Contracts

Question 1

What are the three requirements of a legally enforceable contract?

Answer 1

1. Agreement - offer and acceptance
2. Exchange of consideration - something of legal value (can’t give a gift)
3. Lack of defenses (no reason for it not to be enforced)

*Does NOT need to be in writing unless it’s within the Statute of Frauds or is a merchant’s firm offer.

Question 2

What forms may acceptance of a contract take?

Answer 2

Acceptance can be in any manner reasonable under the circumstances, unless the offeror specifies a method of communication. Utilizing another method in this case results in a counteroffer.

Must be mirror image (common law)- i.e. no changes in terms. Any changes are considered a counteroffer.

Mailbox rule: acceptances are generally effective when they are dispatched if properly addressed. Exception: offeror can opt-out of mailbox rule if they state in offer that acceptances must be received to be effective.

Question 3

Who can accept an offer?

Answer 3

Must be accepted by intended party (offeree)

Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds

They must intend to accept

Question 4

What happens if an offeree accepts a contract but puts added stipulations?

Answer 4

It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree

Question 5

When is an offeror bound by a contract?

Answer 5

Effective upon dispatch (the mailbox rule)

Offers, rejections, revocations and counteroffers are effective on the date received. Acceptances are upon dispatch.

Question 6

What will void an offer?

Answer 6

If offeror dies or becomes insane before acceptance; offer is void.

Contract is binding if acceptance occurs before death/insanity.

Question 7

What is an Option?

Answer 7

Some amount of consideration (like money) is put forth by offeror to keep the offer open for a
stated period of time

Question 8

What is a Requirements Contract? How are they limited?

Answer 8

These are contracts where someone becomes the exclusive provider of something in exchange for
consideration

Companies can’t get locked in to one and then have market conditions force them to sell something at
what has become an unreasonable price

Question 9

What is promissory estoppel?

Answer 9

Promises to donate are legally enforceable

Example: Richie calls the hospital and promises to donate $100K for a new MRI machine. Normally this is a gift unless the hospital detrimentally relies on this and orders the MRI machine.

Question 10

What can make a contract VOID?

Answer 10

Fraud in the execution (e.g. where you think you’re signing an autograph but really it’s a contract)

Extreme duress (e.g. physical force)

Nonexistence of subject matter (e.g. stolen or destroyed) at time when contract is made

Illegality

Failure to have a license required to protect the public (e.g. CPAs, attorneys)

Contract made after a party is adjudicated mentally incompetent

Question 11

What can make a contract VOIDABLE?

Answer 11

Fraud in the inducement (aware of contract but terms are materially misrepresented)

Innocent Misrepresentation

Simple duress (e.g. economic or social harm threatened)

Undue influence

Mutual mistake - adversely affected party can avoid the contract

Party not mentally competent to contract - before adjudication

Question 12

What is the result of a clerical error in a contract?

Answer 12

The contract is unenforceable.

Example: Person signs a contract to pay $500 to have
their lawn re-seeded but due to clerical error; it actually reads $5,000.

Question 13

Contracts under the Statute of Frauds must be in what form to be valid?

Answer 13

They must be in writing in order to be enforceable. Only the defendant must sign (party trying to avoid the contract).

Question 14

What makes a contract subject to the Statute of Frauds?

Answer 14

“MY LEGS”

• Marriage (consideration is)
• Year (cannot be completed within one year). Starts from date of contract not start of performance
• Land interest contracts (e.g. sale of a house, lease greater than a year)
• Executor contracts to pay estate debts out of personal funds
• Goods sale for $500 or more (UCC exception: can be oral regardless of price if completed in one year)
• Surety (e.g. agreement to pay the debt of another); must be collateral and not a promise to pay

Question 15

What is the parol evidence rule?

Answer 15

Prevents one party to a written contract from coming in after the fact and claiming that a certain
conversation/writing took place BEFORE that conflicts with what is agreed upon in the written contract. Intention to seek the vary the terms of the written contract.

It also prevents using an oral argument to read into the meaning of what is written on paper

If it’s on paper; it trumps what was agreed-upon orally prior to the written contract

Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.

Question 16

What are the requirements for the assignment of a contract?

Answer 16

Contracts are assignable to a third party beneficiary; but must be done so in good faith

Obligations may be assignable - Assignor is still liable

Assignor may be released from liability if other party grants a novation

Question 17

What is an “Implied-in-Law” or “Quasi-Contract?

Answer 17

It is actually NOT a contract. Instead, it’s a remedy that allows a plaintiff to recover a benefit unjustly conferred upon the defendant preventing unjust enrichment.

Question 18

What is the difference between Unilateral and Bilateral Contracts?

Answer 18

Unilateral contract: there is one promise given in exchange for performance. A contract is not formed until performance is completed.

Bilateral contract: there are two promises given; a promise in exchange for a promise. A contract is formed as soon as the promises are exchanged.

Question 19

What are the two sources of contract law?

Answer 19

1. Common Law: generally derived from the courts. For contracts involving: Real Estate, Insurance, Sales and Employment (RISE)
2. Uniform Commercial Code (UCC) Sales Article 2: statutory law governs contracts for the sale of goods (moveable things)

Question 20

What must you consider when examining an offer?

Answer 20

1. What there an intent to contract?
2. Was there definiteness and certainty in the essential terms?
3. Was there communication of the above to the offeree?

Contract law is objective: would a reasonable person believe the offer was serious?

Question 21

What makes terms “definite and certain” in an offer?

Answer 21

Under the UCC (sale of goods), generally the offer only needs to include the quantity term (ie 100 widgets)

Under common law (RISE), offer must include:

• Identity of the offeree an the subject matter;
• price to be paid;
• time of performance;
• quantity involved;
• nature of the work to be performed

Question 22

How can an offer be terminated?

Answer 22

1. Revocation by the offeror (effective when received by the offeree)
2. Rejection by the offeree (effective when received by the offeror)
3. Operation of law

Exception: an option contract is not terminated by the death of a party

Question 23

What are the three limitations on an offeror’s power to revoke?

Answer 23

1. Consideration is paid to keep the offer open (option contract);
2. A substantial start on a unilateral contract;
3. Merchant’s firm offer under the UCC

Question 24

What are the types of terminations by Operation of Law?

Answer 24

1. Termination by death or incompetency of parties
2. Termination by destruction of subject matter
3. Termination by illegality

Question 25

What are the two elements of consideration?

Answer 25

1. There must be something of legal value given by each party 2. There must be a bargained for exchange Exceptions: Detrimental reliance/Promissory Estoppel - the promise must be reasonably relied upon and detrimental (ie substantial). Example: promising to donate to charity

Question 26

What is the difference between a void and voidable contract?

Answer 26

Void: unenforceable by either party. Not as common as voidable. Voidable: it may be avoided at the option of the party adversely affected.

Question 27

What are defenses to a contract?

Answer 27

1. Fraud (MAIDS) 2. Fraud in the execution and fraud in the inducement 3. Innocent misrepresentation 4. Duress 5. Undue influence 6. Mutual mistake - voidable 7. Unilateral mistake - generally not a defense UNLESS a mistake as to a material fact if the other party knew or should have known 8. Illegality (contract generally void) 9. Minors may generally disaffirm ("cancel") contracts 10. Intoxication 11. Mental incompetency - void or voidable 12. Statute of Limitations - 4-6 yrs (RISE), 4 yrs (UCC) 13. Statute of Frauds - can be unenforceable 14. Impossibility - discharges adversely affected party 15. Accord and Satisfaction and Substituted Contract 16. Novation 17. Conditions Can Affect a Party's Duty to Perform 18. Prevention of Performance is a Breach 19. Parol (Oral) Evidence Rule 20. Unconscionability - notion of fairness giving the party with benefit substantially superior bargaining power

Question 28

Defense of Fraud: what must a contracting party prove?

Answer 28

"MAIDS" 1. Misrepresentation of a material fact 2. Actual and justifiable reliance by the victim of the misrepresentation 3. Intention to induce the victim to rely on misrepresentation 4. Damages 5. Scienter (defrauding party knew the statement was false or that it was made with reckless disregard for the truth)

Question 29

What are the three tests of reasonableness for a promise not to compete?

Answer 29

Promises not to compete in employment contracts and in the sale of business are enforceable if they meet the following tests: 1. promise must be reasonably needed to protect a legitimate business interest 2. promise must be reasonable in duration (2 yrs or less) 3. promise must be reasonable as to distance (30 miles or less)

Question 30

What is "Anticipatory Repudiation" and what are the non-repudiating party's options?

Answer 30

Occurs when one person unequivocally indicates in advance of performance to another that she will not perform contractual duties when the time comes. Options for nonrepudiating party: 1. treat as a breach and immediately sue for damages 2. ignore repudiation, await time for performance and then sue if the repudiating party has not performed 3. cancel the contract

Question 31

What is the goal of awarding damages in the case of a contract breach?

Answer 31

To put the nonbreaching party in as good a position as he would have been had there been no breach.

Question 32

What types of damages can be awarded for breach of contract?

Answer 32

1. Compensatory damages - for personal service contracts. Awards enough money to the nonbreaching party to obtain substitute performance and potentially additional damages that are reasonably foreseeable as a result of the breach 2. Specific performance - for land or unique items where money would be an inadequate remedy. Can receive specific performance (if available) or compensatory damages but not both. 3. Liquidated damages - specifies in contract what damages will be if there is a breach 4. Punitive damages - not available for breach of contract, only fraud 5. Rescission or Cancellation 6. Quasi-Contract (Restitutional) Damages

Question 33

What is "privity of contract?"

Answer 33

Only the parties to the contract have rights under the contract. Exception: intended third-party beneficiaries

Question 34

What is the difference between "intended" and "incidental" beneficiaries?

Answer 34

Intended beneficiaries are those where the parties of the contract intended to give a benefit directly to the third person. The third party must be named or specifically described in the contract. Intended beneficiaries can enforce the agreement. Incidental beneficiaries are those where there was no intent to directly confer benefits. Incidental beneficiaries have no rights.

Question 35

What is the difference between a "donee" beneficiary and a "creditor" beneficiary?

Answer 35

Both are intended beneficiaries. Donee beneficiaries receive their interest as a gift. Donee beneficiaries generally cannot sue the promisee and attempted gifts are unenforceable. But can sue the promisor. Creditor beneficiaries receive their interest because a party owes them something. Creditor beneficiaries can sue both the promisee for failure to fulfill the original obligation of the promisee as well as the promisor if they fail to perform.

Question 36

What is an "assignment of all rights?"

Answer 36

It's an assignment of a contract, which is both an assignment of rights (rights to a third party) and a delegation of duties (third party performs contractual duties).

Question 37

What are the exceptions to assigning or delegating contracts?

Answer 37

When the assignment will change the obligor's risk or the delegated duty involves specialized personal services or otherwise relies heavily on the personal attributes of the person performing. Offers can generally not be assigned, but options can be (act as a contract - bought time).