Defenses to Contract Enforcement

Question 1

What are the two types of incapacity in contract law?

Answer 1

1) Infancy/Minors

And

2) Mental Incapacity
* More Info:* Incapacity

Question 2

What are the 6 categories of defenses available to the enforcement of a contract?

Answer 2

1) Capacity
2) Misrepresentation
3) Duress
4) Undue Influence
5) Unconscionability
6) Public Policy/Illegality

Note: Defenses apply to the common law and the UCC

More Info: Contract Defenses

Question 3

Who is considered a minor?

Answer 3

Any person under the age of 18

More Info: Minors

Question 4

What is the validity of a contract with a minor?

Answer 4

Minors may enter into a contract, but it is voidable at the minor’s option.

More Info: Contracts with Minors

Question 5

What is the majority/minority split on the validity of contracts for minors who are married or emancipated?

Answer 5

Majority rule: Minors enjoy the power of avoidance even if emancipated or married.

Minority rule: Marriage or emancipation eliminates minority as a contract defense.

More Info: Contracts with Minors - Marriage/Emancipation

Question 6

What happens if a minor avoids a contract?

What happens if there is damage to property that was part of the contract?

Answer 6

The majority rule is that the minor must return the goods if they are in his possession when he disaffirms the contract, but he is not liable for damage, wear and tear, or any depreciation in value.

More Info: Avoidance of Contracts by Minors

Question 7

What is the effect of a minor avoiding a contract for personal services?

Answer 7

The minor is under no further obligation to compensate the performing party.

Question 8

What is the minority rule for minor liability in the event of avoidance?

Answer 8

The minor would be liable for any depreciation or damages to property and for compensation for services received.

Question 9

How can a minor ratify a contract?

Answer 9

Once minors turn 18, they may expressly or impliedly ratify contracts entered into during minority and bind themselves to the contract terms.

Question 10

What is the rule when a minor contracts for necessaries?

Answer 10

A minor’s contract for necessaries is voidable, but the merchant has a quasi-contract right to recover the reasonable value of the goods or services.

Question 11

List the necessaries for a minor.

Answer 11

1) Food
2) Clothing
3) Shelter
4) Medical care

Question 12

When will lack of capacity serve as a defense?

Answer 12

When a party was mentally incompetent at the time of contracting

Question 13

What are the requirements for mental incompetence?

Answer 13

1. Adjudicated as incompetent

Or

2. Cognitive defects

Question 14

What is the burden of proof for cognitive defects?

Answer 14

A person will be deemed mentally incompetent if he is unable to understand in a reasonable manner the nature and consequences of the transaction.

Question 15

When can volitional defects establish incompetence?

Answer 15

1. A person is unable to act in a reasonable manner in relation to the transaction
2. The other party has reason to know of this condition

Question 16

What is the legal consequence of being adjudicated mentally incompetent?

Answer 16

If there’s been an adjudication of mental incompetence, then any contracts entered into by the mentally incompetent individual are altogether void.

If there has been no adjudication of the mental incompetence, then contracts entered into by the individual are voidable at the option of the incompetent party.

Question 17

How can a mentally incompetent person ratify a contract?

Answer 17

A party who is mentally incompetent at the formation of a contract may expressly or impliedly ratify the contract if he later becomes competent.

Question 18

What is the mentally incompetent party’s duty to a seller if they avoid the contract and receive a benefit?

Answer 18

He is required to pay the reasonable value of the goods or services rendered.

Question 19

What is due to a seller that takes advantage of a person’s incompetence?

Answer 19

The incompetent person is only required to return benefits still in his possession.

Question 20

List the categories of misrepresentation.

Answer 20

1) Fraudulent misrepresentation
2) Non-fraudulent misrepresentation

And

3) Fraudulent non-disclosure

Question 21

What are the elements of fraudulent misrepresentation?

Answer 21

1) There is a misrepresentation of an existing fact
2) The misrepresentation is purposeful
3) The misrepresentation is on a material term of the contract
4) The aggrieved party reasonably relied on the misrepresentation.

Question 22

Can opinions be misrepresentations?

Answer 22

No, unless it is a professional opinion

Question 23

What are the elements of negligent misrepresentation?

Answer 23

1) There is a misrepresentation of an existing fact
2) The misrepresentor should have known it was false
3) The misrepresentation is of a material term of the contract
4) The aggrieved party reasonably relied on the misrepresentation

Question 24

What are the elements of innocent misrepresentation?

Answer 24

1) There is a misrepresentation of an existing fact
2) The misrepresentation is on a material term of the contract
3) The aggrieved party reasonably relied on the misrepresentation.

Question 25

What are the elements for fraudulent nondisclosure?

Answer 25

1. The nondisclosure was material to the contract
2. The aggrieved party reasonably relied on the non-disclosure
3. The nondisclosuring party had a duty to disclose

Question 26

When does a party have a duty to disclose?

Answer 26

If a party is aware of material facts that are unlikely to be discovered by the other party through the exercise of ordinary care and diligence, then there will be a duty to disclose that information in these circumstances:

1) Where the parties enjoy a relationship of trust and confidence (attorney, trustee)
2) Where the party has made an assertion that was true at the time but has been rendered untrue by intervening events
3) Where the obligation of good faith would require the party to disclose the information

Question 27

What remedies apply to all types of misrepresentation?

Answer 27

1) Use as a shield: a misrepresentation can be used as defenses to a breach of contract claim.
2) Use as a sword: a misrepresentation may all be used as an action for recision of the contract and for reliance damages

Question 28

What remedy is available only in cases of fraudulent misrepresentation?

Answer 28

The party injured by the misrepresentation may be able to seek punitive damages because it is an intentional tort.

Question 29

What remedy is available in cases of fraudulent and non-fraudulent misrepresentation, but not in cases of fraudulent nondisclosure?

Answer 29

A party may continue with the contract and sue for the anticipated benefit of the bargain

Question 30

What are the elements of duress?

Answer 30

1) Threat
2) The threat is wrongful in nature
3) There is no reasonable choice but to succumb to the threat

Question 31

What threats are wrongful in nature?

Answer 31

The threat is one of the below:

1) A crime or a tort
2) Criminal prosecution or a bad faith civil process
3) Economic duress (a bad faith breach of contract)

Question 32

What is a threat?

Answer 32

A manifestation of an intent to inflict harm on another person made by words or conduct

Question 33

How do you distinguish between a bad-faith threat to breach a contract from a good-faith demand?

Answer 33

If the demand is due to an increased burden on one party caused by unanticipated circumstances, then there is no duress.

Question 34

When is it reasonable to succumb to economic duress?

Answer 34

1. There is no adequate or reasonably priced substitute for the services or goods threatened to be withheld
2. The threatened breach would cause the party to break his own contract

And

3. The alternative of acquiescing to the threat and suing for damages is inadequate.

Question 35

What are the legal remedies for duress?

Answer 35

1) Avoidance: Contracts made under physical compulsion are void and all other contracts are voidable
2. Restitution: The aggrieved party is entitled to restitution of any benefits conferred as long as he returns any benefits received.

Question 36

What are the elements of undue influence?

Answer 36

1) Unfair persuasion

And

2)The other party was vulnerable to the persuasion.

Question 37

What are the seven red flags of unfair persuasion?

Answer 37

1) The discussion of the transaction at an unusual or inappropriate time
2) The consummation of the transaction at an unusual place
3) Insistent demands that the transaction be completed immediately
4. Extreme emphasis on the negative consequences of delaying the transaction
5. The use of multiple persuaders
6. Absence of third party advisors
7. Statements that there is no time to consult advisors or attorneys

Question 38

When can a party be considered vulnerable for undue influence?

Answer 38

1) Vulnerability due to some recent trauma or event
2) Mental infirmity due to age or illness
3) A relationship of trust or confidence exists between the influencer and the influenced party

Question 39

What are the legal consequences of undue influence?

Answer 39

1. The contract is voidable by the aggrieved party

And

2. The aggrieved party is entitled to restitution of any benefits conferred as long as he returns any benefits received.

Question 40

What triggers the unconscionability defense?

Answer 40

1. Procedural unconscionability

And

2. Substantive unconscionability

Question 41

What circumstances bring about procedural unconscionability?

Answer 41

1. Near miss cases: cases almost meeting the requirements for incompetence or duress

Or

2. When there is an absence of bargaining power by one of the parties

Question 42

When is a contract substantively unconscionable?

Answer 42

The terms are unreasonably favorable to one party to the contract by way of:

1) A grossly excessive price
2) A grossly disproportionate consequences for a minor breach
3) A provisions binding on one party but not the other
4) A provisions that is grossly unfair

Question 43

Upon a finding of unconscionability, what may a court do to the contract?

Answer 43

1) Refuse to enforce the contract
2) Blue pencil the offending clause
3) Limit the application of the offending clause so as to avoid any unconscionable results

Question 44

When may public policy be raised as a defense to the enforcement of a contract?

Answer 44

1. Where the subject of the contract itself is explicitly prohibited by law (prostitution, gambling)
2. Where a contract is formed for the purpose of committing a crime
3. Where the contract performance would constitute a tort
4. Where the contract performance would violate certain values and freedoms designated by the state

Question 45

What are the sources of public policy defenses?

Answer 45

1. Legislation
2. Judicial Decisions

Question 46

What may judges base their public policies upon?

Answer 46

1. Moral and social values
2. Economic considerations

And

3. Protection of governmental processes and institutions

Question 47

What is the result of a successful public policy defense?

Answer 47

The defendant wins irrespective of whether he promised to perform the public policy violation or pay for it

Question 48

What happens to a contract that is subject to the defense of public policy?

Answer 48

1. It is automatically void if it is illegal

And

2. If not illegal, it is voidable