Business Law
Chapter 10
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If a party's consent to an agreement results from mistake, fraud, duress, menace, undue
influence or unconscionability, it is not genuine; there is no mutual consent.
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The term "Caveat Emptor" means buyer beware.
3
Throughout history, it has been the responsibility of both parties to a contract to carefully
assess the subject matter and terms of the contract and to be on guard that they may not
receive what they think they are getting.
3
This approach allowed each party to act in a devious manner to obtain the consent of the
other party to the contract. "Let the buyer beware." In 1872, the California Legislature
stated that, "The consent of the parties to a contract must be: free; mutual, and
communicated by each party to the other”. So what exactly does "free" mean? California
Civil Code provides that "apparent consent is not real or free" when obtained through:
mistake, fraud, duress, menace, or undue influence.
3
Generally, this makes the contract voidable, and it may be rescinded by the party whose
apparent consent is not real or free. In effect, rescission means the contract is
extinguished—the parties are placed in the positions they were prior to contracting with
each other. This may mean that one or both parties will have to return items or benefits
received from the other party.
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Rescission is an appropriate remedy when consent was given by mistake or was obtained
through duress, menace, fraud, or undue influence.
3
Other remedies, such as damages or reformation, may be available and are discussed in
more detail in the chapter containing remedies for breach of contract. Let's explore each
of the five problem areas regarding apparent consent that is not real or free.
Welcome to Chapter 10 of the Business Law class, where we will discuss consent and
performance. So far in our voyage through contracts, we have considered the elements of
offer and acceptance, mental capacity, consideration, unlawful agreements, and required
written contracts. What's next? Have you ever made an agreement with someone only
later to realize they tricked you? They did not tell you all of the facts you needed to know
or they lied to you just to get your consent. When you discovered this, what did you do?
This chapter involves the law's desire to recognize a contract and enforce it where both
parties' consent is genuine. Please click on the slide to advance the presentation.
4
The California Legislature has divided mistakes into two types: mistake of fact and mistake
of law. We will look at both types of mistakes. Think of a mistake as a situation where the
apparent consent is not "real."
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When both parties are making the same mistake of a material, or important, fact and
neither one of the parties is at fault, this mutual mistake may prevent a contract from
coming into existence. In order for this to happen, the parties must have a different
understanding as to the subject matter of the contract. In other words, there was never a
meeting of the minds between the parties because they both intended something
different. For example, in the case of Balistreri v. Nevada Livestock Production Credit
Association, the litigation concerned whether the Sebastopol or the Petaluma property
was subject to the deed of trust, which is in default with a pending foreclosure.
5
The plaintiffs signed a deed of trust in favor of the defendant and believed that it covered
the Sebastopol house, which the couple owned together with their son and where their
son resided. This belief was consistent with a cover letter that was sent to the plaintiffs by
an employee of the defendant, asking them to sign the attached deed of trust covering
"your Sebastopol residence for your son." However, the property described in the
attached deed of trust was the parents' residence in Petaluma. This was discovered when
the defendant threatened foreclosure. The plaintiffs sued to cancel the deed of trust
based on mutual mistake of a material fact. The appellate court determined that no
contract had been formed and the deed of trust should be canceled, concluding that each
party believed there was an agreement where there was none. The defendant's loan
agent seems to have gotten the two residences confused. The court also concluded that
the plaintiff did not neglect a "legal duty," as the plaintiffs' failure to read the deed of
trust was because the plaintiffs reasonably relied upon the mistaken representations
contained in the cover letter concerning the subject matter of the contract.
5
Remember, the mistake of fact must be material and not something trivial or insignificant
where the party would have entered into the contract anyway. This time, the mutual
mistake does not deal with the subject matter of the contract, rather it deals with
something contained in the contract. If such a mistake occurs, the remedy is to rescind
the contract. See Williams v. Puccinelli in your text.
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There is no requirement that the mistake be mutual in order to rescind a contract.
Rescission is possible if only one person made a mistake, usually referred to as unilateral
mistake, but only in certain situations.
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As a general rule, if one party makes a mistake that causes that person to enter into the
contract, and the other party was not making the same mistake, the parties are bound to
the terms of the contract and there will he no rescission by the mistaken party.
6
The reason for this rule is easy to understand. If a person is allowed to rescind a contract
solely on the basis of his or her own mistake, then anyone who wanted out of a contract
would come to court, announce they had made a mistake and seek to rescind a contract.
If you were in the contract with that person, you would have no idea that the other party
made a mistake and this would come as a complete surprise to you.
6
Recall in Chapter 7 that Drennan v. Star Paving Co. involved the bidding error where one
contracting party had no idea of the other's mistake. If rescission is allowed, you would
never know whether a contract was binding and enforceable in court or subject to
rescission because of a unilateral mistake by the other party. There are certain situations
when a party making a unilateral mistake will be allowed to rescind the contract. These
situations are: when the mistaken party can meet the requirements of a clerical or
computational mistake, or that a mistake was made that the other party either knew was
being made or should have known was being made. Examples are provided in your text.
6
Let now look at Mistake of Judgment.
6
What happens if the cause of the mistake is not a clerical or computational error, but an
error in judgment? Generally, relief is refused for errors of judgment. For example, if the
subcontractor's bid was erroneous because the subcontractor failed to include enough
concrete in the bid, or underestimated the labor costs, or did not include an amount for
lumber, the contract is nevertheless an enforceable contract.
6
In theory, the agreement that is enforced is the one the person intended to make.
6
Allowing relief would encourage incompetence knowing that the court will give relief if a
contracting party is stupid. Consequently, the mistaken party's contract is binding if the
error is one of judgment.
7
In certain circumstances, California also permits rescission of a contract on the basis of a
mistake of law.
7
A mistake of law occurs when a person who is truly acquainted with the existence or
nonexistence of the relevant facts is ignorant of or arrives at an erroneous conclusion as
to the effect of those facts. When both parties to a contract make substantially the same
mistake as to what the law actually is, California Civil Code section 1578 finds that a
mistake of law has occurred, which will permit rescission. Section 1578 also provides that
where one party is aware the other party is making a mistake as to the law, they have a
duty to rectify the mistake or else rescission may be an appropriate remedy.
7
For example, all parties thought that a law had been recently repealed, when in fact it had
not, and based upon that mistake, entered into the contract. The law's repeal was an
important factor in contract performance. Upon discovery of the mistake, the parties can
rescind the contract because they all made the same mistake of law. Or, if you are aware
that the other party is making a mistake about the law being repealed, which you know
has not been repealed, you must "rectify" that situation by informing the party of the
mistake.
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Regarding offensive conduct
8
California requires that consent be freely given, and in situations where it has not been
given freely, the innocent party is able to disaffirm the contract.
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Situations where consent has not been freely given include: fraud, duress and menace,
and undue influence.
10
If a party to a contract entered into it because of the fraud or deceit of the other party,
the victim can choose either the contract remedy for fraud, which is rescission and
restitution, which means, they can cancel the contract, give back what you got and get
back what you gave, or the tort remedy for deceit of keeping the contract and suing for
money damages. There is the additional possibility of exemplary damages to punish the
wrongdoer and make an example to others.
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Since these two remedies are inconsistent with each other, the plaintiff must make an
"election of remedies" before the conclusion of the case. The "tort" remedy is covered in
Chapter 6, Business Torts. Let's consider the "contract" remedy. The California Legislature
recognizes two types of fraud: actual and constructive.
11
The primary difference between the two types of fraud is that actual fraud requires an
intention to deceive, while constructive fraud does not.
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California Civil Code section 1572 provides that actual fraud "consists in any of the 5
following acts, committed by a party to the contract, or with his connivance, with the
intent to deceive another party thereto, or to induce him to enter into the contract:
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1.
The suggestion, as a fact, of that which is not true, by one who does not believe it
to be true;
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2.
The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, although he believes it to be true;
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3.
fact;
The suppression of that which is true, by one having knowledge or belief of the
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4.
A promise made without any intention of performing it, or
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5.
Any other act fitted to deceive."
12
Essentially, what you have above is intentional misrepresentation; negligent
misrepresentation; concealment; false promise; and whatever the court wants to decide
is fraud. Additionally, the victim of the fraud must show that the misrepresentation was of
a material fact; that there was reliance on the misrepresentation; that the reliance was
reasonable and justified; and the victim suffered some sort of harm or damage as a result
of the misrepresentation. Fraud is a question of fact, not a question of law. Let's now
consider each of the elements of actual fraud, keeping in mind that it's very easy to say
someone defrauded you, but it may be very difficult to prove. Often, it's just one person's
word against the word of the other person. What would constitute fraud in a particular
situation might not be fraudulent when exercised toward another person. Proof of
fraudulent intent is often an impossibility and it must be established by the circumstances
surrounding the transaction. "Fraud is not generally practiced in the open light of day and
for that reason is not susceptible of direct proof but must be spelled out from
circumstantial evidence".
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If you make a statement that you know to be false, you are committing an "intentional
misrepresentation."
13
When asked a direct question, you must answer truthfully. For example, you have been
experiencing problems with the automatic transmission in your car and the transmission
repair shop informs you that it will take twenty two hundred dollars to replace the
transmission. Rather than fix the vehicle, you decide to sell the vehicle and buy a different
one. The first person to respond to your advertisement asks you if there is anything wrong
with the transmission. Even though you know there is a problem, you say, "No, the
transmission is just fine." By not answering truthfully you have committed an intentional
misrepresentation.
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If you make a positive statement, not knowing if it is true, you may have committed
"negligent misrepresentation."
14
Carelessly making an assertion of a fact that you have not substantiated will constitute
negligent misrepresentation if the other party relies on the statement when deciding
whether to enter into the contract with you. In the above example where you were selling
your car, what if the buyer asks if the radiator is clogged up and in need of repair? If you
respond, "No, it's just fine," and it is later determined that the radiator was clogged up,
but that you were unaware of this fact and had no basis for believing your statement to
be true, a negligent misrepresentation has occurred.
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Actively suppressing or concealing a known material fact is considered actual fraud.
15
This is particularly the case when the truth of the statement is not easily discoverable
through reasonable inspection or investigation. What if, when selling your car, you
decided to reduce the noise level of your transmission's shifting of gears by putting a
mixture of fine sawdust and heavy motor oil into the transmission? When the buyer
drives the car the transmission shifts smoothly and is not noisy. Have you actively
suppressed or concealed the true condition of the transmission? Of course you have! You
have also committed actual fraud if the buyer purchases the car believing the
transmission is in good condition.
15
What if you do not undertake the above actions, but rather fail to point out to the buyer
that the transmission is going out? If it is determined that a reasonable inspection by the
buyer would have discovered the transmission problem, you have not actively concealed
a material fact. If the buyer makes an independent investigation of the vehicle, the buyer
will be held to the facts that reasonably would have been discovered and cannot claim
reliance on your representations about those facts. However, the buyer's casual survey or
inexperience will not prevent a claim of reliance on the representations. The general rule
is still "caveat emptor" and unless asked, you are not required to point out reasonably
discoverable defects.
15
In California, both the legislature and the courts have been active in requiring more
disclosures. This attack on the general rule of "caveat emptor" has been primarily
occurring in the area of real estate sales.
15
Recognizing that the purchase of a house may be the single largest acquisition an
individual makes in his or her lifetime, the courts have used judicial flexibility in requiring
disclosures.
15
For example, the courts require a prospective purchaser to be told if the property is on fill
ground as opposed to solid ground. The courts also require the seller of residential
housing to disclose any problems or defects in the house being sold. This covers areas
such as a cracked foundation or slab, a leaky roof, prior termite damage, prior fire damage
or any other material fact that the buyer would want to know in making a decision
whether or not to purchase the house. Noisy neighbors or problems with adjacent land,
which may be a problem for the parcel being sold, such as slippage because of unstable
soil, have also been ruled to be discloseable defects. Since the 1984 case of Easton v.
Strassburger (Chapter 4), this duty of disclosure has also been extended to the sales
agent.
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After watching the courts exercise their judicial flexibility, the legislature eventually
passed the Real Estate Transfer Disclosure Statute.
15
The courts have also found discloseable defects with regard to houses being sold that
were not structural or land related. Does the fact that a murder occurred in the house
being sold constitute a defect? What if an unsavory character previously lived there? The
courts have confronted some of these questions in deciding what should be disclosed. For
example, in the case of Reed v. King, in your book, the court exercises its judicial flexibility.
16
If, at the time of entering into a contract one person makes promises about performance
of an obligation with absolutely no intention of performing that obligation, that is actual
fraud.
16
This is hard to prove. For example, Edward Simmons worked on the "Impact Research"
project at California Institute of Technology and invented a device used in the
measurement of impacts. Dr. Donald Clark headed the project and entered into a contract
with Simmons, on behalf of the institute, which provided that royalties from the use of his
device would be paid to the institute and used to fund the project. Subsequently,
Simmons' employment was terminated because project funds were running low,
according to Dr. Clark. Simmons discovered that all of the royalty funds were used by the
institute, but had never been used to fund the project. Simmons successfully sued to
recover the royalties on the theory of false promise, as the court concluded that the
institute, at the time of contracting, never intended to use the royalties to fund the
project.
17
This is a catch-all that the legislature used to give the courts latitude in finding other types
of fraud that were not specifically identified in Civil Code section 1572. "Fraud is a generic
term, which embraces all the multifarious means which human ingenuity can devise and
are resorted to by one individual to get an advantage over another. No definite and
invariable rule can be laid down as a general proposition defining fraud, as it includes all
surprise, trick, cunning, dissembling, and unfair ways by which another is deceived. ... The
statutes of California expressly provide mat ... any other act fitted to deceive is actual
fraud."
18
The victim must have relied on the fraudulent act when entering into the contract and
that reliance must be justifiable. Reliance occurs when the misrepresentation alters a
party's conduct, which usually means the party changes legal positions by entering into a
contract; or absent that misrepresentation the party would not have entered into the
contract. It is not necessary that the reliance on the misrepresentation be the sole or even
the predominant or decisive factor influencing the party's conduct. It is enough that the
representation has been a substantial factor in influencing the decision. A presumption, or
at least an inference, of reliance arises whenever there is a showing that a
misrepresentation was material. It is material if a reasonable person would attach
importance to its existence or nonexistence in determining whether to enter into the
contract or not. Such materiality is generally a question of fact unless the fact
misrepresented is so obviously unimportant that the jury could not reasonably find that a
reasonable person would have been influenced by it. See Hinesley v. Oakshade Town
Center in your text.
18
Puffing is a statement that exaggerates through superlative comments or opinions, a
property's benefits.
18
Statements such as "This is the best automobile money can buy" or "You're going to make
a whole bunch of money with this franchise," are statements of opinion, not fact, and are
often called "puffing statements."
18
Since puffing is merely the expression of an opinion, the seller can use such statements
without being liable for fraud.
18
However, you may be justified in relying on a person's opinion if there is a fiduciary
relationship or confidential relationship with the other party, or if the other party has
expert knowledge or skill with respect to the subject matter of the contract. In other
words, a client is justified in relying on the opinion of a doctor or attorney, and a naive
purchaser is justified in relying on an expert's opinion about the subject matter of the
contract.
18
If the victim of the misrepresentation does not believe the fraudulent statements and
does not rely on them in entering into the contract, no fraud has been committed.
18
Additionally, if the victim chooses to conduct his or her own investigation of the facts and
discovers that the statements are not true, but nevertheless enters into the contract,
there is no fraud. It is important to note that in most instances, there is no duty or
obligation to verify the truth of the representation.
18
If the victim of the fraud chooses to rescind the contract, it is not necessary to show a
dollar loss.
18
is necessary to show damages or injury resulting from the fraud when the victim chooses
to enforce the contract and seeks money damages from the perpetrator.
18
For example, you are a great fan of Arnold Palmer, the professional golfer. Your goal has
been to acquire golf items that were personally owned by Arnold Palmer, especially a set
of golf clubs. A salesperson at an exclusive golf store tells you that the set of golf clubs
that you are looking at was used by Arnold Palmer on the professional tour. The price he
is asking for the clubs is quite high but, since it has always been your desire to own such a
set, you buy them anyway. Later, you discover that these clubs were never owned by
Arnold Palmer and you were induced to purchase the clubs by the actual fraud of the
salesperson.
18
What remedies are available to you? You could rescind the contract by giving the clubs
back to the store and receiving your money back. In the alternative, if you have become
attached to the clubs and enjoy playing with them, you can keep the clubs and recover, as
your damages, the difference between the current value of the clubs and what you paid
for them. In addition, should you have to go to court to recover your damages for fraud,
the court may award you punitive damages as an additional sum to be added on to your
actual damages, to punish the defendant for committing the fraudulent act and to make
an example so others will not do the same.
19
In the normal fraud case, one party is induced by the other, through either actual fraud or
constructive fraud, to enter into a contract that is voidable because of the fraud.
19
Upon discovering the fraud, the victim of the fraud must promptly rescind the contract
and offer to give back the consideration received from the fraudulent party. Additionally,
the victim may recover money damages to compensate for losses as a result of the fraud
and can seek exemplary damages to punish the wrongdoer. Occasionally, the court may
allow the victim to have the written contract reformed to express the true intention of the
party's bargain by redoing the fraudulent provisions. As an alternative, the victim can
keep the contract and sue the perpetrator for damages resulting from the fraud and seek
exemplary damages.
20
Constructive fraud results from a breach of a confidential relationship, which gains an
advantage for the person without fraudulent intent, because of a tendency to mislead the
other.
20
"Fraud assumes so many shapes that courts and authors have ever been cautious in
attempting to define it. Each case must be considered on its own facts.... In its generic
sense, constructive fraud comprises all acts, omissions and concealments involving a
breach of legal or equitable duty, trust, or confidence, and resulting in damage to
another. Constructive fraud exists in cases in which conduct, although not actually
fraudulent, ought to be so treated—that is, in which such conduct is a constructive or
quasi fraud, having all the actual consequences and all the legal effects of actual fraud....
20
Constructive fraud usually arises from a breach of duty where a relation of trust and
confidence exists. A confidential relation may be said to exist whenever trust and
confidence is reposed by one person in the integrity and fidelity of another. In the case
Estate of Arbuckle, the victim's real estate broker failed to disclose material facts to the
client (a higher offer might be coming), which would have led the client to conclude that
the transaction recommended (accept today's lower offer) by the broker was not in the
client's best interest, but it gained an advantage for the broker (a commission today). One
interesting aspect of constructive fraud is that, unlike actual fraud, no intention to deceive
or defraud the other person is required.
20
Not telling the client the material facts necessary to make a decision amounts to
"constructive fraud," even though there was no intention to defraud the client.
20
Sometimes what is and what is not a "confidential relationship" becomes the question.
That determination depends on the facts and circumstances surrounding the relationship.
For example, in the case of Wilson v. Zorb, the court stated, "we have been unable to find
in the facts established the substance of a fiduciary relationship. Warm friendship,
confidence and an affectionate regard for each other were mutual with the parties, and
yet each was self-sufficient, competent and independent. Such relationships happily are
common, but they are not confidential relationships in a legal sense. It takes something
more than friendship or confidence in the professional skill and in the integrity and
truthfulness of another to establish a fiduciary relationship."
21
An innocent misrepresentation occurs when a party makes a material misrepresentation,
but does so honestly believing it to be true.
21
A buyer for your car asks if the radiator is clogged up and in need of repair. You respond,
"No, it is just fine." You may have committed an innocent misrepresentation if the
radiator is clogged up even though you honestly and reasonably believed your statement
that it was fine was true. If the buyer relies on the innocent misrepresentation and enters
into the contract, what remedy is available to the victim? The remedy available for an
innocent misrepresentation is rescission of the contract and returning the parties to the
position they occupied before the contract.
22
Duress and menace are two other situations where consent to a contract has not been
freely given. Whether or not there is duress/menace is a question of fact.
23
Most legal scholars define duress as the wrongful use of threats to obtain a person's
consent to a contract.
23
In California, duress actually involves the unlawful confinement of a person or a relative of
that person or the unlawful detention of his or her property.
23
This confinement or detention removes the free will of the consent, since the only reason
the person entered into the contract was because of the duress. Not allowing the person
to exercise freedom of movement would constitute duress under California law. The
confinement may be due to physical restraints on the person, or the detention may be
due to keeping physical possession of the property from the person entitled to it. For
example, Max locks your mother in the trunk of his car and refuses to let her out until you
sign a contract selling him your antique doll collection; or, Max refuses to return your car
unless you sign the contract.
23
Duress makes the contract voidable.
24
In California, menace is a closely related form of coercion.
24
If a person threatens to cause the unlawful confinement of another person, to inflict
unlawful and violent injury to another person or their property, or injure the other
person's character, he or she has committed menace.
24
If menace is used to obtain a person's consent to a contract, the contract is voidable. For
example, Max shows you a knife and tells you that if you refuse to sign a contract to sell
him an antique diamond ring, he will stab your mother, who is standing next to you.
Obviously you are entering into the contract not of your own free will, but because of the
threat of physical harm to your mother. Therefore, the contract is voidable.
24
The same is true for property. For example, Max grabs your great-grandfather's pocket
watch and threatens to smash it with a hammer unless you enter into the contract. This
also is menace and makes the contract voidable. Notice that the two types of menace
used by Max are both illegal and unlawful. On the other hand, if Max threatens to sue you
on a valid unpaid three thousand dollars claim he has against you unless you agree to sign
a promissory note for that amount, this does not constitute menace should you sign the
note. Max's claim was a bona fide civil claim that he could bring to court at any time.
24
A threat of criminal prosecution, as opposed to a threat of civil prosecution on a bona
fide claim, will constitute menace if used to gain an advantage in a civil matter.
24
Occasionally, the result of the menace is a void contract as opposed to a voidable
contract. For example, a physical threat to get the person to sign a piece of paper when
the victim has no idea what the paper is about and has no intention to enter into a
contract. In this event, there is no contract, which means that the victim does not have to
seek rescission of a contract, since no contract exists.
25
Economic duress is not specifically mentioned by statute in California; however, it is
recognized by the courts.
25
Economic duress exists whenever a person is induced by the unlawful act of another to
give apparent consent to a contract under circumstances that prevent the exercise of free
will. In other words, because of the economic threat, the victim had no choice but to
enter into the contract.
25
California courts have recognized the economic duress doctrine in private sector cases for
more than fifty years. Rich & Whillock v. Ashton Development, in your text, is an example
of a situation where one party could not say no.
26
Is it possible for a person to take advantage of a relationship with another person so that
the other person's consent is not freely given? The answer is yes! Undue influence occurs
in three different situations, and in all three situations, the contract will be voidable.
27
Most cases involving undue influence are contracts where the parties were in a
confidential relationship with each other.
27
Examples of such relationships include accountants and their clients, attorneys and their
clients, trustees and the beneficiaries, stockbrokers and their clients, and any other
relationship where there is a great deal of trust and good faith owed by one party to the
other. Contracts between parties with a confidential relationship are enforceable if they
are fair and entered into with full knowledge of all material facts and obligations. For
example, an attorney can buy a piece of property from a client, but it is presumed to be
invalid unless the attorney can show mat it was fair and that the attorney informed the
client of all of the facts necessary for the client to make an independent decision on
whether to enter into the contract.
27
The other two situations where undue influence may exist do not involve confidential
relationships. In these cases, the issue becomes:
27
1.
Whether a grossly oppressive and unfair advantage was taken of a person
because of that person's needs or distress, or
27
2.
Whether an unfair advantage was taken because one party had a weakness of
mind.
27
When undue influence is being claimed because of a person's needs or distress, it must be
shown that the other party took "grossly" oppressive and unfair advantage.
27
Therefore, if a party simply drives a hard bargain that is slightly oppressive and unfair, the
contract is enforceable. Additionally, determining if a person has a "weakness of mind" is
difficult, as well as determining if an "unfair advantage" was gained in the contract. What
this points out is that in each of these two situations, the presence of the required
elements depends on the facts of each case.
27
Estate of Auen, in your book, may shed some light on the facts necessary to show undue
influence.
28
This concludes our look at the five elements of Civil Code section 1567, any of which make
consent to a contract "not real or free." We will now consider another area involving
contractual consent: Adhesion of contracts and unconscionability.
29
An adhesion contract is typically prepared by one party who has such overwhelming
bargaining power over the other party that there is no negotiating possible by the weaker
party.
29
The weaker party must either agree to the contract as is or there is no contract at all. This
"take it or leave it" approach defeats the arms-length bargaining element of freedom of
contract. Adhesion contracts are normally standard preprinted forms drafted by the
stronger party for the protection of the stronger party at the expense of the weaker party.
Many times the adhesion contract will shift a risk or potential liability normally held by the
stronger party to the weaker party. Normally, the stronger party has something the
weaker party desires or needs and uses an adhesion contract to gain an economic
advantage to which the weaker party would normally not have agreed.
29
Adhesion contracts are not necessarily bad-they are just one-sided.
29
Rental agreements, motor vehicle purchase contracts, insurance policies, loan and
security agreements, automobile repair contracts and real estate purchase contracts are
examples. These adhesion contracts are typically on standard "fill in the blank" forms that
are used throughout that particular industry or trade and are enforceable contracts. It is
only after considering the bargaining power of each party to the contract and the
particular terms of the contract that a decision can be made whether particular provisions
of the contract are unconscionable or the contract itself is unconscionable.
30
A contract or a portion of a contract so one-sided the courts will find it shocking to their
conscience is considered unconscionable. There is no easy answer to the question of what
makes a contract unconscionable, and there is little direction from the California
Legislature.
30
The courts may use their judicial flexibility in answering the question and that means the
facts of each case must be individually analyzed. The court must find that the contract is
oppressive, or contains an element of surprise due to some objectionable term that has
been hidden in the contract, or that there has been a harsh allocation of risk that is not
justified by the circumstances of the contract.
30
Inserting an unconscionable provision in a contract is unlawful as a deceptive practice
under the Consumer Legal Remedies Act.
30
California Civil Code section 1670.5 provides the following:
30
"(a) if the court, as a matter of law, finds the contract or clause of the contract to have
been unconscionable at the time it was made, the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the applicability of any unconscionable clause as to avoid any
unconscionable result. And,
30
(b) when it is claimed or appears to the court that that contract or any clause thereof may
be unconscionable, the party shall be afforded a reasonable opportunity to present
evidence as to its commercial setting, purpose, and effect to aid the court in making the
determination."
30
In order to understand the approach in California, look at Carboni v. Arrospide, in your
text.
31
Let’s now look at contract performance topics: Common Contract Condition, Satisfaction
Clauses, Time of Performance and Substantial Performance.
32
Common Contract Condition are provisions in the contract tint determine the time for
performance, the order of performance, or establish the circumstances under xohich a
performance obligation begins or ends.
32
Conditions are usually found in a contract when words such as "if," "when," "provided,"
"unless," "as soon as" and "upon the condition that" are used.
32
"An obligation is conditional, when the rights or duties of any party thereto depend upon
the occurrence of an uncertain event". The conditions may be precedent, concurrent or
subsequent. A condition precendent is one that is to be performed before some right
dependent thereon accrues, or some act dependent thereon is performed. For example, a
contractor and a lot owner have contracted for the construction of a home. The contract
provides that the contractor does not have to commence construction until such time as
the trees are removed from the lot by the owner. Tree removal is a condition precedent
to the duty to construct the house. The issue in the case Wal-Noon Corporation v.
Norman, in your text, was whether or not a condition existed in a lease.
32
A conditions subsequent is one referring to a future event, upon the happening of which
the obligation becomes no longer binding on the other party, if he chooses to avail
himself of the condition. For example, a five year employment contract provides that it is
terminated upon the sale of the employer's business. The sale of the business is a
condition subsequent that would terminate the employer's obligation of employment.
32
Conditions concurrent are those that are mutually dependent, and are to be performed at
the same time. For example, the seller conveys ownership of the calculator to you at the
same time that you pay for it. Delivery of the item and payment must occur at the same
time; they are concurrent conditions.
32
Conditions precedent subsequent and concurrent may be either express or implied in the
contract.
32
In the event of a lawsuit, a plaintiff must plead and prove the occurrence or excuse of all
conditions precedent or concurrent in order to charge the defendant with liability for
breach of contract. On the other hand, once the plaintiff has established that the
defendant is obligated to perform, the defendant must plead and prove the occurrence of
a condition subsequent in order to be held not liable to the plaintiff for the failure to
perform the contract.
33
A contract may contain a clause that provides that one party's performance must be
satisfactory to the other party before that performance must occur; this clause becomes a
condition precedent. In other words, if the performance is not to the party's satisfaction,
there is no performance in return.
33
Since a satisfaction clause could arguably make an illusory contract, courts will imply an
obligation of good faith in determining satisfaction. Sometimes the contract calls for
satisfaction to be determined by a third party. The third party determines satisfaction; a
reasonable person standard is not used. As long as the third party acts in good faith, the
determination of satisfaction is binding.
33
The usual dispute is whether performance is "satisfactory." The courts have generally split
contracts containing a satisfaction clause into two categories. One category includes
contracts involving the personal taste or judgment of a party, and the other category
involves contracts which are not personal in nature and generally deal with mechanical
operation, sometimes referred to as mechanical utility or operative fitness.
33
Judgment or Taste:
33
If the satisfaction clause is in a contract that involves the taste or judgment of a party,
that party's sole determination of his or her satisfaction is final, as long as the termination
is made in good faith.
33
Good faith implies a covenant that neither party shall do anything to destroy or injure the
other party's right to receive fruits of the contract. These contracts usually involve
employment or creative services. In order to maintain employment, the contract says that
the employee must be performing the job to the "satisfaction" of the employer. As long as
the facts show that the employer is acting in good faith regarding dissatisfaction with the
employee's performance, the employee can be terminated. For example, dissatisfaction
might consist of an inability to meet production requirements, excessive tardiness, or
numerous customer complaints. If the employee is terminated, not because of
dissatisfaction with the employee's performance, but because the employer is upset with
something the employee's father said in a newspaper article, the employer has not acted
in good faith, and can be held liable.
33
Contracts involving creative services may also contain a satisfaction clause. For example, a
contract whereby one party is to paint a portrait of the other party, or write a song for the
other party, may provide that the other party must be "satisfied" with the results before
making payment.
33
Since the portrait or song involves the "taste" o! the other party, as long as the other
party's dissatisfaction is in good faith, there is nothing the performing party can do to
recover.
33
It is not good faith if the party is claiming dissatisfaction with the portrait or song merely
to avoid having to make payment.
33
Mechanical Utility or Operative Fitness
33
If the satisfaction clause is in a contract involving mechanical utility or operative fitness,
the standard of satisfaction is not the party's personal satisfaction, but whether
performance would be satisfactory to a reasonable person.
33
Construction contracts or the manufacture of goods are normally not considered to be so
personal in nature as to involve a person's taste or judgment. If construction performance
or the manufacture of goods would satisfy a reasonable person, then the satisfaction
clause has been accomplished. However, you should carefully read the satisfaction clause
because, even if the contract involves mechanical utility or operative fitness, it can be
written in such a way that it clearly calls for the personal satisfaction of the other party. In
that case, a reasonable person's satisfaction would not be sufficient.
33
Because of the risk involved, you should be very careful in entering into a contract
requiring your performance to be satisfactory to the other party.
33
Additionally, if you want contract performance to be satisfactory to you personally, make
certain that the satisfaction clause clearly states this.
34
Sometimes the contract specifies the time for performance. This specification can either
be general, "by the end of the rainy season," or specific, "by five P.M., Thursday, March
seventeenth."
34
If no time is specified for the performance of an act required to be performed, a
reasonable time is allowed.
34
If the act is in its nature capable of being done instantly—as, for example, if it consists in a
payment of money only—it must be performed immediately upon the thing to be done
being exactly ascertained. Generally, if the time for performance is specifically stated in
the contract that time will be enforced.
34
Sometimes the time for performance is established by requiring performance as of a
certain date; for example, performance must be completed by twelve noon on April 1. On
the other hand, performance may be specified by a period of time, for example, within
ten days from the date of the contract.
34
The use of a "time is of the essence clause" is either because a delay would cause serious
damage to one of the parties, or the clause is in a preprinted contract form that the
parties happen to be using.
34
Generally, time is not of the essence in a contract, and a short delay in performance
usually does not cause a major problem. Whether the "time is of the essence" clause will
be enforced depends on whether the parties to the contract actually intended that
performance within the time provided in the contract is critical. Therefore, even if such a
clause is in a contract, the court might ignore a slight delay in performance if it is
determined that the time for performance is not critical.
34
On the other hand, if it is determined the time is critical, the clause will be enforced. Also,
just because a date for performance is included in the contract does not mean that time is
of the essence. It’s the facts and circumstances of the contract that determine how critical
the time for performance is.
35
Sometimes the performance by the parties cannot take place in a single act, but will
require performance over a period of time. For example, you have a contract with Harley
to build Harley's house for one-hundred thousand dollars. There is nothing in your
contract regarding specific times for performance, order of performance or the effect that
a failure to perform or defective performance on your part will have upon Harley's duty to
pay. You worked on the project for several months and tendered what you believe is a
completed house that conforms to the terms of the contract. Harley discovers the kitchen
counter is two inches lower than called for in the contract, a breach of the contract on
your part. Due to other commitments, you choose not to remedy the breach by raising
the kitchen counter two inches. Is Harley discharged from his payment to you of onehundred thousand dollars?
35
No, Harley's duty is not discharged, because you substantially performed the contract.
Harley may deduct an amount that would give him the benefit of his bargain since you did
not tender total performance. Harley will be able to deduct the amount necessary to raise
the kitchen counter two inches. It will not be necessary that Harley actually have the
counter raised, but what is necessary is to compensate him for the cost to do so if he so
chooses. Harley could only refuse to pay anything to you if it was expressly stated so in
the contract. If Harley had already paid the one-hundred thousand dollars and then
discovered a defect, Harley may have to sue to recover a judgment for the cost to remedy
the minor defect. You may recover most, but not all of the one-hundred thousand dollars
on the contract since you reached the level of substantial performance.
35
To reach the level of substantial performance, it must be so close to completion that the
other party has obtained the substantial benefit of the bargain.
35
Whether performance is "substantial" is a question of fact that depends on the particular
circumstances of the case. Usually the deficiency in performance is a minor breach and is
inadvertent, or a change or substitution that the performing party believed in good faith
would accomplish the required performance. The court's award of money damages to the
victim of the breach is a way to give the victim the benefit of the bargain.
36
This concludes our chapter on consent and performance. We covered consent, mistakes,
offensive conduct, fraud, duress and menace, undue influence, adhesion contracts and
unconscionability and contract performance.