Business Law: Part 1

Question 1

What is a revocation by offeror?

Answer 1

Revocation by Offeror:
- The general rule is that the offeror can revoke an offer any time before acceptance by communicating the revocation to the offeree.
- The revocation can be direct (e.g., a phone call to the offeree withdrawing the offer) or indirect, where the offeree received correct information that the offeror no longer wants to make the offer
- The revocation is generally effective when received by the offeree.

Question 2

What is the consideration requirement to form a contract?

Answer 2

The consideration requirement to form a contract has been satisfied when the consideration exchange by the parties are legally sufficient, which means something that the law recognizes as consideration.

Question 3

What is a Unilateral contract?

Answer 3

In a unilateral contract situation, only one promise is made—by the offeror. By the terms of the offer, the offeree can accept only by performing the act requested in the offer; the offer cannot be accepted by making a counter-promise.

Unilateral contract - is formed when a promise is exchanged. For example, Kay promised to pay for Hammer’s education in exchange of Hammer’s obtaining rare artifacts and Hammer performed. Thus, a unilateral contract was formed.

Question 4

What is the validity of the contract regarding a proposed agreement for service or sale of goods?

Answer 4

Validity of the contract regarding a proposed agreement for services (governed by common law) - an offer must state essential terms of the cotract in a definite and certain way. The price is an essential contract term.

Validity of the contract regarding a proposed agreement for the sale of goods, a reasonable price term would be implied by the Uniform Commercial Codes Sales Article.

Question 5

If the offer does not state that acceptance is effective upon receipt and does not specify the means of acceptance, when is acceptance effective?

Answer 5

Under common law, if the offer does not state that acceptance is effective upon receipt and does not specify the means of acceptance, the offeree may invoke the “mailbox rule” and make the acceptance effective upon dispatch by using any reasonable means of acceptance.

Question 6

What happens when the offeror dies prior to acceptance of the offeree?

Answer 6

The death of an offeror prior to acceptance terminates the offer by operation of law without notice to the offeree.

Question 7

When can consideration becomes binding?

Answer 7

Consideration to be binding must be “legally sufficient.” Some of the more common examples of consideration include money, a promise, acting, not acting, etc.

Question 8

What is Parol Evidence Rule?

Answer 8

Parol evidence rule - The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one intended as the complete agreement).

However, the parol evidence rule does not prohibit introduction of subsequent agreements.

Question 9

What are the effective methods of ratifying a contract entered into by a minor?

Answer 9

Effective methods of ratifying a contract entered into by a minor:
- A minor can disaffirm (void) any contract until a reasonable time AFTER reaching the age of majority.
- Implied ratifying the contract AFTER reaching the age of majority.
- Expressly ratifying the contract AFTER reaching the age of majority
- Failing to disaffirm the contract within a reasonable time AFTER reaching the age of majority.

Question 10

How can a minor ratify a contract upon reaching his/her majority?

Answer 10

On reaching majority, a minor may ratify a contract in any of the following ways:
- The term “ratification” refers to the process by which a minor by his/her action or “inaction” legally accepts an ENTIRE contract after he/she reaches the age of majority.
- Failing to disaffirm within a reasonable time after reaching majority.
- Orally ratifying the entire contract.
- Acting in a manner that amounts to ratification.
- Upon reaching the age of majority, a person can become bound on contracts entered into as a minor through ratification by retaining the benefits of the contract.

Question 11

Is fraud in the inducement void or voidable?

Answer 11

Voidable contract - If a person is defrauded into entering into a contract because its terms or the surrounding circumstances are not as represented (that is, fraud in the inducement), the contract is merely voidable.

Question 12

What are contracts considered void?

Answer 12

Void Contract
Contracting with a person under guardianship - Entering into a contract with a person who is without capacity and has a guardian appointed (that is, after a court has declared the person incompetent) renders the contract void.

Fraud in the execution - Fraud in the execution (that is, the party did not know that he was signing a contract) renders a contract void.

Physical coercion - (or the threat of physical coercion) is a type of duress that renders a contract void rather than voidable.

Question 13

What is the difference between fraud in execution versus fraud in the inducement?

Answer 13

The difference between fraud in the execution versus fraud in the inducement
The key difference between fraud in the execution and fraud in the inducement lies in the nature of the deception and the point at which it occurs:

Fraud in the Execution (VOID)
Nature of Deception: The signer is deceived about the nature or contents of the document they are signing.

Understanding: The signer does not realize they are entering into a contract or the true nature of the contract.

Effect: The contract is typically considered void because there was no true agreement or “meeting of the minds”.

Fraud in the Inducement (VOIDABLE)
Nature of Deception: One party uses deceit or trickery to persuade the other party to enter into a contract.

Understanding: The deceived party understands they are entering into a contract but is misled about the facts or terms that induce them to agree.
Effect: The contract is voidable, meaning the deceived party can choose to either enforce or void the contract on the fraud is discovered.

Example Scenarios
Fraud in the Execution: If someone is tricked into signing a document they believe is a simple receipt but is actually a legally binding contract, this is fraud in the execution.
Fraud in the Inducement: If someone is persuaded to sign a contract based on false promises or misrepresentations about the benefits or terms of the contract, this is fraud in the inducement.

Question 14

What is the impact of status of limitations?

Answer 14

Impact of status of limitations:
- The running of the statute of limitations bars access to judicial remedies, i.e., it makes the contract unenforceable, but does not make the contract invalid or void in any way.
- Once the period of the statute of limitations has expired, a party cannot be sued, but the contract is valid. The running of the statute of limitations
does not make the contract void; it only makes it unenforceable.
- The expiration of the period of the statute of limitations does not extinguish the contract’s underlying obligation; it merely bars judicial methods to enforce the contract.
- A cause of action barred by the statute of limitations may be revived e.g., by sending a written promise to perform under the contract.

Question 15

What is unenforceable contract?

Answer 15

Unenforceable contract
An unenforceable contract is a valid agreement that, for specific reasons, cannot be enforced by a court. This means that while the contract exists and the parties may choose to honor it, the court will not compel them to do so if one party fails to fulfill their obligations.

Key Points:
Validity: The contract is legally valid but has some defect or issue that prevents it from being enforceable in court.

Court’s Role: The court will not enforce the contract, meaning it won’t require the parties to perform their contractual duties or provide remedies for breach.

Common Reasons: Some common reasons a contract might be unenforceable include lack of capacity (e.g. one party is minor), coercion, undue influence, misrepresentation, or the contract being against public policy.

Example:
If a minor enters into a contract, it might be considered unenforceable because minors typically lack the legal capacity to enter into binding agreements.

Question 16

Under the statue of frauds, what are the contracts that require to be in writing?

Answer 16

MY LEGS (marriage, year, land, executors, goods and suretyship)

M - Marriage
Y - Contracts which by their terms cannot be performed within a year
L - Contracts involving interest in land (eg sales and leases of real property for more than a year)
E - Contracts by executors or similar representatives to pay estate debts out of personal funds
G - Contracts for the sale of goods for $500 or more
S - Contracts to act as surety (ie to pay the debt of another).

**Services can be oral regardless of price so long as the work can be done within a year.

Question 17

What is accord?

Answer 17

An accord is an agreement between contracting parties that a contractual duty can be discharged through a different performance. The agreement is the accord. Satisfaction arises when the substitute performance is completed—and that discharges both the accord and the original duty.

Question 18

What is novation?

Answer 18

A novation is an agreement among two parties to a contract and a third party to substitute the third party for one of the two parties and to release that party from the contract. As this is by the agreement of the parties, it is not by operation of law.

Question 19

What is Specific Performance?

Answer 19

Specific performance is a court order to perform under the terms of a contract. Generally, it is available only in contracts for unique or rare property. A patent, by definition, is unique. Therefore, specific performance would be available to enforce a contract for the sale of a patent.

Question 20

Statute of Frauds - require the contract to be in writing if the amount of goods is greater than $500. However, there is an exception under Sales Article (UCC 2-201) with regard to “confirmatory memo.” What is a confirmatory memo?

Answer 20

The confirmatory memo rule for contracts between merchants - which provides that between merchants, if one merchants send the other a memo of their contract sufficient to bind the sender, it will BIND the recipient as well unless the recipient objects within a reasonable time.

Question 21

Status of Frauds requires contracts involving the sales of goods to be in writing if they exceed $500 (MYLEGS - refer to R5-2 tab). What are the exceptions to this rule (that is oral writing is enforceable)?

Answer 21

SWAP
S - specially manufactured (custom) goods
W - written confirmation between merchants
A - admission in court
P - performance

Question 22

What is express warranty?

Answer 22

Express warranty
- MUST be part of the basis of the bargain
- can be made by any seller (not limited to merchants)
- may be oral or written

Question 23

What is warrant of merchantability?

Answer 23

Warrant of merchantability - The warranty of merchantability is implied whenever a merchant (one who ordinarily sells goods of the kind sold) sells goods. UCC 2-314
- implied warrant under UCC that guarantees that goods sold by a merchant are fit for their ordinary and intended purpose (eg when you buy a toaster from a store, the warranty of merchantability ensures that the toaster will toast bread as expected. If it doesn’t, you may have legal recourse to reutrn the product or seek a remedy.

Question 24

What is implied warrant of fitness?

Answer 24

Implied warranty of fitness - The implied warranty of fitness for particular purpose arises when the seller knows the particular purpose for which the buyer will use the goods and that the buyer is relying on the seller to choose suitable goods.
- eg If a buyer tells a seller that they need a paint that will withstand outdoor weather conditions, and the seller recommends a specific type of paint, there is an implied warrant that the paint will be suitable for outdoor use.

Question 25

When does a raincheck becomes a firm offer?

Answer 25

Raincheck becomes a firm offer when it involves:
- sale of goods
- seller was a merchant
- in writing and signed by the merchant
- writing includes words of firmness (eg. promise to keep the offer open)
*if no time is stated, the offer is irrevocable, up to three months

Question 26

How does an offer of goods consider as accepted?

Answer 26

Offer can be accepted by:
- shipment of goods
- shipment of non-confirming goods can constitute both an acceptance and an immediate breach unless the seller had notified the buyer that nonconforming goods would be shipped as an accommodation.
*accommodation rules should have reasonable notice

Question 27

What are the available rights of the buyer or seller when the seller or buyer breaches a contract?

Answer 27

Question 28

What is anticipatory repudiation?

Answer 28

Failure to give adequate assurances when reasonably demanded is a form of anticipatory repudiation. It constitutes a breach and discharges the buyer.

Anticipatory repudiation - also known as anticipatory breach, occurs when one party to a contract indicates, through words or actions, that they will not fulfill their future obligatioins under the contract. This allows the non-breaching party to take legal action before the actual breach occurs.

Anticipatory repudiation - is considered a material breach of contract, giving the nonbreaching party the right to sue immediately (among other options).

Question 29

What is specific performance?

Answer 29

Specific performance - when the goods involved are unique or in other proper circumstances. (eg. Circumstances are proper for specific performance because Eagle Corporation cannot obtain substitute goods and, without the goods Eagle’s plant may have to close.

Question 30

When an agent breaches her fiduciary duty, what can the principal do?

Answer 30

The principal can:
- terminate the agency
- receive the remedy of a constructive trust - ensure that the principal can recover secret profits obtained by the agent because of the wrongful conduct. (A constructive trust is a legal remedy imposed by a court to address situations where someone is wrongfully obtained or holds property that they should not possess. This type of trust is not created by a formal agreement but is instead established by the court to prevent unjust enrichment and to ensure fairness.)

Question 31

What happens when the principal-agent relationship is NOT contractual?

Answer 31

• recovery for future damages
• recovery for past services
• withholding further performance

*Specific performance is a court order to fulfill the terms of a contract. If the principal-agent relationship is not contractual, there are no contractual terms to fulfill.

Question 32

Is the actual authority automatically terminated upon the death of either the principal or the agent? What happens if the agent’s authority is coupled with interest?

Answer 32

Ordinarily, actual authority is terminated automatically upon the death of either the principal or the agent. However, there is an exception to this rule if the agent’s authority is coupled with an interest. An agent’s authority that is coupled with an interest is irrevocable, even upon the principal’s death. In this case, the bank’s authority is coupled with an interest because it collects payments from the tenants and applies the payments to the borrower’s loan.

An agency coupled with an interest refers to a special type of agency relationship where the agent has a legal interest in the property or subject matter of the agency. This interest gives the agent certain right and protections that are not typically present in a standard agency relationship.
Legal Interest - The agent has a legal stake in the property they are managing for the principal. This could be an estate or some other interest in the property.

Irrevocabiility - Unlike regular agency relationships, an agency coupled with an interest cannot be easily revoked by the principal. It remains in effect until the agent’s interest is fully realized.

Protection against Termination - This type of agency is not terminated by the death or incapacity of the principal, which is a significant difference from other types of agency relationships.

Question 33

What is the extent to which an agent is liable on a principal’s contract with third parties?

Answer 33

• disclosed - existence and identity of the principal are known
• partially disclosed - existence is known but identity is not known
• undisclosed - neither the existence nor the identity of the principal is known

Question 34

What are the types of agency relationships?

Answer 34

Types of agency relationships
- formal
- mutual
- informal

Question 35

What are the types of agents in agency relationship?

Answer 35

Types of agents in agency relationship
- general
- special
- gratuitous

Question 36

What are the types of agent authority to act on behalf of a principal?

Answer 36

Types of agent authority to act on behalf of a principal
- actual - Authority the agent reasonably believes that he or she has based on communications from the principal
- express
- implied

Question 37

What is actual authority?

Answer 37

Actual authority - arises from the communications between the principal and the agent.

Question 38

What is apparent authority?

Answer 38

Apparent authority - arises from the communications between the principal and the third party with whom the agent deals

Question 39

What is Corporation by Estoppel?

Answer 39

Corporation by estoppel is a legal doctrine that prevents a person or entity from denying the existence of a corporation after having treated it as such in their dealings.

Estoppel Principle - If someone contracts or does business with an entity believing it to be a corporation, they cannot later claim that the entity is not a corporation to avoid obligations or liabilities.

Equitable Remedy - This doctrine is applied to prevent unfairness and injustice, ensuring that parties cannot benefit from treating an entity as a corporation and then deny its corporate status when it suits them.

Defective Incorporation - it often applies in situations where a business has attempted to incorporate but failed to meet all legal requirements. Despite the defective incorporation, third parties who have dealth with the business as a corporation are estopped from denying its corporate existence.

Question 40

What is the meaning of subrogation, contribution and exoneration in terms of Surety?

Answer 40

Subrogation is the right a surety has by which the surety succeeds to the creditor’s rights against the principal when the surety pays the principal’s obligations. Subrogation (the right of a surety to gain the creditor’s rights once the surety has made full payment) is not available prior to payment.

Contribution (right of a co-surety) after payment, to demand a pro rata payment from the other co-sureties (is not available prior to payment).

Exoneration is the right a surety prior to payment to get a court order demanding that the debtor pay. Note that this right is available to the surety prior to payment of the surety.

Question 41

What is tender of performance?

Answer 41

Tender of performance by the principal debtor completely releases the surety, even a compensated surety.

Tender of performance - this refers to the principal debt offering to perform their obligation, such as paying a debt or completing a contract.

Question 42

What is Composition of Creditors?

Answer 42

Composition of creditors - A composition of creditors is an agreement between a debtor and at least two creditors that the creditors will take less than full payment to discharge the debts owed by the debtor to the creditors who participate in the composition agreement.

Question 43

What are types of prejudgment?

Answer 43

Types of Prejudgment:
- Attachment - seizing the debtor’s property to ensure it is available to satisfy a future judgment (Writ of attachment is a court order that allows a creditor to seize a debtor’s property before a final judgment is made in a lawsuit.)
- Garnishment - withholding a portion of the debtor’s wages or bank account funds
- Replevin - recovering specific property that the creditor claims a right to
- Injunction - A court order preventing the debtor from disposing of or transferring assets

Question 44

What is garnishment and it’s type?

Answer 44

Garnishmnet is an order to a third person who holds property of the debtor to turn the property over to a creditor. The property involved usually are wages and/or other property owed by the third person to the debtor.

Types of Garnishment:
Wage Garnishment - A portion of the debtor’s earnings is withheld by their employer and sent to the creditor.
Bank Account Garnishment - Funds are taken directly from the debtor’s bank account.
Prejudment remedies are legal actions that a creditor can take to secure a debtor’s assets before a final judgment is made in a lawsuit.

Question 45

What is included in Article 9 of the Uniform Commercial Code?

Answer 45

Article 9 of the Uniform Commercial Code (secured transactions) specifically includes any sale of accounts receivable.

Secured transactions under Article 9 of the UCC includes various aspect related to security interest in PERSONAL PROPERTY, which can include tangible assets like inventory, equipment, and vehicles, as well as intangible assets like accounts receivable, patents, and trademarks.

Secured transactions per article 9 of the UCC excludes the following:
- real estate transactions
- wage assignemnts
- certain statutory liens (e.g. landlord’s lien, sale of chattel paper as part of the sale of a business out of which it arose)

Question 46

What are the Priority of Security Creditors?

Answer 46

Priority of Secured Creditors
Secured creditors will be prioritized, and collateral will thus, become distributed based on a prioritized list as follows:

Priority #1- Consumers purchasing the collateral from a merchant during the ordinary course of business.

Priority #2- Parties who have obtained a perfectly purchased money security order (PMSI).

Priority #3 - Judicial and artisan liens that have become attached to the secured property.

Priority #4 - Parties who have obtained unperfectly perfected purchased money security order (Non-PMSI).

Priority #5 - The debtor.