Defenses to Contract Formation

Question 1

6 Defenses to Contract Formation

Answer 1

1. Incapacity
2. Statue of frauds (SoF)
3. Illegality
4. Misrepresnetation / Fraud
5. Duress
6. Unconscionability

Question 2

Defense to K Formation - Incapacity

Answer 2

Infants and mentally incompetent lack capacity to contract.

Intoxicated persons may lack capacity to contract if the other party has reason to know of intoxication.

CONSEQUENCES OF INCAPACITY
1. Right to disaffirm - incapacitated party may disaffirm the K, making it void.

2. Implied affirmation (ratification) - K can be enforced against incapacitated person is he/she has since gained capacity and retained benefits of the K.
   Look for:
   (a) agreement entered into before capacity;
   (b) Capacity has since been gained;
   (c) Benefits have been retained.
3. Infants liability for necessities - infants are legally obligated to pay for necessities (food, clothes, medical care) under quasi-K theory.

Question 3

Defense to K Formation - Statue of Frauds (SoF)

Answer 3

A. Contracts within the SoF are not enforceable if:

1. Made in consideration of MARRIAGE.
2. Service K incapable of being performed within 1 YEAR.
3. LAND CONTRACTS and leases of land greater than 1 YEAR.
4. GUARANTEE TO to be liable for the debts of others.
5. SALE of GOODS of $500 or more.

B.Method to satisfy SoF

1. Common law: A WRITING signed by the party asserting SoF defense.
2. UCC: between merchants if the party asserting SoF defense received signed order confirmation w/in 10 days of reciept writing not required.

C. Performance - may satisfy the SoF

1. Service K - only full performance satisfy SoF
2. Sale of Goods - delivery of goods satisfies SoF. But for custom made goods, SoF satisfied once substantial work completed.
3. Real estate - part performance satisifes SoF if buyer completes any 2 of 3. (a) full or part payment, (b) takes possession of property, (c) makes improvements to property.

Question 4

Defense to K Formation - Illegality, Misrepresentation, Duress, Unconscionability

Answer 4

1. Illegality - look for an illegal subject matter or purpose for the K.
   (a) illegal subject matter = not enforceable.
   (b) legal subject matter but illegal purpose - only enforceable by one who did not know illegal purpose. legality based on existing law at time of K formation.
2. Misrepresentation - includes false assertions, concealment, or misstatements about a material fact before K formation.
   (a) K will be voidable if A induces B into K by misrepresentation and B relies on the misrepresentation
3. Duress - includes both economic and physical duress. K’s induced by duress or coercion are voidable.
4. Unconscionability - courts may refuse to enforce all or part of a K that is either:
   (a) Procedurally unconscionable - usually involves unfair surprise (e.g. a new material term)
   (b) Substantively unconscionable - usually involves oppressive terms, which are often hidden. Look for adhesion contracts, and exculpatory clauses for intentional acts.

Question 5

Defense to K Formation - Misunderstanding and Mistake

Answer 5

1. Misunderstanding - ambiguity concerning terms of the K is voidable if:
   (a) Parties use a material term reasonably susceptible to multiple interpretations.
   (b) Each party attaches a different meaning to the term.
   (c) Neither party knows or has reason to know about other interpretations. If A knows of B’s misunderstanding but remains silent, K will be enforced according to B’s understanding.
2. Mutual Mistake of fact- both parties are mistake about an underlying assumption of K at time of formation, K is void if:
   (a) both parties are mistaken
   (b) mistake concerns a basic assumption of fact
   (c) Mistake materially affects the K
   (d) Adversely affected K did not bear risk of the mistake.
3. Unilateral Mistake - only one party is mistaken concerning underlying facts of the agreement.
   (a) unilateral mistake will not prevent K formation.
   (b) Exception - K is voidable if the non-mistaken party knows or should have known of the other party’s mistake.