Understanding Contracts: Definition, Types, and Enforceability, Quizzes of Introduction to Business Management

Download Understanding Contracts: Definition, Types, and Enforceability and more Quizzes Introduction to Business Management in PDF only on Docsity! TERM 1 What is a contract? DEFINITION 1 A contract is a legally binding agreement, a promise enforceable by law. Each party becomes legally bound to do or to refrain from doing certain acts. A contract is the legal relationship of the parties, in terms of the rights and duties of each which arise from the promises they have made.Agreement has much broader meaning than "contract". An agreement may or may not be a contract. TERM 2 Does a contract have to be in writing to be enforceable? DEFINITION 2 With a few exceptions, contracts do NOT have to be in writing to be enforceable. TERM 3 What four things must be present to make a contract? DEFINITION 3 1) Manifestation of mutual assent a) Offer and acceptance, b) Reality of the assent2) Consideration3) Capacity of the parties4) Legality of the object of the agreement TERM 4 What are the subject matter of contracts? DEFINITION 4 May relate to the performance of personal services, i.e. playing football or hiring a plumber.May also provide for the transfer of ownership of property from one person to another, such as house (real property) or an automobile (personal property). TERM 5 Parties to a contract DEFINITION 5 The person who makes a promise is the promisor, and the person to whom the promise is made is the promisee.If the promise is binding it imposes on the promisor a duty or obligation, and the promisor may be called the obligor. The promisee who can claim the benefit of the obligation is called the obligee. The parties to a contract are said to stand in privity with each other, and the relationship between them is termed privity of contract. Privity is the chain of relationship to the same thing or right. TERM 6 Parties to a contract (continued) DEFINITION 6 A party to a contract can be anybody, i.e. individual, partnership, corporation, government.One or more persons can be in a contract, and some are three sided (i.e. a credit card transaction involving the holder of the card, the company issuing the card, and the business furnishing goods and services on the basis of the credit card)A person can't be bound to a contract to which that person is not a party. TERM 7 How does a contract arise? DEFINITION 7 A contract is based on an agreement. An agreement arises when a person (offeror) makes an offer and the person to whom the offer is made (offeree). There MUST be an offer and acceptance, if either is lacking there is no contract.There also must be that the parties have an intent to enter into an agreement that is binding. TERM 8 Freedom of contract DEFINITION 8 Parties may make such contracts as they choose. The law does not require parties to be "fair", kind, or reasonable, or to share profits or losses equitably. Its your contract, you can make it any way you want too. TERM 9 Classes of Contracts: formal contracts DEFINITION 9 Contracts can be classified as formal and informal. Formal contracts: one which depends upon a particular form, or which must be in a particular form. 1) Contracts under seal, where a person's signature or a corporations name is followed by a scroll, the word seal, or the letters 'L.S.'2) contracts of record (recognizance) which are obligations that have been entered before a court to some act (i.e. to appear at a later date)3) negotiable instruments, deeds, mortgages, etc. TERM 10 Classes of Contracts: informal contracts DEFINITION 10 All other contracts, written or oral, are informal, since they do not depend upon mere formality for their legal existence or character. They are enforceable, not because of the form of transaction, but because they represent agreement of the parties. TERM 21 Right of first-refusal contract DEFINITION 21 Right of first refusal contract: right of first refusal is the right of a party to meet the terms of a proposed contract before it is executed, such as a real estate purchase agreement. TERM 22 Quasi Contracts DEFINITION 22 Quasi Contract: Not a contract at all. Not based upon an express promise or a promise implied in fact. It is an obligation whichCourt- imposed obligation to prevent unjust enrichment in the absence of a contract. The court isn't seeking to enforce the intentions of the parties contained in an agreement. Rather, when a person receives a benefit from another, even in the absence of a promise to pay for the benefit, a court may impose an obligation to pay for the reasonable value of that benefit, to avoid unjust enrichment. TERM 23 Quasi Contracts (continued) What does a successful claim for unjust enrichment require? DEFINITION 23 A successful claim for unjust enrichment requires:1) a benefit conferred on the defendant2) the defendant's knowledge of the benefit3) a finding that it would be unjust for the defendant to retain the benefit without paymentThe burden of proof is on the plaintiff to prove all of the elements of the claim. TERM 24 What is quantum meruit? DEFINITION 24 As much as deserved; an action brought for the value of the services rendered the defendant when there was no express contract as to the purchase price. Also called restitution damages. TERM 25 Extent of Recovery in a quasi contract? DEFINITION 25 When recovery is allowed in a quasi contract, the plaintiff recovers the reasonable value of the benefit conferred on the defendant, or the fair and reasonable value of the work performed. TERM 26 (E-Sign) Act and the UETA Act DEFINITION 26 Both of these acts mandate parity between paper and electronic contracts. The basic legal rules that govern contracts offline are the very same rules that govern online contracts, and basic civil procedure rules apply. TERM 27 Quasi-Contract recovery example DEFINITION 27 A agrees to work for B for 3 weeks and they have a falling out after 2 weeks, A demands payment for two weeks and B responds that A has not performed under the terms of their contract.A will recover in quasi-contract for the reasonable value of the services received. TERM 28 Another Quasi-Contract recovery example DEFINITION 28 Mrs. Stone discovers that there was home imporvement work done on her house while she was on vacation. The company installing them mistakenly put them on the wrong house, and sues in quasi- contract because Mrs. Stone has been enriched by the obvious home improvement. However, Mrs. Stone will win the suit and will not be liable to pay because the benefits were bestowed without her knowledge and consent. HOWEVER, had she been at home and said nothing to stop the workmen, there would be a contract implied-in-fact from her silence and she would be held liable. TERM 29 What is an offer? DEFINITION 29 An offer is a definite proposal made by one person to another which by its terms is conditional upon an act, a forbearance (a refraining from doing something one has a legal right to do) or a return promise.To make an offer, the offeror must appear to intend to create a binding obligation. TERM 30 Manifestation of mutual assent DEFINITION 30 What we are looking for is an agreement of the parties. The important thing is what the parties made manifest to one another by their spoken or written words or by their conduct. To make an offer, the offeror must appear to create a binding obligation, and whether this intent exists is determined by objective standards (i.e. conduct). The law applies an objective standards and will be concerned with the assent, agreement, or intent of a party only as it reasonably appears from words and actions. The law isn't concerned with what the parties were thinking (subjective intention). TERM 31 What manner do parties usually manifest their mutual assent? DEFINITION 31 By an offer and acceptance. TERM 32 Is an advertisement an offer? DEFINITION 32 No, it is generally an invitation to make offers.Advertisements do not contain a promise and leaves unexpressed many terms which would be necessary to make a contract. I.e. Advertising for bids on a construction job is an invitation to make offers. That is, unless the advertisements states that job will be let "to the lowest bidder without reservation" TERM 33 What about an advertisement of a reward? DEFINITION 33 Advertisement of a reward IS AN OFFER because it is definite and certain, asking for the performance of a certain act (unilateral contract). Proposals made in jest, which the promisee understands as such, are not offers. There is no contractual intent. However, if the intended jest is so successful that the promisee reasonably believes under the circumstances that it has been made as an offer, and accepts, the objective standard applies and the parties have entered into a contract. "I'll give you $300 to mow my lawn tomorrow". TERM 34 What is contractual intent? DEFINITION 34 To make an offer, the offeror must appear to intend to create a binding obligation. Whether this intent exists is determined by objective standards (i.e. conduct).(a) Invitation to negotiate: First statement made by someone not necessarily an offer. There may be an invitation to the other to negotiate or to make an offer. Asking a professor if he'd like to continue next semester is not an offer but an invitation to make an offer. TERM 35 What is contractual intent? (continued) DEFINITION 35 A price tag at a store. The owner cannot possibly intend to create a contract with everyone that sees it, but its rather an invitation to make an offer. (b) Agreement to make a contract at a future date:No contract arises when parties merely agree that at a future date they will consider making a contract or will make a contract on terms agreed at that time. Unless an agreement is reached on all MATERIAL terms and conditions, and nothing is left to future negotiations, a contract to enter a contract in the future is of no effect. TERM 46 Revocation (continued) DEFINITION 46 A letter revoking an offer is only effective when the offeree receives it. Not a revocation when it is written or mailed. However, a written revocation is effective when delivered to offeree's residence/place of business under circumstances that offeree may be reasonably expected to be aware of its arrival. If the offeree accepts an offer before it is effectively revoked, a valid contract is created. TERM 47 Option Contracts DEFINITION 47 Option contract is a binding promise to keep an offer open for a stated period of time or until a specified date. An option contract requires that the promisor receive consideration-- that is, something, such as a sum of money--as the price for the promise to keep the offer open. The option is a contract to refrain from revoking the offer. TERM 48 Firm offers DEFINITION 48 Firm offers: A firm offer is an offer that is stated to be held open for a specified period of time.Under the UCC, this doctrine of firm offer applies to a merchant's signed, written offer to buy or sell goods but with a maximum of three months on its period of irrevocability. Firm offers are another exception to the rule that an offer can be revoked at any time before acceptance. Firm offers and option contracts are the two exceptions. TERM 49 Counteroffer by Offeree DEFINITION 49 Proposal by an offeree to offeror that changes the terms of (and thus rejects) the original offer. An "acceptance" that changes the terms of the offer or adds new terms is rejection of the original offer and constitutes a counteroffer. TERM 50 Rejection of offer by offeree DEFINITION 50 If the offeree rejects the offer and communicates this rejection to the offeror, the offer is terminated. Even though the period with which I've agreed to keep the offer open is still open, a rejection terminates the offer. TERM 51 Lapse of time DEFINITION 51 When an offer states that it's open until a particular date, the offer terminates on that date if it has not yet been accepted. I could say "you have 10 seconds to run this far to get this" if you haven't accomplished it, the offer expires. Doesn't have to be "reasonable".If the offer does not specify a time, it will terminate after the lapse of a reasonable time. "reasonable time" depends on circumstances of each case (nature of subject matter, market its sold in, etc.)When a seller accepts an offer after it has lapsed by the expiration time, the seller's acceptance is merely a counteroffer and no contract is created (unless buyer accepts that counteroffer). TERM 52 Death or Disability of Either Party DEFINITION 52 If either the offeror or offeree dies or becomes mentally incompetent before the offer is accepted, the offer is automatically terminated. Chet offers to sell his ranch and dies 5 days later. The offeree cannot form a contract because the offer made by Chet died with him. TERM 53 Communication of the offer example DEFINITION 53 An offer is effective when it is received; if by mail or telegram, when it is read by the offeree. A parks his car in a parking garage. On the back of the ticket is a statement that the garage is not liable for damage to his car regardless of cause. A does not see or read the disclaimer. His car is subsequently damaged due to the attendant's negligence. The disclaimer is not effective because it was never communicated to A. TERM 54 Subsequent Illegality DEFINITION 54 If the performance of the contract becomes illegal after the offer is made, the offer is terminated. i.e. an offer to sell six automatic handguns to a firing range, but a new law prohibiting such sales is enacted before the offer is accepted, the offer is terminated. TERM 55 Acceptance of Offer DEFINITION 55 The assent of the offeree to the terms of the offer. Objective standards determine whether there has been an agreement of the parties. An acceptance is the offeree's manifestation of intent to enter into a binding agreement on the terms stated in the offer.-Privilege of Offeree-Effect of acceptance-Nature of acceptance TERM 56 Who may accept an offer? DEFINITION 56 Only the person to whom an offer is directed may accept it. If anyone else attempts to accept it, noagreementor contract with that person arises.If directed to the public at large, any member of the public that has knowledge of the existence of the offer may accept it.When a person to whom an offer was not made attempts to accept it, this attempted acceptation has the effect of an offer. If the original offerer is willing to accept this offer, a binding contract arises. TERM 57 Manner and Time of Acceptance DEFINITION 57 The offeror may specify the manner and time for accepting the offer. When offeror specifies that there must be a written acceptance, no contract arises when the offeree makes an oral acceptance.After the time specified in the offer or a reasonable period of time expires (when no time is specified) the offeree's power to make a contract by accepting the offer "lapses".When offeror calls for performance of an act/conduct, the performance thereof is an acceptance of the offer and creates a unilateral contract. The offeror is the master of the offer. TERM 58 Silence as Acceptance DEFINITION 58 The offeree's silence and failure to act cannot be regarded as an acceptance in most cases. Offeror is not permitted to frame an offer in such way as to make silence/inaction of the offeree operate as an acceptance."if you don't speak in 5 seconds, I get your house". TERM 59 Unordered goods and tickets DEFINITION 59 When a seller sends merchandise to somebody and writes that the recipient is obligated to pay for it unless that person sends it back. There is no acceptance if the recipient of the letter ignores the offer and does nothing. The silence of the person receiving the letter is not an acceptance. The Postal Reorganization Act provides that the person who receives unordered mail merchandise from a sender has the right to use it in any way without any obligation to the sender. It also states that unordered merchandise must have conspicuous statement that conveys this message. TERM 60 Communication of Acceptance DEFINITION 60 Acceptance by the offeree is the last step in forming a bilateral contract. face to face, a contract is formed upon the offeror's receipt of the acceptance. When offeror hears offeree's words of acceptance, parties may shake hands and signify understanding that a contract has been formed. TERM 71 Sufficiency of Consideration DEFINITION 71 The consideration found to exist must meet the test of legal sufficiency. To be sufficient, the consideration for the promise must be either a legal detriment to the promisee OR a legal benefit to the promisor. - Legal detriment means the doing, or undertaking to do, or forbearance to do, that which the promisee had no prior legal obligation to do.Legal benefit means the obtaining by the promisor of that which he had no prior legal right to obtain. TERM 72 Cancellation Provisions DEFINITION 72 o Although a promise must impose a binding obligation, it may authorize a party to cancel the agreement under certain circumstances on giving notice by a certain date. Such a provision does NOT make a partys promise illusory, for the party does not have a free way out and is limited to living up to the terms of the cancellation provision. I.e. an agreement for a celebrity to appear in San Antonio, and a provision in the contract stating if a significant acting opportunity comes up, Ms. Gabor will have the right to cancel her appearance in writing by April 15, 1991. However, she only was in the movie for 14 seconds, and this was not a significant acting opportunity, and she was held liable for breach of contract. TERM 73 Conditional Promises DEFINITION 73 o A conditional promise is a promise that depends on the occurrence of a specified condition in order for the promise to be binding.A contract by Mary to hire a chef (White) for 150,000 on condition of successful negotiation of the restaurant lease with Marina Bay Management. Although the happening of the condition was within Marys control, as she could avoid the contract with the chef by not acquiring the restaurant lease, she limited her future options by the contract with White. Her promise to White was not illusory because after signing the contract with him, if she acquired the lease, she was bound to hire him. Before signing the contract with White, she could do whatever. The contract was enforceable. TERM 74 Pre-existing duties and consideration DEFINITION 74 Ordinarily, doing or promising to do what one is already under a legal obligation to do is not consideration. Similarly, a promise to refrain from doing what one has no legal right to do is not consideration. . This preexisting legal duty or obligation can be based on statute, law, responsibilities of an office held, or a preexisting contract. i.e. - a cop that gets paid 500 dollars by a person to watch his neighborhood, the cop has a preexisting official duty as a police officer to protect citizens, thus the promise of 500 dollars is unenforceable. TERM 75 Pre-existing duties and consideration: Unforeseen difficulties DEFINITION 75 Strikes, bad weather, inflation, and production bottlenecks are all foreseeable. When there are unforeseeable difficulties, the contractor (from the example in the notes) can get a higher amount for the performance than specified when the amount is reasonable under the circumstances. This is the good-faith adjustment. TERM 76 Contract for Sale of Goods and Consideration DEFINITION 76 When the contract is for the sale of goods, any modification made in good faith by the parties to the contract is binding without regard to the existence of consideration for the modification. TERM 77 Compromise and Release of Claims DEFINITION 77 Compromise and Release of Claims: The rule that doing or promising to do what one is already legally bound to do is not consideration applies to a part payment made in satisfaction of an admitted or liquidated debt. Thus, a promise to pay part of an amount that is admittedly owed is not consideration for a promise to discharge the balance. It will not prevent the creditor from demanding the remainder later.Example in notes on page 5. TERM 78 Compromise and Release of Claims DEFINITION 78 If the debtor pays the part before its due, then there is consideration because, on the day when the payment was made, the creditor was not entitled to demand any payment. Likewise, if the creditor accepts some article (even of slight value) in addition to the part payment, consideration exists. TERM 79 Unliquidated Debt DEFINITION 79 When there is a dispute over the amount owed or whether any amount owed, it is called an unliquidated debt. When there is a dispute over the amount owed or whether any amount owed, it is called an unliquidated debt. In this case, payment by the debtor of less than the amount claimed by the creditor is consideration for the latters agreement to release or settle the claim. It is generally regarded as sufficient if the claimant believes in the merit of the claim. TERM 80 Part-payment checks DEFINITION 80 Part-Payment Checks When there is a dispute about the amount of a debt and the debtor tenders a check that states on its face paid in full and references the transaction in dispute, but the amount of the check is less than the full amount the creditor asserts is owed, the cashing of the check by the creditor discharges the entire debt. TERM 81 Composition of Creditors and consideration: DEFINITION 81 Composition of Creditors In a composition of creditors, the various creditors of one debtor mutually agree to accept a fractional part of their claims in full satisfaction of the claims. Such agreements are binding and supported by consideration. TERM 82 Past Consideration DEFINITION 82 Past consideration is something that has been performed in the past and which, therefore, cannot be consideration for a promise made in the present. A promise based on a partys past performance lacks consideration. Example on page 6 of the notes TERM 83 Moral Obligation and Consideration DEFINITION 83 Promises made to another based on moral obligation, generally, lack consideration and are not enforceable. They are considered gratuitous promises and unenforceable. TERM 84 Exceptions to Consideration DEFINITION 84 (a) Charitable Subscriptions: When individuals make pledges to finance construction of buildings for charitable purposes, consideration is lacking according to technical standards applied in ordinary contract cases. o For public policy reasons, the reliance on the charity of the pledge in undertaking the project is deemed a substitute for consideration. TERM 85 What areas does the UCC (Uniform Commercial Code) abolish the requirement for consideration? DEFINITION 85 Under the UCC, consideration is not required for: (1) a merchants written, firm offer for goods stated to be irrevocable. (2) a written discharge of a claim for an alleged breach of a commercial contract (3) an agreement to modify a contract for the sale of goods. TERM 96 Restitution by Minor after Avoidance: original consideration intact DEFINITION 96 When a minor disaffirms a contract, the question arises as to what the minor must return to the other contracting party: (1) Original Consideration Intact: When a minor still has what was received from the other party, the minor, on avoiding the contract, must return it to the other party or offer to do so. In other words, the minor must put things back to the original position or restore the status quo ante (original positions of the parties) TERM 97 Restitution by Minor after avoidance: original consideration damaged or destroyed DEFINITION 97 2) Original Consideration Damaged or Destroyed: When the minor cant return what was received because its spent, damaged, etc., the minor still has the right to disaffirm the contract, and is required to returnonly what remains. TERM 98 Recovery of Property by Minor on Avoidance: DEFINITION 98 Recovery of Property by Minor on Avoidance: When a minor disaffirms a contract, the other contracting party must return the money received or any property received from the minor. If the property has been sold to a third person who did not know of the original sellers minority, the minor cannot get the property back. In such cases however, the minor is entitled to recover the propertys monetary value or the money received by the other contracting party. TERM 99 Contracts for necessaries: What constitutes necessaries? DEFINITION 99 Contracts for Necessaries: A minor can disaffirm a contract for necessaries but must pay the reasonable value for furnished necessaries. (1) What Constitutes Necessaries? Necessaries are things indispensable or absolutely necessary for the sustenance of human life. The term would extend only to food, clothing, and lodging. The rule is now relaxed to extend generally to things relating to health, education, and comfort of the minor, thus the rental of a house used by a married minor is a necessary. TERM 100 Liability of parent or guardian when a minor enters a contract for necessaries DEFINITION 100 When third person supplies the parents of a minor with goods or services that the minor needs, the minor is not liable for these necessaries because the third persons contract is with parent or guardian, not the minor. When necessary medical care is provided to the minor, a parent is liable at common law for medical expenses provided. However, at common law, the child can be held contractually liable for her necessary medical expenses when the parent is unable or unwilling to pay. TERM 101 Ratification of a former minor's VOIDABLE contract DEFINITION 101 A former minor cannot disaffirm a contract that has been ratified after reaching majority. (1) What Constitutes Ratification? Ratification consists of any words or conduct of the former minor manifesting an intent to be bound by the terms of a contract made while a minor. (2) Form of Ratification: Generally, no special form is required for ratification of a minors VOIDABLE contract, though some states require a written ratification. TERM 102 Ratification of a former minor's VOIDABLE contract: time for ratification DEFINITION 102 A person can disaffirm a contract any time during minority and for a reasonable time after but, of necessity, can ratify a contract only after attaining majority. The minor must have attained majority, or the ratification would itself be regarded as voidable. TERM 103 What's a contract that a minor CAN'T avoid? DEFINITION 103 Statutes in many states deprive minors may not avoid an educational loan; a contract for medical care; a contract made while running a business; a contract approved by a court; a contract made in performance of a legal duty; and a contract related to bank accounts, insurance policies, or corporate stock. TERM 104 Liability of Third Person for a Minors Contract: Are parents/co-signers bound by the contract of their minor child? DEFINITION 104 Liability of Parent:Ordinarily a parent is not liable on a contract made by a minor child. Parent may be liable if child is acting as agent of the parent making the contract. Parent is also liable to a seller for the reasonable value of necessaries supplied by the seller to the child if the parent had deserted the child. TERM 105 Liability of Third Person for a Minors Contract: Are parents/co-signers bound by the contract of their minor child? DEFINITION 105 Liability of Cosigner: With respect to the other contracting party, the cosigner is bound independently of the minor. If the minor disaffirms the contract, the cosigner remains bound by it. When the debt to the creditor is paid, the obligation of the cosigner is discharged. If minor disaffirms a sales contract but does not return the goods, the cosigner remains liable for the purchase price. TERM 106 Mentally incompetent persons and contractual capacity DEFINITION 106 A person with a mental disorder may be so disabled as to lack capacity to make a contract. If that person is so mentally incompetent as to be unable to understand that a contract is being made or the general nature of a contract, the person lacks contractual capacity.Effect of Incompetency: An incompetent person may ordinarily avoid a contract in the same manner as a minor. Upon removal of the disability, the formerly incompetent person can either ratify or disaffirm the contract. TERM 107 Mentally incompetent persons and the appointment of guardian DEFINITION 107 : If a court appoints a guardian for the incompetent person, a contract made by that person before the appointment may be ratified or in SOME cases, disaffirmed by the guardian. o If the incompetent person makes a contract after a guardian has been appointed, the contract is VOID and not merely VOIDABLE. TERM 108 Intoxicated persons and legal capacity DEFINITION 108 The capacity of a party to contract and the validity of the contract are not effected by the partys being impaired by alcohol at the time of making the contract so long as the party knew that a contract was being made. o If degree of intoxication is such that a person does not know that a contract is being made, the contract is VOIDABLE by that person. The situation is the same as though the person were insane at the time and did not know what he or she was doing. On becoming sober, the individual may avoid or rescind the contract. TERM 109 Intoxicated persons and legal capacity (continued, with example) DEFINITION 109 However, an unreasonable delay in taking steps to set aside a known contract entered into while intoxicated may bar intoxicated person from asserting this right. I.e. Edward made contract while drunk, and disaffirmed the contract for lack of capacity as soon as he sobered up. The other contracting party claimed that voluntary intoxication cannot void a contract, but Edward could disaffirm the contract because he lacked the legal capacity to enter a contract. Courts treat impairment by use of drugs the same as impairment caused by excessive use of alcohol. TERM 110 Validity of a contract when a mistake is made DEFINITION 110 A mistake is an erroneous understanding or an inaccurate concept which if acted upon may produce some unfortunate result for the actor. In determining what the manifestation of mutual assent actually was, the law applies an objective standard based upon what reasonably appears from the words and actions as they relate to their assent, intention, or agreement. TERM 121 Statement of opinion or value: WHEN can it be fraud? DEFINITION 121 o A statement of opinion may be fraudulent when the speaker knows of past or present facts that make the opinion false.This is material misrepresentation of fact. TERM 122 Reliance on statement DEFINITION 122 A fraudulent statement made by one party has no importance unless the other party relies on the statement's truth. See notes for an example.If the alleged victim of the fraud knew that the statements were false because the truth was commonly known, the victim cannot rely on the false statements. TERM 123 Proof of harm: DEFINITION 123 For an individual to recover damages for fraud, proof of harm to that individual is required. The injured party may recover the actual losses suffered as a result of the fraud as well as punitive damages when the fraud is gross or oppressive. The injured party has the right to have the court order the rescission or cancellation of the contract that has been induced by fraud. TERM 124 Negligent Misrepresentation DEFINITION 124 While fraud requires the critical element of a known or recklessly made falsity, a claim of negligent misrepresentation contains similar elements except it is predicated on a negligently made false statement. That is, the speaker failed to exercise due care regarding material information communicated to the listener but did not intend to deceive.When the negligent misrepresentation of a material fact that the listener relies on results in harm to the listener, the contract is VOIDABLE at the option of the injured party. TERM 125 Nondisclosure and the General Rule of non- liability DEFINITION 125 oGeneral Rule of Nonliability: Ordinarily, a party to a contract has no duty to volunteer information to the other party. I.e. if Fox does not ask Tehan any questions, Tehan is not under any duty to make a full statement of material facts. Consequently, the nondisclosure of information that is not asked for does not impose fraud liability or impair the validity of a contract. TERM 126 Exceptions to the Rule of General Non-liability for non-disclosure DEFINITION 126 (1) Unknown defect or condition(2) Confidential Relationship(3) Active Concealment TERM 127 Unknown defect or condition and non- disclosure DEFINITION 127 (1) Unknown defect or condition: A duty may exist (in some states) for a seller who knows of a serious defect or condition to disclose that information to the other party where the defect or condition is unknown to the other person and is of such a nature that it is unlikely that the other person would discover it. However, a defendant who had no knowledge of the defect CANNOT be held liable for failure to disclose it. TERM 128 Confidential Relationship and Nondisclosure DEFINITION 128 Confidential Relationship: If parties stand in a confidential relationship, failure to disclose information may be regarded as fraudulent. Confidential relationship: A relationship in which, because of the legal status of the partier or their respective physical or mental conditions or knowledge, one party places full confidence and trust in the other. i.e. attorney-client privilege The attorneys silence has the same legal consequence as a knowingly made false statement that there was no material fact to be told the client. TERM 129 Active Concealment and Nondisclosure DEFINITION 129 Nondisclosure can be more than just passive failure to volunteer information, it may consist of a positive act of hiding information from the other party by physical concealment, or it may consist of knowingly and recklessly furnishing the wrong information. Such conduct is fraud. TERM 130 Pressure: Undue Influence DEFINITION 130 A disabled person may rely on a nurse, an aged parent may rely on a child. The relationship is that one person is helpless in the hands of the other. When such a confidential relationship exists, it is apparent that the parent, disabled person etc. is not exercising free will in making a contract suggested by the child, nurse, etc. because it is merely following the will of the other person. TERM 131 Pressure: Undue Influence (continued) DEFINITION 131 Because of the great possibility of unfair advantage, the lawpresumes that the dominating person exerts undue influence (influence asserted upon another person by one who dominates that person) on another person whenever the dominating person obtains any benefit from a contract made with the dominated person. The contract is then VOIDABLE. o Contract may be set aside by dominated person unless the dominating person can prove that, at the time the contract was made, no unfair advantage had been taken. o Law does not regard every influence as undue. TERM 132 Pressure: Undue Influence (continued#3) DEFINITION 132 An essential element of undue influence is that the person making the contract does not exercise free will. o In the absence of a recognized type of confidential relationship, such as that between parent and child, courts are likely to take the attitude that the person who claims to have been dominated was merely persuaded and was therefore no undue influence. TERM 133 Duress DEFINITION 133 A party may enter into a contract to avoid a threatened danger. The danger threatened may be a physical harm to person or property, called physical duress, or it may be threat of financial loss, called economic duress. TERM 134 Duress: Physical Duress DEFINITION 134 (a) Physical Duress: A person makes a contract under duress when there is such violence or threat of violence that the person is deprived of free will and makes the contract to avoid harm. The threatened harm can be directed either at a near relative of the contracting party or against the contracting party. If a contract is made under duress, the resulting agreement is voidable at the victims election. TERM 135 Duress: Economic Duress DEFINITION 135 A condition in which one is induced by a wrongful act or threat of another to make a contract under circumstances that deprive one of the exercise of his own free will. -Example on last page of chapter 14 notes. TERM 146 What is the Federal Arbitration Agreement (FAA)? DEFINITION 146 Under this act, the employer can obtain a court order to stay court proceedings and compel arbitration according to the terms of the controlling arbitration agreement. TERM 147 Agreements affecting Public Welfare DEFINITION 147 Agreements that may harm the public welfare are condemned as contrary to public policy and are not binding. Agreements that interfere with public service or the duties of public officials, obstruct legal process, discriminate against classifications of individuals may be considered detrimental to public welfare and are not enforceable. TERM 148 Agreements Contrary to Public Policy DEFINITION 148 A given agreement may not violate any statute but may still be so offensive to society that the courts feel that enforcing the contract would be contrary to public policy-Contracts that may be unenforceable as contrary to public policy frequently relate to the protection of the public welfare, health, or safety; to the protection of the person; and to the protection of recognized social institutions. -Courts cautious in invalidating a contracto n the ground that it is contrary to public policy TERM 149 Gambling, Wagers, and Lotteries DEFINITION 149 Gambling contracts are illegal. Private lotteries involving the three elements of:- 1) prize, 2) chance, and 3) consideration (or similar affairs of chance) are also generally held illegal. In many states, public lotteries (lotteries run by a state government) have been legalized by statute. Raffles are usually regarded as lotteries.- Giveaway plans and schemes are lawful so long as it is not necessary to buy anything or give anything of value to participate. If participation is free, the element of consideration is lacking, and there is no lottery by definition. TERM 150 Regulations of Business: Effects of violations of the law DEFINITION 150 Whether an agreement made in connection with business conducted in violation of the law is binding or void depends on how strongly opposed the public policy is to the prohibited act. Some court take the view that the agreement is not void unless expressly specified by the statute. TERM 151 Statutory Regulation of Contracts DEFINITION 151 - To establish uniformity or to protect one of the parties to a contract, statutes frequently provide that contract of a given class must follow a statutory model or must contain specified provisions. I.e. statutes that require contracts executed in connection with credit buying and loans contained particular provisions designed to protect the debtor. TERM 152 Licensed Callings or Dealings DEFINITION 152 - Statutes frequently require that a person obtain a license, certificate, or diploma before practicing certain professions, i.e law and medicine. - If a license is required to protect the public from unqualified persons, a contract made by an unlicensed person is unenforceable. - I.e. a corporation that doesnt hold a required real estate brokers license cannot sue to recover fees for services as a broker. An unlicensed broker cannot evade the statutory requirement by having a friend (who is a licensed broker) bill for the services and collect payment for him. TERM 153 Contracts in Restraint of Trade DEFINITION 153 - An agreement that unreasonably restrains trade is illegal and VOID on the ground that it is contrary to public policy. Such agreements can take on many forms, i.e. combination to create a monopoly, an association of merchants to increase prices, etc. TERM 154 Contracts about agreements not to compete DEFINITION 154 - In the absence of a valid restrictive covenant, the seller of a business may compete with the buyer, or an ex-employee may solicit customers of the former employer. - A non-competition covenant may be held invalid because of vagueness concerning the duration and geographic area of this restriction. Also if the agreement not to compete is not properly executed in accordance with state law, it will not be enforced. TERM 155 Contracts about agreements not to compete exceptions: Sale of Business DEFINITION 155 - When a going business is sold, it is commonly stated in the contract that the seller shall not go into the same or a similar business again within a certain geographic area or for a certain period of time, or both. In earlier times such non-competition covenants were held void, but to modern courts, the question is whether the restriction imposed on one party is reasonably necessary to protect the other party. If the restriction is reasonable, it is valid and enforceable. - The reason for the exception is to prevent the seller from depriving the buyer of the full value of the acquisition, including the sold companys goodwill. TERM 156 Contracts about agreements not to compete exceptions: Employment contract DEFINITION 156 - Restrictions to prevent competition by a former employee are held valid when reasonable and necessary to protect the interest of the former employer. - Public policy requires that noncompetition covenants be strictly construed in favor of freedom of action of the employee. A restrictive covenant is not binding when it places a restriction on the employee that is broader than reasonably necessary to protect the employer. TERM 157 Effect of invalidity of a restrictive covenant: the "blue-pencil" rule. How does this affect the contract? DEFINITION 157 - When a restriction of competition agreed to by the parties is invalid because its scope as to time or geographic area is too great, how does this affect the contract? Some courts trim the restrictive covenant down to a scope they deem reasonable and require the parties to abide by that revision. oOther courts refuse to apply the blue-pencil rule and hold that the restrictive covenant is VOID or that the entire contract is VOID. There is also authority that a court should refuse to apply the blue-pencil rule when the restrictive covenant is manifestly unfair and would virtually keep the employee from earning a living. TERM 158 Usurious agreements: What is usury? DEFINITION 158 - Usury: lending money at an interest rate that is higher than the maximum rate allowed by law. Most states prohibit by statute charging more than a stated amount of interest. In many states, the usury law does not apply to loans made to corporations. TERM 159 Usurious agreements DEFINITION 159 - When a lender incurs expenses in making a loan, such as the cost of appraising property or making a credit investigation of the borrower, the lender will require the borrower to pay the amount of such expenses.-Any fee charged by the lender that goes beyond the reasonable expense of making the loan constitutes interest for the purposes of determining whether the transaction is usurious. TERM 160 What penalties exist for violating usurious laws? DEFINITION 160 - Penalties for violating usury laws vary from state to state, a number of states restrict the lender to the recovery of the loan but no interest whatsoever, other states allow recovery of the loan principle and interest up to the maximum contract rate. -Some states also impose a penalty on the lender such as the payment of double the interest paid on a usurious loan.