Business Law: Contracts, Capacity, Assent, and Enforceability

Comprehensive review flashcards covering contractual capacity, formation, reality of assent, Statute of Frauds, third-party rights, and relevant case law.

What are the four essential requirements for the formation of a valid contract?

The four are: (1) Agreement (Offer and Acceptance), (2) Consideration (Bargained-For Exchange), (3) Contractual Capacity (Legal ability to enter into a binding contract), and (4) Legality / Legal Object (Legal purpose and subject matter).

How do bilateral and unilateral contracts differ regarding formation and performance?

In the first, mutual promises are exchanged ("Promise ↔ Promise"), and the contract forms immediately while promises remain outstanding (executory). In the second, the offeror makes a promise seeking performance ("Promise ↔ Performance"), and no contract is formed until the offeree completes performance.

What is the distinction between a void contract and a voidable contract?

the first has an illegal purpose or subject matter and cannot be enforced by law (e.g., an agreement to buy illegal drugs). the second satisfies initial formation requirements, but one or both parties have the legal right to disaffirm or withdraw from it.

What defines an executory contract?

this contract is when some or all of the contractual duties have not yet been performed by one or both parties.

What is the general rule regarding advertisements as contractual offers, and when can an advertisement become an offer?

Advertisements are generally treated as invitations to make an offer. However, an advertisement constitutes a valid unilateral offer if its terms are sufficiently definite, specific, and invite acceptance through performance.

What was the legal ruling and key concept established in Carlill v. Carbolic Smoke Ball Co. (1892)?

The company’s specific advertisement promising a reward to customers who followed its instructions and still caught influenza was a valid offer. Carlill accepted by performing the required conditions.Concept: Advertisements can constitute valid unilateral offers accepted by performance.

What was the legal holding in Lucy v. Zehmer (1954), and what contractual concept does it illustrate?

The court enforced a written agreement to sell a farm drafted on a napkin because the seller's outward actions and words led a reasonable person to believe the transaction was serious, regardless of subjective intent to joke. Concept: The objective theory of contracts dictates that intent is judged by outward words and conduct.

What is the operational difference between an auction conducted 'with reserve' versus 'without reserve'?

In the first, the seller or auctioneer retains the right to withdraw the item before the gavel falls. In the second, the seller cannot withdraw the item and must accept the highest bid, treating the listing as an irrevocable offer.

What is an option contract, and what are its key requirements?

the first is an agreement wherein the offeror promises to hold an offer open exclusively for the offeree for a specified, finite duration. the second is independent consideration from the offeree to be legally binding.

Under what three conditions does an offer terminate automatically by operation of law?

An offer terminates by operation of law upon: (1) destruction of the subject matter, (2) death or legal insanity of the offeror, or (3) subsequent subject matter illegality.

What does the common law mirror image rule dictate?

This rule dictates that the offeree's acceptance must match the exact terms of the offer without any modifications, additions, or omissions. (This rule is modified by UCC Article 2 for the sale of goods).

What is the mailbox rule?

this rule provides that an acceptance becomes effective and legally binds the offeror at the moment it is properly posted, dispatched, or mailed to the offeror.

How is consideration defined in contract law?

this is a bargained-for exchange involving the receipt of a legal benefit by the promisor or the suffering of a legal detriment by the promisee (e.g., promising to do something one has no legal obligation to do, refraining from an action one has a legal right to do, or agreeing not to sue on reasonable grounds).

What are the three required elements of promissory estoppel?

(1) One party makes a clear promise knowing the other party will rely on it; (2) the other party reasonably and detrimentally relies on the promise; and (3) enforcing the promise is the only way to avoid injustice.

What is the general judicial rule regarding the adequacy of consideration, as shown in Smith v. Riley (2002)?

Courts generally do not assess the economic fairness or adequacy of consideration; a bad bargain remains enforceable absent fraud or unconscionability. In this case, consideration of $"\$1.00\text{ and other good and valuable consideration}"$ was sufficient to legally enforce the assignment of a half-interest in a lease with option to purchase.

What is an illusory promise, and does it provide valid consideration?

this term is a statement that appears to promise something but does not actually obligate the promisor to do anything (e.g., "I will buy your skis tomorrow if I like them"). Because it is non-committal, it is not a genuine promise and cannot serve as consideration.

Why was the promise unenforceable in Passante v. McWilliam (1997)?

A corporate promise to grant an attorney a $3\%$ equity stake for past completed services was unenforceable because those past acts were not bargained for in exchange for the subsequent promise. Concept: Past consideration is not valid consideration for a present contract.

What is the preexisting duty rule, and what are its three exceptions?

The rule states that promising or performing an act one is already legally or contractually obligated to perform does not constitute valid consideration. The three exceptions are: (1) unforeseen circumstances (e.g., encountering solid rock during pool excavation), (2) additional work requested and performed, and (3) contract modifications under UCC Article 2 for the sale of goods.

How does the enforceability of partial payment differ between liquidated and unliquidated debts?

For the first, where the existence and amount are undisputed, a creditor's promise to accept partial payment does not cancel the remaining balance. For the second, where parties dispute in good faith whether money is owed or the amount owed, parties can settle for a lesser amount via an accord and satisfaction.

What are the essential elements of an accord and satisfaction?

The elements are: (1) the underlying debt is unliquidated or disputed, (2) the creditor agrees to accept less than the claimed sum as full payment (the accord), and (3) the debtor pays the agreed-upon amount (the satisfaction). Note that under the UCC, a check endorsed with "paid in full" does not automatically create an accord and satisfaction merely upon deposit.

What is the contractual capacity of a minor, and how does ratification operate?

Minors under the age of $18$ lack the first term making their contracts voidable at the minor's option. the second term occurs when an individual reaches adulthood and affirms the contract entered as a minor, which can be express (orally or in writing stating an intent to be bound) or implied (taking actions demonstrating intent to ratify).

What is the legal standard for determining the contractual capacity of mentally incapacitated persons?

The issue is whether the person had the mental capability to understand the nature, purpose, and consequences of entering into the contract. If a delusion prevents them from understanding that an agreement is a contract, it is voidable upon regaining competency.

Under what conditions can an intoxicated person disaffirm a contract?

An intoxicated person may only disaffirm if their impairment prevented them from understanding the meaning and consequences of entering the contract. Making an unwise decision does not void the contract, and the contract remains fully enforceable if the other party had no reasonable way of knowing the individual was intoxicated.

Which three categories of individuals have zero legal capacity to contract, rendering their contracts void?

(1) Persons adjudicated mentally insane by a judge or legal authority, (2) persons adjudicated habitual drunkards/intoxicated by a legal authority, and (3) individuals with court-appointed legal guardians (e.g., individuals with advanced Alzheimer's disease).

What happens to an ongoing contract if its subject matter becomes illegal after formation?

The contract is discharged by law and ceases to be enforceable (e.g., if an employee contracts to work as a dealer in a casino for one year and the state legislature subsequently outlaws casino gambling).

What was the ruling in Baja Properties v. Mattera (2018) concerning licensing statutes?

The court held that an unlicensed contractor could not enforce a construction contract because state statutory licensing laws required a valid license to protect the public. Concept: Contracts that violate regulatory licensing statutes or public policy are unenforceable.

Define usury and Sabbath (blue) laws.

the first term occurs when a loan contract charges an interest rate exceeding the maximum limit set by state statute. the second term are state or local laws prohibiting certain commercial transactions on Sundays, such as the sale of alcohol.

What is a covenant not to compete?

this term is an agreement in which an employee or business seller agrees to refrain from competing against a party for a specified period within a defined geographic boundary.

What is the difference between procedural and substantive unconscionability?

the first term involves conditions impairing a party's understanding or voluntary assent (e.g., standardized "take-it-or-leave-it" adhesion contracts). the second concerns overly harsh, unfair, or lopsided terms (e.g., gross consideration disparity like charging three times market value, or denying a party any legal recourse).

What is an exculpatory clause, and where is it typically unenforceable?

this term is a contractual provision releasing a party from all liability regardless of fault or injury. It is frequently held unenforceable in contracts involving entities that serve the public interest, such as public utilities, banks, and common transportation carriers.

What was the holding regarding the exculpatory clause in Riley v. Iron Gate Self Storage (2017)?

The court enforced a contractual limitation of liability capping damages at $\$5{,}000$, even though Iron Gate mistakenly auctioned storage property valued at $\$1.5\text{ million}$ for $\$2{,}000$, because limitation clauses are customary, accepted by the renter, and do not violate public policy in commercial storage rentals.

What does the doctrine of 'in pari delicto' state, and what is its main exception?

this term provides that when both parties are equally at fault in an illegal agreement, courts will not assist either party. The exception applies when an agreement violates a protective statute designed to shield a specific class (e.g., maximum driving hour regulations for truck drivers; the driver can still recover unpaid wages).

How do severable (divisible) contracts differ from indivisible contracts?

the first contract contains multiple parts capable of distinct performance with separate consideration allocated to each individual part; illegal segments can be severed while enforcing the rest. this second term requires complete performance by both parties and fails entirely if infected with illegality.

How do unilateral and mutual mistakes of fact impact contract enforceability?

this term done by one party generally leaves the contract fully binding on the mistaken party. the second term by both contracting parties allows either party to rescind the agreement.

Why was summary judgment denied in Eisenberg, Inc. v. Hall (2017)?

The court denied summary judgment on mutual mistake claims because factual disputes remained regarding whether the antiquities dealer had acted with "conscious ignorance" by failing to perform ordinary due diligence on artwork that turned out to be modern forgeries.

What are the legal remedies and requirements for innocent misrepresentation versus negligent misrepresentation?

In this term (lacking scienter/knowledge of falsity), the aggrieved party may only rescind the contract and cannot recover tort damages. In the other term (carelessly making a false assertion without reasonable grounds), the aggrieved party can both rescind the contract and sue for damages.

What are the three essential elements of fraudulent misrepresentation?

(1) A false assertion of material fact made with scienter (knowledge of falsity or reckless disregard), (2) an intent to deceive the other party, and (3) justifiable reliance on the false assertion by the innocent party.

What legal concept was highlighted in Jordan v. Knafel (2007)?

The case addressed fraudulent misrepresentation and fraud in the inducement concerning a $\$5\text{ million}$ settlement agreement predicated on paternity representations that DNA testing subsequently disproved.

What defeated the franchisee's claim in Fantastic Sams Salons Corp. v. PSTEVO (2016)?

plaintiff could not establish justifiable reliance for its fraudulent misrepresentation claim regarding profitability and start-up capital because the signed franchise contract explicitly contained a disclaimer stating plaintiff did not rely on any sales or earnings representations.

What defines undue influence, and what were its key elements in Evan Rothberg v. Walt Disney Pictures?

Undue influence occurs when a dominant party uses a confidential or fiduciary relationship to overcome the free will of a vulnerable party. In this court case the estate challenged plaintiff waiver of $\$2\text{ million}$ in benefits based on (1) undue susceptibility of the weaker party (terminally ill and facing exposure threats) and (2) excessive pressure exerted by the dominant entity. The defendant was given a summary judgment in grounds of duress and undue susceptibility of weaker party.

What constitutes legal duress in contract law?

Duress occurs when one party threatens the other with a wrongful or illegal act unless contractual assent is given, thereby coercing the victim and removing any reasonable alternative to signing the contract.

Which six categories of contracts are subject to the Statute of Frauds (M.Y. L.E.G.S.)?

(1) Marriage (agreements made in consideration of marriage, like prenuptials); (2) Year (contracts impossible to perform within one year of creation); (3) Land (contracts transferring interests in real estate); (4) Executor (promises by an estate executor to pay debts from personal funds); (5) Goods (contracts for the sale of goods priced at $\$500$ or more under UCC Article 2); and (6) Suretyship / Guaranty (collateral promises to pay another's debt).

What is the main-purpose exception to the Statute of Frauds suretyship provision?

If the primary objective of a secondary promisor in guaranteeing the debt of another is to secure a personal economic benefit, the guaranty does not require a writing to be enforceable.

What is the equal dignities rule?

The rule establishing that if an agent is authorized to negotiate or execute a contract that falls under the Statute of Frauds, the agency appointment itself must also be in writing.

What are the common law requirements for a writing to satisfy the Statute of Frauds?

The writing must identify: (1) the parties to the contract, (2) the subject matter/purpose, (3) the consideration, (4) significant terms (such as price and description), and (5) the signature of the party sought to be bound (the defendant).

What single specific term must be included in a writing under UCC Article 2 to satisfy the Statute of Frauds?

under this ucc article, the written document for the sale of goods must explicitly state the quantity of goods to be sold.

What is the parol evidence rule?

this rule prohibits the introduction of extrinsic oral or written statements made prior to or contemporaneous with a final, fully integrated written contract if that evidence contradicts, alters, or adds to the written terms.

List at least five established exceptions to the parol evidence rule.

Parol evidence is admissible to show: (1) subsequent contract modifications, (2) contracts conditioned on oral terms (conditions precedent), (3) non-final agreements (partially oral, partially written), (4) ambiguous terms requiring clarification, (5) incomplete contracts, (6) obvious typographical errors, (7) void or voidable contracts (e.g., proving fraud, duress, minority), or (8) course of dealing/trade usage under the UCC.

What contractual rights cannot be assigned to a third party?

(1) Rights that are personal in nature, (2) rights whose assignment would materially increase the obligor's risk or burden, (3) rights expressly prohibited from assignment by the contract terms, and (4) rights whose assignment is prohibited by law or public policy (e.g., assignment of future at-will employment wages).

What duties cannot be delegated under a contract?

(1) Duties that are personal in nature (e.g., hiring an artist or specialized professional), (2) duties where performance by a delegatee would vary significantly from the performance expected from the delegator, and (3) duties under a contract containing an express non-delegation clause.

How do intended and incidental third-party beneficiaries differ in their enforcement rights?

first term is directly meant to benefit from the contract and has the legal standing to sue to enforce its obligations once rights have vested. second term benefits unintentionally and possesses no legal right to enforce the contract.

Against whom can creditor beneficiaries and donee beneficiaries enforce their rights?

first term (whose benefit satisfies a legal obligation owed by the promisee) can enforce contract rights against either the promisor or the promisee. second term (whose benefit is intended as a gift) has limited enforcement abilities and can typically enforce rights only against the promisee.

What is the concept of 'vesting of rights' in third-party beneficiary contracts?

this term refers to the point in time when a third-party beneficiary's rights mature and become legally enforceable, preventing the original parties from altering or rescinding those rights without the beneficiary's consent (e.g., life insurance proceeds vest upon the insured party's death).

What key business law issue was addressed in Garage Solutions v. Person (2016)?

The case reviewed the enforceability of employee reimbursement agreements in relation to at-will employment status, public policy, and ongoing contractual duties.