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University of Mississippi School of Law
Roy, Lisa Shaw

Contracts Outline
Spring 2014

Large Topics/Rest.               Small Topics              Cases              Rules/Trends

Defenses to Enforcement
·         Competence
o   Minority (Infancy Doctrine)
o   Mental incapacity
§  2 approaches
·         Bargaining Process
·         Substance


Minority: “Infancy Doctrine”
·         Rest. 2d §14 (Common Law Rule): 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.
o    Exception for “necessaries” (mentioned below)
·         Dodson v. Shrader: Minority (Dodson) purchased a truck from an adult seller (Shrader).  The engine blows up, and Dodson tries to rescind the contract on the basis that he’s a minor.  He parks the truck in front of his house, it gets hit, and does damage to the fender.  Can he get the $4900 he paid for the truck back?
o   Rule (Common Law): Contracts by minors are voidable at the election of the minor (unless it’s for “necessaries” such as food, clothing, medicine, etc.)
§  Benefit Rule: What benefit the minor gets out of the possession of the good
§  Use Rule: What use the minor gets out of the good
§  Modern Trend: The seller gets some sort of compensation with rescission unless there is an overreaching such as fraud, the contract is unfair, or undue influence towards the minor to sign the contract; then the minor will be fully protected from injustice or imposition – any business person who has dealt with the minor in good faith will also be protected
·         Exception when if a minor misrepresents his or her age (Problem 7-1, pg. 535), it is very likely that the minor will be able to take advantage of the minority doctrine, but if the minor says nothing about his age, then it is the seller’s responsibility to find out (as seen here)
o   “Void” v. “Voidable”: If a contract is void, it’s no good and can’t be enforced by anyone (for example, a contract signed under physical duress).  If a contract is voidable, it may be voided by the party that succeeds in establishing the defense (for example, if the minor succeeds in applying the minority doctrine).
o   Sword v. Shield: If a party uses a defense as a sword (as seen in this case), they are suing to recover on the basis of that defense.  If a party uses a defense as a shield, they are the ones being sued to fulfill a contractual obligation.
o   Rescission: A remedy that puts the parties in the positions they were in before they entered the contract – Not merely terminating a contract
o   Disaffirmance: the minor has to void the contract within a reasonable time of reaching the age of majority in order to recover
Mental Incapacity
·         Rest. §15:
o   1(a) Cognitive Test (traditional): Can the person understand what he or she is doing? (Applied in the case below)
o   1(b) Volitional Test: Mentally Incapacitated party is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition – Able to understand it, but unable to act in a reasonable manner, and the other party knows about it
·         Examples of Conditions that Cause Mental Incapacity:
o   Congenital deficiencies in intelligence
o   Mental deterioration of old age
o   Effects of brain damage caused by accident or disease
·         How can we know that someone lacks Mental Incapacity?
o   Judicial determination of a lack of competence is one option (as in the case below)
·         Hauer v. Union State Bank of Wautoma: Ms. Hauer got a brain injury in a motorcycle accident and was declared incompetent. When she was declared competent again, she was persuaded to take out a loan of $30,000 from the bank using her mutual fund (her primary source of income) as collateral in order to invest in a business. She lost the entirety of the loan amount and wished to recover based on mental incapacity.
o   If there had never been a judicial order lifting the mental incapacity, it would have been conclusive, and neither the cognitive or volitional tests would have had to been utilized
o   She doesn’t have the loan proceeds, so what do we do about it?
§  The court concludes that the bank did not act in good faith, so, under these circumstances, she doesn’t have to pay back the $30,000, and the bank will not be able to collect on the collateral – RECISSION
§  If the bank had operated in good faith, she would have to pay back the full loan amount ($30,000)
§  Generally, money has to be paid back unless the facts are like this case
Duress and Undue Influence
·         Economic Duress (Rest. §§ 175 & 176)
o   If there is economic duress, the contract is voidable, but if there had been physical duress, the contract would have been void
o   Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.
§  Facts: There was a contract to move all of this pipeline equipment that went drastically differently than anticipated. Pipeline eventually severed the contract and withheld payment from Totem until they were about to go bankrupt. As a result, Totem accepted a settlement that was drastically less than what they were probably entitled to ($300,000 to $97,000).  Totem filed a complaint, and wants to be able to get past summary judgment on this issue of economic duress.
§  There is a wrongful threat here in the threat of nonpayment.  There is not an explicit threat, however.  The treat arises from the facts.
§  A threat of nonpayment or a threat of breach is not always a wrongful threat
§  Economic Duress is being used as a sword here (trying to invalidate the agreement that they had entered into)
o   Questions to Ask: (§175)
1.      Was there a wrongful threat?
2.      No reasonable alternative but to agree based on the threat?
v  The court sometimes says that the other party has to have a hand in creating the situation that causes the hardship
3.      Does the threat induce the assent?
o   When is a threat improper? (§176)
§  If it is made in bad faith
§  Doesn’t have to be illegal, just wrongful
§  If there is no debt to be truly disputed, then the threat is improper and made in bad faith
·         Undue Influence (Rest. §177)
o   Odorizzi v. Bloomfield School District
§  Facts: Odorizzi was arrested on charges of homosexuality. He submitted his resignation as a schoolteacher after this arrest, but wished to avoid this resignation based on th

ows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material
§  Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the K and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing (in the case below)
§  Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part
§  Where the other person is entitled to know the fact because of a relation of trust and confidence between them
·         §163: When a Misrepresentation Prevents Formation of a Contract
o   If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.
·         §166: When a Misrepresentation as to a Writing Justifies Reformation
o   If a party's manifestation of assent is induced by the other party's fraudulent misrepresentation as to the contents or effect of a writing evidencing or embodying in whole or in part an agreement, the court at the request of the recipient may reform the writing to express the terms of the agreement as asserted,
§  If the recipient was justified in relying on the misrepresentation, and 
§  Except to the extent that rights of third parties such as good faith purchasers for value will be unfairly affected.
·         Hill v. Jones
o   Facts: P bought a $75,000 house from D. Upon moving in, they noticed that the house had severe termite damage, and the wood of the house began to crumble. Should they be able to get out of their contract due to the failure of D to disclose the presence of the termites? The court said yes.
o   The issue is failure to disclose
o   Fraud is not barred by the Parole Evidence Rule, so the sellers will not be able to rely on the language of the contract to help them
·         Park 100 Investors, Inc. v. Kartes
o   Facts: Park 100 got Kartes to sign off on a guaranty provision in their contract that Kartes’s lawyer knew about, but that Kartes had no knowledge of. Should Kartes be able to get out of the contract due to Park 100’s failure to disclose the presence of the new provision? The court said yes.