Contracts: Essential Elements Quiz

Contracts

• Definition: A legally enforceable agreement between two or more parties.
• Essential Elements:
  • Legal Capacity of the Parties: Parties must be legally competent to enter into a contract.
  • Consideration: Mutual exchange of value between parties.
    • Quid pro quo: Something for something.
    • Forms of Consideration: Action, forbearance, promise.
    • Adequacy of Consideration: Courts generally don't evaluate the fairness of the exchange, unless it's grossly inadequate.
    • Issues with Consideration:
      • Illusory Promises: Promises that are not actually binding.
      • Performing Pre-existing Duty: Doing what you are already legally obligated to do.
      • Moral Obligations: Promises based on moral duty alone (e.g. paying a debt you're not legally bound to).
      • Past Consideration: Promises based on actions already completed.
      • Statute of Limitations: Legal time limit for enforcing certain types of claims.
  • Mutual Agreement/Assent (Meeting of the Minds): Parties must agree on the same terms.
    • Offer and Acceptance: Process of proposing and accepting terms.
    • Offer: Must be:
      • Clear intent to form a contract.
      • Definite enough for a court to understand.
      • Communicated to the other party.
    • Acceptance:
      • Must be clear and unqualified.
      • Must be made in the manner required by the offer.
    • Counter-offer: A response to an offer that changes the terms.
    • Negotiation: Back-and-forth exchange of offers and counter-offers.
  • Legal Purpose: The contract must not violate public policy or be illegal.
• Meeting of the Minds (Factors that can invalidate Apparent Agreement):
  • Material Mistake: A significant error concerning a key element of the contract.
    • Mutual Mistake: Both parties make the same mistake.
    • Unilateral Mistake: One party makes a mistake, but the other party knows or should have known about it.
  • Fraud: Intentional misrepresentation of a material fact.
    • Elements of Fraud:
      • Misrepresentation of a material fact.
      • Knowing misrepresentation.
      • Intent to defraud.
      • Reliance on the misrepresentation.
      • Injury to the other party.
  • Undue Influence: One party uses a position of power or trust to unfairly influence another party.
  • Duress: Forcing someone into a contract through threats or coercion.
  • Unconscionability: Extreme unfairness or inequality in bargaining positions.
• Discharging a Contract (Ending or Releasing a Contract):
  • Performance: Both parties fulfill their obligations.
  • Agreement:
    • Mutual Rescission: Both parties agree to terminate the contract.
    • Accord and Satisfaction: Parties agree to substitute a new agreement for the original one.
    • Release: One party agrees to give up their rights under the contract.
    • Waiver: One party voluntarily relinquishes a right.
  • Operation of Law:
    • Subsequent Illegality: The contract becomes illegal after it is formed.
    • Impossibility: Performance becomes impossible due to unforeseen circumstances.
    • Bankruptcy: One party becomes insolvent.
    • Statute of Limitations: Time limit for enforcing claims runs out.
• Breach of Contract: Failure to perform contractual obligations.
• Remedies:
  • Damages: Monetary compensation for losses caused by breach.
    • Basic Rule: Compensation for actual losses (make whole).
      • Limits on Compensation:
        • Reasonable Certainty: Loss must be proven with sufficient evidence.
        • Reasonably Foreseeable: Losses must be foreseeable at the time of contract formation.
        • Duty to Mitigate: Plaintiff has a duty to minimize their losses.
    • Other Forms of Damages:
      • Liquidated Damages: Agreed-upon damages in advance of breach.
      • Punitive Damages: Intended to punish a wrongdoer.
  • Specific Performance: Court order requiring a party to perform their contractual obligations.
    • Generally reserved for unique situations: Like real estate purchases.

Agency

• Definition: A legal relationship where one person (the agent) acts on behalf of another (the principal).
• Types of Agency Relationships:
  • Employer/Employee:
    • Apparent Authority: Principal creates the appearance that an employee has authority to act on their behalf, even if they don't actually have that authority.
  • Power of Attorney: A legal document authorizing someone to act on another's behalf.
  • Independent Contractors: Individuals hired to perform specific tasks, not considered agents.
• Creation of Agency:
  • By Contract: Explicit agreement between principal and agent.
  • By Conduct: Actions that demonstrate an agency relationship.
  • By Ratification: Principal approves an unauthorized act by the agent.
  • By Estoppel: Principal is prevented from denying the existence of an agency relationship.
  • By Necessity or Law: Circumstances require creation of an agency relationship (e.g. parent acting on behalf of a child).
• Duties of Agent to Principal:
  • Fiduciary Relationship: Agent must act in the best interests of the principal.
  • Obey Instructions: Adhere to the principal's directions.
  • Skill and Care: Perform duties with reasonable competence.
  • Avoid Conflicts of Interest: Avoid situations where personal interests conflict with the principal’s interests.
  • Protect Confidential Information: Maintain secrecy of the principal's information.
  • Duty to Notify: Keep principal informed.
  • Duty to Account: Provide accurate records of actions and financial transactions.
• Duties of Principal to Agent:
  • Compensation: Pay agent for services.
  • Expenses: Reimburse agent for reasonable expenses.
  • Inform of Risks: Disclose known risks to agent.
• Liability of Principals:
  • Contracts:
    • Actual Authority: Agent acts within the scope of their granted authority.
    • Apparent Authority: Principal creates the appearance of authority.
  • Torts:
    • Direct Liability: Principal's negligence in selecting, instructing, or supervising the agent.
    • Indirect (Employment) Liability: Principal is liable for the torts of an employee acting within the scope of employment.
• Liability of Agents:
  • Disclosed Principal: Agent is not liable.
  • Partially Disclosed Principal: Agent may be liable.
  • Undisclosed Principal: Agent is liable.
• Termination of Agency:
  • Loss of Legal Capacity: Death, bankruptcy, etc.
  • Frustration of Purpose: The reason for the agency ceases to exist.
  • Subsequent Illegality: The agency becomes illegal.
  • Impossibility of Performance: Performance becomes impossible.
  • Material Breach of Agency Contract: Significant violation of contract terms.

Intellectual Property

• Definition: Intangible property arising from creative endeavors (e.g. literature, software).
• Major Forms of Intellectual Property:
  • Patents: Exclusive rights granted for inventions and new processes (e.g. designs, chemical formulas).
    • Duration (USA): Typically 20 years.
    • Exclusions: Natural processes, abstract ideas, philosophical concepts.
    • Areas of Dispute: Patentability, priority.
  • Copyrights: Exclusive rights granted for original creative works (e.g. written material, music, art).
    • Duration (USA): Life of creator + 70 years.
    • Requirements: Original authorship, expressed in a tangible medium, minimally creative.
    • Exclusions:
      • Fair Use Doctrine: Allowable use of copyrighted material for specific purposes (e.g. education).
      • Libraries and Archives: Limited copying permitted for preservation.
  • Trademarks: Symbols, words, numbers, or pictures used to distinguish a brand.
    • Must be maintained: Don't lapse from disuse.
    • Duration: Renewable.
    • Exclusions: Immoral, confusing, merely descriptive marks.
  • Trade Secrets: Confidential information that gives a business an economic advantage.
    • Requirements:
      • Information is not generally known.
      • Owner takes reasonable steps to keep it private.
      • Owner derives economic value from the information.

Contracts

• A legally enforceable agreement between two or more parties.
• Essential elements: legal capacity, consideration (quid pro quo), mutual agreement (meeting of the minds), and legal purpose.
• Consideration can be an action, forbearance, or promise.
• Courts generally don't evaluate the adequacy of consideration, except when there's a lack of consideration or a disproportionate exchange.
• Illusory promises, doing what one is already obligated to do, moral obligations, past consideration, and statute of limitations can raise issues regarding the existence of consideration.

Promissory Estoppel

• A legal doctrine that prevents a person from going back on a promise even if a legal contract doesn't exist.
• Enables a party to recover damages if they relied on a promise to their detriment.

Offer and Acceptance

• Essential for determining if parties agreed to a contract.
• Offer must clearly indicate intent, be sufficiently definite for a court to understand, and be communicated to the other party.
• Offer remains valid as stated in the offer, for a reasonable time, or until rejected, counteroffered, the offeror loses legal capacity, or the offer is withdrawn.
• Acceptance must be clear, unqualified, and communicated to the offeror.

Discharging Contracts

• Performance: Both parties fulfill their obligations.
• Agreement: Mutual rescission, accord and satisfaction, release, or waiver.
• Operation of Law: Subsequent illegality, impossibility, bankruptcy, or statute of limitations.

Breach of Contract

• Occurs when a party fails to perform their contractual obligations.
• To prove breach, the claimant must demonstrate the existence of a contract, its breach, and resulting damages.

Damages

• Basic rule: Compensation/make whole/indemnity, aiming to put the injured party in the same position they'd be in if the contract had been fulfilled.
• Limits on compensation: reasonable certainty, foreseeability, and duty to mitigate damages.
• Liquidated damages: Agreed-upon compensation in advance of loss.
• Punitive damages: Punishing the breaching party.
• Specific performance: Court order compelling the breaching party to fulfill the contract (typically for unique goods or properties).

Agency

• A legal relationship where one person (agent) acts on behalf of another (principal).
• Can be formed by contract, conduct, ratification, estoppel, or necessity.
• Includes employer/employee relationships, powers of attorney, but generally excludes independent contractors.

Powers of Attorney

• Legal document granting authority to someone to act on behalf of another.
• Subject to local laws designed to prevent fraud and ensure certainty.

Duties of Agent to Principal

• Fiduciary relationship: Duty to act in the principal's best interest.
• Obey instructions, discharge duties with skill and care, avoid conflicts of interest, protect confidential information, notify the principal, and account for actions.

Duties of Principal to Agent

• Compensate the agent, inform them of known risks.

Liability of Principals

• To third parties: Liable under actual or apparent authority.
• In tort: Direct liability for failure in selecting, instructing, or supervising the agent. Indirect liability for employee actions within the scope of employment.

Liability of Agents

• Disclosed principal: No agent liability.
• Partially disclosed principal: Agent may be liable.
• Undisclosed principal: Agent may be liable.

Termination of Agency

• Loss of legal capacity, frustration of agency purpose, subsequent illegality, impossibility of performance, material breach of agency contract.

Intellectual Property

• Intangible property arising from human creative endeavors (like books, software).
• Major forms: Patents, copyrights, trademarks.

Patents

• Temporary protection for inventions, designs, processes, and chemical formulations (like medicine).
• Granted for a defined period (e.g., 20 years in the USA).
• Exclusions: Natural processes, philosophical ideas, abstract knowledge.

Copyrights

• Exclusive right to reproduce and distribute literary and artistic works (like music, art, photographs).
• Requires originality, expression in a tangible medium, and at least minimal creativity.
• Defined by time (life of creator + 70 years in the USA).
• Fair use doctrine allows limited copying for educational and other purposes.

Trademarks

• Protected symbols, words, numbers, pictures used to distinguish a brand.
• Must be distinctive and not lapse from disuse.
• Defined by time, but extendable.
• Exclusions: Immoral, confusing, or merely descriptive marks.

Trade Secrets

• Information not generally known that provides economic value to the owner because it's kept confidential.
• Protected by common law, contract, or both (e.g., non-disclosure agreements).

Negotiable Instruments

• Documents facilitating the transfer of money or credit.
• Examples: Bank notes, checks, drafts, promissory notes, certificates of deposit.
• They must be written, signed, unconditional, for a fixed amount, payable at a definite time, and payable to order or bearer.

Promissory Notes

• Two-party instruments with a maker and a payee.

Negotiation of Negotiable Instruments

• Endorsement is crucial.
• Types of endorsements include blank, special, restrictive, and qualified endorsements.

Liability and Discharge

• Maker/drawer has primary liability.
• Endorsers have secondary liability.

Holder in Due Course

• Concept protecting innocent holders of negotiable instruments from certain defenses.
• Protects reasonable, cautious individuals from fraud or bad faith.

Commercial Paper

• Documents used to facilitate the transfer of money or credit.
• Negotiable instruments are a specific form of commercial paper.