Contracts II
Professor Davis
Spring 2012
1. Should we avoid Enforcement?
a. Is there a question of Minority?
i. RST §14 Infantsà 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
ii. Not VOID but VOIDABLE
iii. Can disaffirm contract but may have to compensate
1. Use Rule: Minor repays what he used (depreciation)
2. Benefit Rule: Minor repays what benefit he attained from the contract
iv. Must be a minor at the time the contract was made
v. If minor reaches 18, still has a reasonable time to disaffirm
vi. In some jurisdictions minors cannot disaffirm contracts for necessities (food, clothing, shelter)
vii. Misrepresentationà If the Minor misrepresents their age they CANNOT disaffirm
b. Is there a question of Mental Incapacity?
i. RST §15 Mental Illness of Defect
1. A person incurs only voidable contractual duties by entering into a transaction if by person of mental illness or defect
a. RST §15(1)(a) Cognitive Test: He is unable to understand in a reasonable manner the nature and consequences of the transaction, OR
b. RST §15(1)(b) Volitional Test: 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
ii. RST §15(2)à Contract not automatically voidable
1. 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 so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.
a. Adult Competency Presumptionà Mentally incompetent person will have to make restitution for incurring a use and benefit
b. Competency is determined at the time the contract is formed
iii. RST §16 Intoxicated Persons
1. A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
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
c. Is there a question of Duress?
i. Two Options
1. Void Contract
a. Bad Faith or Worse
b. RST §174 Duress by physical compulsion prevents the formation of a contract
i. If conduct that appears to be a manifestation of assent by a party who does not intent do engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent
2. Voidable Contract
a. RST §175 When duress by threat makes a contract voidable
i. 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
ii. 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
b. RST §176 When a threat is improper
i. A threat is improper if
1. What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,
2. What is threatened is a criminal prosecution,
3. What is threatened is the use of civil process and the threat is made in bad faith, or
4. The threat is a breach of the duty of good faith and fair dealing under a contract with the recipient
ii. A threat is improper if the resulting exchange is not on fair terms, and
1. The threatened act would harm the recipient and would not significantly benefit the party making the threat,
2. The effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or
3. What is threatened is otherwise a use of power for illegitimate ends
iii. Economic Coercionà Duress exists where
1. One party involuntarily accepts the terms of another
2. Circumstances permitted no other alternative, and
3. Circumstances were the result of coercive act of the other party
iv. Notes
1. If there is a reasonable alternative there is NO duress
2. If a 3rd party induces manifestation of assent it is voidable by the victim UNLESS the other party relied on it in good faith and without reason to know
d. Is there a question of Undue Influence? (Taking unfair advantage of another’s weakness of mind, or taking a grossly oppressive and unfair advantage of another’s necessities or distress)
i. RST §177-When Undue Influence makes a contract VOIDABLE
1. Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.
2. If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.
3. 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 undue influence either gives value or relies materially on the transaction.
ii. Requires
1. Vulnerable party AND
2. Over Persuasion (7 factors)
a. Discussion of the transaction at an unusual/inappropriate time
b. Consummation of the transaction in an unusual place
c. Insistent demand that business be finished at once
d. Extreme emphasis on untoward consequences of the delay
e. The use of multiple persuaders by the dominant side against a single servient party
f. Absence of 3rd party advisors to the servient party
g. Statements that there is no time to consult financial advisors or attorneys
e. Is there a question of Misr
iary, UNLESS
1. It is on fair terms, and
2. All parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know.
5. Victims Options
a. Tort Action for Damages
b. Rescission: Right to avoid the enforceability of the contract
c. Reformation of the Contract (only if it is voidable)
f. Is there a question of Non-Disclosure?
i. Knowledge of Non-Disclosure (must be actual knowledge of the material informationà cannot occur unintentionally)
1. Material Informationà
2. RST §159- Misrepresentation
3. RST § 161- When Non-Disclosure is Equivalent to an Assertion
a. 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:
i. 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.
ii. 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 nondisclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing
iii. 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.
iv. Where the other person is entitled to know the fact because of a relation of trust and confidence between them.
ii. Affirmative Duty to Discloseà affecting the value of the property known by the seller and not available to the buyer
iii. Problem of discoverability of knowledge
iv. Knowledge REQUIRED for Non-Disclosure
1. Innocent or negligent situations are not construed as non-disclosure possibilities
v. Ethics
1. RST §173- When Abuse of a Fiduciary Relation Makes a Contract Voidable (RST above)
g. Is there a question of Unconscionability?
i. Used to allow the courts to examine the bargaining unfairness
ii. Common Law
1. RST §208-Unconscionalbe Contract or Term
a. IF a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result
