Contracts II Outline – Spring 2010
Professor Crystal
I. Defenses Against Enforcement
Minority and Mental Incapacity
Minority (Infancy Doctrine)
1. Classical Approach
a. Minors incapable of creating enforceable K.
b. If seller never checks age and minor tries to rescind K, too bad for seller.
2. Modern Approach
a. Minor should not be able to recover full purchase price one he’s paid for/used the merchandise.
i. Unless they can show that there was fraud or imposition by seller.
b. Exceptions:
i. Lying – if the minor lies, or misrepresents her age à no minority defense.
ii. Necessaries – items one needs to live à child is liable for these.
Rescision (Ex Ante Position)
K with minor is VOIDABLE. Minor can demand rescission, putting parties back in Ex Ante (“before it happened”) position.
MODERN RULES: Benefit Rule/Use Rule (Two different “rules”, but do mostly the same thing)
Absent fraud and undue influence, and contract is fair, minor has to pay for use, depreciation, willful or negligent damage.
Affirmation Upon Reaching Majority
Minor can ratify contract after reaching majority – any act or words expressing willingness to stick to it.
If you don’t disaffirm contract within reasonable time of reaching majority à treated as ratified.
Mental Incapacity
1. NOT SAME as infancy doctrine.
a. Minors under infancy doctrine, can disaffirm even if restoration cannot be made.
b. Mentally incapacitated person must still make restoration to other party.
i. UNLESS special circumstances present. (bad faith, coercion)
2. TESTS for Mental Incapacity
a. Cognitive Test – §15(1)(a) – Can person understand nature and consequences of the contract. à Majority Test
b. Volitional Test – §15(1)(b) – is party unable to act in reasonable manner in relation to the transaction and the other party knows of this or has reason to know of this.
3. §15(2)
a. Where a contract is made on fair terms and the other party is without knowledge of mental illness or defect, if rescission would be unjust, it will not be allowed.
Duress and Undue Influence
Duress
1. Physical Duress
a. Party manifests assent as a result of a threat to life & limb. à VOID CONTRACT.
2. Economic Duress (R§175)(Totem Marine Case)
a. Three Elements:
i. Wrongful or improper threat
1. Essential element of economic duress.
2. Wrongful doesn’t necessarily mean illegal. (Ex: threat of breach)
3. Threat must be made in bad faith
ii. Lack of a Reasonable Alternative
1. Is the burden of existing alternatives even more burdensome than current problem?
2. The dire economic situation at least needs to be contributed to by the DF.
a. If it’s entirely the PL’s making, à No duress.
iii. Inducement into a Contract
1. Threat must actually cause the manifested assent.
b. Economic Duress contracts are VOIDABLE.
c. CASE:
i. Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.
1. Alyeska owed 260-300K on contract to Totem.
2. Totem was in financial trouble and signed agreement to accept $97,500 instead.
3. Economic duress existed b/c Totem had no choice but to accept an inadequate sum or face pending bankruptcy.
Undue Influence
1. Elements:
a. Undue Susceptibility
i. Total weakness (total weakness of mind/understanding)
ii. Lesser weakness (vulnerability in the moment)
b. Excessive Pressure
i. 7 Factors (Don’t need all, but enough to show excessive pressure under circumstances)
1. Discussion of transaction at unusual or inappropriate time
2. Consummation of transaction at unusual place
3. Insistent demand that transaction be finished at once
4. Extreme emphasis on consequences of delay
5. Multiple persuaders on dominant side versus single servient party.
6. Absence of 3rd party advisors to servient party.
7. Statements that there’s no time to consult financial advisors or attorneys.
2. Restatement §177
a. Elements:
i. Unfair persuasion
ii. Of a party under dominion of one persuading them
iii. And who assumes (based on their relationship) that the person will act in his best interest.
3. Look for mismatch of strength and power between bargaining parties.
4. CASE:
a. Odorizzi (PL) v. Bloomfield School District
i. June 10, arrested for homosexual activity
ii. June 11, signed and delivered written letter of resignation from teaching job.
iii. June 13, district accepted resignation.
iv. July, charges dismissed and tried to resume employment, but was denied by district.
v. Ororizzi was under undue influence, didn’t have time to consult a lawyer.
vi. Excessive pressure against one who is vulnerable. (Crystals words)
Misrepresentation and Nondisclosure
Misrepresentation
Overview
1. Victim of misrepresentation has choice between redress in tort for damages or in contract to avoid enforceability of the contract through rescission.
a. You use K to rescind, you CAN NOT recover punitive damages in tort also.
2. Rescission
a. Defense (shield) – defense to enforcement of contract.
b. Affirmative Action (sword) – seeking restitution of benefits conferred on other party.
c. Rescission is judicial return to ex-ante position.
3. RESTATEMENT:
a. R§162 – When Misrepresentation is Fraudulent or Material
i. When the maker of a statement intends to induce assent and knows:
1. Statement does not go along with facts.
2. Knows that what he says is a lie.
ii. Statement is material if it’s likely to induce assent
b. R§164 – Misrepresentation make a contract voidable when:
i. If assent is induced by either a fraudulent or material misrepresentation by other party.
ii. Upon which the recipient is justified in relying.
4. Opinion
a. R§168
class to which the person concealing information belongs.
vi. Nature – nature of the contract itself.
vii. Importance – importance of the fact not disclosed.
viii. Conduct – conduct of person not disclosing something to prevent discovery (active concealment)
c. Materiality is a factual matter to be determined by the trier of fact.
Unconscionability
1. Unconscionability
a. Weakness in bargaining process that is shown by:
i. Gross inequality of bargaining power, and
ii. Terms unreasonably favorable to other party.
b. Procedural Unconscionability – bargaining unfairness. Absence of meaningful choice.
i. Gross inequality of bargaining power
ii. Whether the terms were understood
iii. Whether terms were boilerplate or confusing
iv. Education/Financial means of the parties
v. Sales Practices
vi. Lack of other sellers – if no reasonable alternative, more likely to enter into unfair contract.
c. Substantive Unconscionability – unfair or oppressive terms.
i. Harsh on one party and unreasonably generous to other party.
ii. Look at terms themselves to determine if they are fair or if they are so extreme as to shock the conscience and are not in tune with business practices.
iii. To determine Business Practices
1. Trade Usage – practices of comparable businesses in the area and elsewhere.
a. Look to other business practices to see if business/economic concerns justify it.
2. Is the provision common? If so, then less likely to be so unfair that is unreasonably favorable.
2. RESTATEMENT
a. R§208 – If court finds Unconscionability, it can:
i. Rescind the contract (if it is permeated with unconscionability)
ii. Amend contract to remove the unconscionable terms
iii. Interpret it in a way that does not make the contract unconscionable
3. UCC
a. §2-302 – Applies to the sale of goods between merchants.
To determine if transaction is unconscionable, court must determine whether, in light of the general commercial background, the clause involved is so one-sided as to be unconscionable
