Contracts II Course Outline
I. Is there a question of Minority?
1. [Rst. §14] – Minors
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.
a. Age determined @ time of contract.
b. Disaffirmance valid by words or conduct if before, or within a reasonable time, after majority.
c. Ratification: Any manifestation to be bound by words or conduct after majority makes K binding.
d. Restitution required on minor’s avoidance (minor returns only what he has; if has nothing, then not required to return anything).
e. Exceptions for restitution: 1) Necessaries (food, clothing, shelter); 2) Minor as P (benefit rule, use rule, & deterioration/depreciation rule); 3) Willful or negligent damage; 4) Misrepresentation of age by minor.
f. Special situations: Parents on behalf of minor; emancipation/marriage (no difference); statutory exemption (education financing, insurance, medical care/treatment).
2. “…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.
a. Exception: If there has been any fraud or imposition on the part of the seller or if the contract is unfair, or any unfair advantage has been taken of the minor inducing him to make the purchase, then the rule does not apply.
II. Is there a question of Mental Incapacity?
1. [Rst. §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 [COGNITIVE TEST], or
(b) he is unable to act in a reasonable manner in relation to the transaction [VOLITIONAL TEST] and the other contracting party has reason to know of his condition.
(2) Where the contract is made on fair terms (w/o fraud) and the other party is without knowledge of the incompetency, the contract ceases to be voidable to the extent that the performance in whole or in part has changed the situation such that the parties cannot be equitably restored to their previous positions and avoidance would be unjust.
2. [Rst. §16] – Intoxicated Persons
(1) A party incurs only voidable contractual duties by entering into a transaction if the other contracting party has reason to know that by reason of intoxication;
(a) he is he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(2) he is unable to act in a reasonable manner in relation to the transaction.
3. Adults are presumed competent unless proven otherwise.
a. K is not automatically voidable; the incompetent party is required to make restitution unless special circumstances are present.
4. Competency determined @ time of contracting.
III. Is there a question of Duress?
1. [Rst. §174] – Duress by Physical Compul. Prev. Formation of a K
If a party who does not intend to engage in a certain conduct is physically compelled by duress, the conduct is not effective as a MA [and therefore the K is void].
2. [Rst. §175] – When Duress by Threat Makes a Contract Voidable
(1) If a party’s MA is induced by 1) an improper threat 2) by the other party 3) that leaves the victim no reasonable alternative, the contract is voidable by the victim.
****If there is no improper threat, then there is no duress****
(2) If a party’s MA 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 w/o reason to know of the duress either gives value or relies materially on the transaction.
3. [Rst. §176] – When a Threat is Improper
(1) A threat is improper if;
(a)What is threatened is a crime or a tort, or what is threatened would be a crime or a tort if it resulted in obtaining property.
(b) What is threatened is a criminal prosecution.
(c) What is threatened in the use of civil process and the threat is made in bad faith, or
(d) The threat is a breech of the duty of good faith and fair dealing.
(2) A threat is improper if the resulting exchange is not on fair terms and;
(a) The threatened act would harm the recipient and would not significantly benefit the party making the threat.
(b) The effectiveness of the threat in inducing the MA is significantly increased by prior unfair dealing by the party making the threat, or
(c) What is threatened is otherwise a use of power for illegitimate ends.
4. Duress determined @ time of K.
5. Economic duress uses reasonable person test to determine if free will was overcome.
IV. Is there a question of Undue Influence?
1. [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 b/t them is justified in assuming that the person will not act in a manner inconsistent w/ his welfare.
(2) If a party’s MA is induced by undue influence by the other party, the K is voidable by the victim.
(3) If a party’s MA is induced by one who is not a party to the transaction, the K is voidable by the victim unless the other party to the transaction in good faith and w/o reason to know of the duress either gives value or relies materially on the transaction.
2. Overpersuasion/pressure + weakness/distress = UI w/o need for bad faith.
a. TEST: OP usually involves several of the following 7 elements:
1) Discussion of the transaction at an unusual or inappropriate time.
2) Consummation of the transaction in an unusual place.
3) Insistent demand that the business be finished at once.
4) Extreme emphasis on untoward consequences of delay.
5) The use of multiple persuaders by the dominant side against a single servient party.
6) Absence of third party advisers to the servient party.
7) Statements that there is no time to consult financial advisers or attorneys.
3. Note: Undue Influence more flexible standard than Duress, so easier to prove.
V. Is there a question of Misrepresentation?
1. [Rst. §159] – Misrepresentation Defined
A misrepresentation is an assertion that is not in accord w/ the facts.
2. [Rst. §160] – Concealment
Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.
3. [Rst. §162] – When a Misrepresentation is Fraudulent or Material
(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 assertio
h reasonable standards of dealing.
(2) If it is reasonable to do so, the promisee may properly interpret a promise as an assertion that the promisor intends to perform the promise.
VI. Is there a question of Non-Disclosure?
A. Differentiating Non-Disclosure
1. Misrepresentation is a fraudulent assertion of some kind while non-disclosure is a lack of an assertion or material fact that is treated as an assertion by silence.
1. See [Rst. §159] – Misrepresentation Defined.
2. [Rst. §161] – When Non-Disclosure is Equivalent to an Assertion
(1) 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 failure to act in good faith and in accordance w/ 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 effects of a writing, evidencing or embodying an agreement in whole or in part.
(d) Where the other person is entitled to know the fact b/c of a relationship of trust and confidence b/t them.
(2) A vendor has an affirmative duty to disclose material facts to the buyer in the above stated instances.
3. [Rst. §173] – When Abuse of Fiduciary Rel. Makes a K Voidable
(1) If a fiduciary makes a K w/ his beneficiary relating to matters w/in the scope of the fiduciary relation, the K is voidable by the beneficiary unless:
(a) It is on fair terms, and;
(b) All parties beneficially interested manifest assent w/ full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know.
4. Where the seller knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.
5. NOTE: Knowledge of material fact required for non-disclosure – innocent/ignorant or negligent situations not construed as non-disclosure possibilities.
VII. Is there a question of Unconscionability?
A. Types (need both to prove)
a. A lack of a meaningful choice on the part of one party.
a. Contract terms that are unreasonably harsh.
1. [Rst. §208] – Unconscionable Contract or Term
If a K or term thereof is unconscionable at the time the K is made a court may refuse to enforce the K, or may enforce the remainder of the K w/o the unconscionable term, or may so limit the application of any unconscionable term