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Contracts II
University of South Carolina School of Law
Adams, Gregory B.

Contracts II
Spring 2011
I.  Defenses Related to Defects in Mutual Assent
•     If either party is unduly pressured to assent or is fundamentally misled as to the nature of the contract, the policies underlying the requirement of mutual assent are not met.
A. MISTAKE—R. §151: “a belief that is not in accord with the facts”
i. Mutual Mistake
            1. Restatement §152—1) BOTH parties were mistaken 2) about a basic assumption of the K 3) that has a material effect on the exchange of promises.
                        a. If you meet §152, then go to §154: allocation of risk
            2. Restatement §154—If the party seeking to void the contract bears the risk, then that party cannot void the contract
                        a. How do you “bear the risk”?
                                    i. You are allocated the risk by agreement of the parties
            ii. You know you don’t have complete information about the facts on which the contract is based, yet you enter the K as if the information you do have is sufficient.
            iii. The court allocates the risk to you because it is reasonable to do so.
            3. Lenawee v. Messerly—mutual mistake as to the septic system (installed without a permit and in violation of Health Code)
        a. Basic Assumption—that the property was habitable and it could be used to generate income
        b. Material Effect—the price would’ve been different but for the mistake
         i. ASK YOURSELF—would parties have entered into the contract under the same terms if they were not mistaken as to the assumption? (If NO—then it’s a material effect)
ii. Unilateral Mistake
1. Restatement § 153
a. ONE party to the K is mistaken
b. About a basic assumption of the K
c. That has a material effect on the exchange of promises, AND
d. Enforcement of the K would be unconscionable, OR
e. The other party had reason to know of the mistake or his fault caused the mistake.
2. Restatement § 154—if you get all of those, look to see if the party seeking to void the contract was allocated the risk
                     a. If the party was allocated the risk, then no claim
                     b. If the party was NOT allocated the risk, the elements are all met.
B. MISREPRESENTATION—an assertion that is not in accord with the facts (a mistake that is communicated)
                        i. 4 Types of Misrepresentation:
                                    1. Lie
                                    2. Conceal Facts
                                    3. Nondisclosure
                                    4. Half Truth
ii. Restatement 2nd §161—affirmative duty to disclose exists when:
            1. the nondiscloser later acquires knowledge that must necessarily be disclosed to prevent an earlier assertion from being a misrepresentation
            2. the nondiscloser knows that the other party is operating under a mistake and the disclosure of the fact would correct that mistake
            3. the nondiscloser has a duty to tell the other person because of a fiduciary relationship between them
                        ii. Restatement 2nd §162
                                    1. §162a—FRAUDULENT MISREPRESENTATION
a. A misrepresentation is fraudulent if the maker intends that the misrepresentation induce a party to manifest assent, AND
I. The maker knows or believes that the assertion is not in accord with the facts
II. The maker does not have the confidence in the truth of his statement that the maker states or implied
III. The maker does not have the basis for making the assertion that he state or implies
                                    2. §162b—MATERIAL MISREPRESENTATION
a. A misrepresentation that would likely induce a reasonable person to manifest assent (OBJECTIVE)
I. This is like reasonable reliance
b. An assertion, not in accord with the facts, that the maker knows would likely induce the recipient to manifest assent (SUBJECTIVE)
                                    3. DIFFERENCES
a. When a person makes a fraudulent misrepresentation, he has knowledge that his assertion is false and makes it anyway
b. Consequences:
            I. Fraudulent—prevents the formation of a contract
            II. Material—makes contract voidable
                        iii. Remedies
                                    1. Recission of K
                                    2. Restitution Damages
                        i. Duress
                                    1. A contract is VOIDABLE if:
                                                a. A party’s manifestation of assent is induced by an improper threat
I. This means that the threat overcomes the party’s volition in entering into the contract
II. Entering into the contract is no longer voluntary—it’s coerced
                                                b. The party has no reasonable alternative
I. Totem v. Aleyska—Totem went bankrupt, had to settle in order to receive money from Δ
2. Subjective Test – not whether a reasonable person would have been induced, but rather was the party asserting the defense actually induced. Totem & Holler.
a. Be careful not to find duress where a party takes advantage of a vulnerability that it did not create
I. Aleyska created Totem’s debt which caused the bankruptcy, which is why duress was found here. Otherwise, it would not have been duress.
4. Restatement 2nd §174—duress by physical compulsion prevents contract from ever forming (void)
5. Restatement 2nd §175—duress by threat makes a contract voidable if it is an improper threat (§176) and there is no reasonable alternative
                                    6. Restatement 2nd §176—IMPROPER THREATS:
                                                a) A threat to commit a crime or tort against the party
                                                b) A threat to criminally prosecute the party
                                                c) A threat to use civil process in bad faith against the party
d) A threat to breach the duty of good faith and fair dealing under a contract with the party

                                               IV. Poverty
                                                            V. Extreme Emotional Vulnerability (Ropes)
                                                b) Important Terms Hidden in a Maze of Fine Print
                                                c) Unduly Complicated Language
                                                d) One Party Given Insufficient Time to Consider the Agreement
                                                e) Bargaining Impropriety
                                                            I. Duress
                                                            II. Undue Influence
                                                            III. Misrepresentation
                                                f) ADHESION contract is a hallmark of procedural unconscionability
I. A form contract containing pre-printed terms that are offered on a take-it-or-leave-it basis.
                        iii. SUBSTANTIVE UNCONSCIONABILITY
                                    1. DEFINITION—excessively disproportionate terms
a) Exchange of obligations so one-sided as to shock the court’s conscience
b) In the language of the Restatement, that is terms that are unreasonable favorable. § 208, cmt d.
c) Can be a one-sided allocation of the risk inherent in the contract
2. Unfairness must be in existence in K terms at the time the contract was entered into!
                        iv. Different Ways to Prove an Unconscionability Claim
                                    1. Proof of Substantive and Procedural Unconscionability
2. SLIDING SCALE—substantive and procedural elements need not have equal effect but work together; more proof of one element may require very little of the other
3. Some courts only require proof of substantive unconscionability alone
                        v. American Software v. Ali
1. Superior bargaining power alone does not mean that there is procedural unconscionability
2. And just because the party with superior bargaining power gets a better deal than the weaker party does not make a contract substantively unconscionable.
            a) 4 things show no procedural unconscionability:
                        I. Terms easily comprehendible
                        II. Ali had benefit of counsel
                        III. She was a person with contractual experience
IV. She wasn’t powerless—she had enough bargaining power to negotiate other terms