Test 2: Chapter 8: Intro To Contracts

Front 1

Define a 'Contract'.

Back 1

A legally enforceable promise.

Front 2

Contracts involve either an exchange of ________ for a ________ or a promise conditioned on ________ of an act. ("promise for ________")

Back 2

1) promises
2) promises
3) performance
4) performance

Front 3

True or False: A contract need not be a formal, written document, and those who make a contract do not have to use the word contract or recognize that they have made a legally enforceable promise.

Back 3

True. The rules of a contract will still apply.

Front 4

What are the two sources of contract law?

Back 4

Common law and legislation.

Front 5

Define 'common law'.

Back 5

Court-made law and judicial decisions.

Front 6

Define 'legislation' and give an example.

Back 6

UCC relates to contracts involving goods, and the common law governs other contracts.

Uniform Commercial Code (UCC) which applies to the sale of goods.

Front 7

Define 'breach of contract'.

Back 7

Occurs when one party does not live up to the terms of the contract.

A party that does not live up to the obligation of contractual performance.

Front 8

Name the remedies for a breach of contract.


CNN LARCS

Back 8

1) Compensatory Damages
2) Negotiated Settlement
3) Nominal Damages

4) Liquidated Damages
5) Arbitration
6) Rescission
7) Compensatory Damages
8) Specific Performace

Front 9

Define 'mitigation of damages'

Back 9

Victim of a breach of contract must mitigate damages (i.e. take reasonable steps to reduce damages).

Victim must take reasonable steps to reduce damages.

Front 10

Define 'negotiated settlement'

Back 10

A satisfactory solution to most breaches of contract is resolved by the parties themselves through voluntary negotiated settlements.

Front 11

Define 'arbitration'.

Back 11

The parties agree to abide by the decision of a neutral third party or parties.

Front 12

Define 'compensatory damages'.

Back 12

“bring you back wholly” (can include lost profits) – court-awarded damages to put the plaintiff in the same position as if the contract had been

Front 13

Define 'specific performance'

Back 13

unique! Unusual in the united states. If goods/services are unique, court can award specific performance. Forces the other party to follow through on a contract. – Court-ordered remedy when subject matter of the contract is unique. Example: if seller does not deed contracted-for land to buyer, buyer can get court to order seller to transfer the land.

A equitable remedy that requires defendants in certain circumstances to do what they have contracted to do.

Front 14

Define 'consequential damages'

Back 14

Court-awarded damages arising from unusual losses which the parties knew would result from breach of the contract. Example: plaintiff’s losses due to closing of business when defendant knew that failure to deliver ordered equipment would cause the losses.

Front 15

Define 'Rescission'

Back 15

buying something and its not what you think it is. You want to give it back and get your money back. Everyone goes back to where they were before they entered in to the contract. – Requires each party to return the consideration given the other. Often used in fraud or misrepresentation cases.

A contractual remedy that cancels the agreement and returns the consideration exchanged to each party.

Front 16

Define 'Nominal damages'

Back 16

jury said you should win but we’ll only give you one dollar. Worse than losing. Get a small amount of money in return for winning. – A small amount, often $1, awarded by the court to the plaintiff for a breach of contract which causes no financial injury to the plaintiff.

Front 17

Define 'Liquidated Damages'

Back 17

clauses in your contract. If you breach your lease, you must forfeit one months of rent. – Where real damages for breach of contract are likely to be uncertain, parties sometimes specify in the contract what the damages should be. Courts will enforce these “liquidated” damages unless they seem to penalize the defendant instead of merely compensating the plaintiff for uncertain losses.

Front 18

Define 'restitution'

Back 18

a contractual remedy involving one party returning to another the value previously received.

Front 19

Name the three classifications of contracts.

BU, EX & IMP, Q

Back 19

1) Bilateral and Unilateral
2) Express and Implied-in-fact
3) Quasi Contracts

Front 20

Define 'bilateral contract'.

Back 20

involve each party making mutual promises (promise for a promise)
Note: if it is not clear, most courts tend to assume that it is a bilateral contract

An agreement containing mutual promises.

Front 21

Define 'unilateral contracts'

Back 21

involves a present act in return for a promise of future performance; unilateral contracts are accepted by performing the requested act

• An agreement with only one promise. Exists when a promise is made to motivate an action.
• Promise for performance. You will fix my car and I will pay you.

Front 22

Define 'Express and Implied-in-fact' contracts.

EX & IMP

Back 22

contracts that arise from discussions in which the parties actually discuss the terms of their agreement;

• EX: A negotiated purchase of land for construction of a manufacturing plant is an example of an express contract.

Implied-in-fact are contracts that arise from the conduct of the parties rather than from words.

Asking an accountant for professional advice implies a promise to pay the going rate for this advice even though you do not make an express promise for it.

Front 23

_______ - when you sign a contract. You know you’re entering into it. You’ve signed it. You have the paper.

Back 23

Express contract.

Front 24

_______ - You call your accountant about a question but you get a bill from him from asking him a question (getting his services). It was implied that you would pay him.

Back 24

Implied-in-fact.

Front 25

Define 'quasi contracts' (implied in law)

Q

Back 25

happens when a contract is implied in law.
- This occurs when one party is unjustly enriched at the expense of another; the law may imply a duty on the first party to pay the second even though they do not have a contract
- Does not happen very often

They are judicial remedies to prevent one party receiving unjust enrichment.

Front 26

Paying a bill twice, and then having the check sent back to you is a situation of...

Back 26

A situation of quasi contract

Front 27

Define 'enforceable contract'.

Back 27

The ultimate purpose of a contract is the creation of an agreement which courts will order parties to perform or to pay consequences for the failure of performance. When courts uphold the validity of such promises, the resulting agreement is an enforceable contract.

Front 28

Define 'unenforceable contract'.

Back 28

If a nonperforming party has a justifiable reason for noncompliance with a promise, the result is an unenforceable contract.
In essence, in this latter situation, a defense exists that denies the legal enforcement of an agreement.

Front 29

Define 'valid contract'

Back 29

an enforceable agreement because all of the essential requirements of a contract are present.

Essential elements and fully enforceable at law.

Front 30

Define 'void contracts'

Back 30

are agreements that
a) lack one or more of any of the essential elements to form a contract or
b) are illegal or against public policy; and, therefore, are not contracts at all.
E.g. illegal contracts (sale of drugs, betting) NOTE: lack of capacity = voidable

• One that appears to be an agreement but lacks an essential requirement for validity and enforceability.
• EX: in states where gambling is illegal, courts will not enforce the betting agreement and do not care if the losing party has or has not paid off the bet.

Nothing is enforceable.

Front 31

Define 'voidable contracts'

Back 31

inds one of the parties, but gives the other parties to the agreement the option of withdrawing. See, infra, re: lack of capacity, fraud, misrepresentation, duress, undue influence, and mutual mistake of fact.

• An agreement when one party has the right to withdraw from the promise made without incurring any legal liability. One party has the power to end the enforcement of a voidable contract.
• Voidable contracts involves the fact that these agreements are enforceable in court until a party with the legal right to do so decides to void the contract, thereby making the agreement unenforceable.

one party could get out his or her options. Lack of capacity. Under of 18 could get out of a contract. Mutual mistake of fact – antiques road show (people paid 50 cents for it but its actually 50,000 dollars… mutual mistake of fact)

Front 32

Define 'executed contract'

Back 32

Under the contractual performance terminology, this means that the contract is one that parties have performed (contract is final. everything is performed).

Front 33

Define 'executory contract'

Back 33

Under the contractual performance terminology, this contract is one that the contracting parties have not yet performed.

Front 34

List the 5 elements of a contract.

OACCL

OLD ANGRY CRYING CORNY LOVER

Back 34

1) offer
2) acceptance
3) consideration
4) capacity of persons to a contract
5) legal purpose

Front 35

Define 'offer'.

1st element of a contract.

Back 35

Offer contains a specific promise and a specific demand.

• Offeror – person who makes the offer
• Offeree – person to whom the offer is made.

Distinguish between offer and negotiation.

Specific price not a reasonable price.

Front 36

List seven reasons why an offer might be terminated.

Back 36

• Offers create a legal power in the offeree to bind the offeror in a contract. However, that legal power does not last for ever. When an offer terminates, the offeree’s legal power to bind the offeror ends.

a) Provision of the offer – “this offer terminates noon on Friday”
b) Lapse of time - may be specific or reasonable
c) Rejection
d) Revocation of the offer - note this is not effective until it is received by offeree
- Making a counteroffer
e) Destruction of the subject matter
f) Offeror’s death or insanity
g) Performance becomes illegal

Front 37

Define 'acceptance' and name the three rules of acceptance.

2nd element of a contract.

MSD

Back 37

Necessary to form a binding contract.

1) Mirror Image Rule - acceptance must mirror or match the offer.

- If the acceptance changes any of the terms, it is a Counteroffer
- If acceptance changes the terms of the offer or adds new terms, it is not really an acceptance, it is a counteroffer, and negotiations continue.
• For an acceptance to create a binding contract, stadard contract law requires that the acceptance must “mirror” the offer, that is, must match it exactly.

2) Silence is not Acceptance -
in general, an offeree’s failure to reject an offer does not imply acceptance (see exceptions)

3) Deposited Acceptance Rule or Mailbox rule

Front 38

Define the 'Deposited Acceptance Rule or Mailbox Rule'

Back 38

acceptance becomes binding when it is deposited with the postal service (not when it is received)

Once the contract has been accepted, the offeror cannot revoke the offer
• Unless the offeror specifies a particular time, the acceptance usually binds the parties when the offeree dispatches it.
• Sine offeree frequently mails the acceptance, the acceptance becomes binding when it is “deposited” with the postal service – hence the deposited acceptance rule (mail box rule)
• Offeror cannot revoke the offer once the offeree has accepted it.
• An added significance is that an offeror’s revocation is not effective until the offeree actually receives it.
o A deposited acceptance creates a binding contract even though a revocation is also in the mail.

Front 39

Define 'Consideration'.

Back 39

Defined as a legal obligation or surrendering a legal right.

Bilateral Contract = promise for a promise – each party promises something to the other.
Unilateral Contract = promise for performance – the consideration of one party is a promise; the consideration of the other party is performance of an act.

Front 40

Define 'must be bargained for'

Back 40

something agreed to as part of the agreement
- cannot be something in the past. Prior consideration is not sufficient
• Important part of consideration – it must be bargained for.
o Gifts are not binding.
o Must decide if parties really bargained or just planned to give a gift.
• Prior consideration is no consideration.
o EX: Company votes to give a vice president a new car every year for “services rendered”. Vice Pres retires. One year later, board rescinds its vote. If Vice Pres sues under breach of contract, he loses. The past years service was not bargained for. The board merely promised to give an unenforceable gift to Bigman.

Front 41

Define 'agreement not to sue'

Back 41

if reasonable grounds for a lawsuit exist, an agreement not to sue is consideration to support a promise
- Such an agreement & the payment is known as “accord and satisfaction”
- A form of consideration.
• When reasonable grounds for a lawsuit exist, an agreement not to sue is consideration to support a promise.
o EX: Maria owns student loans and has failed to repay. Bank can sue but agrees not to as long as parents pay the loan = consideration.

Front 42

Define 'preexisting obligation'

Back 42

consideration is not given when a party merely promises to something he or she is already obligated to do
- If you agree to do something for a certain price, you cannot expect to receive additional funds if you decide that you want to restate your price half way through the process.
Movers example. Asking more and agreeing but not following through.
• The owner’s promise to pay an extra $5,000 is not supported by consideration. The contractor is under a preexisting obligation to do the work for which the owner promises an additional $5,000.

Front 43

True or false - pre-existing obligation rule does not apply to a UCC sale of goods.

Back 43

True. • Preexisting obligation rule does not apply to a sale-of-goods contract. The UCC states that parties to a sale-of-goods contract may make binding modifications to it without both parties giving new consideration.
o If buyer of more than $500 dollars worth of supplies agrees to pay your company an additional $500 over and above the amount already promised, this buyer is bound, although your company gives only the consideration (supplies) that it is already obligated to give.
• Also do not apply under a firm offer.
o Firm offer – exists when a merchant offering goods promises in writing that the offer will not be revoked for a period not to exceed three months. This promise binds the merchant, although the offeree buyer gives no consideration to support it.

Front 44

Define 'promissory estoppel'

Back 44

if the promissee justifiably relies on a promissor’s promise to his/her economic injury, then consideration is not necessary
If you enter into an agreement, and you’re going to go start working there, but then you get rejected, promissory estoppel – they can’t tell you no if you’ve taken steps to rely on the agreement. Professor moving from different school.

Consideration - something of value given up in connection with a contract. Something that forms the basis of the bargain. Gift is not a contract.

Front 45

Name the three classes of persons who lack capacity to be bound by a contract.

MIM

Back 45

Minors, Intoxicated persons, and Mentally incompetent.

Front 46

Define 'Capacity'

Back 46

• Capacity refers to a person’s ability to be bound by a contract. Courts have traditionally held three classes of persons to lack capacity to be bound by contractual promises. Minors, Intoxicated persons, and mentally incompetent persons.

Front 47

Name 5 situations involving voidable contracts (excluding MIM)

FMDUM

Back 47

1) Fraud
2) Misrepresentation
3) Duress
4) Undue Influence
5) Mutual Mistake of Fact

Front 48

Define 'fraud'.

Back 48

an intentional misrepresentation of a material fact that induces one to rely justifiably to his or her injury.
Intend to mislead someone. Has to by the material fact (you wouldn’t enter into it if you knew the facts)
• Intentionally calling a zircon a diamond and persuading someone to purchase it on that basis is a fraud.
o Sometimes failures to disclose a material fact can also be a basis of fraud.
o Defrauded party can withdraw from the contract.

Front 49

Define 'misrepresentation'

Back 49

misstatement without intent to mislead; innocent party can void the contract. (contract is still voidable to the innocent party)
Not knowing the diamond was fake but you sold it anyways.

Front 50

Define 'duress'

Back 50

using force or the threat of force (physical and economic) to induce a party to enter into a contract
If you do not pay me 1000 dollars for me to protect your restaurant it may burn down to the ground.

Front 51

Define 'undue influence'

Back 51

occurs when one party is taken advantage of unfairly through a contract by a party who misuses a position of relationship or legal confidence
Family situation. Mom’s dying, and you convince sister is evil, and you get everything in the will for your name.

Front 52

Define 'mutual mistake of fact'.

Back 52

both parties misunderstand something very basic and material about the contract. If so, rescission is appropriate
That is, if the parties had known and not contracted, they can rescind the contract
“Antiques road show kind of example”
• Test of materiality is whether the parties would have contracted had they been aware of the mistake. If they would not have contracted, the mistakes fact is material.

Front 53

Define 'unilaterial mistake'

Back 53

one party is wrong about a material fact
Tend to be binding
EX: united airlines. Had $25 round trip to Europe… word gets around a lot of people book tickets. UA notices mistake. Instead of billing people for $25, then bill them for $2500. Ended up having to pay $25.

Front 54

Define 'lawful purpose'.

Back 54

• A basic requirement of a valid contract is legality of purpose.
• Contracts that require commission of a crime or tort or violate accepted standards of behavior (public policy) are void.
• Exceptions: Contract may have legal and illegal provisions to it. In such a case, courts will often enforce the legal provisions and refuse to enforce the illegal ones.
• Courts will allow an innocent party to recover payment made to a party who knows or should know that a contract is illegal.
o Courts will allow recovery of a payment for professional services made by an innocent person to a person who is unlicensed to provide such services.

Front 55

Name illegal contracts that restrain trade.

Back 55

to monopolize, to fix prices between competitors, to divide up markets. We will discuss this more in connection with antitrust law
• Contracts that restrain trade often are illegal and void. Monopolizing, price fixing, and dividing up markets are all illegal.

Front 56

Define 'covenant'

Back 56

- Some Covenants not to compete are illegal - to be valid, they must:
Have a valid business purpose, be reasonable as to the time and space
(i.e. not be for too long a duration or for an area too large)
• Covenants not to compete are important in protecting employers from having the emlloyees they train leave them and compete against them. They also protect the buyer of a business from having the seller set up a competing business.
• Some covenants not to compete are illegal. Courts will declare such agreements illegal unless they have a valid business purpose, such as to protect the goodwill a business buyer purchases from the seller of the business.
• Must be reasonable as to time and space.
o Cannot restrain competition for too long or in an area too large. If too long or too large courts will declare them unreasonable and void them as being illegal.
o Max is about 4-5 year.
o For space, courts will void covenants not to compete any time the area restrained exceeds the area in which the restraining business operates.
Duration is about 2 years.

Front 57

Define 'assignment of contracts'

Back 57

- assignment = the transfer (generally a sale) of rights under a contract
- some contracts cannot be assigned

Front 58

Define 'novation'

Back 58

a three (or more) party contract wherein the original contracting parties agree to relieve the obligor from liability by substitution an assignee in the place of this party