Contracts Flashcards
Offer
An objective manifestation of a willingness by the offeror to enter into an agreement, that creates a power of acceptance in the offeree.
- must be reasonably interpreted as an offer.
- expresses present intent to be legally bound
- would a reasonable person understand the communication as creating a power of acceptance?
- O’e must have knowledge of the offer.
- TERMS: Certain and definite. CL: All essential terms (parties, SM, price, quantity). UCC: Only essential term is quantity; other gaps filled in by UCC (Req Ks or output Ks don’t need to specify quantity b/c UCC implies good faith as K term)
Duration terms
- In most ongoing Ks, if no duration is specified, courts will assume that it will last for a reasonable period of time.
- Employment: If silent, assume at-will. If provides for “permanent employment,” assume at will (unless contrary intent proved). If “lifetime employment,” some assume at will, some take it literally.
UCC gap-filling
- TIME: Reasonable
- ## PLACE OF DELIVERY: Seller’s PoB
Lapse of offer
- ) Terminates at time specified. If a set number of days, runs upon offer received, not sent, unless offer says otherwise. If offeree is/should have been aware that there is delay in transmittal, offer expires when it would have, if there had been no delay. Otherwise, REASONABLE TIME. For an offer received by mail, an acceptance that is sent by midnight of the day of receipt generally has been made within a reasonable period of time. Unless otherwise agreed upon, if the parties bargain in person or via telephone, the time for acceptance does not ordinarily extend beyond the end of the conversation.
- Death or mental incapacity of offeror, even if offeree doesn’t learn until acceptance is dispatched. UNLESS: Option - if accepted during Option period, acceptance is effective.
- Revocation (manifestation of intent not to enter into a K). Not effective until communicated (if sent by mail, effective upon receipt). UCC: (i) it comes to that person’s attention or (ii) it is duly delivered in a reasonable form at the place of business or where held out as the place for receipt of such communications. Receipt by an organization occurs at the time it is brought to the attention of the individual conducting the transaction or at the time it would have been brought to that individual’s attention were due diligence exercised by the organization
- Rejection - usually effective upon receipt.
Options
- CL: separate consideration needed unless Option is contained within an existing K.
- UCC: Firm offer rule - offer is irrevocable IF (i) merchant, (ii) assurance made that offer will remain open, and (iii) assurance is contained in signed writing by the offeror. [no consideration needed] [for purposes of this rule, merely being a businessperson in a commecial transaction is enough to be a merchant]
NOTE: A firm offer in a form prepared by the offeree must be separately signed by the offeror to protect against inadvertent signing.
- PARTIAL PERFORMANCE: If unilateral K, offeror cannot revoke once performance has begun (has reasonable time to complete work)
Promissory Estoppel: Irrevocability
- When offeree detrimentally and reasonably relies upon a promise prior to acceptance, PE may make the offer irrevocable. Must be REASONABLY FORESEEABLE that the detrimental reliance would occur in order to imply the existence of an option K.
LIABILITY: to extent necessary to avoid injustice, may result in holding offeror to the offer, reimbursement of costs, or restitution
revocability of “general offers”
A general offer can be revoked only by notice that is given at least the same level of publicity as the offer. So long as the appropriate level of publicity is met, the revocation will be effective even if a potential offeree does not learn of the revocation and acts in reliance on the offer.
Counteroffer Rules
- Functions as rejection AND new offer.
- For Option Ks, option holder may make counteroffers during Option Period w/o terminating the original offer (may make new counteroffers but still accept original offer w/in the period)
Revival of offer
- May be revived; once revived, can be accepted.
Acceptance
- Objective manifestation of intent to be bound by the terms of the offer - only party to whom the offer is extended may accept or, if offered to a class, a party who is a member of the class.
Bilateral vs. unilateral
A bilateral contract is one in which a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render them both enforceable. An offer requiring a promise to accept can be accepted either with a return promise or by starting performance. Commencement of performance of a bilateral contract operates as a promise to render complete performance. Restatement (Second) of Contracts § 62.
A unilateral contract is one in which one party promises to do something in return for an act of the other party (e.g., a monetary reward for finding a lost dog). Unlike in a bilateral contract, in a unilateral contract, the offeree’s promise to perform is insufficient to constitute acceptance. Acceptance of an offer for a unilateral contract requires complete performance. Once performance has begun, the offer is irrevocable for a reasonable period of time to allow for complete performance unless there is a manifestation of a contrary intent. However, the offeree is not bound to complete performance. In addition, while the offeror may terminate the offer before the offeree begins to perform, expenses incurred by the offeree in preparing to perform may be recoverable as reliance damages.
NOTE: The offeree of a unilateral contract can accept only an offer that he is aware of. In other words, if the offeree does not become aware of the offer until after acting, then his acts do not constitute acceptance.
Means of accepting
- Offeror is the master of the offer and can dictate manner and means of acceptance. If silent, offeree can accept in any reasonable manner.
A means of acceptance is reasonable if it was used by the offeror, used customarily in the industry, or used between the parties in prior transactions. Even if the acceptance is by unauthorized means, it may be effective if the offeror receives the acceptance while the offer is still open
Silence by acceptance
- Generally, NO.
But yes if - (1) Offeree has reason to believe offer could be so accepted, and was silent with intent to accept by silence, OR (2) reasonable because of past dealings to believe that offeree must notify the offeror if he intends NOT TO ACCEPT.
Acceptance, Shipment
If the buyer requests that the goods be shipped, then the buyer’s request will be construed as inviting acceptance by the seller either by a promise to ship or by prompt shipment of conforming or nonconforming goods.
If the seller ships nonconforming goods, then the shipment is both an acceptance of the offer and a breach of the contract. The seller is then liable for any damage caused to the buyer as a result of the breach.
If, however, the seller “seasonably” notifies the buyer that the nonconforming goods are tendered as an accommodation, then no acceptance has occurred, and no contract is formed. The accommodation is deemed a counteroffer, and the buyer may then either accept (thereby forming a contract) or reject (no contract formed).
Mailbox rule
An acceptance that is mailed within the allotted response time is effective when sent (not upon receipt), unless the offer provides otherwise. The mailing must be properly addressed and include correct postage.
EXAM NOTE: Keep in mind that the mailbox rule applies only to acceptance, and therefore it almost exclusively applies to bilateral contracts (when there is one promise in exchange for another promise), because unilateral contracts require action as acceptance.
The mailbox rule does not apply to an option contract, which requires that the acceptance be received by the offeror before the offer expires, or to offers that specify that acceptance must be received by a certain date.
Rejection after acceptance vs. acceptance after rejection
R AFTER A: If the offeree sends an acceptance and later sends a communication rejecting the offer, then the acceptance will generally control even if the offeror receives the rejection first. If, however, the offeror receives the rejection first and detrimentally relies on the rejection, then the offeree will be estopped from enforcing the contract.
A AFTER R: If a communication is sent rejecting the offer, and a later communication is sent accepting the contract, then the mailbox rule will not apply, and the first one to be received by the offeror will prevail. An acceptance or rejection is received when the writing comes into the possession of the offeror or her agent, or when it is deposited in her mailbox. The offeror need not actually read the communication that is received first for it to prevail.
instantaneous two-way communication
If the acceptance is via an “instantaneous two-way communication,” such as telephone or traceable fax, it is treated as if the parties were in each other’s presence.
notice in a uni. K
In a unilateral contract, an offeree is not required to give notice after performance is complete, unless he has reason to know that the offeror would not learn of performance within a reasonable time, or the offer requires notice.
If notice is required but not provided, the offeror’s duty is discharged, unless:
i) The offeree exercises reasonable diligence to notify the offeror;
ii) The offeror learns of performance within a reasonable time; or
iii) The offer indicates that notification of acceptance is not required.
Notice in bilateral K
An offeree of a bilateral contract must give notice of acceptance. Under the mailbox rule, because acceptance becomes valid when sent, a properly addressed letter sent by the offeree operates as an acceptance when mailed, even though the offeror has not yet received the notice. Under the UCC, notice is required within a reasonable time if acceptance is made by beginning performance and failure to do so will result in a lapse of the offer.
CL Mirror Image Rule
The acceptance must mirror the terms of the offer. Any change to the terms of the offer, or the addition of another term not found in the offer, acts as a rejection of the original offer and as a new counteroffer. Mere suggestions or inquiries, including requests for clarification or statements of intent, made in a response by the offeree do not constitute a counteroffer. A conditional acceptance terminates the offer and acts as a new offer from the original offeree.
UCC, different terms
Additional or different terms included in an acceptance of an offer do not automatically constitute a rejection of the original offer. Generally, for a sale of goods, an acceptance that contains additional or different terms with respect to the terms in the offer is nevertheless treated as an acceptance rather than a rejection and a counteroffer. An exception exists when the acceptance is expressly conditioned on assent to the additional or different terms, in which case the acceptance is a counteroffer.
- WHEN 1 OR BOTH PARTIES ARE NOT MERCHANTS: When the contract is for the sale of goods between nonmerchants or between a merchant and a nonmerchant, a definite and seasonable expression of acceptance or written confirmation that is sent within a reasonable time operates as an acceptance of the original offer. This is true even if it states terms that are additional to or different from the offer, unless the acceptance is made expressly conditional on the offeror’s consent to the additional or different terms. The additional terms are treated as a proposal for addition to the contract that must be separately accepted by the offeror to become a part of the contract.
- WHEN BOTH ARE MERCHANTS (BATTLE OF THE FORMS): i) Acceptance includes additional terms
An additional term in the acceptance is automatically included in the contract when both parties are merchants, unless:
i) The term materially alters the original contract;
ii) The offer expressly limits acceptance to the terms of the offer; or
iii) The offeror has already objected to the additional terms, or objects within a reasonable time after notice of them was received.
If any one of these three exceptions is met, the term will not become part of the contract, and the offeror’s original terms control.
“Materially Alter”: A term that results in surprise or hardship if incorporated without the express awareness by the other party materially alters the original contract. Examples of terms found to have materially altered the original contract include a warranty disclaimer, a clause that flies in the face of trade usage with regard to quality, a requirement that complaints be made in an unreasonably short time period, and other terms that surprise or create hardship without express awareness by the other party. Terms that usually do not materially alter the contract include fixing reasonable times for bringing a complaint, setting reasonable interest for overdue invoices, and reasonably limiting remedies.
Acceptance includes different terms
The courts in different jurisdictions disagree as to the result when different terms are included in the merchant offeree’s acceptance. A few jurisdictions treat different terms the same as additional terms and apply the rule described above. Most, however, apply the “knock-out” rule, under which different terms in the offer and acceptance nullify each other and are “knocked out” of the contract. When gaps are created after applying the knock-out rule, the court uses Article 2’s gap-filling provisions to patch the holes.
UCC acceptance based on conduct
If the offer and purported acceptance differ to such a degree that there is no contract, but the parties have begun to perform anyway (i.e., demonstrated conduct that recognizes the existence of a contract), then Article 2 provides that there will be a contract, and its terms will consist of those terms on which the writings of the parties agree, together with any supplementary terms filled in by the provisions of the UCC.
Rules for Auction Ks
1) Goods auctioned in lots
If goods in an auction sale are offered in lots, each lot represents a separate sale.
2) Completion of a sale
An auction sale is complete when the auctioneer announces its end, such as by the fall of the auctioneer’s hammer or in any other customary way. When a bid is made contemporaneously with the falling of the hammer, the auctioneer may, at her discretion, treat the bid as continuing the bidding process or declare the sale completed at the fall of the hammer.
3) Reserve and no-reserve auctions
In a reserve auction, the auctioneer may withdraw the goods any time before she announces completion of the sale. An auction is with reserve unless specifically announced as a no-reserve auction.
In a no-reserve auction, after the auctioneer calls for bids on the goods, the goods cannot be withdrawn unless no bid is received within a reasonable time.
In either type of auction, a bidder may retract her bid until the auctioneer announces the completion of the sale. A retraction, however, does not revive any earlier bids.
4) When the seller bids
When an auctioneer knowingly accepts a bid by the seller or on her behalf, or procures such a bid to drive up the price of the goods, the winning bidder may avoid the sale or, at her option, take the goods at the price of the last good-faith bid prior to the end of the auction. There are two exceptions to this rule, which are that (i) a seller may bid at a forced sale and (ii) a seller may bid if she specifically gives notice that she reserves the right to bid.
Consideration
If there is a valid offer and acceptance that creates an agreement, the agreement can be legally enforceable if there is consideration.
- Bargain and Exchange
Valuable consideration is evidenced by a bargained-for change in the legal position between the parties. Most courts conclude that consideration exists if there is a detriment to the promisee, irrespective of the benefit to the promisor. A minority of courts look to either a detriment or a benefit, not requiring both. The Second Restatement asks only whether there was a bargained-for exchange. Restatement (Second) of Contracts § 71.
a. Legal detriment and bargained-for exchange
For the legal detriment to constitute sufficient consideration, it must be bargained for in exchange for the promise. The promise must induce the detriment, and the detriment must induce the promise (“mutuality of consideration”).
Consideration can take the form of:
i) A return promise to do something;
ii) A return promise to refrain from doing something legally permitted;
iii) The actual performance of some act; or
iv) Refraining from doing some act.
b. Gift distinguished
A promise to make a gift does not involve bargained-for consideration and is therefore unenforceable.
gift vs. consideration
NOTE: The test to distinguish a gift from valid consideration is whether the offeree could have reasonably believed that the intent of the offeror was to induce the action. If yes, there is consideration, and the promise is enforceable.
Gifts, PE
A party’s promise to make a gift is enforceable under the doctrine of promissory estoppel if the promisor/donor knows that the promise will induce substantial reliance by the promisee, and the failure to enforce the promise will cause substantial injustice
Pre-existing duty
At common law, a promise to perform a preexisting legal duty does not qualify as consideration because the promisor is already bound to perform (i.e., there is no legal detriment). Note that if the promisor gives something in addition to what is already owed (however small) or varies the preexisting duty in some way (however slight), most courts find that consideration exists.
3P EXCEPTION: There is an exception to the preexisting-duty rule when a third party offers a promise contingent upon performance of a contractual obligation by a party. Under the exception, the third party’s promise is sufficient consideration.
PAST CONSIDERATION: Under the common law, something given in the past is typically not adequate consideration because it could not have been bargained for, nor could it have been done in reliance upon a promise.
Modification (CL)
At common law, modification of an existing contract must be supported by consideration. Agreements to modify a contract may still be enforced if:
i) There is a rescission of the existing contract by tearing it up or by some other outward sign, and then the entering into of a new contract, whereby one of the parties must perform more than she was to perform under the original contract;
ii) There are unanticipated difficulties, and one of the parties agrees to compensate the other when the difficulties arise if the modification is fair and equitable in light of those difficulties; or
iii) There are new obligations on both sides.
The modification must rest in circumstances not anticipated as part of the context in which the contract was made but need not have been completely unforeseeable. When such a reason is present, the relative financial strength of the parties, the formality with which the modification is made, the extent to which it is performed or relied on and other circumstances may be relevant
Modification (UCC)
Unlike under the common law, under Article 2, no consideration is necessary to modify a contract; however, good faith is required. Thus, if one party is attempting to extort a modification, it will be ineffective under the UCC.
Good faith requires honesty in fact and fair dealing in accordance with reasonable commercial standards. UCC § 1-201(20). The definition of “good faith” no longer limits the fair dealing prong of the rule to merchants. The same definition of good faith applies to all parties, both merchants and nonmerchants alike.
Generally, a party benefited by a condition under a contract may orally waive that condition without new consideration. However, in installment contracts, the waiver may be retracted by providing the other party with reasonable notice that strict performance is required. The retraction is allowed unless it would be unjust because of a material change of position by the other party in reliance on the waiver.
A&S
1) Accord
Under an accord agreement, a party to a contract agrees to accept a performance from the other party that differs from the performance that was promised in the existing contract, in satisfaction of the other party’s existing duty. Restatement (Second) of Contracts § 281.
a) Dispute of a monetary claim
When a party agrees to accept a lesser amount in full satisfaction of its monetary claim, there must be consideration or a consideration substitute for the party’s promise to accept the lesser amount. For example, consideration can exist if the other party honestly disputes the claim or agrees to forego an asserted defense (see i. Settlement of a legal claim, below), or if the payment is of a different type than called for under the original contract
A “satisfaction” is the performance of the accord agreement; it will discharge both the original contract and the accord contract. However, there is no satisfaction until performance, and the original contract is not discharged until satisfaction is complete. Therefore, if an accord is breached by the party who has promised a different performance, the other party can sue either on the original contract or under the accord agreement.
Use of a negotiable instrument in satisfaction
If a claim is unliquidated or otherwise subject to dispute, it can be discharged if (i) the person against whom the claim is asserted in good faith tenders a negotiable instrument (e.g., a check) that is accompanied by a conspicuous statement indicating that the instrument was tendered as full satisfaction of the claim (e.g., “Payment in full”), and (ii) the claimant obtains payment of the instrument. The addition of a restriction by the claimant to his indorsement of the check, such as “under protest,” does not operate to preserve his right to seek additional compensation.
When the claimant is an organization, the discharge is not effective if the instrument is not tendered to a person, place, or office designated by the organization. If no such designation is made, or if the claimant is not an organization, the discharge is not effective if the claimant returns the payment within 90 days. However, regardless of the type of claimant, these exceptions do not apply and the claim is discharged when the claimant, or the claimant’s agent who has direct responsibility with respect to the disputed obligation, knew, within a reasonable time before collection was initiated, that the instrument was tendered in full satisfaction of the claim. The burden to establish such knowledge is on party seeking discharge.
Illusory promises
An illusory promise is one that essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. Such a promise is not legally binding.
A promise that is based on the occurrence of a condition within the control of the promisor may be illusory, but courts often find that the promisor has also promised to use her best efforts to bring about the condition.
Similarly, a promise to purchase goods upon the promisor’s satisfaction with the goods is not illusory because the promisor is required to act in good faith.
Void and unenforceable promises as Consideration
A promise that is voidable or unenforceable by a rule of law (e.g., infancy) can nevertheless constitute consideration.
Requirements and Output
A requirements contract is a contract under which a buyer agrees to buy all that he will require of a product from the other party. An output contract is a contract under which a seller agrees to sell all that she manufactures of a product to the buyer. There is consideration in these agreements because the promisor suffers a legal detriment. The fact that the party may go out of business does not render the promise illusory.
Because a covenant of good faith and fair dealing is implied in all contracts (common law and UCC), any quantities under such a contract may not be unreasonably disproportionate to any stated estimates, or if no estimate is stated, to any normal or otherwise comparable prior requirements or output.
Promise to settle legal claim as consideration
A promise not to assert or a release of a claim or defense that proves to be invalid does not constitute consideration, unless the claim or defense is in fact doubtful due to uncertainty of facts or law, or the party promising not to assert or releasing the claim or defense believes in good faith that it may be fairly determined to be valid.
Promise to Pay a Debt Barred by the Statute of Limitations or Bankruptcy
A new promise to pay a debt after the statute of limitations has run is enforceable without any new consideration. When the new promise is an express promise, most states require that the new promise be in writing and signed by the debtor. In addition, a new promise may be implied when the obligor (i) voluntarily transfers of something of value (e.g., money, negotiable note) to the obligee as interest on, part payment of, or collateral security for the prior debt, (ii) voluntarily acknowledges to the obligor the present existence of the prior indebtedness, or (iii) states to the obligee that the statute of limitations will not be pled as a defense.
A new promise made to pay a debt discharged in bankruptcy is enforceable without any new consideration. While there must an express promise to pay rather than a mere acknowledgment or partial payment of the discharged debt, the new promise need not be in writing.
Promise to Perform a Voidable Duty
A new promise to perform a duty that is voidable will be enforceable despite the absence of consideration, provided that the new promise does not suffer from an infirmity that would make it, in turn, voidable.
Material Benefit Rule
Under the material benefit rule, when a party performs an unrequested service for another party that constitutes a material benefit, the modern trend permits the performing party to enforce a promise of payment made by the other party after the service is rendered, even though, at common law, such a promise would be unenforceable due to lack of consideration.
This rule is not enforced when the performing party rendered the services without the expectation of compensation (e.g., as a gift). In addition, the promise is enforced only to the extent necessary to prevent injustice, and it is not enforceable to the extent that the value of the promise is disproportionate to the benefit received, or the promisor has not been unjustly enriched.
Requested services
If one party requests another party to perform a service but does not indicate a price, and the service is performed, this generally creates an “implied-in-fact” contract. The party who performed the requested service is generally entitled to recover the reasonable value of her services in a breach-of-contract action in which the party who enjoyed the benefit of the services refused to pay. An exception applies, however, when the services were rendered without the expectation of payment.
Promissory Estoppel
i) The promisor should reasonably expect it to induce action or forbearance on the part of the promisee or a third person;
ii) The promise does induce such action or forbearance; and
iii) Injustice can be avoided only by enforcement of the promise.
Note that, in general, the promisee must actually rely on the promise, and such reliance must have been reasonably foreseeable to the promisor. See below, however, for an exception regarding charitable subscriptions.
The remedy may be limited or adjusted as justice requires. Generally, this results in the award of reliance damages rather than expectation damages.
Exception to the reliance requirement for charitable subscriptions
Courts often apply the doctrine of promissory estoppel to enforce promises to charitable institutions. In some cases, they presume that the charity detrimentally relied on the promised contribution. A charitable subscription (i.e., a written promise) is enforceable under the doctrine of promissory estoppel without proof that the charity relied on the promise.
Construction contracts and promissory estoppel
In the construction industry, it would be unjust to permit a subcontractor to revoke a bid after inducing justifiable and detrimental reliance in the general contractor. Thus, an agreement not to revoke a sub-bid offer can be enforceable under the theory of promissory estoppel.
Because the sub-bid is only an outstanding offer, the general contractor is not bound to accept it upon becoming the successful bidder for the general contract. A general contractor can enter into a subcontract with another subcontractor for a lower price.
Defenses to enforceability
- Void Contracts
A void contract results in the entire transaction being regarded as a nullity, as if no contract existed between the parties.
- Voidable Contracts
A voidable contract operates as a valid contract, unless and until one of the parties takes steps to avoid it.
- Unenforceable Contracts
An unenforceable contract is a valid contract that cannot be enforced if one of the parties refuses to carry out its terms.
Mutual mistake
Mutual mistake occurs when both parties are mistaken as to an essential element of the contract. In such a situation, the contract may be voidable by the adversely affected party upon proof of the following:
i) Mistake of fact existing at the time the contract was formed;
ii) The mistake relates to a basic assumption of the contract;
iii) The mistake has a material impact on the transaction; and
iv) The adversely affected party did not assume the risk of the mistake.
When reformation of the contract is available to cure a mistake, neither party can avoid the contract.
1) Conscious ignorance
A party may bear the risk of a mistake, however, when she is aware at the time of the contract that she has only limited knowledge of the facts to which the mistake relates, and she accepts her limited knowledge as sufficient. Note that the risk created by conscious ignorance rests on the party being aware of her limited knowledge. Restatement (Second) of Contracts § 154.
2) Mistaken party’s negligence
When the mistake is attributable to a party’s failure to know or discover facts before entering into the contract, the party may nonetheless assert the defense of mistake, unless the party failed to act in good faith and in accordance with the reasonable standards of fair dealing. The mistaken party’s negligence with regard to the mistake is not sufficient to prevent the mistaken party from avoiding the contract. Restatement (Second) of Contracts § 157.
Unilateral mistake
When only one of the parties was mistaken as to an essential element of the contract at the time the contract was formed, either party can generally enforce the contract on its terms. However, the mistaken party can void the contract if the elements for a mutual mistake exist and either:
i) The mistake would make enforcement of the contract unconscionable; or
ii) The non-mistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken.
For a unilateral mistake to form the basis for rescission, there must be an absence of serious prejudice to the other party.
Reformation of K
Reformation of a writing for mistake is available if:
i) There was a prior agreement (either oral or written) between the parties;
ii) There was an agreement by the parties to put that prior agreement into writing; and
iii) As a result of a mistake, there is a difference between the prior agreement and the writing.
Note that if one party, without the consent of the other party, intentionally omits a term from the writing that had been agreed upon by the parties, reformation would be available on the grounds of misrepresentation.
Misunderstanding
a. Neither party knows or should know of the misunderstanding
If the misunderstanding involves a material term, and neither party knows or has reason to know that there is a misunderstanding, then there is no contract.
b. One party knows or should know of the misunderstanding
If a material term in the offer and acceptance is ambiguous, and only one party knows or has reason to know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract formed based on the meaning of the term as understood by the unknowing party.
c. Both parties know of the misunderstanding
There is no contract if both parties at the time of contracting knew or had reason to know that a material terms was ambiguous, unless both parties intended the same meaning.
d. Waiver of the misunderstanding
Even if there is a misunderstanding, one party may waive the misunderstanding and choose to enforce the contract according to the other party’s understanding.
e. Subjective determination of misunderstanding
In determining the existence of a misunderstanding, it is each party’s knowledge or reason to know of the misunderstanding that governs, not what a reasonable person would know. In this regard, the objective theory of contracts does not apply. In addition, in determining what a party knows or has reason to know, the principles regarding conscious ignorance and negligence apply.
Fraudulent misrepresentation
Fraudulent misrepresentation requires proof of the following:
i) The misrepresentation is fraudulent;
a) A false assertion of fact made knowingly, or recklessly without knowledge of its truth; and
b) With intent to mislead the other party;
ii) The misrepresentation induced assent to the contract; and
iii) The adversely affected party justifiably relied on the misrepresentation.
Nondisclosure
Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist. In addition, mere nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that:
i) Disclosure is necessary to prevent a previous assertion from being a misrepresentation or fraudulent or material;
ii) Disclosure would correct a mistake of the other party as to a basic assumption, and the failure to disclose would constitute lack of good faith and fair dealing;
iii) Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or
iv) The other party is entitled to know the fact because of a confidential or fiduciary relationship.
Effect of fraud
1) Fraud in the factum
Fraud in the factum (or fraud in the execution) occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction. In such a case, no contract is formed, and the apparent contract is void (i.e., not enforceable against either party), unless reasonable diligence would have revealed the true terms of the contract.
2) Fraud in the inducement
Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. Such a contract is voidable by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.
Nonfraudulent misrepresentation
Even if nonfraudulent, a misrepresentation (innocent or negligent) can still render a contract voidable by the adversely affected party if:
i) The misrepresentation is material (i.e., information that would cause a reasonable person to agree or that the person making the misrepresentation knows would cause this particular person to agree);
ii) The misrepresentation induced assent to the contract; and
iii) The adversely affected party justifiably relied on the misrepresentation.
Effect of party’s fault in not knowing or discovering facts
A party’s fault in not knowing or discovering facts before entering into the contract does not prevent the party’s reliance on the misrepresentation from being justified unless it constitutes a failure to act in good faith and in accordance with the reasonable standards of fair dealing. The party’s negligence with regard to learning about the falsity of the misrepresentation is not sufficient to prevent the party from avoiding the contract.
Undue Influence
A party to a contract who is a victim of undue influence can void the contract.
The key is whether a party has been able to exercise free and competent judgment or whether the persuasion of the other party has seriously impaired that judgment. Relevant factors can include the fairness of the bargain, the availability of independent advice, and the susceptibility of a party to being persuaded.
When a confidential relationship between contracting parties is established, the burden of proving that the contract is fair may be placed upon the dominant party. The dominant party to the contract may also be held to a higher standard of disclosure than she would be in a contract between arms-length parties.
When the undue influence is caused by the person who is not a party to the contract, the victim may void the contract, unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.
Cure of a misrepresentation
If, following a misrepresentation but before the deceived party has avoided the contract, the facts are cured so as to be in accord with the facts that were previously misrepresented, then the contract will no longer be voidable by the deceived party.
Avoidance or reformation for misrepresentation
When one party misrepresents the content or legal effect of a writing to another party, the other party may elect to avoid the contract or to reform it to express what had been represented.
Duress
Duress is an improper threat that deprives a party of meaningful choice.
a. Improper threat
Examples of improper threats include threats of a crime, a tort, or criminal prosecution, or the threat of pursuing a civil action (when made in bad faith). In addition, it is improper to threaten to breach a contract if doing so would violate the duty of good faith and fair dealing. Restatement (Second) of Contracts §176.
1) Threat of criminal prosecution
The threat of criminal prosecution is an improper means by which to induce a person to enter into a contract. It does not matter that the person making the threat honestly believes that the person who would be subject to criminal prosecution is guilty. Nor does it matter that the person threatened with prosecution is in fact guilty of the crime.
2) Threat of civil action
Unlike the threat of criminal prosecution, the threat of a civil action is generally not improper. The lack of success in pursuing a civil action does not make the threat improper unless the civil action is pursued in bad faith.
b. Deprivation of meaningful choice
A person is deprived of meaningful choice only when he does not have a reasonable alternative to succumbing to the threat. Thus, with regard to the threat of a civil action, a person generally has the reasonable alternative of defending against the action. However, if the threat also involves the seizure of property in conjunction with the civil action, or if it causes the person to be unable to fulfill other contractual obligations, then the person may be deprived of a meaningful choice. Restatement (Second) of Contracts § 175.
EFFECT:
When a party’s agreement to enter into a contract is physically compelled by duress, such as the threat to inflict physical harm, the contract is void. In other instances when a party is induced to enter into a contract by duress, such as when the threat is a breach of the duty of good faith and fair dealing, the contract is voidable.
When the duress is caused by the person who is not a party to the contract, the victim may void the contract, unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.
Capacity Rules
- INFANCY - Voidable by infant, not other party. Disaffirmance must happen before reaching age of majority or w/in reasonable time thereafter. If not, ratified.
- Still liable when K is based on necessities (recovery limited to reasonable value of services/goods)
- Statute: student loans may be fully enforceable.
MENTAL ILLNESS: If adjudicated MI, purported K is VOID. If no adjudication, VOIDABLE if - (i) couldn’t understand the nature of the transaction, or (ii) act in a reasonable manner re: transaction AND other party has reason to know of this fact.
- K is fully enforceable if made during lucid period unless adjudication.
- May be liable for reasonable necessities furnished.
GUARDIANSHIP: if under G by reason of an adjudication, individual has no capacity to K and purported K is void.
- May be liable for reasonable necessities furnished,
INTOXICATION: Voidable by intoxicated party if person unable to understand nature and consequences AND other party had reason to know. Must PROMPTLY DISAFFIRM and return any value received. May be liable on QUASI-K for value furnished.
Illegality defense
If the consideration or performance that is to occur under a contract is illegal, then the contract itself is illegal and is unenforceable. If a contract contemplates illegal conduct, it is void. If a contract becomes illegal after it is formed, the duty to perform under the contract is discharged.
EFFECT: Illegal transactions are not recognized or enforceable, restitution is not awarded for consideration, and no remedy is available for partial performance.
b. Exceptions
1) Ignorance of illegality
When one party is justifiably ignorant of the facts that make the contract illegal, that party may recover if the other party to the contract acted with knowledge of the illegality. Restatement (Second) of Contracts § 180.
2) Lack of illegal purpose
If a contract does not involve illegal consideration or the performance of an act that is illegal, and a party has substantially performed, then that party may recover if she is unaware of the illegal purpose that the other party intends to make of that performance.
DIVISIBLE Ks: If a contract can be easily separated into legal and illegal parts, then recovery may be available on the legal part(s).
LICENSING Ks: When a party fails to comply with a licensing or similar requirement and is prohibited from performing an act, the party may not enforce the contract if the requirement has a regulatory purpose and the public policy for the requirement clearly outweighs the interest in enforcing the promise. Where the purpose of the requirement is only to raise revenue, the requirement does not have a regulatory purpose. In weighing the policy for the requirement against the interest in enforcing the promise, the nature of the interest protected (e.g., health and safety vs. economic) and magnitude of the penalty should be taken into account as well as whether the violation was intentional or inadvertent.
