CONTRACTS OUTLINES II SPRING 2002.
AVOIDING ENFORCEMENT
MISREPRESENTATION
R2d §161. When Non-Disclosure is Equivalent to an Assertion [silence]
A person’s non-disclosure of a fact know to him is equivalent to an assertion that the fact does not exist in the following cases only:
a)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
b)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. (§161(b) is broad)
c)Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effects of a writing, evidencing or embodying an agreement in whole or part
d)Where the other person is entitled to know the fact because of a relation of trust and confidence between them [fiduciary].
Note:
Good faith and fair dealing means, not taking more than the legitimate fruits of the exchange/contract. However, there is no contract here. What does the term mean? Perhaps to create a level playing field. Courts are supportive of 2 situations: where the parties had a pre-existing and related contract, and a hidden defect in the item of purchase (where buyer cannot find the defect through ordinary diligence.
Rest. § 162: When misrepresentation is fraudulent or material.
1)Misrepresentation is fraudulent [subjective] if it induces another party agree and the maker,
a)knows or believes that the statement is not true.
b)does not have confidence that he states or implies the truth of the assertion,
c)knows there is no basis that he states or implies the assertion. <Question - what is difference btw b and c?
Note: Fraudulent is when one party intended to misrepresent and/or had knowledge that the acts may not be adequately represented. There must be intent to mislead.
2)Misrepresentation is material if it would likely induce a reasonable person (objective) to manifest assent, or if maker knows that it would be likely to induce the other party to do so.
Note:
Materiality means that statement must be significant enough for other party to rely on. In 2), party may be liable even if party does not know statement is not true. <Question - Does the second part of 2) mean that the party making the statement knows that the statement is being relied on but not that statement is untrue? Also, is the italicized part mean that there is no need for reasonable person standard if maker knows that other party will be induced to assent? what are the remedies given by court for these cases?
In both §162, a plaintiff can satisfy a misrepresentation allegation by proving either materiality or fraud (scienter). A contract may be subject to rescission even if there is an innocent but material misrepresentation.
Rest. §164: When a misrepresentation makes a contract voidable.
1)If the party manifest assent induced by justified reliance in either a fraudulent or material misrepresentation, the contract is voidable.
2)If party manifest assent induced by justified reliance in either a fraudulent or material misrepresentation made by one who is not a party to the transaction, the contract is voidable. Exception: not voidable if the other party transacted in good faith and has no reason to know of misrepresentation either gives value or relies materially on the transaction.
Question - what does the last part of 2) mean?>
Rest. §168: Reliance on Assertions of opinion.
1)An assertion is an opinion if it expresses only a belief, without certainty, as to the existence of a fact, judgment of quality, value, authenticity or similar matters.
1)If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to facts not disclosed and otherwise known to the recipient may properly interpret it as an assertion
a)That the facts known to that person are not incompatible with his opinion, or
b)That he knows facts sufficient to justify him forming it (does he have the basis for making the statement?).
Note:
Opinions are generally not actionable. Opinions can be actionable if the factual basis is contradictory to the opinion. Statement of opinion amounts to an implied representation that the person giving the opinion does not know any facts that would make the opinion false and that the person making the opinion knows sufficient facts to render the opinion.
A statement of opinion also amounts to misrepresentation of fact if the person giving the misrepresented his state of mind, ie. stating the he holds a certain opinion when in fact he did not). §159 see p. 650 of text.
Rest. §169: When reliance on an assertion of opinion is not justified.
As recipient is not justified in relying on an opinion unless the recipient,
a)is in a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or
b)reasonably believes that, as compared with recipient, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or
c)is for some special reason particularly susceptible to a misrepresentation of the type involved.
Syester v. Banta p. 641 - an affirmative misrepresentation case
Dft sold Plt thousands of hours of dance lesson while assuring Plt that she would become a pro. Dft used Plt's instructor to influence Plt into signing release from a prior suit. Current suit was brought for fraud and misrepresentation of sales and in the signing of release.
Court affirm jury verdict finding fraud.
Notes:
-An 'out-of-pocket' rule allows plaintiff to recover the difference between what she parted with and what she received, plus consequential damages that she suffered prior to the discovery of the fraud.
-A 'benefit of the bargain' rule; the plaintiff is put in the position she would have been in if the defendant had spoken truthfully. The court in Syester followed this rule. For examples see pg 651.
Hill v. Jones p.652 - Undisclosed information
Plt were sold house that was infested by termites. Dft did not say anything about termite infestation. Plt did not explicitly ask. However, Plt did ask whether a ripple in the wooden floor was a termite problem, Dft said no, it was water problem.
Court held that there is a duty to disclose material facts in accord to §161. There is a duty to disclose material facts affecting the value of property known to the seller but no reasonably capable of being known to the buyer. A matter is material if it is one to which a reasonable person would attach importance in determining the choice of action in the transaction in question.
Notes:
-In an affirmative misrepresentation case, the asserter is liable even if the assert id not know of the falsity as long as the statement is material. However, in a non-disclosure, courts normally will not enforce against the defendant if defendant did not know. It is when the defendant should have known that becomes a problem. Courts are split on this issue. Some look to see whether it was reasonable for the defendant not to know.
-Factors to help determine whether defendant acted in accordance to good faith and fair dealing:
1)The difference in degree of intelligence of the parties to the transaction,
2)The relation that the parties bear to each other,
3)The manner in which the information is acquired. Information that affects the value of the subject matter of the contract may be acquired by chance, by effort, or by illegal act. It makes a difference on the ethical quality of non-disclosure,
4)The nature of the fact no disclosed. If a vendor conceals an intrinsic defect not discoverable by reasonable care, there is a greater likelihood of the existence of a duty to disclose,
5)The general class to which the person who is concealing the information belongs. It is much more likely that a seller will be required to disclose information than a purchaser,
6)The nature of the contract itself. In releases, and contracts of insurance, practically all material facts must be disclosed;
7)The importance of fact no disclosed,
8)Any conduct of the person not disclosing something to prevent discovery. The active concealment of any material fact - anything that might prevent the purchaser from buying at the price agreed on is, and should be, as a matter of law fraudulent.
-In Laidlaw, the buyer somehow knew that the peace treaty was signed and the blockade was lifted. This would increase the price of tobacco. In the course of the exchange, the seller questioned on whether there is any news on anything that would affect the price of tobacco. The buyer did not answer. The seller later sues buyer for failure to disclose. The Supreme Court argued that the seller waived the disclosure by not pressing the buyer to answer. Although this might not seem equitable, the parties in Laidlaw are in a commodity trading market where the market prices are expected to fluctuate. Also, there is no incentive to have the parties do research on the developments of these markets. This would hinter the research market development sector.
-Prof. Kronman, on p. 661, argues that disclosure of deliberately acquired information should not be required because it is socially desirable to give parties an incentive to acquire information. Nondisclosure protects a party’s investment in the acquisition of such information. Casually acquired information, however, does not reflect an investment of resources and disclosure should be required when the holder knows that the other party is without such information, because disclosure is the least costly method of reducing mistaken contracts.
-Integration clauses: Hill court ruled that contract integration clause did not bar the purchasers’ action to rescind the contract on the basis of fraud because “any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense.”
-But, some courts distinguish between General (vague merger clauses) and Specific Disclaimers. General disclaimers that say you can’t rely on all verbal representations usually won’t free X from fraud action. But in Danann Reality v. Harris, it had a specific disclaimer “seller made no representations about expenses and profits”, and the buyer couldn’t win.
UNCONSCIONABLILITY
UCC §2-302: Unconscionable contracts or clauses
1)If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may [a] refuse to enforce the contract, or [b] may enforce the remainder of the contract without the unconscionable clause, or [c] may so limit the application of any unconscionable clause as to avoid any unconscionable result.
2)When it is claimed or appears to the court the contract or any clause maybe unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.
Commentary to 2-302
-The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.
-The principle is one of prevention of oppression and unfair surprise and not the disturbance of allocation of risks because of superior bargaining power.
-Section 2 is for the court's consideration, not the jury's.
Notes: Restatement §208 express the same ideas as UCC 2-302 1).
Williams v. Walker p.669
The Plt bought household goods from Dft under installment payment plan. The installment contract had an add-on clause, whereby installments are made on pro-rata basis; failure to pay for one item results in repossession of all items not fully paid off. Each new item became security for all items not fully paid off. Plt failed to pay installment, Dft sought to replevy all items purchased by Plt.
Court reasoned that unconscionability is recognized to include an absence of meaningful choice on part of one of the parties and with terms that are unreasonably favorable to the other party.
-Meaningful choice can be determined by examining the circumstances surrounding the transaction, such as a gross inequality of bargaining power, manner in which the contract was entered into (did each party to the contract, considering his education, have a reasonable opportunity to understand the terms of the contract). Court noted that normally one who signs a contract would be held to assume the risk of entering a one-sided contract. However, when a party has little bargaining power, hence little real choice, signs an unreasonable contract with little or no knowledge of the terms, an exception may apply.
-Reasonableness or fairness is considered in the light of the circumstances existing when the contract was made. The terms are then considered in light of the general commercial background and the commercial needs of the particular trade or case. Corbin suggest the test as being whether the terms are 'so extreme' as to appear unconscionable according to the more and business practices of time and place.'
Notes:
-Look at contract as of signing: the contract must be judged as of the facts existing at the time of signing it. The fact that one of the parties (usually the seller) acted in bad faith after the contract was signed has no effect on whether the contract itself was unconscionable (but the post-contract actions may constitute a violation of the party’s duty to perform in good faith, imposed by §1-203.
-Procedural unconscionability may refer to either lack of choice by one party or some defect in the bargaining process (such as quasi-fraud or quasi-duress). Substantive unconscionability relates to the fairness of the terms of the resulting bargain.
-Unconscionability is normally used as a defense (a shield not a sword). In other words, unconscionability can be use to rescind contracts or strike out unconscionable clauses, but is not normally use to provide restitution
-(Should the doctrine also apply price term in addition to provisional terms?) Ahern v. Knecht p. 677. The air-conditioner case. Plt called Dft to repair air-conditioner. Dft required $154 for the service call and told Plt that the charge was $762. Plt paid because she had an appointment. But, repairer did not repair the air-conditioner. Plt brought suit. Court allowed Plt to recover the remainder of her money minus the price of the service actually performed by Dft.
-Courts have divided in cases alleging unconscionable price terms because of the different views about how to determine when a price is excessive. Recently, courts have allowed for restitution and rescission of unconscionable contracts. However, compensatory damages are still normally avoided.
America Software v. Ali p. 683
Ali’s salary was composed of salary and commissions. The company allowed her to take a regular draw against commissions. If it exceeded the draw, she would get the commissions. If she didn’t meet the draw, then she was still allowed to take the draw, but the balance would carry over. If ultimately, she didn’t meet the draw, they wouldn’t make her return the payment. Commissions were only payable if the customer she recruited made actual payment with American Software. With voluntary resignation, her entitlement to commissions would cut 30 days thereafter. Her big clients didn’t pay within 30 days and American Software refused to pay. She sues under a theory of unconscionability.
Court discussed 2 elements in analyzing unconscionability: procedural and substantive.
-Substantive unconscionability focus on the actual terms of the agreement while procedural unconscionability focuses on the manner in which the contract was negotiated and the circumstances of the parties.
-Indications of procedural unconscionability include 'oppression, arising out of inequality of bargaining power and the absence of real negotiation or a meaningful choice and “surprise, resulting from the hiding the disputed term in a prolix document.”
-Indication of substantial unconscionability include by contract terms so one-sided as to “shock the conscience.” Trade usage, whether the terms are commonplace. Ali court rejected the lower std. that the terms were unreasonable. Must shock the conscience.
-Procedural: Ali was an sophisticated businesswoman who had successfully negotiated several big contracts. Contract was not hard to understand, she acknowledged that she knew of the clause and what it meant. It was not a standard adhesion contract. She changed some provisions and had some bargaining power. She also had an attorney to review the contract.
-Substantive: Must be looked at at the time the contract was entered into. It is irrelevant what happened in hindsight. It is irrelevant that she was entitled to a large commission, but for the fact that client didn’t pay. Substantively, the ct. looks at allocation of risks. For π, risk was that she would be extremely successful and wouldn’t get all of the commissions. The risk to American was that if she was lousy and didn’t meet the draw, they would have to take a loss. It was not one-sided. Plus, the term was commonplace.