Legal Environment of Business - Exam 2

agreement

any meeting of the minds resulting in mutual assent to do or refrain from doing something

bilateral contract

a contract involving two promises and two performances; formed by an exchange of promises

unilateral contract

a contract involving one promise, followed by one performance, which then triggers a second performance from the offeror (the party making the offer); when a promise requires acceptance by a required performance

express contract

a contract that is created when the parties have knowingly and intentionally agreed on the promises and performances

implied contract

a contract in which the agreement is reached by the parties’ actions rather than their words

quasi-contract

a classification that permits a contract to be enforceable in cases where no express or implied contract exists, and one party suffers losses as a result of another party’s unjust enrichment

valid contract

a contract that has the necessary elements, and thus, can be enforceable; when a contract has the required elements

void contract

a contract that lacks one or more of the basic required elements of a contract or that has not been formed in conformance with the law from the outset of the agreement and, thus, cannot be enforced by either party; when an agreement lacks one of the required elements or has not been formed in conformance of the law from the outset

voidable contract

a contract that one party may, at its option, either disaffirm or enforce; when the law gives on or more parties the right to cancel an otherwise valid contract under the circumstances

unenforceable contract

a contract that meets the elements required by law for an otherwise binding agreement but is subject to a legal defense; although a contract may have met the required elements and be considered valid, it may be unenforceable because one party asserts a legal defense to performing the contract

state common law

the body of law governing contracts for services or real estate

state statutory law

the body of law governing contracts for goods or products based on the Uniform Commercial Code

hybrid contracts

a contract that involves terms for both goods and services; the source of law is established by determining the predominant thrust of the contract subject matter

mutual assent (agreement)

for the formation of a valid contract, the broad underlying requirement that the parties must reach an agreement using a combination of offer and acceptance and that the assent must be genuine; the broad underlying requirement of an enforceable contract

offer

a promise or commitment to do (or refrain from doing) a specified activity; in contract law, the expression of a willingness to enter into a contract by the offeror’s promising an offeree that she will perform certain obligations in exchange for the offeree’s counterpromise to perform

1. clear

2. serious

3. communicated

three criteria for an offer to be valid

acceptance

the offeree’s expression of agreement to the terms of the offer; created by a valid offer

objective intent

for an offer to have legal effect, the requirement that, generally, the offeror must have a serious intention to become bound by the offer and that the terms of the offer must be reasonably certain

revocation

an action terminating an offer whereby the offeror decides to withdraw the offer by expressly communicating the revocation to the offeree prior to acceptance; offeror revokes (withdraws) the offer prior to acceptance

rejection

an action terminating an offer whereby the offeree rejects the offer outright prior to acceptance; the offeree rejects the offer

counteroffer

an action terminating an offer whereby the offeree rejects the original offer and proposes a new offer with different terms; the offeree rejects the original offer and proposes a new offer with different terms

operation of law

termination of an offer by the occurrence of certain happenings or events, which generally include lapse of time, death or incapacity of the offeror or offeree, destruction of the subject matter of the contract prior to acceptance, and supervening illegality

irrevocable offers

offers that cannot be withdrawn by the offeror; include offers in the form of an option contract, offers that the offeree partly performed or detrimentally relied on, and firm offers by a merchant under the Uniform Commercial Code

detrimental reliance

situation in which the offeree acts, based on a reasonable promise made by the offeror, and would be injured if the offeror’s promise is not enforced; an offer is rendered irrevocable if the offeree makes preparations prior to acceptance based on a reasonable reliance on the offer

mirror image rule

principle stating that the offeree’s response operates as an acceptance only if it is the precise mirror image of the offer; if the response conflicts with the original offer even slightly, the original offer is terminated and the new offer is substituted

lapse of time

an event covered under operation of law in which a contract may be terminated once either the offeror’s expressed time limit has expired, or a reasonable time has passed

mailbox rule

principle stating that the acceptance of an offer is effective upon dispatch of the acceptance via a commercially reasonable means and not when the acceptance is received by the offeree; governs common law contracts; rule that governs common law contracts and determines when a contract is considered to be deemed accepted by the offeree, thus depriving the offeror of the right to revoke the offer

mistake

in contract law, an erroneous belief that is not in accord with the existing facts

mutual mistake

an erroneous belief held by both parties that concerns a basic assumption on which a contract was made; a mistake in which both parties hold an erroneous belief

unilateral mistake

an erroneous belief/mistake held by only one party about a basic assumption in the terms of an agreement

consideration

the mutual exchange of benefits and detriments; for the formation of a valid contract, the requirement that each party receives something of value (the benefit) from the other and that each party gives up something of value (the legal detriment) to the other, resulting in a bargained-for exchange

forbearance

the giving up of a right that you legally possess as consideration in a contract

nominal consideration

consideration that is stated in a written contract even though it is not actually exchanged

preexisting duty

a duty that one is already legally obligated to perform and, thus, that is generally not recognized as a legal detriment

bargained-for exchange

the aspect of consideration that differentiates contracts from illusory promises by holding that a performance or return promise is bargained for only if it was exchanged for another promise

illusory promises

a promise that courts will not enforce because the offeror is not truly bound by his vague promise or because a party cannot be bound by his promise due to the lack of a bargained-for exchange; promises that do not support a bargained-for exchange and will not support contractual consideration

past consideration

a promise made in return for a detriment previously made by the promisee; does not meet the bargained-for exchange requirement

promissory estoppel

theory allowing for the recovery of damages by the relying party if the promisee actually relied on the promise and the promisee’s reliance was reasonably foreseeable to the promisor

capacity

for the formation of a valid contract, the requirement that both parties have the power to contract

minors

category of individuals who have limited capacity to enter into a contract; includes those younger than the majority age of 18; until a person reaches her majority age, any contract that she may enter into is voidable at the minor’s option

mental incapacity

category of individuals who have limited capacity to enter into a contract; includes anyone who is unable to understand the nature and consequences of the contract and anyone who is unable to act in a reasonable manner in relation to the transaction when the other party has reason to know of that person’s condition

lucid

sane and thinking clearly; one who is not suffering from delusion or confusion

legality

for the formation of a valid contract, the requirement that both the subject matter and performance of the contract must be legal

public policy

part of the legality requirement for a valid contract; necessitates that the terms be consistent with public policy objectives

enforceability

the ability of a properly formed contract to be enforceable in a court of law; determined by examining whether the contract is a product of genuine assent and is in writing (under certain circumstances)

genuine assent

the knowing, voluntary, and mutual approval of the terms of a contract by each party; required for a contract to be enforceable

1. misrepresentation and fraudulent misrepresentation

2. duress

3. undue influence

4. unconscionability

lack of genuine assent occurs in cases of

misrepresentation

when one party to an agreement makes a promise or representation about a material fact that is not true, the other party may avoid the contract

1. misrepresented fact was material (concerns a basic assumption in the agreement, or the false representation somehow changes the value of the contract)

2. party justifiably relied on the misstatement when forming an agreement (such as determining the price to be paid for an office building)

3. misrepresentation was one of fact and not just someone’s opinion or mere puffing

for one party to avoid the contract on the basis of misrepresentation, they must prove:

fraudulent misrepresentation

when one party has engaged in conduct that meets the standards for misrepresentation, but that party has actual knowledge that the representation is not true; basis for avoiding a contract

treble damages

triple damages (awards three times the actual damages); often awarded in fraud cases

duress

if one party to a contract uses any form of unfair coercion to induce another party to enter into or modify a contract, the coerced party may avoid the contract

1. violence or threats of a violent act

2. economic threats such as wrongful termination or threats to breach a contract

3. threats of extortion or other threats whereby the other party has no meaningful choice

three categories of duress

undue influence

a defense that gives legal relief to a party who has been induced to enter into a contract through the improper pressure of a trusted relationship; allows the influenced party to avoid a contract when the court determines the terms of the contract are unfair and the parties had some type of relationship that involved a fiduciary duty or some duty to care for the influenced party

unconscionability

a defense that may allow a party to potentially avoid a contract on the grounds that she suffered a grossly unfair burden that shocks the objective conscience

statute of frauds

the law governing which contracts must be in writing in order to be enforceable; purpose is to prevent fraud

1. contracts that involve the sale of interest in land

2. contracts that cannot be (are not able to be, by their terms) performed in under one year

3. contracts to pay the debt of another

4. contracts made in consideration of marriage (ex: prenuptial agreement)

5. contracts for the sale of goods for $500 or more and lease transactions for goods amount to 1,000 or more

five types of contracts statute of fraud applies to

parol of evidence rule

interpretation rule stating that any writing intended by the parties to be the final expression of their agreement may not be contradicted by any oral or written agreements made prior to the writing; does not bar admission of the preliminary documents when they are being used to determine the meaning that the parties intended concerning a particular term in the contract

covenant not to compete

type of contract in which one party agrees not to compete with another party for a specified period of time

ambiguous terms

contract terms that are vague and indefinite; in contract law, these terms are construed by the court against the interest of the side that drafted the agreement

omitted terms

contract terms that are left out or absent; in contract law, courts may supply a reasonable term in a situation where the contract is silent

condition

an event that triggers a particular performance in order to allocate the risk that some part of a contract may not be completed; an event that must occur before a contract obligation is triggered

• condition precedent

• condition subsequent

categories of condition

condition precedent

type of condition in which an event that must occur before performance under a contract is due

condition subsequent

a type of condition in which an event that occurs after the performance under the contract and discharges the parties’ obligations

good faith

in contract law, the duty to honestly adhere to the contract’s common purpose; both parties try to make the deal work as written

discharge

in contract law, the removal of all legal obligations under the agreement; completion of a contract

substantial performance

performance of the essential terms of the contract such that performance can be considered complete less damages for anything still unperformed

material

something that is important to the contract by being necessary and generally indispensable to the contract; some deviation from the contract that results in a substantial change in the value of the contract or that changes a fundamental basis of the agreement

mutual consent

circumstance under which contracting parties may be discharged from their obligation although neither party has fully performed because they agree to cancel the contract

operation of law

termination of an offer by the occurrence of certain happenings or events, which generally include lapse of time, death or incapacity of the offeror or offeree, destruction of the subject matter of the contract prior to acceptance, and supervening illegality

recission

cancellation of a contract that occurs when both parties agree to discharge each other from all duties under the contract and end the agreement, no matter what has been done or left undone; if neither party has fully performed, the parties may agree to cancel the contract

accord and satisfaction

a doctrine that allows one party to create an agreement, or accord, with the other party to accept a substitute performance in order to satisfy the original performance; the completion of the new duty discharges the old one

substitute agreement/modification

an agreement that replaces the original contract when the two parties agree to different duties; the new duties then replace and dissolve the obligations of the original contract; immediately discharges any obligations under the original contract

novation

a type of substitute agreement in which the duties of the contract remain the same but a new, third party assumes the duty of an original party, discharging the original party from further obligations

impossibility

doctrine that excuses performance when an essential part of the contract has become impossible because a crucial, irreplaceable thing has been destroyed; a crucial person has died; a crucial means of performance no longer exists; or a crucial action has become illegal

impracticability

doctrine that excuses performance when an extreme circumstance occurs or reveals itself that destroys the value of the performance to the party and that circumstance was not the fault of either party and was not reasonably foreseeable

frustration of purpose

doctrine that excuses a party from performance if, before a breach, a state of things that was the basis for forming the contract no longer exists, by no fault of either party

1. contract is unilaterally altered by a party

2. contract is subject to relief of the Bankruptcy Code

3. statute of limitations

parties may also be discharged through operation of law when:

unilaterally altered

term pertaining to a contract in which one party changes a term of the offer or acceptance after the contract was made and without the consent of the other party, who is then discharged from performing

bankruptcy code

a procedure by which a debtor’s assets are reorganized and liquidated by a court order to pay off creditors and free the debtor from obligations under existing contracts; the debtor is entitled to complete discharge from any contract once the bankruptcy filing has been approved by a court

statute of limitations

state law that places a time limit on the enforcement of certain contracts in order to ensure diligent enforcement

breach

condition that exists when one party has failed to perform her obligations under the contract; if the breach is material, the nonbreaching party is excused from his performance and can recover monetary damages

remedies

judicial actions, which can be monetary or equitable, taken by courts that are intended to compensate an injured party in a civil lawsuit

anticipatory repudiation

doctrine under which, when one party makes clear that he has no intention to perform as agreed, the nonbreaching party is entitled to recover damages in anticipation of the breach rather than waiting until performance is due

money damages

sums levied on the breaching party and awarded to the nonbreaching party to remedy a loss from breach of contract

1. compensatory damages

2. consequential damages

3. restitution

4. liquidated damages

in a contract claim, money damages are limited to

compensatory damages

damages that are meant to make the injured party whole again; they are an attempt to place the nonbreaching party in the position he would have been in had the contract been executed as agreed; cover a broad spectrum of losses for recovery of actual damages suffered by the nonbreaching party

consequential damages

damages that repay the injured party for any foreseeable but indirect losses that flow from the breach of contract

restitution

a remedy that restores to the plaintiff the value of the performance that he has already rendered to the breaching party and by which the breaching party has been unjustly enriched

liquidated damages

reasonable estimates of the actual damages that will result if the contract is breached; damages that the parties agree to ahead of time

equitable relief

relief granted in the form of either specific performance (“do it”) or an injunction (“stop doing it”) when monetary damages are insufficient due to the unique or irreversible consequences of the breach

1. specific performance

2. injunctive relief

3. reformation

equitable relief primarily comes in the form of:

specific performance

an equitable remedy whereby a court orders the breaching party to render the promised performance by ordering the party to take a specific action

injunctive relief

a court order to refrain from performing a particular act

reformation

contract modification in which the court rewrites the contract to conform to the parties’ actual intentions when the parties have imperfectly expressed their agreement and the imperfection results in a dispute

clean hands

an equitable doctrine whereby a party seeking to enforce a breach of contract against the opposing party must prove that he has no fault in causing the breach; shown by proving that you are prepared to tender performance

tender of performance

an offer or attempt to perform what is required under a contract; readiness to perform

assignment

a transfer of one party’s current rights (not future rights) under a contract to a third party, thereby extinguishing the original party’s rights

delegation

a transfer of one party’s current duties owed under a contract to a third party to perform, with the original party remaining liable for any breach