Avoidance of the Contract

Question 1

What is a void contract?

Answer 1

Void means that no one can enforce it as if it never existed.

Question 2

What is a voidable contract?

Answer 2

Voidable means that one of the parties has a choice about whether or not to enforce the contract.

Question 3

What is a misunderstanding?

Answer 3

The parties attach materially different meanings to the subject matter, and neither aprty knows or has reason to know the meaning attached by the other. A misunderstanding makes a contract void because there is no manifestation of mutual assent.

Question 4

Misunderstanding

The manifestations of the parties are operative in accordance with the meaning attached by one of the parties if . . .

Answer 4

the other party knows or has reason/should know of the meaning attached by that party.

Question 5

What is mutual mistake? (3)

Answer 5

Mutual mistake exists when both parties share a mistaken belief. Mutual mistake makes a contract voidable by the adversely affected party when the mistake (1) concerns a basic assumption of the contract, (2) materially affects the agreed exchange, and (3) the party adversely affected did not bear the risk of mistake.

Question 6

Mutual Mistake

When does a party bear the risk of mistake?

Answer 6

A party bears the risk of mistake when (a) the risk is allocated by agreement, (b) he is aware that he has limited knowledge regarding the mistake but treats that limited knowledge as sufficient, or (c) the risk is allocated to him by the court because it is reasonable to do so under the circumstances.

Question 7

Mutual Mistake

Mistake as to opportunities for resale or resale price . . .

Answer 7

do not justify rescission. The parties should be conscious of the uncertainty.

Question 8

Mutual Mistake

How do releases and mutual mistake interact?

Answer 8

Mutual mistake does not preclude a person from assuming the risk of unknown injuries in a valid release.

Question 9

Mutual Mistake

What is analyzed in determining if mistake will make a release voidable? (4)

Answer 9

(1) the knowledge of the parties at the time of signing concerning the injury, (2) the amount of consideration paid, (3) the extent of negotiations and discussions as to personal injuries, and (4) the haste or lack thereof in obtaining the release.

Question 10

Mutual Mistake

When will releases generally be enforced?

Answer 10

Where both parties are aware generally of the type of injury and the injury later appears to be more severe, a general release is typically found to be effective.

Question 11

Unilateral Mistake

What is a unilateral mistake?

Answer 11

A unilateral mistake occurs when only one party has a mistaken belief. A unilateral mistake makes a contract voidable when the mistake (1) concerns a basic assumption of the contract, (2) materially affects the agreed exchange, and (3) the party adversely affected did not bear the risk of mistake. The mistaken party must show that the transaction is unconscionable, that the other had reason to know of the mistake, or that the other caused the mistake.

Question 12

Unilateral Mistake

Although the general rule is against recovery for unilateral mistake . . .

Answer 12

The law will not permit the non-mistaken party to take advantage of something that it should know is too good to be true.

Question 13

Unilateral Mistake

What type of mistake are usually accepted by the court?

Answer 13

It is generally only mathematical, clerical, or similar errors that attract a court’s sympathy. Miscalculations do not.

Question 14

What is reformation?

Answer 14

Reformation is when the court essentially rewrites and enforces the contract when something was written in error.

Question 15

What is misrepresentation? (4)

Answer 15

Misrepresentation makes a contract voidable when (1) an assertion is not in accord with the facts; (2) the assertion was either fraudulent or material; (3) the assertion induced assent; and (4) reliance was justified. A misrepresentation can be verbal and through conduct.

Question 16

Fraud

When is a plaintiff expected to investigate claims?

Answer 16

A plaintiff is only required to do investigation of his own if there is something that should raise suspicion in the plaintiff.

Question 17

When is a misrepresentation fraudulent?

Answer 17

If it is intended to induce assent and the maker (a) knows or believes that the assertion is not in accord with the facts; or (b) does not have the confidence that he states or implies in the truth of the assertion; or (c) knows that he does not have the basis that he states or implies for the assertion.

Question 18

When is a misrepresentation material?

Answer 18

A misrepresentation is material if it would be likely to induce a reasonable person to manifest assent or if the maker knows that it would be likely to induce assent.

Question 19

Is a misrepresentation fact or opinion? What are the exceptions? (4)

Answer 19

Generally, a misrepresentation must be one of fact, not opinion. This does not apply where: (1) there is a fiduciary duty between the parties; or (2) there has been a lie or trick by the representor; or (3) the parties do not deal at arm’s length; or (4) the representee does not have equal opportunity to learn the truth of the fact represented.

Question 20

Misrepresentation

Is there a duty to disclose?

Answer 20

If a party has no duty to disclose facts, once they begin disclosing facts, they are required to tell the whole truth.

Question 21

What is a merger clause? How do courts treat it?

Answer 21

A merger clause is a provision that states the contract represents the parties’ complete agreement and supersedes all informal understandings and oral agreements relating to the contract. Most courts will not allow a merger clause to bar evidence of fraud in relation to creation of a contract.

Question 22

What about innocent misrepresentations? What does the court consider? (3)

Answer 22

An innocent misrepresentation may be basis for rescission. The court considers (1) whether the buyer relied on the statements, (2) whether the statements were material, and (3) whether the reliance was justified.

Question 23

What is the election of remedies? How does it interact with rescission?

Answer 23

Most courts hold that all a plaintiff can recover in a situation involving rescission is out of pocket expenses, not expectancy damages. The UCC says expectation can be recovered.

Question 24

When is non-disclosure equivalent to an assertion? (2)

Answer 24

When an assertion should be used to correct a mistake or when a person should be told because of trust and confidence.

Question 25

What if the seller creates a condition and does not disclose?

Answer 25

If a seller creates a condition that materially impairs the value of a contract and is within knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care, nondisclosure of the condition constitutes a basis for rescission of the contract.

Question 26

When does duress make a contract void?

Answer 26

If a person is physically compelled by duress, there is no manifestation of assent and the contract is void.

Question 27

When does duress make a contract voidable?

Answer 27

If a party's manifestation of assent is (1) induced by an improper threat and there is no reasonable alternative or (2) induced by someone who is not a party to the transaction, unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies on the transaction.

Question 28

Generally, what is an improper threat? (4)

Answer 28

1. A crime or tort 2. Criminal prosecution 3. Bad faith use of civil proceedings 4. Breach of duty of good faith and fair dealing under a contract with the recipient

Question 29

A threat is improper if the resulting exchange is not on fair terms and . . . (3)

Answer 29

1. Harm to recipient and no significant beenfit to the threatening party 2. Effectiveness of threat is significantly increased by prior unfair dealings 3. Otherwise a use of power for illegitimate ends

Question 30

To establish economic duress, the plaintiff must show, . . .

Answer 30

that had no other choice but to agree to the terms or face serious financial hardship.

Question 31

# Economic Duress When is an available alternative not adequate?

Answer 31

An available alternative or remedy may not be adequate where the delay from pursuing that remedy would cause immediate and irreparable loss to one's economic or business interest.

Question 32

When is the power to avoid lost?

Answer 32

The power of a party to avoid a contract is lost if, after the circumstances that made the contract voidable have ceased to exist, he affirms or otherwise acts inconsistently with disaffirmance.

Question 33

What is undue influence?

Answer 33

Undue influence is intense pressure on a party who seems weak minded or highly susceptible which overcomes that party's will.

Question 34

What factors are weighed in determining whether there has been undue influence? (7)

Answer 34

1. Timeliness of the discussion 2. Lack of sleep 3. Consummation of the transaction in an unusual place 4. Demand that business be finished at once 5. Extreme emphasis on untoward consequences of delay 6. The absence of third-party adviser to the servient party 7. Statements that there is no time to consult financial advisers or attorneys

Question 35

What is an illegal contract?

Answer 35

Illegal contracts are those that courts will not enforce because the course of the contract is clearly outweighed by any public policy concerns, such as moral values, economic interests, or protection of legislation or institutions of the government.

Question 36

If a contract is in violation of the law . . .

Answer 36

the contract will be rended illegal and unenforceable.

Question 37

# If a contract is in violation of the law But the statute is for tax purposes . . .

Answer 37

Then the contract will be enforced.

Question 38

# If the contract is in violation of the law But the statute is for protection of consumers . . .

Answer 38

Then the contract will not be enforced.

Question 39

Can the guilty party of an illegal contract recover?

Answer 39

The guilty party of an illegal contract cannot bring an action to enforce the contract or to recover benefits conferred on principles of quasi contract.

Question 40

If only part of a contract is illegal . . .

Answer 40

The court can sever the illegal part and enforce the rest.

Question 41

What about the legality contracts that restrain marriage? Encourage divorce?

Answer 41

A promise is unenforceable if it is unreasonably in restraint of marriage, such as a promise to pay someone money if they agree not to marry someone. A promise that unreasonably encourages divorce or separation is unenforceable, such as a promise to pay someone if they get a divorce.

Question 42

What about legality of common law marriages?

Answer 42

A court will not recognize an implied contract between unmarried cohabitating parties where common law marriage is illegal and recognition of the implied contract will have the effect of acknowledging common law marriage in contravention of the legislature.

Question 43

What is the general rule for legality of contracts regarding licenses?

Answer 43

If a party is prohibited from foing an act because of his failure to comply wit ha licensing or regsitration requirement, a promise in considertion of that act or promise is unenforceable on grounds of public policy if (a) the requirement has a regulatory purpose or (b) the interest in enforcement is clearly outweighed by the policy behind the requirement (regulatory v. taxation).

Question 44

# Licenses/Legality What can unlicensed person recover?

Answer 44

An unlicensed person is only entitled to recover actual documented expenses that can be shown by clear and convincing evidence.

Question 45

When is a promise to refrain from competition unreasonably in restraint of trade?

Answer 45

A promise to refrain from competition is unreasonably in retraint of trade if (a) the restraint is greater than is needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public.

Question 46

In what two situations do contracts in restraint of trade typically arise?

Answer 46

Sales of busiensses and employment contracts

Question 47

What is a non-compete agreement?

Answer 47

In non-compete agreements in employment contracts, the employee agrees not to work for a competitor or start a competing business in the event they leave in consideration for employment.

Question 48

# Non-compete agreements What must the employer show first?

Answer 48

The employer must first show a need for enforcement of a non-compete agreement.

Question 49

What are the three factors considered for an employer's need for a non-compete agreement?

Answer 49

1. Whether the employee has received specialized training 2. Whether the employee has trade secrets or other confidential information 3. Whether the employer's customers associate the business with the employee due to the employer's repeasted contacts with the customers

Question 50

What is the second thing an employer must show for enforcement of a non-compete?

Answer 50

If need can be shown, the restriction must be reasonable as to both time and geographic region. If it is, it will be enforced.

Question 51

What if the time/geographic scope of a non-compete agreement is burdensome?

Answer 51

If the scope is burdensome, it will be enforced only to the extent that it is reasonably necessary to protect the employer's interest without imposing undue hardship (time, geography, activities prohibited) on the employee. A court may modify an unreasonable covenant to make it reasonable.

Question 52

When will courts hold an entire non-compete invalid?

Answer 52

If evidence shows that the covenant is deliberately unreasonable and oppressive

Question 53

What are the three approaches to unreasonable non-compete agreements?

Answer 53

1. Strict approach: either enforceable or not 2. Blue penciling: can strike but not modify 3. Reformation: MAJORITY: modify and enforce revised agreement

Question 54

How do courts treat non-competes of sale of business?

Answer 54

Courts are more willing to enforce non-compete of sale of business because they should know what they are signing

Question 55

What is incapacity?

Answer 55

A contract is voidable if someone lacks the capacity to contract, such as those under guardianship, a minor, mentally ill or defective, or intoxicated.

Question 56

What happens in contracts with minors?

Answer 56

A minor or his/her legal representative may disaffirm a contract entered into by the minor. To disaffirm, the minor need only indicate that he/she no longer wants to be bound.

Question 57

When can minors not disaffirm?

Answer 57

Minors may not disaffirm contract for necessaries (food, water, shelter, etc.)

Question 58

Can a minor make a contract valid?

Answer 58

Yes. A minor may ratify the agreement upon reaching the age of majority.

Question 59

How is a contract affected by mental illness or defect?

Answer 59

A contract is voidable by a person if, because of mental illness or defect, (a) that person is unable to understand the nature and consequences of the transaction, or (b) that person is unable to act in a reasonable manner in relation to the transaction andthe other party has reason to know of his/her condition.

Question 60

When does avoidance terminate for people with mental illness/defect?

Answer 60

Where a contract is made on fair terms and the other part ydoes not know of the mental illness or defect, the power of avoidance terminates if it has been performed in whole or avoidance would be unjust. Courts may grant relief as justice requires and place great emphasis on an equitable and fair result.

Question 61

How is a contract affected by intoxication?

Answer 61

A contract is voidable by a person when the other party has reason to know that by reason of intoxication (a) he is unable to act in a reasonable manner in relation to the transaction or (b) he is unable to act in a reasonable manner in relation to the transaction.

Question 62

Generally, what two things are required for a contract to be avoided by intoxication?

Answer 62

Generally, (1) the intoxication must be extreme ebfore a drunk person is considered to have been deprived of mental capacity and (2) disaffirmation must be immediate.

Question 63

What is unconscionability?

Answer 63

Unconsionabiltiy is an absense of meaningful choice on the part of one of the parties with terms unreasonably favorable to the other party.

Question 64

What are the two prongs of unconsionability?

Answer 64

Procedural and substantive

Question 65

What is procedural unconscionability?

Answer 65

Defects in the bargaining process and formation of the contract, such as lack/inequality of bargaining power, adhesion contracts, fine print, lack of understanding.

Question 66

What is substantive unconscionability?

Answer 66

When the actual terms of the contract are one-sided and unfair against the weaker, usually less sophisticated, party.

Question 67

Are the two prongs of unconscionability required for a finding of unconscionability?

Answer 67

Procedural alone is never enough. Usually both need to be present. However, substantive alone may be enough.

Question 68

What kind of inquiry is unconscionability?

Answer 68

Unconscionability is a fact-specific inquiry, considering the general commercial background and the commercial needs of the particular trade or case.

Question 69

What are exculpatory agreements?

Answer 69

Clears the defendant from liability.

Question 70

When are exculpatory clauses enforced? Not enforced?

Answer 70

They are generally not enforced for professionals providing a needed public service. However, they are more likely to be enforce when it comes to things a person can walk away from.

Question 71

What are arbitration clauses?

Answer 71

Arbitration clauses are agreements to settle disputes by use a third-party arbitrator and not in a court of law.

Question 72

Where are arbitration clasuses typically found?

Answer 72

In adhesion (take it or leave it) contracts

Question 73

Are arbitration clauses typically enforced? When are they not?

Answer 73

Yes, they are generally enforceable, but can be avoided by a showing of fraud, duress, or unconscionability.

Question 74

What are examples of unconscionable arbitration clauses?

Answer 74

Mandating confidentiality, barring award of particular remedies, selecting distant locations for the hearing, limiting discovery, and imposing hefty costs on the plaintiff.

Question 75

What is the difference between "impossibility" and "impracticability"? Does it matter?

Answer 75

Impossible is impossible and impracticable is nearly impossible. The two are used interchangeably.

Question 76

What must a party prove for a claim of impossibility? (4)

Answer 76

The party wanting to be excused from performance must prove: 1. The event made the agreed performance ipmossible 2. The non-occurrence of the event was a basic assumption on which the contract was made 3. The impossibility was not the fault of the party seeking to be excused 4. The party did not assume greater obligation than the law imposes

Question 77

When does impossibility not apply?

Answer 77

When the party deliberately or negligently causes the impossibility

Question 78

Does impossibility use an objective or subjective test?

Answer 78

Impossibility is objective (the thing cannot be done), not subjective (I can't do it)

Question 79

What are the rules for building contractors and impossibility?

Answer 79

A bulding contractor building a structure from scratch is aware of the possiblity of the destruction of the building and it is not an excusing event. They are expected to insure against it and has to do with foreseeability and implied assumption of the risk. Contractors providing goods or services wrought onto a building can typically recover quasi-contractual.

Question 80

Under UCC 2-615, what is/is not a basis for impossibility?

Answer 80

A rise in price is not a basis for impossibility. A rise or collpase of the market is not a justification because that is the type of business risk one takes. However, shortages of materials or supplies could be enough.

Question 81

What is frustration?

Answer 81

The contract could still be performed by the purpose of the contract was frustrated.

Question 82

# Frustration What if a condition is not expressly mentioned?

Answer 82

When a condition that is not expressly mentioned in a contract can be implied as being understood by both parties as the foundation of the contract, the nonoccurence of the condition may excuse nonperformance of the contract by both parties.

Question 83

For a claim of frustration, what must a party prove? (4)

Answer 83

The party wanting to be excused from performance must prove: 1. The event substantially frustrated the purpose of the contract (equaling a nearly total loss) 2. The non-occurrence of the event was a basic assumpion on which the contract was made 3. The event was not the fault of the party seeking to be excused 4. The party did not assume a greater obligation than the law requires

Question 84

What 3 things do courts generally require for a claim of frustration?

Answer 84

1. The risk of the frustrating event cannot be reasonably foreseeable 2. The value of the contract to the person seeking to avoid it was totally or nearly destroyed 3. The occurrent was not foreseeable or controllable by the promisor

Question 85

Do laws or governmental acts satisfy frustration claims?

Answer 85

Laws or governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation

Question 86

In what specific scenario may parties not invoke the doctrine of frustration?

Answer 86

If parties have contracted with reference to a state of war or have contemplated the rirks arising from it