[Music] hey all it's Professor Tracy back with another contracts video this one is on a defense uh this one on the defense of incapacity or lack of capacity so we have been working our way through an analytic framework that deals with the entire subject of contracts we have thus far spent the vast majority of our time looking at Contract formation and we're moving on to defenses and started to do so with a look at the statute of frauds and after defenses we'll look at in contract interpretation and implied terms and look at breach of contract conditions and repudiation repudiation and then we'll finally look at remedies why are we all doing this obviously we're doing all this in order to get a remedy for ourselves or for our clients so it's obviously important so with formation our Focus was on offer acceptance and consideration and then with defenses we're going to be looking at two different kinds of defenses we'll be looking at defenses to formation and looking at excuses the difference being that defenses to formation occur as the name would suggest at formation meaning there is something that goes wrong there's a defect in the formation process whether that be a failure to comply with the statute of frauds or the fact that one of the parties lacked the capacity contract or maybe there was some amount of coercion or undue influence or duress involved that's what we mean with a defense to formation it's something that occurs at formation which provides a defense and likely invalidates the agreement then the other thing here with excuses when we talk about an excuse which what we mean is an event that occurs after formation that excuses one or both of the parties from having to perform so it excuses a party from performance but it's an event that occurs post formation so our Focus for now though is on the first of these kinds of defenses those things that occur at formation and as we said we look we've looked at the statute of frauds and yes that's something we need to ensure compliance with at formation uh or be cognizant of recalling that the writing need not have been around at formation but it's something we need to be cognizant about at formation but it comes up practically in terms of a defense is a failure to comply with the statute of frauds and this time we're looking at lack of capacity so meaning that they lack the legal capacity to be able to form a contract and so any contract they tried to form would be void or invalid it could be disaffirmed and so why would we do this we do this because we want to protect individuals that we deem to be incapable of protecting their own interest and so we provide a mechanism for them to seek protection in the law against enforcement against a contract that may have been ill-considered so who is it that typically lacks capacity there are three different uh types of individuals so we have minors or with a common laws called infants so anybody under the age of 18 we have mentally incompetent persons and then intoxicated persons assuming the other party to the contract had reason to know of the intoxication so those are the three bases of lack of capacity what are the consequences if somebody is a minor or is mentally incompetent or is uh intoxicated and the other person had reason to know of it well the consequence is this being first the first and foremost and the biggest is that that person who lack Ed to disaffirm the contract to disaffirm the contract the other thing to know is that if somebody retains the benefits of that contract after gaining capacity meaning if they were a minor now they've reached the age of majority and they retain the benefit of the contract they are ratifying that agreement by ratifying it that means the defense is gone they've ratified that it's valid if it's somebody who's intoxicated and they are now uh sober they've sobered up and they they've decided to retain the benefit of that contract that again would be a ratification the same thing would be true if someone was mentally incompetent if either it it if they themselves have inner intervals of in which they are Lucid then they could ratify the agreement at that point by retaining it or if they're retaining it say they have a guardian that's looking after them because they're mentally incompetent then there the decision by the guardian to just retain the benefits of that that contract would also be a ratification and finally the other consequence is if the contract is about what we term under the law as a necessary necessary our food clothing shelter Medical Care those things if that's what we're referring to then while the contract can still be disaffirmed the person who lacked capacity is nonetheless liable in quasi-contract or restitution for the value of those goods or services that are deemed necessaries so let's start with looking at this first Consequence the right to disaffirm by a person without capacity so here's an example we've got Bob Baby Bob here and Bo and Baby Bob says he's going to wash Bo's car and Bo's going to pay him thirty dollars for doing so and Bob surprisingly Baby Bob breaches that agreement now if Bob if both Sue's Baby Bob for breach then uh and remember that's okay there's nothing wrong and you'll you'll understand in a minute why I'm emphasizing this you understand better the fact that Bo is seeking to enforce the agreement is okay but recognize that Bob has a defense he's raising the defense of minority right he is a minor and so he can raise that defense and if it's valid it's a valid defense here he's clearly a minor he's still a minor there's not no benefits been given to him he hasn't ratified in any way so he's disaffirmed the contract he's free to do that he can raise that as a defense that it's that straightforward what about another example with Baby Bob and Bo here uh baby Bob says he'll wash uh Bo's car again and Bo says that he will pay him thirty dollars for doing it and this time Bob performs Bob washes the car and uh that means his duty is discharged that his part of the contract's fulfilled and Beau decides while he has the money he's just going to keep the money and not give it to Bob therefore he breaches his obligation his duty to Bob to pay the thirty dollars and so Bob Baby Bob Sue's bow for breach of contract and Bo tries to raise the defense a minority after all he made a contract with a minor shouldn't he be able to disaffirm it and the answer is no it's only Bob it's only the miner the person who lacks capacity City that can assert the defense so while Bob can raise it defense as we saw in the first example Bo cannot so that's not going to work so what would that mean that would mean Bob would be able to proceed with his lawsuit in that case so what about this second consequence we pointed out that there's this implied ratification if you retain the benefit after gaining regaining capacity so example three here and again this carries across now we have teenage Bob right or pretending and so here they form another contract this time for the purchase and sale of a car and so Bob is promising to pay five thousand dollars plus five percent interest and Bo is promising to deliver Bob a car and Bob breaches again he has the money but he doesn't he doesn't uh pay it over right so but he keeps the car he keeps the car right and so he's retaining this benefit and then Bob turns 18. right he doesn't like the responsibilities of being an adult so here he's got it and he's continuing to retain the car so he's no longer a minor he's reached the age and majority he's decided to retain the benefit of his contract with Bo but he's in breach right he's in breach of that agreement so we can say he has ratified it right given up any defense he would have at by uh for lack of capacity because he was a minor but he ratified it once he became an adult by retaining the benefits right he says I have no complaints or objections in fact I love my car so here Beau even recognizes it right I believe dear little Bobby just ratified our contract so Bo sues him for breach of contract and Bob says I have a defense of minority because keep in mind that would work assuming he hadn't ratified it he would be able to disaffirm it for a reasonable time after reaching the age of majority because the rule is he can disaffirm it anytime while he's a minor or for a reasonable time after reaching the age of majority but here what the trick is that he retained it right he continued to use the car and he implicitly ratified it so he doesn't have a defense he can't raise it because he ratified it so as Bo says it's time for Bobby to pay up so what about necessaries necessaries and quasi-contract liability example four let's look at this so here Bob is mentally incompetent right he's struggling with mental illness and he enters into an agreement to rent an apartment for a thousand dollars and he has the money decides not to use it he breaches then with Bo right he's not going to spend the money give him the money for rent and then Bob Bo sues him for breach and then Bob raises a defense of mental incompetence mental incompetence and we'll look at some of the nuances of the mental incompetence defense and in just a minute or two but for now know that he's re he can raise that saying I lack capacity I was mentally incompetent at the time I entered into the contract and that would in fact disaffirm the agreement so he can disaffirm it and he can say a lack capacity but the contract is for necessaries right because it's an apartment it's somewhere safe and warm for him to live it's a necessary thing so while he can't be sued on the contract he has with Beau he can disaffirm that due to his lack of capacity but he still there's still quasi contract liability or restitutionary liability here for the value of that benefit so that he's still on the hook right for the value and he would have to pay bow the value because it's a necessary so what is this you might say well what do you mean what does disaffirmance look like um it we need to think about it because we've laid it out and said well we're just kind of canceling or voiding out the contract but we need to unpack that a little more so here we've got a drunk bow right so here uh Bob's going to seize the opportunity to enter into a really one-sided lawn mowing contract with Bo and so he promises I will mow your lawn for one thousand seven hundred dollars and Beau promises that he'll pay 1 700 up front and so Bo performs right he pays him that money up front the one thousand seven hundred dollars and so that duty is discharged and then Bo sobers up if I I have bad memories of making a contract with Bob so both sober's up right he's now lucid and he's thinking he's sober right though hungover he says he confronts Bob and he says Seventeen hundred dollars to mow my tiny lawn are you kidding me give it back I was drunk and you knew it nope Deal's a deal it's not my fault you're dumb and irresponsible so there he's saying he's not going to give any of the money back right he's saying I was intoxicated and Bo says Fine face the Wrath of the pollinator and then he raises this right and we'll see that key to the defense of intoxication is this knowledge right he's saying I was intoxicated I lacked capacity at the time I entered into the agreement and you knew it you had reason to know that I was intoxicated so he's suing to disaffirm now keep in mind the difference here this is fine the other situations we looked at is somebody was being sued for breach and they raised lack of capacity as a defense but you can also use it proactively as a sword right not just as a shield I guess I should have made my icon here my drawing a sword but he can use it uh to say please I'm suing to disaffirm or to invalidate the agreement and so he's proactively seeking to invalidate or disaffirm the agreement and he can do that right he can do that so here he can do that proactively but what does that look like we said the whole point of this example is to unpack what does disaffirmance look like and remember to disaffirm means not just to cancel or invalidate the contract but we want to rescind it and put the parties back to where they were before they entered into the contract so they're pre-contract positions and so to do that we have to say well have we completed that the answer here is no because remember while we canceled the obligation Beau already paid Seventeen hundred dollars to Bob and so they have not been restored to their pre-contract positions Bob needs to give the money right so there is quasi contract liability when we are disaffirming if there has been performance by one or both of the parties when we go to discipline firm and rescind the agreement then there will be quasi contract recovery to get that back to the extent because the contract has been disaffirmed it's gone it does not provide any basis for recovery for either Bob or Beau at this point but at this point what we do know is Bob hasn't performed he hasn't mowed the lawn yet but Beau has Beau gave him the Seventeen hundred dollars so in that case what do we know we know that Beau can sue to get that back because that's the value it's cash so it's pretty easy to figure out what the value of the benefit is but he can soon get it back right so that puts now the Seventeen hundred dollars is back in Bo's hands and things are back to the way they should be so there is this element if necessary of Quasi contract recovery if if a one or both of the parties is already performed at the moment at the time we're disaffirming the contract but there are some specific rules and exceptions that apply when we are thinking about each of these types of lack of capacity so we said we have these three let's focus take them one at a time look at minors and here the first thing to know is they have only limited quasi-contract liability so we saw that when things are disaffirmed normally to put people back to their pre-contract position there's some element of Quasi contract recovery and but if they're a minor typically it's limited how so so here we've got Bob and Bo again and we've got this purchase and sale of a car yet again here let's assume that he pays 2 500 of this five thousand dollar price right so you see it's ticked down there um the the blue arrow now says 2500 and Bo delivers the car so Bob has given money right and uh two thousand five hundred dollars and Bo has given the car over to Bob and then Bob is using his car right and I love my sweet ride I drive it everywhere and then he breaches right he has the money and he says I don't think I'm gonna pay for it so he doesn't want to pay the balance he's breaching and then Bose Susan for that breach Bob raises the defense of minority because he is a minor he still he did lack capacity he was a minor he continues to be a minor he can disaffirm the agreement and so he has it's gone the contract is gone but we're not done if we're going to disaffirm and rescind it we need to put them back to their pre-contract positions and what do we know we know we're not complete we're not having completed our disaffirmance because what happens Bo still has some of Bobby's money as he says and Bob still has the car even though it's got some wear and tear on it now right he says it's kind of a junker so it so let's take it a piece at a time right we've disaffirmed it there's no contract for them to get if Bob wants to get his money back he can sue and quasi contract to get the 2500 he already paid Banner and he can then get that and Beau can sue to get the car back and he's got the car but realize it has wear and tear it's depreciated so does the question we have to ask if this was a normal situation and Bob wasn't a miner the answer would be he would have to account for the value he derived from it right the use he got out of it the wear and tear the depreciation that he caused on the vehicle he would have to pay cash to Bob to because or to Beau in order to put the parties back to where they were before they were pre-contract right because now he has a car that's worth less than the car he had at the beginning he is not in the position he was pre-contract but because Bob is a minor he doesn't have to pay him anything he just has to return what he has in the condition it's in Period as he says Nope you get back what I have that's it so what about this though we say Well normally they don't have to pay quasi contract but if the miners engaged in tortious conduct then they do and the two types of tortious conduct tend to be one we'll we'll look at them right so the first would be this is if somebody if a minor is misrepresenting their age right good day to you kind sir so he if we fast forward through our example instead of stepping through each little part of it he's trying to pretend he's older than he really is right so there we fast forward in time and here if we get to the stage of Bob raise the you know was able to prove he was a minor disaffirm the agreement we're now at this quasi contract idea and we're we're to the part right remember that um Beau sued in quasi-contract he got the car back and and claimed but I didn't get everything right I didn't get everything remember Bob got the 2500 back he had gotten but it wasn't everything so what about this because he engaged in tortious misrepresentation he can is gonna have to pay all the some of you know whatever it is I'm assuming I'm saying well does he have to repay all 2500 uh that he got back probably not right whatever value he derived from it whatever it is so he's paying him cash to represent that depreciation so he has to pay restitution here or quasi contract recovery for the value he derived from that car because of the fact he engaged in a tour he lied about his age but what about another type of tour so here going through this again same basic setup where uh Bob's paying half of the 2500 Bo gives him the car and Bob uses the car and now though he uses the car like a let's say he intentionally drives like a he gets into an accident and then we fast forward again to this quiz I recover right see the car it's all burned up it's a it's a burnt husk of a car and he says I get the car back and again look it's all damaged there's wearing it aren't you gonna have to pay me for that and the answer is if that damage is caused by his intentional conduct or his Reckless conda his his tortious conda then he would have to pay for it so again some amount of money would have to go there to represent the the the damage the loss and value the use that he derived from him so he would be liable in that regard so that's minors those are the kind of the specific some specific rules about minors what about mentally incompetent persons the first is how do we know if somebody is mentally incompetent well there are two tests there's a majority test which is the older task but also the far more common task is the cognitive test which says that what we're asking is whether at the time of formation whether the person had sufficient mental ability to understand in a reasonable Manner and the key phrase is the nature and consequences of the transaction did they were they able to understand in a reasonable manner the nature and consequences of the transaction that's the cognitive test the majority test that's used and there are there is also the volitional test which hypothetically what the volitional test is getting at is there are situations where somebody May understand the nature and consequences of the transaction but they may not be able to to they may be impulsive they may not be able to control themselves prevent themselves from entering into that transaction which is what volitional is trying to get a volitional like a choice or will or voluntary um the idea that I'm not because of a mental illness or disability I'm unable to act in a reasonable manner in the transaction and oddly and I think to cause a bit of you know duplication and with other parts of mental incompetence but the volitional test has built into it a requirement that the other party knows of that condition they must know of it in order for us to go yes in fact they satisfy the volitional tops the other thing to realize though with mental incompetence is a somebody cannot always disaffirm the contract there are they will not if three things right what three things if the agreement has been performed in whole or in part the other party had no knowledge of the incompetence which one of the things I was just saying is the volitional test kind of throws a wrench in things because it's like well if you were following the minority test of an additional test or you know using the volitional test rather than cognitive test this makes no sense right that because it's like well didn't I have to prove knowledge in order to do it yes which is why I would say assume nine times out of ten the cognitive test is what we're going to be following okay so the cognitive test you're saying the other party had no knowledge of the incompetence and the terms of the agreement are fair if all three of these things are true and and the reason this exists is because we want while we yes we want to protect mentally incompetent individuals and we also don't want to create unfair situations where the other party May is not going to the the merchant or whoever who may be on the other side of the transaction may have no idea that the other party is suffering from a mental illness or defect and yet they are um are are you know they've got a contract which is can be disaffirmed um and so but it can't be if all three of these are true if the agreement's been performed in whole or in part the other poverty had no knowledge of it meaning if it's a you know a merchant and a mentally incompetent person the merchant had no knowledge of it and the terms of the agreement are fair in other words there the merchant wasn't trying to take take advantage of them if that's the case then what it can't be disaffirmed right if all three are true then a mentally incompetent person would not even though they quote unquote lack capacity they would not be able to disaffirm the agreement so we can see an example we go back to Bob here when he's suffering from uh mental illness and he's going but here rather than an apartment we're good we're doing a car washing here for thirty dollars and here Beau is washing Bob's car for thirty dollars he does so and Bo says all done time to pay up and Bob says no I'm not gonna pay right he doesn't pay the 30 dollars and both Susan for breach saying I perform you need to um do this for me Bob raises the defense of mental income competence we have to remember our special rule right our special rule which says what these three things if the agreement was performed in whole room part well it will go through these right it was it performed in all one part did Bo have knowledge of the incompetence here or the terms of the agreement Fair we can go through these and go there was part performance Beau performed right he went ahead and washed Bob's Car Bo had no knowledge there's nothing about Bob that would tip him off right that that bubble would not be hanging over his head right that's just a way for me to indicate to you that he's mentally incompetent but Bo is no knowledge and that there's nothing you know 30 hour car wash sadly is where we're at right that's that's about how much it costs so that's that's a perfectly Fair agreement um and so mental incompetence is not going to work as a defense and that means beau's suit will proceed right it will move forward um and he would be able to prove it on so what about intoxication we already said that the other party has to meet knowledge but the other question is well what do you mean by intoxication just like with mental incompetence we we need a test and there's only one test we have to worry about the volitional test the cognitive test is the one and only test for intoxication and so the person has to say that they were so incompetent um that or so intoxicated that they lack the ability to understand in a reasonable manner the nature and consequences of the transaction they have to meet that past to show that that was true because of intoxication at the time of formation if it is then they would be able to do it but their need to show knowledge right because with intoxicated persons are concerned is that is protecting them from being taken advantage of so if the other person knew and tried to take advantage of them then that's where we want the defense to apply so if you think back to when Beau was intoxicated here then and Bob did exactly what we're saying you shouldn't do now is my now is my chance to lock Beau into a lawn mowing contract that favors me remember he entered into a seventeen hundred dollar lawn mowing contract um because Bob was trying to take advantage of that's precisely what I mean this would meet here Beau didn't know what he had done he had a vague recollection of some sort of contract and then he figures it out later but he would be able to meet all the elements and so that's it right that's lack of capacity so the or so we've looked at defenses to formation that's where we're at right in our framework did statue of frauds looking at looked at lack of capacity next time we'll look at the wrestling undue influence so I hope that's helpful please like And subscribe I appreciate all the support thank you so much I'll be back soon with another video the next one as I said on duress and undo influence see you soon bye