114/4221 STUDY GUIDE FORMATION OF CONTRACTS

Question 1

4221.01

Answer 1

A contract is a legally enforceable agreement.

Question 2

4221.02

Answer 2

Express contract: The parties manifest their agreement by spoken or written words.

Question 3

4221.03

Answer 3

Implied contract: Implied in fact. The agreement is manifest, not by direct words, but from the conduct of the parties.

Question 4

4221.04

Answer 4

Quasi contract: Implied in law. One party is unjustly enriched at the expense of the other party such that the court will impose an obligation on the enriched party to pay the other party. No quasi contract will be imposed if there is an express or implied contract existing between the parties. The court implies a contractual obligation without regard to the agreement of the parties in order to prevent the unjust enrichment from occurring.

Question 5

4221.05

Answer 5

Formal contract: Under seal. Consideration is conclusively presumed. A notary public’s imprint on a document is not a seal.

Question 6

4221.06

Answer 6

Informal contract: Without a seal. Most contracts are informal and do not require a seal to be legally enforceable.

Question 7

4221.07

Answer 7

Divisible contract: Promises that are not dependent on each other. Partial performance of the contract is allowed.

Question 8

4221.08

Answer 8

Indivisible contract: Interdependent promises that cannot be separated.

Question 9

4221.09

Answer 9

Unilateral contract: A promise in exchange for an act.

Question 10

4221.10

Answer 10

Bilateral contract: Promise in exchange for a promise.

Question 11

4222.11

Answer 11

Promissory estoppel

• A substitute for consideration
• Three elements must exist for promissory estoppel to apply:
  1. A promise by the promisor that is reasonably expected to be relied upon by the promisee
  1. The promisee does in fact detrimentally rely on the promise.
  1. Injustice can be avoided only by enforcing the promise.
• A promise that induces action is binding without return consideration if justice is served.
• Example: A promise of a donation to a charity when the charity makes expenditures in anticipation of the donation but does not give return consideration to support the promise to donate. Promissory estoppel could be used to enforce the promise to donate to the charity even though the promise is not supported by consideration.

Question 12

4222.12

Answer 12

Executed contract: All parties to the contract have done all that they are obligated to do.

Question 13

4221.13

Answer 13

Unenforceable contract: A contract that will not be enforced by the court. Valid when made but made unenforceable by some later event, such as the running of the statute of limitations or discharge of the contract in bankruptcy.

Answer 14

Answer 15

Question 17

4221.19

Answer 17

Laws governing contracts for sale of real property: Common law rules apply.

Question 18

4221.20

Answer 18

Laws governing contracts for services (employment): Common law rules apply.

Question 19

4221.21

Answer 19

There are four elements necessary to have a valid contract:

• Agreement: Manifestation of mutual assent
• Consideration
• Legal purpose
• Competent parties

Question 20

4221.22

Answer 20

An agreement is a mutual understanding between two or more persons.

Question 21

4221.23

Answer 21

There must be a manifestation of mutual assent for the parties to be legally obligated on the contract.

Question 22

4221.24

Answer 22

Objective standard is used to determine agreement. This means what persons show by their conduct, not necessarily what is thought.

Question 23

4221.25

Answer 23

Normally, an agreement is reached by an offer and an acceptance of that offer.

Question 24

4221.26

Answer 24

An offer is a promise to do or refrain from doing something in the future provided the other party complies with the stated conditions.

Question 25

4221.27

Answer 25

Parties to an offer may be diagrammed as follows:

Question 26

4221.28

Answer 26

The offer is always a promise.

Question 27

4221.29

Answer 27

To have a valid offer, the following must be true:

• There must be contractual intent. Use the reasonable person objective standard. Ask, “Would a reasonable person based on the circumstances believe that an offer had been made?” An offer is not any of the following:
  1. A social invitation. “If you promise to come over to my house tonight, I promise to cook you a steak dinner.” This creates a social, not a legal, obligation.
  1. A statement made in obvious jest. “I will give a million dollars to anyone who will tell me the name of that song.”
  1. A statement made in anger, rage, or excitement. “I will give a million dollars to anyone who tells me the name of the person who stole that bike from me.”
  1. An invitation to negotiate further
• The offer must be definite and have a certainty of terms. Courts cannot enforce what cannot be determined. It need not be with absolute certainty but must be capable of determination with reasonable certainty.
  1. Usually need time of performance, price, what is to be done, and subject matter of the contract identified.
  1. Output contracts are OK. An output contract promises to sell all of a person’s production over a set period of time.
  1. Requirements contracts are OK. A requirements contract promises to buy all of a person’s requirements for the product over a set period of time.
  1. Failure to state a specific dollar price is OK, if the price can be objectively determined.

Example: I promise to sell you 1,000 bushels of corn at the market price next Thursday.
* The offer must be communicated to the offeree. It may be to an individual or to a group.

Question 28

4221.30

Answer 28

Advertisements: Attempts to solicit an offer from the reader. Advertisements are not definite enough to be an offer, even if it contains a stated price.

Question 29

4221.31

Answer 29

Quote: Invitation to make an offer - not an offer.

Question 30

4221.32

Answer 30

Bid: An offer.

Question 31

4221.33

Answer 31

Preliminary negotiations: Dickering before a final contract - not an offer.

Question 32

4221.34

Answer 32

An offer may be withdrawn (revoked) by notifying the offeree any time before acceptance.

Question 33

4221.35

Answer 33

Revocation of an offer by the offeror is effective when received by the offeree.

Question 34

4221.36

Answer 34

Rejection of an offer by the offeree is effective when received by the offeror.

Question 35

4221.37

Answer 35

An offer may not be assigned to anyone else.

Question 36

4221.38

Answer 36

Option contract: A contract entered to keep an offer open; the offer cannot be withdrawn without breach of contract during the agreed-upon time period.

Question 37

4221.39

Answer 37

An offer may be terminated by the following:

• Expiration of the time specified in the offer or a reasonable time if no time is mentioned
• Revocation received by the offeree before acceptance
• Rejection by the offeree (a counteroffer is a rejection combined with a new offer to the original offeror)
• Death of the offeror or offeree
• Insanity of the offeror or offeree
• Destruction of the subject matter relating to the offer without the fault of either party
• Intervening illegality—subsequent legislation making the offer or the resulting contract illegal (e.g., an offer to sell bourbon just before prohibition became effective)

Question 38

4221.40

Answer 38

Irrevocable offers are exceptions to the general rule that offers are revocable. These are some examples of irrevocable offers:

• Option contract—made irrevocable by a contract between the parties in which the offeror agrees to keep the offer open in return for some consideration from the offeree.
• Unilateral contract when the offeree has begun substantially to perform the contract. Revocation would be unfair to the party who has begun performance.
• Stated time of a written offer signed by a merchant even though there is no return consideration received in exchange for the promise. (UCC 2-205)

Question 39

4221.41

Answer 39

Acceptance is assent of the offeree to the terms of the offer.

Question 40

4221.42

Answer 40

Offer + Acceptance = Mutual assent

Question 41

4221.43

Answer 41

The acceptance must conform to the terms of the offer. An acceptance that adds terms to the original offer is a counteroffer. See UCC 2-207 for an exception for nonmaterial terms for contracts between merchants.

Question 42

4221.44

Answer 42

The acceptance must be communicated to the offeror. Acceptance is effective when dispatched if an authorized method is used even if it is not received by the offeror.

• Dispatch means to send.
• If the method of acceptance is specified, that is the only authorized method.
• If the method of acceptance is not specified, the following would be authorized methods:
  1. Same as the offeror used to convey the offer
  1. Customary method used in this type of transaction
  1. Prior method used between the parties in question

Answer 43

Question 44

4221.48

Answer 44

To create a contract, mutual assent (agreement) must be given. Real assent is lacking if a party is induced to contract by mistake, fraud, duress, or undue influence, in which case the wronged party can avoid the contract. A contract obtained by mistake, fraud, duress, or undue influence is voidable.

Question 45

4221.49

Answer 45

Fraud in the inducement is a false representation of a material fact intentionally made, justifiably relied upon, and resulting in injury.

Question 46

4221.50

Answer 46

Definitions

• Fact: It is not an opinion or a prediction of what will happen in the future. An opinion by an expert may be considered a fact. A fact is something that can reasonably be subject to exact knowledge.
• Material: It must be related to something of substance and must be important.
• Intentionally: Known by the speaker to be false.
• Justifiably: No better information available. If the party knows the statement is false, or could easily and should reasonably have checked the statement, the reliance is not justifiable.
• Injury: Some damages result from the wrong.

Question 47

4221.51

Answer 47

Fraud may be an act, an omission, a concealment, or a nondisclosure.

Question 48

4221.52

Answer 48

Silence alone is not fraud unless there is a duty to speak based on the relationship between the parties.

Answer 49

Question 50

4221.49

Answer 50

Fraud in the inducement is a false representation of a material fact intentionally made, justifiably relied upon, and resulting in injury.

Question 51

4221.50

Answer 51

Definitions

• Fact: It is not an opinion or a prediction of what will happen in the future. An opinion by an expert may be considered a fact. A fact is something that can reasonably be subject to exact knowledge.
• Material: It must be related to something of substance and must be important.
• Intentionally: Known by the speaker to be false.
• Justifiably: No better information available. If the party knows the statement is false, or could easily and should reasonably have checked the statement, the reliance is not justifiable.
• Injury: Some damages result from the wrong.

Question 52

4221.51

Answer 52

Fraud may be an act, an omission, a concealment, or a nondisclosure.

Question 53

4221.52

Answer 53

Silence alone is not fraud unless there is a duty to speak based on the relationship between the parties.

Question 54

4221.53

Answer 54

If the misrepresentation is innocent and not made with the intent to deceive, the injured party may rescind the contract, but cannot obtain damages for the tort of deceit. Deceit is the tort equivalent to fraud in the inducement for contracts.

Question 55

4221.54

Answer 55

Fraud in the execution results from the substitution of one document for another. The contract so executed is void because there is no consent to contract. The person signing either does not intend the signature to show agreement to a contract or is misled, through no negligence of their own, as to the contents of the writing.

Question 56

4221.55

Answer 56

Duress is a wrongful act that compels contractual agreement through fear. Duress is subjective (what a person thinks), not objective (what a person shows). Age, sex, experience, intelligence, and relation of the parties must be considered.

Question 57

4221.56

Answer 57

The acts leading to duress need not be illegal, although they often are. The threats can be against the individual, someone closely related to the individual, or their property.

• Threat of a civil suit is not duress. A person has the right to file a civil suit.
• Threat of criminal suit may be duress.
• Mere argument, advice, persuasion, or annoyance is not duress.
• Duress makes the contract voidable.

Question 58

4222.28

Answer 58

Sale of goods

• A contract for the sale of goods for a price of $500 or more must be in writing to be enforceable.
• Exceptions (see UCC 2-201):
• Between merchants, an oral contract is enforceable if one of the merchants sends a written confirmation to the other and receives no objection within 10 days after sending it. Both merchants are bound on the oral contract.
  1. If the goods are specially manufactured (for a unique purpose and cannot be resold as shelf items), the oral contract is enforceable if the manufacturer has made a substantial start on their manufacture before the other party tries to withdraw from the contract.
  1. If the goods have been paid for and accepted or received and accepted, the oral contract is enforceable. If there has been only a partial acceptance of the goods or a partial payment, the contract is enforceable only to that extent.
  1. If the person admits in court to have contracted with the plaintiff, the contract is enforceable to the quantity admitted.

Question 59

4222.35

Answer 59

Parol-extrinsic: Evidence about the agreement that is not in the written agreement. It is outside the agreement and usually oral.

Question 60

4222.36

Answer 60

Parol evidence rule. Extrinsic (oral or written) evidence is not admissible to add to, alter, or vary the terms of a written contract. The reason is that all preliminary negotiations are merged into the writing.

Question 61

4222.37

Answer 61

It is acceptable to make an oral contract and a written contract at the same time if the subjects of the contracts are different.

Question 63

What is a divisible contract?

Promises that are not dependent on each other; partial performance is allowed.

An unenforceable contract

A bilateral contract

Common law does not have the concept of a divisible contract.

Answer 63

Question 66

4221.51

Answer 66

Fraud may be an act, an omission, a concealment, or a nondisclosure.

Question 67

4221.52

Answer 67

Silence alone is not fraud unless there is a duty to speak based on the relationship between the parties.

Question 68

4221.53

Answer 68

If the misrepresentation is innocent and not made with the intent to deceive, the injured party may rescind the contract, but cannot obtain damages for the tort of deceit. Deceit is the tort equivalent to fraud in the inducement for contracts.

Question 69

4221.54

Answer 69

Fraud in the execution results from the substitution of one document for another. The contract so executed is void because there is no consent to contract. The person signing either does not intend the signature to show agreement to a contract or is misled, through no negligence of their own, as to the contents of the writing.

Question 70

4221.55

Answer 70

Duress is a wrongful act that compels contractual agreement through fear. Duress is subjective (what a person thinks), not objective (what a person shows). Age, sex, experience, intelligence, and relation of the parties must be considered.

Question 71

4221.56

Answer 71

The acts leading to duress need not be illegal, although they often are. The threats can be against the individual, someone closely related to the individual, or their property.

• Threat of a civil suit is not duress. A person has the right to file a civil suit.
• Threat of criminal suit may be duress.
• Mere argument, advice, persuasion, or annoyance is not duress.
• Duress makes the contract voidable.

Question 72

4221.57

Answer 72

Undue influence is unlawful control exercised by the dominant party, which is a substitute for the free will of the dependent party.

Question 73

4221.58

Answer 73

Undue influence is similar to duress but is generally applied to persons in a close confidential relationship, such as the following:

• Husband and wife
• Parent and child
• Guardian and ward
• Trustee and beneficiary

Question 74

4221.59

Answer 74

Courts are not strict in determining what is a confidential relationship.

Question 75

4221.60

Answer 75

If there is a transaction where the dominant party has gained at the expense of the dependent party, the undue influence is presumed, and the burden of proof is upon the dominant party to prove otherwise.

Question 76

4221.61

Answer 76

Question 77

4221.62

Answer 77

Unilateral mistake. One party is mistaken. There is a good contract so long as the other party is not aware of the mistake and has not entered the contract to take advantage of the mistaken party.

Question 78

4221.63

Answer 78

A mistake as to value is an ordinary risk in the normal business transaction. A contract cannot generally be avoided for a mistake in value.

Question 79

4221.64

Answer 79

A mistake of law as to the parties’ legal rights under the contract is not grounds for rescission.

Question 80

4221.65

Answer 80

If a person knowingly and voluntarily signs a document, the person is conclusively presumed to know its contents and assent to them. The person cannot avoid the contract for a mistake.

Question 81

4221.66

Answer 81

If the court finds as a matter of law that a contract is unconscionable, it may reform the contract to serve justice (see UCC 2-302).

Question 82

4221.67

Answer 82

If the parties are in unequal bargaining positions, the courts are more likely to find an unconscionable contract and will allow the party in the inferior position to avoid the obligation.

Question 83

4221.68

Answer 83

An unconscionable contract is a contract that no rational person would enter into and no ethical person would want to impose on another person.

Question 84

4222.01

Answer 84

Consideration: A bargained-for exchange in which there is legal detriment to the promisee or legal benefit to the promisor.

Answer 85

Question 86

4222.04

Answer 86

A contract must be supported by consideration to be valid and enforceable. It is one of the four elements of a contract.

Answer 87

Answer 88

Answer 89

Answer 90

Question 91

4222.25

Answer 91

Certain contracts must be in writing and signed by the party to be charged or the contract is unenforceable if the statute of frauds is raised as a defense.

Question 92

4222.20

Answer 92

Minors

• A minor’s contract is voidable at their option, but the other party to the contract may not avoid the contract.
• Generally, the age of majority, when the individual is no longer a minor, is the age of 18.
• Contracts by a minor for necessities:
  1. A minor will still have to pay the reasonable value of necessities. This may or may not be the same as the contract price. This is a quasi-contractual obligation imposed by the courts to prevent unjust enrichment.
  1. What is a necessity is a question of fact. Necessities have always been considered food, clothing, lodging, and medical services not supplied by a parent. Items for health, education, and transportation may be necessities in some cases.
  1. In order to recover, the burden of proof as to what is a necessity rests with the adult seller.
• Disaffirmance—getting out of the contract
  1. A minor may disaffirm contracts while still a minor and for a reasonable time after reaching majority.
  1. It may be an express or an implied disaffirmance.
  1. If a minor has the goods, the minor must return them to the seller to disaffirm a contract for the sale of the goods. The goods can be in any condition. The right to disaffirm is not conditioned on being able to return the goods.
  1. A disaffirmance of a conveyance of land can only be done after the minor reaches majority; however, the minor who sold land and disaffirmed the contract can retake the land before reaching the age of majority.
  1. A minor who has sold goods may not be able to regain the goods even if they disaffirm. The Uniform Commercial Code (UCC) allows a person with a voidable title to transfer good title to a good-faith purchaser for value. If the adult has sold the goods to someone else in good faith and for value, the minor cannot get them back. The minor can get the money equivalent to the value of the goods.
  1. A minor is liable for torts if the torts are independent of the contract. Misrepresentation of age is a good example of a tort that precedes, and is independent of, the contract of sale.
  1. Contracts a minor may not be able to disaffirm include the following (it varies by state):
  Educational loans
  Court-approved contract (court has already checked to see that the contract is fair)
  Enlistment contract
  Insurance contract
  Medical care
  Bank account
  Stock transfer
  Business contract
  Marriage contract
• Ratification
  1. A person is liable on a contract made during their minority if they ratify the contract. A minor can ratify a contract only after reaching the age of majority.
  1. Ratification may be expressed in words or implied by actions.
  1. Retention of goods for an unreasonable time after reaching majority age can amount to ratification of the contract.
• A parent is not liable for the minor’s contracts unless the minor is acting as the parent’s agent.
• A minor’s contracts are voidable, not void.

Question 93

4222.25

Answer 93

Certain contracts must be in writing and signed by the party to be charged or the contract is unenforceable if the statute of frauds is raised as a defense.

Question 94

4222.26

Answer 94

The party to be charged is the party that is being sued to be held liable on the contract.

Question 95

4222.27

Answer 95

The writing may be a note, a memorandum, an informal notification, or more than one writing. The writing must meet the test of reasonable certainty and should contain the name of the parties, subject matter, and material terms and conditions.

Signed checks satisfies the written requirement

Question #102742

Question 96

4222.28

Answer 96

Sale of goods

• A contract for the sale of goods for a price of $500 or more must be in writing to be enforceable.
• Exceptions (see UCC 2-201):
  1. Between merchants, an oral contract is enforceable if one of the merchants sends a written confirmation to the other and receives no objection within 10 days after sending it. Both merchants are bound on the oral contract.
  1. If the goods are specially manufactured (for a unique purpose and cannot be resold as shelf items), the oral contract is enforceable if the manufacturer has made a substantial start on their manufacture before the other party tries to withdraw from the contract.
  1. If the goods have been paid for and accepted or received and accepted, the oral contract is enforceable. If there has been only a partial acceptance of the goods or a partial payment, the contract is enforceable only to that extent.
  1. If the person admits in court to have contracted with the plaintiff, the contract is enforceable to the quantity admitted.

Question 97

4222.31

Answer 97

Transfer of an interest in land

1. Transfer of any interest in real property must generally be in writing.
2. This provision would include sale of real estate, giving a lien (mortgage) on the real estate, certain leases of real estate, and granting an easement.
3. Agreements to build on real estate, do other work such as landscaping, or to lend money to buy real estate do not generally have to be in writing to be enforceable.
4. Exception: An oral contract for the sale of real property is enforceable if the buyer takes possession and/or makes valuable improvements on the land. This is called the doctrine of part performance. A valuable improvement might be building a house on the land.

Question 98

4222.33

Answer 98

A promise to pay the debt of another must be in writing to be enforceable.

This is called suretyship.
The person making the promise to pay the debt of another is called a surety or a guarantor.
The promise must be to the creditor. This is referred to as a collateral promise rather than an original promise.
An oral promise to the debtor to pay the debtor’s debt is enforceable even if oral. It was not made to the creditor and is considered an original promise.
Exception: An oral promise made to the creditor to pay the debt of the debtor made solely to benefit the person making the promise. It is called the main purpose doctrine or the leading objective rule.

Question 99

4222.36

Answer 99

Parol evidence rule. Extrinsic (oral or written) evidence is not admissible to add to, alter, or vary the terms of a written contract. The reason is that all preliminary negotiations are merged into the writing.

Question 100

4222.37

Answer 100

It is acceptable to make an oral contract and a written contract at the same time if the subjects of the contracts are different.

Question 101

4222.44

Answer 101

Effect of assignment

• Liability of assignor: Still liable to the nonassigning party on the contract for the promised consideration.
• Liability of assignee: Not liable just because of receiving the assignment. The nonassigning party may be able to sue the assignee if the nonassigning party is a creditor beneficiary of the contract between the assignor and assignee.
• Rights of assignee: Assignee gets all the rights of the assignor. Any defenses the nonassigning party has against the assignor can be asserted against the assignee (up to the amount of the assignment).
• To protect the right to receive performance, the assignee should notify the nonassigning party of the assignment. If there is no notice and the nonassigning party performs for the assignor, their duty under the contract is discharged.
• If no notice is given and the nonassigning party performs for the assignor, the assignee can sue the assignor for damages.

Question 102

4223.14

Answer 102

Accord and satisfaction

• Accord: Agreement between the two contracting parties where some different performance will replace the original performance. An accord by itself does not discharge the contractual obligation.
• Satisfaction: Carrying out the accord
• An accord and satisfaction discharges the contractual obligation.

Question 103

4223.22

Answer 103

Several contracts

• Severally = individually
• Two or more persons who separately agree to perform the same obligation may be sued individually.
• If one of several obligors dies, his estate is liable on the obligation.
• A release of one obligor has no effect on the other.
• “Each of us promises” or “We severally promise” is a several contract.

Question 104

4231.24

Answer 104

A composition agreement is an agreement between the debtor and the creditors whereby the creditors receive a pro rata portion of the debt owed them in exchange for a promise to forgive the rest of the debt.

Question 105

4233.04

Answer 105

The law of secured transactions comes from Article 9 of the Uniform Commercial Code (UCC). A revised Article 9 has been adopted by all of the states and is the basis for the following discussion. Revised Article 9 applies to transactions that create a security interest in tangible or intangible personal property or fixtures. A fixture is personal property that is attached to real property. A central air conditioning unit that is installed in a house would be an example of a fixture.

Question 106

4251.01

Answer 106

Creation of a partnership

• No formalities are required; it is a voluntary contractual relationship. A partnership can be created by express agreement or through an implied agreement. A partnership can also generally be created either orally or in writing.
• Intent governs. It can be by express words (oral or written) or implied by the actions of the parties.
• Tests of existence:
  1. The sharing of net profits and losses creates a rebuttable presumption that a partnership exists. This presumption can be overcome by showing that profits are being shared for another reason. The following are examples:
• Repayment of a debt owed to the other party by way of the transfer of a portion of the profits
• Wages or rent owed to another party being paid as a portion of the profits
• Annuity to a deceased partner’s spouse (Thus the spouse is not a partner simply because the spouse is receiving an annuity payment based on profits.)
• Interest on a loan owed to another party being paid as a portion of the profits
• Consideration for the sale of goods being paid from the profits
  2. Co-ownership of property—this does not of itself establish that a partnership exists but is a factor courts look at in determining if the relationship between the parties is a partnership.
  3. Joint control and management is another factor considered. Courts often view delegating management responsibilities or giving up control as an exercise of joint control.

Question 107

4251.04

Answer 107

Partnership agreement

• A partnership agreement is also sometimes referred to as articles of partnership and articles of co-partnerships.
• A formal written agreement creating the partnership relationship is not required, but it is a good idea to prevent disputes between or among the partners.
• Generally, a partnership agreement can be oral. If any part of the partnership agreement falls under the statute of frauds, however, a writing is needed as a practical matter to make the agreement enforceable.
• Example: Caitlin and Jennifer enter a partnership agreement and specify that the duration of the partnership will last for a period of more than one year (i.e., for two years). For the agreement to be enforceable, a writing is required under the statute of frauds.
• The Uniform Partnership Act (UPA) fills in the rules regarding the relationship between or among the partners unless the agreement specifies a different rule. Thus, the UPA operates as a gap filler.

Question 108

4251.11

Answer 108

Entity

• A corporation is an organization formed under state law or federal law that is legally separate and distinct from those persons who own the corporation. This means the shareholders are not liable for corporate obligations except to the extent of their investment in the corporation.
• Due to its separate legal existence, the corporation is also generally not liable for the personal obligations of its shareholders, directors, officers, or employees.
• The corporate entity is recognized as being separate except when it is used to defeat public convenience, perpetrate fraud, evade the law, or commit a crime.
• Ignoring the corporate entity is referred to as “piercing the corporate veil.” When this is done, the shareholders can be held liable by the creditors of the corporation for corporate obligations.
• For courts to ignore the corporate entity and “pierce the corporate veil,” two elements must generally be present:
  1. Domination by a shareholder or group of shareholders. The idea here is that the shareholder or shareholders control the corporation for their own benefit in an attempt to insulate themselves from liability for wrongdoing.
  2. Improper use of the corporation. Various types of improper use by the dominating shareholder can cause the corporation to be disregarded as a separate entity. For example:
  i. Using the corporation to perpetrate a fraud
  ii. Thin capitalization of the corporation; here the corporation is formed as a “dummy” entity with insufficient capital to meet reasonably expected business obligations.
  iii. Shareholders looting the corporation to the detriment of the corporation’s creditors, such as having the corporation sell assets to a shareholder for a price far below fair market value
• The corporation can hold property in the corporation’s name.
• The corporation can sue and be sued in the corporation’s name.
• Contracts can be entered in the corporation’s name with the corporation as a party to the contract.

Question 109

4222.27

Answer 109

The writing may be a note, a memorandum, an informal notification, or more than one writing. The writing must meet the test of reasonable certainty and should contain the name of the parties, subject matter, and material terms and conditions.

Question 110

4222.36

Answer 110

Parol evidence rule. Extrinsic (oral or written) evidence is not admissible to add to, alter, or vary the terms of a written contract. The reason is that all preliminary negotiations are merged into the writing.

Question 111

4251.01

Answer 111

Creation of a partnership

• No formalities are required; it is a voluntary contractual relationship. A partnership can be created by express agreement or through an implied agreement. A partnership can also generally be created either orally or in writing.
• Intent governs. It can be by express words (oral or written) or implied by the actions of the parties.
• Tests of existence:
• The sharing of net profits and losses creates a rebuttable presumption that a partnership exists. This presumption can be overcome by showing that profits are being shared for another reason. The following are examples:
• Repayment of a debt owed to the other party by way of the transfer of a portion of the profits
• Wages or rent owed to another party being paid as a portion of the profits
• Annuity to a deceased partner’s spouse (Thus the spouse is not a partner simply because the spouse is receiving an annuity payment based on profits.)
• Interest on a loan owed to another party being paid as a portion of the profits
• Consideration for the sale of goods being paid from the profits
• Co-ownership of property—this does not of itself establish that a partnership exists but is a factor courts look at in determining if the relationship between the parties is a partnership.
• Joint control and management is another factor considered. Courts often view delegating management responsibilities or giving up control as an exercise of joint control.