Chapter 12 12/14/2013
Chapter 14 Capacity and GenuineAssent
1. Contractual Capacity Defined
a. Contractual capacity is the ability to understand that a contract is being made and to
understand its general meaning.
i. Aperson does not have to understand the full meaning of contract
ii. Everyone presumed capacity until proven lacking
b. Factual capacity contrasts with incapacity imposed because of the class or group to
which a person belongs.
a. At common law, any person, male or female under 18.
i. Originally 21 but reduced.
b. Contracts made by a minor are voidable at the election of the minor.
i. There are exceptions though
ii. The minor may affirm or ratify the contract on attaining majority, turning 18, by:
1. Performing the contract
2. Expressly approving the contract
3. Allowing a reasonable time to lapse without avoiding the contract
iii. Avoidance 1. Aminor may avoid or disaffirm a contract by any expression of an
intention to repudiate the contract.
2. Any act inconsistent with the continuing validating of the contract
iv. Time forAvoidance
1. Minor can disaffirm a contract only during minority and for a
reasonable time after attaining majority.
a. After the reasonable time, contract is deemed ratified and cannot
be avoided by minor.
c. When a minor disaffirms a contract, the question arises as to what the minor must return
to the other contracting party.
i. Original Consideration Intact
1. When a minor still has what was received form the other party, the
minor, on avoiding the contract, must return it to the other party or offer
to do so. (Status quo ante)
ii. Original Consideration Damaged or Destroyed
1. The minor can still disaffirm the contract, disregarding the condition of
what was received in contract, and is require to return only what remains.
2. Common law rule: minors can refuse to pay for what has been received
under contract or can get back what had been paid or given even though
they do not have anything to return or return property in a damaged
a. TREND TO LIMIT COMMON LAW
d. Aformer minor cannot disaffirm a contract that has been ratified after reaching majority. i. Ratification consists of any words or conduct of the former minor manifesting
an intent to be bound by the terms of contract made while a minor.
ii. Generally, no special form is required for ratification of a minor’s voidable
contract, although in some states a written ratification or declaration of intention
iii. Can only ratify a contract only after attaining majority.
1. Minor must have attained majority, or the ratification would itself be
regarded as voidable.
e. Minor does not have the right to avoid:
i. Educational loan
ii. Medical care
iii. Contract while running a business
iv. Contract approved by court
v. Contract made in performance of legal duty
vi. Contract relating to bank accounts
vii. Insurance policies
viii. Corporate stock
ix. Prof. Conway listed military service in study guide but not in book, I’m assuming
it falls under “legal duty” above
f. Whether parents are bound by the contract of their minor child or whether a person
cosigning a minor’s contract is bound if the contract is avoided. i. Liability of Parent
1. Ordinarily, a parent is not liable on a contract made by a minor child.
2. Parent may be liable if the child is acting as the agent of the parent in
making the contract.
3. If parent deserted child, parent liable for the reasonable value of
necessities supplied to child (kind of like child support I guess)
ii. Liability of Cosigner
1. Another person, parent or friend, may sign along with the minor to make
the contract more acceptable to the third person.
2. Cosigner is bound independently to the contract
a. If minor disaffirms contract, cosigner is still bound.
b. When the debt to the creditor is paid, obligation of cosigner is
c. If minor disaffirms, cosigner is liable for the unreturned goods’
3. Mentally Incompetent Persons
Person of mental disorder may be so disabled as to lack capacity to make a contract. An individual
seeking to avoid the consequences of a contract due to incompetency must demonstrate that at the
time the agreement was executed he or she was suffering from a mental illness or defect, which
rendered the party incapable of comprehending the nature of the transaction, or that by reason of
mental illness the party was unable to control his or her conduct.
a. An incompetent person may ordinarily avoid a contract same as minor. i. Upon becoming competent, the formerly incompetent person can ratify or
disaffirm the contract.
b. Court appointed guardians for incompetent person can ratify or, in some cases, disaffirm
contracts made prior to the assignment as guardian. If the incompetent person makes a
contract after assignment of guardian, the contract is void and not merely voidable.
4. Intoxicated Persons
a. Capacity of a party to contract and the validity of contract are not affected by the party’s
being impaired by alcohol at the time of making the contract as long as the party knew
that a contract was being made.
b. If the degree of intoxication is such that a person does not know that a contract is being
made, the contract is voidable by that person
i. Can rescind or avoid contract when sober
ii. An unreasonable delay since intoxicated may bar that right
c. Excessive intoxication is a viable defense to contracts arises between casinos and their
d. Impairment cause by the use of drugs the same as the impairment by the excessive use of
5. Unilateral Mistakes
a. Unilateral Mistake is a mistake by only one of the parties, not affecting the contract when
the mistake is unknown to the contracting party.
b. The party making the mistake may avoid the contract if the other contracting party knew
or should have known of the mistake. 6. Mutual Mistake
a. When both parties enter into a contract under a mutually mistaken understanding
concerning a basic assumption of fact or law on which the contract is made, the contract
is voidable by the adversely affected arty is the mistake has a material effect on the
b. Acontract on a mutual mistake in judgment is not voidable by the adversely affected
i. Mutual mistakes of fact can make a contract void.
a. Fraud is the making of a material misinterpretation (or false statement) of fact with:
i. Knowledge of its falsity or reckless indifference to its truth
ii. The intent that the listener rely on it
iii. The result that the listener does so rely
iv. The consequence that the listener is harmed
1. To prove fraud, there must be a material misrepresentation of fact. Such
misrepresentation is one that is likely to induce a reasonable person to
assent to a contract.
b. Ordinarily, matters of opinion of value or opinions about future events are not regarded as
fraudulent. i. The theory is that the person hearing the statement recognizes or should
recognize that it is merely the speaker’s personal opinion, not a statement of fact.
ii. Astatement that is merely sales talk cannot be the basis of fraud liability.
iii. Astatement of opinion may be fraudulent when the speaker knows of past or
present facts that make the opinion false.
c. Afraudulent statement made by one party has no importance unless the other party relies
on the statement’s truth.
i. If the alleged victim of fraud knew that the statements were false because the
truth was commonly known, the victim cannot rely on the false statement.
ii. Seller’s statements so “indefinite and extravagant” that reasonable persons would
not rely on them, the statement cannot be the basis of a claim of fraud.
iii. “Trusting the honesty of salespersons or their disarming statements, an individual
may knowingly agree in writing that no representation have been made to him or
her, while at the same time believing relying upon representation, which in fact
have been made and in fact are false, but for which the individual would not have
made the agreement” Super confusing…
1. Purchaser cannot assert justifiable reliance on statements made by sellers
that directly contradict clear and specific terms of their written contracts.
a. Novare Group. Inc. v. Sarif
d. For an individual to recover damages for fraud, proof of hard to that individual is
i. Injured party may recover the actual losses suffered as a result of the fraud as
well as punitive damages when the fraud is gross or oppressive. ii. The injured party has the right to have the court order the rescission or
cancellation of the contract that has been induced by fraud.
a. Ordinarily, a party to a contract has no duty to volunteer information to the other party.
i. The nondisclosure of information that is not asked for does not impose fraud
liability or impair the validity of a contract.
b. Exceptions to the general rule of nonliability for nondisclosure exist:
i. Active Concealment
1. Nondisclosure may be more than the passive failure to volunteer
2. Positive act of hiding information from the other party by physical
concealment, or if may consist of knowingly or recklessly furnishing the
wrong information. Such conduct constitutes fraud.
9. Undue Influence
a. The relationship may be such that for practical purposes, a person is helpless in the hands
of the other.
i. Parent to child, disabled person to nurse, client to an attorney
1. When such a confidential relation exists, it is apparent that the parent,
disabled person, and client in the situations are not exercising free will in
making a contract upon the suggestions of child, nurse, attorney but only
following the will of others. ii. Because of the great possibility of unfair advantage, the law presumes that the
dominating person exerts undue influence on the other person whenever the
dominating person obtains any benefit from a contract made with the dominating
2. May be set aside by the dominated person unless the dominating person
can prove that, at the time the contract was made, no unfair advantage
has been taken.
3. Based on a confidential relationship, which is not clearly defined
a. Juries decide
4. The “acting on free will” or not is a key determinant for undue influence
5. Courts are likely to take the attitude that the person who claims to be
dominated was persuaded not dominated, therefore no undue influence.
a. Physical duress
i. Aperson makes a contract under duress when there is such violence or threat of
violence that the person is deprived of free will and makes the contract to avoid
1. May be directed either at a near relative of the contracting party or
against the contracting party
2. Voidable at victim’s election ii. Agreements made to bring an end to mass disorder or violence are ordinarily not
binding contracts because they were obtained by duress.
iii. One may not void a contract on grounds of duress when only reluctant and
proves to be very disadvantageous to that individual.
b. Economic Duress
i. Economic duress is a condition in which one is induced by a wrongful act or
threat of another to make a contract under circumstances that deprives one of the
exercise of his own free will.
Chapter 15 Consideration
1. Consideration Defined and Explained
Consideration is what each party to a contract gives up to the other in making their agreement.
a. Consideration is the bargained-for exchange between the parties to a contract.
i. Something of value must be given or promised in return for the performance or
promise of performance of the other.
ii. Value given or promised can be:
4. Forbearance of legal right b. Some jurisdictions analyze consideration from the point of view of a benefit-detriment
approach, defining consideration as a benefit received by the promisor or a detriment
incurred by the promisee.
a. Promises to make a gift are unenforceable promises under the law of contracts because of
lack of consideration
b. Charitable subscriptions by which individuals make pledges to finance the construction
of a structure for charitable purposes are binding to the extent that the donor (the
promisor) should have reasonably realized that the charity was relying on the promise in
the undertaking the building program.
i. Some states require proof that the charity has relied on the subscription.
c. An agreement to give property for the consideration of love and affection does not
transfer the property to the donee nor secure for the donee a right to sue and to compel
the completion of the contract
i. Love and affection alone have not been recognized as consideration for a
d. Consideration is what distinguishes a contract from a gift
3. Adequacy of Consideration
a. Ordinarily, courts do not consider the adequacy of the consideration given for a promise.
b. Parties to decide whether each is getting a fair return
i. Courts will not interfere whether or not something is a fair return
c. Internal Revenue Service may view a given transaction as part consideration, part gift i. Gift tax
d. The fact that the consideration turns out to be disappointing does not affect the binding
character of the contract.
4. Forbearance as Consideration
a. Consideration may also consist of forbearance, which is refrained from doing an act that
an individual has a legal right to do, or it may consist of a promise of forbearance.
i. The promisor may desire to buy the inaction or a promise of inaction of the other
ii. The giving up of legal right can be consideration for the promise of the other
party to a contract.
b. Aconditional promise is a promise that depends on the occurrence of a specified
condition in order for the promise to be binding.
i. Prof. Conway says it is sufficient for a contract in study guide
5. Preexisting Legal Obligations
a. Ordinarily, doing or promising to do what one is already under legal obligation to do is
b. Similarly, a promise to refrain from doing what one has no legal right to do is not
i. Preexisting duties or obligations can be based on statute, on general principles of
law, on responsibilities of an office held, or on a preexisting contract.
6. Past Consideration a. Apromise based on a party’s past performance lacks consideration.
b. It is said that past consideration is no consideration.
c. The presence of a bargained-for exchange is not present when a promise is made in
exchange for a past benefit.
7. Moral Obligation
a. In most states, promises made to another based on “moral obligation” lacks consideration
and are not enforceable.
i. They are considered gratuitous promises and unenforceable.
Exceptions to the Laws of Consideration
8. Exceptions to Consideration
a. Where individuals made pledges to finance the construction of buildings for charitable
purposes, consideration is lacking according to technical standards applied in ordinary
i. For public policy reasons, the reliance of the charity on the pledge in undertaking
the project is deemed a substitute for consideration.
b. Under the doctrine of promissory estoppel, a promisor may be prevented from asserting
that his or her promise is unenforceable because the promise gave no consideration for
i. Doctrine of detrimental reliance
ii. Applicable when:
1. Promisor makes a promise that lacks consideration 2. Promisor intends or should reasonably expect that the promise will reply
on the promise
3. Promise in fact relies on the promise in some definite and substantial
4. Enforcement of the promise is the only way to avoid injustice
Chapter 18 Third Persons and Contracts
AThird-Party Beneficiary Contract
When a contract is intended to benefit a third person, such a person is an intended beneficiary and may
bring suit on and enforce a contract.
In some states, the right of the intended third-party beneficiary to sue on the contract is declared by
a. Creditor Beneficiary
i. The intended beneficiary is sometimes classified as a creditor beneficiary when
the promisee’s primary intent is to discharge a duty owed to the third party.
b. Donee Beneficiary
i. The second type of intended beneficiary is a donee beneficiary to whom the
promisee’s primary intent in contracting is to give a benefit.
ii. Life insurance
c. Necessity of Intent i. Athird person does not have the status of an intended third-party beneficiary
unless it is clear at the time the contract as formed that the parties intended to
impose a direct obligation with respect to the third person.
2. Modification or Termination of Intended Third-Party Beneficiary Contract
a. If the contract contains an express provision allowing a change of beneficiary or
cancellation of the contract without the consent of the intended third-party beneficiary,
the parties to the contract may destroy the rights of the intended beneficiary by acting in
accordance with that contract provision.
b. In addition, the rights of an intended third-party beneficiary are destroyed if the contract
is discharged or ended by operation of law
i. Bankruptcy proceedings
3. Limitations on Intended Third-Party Beneficiary
a. The intended third-party beneficiary must take the contract as is.
i. No more rights than the contract provides
b. If there is a time limitation or any other restriction in the contract, the intended
beneficiary cannot ignore it but is bound by it.
i. If the contract is not binding for any reason, that defense may be raised against
the intended third-party beneficiary suing on the contract.
4. Incidental Beneficiaries
a. Not everyone who benefits form the performance of a contract between other persons is
entitled to sue as a third-party beneficiary. b. If the benefit was intended, the third person is an intended beneficiary with the rights
described in the preceding sections
i. If the benefit was not intended, the third person is an incidental beneficiary.
c. Whether or not a third party is an intended or unintended beneficiary, therefore, comes
down to determining whether or not a reasonable person would believe that the promisee
intended to confer on the beneficiary an enforceable benefit under the contract in
i. The intent must be clear and definite or expressed in the contract itself or in the
circumstances surrounding the contract’s execution.
a. Contracts create rights and duties between the parties to the contract.
b. An assignment is a transfer or contractual rights to a third party
c. Obligor or debtor is the party owing a duty or debt under the contract and obligee is the
party to whom the obligation is owed
d. Assignor is the party making the assignment
e. Asignee is the thud party to whom the assignment is made
6. Form ofAssignment
a. Generally, an assignment may be in any form
i. Statues, however, may require that certain kinds of assignments be in writing or
be executed in a particular form. ii. Any words, whether written or spoken, that show an intention to transfer or
assign will be given the effect of assignment
b. No consideration is necessary (Prof. Conway put this in study guide but I didn’t find
this in the book)
7. Notice ofAssignment
a. An assignment, if otherwise valid, takes effect the moment it is made.
i. The assignee should give immediate notice of the assignment to the obligor,
setting forth the obligor’duty to the assignee, in order to prevent improper
b. If the obligor is notified in any manner that there has been as assignment and that any
money due must be paid to the assignee, the obligor’s obligation can be discharged only
by making payment to the assignee
i. If the obligor is not notified that there has been an assignment and that the
money due must be paid to the assignee, any payment made by the obligor to the
assignor reduces or cancels that portion of the debt
1. The only remedy for the assignee is to sue the assignor to recover the
payments that were made by the obligor
c. Uniform Consumer Credit Code (UCCC)
i. Protects consumer-debtors making payments to an assignor without knowledge
of the assignment and imposes a penalty for using a contract term that would
destroy this protection of consumers.
8. Nonassignable Rights
If the transfer of a right would materially affect or alter a duty or the right of the obligor, an assignment is
not permitted. a. Assignment Increasing Burden of Performance
i. When the assignment of a right would increase the burden of the obligor in
performing, an assignment is ordinarily not permitted.
b. Personal Services
i. Contracts for personal services are generally not assignable
1. Professional athletes and their agents commonly deal with assignment or
trading rights of the athletes in their contracts with professionals sport
ii. There is a split among jurisdictions regarding whether employee noncompetition
covenants are assignable to the new owner of a business absent employee consent
1. That is, some courts permit a successor employer to enforce an
employee’s noncompetition agreement as an assignee of the original
a. However, a majority of states that have considered this issue
concluded that restrictive covenants are personal in nature
and not assignable.
c. Credit Transaction
i. When a transaction is based on extending credit, the person to whom credit is
extended cannot assign any rights under the contract to another.
9. Liability of Assignee
It is necessary to distinguish between the question of whether the obligor can assert a particular defense
against the assignee and the question of whether any person can sue the assignee.
Ordinarily, the assignee is not subject to suit by virtue of the fact that the assignment has been made. a. Consumer Protection Liability ofAssignee
i. The assignee of the right to money may have no direct relationship to the original
debtor except with respect to receiving payments.
ii. Consumer protection laws in most states, however, may subject the assignee to
some liability for the assignor’s misconduct.
1. Jackson v. Dewitt
Chapter 19 Discharge of Contracts
Conditions Relating to Performance
The ordinary method of discharging obligations under a contract is by performance.
Certain promises may be less than absolute and instead come into effect only upon the occurrence of a
specified event, or an existing obligation may be extinguished when an event happens.
These are conditional promises.
1. Classification of Conditions
Condition is when the occurrence or nonoccurrence of an event, as expressed in a contract, affects the
duty of a party to the contract to perform
Terms such as: if, provided that, when, after, as soon as, subject to, and on the condition that
indicates the creation of a condition.
a. Condition Precedent
i. Acondition precedent is a condition that must occur before a party to a contract
has an obligation to perform under a contract.
b. Condition Subsequent i. The parties to a contract may agree that a part is obligated to perform a certain
act or pay a certain sum of money, but the contract contains a provision that
relieves the obligation on the occurrence of a certain event.
ii. That is, on the happening of a conditional subsequent, such an event
extinguishes the duty to thereafter perform.
1. Conditions subsequent are strictly construed, and where ambiguous, are
construed against forfeiture.
c. Concurrent Condition
i. Concurrent conditions is when their mutual duties of performance under the
contract are to take place simultaneously.
1. In most bilateral contracts
2. Nature of Performance
Performance may be the doing of an act or the making of payment
i. Tender is an offer to perform
1. If performance of the contract requires the doing of an act, the refusal of
a tender discharges the party offering to perform and is basis for that
party to bring a lawsuit
ii. Avalid tender of payment consists of an unconditional offer of the exact amount
due on the date when due
1. Atender of payment is not just an expression of willingness to pay; it
must be an actual offer to perform by making payment of the amount
owed b. Payment
i. When the contract requires payment, performance consists of the payment of
ii. (Prof. Conway says “payment, service, goods” I’m assuming it’s the same as
payment just with service or goods as well)
3. Time of Performance
When the date or period of time for performance is specified in the contract, performance should be made
on that date or within that time period.
a. No Time Specified
i. When the time for performance is not specified in the contract, an obligation to
perform within a reasonable time is implied.
1. The fact that no time is specified neither impairs the contract on the
ground that it is indefinite nor allows an endless time in which to
a. Reasonable time determined by the nature of the subject matter
of contract and the facts and circumstances surrounding the
making of contract
b. When Time is Essential
i. If performance of the contract on or within the exact time specified is vital, it is
said that “time is of the essence.”
1. Contracts related to property that is perishable or that is fluctuating
rapidly in value ii. When a contract fixes by unambiguous language a time for performance and
where there is no evidence showing that the parties did not intend that time
should be of the essence, failure to perform within the specified time is a breach
of contract entitling the innocent party to damages
c. When Time is Not Essential
i. Unless a contract so provides, time is ordinarily not of the essence, and
performance within a reasonable time is sufficient.
1. I the case of the sale of property, time is not regarded as of the essence
when there has not been any appreciable change in the market value or
condition of the property and when the person who delayed does not
appear to have done so for the purpose of speculating on a change in the
d. Waiver of Essence of Time Limitation
i. Aprovision that time is of the essence may be waived
1. When the specified time has expired but the party who could complain
requests the delaying party to take steps necessary to perform the
4. Adequacy of Performance
a. Substantial Performance
i. Aparty who in good faith has provided substantial performance of the contract
may sue to recover the payment specified in the contract.
1. However, because the performance was not perfect, the performing party
is subject to a counterclaim to damages caused the other party, 2. Common in construction, examples specific to the dimensions in
constructing (not listed in study guide specifically to know but might
i. Anovation allows for the discharge of a new contractual obligation by the
substitution of a new contract involving a new party
5. Discharge byAgreement
i. (Similar to novation but somewhat different, not sure which Prof. Conway is
ii. The parties may decide that their contract is not the one they want. They may
then replace it with another contract. If they do the original contract is discharged
b. Accord and Satisfaction
i. Accord is when the parties have differing views as to the performance required
by the terms of the contract, they may agree to a different performance
1. Accord and satisfaction is when the accord is performed or executed.
a. Must have a bona fide dispute, a proposal to settle the dispute,
and performance of the agreement
i. MKL Pre-Press case
Discharge by External Causes
Circumstances beyond the control of the contracting parties may discharge the contract. 6. Discharge by Impossibility
a. To establish impossibility a party must show:
1. The unexpected occurrence of an intervening act
2. The risk of the unexpected occurrence was not allocated by agreement or
3. The occurrence made performance impossible
ii. The doctrine of impossibility relieves nonperformance only in extreme
1. The party asserting the defense of impossibility bears the burden of
proving “a real impossibility and not a mere inconvenience or
a. Courts will generally only excuse nonperformance where
performance is objectively impossible—that is, incapable
performance by anyone
b. Financial inability to perform a contract that a party voluntarily
entered into will rarely, if ever, excuse nonperformance
b. Destruction of Particular Subject Matter
i. When parties contract expressly for, or with reference to, a particular subject
matter, the contract is discharged if the subject matter is destroyed through no
fault of either party
ii. (Specific examples to wheat and certain rules if you guys want to read into it, not
on study guide)
c. Death or Disability i. When the contract obligates a party to render or receive personal services
requiring peculiar skills, the death, incapacity, or illness of the party that was
either to render or receive the personal services excuses both sides from a duty to
1. “the death of either party is the death of the contract”
ii. Rule does not apply when the acts called for by the contracts are of such
1. Acts may be as well performed by others, such as the promisor’s
2. The contract’s terms contemplate continuance of the obligation after the
death of one of the parties.
7. Developing Doctrines
Commercial impracticability and frustration of purpose may excuse performance
a. The doctrine of commercial impracticability was developed to deal with the harsh rule
that a party must perform its contracts unless it is absolutely impossible.
i. However, not every type of impracticability is an excuse for nonperformance.
b. Commercial impracticability is available only when the performance is made impractical;
by the subsequent occurrences of an event whose nonoccurrence was a basic assumption
on which the contract was made
c. The defense of commercial impracticability will not relieve sophisticated business
entities from their contractual obligations due to economic downturn, even one as drastic
and severe as the recent recession i. Economic downturns and other market shifts do not constitute unanticipated
circumstances in a market economy.
8. Discharge of Operation of Law
a. Acontract is discharge by operation of law by
1. An alteration or material change made by a party
2. The destruction of the written contract with intent