Contract Formation: Requirement that No Defenses Exist

Question 1

What are the categories of defenses to contract ?

Answer 1

1. Absence of Mutual Assent
2. Absence of Consideration
3. Public Policy Defenses - Illegality
4. Defenses based on Lack of Capacity
5. Statute of Frauds
6. Unconscionability

Question 2

What types of defects can lead to an absence of mutual assent?

Answer 2

1. Mistake of Fact
2. Misunderstanding (ambiguous contract language)
3. Misrepresentation

Question 3

What is the rule re: mutual mistake of existing facts?

Answer 3

If BOTH parties are mistaken about EXISTING FACTS, contract may be VOIDABLE by adversely affected party if:

1. mistake concerns BASIC ASSUMPTION on which K is made;
2. mistake has MATERIAL EFFECT on agreed upon exchange; AND
3. party seeking avoidance did not ASSUME RISK

Question 4

What is the rule re: unilateral mistake?

Answer 4

General Rule: Unilateral mistake will NOT prevent K formation

Exception: If one party KNEW or HAD REASON TO KNOW of the mistake, K is voidable by mistaken party IF:

1. mistake had MATERIAL EFFECT on agreed upon exchange; AND
2. party seeking avoidance did not assume risk

Question 5

What is the rule re: Misunderstanding (ambiguous contract language)?

Answer 5

if neither/both parties aware –> No K unless both parties intended same meaning

If one party aware –> binding K based on what ignorant party reasonably believed to be meaning of ambiguous words

Question 6

What is the rule re: fraudulent misrepresentation?

Answer 6

K is voidable by innocent party if:

1. it is a MATERIAL misrepresentation; AND
2. she justifiably relied on it

Question 7

For the purpose of fraudulent misrepresentation, what is a “material” misrepresentation?

Answer 7

It is material if:

1. it would induce a reasonable person to agree; OR
2. maker knows that for some special reason it would induce this particular person to agree, even if a reasonable person would not

Question 8

What are the remedies for fraudulent misrepresentation?

Answer 8

Innocent party may rescind K. Also may pursue all remedies available for breach.

Question 9

What is the rule re: lack of consideration?

Answer 9

No K exists

Question 10

What is the rule re: illegality?

Answer 10

If consideration or subject matter of K is illegal —> K is void
Example –> contract to commit murder

If only the PURPOSE of K is illegal –> K is VOIDABLE by a party who was:

(i) unaware of the purpose;
(ii) aware but did not facilitate purpose AND purpose doesn’t involve serious turpitude

Question 11

What is the rule re: contracts of infants (minors)?

Answer 11

If under 18 –>

• K’s are voidable. infant may disaffirm any time before (or shortly after) reaching age of majority.
• If they disaffirm, infant must return anything that she received that still remains at time of disaffirmance (no obligation to return anything already spent).
• EXCEPTION: in most states will be liable for necessaries

Adults to infants –>
contractual promises of adult to infant are binding on adult

Question 12

What is the rule re: contracts of people without mental capacity to enter into K?

Answer 12

• Someone w/o mental capacity may disaffirm when lucid or by later representative
• they ARE liable in quasi-contract for necessaries
• mentally incompetent person has NO ability to contract once guardian has been appointed. Any contracts entered into after this time are void

Question 13

What is the rule re: contracts of intoxicated people?

Answer 13

• voidable IF the other party had reason to know of intoxication
• may be affirmed upon recovery
• liable in quasi-contract for necessaries

Question 14

What is the rule re: duress/undue influence?

Answer 14

Contract procured by duress/undue influence are VOIDABLE, and may be rescinded as long as not affirmed

Duress:
Improper threat. Usually economic threat is not enough unless:
(i) party threatens to commit wrongful act that would seriously threaten the other contracting party’s property or finances; AND
(ii) there are no adequate means to prevent threatened loss

Undue Influence:

(i) undue susceptibility to pressure by one party;
(ii) excessive pressure by other party

Question 15

What is the general rule re: unconscionability?

Answer 15

Court may refuse to enforce a provision or an entire contract, or may modify contract, to avoid unfairness.

NOTE: unfair price alone is usually not enough

NOTE: it’s often procedural unfairness

Question 16

What is the rule re: unconscionability and contracts of adhesion?

Answer 16

Courts will deem clause unconscionable and unenforceable if:

- signer is unable to procure necessary goods from any seller without agree d

Question 17

What is the rule re: unconscionability and exculpatory clauses?

Answer 17

clause absolving party from liability from INTENTIONAL conduct –> usually unconscionable

Negligent acts —> MAY be unconscionable if inconspicuous, usually OK esp if for hazardous activity

Question 18

What is the rule re: unconscionability and limitations on remedies?

Answer 18

• contract clause limiting liability for damages to property is usually OK unless inconspicuous.
• HOWEVER –> if remedy FAILS OF ITS ESSENTIAL PURPOSE, then court may find it unconscionable (example –> only remedy is repair, and item is incapable of being repaired)n

Question 19

What is the rule re: unconscionability and timing?

Answer 19

-unconscionability is determined by circumstances as they existed at the time K was formed

Question 20

What is effect if court finds unconscionable clause?

Answer 20

court may:

1. refuse to enforce K
2. enforce remainder of K without clause
3. limit the application of any clause so as to avoid unconscionable result