Defenses to Contract Formation & Enforcement

Question 1

Mutual Mistake (and reformation/rescission)

Answer 1

Applies if BOTH parties are mistaken as to an essential element of the contract.

Reformation: The parties can ask a court to reform the contract and rewrite it to reflect the correct element(s) of the contract. Reformation is available if:
- there was a prior agreement (oral or written) between the parties,
- there was an agreement by the parties to put that agreement into writing, and
- as a result of the mistake, there is a difference between the prior agreement and the writing.

Rescission: If reformation is available to cure the mutual mistake, neither party can void (rescind) the contract. If reformation is NOT available, the contract may be voidable if:
- a mistake of fact existed at the time the contract was formed,
- the mistake relates to a basic assumption of the contract,
- the mistake has a material impact on the transaction, and
- the adversely affected party did not assume the risk of the mistake

Question 2

Unilateral Mistake (and rescission)

Answer 2

Applies if ONLY ONE party is mistaken as to an essential element of the contract.

Rescission: The mistaken party can void (rescind) the contract if:
- the mistake would make enforcement of the contract unconscionable, or
- non-mistaken party failed to disclose the mistake or caused the mistake (“unclean hands”)

Question 3

Fraudulent Misrepresentation

Answer 3

An intentional misrepresentation of a fact that the innocent party justifiably relies on. The misrepresentation can be affirmative (a lie) or through non-disclosure (omission).

Question 4

Fraud in the Factum

Answer 4

If a fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction, the apparent contract is VOID.

Question 5

Fraud in the Inducement

Answer 5

If a fraudulent misrepresentation is used to induce another to enter into a contract, the contract is VOIDABLE by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.

Question 6

Undue Influence

Answer 6

Occurs when a party unfairly persuades the other party to assent to a contract. This can occur in certain relationships where the innocent party is susceptible to persuasion (e.g., the elderly).

Question 7

Duress

Answer 7

Occurs when a party is improperly threatened and feels he has no meaningful choice but to agree to the contract.

When a party’s agreement to enter into a contract is physically compelled by duress (e.g., a threat to inflict physical harm), the contract is VOID.

When a party is induced to enter into a contract due to other duress (e.g., a threat of pursuing a civil action in bad faith), the contract is VOIDABLE.

Question 8

Capacity

Answer 8

Certain parties are considered incompetent to enter into a contract (due to infancy, mental illness, or intoxication)

Question 9

Statute of Frauds - Types of Contracts

Answer 9

1) Marriage
2) Contracts that cannot be performed within one year of making
3) Land sale (real property)
4) Sale of goods for $500 or more
5) Suretyship

Question 10

SOF Requirements

Answer 10

There must be a writing signed by the person to be charged (i.e., the person against whom enforcement is sought) that contains the essential terms of the deal.

Writing:
- Does not have to be a formal contract
- Multiple writings can be put together to meet the requirements if they reference each other
- Writing does not need to exist at the time of the promise (can be created after promises made)
- For sale of goods: need quantity term

Signature:
- a document on company letterhead may be enough to constitute a signed writing

Question 11

Letter or Memorandum of Confirmation - SOF $500 Goods

Answer 11

A contract is enforceable against the receiving party if:
- BOTH parties are merchants
- A party sends a confirmatory letter/memo that meets the SOF (writing, signed, essential terms of the deal) to the other party, and
- The other party knowingly receives the memo and does not object in writing within 10 days

Question 12

Sale of Land - SOF

Answer 12

If the contract involves the sale of land, the contract will be enforced if at least two of the following three acts have occurred:
1) the purchaser pays part or all of the purchase price
2) the purchaser takes possession of the land, or
3) the purchaser substantially improves the property

Question 13

Unconscionability

Answer 13

A court will not enforce a contract that is so unfair, no reasonable person would agree to it.

Remedies: The court may refuse to enforce the entire contract, strike the unconscionable portion of the contract, or limit the unconscionable terms.

Two Types of Unconscionability:
1) Procedural = bargaining process leading to the formation of the contract is unfair
2) Substantive = actual terms of the contract are significantly unfair

Question 14

Express Warranty

Answer 14

Any promise or description that is part of the basis of the bargain is an express warranty, unless it is merely the seller’s opinion/commendation of the value of the goods.

Disclaimer clauses that conflict with express warranties are ignored.

Question 15

Implied Warranty of Merchantability

Answer 15

Implied whenever the SELLER is a MERCHANT.

To be merchantable, goods must:
- be fit for their ordinary purpose, and
- pass without objection in the trade under the contract description

This warranty can be disclaimed through a clear written “as is” statement or an oral statement that uses the term “merchantability.”

Question 16

Implied Warranty of Fitness for a Particular Purpose

Answer 16

A warranty that the goods are fit for a particular purpose is implied if the seller has reason to know:
- the buyer has a particular use for the goods, and
- the buyer is relying upon the seller’s skill to select the goods.

Seller NEED NOT be a merchant.

This warranty can be disclaimed by general language such as “as is,” but the disclaimer must be in writing and be conspicuous.