The UCC & CISG’s Adoption of Common Law Rules Regarding Defenses
UCC § 1-103: Supplementary General Principles of Law Applicable
Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy or other validating or invalidating cause shall supplement its provisions
CISG art. 4
This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is NOT concerned with:
(a) The validity of the contract or of any of its provisions or of any usage;
(b) The effect which the contract may have on the property in the goods sold
Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person's eighteenth birthday.
Dodson v. Shrader
(Voidable Minor Contracts / “Use Rule” Exception to the R § 16 Infancy Doctrine)
FACTS
P, aged 16, bought a used pick-up truck from the D’s Auto Sales Shop for $4,900
Ds did not inquire as to P’s age
Truck developed a burnt valve 9 months later
P drove the truck until it “blew up,” then demanded the contract be rescinded and his money returned
ISSUE
Should a merchant who deals with a minor in good faith receive some protection?
HELD
Even if a minor’s contract is rescinded, the merchant MAY keep an amount equal to the decrease in value of the items returned rather than refund the full purchase price (“Use Rule” Exception to Infancy Doctrine)
The GENERAL RULE is that a minor’s contracts are considered VOIDABLE, not void, i.e. the minor has the option in invoking the contract selectively, but the merchant can NOT claim the contract is void (to protect minors from their lack of judgment / crafty adults)
BUT, old rule teaches children “bad tricks” (use infancy doctrine as shield to avoid enforcement before performance / as a sword to rescind a contract after performance)
Court-created EXCEPTIONS:
The “Benefit” Rule→ (Purchase Price) - (Use of Truck for 9 Months)
The “Use” Rule (USED HERE) → (Purchase Price) - (Deterioration of Truck)
Minor’s recovery of full purchase price MINUS depreciation in value while in minor’s possession
Minors Exceptions
Necessities Exception
A minor’s contracts for necessities, such as food, clothing, and shelter are NOT voidable b/c we want adults to make these types of contracts w/ minors
Minors presumptively affirm contracts when they reach the age of 18 unless they expressly disaffirm them
Rest. 2d § 15. Mental Illness or Defect (used in Hauer)
Requires a case-by-case inquiry / not a bright line rule
(1) A person incurs only VOIDABLE contractual duties by entering into a transaction if by reason of mental illness or defect
COGNITIVE Test → (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, OR
Whether the person involved had sufficient mental ability to know what he or she was doing and the nature and consequences of the action
VOLITIONAL Test → (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition
Person may understand at some level the contract, but lacks the ability to effectively control themselves
(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part of the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires
Hauer v. Union State Bank of Wautoma
(Wrong Interpretation of R § 15’s Mental Incapacity)
FACTS
P suffered from a brain injury from motorcycle accident and had previously been adjudicated as incompetent, but treating physician now says okay
D Bank allowed P to use her $80,000 mutual fund to be used as collateral for friend’s loan from D Bank
When loan matured, P filed suit against D Bank, alleging that D knew or should have know she lacked the mental capacity to understand the loan
ISSUE
Does a contracting party expose itself to a avoidable contract where it is put on notice or given a reason to suspect the other party’s incompetence such as would indicate to a reasonably prudent person that inquiry should be made of the party’s mental condition?
HELD
Hauer court got it wrong / NOT how R § 15 should be interpreted
GENERAL RULE: The unadjudicated mental incompetence of one of the parties is NOT a sufficient reason to set aside an executive contract if the parties cannot be restored to their original positions, if the contract was made in good faith for a fair consideration, and without knowledge of incompetence
Since bank did NOT have actual knowledge of Hauer’s mental incompetence, R § 15(2) says that contract may NOT be voided if unjust
BUT, the court interprets R 15 § (1)(b) to mean that if the bank had “reason to know”, then they don’t have the ability to escape the consequences of this transaction / should be held responsible
Rest. 2d § 16. Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
