Defenses to Formation

Question 1

Defenses to Formation

Answer 1

Misunderstanding
incapacity 
mistake 
fraud/misrepresentation 
duress
illegality 
unconscionability

Question 2

Misunderstanding

Answer 2

Must show:

1. parties used a material term that is open to two or more reasonable interpretations
2. each side attaches a different meaning to the term
3. neither party knows or should know of confusion

Question 3

Misunderstanding Waiver

Answer 3

One party may waive the misunderstanding and choose to enforce the contract according to the other party’s understanding

Question 4

Incapacity

Answer 4

Minors
Mentally Ill
Very intoxicated
Guardianship

Question 5

Incapacity

Mentally Ill

Answer 5

Two Standards
1. The person cant understand the nature and consequences of his actions; or
the person cant act in a reasonable manner in relation to the transaction; if the other side knows or has reason to know

Question 6

Incapacity

Very intoxicated

Answer 6

If other side knows or has reason to know

Question 7

Incapacity

Result

Answer 7

Voidable: incapacitated party can disaffirm

Question 8

Contract for Necessities

Answer 8

Party without capacity must still pay fair value

Question 9

Mistake

Answer 9

A belief that is not in accord with a present fact

Question 10

Mutual Mistake

Answer 10

Allows affected party to rescind if:

1. There is a mistake of fact, that existed at the time the deal is made;
2. the mistake relates to a basic assumption of the contract
3. Mistake has a material impact on the deal; and
4. The impacted party didnt bear the risk of mistake

Question 11

Unilateral Mistake

Answer 11

Allows the adversely affected party to rescind if:

1. All elements of mutual mistake: and
2. Either:
   - The mistake would make the contract unconscionable; or
   - The other side knew of, had reason to know of, or caused the mistake

Only adversely affected party can claim defense

Question 12

Misrepresentation

Answer 12

A statement at the time of the contracting that is not true

Question 13

Non Fraudulent Misrepresentation

Answer 13

To assert defense, party must show:

1. The misrepresentation of a present fact (not opinion)
2. That is material
3. Misrepresentation induced assent to contract
4. That is made under circumstances in which it is justifiable to rely on the misrepresentation

Question 14

Fraudulent Misrepresentation

Answer 14

1. The misrepresentation is fraudulent: a false assertion of fact made knowingly or recklessly without knowledge of its truth; and
2. With intent to mislead other party: misrepresentation induced assent to contract; and the adversely affected party justifiably relied on the misrepresentation

Question 15

Nondisclosure

Answer 15

Affirmative conduct to conceal a fact is same as an assertion that the fact doesn’t exist

Question 16

Mere Nondisclosure tantamount to assertion that fact doesnt exist

Answer 16

If the party not disclosing fact knows that:

1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or fraudulent or material;
2. Disclosure would correct a mistake of the other party as to a basic assumption and the failure to disclose would be lack of good faith
3. disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or
4. The other party is entitled to know the fact because of a confidential fiduciary relationship

Question 17

Duress

Answer 17

An improper threat that deprives a party from making a meaningful choice to contract.
Meaningful choice: when they dont have a reasonable alternative
Subjective Test

Question 18

Undue Influence

Answer 18

When a party puts very intense sales pressure on another party, who often seems weak minded or susceptible to high pressure sales
Key is whether party has been able to exercise free and competent judgment
Victim can void

Question 19

Illegality

Answer 19

Unenforceable
Contract entered in furtherance of an illegal act will still be enforced

Generally: law will leave parties where they stand
Modern trend: allows less guilty party to recover restitution

Question 20

Unconscionability

Answer 20

Ultimate contract defense
When it’s so unfair to one party that no reasonable person in the position of the parties would have agreed to it
Question of Law

Question 21

Procedural Unconscionability

Answer 21

A defect in the bargaining process itself:

Hidden term or absence of a meaningful choice

Question 22

Substantive unconscionability

Answer 22

A rip off in some term of the contract