Chapter Four. Policing the Bargain Section Competency to Contract Infancy



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Contracts II

Professor Collins

Spring 2000
Chapter Four. Policing the Bargain

Section 1. Competency to Contract


  1. Infancy

  • K entered into when party less than the majority age is voidable on the part of the minor, can disaffirm the contract at any time or can wait to majority to ratify the contract.

  • Halbman v. Lemke – kid trashes car and wants to return to owner, can return trashed, some states owner would have tort action.

  • necessaries (food, clothing, shelter) are not disaffirmable, necessity depends on social position and situaiotion in life of parents and kids. (Webster Street v. Sheridan)




  1. Mental Incompetent

  1. capacity - the contract of a mental incompetent is voidable at the election of the incompetent. Particularly appropriate when party seeking to void is in position to return to status quo – majority position.

  • Faber v. Sweet Style – guy makes rash business decisisons that he otherwise wouldn’t have, but all the stuff looked like normal business objectively. NO finding that P didn’t understand terms of contract.

  1. compulsion – recognized in second part of RST. If acting under compulsion also have a void contract, not crazy, just really put out.




  • RST §15. Mental Illness or Defect.

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect

(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (capacity)

(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition (compulsion). (Ortelere v. Teachers Retirement – mattered that board knew she was a little mental.) (Farnum v. Silvano lawnboy buys house during lucid interval) New recognition of compulsion but tempered by knowledge.

(2) Where the contract is made on fair terms and the other party is wihtout knowledge of the mental illness

or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so

performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.


Green – Proof of Mental Incompetency and the Unexpressed Major Premise

  • Unexpressed premise is fairness. Transaction should be tested by own terms. Just look to see if something fair or not.




  1. Duress / Undue Influence




  1. duress – need a threat to do something that is illegal. If you can legally do something and you threaten to do so, not duress.




  1. constructive fraud – requires a special relationship between parties such as fiduciary, or another relation of trust and confidence. Employer/employee relation not applicable.

  • Von Hake v. Thomas – if party substitutes his own will for that of another and lawyer fraudulently acts in bad faith then that contract is rescindable.




  1. undue influence – need overpersuasion, inequality in power (lessened capacity to free contract plus excessive strength by the dominant party) but in U.S. hard to draw line between oppressive and persuasion. Undue influence not usually found in commercial contracts.

  • Odorizzi v. Bloomfield School District – found out he may have engaged in homosexual activity and board says resign or we out you. No duress b/c school board didn’t threatent to do something illegal. P has docs testify to get resignation rescinded, clear case of overpersuasion and undue influence.

Overpersuasion

  • discussion of transaction at unusual or inappropriate time

  • consumation of transaction in unusual place

  • insistent demand that business be finished at once

  • extreme emphasis on untoward consequences of delay

  • use of multiple persuaders by dominant side against single servient party

  • absence of 3rd party advisers to servient party

  • statements that there is no time to consult financial advisers or attorneys


Section 2. Revisions of Contractual Duty


  1. Duress




  1. There must be a threat not to comply with existing contract and the non-breaching party has no place else to go. Threatened party must show that it couldn’t have obtained what was contracted for in some other reasonable way.

  • Austin Instrument v. Loral Corp – Navy contract to supply 23 parts. Needs total of 40, D refuses the 23 if doesn’t get the other 17. P nowhere else to go and must order all and pay more.




  1. There is no duress when there is an adequate legal remedy such as suing for specific performance.

  • Smithwick v. Whitley – P paid D extra money for land when D demanded for. Court doesn’t revise payment for duress b/c P could have sued in equity.




  1. Moves into unconscionability when “duress tested not by nature of threats but rather by state of mind induced thereby in the victim” Purley unconscionable and malicious motives are unlawfull with law of duress.

  • Wolf v. Marlton – P to buy house and land from D, P decides doesn’t want house and wants money back, D refuses and P threatens to sell to undesirables. Court says this constitutes duress and won’t enforce contractual recission.

** Collins says courts take narrow view of duress b/c they want certainty of transactions and contracts.




  1. Pre-Existing Duty Rule

Pre-Existing Duty Rule precludes changing contract one sided without some new consideration. Can’t “change” contract to do something you already have a duty to do.



Alaska Packers – if honest dispute as to meaning of K and as result one side modifies w/o making new

consideration, the change is okay w/o the consideration. If no dispute then no consideration for K modification.





  • RST §89. Modification of Executory Contract.

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or

(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.



  • recognizes that in unequitable situations, makes sense to discharge pre-existing duty rule and allow for contract modification.




  1. Will enforce changes to contracts where it is fair and equitable and modifaction is made in response to unexpected difficulties.

  • Brian Construction v. Brighenti – D is to do lots of excavation based on site findings of P. Turns out lots more work to do same excavation, allowed to have D get more money from P. Codified in RST 89.

  • Schwartzreich v. Bauman-Basch – example of getting around pre-existing duty rule. Tear up old employment contract and then do new one for more money, court said each party was giving up rights but in end employee gets more money for same job. Collins no like.

  • Denney v. Reppert – bank robbery and cop can’t get reward money but cop out of jurisdiction can get reward money, but only if they know about it.




  1. Old view that pre-existing duty to third parties was also part of pre-existing duty rule. Modern view is that will enforce contracts even where there is pre-existing duty to third party.

  • McDevitt v. Stokes – Jockey promised $1,000 if he wins. Jockey can’t get money b/c already had pre-existing duty to owner to win. Modern view opposite result.

** As soon as a party has an excuse not to do something, and then promises to do it at the bequest of a third party, no longer pre-existing duty rule problem.




  1. Modification / Recission / Waiver


Corbin – Can’t waive some material part of the contract/exchange. Can’t waive away consideration to the point where you end up with illusory contract. Can waive procedural aspects of contract. Estoppel has different impact and more wide impact than waiver, waiver is often procedural.


  • UCC §2-209 Modification, Recission, and Waiver

  1. An agreement modifying a contract within this Article needs no consideration to be binding.

  2. A signed agreement which excludes modification or recission except by a signed writing can’t be otherwise modified or rescinded, but except as between merchants wuch a requirement on a form supplied by the merchant must be separately signed by the other party.

  3. The requirements of the statute of frauds section of this Article must be satisfied if the contract as modified is within its provisions.

  4. Although an attempt at modification or recission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. An attempt at modification may constitute a waiver, court in Universal Builders found a waiver.

  5. A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived unless the retraction would be unjust in view of a material change of position in reliance on the waiver.



  • Universal Builders v. Moon Motor Lodge – P and D contract to build motel. K contains modification clause that requires any changes to be in writing and signed. Owner orally ordered additional work. As is the clause is valid under UCC 2-209(2), would not be at common law. However, owner said go on, there was reliance, and thus the written condition was waived under 2-209(4).

  • Hackley v. Headley – P cut logs for D. P really needs $ so settled for less money earlier. P claims duress. Court says D didn’t create duress. Did not let question of duress become factual question = more litigation. Capps v. Georgia makes duress factual question.

  • Marton Remodeling v. Jensen – D sends check and says it is for full payment services rendered. P demands balance, files mechanics lien, writes “not full payment” and cashes check. Can’t take benefit without imposition of condition…condition stands, not waived. Opposite result under 1-207. Most jurisdictions concluded that 1-207 didn’t change common law rule of Marton even though it explicitly does.

  • Kilander v. Blickle – if party gives what they feel they owe on a contract and it is accepted then it is consideration. Minority position is they will void it for lack of consideration. Doctrine is there to encourage settlement.

  • If sub’s workers go on strike, the sub is not excused by the fact that his workers on strike in a K b/t sub and owner. Say sub doesn’t perform b/c general has not paid and then owner goes. Father promises son-in-law will give money when married. Most courts say pre-existing duty. Cardozo said now, might be married to get the cash.




  • UCC §1-207 Performance or Acceptance Under Reservation of Rights

(1) A party who, with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice”, “under protest” or the like are sufficient.

(2) Subsection (1) doesn’t apply to an accord and satisfaction.


NOTE

  • Accord and Satisfaction: An executed unilateral contract. If Petterson v. Pattberg had accepted the money then would have accord and satisfaction. Would have completed transaction. But Petterson was just offer for accord and satisfaction and the only way to get the whole thing was by performance. One party performs act for the promise of release. There is no promise on the debtor’s side, only on the creditor’s side. Marton was accord and satisfaction case.

  • Executory Accord: There is outstanding money debt and two parties come to understanding and debtor agrees to pay less money of debt 6 months early and creditor agrees to release debtor. Or money debt outstanding and parties agree that debtor will pay creditor with a tractor. At common law wouldn’t enforce executory accord. Common law said if creditor promised the tractor and doesn’t get it, can’t sue for the tractor. Modern doctrine says sue for the tractor. Until time of performance for new obligation, the cause of action on the original action is suspended. Can sue for money or for the tractor. Requires a writing. This happens where in advance parties agree that original cause of action suspended and other performance will be used instead.

  • Substituted Contracts: Debtor pays larger sum earlier or the debtor agrees to hand over property instead of obligation. If court concludes that parties intended to substitute new contract for old one, in eyes of common law there were no problems b/c there were no efforts to suspend a cause of action, old cause of action is gone. New right and old right is gone. Common law never had any problem enforceing substitued contract. Need to find intent and that is hard to do. Where parties agree that old contract is rescinded and a new contract in its place (novation)


Section 3. Mistake, Misrepresentation, and Nondisclosure


  1. Mistake (split into unilateral / bilateral)




  • RST §152. When Mistake of Both Parties Makes a Contract Voidable

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule in 154.

(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.




  1. Mutual mistake may turn into constructive fraud. Majority position is that of RST, when both parties make a mistake, a contract is voidable at the bequest of the party getting screwed.

  • Jackson v. Seymour – Sister sells brother real estate for a lot less than she should have. Neither knew. Case becomes one of constructive fraud which requires (1) confidential and close relationship (2) gross indadequacy of consideration (3) reliance on the confidential relationship, and (4) an offer to restore the purchase price in return for the deed. Case jives well with RST 152(1).

  • Smith v. Zimbalist – P suing to recover more money from D. D had purchased what he thought was Stradivarius from P, turned out not true. Under RST 152 would be basis of mistake b/c “contract was made as to a basic assumption on which contract was made.” Would also be void under Sherwood approach. UCC-213 also comes in and describes the descriptions of the violins as express warranty. Suppose Zimbalist sues Smith for breach. Could rescind and get back his money, could sue for expectation interest, was promised a Stradavarius and might be entitled to difference b/t what he got and value of Strad…much different result than mutual mistake would allow.




  1. Another approach for dealing with mutual mistake (view in Michigan prior to 1982 at which point MI SC adopted RST 152) was a differentiation between difference or misapprehension as to substance of thing bargained for = no contract, but if difference is in duality or accident, even though mistake actuating motive, contract is binding.

  • Sherwood v. Walker – case where P to buy cow. On delivery day D won’t deliver b/c cow is knocked up. Court holds that both thought the cow was barren and court rules that barren cow is different than a breeding cow and therefore the difference is in substance, were it just difference in value, no relief.




  • RST §153. When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time of a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in §154 and

(a) the effect of the mistake is such that the enforcement of the contract would be unconscionable, or



(b) the other party had reason to know of the mistake or his fault caused the mistake.
Kull – courts less likely to knock down a contract that has already been executed. Once it happens, less likely to rescind / find a mistake.


  1. With unilateral mistake, relief only granted to extent that reliance interest was compensated. Runs counter to basic notions of contract formation so there is controversy. Critics say just go to subjective view of contract formation. Unilateral mistake happens a lot with tort cases, start with broken bone, signs that all claims are settled, turns into chronic, court lets them out b/c unilateral mistake (minority position).

  • Elsinore Union Elementary School v. Kastoroff – D contractor makes clerical error in bid and promptly rescinds contract. Court grants relief to contractor, court finds no neglect on part of contractor.




  1. Move away from mutual mistake, particularly in land use sales. Concern is that where parties don’t know about land use restriction, make sale, mutual mistake, would upset a lot of titles. Courts instead favor common law warranty

  • Hinson v. Jefferson – there is restrictive covenant on use of property when sold by seller, can’t be used for residential purposes b/c can’t put in septic tank. Court of Appeals grants recision and restitution based on mutual mistake based on cow case. Supreme Court says relief appropriate, but rather on basis of common law warranty fit for a particular purpose.

  • Cook v. Salishan Properties – Property sold by developer unsuitable for building b/c of erosion, P wants diminished value. Court doesn’t apply Hinson. Developer free from fault b/c didn’t know about problem and not negligent for failing to discover. Difference here also that was seeking expectation damages, not recission.

  • Bottom line, today, houses have implied warranty of workmanlike quality.




  • UCC §2-314 Warranty of Merchantability: Essentially, when one sells goods they should meet the requirements that such goods normally meet and perform. They are of fair and average quality of the description, pass w/o objection under contract provisions, fit for ordinary purposes for which such goods are used.

  • UCC §2-315 Implied Warranty: Fitness for Particular Purpose: Where seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to selet or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

  • Express Warranty: Consist of statement that seller warrants certain goods. If I say it’s a Stradivarius it damn well better be a Stradivarius.

2. Nondisclosure / Misrepsentation




  • RST §161 When Non-Disclosure is Equivalent to an Assertion (see supplement pg 260 for more)

A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:

  1. where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material

  2. where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

  3. where he knows that disclosure of the fact 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. where the other person is entitled to know the fact b/c of a relation of trust and confidence b/t them.




  1. When innocent misrepresentation scope of liability has varied. Generally innocent misrepresentation leads to discussion of warranty, and that is how liability determined.

  • Johnson v. Healy – D says made house of best materials, eventually the house settled and the foundation was screwy. Once you get to warranty then get to expectation damages (100% perfect hand) As soon as you have warranty there is right to recission and restitution of reliance damages or the alternative is expectation damages. ??? Recovery is cost of completion or difference in value.




  1. Fine line between non-disclosure, misrepresentation, outright lying. Modern view is that have to make a disclosure when you have info and you know that it will affect the deal.

  • Laidlaw v. Organ – guy goes out, learns that British blockade no longer in effect, goes back to New Orleans and buys tobacco and tobacco price shoots up. D sued for misrepresentation, had been asked if D had any info that would change their mind as to sale, D shrugged. Question is whether or not to protect someone who has gone out and gathered information on their own. Later cases suggest that will restrict this holding to circumstances where all have equal access to info.

  • Cushman v. Kirby – P asks how is the water. D says add a little clorox, its fine. D husband says nothing. Really have sulphur water. D wife makes false representation, and D husband has duty to speak under the circumstances. Have duty to disclose b/c D had info and knows that it would affect the deal. Modern view


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