Business Law Chapter on Genuine Assent and Contractual Capacity

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 16:
Genuine Assent and
Contractual Capacity

S-2
Learning Objectives
• Describe the nature of assent.
• Differentiate between a bilateral and
unilateral mistake.
• Recognize the types of
misrepresentations.
• Discuss the lack of voluntary consent.
• Understand the types of incapacity.

S-3
16.0 In the News
Parents’ Lawsuit Against Apple for In-App
Purchases by Minor Children Moves Forward
http://bvtlab.com/h8Kw7
Parents of minor children argued that Apple’s
practice of distributing free apps was misleading
because minor children could purchase “game
currency” through the app for a short duration after
the parents had logged in.
• Does this constitute a voidable contract? Explain

S-4
16.1a Nature of Assent
• Contracts can be avoided where there is
a mistake when the contract is formed.
• Law provides remedy when a party
misrepresents an important aspect of a
contract.
• Categories where the nature of the
assent is not voluntary:
– Undue influence
– Duress
– Adhesion contract

S-5
16.2a Definitions of Mistake
• Unintended act, omission, or error
• A court may grant relief if the mistake
shows no real or genuine assent.
– The mistake must be a material one.
• Relief granted
– Contract reformation
– Contract avoidance
– General rule-courts may grant relief for
bilateral mistake of material fact.

S-6
16.2b &16.2c Bilateral and Unilateral Mistake
Bilateral mistake
• All parties must have the same mistake.
• Relief when there is a material effect on
exchange.
Unilateral mistake
• Mistake or error by only one party
• Affords no relief to that party
• Exceptions:
- Mistake unconscionable
- Error is apparent to the other party
- Significant mathematical error

S-7
16.2c Critical Thinking (Slide 1 of 2)
Case: Amerisourcebergen
Plaintiff sells pharmaceutical products; defendant is a
retail pharmacy. Plaintiff and defendant were parties to a
Primer Vendor Agreement, which defendant thought
contained a termination for cause provision, which was
omitted from the document.
Defendant notified plaintiff of its intent to terminate the
PVA, and Plaintiff sued for breach of contract. Defendant
offered, as a defense, unilateral mistake, of which
Plaintiff should have been aware of the termination
provision.

S-8
16.2c Critical Thinking (Slide 2 of 2)
• Why did the court fail to grant relief for the
alleged unilateral mistake?
• Why did the fact that Kohll was an astute
member of the business community matter to
the Court? What if Kohll had not been
sophisticated in the ways of business and
had instead been a recent university
graduate with a degree in religious studies
working on his first deal?

S-9
16.3a Types of Misrepresentation (Slide 1 of 2)
Intentional (fraud)
• Victim allowed to file suit for dollar
damages, including punitive.
Negligent (lack of due care)
• Victim can recover contract damages
Unintentional
• No recovery of damages

S-10
Elements of actionable fraud (intentional
misrepresentation)
• Scienter, or intention to mislead, which
means knowledge of the falsity
• A false representation or the concealment
of a material fact
• Justifiable reliance on the false statement or
concealment
• Damages as a consequence of the reliance
16.3a Types of Misrepresentation (Slide 2 of 2)

S-11
16.3c Critical Thinking
Case: Vokes
A dance studio did not disclose the truth about the
plaintiff’s ability to achieve greater progress,
illustrating misrepresentation where one party had
superior knowledge.
• Should Vokes be protected by the law from her
decisions to enter into numerous contracts for dance
lessons? Why or why not?
• When do actions of a businessperson move beyond
legal puffing to unacceptable misrepresentation?
• When does opinion become fact under the law of
fraud?

S-12
16.4 Lack of Voluntary Consent
Undue Influence
• One person overpowers the will of another
by use of moral, social, domestic force.
Duress
• Threat to his/her person, family, or property
• Economic pressure may constitute duress.
Adhesion Contracts and Unconscionability
• Printed form presented to a party possessing
considerably less bargaining power
• Conduct that shocks the conscience

S-13
16.5a Types of Incapacity
Incapacity refers to the mental state of a
party to a contract.
• Minors
• Mental incompetents
• Intoxicated persons
• Drug addicts

S-14
16.5b Minors’ Contracts
• Age of majority and capacity to
contract lowered to 18-years-old in
most states.
• Minors have the right to avoid
contracts.
• A contract between a minor and an
adult is voidable only by the minor.

S-15
16.5c Avoiding Contracts by Minors
• Disaffirm a purely executory contract by
directly informing the adult
• Consideration must be returned to the
other party.
• Cannot disaffirm the contract and retain
the benefits at the same time
• Minor may avoid at any time during the
minority and for a reasonable period of
time after majority

S-16
16.5d Ratification
Applies to the approval of a voidable
transaction by one who had right to
disaffirm
• Conduct of a former minor after majority
• Ratified if the consideration is retained for an
unreasonable time after majority
• Eliminates the right to disaffirm

S-17
16.5e Liability for Necessaries
A minor’s liability is in quasi-contract.
• Liability is not for the contract price of
necessaries furnished but rather for the
reasonable value of the necessaries.
• There is no liability on executory contracts,
only for necessaries actually furnished.
General classifications of necessaries.
• Food, clothing, and lodging
• Medical services
• Education

S-18
16.5e Critical Thinking (Slide 1 of 2)
Case: Yale Diagnostic Radiology
Under the Doctrine of Necessaries, a minor is
responsible for contracts for necessaries. The
provider of medical care to this minor is entitled to
payment based on an implied at law contract.
While the parents have a primary duty to pay for
their child’s medical services, there is a secondary
contract created at law that obligates the child to
pay the reasonable value of the services if the
parents do not.

S-19
16.5e Critical Thinking (Slide 2 of 2)
• Is the result in the case fair to the
minor? Why?
• Would the logic of the opinion
expressed above apply to cases where
emergency medical care was not
involved? Why?

S-20
16.5f Third-Party Rights
• If a minor sells goods to an adult, the adult
obtains only a voidable title to the goods.
• Common law: Even a good-faith purchaser of
property formerly belonging to a minor could
not retain the property if the minor elected to
rescind.
• Under Code, the person with voidable title has
power to transfer a good title to a good-faith
purchaser for value.
• Common-law rule is still applicable to sales of
real property by minors.

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