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Chapter 10: Contracts
Formation and Enforceability of Contracts
45
Law
Not Applicable
02/23/2009

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Term
Bilateral Contract
Definition
A contract that includes the exchange of a promise for a promise.
Term
Unilateral Contract
Definition
If the offer is phrased so that the offeree can accept only by completing the contract performance. A "promise for an act."
Term
Express Contract
Definition
terms of a contract are fully and explicitly stated in words, oral or written.
Term
Implied-in-fact Contracts
Definition
the conduct of the parties creates and defines the terms of a contract.
Term
Quasi Contracts
Definition
Contracts implied by the law

They do not arise from any agreement between the parties themselves. The are fictional contracts imposed on parties by courts in the interests of fairness and justice.

Quasi Contracts are equitable rather than contractual in nature.
Term
Valid
Void
Voidable
Definition
Valid: properly constituted contract having legal strength. Contains 4 elements of a contract

Void: no legal force or binding effect

Voidable: may be legally annulled at the option of one of the parties.
Term
4 Elements of a Contract
Definition
1. Agreement
2. Consideration
3. Capacity
4. Legality
Term
1. What does
UCC Article 2
govern?

2. What is not included in UCC Article 2?
Definition
1. Sales contracts, every state follows this for "goods" (identifiable, tangible and movable objects)

2. Real Estate and Contracts for services
Term
Defititeness of Terms
(3 things)
Definition
1.Identification of the parties:
Offeror: offers the agreement
Offeree: considers offer

2. Object or subject matter of the contract

3. Consideration of price
Term
Revocation- offer is withdrawn anytime before offeree accepts agreement.

UNLESS when? 3 exceptions
Definition
Irrevocable offers
Options contracts
Detrimental Reliance or Promissory
Term
Mirror Image Rule
Definition
offeree's (person considering agreement) acceptance to match offeror's (person offering agreement) offer exactly.
Term
3 ways of
Termination by Action of the Parties
Definition
1. Revocation
2. Rejection
3. Counteroffer

Either there is acceptance to exact terms=> mirror image rule

...or rejection followed by new offer => counteroffer
Term
Termination By Operation of the Law qualifications
Definition
1. Death or incompetence of offeree or offeror
2. supervening illegality of the proposed contract (such as a contract to kill)
Term
MailBox Rule
Definition
Acceptance effective at dispatch.

So as soon as you put your letter saying you accept the agreement into your mailbox, the contract is effective.
Term
4 Elements of a Contract:
#2 Consideration definition
Definition
Legal value given in return for a promise or performance. Must have something of legal value or sufficiency.
Term
4 Elements of a Contract
#3 Contractual Capacity definition
Definition
Legal ability to enter into a contractual relationship.
Term
Minor's Right to Disaffirm
Definition
May disaffirm contract at any time during minority or for a reasonable period after minor comes of age. Must disaffirm entire contract.

Reasonable period= before next payment

May be expressed or implied

Cannot disaffirm for necessities (such as food, clothes, shelter)
Term
Mental Incompetence
Void and voidable when?
Definition
Void if party has been adjudged mentally incompetent
Voidable if person does not know or lacks mental capacity to comprehend its nature.
Term
4 Elements of a Contract
#4 Legality

3 ways a contract could be "Contrary to Statute"
Definition
1. Gambling
2. Sabbath (Sunday) Laws: prohibit formation or performance of certain contracts on a Sunday
3. Licensing Statutes: the lack of a license in certain occupations bars the enforcement of work-related contracts
4. Usury: rate or limit on interest chargeable
Term
4 Elements of a Contract
#4 Legality

6 ways a contract could be "Contrary to Public Policy"
Definition
1. Contracts in Restraint of Trade: anticompetitive agreements

2. Unconscionable Contracts or clauses

3. Procedural or Substantive Unconscionability

4. Exculpatory Clauses

5. Discriminatory Contracts

6. Contracts for the commission of a tort
Term
4 Elements of a Contract
#4 Legality

Void if contract is ___ or ___.
Definition
Contrary to Statute or Contrary to Public Policy
Term
4 Elements of a Contract
Legality: Contrary to Public Policy

Unconscionable contract or clause definition
Definition
A contract or clause that is void on the basis of public policy because one party, as a result of its disproportionate bargaining power, is forced to accept terms that are unfairly burdensome and unfairly benefit the dominating party.

Usually involve an Adhesion Contract: drafted by dominant party and presented on a "take it or leave it" basis.
Term
4 Elements of a Contract
Legality: Contrary to Public Policy

Exculpatory Clauses definition
Definition
A clause that releases a party (to a contract) from liability for his or her wrongful acts.

No Matter who is at fault.

Clauses that relieve a party from liability for harm caused by simple negligence normally are unenforceable when they are asserted by an employer against an employee.
Term
Some persons are excepted from the general rule that neither party to an illegal bargain can sue for breach and neither can recover for performance rendered.

Exceptions include: (3)
Definition
1. Justifiable Ignorance of the Facts: when one of the parties has no knowledge of the illegality of a contract, that party can often obtain restitution or recovery benefits conferred in a partially executed contract.

2. Members of a Protected Class: a member of a protected class can enforce as illegal contract even though the other party cannot.

3. Contract Illegal through FRAUD, DURESS, or UNDUE INFUENCE:
if party is induced into contract through fraud, duress or undue influence.

DURESS: physical or moral pressure used to force someone to do something
Term
Genuineness of Assent: a defense to the enforcement of a contract.

Genuineness of Assent may be lacking because of what 4 things?
Definition
1. Mistake
2. Fraudulent Misrepresentation
3. Undue Influence
4. Duress
Term
Types of Mistakes
Definition
Unilateral:
Involves some material fact-- a fact important to the subject matter of the contract.
Ex: you want to sell a computer for 550 but you accidentally tell someone 500 and they accept.

In general, unilateral mistakes do not afford the mistaken party any relief.


Mutual:
When both parties are mistaken about the same material fact, the contract can be rescinded (made void) by either party.
Term
Discharge By Performance
Definition
Contract ends when both parties fulfill duties/acts promised.
Term
Statue of Frauds- Certain types of contracts must be in a signed writing to be enforceable.

(5 types)
Definition
1. Contracts Involving Interest in Land
Land is a real property and includes all physical objects permanently attached to the soil. Fixtures (buildings, vegetation,etc) are also treated as real property.

2. The One-Year Rule
Contracts that cannot be performed within one year of when the contract is formed must be in writing to be enforceable.

3. Collateral Promises
Promise made by 3rd party (C) to a creditor (B) to pay the debt of another (A) who is primarily obligated to pay the debt.

4. Promises Made in Consideration of Marriage
A unilateral promise to pay a sum of money or to give property in consideration of a promise to marry must be in writing.

5. Contracts for the good of Sales
A written contract is required for the sale of goods priced at $500 or more.
Term
Discharge by Performance:
Complete Vs. Substantial Performance
Definition
Complete: Strict performance, conditions expressly stated in contract must fully occur.

Substantial: Performance performed must not vary greatly from performance promised in the contract and must create substantially the same benefits as those promised in the contract.
Term
Discharge by Performance:
Material Breach of Contract
Definition
Nonperformance of contractual duty.
-When there has been a failure of consideration
-discharges non-breaching party from the contract
Term
Discharge by Performance:
Anticipatory Repudiation
Definition
If before a performance is due, one party refuses to perform its contractual obligation=> results in material breach.
-non-breaching party can and should seek other contractor and does not need to remain ready to perform old contract obligations.
Term
Discharge by Agreement:

Explain
Discharge by Rescission
Discharge by Novation
Discharge by Accord and Satisfaction
Definition
Discharge by Rescission:
Rescission is the process in which the parties cancel the contract and are returned to positions the occupied prior to contract's formation.
Parties must make another agreement that includes an Offer, Acceptance, and Consideration. Mutual Rescission can occur when original contract is executory on both sides (neither party has completed performance)


Discharge by Novation:
Substitutes a 3rd party for one of the original parties.
Requires:
1. Existence of a previous, valid obligation
2. Agreement by all parties to a new contract
3. The extinguishing of the old obligation (discharge of prior party)
4. A new, valid contract


Discharge by Accord and Satisfaction:
Parties agree to accept performance different from the performance originally promised.

Accord: an executory contract to perform some act in order to satisfy an existing contractual duty that is not yet discharged.

Satisfaction: the performance of the accord agreement.
Term
Discharge by Operation of Law
(6 types)
Definition
1. Alteration of Contract
2. Statutes of Limitations
3. Bankruptcy
4. Impossibility
5. Commercial Impracticability: when performance becomes much more difficult or expensive than anticipated.
6. Frustration of Purpose
Term
Legal Remedies Vs. Equitable Remedies
Definition
LEGAL
Compensatory Damages
Consequential Damages
Punative Damages
Nominal Damages

EQUITABLE
Rescission & Restitution
Specific Performance
Reformation
Term
Compensatory Damages

involving sale of goods, sale of land and construction
Definition
Sale of goods: the difference between contract price and market price

Sale of Land: the difference between contract price and market price

Construction: depends on when and who breaches contract
Term
Consequential Damages
Definition
Foreseeable damages the breaching party is aware-or should be aware- of that cause damage as a consequence of the original injury; can cause injured party additional loss
Term
Punative Damages
Definition
Designed to punish wrongdoer and deter similar activity in the future (ie: Exxon Case)
Term
Nominal Damages
Definition
Little or no financial loss. Focuses on principle.
Term
Mitigation of Damages
Definition
Rule requiring the party suing to have done whatever was reasonable to minimize damages caused by defendant.
Term
Liquidated Damages vs. Penalites
Definition
Liquidated: amount of damaged determined by agreement or court order, enforceable.

Penalty: designed to punish breaching party. Generally not enforceable.
Term
Equitable Remedies:
Rescission
Definition
an act to undo or cancel contract
Term
Equitable Remedies:
Restitution
Definition
Returning goods, property or money previously conveyed.
Term
Equitable Remedies:
Specific Performance
Definition
Performance of act promised in the contract. Granted only when party's legal remedy (money damages) is inadequate.
Term
Equitable Remedies:
Reformation
Definition
When parties have imperfectly expressed their agreement in writing. Allows contract to be rewritten to reflect parties' true intentions. Most often applied with fraud or mutual mistake.
Term
More On Exculpatory Clauses
Definition
Exculpatory clauses are legal if they are reasonable in nature. The courts will delete such clauses, however, if they are unconscionable or unreasonable. For example the parking lot must still be held responsible for the clearly negligent mishandling of a parked car by an attendant and the drycleaner must still be responsible for putting a white garment in a load of dark colored clothes and causing harm.
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