Policing the Bargain

May I see your contract, sir?

Policing the Bargain?A Possible Checklist

• Capacity: Not everyone isallowed to play the game.

• Behavior: Some rules regulate how actors behave on the field (or on the ice).

• Substantive fairness: The referee can call the game if the outcome is appalling.

There are rules even in hockey and contracts.

Incapacity: Some People Can’t Make Contracts

• Capacity through the ages: Race, gender, marital status.

• Age < 18 for most purposes.

• Temporary mental incapacity.

• Persistent mental incapacity.

• Protection? Or oppression?Why can’t his

business get a loan?

Kiefer v. Fred Howe Motors

Did you remember to run his credit report?

When Children Make Contracts Kiefer v. Fred Howe Motors

• How did Kiefer resemble an adult? Does it matter?

• Effect: Voidable contract.

• Child’s right to disaffirm within reasonable time after majority.

• Is adult bound by contract if child does not disaffirm?“Cancel that deal.

I changed my mind.”

Potential RemediesFor the Disappointed Party

• Delay in disaffirming.

• Emancipation.

• Purchase of “necessaries?”

• Restitution of what is left of goods.

• Misrepresentation: But is there a duty to investigate young person’s age?

If he says he’s 18, can you rely on it?

Problem Minor accepted a job at the Check’s Diner at the age of 17 yrs. and 8 mos. She signed an agreement to submit all disputes to arbitration, and a promise not to misappropriate Check’s “confidential information.” Six months later, Minor resigned and sued Check’s for sexual harassment. Check moved the court to compel arbitration. In reply, Minor asked the court to deny the motion to compel because the agreement to arbitrate was voidable (lack of capacity). How would you rule?

Ortelere v. Teachers’ Retirement Board

Creeping Incapacity

Signs of Incapacity? Ortelere v. Teachers’ Ret. Bd .

• On leave for mental illness.

• Consulted w/ district psychiatrist.

• Diagnosis: Involutional psychosis (severe depression).

• Possible cerebral arteriosclerosis.

• Husband retired to care for her.Does depression mean you lack capacity?

Common Law Cognitive Rule:Restatement (2d) § 15(1)(a)

• Completely capable or completely incapable.

• Could she understand the nature of the transaction?

• Evidence: Delusions; inability to comprehend transaction; inability to make rational decision.Ready for the asylum? If not,

her contract is binding.

Modern “Reasonably Act” Test: Restatement (2d) § 15(1)(b)

• For diminished capacity, emotional illness.

• Unable to act in reasonable manner regarding contract and other party had reason to know.

• Court might still enforce fair

and partly performed K.

Does contracts law need a caution sign?

Ortelere: Mental Illness CausingInability to Act Reasonably?

• Illness: Severe depression.

• Unable to act reasonably with respect to pension?

• Was it unreasonable to take maximum advance with single life annuity?

• Did District have reason to know about her condition?

Gambling on life?

Other Factors Possibly Tipping The Scales in Ortelere?

• Were actions unreasonable in her particular situation?

• Detriment or risk to the Fund?

• Is the case about her? Or him?

• Caveat: Risk of over-protection for other persons suffering depression?

Cundick v.

Broadbent

Does a bad bargain prove

incapacity?

The Dutch buy Manhattan for a handful of beads.

Weighing the Facts In Cundick v. Broadbent

• Consulted with attorney

• Negotiated for higher price

• Family didn’t notice senility

• He understood nature of transaction

• Broadbent didn’t know otherwise.

• Grossly inadequate price?

• Secretly[?] consulted psychiatrist before deal.

• Diagnosis at time of trial: premature arteriosclerosis

• Experts believe he was probably of poor judgment when he made the contract.

Binding Voidable

Bottom line: Unequal bargain doesn’t guarantee rescission.

Unfairness: Conventional Controls

When Competent Parties Make an “Incompetent” Bargain

When the Plaintiff Seeks An “Equitable” Remedy

Bypassing courts and seeking the mercy of the King.

McKinnon v. Benedict

Will campers spoil the view?

McKinnon v. McKinnonWhen Courts do “Equity”

• Common law: damages.

• Equity: specific performance.

• Why did McKinnon prefer specific performance?

• Traditional rule of equity:unequal exchange relevant.

• A modern reason to consider inequality: Specific performance might compound inequality.

What happens when a judge thinks like the Chancellor?

ProblemDiane Toiler applied for a job and was hired as a nurse by

Star Medical Services. Her contract provided that she would not work as a nurse for any other employer or in her own business in the same county for two years after the termination of her employment with Star. Three months after Star Medical hired Toiler, it discharged her from employment. Toiler walked across the street to apply for work at Public Hospital, and Public Hospital hired Toiler. However, Star sued Toiler for breaching her contract. What is the likely result if Star sues for damages? What if it sues for specific performance?

Does anyone other than Star and Toiler have a stake in the outcome?

Tuckwiller v. Tuckwiller

When a fair deal becomes a windfall

Tuckwiller v. TuckwillerContract as a Lottery

• Promise: Take care of me for life; I will give you my farm.

• Was contract “fair” or equal on day it was made?

• Why is exchange so unequal in retrospect?

• Which perspective counts? Did Mrs.Tuckwiller take advantage of her aunt?

Black Industries

v. Bush

The War Profiteer

Are Exorbitant Profits

Against Public Policy?

Black Industries v. BushProfiting at Public’s Expense?

• How is contract unequal?

• Why might plaintiff have gained such an advantage?

• Does public have stake in preventing such disparity?

• General rule: Exorbitant profit not per se illegal or grounds for avoiding the contract.

Overreaching:

Conventional Controls

When a Contract Isn’t A Voluntary

Exchange

The Godfather makes an offer

Duress: From Medieval To Modern Times

• Old: Threat of harm to body or property.

• Modern: Threat of criminal, tortious or other unlawful act.

• Effect: Rescission and/or restitution.

• Uncertain zone: Threat of lawful act or inaction depriving party of free will.

“Now let’s discuss paragraph 6.”

Medieval Duress

Factors Tipping the Scales

In the Uncertain Zone• Diminished capacity.

• Comparative capacity.

• Relation of dependency.

• Unusual emotional or psychological stress.

• Predatory or borderline bargaining tactics.

The Pre-Existing Duty Rule

When a promisor exacts a toll for going forward.

Alaska Packers’ Assn. v. Domenico

Is the employer bound by its promise of a raise?

A Threat of Breach In Support Of Demand for New Terms

• First K: E promises $50 plus 2¢ per fish; workersto work one season.

• Workers’ threat: strike.

• Breach of contract?

• Employer capitulates: $100/season. Is promise to pay additional amount binding?

The fishermen find a way to stretch their pay.

Why Would Terms Change If Parties Can Renegotiate?

• Month 1: Labor supply in S.F. yields certain wage.

• Month 2: Labor supply remote harbor yields new wage (cover impossible).

• Month 3: Parties in SF; APA’s need for labor is now zero, yielding new wage. (cover unnecessary).

$

$

$

$

$

$

$

The Cost of “Cover” for the employer

Hiring workers in California

At work in Alaska

Returning to California

When do employees have the greatest bargaining power?

When does bargaining power shift back to the employer?

Why Terms Might Change(Performance v. Receipts)

• Month 1: APA offersfood, shelter, transport.(ees 1, E 0).

• Month 2: APA offersfood, shelter; workerswork. (ees 2, E 3).

• Month 3: APA offerstransport, food, shelter, pays wages. (ees 3, E 3).

Peformance v. receipts from other party

$

$

$

$

$

$

$

$ Feeds, shelters, transports workers

Obtains work from workers

Pays the workers

When do employees have the greatest bargaining power?

When does bargaining power shift back to the employer?

Alaska Packers: A Rule to Make Contracts Truly Secure?

• Was workers’ threat to breach contract duress?

• Did promise of more pay lack consideration?

• Why isn’t agreement to continue working consideration?

• Pre-existing duty rule.Will the payroll office be closed when the workers return to SF?

The Pre-Existing Duty RuleRestatement (Second) §73

The General Rule: “Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration….”

Problem Assume the facts are the same as in the original Alaska Packers case, but with the following difference. One of the fishermen is working his way through law school. On his advice, the fishermen insist that APA must now pay their compensation (including the raise) in advance by wiring the money to their personal bank accounts. They will return to work only when their accounts show that the money has been transferred. APA follows these instructions, and the work resumes.

Upon return to S.F., APA asks you, its lawyer, what it should do about all of this.

ProblemOwner purchased fire insurance for his house. One

day his house burned down. Under the terms of the policy, the insurer clearly owed $100,000. However, the adjuster arrived offered Owner a check immediately for $80,000 if Owner would accept the check as full payment. Owner needed money to pay for mounting bills, and he accepted the check. A few weeks later, Owner sued for the balance (the other $20,000 due under the policy). What result?

Another Look at RS § 73:Trouble in Paradise?

“Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration….”

Question: What if the amount due under the fire insurance policy was “doubtful?” What if the wage rate due the fisherman under their contract with APA was “doubtful?”

A Backstory in Alaska Packers:Was the Contract “Doubtful?”

• Agreed incentive pay/fish.

• Unexpected glut of fish and APA’s limited canning facility.

• Did APA supply nets designed to let fish go?

• Issue at trial: Did workers have just cause to resign?

• Was there an honest dispute?

Did loose nets reduce the workers’ pay?

Yet Another Look at RS § 73:More Trouble in Paradise?

“Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration, but a similar performance is consideration if it differs from what was required by the duty in way which reflects more than a pretense of bargain.”

Questions: (1) What if the fire insurance policy required payment in six months, but the adjuster offered a lesser amount right away? (2) Suggestions for the fishermen in their dispute with APA?

Summary of the PED RuleAnd Its Complications (Thus Far)

• Plausibly based on a real lack of consideration.

• Prevents quasi-duress in uncertain realm of threats of lawful action.

• Makes contracts truly binding and reliable.

• Problem: What if party seeking modification demands payment/performance in advance?

• Problem: Two potential loopholes: (1) doubtful dispute; (2) “different” performance.

Watkins & Son v. Carrig

When a Rock Appears Out of Nowhere.

Watkins & Son: Trying to Dig Their Way Out of a Hole?

• Contract: Excavate a cellar for stated price.

• Surprise: Rock (in New Hampshire!)

• Modification: 900 percent price increase.

• Alleged consideration for promise of higher price?

What lies just beneath the soil?

Another Exception to the Rule!A Ritual of “Mutual Rescission”

• One: Parties make a contract.

• Two: Parties make a second contract, each promising to release the other from dutiesremaining under first contract.

• Three: Parties make a third contract based on the newly demanded terms.

Preparing a contract for modification.

Reason for Leniency? Potential Oppression of the PED Rule

• Unexpected circumstances (the rock; a hurricane; a fire).

• Unilateral or mutual mistake.

• Usual rule: Either strict liability,or occasional relief by rescission (contract dissolved).

• Continuing relations under a modified contract, if possible, might be a better way.

Is an approaching storm fair grounds for modification?

Is It About Duress After All?Moving Toward a New Rule

• Section 89: “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 by the parties when the contract was made; … or (c) to the extent that justice requires enforcement in view of the material change of position in reliance on the promise.”

• UCC § 2-209(1): “An agreement modifying a contract within this Article needs no consideration to be binding.”

Comment: “However, modifications … must meet the test of good faith…. Nor can a mere technical consideration support a modification made in bad faith.”

Problems• Builder promised to build a house in return for Owner’s

promise to pay $500,000 in a series if “progress payments.” Because of an unexpected shortage of lumber and a significant increase in prices, Builder’s costs were much higher than expected. Midway through the project, he asked for an upward revision in price, and Owner agreed. Will the modification be binding?

• If Owner refused, could Builder (a) quit the job or (b) sue for damages?

• Suppose the facts are the same as in the first paragraph, except that Owner paid the entire contract price in one lump sum in advance. Result?

A More Modern Rule,But Not Out of the Woods, Yet

• Will we know good faith from bad faith?

• What if one party resists modification despite other’s desperate circumstances?

• Luck of timing: Under RS § 89, if either party has finished performance, modification not binding (contra UCC).

Will we know a devil from an angel?

Austin Instrument, Inc. v. Loral Corp.

When the Pre-Existing Duty Rule Fails To Protect Against Highway Robbery

Austin Instrument v. Loral When a “Victim” Has Paid in Full

• Why would PED rule fail to protect Loral?

• Loral’s cause of action:Restitution of money paidunder “economic duress.”

• Was the threat unlawful?

• Was Loral without option (e.g., suit for damages?)

The successful pirate doesn’t accept checks.

When Does Refusal to PerformConstitute Economic Duress?

• Original meaning: Withholding victim’s property under demand for money or concession.

• Can threat of economic loss substitute for loss of property?

• Special factors for Loral: Difficulty of “cover” without severe consequential damages; difficulty of proving and recovering damages.

What if a kennel demanded an extra fee to release Fido?

Undue Influence

Family Photo: Anna Nicole Smith and Howard Marshall

Undue Influence:A Confluence of Factors

• Misuse of relation of trust or dependency.

• Problems of diminished or comparative capacity.

• Asserted or manipulated need for hasty assent.

• Stressing ill consequences of failure to agree; orexaggerated benefits of agreement.

Felonius Fox recruits Pinocchio

Concealment &

Misrepresentation

More Trouble in the Garden

Of Voluntary Exchange? The snake presents the

apple.

Unequal Access to Information:Why Does One Know More?

• Education and experience.

• Purposeful investigation of particular subject matter.

• Experience with the subject.

• Chance acquisition of information (“insider” information).Is it fair to use the advantage

of superior knowledge?

A Duty to Disclose?Why Not Demand Disclosure?

• Are parties entitled to benefit of investigation and education?

• How much disclosure would be required?

• Are sharing and total disclosure contrary to human nature?

• Self-help: Investigate, ask, demand warranty.

Must you tell?What must you tell?

Problem

An oil company employs a geologist ($90,000 per year), satellite imaging and sophisticated equipment (purchased for $2 million to discover likely oil producing property). Using all these assets, the company has determined that your ranch is likely to have oil. One day, a cowboy (employed by the company) rides his horse up to your ranch house, speaks admiringly of the view from your land, and asks what your sale price is. Is he required to disclose his purpose for buying the property?

Swinton v. Whitinsville Savings Bank

The Latent Defect

Swinton v. Whitinsville Savings: Reaffirming General Rule

• Plaintiff’s unsuccessful theory: Tort (fraud).

• Reasons to question usual rule under these circumstances?

• Minority rule for latent defect.

• Potential equitable remedy(or defense) for a buyer?

• Potential advantages of equity for the buyer?

Problem:Feige v. Boehm Revisited

• Recall that Louis failed in arguing lack of consideration. What other argument might he try?

• Would Louis’s chances of success be better if he and Hilda were married, and their agreement was to settle a divorce?

Kannavos v. Annino

The truth … well …, at least some of the truth, or one part of the truth, so help you God?

Are Some “Half-Truths”Whole Falsehoods?

• This car was owned by a little old lady who only drove the car to church on Sundays [because her wild nephew was driving the car on the other six days of the week].

• This house has never been flooded [because we rebuilt it from scratch after the last flood].

• This property has a great view [of the new solid waste dump that will open next year].

Kannavos: “True” FactsImplying a Falsehood?

• Ads described “apartments” as “investment” property

• Presented profit statements.

• Suggested buyer could rent.

• House divided into units.

• Sale included unit furniture.

• Seller knew of buyer’s plans.

Must the seller disclose the code violation?

Kannavos: Is the Plaintiff’sNeglect Excusable?

• How might plaintiff have protected himself?

• Compare w/ Swinton: Which buyer had stronger case?

• Special reasons to excuse Anino?

• Are rules of equity at work again?

Misrepresentation

A Positive Misstatement of the Facts

Elements of MisrepresentationFor Rescission of Contract

• First: Material misrepresentation (of fact?).

• Second: Justifiable reliance.

• Creates defense, or ground for rescission—not damages.

• Intent unnecessary (compare tort law).

Vokes v. Arthur Murray, Inc.

Dancing closer than arms length?

The Contract in Vokes:A Case for the “Chancellor?”

• What is a “baited ‘comeon?’”

• Sale: 2303 hrs. over 16 mos. (35 hrs. of dancing/week) for $31,000 (over $100,000 in today’s dollars).

• Diminished or comparative capacity?

• Court: “it would not only be inequitable but unconscionable, for a court exercising inherent chancery power to allow such contracts to stand.”

Was the instructordancing too close?

Fancy Moves for a Court:Is Flattery Misrepresentation?

• Can opinion be misrepresentation?

• Can flattery be misrepresentation?

• Was there a “special relationship” between the salesman and his customer?

• The importance of the court’s function as the “chancellor?”“Tell me I’m young

and beautiful”