Also known as: nature of transaction · character of the transaction
Written by attorneys · grounded in primary & secondary sources — see below
A factor considered when determining whether a person possesses legal capacity to incur at least voidable contractual duties. Capacity may be partial and its existence for a given agreement may turn on the character and circumstances of that agreement.
Noah Nakamura, recently placed under a limited financial conservatorship, attends an investment reception and signs a complex margin agreement while visibly impaired. The representative knows of Noah's recent hospitalization yet proceeds without inquiry. Because the nature of the transaction is a high-risk leveraged trade, the conservatorship and visible impairment together prevent Noah from incurring even voidable duties under the agreement.
Noelle North, recovering from surgery and still delirious, signs a bedside amendment replacing the bank trustee of her scholarship endowment with a university office. Nurses note that she believes she is still working and does not know the current year. The nature of the transaction, a permanent change in control over a substantial endowment, requires capacity that Noelle lacks at the moment of signing.
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Nalini Narula, recently placed under a limited financial conservatorship, attends a closing and signs an absolute deed conveying her home while visibly impaired. The lender knows of the conservatorship yet proceeds without inquiry. Because the nature of the transaction is a high-risk secured loan rather than a routine sale, the conservatorship and visible impairment together prevent Nalini from incurring even voidable duties.
Norman Nash, recently placed under a limited financial conservatorship, signs a cohabitation agreement while visibly impaired. Nancy Nelson knows of the conservatorship yet proceeds without inquiry. Because the nature of the transaction is a high-risk mutual financial arrangement, the conservatorship and visible impairment together prevent Norman from incurring even voidable duties under the agreement.
The Restatement provides that capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances. A high-risk margin agreement or a permanent change in control over a substantial endowment therefore demands a higher showing of capacity than a routine consumer purchase.
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No. When capacity is at issue, the nature of the transaction may require a higher showing of capacity for a high-risk secured loan than for a routine sale. Courts examine the character and circumstances of the deed to determine whether the grantor possessed capacity to incur even voidable duties.
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When capacity is at issue, contemporaneous writings, board minutes, and statements showing the grantor's understanding (or lack thereof) are admissible. Visible impairment or a recent conservatorship, combined with the high-risk character of the transaction, may demonstrate that capacity was lacking.
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…upon the affirmative intention of the parties. It is a child of the law; it annexes itself to the contract because of the very nature of the transaction. Minneapolis Steel & Machinery Co. v. Casey Land Agency , 51 N. D. 832, 201 N. W. 172 (Sup. Ct. 1924). The judicial process has recognized a right to recover damages for personal…