Question

Using the IRAC Method I need help answering this:

Background:

Hiro is an employee of the Federal Bank of Australia (FBA) and works in the consumer lending division. FBA is currently running a competition with its consumer lenders with first prize being a $25,000.00 bonus at the end of the year. Hiro is very keen for the bonus and decides to speak to his grandmother and an ex-girlfriend of his about arranging loans to boost his sales figures.

Hiro hadn’t visited his grandmother recently and his parents hadn’t informed him about his grandmother developing Alzheimer’s disease. He calls his grandmother and has a short conversation with her about the terms and conditions of the loan, saying to her “I think I’d probably come and visit more if you put in a pool in your backyard. This loan will allow you to build one.” His grandmother mumbles back a reply about it being very lovely to hear from him and says that the weather has been very lovely recently. Hiro presses his grandmother for an answer on the loan and she replies, “Whatever you think is best.” Hiro skips the background check and proceeds with the loan, getting the documents signed the next day. Hiro wonders if he’s done the wrong thing but assures himself there is no problem as his grandmother, despite never going to school, was always very wise in his view.

Hiro then makes a call to his ex-girlfriend, Sally. Sally was very pleased to hear from Hiro as she had always loved him and longed to be together with him again. Hiro, knowing of Sally’s love for him, decides to exploit this love to ensure he gets another loan sale. Hiro says, “If you get this loan, you can buy a house and we can live together. I really want to be with you again, but I can’t see it working out unless you own a house.” Sally, desperate for Hiro’s love, quickly agrees to the loan. As Hiro feels a bit bad for Sally, he reduces the interest on the loan and feels much better about himself.

Advise Hiro on the enforceability of the above contracts. Please use case law to support your answer.

Answer 1

This is a very interesting case about the baffling loopholes regarding the enforceability of the contract. We need to analyze the enforceability of the two contracts. Let me answer it using a pure IRAC format.

Issue: The main issue in this case study is the enforceability of two contracts. Both are loan contracts, the first being entered between Hiro and his grandmother. Unfortunately, the grandmother is having Alzheimer's disease about which Hiro is unaware of. The other contract was entered with his girlfriend, emotionally pursuing her to take a loan. Let us check into the enforceability of both these contracts.

Rule: Initially, let us discuss the erstwhile contract. According to law, parties must be competent before entering into any contract. It means that while entering into a contract, both the promisor and the promisee must have attained the age of majority, must be of sound mind and must not be disqualified by any law. Having a sound mind is the linchpin term with respect to this particular case. A person is said to be of sound mind if he is capable of understanding the contract and is able to analyze the aftereffects of it.

The second contract, which is entered with his girlfriend is also legally questionable. Free consent is an essential element of a valid contract. Factors that invalidate consent include coercion, undue influence, fraud, misrepresentation, and mistake. The linchpin term with respect to this particular contract is " undue influence". Undue influence occurs when a person has real or apparent authority, a fiduciary relationship, or the power to dominate the will of the other.

Analysis: In the first contract, the grandmother, being the promisee of the contract entered into a contract while suffering from Alzheimer's disease. Since the judging capacity of an Alzheimer's patient is poor, she is of unsound mind.

In the second contract, Hiro had undue influence over her girlfriend while entering into the contract. He indirectly forced her to believe that unless she took a loan and purchased a new, house, they won't be able to live together. This was an emotional, undue influence that made her sign the contract.  

Conclusion: From the given facts it is understood that the first contract, being entered with grandmother is invalid and thus unenforceable since grandmother is not in a sound mind at the time of entering the contract. The second contract is also unenforceable since it is obtained through undue influence by the promisor over the promisee. Thus both the contracts have no legal validity.

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