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Contracts II
University of Mississippi School of Law
Roy, Lisa Shaw

Contracts II
Roy—Spring 2007

DEFENSES TO ENFORCEMENT

I. Competency (of one or more of the Parties)
a. Dodson v. Shrader (16-yr-old enters K to purchase used truck and wants to rescind the K now that the truck’s engine has “blown up”; court remands for determination if boy’s depreciation was willful or negligent)
i. Infancy Doctrine—Rest(2d) § 14
A. A natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.
ii. Shield or Sword—A person may use the Infancy Doctrine as either a:
A. Shield (defense)—against lawsuit on the K, or
B. Sword (offense)—to disaffirm the K (to get out of it)
iii. Rescission—puts the parties back in pre-K positions (but seller cannot get “full” value back)
iv. K is voidable (minor can void/get out of K); minor can get $ back minus use and depreciation and any willful & negligent damage by the minor;
A. AS LONG AS there was no fraud by either party or imposition, overreaching, undue influence, etc. by the seller, and
B. UNLESS it is a K for “necessaries.”
b. Hauer v. Union State Bank (con man convinces mentally incompetent woman to get a $30K loan to help him pay off his business debt; her family caught wind; she sued for recission; court ruled bank acted in bad faith by allowing known scoundrel to set up loan for a person they should have known was incompetent)
i. Voidable Ks b/c of Mental Illness or Defect—Rest(2d) § 15
A. A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
1. he is unable to understand in a reasonable manner the nature and consequences of the transaction (cognitive test), OR
2. he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition (volitional test)
B. Where the K is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance terminates to the extent that the K has been performed in whole or in part or the circumstances would make avoidance unjust. In such a case a court may grant relief as justice requires.
ii. Π who wishes to use incompetence as a sword must show incompetence “at the time of the K.”

II. Problems with the Bargaining Process
a. Totem Marine Tug & Barge v. Alyeska Pipeline (Π settled pipe transportation K w/ Δ for far less than K price purely to avoid bankruptcy; court remands to determine whether the K was settled under economic duress)

i. Voidable Ks b/c of Duress—Rest(2d) § 175
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 by the victim.
ii. Economic Duress (sword) requires:
A. Improper/Wrongful Threat
B. No reasonable alternative
C. Causation (link b/w threat and acceptance)
iii. Improper/Wrongful = tortuous, criminal or morally wrong (ex. Threat to breach K or withhold payment done in Bad Faith)
iv. Types of Improper Threats—Rest(2d) § 176
v. Consideration of Alternatives:
A. Are there any available alternatives?
B. Would there be any delays involved in the alternative that would cause financial hardship; if so it is an unreasonable one
C. The hardship must not be of victim’s own making
b. Odorizzi v. Bloomfield School Dist. (gay schoolteacher “convinced” by two school officials to resign after he’d been falsely arrested and hadn’t slept for two days; court holds there is sufficient evidence to hold the K voidable b/c of undue influence)
i. Voidable Ks b/c of Undue Influence—Rest(2d) § 177
A. Undue Influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion…
ii. Undue Influence elements:
A. Undue Susceptibility in servient party—circumstances create a “lessened capacity to make a free K.”
B. Excessive Pressure by dominant party—use of excessive strength, or “overpersuasion,” by dominant side against the servient object
C. EP Factors (Π must show most but not all of them):
1. discussion of the Txn at an unusual or inappropriate time
2. consummation of the Txn in an unusual place
3. insistent demand that the business be finished at once
4. extreme emphasis on untoward consequences of delay
5. use of multiple persuaders by the dominant side against a single servient party
6. absence of third-party advisers to the servient party
7. statements that there is no time to consult financial advisers or attorneys
c. Sylvester v. Banta (old lady takes dancing lessons and they get her to pay for 4-lifetimes worth of classes by telling her she could be a professional; court holds the K void b/c of Fraud and Misrep)
i. Voidable Ks b/c of Misrepresentation—Rest(2d) § 164
A. If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.
ii. When a Misrep is Fraudulent or Material—Rest(2d) §162
A. Fraudulent if the maker intends the assertion to induce a party to manifest his assent and the maker
1. knows or believes that the assertion is not in accord with the facts, or
2. does not have the confidence that he states or implies in the truth of the assertion, or
3. knows that he does not have the basis that he states or implies for the assertion
B. Material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to

bility will be found if there is:
A. Absence of meaningful choice by one party (Procedural), AND
B. Terms unreasonably favorable to the other party (Substantive)—terms “so extreme” as to appear UC according to the mores and business practices of the time and place.
ii. Considerations for determining Procedural element:
A. Was there a lack of assent or opportunity to assent?
B. Did each party have the opportunity to consider and understand the term, or was it hidden in fine print?
C. Was there unequal bargaining power like:
1. Adhesion language (Take-it-or-leave-it)
2. Boilerplate
3. Standardized forms
4. Lack of education or sophistication
iii. Considerations in determining the Substantive element:
A. Does it “shock the conscience such as no man in his senses and not under delusion would make on the one hand, and as no honest or fair man would accept on the other?”
B. Usage of trade
C. Community mores and morals
D. Economic justification?
iv. Remedies for UC Ks—Rest(2d) § 208 and UCC § 2-302:
A. If court finds UC at time of K, it may:
1. Refuse to enforce the entire K
2. Enforce the remainder of the K w/o the UC term
3. Limit the application of any UC term to avoid an UC result
b. Adkins v. Labor Ready (Π sues temp agency under employment statutes but temp K had clause compelling arbitration instead of suit; Π claims the arbitration clause forecloses redress of his substantive rights; court holds that Π has not met burden as to the substantive element and holds for Δ)
i. Π must make “a showing” of both the procedural and substantive elements to succeed under UC
ii. Substantive can be shown by “extreme hardship or unfairness”
iii. One such (substantive) showing is if the arbitration would be cost-prohibitive to the Π.
iv. In the absence of such a showing, a court will enforce the K, especially if there is a strong Public Policy reason (here, a “liberal federal policy favoring arbitration)
c. Cooper v. MRM Investment Co. (KFC employee wants to sue for sexual harassment but she signed an arbitration agreement; court holds per se procedural and that Π has sufficiently shown cost-prohibitive nature of arbitration, t4 K UC)
Procedural—Inequitable bargaining power exists if there