Business Law Final Exam

TJU Exam study deck

Business Judgment Rule

Protects the decisions of a board of directors that:

• Acts on an informed basis

• In good faith *

• In the honest belief that the action taken was in the best interests of the corporation and its shareholders

Consideration

Something of legal value given in exchange for a promise

Gift Promise (Gratuitous Promise)

• Unenforceable due to lack of consideration

• Promise freely given and not induced by promise of some benefit

• Completed gift promises are not revocable

Illegal consideration

A promise to refrain from doing an illegal act

Illusory promise

A contract that both parties enter, but one or both of the parties can choose not to perform their contractual obligations

• Contract lacks consideration

Preexisting duty

A promise to do something the party is already under an obligation to do

• Arises when one party to an existing contract seeks to change the terms of the contract during the course of its performance

Past consideration

A prior act or performance that does not support a new contract

• Problems of past consideration arises when a party to a contract promises to pay additional compensation for work done in the past

Output contract

Contract in which seller agrees to sell all of its production to a single buyer

Purposes of an output contract

• Assuring the seller of a purchaser for all its output

• Assuring the buyer of a source of supply for the goods it needs

Requirements contract

Contract in which a buyer agrees to purchase all of its requirements for an item from one seller

Purposes of a requirement contract

• Assuring the buyer of a uniform source of supply

• Providing the seller with reduced selling costs

Best-efforts contract

A contract which contains a clause that requires one or both of the parties to use their best efforts to achieve the objective of the contract

Accord

Agreement whereby the parties agree to accept something different in satisfaction of the original contract

What is the performance of an accord called?

Satisfaction

What can happen if an accord is not satisfied?

The other party can sue to enforce either the accord or the original contract

Promissory Estoppel

An equitable doctrine that prevents the withdrawal of a promise by a promisor if it will adversely affect a promisee who has adjusted his or her position in justifiable reliance on the promise

What is another term for Promissory Estoppel?

Detrimental reliance

4 Elements of Promissory Estoppel

• The promisor made a promise

• The promisor should have reasonably expected that the promisee would rely on the promise

• The promisee actually relied on the promise and engaged in an action or forbearance of a right of a definite and substantial nature

• Injustice would be caused if the promise were not enforced

Acronym for Promissory Estoppel Elements

P.R.R.I (Promises Reasonably Result in Injustice if ignored)

• Promise

• Reasonable expectation

• Reliance

• Injustice

Confidentiality Agreements

An agreement whereby employees, independent consultants, and others who are privy to a company’s secret or proprietary information agree not to disclose such information to any other party

Non-Solicitation Agreements

An agreement in which employees agree that they will not solicit the clients or customers of the employer for their own benefit or for the benefit of a competitor of the employer after their employment ends.

Covenants Not to Compete

An agreement that provides that a seller of a business or an employee will not engage in a similar business or occupation within a specified geographical area for a specified time following the sale of the business or termination of employment.

What is another term for Covenants Not to Compete

Noncompete clause

Unconscionable Contracts

A contract that courts refuse to enforce in part or at all because it is so oppressive or manifestly unfair as to be unjust; a very unfair, one-sided contract that takes advantage of the other party

• This doctrine may not be used merely to save a contracting party from a bad bargain

• Ex: Adhesion contract

What is an example of an unconscionable contract

Adhesion contract

Mistake

Occurs where one or both of the parties to a contract have an erroneous belief about the subject matter, value, or some other aspect of the contract

• The law permits rescission of some contracts made in mistake

Rescission

An action to undo a contract

Unilateral Mistake

Mistake in which only one party is mistaken about a material fact regarding the subject matter of a contract

• The mistake is so serious that enforcing the contract would be unconscionable

• The other party knew or should have known that a mistake was made

When may a contract may not be enforced due to a unilateral mistake?

One party makes a unilateral mistake of fact, and the other party knew that a mistake was made

Unilateral mistakes occur because of?

A clerical or mathematical error that is not the result of gross negligence

Mutual Mistake of Value

Occurs if both parties know the object of the contract but are mistaken as to its value

Who can enforce the contract in cases of mutual mistake of value?

The contract remains enforceable by either party

Elements of Fraud

• The wrongdoer made a false representation of material fact

• The wrongdoer intended to deceive the innocent party

• The innocent party justifiably relied on the misrepresentation

• The innocent party was injured

Acronym for elements of fraud

F.I.R.I (False Intent Relied upon causes Injury)

• False representation of material fact

• Intent to deceive

• Reliance (justifiable)

• Injury

Fraud in the Inception

Occurs if a person is deceived as to the nature of his or her act and does not know what he or she is signing

• Such contracts are void rather than just voidable

What is another term for Fraud in the Inception?

Fraud in the Factum

In cases of Fraud in the Inception (Fraud in the Factum) Contracts are:

void rather than just voidable

Fraud in the Inducement

Fraud that occurs when the party knows what he or she is signing but has been fraudulently induced to enter into the contract

In cases of Fraud in the Inducement contracts are:

voidable by the innocent party

Fraud by Concealment

Occurs when one party takes specific action to conceal a material fact from another party

What need to occur for silence to become misrepresentation?

• Nondisclosure would cause bodily injury or death

• There is a fiduciary relationship

• Federal or state statutes require disclosure

Silence (note)

*Neither party to a contract owes a duty to disclose all the facts to the other party

What are the types of Fraud ?

1. Fraud in the Inception (Fraud in the Factum)

2. Fraud in the Inducement

3. Fraud by Concealment

4. Silence as Misrepresentation

Misrepresentation of Law

• Usually not actionable as fraud

• The innocent party cannot generally rescind the contract because each party to a contract is assumed to know the law that applies to the transaction

Exception to misrepresentation of law

If one party is a professional who should know the law and intentionally misrepresents it to a less sophisticated party

Innocent Misrepresentation

Occurs when a person makes a statement of fact that he or she honestly and reasonably believes to be true even though it is not

• It is not fraud

In cases of innocent misrepresentation the wronged party can only do what?

May rescind the contract, but may not sue for damages

Duress

A situation in which one party threatens to do some wrongful act unless the other party enters into a contract

In cases of duress what happens?

• The agreement is not voluntary since a party was forced into it

• Such a contract is not enforceable against the innocent party

Undue Influence

Occurs when one person takes advantage of another person’s mental, emotional, or physical weakness and unduly persuades that person to enter into a contract

In cases of undue influence what happens?

• The persuasion by the wrongdoer must overcome the free will of the innocent party

• A contract entered into because of undue influence is voidable by the innocent party

Statute of Frauds

A state statute that requires certain types of contracts to be in writing

Examples of contracts under the statute of Frauds

• contracts involving Real Property

• Contracts that cannot be performed within one year

• Collateral contracts that involve promises to answer for debt or duty of another

• Promises made in consideration of marriage

• Contracts for the sale of goods for $500 or more

• Contracts for the lease of goods with payments of $1,000 or more

Examples of real property

• Land

• building

• Fixtures (ex: built-in cabinets or a chandelier)

• things permanently affixed to the land (ex: a tree)

Executory Agreement

A contract that is not in writing even though the Statute of Frauds requires it to be

• These contracts are unenforceable by either party

Another term for executory agreement

Executory contract

Executed Contracts

An oral contract that should have been in writing under the Statute of Frauds that is executed.

• Neither party can raise the Statute of Frauds to rescind the contract

Integration of Several Writings

The combination of several writings to form a single contract

• Incorporation by reference

Incorporation by reference

Integration made by express reference in one document that refers to and incorporates another document within it

Where a preprinted form contract is used:

• Typed words prevail over preprinted words

• Handwritten words prevail over both preprinted and typed words

Ambiguity in a contract is resolved against who?

Party who drafted the contract

Which prevails? handwritten words, preprinted words, or typed words?

Handwritten Words

When interpreting contract words and terms…

• Specific terms presumed to qualify general terms

  • (The specific examples tell you how broad the general words really are; ex: if a contract says you can bring chairs or other furniture, it means stuff like tables/bookcases, but not a washing machine)

• Trade usage incorporated in contract unless otherwise stated

Parol Evidence Rule

If a written contract is a complete and final statement of the parties' agreement, any prior or contemporaneous oral or written statements that alter, contradict, or are in addition to the terms of the written contract are inadmissible in court regarding a dispute over the contract

Parol evidence

Any oral or written words outside the four corners of a written contract

(exceptions to the rule) Parol evidence may be admitted in court if it:

• Shows that a contract is void or voidable

• Explains ambiguous language

• Concerns a prior course of dealing or course of performance between the parties or a usage of trade

• Fills in the gaps in a contract

• Corrects an obvious clerical or typographical error

Privity of Contract

The relationship between the parties to a contract

• Contracting parties have a legal obligation to perform the duties specified in their contract.

• Duty of performance may be discharged by agreement of the parties, excuse of performance, or operation of law.

Third-Party Rights

Third parties do not typically acquire any rights under other people's contract

When do third-parties have rights?

When the person enforcing the contract is a:

• Assignee to whom rights are subsequently transferred

• Intended third-party beneficiary

What is an Intended third-party beneficiary?

A party that the contracting parties intended to give rights under the contract at the time of contracting

Assignment of a Right

The transfer of contractual rights by an obligee to another party

Assignor

An obligee who transfers a right

Assignee

A party to whom a right has been transferred

Rights that cannot be assigned

• Personal service contract

• Assignment of a future right

• Contract where an assignment would materially alter the risk

• Assignment of a legal action

Condition precedent

A condition that requires the occurrence of an event before a party is obligated to perform a duty under a contract

Personal satisfaction test

Subjective test that applies to contracts involving personal taste and comfort

Reasonable person test

Objective test that applies to commercial contracts and contracts involving mechanical fitness

Time is of the Essence

If a contract expressly states “time is of the essence,” performance by the stated time is an express condition

Implied conditions

Implied conditions are implied from the circumstances surrounding the contract and conduct of the parties

Force majeure clause

A clause in a contract in which the parties specify certain events that will excuse nonperformance

Statute of limitations

A statute that establishes the time period during which a lawsuit must be brought

• If the lawsuit is not brought within this period, the injured party loses the right to sue

Anticipatory breach

• Party indicates that he or she will not perform duties

• Nonbreaching party is immediately discharged

• Nonbreaching party may sue immediately

Monetary damages

An award of money

When are monetary damages available to the nonbreaching party?

• Minor breach

• Material breach

What is a minor breach?

occurs when a party fails to perform a small, non-essential part of an agreement, but the main purpose of the contract is still met

What is a material breach?

occurs when a party renders inferior performance of his or her contractual duties  (inferior performance)

Types of Monetary Damages

• Compensatory damages

• Consequential damages

• Liquidated damages

• Nominal damages

Acronym for types of monetary damages

C.C.L.N. (Compensation Can Limit Negligence)

Specific performance

Remedy that orders the breaching party to perform the acts promised in the contract

Reformation

Equitable doctrine permitting the court to rewrite a contract to express the parties’ true intentions

Injunction

A court order that prohibits a person from doing a certain act

Letters of credit

Formal document issued by a bank, bank guarantees payment to a seller on behalf of a buyer

• UCP

In international sales transactions….

The buyer (importer) and the seller (exporter) are located in different countries

Uniform Customs and Practice for Documentary Credits (UCP)

Establishes specific terms that are almost universally accepted and used to govern international letters of credit

What is a fiduciary relationship?

When a person or organization legally and ethically obligated to act in another party's best interest, prioritizing the client's interests above their own.

Principle-Agent Relationship

Fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other to act.

Principal

Party who employs another person to act on his or her behalf

Agent

Party who agrees to act on behalf of another

Independent Contractor

Relationship between a principal and an independent contractor

• (ex: you pay a freelance contractor to fix a leak in your roof)

What is the nature of the relationship between a principal and an independent contractor?

• Contractor is not an employee of the principal but has been employed by the principal to perform a certain task on behalf of the principal.

• Principal can authorize an independent contractor to enter into contracts.

• Principals are bound by the contracts.