Business Law Test 2


when a person or company proposes a deal. An act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms


once a party receives an offer, he must respond to it in a certain way. An offer accepts by saying or doing something that a reasonable person would understand to mean that he definitely wants to take the offer. The offeree must say or do something to acc


There has to be bargaining that leads to an exchange and both sides must receive some benefit.


The contract use be for a lawful purpose


The parties must be adults of sound mind. The legal ability to enter into a contract. Minors and those with mental impairment lack capacity. A voidable contract may be canceled by the party who lacks capacity.


Certain kinds of trickery and force can prevent formation of a contract. Whether a contracting party truly understood what she was getting into and whether she made the agreement voluntarily.


Some types of contracts must be in writing to be enforceable

Performance and Discharge

if a party fully accomplishes what the contract requires then his duties are discharged


a court will award money or other relief to a party injured by a breach of contract

Bilateral Contract

A promise made in exchange for another promise

Unilateral Contract

A binding agreement in which one party has made an offer that the other party can accept only by action, not words

Executory Contract

an agreement in which one or more parties have not yet fulfilled their obligations

Executed Contract

An agreement in which all parties have fulfilled their obligations

Valid Contract

is one that satisfies all of the law's requirements. A court will enforce it

Unenforceable agreement

when parties intend to form a valid bargain but a court declares that some rule of law prevents enforcing it

Voidable Contract

when the law permits one party to terminate the agreement

Void Agreement

one that neither party can enforce, usually because the purpose of the deal is illegal or because one of the parties had no legal authority to make a contract

Express Contract

an agreement with all the important terms explicitly stated

Implied Contract

the words and conduct of the parties indicate the intended an agreement

Promissory estoppels

a possible remedy for an injured plaintiff in a case with no valid contract, where the plaintiff can show a promise, reasonable reliance and injustice. (only way to avoid injustice is to enforce the promise)


a possible remedy for an injured plaintiff in a case with no valid contract, where the plaintiff can show benefit to the defendant, reasonable expectation of payment, and unjust enrichment

Quantum meruit

as much as he deserves- the damages awarded in a quasi-contract case


anything movable, except money, securities, and certain legal rights


the person who makes an offer


the person to whom an offer is made

Letter of intent

a letter that summarizes negotiating process (an invitation to bargain is not an offer) (an advertisement is generally not an offer)


when the offeror takes it back before the offeree accepts. The offeror may revoke the offer any time before it has been accepted


when you respond to an offer with a new and different proposal. A counteroffer is a rejection. A rejection immediately terminates the offer.


A rejection immediately terminates an offer.
A counteroffer is a rejection
When an offer specifies a time limit for acceptance, that period is binding. If the offer specifies no time limit, the offer has a reasonable period in which to accept.
If an offer

Mirror-image rule

requires that acceptance be on precisely the same terms as the offer. If the acceptance contains terms that vary from the offer, then it is considered a counter offer. For contracts governed by the common law, mirror image rule is still the law.

Battle of the Forms

for the sale of good the important factor is whether the parties believe they have a binding agreement.
If the offeree adds new terms to the offer, acceptance by the offeror generally creates a binding agreement.
If the offeree changes the terms, a court

Rules of Consideration

Both parties must get something of measurable value from the contract.
A promise to give something of value counts as consideration.
The two parties must have bargained for whatever was exchanged and struck a deal.


a party commits this when they were not legally required to do so in the first place.


the opposite of an act. A plaintiff agrees to not do something he had a legal right to do.

Gambling Contract

a gambling contract is illegal unless it is a type of wagering specifically authorized by state statute. Not allowed in CA, allowed in Nevada

Noncompete agreement

an employee promises not to work for a competitor for some time after leaving his company. Noncompete agreements related to the sale of a business are also enforceable if reasonable in time, activity, and territory. In CA: noncompetes are not enforceable

Exculpatory clause

one that attempts to release you from liability in the event of injury to another party. It is generally unenforceable when:
it attempts to exclude and intentional tort or gross negligence
the affected activity is in the public interest
both parties have

Unconscionable contract

one that a court refuses to enforce because of fundamental unfairness. These factors lead to it: Oppression-one party has used its superior power to force a contract on the weaker party. Surprise- the weaker party did not fully understand the consequences

Voidable contracts

when a contract is voidable, one party has the option either to enforce or terminate the agreement.


A contract that is illegal form the beginning and may not be enforced by either party


to give notice of refusal to be bound by an agreement


to cancel a contract


restoring an injured party to its original position. A minor who disaffirms a contract must return the consideration he has received to the extend he is able.

Status quo rule

if a minor cannot return the consideration, the adult or store is only required to return its profit margin to the minor.


When a party to a contract says something that is factually wrong. An injured person must show the following to show fraud:
The defendant knew that his statement was false or that he made the statement recklessly and without knowledge of whether it was fa

Bilateral mistake

occurs when both parties negotiate based on the same factual error. If the parties contract based on an important factual error, the contract is voidable by the injured party.

Unilateral mistake

occurs when only one party enters a contract under a mistaken assumption. To rescind for a unilateral mistake, party must demonstrate that she entered the contract because of a basic factual error that either enforcing the contract would be unconscionable


an improper threat made to force another party to enter into a contract. If one party makes an improper threat that causes the victim to enter into a contract, and the victim had no reasonable alternative, the contract is voidable

Economic duress

courts look at:
acts that have no legitimate business purpose
greatly unequal bargaining power
an unnaturally large gain for one party
financial distress to one party

Statute of Frauds

A plaintiff may not enforce any of the following agreements unless the agreement or some memorandum of it, is in writing and signed by the defendant.
For any interest in land
That cannot be performed within one year
To pay the debt of another
Made by and

Collateral promise

when one person agrees to pay the debt of another as a favor to that debtor and it must be in writing to be enforceable.


is the person who is in charge of an estate after someone dies. If they pay the debts with their own funds it must be in writing.

The writing must contain:

must be signed by the defendant and must state with reasonable certainty the name of each party, the subject matter of the agreement, and all of the essential terms and promises. (electronic contracts and signatures are as enforceable as those on paper)

Parol Evidence

refers to anything that was said, done, or written before the parties signed the agreement or as they signed it.

Integrating Contract

A writing that the parties intend as the final, complete expression of their agreement.(Parol evidence rule: when two parties make an integrated contract, neither one may use parol evidence to contradict, vary, or add to its terms)


a party is discharged when she no longer has duties under the contract. Extinguishment of a contract resulting from performance, action of parties, or operation of law


to terminate the contract by mutual agreement

Strict performance

requires one party to perform its obligations precisely with no deviation from the contract terms

Substantial performance

occurs when one party fulfills enough of its contract obligations to warrant payment. (a party that fails to perform substantially receives nothing on the contract itself and will recover only the value of the work, if any)
Courts look at:
how much benefi

Good faith

the parties to a contract must carry out their obligations in good faith. An honest effort to meet both the spirit and letter of a contract.

Time of the essence clauses

generally make the contract dates strictly enforceable. Merely including a date of performance does not make time of the essence.

Material breach

(Courts will discharge a contract only if a party committed a material breach) one that substantially harms the innocent party and for which it would be it would be hard to compensate without discharging the contract.(when one party breaches a contract, t

Statue of limitations

a statutory time limit within which an injured party must file suit

True impossibility

means that something has happened making it literally impossible to do what the promisor said he would do.
Three causes normally:
destruction of subject matter
death of the promisor in a personal services contract
Doctrine discharging a contrac

Commercial impracticability

means some event has occurred that neither party anticipated and fulfilling the contract would now be extraordinarily difficult and unfair to one party

Frustration of purpose

means some event has occurred that neither party anticipated and the contract now has no value for one party. (for impracticability and frustration claims, the factors must be considered: the event must have been truly unexpected, only major unforeseen di


a legal right to something

Expectation interest

what the injured party reasonably thought she would get from the contract. It is designed to put the injured party in the position she would have been in had both sides fully performed their obligations. The damages are divided into three parts:
1. direct

Reliance interest

expectation damages are unclear but the injured party can prove that he spent money in reliance on the agreement and that he should receive compensation. To win expectation damages, the injured party must prove the breach of contract caused damages that c

Restitution interest

The injured party has conferred a benefit on the other party. Objective is to restore the injured party the benefit she has provided. It is designed to return the injured party a benefit that he has conferred on the other party, which it would be unjust t

Equitable interest

Sometimes money damages will not suffice. Sometimes specific performance like an order to transfer property to an injured party, or an injunction like an order forcing one party to stop doing something.

Direct damages

are those that flow directly from the contract

Consequential damages

reimburse for harm that results from the particular circumstances of the plaintiff. These damages are only available if they are a foreseeable consequence of the breach. They are those resulting from the unique circumstances of this injured party.
They ar

Incidental damages

are the relatively minor costs that the injured party suffers when responding to the breach. relatively minor out-of-pocket expenses a contracting party incurs as a result of the other party's breach of contract.


the process by which a court rewrites a contract to ensure its accuracy or viability. Equitable remedy whereby a court rewrites a contract to state the parties' true understanding.

Specific performance

available on sale of land and unique item/good.
The remedy for specific performance forces the two parties to perform their contract. A court will award specific performance ordering the parties to perform the contract, only in cases involving the sale of


a court order that requires someone to do something or to refrain from doing something. Court order directing a party to do or not do something.

Preliminary injunction

an order issued early in a lawsuit prohibiting a party from doing something during the course of the lawsuit.

Permanent injunction

if after the trial it appears that the plaintiff has been injured and is entitled to an injunction, the trial court will make its order a permanent injunction.


to keep damages as low as is reasonable. A party injured by a breach of contract may not recover for damages that he could have avoided with reasonable efforts.

Liquidated damages

a clause stating in advance how much a party must pay if it breaches. A court will generally enforce liquidated damages clause if at the time of creating the contract, it was very difficult to estimate actual damages and the liquidated amount is reasonabl

When you should definitely sign an agreement

The Statute of Frauds requires it
the deal is crucial to your life or the life of your business
the terms are complex
you do not have an ongoing relationship of trust with the other party


have a different perspective-their primary goal is to protect their clients by avoiding litigation, now and in the future. They also prefer to negotiate touchy subjects at the beginning of a relationship, when everyone is on friendly terms and eager to ma

How to read a contract

Pre-read and think about what provisions are important to you
The first read- have a basic idea of the contract
What-ifs- consider worst-case scenarios
The second read- make sure it handles all the what-ifs and satisfies your needs
(vagueness is your enem


the provision is accidentally unclear. Any ambiguity is interpreted against the drafter of the contract. This is to:
protect laypeople from the dangers of form contracts that they have littler power to change
Protect people who are unlikely to be represen

Scrivener's error

a typo. A court will reform a contract if there is unclear and convincing evidence that the mistake does not reflect the true intent of the parties

Preventing mistakes

let your lawyer draft the contract
resist overlawyering
read the important terms carefully

Structure of a contract

intro paragraph


is a legal term that means a promise in a contract. (don't assume everything will work itself out) Promises parties make about what they will do in the future.

Sole discretion

a party to a contract has the absolute right to make a decision on that issue


ordinary or usual under the circumstances

Reciprocal promises

promises that are each enforceable independently.

Conditional promises

promises that a party agrees to perform only if the other side has first done what is promised.

Representations and warranties

are statements of fact about the past or present

Choice of law provisions

determine which state's laws will be used to interpret the contract.

Choice of forum provisions

determine the state in which any litigation would take place


an amendment or addition to a contract

Three ways to amend a contract

Signing an amendment
Crossing out by hand the wrong part and replacing it
Rewriting the entire contract to include the changed provisions

Assignment of rights

a transfer of benefits under a contract to another person

Delegation of duties

a transfer of obligations in a contract

Force majeure event

a disruptive, unexpected occurrence for which neither party is to blame that prevents one or both parties from complying with a contract


a moveable physical object except for money and securities.

Mixed contract

one with goods and services. In a mixed contact involving sales and services, the UCC will govern if the predominant purpose is the sale of goods, but common law will control if the predominant purpose is providing services.


generally, someone who routinely deals in the particular goods involved. The UCC holds merchants to a higher standard than non-merchants

Three rules that enable parties to make a contract quickly and informally

Any manner that shows agreement-must show that they reached an agreement
Moment of making is not critical-the UCC will enforce a deal even though it is difficult to say exactly when it was formed
One or more terms may be left open-under the UCC, a court m

Merchant exception

When two merchants make an oral contract, and one sends a confirming memo to the other within a reasonable time, and the memo is sufficiently definite that it could be enforced against the sender herself, then the memo is also valid against the merchant w

Additional terms

are those that raise issues not covered in the offer. (an acceptance that adds or alters terms will often create a contract) (when both parties are merchants, additional terms generally become part of the bargain)

Different terms

are terms that contradict those in the offer. (majority of states hold that different terms cancel each other out)(if there is no clear oral agreement, the Code supplies its own terms, called gap-fillers)


a statement that a particular warranty does not apply


means that the goods are fit for the ordinary purposes for which they are used.
Unless excluded or modified:seller does have chance to escape warranty
Merchantability: requires that goods be fit for their normal purposes.
Implied:the law itsel


a contractual assurance that goods will meet certain standards

Express warranty

one that the seller creates with his words or actions


goods that have become attached to real estate

Security interest

an interest in personal property or fixtures that secures the performance of an obligation

Secured party

a person or company that holds a security interest


property that is subject to a security interest


a person who has original ownership interest in the collateral


a person who must repay money or perform some other task to satisfy a debt

Security agreement

a contract in which the debtor gives a security interest to the secured party


the failure of a debtor to pay money due on a loan or credit purchase


third party to whom a contract right is assigned


transfer of a contract right to a third party


contracting party who assigns a contract right to a third party

Breach of Contract

wrongful failure to perform a contractual obligation

Comercial impracticability

doctrine discharging a contract because its value to at least one party has been destroyed by and unforeseen event

Compensatory damages

damages that are the natural result of a breach


transfer of contract duties to a third party

incidental beneficiary

third party whom contracting parties do not intend to benefit by entering into a contract

Mitigation of damages

Doctrine prohibiting recovery of damages that a party can reasonably avoid.

Parol evidence rule

Rule that prohibits altering a final, complete written contract by using parol evidence.

Punitive damages

damages awarded to punish a party


Contractually agreed-upon damages to be paid if a party breaches a contract.

Third-party beneficiary

In general, any third party that may directly or indirectly benefit from a contract even though the contracting parties did not inter to contract for the benefit of the third party.

Time is of the essence

Timely performance is vital; timely performance is required to discharge a contractual duty.

Unenforceable contract

Contract that the courts will not enforce because it is not evidenced by a required writing.