Defenses to formation

Question 1

Misunderstanding

Answer 1

Misunderstanding is a defense to formation if:

(1) The parties use a material term reasonably open to two or more interpretations;
(2) Each side attaches a different meaning to the term; and
(3) Neither side knows, or should know, about the confusion.

Question 2

Incapacity

Answer 2

A contract with a person who lacks capacity is voidable—the incapacitated person can disaffirm—or can be ratified by the person once she obtains capacity, e.g., by reaching the age of adulthood.

A party without capacity must still pay fair value (not necessarily the contract price) for necessities.

Question 3

Mutual mistake

Answer 3

The adversely affected party may rescind the contract if:

(1) There is a mistake of present fact;
(2) The mistake relates to a basic assumption of the contract; and
(3) The impacted party did not bear the risk of mistake.

If, however, there is a “compromise of conscious ignorance,” the contract cannot be rescinded.

Question 4

Unilateral mistake

Answer 4

The adversely affected party may rescind the contract if:

(1) She can establish all of the elements of mutual mistake; and
(2) The mistake:
(a) would make the contract unconscionable; or
(b) the other side:

* knew of, 
* had reason to know of, or 
* caused the mistake.

Question 5

Misrepresentation

Answer 5

Misrepresentation may be grounds to set aside a contract if the misrepresentation:

(1) Is of a present fact—i.e., is not an opinion;
(2) That is material or fraudulent—i.e., intentional; and
(3) Made under circumstances in which it is justifiable to rely on the misrepresentation.

There is no economic harm requirement.

Question 6

Duress

Answer 6

An improper threat that deprives a party from making a meaningful choice to contract:

(1) Economic duress, i.e., threats;
(2) Undue influence, i.e., intense sales pressure on a party that seems weak minded or susceptible.

Question 7

Duress: threat of criminal prosecution

Answer 7

It constitutes an improper threat even if the threatened party is guilty of the crime for which prosecution is threatened.

Question 8

Incapacity: very intoxicated persons

Answer 8

A contract is voidable by a very intoxicated party if the other side knew or had reason to know about the intoxication.

Question 9

Incapacity: mentally illness

Answer 9

If an individual is adjudicated mentally incompetent, a purported contract made by the individual is void.

But if there has been 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.

If a contract is made during a lucid period, the contract is fully enforceable, unless the person has been adjudicated incompetent.

Question 10

Incapacity: minors

Answer 10

When a contract is made by a minor, it is voidable—because of “infancy”—by the minor but not by the other party.

The disaffirmance must be effectuated either before the minor reaches the age of majority or within a reasonable time thereafter.

Question 11

Misrepresentation: nondisclosure

Answer 11

Nondisclosure ordinarily does not allow the adversely affected party to claim a defense unless:

(a) the nondisclosing party engaged in active concealment or
(b) had a fiduciary duty to the adversely affected party.

But nondisclosure of a known fact is tantamount to an assertion that the fact does not exist if:

(1) the party not disclosing the fact knows
(2) that disclosure would correct a mistake of the other party as to a basic assumption of the contract, and
(3) the failure to disclose would constitute lack of good faith and fair dealing.