R7 - Business Law: Part 1

Question 1

What are liquidated damages?

Answer 1

Damages agreed in the contract if there is breach. i.e. I keep your down payment if you back down.

Question 2

When are liquidated damages enforceable?

Answer 2

Liquidated damages are enforceable if the amount is:
1. Reasonable in relation to the actual harm done
2. Not a penalty

Question 3

What is an agency relationship?

Answer 3

The agent acts on behalf of the principal. An agent has the following:
1. Fiduciary duty to the principal
2. Must act in the principal’s best interest
3. Various other duties, such as obedience and loyalty

Question 4

What is fiduciary duty?

Answer 4

Fiduciary duty means the duty of loyalty.

Question 5

What is actual authority?

Answer 5

A principal is liable for the contracts entered into by its agent if the agent has the authority to enter into contracts.

Question 6

What is renuntiation?

Answer 6

When the agent terminates (the act of terminating) the agency relationship. If the agency is coupled with an interest, only the agent has the power to terminate the agency relationship,

Question 7

What is revocation?

Answer 7

When the principal performs the act of terminating the agency relationship.

Question 8

When can an agent’s authority terminate by operation of law?

Answer 8

1. Death of principal or agent (notice need to be given to the agent)
2. Bankruptcy of principal
3. Illegality of purpose - operating without a required license
4. Destruction of the subject matter
5. Incapacity of principal
6. Subsequent illegality

No notice need be given.

Question 9

What is a tort?

Answer 9

Wrongful actions committed by agent in an employment relationship. A tort is a private wrong for which the remedy is usually is money damages rather than jail time. Compare that to a crime that is a public wrong for which the remedy is often jail time and money damages.

Question 10

When is the principal liable for the tort of an agent?

Answer 10

The principal is liable for the tort committed within the scope of the agent’s employment. If the agent is negligent on the job, not only is the agent liable, but so is the principle.

Question 11

What is Respondeat Superior?

Answer 11

A principal, including a corporation, can be held liable for an employee’s tort committed within the scope of employment

Question 12

What is the Ultra Vires doctrine?

Answer 12

A doctrine limiting a corporation’s power to act outside the scope of the corporation’s stated purposes or statutory power.

Question 13

What is ratification?

Answer 13

Occurs when a principal agrees to be bound by a previously unauthorized contract entered into by an agent on the principle’s behalf.

Question 14

What is a unilateral contract?

Answer 14

In a unilateral contract, one promise is given in exchange for performance (e.g., Ann promises to give Barb $10 if Barb will wash Ann’s car). A contract is not formed until performance is completed.

Question 15

What does an offer under common law need to include to create a contract?

Answer 15

1. The identity of the offeree and the subject matter
2. the price to be paid
3. the time of performance
4. The quantity involved, and
5. the nature of the work to be performed.

Question 16

What does an offer for the sale of goods only need to include?

Answer 16

It only needs to include the quantity term (e.g., “I offer to sell 100 widgets”).

Question 17

Are advertisements considered offers?

Answer 17

No, widely distributed statements such as advertisements are not offers because they are not addressed to anyone. They are usually considered only to be invitations seeking offers.

Question 18

What is an option contract?

Answer 18

An option contract is formed when the promisor gives a promise to keep the offer open in exchange for consideration from the promise. Giving the right to do something in exchange for a promise can also be considered as forming an option contract.

Question 19

What is the mailbox rule?

Answer 19

Acceptances are generally effective when they are dispatched (i.e., mailed, e-mailed, faxed, etc.) if properly addressed. It is irrelevant if a properly addressed acceptance is lost or delayed.

if the offer does not state that acceptance is effective upon receipt and does not specify the means of acceptance, the offeree may invoke the mailbox rule.

Question 20

What is consideration?

Answer 20

It is the price of contracting. Both sides of the contract must be supported by legally sufficient consideration. The law will not enforce gratuitous promises.

Question 21

What are the two elements of consideration?

Answer 21

1. Legal value is given by each party
2. bargained for exchange

Question 22

What is duress?

Answer 22

Duress arises when a party’s free will to contract is overcome by the unlawful use of a threat of harm.

Question 23

When is a contract considered void under duress?

Answer 23

If the harm threatened is physical force (e.g., “sign the contract or I’ll break your arm”)

Question 24

When is a contract considered voidable under duress?

Answer 24

If the harm threatened is economic or social (e.g., “I’ll fire you if you don’t sign the contract” or “I’ll divorce you if you don’t sign the contract”)

Question 25

What is undue influence?

Answer 25

• A party’s free will to contract is overcome by the defendant’s abuse of a position of trust or confidence.
• The person in the position of trust or confidence (e.g., a spouse, trustee, guardian, attorney, etc.) uses the position to take advantage of the other’s weakness, infirmity, or distress.
• Undue influence makes a contract voidable.

Question 26

What is the parol evidence rule?

Answer 26

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

Question 27

What is a unilateral mistake?

Answer 27

If one party makes a mistake, the contract could exist but not if the other party knows it’s a mistake and it’s just taking advantage. The contract would be voidable at the option of the party who made the mistake if the other party knows it’s a mistake.

Question 28

What is mutual mistakes?

Answer 28

If both parties to a contract are mistaken about a material fact, the adversely affected party can avoid the contract. The rule does not apply to mistakes as to value because the value is considered a matter of opinion.

Question 29

When can a minor dissafirm a contract?

Answer 29

A minor (usually a person under the age of 18) may dissafirm a contract anytime while a minor, or even within a reasonable time after becoming an adult.

Question 30

When can a person become bound on a contract with a minor?

Answer 30

A person becomes bound on a contract with a minor when the minor reaches the age of majority by ratifying the contract.

Question 31

How can a contract with a minor can be ratified after reaching majority?

Answer 31

A contract may be ratified by:
1. Failing to dissafirm within a reasonable time after reaching majority
2. Expressly ratifying the entire contract orally or in writing
3. Retaining or accepting the benefits.

Question 32

What is fraud in the inducement?

Answer 32

When a party is aware its making a contract, but the terms are materially misrepresented. This act makes a contract voidable.

Question 33

What is a statute of limitation?

Answer 33

A statute of limitation provides that a legal action must be commenced within a certain period of time.

Question 34

Is a contract enforceable if the statute of limitations expire?

Answer 34

A contract would be unenforceable. It does not make a contract void, but bars access to the judicial remedies.

Question 35

When is the status of limitation time computed?

Answer 35

The statute of limitations is computed from the date the contract is breached.

Question 36

What is the timeline for the status of limitation to apply?

Answer 36

Although contracts status of limitation vary, 4 to 6 years is typical.

Question 37

What are the status of fraud?

Answer 37

1. One year: impossible to complete within one year-services, sales of a business.
2. Real estate: Sale of a house, land, building
3. Guaranty: Co-signor’s signature would be required. Oral promise is not sufficient.
4. Investment securities: commercial paper.
5. Executor of a will: Executor’s signature
6. Sale of goods $500 or more

ORGIS

Question 38

What is impossibility?

Answer 38

If after the parties enter into a contract an event occurs that will make performance of the contract objectively impossible (i.e., impossible for anyone to perform), impossibility is available as a defense.

Question 39

Could a contract be avoided if the evidence is destroyed?

Answer 39

Yes, if the subject matter of the contract has been destroyed, the contract may be avoided due to impossibility.

Question 40

What is objective impossibility?

Answer 40

The death or incapacity of a person to perform a service contract will discharge the contract.

Question 41

What is novation?

Answer 41

A novation is a defense to a party who has been released from a contract. It occurs when a new party substitutes an old party in an existing contract.

Question 42

What is condition precedent?

Answer 42

It is a condition that must occur before the other party must perform.

Question 43

What is condition concurrent?

Answer 43

These are conditions that must occur simultanously. For example, the payment of money and exchange of goods in most face-to-face sales contracts

Question 44

What is condition subsequent?

Answer 44

A condition that will not occur after a party’s duty to perform has arisen and will cut off that duty

Question 45

What is an accord?

Answer 45

It is an agreement to substitute one contract for another

Question 46

What is satisfaction?

Answer 46

It is the execution of the accord.

Question 47

What is accord and satisfaction?

Answer 47

Accord and satisfaction discharge the original duty. Until the accord is satisfied a party may sue under the original contract or the accord.

Question 48

What is admissable under the parol evidence rule?

Answer 48

Oral or written modifications made after the contract has been entered into (subsequent modification) are admissible under the parol evidence rule.

Question 49

What is specific performance?

Answer 49

it is a court order (remedy) that the breaching party perform or face contempt charges in relation to land or unique personal property (e.g., one-of-a-kind-item, such as patent) under a contract.

Question 50

What is foreseeability damages?

Answer 50

consequential damages that at the time the contract was formed could be reasonably anticipated as a result of a breach.

Question 51

What is mitigation (reasonable effort to avoid damages)?

Answer 51

Under contract law, a non-breaching party cannot recover for damages that could have been reasonably avoidable. The party must mitigate damages.

Question 52

What is rescission or cancellation?

Answer 52

Cancels the contract and restores the parties to their former position.

Question 53

When is rescission or cancellation available?

Answer 53

Rescission or cancellation is available for mutual or unilateral mistakes, fraud, and most material contract breaches.

Question 54

When can a party not rescind or cancel a contract?

Answer 54

A party may not rescind or cancel a contract if the contract has been substantially performed (doctrine of substantial performance). The non-breaching party only remedy is monetary damages for the minor breach.

Question 55

What is the timeline for a merchant’s firm offer to be irrevocable?

Answer 55

A merchant’s firm offer is irrevocable for the time stated, or if no time is stated, for a reasonable time, but in no event longer than 3 months.

Question 56

What items qualify a merchant for a firm offer?

Answer 56

1. The seller must be a merchant (regularly deals in goods of the kind sold)
2. The offer must be in writing and signed by the merchant.
3. The offer must give assurance that it will be kept open for a certain time.

Question 57

What is an acceptance and breach of contract?

Answer 57

if prompt shipment of goods is an acceptance but if the seller ships goods that do not conform with contract terms without notifying the buyer is a breach.

Question 58

What is a counteroffer?

Answer 58

When the seller reasonably notify the buyer that nonconfirming goods are shipped only as an accomodation to the buyer, the shipment is not an acceptance.

Question 59

What is impossibility to perform in a contract?

Answer 59

Under the contract law, if an event occurs that makes the contract objectively impossible to perform (i.e., no one could perform), the contract is discharged.

Question 60

What is impracticability to perform in a contract?

Answer 60

Under the Sales Article (UCC), a contract is discharged for mere impracticability (e.g., extremely more burdensome than anticipated because of the occurrence of an unforseen event).

Question 61

What is the implied warranty of fitness of a particular purpose?

Answer 61

where the seller knows the particular purpose for which goods are to be used and that the buyer is relying on the seller’s skill or judgement

Question 62

What is the implied warranty of title?

Answer 62

Implied in every sales contract is the warranty that the seller has good title and the right to transfer that title. This warranty can only be disclaimed by specific language or by circumstances that indicate the seller is not guaranteeing there is a title. Examples:
- “As is” or “with all faults”
- “Seller makes no warranties beyond the face of this instrument”
- “I disclaim any and all warranties”

Question 63

What is anticipatory repudiation?

Answer 63

Occurs when either the buyer or seller indicates in advance of performance that they will not perform. The non-breaching party may sue immediately, cancel the contract, demand assurance or wait until the time for performance and sue the party that fails to perform.

Question 64

Can the repudiating party withdraw from a contract under the anticipatory repudiation?

Answer 64

The repudiating party has the right to withdraw the repudiation until the other party relies (brings suit)

Question 65

What is the buyer’s right to specific performance?

Answer 65

Specific performance may be used in a sales contract if the goods are unique or if the buyer cannot reasonably cover.

Question 66

What is replevin?

Answer 66

The right to recover goods wrongfully in the hands of the seller. Maybe be used if the good are identified and the buyer cannot reasonably cover.

Question 67

What is a Surety?

Answer 67

A surety is directly liable on the contract (i.e., creditors will find the surety if the principal debtor fails to pay)

Question 68

What is a guarantor?

Answer 68

A guarantor is liable only if the creditor is unable to collect from the debtor after exhausting all legal remedies, including demand, suit, judgement, and exhaustation of all supplementary proceedings (i.e., co-signer)

Question 69

What do the statutes of fraud required for a suretyship?

Answer 69

The status of fraud requires written evidence of the promise to answer for the debt of another signed by the surety. A suretyship is no enfoceable if there is not a written memorandum.

Question 70

What is subrogation?

Answer 70

After paying the principal debtor’s obligation, the surety may enforce (i.e., subrogate) any rights that the creditor has against the principal debtor.

Question 71

What is contribution?

Answer 71

• On payment, a surety is entitled to contribution from the cosureties for their share of the payment.
• The right of contribution arises only after the surety has already paid more than her share.
• If the contract does not specify the liability of each surety, each surety is liable for a pro rata share determined by the number of solvent sureties.

Question 72

What is exoneration?

Answer 72

One surety may compel the cosureties, by a suit in equity for exoneration, to pay their pro rata share of debt.

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

Question 73

What is creditors’ composition?

Answer 73

It is an agreement between the debtor and at least two creditors that the debtor pays the creditors less than their full claims in full satisfaction of their claims.

Question 74

What is attachment of the security interest?

Answer 74

The relationship between the debtor and the secured party (creditor). Once interest is attached, if the debtor defaults, the creditor has the right to take the collateral from the debtor to satisfy the debt.

Question 75

What are the 3 requirements for an attachment in order for a secured interest to be enforceable?

Answer 75

1. Agreement of the parties (either an authenticated record of the agreement or the creditor’s having either possession or control of the collateral)
2. Value is given by creditor
3. Debtor has rights in the collateral

When a creditor takes possession, no written security agreement is required.

Question 76

What is perfection of the security interest?

Answer 76

To acquire the maximum priority in the collateral over other parties who may have an interest in the collateral (e.g., subsequent purchasers of the collateral, unsecured creditors, and other priority creditors)

Question 77

How can a security interest be perfected by filing of financing statements?

Answer 77

There are 3 requirements:
1. The name and address of the debtor and the secured party.
2. A description or indication of the collateral covered by the financing statement, and,
3. If the collateral is related to the real property, a description of that real property.
The financing statement need not include a statement of the purpose of the transaction.

Question 78

What should a principal do to confirm revokation of an agent?

Answer 78

the principal should notify the third parties that were working with the agent or the agency termination.

Question 79

What is a writ of attachment?

Answer 79

It is an order by the court to a sheriff to seize a person’s property. It can apply to personal property or real property, and so the writ can be used even when a person wons no real property.

Question 80

What is garnishment?

Answer 80

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

Question 81

What is consideration?

Answer 81

It is the price of contracting. Both sides of the contract must be supported by legal sufficient consideration. Something must be given in exchange for a promise for it to be enforceable. Two elements of consideration:
1. Something of legal value by each party
2. A bargained-for exchange

Question 82

When can an oral contract be enforceable under the Statute of Frauds?

Answer 82

If any of the following exceptions apply, an oral contract will be enforceable even without sufficient writing:
1. Specially manufactured goods
2. Written confirmation
3. Admitted in court
4. Performed (enforceable to the extent of the performance of the party sought to be held liable).

If goods were shipped to the party repudiating the contract and those are not accepted, then he/she will not be liable.

Question 83

Can a security interest be perfected for deposit accounts and money?

Answer 83

No, a security interest may be perfected as to all kinds of collateral except deposit accounts and money by filing financial statements.

Question 84

Under agency law, when does the angent need a writing to act on behalf of the principal?

Answer 84

1. When the agreement concerns the sale of land (real estate), or
2. It is impossible for the agent to perform the agent’s duties within one year

Question 85

What is recovery of secret profits?

Answer 85

If the agent obtained a secret profit, the principal can recover the secret profit, usually by imposing a contructive trust on the profit.

Question 86

What condition should be met to form an agency?

Answer 86

Formation of an agency requires a principal with contractual capacity (not a minor or incompetent) and consent of the parties (parties agree to act as principal and agent).

Question 87

Does the surety has the right to compel the creditor to first collect from the debtor?

Answer 87

No, the surety does not have the right to require the creditor to first collect from the debtor. When the debtor defaults, the debtor may do any of the following:
1. immediately demand payment from the surety
2. immediately demand payment from the debtor
3. immediately go after collateral, if there is any

Question 88

What is the purpose of the Fair Debt Collection Practice Act (FDCPA)?

Answer 88

It curbs abuses by collection agencies in collecting consumer debts. it does not apply to creditors attempting to collect their own debt.

Question 89

What are prohibitions of the Fair Debt Collection Practice Act (FDCPA)?

Answer 89

it restricts collections agencies the ability to call third parties, such as relatives of the debtor, to indirectly pressure the debtors. Prohibitions include:
1. Contacting the debtor at inconvenient or unusual times (convenient time is between 8 am and 9 pm)
2. contacting the debtor directly if the debtor is represented by an attorney.
3. Using harrasing or abusive language in talking to the debtor
4. Making false misleading claims
5. contacting the debtor at the place of employment if the employer objects.

Question 90

What defense can the surety use to successfully limit the surety’s liability to a creditor?

Answer 90

The surety can use the following:
1. It’s own contractual incapacity (e.g., minority, adjudicated insinity, etc.)
2. surety’s bankruptcy

Question 91

What is subrogation?

Answer 91

This is an enforcement of creditor’s rights against the principal. After paying the principal debtor’s obligation, the surety may enforce (i.e., is subrogated to) any rights that the creditor has against the principal debtor. This includes the right to enforcement of any security interest and any priority in bankruptcy that the creditor had.

Question 92

What is reimbursement?

Answer 92

The surety is entitled to reimbursement from his principal debtor for any amount the surety paid on behalf of the debtor. Also referred as “indemnification.”

Question 93

When is compensatory damages (benefit of the bargain)?

Answer 93

The standard measure of damages for personal service contracts awards the non-breaching party enough money to obtain substitute performance (i.e., the difference between the cost of subsitute performance and the contract price). It puts the injured party in the same position as if the contract has been performed or agreed.

Question 94

How is shipment of nonconfirming goods treated based on the shipment method?

Answer 94

Shipment of nonconforming goods constitutes a breach of contract. When there is a breach, risk of loss is generally borne by the breaching party no matter whether the contract is “shipment” or “destination.”

Question 95

When is an express warranty with respect to the sale of goods created?

Answer 95

An express warranty can be made by any seller and may be oral or written. The warranty must include the following:
1. Must involve facts.
2. Be part of the basis of the bargain (i.e., made at a time when it could have played some part in the buyer’s decision to buy).

Question 96

When is a security interest effective between parties?

Answer 96

A security interest is effective once the interest is attached. If the debtor defaults, the creditor has some right to take the collateral from the debtor to satisfy the debt.

Question 97

Does attachment provide the creditor the right against third parties to the collateral?

Answer 97

No, attachment does not provide the creditor with the right against third parties who also have an interest in the collateral. To gain rights over third parties, a creditor must take added steps to perfect the security interest.

Question 98

What is perfection of the collateral?

Answer 98

It serves as a form of notice that the creditor has a security interest in the collateral, and because of this notice, gives the creditor rights in the collateral superior to certain third parties.

Question 99

What is the implied warranty of fitness?

Answer 99

Where the seller knows the particular purpose for which goods are to be used and that the buyer is relying on the seller’s skills or judgement. There is an implied warranty that the goods will be fit for the purpose.

Question 100

When is an unauthorized transaction or agreement by the agent voidable?

Answer 100

An unauthorized transaction or agreement by an agent is voidable by the third party if the party cancels the transaction or agreement prior to the principal’s ratifying the transaction or agreement. if the principal ratifies before the third party cancels, the transactions i not void.

Question 101

What is a subsitute contract?

Answer 101

The original parties are both released from the original agreement but are both bound by a new agreement.

Question 102

What is a security interest?

Answer 102

A security interest is a limited right in specific personal property (collateral) of the debtor that allows the creditor to take the property (commonly referred to as repossessing) if the debtor fails to fulfill the creditor obligation.

Question 103

What is a secured transaction?

Answer 103

The creditor wants to be able to rely on something other than the debtor’s promise to ensure payment. A security interest on collateral is that something.

Question 104

What is a Purchase Money Security Interest (PMSI)?

Answer 104

This is a special type of security interest. It has priority over all other types of security interest in the same collateral, if the PMSI is properly perfected. A PMSI arises when:
1. A creditor sells the collateral to the debtor on credit, retaining a security interest for the pruchase price; or
2. The creditor advances funds used by the creditor to purchase the collateral.

Question 105

When there is an oral contract for longer than 1 year, and one of the parties fails to enforce the contract, can the party be held liable?

Answer 105

Yes, if the party to execute the contract fully performed. The party failing to comply with the oral terms of the contract can be held liable. This is an exception to the status of fraud when stating that contracts for more than one year have to be in writing.

Question 106

What type of assets can be perfected using perfection by filing?

Answer 106

A security interest may be perfected as to all kinds of collateral except deposit accounts and money. These are perfected by filing a financing statements

Question 107

How does perfection by taking possession (pledge) works?

Answer 107

A secured party may perfect a security interest in most types of collateral simply by taking possession of the collateral. Similar to when the pawn shop takes an item in exchange for a loan.

Question 108

How does automatic perfection of a security interest works?

Answer 108

Article 9 provides that a security interest can be perfected simply by the attachment of the security interest without any added requirements. This is called automatic perfection. There are only two types of automatic perfection:
1. Purchase of Money Security Interest (PMSI) in consumer goods
2. Small-scale assignment of accounts

Question 109

What is a small-scale assignment of accounts?

Answer 109

A small-scale assignment of accounts (e.g., assignment of a few accounts receivable) is automatically perfected.

Question 110

When is the seller entitled to recover the full contract price from the buyer plus incidental damages?

Answer 110

1. The goods cannot be resold for any price (often the case when the goods are specially manufactured)
2. The goods are destroyed after risk of loss has passed to the buyer.