REG CPA EXAM STUDY GUIDE: R5

Method of Formation

Express Contract -> Formed by language, oral or written

Implied-in-Fact Contract -> Formed by conduct

Implied-in-Law -> Not a contract, it's a remedy to prevent unjust enrichment

Unilateral Contract -> There is one promise given in exchange for performance

Bilateral Contract -> There are two promises (i.e., a promise for a promise)

Fraud (MAIDS)

Can prove fraud if able to prove:

M - Misrepresentation of Material Fact by degrading party

A - Actual and reasonable reliance on the misrepresentation

I - Intent to induce reliance (to make a sale)

D - Damages must have occurred

S -Scienter (intent to deceive)

Fraud in Execution (Void)

- Occurs when a party is deceived into signing something that does not look like a contract

- Fraud in the execution makes a contract void, not voidable because there is no "meeting of the minds"

Fraud in Inducement (Voidable)

- Terms of a contract are materially mispresented

- Most fraud is fraud in the inducement and makes a contract voidable

Innocent Misrepresentation (Defense(

- Innocent misrepresentation has all the elements of fraud except scienter

- Contract is voidable

- Will only pay for compensatory damages

Duress (Defense)

Harm is threatened by physical force -> Void

Harm is threatened by economical/social force -> Voidable

Undue Influence (Defense)

- Person in position of trust/confidence uses their position to take advantage of another

- Contract is Voidable

Mutual Mistakes (Defense)

- Material fact regarding the contract, the adversely affected party can avoid the contract

- If the subject matter is not in existence when contract is made, and neither party knows this the contract is void

- Unilateral mistakes is not a defense unless the guilty party knew or should have known of the mistake and it is material

Illegality (Defense)

Consideration/subject is illegal -> the contract is void

If work is performed without a license:

a) License is required to raise revenue (vendor) -> contract is enforceable

b) License is require to protect public (CPA) -> contract is void

Minors (Defense)

- A minor can disaffirm a contract and must return their possession when they do

- A minor has reasonable time after reaching the age of majority to disaffirm the contract

Can be bound to Contract if they ratify it by age of majority by any of the following:

a) Failing to disaffirm within a reasonable time after reaching majority

b) Expressly ratifying the entire contract orally or in writing

c) Retaining or accepting benefits

Intoxication (Defense)

- Only a valid defense if the intoxication was known and prevents the promisor from knowing the nature or significant details of the contract

Adjudicated Incompetent (Defense)

- Contract made by someone who is adjudicated mentally incompetent is void

Statute of Frauds (MY-LEGS)

Six contracts requiring writing:

M - Contracts in which the consideration is marriage

Y - Contracts which terms cannot be performed within a year

L - Contracts involving interests in land

E - Contracts by executors to pay estate debts out of personal funds

G - Contracts for the sale of goods for $500 or more

S - Contracts to act as a surety (pay the debt of another)

* Exemptions: When already been performed, admitted, or specifically manufacture

Impossibility (Defense)

- After contract exists, events occur that makes the fulfilment of the contract objectively impossible

Parol Evidence Rule

- If parties have entered into a fully integrated written contract, prior or contemporaneous oral statements and prior written statements cannot be admitted into evidence to vary the written terms of the contract

- The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract

Conditions that Affect Duty to Perform

Condition Precedent:

Conditions that must occur before the other party must perform

Condition Concurrent:

Conditions that must occur simultaneously

Conditions Subsequent:

Conditions that will occur after the duty to perform has arisen

Duties of an Agent to the Principal (LORA)

Implied Duties

L - Duty of Loyalty: Agent must act solely in the principal's interest in connection with the agency

O - Duty of Obedience: Agent must obey all reasonable directions (oral/written)

R - Duty of Reasonable Care: Agent must not be negligent

A - Duty to Account: Agent must account for all property/money received

Duties of a Principal to the Agent

Implied by law

Compensation -> principal has implied duty to give reasonable compensation, unless the agent has agreed to act gratuitously

Reimbursement (Indemnification) -> must reimburse for all expenses incurred in carrying out the agency

Principals Remedies for Breach of Contract

If agent is receiving compensation:

- Can sue for torts

- Can sure for contract

If agent is not receiving compensation:

- Can sue for torts

- Cannot sure for contract

* Principal can recover the secret profit (commission/kickbacks( (constructive trust)

* Principal may refuse to pay the agent if the agent committed an intentional tort

Actual Authority (Real Authority)

- Authority the agent believes he possesses because of communications to the agent

Express -> Oral/Written Instructions

Implied -> Reasonable Belief based upon position/title

Termination of Actual Authority: Acts of the Parties

- Agent quits (renunciation) or gets fired (revocation)

-Damages could be available if termination violates contract

-If the agency is coupled with interest -> only the agent can terminate the contract

2) Accomplishment of Objective or Expiration of Stated Period:

3) Automatic Termination of Actual Authority by Operation of Law (BID-LID)

Termination of Actual Authority: Accomplishment of Objective or Expiration of Stated Period

- Will terminate after a reasonable time if no time is stated

Termination of Actual Authority: Automatic Termination of Actual Authority by Operation of Law (BID-LID)

B - Discharge in Bankruptcy of principal

I - Incapacity of the principal

D - Death of either the principal or agent

L - Failure to acquire a necessary License

I - Subsequent Illegality

D - Destruction of subject matter of the agency

Apparent Authority

- Conduct that caused 3rd parties to reasonably believe that the agent had authority

- Apparent Authority requires either:
1) A holding out by the principal
2) Negligent inaction by the principal

- Vest the agent with power to enter into all transactions that a reasonable person would

- Secret limiting instructions limits actual authority but not apparent authority

General Agent -> Ongoing transactions

Special Agent -> One-time transactions

Termination of Apparent Authority

Must give notice to the 3rd parties:

Old or Current Customers -> Actual notice (written/oral) must be given

Potential Customers -> Constructive notice (ads in paper) must be given

* If terminated by operation of law (BID-LID) no notice is needed

Estoppel to Deny Existence of Agency

- Principal bound by contract due to not stopping a claim of misinformation of a party claiming to be their agent when in reality they were not

- Often referred to as agency by estoppel

Ratification: Agency Law

- The agent acts on behalf of the principal in an unauthorized way

- The principal can accept the deal if all material facts are disclosed to them

- The principal can only accept the whole deal

- Only disclosed principals can ratify the contract

- No consideration is required to ratify and there is no need for the principal to make contact with the 3rd party as the 3rd party already thinks that the contract is valid

Sources of Contract Law

Common Law (RISE):

Derived from the courts and includes

R - Real Estate

I - Insurance

S - Services

E - Employment

UCC Sales Article:

Governs sale of goods (moveable)

Elements of Legally Enforceable Contracts

1) Offer and Acceptance (Mutual Assent "Meeting of the Minds")

2) Exchange of Consideration

3) Lack of Defenses

Elements of Consideration

1) Something of legal value:

- Does not need to have monetary value

- Does not need to flow to one of the parties

- Is not obligated to do/will obtain a benefit

- Fairness is not required, as long as it's not shady/a sham

- Promise to perform an existing duty is not sufficient consideration

2) A bargained-for-exchange:

- Must be given for other consideration

Defenses: Void (DAPIE)

Void -> Unenforceable by either party:

D - Destruction of Subject Matter

A - Adjudicated Incompetency

P - Physical Duress

I - Illegality

E - Fraud in the Execution

Defenses: Voidable

Voidable -> At the option of the adversely impacted/affected party "goods guys"

- Fraud in the inducement
- Innocent misrepresentation
- Economic/social duress
- Undue influence
- Mutual/unilateral (in some cases) mistake
- Minor
- Intoxication

Remedies (Common Law)

- Intended to put non-breacher in pre-breach position:

Major Breach -> Can discharge from contract

Minor Breach -> Entitled to damages (no discharge)

* The statue of limitations for breach of contract usually begins to run on the occurrence of the breach

Damages

Compensatory Damages -> Award enough money to obtain substitute performance

Specific Performance -> Alternative to cash, court orders the breaching party to perform or be faced with contempt charges (used with land, patents, or unique items, not service)

Liquidated Damages -> Clauses that specifies what the damages will be

It is enforceable if the amount is:

i) reasonable in relation to the actual harm done and;

ii) not a penalty

Punitive Damages -> Generally not available for breach of contract, but mostly for frauds which is a tort cause of action

Accord, Satisfaction, and Substituted Contracts

Accord -> Agree to substitute one contract for another contract

Satisfaction -> Execution of the accord

* Until the accord is satisfied a party may sue under the original contract or the accord

Substituted Contract -> Similal to an accord and satisfaction in that the duties under the original contract are discharged immediately

Novation

- Available as defense to party released from the contract
- Happens when a new contract substitutes a new party for an old party in an existing contract
- All parties must agree

Creation of an Agency Relationship

- Legal relationship between 3 parties

- Principal hires agent on their behalf

- Agent negotiates with 3rd party

- Principal must have capacity (competence)

- The agent does not need to (agent can be a minor or mentally incompetent)

- Writing and consideration are not required

Power of Attorney

- Written authorization of an agency
- Only the principal is required to sign
- Is limited to specific transactions

Agents Power to Contractually Bind Principal

1) Actual Authority -> Agent has power and right (principal can't sue for damages)

2) Apparent Authority -> Agent has power but not right

3) Ratification -> Agent has no power or right

Agents Liability to 3rd Parties

Disclosed Principal -> Agent is not liable

Unidentified/Undisclosed Principal -> Agent is liable

- 3rd party can hold either party liable but not both

- There is no apparent authority with undisclosed

Surety

A person who agrees to be directly liable for the debt/obligation of another

Guarantor

A person who agrees to be liable only to the creditor if the debtor does not perform their duty

Surety's Rights Against Principal Debtor

Exoneration -> Right to compel principal debtor to pay

Subrogation -> Enforcement of creditors rights against the principal debtor

Reimbursement -> Can recover from principal debtor after the surety pays

Surety's Basics

Surety -> One who agrees to be directly liable for the debt/obligation of another

Guarantor -> Is only liable to the creditor if the debtor does not perform their duty

Co-Sureties -> 2+ sureties of the same obligation that are jointly and severally liable

The Offer

- Can be an expressed or implied contract

- Offer must be sufficient for a reasonable person to assume that the offer was a serious offer to enter

* Advertisements are not offers (considered invitations

* Exceptions are advertisements that limit the scope

Terms must be Definite and Certain:

UCC (Sale of Goods) -> Generally only require quantity terms to be an offer

Common Law (RISE) -> Offers must include offeree, price, time, quantity, and nature of work

Three ways of Termination of Offers

1) Revocation by Offeror:

- Offeror can revoke an offer any time before acceptance by communicating it

- It is considered an irrevocable option if the offeree pays to keep it open

- Effective when received (when done by publication, it effective when published)

2) Rejection by Offeree:

- Offeree can terminate the offer by rejecting it

- Counteroffers are considered both a rejection of the original offer and a new offer

- Effective when received

3) Termination by Operation of Law:

- Terminate if either of the parties dies/becomes incompetent prior to acceptance

* Not necessary for either to be communicated

- Terminate if the subject matter is destroyed or became illegal prior to acceptance

- An option contract is not terminated by the death of a party

The Acceptance

- Acceptance of an offer may be made in any manner reasonable under the circumstances, unless otherwise specified in contract

UCC (Sale of Goods) -> Minor changes to an acceptance can be made and mirror image rules doesn't apply

Common Law (RISE) -> Follows mirror image rule (acceptance must mirror offer to be effective)

Mailbox Rule -> Acceptances are effective when they are sent, unless otherwise specified in contract

UCC Rules: Merchant

Merchant -> One who deals in goods of the kind sold or has special knowledge to the goods

To Qualify as a Merchant Firm Offer:

a) Seller must be a merchant

b) Offer must be in writing and signed by the merchant

c) Offer gives assurances that will be kept open for a certain time (maximum 3 months)

UCC Rules: Acceptance

- Does not follow the mirror image rule

- An offer that does not specify means of acceptance can be accepted in any reasonable way

- An offer that does specify the means of acceptance must be accepted in stated ways

- An offer can be accepted by either a promise to ship (bilateral) or by a prompt shipment (unilateral)

- A prompt shipment of noncoforming goods is both an acceptance and a breach of a contract

* UCC deals require that the seller makes a perfect tender (i.e., the goods and delivery must conform exactly to the contract without any defects)

* UCC modifications are enforceable without consideration so long as the modification is in good faith

UCC Defenses

UCC Statute of Limitation for Fraud -> 4 years from the date of the breach

Exceptions to the Statute of Frauds for UCC (SWAP):

S - Contracts for Specially manufactured goods

W - Written Confirmation memorandum between merchants

A - Contracts for parties have been Admitted in court

P - Contracts have been Performed to the extent that performance is accepted

* Impracticability -> Is the standard to get a contract discharged for UCC; whereas, common law contracts require impossibility

Delivery and Risk of Loss

Delivery and risk of loss can be independent of title

Seller's Duty: Hold conforming goods for buyer and enable buyer to take delivery

For Risk of Loss to Pass

Step 1: Good must be identified -> Title/Risk of Loss cannot pass until goods are identified

Step 2: Parties must agree on contract terms -> Parties that designate something govern the agreement

Step 3: Default Rules Apply in Absence of Agreement ->

Non-Carrier Cases:

Seller has no duty to deliver/ship the goods

If the seller is a Merchant -> Risk of Loss passes when buyer takes physical possession

If the seller is not a Merchant -> Risk of Loss passes upon sellers tender of delivery of goods

Carrier Cases:

Parties agree that a common carrier will be used to ship the good to the buyer

FOB, Seller's City (Shipment) -> Risk of Loss passes when goods get into the common carrier

FOB, Buyer's City (Destination) -> Risk of Loss passes when goods are delivered to the buyer

Non-Conforming Goods Shipped -> Risk of Loss remains with the seller regardless of the terms

Risk in Sales

General rule:

- All sales are final, unless otherwise agreed

Sale on Approval:

- Risk on seller until approval -> buyer has right to return within X days (trial period)

- Title and Risk of Loss remain with the seller until the buyer approves

Sale or Return (Consignment Sales):

- Risk on buyer until returned

- Risk of Loss remain with the buyer until goods are completely sold or returned

Four Types of Warranties

1) Express Warranty -> Something that is done to induce the buyer to buy the goods

2) Implied Warranty of Title -> Seller actually has the right to sell the goods

3) Implied Warranty of Merchantability -> Goods must fit the ordinary purpose intended

4) Implied Warranty of Fitness for Particular Purpose -> Goods must be fit for the buyer's purpose

- An injury by a defective product is a breach of contract

Remedies of Buyers or Seller

Anticipatory Repudiations:

- Occurs if either party indicates in advance that they won't perform the agreed upon duties of the contract

- Options for non-breaching party:

1) Sue immediately

2) Cancel the contract

3) Demand Assurances

4) Wait until time for performance to sue

Punitive Damages:

Are only available for fraud; not available under the UCC

Duty to Mitigate:

Both parties have a duty to avoid damages; can't recover damages on avoided events

Seller's Remedies (If the Buyer's Breach)

- Seller can cancel or rescind and/or sue for damages

- Seller has right to resell; can only sue for the difference between damages and sold goods with any additional costs to sell

- Seller may withhold delivery if there is a breach of the contract

Seller can Collect the full Contract price if the goods:

a) Cannot be resold for any price

b) Are destroyed are Risk of Loss has passed to the buyer

Absence of Liquidated Damages:

- Even with no damage clause, if the buyer makes a down payment, seller can keep the lesser of:

a) $500

b) 20% of sales price

Buyer's Remedies (If the Seller Breaches)

- Seller must make a Perfect Tender (delivery free from defect); buyer has right to reject nonconformity

- If goods do not conform to the contract the buyer can:
1) Reject all of the goods
2) Reject some of the goods
3) Accept all of the goods

Respondeat Superior

General Rule:

A principal is not liable for torts committed by his agent

Respondeat Superior -> Employer can be liable for employee torts if committed within the scope of employment

- Employer has little control over independent contractors and are not liable regarding torts made by independent contractors

Scope of Employment -> Tort must have happened during working hours:

- The activities do not need to have been authorized by the employer, just the same general type

- Not liable for intentional torts or serious crimes (not within the scope of employment)

- Small detours fall within the scope

- Major detours do not fall within the scope

- Cannot limit liability by agreement with employee

Defenses of a Surety

Defrauded Principal -> Principal debtor was induced to enter the contract by the creditor's fraud

Duress Upon Principal -> Principal debtor's promise was obtained by duress and surety didn't know of duress

Illegality of the Principal's Obligation -> Surety is not liable if the underlying obligation is illegal

Discharge of Principal's Obligation -> If the underlying obligation is paid/creditor refuses to accept it, not liable

- If the creditor releases the principal, the surety is no longer liable

Surety's Incapacity or Bankruptcy -> Surety's contractual incapacity is a defense for the surety

Lack of Consideration -> Promise to serve as a surety must be supported be consideration to be enforceable (except for in the case of gratuitous sureties)