Contracts II
"(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 refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result...."
UCC 2-302 Unconscionable Contract or Clause
Unconscionability
Policing doctrine that use to only involve requests for equitable relief, until it was included as a provision in UCC 2-303 and became a statutory governing law for the sale of goods. (shortly after the restatement followed with Restatement 208)
Fact: The stone is a cubic zirconia.
Assertion: "There is a 3 carat diamond in this engagement ring." What would be a fact that asserts misrepresentation over this claim?
Non-Disclosure or Silence
2 separate ways fraud can be shown?
big companies can impose their terms on weaker parties who may have little choice but to accept. Thus, a court finds a contract is adhesive, they will often scrutinize it for procedural unconscionability.
Although Contracts of Adhesion are not necessarily bad/unconscionable because they often results in greater efficiency, centralizes decision-making, lower transaction costs, and therefore lower prices for consumer, and We need to allow for these standard form contracts, What is a DANGEROUS side-effect?
contrary to the doctrines that police contracts for improper bargaining (but similar to policing for illegality or public policy concerns), there is not necessarily a requirement that any improper bargaining be proved for an incapacitated person to avoid a contract.
Although the rules design to protect the incapacitated have much in common with the doctrines that police contracts for improper bargaining, what is a difference?
Courts are generally wary of legislating from the bench, so they will typically make an effort to rely on settled authority: -Expressed legislative goals -Settled common law precedent Nevertheless, it is inevitable the judges' own moral, religious, or philosophical beliefs often impact their decisions in this area. Note: Where a certain type of contract is consistently rendered void on public policy grounds, it may eventually be regarded as illegal (under common law)—so sometimes the line between the doctrines of illegality and public policy can be blurred.
Because violations of public policy in these cases are not violations of law, where do the courts look to determine what the public policy is?
UCC 1-303(e): Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a contract is unreasonable: 1) Express terms prevail over course of performance, course of dealing, and usage of trade; 2) Course of performance prevails over course of dealing and usage of trade; and 3) Course of dealing prevails over usage of trade
Both the UCC & the Restatement organize "course of performance," "course of dealing," and "usage of trade." in contract interpretation into a hierarchy, what is it?
Distinguished from interpretation: Focus of interpretation is on objectively discerning the parties' intended meaning of the terms actually reflected in a written or oral agreement. ○Parol evidence rule is limited to written agreements and applies to parties' attempts to introduce prior/contemporary extrinsic evidence of terms NOT IN the written agreement, and that would supplement (add to) or contradict the written agreement's express terms.
Difference between Contract Interpretation and Parol evidence.
Categories in subsection (1) involve threats so shocking that the court will not inquire into the fairness of the terms of the exchange. Threats in subsection (2) must be in combination with unfair terms of exchange.
Difference in the 2 categories of Duress?
if there is unfairness in the bargaining process such that there is an "absence of any meaningful choice" for one of the parties and the result is unfair or oppressive contract terms, then the courts may provide relief based on the doctrine of unconscionability.
Doctrine of Unconscionability
Because a threat only becomes improper when it amounts to an abuse of the bargaining process,
Duress is distinguished from market pressure or driving a hard bargain how?
Recall when we discussed the pre-existing duty rule, we saw how the doctrine of consideration could be employed to protect parties against attempts to withhold services in exchange for more advantageous terms under an existing contract We also saw, however, that the consideration doctrine can be an imperfect shield in these situations because all the other party has to do is compel better terms and list some new consideration that is of small value by comparison to the new gain they would receive.
Duress relating to contract modification- What is the Preexisting Duty Rule
doctrine of Duress
Policing doctrine that protects situations in which there is no physical force or other improper threat?
Example: Sweet innocent Bobby Joe shows up to your house with his Uncle Guido and offers to buy your F150 (advertised on social media for $20,000) for $15,000. You reject the offer. Bobby Joe says, "Shucks! Well, thanks for considering my offer," and then walks out the door. His Uncle Guido, however, stays behind. He walks up, grabs you by the neck and says—"I'm not as nice as my nephew; you better call him back and take $15K or you'll be sleeping with the fish tonight......
Example of Coercion by a Nonparty
Popeye enters into an agreement with Wimpy to purchase 100 hamburgers. During negotiations, Popeye says he wants the hamburgers on Tuesday. Wimpy responds that he may not be able to get them to Popeye until Thursday. Popeye responds: "Thursday delivery is fine." The parties then reduce their agreement to a final writing and both sign. The writing expressly provides: ○Popeye must pay Wimpy $500 Monday ○Wimpy must deliver 100 hamburgers on Tuesday Wimpy delivers the hamburgers on Thursday and Popeye sues for breach of contract. ○What parol evidence would Wimpy want to introduce? ○Is it admissible?
Example of Parol Evidence.
Actively concealing termite damage by placing a heavy dresser over the hole in the floor is treated the same as making the false statement, "There is no termite damage to this house.
Example of concealment?
Example: Perpetrator grabs victim's hand and forces to sign
Example of duress by physical compulsion?- victim is a "mechanical Instrument"
Example: I sell a minor my F-150 for $20,000. He paid me $5,000 down and promised to make $500-a-month payments. The minor totals the truck by sinking it in quicksand. Afterwards, he disaffirms the contract. Under the general rule, I must return the $5,000 and any payments made. The minor is not required to pay me any restitution for the truck or its use. Note: Some courts are less lenient toward the minor and will grant varying degrees of restitution to the major. Major may also (depending on circumstances) be able to bring a tort claim for fraud or negligence.
Example of the Minors Obligation in a contract?
Where it amounts to an abuse of the bargaining process
For purposes of Duress, what makes a threat improper?
General Rule: Where a court finds that there was improper bargaining that induced assent to an agreement, the usual remedy is to allow the victim to avoid or rescind the contract. In other words, such a contract is generally voidable by the victim.
General Rule for Improper Bargaining Remedies
We will see that the common law and UCC take different approaches, but generally speaking, the parol evidence rule provides that where the parties execute a writing that is intended to be a complete and final expression of their agreement (i.e., "fully integrated"), no parol evidence may be admitted to supplement or contradict it.... If, however, the writing reflects a contract, but it is not a final and complete expression of the agreement with respect to some rights and obligations (i.e., it is only "partially integrated"), then consistent (but not contradictory) parol evidence may be admitted to supplement those parts of the agreement that have not been finally expressed.
General Rule of Parol Evidence?
at the courts discretion; the courts will not just look at the relative moral/legal guilt of the parties, but will also consider the goals of (public interest served by) the law that was violated. For example, even if both parties are equally aware the contract is illegal, the courts may look to which party (if either) the law is designed to protect. If one of the parties was intended to be protected by the law, the court may consider this in applying the doctrine of in pari delicto and may grant enforcement or restitution.
How do the courts apply the doctrine of in pari delicto?
A Minor cannot ratify a contract until he reaches the age of majority. Once of age, generally can be ratified explicitly, implicitly by conduct, or implicitly by silence (failure to avoid after a reasonable time)
How does a minor ratify a contract?
UCC 1-303 (a)-(c): (a) A "course of performance" is a sequence of conduct b/w the parties to a particular transaction that exists if: 1) The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and 2) the other party, with knowledge of the nature of the performance an opportunity for objection to it, accepts the performance or acquiesces in it without objection. (b) A "course of Dealing" is a sequence of conduct concerning previous transactions b/w parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (c) A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.
How does the UCC 1-103 define "course of performance", "course of dealing". and Usage of trade" in dealing with contract interpretation?
UCC 1-103(d): A course of performance or course of dealing b/w the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
How does the UCC 1-103 use "course of performance," "course of dealing," and "usage of trade." in contract interpretation?
UCC 2-306 imposes a duty of good faith on output and requirements contracts, thereby allowing it to meet the test for mutuality of obligation and consideration—and it also prevents one party from attempting to unfairly take advantage of favorable marked price fluctuations: -Output Contract: Buyer Agrees to Purchase Entire Output of Seller. -Requirements Contract: Seller Agrees to Provide however much of a specified good the Buyer Requires. UCC §2-306(1) - Output, Requirements and Exclusive Dealings "(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith...."
How is an Output & Requirement contracts determined?
Common Law. Under UCC 2-209, the preexisting duty rule is eliminated altogether for contract modification.
If the pre-existing duty rule is being used for contract modifications is it UCC or Common law?
Most courts recognize such modifications under the supervening difficulties doctrine; always precluded by the preexisting duty doctrine
In situations where there are no improper threats and both parties want to modify a contract (w/out) new consideration) due to unforeseen problems arising after contract formation what may allow for that and what will never allow for that?
contracts for Necessaries-
Limited exception to Minors entering contracts in which they may be held legally bound to the contracts they enter into?
Doctrine of Fraud
Policing doctrine of fraud that requires a misrepresentation (whether by express assertion, concealment, or silence)?
The presumption is that when parties make the effort to reduce their agreement to a writing, they intend that writing to control the agreement as its final expression. Thus, to protect the reasonable expectations of the parties, the final agreement should be understood as superseding any other agreements concerning the same subject matter that came before or contemporaneous with its execution. Also presumes that written record is more reliable than recollections. Also protects against fraud or self-serving testimony after the fact.
Rationale of Parol Evidence RUle.
Lack Capacity: Prior to reaching the age of majority (usually 18), minors do not have the legal capacity to be contractually bound. Rationale: To protect minors from exploitation due to lack of education and experience. ○Easier to apply bright-line objective age test than case-by-case analysis of capacity.
Rule for Minors entering into contracts?
varies;Some courts (such as in Foss) say that the "immature" behavior by minors to misrepresent their age is precisely why minors are protects; Other courts are not so forgiving and will not allow a minor to avoid a contract if they fraudulently misrepresented their age- so long as the victim of the fraud can prove all the elements of fraud ( Misrep., knowledge of falsity and intent to deceive, Actual inducement, justifiable reliance)
Rule of Minor's and Misrepresentation.
Under this doctrine, a promise modifying a duty under a contract not fully performed is binding (even without new consideration) where: -After the contract is made it becomes subject to substantial and burdensome difficulties not anticipated by the parties when the contract was made Cannot be a risk assumed by the party seeking the modification Cannot simply be result of error of judgment in setting price -Party benefiting from modification must conform to standards of honesty and fair dealing Not attempting to take advantage or coerce -The change in performance obligations must be reasonable and manifestly fair in view of the changed conditions.
Supervening Difficulties
Restatement 208 (Unconscionable)
The UCC 2-302 (Unconscionable) is the same as the what?
Fails to define or offer elements of unconscionability.
The UCC 2-302 nor the Restatement 208 do what?
UCC 1-103(b)
The UCC does not have separate provisions relating to either the doctrines of fraudulent misrepresentation or duress. But what is the common law version of these doctrines
Procedural Unconscionability & Substantive Unconscionability (Some courts require the presence of both & other courts are more flexible.)
The main 2 elements of Unconscionability that is drawn from the comments of UCC 2-302/Restatement 208
Fraudulent Misrepresentation Duress Unconscionability
There are doctrines in contract law designed to regulate/police improper bargaining. Among these are:
"The basic test is whether, in light of the general commercial background and 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 the prevention of oppression and unfair surprise." -"gross disparity in the values exchanged may be an important factor" (Restatement §208 Comment c) -"gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative...." (Restatement §208 Comment d) Other factors which may contribute to a finding of unconscionability in the bargaining process include (Restatement §208 Comment d) : belief by the stronger party that there is no reasonable probability that the weaker party will fully perform the contract knowledge of the stronger party that the weaker party will be unable to receive substantial benefits from the contract knowledge of the stronger party that the weaker party is unable to reasonably to protect his interest by reason of ○physical or mental infirmities ○Ignorance ○illiteracy ○inability to understand the language of the agreement
Though no guidance is given by the language of the UCC & Restatement provisions, what do the comments to UCC 2-203/ Restatement 208 say counts as "unconscionable"?
Permits incapacitated people to avoid any contracts entered into while incapacitated.
To protect incapacitated persons, what does the law do?
"If a contract or term thereof is unconscionable at the time the contract is made, a court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid any unconscionable result."
Unconscionable contract or Term Restatement 208
(1) Judge decides the question of whether the written agreement is integrated—and if so, whether it is fully integrated (in which case no parol evidence is allowed) or only partially integrated. (2) If it is only partially integrated, and the term at issue was missing or incomplete, then the court will admit parol evidence that is consistent with the express terms of the written agreement to supplement its terms.
We have seen that the parol evidence rule's application will depend on whether the court finds the agreement is fully or only partially integrated. The courts generally apply a two-step process:
Restatement 202- Rules in Aid of Interpretation Restatement 203- Standards of Preference in Interpretation UCC 1-303- Course of Performance, Course of Dealing, and Usage of Trade
What "tools" are given for general guidance for interpreting Contractual Terms?
Must be an improper threat. Threat must leave the victim with no real choice.
What MUST be the case for duress?
EXP: You hire a hit man for $5,000. - Hit man bungles job and you want your $5,000 back. EXP 2: You enter into a loan agreement to borrow at 40% interest where usury law limits interest to 25%.- You seek to rescind the contract as illegal and a return of the usurious interest paid.
What are some examples of IN Pari Delicto?
4 corners & Contextualist
What are the 2 CL approaches the the parole evidence rule?
Guilty state of mind ("Scienter" ): Knowledge of (or reckless indifference to) falsity; Intent to mislead
What are the 2 components to the guilty state of mind ("scienter") requirement for misrepresentation to be Fraudulent or Material?
1) Protection of the reasonable expectations of the other party. - Even more important than in the case of infancy because at least minors' youthful appearance should put the other party on some inquiry notice. 2) Protection of persons who cannot protect themselves. (This balance test is reflected in Restatement 15)
What are the 2 important policy considerations the court must balance in determining the treatment of contracting parties suffering from SOME mental incapacity?
The court may determine the contract is void on public policy grounds (not enforceable by either party). Alternatively the courts may exercise discretion to fashion a remedy where justice or policy requires—e.g., full enforcement, full rescission, modification, severing a term, restitution, etc.
What are the remedies for violations of Public Policy?
Not illegal but nevertheless conflicts with settled public policy outlined in legislative goals or common law precedents.
What are violations of public policy?
The court can either declare the contract void/voidable for vagueness or indefiniteness; or the court can supply or remove a term as a matter of law (drawing on law to construct a resolution to the problem as a matter of law)
What can the court do if parties clearly intended a contract but terms are missing; parties' contrary readings cannot be resolved by interpretation; Terms conflict with law or policy?
What counts as a necessary is a fact-based determination, but it is generally regarded as involving something more than the bare necessities of life (food and shelter) and something less than luxury items. -Necessaries are sometimes described as "useful and appropriate" goods and services. -Determining whether something is a necessary is fact-intensive. It may depend on the minor's status. E.g., If living at home with parents, then very little might qualify as a necessary. But if emancipated (married or in military), much more will qualify as a necessary.
What counts as a necessary, in which minors may be legally bound by contracts that they enter into.
"Spoken Word" - oral evidence of agreement- today however it refers to both oran and written terms.
What did Parol Evidence originally mean?
UCC 2-311 - Options and Cooperation Respecting Performance: (1) An Agreement for sale which is otherwise sufficiently definite (Section 2-204) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness. (2) Unless otherwise agreed, specifications relating to assortment of the goods are at the buyer's option and...specifications or arrangements relating to shipment are at the seller's option....
What does Restatement UCC 2-311 say about gap filling options and cooperation respecting performance?
An agreement modifying a contract within this Article needs no consideration to be binding. - Thus, the pre-existing duty rule does not apply to contract modifications under the UCC, but the comments to §2-209 emphasize that such modifications will only be enforceable when made in good faith (precluding those extorted by improper threat).
What does UCC 2-209 say about modifying contracts?
- Imposing specific statutory or common law gap-fillers/ default rules (e.g., UCC 2-305- Open Price term) - If parties want to avoid the application of default rules, they may "opt out" of them expressly in their agreement." - Drawing on general principles of contract law (e.g. fairness, efficiency, good faith, common law principles, etc.)
What does contract construction usually consist of?
parol evidence refers to both oral and written terms agreed to prior to (or contemporaneous with—in the case of oral) the execution of the final written contract, but which are not referenced in it. Note: While all courts consider contemporaneous oral statements to be covered by the rule, most courts will not exclude contemporaneous written agreements because courts will presume they are part of (supplements to) the final written agreement.
What does parol evidence apply to?
Restatement §205 - Duty of Good Faith and Fair Dealing "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." ○Comment (a): "...The phrase 'good faith' is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving 'bad faith' because they violate community standards of decency, fairness or reasonableness....
What does the Restatement (205) - Duty of Good Faith & Fair Dealing say?
Restatement §202(1) offers the general guidance that, ○"Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight." Restatement §202(5) provides that ○"Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade."
What does the Restatement say about contract interpretations?
UCC §1-304 - Obligation of Good Faith "Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement." ~~UCC §1-201(b)(20): "'Good faith,'...means honesty in fact and the observance of reasonable commercial standards of fair dealing."
What does the UCC 1-304 - Obligation of Good Faith say?
UCC-2-204(3) - Formation in General: "...(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy."
What does the UCC say about contract construction?
UCC §2-202 - Final Written Expression: Parol or Extrinsic Evidence "Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented (a) by course of performance, course of dealing, or usage of trade (Section 1-303); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement [i.e., unless it is determined fully integrated]." UCC §2-202 Comments: Comment 2: Paragraph (a) makes admissible evidence of course of dealing, usage of trade and course of performance to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached. Such writings are to be read on the assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negated they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties is considered the best indication of what they intended the writing to mean. UCC §2-202 Comments: Comment 3: Under paragraph (b) consistent additional terms, not reduced to writing, may be proved unless the court finds that the writing was intended by both parties as a complete and exclusive statement of all the terms. If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.
What does the UCC say about the parol evidence rule?
softens the strict application of the general rule that courts will not enforce illegal contracts. Under the doctrine of in pari delicto, the law leaves parties who have participated in an illegal contract where it finds them if they are "equally guilty." This means generally: If plaintiff is equal or greater in guilty, then ○No Enforcement by either party (void) ○No Restitution If plaintiff bears less guilt, then the court may grant some form of remedy. ○
What does the doctrine of In Pari Delicto doe?
Restatement §204 -Supplying an Omitted Essential Term: "When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court."
What does the restatement say about supplying an omitted essential term?
-Unforeseen problem must be substantial and burdensome -Party seeking modification must not have born the risk -Both parties must be acting in good faith - Change in the performance obligations must be reasonable and fair in view of changed circumstances.
What elements must be met for the Supervening Difficulties Doctrine to apply?
The language of the contract The history of the parties' (course of dealing) The formation process The course of the parties' performance of this contract Any relevant usages of trade
What facts may be considered when interpreting contracts?
UCC 2-209
What governs contract modifications for the sale of goods?
does not decide the question of the agreement's enforceable terms—the fact finder must still evaluate the credibility of the evidence and otherwise determine whether it is enough to reflect a binding agreement by the parties to that term.
What happens after admitting parol evidence?
Contract construction- the court applies specific gap-filling provisions. If parties do not want this. (either under CL or UCC) they may OPt Out by explicitly inserting a contrary term
What happens if parties are silent on a certain issue?
The courts will impose the default rule automatically that are presumed to be most efficient/beneficial for the average contracting party and for society as a whole.
What happens if parties do not expressly address the subject-matter covered by the default rule?
Where there is physical compulsion by a non-party, the contract will be void as to even innocent parties.
What happens when the one who makes the improper threat is not a party to the contract?
Basic approach to interpretation of a written contract: 1) The court will review the disputed term and determine whether it is ambiguous (task of the judge not jury) 2) If NOT ambiguous , the the court will decide the case by giving the unambiguous meaning the legal effect 3) If the term admits of more than one reasonable meaning, the court will turn it over to the jury to decide- with the benefit of any admissible extrinsic evidence the parties may offer
What happens when there is a written contract, but the dispute is over the meaning of a particular word?
UCC 2-305- will gap fill and supply a "reasonable" price term
What happens where it is clear that a party intended to enter into a contract for the sale of goods, but failed to include a price term?
the contract is voidable by the victim.
What happens where one party's manifestation of assent is induced by another party's improper threat that leaves the victim no reasonable alternative,
an illegitimate threat to proprietary or economic interests. Economic duress is a well recognized basis for relief. Nevertheless, this should not be confused with simple inequality in bargaining power, or even driving a hard bargain.
What is Economic Duress?
a defense against enforceability that relies on the courts' reluctance to allow the judicial process to become involved with (or tainted by) certain transactions. Fairness to the parties is not the main focus.- subject matter or terms of agreement are illegal The defense of illegality traces to The Highwayman's Case, an unreported English decision from 1725....
What is Illegality?
"A misrepresentation is an assertion that is not in accord with the facts."
What is Misrepresentation
Where one of the parties, having superior bargaining power, is able to dictate the terms of the contract to the other on a take-it-or-leave-it basis, and the weaker party has no choice but to "adhere" to the terms. - Not necessarily bad/unconscionable because it often results in greater efficiency, centralizes decision-making, lower transaction costs, and therefore lower prices for consumer. We need to allow for these standard form contracts.
What is a Contract of Adhesion?
Parties can protect themselves against the introduction of parol evidence to supplement the terms of their written agreement by including a "merger" or "integration" clause. ○Such clauses state that the written contract is the entire agreement between the parties, and that no representations or promises have been made save for those explicitly set out in the writing. Four corners courts will almost always defer to a merger or integration clause. Even contextualist courts will give a merger or integration clause great weight.
What is a Merger/Integration clause?
Seller Agrees to Provide however much of a specified good the Buyer Requires.
What is a Requirements Contract?
Where a contract is void (e.g., fails for lack of consideration), it is not a contract at all. It is a legal nullity, so neither party can sue to enforce the agreement.
What is a Void contract?
Where a contract is voidable, it is valid and fully enforceable unless and until the aggrieved party under one of the policing doctrines elects to exercise the right to terminate (or avoid) it.
What is a voidable contract?
Buyer Agrees to Purchase Entire Output of Seller.
What is an Output contract?
As we've seen, the parol evidence rule only applies once it is understood the parties have entered into a valid, enforceable contract. Consequently, as a general rule, extrinsic evidence that an alleged contract is either void or voidable is admissible as an exception to the parol evidence rule. For example, in cases of clear fraud that otherwise make an agreement unenforceable, courts may find the parol evidence rule cannot be relied upon to exclude extrinsic evidence of the fraud.
What is an exception for evidence of voidability or invalidity of the contract
the courts will sometimes order excision or modification of an offending term as a remedy; This may occur where the aggrieved party would prefer to keep the contract in effect, but remove or modify the term that resulted from the other party's improper bargaining.
What is another possible remedy that the courts will sometime order instead of the avoidance or rescission of a contract that resulted in improper bargaining?
This is because there are simple ways to get around the pre-existing duty rule by changing contract terms (e.g., adding some minimal consideration).
Why can the policing doctrine of duress provide better protection against unfair bargaining contract modification than the preexisting duty rule can?
Contract "construction" refers to the process of imposing contract terms (or meaning of existing terms) by legal implication. Construction goes beyond the search for what the parties intended; instead the court imposes a term/meaning as a matter of law, drawing on Legal default rules and background principles Considerations of justice and fairness Other public policy considerations Courts may construct contract terms where it is clear a contract was intended and: (1) Not enough facts to determine objective intent of parties, and/or (2) Where the law otherwise demands imposition of terms (regardless of objective intent)
What is contract Construction?
Contract interpretation is how the court might approach a dispute over the parties' intended meaning of a contracts terms, but Contract Construction the parties agree there was a contract but terms are missing, parties' contrary readings cannot be resolved by interpretation, terms conflict with law or policy
What is contract construction compared to contract interpretation?
The process of discerning the meaning reasonably intended by the parties to a contract that has already been formed. In interpreting what intent was manifested by the parties, facts such as the following may be considered: The language of the contract The history of the parties (course of dealing) The formation process The course of the parties' performance of this contract Any relevant usage of trade
What is contract interpretation?
Contracts that are not illegal but nevertheless offends public policy.
What is more difficult to determine that contracts that are illegal?
Good faith (both UCC and Restatement recognize)
What is one general principle the court will sometimes rely on to construct missing or ambiguous terms for the parties?
must meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a 'modification' without legitimate commercial reason is ineffective as a violation of the duty of good faith...
What is required for an agreement modifying a contract within UCC 2-209 needing no consideration to be binding?
The modern trend is to rely more on extrinsic evidence of meaning in contracts from the outset of the interpretive process. - SO courts will consider extrinsic evidence to make the initial determination of ambiguity - Rationale: The idea is that sometimes the extrinsic facts/context surrounding: The parties' history, contract formation, course of performance, usages of trade, may render terms that are unambiguously on their face (and vice-versa)
What is the "Contextualist Approach" to contract interpretation?
1) Court attempts to determine whether language at issue is ambiguous on its face (e.g., differing dictionary definitions and other language in the document) - looking at nothing other than the document in its entirety. No extrinsic evidence is permitted at this stage. 2) If the court finds the terms are NOT ambiguous on their face, then the court will adopt that meaning WITHOUT reference to any conflicting extrinsic evidence. 3) Only if it IS ambiguous on its face can extrinsic evidence be consulted under the Plain Meaning approach
What is the "Plain Meaning Approach" used by courts in contract interpretation?
"Four Corners": Looks to only the four corners of the written agreement in determining whether integrated—no extrinsic evidence is considered. If the document interpreted as a whole (in accordance with the plain meaning of the text) appears to be a full and final expression of the agreement, it is fully integrated—and no parol evidence is admitted to supplement its terms Rationale: Logical application provides greater clarity for the parties and greater predictability. If the parties want to include other terms, this strict application encourages them to make their intentions explicit in the agreement at the outset.
What is the 4 corners approach- common law application of the Parol Evidence?
If the minor party has performed (or partially performed), the major party will be required to offer full value of the minor's performance to the minor.
What is the Adult/Major's Obligation once a contract is Disaffirmed?
If the adult/major has performed, the general rule is that the minor is only required to return what he or she has left of the major party's performance (value still retained). Repayment of full value at time of contract is not typically required.
What is the Minor's Obligation once a contract is Disaffirmed?
Focuses on the bargaining behavior of the parties and tries to identify whether there was an absence of meaningful choice: -Were unfair bargaining tactics employed? -Was there a disparity in power between the parties? -Was there "oppression" or "unfair surprise (or terms not reasonably expected)"? (UCC) -Was there awareness of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors? (Restatement)
What is the Procedural element of Unconscionability ?
Focuses on the outcome of the bargaining process: - Is there a gross disparity in the values exchanged? - Are the terms harsh, unfair, or unduly favorable to one of the parties?
What is the Substantive element of Unconscionability?
(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. ["COGNITIVE TEST" - DID HE UNDERSTAND THE NATURE OF THE TRANSACTION?] -[FAIL TEST: THINK YOU ARE SELLING A DOG WHEN SELLING A CAR] (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 ["MOTIVATIONAL TEST" - EVEN IF HE UNDERSTOOD THE NATURE OF THE TRANSACTION, COULD HE CONTROL HIS ACTIONS?] -[FAIL TEST: UNDERSTAND SELLING A HOUSE AT HALF PRICE AND THAT THIS WOULD MEAN SHE COULDN'T PAY BILLS (SO DOES NOT SATISFY (1)(a))—BUT GO THROUGH WITH IT ANYWAY.] -No rational explanation for the decision, so must be presumed it resulted from an "irresistible impulse" driven by illness. (2) Where the contract is made on fair terms and the other party is without 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. Note: A finding of mental incapacity must usually supported by expert psychiatric evidence. The law presumes an adult is competent until proven otherwise.
What is the balancing test (laid out in Restatement 15) for determining whether a party is considered mentally incapacitated to enter into a contract because of Mental illness or Defect?
Contextualist: Recognizes that even writings that appear full and final within their four corners can be exposed as incomplete when considered in light of the entire context of the transaction. Courts adopting the contextualist approach will therefore look beyond the four corners of the document and consider extrinsic evidence that may reveal that an apparently integrated writing was in fact not intended to by fully integrated. Adopts the approach reflected in Restatement §216(2)(b) "An agreement is not completely integrated if the writing omits a consistent additional agreed term which is...such a term as in the circumstances might naturally be omitted from the writing."
What is the contextualist approach- common law application of the Parol Evidence?
EXCEPTION: 15(2) Where the contract is on fair terms, the other party does not know of the mental incapacitation, and an avoidance would be unjust.
What is the exception to contracts dealing with mentally incapacitated when 15(1) has been met?
Both parties are entitled to restitution: Any benefit of the contract received by either party before the rescission must be returned. Otherwise there would be an unjust enrichment
What is the general rule (though not always) when a contract is avoided?
An affirmative false statement or active concealment of the truth
What is the most straightforward case of fraud in the inducement?
facilitative- save time, expense, and risk of error in bargaining every detail- This makes it easier for parties to make enforceable contracts and thus presumably advances important goals of contract law: autonomy and efficiency.
What is the purpose for courts using default rules?
They allow the court to look beyond objective manifestations of assent to find an agreement is unenforceable because the assent was not truly voluntary because it was obtained by improper means.
What is the purpose of the policing doctrines (Fraudulent Misrep., Duress, Unconscionability)
1) Deter bad behavior; 2) Avoid undermining the integrity of the legal system
What is the rationale behind the policing contract formation for illegality?
No action arises out of an immoral act: - No enforcement (contract void) - No restitution
What is the rule of the HIghwayman's Case from the English common law doctrine of ex turpi causa non oritur actio- mean ?
Restatement 202-3 UCC 1-303
What law governs contract interpretations?
UCC 2-201 (SOF)
What must be satisfied if the contract as modified is within its provisions.
The courts must balance the interest of freedom of contract and individual autonomy against the relevant public policy interests. If the harm to the public interest outweighs the benefit of enforcing the otherwise valid contract, then the courts may not enforce
What must the courts do in determining whether to enforce a contract that violates public policy?
the question of integration- whether the written agreement is fully or partially integrated. (Common law courts take diff. approaches)
What question does Parol Evidence Rule typically turn on?
Remedies: Contracts entered into by minors are not legal nullities. Instead, they are voidable at the minor's election. Consequently, a minor is free to disaffirm a contract at any time prior to reaching the age of majority, and up to a reasonable time after turning 18. Note: Severance of a particular term is not generally allowed. -This makes sense. If the minor's defense is lack of capacity to assent, she lacked capacity to assent to any of the contract's provisions.
What remedies are given to Minors who entered into a contract?
Avoidance, excision, or modification- judges decide.
What remedies for Unconscionable contract or clause? Who decides them?
Cross-Collateralization Clause- This gave Walker Thomas a security interest in the goods bought under the new transaction, as well as in all goods that the customer had ever bought from it in the past.- Sparked the policing doctrine of unconscionability
What was going on in William v. Walker- Thomas Furniture Co. (1965)?
Minors & Mentally Incapacitated Adults (unable to voluntarily assent)
Whats the 2 exceptions to the belief that all persons are presumed to have the capacity to enter into contracts?
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent Note: The kind of physical compulsion contemplated here is literal—where the victim becomes a "mere mechanical instrument." The failure of assent means the contract is void.
When Duress by Physical Compulsion Prevents Formation of a Contract:
"(2) If a party's manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction."
When Duress by Threat Makes a Contract Voidable- Restatement 175(2) - non-party
No fraud by silence because the assumption is that parties entering into a contract are each agents in the free market.
Why does a buyer who has thoroughly researched the real estate market not have to tell the seller that the house is priced well under its market value?
(2) A threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, (c) what is threatened is otherwise a use of power for illegitimate ends.
When a threat is improper if underlying exchange is NOT fair?
Where shown by reason of mental illness or defect, the person is: 1) unable to reasonably understand the nature and consequences of the transaction ("Cognitive" test under 15(1)(a)) or 2) is unable to act in a reasonable manner in relation to the transaction and other other party knows (or should have known) this ("Motivational" test under 15(1)(b)) EXCEPTION under 15(2)
When are contracts voidable by the mentally incapacitated?
(1) If a party's manifestation of assent is induced by improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
When does Duress by threat makes a contract voidable?- Restatement 175(1)
The parol evidence rule comes into play where: (1) an agreement is recorded in writing and (2) one of the parties' attempts to introduce extrinsic evidence (Parol Evidence) that the parties agreed to a term prior (written or oral) to or (contemporaneous with) the execution of the final writing, (3) and the term is not reflected in the final writing.
When does Parol Evidence Rule Apply?
If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient; There must be a causal link between the misrepresentation and the contract that actually motivated the other party.
When does a Misrepresentation make a contract voidable?
If it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so
When is a misrepresentation Material?
if the maker intends his assertion to induce a party to manifest his assent and the maker: 1) Knows or believes that the assertion is not in accord with the facts, or 2) Does Not have the confidence that he states or implies in the truth of the assertion 3) Knows that he does Not have the basis that he states or implies for the assertion
When is a misrepresentation fraudulent?
(1) A threat is improper if (a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in retaining property [e.g., blackmail], (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (d) the threat is a breach of duty of good faith and fair dealing under a contract with the recipient.... Note: Remember that there still must be inducement such that the victim had no reasonable alternative—so a threat of a minor crime or tort may not itself warrant a finding of duress if there were reasonable alternatives to assent.
When is a threat improper regardless of fairness of underlying exchange? (elements)
Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.
When is an action equivalent to an assertion? (Concealment)
Only where there is a duty to disclose information
When is misrepresentation by omission fraudulent?
(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. (c) 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. (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.
When is non-disclosure equivalent to an assertion?
(1) offers examples of improper threats regardless of the fairness of the underlying exchange (2) offers more liberal guidelines for finding a threat is improper, but they only apply where underlying exchange is manifestly unfair
When is the threshold into improper bargaining crossed According to Restatement 176
When there has been extreme improper threat by Physical Compulsion; where a threat involves actual physical compulsion such that the victim's body is nothing more than an instrument,
When is there NO assent and the contract is void (whether if by a party or 3rd party)
Where it was clear a contract was intended and: 1) Not enough facts to determine objective intent of parties, and/or 2) Where the law otherwise demands imposition of terms (regardless of objective intent)
When may courts construct contract terms?
When the other party has given value or otherwise detrimentally relied on the contract. (Restatement 175(2))
When will a situation where a third-party threat that satisfies the test for finding duress, the contract will NOT be found voidable at the victims discretion
When parties clearly intended a contract but: Terms are missing altogether (and there is no evidence of the parties' intent) or Methods of interpretation cannot resolve the parties' conflicting readings of a disputed term or The terms are in tension with principles of law or public policy
When would contract construction come into play?
The non-incapacitated party is typically required to provide full restitution of value receive. The incapacitated party, however is usually only required to return the value still in possession. Under some facts, however (e.g., fraud or gross negligence), the law may (in some jurisdictions) provide some remedy in contract to the non-incapacitated party—or that party may be able to bring an action under another theory (e.g., tort).
Where both parties have performed under a contract that is voidable due to incapacity, what remedy (if any) is provided?
engaged in contract construction.
if a court chooses to supply/remove terms as a matter of law, what have they done?