Contract Law: Mistakes, Fraud, and Discharge of Contracts

When is a contract unenforceable due to lack of voluntary consent?

When the parties have not genuinely assented to its terms because of: Mistake, Fraudulent Misrepresentation, Undue Influence, Duress, or Adhesion Contracts & Unconscionability.

What distinction must be made regarding mistakes in contract law, and which type makes a contract voidable?

Must distinguish between Mistakes of Fact and Mistakes of Value. Only a Mistake of Fact makes a contract voidable.

What additional requirement must a mistake of fact meet to affect a contract?

The mistake must involve a material fact.

Are contracts involving Mistakes of Value or Quality voidable?

No, contracts involving Mistakes of Value or Quality are not voidable.

What is the general rule regarding unilateral mistakes?

Unilateral mistakes generally cannot be canceled.

What is the first exception where a unilateral mistake can be canceled?

If the other party to the contract knows or should have known that a mistake of fact was made.

What is the second exception where a unilateral mistake can be canceled?

If the mistake was due to a substantial mathematical mistake and was made inadvertently and without gross negligence.

What additional requirement applies to a unilateral mistake based on a mathematical error?

The mistake must be readily provable and material.

What is the general result if Vic emails Ben an offer for $23,500 by mistake for an RV intended to sell for $32,500?

Vic is bound in contract to sell the RV to Ben for $23,500 because the unilateral mistake falls on him.

What is the exception where Vic would NOT be bound after mistakenly offering $23,500 for his RV?

Ben had knowledge that Vic's asking price was $32,500.

What is a bilateral (mutual) mistake of fact?

Both parties are mistaken as to an existing material fact.

How can a bilateral (mutual) mistake of fact be resolved?

The contract can be rescinded by either party.

What case involved two ships named 'Peerless' both sailing from Bombay, illustrating mutual mistake?

Raffles v. Wichelhaus (1864).

What is the general rule regarding mistakes of value?

Generally, the contract is enforceable by either party.

What types of things are included in mistakes of value?

Mistakes of value include future market value or quality.

Why can't the contract be rescinded if Sung buys a violin for $250 and later learns it is worth thousands?

The mistake is a mistake in value rather than a mistake of fact.

What is the effect of fraudulent misrepresentation on a contract?

The innocent party is fraudulently induced to enter into the contract.

What are the four elements of fraudulent misrepresentation?

1. Misrepresentation of Material Fact. 2. Intent to Deceive. 3. Reliance on Misrepresentation. 4. Injury to the Innocent Party.

What is the effect of a merger clause in Alabama regarding fraud?

A merger clause is ineffective to bar evidence of fraud in the inducement.

Can misrepresentation be by conduct or concealment? Give an example.

Yes. Example: Turn back an auto's odometer.

Are misrepresentations of future facts and statements of opinion considered fraud?

Generally no, unless the person professes to be an expert.

Does misrepresentation of law ordinarily entitle a party to relief?

Ordinarily no, unless the misrepresentation is by a professional with greater knowledge of the law.

Is silence generally considered fraud?

Silence is not fraud, unless there is a serious problem or defect known or asked.

What is a seller's duty to disclose 'latent defects'?

Seller must disclose any 'latent defects'.

When may failure to disclose material facts be fraud even without a direct lie?

When parties are in a fiduciary relationship or a relationship of trust and confidence.

What is 'scienter' in the context of fraud?

Scienter is an Intent to Deceive.

What is an innocent misrepresentation?

A person makes a statement believed to be true but is actually false.

How is negligent misrepresentation treated in fraud law?

Negligent misrepresentation is treated as fraudulent misrepresentation.

What is the third element of fraud regarding the deceived party's actions?

Reliance on Misrepresentation.

Is proof of injury required to rescind a contract? To recover damages?

No proof of injury is required to rescind a contract; proof is required to recover damages.

What is the measure of damages for injury to the innocent party in fraud?

The difference between the amount buyer paid for the property and the value of the property buyer received.

Why are punitive damages available in fraud actions?

To punish the Defendant and deter wrongful conduct.

What effect does undue influence have on a contract?

The contract is voidable.

When is undue influence presumed?

Presumed if a weak party is talked into doing something not beneficial to himself.

What must a guardian show to overcome the presumption of undue influence?

Full disclosure, adequate consideration, and that the ward received independent advice.

What effect does duress have on a contract?

Forcing a party to enter into a contract under fear or threat makes the contract voidable.

What must the threatened act be to constitute duress?

The threatened act must be wrongful or illegal.

Does threatening to exercise a legal right constitute duress?

Ordinarily, no.

What must a threatened act be to constitute duress?

The threatened act must be wrongful or illegal and must render the person incapable of exercising free will.

What is an adhesion contract?

A standard-form, preprinted contract in which the adhering party has no opportunity to negotiate the terms ('take-it-or-leave-it').

What must an aggrieved party show to avoid enforcement of an adhesion contract?

That the parties had unequal bargaining positions and enforcement would be manifestly unfair (unconscionable).

What is the privity of contract rule?

Only the parties to a contract have rights and liabilities under the contract. A third party has no rights under the contract.

What are the three exceptions to privity of contract?

1. Assignment, 2. Delegation, 3. Third party beneficiary contracts.

What is an assignment?

The transfer of contractual rights to a third party.

What is a delegation?

The transfer of contractual duties to a third party.

What do the terms Assignor, Assignee, Obligee, and Obligor mean?

Assignor = party assigning right. Assignee = party receiving right. Obligee = person to whom duty is owed (also assignor). Obligor = person who is obligated to perform duty.

What is the effect of a valid assignment on the assignor's rights?

The rights of the assignor are extinguished.

Are an assignee's rights subject to defenses the obligor has against the assignor?

Yes, the assignee's rights are subject to the defenses that the obligor has against the assignor (e.g., fraud).

What rights cannot be assigned?

1. If assignment is contrary to statute. 2. When a contract is personal in nature. 3. If assignment will significantly change risk or duties. 4. If the contract stipulates the right cannot be assigned (with exceptions).

Is notice to the obligor required to establish a valid assignment?

Notice is not a legal requirement to establish a valid assignment, but until the obligor has notice, the obligor can discharge the obligation by performing to the assignor.

If a party delegates duties to a delegatee and the delegatee fails to perform, is the delegator relieved of obligation?

No, delegation does not relieve the delegator of the obligation to perform if the delegatee fails to perform.

What duties cannot be delegated?

1. When duties are personal in nature. 2. When performance will vary materially from that expected. 3. When the contract expressly prohibits delegation (anti-delegation clause).

What does 'I assign the contract' create?

It may create both an Assignment of Rights and a Delegation of Duties. The assignor (delegator) remains liable if the assignee (delegatee) fails to perform.

What is an intended third party beneficiary?

Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person. The third party has legal rights and can sue the promisor directly.

What is a creditor beneficiary? Give an example.

One who benefits from a contract where one party promises another to pay a debt that the promisee owes to a third party. Example: Jay sells firm to Miller who agrees to take over payments to Speedwell; Speedwell is a creditor beneficiary.

What is a donee beneficiary? Give an example.

A contract is made for the expressed purpose of giving a gift to a third party. Example: Akin pays premiums to Standard Life, and Standard promises to pay a beneficiary on Akin's death; the beneficiary is a donee beneficiary.

What is an incidental beneficiary?

A third party whose benefit from a contract between two parties is unintentional. An incidental beneficiary cannot sue to enforce the contract.

What is a remedy?

The relief provided for an innocent party when the other party has breached the contract. Remedies are at law or in equity.

What are the most common remedies at law and in equity?

At law: Damages. In equity: Rescission and Restitution, Specific Performance, Reformation, and Recovery Based on Quasi Contract.

What is the purpose of damages in contract law?

To compensate the party for harm suffered, placing the innocent party in the same position they would have occupied had the contract been fully performed.

What are the four types of damages?

1. Compensatory (direct losses). 2. Consequential (indirect, foreseeable losses). 3. Punitive (to punish/deter). 4. Nominal (recognize wrongdoing with no monetary loss).

What are compensatory damages in a contract case?

Compensate the nonbreaching party for the loss of the bargain, measured by the difference in value between the promised performance and the actual performance.

In a breach of contract for services where P was to be paid $4,000 but found another job for $3,000, what are compensatory damages?

$1,000, plus expenses to find the second job (incidental damages).

What is the remedy for breach of a land sale contract when specific performance is not available?

Damages are the difference between the contract price and the market price of the land (majority rule).

In a construction contract where the contractor breaches, what are the damages?

The cost of completion (including reasonable compensation for delay).

What are consequential (special) damages?

Foreseeable losses caused by special circumstances beyond the contract itself, which the breaching party was or should have been aware of.

Are punitive damages generally available for mere breach of contract?

No, generally, a tort (e.g., fraud) must also be involved.

What is the duty to mitigate damages?

When a breach occurs, the innocent injured party has a duty to reduce the damages he or she suffered (e.g., landlord finding a new tenant).

What is a liquidated damages provision?

A contract provision that specifies a specific amount to be paid as damages in the event of future default or breach, intended to make the injured party whole.

What two questions do courts ask to determine if a liquidated damages provision is enforceable?

1. Was it apparent that damages would be difficult to estimate? 2. Was the amount a reasonable estimate and not excessive?

What is rescission and restitution?

Rescission cancels the contract; restitution restores the parties to their original positions prior to the transaction.

What is specific performance?

An equitable remedy calling for the performance of the act promised in the contract, typically available for land (unique) but not for personal services courts will not monitor.

What is reformation?

An equitable remedy allowing a contract to be reformed or rewritten to reflect the parties' true intentions when they have imperfectly expressed an agreement in writing.

What is recovery based on quasi contract (quantum meruit)?

A fictional contract imposed by courts to obtain justice and prevent unjust enrichment. Quantum meruit means 'as much as he or she deserves.'

What four elements must a party show to recover in quantum meruit?

1. A benefit was conferred on the other party. 2. The conferring party expected to be paid.

What is a condition in contract law?

A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

What is a condition precedent?

A condition that must be fulfilled before a party's performance can be required.

What is a condition subsequent?

A condition which operates to terminate a party's absolute promise to perform.

What is a condition concurrent?

Each party's performance is conditioned on the other party's performance or tender of performance simultaneously.

What is tender?

An unconditional offer to perform by a person who is ready, willing, and able to do so.

What is the difference between complete performance and substantial performance?

Complete performance fully meets all contract conditions; substantial performance means the party performed in good faith with minor defects.

In Jacob & Youngs v. Kent, what is the measure of damages for substantial performance if the cost to bring into compliance is unreasonable?

The measure of damages is the difference in value between the performance rendered and the performance that would have been rendered if the contract had been completely performed.

What is the reasonable person standard for performance to another's satisfaction?

Contract need only be performed to the satisfaction of a reasonable person unless expressly stated otherwise.

What is a material breach?

Performance that is not at least substantial; the nonbreaching party can sue for damages and is excused from performance.

In a non-material breach, is the duty to perform excused or suspended?

The duty to perform is suspended until the minor breach is cured.

What is anticipatory repudiation?

Before performance is due, one party refuses to perform their contractual obligation, resulting in material breach.

What is discharge by rescission?

The process by which a contract is cancelled or terminated by agreement of the parties.

What is novation?

When both parties to a contract agree to substitute a third party for one of the original parties.

What is accord and satisfaction?

Accord is a contract to perform some act to satisfy an existing contract duty; satisfaction is the performance of that accord agreement.

Name four ways a contract can be discharged by operation of law.

1. Material Alteration of the Contract. 2. Statutes of Limitations. 3. Bankruptcy. 4. Impossibility of Performance.

What is objective impossibility of performance?

A supervening event that was not foreseeable makes performance impossible for anyone.

What are three types of objective impossibility of performance?

1. Death or incapacitation prior to performance. 2. Destruction of the specific subject matter. 3. Illegality in performance.

What is commercial impracticability?

The anticipated performance becomes significantly more difficult and costly due to unforeseen circumstances.

What is frustration of purpose?

A supervening event makes it impossible to obtain the performance that both parties contemplated.

What is the origin of the Statute of Frauds?

England passed it in 1677 as 'An Act for the Prevention of Frauds and Perjuries.'

What five types of contracts must be in writing and signed under the Statute of Frauds?

1. Interests in land. 2. 'One-Year Rule' contracts. 3. Collateral contracts. 4. Promises in consideration of marriage. 5. Sale of goods for $500 or more.

What does 'interests in land' include under the Statute of Frauds?

All physical objects permanently attached to the soil, mortgages, leases, and options to purchase.

What is the One-Year Rule under the Statute of Frauds?

A contract that cannot be performed within one year must be in writing.

What is the test for the One-Year Rule?

Whether performance is possible within one year, not whether it is likely.

What is a collateral promise? Give an example.

A secondary promise made by a third party to assume the debt of a primary party if that party does not perform.