Defenses to Formation Flashcards
(18 cards)
What are the defenses to contract formation?
- Misunderstanding
- Incapacity
- Mistake
- Fraud/Misrepresentation/Nondisclosure
- Duress
When does a misunderstanding arise?
Arises when each party attaches a different meaning to the same words.
What must you show to prove a defense of misunderstanding?
- The parties use a material term that is open to two or more reasonable interpretations;
- Each side attaches a different meaning to the term; and
- Neither party knows, or should know, of the confusion.
Who lacks the capacity to make a contract?
- Minors (under the age of 18)
- People who are mentally ill
- Very intoxicated persons (if the other side has reason to know this)
How do you determine if someone with mental illness is incapacitated?
Two standards:
1. The person cannot understand the nature and consequences of his actions; OR
2. The person cannot act in a reasonable manner in relation to the transaction (if the other side knows or has reason to know this).
What happens if you make a contract with a person who lacks capacity?
The contract is VOIDABLE, meaning the incapacitated party can disaffirm.
EXCEPTION: For a contract for necessities (food, clothing, shelter), the party without capacity must still pay fair value (not necessarily the contract price).
Who can a party without capacity ratify the deal?
By keeping the benefits of the contract AFTER capacity is obtained
What is the defense of mistake?
A mistake is a belief that is not in accord with a present fact.
What are the different types of mistakes?
Mutual Mistake (both parties)
Unilateral Mistake (one party)
What is the consequence of a mutual mistake?
Allows the adversely affected party to rescind IF:
(a) There is a mistake of fact, existing at the time that the deal is made;
(b) The mistake relates to a basic assumption of the contract and has a material impact on the deal; and
(c) The impacted party did not bear the risk of the mistake.
What is the consequence of a unilateral mistake?
Allows the adversely affected party to rescind IF:
(a) She can prove all of the elements of mutual mistake; AND
(b) Either: (i) the mistake would make the contract unconscionable; OR (ii) the other side knew of, had reason to know of, or caused the mistake.
What is the a misrepresentation?
A statement at the time of contracting that is not true. Can be intentional (fraudulent) or accidental.
How must you assert the defense of misrepresentation?
To assert this defense, the party must show:
1. A misrepresentation of present fact (not opinion);
2. That is material OR fraudulent (intentional); and
3. That is made under circumstances in which it is justifiable to rely on the misrepresentation.
What is fraud in the execution (falls under misrepresentation)?
When one party tricks the other party into signing something that they do not even know is a contract.
What is nondisclosure (falls under misrepresentation)?
The other party does not learn the truth about something, but now you just remain quiet. Normally, you do not need to tell the other side about all material facts related to the deal UNLESS a special (fiduciary) relationship exists or there is active concealment.
What is duress (generally)?
An improper threat that deprive a party from making a meaningful choice to contract.
What is economic duress?
Arises when one party makes threats to induce another party to contract (or modify a contract)
What is undue influence (falls under duress)?
Arises when a party puts very intense sales pressure on another party, who often seems weak-minded or susceptible to high-pressure sales tactics
