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

Contracts II
McWilliams              
Spring 2010
Contract liability is a form of strict liability. It does not require fault or that one party be harmed. No requirement of injury – just that an expectation wasn’t filled.
 
Ch. 7: Avoiding Enforcement: Incapacity, Bargaining Misconduct, Unconscoinability, and Public Policy
–          Role of courts: not to inquire nature of parties. Courts assumed that the parties were in relatively equal bargaining power, acting in own self interest. BUT in some types of cases there exists inequality of bargaining power and the court will refuse to enforce it.
–          This chapter deals with flaws in the bargaining process sufficiently severe to rebut the presumption that the contract was entered into fairly
–          There is an irrefutable assumption that some types of parties are so disadvantaged that it rebuts the contract. An example is infants. 
–          Courts have broadened their role in enforcing these agreements to produce what the courts consider to be just outcomes.
–          Concern with the capacity of parties to make an agreement, with the bargaining process by which an agreement is reached, and with the substance of any resulting agreement.
A.            Minority and Mental Incapacity
–          The whole point of the doctrine of infancy is that it is an example of an irrefutable presumption that certain types of parties are so disadvantaged in a contract so as to rebut the presumption of arms level length contract negotiations.
o   Has to do with the capacity to contract. If someone does not have the capacity to contract, then the contract could not have been formed by rational parties bargaining at arm’s length.
 
Dodson v. Shrader (Supreme Court of Tennessee, 1992)
·         Facts: Plaintiff was a 16 year old who bought a used truck from the defendant. Defendant did not inquire as to the plaintiff’s age and the plaintiff made no misrepresentation, although defendant believed the plaintiff to be eighteen. Truck developed mechanical problems, which the defendant did not have fixed. The truck subsequently blew up. The plaintiff demanded a full refund for the truck, the defendant refused, and therefore the plaintiff brought suit.
·         Court has to decide if it is prejudicial to the infant:   
                – if it is- then it is void
-when it is to his benefit: for necessaries…then it is enforceable: binding against the minor (for market value)
                -if it is of uncertain nature: voidable at the election of the infant
·         Issue: Can the plaintiff rescind the contract and be entitled to the full value of the truck since he was not at the age of majority at the time of formation?
·         Rule of Law:
o   old rule: if it was prejudice then it was void. New modern rule (tuck rule): infant is permitted to assume the burden of the contract. Classification system is abandoned: required court to determine if the contract was prejudice, beneficial…etc
o   Minority Rule: Benefit Rule: Upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use (rent) of the merchandise.
o   2nd Minority Rule: Oregon Rule: the minor’s recovery of the full purchase price is subject to a deduction for the minor’s “use” of the consideration he or she received under the contract, or for the “depreciation” or “deterioration” of the consideration in his or her possession.
o   Traditional rule is that a minor may disaffirm or avoid a contract, even when there has been full performance and the minor cannot return what was received. 
o   Therefore, a contract made by a minor is voidable at the minor’s election; it is not necessarily void.
o   Modern rule is that the contract is voidable, but not void, subject to the minor’s discretion
o   A contract may not be enforced against an infant’s will until he comes of age and is able to affirm or disaffirm. If an infant fails to disaffirm the contract with a reasonable time after reaching the age of majority, it becomes enforceable. 
o   The “Benefit Rule” – deducts the minor’s recovery of the full purchase price by his use of the merchandise. 
o   Another minority rule also deducts the amount that the merchandise has depreciated or deteriorated while in possession of the minor.
o   The amount the minor is entitled to recover must be reduced by the expenses incurred in his use of the good (the benefit he received from it, its depreciation, and willful or negligent damage to the good while the minor owned it).
o   This protects minors from overreaching by merchants, but protects, innocent merchants as well. 
o   A contract by an infant may enforced if it is for necessities (food, clothing, shelter), but this is based on restitution.
o   If the minor engages in tortuous conduct…then the contract may be enforceable
o   if parents sign something for minor….the minor can still disaffirm: not affective as to               the kid- parent cannot waive children’s rights
HOLDING: adopt the modified Oregon Rule: Minor cannot recover full amount, 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. If the minor has been taken unfair advantage of, then they can get their money back. But if the adult dealt in good faith with minor…then the minor gets the money back minus the value of the use of the truck.
 
§ 14. Infants. Restatement (Second) of Contracts.
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 eighteenth birthday. (very similar to the Tuck rule)
 
Hauer v. Union State Bank of Wautoma (Court of Appeals of Wisconsin, 1995)
·         Facts: Plaintiff suffered a brain injury and was deemed mentally incompetent. Third party convinced the plaintiff to use her mutual fund as collateral to get a loan for a business and to pay off the loan, and in return, she would make the plaintiff a partner in the business. Plaintiff sought a loan from a bank using the fund as collateral and it was granted. Along the way, the bank was told that plaintiff needed the mutual fund to live on and the bank may have been told of the mental incapacity. However, the bank officer did not notice anything that gave him reason to believe that the plaintiff was unable to understand the loan transaction. The deal went through, the business tanked, and plaintiff defaulted on the loan. 
·         Issue: Can the plaintiff void the executed contract due to lacking the mental capacity to enter into a contract at the time of its formation if she cannot restore the consideration given? can Hauer recover her collateral without liability for the loan proceeds?
·         Rule of Law:
o   The general rule is that a mentally incompetent person may not void a contract if he cannot restore the other party to its original position, provided that the contract was made in good faith, for fair consideration, and without knowledge of the incompetence. If the contract is made on fair terms and without knowledge of the incompetency, the contract cannot be voided unless full consideration can be restored.
o   If the other party knew of the incompetency or took unfair advantage of the incompetent, the contract may be voided even if the consideration may not be fully restored.
o   The law presumes that every adult is fully competent; the person claiming incompetence carries the burden of proof.
o   The test for determining competence is whether the person involved had the mental ability to know what he or she was doing and the nature and consequences of the transaction. 
o   If you are adjudicated incompetent, you are considered like an infant and unable to enter into a contract. It does not matter if the party knew that the other party was adjudicated or not, the contract can still be voided. 
·         general rule for those who only assert incompetence (sect 15): different than infancy: contract can be avoided but to the extent that the contract has been performed, there must be rescission, unless equity intervenes
o   This case is an exception to that rule
·         Infancy Doctrine is absolute and an adjudicated incompetent is absolute
o   However someone asserting incompetency, there are more variables and equity comes into play
o   A contract made by a person who is mentally incomptetent requires the reconciliation of two conflicting policies: the protection of justifiable expectations and of the security of transactions and the protection of persons unable to protect themselves against imposition
 
§ 15. Mental Illness or Defect. Restatement (Second) of Contracts.
(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, [Cognitive test] 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. [Volitional test].
(2)    Where the contract is made on fair terms and the other party is without knowledge of the mental illness o

r better judgment does not necessarily amount to undue influence. 
o   Undue influence used in the making of wills is probably the single most prevalent use of undue influence. 
o   Undue influence makes a contract voidable.
o   There does not have to be a special relationship to prove undue influence, but it makes proving it a lot easier.
o   most cases involve persons who bear a confidential relationship to one another…but this need not be present when the undue influence involves unfair advantage taken of another’s weakness or distress
o   can be a circumstance or trusted confidence
o   both undue influence and duress have to do with substituting judgment of one party with that of the other party
 
C.      Misrepresentation and Nondisclosure
Fraud
Information imbalance – One party has a lot more information than the other. The whole idea of the negotiation process is to make information symmetrical and for the two parties share information with each other
–          Accompanied by a bad act
–          No provision in a contract can release a party from liability for fraud in the formation of the contract – not even a merger clause.
Misrepresentation
Broader than fraud
–          A contract may be rescinded for negligent misrepresentation
–          Silence/nondisclosure can be a misrepresentation
–          The usual rule is that silence is not actionable, unless there is a duty to speak (§162 and §164).
misrepresentation: fraud is a purposeful misrepresentation….negligent misrepresentation can still be a defense
modern law: may have a choice: tort action for damages, or rescission- right to avoid enforceability
 
 
§161. When Non-Disclosure is Equivalent to an Assertion. Restatement (Second) of Contracts.
A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:
a)      Where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material
b)      Where he knows that disclosure of the 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 failing to act in good faith and in accordance with reasonable standards of fair dealing.
c)       Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.
d)      Where the other person is entitled to know the fact because of a relation of trust and confidence between them
 
Duty to speak creates the misrepresentation. You then move on to section 162 to determine whether it’s fraudulent, or material, or neither.
 
MEMORIZE
§162. When a Misrepresentation is Fraudulent or Material. Restatement (Second) of Contracts.
(1)    A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker
a.       Knows or believes that the assertion is not in accord with the facts, or
b.      Does not have the confidence that he states or implies in the truth of the assertion, or
c.       Knows that he does not have the basis that he states or implies for the assertion.
(2)    A misrepresentation is material if it would be likely to induce a reasonable person (objective test) to manifest his assent, or if the maker knows (subjective test) that it would be likely to induce the recipient to do so. (can involve a negligent misrepresentation that the party thinks is true)
 
The distinction between a material and fraudulent misrep is that the latter is