Contract Defenses - Absence of Mutual Assent Flashcards
Mistake
Mistake = A factual error regarding a fundamental matter that has a material effect on the agreed exchange. Basically a mistake about a fact that goes to the heart of the deal rather than some ancillary matter.
Mutual Mistake = both parties were mistaken about the same material fact. Typically both parties were mistaken about the subject matter of the contract (both thought the seller was selling a genuine autographed baseball, but it was actually fake).
Unilateral Mistake = only 1 party was mistaken. Typically a math error by one party. A homeowner accepts the lowest bid, but the electrician made a math error and it should have been a higher bid. Only the electrician was mistaken. If it was only 1, then it is not a viable defense. The electrician can’t raise mistake as a a defense to get out of the deal.
Mutual mistake is a defense but unilateral mistake is NOT!!! The exception is when a party who made a unilateral mistake is SO OBVIOUS the other party should’ve known.
Assumption of Risk = Exception to Mistake
Assumption of Risk = when 1 or both parties assumed the risk of being wrong about a material fact. If you assumed the risk of mistake, you can’t then use the mistake as a defense to enforcement of K. Both parties could assume the risk.
When does a party assume the risk? A party assumes the risk of mistake when 1) they know they don’t know a fact OR 2) they are in the superior position to know the fact.
Typically both parties assume the risk that their assumption as to value is wrong. In an arms-length transaction one side wants to pay as little as possible but one wants to earn as much as possible. Note that a mistake as to the nature of the thing is not the same as mistake of value.
When both parties know they don’t know a fact, but 1 is in a superior/better position to know, then the party in the better position to know is the one who assumes the risk of mistake. You have to watch for 1 expert and one non-expert. If both parties are mistaken as to the autographed baseball, then a baseball shop merchant would probably be held to have assumed the risk. As an expert, he would know how to authenticate the signature.
EXCEPTION to the EXCEPTION:
Unilateral Mistake or Misunderstanding
Unilateral Mistake is usually NOT a defense to contract.
Example: 3 subcontractors bidded and the winner with the lowest bid made a math error and he should have bid higher. He can’t get out of it. That’s a unilateral mistake and not a contract defense.
But there is an EXCEPTION: OBVIOUS MISTAKES MAKE UNILATERAL MISTAKE A VIABLE DEFENSE. If it is so obvious that the non-mistaken party should have known something was off, then the mistaken party can use a unilateral mistake as a defense. So the 3 bidders have a 5k bid, a 22k bid, and a 25k bid. Obviously the 5k is the odd one out. It’s not the size of the numbers that matters, but their relation to each other.
Misunderstanding
Misunderstanding = involves cases where the K contains ambiguous language with words that be interpreted differently.
If neither party is aware of ambiguity OR both parties are aware of ambiguity, there is NO K unless both parties meant the same thing.
If one party was aware of the ambiguity and the other party was not at the time of contracting, a contract will be enforced according to the intention of the party who was unaware of the ambiguity.
Misrepresentation
Misrepresentation = assertion of a fact that is untrue OR nondisclosure of a fact.
Misrepresentation is a defense when MATERIAL and INDUCES the other party to justifiably rely. Can’t just be an opinion or subjective quality or statement about the future.
We judge inducement objectively. Would a reasonable person care about this or would the person who stated the misrepresentation know it would induce them?
Example: A seller believes her house has no termites, but before closing, buyer finds it has termites. Even if the seller’s misrepresentation was innocent, the buyer can still get out of the deal and avoid enforcement, thus this misrepresentation can be used as a defense to a K. Obviously an intentional misrepresentation/fraud also works as a defense.
Fraud is an intentional misrepresentation. Damages are recoverable in addition to rescission. Not innocent or negligible. This makes the K voidable.
Misrepresentation makes the K VOIDABLE, not void. A voidable contract can be enforced if the aggrieved party WANTS it to be.
