Defenses to Enforceability Flashcards
Incapacity
A party may establish the defense of lack of capacity due to the party’s (1) infancy, (2) mental illness or defect, or (3) intoxication at the time of the contract. If the party suffered the incapacity at the time of formation, the contract may be unenforceable. If the incapacity arises after contract formation, it is no defense to enforceability.
Unconscionability
Unconscionability occurs when a contract or term shocks the conscience of the court. Unconscionability usually occurs if the contract/term is BOTH substantively and procedurally unconscionable.
o Procedural unconscionability occurs when one party to the contract (usually the party who wrote the contract) has a superior bargaining position over the other party and uses that power to their advantage. An example is engaging in unfair pressure or bargaining practices to force the other party to enter into the contract.
o Substantive unconscionability occurs when the contract contains terms that are obviously unfair and one-sided in favor of the party with the superior bargaining power.
If a contract or term is found unconscionable a court may:
(a) refuse to enforce the contract; (b) enforce the contract without the unconscionable term; OR (c) limit the application of any unconscionable term.
Mutual Mistake
A contract is voidable (it may be rescinded or reformed) when there is a mutual mistake. Mutual mistake occurs when:
(1) both parties are mistaken as to a basic assumption on which the contract is made;
(2) the mistake is material to the contract; AND
(3) the person asserting the mistake did not bear the risk of the mistake (by agreement or by a party treating their limited knowledge as sufficient).
Unilateral Mistake
A unilateral mistake is (1) a mistake made by one party, (2) that is unknown to the other party, (3) concerning a basic assumption, (4) that has a material effect. A unilateral mistake is generally NOT a valid defense to formation of a contract.
However, (1) if one party knew or had reason to believe that the other party was mistaken;
(2) the mistake is the other party’s fault; OR
(3) the mistake would make enforcement of the contract unconscionable, then the contract is voidable by the mistaken party.
Note: When the mistake involves price or value, the equitable remedy of rescission or reformation will NOT be allowed because price/value is NOT considered material.
Statute of Frauds: Contracts Requiring a Signed Writing–Applicability to Contracts
Under the Statute of Frauds, the following contracts are not valid UNLESS they are in a writing signed by the party to be charged:
(1) Marriage contracts;
(2) Suretyships (where a guarantor promises to take on the debt of another if that person fails to pay) unless the main purpose exception applies (the surety’s main purpose in making the promise was to benefit himself);
(3) Contracts that Cannot be fully performed in 1 year from the date the contract is entered into (there must be no possible way the contract can be performed within 1 year);
(4) Contracts for the Sale of real property or creating an interest in real property (i.e. easements, leases over one year);
(5) Promises to pay an estate’s debt from the personal funds of the Executor/Administrator; AND
(6) Contracts for the Sale of goods for $500 or more (the writing must state the parties, quantity and nature of the goods, and be signed).
Statute of Frauds: Contracts Requiring a Signed Writing–Requirements for the Writing
In order to satisfy the Statute of Frauds, a writing MUST:
(1) be signed by (or on behalf of) the party to be charged;
(2) reasonably identify the subject matter of the contract;
(3) indicate that a contract has been made by the parties; AND
(4) state the essential terms with reasonable certainty. The statute of frauds DOES NOT require that an agreement be contained in one signed document; it may consist of several writings.
Statute of Frauds: Exceptions when a Writing is Not Required–Common law
Under the Common Law, a contract that violates the statute of frauds may still be enforceable in the following
situations:
(1) Full Performance (partial performance is allowed in land sale contracts if a party has done at least two of the following: (i) made payment for land; (2) took possession of land; (iii) made valuable improvements to land);
(2) Judicial Acknowledgement – the party admits to the agreement in pleadings or testimony;
(3) Estoppel – reasonable and foreseeable detrimental reliance on a promise.
Statute of Frauds: Exceptions when a Writing is Not Required UNDER UCC
A contract for the sale of goods falls within the UCC’s statute of frauds if the price is $500 or more. There are four exceptions to this rule:
- if the goods are specially manufactured,
- if the party against whom enforcement is sought admits there was a contract,
- if there has been part performance, and
- if the contract is between merchants (confirmatory memorandum)
List the Defenses to Enforcement
The main defenses to enforceability are:
- lack of capacity,
- duress,
- undue influence,
- illegality,
- unconscionability,
- misrepresentation, and
- Statute of Frauds
Only the party who was affected by the ground for unenforceability (e.g., the party who suffered the incapacity) may raise it as a defense. The other party may not.
Incapacity–Infancy
An unmarried, unemancipated minor lacks capacity due to infancy until the beginning of the day before the minor reaches the age of majority, which is 18 in most jurisdictions. A minor may generally disaffirm a contract until a reasonable time after she reaches the age of majority. If the minor disaffirms the contract, it is unenforceable against her. If the minor expressly ratifies the contract or does not disaffirm it within a reasonable time after attaining majority, the contract is deemed ratified and thus enforceable. The minor must generally return the subject matter of the agreement (or what is left of it) to the other party if she elects to disaffirm.
Exception for Necessities
Contracts for necessities, e.g., food, shelter, and medical care, are always enforceable against minors. In other words, a minor may not disaffirm a contract for necessities. This serves the public-policy goal of ensuring that minors are able to obtain necessities, as people would be reluctant to enter into necessities contracts with minors if they were enforceable only at a minor’s election.
Incapacity–Mental Illness or Defect
A person lacks capacity if, due to mental illness or defect, she is unable to (1) reasonably understand the nature and consequences of the transaction or (2) act in a reasonable manner concerning the transaction (provided the other party has reason to know of the mental illness or defect). Generally, a contract by a person lacking capacity due to mental illness or defect is enforceable, but it may be voided (i.e., made unenforceable or disaffirmed) by the incapacitated party’s legal representative. Alternatively, if the party regains capacity, she may elect to ratify or disaffirm the contract herself.
However, if the contract has been ratified, it may not be disaffirmed. Also, if the contract was made on fair terms, and the other party does not know of the mental condition, the contract may not be disaffirmed, to the extent that injustice would arise from disaffirmance because either the contract has been performed or the circumstances have changed.
Statute of Frauds: UCC Modifications for Sale of Goods over $500.
Under the UCC, if an initial contract does not fall within the statute of frauds but is later modified so that it does fall within the statute of frauds, then the contract as modified is subject to the statute of frauds. However, if the initial contract falls within and satisfies the statute of frauds, then any modification need not satisfy it. The initial enforceability passes through to the modifications. A contract subject to the UCC statute of frauds is enforceable only up to the quantity of goods indicated in the writing. Thus, if a modification to a contract subject to the statute of frauds purports to change the quantity, then the modification itself must appear in a writing satisfying the statute of frauds.
Statute of Frauds: Exceptions when a Writing is Not Required UNDER UCC–Specially Manufactured Goods
A signed writing is not required if the contract is for the sale of specially manufactured goods that are not suitable for sale to others in the ordinary course of the seller’s business. The seller must have substantially begun to manufacture the goods or made a commitment to procure the goods (1) before receiving notice that the buyer has repudiated (i.e., manifested intent to back out of) the contract and (2) under circumstances reasonably indicating that the goods are or are to be made for the buyer.
Statute of Frauds: Exceptions when a Writing is Not Required UNDER UCC–Judicial Admission
A signed writing is not required if the party against whom enforcement is sought admits in court by pleading, testimony, or other means that a contract for sale was made. However, the contract is enforceable only up to the quantity of goods admitted.
Statute of Frauds: Exceptions when a Writing is Not Required UNDER UCC–Part Performance
A contract subject to the UCC statute of frauds is enforceable without a signed writing to the extent that (1) the goods have been accepted or (2) payment for the goods has been made and accepted.
