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Exam 3 Review

1.) What are the primary sources of contract law?

 Common law for all contracts except for sales and leases
- All contracts except when it has been modified or replaced by statutory law such as the UCC
or by administrative agency regulations
- Contracts relating to services, real estate, employment and insurance are generally
governed under common law
 The Uniform Commercial Code for sales and leases of goods

2.) What is the objective theory of contracting?

 Circumstances that determine the intent of parties


 Objective facts include:
- What the party said when entering the contract
- How the party acted or appeared (intent may be manifested by conduct as well as by oral or
written words)
- The circumstances surrounding the transaction

3.) What is the difference between a “common law contract” and a U.C.C. contract?

 Common law contract


- Governs all contracts except when it has been modified or replaced by statutory law, such as
the U.C.C., or by administrative agency regulations
- Contracts relating to services, real estate, employment and insurance are generally
governed by common law
 Uniform Commercial Code (U.C.C.) contract
- Facilitates commercial transactions by making the laws governing sales and lease contracts
clearer, simpler and more readily applicable to the numerous difficulties that can arise
during such transactions

4.) Know when the UCC rules apply to a contract as opposed to the common law rules.

 Regarding contracts of sales or leases


5.) Know what the key elements of a contract are: agreement, consideration, capacity, legality.

(if any of these elements is lacking, there is no valid contract)

 Agreement
- Includes an offer from a party and an acceptance from another party
- One party must offer to enter into a legal agreement, and another party must accept the
terms of the offer
 Consideration
- Bargained-for-exchange
- Any promises made by the parties to the contract must be supported by legally sufficient
and bargained-for consideration (something of value received or promised, such as money,
to convince a person to make a deal)
 Capacity
- Contractual capacity
- Both parties entering into the contract must have the contractual capacity to do so. The law
must recognize them as possessing characteristics that qualify them as competent parties
 Legality
- Purpose of contract must be legal at the time of execution
- The contracts purpose must be to achieve some goal that is legal and not against public
policy
6.) Know the different types of contract as set out in chapter 11.

 Bilateral vs unilateral
- Bilateral contracts
 A promise for a promise, offeree must only promise to perform
 If the offeree can accept simply by promising to perform, the contract is bilateral
 The contract comes into existence at the moments the promises are exchanged
- Unilateral contract
 A promise for an act
 If the offer is phrased so that the offeree can accept the offer only by completing
the contract performance, it is a unilateral contract
 A unilateral contract is formed not when promises are exchanged but at the
moment when the contract is performed
 Revocation of offer cannot be made once performance has started
 Formal vs informal
- Formal contracts
 Must be in writing to be enforceable
 Require a special form or method of creation (formation) to be enforceable
- Informal contracts (simple contracts)
 Include all other contracts
 Contracts are usually based on their substance rather than their form
 Express vs implied
- Express
 Terms of the agreement are fully and explicitly stated in words, oral or written
- Implied
 Conduct of the parties, rather than their words, creates and defines the terms of the
contract
 Requirements:
 The plaintiff furnished some service or property
 The plaintiff expected to be paid for that service or property, and the
defendant knew or should have known that payment was expected
 The defendant had a chance to reject the services or property but did not

7.) What is an agreement? (Offer + acceptance = agreement)

 Parties must show mutual assent to terms of contract


 Once an agreement is reached, if the other elements (consideration, capacity and legality) of the
contract are present a valid contract is formed
8.) What are the requirements of an offer?

 An offer is a promise or commitment to do or refrain from doing some specified action in the
future
 3 elements are necessary for an offer to be effective
- The offeror must have a serious intention to become bound by the offer
 Serious intent is determined by what a reasonable in the offeree’s position would
conclude that the offeror’s words and actions meant
- The terms of the offer must be reasonably certain and definite, so that the parties and the
court can ascertain the terms of the contract
 Contract must include the following terms, either expressed in the contract or being
reasonably inferred from it:
 The identification of the parties
 The identification of the object or subject matter of the contract (also the
quantity, when appropriate), including the work to be performed, with
specific identification of such items as goods, services and land
 The consideration to be paid
 The time of payment, delivery or performance
- The offer must be communicated to the offeree
 Directly by the offeror or;
 Use of agent

9.) What are the requirements of an acceptance?

 A voluntary act (words or conduct) by the offeree that shows assent (agreement) to the terms of
an offer
 The acceptance must be unequivocal and must be communicated to the offeror
 Types of acceptance
- Unequivocal acceptance
 An acceptance cannot impose new conditions or change the forms of the original
offer
- Silence as acceptance
 Generally, an offeree should not be legally obligated to affirmatively reject an offer
 Exclusion to that
 When an offeree takes the benefit of offered services even though he or she
had an opportunity to reject them and knew that they were offered with
the expectation of compensation
 When the offeree has had prior dealing with the offeror
- Communication of acceptance
 In a bilateral contract, communication is necessary because acceptance is in the
form of a promise for a promise
 In a unilateral contract, acceptance is only accepted when an act is fully performed
- Mode and timeliness of acceptance
 In bilateral contracts, acceptance is timely if made before the offer expires
 Applies to the mailbox rule

10.) When and how can an offer be revoked? Can an offer be made irrevocable?

 The offeror’s act of withdrawing (revoking) an offer is known as revocation


 The offeror usually can revoke the offer, as long as the revocation is communicated to the
offeree before the offeree accepts. This can be done by either of the following:
- Express repudiation of the offer (such as “I withdraw my previous offer on October 17”)
- Performance of acts are inconsistent with the existence of the offer and are made known to
the offeree (for instance, selling the offered property to another person in the presence of
the offeree)
 The revocation is effective when the offeree receives it (the revocation)
 An offer made to the general public can be revoked in the same manner that the original offer
was communicated (ex. Put out ads in 4 newspapers, place the revocation in the same 4
newspapers)
 Increasingly, courts refuse to allow an offeror to revoke an offer when the offeree had changed
position because of justifiable reliance on the offer
 Another form of irrevocable offer is an option contract
- Created when an offeror promises to hold an offer open for a specified period of time in
return for a payment (consideration) given by the offeree (ex. Buying a house, put money
down to place a hold on it while you think about it)
- The offeror cannot sell to someone else once an option contract is placed

11.) What is the “mirror image rule”? How does it differ between common law contracts and U.C.C.
contracts? Note that Section 2-207 of the UCC significantly modifies the Mirror image rule. The UCC is
located in the appendix section of your textbook.

 The mirror image rule requires that the terms of the acceptance exactly match those of the offer
- Any change in terms automatically terminates the offer and substitutes a counteroffer
 Under the U.C.C., a contract is formed if the offeree’s response indicates a definite acceptance
of the offer, even if the acceptance includes terms additional to or different from those
contained in the offer.
- Whether the additional terms become part of the contract depends, in part, on whether the
parties are nonmerchants or merchants
 If one or both parties is a nonmerchant, the contract is formed according to the
terms of the original offer and does not include any of the additional terms in the
acceptance
 If both parties are merchants, the additional terms automatically become part of
the contract unless one of the following conditions arises:
 The original offer expressly limited acceptance to its terms
 The new or changed terms materially alter the contract
 The offeror objects to the new or changed terms within a reasonable period
of time
12.) With respect to an offer what does: “serious intent” mean?

 Serious intent is not determined by the subjective intentions, beliefs, and assumptions of the
offeror. Rather, it is determined by what a reasonable person in the offeree’s position would
conclude that the offeror’s words and actions meant. Offers made in obvious anger, jest, or
undue excitement do not meet the serious-and-objective-intent test because a reasonable
person would realize that a serious offer was not being made. Because these offers are not
effective, an offeree’s acceptance does not create an agreement.
 Situations when intent may be lacking
- Expressions of opinion
 An expression of opinion is not an offer. It does not indicate an intention to enter
into a binding agreement.
- Statements of future intent
 A statement of an intention to do something in the future is not an offer.
- Preliminary negotiations
 A request or invitation to negotiate is not an offer. It only expresses a willingness to
discuss the possibility of entering into a contract.
- Advertisements
 Treated not as offers to contract but as invitations to negotiate
- Online auctions
 Generally are treated as invitations to negotiate
- Live auctions
 In a live auction, a seller “offers” goods for sale through an auctioneer, but this is
not an offer to form a contract. Rather, it is an invitation asking bidders to submit
offers
- Auctions with and without reserve
 In an auction with reserve, the seller (through the auctioneer) may withdraw the
goods at any time before the auctioneer closes the sale by announcement or by the
fall of the hammer
 In an auction without reserve, the goods cannot be withdrawn by the seller and
must be sold to the highest bidder
- Agreements to agree
 In an auction without reserve, the goods cannot be withdrawn by the seller and
must be sold to the highest bidder
- Preliminary agreements
 a preliminary agreement constitutes a binding contract if the parties have agreed on
all essential terms and no disputed issues remain to be resolved
13.) What is the “mailbox rule” and how does it work?

 Acceptance takes effect, thus completing formation of the contract, at the time the offeree
sends or delivers the communication via the mode expressly or impliedly authorized by the
offeror
 Under this rule, if the authorized mode of communication is the mail, then an acceptance
becomes valid when it is dispatched, not when it is received by the offeror
 The mailbox rule does not apply to instantaneous forms of communication, such as when the
parties are dealing face to face, by telephone, by fax, and usually by e-mail.

14.) Generally, when can an offeror revoke an offer?

 the offeror usually can revoke the offer, as long as the revocation is communicated to the
offeree before the offeree accepts
- a revocation becomes effective when the offeree or the offeree’s agent actually receives it
- An offer made to the general public can be revoked in the same manner that the offer was
originally communicated

15.) What is an option contract?

 An option contract is created when an offeror promises to hold an offer open for a specified
period of time in return for a payment (consideration) given by the offeree
 An option contract takes away the offeror’s power to revoke the offer for the period of time
specified in the option

16.) Generally, do advertisements constitute offers?

 In general, advertisements are treated not as offers to contract but as invitations to negotiate
- The buyer is the offeror and the organization is the offeree
 On some occasions, courts have construed advertisements to be offers because the ads
contained definite terms that invited acceptance
17.) How do offers terminate?

 An offer may be terminated prior to acceptance either by:


- Action of parties
 Revocation
 Express repudiation of the offer (such as “I withdraw my previous offer of
October 17”)
 Performance of acts that are inconsistent with the existence of the offer and
are made known to the offeree (for instance, selling the offered property to
another person in the presence of the offeree).
 Rejection
 If the offeree rejects the offer—by words or by conduct—the offer is
terminated
 Counteroffer
 A counteroffer is a rejection of the original offer and the simultaneous
making of a new offer
- Operation of law
 Lapse of time
 An offer terminates automatically by law when the period of time specified
in the offer has passed
o If by date, then midnight of that day
o If by number of days, then it starts when the offeree receives the
offer
o If no time, then by a reasonable period of time
 Destruction of the specific subject matter of the offer
 An offer is automatically terminated if the specific subject matter of the
offer (such as a smartphone or a house) is destroyed before the offer is
accepted
 Death or incompetence of the offeror or offeree
 An offeree’s power of acceptance is terminated when the offeror or offeree
dies or is legally incapacitated— unless the offer is irrevocable.
 Supervening illegality of the proposed contract
 A statute or court decision that makes an offer illegal automatically
terminates the offer.

18.) What happens if an offer is made and before the offer is accepted either the offeror or offeree dies
or the subject of the offer is destroyed?

 An offeree’s power of acceptance is terminated when the offeror or offeree dies


 An offer is automatically terminated if the specific subject matter of the offer (such as a
smartphone or a house) is destroyed before the offer is accepted
19.) Who can accept an offer?

 Generally, only the person to whom the offer is made or that person’s agent can accept the
offer and create a binding contract

20.) What is consideration?

 Often, consideration is broken down into two parts:


- Something of legally sufficient value must be given in exchange for the promise
 A promise to do something that one has no prior legal duty to do.
 The performance of an action that one is otherwise not obligated to undertake.
 The refraining from an action that one has a legal right to undertake (called a
forbearance)
- There must be a bargained-for exchange
 The item of value must be given or promised by the promisor (offeror) in return for
the promisee’s promise, performance, or promise of performance.
 This element of bargained-for exchange distinguishes contracts from gifts

21.) What is the “pre-existing duty rule” with respect to consideration?

 a promise to do what one already has a legal duty to do does not constitute legally sufficient
consideration
 Exceptions to this rule
- Unforeseen difficulties
 if, during performance of a contract, extraordinary difficulties arise that were totally
unforeseen at the time the contract was formed, a court may allow an exception to
the rule
- Rescission and new contract
 Rescission is the unmaking of a contract so as to return the parties to the positions
they occupied before the contract was made
 Sometimes, parties rescind a contract and make a new contract at the same time

22.) What does “past consideration is no consideration” mean?

 Promises made in return for actions or events that have already taken place are unenforceable
- In short, you can bargain for something to take place now or in the future but not for
something that has already taken place
23.) Is the fairness of consideration ever an issue? Under what circumstances?

 A court ordinarily does not look at the fairness or equity of a contract (or inquire into the
adequacy of consideration
- Persons are assumed to be reasonably intelligent, and the courts will not come to their aid
just because they have made an unwise or foolish bargain.
 In certain circumstances, however, bargains are so oppressive that the courts relieve innocent
parties of part or all of their duties, such bargains are deemed unconscionable
- Procedural unconscionability
 Procedural unconscionability often involves inconspicuous print, unintelligible
language (“legalese”), or the lack of an opportunity to read the contract or ask
questions about its meaning
 This type of unconscionability typically arises when a party’s lack of
knowledge or understanding of the contract terms deprived him or her of
any meaningful choice
 Procedural unconscionability can also occur when there is such disparity in
bargaining power between the two parties that the weaker party’s consent
is not voluntary.
- Substantive unconscionability
 Substantive unconscionability occurs when contracts, or portions of contracts, are
oppressive or overly harsh
 Courts generally focus on provisions that deprive one party of the benefits
of the agreement or leave that party without a remedy for nonperformance
by the other

24.) At what age is a person an adult for contracting?

 Today, in almost all states, the age of majority (when a person is no longer a minor) for
contractual purposes is eighteen years
 Minority status may also be terminated by a minor’s emancipation, which occurs when a child’s
parent or legal guardian relinquishes the legal right to exercise control over the child
- Normally, minors who leave home to support themselves are considered emancipated
25.) What is the power of disaffirmance? When can the minor exercise this power?

 The legal avoidance, or setting aside, of a contractual obligation is referred to as disaffirmance.


- To disaffirm, a minor must express his or her intent, through words or conduct, not to be
bound to the contract
- The minor must disaffirm the entire contract, not merely a portion of it.
 Must be with a reasonable time
- If the minor reaches the age of majority, it can only disaffirm within a reasonable period of
time
 Minor’s obligation on disaffirmance
- Courts in most states hold that the minor need only return the goods (or other
consideration) subject to the contract, provided the goods are in the minor’s possession or
control
 Even if the minor returns damaged goods, the minor often is entitled to disaffirm
the contract and obtain a full refund of the purchase price
- Courts in a growing number of states place an additional duty on the minor to restore the
adult party to the position she or he held before the contract was made.
 These courts may hold a minor responsible for damage, ordinary wear and tear, and
depreciation of goods that the minor used prior to disaffirmance

26.) If a minor contracts with an adult and the minor misrepresents his or her age, can the minor still
disaffirm?

 Ordinarily, minors can disaffirm contracts even when they have misrepresented their age
- Nevertheless, a growing number of states have enacted laws to prohibit disaffirmance in
such situations

27.) If a minor contracts for a necessity, is the contract enforceable against the minor? Under what
circumstances?

 A minor who enters into a contract for necessaries may disaffirm the contract but remains liable
for the reasonable value of the goods.
- Necessaries are basic needs, such as food, clothing, shelter, and medical services. What is a
necessary for one minor, however, may be a luxury for another
 Contracts for necessaries are enforceable only to the level of value needed to maintain the
minor’s standard of living
28.) If you are a minor and don’t misrepresent your age and buy something that is not a necessity is your
contract enforceable against you or is it void or voidable?

 Minors—or infants, as they are commonly referred to in legal terminology— usually are not
legally bound by contracts

29.) In the absence of an adjudication of incompetence what presumption applies?

 If a court has not previously judged a person to be mentally incompetent but the person was
incompetent at the time the contract was formed, the contract may be voidable
- A contract is voidable if the person did not know he or she was entering into the contract or
lacked the mental capacity to comprehend its nature, purpose, and consequences

30.) What does it mean when someone is “adjudicated” incompetent?

 If a court has previously determined that a person is mentally incompetent


- Any contract made by that person is void—no contract exists
- On determining that someone is mentally incompetent, the court appoints a guardian to
represent the individual. Only the guardian can enter into binding legal obligations on behalf
of the mentally incompetent person

31.) If a person is adjudged incompetent and a guardian appointed to represent the person is the
contract void or voidable?

 Only the guardian can enter into binding legal obligations on behalf of the mentally incompetent
person
- Any contract made by the mentally incompetent person is void—no contract exists

32.) If a person is incompetent but had never been adjudicated incompetent and a guardian has not
been appointed, what is the presumption concerning that persons competency? If they overcome that
presumption, is their contract void or voidable?

 If a court has not previously judged a person to be mentally incompetent but the person was
incompetent at the time the contract was formed, the contract may be voidable.
- A contract is voidable if the person did not know he or she was entering into the contract or
lacked the mental capacity to comprehend its nature, purpose, and consequences. In such
situations, the contract is voidable
- The contract is only voidable at the option of the mentally incompetent person but not at
the option of the other party.
33.) What is an accord and satisfaction?

 a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally
claimed was owed
- The accord is the agreement.
- Satisfaction is the performance (usually payment) that takes place after the accord is
executed
 A basic rule is that there can be no satisfaction unless there is first an accord
 For accord and satisfaction to occur, the amount of the debt must be in dispute

34.) Is it is illegal to engage in a certain business or profession without a license? If a person were to
practice in an area that requires a valid license and does not have one, what are the consequences?

 Whether a contract with an unlicensed person is legal and enforceable depends on the purpose
of the licensing statute
- If the statute’s purpose is to protect the public from unauthorized practitioners (such as
unlicensed attorneys and electricians, for instance), then a contract involving an unlicensed
practitioner is generally illegal and unenforceable
- If the statute’s purpose is to protect the public from unauthorized practitioners (such as
unlicensed attorneys and electricians, for instance), then a contract involving an unlicensed
practitioner is generally illegal and unenforceable

35.) What is a ‘covenant not to compete’ and under what circumstances are they enforceable?

 An agreement for a seller of a store to not open up a new store just like his old one nearby and
for an employee who leaves his job, not to work for their competitor for an x amount of time
 Enforceable?
- Covenant not to Compete in Employment is enforceable as long as time and geographic
terms are reasonable
36.) What do the following terms mean? a. unconscionable contract b. adhesion contract c. usurious
contract d. exculpatory clause in a contract

 Unconscionable contract
- Bargains are so oppressive that the courts relieve innocent parties of part or all of their
duties
- A contract can be unconscionable on either procedural or substantive grounds
 Procedural unconscionability often involves inconspicuous print, unintelligible
language (“legalese”), or the lack of an opportunity to read the contract or ask
questions about its meaning.
 Substantive unconscionability occurs when contracts, or portions of contracts, are
oppressive or overly harsh
 Adhesion contract
- a contract written exclusively by one party and presented to the other on a take-it-or-leave-
it basis
- In other words, the party to whom the contract is presented (usually a buyer or borrower)
has no opportunity to negotiate its terms. Not all adhesion contracts are unconscionable,
only those that unreasonably favor the drafter.
 Usurious contract
- Almost every state has a statute that sets the maximum rate of interest that can be charged
for different types of transactions, including ordinary loans
 Although usurious contracts are illegal, most states simply limit the interest that the
lender may collect on the contract to the lawful maximum interest rate in that state.
 Exculpatory contract
- Release a party from liability in the event of monetary or physical injury – no matter who is
at fault
 Enforceable when they are not against public policy, are not ambiguous, and do not
shield parties from intentional conduct.

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