law+of+contracts posner2002c

8/6/2019 Law+of+Contracts Posner2002c

1/21

Mutual Assent

DOCTRINE: In order for a contract to exist, both parties must show the intention to contract.

OBJECTIVE THEORY OF CONTRACT:Assent is demonstrated by objective manifestations from which a reasonable person would

interpret the other partys intention. In other words, notice must be given of intent to contract.4. Might be offset by objective indicators of intent NOT to contract.5. If party actually knows other party has no intent to contract, then no contract.

RSF 25 -- If from a promise or manifestation of intention, or from the circumstances existing atthe time, the person to whom the promise or manifestation is addressed knows or has reason toknow that the person making it does not intend it as an expression of his fixed purpose until he hasgiven a further expression of assent, he has not made an offer.

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.

UCC 2-204 -- Contract Formation(1) A contract for sale of goods may be made in any manner sufficient to show agreement,including conduct by both parties which recognizes the existence of such a contract.(2) An agreement sufficient to constitute a contract for sale may be found even though the momentof its making is undetermined.

EXAMPLES:Embry v Hargadine: Go ahead, youre all right; get your men out there and dont let that worryyou.Lucy v Zehmer: D jokingly goes through motions of selling farm, Lucy accepts offer.

but see Lonergan v Scolnick: D responds to ad about land for sale, receives form letter, letter encouraginghim to hurry, accepts.Cobaugh v Klick-Lewis: Sign on golf course advertising car for hole-in-one.

SITUATIONS DEMANDING PRESUMPTION AGAINST CONTRACT:6. Social & domestic agreements.

7. When industry norms do not support it. See Cohen v Cowles Media: reporters promise not K

AGREEMENTS TO AGREE:1) Letters of Intent: presumption for K unless

8. subject to clauses, including procedural formalities, indicate otherwise9. issues that remain to be worked out are not trivial

2) Oral agreements intended to be memorialized in writing

a) same as above; presumption for K unless a) and b).

EXAMPLES:Empro Manufacturing v Ball-Co.: Letter of intent to buy Ball-Co. subject to board approval.

but see Oglebay Norton Co. v Armco: prior agreement to agree upheld even when terms become uncertain


2/21

Offer

RSS 24: A statement or act that creates a power of acceptance. When a person makes an offer, she isindicating that she is willing to be immediately bound by the other persons acceptance without furthernegotiation.

SITUATIONS REQUIRING A PRESUMPTION AGAINST OFFER:10. Solicitation of or Invitation to Bid11. Price Quotes12. Advertisements

OFFER MAY BE WITHDRAWN AT ANY TIME, UNLESS OPTION EXISTS:

Acceptance

RSS 45(1) -- Creation of Option Contract by Part Performance. Where an offer invites an offereeto accept by rendering a performance and does not invite a promissory acceptance, an optioncontract is created when the offeree tenders or begins the invited performance or tenders abeginning of it.

RSS 45(2) -- Offerors Duty. The offerors duty of performance under any option contract socreated is conditional on completion or tender of the invited performance in accordance with theterms of the offer.

Marchiondo v Scheck: Despite communicating revocation of offer to sell house, contract withbroker who later found buyer upheld because partial performance had occurred.

MAILBOX RULE:

Battle of the Forms

LAST ONE TO PROPOSE MODIFICATION WINS


3/21

Warranties

See UCC & RSS

Missing Terms

UCC 2-204(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness

if the parties have intended to make a contract and there is a reasonably certain basis for giving anappropriate remedy.

See UCC & RSS

Indefiniteness

RSS 33 -- Certainty

(a) Even though a manifestation of intention is intended to be understood as an offer, it cannot beaccepted so as to form a contract unless the terms of the contract are reasonably certain.

(b) The terms of a contract are reasonably certain if they provide a basis for determining theexistence of a breach and for giving an appropriate remedy.

(c) The fact that one or more terms of a proposed bargain are left open or uncertain may show thata manifestation of intention is not intended to be understood as an offer or as an acceptance.

See UCC & RSS


4/21

Misunderstanding

DOCTRINE: Where parties appear to agree on same terms, but do not, misunderstanding voids thecontract.

TEST:

RSS 20 (1) There is no manifestation of mutual assent to an exchange if the parties attach materiallydifferent meanings to their manifestations AND

(a) neither party knows or has reason to know the meaning attached by the other; or(b) each party knows or each party has reason to know the meaning attached by the other.

(2) The manifestations of the parties are operative in accordance with the meaning attached tothem by one of the parties if

(a) that party does not know of any different meaning attached by the other, and the otherknows the meaning attached by the first party; OR(b) that party has no reason to know of any different meaning attached by the other, andthe other has reason to know the meaning attached by the first party.

EXAMPLES:Raffles v Wichelhaus: The Peerless sailing from Bombay in October or December? Holmes:

each had just as good a reason as the other for attaching a different meaning to Peerless. Since theplaintiff offered one thing, and the defendant expressed his assent to another, the offer was thusnever accepted.Konic International Corp. v Spokane Computer Services: Surge-protector for fifty-six twenty.


5/21

Parol Evidence Rule

Is there a prior written or oral agreement or a contemporaneous oral agreement?

DOCTRINE: When a written agreement is completely integrated, or when a term in a partially integratedagreement is found to be integrated, it cant be contradicted or supplemented with prior written or oral

terms or agreements, or contemporaneous oral agreements. An integrated agreement or term is one whichthe parties intended to be a final and complete statement of their agreement.

UCC 2-202: No evidence is admissible to show prior written or oral agreements, or contemporaneous oralagreements contradicting the contract -- however, a contract can be explained or supplemented by evidenceof trade usage, or course of dealings or performance. Furthermore, unless the contract is found to be acomplete and exclusive statement of terms, evidence of consistent additional terms may be admitted.

TEST: Parol evidence of a collateral agreement will not be admitted unless:1) The agreement is truly collateral; not so closely related that it would naturally be included in K.2) The parol evidence does not contradict express or implied provisions of K.3) The terms of the collateral agreement are such that ordinary parties would not expect them to beembodied in writing.

EXCEPTIONS:1) Defect in formation (fraud, duress, lack of consideration, mistake, etc.)2) Evidence that the agreement wasnt final3) Nonoccurrence of a Condition Precedent4) Evidence about patent ambiguities5) Omitted terms

FINDING FULL INTEGRATION:1) Traditional Rule: Only look within the four corners of the contract.2) Modern Rule: Any relevant evidence relevant to the parties intentions.

MERGER CLAUSE:This writing is a final expression of all the terms agreed upon by the parties, and it is a completeand exclusive statement of those terms.

ALL CHANGES MUST BE IN WRITING CLAUSE: Not enforceable, because subsequent oralagreement is considered evidence that this clause has been waved. However, under UCC, enforceableunless not enforcing the modification would be unfair because a party materially changed position inreliance on the oral modification or waiver. (UCC 2-209)

POLICY:1) To avoid perjured testimony, and2) To give a clear basis on which to base a judgment.

CASES:Mitchel v Lath: Oral agreement to buy farm on condition that ice house be demolished excluded.

but see Luther Williams Jr., Inc. v Johnson: Oral understanding that contract for home improvementsconditional upon financing included.Alaska Northern Development v Alyeska Pipeline Service: Oral evidence limiting boardsauthority to approve or reject sales agreement for spare parts excluded.

but see Masterson v Sine: Oral evidence that an option was not assignable included.


6/21

Statute of Frauds

DOCTRINE: If statute not satisfied, contract unenforceable.

Restitution for reasonable value of part or full performance of goods / services renderedpossible

NINE TYPES OF CONTRACTS THAT REQUIRE WRITING:1) Interest in Land (includes leases of 1-yr.)2) Incapable of Performance within less than one year

a) automatic renewal clauses not covered3) For sale of goods priced more than $500 (UCC 2-201)4) For sale of specifically-manufactured goods5) For sale of goods where there has been partial performance6) For sale of securities (UCC 8-319)7) For sale of personal property other than goods priced at over $5,000

a) royalty rights OR b) patent rights8) Suretyship: to answer for anothers debt; as collateral, not primary, promise

a) main purpose rule: if main purpose to further own interests, not covered by Statuteb) includes executor of estate settling debts

9) In consideration of marriage, not mutual promises to marry unless marriage only considerationNOTE: services of any kind not included

REQUIRED ELEMENTS OF CONTRACT UNDER RSS:1) Contracts subject matter2) Parties identities3) Promises, by whom and to whom made, and essential terms and conditions stated withreasonable certainty.4) Signature or initials of the party to be charged (the one denying the contract)

REQUIRED ELEMENTS OF CONTRACT UNDER UCC:1) quantity

EXCUSES UNDER RSS: A writing will not be required where there is:1) Full performance by both sides2) Seller conveys property to buyer3) Buyer pays all or part of the purchase price AND performs some act explainable only by thecontracts existence (e.g. building a house on property)4) Promissory estoppel5) Waiver (only by not affirmatively pleading Statute of Frauds as defense)6) Admission in court (only enforced, however, to extent admitted)

EXCUSES UNDER UCC:1) Part performance, but only to the extend thereof --

a) receipt and acceptance of goodsb) partial paymentc) full payment

2) Admission of Contracts Existence in Court.a) terms must be proven

3) Specially Manufactured Goods wherea) circumstances reasonably indicate the goods are for a specific buyer, ANDb) seller has substantially begun manufacture or made commitments for procurement ofthe goods.

A specially manufactured good is not suitable for sale to others in the ordinary course of asellers business4) A letter of confirmation between merchants only.


7/21


8/21

Pre-Existing Duty

DOCTRINE: If, in exchange for a promise or performance, a party does or refrains from doing somethingthat she is already under legal obligation to do, there is no consideration.

POLICY:

1) Prevent hold-up.

EXCEPTIONS:1) Different Performance. (Consideration = modification. E.g. not to file for bankruptcy.)2) Honest dispute over existence of debt. (Consideration = agreeing not to withhold)3) Honest dispute over amount of debt. (Consideration = amount above old bargain)

ACCEPTABLE CHANGES in PRE-EXISTING CONTRACTS:Unanticipated circumstances which make re-adjustment fair and equitable are allowed (RSS 87).Modifications are acceptable as long as they are undertaken in good faith (UCC 2-209).

ACCORD: An agreement where the party with a right to receive performance agrees to some performancedifferent than that originally contracted for.

EXAMPLES:Rewards and bonuses when promise already under obligationAlaska Packers v Domenico: workers demand raise when arrive in Alaska; raise rescinded.Levine v Blumenthal: Tenants request to not honor contracted rent increase honored by landlord,but court rescinds change in lease.

but see Angel v Murray: garbage collection renegotiated after unexpected increase in houses serviced.


9/21

Mutuality of Consideration

DOCTRINE: In bilateral contracts, both parties must furnish consideration, must suffer detriment, and mustmake promises that bind them.

REQUIREMENTS CONTRACT:

In return for exclusive selling arrangement, buyer agrees to buy all required goods.Other details may be read in by court and tied to fair dealing and customary practice.McMichael v Price: Plaintiff tries and fails to argue lack of mutuality b/c of possibility cantperform b/c of bankruptcy.

OUTPUT CONTRACT:In return for exclusive buying arrangement, seller agrees to supply all output to buyer.Other details may be read in by court and tied to fair dealing and customary practice.

EXCLUSIVE AGENCY CONTRACT:In return for marketing name, copywrights, etc., party agrees to share profit percentage and notmarket name elsewhere.Wood v Lucy, Lady Duff Gordon: Lady Duff violates exclusivity provision, markets with others.

TERMINATION CLAUSES:Only enforceable if right to terminate comes after partial performance or linked to some otherdetriment.

CONDITIONAL PROMISES:Enforceable so long as condition depends on some outside event not in control of promise.Omni-Group v Seattle First National Bank:


10/21

Enforceable Promises Lacking Consideration

1. GIFTS TO CHARITY:

Allegheny College v National Chautauqua County Bank of Jamestown

2. PROMISES TO PAY PAST DEBTS DISCHARGED BY STATUTE OF LIMITATIONS

1. Must be in writing

Manwill v Oyler: Promise not enforced because not in writing.

3. PROMISES TO PAY FOR BENEFITS ALREADY RECEIVED (RESTITUTION)

DOCTRINE OF MORAL OBLIGATION:1. Defendant received non-officious or non-gratuitous material benefit2. Defendant had appreciation of knowledge of benefit3. There was no opportunity to bargain4. In would be unjust for defendant to retain benefit without paying

(Usually because plaintiff incurred a corresponding detriment.) Promise to pay might be implied by law.5. Recovery limited to value of benefit received, not detriment incurred.

Webb v McGowin: Employee saves life of employer, permanently disabled, employer promises topay stipend for life. Suit against employers testators.

but see Harrington v Taylor: Hand injury from stopping wife from killing husband; husband promises topay, but after paltry payment, reneges.

but see Mills v Wyman: adult son sick and cared for.

4. PROMISES TO PERFORM A VOIDABLE DUTY

5. GOOD-FAITH MODIFICATIONS OF EXISTING CONTRACT

UCC 2-209: No consideration required.

6. OPTION CONTRACTS (IRREVOCABLE OFFERS):

1. Limit of Three Months2. Unless for sale of goods, consideration must be recited.

RSS: Consideration must be cited but not fulfilled. UCC: Consideration not needed.UCC 2-205 -- Firm Offers. An offer by a merchant to buy or sell goods is irrevocable if it is asigned writing and it gives explicit assurance that the offer will be held open. There is no need forconsideration.

EXAMPLES:

Humble Oil v Westside Investment: P tries to attach provisions to exercise of option to buy land(normally a counter-offer), later waives the provisions. Sale upheld.


11/21

Conditional Promises

Failure of a condition causes forfeiture; failure of a promise causes breach.

TYPES OF CONDITIONS1) precedent: Plaintiff has burden to show that any conditions occurred and performance was due.

2) concurrent: same3) subsequent: Defendant has burden to show that any condition was not met and duty wasdischarged. Courts will only uphold these if they are reasonable.4) express: agreed to the letter. Usually requires strict compliance, not substantial performance.5) implied: agreed without being explicit. Usually requires strict compliance.6) constructive: not agreed to by parties but granted by law. Requires substantial performance(quantum meruit) only.

EXAMPLES:1) Tender of goods (sale): a constructive, concurrent conditional contract.2) Satisfaction clauses: if matter of personal taste, honest claim of dissatisfaction is good enoughfor exchange to fail (claim must not be reasonable); if matter is commercial, then not becauseclause carries an implied condition that the dissatisfaction claim be made in good faith.

3) Financing clauses: legal, usually carry an implied promise of good faith effort to secure.

EXCUSES FOR NON-PERFORMANCE:1) Waiver: either by words or actions, party excuses performance of condition.2) Wrongful interference: condition excused and other party must perform anyway.

NOTE: Especially in the context of insurance contracts, courts may find a waiver of the conditionor read out a condition if:

a) no prejudice results, where prejudice is an unexpected or unfair harm incurred by oneparty corresponding with an unexpected or unfair benefit incurred by the other. Forexample, if the purpose of the condition is preserved despite its violation.b) violation of the condition was not unreasonable, inexcusable, or in bad faithc) the contract was an adhesion contract, giving no occasion to bargain.

EXAMPLES:Clark v West: Triple payment of $2/page for law books if condition of abstaining from drinkingmet. Condition waived b/c major purpose of contract realized (timely & quality production).

but see Aetna Casualty and Surety Co. v Murphy: Insurred violates condition of insurance claim aftertwo-year delay in filing. Summary judgment upheld b/c no showing of no prejudice.Dove v Rose Acre Farms: Law student gets sick, is not on time to work, misses big bonus.Wal-Noon v Hill: Violation of implied condition of notification before re-roofing.

BILATERAL CONTRACTS:Unless otherwise stated or implied, each partys substantial performance creates a constructivecondition to the performance of any subsequent duties by other party.

EXAMPLE:

Kingston v Preston: Refusal to turn over business b/c of violation of conditional provision ofsecurity. Working for one year not enough for substantial performance.


12/21

Divisible Contracts and Substantial Performance

DIVISIBLE CONTRACTS: Exist ifRSS240 1) Each partys performance is divided into at least two parts, which are dependent on the other

partys corresponding part for their value. [consideration apportioned]2) The segments of performance each party owes are equal in number.

3) Each segment of performance has an agreed-upon corresponding performance form the otherparty.

NOTE: Divisible contracts allow parsing of damages, as the contract is treated as a series ofcontracts for the purpose of determining constructive conditions. Courts will only use todetermine damages if result does not prejudice non-breaching party.

EXAMPLES:Lowy v United Pacific Insurance: Substantial performance of first of two portions of contract.Britton v Turner: Worked for 9 months when contracted for 12.

MATERIAL BREACH: When breach so great that performance is not substantial and non-breaching partycan both recover damages and also suspend or be discharged from performance.

FACTOR TEST FOR MATERIAL BREACH:1) Extent to which non-breaching party deprived of the reasonably expected benefit.2) Whether breach goes to the essence of the contract -- i.e. the consideration at stake.3) Adequacy of expectation or other damages.4) Amount of performance completed.5) Likelihood that breach may be cured.6) Willfulness of breach7) Prejudice from delay of performance

TEST FOR SUBSTANTIAL PERFORMANCE OR QUANTUM MERUIT:

1) Good faith effort to comply2) Work substantially completed3) Defects not pervasive4) Deviation not essential5) Difficulty of remedying defects not too great6) Ratio of value of tendered vs. promised performance.

EXAMPLES:O.W. Grun Roofing v Cope: Mismatched shingled roof held to be material breach.Jacob & Youngs v Kent: Wrong brand of pipe mistakenly installed.


13/21

Mistake

DOCTRINE: A mistake is a belief that is not in accord with the facts. May justify rescission.

MUTUAL MISTAKE TEST: Rescission only justified by three elements --RSS152 1) The mistake was about a basic assumption of the agreement

RSS154 a) the existence of the subject matter (burned timber)b) the quality of the subject matter (barren cow; counterfeit coin)c) TYPICALLY EXCLUDES market conditions, the liquidity of the buyer

2) The mistake must have had a material effect on the exchange

LOOK for unexpected gains and offsetting losses.3) The adversely affected party did not implicitly or explicitly borne the risk of the mistake.

a) the party that knows his knowledge is limited, but treats his limited knowledge assufficient, will be held to bear the risk.b) court looks for reasonable grounds to allocate risk.

EXAMPLES:Beachcomber Coins v Boskett: court decides on rescission despite dealers superior position.Sherwood v Walker: sale of barren cow turns out to be breeding cow. Rescission.

but see Lenawee Country Board of Health v Messerly: Pickles buys apartment complex, signs as isprovision, but finds out that septic tank disaster makes land virtually worthless. Tough luck.

ERROR IN TRANSMISSION: Contract may be rescinded only if:1) Receiver is not innocent, ie. had no reason to suspect error or knowledge of error OR2) The message is forged.

EXAMPLE:Ayer v Western Union: errant telegraphed price quote; contract enforced; Western Union paysdifference, not just refund of cost of message.

UNILATERAL MISTAKE TEST: Rescission only justified when MUTUAL MISTAKE TEST met AND1) enforcement of the contract would be unconscionable OR

a) would not be oppressive or grossly unfair ANDb) would not impose substantial hardship on other party (usually, that means not yetperformed.)

2) the other party had reason to know of the mistake, knew of the mistake, or actually caused it [inwhich case contract voidable.]

CONSTRUCTION BIDS:1) Mistake must be a significant amount, depriving of most of profit (otherwise not material)

a) look for unperformed vs. performed contract.2) No fault: clerical error common reason

EXAMPLE:Boise Jr. College District v Mattefs Construction: Bidder mistakenly left out large component ofestimate. Plaintiff knew or should have known, so contract voidable.


14/21

Impossibility, Impracticability, and Frustration of Purpose

DOCTRINE: Where, after a contract is made, a partys performance is made impracticable without hisfault by the occurrence of an event the non-occurrence of which was a basic assumption on which thecontract was made, his duty to render that performance is discharged, unless the language or thecircumstances indicate the contrary.

IMPOSSIBILITY

DOCTRINE: If an unexpected event makes performance impossible, party may be discharged ofobligations

IMPRACTICABILITY

DOCTRINE: If an unexpected event makes performance excessively and unreasonably costly, party maybe discharged of obligations.

TEST: 1) Event unforeseen and ex-post; 2) Non-occurrence of event basic assumption of contract; 3)Event was not fault of a party; AND 4) Parties did not otherwise allocate the risk of the event.

EXAMPLES & TYPES:

13. Destruction of Subject matter.Taylor v Caldwell

14. Failure of the Agreed-Upon Means of Performance.United State v WegematicCanadian Industrial Alcohol v Dunbar Molassess

15. Death or Incapacity of a Party16. Supervening Illegality

FRUSTRATION OF PURPOSE

DOCTRINE: If unexpected event frustrates one partys purpose in entering into the agreement, eventhough performance of the contract not impossible or costly, that party may be discharged of obligations.

TEST: As above, with these additions: 1) Frustrated purpose is principle purpose of contract; 2) Frustrationmust be substantial; AND 3) Promisee got no benefit from contract after event.

NOTE: Key is nature of the good. General purpose goods to which buyers attach specific purposes are notsufficient. Rather, need specific purpose good whose specific purpose frustrated ex-post. Like mistake.

EXAMPLES:

Krell v Henry: Rented apartment for viewing coronation procession; coronation did not occur.

Washington State Hop Producers v Goschie Farms: Allotments to grow hops sold, then USDA

terminates allotment requirement.


15/21

Misrepresentaiton & Duty to Disclose

FRAUD DOCTRINE: When a party obtains the other partys assent to a contract by misrepresenting amaterial term, whether reasonable or not, the contract is voidable at the option of the defrauded party.

MISREPRESENTATION RULE: An agreement because of misrepresentation where the misrepresentation

1) may arise from innocent or negligent behavior2) must be material3) must be justifiably relied upon by the innocent party, although justifiably or reasonablyrequirement drops out in intentional misrepresentation cases (fraud).4) must be one of fact, not opinion, unless:

a) There is a fiduciary duty between the partiesb) The agreement was not made at arms lengthc) The misrepresentation was made by trick or artificed) The disadvantaged party does not have equal opportunity to become apprised of thetruth or falsity of the represented fact.

FIDUCIARY RELATIONSHIPS: OBLIGATION OF GOOD FAITH DEPENDENT ON:1) student teacher 1) Nature of undisclosed fact

2) priest / rabbi congregation 2) Accessibility of parties to knowledge3) doctor patient 3) Nature of contract4) husband wife 4) Trade customs and prior course of dealing5) attorney client 5) Conduct of the party in obtaining the information

6) Status quo and relationship between the parties

CONSTRUCTIVE FRAUD: Any breach of duty [arising from a confidential or trust relationship] which,without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming underhim, by misleading another to his prejudice, or to the prejudice of anyone claiming under him.

DUTY TO DISCLOSE: A vendor has an affirmative duty to disclose where:RSS161 1) Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from

being fraudulent or material; [e.g. partial misleading disclosures]2) Disclosure would correct a mistake of the other party as to a basic assumption on which thatparty is making the contract and if nondisclosure amounts to a failure to act in good faith and inaccordance 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 confidencebetween them.

RSS161 However, a party may reasonably expect the other to take normal steps to inform himself and todraw his own conclusions.

CA. Where 1) the seller knows of facts materially affecting the value or desirability of the propertywhich are known or accessible only to him and also 2) knows that such facts are not known to, orwithin the reach of the diligent attention and observation of the buyer, the seller is under a duty todisclose them to the buyer. (Lingsch v Savage, in Hill v Jones.)

POLICY CONCERNS:1) Promote honesty and fair dealing2) Encourage parties to inform themselves by limiting ways to rescind.

CASES:Vokes v Arthur Murray: dance studios effort to convince a bad dancer that she was good.Morta v Korea Insurance: general release signed after accident paymentLaidlaw v Organ: tobacco sale at end of War of 1812


16/21

Duress and Undo Influence

Unless you agree to this bargain, I will see that X happens, where X is usually withholding of neededgoods.

DOCTRINE: A contract is voidable on grounds of duress if 1) immediate possession of needful goods or

direct dire harm is threatened, 2) and the threat overbears the exercise of free will.

TEST: 1) the party who asserts business compulsion must show that he has been the victim of a wrongfulor unlawful act or threat; and 2) the threat must be one which deprives the victim of his unfettered will.

ELEMENT 1: Wrongful act:unlawful threatswrongful, oppressive or unconscionable conduct

RSS177: A threat is improper if what is threatened is:1 a crime or a tort, or the threat itself would be a crime or tort if it resulted in obtaining property2 a criminal prosecution OR3 the bad faith use of civil process OR4 breach of the duty of good faith and fair dealing

AND If the resulting exchange is not on fair termsAND EITHER1 the threatened act would harm the recipient and would not significantly benefit the partymaking the threat, OR2 the effectiveness of the threat in inducing the manifestation of assent is significantly increasedby prior unfair dealing by the party making the threat, OR3 what is threatened is otherwise a use of power for illegitimate ends.

ELEMENT 2: Deprives Victim of Unfettered Will:No reasonable alternativeNormal contracting remedies insufficient hold up

NOTE: Element 2 is high hurdle because courts have injunctive powers and parties always havethe option to use them. Would have to show circumstances precluding such injunction.

CASES:

Austin Instruments v Loral Corp

Machinery Hauling v Steel of West Virginia

UNDO INFLUENCE: Arising from one of the following (Guam Civ. Code, see Morta v Korea Insurance):1) the use, by one in whom a confidence is reposed by another... of such confidence ... for thepurpose of obtaining an unfair advantage over him2) taking an unfair advantage of anothers weakness of mind3) taking a grossly oppressive and unfair advantage of anothers necessities or distress.


17/21

Unconscionability

PROCEDURAL UNCONSCIONABILITY: Unfair surprise

Usually dispositive. When unfair clauses present, presumption against knowing & willing assent.

DOCTRINE 1: Unfair surprise; thwarts reasonable expectations of buyer.

DOCTRINE 2: Adhesion contracts disfavored where an adhesion contract exists unless party who assentshas reason to believe that like writings are regularly used to embody terms of agreements of the same type,AND 1) standardized form, 2) non-negotiated terms 3) favorable to drafter 4) on take it or leave it basis.

BALANCING TEST:

CONTRACT CONSUMER Size of type Physical infirmityConfusing wording IgnoranceConfusing organization Illiteracy

of paragraphs Inability to Understand Language

EXAMPLES:

Jones v Star Credit: Court rules that not probable that Jones understood terms.

Cutler Corp v Latshaw: evidence that P never called Ds attention to boilerplate language in smalltype on back of contract

But see Williams v Walker-Thomas Furniture: D uneducated, on public assistance, but hadabsolute duty to read.

ORSUBSTANTIVE UNCONSCIONABILITY: Unfair bargains

DOCTRINE: An agreement or clause that is shockingly unfair or one-sided

BALANCING TEST: 1) shockingly unfair, 2) gross inequity of bargaining power, 3) Superior partyknows that no reasonable probability that other party can meet obligation without penalties.

EXAMPLES:

Jones v Star Credit: Paid $600 of $1400 for a freezer worth $300.

Cutler Corp v Latshaw: warrant of attorney with confession of judgment (these have been banned)

But see Williams v Walker-Thomas Furniture: clause allowing repossession of all goods if onegood not paid for.

REMEDIES:

Refuse to enforceStrike through offending clauseLimit force of clause


18/21

Lack of Capacity

DOCTRINE: If an incompetent enters a contract, that contract is voidable at her option. (That party maydisaffirm contract.)

TEST: A party is incompetent if she is either 1) an infant (minor) OR 2) mentally incompetent.

EXCEPTIONS FOR MINORS:1. Necessities: infant must pay a reasonable price for such things as are necessary to the support,use or comfort of the minor, as food, raiment, lodging, medical attendance, and common schooleducation; NOT horses, saddles, bridles, liquors, pistols, powder, whips and fiddles. Price vSanders (1878). If minor cannot be maintained properly without it, considering her situation inlife, social status and financial position. See Bowling v Sperry2. If minor fails to disaffirm contract after reasonable period after reaching majority.3. If the minor lies about her age (fraud), excepted some states life MASS.

Bowling v Sperry: Minor buys car with aunts money and in her presence, disaffirms when turnsout to be a lemon. Presence of guardian not sufficient to overcome incompetence.

TEST FOR MENTAL INCOMPETENCE:

In general, there is a presumption of competence. But...

RSS 15 (1) A person incurs only voidable contractual duties by entering into a transaction if by reason ofmental illness or defect (a) he is unable to understand in a reasonable manner the nature andconsequences of the transaction, OR (b) he is unable to act in a reasonable manner in relation tothe transaction and the other party has reason to know of his condition.

Com. b Where a person has some understanding of a particular transaction which is affected by mentalillness or defect, the controlling consideration is whether the transaction in its result is one which areasonably competent person might have made.

RSS 13 A person has no capacity to incur contractual duties if his property is under guardianship...

EXCEPTIONS FOR MENTAL INCOMPTETENCE:RSS 15 (2) Where the contract is made on fair terms and the other party is without knowledge of the

mental illness or defect, the power of avoidance terminates to the extent that the contract has beenso performed in whole or in part or the circumstances have so changed that avoidance would beunjust. In such a case a court may grant relief as justice requires.

Heights Realty v Phillips: History of incompetence overcomes presumption of competence whenold woman fails to accept offer on home.

POLICY BALANCE:1) justifiable expectations and the security of transactions2) the protection of persons unable to protect themselves against imposition.


19/21

Illegality

DOCTRINE: If a contracts subject matter is illegal or against public policy, the contract is void.

TEST: Courts wont enforce when EITHER1. A legislative statute bars promised activity OR

2. A special public interest would be harmedAND FOLLOWING FACTORS WEIGH AGAINST ENFORCEMENT

RSS178 1. Strength or importance of the policy at stake2. Likelihood that enforcement would harm3. Seriousness & intentionality of misconduct4. Directness of connection between misconduct and illegality/wrongful result

EXCEPTIONS WHEN RESTITUTION POSSIBLE:1. Denial of restitution causes disproportionate forfeiture2. Excusable ignorance or minor statute3. Injured party not in pari delicto4. No serious misconduct & party withdraws before illegal purpose achieved.5. Special statutes protect the party that looses.

CASES:Sinnar v LeRoy: Payoff to bribe official into buying previously-denied liquor liscence.

EXAMPLE: Covenants not to Compete:

Test: 1) Reasonable scope & duration (covers only main customer area; limited duration)AND2) Protects a legitimate interest (trade secrets; customer lists; confidential information)

Note: Courts will usually refuse to recognize skills acquired at company duringemployment as a legitimate interest.

Case: Data Management v Greene: General I.T. employee signed clause not to compete for 5years in all of Alaska

EXAMPLE: Cohabitation Agreements:

Test: Balance 1) the interest in enforcing bargain against 2) the policy against enforcement.

Case: Watts v Watts: Wife sues on grounds of unjust enrichment after 12 yearsmisrepresentation as married.

REMEDIES:1) Strike offending clause2) Blue pencil offending words in clause3) Reform the covenant to make it enforceable


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Remedies

ELEVEN STEP PROCESS FOR DETERMINING REMEDIES:1) Do the parties simply want to modify an incorrectly written agreement to reflect their actual

agreement? Reformation.2) Does the plaintiff want to return the parties to the position they were in before the contract was

formed, as though the contract never existed? Rescission & Restitution3) Would money damages inadequately compensate the plaintiff?

Specific Performance

4) Is there a liquidated damages clause? Is it valid? Liquidated damages controls5) Is it possible to put the plaintiff in the position he would have been in had there been no breach?

Expectation Damages6) Is it possible to give the plaintiff the money equivalent of the benefits he conferred on the

defendant? Restitution Damages7) Is it possible to compensate the plaintiff for his detriment in changing position in response to

the promise? Reliance Damages8) Is plaintiff entitled to damages that are due to unique circumstances of the plaintiff?

Consequential Damages9) Did the plaintiff suffer from malicious conduct or a malicious tort?

Punitive Damages

10) Was there breach but no harm? Nominal Damages11) Should the plaintiffs damages be reduced due to a failure to mitigate?


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Consequential & Liquidated Damages

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