Avoidance of the Contract Flashcards
What is a void contract?
Void means that no one can enforce it as if it never existed.
What is a voidable contract?
Voidable means that one of the parties has a choice about whether or not to enforce the contract.
What is a misunderstanding?
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.
Misunderstanding
The manifestations of the parties are operative in accordance with the meaning attached by one of the parties if . . .
the other party knows or has reason/should know of the meaning attached by that party.
What is mutual mistake? (3)
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.
Mutual Mistake
When does a party bear the risk of mistake?
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.
Mutual Mistake
Mistake as to opportunities for resale or resale price . . .
do not justify rescission. The parties should be conscious of the uncertainty.
Mutual Mistake
How do releases and mutual mistake interact?
Mutual mistake does not preclude a person from assuming the risk of unknown injuries in a valid release.
Mutual Mistake
What is analyzed in determining if mistake will make a release voidable? (4)
(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.
Mutual Mistake
When will releases generally be enforced?
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.
Unilateral Mistake
What is a unilateral mistake?
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.
Unilateral Mistake
Although the general rule is against recovery for unilateral mistake . . .
The law will not permit the non-mistaken party to take advantage of something that it should know is too good to be true.
Unilateral Mistake
What type of mistake are usually accepted by the court?
It is generally only mathematical, clerical, or similar errors that attract a court’s sympathy. Miscalculations do not.
What is reformation?
Reformation is when the court essentially rewrites and enforces the contract when something was written in error.
What is misrepresentation? (4)
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.
Fraud
When is a plaintiff expected to investigate claims?
A plaintiff is only required to do investigation of his own if there is something that should raise suspicion in the plaintiff.
When is a misrepresentation fraudulent?
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.
When is a misrepresentation material?
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.
Is a misrepresentation fact or opinion? What are the exceptions? (4)
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.
Misrepresentation
Is there a duty to disclose?
If a party has no duty to disclose facts, once they begin disclosing facts, they are required to tell the whole truth.
What is a merger clause? How do courts treat it?
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.
What about innocent misrepresentations? What does the court consider? (3)
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.
What is the election of remedies? How does it interact with rescission?
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.
When is non-disclosure equivalent to an assertion? (2)
When an assertion should be used to correct a mistake or when a person should be told because of trust and confidence.
What if the seller creates a condition and does not disclose?
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.
When does duress make a contract void?
If a person is physically compelled by duress, there is no manifestation of assent and the contract is void.
When does duress make a contract voidable?
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.
Generally, what is an improper threat? (4)
- A crime or tort
- Criminal prosecution
- Bad faith use of civil proceedings
- Breach of duty of good faith and fair dealing under a contract with the recipient
A threat is improper if the resulting exchange is not on fair terms and . . . (3)
- Harm to recipient and no significant beenfit to the threatening party
- Effectiveness of threat is significantly increased by prior unfair dealings
- Otherwise a use of power for illegitimate ends
To establish economic duress, the plaintiff must show, . . .
that had no other choice but to agree to the terms or face serious financial hardship.
Economic Duress
When is an available alternative not adequate?
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.
When is the power to avoid lost?
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.
What is undue influence?
Undue influence is intense pressure on a party who seems weak minded or highly susceptible which overcomes that party’s will.
What factors are weighed in determining whether there has been undue influence? (7)
- Timeliness of the discussion
- Lack of sleep
- Consummation of the transaction in an unusual place
- Demand that business be finished at once
- Extreme emphasis on untoward consequences of delay
- The absence of third-party adviser to the servient party
- Statements that there is no time to consult financial advisers or attorneys
