Contracts II Outline
§ 3 Case
Spring 2010
I. Avoiding Enforcement: Incapacity, Bargaining Misconduct, Unconscionability, and Public Policy
A. Minority and Mental Incapacity
Dodson v. Shroder- minor buys truck and blows up, wants to return for refund
– Majority Rule = Minor entering into agreement creates a voidable k and he can
disaffirm even if there has been full performance and he can’t return the
consideration he received in the exchange.
Exception: minor can’t void a K for “necessaries” needed to live- can’t run out
on restaurant bill.
– Policy: Protect minors from adults who may take advantage of them
– After reaching 18 a minor must disaffirm within a reasonable time or they are
deemed to have ratified the K.
– Minority rule: Allows deductions for deterioration and depreciation of returned
consideration (ie. Car)
RS § 14 Infants
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.
Hauer v. Union State Bank- bank loans money to mentally impaired lady to invest
in another’s business, she sues to void K when loan comes due
– There is a presumption of competency and the BOP lies with the party seeking
to avoid the K
– bank argues under RS§15(2) k shouldn’t be voided b/c she knew what she was
doing, Ct rejects b/c bank had knowledge of her mental illness
RS § 15 Mental Illness or Defect
(1)A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (cognitive test)
(b) 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)
(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.
RS § 16 Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction.
B. Duress and Undue Influence
Totem Marine v. Alyeska Pipeline- P signed settlement release for small amount
due to impending bankruptcy, sues for amount owed claiming economic duress.
– Economic duress exists when:
1) There is a wrongful act or threat that induces entry into K
2) There is no reasonable alternative or adequate remedy accept agreeing to K
– An available alternative or remedy may not be adequate where the delay
involved in pursing that remedy would cause immediate and irreparable loss to
one’s economic or business interests.
RS § 174 When Duress by Physical Compulsion Prevents Formation of a Contract
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.
RS § 175 When Duress by Threat Makes a Contract Voidable
1) 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.
2) If a party’s manifestation of assent is induced by one who is not a party to the
transaction, the contract is voidable by the victim unless the other party to the
transaction in good faith and without reason to know of the duress either gives value or
relies materially on the transaction.
RS § 176 When a Threat Is Improper
1) A threat is improper if:
a) what is threatened is a crime or a tort, or the threat itself would be a crime or a
tort if it resulted in obtaining property,
b) what is threatened is a criminal prosecution,
c) what is threatened is the use of civil process and the threat is made in bad faith, or
d) the threat is a breach of the duty of good faith and fair dealing under the contract
with the recipient.
2) A threat is improper if the resulting exchange is not on fair terms, and
a) the threatened act would harm the recipient and would not significantly benefit the
party making the threat,
b) the effectiveness of the threat in inducing the manifestation of assent is significantly
increased by prior unfair dealing by the party making the threat, or
c) what is threatened is otherwise a use of power for illegitimate ends
Odorizzi v. Bloomfield School Dist.- P was teacher charged with homo activity
resigned from job, later charges dropped claimed undue influence
– Undue influence:
1) lessened capacity or undue susceptibility to pressure (exhaustion, emotional
turmoil, physical condition, age)
2) Application of excessive pressure by dominant person over serviant person
– Seven elements of overpersuasion:
1) Discussion of the transaction at unusual or inappropriate time
2) In an unusual place
3) Insistent demand business be finished at once
4) Extreme emphasis on untoward consequences of delay
5) Multiple persuaders on dominant side vs. one on serviant side
6) No 3rd party advisors for ser
the seller knows of facts materially affecting the value of the property
which are not readily observable and are not known to the buyer, the seller is
under a duty to disclose them to the buyer.
– A matter is material if it is one to which a reasonable person would attach
importance in determining his choice of action in the transaction in question.
Park 100 Investors v. Kartes-D tricked into signing personal guaranty, later sued
– Trial Ct. rules for D and Appellate Ct. Affirms.
– Fraud in the execution- mislead about the nature of the document you are
signing. (told document was a lease, but was a personal guaranty clause)
– Fraud in the inducement – understanding what you are signing is a K, but
induced to enter into it fraudulently by false statements or misrepresentations
(ex.Hill v. Jones- told there was no termite problem.)
RS § 161 When Non-Disclosure Is Equivalent to an Assertion
A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:
(a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material.
(b) 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 contract 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.
(c) 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.
(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.
RS § 173 When Abuse of a Fiduciary Relation Makes a Contract Voidable
If a fiduciary makes a contract with his beneficiary relating to matters within the scope of the fiduciary relation, the contract is voidable by the beneficiary, unless
(a) it is on fair terms, and
(b) all parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know.
