CONTRACTS II- Spring 2015
Professor Drennan
I. Avoiding Enforcement: Inacpacity, Bargaining, Misconduct, Unconscionability, and Public Policy
The doctrines in this section are concerned with the competency of parties to make an agreement, with the bargaining process by which an agreement is reached, and with the substance of any resulting agreement
In other words, the principles to focus on in this section are the status of the parties, the behavior of the parties, and the substance of the agreement
3 areas of focus- case can have and often will have more than 1 of these
of one or both of the parties- who they are- competency, relationship of parties
Behavior of the parties- fraud, duress, etc.
Substance of the agreement- subject matter, substance
A. MINORITY AND MENTAL INCAPACITY
– Determined objectively- either under 18 and minor or 18+ major
1. Common law- minors/infants age of majority= 21
2. Modern Rule: Minors/Infants- lack capacity to contract and, therefore, can disaffirm the contract. Their status can make the contract voidable.
3. Rest. 2nd Sec. 14: “Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.”
4. 2 Competing Rules- Infancy Doctrine (traditional) vs. Dodson Rule (modern)
a. Infancy Doctrine (Traditional Rule)- Minor can disaffirm or avoid a K if she chooses even if there has been full performance and minor cannot return to the adult what was received in the exchange without liability absent willful destruction of the goods- no obligation to account for depreciation-minor just has to return item or what was left of it and get full purchase price back.——-bright line, clear rule- age is determinator and that’s it- arbitrary
Traditional rule policy- minors are (1) not mature enough and lack good judgment to understand consequences of a K and (2) keeps safe from crafty adults who would take advantage of them
Protection to merchant- (1) minor still has to return the items in questions or the proceeds and (2) merchant can get identification to see if minor or not and if minor not make the K
Does not protect the minor if (1) minor commits fraud (lies about their age)- they can disaffirm K but will be liable in tort from fraudulent behavior
(2) Equitabble estoppel-if in entering agreement a party makes a misrepresentation in fact in later litigation they will be estopped from entering a fact that contradicts what they say (if you say you are 19 and seek to prove contrary to do that- equitable estoppel prevents you from doing this)
b Benefit Rule- (Dodson) Minor can disaffirm or avoid a K absent fraud, duress, etc. but must make restitution for either benefit received under K or depreciation in value of the property when minor seeking to recover payment made to adult.
Exceptions to Dodson Rule
Necessaries- Minor is liable for reasonable value of necessaries (what one needs to live food, clothing, shelter)- necessaries are relative to social status, other characteristics of the minor
Relative and must be determined on factual basis case by case
Tortious Conduct- Minor’s ability to disaffirm may be restricted if minor engages in tortious conduct (i.e. misreprensentation of age, or willful destruction of goods)
Ratification after reaching majority- Once reach majority have power to affirm or ratify the K, in which event minor is bound
On reaching majority, must act w/in reasonable period of time to disaffirm the K or will be deemed to have affirmed the K
Statutes can restrict (i.e. statute allowing 16-17 years old to work, can’t disaffirm K then)
Pre- and Post-injury Release Agreement- Majority- minor can disaffirm a pre-injury release signed by parent. Minority- Cannot disaffirm release signed by parent b/c promotes allowing parents to make decisions about child
Marriage- Majority- takes away inability to make K, Minority- Infancy still exists
Case:Dodson v. Shrader- 1992
Cause of Action: Disaffirming contract of a minor
Facts: Plaintiff, who at the time was 16 years of age, purchased a pick-up truck from Defendant for $4900. No discussion of Plaintiff’s age was had and Defendant testified that he believed Plaintiff to be 18 or 19 years old. Plaintiff bought the truck with money had had borrowed from his girlfriend’s grandmother. After nine months from the date of purchase, Plaintiff brought the truck in for repair after the truck began experiencing mechanical difficulties. The mechanic notified Plaintiff that it was likely the truck needed a repair. Plaintiff could not afford such repairs and elected to continue driving the truck around until the engine blew out. After unsuccessfully trying to return the truck to Defendant, Plaintiff parked the car in his front yard. While parked, a passing car hit the front fender of the truck; the estimated value of the truck after the collision was $500
Issues: Whether a seller is entitled to receive reasonable compensation for the loss of value to goods sold to a minor while such goods are in the minor’s possession.
Reasoning: The Court held that absent any overreaching, fraud, or unfair advantage on the part of the adult seller, a seller is entitled to reasonable compensation for the use of, depreciation, or willful or negligent damage done to goods sold, while such goods are in the minor’s possession. The Court remanded the case to the trial court to make factual determinations of whether there was any overreaching, and if not, to determine whether Plaintiff’s actions of parking the car on the side of the
MENTAL INCAPACITY- Determined by subjective attributes
1. Law presumes that every adult person is fully competent until satisfactory proof to contrary is presented.
Burden of proof is on person seeking to void the act because of mental incompetency
RS 13: Exception: A person does not have capacity to enter into Ks if the person’s property is under conservatorship.- Effect of court-decreed guardianship
2. MAJORITY Test for determining competency is whether person involved had sufficient mental ability to know what he or she was doing and nature and consequences of the transaction.*******Test for mental competency—Cognitive Test- did person understand what they were doing
VS.
MINORITY: Volitional test for incompetence- Lack capacity to K if person is unable to act in a reasonable manner in the transaction and the other party has reason to k
is made in bad faith, or
(d) the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient.
(2) A threat is improper if the resulting exchange is not on fair terms, and
(a) the threatened act would harm the recipient and would not significantly benefit the party making the threat,
(b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or
(c) what is threatened is otherwise a use of power for illegitimate ends.
h. Lack of Reasonable Alternative- Economic duress does not work and K enforceable unless the party who submitted to the agreement had no reasonable alternative but to accept the agreement
1. Possible reasonable alternatives (1) availability of legal action, if under circumstances, it is a viable option (2) Alternative sources of goods, services, or funds where there is a threat to withhold such things (3) toleration if the threat is only a minor vexation
i. Inducement of involuntary assent- wrongful threat must cause victim to involuntarily enter into the transaction- must substantially contribute to their entering into K-
Common law def of inducement- objective- whether the threat be such as to overcome the will of a person of ordinary firmness and courage
Modern law- whether the particular victim was induced by the threat
j. Must threatening party cause hardship?
1. Majority- fact a party agreed to settlement because of a desperate need for cash could not be basis for duress unless other side had caused the financial hardship
2. Minority- Enough that one party takes advantage of the other side’s dire circumstances without having caused the financial hardship
k. Role of duress in contract settlement or modification- Duress can be used to avoid enforcement of a contractual “modification” of an executor contract
Economic Duress
1. Traditional Rule: A person must be subjected to the threat of an unlawful act in the nature of a tort or a crime.
2..Modern Rule: If a party’s manifestation of assent is (1) induced by an improper threat by another party that (2) leaves the victim no reasonable alternative (doesn’t have to be illegal, just wrongful). Even if it is wrongful, he must still not have any reasonable alternative.
3. UCC Good Faith Test: Common law doctrine of “economic duress” has been subsumed by the good faith test, for determining the enforceability of agreements modifying K’s for the sale of goods. A threat to breach is not always in bad faith, it is a matter of degree.
