Question 1: I read that a mentally impaired adult s contracts may be void or voidable. Which is it? Answer 1: It depends. If a court of proper jurisdiction has found an adult to be non compos mentis, or mentally incompetent, contracts made by that person will have no legal effect (i.e., they are void). On the other hand, if a person is mentally incompetent, but a court has not yet judged him to be so, the contract is voidable. When a court determines that an adult is non compos mentis, it may appoint someone to handle that person s affairs; the appointee may then make contracts on behalf of the incapacitated person. The exact legal standard for mental competency varies from state to state but focuses on an individual s ability to comprehend and appreciate the consequences of his actions or to make and communicate reasonable decisions concerning her property. Question 2: What is ratification, and what actions constitute ratification? Answer 2: Ratification is the approval of a prior nonbinding act with the result that it becomes binding. Where a party s incapacity renders a contract voidable, the contract will become binding if that party ratifies it upon gaining (in the case of a minor) or regaining (in the case of a mentally incompetent or intoxicated adult) contractual capacity. Ratification may be express or implied from a party s conduct. The following may constitute ratification: A party explicitly approves the contract. A party retains benefits obtained under the contract. A party insists that the other party perform the contract. A party unreasonably delays in repudiating the contract. Question 3: What is the legal effect of an exculpatory clause? Answer 3: 1
First, here is a little terminology: The word exculpatory comes from the Latin ex, meaning "from" and culpa, meaning "fault or blame." An exculpatory clause is a provision in a contract that seeks to relieve someone from liability for harm that might occur. Tort law classifies conduct as negligent, grossly negligent, reckless, willful, wanton, and intentional. When a person fails to use reasonable care to avoid harm to others, that person s conduct is deemed negligent. Conduct is grossly negligent when one fails to exercise slight care to avoid harm to others. When performed with conscious indifference to the possibility of harming others, an act may be classified as reckless, willful, or wanton. Conduct is intentional to the extent that known harm is substantially certain to result. Recall that enforcement of a contract may be limited or precluded on the basis of public policy. With an exculpatory clause, the policy favoring freedom of contract conflicts with a policy that requires persons to take care to avoid harming others. The law seeks to balance these competing policies with a rule that generally allows enforcement of exculpatory clauses in cases where the offending party s conduct was no worse than negligent (i.e., where the conduct in question was not grossly negligent, reckless, willful, wanton, or intentional). Question 4: Explain the concept of mistake and its effect upon a contract. Answer 4: The term mistake refers to a contracting party s mistake as to a specific fact, the existence or nonexistence of which was a crucial assumption upon which the contract was made. Mistakes are classified as unilateral, where one party to the contract was mistaken, and mutual, where both contracting parties were mistaken. Contracts are rescinded, or cancelled, in cases of mutual mistake. In cases involving unilateral mistake, the law will usually enforce the contract unless a party knew, at the time of contracting, that the other party was mistaken. Question 5: Under what circumstances is impossibility of performance a defense to the enforcement of a contract? Answer 5: One must distinguish between subjective impossibility and objective 2
impossibility. Subjective impossibility is where a promisor is unable to perform the contract but some other person would be able to do so. Subjective impossibility includes cases in which the promisor is financially unable to perform a contract or lacks the skill or competence necessary to perform. Subjective impossibility is not a defense to enforcement of a contract. Objective impossibility refers to situations in which it would be impossible for anyone to perform the obligation of the promisor. Examples include destruction of the subject matter of the contract and the death or incapacity of the promisor in a personal service contract. Objective impossibility is a defense to enforcement of a contract. The concept of frustration of purpose is closely related to impossibility of performance. In cases involving frustration of purpose, performance of the contract, while possible, has been rendered essentially meaningless or worthless as a result of unforeseen events. Consider the case of an elderly woman who contracts for a series of dance lessons, after which she suffers a massive heart attack that prevents her from engaging in even mild physical activity. Under such circumstances, performance of the contract is not objectively impossible but is essentially worthless to the one-time student; the defense of frustration of purpose will excuse her from performing the contract (i.e., paying for the dance lessons). Question 6: How does fraud affect the enforcement of a contract? Answer 6: There are two types of fraud; each affects the enforcement of contracts in a different way. Fraud in the execution renders a written contract void whereas fraud in the inducement results in a voidable contract. Fraud in the execution, also known as fraud in the inception or fraud in the factum, involves trickery in the signing of a written contract, as where one surreptitiously substitutes a different document prior to the signing. While the specific requirements vary among states, fraud in the inducement generally requires a false representation 3
of a material fact made with the author s knowledge of the falsity or ignorance of the truth the author s intent to deceive the hearer s justifiable reliance on the representation Note the requirement of a false representation. While a representation may be spoken or written, words are not required. A false representation is made when one changes the odometer reading in a car that is offered for sale. When a party takes steps to conceal a defect in property offered for sale, concealment is treated as a representation that the property is free from such defect. In addition, silence is treated as a representation where disclosure is required by statute or where one party occupies a fiduciary relationship vis a vis the other. In some cases, it may be necessary to distinguish between a representation of fact and an expression of opinion. The law permits "puffing," or sales talk by which a salesperson expresses a high opinion of his wares. The distinction between fact and opinion may turn upon whether the truth of a statement can be proven by test or measurement; facts are subject to proof by test or measurement while opinions are not. Note, however, that courts may disregard the distinction between fact and opinion in cases involving statements made by learned professionals in which opinion is commonly regarded as fact. Note also that statements of intention are not generally regarded as statements of fact unless no such intention existed at the time the offending statement was made. The requirement that fraud consists of a material misrepresentation reminds us that in cases of fraud, "What doesn t make a difference doesn t matter." As a general rule, a false representation will be regarded as material if it was a substantial factor in a party s decision to make a contract. Fraud in the inducement requires that a false representation be made with the author s knowledge of the falsity or ignorance of the truth and with intent to deceive (Brown, 2008). Such facts are frequently inferred from the circumstances of a transaction. The requirement that the hearer justifiably rely on the truth of the representation means those persons must take reasonable steps to protect themselves by rejecting contracts that are hyped by statements that are obviously false or questionable. Question 7: What about a false statement that fails to meet the legal requirements of fraud? Can those affect the enforcement of a contract? Answer 7: 4
Yes, an increasing number of courts are excusing the nonperformance of contracts that were induced by negligent misrepresentation (i.e., a person s failure to use reasonable care in ascertaining the truth of a statement that he/she made). This defense is typically limited to business settings. Question 8: What is duress, and how does it affect a contract? Answer 8: Duress is the use of force or threats to overcome a party s free will and persuade him/her to enter into a contract. Duress renders the resulting contract voidable. Cases of duress may involve force or the threat of force, the threat of criminal prosecution, and economic duress. Where duress is based upon force or the threat of force, the following rules frequently apply: 1. The party making the threat must have had the apparent ability to carry out the threat. 2. The threat must have been directed against a party to the contract or a close relative of that party. Economic duress is more problematic. It requires proof that the coerced party had no reasonable alternative but to accede to the demands made upon her. In most cases, the law requires that the coerced party s economic hardship be the result of the other party s illegal action (e.g., the filing of a meritless civil action or an obvious breach of contract, such as the withholding of money that is clearly due). Question 9: What is undue influence, and how does it affect performance of a contract? Answer 9: Undue influence arises out of a special relationship of trust and confidence existing between two parties. Undue influence occurs when one party takes advantage of that relationship to obtain the other party s consent to a contract. A fiduciary is one who bears a special relationship of trust and confidence vis a 5
vis another with the result that the fiduciary is held to the highest legal standards of faithfulness and fair dealing. Examples of a fiduciary relationship typically include attorney-client, agent-principal, and trustee-beneficiary. Some jurisdictions regard the relationship between spouses, parent and child, doctor and patient, and clergy and parishioner as fiduciary in nature. Contracts between parties to a fiduciary relationship are presumed to result from undue influence and, as such, are voidable. The contract will be enforced, however, if the fiduciary can prove that it is fair and that it was made upon full disclosure of all pertinent facts. Question 10: I read that the doctrine of unconscionability will prevent the enforcement of one-sided contracts. It seems that this would prevent the enforcement of many contracts. Answer 10: You raise a good point: If the doctrine of unconscionability is too readily applied, it will undermine public confidence in the enforceability of contracts with disastrous economic effect. For this reason, judicial findings of unconscionability are reserved for the most egregious cases typically, cases involving some combination of gross inequality of bargaining power, the use of nonnegotiable form contracts, and a degree of unfairness that shocks the conscience of the court. Reference Brown, G. (2008). Legal terminology. Upper Saddle River, NJ: Prentice Hall. 6