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MBE > MBE Contract Law > Defenses to Formation & Enforceability > Flashcards

Defenses to Formation & Enforceability Flashcards

Learn about the 10 defenses to contract formation & enforceability: (1) Incapacity (2) Misrepresentation (3) Duress (4) Undue Influence (5) Unconscionability (6) Illegality (7) Statute of Frauds (8) Misunderstanding (9) Mistake (10) Public policy

1
Q

void contract

A

Entire contract is void and non-existent

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2
Q

voidable contract

A

Valid contract unless one party seeks to void it

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3
Q

unenforceable contract

A

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

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4
Q

What are the 10 defenses to contract formation and enforceability?

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

What are 3 types of incapacity?

A
  1. Minor/infant;
  2. Mental incompetence; or
  3. Intoxication
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6
Q

Who can void a contract with a minor?

A

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

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7
Q

Can a minor void a contract for necessities?

A

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

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8
Q

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

A

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

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9
Q

Can a minor choose to enforce a contract?

A

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)
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10
Q

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

A

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
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11
Q

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

A

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

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12
Q

Can an intoxicated party void the contract?

A

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
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13
Q

Elements of misrepresentation

A
  1. D makes a claim about a material element of K;
  2. That is false; and
  3. Induces justifiable assent and reliance by P
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14
Q

What are the elements of fraudulent misrepresentation?

A
  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
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15
Q

fraud in the factum

A

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

K is void.

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16
Q

fraud in the inducement

A

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

K is voidable if adversely affected party relied on misrepresentation.

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17
Q

Elements of negligent misrepresentation

A
  1. Misrepresentation of a material fact;
  2. That misrepresentor should have known was false; and
  3. P reasonably relied on the misrepresentation
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18
Q

Are opinions considered misrepresentations?

A

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.

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19
Q

Is there a duty to disclose?

A

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)
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20
Q

Differentiate between misrepresentation and nondisclosure

A

Misrepresentation: affirmatively saying something that isn’t true

Nondisclosure: withholding information

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21
Q

duress

A

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

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22
Q

What are examples of duress?

A

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
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23
Q

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

A

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

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24
Q

K’s made under threats of physical violence are _____

A

Void

25
Q

Contracts made under economic threats or other non-physical threats are ______

A

Voidable by the aggrieved party

26
Q

What is undue influence and what are the elements?

A

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
27
Q

What are examples of unfair persuasion?

A
  • 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
28
Q

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

A

Party being accused

29
Q

What remedies are available for undue influence?

A

Aggrieved party can void the contract and seek restitution

30
Q

unconscionable contract

A

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

31
Q

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

A

Judge

32
Q

What are two categories of unconscionability?

A
  1. Procedural
  2. Substantive
33
Q

procedural unconscionability

A

When one side enters into a contract without meaningful choice

34
Q

What are examples of procedural unconscionability?

A
  • Adhesion contracts (“take it or leave it”)
  • Contracts with boilerplate terms
  • Contracts with hidden terms that are vague or confusing
35
Q

substantive unconscionability

A

Terms of K itself are not fair

36
Q

What are examples of substantive unconscionability?

A
  • Grossly excessive price
  • Disproportionate consequences for minor breach
  • Provisions unreasonably limiting warrranties or remedies
37
Q

What actions can a court take upon finding unconscionability?

A
  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
38
Q

When does a K violate public policy?

A

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)
39
Q

illegal contract

A

Either contains illegal clauses or contemplates illegal actions

40
Q

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

A

formed

41
Q

Differentiate K’s that have illegal subject matter vs. illegal purpose

A

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”

⚠️ Note: If both parties knew of the illegal purpose, K is void and unenforceable

42
Q

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

A

Only if:

  • Party was not aware of the illegal purpose; or
  • Only one party had an illegal purpose
43
Q

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

A

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
44
Q

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

A

Restitution

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.

45
Q

Define

misunderstanding

A

Parties misunderstand the terms they agreed upon

46
Q

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

A

K did not form.

47
Q

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

A

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

48
Q

What happens if both parties knew the contract was vague?

A

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

49
Q

Define

mistake

A

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

50
Q

Define

mutual mistake

A

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

51
Q

When can a contract be voided for mutual mistake?

A

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
52
Q

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)

A

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

53
Q

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

A

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

54
Q

When can a party void for unilateral mistake?

A

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
55
Q

Definee

reformation

A

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

56
Q

When can a party seek reformation for a mistake?

A
  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
57
Q

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

A

This constitutes a misrepresentation and the other party can seek reformation

58
Q

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

A
  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?

⚠️ Note: Courts can choose to enforce only reasonable provisions of a non-compete

MBE Contract Law (8 decks)

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