Unit 7 AS: Analyze a Contractual Situation

BLAW 2051 Unit 6

Contractual Defenses

Legal Assent

When parties enter a contract, not only must there be the required four elements of contract, but the parties must also have what the law terms a 'meeting of the minds.' Requiring that contracts have legal assent makes business transactions more dependable. There are four obstacles to legal assent: Mistake, Misrepresentation, Undue Influence, and Duress.

A mistake is an erroneous belief about a material aspect of a contract at the time a contract is made. In the case of a unilateral mistake, where only one party makes a mistake about a material fact in the contract, the contract is still valid. However, if both parties make a mistake about a material fact in a contract, legal assent is absent as the parties really didn't agree to the same deal as the other. In such a scenario, this is a mutual mistake, and it renders the contract voidable by either party. Such a contract can also be rescinded by a court.

A misrepresentation also prevents legal assent in a contract. A misrepresentation takes place when a material fact regarding a contract turns out to be untrue. Misrepresentations can be innocent, negligent, or fraudulent.

· An innocent misrepresentation is a false statement about a material fact in a contract. The party that made the statement believed the statement to be true. The party injured by the false statement can rescind the contract, but cannot collect damages as the statement was made with no knowledge of its falsity.

· A negligent misrepresentation is a false statement about a material fact in a contract, made by a party that failed to take steps to assure the statement was true. The party injured by the false statement may rescind the contract and may be entitled to damages.

· A fraudulent misrepresentation is a false statement about a material fact in a contract, made with a deceitful purpose. If the innocent party justifiably relies on the false statement in deciding to enter the contract, the innocent party is entitled to rescind the contract and recover damages.

Undue influence in contracting can result when a dominant party exploits a special relationship they have with a subservient party in an effort to induce that subservient party to contract. When a party contracts with someone to whom they have yielded a high degree of trust, undue influence can arise. The trusting nature of the relationship makes the subservient party susceptible to influence in contracting with the dominant party. If a court finds that a contract was the result of undue influence, the court will order that the contract be rescinded.

Finally, duress may interfere with legal assent. In a situation where a party enters a contract under duress, they are no longer acting of their own free will. Duress can result from physical harm, financial or economic harm, or unlawful threats. In a situation where a party enters a contract under duress, that party can void the contract, or a court can order that the contract be rescinded.

Written Contracts

Many of the contracts that we enter in our lives, and that businesses enter through their operations, are oral. Students of business law are often surprised to learn that contracts need not be written, but quickly identify the many examples of oral contracts they've experienced in their own personal and work lives. Even so, written contracts provide several advantages over oral contracts, including that they are just easier to prove in court. For this and many other reasons, some contracts are required to be in writing to be enforceable.

The Statute of Frauds

When a contract is subject to the statute of frauds, that contract must be written. The statute of frauds originated in English common law, with the purpose of preventing fraud in contracting. The "statute of frauds" is the term given to contracts that must be written, but there isn't a single statute of frauds. Instead, these statutes are codified under state law, and often appear in several different statutes within the state statutory codes.

Since the statute of frauds is state law, there are differences in treatment among the several states. There are, however,

common areas of contracting that may be governed by the state statute of frauds.

· Contracts that Cannot Be Completed within a Year – Commonly called the "one-year rule" this statute requires that a contract that cannot possibly be completed within one-year from the time the contract is created must be written. Note that this is a bright line; the one-year rule does NOT apply to contracts that can be completed within the year, even if such performance is unlikely.

· Contracts Made in Consideration of Marriage – Contracts that promise something other than a promise to marry must be written to be enforced. For instance, if a couple decides to marry, that promise need not be written. However, if one of the parties promises the other party a car in exchange for marriage, that contract must be written. This aspect of the statute of frauds relates to pre-nuptial agreements where the agreement to marry is accompanied by several other agreements pertaining to property within the marriage or on dissolution of marriage.

· Contracts to Pay the Debt of Another Party – Contracts where one party agrees to pay a debt for another party must be written. Students of business law typically think of these agreements as those that require a co-signor, but here they are called 'secondary obligations' or 'secondary promises.' Such contracts will bind the secondary obligor to pay a debt even when that party gets no benefit from the original contract.

· Contracts Relating to Interests in Land – Contracts relating to interests in land, including the soil, structures, improvements, etc. must be written.

· Contracts for the Sale of Goods in Excess of $500.00 – The Uniform Commercial Code (UCC) requires that sales of goods totaling in excess of $500.00 require a written contract. This contract must recite the quantity of the goods, and the signature of the party against whom enforcement is sought.

Generally speaking, if a contract must be written, a court will not enforce that contract unless it is, in fact, written. But, there are some important exceptions to the statute of frauds. If a party, under oath, admits that a contract exists, that admission can serve to prove a contract to the satisfaction of the court even if there is no written version of the contract. The doctrine of promissory estoppel, which was introduced in the chapter on Consideration, can operate to allow a court to enforce an oral promise that was otherwise subject to the Statute of Frauds. There are special exceptions under the UCC for specially manufactured goods. And finally, partial performance of an oral contract can be the proof that a court requires to enforce an oral agreement.

Conclusion

Legal assent is an essential aspect of contract law, as it provides that a meeting of the minds has occurred in a contract. The Statute of Frauds similarly operates to bring a different type of trustworthiness to contracts.

(CSLO 1, CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business law.

Chapter 17 – Legal Assent Chapter 18 – Contracts in Writing