CONTRACTS OUTLINE – SPRING 2009 – Denicola
I- UNCONSCIONABILITY AND ADHESION CONTRACTS
A- Adhesion Contracts: Contracts between parties with unequal bargaining power. Lesser party required to adhere to the contract by the superior party. Take it or leave it.
1. Fairness: The concept of adhesion contracts is an invitation to the court to consider the substantive fairness of the deal even though there has been no fraud, duress, mistake, etc.
2. Characteristics of Adhesion Contracts:
a. Standardized Form: Terms not individually negotiated
b. Gross Disparity: gross disparity in the bargaining power between parties.
c. Lack of Choice: Weaker party has a lack of choice. Must accept “as-is.”
i. Example: O’Callaghan: P signed a lease w/ landlord (D). Exculpatory clause released D from liability for injury in certain common areas. Held: P could not sue D for injury b/c of exculpatory clause.
1. Freedom of Contract: Parties have the right to enter into agreements. If so, the law ought to enforce those agreements.
a. Limits on Freedom: Illegal contracts such as gambling, unreasonable restraints on trade, contracts to commit crime, etc. These are unenforceable.
2. No Freedom of Contract (dissent): Dissent believed that housing shortage left the P without a choice. Thus, adhesion contract and should be unenforceable.
3. Standardized Form Contracts:
a. Two Elements in Enforceability:
i. Knowing Consent: Did the other party knowingly consent to the terms of the deal? Is one party reasonable in believing that the other party has assented to the contract? If so, then it is enforceable. Not reasonable to think P is giving a “blank check.”
1. Uncommon Terms: The more uncommon the term, the more likely the court will determine party did not consent. If the term is unexpected, it should not be buried in fine print.
2. More Notice = Consent: The more notice the party had, the more likely court will conclude they assented to the deal. (Prominent lettering, separate signature on unusual term)
ii. Adhesion: Did the other party have any other choice? If so, more likely to be enforced.
i. Job Contract: D offers job to S and tells S to sign form. Later, D fires S on the at-will provision in contract. S says he never read contract.
1. Enforceable – Reasonable: D is reasonable in thinking S had read the contract and assented to it.
ii. Package and Parcel Room: P leaves coat with D for nominal fee. D gives ticket stub. Stub includes a provision releasing D from liability.
1. Not Enforceable – Not Reasonable: P not reasonable in viewing stub as contract (identifies coat). D not reasonable in thinking P had assented to terms on the stub.
iii. Car: P buys car from D. Fine print on back revokes the IWM. D brought suit when car defective.
1. Not Enforceable – Too Unusual: The term is too unusual to be buried in fine print. D not reasonable in thinking P assented, and P not reasonable in thinking he was agreeing to that term.
2. Adhesion: All manufacturers used this form, so P had no choice but to take it or leave it.
c. Long-Form Contracts: Neither expects the contract to be fully read – too inconvenient and inefficient.
i. Freedom to Contract: not enforced as strongly in cases of long form contract. Assent is more general, not specific.
ii. Reasonableness: Same standard: Is the party reasonable in thinking the other had assented?
1. Presumption: The other party is reasonable in believing that assent has been given to the normal and reasonable things usually found in this type of transaction.
a. Example: Checking account, you are held to things normally found therein, not to giving your money away.
4. Courts v. Legislatures:
i. Better in position to collect relevant information on topic
ii. Can only deal with standardized transactions
iii. Knowledge Problem: Truth-in-lending type statutes remedy the problem with knowledgeable assent. Doesn’t solve problem of unfair bargaining, unconscionability designed to do that.
i. Restricted to relying on facts in the case
ii. Better position to police individual transactions.
1. UCC 2-302: An invitation to the court to look into the substantive fairness of a contract.
a. Applicability: Applies only to sales of goods cases, but courts have look to it by way of analogy in non sales of goods cases.
b. Comment 1: The principle is one of the prevention of oppression and unfair surprise. Thus, this provision is intended to remedy both problems inherent in adhesion contracts.
2. Defined: Absence of meaningful choice on the part of one of the parties along with terms which unreasonably favor the other party constitutes unconscionability.
a. Absence of Meaningful Choice: Two forms:
i. Oppression: Unequal bargaining power. No choice but to assent (O’Callaghan).
ii. Unfair Surprise: Checking account terms, unexpected terms in contract.
b. Terms unreasonably favorable to another party:
i. Unfairness in bargaining outcome.
ii. Factors Court Considers:
1. Business practice at the time, financial resources of the other party, inequality of buying power, buyer’s knowledge of seller’s position.
2. Example: P wanted to sue D, but employment contract had no arbitration clause and limit on damages for P. Didn’t apply for D. Court held that K was unconscionable.
a. Both Ways: Arbitration clause isn’t unconscionable, but only applying to one party, and damages limited to one party is unconscionable.
c. Note: These factors are an invitation to look at the substantive fairness. Just because there is unequal bargaining power or little knowledge does not mean the contract is unenforceable.
3. Remedies under 2-302(1): The court may:
a. Don’t Enforce Entire Contract: Less Common.
b. Don’t Enforce Unconscionable Part Only:
i. Most Common: Courts try to enforce contracts as much as possible to ensure freedom to contract.
1. Example: P bought $300 freezer for $900 from salesman. P paid $620 then sued. Court found for P (only had to pay $620 already paid). Star Credit.
a. Price: Price was unconscionable
b. Bargaining Position: D knew of P’s position (went door to door), and it was harder for P to say no.
2. NE: Has three days to cancel contract from door-to-door salesman. Salesmen must tell buyer K is voidable.
4. Evidence Presented: 2-302(2)
a. The court allows the parties to submit evidence as to its commercial setting, purpose, and effect to aid the court in making its determination.
5. Procedural v. Substantive Unconscionability:
a. Procedural: Was there a problem with the bargaining process?
i. Bad Procedural Unconscionability = Likely Term Won’t Be Enforced
ii. Better Procedure = Less Likely to be Thrown Out
b. Substantive: look at the terms of the contract.
c. Sliding Scale:
i. Procedural Unconscionability Slight – Must be great substantive unconscionability.
2. Terms in Expectancy Formulas:
a. Loss in Value: The value of the performance of the other party that you didn’t get
b. Cost Avoided: Cost to the victim of the breach that they save by not having to go through with their end of the deal.
c. Loss Avoided: Salvage value, reallocation of resources it would otherwise have spent on performance of the contract/substitute transactions
d. Cost of Reliance: What injured party spent in reliance on contract.
3. Formulas for Calculating Expectancy Interest:
a. Formula A: Damages = Loss in Value + Other Loss – Cost Avoided – Loss Avoided
i. Example: Skateboards. Retailer orders $50K in boards. Mfg spends $10K when buyer cancels. Would have cost $30K more to finish the job.
1. Loss in value: $50K (what the injured party should have got)
2. Cost avoided: $30K
3. Damages: $20K. P gets $20K under this formula.
ii. Assume: Mfg salvaged some parts and sold them for $10K.
1. Loss Avoided: $10K would be subtracted in formula.
2. Damages: $10K.
b. Formula B: Damages = Cost of Reliance + Profit – Loss Avoided + Other Loss
i. Cost of Reliance: $10K (what they’ve spent under the contract).
ii. Profit: $50K (contract price) – $10K (already spent) – $30K (to finish) = $10K in profit
iii. Loss Avoided: $10K for salvaged parts.
iv. Damages: $10K.
c. Intuitive Conception: Where is the P at time of breach? $10K in hole (cost of reliance). How much profit is anticipated? $10K. P needs to end up w/ $10K in profit, so do whatever it takes to get there.
d. Cost Avoided: Costs P would have had to spend to perform the contract (buying materials, electricity to run machines, etc).
i. Overhead Not Deducted as Cost Avoided: Overhead is a fixed cost and is not a cost saved, thus it should never be deducted. P should never recover these costs (simply ignore them).
ii. Fixed Cost: overhead is incurred whether the contract is performed or not.
1. Ex: Rent, property taxes, admin salaries
2. Not Cost Saved: P is not saving this share of overhead by not having this contract, so overhead is not deducted as a cost saved.
3. Example: Vitex v. Caribtex: P entered into contract w/ D to open mill and D would send wool to P.D breached and P recovered lost profits less costs saved.
iii. Not an Average: Courts should not consider the average cost to produce the required quantity.
1. Two Steps in the Analysis:
a. What was already spent in production (reliance costs)
b. How much will it cost to produce the remaining quantity?
i. Not always proportionate to what was already spent.
ii. Ex: Bought first chemicals at high price, supplier going to give large discount on next order. This is relevant.
D- COVER DAMAGES
Cover Defined: The cost of going out onto the market and getting