M-2 - Contracts: Part 2 Flashcards
What is a defense when it comes to contracts?
A defense is something that makes a contract unenforceable, and it could be due to duress, taken advantage of, contact with minor, etc.
If the courts deem the contract not valid, are the contracts normally void or voidable? What do those mean.
Contracts are normally voidable, but can be void by the courts as well. The acronym “A PIE” makes the contract void.
Void - That means that the courts deem the contract not valid and neither party can be part of it.
Voidable - The defense still has the option to enter into the contract if they so choose, but void means no one can.
What is the first type of defense in contract law?
Fraud. Acronym “MAIDS” can be used for proving fraud.
What does the acronym “MAIDS” stand for?
This is an acronym, where if you can prove all five of these elements, then fraud can be used as the defense.
M - Misrepresentation of Material Fact by Defrauding Party - EX: Someone sells you a car and says there were no accidents when there were. These have to be facts and not opinions. If someone says you look good in a dress and you buy it, and decide you don’t, that is not fraud.
A - Actual and Reasonable Reliance. EX: You relied on the sellers statement when buying the product.
I - Intent to Induce Reliance - The defrauding party made a misrepresentation so the relying party would rely on that and buy the car.
D - Damages, defrauder is liable to anyone who suffered a loss
S - Scienter - Did this on purpose, did this intentionally. They knew it was false or could be false.
What is Fraud in the execution?
This is when someone is deceived into signing something that does not look like a contract:
For example, you go up to an athlete and ask for their autograph. They sign it, but they actually signed a contract saying they were going to give you a million dollars. That contract is void since there is not meeting of the minds.
What is Fraud in the inducement?
This is when one party is aware they are getting into a contract but the terms of the contract are materially misrepresented. This is voidable, so the party could still enter this contract if they want to.
What is Innocent Misrepresentation?
This is when fraud occurs but it was unintentional. The seller was not trying to defraud you, just made a bad sale. Has all the elements of MAIDS, except the S, which is internet to defraud.
The big difference here is the defrauder will pay compensatory damages, but not punitive damages like the MAIDS would be.
What is Duress?
Enter into an agreement under your own freewill. Like someone puts a gun to your head and says sign the contract, that is duress.
If the duress is due to harm or physical, like the gun example, that contract is void.
If the harm is economic or social, then the contract is voidable.
Fairness is not a requirement, but those two elements cause duress.
What is Undue Influence?
This is an exception to the fairness rule, where a related party makes an unfair contract. Related parties, including CPA’s and attorneys have a fiduciary duty of fairness, if this is broken, then the contract will be voidable, only exception.
What is a mutual mistake? Are these void or voidable?
A mutual mistake is where both parties in a contract were not aware of a material mistake in the sale.
For example, if one person is selling a watch to another, and the watch turns out to be fake, and neither party knew this, then this would be a voidable contract.
Now if the same example above occurred but the watch was destroyed and neither party knew this, then the transaction would be void, since the watch no longer exists. - This is when the subject matter is not in existence.
IMPORTANT: This does not apply to value, so if both parties sold the watch for 200 and they found out later the watch was worth 20,000, then tough. No defense for this.
What are unilateral mistakes? Are these defenses?
Unlike mutual mistake, this is where one party was not aware of some details in a sale. Generally this are not defenses, but there is an exception. If the seller knew that the buyer was going to use the sale for something that cannot be done, then they have to tell them. See the examples below:
- If someone goes to buy some land so they can build a 20 story building, but the land can only support a 3 story building, as long as they didn’t tell the seller this, than that is too bad. You have to honor the sale, and you should have done more due diligence before buying the land.
- Now same example as above, but this time the buyer told the seller they wanted to build a 20 story building, and the buyer knew that they could only build up to a 3 story building, then they have to disclose that otherwise this would be a defense.
Are Illegal contracts void or voidable? What are some examples of this?
All illegal contracts are void, since they are illegal. Some examples include:
Agreements to commit a crime or tort - EX: Hitman
Gambling Contracts - To pay off your gambling debts
Usurious contacts - EX: Contracts with such high interest rates they are illegal.
If work is performed without a license, is that illegal in contract law?
It depends, there are two scenarios, one is where the contract is enforceable, and one is where the contract is void.
- If you are selling something simply to raise revenue, then that contract is enforceable. For example, if a kid has a lemonade stand, but they don’t have a license to sell, you cannot just take that lemonade for free and run away. You have to pay for it, and the contract is enforceable. Same if an adult was selling t shirts, same law applies.
- Now if your license is required in order to protect the public, then the contract is void. This includes people like doctors, attorneys, CPA’s, electricians, people who need a license to protect the public. For example, if someone performs surgery on you, but they do not have a degree or the right license, that is completely void, you do not have to pay that person. Even if they did an amazing job.
Are entering into contracts with minors void or voidable?
It is dangerous entering into a contract with a minor (under the age of 18), because they can disaffirm the contract while they are a minor or any reasonable time after they are no longer a minor.
- For example, you an adult sell a motorcycle to a 13 year old, because they have a license. They ride the motorcycle for 6 months, beat it up, and decide they don’t want it anymore. If the kid comes back to you and returns the motorcycle, you have to take it back and give them all of their money back. This is why it is dangerous to enter into an agreement with minors. But the minor has to give back the property in order to get the money back.
The exception is if they bought food or something, they can’t give that back.
Can a minor ratify?
Ratify means that the minor promises not to return the goods, and they cannot do that until they are an adult. If they ratify at 15 and when it comes to them being 18 and they have not brought the good back, then you are okay.
