Exam 3 - Terms Flashcards
What is a contract?
an agreement that is enforceable by a court of law or equity
What are Sources of Contract Law?
1) The Common Law of Contracts
2) The Uniform Commercial Code (UCC)
3) The Restatement of the Law of Contracts
What is the Common Law of Contracts?
Contract law developed primarily by state courts
What is the Uniform Commercial Code (UCC)?
Comprehensive statutory scheme that includes laws that cover aspects of commercial transactions
What is the Restatement of the Law of Contracts?
- Compilation of model contract law principles drafted by legal scholars
- The Restatement is not the law
- Lawyers and judges often refer to it for guidance in contract disputes
What is the Offeror?
the party who makes an offer to enter into a contract
What is the Offeree?
the party to whom an offer to enter into a contract is made
What are the 6 Classifications of Contracts?
1) Bilateral and unilateral contracts
2) Express and implied-in-fact contracts
3) Quasi-contract (implied-in-law)
4) Formal and informal contracts
5) Valid, void, voidable, and unenforceable contracts
6) Executed and executory contracts
What is a Bilateral Contract?
- A contract entered into by way of exchange of promises of the parties
- “A promise for a promise.” meaning an offer is accepted by a promised
What is a Unilateral Contract?
- A contract in which the offeror’s offer can be accepted only by the performance of an act by the offeree
- “A promised for the act”
What is an Express Contract?
An agreement that is expressed, the terms in written or oral words
What is an Implied-in-fact Contract?
- A contract where agreement between parties has been inferred from their conduct
- Plaintiff provided goods or services
- Plaintiff expected to be paid
- Defendant had the opportunity to reject the goods or services and did not
What is the Objective Theory of Contracts?
- The intent to enter into an express or implied-in-fact contract is judged by the reasonable person standard
- The subjective intent of a party to enter into a contract is irrelevant
What are Quasi-Contracts (Implied-In-Law)?
- Allows a court to award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed between the parties
- Intended to prevent unjust enrichment and unjust detriment
- Under this type of contract, a plaintiff can recover in quantum meruit, which is a Latin term meaning “as much as he deserves.”
What are Formal Contracts?
Contracts that require a special form or method of creation
- Contracts Under Seal, Recognizes, Negotiable Instruments Letters of Credit
What are Informal Contracts?
- No special form or method is required for their creation
- Fully enforceable and may be sued upon if breached
- Leases, Sales Contracts, Service Contracts, Any other contract that does not qualify as formal
What is a Valid Contract?
- Contract that meets all the essential elements to establish a contract
- Enforceable by at least one of the parties
What is a Void Contract?
- A contract that has no legal effect
- Neither party is obligated to perform
- Neither party can enforce the contract
What is a Voidable Contract?
- Contract where one or both parties have the option to avoid their contractual obligations
- If a contract is avoided, both parties are released from their contractual obligations
What is an Unenforceable Contract?
- A contract where the essential elements to create a valid contract are not met
- However, there is some legal defense to the enforcement of the contract
What is an Executed Contract?
- A contract that has been fully performed on both sides
- A completed contract
What is an Executory Contract?
A contract that has not been fully performed by either or both sides
What is a Legally Enforceable Contract?
- If one party fails to perform as promised, the other party can use the court system to enforce the contract and recover damages or other property
What are the 4 elements of an Enforceable Contract?
1) Agreement
2) Consideration
3) Lawful Object
4) Contractual Obligations
What is the Agreement element of a contract?
- There must be an agreement between the parties
- This requires an offer by the offeror and an acceptance of the offer by the offeree
- There must be mutual assent by the parties
What is the Consideration element of a contract?
- The promise must be supported by a bargained-for consideration that is legally sufficient
- Gift promises and moral obligations are not considered supported by valid consideration
What is the Contractual Capacity element of a contract?
- The parties to a contract must have contractual capacity
- Certain parties, such as persons adjudged to be insane, do not have contractual capacity
What is the Lawful Object element of a contract?
- The object of the contract must be lawful
- Contracts to accomplish illegal objects or contracts that are against public policy are void
Is there a contract without mutual assent?
Without mutual assent there is no contract
What is an offer?
The manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it
What are the Requirements of an Offer?
- The offeror must objectively intend to be bound by the offer
- The terms of the offer must be definite or reasonably certain
- The offer must be communicated to the offeree
What can valid contract NOT result from?
- Preliminary negotiations
- Offers that are made in jest, anger, or undue excitement
- Offers are that are an expression of opinion
What is the Definiteness of Terms requirement of an offer?
- The terms of an offer must be clear enough to the offeree to be able to decide whether to accept or reject the terms of the offer
- If the terms of the offer are indefinite, the courts cannot enforce the contract or determine an appropriate remedy for its beach
What must an offer (and contract) contain?
- Identification of the parties
- Identification of the subject matter and quantity
- Consideration to be paid
- Time of performance
What are Implied Terms?
The court can supply a missing term if a reasonable term can be implied
What is a Communication in terms of an offer?
An offer cannot be accepted if it is not communicated to the offeree by the offeror or a representative or agent of the offeror
What are Special Offer Situations?
1) Advertisements
2) Rewards
3) Auctions
What is an Advertisement in terms of an offer?
- A general advertisement is an invitation to make an offer
- A specific advertisement is an offer
What is a Reward in terms of an offer?
An offer to pay a reward is an offer to form a unilateral contract
What must the offeree do in order to collect a reward?
The offeree must:
1) have knowledge of the reward offer prior to completing the requested act
2) Perform the requested act
What is an Auction With Reserve?
Unless expressly stated otherwise, an auction is an auction with reserve, i.e., the seller retains the right to refuse the highest bid and withdraw the goods from auction
What is an Auction Without Reserve?
An auction in which the seller expressly gives up his or her right to withdraw the goods from sale and must accept the highest bid
How can an offer be terminated?
1) Termination of an Offer by Action of the Parties
2) Termination of an Offer by Operation of Law
What is Revocation?
- Withdrawal of an offer by the offeror terminates the offer
- An offeror can revoke an offer at any time prior to its acceptance by the offeree
What is Rejection?
- Express words or conduct by the offeree that rejects an offer
- Rejection terminates the offer
What is a Counteroffer?
- A response by an offeree that contains terms and conditions different from or in addition to those of the offer
- A counteroffer terminates an offer
- Reverses the roles of the parties
What is Destruction of the subject matter?
The offer terminates if the subject matter of the offer is destroyed through no fault of either party prior to its acceptance
What is Death or incompetency of the offeror or offeree?
The death or incompetency of either party terminates the offer
What is Supervening Illegality?
- The enactment of a statute, regulation, or court decision that makes the object of an offer illegal
- This action terminates the offer
What is Lapse of Time?
An offer terminates when a stated time period expires
What is Acceptance?
A manifestation of assent by the offeree to the terms of the offer in a manner invited or required by the offer as measured by the objective theory of contracts
Only the offeree can legally accept an offer and create a contract. T/F
True
The offeree’s acceptance must unequivocal. T/F
True
Is Silence considered acceptance even if the offeror states that it is?
No
What is the mirror image rule?
Requires the offeree to accept the offeror’s terms
What are the 3 rules concerning the time and mode of acceptance of a contract?
1) Mailbox rule
2) Proper Dispatch Rule
3) Mode of Acceptance
What is the Mailbox Rule?
- A rule that states thats an acceptance is effective when it is dispatched, even if it is lost in transmission
- If an offeree first dispatches a rejection and then sends an acceptance, the mailbox rule does not apply to the acceptance
What is the Mailbox Rule also called?
the acceptance-upon-dispatch rule
What is the Proper Dispatch Rule?
- The acceptance must be properly dispatched
- The acceptance must be properly addressed, packaged, and posted to fall within the mailbox rule
- Under common law, if an acceptance is not properly dispatched, it is not effective until it is actually received by the offeror
What is the Express Authorization Mode of Acceptance?
- A stipulation in the offer that says the acceptance must be by a specified means of communication
- Use of an unauthorized means of communication makes acceptance not effective
What is the Implied Authorization Mode of Acceptance?
Mode of acceptance that is implied from what is customary in similar transactions, usage of trade, or prior dealings between the parties
When is an Offer effective?
When received by offeree
What is a Revocation of offer effective?
When received by offeree
When is a Rejection of offer effective?
Received by offeror
When is a Counteroffer effective?
When received by offeror
When is an Acceptance of offer effective?
When sent by offeree
When is an Acceptance after previous rejection of offer effective?
When received by offeror
What is Consideration?
- Something of legal value given in exchange for a promise
- Consideration is a necessary element for the existence of a contract
What are some common types of Consideration?
- A tangible payment (money or property); or
- Performance of an act (e.g., providing legal services)
What are the 2 elements of Consideration?
1) Something of legal value must be given; and
2) There must be a bargained-for exchange
What is the Legal Value element of consideration?
- Something of legal value must be given
- Under the modern law of contracts, a contract is considered supported by legal value if:
1) The promisee suffers a legal detriment; or
2) the promisor receives a legal benefit
What is the Bargained-for Exchange element of consideration?
- To be enforceable, a contract must arise from a bargained-for exchange
- Exchange that parties engage in that leads to an enforceable contract
- Gift or gratuitous promise: an unenforceable promise because it lacks consideration
What are the two special types of business contracts that specifically allow a greater degree of uncertainty concerning consideration?
1) Output Contracts
2) Requirements Contracts
What are Contracts Lacking Consideration?
1) Illegal Consideration
2) Illusory Promise
3) Moral Obligation
4) Preexisting Duty
5) Past Consideration
What is an Illegal Consideration?
- a promise to refrain from doing an illegal act
- such a promise will not support a contract
What is an Illusory Promise?
- a contract into which both parties enter, but one or both of the parties can choose not to perform their contractual obligations
- Thus, the contract lacks consideration
- Such promises are unenforceable
What are Moral Obligations?
- Promises made out of a sense of moral obligation or honor lack consideration
- Moral consideration is not treated as legal consideration
- Such promises are unenforceable in most states
What is Preexisting Duty?
- a promise lacks consideration if a person promises to perform an act or do something he or she is already under an obligation to do
- This promise is unenforceable because no new consideration has been given
When does the Preexisting Duty rule arise?
- When one of the parties to an existing contract seeks to change the terms of the contract during the course of its performance
- Such midstream changes are unenforceable
- The parties have a preexisting duty to perform according to the original terms of the contract
What can a contract be modified and enforced without new consideration being given?
1) The parties rescind the contract and enter into a new contract
2) When a party runs into substantial unforeseen difficulties while performing his or her contractual duties
What is Settlement of Claims?
- The law promotes the voluntary settlement of disputed claims
- Settlement: saves judicial resources and serves the interests of the parties entering into the settlement
What is an Accord?
an agreement whereby the parties agree to accept something different in satisfaction of the original contract
What is Satisfaction?
The performance of the accord
If the accord is not satisfied can the other party sue to enforce either the accord or the original contract?
Yes
What is Promissory Estoppel (detrimental reliance)?
- A doctrine that prevents the withdrawal of a promise by a promisor if it will adversely affect a promisee who has adjusted his or her position in justifiable reliance on the promise
- Applies when there is no contract
For the doctrine of promissory estoppel to be applied, what elements must be shown:
1) The promisor made a promise
2) The promisor should have reasonably expected to induce the promisee to rely on the promise
3) The promisee actually relied on the promise and engaged in an action or forbearance of a right of a definite and substantial nature
4) Injustice would be caused if the promise was no enforced
What is Capacity?
- The law presumes that the parties to a contract have the requisite contractual capacity to enter into the contract
What certain persons do not have the capacity to enter into a contract?
- minors
- insane persons
- intoxicated persons
What does common law define minors as?
- Females under the age of 18
- Males under the age of 21
What is most prevalent age of majority?
18 years old for males and females
What is the period of minority?
Any age below the statutory age of majority
What is the Infancy Doctrine?
- A doctrine that allows minors to disaffirm (or cancel) most contracts they entered into with adults
- Doctrine based on public policy that reasons that minors should be protected from unscrupulous behavior of adults
What is Disaffirmance?
- The act of a minor to rescind a contract under the infancy doctrine
- may be done orally, in writing, or by the minor’s conduct
What is the Competent Party’s Duty of Restitution?
If the minor has transferred consideration to the competent party before disaffirming the contract, that party must place the minor in status quo
What is the Minor’s Duty of Restoration?
a minor is obligated only return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance
What is the Minor’s Duty of Restitution?
most states provide that the minor must put the adult in status quo upon disaffirmance of the contract if the minor’s intentional or grossly negligent caused the loss of value to the adult’s property
What is Misrepresentation of Age?
- Minors who represent their age must place the adult in status quo if they disaffirm the contract
- A minor who has misrepresented his or her age when entering into a contract owes the duties of restoration and restitution when disaffirming it
What is Ratification?
If a minor does not disaffirm a contract either during the period of minority or within a reasonable time after reaching the age of majority:
- the contract is considered ratified (accepted)
- The minor (now an adult) is bound by the contract
- The right to disaffirm the contract has been lost
What is Necessaries of Life?
- Minors are obligated to pay for the necessaries of life
- Food, shelter, clothing, medical services
What is Parent’s Liability for Their Children’s Contracts?
- Parents owe a legal duty to provide food, clothing, shelter, and other necessaries of life for their minor children
- Parents are liable for their children’s contracts for necessaries of life if they have not adequately provided such items
What does parental duty of support terminate?
If a minor becomes emancipated
What does the law require for a mentally incompetent person to be relieved of his or her duties under a contract?
The law requires a person to have been legally insane at the time of entering into the contract
What is Legal Insanity?
a state of contractual incapacity as determined by law
What are the two standards the law has developed concerning contracts of mentally incompetent persons?
1) Adjudged Insane
2) Insane, But Not Adjudged Insane
What is Adjudged Insane?
- A person who has been adjudged insane by a proper court or administrative agency
- A contract entered into by such a person is void
- Neither party can enforce the contract
What is Insane, But Not Adjudged Insane?
- A person who is insane but has not been adjudged insane by a court or administrative agency
- A contract entered into by such a person is generally voidable
- The competent party cannot void the contract
What happens to contracts if a person was intoxicated?
- Most states provide that contracts entered into by such intoxicated persons are voidable by that person
- The contract is not voidable by the other party if that party had contractual capacity
What happens regarding Illegality of a contract?
- One requirement to have an enforceable contract is that the object of the contract must be lawful
- Contracts with an illegal object are void and therefore unenforceable
What are the 2 key categories of illegality?
1) Contracts contrary to statutes
2) Contracts contrary to public policy
What are Contracts Contrary to Statutes?
- Federal and state legislatures have enacted statutes that prohibit certain types of conduct
- Contracts to perform an activity that is prohibited by statute are illegal contracts
What are some examples of Contracts Contrary to Statutes?
- Usury Laws
- Gambling Statutes
- Sabbath Laws
- Licensing Statutes
What are Contracts Contrary to Public Policy?
- Contracts that have a negative impact on society or that interfere with the public’s safety and welfare
- Such contracts are void
What are some examples of Contracts Contrary to Public Policy?
- Immoral Contracts
- Contracts in Restraint of Trade
- Exculpatory Clauses
What certain situations are exempt from the general rule of the effect of finding an illegal contract?
1) Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal
2) Persons who were induced to enter into an illegal contract by fraud, duress, or undue influence
3) Persons who entered into an illegal contract withdrawn before the illegal act is performed
4) Persons who were less at fault than the other party for entering into the illegal contract
Covenants not to compete that are ancillary to a legitimate sale of a business or employment contract are lawful if they are reasonable in what three aspects?
1) The line of business is protected
2) The geographical area is protected
3) The duration of the restriction
What is the Doctrine of Unconscionability?
- Some lawful contracts are so oppressive or manifestly unfair that they are unjust
- a contract found to be unconscionable under this doctrine is called unconscionable contract, or a contract of adhesion
What elements must be shown to prove that a contract or clause is unconscionable?
1) The parties possessed severely unequal bargaining power
2) The dominant party unreasonably used its unequal bargaining power
3) The adhering party had no reasonable alternative
What are the Defenses to the Enforcement of a Contract?
1) Genuineness of Assent
2) Writing and Form
What is Genuineness of Assent?
- The consent of the parties to create a contract must be genuine
- There is not real consent if the consent is obtained by: duress, undue influence, fraud
What is Writing and Form?
- The law requires that certain contracts be in writing or in a certain form
- Failure of these contracts to be in writing or be in proper form may be raised against the enforcement of this contract
What is Equity?
a doctrine that permits judges to make decisions based on fairness, equality, moral rights, and natural law
What is Assent?
- Voluntary assent by the parties is necessary to create an enforceable contract
- Assent is determined by the relevant facts surrounding the negotiation and formation of the contract
- Assent may be manifested in any manner sufficient to show agreement, including express words or conduct of the parties
What areas is Genuineness of Assent an issue?
1) Mistake
2) Misrepresentation
3) Duress
4) Undue Influence
What is a Mistake?
a mistake occurs where one or both of the parties have an erroneous belief about the subject matter, value, or some other aspect of the contract
What is Rescission?
- An action to undo a contract
- the law permits rescission of some contracts made in mistake
What is a Unilateral Mistake?
- When one party is mistaken about a material fact regarding the subject matter of the contract
- Generally the mistaken party will not be permitted to rescind the contract
- The contract will be enforced on its terms
What are the three types of situations where the contract may not be enforced?
1) One party makes a unilateral mistake of fact and the other party knew (or should have known) that a mistake was made
2) A unilateral mistake occurs because of a clerical or mathematical error that is not the result of gross negligence
3) The mistake is so serious that enforcing the contract would be unconscionable
What is a Mutual Mistake of Fact?
- A mistake made by both parties concerning a material fact that is important to the subject matter of the contract
- The contract may be rescinded on the ground that no contract has been formed because there has been no “meeting of the minds” between the parties
What is a Mutual Mistake of Value?
- A mistake that occurs if both parties know the object of the contract, but are mistake as to its value
- The contract remains enforceable by either party because the identify of the subject matter of the contract is not at issue
What is Fraudulent Misrepresentation?
An assertion is made that is not in accord with the facts
What is Intentional Misrepresentation?
- Occurs when one person consciously decides to induce another person to rely on a misrepresentation
- also called fraud
What happens when fraudulent misrepresentation is used to induce another to enter into a contract?
- The innocent party’s assent to the contract is not genuine; and
- The contract is voidable by the innocent party
What elements are needed to prove fraud?
1) The wrongdoer made a false representation of material fact
2) The wrongdoer intended to deceive the innocent party
3) The innocent party justifiably relied on the misrepresentation
4) The innocent party was injured
What are the types of Fraud?
1) Fraud in the Inception
2) Fraud in the Inducement
3) Fraud by Concealment
4) Silence as Misrepresentation
5) Misrepresentation of Law
When does Fraud in the inducement occur?
when a person knows what he or she is signing but consent is induced by the fraud of another.
When does Fraud in the inception occur?
when a party is deceived concerning the nature of his or her acts and does not know what he or she has signed and does not intend to enter into a contract
What is Fraud by Concealment?
“Concealment” is the suppression of that which is true, by one having knowledge or belief of the fact and a duty to disclose the fact
When does Innocent Misrepresentation occur?
- When a person makes a statement of fact that he or she honestly and reasonably believes to be true, even though it is not
- The aggrieved party may rescind the contract but may not sue for damages
Is Innocent Misrepresentation fraud?
no
Can the innocent party sue for damages and rescind the contract for Fraud in the inception?
- may sue for damages
- may rescind contract
Can the innocent party sue for damages and rescind the contract for Fraud in the inducement?
- may sue for damages
- may rescind contract
Can the innocent party sue for damages and rescind the contract for fraud by concealment?
- may sue for damages
- may rescind contract
Can the innocent party sue for damages and rescind the contract for Silence as misrepresentation?
- may sue for damages
- may rescind contract
Can the innocent party sue for damages and rescind the contract for misrepresentation of law?
- usually cannot sue for damages
- usually cannot rescind contract
Can the innocent party sue for damages and rescind the contract for for innocent misrepresentation?
- may not sue for damages
- may rescind contract
What is Economic Duress?
- Occurs when one party to a contract refuses to perform his or her contractual duties unless the other party:
1) pays an increased price
2) enters into a second contract with the threatening party, or
3) undertakes a similar action
What is Undue Influence?
- Occurs when one person:
1) takes advantage of another person’s mental, emotional, or physical weakness, and
2) unduly persuades that person to enter into a contract - A contract entered into because of undue influence is voidable by the innocent party
What are the elements to prove Undue Influence?
1) A fiduciary or confidential relationship must have existed between the parties
2 The dominant party must have unduly used his or her influence to persuade the servient party to enter into a contract
What is the Statute of Frauds?
- State statutes that require certain types of contracts to be in writing
- Intended to ensure that the terms of important contracts are not forgotten, misunderstood, or fabricated
What types of contracts do most states require to be in writing?
- Contracts involving interests in land
- Contracts that by their own terms cannot possibly be performed within one year
- Collateral contracts where a person promises to answer for the debt of another
- Promises made in consideration of marriage
- Real estate agents’ contracts
- Agents’ contracts where the underlying contract must be in writing
- Promises to write a will
- Contracts to pay debts barred by the statute of limitations or discharged in bankruptcy
- Contracts to pay compensation for services rendered in negotiating the purchase of a business
- Contracts for the sale of goods for more than $500
- Finders fee contracts
What happens with contracts involving interests in land?
Any contract that transfers an ownership interest in real property must be in writing under the Statute of Frauds to be enforceable
- Real Property
- Fixed
What are examples of contracts involving interests in land?
- mortgages
- leases
- life estates
- easements
What is the Part Performance Exception to contracts involving interests in land?
An equitable doctrine that allows the court to order an oral contract for the sale of land or transfer of another interest in real property to be specifically performed if it has been partially performed and performance is necessary to avoid injustice.
What is the One Year Rule?
- An executory contract that cannot be performed by its own terms within one year of its formation must be in writing.
- Intended to prevent disputes about contract terms that may otherwise occur toward the end of a long-term contract.
- Contract may be oral if the performance of the contract is possible within the one year period.
What is a Collateral Contract?
- Occurs when one person agrees to answer for the debts or duties of another person
- Required to be in writing under the Statute of Frauds
What is a Guaranty Contract?
the contract between the guarantor and the original creditor
What is the Main Purpose Exception?
- If the main purpose of a transaction and an oral contract is to provide pecuniary benefit to the guarantor:
1) the collateral contract is treated like an original contract and
2) Does not have to be in writing to be enforced
Do contracts for the sale of goods costing $500 or more to be in writing?
Yes to be enforceable
What is the Equal Dignity Rule?
A rule that states that agents’ contracts to sell property covered by the Statute of Frauds must be in writing to be enforceable
What are the elements to Sufficiency of the Writing?
1) Formality of the Writing
2) Required Signature
3) Integration of Several Writings
What is the Formality of the Writing element to sufficiency of the writing?
- Generally, the law only requires a writing containing the essential terms of the parties’ agreement
- any writing can be enforceable under this rule
- a written contract does not have to be drafted by a lawyer or formally typed to be legally binding
What is the Required Signature element to sufficiency of the writing?
- The Statute of Frauds and the UCC require the written contract, whatever its form, to be signed by the party against whom enforcement is sought.
- The signature of the person who is enforcing the contract is not necessary.
What is the Integration of Several Writings element to sufficiency of the writing?
- The combination of several writings to form a single contract.
- The entire writing does not have to appear in one document to be an enforceable contract.
- Incorporation by reference
- Implied integration
Where a preprinted form contract is used:
- Typed words prevail over preprinted words
- Handwritten words prevail over both preprinted and typed words
What is Parol Evidence?
any oral or written words outside the four corners of the written contract
What is Parol Evidence Rule?
The rule states that if a written contract is a complete and final statement of the parties’ agreement, any prior or contemporaneous oral or written statements that alter, contradict, or are in addition to the terms of the written contract are inadmissible in court regarding a dispute over the contract
What are Exceptions to the Parol Evidence?
Parol evidence may be admitted in court if it:
- Shows that a contract is void or voidable
- e.g. evidence that the contract was induced by fraud, misrepresentations, duress, undue influence, or mistake
- Fills in the gaps in the contract.
Corrects an obvious clerical or typographical error.
- The court can reform the contract to reflect the correction.
What is the Merger, or Integration Clause to the Parol Evidence Rule?
- A clause in a contract that stipulates that it is a complete integration and the exclusive expression of the parties’ agreement.
- Parol evidence may not be introduced to explain, alter, contradict, or add to the terms of the contract.
What is Privity of Contract?
- The state of two specified parties being in a contract.
- Contracting parties have a legal obligation to perform the duties specified in their contract.
- If one party fails to perform as promised, the other party may enforce the contract and sue for breach.
What are Third Party Rights?
- Third parties generally do not acquire any rights under other people’s contracts
What are exceptions to third party rights?
1) Assignees to whom rights subsequently are transferred, and
2) Intended third-party beneficiaries to whom the contracting parties intended to give rights under the contract at the time of contracting
What is Assignment?
The transfer of contractual rights by the obligee to another party
What is an Assignor?
The obligee who transfers the right
What is an Assignee?
The party to whom the right has been transferred
Can Personal Service Contracts be assignable?
contracts for the provision of personal services are generally not assignable
Can Assignment of Future Rights be assignable?
Usually, a person cannot assign a current nonexistent right he or she expects to have in the future
Can Contracts Where Assignment Would Materially Alter the Risk be assignable?
A contract cannot be assigned if the assignment would materially alter the risk or duties of the obligor
Can Assignment of Legal Actions be assignable?
Legal actions involving personal rights cannot be assigned
What is the effect of an assignment of rights?
- Where there has been an assignment of a right, the assignee “stands in the shoes of the assignor” and is entitled to performance from the obligor.
- The unconditional assignment of a contract right extinguishes all the assignor’s rights.
What is a Notice of Assignment?
To protect his or her rights, the assignee should immediately notify the obligor that:
1) The assignment has been made, and
2) performance must be rendered to the assignee
What is the Anti-Assignment Clause?
- A clause that prohibits the assignment of rights under the contract.
- Used when obligor doesn’t want to deal with or render performance to an unknown third party.
What is the Approval Clause?
- A clause that permits the assignment of the contract only upon receipt of an obligor’s approval.
- Approval cannot be unreasonably withheld.
What are Covenants?
- An unconditional promise to perform.
- Nonperformance of a covenant is a breach of contract that gives the other party the right to sue.
What are Conditions?
A qualified or conditional promise that becomes a covenant is met
What are Conditions Precedent?
- Event that must occur before a party is obliged to perform under a contract.
- May be based upon meeting the party’s satisfaction.
1) Personal satisfaction test
2) Reasonable person test - Time of performance may be a condition precedent.
What are Conditions Subsequent?
This occurs when a contract provides that the occurrence or nonoccurrence of a specific event excuses performance of a contractual duty.
What are Concurrent Conditions?
- Parties to a contract must simultaneously render performance.
- Each party’s absolute duty to perform is based on the other party’s absolute duty to perform.
What are Express Conditions?
Express conditions exist if parties expressly agree to terms
What are Implied in fact conditions?
conditions that are implied from the circumstances surrounding the contract and conduct of the parties
A party’s duty to perform under a contract may be discharged by?
1) Mutual agreement of the parties
2) Impossibility of performance
3) Force Majeure clauses
4) Commercial impracticability
5) Operation of the law
What is Discharge by Agreement?
- The parties to a contract may mutually agree to discharge or end their contractual duties.
- Mutual Rescission
- Substituted Contract
- Novation
- Accord and Satisfaction
What is Discharge by Impossibility?
- Contracts may become impossible to perform.
- Death or Incapacity of promisor
- Destruction of subject matter
- Supervening illegality
What are Force Majeure Clauses?
- The parties may agree in their contract that certain events will excuse nonperformance of the contract.
- These clauses are called force majeure clauses.
- Natural disasters
- Labor strikes
- Shortages of raw materials
What is Commercial Impracticability?
- Most states recognize this doctrine as an excuse for nonperformance.
- Excuses performance if an unforseeable event makes it impracticable to perform.
- Examined on a case-by-case basis.
What is Discharge by Operation of Law?
Certain legal rules discharge parties from performing contractual duties.
- Statutes of Limitations
- Bankruptcy
- Alteration of the Contract
What are the types of performance?
1) Complete Performance
2) Substantial Performance
3) Inferior Performance
What is Complete Performance?
- Most contracts are discharged by strict performance.
- A fully performed contract is an executed contract.
- Tender of performance discharges contractual obligations.
What is Substantial Performance?
This occurs when there is a minor breach of contract.
- Performance deviates slightly from complete performance.
- Nonbreaching party may recover damages.
What is Inferior Performance?
- This is a material breach of contractual obligations.
- Nonbreaching party may rescind contract and seek restitution.
- Nonbreaching party is excused from any further performance.
What is an Anticipatory Breach?
- A breach that occurs when one contracting party informs the other that he or she will not perform his or her contractual duties when due.
- Also called anticipatory repudiation.
- Nonbreaching party’s duties are immediately discharged.
- Nonbreaching party may sue repudiating party at time of breach.
What are Monetary Damages?
- A non-breaching party may recover monetary damages from a breaching party.
- Monetary damages are available whether the breach was minor or material.
What are they types of Monetary Damages?
1) Compensatory Damages
2) Consequential Damages
3) Nominal Damages
4) Liquidated Damages
What are Compensatory Damages?
- Award of money intended to compensate a non-breaching party for the loss of the bargain.
- They place the non-breaching party in the same position as if the contract had been fully performed by restoring the “benefit of the bargain.”
What are Consequential Damages?
Foreseeable damages that arise from circumstances outside the contract.
What must one do to be liable for Consequential Damages?
The breaching party must know or have reason to know that the breach will cause special damages to the other party
What are Liquidated Damages?
Damages to which parties to a contract agree in advance if the contract is breached.
What is required to be lawful Liquidated Damages?
- The actual damages must be difficult or impracticable to determine, and
- The liquidated amount must be reasonable in the circumstances.
What are Nominal Damages?
- Damages awarded when the non-breaching party sues the breaching party even though no financial loss has resulted from the breach.
- Usually awarded in a small amount, such as $1.
- Cases involving nominal damages are usually brought on “principle.”
What is a Writ of Attachment?
Orders the sheriff to:
- Seize property in the possession of the breaching party that he or she owns, and
- To sell the property at auction to satisfy the judgment.
What is a Writ of Garnishment?
Orders that:
Wages, bank accounts, or other property of the breaching party that is in the hands of third parties be paid over to the non-breaching party to satisfy the judgment.
What are Equitable Remedies?
- Equitable remedies are available if there has been a breach of contract that cannot be adequately compensated by a legal remedy.
- They are also available to prevent unjust enrichment.
What is Reformation?
- Court rewrites a contract to express the parties’ true intentions.
- Usually used to correct clerical errors.
What is Intentional Interference with Contractual Relations?
A tort that arises when a third party induces a contracting party to breach the contract with another party.
What elements need to be shown for Intentional Interference with Contractual Relations?
- A valid, enforceable contract between the contracting parties.
- Third-party knowledge of this contract.
- Third-party inducement to breach the contract.
What is Breach of the Implied Covenant of Good Faith and Fair Dealing?
Under this covenant:
- The parties to a contract are held to the express terms of the contract, and
- They are also required to act in good faith and deal fairly in all respects in obtaining the contract.
- A breach of this implied covenant is a tort for which tort damages are recoverable.
What is an agency?
Agency is the fiduciary relationship “which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other so to act.”
What is the Principal?
The party who employs another person to act on his or her behalf
What is an agent?
the party who agrees to act on behalf of another
What are the three kinds of employment relationships?
1) Employer-Employee Relationship
2) Principal-Agent Relationship
3) Principal-Independent Contractor Relationship
What is an Employer-Employee Relationship?
A relationship that results when an employer hires an employee to perform some form of physical service.
An employee is not an agent unless he or she is specifically empowered to enter into contracts on the principal employer’s behalf.
What is a Principal-Agent Relationship?
An employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf.
The extent of this authority is governed by any express agreement between the parties and implied from the circumstances of the agency.
What is a Principal-Independent Contractor Relationship?
Principals employ persons or businesses who are not employees to perform certain tasks on their behalf.
These persons and businesses are called independent contractors.
What is the crucial factor in determining whether a person is an employee or an independent contractor?
the degree of control that the principal has over that person
What is an Express Agency?
Authority is expressly given to the agent by the principal
What is the enforcement of contract for Express Agency’s?
Principal and third party are bound to the contract
What is an Implied Agency?
Authority is implied from the conduct of the parties, custom and usage of trade, or act incidental to carrying out the agent’s duties
What is the enforcement of contract for Implied Agency’s?
Principal and third party acts are bound to the contract
What is an Apparent Agency?
Authority created when the principal leads a third party into believing that the agent has authority
What is the enforcement of contract for an Apparent Agency?
Principal and third party are bound to the contract
What is an Agency By Ratification?
Acts of the agent committed outside the scope of his authority
What is the enforcement of contract an Agency By Ratification?
Principal and third party are not bound to the contract unless the principal ratifies the contract
If the agent spends his or her own money, on the principal’s behalf, the principal owes a duty to reimburse the agent for all such expenses if they were:
1) Authorized by the principal
2) Within the scope of the agency
3) Necessary to discharge the agent’s duties in carrying out the agency
What is an Agent’s Duty of notification?
The agent’s has a duty to notify the principal of any information that is important
What is an Agent’s Duty of Accountability?
Agent has duty to maintain accurate accounting of all transactions undertaken on the principal’s behalf.
How can an Agency be terminated?
1) Acts of the parties
2) Operation of Law
What acts may terminate an agency?
1) Mutual agreement
2) Lapse of time
3) Purpose achieved
4) Occurrence of a specified event
What is an Irrevocable Agency?
An agency coupled with an interest:
- Special type of agency relationship
- Irrevocable by the principal
- Not terminated by the death or incapacity of either the principal or the agent
- Terminates only when the agent’s obligations are performed
What are some ways an agency can be terminated by Operation of law?
1) Death of the principal or agent
2) Insanity of the principal or agent
3) Bankruptcy of the principal
4) Impossibility of performance
5) Changed circumstances
6) War between the principal’s and agent’s countries
What is an Agent’s Duty of Loyalty to Principal?
An agent owes a fiduciary duty not to act adversely to the interests of the principal. Common breaches include:
What is the Duty of Loyalty breach Self Dealing?
Agents are generally prohibited from undisclosed self-dealing with the principal.
What is the Duty of Loyalty breach Usurping an Opportunity?
An agent cannot usurp an opportunity that belongs to the principal.
What is the Duty of Loyalty breach Competing with the Principal?
Agents are prohibited from competing with the principal.
What is the Duty of Loyalty breach Misuse of Confidential information?
The agent is under a legal duty not to disclose or misuse confidential information during or after course of the agency.
What is the Duty of Loyalty breach Dual Agency?
An agent cannot meet a duty of loyalty to two parties with conflicting interests.
What is an Agency’s Contract Liability to Third Parties?
- A principal who authorizes an agent to enter into a contract with a third party is liable on the contract.
- The third party can enforce the contract and recover damages from the principal .
What is a Fully Disclosed Agency?
- When the third party entering into the contract knows:
- That the agent is acting as an agent for a principal, and
- The actual identity of the principal
- The principal is liable to the third party.
- The agent is not liable.
What is a Partially Disclosed Agency?
An agency that occurs if:
- The agent discloses his or her agency status but does not reveal the principal’s identity, and
- The third party does not know the principal’s identity from another source
- Both the principal and the agent are liable to the third party if the principal fails to perform the contract.
What is an Undisclosed Agency?
An agency that occurs when the third party is unaware of either:
- The existence of an agency, or
- The principal’s identity
Both the principal and the agent are liable to the third party if the principal fails to perform the contract.
What is an Agency’s Tort Liability to Third Parties?
- The principal and the agent are each personally liable for their own tortious conduct.
- The principal is liable for the tortious conduct of an agent who is acting within the scope of his or her authority.
- The agent only is liable for the tortious conduct of the principal if he or she directly or indirectly participates in or aids and abets the principal’s conduct.
What is an Agency’s Frolic and Detour Negligence?
Agents sometimes do things during the course of his or her employment to further their own interests, rather than the principal’s
What is an Agency’s Coming and Going Rule Negligence?
Principal is generally not liable for injuries caused by its agents and employees while they are on their way to or from work.
What is an Agency’s Dual Purpose Mission Negligence?
An errand or other act that principal requests of an agent while the agent is on his or her own personal business.
What is an Agency’s liability for Intentional Torts?
- The principal is not liable for intentional torts of agents and employees that are committed outside the principal’s scope of business.
- Two tests to determine the scope of employment boundaries:
1) Motivation Test
2) Work-Related Test
What is the Motivation Test?
- If the agent’s motivation in committing an intentional tort is to promote the principal’s business, the principal is liable for injuries caused by the tort.
- If agent’s motivation is personal, principal is not liable.
What is the Work Related Test?
- Only applied in some jurisdictions
- If agent commits intentional tort within a work-related time or space, the principal is liable.
- Agent’s motivation immaterial.
What is the liability for Independent Contractor’s Torts?
- A principal is generally not liable for the tortious conduct of independent contractors it hires.
- Independent contractors are personally liable for their own torts.
- The rationale behind this rule is that principals do not control the means by which the results are accomplished.
What is the most common form of business organization in the US?
Sole Proprietorship
What is a Sole Proprietorship?
- Owner is actually the business.
- Business is not a separate legal entity.
What are advantages of a Sole Proprietorship?
- Ease and low cost of formation.
- Owner can make all management decisions.
- hiring and firing employees.
- No other approvals required.
- Sole proprietor owns all of the business
- Has the right to receive all of the business’s profits.
- Easily transferred or sold
What are disadvantages of a Sole Proprietorship?
- Access to capital is limited to:
personal funds, plus
any loans he or she can obtain. - Legally responsible for the business’s contracts
- Responsible for any torts committed in the course of employment.
What is the creation of a sole proprietorship?
- No formalities.
- No federal or state government approval is required.
- Some local governments require a license to do business within the city.
What is the personal liability of a sole proprietorship?
- The sole proprietor bears the risk of loss of the business.
- Will lose his or her entire capital contribution if the business fails.
- The sole proprietor has unlimited personal liability.
- Creditors may recover claims against the business from the sole proprietor’s personal assets.
What is a General Partnership?
- Voluntary association
- Two or more people
- Carry on business for profit
- Creates rights and duties between partners and with third parties
- General partners personally liable for the debts and obligations of the partnership.
What are the requirements for a General Partnership?
1) A voluntary association of two or more persons
- Includes natural persons, partnerships, corporations
2) Carrying on a business
3) As co-owners
- All partners must agree to participation
4) For profit
What is the Evidence of Partnership?
Prima facie evidence:
- Receipt of a share of business profits
- Compelling evidence:
1) Agreement to share in profits and losses
2) Right to participate in management
What is a partnership agreement?
- May be written or oral
- Statute of Frauds applies
- No formalities required
- Recommended that it be in writing
1) Called partnership agreement or articles of partnership
2) UPA will fill gaps
What are the Rights Among Partners?
- Unless otherwise agreed, each partner:
- Has a right to participate in management, and
- Has an equal vote on partnership matters.
- Under UPA, a simple majority decides most ordinary partnership matters.
What are Partners’ Rights to Share in Profits?
- UPA mandates right to an equal share in profits and losses
- Agreements often provide otherwise
1) If agreement describes sharing of profits, but losses are silent, then losses are shared in same proportion
2) If agreement states sharing of losses, but is silent as to profits, then profits are shared equally
What can Partnerships do under the Entity Theory of Partnership?
- UPA considers partnerships as separate legal entities
- They can:
1) Hold title to property (real and personal)
2) Transact business in the partnership name
3) Sue in the partnership name
What are the rules regarding a fictitious partnership name?
- must file fictitious business name certificate
- publish notice
- Cannot be similar to name used by another business
What is the partner Duty of Loyalty?
- Duty that a partner owes not to act adversely to the interests of the partnership
- imposed by law
- cannot be waived
What must a partner choose in the case of a conflict between partnership interests and personal interests?
partner must choose the interest of the partnership
What is the partner Duty of Care?
- Partners must use the same level of care and skill that a reasonable person in the same position would use in the same circumstances
- A breach of this duty of care is negligence
- A partner is liable to the partnership for any damages caused by his or her negligence
What is the partner Duty to Inform?
- Duty partner owes to inform his or her co-partners of all information he or she possesses, that is relevant to the affairs of the partnership.
- Knowledge is imputed to other partners.
What is the partner Duty of Obedience?
- Duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership.
- Partner who breaches this duty is liable to the partnership for any damages caused by the breach.
Can a partner sue the partnership?
No
What is the tort liability of a general partnership?
- Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners
- both negligence and intentional torts covered
What is Joint and Several Liability of a general partnership?
- Partners are jointly and severally liable for tort liability of the partnership.
- i.e., the plaintiff can sue one or more of the partners separately.
- If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners.
- Release of one partner does not discharge the others.
What is the Contract Liability of a general partnership?
- Partners are jointly liable for contracts and debts of partnership.
- Third party must name all partners in suit.
- If suit does not list all, judgment cannot be collected.
- If one is released, all are released.
- Successful third party may collect judgment against any or all partners.
What is the liability of incoming partners?
- New partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution.
- The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner.
What is the winding-up of a partnership?
- Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership.
- The surviving or remaining partners have the right to wind-up the partnership.
Can a bankrupt partner participate in the winding-up of a partnership?
No
When must a Notice of Dissolution be given to third parties in a partnership?
- Third parties who dealt with partnership must be given actual notice
- Third parties who had knowledge of the partnership must be given actual or constructive notice
- Third parties who had no knowledge owed no notice
What is the order of asset distribution in the winding up of a partnership?
1) Creditors (except partners who are creditors)
2) Creditor-partners
3) Capital contributions
4) Profits
What is the right of survivorship for a general partnership?
- Does not pass to heirs or next of kin
- Value passes to beneficiaries and heirs
What is a Limited Partnership?
- Statutory creations
- Have both general and limited partners
- used for investing in real estate, movies, oil and gas
What is a general partner?
invest capital, manage the business, and are personally liable for partnership debts
What are limited partners?
invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution
A limited partnership must have at least one general partner and one limited partner. T/F
True
How does one form a Limited Partnership?
- The creation of limited partnerships are formal
- Requires public disclosure
- Entity must comply with the statutory requirements of the RULPA or other state statute
- must file certificate of limited partnership
What is a Certificate of Limited Partnership?
- Document that two or more persons must execute and sign.
- Contains name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner.
- Must be filed with secretary of state.
- Not formed until certificate filed.
When can the firm name of a limited partnership include the surname of a limited partner?
1) If it is also the surname of a general partner, or
2) The business was carried on under that name before the admission of the limited partner
What is a Limited Partnership Agreement?
Document that sets forth:
- The rights and duties of the general and limited partners; and
- The terms and conditions regarding the operation
dissolution and termination terms.
- If no agreement, certificate serves as articles.
What happens if there is no agreement about share of profits and losses in a Limited Partnership?
If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner’s capital contribution
When can a new limited partner be added to a Limited Partnership?
- A new limited partner can be added only upon the written consent of all partners.
- Agreement can provide otherwise.
- Admission effective after amendment filed.
What is the liability of General and Limited Partners?
- General partners of a limited partnership have unlimited liability for debts and obligations of the partnership.
- Limited partners are liable only up to amount of their capital contributions.
- Give up right to participate in the control and management
What are permissible activities of a limited partner?
Being a:
- agent of the limited partnership
- employee of the limited partnership
- contractor of the limited partnership
- General partner
- consultant or advisor to a general partner
What are exceptions to the General Rule of Liability of Limited Partners?
Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations:
- Defective Formation
- Participation in Management
- Personal Guarantee
When may a Limited Partnership Dissolve?
Partnership may be dissolved:
1) At the end of the life of the limited partnership as specified in the certificate of limited partnership.
2) With the written consent of all general and limited partners.
3) Because of the withdrawal of a general partner.
4) With the entry of a decree of judicial dissolution.
What must happen upon the dissolution of a Limited Partnership?
- a limited partnership must wind-up its affairs upon dissolution
- Certificate of cancellation must be filed
