Outline: Contracts - VII - Unenforceability

Contracts (Spring 2006, Hull)

VII. UNENFORCEABILITY

1. Misunderstanding - Related to ambiguity exception to PER. [Frigaliment Importing Co. v. B.N.S. International Sales Corp. – Where buyer has not established narrower meaning of "chicken", contract is unenforceable with narrower meaning]
2. Mistake of Fact
   1. Mutual Mistake
      1. R.2d 152
         1. Mutual mistake regarding basic assumption
         2. Materiality
         3. No risk assumption under R.2d 154
      2. Reilley v. Richards – Where buyer and seller both mistaken as to character of land which was material (FEMA designation which prevented building), rescission is proper.
      3. Woyma v. Ciolek – Signature of release for personal injury may be set aside in case of latent injuries, which neither side would have known about (so no assumption of risk on her part), and which was material to release.
   2. Unilateral Mistake
      1. R.2d 153
         1. Unilateral mistake regarding basic assumption
         2. Material
         3. Non-mistaken party had reason to know of mistake or enforcement would lead to unconscionable result
         4. No risk assumption under R.2d 154
      2. Donovan v. RRL Corporation – Rescission is proper where typo in ad in one of many local papers establishes good-faith unilateral mistake on part of car dealer, which was not assumed because typo was made at newspaper.
   3. R.2d 154 – When Party Bears Risk of Mistake
      1. Risk is allocated by agreement of parties; or
      2. Party is aware of its limited knowledge but treats it as sufficient; or
      3. Risk is allocated by court on grounds of reasonability
3. Impossibility
   1. Impracticability - Seller's excuse
      1. Impracticable performance
      2. Caused by event which contract assumed would not occur [Mishara Construction Co. v. Transit-Mixed Concrete Corp. – Labor strikes which disrupt delivery of concrete subject to jury determination of foreseeability]
      3. Event not caused by party seeking excuse
      4. Party seeking excuse did not assume risk
   2. R.2d 266(1) - Where a party’s performance under a contract is impracticable without his fault at time of formation because of a fact he has no reason to know, and whose non-existence is assumed, there is no duty to perform. [Sunflower Electric Co-Op. v. Tomlinson Oil Co. – Where gas reserves were exhausted, provider should have known that reserves are inherently unknowable, and use of word "guarantee" assumed risk, for which provider is liable]
   3. Foreseeability
      1. Economic Theory (Posner) – Supplier in better position to anticipate and prevent loss of production due to strikes by its employees, so should incorporate them in contracts
      2. Relational Contract Theory – Risk should be distributed to prevent burdening one party and to minimize loss, so parties should compromise/adjust to continue contractual relationship
   4. Frustration of Purpose - Unusual, not readily available; buyer’s excuse, because when purpose is gone, no sense for buyer to continue to perform [Chase Precast Corporation v. John J. Paonessa Company, Inc. – Government deletion of order for concrete was beyond buyer contractor’s control, seller provider was aware of the risk, and buyer paid for concrete already produced, contract had no more purpose, and is unenforceable]
      1. Event causes substantial frustration of principal purpose of contract
      2. Contract made assumption that event would not occur
      3. Event not caused by party seeking excuse
      4. Party seeking excuse did not assume risk
4. Adhesion Contracts and Unconscionability
   1. Adhesion Contracts – An adhesion contract is not enforceable if it [Graham v. Scissor-Tail, Inc. – Reasonably expectable arbitration clause in concert promotion contract was unconscionable for designating arbitrator with identical interests]:
      1. Does not fall within reasonable expectations of weaker or adhering party
      2. Is unduly oppressive or unconscionable, even if expectations are reasonable
   2. 2-203 – Unconscionability Analysis [Williams v. Walker-Thomas – Contract which redistributed balance of payment so that buyer would always have balance until every item is paid off is subject to UCC analysis]
      1. Purpose - prevent oppression and unfair surprise
      2. Procedural element - Problems in bargaining process, lack of meaningful choice, need of person bargaining, vitality of service, alternatives, lack of education, sophistication, legalese, fine print, deceptive sales practices
      3. Substantive element – Terms unreasonably favorable to one party
      4. Determination - At time of contract
      5. Decision for judge - May enforce clause to some extent or not at all
   3. R.2d 208 - Unconscionable Contract or Term – Court may refuse to enforce contract, or may enforce without unconscionable term, or limit application of unconscionable term to avoid unconscionable result.
   4. Price Unconscionability
      1. Jones v. Star Credit Corp. – Mathematical disparity between $300 retail price and $900 purchase price, fact that welfare buyer already paid $600 of an estimated $1200 in installments, weigh in favor of reforming contract to amend payment to amount already paid.
      2. Remco Enterprises, Inc. v. Houston – Use FMV retail price to figure ratio; limit contract-to-retail ratio ~ 5:2; where ratio is low (108%), and buyer need not maintain good, no price unconscionability.