Contracts II
Farnsworth 7th edition
Prof. Thom Lambert
Spring 2012
I. Policing the Bargaining Process (Unfair Bargaining, defenses to K enforcement)
Policy for existence: Voluntary exchange may not be wealth creating because of something and the law follows a few narrow doctrines that try to weed out voluntary exchanges that don’t create wealth. Preventing unfair bargaining. Not pareto efficient.
1. Status of parties
2. Behavior of parties
3. Substance of the deal
à A. Status Based Defenses (Capacity to contract; generally it is assumed that you have the capacity)
(i) Infancy (minority)
Rest. § 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 18th birthday.
Disaffirm after reaching majority/no full restitution unless an exception is met.
Kiefer v. Fred Howe Motors, Inc. (1968, Wisc.) Kiefer bought a car from Fred Howe Motors when under 21 w/ a contract that stated: “I represent that I am 21 years of age or over and recognize that the dealer sells the above vehicle upon this representation.” After he turned 21 Kiefer sued to disaffirm/void the contract. Court affirmed judgment for Kiefer.
· Holding: “Minors require some protection from the pitfalls of the market place.” Court doesn’t want to change the rule, deal is undone. Not making full restitution just giving the car back.
· Rule: “the contract of a minor, other than for necessaries, is either void or voidable at his option”
o à May disaffirm because it was only a short time after reaching majority but can only disaffirm within a reasonable time after reaching majority.
§ Many states have enacted statutes that give timeline to allow to disaffirm; if not then go with reasonable time standard.
· Restitution on minor’s avoidance
· No right to full restitution (Kiefer would give back the depreciated value car, if sold it he would have to give back the money)
· What if he sold the car and spent the money?
o Just return what received or what remains of it. Also, must return what remains of anything acquired from third persons in exchange for what the minor received from the other party.
o NOTE: New Hampshire allows restitution in full.
RESTITUTION EXCEPTIONS: (Can still disaffirm but other party gets full restitution)
· For:
o (1) necessaries,
§ Policy: want to encourage providers of necessities to be willing to sell to minors.
o (2) minor as plaintiff (minority but substantial) where minor as plaintiff seeks recovery of money paid. Must make full restitution.
§ The result is one who furnishes goods or services to a minor for cash is entitled to restitution in full in the event of avoidance, while one who furnishes them on credit is not.
§ If minor is ∆ then only required to make partial restitution. (sward v. shield)
o (3) misrepresentation of age. (some jurisdictions) can still disaffirm but must make full restitution.
§ Policy: Minors are liable for torts and fraudulent misrepresentation of age is actionable as a tort if it induced reliance by the other party (NH) à Infant can still disaffirm but must make full restitution; eliminates a second lawsuit.
**note: whether or not something is a necessary is generally a question of law.
§ The context matters: Food, clothing, and shelter as appropriate to the minor’s situation (so not if parents are providing)
§ Education and automobiles are split.
Other exceptions created by legislatures in NY and Cal.:
· If there is an infant that wants to enter an enforceable contract, they can go to a court and the court can approve or make it binding.
· Also, possibility that infant could just go once to court and have the power to enter into enforceable contacts given to them for the rest of infancy.
**note: Contract is not void but “voidable” by minor
· If a minor dies executor or administrator or heirs can disaffirm the contract
· Minor can disaffirm before or after reaching the age of majority; can be words, written or oral, or by other conduct.
· Entire contract has to be disaffirmed not just part
Ratification – the surrender of the power of avoidance
· %(what if he made a promise after he turned 21 to make the rest of the payments? Is there consideration? No but this is one of the areas that is an exception to the bargained for exchange rule) ratification [1st way to ratify]
· %(what if he kept making payments but didn’t specifically ratify by saying. Is it implicit ratification? Yes it would be implicit ratification. [2nd way to ratify] We want to protect infants but we don’t want infants taking advantage of us)
· %(what if dude paid straight cash homie, waited until his 22nd birthday and then wanted to void the K. naw. You only get reasonable time to void [3rd way to ratify])
(ii) Mental Incapacity (infirmity)
· Old people are confused. Can’t take advantage of them.
· General rule is that people can drift in and out of capacity. And you can only avoid it if you are incompetent when you enter the contract. If entered into during a lucid interval à valid K.
· FULL RESTITUTION is required when using mental incapacity/infirmity as a basis for avoiding/disaffirming the contract.
Rest. § 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
(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.
(2) Where the contract is made on fair terms and the other party is w/o knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the K has been so performed in whole or in part or the circumstances have so changed tat avoidance would be unjust. In such a case a court may grant relief on such equitable terms as justice requires.
modern volitional test
Ortelere v. Teachers’ Retirement Bd. (1969, NY) 60-year old school teacher on leave for mental illness. Changed her retirement plan so she would get the max benefits and her husband wouldn’t get anything. Husband sued saying she was mentally incapable of making the change.
· It is a personal right to avoid so he is trying to enforce the right on her behalf as the executor of her estate. (even if still alive it would be on her behalf by petitioning to be guardian)
· Def.: there was evidence that she was capable at the time she made the change.
· Court held that because the school board knew of her mental illness the contract was avoidable. Diagnosed mental illness.
o Often have to return full and not just what is left when voided for mental incapacity
o Restitution in full for mental incapacity unless the other party acted unfairly and with knowledge of the incompetency
·
o %(what if the policy was with an independent provider) probably would not have come out the same because they would not have known. RS §15 (1)(b) have volitional defect AND contracting partner knows or should have known. ß must be aware
kers doctrine. (Rest. § 89)
(has to be more than a pretense if there is a change, Def. Tried to say the nets were defective and that’s why they wanted the raise but the nets probably weren’t)
Rest. § 73. Performance of Legal Duty
Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of a bargain.
Despite no consideration it can be enforceable / can modify on commercially reasonable grounds. Most modifications of executory Ks will fit under this but possible it doesn’t.
Rest § 89. Modification of Executory Contract.
A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
%hypo – like Alaska Packers facts. You go up to AK to fish in a similar situation but you want to get the higher pay. So you add something for consideration but it may be a pepper corn. Can’t be just pretense of a bargain.
· Is there a way to enter into a contract that makes the deal go away? Yes, resend first K and enter into second K.
o Promise to let Alaska Packers off the hook if they let you off the hook. (Second K).
o Then you make a new K. I promise to fish if you promise to pay x.
§ This is how easy it is to circumvent Alaska Packers doctrine. New (Third) K not a modification to the old one,
§ Duress still exists though so there is a remedy. You can’t just use the Alaska Packers rule.
§ And besides, Alaska packers rule has potential to thwart mutually beneficial obligations. (example below)
· %hypo – dude will tile lamberts bathroom for $1k which will increase the value of his house by $2k. Parties agree and the dude proceeds to rip the tiles out in Lambert’s bathroom.
o Subsequently, there is a raise in the price of tile and dude says he can’t do the job for less than $1.2k
o Lambert says no and the dude breaches and doesn’t tile. Breach results in an award of $1k.
§ The lawsuit will cost lambert $300. So the real value to say no to request is $700.
§ If he instead says yes he would pay $1,200. H will end up w/ $800 in value as opposed to $700 if he sues.
· If it was the same situation but the dude raise the price because there were no other tile masons around?
o Rest. § 175 would deal with this.
§ Dude made a threat to not complete performance and it was improper.
§ Rest. § 73 must execute?
§ Rest. § 89 (b) and (c) would not apply. But (a) it was not fair and equitable. There was a NOT a commercial reason for the modification.