Void Versus Voidable Effects

Void Versus Voidable Effects

Earlier sections used void and voidable to describe the relationship between the two people who signed a contract. The same labels also decide what happens when the property or the paper moves on to a third person. A voidable contract is one in which a party holds the power, by a manifestation of election, to avoid the legal relations the contract created, or to extinguish that power by ratifying.¹ A person whose property is under guardianship by reason of an adjudication has no capacity to incur contractual duties, so the attempted contract is void and no election is involved.² Between the original parties the two results look alike, because either one lets the impaired person out. The difference appears when a bona fide purchaser enters the picture. That term means someone who buys in good faith, pays value, and has no notice of a defect in the seller's title, and the question is whether the impaired person can reach that stranger.

The answer turns on one pair of propositions. A void transaction can be disaffirmed even against a bona fide purchaser who bought in good faith from the capable party, while a voidable transaction leaves the impaired person with a power that is lost once the rights of a bona fide purchaser have intervened.³ The reason lies in what each label says about title. A void transaction never took effect, so the capable party received nothing to pass along, and a purchaser from that party stands in the same empty position. A voidable transaction did pass title, carrying a defect that only the protected person may invoke, and a capable party who holds that title can transfer it to someone who pays value in good faith and has no way to see the defect. Either way the law must choose between two innocent people, the impaired person and the stranger who bought later. For a void transaction it chooses the impaired person, and for a voidable one it chooses the purchaser once the purchaser's rights attach.

For mental incapacity, the line between the two results follows the court record. Under the modern majority view, the contract of a person who is mentally ill or defective, and who has not been adjudicated incompetent, is voidable and not void, and that person falls within the third listed exception to full capacity.⁴ Many jurisdictions treat the transaction as void only if an adjudication of incompetence and the appointment of a guardian of property came before it.⁵ The Restatement (Third) of Restitution and Unjust Enrichment sorts transfers the same way: a transfer is void if the transferor's incapacity had been adjudicated and was continuing at the time, and it confers only voidable title if the adjudication came afterward.⁶ The timing of the court order therefore selects the category, whatever the depth of the person's impairment. That placement fits the notice rationale from the guardianship section, since an adjudication puts everyone dealing with the ward on actual or constructive notice, and a purchaser in that chain has a weaker claim to protection than one who bought from a seller whose impairment appears in no record.⁷

On an exam stem, the first question is whether a court adjudicated the incapacity before the transfer, because that single fact sorts the problem into void or voidable before any purchaser is considered. A common error is to say that a voidable contract can always be avoided against anyone, which skips the rule that a bona fide purchaser's intervening rights end the power.

Infancy complicates the pattern, because a minor's contract is voidable and yet disaffirmance reaches farther than that label suggests.⁸ After a minor has disaffirmed, the transaction is treated for many purposes as if it had been void from the beginning.⁹ A minor who disaffirms a conveyance may therefore reclaim the real property from a later purchaser who bought in good faith and without notice that an infant had preceded the vendor in the chain of title, and a minor may disaffirm liability on a negotiable instrument even as against a holder in due course.¹⁰ Goods are the exception. The Uniform Commercial Code gives a minor's disaffirmance no effect on a later bona fide purchaser who obtained the goods for value.¹¹ The protection for good-faith purchasers noted in the discussion of restitution after disaffirmance is thus the goods rule, and land and instruments follow the opposite result.

Commercial law builds the same distinction into the rules for negotiable instruments. A negotiable instrument is a signed writing, such as a promissory note, that promises or orders payment of money and is designed to circulate, and a holder in due course is a transferee who takes it for value, in good faith, and without notice of problems with it. The holder's right to enforce is subject only to the obligor's real defenses listed in UCC § 3-305(a)(1), and ordinary personal defenses are cut off.¹² Infancy is a real defense to the extent it is a defense to a simple contract under other law, and the Code states the policy as protecting the infant even at the expense of occasional loss to innocent purchasers.¹³ Other incapacity, such as mental incompetence or guardianship, is a real defense only where state law renders the obligation entirely null and void, and it is merely a personal defense where state law renders the obligation voidable at the obligor's election.¹⁴ The Code does not say when incapacity nullifies an obligation, so it borrows the answer from the void-versus-voidable line drawn above: an adjudicated ward's obligation is void and survives against the holder, while an unadjudicated person's is voidable and does not.