Business Law Test #1 Chapters 6-12

CHAPTER 6 INTRODUCTION TO CONTRACTS:

Contract Legally Binding. Social or moral obligations are not legally enforceable.
Ex. Promise to take a cab with a friend
1. Offer Offer is made by one party (offeror) to enter into a contract with
another (offeree).
Acceptance indication made by offeree to agree to be bound by the terms
of the offer.
2. Mutual Agreement Indication that both parties have agreed to the terms
and are in the right state of mind.
3. Consideration Promise to give over something of value, or do something
one is not otherwise legally required to do.
4. Competent Parties must be capable of understanding what they are doing.
(Normal mentality and of legal age)
5. Legality of Purpose Contents of the contract cannot violate the law.
6. Proper Form Contracts must be created with proper format. This varies
according to what is contained within the contract. Examples: Contract for
sale of personal property for over $500 must be in writing. Some contracts
must contain both parties signatures.
- If an agreement satisfies all 6 elements, the contract is legally
enforceable.
Express Contract Terms are clearly expressed, either orally or in writing.
Implicit Contract Terms are not specifically stated, but are implied through actions,
circumstance, or customs of the trade.
Ex. Ordered a copy machine delivered, no mention of payment. Expected to
pay on delivery and at market price, and that delivery will be within a
reasonable timeframe.
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Also, implied contract results when one receives goods or services that
cannot be considered a gift. If he has knowledge of receiving them, he is
responsible to pay for them.

Entire Contract everything stated in the contract must be completed at the same
time, because each part of the contract is dependent on the other.
Ex. Desks were delivered, but chairs backordered. Not required to pay for
desks until chairs arrive. Dependent on the other, not a Divisible Contract - If
swings were delivered, but slides were backordered payment is required
because can use swings without slides.
Executory Contract Some parts still need to be fulfilled under the terms of the
contract.
Void Contract Contract that is not enforceable. No access to any legal recourse.
(Ex. A contract that violates the law)
Voidable Contract A contract where one party has the legal right to reject the
agreement. It is a valid contract until one party withdraws.
Ex. Minor and adult entering into a contract. Ex. Incompetent party. Ex.
Failure to meet agreement.

CHAPTER 7- OFFER & ACCEPTANCE:

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In order for an offer to be valid, it must be: 1. Definite and certain 2.

Communicated to the offeree (Purchase orders or actions are communication)
3. Made with a serious intention that the offeror will be bound by it.

Request for Proposal the offer and the proposal submitted do not create a
binding contract. The offer is an Invitation to Trade.
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In order for acceptance to be valid: 1. it must be communicated to the offeror

2. It must be unconditional.
Unless agreed upon beforehand, silence or failure to respond is not a binding
agreement.

Mailbox Rule acceptance sent via mail or courier service is effective when sent.
Termination of an Offer 1. Lapse of time 2. Revocation by the offeror 3.
Rejection by the offeree.
CHAPTER 8 MUTUAL AGREEMENT:
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A voidable contract results if agreement of either party is obtained by fraud,

misrepresentation, mistake, undue influence, or duress, or if the contract is
one of adhesion, or is unconscionable.

Fraud 1. Intentional 2. misstatement or nondisclosure of an essential fact made

by one party with the 3. intent to deceive the other party and 4. The other party
relies and acts on this information 5. Causing him to suffer a loss. Fraud can only be
claimed if all these 5 things were in place and can be proven.
Ex. Sold a computer that would not need the customers stated needs. (not
enough memory)
Misrepresentation Unintentional misstatement or nondisclosure of essential facts
that cause one to enter into an agreement to his or her loss. (Different than fraud, If
misrepresentation is proven the contract will be canceled, but cannot sue for
additional damages.)
Ex. Contractor did not intentionally refrain from telling client the zoning laws
for building a pool, so no suit for damages may be brought.
Mistake belief that is not in accord with the facts.
Ex. Wrong painting number 1401/1410
Undue Influence Excessive pressure by dominant party in a relationship to
convince weaker party to enter a contract that greatly benefits the dominant party.
Often with Doctors/Nurse and patient, Teacher and Student, Attorney and Client Etc.
Ex. Professor files patent in his name only, uses influence to pressure student
to benefit himself.
Duress Intense pressure to influence a party to enter a contract. Force or Threats
are considered duress.
Contract of Adhesion Contract that must be accepted as is on a take-it-or-leave-it
basis with no room for negotiation. Often unenforceable in court.
Ex. Waiver to enter trampoline place. Insurance policy

Unconscionable Contract A contract so unfair, one that majorly benefits and gives
advantage to one side.
Ex. Contract with one who does not know the language.
CHAPTER 9 CONSIDERATION:
Forbearance promise to refrain from doing something that one legally has the
right to do.
Ex. Promise to stop smoking, a legal activity, for a reward.
Promisor Offers/makes the promise.
Promisee One to whom the promise is made.
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In order for Consideration to be valid: 1. Legality 2. Adequacy (is the deal

fair?) 3. Possibility of performance.

Legality of Consideration The act offered for consideration must be legal.

Consideration cannot be the promise to avoid performing an act that is legally
required to be performed.
Possibility of Performance A legally enforceable contract cannot be based on a
promise that is impossible to fulfill.
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Valid Consideration: 1. A promise for a promise (Fix car if you paint house) 2.
Promise of Forbearance (Buy your Fruit Stand if you promise not to open
another one in same town) 3. A Pledge (Promise to Donate money to charity
or an organization)

UCC does not require Consideration in certain contracts that involve:

A merchants written firm offer that proves that the contract is
irrevocable
A written discharge of a claim for an alleged breach of contract
Modifications of existing contracts

Agreements that lack Consideration:

o Barren Promise A promise of something already owed. A promise to
pay an existing debt or to obey the law.
o Preexisting Duty Existing obligation to an already existing agreement.
This obligation may not be used as consideration in a new contract.
Ex. Police officers cannot use the capture of a criminal as
consideration to claim a reward because they already have an
preexisting duty to do so.
o Gratuitous Promises A promise that does not require some benefit in
return. Promise is not binding, because there is no consideration.
o Moral Consideration Something one is not legally bound to do, but
may feel bound to do because of love, friendship, honor, sympathy, or
conscience etc.
Ex. Someone declared bankruptcy and her depts. Were forgiven.
However, she promised to repay her debts anyways out of moral

consideration. This promise would probably be enforceable even

though there was no consideration.
o

Past Consideration A promise to repay someone for a benefit after it

has been received.
Ex. After Traveling, promise to pay for half a plane ticket. Not
legally bound by this promise because it was based on Past
Consideration.

CHAPTER 10 COMPETENT PARTIES:

Contractual Capacity The ability to make a valid contract.
Minor One who has not reached the age of majority (The legal Age (18-21)).
Coming of Age Rule A persons legal birthday is at 12:01 the day before his
birthday.
Disaffirmance Minors right to avoid a contract through statement or actions. The
competent party is still bound. However, in contracts for Necessaries the Minor is
bound to the contract. (Food, Water, Shelter, Employment, Medical Care essential
to Minors health and welfare) Can be determined through lack of action, such as
failure to make a payment.
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Once a minor reaches legal age, he must Ratify (approve) or disaffirm the
contract. This can be done through action or over the passage of time. (If no
action is taken after a significant time period has passed, it is assumed that
the contract remains intact) It does not matter if the contract is executable or
has been executed.

Emancipation Acceptance of responsibilities of a legal adult. Emancipation

requires that minors become liable for necessaries, as well as Abandonment,
surrender of the special protections given to minors by the law. Emancipation may
be voluntary or result from marriage.
Ex. Emancipated minor is responsible to cover medical treatment costs,
because they are a necessary.
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A minor is not protected by the law if he has committed a tort or crime.

Incompetent most contract made with an incompetent person are VOIDABLE,

unless the other party can prove lucidity at the time of the agreement. (Drugs,
Alcohol, Alzheimers, insanity, brain injury) Responsible for purchase of necessaries.
Ex. Drunk person buys a parka, claims not responsible because intoxicated,
but its a necessary, so required to pay if cant return it.
All contracts with a court declared insane person are VOID.
CHAPTER 11 LEGAL PURPOSE OF CONTRACTS:
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A Monopoly is illegal because it results in a Restraint of Trade.

Sherman Antitrust Act Federal statute that forbids certain agreements that tend to
unreasonably inhibit competition, fix prices, allocate territories, or limit production.

Robinson-Patman Act Federal statute that makes it unlawful to discriminate, in

matters involving product pricing, advertising, and promotion.
Unlicensed Transaction Agreement with a person who does not have a required
license. If license is required to ensure competency, agreement would be illegal. If
the purpose of the license is to raise revenue, lack of license does not make the
agreement void.
Usurious Agreement
CHAPTER 12 FORM OF CONTRACTS:
Parol Evidence Rule Rule that any spoken or written words in conflict with what the
written contract states cannot be introduced as evidence in a court of law.
Statute of Frauds Certain contracts must be in writing.
1. Agreements by an executor or administrator (court appointed) to pay off
debts of a deceased person.
2. Agreements to answer for the debts of another.
3. Agreements that cannot be completed in under one year.
4. Agreements made in contemplation of marriage.
5. Agreements to sell any interest in real property.
6. Agreements to sell personal property for $500 or more.
Guaranty Promise to pay debts, must be in writing.
CHAPTER 13 OPERATIONS OF CONTRACTS:
Third-party Beneficiary He intentionally benefits as a consequence of the
contract.
Ex. Life Insurance Policy
Incidental Beneficiary Benefit as an indirect consequence of a contract, NO legal
rights to the contract.
Assignment Transfer of a contract rights to a third party who can receive its
benefits., One who transfers is not relieved of duties until contract is completely
executed.
Assignor Person who transfers his rights.
Assignee Third part to who rights are transferred.
Delegation appointment of a third party to perform contractual duties that do not
require any unique skill, talents, or abilities.
Personal Service Contract Cannot be delegated to anyone else.
Novation Requires consent of all parties, transfers all rights and obligations
CHAPTER 14 DISCHARGE OF CONTRACTS:
Termination By Agreement Both parties agree to terminate.
Substantial Performance small detail unfulfilled, but majority of contract has been
completed. As long as material agreement is intact there is no breach of contract.

Tender Offer of payment. Once made and rejected, can sue for breach of contract.
Impossibility of Performance Contract is VOID and parties are discharged.
Termination by Operation of Law Law is passed after contract is entered that make
it illegal, contract is terminated by operation of law.
Frustration of Purpose purpose of contract no longer exists. Contact is terminated.
Anticipatory Breach Stated intention by a party to breach the contract
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Each party has a DUTY to mitigate Damages or loss. Ex. Find new tenants.