Mastering the Bar Exam: Contracts & Sales Law - Defenses to Contract Formation (Module Two)

1. Mistake.

Unilateral and Mutual Mistake.

A mistake can significantly impact the validity of a contract. It refers to a belief that is not in accord with existing facts. Mistakes can be categorized into two types:

Unilateral Mistake: This occurs when one party is mistaken about a material fact regarding the contract. Generally, a unilateral mistake does not render a contract voidable unless the other party knew or should have known of the mistake or if the mistake was due to a mathematical error made inadvertently and without gross negligence.

Raffles v Wichelhaus (1864), known as the "Peerless" case, is a classic example of a mutual mistake where both parties had a different understanding of the contract's subject matter.

Mutual Mistake.

Mutual Mistake: This happens when both parties have a mistaken belief about a basic assumption on which the contract is based. If the mistake significantly impacts the agreed-upon exchange, the contract may be voidable by the adversely affected party.

Sherwood v Walker (1887): In this case, a mutual mistake about the fertility of a cow led to the contract being voidable.

2. Misrepresentation and Nondisclosure.

Misrepresentation occurs when a false statement of past or present fact is made, causing the other party to enter into the contract.

Fraudulent Misrepresentation: This involves intentional deceit for personal gain. The elements include a false statement of material fact, knowledge or belief that the statement is false, an intention to induce the other party to act, justifiable reliance by the deceived party, and damages resulting from the deception.

Negligent Misrepresentation: This occurs when the party making the statement should have known it was false.

Innocent Misrepresentation: This involves a false statement made without knowledge of its falsity but with due care. It allows for rescission of the contract but not damages.

Nondisclosure can sometimes equate to misrepresentation, especially in cases where disclosure is necessary to correct a previous assertion, where one party knows the other party is under a mistaken belief, or in a relationship of trust and confidence.

3. Duress and Undue Influence.

Duress involves coercion by physical or economic threat, rendering the agreement voidable.

Elements of Duress: The elements include a threat to harm or exert improper pressure, a lack of reasonable alternative for the threatened party, and the threat actually induces the contract.

Remedies: The primary remedy for duress is rescission of the contract.

Undue Influence occurs when one party takes advantage of a position of power over another person, unduly persuading them to enter into a contract.

Elements of Undue Influence: This includes a relationship between the parties either of trust or where one party is dominant, and the dominant party uses this position to unfairly persuade the other party.

Remedies: Like duress, the main remedy is rescission.

4. Unconscionability.

A contract is unconscionable when it is so one-sided that it is oppressive or unfairly prejudicial to one party.

Procedural Unconscionability: This involves unfairness in the bargaining process, such as a lack of negotiation opportunity, hidden terms, or a significant imbalance in the parties' bargaining power.

Substantive Unconscionability: This refers to the terms of the contract itself being excessively unfair or one-sided.

Williams v Walker-Thomas Furniture Co. (1965): This case illustrates substantive unconscionability, where a contract included a highly unfavorable term that was enforced in a manner that was considered unconscionable.

In contracts law, defenses play a critical role in ensuring that agreements are entered into freely and fairly. Understanding these defenses, their elements, and their remedies is crucial for any aspiring attorney.