Chapter 12 Notes

Question 1

The value given in return for a promise. Broken down into two parts:

1. Something of legally sufficient value must be given in exchange for a promise.
2. There must be a bargained-for exchange.

Answer 1

Consideration

Question 2

The consideration must be something of value in the eyes of the law. It may consist of:

1. A promise to do something that one has no prior legal duty to do.
2. The performance of an action that one is otherwise not obligated to undertake.
3. The refraining from an action that one has a legal right to undertake (called a forbearance).

Answer 2

Legally Sufficient Value

Question 3

The act of refraining from an action that one has a legal right to undertake.

Answer 3

Forbearance

Question 4

The promise for a promise. Each of these promises consitiutes consideration for a contract.

Answer 4

Consideration in Bilateral Contracts

Question 5

A promise for an act. The act is consideration.

Answer 5

Consideration in Unilateral Contracts

Question 6

The second element for consideration. It must provide basis for the bartain struck between the contracting parties. The item of value must be given or promised by the promisor (offeror) in return for the promisee’s promise or performance.

• This element distinguishes contracts from gifts.

Answer 6

Bargained-For Exchange

Question 7

Generally concerns the fairness of the bargain. Involves “how much” consideration is given.

• The general rule
• When voluntary consent may be lacking

Answer 7

Adequacy of Consideration

Question 8

A court will not question the adequacy of consideration based solely on the comparative value of the things exchanged. Something need not be of direct economic or financial value to be considered legally sufficient consideration. In many situations, the exchange of promises and potential benefits is deemed to be sufficient consideration.

• Doctrine of freedom of contract

Answer 8

The General Rule

Question 9

Courts leave it up to the parties to decide what something is worth, and parties are usually free to bargain as they wish.

• If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with frivolous suits.

Answer 9

Doctrine of Freedom of Contract

Question 10

An exception to the general rule for adequacy of consideration.

• A large disparity in the amount or vaue of the consideration exchanged my raise a red flag for a court to look more closely at a bargain.
• Inadequate consideration can indicate that fraud, duress, or undue influence was involved.
• It is the judge’s task to make certain that there was not some defect in the contract’s formation that negated voluntary consent.

Answer 10

When Voluntary Consent May be Lacking

Question 11

• Preexisting duty
  
  • Unforseen difficulties
  • Rescission and new contract
• Past consideration
• Illusory promises

Answer 11

Agreements that Lack Consideration

Question 12

• Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration.
• If a party is already bound by a contract to perform a certain duty, that duty cannot serve as consideration for a second contract.
• Unforseen difficulties
• Rescission and new contract

Answer 12

Preexisting Duty

Question 13

If extraordinary difficulties arise that were totally unforseen at the time the contract was formed, a court may allow an exception to the preexisting duty rule.

• Key is whether the court finds that the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made.

Answer 13

Unforseen Difficulties

Question 14

A remedy whereby a contract is canceled and the parties are returned to the positions they occupied before the contract was made.

Answer 14

Rescission

Question 15

• The law recognizes that two parties can mutally agree to rescind, or cancel, their contract, at least to the extent that it is executory.
• Sometimes a contract is rescinded to make a new contract at the same time. It is difficult to determine whether there was consideration for the new contract or whether the parties had a preexisting duty under the previous contract. If a court finds that there was preexisting duty, then the new contract will be invalid because there was no consideration.

Answer 15

Rescission and New Contract

Question 16

Promises made in return for actions or events that have already taken place are unenforceable.

• These promises lack consideration in that the element of bargained-for-exchange is missing.
• You can bargain for something to take place now or in the future but not for something that has already taken place.

Answer 16

Past Consideration

Question 17

An act that takes place before a contract is made and that ordinarily, by itself, cannot later be consideration with respect to that contract.

Answer 17

Past Consideration (defined)

Question 18

If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise is said to be illusory- without consideration and unenforceable.

• Option-to-cancel clauses in contracts for specified periods sometimes present problems because of illusory promises.

Answer 18

Illusory Promises

Question 19

Commonly used settlement agreements:

• Accord and satisfaction
• The release
• Covenant not to sue

Answer 19

Settlement of Claims

Question 20

A common means of settling a disputed claim, whereby a debtor offers to pay a lesser amount than the creditor purports to be owed.

• The accord is the agreement
• Satisfaction is the performance

Answer 20

Accord and Satisfaction

Question 21

The agreement. One party undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than on whcch the parties originally agreed.

Answer 21

Accord

Question 22

The performance (usually payment) that takes place after the accord is executed.

Answer 22

Satisfaction

Question 23

There can be no satisfaction unless there is first an accord. In addition, for accord and satisfaction to occur, the amount of the debt must be in dispute.

Answer 23

Basic Rule Governing Accord and Satisfaction

Question 24

A debt whose amount has been ascertained, fixed, agreed on, settled, or exactly determined.

• If a debt is liquidated, accord and satisfaction cannot take place.
• The debtor has given no consideration to satisfy the obligation of paying the balance to the creditor.
• The debtor has a preexisting legal obligation to pay the entire debt.

Answer 24

Liquidated Debt

Question 25

A debt that is uncertain in amount.

• Acceptance of payment of the lesser sum operates as a satisfaction, or discharge, of the debt because there is valid consideration.
• The parties give up a legal right to contest the amount in dispute.

Answer 25

Unliquidated Debt

Question 26

An agreement in which one party gives up the right to pursue a legal claim against another party.

• Bars any further recovery beyond the terms stated in it.

Answer 26

Release

Question 27

1. An agreement made in good faith
2. The release contract is in a signed writing (required in many states).
3. The contract is accompanied by consideration.

Answer 27

Requirements for a Release to be Binding

Question 28

An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.

• Does not always prevent further recovery
• Can form the basis for a dismissal of the claims of either party to the covenant.

Answer 28

Covenant Not to Sue

Question 29

A doctrine that can be used to enforce a promise when the promisee has justifiably relied on the promise and when justice will be better served by enforcing the promise.

• A person who has reasonably and substantially relied on the promise of another can obtain some measure of recovery.
• Allows a party to recover on a promise even though it was made without consideration.
• A court may enforce an otherwise unenforcable promise to avoid an injustice that would otherwise result.

Answer 29

Promissory Estoppel (Detrimental Reliance)

Question 30

1. There must be a clear and definite promise
2. The promisor should have expected that the promisee would rely on the promise.
3. The promisee reasonably relied on the promise by acting or refraining from some act.
4. The promisee’s reliance was definite and resulted in substantial detriment.
5. Enforcement of the promise is necessary to avoid injustice.

• If these requirements are met, a promise may be enforced even though it is not supported by consideration. The promisor (in essence) is estopped from asserting lack of consideration as defense.

Answer 30

Elements Required for Promissory Estoppel to be Applied:

Question 31

Barred, impeded, or precluded.

Answer 31

Estopped

Question 32

• Originally applied to situations involving gifts and donations to charities.
• Later applied to business transactions, employment relationships, and disputes among family members.

Answer 32

Application of Promissory Estoppel

Question 33

The capacity required by the law for a party who enters into a contract to be bound by that contract.

Answer 33

Contractual Capacity

Question 34

• Mentally Incompetent
• Minors (Infants)
• Intoxicated persons

Answer 34

Situations Where Capacity is Lacking or Questionable

Question 35

The age (eighteen in most states) at which a person, formally a minor, is recognized by law as an adult and is legally responsible for his or her actions.

• Some states provide for the termination of minority on marriage.
• Minority status can be terminated by emancipation

Answer 35

Age of Majority

Question 36

In regard to minors, tje act of being freed from parental control.

Answer 36

Emancipation

Question 37

A minor can enter into any contract that an adult can, provided that the contract is not one prohibited by law for minors (i.e. alcohol and tobacco).

• My be voidable at the option that the minor, subject to certain exceptions.
  
  • need only to manifest an intention not to be bound by it.
  • Avoids the contract by disaffirming it.

Answer 37

General Rule for Minors with Contracts

Question 38

The legal avoidance, or setting aside, of a contractual obligation.

• The minor must express, through words or conduct, his or her intent not to be bound to the contract.
• Must do this for the entire contract, not just a portion of it.

Answer 38

Disaffirmance

Question 39

Cannot avoid his or her contractual duties on the ground that the minor can do so.

• Unless the minor exercises the option to disaffirm the contract, this party is normally bound by it.

Answer 39

An Adult who Enters into a Contract with a Minor

Question 40

• Usually during any time during minority
• For a reasonable time after the minor reaches the age of majority.
  
  • Varies
  • If an individual fails to disaffirm an executed contract within a reasonable time after reaching the age a majority, a court will likely hold that the contract has been ratified.

Answer 40

Disaffirmance Within a Reasonable Time (minors)

Question 41

• All state’s law permits minors to disaffirm contracts (with certain exceptions) inclusind executed contracts.
  
  • Differ on the extent of a minor’s obligations on disaffirmance.
• Most states- The minor need only return the goods subject to the contract, provided that the goods are in the minor’s possession or control. (even if the goods are damaged).
• Growing number of states- additional duty on the minor to restore the adult party to the position she or he held before the contract was made. (hold minor resonsible for damage, wear and tear, and depreciation of goods the minor used prior to disaffirmance).

Answer 41

A Minor’s Obligations on Disaffirmance

Question 42

• Marriage contracts
• Contracts to enlist into armed services
• Growing number of states- misrespenting their age (ordinarily minors can disaffirm contracts even though this happens).
• A minor who enters into a contract for necessaries may disaffirm the contract but remains liable for the reasonable value of goods.

Answer 42

Exceptions to Minor’s Right to Disaffirm

Question 43

Necessities required for life, such as food, shelter, clothing, and medical attention.

• What is necessary for some minors may be considered a luxury for another.

Answer 43

Necessaries

Question 44

The acceptance or confirmation of an act or agreement that gives legal force to an obligation that previously was not enforceable.

• A minor who has reached the age of majority can ratify a contract expressly or impliedly.

Answer 44

Ratification

Question 45

Occurs when the individual, on reaching the age of majority, states orally or in writing that she or he intends to be bound by the contract.

Answer 45

Express Ratification

Question 46

Takes place when the minor, on reaching the age of majority, behaves in a manner inconsistent with disaffirmance.

Answer 46

Implied Ratification

Question 47

A court must determine whether the conduct constitutes implied ratification or disaffirmance. Generally, the courts presume that executed contracts (fully performed) are ratified and the executor contracts (not yet fully performed by both parties) are disaffirmed.

Answer 47

If a Minor Fails to Disaffirm a Contract Within a Reasonable Time of Reaching the Age of Majority:

Question 48

A condition in which a person’s normal capacity to act or think is inhibited by alcohol or some drug.

Answer 48

Intoxication

Question 49

A contracted entered between these people are either voidable or valid (and thus enforceable).

• If intoxicated to lack of mental capacity- voidable at the option of the intoxicated person, even if the intoxication is purely voluntary.
• If despite intoxication, the person understood the legal consequences of the agreement, the contract is enforceable.

Answer 49

Intoxicated Persons

Question 50

• Courts look at objective indications of the intoxicated person’s condition
• Difficult to prove that a person’s judgement was so severly impaired that he or she could not comprehend the legal consequences of entering into a contract.

Answer 50

The Court Rarely Permits Contracts to be Avoided due to Intoxication

Question 51

Contracts can be void, voidable or valid.

Answer 51

Mentally Incompetent Persons

Question 52

If the court has previously determined the person to be incompetent and has appointed a guardian

• Only the guardian can enter into a binding contract on behalf of the person.

Answer 52

Void

Question 53

Court has not previously determined the person to be incompetent. (In some states)

Answer 53

Contract is Voidable

Question 54

The person did not know that he or she was entering into a contract or lacked the mental capacity to comprehend its nature, purpose, and consequences.

Answer 54

The Contract is Voidable or can be Ratified at the Option of the Mentally Incompetent Person (Not at the option of the other party)

Question 55

A contract entered into by a mentall ill person (whom the court has not previously declared incompetent) if the person had the capacity at the time the contract was formed.

Answer 55

May be Valid

Question 56

Temporary periods of sufficient intelligence, judgement, and will.

• Due to age or illness
• During these intervals, they will be considered to have legal capacity to enter into contracts in the majority of states.

Answer 56

Lucid Intervals

Question 57

The fourth requirement for a valid contract to exist. For a contract to be valid and enforceable, it must be formed for a legal purpose.

• Cannot be something that is prohibited by federal or state statutory law
• Cannot be to commit a tortious act (such as fradulent misrepresentation)
• Cannot commit an action that is contrary to public policy

Answer 57

Legality

Question 58

• Contracts to commit a crime
• Usury
• Gambling
• Licensing statutes

Answer 58

Contracts Contrary to Statute

Question 59

Any contract to do this is in violation of a statute.

• Sometimes the object or performance of a contract is rendered illegal by statute after the contract has been formed. In this situation, the contract is considered discharged (terminated) by law.

Answer 59

Contracts to Commit a Crime

Question 60

Charging an illegal rate of interest.

• Every state has a statute that sets the maximum rate of interest that can be charged for different types of transactions, including ordinary loans.
• Most states simply limit the interest the lender may collect on a contract to the lawful maximum interest rate in that state.
• In a few states, the lender can recover the principal amount of the loan but no interest.

Answer 60

Usury

Question 61

• Corporate loans (many states)
• Higher interest rate loans for borrowers who could not otherwise obtain loans. (almost all states).

Answer 61

Exceptions to Usury

Question 62

The creation of risk for the purpose of assuming it.

• Traditionally- these contracts are deemed illegal and thus void.
• Today- many states allow (and regulate) certain forms of gambling such as horse racing, video poker machines, and charity sponsored bingo.
• Nearly all states allow state-operated lotteries and gambling on Native American reservations.
• Even in states that allow gambling, courts often find that these contracts are illegal.

Answer 62

Gambling

Question 63

All states require members of certain professions- including physicians, lawyers, real estate brokers, accountants, architects, electricians, and stockbrokers-to have licenses.

• Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the licensing statute.

Answer 63

Licensing Statutes

Question 64

Although contracts involve private parties, some are not enforceable because of the negative impact they would have on society.

• Contracts to commit an immoral act
• Contracts that prohibit marriage
• Contracts in Restraint of Trade
• Unconscionable contracts or clauses
• Exculpatory clauses

Answer 64

Contracts Contrary to Public Policy

Question 65

The United States has a strong public policy favoring competition in the economy, hence, these contracts are generally unenforceable because they are contrary to public policy.

• Generally also violate one or more federal or state antitrust laws.

Answer 65

Contracts in Restraint of Trade

Question 66

When the restraint is reasonable and is an ancillary (secondary, or subordinate) part of the contract.

• Often included for the sale of an ongoing business and employment contracts.

Answer 66

Exception of Contracts in Restraint of Trade

Question 67

A contractual promise of one party to refrain from conducting business similar to that of another party for a certain period of time and within a specified geographical area.

• Enables the seller to sell, and the buyer to buy, the goodwill and reputation of an ongoing business without having to worry that the seller will open a competing business a block away.
• Provided that the restrictive covenant is reasonable and an ancillary part of the sale of an ongoing business, it is enforceable.

Answer 67

Covenant not to Compete (Restricted Covenant)

Question 68

A contract between an employer and an employee in which the terms and conditions of employment are stated.

Answer 68

Employment Contract

Question 69

People in middle-level and upper-level management positions commonly agree not to work for competitors and not to start a competing business for a specified period of time after terminating employment.

• Generally legal in most states so long as the specified period of time (of restraint) is not excessive in duration and the geographical restriction is reasonable.

Answer 69

Covenants not to Compete in Employment Contracts

Question 70

A restriction on competition must protect a legitimate business interest and must not be any greater than necessary to protect the interest.

Answer 70

Reasonable (Covenants not to Compete in Employment Contracts)

Question 71

May be different in the online environment than in conventional employment contracts. Because the geographical restrictions appy worldwide, the time restrictions may be shorter.

Answer 71

Reasonable Time Period (Covenants not to Compete in Employment Contracts)

Question 72

The laws governing the enforceability of covenants not to compete vary significantly from state to state.

• California- prohibits the enforcement of all covenants not to compete.
• Texas (some other states)- will not be enforced unless the employee has received some benefit in return for signing the noncompete agreement. This is true even if the covenant is reasonable as to time and area. If the employee receives no benefit, the covenant will be deemed void.

Answer 72

Enforcement Problems

Question 73

A court-ordered correction of a written contract so that it reflects the true intentions of the parties.

• If found unreasonable in terms of time and geographical area- convert the terms into reasonable ones and then enforce the reformed covenant. (problem- judge becomes a party to the contract)
• Courts usually resort to this only when necessary to prevent undue burdens or hardships.

Answer 73

Reformation

Question 74

A contract or clause that is void on the basis of public policy becuase one party was forced to accept terms that are unfairly burdensome and that unfairly benefit the other party.

• “Void of conscience”
• UCC incorporates this concept in the provisions with regard to the sale and lease of goods.
• Can be on procedural or substanstive grounds

Answer 74

Unconscionable (Contract or Clause)

Question 75

Often involves inconspicuous print, unintelligible language (“legalese”), or the lack of an opportunity to read the contract or ask questions about its meaning.

• Typically arises when a party’s lack of knowledge or understanding of the contract terms deprive him or her of any meaningful choice.
• Can also occur when there is such a disparity in bargaining power between the two parties that the weaker’s party’s consent is not voluntary. (requires an adhesion contract)

Answer 75

Procedural Unconscionability

Question 76

A standard-form contract in which the stronger party dictates the terms.

• take-it-or-leave-it-basis
• Not all of these contracts are unconscionable, only those that unreasonably favor the drafter.

Answer 76

Adhesion Contract

Question 77

Occurs when contracts, or portions of contracts, are oppressive or overly harsh.

• Courts generally focus on provisions that deprive one party of the benefits of the agreement or leave that party without remedy for nonperformance by the other.

Answer 77

Substantive Unconscionability

Question 78

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

• Courts sometimes refuse to enforce such clauses because they deem them to be unconscionable.

Answer 78

Exculpatory Caluses

Question 79

• Exculpatory clauses are almost always unenforceable in residential property leases.
• Courts often hold that exculpatory clauses are against public policy in the employment context.
  
  • Cannot enforce these clauses in contracts with employees or independent contractors to avoid liabity for work-related injuries.

Answer 79

Often Violate Public Policy

Question 80

• When they are reasonable
• Do not violate public policy
• Do not protect parties from liability for intentional misconduct.
• Language used must not be ambiguous
• Parties must have been in relatively equal bargaining positions.
• Non-essential services (amuse parks, ski facilities, etc..)
• Loan documents
• Real estate contracts
• Trust agreements

Answer 80

When Courts Will Enforce Exculpatory Clauses

Question 81

In most illegal contracts, both parties are considered to be at fault- in pari delicto.

• If executory- neither party can enforce it
• If executed- neither party can recover damages.
• Courts are not concerned if one wrongdoer is unjustly enriched at the expense of the other
• A plaintiff who has broken the law by entering into an illegal bargain should not be allowed to obtain help from the courts.
• Hope-for deterrent effect: a plaintiff who suffers a loss because of an illegal bargain will presumably be deterred from entering into similar illegal bargains in the future.

Answer 81

The Effect of Illegality

Question 82

• Justifiable ignorance to the facts
• Members of protected classes
• Withdrawal from an Illegal Agreement
• Severable, or Divisible, Contracts
• Fraud, duress, or undue influence.

Answer 82

Exceptions to the General Rule that Neither Party to an Illegal Bargain can Sue for Breach and Neither Party can Recover for Performance Rendered:

Question 83

One of the parties to a contract has no reason to know that the contract is illegal and thus is relatively innocent.

• Can often recover any benefits conferred in a partially executed contract.
• Courts will not enforce the contract but will allow the parties to return to their original positions.
• A court may sometimes allow an innocent party who has fully performed under a contract to enforce the contract against the guilty party.

Answer 83

Justifiable Ignorance of the Facts

Question 84

When a statute is designed to protect a certain class of people, a member of that class can enforce a contract in violation of the statute even though the other party cannot.

• I.E. insurance statutes

Answer 84

Members of Protected Classes

Question 85

If the illegal part of a bargain has not yet been performed, the party rendering performance can withdraw from the contract and recover the performance or its value.

Answer 85

Withdrawal from an Illegal Agreement

Question 86

Consists of distinct parts that can be performed seprately, with separate consideration provided for each part.

• A court may enforce the legal portion but not the illegal one, so long as the illegal portion does not affect the essence of the bargain.
• Consistent with enforcing the legal intentions of the contracting parties whenever possible.

Answer 86

Severable, or Divisible, Contracts

Question 87

Complete performance by each party is essential, even if the contract contains a number of seemingly separate provisions.

Answer 87

Indivisible Contract

Question 88

Often, one party to an illegal contract is more at fault than the other. When one party uses fraud, duress, or undue influence to induce the other party to enter into an agreement, the second party will be allowed to recover for the performance or its value.

Answer 88

Fraud, Duress, or Undue Influence