Other Defenses to a Contract

Question 1

What are the three elements of the duress defense to contract?

Answer 1

• A threat
• That is wrongful in nature, AND
• No reasonable choice but to succumb to the threat

Question 2

Under which three circumstances would a threat be wrongful in nature?

Answer 2

• What is threatened is a crime or tort.
• What is threatened is a criminal prosecution or bad faith civil process.
• What is threatened is a bad faith breach of K (aka economic duress).
  o NOTE: Economic duress is the most common circumstance tested.
  o EXAMPLE: Sailors on a fishing voyage cease their work midway through the voyage and refuse to resume their duties unless the captain agrees to give them a raise.

Question 3

When would it be unreasonable to succumb to a threatened crime, tort, or bad faith prosecution?

Answer 3

• Succumbing to a threat is seldom an issue when what is threatened is a crime or a tort, a criminal prosecution, or a bad faith civil suit, for risking the eventuality of any of those is scarcely a “reasonable” choice.

Question 4

What are three common situations in which it would be reasonable to succumb to economic duress?

Answer 4

• Situation #1: No adequate and reasonably priced substitutes for the services/goods that are threatened to be withheld.
  o EXAMPLE: The ship’s captain is not in a position to find replacement sailors when already at sea, so no adequate substitutes would be available.
• Situation #2: The threatened breach would cause aggrieved party to break his own K’s (i.e. a threatened breach of a subcontractor that may force the general contractor to breach his own Ks).
  o EXAMPLE: A purchaser of upsidasium bearings used in the manufacture of turbo-jet engines would, on account of the breach, be forced to breach its contract with an aircraft manufacturer.
• Situation #3: When the alternative of acquiescing to the threat and then suing for damages is inadequate to address the harm caused.
  o EXAMPLE: Where the threatened breach would cause the aggrieved party to renege on its own commitments and thus harm its reputation and opportunities for future business, damages would be inadequate as a remedy.

Question 5

What are the two elements of undue influence as a defense to contract?

Answer 5

• Element #1: Unfair persuasion used
• Element #2: Other party was vulnerable to such persuasion

Question 6

What is the test for determining whether unfair persuasion was used?

Answer 6

• Multi-factor test:
  o Discussion of the transaction at an unusual or inappropriate time;
  o Consummation of the transaction at an unusual place;
  o Insistent demands that the transaction or business be finished immediately;
  o Extreme emphasis on the untoward consequences of delaying the transaction;
  o The use of multiple persuaders against the target of persuasion;
  o Absence of third-party advisors to the target of persuasion;
  o Statements that there is no time to consult financial advisors or attorneys.

Question 7

When would a party be considered vulnerable to undue influence?

Answer 7

• Circumstance #1: Mental infirmity is due to age or illness.
• Circumstance #2: Vulnerability is due to recent trauma or event.
• Circumstance #3: There is a relationship of trust or confidence.

Question 8

What two elements are needed to prove unconscionability?

Answer 8

• Element #1: Procedural unconscionability
• Element #2: Substantive Unconscionability

Question 9

When has procedural unconscionability taken place?

Answer 9

• Bargaining process created an absence of meaningful choice for aggrieved party.

Question 10

When has substantive unconscionability taken place?

Answer 10

• K terms are unreasonably favorable to one party to the K (ex: excessive price, extreme consequences for breach, or grossly unfair provisions).
  o EXAMPLE: Where a pay-over-time plan requires the consumer to pay a total sum that is many times the value of the purchased goods; or where a bank charges an overdraft fee that is many times the bank’s actual processing costs.
  o EXAMPLE: An add-on clause, pursuant to which a merchant is entitled to repossess multiple household items, including furniture, bedding, and a stereo, when a consumer missed a payment, despite the fact that the consumer had already paid nearly 80% of the monies owed for the various purchases.

Question 11

What may the court do upon a finding of unconscionability?

Answer 11

• refuse to enforce K;
• excise the offending clause and enforce remainder; or
• limit application of offending clause to avoid unconscionable result.

Question 12

Under which three contexts may public policy be raised as a defense against a contract?

Answer 12

• Context #1: Subject of K itself is specifically prohibited by law.
  o EXAMPLE: In most jurisdictions, a contract for prostitution, gambling, or bribery is illegal under the law and accordingly unenforceable in court.
• Context #2: K formed for purpose of committing a crime or tort.
  o EXAMPLE: A contract between an employer and a hired assassin would be a contract for the commission of a crime.
• Context #3: K performance would violate certain values/freedoms designated by the state.
  o EXAMPLE: A contract that prohibits one party from marrying for an extended period of time would violate the public policy of promoting free and consent-based marriages.