#10999 - Defenses To Legal Enforcement Of Admitted Contracts - Contracts

Defenses to Legal Enforcement of Admitted Contracts

A. Generally

1. Defenses are only applicable to agreements that meet all the requirements of contracts (consideration, assent, agreement, and agreement is clearly proven).

B. Subject Matter Limitations of Freedom of Contract

1. Can’t enforce contract if the substance of the contract is illegal or strongly contradicts public policy.

2. Public policy considerations

a) This contract affects non-parties to contracts (externalities)

b) Examples:

(1) Online-gambling causes addictions and affects families

(2) Contracts for sex – worry about commodification of sex

(3) Look at statutes and constitutional principles to find public policy

3. Unenforceable: In re Baby M (1987) – Mr. Stern entered into a surrogacy contract with Mrs. Whitehead so she could deliver a child for him and his wife. Mrs. Whitehead became attached to the child and fled when the Sterns tried to take her back. The court held that surrogacy contracts are unenforceable in the state of NJ because they violate public policies. Public policy is that the child’s best interests, rather than the interests of contract makers, should determine custody, and the state of NJ believes that children should be brought up with their natural parents.

C. Other Problems with the Bargaining Process

Freedom of contract presumes that a contract was entered into voluntarily and knowingly. The below defenses are an attempt to show that this was not the case.

D. Duress

1. Restatement § 175 – Duress is found when an improper threat leaves the victim with no reasonable alternative but to assent

2. Restatement § 176 – Defines improper threat

a) Crime or tort

b) Use of civil or criminal process

c) Breach of duty of good faith

3. If the demands made are not ones that would tangibly benefit the one making the demands, the threat is improper. This probably counts as breach of the duty of good faith.

4. A party cannot make a duress defense if it could have simply sought damages.

5. Duress: Wolf v. Marlton Corp. (1959) – A couple wanted to get out of a housing contract and demanded their full deposit be returned. When the realtor refused, the couple threatened to buy the house and sell it to people (ethnic or religious minorities, most likely) who wouldn’t be well received in the community. The realtor took this as a threat and refused to negotiate any further. The court ruled in the realtor’s favor, holding that, even if what’s being threatened is legal, if the threat would simply hurt the other party and in no way help the threatening party, it can be found to cause duress.

6. Duress: Austin Instrument, Inc. v. Loral Corp. (1971) - Navy contract in time of war (Vietnam) -- Where the Navy awarded defendants (Loral) a contract to produce radar sets and the defendants awarded the plaintiffs (Austin Instruments) a subcontract, and the Navy awarded Loral a second contract but Austin said it would cease deliveries on the existing subcontract unless Loral consented to a price increase retroactively and on all those parts not yet delivered and awarded Austin the second subcontract and Loral searched for other suppliers but found no others who could deliver in time to meet Loral’s obligation with the Navy, Loral agreed to the price increase and was able to meet its commitments on both contracts, the court held that Loral agreed to the price increases under economic duress because they had no reasonable way to obtain the goods from another source of supply and that seeking damages after the fact would not have been adequate because it would have affected their future business with the government.

Note: If Austin’s demands were induced by unforeseeable financial developments, it could have argued that it was satisfying the requirements of modification doctrine.

7. Duress: Post v. Jones (1856) – Stranded Whalers -- Where the plaintiff’s ship was whaling in the Arctic Ocean and the ship and crew became stranded and three ships came along who agreed to carry the crew members and suggested and participated in an auction of the stranded ship’s oil and cargo which resulted in the plaintiff receiving far below market value the court held that the plaintiffs were under economic duress because there was the implied threat that if they did not agree to the sale the crew would not be rescued. A sale where there was no market, no money, no competition and one party with absolute power had no characteristics of a valid contract.

a) “… hopeless, helpless, and passive – where there was not market, no money, no competition – where one party had absolute power, and the other had no choice but submission – where the vendor must take what is offered or get nothing – is a transaction which has no characteristic of a valid contract.”

E. Fraud

1. Elements of fraud

a. false assertion of present/past fact

b. assertion must be fraudulent (knowingly false and intended to mislead) or material (significant)

c. reliance – the assertion actually did induce assent

d. reliance was justifiable – independent investigation would have been very costly in terms of time and money spent

e. harm

2. Fraudulent statements do not have to be made with knowledge or reckless disregard of the falsity statements’ falsity. They also don’t have to be made with the intent to deceive. They just have to be material, though I’m sure anyone accused of fraud will raise the defense that it was unintentional.

3. A promise can only be considered fraud if the promise was made with the knowledge that it either couldn’t or wouldn’t be fulfilled.

4. Fraud: Spiess v. Brandt (1950) – The P’s bought a wilderness resort from the D’s. During the course of negotiations, when the P’s asked the D’s how much money they were making, the D’s told them they were making good money (specifically, profits of around $19K in both 1946 and 1947). When the P’s asked to see the books, the D’s refused. In actuality, the resort had been losing money for quite some time. The court ruled in the P’s favor, holding that the D’s had committed fraud by making false claims about past earnings. These false claims definitely contributed to the P’s decision to buy the property. Reliance was justifiable because the parties had a prior relationship and the P’s did not have much business experience.

Counter: Reliance wasn’t justifiable. P’s should have known that something was amiss when the D’s refused to let them see their financial records.

5. Non-disclosure - § 161 of the Restatement states that non-disclosure is equivalent to misrepresentation when the undisclosed fact concerns a basic assumption of the other party. However, information that could be acquired by analyzing the market does not need to be disclosed.

6. Hidden defects (mutant rats) must be shared. Hidden benefits (there’s actually a gold mine in your attic) do not have to be shared.

7. Nondisclosure is fraud: Kannavos v. Annino (1969) – P agreed to buy D’s residential rental property. D failed to inform P that the building was being operated as a multi-family dwelling in violation of a zoning ordinance and without the necessary permit. After the sale, the city tried to stop the illegal use of the building. P sued D for fraud, and the court ruled in P’s favor, holding that nondisclosure is unacceptable when a seller offers property for a specific use with knowledge that a hidden defect makes such use impossible.

F. Is Fraud a Default or Mandatory Rule?

1. No Fraud: Danaan Realty Corp. v. Harris (1959) – During the course of negotiations, D made false statements to P regarding operating expenses and profits. However, there was a provision in the contract that stated, in very specific language, that the buyer acknowledges that no claims have been made, and that neither party is relying on any claims that aren’t embodied in the contract. The court ruled in D’s favor, holding that, though vague merger clauses cannot absolve a party of fraud, the specificity of this provision directly addressed the P’s claim to have relied on the representations made by D. If the language in this provision was not sufficient to protect oneself from fraud allegations, then no language to this effect could be.

a. The fact that both parties were sophisticated likely influenced the outcome of this decision.

b. There’s a concern that completely barring clauses of this nature would increase the potential for fraud perpetrated by the buyer. He could falsely claim that he relied on inaccurate statements that, in actuality, were never made.

G. Failure to Disclose as Fraud

1. Though we don’t force individuals to share all privately acquired information, the law of disclosure and concealment covers cases in which a party:

a. takes steps to prevent the promisor from discovering a material fact or

b. knowingly fails to correct the promisor’s mistaken belief about a material fact or

c. fails to inform the promisor of a material fact of which he knows the promisor is

ignorant

2. Non-disclosure - § 161 of the Restatement states that non-disclosure is equivalent to misrepresentation when the undisclosed fact concerns a basic assumption of the other party. However, information that could be acquired by analyzing the market does not need to be disclosed.

3. Courts must choose whether, given the circumstances of the case, it makes more sense to place a burden of disclosure on the seller or a burden of inquiry on the buyer.

4. Courts seem to be okay with the existence of an information asymmetry, but not so much when one party would, realistically, have a very hard time discovering the information the...