Defenses to Contract Enforcement Flashcards
status quo ante
situation existing before the contract was formed
void ab initio
from its inception
Defenses based on Lack of Capacity to Contract
- Infancy
- Mental Illness or Defect
- Intoxication
Defenses related to Defects in Mutual Assent
- Mistake
- Misrepresentation
- Duress
- Undue Influence
- Unconscionability
mistake
A belief not in accord with the facts
Define Fact
A fact is a past or present state of things—something that actually exists or an event or circumstance that has occurred.
Define Promises
Promises are commitments to do or not do something in the future.
Define Predictions
Predictions are expectations about a future occurrence or state of things.
Define Opinions
Opinions are personal views, attitudes, or professional appraisals about present circumstances or the future, or beliefs or judgments based on grounds insufficient to produce complete certainty.
Defense of Mutual Mistake
Both parties were mistaken about a fact at the time of contract formation.
Defense of Unilateral Mistake
Only one party was mistaken about a fact at contract formation.
Four types of Mistake
- Mistake of Opinion
- Mistake of Prediction
- Mistake of Fact
- Mistake of Law
Defense of mistake applies to…
Assertions of fact, but not to promises, predictions, or opinions.
Capacity to Contract (1)
(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances.
Capacity to Contract (2)
(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is
(a) under guardianship, or
(b) an infant, or
(c) mentally ill or defective, or
(d) intoxicated.
Infants
Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.
Mental Illness or Defect
(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.
Two tests courts use to determine mental illness
- Cognitive Tes 2. Motivational or Affective Test
Define Cognitive Test
A person is unable to understand in a reasonable manner the nature and consequences of the transaction
Define Motivational or Affective Test
A person is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.
Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction.
Void Contracts
Cannot be enforced at all. (void ab initio, “from its inception”)
Voidable Contracts
A contract is voidable, when the party protected by the defense has the power to affirm or avoid the agreement, which is otherwise valid and enforceable.
When Mistake of Both Parties Makes a Contract Voidable
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.
(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or
(b) the other party had reason to know (or should have known) of the mistake or his fault caused the mistake.
When a Party Bears the Risk of a 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.
When Mistake of Both Parties as to Written Expression Justifies Reformation
Where a writing that evidences or embodies an agreement in whole or in part fails to express the agreement because of a mistake of both parties as to the contents or effect of the writing, the court may at the request of a party reform the writing to express the agreement, except to the extent that rights of third parties such as good faith purchasers for value will be unfairly affected.
Three Forms of Misrepresentation
- Affirmative misstatement (deliberate lie)
- Concealment (hiding truth by an affirmative act)
- Nondisclosure (keeping silent)
The Elements of Misrepresentation
- The untrue statement is one of fact or there is active concealment;
- The statement is material (important) to the transaction or is fraudulent;
- The victim reasonably relied on the statement. (Reasonable reliance)
When Action Is Equivalent to an Assertion (Concealment)
Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.
Define Concealment
It is the act of preventing another from learning of a fact that is significant and this act is always equivalent to a misrepresentation.
Define Misrepresentation
An assertation that is not in accord with the facts.
What are the three forms of Misrepresentation?
Defenses Flow Chart
Elements to prove the Defense of Mistake
- There is a mistake
- It is mutual (a mistake of both parties)
- It is present at the time the contract is made
- It relates to a basic assumption
- It has a material effect on the exchange
- The party seeking relief did not bear the risk
Parol Evidence
Evidence of Antecedent Negotiations
Parol Evidence Rule (PER)
When the parties to a contract have made and signed a completely integrated written contract, evidence of antecedent negotiations (called “parol evidence”) will not be admissible for the purpose of varying or contradicting what is written into the contract.
Mutual Mistake
K is voidable by an adversely affected party if:
- Mistake concerns a basic assumption of fact;
- Mistake materially affects the agreed-upon exchange; and
- Adversely affected party did not bear risk of the mistake
Unilateral Mistake
- Unilateral mistake will not prevent K formation;
- Exception -
- K is voidable by mistaken party if non-mistaken party knew or should have known of the mistake or misunderstanding
Misunderstanding based on Ambiguity
Enforceability of the K depends on whether parties were aware of the ambiguity at the time of K formation
- Neither party aware of ambiguity - no K formed unless both parties intended the same meaning
-
One party aware of ambiguity - K formed
- K will be enforced according to the intention of the party unaware of the ambiguity
- Both parties aware of ambiguity - no K formed unless both parties intended the same meaning
Illegality
When the subject matter of a K or the consideration supporting it is illegal
- E.g. K for payment to commit a crime
- K will be void and uneforceable
- Legality is based on existing law at the time of K formation
Duress
Where one party is forced or coerced into K
- Duress will be found where there is a wrongful act or threat that overcomes the free will of a party
- K is either void or voidable by victim depending on type of duress:
- K is physically induced - K is void
- K is induced by non-physical threat - K is voidable by victim
K is voidable for Misrepresentation if:
- First, there must have been a misrepresentation;
- Second, the misrepresentation must have been either material or fraudulent;
- Third, the misrepresentation must have induced the recipient to make the contract; and
- Fourth, the recipient must have been justified in relying on the misrepresentation.
Non-fraudulent misrepresentation
Where a misrepresentation is made unintentionally
- If A’s misrepresentation is innocent, B can void the K if:
- The misrepresentation concerns a material fact; and
- B enters into the K in reliance on A’s misrepresentation
Consequence of incapacity
- Right to disaffirm - person who lacks capacity to contract (e.g. minor) may disaffirm the K, rendering it void
-
Implied affirmation (ratification) - a K can be enforced against a minor if she has gained capacity and retained benefits of the K
- Elements
- Agreement entered into before capacity;
- Capacity has since been gained; and
- Benefits have been retained.
- Elements
Intoxication
Intoxicated persons may lack capacity to contract if the other party has reason to know of intoxication
Unconscionability
May be based on unfair bargaining and/or unfair substantive terms
- Can arise with Ks of adhesion, exculpatory clause for intentional acts, risk-shifting provisions, etc.
- Look for Ks that contain oppressive or unfair terms and/or where the disadvantaged party lacks a meaningful choice
- Timing - unconscionability is determined by circumstances that existed at the time of K formation
Complete Integration
Writing is intended by parties to express their complete, final agreement
Parol Evidence Rule typically bars evidence of:
- Negotiations before a K becomes integrated
- Agreements made before a K becomes integrated
Parol Evidence Rule does not apply to:
- Agreement (oral or written) made after the writing
- Evidence necessary to determine if there was a mistake in the process of reducing an agreement to writing
- Evidence concerning a party’s defense based on misrepresentation, fraud, or duress
- Evidence used to resolve ambiguities about the meaning parties intended to give particular terms in the writing
A party bears the risk of mistake when:
- The risk is allocated to him by agreement of the parties; or
- 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
- The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
Elements of Fraud
- Untrue statement of fact
- Statement is material
- It was reasonably relied upon
- The statement was made intentionally
- Injury resulted.
Promissory Estoppel or reliance
A substitute for a bargained-for exchange where one party reasonably incurs a detriment or loss
Avoidance of the contract
The option of a person who entered into a contract lacking capacity.
Standard for determining if an additional term
Whether there is surprise or hardship.
When a court may refuse to enforce a K
- Where the parties to the agreement are impermissible (incapacity)
- Where there are defects in the bargaining process (mistake, fraud and misrepresentation, duress, undue influence, unconscionability)
- Where there are impermissible terms in the agreement (unconscionability, illegality)
consensus ad idem
agreement on the same thing
Raffles v Wichelhaus
(Peerless)
Where parties attach “materially different meanings” to their “manifestations” and neither party has reason to know of the meaning attached by the other, there is no “manifestation of mutual assent.”
An infant (minor) may disaffirm or avoid a K:
Anytime before reaching majority or within a reasonable time thereafter.
Note
Failure to disaffirm within a reasonable time of attaining majority constitutes a “ratification” of the contract and the minor is bound, thus terminating the power to disaffirm. Ratification can be by words or conduct such as performance of the contractual obligation or accepting the other party’s performance under the contract.
Necessaries
An elastic term and includes goods and services that are essential for maintaining the minor’s existence.
Whether goods are “necessaries” is a question of law and if found to be so, their quantity, quality, and reasonable value are matters of fact.
Determining what are or are not necessaries takes into account what is reasonable and necessary for the “proper and suitable maintenance of the infant in view of his social position and situation in life, the customs of the social circle in which he moves or is likely to move, and the fortune possessed by him and by his parents.”
Elements of Defense of Mistake
- First, the mistake must relate to a fact in existence at the time of contract.
- Second, the mistake must be with respect to a material aspect of the contract and have a significant effect on the agreed exchange of performances.
- Third, the aggrieved party neither assumed the risk of the mistake nor would it be fair or appropriate to allocate it to her
To establish unconscionability:
the mistaken party “must ordinarily show not only the position he would have been in had the facts been as he believed them to be but also the position in which he finds himself as a result of [the] mistake.
Scrivener’s Error
A clerical or “scrivener’s” error resulting in a written agreement that fails to express the parties’ agreement correctly. The appropriate remedy is reformation of the writing to properly reflect the agreement reached by the parties.
State of Mind for Misrepresentation
Distinctions with respect to the state of mind are important for a couple of reasons.
- First, if the misrepresentation is intentional, then the party does not have to show that it was material.
- Second, only those who have been the victims of intentional misrepresentations are entitled to relief in either the form of damages (such liability is imposed under tort law) or avoidance of the contract.
Exceptions where reliance on an assertion of opinion is justified:
- Where the recipient stands in a confidential relationship to the person whose opinion is asserted such that the recipient is reasonable in relying on it. It need not be a fiduciary relationship but may be one between family members or where one party has taken steps to induce the other to believe that he can rely on the first party’s judgment.
- Where the recipient reasonably believes the other person has special skill or judgment with respect to the subject matter.
- Where the recipient is “for some other special reason particularly susceptible to a misrepresentation of the particular type involved.
When Non-Disclosure may be a Misrepresentation
- Where a party knows that disclosing the fact is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material;
- Where a party knows that disclosing the fact would correct a mistake of the other party as to a basic assumption on which the party is making the contract and if non-disclosure amounts to a failure to act in good faith;
- Where a party knows that disclosing the fact would correct a mistake of the other party as to the contents or effect of a writing; and
- Where the other party is entitled to know the fact because there is a relationship of trust between the parties.
Concealment
The act of knowingly or intending to prevent another from learning of a fact that she otherwise would have learned. Such an action is equivalent to a misrepresentation.
Elements of Unconscionable K
- The procedural aspect is one characterized by an absence of meaningful choice so the court looks to the relationship between the parties to determine if there was:
- unequal bargaining power,
- a lack of opportunity to study the contract and inquire about the terms, and
- whether the terms were non-negotiable.
- The substantive aspect is one which looks at the terms of the contract to see if they are unfairly one-sided. A one-sided agreement may be found where one party is:
- deprived of all the benefits of the agreement or
- left without a remedy for the other party’s breach or
- there is a large disparity between the prevailing market price and the contract price.
