Farber Contracts Spring 2017
Contract Boundaries
Reasons to enforce contracts:
letting people make their own decisions
efficient running of economy
breaking promises is “wrong” – Kantian morality
Reasons to limit contracts:
improper bargaining methods
ignorant or inexperienced consumers
monopoly power
one-sided bargains
General Contract Tensions:
Crystals v. mud – use of clear rules vs. standards
Upholding reasonable expectations versus upholding written instruments
ensuring fairness vs. trusting the market
Unfairness
Contract will be unfair if: (McKinnon)
Restricts free use of land
Arose from inequitable bargaining positions
Exception: fair at time of formation, even if retrospectively unfair (Tuckwiller)
They contain exculpatory clauses that violate public policy (O’callaghan) (most states outlaw exculpatory clauses for rental unites)
Cases
McKinnon v. Benedict p. 491 – M imposed several restrictions on B in the sale of land / summer camp. Contract found to be oppressive / void.
Tuckwiller – Dying woman offered home to friend if friend cared for her until she died. She died next day. Contract still valid b/c fair at time of formation.
Adhesion Contracts
– terms which are offered on a take it or leave it basis and are one-sided (Graham v. Scissor-Tail)
Policy: Forcing contracts to be personalized may be so inefficient and resource consuming as to be more of a social ill than having them be generic
Does the contract include terms of adhesion? If yes – closer scrutiny.
Do the terms of adhesion fall under “reasonable expectations” of the parties and the contract is not wholly unconscionable? Graham
“wholly unconscionable” may include provisions violating specific state statutes Great Expectations
UCC 2-302: “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract [or limit enforcement].”
Cases:
Graham v. Scissor-Tail – adhesion K re: concerts, Graham knew of all the provisions in K, therefore not unreasonable. Against public policy b/c record labels presided over arbitration
Great Expectations v. Doe – online dating provider didn’t include many state protections for users in its adhesion contracts. (protections only for opposite sexes)
Unconscionability
– denial of enforcement of a contract if that contract/terms are deemed to be oppressive UCC § 2-302(1)(2)
“Reasonable Expectation of the Consumer” (procedural unconscionability)
Was there an element of coercion in the process? Would the party be surprised to find that this term was included?
Is there a deviation from regular business practices? Graham
Is there an attempt to conceal?
Does unconscionability exist at formation? Contract eligible to be unenforceable. UCC 2-302(1); Walker-Thomas Furniture
Commercial Reasonableness (harsh, one-sided deals) (substantive unconscionability)
Does the contract involve exorbitant profits / “sharp dealing”? Star Credit
Courts almost never engage in price control, but there are exceptions for truly extreme cases. Cf Star Credit and Black Industries
High cost to one party, small gain to the other
Undermines core purpose of contract
Take advantage of bounded rationality
Policy: “Sellers can charge most exorbitant rates, confident that they’ll at worst be able to recover reasonable profit + expenses”
Paternalism
What is the role of paternalism in evaluating which parties are held to contracts/which bailed out by courts. Racism? Socioeconomic status?
Examples:
Payday lending – often charge exorbitant rates (Not in Farber’s neighborhood)
Arbitration
Increasingly common throughout every facet of modern life – cell phones, businesses, insurance, etc.
Is the class action waiver / arbitration agreement detrimental to a state statute by undermining its purposes and does it cause injury to the public good? Likely unconscionable Scott v. Cingular
UCC 2-302(1)
“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract [or limit enforcement].”
Public Policy
Main policy restrictions
Unconscionability
Illegality
Family contracts
R2 §178:
(1) A promise or other term of an agreement is unenforceable if…the interest in its enforcement is clearly outweighed in the circs by a public policy
(3) In weighing a public policy: account is taken of:
Strength of that policy
Likelihood that a refusal to enforce the term will further that policy
The seriousness of any misconduct involve and the extent to which it was deliberate
The directness of the connection b/n misconduct and contract term
General Rules
Contracts / terms that are flagrantly illegal are void. May also include violations of the spirit of the law. (Bovard).
Contracts are not void unless the contract/its provisions are against public policy — parties who are engaged in illegal activities (i.e. the Mafia) do not necessarily void the contract. (XLO Concrete.)
Covenants not to compete have
JC PENNY
JC Penny Store / lease buy back
Sought to use vague term in K to cause substantial loss; too opportunisitic
Bloor p.567 / BEER COMPANY
beer co. sold to larger distributor with royalty fee; larger distributor stopped using good faith efforts to sell beer.
Contract Formation
Contracts begin with:
Promise + statement a reasonable person would interpret as a firm commitment.
Without firm commitment, promise is a gratuitous promise
Promise without any limits/duties = illusory promise (“I promise to pay if I want)
Promises become enforceable with consideration (and sometimes reliance)
R2 bargain Principle
§17: The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration
Consideration
Gifts are one-sided / contracts require an exchange / consideration
Did the parties intend to make a binding contract?
Could a party reasonably understand that a binding contract was made? (Hawkins)
Parties may not rely on generalized information to procure warranty (Bayliner)
WAS THERE CONSIDERATION?
Right, interest, profit or benefit accrued to one party
Forbearance, detriment, loss or responsibility given, suffered or undertaken by another (Hamer v. Sidway)
Forbearance can include voluntarily giving up:
legal rights (i.e. smoking Hamer)
impossible privileges (i.e. unmeritorious legal claim Dyer given reasonable belief that forbearing actual privilege).
Promise of forbearance must include valid timeline, vagueness ≠ consideration (Sheffield)
Moral obligations to repay don’t count (Mills v. Wyman)
however, exceptions may be had if parties create reliance interest Webb
If new conditions are added (i.e. non-compete clause), continued employment after the fact may count as consid. Lake Land
NO CONSID? Did the party ntl detrimentally rely on the gratuitous promise?
If yes, promise may be turned into enforceable contract. Pfeiffer
A promise for a promise = valid consideration; but past consideration is invalid
