Contracts - DEFENSES to contract formation Flashcards
What defenses exist to contract formation?
MUSCLE MAP (In no particular order)
(1) Mistake about a MATERIAL FACT (mutual v. unilateral)
(2) Unconscionability
(3) Statute of Frauds
(4) no CONSIDERATION
(5) Lack of Capacity
(6) Economic Duress
(7) Misrepresentation/Non-disclosure of a Material Fact
(8) Ambiguity/Misunderstanding
(9) Public Policy
DEFENSES:
Lack of Capacity
Includes Minors (under 18), intoxicated, mentally incompetent
GENERAL RULE: an incapacitated Defendant may DISAFFIRM the contract
IMPLIEDLY AFFIRM - if retain the benefit of the contract after (re-)gaining capacity
EXCEPTION TO ABILITY TO DISAFFIRM***: an incapacitated party is liable for necessaries (ie food, shelter, clothing, and medical care) but only for the REASONABLE VALUE, not the contract price
DEFENSES
Lack of Capacity - MINORS
general rule is that minors (under the age of 18) may disaffirm a contract made when he was a minor
IMPLIED AFFIRMATION: but if he retains the benefit after gaining capacity (ie after he turns 18) he impliedly affirms and agrees to be bound by the contract
EXCEPTION TO ABILITY TO DISAFFIRM***: an incapacitated party is liable for necessaries (ie food, shelter, clothing, and medical care) but only for the REASONABLE VALUE, not the contract price
DEFENSES: ECONOMIC DURESS
contracts induced by duress or undue influence are voidable and may be rescinded as long as not affirmed
Generally, taking advantage of another person’s economic needs is not a defense. HOWEVER, withholding something someone wants or needs will constitute economic duress IF:
(I) the party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; and
(ii) there are no adequate means available to prevent the threatened losses
DEFENSES: Misrepresentation/DON-DISCLOSURE of a Material Fact
A MISREPRESENTATION- is a false assertion of fact. It is fraudulent if intended to induce a party to enter into a contract and maker knows or believes the assertion is false or has no basis for what he says.
*If a party induces another to enter into a contract by using FRAUDULENT MISREPRESENTATION, the contract is VOIDABLE by the innocent party if she JUSTIFIABLY RELIES on the fraudulent misrepresentation
also if SAY NOTHING ABOUT A MATERIAL FACT, contract is voidable for misrepresentation (even though not considered fraud)
EVEN AN HONEST MISREPRESENTATION is a fatal flaw in the agreement process as long as it concerns a MATERIAL FACT, same is true of nondisclosure
e. g.. S tells B house has no foundational problems. The statement induces B to agree to buy S’s house. S HONESTLY believes the house has no foundational problems but it DOES - is B bound?
- –No, even an honest misrepresentation is a FATAL FLAW in the agreement process as long as it concerns a MATERIAL FACT
Same is true of nondisclosure - if don’t disclose material fact, let buyer get out
Note on Affirmance
for most of these, if the party who has the right to void the contract, affirms, the contract becomes enforceable
DEFENSE: Ambiguity or Misunderstanding
If contract language has at least 2 possible meanings and neither party is aware of the ambiguity, there is NO CONTRACT FORMED if the parties intend different things
(ie Parties are on different wavelengths)
e.g. Peerless example - B and S contract for delivery of cotton on the “peerless.” B means the one sailing in May, S means the one in July. Neither party had reason to know there were 2 ships named “peerless”
HOWEVER, IF ONE PARTY is aware of the ambiguity and the other party was not, the CONTRACT WILL BE ENFORCED according to intention of the party who was unaware
DEFENSE: Mistake about a Material Fact
(1) MUTUAL MISTAKE
Mutual Mistake - when both parties are mistaken about an existing fact (not future happenings) relating to the agreement, the contract may be voidable by the adversely affected party IF:
(I) the mistake concerns a BASIC ASSUMPTION on which the contract was made
(ii) the mistake has a MATERIAL EFFECT on the agreed-upon exchange
e. g. Madonna agrees to sell a print to Scalia for $75k, neither party is aware the print had been destroyed by fire 2 days earlier
e. g.2 - M agrees to sell S print for $75k, both believe the print is by Andy Warhol, after agreement they learn print is by another artist
- –in both cases the adversely affected party is excused from contract (not enforceable) - no mutual asset
NOTE however - MISTAKE IN VALUE is generally not a defense
DEFENSE: Mistake about a Material Fact
(2) UNILATERAL MISTAKE
If only one of the parties is mistaken about facts relating to the agreement, the mistake will NOT prevent formation of a contract. (makes sense, otherwise too easy to make stuff up and claim unilateral mistake)
HOWEVER, if the nonmistaken party KNEW OR HAD REASON TO KNOW of the mistake made by the other party, the contract is voidable by the mistaken party
DEFENSE: No Consideration
Consideration exists when there is a bargained-for exchange in which each party receives something that is either a benefit to it or a detriment to the other party.
A person can bargain for a PROMISE, PERFORMANCE, or even FORBEARANCE
for defenses under lack of consideration go to “CONSIDERATION DECK”
DEFENSE: Public Policy
(1) if either the consideration or the subject matter of the contract is ILLEGAL, serves as a defense to enforcement
(2) general public policy - e.g. against restraint on trade
main one: NON-COMPETE covenants - court will invalidate or narrow the scope if it operates as a restraint on trade
another one: EXCULPATORY CLAUSES - can eliminate liability for negligence, but NOT for gross negligence
note: IN PARI DELICTO - when one party is more culpable than the other (e.g. an occasional gambler might be able to enforce against a bookie)
Non-Compete Covenants/Clauses
a court will invalidate or narrow a covenant not to compete that operates as a restraint of trade
Scope of the covenant - consider DURATION and GEOGRAPHY
Ask whether the courts will find the restriction REASONABLE - courts try to balance the Freedom of CONTRACT on the one hand, against the RESTRAINT of TRADE on the other hand.
DEFENSE: Public Policy
Exculpatory Clauses
An EXCULPATORY CLAUSE can eliminate liability for negligence, but NOT for GROSS NEGLIGENCE
DEFENSE: UNCONSCIONABILITY
Generally, not a valid defense against enforcement
2 kinds:
(1) SUBSTANTIVE - the terms are unfair (e.g. indentured servitude) - where a contract or clause “shocks the conscience” of the court
(2) PROCEDURAL - the agreement process was unfair (e.g. small print, unequal bargaining power, inconspicuous risk-shifting provisions, adhesion contrats [take it or leave it] exculpatory cluases, limitation on remedies)
as remedy, court may (I) refuse to enforce the contract or (ii) enforce the remainder of contract WITHOUT the unconscionable clause or (iii) limit application of any clause so as to avoid an unconscionable result
