Defenses

Question 1

Restatement § 15:

A person incurs voidable contractual duties by entering a transaction if by reason of mental illness or defect:

Answer 1

• unable to understand the nature and consequences of the transaction (cognitive test), OR
• unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

Question 2

Orterelere v. Teachers’ Retirement Board

altered retirement plan, dies early

Answer 2

F: Retired teacher alters her retirement plan payments so it pays out more while she is alive, leaving less for her husband after her death. Dies unexpectedly and husband claims that she was mentally incompetent when she made the decision

I: Can contract be avoidable when it seems person making contract at the time appears competent but in actuality is not?

H: Court accepts the husband’s argument even though the change in decision by P seems reasonably calculated.

R: Second type of mental incompetence cited above.

Question 3

Two kinds of mental incompetence with different rules:

Answer 3

(1) Total lack of understanding

Where a person is completely unable to understand the contract, it is voidable even if the terms are completely fair, and even where the other party had no reason to know of mental impairment

(2) Understands, but unable to act reasonably

Transactions less likely to be set aside. Will be set aside only if the person opposing it shows:

• the other person knew of the mental condition, and
• the transaction is not one which a reasonably competent person might have made

A third rule states that rescission will be allowed if status quo can be restored with merely a showing of mental incompetence

Question 4

Infancy

Rule: Minors may enter into contracts, but

Answer 4

Rule: Minors may enter into contracts, but they do not have the capacity to bind themselves absolutely, so minors can void contractual obligations.

• Courts are essentially discouraging adults from contracting with (and potentially taking advantage of) infants
• Essentially saying, you do this at your own risk
• Courts try giving a little protection to seller by have a right to restitution, i.e. if there is something left to return by minor

Question 5

Exception to the Infancy Rule

Answer 5

Exception: If a minor contracts for a necessary, the contract is not voidable.

• Necessary is something the minor actually needs and is obligated to provide for themselves.
• So if parents are willing and able to provide shelter, for instance (Webster Street), then the rent on the apartment is not a necessary and the contract can be voided

Question 6

Infancy

General Rule: When minor turns the age of majority,

Answer 6

General Rule: When minor turns the age of majority, they can either disaffirm or affirm the contract.

• Not disaffirming within a reasonable time=affirmation.
• But living in apartment another 7 days after turning 17 is still within the reasonable time to disaffirm.

Question 7

Infancy

Minors can disaffirm their own consent AND that of their parents

Answer 7

General Rule: Minors can disaffirm their own consent AND that of their parents

BUT statutes can abrogate this right (like with Brooke Shields and her filthy whore of a mother)

Question 8

If a minor willingly misrepresents age, court may:

Answer 8

• Require greater restitution
• Allow party who was lied to to bring a tort action of misrepresentation against infant who is still allowed to disaffirm; or
• A contract avoidance on grounds of fraud

Question 9

Brooke Shields v. Gross

Answer 9

Celebrity seeks to void contract made by her mom over pictures

F: P’s mother executed two contracts on behalf of P to allow D to use photos of P as D saw fit.

I: What are legal effects of parental consent when infant becomes of legal age?

R: Under common law, infant has right to disaffirm written consent, however, legislature may abrogate that right by creating a statute that expressly permits a certain class of agreements to be made by infants, in this case a statute allowing a parent consent can stand in to make a contract enforceable.

     H: Since consent in this case complied with legislative statute, is it valid and cannot be disaffirmed.

     Dissent: Purpose of statute is to protect interest of child, what if parent consenting is not acting on the best interest of child? Since child is not of legal age, aren’t they the one’s able to express what is in their best interest? Shouldn’t bind them when they expressly want to disaffirm a contract once they are of legal age. Overriding interest of society in protecting children outweighs the interest of merchants who attempt to contract with children.

Question 10

Obtaining Assent by Improper Means

A misrepresentation is

Answer 10

A misrepresentation is an assertion not in accord with the facts

Question 11

Fraudulent misrepresentation

Answer 11

Assertion made that is known or believed to not be in accord with the facts.

Question 12

Fraud is:

2. 3.

Answer 12

Fraud is:

(1) Assertion made knowing it is not in accord with facts, OR
(2) Absence of confidence in the assertion, OR
(3) Making an assertion without the claimed basis of personal knowledge.

Question 13

Material Misrepresentation

Answer 13

Assertion made not in accord with facts that is:

(1) Likely to induce a reasonable person to go ahead with the contract, OR
(2) Likely to induce that person to go ahead with the contract (based on the knowledge of the representing party).

If these elements are met, the induced party has the right to void the contract.

Misrepresentation does not have to be fraudulent (speaker intended to mislead/knew it was false) to be actionable; it just has to be material

Question 14

Opinions can’t be misrepresentations, because they are not representations of fact

Exception if:

Answer 14

1. Not the real opinion of that party.
2. There is a fiduciary relationship (such that the opinion will be relied on as fact)
3. Superior knowledge of one party (inability of the other to know truth)
4. Scheme/trick
5. Half-Truth (choosing to disclose some means you have a duty to disclose all)

Question 15

§ 168(1): Assertion is one of opinion if

Answer 15

§ 168(1): Assertion is one of opinion if it expresses only a belief, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters.

• Statements of value are typically opinion because value is usually subjective (based on personal circumstances)
• However, a statement of value may be a fact if there is a defined market value (like stock price, or Blue Book value)

Question 16

Byers v. Federal Land Co.,

purchaser of land in WY paid more than land was worth

Answer 16

F: P, residents of NE, purchase land in WY from D in WY. Defendant did not actually own land but was working as a third party, D quoted price of land to be $35 when in actuality it was worth $15/acre unbeknownst to both parties.

I: Can P sue D for misrepresentation for having P believe it was the actual owner and in possession of the land and that the value of the land was $35/acre when it was actually $15?

H: not fraudulent misrepresentation, it was an honest mistake and not intentional in regards to $, brokers had no special knowledge regarding land

R: under this court – only dishonest opinions are fraudulent misrepresentations

Question 17

**Vokes v. Arthur Murray, Inc. **

bad dancer induced to purchase more dance lessons

Answer 17

F: P, a poor dancer, was told by instructor of dance under D that she was improving and would become a great dancer. P was induced to purchase an insane amount of dance lessons. P realizes she sucks and wants to get out of contracted dance lessons.

I: Were D’s actions just mere “sales puffing” or did they constitute fraudulent misrepresentation?

R: Statements of dance potential is an opinion of D.

Usually, opinions are not actionable except in cases where:

• there is a fiduciary relationship between parties or
• where there has been some artifice or trick employed by representor or
• where parties do not in general deal @ “arms length” or
• where the representee does not have equal opportunity to become apprised of the truth or falsity of the fact represented

H: voidable – a statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if parties were dealing on equal terms

Question 18

Duress is when

Answer 18

Duress is when one by the unlawful act of another is induced to make a contract or perform some act under circumstances that deprive him of the exercise of free will.

• Physical duress is a classic contract defenseà one’s consent to contract is not binding if it was obtained by the use or threatened use of force.
• But this extends beyond physical duress–> economic duress

Question 19

Elements of Duress

Answer 19

1. Wrongful threat (Claim that party will breach/not perform if you don’t…)
2. Deprives of free will
3. Induces giving something up
4. No alternative (reasonable) way to get goods within reasonable time
5. Normal remedies ($$$) not adequate to compensate

Question 20

Halpert v. Rosenthal

Defect in the house; termites.

Answer 20

Previously asked about the presence of termites. Defendant had asked the agent if there was a termite problem; plaintiff said there was no termite problem. There was a termite problem. Innocent misrepresentation.

HOLD: Misrepresentation can be basis for contract rescission, if it is material and the other party relies on it to its detriment. Irrelevant that it was innocent/not innocent; justice demands that misrepresenter be responsible.

The misrepresentation becomes material when it is likely to affect the conduct of a reasonable man.

The misrepresentation becomes fraudulent when a party makes a representation that is untrue to induce a party to agree to a contract.

If a party’s manifestation of assent is induced by a fraudulent or material misrepresentation, the contract is voidable.

Question 21

Example of § 168 Assertion

A is trying to get B to buy real property, tells him the sewage system is good. A knows that the sewage system sucks, B interprets A’s statement of opinion as not incompatible with his opinion and is induced by this assertion to make a contract.

Answer 21

B’s interpretation is reasonable, A made a fraudulent misrepresentation, and there is no K.

A, who is knowledgeable in financial matters, seeking to induce B, who is also knowledgeable in such matters, to make a contract to buy A’s shares of stock in C Corporation, tells B that within five years the shares will pay dividends that will amount to the purchase price of the stock. Neither A nor B has information about the finances of C, which is, in fact, hopelessly insolvent. B interprets A’s statement of opinion as an assertion that A knows facts sufficient to justify him in forming that opinion and is induced by this assertion to make the contract. B’s interpretation is reasonable, the assertion is a fraudulent misrepresentation, and the contract is voidable by B.

Question 22

Rule: If party is going to claim economic duress, it needed to have

Answer 22

Rule: If party is going to claim economic duress, it needed to have put up a fight against contract modification

• other party must be put on notice that there is an issue with the modification.

Question 23

Test for Duress

Answer 23

1. Threat made or pressure exerted that
2. Deprives P of free will such that
3. P acts contrary to his inclination and best interest and
4. Threat is wrongful (illegal, immoral, or exerted in bad faith)
5. If duress exists, P is relieved of duty to perform.

Question 24

Remedy for contract voided on claim of duress is _______.

Answer 24

Restitution

Question 25

Austin Instrument v. Loral

Navy defense contract – want of exclusive rights, or else.

Answer 25

F: D was a gov’t defense contractor who subbed to P. P, after delivering partially on very tight timeframe contract A, threatened to halt delivery unless D gave it contract B, for which it was not low bidder. D, unable to find a suitable substitute on short notice that could complete contract in time, agreed to P’s stipulations. Post completion, D stopped paying and they each sued.

I: did the threat not to deliver constitute economic duress?

H: yes, a “classic case”. D was time sensitive. Subject matter was defense instruments, exacting standards. No alternative suppliers in a timely/reliable manner. D was right to wait to sue because that was the first safe time. No adequate alternatives, no legal remedy alternatives without fear of tarnishing representation in eyes of gov’t.

R: a contract is voidable on the ground of duress when a threat deprives a party of free will.

NOTE THAT THIS RESULT COULD HAVE BEEN DETERMINED BY §2-209 §89 APPROACH OF GOOD-FAITH AND LEGITIMATE COMMERCIAL REASON.

Question 26

Hackley v. Headley

log delivery, settle for less due to economic hardship

Answer 26

F: D owed P $4260, offered $4000 with a stipulation that it was final payment. P agreed and now seeks to void contract claiming D knew he was in an economic pinch and needed the money badly.

I: Does this constitute economic duress?

H: no, nothing illegal going on, all D did was tell P all he could give him at the moment even though he knew P was having financial problems. It’s P’s own fault that he has economic problems that put him in this position

Question 27

Defenses to Contracts

Answer 27

(1) Incapacity to Contract

1. Incompetence
2. Infancy

(2) Obtaining Assent by Improper Means

1. Misrepresentation
2. Duress
3. Unconscionability

(3) Failure of a Basic Assumption

1. Mistake of Fact
   
   • Mutual mistake of Fact
   • Unilateral Mistake
2. Impossibility and impracticability

Question 28

Unconscionability

Rule:

Answer 28

When party with superior bargaining power imposes terms on another party that have no reasonable commercial justification, and the terms are so one sided that it is unlikely the other party willingly consented to those terms.

**Generally, it is an absence of meaningful choice on the part of one of the parties together with contract terms that are unreasonably favorable to the other party. **

Question 29

Unconscionability

Factors to Consider

Answer 29

1. Denial of Remedies
2. Disproportionate Penalties
3. One-Sided Terms that are Hidden/Non-Discernable (taking into account education and sophistication of disadvantaged party)
4. Reasonable Alternatives (simply not entering the agreement is not a reasonable alternative…must be alternative way to get the good/service desired in contract)

Question 30

2 Kinds of Unconscionability

Answer 30

1. Procedural: Problem in formation of contract
2. Substantive: Problem in content of contract

Question 31

§2-302: Unconscionable contract or clause

if court finds contract is unconscionable, it may:

Answer 31

1. Refuse to enforce the contract;
2. Enforce the remainder of the contract w/o the unconscionable clause;
3. Limit the application of the unconscionable clause.

Question 32

Unconscionability

Factors to consider:

Answer 32

• Gross inequality of bargaining power
• Terms unreasonably favoring the stronger party
• No meaningful choice for the weaker party
• No real alternative
• So one-sided at the time the contract was made
• Highly technical language / Disparity of sophistication
• Does the case also raise/allude to issues of duress or fraud
• Did party know what they were getting into – “unfair surprise”
• Fine print, complex convoluted language
• Lack of opportunity to study contract
• Lack of understanding of particular party
• Language difficulties

Question 33

Williams v. Walker Furniture

Purchase of furniture on installment plan

Answer 33

F: P bought a variety of things from D over time, all on credit that was cross-collateralized. Payment scheme was such that each payment was prorated to all outstanding goods; result was that no title passes to P until entire account is flat. P missed a payment, D went for replevy.

H: repossesion provision on consumer goods purchase agreement is unconscionable, and a court may refuse to enforce a contract that was unconscionable at the time it was made.

Note: court maneuvered around the recent adoption of § 2-302, which it enforced, and which was adopted after the acts occurred. Court took the opinion that the code merely codified CL.

R1: “when a party of little bargaining power, and hence of little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms.” Unequal bargaining power – procedural unconscionability

R2: “In determining reasonableness of 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 unreasonably favorable to one party – substantive unconscionability

Question 34

Carnival Cruise v. Shute

choice of venue clause on back of ticket

Answer 34

F: P (Shute) slipped while on a cruise on D. P lived/bought ticket in WA, injury was in int’l waters off of Mexico. Ticket had clause of forum-selection requiring all suits to be brought in Florida.

I: Is clause on venue selection on back of ticket enforceable?

H - not unconscionable even if P didn’t know until after buying the ticket. There are many reasonable business interests for requiring litigation in D’s home state. Some of these may lower costs, resulting potentially in lower prices for other Ps.

R: this clause is not the sort of thing that one bargains for, and therefore this is governed by ordinary commercial considerations. The clause is reasonable and was made in good faith. Clause is enforceable because it does not preclude recovery.

Dissent: P does not see conditions of contract until after purchase of tickets

Question 35

Three Types of Contract Defenses

Answer 35

Impotence and Infancy - Circumstances where the promisor’s capacity to assent was deficient.

Misrepresentation - One person obtained the contract using improper means

• Misrepresentation
• Duress
• Undue influence
• Unconscionability

Failure of a Basic Assumption - One or both parties assumed something to be true which was incorrect

• Mistake
• Impossibility
• Frustration

Question 36

Gatton v. T-Mobile USA

Cell phone company had an arbitration clause;

Answer 36

P tried to say that arbitration clause was unconscionable.

HOLD: Two elements to unconscionability: procedural element and substantive element.

Procedural: existence of oppression or surprise

Oppression arises from inequality of bargaining power that results in no real negotiation and absence of meaningful choice. (no oppression, terms were on take/leave basis, didn’t have to get phone from T-Mobile)
Surprise is the extent to which the supposedly agreed-upon terms of the bargain are hidden in the form produced by the party seeking to enforce terms. (No surprise, full disclosure of lockout, customer didn’t have to get phone from this company, customers need to read contracts)

Substantive: overly harsh or one-sided results

Arbitration + class action clause were not unconscionable. K stands.

Question 37

Unconscionability is

Answer 37

the gross inequity of bargaining power + terms unreasonably favorable to the opposing party.

Question 38

**Taylor v. Caldwell **

place of rental burned down before use

Answer 38

F: P rented D’s music hall for concerts but music hall burned down before use. P claiming preparation for concert damages. D argues by expressed terms relieves them of any liability and trade custom designates that in the event that place was destroyed or damage, contracts must be rescinded.

I: Whether, because place burned down before use by P, the loss which P sustains needs to fall upon D.

H: the parties contracted on the continued existence of the particular place, because the theater burned down, the impossibility of performance shall excuse the performance

R: implied condition in contract for existence of place for contract results in an excuse for performance however exceptions include N on party in causing fire, foreseeability, or expressed terms to the contrary. Implied condition can be contracted around. Look for evidence for assumption of risk. if party’s contract becomes impracticable and not fault of party and not assumed by parties, then party is no longer under any duty to perform unless contracted around.

Question 39

4 requirements for successful impossibility defense: §261

Answer 39

1. Impracticable performance
2. Nonoccurrence of event must be a basic assumption by both parties on which contract is made
3. Impracticability must not be a result of a fault of one of the parties
4. The parties must not have assumed a risk, i.e. language or circumstances do not indicate the contrary

Question 40

Unconscionaility

Bates’ Rule

Answer 40

Terms imposed on the other party without reasonable commercial justification, which are so one-sided that it’s unlikely the other party voluntarily agreed to it. Factors

• Denial of Rights (S)
• Denial of Remedies (S)
• Hidden terms: (1) Strategically located (2) Legalese (3)Context of sophistication of the parties
• Disparate Penalties: One party has severe penalties, virtually none available for the other

Question 41

Exculpatory agreement

Answer 41

• gets rid of a party’s liability
• as a general rule courts find exculpatory agreements to be unconscionable