Defenses and Excuses

Question 1

What is the function of defenses in contracts law?

Answer 1

Defenses allow parties to avoid enforcement of an otherwise valid contract.

Question 2

What are the effects of establishing a defense or excuse?

Answer 2

1. Recission: put parties in same position they were in before contract was formed
2. Sue for Breach: put parties in same position as if contract had been performed
3. Reformation: Keep parties in a contractual relationship with modified terms

Question 3

What is the rule for the defense of Duress?

Answer 3

“If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.”

Question 4

What are the two types of duress?

Answer 4

Physical Duress: Occurs when someone threatens physical violence
Economic Duress: Occurs where an improper threat puts economic pressure on a party to enter into an agreement

Question 5

What are the elements of duress?

Answer 5

1. Inducement
2. Improper Threat
3. No Reasonable Alternative

Question 6

What are the consequences of duress?

Answer 6

1. A contract is VOIDABLE if a party is coerced by economic duress.
2. A contract is VOID if a party is physically compelled by
   duress to enter into the agreement.
3. If the other party to the contract knows the victim is being coerced improperly, then the contract is void or voidable based on that knowledge. If the third party does not know of the duress and, operating in good faith, either gives consideration or materially relies on the contract, then the contract is not void or voidable.

Question 7

What is Undue Influence?

Answer 7

(1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act
in a manner inconsistent with his welfare.

(2) If a party’s manifestation of assent is induced by undue influence by the
other party, the contract is voidable by the victim.

Question 8

What are the elements of Undue Influence?

Answer 8

(1) inducement, (2) unfair persuasion, (3) undue susceptibility to domination by another party, and (4) an inequitable result.

Question 9

What is Misrepresentation?

Answer 9

“If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.”

Question 10

What are the elements of Misrepresentation?

Answer 10

1. Misrepresentation,
2. Fraud or Materiality,
3. Inducement, and
4. Justifiable Reliance.

Question 11

What is Nondisclosure?

Answer 11

Generally, there is no requirement of full disclosure of all relevant facts in every business relationship.

Question 12

What are the exceptions to nondisclosure?

Answer 12

Exceptions: An uninformed party may seek rescission of a contract if there
are non-disclosed facts which
(a) have a material effect on the transaction,
(b) are not readily observable, and
(c) are not known to the non-disclosed party in the following
circumstances:
(1) where disclosure is required by statute;
(2) where a party intentionally conceals the non-disclosed facts;
(3) where the uninformed party is entitled to know the facts because of a relationship of trust and confidence between the parties; or
(4) in order to prevent or correct a mistake of the uninformed party
when nondisclosure is a breach of the duty of good faith.

Question 13

What are qualifying circumstances related to nondisclosure?

Answer 13

1. Disclosure is Required by Statute (i.e. securities laws)
2. Intentional Concealment (“the act of the cover-up”)
   ● Active Concealment: a party purposely “hides something from the
   other, as when the seller of a building paints over a defect”
   ● Indirect Concealment: “a party prevents the other from making an
   investigation that would have disclosed a defect.”
3. Relationship of Confidence (i.e. financial advisor-client, attorney-client)
4. Duty to Disclose to Correct a Mistake (When one party knows that the
   other party has made a mistake on a basic assumption of the contract, then
   there may be an affirmative duty to disclose to correct a mistake

Question 14

What is Unconscionability?

Answer 14

Courts that find any contract or clause to be unconscionable at the time it was made can refuse to enforce the contract or limit the unconscionable clause to avoid an unconscionable result

Question 15

What are the two required types of unconscionability?

Answer 15

Unconscionability requires both:
1. procedural unconscionability, and
2. substantive unconscionability

Question 16

Procedural Unconscionability is:

Answer 16

Procedural Unconscionability: may be demonstrated by (1) gross inequality in bargaining power, or (2) unfair surprise.
Gross Inequality in Bargaining
Power: occurs when a party lacks a meaningful choice.
Unfair Surprise: occurs where
reasonable expectations of a party
are disappointed as a result of the
bargaining process.

Question 17

Substantive Unconscionability is:

Answer 17

Substantive unconscionability may be shown by:
(1) Overly harsh allocation of risks not justified by the circumstances, or
(2) Great price disparity (i.e., gross inadequacy of consideration, unduly
favorable to another party).

Question 18

What are the two types of mistake?

Answer 18

Mutual Mistake: Both parties must make the same
mistake at the time of contract formation.
Unilateral Mistake: Only one party makes a mistake

Question 19

What are the elements of mutual mistake?

Answer 19

Mutual Mistake Elements
A contract is voidable under mutual mistake if:
1. Both parties, at contract formation,
2. Make a mistake,
3. About a basic assumption on which the
contract was made,
4. And the mistake has a material effect on the
agreed exchange of performances.
Exception: Mutual mistake is not available to
excuse a party who bears the risk of the mistake.

Question 20

In determining whether a
mistake was a basic
assumption of the
contract, courts often look
at the

Answer 20

motivation of the
parties in entering into
the contract.

Question 21

What are exceptions to mistake?

Answer 21

1. Party Bears the Risk of Mistake
   A party bears the risk of a mistake when:
   (a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
2. Risk Allocated by Agreement
   Such agreements should ideally be reflected in the express language of the contract, but they could also arise through conduct.
3. Conscious Ignorance/Assumption of Risk
   Conscious Ignorance/Assumption of Risk occurs where one
   party knows that he lacks full information regarding the
   transaction and fails to take reasonable affirmative steps to
   determine the key facts related to the transaction.
4. Allocated by the Court
   “In dealing with such issues, the court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions.” — Restatement (Second) of Contracts §154, comment (d) Court may allocate the risk to a party that, based on all the facts and circumstances, they believe is more at fault than the other.

Question 22

What are the elements of unilateral mistake?

Answer 22

1. One party,
2. at contract formation*
3. made a mistake*
4. about a basic assumption on which the contract was made*
5. and the mistake has a material effect on the agreed exchange of
   performances*
   AND EITHER
6. the effect of the mistake is such that enforcement of the contract would be
   unconscionable
   OR
7. the other party had reason to know of the mistake or his fault caused the
   mistake
   EXCEPTION: Party bears the risk of the mistake.*
   *Element also applies to Mutual Mistake

Question 23

What is the defense of Unconscionability within Mistake?

Answer 23

Defense of Unconscionability: requires both procedural unconscionability and substantive unconscionability (on a sliding scale). Procedural unconscionability is shown by (1) inequality in bargaining power, or (2) unfair
surprise. Substantive unconscionability is shown by (1) overly harsh allocation of risks not justified by the circumstances, or (2) great price disparity.

Question 24

What are the three types of Changed Circumstances?

Answer 24

1. impossibility: performance of the agreement must
   literally be impossible.
2. impracticability: performance must result in an
   extreme and unreasonable difficulty, expense, injury, or loss
   in order to excuse performance.
3. Frustration of purpose: occurs when performance becomes
   meaningless.

Question 25

Changed Circumstances: what are the elements of impossibility?

Answer 25

Elements
1. After contract formation.
2. A supervening event occurs without fault of
the party seeking relief.
3. The event causes a party’s performance to
become impossible.
4. The nonoccurrence of the event was a basic
assumption on which the contract was made.
Exception: the contract language or
circumstances indicate risk should be
allocated to one party.

Question 26

What are the consequences/outcomes of Impossibility?

Answer 26

Total Impossibility: The parties are excused from performance but may recover for restitution to the extent that there has been unjust enrichment.

Partial Impossibility: If a contract is made only partially impossible, a court might partially enforce the agreement by making void obligations that are impossible but still enforce the rest of the agreement

Temporary Impossibility: If performance is rendered impossible only temporarily, then the duties under the agreement are only suspended until performance is no longer impossible.

Question 27

What is Impracticability and what are the elements?

Answer 27

Impracticability: “extreme and unreasonable difficulty,
expense, injury, or loss.”

Elements
(The elements that are also present in impossibility are indicated by .)
1. After contract formation.
2. A supervening event occurs without fault of the party seeking relief.*
3. The event causes a party’s performance to become impracticable.
4. The non-occurrence of the event was a basic assumption on which the contract was made.*
5. The party’s duties are discharged unless the contract language or circumstances indicate risk should be allocated to one party.*

Question 28

What is the UCC approach to Impracticability?

Answer 28

UCC §2-615, Excuse by Failure of Presupposed Conditions, “excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of
the parties at the time of contracting.”

Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market
in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in
cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.
— § 2-615 Excuse by Failure of Presupposed Conditions, cmt. 4

Question 29

Changed Circumstances: What is frustration of purpose and what are the elements?

Answer 29

Frustration of Purpose: The test is whether the “principal
purpose” of the contract is “substantially frustrated” so as to make performance of one party worthless to the other party.

Elements
(The elements that are also present in impossibility are indicated by .)
1. After contract formation.
2. A supervening event occurs without fault of the party seeking relief.*
3. The event causes a party’s performance to become substantially
frustrated.
4. The non-occurrence of the event was a basic assumption on which the
contract was made.*
5. The party’s duties are discharged unless the contract language or
circumstances indicate risk should be allocated to one party.*