Contracts

Policing the Bargain

Professor Corbin said it best: "That which is bargained for by the promisor and given in exchange for the promise by the promisee is not made insufficient as a consideration by the fact that its value in the market is not equal to that which is promised." (Corbin on Contracts § 127) Yet, there are exceptions to the basic rule that "the court will not inquire into the adequacy of consideration." The most notable exceptions involve the capacity of the parties or situations of unconscionability.

Capacity

Certain classes of persons are deemed by the law to have a limited ability to contract. Typically these classes of persons include "infants" (minors) and the mentally infirm.

Minors

With respect to minors, the general rule is that the contract of a minor, other than for necessaries, is voidable at the minor's option. The rationale behind this rule is that minors are immature and should be protected from their own bad judgment as well as those who would take advantage of them.

Mental Capacity

Under Rest.2d §15, a contract is voidable if the party "by reason of mental illness or defect is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition."

Unconscionable Contracts Under the UCC

The doctrine of unconscionability permits a court to refuse to enforce a contract if it feels it is unfair. Unconscionability has generally been recognized to include absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. UCC 2-302 authorizes three forms of relief: (1) the court may refuse to enforce the entire contract, (2) or any part of it, or (3) the court may limit the application of a particular clause to prevent an unconscionable result. Although California has not adopted UCC 2-302, it has it enacted a nearly identical statute dealing with unconscionability which is found at Cal.Civ.Code § 1670.5.

Two Categories of Unconscionability

Unconscionability may take the form of being either substantive or procedural. Substantive unconscionability may result when contract terms are excessively oppressive or harsh. Procedural unconscionability relates to the manner in which the term in issue was made a part of the contract, i.e., did the term in question find its way into the contract in a manner that was fair and square?

Duress

"The word duress implies feebleness on one side, overpowering strength on the other." (U.S. v. Bethlehem Steel Corp., 315 U.S. 289 (1952)  The Restatement Second of Contracts addresses the problem of duress in sections 175 and 176. "If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim." (Rest.2d sec. 175(1).) A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will. However, a mere threat to break a contract does not constitute duress. A threat to breach a contract constitutes duress if the threatened breach would, if carried out, result in irreparable injury because of the absence of an adequate legal or equitable remedy, or other reasonable alternative.

Adhesion Contracts

An "adhesion contract" is a standardized contract, imposed and drafted by the party of superior bargaining strength to cover transactions with many people rather than with an individual, which relegates to the subscribing party only the opportunity to adhere to the contract or reject it. (These are sometimes referred to as "take it or leave it" contracts.) The result is often that the stronger party is able to dictate the terms of the contract to the weaker party.

As a result, standardized form contracts which purport to excuse  a party from the consequences of his or her own negligence are often held void on grounds of public policy. The two main reasons for the creation and application of the rule have been (1) to discourage negligence by making wrongdoers pay damages, and (2) to protect those in need of goods or services from being overreached by others who have power to drive hard bargains.  Bisso v. Inland Waterways Corp., 349 U.S. 85, 91, 75 S.Ct 629, 99 L.Ed. 911.

In a rare foray into the area of substantive contract law, the U.S. Supreme Court in the case of Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111 S.Ct. 1522, L.Ed.2d 622 (1991) held that a forum selection clause limiting the place where a lawsuit could be filed to the state of Florida, would be given effect even though the clause was not bargained for.

Duty to Read

The general rule is that one is bound by a contract which he or she voluntarily and knowingly signs. In the absence of fraud, one who signs a written agreement is bound by its terms whether or not he or she read it and understood it, or whether or not he or she could read it. Exceptions: 1) Document is not legible, e.g., fine print. 2) Provision not called to the attention of one party, e.g., clauses on the reverse side. 3) Fraud or mistake.

Illegality

Courts will not enforce illegal bargains. Nor will they allow restitution for illegal contracts. There are 3 categories of illegal contracts: 1) Those contrary to express statutes; 2) those contrary to the policy of express statutes; 3) those otherwise contrary to good morals. (Cal.Civ.Code § 1667.) The maxim in pari delicto (equally blameworthy) means that the defendant will prevail when the parties are of equal guilt. When the parties are not equally culpable, the defense of in pari delicto is not appropriate.

Closely related to the unwillingness of the courts to enforce illegal bargains is the doctrine of "unclean hands."

A contract which is legal on its face and does not call for unlawful conduct in its performance is not voidable simply because it resulted from an antitrust conspiracy. The unlawful use of market power to inflate the contract price, and the resulting anti-competitive effects, must be assessed in determining whether granting the judgment sought would be to make the courts a party to the carrying out of one of the very restraints forbidden by the antitrust laws. (X.L.O. Concrete Corp. v. Rivergate Corp. (83 N.Y.2d 513, 634 N.E.2d 158 (1994)

When Relief Will be Granted for Mistake

A mistake of fact, shared by both parties, which goes to the basis of the bargain, entitles either party to rescind the contract. (See, Sherwood v. Walker, 33 N.W. 919 (Mich. 1887).) If both parties are mistaken and neither is at fault or both are equally to blame, mistake may prevent the formation of a contract. Unilateral mistake does not render a contract voidable except where the mistake is due to the fault of the other party or the other party knows or has reason to know there is a mistake. (Rest.2d § 153)

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