initial fact pattern does not fit any of the exceptions to the
general rule of nonliability for non-disclosure. There was no serious defect unlikely to be discovered by
Paden and no “active concealment” nondisclosure. Rather the sales contract called for Paden to examine
Were Mr. Murray to have stated the home had a concrete foundation prior to the sale when the foundation
was actually made of wood, such may not have amounted to fraud even though such a statement was a
material misstatement of fact. A key element of fraud is “reliance”, and such may have been missing in this
4. Duress. While the take-it-or-leave-it may have been an adhesion contract, it is not necessarily duress if
5. Contracts that minors cannot avoid. Bell could avoid his contract of employment and free himself from the
obligation of working for Pankas. This right is given to the minor to protect him. However, the minor should
6. What constitutes economic duress. No. Aldrich had a right to insist on execution of the note to protect his
claim. The fact that Donovan felt compelled to sign the note was a result of Donovan ’s own financial
7. Fraud; negligent misrepresentation. A fraud theory may be pursued based on the material misstatement of
fact that the card was authentic, reliance, and harm. However, there may be difficulty proving the element of
knowledge of the falsity; [that] Strek knew the card had been refinished and trimmed. Lack of proof of this
element would defeat the fraud theory. The negligent misrepresentation theory should apply based on a
8. Fraud. The Tschiras’ relied on Willingham’s statement that he would obtain an investment property at a “fair
market price”. The fair market price was $774,000 as determined by the price paid by Willingham on the
initial purchase; as well as the actual dollar value of the title insurance placed on the sale to the Tschiras.
9. Duress. Agreements such as these between departing employers and employees have come under
increasing scrutiny. The agreements will be struck down unless: (a) employee given sufficient time to
10. What constitutes a false statement. Yes. The statement that the roof had been repaired would suggest to the
ordinary person that the repairs had been successful. This conclusion was reinforced by the statement that
the roof was “in good condition.” The net result was that what was said and what was not said had the effect
Authors’ Comment: You can change the facts to show active concealment by the sellers. Ask the students
whether the sellers would have had to disclose the history of the leaky roof if it had been raining when Sippy
had looked at the house and the leaky roof had been visible. What would happen if the leaky roof had been
11. Fraud: statement of opinion or value. The court held that the first half of the sentence in question was formed
as a mere opinion as to future events, and thus non-actionable; and as to the characterization of its
12. Unilateral mistake. Because Office Supply’s mistake was unilateral, the contract for the 100 machines in
enforceable. If, however, a regular Compuserve salesperson called on Office Supply and knew of Office
13. Mistake in printing of contract: reformation. Based on the clear and convincing evidence of a practice of
following the contractual pattern set by the large printer and Sullivan’s assent to again follow the pattern, a
court or arbitrator will reform the contract.
14. Liability for nondisclosure. Judgment for contractor. An owner is liable for not informing the contractor of
unusual difficulties known to the owner that the contractor will encounter in the performance of a contract
when such difficulties are not known to the contractor. Because the city knew that the contractor would base
15. Elements of fraud. Judgment for Westby. All of the elements of fraud are present in this case. Gorsuch
misrepresented the material fact of the general value of the ticket as “worth nothing” and “couldn’t fetch
$500” and the album as “worth nothing.” These representations were false. He intended that Westby rely on
LAWFLIX
Matilda (1996) (PG)
A brilliant little girl with a strong moral compass who tries to instruct her family on many things erudite and her
Jerry Maguire (1996) (R)
Have the students review the film for the marriage proposal, its validity and Dorothy’s later statement, “I did this.
Have the students discuss Maguire’s state of mind at the time of the proposal. Have them consider its possible
Also, review with the students the issues of contracts for marriage.
Shakespeare in Love (1999) (R)
Have the students view the first few moments of the film to see feet placed in hot coals as a means of securing a
management system for classroom use.