Chapter 11 1 Chief justice The United States Peters Business partner ship sole

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CHAPTER ELEVEN. CONTRACTS

LEARNING OBJECTIVES

• To understand the importance of contracts in everyday transactions

• To understand and identify the elements of a valid contract

• To understand and identify key statutes that deal with contractual obligations

• To understand various types of business relationships

CHAPTER SUMMARY

Contracts are an integral aspect of everyone’s lives. This chapter begins by emphasizing

that point and discussing the critical goals of stability and certainty. It continues by

distinguishing void, voidable, and valid contracts and by explicating the required elements of a

valid contract such as parties, mutual assent (offer and acceptance), and consideration. Possible

defenses for breach of contract are presented as well as possible remedies. Because contracts

frequently are ambiguous, some of the rules of construction commonly employed by courts to

interpret the documents are included.

I. Introduction

II. Contractual Terms of Art

III. Formation of Contracts

A. Parties

B. Mutual Assent

C. Consideration

IV. Breach of Contract

A. Defenses

B. Remedies

A. Sole Proprietorships

B. Partnerships

C. Limited Liability Companies

D. Corporations

TERMS/CONCEPTS/PEOPLE

Agreement Assent

Uniform Commercial Code (UCC) Valid contract

Void Voidable

Unenforceable contract Offer

Offeror Offeree

Acceptance Solicitation of offer

Termination of offer Assignor

Duress Fraud

Undue influence Innocent misrepresentation

Mistake Consideration

Capacity Statute of Frauds

Parol evidence rule Assignment

Promissory estoppel Warranty

CHAPTER TEST QUESTIONS

Multiple Choice Questions

1. 1. Following throat surgery, Julie Andrews lost her five-octave singing voice. Because of

her illness, she was able to withdraw from her singing contracts without penalty but not her

acting or directing contracts. This defense of breach of contract is known as:

A. Refraction;

B. Repudiation;

C. Recapitulation;

D. Renascence;

E. Redaction.

2. Which of the following is not correct about the Uniform Commercial Code?

A. The Code primarily governs real estate transactions;

B. The Code provisions are originally drafted by the National Conference of

Commissioners on Uniform State Laws but may be modified by state legislatures as they

consider the provisions;

C. That the average consumer may obtain protection under the Code because of the

warranty provisions;

D. That the Code is silent on rememdies for breaches of contracts covered therein;

E. None of the above.

3. Which of the following is not correctly matched?

A. Punitive damages are designed to punish malicious wrongdoers;

B. Compensatory damages are designed to put the aggrieved party in the economic

position that she would have been in had the contract been completed;

C. Specific performance is an equitable remedy that is particularly appropriate when the

subject of the contract is unique;

D. Promissory estoppels is an appropriate remedy when the promisor has substantially

changed positions in reliance on the gratuitous promise of the promisor;

E. None of the above.

4. The Black Eyed Peas have agreed to appear at your university for the sum of $5,000,000; however, a Dallas

promoter offers $100,000,000 for a performance on the same night. When the band accepts the Dallas offer, the

university sponsor files for breach of contract. Which legal remedies would be appropriate?

A. Restitution;

B. Specific performance to force The Black Eyed Peas to appear on your campus;

C. Prohibition;

D. Injunction to prevent the band from performing that evening in any location;

E. All of the above.

5. George recently found a painting in his grandmother’s attic. Being untrained about art, he had

the piece appraised by the renowned art auction house, Sotheby’s of London, which verified it as

a lost Monet. George agrees to sell it to you for $30,000,000. It now develops that the painting is

a forgery. The contract is voidable because of:

A. Duress;

B. Innocent misrepresentation;

C. Fraud;

D. Undue influence;

E. None of the above.

6. Peter is a renowned artist who has been commissioned to produce a portrait of the Chief

Justice of the United States. Peter’s business is a:

A. Partnership;

B. Sole proprietorship;

C. Corporation;

D. Subschapter S corporation;

E. None of the above.

7. Which of the following is a requirement for a valid contract?

A. Offer and acceptance;

B. Consideration;

C. Capacity of parties;

D. Does not contravene public policy;

E. All of the above.

8. Consideration for contracts:

A. Must be cast in monetary terms for a valid contract;

B. Can be a mutual exchange of promises;

C. Can be an exchange of detriments;

D. A and C;

E. B and C.

9. Ruth cared for her husband during his illness (Alzheimer’s) and was treated for depression

herself by a psychiatrist. During all of this, her most trusted financial advisor was her accountant,

Dewey Cheatum. Three months after her husband’s death, Ruth conveyed property valued at

$500,000 to Dewey for the sum of $10. Under what theory would Ruth seek to cancel the

property transfer?

A. Misrepresentation;

B. Duress;

C. Fraud;

D. Undue influence;

E. Misunderstanding.

10. Bubba’s Motors advertises 2011 Jaguars for the sum of $100.00 in the Daily

Disappointment, the local newspaper. This advertisement is:

A. A contract to sell you the vehicle at that price;

B. A formal offer;

C. Merely a solicitation for offer;

D. An example of estoppel;

E. All of the above.

11. The present transfer of a contractual interest to a third party is:

A. Assurance;

B. Arbalest;

C. Acceptance;

D. Assent;

E. Assignment.

12. Ricardo and Miriam entered into an oral agreement that Ricardo will sell Miriam’s

company the land on which to build a shopping center for $100,000,000. The agreement:

A. Is a valid contract because there is genuine assent;

B. Is a valid contract because it is supported by consideration;

C. Is a valid contact because it is not for illegal purposes;

D. Is a valid contract because it is between competent parties;

E. Is not a valid contract because it violates the Statute of Frauds.

13. The rule that a person cannot use evidence of oral statements made before or at the time

the contract was signed to alter the written terms is:

A. Statute of Frauds;

B. Parol Evidence Rule;

C. Respondent superior,

D. Specific performance;

E. Exculpatory Clause.

14. Abby enters into an agreement to purchase the helmet worn by Jimmie Johnson in the race

when he won his fifth-straight NASCAR Championship. She discovers that the helmet was

actually worn in a different race. The appropriate legal remedy is:

A. Acquiescence in the substitution;

B. Promissory estoppels;

C. Punitive damages;

D. Specific performance;

E. There is no legal

remedy.

15. The primary purpose of contract law is:

A. To protect those who injudiciously enter into contracts;

B. To provide certainty and stability in business transactions;

C. To provide a means for enforcement of illegal transactions;

D. All of the above;

E. None of the above.

16. An offer terminates:

A. When either the offeror or the offeree dies;

B. When a counteroffer is substituted;

C. By rejection in the specified

manner;

D. By withdrawal of the offeror;

E. All of the above.

17. Which of the following constitutes consideration?

A. Sherri does something she is not already legally obligated to do;

B. Sherri promises to do something she was not already obligated to do;

C. Sherri refrains from doing something she legally could have done;

D. Sherri promises to refrain from doing something she legally could have done;

E. All of the above.

18. According to the text, the freedom to contract:

A. Is absolute;

B. Is protected under the U.S. Constitution;

C. Is increasingly being limited by courts, administrative agencies, and legislative bodies;

D. A and B;

E. B and C.

Essay Questions

1. Define a contract and discuss the required elements of a valid contract.

2. Distinguish between an offer and a solicitation to offer.

3. Discuss the conditions under which an offer terminates.

4. Discuss assent and the various factors that may destroy the reality of the consent.

5. Define capacity and the effect of minority on contracts.

6. Identify the types of contracts that the Statute of Frauds affects and its effect.

7. Discuss a breach of contract and remedies for the breach of contract.

8. Identify and discuss various rules of contract interpretation.

9. Discuss warranties, especially those found in the Uniform Commercial Code.

10. Identify and discuss various types of business relations including, but not limited to,

ownership interests, liability and tax issues.