R5 - Business Law Part 1 Flashcards
Methods of Formation
A contract is a legally enforceable agreement
Methods of formation include:
- Express Contract—Formed by language (oral or written)
- Implied-in-Fact Contract—Formed by conduct
- Implied-in-Law (Quasi) Contract—Not a contract but a remedy to prevent unjust enrichment
- Unilateral Contract—One promise is given in exchange for performance; the contract is not
formed until performance is completed
- Bilateral Contract—When there are two promises and a promise is exchanged for a promise, the contract is formed when the promises are exchange
Sources of Contract Law
Understand the sources of contract law:
- UCC for sale of goods
- Common law for all other contracts
(“RISE” mnemonic—real estate, insurance, services, and employment law).
Elements of a Legally Enforceable Contract
Elements of a Contract—
(1) Agreement (offer and acceptance),
(2) consideration, and
(3) lack of defenses.
*Pass key: Notice that “a writing” is NOT a general element of a contract. Certain contracts must be evidenced by writing, but a general rule is that writing is not required.
Offer and Acceptance—
- A “meeting of the minds.”
- Advertisements are generally not offers. An advertisement is an offer only if it is a promise to perform a very specific act conditioned upon acceptance.
- Terms must be definite and certain.
Offer for sale of goods under UCC needs:
(1) quantity term
Offer to create a contract under common law (“RISE”: Real estate, Insurance, Services, Employment) needs:
(1) identity of the offeree and the subject matter,
(2) price to be paid,
(3) time of the performance,
(4) quantity involved, &
(5) nature of the work to be performed
- An offer must be communicated to the offeree.
Termination of Offer—
- Revocation (an offer is considered to be revoked if the offeree obtains info from a reliable source that the subject matter of the offer has been sold),
- rejection (including counteroffers), and
- by operation of law (“DIDI”: death, incompetency, destruction, and illegality).
*Not necessary that death or incompetency is communicated to the other party.
*Exception: option contract is not terminated by the death of a party
- Revocations and rejections are effective only when received.
Acceptance—
- Only the offeree may accept.
- They must use a reasonable method; unless otherwise stated, they must use the specified method.
- Acceptance must be the mirror image of the offer, except in contracts for the sale of goods. If a communication includes a term different from one in the offer, it constitutes a rejection of the offer and a counteroffer, which the original offeror may accept or reject.
Mailbox Rule—
- Acceptances are effective upon dispatch.
- Offeror may opt out by stating that “acceptance is effective upon receipt.”
Consideration—
- The legal value (not necessarily equal or fair) through a bargained-for exchange.
- In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be: LEGALLY SUFFICIENT
- An offer may be terminated by the offeror at any time unless the offeree gave consideration to keep the offer open.
- *Preexisting Duty Rule—If a party is already legally bound to perform, there is not adequate consideration.
- If parties legitimately disagree on the amount owed under their contract, a promise to compromise has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute. However, if the amount owed is already settled (liquidated), a promise to compromise lacks legal value and cannot serve as consideration.
Pass key: Option Contracts for Offer Extention
Generally, a promise to keep an offer open for a specified time is unenforceable unless it is made in writing by a merchant (i.e., a merchant’s firm offer) or consideration supports the promise, in which case, an option contract is formed.
The examiners frequently use irrevocability as the wrong answer choice. They will tell you about the parties’ negotiations and ask you to pick a true statement. One answer choice frequently is that the offer is “irrevocable” or “it could not be revoked because it is an option”. Scrutinize the facts carefully. The key point to remember is that IF CONSIDERATION WAS NOT GIVEN TO KEEP THE OFFER OPEN, IT IS NOT AN OPTION.
Pass key: Mailbox Rule Approach
- Was the offer revocable? Chances are it was, unless the offeree paid consideration the keep the offer open (an option).
- Determine whether the mailbox rule applies (acceptance is effective on dispatch rather than receipt, unless the offer stated that an acceptance had to be received to be effective)
- Compare any effective revocation date with the effective acceptance date. If a revocation was effective first, the offer was terminated and there is no contract. If the acceptance was effective first, there is a contract and the revocation was ineffective.
*If the attempted acceptance arrives late, it will be deemed a counteroffer.
*Mailbox rule only makes acceptances effective on dispatch; revocations, rejections, and counteroffers are effective only upon receipt.
Defenses
*Pass key: Defenses are the most tested area in contracts. Remember: very FEW defenses makes a contract VOID (unenforceable by either party). MOST defenses make a contract only VOIDABLE (it may be avoided at the option of the party adversely affected).
The following defenses, along with lack of agreement and lack of consideration, can make a contract unenforceable:
Fraud—”MAIDS”: (M) Misrepresentation of a material fact, (A) actual & reasonable reliance by plaintiff, (I) intent to induce plaintiff’s reliance, (D) damages & (S) scienter (intent to deceive).
Innocent Misrepresentation—The same as fraud but with no “scienter.”
Duress—Unlawful use of a threat of harm. If harm threatened is by physical force, then the
contract is void. If the harm threatened is economic or social, the contract is voidable.
Undue Influence—Abusing a position of trust or confidence.
Mutual Mistake—Both parties are mistaken as to a basic assumption of the contract. If both
parties are unaware of the existence of the subject matter, the contract is void.
Unilateral Mistake—A mistake by one party; this is generally not a defense unless the other party
knew or should have known of the mistake.
Illegality—Illegal contracts are void. Failure to have a required license makes all contracts void
unless the license was a mere revenue-raising measure. Covenants not to compete are valid in
the sale of business contracts and employment contracts if they are reasonably needed,
reasonable as to time, and reasonable as to distance.
Minors—Minors may disaffirm anytime during minority and within a reasonable time after
becoming an adult. They can ratify once they reach the age of majority by failing to disaffirm
within a reasonable time, expressly ratifying or retaining the benefits.
Intoxication—A defense only when the intoxication is so severe that it prevents the person from understanding the nature of the contract.
Adjudicated Mental Incompetency—A contract made after a person has been adjudicated
mentally incompetent is void.
Statute of Limitations—Four to six years to sue, measured from the date of the breach.
Statute of Frauds—Contracts that need to be evidenced by writing (“MY LEGS” mnemonic:
marriage, year, land, executors, goods, surety). Contracts in which marriage is the consideration, contracts that by their terms cannot be performed within one year, contracts for interests in land (& leases of real property of more than a year), contracts by executors to pay estate debts out of personal funds, contract for the sale of goods for $500 or more, and surety contracts (pay the debt of another).
— They need only be signed by one party but can be enforced only against the one who signed.
— Terms can be stated in more than one document.
*Examiners try to trick you with the $500 threshold - it applies only to GOODS contracts
Impossibility—Events make performance impossible (e.g., destruction of subject matter or death of the party to perform services).
Accord and Satisfaction and Substitute Contract—An accord is an agreement to substitute one
contract for another, and satisfaction is the execution (performance) of the accord. Until the
accord is completed, a party may sue under the original contract. A substituted contract
discharges the original contract immediately.
Novation—Occurs when a new contract substitutes a new party for an old party in an existing contract and all the parties agree that the old party is immediately released from liability.
Parol Evidence Rule—This prohibits the admission of prior oral or written evidence or
contemporaneous oral statements to contradict the terms of a fully integrated (i.e., apparently
complete) written contract. Exceptions to show fraud, duress, a mistake, or any subsequent event or change.
*Subsequent statements (AFTER the writing is signed) that contradict (or change a term) are ADMISSIBLE.
Remedies
Material or Substantial Breach—At common law, the non-breaching party can be discharged from the contract if there is a material breach; if the breach is only minor, there is no discharge, just damages. Under the Sales Article, a non-breaching party can be discharged for any breach (even a minor one— the perfect tender rule).
KEY: damage measures are intended to put the non-breaching party in as good as a position as he would have been had there been no breach
Once a breach occurs, the non-breaching party may be entitled to the following damages:
- Compensatory—Money to put the non-breaching party in the position he or she would have been in had there been no breach. Consequential damages are recoverable if reasonably foreseeable.
- Specific Performance (for Land and Unique Items)—A court order requiring the breaching party to perform.
- Liquidated Damages—Damages agreed to in the contract; must be reasonable and not a penalty
- Punitive Damages—These punish the defendant; they are usually not available for breach of contract. *It is an incorrect choice unless the question asks which remedy is not available or the cause of action is for fraud (a tort) rather than a breach of contract.
- Rescission or Cancellation—These cancel the contract and return parties to their original
positions
Formation Defenses: Void vs. Voidable Distinction
VOID -> “DA PIE”
(D)estruction of the subject matter
(A)djudicated incompetent
(P)hysical duress
(I)llegality
(E) fraud in the Execution
ELSE -> VOIDABLE
