(E) Defenses to Formation Flashcards
defenses to formation generally
a person who is asserted to be breach of a contract can defend the action by showing that there was no “meeting of the minds” due to a mistake or misunderstanding, misrepresentation or fraud, undue influence or duress, or the party’s own lack of capacity
what are the defenses to formation? (6)
(1) mistake
(2) misunderstanding
(3) misrepresentation, nondisclosure, and fraud
(4) undue influence
(5) duress
(6) capacity to contract
mistake
mistake is a belief that is not in accord with the facts as to a basic assumption on which the contract was made that materially affects performance
what must the mistake pertain to?
the mistake must be with regard to a belief about an existing fact and not with regard to something that will happen in the future
mutual mistake generally
mutual mistake occurs when both parties are mistaken as to an essential element of the contract
mutual mistake - a contract may be voidable by the adversely affected party upon proof of the following (4):
(i) mistake of fact existing at the time the contract was formed;
(ii) the mistake relates to a basic assumption of the contract;
(iii) the mistake has a material impact on the transaction; and
(iv) the adversely affected party did not assume the risk of the mistake
what happens when reformation of the contract is available to cure a mistake?
neither party can avoid the contract
conscious ignorance
a party may bear the risk of a mistake, however, when she is aware at the time of the contract that she has only limited knowledge of the facts to which the mistake relates, and she accepts her limited knowledge as sufficient
what part does the risk created by conscious ignorance rests on?
on the party being aware of her limited knowledge
mistaken party’s negligence
when the mistake is attributable to a party’s failure to know or discover facts before entering into the contract, the party may nonetheless assert the defense of mistake, unless the party failed to act in good faith and in accordance with the reasonable standards of fair dealing
is a mistaken party’s negligence with regard to the mistake sufficient to prevent mistaken party from avoiding the contract?
no
unilateral mistake
when only one of the parties was mistaken as to an essential element of the contract at the time the contract was formed, either party can generally enforce the contract on its terms.
unilateral mistake - the mistaken party can void the contract if the elements for mutual mistake exist and either (2):
(i) the mistake would make enforcement of the contract unconscionable; or
(ii) the non-mistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken
what’s required for a unilateral mistake to form the basis for rescission?
there must be an absence of serious prejudice to the other party
reformation for mistake
when a writing fails to express the agreement because of a mistake of both parties, the court may, at the request of a party, reform the writing to express the agreement, except to the extent that rights of third parties who have relied on the document, such as good-faith purchasers for value, will be unfairly affected
reformation of a writing for mistake is available if (3):
(i) there was a prior agreement (either oral or written) between the parties;
(ii) there was an agreement by the parties to put that prior agreement into writing; and
(iii) as a result of a mistake, there is a difference between the prior agreement and the writing
what is the result if one party, without consent of the other party, intentionally omits a term from the writing that had been agreed upon by the parties?
reformation would be available on the grounds of misrepresentation
misunderstanding
a misunderstanding occurs when both parties believe that they are agreeing to the same material terms, but they in fact agree to different terms
neither part knows or should know of the misunderstanding
if the misunderstanding involves a material term, and neither party knows or has reason to know that there is a misunderstanding, then there is no contract
one party knows or should know of the misunderstanding
if a material term in the offer and acceptance is ambiguous, and only one party knows or has reason to know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract formed based on the meaning of the term as understood by the unknowing party (while a contract exists, the contract may be voidable on the grounds of mistake or misrepresentation due to the conduct of the party with the superior knowledge)
both parties know of the misunderstanding
there is no contract if both parties at the time of contracting knew or had reason to know that a material term was ambiguous, unless both parties intended the same meaning
waiver of the misunderstanding
even if there is a misunderstanding, one party may waive the misunderstanding and choose to enforce the contract according to the other party’s understanding
subjective determination of misunderstanding
in determining the existence of a misunderstanding, it is each party’s knowledge or reason to know of the misunderstanding that governs, not what a reasonable person would know
does the objective theory of contracts apply to subjective determination of misunderstanding?
no
subjective determination of misunderstanding - how do you determine what party knows or has reason to know?
the principles regarding conscious ignorance and negligence apply
misrepresentation
a misrepresentation is an untrue assertion of fact
assertion of fact
in order to constitute a fact, the assertion must be about a present event or past circumstance
assertion of an opinion
an assertion of an opinion, such a belief or judgment as to the quality, value, or authenticity of an item or the occurrence of a future event, is generally not an assertion of a fact
