First State Bank of Sinai v. Hyland

Supreme Court of South Dakota · 1987 · Contracts

ContractsCapacityIntoxicationVoid and voidable contractsRatificationRescissionintoxicationcapacity

Facts

Randy Hyland's overdue notes to the bank were consolidated into a $9,800 note, and the bank agreed to extend the debt only if Randy's father, Mervin, cosigned. Mervin signed the note in October 1981, but later claimed he was incapacitated by alcohol and had no recollection of signing it. Although Mervin had serious alcohol problems and had been involuntarily committed near that period, he also conducted other business during the same time, including signing another promissory note, writing checks, hauling grain, selling grain, and driving. After the note became overdue in April 1982, Mervin received notice and paid the accrued interest with his check, but did not promptly rescind before Randy later filed bankruptcy.

Issue

Was Mervin's promissory-note obligation void because he was entirely without understanding when he signed due to intoxication? If not, did his later conduct and failure to promptly disaffirm ratify the obligation and make it binding?

Rule

A contract is void for mental incapacity or intoxication only if, at the time of contracting, the person was entirely without understanding, meaning he lacked the mental ability to comprehend the nature and ultimate effect of the transaction. The party seeking to avoid the contract bears that burden, and prior or later incompetence, memory lapse, neglect, or unreasonableness are not determinative. If the person was not entirely without understanding, the contract is voidable, not void; it must be promptly rescinded after recovery and notice, and it may be ratified expressly, by conduct, or by delay in disaffirmance, especially where the delay prejudices the other party.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Sioux Falls, Nolan Pierce signed a guaranty for his sister's equipment loan after an evening of heavy drinking. At trial, Nolan proved he was slurring his words and later remembered nothing, but the lender showed that earlier that same day he had negotiated a cattle sale, written two checks, and arranged grain delivery times.

If Nolan argues the guaranty was void because he was intoxicated when he signed, which is the strongest analysis?

Explanation. A contract signed by an intoxicated person is void only if the signer was entirely without understanding at the time of contracting, meaning he lacked the mental ability to comprehend the nature and ultimate effect of the transaction. The burden is on Nolan, not the lender. Later memory loss and evidence of heavy drinking are not determinative by themselves, and contemporaneous business activity tends to show sufficient understanding. If not void, the contract is at most voidable.