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Contracts II
Faulkner Law - Thomas Goode Jones School of Law
See, Brenda

Contracts II – Spring 2010 – See
I. Defenses Due to Improper Bargaining
A. General Introduction to the Doctrines in This Chapter
      Voidable Contract: can avoid contract, and each party is entitled to restitution of any benefits conferred on the other under the contract up to the time of avoidance
B. Misrepresentation and Fraud
Ø  If party can show misrepresentation to him prior to signing, he may be able to use this in either of 2 ways:
o   (1) he may use this as a defense in a breach of K brought by the other, or
o   (2) he may use it as the grounds for recission or damages in a suit in which he is the P
Ø  Elements of proof:
o   Part asserting the misrep must show that he justifiably relied on the misstatement
o   Misrep must be one of fact, not opinion
Ø  General rule is that only affirmative statements can serve as the basis for misrep.
Ø  Failure to disclose will usually not justify misrep, with some exception where non-disclosure will support an action:
o   Half-Truth: If half truth is told, but part is not
o   Positive Concealment: If a party takes positive action to conceal the truth
o   Failure to correct past statement: If a party knows that disclosure of a fact is needed to prevent some previous assertion from being misleading and doesn’t disclose it
o   Fiduciary relationship: if parties have a fid. Rel.
o   Failure to correct mistake: If party knows one party is making a mistake as to a basic assumption and doesn’t correct if non-disclosure = a failure to act in good faith
      Tort Definition of Fraud is the intentional misrepresentation of a material fact from which an innocent party justifiably, reasonably relies to his detriment
      Misrepresentation- an assertion not in accordance with the facts (actual occurrences)
      Remedies for Fraudulent Misrepresentation
1.)    Rescind and obtain Restitution
2.)    Keep the Contract and sue for loss in value of the performance as a result of the fraud (sue for reformation of the contract and a new price)
3.)    Punitive Damages are allowed
o   Misrepresentation Can Take Place When There Is:
1.) Active concealment of a defect
2.) Prevents Investigation
3.) Told a Half-Truth
4.) Made an Ambiguous Statement
5.) Intent is to Create a False Impression and the Seller Does so
6.) Fiduciary Relationship
7.) Exclusively Within the Knowledge of One Party
8.) The Other Party is in no Position to Disclose
§ 164 When a Misrepresentation Makes a Contract Voidable
A contract is voidable by the recipient if:
1.) A party’s manifestation of assent
2.) Is induced by either a fraudulent or a material misrepresentation by the other party
3.) Upon which the recipient is justified in relying (reasonableness)
§ 162 When a Misrepresentation Can Be  Fraudulent or Material
(1)   Fraudulent: the maker intends his assertion to induce a party to manifest his assent, and (Intentional Misrepresentation):
(a)    Knows or believes that the assertion is not in accord with the facts, or
(b)   Does not have the confidence that he states or implies in the truth of the assertion, or
(c)    Knows that he does not have the basis that he states or implies in the assertion
(2)   Material: would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so
§  Negligent: breach SOC the RP person would use in asserting a representation; some courts only allow relief when there is physical injury and not just economic loss
§  Innocent: believed statement was true
      3 Types of Fraudulent Misrepresentation:
1.) Affirmative False Statement
2.) Non-Disclosure
            a.) Commercial Parties have a Duty to Disclose When:
1.) Fact is Material to Transaction
2.) Knows party is about to enter under a mistake of fact
3.) Fact is peculiarly and exclusively within the knowledge of one party, and the other party cannot reasonably be expected to discover it
4.) Mistaken party would reasonably expect disclosure of the fact
            b.) Basis for Rescission When:
1.) A condition which has been created by the seller materially impairs the value of the contract and is peculiarly within the knowledge of the seller or
2.) Unlikely to be discovered by a prudent purchaser exercising due care with respect to the subject transaction
§  If the buyer conducted an investigation and learns that the seller’s statement is false, he cannot recover
3.) Concealment
§  Active concealment is a fraudulent misrepresentation
      What is a Fact?
1.) Statement of Opinion- only if it may reasonably be understood as implying the existence of facts that justify the statement
§  Disclaimers do not automatically defeat fraudulent misrepresentation claims
2.) Misrepresentation of Intent- must intend to breach when party entered contract
§  Called Promissory Fraud in AL
      Fraud in the Inducement v. Fraud in the Factum
1.)    Fraud in the Inducement- Misep. Forms basis of contract; VOIDABLE
2.)    Fraud in the Factum- document is fraudulent; VOID
      Misrepresentations of Law- not a defense to a contract; cannot avoid.
C. Duress – Any wrongful act or threat which overcomes the freewill of a party
Defense of duress is available if the D can show that he was unfairly coerced into entering the K or modifying it
Ways of committing duress –
Ø  Violence or threats
Ø  Imprisonment or threats of it
Ø  Wrongful taking or keeping of another’s property
Ø  Threats to breach K or commit wrongful acts
o   Like when D threatens to breach unless its modified in his favor (apply good faith and fair dealing) standard here
(1.) Elements of Duress
§ 175 When Duress By Threat M

imate commercial reason is ineffective as a violation of the duty of good faith
      “Good faith”- every contract requires a merchant to be honest in fact and observe reasonable commercial standards of fair dealing in the trade. Common people must only be honest in fact since they do not know the commercial standards.
      Exceptions to Pre-Existing Legal Duty[SS1] 
1.)    A new or different consideration promised
2.)    Modification- if parties choose to modify their contracts, consideration is found where the obligations of both parties are varied by the modification
3.)    Voidable Obligation- infant’s ratification of a contract upon reaching majority is enforceable without new consideration
4.)    “Unforeseen Difficulties”- is not a substitute for consideration, but where the unforeseen difficulty rises to the level of impracticability, most states will hold that the unforeseen difficulty is an exception to the pre-existing duty rule.
5.)    UCC 2-209- when both parties are acting in good faith, an agreement modifying the contract needs no consideration to be binding
6.)    Existing Debt- payment of a smaller sum to discharge an existing debt will not be sufficient consideration—unless a discharge by accord (come to a new agreement) and satisfaction (when you pay it off); Liquidated and Unliquidated Debt; giving up right to sue
E. Undue Influence
      Remedy: Avoid Contract unless:
a.)    The other contracting party acted in good faith
b.)    Was unaware of the undue influence
c.)    And gave value or reliance on the transaction
      Subjective Element: Lack of Capacity
      Objective Elements: Time and place, subtle pressure, extreme emphasis on consequences
1.)    Unfair persuasion
2.)    Dominated by a fiduciary and confidential relationship
3.)    Overcomes her Will
      Must Show:
1.) Person was unduly influenced to execute the contract
2.) There was opportunity to exercise undue influence
3.) Intent to exercise undue influence for improper purpose
4.) The result was clearly a product of the undue influence.
      There must be substantial evidence of:
§  Confidential relationship
§  Improper Dealing
§  Inequality
§  Detriment to the Dependent Party