Yesterday, we talked about infancy and mental incompetence.
Let’s move on to…
Odorizzi is an elementary school teacher. Odorizzi, let’s 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 it’s a “bum pinch” and the charges are ultimately dismissed.
After he’s 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 he’s 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 person’s 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 we’re using a cognitive test. There’s every reason to think that he understood what was going on even if he didn’t like it or didn’t feel that he had a free choice. Did he have the capacity to control his behavior? There’s 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 If he can make his case at trial, he can have the writing rescinded.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 they’re not under pressure, but if you compound the difficulties of old age with excessive pressure, you’re on the way toward making an undue influence case. Odorizzi is weakened due to his arrest and the stressful situation he’s been through. The superintendent and principal come and pressure him into a resignation.
This case does not stand for the proposition that you can’t use pressure to obtain contracts. Whenever you make an offer, you’re exerting a type of pressure on the offeree. At least implicitly, you’re saying: “Take this, or we can’t deal. This may well be my best offer.” That’s a kind of pressure. Offerees sometimes make a counteroffer, and that’s pressure too. There is pressure involved in the making of most agreements, and that’s fine. But sometimes the pressure becomes too great and turns into “overpersuasion”. You can use pressure to make a deal, including vigorous salesmanship. That’s perfectly okay. But sometimes the pressure will overflow the bounds and result in overpersuasion and undue influence.
When you have pressure that is “coercive in nature” and “overcomes the will without convincing the judgment”, you’ll have undue influence. This is a doctrine with soft edges. It mustn’t be used too broadly and applied to situations to which it is not intended.
Where does it not apply? We can’t back out of a deal just because we have second thoughts. Hindsight is always better than foresight. You’ll 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. It’s to your advantage to be able to make contracts and be bound by them, but you pay just the same thing as a price: you’re bound by the contracts you make.
This case tells you that there is usually a pattern to undue influence. You don’t 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 Odorizzi’s arrest)
2. Consummation of the transaction in an unusual place (at his apartment) – deals can be negotiated in somebody’s house, but it’s 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 – 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 § 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 superintendent’s office during office hours a while after the charges had been filed and let him think it over overnight.
One thing that Odorizzi’s lawyer tried was duress. The court finds that there wasn’t 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. It’s a rougher situation than undue influence, and has harder edges. It’s easier to see whether you have a duress case than a case of undue influence.
The applicable sections of the Restatement are §§ 174-176. It starts out with a very basic rule at § 174 that says that if you were physically coerced into an agreement, your assent is ineffective under those circumstances.
At § 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 don’t 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 in…
threat here is to the effect of: “If you don’t sweeten the pot for me, I’m
going to break my promise.” A majority
of the Court of Appeals of
But not all threats to break a contract won’t 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 doesn’t coerce when the remedy in the courthouse is effective. If that’s true, then your choice to sweeten the pot is your free choice and that’s fine. You could have chosen to seek your remedy in the courthouse.
But in the majority’s view here, there is economic duress because of Loral’s 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 they’re 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. It’s 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 Loral’s 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 that’s almost always the case. It’s easy to state the principles, and there won’t be a whole lot of disagreement about the principles, but their application to the particular facts is often difficult.
did this happen?
The way the majority states the facts, they almost turn it into a classic duress case. If that’s 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 party’s 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 “undesirable”, which was a euphemism for “black” at the time. The court says that you can make a duress case out of this.
Holmes said: “When 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.”
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 you’re only doing it for the purpose of hurting the other side.
What’s 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? It’s the threat to sue! You can threaten to bring a civil suit and it will be considered proper on its face. That’s what you’re supposed to do in the event of a dispute. That’s a proper threat unless you do it in bad faith. You’ll find this in § 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 can’t do it.
We need to figure out whether what is threatened in a duress case is proper or improper. After figuring that out, assuming it’s 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 § 2-209?