COLLINS: CONTRACTS II
I.COMPETENCY TO CONTRACT
A.People who are incompetent have the option to void a contract where the other pty does not
B.Minors
1.Until psn reaches majority, any K she enters is voidable at her option
2.Must disaffirm promptly after reaching majority
3.Can always disaffirm executory K the other pty is trying to enforce (i.e., K not performed yet, minor is D)
4.Economic Adjustment (Damages) After Disaffirmance
a.If minor is plaintiff
1)Minor must return to other pty only what he still has now from the contract bargain, incl any proceeds from the K, if they exist, and gets back reimbursement for performance to date
Halbman: P minor bought used car from D, then wanted out after car broke, before all purchase $ was paid --> P gets rescission and full reimbursement of what he's paid, and must return the car as is, even tho' it has lower value than car as he received it: P must give back only what remains of his benefit
2)Most Cts: P minor must return any remaining consideration he received, + any value he received and dissipated --> no unjust enrichment
b.If minor is defendant
1)P may sue minor bcse he does not go through w/contract:
2)Non-minor P won't recover expectation dgs (profits she w/h/made), or any other contract dgs.
3)P gets limited right of restitution: rt to require D minor to return goods or other value (eg. if D exchanged goods for other stuff) if D still has them.
i.If goods since disposed/destroyed, D has no obligation to pay reasonable value
5.If Minor Falsely Represents Her Age
a.Most cts won't make a distinction, & P will be allowed to avoid the K Premise behind allowing disaffirmance is that minors are "incompetent" -- misrepresentation is a manifestation of such incompetence, and minor still makes a bad K
b.Some cts say minor waived specific rights
1)Minor c/be req'd to pay reas value of goods, even if they're gone
2)P may be allowed to sue in tort for misrep, although minor still gets to disaffirm
6.Necessities
a.If psn supplies "necessaries" to a minor, she may recover in quasi-contract for the reasonable value of goods -- eg. food, clothing, shelter -- minor not liable for necessities bought on another's credit
b.Webster Street Partnership: minors disaffirmed lease --> not liable for accrued rent/expenses bcse apt was not a "necessity": minors had homes, & c/h/b living w/parents --> minors got resitution of rent paid
C.Mental Incompetents
1.Includes: insane, mentally ill, senile, retarded, drunk
2.Standard: psn lacks capacity to contract if
a.He is unable to understand in a reasonable manner the nature and consequences of the transaction
1)Modern Take: any disorder but-for which K w/n/h/b made
b.He is unable to act in a reasonable manner in relation to the transaction and the other pty has reason to know of the condition
1)Faber: P made K w/D to buy land to build houses, rescinded after taking many steps toward development --> even tho' P understood, acted under compulsion --> rescission allowed even tho' D didn't know of condition
2)Ortelere: P's husband gets to reverse P's former decision to get lower monthly retirement benefits if he can show that P was "psychotic" @ time of election -- D knew of P's mental illness
Dissent: was P's decision really irrational?
3)Green (p. 562): s/look at deal to see if it's irrational -- can't just consider pty's state, but also relation btwn mental state & K
c.Rest §15
1)If failure of cognitive understanding, K can be avoided in any case
2)If compulsion to act, other pty must know of the compulsion for compulsive pty to avoid the K
D.Undue Influence: may apply where duress does not -- Odorizzi: P forced to resign from teaching job under threat of exposure (homosexuality) by superintendant --> threat not illegal, but:
weaker pty overcome by dominant pty
1.Problem: society values persuasion in sales, pushing goods
II.REVISIONS OF DUTY (Discharge of Duty/Cancelling the K)
A.Duress
1.Unlawful action must constitute the duress: pty must do something she doesn't have contractual rt to do, overcoming free will of other pty -- pty under duress gets restitution
a.Wh will was overcome is judged by subjective standard -- wh psn of "ordinary firmness" w/h/succumbed has evidentiary value only
b.Psn claiming duress must show she was unfairly coerced into entering the K or modifying it -- incl. showing that there was no other alternative (legal remedy not adequate)
c.Taking advantage of another's bad financial situation by witholding perf ≠ duress, where psn taking advantage did not create the bad situation Hackley v. Headley
3.Economic Duress: if pty threatens to withold needed goods or svcs and victim can't find another source & no adequate legal remedy (threatened pty must have no alternative)
a.Duress of goods: if pty has your goods & refuses to return them w/o add'l benefit -- won't comply w/agreed upon standards
Austin Instrument Co
4.Minority: allows duress w/o unlawful threat: even if psn has legal/K right -- if unfairness results (forcing to lower price, sell stock in co.)
5.Test of unlawful force: majority -- threat to breach K if it's not modified
Duress found if threatened breach wld result in irreparable injury unavoidable by lawsuit or other means, and threat = breach of good faith and fair dealing.
6.Preexisting Duty Rule/Consideration -- intertwined w/duress
a.Pty can't enforce K modification if she gave no consideration other than preexisting duty to perform (got modification by threatening to withold svcs/goods if demand not granted)
Alaska Packers'
b.Opp View: consideration = giving up right to threaten breach
(Primary duty: perform K; secondary duty: pay dgs if breach)
1)Trad: if some colorable basis for claim --> consideration
2)Modern: if P believes she has a claim --> consideration
c.Destroy 1st K and make new K: violation of preex duty rule? NO: consideration for rescission = giving up right to sue to enforce the K
POLICY: freedom of K
New K requires intervening moment of time when pties intend to be free of any obligation-- can't go directly from one to another w/o it (Schwartzreich says you can -- one-sided modification will be enforced)
d.UCC §2-209(1): abandons preex duty rule -- modifications enforced w/o consideration, but requiresgood faith
e.N/A to 3rd pties: performance of duty already owed to 3rd psn = consideration for another's promise to pay for that perf
eg. P subcontractor agreed to finish job even tho' gen contractor had walked, in reliance on owner's promise to pay --> owner's promise enforced bcse P under no obligation to owner to do work (only to general) see p. 590
f.OUT OF ORDER: if have pre-existing duty to do something, can't collect reward for perf of that duty Denney
B.Unforeseen Circumstances
1.Modification will be enforced w/o consideration if unexpected burden + good faith effort to deal w/the circumstances
a.JUSTIFICATION: psn didn't originally contract for add'l bdn -- want to uphold unobjectionable mods of executory Ks
b.Brian Constr & Dev Co "Extra Rubble"
2.R2d §89: modification of K not fully perf'd by either pty binding if:
a.modification fair considering circs not orig anticipated
b.to extent provided by statute
c.to extent nec in view of material change in position in reliance on the modification
3.Similar Doctrine: R2d §266: pty can walk from K if impracticable to perform and pty didn't know/had no reason to know
4.Drop in real estate mkt -- not ordinary unforeseen circs -- "out there"
C.Waiver and Estoppel: Differences
1.Common Law: pties may always orally modify a K, even if K explicity provides that modifications must be written -- such clause not effective -- can't restrict ability to make new bargain
--based on separate agmt, implied waiver
2.UCC §2-209: no oral mod clause is enforceable, and a subsequent oral modification is not binding valid despite what pties do later
a.Exception: attempt at oral modification may be a waiver --
i.e. if one pty voluntarily gives up rt to insist on written modif.
Eg. if buyer tells seller goods c/arrive later.
b.Such right can be reinstated unless other pty has relied. Once she detrimentally relies on other's promise to discharge part of performance owed/debt --> estoppel
3.Once estopped from asserting something, always estopped Moon Motor Lodge: D owner promised to pay P contractor to fix sub-contractor's work, K contained no oral mod clause --> D must pay, bcse P did work (and D knew it was being done)
5.Can't waive material part of contract, otherwise no consideration
6.Modification is diff -- neither waiver nor estoppel relies upon consid for changing no oral modification clause ?
7.A pty can invalidate a "compromise" adjusting the K by showing that other pty acted unfairly, asserted claims to which he knew he had no right, to get the adjustment. Eg., D agreed to pay a sum less than what he knew he owed --> no compromise. Headley
D.ACCORD AND SATISFACTION
1.Arises in context of valid dispute -- eg. if dispute over price, paying middle price = A&S
2.Executory Accord: agmt by pties that one pty (debtor) will give substitute performance, and other pty (creditor) will accept it instead of existing, owing duty
a.Always enforceable, but previous contractual duty is not discharged upon making of executory accord -- discharge occurs when the new terms are performed
b.Satisfaction: when (debtor) pty renders substitute perf
1)Discharges (debtor) pty's original obligation
2)(Creditor) pty may not sue for dgs he may have incurred by accepting the substitute performance
c.Executory Accord ≠ Substitute Contract (novation): executory accord is a suspension of a cause of action
1)If pties substitute a diff kind of perf --> viewed as substitute K
If lesser amt of $ is substituted --> exec accord
3.If debtor fails to perform accord agmt, creditor has two options
a.Sue for breach of original contract
b.Sue for breach of accord agmt
4.If Creditor breaches accord agmt, by suing for original K perf before accord perf is rendered, debtor has two options
a.Sue for spec perf of accord agmt -- i.e. get order preventing Creditor from suing for orig perf until accord perf is due
b.Render original K perf and sue for dgs for Creditor's breach
5.Cashing a Check as Accord & Satisfaction
a.Situation: if valid dispute btwn pties over amt due by one to the other, and Debtor gives check for less than Creditor believes due, w/wds written on it: "payment in full"
If Creditor cashes the check, is there an implied A&S (thus discharging Debtor from add'l obligation)?
b.Common Law: once valid accord is tendered & check is cashed --> check-casher has discharged the Debtor -- can't claim any add'l perf is due
1)Applies even if Creditor indicates rights reserved on the check, by writing "under protest" or "not full payment"
Marton Remodeling
c.Some Cts & UCC §1-207: Creditor can cash check, w/rights reserved explicitly, and then sue for remaining amt disputed
1)Many cts say §1-207 n/a to check-cashing situation: Creditor discharges Debtor & accepts A&S as w/com law
d.Some cts: for valid accord, must tender more than amt admitted to be due
If Debtor's check is for an amt she has admitted to be due, even if it says "full payment," Creditor may cash it and then sue for the balance Whitaker
e.Other: as long as give what one admits is due = valid accord
f.Remember: must have bona fide dispute over amt owed: if not, acceptance of less $ than is due ≠ A&S --> Creditor may sue for difference
E.MISTAKE
1.Constructive Fraud: fiduciary pties, don't need intent to deceive -- if deal is inequitable, psn w/bad end can avoid the K -- not imptt
a.Jackson: brother bought land from sister at low price, telling her it was worthless, then discovered valuable timber and sold it --> constructive fraud even tho' brother didn't know @ K time, bcse gross inadequacy of consideration & close relationship of pties
2.Definition: mistake about circumstances as they exist @ time of contracting, not about what will happen in future
Substance vs. Value debate: can ignore it, instead -->
3.MUTUAL MISTAKE: Requirements for Pty to Avoid the K: R2d §152
a.If pties are mistaken about basic assumption
b.material to deal on which K is made
c.and risk of mistake not allocated to pty seeking avoidance
--> then can get rescission (only remedy under mistake)
4.Basic Assumption
a.If mistake leads to unexpected, unbargained-for gain for one pty and unexpected, unbargained-for loss to other pty
b.Eg. P collector sells violins to D violinist, both thinking they're Stradivarius -- K price = $8,000. Discovered that violins are imitations --> D rescinds, excused from paying balance on K price.
c.Not Basic Assumptions
1)Regarding mkt conditions: eg. wrong about future land value
2)Regarding fin ability: eg. mistake about buyer's ability to pay
d.Quality of Contract Subject Matter = basic assumption
1)Sherwood v. Walker: "Fertile Cow" Seller gets rescission of K to sell Buyer a cow when they discover that cow is fertile, rather than barren, and very low K price was for non-breeding cow: "thing actually delivered is diff in substance from thing bargained for"
5.Material Effect on the Deal
a.Occurs when resulting imbalance in the deal is so severe that it would be unfair to require performance (i.e., harder to show than that pty w/n/h made the K had she not been mistaken)
b.More likely if mistake advantages one pty while disadvantaging other pty (the one seeking avoidance)
c.Less likely if other relief besides rescission is available, eg. reforming the K, or ordering restitutionary payment, pro rata adjustment
6.Allocation of Risk to a Pty
a.If basic assumption is unknowable to either pty, then pties are assuming the risk -- eg. pty knows @ time of contracting that she has only ltd knowledge w/r/t facts which relate to the mistake
1)Sherwood: buyer bears the risk, knowing cow c/be either way
2)Risk may also be expressly allocated in the K
b.If pty has assumed the risk, she cannot avoid the K
7.Unilateral Mistake
Often said both pties must be mistaken, but others say not nec to have mutual mistake
a.Edwards "Impossible Gravel": ct views D's mistake as to accessibility of gravel on P's land as unilateral, even tho' P was mistaken too (only diff: P is indifferent) -- ct grants rescission anyway, bcse D c/n perform except at "ruinous expense" -- almost frustration of purpose
b.R2d §153: adds one more req to first three: Either:
1)Mistake is such that enforcement of the K --> unconscionable
2)Non-mistaken pty had reason to know of the mistake, or caused the mistake (diff from general rule on nondisclosure: here, knowing pty can't take advantage)
c.Most Common w/ Mistaken Construction Bids
1)Summary: will grant rescission to mistaken bidder if no negligence on bidder's part and if other pty doesn't rely to her detriment: also need material diff btwn mistaken & actual bids
2)Contractor/Subcontractor makes error in bid for job
3)Rescission if: contractor c/show that he will be severely harmed by performing & that other pty has not relied on bid (assuming other pty didn't have reason to know)
4)Elsinore: D contractor erred in bid to P school district, by forgetting to add in one sub-c's bid; P awards D the job; next day D discovers error & calls P; P uncooperative, then hires someone else & sues D for diff in price -->
D gets rescission bcse mistake was honest clerical error, not so grossly negligent as to bar relief, D notified P ASAP, result wld be inequitable, & sum omitted was material, 10% of total
5)Rescission more likely if error is clerical (mistaken calculation), and not a mistake as to judgment
6)If other pty knows bidder has made an error, this pty can't take advantage (reason to know --> rescission)
8.Duty to Investigate: if mistake is so bad that psn be really injured if not allowed to rescind, then cts won't impose duty to investigate, even if it w/h/b easy
Eg. Gartner (zoning law): duty to investigate elements of the K based on reasonableness: mutual mistake --> property not develop-able --> rescission
9.Relation to Warranties
a.Where pty can't recover by mutual mistake, may get rescission by breach of wty, if mutual mistake as to nature & value of goods
b.Hinson: land P bought from D c/n/support septic system, so P c/n/build on it --> ct won't decide on mistake basis, bcse it's an uncertain doctrine (P got essentially the land he contracted for -- what is value?)
P gets rescission under breach of implied wty of workmanlike quality (bgng of iwh) --> land sold for a specific purpose (& restricted by K to that purpose), & then discovered it c/n/be used for that purpose
F.MISREPRESENTATION AND NONDISCLOSURE: Real Estate Cases
1.Two Main Scenarios
a.neither seller nor buyer knows of defect (unintentional misrepresentation)
b.seller knows, & buyer doesn't (intentional misrepresentation)
2.Neither Knows: 3 Approaches
a.Common Law: caveat emptor: no relief for purchaser (not majority)
b.Mutual Mistake: may afford relief depending on how material mistake is to the contract (basic assumption material to deal on which K is made): look at effect on buyer's purposes, on value of land
Remedy: rescission
c.Warranty Theory: commercial builder vendor gives implied wty of workmanlike quality to first buyer -- n/a to patent defects -- no implied wty for such defect
Remedy: P can choose rescission or dgs to place her in position she w/h/b in had house been as warranted (subject to dim in value, economic waste, cost of completion inquiries) -- so this way can get dgs and keep house
Johnson: P got dim in val dgs bcse builder/vendor D told P "nothing wrong" w/house, not knowing foundation was faulty
1)Not every ct has adopted wty theory
3.Seller Knows, Buyer Doesn't (no wties apply, two non-comm(?) pties):
Three Approaches
a.Caveat Emptor: no relief (not gen rule today)
b.Two Duties on Seller's Part:
1)Not to mislead: can't represent that you have full info and then disclose only part of it w/intent to deceive (duty arises once you open your mouth)
Cushman "Sulfur Water": Seller Ds knew water was bad, H/D said it was fine, while W/D remained silent -- Buyer Ps relied --> dgs = dim in val if defect is permanent, = repair cost if curable
2)Duty to speak: arises if there are material facts w/in seller's knowledgenot w/in diligent buyer's (c/n readily discover this defect w/ordinary investigation) --> seller has duty of disclosure: silence = misrepresentation
Q: but same does not apply to knowledge buyer has but which seller c/n get, as when buyer knows the value of seller's property is about to go up for whatever inside information reason?
c.R2d §161 on this issue: nondisclosure = misrepresentation if: