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

Assume that a contract is enforceable this semester
FOUR PARTS:
            Reasons to not enforce a contract
            Excuses for non-performance
            Remedies
            Rights and duties of third-parties
 
CHAPTER 7 – AVOIDING ENFORCEMENT: Incapacity, Bargaining, Misconduct, Unconscionability, and Public Policy
Contract
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
NECESSARIES à ENFORCEABLE
IN BETWEEN à VOIDABLE
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
OVERALL, CHILDREN DO NOT HAVE CAPACITY TO ENTER INTO A CONTRACT
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 void but only voidable and subject to be disaffirmed by the minor either before or after attaining majority (Tuck v. Payne – more of the Restatement rule)
 
Restatement §14: Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s 18th birthday.
 
–          Two minority rules for refunds:
o    Minority Rule 1: the Benefit Rule – Upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise
o    Minority Rule 2: the Oregon Rule – The minor’s recovery of the full purchase price is subject to a deduction for the minor’s “use” of that consideration he or she received under the contract, or for the depreciation or deterioration of the consideration in his or her possession
o    “Use”- like paying rent
o    These rules apply only to refunds. If minor hasn’t paid money, creditor never gets money because there is no enforceable contract.
–          Holding: A modified version of the Oregon Rule should be adopted in Tennessee. 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 to 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 purchased, while in his hands. (not rescission)
–          The rule will fully and fairly protect the minor against injustice or imposition, and at the same time it will be fair to a business person who has dealt with the minor in good faith
–          McWilliams: take away from this case…      
o    Difference in treatment of minors (infants)
o    Conclusive presumption that someone under 18 simply lacks the bargaining power to enter into an enforceable contract
 
Hauer v. Union State Bank of Wautoma (p.526)
Hauer suffered a brain injury and was held to be incompetent. A year after her accident she was declared to be competent and was given the ability to manage her own affairs. She received $900 per month from social security and interest income from a mutual fund. Hauer was convinced by Eilbes to invest in his business by taking out a loan using her mutual fund income as collateral. Eilbes discussed the potential loan agreement with an assistant VP at Defendant Bank. The VP then spoke to Hauer’s financial consultant to verify the existence of the bank loan. He admits that the consultant told him not to use the mutual fund as collateral because it was the primary source of her income, and further that it was possible that the financial advisor told him about Hauer’

ent in order to reach a settlement. Plaintiff eventually agreed to release Defendant from all liability in exchange for less money. Plaintiff then brought suit to rescind the amended agreement and to recover the balance allegedly owed on grounds of economic duress.
–          Issue: Was Totem forced to accept the terms and conditions of the amendment such as to allow rescission based on economic duress?
–          Holding: Yes. Totem showed that Alyeska deliberately withheld payments of a debt, with knowledge that Totem had no choice but to accept the conditions of the amendment or declare bankruptcy (the only way to avoid bankruptcy was to accept the amendment). The court remands to case back to trial for determination of whether a claim for economic duress truly existed.
–          Rule: A party may rescind an agreement if they can prove they entered into such agree under economic duress.
 
Restatement §175: When Duress by Threat Makes a Contract Voidable
(1)   If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
(2)   If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.
 
Restatement §492(b) – Duress – Any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended of should reasonably have been expected to operate as an inducement.
 
3 part test for duress:
1. One party involuntarily accepted the terms of another
2. Circumstances permitted no other alternative
3. Such circumstances were the result of coercive acts of the other party
 
Majority:D must have caused the hardship
Minority:D took advantage of hardship without having caused it
Unger: Role of the courts – If you have a subjective test with no causation, doctrine undercuts freedom of contract
 
Odorizzi v. Bloomfield School District  (p.548)
Odorizzi was employed in 1964 as an elementary school teacher by defendant school district and was under contract to teach the following year as a permanent employee. He was arrested on criminal charges of homosexual activity and delivered his resignation to the district the next day. A month later, charges were dismissed and he sought to resume his employment. On the district’s refusal to reinstate him, he filed suit. His complaint asserts that his resignation was invalid because it was obtained through duress, fraud, mistake, and undue influence and given at a time when he lacked capacity to make a valid contract.
–          Issue: Whether the plaintiff had a cause of action to rescind the agreement based on duress, fraud (actual and constructive), mistake, or undue influence
–          Holding: Dismissal of complaint upheld on all grounds but one. The facts in the complaint are insufficient to state a cause of action for duress, menace, fraud, or mistake, but they do set out sufficient elements to justify rescission of a consent because of undue influence.
–          Rule: A party may rescind an agreement if he can prove it was made as the result of undue influence.
–          Ultimate question concerning duress or undue influence: was there meaningful assent?
 
Elements of Fraud:
–          misrepresentation
–          knowledge of falsity
–          intent to induce reliance
–          justifiable reliance
–          resulting damage
 
* Constructive fraud: arises on a breach of duty by one in a confidential or fiduciary relationship to another which induces justifiable reliance by the latter to his prejudice.
* Actual fraud: conscious misrepresentation, or concealment, or non-disclosure of a material