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Contracts II
University of Dayton School of Law
Germain, Kenneth B.

Contracts II Outline

Fall 2011 – Professor Germain

A) Minors & The Infancy Doctrine

1) A minor who enters into a contract has the absolute right to disaffirm the contract.

(a) This right is limited to contracts that are not considered to be necessaries.

(b) The contract is voidable at the choice of the minor.

i Void: Contract, on its face, holds no weight.

ii Voidable: The minor retains the option to void the contract or follow through with performance of the contract.

· The option to disaffirm the contract is retained by the minor until after the age of majority.

(c) Because the minor has the option to void the contract, he may choose to enforce it against an adult.

(d) Minor: a person under the age of majority.

i In some states, a minor who emancipated from his parents may be treated as an adult.

(e) A contract with a minor is voidable when the minor reaches the age of majority.

2) Purpose of the doctrine

(a) To protect minors from the shrewd dealings of adults.

3) Doctrine can be used as a “sword” or a “shield”

(a) Sword: “I want back the consideration I conferred upon you, the seller.”

(b) Shield: “I want out of this contract that I signed.”

4) Remedies

(a) Restitution: A disaffirming minor is entitled to recover all consideration conferred to the other party incident to the transaction.

(b) The minor must return as much of the consideration conferred upon him that remains in his possession at the time he disaffirms the contract.

i Restatement of Restitution §62

ii Restatement (Second) of Contracts §14

(c) A disaffirming minor is only liable for the value of necessaries supplied under the contract.

5) Doctrine of Necessaries

(a) Common Law: A minor who disaffirms a contract for necessaries does not escape liability.

(b) It must be shown that the minor was actually the person who entered into the contract.

i A minor is not liable for necessaries gained by the efforts or funds of someone else.

(c) When a minor breaches a contract for a “necessary” item, the minor is liable to pay the value of the consideration conferred upon the non-minor.

(d) Examples of necessaries include: Food, clothing, shelter, etc.

6) Defenses available to non-minors entering into contracts with minors.

(a) Where the minor makes a misrepresentation or willfully destroys property, the non-minor may recover in tort.

B) Mental Capacity & Competence

1) Mental Illness or Defect

(a) Restatement (Second) of Contracts §15

i A contract is voidable by the party lacking mental capacity if the party entering into the contract is:

· Unable to understand the nature and consequences of the transaction in a reasonable way, OR

· Unable to act in a reasonable manner, in relation to the transaction, AND the other party has reason to know of his condition.

ii A party cannot get out of a contractual obligation by virtue of incompetence if:

· The contract is made on fair terms, AND

· The other party has no knowledge of the party’s incompetence, AND

· The contract has been performed in whole or in part, OR

· A change in circumstances would make the escape of liability unjust.

(b) Test of Mental Capacity – “Cognitive Test”

i A person, to enter into a valid contract, must have the capacity to understand the nature and consequences of the transaction.

ii An ability to comprehend the nature and quality of the transaction, together with the understanding of its significance and consequences is required.

· Evidence must be shown to support the incompetence of the party.

2) Primary concern is the ability of the party to comprehend the effects of the decision he is making.

3) Contracts can be invalid if the party is delusional and it can be shown that there is a connection between the delusions and the entering into of the contract. It must be shown that the party did not understand the consequences of the decision and would not have made the contract if thoroughly sane.

4) Admissible evidence of mental incapacity (Factors)

(a) Guardianship

(b) Court Order

i Diagnosis by hospital’s medical/psychiatric staff.

· Nothing less serious than mental psychosis will be sufficient to escape liability of a contract.

5) Restitution for Necessaries

(a) In contracts for necessaries, a person lacking mental capacity is liable in restitution for the value of any consideration conferred upon him (same restitution as contracts with minors).

6) Drunk or Drugged Contract parties

(a) The test is the same. The party must be drunk/drugged to a point where the elements of the test are satisfied.

C) Duress & Menace

1) The action or threat of action against the complaining party must be unlawful.

(a) A threat to take a legal action is not unlawful unless the party making the threat knows that the threatened claim is false.

(b) Duress Rule:

i A contract is voidable on the grounds of duress when it’s shown that the party making the claim was forced to agree by means of wrongful threat restricting the exercise of free will.

2) Economic Duress

(a) Immediate possession of necessary goods is threatened by proof that one party has threatened to breach the agreement by withholding goods unless the party agrees to its further demands.

(b) It must also be shown that the oppressed party could not obtain the goods from another source of supply and that the ordinary contract remedy would be inadequate.

D) Fraud

1) Actual Fraud – Elements

(a) A party makes a misrepresentation to induce another party to action, AND

(b) The party either:

i Knows or believes the assertion to be untrue, OR

ii Lacks confidence in the truth of the assertion, OR

iii Says, or implies, that there is a basis for the assertion, when in fact, there is not.

2) Constructive Fraud

(a) Arises from a breach of a duty owed by a party in a confidential or fiduciary relationship with another which induces justifiable reliance.

3) Contracts entered into under a fraudulent misrepresentation are voidable.

E) Undue Influence – “Over Persuasion”

1) Elements of Undue Influence:

(a) Undue susceptibility in the subservient person, AND

(b) Excessive pressure by the dominant person.

2) Two approaches to this claim:

(a) “Regular” person with “regular” susceptibilities being subjected to abnormally oppressive pressure or influence.

(b) Person with “subnormal” capacities and/or susceptibilities is subjected to “regular” pressure or influence.

3) Characteristics indicating the presence of Undue Influence:

(a) Discussion of the transaction at unusual or inappropriate time.

(b) Consummation of the transaction at an unusual place.

(c) Demand and insistence that the deal be completed immediately.

(d) Extreme emphasis on unsavory consequences of delay.

(e) Multiple dominant persuaders vs. single “subservient” party.

(f) No 3rd party advisor to subservient party.

(g) Dominant party tells subservient party that there is no time to consult financial or legal advisor.

4) Persuasion which tends to be coercive in nature.

5) Contracts signed under Undue Influence are voidable.

6) “Persuasion which overcomes the will without convincing the judgment.”

(a) High pressure which works on mental, moral, or emotional weakness which approaches the boundaries of coercion.

(b) No misrepresentation is required.

7) Taking unfair advantage of another’s weakness of mind or taking a grossly oppressive and unfair advantage of another’s necessities or distress.

8) A confidential or authoritative relationship between the parties is not required.

II. Contract Modification, Rescission, Waiver and Consideration Issues – §2-209

A) Modification of Contract Terms

1) Legal Duty Rule:

(a) Contracts outside the UCC (i.e. Construction contracts)

i For the terms of a contract to be modified, there must be new consideration offered by both parties, independent of the original terms of the agreement.

ii Exception:

· Courts will allow a modification without consideration if the modification is fair and equitable in view of circumstances that weren’t considered when the parties created the contract.

iii No-oral-modification provisions

· Exmaple:

1. Builder agrees to excavate a cellar for Owner for $6K. Builder unexpectedly encounters subsoil hard-pan, and so notifies Owner. The unanticipated subsoil conditions do not give the builder the defense of impossibility to escape performance of the contract. Nevertheless, in view of the unanticipated circumstances, which significantly increase Builder’s costs, Owner agree to pay Builder an additional $2K for the excavation. This increase in compensation is fair and equitable in view of the unanticipated greater difficulty of performance. Owner’s new promise to pay additional $2K is enforceable.

· The provisions are enforceable but may be waived, allowing a contract to be modified orally.

(b) Contracts for the sale of goods – UCC §2-209(1)

i An agreement modifying a contract for the sale of goods needs no new consideration to be binding.

· Good faith is required.

· Courts will enforce provisions that require modifications to be in writing.

ii No-oral-modification provisio

that there be an unliquidated claim or bona fide dispute over the amount due under the contract.

5) For partial payment to be considered tendered and accepted:

(a) There must be a genuine dispute over the amount owed, AND

(b) Payee must receive and cash payment from the payor.

i The payee writing “partial payment” on the check is not a defense.

E) Express Warranties Limiting Liability

1) General Rule:

(a) Absent fraud, a person who doesn’t read a contract cannot later relieve himself of the burden of the contract.

(b) General rule is derogated by the unequal bargaining power present in some contractual relationships.

2) Limitations on the general rule

(a) Disclaimers that are stated unclearly (back of a contract, small font, etc.) are said to be unfairly procured unless they are brought to the attention of the buyer (or weaker party).

(b) Liability can only be fairly limited if the limitation is fairly and honestly negotiated and understandingly entered into.

i The law does not allow the dominant party in a contractual relationship to use that power to relieve itself of liability and transfer the risk to an unsuspecting party.

(c) Implied warranties that protect consumers, and the public at large, cannot be contracted away to the detriment of the unsuspecting consumer.

F) Modification and/or Limitation of Warranties UCC §2-316

1) Implied Warranty of Merchantability

(a) An implied warranty that goods are reasonably fit for the general purposes for which they are sold.

2) Two approaches to modifying or limiting implied warranties

(a) Disclaimers UCC §2-316(2)

i To exclude or modify the implied warranty of merchantability, the language of the disclaimer must mention merchantability and be conspicuous.

· It is not required that the disclaimer be in writing, but if it is, it must be conspicuous.

ii To exclude or modify the implied warranty of fitness, the disclaimer must be in writing and conspicuous.

· No requirement that any particular words be used.

(b) Limitation of remedies UCC §2-719

i The seller may limit the buyer’s remedies for breach of warranty to repair or replacement of the defective goods.

3) Seller’s tools to limit liability

(a) Expressions such as: “as is”, “with all faults”, etc. serve to put the buyer on notice that there is no implied warranty associated with the sale of the good.

G) Recovery for Economic Loss

1) Economic loss that arises from commercial transaction are not recoverable under negligence or strict liability.

(a) Economic loss is recoverable when personal injury or property damage is involved.

III. Unconscionable Contracts

A) Unconscionable Contracts – UCC §2-302

1) Unconscionability – Determined by the Court, NOT the jury

(a) Absence of meaningful choice by one of the parties (Procedural)

i Meaningful choice is generally discarded because of gross inequality of bargaining power.

ii The manner in which the parties entered the contract must also be considered.

iii Unconscionability must be present at the time the parties enter into the contract.

(b) Contract terms that are unreasonably favorable to one of the parties (Substance)

i Typically, procedural and substantive unconscionability are required, but substantive unconscionability may be sufficient.

(c) The unconscionability test of the UCC also applies to contracts other than for the sale of goods.

i Restatement of Contracts §208 mirrors UCC §2-302.

(d) Basic test of unconscionability

i Whether, in light of the general commercial circumstances and commercial needs of the particular trade, the provisions in the contract are so one-sided as to be unconscionable at the time of the making of the contract.