Duress and Undue Influence in Contract Law as Cognitive Trespass

• Publication year: 2021

98 Nebraska L. Rev. 970. Duress and Undue Influence in Contract Law as Cognitive Trespass

Duress and Undue Influence in Contract Law as Cognitive Trespass

Jeffrey L. Harrison(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 970

II. Pure and Active Advantage-Taking .................... 970

III. Are There Justifications for the Permissive Approach? . 977
A. The Economics .................................... 977
1. Efficiency and Investment in Advantage-Taking Strategies ..................................... 977
i. A Paretian Standard ....................... 977
ii. Kaldor-Hicks and Selling Your Will ........ 978
iii. Advantage-Taking as Theft ................. 979
iv. The Opportunistic Avoidance Issue ......... 980
B. Philosophical Questions ........................... 981

IV. Information, Offers, and Threats ...................... 982

V. The Science ........................................... 986

VI. Survey of the Literature .............................. 988

VII. The State of the Law .................................. 990
A. Duress ............................................ 990
B. Undue Influence .................................. 993

VIII. Concluding Comments and Problem Areas ............. 994

I. INTRODUCTION

Much of contract law concerns how to treat instances in which one party is vulnerable to advantage-taking by another. The cases fall into two groups. In some, the advantage taker just happens upon the vulnerable party and has no part in creating that vulnerability. This has been labeled "pure advantage-taking."(fn1) In other cases, specifically duress and undue influence, the advantage taker is responsible to some degree for creating that vulnerability. This is "active advantage-tak-

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ing."(fn2) In all cases, contract law takes a permissive approach by limiting the remedy to avoidance and restitution.(fn3) This Article argues that the permissive approach is inappropriate, particularly in cases in which the vulnerability is created.(fn4) Its position is that these are cases of cognitive trespass that should be treated as torts, thus leading to the availability of punitive damages. The analysis breaks with the tradition of viewing duress and undue influence through the lenses of free will,(fn5) impairment of bargaining power,(fn6) or the fairness of the bargain.(fn7) Instead, it argues that illegitimate pressure alone is a harm that should be addressed regardless of the contractual outcome.

The approach currently taken is labeled "permissive" for two reasons. First, even when a contract is successfully avoided, the parties are returned, as much as possible, to their ex ante positions.(fn8) This means there is little incentive not to take maximum advantage of vulnerable parties, even if it means investing in creating that vulnerability. This is particularly obvious in the case of repeat players. For example, take the case of an auto dealer that makes a habit of pressuring elderly or uneducated customers. Even if a handful of those contracts are avoided by customers, the net expected gain to the dealer is positive unless every disadvantaged party brings an action or the activity is penalized. The idea that every contract made under suspect conditions would be challenged is, if course, unsupportable. People who are vulnerable in the context of contract-making are probably less likely to assert a legal action in the first place or are simply ignorant of their rights. Moreover, to the extent the vulnerable party is also less affluent, such an action involves a substantial risk. The repeat advantage taker has an expected net positive outcome from exercising not just maximum leverage, but from actually making improper

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threats like those enumerated in the Restatement (Second) of Contracts.(fn9) More worrisome is that this net positive outcome encourages research and investment in activities designed to create duress and undue influence.(fn10)

Even for the non-repeat player the net expected outcome is likely to be positive. The likelihood the disadvantaged party will bring an action is far less than 100%. Thus, the probabilities favor keeping the profits from the exchange. And even if avoided, the result is loss of those ill-gotten gains without further consequence. Consequently, for the advantage taker, it is a bit like gambling, except your money is returned if you lose.

The second manifestation of the permissiveness of the current approach is that the remedy of avoidance only extends to those who were unable to resist the pressure exerted. Oftentimes the party upon whom pressure is applied does resist and no contract is made, or one is made on fair terms. If fact, he or she may not want to avoid the contract because it ultimately reflects a fair outcome as a result of resisting illegitimate pressure. Under these circumstances, even an acceptable bargain is achieved at an unnecessary cost.

Studies of brain circuitry indicate that threat-making and the resulting stress activate a series of chemical reactions that are physically harmful to the disadvantaged party.(fn11) If one is said to own oneself and the processes that take place in one's brain, the threat-maker or one creating undue influence is an unwanted intruder regardless of whether the target is able to resist. There is no logical reason why intrusion is viewed as any less physical than more conventional intrusions on private property. In fact, it is noteworthy that the origins of actions based on duress were in the context of

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"physical assault, exerted or threatened, by means of which transfer[s] . . . were extorted."(fn12)

Contract law's policy of effectively incentivizing engagement in duress and undue influence is unsupportable as an economic and philosophical manner. Deterrence is the appropriate policy, but contract law has no teeth in this regard. Deterrence calls for punitive damages and can be drawn from tort law. The proposed solution is that duress and undue influence be regarded as torts with the desired consequences that (1) parties who are taken advantage of are more likely to bring vindicating actions in part because legal assistance will be more readily available, and (2) those who do take advantage will have negative expected outcomes. Treating duress and undue influence as torts is not much of a leap for two reasons. First, the fact that parties already have a right avoid contracts made under conditions of duress or undue influence suggests very strongly that there already is a soft duty not to engage in these activities. Second, the test of whether a duty has been violated is whether one party has forced another to enter into a contract that a court now finds voidable.(fn13) In other words, no additional judicial analysis is necessary to determine if the duty has been violated.

Part II explains why this effort is limited to instances of duress and undue influence and why they are joined together. Part III addresses why the current posture of the law with respect to advantage-taking cannot be justified by economics or moral philosophy. It analogizes duress and undue influence to instances of theft in the sense that they involve the taking of another's capacity. Part IV compares information, offers, and threats. Part V is a brief summary of the scientific literature supporting the view that placing people in stressful situations is a physical intrusion. Part VI is a survey of the scattered but useful literature with respect to treating active advantage-taking as a tort. Part VII examines the law as it applies to viewing duress and undue influence as torts. It notes that some courts appear to treat duress as a tort. An exhaustive search, however, did not find any cases in which undue influence, in the contract law context, was treated as a tort. Part VIII contains concluding remarks focusing on the problems of adopting the approach advanced here.

Before beginning, a quick qualification is in order. Although the theme of this Article is that contract law actually condones advantage-taking by limiting remedies for the vulnerable to avoidance of the contract, it does not take issue with the classes of vulnerability as identified in the Restatement (Second) of Contracts. The basic categories in

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the Restatement seem correct. In that context, vulnerability involves being susceptible to harm by reason of capacity,(fn14) duress,(fn15) undue influence,(fn16) or material misrepresentation.(fn17) Because unconscionability seems to take on both a procedural and a substantive element,(fn18) it too can be treated as a case of vulnerability; but that possibility is not explored here because the advantage-taking party is not always the source of the weaker party's disability.(fn19) Finally, vulnerability, as treated here, does not involve instances in which one party simply has better information than another.

II. PURE AND ACTIVE ADVANTAGE-TAKING

This Article addresses active, as opposed to pure, advantage-taking. An explanation for focusing on discouraging active advantage-taking is in order because there also may be very sound reasons to discourage pure advantage-taking. Good examples of pure advantage-taking are instances in which a contracting party is volitionally or cognitively impaired. The law presumes impairment in cases of minors. In the case of pure advantage-taking, the advantage taker may or may not be...