Business Law: Ch 9 Contracts: Consideration, Capacity, and Legality
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| What are the requirements of a contract? | Agreement, Consideration, Capacity (Contractual), and Legality
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| Generally, consideration must have: | “Legally Sufficient Value;” and a be a “Bargained-for-Exchange.”
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| Legally sufficient value may consist of (3 things) | Promise, performance, or forebearance
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| Bargained-for-Exchange: must __________ | provide basis for the bargain.
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| 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.
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| The promise must be either _________ to the promisee, or ____________ to the promisor. | legally detrimental; legally beneficial
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| [Adequacy of Consideration] Courts typically will not consider: | Freedom of contract doctrine
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| [Adequacy of Consideration] Law does not protect a person from ________ | entering into an unwise contract
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| Cases of ______ may raise red flags and be ruled unconscionable | shockingly inadequate consideration
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| What are examples of agreements that lack consideration? (4) | 1.Preexisting Duty
2.Unforeseen Difficulties
3. Past Consideration
4.Illusory Promises
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| [Lacking Consideration] Describe Preexisting Duty | Promise to do what one already has a legal duty to do does not constitute legally sufficient consideration
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| [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]
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| [Lacking Consideration] Describe Illusory Promises | promisor has not definitely promised to perform because consideration is lacking, and unenforceable.
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| Define: rescission | The “untying” of a contract (knot) so as to return the parties to their original position
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| [Settlement of (legal) Claims] Describe accord and satisfaction | Settlement for lessor amount; debt must be in dispute
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| [Settlement of (legal) Claims] Describe liquidated debts | debt is certain, accord and satisfaction cannot occur
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| [Settlement of (legal) Claims] Describe unliquidated debts | amount not settled
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| [Consideration] Define: Release | a contract where one parties gives up their rights to pursue a legal claim against the other party
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| [Consideration] Define: Covenant not to sue | does not always bar further recovery (legal claim not given up)
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| [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
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| 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
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| _________________ is the legal ability o enter into a contractual relationship | Contractual Capacity
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| What does emancipation mean for a minor? | have the legal capacity to enter into any contract that an adult can
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| However, a contract entered into by a minor is ________ at the option of that minor, and can be disaffirmed | voidable
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| Minors can enter into contracts adults can provided __________________ | contract is not one prohibited by law for minors.
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| Define emancipation: | Child’s parent or guardian relinquishes legal control over the child
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| [Contractual Capacity - Minors] A contract can be _____________ at any time during minority, or for a reasonable period after minor is emancipated | disaffirmed
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| [Contractual Capacity - Minors] Can minors disaffirm only parts of a contract? | No, a minor must disaffirm the entire contract.
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| [Contractual Capacity - Minors] Define ratification | when minor reaches the age of majority, he can ratify a contract created while minor
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| [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)
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| [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
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| [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
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| [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
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| [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)
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| [Legality] T or F: a contract must be formed for a legal purpose | True
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| [Legality] T or F: A specific clause in contract can be illegal, but rest of contract can be enforceable | True
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| [Legality] T or F: Contract to commit a tortious act is illegal or an act that is inconsistent with public policy | True
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| [Legality] Any contract prohibited by federal or state statutory law is illegal and therefore ___________ | void (never existed)
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| [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
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| [Legality - Contracts contrary to statute] Describe usury | Laws setting maximum limit for interest rates
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| [Legality - Contracts contrary to statute] Describe Gambling | distribution of property based on chance among persons who have paid valuable consideration
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| [Legality - Contracts contrary to statute] Describe Licensing Statutes | contract’s enforceability depends on purpose
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| [Legality] Contracts contrary to public policy are ____ | void!
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| [Legality] Contracts in Restraint of Trade are generally ________ | void
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| [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
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| [Legality] What are two categories of Unconscionable Contracts or Clauses | 1.Procedural Unconscionability
2.Substantive Unconscionability
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| [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
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| [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?
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| [Legality] Define Exculpatory Clauses | Release a party from liability in the event of monetary or physical injury no matter who is at fault
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| [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
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| [Legality] Generally, an illegal contract is ___ | void
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| [Legality] In illegal contracts, who is considered to be at fault? | Both parties
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| [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
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| [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
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| [Legality] Describe blue sky laws | regulate sale of securities to individuals (protects the public from fraud)
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| [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
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| [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
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| [Legality] Describe fraud, duress, or undue influence | Party to an illegal contract may be able to recover if wrongfully induced
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