Contracts Class Notes 2/10/04

 

Yesterday, we talked about infancy and mental incompetence.

 

Letís move on toÖ

 

Odorizzi v. Bloomfield School Dist.

 

Odorizzi is an elementary school teacher.Odorizzi, letís assume, is charged with a serious criminal offense.But before too long, the charge is dismissed because they were brought without probable cause.He was arrested for something serious, but itís a ďbum pinchĒ and the charges are ultimately dismissed.

 

After heís been booked and comes back to his apartment, the superintendent and school principal tell him that there are going to be charges filed against him and that heís going to get canned soon.They tell him that he has the opportunity to resign, but that he better hurry up and do it on the spot.He does so.

 

He goes on to regret resigning, especially after he gets out of the criminal charges.He successfully gets out of the resignation.

 

By the way, this is probably not a contracts case per se, but rather more a case of administrative law and how public schools are run.This case is in the book because it contains an articulate essay on undue influence, which is applicable to contracts.You can also apply this to gifts and wills, where an often elderly person is prevailed upon to make a gift to one child and not other children.The other children may assert that undue influence was used to get the elderly personís favor.

 

What grounds can the lawyer use to get him out of his resignation?His lawyers say that he ought to be able to get out of his resignation on a whole bunch of grounds: duress, menace, (constructive) fraud, mistake, undue influence, or lack of capacity.

 

Did he lack capacity at the time he resigned?Probably not, if weíre using a cognitive test.Thereís every reason to think that he understood what was going on even if he didnít like it or didnít feel that he had a free choice.Did he have the capacity to control his behavior?Thereís no reason to suspect that he lacked capacity before or after this one occasion.

 

But the judge says that the one ground upon which Odorizzi has stated a case is undue influence.If he can make his case at trial, he can have the writing rescinded.

 

What are the elements of undue influence?There is a dominant party and a servient party.One party has considerable strength, and the other party has some weakened capacity to resist.The servient party might be an older person in some cases.They may have some capacity if theyíre not under pressure, but if you compound the difficulties of old age with excessive pressure, youíre on the way toward making an undue influence case.Odorizzi is weakened due to his arrest and the stressful situation heís been through.The superintendent and principal come and pressure him into a resignation.

 

This case does not stand for the proposition that you canít use pressure to obtain contracts.Whenever you make an offer, youíre exerting a type of pressure on the offeree.At least implicitly, youíre saying: ďTake this, or we canít deal.This may well be my best offer.ĒThatís a kind of pressure.Offerees sometimes make a counteroffer, and thatís pressure too.There is pressure involved in the making of most agreements, and thatís fine.But sometimes the pressure becomes too great and turns into ďoverpersuasionĒ.You can use pressure to make a deal, including vigorous salesmanship.Thatís perfectly okay.But sometimes the pressure will overflow the bounds and result in overpersuasion and undue influence.

 

When you have pressure that is ďcoercive in natureĒ and ďovercomes the will without convincing the judgmentĒ, youíll have undue influence.This is a doctrine with soft edges.It mustnít be used too broadly and applied to situations to which it is not intended.

 

Where does it not apply?We canít back out of a deal just because we have second thoughts.Hindsight is always better than foresight.Youíll always wish that you had bargained for better terms, but too bad.You take responsibility for your actions and abide by the contracts you make.Itís to your advantage to be able to make contracts and be bound by them, but you pay just the same thing as a price: youíre bound by the contracts you make.

 

This case tells you that there is usually a pattern to undue influence.You donít need all the elements in the pattern to have undue influence, and you can have many elements without having an undue influence case, but the factors the judge lists in this opinion tend to suggest that undue influence is present:

 

1.     Discussion of the transaction at an unusual or inappropriate time (right after Odorizziís arrest)

2.     Consummation of the transaction in an unusual place (at his apartment) Ė deals can be negotiated in somebodyís house, but itís a factor that should cause you to take a second look.

3.     Insistent demand that the business be finished at once

4.     Extreme emphasis on untoward consequences of delay

5.     The use of multiple persuaders by the dominant side against a single servient party Ė the superintendent and the principal were both working on Odorizzi at once.

6.     Absense of third-party advisers to the servient party

7.     Statements that there is no time to consult financial advisers or attorneys

 

The Restatment formulation of this doctrine can be found at ß 177.

 

You can learn from this case that if you want to get a deal out of somebody, this is not the way to do it.It would have been different if Odorizzi had been called into the superintendentís office during office hours a while after the charges had been filed and let him think it over overnight.

 

Duress

 

One thing that Odorizziís lawyer tried was duress.The court finds that there wasnít duress.There was a threat, but it was a lawful, rightful threat and thus it was not duress.

 

Duress involves improper pressure of some sort which actually has the effect of coercion.Itís a rougher situation than undue influence, and has harder edges.Itís easier to see whether you have a duress case than a case of undue influence.

 

The applicable sections of the Restatement are ßß 174-176.It starts out with a very basic rule at ß 174 that says that if you were physically coerced into an agreement, your assent is ineffective under those circumstances.

 

At ß 175, we get to a threat.The threat can be coercive and highly improper.Cases of physical coercion or coercion by threat are clear, and thus we donít have to worry about them that much.

 

The more refined kind of duress that we will have to deal with more often is economic duress, as articulated inÖ

 

Austin Instrument, Inc. v. Loral Corp.

 

The threat here is to the effect of: ďIf you donít sweeten the pot for me, Iím going to break my promise.ĒA majority of the Court of Appeals of New York found that the threat in this case amounted to duress.

 

But not all threats to break a contract wonít result in economic duress.How come?Remedies are available in the courthouse for breach of contract.What does that mean in terms of making an economic duress case?Why does this argue against duress?The idea is that the threat doesnít coerce when the remedy in the courthouse is effective.If thatís true, then your choice to sweeten the pot is your free choice and thatís fine.You could have chosen to seek your remedy in the courthouse.

 

Austin threatens to break a contractual promise to provide gears to Loral for the radar sets.That coerced Loral for two reasons: (1) Loral couldnít come up with gear components from a third-party supplier by the time it needed them, and (2) its remedy in the courthouse would not be adequate to protect its interests.These two factors will not be present in many situations, and thus it wonít amount to duress.

 

But in the majorityís view here, there is economic duress because of Loralís need for these gear components.Loral is on a government contract with strong terms in favor of the government, including tight deadlines and liquidated damages if Loral is late.Another factor the court mentions is the fact that Loral is a defense contractor.Loral only has one customer: the government.It needs to satisfy that one customer or else theyíre in terrible trouble.Loral needs those gear components and it needs them soon, or else it will break its contract with the Navy.It needs future contracts with the Navy in order to survive.Under these circumstances, the threat of breach of contract can coerce.

 

Loral tried to find a replacement provider of gears, but was unsuccessful.None of the ten companies they asked could make the gears in sufficient time.Loral could have filed a suit to get substantial damages, or this could also have been a good case for specific performance.Itís a contract for the sale of goods, but you could argue that the remedy at law could be inadequate and quick specific performance is available.To the extent that such quick specific performance is available, that argues against Loralís duress claim.

 

The editors suggest at the beginning of this section that in contracts there are frequently adjustments after they are made.Many of those adjustments are commercially sensible and ought to be upheld.The adjustments are made under the influence of pressure, just like the originally agreements.Some degree of pressure is appropriate.Duress will undo relatively few deals.

 

Was there duress here or not?It is debatable, and thatís almost always the case.Itís easy to state the principles, and there wonít be a whole lot of disagreement about the principles, but their application to the particular facts is often difficult.

 

How did this happen?Austin was probably at least slightly subtle about this.They probably didnít threaten Loral in a completely direct way.What happened here?They probably implied, without stating, that their disappointment at not getting all the contracts was connected to their inability to provide any of the gears.It probably wasnít totally blatant.The threat was probably subtle.Loral probably didnít get extremely upset at first either.

 

The way the majority states the facts, they almost turn it into a classic duress case.If thatís so, why did the trial court go the other way?Why did several good judges dissent?The result is probably muddier than it seems in this opinion.

 

Smithwick v. Whitley

 

This is a somewhat similar threat.But it is found that the agreement to give a higher payment was voluntary.In this case, a remedy was available in the courthouse that would have done the threatened partyís work.

 

Wolf v. Marlton Corp.

 

What do we learn here?The vendor makes an agreement to sell a lot to be improved by a house and the vendor is both selling lots and building houses on them.The purchasers take the position that the vendor is in default because the vendor has refused to go through with the deal because they sold the house to someone else.The vendor avoids being in default because it says that their failure to perform was compelled by duress.How did the purchasers coerce the vendor into failing to perform?They threatened to buy the house and then resell it to someone ďundesirableĒ, which was a euphemism for ďblackĒ at the time.The court says that you can make a duress case out of this.

 

Holmes said: ďWhen it comes to the question of obtaining a contract by threats, it does not follow that, because you cannot be made to answer for the act, you may use the threat.Ē

 

If the Wolfs had followed through on their threat, they would not have been liable in any way.However, their threat, in the view of the courts, may stand on a different footing.Why?Because their threat here is entirely self-interested.They are trying to get an advantage for themselves by threatening to do something which is lawful, but that they would only do to hurt the other party.

 

You can frequently test whether a threat is proper or improper by whether the person making the threat has the right to do it.But sometimes, even though you have the right to do it, the threat ought to be treated as improper if youíre only doing it for the purpose of hurting the other side.

 

Whatís the most common kind of threat made in making contracts and adjustments to contracts that you have the right to do and is generally not improper?Itís the threat to sue!You can threaten to bring a civil suit and it will be considered proper on its face.Thatís what youíre supposed to do in the event of a dispute.Thatís a proper threat unless you do it in bad faith.Youíll find this in ß 176.

 

On the other hand, the threat of a criminal action in order to obtain an advantage on a contract is improper.You just flat-out canít do it.

 

We need to figure out whether what is threatened in a duress case is proper or improper.After figuring that out, assuming itís improper, then we additionally need to find out whether that threat actually coerced someone to do something.

 

Could we have talked about lack of consideration as a ground for finding for Loral in Austin Instrument?

 

What is the effect of UCC ß 2-209?

 

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