Contracts Outline pg. 18-26

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. The intoxicated party must act promptly to disaffirm the contract and is required to return any value received, if possible. Generally, the intoxicated party may be liable in quasi-contract for the fair value of the goods or services furnished.

Enforceability

A contract may be unenforceable based upon a defense to formation or a defense to enforcement. Proof of the defense may render the contract void or voidable.

Misrepresentation, Nondisclosure, and Fraud

A misrepresentation is an untrue assertion of fact. In order to constitute a fact, the assertion must be about a present event or past circumstance. 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. However, an assertion of an opinion may, if reasonable, be interpreted by a party as an assertion that the person knows facts that are not incompatible with the opinion or that the person knows facts sufficient to justify the formation of the opinion. Note that the use of an "as is" provision in a contract can shift the risk to a buyer in the absence of unconscionability. Misrepresentation can be innocent, negligent, or fraudulent.

Mistake

A 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. Note that 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. Risks with regard to changing facts are governed by the doctrines of impracticability and frustration of purpose.

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.

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. Thus, with regard to the threat of a civil action, a person generally has the reasonable alternative of defending against the action. However, if the threat also involves the seizure of property in conjunction with the civil action, or if it causes the person to be unable to fulfill other contractual obligations, then the person may be deprived of a meaningful choice. EXAM NOTE: In assessing the effect of the threat, the test is a subjective one: Did the threat induce the person's assent?

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. Note that the risk created by conscious ignorance rests on the party being aware of her limited knowledge.

Undue Influence

A party to a contract who is a victim of undue influence can void the contract.

Effect of party's fault in not knowing or discovering facts

A party's fault in not knowing or discovering facts before entering into the contract does not prevent the party's reliance on the misrepresentation from being justified unless it constitutes a failure to act in good faith and in accordance with the reasonable standards of fair dealing. The party's negligence with regard to learning about the falsity of the misrepresentation is not sufficient to prevent the party from avoiding the contract.

Defenses to Formation

A person who is asserted to be in 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.

Void Contracts

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.

Nondisclosure

Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist. In addition, mere nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that: i) Disclosure is necessary to prevent a previous assertion from being a misrepresentation or fraudulent or material; 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.

Liability for Necessities

An exception to the infancy rule exists when the contract is based on necessities. When necessities are furnished to the infant, the infant must pay for them, but the 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.

Unenforceable Contracts

An unenforceable contract is a valid contract that cannot be enforced if one of the parties refuses to carry out its terms. EXAM NOTE: Remember that a void contract cannot be enforced, but a party may opt to avoid a voidable contract.

Statutory Exceptions

By statute, an education loan made to a minor student may not be voidable by the student but instead may be fully enforceable by the lender. Similar treatment may also be accorded an insurance contract entered into by a minor.

Duress

Duress is an improper threat that deprives a party of meaningful choice.

Nonfraudulent Misrepresentation

Even if nonfraudulent, a misrepresentation (innocent or negligent) can still render a contract voidable by the adversely affected party if: i) The misrepresentation is material (i.e., information that would cause a reasonable person to agree or that the person making the misrepresentation knows would cause this particular person to agree); ii) The misrepresentation induced assent to the contract; and iii) The adversely affected party justifiably relied on the misrepresentation.

Waiver of 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.

Improper Threat

Examples of improper threats include threats of a crime, a tort, or criminal prosecution, or the threat of pursuing a civil action (when made in bad faith). In addition, it is improper to threaten to breach a contract if doing so would violate the duty of good faith and fair dealing. 1) Threat of criminal prosecution: The threat of criminal prosecution is an improper means by which to induce a person to enter into a contract. It does not matter that the person making the threat honestly believes that the person who would be subject to criminal prosecution is guilty. Nor does it matter that the person threatened with prosecution is in fact guilty of the crime. 2) Threat of civil action Unlike the threat of criminal prosecution, the threat of a civil action is generally not improper. The lack of success in pursuing a civil action does not make the threat improper unless the civil action is pursued in bad faith.

Effect- fraud in the factum

Fraud in the factum (or fraud in the execution) occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction. In such a case, no contract is formed, and the apparent contract is void (i.e., not enforceable against either party), unless reasonable diligence would have revealed the true terms of the contract.

Effect- fraud in the inducement

Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. Such a contract is voidable by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.

Fradulent Misrepresentation

Fraudulent misrepresentation requires proof of the following: i) The misrepresentation is fraudulent; a) A false assertion of fact made knowingly, or recklessly without knowledge of its truth; and b) 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.

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 grounds of mistake or misrepresentation due to the conduct of the party with the superior knowledge.

Mental Illness

If an individual is adjudicated mentally incompetent, a purported contract made by the individual is void. On the other hand, if there has been no adjudication, a contract is voidable and may be disaffirmed if the individual is unable to: i) Understand the nature and consequences of the transaction; or ii) Act in a reasonable manner with regard to the transaction, and the other party has reason to know of this fact. If a contract is made during a lucid period, the contract is fully enforceable, unless the person has been adjudicated incompetent. A mentally incompetent person may be liable for the reasonable value of necessities furnished by another party.

Guardianship

If an individual's property is under guardianship by reason of an adjudication (such as for mental illness or defect, habitual intoxication, narcotics addiction), that individual has no capacity to contract, and a purported contract made by the individual is void. A person under guardianship may be liable for the reasonable value of necessities furnished by another party.

Neither Party 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.

Cure of misrepresentation

If, following a misrepresentation but before the deceived party has avoided the contract, the facts are cured so as to be in accord with the facts that were previously misrepresented, then the contract will no longer be voidable by the deceived party.

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. In this regard, the objective theory of contracts does not apply. In addition, in determining what a party knows or has reason to know, the principles regarding conscious ignorance and negligence apply (see E.1.a.1) Conscious ignorance, and E.1.a.2) Mistaken party's negligence, above).

Infancy

Infants (in most states, individuals who are under the age of 18) do not have the capacity to contract. When a contract is made by an infant with a person who does not lack capacity, it is voidable by the infant but not by the other party. This means that the infant may either disaffirm (void) the contract and avoid any liability under it or choose to hold the other party to the contract. The disaffirmance must be effectuated either before the individual reaches the age of majority or within a reasonable time thereafter. If the contract is not disaffirmed within a reasonable time after the individual reaches the age of majority, then the individual is deemed to have ratified the contract. If the contract is disaffirmed, the individual must restore any benefits received under the contract, if possible.

Mutual Mistake

Mutual mistake occurs when both parties are mistaken as to an essential element of the contract. In such a situation, the contract may be voidable by the adversely affected party upon proof of the following: 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. Example: Rescission of a contract to sell a cow was granted on grounds of mutual mistake when both parties completed the exchange of the cow on the mistaken understanding that the cow was barren. When reformation of the contract is available to cure a mistake, neither party can avoid the contract.

Capacity to Contract

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

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

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 terms was ambiguous, unless both parties intended the same meaning.

Unfair Persuasion

Undue influence is the unfair persuasion of a party to assent to a contract. It can occur by virtue of a relationship in which one party is dominant and the other dependent, either due to lack of expertise or experience, or because the dependent person has diminished mental capacity. Such relationships include trustee-beneficiary, lawyer-client, doctorpatient, financial advisor-client, and, in some cases, parent-child. Compare duress and misrepresentation: Undue influence can provide a party with relief in circumstances in which the behavior of the other party to the contract does not rise to the level of duress or misrepresentation. The key is whether a party has been able to exercise free and competent judgment or whether the persuasion of the other party has seriously impaired that judgment. Relevant factors can include the fairness of the bargain, the availability of independent advice, and the susceptibility of a party to being persuaded. Caution: Although a person who is mentally or physically infirm may be more susceptible to persuasion, the mere existence of an infirmity is not grounds for avoiding a contract. Similarly, the existence of a confidential relationship, by itself, is not grounds for avoiding a contract.

Confidential Relationship

When a confidential relationship between contracting parties is established, the burden of proving that the contract is fair may be placed upon 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.

Effect on the contract

When a party's agreement to enter into a contract is physically compelled by duress, such as the threat to inflict physical harm, the contract is void. In other instances when a party is induced to enter into a contract by duress, such as when the threat is a breach of the duty of good faith and fair dealing, the contract is voidable. When the duress is caused by the person who is not a party to the contract, the 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. Generally, restitution damages are available to the party induced to enter a contract under duress.

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: 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. Note that if one party, without the 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.

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 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. However, the mistaken party can void the contract if the elements for a mutual mistake exist and either: 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. For a unilateral mistake to form the basis for rescission, there must be an absence of serious prejudice to the other party.

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. The mistaken party's negligence with regard to the mistake is not sufficient to prevent the mistaken party from avoiding the contract.

Third party undue influence

When the undue influence is caused by the person who is not a party to the contract, the 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.