4. CONTRACTS: Defenses to Formation

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rubidoux
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148412
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4. CONTRACTS: Defenses to Formation
Updated:
2012-05-18 15:04:52
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defenses to formation
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  1. ABSENSE OF MUTUAL ASSENT:
    MUTUAL MISTAKE
    When both parties entering into a contract are mistaken about facts relating to the agreement, the contract may be voidable by the adversely affected party if:

    (1) the mistake concerns a basic assumption on which the contract is made;

    (2) the mistake has a material effect on the agreed-upon exchange; and

    (3) the party seeking avoidance did not assume the risk of the mistake.

    ASSUMPTION OF RISK: commonly occurs when one party is in a position to better know the risks than the other party or where the parties knew that their assumption was doubtful.

    If the parties make assumptions as to value of the subject matter, mistakes in those assumptions will generally not be remedied because both parties assumed the risk that their assumption as to value was wrong.
  2. ABSENSE OF MUTUAL ASSENT:
    UNILATERAL MISTAKE
    If only one of the parties is mistaken about facts relating to the agreement, the mistake will not prevent formation of a contract. However, if the nonmistaken party knew or had reason to know of the mistake, the contract is voidable by the mistaken party.

    Contracts with errors, such as computation mistakes, may be canceled in equity, assuming that the nonmistaken party has not relied on the contract. There is also modern authority indicating that a unilateral mistake that is so extreme that it outweighs the other party's expectations under the agreement will be a ground for cancellation of the contract.

    An error in judgment by one of the parties as to the value or quality of the work done or goods contracted for will not prevent formation of a contract even if the nonmistaken party knows or has reason to know of the mistake made by the other party.
  3. ABSENSE OF MUTUAL ASSENT:
    MISTAKE BY THE INTERMEDIARY
    When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake.
  4. ABSENSE OF MUTUAL ASSENT:
    LATENT AMBIGUITY -- MUTUAL MISUNDERSTANDING
    NEITHER PARTY IS AWARE OF AMBIGUITY/BOTH PARTIES AWARE: there is no contract unless both parties happened to intend the same meaning.

    ONE PARTY AWARE: a contract will be enforced according to the intention of the party who was unaware.

    The latent ambiguity situation is unique in that the courts look to the subjective intention of the parties. The objective manifestations of the parties appear to be perfectly clear but subsequent facts indicate the latent ambiguity. It is then necessary to receive evidence of what each party subjectively thought at the time of contracting.
  5. ABSENSE OF MUTUAL ASSENT:
    FRAUDULENT MISREPRESENTATION
    (FRAUD IN THE INDUCEMENT)
    If a party induces another to enter into a contract by using fraudulent misrepresentation, the contract is voidable by the innocent party if she justifiably relied on the fraudulent misrepresentation.

    Fraud in the factum is tricking someone into signing a contract when they don't know the significance of the agreement, and the contract will be void.
  6. ABSENSE OF MUTUAL ASSENT:
    NONFRAUDULENT MISREPRESENTATION
    Contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and it was material.

    A misrepresentation is material if either: (1) the information asserted would induce a resonable person to agree; or (2) the maker of the misrepresentation knew the information asserted would cause a particular person to agree.
  7. ILLEGALITY
    If either the consideration or subject matter of the contract is illegal, this will serve as a defense to enforcement.

    Usually contract is void, but in a close case court may strike illegal clause.

    If the contract was formed for an illegal purpose but neither the subject matter or consideration is illegal, the contract is only voidable by the party who (1) did not know of the purpose; or (2) knew but did not facilitate the purpose and the purpose does not involve serious moral turpitude.

    If both parties knew of the illegal purpose, the contract is void and unenforceable.

    • LICENSING:
    • -- if the licensing is required merely to raise revenue, the contract is enforceable
    • -- if the license is required to ensure that the licensee meets minimum requirements to protect the public welfare, the contract is void.
  8. LACK OF CAPACITY:
    LEGAL INCAPACITY TO CONTRACT
    The age of majority in most jurisdictions is 18. However, in many states, married persons under 18 are considered adults.

    A contract entered into between an infant and an adult is voidable by the infant but binding ont he adult.

    An infant may choose to disaffirm a contract any time before or shortly after reaching the age of majority. She must return anything received under the contract that still remains.

    • EXCEPTIONS:
    • -- an infant is bound to pay the reasonable value of necessities, what is a necessity depends on the infant's station in life
    • -- statutory exceptions for student loans, insurance, etc.
    • ____________________
    • One whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative. He may likewise affirm during a lucid interval or upon complete recovery, even without formal restoration by judicial action. In other words, the contract is voidable.
    • _______________________
    • One who is so intoxicated that he does not understand the nature and significance of his promise may be held to have made only a voidable promise if the other party had reason to know of the intoxication.
  9. DURESS AND COERCION
    Voidable and may be rescinded as long as not affirmed.

    • Withholding something someone wants or needs will constitute economic duress if:
    • (1) the party threatens to commit a wrongful act that would seriously threaten the other contracting party's property or finances; and
    • (2) there are no adequate means available to prevent the threatened loss.

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