Contracts - Part 2 (Defenses)

What are the 2 situations in which intentional concealment occurs?

1. Active 2. Indirect

What are the 3 elements and 1 exception of mutual mistake?

1. Both parties make the mistake at formation. 2. Mistake is about the basic assumption. 3. Mistake has a material effect on the agreed exchange of performances. EXCEPTION: Party who bears the risk won't be excused.

What are the 3 situations in which a party bears a risk?

1. Contract states the allocation of risk. 2. A party is aware at formation that they have limited, yet sufficient, knowledge of the facts to which the mistake related. 3. Court allocates the risk.

What are the 4 conditions that makes a threat improper? PS C3G

1. Crime/Tort 2. Criminal Prosecution 3. Civil process in bad faith 4. Good faith and fair dealing breach

What are 3 examples of overly harsh allocation of risk?

1. Disclaimer of liability for intentional torts. 2. Disclaimer of liability for gross negligence. 3. Mandatory arbitration clauses (employment and consumer contracts).

What are the 4 elements that must be present for misrepresentation to occur? PS Freddy Frog Ingests Jello

1. False Statement 2. Fraud/Materiality 3. Inducement 4. Justifiable Reliance

What are the 2 elements that can demonstrate procedural unconscionability?

1. Gross inequality in bargaining power 2. Unfair surprise

What are the 3 elements that can demonstrate unfair surprise?

1. Lack of actual knowledge of terms. 2. Sharp bargaining practices. 3. Intentionally complex and hidden terms in a document.

What are the 3 defenses?

1. Minor Incapacity 2. Mental Incapacity 3. Intoxication

What are the 5 elements and 1 exception of unilateral mistake?

1. One party makes the mistake at formation. 2. Mistake is about the basic assumption. 3. Mistake has a material effect on the agreed exchange of performances. 4. Effect of the mistake is unconscionable. 5. The other party knew of or caused the mistake. EXCEPTION: Party who bears the risk won't be excused.

What are the 2 elements that can demonstrate substantive unconscionability?

1. Overly harsh allocation of risk 2. Great price disparity

What are the three possible outcomes when a party asserts a defense to formation?

1. Rescission 2. Sue for Breach 3. Reformation

What are the 2 conditions that define weakness of the mind (a condition of undue susceptibility)?

1. Total Incapacity 2. Physical, emotional, or mental health of the other person at the time of contract formation

What are the 2 tests of mental incapacity?

1. Traditional/Cognitive 2. Modern/Volitional

What 2 conditions would suggest undue susceptibility?

1. Weakness of the Mind 2. Trusting Relationship

What is the age of majority?

18 in most states or younger if the minor is emancipated.

What are the 4 exceptions to mental incapacity?

A mentally incapacitated party cannot disaffirm: 1. Contracts that provide for the necessities of life. 2. Contracts performed in part or in whole. 3. The other party wasn't aware of their incapacity. 4. Contracts that were on fair terms.

What are the 4 exceptions to minor incapacity?

A minor cannot disaffirm a contract: 1. Misrepresented their age. 2. Willfully damage property. 3. Statutory Exceptions. 4. Contract provides for the necessities of life.

Rescission

A party voids a contract and puts the parties in their pre-contract position.

Modern/Volitional Test

A person lacks the capacity to contract if (1) they can't act in a reasonable manner (though they may understand the consequences) in the transaction and (2) the other party knows of this condition.

Intoxication (as a defense)

A person who is so intoxicated such that they are unable to understand in a reasonable manner the nature and consequences of the transaction may be held to have made a voidable promise if the other party had reason to know of the intoxication.

Under the duress defense, when is there no reasonable alternative?

A situation would cause immediate and irreparable loss to one's economic/business interest.

What is the exception to intoxication as a defense?

An intoxicated party cannot disaffirm contracts that provide for the necessities of life.

When must unconscionability be present in the contract?

At formation

When does a mentally incapacitated party need to be incapacitated to be able to disaffirm a contract?

At the time of formation.

Mutual Mistake

Both parties make the same mistake at formation such that there is a material effect on the agreed exchange of performances.

Mental illness is broadly/narrowly defined and can be the result of congenital deficiencies in intelligence, the mental deterioration from old age, brain damage due to accident, or organic disease and mental illness.

Broadly

Unfair Persuasion

Coercion such that a dominant party plays upon a weaker party's mental, moral, or emotional weakness.

What is the test that courts use to determine great price disparity?

Compare the price being paid by the complaining party to the price being paid by similarly situated consumers in a similar transaction.

Traditional/Cognitive Test

Determines if the person involved in a contract had sufficient mental ability to reasonably understand the nature and effects of the transaction.

When can a minor disaffirm a contract? PS time in life, not time in contract

Either when they are still a minor or within a reasonable time upon reaching the age of majority.

Mistake as a defense refers to a mistake of ___, not performance, judgment, miscommunication, nor typos and calculation.

Fact

(T/F) A defense occurs at contract formantion.

False, a defense occurs at or after contract formation.

(T/F) Misrepresentation must occur after formation.

False. Misrepresentation occurs before or at formation.

(T/F) In order to void transactions for misrepresentation, it must materially affect the value of the transaction and not be readily observable/known to the non-disclosing party.

False; nondisclosure.

What are examples of how a party can intentionally make a document complex and hide terms (in unfair surprise)

Font size, bold headings, term placement, length of document, and clarity of language.

What is considered the necessities of life?

Food, clothing, shelter, and medical services that the minor cannot procure from a parent/guardian.

If a party intentionally conceals facts, this is ___ misrepresentation.

Fraudulent

An adhesion contract is an example of ___.

Gross inequality in bargaining power.

Mental Incapacity

If a party is unable to form the intent necessary to enter into a bargain due to mental incompetency, then the contract is voidable by the incapacitated party.

Duress

If manifestation of assent is induced by an improper threat that leaves the victim no reasonable alternative, then the contract is voidable by the victim.

Inducement

If the misrepresentation substantially contributes to a party's decision, then a party is induced.

If a party makes an improper threat which induces a party to enter into a contract with a 3rd party, is the contract voidable?

If this third party knew of the coercion, then the contract is voidable, but if not, then the contract isn't voidable.

How do you determine if inducement occured?

Inquire into the motives that a party had to enter into a contract.

What is a situation in which the non-mistaken party knew/should have known that there was a mistake?

Large disparity between the lowest and next highest bid (puts the non-mistaken party that there was constructive notice that an error had been made).

Fraudulent Misrepresentation PS 3 factors

Maker intends to induce a party to manifest their assent if the maker (1) knows or should have known the facts are untrue, (2) doesn't have confidence or basis that they state/imply in the truth of the assertion, or (3) making the statement with the intent to mislead the other party.

Misrepresentation

Manifestation of assent is induced by a fraudulent or materially false statements by the other party upon which the recipient is justified in relying.

Sharp Bargaining Practices (in unfair surprise)

Marketing techniques that border on dishonesty and mislead.

Gross inequality in bargaining power occurs when a party lacks a ___ choice.

Meaningful

Minor Incapacity

Minors retain the right to disaffirm the contract even after it has been performed.

Active concealment is the equivalent to ___.

Misrepresentation

Do courts readily grant the intoxication? Why?

No, because it has voluntary and compulsive aspects, so you must dial up the compulsivity.

Is a contract made under undue influence automatically void?

No, but it is voidable by the victim.

Is misrepresentation automatically void?

No, but it is voidable.

Is economic duress automatically void?

No, it is void if the victim wants it void.

Does a minor need to return the adult to their pre-contract position if they disaffirm a contract? PS nuance

No, they just need to return the consideration they have possession of. However, if the minor willfully damages property or misrepresents their age (i.e., tortious conduct), then the minor may be liable to restore the value of the consideration via restitution.

Is there a requirement of full disclosure of all relevant facts?

Not generally.

Does lack of actual knowledge of terms (in unfair surprise) reach the level of mental incapacity?

Not necessarily, the recipient may just be very young/old or uneducated.

Nondisclosure

One party has knowledge of a fact that might inhibit the other party from entering into the agreement, but the party with knowledge doesn't speak up.

Unilateral Mistake

One party makes a mistake at the time of formation such that there is a material effect on the agreed exchange of performances.

What are the 4 conditions that can indicate an inequitable result?

Outcome must be unfair to the victim taking into account: 1. Economic consequences to victim. 2. Divergence from victim's prior intent/course of conduct. 3. Value of services/consideration received. 4. Appropriateness of change (dependent on length and nature of relationship).

Basic Assumption

Parties assumed that a certain fact existed at contract formation, so they wouldn't have entered into the contract if the fact was not true.

Indirect Concealment

Party prevents others from making an investigation that would have disclosed a defect.

Active Concealment

Party purposely hides something from the other.

What is a material misrepresentation based on the objective standard?

Party represents a statement they didn't know was false, and it is likely to induce a reasonable person to manifest their assent.

What is a material misrepresentation based on the subjective standard?

Party represents a statement they didn't know was false, and the maker knows that it would likely cause the recipient to manifest their assent (based on their knowledge of the recipient's preferences).

What are the 2 parts of unconscionability?

Procedural and Substantive

What standard is justifiable reliance based on?

Reasonability standard based on all facts and circumstances.

Unfair Surprise

Reasonable expectations of a party are disappointed due to the bargaining power.

A party can sue for breach and get awarded the ___ interest which would put the parties back to where they were before the contract.

Reliance

Material Misrepresentation

Representation where the maker has no knowledge that the statement was false.

What can a party do to show that a term is not hidden?

Require a party to initial an important term is enough evidence.

Material Effect

Resulting imbalance in the agreed exchange is so severe that one cannot fairly be required to carry it out.

The elements of unconscionability are measured on a ____ scale. Explain.

Sliding - greater degree of one element, then the lesser degree of the other.

Does improper threat use a subjective or objective standard? Explain.

Subjective - an improper threat must substantially contribute to the victim's decision, so inducement is dependent on age, background, relationship of parties, etc.

What happens when a contract is reformed?

The court will rewrite the terms, so the parties are still contracted to each other.

What are the 6 circumstances in which an uninformed party can seek rescission of a contract where there are non-disclosed facts? PS MT SING

The non-disclosed facts... 1. Material effect 2. Trusting relationship between parties 3. Statutory-required disclosure 4. Intentional concealment 5. Not readily observable 6. Good faith breach

What is the test of intoxication as a defense?

Traditional/Cognitive

(T/F) A party cannot rescind an agreement based on a mistake that is based on the basic assumption that the contract will be profitable. Market conditions and the financial situation of the parties are not assumptions.

True

(T/F) Conscious ignorance occurs when a party knows that they're not fully informed on some aspect of the transaction, but does not take action to determine the facts. In this case the court may shift the risk to the party that didn't investigate further. On the other hand, if the court determines that the party made reasonable efforts to be informed of the true facts, but still wrong, then the court may determine that the party should not bear the risk.

True

(T/F) The minor has discretion over whether to rescind the agreement.

True

(T/F) The party performing economic duress must know of the other party's economic situation.

True

(T/F) The law assumes that every adult has the capacity to enter into a contract until there is proof otherwise, and the burden is on the party who made suggested the contract.

True - The law assumes that every adult has the capacity to enter into a contract until there is proof otherwise False - Burden is on the party seeking to avoid the contract (i.e., mentally incapacitated or intoxicated party).

Undue Influence

Unfair persuasion of a party who is justified in assuming that the influencer will not act in a manner inconsistent with their welfare.

Undue Influence = ___ + ___ + ___

Unfair persuasion, undue susceptibility, inequitable result.

Procedural Unconscionability

Unfairness in the bargaining process.

Substantive Unconscionability

Unfairness of the terms.

Under the duress defense, who can void the contract?

Victim

In mutual mistake the contract is ___ by the ___ party unless they ____.

Voidable, adversely affected, bear the risk.

If the non-mistaken party knows or should have known that a mistake was made and doesn't correct it, then the contract may be ___ so long as there was no ___.

Voidable, risk shifting.

When are non-disclosed facts a breach of duty of good faith?

When a party knows that the other party has made a mistake on the basic assumption of the contract, then there may be an affirmative duty to disclose this mistake.

Is physical duress automatically void?

Yes

Once a minor becomes an adult, can they reaffirm a contract they entered into as a minor but disaffirmed?

Yes

Should consideration be restored to the party that performed when rescission occurs?

Yes

Does an incapacitated party have to restore consideration if they disaffirm a contract?

Yes unless (1) the other party knew of their incompetence at the time of formation or (2) the other party took unfair advantage of them.

Does an intoxicated party have to restore consideration if they disaffirm a contract? PS nuance

Yes unless (1) the other party knew of their intoxication at the time of formation or (2) the other party took unfair advantage of them.

Can an intoxicated party reaffirm a contract they disaffirmed.

Yes upon becoming lucid.

Can a mentally incapacitated party reaffirm a contract they disaffirmed.

Yes, upon becoming lucid.