Reg 6 Flashcards
Green was adjudicated incompetent by a court having proper jurisdiction. Which of the following statements is correct regarding contracts subsequently entered into by Green? a. All contracts are enforceable. b. All contracts are voidable. c. All contracts are valid. d. All contracts are void.
Choice “d” is correct. Contracts entered into by one who has been adjudicated mentally incompetent are void rather than voidable. Thus, choice “b” is incorrect. Note that choices “c” (all contracts are valid) and “a” (all contracts are enforceable) are the same answer. Since both cannot be correct, both must be wrong.
Which of the following actions if taken by one party to a contract generally will discharge the performance required of the other party to the contract? a. Tender. b. Material breach of the contract. c. Assignment of rights. d. Delay in performance.
Choice “b” is correct. A material breach generally will discharge the nonbreaching party.
Choice “d” is not as good an answer as “b”. While a delay in performance could cause a discharge, it will do so only in a UCC Sales contract, a contract stating that time is of the essence, or if the delay otherwise materially breaches the contract.
Choice “a” is incorrect. Generally if a party tenders performance, the other party will also have to perform. Tender of performance does not discharge the other party.
Choice “c” is incorrect. Generally, contracts are assignable, and an assignment of rights will not discharge the other party from performing.
Which of the following facts must be proven for a plaintiff to prevail in a common law negligent misrepresentation action?
a.
The misrepresentations were in writing.
b.
The misrepresentations concerned opinion.
c.
The defendant made the misrepresentations with a reckless disregard for the truth.
d.
The plaintiff justifiably relied on the misrepresentations.
Choice “d” is correct. To make out an action for negligent misrepresentation, the plaintiff must show both actual and justifiable reliance on the misrepresentation.
Choice “c” is incorrect. In negligent misrepresentation, the misrepresentation can arise out of conduct that is negligent (i.e., simple carelessness); reckless disregard for truth is considered the equivalent of fraud and is a much higher standard of misconduct.
Choice “a” is incorrect. Misrepresentations need not be in writing to give rise to a cause of action.
Choice “b” is incorrect. The misrepresentation must be of a material fact; misrepresentation of an opinion generally will not support a cause of action for negligent misrepresentation.
A building subcontractor submitted a bid for construction of a portion of a high-rise office building. The bid contained material computational errors. The general contractor accepted the bid with knowledge of the errors. Which of the following statements best represents the subcontractor’s liability?
a.
Not liable because the errors were a result of gross negligence.
b.
Liable because the errors were material.
c.
Liable because the errors were unilateral.
d.
Not liable because the contractor knew of the errors.
Choice “d” is correct. Unilateral mistake is a defense to a contract if the nonmistaken party knew or should have known of the mistake. Here, the contractor knew of the error.
Choice “a” is incorrect. Whether the mistake was due to ordinary negligence or gross negligence is irrelevant in determining whether the mistake will constitute a contract defense.
Choice “c” is incorrect. Unilateral mistake is a defense to a contract if the nonmistaken party knew or should have known of the mistake.
Choice “b” is incorrect. While mistake is grounds for a defense only if the mistake is material, materiality is not all that is necessary. When the mistake is unilateral, as it is here, the nonmistaken party must also have known of the mistake (or had cause to know of the mistake).
Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook’s part. Grove will prevail if he can establish that:
a.
Brook’s only claim of consideration was the relinquishment of a legal right.
b.
The consideration to be performed by Brook will be performed by a third party.
c.
Prior to Grove’s promise, Brook had already performed the requested act.
d.
Brook’s asserted consideration is only worth $400.
Choice “c” is correct. A contract generally must be supported by valid consideration. Valid consideration will be present if there is a bargained for exchange of something of legal value. If the act promised has already been performed, the bargain element fails. Thus, it is said that past consideration is no consideration.
Choice “a” is incorrect. A contract generally must be supported by valid consideration. Relinquishment of a legal right constitutes something of legal value. Thus, this is not a good defense for Grove.
Choice “d” is incorrect. As long as the consideration is not a sham, the courts will not inquire into the adequacy of the consideration exchanged. $400 is not sham consideration; thus, the large disparity in value of the consideration exchanged here is not a defense.
Choice “b” is incorrect. The benefits of a contract need not flow to the parties to constitute consideration, the mere giving of a benefit or receipt of a detriment is sufficient.
One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must:
a.
Be in writing and signed by the assignor.
b.
Be supported by adequate consideration from the assignee.
c.
Not materially increase the other party’s risk or duty.
d.
Not be revocable by the assignor.
Choice “c” is correct. Generally, all contracts are assignable unless the assignment would result in a change in the obligor’s risk.
Choice “b” is incorrect. An assignment need not be supported by consideration; assignments may be gratuitous.
Choice “a” is incorrect. There is no requirement that an assignment of a contract for the sale of goods be in writing.
Choice “d” is incorrect. An assignment may be revocable or irrevocable.
If a person is induced to enter into a contract by another person because of the close relationship between the parties, the contract may be voidable under which of the following defenses? a. Fraud in the inducement. b. Undue influence. c. Duress. d. Unconscionability.
Choice “b” is correct. Undue influence is when a person in a position of trust or confidence takes unfair advantage of the relationship such that the other party’s free will to contract is overcome.
Under a personal services contract, which of the following circumstances will cause the discharge of a party’s duties?
a.
Illegality of the services to be performed.
b.
Death of the party who is to receive the services.
c.
Cost of performing the services has doubled.
d.
Bankruptcy of the party who is to receive the services.
Choice “a” is correct. Illegality of the services to be performed always results in a discharge of duties. This assumes that the services were legal at the time the contract was formed. If the services had been illegal at the time of attempted formation, there would be no contract.
Choice “b” is incorrect. The death of the party who is to receive the services does not usually result in discharge of duties under a personal services contract. However, death might make performance impossible therefore causing a discharge (e.g., if doctor contracts to perform a bypass operation on patient and patient dies before the operation can be performed, doctor is discharged from performing).
Choice “c” is incorrect. A party can be discharged from a contract for impossibility or commercial impracticability, but a mere increase in costs does not make a performance impossible or impracticable.
Choice “d” is incorrect. Mere bankruptcy of the party to receive the services will not result in a discharge, although discharge is possible if the bankruptcy constitutes anticipatory repudiation, such as when it makes it very unlikely that the person receiving the services will be able to pay.
Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the: a. Contract is breached. b. Contract is signed. c. Construction is begun. d. Contract is negotiated
Choice “a” is correct. The statute of limitations for breach of contract usually begins to run on the occurrence of the breach
Egan, a minor, contracted with Baker to purchase Baker’s used computer for $400. The computer was purchased for Egan’s personal use. The agreement provided that Egan would pay $200 down on delivery and $200 thirty days later. Egan took delivery and paid the $200 down payment. Twenty days later, the computer was damaged seriously as a result of Egan’s negligence. Five days after the damage occurred and one day after Egan reached the age of majority, Egan attempted to disaffirm the contract with Baker. Egan will:
a.
Be able to disaffirm despite the fact that Egan was not a minor at the time of disaffirmance.
b.
Not be able to disaffirm because Egan had failed to pay the balance of the purchase price.
c.
Be able to disaffirm only if Egan does so in writing.
d.
Not be able to disaffirm because the computer was damaged as a result of Egan’s negligence.
Choice “a” is correct. A minor has a reasonable time after reaching the age of majority to disaffirm contracts. One day after reaching majority is within a reasonable time, and so Egan could disaffirm.
Choice “c” is incorrect. There is no requirement that a minor who wishes to disaffirm must do so in writing.
Choice “b” is incorrect. A minor may disaffirm a partially executed contract. The minor will only have a right to get back what he has paid.
Choice “d” is incorrect. A minor may disaffirm even if the subject matter of the contract has been destroyed; the minor’s only duty is to return whatever is left.
To prevail on the defense of fraud in the inducement, a victim must prove that the:
a.
Defrauder was an expert with regard to the misrepresentations.
b.
Defrauder was in a fiduciary relationship with the victim.
c.
Misrepresentations were in writing.
d.
Defrauder made the misrepresentations with knowledge of their falsity and with an intention to deceive.
Choice “d” is correct. The common law defense of fraud requires a showing of intent to deceive. Fraud in the inducement (as opposed to fraud in the execution) merely means that the victim was deceived as to the reason for the transaction.
Choice “a” is incorrect. A person need not be an expert concerning the subject matter of the deceit to be liable for misrepresentation. The person need only knowingly lie.
Choices “c” and “b” are incorrect. Fraud in the inducement means that the victim was deceived as to the reasons for entering into the fraudulent transaction; there is no requirement that the misrepresentation have been made in writing, so “c” is incorrect. Similarly, there is no requirement of a fiduciary relationship, so “b” is incorrect.
Which of the following offers of proof are inadmissible under the parol evidence rule when a written contract is intended as the complete agreement of the parties: I. Proof of the existence of a subsequent oral modification of the contract. II. Proof of the existence of a prior oral agreement that contradicts the written contract. a. Neither I nor II. b. II only. c. I only. d. Both I and II.
Choice “b” is correct. The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one intended as the complete agreement). Thus, II is prohibited. However, the parol evidence rule does not prohibit introduction of subsequent agreements; thus, I is not prohibited.
Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures, which are of slightly lesser quality than Ace fixtures, but in all other respects meet White’s needs. Which of the following statements is correct?
a.
White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.
b.
Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.
c.
White will not be able to recover any damages from Ames because the breach was inadvertent.
d.
Ames must install Ace fixtures or White will not be obligated to accept the warehouse.
Choice “a” is correct. Contracts governed by the common law, especially construction contracts, do not allow rescission for minor breaches, but limit the nonbreaching party to recovery of damages.
Choice “c” is incorrect. Contract law generally does not differentiate between intentional and inadvertent breaches; damages are recoverable for both.
Choice “b” is incorrect. First, the facts say that Perfection fixtures were of a lesser quality than Ace fixtures, and even if this were not true, there still would be a breach; the contract called for Ace fixtures and so only the use of Ace fixtures would constitute full compliance with the contract.
Choice “d” is incorrect. Contracts governed by the common law, especially construction contracts follow the doctrine of substantial performance. A party who receives substantially all of the benefit of the bargain is bound to the contract and can seek only damages for any minor breaches.
All of the following are effective methods of ratifying a contract entered into by a minor, except:
a.
Failing to disaffirm the contract within a reasonable time after reaching the age of majority.
b.
Expressly ratifying the contract after reaching the age of majority.
c.
Ratifying the contract before reaching the age of majority.
d.
Impliedly ratifying the contract after reaching the age of majority.
Choice “c” is correct. A minor can disaffirm any contract until a reasonable time after reaching the age of majority. Thus, a “ratification” prior to reaching majority can be revoked and is not effective.
Choice “b” is incorrect. Express ratification after reaching the age of majority is one way to ratify a contract.
Choice “a” is incorrect. Failing to disaffirm a contract within a reasonable time after reaching the age of majority constitutes a ratification.
Choice “d” is incorrect. Impliedly ratifying after reaching the age of majority (e.g., by retaining the benefits of the contract or failing to timely disaffirm) effectively ratifies a minor’s contract.
Which of the following statements correctly applies to a typical statute of limitations?
a.
The statute prohibits the admission into evidence of proof of oral statements about the meaning of a written contract.
b.
The statute provides that only the party against whom enforcement of a contract is sought must have signed the contract.
c.
The statute limits the right of a party to recover damages for misrepresentation unless the false statements were intentionally made.
d.
The statute requires that a legal action for breach of contract be commenced within a certain period of time after the breach occurs.
Choice “d” is correct. A statute of limitations requires that actions to enforce rights under a contract be brought within a certain time after breach has occurred.
Choice “b” is incorrect. The Statute of Frauds, not statute of limitations, is concerned about who has signed a contract.
Choice “c” is incorrect. The right to recover if there was an intentional false statement involves the concept of scienter.
Choice “a” is incorrect. Oral statements offered to prove the meaning of a written contract involves the parol evidence rule.
On February 1, Burns contracted in writing with Nagel to sell Nagel a used car. The contract provided that Burns was to deliver the car on February 15 and Nagel was to pay the $800 purchase price not later than March 15. On February 21, Burns assigned the contract to Ross for $600. Nagel was not notified of the assignment. Which of the following statements is correct?
a.
Ross will not be subject to any contract defenses Nagel could have raised against Burns.
b.
The assignment to Ross is invalid because Nagel was not notified.
c.
By making the assignment, Burns impliedly warranted Nagel would pay the full purchase price.
d.
By making the assignment, Burns impliedly warranted a lack of knowledge of any fact impairing the value of the assignment.
Choice “d” is correct. Essentially, by the assignment, Burns sold the contract right to collect the $800 from Nagel. In such a case, the assignor warrants that he does not know of anything that would impair the value of the assignment; otherwise, people would attempt to assign contracts whenever they knew of a problem.
Choice “c” is incorrect. There is no implied warranty that the promisor will perform.
Choice “b” is incorrect. The obligor need not be given notice to effectively assign a contract right. However, until the obligor receives notice, no liability is incurred by paying the assignor.
Choice “a” is incorrect. An assignee generally is subject to all of the defenses that the promisor would have against the assignor relating to the contract (e.g., that the car was stolen).
Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master’s computer system failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will:
a.
Lose, because Accur’s breach was not material.
b.
Win, because under all circumstances liquidated damage provisions are enforceable.
c.
Win, unless the liquidated damage provision is determined to be a penalty.
d.
Lose, because liquidated damage provisions violate public policy.
Choice “c” is correct. A liquidated damages clause is enforceable if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is a reasonable approximation of damages and not a penalty.
Choice “b” is incorrect. A liquidated damages clause is not enforceable if it constitutes a penalty, if actual damages would be easy to assess at the time the contract was made, or if the liquidated damages amount is not a reasonable approximation of actual damages.
Choice “a” is incorrect. The agreement of the parties made time of the essence under the contract, since Master could not operate without its computer system and this fact was made clear to Accur. Thus, the delay is a material breach.
Choice “d” is incorrect. Liquidated damages provisions do not violate public policy if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is a reasonable approximation of damages and not a penalty.
On September 10, Harris, Inc., a new car dealer, placed a newspaper advertisement stating that Harris would sell 10 cars at its showroom for a special discount only on September 12, 13, and 14. On September 12, King called Harris and expressed an interest in buying one of the advertised cars. King was told that five of the cars had been sold and to come to the showroom as soon as possible. On September 13, Harris made a televised announcement that the sale would end at 10:00 PM that night. King went to Harris' showroom on September 14 and demanded the right to buy a car at the special discount. Harris had sold the 10 cars and refused King's demand. King sued Harris for breach of contract. Harris' best defense to King's suit would be that Harris': a. Television announcement revoked the offer. b. Offer had not been accepted. c. Offer was unenforceable. d. Advertisement was not an offer.
Choice “d” is correct. Advertisements are generally not offers, but invitations to negotiate. An advertisement is an offer only if it is a promise to perform a very specific act conditioned upon acceptance. If Harris’ ad had stated that Harris would sell 10 specifically identified cars for a specified price during the sale, Harris’ advertisement would be an offer. Harris’ actual advertisement is too vague to be an offer.
Choice “c” is incorrect. The advertisement here is too vague to be considered an offer since it does not specify which cars or what the special discount is.
Choice “a” is incorrect. The announcement did not revoke an offer because the original ad was too vague to be considered an offer since it does not specify which cars or what the special discount is. Moreover, generally revocations must be made through the same means as the offer. If the newspaper ad were an offer, a television announcement would not be a sufficient way to revoke it.
Choice “b” is incorrect. The advertisement here is too vague to be considered an offer since it does not specify which cars or what the special discount is. Thus, there was no offer to be accepted or not accepted. Moreover, even if the ad were an offer, because all 10 cars had already been sold by the time King came in to accept, any attempted acceptance was too late; the offer had terminated because all 10 cars were sold.
On April 1, Fine Corp. faxed Moss an offer to purchase Moss’ warehouse for $500,000. The offer stated that it would remain open only until April 4 and that acceptance must be received to be effective. Moss sent an acceptance on April 4 by overnight mail and Fine received it on April 5. Which of the following statements is correct?
a.
A contract was formed when Fine received Moss’ acceptance.
b.
No contract was formed because Fine received Moss’ acceptance after April 4.
c.
No contract was formed because Moss sent the acceptance by an unauthorized method.
d.
A contract was formed when Moss sent the acceptance.
Choice “b” is correct. Generally, under the mailbox rule, acceptance is effective when sent. However, an offeror may opt out of the mailbox rule by stating that the acceptance must be received by a certain date to be effective. Fine’s offer here required receipt by April 4. Moss’ acceptance was received after the April 4th deadline.
Choice “c” is incorrect. The offer did not require any particular method of acceptance, only receipt within a specified time. Thus, any reasonable means of acceptance was authorized.
Choice “d” is incorrect. Since the offeror required that the acceptance be received to be effective, the mailbox rule would not be applicable.
Choice “a” is incorrect. The offer stated that an acceptance had to be received by April 4 and the attempted acceptance here was received on April 5. Thus, it was ineffective because the offer had already terminated on the date attempted acceptance was received.
In which of the following situations does the first promise serve as valid consideration for the second promise?
a.
A police officer’s promise to catch a thief for a victim’s promise to pay a reward.
b.
A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 liquidated debt.
c.
A builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion.
d.
A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt.
Choice “d” is correct. Anything having legally recognized value can constitute consideration. If parties legitimately disagree as to the amount owed under their contract, a promise to compromise, such as the parties are doing here, has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute.
Choice “a” is incorrect. A promise to do something that one is already obligated to do has no legal value and is not valid consideration under the preexisting legal duty rule. A police officer has a preexisting legal duty to catch thieves; therefore, this promise cannot serve as consideration.
Choice “c” is incorrect. A promise to do something one is already obligated to do has no value and is not valid consideration under the preexisting legal duty rule. Here, the builder already owed a duty to complete the contract, and so his second promise to do so is not valid consideration.
Choice “b” is incorrect. If parties legitimately disagree as to the amount owed under their contract, a promise to compromise has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute. However, here the amount owed is liquidated, which means that it is not in dispute. A promise to compromise here has no legal value and cannot serve as consideration since there is no legitimate right to litigate a liquidated claim.
West, an Indiana real estate broker, misrepresented to Zimmer that West was licensed in Kansas under the Kansas statute that regulates real estate brokers and requires all brokers to be licensed. Zimmer signed a contract agreeing to pay West a 5% commission for selling Zimmer’s home in Kansas. West did not sign the contract. West sold Zimmer’s home. If West sued Zimmer for nonpayment of commission, Zimmer would be:
a.
Liable to West for the full commission.
b.
Liable to West only for the value of services rendered.
c.
Not liable to West for any amount because West did not sign the contract.
d.
Not liable to West for any amount because West violated the Kansas licensing requirements.
Choice “d” is correct. The buyer Zimmer is not liable to West, the unlicensed real estate broker, because West violated Kansas licensing requirements. Failure to have a license required to protect the public (as opposed to merely raise revenue) renders the contract void. Real estate broker licenses are required to protect the public.
Choices “b” and “a” are incorrect, because this licensing law was not designed to raise revenue and, therefore, the contract is void and a party cannot be held liable on a void contract.
Choice “c” is incorrect. Under the Statute of Frauds, certain contracts must be signed by the party sought to be bound to be enforceable. The contract here-to provide brokerage services-probably is not within the Statute since it is for services and can be performed within a year. But even if the contract were within the Statute, it still would be enforceable against Zimmer since Zimmer signed it; it is irrelevant that West did not sign.
Carson agreed orally to repair Ives' rare book for $450. Before the work was started, Ives asked Carson to perform additional repairs to the book and agreed to increase the contract price to $650. After Carson completed the work, Ives refused to pay and Carson sued. Ives' defense was based on the Statute of Frauds. What total amount will Carson recover? a. $650 b. $0 c. $450 d. $200
Choice “a” is correct. The contract here is for services (repair of a book) and so is governed by the common law. The common law requires modifications to be supported by consideration on both sides. There is consideration on both sides here since Carson agreed to perform additional repairs and Ives agreed to pay more. The Statute of Frauds is not a problem here since the contract is for services and can be performed within a year (the examiners were trying to trick you by taking the contract over the $500 threshold, but that threshold applies only to contracts for the sale of goods). Thus, the oral contract is enforceable as modified.
In an action for breach of contract, the statute of limitations time period would be computed from the date of the: a. Signing of the contract. b. Commencement of the action. c. Breach of the contract. d. Negotiation of the contract.
Choice “c” is correct. In an action for breach of contract, the statute of limitations time is computed from the date of the breach. Otherwise, in a long-term contract, the statute could run before the breach occurs. Therefore, “a”, “d”, and “b” are incorrect.
Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract? a. Prediction. b. Appraised value. c. Nonexpert opinion. d. Immaterial fact.
Choice “b” is correct. Fraud requires misrepresentation of a material fact. Ordinarily, opinions or statements of value do not constitute misrepresentations of material facts unless made by experts. Appraised value would constitute a misrepresentation of a material fact because it was made by an expert.
Choice “c” is incorrect. Fraud requires misrepresentation of a material fact. Opinions are not facts.
Choice “a” is incorrect. Predictions are not material facts but rather are mere guesses as to what the future may hold. Therefore, they cannot be the basis for fraud.
Choice “d” is incorrect. Immaterial facts cannot be the basis for a fraud defense since they are not very relevant to the contract decision-making process.
If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be: a. Void as a matter of law. b. Void at the election of the buyer. c. Valid as to both parties. d. Voidable at the election of the seller.
Choice “c” is correct. An immaterial unilateral mistake is not a defense to a contract. A material unilateral mistake can be a defense if the nonmistaken party either knew or should have known of the mistake.
Choices “a” and “b” are incorrect. A contract based on a mistake is voidable at the option of the adversely affected party.
Choice “d” is incorrect. A contract based on a material unilateral mistake is voidable at the option of the adversely affected party. Although the mistake here apparently affects the seller, the facts state that it was immaterial and so is not a ground for rescission.
Under the parol evidence rule, oral evidence will be excluded if it relates to:
a.
Failure of a condition precedent.
b.
A contemporaneous oral agreement relating to a term in the contract.
c.
Lack of contractual capacity.
d.
A modification made several days after the contract was executed.
Choice “b” is correct. The parol evidence rule generally bars evidence of prior or contemporaneous oral statements offered to vary the terms of a fully integrated written contract. Oral evidence is permissible when the contract is incomplete, ambiguous, invalid, or subject to a condition precedent, or when modification is made after the original contract is written. A contemporaneous oral agreement will be excluded.
Choice “a” is incorrect. Oral evidence is admissible to prove the failure of a condition precedent since this does not vary the terms of the contract but rather is a collateral issue. The parol evidence rule bars only prior or contemporaneous oral statements that seek to vary the contract’s terms.
Choice “c” is incorrect. The parol evidence rule bars only prior and contemporaneous oral statements that seek to vary the terms of a contract. The lack of contractual capacity is not relevant to the parol evidence rule.
Choice “d” is incorrect. The parol evidence rule bars evidence of prior or contemporaneous statements that contradict a written contract. It does not exclude evidence of subsequent statements.
To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a: a. Rescission. b. Revocation. c. Release. d. Novation.
Choice “a” is correct. A rescission “undoes” a contract and restores the parties to the positions they would have been in if no contract were made.
Choice “d” is incorrect. In a novation, the original parties enter into a new contract that releases at least one of the original parties and substitutes at least one new party. All involved parties must agree.
Choice “c” is incorrect, since a release simply discharges a party. It does not restore the party to their original position.
Choice “b” is incorrect. A revocation refers to the withdrawal of an offer. A contract may not be revoked.
Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye. To what relief is Hodges entitled?
a.
Compensatory damages or specific performance.
b.
Consequential damages or punitive damages.
c.
Specific performance and compensatory damages.
d.
Punitive damages and compensatory damages.
Choice “a” is correct. When a contract for the sale of real property is breached, the nonbreaching party can either recover compensatory damages (damages that compensate for the breach) or obtain specific performance (forced performance).
Choice “d” is incorrect. In contract cases, punitive damages are generally not awarded.
Choice “c” is incorrect. Damages are designed to compensate for nonperformance while specific performance forces performance. These are alternative remedies. A party cannot obtain specific performance and recover compensatory damages.
Choice “b” is incorrect. In contract cases, punitive damages are generally not awarded. Moreover, a party generally is not limited to consequential damages (the collateral damages that result from a breach); the actual damages that result from the breach are also recoverable (compensatory damages).
In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be: a. Legally sufficient. b. Of approximately equal value. c. Fair and reasonable under the circumstances. d. Exchanged simultaneously by the parties.
Choice “a” is correct. To be effective, consideration must be legally sufficient, which means something that the law recognizes as consideration.
Choice “b” is incorrect. The courts do not require contracts to be “fair,” giving each party equal benefit.
Choice “d” is incorrect. There is no requirement that consideration be exchanged simultaneously. For example, in a unilateral contract, the promise is given first and the performance, which is the consideration on the other side, comes later.
Choice “c” is incorrect. The courts will not inquire into the fairness of a bargain.
On June 15, Peters orally offered to sell a used lawn mower to Mason for $125. Peters specified that Mason had until June 20 to accept the offer. On June 16, Peters received an offer to purchase the lawn mower for $150 from Bronson, Mason’s neighbor. Peters accepted Bronson’s offer. On June 17, Mason saw Bronson using the lawn mower and was told the mower had been sold to Bronson. Mason immediately wrote to Peters to accept the June 15 offer. Which of the following statements is correct?
a.
Mason’s acceptance would be effective when received by Peters.
b.
Mason’s acceptance would be effective when mailed.
c.
Peters’ offer had been revoked and Mason’s acceptance was ineffective.
d.
Peters was obligated to keep the June 15 offer open until June 20.
Choice “c” is correct. Peters’ offer was already revoked. To be effective, an acceptance must be received before the offer is terminated. An offer may be terminated by the offeror at any time unless the offeree gave consideration to keep the offer open. Mason gave no consideration to keep the offer here open; thus Peters could revoke. An offer is considered to be revoked if the offeree obtains information from a reliable source that the subject matter of the offer has been sold. Here, Mason received the information of the sale before he attempted to accept. Therefore, his attempted acceptance came too late and was ineffective.
Rail, who was 16 years old, purchased an $800 computer from Elco Electronics. Rail and Elco are located in a state where the age of majority is 18. On several occasions Rail returned the computer to Elco for repairs. Rail was very unhappy with the computer. Two days after reaching the age of 18, Rail was still frustrated with the computer’s reliability, and returned it to Elco, demanding an $800 refund. Elco refused, claiming that Rail no longer had a right to disaffirm the contract. Elco’s refusal is:
a.
Correct, because Rail could have transferred good title to a good faith purchaser for value.
b.
Incorrect, because Rail could disaffirm the contract at any time.
c.
Incorrect, because Rail disaffirmed the contract within a reasonable period of time after reaching the age of 18.
d.
Correct, because Rail’s multiple requests for service acted as a ratification of the contract.
Choice “c” is correct. A minor may disaffirm a contract within a reasonable time after reaching majority, and two days is certainly a reasonable time.
Choice “d” is incorrect. A minor cannot ratify a contract until reaching majority. Thus, Rail’s requests for repairs before reaching majority are irrelevant.
Choice “a” is incorrect. A minor has a right to disaffirm contracts despite the minor’s power to transfer good title to a good faith purchaser.
Choice “b” is incorrect. A minor must disaffirm a contract within a reasonable time after reaching majority.
Which of the following statements is true with regard to the Statute of Frauds?
a.
The written contract must be signed by all parties.
b.
All contracts involving consideration of more than $500 must be in writing.
c.
The Statute of Frauds applies to contracts that can be fully performed within one year from the date they are made.
d.
The contract terms may be stated in more than one document.
Choice “d” is correct. There is no requirement that the terms of a written contract be contained in a single writing.
Choice “b” is incorrect. The $500 rule applies only to contracts for the sale of goods under the UCC. (Note: Be careful when selecting answers that contain absolute terms such as all, always, only, etc.)
Choice “a” is incorrect. The Statute of Frauds does not require the contract to be in writing—only that some writing reflects the material terms of the contract and that that writing is signed by the party sought to be held liable, not necessarily both parties. (Again, be careful when selecting answers that contain absolute terms such as all, always, only, etc.)
Choice “c” is incorrect. The Statute of Frauds does not apply to contracts that can be fully performed within one year.
Maco, Inc. and Kent contracted for Kent to provide Maco certain consulting services at an hourly rate of $20. Kent’s normal hourly rate was $90 per hour, the fair market value of the services. Kent agreed to the $20 rate because Kent was having serious financial problems. At the time the agreement was negotiated, Maco was aware of Kent’s financial condition and refused to pay more than $20 per hour for Kent’s services. Kent has now sued to rescind the contract with Maco, claiming duress by Maco during the negotiations. Under the circumstances, Kent will:
a.
Lose, because Maco cannot prove that Kent, at the time, had no other offers to provide consulting services.
b.
Win, because Maco refused to pay the fair market value of Kent’s services.
c.
Lose, because Maco’s actions did not constitute duress.
d.
Win, because Maco was aware of Kent’s serious financial problems.
Choice “c” is correct. Duress occurs when a person overcomes the will of another through wrongful force or threats of imminent force. Economic duress generally is not recognized as a defense to contract, and even where it is, it is usually required that the party taking advantage of the other party’s poor financial condition must have caused the poor condition.
Choice “b” is incorrect. The parties to a contract are free to drive the best bargain they can. It is not a defense that the price agreed to was unfair.
Choice “d” is incorrect. A party is free to drive the best bargain he can in contracting. The fact that the other party is in a poor financial condition does not change this rule.
Choice “a” is incorrect. Kent contracted to provide services for $20 per hour and the state of his other offers for work is unrelated to the contract here.
Miller negotiated the sale of Miller’s liquor store to Jackson. Jackson asked to see the prior year’s financial statements. Using the store’s checkbook, Miller prepared a balance sheet and profit and loss statement as well as he could. Miller told Jackson to have an accountant examine Miller’s records because Miller was not an accountant. Jackson failed to do so and purchased the store in reliance on Miller’s financial statements. Jackson later learned that the financial statements included several errors that resulted in a material overstatement of assets and net income. Miller was not aware that the errors existed. Jackson sued Miller, claiming Miller misrepresented the store’s financial condition and that Jackson relied on the financial statements in making the decision to acquire the store. Which of the following statements is correct?
a.
Jackson would be entitled to rescind the purchase even if the errors in the financial statements were not material.
b.
Jackson will not prevail because Jackson’s reliance on the financial statements was not reasonable.
c.
Money damages is the only remedy available to Jackson if, in fact, Miller has committed a misrepresentation.
d.
Jackson will prevail if the errors in the financial statements were material.
Choice “b” is correct. Since Miller did not intentionally misrepresent the store’s financial condition (i.e., the misrepresentation was unintentional), the misrepresentation is a defense only if reliance on it was reasonable. It was not reasonable to rely here since Miller told Jackson that Miller did not know what he was doing and that Jackson should hire an accountant.
Choice “d” is incorrect. Even if the misrepresentations were material, because Miller’s misrepresentation was innocent, it is actionable only if Jackson reasonably relied on the misrepresentation. Jackson did not reasonably rely on the misrepresentation, because Miller had told him that Miller was not an accountant and that Jackson should have Miller’s work checked.
Choice “c” is incorrect. For misrepresentation, the injured party has a choice of voiding the contract (and getting the purchase price back) or damages.
Choice “a” is incorrect, since Jackson would have to prove that the errors were “material” in order to rescind the agreement.
Ferco, Inc. claims to be a creditor beneficiary of a contract between Bell and Allied Industries, Inc. Allied is indebted to Ferco. The contract between Bell and Allied provides that Bell is to purchase certain goods from Allied and pay the purchase price directly to Ferco until Allied’s obligation is satisfied. Without justification, Bell failed to pay Ferco and Ferco sued Bell. Ferco will:
a.
Prevail, provided Ferco was aware of the contract between Bell and Allied at the time the contract was entered into.
b.
Prevail, because Ferco was an intended beneficiary of the contract between Allied and Bell.
c.
Not prevail, because Ferco did not give any consideration to Bell.
d.
Not prevail, because Ferco lacked privity of contract with either Bell or Allied.
Choice “b” is correct. Intended beneficiaries (persons who were intended to be benefited by a contract other than the bargaining parties) can enforce the contract as soon as their rights vest. Here, Allied clearly intended Ferco to receive benefits of the contract and Ferco’s rights vested upon filing suit for Bell’s breach, if not before.
Choice “d” is incorrect. Intended beneficiaries are in privity (one of the parties to a contract) since they are actually named in the contract.
Choice “c” is incorrect. There is no requirement that an intended beneficiary give consideration; it is sufficient that consideration flows between the other parties.
Choice “a” is incorrect. An intended beneficiary need not know of the contract when it is made; his or her rights may vest in the contract later by relying on it, assenting to it, or bringing suit on it.
Rogers and Lennon entered into a written computer consulting agreement that required Lennon to provide certain weekly reports to Rogers. The agreement also stated that Lennon would provide the computer equipment necessary to perform the services, and that Rogers’ computer would not be used. As the parties were executing the agreement, they orally agreed that Lennon could use Rogers’ computer. After executing the agreement, Rogers and Lennon orally agreed that Lennon would report on a monthly, rather than weekly, basis. The parties now disagree on Lennon’s right to use Rogers’ computer and how often Lennon must report to Rogers. In the event of a lawsuit between the parties, the parol evidence rule will:
a.
Not apply to any of the parties’ agreements because the consulting agreement did not have to be in writing.
b.
Not prevent Lennon from proving the parties’ oral agreement that Lennon could use Rogers’ computer.
c.
Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.
d.
Not apply to the parties’ agreement to allow Lennon to use Rogers’ computer because it was contemporaneous with the written agreement.
Choice “c” is correct. The parol evidence rule prohibits introduction of prior or contemporaneous oral statements that seek to vary the terms of a written contract. It does not prohibit introduction of subsequent oral statements that modify the contract.
Choice “a” is incorrect. The parol evidence rule applies whenever there is a written contract, not only to contracts that must be in writing because of the Statute of Frauds.
Choice “b” is incorrect. The parol evidence rule prohibits introduction of prior or contemporaneous oral statements that seek to vary the terms of a written contract. The agreement that Lennon could use Rogers’ computer is different from what the contract provides and was made contemporaneously with the written contract. Thus, the parol evidence rule will bar its introduction.
Choice “d” is incorrect. The parol evidence rule bars contemporaneous oral statements that seek to vary the terms of a written contract.
Wilcox Co. contracted with Ace Painters, Inc. for Ace to paint Wilcox’s warehouse. Ace, without advising Wilcox, assigned the contract to Pure Painting Corp. Pure failed to paint Wilcox’s warehouse in accordance with the contract specifications. The contract between Ace and Wilcox was silent with regard to a party’s right to assign it. Which of the following statements is correct?
a.
Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure.
b.
Ace’s duty to paint Wilcox’s warehouse was nondelegable.
c.
Ace would not be liable to Wilcox if Ace had notified Wilcox of the assignment.
d.
Ace’s delegation of the duty to paint Wilcox’s warehouse was a breach of the contract.
Choice “a” is correct. In the absence of an agreement to the contrary, the assignment of a contract does not relieve the assignor of his/her obligations under the contract. Here, Ace remains liable to Wilcox even though Ace assigned (delegated) its contractual responsibility to Pure.
Choice “c” is incorrect. Notice alone isn’t enough to remove liability. Ace could avoid liability only by an agreement among all of the parties substituting Pure for Ace and releasing Ace. Such an agreement is known as a novation.
Choice “b” is incorrect. Only duties that involve specialized personal skills (i.e., rely heavily on the personal attributes of the person performing) cannot be delegated, and a contract to paint a warehouse does not rely on specialized skills, as would a contract to paint a portrait.
Choice “d” is incorrect. The duty to paint a building does not involve highly specialized skills and, therefore, is delegable. Since Ace’s duty to paint Wilcox’s warehouse could be delegated, the act of delegating was not a breach of contract.
Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost's rights under the contract are: a. Assignable only with Egan's consent. b. Nonassignable because they are personal to Yost. c. Generally assignable. d. Nonassignable as a matter of law.
Choice “c” is correct. Most contracts are assignable unless they involve personal services or the assignment would vary the risks or burdens of the contract. Normally a real estate contract is assignable.
Choices “a”, “b”, and “d” are incorrect. Generally, unless a contract involves specialized personal services or otherwise relies heavily on the personal attributes of the parties, it is assignable without consent. A contract to purchase real estate does not involve personal services, therefore no consent is needed.
Kram sent Fargo, a real estate broker, a signed offer to sell a specified parcel of land to Fargo for $250,000. Kram, an engineer, had inherited the land. On the same day that Kram’s letter was received, Fargo telephoned Kram and accepted the offer. Which of the following statements is correct under the common law statute of frauds?
a.
A contract was formed but would be enforceable only against Kram.
b.
A contract was formed and would be enforceable against both Kram and Fargo.
c.
No contract could be formed because Fargo’s acceptance was oral.
d.
No contract could be formed because Kram’s letter was signed only by Kram.
Choice “a” is correct. A contract was formed between Kram and Fargo because Kram made a valid offer and Fargo made a valid acceptance of that offer. Under the Statute of Frauds, contracts involving interests in real property are enforceable only if their material terms are set forth in a writing signed by the party sought to be held liable. The original signed offer from Kram would be a sufficient writing to satisfy the Statute of Frauds if Fargo is seeking to enforce the contract. Since Fargo accepted by telephone, there is no writing signed by Fargo. Thus, the contract could be enforced against Kram, but could not be enforced against Fargo due to the lack of a signed writing by Fargo.
Choices “c” and “d” are incorrect because they state that no contract was formed. There was a contract. The Statute of Frauds does not make oral contracts invalid, it only makes them unenforceable.
Choice “b” is incorrect because the contract could not be enforced against Fargo. A real estate contract is within the Statute of Frauds, and a contract within the Statute of Frauds generally is enforceable against a party only if that party signed a written memorandum containing the material terms of the contract.
On May 25, Fresno sold Bronson, a minor, a used computer. On June 1, Bronson reached the age of majority. On June 10, Fresno wanted to rescind the sale. Fresno offered to return Bronson’s money and demanded that Bronson return the computer. Bronson refused, claiming that a binding contract existed. Bronson’s refusal is:
a.
Justified, because Bronson and Fresno are bound by the contract as of the date Bronson reached the age of majority.
b.
Justified, because Fresno must perform under the contract regardless of Bronson’s minority.
c.
Not justified, because Fresno does not have to perform under the contract if Bronson has a right to disaffirm the contract.
d.
Not justified, because Fresno is not bound by the contract unless Bronson specifically ratifies the contract after reaching the age of majority.
Choice “b” is correct. In this problem, Fresno was an adult and Bronson was a minor at the time of contracting. The common law gives minors the right to disaffirm a contract anytime while a minor or within a reasonable time after becoming an adult. Only the minor has the right to disaffirm. The adult may not disaffirm the contract.
Choice “d” is incorrect. Fresno, the adult, is bound by the contract unless Bronson disaffirms. Bronson does not have to ratify.
Choice “c” is incorrect. Fresno, the adult, is bound by the contract unless Bronson disaffirms. Fresno does not have the right to get out of the contract. Only Bronson, the minor, does.
Choice “a” is incorrect. Fresno was bound by the contract on the date it was made. Bronson becomes bound upon ratifying or failing to disaffirm the contract within a reasonable time after reaching the age of majority.
West, Inc. and Barton entered into a contract. After receiving valuable consideration from Egan, West assigned its rights under the Barton contract to Egan. In which of the following circumstances would West not be liable to Egan? a. West released Barton. b. Egan released Barton. c. Barton paid West. d. West breached the contract.
Choice “b” is correct. In an assignment for consideration, the assignor and obligor are both liable to the assignee. However, if the assignee releases the obligor, it will serve to release the assignor as well. Thus, if Egan (the assignee) releases Barton (the obligor), West (the assignor) will be released as well.
Choice “a” is incorrect. In an assignment for consideration, the assignor and obligor are both liable to the assignee. Thus, if West (the assignor) released Barton (the obligor), West would remain liable to Egan (the assignee) because Egan paid consideration to be assigned West’s rights.
Choice “d” is incorrect. In an assignment for consideration, the assignor owes a contractual duty to the assignee. If the assignor breaches his contract with the obligor so that the obligor is discharged from performing for the assignee, the assignee can hold the assignor liable.
Choice “c” is incorrect. In an assignment for consideration, the assignor and the obligor are both liable to the assignee. Thus, if Barton (the obligor) pays West (the assignor) it does nothing to extinguish the obligation owed to Egan (the assignee). Therefore, it would not constitute a release of West (the assignor).
Which of the following types of mistake will generally make a contract unenforceable and allow it to be rescinded? a. A mutual mistake of value. b. A unilateral mistake of fact. c. A mutual mistake of fact. d. A unilateral mistake of value.
Choice “c” is correct. A mutual mistake of a material fact will make a contract voidable at the option of the adversely affected party.
Choice “b” is incorrect. Generally, a unilateral mistake of fact does not make the contract voidable. The mistaken party can avoid a contract on the basis of a unilateral mistake only if the other party either knew or should have known of the mistake.
Choice “d” is incorrect. Only mistakes as to material facts can make a contract unenforceable. Value generally is not a fact but, rather, is a matter of opinion.
Choice “a” is incorrect. Only mistakes as to material facts can make a contract unenforceable. Value generally is not a fact but, rather, is a matter of opinion.
Which of the following contract rights can generally be assigned?
a.
The right of an insured to coverage under a fire insurance policy.
b.
A right whose assignment is prohibited by statute.
c.
The right to receive personal services.
d.
The right to receive a sum of money.
Choice “d” is correct. Generally, one can assign rights under a contract with the exception of personal services or when the assignment increases the obligor’s risk. The right to receive money is a very common right that is assignable.
Choice “c” is incorrect. Generally, the right to receive personal services is not assignable.
Choice “a” is incorrect. Generally one cannot assign a right if the assignment will vary the obligor’s risk. Insurance policies are contracts involving the assessment of risk. Therefore, coverage rights under these contracts are not assignable.
Choice “b” is incorrect. If a statute prohibits assignment of a particular right then, obviously, the right is not assignable by operation of law.
Which of the following promises is supported by legally sufficient consideration and will be enforceable?
a.
A promise to pay the police $250 to catch a thief.
b.
A person’s promise to pay a real estate agent $1,000 in return for the real estate agent’s earlier act of not charging commission for selling the person’s house.
c.
A parent’s promise to pay one child $500 because that child is not as wealthy as the child’s sibling.
d.
A promise to pay a minor $500 to paint a garage.
Choice “d” is correct. To constitute consideration, there must be a bargained for exchange of something of value. A detriment to the promisee or a benefit to the promisor constitutes value. A promise to pay a minor $500 to paint a garage constitutes a detriment to the promisee; the promisee is not otherwise bound to pay the minor $500 to paint the garage, and the minor’s painting the garage constitutes valid consideration to support the promise to pay $500.
Choice “b” is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promisor constitutes value. Past acts generally do not constitute valid consideration because the acts were not bargained for. Thus, a promise to pay $1,000 in return for a prior performed act (not charging for services) is not supported by consideration.
Choice “c” is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promisor constitutes value. Here, there is no bargained for exchange. The promise is gratuitous and not supported by consideration.
Choice “a” is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promisor constitutes value. A promise to perform a pre-existing duty does not constitute valid consideration. Because a police officer already owes a crime victim a duty to catch the perpetrator, the police officer’s promise to perform his duty does not constitute valid consideration.
For which of the following contracts will a court generally grant the remedy of specific performance?
a.
A contract for the sale of fungible goods.
b.
A contract of employment.
c.
A contract for the sale of stock that is traded on a national stock exchange.
d.
A contract for the sale of a patent.
Choice “d” is correct. Specific performance is a court order to perform under the terms of a contract. Generally, it is available only in contracts for unique or rare property. A patent, by definition, is unique. Therefore, specific performance would be available to enforce a contract for the sale of a patent.
Choice “b” is incorrect. Specific performance is not available to enforce a contract of employment, at least not in an action by the employer, because it would be tantamount to an order of involuntary servitude, which is prohibited by the 14th Amendment to the United States Constitution.
Choice “a” is incorrect. Specific performance is available only to enforce a contract involving unique or rare property. It is not available to enforce a contract for fungible goods, as such goods are easily replaced.
Choice “c” is incorrect. Specific performance is available only to enforce a contract involving unique or rare property. It is not available to enforce a contract for fungible items. Stock traded on a national securities exchange is fungible.
Camp orally guaranteed payment of a loan Camp’s cousin Wilcox had obtained from Camp’s friend Main. The loan was to be repaid in 10 monthly payments. After making six payments, Wilcox defaulted on the loan and Main demanded that Camp honor the guaranty. Regarding Camp’s liability to Main, Camp is:
a.
Liable under the oral guaranty because Camp benefitted by maintaining a personal relationship with Main.
b.
Not liable under the oral guaranty because Camp’s guaranty must be in writing to be enforceable.
c.
Liable under the oral guaranty because the loan would be paid within one year.
d.
Not liable under the oral guaranty because of failure of consideration.
Explanation
Choice “b” is correct. A promise to pay the debt of another must be evidenced by some type of writing to be enforceable. Camp’s oral promise to pay the debt of Wilcox is not enforceable without some type of writing.
Choices “c” and “a” are incorrect because they state Camp is liable. Camp is not liable due to the lack of a writing.
Choice “d” is incorrect. Consideration is present. Each of the parties promised to do something of legal value. Main promised to loan Wilcox money. Wilcox promised to repay the loan. Camp promised to pay if Wilcox defaulted. Each of the promises serves to make the others enforceable.
On December 1, Gem orally contracted with Mason for Mason to manage Gem’s restaurant for one year starting the following January 1. They agreed that Gem would pay Mason $40,000 and that Mason would be allowed to continue to work for Gem if “everything worked out.” On June 1, Mason quit to take a better paying job, alleging that the contract violated the statute of frauds. What will be the outcome of a suit by Gem for breach of contract?
a.
Gem will lose because the contract required payment of more than $500.
b.
Gem will win because the contract was for services not goods.
c.
Gem will lose because the contract could not be performed within one year.
d.
Gem will win because the contract was executory.
Choice “c” is correct. As a general rule, under the statute of frauds, a contract that cannot be performed within one year from the time of its making is unenforceable absent proof of its material terms in a writing signed by the party being sued. Here, the contract by its terms could not be performed within a year from the time it was made and Gem cannot prove the material terms of the contract through a writing signed by Mason. Therefore, Gem would lose its breach of contract action.
