IV. Contracts
    C. Enforcing contracts (cont'd.)

    3. Unacceptable conditions

    Key situations: fraud and situational monopoly

    a. Fraud

1. P: What are the facts of the case?
2. D: Why do you feel that you own the property in question?
3. P: Why do you feel that you retain title to your former property?
4. D: Can an innocent buyer gain valid title through acquisition of a forged deed?
5. D: What if the deed had been obtained by fraud?
6. D: What is the justification for the different treatment under the law?
7. P: Which situation do you claim applies in your case?
8. P: Does the court grant you the chance to substantiate your claim?

    Stambovsky v. Ackley 169 A.D.2d 254; 572 N.Y.S.2d 672 (1991)

1. What are the facts of the case?
2. What is caveat emptor?
3. Does the court consider silence regarding relevant information to be a fraud?
4. So why is it a fraud in this case?
5. Is there any evidence that the plaintiff believes in ghosts?
6. Is it reasonable to presume that ghosts exist?
7. If not, then why refuse to enforce this contract?

    fraud = deception
    Hidden in fine print on page three of your auto rental contract: "I agree to give everything I own to Hertz?"
    Contracts so complicated that consumers don't really know what they are signing.

    2 potential types of fraud involving information:
    (i) providing false information
    (ii) withholding useful information

    (i) providing false information--always a fraud

    Ex: Harding v. Ja Laur Corp.
    related fraud cases:
    Love v. Elliott, 350 So. 2d 93 (Fla. App. 1977): Russell fraudulently got Mrs. Elliott, who was illiterate, to sign by her mark a deed conveying a much larger mineral interest in her property than she had agreed to sell. Russell then recorded his deed and sold his interest. The buyer was held to have good title, the court holding that a deed procured by fraud, unlike a forged deed, could be used to pass title to a bona fide purchaser.
    Cumberland Capital Corp. v. Robinette, 331 So. 2d 709 (Ala. App. 1976) On the other hand held that a signature procured by deceiving the grantor about what he was signing counted as a forgery.

    "The liar makes a positive investment in manufacturing and disseminating false information."
    "forbidding sellers to lie...save[s] the expense of the self-protective measures that buyers would have to take." (P111)
    Lying is "unlawful even if the buyer could unmask the lie at very low cost." (P113)
    market remedies exist: trade associations to correct individual seller misinformation; department stores to "inform consumers about the merits of particular goods." Problem with trade associations: free riding; no producer has an incentive to disclose negative info that pertains to all sellers; industries may be monopolies. (P112)
    "If one cigarette manufacturer advertises that smoking is good for your health, other cigarette manufacturers will have no incentive to disparage the claim." [counterexample: Ford and seatbelts] (P112)

    (ii) withholding useful information--not usually a fraud

    case for disclosure: reduces information costs
    Stambovsky v. Ackley: "We do not want a system in which people who happen to have information highly relevant to the value of what they are selling... have an incentive to withhold it...." (F170)
    "The case for requiring disclosure is strongest when a product characteristic is not ascertainable by the consumer at low cost." infrequent purchases; not discernable; expensive.  (P113)
    Ex: some courts consider it a fraud to not disclose termite infestations (P111)
    Competitive market response to high information costs: Warranties: "a guaranty of results...makes the disclosure of information unnecessary." (P113)

    case against disclosure:
    protects the value of acquiring information that can be costly and useful
    Ex: Laidlaw v Organ, 15 U.S. 178 (1817).  
    Organ received advance news about the Treaty of Ghent ending of the War of 1812 and bought tobacco in anticipation of end of blockade of New Orleans. Laidlaw tried to back out of tobacco contract. LA Supreme Ct said no. (P110)
    The argument for the court's position: Getting information is not free, and Organ's transaction helped move market toward new equilibrium. (P111)
    "If the Louisiana Supreme Court had ruled in favor of Laidlaw rather than Organ, and consistently followed the same rule in other cases, the result would have been less speculation and more unstable prices for agricultural commodities." (F170)
    Offset: Organ's victory induces rent seeking. (F169)
    There is no direct link between private and social benefit from information
    Anthony T. Kronman, "Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Leg. Stud. 1, 9-18 (1978).

    Summary: 
    Fraud does not usually include failure to disclose information
    Efficiency => protect value-promoting information but not wealth-shifting information
    Note regarding Stambovsky v. Ackley: Courts do not usually second-guess the subjective valuations of contracting parties.
    The fact that no 'rational' person would pay less for for the properties on account of these facts was irrelevant; the courts accepted the 'subjectivity' of values, a cornerstone of freedom of contract and modern economic theory. P265

    b. situational monopoly

    exercise of ordinary monopoly power does not void a contract
    but abuse of monopoly circumstances linked to the bargaining situation can

    Alaska Packers Assn. v. Domenico, , 117 F. 99 (1902)

1. P: What are the facts of the case?
2. P: How do the base wages of the original and renegotiated contract compare?
3. D: What did you do at first when the workers demanded the higher wage?
4. P: Why did you demand the higher wages?
5. D: Did the court accept plaintiff's rationale?
6. P: What options would you assert that the defendant had at the time rather than accepting your new contract terms?
7. D: Why didn't you simply sue the workers for damages?
8. D: Why do you feel that you are not bound by the renegotiated contract?
9. D: Would you have offered any other defense if the plaintiffs had agreed to work an extra 1/2 hour per day in exchange for the 100% wage increase?

    Notes re Alaska Packers:
    Famous case
    Defense based on lack of consideration, but illustrates duress
    Duress: dire straits caused by the opportunistic conduct of your contract partner
    Contracts negotiated under duress are not enforceable

    related case: Austin Instrument Inc. v. Loral Corp., 29 N.Y.2d 124, 272 N.E.2d 253 (1971): a firm obtained refund of a price increase, which it had agreed to pay under pressure, on grounds of economic duress. The "emergency" was the result of the supplier threatening to breach its contract if it did not get the higher price.

    Related situation:
    Necessity: dire straits, but not caused by the conduct of your contract partner
    Ex: saving a sinking ship (bilateral monopoly)

    Efficiency =>
    Charge shipowners expected cost of rescue
    Pay the rescuer the value of the cargo (F154-5)
    --insurance schemes can do this
    the present legal rule "permits an admiralty court to rewrite a contract that is too favorable to one side." Lowers chance of sinking while bargaining. (F156)
    Posner gets this wrong--worries about "excessive" efforts when the efforts to rescue due to getting the full value are efficient. This is not like the patent race or the sunk treasure case, because if another rescuer is expected in ten minutes, the first one isn't going to be able to get a very high price. (F)

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