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Contracts II
University of South Carolina School of Law
McWilliams, Martin C.

CONTRACTS II OUTLINE

AVOIDING ENFORCEMENT

Misrepresentation and Non-Disclosure

Res 2d §162: When a Misrepresentation is fraudulent or Material
Ø (1) fraudulent
Ø intend to induce other to assent
Ø know or believe assertion to be false
Ø (2) material
Ø innocent
Ø no intent to induce req’d
Res 2d §164: When a Misrepresentation makes a K voidable—
Ø if you make either kind of misrep, the other party can rescind (get out of) the K.
R2d §163: Misrepresentation of Contents of K
Ø lying about what’s in K
Ø Makes K void not voidable!

Hill v. Jones (P.652C)
Ø FACTS: termite case/ P asks about floor ripple, D thought it was water damage and told P that.
Ø RULE: “where the seller of a home knows of facts materially effecting 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 (P.657C) (Johnson v. Davis)
Ø Footnote: in Arizona, whether or not the fact may be material, a duty to disclose arises whenever the buyer makes an inquiry of the seller. (“if you don’t read the footnotes, your children will starve”)
Ø Def of “material”: P.658C
Ø Compare this rule to Res 2nd §161b (Res gives a broader basis of relief)
Ø Problem with Hill rule is that you have to prove that seller knew
Ø With Res 161b, you have to prove that seller knew and that seller knew that buyer didn’t know—tough! Also, are they fid’s under “d”?
Ø Look to 162 and 163 to see what to do if you satisfy 161
MINOR RULES:
Ø “[P]arol evidence always admissible to show fraud, and this is true, even though it has the effect of varying the terms of a writing between the parties.”
Ø You can’t use an integration clause to get out of your own fraud P.655C
Ø Duty to speak rule P.656C

Remedies for Misrepresentation (P.640C)
1. Recission: puts both parties in the position they were in before the K. The injured party and the guilty party might have to give something up.
2. Tort action for damages (P.651C)
1. “out of pocket” rule: P can recover the difference b/t what she parted with and what she received, plus consequential damages that she suffered prior to the discovery of the fraud.
2. “benefit of the bargain” rule: P is to be put in the position she would have been in if the D had spoken truthfully.

Opinions: the expression of a belief, w/o certainty, as to the existence of a fact (typically, they deal with matters such as quality or value of property). (see def in Res. 2d §168)
Ø when an opinion could be actonable: P.650C

Unconscionability
Ø UCC 2-302
Ø Res 2d §208
Ø UNIDROIT Article 3.10 (P.199R)

Williams v. Walker-Thomas Furniture (P.669C)
Ø FACTS: seller sells furniture with an add-on clause (if you default on one payment, they can repo all you ever bought from them. Welfare P buys stereo and defaults
Ø Procedural unconscionablity: either lack of choice by one party or some defect in the bargaining process (such as quasi-fraud or quasi-duress)
Ø Case calls this “absence of meaningful choice on the part of one of the parties” P.672C
Ø 2 types of lack of meaningful choice
1. “a gross inequality of bargaining power”
2. lack of a “reasonable opportunity to understand the terms of the K”
Ø Substantive unconscionablity: relates to the fairness or lack or fairness of the K terms
Ø TEST from case: if terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place” P.673C (Corbin test)
Ø This case says you need both kinds to prove uncons. (and in this case you do—welfare lady wins)
Ø UCC 2-302 unconscionability rule: If the court thinks the K is bad, the court can refuse to enforce it (blank check to courts)
Ø UCC does not recognize “unfair bargaining position” as procedural uncons
Ø Court has 3 options (tremendous flexibility)
Ø Comments P.38R: does the UCC recognize unequal bargaining power as a form of procedural uncons??
Ø UCCC gives another multi-factor balancing approach to finding unconscionability (P.677C)
Ø Consumer protection legislation P.680C
Ø UCCC 3-302,303 (bott P.675C) gives a rule about “add-on clauses” (you pay off items one at at a time)
Ø SC Code 37-2-409 looks similar
Ø Do add-on clauses make sense economically? P.679C

American Software, Inc. v. Ali (P.683)
Ø FACTS: a commission clause in a K is ruled uncons because of the unequal bargaining power
Ø Substantive unconscionability: “indicated by K terms so one-sided as to “shock the conscience” (P.685C)
Ø Throws out the reasonable standard
Ø Makes it harder for courts to find uncons!
Ø Procedural unconscionability: “oppression, arising from the inequality of bargaining power and the absence of real negotiation or a meaningful choice” and “surprise, resulting from hiding the disputed term in a prolix document”
Ø You must show both (but a “sliding scale” may work)
Ø It must be uncons at FORMATION: “the critical juncture for determining whether a contract is unconscionable is the moment when it is entered into by both parties—not whether it is uncons in light of subsequent events” (P.685C)
Ø UCC 2-302 agrees
Ø Uncons is a shield, not a sword—P.689C (its only a defense)

Policy of Unconscionability: protects weaker party from entering K’s that are unfair. But, does it limit freedom of K? Is it like Robin Hood in that it steels freedom from strong/rich and gives freedom to the poor?
Ø Extending uncons any more will end up hurting the poor because rich companies won’t deal with them anymore. So maybe “shock the con” standard is best because it insures this stuff won’t be used much.

Piantes v. Pepperidge Farm, Inc. (P.690)
Ø FACTS: francisee ent

to public policy”
Ø Public Policy here: its good public policy to have free competition, and its bad public policy to send doctors out of town if they leave their current group, and its also bad when a restrictive cov interferes with the valuable patient-doctor relationship. But this court says the stronger public policy is to not discourage apprenticeships and partnerships that lower fees (722)

Ø Common Law says that no-competes are unenforceable
Ø Exceptions: P.725C
Ø Res 2d 187: a no compete is unenforceable unless it is ancillary to a valid transaction.
Ø “blue pencil theory” (P.728C) a court may excise or limit objectionable aspects and enforce the remainder of the restrictive covenant. A more modern view even lets courts reduce the effect or scope of a clause
Ø Problem this creates: employers may draft overly broad restrictive covs, relying on courts to merely pare them down if challenged by employees. Also, some ee’s would comply with a n-c that was totally unreasonable just because they didn’t want to fight it.
Essentially, if a n-c is overly restrictive, courts can deny enforcement, enforce it, or “blue pencil” it, whatever it takes to make it reasonable.

RR v. MH & another (P.730C)
Ø FACTS: surrogacy agreement. Surrogate mother decides to keep the baby—father sues and loses because the surrogacy K is unenforceable.
Ø RULES:

you can’t give her money to make her give up kid

Ø rule bott P.735
Ø top P.736 2nd rule

you can’t pay her for “services” or any thing else beyond pregnancy expenses

Ø rule P.735 bottom

a consent to custody agreement will not be recognized unless it was given 4 days after baby’s birth

Ø rule top P.736

Ø note that under these rules no father would ever do this (no guarantee of custody) and no surrogate mother would ever do it (there’s no compensation, and you don’t keep the kid)
Ø Even if all the requirements are met, the “best interests of the child could still override a K. (Res 2d §191)
Ø POLICY: freedom of K/free market vs. paternalism
Ø Court falls on paternalistic side on this case. See P.736 for policy reasons not to enforce this one. They don’t enforce the K here because there’s an adverse effect on a party who did not consent to the K (the baby!)