CONTRACTS II
Professor Lee
I. Defenses
A. Lack of Capacity
1) Infancy Doctrine (Common Law)
a) A minor’s contracts are voidable but not void at the election of the minor.
b) Upon reaching the age of majority, a minor may choose to affirm the contract.
i. If a minor does not actively disaffirm the contract within a reasonable time after reaching the age of majority, then she has affirmed through conduct.
c) EXCEPTIONS:
i. Contracts that provide for the necessities of life.
ii. Where a minor misrepresents age.
iii. Willful destruction of property. (tortious conduct)
iv. Statutory exceptions (e.g., insurance Ks, student loan Ks, etc.)
2) Mental incapacity- One whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract may disaffirm when lucid or by his legal representative. He may likewise affirm during a lucid interval or upon complete recovery even without formal restoration by judicial action. (contract is voidable)
3) Incapacity due to intoxication: One who is so intoxicated as not to understand the nature and significance of his promise may be held to have made only a voidable promise is the other party had reason to know of the intoxication. The intoxicated person may affirm the contract upon recovery. Once again, there may be quasi-contractural recovery for necessities furnished during the period of incapacity.
B. Duress
1) Modern view
a. The concept has been broadened to include myriad forms of economic coercion which force a person to involuntarily enter into a particular transaction.
b. TEST: The test has come to be whether the will of the person induced by the threat was overcome rather than that of a reasonably firm person.
2) Duress by Physical Compulsion (Rest 2d Sec. 174)
a. If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.
b. Contract is void
3) Economic Distress (Rest 2d Sec. 175(1))
a) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable….
i. Improper Threat (Rest 2d Sec. 176(1))
1. A threat is improper if
(a) what is threatened is a crime or a tort…,
(b) what is threatened is a criminal prosecution,
(c) .. the use of civil process and…made in bad faith,
(d) the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient.
(Rest 2d Sec. 176(2))
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.
3. No reasonable Alternative (Rest. 2d Sec. 175):
(a) Availability of legal action
(b) Alternative sources of goods, services or funds
(c) Toleration if the threat involves only a minor vexation.
– Note 4, Totem Marine v. Alyeska
4) Undue Influence:is persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment. Requires both (1) excessive pressure and (2) undue susceptibility.
a) Excessive pressure approaches the boundaries of coercion – i.e., over-persuasion.
b) Undue susceptibility may consist of total weakness, without understanding; or,
a lesser weakness which destroys the capacity of a person to make a contract even though he is not totally incapacitated.
d) Odorizzi v. Bloomfield
e) Rest. 2d § 177. When Undue Influence Makes a Contract Voidable
(1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.
(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.
(3) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim un
isclosure corrects a mistake as to a basic assumption of the contract and if nondisclosure is akin to a failure to act in good faith and fair dealing;
3. Disclosure corrects a mistake as to the contents or effect of a writing, evidencing the agreement;
4. The other person is entitled to know because of a relationship of trust and confidence between them.
7) Unconscionable Contract or Term (Rest. 2d § 208/UCC 2-302)
a) If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
b) Unconscionability has generally been recognized to include:
1) Procedural Unconscionability: an absence of meaningful choice on the part of one of the parties
i. Gross disparity in bargaining power or
ii. Party did not have reasonable opportunity to understand the terms or
iii. Contract includes hidden terms or is not reasonably intelligible (creates unfair surprise)
i. Focuses on surprise or oppression due to unequal bargaining power (Higgens)
ii. the lack of a meaningful choice, considering all of the circumstances surrounding the transaction including
a) the manner in which the contract was entered,
b) whether each party had a reasonable opportunity to understand the terms of the contract, and
c) whether the important terms were hidden in a maze of fine print.
2) Substantive Unconscionability: contract terms which are unreasonably favorable to the other party.
i. Standard: terms that are so extreme as to appear unconscionable according to the mores and business practices of the time and place.
