Chapter 8
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Adhesion
Contract: a contract of
adhesion is a “take it or leave it” contract, such as standardized forms
provided by insurance companies, automobile dealers, airlines, etc. However, non-standardized contracts can be
adhesion contracts as well. Adhesion
contracts are very one-sided contracts; they significantly benefit one party to
the detriment of the other party. Not
all adhesion contracts are unenforceable, only those that are unconscionable.
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Unconscionabilty: Contracts of adhesion, or terms in such
contracts, may be unenforceable IF they are found to be unconscionable. Contract provisions are unconscionable if (1)
there is an absence of meaningful choice (one party lacks bargaining power) and
(2) if the terms are unreasonably favorable to one side (one party takes
advantage of the other).
Example: Joe’s wife is severely injured and is
transported by LifeFlight to a local hospital. Joe is required to sign numerous hospital
forms before the hospital will provide care for his wife. One of the forms is labeled “Release of
Liability” and requires Joe to release the hospital from liability for
negligence of the any of its care providers, including physicians, nurses, and
support staff. This is clearly an
unconscionable provision and the court would not enforce this contract term.
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Unconscionable
at Contract Formation: The objectionable provision must be
unconscionable at the time the contract is made. Terms that were reasonable at the time the
contract was made but later become unreasonable, are not “unconscionable.”
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Contract
Construction: When the court is reviewing a contract, they
will construe it (interpret it) strictly against the drafter. The rationale for this is that a party
drafting a contract can create a very one-sided agreement without the other
party being fully aware of the effect of all of the contract’s provisions.
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(1) “Lack of meaningful choice”: A lack of meaningful
choice occurs when either (1) there is an imbalance in bargaining power or (2)
a lack of knowledge of the terms of a contract.
Example: Bob rented a UHaul storage truck for a local move. When he returned the truck, the gas tank was
half-full. The terms of the contract, in
small print on page 20, required that the truck be returned with the gas tank
full or a full charge of $4.05 per gallon would be assessed. Bob was unaware of this excessive fuel charge
and was not told about it when he returned the truck. The court would likely hold this term to be unsconscionable.
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(2) Terms unreasonably favor one side: A contract
must unreasonably favor one side before it will be found to be
unconscionable.
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Remedy: If the
court finds that a contract terms is unconscionable, the court may: (1) refuse to enforce the contract, (2)
delete the unconscionable term, or (3) reform the unconscionable term so that
it no longer produces unconscionable results.
A
misrepresentation may be (1)
negligent misrepresentation (unintentional) or (2) intentional
misrepresentation (intentional).
Intentional misrepresentation is fraud.
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Misrepresentation: When the
term “misrepresentation” is used, it generally means negligent misrepresentation. Negligent misrepresentation is when a party
provides incorrect information, generally unknowingly.
Example: Gerald advertised a Picasso painting for
sale. Jessie, an art collector,
purchased the painting, believing it to be a Picasso original. Gerald later discovered that the gallery that
he purchased the painting from was accused of selling forged artwork, including
the painting that he sold to Jessie.
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Fraud: Fraud is
intentional misrepresentation. Fraud can
be either: (1) fraud in the “factum”/execution or (2) fraud in the inducement.
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Fraud in
the “factum,” also known as fraud in the execution, occurs when one party does
not know they are entering a contract.
These types of contracts are void.
Example: Jessica is the caretaker of an elderly woman,
Ms. Ageless, who has poor eyesight.
Jessie asks Ms. Ageless to sign a “letter to a friend.” However, the “letter” is actually a contract
that provides that Ms. Ageless will leave her home to Jessie when she
dies. Ms. Ageless is unaware that she is
signing a contract and, therefore, the contract is unenforceable.
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Fraud in
the inducement entices a party
to accept an offer. That is, one party is induced to enter into a contract on
the basis of fraudulent statements.
These contracts are voidable. In such cases, the deceived party can
disaffirm (deny) the contract. The
elements of fraud in the inducement are:
(1) a
false statement, (2) that is known to be false by the party making the
statement and is intended to induce another party into acting, (3) the person
to whom the statement is made believes it to be true and relies on it, (4) the
statement is material (significant).
Example: At a garage sale, Stetson tells a buyer that
the X-Box for sale works perfectly. However,
Stetson is selling the X-Box because it will not properly load and replay
games. This fraud in
the inducement.
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Duress
Duress
occurs when one party makes acts or threats to influence another party to enter
into a contract. Duress takes away a party’s
“free will.” Duress takes two forms: (1) personal
duress: duress by physical force and (2)
economic duress: referred to in the text
as duress by threat. Economic duress
requires extreme circumstances that would generally “shock the conscience.”
Example/Personal Duress: Abby held a gun to Joe’s head and told him to
sign a contract agreeing to give her his house.
Example/Economic Duress: Nick tells his ex-wife that he won’t pay his
child support or his spousal support unless she agrees to let him have the kids
for Christmas.
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Undue Influence
Undue
influence occurs when a person in a position of dominance or trust (special
relationship) exerts undue influence on a party to enter into a contract. Elements: (1) susceptibility of one party (mental
illness/infirmity), (2) special relationship, (3) unfair advantage to the
influencing party.
Key: The parties must have a special relationship.
Example: Yvonne cared for her grandmother. Yvonne told her grandmother that if she did
not execute a will leaving Yvonne her entire estate, she would not continue to
care for her. Her grandmother executed
the will, but after her death, her other heirs challenged the will, alleging
that Yvonne exerted undue influence on the grandmother.
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Mistake in Basic Assumption of Fact
A
mistake made by the parties regarding a basic assumption of fact about the
contract may make the contract unenforceable; however, a mistake regarding the
value of an item or the quantity does not make a contract unenforceable,
although it may make one party subject to a restitution action.
Example: Dana agreed to sell Ken a piano that was
signed by Elvis Presley. After the
parties agreed to the terms of the contract, a handwriting expert determined
that the signature was a forgery. If the
court determines that Elvis’ signature was a basic element in the purchase, the
contract may be unenforceable.