R5 M2 - Contracts: Part II Flashcards
(15 cards)
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.
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.
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. Win, because Maco refused to pay the fair market value of Kent's services. B. Win, because Maco was aware of Kent's serious financial problems. C. Lose, because Maco's actions did not constitute duress. D. Lose, because Maco cannot prove that Kent, at the time, had no other offers to provide consulting services.
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 “A” 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 “B” 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 “D” 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.
Which of the following types of mistake will generally make a contract unenforceable and allow it to be rescinded?
A. A unilateral mistake of fact. B. A mutual mistake of fact. C. A unilateral mistake of value. D. A mutual mistake of value.
Choice “B” is correct. A mutual mistake of a material fact will make a contract voidable at the option of the adversely affected party.
Choice “A” 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 “C” 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 “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.
Paco Corp., a building contractor, offered to sell Preston several pieces of used construction equipment. Preston was engaged in the business of buying and selling equipment. Paco’s written offer had been prepared by a secretary who typed the total price as $10,900, rather than $109,000, which was the approximate fair market value of the equipment. Preston, on receipt of the offer, immediately accepted it. Paco learned of the error in the offer and refused to deliver the equipment to Preston unless Preston agreed to pay $109,000. Preston has sued Paco for breach of contract. Which of the following statements is correct?
A. Paco will not be liable because there has been a mutual mistake of fact. B. Paco will be able to rescind the contract because Preston should have known that the price was erroneous. C. Preston will prevail because Paco is a merchant. D. The contract between Paco and Preston is void because the price set forth in the offer is substantially less than the equipment's fair market value.
Choice “B” is correct. A contract can be rescinded for unilateral mistake if the nonmistaken party either knew or should have known of the mistake. Since Preston was in the business of buying and selling equipment, he should have known that the price here was too low.
Choice “A” is incorrect. The mistake here was unilateral, only Paco was mistaken as to the price it intended. A mutual mistake requires that both parties be mistaken. While it is true that Preston should have known of the mistake, this does not make Preston mistaken.
Choice “C” is incorrect. Although Paco is a merchant, merchant status is irrelevant to the result here. The rule is that a contract may be rescinded for a unilateral mistake where the nonmistaken party either knew or should have known of the mistake. It is clear that Preston should have known of the mistake here, and thus Preston will not prevail.
Choice “D” is incorrect. The courts will not assess the adequacy of consideration and parties are free to bargain as they desire. A low price will not make a contract void.
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. Not justified, because Fresno is not bound by the contract unless Bronson specifically ratifies the contract after reaching the age of majority. B. Not justified, because Fresno does not have to perform under the contract if Bronson has a right to disaffirm the contract. C. Justified, because Bronson and Fresno are bound by the contract as of the date Bronson reached the age of majority. D. Justified, because Fresno must perform under the contract regardless of Bronson's minority.
Choice “D” 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 “A” is incorrect. Fresno, the adult, is bound by the contract unless Bronson disaffirms. Bronson does not have to ratify.
Choice “B” 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 “C” 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.
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. Material breach of the contract. B. Delay in performance. C. Tender. D. Assignment of rights.
Choice “A” is correct. A material breach generally will discharge the nonbreaching party.
Choice “B” is not as good an answer as “A”. 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 “C” 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 “D” is incorrect. Generally, contracts are assignable, and an assignment of rights will not discharge the other party from performing.
What type of conduct generally will make a contract voidable?
A. Fraud in the execution. B. Fraud in the inducement. C. Physical coercion. D. Contracting with a person under guardianship.
Explanation
Choice “B” is correct. If a person is defrauded into entering into a contract because its terms or the surrounding circumstances are not as represented (that is, fraud in the inducement), the contract is merely voidable.
Choice “A” is incorrect. Fraud in the execution (that is, the party did not know that he was signing a contract) renders a contract void.
Choice “C” is incorrect. Physical coercion (or the threat of physical coercion) is a type of duress that renders a contract void rather than voidable.
Choice “D” is incorrect. Entering into a contract with a person who is without capacity and has a guardian appointed (that is, after a court has declared the person incompetent) renders the contract void.
With regard to an agreement for the sale of real estate, the Statute of Frauds:
A. Does not require that the agreement be signed by all parties. B. Does not apply if the value of the real estate is less than $500. C. Requires that the entire agreement be in a single writing. D. Requires that the purchase price be fair and adequate in relation to the value of the real estate.
Choice “A” is correct. The Statute of Frauds does not actually require an agreement to be signed by any party; instead, it requires written proof of the material terms of the agreement to be evidenced by a writing signed by the party being sued.
Choice “B” is incorrect. The $500 threshold concerns sale of goods and not real estate.
Choice “C” is incorrect. There is no such rule. The contract could be made up of a series of writings and the Statute of Frauds can be satisfied through a series of writings signed by the party against whom enforcement is sought.
Choice “D” is incorrect. There is no such rule. The Statute of Frauds is concerned with whether certain contracts are evidenced by a writing (or writings) signed by the party to be held liable under the contract and not with the fairness and adequacy of the price.
The statute of limitations on Dart’s fraud claim will begin to run when Dart reasonably could have discovered the fraud (1965). **The limitations period on most contracts claims generally varies from four to six years. ** Here, Dart waited about 26 years before bringing his claim, and the statute of limitations surely would have expired before he filed.
A CPA sued a former client for nonpayment of the final bill. Although happy with the CPA’s performance of services, the client claimed that the CPA is not entitled to the final bill payment because the contract between the client and the CPA failed to meet the Statute of Frauds. The client argues that the contract allowed up to 15 months for the CPA to complete the work, the contract price was well over $5,000, and although the client sent signed checks to the CPA, the client did not sign the contract. Which of the following statements about this situation is correct?
A.
The Statute of Frauds does not apply, allowing enforcement of the contract terms.
B.
The Statute of Frauds does not apply, preventing enforcement of the contract terms.
C.
The Statute of Frauds does apply, and the requirements are not satisfied, thereby preventing enforcement of the contract terms.
D.
The Statute of Frauds does apply, but the requirements are satisfied by the client’s signing of the checks, allowing enforcement of the contract terms.
Choice “A” is correct. Under the Statute of Frauds, certain contracts are unenforceable unless the party against whom enforcement is sought has signed a writing containing the material terms of the contract. There is no such writing here, but the contract is not one within the Statute of Frauds. Contracts that by their terms cannot be performed within one year from the making of the contract are within the statute, and so are contracts for the sale of goods for $500 or more. Here, while the contract allowed the CPA up to 15 months to complete performance, nothing indicates that performance could not be completed within a year. Therefore, that branch of the Statute does not apply. And although the contract price was $5,000, this is a contract for services and so the $500 threshold does not apply, either.
Choice “B” is incorrect. When the Statute of Frauds does not apply, the contract is enforceable even absent a writing reflecting its terms. This choice has the rule backwards.
Choice “C” is incorrect. Although it is true that there is no writing here that would satisfy the Statute of Frauds, as explained above, the contract here is not within the Statute, and so the lack of a sufficient writing is irrelevant.
Choice “D” is incorrect. This incorrectly indicates the Statute of Frauds applies, and even if that were true, the checks would not be a sufficient writing because nothing indicates they included the material terms of the contract.
Kelly owed Connor $500. Connor agreed to accept Kelly’s microwave oven instead of the money. Kelly immediately delivered the oven to Connor. Which of the following terms correctly describes this agreement?
A. Mutual rescission. B. Accord and satisfaction. C. Novation. D. Material alteration.
Choice “B” is correct. An accord is an agreement to substitute one contract for another (the agreement to accept the microwave instead of the money), and satisfaction is the execution of the accord (here, the delivery of the microwave). Accord and satisfaction discharge the original duty.
Choice “A” is incorrect. In mutual rescission, the parties agree to release each other from a contract. Their mutual agreement to do so is supported by consideration since each party is giving up contract rights.
Choice “C” is incorrect. A novation is an agreement to substitute a third party for one of the parties to a contract and to release the party who was substituted out.
Choice “D” is incorrect. A material alteration changes an existing term, usually by one party. Here, we had an agreement between parties.
Which of the following statements is correct regarding the parol evidence rule?
A. It applies only in cases involving an oral contract. B. It applies only to subsequent written modifications to a written contract. C. It applies to subsequent oral agreements that contradict the terms of a final written agreement. D. It applies to prior or contemporaneous oral agreements that contradict the terms of final written agreements.
Choice “D” is correct. The parol evidence rule prohibits a party in a lawsuit involving a fully integrated written contract (that is, a written contract that appears to be intended to reflect the entire agreement between the parties) from introducing at trial evidence of prior or contemporaneous oral agreements that contradict the terms of final written agreements.
Choice “A” is incorrect. It is just the opposite; the parol evidence rule applies only to fully integrated written contracts.
Choice “B” is incorrect. The parol evidence rule does not prohibit introduction of subsequent written modifications; such modification is allowed under the rule.
Choice “C” is incorrect. The parol evidence rule does not prohibit introduction of subsequent oral modifications; whether such modifications are effective turns largely on whether the Statute of Frauds applies.
Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne’s books at 80¢ per book. Later, Dunne requested, in good faith, that the price be reduced to 70¢ per book. Cook agreed orally to reduce the price to 70¢. Under the circumstances, the oral agreement is:
A. Enforceable, but proof of it is inadmissible into evidence. B. Enforceable, and proof of it is admissible into evidence. C. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence. D. Unenforceable, due to the Statute of Frauds, and proof of it is inadmissible into evidence.
Choice “C” is correct. Since this contract is for services (rebinding books) the agreement is governed by the common law of contracts. Under the common law of contracts a contract modification is treated like a separate contract and requires consideration. Nevertheless, proof of the modification would be admissible into evidence. The parol evidence rule prohibits introduction of prior or contemporaneous oral statements and prior written statements to vary the terms of a fully integrated written contract (i.e., one purporting to reflect the whole agreement). It does not prohibit introduction of evidence of subsequent agreements, such as the modification here.
Choices “A” and “B” are incorrect. The oral agreement is unenforceable because a contract to rebind books is a service contract, which is governed by the common law. At common law, modification of a contract must be supported by consideration, and no consideration was given for the modification here. On the other hand, proof of the oral agreement attempting to modify the contract would be admissible under the parol evidence rule because that rule does not bar introduction of evidence that a contract was modified after it was made.
Choice “D” is incorrect. The Statute of Frauds makes service contracts unenforceable unless they are evidenced by a writing signed by the party to be charged if the contract cannot be performed within a year. The contract here does not indicate that it cannot be performed within a year. Moreover, proof of the oral modification would be admissible into evidence because the parol evidence rule does not bar admission of evidence that a written contract was subsequently modified.
