Defenses to contract formation Flashcards
A party must have capacity to enter into a contract. There are three main types of incapacity
(infancy, mental illness, and intoxication).
Infancy. Unless a statute provides otherwise, a person has the capacity to incur
only voidable contractual duties until
the beginning of the day before the person turns 18. I.e., if a minor enters into a contract with an adult, the minor may choose to either:
Disaffirm (rescind) the contract and avoid liability under it;
Note: If the minor chooses to disaffirm the contract, the minor must
return anything that he received under the contract that still remains in his possession at the time of disaffirmance (there is no obligation to return anything that has been negligently squandered or destroyed).
OR
Affirm (enforce) the contract and hold the adult party liable under it.
A minor may affirm the contract expressly or implicitly by failing to disaffirm the contract within a reasonable amount of time after turning 18 thereby ratifying the contract.
Mental Illness Defense
A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect, the individual is unable to:
Understand in a reasonable manner the nature and consequences of the transaction,
OR
Act in a reasonable manner in relation to the transaction AND the other party has reason to know of his condition.
If the mentally ill party wishes to avoid liability under the contract, he may
disaffirm the contract when lucid or by his legal representative.
However, a party to a contract who is mentally ill CANNOT disaffirm the contract if:
The contract was made on fair terms;
AND
The other party is without knowledge of the mental illness or defect (e.g., the the mentally ill party is in a lucid state at the time of contracting).
Intoxication Defense.
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that due to intoxication, the individual is unable to:
Understand in a reasonable manner the nature and consequences of the transaction,
OR
Act in a reasonable manner in relation to the transaction.
If the intoxicated party wishes to avoid liability under the contract, he must act promptly upon recovery to disaffirm the contract and is required to return any value received, if possible.
Necessaries Doctrine.
When necessaries (e.g., food, shelter, clothing, healthcare, etc.) are furnished to a party who lacks capacity (i.e., minors, mentally ill parties, and intoxicated parties), the party who lacks capacity is liable for the reasonable value of the services or goods (not the agreed-upon price) under a quasi-contract theory of restitutionary recovery.
Mutual Mistake.
A mutual mistake occurs when both parties are mistaken as to a basic assumption on which the agreement is made.
The adversely affected party in a mutual mistake K may rescind the deal if:
There is a mistake of fact, existing at the time that the deal is made;
The mistake relates to a basic assumption of the contract;
The mistake has a material impact on the deal;
AND
The impacted party did NOT assume the risk of mistake.Note: The impacted party assumes the risk of mistake when:
He is aware, at the time the contract is made, that he has only limited knowledge regarding the facts to which the mistake relates but treats his limited knowledge as sufficient; OR
The risk is allocated to him by agreement of the parties (e.g., “as is” contracts).
The impacted party assumes the risk of mistake in a mutual mistake K when:
He is aware, at the time the contract is made, that he has only limited knowledge regarding the facts to which the mistake relates but treats his limited knowledge as sufficient;
OR
The risk is allocated to him by agreement of the parties (e.g., “as is” contracts).
Unilateral Mistake.
A unilateral mistake is a mistake made by one party that is unknown to the other party.
The adversely affected party may rescind the deal if:
There is a mistake of fact, existing at the time that the deal is made;
The mistake relates to a basic assumption of the contract;
The mistake has a material impact on the deal;
The impacted party did NOT assume the risk of mistake;
AND
The mistake would make the contract unconscionable OR the other side knew of, had reason to know of, or caused the mistake.
A misrepresentation is
a statement at the time of contracting that is NOT TRUE.
It can be intentional (fraudulent) or accidental.
To assert this defense, the party must show:
A misrepresentation of a present fact (not opinion);
That is material OR fraudulent (knowingly or reckless);
AND
That is made under circumstances in which it is justifiable to rely on the representation.
Duress.
A contract is VOID if a party to the contract is compelled by physical duress, such as the threat to inflict physical harm (e.g., “Sign this or I’ll break your legs with my baseball bat.”). Otherwise, a contract is VOIDABLE by the adversely affected party if the adversely affected party’s assent is induced by an improper threat that leaves the adversely affected party no reasonable alternative.
As to the defense of duress, A threat is improper if:
What is threatened is a crime or tort, or the threat itself would be a crime or tort if it resulted in obtaining property;
What is threatened is a criminal prosecution;
What is threatened is the use of civil process AND the threat is made in bad faith;
The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient;
OR
The resulting exchange is NOT on fair terms; AND the threatened act would harm the recipient and would not significantly benefit the party making the threat;
The effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat; OR
What is threatened is otherwise a use of power for illegitimate ends.
