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Contracts II
Faulkner Law - Thomas Goode Jones School of Law
Garrett, Allison

        1. Minority Rule
 
A. Minority Rules to refund less than the full consideration paid in the
event of rescission.
B. Benefit Rule – upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise, must repay the benefit he gained
3. MAJORITY RULE  USE RULE minor’s recovery of full purchase price is subject to deduction for the minor’s use of the consideration, depreciation, deterioration of the consideration in his possession.
                a. So long as the vendor has clean hands
4. Equity for Equity…if they don’t have the full consideration to return then they will only receive the value of the consideration they are returning
 
 
I.                    Mental Incapacity
 
A.      Law Presumes every adult is competent          
B.      If you are arguing for mental incapacity
a.       Burden of proof is on the person arguing
b.       Test for determining Competency:
c.        Person involved had sufficient mental ability to know what he or she was doing
d.       The nature and the consequences of the transaction
e.         Competency must be determined on the date the instrument was executed
a.        
b.        
C.      Mental Incapacity Majority approach
 
D.      disaffirming contracts
a.       Absent Fraud or knowledge of the Capacity
b.       Contract of someone incomp. Is voidable only if it is inequitable (equity for equity)
c.        Unadjudicated (court not determined) mentally incompetent
d.       Contract will not be set aside
e.        If made in good faith
f.        for fair consideration
g.        without knowledge of incapacitation
 
 
E.      Economic Duress Elements lack physical threat voidabl
 
a.       Party involuntarily accepted the terms of another
b.       Circumstances permitted no other alternative
c.        Such circumstances were the result of coercive acts of the other party
 
F.       Duress Elements physical threat void
 
Only the party that signed the contract that was subjected to duress or undue influence can use that defense. The party that exerted the force upon the signer cannot use duress or undue influence to get out of the contract. It should be clear that one party owes another and the party is refusing to pay or wanting to pay amount significantly lower.
Elements of Economic Duress:
a.       Wrongful or improper/unlawful threat
b.       Lack of reasonable alternative
c.        Party involuntarily accepts another’s terms
d.       Remedies, Recission (void)/Restitution (put back in same place before K)
 
G.      ELEMENTS OF UNDUE INFLUENCE: (Duress Lite!)\
 
Unfair bargaining against a weaker party.
1.       Discussion at an inappropriate time
2.       Consummation of transaction in unusual place
3.       Insistent demand that transaction be completed at once
4.       Extreme emphasis on untoward consequences of delay
5.       Use of multiple persuaders by the dominant side against a single servient party
6.       Absence of third-party advisers to the servient party
7.       Statements that there is no time to consult financial advisers or attorneys
REMEDY
                                    Rescission: to return parties to their original positions
 
 
 
 
 
 
H.      Misrepresentation
 
 
a.       Elements of:
b.       Got to have a MISREPRESENTATION
c.        Of a fact
d.       RELIANCE by the buyer on that statement
e.        Must be deceived by it
f.        Unintentional Misrepresentation
1.       misrepresentation has to be material to make the contract voidable
e.         Intentional Misrepresentation: You can get out of the contract regardless of whether the misrepresentation is material or not. The party must have been deceived to avoid. 
f.         Damages and reliance are not required to avoid the contract.
g.       Tort Law measure of damages
1.       Actual (out of pocket)
2.       Punitive
h.       Contract Law
1.       Seek damages
a.       Benefit of the Bargain
2.       Remedy
Rescission
a.       Put parties into the same position as before
b.       No punitive damages
3.        
I.        Non-Disclosure
a.       Caveat Emptor (Buyer beware)
1.       Generally no duty to disclose facts that would make the consumer not want to enter into agreement
a.       Affirmitive Disclosures
1.       Consumer Laws
                                                                                                                              ii.      Can not actively conceal a defect
                                                                                                                            iii.      Can not tell a half truth. When disclosing some you must disclose all of it.
                                                                                                                            iv.      Fiduciary Relationships
1.       Relationship of trust and confidence
2.       Attorney client
3.       Trustee of a beneficiary of a trust
4.       Owes a level of duty of care
5.       Must make disclosure of all relevant facts
b.       Employer
                                                                                                                               i.      If an employee makes an misrepresentations to a third party you are liable for there misrepresentations
J.       Fraud
1.       Material misrepresentation
a.       Could of made a difference in your decision had you known
2.       Elements of:
a.       Got to have a MISREPRESENTATION
b.       Of a MATERIAL FACT
c.        SCIENTER state of mind
                                                                                                                               i.      Must have knowledge that it is false
                                                                                                                              ii.      Or reckless disregard of whether it is true or false
1.       sort of thing a reasonable person would check out before making
d.       RELIANCE by the buyer on that statement
e.        DAMAGES
3.       Under Contract Law
a.       Fraud Infactum
                                                                                                                               i.      You have no idea what you are signing
                                                                                                                              ii.      No mutual assent because you didn’t know what you are signing
1.       where there is no mutual assent the contract is void
b.       Fraud in the inducement
                                                                                                                               i.      Lies about something of material fact
1.       I changed the oil every 3K on this car
2.       you buy but find out it never has been changed
                                                                                                                              ii.      Reliance of the lie
                                                                                                                            iii.      Results in a voidable contract
 
K.      Unconscionability (similar to adhesion)
1.       Elements of:
Absence of reasonable choice
Terms that are unreasonable favorable to other party
a.       Grave misconduct
b.       Extremely favorable to one party
c.        No meaningful choice by the other party
d.       First party took advantage of other party
2.       Court decides if it is unconscionability (question of law)
a.       3 approaches the court can take under §2-302 and §208.
                                                                                                                               i.      Refuse to enforce the unconscionable clause
                                                                                                                              ii.      Refuse to enforce the entire contract
                                                                                                                            iii.      Limit application of the Unc. Clause
3.       Procedural Unconscionability: some defect in bargaining process or lack of choice by one party, e.g. fraud; here, factors for “absence of meaningful choice” prong of rule go to procedural aspect of analysis of unconscionability,
4.       Substantive unconscionability: fairness of terms in resulting bargain; here, terms unreasonably unfavorable to the party
5.       Cross Collateral
a.       If you have previous credit from the company and make a payment the payment applies to the total debt not just to one item.
6.       Cross Default Clause
a.       if party defaults in one transaction then the other party can deem the party default in all loans or if you have transactions with one company and you default with another unrelated to the 1st company, you are defaulted with the 1st company.
 
7.       Arbritration Clauses
The claim of unconscionability has to be related to the actual cause of action.
a.       In court the tax payers pay the judge, clerk and all there salaries (Administrative cost paid by the tax payers)
b.       Attorney’s Fees paid by each party or the loser will pay
c.        BUT IN ARBITRATION
                                                                                                                               i.      Administrative costs paid by the parties
1.       costs more to the parties to have the matter decided
                                                                                                                              ii.      NOW the employer pays the costs of arbitration
b.       Won’t be upheld if unconscionable
1.       contract terms are unreasonable (substantive)
2.       lack of meaning choice on the part of the party (procedural
3.       inequality of the bargain is so manifest as to shock the judgment of a person of common sense
4.       terms are so oppressive that no reasonable person would make them on one hand
5.       no honest person would accept them on the other
c.        Court will not enforce adhesion contracts which are oppressive to the weaker party
1.       Court finds

status quo
3.       Conscious ignorance of something is assumption of the risk – RST § 154.
4.       Mistake in judgment cannot be claimed to relieve yourself of liability.
a.       §152 When Mistake of Both Parties Makes a Contract Voidable
(1)     Where a mistake of both parties at the time of contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154.
(2)     In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
b.       §153 When Mistake of One Party Makes a Contract Voidable
(3)     Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of mistake under the rule stated in §154, and
(a)     The effect of the mistake is such that enforcement of the contract would be unconscionable, or
(b)     The other party had reason to know of the mistake or his fault caused the mistake
c.        §154 When a Party Bears the Risk of Mistake
(4)     A party bears the risk of mistake when
(a)     The risk is allocated to him by the agreement of the parties, or
(b)     He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c)     The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so
**Problem: protects only people who were unreasonably unaware of his ignorance. Cts really just assigning to person they think should have it.
2.       Allocation of Risk
“As-is” clause – where parties allocate risk, the court will respect the agreement. 
Most or all contracts are dealing with allocation of risk between the parties
(1)     E.g., contract for sale of apples à buyer runs risk that cost will drop; seller runs risk that cost will rise
Under what circumstances can a court reallocate the risk set forth in a contract? (see §154)
(2)     In the mistake rule, if there is mutual mistake, then you can rescind, unless there is an allocation of risk
(a)     Express in Lenawee, but it can also be allocated by the court (§154(c))à implied in fact by the parties’ conduct, dealings, etc. or implied in law
(3)     §154(b)
(a)     Seems to apply to almost any contract – no one knows everything
Courts actually reason under 154(a) or (b) because the language is so overly inclusive
 
C.      Impossibility – Impracticability – Frustration of Purpose
RST §§ 261-272 and UCC § 2-615
1.       All of these doctrines are used when an event has happened not anticipated by the parties
2.       Resulting in one party having a windfall gain or loss
3.       Does the K allocate the risk?
a)       If there is a clear risk allocation in the K
(1)     You don’t need to look at these defenses
b)       If the K identified unforeseen risks and identified who would assume that risk these will not apply
4.       Impossibility and Impracticability
a)       Normally applies to Sellers
5.       Frustration of Purpose
a)       Normally applies to Buyers
6.       Common law used all three terms
7.       Modern law – only see Impracticability and Frustration of Purpose
 
D.      Doctrine of Impossibility
a)       Normally applies to Sellers
b)       Taylor v. Caldwell
(1)     Music hall rented for concert by burned down
(2)     Court said ‘ where you have an essential element of the K destroyed and its continued existence was a basis of the K, the existence was essential element to K- so destruction excused non performance
c)       Performance is impossible by anyone
d)       Objective Standard
e)       Must occur after the K is entered into
f)        If the event existed before the K b