MBE Contract Law - Defenses to Formation and Enforceability

Entire contract is void and non-existent

Valid contract unless one party seeks to void it

A valid contract that cannot be enforced when one party halts performance

Duress

Incapacity

Illegality

Misrepresentation

Mistake

Misunderstanding

Public Policy

Unconscionability

Undue Influence

Statute of Frauds

Minor/infant;

Mental incompetence; or

Intoxication

Minor only: the other party cannot void the contract and the minor can enforce it against the other party

⚠️ If, however, the minor lied about his age, the other party can seek to void it on grounds of fraud

Minor cannot void K for necessities (clothing, shelter, food, medical) → must pay for them

Reasonable value of the goods (under quasi-contract theory)

Yes, if:

Minor entered into K before adulthood;

Minor has now reached adulthood; and

Minor ratifies either:

​Implicitly (fails to disavow K after reaching adulthood);

Explicitly (orally or through writing); or

By conduct (minor encourages the other party to perform and a mutual exchange begins)

When the person:

Fails to comprehend K; or

Comprehends it, but acts in an unreasonable manner, and the other party knows the person is acting unreasonably

A contract is void for one who has been adjudicated mentally incompetent, but voidable for one in which no judgment has been made

Yes, if:

Party could not understand the nature of the contract; and

Other party knew or had reason to know of that fact

D makes a claim about a material element of K;

That is false; and

Induces justifiable assent and reliance by P

There was a misrepresentation;

Of a material fact;

That the D knew was false or made with reckless disregard for the truth;

That the D knew would cause P to reasonably rely on it;

P did in fact rely on the misrepresentation; and

P suffered damages as a result

Party is prevented from knowing essential terms of K due to fraudulent misrepresentation.

K is void.

Party is induced into entering K b/c of fraudulent misrepresentation.

K is voidable if adversely affected party relied on misrepresentation.

Misrepresentation of a material fact;

That misrepresentor should have known was false; and

P reasonably relied on the misrepresentation

No, unless they are an assertion of professional fact that is likely to create an express warranty or justifiable reliance.

If just a promotional tool, opinions will be considered puffery & not misrepresentations.

Yes, if either:

Fiduciary relationship exists;

P was only told part of the truth such that it was misleading;

D fails to correct a statement by P that they know is misleading;

One party knows that the other is mistaken as to a basic assumption; or

D does an affirmative act to hide a material fact (e.g. painting over mold to conceal it)

Misrepresentation: affirmatively saying something that isn’t true

Nondisclosure: withholding information

Any wrongful act or threat which overcomes the free will of a party such that there is no other reasonable alternative than to assent to the contract

⭐️ subjective standard

Threats of:

Physical violence;

Civil or criminal penalties (ex. imprisonment);

Breaching the K or doing other unlawful acts (ex. “if you don’t change the contract to say you now owe me $100 million dollars, I’ll breach); or

Wrongful interference with the other party’s property

Bad-faith threat: When one party is exploiting another party for unfair gain

Good-faith demand: When the demand is due to an increased burden on one party caused by unanticipated circumstances

Void

Voidable by the aggrieved party

One party enters into a contract after being unfairly persuaded by the other.

Elements:

Weaker party lacked capacity, expertise, or was part of a special relationship; and

Was unfairly persuaded by the stronger party; and

Persuasion hindered the free will of weaker party

Talking about the K at an unusual time;

Completing the K at an unusual place;

Demanding that the K be completed immediately;

Extreme emphasis on the negative consequences of delaying the transaction; or

Stating that there is no time to consult advisors or attorneys

Party being accused

Aggrieved party can void the contract and seek restitution

K where the bargaining power or terms are so unequal as to shock the conscience, i.e. no reasonable person would agree to it

Judge

Procedural

Substantive

When one side enters into a contract without meaningful choice

Adhesion contracts ("take it or leave it")

Contracts with boilerplate terms

Contracts with hidden terms that are vague or confusing

Terms of K itself are not fair

Grossly excessive price

Disproportionate consequences for minor breach

Provisions unreasonably limiting warrranties or remedies

Declare the entire contract void;

Strike the unconscionable clause while leaving the rest; or

Rewrite the offending clause to make it conscionable

Either:

Subject matter is explicitly prohibited by law (prostitution, gambling);

Formed for the purpose of committing a crime or tort; or

Violates certain values and freedoms designated by the state (ex. freedom of trade)

Either contains illegal clauses or contemplates illegal actions

formed

Illegal Subject Matter: Illegal and completely void & unenforceable

Illegal Purpose: Voidable by party who:

Did not know of the purpose; or

Knew but did not facilitate the purpose and the purpose does not involve “serious moral turpitude”

⚠️ Note: If both parties knew of the illegal purpose, K is void and unenforceable

Only if:

Party was not aware of the illegal purpose; or

Only one party had an illegal purpose

If the K does not involve "moral turpitude," then restitution may be available to the partly performing party

If contract is divisible, court may order performance of non-illegal provisions

If one party is substantially less guilty (not "in pari delicto") than the other, they can seek full performance and restitution

Restitution

Ex. Max sells purses to Ian, who is involved in an illegal counterfeiting ring. Even though Max knew about the illegal ring, he can can still recover the price of purses as long as he was not involved in the illegal ring.

Parties misunderstand the terms they agreed upon

K did not form.

K will have formed, but will be based upon the meaning of the term by the unaware party

No K will have formed, unless both the parties agreed to the meaning in writing

Mistaken belief as to a basic, current fact about the K

Both parties are mistaken as to a basic assumption of the contract

By the adversely affected party if:

Both parties had a mistake of fact when the contract was formed;

About a material assumption of the contract;

Adversely affected party did not assume risk of the mistake; and

Mistake cannot be fixed by reformation

Yes, as long as party acted in good faith in accordance with standards of fair dealing, they can still use the defense of mistake.

When only one party is mistaken as to a basic assumption of the K; will not prevent K formation

The mistaken party can void if:

There was a mistake as to basic assumption when K was formed;

About material effect of K; and

Adversely affected party did not assume risk of the mistake

AND either:

Mistake would make K unenforceable; or

Other party had reason to know of mistake; or

Mistake was the other party's fault

when the court rewrites the K to reflect the true intent of the parties

Parties had a prior agreement;

Parties agreed to put the prior agreement in writing; and

There is a difference in the prior agreement and the writing due to mistake

This constitutes a misrepresentation and the other party can seek reformation

Is there a significant business justification (e.g. access to trade secrets);

Is the scope reasonable in duration and geographical reach; and

Is there an express provision of a covenant not to compete?

⚠️ Note: Courts can choose to enforce only reasonable provisions of a non-compete