12.2 Contract Defenses and Discharge of Obligations

Formation is not the end of the analysis. A deal that looks complete can still be avoided, unenforceable, or discharged. The PCCE groups defenses (why a party is not bound) with discharge (why remaining duties end). Label the doctrine before you pick a remedy from section 12.3.

Fraud, misrepresentation, and lack of intent

Fraudulent misrepresentation is a false statement of a material fact, made with scienter (knowledge of falsity or reckless disregard), with intent to induce reliance, that the other party justifiably relies on, causing damage. The contract is typically voidable by the deceived party, who may rescind and seek restitution or, in many jurisdictions, affirm and sue for damages. A misstatement of opinion or sales puffery is usually not fraud; a statement of present fact is. Concealment (active hiding) and, in a fiduciary or half-truth setting, nondisclosure can substitute for an affirmative lie.

Innocent or negligent misrepresentation of a material fact can still support rescission even without scienter. Fraud in the execution (factum) — the signer does not know the character of the instrument — can make the supposed agreement void. Fraud in the inducement makes it voidable.

Lack of intent / no meeting of the minds is a formation point the blueprint lists with defenses. If both parties are joking and both know it, there is no contract. If they attach different meanings to a material term and neither should have known the other's meaning, mutual assent fails (Raffles v. Wichelhaus). The objective test still binds the party who appeared serious.

Statute of Frauds

The Statute of Frauds does not say oral contracts are illegal. It says certain contracts are unenforceable unless evidenced by a writing signed by the party to be charged (the defendant) that states the essential terms. Classic categories a national exam expects:

1. Contracts for an interest in land (sale, many longer leases, mortgages, easements). Part performance — possession plus payment or improvements — can take a land deal out of the statute in equity.
2. Contracts that cannot be performed within one year from the date of making. The test is possibility, not likelihood. A five-year employment term is within the statute. A contract "for life" is not, because the person might die within a year. A deal that can be finished in six months is outside the statute even if work happens to last longer.
3. Suretyship — a promise to a creditor to pay another person's debt. The main-purpose (leading-object) exception: if the surety's leading object was the surety's own pecuniary benefit, the promise can be oral.
4. UCC 2-201 — a contract for the sale of goods for $500 or more. That $500 figure is the classic UCC 2-201 amount. Some states have amended the dollar threshold; the PCCE tests the official-text number unless a stem supplies a different local statute. The writing need only be sufficient to indicate that a contract was made and specify a quantity; a missing price can be gap-filled. Exceptions: specially manufactured goods, a judicial admission, payment made and accepted or goods received and accepted, and the merchant confirmation (a confirming memo binds a merchant recipient who does not object in writing within ten days).

Historically the statute also covers promises in consideration of marriage (not the marriage itself) and an executor's promise to pay estate debts from personal funds. If the stem is goods, start with 2-201. If it is land or a multi-year services deal, start with the common-law statute.

Duress, undue influence, unconscionability, and illegality

Duress is a wrongful threat that overcomes free will. Physical compulsion can make a "contract" void. Economic duress — a wrongful threat to withhold a needed performance or to breach, leaving no reasonable alternative — typically makes the contract voidable. A hard bargain, without a wrongful threat, is not duress.

Undue influence is unfair persuasion by a dominant party in a confidential or trusting relationship (caretaker and elderly client; some lawyer-client settings). The weaker party's assent is not free.

Unconscionability (UCC 2-302 and the common-law analogue) has two strands. Procedural unconscionability is unfair surprise and inequality of bargaining process (buried terms, no chance to read). Substantive unconscionability is oppressive terms. Courts often look for both. The court may refuse to enforce the contract, enforce it without the clause, or limit the clause to avoid an unconscionable result. Unconscionability is decided by the court, not the jury.

Illegality and public-policy violations make the agreement void or unenforceable. When parties are in pari delicto, a court may leave them where it finds them.

Mistake

Mutual mistake: both parties are mistaken as to a basic assumption on which the contract was made, the mistake has a material effect on the agreed exchange, and the adversely affected party did not bear the risk (Restatement § 152). The contract is voidable by that party. A mutual mistake about the identity or existence of the subject matter qualifies; a mutual mistake about market value usually does not.

Unilateral mistake: only one party is mistaken. The default is no relief. Exceptions: the other party knew or had reason to know of the mistake (the bid that is obviously off by a digit), or enforcement would be unconscionable and the mistaken party did not bear the risk. A bad guess about value, standing alone, is not enough.

Impossibility, impracticability, and frustration

These doctrines discharge remaining duties after an unforeseen post-formation event.

• Impossibility is objective: nobody can perform. Death or incapacity of a person necessary to the performance, destruction of the identified subject matter without fault, or supervening illegality.
• Impracticability (Restatement § 261; UCC 2-615) is extreme and unreasonable difficulty or expense from an unforeseen event the parties assumed would not occur. A price increase that merely makes the deal less profitable is usually not enough.
• Frustration of purpose (Krell v. Henry coronation cases): performance is still possible, but the principal purpose known to both parties is substantially frustrated by an unforeseen event.

Discharge of obligations

Duties end in four families.

Performance. Complete performance discharges. At common law, especially in construction, substantial performance of a constructive condition lets the performing party recover the contract price minus damages for remaining defects. Article 2's perfect tender rule (section 12.4) is harsher for goods.

Agreement.

• Rescission — both parties agree to cancel an executory deal.
• Novation — a new party is substituted and the original obligor is released. Three- or four-party consent is the point. If the original obligor is not released, you have a delegation or a new promise, not a novation.
• Accord and satisfaction — the accord is an agreement to accept a different performance in satisfaction of an existing duty; satisfaction is the carrying out of that accord. Until satisfaction, the original duty is suspended, not automatically erased. Cashing a payment-in-full check on a bona fide disputed unliquidated claim is the classic satisfaction fact pattern.

Operation of law. Impossibility, impracticability, or frustration; a material alteration of an instrument; a discharging bankruptcy; the statute of limitations (it bars the remedy; jurisdictions differ on whether the underlying duty is extinguished).

Breach. A material (total) breach goes to the essence and discharges the nonbreaching party's remaining duties; that party may sue for expectation damages. A minor (partial) breach does not discharge the other party's duty to perform, but it does support a damages claim. A time-of-the-essence clause can make a short delay material.

Anticipatory repudiation is a clear, unequivocal indication before performance is due that the party will not perform — a statement, or a voluntary act making performance impossible. The nonbreaching party may treat the repudiation as an immediate total breach, suspend its own performance, or wait a commercially reasonable time and urge retraction (UCC 2-610; common-law analogue). A vague expression of doubt is not enough; demand adequate assurance (UCC 2-609) when commercially reasonable insecurity arises.

Conditions

A condition is an event, not certain to occur, that must occur (or be excused) before a duty becomes due, or that extinguishes a duty.

Express conditions are strictly enforced. Constructive conditions — supplied by law, especially the order of performance — are tempered by substantial performance. Waiver, estoppel, and prevention can excuse a condition.

Worked path. A supplier orally agrees on June 1 to deliver $12,000 of widgets next spring. That goods contract is within classic UCC 2-201 ($500+). Flag the missing writing. Separately, a contractor refuses in October to perform a December services job and emails "we will not show up." That is anticipatory repudiation. The client need not wait until December to treat the contract as breached. If instead the contractor finishes the job with only a cosmetic defect, that is likely a minor breach and substantial performance — pay the price minus defect damages; do not walk away from the entire remaining balance.