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Midterm #3 Study Guide

by: Brittany Bourdage

Midterm #3 Study Guide bus 207

Brittany Bourdage
Cal Poly

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This is all of the information that is on Midterm #3.
Legal Responsibilities of Business
Chris Carr
Study Guide
business, Law
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This 9 page Study Guide was uploaded by Brittany Bourdage on Monday June 6, 2016. The Study Guide belongs to bus 207 at California Polytechnic State University San Luis Obispo taught by Chris Carr in Winter 2016. Since its upload, it has received 11 views.


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Date Created: 06/06/16
5/9/16 ClearGear - A couple didn’t receive product for over a month, left a bad review, was charged $3000+ since it was in the contract agreement to leave a bad review, their credit score is now so terrible they can’t get a new car, etc. Soldier with PTSD - A soldier with PTSD is suing salesman for “using” his PTSD episode to make a sale, he claims after 5 days of not sleeping, he purchased a Harley and was planning on driving all the way to Georgia without a motorcycle license. Elvis Dumervil (NFL Broncos player) - He was making 12 million and had to cut his salary to 8 million (and he agreed), his contract has been terminated since it took to long to file (6 mins late), so he was released since it was not filed by the deadline Donald Trump vs. Bill Maher - Bill Maher said he would pay Trump $5 million to prove he wasn’t the spawn of his mother having sex with an orangutan, Trump proved he wasn’t, and plans on suing Bill since he did OFFER the money. Walking Away 60 Mins - Housing market still sucks, people are just leaving their houses since monthly payments aren’t worth it 5/11/16 Study Outline for Midterm #3 I. Introduction A. Definition of a contract: an agreement that can be enforced in court; formed by two or more parties who agree to perform or to refrain from performing some act now or in the future B. Other definitions: 1. Offeror: person who makes the offer 2. Offeree: person receiving the offer 3. Breach: this means that one of the parties who was obligated to do/not do something under the contract failed to do that 4. Voidable: the contract can be cancelled II. The Nature of Contracts A. In order for a promise to be treated as a contract you need: offer, acceptance, valid consideration, and no defenses to the formation or enforcement of the contract can apply. III. The Function and Social Utility of Contracts A. Enables us to facilitate private business planning, know what to expect, and also know that we can call upon the law to ensure that such agreements will be honored. IV. Basic Contract Concepts, Types, and Related Doctrines A. Bilateral Contract: involves a promise in return for a promise B. Unilateral Contract: involves a promise in return for some type of an act or performance 1. Note: the importance of the difference will become more apparent later when we discuss offer, acceptance, consideration, etc. C. Express Contract: parties expressly create a contract either by words (oral) or in writing D. Implied Contract: parties create a contract by their conduct E. Promissory Estoppel: situation where one person relies on a promise made by another, but because one or more of the required elements of a contract is missing, a contract has not been created 1. Rule: A promise which the promisor should reasonably expect to induce action or forbearance of the part of the promisee/a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise a. The key here is reliance b. A court will either enforce the promise, or, allow the plaintiff to recover his/her reliance losses/damages F. Quasi-Contract: is not a contractual obligation created by the parties, but is instead is an obligation imposed by law in order to avoid the unjust enrichment of one party at the other party’s expense. As a matter of law, the benefitted party is usually required to pay the reasonable value of the benefits or services he received. Also, in order for this doctrine to apply, the benefited party must have knowingly accepted and retained the benefit V. The Uniform Commercial Code (the “UCC”) A. Background: 1. Origin: created by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. All states have adopted some version of the UCC except Louisiana 2. Purpose: to promote uniformity among the states where commercial transactions are involved; create a body of rules which would realistically and fairly solve common problems which occur in commercial transactions; and formulate rules which would promote fair dealing and higher moral and ethical standards in the market place. 3. Scope of the UCC: the UCC has 9 articles. We will only focus on Article 2 of the UCC which involves the sale of goods a. Nature of Article 2: in many cases, the UCC and its rules of contract are the same as the common law rule. However, in other cases it is different from the common law contract rule. B. Application of the Article 2 of the UCC 1. Article 2 only applies to contracts involving the “sale of goods.” Goods are essentially defined by section 2-105 as “tangible, movable, personal property.” Goods do not include things such as real estate, stocks, bonds, etc. Also, Article 2 does not apply to service contracts a. What about “hybrid transactions”? 1. Hybrid transactions: a contract that has both a good and a service component to it a. The “Predominant Factor Test” i. Under contract law, if the good aspect of the transaction contract “dominates”, then the UCC and its rules apply. If not, then regular common law contract rules apply Agreement Outline, Part 1A I. What is an offer? A. Offer: a promise or commitment to perform or refrain from performing some specified act in the future B. The most important thing that courts usually look at to determine whether an offer has been made, as opposed to mere negotiations or invitations to deal, is some objective (not subjective) indication/evidence of a present intent to contract. Ex. There must be, according to this objective test, a “meeting of the minds” between the two parties on the relevant and important terms of the contract. In analyzing this issue courts consider: 1. Definitiveness or Certainty of the Terms- the more definitive and certain the terms, the more likely an offer. a. Note: preliminary negotiations, invitations to deal, expressions of opinion, statements of intention, etc. are not offers! b. Note that “objective” means “what would a reasonable person conclude here?” where as “subjective” means “what the defendant meant/intended.” c. Also, by “terms” we mean such things as price, quantity, identity of the subject matter of the contract, time of delivery, method and time of payment, any warranties, etc. C. Communication to the Offeree 1. General Rule – the offeror must also communicate the offer to the offeree a. Rationale: if the offeror did not communicate the offer to the offeree, this is good evidence that he lacked the present intent to contract which is necessary for an offer. II. Special Offer Problem Areas A. Advertisements 1. General Rule – Advertisements are generally not regarded as an offer (because they are not certain or definitive enough) and instead are viewed as only invitations from the merchant-seller to deal/bargain/negotiate to and with the consumer a. Rationale: such important terms such as price, duration, subject matter, etc are generally not discussed or made clear in the ad so how could it be an offer? 2. Exception: if the terms are certain or definitive enough, then an ad may be an offer B. Rewards 1. General Rule – a public offer for a reward is an offer, but it is a unilateral offer a. Also, in order to be entitled to the reward, most states require the offeree to have performed the act with knowledge of/because of the offer C. Auctions 1. With reserve: The person making the bid is the offeror and the seller of the item is the offeree. Acceptance only occurs when the auctioneer brings the hammer down and says “sold.” The auctioneer may withdraw the goods at any time before acceptance. 2. Without reserve: the seller of the item is treated as the offeror and the bidders are the offerees. After the auctioneer calls for bids on the property, the auctioneer can’t withdraw the property. D. Bids 1. Ads for bids are generally treated as invitations to deal (unless the ad states the contrary). Those who submit bids are treated as the offerors. Bidders can withdraw bid at any time before acceptance. Note that for government contracts special rules and statutes apply III. Termination of Offers -In order for a contract to be formed, the offer must be accepted by an offeree before it expires/terminates.. So how/when can an offer expire/terminate? A. By the Terms of the Offer itself- the important point to remember here is that the offeror is the “master of his offer” and can therefore give it the length of life he wants, lay down the ground rules for how it needs to be accepted, etc. B. Revocation 1. General rule: offeror can revoke their offer at any time, even if he promises to hold it open for a certain period of time 2. Exception: option contract supported by consideration 3. Exception: UCC “Firm Offer”- a writing signed by a merchant, promising to buy or sell goods, and which promises to hold the offer opens for a certain period of time 4. Exception: Unilateral contract is involved and the offeree starts to perform the required act a. Once the offeree starts to perform, the offeror must hold the offer open for a reasonable period of time. 5. Exception: Promissory Estoppel- in some cases, the offeree relies on the offer being kept open, and the offeree will suffer an injustice if the offeror is allowed to revoke, so the doctrine of promissory estoppel can operate to prevent the offeror from revoking their offer prior to acceptance 6. Effectiveness of revocation (when is a revocation of an offer by the offeror effective? a. General Rule: upon receipt by the offeree b. Exception: the offeree indirectly learns that the offeror has revoked the offer C. Rejection by the offeree- can be express, implied by conduct, making of a counteroffer, etc. The effect is to automatically terminate the offer. The offeree can’t later go back and try to “revive” it and then accept it. If he does so, he has made his own offer/counteroffer 1. Effectiveness of rejection (when is a rejection of an offer by the offeree effective?) a. Rule: Upon receipt of the rejection by the offeror D. Lapse of time – if no time stated as to how long the offer will remain open, then the law deems it to remain open for a “reasonable” period of time E. Death or insanity of either party – automatically terminates the offer without notice 1. Rationale: a meeting of the minds is impossible when one of the parties has died or become insane F. Destruction of the subject matter of the contract 1. If, prior to the acceptance of the offer, the subject matter of the contract is destroyed without the knowledge or fault of either party, the offer is automatically terminated G. Intervening illegality Agreement Outline, Part 1B I. What is an Acceptance? A. An acceptance is a voluntary act by the offeree that shows assent, or agreement, to the terms of an offer. It can take place by words and/or conduct. In analyzing this issue courts will look at whether there was an: 1. Intention of accept – did the offeree indicate a present intent to accept?; and 2. Intent and acceptance of the offeror’s terms a. Common law “mirror image rule” – states that the offeree’s acceptance must exactly mirror the terms of the offer. If anything is changed when the offeree attemps to accept the offer, then there is no acceptance, and the offeree’s attempt to accept the offer was/is really a counteroffer b. The UCC and the “Battle of the Forms” B. Communication of an Acceptance (i.e. when is an acceptance of an offer by the offeree effective?) 1. Acceptance by instantaneous forms of communication – here, there is generally no problem or issue because the parties are dealing face to face, by telephone, etc. In such situations the acceptance is instantaneous. 2. Acceptance by non-instantaneous forms of communications (ex. Letter, fax, email, messenger, etc.) a. Mailbox Rule – states that the acceptance is effective and valid upon posting/dispatch by the offeree 1. Exception: Offer expressly says acceptance only effective upon receipt by the offeror 2. Exception: If the acceptance was improperly addressed or the postage was incorrect, it was effective upon receipt by the original offeror 3. Stipulated means of communication a. If the offeror expressly conditioned acceptance upond the use of a certain medium, and the offeree used another trying to accept, there is no acceptance upon dispatch because the attempted acceptance varies from the terms of the offer. Instead, that attempted acceptance because an offer/counteroffer itself which will be effective upon receipt by the original offeror C. Miscellaneous Rules Regarding Acceptance: 1. Silence as an acceptance a. General Rule – silence cannot/is not an acceptance b. Exception: custom in the industry is otherwise; or, the past/prior relationship between the parties is/was otherwise 2. Who can accept an offer? Only the offeree. If anyone else tries to accept, the attempted acceptance will be treated as an offer which the original offeror can accept or reject. 3. Communication of an acceptance a. In order for an acceptance to be valid, it obviously needs to be communicated to the offeror 1. Special situation: depending upon the situation, sometimes notification or communication of the acceptance is necessary where a unilateral contract is involved 4. Manner of communication – if the offeror states what needs to be done in order to accept, those conditions need to be followed or the attempt to accept fails. If the offer however, merely suggests a method or place of communication, or is silent on such matters, the offeree may accept within a reasonable time and by any reasonable manner of communication 5. Acceptance in unilateral contracts – in order to accept, the offeree must perform the requested act 6. Acceptance in bilateral contracts – in order to accept, the offeree must generally make the promise requested by the offer. This can be done expressly or implicitly. Consideration Study Outline I. The Idea of Consideration A. It is “legal value, bargained for and given in exchange for an act or a promise.” The idea or concept involved is a “bargained for exchange” of something. It is the “glue that holds the bargain together.” II. Legal Value A. Adequacy of consideration – as long as the promisee’s act/performance or promise satisfies the legal value test, courts will generally not ask or inquire wheteher what the promisor gave or promised to give was worth it. 1. Rationale: freedom of contract includes the right to make bad bargains as well as good ones; courts have better things to do than second guess the parties and play the role of appraiser. a. Qualification: i. Gross inadequacy of consideration may give rise to an independent basis for setting aside the contract based upon such grounds as fraud, duress, lack of capacity, etc. 2. Illusory Promises: “I will wash your car if I feel like it” is not valid consideration because the promisee is not really legally binding himself to do anything. Therefore, it fails the “legal value” test. 3. Preexisting Duties (The Preexisting Legal Duty Rule) a. Common law rule: a promise to do what one is already legally obligated to do is not valid consideration b. UCC contract modification rule (is different than the above common law preexisting legal duty rule) 1. Rule: Under the UCC, an agreement to modify a contract for the sale of goods does not need and new consideration in order to be binding III. Bargained for exchange – the essence of consideration is that it is given and accepted as the motive or inducement of the promise A. Past Consideration 1. Rule: Agreeing to do something that has already taken place is not valid consideration. B. Moral Consideration: 1. Rule: promises based on moral obligations are also generally held to lack adequate/valid legal consideration and therefore are unenforceable C. Gifts: 1. Rule: generally, not enforceable because no bargaining took place and consideration therefore fails. IV. Substitutes for Consideration (or Exceptions to the Consideration Requirement) A. The Doctrine of Promissory Estoppel – where the promisor should reasonably expect the promisee to rely on his promise, the promisee does in fact rely on that promise, and injustice results to the promisee as a result of relying on that promise, then a court may step in and enforce the promise B. UCC Firm Offer – already discussed under “offers” C. UCC Contract Modification Rule – discussed above Contracts Practice Problems & Related Materials -Intellectual Property: a catch-all label for property that is recognized in works of the mind, without general acceptance of any definitive listing of what is covered by the expression. At a minimum, it includes copyright, patent, trademark, trade name, and service mark. -License: generally a right granted which gives the grantee permission to do something which he could not legally do absent such permission. It is a variety of contract by which the owner of personal and/or intellectual property grants permission to another to make limited use of the intellectual property, subject to such terms and conditions as are imposed by the license. -Shrink-Wrap License: a mass-market license which appears on certain products, most commonly computer software packages, which are sealed in transparent wrapping. The typical shrink-wrap license purports to obligate anyone who breaks the seal to comply with various contractual terms. Often, the terms are found inside the box, and can’t be reviewed until the seal has been broken.


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