Contracts
Class Notes
Yesterday,
we talked about infancy and mental incompetence.
Let’s
move on to…
Odorizzi v. Bloomfield School Dist.
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the writing rescinded.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.
Duress
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…
Austin Instrument, Inc.
v. Loral Corp.
The
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.
How
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?