CONTRACTS II – Wilmarth – Spring 2010
I. GROUNDS FOR AVOIDING ENFORCEMENT (cont. from last semester)
A. Misrepresentation
- Syester v. Banta – dance studio scam
§164 – When misrepresentation makes contract voidable:
(1)if party’s manifestation of assent is induced by either fraudulent or material misrepresentation by the other party upon which the recipient is justified in relying,rescission
(2)if party’s manifestation of assent is induced by either fraudulent or material misrepresentation by one is not a party upon which the recipient is justified in relying, rescission unless other party in good faith and w/o reason to know of the misrepresentation gives value or relies
§162 – Either fraudulent or material misrepresentation will give rise to rescission
-Misrepresentation is fraudulent if the person intends inducement of assent through it
-Objective material misrepresentation is that which would be likely to induce assent in a reasonable person; Subjective material misrepresentation is that which it is known would be likely to induce assent in that particular person
§163–If a misrepresentation as to character or essential terms of a proposed contract induces assent by one who neither knows nor has reasonable opportunity to know, the conduct is not assent
§376 – If you void a contract on grounds of misrepresentation, there is a requirement of mutual restitution (if you seek rescission, mutual restitution generally follows)
-Fraud: Misrepresentation + Materiality (Obj.) + Scienter (bad intent) + Reliance + Transactional Causation (But-for) + Loss Causation (proximate)
-Rescission: Misrepresentation + Materiality (Obj./Subj.) OR Scienter + “Justified” Reliance
-You can only rescind the part of the contract that has not yet been performed (past performance and compensation for that performance can’t be returned in mutual restitution)
§166 – Misrepresenting the contents of the writing justifies reformation of contract if the recipient was justified in relying on the misrepresentation (except to the extent that rights of 3d parties not affected)
§167 – A misrepresentation induces a party’s manifestation of assent if it substantially contributes to the decision to assent
§168 – Assertions of opinion are misrepresentation if an individual asserts a reasonable opinion that he does not honestly believe or has no facts to back up (not simply “puffing”)
§169 – Reliance on an opinion is justified if there a relationship of trust and confidence
-Laidlaw v. Organ – nondisclosure of end of war; Supreme Court said that silence was ok
-The modern standard is that you have a duty to disclose information that has been casually acquired but no duty to disclose information that was required through substantial investigation
§161 – When nondisclosure is equivalent to an assertion
(a)If you make a statement and later discover that the statement is a misrepresentation, you have a duty to disclose
(b)If you know that the disclosure would correct the other party’s mistake about a basic assumption on which they entered the contract if non disclosure would amount to a failure to act in good faith (this provision is not universally accepted)
(c)If you know that the other party is mistaken about the contents or effect of the written agreement
(d)In the case of a fiduciary relationship
§173 – Abuse of a fiduciary relationship makes a contract voidable when
(a)It is on fair terms, and
(b)All parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know
-Hill v. Jones – Buyers of house bring suit after sellers failed to disclose past termite damage
§160 – actions intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist
-Other facts to consider in deciding when fairness requires disclosure of material info (p174):
(1) Difference in degree of intelligence of the parties to the transaction
(2) The relation the parties bear to each other
(3) The manner in which the information is acquired (by chance/effort/illegal act)
(4) The nature of the fact not disclosed
(5) The general class to which the person who is concealing the information belongs
(6) The nature of the contract itself
(7) The importance of the fact not disclosed
(8) Any conduct of the person not disclosing something to prevent discovery
-Park 100 v. Kartes – misrepresentation in “lease papers” on commercial building lease
B. Unconscionability
-Codified in UCC §2-302 and R §208 (Wilmarth: the “not quite” doctrine)
Both UCC and Restatement focus on unconscionability at time the contract was made
-Unconscionability is a bargaining issue, not a performance issue
Procedural unconscionability: circumstances of the sides / negotiations are grossly unfair
Substantive unconscionability: terms themselves are grossly unfair
-A balancing test: if you have a lot of bargaining misconduct, don’t need really bad terms
If you have really outrageous terms, don’t need that much bargaining misconduct
-The court can either strike certain provisions that are unconscionable, or void the entire contract
In a lot of cases, if entire contract is voided, unconsionability is grounds for restitution
-Williams v. Walker-Thomas Furniture Co.
-Furniture store had sale contract that stipulated that any credit for buying goods would be “credited pro rata on all outstanding leases, bills, and accounts” (the store could repossess items still being paid for if an individual defaulted on a payment for a later bought item)
-Court applies D.C. adaptation of UCC §2-302 and finds agreement unconscionable
-Court defines unconscionability as “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party”
-“In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made.”
-Higgins v. Superior Court of Los Angeles County – “Extreme Home Makeover”
-American Software v. Ali – Ali sued company to recover commissions on contracts that came in after she resigned her position; a clause in the contract terminated that 30 days after resignation
§208 comments: the judge makes the decision on unconscionability
-The exclusion of consequential damages can be unconscionable
-The fact that the contract is an adhesion contract permits an inference of unconscionability, but it does not definitively mean that the contract is unconscionable
C. Voiding on Grounds of Public Policy
§178 – When a Term is Unenforceable on Grounds of Public Policy
(1)A promise or other term is unenforceable on public policy grounds if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed by a public policy against the enforcement of such terms
(2)In weighing interest in enforcement of a term, look to:
a)The parties’ justified expectations
b)Any forfeiture that would result if enforcement were denied
c)Any special public interest in the enforcement
(3)In weighing interest against enforcement of a term, look to:
a)The strength of that policy as manifested by legislation or judicial decisions
b)The likelihood that a refusal to enforce the term will further that policy
c)The seriousness of any misconduct involved and the extent to which it was deliberate
d)The directness of the connection between that misconduct and the term
§179 – A public policy against the enforcement of promises or terms may be derived by:
(a)Legislation relevant to such a policy
(b)The need to promote some aspect of public welfare (i.e. restraint of trade, family relations)
§187 – If the contract does nothing more than restrain competition, it is no good
§188 – A promise to refrain from competition that imposes a restraint that is ancillary is unreasonable if:
(a)The restraint is greater than is needed to protect the promisee’s legitimate interest, or
(b)The promisee’s need is outweighed by the hardship to the promisor and injury to public
Promises imposing restraints that are ancillary to valid transaction include:
(a)Promise by seller of a business not to compete with the buyer
(b)Promise by an employee or other agent not to compete with his employer or principal
(c)Promise by a partner not to compete with the partnership
- Valley Medical Specialists v. Farber – Restrictive covenant not to compete for doctor unenforceable
- RR. v. M.H. & another – Surrogacy contract unenforceable
§197 – restitution generally unavailable for a promise unenforceable on grounds of public policy
§198– restitution is available for a promise unenforceable on grounds of public policy if:
(a)He was excusably ignorant of the facts or of legislation of a minor character
(b)He was not equally in the wrong with the promisor (“in pari delicto”)
“in pari delicto” – equally in the wrong (both parties are left where the court finds them and no remedy is given to either party, even if one has received a benefit from the other)
-Unconscionability (procedural/substantive) is the lowest rung; the next step up is misrepresentation, abuse of relationship of trust and confidence, or undue influence
-The courts are not predisposed to rescission (somebody always gets hurt when you “unwind” the transaction) so it takes a significant showing to demonstrate cause for rescission
-For mistake, the mistake has to relate to a fact or condition that is already in existence
- Lenawee County Board of Health v. Messerly – condemned property; equitable remedy of rescission not available when both parties innocent (did not know about present condition)
§152 – 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 performance, the contract is voidable by the adversely affected party unless he bears the risk of mistake
-The way you should approach the problem is start with §153 for basic assumptions, then go to §154 for when party bears risk, then back to §153 (a) & (b)
§153 – Where a mistake of one party at the time a contract was made as to a basic assumption on which the contract was made has a material effect on performance that is adverse to him, the contract is voidable by him if he does not bear the risk of mistake and
(a) The effect of the mistake is such that enforcement of the contract would be unconscionable
(b) The other party had reason to know of the mistake or his fault caused the mistake
§154 – A party bears the risk of mistake if:
(a) The risk is allocated to him by the agreement of the parties, or
(b) He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c) The risk is allocated to him by the court on the ground that is reasonable to do so
-If there’s some indication of bad faith, 154(c) may shift the bearing of risk to the bad faith party
§155 – When mutual mistake consists of failure of the written contract to accurately state agreement of the parties, reformation of contract to express parties’ mutual intent is the typical remedy
-Generally unilateral mistake doesn’t get you equitable remedy (exceedingly difficult)
-Wil-fred’s Inc. v. Metropolitan Sanitary District
-Court lists conditions generally required for rescission in IL:
(1) That the mistake relate to a material feature of the contract
(2) That it occurred nonwithstanding the existence of reasonable care
(3) That it is of such grave consequence that enforcement would be unconscionable
(4) That the other party can be placed in the status quo (back to before contract)
-One context in which the courts are more likely to grant rescission for unilateral mistake is when the mistake is so obvious or “palpable” that the party should have known that it was too good to be true
(i.e. Wil-Fred’s bid being $235k lower than lowest bid)
D. Doctrines of Changed Circumstances
-Impossibility:
§262 – death or incapacity of person necessary for performance
§263 – destruction, deterioration, or nonexistence of thing necessary for performance
§264 – prevention by gov’t regulation or order
-Impracticability:
§261 – discharge by supervening impracticability
§266(1) – existing impracticability (previously existing but unknown: like mistake)
-Frustration of purpose:
§265 – discharge by supervening frustration
§266(2) – existing frustration (previously existing but unknown: like mistake)
UCC: §2-613 and §2-615
-Impossibility requires literal objective impossibility (“no one could do it”)
-Impracticability requires circumstances sufficiently different from what parties contemplated at the time of contracting as to be impractical (not literally impossible but really tough)
-The first big impracticability case was Mineral Park Land Co. v. Howard
Defendant was able to claim impracticability when removing all the gravel it had contracted to do would require costs not contemplated b/c some gravel was underwater
-The difference between frustration and impracticability is a subtle one
In impracticability, what happened changed a basic assumption of the agreement
In frustration, the principle purpose of the contract has also been frustrated
- Karl Wendt Farm Equip. Co. v. Int’l Harvester Co. – impracticability on grounds of market failure
-In Karl Wendt, the court does not find frustration of purpose because the “mutual profitability” is not a sufficiently basic assumption as to allow the defense
-With unconscionability, you have the option of reformation; but with impossibility/impracticability/frustration it’s all or nothing (with exception of Alcoa)
-Clearly unconscionability is not a jury question, but there is debate about whether or not impossibility/impracticability/frustration should be a jury question (in most places it is)
-Forseeability can be a consideration in determining changed impos/imprac/frustration
-Courts have not historically granted rescission based on war or other international conflict that made the contract impracticable (i.e. closing of Suez Canal in ’56, ‘67)
- Harriscom Svenska v. Harris Corp. & RF Systems – impracticability b/c of Iran tech embargo
-The court finds that RF established the affirmative defense of commercial impracticability because it complied in good faith with the government’s informal requirements
§264 – compliance with foreign or domestic government regulation or order as a basis for relief
§272 – restitution is also available as relief for valid impossibility/impracticability claim
-a “force majeure” clause provides for excuse where performance is prevented or delayed by circumstances beyond the control of the party seeking excuse
-Courts are skeptical of these clauses and test them against good faith / unconscionability
§89 – modification of existing 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
(b)To the extent provided by statute
(c)To the extent that justice requires enforcement in view of reliance on the promise
-A novation is a new contract to replace an old one (new contract, new consideration required)
-Under UCC §2-209, an agreement modifying a contract needs no consideration to be binding
-A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, except by merchants
- Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. – price increases to keep smelting plant open
- Alaska Packers’ Ass’n v. Domenico – workers on fishing boat forced reformation of contract in AK
UCC §1-308 deals with reservation of rights
-Party performs but makes a formal reservation of the right to sue later on
-Use of such words as “without prejudice” or “under protest” are sufficient
§2-209 – for modification, rescission, and waiver
(1)An agreement modifying a contract within UCC needs no consideration
(2)A signed agreement which excludes modification or rescission except by signed writing cannot be otherwise modified or rescinded except if between merchants on separate form
(3)Requirements of statute of frauds must be satisfied
(4)An attempt at modification or rescission does not satisfy (2) or (3) but can be a waiver
-§2-209 gives the party the instrumentalities to oppose a one-sided modification by the other party
-§2-209(4) provides that although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver
- Brookside Farms v. Mama Rizzo’s – unforeseen basil leaf costs created impracticability
-“no oral modification”clauses(NOM) prohibit oral modifications to the contract
Generally, the cases support the proposition that the NOM clause may be waived
-“no-waiver” clause: intended to insulate the parties from a claim that any provision in the contract had been orally waived
II. CONSEQUENCES OF NONPERFORMANCE
§224 – a “condition” is an event, not certain to occur, which must occur before performance is due
§225 – effects of non-occurrence of a condition
(1)Performance of a duty subject to a condition cannot become due unless the condition occurs or its nonoccurrence is excused
(2)Unless it has been excused, the nonoccurrence of a condition discharges the duty when the condition can no longer occur
(3)Nonoccurrence of a condition is not a breach by a party unless he is under a duty that the condition occur
§227 – three flavors of conditions
a)Pure promise (I promise to buy the car)
b)Pure condition (I promise to buy the car if the car is inspected)
c)Promissory condition (I promise to sell you the car and get it inspected)
-For §227, the order of preference in doubtful cases (hierarchy is used to avoid forfeiture):
1)Promise
2)Pure condition
3)Promissory condition
-Forfeiture is when one party’s duty is discharged even after the other party has invested or relied upon the promise (that value/contribution has been forfeited)
-When a condition only protects one party, it cannot be held to discharge the other party’s duty
(i.e. buyer doesn’t get mortgage but still wants to go forward w/ purchase in cash)
-One can waive conditions, but a waiver can be retracted
-If you rely to your detriment on the waiver, the court can enforce based on that reliance
-Duty of good faith efforts to make a condition happen
The other party cannot block or prevent the condition from happening
-Duty may be discharged based on bad faith obstruction or frustration by one party
-There can be oral conditions (subject to statute of frauds)
-Oppenheimer v. Oppenheim – “unless and until” text in contract meant no substantial performance
§229– to the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was material
Three basic areas where the courts have created conditions:
§234 has the first two:
1) When simultaneous performance required, performance of one requires the other
2) When one performance is short/instant and the other takes time, longer one goes first
§240has the third (partial performances)
3) When a contract’s performances are divisible, remedies can be reasonably divided
§235 – any failure to perform when that performance is due is a breach
Δπ
1) Partial (“technical”) breach-must keep performing, but may sue for direct damages
2) Material breach-may suspend performance (“suspended animation”)
3) Total breach-is completely discharged from further performance,
may seek all remedies