Contracts Outline

Spring 2010
Contracts Outline
 
I.     Formation Defenses
A.    Mistake and Misunderstanding
1.    R2d § 151: Mistake Defined
a.    A mistake is a belief not in accordance with the facts.
2.    Mistake is a formation defense that is used to avoid finding an enforceable contract when offer, acceptance, and consideration or a valid consideration substitute are present.
3.    If a contract is made upon a mistake of material fact (subject-matter of the sale, the price, or some collateral fact materially inducing the agreement), then it is voidable. (Sherwood v. Walker)
4.    Substantive v. Qualitative  (Sherwood v. Walker)
a.    “If there is a difference or misapprehension as to the substance of the thing bargained for; if the thing actually delivered or received is different in substance from the thing bargained for, and intended to be sold, – then there is no contract.”
b.    “But if it be only a difference in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both of them, yet the contract remains binding.”
5.    Unconscionable and Palpable mistakes are the two ways to get out with mistake
a.    Unconscionable mistake – a mistake so big that it would be unjust to enforce a contract based on it
b.    Palpable mistake – a mistake big enough that it is reasonable to say that the other party should have know
6.    Mistake by Both Parties at the Time the Contract was Made
a.    R2d § 152: When Mistake of Both Parties Makes a Contract Voidable
i.      Where a mistake of both parties at the time a contract was made as to the basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154. (When both parties are mistaken as to a material fact, the adversely affected party can void the contract so long as he doesn’t bear the risk of mistake under § 154)
ii.     In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
b.    Breaking Down R2d § 152 (and § 154)
i.      Was there a mistake by both parties at the time the contract was made?
ii.     Is the mistake as to the basic assumption on which the contract was made?
iii.    Does the mistake have a material effect on the agreed exchange as to upset the very basis for the contract?
iv.   If yes to all, the contract is voidable by the adversely affected party UNLESS
A)   The risk is allocated to him by agreement of the parties, OR
B)   He has limited knowledge and knows it and treats it as sufficient, OR
C)   The risk is allocated to him by the court because it is reasonable
7.    Mistake by One Party at the Time the Contract was Made
a.    R2d § 153: When Mistake of One Party Makes a Contract Voidable
i.      Where a mistake of one party at the time a contract was made as to the basic assumption on which the contract was made has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and (When one party is mistaken as to a material fact and is adversely affected, he may void the contract so long as he doesn’t bear the risk of mistake under § 154 AND)
A)   the effect of the mistake is such that enforcement of the contract would be unconscionable, or (enforcing the contract as it is would be unconscionable or)
B)   the other party had reason to know of the mistake or his fault caused the mistake (the other party had reason to know of the mistake or caused it)
ii.     Note* Mistake by one party is harder to prove than mistake by both parties because when a mutual mistake is made, both parties contributed and so it is more likely that they both don’t want to be bound to the contract.
b.    Breaking Down R2d § 153 (and § 154)
i.      Was there a mistake by one party at the time the contract was made?
ii.     Is the mistake as to the basic assumption on which the K was made?
iii.    Does the mistake have a material effect on the agreed exchange of performances that is adverse to him?
iv.   If yes to both, the contract is voidable by him UNLESS
A)   The risk is allocated to him by agreement of the parties, OR
B)   He has limited knowledge and knows it and treats it as sufficient, OR
C)   The risk is allocated to him by the court because it is reasonable, AND
D)   The effect of the mistake is such that enforcement of the contract would be unconscionable, OR
c.    The other party had reason to know of the mistake or his fault caused the mistake
8.    Bearing the Risk of a Mistake
a.    R2d § 154: When a Party Bears the Risk of a Mistake
i.      A party bears the risk of a mistake when
A)   The risk is allocated to him by agreement of the parties, or
B)   he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
C)   the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
ii.     Note* If one party bears the risk of a mistake, then the mistake is not a defense.
9.    Note* Sometimes both parties’ beliefs are in accordance with the facts, but their facts contradict one another (i.e. they have a misunderstanding). This is NOT a mistake.
a.    R2d § 20: Effect of Misunderstanding
i.      There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
A)   neither party knows or has reason to know the meaning attached by the other; or
B)   each party knows or each party has reason to know the meaning attached by the other.
ii.     The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if
A)   that party does no know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or
B)   that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party
b.    There is a misunderstanding when both fact sets could be true. So we employ the “Clueless Rule” (R2d § 20) – if you are more clueless than the other party then you may get your understanding.
i.      When one party believes one set of facts, and the other party believes another, and
A)   Both parties have the SAME LEVEL OF KNOWLEDGE, then there is no contract.
B)   One party has (or has reason to have) MORE KNOWLEDGE, then the clueless party gets his understanding of the contract.
10.Analyzing Mistakes
a.    Dupre’s Approach
i.      X made a mistake because [define mistake – a belief not in accordance with the facts – explain what the belief was under your facts] ii.     The mistake went to the basic assumption on which the contract was made because [look at Sherwood case and explain whether the mistake goes to the core/nature