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Contracts II
University of Nebraska School of Law
Denicola, Robert C.

PROFESSOR DENICOLA _ CONTRACTS II –SPRING SEMESTER 2013

CH. 6 LIMITS ON THE BARGAIN AND ITS PERFORMANCE

I. Standard From and Adhesion Contracts

a. Benefits of Standard Form: makes risks calculable by reducing uncertainty. Discusses the unforeseeable contingencies and the abilities to exclude irrational factors.

b. Disadvantages: One party’s will upon another (disproportionate strong economic power, no opportunity to bargain, usually used by a party who has had the time to seek the expert advice.

c. Adhesion Contract: A standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or to reject it.

i. Rule: Adhesion contracts are unenforceable when (1) such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party or (2) if considered in the context, it is unduly oppressive or “unconscionable.”

ii. Graham v. Sissor;

1. Facts: P, concert promotor, entered into a K with producer D. K provided that any disputes would be arbitrated by the union’s international executive board. Dispute arose, P filed breach of K and D wants to compel arbitration.

2. Holding: K is adhesive because P and other producers are not permitted to sign any K other than those issued by the union. Because the minimum levels of integrity which are requisite to a K agreement for arbitration are not achieved here, so it is unconscionable.

3. Rule:

a. Adhesion K is a standardized K imposed by a party with superior bargaining power and make it on a take it or leave it basis.

b. Adhesion Ks are not necessarily unenforceable, other factors must be present: (1) A K that doesn’t fall within the reasonable expectation of the weaker party will not be enforced against him (2) A k or provision will not be enorced if it is unduly oppressive or unconscionable.

d. Exculpatory Clause: it is a provision that says a party shall not be liable for any injuries resultant from its own negligence.

i. States now make it ineffective in residential lease ineffective via statutes

ii. O’Callaghan v. Waller

1. Facts: P injured when she was walking from the garage to her apt and sued landlord for negligence. There was exculpatory clause in the lease.

2. Holding: Ct found it valid.

3. Rule: Two factors that affect whether an exculpatory term is enforceable:

a. Public interest

b. The dominate position of those seeking exculpation (the social relationship of the parties militating against upholding the agreement)

e. Theories For Interpreting A Contract/ clauses:

i. Strict Construction: traditional method: if a court does not agree with the outcome of enforcing an agreement and protect the weaker party in the bargaining position, the court may use strict construction, narrow, to go around the actual meaning of the agreement. It directly looks into the terms or language of the clause and determines if the action or injury was covered by the clause.

ii. Freedom of Contract: If the parties assent to the terms of the deal then they should be held to the terms within the contract. What makes things legally enforceable is the assent of the parties.

1. If there is lack of assent, then it opens the doors for the court to evaluate the fairness of the terms (O’Callaghan)

2. Illegal Ks (the term or K itself is illegal) are not part of the freedom of K.

f. Ways To Deal With Unfair Terms

i. There is no assent (kind of under Freedom of Contract)

1. The other party must have a reasonable expectation that the agreeing party assented to the terms (H. & M. Parcel Room)

a. Agreeing to Boiler plate: Restatement 211(3): where a party effectively manifests assent to a standardized expression of agreement, and the other party has reason to believe that he would not have done so if he had known that it contained a particular term, the term is not part of the agreement. Doctrine of Reasonable Expectation.

2. The assent must be knowing and voluntary (Henningsen) If the assent is not both knowing and voluntary then the term can be thrown out.

3. Rule: In a situation where the other party knows that the signing party did not “knowingly assent,” the enforceable terms will be those that are reasonably expected in the transaction

4. Other limits on excluding implied warranties

a. Henningson v. Bloomfield Motors

i. Fact: P, wife of purchaser, was allowed to recover for personal injury against manufacturer and dealer. There was a disclaimer of warranty clause in the K, which limited warranty protection to the purchaser and to the replacement of defective parts.

ii. Holding: Warranty clause is invalid it is standardized form and it is a take it or leave it basis. No arm’s length nego

e and effect to aid the court in making the determination.

iii. **Note** Many courts have applied this rule outside the boundary of sale of goods cases.

iv. Principle is one of the prevention of oppression and unfair surprise.

b. Unconscionability is a problem for a judge to decide and does not go to a jury.

i. Usually involves a consumer b/c it is generally believed businesses are capable of protecting their own interests.

c. Two Views

i. An explication

1. Sliding Scale of Unconscionability

a. Procedural Unconscionability: A problem with assent, unfair surprise, or lack of bargaining power. Absence of meaningful choice. Something about the transaction justifies saying that P should not be bound to everything. Unfairness in the bargaining PROCESS. Includes: use of fin print and convoluted language, lack of understanding, inequality of bargaining power.

b. Substance Unconscionability: The substance of the deal itself is too unfair. Normally involve excessive price (2 or 3 times the market price) or an unfair modification of either seller’s or buyer’s remedies. Unfairness in the bargaining OUTCOME or TERMS.

c. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. (Armendariz) These factors are judged at the time of signing, not after the contract has already been agreed to.

d. Exception to both MUST exist rule: If the K rises to the level of misrepresentation, duress, or undue influence, K may be voidable without regard to substantive unconscionability.

ii. Fundamental objection: defense to freedom of contract

1. Courts not required to enforce every K before it. It just needs a reason for not enforcing the K:

a. Show proof of some defect in the process of K formation (duress, fraud or undue influence)

b. Or incompetence by the party