Podcast
Questions and Answers
What is the primary characteristic of strict liability?
In the context of strict liability, which type of activities can lead to liability?
What does the plaintiff need to prove in a strict liability case?
Which of the following scenarios exemplifies strict liability?
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What is one reason a plaintiff might sue for multiple torts?
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What is the burden of proof in a strict liability case?
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Which of the following is NOT a recognized cause of action under product liability?
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Which of the following is an example of an abnormally dangerous activity?
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What is the main characteristic of a sole proprietorship?
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How are profits generally split in a general partnership without a specific agreement?
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What is a primary disadvantage of a sole proprietorship?
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Which document is primarily involved in forming a limited liability company (LLC)?
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What does dissolution of a partnership refer to?
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What type of tax do sole proprietors need to pay in addition to their personal income tax?
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In a limited partnership (LP), who is fully liable for the debts of the partnership?
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Which of the following is a pro of establishing a franchise?
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What is typically required for forming a partnership?
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Which term describes a situation where two entities collaborate on a specific project?
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Which of the following accurately describes tax responsibilities of partnerships?
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Which of the following accurately represents the liability of partners in a general partnership?
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What forms the basis for a sole proprietorship's formation?
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What element of negligence addresses whether a defendant acted with a standard of care?
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What legal principle protects music artists under the First Amendment in relation to potentially harmful lyrics?
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Which type of plaintiff negligence results in a complete bar to recovery if the plaintiff is found to have assumed the risk?
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What is the main criteria to determine if a defendant's breach led to a plaintiff's harm?
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What type of damages are intended to punish the defendant in tort cases?
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What is the required burden of proof for the plaintiff in a negligence case?
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In what scenario can a landowner be liable for injuries to a licensee?
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Which legal concept relates to the responsibility of professionals to act with a heightened standard of care?
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How does the Hand Analysis in negligence law help in determining breach?
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What is the general expectation of care for children engaged in adult activities?
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In comparative negligence states, what happens if the defendant is determined to be 80% responsible for the accident?
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What would be a valid defense in a negligence case when the plaintiff voluntarily participates in a risky activity?
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What is the primary focus of proximate causation in a negligence case?
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What is the annual State franchise tax that all LLCs in California are required to pay?
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Which of the following is not a requirement for forming an LLC in California?
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What type of tax treatment does a multi-member LLC typically default to for federal taxation?
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Who can typically own an LLC?
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What document sets forth the rights and duties of the members and profit interests in an LLC?
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What is a significant disadvantage of limited liability companies (LLCs) compared to corporations?
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In California, which professionals are generally not permitted to form LLCs?
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What must members of an LLC do to shield their personal assets from the LLC's debts?
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Which process ensures that all members of an LLC are properly identified?
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In a member-managed LLC, who typically participates in the management of the company?
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What is a characteristic legal duty owed by members and managers of an LLC?
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When forming a corporation, which document includes details about roles and meetings?
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What is a unique aspect of Limited Liability Limited Partnerships (LLLPs) compared to traditional limited partnerships?
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What primary advantage does forming a single-purpose LLC provide for filmmakers?
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What must be proven for a product to be considered defective in a strict liability claim?
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Which of the following is an example of a failure to warn?
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Under strict liability, what is not a valid defense for a defendant?
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Which element of negligence requires that the defendant's action was a direct cause of the harm?
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Which scenario exemplifies the concept of ‘risk’ in establishing a duty of care?
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In which situation might a court find a defendant not liable due to misuse of a product?
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What does UGC stand for in internet law?
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Which statement about internet service providers (ISPs) is true?
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What is required for a breach of duty to be established in a negligence case?
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What does the 'HAND formula' relate to in strict liability?
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Which hypothetical situation does not create a duty of care?
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In what case can a plaintiff sue both the manufacturer and retailer of a defective product?
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What is the primary goal of establishing a duty of care?
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In a negligence case, what constitutes actual damages?
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Which legal concept allows a plaintiff to argue based on reliance in a negligence case?
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What is the primary reason why forming a corporation may not be advantageous for tax purposes?
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Which of the following is a requirement for S-corporations?
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Who is typically responsible for managing the day-to-day activities of a corporation?
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Under what circumstance might a corporation not be liable for the actions of its employees?
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What role does the doctrine of respondeat superior play in corporate liability?
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What entity type can generally raise funds by issuing shares to the public?
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What is one primary advantage of debt financing for a corporation?
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Which of the following rights does a director NOT have?
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What fiduciary duty involves acting in good faith and exercising reasonable care?
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What is the typical term length for a director on a board of directors?
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Which statement about shareholders is accurate?
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What is the purpose of a company establishing its authorized shares?
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What is a potential disadvantage of issuing shares to raise funds?
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Why might venture capital financing be preferred over bank loans?
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What is a key feature of a valid contract?
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Which act primarily addresses monopolies in the U.S.?
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What must be proven for a violation of Section 10(b)(5) of the Securities Act?
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What is an example of a horizontal restraint of trade?
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Which of the following is a type of exemption from securities registration under the 1933 Securities Act?
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Which type of contract allows one party the right to terminate it?
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What is the primary purpose of antitrust laws?
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What does price discrimination involve?
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Which of the following defines a 'bilateral contract'?
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What is now prohibited in most circumstances under Section 10(b)(5) of the Securities Act?
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In what situation is a contract void?
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In a contractual agreement, what does 'consideration' refer to?
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Which group is exempt from antitrust laws?
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What type of financial instrument includes stocks and bonds?
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What is a primary method to create an agency relationship?
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Which type of offering allows for up to $1M without registration?
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Which of the following is NOT one of the agent's duties to the principal?
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When does an agency relationship typically NOT exist?
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What is one major liability distinction between employees and independent contractors?
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According to the CA Bill AB5 Test, which condition is NOT a requirement for a worker to be classified as an independent contractor?
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What must a principal provide to an agent under their duties?
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What does the term 'work for hire' refer to?
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In which scenario can a principal be liable for an agent's unauthorized acts?
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What is a method of creating an agency relationship by ratification?
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Which of these workers is typically entitled to employee protections under California employment law?
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Which act primarily governs unfair competition in business practices?
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What could constitute a breach of the duty of loyalty by an agent?
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What is an example of a principal’s duty in relation to expenses incurred by agents?
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When does an agency relationship typically end?
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What is one of the conditions that must be met for officers to utilize the business judgment rule?
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What does the duty of loyalty require from directors and officers?
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If a director has a conflict of interest about a transaction, what should they do?
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What right do shareholders have regarding the inspection of corporate documents?
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What is a direct action that shareholders can take against the corporation?
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Which of the following is NOT a power of shareholders?
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What must shareholders demonstrate to bring a derivative action?
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What is one challenge of operating a close corporation?
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In a situation where majority shareholders refuse to perform a valuation for a minority shareholder in a close corporation, what recourse does the minority shareholder have?
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Which argument might a shareholder like Nicole use in her direct action against the corporation's directors for mismanagement?
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What underlying principle justifies the business judgment rule?
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What is the legal stance of a company defending itself against a claim of mismanagement?
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Which of the following is a required trait for directors or officers acting in the best interest of the corporation?
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What is a potential benefit of having multiple classes of shares for a company?
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What defines a unilateral contract?
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Which of the following best describes an express contract?
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What is a 'Merger/Integration Clause'?
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Under what circumstance does the Uniform Commercial Code (UCC) apply?
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In the context of contracts, what does 'consideration' refer to?
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What is the 'Mirror Image Rule' in contract acceptance?
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Which of the following actions would effectively terminate an offer?
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What happens if an offer is revoked before it is accepted?
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When does acceptance become effective under the Mailbox Rule?
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Which party typically holds the burden of proof in demonstrating the existence of mutual assent?
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In the Kirksey case, what was a critical reason for the plaintiff's success in court?
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Why are price quotes not considered valid offers?
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Which of the following describes unjust enrichment?
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What concept allows a party to hold a promise enforceable, despite lack of a formal agreement?
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Which condition allows for an offer to be revoked before acceptance?
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What type of promise is considered an 'illusory promise' and lacks consideration?
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In which situation can a debtor legally settle a dispute over a debt for less than the full amount owed?
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Which of the following is an example of past consideration?
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What is required for the formation of an enforceable contract?
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What happens when one party performs a service they are already obligated to do?
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What is the outcome if a creditor accepts a payment that is less than a liquidated debt?
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How can a plaintiff claim damages for a broken promise in a moral consideration case?
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What does the concept of 'consideration' specifically require?
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Which of the following best describes a liquidated debt?
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What effect does a ‘preexisting duty’ have on a new contract?
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When can an option contract be said to exist?
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Why is a moral consideration not enforceable in court?
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What must a party show in order to seek an injunction?
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Which of the following correctly describes the function of nominal damages?
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What allows a party to fix a breach in a contract before facing penalties?
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What is true about punitive damages in breach of contract situations?
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Under the UCC, what option is available to buyers if they breach a contract?
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Which of the following describes a non-competition agreement that is enforceable?
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What could potentially allow a casino in California to collect on a $30,000 contract?
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Which of the following is a requirement for the enforceability of contracts that fall under the 'MY LEGS' acronym?
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Under what condition can a court enforce a non-competition provision?
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Which statement best captures the essence of procedural unconscionability?
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What does the 'Cure' provision in a contract typically allow?
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In the context of UCC 2-207, what happens to conflicting terms in a purchase agreement?
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What can lead to a breach of contract?
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What typically characterizes an exculpatory clause?
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Which term refers to an event that can temporarily suspend contractual obligations?
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When must modifications to a contract be documented?
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Which factor is NOT a component of a non-competition agreement's reasonableness?
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An Executor's promise to pay debts must be in which form to be enforceable?
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Which of the following best describes substantive unconscionability?
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What effect does substantially performing a contract have?
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What does a condition precedent in a contract signify?
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Which clause ensures that ambiguities in a contract are not held against the drafting party?
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What was the outcome of the dispute between Jay Leno and Conan O'Brien regarding the Tonight Show?
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What kind of interest do usury laws prevent?
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What is the impact of a Merger/Integration Clause in a contract?
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What is an essential characteristic of a warranty in a contract?
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Which situation does NOT typically result in a breach of contract?
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In the context of UCC contracts, which item is a requirement for enforceability when dealing with goods valued over $500?
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In a bailment agreement, what could happen if the item is damaged despite a signed waiver?
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What is a 'representation' in contract terms?
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What happens when one party indicates they will not fulfill their contractual obligations before performance is due?
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What is the legal effect of a 'Severability' clause in a contract?
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What constitutes the situation of 'impossibility' in contract performance?
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Which of the following correctly describes 'frustration of purpose' in contract law?
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What is a primary reason why a party may not be able to delegate obligations under a contract?
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What defines an 'intended beneficiary' in a contract?
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In which scenario can a seller not withdraw from a contract due to impracticability?
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Which type of condition requires fulfillment before a party is obligated to perform under a contract?
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In what circumstance can a creditor beneficiary enforce a contract?
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Which defense can be claimed when the specific subject matter of a contract has been destroyed?
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Under what conditions is an assignment typically considered irrevocable?
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What does 'concurrent conditions' in a contract imply?
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Which scenario exemplifies an incidental beneficiary?
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Which of the following would not be considered an excuse for non-performance of a contract?
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Which of the following is a common characteristic of the Uniform Commercial Code (UCC)?
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What is a necessary condition for a contract to be considered voidable?
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Under which circumstance can Bill argue for the full contract price after completing part of the house?
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Which of the following best describes 'good faith and fair dealing' in contract law?
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What is the effect of a 'time of the essence' clause in a contract?
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If a party claims that they entered into a contract under duress, what must they prove?
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What is the legal capacity of a minor regarding contracts?
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In what scenario could a party successfully claim unjust enrichment?
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What is the essential term required for a UCC contract to be enforceable?
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What must be proved to establish fraud in a contract?
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Which of the following scenarios would typically require a UCC contract to be in writing?
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What is a characteristic of a unilateral mistake in contract law?
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What happens when two parties propose different terms in a UCC contract?
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What happens if one party learns new information about a contract before performance?
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What is an essential characteristic of equitable remedies?
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Which scenario indicates a breach of contract when only minor defects are present?
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What type of damages are awarded based on the unique situation of the injured party?
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What must be shown to claim rescission due to mutual mistake?
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Which of the following statements is true regarding mental incapacity in contracts?
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How are reliance interest damages assessed?
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What document primarily guides the enforcement of contractual obligations?
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What determines whether a plaintiff is entitled to restitution interest?
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Which of the following statements accurately reflects UCC contract modifications?
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In the context of UCC contracts, what does 'gap filler' refer to?
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Which scenario exemplifies a situation valid for a claim of mutual mistake?
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What is the primary characteristic of compensatory damages under the expectation interest model?
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What is the threshold for requiring a contract to be in writing under UCC guidelines?
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An injunction is best defined as _____.
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Study Notes
Negligence, Strict Liability, and Product Liability Intro
- Negligence occurs when someone acts unreasonably and causes harm to another, but did not intend to do so.
- Strict liability holds someone liable for harm, regardless of intent or negligence.
- Companies can be sued for both strict liability and negligence.
- Suing for multiple torts allows for a case to continue even if one claim is dismissed.
Strict Liability (SL)
- Plaintiffs must prove the Defendant was responsible for their injuries.
- This is established through abnormally dangerous activities (ADA) or product liability.
- Examples of ADA include keeping wild animals, using explosives, and transporting hazardous chemicals.
- With SL, the burden of proof shifts to the Defendant to show they were not negligent.
- The Plaintiff only needs to prove the Defendant had exclusive control over the object that caused injury.
- Liability for normal activities is typically based on negligence, not SL.
Product Liability
- There are three main causes of action under product liability:
- Design defects/manufacturing defects
- Defective products
- Failure to warn
-
Design (or Manufacturing) Defects: Occur when a product is negligently manufactured (e.g., the Tylenol case).
- This includes situations where a product causes harm simply by existing.
- Defective Products: Exist when the product is defective at the point of sale (e.g., the Ford Pinto case).
-
Failure to Warn: Products must include warning labels for any foreseeable dangers.
- Examples include warning labels on Superman costumes and spray paint.
- Under SL, companies cannot claim they took reasonable care; they are liable if:
- The product was defective at the time of sale.
- The Defendant sells these products.
- The product is dangerous.
- The Plaintiff was harmed by the product.
- Both the manufacturer and retailer can be sued for defective products.
- Courts use market-share liability to apportion fault to each Defendant based on their market share.
- Exception: Companies are not liable if the risk was not foreseeable due to misuse or alteration of the product.
Privacy and Internet/Cyberlaw
- This area of law primarily focuses on the protection of personally identifiable information (PII) online, including financial info, addresses, phone numbers, and passwords.
- UGC (User Generated Content): Content created and publicly available by end users (e.g., social media posts).
- Rule: Internet Service Providers (ISPs) are not liable for content posted on their servers unless they directly edit those posts.
- ISPs are given a "safe harbor" and are exempt from liability for hosting content.
Negligence/Unintentional Torts
- Definition: Unreasonable conduct that causes another person actual harm.
- It involves lawful conduct that can be proven harmful.
- The harm must be reasonably foreseeable.
Policy Considerations
- They include considerations of loss allocation, fairness, accident deterrence, economic impacts, administrative concerns, floodgate of litigation, and legislative concerns.
Negligence Elements (the Big 4!)
- Duty: The Defendant is obligated to exercise some care toward the Plaintiff.
- Breach: The Defendant has violated the specific standard of care required by duty.
- Causation: The Defendant's breach was a factual and proximate cause of the harm.
- Damages: The Plaintiff's harm resulted in actual damages.
Element 1: Duty of Care
- Definition: A court determines, as a matter of law, that one person is obligated to exercise a standard of care towards another.
- General Rule: People who do not act owe no duty of care, but people who do act, do owe a duty of care.
- Duty of care is established through: Risk, Relationship, Reliance.
Risk
- If the Defendant creates a risk by their actions (e.g., speeding), a duty of care exists.
- If the Defendant fails to reduce an existing risk (e.g., not hiring security), a duty of care may still exist.
Relationship
- A special relationship exists when one party has special knowledge or control over the other, and the Plaintiff is dependent on them.
- Examples include doctor/patient, hotel manager/guest, pilot/passenger, and school/student.
Reliance
- A duty of care exists when someone starts to help someone at risk, but then either worsens their situation or prevents other help.
Duty Analysis: Policy
- Policy considerations must be weighed, including:
- Risk of harm (e.g., music causing dangerous behavior).
- Foreseeability of harm (e.g., someone acting on lyrics in a song years later).
- Constitutional protections (e.g., freedom of speech).
Element 2: Breach
- Issue: Did the Defendant breach the standard of care?
- Rule: A person is expected to behave as a reasonable person (RP) acting under the same or similar circumstances.
- Hypo: A window washer bumps a can, causing it to fall on someone's head. A RP would know gravity causes things to fall.
Special Breach Rules
-
Landowners:
- Trespassers generally have no liability for negligence.
- Licensees: The owner is only liable for hidden dangers.
- Invitees: The owner is liable if they know about existing defects.
- Landowners must warn licensees and invitees of dangerous conditions.
- Professionals: Professionals (e.g., doctors, lawyers, accountants) have heightened duties of care.
-
Children: Children must act like a reasonable child of their intelligence, experience, age, and maturity.
- Exception: They must act like adults when engaging in adult activities (e.g., driving).
The Hand Analysis
- It is a theoretical blueprint for determining breach (B < P x L)
- "Burden < Probability of event occurring x Likelihood of the event happening"
- Companies are negligent if they could have spent a small amount of money to prevent a larger loss in the future.
Element 3– Factual and Proximate Causation
- Factual Causation Rule: The Defendant's breach must have led to the Plaintiff's harm.
- "But for" Test: If the Defendant's act is removed, would the harm still occur?
- Proximate Causation Rule: The type of harm must be reasonably foreseeable.
Element 4: Damages and Defenses
-
Types of Damages:
- Compensatory: (Actual) - lost wages, medical expenses, and other harm (including current and future suffering).
- Punitive: Designed to punish the Defendant.
- In comparative negligence states, the Plaintiff receives damages based on the percentage of fault assigned to the Defendant.
- In contributory negligence states, the Plaintiff receives nothing if they are partially at fault.
- Assumption of Risk: If the Plaintiff knowingly assumes the risk of an activity, they may be barred from receiving damages.
- Sports: Participants generally assume the risk of injury in sports activities.
Business Organizations I
Corporate Law Introduction
- Corporate structures are important for building employment and wealth within society.
- Corporate law is a global standard and is essential for understanding business structures.
Forming an Entity
- Step 1: Choose a name and search with the California Secretary of State.
- Step 2: Choose a "home" state for the entity.
- Step 3: Select the entity type (sole proprietorships, partnerships, LLCs, corporations, etc.)
- Step 4: File the appropriate documents with the Secretary of State's office to create the entity.
Sole Proprietorships
- Definition: A business with no separate legal existence from its owner.
- Formation: No formal requirements; operate under your own name
- Profits: All income is taxed at the individual's personal rate.
- Taxation: Sole proprietors pay tax at two rates: their personal tax rate and self-employment tax (for Social Security and Medicare).
- Pros: More flexibility than partnerships or corporations, fewer formalities, can transition to more formal entities as needed.
- Cons: Owner has unlimited personal liability for debts, limited capital-raising options.
- Dissolution: Occurs when the sole proprietor passes away or closes the business.
Partnerships
- Definition: An agreement by two or more people to manage a business and share profits.
- Formation: Choose a name, obtain an EIN, file a fictitious name permit, and sign a partnership agremeent.
- Profits and Taxation: Profits are split equally unless agreed otherwise. Partnerships are pass-through entities and do not pay income tax.
- Types: GP (all partners operate the business), LP (at least one general partner with unlimited liability; limited partners have liability limited to their investment), LLP (all partners have limited liability).
- Pros: Flexibility in structure, some offer limited liability, can transition to more formal entities.
- Cons: Partners still have personal liability for debts, profits are often split equally regardless of contributions.
- Dissolution: Termination is known as "winding up" and assets are distributed.
- Franchise: A franchise is an agreement where the owner of an intellectual property (logo, slogan) licenses its use with a franchisee.
Franchise
- Definition: An agreement where a business (franchisor) grants a license to another business (franchisee) to operate under its name and system.
- Pros: Franchisee gets brand recognition, established systems, and support from franchisor. Franchisor benefits from expansion and increased brand recognition
- Cons: Franchisee must pay fees and royalties, and often must follow strict guidelines set by the franchisor.
Agency Relationships
- Agents owe five duties to the principal:
- Performance: Use ordinary care as a reasonable person
- Notification: Communicate with the principal about all business matters
- Loyalty: Act in the best interest of the company and not divert business to a third party or themselves
- Obedience: Follow the law and all employer policies
- Accounting: Keep records of all property and funds
Employee vs. Independent Contractor
- There is a growing trend of companies wanting to classify employees as independent contractors.
- Companies may withhold taxes for employees but not independent contractors.
- Independent contractors may or may not be agents of the company.
- A "Work For Hire" arrangement occurs when someone works for a company or is hired to complete a specific job.
- When unclear whether a worker is an employee or independent contractor, consider the level of control the employer has over the worker.
- Factors to consider include: office facilities, knowledge and skill, employer supervision, use of equipment, and whether the worker sets their own schedule or has their own employees.
Independent Contractor vs. Employee Court Battles
- Companies are attempting to classify their workers as independent contractors to avoid paying benefits. This impacts companies like Uber, Lyft, and Grubhub.
- California has recently filed a lawsuit against Lyft for misclassifying its workers.
- The California AB5 Test determines worker classification:
- The worker can perform services without the control or direction of the company.
- The worker performs tasks outside the usual course of the company's business activities.
- The worker is customarily engaged in their own independently established trade.
- Food delivery companies like Doordash, Grubhub, and Eat24 are classifying drivers as independent contractors.
- Gig economy drivers are not entitled to employee protections in California.
Principal's Duties to Agent
- Principals must compensate the agent, reimburse company-related expenses, provide safe working conditions, and assist the agent in completing tasks.
- Employers indemnify some agents for wrongful acts, meaning the principal is responsible for legal fees incurred by the agent. This does not apply to unauthorized acts (intentional torts).
- A principal can be liable if the agent is acting within the scope of their employment or if the principal instructs the agent to act on their behalf.
- A principal can also be liable for unauthorized acts while on the job.
- An agent must act with authority from the principal, which can be express or implied/apparent.
- An agency relationship can end through: contract term ending, purpose being achieved, mutual agreement, termination, or resignation.
Antitrust
- Antitrust Law (Sherman Act) addresses unfair competition.
- Section 1: Every contract in restraint of trade is illegal.
- Section 2: Monopolizing or attempting to monopolize is a felony.
- A market controlled by one or a few sellers constitutes a monopoly.
- Price-fixing occurs when a company or companies control the entire market and set prices for all consumers.
- Bundling/tying is an example of potential antitrust violation, like NBC Universal and Disney bundling high-demand and low-demand channels. A-la-carte TV could offer a solution.
- Horizontal restraints involve agreements that restrict competition between rival firms, such as group boycotts, market divisions, and trade associations.
- Vertical restraints of trade involve companies vertically integrated (controlling manufacturing, inventory, wholesale, and retail).
- Section 2 of the Sherman Act focuses on monopolies, established through dominant market share and the intent to monopolize.
- Price discrimination involves selling goods to competing buyers at different prices.
- Exemptions from Antitrust Law include: labor unions, music industry, and insurance companies.
Secured Transactions
- A security is a financial instrument with monetary value, like stocks and bonds.
- Security interests include options (puts and calls) to buy and sell stocks at a future date.
- The 1933 Securities Act requires registering securities before offering them to the public.
- A company prospectus outlines key securities information.
- Corporations pay a fee to register securities based on value and quantity.
- Specific types of securities and transactions are exempt from registration and do not require a prospectus. These include: Regulation A offerings (up to 50M),Rule504/RegulationDofferings(upto50M), Rule 504/Regulation D offerings (up to 50M),Rule504/RegulationDofferings(upto1M), Rule 505 (up to $5M to accredited investors), and Rule 506 (private placement exemption for non-solicited securities).
Violations of the Securities Act
- Section 10(b)(5) prohibits fraud or misleading investors during security purchase or sale.
- Elements of a Section 10(b)(5) violation include:
- Material misrepresentation
- Scienter (wrongful state of mind)
- Reliance
- Economic loss
- Causation
- The goal is to prevent insider trading.
Contracts Introduction
- A contract is a legally enforceable agreement that outlines the rights and duties of two or more parties.
- The plaintiff bears the burden of proof by a preponderance of the evidence (51%).
- For a contract to be valid and enforceable, it must include:
- Offer
- Acceptance
- Consideration (KSN)
- Secondary Issues:
- Legality
- Capacity
- Consent
- Writing
Contracts: The Big 6
- Six key questions for contract analysis:
- Which law applies? Common Law or Uniform Commercial Code
- Is there a contract? Mutual assent and consideration
- What does the contract mean? Terms, modifications, and interpretation
- Is there performance or breach? Full, substantial, partial, poor, or no performance
- Are there excuses for breach? Impossibility, impracticability, frustration of purpose, mistake, force majeure
- What is the remedy for no excuse? Monetary or equitable damages
Validity of Contracts
- Voidable contract: One party can terminate the agreement.
- Void contract: Neither party can enforce the agreement.
- Promises:
- Bilateral contract: Both parties make a promise to each other.
- Unilateral contract: One party promises in exchange for the other's performance.
Contract Formation Theories
- Express contract: Parties explicitly state all material terms.
- Implied contract: Courts infer an agreement based on the parties' words and conduct.
- Reliance/Promissory Estoppel: Enforcing a promise based on the plaintiff's detriment in relying on the promise.
- Unjust Enrichment: Enforcing a benefit received by the defendant that would be unjust to retain without compensation.
- Option contract: One party pays to keep an offer open for a set period.
Big Picture Q1: Which law applies?
- Common Law: Governs contracts for services.
- Uniform Commercial Code (UCC): Governs contracts for the sale of goods, movable items.
- When a contract has both goods and services, the UCC governs if the primary purpose is the sale of goods; otherwise, common law applies.
Big Picture Q2: Is there a contract?
- Mutual Assent: Agreement comprised of:
- Offer: Manifestation of willingness to enter into a bargain.
- Acceptance: Offeree's acceptance of the same terms as the offer.
The Offer
- Offer elements:
- Offeror's intent to enter into a deal.
- Definite terms.
- Not offers:
- Invitations to bargain
- Price quotes
- Advertisements
- Auctions
Acceptance
- Acceptance can occur through words, signature, or conduct.
- Mirror Image Rule: Acceptance must mirror the offer's terms exactly, otherwise, there is a rejection/counteroffer.
- Method and Manner: Acceptance must comply with the offer's specified method and time.
- Mailbox Rule: Acceptance is effective upon dispatch.
- Rejection is effective upon receipt.
Termination of Offers
- Once terminated, an offer cannot be accepted.
- Termination methods:
- Revocation: Offeror takes back the offer.
- Rejection: Offeree declines the offer or makes a counteroffer.
- Expiration: Offer specifies a time limit for acceptance.
- Operation of Law: Offeror dies or subject matter is destroyed.
Consideration
- Consideration (KSN) is the inducement (price or promise) that causes a party to enter into a contract.
- It forms the basis of the parties' exchange.
- KSN Elements:
- Value: Legal benefit to the promisor or legal detriment to the promisee.
- Bargained-for Exchange: Actual promises exchanged between the parties.
Element #1: "Value"
- Value is the legal detriment to the promisee (giving up something they have a right to) or the legal benefit to the promisor (receiving something they wouldn't otherwise have).
- Value can be an act or forbearance:
- Act: A promise to perform a service or give something.
- Forbearance: A promise not to do something.
- An act cannot be something a party was already legally obligated to do.
Element #2: Bargained-For Exchange
- Courts do not assess the adequacy of the dollar value of consideration.
- An unfair deal is still enforceable as a contract.
Exceptions to KSN
- Illusory Promise: A promise that is entirely optional is not consideration.
- Preexisting Duty: Performing an existing legal duty is not consideration.
- Past Consideration: An act completed before a promise is made is not consideration.
Consideration and Promissory Estoppel
- A promise can be enforced even without consideration if there is a justifiable reliance on the promise and the person relying on it suffered a detriment.
- An example is a 37-year employee offered a pension and retired early, relying on this promise. When the company took the pension away, the court allowed the employee to sue under a promissory estoppel theory.
Special Consideration Cases: Settlement of Debts
- A liquidated debt is when both parties agree on the amount owed.
- An agreement to take less than the full amount owed is not binding because there's no consideration to support the promise to accept a reduced payment.
- An unliquidated debt is when the parties dispute the amount owed or whether money is owed at all.
- Parties can enter into an agreement to settle for less, called an accord and satisfaction, which is a valid contract.
- Accord and satisfaction is valid if both parties have a good faith dispute about the amount owed.
- A moral consideration, like a promise to donate to a non-profit, does not constitute valid consideration.
Legality of Contracts
- Contracts violating statutes are unenforceable.
- Gambling contracts are illegal in California.
- Insurance policies on others are legal.
- Certain professions require licenses, and an unlicensed professional cannot sue their clients for services rendered.
- Usury laws prevent excessive interest on loans.
Public Policy: Non-Competition Agreements
- Non-competition agreements must accompany a bargain and require consideration.
- An agreement between businesses not to hire each other's employees is enforceable.
- When selling a business, a covenant not to open a competing business is enforceable if the scope of coverage-time, geography, and services- is reasonable.
- Non-competition clauses are typically unenforceable unless they are essential to the employer, fair to the employee, and harmless to the public.
- Non-competition provisions should be enforced when they involve trade secrets like technical specs, formulas, or customer lists.
Public Policy: Exculpatory Clauses
- Exculpatory clauses release a company from liability for injuries sustained, such as in a gym.
- They are unenforceable if they pertain to intentional torts, gross negligence, or involve unequal bargaining power.
- Exculpatory clauses in bailment cases, where someone gives up personal property, are enforceable.
Unconscionable Contracts
- Courts will not enforce contracts or specific clauses if they are unfair.
- Procedural unconscionability occurs when superior bargaining power creates an unfair contract.
- Substantive unconscionability refers to terms in a contract that are one-sided or harsh.
UCC 2-207: Adding or Changing Terms
- UCC 2-207 applies to sales of goods.
- Under UCC 2-207, different terms added by the parties to the contract are canceled out, replaced with gap fillers, and new terms become part of the contract.
- For a contract modification, new consideration is required for common law contracts but not for UCC contracts.
- Ambiguous terms in a contract are construed against the drafting party.
Boilerplate/Standard Contract Terms
- Covenants are the promises and obligations undertaken by the parties in a contract.
- A condition precedent is an event that must occur before contractual duties exist.
- A warranty is a promise about existing or future facts or conditions.
- A representation is a statement of present or past fact that induces a party to enter a contract.
Interpreting Terms: Case Example
- The "pay or play" vs "pay and play" dispute surrounding the Tonight Show illustrates the importance of accurate contract language.
- NBC paid Conan O'Brien not to host the Tonight Show.
- NBC paid Jay Leno to host the Tonight Show.
- This dispute highlighted the need for precise language to prevent ambiguities.
Boilerplate ( Non-Material) Contract Terms
- Indemnification: A party agrees to hold another party harmless for any breach.
- Cure Period: A party can fix minor problems or incomplete performance before a lawsuit is filed.
- Modification: Changes to the contract must be in writing and signed by both parties.
- Governing Law: Specifies which state’s law applies.
- Venue: Determines the location where a lawsuit will be litigated.
- Arbitration: Parties can waive the right to litigation and choose arbitration instead.
- Attorney’s Fees: Legal fees and court costs can be awarded to a winning party.
- Joint Drafting: Ambiguities are not construed against the drafting party.
- Severability: If a provision is deemed unenforceable, the rest of the contract remains valid.
- Force Majeure: An unforeseen event, like a pandemic, suspends contractual performance.
- Merger/Integration Clause: All discussions between the parties are finalized in the contract.
Statute of Frauds: Written Contracts
- Contracts falling under these categories must be in writing and signed by the defendant.
- "MY LEGS" is a helpful acronym for remembering the categories:
- Marriage
- Contracts lasting over one year
- Land contracts
- Agreements by executors of an estate
- Guaranty agreements
- Sale of goods for $500 or more
Sale of Goods Contracts under the Statute of Frauds
- Contracts for the sale of goods exceeding $500 must be in writing and signed by the defendant.
- The defendant's signature is crucial, and quantity is the only essential term needed.
- Verbal contracts between merchants are enforceable if not objected to within a reasonable time (generally 10 business days).
Performance and Breach of Contract
- Full performance is never a breach.
- Partial, poor, or no performance can constitute a breach.
- If a party is in breach, the non-breaching party must notify them of the anticipatory breach, which means one side indicates they will not perform their part of the agreement before the time for performance is due.
- Many contracts include a cure provision, giving the breaching party time to rectify mistakes.
- If a party breaches a contract, the non-breaching party's obligations are discharged.
- Courts will enforce a time-of-the-essence clause, making performance due on a specific date.
Substantial Performance and Performance Hypo
- Substantial performance makes a party entitled to payment even if their performance is not complete but sufficient for the intended purpose.
- If a party completes 10% of the work and then stops, they are in breach because the owner cannot use the property for its intended purpose.
- If 90% of the work is done, the contractor is entitled to the full contract price minus any defects.
- Minor defects are generally not considered a breach of contract if the work is otherwise complete.
Good Faith and Fair Dealing
- Parties to a contract have an implied covenant to act commercially reasonable.
Contract Defenses: Void vs. Voidable
- A void contract is unenforceable because it is illegal.
- A voidable contract can be rescinded by one of the parties.
Capacity Defense: Minors
- Minors under 18 are generally presumed to lack capacity and can disaffirm contracts.
- Contracts with minors are voidable.
- Minors can choose to enforce or terminate contracts.
- A minor can disaffirm a contract even after reaching majority (age 18) if the contract was entered into when they were under 18.
- If a minor misrepresents their age, the contract is enforceable, and they cannot disaffirm it.
Capacity Defense: Mental Incapacity and Consent
- A person suffering from mental incapacity, unable to understand a contract, has voidable contracts.
- If a court has declared a person incompetent, contracts they enter are void.
- The intoxication defense is difficult to prove and courts analyze it differently depending on the type of contract.
- Consent means the contracting party understood the terms of the contract.
Consent-Based Defenses: Fraud, Mistake, Duress, and Undue Influence
- Fraud: When a party makes a false statement that is material and known to be untrue, inducing another party to enter into a contract.
- Puffery (exaggeration) is not fraud. Opinions are not fraud.
- A material false statement is essential for fraud to exist.
- An innocent misrepresentation allows for rescission but not damages.
- Duress: An improper threat to coerce a party into entering a contract. Courts consider the parties' relative bargaining power.
Unilateral and Mutual Mistake
- Unilateral Mistake: One party mistakenly believes in a specific fact. It must be material and unconscionable, like a mathematical error in a bid.
- Mutual Mistake: Both parties share the same mistake, making the contract voidable.
Undue Influence
- One party unfairly dominates the will of another party.
- Courts consider the relationship of the parties, how susceptible one party is, and whether the transaction was fair.
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