Test 4: Chapters 9, 10, & 11

Question 1

Contract

Answer 1

A promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes duty.

Question 2

4 elements of a contract

Answer 2

1. The agreement
2. The consideration
3. Contractual capacity
4. A legal object

Question 3

Agreement

Answer 3

One of the four elements necessary for a contract; consists of an offer made by one party, the offeror, and the acceptance of the offer by another party, the offeree.
- Consists of an offer by one party (the offeror) and an acceptance of the terms of the offer by the other party (the offeree)

Question 4

Offer

Answer 4

A key factor in the agreement element of a contract; consists of the terms and conditions set by one party, the offeror, and presented to another party, the offeree.

Question 5

Acceptance

Answer 5

A key factor in the agreement element of a contract; consists of the agreement of one party, the offeree, to the terms of the offer in the contract made by the other party, the offeror.

Question 6

Consideration

Answer 6

The bargained-for exchange; what each party gets in exchange for his or her promise under a contract.

Question 7

Contractual capacity

Answer 7

The legal ability to enter into a binding agreement.

• Persons who don’t have the capacity to enter into legally binding contracts include those who are under the age of majority, intoxicated, or suffering from mental illness.
• Most adults over the age of majority have the legal ability to enter into binding contracts.
• Understand what your obligations and duties are under the contract
• Means you have the right to understand your obligations and duties
• If you don’t have it, you have incapacity or incompetence

Question 8

Legal object

Answer 8

A purpose that does not violate a statute of public policy.

- The contract cannot be either illegal or against public policy.

Question 9

Defenses to the contract’s enforcement

Answer 9

Lack of genuine assent and Lack of proper form

Question 10

Lack of genuine assent

Answer 10

A defense to the agreement of a contract in which the offeree claims that the offeror secured the agreement through improper means, such as duress, fraud, undue influence, or misrepresentation.

Question 11

Lack of proper form

Answer 11

Typically means it lacks a writing. Certain contracts require a writing, and if there is none, the agreement will not be enforced

Question 12

Uniform Commercial Code (UCC)

Answer 12

A statutory source of contract law in the United States applicable to transactions involving the sale of goods. The UCC was created in 1952 and adopted by all 50 states, the District of Columbia, and the Virgin Islands; it may be modified by each state to reflect the wishes of the state legislature.

• Made to remedy some of the difficulties created by a patchwork of different laws governing commercial transactions
• It because law in each state that adopted it completely or partially as part of its state code
• UCC is the most passed state law

Question 13

How to find out what the law is regarding contracts

Answer 13

Go to the Restatement (Second) of the Law of Contracts

- The compilation has subsequently been revised and published as Restatement of the Law Second, Contracts.

Question 14

All contracts can be classified as:

Answer 14

Bilateral or Unilateral

Question 15

Why is it important to know if a contract is bilateral or unilateral?

Answer 15

• Important to know which because that classification determines when the offeree is legally bound to preform.
• Whether a contract is bilateral or unilateral depends on what response the offeror (the party proposing the contract) expects from the offeree (the person agreeing to or accepting the contract)

Question 16

Bilateral contract

Answer 16

A promise exchanged for a promise.
- As soon as the promises are exchanged, a contract is formed and the parties’ legal obligations arise.
- Ex. Shannon promises to pay Gary $1,000 in exchange for his promise to paint her car on July 1, they have a bilateral contract.
- Zappos.com INC case: Provides explanation of when an arbitration clause is illusory and therefore unenforceable.
o Someone hacked into Zappos site and stole information. A customer whose information got stolen sued Zappos, but Zappos said they signed the terms and conditions

Question 17

Unilateral contract

Answer 17

A promise exchanged for an act.

• The offeror wants a performance to form the contract—the offeror wants the offeree to do something, not promise to do something
• Most common unilateral offer: a reward
• Ex. Jim posts a sign saying “$50 reward for the safe return of my dog.” If Rita says she’ll find the dog, she’s not making a contract because the unilateral offer calls for an action, not a promise. The offeree is under no obligation actually to do the act, and the offeror may revoke the offer at any time before performance.
• Once an offeree begins performance, the offeror must hold the offer open for a reasonable time to allow the offeree to complete the performance.

Question 18

Express contract

Answer 18

A contract in which all the terms are clearly set forth in either written or spoken words.

Question 19

Implied contract

Answer 19

A contract that arises not from words of agreement but from the conduct of the parties.
- Ex. When you have a dental emergency and your dentist pulls your severely infected tooth without prior negotiation about payment, or even any mention of payment, you have an implied contract for payment for his services.

Question 20

3 conditions that must be met for the courts to find an implicit (or implied-in-fact) contract:

Answer 20

1. The plaintiff provided some property or service to the defendant.
2. The plaintiff expected to be paid for such property or service and a reasonable person in the position of the defendant would have expected to pay for such property or services.
3. The defendant had an opportunity to reject the property or services but did not.

Question 21

Quasi-contract

Answer 21

(sometimes called implied-in-law contracts) A court-imposed contractual obligation to prevent unjust enrichment.

• Not actually contracts
• Ex. Jones sees that a company is about to repave his driveway but doesn’t say anything until after and refuses to pay. The court will probably impose a quasi-contract, requiring Jones to pay the paving company the fair market value of the resurfacing.
• Limits: The enrichment must be unjust
• The courts will not make people pay for others’ mistakes

Question 22

Valid

Answer 22

A term applied to a contract that includes all four elements of a contract: agreement (offer and acceptance), consideration, contractual capacity, and legal object.

• One that will be enforced
• However, sometimes a contract may be valid but unenforceable.

Question 23

Contracts that don’t have a legal object are:

Answer 23

Not valid

Question 24

Contracts may lack a legal object because:

Answer 24

They violate a statute or violate public policy

Question 25

Unenforceable

Answer 25

A term applied to a contract that, because of a law, cannot be enforced by the courts.
- Ex. Sale of real estate

Question 26

Void

Answer 26

A term applied to a contract that is not valid because its object is illegal or is has some defect that is so serious that it is not a contract.
- In effect, not a contract at all

Question 27

Voidable

Answer 27

A term applied to a contract that one or both parties have the ability either to withdraw from or enforce.

• If the parties discover the contract is voidable after one or both have partially performed, and one party chooses to terminate the contract, both parties must return anything had already exchanged under the agreement so that they will be returned to the condition they were in at the time they entered into the agreement.
• Certain types of error in the formation of a contract lead to it being voidable.
• Minors (however, if the minor is emancipated this does not apply or if they’re married)

Question 28

Difference between void/voidable:

Answer 28

Void: Contract isn’t valid because it’s illegal or something similar.
Voidable: When one or both parties are able to either withdraw from or enforce.

Question 29

Disaffirm

Answer 29

?????

Question 30

Executed

Answer 30

A term applied to a contract in which all of the terms have been fully performed.

Question 31

Executory

Answer 31

A term applied to a contract in which not all of the terms have been fully performed.
- Ex. Randolph hires Carmine to paint his garage on Saturday for $800, with $200 paid as a down payment and the balance due on completion of the job, the contract becomes executory as soon as the agreement is reached. When the down payment has been made and the painting is halfway completed, the contract is still executory. Once the payment has been finished and the final payment made, the contract is an executed contract.

Question 32

Formal contract

Answer 32

A contract that must have a special form or must be created in specific manner.

Question 33

The Restatement (Second) of Contracts identifies the following 4 types of formal contracts:

Answer 33

1. Contracts under seal
2. Recognizances
3. Letters of credit
4. Negotiable instruments

Question 34

Contract under seal

Answer 34

A contract that has a seal certifying its legality. Such contracts require no consideration for them to be legal.

• The term under seal comes from the days when a contract was literally sealed with a piece of soft wax into which an impression was made. Today, sealed contracts may still be literally sealed with wax or some other soft substance, but they are more likely to be simply identified with the word seal or the letters L.S. (abbreviation for locus sigilli, which means “the place for the seal”) at the end of the document
• States today don’t require contracts to be under seal. However, 10 states still allow a contract without consideration to be enforced if it is under seal.

Question 35

Recognizance

Answer 35

An obligation in which a party acknowledges in court that he or she will perform some specified act and/or pay a price on failure to do so.
- Ex. Bond used as bail in a criminal case. The person agrees to return to court for trial or forfeit the bond.

Question 36

Letter of credit

Answer 36

A binding document that a buyer can request from a bank to guarantee that the payment for goods will be made to the seller.
- The Uniform Commercial Code governs letters of credit.

Question 37

Negotiable instrument

Answer 37

A written document signed by a person who makes an unconditional promise to pay a specific sum of money on demand or at a certain time to the holder of the instrument; an acceptable medium for exchanging value from one person to another.

• Most commons forms are checks, notes, drafts, and certificates of deposit
• Primarily governed by the UCC

Question 38

Informal Contract

Answer 38

A contract that requires no formalities.

• Also called a simple contract
• May be quite complex, but they are called simple because no formalities are required in making them.

Question 39

3 Elements of an offer

Answer 39

1. Intent
2. Definite and certain terms
3. Communication to the offeree

Question 40

Intent

Answer 40

The intended purpose or goal of an action, especially in a contract.

• The offeror must manifest an intent to be bound by the offeree’s acceptance
• The courts interpret the words and actions of the parties the way a reasonable person would interpret them.

Question 41

Lucy v. Zehmer case

Answer 41

• Made a bet and then drew up a contract while drunk
• Decision: the parties had entered into a binding agreement, and the court enforced the agreement
• Significance: Courts look at the circumstances surrounding the alleged making of a contract and focus on the outward manifestations of a person’s intent.
• Basically, be careful when joking about entering into a contract

Question 42

Preliminary negotiations

Answer 42

An invitation to negotiate or an expression of possible interest in an exchange is not an over.
- Ex. If Rachel asked Bill whether he would sell his car for $5,000, she is not making an offer; just inquiring about his potential willingness to sell.

Question 43

Advertisements

Answer 43

If a custom furniture maker places an ad in the paper the says, “Old fashioned, hand-crafter cedar rocking chairs only $250 the first week in May,” the store is merely inviting customers to come to the store and offer $250 for a rocker.

• However, under limited circumstances an ad can be treated as an offer. If it appears from the ad that the store did intend to make an offer, the courts will treat it as an offer.
• Fur coat case:
• Some states have consumer protection laws requiring advertisers to state in their ads either that quantities of the item are limited to the first X amount of people or that rain check will be available if the item sells out.

Question 44

Auctions

Answer 44

• When a person places a good with an auctioneer for sale by auction, is the seller making an offer or is the bidder? Depends on what kind of auction is taking place.
• If nothing is stated to the contrary in the terms of the auction, an auction is presumed to be with reserve, meaning the seller is merely expressing an intent to receive offers.
• In an auction without reserve, the seller is treated as making an offer to accept the highest bid (very few auctions are without reserve)

Question 45

Under common law, the terms of the offer must be:

Answer 45

Definite and certain

Question 46

With reserve

Answer 46

the seller is merely expressing an intent to receive offers

Question 47

Without reserve

Answer 47

The seller is treated as making an offer to accept the highest bid (very few auctions are without reserve)

Question 48

Material terms

Answer 48

Those terms that allow a court to determine what the damages are in the event that one of the parties breaches each other.

Question 49

Janky v. Batistatos

Answer 49

• Decision: A valid contract didn’t exist because the term mutual global release is not definite enough to be enforceable
• Significance: Illustrates the importance of making sure that all the essential terms of a proposed contract are definite and, if necessary, defined in the offer.

Question 50

5 ways to terminate an offer

Answer 50

1. Revocation by the offeror
2. Rejection by the offeree
3. Death or incapacity of the offeror
4. Destruction or subsequent illegality of the subject matter of the offer
5. Lapse of time or failure of other conditions stated in the offer

Question 51

Revocation by the offeror

Answer 51

The offeror is said to be the master of his offer and, can revoke it at any time, even if he says he will hold the offer open for a stated period of time

Question 52

Option contract

Answer 52

An agreement whereby the offeree gives the offeror a piece of consideration in exchange for the offeror’s agreement to hold the offer open for the specified period of time.
- Ex. If the person who made the offer is ill, and you are afraid he or she might die

Question 53

Rejection by the offeree

Answer 53

Regardless of how long the offer was stated to be open, once the offeree rejects it, it is terminated.

Question 54

Death of incapacity of the offeror

Answer 54

The offer terminates immediately if the offeror dies or loses the legal capacity to enter into the contract.

• This termination occurs even if the offeree doesn’t know of the terminating event
• Exception: when the parties had already entered into an option contract to hold the offer open for a set period of time (the administrator of the offeror’s estate or the guardian of the offeror must hold the offer open until it expires in accordance with the option contract.

Question 55

Destruction or subsequent illegality of the subject matter

Answer 55

If the subject matter of the offer is destroyed or becomes illegal, the offer immediately terminates.
- Ex. If Jamie offers Bill a job managing the riverboat casino he plans to open on January 1 but, before Bill accepts the offer, the state decides no longer to allow riverboat casinos to operate in the state, the offer of employment terminates.

Question 56

Lapse of time or failure of another condition specified in the offer

Answer 56

If the offer states that it will be help open for only a certain time, the offer will terminate when that time expires. In the absence of a time condition in the offer, the offer will expire after the lapse of a reasonable amount of time.

Question 57

Elements of the Acceptance

Answer 57

1. Manifestation of intent to be bound to the contract
2. Acceptance of definite and certain terms: The mirror-image rule
3. Communication to the offeror

Question 58

Manifestation of intent to be bound to the contract

Answer 58

2 ways an offeree can manifest her or his intent to enter into the contract: by performance or by a return promise.

Question 59

Silence as a form of acceptance

Answer 59

As a general rule, silence can’t be used to form a contract.

Question 60

Mirror-image rule

Answer 60

The principle that holds that the terms of the acceptance must mirror the terms of the offer; if the terms of the acceptance do not mirror the terms of the offer, no contract is formed and the attempted acceptance is a counteroffer.

• When a bilateral contract is being formed under the common law, the mirror-image rule applies to the acceptance.
• If the terms of the acceptance are different from those in the offer, various states treat the terms differently (in most states, the terms are said to cancel each other out, and the courts then look to the UCC for neutral terms to insert into the contract).

Question 61

To eliminate the problem of the battle of the forms, UCC Section 2-207 modified the mirror-image rule by providing that, as a general rude, an offeree may include in the acceptance terms that are additional to or different from the terms of the offer as long as:

Answer 61

1. The offeror didn’t explicitly state in the offer that all terms of the offer must be accepted exactly as proposed
2. The offeror doesn’t promptly reject the new terms on receipt of the acceptance
3. The new terms don’t materially change the terms of the original offer

Question 62

Communication to the offeror

Answer 62

An offeror has the power to control the means by which the acceptance is communicated, and if the offeror specifies that only a certain mean of of communication will be accepted, then only that method of communication forms a valid offer.

• If no means of communicating the acceptance is specified, any reasonable means is generally acceptable.
• Telephone, telegraph, mail, fax, and e-mail are all valid means of accepting an offer.
• If a person drafting an offer wants acceptance to be only by a particular means, the offer must make it clear that only a certain means is allowed.

Question 63

Mailbox rule

Answer 63

The principle that holds that an acceptance is valid when it is placed in the mailbox, whereas a revocation is effective only when received by the offeree. In some jurisdictions, the mailbox rule has been expanded to faxes.
- Today, it is likewise applied to e-mail transmissions in that once the acceptance is sent, it is considered accepted.

Question 64

The effect of an acceptance after a rejection

Answer 64

If an acceptance is received after a rejection is received, the acceptance is not valid because the rejection terminated the over.

Question 65

Consideration

Answer 65

• Rule: Consideration is what a person will receive in return for performing a contract obligation.
• Can be anything, as long as it is the product of a bargained-for exchange.
• In a business context, it is often money
• Rule: For a promise to be enforced by the courts, there must be consideration
• Something of value given in exchange for something else of value; it must be the product of a mutually bargained-for exchange.

Question 66

Types of consideration and examples

Answer 66

1. Benefit to the promisor (ex. A promise to stay in a job until a particular project is complete- this is a benefit to the employer).
2. A detriment to the promise (ex. A promise to your football coach to refrain from riding your motorcycle during football season even though you love riding it
3. A promise to do something (ex. A promise to cook dinner for your roommate for the next six months)
4. A promise to refrain from doing something (ex. A promise to stop drinking alcohol during exam week)

Question 67

Hamer v. Sidway

Answer 67

• Uncle promises $5,000 to nephew to stop drinking and smoking but then Uncle dies

Question 68

Type of contract/Promisor/Promisee:

Answer 68

1. Bilateral/A promise/A promise

2. Unilateral/A promise/An act

Question 69

An exception to the rule requiring consideration:

Answer 69

Promissory estoppel

Question 70

Promissory estoppel

Answer 70

The legal enforcement of an otherwise unenforceable contract due to a party’s detrimental reliance on the contract.

Question 71

Promissory estoppel occurs when 3 conditions are met:

Answer 71

1. One party makes a promise knowing the other party will rely on it.
2. The other party does rely on the promise.
3. The only way to avoid injustice is to enforce the promise.

Question 72

Adequacy of consideration

Answer 72

• Rule: The court seldom considers adequacy of consideration.
• Means that the court doesn’t weigh whether you made a good bargain.
• Exception: if it appears that the sale of the assets was done to avoid payment to creditors

Question 73

Illusory promise

Answer 73

A situation in which a party appears to commit to something buy really has not committed to anything. It is not a promise and thus not consideration.

• Rule: An illusory promise is not consideration.
• Ex. Shawn offers to sell Molly his skis, and she says “I’ll look at them in the morning, and if I like them, I’ll pay you.” She hasn’t promised anything yet.

Question 74

Past consideration

Answer 74

• Rule: Past consideration is no consideration at all.
• A promise can’t be based on consideration that was provided before the promise was made.
• For a promise to be enforceable, there must be bargaining and an exchange.

Question 75

Preexisting duty

Answer 75

• Rule: A promise to do something that you are already obliged to do is not valid consideration.
• 2 parts to this rule:
  o First, performance of a duty you are obligated to do under the law is not good consideration (ex. A police officer is sworn to hold up the law, so they can’t collect an award for capturing a suspected criminal).
  o Second, performance of an existing contractual duty is not good consideration. (ex. Under the contract, the pool must be completed by a certain date. The contractor says it’ll be $5,000 extra to get it done by then. Gene says okay but when it’s done he is not obligated to pay the $5,000 because they had a preexisting contract to complete the pool by that date.

Question 76

Exceptions to the preexisting-duty rule

Answer 76

o Unforeseen circumstances
o Additional work
o UCC- sale of goods

Question 77

Unforeseen circumstances

Answer 77

Events that a reasonable person would not be expected to anticipate.
- If a party to a contract agrees to do additional work, the promise is valid consideration.

Question 78

Liquidated debt

Answer 78

Debt for which there is no dispute between the parties about the fact that money is owed and the amount of money owed.

• Ex. A creditor’s promise to accept less than owed, when the debtor is already obligated to pay the full amount, is not binding.
• Exception: when the debtor offers different performance (ex. Accepts a car instead of money for debt).

Question 79

Unliquidated debt

Answer 79

Debt for which the parties either dispute the fact that any money is owed or agree that some money is owed but dispute the amount.
- A dispute over an unliquidated debt may be settled for less than the full amount if the parties enter into an accord and satisfaction.

Question 80

Accord and satisfaction

Answer 80

An arrangement between contracting parties whereby one of the parties substitutes a different performance for his or her original duty under the contract.
- The promise to perform the new duty is the accord, and the actual performance of that new duty is the satisfaction.
- The accord is the new agreement to pay less than the creditor claims. The satisfaction is the payment, by the debtor, of the reduced amount.
- If the debtor fails to pay the new amount, the creditor may then sue for the full amount of the original debt.
- Ex. Writing “paid in full” on the check sent: 2 exceptions to this:
o Any offer to settle a claim for less than the amount owed must be sent to a particular address and/or person.
o If a business does inadvertently case a paid-in-full check, the business has 90 days from the date is cashed that check to offer repayment in the same amount to the debtor.

Question 81

3 requirements that must be met for accord and satisfaction:

Answer 81

1. The debt is unliquidated (i.e., the amount or existence of the debt is in dispute).
2. The creditor agrees to accept as full payment less than the creditor claims is owed
3. The debtor pays the amount they have agreed on.

Question 82

Capacity

Answer 82

The legal ability to enter into a binding contract.

• Natural persons over the age of majority are presumed to have the full legal capacity to enter into binding, legal contracts.
• The third element of a legally binding contract.
• A person who ahs legal capacity to contract is one who has the mental ability to understand his or her rights and obligations under a contract and will presumably be able to understand how to comply with the terms of the agreement.

Question 83

A person has only limited capacity to enter into a legally binding contract if the person is:

Answer 83

• A minor
• Suffering from a mental deficiency that prevents the person from understanding the nature and obligations of contracts
• Intoxicated

Question 84

A person has no capacity to enter into a contract if the person:

Answer 84

• Has been adjudicated insane
• Has been adjudicated a habitual drunkard
• Has had a legal guardian appointed to enter into contracts on his or her behalf.

Question 85

Incapacity (incompetence)

Answer 85

Some sort of mental or physical defect that prevents a natural person from being able to enter into a legally binding contract.
- A person may have no capacity (any attempted contract is void), or limited capacity (ability to form only voidable contracts).

Question 86

Disaffirmance of the contract

Answer 86

• Because minor’s contracts are voidable, they have the right until a reasonable time after reaching the age or majority, to disaffirm, or avoid, their contracts.
• The minor only needs to have an intention to rescind the contract (by words or actions), but the minor must avoid the entire contract- they can’t choose to disaffirm only a portion of it.
• In most states, the minor’s obligation is to notify the competent party of the intent to disaffirm and return to the competent party any consideration received under the contract that was still under the minor’s control, regardless of the condition of the consideration.
• If the consideration has been destroyed or damaged, the minor returns whatever is left of it, and the other party has no recourse against the minor under most circumstances.
• A number of states have now modified the duty of the minor on disaffirmance so that the minor has a duty of restitution that requires them to place the competent party back in the position that party was in at the time the contract was made.
• The disaffirmance must occur before or within a reasonable time of the minor reaching the age of majority.
• What a reasonable time is determined on a case-by-case basis.
• If the minor uses a fake ID to enter into a contract: depends on which state, but in most it doesn’t matter and the minor can still disaffirm the contract even though they lied.
• Purpose of this law: to keep minors from being taken advantage of

Question 87

Exceptions to the minor’s right to disaffirm the contract

Answer 87

• As a general rule, most states will not allow a minor to disaffirm contracts for life insurance, health insurance, psychological counseling, the performance of duties related to stock and bond transfers and bank accounts, education loan contract, child support contracts, marriage contracts, and contracts to enlist in the armed services.
• Some states hold that when a minor who appears to be of the age of majority misrepresents his or her age and a competent party relies on that misrepresentation in good faith, the minor gives up the right to disaffirm the agreement. Justification: any minor who intends to misrepresent their age doesn’t need the protection that disaffirmance is designed to provide.
• Compromise some states have found: Requiring the minor to restore the competent party to that party’s pre-contract position before allowing the disaffirmance or by allowing the minor to disaffirm but then giving the competent party the right to sue the minor in tort and recover damages for fraud.

Question 88

Liability of minors for necessaries

Answer 88

• Contracts for necessaries are sometimes considered an exception to the rule that minors can disaffirm their contracts.
• A minor can disaffirm contracts for necessaries, but the minor will be held liable for the reasonable value of the necessary (ensures minors can get the basic necessities of life when their parents won’t provide for them).

Question 89

Contract for a necessary

Answer 89

A contract that supplies the minor with the basic necessities of life generally thought of as food, clothing, shelter, and basic medical services.

• Some courts define a necessary as what is needed for the minor to maintain their standard of living and financial and social status, but this can lead to a problem when an item that may be considered a necessary for a child of upper-income parents might be considered a luxury to a child of lower-income parents.
• Whether an item is considered a necessary is also related to whether the minor’s parents are willing to provide the item in question for the minor.

Question 90

Liability for necessities:

Answer 90

food, shelter, basic medical needs, etc.
- Ex. A contract for shelter (necessary)- can the minor disaffirm that contract?
o Yes, but the landlord can still sue for the value of the necessary
o If the minor doesn’t pay rent for a month, they can still disaffirm the contract, but the landlord can sue for the rent

Question 91

Why is it different with necessaries?

Answer 91

o To prevent minors from being homeless or stuff because otherwise no one would enter into a contract with a minor

Question 92

Ratification

Answer 92

• Once a person reaches the age of majority, he or she may ratify, or legally affirm, contracts made as a minor. Once ratified, the contract is no longer voidable, it is legally binding.
• You have to do it verbally or in writing.
• Ratification may be either expressed or implied.

Question 93

Express ratification

Answer 93

Occurs when, after reaching the age of majority, the person states, either orally or in writing, that he or she intends to be bound by the contract entered into as a minor.

Question 94

Implied ratification

Answer 94

When the former minor takes some action after reaching the age of majority that is consistent with intent to ratify the contract.

Question 95

Parents’ liability for their children’s contracts, necessaries, and torts:

Answer 95

• As a general rule, parents are not liable for the contracts entered into by their minor children. Because of this, merchants are often reluctant to enter into contracts with minors unless some competent person is willing to agree to cosign the contract. In that way, the competent person will be legally count to perform the obligations undertaken by the minor if the minor no longer wishes to live up to the terms of the contracts.
• Parents do have a legal duty to provide their children with the basic necessities of life, such as food, clothing, and shelter. Thus, they may be held liable in some states for the reasonable value of necessaries for which their children enter into contracts.
• In most states, parents aren’t liable for the torts of their minor children; minors are liable for their own personal torts. However, in many states, parents may be liable when a child causes harm because the parent failed to supervise the child properly, thereby subjecting others to an unreasonable risk of harm from the child.

Question 96

Mentally incapacitated persons

Answer 96

• Persons suffering from a mental illness or deficiency may have full, limited, or no legal capacity to enter into a binding contract, depending on the nature and extent of their mental deficiency.
• If a person suffers from mental problems yet still understands the nature of the contract and the obligations imposed by it, they can enter into a legal, binding agreement.
• A person only has limited capacity to enter into a contract if he suffers from a mental illness or deficiency that prevents him from understanding the nature and obligations of the transaction he is entering into.
  o Must be disaffirmed within a reasonable time after they no longer suffer from the mental deficiency. Once the mental deficiency has been removed, they can also choose to ratify the contract.
• If a person is insane and a guardian has been appointed for him, he has no capacity to enter into contracts, and any contract he attempts to enter into is void.
• Guardians can be appointed for those adjudicated insane and those who are adjudicated habitual drunkards and those whose judgment has been impaired because of a condition like Alzheimer’s. No matter which is the case, the person for whom the guardian has been appointed no longer has the legal capacity to enter into contracts, but the guardian has the legal capacity to enter into contracts on that person’s behalf.

Question 97

Intoxicated persons

Answer 97

• As a general rule, most states follow the Restatement of Contracts, Section 16, which provides that contracts of an intoxicated person are voidable by the intoxicant if the other party had reason to know that because of the intoxicated person’s condition, that person was unable to understand the nature and consequences of the transaction or is unable to act in a reasonable manner in relation to the transaction.
• If one party has no way of knowing that the other was intoxicated at the time the agreement was made, and the agreement is a fair one, it will be upheld by most courts.
• Once sober, the intoxicant has the ability to either ratify or disaffirm the contract.
• If the contract is disaffirmed on the basis of intoxication, each party to the contract must return the other to the condition she or he was in at the time the contract was entered into.
• Same as contracts of disabled people, a contract of an intoxicated person for necessaries will be enforced for the reasonable value of the necessaries.
  Intoxicated people: Do they have capacity?
• The other person must have a reasonable belief that the drunk person knew what they were doing and the drunk person must understand and know what they’re doing
  Is email a way to accept an offer? Yes. What if they accept over email but then later say they were drunk at the time?
• The other person had no idea they were drunk so the person who claims they were drunk would lose

Question 98

Legality

Answer 98

• To be enforceable, a contract must have a legal exchange as its subject and must be able to be performed legally.
• In the event of a contract with an illegal subject, it’s the agreement or the bargain that is illegal, not the contract.
• By definition, contracts are legal. This is why when a contract is overturned due to being contrary to law, the contract is frequently declared void, as if it never existed, as opposed to being declared illegal.
• Keep in mind that contracts can be determined illegal even if they aren’t against a specific statute. When contracts are against generally accepted public policy, these agreements are determined to be unenforceable, and not void. No remedy is available for unenforceable agreements.
  Another element is legality: A contract that is illegal, the contract is void
• Or if the contract violated public policy, it is not void (it’s a legal contract) but it’s unenforceable.

Question 99

If the illegal portion of a contract can be severed from the legal portion, …..

Answer 99

The courts may simply refuse to enforce the illegal parts and enforce the remaining legal parts.

Question 100

Agreements to commit a crime or tort

Answer 100

• Any agreement to commit a crime or tort is illegal and unenforceable.
• If a legal contract is formed and then the subject of the contract becomes illegal under a new statute, the contract is considered discharged by law.

Question 101

Licensing statutes

Answer 101

When licensing is required by law, people in certain fields must obtain a license before they can legally enter into an agreement to perform the restricted services.

Question 102

2 main purposes of licensing statutes:

Answer 102

1. To give the government an avenue by which to regulate the specific industries (the government has some say over who can perform which jobs as well as how many people can perform these jobs).
2. To protect the public’s health, safety, and welfare

Question 103

Licenses: What if you enter into a contract with someone who doesn’t have a license?

Answer 103

• If a professional performs a job without a license, in most states this would mean they don’t have a contract
• No license, no contract states look at what the purpose of the license is

Question 104

King v. Lidal case

Answer 104

• Hired a contractor to make improvements to their house ($14,000)
• Made the house worse instead of making it better, so the homeowners had to hire someone else to fix it.
• Homeowner sued the contractor and then the contractor sued the homeowner for breach of contract
• In Alabama, in order to do over $10,000 of work you must be licensed, and the contractor was not
• Significance: Explains the importance of a homebuilder being licensed by the state for that home builder to be able to file any necessary breach of contract claims against a customer.

Question 105

Usury

Answer 105

The lending of money at an exorbitant or unlawful rate of interest.

• Exceptions where loans can exceed the maximums:
  1. Corporate loans
  2. Smaller loans
• Legal maximum is different for every state
• Maximum in GA: it depends on how much you’re borrowing
• Over 7%, you have to express it in writing
• A large number of states allows lenders to recover the principal amount the loaned, but these parties cannot collect any interest on the loan.

Question 106

Gambling

Answer 106

An agreement in which a party pays consideration (money placed during bets) for the chance, or opportunity, to obtain an amount of money or property.

• States most knows from casino gambling: Nevada, New Jersey, and Louisiana
• Gambling is still illegal in most states, but some states make exceptions/find loopholes.

Question 107

Sabbath laws

Answer 107

Laws prohibiting the performance of certain activities on Sundays.

• Known as Sabbath, Sunday, or blue laws
• Most Sabbath laws pertain to the sale of alcoholic beverages. Tend to prohibit the sale of all alcohol or at least specific types either all day or at restricted times on Sundays.

Question 108

Agreements that violate public policy:

Answer 108

Involves both the government’s concern for its citizens and the beliefs people hold regarding the proper subject of business transactions.

Question 109

Contracts in restraint of trade

Answer 109

Restraints on trade are otherwise known as anticompetitive agreements

Question 110

Exception that allows specific types of restraints on trade

Answer 110

When a restraint on trade is reasonable, as determined by the courts, and the restraint is part of a subordinate, or ancillary, clause, the restraint is typically allowed. Such restraints are known as:
Covenants not to compete (restrictive covenants

Question 111

Covenants not to compete

Answer 111

An agreement not to compete against a party for a set period of time within a designated geographic area.

• To be legal, the covenant needs to protect a legitimate business interest.
• The covenant needs to be for a reasonable period of time and geographic area so that it doesn’t unlawfully impinge on the employee’s right to earn a living.

Question 112

2 varieties of covenants not to compete

Answer 112

Noncompetition in the sale of an ongoing business and noncompetition in employment

Question 113

Noncompetition in the sale of an ongoing business

Answer 113

refers to the status of the business being sold: the business is still running and will still run on its own; it’s not being merged and isn’t closing down.

Question 114

Noncompetition in employment

Answer 114

Employee is agreeing not to compete with her boss, if she leaves, for a designated period of time within a designated geographic area.

Question 115

4 situations in which covenants not to compete are enforceable (Florida):

Answer 115

1. The sale of goodwill of a business
2. An employment, agency, or independent contractor relationship
3. A licensing relationship
4. A partnership

Question 116

Unconscionable

Answer 116

A term applied to a contract in which one party has so much more bargaining power than the other party that the powerful party dictates the terms of the agreement and eliminates the other party’s free will.

• This refers to the fact that the agreement in question is so unfair that it is void of conscience.
• Rules against unconscionable contracts exist in both the Restatement (Second) of Contracts and the Uniform Commercial Code

Question 117

2 main types of unconscionable agreements:

Answer 117

procedural and substantive

Question 118

Procedural unconscionability

Answer 118

Unconscionability that derives from the process of making a contract.

• Relates to conditions that would impair one party’s understanding of a contract and to the integration of terms into a contract.
• The factors can be anything from tiny, hard-to-read print on the back of an agreement to excessive use of legalese or even the inability of a person to read over a contract fully and ask any questions before they were required to sign.
• Most frequently, procedural unconscionability arises when one party presents the other with an adhesion contract

Question 119

Adhesion contract

Answer 119

A contract created by a party to an agreement that is presented to the other party on a take-it-or-leave-it basis.
o The contract is presented as complete and as the only chance the presented party (adhering party) will have to enter into the agreement.

Question 120

Substantive unconscionability

Answer 120

A statement in a contract that frees one party (usually the drafter of the agreement) from all liability arising out of performance of the contract; generally based on factors such as consumer ignorance or a great deal of unexplained fine print that serve to deprive the less powerful party of a meaningful choice.

• Involves overly harsh or lopsided substance in an agreement
• If an agreement is terribly one-sided, it’s probably invalid on the basis of substantive notions of fairness and fair dealing
• Ex. High differences between cost and price in a sales agreement; agreements in which one party gains vastly more than the other; agreements in which one party is prevented from having any sort of equal benefit; agreements in which one party has little to no legal recourse, according to the agreement; and portions of an agreement that are completely unrelated to anything having to do with either party’s business risk.

Question 121

Exculpatory clause

Answer 121

A statement in a contract that frees one party (usually the drafter of the agreement) from all liability arising out of performance of the contract; generally based on factors such as consumer ignorance or a great deal of unexplained fine print that serve to deprive the less powerful party of a meaningful choice.

• A statement releasing one of the parties to an agreement from all liability, regardless of who is at fault or what the injury suffered is.
• Frequently show up in rental agreements for commercial or residential property.
• To be able to enforce an exculpatory clause, the party seeking enforcement must be a private business or an individual and must not be important to the public interest.
• Examples of private businesses that can enforce exculpatory clauses: Skiing facilities such as resorts or rental places, private gyms or health clubs, any business offering skydiving or bungee jumping, amusement parks, etc.
• These parties are allowed to deny liability if the party with which they are contracting agrees to the exculpatory clause.

Question 122

Eric Lucier and Karen A. Haley v. Angela and James Williams, Cambridge Associates, LTD.:

Answer 122

• Issue: Was the limitation of liability clause in the come inspection contract unconscionable?
• Decision: Contract was unconscionable, and therefore the court reversed the decision and remanded it back to the lower court for trial.
• Significance: Thought courts don’t usually find contracts to be unenforceable due to unconscionability, this case provides a good illustration of when the court will find the doctrine applicable.

Question 123

In pari delicto

Answer 123

In equal fault.

• In the law, when both parties are equally responsible for an illegal agreement, the parties are said to be in pari delicto.
• Most illegal agreements are void, meaning neither party can enforce the agreement and neither party is entitled to recovery.
• If one party is not responsible for an illegal agreement, or special circumstances forgive the illegality, it makes sense sometimes to allow one party to an illegal agreement to recover carious damages.

Question 124

Exceptions to in pari delicto

Answer 124

o When a member of a protected class is involved in an agreement that contradicts a statute intended to protect the specific class. In such a situation, the member of the protected class is allowed to sue for performance.
o When there is a justifiable ignorance of facts: one party’s lack of knowledge regarding a provision of the agreement that would make it illegal.
o When one of the parties withdraws from an illegal agreement.
• The key to any recovery is that the party must have withdrawn before any illegality occurred.
• If this is the case and if part or full performance has occurred, the party may recover value for whatever portion ahs been completed. However, if the party is involved in any way in the illegal activity, the party can’t recover at all.

Question 125

Severable contract (divisible contract)

Answer 125

A contract that contains multiple parts that can each be performed separately.

• Separate consideration is offered for each individual part.
• A severable contract is like numerous contracts in one.
• For a court to be able to enforce parts of a severable contract, the parts that are enforced must still represent the main purpose of the original agreement.
• If declaring parts of a contract void substantially alters the contract, the court is not likely to enforce the remaining portions of the agreement.
• Allow courts to facilitate business transactions and enforce the legal wishes of parties.
• Since they’re subject to a court’s interpreting each section for legality, it’s probably unwise to enter into such an agreement when the legality of some sections is questionable.

Question 126

Indivisible contract

Answer 126

A contract that requires complete performance by both parties, even if it appears as though the contract contains multiple parts, similar to a severable contract.
- Must be enforced or rejected in their entirety.

Question 127

Severable v. Indivisible contracts

Answer 127

With respect to illegality, severable contracts have a huge advantage over indivisible contracts: If a severable contract has both legal and illegal portions, the court has the option of declaring void only those sections of the agreement that are illegal (the court can then enforce the remaining, legal portions of the contract).

Question 128

Violates law:

Violates public policy:

Answer 128

Void

Unenforceable