Restatement § 161: When Non-Disclosure Is Equivalent to an Assertion (Used in Hill)
A person’s non-disclosure of a fact known to him is EQUIVALENT to an assertion that the fact does not exist in the following cases ONLY:
When necessary to correct a previous assertion
R § 161(a)where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material
Where good faith seems to require disclosure
R § 161(b)where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract AND if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing
When you know the other party is mistaken about the effect of a writing
R § 161(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part
Where there is any confidential relationship (i.e. attorney-client relationship)
R § 161(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them
Restatement § 173: When Abuse of a Fiduciary Relation Makes a Contract Voidable
A greater duty is imposed b/w these 2 contracting parties, such that the terms of the transaction must be fair and must be fully explained to the other party
If a fiduciary makes a contract with his beneficiary relating to matters within the scope of the fiduciary relation, the contract is voidable by the beneficiary, UNLESS
(a) it is on fair terms, AND
(b) all parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know
Hill v. Jones
(Vendor’s Affirmative Duty to Disclosure Material Facts in Good Faith under R § 161)
FACTS
P purchased D’s home
During escrow, D assured P that the ripple in floor was from water damage, not termite damage
D never said anything about termites to either P, P’s hired exterminator, or P’s realtor despite previous infestations treated during D’s ownership
After moving in, P noticed wood crumbling & exterminator confirmed the existence of termite damage to floor, steps, and wood columns to house
P sued to rescind purchase contract on ground of intentional nondisclosure of terminate damage
ISSUE
Is the existence of termite damage in a residential dwelling the type of material fact which gives rise to the duty to disclose because it is a matter to which a reasonable person would attach importance in deciding whether or not to purchase such a dwelling?
HELD
Where the seller of a home knows of facts materially affecting value of property which are not readily observable / are not known to buyer, the seller is under a duty to disclose them
Disclosure of the fact that there was prior termite damage would correct the mistake of P as to the basic assumption on which P purchased the home
A vendor MUST disclose material facts that would make a reasonable person think twice about the transaction
Park 100 Investors v. Kartes
FACTS
Park 100 sought to collect unpaid rent from the Karteses under a provision of the lease which was induced through fraudulent means
The Karteses were told that they were signing a lease agreement but actually they signed a personal guaranty of the lease
ISSUE
Can a contract of guaranty be enforced by the guarantee, where the guarantor has been induced to enter into the contract by fraudulent misrepresentations or concealment on the part of the guarantee?
HELD
No, where one employs misrepresentation to induce a party's obligation under a contract, one cannot bind the party to the terms of the agreement.
Whether fraud is present in a case is rooted in the surrounding facts and circumstances and is for the trial court to determine.
The evidence supports the trial court's conclusion here; the findings support the judgment and are not clearly erroneous.
Unconscionability
In order to find unconscionability, a court must find BOTH:
Procedural Unconscionability
Either a lack of choice by one party or some defect in the bargaining process / the way the contract was negotiated or devised, such as quasi-fraud or quasi-duress
Substantive Unconscionability
Relates to the fairness of the terms of the resulting bargain
Approaches to Unconscionability
UCC Approach
Procedural Unconscionability-> Unfair Surprise
Inequality in bargaining power NOT sufficient in itself because its too common
Substantive Unconscionability-> Terms of Oppression
Basically the same asWilliams’ “unreasonably favorite terms”
Williams v. Walker-Thomas Approach
Procedural Unconscionability-> The absence of meaningful choice
Look for inequality in bargaining power (can be enough by itself) and some term that is unintelligible / difficult to parse
Terms seem to be tilted toward other side / similar to UCC “terms of oppression”
What Can Courts Do Once They Find A Term in the Contract Unconscionable?
Under both UCC 2-302 & Restatement § 208, courts can:
Try and strike the clause
Refuse to enforce the contract as a whole if they find that unconscionability permeates the whole contract
Limit the clause so as to contain the unconscionability
UCC § 2-302Unconscionable Contract or Clause
If the court as a matter of law finds the contract or any 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 application of any unconscionable clause as to avoid any unconscionable result.
When it is claimed or appears to the court that the contract or any clause thereof may be unconscionablethe parties 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.
Rest. 2d § 208 Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
Williams v. Walker-Thomas Furniture Co.
(Unconscionable=Lack of Mean. Choice / Unreason Fav. Terms)
FACTS
D, a retail furniture store, sold furniture to P under a printed form contract containing an “add-on” clause, the effect of which was to keep balance due on EVERY item purchased until balance due on ALL items, whenever purchased, was liquidated
P purchased a stereo while had balance of $164 still owed on prior purchases
P defaulted on payment and D sought to replevy all goods previously sold to D
ISSUE
Are the bargaining process and resulting terms of the contract so unfair that enforcement should be withheld?
HELD
The defense of unconscionability to action on a contract is judicially recognizable when the contracting party lacks meaningful choice in the bargaining process, resulting in unreasonable favorable terms in the contract
Procedural Unconscionability→ D knows P has meager income / sale took place at her home / terms were hidden in a printed form contract
Substantive Unconscionability→ D can take everything away for one default
Higgins v. Superior Court
(Unconscionability in a clause, not whole contract)
FACTS
The Higgins children who orphaned and the show Extreme Make-Over Home Edition built a new home for the family that was housing the Higgins children. The family whom the house was built kicked the Higgins children out.
When the television network failed to help the Higgins children with their situation with the family in the home, the Higgins brought suit against the family and the network.
The network petitioned to compel arbitration in accordance with the arbitration clause of the contract that the oldest Higgins child signed.
The Higgins argued that the arbitration clause was unconscionable.
The trial court granted the petition and the Higgins moved for a writ of mandate challenging the court's ruling
ISSUE
May an arbitration clause in a written agreement be enforced, if only the clause as opposed to the entire agreement, is being challenged and the clause is unconscionable?
HELD
No, an arbitration clause in a written agreement may not be enforced if only the clause, as opposed to the entire agreement, is being challenged and the clause is unconscionable.
The arbitration clause in unconscionable because
It was a contract of adhesion - the Higgins only had the opportunity to adhere to the contract or reject it
The Higgins's were not present during the talks between the television network and the family for whom the house was built
Procedural
There was oppression and surprise due to unequal bargaining power
The arbitration clause was not separated from other clauses in the contract and was instead placed in a chuck of text marked miscellaneous = surprise
The network knew that the people signing the document were young, unsophisticated and had recently lost their parents, but they did nothing to make the contract digestible for the Higgins
Substantive
There were overly-harsh and one-sided results
The arbitration clause only required that the Higgins's submit to arbitration but the television network could deny it if they wanted
In re Checking Account Overdraft Litigation
(Affirmative assertion of unconscionability)
FACTS
Checking account customers contended that federally chartered banks charged excessive overdraft fees for charges to their accounts on debit card transactions, primarily by entering charges debiting the customers' accounts from the "largest to the smallest," thus maximizing the overdraft fee revenue for the Banks.
The Banks moves to dismiss on the grounds that the customers assertion of unconscionability was invalid because unconscionability may be asserted only as a defense, not as an affirmative claim
ISSUE
May a court in the exercise of its equitable powers entertain and affirmative claim of unconscionability of contract and fashion a remedy for such a claim?
Will an affirmative claim of unconscionability be dismissed where plaintiffs have sufficiently pled that a contract is both procedurally and substantively unconscionable?
HELD
Yes, unconscionability can be asserted as an affirmative claim and the court may fashion a remedy for it
No, the claim can not be dismissed if the plaintiffs have shown procedural and substantive unconscionability
Procedural
The contracts with the banks were boilerplate contracts of adhesion, the customers had no bargaining power and were much less sophisticated than the banks
The customers were not notified that they could refuse the overdraft protection service
Substantive
No reasonable person would agree to allow the Banks to post debits in a manner designed solely to maximize the number of overdraft fees, and the fees were excessive because the fees were no reasonably related to the costs or risks associated with providing overdraft protection
