Outline for Contracts II
Professor Denbaux – Spring 1999
I. Implied Terms (Implied Warranties) cont’d.
A. Implied Warranties – Are an indication of the move away from the strict common law rule of Caveat Emptor (See Chandler v. Loepus (1603)(the case of the fake goat beezer stone)). They are not based upon any agreement between the parties, but instead are imposed by law upon the seller.
B. UCC Implied Warranties:
1. UCC § 2-313 – Express Warranties: Deals with express warranties in a contract. Express warranties may be created in several ways: by words (the most common); by description of the goods; by a representative sample of the goods (a sales sample); or by a model. If the warranty is expressly included, to often excludes the other implied warranties and limits recovery to “repair or replacement.”
2. UCC § 2- 314 – Implied Warranty of Merchantability:
a. A merchant who sells goods impliedly warrants that the goods are of good quality and are fit for the ordinary purposes for which they are used. Recovery under this warranty requires the showing that the product is defective, or of poor quality.
b. Implied warranties of merchantability may be disclaimed by appropriate language in the K.
3. UCC § 2- 315 – Implied Warranty of Fitness for a Particular Purpose:
a. Arises by implication of law, but only when: (i) the buyer relies on the seller’s skill or judgement to select suitable goods, and (ii) the seller knows or has reason to know of this reliance.
b. Brach of this warranty does not require a showing that the goods are defective in any way, only that they are not fit for the buyer’s particular purpose.
c. Can be disclaimed in the contract.
Doe v. Travenol Laboratories: held that blood supplies and transfusions represent services and not goods and thus denied a p’s claim of breach of warranty for his receiving AIDS tainted blood clotting factor from the Lab. Citing policy concerns over the need for blood supply and the lack of accurate HIV tests (it was 1988) the court held that he must proceed on negligence grounds.
C. Non UCC Implied Warranties:
1. The Implied Warranty of Habitability: Is now implied (in almost every state) into all leases of residential property. It is codified in ULTRA § 2.14. (See Property I). The trend began with its imposition into new home construction.
a. New Homes for Sale: The NJ Supreme Court held in McDonald v. Mianecki, that the implied warranty of habitability is imposed on builders/ vendors of new home construction (merchants of housing). The vast majority of states have also implied this warranty into the sale of new homes by builder/ vendors. The NJ Court did not address private construction by individuals or purcahses of “used” homes.
b. Extending the “Habitability”: In Aronson v. Mandara, the NJ S. Ct. implied the warranty of habitability protection to the construction of a patio, making builder/ vendors of new homes liable for defects in construction that do not directly affect the habitability of the home.
c. Disclaimer of the Warranty: Most courts allow for the IWH to be expressly disclaimed in the contract of sale for new homes, but many will closely scrutinize the disclaimer to ensure that it was conspicuous, specific, and the result of a mutual agreement.
d. Extension to Subsequent Purchasers: A growing number of courts have extended the IWH to subsequent purchasers despite lack of privity with the builder/ vendor.
e. Financiers of New Home Construction: Generally, the financier’s role must be go beyond providing funding for the construction, they must be active participants in the building process before they will be held liable for breach of the IWH.
f. Commercial Property: Courts are divided as to whether the IWH (or implied warranty of suitability) extends to commercial construction, primarily because of what the courts see as more equality in the bargaining power between the parties.
II. Avoiding Enforcement of a Contract
A. Duress: When one party’s freewill is overborne so that the objective manifestation of assent is shown not to be real assent, but the result of involuntary acquiescence to improper threats made by the other party. Proof of duress makes a K voidable. At C/L the threat had to be a serious threat to the person (serous injury, imprisonment) but the modern trend allows for threats to a party’s economic or property interests to support a charge of duress. However, in the context of business entities, the line between duress and simply “driving a hard bargain” is often blurry- it always depends upon the facts and a finding of duress usually involves some element of “bad faith.”
1. Elements of Duress: (Totem Marine & Restatement (2d) § 175(1)).
A K may be voided on grounds of duress (economic or otherwise) if the party seeking to void the K shows:
a. Wrongful or improper threats (or actions) by the other party to coerce the party seeking to void the K to agree,
b. That are of sufficient gravity that the will of the victim is overborne (a subjective standard).
c. The absence of any reasonable alternative to acceptance of the agreement.
2. When is a threat “wrongful or improper”?
a. “Wrongful” Threats: Threats to cause physical harm; to commit a crime or a tort; or the threat of criminal prosecution are “wrongful” and always sufficient to satisfy the threat prong.
b. “Improper” Threats: A threat may be improper even if the action threatened is not “wrongful.” For example, threats to engage in civil litigation or threats to refuse to honor contractual obligations are not per se improper, but if made in bad faith can be sufficiently improper to render a K voidable. Knowing that there is no basis for the threatened litigation, or breaching the obligation of good faith and “fair dealing” in performance of a contract have been held to be “bad faith.”
c. Threats by a persons not a party: If the threat inducing assent is made by someone not a party to the K, the victim may seek recission, unless the other party to the K, in good faith and w/o reason to know of the duress either give valuable consideration or relies materially on the transaction. Restatement (2d) § 175 (2).
3. Absence of a “reasonable alternative”: An available legal remedy, such as an action for breach of contract, a action in tort to recover damages, or the defense of litigation, may be a reasonable alternative, but, an
right of recission for fraudulent inducement but required the party seeking recission to have made a “tender” of any money or property received before instituting the action. The modern courts abandoned this requirement, and with the merger of the courts of law and equity, a victim of misrepresentation has two alternative avenues of relief.
1. The Tort of Misrepresentation (or Fraud): The victim of misrepresentation can seek damages for fraud in tort. The tort action is generally harder to get, because instead of recission and restitution damages are awarded. Generally a showing of scienter is required.
a. Damages for the Tort Action:The damages for the tort action are based on either
i. The “Out of Pocket” Rule: (Minority Rule).Recovery of the difference between what was parted with and what was received, plus any consequential damages incurred prior to the discovery of the fraud, or
ii. The “Benefit of the Bargain” Rule: (Majority Rule). The victim of the fraud is put into the position that he would have been had the other party spoken truthfully.
2. The Contract Action for Recission Based on Misrepresentation:
a. Elements of the Contract Action: (See Restatement (2d) § 164(1) & Syester v. Banta (the old lady and the dance lessons)):
i. An assertion by one party that is not in accord with the facts,
ii. The assertion must be fraudulent or material.
(a) “A matter is material if it is one which a reasonable person would attach importance to in determining his choice of action in the transaction in question.” (Hill v. Jones).
(b) Material misrepresentations do not require a showing of fraudulent intent and can be the result of negligence or even innocent mistake by the party making the assertion.,
iii. The assertion must be relied on by the recipient in manifesting assent,
iv. The reliance of the recipient must be justified.
b. Fact vs. Opinion: Opinions are defined as “expressions of belief without certainty as to the existence of a fact (RS (2d) § 168(1)). The general rule is that the assertion must a misrepresentation of fact. Early C/L held that mere opinions were not actionable because of the need for leeway for “puffing” in bargaining. The modern rule is less forgiving of a knowing misstatement characterized as an opinion.
i. Modern Rule for Statements of Opinion: A statement of opinion amounts to a misrepresentation (and is thus actionable) if the person giving the opinion misrepresented his state of mind – i.e., stated that he held an a certain opinion when in fact he did not. (RS (2d) § 159 cmt. d).
