11/19/2021

Defenses to Formation and Enforcement

•We already have mutual assent (offer and acceptance) and consideration
 valid contract unless there is a defense to the formation:

•incapacity
•mistake
•Misunderstanding
•Misrepresentation
•Duress
•Undue influence
•Illegality
•unconscionability

If all of the requirements for any of these are these for met:
 contract “void” or “voidable”
Void  null, will be treated as if it never existed, not enforceable buy either party (contracts that
are illegal)
Voidable  enforceable contract UNTIL a party takes steps to get out of the contract or avoid it

1) incapacity  idea that in order to enter a contract both parties must have capacity to do so
3 common examples: 1) a party is under the age of 18 2) a party has a mental illness 3) a party is
intoxicated
2) mistake:  one party or both parties are mistaken as to a basic assumption on which the
contract was formed
3) Misunderstanding  there is a term in the contract that lends itself to different interpretations
or meanings
4) Misrepresentation  a lie or assertion of fact that is not true (on purpose, fraudulent) (or on
accident, nonfraudulent misrepresentation)
5) Duress  use of improprer threats to coerce another party
6) Undue influence  use of excessive pressure on a party that is susceptible to coercion
7) Illegality  consideration or performance is illegal
8) unconscionability  terms of the contract are so unfair or oppressive that it actually shocks
the conscience of the court
1) incapacity  idea that in order to enter a contract both parties must have capacity to do so
3 common examples:
a) a party is under the age of 18 (minors)
 in most states, voidable at the minor’s discretion or before ratification (not trying to disaffirm
the contract within a reasonable amount of time of turning 18)
 necessities exception: the party is still liable for the reasonable value of the stuff, not the
agreed upon price
 if a minor receives benefits from the contract and wants to cancel contract, has to return
unless they spent it, or got rid of it, etc. Only have to return if they have the benefit.

b) a party has a mental illness (not lucid at time of entering into contract)
 necessities exception: if contract for purchase or sale of necessities (food, water, etc), then the
party is still liable for the reasonable value of the stuff, not the agreed upon price

c) a party is intoxicated
 necessities exception: if contract for purchase or sale of necessities (food, water, etc), then the
party is still liable for the reasonable value of the stuff, not the agreed upon price

2) mistake:  one party or both parties are mistaken as to a basic assumption on which the
contract was formed

a) Mutual Mistake  A contract is VOIDABLE at the adversely affected party's discretion if all
of the following elements are met: factor 4 is the hardest, meat of the analysis

1. There is a mistake of fact existing at the time the deal is made;

2. The mistake relates to a basic assumption (performance/functionality) of the contract;
3. The mistake has a material impact on the deal; AND
4. The adversely affected party did NOT assume the risk of mistake.
o A party assumes the risk of mistake when:
o I. The risk is allocated to him by agreement of the parties (e.g., "as is"
contracts), OR
o II. He is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats his
limited knowledge as sufficient (i.e., "conscious ignorance".

b) Unilateral Mistake:  A contract is VOIDABLE at the adversely affected party's discretion if

all of the following are met: (miscalculation)

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 contract;
3. The mistake has a material impact on the deal;
4. The adversely affected party did NOT assume the risk of mistake; AND
5. The mistake would make the contract unconscionable OR the other party had reason to
know of the mistake or his fault caused the mistake.
3) misunderstanding  if the agreement includes a term that has multiple possible meanings, the
result depends on the parties’ knowledge of the misunderstanding:
1) neither party knows or should know of the misunderstanding  no K unless both intended
same meaning
2) if both parties know or should know of the misunderstanding  no K unless both intended
same meaning
3) if one party knows or should know of the misunderstanding  binding K based on the
ignorant party’s reasonable terms

4) misrepresentation  a contract is voidable by the adversely affected party if:

FRAUDULENT MISREPRESENTATION
I. Fraud in the Factum (tricking another party, contract hidden under a carbon copy, don’t know
what terms you’re agreeing to or they’re beind hidden, fraud in the execution)  void 100%

II. Fraud in the Inducement occurs when a fraudulent misrepresentation is used to induce another
to enter a contract. Such contracts are VOIDABLE by the adversely affected party if:

A contract is voidable by adversely affected party if:

(1) A fraudulent misrepresentation of fact:  includes expert opinions / silence (nondisclosure)
 A misrepresentation is fraudulent if it is made:
(a) knowingly, or recklessly without knowledge of the truth
(b) with the intent to induce assent
(2) induced the adversely affect party to manifest
(3) the adversely affected party was justified in relying on the misrepresentation

NONFRAUDULENT MISREPRESENTATION
Material Misrepresentation
A contract is voidable by the adversely affected party if
(1) a MATERIAL misrepresentation of FACT: includes expert opinions / silence (nondisclosure)
 A misrepresentation is material if:

(a) It would be likely to induce a reasonable person to manifest his assent; OR

(b) If the maker knows that it would be likely to induce the recipient to do so.
2. Induced the adversely affected party to manifest assent; AND
3. The adversely affected party was justified in relying on the misrepresentation.

5) Duress: A contract is voidable by the AAP (adversely affected party) if his assent is induced
by IMPROPER THREAT that leaves him no reasonable alternative but to succumb to the threat
 threat of a crime/ tort (gun to the head scenario); bad faith civil action threat; criminal
prosecution threat; threatens to breach good faith
6) Undue Influence: A contract is voidable by the AAP (adversely affected party) if his assent is
induced by his susceptibility to pressure AND the other party’s application of excessive pressure
Y axis: susceptibility, X axis: pressure applied. If high x and high y, probably undue influence.

1) Susceptibility: nature of the relationship between parties, level of sophistication and expertise,
any physical, mental, emotional, or financial conditions that make a party more susceptible to
pressure

2) Excessive Pressure:
Discussion at unusual / inappropriate time;
Consummation of contract at unusual place;
Insistent demand that it be finished at once;
Emphasis on consequences of delay (now or never)
Multiple persuaders against one person
Absence of 3rd party advisors
Statements that there is no time to consult an advisor or attorney

(key words, sign this or xyz will happen, agree to this or xyz)

7) unconscionability: If the terms of the contract are so unfair to one party that is shocks the
conscience of the court and suggests abuse during formation of the contract

There are two types of unconscionability that courts consider:

 Procedural unconscionability is present when there is a defect in the bargaining process

(e.g., one side applies excessive pressure).
 Substantive unconscionability is present when the terms of the deal are grossly unfair
and one-sided in one party's favor.