Contracts - Defenses to Formation
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- 1. Misunderstanding
- 2. Incapacity
- 3. Mistake
- 4. Fraud/Misrepresentation/Nondisclosure
- 5. Duress
- 6. Illegality
- 7. Unconscionability
Misunderstanding - Contract Defense
- 1. The parties use a MATERIAL TERM that is open to two or more reasonable interpretations (so the objective test DOES NOT apply)
- 2. Each side attaches a different meaning to the term; AND
- 3. Neither party knows, or should know, of the confusion.
Incapacity - Contract Defense
- Lacks Capacity
- 1. Minors (under the age of 18)
- 2. Mentally ill—two standards:
- —The person cannot understand the nature and consequences of his actions; OR
- —The person cannot ac tin a REASONABLE MANNER in relation to the transaction (if the other side knows this)
- 3. Very Intoxicated people (if the other side knows this)
- 1. Minors = Blanket protection
- 2. Mentally ill = Intermediate level of protection
- 3. Intoxicated Persons = depends on what the other side knows or should know at the time
- Contracts w/ Someone who Lacks Capacity
- 1. Contract is VOIDABLE meaning that the incapacitated party can disaffirm;
- 2. For NECESSITIES; the party w/o capacity must still pay FAIR VALUE (not necessarily the K price)
- 3. A party w/o capacity can RATIFY the deal by keeping the benefits of the K after capacity is obtained.
Mistake - Contract Defense
- Rule: A mistake is a belief that is not in accord w/ a PRESENT fact. (ONLY ADVERSELY AFFECTED PARTY CAN CLAIM DEFENSE)
- Mutual Mistake (affects both parties) lets the ADVERSELY affected party rescind if:
- 1. There is a mistake of fact, existing at the time that the deal is made;
- 2. The mistake relates to a BASIC assumption of the K and has a material impact on the deal; AND
- 3. The adversely affected party did not ASSUME THE RISK of mistake. (also see “compromise of conscious ignorance”)
- Unilateral Mistake (one party) lets the adversely affected party rescind if she can prove ALL the elements of mutual mistake; PLUS either:
- 1. The mistake would make the K unconscionable; OR
- 2. The other side knew of, had reason to know of, or caused the mistake.
Fraud/Misrepresentation/Nondisclosure - Contract Defense
- Misrepresentation (fraud in the inducement) - A misrepresentation is a statement at the time of contracting that is not true. It can be intentional (fraudulent) or accidental. To assert this defense, party must show:
- 1. A misrepresentation of a PRESENT FACT (not opinion);
- 2. That is material OR fraudulent(intentional); AND
- 3. That is made under circumstances in which it is justifiable to RELY on the representation.
- Fraud in the Execution - Fraud in the execution is when you trick someone into signing something that she doesn’t even know is a K. (see different from above)
- Nondisclosure - The other party doesn’t learn the truth about something, but now you just remain quiet. Normally, you need not tell the other side about all material facts related to the deal. BUT watch out for a special (fiduciary duty) relationship or active CONCEALMENT.
Duress - Contract Defense
- Rule: Duress is an improper threat that deprives a party from making a meaningful choice to contract. (two major types on BAR)
- 1. Economic Duress arises when one party makes threats to induce another party to contract (or modify a contract)
- 2. Undue Influence arises when a party puts very intense sales pressure on another party — who of tens seems weak minded or susceptible to high-pressure sales tactics.
Illegality - Contract Defense
- Rule: Illegal contracts are UNENFORCEABLE. But, a K entered in furtherance of an illegal act (that is not itself illegal) will still be enforced.
- —Typically, the law will just leave the parties where they stand, but there is a modern trend toward allowing less-guilty parties to recover restitution (i.e., get their money back)
- —Contracts against public policy WILL NOT be enforced. These are contracting situations that are not formally illegal but present some other policy concern (e.g., a broad exculpatory agreement)
Unconscionability - Contract Defense
- Rule: This is the ultimate contract defense. Everything seems fine, but a court simply looks at the deal and says, “NO, this shocks my conscience. It’s unconscionable.” (two types)
- Procedural Unc. —> Where there is a defect in the bargaining process itself, such as a hidden term (surprise) or an absence of meaningful choice (no other contracting option);
- Substantive Unc. —> A rip-off in some term of the contract.
- **NOTE: Some jdx’s require both varieties to be present before a deal is struck down; other jdx allow someone to act if only one variety is present.
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