Contracts II Outline

Contracts II: Spring 2009
Lund- Knapp,…
I.        Avoiding Enforcement: Incapacity, Bargaining Misconduct, Unconscionability, and Public Policy (Doctrines involve some defect in the bargaining process, or some problem with the substance of the resulting contract, or a combination of both.)
A.      Minority and Mental Capacity
                             i.      Traditional rule as to minority
·         Contracts entered into by minors are voidable, at minor’s option, once he or she has reached the age of majority.
·         Age of majority is 18 in most states. 
                           ii.      Voidable?
·         It’s the minor’s choice whether to disaffirm the contract or not.
·         Must take affirmative steps to avoid, within reasonable time of reaching age of majority.
·         The contract is enforceable if the minor so chooses.
                         iii.      Rationale for the rule?
·         Has something to do with minors being presumed not to be able to make good judgments.
·         Casebook p. 518: that minors do not have the judgment to protect themselves in the marketplace.
                          iv.      Widely recognized exceptions
·         Necessities Doctrine: Minor may be liable for the reasonable value of a “necessary.”
·         May effectively be held liable based upon affirmative misrepresentation of age.
·         May effectively be held liable based on willful destruction of goods.
·         In all these, the contract remains unenforceable but the minor is liable in restitution (for the necessity) or in tort (for the willful damage).
                            v.      Problem 7-1 pg 519
·         ***
                          vi.      Dodson v. Shrader
·         Discusses another possible exception, used in a minority of states.
·         “Benefit” rule: upon recession, recover of purchase price reduced by value of benefit minor received.
·         “Use/depreciation” rule” upon rescission, recover of purchase price reduced by depreciation of item while in the minor’s possession.
                        vii.      Similarities between minority and mental incapacity
·         First, a contract entered into a mentally incompetent person is voidable, not void.
·         Second, an exception may apply for a “necessary.”
                      viii.      Hauer v. Union State Bank of Wautoma  pg 526
·         The Bank knew or had reason to know that Hauer was mentally incompetent to understand the nature of the loan at the time it was entered into is inherent and intertwined in the jury’s finding that the Bank failed to act in good faith.
                          ix.      Tests for Competency
·         Hauer/traditional test: Whether the person had sufficient mental ability to know what he or she was doing and the nature and consequences of the transaction (cognitive test.)
·         Newer/minority test: Whether the person is unable to act in a reasonable manner regarding the transaction and the other person has reason to know of the condition (volitional test).
                            x.      Difference between minority and mental incapacity
·         Majority view is that party alleging mental incapacity must return consideration received, if the contract was made on fair terms and without knowledge of the incapacity by the other party.
 
B.      Duress and Undue Influence
                             i.      Duress
·         Doctrine originally applied only to cases of actual or threatened physical harm.
·         Later expanded to include threats to person’s property (duress of goods).
·         Eventually expanded to include economic duress, where most cases arise today.
a.      Effect of Duress
        § Contracts made under economic duress are voidable, not void. (Can be ratified either explicitly or by conduct amounting to ratification.
b.      Totem Marine v. Alyeska Pipeline pg 583
        § Totem claimed it was owed $260-300k under contract with Alyeska.
        § Alyeska said it wasn’t sure how soon it could pay. 
        § Totem accepted Alyeska’s offer to settle for $97,500.
        § Totem now seeks to rescind settlement agreement on grounds of economic duress.
        § Test for determining whether transaction can be avoided on grounds of economic duress is whether will of the person induced by the threat was overcome rather than whether the will of a reasonably firm person would have been overcome.
        § An essential element of economic duress, which would allow avoidance of a transaction, is whether a party, by wrongful acts or threats, has intentionally caused other party to involuntarily enter into the transaction; though such requirement may be satisfied where alleged wrongdoer’s conduct is criminal or tortious, an act or threat may also be considered wrongful if it is wrongful in the moral sense.
        § Alyeska/2d Restatement Rule
ú To avoid agreement for economic duress, must establish.
·         A wrongful or improper threat.
·         Absence of any reasonable alternative to acceptance of the threat.
ú Must also show that the threat actually induced the party to enter into the contract.
        § Wrongful threat here?
ú Totem will have to prove that Alyeska was deliberately withholding payments despite having acknowledged the debt.
ú No wrongful threat if Alyeska had a plausible basis for believing it wasn’t liable to Totem for the amount claimed.
ú Note that conduct does not have to be “illegal” to amount to an improper threat.
        § No Reasonable Alternative?
ú Courts originally used a reasonable person standard.
ú But test is now a subjective one that asks whether the particular victim was induced by the threat.
ú Argument that Totem had no reasonable option: creditors were hounding Totem, if it didn’t get money quickly it would have had no choice but to declare bankruptcy.
ú Some courts hold that financially difficulty alone is insufficient to establish duress, that the defendant must have caused the plaintiff’s situation of distress.
c.       Odorizzi v. Bloomfield School District pg 548
        § Odorizzi resigned as schoo