Defenses to Formation Flashcards
Defenses to Formation
A person who is asserted to be in breach of a contract can defend the action by showing that there was no “meeting of the minds” due to a mistake or misunderstanding, misrepresentation or fraud, undue influence or duress, or the party’s own lack of capacity
Defenses to formation - Mistake
A mistake is a belief that is not in accord with the facts as to a basic assumption on which the contract was made that materially affects performance.
Must be with regard to a belief about an existing fact and not with regard to something that will happen in the future.
Changing facts - doctrines of impracticability and frustration of purpose
Mutual Mistake
Mutual mistake occurs when both parties are mistaken as to an essential element of the contract.
Mutual Mistake - elements to be voidable
The contract may be voidable by the adversely affected party upon proof of the following:
1. Mistake of fact existing at the time the contract was formed
2. The mistake relates to a basic assumption of the contract
3. The mistake has a material impact on the transaction; and
4. The adversely affected party did not assume the risk of the mistake
When reformation of the contract is available to cure a mistake, neither party can avoid the contract
Mutual Mistake - conscious ignorance
Limited Knowledge - accepts as sufficient
Mutual Mistake - Mistaken party’s negligence
failure to discover facts - can assert mistake
Unilateral Mistake
When only one of the parties was mistaken as to an essential element of the contract at the time the contract was formed, either party can generally enforce the contract on its terms.
Unilateral Mistake - Elements
The mistaken party can void the contract if the elements for a mutual mistake exist and either:
1. the mistake would make enforcement of the contract unconscionable; or
2. the non-mistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken
For a unilateral mistake to form the basis for recession, there must be an absence of serious prejudice to the other party
Reformation of a writing for mistake is available if
Writing failed to express the agreement because of the mistake of both parties - at request court may reform the writing to express the agreement
Except to the right of the third-parties who relied
1. There was a prior agreement (either oral or written) between the parties
2. There was an agreement by the parties to put that prior agreement into writing; and
3. As a result of a mistake there is a difference between the prior agreement and the writing
Misunderstanding
Misunderstanding both parties believed that they are agreeing to the same material terms but they in fact agree to different terms
Neither party knows or should know of the misunderstanding - no contract
One party knows or should know of the misunderstanding - meaning of the term as understood by the unknowing party
Both parties know of the misunderstanding
There is no contract if both parties at the time of contracting knew or had reason to know that a material terms were ambiguous, unless both parties intended the same meaning
Waiver of the misunderstanding
Even if there is a misunderstanding one party may waive the misunderstanding and choose to enforce the contract according to the other party’s understanding
Subjective determination of misunderstanding
know or have reason to know
Misrepresentation
A misrepresentation is an untrue assertion of fact
Assertion must be about a present event or past circumstance
Can be innocent, negligent, or fraudulent
Fraudulent Misrepresentation - Elements
- A false assertion of fact made knowingly, or recklessly without knowledge of its truth and
- With the intent to mislead the other party
- Misrepresentation induced assent to the contract
- The adversely affected party justifiably relied on the misrepresentation
Nondisclosure - Misrepresentation
Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist
Effect - Misrepresentation - Fraud in the Factum
Fraud in the factum occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction.
Contract is void unless reasonable diligence would have revealed the true terms of the contract.
Effect - Misrepresentation - Fraud in the Inducement
When fraudulent misrepresentation is used to induce another to enter into a contract
Contract is voidable by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement
Nonfraudulent Misrepresentation - Elements
Can still render a contract voidable by the adversely affected party if:
- Misrepresentation is material
- Misrepresentation induced assent to the contract
- Adversely affected party justifiably relief on the misrepresentation
Misrepresentation - Cure of a Misrepresentation
Following a misrepresentation but before the deceived party has avoided the contract, the facts are cured so as to be in accord with the facts that were previously misrepresented, then the contract will no longer be voidable by the deceived party
Undue Influence - Contract
A party to a contract who is a victim of undue influence can void the contract
Undue Influence - Unfair Persuasion
Undue Influence is the unfair persuasion of a party to assent to a contract.
Can’t exercise free and competent judgment or whether the persuasion of the party has seriously impaired that judgment.
Relevant factors can include - fairness of the bargain, availability of independent advice, susceptibility of a party to being persuaded
Damages - restitution damages
Undue Influence - Confidential relationship
Dominant party may be held to a higher standard
Duress
Duress is an improper threat that deprives a party of meaningful choice
Duress - Deprivation of meaningful choice
A person is deprived of meaningful choice only when he does not have a reasonable alternative to succumbing to the threat
Capacity to Contract - Infancy
When a contract is made by an infant with a person who does not lack incapacity it is voidable by the infant but not by the other party
Mental Illness - Void
If an individual is adjudicated mentally incompetent a purported contract made by the individual is void
Mental Illness - Voidable
If there is no adjudication a contract is voidable and may be disaffirmed if the individual is unable to:
1. Understand the nature and consequences of the transaction; or
2. Act in a reasonable manner with regard to the transaction, and the other party has reason to know of this fact
Lucid period - the contract is fully enforceable, unless the person has been adjudicated incompetent
Intoxication
A contract entered into while intoxicated due to alcohol or drugs is voidable by the intoxicated party if that person was unable to understand the nature and consequences of the transaction, and the other party has reason to know of the intoxication
