Defenses

Question 1

Types of defenses

Answer 1

1. defense to formation
2. defense to enforcement

Question 2

Misunderstanding Defense

Answer 2

Misunderstanding provides a defense to K formation when each party attaches a different meaning to the same words.

Defense must show that:

1. the parties used a material term that is open to two reasonable interpretations,
2. each side attached a different meaning to the word, AND
3. neither party knew/should have known of the confusion

Question 3

Incapacity Defense:

minority
mental illness
intoxication

Answer 3

Incapacity provides a defense to K formation.

Minors – voidable by the minor; minor does not have to disaffirm

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.

Intoxication – if the other side knows/should know

Question 4

Consequences of making a K with someone who lacks capacity

Answer 4

K is voidable by incapacitated (but not by other party). Incapacitated person can disaffirm, except:

1. If the K is for necessities, the incapacitated person must still pay.
2. If the incapacitated person regains capacity, they can ratify the deal by keeping the benefits of the K.

Question 5

4 Requirements for mutual mistake defense

Answer 5

The adversely affected party can rescind the K if:

1. there is a mistake of fact existing at the time the deal is made
2. the mistake relates to a basic assumption of the K
3. the mistake has a material impact on the deal
4. the impacted party did not bear the risk of the mistake. [consider conscious ignorance]

If elements are met, K is voidable by adversely affected party.

Question 6

How does “conscious ignorance” impact the mutual mistake defense?

Answer 6

A party bears the risk of a mistake when (1) he knows at the time of contracting that he has only a limited knowledge of the facts to which the mistake relates, and (2) he accepts his limited knowledge as sufficient.

Question 7

5 Requirements for unilateral mistake defense

Answer 7

The adversely affected party can rescind the K if:

1. they can prove all the elements of the mutual mistake, AND
2. either:
   - the mistake would make the K unconscionable, OR
   - the other side knew/should have known/caused the mistake

Question 8

Misrepresentation defense to K formation

Answer 8

A party can assert a misrepresentation defense to K formation if they show:

1. a misrepresentation (untrue assertion) of a present fact (not opinion),
2. that is material, or fraudulent (intentional),
3. that is made under circumstances in which it is justifiable to rely on the misrepresentation.

Note: Equitable estoppel generally applies when one party has misrepresented a fact and the other party has injuriously relied on that misrepresentation.

Question 9

What is fraud in the execution?

Answer 9

Tricking someone into signing something that they do not even know is a K.

Question 10

Can nondisclosure provide a defense to K formation?

Answer 10

Normally, parties do not need to tell the other side about all material facts related to the deal. EXCEPT:

party owes a fiduciary duty, OR
party actively conceals the information

Question 11

Duress Defense to K Formation

Answer 11

Duress is an improper threat that deprives a party of meaningful choice. (threatened crime, tort, criminal prosecution, bad faith civil action).

Deprivation = party does not have a reasonable alternative to succumbing to the threat.

Question 12

Illegality defense to K Formation

Answer 12

A party can raise an illegality defense because illegal Ks are unenforceable. Parties are left where they stand, but modern trend allows less-guilty parties to recover restitution.

Ks entered in furtherance of illegal act, that is not itself illegal, are enforceable. (taxi cab)

Question 13

Unconscionability defense to K formation

Answer 13

As a last resort, a party can argue that the K should not be enforced on the grounds that it is unconscionable. Party must show that K was:

Unconscionable—i.e., so unfair to one party that no reasonable person in that party’s position would have agreed to it.

procedurally unconscionable – a defect in the bargaining process itself (hidden term, absence of meaningful choice), AND/OR (depends on JX)

substantively unconscionable – term of K is a rip-off.

Question 14

How can a bilateral offer be accepted?

Answer 14

An offer requiring a promise to accept (bilateral) can be accepted either with a return promise or by starting performance. (Commencement of performance of a bilateral K operates as a promise to render complete performance.)

Unilateral offers can only be accepted via performance.

Question 15

Name all the ways to discharge contractual obligations.

Answer 15

Ways to discharge contractual obligations

Full performance of contractual obligations
Impossibility, impracticability, or frustration of purpose
Release (in writing only)
Mutual rescission

Substituted contract
Contract or covenant not to sue
Accord & satisfaction
Novation

Mnemonic: FIRM SCAN

Question 16

How does an accord and satisfaction discharge a contractual obligation?

Answer 16

A contracting party agrees to accept a performance that differs from what was promised in an existing K in satisfaction of the other party’s existing duty.

The new performance = the accord
The excusal of the initial obligation = the satisfaction.

Question 17

How can a claim subject to dispute be discharged by accord and satisfaction?

Answer 17

• the person against whom the claim is asserted tendered a negotiable instrument (ex: check)
• the instrument was accompanied by a conspicuous statement indicating that it was tendered as full satisfaction of the claim (“payment in full”), AND
• the claimant obtained payment of the instrument

Example: The rugmaker sent the supplier a check for $15,000 (instead of $20,000) after receiving yarn made of 90% wool (instead of 100% wool). The check clearly stated that it was being tendered as payment in full for the supplier’s shipment of the lesser-quality yarn. The supplier then obtained payment by depositing the $15,000 check. Therefore, the rugmaker’s best defense is that there was an accord and satisfaction that discharged the rugmaker of any further duty to pay the remaining $5,000 for the shipment.