Grounds for Avoiding Contracts

GROUNDS FOR AVOIDING CONTRACTS

Recission = Cancellation of a contract

Grounds for avoiding contracts

1. Minority
2. People under 18 have an open ended right to rescind contracts within a reasonable time after becoming an adult
3. Mutual restitution – both parties give back what they received from the contract
4. Mental incapacity
5. Cognitive test: The person is not able to understand the nature of the transaction
6. Doesn’t matter whether the other party knew or not
7. Volitional test: The person understands that a contract was made, but wasn’t acting rationally when they entered into it
8. The other party must have had reason to know of the incapacity
9. Bargaining misconduct
10. Contract is void if there was egregious misconduct, such as bodily injury or threat to destroy property (RST 174)
11. Contract is voidable if there was less egregious misconduct; the affected party may void the contract if they choose
12. Economic duress
13. One party involuntarily accepted the terms of the other
14. There were no other alternatives but to agree
15. The compulsion induced the action
16. Undue influence (balancing test – not all elements must be met)
17. Discussion of the transaction at an inappropriate time
18. Consummation of the transaction in an unusual place
19. Insistent demand that the business be finished at once
20. Extreme emphasis on untoward consequences of delay
21. The use of multiple persuaders by the dominant side
22. Absence of third party advisors to the weaker party
23. Saying there is no time to consult financial advisors/attorneys

Types of Improper Threats (RST 176)

1. Threat to commit a crime or tort
2. Threat of prosecution
3. Threat made in bad faith
4. Resulting exchange is on unfair terms
5. Threatened act would harm recipient and not significantly benefit the other party

Elements of fraud

1. Misrepresentation
2. Materiality (a party relies on the misleading statement)
3. Scienter (bad intent)
4. Reasonable reliance on the misrepresentation
5. Loss causation (the reliance was the proximate cause of the loss)

Constructive Fraud = Breach of fiduciary relationship

Misrepresentation (RST 162)

1. A contract can be rescinded if one party’s consent was induced by either fraudulent or material misrepresentation
2. Fraudulent misrepresentation = Knowing misrepresentation
3. Recission is always allowed
4. Material misrepresentation = Unknowing misrepresentation
5. Recission is only allowed if the fact was major
6. There are two types of misrepresentation
7. Enough to rescind a contract
8. Limited to restitution damages
9. Enough to amount to the tort of fraud
10. Can get restitution, compensatory and punitive damages
11. The recipient of an opinion is entitled to believe that the information is honest (RST 168)
12. Once you begin to speak, you can’t withhold facts (RST 161)

RST 161: During the negotiation process, there is a duty to disclose in certain situations

1. There is a duty to disclose material facts
2. There is a duty to disclose if there is a fiduciary relationship
3. (A) and (D) are universally accepted, (B) and (C) are more controversial
4. Some say a party must actually lie to be held liable for misrepresentation

Unconscionability: No definite standard; “ordinary unfairness” is the most common, but some courts require “gross unfairness”

Commercial unconscionability cases are difficult to win, because parties are generally sophisticated

Public Policy

1. RST 178/179: We must balance desire to enforce contracts with reluctance to enforce contracts that are against public policy
2. Public policy may outweigh other concerns
3. No restitution if a contract is void against public policy

Contracts in Restraint of Competition

1. RST 186: Contracts in unreasonable restraint of competition should be void
2. RST 187: An unreasonable restraint has no valid purpose other than suppressing competition
3. RST 188: Some restraint of competition may be valid
4. Example: Partnership agreements/employment contracts (it may be proper to ask a former partner/employee not to compete)

Balancing test for enforcement of covenants not to compete

1. Balance following factors:
2. Legitimate interests to be protected
3. Hardship on restricted person
4. Hardship on public
5. Determine reasonableness of:
6. Geographic restraints
7. Time restraints
8. May depend on uniqueness of skill/level of harm to company

Generally, covenants not to compete among lawyers are pro se prohibited

Totem Marine v. Alyeska Pipeline

1. Facts of the case
2. Alyeska hired Totem to transport pipeline but misrepresented the job
3. There was more product than expected and transportation took longer
4. Alyeska canceled the contract and unloaded the material in a way that voided Totem’s insurance policy
5. Totem claimed they were owed $260-$300k for work done
6. Alyeska receives the invoices but refused to pay quickly
7. Totem needed to money to avoid bankruptcy, so they accepted a payment of $97,500 and released Alyeska from further obligation
8. Question: Does Totem have a claim for recission due to duress?
9. Holding: Yes, the case must go to trial because Totem signed the release under economic duress
10. Alyeska acted in bad faith, and Totem was particularly vulnerable... they had no choice but to accept the deal if they wanted to avoid bankruptcy

Odorizzi v. Bloomfield School District***

1. Facts of the case
2. Question: Does Odorizzi have a claim for duress?
3. Holding: Odorizzi has a claim for undue influence
4. There was no fraud, because there was no misrepresentation (if he didn’t resign, he would be removed)
5. There was no fiduciary relationship and there should be no expectation of trust when you’re being fired
6. There WAS undue influence:
7. Excessive pressure, Odorizzi was particularly vulnerable, the transaction occurred in an unusual place (his home), there was extreme time pressure and no chance to consult with anyone

Syester v. Banta

1. Facts of the case
2. Dance studio used egregious selling practices to entice students to sign up for lessons
3. They told Syester, a woman in her 60s, that she could become a professional dancer
4. Syester bought three lifetime memberships and spent thousands on lessons
5. Question: Does Syester have a claim for misrepresentation?
6. Holding: Yes, this was a case of fraud
7. Syester was a lonely widow and particularly vulnerable
8. The studio manager knew that Syster wasn’t going to be a professional
9. There was reasonable reliance, the managers purported to be experts/friends
10. Outcome
11. Jury awards restitution – the amount she paid, minus the benefit she actually received
12. Jury also awards $40,000 in punitive damages
13. Since this was a case of intentional fraud, which is a tort, punitive damages apply

Hill v. Jones

1. Facts of the case
2. Hill buys a home from Jones and discovers termite damage that had not been disclosed
3. The owners put a large plant in the middle of the floor over the damage, and Jones said ripples in the floor were from water damage – this was an affirmative misrepresentation
4. According to RST 161, once you make an affirmative statement, you can’t withhold facts
5. Question: Were the Jones required to disclose the damage?
6. Holding: Disclosure is required when material facts are involved
7. The termite infestation was probably a material fact (remanded to decide)
8. Affirmative acts to conceal may be considered fraud
9. If sellers know there is a defect that is not readily observable to the buyer they must disclose it... once a buyer has notice of the problem, they must make reasonable inquiries

Park 100 Investors v. Kartes

1. Facts of the case
2. Kartes owned a video store and signed a lease to move into a new building
3. Scannell, a representative is Park 100, came and presented Kartes with “lease papers”
4. The papers were actually a personal guaranty, and Scannell told Kartes he couldn’t move out until the papers were signed (this wasn’t true)
5. Kartes signed the guaranty, which said “lease agreement” on the front
6. Question: Was Kartes induced to sign the guaranty by fraud? Should he be held to it?
7. Holding: This was fraud, the agreement is invalid
8. Scannell intentionally lied, and Kartes reasonably relied on the misrepresentation
9. Duty to read doesn’t apply if one party fraudulently misrepresents the agreement
10. Trial court (but not appellate court) said that Scannell knew Kartes was mistaken, so he had a duty to correct him under 161(c)

Higgins v. Superior Court of Los Angeles County

1. Facts of the case
2. The Higgins siblings were living with the Leonidas family after the death of their parents and were chosen to appear on Extreme Home Makeover
3. They signed a contract saying that all disputes with the show would have to be arbitrated; they didn’t have any counsel and were told to “flip through and sign”
4. Question: Should the mandatory arbitration clause be upheld?
5. Holding: The clause is not valid due to procedural unconscionability
6. Lack of notice/unfair surprise – there was nothing in the contract to draw attention to the arbitration clause
7. Bargaining disparity – The network knew the plaintiffs were unsophisticated
8. Substantive unconscionability – The agreement was one-sided; only plaintiffs had to agree to arbitration

American Software v. Ali

1. Facts of the case
2. Ali was a software salesperson on salary and commission; she had a guaranteed base salary, guaranteed bonus, and additional commissions
3. Employment contract said that if she left the company voluntarily, she would get no commissions after 30 days
4. She left voluntarily and sued American Software for the old commissions
5. Questions: Was this contract unconscionable?
6. Holding: The contract was valid; it was not unconscionable
7. No procedural unconscionability – This wasn’t a contract of adhesion, Ali bargained for the terms, the contract was straightforward, Ali was a sophisticated employee who had negotiated business contracts before, and she was aware of the provision (no surprise)
8. No substantive unconscionability – There was a good reason for the provision (it creates an incentive for employees to stay), there were risks to both parties (the company would pay the employee’s bonus no matter what), the terms didn’t shock the conscience

Valley Medical Specialists v. Farber

1. Facts of the case
2. Restrictive covenant in a doctor’s employment contract said that Farber wasn’t allowed to compete within 5 miles of any VMS office (a total distance of 225 miles)
3. Farber also wasn’t able to provide any medical assistance to clients or competitors of VMS
4. Question: Is the restrictive covenant valid?
5. Holding: No, the covenant is invalid as a matter of public policy
6. VMS had a legitimate interest to be protected, but public policy outweighed it
7. Hardship on the public was great
8. Farber treated HIV patients with a special procedure that not all doctors could do
9. Patients would lose the ability to choose their doctor
10. Supreme Court doesn’t approve of “blue penciling” (changing only certain parts of a covenant), because it could create and incentive for drafters to be overly restrictive to see what they could get away with

RR v. MH & Another

1. Facts of the case
2. Involves a surrogacy contract – Mother donated the egg and acted as a surrogate for an infertile couple; father had naming rights and full custody; contract allowed for some maternal contact, but if she sought maternal rights she would have to give back the $10,000 she was paid for the surrogacy
3. Question: Is the surrogacy contract void?
4. Holding: The contract is void on public policy grounds
5. Surrogacy is similar to adoption, where there can be no advance consent and no payment other than reasonable medical expenses
6. This type of agreement treats babies like commodities and may exploit low-income women
7. Some states have laws saying surrogacy agreements must be evaluated by a court for fairness before proceeding

JUSTIFICATION FOR NON-PERFORMANCE:

MISTAKE & CHANGED CIRCUMSTANCES

MISTAKE

Mistake in Fact (RST 151)

1. Fact must have been in existence when the contract was made
2. Fact must be related to basic assumptions of both parties
3. Fact must have a material effect on the exchange of performances
4. RST 154 – Is the risk allocated to one party?

Unilateral mistake is less likely to void a contract than mutual mistake

Mistake in drafting the contract: If the evidence shows that both parties meant the contract to say something different but it was mistakenly drafted, it can be re-written to reflect the intent of the parties

Lewanee County Board of Health v. Messerly***

Shore Builders v. Dogwood

1. Facts of the case
2. A large piece of unimproved land on the Eastern Shore of DE was sold for residential development during the dry season
3. The buyer carefully inspected the property but didn’t have an opportunity to see the land during the wet season, when it became very marshy and couldn’t be built upon
4. Question: Is the buyer entitled to recission?
5. Holding: The agreement may not be upheld
6. The problem was a “hidden defect” that the seller should have given specific notice of

Wil-Fred’s v. Metropolitan Sanitary District

1. Facts of the case
2. Wil-Fred was awarded a big for a large project, but their subcontractor (Ciago) made a mistake and grossly underestimated the cost of the project
3. If Wil-Fred was held to the contract they would have lost $1-2 million for forfeiting the bond or $150k as a result of Ciago’s mistake (=15% of contract price)
4. Question: Was the mistake material? Is the contract voidable as a result?
5. Holding: The contract is void
6. The assumption was a material mistake because it represented a major part of the contract
7. The effect of the mistake is so large that to uphold the contract would be unconscionable
8. Recission was reasonably fair for Sanitary District, because they could just choose the next lowest bidder and the only thing they would lose is the windfall from Wil-Fred’s mistake

CHANGED CIRCUMSTANCES

Impracticability

1. Market shifts and economic cycles do not make an argument for impracticability
2. Foreseeability does not defeat impracticability
3. However, the more foreseeable something is, the less likely the party can be excused

Relief for Void Contracts = Recission and restitution

UCC 2-209(1): A modification to an existing contract needs no consideration to be binding

1. Modifications must meet the test of good faith
2. Must be commercially reasonable, fair and equitable
3. There must be a good reason to request to modification
4. Modifications extracted in bad faith are not enforceable

Accord and Satisfaction: If you have a dispute over an “unliquidated obligation” (an obligation not reduced to a dollar amount), then acceptance of a check for payment discharges any remaining obligation

Karl Wendt Farm Equipment v. International Harvester

1. Facts of the Case
2. IH decides to leave the farm equipment business due to a downturn in the market, so they sell all of their assets and inventory to Case Tenneco; Case chose which of IH’s dealers they wanted to keep
3. Wendt’s dealership was not chosen by Case and was about to go out of business, so Wendt sues IH for wrongful termination of the contract
4. IH claims impracticability and frustration of purpose, because of market downturns and lack of mutual profitability
5. Question: Was the contract wrongfully terminated?
6. Holding: Yes, the contract was wrongfully terminated
7. Market downturns are not enough to prove impracticability
8. Every contract is based on mutual profitability, so lack of profitability is not a valid argument for frustration of purpose
9. IH did not act in the spirit of good faith and fair dealing; they should have shared some of their profit from the sale with Wendt
10. When there is no express termination agreement, there must be reasonable notice

Wolf Trap

1. Facts: A storm knocked out the power in a music venue, so the Boston Opera wasn’t able to perform and sued for lost profits
2. Question: Was impossibility a valid defense?
3. Holding: Impossibility was a valid defense, venue wins
4. Electricity was necessary for the performance, and the problem wasn’t foreseeable

Thrifty Rent-A-Car

1. Facts: Thrifty couldn’t keep up with contractual obligations due to hurricanes
2. Question: Was impossibility a valid defense?
3. Holding: Impossibility was NOT a valid defense
4. Hurricanes were foreseeable, they happen in Florida all the time

HarriscomSvenska v. Harris Corp

1. Facts of the Case
2. Harriscom was the distributor for products to Iran, Harris Corp was the manufacturer
3. Harris Corm was supposed to ship radios to Harriscom so Harriscom could ship them to Iran, but Harris couldn’t fill the orders
4. The government stopped one of Harris’ shipments to Sweden because they didn’t want military goods shipped to Iran
5. Question: Did Harris breach the contract by failing to fill the orders?
6. Holding: Harris did NOT breach
7. The contract was impracticable because the government forced compliance
8. The government’s orders were not foreseeable

MODIFICATION

No consideration needed for modification

Alaska Packers v. Domenico

1. Old common law rule: There had to be consideration for a modification (not the case now)
2. UCC 2-209(1): An modification to an existing contract needs no consideration to be binding
3. But, comments say that modifications must meet the test of good faith
4. Must be commercially reasonable; fair and equitable in view of circumstances not expected by the parties
5. There must be a good reason to request the modification
6. Modifications extracted in bad faith are not enforceable

Kelsey Hayes***

• Economic duress
• The price hike was being forced upon them, and they had no alternatives but to accept the higher prices
• There was no other supplier who could supply the castings needed for the brake assemblies
• The court says that whether there was “no reasonable alternative” is to be determined at trial, but Kelsey-Hayes provided enough evidence that it may have been the case
• Improper Threat
• Under the old theory of duress, you had to show that the threat was illegal
• Now all you have to show under RST 176 is that the threat was wrongful
• Galtaco was threatening to stop supplying the casings unless Kelsey-Hayes agreed to the higher prices

Brookside v. Mama Rizzo*

1. Facts of the case
2. Parties entered into a series of oral agreements to change prices, despite a “no oral modification” clause
3. Question: Were the oral modifications enforceable?
4. Holding: The oral agreements were enforceable because the goods were delivered and accepted at the modified price
5. UCC 2-201(3)(c): Statute of Frauds is overcome if goods are delivered and accepted or if payment is made and accepted
6. Invoices and receipts all reflected higher prices; there was no surprise

CONSEQUENCES OF NONPERFORMANCE