Formation Defects

Question 1

Effect of formation defect doctrines

Answer 1

Defendant must prove as an affirmative defense

Can result in contracts being void or voidable

Question 2

Types of formation defects

Answer 2

Incapacity
Misrepresentation
Duress
Unconscionability
Undue influence

Question 3

Incapacity

Answer 3

Allows for voidability of contract entered into individuals who are

Mentally ill
intoxicated
Infants
Under guardianship

Question 4

Ortelere v. Teachers Retirement board

Answer 4

A Contract can be declared voidable if a party is unable to understand the transaction and the other party knew or had reason to know of the incapacity.

Question 5

Tests for Incapacity:

Answer 5

Traditional Test (Cognition):
Whether mind was “so affected as to render him/her wholly and absolutely incompetent to comprehend and understand nature of transaction
Allows avoidance of any contract (regardless of executory nature)

Question 6

Modern test for Incapacity due to mental illness

Answer 6

Restatement Test (§15)
Contractual Duties voidable if by reason of mental illness/defect:

1. Inability to understand in a reasonable manner nature and consequence of transaction, or
2. Inability to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

But when contract is on fair terms, and counterparty doesn’t know about incapacity, power to avoid is terminated to extent that contract is not executory (prospective only) or circumstances have so changed that avoidance would be unjust

Question 7

Intoxication

Answer 7

Person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication

(A) He is unable to understand in a reasonable manner the nature and consequence of the transaction, or

(B) He is unable to act in a reasonable manner in relation to the transaction

Question 8

Infancy

Answer 8

Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.

Makes contracts voidable

Question 9

Webster St. v Sheridan

Answer 9

An infant is liable for the value of the necessaries furnished him. Necessaries are those an infant must have an actual need for - obliged to procure for himself

Question 10

Shields v. Gross

Answer 10

At common law, an infant can disaffirm a contract executed by a parent. Not the case if a statue alters common law for parents giving consent on behalf of infants. Rest § 14

Question 11

Misrepresentation/ Fraud

Answer 11

1. An assertion that is not in accord with the facts;
2. Receiving party’s assent must be induced by misrepresentation (to his/her detriment)
3. Receiving party must be justified in relying on the misrepresentation;
4. Misrepresentation must be either material or fraudulent

Question 12

What is an assertion?

Answer 12

Oral/written statement
Action
Silence

Question 13

Oral/Written Assertion

Answer 13

Communicates facts or opinions about facts

Question 14

Actions asssertion

Answer 14

Constitute assertions if they’re “intended or known to prevent another from learning some fact

Question 15

Silence

Answer 15

General Rule: silence ≠ assertion
Exceptions (Rest § 161)
Prior assertions are/have become inaccurate
Other party mistaken about effect of a writing
Parties are in a relationship of “Trust and Confidence”
Other party mistaken, and failure to correct amounts to bad faith * (not as broad as it may seem)

Question 16

Induced

Answer 16

Substantially contributes to one’s decision to enter contract

Question 17

Justified reliance

Answer 17

Is the statement based upon some specialized or non-public knowledge

Question 18

As to facts

Answer 18

relying, and need not investigate further;
(However: if receiver decides to investigate and does so improperly or negligently, courts may not be as charitable).

Question 19

As to opinions

Answer 19

General Rule: if an assertion is one of opinion, recipient cannot justifiably rely upon it
(through one can justifiably rely on any assert facts that form the “basis” of opinion)

Question 20

Exceptions to relying on opinions

Answer 20

Stands in such a relationship of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it;
Reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter;
Is for some other reason particularly susceptible to a misrepresentation of the type involved

Question 21

Material

Answer 21

Materiality:
Likely to induce a reasonable person to manifest his assent - asserting state of mind is irrelevant

Question 22

Fraudulent

Answer 22

Asserting party intends it to induce other to manifest assent, AND
Asserting party:
(a) knows/believes that the assertion is not in accord with the facts; or
(b) does not have the confidence she states/implies in the truth of the assertion; or
(c) knows that she does not have the basis that she states or implies for the assertion

Question 23

Consequences of material misrepresentation

Answer 23

Contract is voidable by the party claiming the defect, followed by restitution to both parties (if applicable).

Question 24

Fraudulent Misrepresentation (deceit):

Answer 24

Contract is voidable/void as above

Question 25

Caveats to misrep or fraud

Answer 25

Possibly to “ratify” contract through words or conduct evidencing desire to continue Fraud in inducement (--> voidable) vs. Fraud in Factum (--> void)

Question 26

Duress

Answer 26

Threats of Physical Harm or non physical harm Econimic duress

Question 27

Duress: Threats of physical harm

Answer 27

Physical Duress: Conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress Physical duress renders a contract void (rather than voidable)

Question 28

Economic Duress:

Answer 28

Threat to take some action that damages the assenting party in financially disadvantageous way Voidable contract

Question 29

Non-Physical Duress Conjunctive Elements

Answer 29

1. Existence of a “threat” 2. Threat must be “improper” 3. Must induce the receiver to manifest her assent 4. Threat must be sufficiently grave to manifest such assent, or leave receiver with no real alternative

Question 30

When is a threat improper?

Answer 30

(1) resulting exchange appears one sided, and (2) one of the following holds: (a) the threat involves imposing a harm on the recipient with little benefit to the threatening party, (b) prior unfair dealings with the threatening party significantly increase the effectiveness of the threat in inducing the manifestation of assent; or (c) what is threatened is otherwise a use of power for illegitimate ends.

Question 31

Austin Instrument v. Loral Corp.,

Answer 31

A contract is voidable on the ground of economic duress if it is established that the party making the claim was forced to agree to the contract by means of a wrongful threat precluding the exercise of his free will.

Question 32

United States v. Progressive Enterprises, “”

Answer 32

A party must communicate and establish that it will suffer economic duress in the event of a modification of a contract

Question 33

Unconscionability

Answer 33

Procedural Unconscionability: Absence of meaningful choice on the part of one of the parties; Gross inequality of bargaining power Other circumstances: “Given obvious education or lack of it, did each party have reasonably opportunity to understand the terms of the K?” (2) Substantive Unconscionability: Contract terms unreasonably favorable to the other party Whether terms of K, considered in light of general commercial background and commercial needs of particular trade and case, are manifestly one-sided

Question 34

Procedural Unconscionability

Answer 34

Absence of meaningful choice on the part of one of the parties; Gross inequality of bargaining power Other circumstances: “Given obvious education or lack of it, did each party have reasonably opportunity to understand the terms of the K?”

Question 35

Substantive Unconscionability

Answer 35

Contract terms unreasonably favorable to the other party Whether terms of K, considered in light of general commercial background and commercial needs of particular trade and case, are manifestly one-sided