Defenses to contract formation

Question 1

types of defenses

Answer 1

defenses based on lack of capacity

defense to formation of the K

defense to enforcement of certain terms exists

Question 2

defenses based on lack of capacity

Answer 2

contracts with minors

mental incapacity

intoxicated persons

Duress and undue influence

Question 3

defenses based on lack of formation of contract

Answer 3

Absence of mutual assent
–misunderstanding - ambiguous contract language
– mutual mistake as to existing facts
– mistake by the intermediary
– misrepresentation

absence of consideration

Public policy defenses - illegality

unconsionability

statute of frauds

Question 4

public policy defenses to lack of formation of K

Answer 4

illegality

unconsionability

Question 5

what is the defense based on lack of capacity due to being a minor, including disaffirmance, exceptions, necessaries, and affirmance upon attaining majority

Answer 5

RULE
– minors lack capacity to enter into binding contracts
– adults can be bound by their promises to minor

DISAFFIRMANCE
– minor may disaffirm any time before or shortly after reaching the age of majority [reasonable time after]
— disafirmance must be made in whole
— requires that minor return anything they received under the K that still remains at the time of disaffirmance

EXCEPTIONS
– some states have statutory exceptions for student loans, insurance Ks, and agreements not to reveal employers’ proprietary information
– necessaries

NECESSARIES
– “Necessaries” are items necessary for subsistence, health, or education (including food, shelter, clothing, and medical care).
— A minor may disaffirm a contract for necessaries but will be liable in restitution for the fair market value of benefits received. [ not a contract requirement]

AFFIRMANCE UPON ATTAINING MAJORITY
– A minor may affirm, that is, choose to be bound by the contract in whole, upon reaching majority.
– A minor affirms either expressly or by conduct [implied], such as by failing to disaffirm the contract within a reasonable time after reaching majority, keeping the benefits after gaining capacity

HOW LONG TO DISAFFIRM
- reasonable amount of time after reaching majority

Question 6

what is the defense based on lack of mental capacity and when may they affirm or disaffirm, and re: necessaries and effect of guardian

Answer 6

RULES
- lack of mental capacity creates a VOIDABLE K
- lack of mental capacity = incapable of understanding the nature and significance of a contract

when may they disaffirm:
- disaffirm when lucid or by a later appointed legal representative.

when may they affirm:
- during a lucid interval or upon complete recovery, even without formal restoration by judicial action.

NECESSARIES
- liable in quasi-contract for necessaries.

EFFECT OF GUARDIAN
– mentally incompetent person has no ability to contract once a guardian has been appointed.
– Any attempted contracts by an incapacitated person who is under a guardianship are VOID .

Question 7

defense of intoxication – what it is and whether they may affirm or disaffirm

Answer 7

One who is so intoxicated that they don’t understand the nature
and significance of their promise creates only a VOIDABLE promise IF the other party had reason to know of the intoxication

when may affirm:
- upon recovery from intoxication

Necessaries
- quasi contract liability for necessaries

Question 8

effect of duress or undue influence on a K, economic vs. physical duress, undue influence

Answer 8

RULE
– contracts induced by duress or undue influence are voidable and may be rescinded as long as they are not affirmed

PHYSICAL DURESS
- physical threats

ECONOMIC DURESS
— NOT taking advantage of another person’s economic needs
— CAN BE DURESS by withholding something someone wants or needs will constitute economic duress if:
(1) the party threatens to commit a wrongful act that would seriously threaten the other contracting party’s property or finances; AND
(2) there are no adequate means available to prevent the threatened loss.

UNDUE INFLUENCE requirements
(1) undue susceptibility to pressure by one party, and
(2) excessive pressure by the other party.
Undue influence concerns often arise when the dominant party is in a confidential or caregiver relationship with the influenced party.

Question 9

Explain the Ambiguity and misunderstanding defense to contract

Answer 9

If the contract includes a term with at least two possible meanings, the result depends on the parties’ awareness of the ambiguity:

a. Neither party aware—no contract unless both parties intended the same meaning;

b. Both parties aware—no contract unless both parties intended the same meaning;

or

c. One party aware—binding contract based on what the ignorant party reasonably believed to be the meaning of ambiguous words.

Ambiguity is one area where subjective intent is taken into account.

Question 10

Explain the mutual mistake as to existing facts defense to K

Answer 10

If both parties entering into a contract are mistaken about existing acts (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 is made (for example, the parties think they are contracting for the sale of a diamond but in reality the stone is a cubic zirconia, existence of the subject matter, etc.);

(ii) The mistake has a material effect on the agreed-upon exchange (for example, the cubic zirconia is worth only a hundredth of what a diamond is worth);

AND

(iii) The party seeking avoidance did not assume the risk* of the mistake.

*ASSUME RISK:
EITHER [1] one party is in a position to better know the risks than the other party (for example, contractor vs. homeowner)
OR
[2] where the parties knew that their assumption was doubtful (that is, when the parties were consciously aware of their ignorance).

Question 11

what is not a “mistake’ defense to formation of a K?

Answer 11

mutual mistake in value [bc both parties assume the risk]

Unilateral mistake UNELSS the nonmistaken party knew or had reason to know of the mistake made by the other party

Question 12

what is effect of a unilateral mistake

Answer 12

IN GENERAL - unilateral mistake does not render contract unenforceable

VOIDABLE IF “PALPABLE OBVIOUS MISTAKE”
– nonmistaken party knew or had reason to know of the mistake made by the other party
– the mistake must have a material effect on the agreed-upon exchange
AND
— the mistaken party must not have borne the risk of the mistake.

Question 13

unilateral mistake triggers

Answer 13

computational or mechanical errors

henever you see facts in which a subcontractor’s bid was wrong or
acreage in a land sale contract was miscalculated, consider whether the contract may be avoided due to unilateral mistake.

Question 14

effect of mistake by the intermediary (transmission)

Answer 14

When there is a mistake in the transmission of an offer or accep- tance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known of the mistake.

Question 15

types of misrepresentation and their effect of misrepresentation on formation of K

Answer 15

(1) Fraudulent misrepresentation [inducement]

what it is: asserting info you know is false to induce someone to agree to a K;
— need not be spoken or written, can be inferred from conduct, such as concealment, frustrating investigation of a fact, or falsely denying knowledge of a fact

effect: the contract is voidable by the innocent party if they justifiably relied on the fraudulent misrepresentation
.
.
.
(2) material misrepresentation

A misrepresentation is material if:
(1) it would induce a reasonable person to agree, OR
(2) the maker knows that for some special reason it is likely to induce the particular person to agree, even if a reasonable person would not.

effect: voidable by innocent party if the party justifiably relied on the misrepresentation and the misrepresentation was material

Question 16

effect of nondisclosure of a fact

Answer 16

nondisclosure of a fact is not misrepresentation UNLESS it is material or fraudulent [ex: false denial of knowledge of a material fact]

nondisclosure ≠ concealment

Question 17

remedy for misrepresentation

Answer 17

rescission of agreement - don’t have to wait till they are sued

breach remedies

Question 18

absence of consideration as defense to formation of K

Answer 18

usually lacking elements of bargain or legal detriment

one of the promises is usually illusory

Question 19

public policy defenses to formation of a K

Answer 19

[A] f the consideration or subject matter of a contract is illegal (for example, a contract to commit a murder), the contract is void.

EXCEPTIONS:
(1) the plaintiff is unaware of the illegality while the defendant knows of the illegality;
(2) the parties are not in pari delicto (that is, one party is not as culpable as the other); or
(3) the illegality is the failure to obtain a license when the license is for revenue-raising purposes rather than for protection of the public.
.
.
.
[B] If only the purpose behind the contract is illegal, the contract is voidable by a party who was
(1) unaware of the purpose;
OR
(2) aware but did not facilitate the purpose and the purpose does not involve serious moral turpitude.

Question 20

general concept of unconsionabiltiy

Answer 20

allows a court to modify or refuse to enforce an entire contract or a provision in it to avoid “unfair” terms, usually due to some unfairness in the bargaining process

Question 21

what is not a ground for unconsionabiltiy

Answer 21

unfair price alone

that a K turned out badly

Question 22

Common instances of procedural unconsionability

Answer 22

(1) inconspicuous risk-shifting provision

Standardized printed form contracts that contain a material provi- sion that seeks to shift a risk normally borne by one party to the other.
Usually in the fine print (“boilerplate”) in printed form contracts.

HOLDING: Courts have invalidated these provisions because they are inconspicuous or incomprehensible to the average person, even if brought to their actual attention.
.
.
.
(2) contracts of adhesion

take it or leave it contracts in which one party drafts and forces the other party to accept

HOLDING: unconscionable and unenforceable if signer is unable to procure necessary goods, such as an automobile from any seller without agreeing to a similar provision
.
.
.
(3) exculpatory clauses

release a contracting party from liability for their own wrongful acts (intentional or negligent)

HOLDINGS:
[a] exculpation from INTENTIONAL acts – usually found to be unconscio- nable because such a clause is against public policy in most states.

[b] exculpation from NEGLIGENT acts – may be found to be uncon- scionable if the clauses are inconspicuous (as discussed above), but they commonly are upheld if they are in contracts for activities that are known to be hazardous (for example, a contract releasing a ski hill operator for liability for negligence often will be upheld).
.
.
.
(4) limitations on remedies

[a] limiting liability for damages to property generally
HOLDING: NOT unconscionable unless inconspicuous

[b] limiting party to certain remedy and that remedy fails its essential purpose [i.e. contract for repair but no remedy for repair]
HOLDING: unconscionable such that courts will ignore that provision

Question 23

how is unconscionability determined

Answer 23

circumstances as they existed at the time the K was formed

generally,

unfair surprise, consequences are unduly harsh and oppressive,

Question 24

effect if court finds unconsiconabiltiy

Answer 24

court may:

(1) refuse to enforce K
(2) enforce remainder of the K without the unconscionable clause
or
(3) limit the application of any clause so as to avoid an unconscionable result

Question 25

triggers for finding of unconsionabiltiy

Answer 25

this is rare TBH

unfair bargaining power

Question 26

general concept of statute of frauds

Answer 26

in most instances, an oral contract is valid. However, certain agree- ments, by statute, must be evidenced by a writing signed by the party sought to be bound.

signed by the party that is being SUED

Question 27

what agreements are covered by the statute of frauds

Answer 27

(1) promises in consideration of marriage

promises that induce marriage by offering something of value, other than return promise to marry [I will give you my house if you marry my son]

prenups!
.
.
.
(2) performance not within one year from date of FORMATION of K

promise that, by its terms, cannot be performed within one year from the date of agreement

[BUT FULL performance will remove it from SoF]

note that time of actual performance doesn’t matter

Lifetime employment contracts NOT subject to the SoF
.
.
.
(3) promise creating interest in land

Types of K to create interest in land
– sale of real property
– leases for more than one year
– easements of more than one year
– mortgages and most other security liens
– fixtures
– minerals (or the like) or structures if they are to be severed by the buyer

do NOT create interest in land:
- contracts to build a building
- construction K to build a fence
- contracts to find a buyer for a seller / broker’s contracts

how to take it out of SoF:
– full performance by seller
– in some cases, part performance by buyer
.
.
.
(4) executor or administrator promises to personally pay estate debts

A promise by an executor or administrator to pay the estate’s debts out of their own funds must be evidenced by a writing.
.
.
.
(5) goods priced at $500 or more

A contract for the sale of goods for a price of $500 or more

Note that a writing is sufficient even though it omits or incorrectly states a term, but the contract is not enforce- able beyond the quantity of goods shown in the writing.

EXCEPTION: situations where merchant’s confirmatory memo applies (between merchants)
.
.
.
(6) promises to pay debt of another [suretyship promises]

When subject to SOF:
Must be collateral to another person’s promise to pay, and not a primary promise to pay [think of a guarantor on a lease, for example, or “if X doesn’t pay, I will pay”]

When NOT subject to SOF:
Main purpose or leading object of the promisor is to serve a pecuniary interest of his own, the contract is not within the Statute of Frauds even though the effect is still to pay the debt of another (for example, homeowner promises to pay contractor’s debt to building supplier if contractor does not pay, so contractor can obtain supplies to work on homeown- er’s house).

Question 28

effect of noncompliance with statute of frauds

Answer 28

renders K unenforceable at the option of the party to be charged

aka party being sued may raise the lack of a sufficient writing as an affirmative defense

Question 29

can you waive Statute of frauds defense?

Answer 29

yes, by not raising it as a defense

Question 30

when is a K removed from the Statute of frauds

Answer 30

(1) oral contract modifications must be in writing if the contract AS MODIFIED falls within the SoF …. oral contract modifications do NOT have to be in writing when the K as modified would fall outside SoF

BUT note the quirks of when the K itself requires writing [see other card]

AND note quirks of waiver
.
.
.
(2) when there has been performance

[a] land sale contracts

[I] When there is an oral promise to pay for land, and the seller conveys the property to the buyer, the seller can enforce buyer’s oral promise to pay

[ii] when there has been part performance that UNEQUIVOCALLY indicates that parties have contracted for the sale of land, you can enforce oral K

part performance requires TWO of THREE of the following – payment in whole or part, and/or possession, and/or valuable improvements

how to sue: ONLY specific performance [not damages]

keep an eye out for: partial payments that are consistent with landlord tenant relationship do not unequivocally indicate that parties contracted for sale of land and therefore will not take a transaction out of the statute of frauds requirements.

[b] services contracts

– full performance takes it out of the statute of frauds

[c] sale of goods contracts

Part performance takes a sale of goods contract out of the Statute of Frauds when:
(i) the goods have been specially manufactured, or (ii) the goods have been either paid for or accepted.

deposit counts as partial payment
.
.
.
(3) situations when writing not required

SWAP
.
.
.
(4) equitable and promissory estoppel apply

if it would be inequitable to allow the SoF to defeat a meritorious claim, you can enforce the oral K against the defendant

Ex: situations where the defendant falsely and intentionally tells the plaintiff that the contract is not within the Statute or induces the plaintiff to change position in reliance on an oral agreement.
.
.
.
(5) judicial admission

If a party admits in pleadings or testimony that there is an agreement, it’s treated the same as though the party signed a writing.

Question 31

what is the statute of frauds writing requirement

Answer 31

one or more writings that

(1) reasonably identify the subject matter of the K

(2) indicate that a K has been made between the parties

and

(3) state with reasonable certainty the essential terms

AND

has a signature of the person against whom enforcement is sought

– electronic record satisfies this

CAN BE MULTIPLE WRITINGS or correspondence together or be on a napkin

Question 32

what counts a signature for the statue of frauds

Answer 32

in general
- mark or symbol made with intent to authenticate the writing as the signer
- need not be handwritten
- can be printed or typed

UCC
- initials or letterhead is ok
- electronic signature is ok

WHO signs it
— the party being sued must have signed it [unless merchant’s confirmatory memo]

Question 33

remedies if K violates statute of frauds

Answer 33

party can sue for reasonable value of the services or part performance rendered

or

party can sue for restitution or any other benefit that has been conferred

Question 34

what happens if a writing evidencing an oral K for a sale of goods of $500 or more has an omission or incorrect term?

Answer 34

a writing is sufficient for statute of frauds even though it omits or incorrectly states a term, BUT the contract is not enforce- able beyond the quantity of goods shown in the writing.

Question 35

when is writing not required for Statute of Frauds purposes and mnemonic

Answer 35

SWAP:
Specially made goods,
Written confirmation by a merchant,
Admission in court, or
Performance.

(1) specially manufactured goods

i.e. not suitable to sell to others in ordinary course of business

WHEN ENFORCEABLE WITHOUT WRITING: enforceable if the seller has, under circumstances that reasonably indicate that the goods are for the buyer, made a substantial beginning in their manufacture or commitments for their purchase before notice of repudiation is received.
.
.
.
(2) admissions in pleadings or court

when party against whom enforcement is sought admits in pleadings, testimony or in court that the K was made, it is enforceable for the quantity of goods admitted in court
.
.
.
(3) Merchant’s confirmatory memo [between merchants]

In contracts between merchants, if one party, within a reason- able time after an oral agreement has been made, sends to the other party a written confirmation of the understanding that is sufficient under the Statute of Frauds to bind the sender [i.e. must contain quantity term and signature], it will also bind the recipient if: (1) they have reason to know of the confirmation’s contents; and (2) they do not object to it in writing within 10 days of receipt.

i.e. if they agree over the phone and one sends a written confirmation, article 2 lets one merchant use its own confirmation to satisfy the SoF against the other merchant

(4) performance
[see other card]

Question 36

mnemonic for when SOF applies

Answer 36

MY LEGS:

Marriage
Year (Within one)

Land
Executor (or Administrator)
Goods (for $500 or more)
Surety

Question 37

to what extent can a contract prohibit oral modifications ? State the rule for UCC and Common law … and what issues might pop up?

Answer 37

COMMON LAW

if a written contract expressly provides that it may be modified only by a writing, the parties can still orally modify the contract
[i.e. prohibitions on oral modifications are unenforceable - assumes that is an oral waiver of the writing provision]
.
.
.
UCC

if a K requires modifications only by a signed writing, that provision is given effect = no oral modifications

NOTE! – if the K is between merchant and non merchant, this provision requires the nonmerchant’s separate signature

***note WAIVER issues

Question 38

what happens when a party attempts to orally modify a K that must be modified in writing due to SoF?

Answer 38

that modification is not effective as a modification, it is effective as a waiver

when waiver will be found:
– when the other party has changed position in reliance on the oral modification

when waiver can be retracted:
– a party who makes waiver affecting an executory [not yet performed] portion of the K may retract the waiver if they notify the other party that strict performance of the waived terms is required

when waiver cannot be retracted
– when the other party detrimentally relied on the waiver

Question 39

to what extent is an oral sale of good contract enforceable when there has been part performance?

Answer 39

If a sales contract is only partially paid for or accepted, the contract is enforceable only to the extent of the partial payment or acceptance.

If goods are either received and accepted or paid for, the contract is enforceable. However, the contract is not enforceable beyond the quantity of goods accepted or paid for.

Thus, if only some of the goods called for in the oral contract are accepted or paid for, the contract is only partially enforceable.

If an indivisible item is partially paid for, most courts hold that the Statute of Frauds is satisfied for the whole item.

Question 40

what are essential and material terms for the purposes of satisfying the writing requirement for Statute of frauds - for diff types of K

Answer 40

DEPENDS on type of K

Examples of essential terms include: identity of the parties, description of the subject matter, and the terms necessary to make the contract definite.

LAND SALE
- must contain a description of the land and price

EMPLOYMENT
- length of employment

UCC
- some signed writing indicating that a K has been made and specifying quantity term

COMMON LAW K for SERVICES
– who is K between
– what is the K about

CAREFUL – If an essential term is contained in the writing, evidence is admissible to explain the particulars, BUT evidence will not be admitted to add a missing term

Question 41

equal dignity rule

Answer 41

if you authorize someone to buy something else, that authorization must be in writing if the underlying transaction has to be in writing as required by the Statute of Frauds

the two transactions, the authorization and sale, must be of equal dignity

Question 42

leases of one year or less are ….

Answer 42

NOT subj to statute of frauds