Defenses to Formation: Capacity, Mistake, Misrepresentation, Duress, Unconscionability

Capacity: Minors, Mental Illness, Intoxication

Certain parties lack the legal capacity to be fully bound, making their contracts voidable at their election.

• Minors (infancy): A person under 18 may disaffirm a contract any time during minority and for a reasonable time after reaching majority. On disaffirmance the minor must return any consideration still in their possession but generally need not account for use or depreciation (majority rule). A minor who fails to disaffirm and instead acts on the contract after majority ratifies it. Exception: minors are liable in quasi-contract for the reasonable value of necessaries (food, shelter, clothing, medical care) — not the contract price.
• Mental incompetence: A person who cannot understand the nature and consequences of the transaction may disaffirm; if adjudicated insane, contracts may be void, otherwise voidable.
• Intoxication: Voidable only if the other party had reason to know the intoxicated party could not understand the transaction or act reasonably — a high bar, and the intoxicated party must act promptly to disaffirm on regaining capacity.

The protected party (the minor or incompetent) holds the power; the OTHER party cannot escape, because the contract is voidable only by the incapacitated party.

Mistake

Mutual mistake (Restatement 152): the contract is voidable by the adversely affected party if (1) both parties were mistaken about a basic assumption on which the contract was made, (2) the mistake has a material effect on the agreed exchange, and (3) the adversely affected party did not bear the risk of the mistake. The classic case is Sherwood v. Walker — a cow believed barren but actually pregnant (rescission allowed). Contrast Wood v. Boynton — a stone of uncertain identity sold cheaply; the seller bore the risk of the unknown and could not rescind.

A party bears the risk when the contract allocates it to them, or when they contracted with conscious awareness of their limited knowledge ('as is,' or knowingly treating their estimate as sufficient).

Unilateral mistake: Only one party is mistaken. Traditionally NOT a ground for relief, to protect the expectations of the non-mistaken party. Rescission IS allowed if: (a) the non-mistaken party knew or had reason to know of the mistake (e.g., an obviously erroneous bid the offeree snapped up), or (b) the mistake makes enforcement unconscionable and rescission will not unduly harm the other party. A mere mistake in business judgment or value is not a basis for relief.

Mistake at a Glance

Misrepresentation, Duress, and Undue Influence

Misrepresentation renders a contract voidable by the recipient who justifiably relied. Elements: (1) a false assertion of fact (or active concealment, or nondisclosure where a duty to disclose exists), (2) that is material OR fraudulent, (3) made to induce assent, and (4) justifiably relied upon.

• Fraudulent misrepresentation requires scienter (knowledge of falsity or reckless disregard) and intent to induce reliance; it need NOT be material to permit rescission, and supports a tort action for damages too.
• Negligent or innocent misrepresentation must be material to permit rescission.
• Opinions and 'puffery' generally are not actionable unless made by an expert or in a relationship of trust. A half-truth or failure to correct a now-false prior statement can constitute misrepresentation.

Duress: An improper threat that leaves the victim no reasonable alternative makes the contract voidable. Physical-compulsion duress (a gun to the hand) makes the contract void; ordinary economic duress (threatening breach to extract a modification, or wrongful threats of criminal prosecution) makes it voidable. The threat must be improper and overcome free will.

Undue influence: Unfair persuasion of a party who is under the domination of, or reposes trust in, the persuader (caregiver–elder, attorney–client). Look for a confidential relationship plus suspicious, lopsided terms.

Unconscionability

Unconscionability (UCC 2-302; Restatement 208 at common law) lets a court refuse to enforce a contract, or a clause, that is grossly unfair. It is assessed at the time the contract was made (not in hindsight), and it is a question of law for the court. Most courts require BOTH:

• Procedural unconscionability — defects in the bargaining process: oppression, unfair surprise, hidden fine print, gross inequality of bargaining power, an adhesion 'take-it-or-leave-it' contract, or terms a party could not realistically negotiate or understand; and
• Substantive unconscionability — terms that are unreasonably harsh, one-sided, or oppressive: grossly excessive price, a draconian remedy clause, an unfair limitation of remedies, or a waiver of basic protections.

A court finding unconscionability may (1) refuse to enforce the whole contract, (2) strike the offending clause and enforce the rest, or (3) limit the clause's application. Classic illustration: Williams v. Walker-Thomas Furniture — a cross-collateral clause allowing repossession of ALL items until the last installment on the last purchase was paid.

Essay tip: When a defense succeeds, the remedy is usually rescission (unwinding the deal) plus restitution to restore any benefit conferred. Identify whether the contract is VOID (no legal effect, e.g., physical duress, mutual mistake of identity in some cases) or merely VOIDABLE (valid until the protected party rescinds) — only voidable contracts can be ratified.