Defenses to Formation or Enforcement

Question 1

Defenses to Contract Formation

Answer 1

The following are defenses to K formation or enforcement

• If established, a court may choose not to enforce an otherwise valid K or it may be void or voidable by parties

1. Incapacity - one or both parties lack capaciy to enter into a K
2. SOF - Ks subject to SOF that fail to meet SOF requirements are invalid
3. Illegality - Subject matter or purpose of K is illegal
4. Misrepresentation / Fraud - K that is formed based on fraud or misrepresentation
5. Duress - K that is induced by force, coercion, or duress
6. Unconscionability - K that is unfair or oppressive to one party
7. Misunderstanding - Where there is ambiguity concerning terms of a K
8. Mistake - Where one or both parties is mistaken concerning underlying facts of a K

Question 2

Incapacity

Answer 2

Infants and mentally incompetent persons lack capacity to contract

• Intoxication - intoxicated persons may lack capacity to contract if the other party has reason to know of intoxication

Right to disaffirm - person who lacked capacity to contract (e.g. infant) may disaffirm the K, which renders it void

Infancy exceptions - Ks involving minors may be enforced or otherwise recognized where:

• Implied affirmation (ratification) - a K can be enforced against one who was an infant at the time of K formation if she has since gained capacity and retained benefits of the K
  
  • Requirements:
    
    1. Agreement entered into before capacity;
    2. Capacity has since been gained; and
    3. Benefits have been retained
• Infant liability for necessities - infants are legally obligated to pay for necessities (e.g. food, clothes, medical care)
  
  • Liablity is based on quasi-K, so infant cannot be sued for breach (b/c there is not an enforceable K)

Question 3

Statute of Frauds

(SOF)

Answer 3

Contracts subject to the SOF require special proof of their existence

• Failure to satisfy SOF requirements may result in an invalid K

Methods of satisfying the SOF:

1. Signed writing - a writing containing the signature of the party to be charged (i.e. the party asserting the SOF defense)
   
   • UCC exception - signed writing not required if:
     
     • Both parties are merchants; and
     • The party asserting SOF defense received a signed writing memorializing the agreement and its essential terms and failed to respond within 10 days of receipt
2. Performance - may satisfy SOF
   
   • Service K - only full performance satisfies SOF
   • Sale of goods - delivery of goods satisfies SOF
     
     • Custom made goods - SOF satisfied once seller makes a substantial beginning toward performance
   • Real estate - part performance by the buyer satisfies SOF if buyer has done 2 of the following 3:
     
     1. Full or part payment
     2. Possession of property
     3. Improvements to property

Question 4

Contracts within the SOF

Answer 4

If a contract is w/in the SOF, it must satisfy SOF requirements to be valid

Contracts w/in the SOF:

1. Marriage Ks - promises made in consideration of marriage
2. Service Ks incapable of being performed within 1 year
   
   • SOF does not apply to: “lifelong” deals or Ks that say nothing about time for performance - both are technically capable of performance within one year
3. Land-related Ks - transfers of property interests, including leases for terms greater than one year
4. Executor promises - promises by executors/administrators to personally answer for the debts of the decedent’s estate
5. Guarantees - promises to pay the debt of another
6. Sale of goods of $500 or more

Question 5

Illegality, Misrepresentation, Duress, & Unconscionability

Answer 5

Illegality, misrepresentation/fraud, duress, and unconscionability are all defenses to contract formation or enforcement

Illegality - look for an illegal subject matter or purpose for the K

• Illegal subject matter - K is not enforceable
• Legal subject matter but illegal purpose - K only enforceable by one who did not know about its illegal purpose
• Legality is based on existing law at the time of K formation

Misrepresentation (fraud) - false assertions, concealment, or misstatemetns about a material fact before K formation

• K will be voidable if A induces B into a K by misrepresentation and B relies on the misrepresentation

Duress - includes both economic and physical duress

• Duress = wrongful act or threat that overcomes a party’s free will
• Physical - Ks induced by physical duress are void
• Non-physical - Ks induced by non-physical coercion or threats are voidable by the coerced or threatened party

Unconscionability - courts may refuse to enforce all or part of a K that is unfair or oppressive to one party based on unfair bargaining and/or unfair substantive terms

• Arises with adhesion Ks, exculpatory clauses for intentional acts, etc.
• Look for an absence of meaningful choice by the disadvantaged party

Question 6

Misunderstanding & Mistake

Answer 6

A K may be unenforceable or void/voidable where there was a significant misunderstanding or mistake during K formation

Misunderstanding - ambiguity concerning terms of the K

• Neither party aware of ambiguity - no K formed unless both parties intended the same meaning
• One party aware of ambiguity - K formed
  
  • K enforced acccording to the intention of the unaware party
  • E.g. If A knows B misunderstands but A remains silent, K enforced according to B’s understanding
• Both parties aware of ambiguity - no K formed unless both parties intended the same meaning

Mutual Mistake - both parties are mistaken about an underlying factual assumption at the time of K formation

• K is voidable by an adversely affected party if:
  
  1. Both parties are mistaken concerning a basic assumption of fact;
  2. Mistake materially affects the agreed-upon exchange; and
  3. Adversely affected party did not assume risk of the mistake

Unilateral Mistake - one party makes a mistake concerning facts of an agreement; usually arises with computational errors

• Unilateral mistake will not prevent K formation
• Exception - mistaken party may void K if mistake is material and non-mistaken party knew/should have known of mistake