Business Law Chapter 9

Front 1

contractual capacity

Back 1

the legal ability to enter into a contractual relationship

Front 2

contractual capacity is not met if:

Back 2

1. person is a minor
2. person is intoxicated
3. person is mentally incompetent

Front 3

legality

Back 3

contract must be legal, otherwise it can be unenforceable.

Front 4

disaffirmance

Back 4

the legal avoidance, or setting aside of a contractual obligation

Front 5

necessaries

Back 5

basic needs at a level of value required to maintain the minor’s standard of living/financial and social status

Front 6

usury

Back 6

a lender who makes a loan at an interest rate above the lawful maximum

Front 7

gambling

Back 7

any scheme that involves the distribution of property by chance among persons who have paid valuable consideration for the opportunity to receive property

Front 8

licensing statutes

Back 8

If a state’s statute is designed to protect the public from unauthorized practitioners, then a contract with an unlicensed practitioner is illegal and unenforceable.

Front 9

contracts contrary to public policy

Back 9

some contracts are not enforceable because of the negative impacts they would have on society. Ex: can’t sell child, can’t forbid marriage

Front 10

contracts in restraint of trade

Back 10

contracts that restrict trade or anticompetitive agreements are generally unenforceable because they are contrary to public policy

Front 11

unconscionable contract or clause

Back 11

contracts that are so unscrupulous or grossly unfair as to be “void of conscience.” Courts will come to parties’ aid if they are involved in unconscionable contracts

Front 12

procedural unconscionability

Back 12

often involves inconspicuous print, unintelligible language, or lack of opportunity to read contract.

Front 13

substantive unconscionability

Back 13

– occurs when contracts of portions of contracts are oppressive or overly harsh.

Front 14

adhesion contract

Back 14

a “standard form” contract written exclusively by one party (dominant party, usually seller or creditor) and presented to the other (adherer) on a take-it-or-leave-it basis
Adhering party has no opportunity to negotiate terms of contract
example of procedural unconscionability

Front 15

exculpatory clauses

Back 15

closely related to concept of unconscionability, release party from liability in event of monetary or physical injury, no matter who is at fault. Ex: ski resorts use these clauses to escape liability for injured guests

Front 16

justifiable ignorance of the facts

Back 16

party who is reasonably innocent and has no reason to believe contract is illegal can recover damages (but only enough to restore them to original position)from other party

Front 17

members of protected classes

Back 17

when a statue protects a certain class of people, a member of that class can enforce an illegal contract even though the other party cannot

Front 18

blue sky laws

Back 18

state laws that regulate the offering and sale of securities for the protection of the public

Front 19

withdrawal from an illegal agreement

Back 19

if the illegal part of a bargain has not yet been performed, the party rendering performance can withdraw from the contract and recover the performance or its value.

Front 20

legality and severable/divisible contracts

Back 20

a contract that is severable or divisible consists of distinct parts that can be performed separately, with separate consideration provided for each part
If a contract is divisible into legal and illegal portions the court may enforce the legal ones and void the illegal ones, but entire contract is not void

Front 21

contracts illegal through fraud, duress, or undue influence

Back 21

when party has been induced to enter an illegal bargain through fraud, duress, or undue influence, they will be able to recover for the performance or its value

Front 22

voluntary consent (assent)

Back 22

may be lacking because of mistake, fraudulent misrepresentation, undue influence, or duress.

Front 23

2 types of mistakes

Back 23

mistakes of fact and mistakes of value or quality. Only mistake of fact makes contract voidable

Front 24

Mistakes of fact occur in two forms: unilateral and bilateral (mutual)

Back 24

Unilateral mistakes – occurs when only one party is mistaken as to a material fact – that is, a fact important to the subject matter of the contract. Contract is normally enforceable against mistaken party
2 exceptions:
1. If other party to contract knows or should have known mistake was made, contract may not be enforceable
2. When a unilateral mistake of fact was due to a mathematical mistake and was made inadvertently and without gross negligence
Bilateral (mutual) mistakes – when both parties are mistaken about the same material fact, the contract can be rescinded by either party.

Front 25

unilateral mistake

Back 25

occurs when only one party is mistaken as to a material fact – that is, a fact important to the subject matter of the contract. Contract is normally enforceable against mistaken party

Front 26

bilateral mistake

Back 26

when both parties are mistaken about the same material fact, the contract can be rescinded by either party.
Mutual misunderstanding of ambiguous term in contract could lead to bilateral mistake and rescission of contract

Front 27

fraudulent misrepresentation

Back 27

even though fraud is a tort, the presence of fraud also affects authenticity of the innocent parties consent to a contract. Contract can usually be avoided because party did not “voluntarily” consent (under pretense of fraud)

Front 28

2 exceptions to unilateral mistake

Back 28

1. If other party to contract knows or should have known mistake was made, contract may not be enforceable
2. When a unilateral mistake of fact was due to a mathematical mistake and was made inadvertently and without gross negligence

Front 29

3 elements of fraud

Back 29

1. A misrepresentation of material fact
2. An intent to deceive
3. The innocent party must justifiably rely on misrepresentation

Front 30

misrepresentation of law

Back 30

ordinarily does not entitle a party to be relieved of contract. Seller can tell buyer they can do something with property that they know they cannot do and get away with it because buyer is supposed to know state and common laws

Front 31

misrepresentation by conduct

Back 31

when a party takes specific action to conceal a fact that is material to the contract.

Front 32

misrepresentation by silence

Back 32

ordinarily, neither party to a contract has a duty to disclose facts, and contract will normally not be set aside because certain pertinent information had not been volunteered
Normally, seller must only disclose “latent” defects, which are defects that could not be readily ascertained by the buyer

Front 33

intent to decieve

Back 33

second element of fraud is knowledge on the part of the misrepresenting party that facts have been misrepresented.

Front 34

scienter

Back 34

“guilty knowledge” generally signifies that there was an intent to deceive .

Front 35

injury to the innocent party

Back 35

most courts do not require a showing of injury when the action is to rescind the contract. To recover damages caused by fraud, however, proof of an injury is universally required.

Front 36

undue influence

Back 36

arises from relationships in which one party can greatly influence another party, thus overcoming that party’s free will. A contract entered under excessive or undue influence lacks voluntary assent and is therefore voidable

Front 37

duress

Back 37

consent to terms of contract is not genuine if one of the parties is forced into the agreement. Defined as “forcing a party to enter into a contract because of fear caused by threats”

Front 38

economic duress

Back 38

party exacts a very high price for something other party needs, and also creates need for that party (IRS example)

Front 39

statute of frauds

Back 39

statute that every state has which stipulates which types of contracts must be in writing or evidenced by record. Does not apply to fraud.

Front 40

statute of frauds: writing requirement

Back 40

Following types generally required to be in writing (state statutes vary slightly from state to state):
1. Contracts involving interests in land
2. Contracts that cannot by their terms be performed within one year from the day after the contract is formed
3. Collateral contracts, such as promises to answer for the debt or duty of another
4. Promises made in consideration of marriage
5. Under UCC contracts for sales of goods priced at $500 or more

Front 41

one year rule

Back 41

contracts that cannot, by their own terms, be performed within one year from day after contract is formed but be in writing to be enforceable

Front 42

collateral promise

Back 42

secondary promise, one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. A promise made by a third party to assume debts or obligations of a primary party to a contract if that party does not perform.

Front 43

primary v. secondary obligations

Back 43

contract in which party assumes primary obligation does not have to be in writing to be enforceable. (paying a business which provided you a service = your primary obligation)

A contract in which a party assumes a secondary obligation does have to be in writing to be enforceable
Usually is in the form of a collateral promise

Front 44

"main purpose rule"

Back 44

an oral promise to answer for the debt of another is covered by statute of frauds unless guarantor’s purpose in accepting secondary liability is to secure personal benefit. This type of contract need not be in writing.

Front 45

contracts that must be in writing

Back 45

contracts in consideration of marriage, prenuptual agreeements, sales of goods over $500

Front 46

partial performance (exception to statute of frauds)

Back 46

in cases involving oral contracts for transfer of interests in land , if purchaser has paid part of price, taken possession, and made valuable improvements to property, court may grant specific performance (performance of the contract to its precise terms)

Front 47

admissions (exception to statute of frauds)

Back 47

when party against whom enforcement is sought admits in testimony (or other court proceedings) that contract for sale was made, then contract will be enforceable.

Front 48

promissory estoppel (exception to statute of frauds)

Back 48

Restatement of Contracts provides that an oral promise can be enforceable, notwithstanding the statute of frauds, if promise has justifiably relied on it to his or her detriment.

Front 49

What must be contained in writing?

Back 49

Memorandum for oral contract need only contain essential terms of contract, not every term. Also needs to prove that both parties voluntarily agreed (signature).