Download Defenses in Contracts: Voidable, Minority, Liability, and Incompetence and more Lecture notes Law in PDF only on Docsity!
Contracts Professor Keith A. Rowley William S. Boyd School of Law University of Nevada Las Vegas Spring 2009
Formation Defenses
I. “Void” vs. “Voidable” Contracts
A. “Void” Contract: A contract that is unenforceable as a matter of law ( e.g. , a contract for child prostitution).
B. “Voidable” Contract: An otherwise enforceable contract that a party may avoid, as a matter of fact, based on one of the following defenses.
♦ A party’s acts or statements after her right to avoidance arises ( e.g. , ratification or reaffirmance) may cut off her ability to avoid a contract.
II. Lack of Capacity
A. Contractual Capacity: The minimum legal capacity required to bind a party to a contract he, she, or it allegedly made.
♦ Because incapacity may be transient , the key is whether the party has or lacks capacity when the contract forms.
B. Minority: Unmarried minors may enter into any contract an adult can, provided that the contract is not illegal for a minor ( e.g. , an agreement to buy cigarettes).
- Voidability: Unlike those entered into by adults, contracts entered into by minors are generally voidable.
♦ Most states recognize an age before which a contract with a minor is void.
- Disaffirmance: In order for a minor to avoid or set aside a contract, she need only manifest her intention not to be bound by it.
a. The minor may manifest her intent to avoid by words or actions.
b. Generally speaking, a minor may disaffirm a contract at any time before and for a reasonable time after the minor comes of age.
c. The minor must disaffirm the contract in its entirety.
d. A disaffirming minor may recover all consideration she provided to the other party – even if the other party to the disaffirmed contract subsequently transferred it to a third party.
e. Only the minor may disaffirm her contractual obligations; any adult parties to the contract remain bound by it unless the minor disaffirms.
f. A minor who fails to timely disaffirm will have constructively affirmed the contract.
- The Minor’s Obligations: Upon disaffirmance, the minor
a. must return any goods or other consideration in her possession , and
b. may have to restore the adult to the position he was in prior to entering the contract by either
i. compensating the adult for any deterioration in value of the consideration caused by the minor’s use , or
ii. compensating the adult for any benefit the minor derived from her use of the consideration.
- Emancipation: If a child’s parents/guardians have relinquished their legal right to control her, she will have the same capacity to contract as an adult.
♦ A married minor is emancipated as a matter of law.
- Misrepresentations Regarding Age: Most states permit disaffirmance even if the minor misrepresented her age when entering into the agreement. However, some states
a. prohibit disaffirmance in all cases where the minor misrepresented her age;
b. prohibit disaffirmance in cases where the minor has engaged in business as an adult ;
c. refuse to allow minors to disaffirm fully performed contracts, unless they can return all consideration received; or
d. permit disaffirmance but subject the minor to tort liability for her misrepresentation.
♦ Only the incompetent party has the option of disaffirming his contractual obligations; any competent party to the contract remains bound unless released by the incompetent party’s disaffirmance.
c. Valid Contract: An otherwise incompetent party who understood the nature, purpose, and consequences of entering into the contract is bound by it.
- Burden of Proof: The law presumes competency, so the party seeking to void or avoid the contract bears the burden of proving incompetence.
D. Intoxication: A transient condition in which a person’s normal capacity to act or think is inhibited by alcohol or some drug.
- If a party was so intoxicated at the time she entered into a contract as to either be cognitively or volitionally incompetent and the other party knew or had reason to know of her condition, then she may avoid the contract, even if her intoxication was purely voluntary.
- Most courts will look for objective indications that the allegedly intoxicated party possessed or lacked the necessary capacity – e.g. , negotiating the terms of the contract, committing it to writing, etc.
- If a party is entitled to avoid her contract due to intoxication, she may disaffirm it, in the same way as a minor. However, unlike minors in some jurisdictions, she will likely be required to make full restitution to the other party before being allowed to disaffirm.
E. Ratification: Accepting and giving legal force to an obligation that previously was voidable. Ratification may be either express or implied.
- Express Ratification: A person lacking contractual capacity at the time he formed a contract may, upon (re)gaining the necessary capacity to do so, expressly ratify the contract by stating, orally or in writing, that he intends to be bound by the contract.
- Implied Ratification: Likewise, a person lacking contractual capacity at the time he formed a contract may, upon (re)gaining the necessary capacity to do so, impliedly ratify the contract
a. by acting in a manner that is clearly inconsistent with disaffirmance or avoidance or,
b. in the case of a minor, by failing to disaffirm within a reasonable time after reaching the age of majority.
F. Representative Capacity
- Agency: “[T]he fiduciary relationship that arises when one person (a ‘ principal ’) manifests assent to another person (an ‘ agent ’) that the agent shall act on the principal’s behalf and subject to the principal’s control , and the agent manifests assent or otherwise consents so to act.” RESTATEMENT (THIRD ) OF AGENCY § 1.01 (2006) (emphases added).
- Actual Authority
a. Express Authority: Authority declared in clear, direct, and definite terms, orally or in writing.
b. Implied Authority: Authority that is
i. conferred by custom ,
ii. inferred from the position the agent occupies, or
iii. inferred as being reasonably necessary to carry out the agent’s express authority.
- Apparent Authority: Authority that arises when a principal causes a third party to believe that an agent has authority to act, even though the agent has no express or implied authority with regard to the matter at hand.
a. If the third party changes his or her position in reliance on the principal’s representations regarding the agent’s authority, the principal may be estopped from denying that the agent had authority to act.
b. By contrast to agency-by-estoppel , where the principal may be estopped from denying that a non-agent is acting on the principal’s behalf, here the person acting on the principal’s behalf is an agent
- just not one who has express or implied authority to act with regard to the particular matter at hand.
- Ratification by the Principal: The express or implied affirmation of a previously unauthorized act of a purported agent. In summary:
a. The agent must have acted on behalf of the principal who subsequently ratified the action;
b. The principal must affirm the agent’s act in its entirety ;
c. The principal must affirm before the third party withdraws from the transaction;
IV. Misrepresentation: An innocent party may usually avoid, for lack of genuine assent, a contract she entered into based on a material misrepresentation.
A. Fraud is
- a misrepresentation or omission
- of material fact ,
- made knowingly and with the intent to deceive an innocent party,
- on which the innocent party relied
- resulting in injury to the innocent party.
B. Negligent Misrepresentation shares the same elements as fraud except that the wrongdoer need not have acted knowingly or with the intent to deceive.
C. Misrepresentation: An assertion that is not in accord with the facts. R2 § 159.
- The assertion must relate to something that is a fact at the time the assertion is made, not to a future event or circumstance. R2 § 159 cmt. c.
- Particular Types of Misrepresentations and Omissions
a. Predictions and Expressions of Opinion will generally not excuse performance, unless
i. the speaker had particular expertise and knew or had reason to know that the listener intended to rely on the statement;
ii. the speaker misrepresented his own opinion;
iii. the speaker owed some fiduciary duty to the listener; or
iv. the speaker knew or had reason to know that the listener was unduly susceptible to the speaker’s opinion.
b. Misrepresentations of Law will not excuse performance, unless the speaker is a member of a profession that commonly requires greater legal knowledge than the average citizen possesses.
c. Misrepresentation by Conduct: The conduct of a party – particularly a party’s concealment of some material fact from the other party – will support a claim of misrepresentation. R2 § 160.
d. Misrepresentation by Silence: Generally, neither party to a contract has a duty to volunteer facts unless the other party asks.
However, common and statutory law create a duty to speak in certain situations, including where the disclosure is required to
i. keep something that was said (or done) from being misleading (can’t tell half of the story);
ii. correct a basic assumption of the other party;
iii. satisfy the duty of good faith and fair dealing;
iv. correct a mistake about writing;
v. satisfy a trust, confidence, or fiduciary duty; or
vi. alert an innocent party to a serious defect or risk of injury.
D. Materiality: A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. R2 § 162(2).
- Materiality is judged from the maker’s viewpoint, while the justification of reliance is judged from the recipient’s viewpoint. R2 § 162 cmt. c.
- A misrepresentation is material if
a. it would likely induce a reasonable person to manifest assent, or
b. the maker knows that for some special reason it would likely induce the particular recipient to manifest assent.
E. Scienter: A defendant acts with the intent to deceive if he:
- knows a statement to be false,
- makes a statement he reasonably believes to false,
- makes a statement recklessly , without regard to its truthfulness, or
- implies that a statement is made on the basis of information that he does not possess or on some other basis on which it is not, in fact, based.
F. Reliance: The party seeking to avoid the contract must have acted based on (although not necessarily solely based on) the misrepresentation. Moreover, in some jurisdictions, her reliance must have been objectively reasonable.
G. Injury: Courts generally do not require a showing of actual injury in order to rescind; but actual injury is required before a plaintiff can recover damages.
VI. Undue Influence: Taking an unfair advantage of another’s weakness of mind or taking an oppressive and unfair advantage of another’s necessity or distress.
A. Like duress, undue influence involves coercing a promisor into acting against their free will.
B. Unlike duress, undue influence requires no threat , nor does it require that the promisor was left with no other reasonable alternative than that sought by the dominant party.
C. R2 § 177: Undue influence can arise when the promisor is unfairly persuaded by
- someone in a dominant position relative to the promisor, or
- someone who, because of the close relationship between the promisor and the persuading party, the promisor reasonably believes is looking out for the promisor’s best interest.
D. Factors relevant to undue influence
- discussion of transaction at inappropriate time
- consummation of transaction in an unusual place
- insistent demand that business be finished at once
- extreme emphasis on untoward consequences of delay
- using multiple persuaders against a single servient party
- absence of third-party advisers to the servient party
- statements that there is no time to consult advisers
VII. Unconscionability
A. Procedural Unconscionability : Arises when one party to the contract lacks or is deprived of any meaningful choice regarding the terms of the contract due to
- inconspicuous print,
- unintelligible language,
- lack of opportunity to read the contract before signing, or
- lack of bargaining power.
B. Substantive Unconscionability : Arises when the terms of the contract substantially deprive one party of the benefit of its bargain or of any meaningful remedy for breach by the other party. Put another way, the terms of the contract are so grossly unfair as to “shock the conscience” of the court.
C. Courts generally require both substantive and procedural unconscionability. However, some courts will find substantive unconscionability (but not procedural unconscionability) alone sufficient.
D. Unconscionability is tested when the contract is formed. R2 § 208. If the contract turns out to be horrible later, that alone does not make it unconscionable.
E. If a court determines the contract was unconscionable when made, it may
- refuse to enforce the contract in its entirety ,
- sever the unconscionable clause and enforce the remainder of the contract, or
- permit the unconscionable clause to be applied only if its effect is not unconscionable.
F. The doctrine is designed to prevent oppression and unfair surprise, not to disturb the parties’ allocation of risks due to superior bargaining power. ( See UCC § 2- 302 cmt.)
G. Unconscionability is a question of law for the court, but can usually only be decided after the jury has made findings of fact.
VIII. Illegality: A contract made illegally or for an illegal purpose may be unenforceable, even if it was not illegal when made.
A. Statutes sometimes proscribe certain types of contracts or contractual provisions. For example:
- Usury: Virtually every state has a statute that sets the maximum rate of interest that can legally be charged for different types of transactions, including ordinary loans. Usurious contracts may be void in their entirety, but most states simply limit the interest the lender is permitted to collect.
- Gambling: Most gambling contracts are illegal and void, even in states where certain forms of regulated gambling are permitted.
- Blue Laws: Some states and localities prohibit engaging in certain business activities on Sundays.
