Chapter 13- Defenses to Contract Enforceability

Question 1

• Lack of voluntary consent
• Form- The Writing Requirement
• Sufficiency of the writing or electronic record
• The parole evidence rule

Answer 1

Defenses to Contract Enforceability

Question 2

May be lacking because of:

• Mistake
• Fraudulent misrepresentation
• Undue influence
• Duress

Generally, a party who demonstrates that he or she did not genuinely agree to the terms of a contract can choose either to carry out the contract or the rescind (cancel) it and thus avoid the entire transaction.

Answer 2

Voluntary Consent

Question 3

• Mistakes of fact
• Mistakes of value or quality

Only a mistake of fact may allow a contract to be avoided.

Answer 3

Mistake

Question 4

Occurs in two forms:

• Unilateral Mistake
• Bilateral Mistake

Answer 4

Mistake of Fact

Question 5

A mistake that occurs when one party to a contract is mistaken as to a material fact.

• Generally does not give the mistaken party any right to relief from a contract. (The contract is normally enforceable against the mistaken party).

Answer 5

Unilateral Mistake

Question 6

1. The other party to the contract knows or should have known that a mistake of fact was made.
2. The error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence.

In both situations, the mistake must still involve some material fact.

Answer 6

Exceptions for a Unilateral Mistake

Question 7

A mistake that occurs when both parties to a contract are mistaken about the same material fact.

• A contract can be rescinded by either party.
• The mistake must be about a material fact.
• Normally the contract is voidable by the adversely affected party and can be rescinded.
• Words or terms subject to more than one reasonable interpretation- if the parties to the contract attach materially different meanings to the term- their mutual misunderstanding may allow the contract to be rescinded.

Answer 7

Bilateral Mistake

Question 8

When an innocent party is fraudulently induced to enter into a contract, the contract can usually be avoided because that party has not voluntarily consented to the terms.

• Normally- the innocent party can either rescind the contract or be restored to his or her original position or enforce the contract and seek damages for any harms resulting from the fraud.
• Generally refers only to misreprensation that is consciously false and is intended to mislead another.
• To collect damages, a party must have been harmed as a result of the misrepresentation.

Answer 8

Fraudulent Misrepresentation

Question 9

1. A misrepresentation of a material fact must occur.
2. There must be an intent to deceive.
3. The innocent party must justifibly rely on the misrepresentation.

Answer 9

Three Elements Involved with Fraud

Question 10

The first element for misrepresentation. Occurs only through words or actions:

• Misrepresentation by conduct
• Statements of opinion
• Misrepresentation of law
• Misrepresentation by silence

Answer 10

Misrepresentation has Occurred

Question 11

A party takes specific action to conceal a fact that is material to the contract. If a seller, by his or her actions, prevents a buyer from learning of some fact that is material the contract, the seller’s behavior constitutes this.

• Also occurrs when a seller to untruthfully deny knowledge of facts that are material to the contract when a buyer requests such information.

Answer 11

Misrepresentations by Conduct

Question 12

Generally not subject to claims of fraud. Contracting parties should recognize these statements as not being factual.

• A fact is objective and verifiable, opinions are usually subject to debate.
• Puffery is allowed
• In certain situations, the innocent party may be entitled to recission or reformation when they have relied on the opinion from an expert.

Answer 12

Statements of Opinion and Predictions

Question 13

Ordinarily does not entitle a party to be relieved of a contract.

Exception:

• When the misrepresenting party is in a profession known to require greater knowledge of the law than the average citizen possesses.

Answer 13

Misrepresentation of Law

Question 14

Ordinarily, neither party to a contract has a duty to come forward and disclose facts, and a contract normally will not be set aside because certain pertinent information has not been volunteered.

• If the seller knows of a serious potential problem that the buyer cannot reasonably be expected to discover, the seller may a duty to speak.
• Normally must disclose only latent defects
• Must disclose when in a fiduciary relationship

Answer 14

Misrepresentation by Silence

Question 15

A defect that is not obvious or cannot readily be ascertained.

Answer 15

Latent Defect

Question 16

One of trust, such as partners, physician and patient, or attorney and client.

Answer 16

Fiduciary Relationship

Question 17

Second element of fraud- knowledge on the part of the misrepresenting party that facts have been misrepresented. (Scienter)

• Signifies that there was an intent to decieve.
• Clearly exists if a party knows that a fact is not as stated.
• Also exists if a party makes a statement that he or she believes not to be true or makes a statement recklessly, without regard to whether it is true or false.
• This element is met if party says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Answer 17

Intent to Deceive

Question 18

Knowledge on the part of a misrepresenting party that material facts have been falsely represented or omitted with an intent to decieve.

Answer 18

Scienter

Question 19

A misrepresentation that occurs when a person makes a false statement of fact that he or she believes is true.

• The aggrieved party can rescind the contract but usually cannot receive damages.

Answer 19

Innocent Misrepresentation

Question 20

A misrepresentation that occurs when a person makes a false statement of fact because he or she did not exercise reasonable care or use the skill and competence required by her or his business or profession.

• In most states this is equal to scienter.
• Treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.
• Culpabe ignorance of the truth supplies the intention to mislead, even if the defendent can clam, “I didn’t know.”

Answer 20

Negligent Misrepresentation

Question 21

Third element of fraud. The deceived party must have this. The misrepresentation must be an important factor (but not necessarily the sole factor) in inducing the deceived party to enter into the contract.

• Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements. The same applies to defects in property sold (unless latent).

Answer 21

Justifiable Reliance on the Misrepresentation

Question 22

Most courts do not require a showing of harm in an action to rescind a contract because recission returns the parties to the positions they held before the contract was made.

• When fraud is involved- proof of harm is unversially required. The measure of damages is ordinarily equal to the property’s value had it been delivered as represented, less the actual price paid for the property.
• Because fraud actions necessarily involve wrongful conduct, courts may also award punitive (or exemplary) damages, which compensate a plaintiff over and above the amount of the actual loss.

Answer 22

Injury to the Innocent Party

Question 23

Persuasion that is lesss than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party.

• Lacks voluntary consent and is voidable.
• One party dominates the other

Answer 23

Undue Influence

Question 24

One party may have an opportunity to dominate and unfairly influence another party. The essential feature is that the party being taken advantage of does not exercise free will in entering into a contract (there must be clear and convincing evidence of this). The existence of a fiduciary relationship alone is insufficient to prove undue influence.

• Minors and elderly under the influence of guardians.
• Confidential or fiduciary relationships

Answer 24

One Party Dominates the Other

Question 25

The dominant party in a fiduciary relationship must exercise the utmost good faith in dealing with the other party. When the dominant party benefits from the relationship, a presumption of undue influence may arise.

• When a contract enriches the dominant party in a fiduciary relationship, the court will often presume that the contract was made under undue influence.

Answer 25

Presumption of Undue Influence in Certain Situations

Question 26

Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement.

• Use of treats
• There must be proof of a threat to do something that the threatening party has no right to do.
• The treatened act must be wrongful or illegal, and it must render the person who receives the threat incapable of exercising free will. A threat to exercise a legal right does not consitute duress.

Answer 26

Duress

Question 27

A defense to the enforceability of a contract. Some contracts must be in writing or evidenced bya written memorandum or an electronic record.

• The party or parties against whom the enforcement is sought must have signed the contract, unless certain exceptions apply.
• Statute of frauds

Answer 27

Form- The Writing Requirement

Question 28

A state statute that requires certain types of contracts to be in writing to be enforceable.

• Does not apply to fraud
• In an effort to prevent fraud, denies enforceability to certain contracts that do not comply with its requirements.
• Name derived from English act passed in 1677 that was titled “An Act for the Prevention of Frauds and Perjuries.”

Answer 28

Statute of Frauds

Question 29

1. Contracts involving interests in land.
2. Contracts that cannot by their terms be performed within 1 year from the day after the date of formation.
3. Collateral, or secondary, contracts, such as promises to answer for the debt or duty of another.
4. Promises made in the consideration of marriage.
5. Under the Uniform Commercial Code, contracts for the sale of goods priced at $500 or more.

Answer 29

Contracts that fall Within or Under the Statute of Frauds (Require Writing)

Question 30

A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written memorandum.

• Statute of frauds operates as a defense to the enforcement of an oral contract for the sale of land.
• Statute of frauds also requires written evidence of contracts for the transfer of other interests in land, such as mortgage agreements and leases.
• Agreement that includes an option to purchase real property must be in writing for the option to be enforced.

Answer 30

Contracts Involving Interests in Land

Question 31

Real property and includes all physical objects permanently attached to the soil, such as buildings, fences, trees, and the soil itself.

Answer 31

Land

Question 32

Contracts that cannot, by their own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable.

• The parties’ memory of the contracts terms is not likely to be reliable for longer than a year.
• Time period starts the day after the contract is formed.
• Must be objectively impossible to perform within one year.

Answer 32

The One-Year Rule

Question 33

The test for determining whether an oral contract is enforceable under the one-year rule is whether performance is possible within one year from the day after the date of contract formation.

• It doesn’t matter whether the agreement is likely to be performed during that period.
• If objectively impossible- must be in writing
• If possible within one year under the contract’s terms, it does not need to be in writing.

Answer 33

Must be Objectively Impossible to Perform Within One Year

Question 34

A secondary promise to a primary transaction, such as a promise made by one person to pay the debts of another if the latter fails to perform. Normally must be in writing to be enforceable.

Answer 34

Collateral Promises

Question 35

A direct party to a contract incurs this under the contract. A contract in which a party assumes this does not need to be in writing to be enforceable.

Answer 35

Primary Obligation

Question 36

Has to be in writing to be enforceable. One that is ancillary (subsidiary) to a principal transaction or primary contractual relationship.

Answer 36

Secondary Obligation

Question 37

An exception to the collateral promise. An oral promise to answer for the debt of another is covered by the Statute of frauds unless the guarantor’s purpose in accepting secondary liability is to secure a personal benefit. Under this rule, this type of contract does not need to be in writing.

• The assumption is that a court can infer from the circumstances of a case whether a “leading objective” or the promisor was to secure a personal benefit.
• Also applies when one creditor guarantees a debtor’s debt to another creditor to forestall litigation. (allows the debtor to remain in business long enough to generate profits sufficient to pay both creditors).- Guaranty does not need to be in writing to be enforceable.

Answer 37

The “Main Purpose” Rule

Question 38

A unilateral promise to make a monetary payment or to give property in consideration of marriage must be in writing.

• Also applies to Prenuptial Agreements

Answer 38

Promises Made in Consideration of Marriage

Question 39

An agreement made before marriage that defines each partner’s ownership rights in the other partner’s property. Must be in writing to be enforceable.

Answer 39

Prenuptial Agreement

Question 40

The Uniform Commercial Code includes State of Frauds provisions that require written evidence or an electronic recordof a contract for the sale of goods priced at $500 or more.

• Need only state the quantity term.
• The contract will not be enforceable for any quantity greater than that set forth in the writing.
• Other agreed-on terms can be omitted or stated imprecisely in the writing, as long as they adequately reflect both parties’ intentions.
• Does not need to designate the buyer or the seller, the terms of payment, or the price.
• A written memorandum or series of communications (including e-mail) evidencing a contract will suffice, provided that the writing is signed by the party against whom enforcement is sought.

Answer 40

Contracts for the Sale of Goods

Question 41

• Partial performance
• Admissions
• Promissory estoppel
• Special exceptions under the UCC

Answer 41

Exceptions to the Statute of Frauds

Question 42

When a contract has been partially performed and the parties cannot be returned to the positions prior to the contract’s formation, a court my grant specific performance. (Must prove contract existed).

• Oral contracts for the transfer or land- courts usually look at whether justice is better served by enforcing the the oral contract when partial performance has taken place.
• In some states- reliance on certain types of oral contracts is enough to remove them from the Statute of frauds.
• Under UCC- oral contracts for goods priced at $500 or more is enforceable to the extent that a seller accepts payment or a buyer accepts delivery of the goods.

Answer 42

Partial Performance

Question 43

An equitable remedy that requires that a contract be performed according to its precise terms.

Answer 43

Specific Performance

Question 44

If a party against whom enforcement of an oral contract is sought “admits” under oath that a contract for sale was made, the contract will be enforceable.

• Can occur at any part of the court proceedings- deposition, other discovery, pleadings, tertimony
• If a party admits a contact subject to UCC, the contract is enforceable, but only to the extent of the quantity admitted.

Answer 44

Admissions

Question 45

An oral contract that would otherwise be unenforceable under the Statute of Frauds may be enforced under this doctrine.

• The promisee has justifibly relied on the promise to his or her detriment.
• The promisee’s reliance must have been foreseeable to the person making the promise, and enforcing the promise must by the only way to avoid injustice.
• Similar to partial performance- reasonable reliance required.

Answer 45

Promissory Estoppel

Question 46

• Oral contracts for customized goods
• Contracts between merchants that have been confirmed in a written memorandum.

Answer 46

Special Exceptions under the UCC

Question 47

A written contract will satisfy the writing requirement of the Statute of Frauds, as will a written memorandum or electronic record that evidences the agreement and is signed by the party against whom enforcement is sought.

• Signature can be anywhere on the document (does not have to be at the end).
• Signature can consist of a typed name or just initials rather than the full name.

Answer 47

Sufficiency of the Writing or Electronic Record

Question 48

A writing can consist of any confirmation, invoice, sales slip, check, fax, or e-mail- or such items in combination.

• Does not have to be contained in a single document to constitute an enforceable contract.
• One document may incorpoarte another document by expressly referring to it.
• Several documents may form a single contract if they are physically attached- staple, paperclip or glue, or even if they are only placed in the same envelope.

Answer 48

What Constitutes a Writing?

Question 49

Only needs to contain the essential terms of the contract, not every term.

• Must also be some indication that the parties voluntarily agreed to the terms.
• Under the UCC- Contracts for sale of goods- only quantity and must be signed by the party against whom the enforcement is sought.
• Most state laws- name the parties and identify the subject matter, the consideration, and the essential terms with reasonable certainty.
• Sale of land- price and a description with sufficient clarity to allow these terms to be a determined without reference to outside sources.
• A contract may be enforceable by one of its parties but not the other (only need to be signed by the person against whom enforcement is sought).

Answer 49

What must be Contained in the Writing?

Question 50

A rule of contracts under which a court will not receive into evidence prior or contemporaneous external agreements that contradict the terms of the parties’ written contract.

Answer 50

The Parole Evidence Rule

Question 51

Testimony or other evidence of communications between the parties that is not contained in the contract itself.

Answer 51

Parole Evidence

Question 52

1. Contracts subsequently modified
2. Voidable or void contracts
3. Contracts containing ambiguous terms
4. Incomplete contracts
5. Prior dealing, course or performance, or useage of trade
6. Contracts subject to an orally agreed-on condition precedent.
7. Contracts with an obvious or gross clerical (or typographic) error

Answer 52

Exceptions to the Parole Evidence Rule

Question 53

Evidence of a subsequent modification (oral or written) of a written contract can be introduced into court.

• Oral modifications may not be enforceable if they come under the Statute of frauds
• Oral modifications will not be enforceable if the original contract provides that any modification must be in writing.

Answer 53

Contracts Subsequently Modified

Question 54

Oral evidence can be introduced in all cases to show that the contract was voidable or void.

• Reason: if deception led one of the parties to agree to the terms of a written contract, oral evidence indicating fraud should not be excluded.

Answer 54

Voidable or Void Contracts

Question 55

When the terms of a written contract are ambiguous, evidence is admissible to show the meaning of the terms.

Answer 55

Contracts Containing Ambiguous Terms

Question 56

Evidence is admissible when the written contract is incomplete in that it lacks one or more of the essential terms.

• Court allows evidence that will “fill in the gaps” in the contract.

Answer 56

Incomplete Contracts

Question 57

Under the UCC, evidence can be introduced to explain or supplement a written contract by showing a prior dealing, course of performance, or useage of trade.

• When buyers and sellers deal with each other over extended periods of time, certain customary practices develop. These practices are often overlooked in the writing of the contract, so courts allow the introduction of evidence to show how the parties have acted in the past.
• Useage of Trade- practices and customs generally followed in a particular industry- can also shed light on the meaning of certain contract provisions, and thus evidence of trade useage may be admissible.

Answer 57

Prior Dealing, Course of Performance, or Useage of Trade

Question 58

If the parties have orally agreed on a condition precedent and the condition does not conflict with the terms of a written agreement, then a court may allow parole evidence to prove the oral condition.

• Parole evidence rule does not apply here- the existence of the entire contract is subject to an orally agreed-on condition.
• Proof of the conditions does not alter or modify the written terms but effects the enforceability of the written contract.

Answer 58

Contracts Subject to an Orally Agreed-on Condition Precedent

Question 59

The parties agree that a condition must be fulfilled before a party is required to perform the contract.

Answer 59

Condition Precedent

Question 60

When an obvious or gross clerical (or typographic) error exists that clearly would not represent the agreement of the parties, parol evidence is admissible to correct the error.

Answer 60

Contracts with an Obvious or Gross Clerical (or Typographic) Error

Question 61

A written contract that constitutes the final expression of the parties’ agreement. Evidence extraneous to the contract that contradicts or alters the meaning of the contract in any way is inadmissible.

• Can be complete or partial
• Courts exclude evidence that contradicts the writing.

Answer 61

Integrated Contract

Question 62

When a contract constains all of the terms of the party’s agreement.

Answer 62

Completely Integrated

Question 63

If a contract contains only some of the terms of the parties’ agreement.

• Evidence of additional terms is admissible to supplement the written agreement.
• Admitted only to add to the terms of a partially integrated contract.

Answer 63

Partially Integrated