Business Law Midterm 2

Prof. Murphy

What is a promise

a declaration made by a person (promisor) to do/not do a certain act, and as a result, another person (promisee) has a right to expect such thing will/wont happen

What governs contracts for the sale of goods

Uniform Commerical Code (UCC)

objective theory of contracts what does it say? what are some facts that are used?

intent to form a contract will be evaluated by objective factual, reasonable person standard—NOT THE SUBJECTIVE INTENT OF CONTRACT PARTIES

Facts used:

1. what party said when entering contract

2. how party acted or appeared (by conduct and/or oral/written statements)

3. circumstances surrounding transaction

elements of a valid contract

1. agreement (offer and acceptance of offer)

2. consideration (must have some sort of legally-recognizable thing of value that is received/promised)

3. capacity (mentally & legally & age wise)

4. legality (not against public policy/the law)

What are the two defenses to the enforceability of a contract

1. voluntary consent: wasn’t formed based on fraud, undue influence, mistake, duress, alcohol intoxication, may not be enforceable

2. form: must be in writing for certain contracts

unilateral vs bilateral contracts

unilateral: a promise for an act (if someone does this, i promise to do this). formed when act is completed

bilateral: promise for a promise (i’ll do this if you do this). formed when words are exchanged

When can you revoke a unilateral contract

before substantial undertaking of the act

Formal vs informal contract

formal: require specific form and language (ex: negotiable instruments like checks)

informal: everything else, even if it’s required to be in writing it falls under this

express vs implied contract

express: terms are fully expressed in writing/orally

implied: formed via conduct

elements for an implied contract

1. plaintiff offered some property/service

2. plaintiff expected to be paid, and the defendent knew/should have known that they wanted to be paid

3. defendent had a chance to refuse plaintiff and didn’t

valid vs void contracts

• valid = all 4 elements; enforceable, voidable, and unenforceable contracts

• void contract = one element is missing

what is an enforceable vs voidable vs unenforceable contract

• enforceable: all 4 elements + no legal defenses against it

• voidable: all 4 elements + party has choice of avoiding/enforcing the contractual obligation

• unenforceable: all 4 elements + has legal defense against it b/c some legal statute

when are contracts voidable

• made under fraud

• made with a minor

• made under the influence

• made under duress

Quasi contract?

• equitable remedy assigned by court when no contract exists

• meant to correct unjust enrichment at expense of other

• does not count if party unnecessarily confer benefit on someone else or as a result of negligence or misconduct

Plain Meaning Rule? When is there considered ambiguity?

• meaning if writing is clear and unequivocable, then court will apply that

• there is ambiguity if there is

1. intent cannot be determined from language

2. lacks a provision on a disputed term

3. term is suceptible from more than 1 interpretation

4. there is uncertainty about a provision

• you can use extrinsic (outside of contract) evidence to clear up ambiguities

elements for an offer

1. serious and objective intention

2. definitive terms

3. offer must be communicated to offeree

when is there not intention in an offer

• made in jest/anger

• expressions of intent

• statements of future intent

• preliminary negotiations (but preliminary agreements DO count if they have all the basic elements and essential terms incuded)

• invitations to a bid (ex: promotional deals

• advertisements and price lists

• live and online auctions

elements of definitiveness of an offer

1. identification of parties

2. identification of subject matter (quantity also when needed),

3. consideration to be paid

4. time of payment/delivery/performance

when is an offer’s revocation is valid? when can you not revoke an offer

when it is received. cannot revoke if you signed an options contract

what terminates an offer by operation of law?

• lapse of time

• destruction of specific subject matter (notification not required, just has to be before acceptance)

• death/incompitence of offeror/ee

• supervening illegality

what terminates offer by action of the parties?

• revocation

• rejection

• counteroffer

when is communication of acceptance needed? when is it enforceable

• needed in bilateral contracts

• enforceable when mailed

if offer doesn’t specify any means of communication, what type can you use?

any reasonable form

elements of consideration

1. legally suficient value giiven in exchange for promise

2. bargained-for exchange

when is something considered of legally sufficent value so that it constitutes consideration?

1. promise to do something you have no legal duty to do

2. performance of an action that you are not otherwise obligated to undertake

3. refraining from an action you have a legal right to do (aka forbearance)

what does bargained-for exchange mean in consideration?

• that you gave something/promised something in exchange for something; you gain something.

• distinguishes from gifts, where you are giving something without something in return

when will courts intervene on questions about adequacy of consideration

when fraud, undue influence, duress, or lack of bargained-for exchange may be involved

what agreements don’t have consideration?

• pre-existing duty

• past consideration

• illusory promises

when can you get out of a pre-existing duty?

when there is a crazy unforseen difficulty that arises when contract is supposed to be performed

when there is recission/recission and new contract (but you need extra new consideration)

when is a promise illusory?

when terms are so indefinite you aren’t actually promising to do anything; fails to bind promissor to do something (ex: if profits are up, we will give you a bonus, if management agrees) or when there’s an option to cancel before performance has begun

what is accord and satisfaction? when can you do them?

• debtor offers to pay, and creditor accepts, less than what was originally loaned out. accord = altered agreement, satisfaction = performance (usually payment)

• cannot happen when there’s liquidated debt (one with due and certain amount); essentially, you have to be able to argue about the amount due (unliquidated debt)

what’s a release? what are the elements?

• one party forfeits right to pursue legal claims against another

• elements:

  • done in good faith

  • signed in writing

  • additional consideration

what’s a covenant not to sue?

• one where you agree not to pursue a valid, present claim

• you can sue if the other party doesn’t do what they promised (ex: fails to pay you)

what is it called when a minor avoids a contract? what must be done to do this?

• disaffirming

• done via written/oral communication or conduct

• must disaffirm entire contract for it to be valid

• should be done within reasonable time of becoming a major?

when is a minor unable to disaffirm?

• marriage contracts and enlistment agreements

• in some states, when they lie about their age

• contracts for necessaries: still liable for reasonable value of goods

What is ratification in relation to capacity?

• basically intent to abide by contract made when a minor

• must disaffirm within a reasonable time of turning 18 otherwise it’s implicit ratification

When incapacitated, how should you go about disaffirming once sober?

• do it within reasonable time

• return all consideration except when it’s a necessity

• contracts for necessities are voidable, but you are liable for reasonable value of consideration

with mental incapacity, when is a contract valid vs void vs voidable?

void: if a court has previously judged a person to be incapable

voidable: not previously judged incapable, but was at time of formation. can be ratified at mentally incapable party’s will

valid: not previously judged incapable, and if the person was temporarily mentally capable during formation

how we feel about noncompetes?

• generally frowned upon

• only valid when reasonably restrained (by geo, time, industry scope) and is a key part of ongoing business operations

what’s an exculpatory clause? are they valid?

• clause that releases a party from liability for monetary or physical injuries, no matter who’s at fault

• often against public policy, but valid for stuff that’s risky as hell (skydiving, amusement parks)

if a contract lacks voluntary consent, what is it then?

voidable

what types of mistakes make a contract voidable? when do unilateral mistakes excuse you?

• mistakes of fact, NOT of value/quality

• ex: said it was topaz, was diamind; NOT said it was a high quality diamond when its actually shit

• bilateral mistakes makes it voidable for BOTH parties

• unilateral mistakes doesn’t excuse you UNLESS:

  • other party should’ve known a mistake of fact was being made

  • error was due to substantial math error made in accident

Elements of fraud? what can you do when it’s there?

1. misrepresentation of material fact (opinions and silence do NOT count)

2. intent to deceive

3. justifiable reliance on misrepresentation

4. harm

you can either rescind and be restored to original conditions, or you can pursue enforcement and damages

when does a misrepresentation of law count as fraud?

when the person making the statement is in a profession that requires above average citizen familiarity with the law

what is undue influence? what does it do to your contract

• undue influence: basically when someone has great influence over another party to the point it overcomes their free will

• voidable contract

what are adhesion contracts?

• ones written on a take it or leave it basis to the point where you have no chance negotiate the terms

what’s statute of frauds?

statute stipulating which contracts need to be in writing, comes from english common law tradition

which contracts must be in writing?

• contracts for sale of land

• contracts that cannot be performed within a year

• collatoral/secondary contracts

• promises made in consideration of marriage (includes prenups)

• under UCC, goods over $500

What’s the one-year requirement?

• performance must be possible, even if highly difficult. Impossibility = needs to be written (ex: 3 crops of pumpkins, 3 Christmas Day parties)

• time period starts day after formation

when can a collateral promise NOT be in writing?

if the guarantor’s main purpose is personal benefit or to forestall litigation

What are the exceptions to the writing requirement?

• Partial performance (has been performed to the point where you cannot return parties to starting point → equitable remedy for specific performance)

• admission (someone admits under oath there was an agreement; for UCC only to the quantity admitted)

• Promissory Estoppel: justifiable and detrimental reliance on another’s promise and forseeable to promisor & no other justifiable remedy other than performance

What’s considered sufficent writing

• under ucc: only needs to state quantity and be signed by party against whom enforcement is sought

• basically just need essential terms and evidence of voluntary consent

• most states want you to name parties + describe subject matter clearly (esp. land)

What is parole evidence? what’s the parole evidence rule?

• parole evidence rule: testimony/other evidence of communications between parties not in contract itself to resolve disputes about terms

• Parole evidence rule: cannot admit parole evidence when:

  • negotiations prior to formation

  • agreements prior to formation

  • oral agreements made at same time as formation

what are the exceptions to the parole evidence rule?

• contracts subsequently modified: evidence of subsequent oral or written modifications to written contract; oral mods may not be enforceable under statute of frauds or if there’s a term that says K is only modifiable in writing

• voidable/void contracts: can admit evidence that shows it’s void/voidable, valid even for oral evidence

• contracts with ambiguous terms

• incomplete Ks

• prior dealing/course of performance: falls under UCC

• contracts subject to orally-agreed on condition precedent

• Ks with obvious/gross clerical or typographic errors

what’s an integration clause? when is it valid?

clause that says that the K is the complete contract; prevents any extraneous (outside) evidence. only valid when FULLY INTEGRATED

assignment vs delegation?

• assignment: transfer of contractual RIGHTS to a third party, doesn’t need to be in writing, should but doesn’t have to notify obligor

• delegation: transfer of contractual DUTIES to a third party

In assignment, can the original assignor claim any rights once they’re assigned?

No; assignee takes all the ORIGINAL rights of the assignor

when can you NOT assign rights?

1. when assignment is prohibited by a statute

2. personal contracts (unless if it’s just for monetary payment)

3. assignment significantly changes risks/duties of obligor

4. contract prohibits assignment

What are the exceptions to the no assignment possibilities?

1. assigning right to receive funds (it’s the basis of today’s economy, transfer of credit)

2. when doing alienation (voluntary transfer of real estate to another person)

3. assignment of negotiable instruments (checks, CDs, etc)

4. in contract for sale of goods, right to receive damages for breach of contract/payment of an account receivable

T/F: if assignor doesn’t tell you about assignment, if you perform obligation to them then you are released

true

If you delegate an obligation and the delegee doesn’t do it, do you have to?

yes

Duties that can’t be delegated?

1. K depends on special personal abilities of delegator; duties are personal in nature

2. performance by a 3rd party would be materially different than what’s expected

3. K expressly prohibits delegation

Who can be sued for nonperformance in delegation: delegator or delegatee?

Both

when can an assignor be held liable for nonperformance after assignment?

if they assign “all rights” b/c they’re assigning both rights and duties, hence also delegating

when can third parties sue for breach of K? who do they sue?

• when they are an intended beneficiary (third party for whose benefit the K was made)

• sues promisor (one who made promise that benefits third party)

creditor vs donee beneficiary? where does this apply?

• creditor: exists when promisor promises to promisee to fulfill duties owed to a third party (creditor beneficiary)

• donee: contract expressly made to give a gift to third party (ex: life insurance policy)

when do third parties’ rights vest?

1. when third party expresses consent to agreement

2. when third party materially changes circumstances in detrimental reliance on the contract

3. when conditions for vesting are satisfied (ex: if life insurance policy holder dies)

what’s an incidental beneficiary? can they sue?

• party that benefits because of K, but for whose benefit the K wasn’t made in the first place

• cannot sue

what is a condition?

• condition: qualification of contract based on a possible future event happening/not happening. if it isn’t satisfied, both parties are discharged

conditions precedent vs subsequent vs concurrent conditions?

• precedent: must be fulfilled before a party’s performance is required; more common

• subsequent: terminates a party’s requirement to perform if a condition occurs; rarer

• concurrent: when each party’s performance is conditioned on each other’s performance or offer to perform. Only happens if the contract wants simultaneous performance

Express vs implied conditions

• express: written in contract, uses “if”, “provided”, “after”, or “when”

• implieed: not in contract but understood as part of agreement, implied from purpose of K or intent of parties

When are you discharged by performance?

• at complete or substantial performance (given that substantial performance ≠ personal service contract)

elements of substantial performance? what principle guides how to determine substantivity

1. done in good faith

2. performance doesn’t vary greatly from the performance promised in contract; considered minor if can be fixed by monetary damages

3. creates substantially the same benefits as complete performance

must be to reasonable person standard of substantiality unless it’s a personal contract

what can the nonbreaching party do in a material breach of contract

• they are discharged

• can immediately sue for breach

What’s it called when a party, before either party has duty to perform, refuses to perform?

anticipatory repudiation. must however act to mitigate harm from breach if you look to sue them

what do you say to make time a condition?

it is “of the essence” and you complain about it in case of breach

what is mutual recission?

• both parties agree to cancel contract and return each other to pre-K standings. must have legal elements of a K too for it to be valid

• Under UCC, MUST be in writing

• discharges both parties from performance

what is novation? elements?

• novation: both parties agree to substitute a third party for one of the original parties.

• needs following elements:

  • previous valid obligation

  • agreement by all parties to a new contract

  • extinguishing of old obligation (discharge of old party)

  • new, valid contract

• discharges an original party

what is discharge by settlement agreement vs discharge by accord and settlement

• settlement agreement: compromise/agreement from a genuine dispute over obligations; acts as a substitute agreement for old one and discharges both from old agreement for this new one

• accord and settlement: both sides agree to accept performance diff than originally stated. Accord = contract to perform some act to satisfy existing K duty not yet discharged. Satisfaction = execution of accord. Old agreement is suspended until completion; if a party breaches, nonbreaching can sue based on old or accord agreement

Discharges by operation of law?

• material alteration of contract: one party altered physical written contract w/o o/pty consent → unaware party can be discharged

• statutes of limitations: 2-3 years for oral, 4-5 for written, within 4 years under UCC

• bankruptcy

• impossibility of performance

• commercial impracticability: increases cost/difficulty of execution b/c random event

• frustruation of purpose: decreases value of what was in K b/c of random event

When is performance impossible?

1. Pty dies/becomes impaired in a personal contract

2. Destruction of specific subject matter

3. change in law makes performance illegal

what is commercial impracticability?

• Basically when:

  • Contingency occurs

  • Contingency makes performance impracticable

  • Nonoccurrence of contingency was supposed when K was made

• added burden of performance must not have been forseeable at time of K

four types of damages?

• compensatory (cover direct losses and costs)

• consequential (cover indirect and foreseeable losses)

• punitive (punish and deter wrongdoing)

• nominal (recognize wrongdoing when no monetary loss suffered)

How are compensatory damages treated in contract law?

• compensate pty for loss of bargain

• replace what was lost b/c of wrong/damage and make person whole again

How do we assign compensatory damages?

• standard measure: damages = promised performance - actual performance value - avoided losses + incidental damages

• In UCC cases: contract price - market price OR lost profits on sale if buyer reneges before seller can perform.

• In sales of land: specific performance if seller in breach, diff b/w mkt and K price if buyer in breach or if specific performance unavailable

what are incidental damages? what do they fall under

• damages to compensate expenses directly incurred b/c of breach, like getting performance from another source

Consequential damages examples?

• loss on profits from nonperformance

• other party must know/reasonably should’ve known the additional damages

What is the duty to mitigate? what does that have to do with anything?

Innocent injured party must reduce damages suffered by finding new tenant, new employee, new job, etc. If they don’t do this, they cannot receive damages

what’s a liquidated damages clause?

state that a reasonable dollar amount must be paid in case of breach; usually enforceable. are NOT penalties

what are the equitable remedies you can seek as damages for breach of contract?

• recission (promise to undo contract) and restitution (returning goods/funds/property previously transferred or dollar amount substitute per K)

• specific performance: only granted if item is of unique and rare value so that estimating monetary damages would not let innocent pty get an identical substitute

• Reformation: rewriting contract to better reflect intentions of parties. happesn when fraud or mutual mistake, writing incorrectly reflects oral agreement, has a noncompete

T/F: you can use quasi-contract theory to get remedy for breach of contract

True, gives fair market value of the conferred benefit