Brief Fact Summary. Two corporations entered into a contract with one another. Corporation 1 would only enter into the contract if the shareholders of Corporation 2 gave them a "continuing guaranty". One of the shareholders of Corporation 2 gave the "continuing guaranty" was adjudicated insane.
Synopsis of Rule of Law. Thus, "the decisive consideration should be the presence or absence of knowledge by plaintiff, actual or reasonably to be imputed, of decedent's incompetency at the time of each advance of credit pursuant to the guaranty."
A continuing guaranty is one which is not limited to a particular or specific transaction, but which is intended to cover future transactions.View Full Point of Law
Issue. "[W]hether an adjudication of mental incompetency of a guarantor operates automatically to revoke a continuing guaranty?"
Held. No. The court first recognizes that this is an issue of first impression. Analogously, the court acknowledges courts have determined that if a guarantor dies the guaranty is terminated without regard to knowledge.
• The court limits its decision to solely those instances where a guarantor is adjudged incompetent, not where he has died.
• Contract law in a broad sense has been said "to attempt(s) the realization of reasonable expectations that have been induced by the making of a promise." Here, Mr. Smigel promised the Plaintiff to pay any bills that Pine Haven failed to pay. If Mr. Smigel did not provide this guaranty, the Plaintiff may not have sold merchandise to Pine Haven. Further, the Plaintiff did not know that Mr. Smigel was adjudicated incompetent at any time it was making deliveries, which gave rise to the relevant debts. As such "plaintiff's reasonable expectations based on decedent's original continuing promise would be unjustifiably defeated by denial of recovery."
• The court thinks that "[i]f the situation is judged in terms of relative convenience, it would seem easier and more expectable for the guardian of the incompetent to notify at least those people with whom the incompetent had been doing business of the fact of adjudication than for the holder of a guaranty such as here to have to make a specific inquiry as to competency of the guarantor on each occasion of an advance of credit to the principal debtor."
• Generally, in New Jersey, contracts with lunatics are invalid. However, if the contract has been made for full con¬sideration and without knowledge of the insanity, it will be upheld. Thus, "the decisive consideration should be the presence or absence of knowledge by plaintiff, actual or reasonably to be imputed, of decedent's incompetency at the time of each advance of credit pursuant to the guaranty."
Discussion. This case offers a very interesting discussion about the effect of mental incapacity on the ability to make contracts.