Defenses to Contract Formation Flashcards
Minor Incapacity Rule
Restatement 2nd §14
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.
Exceptions to the Minor Incapacity Rule:
- Contracts for necessaries
- Statutory exceptions (i.e. student loans, insurance, and certain employment contracts
- *Where a minor misrepresents his age or Where the minor willfully harms the property that is the subject of the contract
Note: Most courts will still allow the minor to disaffirm, but some will hold the minor liable in tort for the amount of the restitution otherwise owed to him or allow the adult party to bring a tort suit. Whether the minor must pay restitution for intentional damages depends on the court’s view of minor’s paying restitution
Minor May Disaffirm the Contract
The minor may disaffirm the contract anytime before their 18th birthday or within a reasonable time after.
What is a reasonable time is a question for the trier of fact.
Minor Ratification
The minor may ratify the contract through words or conduct (“i ratify the contract” or continuing performance, or failing to disaffirm within a reasonable time)
Restoring Consideration in cases of Minor Incapacity
If the minor disaffirms the contract, the parties return to their pre-contractual positions and restitution is owed to both parties
In most states, if a party has performed, the minor is only required to return what is still in their possession at the time of disaffirmation. The adult party should restore full consideration.
What is a Necessary?
Necessary Includes the basic necessities of life (food, clothes, shelter, education, and medical care) and whatever goods or services are needed for the minor’s livelihood and well-being in accordance with reasonable standards of living, or appropriate to the minor’s own circumstances and standard of living. That the minor cannot access from a parent/guardian.
Mental Incapacity Rule
Restatement 2nd §15
(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.
(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.
Cognitive Test
A party may avoid the contract if the party “is unable to understand in a reasonable manner the nature and consequences of the transaction”
Volitional Test
a party may avoid the contract “if the party is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition.”
Exceptions to the Mental Incapacity Rule
- Contracts for necessaries
- Statutory Exceptions
Proving an Mental Incapacity Defense
To prove incapacity, the party must prove that the condition existed time of contracting and that it was in nature and extent severe enough to preclude an adequate degree of assent.
Avoided for mental incapacity is confined to psychiatrically diagnosed mental illness or incompetence. Incompetence or infirmity that falls short of psychiatrically recognized mental incapacity does not give grounds to avoid the contract.
Proving Minor Incapacity
The party seeking to disaffirm must prove that he was a minor at the time the contract was formed.
If the competent party knows of the mental incompetency…
If the competent party knows of the incompetency and tries to take advantage of the incompetent party, then the court will treat the issue like minor incapacity and not require the incompetent party to restore the full restitution.
Intoxication Rule
Restatement 2nd §16
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.
Proving Intoxication
A party seeking to avoid a contract for intoxication must prove that he was intoxicated at the time of formation.
Exceptions for Intoxication Defense
- Contracts for necessaries
- Statutory exceptions
What is the remedy for incapacity defenses
Avoidance: The contract is voidable by the incapacitated party.
Physical Duress Rule
Restatement 2nd §174
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.
2 Situations constituting physical duress
(1) The victim’s actions in signing an agreement are manually manipulated by another person through physical force (i.e. guiding the person’s hand holding the pen to sign.)
(2) The victim’s actions are not manually manipulated but she manifests assent under the threat of imminent physical harm
Duress in General Rule
Restatement 2nd 175
(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.
Improper Threats Rule
Restatement 2nd §176
(1) A threat is improper if
(a) What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,
(b)What is threatened is a criminal prosecution,
(c) What is threatened is the use of civil process and the threat is made in bad faith, or
(d) The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient.
(2) A threat is improper if the resulting exchange is not on fair terms, and
(a) The threatened act would harm the recipient and would not significantly benefit the party making the threat,
(b) 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
(c) What is threatened is otherwise a use of power for illegitimate ends.
Duress Element: The victim was induced to enter the contract
a. “Whether, under all the circumstances, the duress substantially overcame the victim’s free will, leaving the victim no reasonable alternative but to acquiesce
b. “But-for” the improper threat, the victim would not have entered the contract.
Duress Element: The victim has no reasonable alternative
a. Most of the time, a reasonable alternative could be a breach of contract claim.
b. If this alternative would “cause immediate and irreparable loss to one’s economic or business interest,” then a court may find that the party has no reasonable alternative.
