Handout for Econ 522, Spring 2009, Disc #5, 2/27
Formation Defense and Performance Excuse (P308)
Formation Defense: defendents can claim that they have no legal obligation to the plaintiff
because no contract exist between them. A formation defense asserts that the conditions for
creating a contract were no satisfied.
a. Incompetence
if the contract is in favor of the incompetent, could be enforceable
b. Dire Constraints and Remote Risks
Duress
on renegociation: “In general, courts do not enforce contract renegociations motivated
by the increase in the promisor’s bargaining strength that results from the promisee’s
reliance.”
Necessity:
Efficient activity and Efficient rescue, especially if the rescue is fortuitous.
c. Derogation of public policy:
negative externality towards people outside the contract
Performance Excuse: defendants can concede that a contract exists, and then claim that
they were excused from performing under the circumstances. A performance excuse admits the
existence of a contract and denies liability for breach.
Note: as “excuse”, it’s relevent to know if liability of breach is needed.
0. fraud; failure to disclose
a. Impossibility
prevent one party from performing his duty, we ask if he is the efficient bearer of the risk.
b. frustration of perpose (e.g. ticket for sitting in the theatre)
something changed after signing, performance is meaningless, but could still be performed.
c. mutual mistake
contingency materialize before signing contracts, voluntary exchange and involuntary
exchange
Other concepts:
Uniting Knowledge and Control,
Productive Information and Distributive Information.
Unilateral Mistakes (not an excuse, doesn’t mean need to be enforced)
Sample Questions
1. A manufactorer argue that she is excused from dilivering the promised goods because her
factory burned down. Should she? What does this depend on? What if it is done by the Joker?
2. A young girl found an “attractive stone” and sold it to a jeweler for $1. Later her family found
out it’s actually a rough dimond worth $700. What doctrine can be used to void the contract?
3. Mr. Robinson was sailing and saw a storm coming his way. He went to an island nearby and
lookded for help. Mr. Friday on the island didn’t know about the storm, and pointed a gun at
Mr Robinson and ask him to sign a contract to give the boat to Mr. Friday.
4. Chao sign a lease with his landlord for the coming year. Then World War III breaks out and
Chao needs to get back to China. What doctrine is applicable? What if the War actually breaks
out before they sign the contract?
5. Michael sold a gift card that will expire in three days to Steve. Steve only found out when he
tried to use the gift card after a week. Steve sued, should Michael pay any damage?