MANGMT 3540: EXAM 3
181 Cards in this Set
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caveat emptor
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buyer beware-contract is a contract
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Reality of Consent
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e concept that there is a defense to a contract unless the parties' consent is both real and voluntary
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5 types of inequitable contracts voidable in equity courts
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Mutual mistake of fact
Material misrepresentation
duress
undue influence
unconscionability
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Remedies
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sue for damages under contract
recission
reformation
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Recission
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Court cancels the contract and each party must restore the status quo (money or property)
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Mutual mistake of fact
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bilateral mistake
mistake of fact by both parties to the contract
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requirements for mutual mistake of fact
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material, fact important to subject matter
fact, not as to law, opinion, prediction, or value
usually goes to existence, identity, or character of subject matter
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Is it a mutual mistake of fact? We both think an item is a diamond but it is actually a piece of cut glass
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It is a mutual mistake
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it a mutual mistake of fact? We see a shiny object, one think it's glass other thinks it is a diamond pay $100
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Contract is binding, case of mutual uncertainty rather than mutual mistake , must be more than mere uncertainty to be a true mutual mistake
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Is it mutual mistake of fact? both unsure of tire pressure in sale of car
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no, tire pressure is immaterial fact in the sale of the car
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Is it a mutual mistake of fact? Both believe the mileage of car is 20,000 really 70,000
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it is a mutual mistake of material fact
on other hand if an opinion, stated by one of the parties not considered an issue of fact
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Is it a mutual mistake of fact? Both parties mistake the value of the item
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no, not a mistake of fact, is a mistake in value which is binding
In extreme cases of mistake in value courts likely to call it a mistake in character of the subject matter, if both thought an ordinary violin was worth $400 but actually rare violin would be a mistake in he character of …
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Is it a mutual mistake of fact? Contract to sale of a car both believe to be in good condition but actually destroyed by fire
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Yes, mutual mistake to the existence of the subject matter
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Is it a mutual mistake of fact? contract to sale of a corvette, but each party talking about different one on the lot
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yes, is a mutual mistake of the identity of subject matter
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Is it a mutual mistake of fact? Make deal with junk dealer he could keep whatever found when clearing out an estate, unknown about valuable sculptures by either party
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yes, mutual mistake as to the character of the subject matter, ordinary household goods are different in charter than rare art objects
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Unilateral mistake of fact
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mistake of one party, is generally not grounds for recission
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Valid defense of unilateral mistake of fact proven if:
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there is material mistake of fact by one party
the other party has reason to know of the mistake
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recission remedy for unilateral mistake of fact
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cant take knowing advantage of mistake by the other party
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is there a Recission Remedy? Significant underbid by a card collector for rookie Mantle card sale by unknowing employee
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Yes, cause the buyer should have known that the vendor did not know the character of the subject matter when he gave a price off $10 for a $50k card
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3 types of material Misrepresentation
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innocent misrepresentation
negligent misrepresentation
fraudulent misrepresentation
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Innocent misrepresentation and remedies
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a mistake without fault
recission only
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negligent representation and remedies
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mistake because of failure to use reasonable care
recission or actual damages ($)
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Fraudulent misrepresentation and remedies
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is a false statement with intent to deceive, reasonably relied on and causing damages
actual and punitive damages on one hand to discourage others from similar actions or recission on the other hand
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Two types of fraud
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Fraud in execution (signing)
Fraud in inducement
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fraud in execution
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(signing) told he is signing something else
contract is void
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Fraud in inducement
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deception as to the understood subject matter of contract not as to document itself
contract is voidable
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What type of fraud? Victim told he's signing a loan application, but is instead a promissory note to pay $100,000
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fraud in execution, contract voided
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Elements of Fraud in the inducement
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misrepresentation of material fact
intent to deceive by the defendant
reliance, must be justifiable reliance by plaintiff
injury to plaintiff, must prove monetary loss
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Misrepresentation of Material Fact in fraud
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material-important to deal
must be misrepresentation of past or present material fact: not expression of opinion, future event, value, general quality, or legal opinion
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3 exceptions making misrepresentations of material fact unnecessary for fraud if there is
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an opinion misusing a position of trust, where there is a confidential relationship of between buyer and seller
seller's opinion where seller has superior knowledge which the seller expects reliance
concealment of serious defect of which seller knows but seller has no reasonable way of…
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Intent to deceive by the the defendant in fraud
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defendant has knowledge of falsity
defendant has reckless disregard for the truth making a statement at a time when the speaker has serious doubts about the truth of it
ex. car salesman asked if car has ever been wrecked and he says no without ever looking for signs of repair
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Duress
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forcing a party into a contract through fear of wrongful threats
threatening what you have a legal right to do isnt enough
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4 elements of duress
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defendant threatened plaintiff in a serious way
threat was unlawfully or wrongfully made,(violate a law or violate a ----contractual or professional dutry)
causing involuntary acceptance, would have acted differently if not ---------threatened
because circumstances permit no al…
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Example of duress? Owe someone money and they threaten to break your arms unless paid.
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yes, serious threat unlawfully made , involuntary acceptance
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example of Duress? Owe money to someone and they threaten to sue you unless paid
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No, they have a legal right to sue you
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example of Duress? Lawyer finds appeal due next day that will win case, calls client tells him he will only file it if restructure agreement paying him more money
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Yes, economic duress, wrongful threat(violated professional duty, had no alternative but to accept (since he couldnt find a new lawyer in time because of time restriction) court sided with client who withheld the extra earnings of the new contract
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example of Duress? Put gun up to head and threaten to pull trigger if you dont sign
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yes, serious and wrongful threat, caused involuntary acceptance and permitted no alternative
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Undue influence
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the abuse of position of trust to take advantage of a person who lacks freedom of will because of trusting relationship
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Difference between duress and undue influence
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duress involves coercion whereas undue influence involves wrongful persuasion by a trusted party
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3 elements of undue influence
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confidential, family or trust relationship (attorney-client: guardian-ward)
weaker party lacked free will because of influence
a contract results between two parties ( or gifts)
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Undue influence or not? Take care of mother for years, have close trust relationship where she does whatever tell her, convince her to sell 1965 mustang for $500
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yes it is undue influence, cause she has no free will at this point, she trusts you and you create a contract that is unfair
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Undue influence or not? Death bed scenario, younger relative convinces them to change their will
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yes, burden of proof falls on person trying to prove undue influence with clear and convincing evidence otherwise will or deed will stand
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Unconscionability
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a defense which must allows a person to avoid a contract if they were pressured into accepting terms of the contract and it is grossly unfair
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3 elements of Uncoscionability
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unequal bargaining power
dictation of terms of contract by stronger party-adhesion contract
terms manifestly unfair
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Contract of adhesion
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terms of contract dictated by stronger party
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Contract performance and discharge issues
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What is good enough for complete performance?
When is performance so inferior that other party is released (discharged) from obligation?
How can a party excuse nonperformance?
When does the law excuse nonperformance?
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6 ways to discharge contract duties
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Complete Performance
Material Breach
Occurrence or failure of a condition
Agreement of the Parties
Discharge by Operation of Law
Compliance with a Court-ordered Remedy
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Complete Performance
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simply fulfilling the contract terms
pass the reasonable expectations test
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Reasonable expectations test
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the performing party under a service contract is released due to complete performance when he meets reasonable expectations
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Is there complete performance? Contracted to build a house, minor complaint about a squeaky door leads to withheld payment
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Yes there is complete performance since the contract terms were completely performed and met legal standards and a reasonable person would be satisfied with performance despite a squeaky door
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Substantial Performance
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performance where there is an immaterial breach
is a partial discharge of the performing party- the performing party may still collect on contract, but the other party is entitled to a reduction of payment because of immaterial breach
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Is there complete performance? I build a house and install cabinets of a slightly inferior grade than contracted to, payment is withheld and they sue
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no, this is substantial performance and i am able to recover the contract price minus any damages suffered due to the inferior cabinets.
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Material breach vs. Immaterial breach
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material is important in light of entire contract while immaterial is unimportant in light of the contract and the breaching party has still substantially performed and may sue on the contract
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Consequence of Material Breach
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nonbreaching party's duty of performance is discharged
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3 things that affecting materiality of breach
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satisfaction clause
time is of the essence clause
anticipatory repudiation
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Satisfaction clause
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requires one party to perform the contract to the satisfaction of the other party
If involves matter of taste then complete personal satisfaction is required, deals with art and design mostly
If a matter of function then reasonable satisfaction is required
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Time is of the essence clause
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can make an immaterial breach material
reasonable time delay is usually an immaterial breach
stating the exact words "time is of the essence" converts an immaterial time delay into a material breach
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Anticipatory Repudiation
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One party informs the other they will not complete contract prior to the time contract is due
considered a material breach even though there would have been time to for performance at moment of announcement
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What type of Material Breach? Hired to paint a portrait, client is not satisfied with the quality and discharges contract
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It breaches the satisfaction clause of the contract since it is a matter of taste, and you have materially breached your satisfaction guarantee.
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What type of Material Breach? Building a house, and doesn't put the cabinets in the right place
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it is a satisfaction clause that is breached since it is a matter of function and i didnt meet the reasonable satisfaction guarantee
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What type of Material Breach?Contracted to bring champagne on a certain date, using specific words, delivered the champagne a day late
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breached the time is of the essence clasue which makes an immaterial time delay material
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What type of Material Breach? Contracted to build house and realize that wont finish by Sep. 1 deadline inform other party wont finish in time
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Anticipatory repudiation, breached at time inform the other party that you wont be able to complete the contract
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Occurrence or Failure of a condition
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contract may be discharged for a party's duty of performance through the fulfillment or failure of a condition,
contracts usually have various conditions which need to be fulfilled in order to give birth to a contract or keep the party's duty to perform in force
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3 Types of Conditions included in Occurrence or Failure of Condition
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condition precedent
condition subsequent
concurrent condition
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Condition precedent
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condition must happen before a contractual duty arises
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Condition subsequent
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contract duty is relieved after an event has taken place
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Concurrent Condition
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Each party's duty conditioned on the other's simultaneous performance
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What type of condition is this? Man wrecks corvette, trades it in for a new one and calls insurance company to receive insurance payment. had duty to present car for damage assessment before recovering insurance. Since repaired couldnt collect
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condition precedent
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What type of condition is this? Employee bonus for certain sales numbers
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condition precedent
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What type of condition is this? Notification of a draught
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condition subsequent, discharged after event
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What type of condition is this? Cash on delivery for a good
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concurrent condition
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4 Agreements of the Parties
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Voluntary Recission
Novation
Accord and Satisfaction
Waiver
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Voluntary Recission
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an agreement by the parties to cancel the contract
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Novation
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an agreement by the parties to to cancel the old contract and enter a new contract
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Accord & Satisfaction
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an agreement (accord) by one party to accept performance which is different from the that required by contract, followed by the completion (satisfaction) of that performance by the other party
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Waiver
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a voluntary acceptance of inadequate performance or a pattern of conduct which implies a waiver of breach of breach of contract
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What type of agreement is this? Contracted to work for $10,000 dissatisified with the pay, we could agree to cancel contract and create a new one making more money
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novation
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What type of agreement is this? Order a stove online and they are out of the stove ordered and ask if you will take a different more expensive stove, and we agree
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accord and satisfaction
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What type of agreement is this?Build house and some drawers wont open but add other items elsewhere, waive price of items and other party waives drawer breach
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waiver
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What type of agreement is this? Landlord repeatedly takes rent on 10th of month despite due on 1st, never says anything about it
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waiver, waived right to insist prompt payment
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Discharge by Operation of Law
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performance under a contract is relieved due to legal reasons , law says that even though there was a contract there isnt a contract anymore
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Types of Discharge by Operation of Law
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Bankruptcy
State of Limitations
Alteration
Impossibility
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Bankruptcy
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cancels (discharges) most debts the bankruptcy debtor
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Exceptions to Bankruptcy
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Student Loans
Child support
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Statute of Limitations
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when the time period set by a statute for filing a type of lawsuit expires, the breaching party's obligation is canceled (discharged)
contract becomes unenforceable
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Alteration
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ntentional, material alteration by one party discharges the other
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Four Types of Impossibility
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Death or incapacity of an important party
destruction of subject matter of contract-ex. fire
intervening illegality
Unforeseeable Change
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Intervening Illegality
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the agreement become illegal between time entered and the time performance is completed
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Unforeseeable Change
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commercial frustration- drastic, unenforceable change in circumstances makes performance impossible
commercial impracticability-event which parties assumed wouldnt occur as basic part of performance and event has extreme effect on performance like cost of performance increasing by10x or …
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Is it discharged by Op. o Law? Enter into contract 11 years ago for sale of car, agreed to pay day after enter contract, failed to pay
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Yes, due to the statute of limitations the contract is unenforceable
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Is it discharged by Op. o Law? Want to make more money so I add two pages to our contract to perform services
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Yes since i have intentionally and materially altered the contract
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Is it discharged by Op. o Law? I was contracted to paint a portrait but die before completion of the contract
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Yes, because of the death or incapacity of an essential party
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Is it discharged by Op. o Law? I was contracted to paint a portrait, but client dies before completion of contract
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No, the estate would have to pay since the client is not an essential party since payment of money requires no significant discretion or skill
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Is it discharged by Op. o Law? Contract to buy a house, but prior to delivery of deed it burns down
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yes, because of destruction of subject matter
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Is it discharged by Op. o Law? Agree to build seventy story building, but new zoning laws make it illegal
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Yes due to intervening illegality
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Is it discharged by Op. o Law? Timber Company agrees to sell logs to someone but due to ice storm, have to change transport to a helicopter causing cost of production to multiply by 15
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yes due commercial impracticality , since logs are goods UCC applies
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Is it discharged by Op. o Law? Contract for logging services is halted due to ice storm
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yes due to commercial frustration under the common law
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Compliance with Court Ordered Remedy
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breach of contract suit followed by judgement and payment
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Types of interests for non-breaching parties
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expectation interest
reliance interest
restitution interest
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Expectation interest
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non-breaching party gets the benefit of the bargain
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Reliance interest
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the non-breaching party receives the cost of partial performance or preparation to perform
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Restitution Interest
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One party receives the value of the benefit conferred on the other party (quasi contract -implied by law)
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What type of interest? Agree to buy car for $10,000, you fail to produce the car so i have to buy a different one for $12,000, recover extra $2,000 from you to give original benefit
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expectation interest
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What type of Interest? Agree to produce 10,000 specific type of screws, have to change factory to produce unique item, you cancel order, I recover damages due to prep to perform
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reliance interest
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What type of Interest? Smith Construction builds Jones a house, craftsmanship materially breaches contract. Jones still received significant benefit, Smith still recovers the value of benefit of land provided
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restitution interest
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Six categories of Money Damages
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Compensatory (Direct) Damages
Consequential Damages
Incidental Damages
Punitive Damages
Nominal Damages
Liquidated Damages
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Consequential (Direct) Damages
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damages that naturally flow from the breach of the contract and which meet the typical expectation interest of the non-breaching party
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Compensatory damages for the buyer of goods
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cover price minus contract price for seller's breach
agree to pay $10,000, you fail to produce car have to find a new one for $15,000
c15,000-k10,000=$5000
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Compensatory damages for the buyer of services
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cover price minus contract price for provider's breach
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Compensatory damages for the seller of goods
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contract price minus fair market value for buyers breach
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Compensatory damages for the providers of services
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lost profits plus the cost of partial performance (or contract price if complete performance)
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Consequential Damages
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Indirect, foreseeable damages
lost profits most common
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To recover lost profits must prove:
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they were foreseeable
evidence of specific loss based on historical sales
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Incidental Damages
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cost of finding substitute performance (cost of mitigation)
mitigation of damages usually required
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Mitigation of Damages
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non-breaching party is usually required to make reasonable efforts to lessen damages of
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Punitive (Exemplary) Damages
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Damages awarded to punish the defendant and to deter others from similar conduct
typically only available for intentional torts
not available for breach of contract, but are available for breach of contract and fraud which arises in a contract situation
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Nominal Damages
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a small amount of damages given to a party who wins but can show injury
can greatly aid plaintiffs cause in a trespass case it shows property is mine and you have no right to be there and makes it so i can now obtain an injunction against you to keep you off of my land
in a discriminati…
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Liquidated damages
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damages in a fixed amount agreed upon by the parties prior to any breach
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Requirements for recovery of liquidated damages
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damages difficult to estimate
reasonable amount- unreasonable penalties not enforceable
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Penalties vs. Liquidated Damages
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penalties legally defined as unenforceable, but the fact that liquidated damages referred to as late payment penalty is irrelevant
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Equitable Remedies
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allowed when:
-monetary damages alone must be inadequate
-person seeking equitable remedy must be reasonable
types of remedies: act or refrain from an act; orders to change a status
judge decides facts
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Legal Remedies
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required avenue when monetary compensation is sufficient (typically for tort or breach of contract)
right to have a jury trial: jury decides facts
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5 Types of Equitable Remedies
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Recission and Restitution
Specific Performance
Quasi Contract
Injunction
Reformation
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Recission and Restitution
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cancellation of contract and restoration of Status Quo
available where there is lack of reality of consent
-material mistake of fact, fraud, duress, undue influence, and uncoscionability
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Specific Performance
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A court order requiring a party to perform the terms of a contract
only available for unique items
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What are considered unique items for specific performance?
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land (always unique), heirlooms, rare objects, antiques
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Quasi Contract (Elements)
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value of benefit
one party provided a service or benefit to the other party
the other party is unjustly enriched if no payment for benefit
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Quasi Contract (Application)
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material breach; either breaching or non-breaching party may use in appropriate circumstances
1) breaching party:may sue to get value of benefit
2)Non-breaching party: can sue for believed value of benefit
work done by mistake
unconscious patient
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Injunction
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a court order that something be done or be stopped
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Elements of proof for an injuction
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money damages must be inadequate
irreparable injury must result if there is no injunction
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Election of remedies Double Recovery
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problem of double recovery
allowing both legal and equitable remedies can lead to double recovery
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Election of Remedies Choice Required
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typically the plaintiff is required to choose between contradictory equitable and legal remedies prior to submission of case to judge and jury for decision
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Commercial paper
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article 3 of the UCC
refers to a class of documents, typically negotiable instruments, which can be freely transferred in commerce and give special rights to those who hold them
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Negotiable insrument
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document which meets all 6 requirements under article 3 of the UCC
Most common type is checks
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Indorsement
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the signature of the holder on the back of the instrument
signature of a transferor of a negotiable instrument usually on the back
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indorser
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person signing indorsement
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indorsee
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person to whom the instrument is indorsed
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holder
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the person properly in possession of a properly transferred negotiable instrument from one owner to the next
one can hold a check, promissory note, or a mortgage
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Types of Negotiable Instruments
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Order paper
Promise Paper
Holder
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Order Paper
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Contains order by one person for another to pay
3 parties ordinarily involved- drawer, drawee, payee
draft
check
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Drawer
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person signing order paper (person giving an order to draw from an account with another person)
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Drawee
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Person or entity ordered to pay
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Payee
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Person who is originally to be paid
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Draft
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order issued by drawer for a drawee to pay-generic order paper
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Check
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draft payable on demand in which bank is drawee
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Promise Paper
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contains a promise by one party to pay another
ordinarily two parties involved- maker, payee
promissory note
certificate of deposit
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maker
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person who makes promise to pay
payee--person to whom promise is made
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promissory note
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promise by maker to pay a sum of money to payee at a future time- generic promise paper
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on a check name the drawer, the drawee, and the payee
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drawer- the owner of the checking account
drawee- bank
payee- recipient of check
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What is this an example of? For value received, maker promises to pay Gwen Johnson the sum of $5 million payable 1 year from now with 9% interest
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Promissory note
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Certificate of Deposit
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note of bank acknowledging deposit and promising to pay at future time with interest
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6 requirements for negotiability
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An instrument in writing
signed by maker or drawer
containing unconditional, unequivocal promise or order to pay
a sum in certain money
payment due on demand or at definite time
payable to order or bearer
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containing unconditional, unequivocal promise or order to pay
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acknowledgement of debt not enough
IOU isnt enough need a promise or order
if conditional on any performance, non-negotiable
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equivocal
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, non-negotiable
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A sum certain in money
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must be able to ascertain face (text) of the instrument the minimum amount due
okay to state interest variable with a public interest rate like the prime rate
penalties and attorney's fees in the event of default are ok
money only, not commodities like gold, silver, cattle
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Payment due on demand or at definite time
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On demand: whenever the the holder demands payment
definite time
-stated time or date when due
-stated period after started date ok
an acceleration clause doesnt destroy negotiability
postdating doesnt affect negotiability (may be ignored by subsequent holders)
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Payable to order or bearer
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words of negotiability
order instruments- pay to order of name payee
bearer instrument- pay bearer or pay cash
a) to order of bearer or cash
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acceleration clause
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benefits the holder of a promissory note ny allowing demand for payment in full upon any default
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Negotiation- Legal Transfer 1st Delivery
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delivery from original maker or drawer to payee or intended recipient is sufficient to negotiate the instrument and transfer legal title
The transferee becomes the holder
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Negotiation- Legal Transfer After 1st Delivery
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Bearer instrument: physical delivery alone negotiates the instrument
Order Instrument: physical delivery and necessary indorsement by transferor negotiates the instrument
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Negotiation- Legal Transfer Transferor
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Could be Payee
could be indorsee- person to whom previously indorsed
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Indorsement Parties
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transferor -indorser
transferee (recipient)- indorsee
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Indorsement rules Indorsement required
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indorsement required for transfer if instrument payable to a named payee or indorsee
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Indorsement rules Indorsement not required
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if payable to bearer or indorsed in blank, indorsement not required, but transferee may request transferor sign it. Physical delivery negotiates a bearer instrument
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Indorsement rules Multiple payees-Alternate Payees
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pay A or B, either may indorse to negotiate
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Indorsement rules Multiple Payees- Joint Payees
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pay A and B, both must undorse to negotiate,
provides protection maker or drawer
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Indorsement rules Indorser Liability
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Indorsers are typically secondarily liable on the instrument
liable if drawer or maker does not pay
if you simply indorse it, you are liable
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Indorser Liability Ex. Barney Rubble delivers a checkto you, you indorse it to Fred Flinstone. Bank dishonors check. If Barney Doesn't pay fred you do
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Fred: indorsee holder
Barney:drawer
Me: indorser, payee
Barney's Bank: drawee
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Five Types of Indorsements
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blank indorsement
special indorsement
qualified indorsement
restrictive indorsement
forged indorsements
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blank indorsement
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holder signs name without naming an indorsee
instrument becomes a bearer instrument regardless of what it was before: delivery alone negotiates
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special indorsement
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made payable to specific (named) person (indorsee)
ex. pay Bart Simpson s/ Stephen Gaffney
Can convert bearer instrument to an order instrument by special indorsement
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qualified indorsement
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indorser signs words "without recourse"
indorser now is not liable if the instrument is not paid
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restrictive endorsement
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restricts rights of indorsee (new holder)
3 types- conditional, for deposit only, and trust indorsement
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conditional indorsement
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pay x if x delivers the goods
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for deposit only restrictive indorsement
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restricts bank to acting as collection agent
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trust indorsement
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restricts indorsee to using funds solely for benificiery's benefit
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forged indorsement
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forger has primary liability on the instrument rather than drawer or maker
the person who received the instrument from the forger bears the loss if the forger doesnt pay
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Holder in due course
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a Holder who takes the instrument
for value- pay $ or provide services
in good faith- honestly believes instrument regular or ordinary, inadequate consideration destroys good faith
without notices of defenses
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Common law transferee (ordinary holder)
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CLT took no right or defense greater than the transferor had
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Defenses against Holders in due course
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defenses are limited; an HDC has rights beyond those the transferer had
an HDC is typically free of personal defense to payment, such as; breach of contract of warranty , fraud in the inducement, failure of consideration
Exception: even an HDC is subject to defense of a consumer in a …
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AN HDC is subject to Real Defenses:
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fraud in execution,duress
incapacity, illegality
forgery or alteration
discharge in bankruptcy
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MANGMT 3540: EXAM 1