Session 14: Defenses to Formation

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I. Overview of Defenses to Formation

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General Framework

• These are defenses to formation (covered this semester)
• Distinguished from defenses to enforcement (next semester)
• Previously covered defenses:
  • Capacity (minors, insanity)
  • Necessities of life exception
  • Age of majority: common law = 21 years; modern = 18 years
  • Cognitive test and product tests for insanity

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II. Mistake

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A. Types of Mistake

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1. Unilateral Mistake

Definition: One party makes a mistake Rule: Unilateral mistake is a defense to formation IF the non-mistaken party knew or should have known of the mistake Elements:

• Mistake relates to certain definite terms (CDTs)
• Mistake is of important/material nature
• Non-mistaken party had actual or constructive knowledge

Example:

• Contract to ship to “Paris”
• One party thinks Paris, Texas; other thinks Paris, France
• If other party knew of the misunderstanding → unilateral mistake defense applies

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2. Bilateral/Mutual Mistake

Definition: Both parties make a mistake Rule: Mutual mistake is ALWAYS a defense to formation Requirement: Mistake must relate to certain definite terms (CDTs)

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B. Critical Limitation: Assumption of Risk

Key Rule: Mistake can act as a defense to formation AS LONG AS there was NO assumption of risk Definition of Assumption of Risk: When a party contractually agrees to assume all risk related to the mistake Examples:

1. Shipping Context: Contract states “you assume all risk with shipping to destination” → even if innocent mistake about Paris, TX vs. Paris, France, party may be bound
2. Construction Context: Contractor assumes all risk → if earthquake destroys project or unexpected conditions arise (gas, etc.), contractor must rebuild/handle at own expense

Note: If a party assumes the risk, they are stuck regardless of whether the other party knew or didn’t know about the mistake

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C. Void vs. Voidable Contracts

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Void Contracts

• Automatically invalid from the beginning (ab initio)
• Examples:
  • Illegal contracts (contract to distribute cocaine, contract to sell minors)
• Cannot be enforced; don’t need court action to void

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Voidable Contracts

• Valid unless a party takes action to void it
• Applies to: mistake, capacity, duress, undue influence, misrepresentation
• Remains valid if no party raises the defense
• Can be ratified

Rationale for “Voidable”:

• Contract remains valid if nobody raises the issue
• Party may choose to proceed despite mistake (not worth litigating, or advantageous to continue)
• Contract is valid until party takes steps to prove mistake/defense existed

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D. Ratification

Definition: A voidable contract may become enforceable if a party later ratifies it by conduct or statements Requirements:

1. The grounds for voiding must be removed
2. The aggrieved party must intend to ratify the contract

Ways to Show Ratification:

• Intentionally accepting benefits under the contract
• Remaining silent or not objecting
• Remaining in the contract for long period after opportunity exists to have it declared void
• Affirmatively acknowledging the contract
• Performing under the contract

Exam Tip: Students frequently forget to discuss:

1. Assumption of risk
2. Ratification

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III. Duress

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A. Physical Duress

Definition: A subjective defense in which the asserting party must establish that they were completely broken down to the point that the contract was NOT their choice Key Characteristics:

• Subjective defense (gets into mind/intent of party, unlike objective theory of contracts)
• Burden of proof on party asserting defense
• Requires complete breakdown of will

Standard: Not mere pressure like “I’ll be at your door every day until you sign” - requires actual physical force or threat Classic Example: Gun to someone’s head; literally physically forcing someone to sign Test Priority: Physical duress rarely tested (too obvious); economic duress is the focus

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B. Economic Duress

Full Definition: A subjective defense in which the asserting party must establish that:

1. There was an existing contractual relationship, AND
2. The other party refuses to perform their contractual obligation, AND
3. There are no reasonable alternative choices available

Critical Element - Source of Duress: The duress must come from the DEFENDANT/other party to the contract

• NOT from third parties
• NOT from general business circumstances
• NOT from party’s own financial difficulties

Exam Trap:

• Fact pattern shows real economic hardship/duress
• But duress comes from party’s own circumstances (bankruptcy, business failing, neighbor causing problems)
• NOT from the defendant = NO economic duress defense
• Approximately 25-30% of students fall for this trap on exams

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Economic Duress vs. Modification

Key Distinction: Need to distinguish economic duress from fair and reasonable contract modification UCC Rule: UCC allows reasonable, fair modification without need for consideration Analysis Required:

• Is this legitimate modification due to unforeseen circumstances?
• OR is this party trying to “stick it” to the other party?

Example Context: Supplier says they can’t perform unless paid more money

• Could be: legitimate modification (unforeseen costs, both parties working to get job done)
• Could be: economic duress (wrongful refusal to perform, extracting higher price)

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C. Wachovia v. Fullerton County National Bank

Facts:

• Stephen Barker and Alfred Cheney started business to restore old buildings
• Borrowed money from bank
• Bank promised to help sell one building but removed plaintiffs from property and took control
• Bank pressured them into signing agreement giving up rights to sue
• Bank threatened to stop lending and demand immediate repayment of all loans if they refused
• Plaintiffs felt they had no choice and signed
• Later sued for fraud

Issue: Can a contract be canceled if signed under force or threat? Rule - Three Elements of Economic Duress (Federal Common Law):

1. Plaintiff involuntarily accepted defendant’s terms
2. Circumstances permitted no alternative to acceptance of defendant’s terms
3. Circumstances were result of coercive act by defendant

Holding: Contract can be canceled for duress, but material question of fact exists requiring trial (not summary judgment) Key Analysis - Ratification: Court extensively discusses ratification after duress Ratification After Duress - Requirements:

1. The duress must be removed
2. The aggrieved party must intend to ratify the contract

Key Quote (Page 461):

“A contract executed under duress is not per se void, but merely voidable. Thus, once the duress is removed, the party claiming duress must choose either to promptly repudiate the contract, or to acquiesce to its terms pursuant to the doctrine of ratification.”

Duress Removed - Meaning:

• Once party has opportunity to object without duress (e.g., other suppliers available, no more threats)
• If party continues to perform/accept benefits, duress is “removed”
• Can no longer claim duress defense

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D. Austin Instrument v. Loral Corporation

Facts:

• Loral Corporation got contract from Navy to make radar sets
• Subcontracted parts to Austin Instruments
• When Loral got second Navy contract, Austin demanded to make all parts
• Austin threatened to stop delivering parts for first contract unless Loral agreed to pay more
• Loral couldn’t find another supplier in time to avoid breaking Navy contract
• Loral agreed to Austin’s price increases
• After fulfilling Navy contracts, Loral refused to pay increased prices, claiming economic duress

Issue: Whether contract can be canceled if one party was forced to agree due to wrongful threat that prevented free choice Holding: Yes, contract can be canceled if forced to agree due to wrongful threat Elements Shown:

1. One party threatened to break contract unless other party agreed to something more
2. Threatened party must show they couldn’t get goods from another supplier
3. Usual remedies for breach wouldn’t work (adequate substitute goods not available)

Key Legal Principles (Page 464):

1. General Rule: “A contract is voidable on the grounds of duress when it is established that the party making the claim was forced to agree to it by means of wrongful threat precluding exercise of free will.”
2. Economic Duress Shown By: “Proof that immediate possession of needful goods is threatened”
3. Critical Limitation: “However, a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress.”
4. Additional Requirements: “It must also appear that the threatened party could not obtain the goods from another source of supply, and that the ordinary remedy of an action for breach of contract would not be adequate.”

Application:

• Must show no other reasonable source of supply
• Can’t just rely on familiar suppliers; must make reasonable effort to find alternatives
• Not required to go to extreme lengths (China, Timbuktu) but must check reasonable alternatives

Pre-Existing Duty Rule Connection:

• Should always consider pre-existing duty rule when one party tries to modify contract terms
• Alternative cause of action: Party already obligated to perform A, B, and C
• Asking for more money for same performance = potential pre-existing duty violation

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E. Problem: CAPPS v. Georgia Pacific (1969)

Facts:

• Loral entered fixed-price contracts with Navy for electronic equipment
• Contract prices based on Navy’s calculation of production costs
• Navy didn’t adequately calculate rental value of Loral’s factory
• Despite Loral’s objections, Loral entered into contracts
• Loral now seeks additional compensation, alleging duress
• Argues: dealt almost exclusively with government, would have committed “financial suicide” by refusing Navy’s price

Result: Judgment for defendant (Navy) Reasoning:

• Duress existed but NOT of any fault of Navy
• Navy didn’t force Loral to enter contract
• Navy didn’t change terms of existing contract
• No wrongful act by defendant
• Party that caused duress (Loral’s own circumstances) ≠ party being sued
• Wanting the contract doesn’t mean defendant committed duress

Exam Testing Point:

• Shows economic duress where hardship exists but caused by plaintiff’s circumstances, not defendant’s wrongful act
• Common MBE trap answer

What Would Make This Economic Duress?:

• If Navy and Loral had existing contractual relationship
• Navy exclusively dealt with Loral and knew this
• Navy ordered additional 500 units
• Navy forced old price knowing it would cause losses/bankruptcy
• Navy not dealing fairly = could argue economic duress

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F. Problem: Pregnancy Termination/Will Disinheritance

Facts:

• Plaintiff’s father had will treating three children equally
• Plaintiff informed father she was pregnant, no intention to marry
• Father threatened: terminate pregnancy or be disinherited
• She refused; within days he changed will
• Shortly after, he agreed: terminate pregnancy → will would be restored to original form
• She complied
• He died before executing new will
• She sued estate and siblings
• Siblings raised defense: she was coerced into agreement, therefore void/avoidable for duress

Analysis:

• Father was the one exerting coercion on daughter
• Daughter was not coercing father
• Father cannot raise duress defense (he was the coercing party)
• Third parties (siblings) deriving benefit cannot raise duress defense on father’s behalf

Additional Issues:

• Daughter had no legal right to revoked will (inheritance is a gift)
• Arguably not duress because she had alternatives (didn’t have to rely on father’s will)
• Could be challenged on public policy grounds (not duress)

Result: Defense fails - contract was formed Contract Analysis:

• Unilateral offer accepted by conduct
• Father: “If you do X, I’ll give you inheritance I had given before”
• Daughter complied (performed)
• Valid contract despite troubling circumstances

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IV. Undue Influence

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A. Definition and Elements

Full Definition: Was the party asserting the defense:

1. Susceptible to undue influence of the other party, who had
2. Both the opportunity AND the disposition to exert undue influence
3. Which resulted in an unnatural transaction

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Key Elements Explained

Susceptibility:

• Party must be vulnerable/susceptible to influence
• Often elderly, mentally compromised, or in dependent relationship

Opportunity + Disposition:

• Other party must have BOTH:
  • Opportunity: position, access, circumstances allowing influence
  • Disposition: inclination, motivation, character to exert influence

Unnatural Transaction:

• Wholly one-sided
• Totally unreasonable
• No court could reasonably say transaction is fair

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B. Typical Relationships

Common Relationships:

• Husband and wife
• Parent and child
• Caregiver and elderly person
• Church member and church leaders
• Professional and client (CPA, attorney, etc.)
• Any relationship of confidence and trust

Characteristics:

• Parties know each other
• Have existing relationship
• One has superior authority or mental advantage
• One party susceptible; other uses relationship to advantage

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C. Undue Influence vs. Economic Duress

Key Distinction:

• Economic Duress: Does NOT require susceptibility
  • Requires: wrongful act by defendant + no reasonable alternatives
• Undue Influence: REQUIRES susceptibility
  • Requires: susceptibility + opportunity + disposition + unnatural result

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D. Francois v. Francois (1971)

Facts:

• Victor Francois (plaintiff) married Mary Jane Francois (defendant)
• Victor was wealthy, owned substantial property
• During marriage, Victor:
  • Put money in joint account (both names)
  • Bought expensive house (both names)
  • Adopted her children
  • Conveyed entire interest in rental properties to her
  • Conveyed substantial portfolio/interest in family businesses to her
  • Gave her power of attorney over public stocks
  • Bought her a boat
• In 1974, Jane retained divorce attorney
• Without Victor’s knowledge, presented property settlement and separation agreement
• Pressured him to sign to avoid divorce
• Victor signed against attorney’s advice (attorney said it would be “financial suicide”)
• Couple years later, she left him and divorced him

Procedural History:

• Victor sued ex-wife
• He won at trial
• She appealed
• Appellate court affirmed

Issue: Whether document was induced by undue influence where relationship has unequal balance of power Holding: Yes - undue influence exists where:

• Relationship of trust between two parties
• Results in unequal balance of power
• More powerful party uses dominance and influence to persuade weaker party to act against his/her interests

Court’s Analysis:

• Orchestrated event from day one
• All dates/timeline shows planning
• She had susceptibility, opportunity, disposition
• Transaction wholly one-sided/unnatural

Key Legal Principle (Page 472):

“The degree of persuasion that is necessary to constitute undue influence varies from case to case. The proper inquiry is not just whether the persuasion induced the transaction, but whether the result was produced by the will of the victim being overcome by the person exerting undue influence.” - Restatement of Contracts § 497

Important Limitation (Page 475):

“It is true that exerted influence cannot be branded as undue merely because it is persuasive and effective.”

Explanation:

• If someone is persuasive, very effective, argumentative, and other party gets tired and agrees = NOT undue influence
• Must subvert free will
• Must destroy free agency

“A finding of undue influence is justified only where the actor’s free agency and will has been destroyed.”

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E. Methodist Mission Home v. NAB (1970, Texas)

Facts:

• Plaintiff: unwed mother
• Resided at Methodist Mission Home for over 15 weeks
• Home operated by United Methodist Church
• Home’s policy: encourage mothers to release children for adoption
• Initially intended to give up child (noted in admission application)
• After birth of son, expressed desire to keep him
• Led to intensive counseling sessions by Ms. Burns (home’s agent)
• Plaintiff claimed sessions were coercive:
  • Emphasized negative consequences of keeping child
  • Accused her of selfishness
  • Questioned her right to keep child
  • Focused only on negatives, no balanced view
  • Led to emotional distress
• Eventually signed adoption consent documents
• Later challenged validity based on undue influence

Trial Court: Ruled for plaintiff, voided adoption consent based on undue influence Issue: Whether execution of adoption consent documents resulted from undue influence, rendering consent revocable Holding: Yes - sufficient evidence supported jury finding of undue influence Reasoning:

• Plaintiff was vulnerable (unwed mother)
• Subjected to concentrated effort to convince her to give up child
• Counseling aligned with Home’s policy to encourage adoption
• Counseling sessions one-sided (only negatives)
• Emotional distress during critical, vulnerable period (after childbirth)
• Influence went beyond mere persuasion
• Effectively subverted plaintiff’s free agency

Additional Consideration:

• Relationship of confidence and trust (church member/faith-based institution)
• Person of faith acts differently with church teachings
• Court likely considered this relationship in finding undue influence

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V. Unconscionability

Definition: Although parties objectively and subjectively agreed to terms, the terms are so unconscionable (wholly one-sided) that the court of law will NOT enforce the contract Key Characteristics:

• Contract otherwise validly formed
• Both objective and subjective agreement exists
• Terms are extremely one-sided
• Beyond what conscience allows
• Court will refuse enforcement

Standard: Court literally says “this is beyond conscious” - so unfair that enforcement would shock the conscience

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VI. Misrepresentation

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A. Types of Misrepresentation

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1. Negligent Misrepresentation

• Must be of material fact (CDT - certain definite terms)
• Requires duty to the other party
  • Duty of candor, honesty, truthfulness
  • Duty of good faith and fair dealing
  • Example: Duty by virtue of marriage relationship

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2. Intentional Misrepresentation (Fraud)

• Must be of material fact (CDT)
• Does NOT require duty
• Can “screw anybody” in a contract
• When filing lawsuit: usually called “fraud”
• May also include related tort claims:
  • Negligent infliction of emotional distress
  • Intentional infliction of emotional distress

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B. Defense Requirements

General Rule: Misrepresentation (whether intentional or negligent) may be a defense to formation as long as the other party acted reasonably Reasonableness Standard: Objective inquiry into whether reliance was justified

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VII. Fraud

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A. Fraud in the Factum

Definition: If the party asserting the defense:

• Did NOT know, NOR
• Should have known, that
• They were entering into a contract by signing the document

Result: Contract is VOID (not voidable) Classic Example:

• Blank piece of paper presented for signature
• Person signs bottom of paper
• Later, contract details filled in above signature
• Person didn’t actually sign contract - signed something else (blank paper or one sentence)

Effect: Contract is void ab initio (from the beginning), not merely voidable Distinction from Other Defenses:

• Most defenses = voidable
• Fraud in factum = void
• Cannot be ratified (contract never existed)

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B. Real-Life Examples

Family Context:

• Child says: “Daddy, sign here for hospital colonoscopy procedure (to authorize pulling plug or not)”
• Father doesn’t know he actually signed away half his life/assets in same document
• Common with family members taking advantage

Contractor Context:

• Contractor says unforeseen things might need extra material
• “Just sign here, details aren’t spelled out”
• Person trusts contractor (recommended by someone they know)
• Contractor later fills in language

Legal Context:

• Lawyers can do this too
• Protection:
  • Initial every page
  • Don’t leave lawyer’s office without copy of every page of retainer agreement
  • Prevents lawyer from switching pages or claiming “you never saw this page”

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VIII. Misrepresentation & Warranty Cases

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A. Vokes v. Arthur Murray (Dance Lessons)

Facts:

• Audrey Vokes convinced by J.P. Davenport (dance school owner) to buy month of dance lessons
• Over next 18 months, bought 14 more courses
• Spent over $31,000
• Vokes sued, claiming they tricked her by lying about how good she was at dancing
• Davenport argued: just giving opinion (allowed)

Trial Court: Dismissed Vokes’ case Issue: Whether someone’s opinion can be considered a lie if they know more about the truth than the person to whom they’re speaking Holding: Yes - opinion can be a lie if person giving it knows more about truth than listener Reasoning:

• Usually lies only actionable if about important facts
• Rule doesn’t apply if:
  • One party knows more than other, OR
  • Trickery involved
• Davenport and associates knew more about Vokes’ dancing ability than she did
• Their opinions about her progress were treated as facts
• Superior knowledge = opinion becomes actionable misrepresentation

Result: Trial court reversed; Vokes’ appeal granted Key Legal Principle (Page 488):

“Where parties are dealing on a contractual basis, at arm’s length, with no inequalities or inherently unfair practices employed, the court will, in general, leave the parties where they find themselves.”

Application:

• Unless you really screw somebody over
• If arm’s length negotiation occurred
• Court won’t intervene just because one party doesn’t like result

Why Frequently Tested: Example of exploitation/taking advantage; appears often in bar exams

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B. Syester v. Banta (1965)

Facts:

• Defendant (Walker) and wife purchased land in 1975
• Attempted to sell in 1976
• Multiple listing agreement stated:
  • 580 feet of highway frontage
  • Over $1 million in gravel on property
• New listing: same frontage, but gravel reduced to 80,000 cubic yards
• After appraisal, plaintiff offered $360,000
• Needed property for gravel extraction business
• Finally agreed to pay $385,000
• Shortly after closing, plaintiff started gravel removal
• After investing $12,000 in gravel scale, discovered:
  • Frontage actually only 450 feet
  • Only 6,000 yards of gravel (not 80,000)
• Plaintiff stopped paying (had paid $99,000 of$385,000)
• Sued for rescission and restitution

Trial Court: Denied rescission and restitution; ruled for defendant (claimed plaintiff didn’t rely on misrepresentations) Issue: Whether plaintiff entitled to rescission and restitution for land purchased under false statements Holding: Yes - plaintiff entitled to rescission because:

• Defendant made misrepresentation
• Plaintiff relied on misrepresentation
• Misrepresentation was material to contract

Key Legal Rule - Three Requirements for Rescission (Page 480): To determine whether entitled to rescission and restitution based on misrepresentation:

1. Must determine whether plaintiff actually relied on statement
2. Statements were material
3. Reliance was justified (objective reasonableness)

Analysis of Materiality:

• Even though gravel/frontage not material element in 1977 purchase agreement itself
• Plaintiff relied on misinformation for gravel extraction as business profit
• Business profit was at issue
• Plaintiff interested in property for gravel extraction ONLY
• Therefore misrepresentation considered material

Caveat Emptor Rejected:

“The principle that the buyer alone is responsible for checking quality and suitability of goods before purchase does not apply”

Why?: Statements regarding frontage and gravel were:

• Material (as matter of law)
• Defendant considered them selling points
• Lying about frontage/gravel purposely falsified to sell

Justifiable Reliance Analysis:

• Key question: Who is the speaker?
• Should you justifiably rely on that speaker’s statement?
• MLS (Multiple Listing Service): Can reasonably rely on statements about square footage, bedrooms, pool, sauna
• Real estate agent: Lying about transaction is “big deal” - agents have duty of care to provide accurate information
• Manufacturer specs: Generally can rely (though gas mileage often inaccurate)

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C. Beachcomber Coins v. Boskett (Violin)

Facts:

• Karen Bentley responded to notice by Charles Slavik offering 1835 Bernardo violin for sale
• Slavik not expert or dealer
• Showed Bentley certificate from violin appraiser:
  • Estimated violin genuine
  • Valued at $50,000-$20,000
• Bentley inspected and played instrument
• Purchased for $17,500 ($15,000 immediately; remainder later)
• Bill of sale described model
• Bentley expressed satisfaction when paying balance
• About year later, learned violin might be inauthentic
• Expert confirmed value only $2,000
• Sued for breach of contract and mutual mistake

Issue: Is buyer entitled to damages for overpaying when both parties honestly mistook item as authentic? Holding: Yes - entitled to damages under:

1. Breach of express warranty, AND
2. Mutual mistake

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Breach of Express Warranty Analysis

UCC § 2-313 - Express Warranties by Affirmation, Promise, Description, Sample (Page 973): (a) Affirmation/Promise:

“Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.”

(b) Description:

“Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.”

(c) Sample/Model:

“Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.”

Application to Violin Case:

• By describing violin as genuine, Slavik warranted its authenticity
• Even though he acted in good faith
• Violin proven false = breach of warranty

Practical Applications of UCC § 2-313:

1. Used Car Context (CPO):
   • Lemon law may not apply to used cars
   • Alternative: Breach of express warranty
   • Example questions to dealer:
     • “How are the brakes on this car?”
     • Dealer: “Absolutely the best, better than [specific other car]”
   • NOT mere opinion (can fact-check comparison)
   • Actionable as warranty breach
2. Sample/Model (Subsection c):
   • Suppliers order goods without seeing final product
   • Buyer sees sample: “I love it, I want 500”
   • If final product doesn’t conform to sample: breach of warranty

Causes of Action Available:

• Fraud
• Misrepresentation
• Negligent misrepresentation
• Breach of warranty (powerful cause of action)

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D. Nelson v. Rice (Estate Sale Paintings)

Facts:

• Estate of Martha Nelson scheduled estate sale after her death
• Appraiser brought in (did NOT appraise fine art)
• Appraiser told representatives she’d notify them of any fine art so they could hire independent appraiser
• Appraiser did NOT report any fine art
• At sale, Carl Rice (defendant) purchased two oil paintings for $60
• Rice not knowledgeable collector
• Assumed paintings not originals
• Nevertheless, compared signatures to book of artists’ signatures
• Submitted photos to Christie’s auction house
• Christie’s authenticated as genuine Martin Johnson Head paintings
• Christie’s sold paintings on consignment
• Rice netted $911,000
• Estate sued Rice for rescission/reformation on grounds of:
  • Mutual mistake
  • Unconscionability

Trial Court: Granted summary judgment for Rice (ruled against estate) Estate’s Appeal: Claimed mutual mistake entitled them to rescission Issue: Does party to contract bear risk of mistake if aware at time contract made that he has only limited knowledge regarding facts to which mistake relates, but treats limited knowledge as sufficient? Holding: Yes - party assumes risk of mistake if “consciously ignorant” Key Legal Principle - Assumption of Risk:

“A party assumes the risk of mistake if it is consciously ignorant, that is, if it proceeds with the transaction despite knowing that it lacks factual information relating to the mistaken issue.”

Mutual Mistake Generally:

• Mutual mistake regarding basic assumption underlying contract MAY entitle party to rescind
• BUT ONLY if such party did NOT assume risk of mistake

Application:

• Estate thought knowledge was superior
• Estate made mistake (didn’t know paintings were authentic)
• Rice didn’t know either (also made mistake)
• BUT: Estate assumed risk by not hiring fine art appraiser
• Estate consciously proceeded with limited knowledge
• Cannot claim foul when nobody committed foul except estate (by ignorance)

Result: Estate stuck with decision; no rescission Key Takeaway: Assumption of risk defeats mutual mistake defense - if you think your knowledge is superior and make a mistake while other party also didn’t know, you’re bound by your assumption of risk

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IX. Summary Chart: Defenses to Formation

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X. Exam Tips

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Key Points Frequently Tested

1. Economic Duress Source:
   • Must come from defendant, not third party or circumstances
   • 25-30% of students miss this on exams
2. Assumption of Risk:
   • Students frequently forget to discuss
   • Critical limitation on mistake defense
   • Defeats mutual mistake claims
3. Ratification:
   • Students frequently forget to discuss
   • Critical issue after finding voidable contract
   • Must address whether party ratified by conduct/acceptance of benefits
4. Void vs. Voidable:
   • Understand distinction thoroughly
   • Know which defenses create which result
   • Only fraud in factum and illegal contracts are void
5. Pre-Existing Duty Rule:
   • Always consider when party tries to modify contract
   • Alternative to economic duress claim
   • Should discuss even if not obvious issue
6. Justifiable Reliance:
   • Who is the speaker?
   • What is their position/authority?
   • Would reasonable person rely on them?
7. Express Warranty (UCC § 2-313):
   • Powerful cause of action
   • Frequently applicable
   • Can be combined with fraud/misrepresentation claims

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Analysis Framework

When analyzing a defense to formation:

1. Identify the potential defense
   • What facts suggest which defense(s)?
2. State the rule and elements
   • Define the defense completely
   • List all required elements
3. Apply facts to elements
   • Does each element exist?
   • What facts support/contradict?
4. Address limitations
   • Assumption of risk?
   • Ratification?
   • Void vs. voidable?
5. Consider alternative defenses
   • Pre-existing duty rule?
   • Multiple defenses available?
6. Conclude
   • Will defense succeed?
   • What is the remedy?