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BSLW 1021 (15)

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Business Law
BSLW 1021
Kevin Conway

Chapter 12 12/14/2013 Chapter 14 Capacity and GenuineAssent Contractual Capacity 1. Contractual Capacity Defined a. Contractual capacity is the ability to understand that a contract is being made and to understand its general meaning. i. Aperson does not have to understand the full meaning of contract ii. Everyone presumed capacity until proven lacking b. Factual capacity contrasts with incapacity imposed because of the class or group to which a person belongs. 2. Minors a. At common law, any person, male or female under 18. i. Originally 21 but reduced. b. Contracts made by a minor are voidable at the election of the minor. i. There are exceptions though ii. The minor may affirm or ratify the contract on attaining majority, turning 18, by: 1. Performing the contract 2. Expressly approving the contract 3. Allowing a reasonable time to lapse without avoiding the contract iii. Avoidance 1. Aminor may avoid or disaffirm a contract by any expression of an intention to repudiate the contract. 2. Any act inconsistent with the continuing validating of the contract iv. Time forAvoidance 1. Minor can disaffirm a contract only during minority and for a reasonable time after attaining majority. a. After the reasonable time, contract is deemed ratified and cannot be avoided by minor. c. When a minor disaffirms a contract, the question arises as to what the minor must return to the other contracting party. i. Original Consideration Intact 1. When a minor still has what was received form the other party, the minor, on avoiding the contract, must return it to the other party or offer to do so. (Status quo ante) ii. Original Consideration Damaged or Destroyed 1. The minor can still disaffirm the contract, disregarding the condition of what was received in contract, and is require to return only what remains. 2. Common law rule: minors can refuse to pay for what has been received under contract or can get back what had been paid or given even though they do not have anything to return or return property in a damaged condition a. TREND TO LIMIT COMMON LAW d. Aformer minor cannot disaffirm a contract that has been ratified after reaching majority. i. Ratification consists of any words or conduct of the former minor manifesting an intent to be bound by the terms of contract made while a minor. ii. Generally, no special form is required for ratification of a minor’s voidable contract, although in some states a written ratification or declaration of intention is required. iii. Can only ratify a contract only after attaining majority. 1. Minor must have attained majority, or the ratification would itself be regarded as voidable. e. Minor does not have the right to avoid: i. Educational loan ii. Medical care iii. Contract while running a business iv. Contract approved by court v. Contract made in performance of legal duty vi. Contract relating to bank accounts vii. Insurance policies viii. Corporate stock ix. Prof. Conway listed military service in study guide but not in book, I’m assuming it falls under “legal duty” above f. Whether parents are bound by the contract of their minor child or whether a person cosigning a minor’s contract is bound if the contract is avoided. i. Liability of Parent 1. Ordinarily, a parent is not liable on a contract made by a minor child. 2. Parent may be liable if the child is acting as the agent of the parent in making the contract. 3. If parent deserted child, parent liable for the reasonable value of necessities supplied to child (kind of like child support I guess) ii. Liability of Cosigner 1. Another person, parent or friend, may sign along with the minor to make the contract more acceptable to the third person. 2. Cosigner is bound independently to the contract a. If minor disaffirms contract, cosigner is still bound. b. When the debt to the creditor is paid, obligation of cosigner is discharged. c. If minor disaffirms, cosigner is liable for the unreturned goods’ purchase price. 3. Mentally Incompetent Persons Person of mental disorder may be so disabled as to lack capacity to make a contract. An individual seeking to avoid the consequences of a contract due to incompetency must demonstrate that at the time the agreement was executed he or she was suffering from a mental illness or defect, which rendered the party incapable of comprehending the nature of the transaction, or that by reason of mental illness the party was unable to control his or her conduct. a. An incompetent person may ordinarily avoid a contract same as minor. i. Upon becoming competent, the formerly incompetent person can ratify or disaffirm the contract. b. Court appointed guardians for incompetent person can ratify or, in some cases, disaffirm contracts made prior to the assignment as guardian. If the incompetent person makes a contract after assignment of guardian, the contract is void and not merely voidable. 4. Intoxicated Persons a. Capacity of a party to contract and the validity of contract are not affected by the party’s being impaired by alcohol at the time of making the contract as long as the party knew that a contract was being made. b. If the degree of intoxication is such that a person does not know that a contract is being made, the contract is voidable by that person i. Can rescind or avoid contract when sober ii. An unreasonable delay since intoxicated may bar that right c. Excessive intoxication is a viable defense to contracts arises between casinos and their patrons. d. Impairment cause by the use of drugs the same as the impairment by the excessive use of alcohol Mistakes 5. Unilateral Mistakes a. Unilateral Mistake is a mistake by only one of the parties, not affecting the contract when the mistake is unknown to the contracting party. b. The party making the mistake may avoid the contract if the other contracting party knew or should have known of the mistake. 6. Mutual Mistake a. When both parties enter into a contract under a mutually mistaken understanding concerning a basic assumption of fact or law on which the contract is made, the contract is voidable by the adversely affected arty is the mistake has a material effect on the agreed exchange. b. Acontract on a mutual mistake in judgment is not voidable by the adversely affected party i. Mutual mistakes of fact can make a contract void. Deception 7. Fraud a. Fraud is the making of a material misinterpretation (or false statement) of fact with: i. Knowledge of its falsity or reckless indifference to its truth ii. The intent that the listener rely on it iii. The result that the listener does so rely iv. The consequence that the listener is harmed 1. To prove fraud, there must be a material misrepresentation of fact. Such misrepresentation is one that is likely to induce a reasonable person to assent to a contract. b. Ordinarily, matters of opinion of value or opinions about future events are not regarded as fraudulent. i. The theory is that the person hearing the statement recognizes or should recognize that it is merely the speaker’s personal opinion, not a statement of fact. ii. Astatement that is merely sales talk cannot be the basis of fraud liability. iii. Astatement of opinion may be fraudulent when the speaker knows of past or present facts that make the opinion false. c. Afraudulent statement made by one party has no importance unless the other party relies on the statement’s truth. i. If the alleged victim of fraud knew that the statements were false because the truth was commonly known, the victim cannot rely on the false statement. ii. Seller’s statements so “indefinite and extravagant” that reasonable persons would not rely on them, the statement cannot be the basis of a claim of fraud. iii. “Trusting the honesty of salespersons or their disarming statements, an individual may knowingly agree in writing that no representation have been made to him or her, while at the same time believing relying upon representation, which in fact have been made and in fact are false, but for which the individual would not have made the agreement” Super confusing… 1. Purchaser cannot assert justifiable reliance on statements made by sellers that directly contradict clear and specific terms of their written contracts. a. Novare Group. Inc. v. Sarif d. For an individual to recover damages for fraud, proof of hard to that individual is required. i. 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. ii. The injured party has the right to have the court order the rescission or cancellation of the contract that has been induced by fraud. 8. Nondisclosure a. Ordinarily, a party to a contract has no duty to volunteer information to the other party. i. The nondisclosure of information that is not asked for does not impose fraud liability or impair the validity of a contract. b. Exceptions to the general rule of nonliability for nondisclosure exist: i. Active Concealment 1. Nondisclosure may be more than the passive failure to volunteer information. 2. Positive act of hiding information from the other party by physical concealment, or if may consist of knowingly or recklessly furnishing the wrong information. Such conduct constitutes fraud. 9. Undue Influence a. The relationship may be such that for practical purposes, a person is helpless in the hands of the other. i. Parent to child, disabled person to nurse, client to an attorney 1. When such a confidential relation exists, it is apparent that the parent, disabled person, and client in the situations are not exercising free will in making a contract upon the suggestions of child, nurse, attorney but only following the will of others. ii. Because of the great possibility of unfair advantage, the law presumes that the dominating person exerts undue influence on the other person whenever the dominating person obtains any benefit from a contract made with the dominating person. 1. Voidable 2. May be set aside by the dominated person unless the dominating person can prove that, at the time the contract was made, no unfair advantage has been taken. 3. Based on a confidential relationship, which is not clearly defined a. Juries decide 4. The “acting on free will” or not is a key determinant for undue influence 5. Courts are likely to take the attitude that the person who claims to be dominated was persuaded not dominated, therefore no undue influence. 10. Duress a. Physical duress i. Aperson 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 1. May be directed either at a near relative of the contracting party or against the contracting party 2. Voidable at victim’s election ii. Agreements made to bring an end to mass disorder or violence are ordinarily not binding contracts because they were obtained by duress. iii. One may not void a contract on grounds of duress when only reluctant and proves to be very disadvantageous to that individual. b. Economic Duress i. Economic duress is a condition in which one is induced by a wrongful act or threat of another to make a contract under circumstances that deprives one of the exercise of his own free will. Chapter 15 Consideration General Principles 1. Consideration Defined and Explained Consideration is what each party to a contract gives up to the other in making their agreement. a. Consideration is the bargained-for exchange between the parties to a contract. i. Something of value must be given or promised in return for the performance or promise of performance of the other. ii. Value given or promised can be: 1. Money 2. Service 3. Property 4. Forbearance of legal right b. Some jurisdictions analyze consideration from the point of view of a benefit-detriment approach, defining consideration as a benefit received by the promisor or a detriment incurred by the promisee. 2. Gifts a. Promises to make a gift are unenforceable promises under the law of contracts because of lack of consideration b. Charitable subscriptions by which individuals make pledges to finance the construction of a structure for charitable purposes are binding to the extent that the donor (the promisor) should have reasonably realized that the charity was relying on the promise in the undertaking the building program. i. Some states require proof that the charity has relied on the subscription. c. An agreement to give property for the consideration of love and affection does not transfer the property to the donee nor secure for the donee a right to sue and to compel the completion of the contract i. Love and affection alone have not been recognized as consideration for a contract. d. Consideration is what distinguishes a contract from a gift 3. Adequacy of Consideration a. Ordinarily, courts do not consider the adequacy of the consideration given for a promise. b. Parties to decide whether each is getting a fair return i. Courts will not interfere whether or not something is a fair return c. Internal Revenue Service may view a given transaction as part consideration, part gift i. Gift tax d. The fact that the consideration turns out to be disappointing does not affect the binding character of the contract. 4. Forbearance as Consideration a. Consideration may also consist of forbearance, which is refrained from doing an act that an individual has a legal right to do, or it may consist of a promise of forbearance. i. The promisor may desire to buy the inaction or a promise of inaction of the other party. ii. The giving up of legal right can be consideration for the promise of the other party to a contract. b. Aconditional promise is a promise that depends on the occurrence of a specified condition in order for the promise to be binding. i. Prof. Conway says it is sufficient for a contract in study guide Special Situations 5. Preexisting Legal Obligations a. Ordinarily, doing or promising to do what one is already under legal obligation to do is not consideration. b. Similarly, a promise to refrain from doing what one has no legal right to do is not consideration. i. Preexisting duties or obligations can be based on statute, on general principles of law, on responsibilities of an office held, or on a preexisting contract. 6. Past Consideration a. Apromise based on a party’s past performance lacks consideration. b. It is said that past consideration is no consideration. c. The presence of a bargained-for exchange is not present when a promise is made in exchange for a past benefit. 7. Moral Obligation a. In most states, promises made to another based on “moral obligation” lacks consideration and are not enforceable. i. They are considered gratuitous promises and unenforceable. Exceptions to the Laws of Consideration 8. Exceptions to Consideration a. Where individuals made pledges to finance the construction of buildings for charitable purposes, consideration is lacking according to technical standards applied in ordinary contract cases. i. For public policy reasons, the reliance of the charity on the pledge in undertaking the project is deemed a substitute for consideration. b. Under the doctrine of promissory estoppel, a promisor may be prevented from asserting that his or her promise is unenforceable because the promise gave no consideration for the promise. i. Doctrine of detrimental reliance ii. Applicable when: 1. Promisor makes a promise that lacks consideration 2. Promisor intends or should reasonably expect that the promise will reply on the promise 3. Promise in fact relies on the promise in some definite and substantial manner 4. Enforcement of the promise is the only way to avoid injustice Chapter 18 Third Persons and Contracts AThird-Party Beneficiary Contract 1. Definition When a contract is intended to benefit a third person, such a person is an intended beneficiary and may bring suit on and enforce a contract. In some states, the right of the intended third-party beneficiary to sue on the contract is declared by statute. a. Creditor Beneficiary i. The intended beneficiary is sometimes classified as a creditor beneficiary when the promisee’s primary intent is to discharge a duty owed to the third party. b. Donee Beneficiary i. The second type of intended beneficiary is a donee beneficiary to whom the promisee’s primary intent in contracting is to give a benefit. ii. Life insurance c. Necessity of Intent i. Athird person does not have the status of an intended third-party beneficiary unless it is clear at the time the contract as formed that the parties intended to impose a direct obligation with respect to the third person. 2. Modification or Termination of Intended Third-Party Beneficiary Contract a. If the contract contains an express provision allowing a change of beneficiary or cancellation of the contract without the consent of the intended third-party beneficiary, the parties to the contract may destroy the rights of the intended beneficiary by acting in accordance with that contract provision. b. In addition, the rights of an intended third-party beneficiary are destroyed if the contract is discharged or ended by operation of law i. Bankruptcy proceedings 3. Limitations on Intended Third-Party Beneficiary a. The intended third-party beneficiary must take the contract as is. i. No more rights than the contract provides b. If there is a time limitation or any other restriction in the contract, the intended beneficiary cannot ignore it but is bound by it. i. If the contract is not binding for any reason, that defense may be raised against the intended third-party beneficiary suing on the contract. 4. Incidental Beneficiaries a. Not everyone who benefits form the performance of a contract between other persons is entitled to sue as a third-party beneficiary. b. If the benefit was intended, the third person is an intended beneficiary with the rights described in the preceding sections i. If the benefit was not intended, the third person is an incidental beneficiary. c. Whether or not a third party is an intended or unintended beneficiary, therefore, comes down to determining whether or not a reasonable person would believe that the promisee intended to confer on the beneficiary an enforceable benefit under the contract in question i. The intent must be clear and definite or expressed in the contract itself or in the circumstances surrounding the contract’s execution. Assignments 5. Definitions a. Contracts create rights and duties between the parties to the contract. b. An assignment is a transfer or contractual rights to a third party c. Obligor or debtor is the party owing a duty or debt under the contract and obligee is the party to whom the obligation is owed d. Assignor is the party making the assignment e. Asignee is the thud party to whom the assignment is made 6. Form ofAssignment a. Generally, an assignment may be in any form i. Statues, however, may require that certain kinds of assignments be in writing or be executed in a particular form. ii. Any words, whether written or spoken, that show an intention to transfer or assign will be given the effect of assignment b. No consideration is necessary (Prof. Conway put this in study guide but I didn’t find this in the book) 7. Notice ofAssignment a. An assignment, if otherwise valid, takes effect the moment it is made. i. The assignee should give immediate notice of the assignment to the obligor, setting forth the obligor’duty to the assignee, in order to prevent improper payment b. If the obligor is notified in any manner that there has been as assignment and that any money due must be paid to the assignee, the obligor’s obligation can be discharged only by making payment to the assignee i. If the obligor is not notified that there has been an assignment and that the money due must be paid to the assignee, any payment made by the obligor to the assignor reduces or cancels that portion of the debt 1. The only remedy for the assignee is to sue the assignor to recover the payments that were made by the obligor c. Uniform Consumer Credit Code (UCCC) i. Protects consumer-debtors making payments to an assignor without knowledge of the assignment and imposes a penalty for using a contract term that would destroy this protection of consumers. 8. Nonassignable Rights If the transfer of a right would materially affect or alter a duty or the right of the obligor, an assignment is not permitted. a. Assignment Increasing Burden of Performance i. When the assignment of a right would increase the burden of the obligor in performing, an assignment is ordinarily not permitted. b. Personal Services i. Contracts for personal services are generally not assignable 1. Professional athletes and their agents commonly deal with assignment or trading rights of the athletes in their contracts with professionals sport franchise ii. There is a split among jurisdictions regarding whether employee noncompetition covenants are assignable to the new owner of a business absent employee consent 1. That is, some courts permit a successor employer to enforce an employee’s noncompetition agreement as an assignee of the original employer. a. However, a majority of states that have considered this issue concluded that restrictive covenants are personal in nature and not assignable. c. Credit Transaction i. When a transaction is based on extending credit, the person to whom credit is extended cannot assign any rights under the contract to another. 9. Liability of Assignee It is necessary to distinguish between the question of whether the obligor can assert a particular defense against the assignee and the question of whether any person can sue the assignee. Ordinarily, the assignee is not subject to suit by virtue of the fact that the assignment has been made. a. Consumer Protection Liability ofAssignee i. The assignee of the right to money may have no direct relationship to the original debtor except with respect to receiving payments. ii. Consumer protection laws in most states, however, may subject the assignee to some liability for the assignor’s misconduct. 1. Jackson v. Dewitt Chapter 19 Discharge of Contracts Conditions Relating to Performance The ordinary method of discharging obligations under a contract is by performance. Certain promises may be less than absolute and instead come into effect only upon the occurrence of a specified event, or an existing obligation may be extinguished when an event happens. These are conditional promises. 1. Classification of Conditions Condition is when the occurrence or nonoccurrence of an event, as expressed in a contract, affects the duty of a party to the contract to perform Terms such as: if, provided that, when, after, as soon as, subject to, and on the condition that indicates the creation of a condition. a. Condition Precedent i. Acondition precedent is a condition that must occur before a party to a contract has an obligation to perform under a contract. b. Condition Subsequent i. The parties to a contract may agree that a part is obligated to perform a certain act or pay a certain sum of money, but the contract contains a provision that relieves the obligation on the occurrence of a certain event. ii. That is, on the happening of a conditional subsequent, such an event extinguishes the duty to thereafter perform. 1. Conditions subsequent are strictly construed, and where ambiguous, are construed against forfeiture. c. Concurrent Condition i. Concurrent conditions is when their mutual duties of performance under the contract are to take place simultaneously. 1. In most bilateral contracts 2. Nature of Performance Performance may be the doing of an act or the making of payment a. Tender i. Tender is an offer to perform 1. If performance of the contract requires the doing of an act, the refusal of a tender discharges the party offering to perform and is basis for that party to bring a lawsuit ii. Avalid tender of payment consists of an unconditional offer of the exact amount due on the date when due 1. Atender of payment is not just an expression of willingness to pay; it must be an actual offer to perform by making payment of the amount owed b. Payment i. When the contract requires payment, performance consists of the payment of money ii. (Prof. Conway says “payment, service, goods” I’m assuming it’s the same as payment just with service or goods as well) 3. Time of Performance When the date or period of time for performance is specified in the contract, performance should be made on that date or within that time period. a. No Time Specified i. When the time for performance is not specified in the contract, an obligation to perform within a reasonable time is implied. 1. The fact that no time is specified neither impairs the contract on the ground that it is indefinite nor allows an endless time in which to perform a. Reasonable time determined by the nature of the subject matter of contract and the facts and circumstances surrounding the making of contract b. When Time is Essential i. If performance of the contract on or within the exact time specified is vital, it is said that “time is of the essence.” 1. Contracts related to property that is perishable or that is fluctuating rapidly in value ii. When a contract fixes by unambiguous language a time for performance and where there is no evidence showing that the parties did not intend that time should be of the essence, failure to perform within the specified time is a breach of contract entitling the innocent party to damages c. When Time is Not Essential i. Unless a contract so provides, time is ordinarily not of the essence, and performance within a reasonable time is sufficient. 1. I the case of the sale of property, time is not regarded as of the essence when there has not been any appreciable change in the market value or condition of the property and when the person who delayed does not appear to have done so for the purpose of speculating on a change in the market price. d. Waiver of Essence of Time Limitation i. Aprovision that time is of the essence may be waived 1. When the specified time has expired but the party who could complain requests the delaying party to take steps necessary to perform the contract 4. Adequacy of Performance a. Substantial Performance i. Aparty who in good faith has provided substantial performance of the contract may sue to recover the payment specified in the contract. 1. However, because the performance was not perfect, the performing party is subject to a counterclaim to damages caused the other party, 2. Common in construction, examples specific to the dimensions in constructing (not listed in study guide specifically to know but might look over) b. Novation i. Anovation allows for the discharge of a new contractual obligation by the substitution of a new contract involving a new party 5. Discharge byAgreement a. Substitution i. (Similar to novation but somewhat different, not sure which Prof. Conway is referring to) ii. The parties may decide that their contract is not the one they want. They may then replace it with another contract. If they do the original contract is discharged by substitution b. Accord and Satisfaction i. Accord is when the parties have differing views as to the performance required by the terms of the contract, they may agree to a different performance 1. Accord and satisfaction is when the accord is performed or executed. a. Must have a bona fide dispute, a proposal to settle the dispute, and performance of the agreement i. MKL Pre-Press case Discharge by External Causes Circumstances beyond the control of the contracting parties may discharge the contract. 6. Discharge by Impossibility a. To establish impossibility a party must show: 1. The unexpected occurrence of an intervening act 2. The risk of the unexpected occurrence was not allocated by agreement or custom 3. The occurrence made performance impossible ii. The doctrine of impossibility relieves nonperformance only in extreme circumstances 1. The party asserting the defense of impossibility bears the burden of proving “a real impossibility and not a mere inconvenience or unexpected difficulty” a. Courts will generally only excuse nonperformance where performance is objectively impossible—that is, incapable performance by anyone b. Financial inability to perform a contract that a party voluntarily entered into will rarely, if ever, excuse nonperformance b. Destruction of Particular Subject Matter i. When parties contract expressly for, or with reference to, a particular subject matter, the contract is discharged if the subject matter is destroyed through no fault of either party ii. (Specific examples to wheat and certain rules if you guys want to read into it, not on study guide) c. Death or Disability i. When the contract obligates a party to render or receive personal services requiring peculiar skills, the death, incapacity, or illness of the party that was either to render or receive the personal services excuses both sides from a duty to perform. 1. “the death of either party is the death of the contract” ii. Rule does not apply when the acts called for by the contracts are of such character: 1. Acts may be as well performed by others, such as the promisor’s personal representatives 2. The contract’s terms contemplate continuance of the obligation after the death of one of the parties. 7. Developing Doctrines Commercial impracticability and frustration of purpose may excuse performance a. The doctrine of commercial impracticability was developed to deal with the harsh rule that a party must perform its contracts unless it is absolutely impossible. i. However, not every type of impracticability is an excuse for nonperformance. b. Commercial impracticability is available only when the performance is made impractical; by the subsequent occurrences of an event whose nonoccurrence was a basic assumption on which the contract was made c. The defense of commercial impracticability will not relieve sophisticated business entities from their contractual obligations due to economic downturn, even one as drastic and severe as the recent recession i. Economic downturns and other market shifts do not constitute unanticipated circumstances in a market economy. 8. Discharge of Operation of Law a. Acontract is discharge by operation of law by 1. An alteration or material change made by a party 2. The destruction of the written contract with intent
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