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

Contracts II, McWilliams (Spring 2010)
Assume that a contract is enforceable this semester
            Reasons to not enforce a contract
            Excuses for non-performance
            Rights and duties of third-parties
CHAPTER 7 – AVOIDING ENFORCEMENT: Incapacity, Bargaining, Misconduct, Unconscionability, and Public Policy
Two parties acting in their own self-interest
In some cases there was horribly unequal bargaining power
Led to some contract provisions
Minority and Mental Incapacity
Dodson v. Shrader
Dodson, a minor, bought a used truck using cash. Drove car for 9 months then had engine problems. Car’s engine was destroyed. Asked to rescind the contract (give considerations back). During the time this is going on, the car was hit and the value decreased even more.
Issue à Does he get all his money back?
Court says: Either he pays for the benefits he received or pays for the depreciation in the value of the property
Infancy Doctrine – minor can void a contract unless it is for necessaries (food, shelter, clothing)
Only the “infant” can void the contract
BAD for infant à VOID
Once a minor reaches majority, they must disaffirm the contract in reasonable time otherwise it becomes non-voidable
Minor is considered incapable of entering into a contract which is enforceable by the other party
Modern Minority Rules
Benefit Rule – upon rescission, the minor gets their money back minus “payment” for benefit of use (“rent”)
Depreciation Rule – upon rescission, the minor must pay/deduct value of depreciation from their returned payment
Tennessee Rule – Where the minor has not been overreached in any way, and there has been no undue influence, and the contract is a fair and reasonable one, and the minor has actually paid money on the purchase price, and taken and used the article purchased, that he ought not be permitted to recover the amount actually paid, without allowing the vendor of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to the article, while is his hands
Judge can void contract again
Section 14 (Restatement) – dictates what happens with minors
Law of tort operates with minors
Releases signed by minors
Pre/Post-injury releases signed by the child is not enforceable
Many courts have held that minors are able to disaffirm such preinjury exculpatory agreements signed by the parent
Courts would have to approve a contract in special circumstances
As a matter of law, he did not have mental capacity
Hauer v. Union State Bank of Wautoma (1995)
Very complex case dealing with mental incapacity and the court has to try to allocate the most equitable decision. Issue with mutual assent à contract appeared to be an enforceable contract
FACTS: Plaintiff suffered a brain injury (motorcycle accident), was appointed a guardian but was judged to not need it anymore. Third party had a business but was low on money. Got the plaintiff interested and she attempted to take a loan out with the mutual fund as collateral. Bank was told that the plaintiff needed the mutual fund for living expenses. Loan still gets approved.
ISSUE: Loan matures and the plaintiff attempts to void the loan contract as well as some punitive damages. Attempted to get a rescission (everyone gets their consideration back) but she does not have the loan money.
Each state established procedures by which a court on petition of a family member or other interested party can declare a person legally incompetent and appoint a guardian or conservator to care for the incompetent’s person or property
General rule is that a person does not have capacity to enter into contracts if the person’s property is under conservatorship
Hauer claims three things
The Bank knew or should have known that she lacked the mental capacity to understand the loan
The Bank intentionally misrepresented, negligently represented, or misrepresented the circumstances surrounding the loan on which she relied
The Bank breached a fiduciary duty owed to her
Fiduciary duty claim is dismissed
Misrepresentation claim is also dismissed
Jury makes two findings
Lack of capacity finding
Bad faith finding
Capacity is a matter of law
Exception to the Rule of Rescission
If the other party acts in bad faith
Traditional “Cognitive” Test
Under this approach a person lacks capacity to enter into a contract if the person is unable to understand the nature of the transaction or its consequences
Restatement § 15 has gone beyond the cognitive standard to adopt an alternative “volitional” test for incapacity
The law presumes that every adult person is fully competent until satisfactory proof to the contrary is presented
Fiduciary Duty – A duty imposed on one party to act on the behalf of another
One instance is a relationship of trust and confidence
The vulnerable party is justified in believing that the other party will work in their best interest
Duty of care – will act with due care
Duty of loyalty – in looking after your affairs, they will ONLY act in your own best interest
Must be acted upon in good faith
Lawyers, Doctors, Agents, etc…
Duress and Undue Influence
Bargaining power is horrible inequitable
Presumption that when people do certain things, they bound themselves
Totem Marine v. Alyeska Pipline
Totem is attempting to void the settlement agreement
Trial court gives summary judgment to Alyeska since the parties had a signed settlement agreement
Totem argues economic duress
Chapter 7: Avoiding Enforcement: Incapacity, Bargaining Misconduct, Unconscionability, and Public Policy
Enforceable: for a breach, the court will give a remedy
A.    Minority and Mental Incapacity
There is a presumption of no meaningful bargain in the case of incapacity and infancy.
Dodson v. Shrader (p.519)
Dodson, 16, bought a truck from Shrader for $4900. Shrader testified that he believed Dodson to be 18 or 19 years old. 9 months later, mechanic said it was likely that the truck needed a repair. Dodson could not afford it and continued driving the truck until the engine blew out. After unsuccessfully trying to return the truck to Shrader, Dodson parked it in his front yard. While parked, a passing car hit the front fender of the truck; the estimated value of the truck after the collision was $500. Dodson brought suit against Shrader seeking to rescind the original agreement.
–          Issue: Whether Dodson is entitled to a full refund of the money he paid or whether the seller is entitled to a setoff for the decrease in value of the truck while it was in Dodson’s possession.
–          Rescission: party unilaterally unmakes a contract for a legally sufficient reasons – everyone gets everything back
–          Old Rule: if an infant made a contract, it was void. Exception: necessaries (recovery for adult in this case is based on restitution rather than enforcement of the contract).
–          Modern Rule: contracts of infants are not

eption to the general rule
–          Presumption: all adults are competent – presumption shifts with certified mental incapacity – adjudicated incompetent (like an infant)
–          General rule: a person does not have capacity to enter into contracts if the person’s property is under conservatorship
–          Uncertified mental incapacity has to be proven by the incompetent person. If proven, it can be a bar to enforcement of contract.
–          Incompetent person’s transactions are voidable. If the incompetent person has the consideration, he has to pay it all back.
Restatement §13: A person does not have the capacity to enter into contracts if the person’s property is under guardianship
Spendthrift laws – in some states, family can have a member adjudicated as a spendthrift (compulsive money spender) so their contracts are voidable.
2 tests for incapacity: (not for someone adjudicated incompetent – test a court will apply when a person is unadjudicated)
1. Cognitive test (Hauer) – person lacks capacity to understand nature of transaction and consequences (but says nothing about notice)
2. Volitional test (Restatement §15)– person is unable to act in a reasonable manner and other party has reason to know of the condition (broader test)
Restatement §15: Mental Illness or Defect
(1)   A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
a.     He is unable to understand in a reasonable manner the nature and consequences of the transaction, or
b.    He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.
(2)   Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.
B.    Duress and Undue Influence
Origins of Duress – imprisonment or threat of physical harm
–          Courts have broadened the types of threats by duress, first to threats to a person’s property (duress of goods) and later to economic duress
a)     Economic duress (or business compulsion) cannot exist if there is an adequate alternative. An alternative may not be adequate if delay would cause harm.
–          Williston (old rule): At early common law, a contract could be avoided on the ground of duress only if a party could show that the agreement was entered into for fear of loss of life or limb, mayhem (CL: unlawfully and violently depriving another by the use of such of his members as would render him the less able in fighting; modern: rendering a limb useless, disables, etc. limb) or imprisonment.