CHAPTER 5 – RESTRICTIONS ON THE POWER TO K
(A) ILLEGALITY AND VIOLATION OF PUBLIC POLICY (sometimes referred to as K defenses) Res. Section 178
· Party to illegal K can’t ask ct to have illegal objects carried out → malum prohibitum – more regulatory / malum in se – bad in itself
· Doctrine of in pari delicto → parties are equally guilty, BUT if someone is more blameworthy then other, the ct may enforce K .
Matter of Baby M (NJ, 1988) → illegal and violates public policy. Payment of money to a surrogate mother is illegal & invalid b/c : (1) direct conflict w/ existing statutes → law prohibits accepting/ paying $$ for adoptions &(2) conflict w/ public policies of this state expressed in decisional law .. Best interest of child
AC v. CB (mexico, 1992) ( Must consider best interest of child & questions regarding rights of non-traditional parents). CANT have irrebuttable presumption disqualifying from custody/visitation solely b/c of sex. orientation.
(C) LACK OF CAPACITY (can be used to avoid liability on a K)
· UCC: Section 1-103: then → Res. : Who has capacity to K (Res. , § 12) → (those w/o capacity may avoid the K by disaffirming)
◦ Person has full capacity to K unless (…§ 12(2)) →
◦ Infants (§ 14) OR Mental Illness or defect (§ 15) OR Intoxication (§ 16).
· Federal Civil Rights act of 1868 → all people regardless of race or ethnicity, should have legal right to K
· MINORS → Upon reaching majority may choose to ratify /affirm the K and if performance is ongoing, continuation may be treated as implied affirmation.
◦ If the K is voided, the child may be liable in restitution if the other party provided “necessaries” or necessities to child. K of a minor for items which are not necessities is void or voidable at the minor’s option. Absent misrepresentation or tortious damage to property, a minor who disaffirms a K for the purchase of an item which is NOT a necessity MAY recover his purchase price WITHOUT liability for use, depreciation, or other diminution in value
JAMES HALBMAN JR, v. MICHAEL LEMKE (Wisconsin, 1980) (minor enters into K to buy car, car ends up being vandalized and is un-salvageable)
· RULE → K of a minor for items which are not necessities is void or voidable at the minor’s option.Minor who disaffirms a K is entitled to recover all consideration he has conferred. But, minor expected to return consideration remaining
· void– totally unenforceable. (void ab initium → void from the beginning)
· voidable – rule operates in benefit of 1 of the parties. Allows that party to decide whether or not (s)he will perform the K.
· Illinois rule → limit minors responsibility to restoration to specie only (in kind, returning actual thing you have)→ don’t have to pay vendor
· NJ case → you have to restore the property to the status quo. (status quo ante-before the K). You cant go to the vendor and say u don’t have the property b/c you sold/ traded/ got value of the property. You would have to give the vendor the proceeds from the good.
· Texas case – Cain v. Coleman →if u misrepresent your age, in purchase car → if u say ur an adult, your liable for the depreciation in value. If u tell them ur minor and they sell, all you have to do is return the property as is.
· New Hampshire Rule → restore any benefits u received from the contracts.
MENTAL INCAPACITY (mental illness = voidable K (person lacking capacity, will use this doctrine)
UCC 1-103 → use Res. to supplement UCC in capacity → Res. §15 (Mental illness or defect)
· COGNITIVE TEST → unable to understand in a reasonable manner the nature and consequences of the transaction (Res. , 15(1)(a))
· VOLITIONAL/ COMPULSION TEST → Unable to ACT in a reasonable manner in relation to the transaction and the other party has reason to know of his condition (Res. , Section 15(1)(b))
· K entered by a person who is unable to understand the nature of the K and obligations is voidable by that person. Res. Sec 12.
· if terms appear fair, Ct. less likely to find incompetence.
SHOALS FORD, INC. v. MAXINE CLARDY (Supreme Ct. of Alabama, 1991) (Insane person buys car, Ford dealer knows)
· RULE: Contracts of insane persons are wholly and completely void.
◦ COGNITIVE UNDERSTANDING TEST of Alabama → to show insanity → satisfactorily shown that party was incapable of transacting on particular business in quest. Not enough if he was delusional/mentally weak. Party can’t avoid K on ground of mental incapacity UNLESS it’s shown his insanity was such that he had no reasonable perception or understanding of nature/ terms of K. You have to show that u did not understand the NATURE or CONSEQUENCES of the transaction.
· Res. § 15 (2)
◦ cannot have knowledge that the person lacks capacity , changing position for the worst./ Will the person who lacks capacity need to fully performed? LOOPHOLE – grant relief as justice requires. / Vendor will get either restitution or reliance damages. Will say it was fair K, I performed & didn’t know person was mentally ill.
· A seller CANNOT get out of deal b/c someone has mental illness. The person with the incapacity can use the doctrine.
CHAPTER 6 → MARKET MISCONDUCT OR ERROR
DEFENSES →Duress, undue influence, misrepr, mistake, & unconscionably deny legal enforcement to private agreements
(A) DURESS
PHYSICAL DURESS → VOID K → RULE: If conduct that appears to be a manifestation of assent by a party who does not intent to engage in that conduct is physically compelled bu duress, the conduct is not effective as manifestation of assent. (Res§ 174)
DURESS BY IMPROPER THREAT → VOIDABLE K Rest § 175
· RULE 1: If party’s manifestation of assent is induced by improper threat by other party that leaves the victim no reasonable alternative, the K is voidable by the victim
· RULE 2: If a party’s manifestation of assent is induced by 1 who is NOT a party to the transaction, the K is voidable by the victim UNLESS the other party to the transaction in good faith and WITHOUT reason to know of the duress either gives values OR relies materially on the transaction.§ 175(1))
TONIE E. SOSNOFF v. JASON D. CARTER ( NY, 1991 )
RULE: A K is voidable on ground of duress when established that the party making claim was forced to agree to it by means of a wrongful threat precluding exercise of free will.
ECONOMIC DURESS ELEMENTS:
· (1) show there is a wrongful threat. Is a threat to breach, wrongful? (2) threat overcomes the will of the party (element of coercion) → is it the kind of threat that is capable of making u overcome ur will and make u do something that u would normally not do (3) and results in irreparable harm (4) was there reasonable alternative?
· victim of duress may not be able to use the doctrine to avoid the K if the threat came from 3rd party. Res. allows a defense of duress by a 3rd party only where there was actual physical compulsion or where the party seeking to enforce the K knew of threats being made by a 3rd party.
US for the use of the TRANE COMPANY v. LORNA D. BOND (Maryland, 1991)
· Can a party whose consent to enter K is coerced assert defense of duress against a party who neither knew nor participated in the infliction of coercive act.
· LORNA → relying on Copeland, → duress rendered a K void from the beginning, not voidable. TEST → whether the duress amounts to the type of coercion which would make the agreement void, or whether notwithstanding the coercion, there was actual expression of assent to the K. Under COPELAND, person coerced into executing K can raise defense of duress against a 3rd party who neither participated nor had knowledge of coercion.
Duress by compulsion- rendering K void (Res. , §174) → Fear of battery is not enough to render K void.
· If someone threatens ur life or limb, there is probably no atonement → so this could be basis for arguing physical coercion.
Duress by threats → rendering K voidable (Res. , §175)
Cases:
· Copeland → a K, execution of which was induced by fraud, is void, and stronger character cannot reasonably be assigned to 1, the execution of which is obtained by duress. Difficult to determine whether 1 executed a K/deed w/ a mind and will sufficiently free to make act binding.
· Whiteridge v. Barry → wife alleged that she assigned her interest in an insurance policy under duress by her husband to satisfy his debts.
· First National Bank v. Eccleston → wife, following husbands death, claimed deed was void b/c she was forced to sign and acknowledge it by threats & ill treatment of her husband. Ct held that deed was void.
· Brown v. Pierce → conveyance was held void as against an innocent 3rd party who in good faith gave value where the person conveying title to the property was forced to do sunder threats of death and violence. Ct. said: actual violence is not necessary to constitute duress
· LAW: would a reasonable person under the circumstances believe there was a imminent threat of physical violence
◦ MUST (1) believe imminent threat of physical violence
◦ MUST (2) be a reasonable person
· ARGUMENTS: → WOULD IT BENEFIT UR CLIENT TO MAKE THE Res. ARGUMENT, OR THE ARGUMENT OF THE Maryland Ct.. U CAN ARGUE Maryland STANDARD AS OPPOSED TO JUST Res. STANDARD.
(B) UNDUE INFLUENCE
RULE: If a party’s manifestation of assent is induced by undue influence by the other party, the K is voidable by the victim (Res 177(2))
UNDUE INFLUENCE=unfair persuasion of a party
· who is under the domination of the person exercising the persuasion OR
· who by virtue of relation b/w them is JUSTIFIED in assuming that the person will not act in a manner inconsistent w/ his welfare (Res Section 177(1)) → K VOIDABLE
· Presumptive undue influence by 1 who wields power b/c of a victims faith or infatuation assumes that the victim will lose perspective, the capacity for critical thought or rational consideration of alternative choices
NANCY FERGUSON V. JOHN JEANES (Ct of Appeals of Washington, 1980) (she fell in love, he used religion and love as way to induce her to join him as partner)
· When 1 party is under domination of another, or by virtue of relationship b/w them is justified in assuming that the other party will not act in a matter inconsistent with his welfare, a transaction induced by unfair persuasion , is induced by undue influence & is voidable.Persuasion is unfair, & influence undue, ONLY when it overcomes the will of another such that her own free agency is destroyed. Undue influence makes assent involuntary, and unless unduly influenced party chooses to affirm the K, appropriate remedy is a rescission that places parties in the position they were in prior to invalid agreement.
· Rescission of partnership agmt is proper remedy where partnership is created through undue influence.( parties go back to the point before the K.)
C) MISREPRESENTATION (makes K voidable, and in some cases void)
· Defined : Section 159 → misrepresentation Defined / misrepresentation is MATERIAL → 162 (2)
◦ void → Section 163 voidable → 164
Affirmative → making statement that turns out to be untrue
Omission → duty to disclose
Fact, not opinion (superior knowledge) or promise (statement of intention); where misrepresentation is intentional → ** fraud/ tort law (fraud- intentional misrepresentation); cases where misrepresentation is negligent or reckless
caveat emptor / confidential or fiduciary relationship, some info given requires more disclosure, fact not discoverable by the buyer, intent by materiality
justifiable reliance
causation (inducement); injury
ELEMENTS → MAKING K UNENFORCEABLE:
· (1)- 1 party makes a statement relevant to the exchange that isn’t true.
Doesn’t require proof that person knew of or disregarded the falsity of his statement, so long as the misinformation is material.
· (2)- the aggrieved party relied on the false information in entering into the K
◦ most courts have held that its enough if the false information was a substantial factor in the decision
◦ causation test of misrepresentation → does evidence tend to show that aggrieved party would not have entered the K unless the false statement was made?
· &(3)- the aggrieved party’s reliance was reasonable or justifiable.
◦ Would reasonable person in the position of aggrieved party accept the statement as true?
◦ Should aggrieved party have trusted the person?
◦ Was there a duty to read documents/ duty to investigate?
· (4) AND AN INJURY RESULTED, MAKING THEM ENTITLED TO A REMEDY
· promise is not misrepresentation unless unless proof that never intended to perform the promise
· Puffing is not misrepresentation but sales pitch no reasonable person would believe to be factual
LAWRENCE KANG V. DEWEY HARRINGTON (SC of Hawaii, 1978 ) (he put perpetual agreement, and she didn’t know-
t mistake; clerical error. Barber promptly notified the Pl that a mistake was made in calculation of the bid. The Pl had knowledge of the mistake, before it forwarded the K to Barber. It was a mistake which was material to the K.
(F) unconscionability (Defense → K is not enforceable or should not be enforceable UCC 2-302 and comment 1which echoes Res. Section 208
Doctrine requires usually that u prove BOTH: (TERMS TO USE)
· (1) substantive unconscionability &
◦ its unfair–term unreasonably favorable to 1 side. The bargain is titled in favor of 1 of the 2 parties. Shocks the conscience. “No man in his senses and not under a delusion would make on the 1 hand and no honest or fair man would make on the other”. Surprise and oppression
· (2) procedural unconscionability
◦ Absence of meaningful choice (issue as to whether there was assent to terms of the K)
◦ Some suggestion there was no assent to the unreasonably unfavorable term. Disparity in bargaining power (social or economic), education and experience , language differences , high pressure sale tactics, hidden terms
ROBERT W. RYAN v. NORMAN WEINER (Ct. of Chancery of Delaware, 1992 )
Contracts made by fraudulent misrepresentations can be voided. → Presume Fraud if adequacy of consideration is very gross
· TEST: a K is unconscionable if it such as no man in his sense and under a delusion would make on the 1 hand, & as no honest or fair man would accept on the other. Generally held that unconscionability test involves the quest of whether provision amounts to a taking of an unfair advantage by 1 party
· A party may rescind agreement based on unilateral mistake if (1) enforcement of agreement would be unconscionable; (2) mistake relates to the substance of consideration (3) mistake occurred regardless of exercise of ordinary care &(4) its possible to place the other party in status quo.
TONY BROWER v. GATEWAY 2000 (SC of NY, AD 1998 ) (comp had arbitration provision which made it so costly that no1 would want to arbitrate)
· RULE: → Unconsciounability requires a showing that a K is both procedurally and substantively unconscionable when made. There must be some showing of an absence of meaningful choice on the part of 1 of the parties together w/ K terns which are unreasonably favorable to the other
TESTS: 1. absence of meaningful choice on the part of 1 of the parties together with K terms which are unreasonably favorable to the other party. 2. Whether, in light of general commercial background and commercial needs of the particular trade or case, the clauses involved are so 1 sided as to be unconscionable under the circumstances at the time of the making of the K. 3. Procedural unconscionably (bargaining naughtiness) vs. substantive unconscionably (evils in resulting K)
BROOKLYN UNION GAS COMPANY v TAFAEL JIMENIZ (Civil ct of NY , 1975 ) D couldn’t read English and they wouldn’t give Spanish translation
· RULE: UCC 2-302: if ct finds the K or any clause of it to be unconscionable at the time it was made, the Ct. may refuse to enforce the K.
◦ An unconscionable sales K contains procedural elements involving K formation of process, which the use of high pressure sales tactics, failure to disclose terms of the K, misrepresentation and fraud on the part of the seller, a refusal to bargain on certain critical terms, clauses hidden in fine print, and unequal bargaining power aggravated by the fact that the consumer in many cases cannot speak English.
NEZ PERCE TRIBLE OF INDIANS v. THE UNITED STATES (USCt of Claims, 1966 )
· although ct has held that a particular consideration was unconscionable when it involved discrepancies over 100% ( percentage diff b.w actual value and amt paid), there has been no indication that the lesser percentage discrepancies are exempt from challenge of unconscionability.
· PROCEDURAL unconscionably -RELATIVE POWER B/W THE 2 SIDES
· UNCONSCIONABILITY DOCTRINE: show transaction disproportionately favorable to 1 side. showing absence of meaningful choice- disparate bargaining power(Terms buried in back, written in language u don’t get, high pressure sales tactics, class differences, age differences). Show person was particularly vulnerable & NO bargained for exchange.
CHAPTER 7: UNDERSTANDING CONTRACTUAL OBLIGATIONS- INTERPRETATION
COMMON LAW
UCC *** USE THIS
Looks for collateral agreement
is this a different deal from the 1 covered by the written agreement
Is this the kind of term which would naturally be omitted from the writing (included in a separate agreement?)
Asks whether the writing is “fully integrated”
Nature of the transaction
Form agreement or negotiated
2-202 applies to both extrinsic evidence (for purposes of interpretation) and evidence of additional or supplemental terms
Parol evidence may not contradict writing BUT may be EXPLAINED or SUPPLEMENTED by
(a) COURSE OF DEALING or USAGE of TRADE (1-205) or by COURSE OF PERFORMANCE (2-208); &
(b) by evidence of CONSISTENT ADDITIONAL terms UNLESS the Ct. finds writing was INTENDED also as COMPLETE and EXCLUSIVE statement of terms
· if “complete and exclusive” → no admission of additional terms
