Defenses to Formation & Enforceability

Question 1

void contract

Answer 1

Entire contract is void and non-existent

Question 2

voidable contract

Answer 2

Valid contract unless one party seeks to void it

Question 3

unenforceable contract

Answer 3

A valid contract that cannot be enforced when one party halts performance

Question 4

What are the 10 defenses to contract formation and enforceability?

Answer 4

1. Duress
2. Incapacity
3. Illegality
4. Misrepresentation
5. Mistake
6. Misunderstanding
7. Public Policy
8. Unconscionability
9. Undue Influence
10. Statute of Frauds

Question 5

What are 3 types of incapacity?

Answer 5

1. Minor/infant;
2. Mental incompetence; or
3. Intoxication

Question 6

Who can void a contract with a minor?

Answer 6

Minor only: the other party cannot void the contract and the minor can enforce it against the other party

⚠️ If, however, the minor lied about his age, the other party can seek to void it on grounds of fraud

Question 7

Can a minor void a contract for necessities?

Answer 7

Minor cannot void K for necessities (clothing, shelter, food, medical) → must pay for them

Question 8

If a minor breaches a K for necessities, what can the other party recover?

Answer 8

Reasonable value of the goods (under quasi-contract theory)

Question 9

Can a minor choose to enforce a contract?

Answer 9

Yes, if:

1. Minor entered into K before adulthood;
2. Minor has now reached adulthood; and
3. Minor ratifies either:
   
   1. ​Implicitly (fails to disavow K after reaching adulthood);
   2. Explicitly (orally or through writing); or
   3. By conduct (minor encourages the other party to perform and a mutual exchange begins)

Question 10

When is a person considered mentally incompetent to enter into a contract?

Answer 10

When the person:

1. Fails to comprehend K; or
2. Comprehends it, but acts in an unreasonable manner, and the other party knows the person is acting unreasonably

Question 11

A contract is [void or voidable] for one who has been adjudicated mentally incompetent, but [void or voidable] for one in which no judgment has been made

Answer 11

A contract is void for one who has been adjudicated mentally incompetent, but voidable for one in which no judgment has been made

Question 12

Can an intoxicated party void the contract?

Answer 12

Yes, if:

1. Party could not understand the nature of the contract; and
2. Other party knew or had reason to know of that fact

Question 13

Elements of misrepresentation

Answer 13

1. D makes a claim about a material element of K;
2. That is false; and
3. Induces justifiable assent and reliance by P

Question 14

What are the elements of fraudulent misrepresentation?

Answer 14

1. There was a misrepresentation;
2. Of a material fact;
3. That the D knew was false or made with reckless disregard for the truth;
4. That the D knew would cause P to reasonably rely on it;
5. P did in fact rely on the misrepresentation; and
6. P suffered damages as a result

Question 15

fraud in the factum

Answer 15

Party is prevented from knowing essential terms of K due to fraudulent misrepresentation.

K is void.

Question 16

fraud in the inducement

Answer 16

Party is induced into entering K b/c of fraudulent misrepresentation.

K is voidable if adversely affected party relied on misrepresentation.

Question 17

Elements of negligent misrepresentation

Answer 17

1. Misrepresentation of a material fact;
2. That misrepresentor should have known was false; and
3. P reasonably relied on the misrepresentation

Question 18

Are opinions considered misrepresentations?

Answer 18

No, unless they are an assertion of professional fact that is likely to create an express warranty or justifiable reliance.

If just a promotional tool, opinions will be considered puffery & not misrepresentations.

Question 19

Is there a duty to disclose?

Answer 19

Yes, if either:

• Fiduciary relationship exists;
• P was only told part of the truth such that it was misleading;
• D fails to correct a statement by P that they know is misleading;
• One party knows that the other is mistaken as to a basic assumption; or
• D does an affirmative act to hide a material fact (e.g. painting over mold to conceal it)

Question 20

Differentiate between misrepresentation and nondisclosure

Answer 20

Misrepresentation: affirmatively saying something that isn’t true

Nondisclosure: withholding information

Question 21

duress

Answer 21

Any wrongful act or threat which overcomes the free will of a party such that there is no other reasonable alternative than to assent to the contract

⭐️ subjective standard

Question 22

What are examples of duress?

Answer 22

Threats of:

• Physical violence;
• Civil or criminal penalties (ex. imprisonment);
• Breaching the K or doing other unlawful acts (ex. “if you don’t change the contract to say you now owe me $100 million dollars, I’ll breach); or
• Wrongful interference with the other party’s property

Question 23

Distinguish between a bad-faith threat and good-faith demand

Answer 23

Bad-faith threat: When one party is exploiting another party for unfair gain

Good-faith demand: When the demand is due to an increased burden on one party caused by unanticipated circumstances

Question 24

K’s made under threats of physical violence are _____

Answer 24

Void

Question 25

Contracts made under **economic threats** or other **non-physical threats** are \_\_\_\_\_\_

Answer 25

**Voidable** by the aggrieved party

Question 26

What is **undue influence** and what are the **elements**?

Answer 26

One party enters into a contract after being **unfairly persuaded** by the other. Elements: 1. Weaker party lacked **capacity, expertise**, or was **part of a special relationship**; and 2. Was **unfairly persuaded** by the **stronger** party; and 3. Persuasion **hindered the free will** of weaker party

Question 27

What are examples of **unfair persuasion**?

Answer 27

* Talking about the K at an **unusual time;** * Completing the K at an **unusual place;** * Demanding that the K be completed **immediately;** * Extreme emphasis on the **negative consequences of delaying** the transaction; or * Stating that there is no time to **consult advisors or attorneys**

Question 28

Who bears the **burden** to show that the contract was made **without undue influence**?

Answer 28

Party being **accused**

Question 29

What remedies are available for **undue influence**?

Answer 29

Aggrieved party can **void** the contract and seek **restitution**

Question 30

unconscionable contract

Answer 30

K where the bargaining power or terms are **so unequal** as to **shock the conscience**, i.e. no reasonable person would agree to it

Question 31

Who decides whether a contract is unconscionable: a **judge or jury**?

Answer 31

Judge

Question 32

What are **two categories** of **unconscionability**?

Answer 32

1. Procedural 2. Substantive

Question 33

procedural unconscionability

Answer 33

When one side enters into a contract **without meaningful choice**

Question 34

What are **examples** of **procedural unconscionability**?

Answer 34

* **Adhesion** contracts ("take it or leave it") * Contracts with **boilerplate terms** * Contracts with **hidden** terms that are **vague** or **confusing**

Question 35

substantive unconscionability

Answer 35

**Terms** of K itself are **not fair**

Question 36

What are examples of **substantive unconscionability**?

Answer 36

* Grossly excessive **price** * **Disproportionate consequences** for minor breach * Provisions **unreasonably limiting warrranties or remedies**

Question 37

What actions can a court take upon finding **unconscionability?**

Answer 37

1. Declare the **entire contract void;** 2. **Strike the unconscionable clause** while leaving the rest; or 3. **Rewrite** the offending clause to make it conscionable

Question 38

When does a K violate **public policy**?

Answer 38

Either: * Subject matter is **explicitly prohibited by law** (prostitution, gambling); * Formed for the **purpose of committing a crime** or **tort**; or * **Violates certain values and freedoms** designated by the state (ex. freedom of trade)

Question 39

illegal contract

Answer 39

Either contains **illegal clauses** or contemplates **illegal actions**

Question 40

For the purposes of determining whether a K is illegal, courts look at the laws that existed at the time the K was \_\_\_\_\_\_\_\_

Answer 40

formed

Question 41

Differentiate K's that have illegal **subject matter** vs. illegal **purpose**

Answer 41

_Illegal Subject Matter_: Illegal and **completely void & unenforceable** _Illegal Purpose_: **Voidable** by party who: * **Did not know** of the purpose; or * Knew but **did not facilitate the purpose** and the purpose does not involve “**serious moral turpitude**” ## Footnote ⚠️ Note: If **both parties** knew of the illegal purpose, K is void and unenforceable

Question 42

If an illegal contract has **not yet been performed**, can a party **recover damages for breach**?

Answer 42

Only if: * **Party was not aware** of the illegal purpose; or * **Only one party** had an illegal purpose

Question 43

If **performance has started or finished** on an illegal K, what recovery is allowed?

Answer 43

Depends: * If the K **does not involve "moral turpitude,**" then **restitution** may be available to the partly performing party * If contract is **divisible**, court may order **performance** of non-illegal provisions * If one party is **substantially less guilty** (not *"in pari delicto"*) than the other, they can seek **full performance and restitution**

Question 44

If a party to an illegal K withdraws **before the illegal purpose has been achieved**, what remedies can the other party seek?

Answer 44

**Restitution** ## Footnote Ex. Max sells purses to Ian, who is involved in an illegal counterfeiting ring. Even though Max knew about the illegal ring, he can can still **recover the price of purses** as long as he was not involved in the illegal ring.

Question 45

# Define misunderstanding

Answer 45

Parties **misunderstand** the terms they agreed upon

Question 46

What happens if there is a misunderstanding involving a **material term** and **neither party knows** of the misunderstanding?

Answer 46

K **did not form.**

Question 47

What happens if **one party** **knew** that a **material term was ambiguous** AND **knew** that the other party would misunderstand the term?

Answer 47

K will have formed, but will be based upon the meaning of the term **by the unaware party**

Question 48

What happens if **both parties knew** the contract was vague?

Answer 48

No K **will have formed**, unless both the parties agreed to the meaning in writing

Question 49

# Define mistake

Answer 49

Mistaken belief as to a **basic, current fact** about the K

Question 50

# Define mutual mistake

Answer 50

**Both parties** are mistaken as to a basic assumption of the contract

Question 51

When can a contract be **voided** for **mutual mistake**?

Answer 51

By the **adversely affected** party if: 1. **Both parties** had a mistake of fact when the contract was **formed**; 2. About a **material** assumption of the contract; 3. Adversely affected party **did not assume risk** of the mistake; and 4. Mistake cannot be fixed by **reformation**

Question 52

Is mistake a valid defense if one party acted **negligently**? (e.g. one party negligently failed to investigate facts that would have avoided the mistake)

Answer 52

Yes, as long as party acted in **good faith** in accordance with standards of **fair dealing,** they can still use the defense of mistake.

Question 53

What is a **unilateral** mistake and will it prevent the K from **forming**?

Answer 53

When only **one party** is mistaken as to a basic assumption of the K; will **not** prevent K formation

Question 54

When can a party void for **unilateral mistake**?

Answer 54

The mistaken party can void if: 1. There was a **mistake as to basic assumption** when K was **formed**; 2. About **material effect** of K; and 3. Adversely affected party **did not assume risk** of the mistake **AND either:** 1. Mistake would make K **unenforceable**; or 2. Other party had **reason to know of mistake**; or 3. Mistake was the **other party's fault**

Question 55

# Define reformation

Answer 55

when the court **rewrites** the K to reflect the true intent of the parties

Question 56

When can a party seek **reformation for a mistake**?

Answer 56

1. Parties had a **prior agreement**; 2. Parties **agreed to put the prior agreement in writing**; and 3. There is a **difference** in the prior agreement and the writing **due to mistake**

Question 57

What happens if one party **intentionally omits** a term from the written K that was previously agreed upon by the parties?

Answer 57

This constitutes a **misrepresentation** and the other party can seek **reformation**

Question 58

What **three** factors do court consider when deciding the **enforceability of non-compete clauses?**

Answer 58

1. Is there a **significant business justification** (e.g. access to trade secrets); 2. Is the **scope** **reasonable in duration** and **geographical reach**; and 3. Is there an **express provision** of a covenant not to compete? ## Footnote ⚠️ Note: Courts can choose to enforce only reasonable provisions of a non-compete