Defenses To Formation Flashcards
What are the seven defenses?
- Misunderstanding
- Incapacity
- Mistake
- Fraud/Misrepresentation/Nondisclosure
- Duress
- Illegality
- Unconscionability
When do you have a misunderstanding defense?
Look for situations where each party attaches different meanings to the same words.
What are the elements of Misunderstanding?
- The parties use a material term that is open to two or more reasonable interpretation (objective test cannot apply)
- Each side attaches a different meaning to the term; and
- Neither party knows, or should know, of confusion.
Who lacks the capacity to make a contract?
- Minors under 18
- Persons who are mentally ill-two standards:
•the person cannot understand the nature and consequences of his actions; or
• the person cannot act in a reasonable manner in relation to the transaction (if the other side knows this) - Very intoxicated persons (if the other side knows this)
What happens if you make a contract with a person who lacks capacity?
- The contract is voidable meaning that the incapacitated party can disaffirm.
- a party without capacity can ratify the deal by keeping the benefits of the contract after capacity is obtained.
What must a a person who lacks capacity pay for?
Necessities- must still pay for value NOT the contract price.
Necessities are something you really need to live-food. Clothing, or shelter.
What is a Mistake?
Mistake is a belief that is not in accord with a present fact
What are the two types of Mistake?
What are the elements of each?
Who can claim the defense?
- Mutual Mistake- let’s the affected party rescind if:
• there is a mistake of fact, existing at the time that the deal is;
• The Mistake related to a basic assumption of the contract and has a material impact on the deal; and
• The impacted part did not assume the risk. - Unilateral mistake- lets the adversely affected party rescind if:
• you can prove all elements of mutual mistake; plus
• 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 the defense.
What is a misrepresentation defense?
What are the elements to misrepresentation?
A statement at the time of contracting that is not true. It can be intentional (fraudulent) or accidental.
To assert this defense, the party must show:
- A misrepresentation of a present fact (not opinion);
- That is material or fraudulent (intentional); and
- That is made under circumstances in which it is justifiable to rely on the misrepresentation.
What is Fraud in the Execution?
When you trick someone into signing something that she doesn’t even know is a contract.
What is Non-disclosure?
2 statements
The other party doesn’t learn the truth about something, but now you just remain quiet.
- Normally, you need to tell the other side about all material facts related to the deal.
- But watch out for a special (fiduciary) relationship or active concealing something from the other party.
What is Duress?
What are the two types?
An improper threat that deprives the party from making a meaningful choice to contract
- Economic Duress arises when one party makes threats to induce another party to contract (or modified contract).
- Undue influence arises when a party puts very intense sales pressure on another party – who often seems weak minded or susceptible to high-pressure sales tactics (Think wolf on Wall Street).
What is Illegality?
3 statements
- Illegal contracts are unenforceable.
But, the contract entered in furtherance of an illegal act (that is not itself legal) will still be enforced.
- Typically, the law will just leave the parties where they stand, but there is a modern trend toward allowing less-guilty parties to cover restitution (i.e., get their money back).
- Contracts against public policy will not be enforced. These are contracting situations that are not formally illegal the present some other policy concerns (e.g., a broad exculpatory agreement).
What are the two types of Unconscionability?
Define each
- Procedural unconscionability-A defect in the bargaining process itself, such as a hidden term (surprise) or an absence of meaningful choice (no other contracting option);
- Substantive unconscionability – a rip-off in some terms of the contract.
What is the UCC Unconscionability?
A contract or term is unconscionable when no reasonable person in the position of the party would agree to it.
