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

Contracts II
Roy—Spring 2009

DEFENSES TO ENFORCEMENT

– Defenses that focus on competence (ex: mental capacity of parties)
o Minority
o Mental incapacity
– Defenses that focus on bargaining power
o Misrepresentation
o Undue influence
o Duress
– Defenses that focus on substance of contract
o Unconscionability
o Public Policy

I. Competency (of one or more of the Parties)
a. Minor Rule-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)(can void contract after complete performance); minor can get $ back minus use and depreciation and any willful & negligent damage by the minor(benefits and use rule- which is done to protect seller’s that weren’t attempting to take advantage of 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.”
C. Exceptions to minor rule
1. Classical Doctrine
i. “necessaries rule”
2. Modern doctrine
i. Benefit rule
ii. Use rule
b. Mental Incapacity- 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.”
iii. Issue of Good Faith (they had reason to know she was incompetent)
A. Important because recission is hard in this situation because there is a third party(they would still have to give back the collateral they received)- whether or not she gets her collateral back turns on this issue
B. Good Faith goes to whether or not she has to restore that value (they should have known she was incompetent so she should get her collateral back)
iv. When it comes to rescission or restoring to the value (majority rule)
A. Mentally incapacitated have to restore the property
B. Minors do not have to restore the property

II. Problems with the Bargaining Process
a. Economic Duress-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) the wrongful threat induces the other party to accept or assent to the contract
iii. Improper/Wrongful = tortuous, criminal or morally wrong (ex. Threat to breach K or withhold payment done in Bad Faith) (or when attempting to take advantage of other party’s problems)
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. Undue Influence- 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
1. EP Factors (Π must show most but not all of them): (may be doing what they truthfully feel is right, but still excessive pressure)
i. discussion of the Transaction at an unusual or inappropriate time
ii. consummation of the Transaction in an unusual place
iii. insistent demand that the business be finished at once
iv. extreme emphasis on untoward consequences of delay
v. use of multiple persuaders by the dominant side against a single servient

ooks at bargaining process
d. Non-Disclosure- Hill v. Jones (seller did not tell buyers that home’s roof had been damaged by termites; buyers roof caved in after purchase; court remands to determine buyer’s knowledge or lack of diligence in examining the possibility of termite damage; seller knew of termites and didn’t disclose- knew because paid for pest removal)
i. Nondisclosure Equivalent to an Assertion—Rest(2d) § 161
A. A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist if:
1. he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrep or from being fraudulent or material
2. 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 breach of GF&FD (good faith and fair dealing)
3. 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 part
4. the other person is entitled to know the fact because of a relation of trust and confidence between them.
ii. Seller MUST disclose ALL Material facts
iii. Can fraud get around parol evidence rule
A. Fraud can always be used to get around the parol evidence rule
iv. If the defect is open and obvious then buyer is put on notice so burden starts shifting to buyer some
e. Misrepresentation- Fraud in Execution – Park 100 v. Kartes (Kartes owned a business and wanted to move into a new building and worked out details that attorney approved that did not contain an personal guarantee; building owner came back with papers and got him to sign them in a hurry without letting attorney look at them, had “lease agreement’ on top of page actually contained a personal gurantee- which is an agreement that if he sells his business and that person doesn’t pay the rent then he has to pay for them)
i. No duty to read if there is fraud
A. Misrepresentation here so no duty- fraud in the execution
B. Fraud makes a contract void not voidable
1. Difference from Slyvester because she knew what agreeing to and it was fraud in the inducement whereas fraud in the execution deals with the person thinking they are agreeing to one thing and actually agreeing to something else