CONTRACTS Defenses and Enforceability (Themis)

Exceptions for illegality

1. Ignorance of illegality 2. Lack of illegal purpose

Intoxication

A contract entered into while intoxicated due to alcohol or drugs is voidable (by the intoxicated party) if that person was unable to understand the nature and consequences of the transaction, and the other party had reason to know of the intoxication.

Deprivation of meaningful choice

A person is deprived of meaningful choice only when he does not have a reasonable alternative to succumbing to the threat.

Ratification

A contract will be deemed ratified: -if upon reaching the age of majority, the infant AFFIRMS the K, or fails to disaffirm, or conduct that manifests intent (ratification need not be express) A ratified contract will only be valid to the extent that it is has been ratified

Elements of quasi contract recovery

A court may allow restitutionary recovery if: i) Plaintiff conferred a benefit ii) Benefit was not intended as a gift iii) It would be unfair to let the defendant retain the benefit Plaintiff cannot be an officious intermeddler

Unconscionability

A court may modify or refuse to enforce a contract or part of a contract on the grounds that it is unconscionable. A contract (or part of a contract) is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would have agreed to it.

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. One party can waive misunderstanding and choose to enforce K based on other party's understanding

Bearing the risk of mistake

A party may bear the risk of a mistake, however, when she 1. is aware at the time of the contract that she has only limited knowledge of the facts to which the mistake relates, and 2. she accepts her limited knowledge as sufficient.

Defenses to Enforcement

A party to a contract can assert that the nature of the agreement or the manner in which it was arrived at should prevent its enforcement.

Guardianship

A person under guardianship lacks capacity to contract, and a purported K made by the individual is void

Void K

A void contract results in the entire transaction being regarded as a nullity, as if no contract existed between the parties.

Voidable Contracts

A voidable contract operates as a valid contract, unless and until one of the parties takes steps to avoid it.

Mental illness

Adjudicated mentally incompetent - K made by the individual is void. Not adjudicated mentally incompetent - K voidable, if party can't i) Understand the NATURE and CONSEQUENCES of the transaction; or ii) Act REASONABLY regarding the transaction, and other party KNOWS OR HAS REASON TO KNOW he's incompetent

Duress

An improper threat that deprives a party of meaningful choice. Generally makes a contract void; . but if the result of a breach of good faith and fair dealing (or 'inducement'), K is voidable.

Unenforceable Contracts

An unenforceable contract is a valid contract that cannot be enforced if one of the parties refuses to carry out its terms.

Illegality exception example 3

Assume the same facts as those in Example 2, except that the buyer tells the owner that he intends to use the rifle to kill his wife. The owner may not recover the price of the rifle from the buyer because the owner knew both that the buyer intended to put the rifle to illegal use and that the illegal use involved grave social harm.

Confidential relationship—fairness and disclosure

Burden of proving that the contract is fair is on the dominant party. The dominant party to the contract may also be held to a higher standard of disclosure than she would be in a contract between arms-length parties.

Reformation for mistake

Courts 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 available if: 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.

Statutory exceptions

Education loans and made to a minor are fully enforceable by the lender; so are insurance contracts entered into by a minor.

Public Policy

Even if a contract is neither illegal nor unconscionable, it may be unenforceable if it violates a significant public policy, such as a contract in restraint of marriage, a contract for the commission of a tort, or a contract that unreasonably restrains trade.

Threat of civil action

Generally not improper, unless in bad faith.

Illegality: Divisible contracts

If a contract can be easily separated into legal and illegal parts, then recovery may be available on the legal part(s).

One party knows or should know of the misunderstanding

If a material term in the offer and acceptance is ambiguous, and one party knows or should know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract based on the meaning that the unknowing party understands

Cure of a misrepresentation

If misrepresentation is cured, the contract will no longer be voidable by the deceived party.

Illegality

If the consideration or performance that is to occur under a contract is illegal, then the contract itself is illegal and is unenforceable. No restitution is awarded for consideration.

Neither party knows or should know of the misunderstanding

If the misunderstanding involves a material term, and neither party knows or should know that there is a misunderstanding, then there is no contract.

Mistaken party's negligence

Negligence is not a bar to asserting the defense of mistake, unless the party failed to act in good faith and in accordance w/reasonable standards of fair dealing

Nondisclosure

Nondisclosure = misrepresentation, when non-disclosing party knows that: i) Disclosure is necessary to prevent a previous assertion from being fraudulent or a misrepresentation; ii) Disclosure would correct a mistake of the other party as to a basic assumption, and the failure to disclose would constitute lack of good faith and fair dealing; iii) Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or iv) The other party is entitled to know the fact because of a confidential or fiduciary relationship.

LACK OF CAPACITY

Parties to a contract must be competent (i.e., have the legal capacity to be held to contractual duties). Incompetency arises because of infancy, mental illness or defect, guardianship, intoxication, and corporate incapacity.

Damages for undue influence

Restitution damages may be available to the party induced to enter a contract because of undue influence.

Illegality exception example 1

The maker of an electronic device ships the device to a buyer. The maker is unaware that the buyer intends to export the device in violation of federal law. The maker may recover the price of the device from the buyer even though the buyer had an illegal purpose in acquiring the device.

Illegality exception example 2

The owner of a rifle delivers a rifle to a buyer. The sale of the rifle to this buyer is legal. The buyer tells the owner that he intends to use the rifle over the weekend to hunt deer. The owner knows that deer hunting season has passed. Other than transferring the rifle to the buyer, the owner takes no action with regard to the buyer's intended use of it. The owner may recover the price of the rifle from the buyer even though the owner knew of the illegal use that the buyer intended to make of the rifle.

Exceptions for illegality explanation

The party who has substantially performed can recover even if she knows of the illegal use that the other party intends to make of the performance, unless the performing party acted for the purpose of furthering the illegal use or the use involves grave social harm. A party's purpose of furthering an improper use may be evidenced by additional acts that facilitate that illegal use or by a course of dealing with persons engaged in the illegal conduct. Restatement (Second) of Contracts § 182.

Both parties know of the misunderstanding

There is no contract

Undue Influence

Undue influence is unfair persuasion of a party to assent to a contract. K is voidable by victim of undue influence. Occurs when parties have a preexisting relationship: one party is dominant and the other dependent - e.g. trustee-beneficiary, lawyer-client, doctor-patient, financial advisor-client, parent-child.

3rd party duress

Victim may void the contract, unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.

Mutual mistake

Voidable by the adversely affected party if: i) Mistake of fact existed AT TIME the contract was formed; ii) The mistake relates to a BASIC ASSUMPTION of the contract; iii) The mistake has MATERIAL IMPACT on the transaction; and iv) The ADVERSELY affected party DID NOT ASSUME THE RISK of the mistake.

Infancy

When a contract is made by an infant, it is voidable by the infant but not by the other party. Infant must disaffirm either before the age of majority or within a reasonable time thereafter. An infant that does not disaffirm upon reaching the age of majority or a reasonable time thereafter will be held to have ratified the contract as an adult.

Implied-in-Law ("Quasi") Contracts

When a plaintiff confers a benefit on a defendant and the plaintiff has a reasonable expectation of compensation, allowing the defendant to retain the benefit without compensating the plaintiff would be unjust. Tthe court can permit the plaintiff to recover the value of the benefit to prevent the unjust enrichment.

Liability for necessities

When necessities are furnished to the infant, the infant must pay for them. Recovery by the person furnishing the necessities is limited to the reasonable value of the services or goods (not the agreed-upon price). Recovery is under a theory of quasi contract.

Avoidance or reformation for misrepresentation

When one party misrepresents the content or legal effect of a writing to another party, the other party may elect to avoid the contract or to reform it to express what had been represented.

Unilateral mistake

When only one party is mistaken as to an essential element of the contract, either party can generally enforce the contract on its terms. But the mistaken party (who did not bear the risk of the mistake) can void the K if either: i) The mistake would make enforcement of the K unconscionable; or ii) The non-mistaken party 1. caused the mistake, 2. had a duty to disclose or failed to disclose the mistake, or 3. knew or should have known that the other party was mistaken. For a unilateral mistake to form the basis for rescission, there must be an absence of serious prejudice to the other party. Restatement (Second) of Contracts § 154.

Implied-in-Fact Contracts

When words express the intent of the parties, the contract is an express contract. When conduct indicates assent or agreement, the agreement is considered implied in fact

Mistake

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

Nonfraudulent misrepresentation

a misrepresentation (innocent or negligent) renders K voidable by the adversely affected party if: i) The misrepresentation is material; ii) The misrepresentation induced assent to the contract; and iii) The adversely affected party justifiably relied on the misrepresentation.

Fraudulent misrepresentation

a) A false assertion of fact made knowingly, or recklessly, or with intent to mislead the other party; ii) The misrepresentation induced assent to the contract; and iii) The adversely affected party justifiably relied on the misrepresentation.

Fraud in the inducement

occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. voidable by the adversely affected party.

Fraud (in the factum)

occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction. The apparent contract is void (i.e., not enforceable)

Test for effect of the threat

the test is a subjective one: Did the threat induce the person's assent?

Improper threat

threats of a crime, a tort, or criminal prosecution, or the threat of pursuing a civil action (when made in bad faith). Also improper to threaten to breach a contract if doing so would violate the duty of good faith and fair dealing