DEFENSES TO CONTRACTS
· (1) Mutual Mistake
· (2) Misrepresentation & Non-Disclosure
· (3) Duress
· (4) Illegality / Public Policy
· (5) Incapacity
· (6) Unconscionability
· (7) Statute of Frauds (covered last semester)
Each defense listed above is an independent basis for voiding an otherwise valid contract (i.e., O+A+C)
(1) Mutual Mistake
Rest: §§ 151, 152, 154
Generally
– Situation in which K exists and party attempt to rescind the K b/c both parties (mutual mistake) acted on a mistaken belief about an existing fact
– Restatements
o 151. Definition
§ A mistake is a belief that is not in accord with the facts
o 152. When a MUTUAL mistake renders a K voidable
§ (1) The mistake relates to a “basic assumption” on which the K was made
· Basic Assumption = goes to the nature and essence of the K, not just the value of it
§ (2) The mistake has a “material effect” on the exchange of performances
§ (3) The adversely affected party does NOT bear the risk of mistake
· Refers us to 154
o 154. When Adversely Affected Party bears the risk of mistake
§ (1) The terms of the K allocate the risk to the party
§ (2) The party has limited knowledge with respect to the relevant facts, but is aware of the limited knowledge and treats it as sufficient
§ (3) The court allocates the risk of mistake to the party
Sherwood v. Walker
– K for the sale of a barren cow. Both parties thought that the cow was barren at the time of K. Upon delivery, seller realized that the cow was fertile. Barren cow was worth significantly less than a fertile cow.
– Seller seeks to void the K on the ground of mutual mistake.
– Court held that if the parties both believed that the cow was barren, then the K Was voidable on grounds of mutual mistake
– Traditional test for mistake – ‘relating to the substance of consideration’
o The mistake related to the consideration – the K was for a barren animal, but the cow was fertile
Lenawee County v. Messerlys (K not voidable – as is clause)
– Buyers bought property with purpose to rent it and generate income from sellers who had been renting the property. County found poor septic system (neither party knew about it) and condemned the property unfit for habitation
– Buyers want to undo the deal and rescind the K on the grounds of mutual mistake
– K for sale read: ‘Purchaser has examined property and agrees to accept same in present condition’
– Rest 152 Analysis
o (1) The K did relate to a basic assumption of the K
§ Essence of the K was a habitable property
§ NOT just that the buyers could not make as much rent as they thought (merely value), it’s that they got something with no value at all – not what they bargained for
o (2) Mistake did have a material effect on the exchange of performances
§ Getting much less than what they bargained for
o (3) But, the adversely affected party (buyer) bears the risk of mistake
§ 154(a) – the language of the K assigns the risk of loss to the buyer b/c of the as is clause
– Therefore, the party bore the risk of loss and the K would not be rescinded.
(2) Misrepresentation & Non-Disclosure
Rest: §§ 159, 161, 162
– 2 Types:
o Misrepresentation based on explicit statements (Fraud)
o Misrepresentation that occurs from silence when there is a duty to speak (Non-disclosure)
– 4 Elements of Misrepresentation:
o Misrepresentation (assertion that is not in accord with the facts à Rest 159)
o Material or Fraudulent
o Actual Reliance
o Reasonable or Justifiable Reliance
Misrepresentation Based on Explicit Statements
Generally:
– Misrepresentation is:
o Regarding a past or present fact
o Somewhat specific (i.e. not vague)
o Material (innocent) or fraudulent
o IF speak – duty to disclose qualifying matters so as not to create a false impression
– Misrepresentation is NOT: Puffery and Opinions (sometimes)
o Puffery à to vague and indefinite
§ Puffery = indefinite generality of exaggeration
o Exception: Opinion regarding the quality of condition might be a misrepresentation if:
§ It appears to be based on facts
§ Particularly within the speakers knowledge and difficult for hearer to ascertain
§ Discourages hearer to investigate
Fowler v. Benton (Statement about adequacy of septic system were actionable misrepresentations)
– P, large family, bought house from D, builder. D installed septic system for 3 person family, D knew that Ps were an 11 person family. P specifically asked whether septic system was adequate. D said he wouldn’t know any reason why the septic system would not be adequate b/c it was put in according to health department specs.
– Is this a misrepresentation? R 159
o Here, Benton’s statement did seemed was tantamount to an assertion of fact
o Seemed to be factually based regarding the adequacy of the septic system
o The adequacy of the septic system was particularly within D’s knowledge
o And, it discouraged Ps from investigating the adequacy
– Benton failed to include qualifying information that it was only approved for a smaller family
Misrepresentation from Non-Disclosure
Generally:
– General Rule: NO duty to speak
– Rest 161à When Non-Disclosure is Equivalent to an Assertion
o Duty to disclose in the following situations only:
§ (a) Where the party knows that disclosure of a fact is necessary to present some previous assertion from being a misrepresentation
§ (b) Where the party knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the K AND if non-disclosure would amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing
§ Was there a special relationship?
Hill v. Jones (Seller required to disclose termite damage here)
– Seller did not voluntarily disclose past termite damage to buyer
– Rest 161(b) is the applicable rule – does the failure to disclose termite damage constitute bad faith?
– Rule: Where the Seller of residential property:
o knows of material facts that affect the value of the property
o which are not readily observable to the buyer and
o are not known to the buyer,
o then the seller has a duty to disclose to the buyer
DEFENSES TO CONTRACTS
· (1) Mutual Mistake
· (2) Misrepresentation & Non-Disclosure
· (3) Duress
· (4) Illegality / Public Policy
· (5) Incapacity
· (6) Unconscionability
· (7) Statute of Frauds (covered last semester)
Each defense listed above is an independent basis for voiding an otherwise valid contract (i.e., O+A+C)
(3) Duress
Rest: §§ 175, 176
– If the K was formed under duress, its unenforceable
– Includes both overt and more subtle threats
– 2 things to look for:
o Improper Threat (defined in Rest 176)
§ Commit crime or tort
§ Bad faith use of civil process
§ Extremely unfair business dealings
§ THIS IS SOMEWHAT DIFFICULT
· Not threat if someone takes advantage of “dire” circumstances
o Was there no reasonable alternative?
Austin Instrument v. Loral Corp.
– Parties had K where Austin was to deliver certain parts to Loral for Loral’s K with the Navy.
– Under a new bidding round for a new K, Loral told Austin they would only award a K to Austin for those Ks which Austin was the lowest bidder. Austin then refused to perform any more work on the existing K without a price increase and without acceptance of the new bids.
– Rules: 2 requirements for economic duress:
o Threat by one party to breach the K by not delivering the required items, AND
o Proof that the threatened party would not obtain the goods from another supplies and a regular action for breach of K would not be adequate
– Court found both requirements present – Loral agreed to the new Ks and the price increases under duress.
(4) Illegality / Public Policy
Rest: §§ 178, 181, 188
– General Rule: Courts will not enforce Ks that are against public policy
– HOWEVER, courts are hesitant to invalidate contracts on PP grounds, because…
o If it’s too easy to invalidate Ks on PP grounds, then it undermines the stability of Ks
– Courts view the following Ks with suspicion:
o Contracts in Restraint of Trade
o Contracts with an Illegal Purpose (definitely against PP)
o Contracts that harm the Public
Sinnar v. LeRoy (K is illegal)
– Sinnar denied liquor license, LeRoy tells him that he can obtain the license for $450 or else he can get his money back. Sinnar pays LeRoy and never gets the license and never gets his money back. Sinnar sues.
– Defense of illegality need not be pleaded – the court can raise the issue sua sponte (on its own motion) if of a serious nature
o Here, a serious nature à bribery to secure a state liquor license
– Court did not enforce the K, left the parties where they stood – Did not provide a remedy – Refused to enforce an illegal K to help Sinnar get his $$ back
o In Pari Delicto – Traditional Rule (leave the parties where they stand)
o Rest 178 à more nuanced – involves a balancing test
§ A K is unenforceable where its interest in enforcement is clearly outweighed by public policy against the enforcement
§ 178(2) and (3)– Lists factors to b
Step 2. If Integrated, is it Partially or Completely Integrated?
– Definition: Completely Integrated
o The writing was intended to be final (integrated) as to ALL of the terms of the agreement.
o It is a complete and exclusive statement of the terms of the agreement.
– Definition: Partially Integrated
o The writing was intended to be final (integrated) as to some, but not all of the terms of the agreement
– Approaches
o 4 Corners
§ Can only look at the written document to determine whether its partially or completely integrated
§ More likely to find that an agreement is completely integrated
o Contextual
§ Look at the intent of the parties, the written document, the facts and circumstances surrounding the K to determine whether its partially or completely integrated
§ More likely to find an agreement is partially integrated
– Effect of a Merger Clause:
o Merger clause is almost always conclusive of complete integration
– Outcome:
o If COMPLETELY integrated à PER prohibits any extrinsic evidence from being admitted
§ Rule: Cannot supplement or contradict a completely integrated document
o If PARTIALLY integrated à PER allows certain extrinsic evidence – Continue to Step 3.
§ Rule: No extrinsic evidence may be admitted to contradict the partially integrated document, but extrinsic evidence is admissible to supplement the terms.
o General Rule: Can NEVER contradict an integrated document, whether partially or completely integrated
Step 3. If Partially Integrated, is the Extrinsic Evidence Contradictory or Supplemental?
– Rules:
o Extrinsic Evidence of supplemental terms if OK if partially integrated
o Extrinsic Evidence of contradictory terms is never OK for an integrated document
– Test to determine whether Contradictory or Supplemental:
o Reasonable Harmony Test
§ The term is supplemental if it is in “reasonable harmony” with the terms of the written contract and the respective obligations of the party
o Complete Negation Test
§ The term is inconsistent (contradictory) ONLY if it contradicts an express term of the K
§ Only contradictory if it completely negates a term of the writing
– Outcomes
o If CONTRADICTORY à Evidence is OUT
o If SUPPLEMENTAL à Evidence is IN
Mitchill v. Lath
– Mitchill agreed in writing to buy a farm from Lath. Lath orally promised to tear down an ice house on adjacent land, but then later refused to tear it down.
– Issue: was the oral agreement to tear down the ice house admissible?
– Does PER apply? Yes. Prior oral agreement which seeks to supplement or contradict a written K.
o Was the K integrated?
o Here, the K was detailed as to the responsibilities of the parties to the K. The detail implied that the seller was not responsible to do anything not written in the K.
o The K was final and complete and set forth the detailed obligations of the parties.
Masterson v. Sine
– Buyers bought house with deed that reserved sellers the option to buy back the house. Buyer and seller are brother and sister. Buyer wants to introduce EE that the purpose of the option was to keep the home in the family.
o Sellers went bankrupt and the trustee wanted to exercise the option to buy the home back. Buyers wanted extrinsic evidence of family purpose to prove that the option to buy was personal only to the sellers, not the bankruptcy trustee.
– Contextual Approach: The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement
o Refers to the 4 Corners approach, but declines to apply it
– Ruling: Partially Integrated. Because …
