Defenses To Formation

Question 1

Infancy doctrine (S14)

Answer 1

Majority Rule
Minors (under 18) are not allowed to form contracts except for necessities (goods or services)
-contracts entered into by minors are VOIDABLE
- upon entering majority age, the minor can either ratify or avoid the contractual obligation entered into during minority
- necessities are not voidable even after reaching majority age
- once reaching majority, must act within a reasonable time period to disaffirm the contract otherwise it will be deemed affirmed (S14)
- Minor cannot willfully misrepresent age or willfully destroy property

Minority Rule
1.Benefit rule
- Upon rescission, recovery of the full price is deducted from the minor’s use of the merchandise

2. Use rule
   Minor’s recovery of the full purchase price is subject to deduction for the minor’s use of the consideration, or the depreciation or deterioration of the possession

Note: minors who are emancipated are usually seen as adults

Question 2

Mental incapacity (S15)

Answer 2

1. Cognitive Test (Traditional rule)
   - The party who is trying to avoid the contract “could not understand the nature, and quality of the transaction or grasp its significance” (can’t understand consequences or the nature of the contract)
   - Voidable
   - burden on party seeking to AVOID contract
2. Affective/Volitional Test (Modern rule) (S15)
   - Even if incapacitated party has some or even sufficient understanding of the nature of the consequences of the contract,
   - The contract is voidable if he or she by reason of mental illness or defect acts in a UNREASONABLE manner and
   - The OTHER PARTY KNOWS about condition
   - Voidable
   - burden on party seeking to AVOID contract

Note for modern rule: if contract is fair and the other party does not know about condition, and the contract has been performed in part or whole, the contract is not voidable and restoration may be required

Note 2: if party A has legal guardian/conservatory because party A is considered mentally incompetent, party A cannot legally enter contracts and any contract entered into is voidable unless authorized by guardian (S13)

Question 3

Duress and undue influence (Physical) (S174)

Answer 3

Physical (S174): If conduct appears to be a manifestation of assent compelled by physical duress and the victim does not want to assent, there is no manifestation of assent
- contract is void

Voidable (S175):
(1) If assent is induced by an improper threat and the victim has no reasonable alternative, the contract is voidable by victim
(2) If manifestation of assent is induced by third party who is not a part of the contract, the contract is voidable by victim unless the contracting party executed in good faith and without reason to know of duress either gives value (consideration) or relies materially on the transaction

Question 4

Mistake (mutual)

Answer 4

1. When a MISTAKE by BOTH PARTIES as to a BASIC ASSUMPTION of the contract
   Basic assumption: material fact of the agreement
   - must be so great as to make the enforcement unconscionable/unfair
2. Has a MATERIAL EFFECT on the contract ( central to purpose) (collateral is not central to purpose)
3. The contract is VOIDABLE by the ADVERSELY affected party
4. Unless he BEARS THE RISK OF THE MISTAKE under S152 (mutual mistake of fact)
   S152
   - risk is allocated by the agreement of the parties
   - when he is aware he has limited knowledge of the facts but treats it as sufficient knowledge
   EX: Sold painting for $60 but never was appraised, worth 1 million/buying land without surveying and no zoning law for land
   -in writing: look to mutual intent

Question 5

Mistake (Unilateral)

Answer 5

A mistake by one party plus either
1. The enforcement of the contract would be UNCONSCIONABLE and/or
2. The non mistaken party MUST of had reason to KNOW of the other party’s mistake and/or
3. The mistaken party’s mistake was the FAULT of the other party

Note: (Usually found in construction cases)

Remedies:

1. Rescission: Contract rescission is where the contract is completely cancelled and the parties restored to their position before the contract was entered into. Rescission is only available if the non-mistaken party knows or should have known about the unilateral mistake.
2. Reformation: Contract reformation is where the written agreement is changed to reflect the parties’ original understanding. Reformation is granted only if one party was not aware that the writing does not conform to the actual agreement.

Question 6

Misrepresentation (S159)

Answer 6

Incorrect or fraudulent assertions of fact during negotiations that cause reliance on the part of the other party

False statement must be intentional and must be important, or material for the defense to apply
- merely deceiving someone is not necessarily misrepresentation unless it has a material effect (puffering)
- if the misrepresentation is innocent and causes substantial material effect, the contract is unenforceable

If defense is successful, the contact is voidable or the court can step in and make the contract fair

Question 7

Mutual mistake remedies

Answer 7

Equitable relief (both sides get what was intended)
Rescission of contract
Restitution (if necessary in that case)

Question 8

Intoxication (Mental Illness) (S16)

Answer 8

A contract is VOIDABLE if the OTHER PARTY KNOWS by reason of intoxication, party A
- cannot understand in a reasonable manner the nature and consequences of transaction OR
- unable to act in a reasonable manner in relation to the transaction

Note: If Party A is EXTREMELY INTOXICATED, there is NO contract (not voidable because no contract exists)
Note: may ratify contract while sober by disaffirming and offer new consideration

Question 9

Duress (economic)

Answer 9

(1) One party involuntarily accepting terms of another
(2) circumstances permitted no alternative
(3) circumstances were result of coercive acts of other party
- duress must result from defendant’s coercive acts and not plaintiff’s necessities
- must be done intentionally
- must have no choice but to accept or face serious economic hardship
- victim must have no adequate remedy if threat is carried out

Question 10

Undue Influence (S177)

Answer 10

Voidable
(1) unfair persuasion of a party who is under the domination of the person executing the persuasion or is justified in assuming the other party acts in a manner inconsistent with the victim’s welfare
(2) assent induced this way is voidable
(3) If induced by a third party, the contract is voidable unless the original contractor acts in good faith and without reason to know of the threat, gives value (consideration) or materially relies on the offer