Contracts II - Schooner - Spring 2004_4

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,







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,







(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.

Contracts II - Schooner - Spring 2004_4

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Transcript of Contracts II - Schooner - Spring 2004_4