Exam 2 Study Guide - MGMT 455 (Business Law)
Exam 2 Study Guide - MGMT 455 (Business Law) MGMT 455
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This 12 page Study Guide was uploaded by boilermaker2016 on Thursday March 3, 2016. The Study Guide belongs to MGMT 455 at Purdue University taught by Gothard in Fall 2015. Since its upload, it has received 56 views. For similar materials see Business Law in Business, management at Purdue University.
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Date Created: 03/03/16
Chapters 12-17 Nature and Classes of Contracts: Contracting on the Internet (CH12) A. Nature of Contracts 1. Definition of contracts i. Contract – legally binding agreement based on the genuine assent of the parties, made for a lawful object, between competent parties, in the form required by law, and generally supported by consideration 2. Elements of a Contract i. An agreement ii. Between competent parties iii. Based on the genuine assent of the parties that is iv. Supported by consideration v. Made for a lawful objective vi. In the form required by law, if any 3. Subject Matter of Contracts i. May relate to the performance of personal services such as contracts of employment to work developing computer software or to play professional football 4. Parties to a Contract i. Promisor – person who makes a promise ii. Promisee – person to whom a promise is made iii. Obligor – promisor iv. Obligee – promisee who can claim the benefit of the obligation v. Privity – succession or chain of the relationship to the same thing or right, such as privity of contract, privity of estate, privity of possession vi. Privity of contract – relationship between a promisor and the promise 5. How a Contract Arises i. Contracts are based on agreements. An agreement arises when one person, the offeror, makes an offer and the person to whom the offer is made, the offeree, accepts ii. Offeror – person who makes an offer iii. Offeree – person to whom an offer is made 6. Intent to Make a Binding Agreement i. Parties must have an intent to enter into an agreement that is binding 7. Freedom of Contract i. In the absence of some ground for declaring a contract void or voidable, parties may make such contracts as they choose. B. Classes of Contracts 1. Formal and Informal Contracts i. Formal Contracts 1. Formal contracts - are enforced because the formality with which they are executed is considered sufficient to signify that the parties intend to be bound by their terms ii. Informal contracts – simple oral or written contracts. These contracts are enforceable, not because of the form of the transaction but because they represent agreement of the parties 2. Express and Implied Contracts – simple contracts may be classified as express contracts or implied contracts i. Express contracts – an express contract is one in which the terms of the agreement of the parties are manifested by their words, whether sp oken or written ii. Implied contracts – contract expressed by conduct or implied or deduced from the facts, or one in which the agreement is shown not by words, written or spoken, but by the acts and conduct of the parties. 3. Valid and Voidable Contracts and Voi d Agreements i. Valid contracts – an agreement that is binding and enforceable ii. Voidable contracts – a voidable contract is an agreement that is otherwise binding and enforceable, but because of the circumstances surrounding its execution or the lack of capaci ty of one of the parties, it may be rejected at the option of one of the parties iii. Void agreements – agreement that cannot be enforced and is without legal effect 4. Executed and Executory Contracts i. Executed contracts – agreement that has been completely performed ii. Executory contract – agreement by which something remains to be done by one or both parties 5. Bilateral and Unilateral Contracts i. Bilateral Contract – agreement under which one promise is given in exchange for another 1. Example – paying money for your house to get painted ii. Unilateral Contract – contract under which only one party makes a promise 1. Example – reward offer, contest announcement iii. Option and First-Refusal Contracts 1. Option contract – contract to hold an offer to make a contract open for a fixed period of time a. Offer to buy someone’s house for a period of time 2. Right of first refusal – right of a party to meet the terms of a proposed contract before it is executed, such as a real estate purchase agreement 6. Quasi Contracts i. Court-imposed obligation to prevent unjust enrichment in the absence of a contract 1. Prevention of Unjust Enrichment a. Claim against unjust enrichment requires i. Benefit conferred on the defendant ii. The defendant’s knowledge of the benefit iii. A finding that it would be unjust for the defendant to retain the benefit without payment b. Quantum meruit – as much as deserved; an action brought for the value of the services rendered the defen dant when there was no express contract as to the purchase price 2. Preclusion by an express contract – court award relief based on quasi- contractual principles, implying by law a contract where one did not exist in fact 3. Extent of Recovery – the plaintiff recovers the reasonable value of the benefit conferred on the defendant or the fair and reasonable value of work performed, depending on the jurisdiction and the circumstances of the case itself C. Contracting on the Internet Formation of Contracts: Offer and Acceptance A. Requirements of an Offer a. Contractual Intention i. Invitation to Negotiate 1. The offeror must intend to cre ate a binding obligation ii. Agreement to Make a Contract at a future date 1. No contract arises when the parties merely agree that at a future date they will consider making a contract or will make a contract on terms to be agreed on at that time b. Definiteness i. An offer, and the resulting contract, must be definite and certain 1. Definite by incorporation – an offer and the resulting contract that by themselves may appear “too indefinite” may be made definite by reference to another writing 2. Implied terms – not all terms need to be expressed 3. “Best Efforts” clause 4. Divisible contracts – agreement consisting of two or more parts, each calling for corresponding performances of each part by the parties 5. Exceptions to definiteness a. Requirements contract – contract to buy all requirements of the buyer from the seller b. Output contract – contract of a producer to sell its entire production or output to a given buyer c. Communication of Offer to Offeree i. An offer must be communicated to the offeree. Otherwise, the offeree cannot accept even through knowledge of the offer has been indirectly acquired B. Termination of Offer – offeree cannot accept a terminated offer. Offers may be terminated by revocation, counteroffer, rejection, lapse of times, death or disability of a party, or subsequent illegality a. Revocation of Offer by Offeror i. Ordinarily, an offeror can revoke the offer before it is accepted 1. What constitutes a revocation? – any word indicating the offeror’s termination of the offer are sufficient for a revocation 2. Communication of Revoca tion – a revocation of an offer is ordinarily effective only when it is made known to the offeree 3. Option contracts – an option contract is a binding promise to keep an offer open for a stated period of time or until a specified date 4. Firm offers – offer stated to be held open for a specified time, which must be held in some states even in the absence of an option contract, or under the UCC, with respect to merchants b. Counteroffer by offeree – proposal by an offeree to the offeror that changes the terms of, and thus rejects, the original offer c. Rejection of Offer by Offeree – if the offeree rejects the offer and communicates this rejection to the offeror, the event is terminated d. Lapse of Time – when the offer states it is open until a particular date, the offer terminates on that date if it has not yet been accepted e. Date of Disability of Either Party – if either the offeree or offeror dies or becomes mentally incompetent before the offer is accepted, the offer is automatically terminated f. Subsequent Illegality – if the performance of the contract becomes illegal after the offer is made, the offer is terminated C. Acceptance of Offer a. Acceptance – unqualified assent to the act or proposal of another; as the acceptance of a draft (bill of exchange), of an offer to make a contract, of goods delivered by the seller, or of a gift or deed i. What constitutes an acceptance? – must be clear expression that the offeree agrees to be bound by the terms of the offer ii. Privilege of Offeree – the offeree may refuse to accept an offer. If there is no acceptance, by definition there is no contract iii. Effect of Acceptance – the acceptance of an offer creates a binding agreement or contracts, assuming that all of the other elements of a contract are present iv. Nature of Acceptance – acceptance is the offeree’s manifestation of intent to enter into a binding agreement on the terms stated in the offer v. Who may accept? – only the person to whom an offer is directed may accept it vi. Manner and Time of Acceptance – the offeror may specify the manner and time for accepting the offer . 1. Silence as acceptance – in most cases, the offeree’s silence and failure to act cannot be regarded as an acceptance 2. Unordered goods and tickets – There is no acceptance if the recipient of the letter ignores the offer and does no thing vii. Communication of Acceptance – acceptance by the offeree is the last step in the formation of a bilateral contract. Intuitively the offeror’s receipt of the acceptance should be the point in time when the contract is formed and its terms apply 1. Mailbox Rule – properly addressed, postage -paid mailed acceptance takes effort when the acceptance is placed into the control of the US Postal Service or by judicial extension, is placed into control of UPS or FedEx 2. Determining the applicable means of communicati on – the modern rule on the selection of the appropriate medium of communication of acceptance is that unless otherwise unambiguously indicated in the offer, it shall be construed as inviting acceptance in any manner and by any medium reasonable under the circumstances 3. Telephone and Electronic communication of acceptance – telephonic communication (acceptance) are effective where and when dispatched 4. Effects of the mailbox rule – if an offer requires acceptance be communicated by a specific date and the acce ptance is properly dispatched by the offeree on the final date, the acceptance is timely and the contract is formed, even though the offeror actually receives the acceptance well after the specified date has passed viii. Auction Sales – at an auction sale, the s tatements made by the auctioneer to draw forth bids are merely invitations to negotiate Capacity and Genuine Assent A. Contractual Capacity a. Contractual capacity is the ability to understand that a contract is being made and to understand its general meaning i. Status incapacity – classes such as minors that lack contractual capacity ii. Factual incapacity – contrasts with incapacity imposed because of the class or group to which a person belongs b. Minors i. Who is a minor ? – anyone under the age of 21 (common law). The age of majority has been reduced from 21 years to 18 years ii. Minor’s power to avoid contracts – a contract made by a minor is voidable at the election of the minor 1. What constitutes avoidance? – a minor may avoid or disaffirm a contract by any expression of an intention to repudiate the contract 2. Time for Avoidance – a minor can disaffirm a contract only during minority and for a reasonable time after attaining majority 3. Minor’s misrepresentation of age – generally, the fact that the minor has misrepresented his or her age does not affect the minor’s power to disaffirm the contract iii. Restitution by minor after avoidance – when a minor disaffirms a contract, the question arises as to what the minor must return to t he 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 2. Original consideration damaged or destroy – spent, used, damaged, or destroyed items received by minors does not disaffirm the contract is not affected iv. Recovery of property by minor – when a minor disaffirms a contract, the other contracting party must return the money received v. Contracts for necessaries – a minor can disaffirm a contract for necessaries but must pay the reasonable vale for furnished necessaries 1. What constitutes necessaries? – things indispensable or absolutely necessary for the sustenance of human life 2. Liability of parent or guardian – when a third person supplies the parents or guardian of a minor with goods or services that the minor needs, the minor is not liable for those necessaries because the third person’s contract is with the parent or guardian, not with the minor vi. Ratification of former minor’s voidable contract – a former minor cannot disaffirm a contract that has been ratified after reaching majority 1. What constitutes 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 – no special form required 3. Time for ratification – a person can disaffirm a contract any time during minority and for a reasonable time after that but, of necessity, can ratify a contract only aft er attaining majority vii. Contracts that minors cannot avoid 1. Educational loan 2. Medical care 3. Contract while running a business 4. Contract approved by court 5. Contract made in performance of legal duty 6. Contract relating bank accounts, insurance policies, or corporate stocks viii. Liability of third person for a minor’s contract 1. Liability of parent – ordinarily a parent is not liable for a contract made by a minor child with the exception being the child is acting as an agent of the parent making the contract 2. Liability of a co-signer – the cosigner is still bound by a contract with the minor disaffirms it c. Mentally Incompetent persons – a person with a mental disorder may be so disabled as to lack capacity to make a contract i. Effect of incompetency – an incompetent person may ordinarily avoid a contract in the same manner as a minor ii. Appointment of guardian – 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 guard ian d. Intoxicated persons – the capacity of a party to contract and the validity of the contract are not affected by the party’s being impaired by alcohol at the time of making the contract so long as the party knew that the contract was being made. B. Mistake a. Unilateral mistake – a mistake that is by only one of the parties, as to a fact does not affect the contract when the mistake is unknown to the other contracting party b. Mutual Mistake – 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 party if the mistake has a material effect on the agreed exchange c. Mistake in the transcription or printing of the contra ct: reformation – an aggrieved party may petition the court to reform, or remedy by which a written instrument is corrected when it fails to express the actual intent of both parties because of fraud, accident, or mistake, the contract to reflect the actua l agreement of the parties. C. Deception a. Intentional misrepresentation i. Fraud is a generic term embracing all multifarious means that human ingenuity can devise and that are resorted to by one individual to get advantage over another b. Fraud i. Fraud is the making of material misrepresentation of fact with; 1. Knowledge of its falsity or reckless indifference to its truth 2. The intent that the listener rely on it 3. The result that the listener does so rely 4. The consequence that the listener is harmed ii. Statement of opinion or value – ordinarily, matters of opinion of value or opinions about future events are not regarded as fraudulent iii. Reliance of statement – a fraudulent statement made by one party has no importance unless the other party relies on the statement’s truth iv. Proof of harm – for an individual to recover damages for fraud, proof of harm to that individual is required c. Negligent misrepresentation – similar to fraud except it is predicated on a negligently made false statement d. Nondisclosure – serves to make a contract voidable, especially when the nondisclosure consists of active concealment i. General rule of nonliability – ordinarily, a party to a contract has no duty to volunteer information to the other party ii. Exceptions 1. Unknown defect or condition 2. Confidential relationship – if parties stand in confidential relationship, failure to disclose info may be regarded as fraud 3. Active concealment D. Pressure a. Undue influence –influence that is asserted upon another person by one who dominates that person b. Duress i. 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 ii. Economic duress – 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 Consideration A. General Principles a. Consideration Defined and Explained – consideration is what each party to a contract gives up to the other in making their agree ment i. Bargained-For Exchange – consideration is the bargained -for exchange between the parties in a contract ii. Benefit-Detriment Approach – defines consideration as a benefit received by the promisor or a detriment incurred by the promise b. Gifts – promises to make a gift are unenforceable promises under the law of contracts because of lack of consideration c. Adequacy of consideration – ordinarily, courts do not consider the adequacy of the consideration given for a promise d. Forbearance as Consideration – most cases, consideration consists of the performance of an act such as providing a service, or the making of a promise to provide a service or goods, or paying money. May also consist of forbearance, which is refraining from doing an act that an individual has a legal right to do e. Illusory Promises – promise that in fact does not impose any obligation on the promisor i. Cancellation provisions – 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 ii. Conditional promises – a promise that depends on the occurrence of a specified condition in order for the promise to be binding B. Special Situations a. Preexisting Legal Obligation – ordinarily, doing or promising to do what one is already under a legal obligation to do is not consideration i. Completion of contract – if the promise of the contractor is to do something that is not part of the first contract, then the promise of the party is binding 1. Good-Faith Adjustment – a second promise is enforced to pay a contractor a higher amount for the performance of the original contract when there are extraordinary circumstances cause by unforeseeable difficulties 2. Contract for Sale of Goods – any contract made in good faith by th e parties to the contract is binding ii. Compromise and release of claims – a promise to pay part of an amount that is admittedly owed is not consideration for a promise to discharge to balance. It will not prevent the creditor from demanding the remainder lat er. iii. Part-Payment checks – the cashing of a partial check that states “paid in full” by the creditor discharges the entire debt iv. Composition of Creditors – agreement among creditors that each shall accept a part payments as full payment in consideration of t he other creditors doing the same b. Past consideration – a promise based on a party’s past performance lacks consideration c. Moral obligation – promises made to another based on moral obligation lack consideration and are not enforceable C. Exceptions to the laws of consideration a. Exceptions to consideration i. Charitable subscriptions – when pledges are made to finance to construction of buildings for charitable purposes, consideration is lacking according to technical standards applied in ordinary contract cases ii. Uniform commercial code iii. Promissory estoppel – doctrine that a promise will be enforced although it is not supported by consideration when the promisor should have reasonably expected that the promise would induce action or forbearance of a definite and substantial character on the part of the promised and injustice can be avoided only by enforcement of the promise Legality and Public Policy A. General Principles a. Effect of Illegality – an illegal agreement is void b. Exceptions to effect of illegality i. Protection of one party – when the law that the agreement violates is intended to protect one of the parties, that party may seek relief ii. Unequal guilt – when the parties are equally guilty, the least guilty party is granted relief when public interest is advanced by doi ng so c. Partial Illegality – the legal parts of the agreement may be enforced provided that they can be separated from the parts that are illegal d. Crimes and Civil Wrongs – an agreement is illegal, and therefore void, when it calls for the commission of any act that constitutes a crime e. Good faith and fairness – every contract implies a covenant of good faith, or absence of knowledge of any defects or problems, and fair dealing f. Unconscionable clauses – ordinarily, a court will not consider whether a contract is fair or unfair, is wise or foolish, or operates unequally between the parties i. What constitutes unconscionability? A provision in a contract that gives what the court believes is too much of an advantage over a buyer may be held void as unconscionable ii. Determination of unconscionability 1. Procedural unconscionability – deals with matters of freedom of assent 2. Substantive unconscionability – focuses on the actual terms of the contract itself B. Agreements affecting public welfare a. Agreements Contrary to Public Poli cy – 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 b. Gambling, Wagers, and Lotteries – gambling contracts are illegal C. Regulation a. Effect of Violation – 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 b. Statutory regulation of contracts – to establish uniformity or to protect one of the parties to a contract, statutes frequently provide that contracts of a given class must follow a statutory model or must contain specified provisions c. Licensed Callings or Dealings – Statutes frequently require that a person obt ain a license, certificate, or diploma before practicing certain professions, such as law and medicine d. Contracts in Restraint of Trade – an agreement that unreasonably restrains trade is illegal and void on the ground that it is contrary to public policy e. Agreements not to compete – 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 i. Sale of business – when a going business is sold, it is commonly stated in the contract that the seller shall not go into the same or similar business again within certain geographic area or for a certain period of time ii. Employment contract – restrictions to prevent competition by a former employee are held valid when r easonable and necessary to protect the interest of the former employer iii. Effect of invalidity – courts can trim unreasonable restrictions down f. Usurious Agreements – usury is committed when money is loaned at a higher rate of interest than the law allows Writing, Electronic Forms, and Interpretation of Contracts A. Statue of Frauds a. Validity of Oral Contracts – oral contracts may be deemed legally enforceable contracts i. Statute of frauds – statute that, in order to prevent fraud, through the use of perjured testimony, requires that certain kinds of transactions be evidenced in writing in order to be binding or enforceable b. Contracts that must be evidenced by a writing i. Agreement that cannot be preformed within one year after the contract is made – a writing Is required when the contract, by its terms or subject matter, cannot be performed within one year after the date of the agreement 1. Oral extension of a contract – a contract in writing, but not required to be so by the statute of frauds because it is terminabl e at will, may be varied by a new oral contract ii. Agreement to sell or a sale of an interest in land – all contracts to sell land, buildings, or interests in land, such as mortgages, must be evidenced by a writing iii. Promise to answer for the debt or default of another 1. Main purpose of exception – when the main purpose of the promisor’s promise to pay the debt of another is to benefit the promisor, the statute of frauds is not applicable, and the oral promise to pay the debt is binding iv. Promise by the executor or administrator of a decedent’s estate to pay a claim against the estate from personal funds – the personal representative has the duty of handling the affairs of a deceased person, paying the debts from the proceeds of the estate and distributing any balanc e remaining v. Promises made in consideration of marriage – promises to pay a sum of money or give property to another in consideration of marriage must be in writing under the statues of frauds vi. Promissory Estoppel c. Note or Memorandum – the statue of frauds requires a writing to evidence those contracts that come within its scope i. Signing – the note or memorandum must be signed by the party sought to be bound by the contract ii. Content – the note or memorandum must contain all of the essential terms of the contract so the court can determine just what was agreed d. Effect of Noncompliance – contract not complying with the statue of fraud is not enforceable i. Recovery of value conferred – a person who is prevented from enforcing a contract because of the statue of frau ds is nevertheless entitled to recover from the other party the value of any services or property furnished or money given under the oral contract ii. Who may raise the defense of noncompliance? – only a party to the oral contract may raise a defense that is n ot binding because there is no writing that satisfies the statute of fraud B. Parol Evidence Rule a. Exclusion of parol evidence – general rule is that parol or extrinsic evidence will not be allowed into evidence to add to, modify, or contradict the terms of a written contract that is fully integrated or complete on its face b. When the parol evidence rule does not apply i. Ambiguity – if a written contract is ambiguous or may have two or more different meanings, parol evidence may generally be admitted to clarify the meaning ii. Fraud, Duress, or Mistake – a contract apparently complete on its face may have omitted a provision that should have been included. Parol evidence may be admitted to show that a provision was omitted as the result of fraud, duress, or mistake and to further show what that provision stated iii. Modification of Contract – The parol evidence rule prohibits only the contradiction of a complete written contract C. Rules of Construction and Interpretation a. Intention of the parties – when persons enter into an agr eement, it is to be presumed that they intend for their agreement to have some effort i. Meaning of words – ordinary words are to interpreted according to their ordinary meeting ii. Incorporation by Reference – the contract may not cover all of the agreed terms and the missing terms can be found in another document b. Whole Contract – the provisions of a contract must be construed as a while in such a way that every part is given effect c. Contradictory and ambiguous terms – one term in a contract may conflict with another term, or one term may have two different meanings i. Nature of writing – written part prevails over printed, etc. ii. Ambiguity – a contract is ambiguous when the intent of the parties is uncertain and the contract is capable of more than one reasonable interpretation iii. Strict construction against drafting party – an ambiguous contract is interpreted strictly against the party who drafted it d. Implied terms – a court will imply a term to cover a situation for which the parties failed to provide or, when needed, to give the contract a construction or meaning that is reasonable e. Conduct and Custom i. Conduct of the parties – the conduct of the parties in carrying out the terms of a contract is the best guide to determine the parties’ intent ii. Custom and usage of trade f. Avoidance of Hardship – a party is bound by a contract even though it proves to be a bad bargain
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