Contracts II Outline

Contracts II Outline
Professor Crystal
Spring 2006

AVOIDING ENFORCEMENT – Ch. 7
– These defenses are allowed based on the values of voluntariness (freedom to contract) and fairness
– These are affirmative defenses, thus can use them for either an offensive OR defensive claim for rescission/damages (e.g. if you are mentally ill, can bring suit based on your mental incapacity, or if you are sued, you can claim mental incapacity as a defense)
– Voidable = capable of being affirmed or rejected by one of the parties
– Void = of no legal effect, null
I. Mental Incapacity and Minority
– Restatement §15: a contract is voidable by reason of a party’s mental incapacity if
o The party is unable to understand the nature and consequences of the transactions (cognitive test), OR
o The party fails to act in a reasonable manner in relation to the transaction and the other party has reason to know of that party’s mental defect (volitional test)
– E.g. a patient w/ Alzheimer’s starts spending like crazy, which is totally opposite his previous habits; under the cognitive test, his transactions aren’t voidable b/c he knew what he was doing… but under the volitional test, his transactions are voidable b/c he’s acting in an unreasonable manner, acting on impulse
– Note: many courts have only accepted the cognitive test, not the volitional test too… this is b/c there’s concern that the volitional test interferes w/ the expectations of the healthy party who may honestly not know that the party is mentally ill
– R §14: a contract is always voidable by reason of a party’s minority if that party is under 18… if the other party has acted in good faith reliance on the other party being over 18, it may sue for restitution
II. Duress
– R §175(1): duress = improper threat + absence of meaningful choice + inducement of assent by the threat
– Duress originally only resulted from a threat of physical harm (R §174) but today includes threats against property or economic duress
– Totem Marine v. Alyeska Pipeline Service (Alyeska cancelled contract w/ Totem, said it couldn’t pay Totem for unspecified time unless the amount was lessened, causing Totem to face bankruptcy in the meantime): under R §176(2), it’s not an improper threat to say you won’t pay if you have a legitimate reason (e.g. saying Totem didn’t comply w/ its contractual obligations), but it is an improper threat if said in bad faith
III. Undue Influence
– R §177: undue influence = unfair persuasion + domination
– Undue influence involves the susceptibility of the servient party and the excessive pressure exerted by the dominant party
– To determine if undue influence is present, look for:
o Discussion of the transaction at an unusual or inappropriate time
o Consummation of the transaction in an unusual place
o Insistent demand that the transaction be completed immediately
o Extreme emphasis on untoward consequences of delay
o Use of multiple persuaders by the dominant side against a single servient party
o Absence of 3rd party advisers for the servient party
o Statements that there’s no time to consult financial or legal advisers
– Odorizzi v. Bloomfield School District (Odorizzi pressured to quit being a teacher b/c gay): being offered a chance to resign by 2 school officials in Odorizzi’s home at night or else they fire him the next day = undue influence; also, don’t need to have a fiduciary relationship between the parties in order for it to be undue influence
IV. Misrepresentation
– R §159: misrepresentation = false statement of material fact
– R §164: a contract is voidable if a party’s manifestation of assent was induced by either a fraudulent or a material misrepresentation by the other party upon which the party relied… thus the misrepresentation can be intentional or an honest mistake and still cause the contract to be voidable
– R §162: a misrepresentation is fraudulent when the party inducing assent knows or believes the statement is false or isn’t sure if the statement is true or not, but says it anyway; a misrepresentation is material if the other party attaches importance to that statement as fact
– Syester v. Banta (70-year old told she could become a dancer): false statements AND specific statements of opinions can constitute misrepresentations (R §168, 169 = reliance on opinions; gen., reliance on opinions isn’t ok)
V. Nondisclosure
– Nondisclosure = failure to reveal a material fact
– R §161: 4 situations where nondisclosure = misrepresentation:
o Where the disclosure of a fact is necessary to prevent some previous assertion from being a misrepresentation
o Where the disclosure of a fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing
o Where the disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing
o Where the other person is entitled to know the fact b/c of a relation of trust and confidence between them (i.e. there’s a fiduciary relationship between the parties)
– The old idea of caveat emptor has been rejected, thus sellers must inform buyers of all relevant info.
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