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Principles Of Business Law - CHAPTER IV























































Sec. 45. Voidable contracts. A voidable contract is one which,
for some reason satisfactory to the court, may be set aside at the
request of one of the parties. It is sometimes incorrectly said that
such a contract is void. It differs, however, from a contract which
is void, in that the latter cannot be enforced by either party, while
the former may be binding unless the injured party sees fit to avoid
the agreement. Even in such cases, the contract can be avoided
only between the immediate parties to the agreement. The rights
of later innocent third parties in the property sold are not disturbed.

Capacity of Parties

Sec. 46. Competent parties. Our definition of a contract pro-
vides that the agreement must be entered into between competent
parties. All persons are presumably competent to contract ex-
cept infants, insane persons, intoxicated persons, married women,
and corporations. The power of a corporation to contract is lim-
ited by its charter, and will be considered later under the subject
of corporations. By legislation in most states married women
today are accorded the same right to contract that is granted to
anyone else. Under the common law, unmodified by statute, a
married woman has few contractual powers.

The canadian law concerning insane persons and drunkards is similar to
that which governs the rights of infants. It will be considered
separately only in those cases in which the rules differ.

Sec. 47. Infants' contracts are voidable. An infant normally
reaches his majority at the age of twenty-one, although some states
have provided that women become of age at eighteen. An .infant's
contract is voidable only by the infant; the adult may Ee forced to
carry out the terms of the agreement unless the infant desires to

It is said by many courts that the appointment of an agent by an
infant is absolutely void and has no effect whatever. The tendency
of the courts at present, however, seems to be to place contracts of
this nature in the same category as any other agreement of the
minor, thus requiring the infant to avoid contracts made by his
agent in order to evade liability.

If an infant has entered into a partnership agreement, he may
withdraw from the partnership at any time, regardless of the terms



of the agreement, and avoid liability in damages to his partners.
The capital whick hft has invested is nevertheless subject to firm
debts; therefore, to the^extent of the capital which he has invested,
Tie carinof "avoid"TKe payment of firm creditors. With this excep-
tion, all other contracts of the infant may be avoided. Where the
contract is purely executory not performed on either side the
matter is quite simple, as any act on the part of the infant which
clearly indicates an intent to disaffirm the agreement will have that
effect. After such conduct on the part of the infant, any attempt
by the adult to recover damages for breach of the agreement would
be utterly futile.

Sec. 48. Executed contracts. The fact that both parties to
the contract have fulfilled their promises does not affect the right
of the infant to avoid the agreement. If he is in possession of the
consideration which has passed to him, he must return it to the
other party, as he cannot disaffirm the contract and at the same
time retain the benefits of the agreement. Any burdens imposed
by the contract upon the infant must continue to be met until he
decides to disaffirm the agreement. The right of an infant to dis-
affirm a contract differs from other voidable contracts, in that he
may demand the return of goods from innocent third persons who
have purchased from his immediate transferee. In those states
which have adopted the Uniform Sales Act this procedure is no
longer possible in the case of personal property. In all other in-
stances, however, an infant may disaffirm as against innocent third
parties. v

The states are somewhat in conflict concerning those cases in
which the infant has spent or squandered what he received and is,
therefore, unable to return it. The majority of the states hold that
the infant may, nevertheless, disaffirm the contract and demand the
return of the consideration with which he has parted^ Hence, an
infant might purchase an automobile, and, after driving it for a year
or two, rescind his contract and demand the full amount which he
paid for it; or, after having an accident which demolished it, he
might follow the same procedure. A few of the courts, however,
hold that if the contract is advantageous to the infant and the adult
has been fair in every respect, the contract cannot be disaffirmed
unless the infant returns the consideration which he received.

If the minor has the consideration received by him but in a dif-
ferent form for example, if he has traded it for something else
he is probably bound to return the consideration which he has, as a
basis of his disaffirmance.

A provision in the contract that the minor is of age does not de-

^McGuckian v. Carpenter, 1920, 49 R.I. 94, 110 Atl. 402; p. 491.


prive him of his right to rescind ; nor does the fact that he is in busi-
ness or has all the appearances of an adult or possesses a business
acumen beyond that of the average adult. The right of a minor
to disaffirm his contract is subject to almost no limitations.

A contract cannot be avoided in part only. It must be dis-
affirmed in toto or not at all.

Attention is called to legislation in a few of the states which per-
mits a minor, upon compliance with the terms of the statutes, com-
plete freedom of contract. Before such permission is granted, he
is usually required to present evidence of sufficient experience and
maturity of judgment to protect his own interests.

Sec. 49. Time of disaffirmance. With the exception of sales
of real estate, an infant may avoid his contract and demand the
consideration with which he has parted, at any time during his
minority. This right continues until a reasonable time after he
becomes of age. A reasonable time depends on the nature of the
article involved and on the surrounding circumstances. In the case
of real estate sold by the infant, it may consist of several years.

A minor cannot disaffirm a sale of his real estate until after he
reaches his majority. This provision is said to result from the fact
that the land will always be there; thus he cannot be materially
injured by being forced to wait until he becomes of age. He may,
however, prior to disaffirmance, enter into possession and take over
the management of the property, thus appropriating to himself the
income from it while title rests in the adult. Where the minor
does not avail himself of this protection, many states permit him
at the time of disaffirmance of the sale of real estate to recover from
the adult for the use of the property while he has been out of pos-

Sec. 50. Ratification. An infant may avoid his contract dur-
ing his minority, but he can ratify it only after he becomes of age.
When he reaches his majority, the option arises. If his contract is
wholly executory, continued silence would import disaffirmance.
On the other hand, receipt of the goods or an express statement that
he expected to perform the contract would amount to ratification.

An executed contract is ratified after majority through the re-
tention and use of the article for an unreasonable time; by accept-
ance of the benefits incident to ownership, such as rents, dividends,
and interest; by selling the property; or by any other act which
clearly indicates his satisfaction with the contract made during his
minority. 2 Many states hold that the acts of the minor after he
becomes of age do not ratify unless he is aware of his right to dis-
affirm. The weight of authority, however, appears to be otherwise.

'Boyden v. Boyden, 1845, 9 Mete. (Mass.) 519; p. 492.


Sec. 51. Liability for necessaries. It is often said that an in-
fant is liable on his contracts for necessaries. Such a statement,
technically speaking, is not true, as he is liable on quasi contract
only for the reasonable value of necessaries received by him, after
proper consideration is given to his station in life. Hence, an ex-
ecutory contract of an infant for necessaries is never enforceable. 3
Furthermore, an infant is not liable for the contract price, but only
for the reasonable value of the necessaries which he receives, after
his station in life is properly considered.

Before goods can be considered as necessary, it must be estab-
lished that the infant is in need of them. 4 Thus, if an infant is
already possessed of four suits of clothes, and his station in life does
not demand more, another suit cannot be considered a necessary,
although, as a general rule, clothing falls within the list of necessi-

Likewise, if he is adequately supplied with necessaries by a parent
or a guardian, a further supply made available by a merchant can-
not be classed as necessaries.

Necessaries consist of such things as clothing, food, lodging, med-
ical attention, and a certain amount of education. Although other
things may occasionally be deemed necessaries, the majority of the
courts closely limit the list to those enumerated. Contracts relat-
ing to the minor's estate, property, or business do not involve neces-
saries. Thus, insurance contracts, agreements for the repair of
property, or the employment of people to look after property or
3usiness may be avoided by the minor. Such agreements should
be made with his guardian. Money borrowed to purchase neces-
saries need not be repaid unless the lender supervises its spending.

Sec. 52. Parent's liability for infant's contract. Many people
seem to labor under a misapprehension concerning the parent's
liability for the contracts of an infant. The parent is never liable
on such contracts unless he has in some manner appointed the
infant as an agent and thus clothed him with authority to enter
into the agreement in the name of the parent. In such cases the
parent is liable if the article purchased is charged to his account^

It should also be noted that a parent who signs a contractual ob-
ligation along with the minor is liable on his contract. This pro-
cedure is the customary method which businessmen adopt for theii
protection when dealing with infants.

Furthermore, the parent, being under a duty to support his fam-
ily, and having failed or refused to do so, is responsible for any
necessaries furnished the infant by third parties. At the same time

8 Gregory v. Lee, 1894, 64 Conn. 407, 30 A. 53; p. 493.
4 Davis v. RaMwell. 1S53. 12 Rush. (Mass.) 512: D. 493.


it should be noted that the parent is entitled to any compensation
which an infant earns unless he has in some manner surrendered
this right. Payment to the infant does not discharge this duty
owed to his parent, unless the parent has authorized the payment
or has left the minor to support himself.

Sec. 53. Infant's torts. An infant is liable for his own torts,
If, considering his age, an infant negligently injures the person or
property of another, he thereby creates a legal liability in favor of
that person. For this reason an infant who, by misrepresenting his
age, induces an adult to enter into a contract, may rescind the agree-
ment, but he is liable for any resulting damage in an action of de-
ceit. 5 Such conduct possesses all the elements of fraud, which
forms the basis for the tort action of deceit.

The parent is responsible for his children's torts only if they are
committed at his direction or in his presence.

Sec. 54. Contracts of insane persons. Contracts of insane
persons, according to the view of most courts, are voidable much
the same as those of infants. There is a tendency, however, to go
a step further and hold that an insane person cannot disaffirm un-
less he can return the consideration received, provided the contract-
is reasonable a-nd no advantage has been taken of the disabled
party's condition. The appointment of a conservator for an insane
person vests the conservator with full control over the property of
his charge. For this reason any contracts made by a lunatic after
such an appointment are absolutely void and not merely voidable.

Sec. 55. Drunkard's contracts. If a person becomes so far
intoxicated as to be incapable of understanding the effect of his
action, he is thereby incapacitated, and his contracts are voidable.
They differ, however, from those of the infant and the insane person
in that they could not be disaffirmed if the disaffirmance would in-
jure a third party who had subsequently in good faith purchased
the property involved. Drunkards, like infants, are liable in quasi
contract for necessaries.


Sec. 56. Definition. Since misrepresentation and fraud are
similar in most respects, they will be treated together. An inten-
tional misstatement concerning a material existing fact which in-
duces another to act thereon to his damage is fraud. From this it
will be seen that the chief elements of fraud are intention to mis-
lead, misstatement, material fact, reliance upon the statement, and
injury to the defrauded party. Misrepresentation is alike in all
particulars excep^he^ first; intention to mislead is not a requisite of

6 Rice V. Boyer, 188a*J$08 Ind. 472, 9 N.E. 420; p. 494.


misrepresentation. An unintentional misstatement of fact, made
honestly and in good faith, gives the injured party remedies which
are in all respects, save one, identical with those arising in case of
fraud. Consequently, the material in the sections which follow is
applicable to both unless otherwise indicated.

Sec. 57. Untrue statement, The very gist of fraud or mis-
representation is an untrue statement. The statement may in-
volve a verbal or written expression which is clearly untrue, or the
untruth may be the result of a course of conversation the net result
of which is to mislead. Although each statement, taken alone, may-
be true, there is fraud if all of them, taken together, tend to mislead
the party to whom the statements are made. A partial truth, when
full information is requested, in reality becomes an untruth when-
ever it creates a mistaken impression and is designed to do so. 6

Sec. 58. Failure to disclose as misrepresentation. In the ab-
sence of a fiduciary relationship one of trust and confidence such
as exists between principal and agent, or guardian and ward one
party is under no duty to inform the other party to an agreement
of special facts and circumstances known only to him, and which
vitally affect the value of the subject matter under consideration, 7
In other words, silence, of and by itself, does not constitute fraud.
To this rule three exceptions exist: First, it is the duty of the
vendor of property which has a known latent defect one not
apparent upon inspection to inform the purchaser of the defect;
second, if one party kuqws the other to be harboring a misapprehen-
sion concerning a material fact, which material fact is such that it
would constitute a mutual mistake if both parties carried the same
impression, he must inform the innocent party of the error; and,
third, a person who has misstated an important fact at some pre-
vious occasion is obligated to correct the statement when negotia-
tions are renewed.

The gist of all these exceptions is that one of the parties rests
under the impression that certain things are true, whereas the other
party is aware that they are not true and also knows of the misun-
derstanding. A typical illustration involves the seller of farm land
for a lump sum, the buyer indicating^ that he thinks there are eighty
acres in the tract. If the seller knoVs there are only sixty acres in
the particular property, he is duty bound to notify the buyer of that
fact. Similarly, if there had previously been a house on the tract
but, unknown to the buyer, it had been destroyed, the seller should
make known such fact to the buyer provided he is in possession of

6 Newell v. Randall, 1884, 32 Minn. 171, 19 N.W. 792; p. 495.

7 Guaranty Safe Deposit & Trust Co. v. Liebold, 1904, 207 Pa. St. 399, 66 Atl. 961 ;
P. 496.


the information. This does not mean that a potential seller or
buyer has to disclose all the factors about property which are in his
possession relating to its value. It is only where he knows that the
other party to the agreement is harboring a misunderstanding rela-
tive to some vital matter that the duty to speak arises.

Sec. 59. Physical concealment of facts. A misrepresentation
may be made by conduct as well as by language. Any physical act
which has for its ultimate object the concealment of the true facts
relating to the property involved in a contract is in effect a misstate-
ftient. 8 One who covers up the hole to a cave so that it cannot be
discovered, fills a motor with heavy grease to keep it from knocking,
or paints over an apparent defect in each case thus concealing the
defect asserts an untrue fact as effectively as though speaking.
Such conduct, if it misleads the other party, amounts to fraud and

Sec. 60. Material facts. To constitute fraud the misstatement
must relate to some material existing fact one that has a moving
influence upon the conduct of the contracting party. Statements
of opinion are not statements of fact and as a rule do not justify one
in relying thereon. A statement of fact relates to something that
exis % ts at present or that has taken place in the past, whereas a state-
ment of opinion is usually qualified, directly or indirectly, by such
terms as "I think" or "I believe," and merely purports to be the
impression or present understanding of the speaker. Statements
of value or as to the manner in which an article will act or react in
the future are merely expressions of opinion^ An expert one who
by experience or position is better qualified to judge than another
who misstates his opinion misstates a fact, his opinion being the
fact. Many of the courts have gone beyond this in holding that
all who intentionally misstate their opinion are guilty of fraud.

A promise to perform some act in the future is not a misstate-
ment of a present fact, and a rescission of the agreement will be
denied, even though the promisor fails to perform. In such cases
the injured party is limited to an action to recover damages for
breach of the contract. However, if the promisor never intended
to carry out his promise at the time he made it, he misstated his
intention and fraud resulted.^

An intentional misrepresentation concerning existing local or
state law affords no basis for rescission, since the law is presumably
a matter of common knowledge, open and available to all who de-
sire to explore its mysteries. A misstatement as to the law of an-
other state or nation, law, however, is one of fact and may be used as a
basis for redress.

Sec. 61. Reliance by injured party. Clearly, if the party to
whom the misrepresentations are made does not rely upon them,
but, after pursuing his own investigation, makes his decision as a
result of information obtained by himself, fraud is lacking. Some
states go a step further and hold that, if all the information is read-
ily available for ascertaining the truth of statements, reliance upon
the misrepresentation is not justified. In such a case the party is
said to be negligent in not taking advantage of the facilities avail-
able for confirmation of the statement. Extreme care should be
exercised in the application of this rule to limit it to cases in which
no effort or expense is required to determine the true facts.

In order to establish fraud, the party relying upon the misstate-
ment must offer proof of resulting damage, although, normally,
such damage is proved by evidence which indicates that the con-
tract would have been more valuable provided the statements had
been true.

Sec. 62. Effect of fraud. Fraud gives to the injured party a
choice of several remedies. If the contract is executory, he ma^r

PL rjgfcr^ is 'lirnnght, against him ;


where the contract has been executed, fie^majTHemand abscission
and a return of the consideration parted~wrffi7 m ^ which "case he must
offer to" restore the consideration which he has received. In addi-
fion7if the injured party desires to do so, he may carry out the terms
of the contract and bringjjjfcort action of deceit to recover the dam-
ages he has suffere31by reason of the. fraud.

^HRT should" be noted that rescission is permitted only in case the
defrauded party acts with reasonable promptness after he learns of
the fraud. Undue delay on his part effects a waiver of his right to

Sec. 63. Unintentional misrepresentation. Occasionally one
unwittingly makes a misrepresentation because of a mistaken con-
ception on his part as to existing facts. Although no fraud results,
a contracting party who has relied upon such a statement is as effec-
tively injured as though the statement had been intentionally
made. The remedy in such a case is rescission, the right to sue and
recover damages for misrepresentation being denied.

In the case of fraud, an action to recover damages may be prose-
cuted successfully against one who misrepresents intentionally,
even though he is not a party to the contract. Of course, if the
statement is made with no intention to mislead, no action can be
maintained against the third party. However, if one makes a
statement of fact as being true, with reckless disregard for whether


it is true or false, and it is later proved to be false, an action for
damages will lie. A person should not make a statement as true
when he is uncertain concerning its truth or knows it to be true
only with certain qualifications. Although the person making such
a statement is not a contracting party, he will be liable to any one
injured by reliance upon the statemen*?if the statement is ex-
pected to be relied upon.


Sec. 64. Unilateral mistake. A contract entered into because
of some mistake or error on the part of one of the contracting par-
ties affords no basis for relief. The majority of such mistakes re-
sult from carelessness or lack of diligence on the part of the injured
party, and should not, therefore, affect the rights of the other party,
who, without any misconduct, entered into the agreement.

This rule is subject to one well-recognized exception. Where a
mistake has been made in the calculation or transmission of the
figures which form the basis of a contract, and such mistake is
clearly apparent to the other party, the contract may be avoided.
Hence, a contractor who, in arriving at his estimates for a bid on
construction work, uses the wrong figure, through error, may be
relieved of his contract if it becomes apparent to the other party;
prior to acceptance, that some mistake in the calculations must
have been made. The courts, in such a case, refuse to allow one
party knowingly to take advantage of another's mistake.

Sec. 65. Bilateral mistake. An agreement entered into as a
result of a mutual mistake concerning some material fact is void-
able and relievable in equityo Some writers state that the mis-
take must relate to the identity, existence, or quantity of the sub-
ject matter involved, but the weight of authority appears to allow
rescission whenever the mistake relates to any material or con-
trolling fact. Thus, a mutual mistake concerning the number of
acres in a plot of ground or the metal of which some commodity is
made has been held sufficient ground for relief.

In ordinary business it is customary upon many occasions to dis-
pose of property about which the contracting parties willingly
admit that all the facts are not known. In such instances the
property is sold regardless of the quality or characteristics which it
possesses, and the agreement may not be rescinded where it later
appears that the article contains certain properties which neither
of the parties had reason to believe existed or is more valuable than
either party had reason to suspect. Under such conditions the par-

11 State Street Trust Co. v. Ernst et al., 1938, 278 N.Y. 104, 15 N.E.(2) 416; p. 499.
"Frwer v. Glass, 1941, 311 111. App. 336, 35 N.E.(2) 953; p. 500.


ticular property forms the subject matter of the agreement, regard*
less of what its nature happens to be. Thus, A sells B a farm, and
shortly thereafter a valuable deposit of ore is discovered on it.
Clearly, such an agreement could not be rescinded on the ground of
mutual mistake.

Sec. 66. Reformation of written agreements. All written con-
tracts should be carefully read before they are signed. Normally;
the parol evidence rule forbids the introduction of any evidence to
Tary the terms of a written agreement. The writing is the best
evfdence of the nature of the contract entered into between the
parties; however, if it can be established definitely that a mistake
has been made in reducing an agreement to writing, the injured
party may demand that the writing be reformed by a court of
equity, in order to conform to the intention of the parties. In such
a case the evidence must clearly indicate that the scrivener made
an error, and that the agreement as written did not represent the
intention of either of the parties. Occasionally a mistake is made
in the execution of a contract, such as an error in the description of
land conveyed by a deed. If the deed does not convey the land
called for by the contract, it may, upon petition, be altered to con-
form to the agreement, unless the rights of innocent third parties
have intervened.


Sec. 67. Nature of duress. Every agreement presupposes that
the parties thereto are free to enter into the agreement or not, as
their best judgment dictates. Therefore, if the will of one of the
parties is coerced through fear of the other, the contract is not a
voluntary one and may be avoided by the injured party. The es-
sence of duress is the inability freely to exercise one's will at the
time of the formation of an agreement because of fear, usually the
result of misconduct on the part of the other party.

Such fear may result from a threat of bodily injury, or it may be
induced by a threat of criminal prosecution of the contracting party
or some close relative. The guilt or innocence of the party charged
with the crime has no bearing on the rescission unless the guilty
party is asking the rescission. A contract made by him for the pur-
pose of adjusting the effect of his crime is enforceable even though
induced by threat, but, if the contract is made by some close rela-
tive, it is voidable. Threat of a civil suit one to recover a debt,
property, or for some injury has never been held to constitute

Unlawful retention of, a threat to retain wrongfully, or a threat
to destroy the property of another, if used to compel the owner's


consent to the terms of an unfavorable contract, is duress. 13 Such
pressure robs the owner of the property of the free exercise of his
will and gives him the right to avoid the agreement. Thus, if a
lease has expired and the tenant threatens to destroy the property
unless the lease is renewed, any renewal contract can be rescinded.

Review Questions and Problems

1. What is a voidable contract? How does it differ from one which
is void?

2. What persons are not fully competent to contract? *

3. An infant agrees with an adult to purchase from the adult a $60
watch. Before the watch is delivered, the adult learns for the first time
that the other party is an infant. May the infant recover damages for
breach of the contract if the adult refuses to perform?

4. A 9 an infant, procures a policy of life insurance from the X Com-
pany. Shortly after he becomes of age, he demands that the company
return the amount of the premiums which he paid while an infant. May
he recover it?

5. M, a minor, shortly before reaching his majority purchased some
corporate stock. Three years later, the stock having paid no dividends,
he desires to rescind, although he has been of age for two years. Has he
the right to do so?

6. An infant purchases an overcoat for which he promises to pay
$125. What are the factors to be considered in determining his liability?
Would the result be the same if the overcoat had not been delivered?

7. What is the liability of the parent for necessaries furnished his

8. What are the elements of fraud?

9. A procured from B a deed to certain land upon the strength of A's
promise to erect a factory upon the land. A failed to erect the factory.
May the deed be set aside because of fraud?

10. A, being desirous of selling some stock in the X Company to B,
made the statement that the bottling works were selling two cars of the
product daily and that the profit was $2 a case. As a matter of fact the
company was selling only half the stated amount and the profit was only
$1 a case. The company, however, is earning sufficient to pay a fair divi-
dend. May B rescind a contract for the purchase of stock under such

11. The owner of a race horse desiredvto sell the animal because its legs
were in bad condition, the horse being well known to the racing world be-
cause of its previous performances. He advertised the horse for sale,
keeping it in a dark stable which was heavily bedded with straw, where
he showed it to a prospective purchaser and ultimately effected a sale.
The buyer, upon discovering the defect, desires to rescind because the
straw and dark stable made it impossible to discover the defect. Was
fraud present?

13 Slade v. Slade.et.al, 1941, 310 111. App. 77, 33 N.E.(2).951j. p. 503.


12. A submitted a bid to the City of B on the construction of a water
main. Being hurried in his bid, he figured the weight of the pipe per foot
instead of the price per foot. When his bid was received, the city engi-
neer called attention to the fact that the bid proposed to install the pipe
for less than the pipe could be purchased. Nevertheless, the city council
immediately notified A of its acceptance. May A avoid the contract be-
cause of the mistake?

13. W took a stone to B, a jeweler, for inspection. W did not know the
nature of the stone, but had been informed that it was probably a topaz.
B examined the stone, but was also uncertain as to its value. He offered
to purchase it, such as it was, for $1, and the sale was consummated. It
appeared later that the stone was an uncut diamond worth about $700.
W brings an action to rescind. What should be the result?

14. A sold a watch to B. Both parties dealt on the assumption that
the watch was made of gold. Later it was found to be made of some base
metal. May B rescind?

15. What is meant by duress?

16. A, being insolvent but unaware of that fact, purchased $500 worth
of goods from B on credit. After the goods were delivered, B learned of
A's insolvency. May he have the contract avoided and recover posses-
sion of the goods sold?

17. sold real estate to A, J5, C, and D for $16,000, each purchaser
paying $4,000 for his undivided interest. The property was of little
value and, unknown to D, had agreed to give a rebate of $3,000 each to
A, B, and C. When this was discovered by D, he alleged fraud and
sought to rescind. Was he entitled to rescission?

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