AVOIDANCE OF CONTRACT

CONTRACTS OUTLINE KELSO FALL 2001

- DEFENSES - you cannot affirmatively sue for damages under any of these. They are only defenses. STANDARD CONFIDENTIAL/FIDUCIARY RELATIONSHIP Capacity Mistake Misrepresentation f - Constructive Fraud Duress f - Undue Influence Unconscionability f - Concealment/Duty to Disclose Illegality f - Economic Coercion
Normal Remedy: Rescind the contract and Restitution to restore where everyone was before the contract was made Alt. Remedy: Reform the contract to be fair in light of the mistake

I. CAPACITY TO CONTRACT If a person lacks capacity to K, that person can void the K at any time at their option. But initially, there is an enforceable K. But that party has chance to get out of K if they want to. To void K, both parties must be returned to their pre-K position (to the extent that they can be). o Traditional Approach: M must return goods BUT is not liable for depreciation of the goods; Merchant is out-of-luck. A. MINORS (M) - M can void contract anytime b/f reaching the age of majority (statutory adulthood). Question of Fact (for the trier of fact/jury) Under statutory age (usually 18 Texas) If there is an adult co-signer, this defense does not work.

TRAD if disaffirm, return as much as in possession & possible tort set-off. MOD no tort set-off. Maj/Tx TRAD

Exceptions: 1. NECESSITY things necessary to Ms support: food, clothing, lodging, medical care, education. Question of Law (whether goods are necessities). M cannot disaffirm contracts for necessities. Policy: So they can get the things that they need. 2. RATIFICATION can ratify after the statutory age if it occurs after a reasonable time passes. Question of Law (not for jury) o Ex1: M continues to use car after turns 18. If continue to use for several months after turning 18 M has ratified the K. o Ex2: M continues to make installment pmts after turning 18 usually ratifies K. Rule of Thumb but some exceptions if only one installmt pmt after 18, may not be considered ratified (more likely a Modern court exception). 3. EMPANCIPATION by statute or by court. Question of Law Some states automatic w/ marriage (makes individual capable of entering contracts as adult). Texas auto-emancipation. 4. MISREPRESENTATION OF AGE if M misrepresented age, K will be enforceable. MAJORITY states may estop M from bringing Lack of Capacity to K defense. Therefore, M loses the capacity to disaffirm, so K is enforceable.

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MINORITY states may allow defense, but M must pay for depreciation/reliance of the good. TEXAS has used both.; MASS doesnt matter, still protected For this doctrine to apply, M must do something affirmative. (b/c M has the right to conceal age if merchant does not ask.)

Boilerplate Clause stating signer swears adulthood (fine print not pointed out) o MODERN not a mispresentation (M must independently initial the age clause). o TRADITIONAL tough luck - minor s/h/k better & read the entire document.

Bowling v. Sperry - P (16) bought car from D car dealership. One week later, car broke down. P disaffirmed K & gave car back & wanted all money back. Court held for P who disaffirmed K. Aunts name was not on title, therefore, no cosigner. Necessity car was deemed not b/c P lived w/ parents & could to work another way. Ratification, Statutory Law, Misrepresentation of Age all n/a. Problem: Bold Graduates M1 & M2 and apartment lease. Lease was voidable at Ms option b/c underage.

Necessity? Possibly boys were trying to live on their own, but parents assured them that they will always be welcome at home, so necessity doesnt apply they can always go home. Ratified? If one boy turned 18 & they continued to make rent pmts then yes-ratification. If only one rent pmt b/f disaffirming, arguable and K may not be enforeceable. Statutory Law? If one boy had applied for emancipation, they the K w/h/b enforceable. Misrepresentation of Age? If boys had misrepresented age, then M c/b estopped from disaffirming the K or if allowed to disaffirm, M will have to pay for the depreciation of the good.

B. MENTAL INCOMPETENCE (MI) Question of Fact (for the jury) Will: May still prepare a will..different test. Restatement (Second) 15 (1) Person incurs only voidable contract duties by entering into a transaction if by reason of mental illness or defect: (a) Unable to understand the nature & consequences of the transaction (extreme) or (b) Unable to act in a reasonable manner and other party knows or has reason* to know (Critical Factor: other party is taking advantage of mental person). *Reason to Know ex: if price is so low that a reasonable person s/h suspected mental state. (2) If K is made on fair terms & other party has no knowledge of mental illness, then estoppel doctrine, to stop mental illness defense & to make K enforceable.

TRAD/Maj (a) only unable to understand transaction. Mod/Txboth a&bunable to understand/unable to act in reasonable manner & other party knows. IMP - If MI can show 1(a) that will let MI make mental illness defense, even if D has (2). Must show at the time of K was made, person was mentally incompetent at that time. Inadequacy of Consideration Plus Something Else underlying fairness of deal affects the courts decision. Incapacity Due to Intoxication same doctrine as to mental incompetence cases. 15(2) - Although rarely estoppel act is applied, often used if MI was voluntarily influenced by drugs or drunk. MI w/b estopped from raising MI defense.

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Burden of Proof most of the time by a preponderance of evidence. Some civil cases have higher burden of proof. o 1 Beyond Reasonable Doubt highest burden of proof (criminal) o 2 Clear & Convincing Evidence mid-level burden of proof (Heights case civil) o 3 Preponderance of Evidence lowest burden of proof (civil) 3 Things Looked at for Burden of Proof: 1 Family Testimony; 2 Psychiatric Testimony; 3 Fairness of Deal *

Heights Realty v. Phillips TRAD focuses on 15(1)(a) - P sued D (MI) for not following through on agreement for sale of property. Ds family testified that she was erratic & forgetful. Court ruled for D. Per Kelso this case c/h/b decided either way. (app. ct. only reverses if clear obvious errors). Inadequacy of Consideration alone will not void K must have D being taken advantage of. Consideration seemed adequate; P was unaware of Ds mental illness. (c/h ruled for P, also). Problem: Drug Influenced Seller P (drugged when he sold fathers belt) sued D. Ct rules for D. Exam: To what extent did it seem to be a fair contract? Consideration was fair & about right. Actual consideration paid is important. D did not know that P was under the influence of drugs.

Estop MIs defense & render K valid for D.

AVOIDANCE OF CONTRACTS

II. MISTAKE A. MUTUAL MISTAKE 1. Elements f a) Both Parties f b) Basic Assumption f c) Material Effect l d) Does Not Bear Risk f = Question of Fact l = Question of Law

(has to be a big element of K not a minor insignificant element) (b & c always together if you find one you find the other in the K) (party seeking relief doesnt bear ROL) risk bearing analysis-court must decide equitable decision. 3 factors to balance to determine party to bear ROL (not elements): 1) ExpressAllocation by Parties in the contract of who bears ROL. 2) Implicit Allocation 3) Allocated by Court (of ROL): (a) Industry Standard whats normally done in the industry/trade standards. (b) Party better able to get insurance so they will insure against risk. (c) Repeat player who handles many of these transactions; can spread ROL. (d) Buyer beware all other things equal, buyer s/h/k better. caveat emptor (e) Equity some ultimate sense of equity allows rescission. If you know the risk, but went ahead anyway, then allocate the risk against you.

Mistake by party who forth with contract using limited knowledge bears ROL B. UNILATERAL MISTAKE 1. Elements f a) Both Parties f b) <same> f c) <same> l d) <same> l e) (1) Unconscionable Injury OR (2) Other Party Knows or had Reason to Know OR (3) Other party Caused the mistake f) Place Other Party in Status Quo Reliance Interest (did P rely?) If you give relief to D, you be able to make sure P can be returned to pre-K position. C. ADDITIONAL f 1. Brought suit in a timely manner f 2. D was not grossly negligent in the mistake (ordinary negligence ok) Statutes: Override the common law. Govt cases may get relief and get the higher contract profit margin. Not detailed on the exam. Middle Man: party who selects the telegraph as the means of communication shall bear the loss caused by errors of the telegraph. telegraph company bears the risk of miss-communicating unless risk is allocated/limited by contract. Mistake cases: * * *
Boise Junior College(P) v. Mattefs Construction (D) P (GC) sued D (SC). D make clerical error on bid to P which P used to submit for job bid. Unilateral mistake. Court rules for D. a) One Party Ds mistake. b) Basic Assumption main element of contract. c) Material Effect yes 14% error would result in Ds lost profits. d) ROL GC does not always bear ROL if they can show necessary elements of reliance on SCs bid. e) Unconscionable D will lose money on contract b/c of mistake. (Possible ct. w/h made D perform if D were to still make profit). f) Other Party in Status Quo If D walks, P is in same position as b/f contract (P w/h no losses yet from reliance).

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Additional: 1) Timely manner yes 2) Grossly negligence no (b/c its common mistake per Kelso) Even if D were still to make a profit (so K w/n/b unconscionable), the D: Could show that P had reason to know (e)(2) of mistake ex: If Ds bid was way below all the other bids. Not the case here P had no reason to know b/c Ds bid was w/in the range of the other bids.

Federal Government Contracting & Mistake in Bids If there is some statute on point, then you must follow the statute.

Mistaken Admissions: University accepted them, but counseled them that they would do well there, but they said if you want to come, you can come. They did not have to use the mistake defense. Beachcomber Coins, Inc(P) v. Boskett (D) P (buyer/retailer in coins) sued D (seller) for a counterfeit coin purchased. Both P & D believed the coin to be geniune. Mutual Mistake. Court rules for P. a) Both Parties yes. b) Basic Assumption main element of contract. c) Material Effect yes worthless fake coin for which P paid $500. d) ROL (1) Allocation by Parties (explict/implicit) - no (2) Mistake by party who went forth using limited knowledge - no P & D both thought they knew. (3) Allocation by the Court - yes. (a) Industry standard no. (b) Insurance - no (P) (c) Repeat Player no (P) (d) Buyer Beware no (P) (e) Equity yes (D bears ROL) Negligent to inspect is not enough, must be grossly negligent If Exam Hypo answer w/h mentioned that this w/b a pretty close case. Lenawee Board of Health(P) v. Messerly (D) .D sold land as is to 3rd party. Raw sewage on land & land was condemned. 3rd party breached K. D nor 3rd party knew of raw sewage problem. County (P) sued D. Mutual Mistake. Court rules for D. a) Both Parties yes. b) Basic Assumption main element of contract. c) Material Effect yes land with raw sewage is worthless. d) ROL (1) Allocation by Parties (explict/implicit) - yes K said buyer purchased land as is meaning buyer has ROL (3rd party). Implicited stated by the parties through the language of the K. *Possible save for 3rd party if they could show that they were unsophiscated buyers & the as is clause was never pointed out (buried in fine print) & D was a sophiscated seller outcome may be different & ruled in favor of 3rd party (buyer)

Court rarely overturns Allocation by the Parties. IMP - But if the Court decides the risk allocation clause by the parties is too unconscionable to follow they will rule against it. Oil and Gas: typically buyer/vendor takes the risk that the oil may not be present

Ayer(P) v. Western Union Telegraph (D) .P used D to send telegraph offer to X. D left out a word that changed the price substantially. X accepted. P had to perform & then sued D for the difference in price b/c of Ds mistake. D admits liability but says they are only liable for the price of sending the telegraph. Performance has gone on long enough to where you cant really rescind the K. Must determine correct K price. 1) P & X Seller bears ROL b/c seller selected telegraph for the offer (mistake in communication). P must collect loss from D. 2) P & D Telegraph co bears ROL (b/c it made the mistake). Seller (P) gets full expectation damages.

AVOIDANCE OF CONTRACTS

III. FRAUD/MISREPRESENTATION f = Question of Fact A. MISREPRESENTATION l = Question of Law 1. Elements f a) False Statement/ Half-Truths by one of the parties f b) Justifiable Reliance by the other party c) Silence/Concealment is OK 2. Half-Truths Technically True BUT Not the full picture. If you tell a story, you must tell the whole story. If half-truth, you must tell the full-truth. BUT if you say nothing, there is no half-truth. 3. Intentional Fraud vs. Innocent Intentional Fraudulent False Statement o Any False Statement even minor element. o more likely to get Reformation remedy. Innocent But False Statement o Making material false smt about a material element to K. 4. Confidential/Fiduciary Relationship a) CONSTRUCTIVE FRAUD b) CONCEALMENT/ DUTY TO DISCLOSE Ex. Dancer case half truth flattery of ability Confidential vs. arms length reasonable why that level of trust should exist Employee vs. Employer (young and trusting) Relatives Housing deal OTOH, salesman misleading is something one shouldnt rely upon; but hard and fast statements Statutes may govern business or trade practice 5. Generally misrepresentation must be one of fact not opinion. (ex: pregnant, barren cow) Fraud/Misrepresentation Cases: 6. Remedy = Revision and Restitution 7. Modern View of Disclosure: a. necessary to prevent mis/fraud b. would correct mistake of the other and failure to disclose = bad faith c. correct as to contents or effects of writing d. other person entitled to know the fact because of a relationship of trust and confidence * * *
Morta(P) v. Korea Ins Corp (D) FRAUD -good fact pattern for exam question Car accident & insurance claim. NOT ACTUAL FRAUD b/c didnt have both false smt & justifible reliance CONSTRUCTIVE FRAUD b/c youre in a situation where you are suppose to be able to trust them? N/A b/c P is not dealing with his own ins. co its the other guys. Holding TRAD enforce clause/release Dissent MOD protect weaker parties Procedurally unconscionable b/c P was unsophisticated. MUTUAL MISTAKE both parties thought he w/n/h any other injuries. Doesnt work b/c of ROL analysis. o P released them from all claims he s/h/k better.

AVOIDANCE OF CONTRACTS

V. DURESS f = Question of Fact A. DURESS l = Question of Law 1. Elements f a) Improper Threat - you are the victim of improper threat f b) Deprived of Freewill - deprived your freewill (no reasonable choice) ordinary firmness f c) Normal Legal Remedy is Inadequate - (ex: take to court no time) f d) Claim w/in Reasonable Time - (bring duress claim very soon after threat passes) 2. Question of Fact for the Trier of Fact. BUT, court can take fact question away from jury & decide as matter of law IF the facts are so clear that any reasonable juror w/h to decide that way. 3. Confidential/ Fiduciary Relationship Economic Coercion o Do not need to prove improper threat OR deprivation of freewill o Just Powerful Threat will do for Economic Coercion. o If P & D had been in a fiduciary relationship. Then, this case w/ the powerful threat w/h/b economic coercion. (Case: P threatened to pull business from D (millions in profits from P)). Undue Influence o You had greater influence you abused that influence do not have to prove deprevation of freewill.

Austin Inc (P-SC) v. Loral (D-GC) DURESS P threatened D that if D didnt give P the modified price on 1st K & then give them the 2nd K, then P would breach K. D says its under duress & wants recission. Duress Elements: 1) Improper Threat? MUST SHOW WHY THE THREAT WAS IMPROPER - wrong for them to threatem if threat was improper [threat is not always duress] Improper Threat includes threatening Criminal Prosecution This w/b an improper threat. Can improper threat of something you have legal right to do? Yes if bad faith motive, then will be improper threat. Case: YES - Improper b/c P is threating to breach 1st K. Its always improper threaten to breach K. 2) Deprived of Freewill/ No Reasonable Choice? Case: YES deprived of freewill b/c D needed the parts to satisfy the navy customer. D wanted to continue to have navy client, so D had to have Ps parts. 3) Normal Legal Remedy Inadequate? Normally, you could get anticipatory repudiation if you know P will breach K. Case: YES inadequate b/c D needed the parts now for navy K. Too long to go through the courts (not enough time). 4) Duress Claim w/in Reasonable Time? Case: YES brought claim w/in 3 days after the last delivery of the parts (After the threat had passed).

AVOIDANCE OF CONTRACTS

V. UNCONSCIONABILITY A. UNCONSCIONABILITY Question of LAW for the court (never goes to jury) 1. Elements a) PROCEDURAL (In Bargaining) (1) Unequal Bargaining Power (2) No Opportunity to Bargain (3) Unfamiliarity with Terms: (a) Hidden (b) Too Technical (4) Other Consumer vs. Commerical

b) SUBSTANTIVE (In Contract Product of Abusive Bargaining) (1) Harsh, One-sided Terms, Oppressive 2. MAJ - Need Both (a) & (b) the more you have of one, the less you need of the other. 3. Use as an alternate defense AFTER trying Duress & Mistake, etc. (Jury Questions are better) 4. Burden of Proof Defendant person asking for defense. 5. Consumer v. Commerical Business [Procedural Element] Consumer courts go in thinking sophisticated retailer dealing w/ weaker party. Commerical courts tend to think of business as equal. Generally Q for court because they fear Jury breaking too many contracts 6. Texas Deception Trade Practice Act Gives 3 times the damages. Can sue in affirmative for unconscionability. Jury decides if unconscionable & intent. 7. Good Faith Obligation means youre behaving honestly with respect to the other person & the contract terms.

Ex: If terminate K for no reason w/ 90 days notice. Not bad faith if following K terms.

8. IF Confidential/ Fiduciary Relationship Court will scruntize all procedural or substantive unconscionability terms to make sure no unconscionability.

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Ex: Derby v. Derby if both spouse equally represented in marital dissolution then no unconscionability. Probably w/n start with unconscionability try undue influence first easier to prevail.

Cutler Corp(P) v. Latshaw (D) CONSUMER Fine print in K. Signer waives all rights. SUBSTANTIVE PROCEDURAL Signer waives all rights very powerful one-sided provision Alone this is not enough to make K unconscionable must show Procedural

AVOIDANCE OF CONTRACTS

Clause of K was hidden in fine print on a back page so signer w/n notice. BUT even if signer had known it was there, they c/h/b coerced into signing b/c of weaker bargaining power unfamiliarity w/ the terms (lack of understanding) Weaver (D) v. American Oil (P) COMMERCIAL Exculpatory/indemnification clause D brings unconsionable defense SUBSTANTIVE very one-sided clause PROCEDURAL * has all 3 factors required for Procedural Unconscionability* 1) Large multinational corp w/ preprinted form drafted by attorneys vs. Weaver (high school dipolma only) 2) Unfamiliarity with Terms No title to alert reader Hidden in Fne Print (not clear) Techincal Terms 3) No opportunity to Bargain (sign it or no deal.) Zapata (P) v. Dairy Mart (D)- COMMERCIAL - NOT UNCONSCIONABLE Termination w/o cause upon notice franchise agreement. SUBSTANTIVE one-sided agreement? Not really Harsh Terms? No P will buy back some inventory & must give some notice. PROCEDURAL D was high graduate - D had taken college courses for business - 21 yrs business experience - was a manager business savvy - P is not as disadvantaged - Not unequal bargaining power Nature of Terms? o Clearly presented (not hidden/clear langauge) o People pointed it out to him & advised him to take it to an attorney o He decided to just sign the K. Really no Procedural Issues. Co. may just not want to deal with the paperwork for reasons (burden to them) Therefore, may be reasonable that they have the clause.

AVOIDANCE OF CONTRACTS

VI. ILLEGALITY A. CONTRACT CONCERNS: 1. 2. 3. 4. Criminal Statute Civil Statute Common Law Policy (created by judges) 1-3 look at strictly the K. Not the criminal or civil remedies.

B. STATUTE ITSELF MAKES CONTRACT ILLEGAL: 1. Degree of Involvement to what degree is the troublesome part... a) Central To OR b) Dominant Part ...of the K

Ex: Construction K bribe to electrical inspector may not be central to K. o Therefore, may not render K void b/c its not a central part of the K. o Keep rest of the contract

2. Seriousness of Illegality Health/Safety/Alcohol Issue serious C. REMEDIES

Admin/Fees Issue not so serious

1. Contract Void (from the beginning) Other defenses do not work the same way. If illegal there was never a valid K. Either party can raise the claim. Court can raise the claim on its own (w/o regard to either parties intent). o Other defenses court does not raise on its own. No rescission/restitution Neither party has any rights to K Leave the parties as they are. 2. Exceptions Restitution Available if: a) Both Parites NOT In Pari Delicto o Less Culpable Party is Protected o Restitution available b) One Party Backs Out in a Timely Manner That party can get restitution if they backed out in a timely manner Not a rat leaving a sinking ship. Liability = Can contract to limit liability for ordinary negligence consumer/business (not in products liability(selling of goods)); UCC 2-719(3) - unconscionable to contract out of products liability or personal injury for sale of goods case

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D. COVENANT NOT TO COMPETE DOCTRINE Special Area of Illegality Doctrine 1. REMEDIES 3 Approaches a) TRAD will not enforce an overbroad covenant If covenant is illegal its void leave parties as they are b) BLUE PENCIL RULE deletes overbroad provisions Cut out the 5 yr provision if too long then left w/ 1 yr But if 5 yr is too broad & the only one & have to line it out & then nothing so no covenant Encourages people to draft covenants w/ alternatives long & drawn out. c) MAJ/TX reasonably alter an overbroad covenant to make it enforceable If too broad, then court will cut back to reasonable amount. Court reforms agreement. Avoids cumbersome contracts But only if company behaved in good faith o Did not intentionally draft a covenant too broad If bad faith then covenant is totally void Encourages co. to draft a little broader than necessary Cannot recover for damages for the period it was overly broad, but thereafter. 2. Reasons: Valid Reasons: Trade Secrets Confidential Info Customer Lists o Unfair taking advantage of company; develop list then switch co. and try to take them with you. (1yr) Special Investment in Training o Co makes them an expert in business & then they leave & compete against them (next day). (1yr) Business Goodwill o Developed during the time of employmentcan prevent customers leaving. (1yr) Invalid Reasons: Employees use of own knowledge/ skill that employee gathered on his own. (inherent) General Information acquired by working for the company. Merely to Limit/Stifle Competition courts are pro-competition Works for a Competitor, but with different role or skills

3. Reasonableness (courts dont like them b/c they go against CL policy.) a) Area how far blocks, city, state, etc... Has to be your competitive area If your area is mostly w/in 2 blocks then thats it. b) Time how long Generally, one year is the max (CL policy supporting)

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 Especially for customer lists Trade Secrets can be protected for longer c) Subject Matter area of business protected Ex: protect trade secrets cant compete in a way that comprises trade secrets. Covenant must be related in subject matter that youre protecting Has to be a particular job that that person was doing

VII. CONFIDENTIAL RELATIONSHIPS By Statute o Home Sales/ Residential duty to disclose o Family Members* -duty to disclose o Husband & Wife* - duty to disclose * Not always Confidential Relationship Businessman brothers can have an arms-length relationship (not conf.) Employer/Employee NOT confidental relationship BUT a question of fact

VII. REMEDIES A. STANDARD REMEDY (when seeking K defense) 1. Recission (Law) restores the parties to status quo (as b/f the K was made). 2. Restitution (Law) compensates for benefits conferred (unjust enrichment). 3. Entitled to these as a matter of law court cannot deny. B. REFORMATION - ANOTHER REMEDY 1. Reformation (Equitable) court corrects the mistakes in K. Court rarely does this (they dont like to) If cannot untangle the part of the K already performed. Parties do not rebargain courts impose new price terms on the parties If so much of K has already happened, then this may be more equitable. 2. Youre not entitled to it court can decide.

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VIII. FAMILY MATTERS

Non-Marriage:
Cohabitation Agreement (MAJ) - enforced by Court/alt. Unjust enrichment (ue); (Min) no Same or different sex doesnt matter Purely sex = prostitution = illegal v. sex part illegal

Surrogacy Contract
Can it be enforced? NJ Supreme (MAJ) said it was against public policy; many followed with statutes making it illegal People still do it and people agree to it

Contraceptive Fraud Not a contractual obligation

Possible claims against complications in pregnancy and/or disease transmission. Getting out of child support is against public policy

Gambling:
If it is legal, then it is an enforceable contract. (or Nevada). If it is illegal, then it isnt enforceable. If state makes exception for Casino boat or Indian Reservation, then enforceable.

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