REG: Chapter 4 Flashcards
Nature and Classification of Contracts
What is the difference between Implied-in-Law, Implied-in-Fact and an Express contract?
Implied in fact contract
* May be formed without an express terms of the agreement
* The facts of the situation imply an intent of both parties in the contract
Implied-in-law
* Also known as quasi contract
* Prevents unjust enrichment of one party when the facts show that there was no intent by both parties to form a contract
* Imposed mutually dependant and concurrent conditions to reach a result even though nothing is stated in the contract
Express Contract
* A contract where terms (i.e. money) are specifically agreed on
Nature and Classification of Contracts
What’s the difference between void and voidable?
Void
* The contracts are not in effect and are not recognized under law
Voidable
* The contract is not valid due to an issue (i.e. fraud)
* The contract may be enforced if the innocent party enters into a contract
* A contract cannot be voided by either party if its valid
Nature and Classification of Contracts
What is an adhesion contract?
- It permits the seller to avoid costs associated with negotiating terms at an individual level
- The transaction costs of inexpensive goods and services are reduced
Mutual Assent (Offer and Acceptance)
Can a person accept a contract if it has already been rejected?
- Rejection by the offeree automatically terminates the offer
- An offer cannot be accepted once it has been rejected
- If the offeree attempts to accept the offer after rejection, then it is a new offer
Mutual Assent (Offer and Acceptance)
When may an offer be revoked?
- An offer may be revoked by words or action
- Due to operation of law under certain circumstances
- Death or incompetence of either party
- A contract is revoked if the person dies prior to the acceptance
Mutual Assent (Offer and Acceptance)
What are the elements of an offer?
- Communication to the offeree is made or authorized by the offeror
- Intent to enter into the contract
- Be sufficiently definite and certain
An offer does not need to be communicated in words in order to be an offer. An offer may be oral
Mutual Assent (Offer and Acceptance)
Are price tags considered a contract?
- Price tags are considered as advertising
- There are no words of promise
- They are address to the general public and not one person
- The amount is usually indefinite
Mutual Assent (Offer and Acceptance)
When is a contract unenforceable because of indefiniteness?
- The requirements term that is identified in the conract must be reasonable to the seller’s needs or buyer’s business
- The contract cannot exist if the terms of the contract is based on the buyer’s or seller’s will
Mutual Assent (Offer and Acceptance)
When is an offer terminated by operation of law?
- Incapacity due to death or insanity
- Destruction of the subject matter
- The contract is illegal
An offer is not terminated if the subject matter is sold to a third party
Consideration
What is consideration of a contract?
- Consideration can either be a promise, act or forebearnace
- Consideration does not occur if the act happened in the past or has a pre-existing legal duty
- Consideration has occurred if the person receiving the promise experiences a legal detriment or receives a legal benefit
- Consideration must be legally sufficient
- Must provide a bargained-for exchange
- There must be mutual consideration provided by the other party
Capacity
What causes a contract to be void?
- The party is incompetent
- If another party cosigns the note or acts as surety, then the contract will not be void and they will be responsible
Legality
Lack of Genuine Assent
What makes a contract void?
- Physical coercion
- Fraud in the execution
- Making a contract in a person who is incompetent
- Death of one of the parties
- Duress through physical compulsion
Lack of Genuine Assent
What makes a contract voidable?
- Undue influence
- Duress through improper threats
- Mutual mistakes of facts
- Fraud in the inducement
Lack of Genuine Assent
What is duress?
- A threat, in either words or actions, in order for a person to enter a contract that they did not intend to enter
- Taking advantage of the other party’s financial difficult does not constitute duress
Lack of Genuine Assent
What is undue influence?
- A person is induced to enter into a contract by another person
- One party can take advantage of the other party because there is close relationship with the parties
Lack of Genuine Assent
What is fraud in the inducement?
- The consideration is misrepresented
- Make a contract voidable
- A material fact that is intentionally misstated by the seller to a buyer
Lack of Genuine Assent
What is innocent misrepresentation?
- False representation of a material fact
- Intended to induce reliance
- Is justifiably and detrimentally relied upon
- The only remedy is rescission
Lack of Genuine Assent
What is rescission?
- Cancellation of the agreement
- Both parties are restored to the positions that they had before entering into the contract
- Payment of reliance damages may occur
Lack of Genuine Assent
What is a defense that a CPA can take if he is being sued for negligence?
- Due Care
- The CPA must perform the work with a degree of knowledge and expected skill
- The CPA has followed the standards (i.e. GAAP, PCAOB, GAAS, etc.)
Statute of Frauds
What are the requirements of Statue of Fraud?
- Only the defendant’s signature is required
- If there is a secondary promise to pay (i.e. co-lender), then the promise must be in writing
- A service contract is subject to the statute if performance takes more than a year
- Recovery is not limited to the original price
- Contracts involving more than $500 for the sale of goods must be in writing
- Agreements in consideration of marriage
Parol Evidence Rule
What services can use the Parol Evidence Ruling?
- Real estate
- Services
- Sale of goods
- Sale of a business
Performance, Discharge, and Breach
What can discharge a party’s obligation from a contract?
- Accord and Satisfaction
- Mutual rescission
Performance, Discharge, and Breach
What is the frustration of purpose doctrine?
- When one of the items for consideration in the contract cannot occur
- Example: Contract to purchase a room overlooking a parade route, but then the parade is cancelled
Performance, Discharge, and Breach
What are the doctrines of impossibility and impracticability?
- Performance is excused if unforseeable circumstances occur that would result in the contract not being fulfilled
- Ordinary business risks (i.e. change in weather condition) cannot be considered when using these doctrines as a defense
Performance, Discharge, and Breach
What type of recovery can be made when a breach of contract is not material?
- The recovery is limited to monetary damages
- The party substantially performed and is entitled to receive the contract price less any costs for damages
Performance, Discharge, and Breach
What is a material breach of contract?
- An unjustified failure to perform a substantial amount of work that is stated in the contract
- It discharges the nonbreaching party from any obligation to perform
- The nonbreaching party can seek damages or relief as a remedy for the breach
- A breach is not material if the injured party substantially receives of the benefits that were stated in the contract
Performance, Discharge, and Breach
What is the difference between novation and substituted contract?
Novation
* Substitutes a new party for the original party
Substituted Contract
* A new contract that involves all original parties
* Discharges the original duties and impose new duties
Performance, Discharge, and Breach
What is repudication/anticipatory breach
- An express or implied indication that a party has no intention to perform the contract
- It discharges the nonbreaching party’s duty to perform
Performance, Discharge, and Breach
What is commercial impracticability?
- A contract is cancelled due to unforeseen and unjust hardship
- It is less rigid than the impossiblity and impracticability doctrine
Remedies
What type of damages can be recovered due to a breach of contract?
- Compensatory
- Foreseeability of damages
- Mitigation of damages
- Specific peformance
Punitive damages cannot be recovered in for a breach of contract
Remedies
When are monetary damage remedy and specific performance remedy used?
- Monetary damages is the primary remedy
- Specific performance remedy is used when subject of the breached contract is land or other unique property, such as an intangible asset
Remedies
What are liquidating damages?
- The parties agree in advance to the damages to be paid if there is a breach
- It is not intended as a penalty
- It reasonably forecasts the probable loss due to the breach
- The loss is difficult to calculate
- The liquidating damage clause is void if it is used to prevent a breach and is not in good faith to estimate probable damages
Contract Beneficiaries
What is a creditor beneficiary?
Has standing to enforce a contract where they are the third party
Example
* Person A owes Person B
* Person C is in contract with Person A to purchase goods
* Instead of Person C paying Person A, they pay Person B to satisfy the obligation owed
Contract Beneficiaries
What is a third-party donee beneficiary?
- A contract is entered into by the primary parties that directly benefits a third party
- A doneed beneficiary occurs when the gift is promised to a third party
- An example of a third-party donee beneficiary is a beneficiary that is name on a life insurance policy
Assignment and Delegation
What type of contracts are assignable?
- Option contract rights
- Mortgage Payments
- Car Payments
Assignment and Delegation
What are assignments?
- An assignment occurs when the person that receives services from the contract (i.e. bank for a loan) assigns the contract to another party
- The new party has whatever rights that the previous owner had
- The basic rule is that the assignment cannot materially change the original contract or increase the other party’s risk
- The assignment must be made with the intent to transfer, otherwise the rights under the contract would be invalid
- Contracts are generally assignable and the contract can be signed without the assignor’s consent
Assignment and Delegation
When is it necessary to have both the original parties agree on an assignment?
- When there is an amendment to the contract
- Both parties must agree in order for the assignment to be enforceable
Assignment and Delegation
When an assignment is made for value, what are the implicit warranties that the assignor makes to the assignee?
- The assignor will do nothing to impair the value of the assignment
- The right actually exists and is not subject to limitation
- The right is genuine
Assignment and Delegation
What type of contracts cannot be assigned?
- Contracts that prohibits the rights to be assignable
- Increases the other party’s risk
- Personal services
- Malpractice insurance policy rights
Assignment and Delegation
What is delegation?
- A person who has a duty to perform authorized another person to perform the duty
- For example, a person buying a building from another person and taking over that person’s mortgage payments instead of getting their own financing
- If either party breaches the agreement, then the effected party may sue either party
