1Supplementing the Agreement: The Obligation of Good Faith and
Other Implied Terms
1Rationale of Implied Terms
1Wood v. Lucy, Lady Duff-Gordon
2Leibel v. Raynor Manufacturing Co.
3Implied Obligation of Good Faith
3Locke v. Warner Bros., Inc.
4Warranties
4Bayliner Marine Corp. v. Crow
5Caceci v. Di Canio Construction Corp.
5Avoiding Enforcement: Incapacity, Bargaining Misconduct, and
Unconscionability
6Minority and Mental Incapacity
6Dodson v. Shrader
7Hauer v. Union State Bank of Wautoma
7Duress & Undue Influence
7Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service
Co.
8Ordorizzi v. Bloomfield School District
9Misrepresentation and Nondisclosure
9Syester v. Banta
11Hill v. Jones
11Unconscionability
12Williams v. Walker-Thomas Furniture Co.
13Ahern v. Knecht (1990)
13Batsakis v. Demotsis
14Adkins v. Labor Ready, Inc
15Justification for Nonperformance: Mistake, Changed
Circumstances, and Contractual Modification
15Mistake
15Lenawee County Board of Health v. Messerly
16Wil-Freds Inc. v. Metropolitan Sanitary District
16Changed Circumstances: Impossibility, Impracticability, and
Frustration
16Karl Wendt Farm Equipment Co. v. International Harvester
Co.
17Mel Frank Tool & Supply, Inc. v. Di-Chem Co.
18Modification
19Alaska Packers Association v. Domenico
20Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.
20Rights & Duties of 3rd Parties
203rd Party Beneficiaries
20Vogan v. Hayes Appraisal Associates, Inc.
21Zigas v. Superior Court
21Assignment and Delegation
22Herzog v. Irace
22Sally Beauty Co. v. Nexxus Products Co
23Consequences of Nonperformance: Material Breach, Anticipatory
Repudiation, and Express Conditions
23Material Breach and Constructive Conditions
23Jacobs & Youngs, Inc. v. Kent
24Sackett v. Spindler
25Anticipatory Repudiation and Adequate Assurances of
Performance
25Truman L. Flatt & Sons v. Schupf
26Hornell Brewing Co. v. Spry
26Express Conditions Classic Principles
26Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co
27Express Conditions: Excuse and Interpretation of
Conditions
27J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc.
27Morin Building Products Co. v. Baystone Construction, Inc.
29Expectation Damages: Principles and Limitations
29Computing the Value of Plaintiffs Expectation Intro
29Computing the Value of Plaintiffs Expectations: Real Estate
Contracts
30Turner v. Benson
30Computing the Value of Plaintiffs Expectation: Employment and
Construction Contracts
30Handicapped Childrens Education Board v. Lukaszewski
31American Standard, Inc. v. Schectman
31Foreseeability, Certainty, and Causation
31Hadley v. Baxendale
32Florafax International, Inc. v. GTE Market Resources, Inc.
32Mitigation of Damages
33Rockingham County v. Luten Bridge Co.
33Boehm v. American Broadcasting Co.
33Nonrecoverable Damages: Items Commonly Excluded from
Plaintiffs Damages for Breach of Contract
33Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co.
34Erlich v. Menezes
34Justifications for the Expectation Damage Rule
34Roth v. Speck
Supplementing the Agreement: The Obligation of Good Faith and
Other Implied TermsRationale of Implied TermsWhy parties to a
contract would decide to omit terms?
Avoid Transaction costs of the bargain - Inefficiency to bargain
over every term bargaining is expensive.
Strategic Omission (court may penalize)
Time is spent on bargain b/c:
In the event of a disagreement there are litigation costs
In the end it may be the courts deciding and not the parties if
not bargained for.
What justifies courts in implying terms not bargained for?
Not implying a term is not a neutral position, it favors one
side.
Tailored default terms
What would the parties have agreed to if they had bargained over
it
May look at course of dealings, what they did agree to and
extrapolate.
UCC Untailored default rule what the rules should be for
everybody, they may reflect what most people would agree to.
Or imposition of a standard. Statute provides for implied
terms.
Penalize Parties influence the behavior of others.
Walker Case agree to agree case on Rent.
Court finds no agreement to send a message to parties that they
must be more specific in their contracts. In essence, in this case
it hurts the Tenant. Failure to imply a term acts as a penalty.
BUT a court can also imply a term to punish.
In theory contract law is not meant to penalize, it is meant to
facilitate commerce but occasionally it imposes obligations that is
not consistent with how the parties would have agreed with the
effect of penalization.
Wood v. Lucy, Lady Duff-Gordon
Contract between Wood and Lucy, where Wood was to have exclusive
marketing rights to her label and she would, in exchange receive
half of the profits of the venture. She signed a deal with Sears
Roebuck, however, and he is bringing suit for breach of contract.
She claims that he has no consideration, but Cardozo infers promise
of best efforts on his part that he will actually do something. He
considers it unreasonable for her to have given this right "as a
gift" and recognizes his marketing expertise to conclude that this
gap should be filled by the courts. Look at 3 elements that show it
is not a gift -
1. she gets of profits
2. he has expertise in marketing
3. he is held accountable to her for his spending and efforts
and he is to take out copyrights and patents to protect the
articles under agreement.
Exclusive right was to last 1 year from April 1, 1915 and
thereafter from year to year unless terminated by a notice of 90
days.
Plaintiff said he kept the contract on his part and that the
defendant broke it.
She place her label on other things without his knowledge, and
withheld profits.
Agreement of employment is signed by both parties and has a
wealth of recitals
But defendant says that it lacks the elements of a contract.
Because there is no mutuality or consideration on Woods side for
her promise.
She says there is no consideration for her promise. (71
Requirement of Exchange, Types of Exchange)
On his side, she is seeking his promise to market her
designs.
On her side, he never promised to do those things, he didnt have
to do those things. He was not obligated his promise is illusory
(77).
REASONING: Law has outgrown primitive stage of formalism
Court addresses consideration argument by implying into the
promise something that makes it NOT illusory.
A promise may be lacking, and yet the whole writing may be
instinct with an obligation, imperfectly expressed. If that is so,
there is a contract.
The contract is full of obligation that the parties intended to
be bound. Cardozos reasoning for Implications of promise in:
1. Defendant gave exclusive privilege. (Tailored Default) It is
not rational to give someone exclusive agency, and not have some
standard of performance attached to it.
The acceptance of the exclusive agency was an assumption of its
duties.
2. In the contract it states that Wood possesses a business
adapted to the placing of endorsements if approved.
Implication is that the plaintiffs business will be used for the
purpose for which it is adapted.
3. Terms of compensation are more significant.
She gets of everything resulting from the plaintiffs reasonable
efforts.
Unless he gave his effort, she could not get anything.
The court in looking at this arrangement is treating Lady
Duff-Gordon as a sophisticated person.
HYPOS
1. if she was ready to retire and the agreement was the same,
she might be bargaining for the chance that the person might
perform.
Therefore Cardozos argument that it would not be rationale to
enter into this agreement without wanting to be obligated might be
incorrect.
She could be bargaining for the chance. (Eisenberg)
And it isnt a small chance, he may be very likely to work for
her he would probably use his best efforts.
Many times you can avoid the lack of consideration argument by
looking at the contract as 2 parties bargaining for the chance.
She knows her product is very good and she knows that he wants
to make money
Had there already been performance under the contract it would
even be stronger.
2. If Wood presented evidence that Lady Duff-Gordon purposely
left out of the contract details of what he had to do thinking that
she could then argue lack of consideration.
It would be hard for the court to imply that she wanted to agree
to something, because she didnt agree.
The court would probably imply a term and find for Wood because
it would be punishing Lady Duff-Gordon.
Implied Terms and Illusory Promises principle recognized in
Wood, an implied obligation to use reasonable efforts will prevent
a somewhat indefinite promise from being illusory. (UCC 2-326, Sale
on Approval money back guarantee)
Statutory Context
Leibel v. Raynor Manufacturing Co.
Transaction = Leibel (P) buying garage doors + distribution
services from Raynor (D). Raynor gives them garage doors and
exclusive right to distribute within 50 mile radius.
After 2 years of decreasing sales of Raynor products in the
Lexington area, Raynor notified Leibel that the relationship was
over June 30, 1976
Also notified that Helton Overhead Door Sales had been
established as the new dealer-distributor for the area, and that
Raynor would be required to order all future supplies from
them.
Appellant relied on the provisions regarding sales in the UCC
(2), (3) of KRS 355.2-309.
Trial court concluded that the code was not intended to apply to
the situation in this case. This was a exchange of services (right
of distribution) not goods.
Court concluded that even if the UCC did apply, the section
above means that actual notice of the termination must be
given.
Written notice had been given.
Additional requirement of reasonable notification was not
necessary.
If it required reasonable notification for termination of the
agreement, it would be making a contract for the parties by stating
a time for the duration of the contract.
Issue
Whether or not the notification of termination given in this
case was reasonable under the circumstances
Reasoning: This court disagrees with the conclusion of the trial
court
The court looks to the overall purpose of the contract, which is
sale of goods.
Leibel was a dealer the transaction was about the sale of the
doors. Pg 437, In the case at bar, we have a clear situation where
the dealer-distributor was to sell the goods of the
manufacturer-supplier. Appellant was not a commissioned salesman,
and the agreement appears to be for the sale of goods.
Important to dispute that UCC applies because then they are
within the purview of 2-309 Absence of Specific Time Provisions
Notice of Termination.
According to 2-309 Leibel must have enough time to react.
Reasonableness is not just the method of notice, it is the time
given by the notice = Advanced Warning.
Sufficient advanced warning is reasonable time to seek a
substitute arrangement, time to recoup investment, etc fact
specific situation.
UCC 2-309 Absence of Specific Time Provisions; Notice of
Termination
1. Assessing Reasonable Notice Leibel opinion refers to some
Relevant factors of whether or not reasonable notification has been
given:
a. The distributors need to sell of its remaining inventory and
the question of whether it sill has substantial un-recouped
investment made in reliance on the agreement.
b. Determination of whether notice is reasonable may also be
affected by the terms and contained in the parties present or prior
agreement and by industry standards.
2. Effects of express termination provisions UCC 2-309(3)
dispensing with notification is invalid if its operation would be
unconscionable (shocking).
a. Parties can include an express termination provision but it
must not be shocking.
b. If there is a specified event, they could terminate
immediately doesnt matter if it is still unconscionable.
Termination provisions are one of the most important parts of
the contract.
Notice UCC 1-201(25)
A person has notice of a fact when
(a) he has actual knowledge of it; or
(b) he has received a notice or notification of it; or
(c) from all the facts and circumstances known to him at the
time in question he has reason to know that it exists.
A person knows or has knowledge or a fact when has actual
knowledge of it. Discover or learn or a word or phrase of similar
import refers to knowledge rather than to reason to know. The time
and circumstances under which a notice or notification may cease to
be effective are not determined by this Act.
Implied Obligation of Good Faith Law does not impose duty of
fair dealing when negotiating.
Partly because it would eliminate hard bargaining.
Prevent people from entering into bargaining for fear that they
must complete the bargain.
BUT once parties are bound once there is a contract, they must
act in good faith and fair dealing.
Good faith dont undermine the spirit of the contract
Subjective look honesty in fact.
Objective people in same circumstance, would they think there
was good faith, fair dealing?
The UCC (1-203) declares that every contract or duty within its
scope imposes an obligation of good faith in its performance or
enforcement.
RS 205 Duty of Good Faith and Fair Dealing = echoes UCC
extending the duty of good faith and fair dealing to every
contract.
UCC Definitions of Good Faith:
1-201(19) - Honesty in fact at a minimum lying and other kinds
of deception should be regarded as bad faith conduct and
proscribed.
Subjective view of good faith would be
2-103(1)(b) defines good faith where merchants are concerned, as
requiring not merely honesty but also the observance of reasonable
commercial standards of fair dealing in the trade. Objective view
would reasonable people looking at the situation say it involves
good faith? Locke would other producers have produced her films?
(in Locke the court asks for subjective view and this would be
enough) Do look at express terms of the contract to determine if
there is good faith and fair dealing.
Locke v. Warner Bros., Inc.
1. Locke would receive $250,000/yr for 3 yrs for a non-exclusive
1st look deal
Locke was to submit any picture she was interested in developing
before submitting it to any other studio.
Warner had 30 days either to approve or reject a submission.
2. $750,000 pay or play directing deal.
Warner Bros had the ability to reject projects, they had the
responsibility to use their discretion regarding her projects.
lots of law on how to interpret discretion clause in contracts.
What kind of standard does a court have to look at when determining
satisfactions: objective standard or subjective standard.
Warner paid Locke the guaranteed $1.5 million, provided her with
an office and assistant.
But they did not develop any of her projects or hire her to
direct any films.
Locke contends the development deal was a sham, that Warner
never intended to make any films with her, and that Warners sole
motivation in entering into the agreement was to assist Eastwood in
settling his litigation with Locke.
She argues that they had predetermined to reject all projects.
They didnt use their discretion.
Issue
She wanted to direct projects she lost the opportunity to direct
projects suggesting it hurt her professionally. (Reputation &
Additional Cash)
Had they not have breached, she would have gotten:
1. more money from working as a director
2. Reputation would have improved leading to other jobs.
(Under contract law you are not penalized for breaching your
contract in regards to damages. Contract law has embraced the idea
of the efficient breach as long as person breaching will pay for
the damages. You pay compensatory damages, not punitive
damages.)
HOLDING/REAONSING: The implied covenant of good faith and fair
dealing obligated Warner to exercise that discretion honestly and
in good faith.
You have to be able to show that you were dissatisfied
limitations on subjective view of whether one party is satisfied or
not. Honesty in fact subjective standard.
The issue is whether or not Warner Bros was satisfied or not
with the particular projects. Subjective standard does not give
complete discretion - Other Issues:
Discrimination argument she waives it, doesnt go forward.
There is no general private party rule against sexual
discrimination. Hers is a bad faith argument, not a statutory
right. Would it be bad faith for Warner to discriminate based on
faith. Breach of Duty of good faith and fair dealing gives you
arguments when there are no other arguments. but DO NOT MAKE THIS
YOUR FIRST ARGUMENT. (like not arguing promissory estoppel if there
is a real contract.) It is more convincing to a court to prove some
sort of contractual breach.
Warranties
Bayliner Marine Corp. v. Crow
Express Warranty -
On appeal Crow argues that the prop matrixes he received created
an express warranty by Bayliner that the boat he purchased was
capable of a maximum speed of 30 mph.
Conclude that the statements contained in the prop matrixes did
not constitute an express warranty by Bayliner about the
performance capabilities of the particular boat purchased by
Crow.
Crow contends Bayliner made an express warranty regarding the
boats maximum speed in the statement in Bayliners sales brochure
that this model delivers blah blah.
No express warranty breach - General rule is that a description
of the goods that forms a basis for the bargain constitutes an
express warranty, 2-313(2) directs that a statement purporting to
be merely the sellers opinion or commendation of the goods does not
create a warranty.
Implied Warranty
Crow asserts that because his boat was not capable of achieving
a maximum speed of 30 mph it was not fit for its ordinary purpose
as an offshore sport fishing boat.
Bayliner contends that there was No evidence from which the
trial court could conclude that the boat generally was not
merchantable as an offshore fishing boat. This court agrees with
Bayliner.
2-314(2)(a) Crow failed to prove that the boat would not pass
without objection in the trade. Whether record supports a
conclusion that Crows boat was not fit for its ordinary purpose as
an offshore sport fishing boat. Factual questions.
Evidence fails to establish that the boat was not fit for the
ordinary purpose for which it was intended. (he used it in the
first few years, 850 hours logged).
Implied Warranty: Fitness for Particular Purpose - 2-315
Applies regardless if seller is merchant or non merchant.
Crows claim that Bayliner breached an implied warranty of
fitness for a particular purpose. He particularly wanted to get to
the prime fishing area at 30mph.
2-315 provides that when a seller has reason to know any
particular purpose for which the goods are required and that the
buyer is relying on the sellers skill or judgment to select or
furnish suitable goods, there is an implied warranty that the goods
shall be fit for such purpose. (question of fact)
buyer must prove as a threshold matter that he made known to the
seller the particular purpose for which the goods were
required.
Record does not support a conclusion that Crow informed Atherton
of this precise requirement.
Statements made by Bayliner in sales brochure is merely a
commendation of the boats performance and does not describe a
specific characteristic or feature of the boat.
2-314 in all contracts for the sale of goods by a merchant, a
warranty is implied that the goods will be merchantable.
To be merchantable, the goods must be such as would pass without
objection in the trade and as are fit for the ordinary purposes for
which such goods are used. 2-314(2)(a), (c)
Significant segment of the buying public would object to buying
the goods
Whether the goods are reasonably capable of performing their
ordinary functions.
Express Warranties -
2-313 - Puffing is not express warranty, it is just a part of
the persuasion. 2-313(c) delivered goods has to meet the model you
were presented with. Model has the effect of an express
warranty.
2-314 Implied Warranty: Merchantability Usage of Trade
Only applies to merchants! Pass without objection in the
trade/reasonable performance - 2-314(a) Are fit for the ordinary
purposes for which such goods are used - 2-314(c)2-316 Exclusion or
Modification of Warranties
Bayliner could have avoided this problem by making the
disclaimer conspicuous.
(3) require conspicuousness to exclude implied warranty.
Caceci v. Di Canio Construction Corp.
HOLD Implied housing merchant warranty skillful construction in
a case like this, that the closing itself, the very act which
triggers the claim, also served to extinguish it is
self-contradictory, illusory and against public policy.
Responsibility and liability in cases such as this, should as a
matter of sound contract principles policy and fairness, be placed
on the party best able to prevent and bear the loss.
Court says that this may be an implied in fact term they already
agreed to this although maybe not overtly.
Common sense dictates that the buyer get a house they can live
it! Law ought to fulfill that commonsense expectation.
Reasoning/Rational
This court holds that there is an implied term in the express
contract between the builder-vendor and purchasers that the house
to be constructed would be done in a skillful manner free from
material defects.
The builders-sellers knowledge of the defect, however relevant
in a fraud claim, is not decisive under this implied contractual
warranty theory.
The contracts standard merger clause is of no legal effect in
these circumstances of an implied warranty with respect to latent
defects.
Plaintiffs claim based on a breach of implied warranty could
only arise at closing of title when the builder-vendor conveyed a
house which suffered from latent material defects.
In construction of homes cases 2 parties generally do not
bargain as equals in relation to potential latent defects from
faulty performance.
Purchaser has no choice but to rely on the builder-vendor to
deliver what was bargained for a house reasonably fit for the
purpose for which it was intended.
Efficient because - Builder Vendor maintains a superior and is
the only one who can prevent the occurrence of major defects.
Can disclaim implied warranties but must be conspicuous.
Avoiding Enforcement: Incapacity, Bargaining Misconduct, and
Unconscionability
Despite fact that parties have entered into the perfect
agreement (in terms of formalistic approach) there might be reasons
why a court may allow a party to rescind an agreement. Parties here
are not seeking damages, they are seeking Rescission. Say the
contract shouldnt be enforced, go back to original position. If
your client doesnt want rescission, dont argue the following. If
they are seeking to enforce, argue breach Different reasons why the
court may be willing to allow for rescission:
Age of one of the parties or mental capacity and allows them to
get out of the contract
Other theories relate to the bargaining defects bargaining
process is unfair and therefore the parties should get out of it:
duress, misrepresentation, unconscionability, fraud, etc
Minority and Mental Incapacity
Dodson v. Shrader
Action to disaffirm the contract of a minor for the purchase of
a pickup truck and for a refund of the purchase price.
Seeking rescission, not breach.
Reasoning/Rational
Some courts allow the minor to make a choice - Contract is
voidable the minor has the ability to get out of the contract if
they chose.
Court says it should be use as a shield not a sword.
Traditional Infancy doctrine to protect minors from their lack
of judgment and from squandering their wealth through improvident
contracts with crafty adults who would take advantage of them in
the marketplace.
Exception to Rule that Contracts by Minors are Voidable:
Modern trend among states, either by judicial action or by
statute, in the approach to the problem of balancing the rights of
minors against those of innocent merchants.
2 minority rules have developed which allow the other party to a
contract with a minor to refund less than the full consideration
paid in the event of rescission.
1. Benefit Rule (deduct value of use) (look at the benefit of
the use of the car and deduct it from the price) upon rescission,
recovery of the full purchase price is subject to a deduction for
the minors use of the merchandise. Rule recognizes that the
traditional rule has been extended to hold minor to his contracts,
where he failed to restore what he has received under them to the
extent of the benefit actually derived by him from what he has
received from the other party to the transaction.
(the value to the minor for having been able to drive it for the
time maybe compare what it would have cost to take other forms of
transportation - look at expected life of the vehicle, divide from
days of expected life calculate how many days he used it how much
would it cost to rent the car.)
The Benefit Rule may be more beneficial to the Minor. So this
court adopts the Use Rule.
2. Use Rule (deduct depreciation of goods) Minors recovery of
the full purchase price is subject to a deduction for the minors
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.
Exceptions would allow the Minor to void the contract but pay
for their use when there is an innocent merchant.
Executory promise minor hasnt performed and wants to get out of
the contract retreat before consideration shield
Sword retreat back after consideration court has more difficulty
enforcing this in favor of the minor.
Contracts by Minors are Voidable, not void.
1. Restoration or Restitution by Disaffirming Minor other courts
decide to uphold pure rule without exceptions. Define the way the
rule is triggered by age 18.
Contracts by Minors are Voidable. Exceptions: Benefit Rule
(deduct value of use) Use Rule (deduct depreciation of goods)
Misrepresentation Contracts Involving Necessaries - contract is
enforceable for the reasonable value of the goods. (not necessarily
the contract value) This encourages adults to enter into contracts
with minors for the things that they really need. (Mills v. Wyman
if he was a minor, which he wasnt, and he had promised to pay, he
would have been responsible for the reasonable value of the
necessaries.) Not Voidable After Majority - Only has reasonable
time once they have reached majority to disafirm their contract. 2.
Liability for Necessaries and tortuous conduct the minor is liable
for the reasonable value of necessaries based on quasi contractual
relief rather than enforcement of the actual contract.
3. Ratification after Reaching Majority RS 14 even if a minor
enters into a contract that does not involve necessaries, the
contract is not void but only voidable at the election of the
minor. Once the minor reaches the age of majority, she has the
power to affirm or ratify the contract, in which event the minor is
bound. On reaching the age of majority, the minor must act within a
reasonable period of time to disaffirm the contract or she will be
deemed to have affirmed the transaction.
4. Statutory Exceptions There are some state statutes that make
some contracts with minors enforceable, not voidable. Hauer v.
Union State Bank of Wautoma
Test for determining competency is whether the person involved
had sufficient mental ability to know what he or she was doing and
the nature and consequences of the transaction. (RS
15(1)(a))Definition of Mental Incapacity
RS 15(a) Test In Hauer Cognitive Standard
RS 15(b) volitional standard includes a knowledge requirement on
the part of the other party.
If the court proves that there is mental incapacity -
A. Good Faith
Even if the infancy verdict did not apply, the jurys finding
that the Bank failed to act in good faith in the loan transaction
distinguished this case from the general rule providing that the
person seeking relief from a contract must return the consideration
paid.
The rule says that the exception occurs if you have knowledge
the trial court says that the jury didnt find knowledge, but did
act in bad faith.
The great weight of authority from other jurisdictions provides
that the un-adjudicated mental incompetence of one of the parties
is not a sufficient reason for setting aside an executed contract
if the parties cannot be restored to their original positions,
provided that the contract was made in good faith, for a fair
consideration and without knowledge of the incompetence. (pp 521)RS
15. Mental Illness or Defect
Hauer doesnt have any of 15(1)(b) in it. And this is the most
controversial part of the restatement.
15(1)(a) cognitive standard
15(1)(b) volitional standard
There is a proof difference between (a) and (b) & in (b) you
may understand but not be able to do what is required. RS 15(2)
where the contract is made in fair terms and the other party is
without knowledge of the mental illness or defect, the power of
avoidance 1. Cognitive and volitional tests for incapacity Ortelere
v. Teachers Retirement Board she is incapable of entering into this
agreement although she understands She cannot make a rational
choice with respects to the things she understands. Someone in her
situation is refusing to accept the idea that she will die, she is
placing the hope in her choice and the reason for this choice is
because she is lacking mental capacity.
Objective Age standard may be overly exclusive
Mental Incapacity cant card everyone and label them mentally
incompetent.
Duress & Undue Influence
Courts have gradually broadened the types of threats that are
considered improper under the defense of duress, first to threats
to a persons property (known as duress of goods) and later to
economic duress. Similarly, the defense of undue influence has been
extended to situations that do not involve a confidential
relationship.
When you have a case of duress, you should think of undue
influence because they are very closely related.
Both cases in this section address the modern viewpoint on these
theories.
Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service
Co.
Totem was hired to carry a load from Texas to Alaska. Series of
problems encountered on the trip and Alyeska ends up terminating
the contract. Alyeska couldnt guarantee when payment would be made
so a settlement is made for $97,500 instead of $300,000. Totem is
trying to rescind the settlement agreement.
Economic duress exists where: (1) one party involuntarily
accepted the terms of another, (2) circumstances permitted no other
alternative, and (3) such circumstances were the result of coercive
acts of the other party.
RS 175 When Duress by Threat Makes a Contract Voidable(1) If a
partys 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.
Difference: the coercive act element is encompassed by improper
threat
Analysis under this case:
threat: no payment right away; improper because of their dire
financial situation
no reasonable alternative: they would go bankrupt; the creditors
could have forced them into it; argument for an alternative would
by that they could have sued for breach of contract
When applying the theory, be sure to spend a lot of time on the
improper threat aspect.
RS 176 When a Threat is Improper(1) A threat is improper if (a)
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, (b) what
is threatened is a criminal prosecution, (c) what is threatened is
the use of civil process and the threat is made in bad faith, or
(d) the threat is a breach of the duty of good faith and fair
dealing under a contract with the recipient. (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 manifestation of assent
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.
1. Must Threatening Party Cause Hardship?
Note 6: A question which frequently arises is the role that an
alleged victims financial difficulty plays in the determination of
economic duress. For economic duress there must be a causal link
between coercive acts and circumstances of economic duress. (Posner
cases: efficiency oriented decisions)a. Note case suggests that at
least some courts will look very closely at the inducement
concept.
b. Posner (and other courts) is hesitant to let parties get
around settlement agreement. It would be rewriting the contract
between the parties.
On remand, Totem wont have to necessarily show that Alyeska
breached, just that the events led to some sort of improper threat;
additionally, they dont have to show that Alyeska owed them
$300,000.2. Rationale for Duress Doctrine
Note 8: excerpt from Professor Unger theory is arbitrary, there
are no definite results; he is saying that the whole contracting
process stinks; all the duress theory does is make us feel good
about the system; we need to rethink the contracts system
entirely
Ordorizzi v. Bloomfield School District
Odorizzis amended complaint asserts his resignation was invalid
because obtained through duress, fraud, mistake, and undue
influence and given at a time when he lacked capacity to make a
valid contract.
That if he did not resign immediately the district would suspend
and dismiss him from his position and publicize the proceedings and
cause him to suffer extreme embarrassment and humiliation
But if he resigned at once the incident would not be publicized
and would not jeopardize his chances of securing employment as a
teacher elsewhere. 1. No duress or menace has been pleaded Duress
consists in unlawful confinement of anothers person, or relatives,
or property, which causes him to consent to a transaction through
fear.
a. Duress is often used interchangeable with menace in Cal
menace is technically a threat of duress or a threat of injury to
the person, property or character of another. (RS 492, 493)
b. Neither Duress or Menace was involved in this case because
the action or threat in duress or menace must be unlawful, and a
threat to take legal action is not unlawful unless the party making
the threat knows the falsity of his claim.
RS 175 When Duress by Threat Makes a Contract Voidable
Has to be improper threat (RS 176)
In this case possibly 176(1)(c) or (1)(d) or 176(2)
Principle and Superintendent state to Odorizzi:
That if he did not resign immediately the district would suspend
and dismiss him from his position and publicize the proceedings and
cause him to suffer extreme embarrassment and humiliation (Court
suggests that the school district was required to suspend him, but
they didnt have to publicize it to the media, etc)
But if he resigned at once the incident would not be publicized
and would not jeopardize his chances of securing employment as a
teacher elsewhere.
Has to show that Odorizzi had no reasonable alternative but to
resign.
If it is publicized, he may never be able to get a job
again.
With more modern definition of duress he may have an
argument.
Over-persuasion - The hallmark of such persuasion is high
pressure, a pressure which works on mental, moral, or emotional
weakness to such an extent that it approaches the boundaries of
coercion.
Hallmark of Persuasion: Combination of (1) Over-persuasion and
(2) undue susceptibility. (1) Undue Susceptibility may consist of
total weakness of mind which leaves a person entirely without
understanding; or a lesser weakness which destroys the capacity of
a person to make a contract even though he is not totally
incapacitated. a. Such lesser weakness need not be long lasting nor
wholly incapacitating, but may be merely a lack of full vigor due
to age, physical condition, emotional anguish, or a combination of
such factors. (2) Over-persuasion - generally accompanied by
certain characteristics which tend to create a pattern: (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 3rd party advisors to the servient party,
(7) statements that there is no time to consult financial
advisers or attorneys.
If a number of these are simultaneously present, the persuasion
may be characterized as excessive.
Doesnt have to be a confidential relationship (fiduciary
relationship, attorney/client, doctor/patient, clergy/parishioner)
b/w the parties to prove undue influence.
RS 177(1) When Undue Influence Makes a Contract Voidable
describes undue influence as involving unfair persuasion of a party
who is under the domination of the person exercising the persuasion
of a party 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.
1. Neither the Odorizzi court nor the RS require the presence of
a special relationship; such a finding will often be a significant
factor in a courts assessment of undue influence. But the existence
of the close relationship, or that some influence was exerted, will
not necessarily prove undue influence.
a. No Need for Confidential Relationship.
The intent of the persuader has nothing to do with this concept
the concept is focused on overpersuasion and undue influence.
Only matters whether or not the will is taken over.
Misrepresentation and Nondisclosure Look at individual elements
may not be as straight forward as it looks.
Misrepresentation under tort theory and contract theory:
difference is in the damages : Contracts = rescission, back in
the position as if the contract never occurred. But the plaintiff
may not want that. They may want something more like expectation
damages. Thats why you would go with Tort theory. Cant get punitive
damages. Tort = other damages + punitive. A plaintiff can plead
both Tort and Contract damages Elements Torts intent, scienter must
be proven Contract dont have to show that it was intended as a
misrepresentation. Syester v. Banta
Evidence was such that the jury found that there was such a
concerted effort, lacking in propriety, to obtain the releases as
to constitute fraudulent overreaching. The jury concluded that
there was a predatory play on the vanity and credulity of an old
lady.
Defendants argue that in an action based upon fraud, certain
universally recognized elements must be alleged and shown, and the
failure to establish any once or more of such elements is fatal to
such action
Find the misstatement and identify it!
Misrepresentation with signing of release occurs when (can also
argue on the opposite side that these are only opinion
statements):
(1) she could be a professional dancer
(2) we are your only friends
(3) dont need an attorney
Proving Misrepresentation:
RS 162 When a Misrepresentation is Fraudulent or Material
Under restatement you have to show (1) misrepresentation, you
have to show (2) that they relied on it and (3) the
misrepresentation must be material or fraudulent (RS 162)
Fraudulent statements 162(1)
his statements are not true,
he makes his assertions in order to induce her to sign the
letter and
he has no basis for believing they are true
Material misrepresentation he knew that she favored him and that
he had a good chance of inducing him.
RS 164 When Misrepresentation Makes a Contract Voidable
Good argument for the studio - that she is relying an someone
who she has already sued.. is she really justified in relying on
the statements made by a representative of a studio?
RS 168 Reliance on Assertions of Opinion.
Other side cant say that this is their opinion because it was a
lie. It was individualized lying.
RS 168 (2)(b)
Syester may have also been able to prove undue influence
The dance studio may have created the susceptibility
Some Odorizzi Factors of Overpersuasion may be present in this
case: (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 3rd party advisors to the servient party,
(7) statements that there is no time to consult financial
advisers or attorneys.
Not all the factors apply to this case. First must find the
misstatement of fact to find misrepresentation.
1. Fraudulent or material misrepresentation RS 164(1) provides
that a contract is voidable if a partys manifestation of assent is
induced by either a fraudulent or material misrepresentation by the
other party upon which the recipient is justified in relying
(a) For fraud have to prove intent.
(b) Material proven if it would substantially change the
situation or transaction. (162(2) material if it would be likely to
induce a reasonable person to manifest his assent, or if the maker
knows that it would be likely to induce the recipient to do
so.)
RS 162 (1)(b) and (c) define fraudulent also to include an
assertion made as true but without knowledge or confidence by the
maker whether it is true or false, and thus may include statements
that are made recklessly or negligently.
A contract may be subject to rescission because of an innocent
but material misrepresentation RS 162(2) and Comment c.
Restatement 169, 168
Requirement of assent implies in a general way that both parties
to an exchange shall have a reasonably clear conception of what
they are getting and what they are getting and what they are giving
up. If the identity or the character of the property or being
service being bought or sold is overtly misrepresented by one of
the consenting parties than the other party's assent is obviously
less than meaningful and any agreement that results will be
regarded as voidable, even if there is no specific intent to
defraud
162 When a Misrepresentation is Fraudulent or Material - a
misrepresentation is an assertion (action or statement) that is not
in accord with the facts (See also 159, 164)161 When Non-Disclosure
is Equivalent to an Assertion - when one party knows that other
party is relying on a crucial (erroneous) assumption, not telling
is tantamount to an assertion, treats nondisclosure as equivalent
to misrepresentation where the undisclosed fact amounts to a
failure to act in good faith, the good faith assertion is meant to
distinguish between seller's knowledge of hidden defects and so
called market information typically the result of research and
special expertise on the part of the buyer
Hill v. Jones
Plaintiffs filed suit to rescind an agreement to purchase a
residence. (suing the inspector isnt going to get them out of the
contract so they go for the sellers).
Buyers allege that the Joness (sellers) had made
misrepresentations concerning termite damage in the residence and
had failed to disclose to them the existence of the damage and
history of termite infestation in the residence.
Holding
Sellers cross appeal is moot. Reversed and remanded.
Remands to jury because It is the rule of law that in selling a
home the seller has to disclose material facts.
Reasoning/Rational
Classic View was caveat emptor buyer beware there was no duty to
disclose.
Classic view makes a lot of sense, contract law is not there to
impose duties it is to enforce agreements.
Contract Integration Clause
Trial courts ruling that the agreement of the parties did not
give buyers the right to rely on the statement made by Mrs. Jones
that the ripple in the floor was water damaged.
Find ruling to be in error. Any provision in a contract making
it possible for a party thereto to free himself from the
consequences of his own fraud in procuring its execution is invalid
and necessarily constitutes no defense.
parol evidence is always admissible to show fraud, and this is
true, even though it has the effect of varying the terms of a
writing between the parties.
Duty to Disclose
principle legal question whether a seller has a duty to disclose
to the buyer the existence of termite damage in a residential
dwelling known to the seller, but not to the buyer, which
materially affects the value of the property.
Hold that such a duty exists modern view is that a vendor has an
affirmative duty to disclose material facts where:
1. Disclosure is necessary to prevent a previous assertion from
being a misrepresentation or from being fraudulent or material;
2. disclosure would correct a mistake of the other party as to a
basic assumption on which that party is making the contract and if
nondisclosure amounts to a failure to act in good faith and in
accordance with reasonable standards of fair dealing;
3. disclosure 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;
4. the other person is entitled to know the fact because of a
relationship of trust and confidence between them.
RS 161, RS of Torts 551
RS 161 When Non-Disclosure is Equivalent to an Assertion
(definitional)
Relief comes only from 164.
1. Historical Perspective: Laidlaw v. Organ classical view was
that a party to a business transaction could not avoid the
transaction because of nondisclosure of material information by the
other party.
a. Information in Laidlaw end of war was externally available.
Whereas the information of termites in Hill is only held by a few
people. b. In Hill the seller has more ready access to the
information, even if buyer hires an expert because sellers lived
there. Buyer cant get the information because they dont live there.
Modern law each party is bargaining in their own best interest
(arms length bargaining).
2. Economic Analysis of Nondisclosure disclosure of deliberately
acquired information should not be required, because it is socially
desirable to give parties an incentive to acquire information.
a. Nondisclosure protects a partys investment in the acquisition
of such information
b. Casually acquired information does not reflect an investment
of resources
i. Disclosure of such information should be required when the
holder knows that the other party is without such information,
because disclosure is the least costly method of reducing mistaken
contracts.
3. Innocent or Negligent Nondisclosure Under RS 161 it has to be
a knowing non-disclosure.
Find ruling to be in error. Any provision in a contract making
it possible for a party thereto to free himself from the
consequences of his own fraud in procuring its execution is invalid
and necessarily constitutes no defense.
parol evidence is always admissible to show fraud, and this is
true, even though it has the effect of varying the terms of a
writing between the parties.
Unconscionability
Unconscionability codified in UCC 2-302 judicial tool for
dealing with unfair contracts. UCC 2-302 applies only to contracts
for the sale of goods
RS 208 applied to all types of contracts.
RS 208 Unconscionable Contract or Term way to refuse to enforce
a contract or portion of contract.
UCC 2-302 has to be unconscionable at the time the contract was
made.
Williams v. Walker-Thomas Furniture Co.
Contract provided: a weird clause intended to keep a balance due
on every item purchased until the balance due on all items,
whenever purchased, was liquidated.
The debt incurred at the time of purchase of each item was
secured by the right to repossess all the items previously
purchased by the same purchaser, and each new item purchased
automatically became subject to a security interest arising out of
the previous dealings.
This is called a cross-collateralization clause makes every
piece collateral for future loans. Ensure more security for their
loan allows them to repossess everything. Allows lender to maintain
lean on more property.
Unconscionability has been recognized to include:
(1) an absence of meaningful choice on the part of one of the
parties together with
(2) contract terms which are unreasonably favorable to the other
party.
Meaningful choice is determined by consideration of all the
circumstances surrounding the transaction.
In many cases the meaningfulness of the choice is negated by a
gross inequality of bargaining power.
Manner in which the contract was entered is also relevant to
this consideration
Look at sophistication of the parties
Hidden important terms,
Deceptive sales practices sales occurred in the persons home,
the salesman came to them.
In determining reasonableness or fairness, the primary concern
must be with the terms of the contract considered in light of the
circumstances existing when the contract was made.
Terms are to be considered in the light of the general
commercial background and the commercial needs of the particular
trade or case.
Whether the terms are so extreme as to appear unconscionable
according to the mores and business practices of the time and
place. (shocking the conscience)
The Court determines what is unconscionable even though it is a
fact based analysis.
Idea is that juries would be too sympathetic to the less
sophisticated party, the party with the weaker bargaining
power.
ANALYSIS:
Procedural
Look at sophistication of the parties
Deceptive sales practices sales occurred in the persons home,
the salesman came to them.
Substantive
Hidden important terms,
Cross-collateralization of other products when new product
sold.
One can argue that the products that they reposes is not worth
as much as the money paid for it. They are getting a lien on a
bunch of stuff that isnt worth as much.
May be using it as a threat/punishment.
There is Legislation in many states that allows consumers to
rescind door to door contracts within 3 days. 1. Procedural and
Substantive Unconscionability Williams court states that
unconscionability consists of an absence of meaningful choice on
the part of one of the parties together with contract terms which
are unreasonably favorable to the other party and goes on to note
that conspicuousness and intelligibility of a clause will also be
relevant.
Prof. Leff coined terms Procedural unconscionability and
substantive unconscionability to identify what he perceived as 2
key aspects of the new provision of UCC 2-302
Procedural Unconscionability may refer to either lack of choice
by one party or some defect in the bargaining process (gross
unfairness in the bargaining process)
Substantive Unconscionability relates to the fairness of the
terms of the resulting bargain. (looks at terms what you agreed
to.)
Most courts require a finding of both procedural and substantive
unconscionability.
Price Term Unconscionability both the RS and UCCC indicate that
excessive price may be a basis of unconscionability. (RS 208
Unconscionable Contract or Term, UCCC 5.108(4)(c).
Unconscionability
Procedural absences of meaningful choice?
Substantive terms unreasonably favorable?
Ahern v. Knecht (1990) plaintiff was confronted with a central
air conditioner that failed to cool in the middle of a heat
wave.
Ahern chose Knechts repair mostly because his telephone book ad
stressed honesty.
Knecht required an initial payment of $154 for the service call
then told her that total charge would be $762.
Ahern expressed shock and then complied with the demand for a
check before she left home to keep a medical appointment.
When she got home from the appointment, Knecht was gone and the
air conditioner wasnt working.
Another company made an effective repair for a charge of $72
after Knecht refused to return. Aherns brought an action to recover
the amount paid to Knecht.
Trial court rewarded the Aherns $684
If she sues for breach of contract she would only get what she
bargained for - $800 she wouldnt get back the $154.
Instead she wants rescission .
even where this is no actual fraud, courts will relieve against
hard and unconscionable contract which have been procured by taking
advantage of the condition, circumstances or necessity of other
parties.
Ahern stood at a bargaining disadvantage because:
she knew little about the technology of air-conditioner,
was committed to the service charge after calling Knecht,
and was apparently intimidated by the demand for payment.
Procedural disadvantage for Ahern:
she knew little about the technology of air-conditioner
wasnt able to assess whether or not it was an accurate
estimate.
was committed to the $154 service charge after calling Knecht
already lost money to him.
Once she has already paid the money she is already invested,
creates a certain amount of pressure.
Although one could argue that she created the pressure herself
by not shopping around.
Situation of the day heat wave, no air-conditioning.
Substantive Disadvantage:
Competitor did the repair work for much less money $72
Price difference makes a difference allows the court to discuss
substantive issue of the contract.
Why couldnt Ahern use the doctrine of reasonable expectations in
this case?
She has to argue that the price clause is unreasonable to her
reasonable expectations.
In C&J burglary didnt read the clause.
Here she read the clause unreasonable expectations is about
clauses never read.
Unconscionability yes bargained, yes read.
Procedural Limits the court in Williams held that the case must
be remanded to the trial court for a determination of whether the
clause was unconscionable.
2-302 provides that the question of unconscionability is a legal
issue to be decided by the court, rather than the trier of fact,
but only after holding an evidentiary hearing to examine the
disputed provision within the relevant context.
UCC and RS 208 further provide that unconscionability is to be
judged as of the time that the contract is made.
Unconscionability
Procedural absences of meaningful choice?
Procedural Unconscionability may refer to either lack of choice
by one party or some defect in the bargaining process (gross
unfairness in the bargaining process) Substantive terms
unreasonably favorable?
Substantive Unconscionability relates to the fairness of the
terms of the resulting bargain. (looks at terms what you agreed
to.)Batsakis v. Demotsis court upholds the contract rejecting the
argument that there was no consideration.
Procedural - She has no choice but to deal with him.
Substantive double the amount test? In this case it was 100
times more. Unfair terms.
Opposite argument
Procedural there was no coercion or duress
Substantive in order to ensure his investment he has to charge
more.
Dont address adequacy of consideration (RS 79) with
unconscionability.Adkins v. Labor Ready, Inc
Adkins arguments:
There was no exchange of consideration to support the formation
of a contract based on the employment application.
Labor Readys promise to arbitrate its own claims is a fortiori
adequate consideration for this agreement.
Adkins argues that this promise was illusory but advances no
convincing reasons to support his.
Adequate consideration to support formation of a contract.
Analysis of court consistent with Hamer v. Sidway they are giving
up a legal right, doesnt matter how much its worth. Analysis of
Consideration under RS 71 Requirement of Exchange; Types of
Exchange Adkins is seeking payment
Employment agreement was an unconscionable contract of adhesion
under W. VA law. He points to the fact that many of the plaintiffs
didnt complete HS, were paid at or near the minimum wage, live in
low=income housing, and did not know what arbitration was when they
signed the employment app.
Also - Labor ready is large, sophisticated, international corp.
that generated more than $850 million in revenues.
Court says a ruling of unconscionability based on this analysis
could potentially apply to every contract of employment in
contemporary economy.
Adkins argues that the arbitration clause forecloses redress of
his rights b/c it effectively precludes access not only to courts,
but even to the arbitration forum itself.
He contends it does so by the interaction of 2 factors: (1) the
fee structure of Labor Readys arbitration procedure and (2) its
preclusion of class actions.
Court where a party seeks to invalidate an arbitration agreement
on the ground that arbitration would be prohibitively expensive ,
that party bears the burden of showing the likelihood of incurring
such costs Adkins doesnt do that.
Chapter Review Pregnant Teen, mom tricks her into giving up
baby.
Look at common law theories for voiding the contract:
(1) Minority view she was a minor
(2) Duress no threat so may be dismissed.
(3) Misrepresentation
a. Misrepresentation = lie that Mrs. Wallace was someone from
the welfare dept. who was just going to take care of her baby.
b. Was it material? Maker knows that it is likely to induce
assent. They all knew that she needed rest and someone to take care
of her baby.
c. Fraudulent statement maker knows that she lied purposely to
induce assent
i. RS 164(2) 3rd party fraud voidable, unless the other party to
the transaction in good faith and without reason to know of the
misrepresentation either gives value or relies materially on the
transaction.
d. Reliance on the misrepresentation she is justified on relying
on her mother, or someone brought in by the mother from the
state.
(4) Undue Influence they were seeking the signing of the
adoption papers, whereas the family needed to care for the child.
Wrong place and time for the signing of such an important thing. a.
177(1) by virtue of the relation b/w them is justified in assuming
that the person will not act in a manner inconsistent with his
welfare. b. 177(2) undue influence - Some Odorizzi Factors of
Overpersuasion (Undue Influence) may be present in this case: (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 3rd party advisors to the servient party,
(7) statements that there is no time to consult financial
advisers or attorneys.
(5) mental capacity based on sleep depravation she may not have
had the cognitive or volitional capacity to make this type of
decision.
(6) Unconscionability difficult as a theory because the terms
arent bad.
Proving Misrepresentation:
RS 162 When a Misrepresentation is Fraudulent or Material
Under restatement you have to show (1) misrepresentation, you
have to show (2) that they relied on it and (3) the
misrepresentation must be material or fraudulent (RS 162)
Fraudulent statements 162(1)
Material misrepresentation he knew that she favored him and that
he had a good chance of inducing him.
RS 164 When Representation Makes a Contract Voidable
Justification for Nonperformance: Mistake, Changed
Circumstances, and Contractual Modification
Mistake
Justifications for Nonperformance allow you to get out of a
contract.
The argument here is that the world changed after signing the
contract and it was beyond their control.
Problematic because the purpose of contracts is to bind yourself
into the future even though the world changes
Courts may be hostile to these theories and therefore they are
not applied often.
Lenawee County Board of Health v. Messerly
Bench trial concluded that the Pickelses had no cause of action
against either the Messerlys or the Barneses as there was no fraud
or misrepresentation.
Predicated on the conclusion that none of the parties knew of
Mr. Blooms earlier transgression or of the resultant problem with
the septic system until it was discovered by the Pickleses.
And that the sanitation problem was not caused by any of the
parties.
Contractual Mistake is a belief that is not in accord with the
facts.
The erroneous belief of one or both of the parties must relate
to a fact in existence at the time the contract is executed.
Belief which is found to be in error may not be a prediction as
to a future occurrence or non-occurrence.
In this theory you have to find the fact that was mistaken and
it cant be a prediction of the future.
Agree with appellate court the parties were mistaken as to the
income-producing capacity of the property in question.
Court says the mistake while directly and dramatically affecting
the propertys value, cannot accurately be characterized as
collateral because it also affects the very essence of the
consideration.
The thing sold and bought had in fact no existence.
Essence (cant really agree because you dont know what you are
actually contracting on) v. value (what its worth, not what it
is)
No relief for value you should know better. Court wont protect
you.
Essence fundamental mistake.
Cow Case thought he was selling a barren cow ended up being
fertile
Difference goes to the essence to the contract.
Court Rejects an essence vs. value view
This court follows Restatement 152 (When Mistake of Both Parties
Makes a Contract Voidable) approach - Better approach is the
case-by-case analysis whereby rescission is indicated when the
mistaken belief relates to a basic assumption of the parties upon
which the contract is made, and which materially affects the agreed
performances of the parties.
Rescission is not available to relieve a party who has assumed
the risk of loss in connection with the mistake.
In cases of mistake of 2 equally innocent parties, must
determine which blameless party should assume the loss resulting
from the misapprehension they shared.
Draw own notions of what is reasonable and just under all the
surrounding circumstances.
154 When a Part Bears the Risk of a Mistake determining when a
party bears the risk of mistake. (allocation of risk concept)
Court should look first to whether the parties have agreed to
the allocation of the risk b/w themselves
as is clause
Legal standard for fraud is actual Knowledge.
Mutual mistake = easier to prove. Both were wrong.
Unilateral mistake = more difficult to prove, easy to fabricate
and use as an attempt to rewrite contracts. Wil-Freds Inc. v.
Metropolitan Sanitary District
What makes this binding is that Wil-Freds received a return
promise from the Sanitary District that they would award the
contract to the lowest bidder.
SD would also be able to argue promissory estoppel.
Court In ILL. The conditions generally required for rescission
are:(1) that the mistake related to a material feature of the
contract
(2) that it occurred notwithstanding the exercise of reasonable
care
(3) that it is of such grave consequence that enforcement of the
contract would be unconscionable
(4) and that the other party can be placed in status quo..
evidence of these must be clear and positive.
Outlook of above factors in this case:
(1) Mistake was thinking they could use the heavy machinery.
This is material because it makes a $200,000 difference. This is a
big portion of the bid 17%.
(2) they had used the subcontractor before, subcontractor had
experience.
(3) subcontractor would go out of business. Wil-Freds would have
to forfeit the $100,000 bond.
(4) They could be put back into their original position because
they could take the next lowest bid.
RS 153 Unilateral Mistake permits avoidance of a contract for
mistake of one party, requires either
(a) that the mistake be such that the enforcement of the
contract would be unconscionable, or
(b) that the other party either have reason to know of, or be
responsible for causing, the mistake.
Unconscionable in the context of 153 means merely severe enough
to cause substantial loss.
RS 153 bear the risk of the mistake
Unilateral Mistake other party knows or has reason to know the
true facts, or at least to know that there is a mistake.
1. Mistake of fact vs. mistake of judgment rescission will be
permitted for clerical errors or other mistakes of fact, but not
for mistakes in judgment.
Even though Wilfreds has not been awarded the main contract
Subcontract would be bound to perform (see Brennan case).
Changed Circumstances: Impossibility, Impracticability, and
Frustration
Impracticability/Impossibility
Easiest are when contract is literally impossible to
perform.
Harder when they are not impossible but are impracticable.
Party is arguing that performance has become so difficult and so
contrary to base of contract that it doesnt make sense to enforce
the contract.
Frustration - Frustration of Purpose the exchange valued for by
the contract had lost all value to the defendant, because of a
supervening change in extrinsic circumstances.
Performance doesnt become any more difficult.
But the point of the contract is frustrated.
Karl Wendt Farm Equipment Co. v. International Harvester Co.
RS 261 Discharge by Supervening Impracticability requires a
finding that impracticability is an inappropriate defense in this
case.
The fact that IH experienced a dramatic downturn in the farm
equipment market and decided to go out of the business does not
excuse its unilateral termination of its dealership agreements due
to impracticability.
While the SC of Michigan might recognize the defense of
impracticability, it would not do so in the circumstances of this
case as a matter of law. Find that the district court erred in
permitting the dense of impracticability to go to the jury and that
Wendt was entitled to a directed verdict on this issue as a matter
of law.
IH loses.
Frustration court rejects IHs argument.
The DC had substantial grounds for so finding and we affirm the
district courts grant of a directed verdict for Wendt on the
frustration defense.
IHs argument
261 Discharge by Supervening Impracticability
downturn of the market after the contract is made
without his fault
the basic assumption under the contract is that there would not
be a recession.
According to court Good economic conditions are not what they
contracted for. The commentary to 261 provides extensive guidance
for determining when economic circumstances are sufficient to
render performance impracticable.
Comment d makes clear that mere lack of profit under the
contract is insufficient.
Impracticability means more than impracticality
A mere change in the degree of difficulty or expense due to such
causes as increased wages, prices of raw materials or costs of
construction, unless well beyond the normal range, does not amount
to impracticability since it is this sort of risk that a fixed
price contract is intended to cover.
IH had alternatives which could have precluded unilateral
termination of the contract.
They had a termination clause in the contract and they could
have gotten out of the contract in that way.
They may have lost more money but if this is not a compelling
argument for impracticability.
Frustration of Purpose
Groseth found that under RS the defense of frustration requires
the establishment of 3 factors (RS 265 Discharge by Supervening
Frustration):
(1) that the purpose frustrated by the supervening event must
have been the principle purpose of the party making the
contract.
a. Requires an inquiry into the principal purpose of the
contract and a finding that the frustrating event destroys the
primary basis of the contract.
(2) That the frustration be substantial not enough that the
transaction has become less profitable for the affected party or
even tat he will sustain a loss. The frustration must be so severe
that it is not fairly to be regarded as within the risks that he
assumed under the contract..
a. The fact that performance has become economically burdensome
or unattractive is not sufficient to excuse performance.
(3) That the frustrating event must have been a basic assumption
of the contract
a. Analysis the same as the defense of impracticability.
1. Natural Disaster or war as a basis for relief natural
disaster or war have been the basis for claimed relief from a
contract under the doctrines of impracticability and frustration
but here also the courts have been generally unwilling to grant
relief.
2. Death or incapacity of particular person necessary for
performance
3. Role of foreseeability most courts have held that relief
under the doctrines of impracticability or frustration of purpose
should not be denied simply because the event may have been
foreseeable.
Foreseeability or even recognition of a risk does not
necessarily prove its allocation. Parties to a contract are not
always able to provide for all the possibilities of which they are
aware, sometimes because they cannot agree, often simply b/c they
are too busy. Moreover, that some abnormal risk was contemplated is
probative but doe not necessarily establish an allocation of the
risk of the contingency which actually occurs.
UCC does not in 2-615 expressly impose any unforeseeability
requirement, although Comment 1 to 2-615 does refer to unforeseen
supervening events.
Foreseeability is not determinative but courts do think about
it.
4. Economic analysis of impracticability Posner & Rosenfeld
look at who is the superior risk bearer to determine the case. When
the contract specifically allocates the risk to a party, that party
is the superior risk bearer. In the absence of a contractual
provision, the risk should be assigned to the party who is in the
best position to prevent the event from occurring, or if prevention
is not possible, to minimize its consequences at the lowest cost,
typically by purchasing insurance.
Mel Frank Tool & Supply, Inc. v. Di-Chem Co.
Discharge by Supervening Frustration
The performance by the tenant hasnt become more difficult, it
has just become pointless.
Cant store chemicals.
Court thinks that this case falls within the parameters of 265
not 261 (this is a frustration case not an impracticability
case).
Principle purpose (store chemicals)
Substantially frustrated (court says no substantial frustration
they could have stored other materials, no hazardous materials.
Di-Chem didnt show that they were going to primarily store
hazardous chemicals. Could have given better proof, if only 5% is
hazardous, than that is not Substantial.)
Basic assumption
The tenant is not relieved from the obligation to pay rent if
there is a serviceable use still available consistent with the use
provision in the lease.
Di-Chem tries to pick out the force majeure clause in order to
get out of the contract
The court says you have to read the whole clause, the overall
purpose of the clause was not to allow them to get out of the
contract for this reason.
Courts are reluctant to punish parties for complying with
government regulations Courts also reluctant to punish a party who
is complying with and going above and beyond government regulation.
Force majeure clauses provide for excuse where performance is
prevented or delayed by circumstances beyond the control of the
party seeking excuse. Clauses that allow parties to get out of
contracts based on occurrences that are beyond their control.
ModificationMain Issues of Modification:
need for refresh of consideration.
Idea is that if you are already bound, how can you enforce a new
agreement when you were already bound.
Duress
UCC changes the common law and generally with sale of goods the
code does not require consideration to support a modification of an
existing contract.
Start with persuasion -
May be able to negotiate on the % to be paid.
Let them know if you breach the contract you are going to claim
a certain amount in damages.
Determine damages if you breach they might decide to go ahead
with original contract based on how much it would potentially cost
them.
Their breach is so big you may be able to pull out of the
contract without actually breaching.
To determine whether or not it was a sale of goods (use UCC) you
would have to figure out what the primary cost is: tile or
installation? Even if it is service and tile A court may still
apply UCC because the complaint is about the sale of goods portion.
No Change to analysis code 2-615 adopts the same analysis as RS.
There is no consideration for contract that you already had made if
that contract changes.
No consideration for the modification, therefore the
modification is not enforceable.
To the extent the contract is covered in the UCC
consideration doesnt matter
but dont have enough facts to decide whether its UCC or common
law.
Under common law there is no consideration, but under UCC there
is bad faith and you can bring in Duress.
Protest and pay the reason for protest is to give the other
party an opportunity to breach. Breach is a solution, it may be
cheaper than forming the contract and later finding out about the
protest.
Do not keep a secret protest must voice it!
Good faith concept.
RS 89 Modification of Executory Contract
89(c) - Reliance requirement the performance under the contract
may be reliance.
Eliminates the consideration argument
Although Waller Bros may be able to show reliance because if
they do perform they gave up the right to breach and deal with the
damages that way.
May undermine the idea of consideration.
89(a) the circumstance is not anticipated by parties when the
contract was made. Also fair and equitable = need more info maybe
it is fair and equitable for them to pay for the riskiness of the
transaction.
OR not fair and equitable knowing that you are the sole
distributor to demand more money once there is a contract.
Waller Bros is in a better position to protect itself from this
risk (economic argument)
Waller Bros can argue that they are incurring the increase and
absorbing part of it.
UCC 2-209- Modification, Rescission and Waiver
Even if UCC applied can make good faith bad faith arguments
regarding modifications.
Economic Duress:
Question of reasonable alternative, we would want to show how
this would have a devastating effect.
Tight time line no other viable alternative because of the
issue.
Threat not to deliver the goods is improper makes duress easier
to prove. (Kelsey-Hayes)
Improper threat element of duress argument same arguments of
good faith and fair dealing are part of it.
176(1)(d) When a Threat is Improper How to ensure that promise
to pay 20% would be enforceable so that other party feels
comfortable moving forward?
Add some consideration on the part of the other party
They could agree to finish the work early
but not a strong consideration.
If under 71 they are really not seeking early performance then
it isnt consideration.
Under 89(a) (Modification of Executory Contract) the
modification is fair and equitable in view of circumstances not
anticipated.
73 Performance of Legal Duty performance is consideration if it
differs from what was required by the duty in a way which reflects
more than a pretense of a bargain.
Most courts take any little indication as consideration,
regardless of pretense of a bargain.
b/c in terms of enforcing modification parties have evidenced
their intention to be bound it doesnt matter if the consideration
is absent, or miniscule. As long as there is evident of their
intent it is enforceable. (Similar to Material Benefit Rule of
Restitution).
Parties can cancel their contract obligations they can mutually
agree to cancel the contract and enter into a new contract.
Courts may see it as funny but may accept it.
new contract could be upheld as being the product of a mutual
rescission, followed by a new and valid contract.
RS points out in Cmt B to 89 that such a rationale is fictitious
when the rescission and new contract are simultaneous.
(Scwartzreich)
But it may be justified as a case in which the element of
coercion was absent and circumstances had changed unexpectedly,
other party had relied justifiably on the promise.
Absent additional consideration and a renegotiation of the
contract, the previous contract is binding.
Should there be a clear rule against modifying contracts without
additional consideration? IF there is such a rule, good faith
modifications will not be recognized in court. If not, then
sometimes the court may allow some bad faith modifications to
stand.
2-209 - parties must exercise good faith in modifying
contracts.
Restatement 89
Alaska Packers Association v. Domenico
Plaintiffs contracted to be paid $50 or $60 to fish in Alaska
plus $.02 for every fish. When the arrived in Alaska, recognizing
Domenico's investment in the cannery, the fishermen petitioned more
money, saying that they would not fish but for $100. Under duress,
the manager (who lacked authority to make this deal) agreed, but
Domenico paid them according to their original contract when they
returned. Court held that there was no consideration; they were
contracted to fish and that is what they did. Court considered that
allowing plaintiff to recover places a premium on acting in bad
faith.
Company itself knew nothing of the breach until the expedition
returned to San Fran
Common law rule there has to be consideration for
modification
Fishermen tried to argue that their obligations were
changed.
It became more difficult for them to catch fish now.
But court doesnt buy the factual argument the fishermen didnt
prove that the nature of their obligation had changed.
Companys relative bargaining power shifted when the boat took
off.
At the dock the employer had power, once performance has begun
relative bargaining power can shift drastically.
This gets to the duress argument.
Pre-existing duty rule - implications Pirates v. privateers,
performance of an act which the promisee (A) is already bound by
consideration for the change that the promisor (B) has apparently
agreed to. The enforcement of B's subsequent promise would
accordingly be barred on the ground that a fresh consideration for
that promise was lacking
3 ways to avoid it -
1. do or promise to do something beyond the existing obligation
(i.e. provide addl. Consideration)
2. rescind the first contract before entering into the
second.
3. address changed circumstances
Other exceptions to the pre-existing duty rule: Unforeseen
circumstances (RS 89(a)) a promise of modification is binding if
fair and equitable in view of circumstances not anticipated by the
parties when the contract was made.
RS 89(c) recognizes reliance on a promised modification as
another basis for enforcing a modifying agreement despite the
absence of fresh consideration.
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.
Doctrine of economic duress or business compulsion:
Now a contract is voidable if a partys manifestation of assent
is induced by an improper threat by another party that leaves the
victim no reasonable alternative. (RS 175(1))
Economic duress can exist in the absence of an illegal threat;
the threat must merely be wrongful.
Even acts lawful and non-tortious may be wrongful depending on
the circumstances.
In order to state a claim of economic duress a buyer coerced
into executing a modification to an existing agreement must
at least display some protest against the higher price in order
to put the seller on notice that the modification is not freely
entered intoconsideration
pretense of consideration
duress argument
court concerned when protest isnt made
general idea of avoiding bad faith.
Rights & Duties of 3rd Parties
3rd Party Beneficiaries
Leading case of Lawrence v. Fox NY Court of Appeals 1859
Plaintiff loaned money to Holly,
Holly made a similar loan to Fox
Fox promises Holly that he will pay Lawrence
The Fox did not keep his promise to pay Lawrence
Lawrence sued Fox for the amount of the promised payment.
Plaintiff could enforce the obligation created by that promise,
as a kind of beneficiary of the right created by it.
Plaintiff is a creditor of the promise called creditor
beneficiary
Policy justification for allowing this is efficiency.
Lawrence ( loaned $ ( Holly ( loaned $ ( Fox
(Plaintiff)
(Promisee) (Promisor)
Donee Beneficiary Cases:
Seaver v. Ransom (1918) niece left out of the will by
husband.
RS 302 Intended and Incidental Beneficiaries
(b) refers to donee beneficiaries but not directly.
Vogan v. Hayes Appraisal Associates, Inc.
MidAmerican orally contracted with Hayes to do the initial
appraisal and make periodic appraisals of the progress of the
construction.
Vogans counterclaimed alleging that the bank had improperly
authorized payment of funds to Markely.
Bank did not follow its loan procedure for disbursement of
funds
Undisclosed settlement reached b/w bank and Vogans.
Vogans then filed a petition against Hayes
Contending it negligently certified the extent of the
construction that had been completed.
Vogans Arguments
Assert that the court should look to the intent of the parties
and the surrounding circumstances and argue that the banks intent
was to protect the Vogans money as construction progressed.
Analysis
Info gave Hayes reason to know that the purpose of MidAmerica
obtaining the periodic progress reports was to provide the Vogans
with some protection for the money they had invested in the
project.
Applying the Tredrea standards: A third party who is not a
promisee and who gave no consideration has an enforceable right by
reason of a contract made by two others1. If promised performance
will be of pecuniary benefit to the 3rd party
2. and the contract is so expressed as to give the promisor
reason to know that such benefit is contemplated by the promise as
one of the motivating causes of his making the contract
Causation Issue
Jury here could find that the purpose of Hayes reports on the
progress of the work was to assist the bank in disbursing all funds
on deposit that were intended for application to the Vogans home
construction.
When does the 3rd party beneficiary right vest?
Reliance
Prior to modification if there had been reliance on the
contract.
311 Variation of a Duty to Beneficiary (modification)Friend (
will, painting to friend ( Client ( $ ( Lawyer
( Will (
Can Friend sue lawyer if lawyer doesnt include painting to
friend in will?
Under Tredrea standard from Vogan Case: Yes
Pecuniary benefit
Benefit is contemplated by the promisee as one of the motivating
causes of his making the contract.
RS 302 Intended and Incidental Beneficiaries (1) Promisee
(client) does have the intention of benefiting friend
(beneficiary)
but it also refers to intention of the parties this would
include the lawyer.
Much more restricted standard if all parties intent taken into
consideration
Not being asked to prove for both parties, what you are asked to
prove in (b).
3 lines of authority have developed:
some courts held that both the promisor and promisee must intend
to give the 3rd party rights under the contract
other courts have concluded that the intention of the promisee
controls
number of decisions hold that the promisor must know or at least
have reason to know of the promisees intent to benefit the 3rd
party, even if the promisor has no particular desire to confer a
benefit on or create an obligation to the 3rd person.
302 RS is unclear as to what intent is necessary.
Zigas v. Superior Court
Court distinguishes between current case and Martinez
Tenants in this case are specifically intended beneficiaries
Martinez youd have to prove they were going to apply for the
jobs.
Petitioners are entitled to maintain a 3rd party cause of action
under the Shell rationale.
HUD agreement could only benefit the tenants.
Tenants constitute the class which congress intended to
benefit.
Tenants have standing because of Shell and Congresss intent.
Assignment and Delegation
(Assignee) (Assignor) (Obligor)
Bank (note( Lawyer ( Legal ( Big Client
( $ ( ( $ ( Big Client takes obligation to pay bank directly
Novation willing release of one of the parties.
Assignment of accounts receivable is like collateral to the
bank.