Management 3540 Test 3

Front 1

Reality of Consent
Introduction

Back 1

A. Moving away from Caveat Emptor
1. Old Rule: "Buyer Beware;" a contract is a contract
B. Contracts voidable in equity because of inequity of enforcing contract
C. Major Categories

Front 2

Reality of Consent
Introduction
Major Categories

Back 2

1. Material mistake of fact
2. Misrepresentation
3. Duress
4. Undue influence
5. Unconscionability

Front 3

Reality of Consent
Remedies

Back 3

Usually must choose between dollar damages and equitable remedy
A. Rescission
B. Reformation

Front 4

Reality of Consent
Remedies
Rescission

Back 4

Equity Court
Court cancels the contract and each party must restore the status quo (e.g., return $ or property)

Front 5

Reality of Consent
Remedies
Reformation

Back 5

If there is an oral agreement of the parties and a mistake in writing it up (scrivener's error), court revises the contract to conform to the actual agreement (problem is proof)

Front 6

Reality of Consent
Mutual Mistake of Fact (Bilateral)

Back 6

A. Mistake of both parties to the transaction
uncertainity usually not enough
B. As to material fact
1. Material - fact important to subject matter
2. Fact - not as to law, opinion, prediction, or value
3. Usually goes to: existence, identity, or character of subject matter
a. Example: Negotiating on purchase of car then it is stolen, thought talking about other car, OR both thought cubic zirconian
b. Example: Junk dealer cleaning out basement found precious art, estate entitled to recission

Front 7

Reality of Consent
Unilateral Mistake of Fact

Back 7

A. Generally Rule
Unilateral mistake is generally not grounds for recission
B. Elements of valid defense:
1. Material mistake of fact by one party
AND
2. Other party has reason to know of the mistake
C. Rescisiion Remedy
1. Can't take knowing advantage of another's mistake
2. Example: Significantly underbid on building something, baseball card that kid signed for when mis-quoted

Front 8

Reality of Consent
Misrepresentation - Types and Remedies

Back 8

A. Innocent
Mistake without fault - Rescission only
B. Negligent
Rescission OR money damages
C. Fraudulent
Actual and punitive damages on one hand OR rescission on the other

Front 9

Reality of Consent
Fraud

Back 9

A. Fruad in the execution (signing)
1. Victim is told he's signing something else
2. Example: Told a promissory note is a loan application
3. Contract is void
B. Fraud in inducement
1. Deception as to the understood subject matter of contract, not as to document itself
2. Contract is voidable
3. Example: GET FROM TARA

Front 10

Reality of Consent
Elements of Fraud in the Inducement

Back 10

A. Misrepresentation of a material fact
B. Intent to deceive by the defendant
C. Reliance
D. Injury to Plaintiff

Front 11

Reality of Consent
Elements of Fraud in the Inducement
Misrepresentation of a material fact

Back 11

1. Material - important to deal
2. Must be misrepresentation of past or present material fact; not expression of opinion, future event, value, general quality, legal opinion
3. Exceptions - a false opinion or concealment without a misrepresentation of fact is fraud if there is:
a. A confidential relationship between seller and buyer
1. Example: Lying to care so you can get a better deal on car that you have access
b. Seller has superior knowledge upon which seller expects reliance
1. Example: Seller sells something "that will work" and it doesn't, then no return policy
c. Concealment of serious defect of which seller knows but buyer has no reasonable way of finding out
1. Example: cracks in foundation covered up
d. Partial disclosure
1. Example: GET FROM TARA

Front 12

Reality of Consent
Elements of Fraud in the Inducement
Intent to deceive by the defendant

Back 12

1. Defendant has knowledge of falsity OR
2. Defendant has reckless disregard for the truth: making a statement at a time when the speaker has serious doubts about the truth of it

Front 13

Reality of Consent
Elements of Fraud in the Inducement
Reliance

Back 13

There must be justifiable (reasonable) reliance by the plaintiff

Front 14

Reality of Consent
Elements of Fraud in the Inducement
Injury to Plaintiff

Back 14

If seeking monetary damages, must prove monetary loss

Front 15

Reality of Consent
Duress

Back 15

A. Definition
1. Forcing a party into a contract under fear of wrongful threats
2. Threatening what you have a legal right to do not enough
3. Examples: "If you don't sign promisory note, I'm going to sue you." - Not Duress
B. Elements
1. Threat
2. Unlawfully or wrongfully made
3. Causing involuntary acceptance
4. Because circumstances permit no alternative
5. E.g., Thompson(client) v. Egman(lawyer) - Egman change fee structure day before tax appeal due to get % so more money
6. E.g., Source Code Case: couldn't record sales because register broke and couldn't enter sales

Front 16

Reality of Consent
Undue Influence

Back 16

A. Compared to Duress
Duress involves coercion undue influence, persuasion
B. Elements:
1. Confidential, family, or trust relationship
a. e.g., attorney-client; guardian-ward
2. Weaker party lacked free will because of influence
3. A contract results between the parties

Front 17

Reality of Consent
Unconscionability - Contracts which are grossly unfair

Back 17

A. Elements necessary to prove a case:
1. Unequal bargaining power (usually consumer, not commercial)
2. Dictation of terms of contract by stronger party - Adhesion Contracts
3. Terms manifestly unfair or oppressive
B. Examples:
1. William vs. Walker Thomas: Store could repossess everything every purchased when only default one payment
2. Campbell's Soup Case: contract unjustly unfair over various choices

Front 18

Performance and Discharge
Completed Performance

Back 18

A. Reasonable Expectations Test
B. Substantial Performance

Front 19

Performance and Discharge
Completed Performance
Reasonable Expectations Test

Back 19

1. The performing party is released due to complete performance when he meets the reasonable expectations of the other party in light of the entire contract
2. Example: Building a home, owner wants builder to fix little things but builder refuses (Reasonable Expectation Test)

Front 20

Performance and Discharge
Completed Performance
Substantial Performance

Back 20

1. A partial discharge of the performing party - the performing party may still collect on the contract, but the other party is entitled to a reduction of payment because of the immaterial breech
2. Example: Install Kholer fixtures instead of Crane (probably immaterial breech), entitled to difference in value because fixtures were cheaper

Front 21

Performance and Discharge
Material Breach

Back 21

A. Material vs. Immaterial
1. A material breach is one which is important in light of the entire contract
2. Immaterial breach: unimportant in light of the entire contract - still have substantially performed and may sue on the contract
B. Consequences of Material Breach
The non-breaching party's duty of performance is discharged
C. Three things affecting materiality of breach:
1. Satisfaction Clause
2. "Time is of the essence" clause
3. Anticipatory Repudiation

Front 22

Performance and Discharge
Material Breach
Three things affecting materiality of breach:
1. Satisfaction Clause

Back 22

No Breech --> Breech
a. If the contract is a matter of taste, then complete personal satisfaction is required
b. If the contract is a matter of function, then reasonable satisfaction is required
c. Example:
A-Painting portrait, could be perfect but I want to be prettier, not OK
B-Fix car but not noise you didn't disclose, OK

Front 23

Performance and Discharge
Material Breach
Three things affecting materiality of breach:
2. "Time is of the essence" clause

Back 23

Immaterial --> Material
a. Generally a reasonable time delay is an immaterial breach or not a breach at all
b. A "time is of the essence clause" converts an immaterial time delay into a material breach
c. Example: fix lakes at resort by start of season

Front 24

Performance and Discharge
Material Breach
Three things affecting materiality of breach:
3. Anticipatory Repudiation

Back 24

No breech --> Breech
Cancelling before contract
a. One party informs the other that he will not perform the contract, prior to the time performance is due
b. Considered a material breach, although there is time remaining for performance
Main point: When cancelled must be clear that you are not returning (hopefully in writing)

Front 25

Performance and Discharge
Occurrence of Failure of Condition

Back 25

A. Condition Precedent
B. Condition Subsequent
C. Concurrent Condition

Front 26

Performance and Discharge
Occurrence of Failure of Condition
Condition Precedent

Back 26

1. Event must happen before a contractual duty arises
2. Examples: Collision claim (must produce car with damage to make claim), bonus incentive

Front 27

Performance and Discharge
Occurrence of Failure of Condition
Condition Subsequent

Back 27

1. Contractual duty is relieved after an event
2. Example: Notification of drought

Front 28

Performance and Discharge
Occurrence of Failure of Condition
Concurrent Condition

Back 28

1. Each party's duty conditioned on teh other's simultaneous performance
2. Example: Cash on Delivery (COD)

Front 29

Performance and Discharge
Agreement of Parties

Back 29

A. Voluntary Rescission
B. Novation
C. Accord & Satisfaction
D. Waiver

Front 30

Performance and Discharge
Agreement of Parties
Voluntary Rescission

Back 30

Voluntary Cancellation
An agreement by the parties to cancel the contract

Front 31

Performance and Discharge
Agreement of Parties
Novation

Back 31

An agreement by the parties to cancel the old contract and enter a new contract

Front 32

Performance and Discharge
Agreement of Parties
Accord & Satisfaction

Back 32

1. An agreement (accord) by one party to accept a performance which is different from that required by the contract, followed by the completion (satisfaction) of that performance by the other party
2. Example: Stove was on back order. They offered more expensive and you accept. They receive.

Front 33

Performance and Discharge
Agreement of Parties
Waiver

Back 33

1. A voluntary acceptance of inadequate performance, or a pattern of conduct which implies a waiver of breach of contract.
2. Example: Paying on the 10th every month when due on 1st

Front 34

Performance and Discharge
Discharge by Operation of Law

Back 34

A. Bankruptcy
B. Statute of Limitations
C. Alteration
D. Impossibility or Impracticability

Front 35

Performance and Discharge
Discharge by Operation of Law
Bankruptcy

Back 35

1. Bankruptcy cancels (discharges) most debts of the bankruptcy debtor
2. Exceptions: student loans, child support, taxes

Front 36

Performance and Discharge
Discharge by Operation of Law
Statute of Limitations

Back 36

1. When the time period set by a statute for filling a type of lawsuit expires, the breaching party's obligation is cancelled (discharged)
2. Contract becomes unenforceable

Front 37

Performance and Discharge
Discharge by Operation of Law
Alteration

Back 37

1. Intentional, material alteration by one party discharges the other
2. Example: Change of contract, can get out

Front 38

Performance and Discharge
Discharge by Operation of Law
Impossibility or Impracticability

Back 38

1. Impossibility
a. Death or Incapacity of an essential party (performance occurred, payment must be made)
b. Destruction of Subject Matter or Contract - for example by fire
c. Intervening Illegality - the agreement becomes illegal between the time it is entered and the time performance is complete
d. Commercial Frustration (Common Law) - a drastic unforeseeable change in circumstances makes performance impossible
2. Commercial Impracticability (UCC Sales) - 10X more price = Extreme
a. An event occurred which parties assume would not occur as basic part of contract
b. The event has an extreme effect on performance (or cost)

Front 39

Performance and Discharge
Compliance with Court Ordered Remedy

Back 39

Breach of contract suit followed by judgement and payment of judgement

Front 40

Remedies
Types of interests of non-breaching parties

Back 40

A. Expectation Interest
B. Reliance Interest
C. Restitution Interest

Front 41

Remedies
Types of interests of non-breaching parties
Expectation Interest

Back 41

1. The non-breaching party gets the benefit of the bargain
2. Example: Seller of car want $10,000 and no car, buyer breaches and I find another for $8,000, you should pay $2,000

Front 42

Remedies
Types of interests of non-breaching parties
Reliance Interest

Back 42

1. The non-breaching party receives the cost of partial performance or preparation to perform
2. Example: DON'T HAVE

Front 43

Remedies
Types of interests of non-breaching parties
Restitution Interest

Back 43

1. One party receives the value of the benefit converred on the other party
2. Example: Quasi contract (Implied in law)

Front 44

Remedies
Six categories of Money Damages

Back 44

Legal, Common Law Remedies
A. Compensatory (Direct) Damages
B. Consequential Damages
C. Incidental Damages
D. Punitive (Exemplary) Damages
E. Nominal Damages
F. Liquidated Damages

Front 45

Remedies
Six categories of Money Damages
Compensatory (Direct) Damages

Back 45

1. Buyer of goods recovers: cover price (cost of substitute good/service) minus contract price for seller's breach
2. Seller of goods recovers: contract price minus fair market value for buyer's breach
3. Buyer of services recovers: cover price minus contract price for provider's breach
4. Provider of services recovers: lost profit plus cost of partial performance (or contract price if complete performance)

Front 46

Remedies
Six categories of Money Damages
Consequential Damages

Back 46

1. Indirect, foreseeable damages
2. Lost profits are consequential damages
3. Hadley vs. Braxendale - Guy hired to transport millstone for repaires, transporter delayed on delivery after repairs, not foreseeable because most mills had multiple millstones. Must state profits will be lost in contract.

Front 47

Remedies
Six categories of Money Damages
Incidental Damages

Back 47

1. Cost of finding substitute performance (Cost of Mitigation - lessening the effects)
2. Mitigation of damages - Non-breaching party is usually required to make reasonable attempts (efforts) to lessen damages from breach
3. Examples - Walk out of lease, landlord must try to fill lease, cannont just sue of entire amount.
a. Mitigation in lease situation
b. What is reasonable? Try to lease to another tenant
Shirley McClain (actress) starred in musical comedy for $800,000 then got rid of it, offerred another position for same money court decided she did not have to take the job because it was not "singing and dancing"

Front 48

Remedies
Six categories of Money Damages
Punitive (Exemplary) Damages

Back 48

1. Damages awarded to punish the defendant and to deter others from similiar conduct
2. Typically available only for intentional torts, not just breach of contract
Not only is company that committed fraud but also the company which put them in that position

Front 49

Remedies
Six categories of Money Damages
Nominal Damages

Back 49

1. A small amount of damages given to a party who wins but can show no monetary injury
2. Examples - giving a dollar
a. Auto accident where no injury - car already fixed and no one is hurt
b. Trespass action - boundary dispute ($1 proves you won) then file an injuction case
c. Employment discrimination - opens other doors
You lost but can help in future

Front 50

Remedies
Six categories of Money Damages
Liquidated Damages

Back 50

1. Defined: damages in a fixed amount agreed on by the parties prior to any breach
2. Requirements: to prevent an absurd amount
a. Damages difficult to estimate
b. Reasonable amount
3. Penalties unenforceable
4. Example: $1,000 per day or $300,000 for a default on $10,000 loan

Front 51

Equitable vs. Legal Remedies
A. Equitable Remedies

Back 51

Other than money
1. When allowed
a. Monetary damages (common law or "legal" remedy) alone must be inadequate
b. Person seeking equitable remedy must be acting fairly
2. Types of remedies: orders to do or refrain from an act; orders to change a status. Example: Divorce, or dissolve agreement
3. Judge decides facts

Front 52

Equitable vs. Legal Remedies
B. Legal Remedies

Back 52

1. Required avenue where monetary compensation is sufficient
2. Right to have a jury decide facts

Front 53

Types of Equitable Remedies

Back 53

A. Rescission and Restitution
B. Specific Performance
C. Quasi Contract
D. Injunction
E. Reformation

Front 54

Types of Equitable Remedies
A. Rescission and Restitution

Back 54

1. Cancellation of the contract and restoration of the Status Quo (pre-contract situation)
2. Available where there is a lack of reality of consent (fraud, durress, etc.)

Front 55

Types of Equitable Remedies
B. Specific Performance

Back 55

1. A court order requiring a party to perform the terms of the contract
2. Only available for unique items
3. Land is always unique
4. Examples: art, family heirlooms, antiques

Front 56

Types of Equitable Remedies
C. Quasi Contract

Back 56

1. Elements
a. One party provided a service or benefit to the other party
b. The other party is unjustly enriched if there is no payment for the benefit
2. Application
a. Material breach -
- non-breaching can sue to recover more than the contract price
- breaching party can sue to get some payment when the other party is released
b. Work done by mistake - someone did work on your property
c. Unconscious patient

Front 57

Types of Equitable Remedies
D. Injunction

Back 57

1. A court order that something be done or stopped
2. Elements of proof:
a. Money damages must be inadequate
b. Irrepreable injury must result if there is no injuction
3. Example: Take over dental practice and old dentist tries to continue

Front 58

Types of Equitable Remedies
E. Reformation

Back 58

An oral agreement is imperfectly reduced to writing (scrivener's error), so the agreement is revised to conform to the parties' intent

Front 59

Election of Remedies

Back 59

A. Problem of Double Recovery
Allowing both equitable and legal remedy can lead to double recovery - must choose
B. Example
Both recission and money damages for negligent misrepresentation - get damages for a bad car you no longer have because you got your money back and returned it
C. Choice Required:
Typically, the plaintiff must choose between inconsistent (contradictory) remedies prior to submission of case to judge or jury for decision

Front 60

Commercial Paper

Back 60

Most Typical: Checks

I can negotiate (transfer) them, usually by indorsement and delivery to another person.

Front 61

Order Paper

Back 61

1. Contains an order by one person for another to pay.
2. Ordinarlily 3 parties involved.
3. Draft - order issued by drawer for a drawee to pay - generic order paper (all our drafts)
4. Check-draft payable on demand in which bank is drawee

Post-dating does not affect bank.

Front 62

Order Paper
Drawer

Back 62

Person signing order paper (making order) - Me

Front 63

Order Paper
Drawee

Back 63

Person or entity ordered to pay - Bank

Front 64

Order Paper
Payee

Back 64

(optional) - named person who is originally - gets money

Front 65

Promise Paper

Back 65

1. Contains a promise by one party to pay another
2. Ordinarly 2 parties involved
3. Promissory Note - promise by maker to pay a sum of money to payee at a future time - a generic promise paper. Ex. For value received, maker promises to pay Gwen Johnson the sum of five million dollars payable one year from date with 9% interest (non-negotiable)
4. Certificate of Deposit - note of bank acknowledging deposit and promising to pay at future time with interest

Front 66

Promise Paper
Maker

Back 66

Person who promises to repay

Front 67

Promise Paper
Payee

Back 67

Person to whom promise is made

Front 68

Holder

Back 68

Person in possession of property negotiated negotiable instrument - properly transferred from one owner to another

Front 69

Six Requirements for Negotiability

Back 69

1. An instrument in writing
2. Signed by maker or drawer
3. Containing unconditional, un-equivocal promise or order to pay
4. A sum certain in money
5. Payment due on demand or at definite time
6. Payable to order or bearer

Front 70

Six Requirements for Negotiability
3. Containing unconditional, un-equivocal promise or order to pay

Back 70

1. Acknowledgement of debt not enought
2. "IOU" Not OK - need a promise or order
3. If conditional on any performance, non-negotiable
a. Example: I promise to pay X if X delivers goods - Conditional
4. I may or may not pay - equivocal.

Front 71

Six Requirements for Negotiability
4. A sum certain in money

Back 71

1. Must be able to ascertain(tell) from the face of the instrument the minimum amound due
2. Okay to state interest variable with a public interest rate like the prime rate
3. Penalties or attorney fees in the event of default are OK
4. Money only, not commodities such as gold, silver, grain, cattle (can be binding but not negotiable)

Front 72

Six Requirements for Negotiability
5. Payment due on demand or at definite time

Back 72

1. On demand: Whenever the holder demands payment (checks)
2. Definite time:
a. Stated time or date when due
b. Stated period after stated date OK
c. Subject to acceleration OK
3. An acceleration clause does not destory negotiability (allows the holder to collect full payment on default)
4. Postdating does not affect negotiability

Front 73

Six Requirements for Negotiability
6. Payable to order or bearer

Back 73

1. Words of negotiabiility
2. Order Instruments - payable to order of name payee
3. Bearer instrument - paper is payable to "bearer" or to cash
a. Pay to order of bearer
b. Pay to order of cash
c. Pay to order of named person or bearer

Front 74

Negotiation - Legal Transfer
A. First Delivery

Back 74

Delivery from original maker or drawer to payee or intended recipient is sufficient to negotiate the instrument and transfer legal title. The transferee becomes the holder.

Front 75

Negotiation - Legal Transfer
Transferor

Back 75

1. Could be payee
2. Could be indorsee-person to whom previously indorsed

Front 76

Indorsement

Back 76

Signature of a transferor, usually on back of an instrument
Parties:
1. Transferor-Indorser
2. Transferee (recipient)-Indorsee

Front 77

Rules on Indorsements
A. Indorsement Required

Back 77

Indorsement is required to transfer if instrument payable to a named payee or indorsee

Front 78

Rules on Indorsements
B. Indorsement not required

Back 78

If payable to a bearer or indorsed in BLANK (someone not named), indorsement not required, but transferee may request that transferor sign it. Physical delivery negotiate a bearer instrument.

Front 79

Rules on Indorsements
C. Multiple Payees
Alternative Payees

Back 79

1. Pay A or B
2. Either may indorse to negotiate

Front 80

Rules on Indorsements
D. Multiple Payees
Joint Payees

Back 80

1. Pay A and B
2. Both must indorse to negotiate

Front 81

Rules on Indorsements
E. Indorser Liability

Back 81

1. Indorsers are typically secondarily liable on the instrument
a. That is, liable if drawer or maker doesn't pay
2. If you simply indorse, you're liable.

Promise of guarante-deamnd from them first

Front 82

Types of Indorsements
A. Blank v. Special Instruments

Back 82

1. Blank: Holder signs name only-paper becomes bearer instrument: delivery alone enough to negotiate
2. Special Indorsement: Payable to specific (named) person (indorsee)(Pay Bart Simpson s/John Swenson)
3. Can convert bearer instrument to order instrument by special indorsement

Front 83

Types of Indorsements
B. Qualified Indorsements

Back 83

1. Indorser signs words "without recourse"
3. Indorser now generally not liable as indorser if instrument is not paid

Front 84

Types of Indorsements
C. Restrictive Indorsements

Back 84

Do not affect negotiability
1. Restricts rights of indorsee (new holder)
2. Ex. COnditional indorsement (pay X if X delivers goods)
3. "For deposit only" - restricts bank to acting as collection agent
4. Trust Indorsement: To John IN TRUST for Phillip

Front 85

Types of Indorsements
D. Forged Indorsements

Back 85

Person who received the instrument form the forger bears the loss if the forger does not pay
(Same with forged indorsement)

Front 86

Holderin Due Course
A. Definition: A holder who takes:

Back 86

1. For value
a. Ex. pay $ or provide services (not by gift)
3. In good faith
a. Honestly believes instrument regular or ordinary
b. Inadequate consideration destroys good faith
3. Without Notice of defenses
a. Ex. that instrument overdue, illegal, altered, time past or demand already made

Front 87

Types of Indorsements
B. Common Law Transferee (or Ordinary Holder)

Back 87

1. A common law transferee-everyone except holder in due course(of a contract) took no right or defense greater than the transferor had
2. Ex. Sale of office equipment by Seller: Buyer signs installment contract; Seller assigns contract to a Thrid pary (T); warranty on furniture is breached - Buyer can assert breach of warranty defense against T.

Front 88

Defenses against a holder in due course

Back 88

1. Defenses are limited
2. An H.D.C. takes free of Personal Defenses
a. Breach of contract or warranty, Fraud in the inducement, failure of consideration

Front 89

An H.D.C. is subject to real defenses

Back 89

1. Fraud in the execution, Duress
2. Incapacity, illegality
3. Forgery or alteration
4. Discharge in Bankruptcy

HDC get payment no matter subject matter condition.