Policing the Bargain

1
Policing the Bargain
May I see your contract, sir?
2
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.
3
Incapacity Some People Cant Make Contracts

• Capacity through the ages Race, gender, marital
  status.
• Age lt 18 for most purposes.
• Temporary mental incapacity.
• Persistent mental incapacity.
• Protection? Or oppression?

Why cant his business get a loan?
4
Kiefer v. Fred Howe Motors
Did you remember to run his credit report?
5
When Children Make Contracts Kiefer v. Fred Howe
Motors

• How did Kiefer resemble an adult? Does it
  matter?
• Effect Voidable contract.
• Childs 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.
6
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 persons age?

If he says hes 18, can you rely on it?
7
Problem

• Minor accepted a job at the Checks 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 Checks
  confidential information. Six months later,
  Minor resigned and sued Checks 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?

8
Ortelere v. Teachers Retirement Board

• Creeping Incapacity

9
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?
10
Common Law Cognitive RuleRestatement (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.
11
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?
12
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?
13
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?

14
Cundick v. Broadbent

• Does a bad bargain prove incapacity?

The Dutch buy Manhattan for a handful of beads.
15
Weighing the Facts In Cundick v. Broadbent
Binding
Voidable

• Consulted with attorney
• Negotiated for higher price
• Family didnt notice senility
• He understood nature of transaction
• Broadbent didnt 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.

Bottom line Unequal bargain doesnt guarantee
rescission.
16
Unfairness Conventional Controls
When Competent Parties Make an Incompetent
Bargain
17
When the Plaintiff Seeks An Equitable Remedy
Bypassing courts and seeking the mercy of the
King.
18
McKinnon v. Benedict

• Will campers spoil the view?

19
McKinnon v. McKinnonWhen Courts do Equity

• Common law damages.
• Equity specific performance.
• Why did McKinnon prefer specific performance?
• Traditional rule of equityunequal exchange
  relevant.
• A modern reason to consider inequality Specific
  performance might compound inequality.

What happens when a judge thinks like the
Chancellor?
20
Problem

• Diane 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?

21
Tuckwiller v. Tuckwiller

• When a fair deal becomes a windfall

22
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?
23
Black Industries v. Bush

Are Exorbitant ProfitsAgainst Public Policy?

The War Profiteer
24
Black Industries v. BushProfiting at Publics
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.

25
Overreaching Conventional Controls

• When a Contract Isnt A Voluntary Exchange

The Godfather makes an offer
26
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.

Medieval Duress
Now lets discuss paragraph 6.
27
Factors Tipping the ScalesIn the Uncertain Zone

• Diminished capacity.
• Comparative capacity.
• Relation of dependency.
• Unusual emotional or psychological stress.
• Predatory or borderline bargaining tactics.

28
The Pre-Existing Duty Rule

• When a promisor exacts a toll for going forward.

29
Alaska Packers Assn. v. Domenico

• Is the employer bound by its promise of a raise?

30
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.
31
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 APAs need for labor is
  now zero, yielding new wage. (cover unnecessary).

The Cost of Cover for the employer
When do employees have the greatest bargaining
power?
When does bargaining power shift back to the
employer?
Hiring workers in California
At work in Alaska
Returning to California
32
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
When do employees have the greatest bargaining
power?
When does bargaining power shift back to the
employer?
Feeds, shelters, transports workers
Obtains work from workers
Pays the workers
33
Alaska Packers A Rule to Make Contracts Truly
Secure?

• Was workers threat to breach contract duress?
• Did promise of more pay lack consideration?
• Why isnt agreement to continue working
  consideration?
• Pre-existing duty rule.

Will the payroll office be closed when the
workers return to SF?
34
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.

35
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.

36
Problem

• Owner 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?

37
Another Look at RS 73Trouble 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?

38
A Backstory in Alaska PackersWas the Contract
Doubtful?

• Agreed incentive pay/fish.
• Unexpected glut of fish and APAs 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?
39
Yet Another Look at RS 73More 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?

40
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.

41
Watkins Son v. Carrig

• When a Rock Appears Out of Nowhere.

42
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?
43
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.
44
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?
45
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.

46
Problems

• Builder promised to build a house in return for
  Owners promise to pay 500,000 in a series if
  progress payments. Because of an unexpected
  shortage of lumber and a significant increase in
  prices, Builders 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?

47
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
  others 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?
48
Austin Instrument, Inc. v. Loral Corp.

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

49
Austin Instrument v. Loral When a Victim Has
Paid in Full

• Why would PED rule fail to protect Loral?
• Lorals cause of actionRestitution of money
  paidunder economic duress.
• Was the threat unlawful?
• Was Loral without option (e.g., suit for
  damages?)

The successful pirate doesnt accept checks.
50
When Does Refusal to PerformConstitute Economic
Duress?

• Original meaning Withholding victims 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?
51
Undue Influence
Family Photo Anna Nicole Smith and Howard
Marshall
52
Undue InfluenceA 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
53
Concealment Misrepresentation

• More Trouble in the Garden Of Voluntary Exchange?

The snake presents the apple.
54
Unequal Access to InformationWhy 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?
55
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?
56
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?

57
Swinton v. Whitinsville Savings Bank

• The Latent Defect

58
Swinton v. Whitinsville Savings Reaffirming
General Rule

• Plaintiffs 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?

59
ProblemFeige v. Boehm Revisited

• Recall that Louis failed in arguing lack of
  consideration. What other argument might he try?
• Would Louiss chances of success be better if he
  and Hilda were married, and their agreement was
  to settle a divorce?

60
Kannavos v. Annino

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

61
Are Some Half-TruthsWhole 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.

62
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 buyers plans.

Must the seller disclose the code violation?
63
Kannavos Is the PlaintiffsNeglect 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?

64
Misrepresentation
A Positive Misstatement of the Facts
65
Elements of MisrepresentationFor Rescission of
Contract

• First Material misrepresentation (of fact?).
• Second Justifiable reliance.
• Creates defense, or ground for rescissionnot
  damages.
• Intent unnecessary (compare tort law).

66
Vokes v. Arthur Murray, Inc.
Dancing closer than arms length?
67
The Contract in VokesA 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
  todays 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?
68
Fancy Moves for a CourtIs 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 courts function as the
  chancellor?

Tell me Im young and beautiful