Contracts: Defenses

Contracts of Infants (minors)

Infants (anyone under 18 in most Jx) generally lack capacity to enter into a contract binding on themselves. But, contractual promises of an adult made to an infant are binding on the adult

Disaffirmance

An infant (minor) may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority. The contract must be disaffirmed as a whole. If a minor chooses to disaffirm, they must return anything they received under the contract that still remains at the time of disaffirmance. There is no obligation to return any part of the consideration that has been squandered, wasted, or negligently destroyed

Affirmance Upon Attaining Majority

A minor may affirm a contract upon reaching majority. A minor affirms either expressly or by conduct, such as failing to disaffirm the contract within a reasonable time after reaching majority

Minor Incapacity Exceptions

States have created a few statutory exceptions for student loans, insurance contracts, and agreements not to reveal an employer’s proprietary information

Minor Contracts and “Necessaries”

Necessaries are items necessary for subsistence, health, or education. A minor may disaffirm a contract for necessaries but will be liable in restitution for the value of benefits received

Mental Incapacity

One whose mental incapacity is so deficient that they are incapable of understanding the nature and significance of a contract may disaffirm when lucid or by a later appointed legal representative. They may likewise affirm during a lucid interval or complete recovery, even without formal restoration by a judicial action. AKA the contract is voidable. They are liable in quasi-contracts for necessaries. A mentally incompetent person has no ability to contract one a guardian has been appointed, and any attempted contract by that person is void.

Intoxicated Persons

One who is so intoxicated that they do not understand the nature and significance of their promise may be held to have made only a voidable promise if the other party had reason to know of the intoxication. The intoxicated person may affirm the contract upon recovery. There may be quasi-contractual recovery for necessaries furnished during the period of incapacity

Duress or Undue Influence

Contracts induced by duress or undue influence are voidable and may be rescinded as long as they are not affirmed. Generally, taking advantage of another’s economic needs is not duress, but withholding something someone wants or needs will constitute economic duress if: (1) the party threatens to commit a wrongful act that would seriously threaten the other party’s property or finances; and (2) there are no adequate means available to prevent the threatened loss.

Elements of Undue Influence

(1) undue susceptibility to pressure by one party; and (2) excessive pressure by the other party. Undue influence concerns often arise when dominant party is in a confidential or caregiver relationship with the influenced party

Misunderstanding: Ambiguous Contract Language

If the contract includes a term with at least two possible meanings, the result depends on the parties’ awareness of the ambiguity: (1) if neither party was aware, no contract unless both parties intended the same meaning; (2) if both parties were aware, no contract unless both parties intended the same meaning; or (3) if one party was aware, there is a binding contract based on what the ignorant party reasonably believed to be the meaning of ambiguous words

Mutual Mistake as to Existing Facts

If both parties entered into a contract and were mistaken about existing facts relating to the agreement, the contract may be voidable by the adversely affected party if: (1) the mistake concerns a basic assumption on which the contract is made; (2) the mistake has a material effect on the agreed-upon exchange; and (3) the party seeking avoidance did not assume the risk of the mistake

Mutual Mistake and Bearing the Risk

Mutual mistake is not a defense if the party asserting mistake as a defense bore the risk that the assumption was mistaken. This commonly occurs when one party is in a position to better know the risks than the other party or where the parties knew that their assumption was doubtful

Mistake in Value

If the parties to a contract make assumptions as to the value of the subject matter, mistakes in those assumptions will generally not be remedied, even though the value of the subject matter is a basic assumption and the mistake creates a material imbalance, because both parties usually assume the risk that their assumption as to value is wrong.

Unilateral Mistake

If only one of the parties is mistaken about facts relating to the agreement, the mistake will not prevent formation of a contract. But if the nonmistaken party knew or had reason to know of the mistake made by the other party, the contract is voidable by the mistaken party. The mistake must have a material effect and the mistaken party must not have borne the risk

Mistake by Intermediary

When there is a mistake in the transmission of an offer or acceptance by an intermediary, the prevailing view is that the message as transmitted is operative unless the other party knew or should have known about the mistake

Fraud in the Inducement

If a party induces another to enter into a contract by using fraudulent misrepresentation, the contract is voidable by the innocent party if they justifiable relied on the fraudulent misrepresentation

Material Misrepresentation

Whether or not a misrepresentation is fraudulent, the contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material. A misrepresentation is material if: (1) it would induce a reasonable person to agree; or (2) the maker knows that for some special reason it is likely to induce the particular person to agree, even if a reasonable person would not

Misrepresentation: Justified Reliance

A party is not entitled to relief if the reliance was unreasonable under the circumstances. However, just because a misrepresentation could have been revealed by the exercise of reasonable dare does not mean that reliance was unjustified. Failure to read a contract or use care in reading it does not necessarily preclude a party from avoiding a contract for misrepresentation

Misrepresentation: Rescission

The innocent party doesn’t have to wait until they are sued on the contract but may take affirmative action in equity to rescind the agreement. In addition, they may pursue all remedies available for breach of contract

Absence of Consideration

If the promises exchanged at the formation stage lack the elements of bargain or legal detriment, no contract exists.

Illegality: Illegal Consideration or Subject Matter

If the consideration or subject matter of a contract is illegal, the contract is void. Exceptions: (1) the plaintiff was unaware of the illegality while the defendant was aware; (2) the parties are not in pari delicto (not equally culpable); or (3) the illegality is the failure to obtain a license when the license is for revenue-raising rather than public protection.

Illegality: Illegal purpose

If the only purpose of the contract is illegal, the contract is voidable by a party who was (1) unaware of the purpose; or (2) aware but did not facilitate the purpose and the purpose does not involve serious moral turpitude

Unconscionability, Generally

The concept of unconscionability allows a court to modify or refuse to enforce an entire contract or a provision in it to avoid “unfair” terms, usually due to some unfairness in the bargaining process (procedural unconscionability) Unfair price alone is not sufficient.

Inconspicuous Risk-Shifting Provisions

Standardized print form contracts often contain a material provision that seeks to shift a risk normally borne by one party to the other. Typically, these clauses are found in the fine print (boilerplate) in printed contracts. Courts have invalidated these provisions because they are inconspicuous or incomprehensible to the average person, even if brought to their actual attention

Contracts of Adhesion

Courts will deem a clause unconscionable and unenforceable if the signer is unable to procure necessary goods, such as an automobile, from any seller without agreeing to a similar provision

Exculpatory Clauses

An exculpatory clause releasing a contracting party from liability for their own intentional wrongful acts is usually found to be unconscionable. Exculpatory clauses for negligent acts may be found to be unconscionable if the clauses are inconspicuous, but they are commonly upheld in contracts for dangerous activities.

Limitations on Remedies

A contractual clause limiting liability for damages to property generally will not be found unconscionable unless it is inconspicuous. But, when a contract that limits a party to a certain remedy and that remedy fails of its essential purpose, the limitation may be found unconscionable

Unconscionability: Timing

Unconscionability is determined by the circumstances as they existed at the time the contract was formed

Effects of Unconscionable Clauses

If a court finds as a matter of law that a contract or any clause within was unconscionable when made, the court may: (1) refuse to enforce the contract; (2) enforce the remainder of the contract without the unconscionable clause; or (3) limit the application of any clause so as to avoid an unconscionable result