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MS 331 Ch 9
Business Law: Ch 9 Contracts: Consideration, Capacity, and Legality
| Question | Answer |
|---|---|
| What are the requirements of a contract? | Agreement, Consideration, Capacity (Contractual), and Legality |
| Generally, consideration must have: | “Legally Sufficient Value;” and a be a “Bargained-for-Exchange.” |
| Legally sufficient value may consist of (3 things) | Promise, performance, or forebearance |
| Bargained-for-Exchange: must __________ | provide basis for the bargain. |
| What is the requirement for the basis for the bargain? | Something of legal value (a promise, or a performance) must be exchanged between the parties. |
| The promise must be either _________ to the promisee, or ____________ to the promisor. | legally detrimental; legally beneficial |
| [Adequacy of Consideration] Courts typically will not consider: | Freedom of contract doctrine |
| [Adequacy of Consideration] Law does not protect a person from ________ | entering into an unwise contract |
| Cases of ______ may raise red flags and be ruled unconscionable | shockingly inadequate consideration |
| What are examples of agreements that lack consideration? (4) | 1.Preexisting Duty 2.Unforeseen Difficulties 3. Past Consideration 4.Illusory Promises |
| [Lacking Consideration] Describe Preexisting Duty | Promise to do what one already has a legal duty to do does not constitute legally sufficient consideration |
| [Lacking Consideration] Describe Past Consideration | no consideration because the bargained-for exchange element is missing [Ex. A helps B put in a fence for fun, a week later A says he will pay B $100 for the past work. No contract] |
| [Lacking Consideration] Describe Illusory Promises | promisor has not definitely promised to perform because consideration is lacking, and unenforceable. |
| Define: rescission | The “untying” of a contract (knot) so as to return the parties to their original position |
| [Settlement of (legal) Claims] Describe accord and satisfaction | Settlement for lessor amount; debt must be in dispute |
| [Settlement of (legal) Claims] Describe liquidated debts | debt is certain, accord and satisfaction cannot occur |
| [Settlement of (legal) Claims] Describe unliquidated debts | amount not settled |
| [Consideration] Define: Release | a contract where one parties gives up their rights to pursue a legal claim against the other party |
| [Consideration] Define: Covenant not to sue | does not always bar further recovery (legal claim not given up) |
| [Consideration] Define: Promissory Estoppel | "Detrimental Reliance": when a person relies on the promise of another to their legal detriment; promisor is “estopped” (precluded) from revoking the promise |
| What are some components/requirements of promissory estoppel? | 1.Must be definite promise 2.Promisee must justifiably rely on the promise 3.Reliance is substantial 4.Justice will be served by enforcing the promise |
| _________________ is the legal ability o enter into a contractual relationship | Contractual Capacity |
| What does emancipation mean for a minor? | have the legal capacity to enter into any contract that an adult can |
| However, a contract entered into by a minor is ________ at the option of that minor, and can be disaffirmed | voidable |
| Minors can enter into contracts adults can provided __________________ | contract is not one prohibited by law for minors. |
| Define emancipation: | Child’s parent or guardian relinquishes legal control over the child |
| [Contractual Capacity - Minors] A contract can be _____________ at any time during minority, or for a reasonable period after minor is emancipated | disaffirmed |
| [Contractual Capacity - Minors] Can minors disaffirm only parts of a contract? | No, a minor must disaffirm the entire contract. |
| [Contractual Capacity - Minors] Define ratification | when minor reaches the age of majority, he can ratify a contract created while minor |
| [Contractual Capacity - Minors] Describe parent's liability | generally, parents are not liable for minors, except for necessaries (whatever is reasonably needed to maintain the minor's standard of living) |
| [Contractual Capacity - Intoxication] Describe how intoxication is related to contractual capacity | Lack of capacity at the time the contract is being made. Contract is either voidable or valid, depending on circumstances |
| [Contractual Capacity - Mental Incompetence] Describe how mental incompetence is related to contractual capacity -VOID | Void: person previously adjudged mentally incompetent by a court of law and a guardian has been appointed |
| [Contractual Capacity - Mental Incompetence] Describe how mental incompetence is related to contractual capacity -VOIDABLE | Voidable: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences |
| [Contractual Capacity - Mental Incompetence] Describe how mental incompetence is related to contractual capacity -VALID | Valid: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals) |
| [Legality] T or F: a contract must be formed for a legal purpose | True |
| [Legality] T or F: A specific clause in contract can be illegal, but rest of contract can be enforceable | True |
| [Legality] T or F: Contract to commit a tortious act is illegal or an act that is inconsistent with public policy | True |
| [Legality] Any contract prohibited by federal or state statutory law is illegal and therefore ___________ | void (never existed) |
| [Legality] What are some examples of contracts contrary to statute? | 1.Prohibited by federal or state law 2.Contracts to commit a crime 3.Contracts for usury 4.Gambling 5.Licensing statutes |
| [Legality - Contracts contrary to statute] Describe usury | Laws setting maximum limit for interest rates |
| [Legality - Contracts contrary to statute] Describe Gambling | distribution of property based on chance among persons who have paid valuable consideration |
| [Legality - Contracts contrary to statute] Describe Licensing Statutes | contract’s enforceability depends on purpose |
| [Legality] Contracts contrary to public policy are ____ | void! |
| [Legality] Contracts in Restraint of Trade are generally ________ | void |
| [Legality] What are some exceptions to the restraint of trade? | 1.Covenant not to compete/sale of an ongoing busniess 2.Covenant not to compete/employment |
| [Legality] What are two categories of Unconscionable Contracts or Clauses | 1.Procedural Unconscionability 2.Substantive Unconscionability |
| [Legality - Unconscionable Contracts or Clauses] Describe Procedural Unconscionability | inconspicuous print or legalese; One party has much more bargaining power than another (adhesion contract) / take-it-or-leave-it basis |
| [Legality - Unconscionable Contracts or Clauses] Describe Substantive Unconscionability | Contracts are oppressive or overly harsh; that deny a remedy for nonperformance; contract terms “shock the conscience” of the court? |
| [Legality] Define Exculpatory Clauses | Release a party from liability in the event of monetary or physical injury no matter who is at fault |
| [Legality] When might an exculpatory clause be enforceable? | when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct |
| [Legality] Generally, an illegal contract is ___ | void |
| [Legality] In illegal contracts, who is considered to be at fault? | Both parties |
| [Legality] Describe justifiable ignorance of the facts | If one party is ‘innocent’ (don’t know contract is illegal), they can recover if there has been unjust enrichment; Likewise, if an innocent party has fully performed, courts may enforce the contract against the other party |
| [Legality] Describe Members of Protected Classes | When a statute protects a certain class of people, a member of that class can enforce the contract, even though the other party cannot |
| [Legality] Describe blue sky laws | regulate sale of securities to individuals (protects the public from fraud) |
| [Legality] Describe withdrawal from an illegal agreement | If the contract is executory, a party can withdraw from the contract, and recover the performance or its value |
| [Legality] Describe severalbe, or divisible, contracts | Distinct parts that can be performed separately, with separate consideration for each part --- Illegal portion of contact can’t constitute the essence of the contract itself |
| [Legality] Describe fraud, duress, or undue influence | Party to an illegal contract may be able to recover if wrongfully induced |
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savelae
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