Chapter 5 © 2011, Tiffany M. Garrick Contract defenses Chapter 5 © 2011, Tiffany M. Garrick

OBJECTIVES Explain what a defense to a contract means. Compare and contrast the defenses of fraud, duress, and mutual mistake. Describe the phrases caveat emptor and caveat vendor and why they are important in the study of contracts Understand the relationship between consumer protection laws and contracts.

“Meeting of the Minds” Recall that a contract is a LEGALLY BINDING and ENFORCEABLE AGREEMENT between two or more parties. The parties to an agreement must have the same understanding of the contractual terms and consideration for the contract. While it may appear that there is an outward manifestation of an agreement, there may not be a “meeting of the minds.”

If it is discovered that there are DIFFERING INTERPRETATIONS of the terms or IMPROPER REASONS for entering the bargain, then the courts may allow the “innocent” party to avoid the contract.

DEFENSES We will take a look at three common defenses that may be used by a party to avoid performance obligations under a contract: 1. Fraud 2. Duress 3. Mutual Mistake The satisfaction of all elements required for the above defenses makes the contract VOIDABLE, meaning that the innocent party, at its option, may avoid performing under the contract.

Fraud A KNOWING AND INTENTIONAL misstatement of the truth in order to achieve a desired action from another person. Intent to deceive is the defining element. Strongest contract defense. Contract is VOIDABLE at the option of the innocent party.

Elements of Fraud Statement made to another party; Regarding a MATERIAL fact; Goes to the heart of the contract. A fact is material if it is important to a party’s decision whether or not to enter into the contract. With intent to deceive; Wrongdoer must plan on the innocent party’s reliance on the wrongdoer’s untruthfulness. Distinguishes fraud from negligent misrepresentation Actual reliance on the statement; AND Innocent party harmed by the reliance.

Fraud v. Misrepresentation Requires proof of five (5) elements. Intent to deceive defines the cause of action. Requires proof of four (4) elements. No affirmative deceptive intent required. Liable where could or should have known of the truth regarding the material fact but did not ascertain that truth before relating the falsity to the innocent party. “Reckless disregard” for the truth.

Duress Freedom of contract requires that the parties freely entered into the agreement and there was a fair bargaining process. In the case of duress, there has been some sort of FORCE or COERCION by the inducing party. Various kinds of duress: Physical Emotional/Mental Economic Subjective standard applies: court will place itself in the innocent party’s shoes. Reasonableness to a third party is irrelevant! (no objective standard)

Types of Duress Physical Duress – threat of physical harm Example: Vito, a rather old-fashioned and protective father, finds out that his daughter Sophia has been impregnated by Dan. Vito confronts Dan and threatens to “break his legs” if Dan doesn’t “do right” by his daughter and marry her. Emotional/Mental Duress – threat of harm to a party’s overall well-being or a threat of harm to loved ones that induces action on the part of the threatened party. If there is a close, fiduciary relationship between the parties, duress is referred to as “undue influence,” which is another contract defense.

Economic Duress – threat of harm to a party’s financial resources unless demands are met. Examples: taking away money/assets; refusing to give earned financial rewards; threats to fire *Note that the coercion must be a WRONGFUL THREAT. For instance, it is wrong to ask an hourly employee to work overtime without pay. A different result would be reached if the company requested an employee sign a covenant not to compete or else be fired. A company has a legal right to request an employee sign a reasonable covenant; therefore, it cannot constitute a wrongful act to show duress.

Mistake Where one or both parties are innocently mistaken as to the subject matter of the contract, there is a mistake. Mistakes can be made by both parties, a mutual mistake, or made by only one party, a unilateral mistake.

A Note On Unilateral Mistake Generally, contract law turns a deaf ear on unilateral mistakes (remember the objective standard). Unilateral mistakes can be subjective, and therefore, are disfavored as a basis for granting a remedy. BUT, where there is some detectable or obvious error, unilateral mistake may result in the possibility of avoidance of the contract.

Mutual Mistake This kind of mistake goes to the very foundation of the contract – the consideration. In order for mutual mistake to exist, BOTH parties must have a DIFFERENT CONCEPT of what they are bargaining for. There must be an actual mistake on the part of both parties that goes to the very heart of the contract, not just a disagreement as to the meaning of the terms. Where there is a disagreement on the meaning of the terms, the rules of contract construction will apply.

Things That WILL NOT Constitute A Valid Defense Poor judgment Intoxication Nondisclosure, in the absence of an affirmative duty to disclose the truth. Puffery

Caveats Consumers get certain protections when it comes to contracts (e.g., consumer protection laws) Traditionally, law took a caveat emptor (let the buyer beware) approach. Modern trend is to move away from that approach toward a more consumer-protective approach of caveat vendor (let the seller beware).