Business Law Contracts Exam

Promisor

party making the promise

Promisee

party to which the promise is made

UCC Contracts

contracts involving the sale or lease of goods are governed by the Uniform Commercial Code, which is a state statute

Goods (as defined by the UCC)

tangible, movable property

Examples of Non-UCC Contracts

service agreements, buying/selling real estate, employment contracts, intellectual property, stock contracts/financial instruments, insurance

What is the UCC Statute of Limitations?

4 years from time of breach of contract

Elements of a Valid Contract

1. Agreement

2. Exchange

3. Capacity

4. Genuine Assent

5. Legality

Agreement

shown through the process of offer and acceptance of terms

Exchange

each party must be giving something up to the other party

Capacity

the legal ability of a person to make a contract

Genuine Assent

when the parties agree, it must be genuine and freely given

Legality

what the parties are agreeing to exchange must be legal to exchange

What elements must the plaintiff prove to presume a valid contract?

Agreement and Exchange

What are defenses that would make the contract void or voidable?

Capacity, Genuine Assent, Legality

Statute of Limitations

the period of time one has in order to bring a lawsuit

What are the two alternative theories of recovery for invalid or unenforceable contracts?

Quasi Contract and Promissory Estoppel

Quasi Contract

applies when justice requires that someone pays for a benefit they receive in order to avoid their unjust enrichment

What is the remedy to quasi contract?

the fair value of the benefits received, which is determined based on the market rather than on individual company accounting

Promissory Estoppel

applies when a promisee detrimentally relies on a promise

Elements of Promissory Estoppel

1. defendant made a promise to plaintiff

2. there was reasonable, foreseeable detrimental reliance by the plaintiff

3. Injustice can be avoided only by enforcing the promise

When is a contract formed?

At the moment when the offeree accepts the offer

What form of intent determines a party’s intent?

Objective Intent

Subjective Intent

what was the party thinking? did they want to make that contract on those terms?

Objective Intent

would a reasonable person in the other party’s position have thought that they intended to agree?

Mutual Assent

does not mean the parties are thinking the same thing, matters what does it LOOK like they’re thinking

What are the requirements of an agreement?

1. objective intent

2. definite terms of offer and acceptance

3. communication

Potential Terminations of an Offers

1. as stated in the offer (deadline for acceptance)

2. after a reasonable time

3. death or insanity of either party

4. impossibility

5. illegality

6. rejection by offeree

7. revocation by offeror

Exceptions to Revocation

1. option contract

2. promissory estoppel

3. firm offer

Option Contract

when the offeree exchanges something to keep the offer open

Firm Offer

UCC only, a merchant’s signed promise to keep an offer open is irrevocable

Counter Offer

any response by the offeree that contains different or new terms, seen as a rejection of the original offer because it objectively indicates that the terms are not acceptable

Ambiguities in a Contract

construed against the drafter, court will give the ambiguous provision the meaning that favors the other party, discourages people from intentionally writing contracts with ambiguous terms to take advantage of the other party

Consideration

what is given in exchange, distinguishes a contract from a promised gift, contracts are not enforceable without consideration

Peppercorn Theory

courts do not consider the relative value of the consideration in deciding whether there was sufficient consideration

When does consideration exist?

when someone either gives up on existing legal rights or assumes a new legal duty

Promises Enforced Without Consideration

1. Promissory Estoppel

2. charity gifts

3. Modification of contracts (so long as there are unforeseen circumstances that justify a party’s request for modification and the other party freely agrees to it)

4. Modification of UCC contracts (so long as the modification is made in good faith)

Does contract modification require new consideration?

Yes

Past Consideration

something that occurred before the promise was made (no consideration at all)

Unliquidated Debt

a debt for a certain amount that is in genuine dispute, no duty to pay

Liquidated Debt

a debt for a specific amount and one that is not in dispute

Capacity

a person’s legal ability to make a contract

Groups with Limited Capacity

1. Adjudicated insane (NO CAPACITY)

2. Mentally Ill

3. Intoxicated

4. Minors

When must one disaffirm a voidable contract?

within a reasonable time after becoming a sane, sober adult otherwise the contract is ratified

Instances of Express Ratification

words

Instances of Implied Ratification

acts such as waiting too long, beginning performance, accepting benefits of the contract

What is the difference between adjudicated insane and mentally ill?

whether a court has ruled that one is insane

What is the status of the capacity of individuals who are adjudicated insane?

capacity is revoked and given to a guardian to make decisions and contracts on their behalf

How is a contract avoided due to mental illness?

must be shown that the person entering into the contract had a mental illness or defect at the time that prevented the person from being able to understand the contract and the consequences of assent

How is a contract avoided on the grounds of intoxication?

must be shown that at the time they entered into the contract a person was intoxicated and it prevented them from being able to understand the contract and consequences of assent, and that the other party had reason to know that they were intoxicated and that their intoxication was causing an inability to understand

Restitution

must be provided when a party disaffirms, return what they took from the other party and pay for what they cannot return

What happens when a minor disaffirms?

doesn’t require restitution, just giving back whatever is left for the consideration they received – they get back anything that they provided for the adult though

When is a contract considered illegal by nature?

when it violates a statute, an important public policy, or it is unconscionable

Non-Compete Agreement

when somebody promises not to compete with somebody else

Anti-trust Violation/Market Allocation

when businesses allocate what specific markets themselves or a competitor will have

Enforceable Non-Competes

1. sale of businesses

2. partnership agreements

3. franchise agreements

4. employment contract

Exculpatory Clauses

releases one party from liability for potential torts they may commit (does not protect against intentional torts and gross negligence)

What are the options of the court in the case of an illegal contract?

1. void the whole contract (has to be used if essentially the entire contract is illegal)

2. sever the bad clause

3. edit the clause

Elements of Unconscionability (must have BOTH)

procedural and substantive unconscionability

Procedural Unconscionability

the way the contract was entered into was unfair, deprived one of the parties from the ability to negotiate properly

Substantive Unconscionability

the terms themselves are unfair

Examples of an Adhesion Contract

apartment lease, rental car agreement, tuition agreement

Elements of an Adhesion Contract

1. the contract is for some important goods or services

2. the parties have unequal bargaining position

3. the dominant party offers a form contract on a take-it-or-leave-it basis

4. the weaker party has no real alternative but to adhere to the terms

4 Defenses to Lack of Genuine Assent

1. Duress

2. Misrepresentation

3. Mutual Mistake

4. Undue Influence

Duress

an improper threat that causes a party to lose its free will, making the contract voidable (i.e. a crime, tort, or bad faith breach of contract)

Misrepresentation

The other party made a false statement or omission of a material fact and there was reasonable reliance on said statement by the other party

What differentiates misrepresentation from fraud?

proof of intent

Is silence a form of misrepresentation?

No, unless the facts create a duty to disclose (protects contracting with superior knowledge)

What are situations with a duty to disclose?

1. a special relationship exists with the other party, like a fiduciary relationship

2. an earlier statement later becomes false (when it was stated it was true)

3. active concealment (took steps so that the party could not discover the truthfulness of what you told them

4. the seller knows of a defect that is material and latent

Material Defect

a defect that would tend to influence a reasonable person’s decision

Latent Defect

a defect not readily discoverable by inspection

Mutual Mistake

when the contract is made based on a mistake by both parties about a material fact that was an important assumption in entering into that contract, the one injured by that mistake can avoid the contract

What does not qualify for mutual mistake?

valuation, opinion, or predictions

Unilateral Mistake

not a defense, to avoid a contract one must show in addition to the usual requirements for mutual mistake that the other party knew about the mistake

Elements of Undue Influence

1. the parties have an existing relationship

2. the weaker party is especially susceptible to the will of the stronger

3. the stronger party uses unfair persuasion, causing the weaker party to agree without free will

Reasons to Get a Contract in Writing

1. to prove it exists

2. to prove the terms

3. to force the parties to understand the contract fully and think about what they’re getting into

Requirements of a Contract to be Within the Statute of Frauds

(requires signed writing to be enforced

1. promises that, by their terms, cannot be fully performed within one year

2. contracts involving an interest in real property, but not leases for less than 1 year

3. guaranty the performance of another

4. a sale of goods for $500 or more, or a lease of goods for $1,000 or more of aggregate rental payments

When must it be determined whether a contract is within the statute of frauds?

at the time the contract is made

Written Requirements of the Statute of Frauds

a signed, written reference to the contract (authenticated record)

Record

any method of recording other than human memory

Authentication

any symbol, sound, or process used to show an act is genuine

Other Ways to Satisfy the Statute of Frauds Without a Signed Writing

1. Promissory Estoppel

2. Quasi Contract

3. the extent to which performance is accepted

4. admission in court

Parol Evidence Rule

stops parties from introducing outside evidence to contradict, vary, or add to a final written agreement (does not prohibit evidence of later amendment to the contract)

How do judges often determine the finality of an agreement?

the presence of a complete agreement (merger) clause

The Plain Meaning Rule

in deciding what terms used in a contract mean, most US courts give words their ordinary meaning and do not allow the parties to try to prove some different meaning was intended, unless the words are ambiguous

Custom

a standard practice in an industry or community in which the contract is made, if proved than customary meaning applies over plain meaning

Privity of Contract

only those party to a contract can enforce it

Exceptions to Privity of Contract

1. assignment of contract rights

2. intended beneficiaries

How can assignment be prevented?

by putting a prevention of assignment of contract rights in writing

When are rights non-assignable?

in contracts for personal services

Personal Services

services that involve trust or subjective judgement

Intended Beneficiary

someone that the parties intend to benefit from their contract

When do parties to an intended beneficiary contract lose their right to amend?

when the beneficiary’s rights vest

Vest

to become fixed, unconditional, and irrevocable

When do the rights of intended beneficiaries vest?

1. when they detrimentally rely on the promise

2. when they sue to enforce the promise

3. when they give assent to the agreement at the request of either party

Incidental Beneficiary

someone who just happens to benefit from a contract that they are not party to (they can not enforce the contract)

Delegation

a transfer of duties (does not relieve the delegator of liability)

5 Excuses for Non-Performance

1. Occurrence or Failure of Condition

2. Impossibility

3. Force Majeure

4. Material Breach by the Other Party

5. Waiver

Discharged

being excused from having to perform a contract

Frustration of Purpose

even if a promise is not impossible to perform, the promise may be excused if the purpose of the contract was frustrated by an unforeseeable event

Force Majeure Clause

an agreed-upon list of events that will excuse a party if they cause the party to be unable to perform