Defenses To Formation

I love contracts but most people hate them.  I was warned before starting 1L that I would hate contracts and that it would be the most difficult 1L subject to understand.  To a certain extent those warnings were correct but they were also very wrong.  Once you understand that contracts analysis has to happen in a specific format it was all downhill!

We all know that when evaluating a fact pattern for a valid enforceable contract we start at the top and work our way down.  We cover mutual assent; offer, acceptance and consideration.  You can have all the offer, acceptance, and consideration you want but if you have any defenses to the enforcement of that contract you may still have an unenforceable contract.

What Defense Will You Find

An agreement may still be unenforceable if there are problems of capacity to contract, if the agreement is a product of illegality, unconstitutionality, fraud, mistake, or undue influence or if the agreement fails to comply with the Statute of Frauds.  Yes, we will cover the Statute of Frauds, more often known as SOF.

Capacity is an easy place to start when discussing defenses to formation.  Generally, capacity issues are either due to the age of one or both of the parties or due to the mental capacity of one or both of the parties.  This means if you have a child or a crazy/drunk person entering into contracts you may defenses to enforcement to bring up.

If capacity issues arise due to mental reasons then your discussing mental incompetence.   Mental incompetence is shown when a party cannot comprehend the legal effect of the agreement or if the incompetence results from insanity or intoxication.  The key with mental incompetence rests in when the contract was formed.  If the party was mentally incompetent at the time the agreement was made its void from the get but, if the party entered into the contract and then became mentally incompetent the contract is voidable.  The exception to this is that mentally incompetent people will be held liable for necessities.

Anytime you see an age in a fact pattern it is put there for a reason!

In most States, a person is a minor until they reach 18 years old.  A contract entered into by a minor is voidable by the minor but not the other party.  As is the case with almost all legal issues there are some additional rules to this simple theory.

If the child turns 18, thus reaching the age of majority, and manifests an intent to be bound to the contract, the manifestation of intent will be treated as a ratification of the contract and it will become fully enforceable.  As with the mentally incompetent, minors are also held liable for necessities.

Oh No You Didn’t

Illegality, unconscionability, fraud, mistake, and undue influence all fall into our next set of defense to formation.  These defenses can often get confusing so making sure you cover them thoroughly will help ensure you don’t lose points on essays.

If the subject matter or consideration of a contract becomes illegal after formation of the contract, the subsequent illegality discharges all obligations to perform and makes the contract void.  Unconsciounablity will be found as a matter of law if a contract is one-sided and the product of unequal bargaining power.

Fraud is present when one party to an agreement was induced by a material misrepresentation by the other party and will not be enforced.

Duress is present when a party’s assent was compelled by force or threat of force such that the party was not able to exercise free will and will not be enforced.

Mistake is one of the most often confused defenses that often arises in fact patterns.  Mistake can be unilateral or mutual.  How could any of us forget Sherwood v. Walker and the case of the mutually mistaken farmers and their barren cow Rosie?

If only one party entered into the contract because of a mistake, no relief will be reason to know of the mistake.  Mutual mistake happens when both parties are mistaken as to granted unless the non-mistaken party knew or had a basic assumption of the contract, the mistake is of a material aspect of the subject matter, and the party asserting the mistake as a defense did not assume the risk of the mistake.  When all these elements align the contract will be voidable; but very rarely does that happen.

Statute of Frauds

The Statute of Frauds requires that certain contracts be evidenced by a sufficient writing and signed by the party to be charged.  We have all written this statement a million times and many of us probably have nightmares about the SOF.   On its face it seems to be a pretty easy rule to apply but where it gets complicated is when you start delving into merchants and exceptions.

Lets start our discussion on SOF by identifying the types of contracts that fall within the statue.  The only mnemonic that I ever used in 1L was MYLEGS and is very helpful in memorizing these contracts.

  • M – Contracts in consideration of marriage
  • Y – Contracts that cannot be performed in one year
  • L – Contracts for the sale of land
  • E – Contracts by executors of estates
  • G – Contracts for the sale of goods $500 or more
  • S – Contracts for suretyships

When I am trying to explain SOF to students I use the analogy of Pac Man.  The SOF is like the Pac Man of the contract world.  In order to move your contract out of Formation and into Performance you have to satisfy Pac Man.  Pac Man requires that contracts for MYLEGS be in a sufficient writing signed by the party to be charged or else he eats it; and you have nothing.  The only way to make Pac Man happy, ensuring he lets your contract pass by unscathed,  is to satisfy the SOF as stated above or to show partial performance.  For a more detailed discussion on SOF see our article; Statute of Frauds?

Parol Evidence Rule

The Parol Evidence Rule bars introduction of evidence of prior or contemporaneous agreements which contradict the terms of a complete integrated written agreement.  Therefore, if you make it past Pac Man with a written agreement but there is a party who claims additional oral conditions not included in the writing, you have to determine if the Parol Evidence Rule bars admission of the statements or allows for these statements.

How to determine if a written agreement is a complete integration?

  • Look at the written agreement
  • Look at the circumstances surrounding the agreement
  • Identify any prior or subsequent expressions of the parties
  • Keep an eye out for merger clauses

If a contract contains a merger clause the court will generally find this as conclusive evidence of a complete integration.

Partial Integration. A partial integration can be found where not all matters of the contract have been fully determined and in some cases where some matters have been fully determined and others not so much.

There are exceptions to the Parol Evidence Rule just like every other rule in 1L; to show fraud, illegality, duress, undue influence, mistake, or ambiguous language.

Keep your eyes peeled for our next article on Parol Evidence if you liked this article!

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