7. Defenses Flashcards
What are the six contract defenses?
- Incapacity
- Misrepresentation
- Duress
- Undue Influence
- Unconscionability
- Public Policy
Define Infancy in the context of contract law.
Infancy is the time period before a person reaches the age of majority, typically under the age of 18.
What is the power of avoidance in contract law for minors?
The power of avoidance means that the minor has the option of voiding the contract.
True or False: The contract is NOT void against the other parties to a contract, and so is enforceable against everyone BUT the minor.
True
True or False: A minor can use the defense of incapacity to bring suit against the other party for restitution of monies already paid.
False
Return of Goods
What is the obligation of a minor upon exercising the right to disaffirm a contract?
The minor is obligated to return any goods received under the contract if they are in her possession.
True or False: A Minor is NOT liable for damage, wear and tear, or any other depreciation in value of the returned goods
True
Fill in the blank: If a minor is NOT in possession of goods at the time of disaffirming the contract, they must turn over the _______.
proceeds of the sale of the goods
A contract between a minor and another party may be for something that cannot be returned, such as a services contract or a lease.
In such a case, where the subject matter of the contract is non-returnable, the minor is
under NO further obligation to return or compensate the other party.
What happens when a minor ratifies a contract upon reaching the age of majority?
The contract becomes enforceable even without new consideration.
What is the effect of a minor’s silence regarding a contract after reaching the age of majority?
Silence is NOT sufficient to constitute ratification unless the minor continues to take advantage of the goods or services.
What occurs once a minor disaffirms a contract?
The contract will be void, with title to the property revesting in the other party.
The Minor can NO LONGER ratify the contract.Ratification MUST occur PRIOR TO the minor’s avoidance of the contract.
When an infant disaffirms and becomes the defendant, meaning he is sued for breach of contract he entered into as a minor, the plaintiff will NOT be able to recover
profits would have made under the contract or any other contract damages, although he will have a limited right to restitution.
A minor’s contract for necessaries is ____________
However, the other party has the right in
voidable.
quasi-contract to recover for the reasonable value of the goods or services provided, NOT the contract price.
If a minor has misrepresented his age to the contracting party in order to obtain the goods or services of the contract, he may be
equitably estopped from proving his real age in court. This would deny the minor the defense of infancy and make the contract enforceable.
What is the legal consequence of a contract entered into by an incompetent person?
The contract is VOIDABLE at the option of the incompetent party.
This means that the contract is enforceable at the option of the incompetent party, rather than void, which would make it unenforceable by either party.
What are cognitive defects in relation to mental incompetence?
A person is deemed mentally incompetent if they are unable to understand the nature and consequences of the transaction.
Define Volitional Defects.
Volitional defects occur when a person is unable to act in a reasonable manner regarding the transaction, and the other party knows of this condition.
A party who is mentally incompetent at the time of contract may ratify the contract if she becomes
Ratification may be accomplished by
competent at a later time.
an oral or written manifestation of the intention to be bound by the original contract.
If the mentally incompetent person exercises her power of avoidance and has received some benefit under the contract, then she is required to
make the other party whole by paying the reasonable value of the goods or services rendered.
Damagers of an Incompetent Person
A mentally incompetent party will be responsible for damage, wear and tear, or any other depreciation in the value of the goods.
If the other party takes unfair advantage of the mentally incompetent person, and has knowledge of the person’s incompetence, then the other party is entitled only to
a return “as is” of any goods still in the possession of the mentally incompetent party and will have no right of recovery for goods or services already consumed.
Necessaries-Incompetent Person
The mentally incompetent party will be liable to the other party for the reasonable value of those goods and services.
For mentally incompetent persons, necessaries include the retention of legal services in connection with adjudicating mental incompetence.
Section B: Misrepresentation
What is misrepresentation in contract law?
Misrepresentation refers to untrue statements or assertions that relate to existing facts.
Misrepresentation can be used as a defense to an effort to enforce the contract.
True or False: Misrepresentations can relate to future conduct or action.
False
Types of Misrepresentation
What must be established to prove fraudulent misrepresentation?
- Assertion inconsistent with existing facts
- Scienter and intent to mislead
- Materiality of the misrepresentation
- Reasonable reliance on the misrepresentation
Half-truth statements
Statements that are “half-truths” can be misrepresentations.
Misrepresentations made through conduct
Active efforts to “cover-up” the truth (termed fraudulent concealment) constitute misrepresentations.
Scienter
The scienter requirement relates to the defendant’s state of mind with respect to the assertion.
The defendant will satisfy the scienter requirement if either:
i.) he made the assertion knowing it to be false; or
ii.) he made the assertion knowing that he had no idea whether it was true or false.
Intent to Mislead
The defendant will meet the requirement for intent to mislead if:
- he made the assertion for the purpose of misleading the aggrieved party; or
- he made the assertion knowing there was a substantial likelihood that the aggrieved party would be misled.
Under an objective standard, a misrepresentation is material where
such an assertion was likely to induce a reasonable person to enter into the contract.
A misrepresentation is a material under a subjective standard if
assertion of such a fact was likely, for reasons known to the defendant, to induce the aggrieved party specifically into entering the contract.
The standard for determining whether an aggrieved party’s reliance on the defendant’s misrepresentation is reasonable is whether,
under all of the same circumstances, a reasonable person would have relied on the assertion.
Reliance would be unreasonable if:
i.) the aggrieved party has independent knowledge OR reason to know that the perpetrator’s statement is false.
ii.) The aggrieved party has reason to believe that the perpetrator is unreliable.
iii.) NO reasonable person would have believed the assertion.
iv.) if the aggrieved party could have easily ascertained the truth by cursory inspection of the goods.
Duty to Read
Because of the “duty to read,” it is generally not reasonable to rely on a trading partner’s characterization of a writing’s content.
However, two situations in which reliance on the contents of a writing would be reasonable are:
i.) if the defendant is a merchant and the aggrieved party is a customer; or
ii.) if the defendant induces the aggrieved party not to read the writing by some devious means.
Negligent Misrepresentation
the aggrieved party MUST show that the perpetrator would have known that the assertion was false had she exercised reasonable care.
-The aggrieved Party CANNOT seek the benefit of the bargain.
-Punitive damages are not available.
Innocent misrepresentation
The aggrieved party need only show that the perpetrator made an assertion NOT in accord with existing fact.
-The aggrieved Party CANNOT seek the benefit of the bargain.
-Punitive damages are not available.
What constitutes fraudulent nondisclosure?
Fraudulent nondisclosure occurs when there is silence where there was a duty to disclose material facts.
Duty of Disclose-Trading Partners
Although there is generally no duty of disclosure to trading partners, if a party is aware of material facts that are unlikely to be discovered by the other party in the exercise of ordinary care and diligence, then there will be a duty to disclose that information in these circumstances:
i.) Where the parties enjoy a relationship of trust and confidence;
ii.) If a party has made an assertion that was true at the time but has been rendered untrue by intervening events; or
iii.) If the obligation of good faith would require that the party disclose the information.
Victims of fraudulent misrepresentation, non-fraudulent misrepresentation, and fraudulent nondisclosure may use those claims in two ways:
i.) avoidance; or
ii.) rescission and reliance damages.
Victims of fraudulent and non-fraudulent misrepresentation have a third option:
they may live with the contract and sue for the benefit of the bargain.
Section C: Duress
What are the three elements of duress?
- A threat made by the perpetrator is a manifestation of intent to inflict harm on the other person, made in words OR by conduct;
- The threat is wrongful in nature
- Leaves the aggrieved party with no reasonable choice but to succumb to the threat
What must be shown to prove a threat is wrongful in nature?
- Involves criminal or tortious conduct
- Threat to pursue criminal charges
- Bad faith threat to bring a civil action
What is economic duress?
i.) If a party refuses to perform UNLESS he is awarded additional benefits; or
ii.) threatened party acquiesces to the other party’s demands at the time but then refuses to confer the additional benefits.
When is there no economic duress?
If the demand for a change in contract terms is due to the fact that performance under the terms of the contract has become extremely burdensome because of unanticipated circumstances, then there is no duress.
True or False: A wrongful threat made by a third party can still result in a valid claim of duress.
True.
What are the two conditions under which a third-party duress claim is invalid?
- The other party gives value or relies materially on the transaction
- The other party is proceeding in good faith without reason to know of the duress
What is the status of contracts made under physical compulsion?
VOID.
What remedies are available for contracts entered into under duress?
- Restitution of any benefits conferred under duress
- Required to return excess value of benefits to the perpetrator
Section D: Undue Influence
What are the elements that reveal undue influence?
- A vulnerable, but NOT incapacitated, party
- Succumbing to untoward bargaining tactics and pressures
- Pressures or tactics that fall short of fraud or duress
i.) unfair persuasion was used; and
ii.) the other party was vulnerable to such persuasion.
What does ‘unfair persuasion’ entail in the context of undue influence?
Courts look for indicia of untoward pressure such as:
* Discussion at unusual or inappropriate times
* Consummation at unusual places
* Insistent demands for immediate completion
* Extreme emphasis on untoward consequences of delay
* Use of multiple persuaders
* Absence of third-party advisers
* Statements indicating no time for consultation
What establishes a party’s vulnerability to undue influence?
- Mental infirmity due to age or illness
- Vulnerability due to recent trauma
- Reliance on the other party due to a relationship of trust
What remedies are available for contracts assumed under undue influence?
- Restitution of benefits conferred on the other party
- Required to return the value in excess of those benefits
What is the rule for undue influence by a third party?
The aggrieved party can avoid the contract unless:
* The other party gives value or relies materially on the transaction
* The other party is proceeding in good faith without reason to know of the undue influence
Section E: Unconscionability
What are the two elements of unconscionability?
- Procedural unconscionability
- Substantive unconscionability
What does procedural unconscionability refer to?
The bargaining process that produced the contract created an absence of meaningful choice.
What circumstances may establish the absence of meaningful choice?
- Near-miss cases
- Absence of bargaining power
- Fine-print terms
What is substantive unconscionability?
Contract terms that are unreasonably unfavorable to the aggrieved party.
What are typical examples of substantive unconscionability?
- Grossly excessive price
- Grossly disproportional consequences for a minor breach
- Provisions binding one party but not the other
- Provisions which are grossly unfair
What can a court do upon a finding of unconscionability?
- Refuse to enforce the contract
- Excise the offending clause and enforce the remainder
- Limit the application of the offending clause to avoid unconscionable results
Section F: Public Policy
In what contexts can public policy be raised as a defense to contract enforcement?
- Subject matter prohibited by law
- Contract formed for committing a crime
- Contract performance constituting a tort
- Violation of values and freedoms designated by the state
What must be true for a contract to be unenforceable due to a licensing requirement?
- The requirement has a regulatory purpose
- The interest in enforcement is outweighed by public policy
What are sources of public policies?
- Legislation
- Judicial Decisions
What is the operation of the defense of public policy?
It is invoked as a defense in an action by one party seeking enforcement of a contract against the other.
What does ‘In Pari Delicto’ mean?
Parties are equally at fault.
What is the rule for noncompetition agreements?
Generally enforceable if reasonable in duration, geographic area, and scope.
What is the ‘Blue Pencil Rule’?
Most jurisdictions remove the offending portion of a noncompetition clause while enforcing the remainder.
What are the conditions under which liability-limiting provisions may not be upheld?
Provisions that limit liability for reckless or intentional tortious behavior.
What is the status of contracts for unlicensed goods or services?
May be rendered unenforceable by the public policy defense.
Fill in the blank: Contracts that violate a state statute may be declared unenforceable on grounds of _______.
public policy
