Contracts Contrary to Public Policy

1
Contracts Contrary to Public Policy

• Unconscionable Contracts/Clauses.
• Exculpatory clauses.
• Case 13.3 Thibodeau v. Comcast Corp. (2006)
• Exhibit 13.1, page 269
• Other Contracts Contrary to Public Policy.
• Contracts that promise to discriminate.
• Contracts to Obstruct legal Process.
• Pre and Post Nuptial (Antenuptial) Agreements.

2
Effect of Illegality

• Generally, the rule is that the contract is void.
• Exceptions
• Justifiable Ignorance of the Facts.
• Members of Protected Classes.
• Withdrawal from an Illegal Agreement.
• Contract Illegal through Fraud, Duress, or Undue
  Influence.
• Severable or Divisible Contracts.

3
Introduction

• Contract may be unenforceable if the parties
  have not genuinely assented to its terms by
• Mistake.
• Misrepresentation.
• Undue Influence.
• Duress.

4
Mistakes of Fact

• Only a Mistake of Material Fact allows a contract
  to be canceled.
• Bilateral (Mutual) Mistakes can be rescinded by
  either party.
• Materiality Important to the Financial
  Consequences (or consideration) of the contract
  To The Parties
• Classic Case Raffles v. Wichelhaus (1864)

5
Mistakes of Fact

• Unilateral Mistakes cannot be canceled unless
• If other party to the contract knows or should
  have known that a mistake of fact was made.
  SNATCHING UP
• If mistake was due to mathematical mistake in
  addition, summation, subtraction, division, or
  multiplication and was made inadvertently and
  without gross negligence. Show Work

6
Mistakes of Value

• Generally, contract is enforceable by either
  party.
• Exception Mistake of value because of a mistake
  of material fact.
• Case 14.1 Roberts v. Century Contractors, Inc.
  (2004).
• Has one party assumed the risk?
• Was the risk allocated by the contract?
• Was the risk known to the parties, or was it
  known that knowledge was limited?
• Is risk to be allocated by the court based on
  reasonableness?

7
Fraud Misrepresentation

• Contract Voidable by Innocent Party.
• Fraud Tort Elements
• Duty Not to intentionally, by words or actions,
  misrepresent a material fact. (but no duty to
  disclose)
• Breach Intentional Misrepresentation of Material
  Fact.
• Causation Reliance on Misrepresentation.
• Damages Injury to the Innocent Party, may
  include punitive.

8
Misrepresentation Has Occurred

• Misrepresentation can be express or implied.
• Concealment.
• Misrepresentation of future facts and statements
  of opinion are not fraud, unless person professes
  to be an expert.
• Misrepresentation of Law is not fraud, unless
  person has greater knowledge of the law.
• Silence is not fraud, unless serious problem or
  defect known or asked and person lied.
• Case 14.2 Vokes v. Arthur Murray Inc. (1968).

9
Intent to Deceive

• Scienter is an Intent to Deceive.
• Party knowledge that fact is not as stated.
• Party makes a reckless statement with disregard
  of the truth.
• Party implies that statement is based on personal
  knowledge or investigation.

10
Reliance on Misrepresentation

• Deceived party must have Justifiable Reliance.
• Depends on the knowledge and experience of the
  party relying.
• Case 14.3 Fogel v. Enterprise Leasing Co. of
  Chicago (2004).

11
Injury to the Innocent Party

• No proof of injury is required when the action is
  to rescind contract.
• Proof of injury is universally required to
  recover damages.

12
Three Types of Misrepresentation

• (Neg.) Misrepresentation. Same Elements of
  Fraud without Scienter, but with Gross
  Negligence. Remedy excludes punitive damages
• Innocent Misrepresentation. Same Elements of
  fraud, but with Duty including disclosure of all
  known Materially adverse facts. Remedy merely
  voidable contract.
• Disclosure Statutes. Duty to disclose, remedy
  repair or replace.

13
Undue Influence

• Contract is Voidable.
• Confidential or Fiduciary Relationship.
• Relationship of dependence.
• Influence or Persuasion.
• Weak party talked into doing something not
  beneficial to him or herself.
• Presumption of Undue Influence. (Fiduciary
  Duties)

14
Duress

• Forcing a party to enter into a contract under
  fear or threat makes the contract voidable.
• Threatened act must be wrongful or illegal.
• Improper Threat.
• Threat to exercise legal rights (criminal or
  civil suit).
• Economic or physical.
• Relationship to Blackmail

15
Adhesion Contracts and Unconscionability

• Standard-Form (Adhesion) Contracts.
• Preprinted contract in which the adhering party
  has no opportunity to negotiate the terms of the
  contract.
• Take-it-or-leave-it adhesion contracts.
• Unconscionability.
• One sided bargains in which one party has
  substantially superior bargaining power and can
  dictate the terms of the contract.

16
Origins of the Statute of Frauds

• 1677 England passed the law An Act for the
  Prevention of Frauds and Abuses.
• Certain types of contracts must be in writing and
  signed by the party against whom enforcement is
  sought to be enforceable. (Has little or nothing
  to do with Fraud, per se)
• Today, almost every state has a Statute of Frauds
  and even if they dont it has become a common law
  doctrine applicable to all states. However, this
  is almost never the case internationally.

17
Contracts That Fall within The Statute of Frauds

• To be enforceable, the following types of
  contracts must be in writing and signed
• Contracts involving interest in land.
• Contracts which cannot be completed within a year
  One-Year Rule.
• Collateral or Secondary Contracts.
• Promise made in consideration of marriage.
• Contracts for the sale of goods priced at 500 /
  5000 or more.

18
Contracts Involving Interests in Land

• Land includes all physical objects that are
  permanently attached to the soil buildings,
  fences, trees, and the soil itself.
• All contracts for the transfer of other interest
  in land mortgages and leases.
• Exception, leases and licenses for a stated
  duration of 1 year or less.

19
The One-Year Rule

• A contract that cannot, by its own terms, be
  performed within one year from the date it was
  formed must be in writing to be enforceable.
• One-year period begins to run the day after the
  contract is made.
• Test Whether performance is possible
  (although unlikely) within one year Case 15.1
  Sawyer V. Mills

20
Collateral Promises

• Primary v. Secondary Obligations.
• Primary Obligation is to the party who receives
  the benefit.
• Secondary Obligation is to anyone else (exhibit
  15-2)
• Co-Signors as primary obligors?
• Main Purpose Rule Exception .
• If Secondary Obligation derives as its main
  purpose the accomplishment of the purpose of the
  third party it is a Primary Obligation in fact.

21
Promises Made in Consideration of Marriage

• Prenuptial and Antenuptual agreements must be in
  writing and signed to be enforceable.
• Contracts must be supported by some consideration
  to be enforceable. Marriage alone is insufficient
  consideration ie love and affection.
• The contracts incidental to marriage are not
  within the statute of frauds.

22
Contracts for the Sale of Goods

• UCC requires a writing or memorandum for the sale
  of goods priced at 500 / 5000 or more.
• In a mixed labor / goods contract, look to the
  main purpose of the contract.
• Total Contract price / not individual item price
• More detail in Chapter 20

23
Sufficiency of the Writing

• The Statue of Frauds is satisfied by a writing
  that in and of itself is sufficiently definite to
  be an offer, recall
• Identification of the parties.
• Object or subject matter of the contract.
• Consideration to be paid.
• Time of payment, Delivery, or Performance.
• Multiple Writings can be linked if there is a
  factual written basis to do so.
• Signature is any mark that provides proof of
  authenticity and assent

24
Exceptions to S/F

• Judicial Admission If a party judicially admits
  the contract, it is enforceable to the extent
  admitted. (most states)
• Partial Performance If
• a buyer has taken partial possession of property,
  and
• paid that part of the contract price, and
• if the parties cannot be returned to their
  pre-contractual positions

25
Statute of Frauds Does Not Apply

• Promissory estoppel
• Unjust Enrichment ( a.k.a. quasi contract,
  implied at law)

26
The Parol Evidence Rule

• Bars the introduction of evidence of prior or
  contemporaneous Oral Statements AND prior Written
  Statements to contradict or change an Integrated
  Written Contract.
• Integrated Contracts. A Contract is integrated if
  it is objectively intended by the parties to be
  the final and exclusive agreement of the parties.
• Integration Clauses

27
Exceptions to the Parol Evidence Rule

• Contracts subsequently modified.
• Voidable or Void contracts.
• Contracts containing ambiguous terms. (i.e.
  mistake, fraud, or misrepresentation)
• Prior dealing, course of performance, or usage of
  trade.

28
Exceptions to the Parol Evidence Rule

• Contracts subject to orally agreed-on conditions
  to the existence of the contract (conditions
  precedent).
• Contracts with an obvious or gross clerical error
  that clearly would not represent the agreement of
  the parties.

29
Introduction

• Typically Only the Parties to a contract have
  rights and liabilities under the contract.
  (Privity Group)
• Exceptions
• Sub-Contractors
• Assignment
• Delegation.
• Third party beneficiaries.

30
Assignments and Delegations

• Transfer of contractual rights is an Assignment.
• Transfer of contractual duties is a Delegation.
• A transfer of all rights and duties is generally
  known as an Assignment of All Rights

31
Assignments

• Transfer of rights in a bilateral contract to a
  third party.

32
Notice of Assignment

• Once a valid assignment of rights has been made,
  the assignee should notify the obligor of the
  assignment.
• The assignment is effective immediately, whether
  or not the assignee gives notice to the obligor.
• However, until the obligor receives notice of the
  assignment, he may satisfy his contractual
  obligations by performance to the assignor even
  if the assignor has already assigned her rights
  to the assignee.

33
Restrictions on Assignments

• As a general rule, all contract rights may be
  assigned, except where
• (1) the assignment is prohibited by statute
• (2) the contract to be assigned is for personal
  services,
• (3) the assignment would materially increase the
  risk or alter the duties of the obligor or
• (4) the contract specifically forbids assignment.

34
Exceptions to Restrictions on Assignments

• But if assignment is restricted pursuant to 2 or
  4 above, nevertheless it may be assigned if it
  is only
• (a) the right to receive money,
• (b) rights in, or the alienation of, real
  property,
• (c) negotiable instruments, or
• (d) the right to recover damages for breach of
  contract or for payment of an account under the
  UCC.

35
Delegations

• Contractual duties in a bilateral contract that
  are delegated to a third party.

New Contract?
36
Restrictions on Delegation

• As a general rule, all contract rights may be
  assigned, except where
• When special trust has been placed on the
  obligor.
• When performance requires personal skill or
  talents.
• When performance will vary materially from
  obligee expectations.
• When the contract expressly prohibits delegation.

37
Effect of a Delegation

• If the delegation is enforceable, the obligee
  must accept performance by the delegatee
• However, unless Obligee agrees to the delegation
  as a substitution of parties, the Delegator
  remains liable.

38
Third Party Beneficiaries

• Original parties (Privity Group) to the
  contract intend at the time of contracting that
  the contract performance directly benefits a
  third person.
• Intended Beneficiary A third party for whose
  benefit a contract is formed. (Has Rights in
  Contract)
• Incidental Beneficiary A third party who
  benefits from the performance of a contract, but
  whose benefit was not the reason the contract was
  formed. (Has no Rights in Contract)

39
Intended v. IncidentalBeneficiaries

• Intended
• Promisee intended to confer on the beneficiary
  the right to bring suit to enforce the contract.
• Factors
• Performance is rendered directly to 3rd party.
• 3rd partys right to control contract details.
• 3rd party expressly designated as beneficiary.

40
Types of Intended Beneficiaries

• Creditor Beneficiary A third party who benefits
  from a contract in which the promisor promises to
  pay a debt owed by the promisee to the
  third-party beneficiary. (Can Sue to Enforce
  Contract)
• Donee Beneficiary A third party for whose
  benefit a contract was made whereby the promisor
  promised the promisee to make a gift to the
  third-party beneficiary. (Cannot Sue )

41
Third Party Beneficiaries

• Party 1 contracts with Party 2 for benefit to
  Third Party Beneficiary

performance/ benefit given
42
The Vesting of an Intended Beneficiarys Rights

• For third party beneficiary contract to be
  effective, rights under the contract must vest
• Third partys manifesting assent to the contract.
• Third partys materially altering position in
  detrimental reliance on the contract.
• Condition of vesting (i.e. life insurance)

43
Assignments

• Transfer of rights in a bilateral contract to a
  third party.

44
Delegations

• Contractual duties in a bilateral contract that
  are delegated to a third party.

New Contract?
45
Third Party Beneficiaries

• Party 1 contracts with Party 2 for benefit to
  Third Party Beneficiary

performance/ benefit given