Defenses to Contract Enforcement Flashcards
What are the two types of incapacity in contract law?
What are the 6 categories of defenses available to the enforcement of a contract?
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
What is the validity of a contract with a minor?
Minors may enter into a contract, but it is voidable at the minor’s option.
More Info: Contracts with Minors
What is the majority/minority split on the validity of contracts for minors who are married or emancipated?
Majority rule: Minors enjoy the power of avoidance even if emancipated or married.
Minority rule: Marriage or emancipation eliminates minority as a contract defense.
What happens if a minor avoids a contract?
What happens if there is damage to property that was part of the contract?
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
What is the effect of a minor avoiding a contract for personal services?
The minor is under no further obligation to compensate the performing party.
What is the minority rule for minor liability in the event of avoidance?
The minor would be liable for any depreciation or damages to property and for compensation for services received.
How can a minor ratify a contract?
Once minors turn 18, they may expressly or impliedly ratify contracts entered into during minority and bind themselves to the contract terms.
What is the rule when a minor contracts for necessaries?
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.
List the necessaries for a minor.
1) Food
2) Clothing
3) Shelter
4) Medical care
When will lack of capacity serve as a defense?
When a party was mentally incompetent at the time of contracting
What are the requirements for mental incompetence?
- Adjudicated as incompetent
Or
- Cognitive defects
What is the burden of proof for cognitive defects?
A person will be deemed mentally incompetent if he is unable to understand in a reasonable manner the nature and consequences of the transaction.
When can volitional defects establish incompetence?
- A person is unable to act in a reasonable manner in relation to the transaction
- The other party has reason to know of this condition
What is the legal consequence of being adjudicated mentally incompetent?
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.
How can a mentally incompetent person ratify a contract?
A party who is mentally incompetent at the formation of a contract may expressly or impliedly ratify the contract if he later becomes competent.
What is the mentally incompetent party’s duty to a seller if they avoid the contract and receive a benefit?
He is required to pay the reasonable value of the goods or services rendered.
What is due to a seller that takes advantage of a person’s incompetence?
The incompetent person is only required to return benefits still in his possession.
List the categories of misrepresentation.
1) Fraudulent misrepresentation
2) Non-fraudulent misrepresentation
And
3) Fraudulent non-disclosure
What are the elements of fraudulent misrepresentation?
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.
Can opinions be misrepresentations?
No, unless it is a professional opinion
What are the elements of negligent misrepresentation?
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
What are the elements of innocent misrepresentation?
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.
What are the elements for fraudulent nondisclosure?
- The nondisclosure was material to the contract
- The aggrieved party reasonably relied on the non-disclosure
- The nondisclosuring party had a duty to disclose
When does a party have a duty to disclose?
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
What remedies apply to all types of misrepresentation?
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
What remedy is available only in cases of fraudulent misrepresentation?
The party injured by the misrepresentation may be able to seek punitive damages because it is an intentional tort.
What remedy is available in cases of fraudulent and non-fraudulent misrepresentation, but not in cases of fraudulent nondisclosure?
A party may continue with the contract and sue for the anticipated benefit of the bargain
What are the elements of duress?
1) Threat
2) The threat is wrongful in nature
3) There is no reasonable choice but to succumb to the threat
What threats are wrongful in nature?
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)
What is a threat?
A manifestation of an intent to inflict harm on another person made by words or conduct
How do you distinguish between a bad-faith threat to breach a contract from a good-faith demand?
If the demand is due to an increased burden on one party caused by unanticipated circumstances, then there is no duress.
When is it reasonable to succumb to economic duress?
- There is no adequate or reasonably priced substitute for the services or goods threatened to be withheld
- The threatened breach would cause the party to break his own contract
And
- The alternative of acquiescing to the threat and suing for damages is inadequate.
What are the legal remedies for duress?
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.
What are the elements of undue influence?
1) Unfair persuasion
And
2)The other party was vulnerable to the persuasion.
What are the seven red flags of unfair persuasion?
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
When can a party be considered vulnerable for undue influence?
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
What are the legal consequences of undue influence?
- The contract is voidable by the aggrieved party
And
- The aggrieved party is entitled to restitution of any benefits conferred as long as he returns any benefits received.
What triggers the unconscionability defense?
- Procedural unconscionability
And
- Substantive unconscionability
What circumstances bring about procedural unconscionability?
- Near miss cases: cases almost meeting the requirements for incompetence or duress
Or
- When there is an absence of bargaining power by one of the parties
When is a contract substantively unconscionable?
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
Upon a finding of unconscionability, what may a court do to the contract?
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
When may public policy be raised as a defense to the enforcement of a contract?
- Where the subject of the contract itself is explicitly prohibited by law (prostitution, gambling)
- Where a contract is formed for the purpose of committing a crime
- Where the contract performance would constitute a tort
- Where the contract performance would violate certain values and freedoms designated by the state
What are the sources of public policy defenses?
- Legislation
- Judicial Decisions
What may judges base their public policies upon?
- Moral and social values
- Economic considerations
And
- Protection of governmental processes and institutions
What is the result of a successful public policy defense?
The defendant wins irrespective of whether he promised to perform the public policy violation or pay for it
What happens to a contract that is subject to the defense of public policy?
- It is automatically void if it is illegal
And
- If not illegal, it is voidable
