Final Exam Review

Contract

A promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty.

A legally binding contract requires four elements

Agreement, Consideration, Capacity, Legal Object

Agreement

Consists of an offer by one party to enter into a contract and an acceptance of the terms of the offer by the other party.

Offeror

Party who makes the offer

Offeree

Party to whom the offer is made

Consideration

The bargained for exchange or what each party gets in exchange for their promise under the contract.

Contractual capacity

The legal ability to enter into a binding agreement

Objective theory of Contracts

We base the existence of a contract on the parties’ outward manifestation of intent and we base its interpretation on how a reasonable person would interpret it. Subjective intent is not usually relevant. What matters is how they represented their intent through their actions and words.

Bilateral Contract

A promise in exchange for a promise. As soon as the promises exchanged, a contract is formed and the parties’ legal obligations arise.

Unilateral Contract

Requires performance in order to form a contract (a promise + a requested action). The offeror wants the offeree to do something, not promise to do something.

Express Contract

The terms of the contract are all clearly set forth in either written or spoken words

Implied Contract

Arise not from words but from the conduct of the parties.

Quasi Contract

Also called “implied in law contracts”, but they are not actually contracts. Courts impose contractual obligations on one of the parties as if a contract existed to prevent one party from being unjustly enriched at the expense of the other party.

Void Contract

Not a contract at all. Either its object is illegal or it has some defect so serious it is not a contract.

Voidable Contract

One or both parties has the ability to either withdraw from the contract or enforce it.

Elements of a valid offer

Offer must be communicated to offeree. Offeror must manifest serious intent to be bound by the acceptance. Offer must contain reasonably definite terms.

Option contract

The offeree gives the offeror consideration in exchange for holding the offer open for a specified period of time. The offer is irrevocable for that period of time.

Revocation

The offeror can revoke the offer at any time unless the offeree entered into an option contract with the offeree receives it.

Rejection

Another way to terminate the offer, effectuated by the offeree. Regardless of how long the offer was stated to be open, once the offeree rejects it, it is terminated.

Counteroffer

An offer made by an offeree to his offeror relating to the same matter as the original and proposing a subtituted bargain differing from that proposed in the original offer. Terminates the original offer.

Mirror image rule

The terms of the acceptance must mirror the terms of the offer exactly for common law contracts. If not, no contract is formed and the purported acceptance is treated as a counteroffer.

Destruction or subsequent illegality of the subject matter

If the subject matter of the offer is destroyed or becomes illegal. the offer immediately terminates.

Lapse of time

If the offer states it will be held open for only a certain time, it terminates when that time expires. In the absence of such a time condition, the offer will expire after the lapse of a reasonable amount of time.

Authorized means of acceptance

If the offer specifies that acceptance must be communicated by a specific mode, that mode is the only means for accepting the offer. If no mode of communication is specified in the offer, any reasonable means of acceptance is valid.

Consideration

What a legal entity receives in return for performing a contract obligation.

Types of consideration

A benefit to the promisee. A detriment to the promisor. A promise to do something. A promise to refrain from doing something.

Adequacy of consideration

The court seldom considers adequacy of consideration. The court does not weigh whether you made a good bargain. Exception: If the court believes fraud or undue influence occurred, the court may look at adequacy of consideration.

Illusory Promise

Not a promise at all. Not consideration.

Enforcement of promise

Both parties must provide a valid consideration, consideration by only one party only is insufficient to support an enforceable contract.

Preexisting duty rule

Performance of a duty you are obligated to do under the law is not consideration. Performance of an existing contractual duty is not good consideration.

Partial payment of a debt

Liquidated debt and unliquidated debt.

Liquidated debt

No dispute that money is owed or how much

Unliquidated debt

The parties either disagree about whether money is owed or dispute the amount. The parties can settle for less than the full amount if they enter into an accord and satisfaction.

Accord and Satisfaction

Settling to pay an unliquidated debt for less than the full amount requires: The debt is unliquidated. The creditor agrees to accept as full payment less than it claims is owed. The debtor pays the amount they have agreed on.

Capacity

The third required element of a legally binding contract. Has the mental ability to understand their rights and obligations under a contract and therfeore presumably to comply with terms.

Emancipation

In most states a person is given full legal capacity to enter into contracts when they become emancipated before reaching the age of majority. Occurs when a minor’s parents or legal guardians give up their right to exercise legal control over the minor, typically when the minor moves out of the parent’s house and begins supporting themself.

Disaffirmance by a Minor

Because their contracts are voidable, minors have the right, until a reasonable time after reaching the age of majority, to disaffirm or avoid their contract. Only the minor who has the right to disaffirm, never the adult with whom the minor entered into the agreement.

Ratification by a Minor

Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor.

Express ratification

After reaching the age of majority the person states orally or in writing that they intend to be bound by the contract entered into as a minor.

Implied ratification

Occurs when the former minor takes some action after reaching the age of majority consistent with the intent to ratify the contract.

Mentally incapacitated Persons

Contracts with a person with limited mental capacity can be valid, voidable, or void, depending on the circumstances. If a person suffers from delusions that may impair his judgement but he can still understand that he is entering into a contract and understand his obligations under the contract, his contract is valid. If their delusions prevent him from understanding that he is entering into a contract or the nature and extent of his obligations under the contract, their contract is voidable unless he has been adjudicated insane, their contract is void.

Intoxicated persons

Contracts by intoxicated persons are generally voidable if the other party had reason to know that their intoxication rendered the person unable to understand the nature and consequences of the transaction. When the intoxicated person becomes sober, the contract can be ratified or disaffirmed. However, the courts will fairly liberally interpret behavior that seems like ratifying the contract once the intoxicated person becomes sober. If the contract is disaffirmed on the basis of intoxication, each party must return the other to the condition they were in at the time they entered.

Agreement to commit a crime or tort

Contracts cannot be for illegal purposes or require illegal acts for performance. Any agreement to commit a crime or tort is illegal, void, and unenforceable.

Unconscionable Contracts

Agreement in question is so unfair that it is void of conscience and may be unenforceable. Requires procedural unconscionability and substantive unconscionability.

Legal Assent

A promise the courts will require the parties to obey.

Absence of legal assent

Without legal assent the contract may be voidable, a circumstance that can cost a business large profits when the transaction is significant. A voidable contract can be rescinded, or canceled, permitting the person who canceled the contract to require the return of everything she gave the other party.

Unilateral Mistake

Result of an error by one party regarding a material fact; generally not a basis for rescission. Since courts are hesitant to interfere when only one of the parties had an incorrect understanding of the material facts of the agreement, a unilateral mistake does not generally render a contract voidable.

Mutual Mistake

The result of an error by both parties regarding a material fact; is a basis for rescission. When both parties are mistaken about a current or past material fact, either can choose to rescind the contract. Rescission is fair because any agreement was an illusion: Ambiguity prevented a true meeting of the minds.

Innocent Misrepresentation

Results from a false statement about a fact material to an agreement that the party making it believe to be true, and innocent misrepresentations permit the misled party to rescind the contract.

Negligent Misrepresentation

In some contract negotiations, one party makes a statement of material fact that he thinks is true, but if he could have known the truth by using reasonable care to discover or reveal it and fails to do so, his statement is negligent misrepresentation.

Misrepresentation

Any fraud on the part of a party to a contract provides a basis for rescission.

Fraudulent/Intentional Misrepresentation

A consciously false representation of a material fact intended to mislead the other party.

Undue Influence

Refers to those special relationships in which one person takes advantage of a dominant position in a relationship to unfairly persuade the other and interfere with the person’s ability to make their own decision.

Duress

Occurs when one party threatens the other with a wrongful act unless assent is given. Such assent is not legal assent because coercion interferes with the party’s free will. For the courts to rescind the agreement, the injured party must demonstrate that the duress left no reasonable alternatives to agreeing to the contract.

Statute of Frauds

State laws requiring certain types of contracts must be in writing to be enforceable, which are intended to ease contractual negotiations by requiring sufficient reliable evidence to prove the existence and specific terms of a contract, preventable unreliable oral evidence from interfering with a contractual relationship, and prevent parties from entering into contracts in which they do not agree.

Contracts falling within the Statute of Frauds

Contracts whose terms prevent possible performance within one year.

Contracts falling within the Statute of Frauds

Promises made in consideration of marriage

Contracts falling within the Statute of Frauds

Contracts for one party to pay the debt of another if the initial party fails to pay

Contracts falling within the Statute of Frauds

Contracts related to an interest in land

Contracts falling within the Statute of Frauds

Under the Uniform Commercial Code, contracts for the sale of goods totaling more than $500

Prenuptial Agreement

An agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party’s property

Exceptions to state of frauds

Partial performance in a land-sake contract. If the buyer is an oral contract for the sale of land has paid any portion of the sale price, has begun to permanently improve the land, and/or has taken possession of it, the courts will consider the contract partially performed and this partial performance may amount to proof of the contract despite the lack of a formal writing sufficient to satisfy the statute of frauds.

Sufficiency of the writing generally requires

The names of the parties to the contract. The subject matter of the agreement. The consideration given for the contract. All relevant contractual terms. The signature of the party against whom enforcement is sought is required.

Parol Evidence Rule

A common law rule stating that oral evidence of an agreement made prior to or contemporaneously with the written agreement is inadmissible when the parties intend to have a written agreement be the complete and final version of their agreement. The purpose is to prevent introduction of evidence that substantially contradicts the agreement in its written form.

Integrated contracts

When a written contract is intended to be the complete and final representation of the parties’ agreement it is referred to as an integrated contract. The admissibility of parol evidence other than in certain enumerated exceptions is generally not permitted where the contract is integrated.

Merger Clause

One way parties can indicate their desire to create an integrated contract is through the use of a merger clause. A merger clause explicitly states that the written contract is intended to be the complete and final version of the contract between the parties and that other possible agreements between the parties, besides the one in question, are not part of the final written agreement.

Obligor

Obligee