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08 Key 1. Contracts are legally enforceable promises. Answer: True Simply stated, a contract is a legally enforceable promise or an exchange of promises. 2. To be enforceable, a contract must contain a written promise. Answer: False A contract need not be a formal, written document, and those who make a contract do not have to use the word contract or recognize that they have made a legally enforceable promise. 3. Contract law enables private agreements to be legally enforceable. Answer: True Contract law enables private agreements to be legally enforceable. 4. The Uniform Commercial Code (UCC) applies to individuals as well as firms. Answer: True The Uniform Commercial Code (UCC) applies to individuals as well as firms. 5. A unilateral contract is an agreement with only one promise, and only one party is committed to perform. Answer: True A unilateral contract is an agreement with only one promise, and only one party is committed to perform. 6. A teacher's promise to pay $5.00 if a student to go to her office to get her some chalk is an example of a unilateral contract. Answer: True A unilateral contract is an agreement with only one promise, and only one party is committed to perform. 7. Miguel asks Alicia, an accountant, for her professional advice regarding his portfolio, Miguel is not obligated to pay Alicia since he did not express a promise to pay for her advice. Answer: False Implied-in-fact contracts arise from the conduct of the parties rather than from words. For instance, asking a person such as an accountant for professional advice implies a promise to pay the going rate for this advice even though you do not make an express promise to pay for it. 8. If a debtor overpays a creditor $5,000, the debtor can force the creditor to return that amount by suing under quasi-contract. Answer: True When one party is unjustly enriched at the expense of another, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties. 9. A voidable contract is an agreement when one party has the right to withdraw from the promise made without incurring any legal liability. Answer: True A voidable contract is an agreement when one party has the right to withdraw from the promise made without incurring any legal liability. 10. An executed contract is one that is fully performed. Answer: True An executed contract is one in which the parties have performed their promises. 11. Shane wants to sell his car. He accepts Layla's offer and sells the car at $15,000. Layla is the offeree. Answer: False An offeror (person making the offer) must intend to make the offer by making a commitment to the offeree (the person to whom the offer is made). 12. Avery mails Taylor offering to sell her house at a reasonable price. Taylor mails his acceptance. Avery and Taylor are bound by a valid contract. Answer: False Under the common law of contracts, contractual terms must be definite and specific. An offer to purchase a house at a "reasonable price" cannot be the basis for a contract because of indefiniteness. 13. According to the UCC, a contract for the sale of goods can be valid even when the acceptance proposes new or different nonquantity terms. Answer: True Under the UCC, contracts for the sale of goods can leave open nonquantity terms to be decided at a future time. 14. Ana offers Corey her vacuum cleaner for $300. Corey rejects the offer so Ana promises to sell the vacuum cleaner to Abey. But, a day later, Corey decides to buy the vacuum cleaner and informs Ana of his acceptance. Ana must sell the vacuum cleaner to Corey. Answer: False When an offer terminates, the offeree's legal power to bind the offeror ends. An offer is terminated by an offeree's rejection, a counteroffer, or by the offeror's revocation. Refer to sidebar 8.4. 15. Darcy offers Kate his farm house for $200,000. However, before Kate communicates her acceptance, the farm house gets destroyed due to a fire. In this situation Kate can sue Darcy for breach of contract. Answer: False When an offer terminates, the offeree's legal power to bind the offeror ends. 16. The mirror image rule is the same under common law rules and the UCC. Answer: False In sales of goods contracts, the UCC changes the common law rule of mirror image. 17. Juan offers to sell his cycle to Charles for $1000. Charles agrees saying, "I will pay you $1000, if you give me an extra tire with the cycle." This is an example, a binding contract is created between Juan and Charles as a result of the mirror image rule. Answer: False For an acceptance to create a binding contract, standard contract law requires that the acceptance must "mirror" the offer, that is, must match it exactly. This is the mirror image rule. 18. A deposited acceptance creates a binding contract even if there is a revocation in the mail. Answer: True The importance of the mailbox rule is that the offeror cannot revoke the offer once the offeree has accepted it. An added significance is that an offeror's revocation is not effective until the offeree actually receives it. Thus, a deposited acceptance creates a binding contract even though a revocation is also in the mail deposited acceptance rule, mailbox rule. 19. Promises to make gifts are not binding because there is no bargained for exchange. Answer: True Promises to make gifts are not binding, because no bargained-for consideration supports the promise. 20. Fixman Ltd. agrees to renovate Juan's house for $20,000. During the renovation, Fixman demands an additional $5,000 to complete the work, which Juan agrees. Fixman can sue Juan, if Juan fails to pay the additional amount. Answer: False A party to an agreement does not give consideration by promising to do something that he or she is already obligated to do. If the contractor sues, he will lose. Juan's promise to pay an extra $5,000 is not supported by consideration. Fixman Ltd. is under a preexisting obligation to do the work for which Juan promises an additional $5,000. 21. Casper offers to sell a car to Amanda for $1,000, to which Amanda agrees. Both the parties have signed a contract fully detailing the transaction which will be executed in 24 hours. This contract is an example of a firm offer. Answer: False Firm offer exists when a merchant offering goods promises in writing that the offer will not be revoked for a period not to exceed three months. Refer to sidebar 8.7. 22. Under the UCC, all contracts and contract offers must have consideration. Answer: False The UCC changes the legal requirement of consideration in cases of firm offers, and of preexisting obligations. Refer to sidebar 8.7. 23. An option offer is open for a certain time period, and is supported by the offeree's consideration. Answer: True In contracts that are not between merchants selling goods, a promise to keep an offer open for a certain time period must be supported by the offeree's consideration. Such agreement to not revoke an offer is called an option. 24. Promissory estoppels often is used to prevent a party who has made a unilateral offer from withdrawing the offer after the requested work has begun. Answer: True Promissory estoppels often is used to prevent a party who has made a unilateral offer from withdrawing the offer after the requested work has begun. 25. A minor can disaffirm the contract and legally recover any consideration that has been given to an adult, even if the minor cannot return the adult's consideration disaffirm Answer: True A minor can disaffirm the contract and legally recover any consideration that has been given to an adult, even if the minor cannot return the adult's consideration. 26. A party who makes a unilateral mistake can void the contract. Answer: False A party who makes a unilateral mistake suffers the burden of that mistake. 27. Misrepresentation is simply a misstatement without intent to mislead. Answer: True Misrepresentation is simply a misstatement without intent to mislead. 28. When there is a mutual mistake as to a material fact inducing a contract, rescission is inappropriate. Answer: False When there is a mutual mistake as to a material fact inducing a contract, rescission is appropriate. 29. A collateral promise is a secondary or conditional promise. Answer: True A collateral promise is a secondary or conditional promise. 30. The doctrine of part performance creates an exception to the requirement that sales of interests in land must be in writing. Answer: True The doctrine of part performance creates an exception to the requirement that sales of interests in land must be in writing. 31. Contracts are: A. legally enforceable promises. B. always required to be written. C. a form of a circular. D. enforceable only in the supreme court. E. informal agreements. Answer: A. legally enforceable promises. Simply stated, a contract is a legally enforceable promise or an exchange of promises. 32. Contract law applies to: A. only formally written documents. B. documents that use the word ‘contract'. C. private agreements, making them legally enforceable. D. all business dealing, covering those that are against public policy. E. only oral agreements and contracts. Answer: C. private agreements, making them legally enforceable. Contract law enables private agreements to be legally enforceable. Enforceability of agreements is desirable because it gives people the certainty they need to rely on promises contained in agreements. 33. A(n) is an agreement containing mutual promises. A. unilateral contract B. quasi-contract C. express-in-fact contract D. bilateral contract E. implied-in-fact contract Answer: D. bilateral contract A bilateral contract is an agreement containing mutual promises. 34. Madison promises Grace $10 if Grace will pick-up her dry cleaning for her. This is an example of a contract. A. bilateral B. unilateral C. voidable D. void E. unenforceable Answer: B. unilateral A unilateral contract is an agreement with only one promise, and only one party is committed to perform. The maker of such a promise seeks an action rather than a promise in return. 35. Fred takes Betty to dinner at a very expensive and exclusive restaurant. The menu does not mention the prices. The server takes their order and both Fred and Betty enjoyed the meal immensely. When the bill comes, Fred refuses to pay because the menu had no prices and because he and the server never engaged in language indicating an offer and acceptance. The server said, "Are you ready to order" and when Fred said "yes", the server merely asked, "What may I get you tonight"? A. Fred must pay based on an implied-in-fact contract theory. B. Fred must pay based on a promissory estoppel theory. C. Fred must pay based on an express contract theory. D. Fred is correct because no contract was formed. E. Fred and the server are a part of an express contract; hence Fred will have to pay. Answer: A. Fred must pay based on an implied-in-fact contract theory. Iimplied-in-fact contracts, arise from the conduct of the parties rather than from words. For instance, asking a person such as an accountant for professional advice implies a promise to pay the going rate for this advice even though you do not make an express promise to pay for it. 36. A(n) contract is the one in which the promised terms of the contract have been discussed by the parties. A. express B. reciprocal C. implied D. bilateral E. unilateral Answer: A. express Many contracts arise from discussions in which parties actually discuss the promised terms of their agreement. These are called express contracts. 37. Implied-in-law contracts are also known as _________. A. reciprocal contracts B. quasi-contracts C. express contracts D. bilateral contracts E. unilateral contracts Answer: B. quasi-contracts When one party is unjustly enriched at the expense of another, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties. The doctrine that requires this result is based on an implied-in-law contract. Since there really is no actual contractual agreement, the phrase quasi-contract often is used. 38. The courts enforce the concept of to remedy situations of unjust enrichment. A. quasi-contracts B. implied-in-law C. divisible contracts D. bilateral contracts E. unilateral contracts Answer: B. implied-in-law When one party is unjustly enriched at the expense of another, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties. The doctrine that requires this result is based on an implied-in-law contract. Since there really is no actual contractual agreement, the phrase quasi-contract often is used. 39. The ultimate purpose of a contract is the creation of an agreement that courts will order parties to perform or to pay consequences for the failure of performance. When courts uphold the validity of such promises, the resulting agreement is a(n) " contract." A. absolute B. differentiated C. void D. relative E. enforceable Answer: E. enforceable The ultimate purpose of a contract is the creation of an agreement that courts will order parties to perform or to pay consequences for the failure of performance. When courts uphold the validity of such promises, the resulting agreement is an enforceable contractenforceable contract. 40. A(n) contract is one that appears to be an agreement but lacks an essential requirement for validity and enforceability. A. voidable B. unenforceable C. void D. valid E. unapplied Answer: C. void A void contract is one that appears to be an agreement but lacks an essential requirement for validity and enforceability. 41. An contract is one that is partially or completely unperformed. A. executed B. executory C. express D. exculpatory E. unenforceable Answer: B. executory When the parties have not yet performed their agreement, it is called an executory contract. 42. A(n) contract is an agreement when one party has the right to withdraw from the promise made without incurring any legal liability. A. executory B. voidable C. void D. implied-in-fact E. reciprocal Answer: B. voidable A voidable contract is an agreement when one party has the right to withdraw from the promise made without incurring any legal liability. 43. A(n) contains a specific promise and a specific demand. A. consideration B. revocation C. offer D. capacity E. novation Answer: C. offer An offer contains a specific promise and a specific demand. 44. Mayra offers to sell her home to Hanna for "about $100,000 plus closing costs." Hanna accepts Mayra's offer but later, a dispute arises concerning the precise dollar amount of the purchase price. How will a court resolve this dispute? A. The court will determine a reasonable price to be paid by Hanna. B. The court will determine that Hanna pay only the figures mentioned in the contract. C. The court will appoint a licensed real estate appraiser to determine the price to be paid by Hanna. D. The court will require Hanna to pay the average of her price and Mayra's price. E. The court will declare the purchase price and terms too indefinite to create a binding contract. Answer: E. The court will declare the purchase price and terms too indefinite to create a binding contract. Under the common law of contracts, contractual terms must be definite and specific. An offer to purchase a house at a "reasonable price" cannot be the basis for a contract because of indefiniteness. 45. In case an offeror withdraws his/her offer, it is called ______. A. rejection B. reversion C. novation D. revocation E. triangulation Answer: D. revocation When an offer terminates, the offeree's legal power to bind the offeror ends. An offer can terminate by the offeror's revocation which refers to withdrawing of an offer by its offeror. "I regret to inform you that I am withdrawing my offer." 46. Brett offers to sell his old, but working, cell phone to James for $65. James says he will accept the offer if Brett lowers the price to $60. James has: A. made an unequivocal acceptance. B. made a counteroffer. C. demonstrated the mirror image rule. D. entered into an option contract. E. entered into an executory contract. Answer: B. made a counteroffer. If the acceptance changes the terms of the offer or adds new terms, it is not really an acceptance but a counteroffer A counteroffer is also a rejection: "Your offer of $10,000 for the land is too low. I will sell it to you for $12,500." 47. Josh's dog, Ginger, has run away so Josh places reward posters throughout the neighborhood offering $500 for anyone who brings Ginger home safely. Amanda, Josh's colleague sees Ginger and brings her back to Josh without ever seeing a poster. After returning the dog, Amanda then sees one of the reward posters and returns to claim the money. Which of the following is true of this situation? A. Amanda is not entitled to the money because the offer was not communicated to her. B. Amanda is not entitled to the money because she is Josh's colleague and acted in good faith. C. Amanda is entitled to the money because the poster constituted an offer and is effective for the entire neighborhood. D. Amanda is entitled to the money since performance of the requested act in the poster indicates acceptance. E. Amanda is not entitled to the money since she did not communicate the acceptance of offer in writing. Answer: D. Amanda is entitled to the money since performance of the requested act in the poster indicates acceptance. Unilateral contracts are accepted by performing a requested act, not by making a promise. 48. According to the mirror image rule, . A. the acceptance must exactly match the offer B. to be enforceable, a contract must be accepted in writing by both the parties involved C. the acceptance of an offer involves changing the terms of offer or adding new terms D. terms of contract must be definite to be clear and enforceable E. the contract becomes enforceable by performing a requested act, not by making a promise Answer: A. the acceptance must exactly match the offer For an acceptance to create a binding contract, standard contract law requires that the acceptance must "mirror" the offer, that is, must match it exactly. This is the mirror image rule. 49. Which statement is true concerning silence as a method of acceptance? A. An offeree's silence implies that the offree will make a counter offer. B. Parties' prior course of dealing may allow silence as a valid acceptance. C. If the offer states that silence means acceptance, then the offeree must respond or there will be a valid contract. D. Silence alone can be acceptance and basis of a binding contract. E. Silence leads to acceptance of an offer due to the mirror image rule. Answer: B. Parties' prior course of dealing may allow silence as a valid acceptance. Silence may well imply acceptance if the parties previously dealt with each other by having the buyer take shipments from the seller unless the buyer notified the seller in advance not to ship. 50. The deposited acceptance rule is also known as the rule. A. mirror image B. mailbox C. unilateral D. bilateral E. negotiation Answer: B. mailbox Unless the offeror specifies a particular time, the acceptance usually binds the parties when the offeree dispatches it. Since the offeree frequently mails the acceptance, the acceptance becomes binding when it is "deposited." Hence the deposited acceptance rule is also called the mailbox rule. Since the offeree frequently mails the acceptance, the acceptance becomes binding when it is "deposited" with the postal service—hence the deposited acceptance rule, also called the mailbox rule. 51. According to the mailbox rule: A. a contract is formed when the offer is mailed. B. a contract is formed when the offer is received. C. a contract is formed when the acceptance is received. D. a contract is formed when the acceptance is mailed. E. a contract is formed when the offer is converted in a written document. Answer: D. a contract is formed when the acceptance is mailed. Unless the offeror specifies a particular time, the acceptance usually binds the parties when the offeree dispatches it. Since the offeree frequently mails the acceptance, the acceptance becomes binding when it is "deposited" with the postal service—hence the deposited acceptance rule, also called the mailbox rule. 52. Brandie is facing financial difficulties. Warren wants to help Brandie and tells her that he will pay her $1,000. But afterwards Warren refuses to pay the promised money to Brandie. Which of the following statements is correct? A. Brandie is entitled to the payment because a promise is made and consideration has nothing to do with the agreement. B. Warren need not pay Brandie because Brandie did not promise anything in return. C. Warren must pay the money to Brandie because by promising her the money he has entered into an implied-in-fact contract. D. Warren does not have to pay because of the mirror image rule. E. Warren must pay the money to Brandie because by promising her the money he has entered into an executory contract. Answer: B. Warren need not pay Brandie because Brandie did not promise anything in return. All promises are not enforceable through legal action. There must be some incentive or inducement for a person's promise or it is not binding consideration, 53. Robert is about to graduate from his university and his parents tell him that because he is the first member of the family to graduate college, they want to buy him a new but inexpensive car. They have the money to buy the car and Robert is excited to get his gift. On graduation day, his parents tell him that they have decided to use the car money for a vacation and there will be no car. A. Robert can successfully sue based on promissory estoppel. B. Robert can successfully sue based on the promise of a gift. C. Robert cannot sue because the promise was not reasonable and would not support promissory estoppel. D. Robert cannot sue because he did not suffer any legal detriment in the receipt of the promise. E. Robert can sue since the promise is his legal benefit and he suffered legal detriments. Answer: D. Robert cannot sue because he did not suffer any legal detriment in the receipt of the promise. Promises to make gifts are not binding, because no bargained-for consideration supports the promise. 54. Valid consideration can include any promise to do something one has no obligation to do, refrain from doing something one has the right to do, or in the case of a unilateral contract, a performance when there is no obligation to do so. This is called as a(n) . A. accord B. legal detriment C. release D. negotiation E. promissory estoppel Answer: B. legal detriment Valid consideration can include any promise to do something one has no obligation to do, refrain from doing something one has the right to do, or in the case of a unilateral contract, a performance when there is no obligation to do so. That is the definition of a legal detriment. 55. Aria phones Jessica and asks if she can borrow one of her dresses for an office party that weekend. Jessica agrees to this. However, when Aria goes to pick up the dress, Jessica refuses to give it to her. Which of the following statements is true of this situation? A. Jessica has committed a breach of contract. B. A bargained-for exchange has not occurred, so Jessica does not have to loan Aria the dress. C. Jessica has promised Aria something of value, so she must loan her the dress. D. A bargained-for exchange has occurred, so Jessica must loan Aria the dress. E. Jessica has given a valid consideration, making the agreement between her and Aria a binding contract. Answer: B. A bargained-for exchange has not occurred, so Jessica does not have to loan Aria the dress. An important part of consideration is that it must be bargained for. Since Aria has not promised anything in return for Jessica, Jessica need not give the dress to Aria. 56. There must be some incentive or inducement for a person's promise or it is not binding. The legal mechanism for evaluating the existence of this incentive is " " which refers to the receipt of a legal benefit or the suffering of a legal detriment. A. collusion B. promissory estoppel C. consideration D. reversion E. novation Answer: C. consideration There must be some incentive or inducement for a person's promise or it is not binding. The legal mechanism for evaluating the existence of this incentive is "consideration" which refers to the receipt of a legal benefit or the suffering of a legal detriment. 57. Under the UCC, the rules of consideration also do not apply to . A. real estate sales B. service contracts C. firm offers D. employment contracts E. an option Answer: C. firm offers Refer to sidebar 8.7. Under the UCC, the rules of consideration also do not apply to a firm offer. A firm offer exists when a merchant offering goods promises in writing that the offer will not be revoked for a period not to exceed three months. 58. Victor Enterprise Inc. writes a letter dated August 1 to Hallway Stores, offering to sell table lamps to Hallway Stores at $80 each for the next one month. In mid August, Victor Enterprises receives an offer from Shine Retailers to purchase the table lamps at a price of $85 each. Can Victor withdraw its offer to Hallway Stores? A. Yes, as this is only an option. B. No, since the doctrine of promissory estoppel is applicable. C. Yes, the offer was simply an invitation to negotiate. D. No, as this is a firm offer. E. Yes, the offer may be withdrawn since it lacks consideration. Answer: D. No, as this is a firm offer. Under the UCC, the rules of consideration also do not apply to a firm offer. A firm offer exists when a merchant offering goods promises in writing that the offer will not be revoked for a period not to exceed three months. This promise binds the merchant, although the offeree buyer gives no consideration to support it. Refer to sidebar 8.7. 59. In contracts that are not between merchants selling goods, a promise to keep an offer open for a certain time period must be supported by the offeree's consideration. Such an agreement to not revoke an offer is called a(n) . A. firm offer B. option C. promissory estoppel D. novation E. assignment Answer: B. option In contracts that are not between merchants selling goods, a promise to keep an offer open for a certain time period must be supported by the offeree's consideration. Such agreement to not revoke an offer is called an option. 60. An important exception to the rule requiring consideration to support a promise is the doctrine of This doctrine arises when a promisee justifiably relies on a promisor's promise to his or her economic injury. A. firm offer B. consideration C. termination D. promissory estoppel E. accord and satisfaction Answer: D. promissory estoppel The doctrine of promissory estoppel arises when a promisee justifiably relies on a promisor's promise to his or her economic injury. 61. Ajax Pvt. Ltd. made a promise to Garrett offering a job with an annual salary of $150,000, and at least two years employment. Since Garrett would have to move to New York for the new job, Ajax Pvt. Ltd. also offered to reimburse all moving expenses. Based on this promise, Garrett resigned from his $100,000 annual salary job at Dab Pvt. Ltd., San Francisco. However, once Garrett moved to New York, his employment with Ajax was terminated because the company found a candidate who was willing to work for a lesser salary. Which of the following is true of this situation? A. Garrett cannot sue Ajax since the promise was oral. B. Garrett can sue Ajax under promissory estoppel. C. Garrett cannot file a lawsuit since a promise of employment is always subject to market conditions. D. Garrett can sue Ajax, but only for the moving expenses that Garrett can prove he incurred. E. Garrett cannot sue Ajax since the reasons for termination will be accepted in court as legal detriment. Answer: B. Garrett can sue Ajax under promissory estoppel. An important exception to the rule requiring consideration to support a promise is the doctrine of promissory estoppel. This doctrine arises when a promisee justifiably relies on a promisor's promise to his or her economic injury. Promissory estoppels often is used to prevent a party who has made a unilateral offer from withdrawing the offer after the requested work has begun. 62. Which of the following terms refers to a person's ability to be bound by a contract? A. Legality B. Capacity C. Usability D. Negotiability E. Measurability Answer: B. Capacity Capacity refers to a person's ability to be bound by a contract. 63. If a minor fails to disaffirm a contract within a reasonable time after reaching majority, the minor is said to the contract. A. transcend B. confirm C. void D. ratify E. breach Answer: D. ratify If a minor fails to disaffirm a contract within a reasonable time after reaching majority, the minor is said to ratify the contract. 64. Dustin, aged 17, purchased a car from Speed Auto Sales for $1,000. The following year, his father gifted him a brand new car on Dustin's 18th birthday. Dustin returned the car to Speed Auto Sales the next day, and demanded his money back. At the time of disaffirmance, Dustin was 18, the age at which he was considered an adult in his jurisdiction. Will this disaffirmance be enforceable in the court of law? A. No, since Dustin did not give Speed a signed revocation. B. Yes, since Dustin disaffirmed during the year he reached his adulthood. C. No, since the disaffirmance must be written when the price exceeds $500. D. Yes, since the courts and laws always rule in the favor of minors. E. No, since Dustin has reached adulthood and disaffirmance can be expressed only by a minor. Answer: B. Yes, since Dustin disaffirmed during the year he reached his adulthood. The minor may disaffirm a contract anytime before reaching the age of majority (usually 18) and for a reasonable time after reaching majority. 65. Which of the following involves an intentional misstatement of a material fact that induces one to rely justifiably to his or her injury? A. Duress B. Misrepresentation C. Undue influence D. Mutual mistake E. Fraud Answer: E. Fraud Fraud involves an intentional misstatement of a material (important) fact that induces one to rely justifiably to his or her injury. 66. Tony's Carpets wants to charge $9.80 a yard for installing a carpet for Serenity Bookstore, but accidentally states $8.90 a yard in the bid. Serenity Bookstore accepts Tony's bid. Tony's Carpets made a mistake. A. bilateral B. unilateral C. mutual D. rescission E. contractual Answer: B. unilateral A unilateral mistake arises when only one of the parties to a contract is wrong about a material fact. 67. Which of the following terms refers to force or threat of force? A. Unilateral mistake B. Misrepresentation C. Undue influence D. Duress E. Mutual mistake Answer: D. Duress Duress means force or threat of force. 68. Which of the following oral contracts can be enforceable in court? A. Contracts involving goods worth $500, or more B. Contracts involving the sale of land C. A contract for goods for which payment has been made D. A contract for a service that lasts for 5 years E. A collateral promise to pay another's debt Answer: C. A contract for goods for which payment has been made Refer to sidebar 8.10. An exception to statute of frauds requirement that sale-of-goods contracts be in writing is a contract for goods for which payment has been made and accepted or that have been received and accepted. 69. Barney takes his wife Betty to a Porsche dealership and tells her to pick out whichever car she wants as a birthday present. She chooses a red Boxter. Barney negotiates a price with the dealership and signs a contract paying cash for the car. Barney repeatedly tells the dealer that the car is a gift for his wife. The car is to be serviced and picked up at 10:00 a.m. the next morning. Barney dies that night. When Betty arrives at the dealership to get the car, they refuse to give it to her because only Barney signed the contract. A. Betty is entitled to the car as a creditor beneficiary. B. Betty is entitled to the car as a donee beneficiary. C. Betty is entitled to the car as an incidental beneficiary. D. Betty is not entitled to the car but can get the money back. E. Betty is not entitled to the car as it was a gift without any consideration. Answer: B. Betty is entitled to the car as a donee beneficiary. When the performance under a contract is meant as a gift to a third party, that person is a donee beneficiary. Donee beneficiaries can sue the party who owes them a performance under a breached contract, but they cannot sue the party who contracted to make them a gift. 70. A(n) beneficiary is a third party who unintentionally benefits from a contract. A. donee B. creditor C. intended D. accidental E. incidental Answer: E. incidental An incidental beneficiary is a third party who unintentionally benefits from a contract. 71. Electronics, Inc., sells 250 radios on credit at $20 apiece to Radio Land Retail. Electronics then sells its rights under the contract to Manufacturers' Credit Co. When the payment becomes due, Manufacturers' Credit collects the $5,000 owed to Electronics by Radio Land. This transaction is controlled by the law of _______. A. negotiation B. agreement C. assignment D. novation E. representation Answer: C. assignment The law of assignment involves a transfer (generally a sale) of rights under a contract. 72. Stanley offers Rachel $60 to take care of his dog when he is traveling. Rachel accepts Stanley's offer, but delegates the duty to her neighbor, Ashley. In this assignment, Rachel is the _______. A. assignee B. obligee C. obligor D. beneficiary E. assignor Answer: E. assignor In an assignment one of the original contracting parties becomes an assignor and assigns rights or duties or both to a third party, known as the assignee. 73. If an assignor assigns the same rights to two different assignees: A. the assignee who first received the assignment has priority in receiving payment from the obligor. B. the assignee who first notifies the obligor of the assignment has priority in receiving payment from the obligor. C. the obligor must pay both assignees equal amounts but no more than what would have been paid had there only been one assignment. D. the assignment becomes void and the original contract remains in force. E. the original contract and the assignments, thereafter, will be declared void since assigning the same rights to two assignees is illegal. Answer: B. the assignee who first notifies the obligor of the assignment has priority in receiving payment from the obligor. A dishonest or careless assignor may assign the same contract rights to two different assignees. Notification to the obligor is especially important in this situation. In most states, the law says that the first assignee to notify the obligor has priority no matter which assignee receives the first assignment of rights. 74. Hans is notified that her mortgage with Omer Bank has been transferred to Grate Loan Co. However, Hans made his mortgage payments in full one day before receiving the notice. Omer Bank, however, argues that at the time of the assignment, Hans had not made the mortgage payment, and hence has to make payments to Grate Loan Co. Which of the following is true of this situation? A. Hans is not liable to Grate Loan Co. since he has already paid to Omer Bank. B. Hans is liable to Grate Loan Co. since his mortgage has been transferred. C. Hans is not liable to Grate Loan Co. due to the rule of mirror image. D. Hans is liable to Grate Loan Co. since they sent him the notification of the assignment. E. Hans is liable to Grate Loan Co. since he was an obligor to Omer Bank at the time of the assignment. Answer: A. Hans is not liable to Grate Loan Co. since he has already paid to Omer Bank. When an assignment is made, an assignee should notify the obligor immediately. Otherwise, the obligor may perform for the obligee-assignor. 75. Daniel purchases a house through Adelaide Loan Co. However, he moves to another city for work and sells the house to Christopher. Daniel wants to be released from his payment obligations to Adelaide Loan Co. Which of the following would release Daniel from this liability? A. An oral delegation of the payment obligation by Daniel to Christopher will release Daniel from liability. B. The sale of the house by Daniel to Christopher involuntarily releases his payment obligation. C. A delegation of the payment obligation to Christopher along with a written notice to Adelaide Loan Co. can release Daniel from liability. D. A novation in which Adelaide Loan Co. agrees to substitute Christopher for Daniel will release Daniel. E. An assignment where Daniel transfers his rights to Christopher will release Daniel from all his liabilities. Answer: D. A novation in which Adelaide Loan Co. agrees to substitute Christopher for Daniel will release Daniel. A novation is a three (or more) party contract wherein the original contracting parties agree to relieve the obligor from liability by substituting an assignee in the place of this party. 76. Appy hires Tring Painters to paint her living room. She selects deluxe paints that cost her $200 in total. However, as the painters begin their work, Appy notices that they are mistakenly using washable finesse paints, which would cost her $500 in total. When the work is done, Appy refuses to pay Tring Painters the $500, saying she wanted paints that would cost $200. Analyze the rights of the parties in this case. Answer: When one party is unjustly enriched at the expense of another, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties. The doctrine that requires this result is based on an implied-in-law contract. Since there really is no actual contractual agreement, the phrase quasi-contract often is used. The court will not allow Appy to benefit at the expense of Tring Painters, and since she noticed that they were using washable finesse paints but didn't object, she will have to pay the expenses. 77. Allan promises to pay $400 to Waker if he can steal the next day's test paper from their professor. That night, Waker steals the paper and brings it to Allan. Allan, who is now worried about being caught, tells Waker he does not want the test paper and refuses to pay him the $400. Has Allan breached the contract between him and Waker? Answer: This is a case of a void contract since it involves illegal purposes. A void contract is one that appears to be an agreement but lacks an essential requirement for validity and enforceability. The most typical example of a void contract is an apparent agreement that has an illegal purpose. Courts will generally take no action on a void contract, and they will leave the parties to a contract where they have put themselves. 78. Sam goes to a supermarket and fills his cart with food items, pushing it up to a checkout line. Discuss the type of contract Sam and the supermarket have. Answer: They have an implied-in-fact contract, which arise from the conduct of the parties rather than from words. implies express Since Sam has picked up food items from the supermarket for his personal use, it is implied that Sam should pay for the food items even though he did not make an express promise to pay for it. 79. What are the five essential elements of a valid contract? Answer: The five essential elements of a valid contract are offer, acceptance, consideration, capacity of the parties, and a lawful purpose. All contracts must have these elements. 80. Kevin has been offered the position of vice-president by the Earnest Group Pvt. Ltd. at their head office in Washington D.C. Earnest Group has also offered to provide Kevin and his family with a house, and an annual salary of $100,000. Kevin replied stating that he would accept the offer if the company would pay him an annual salary of $150,000, and relocation expenses. Analyze the agreements between the parties. Answer: Kevin and Earnest Group have not created a contract yet. Kevin has not accepted the offer but has made a counteroffer when he asked Earnest an annual salary of $150,000 and relocation expenses. Hence, Earnest's original offer is now terminated. For a contract to exist, the offeree has to express acceptance. If Earnest accepts Kevin's counteroffer, the contract would be valid. 81. Canary offers in writing to sell her ranch to Erik for $150,000. A week later, when Erik is about to mail his acceptance, Canary dies in an auto accident. Canary's heir informs Erik that she is no longer interested in selling the ranch. Erik decides to move to court, stating that the offer cannot be revoked since he had already accepted the offer and was about to mail it. Analyze the case and discuss what the court is likely to rule? Answer: An offer is terminated due to the offeror's death before the offer has been accepted. According to the mailbox rule, the acceptance becomes binding when it is "deposited" with the postal service. In this case, Canary died before Erik deposited the acceptance with the postal service. Hence, Erik's acceptance will not be recognized in court. Canary's offer to sell the ranch is terminated. 82. Sarrah agrees to sell her house to Tiffany for $300,000. Tiffany replies that she will be glad to buy the house at $300,000, and asked if the price included the furniture. Sarrah replied that the furniture was not included. Tiffany agreed to pay $300,000, but Sarrah demanded $350,000, stating that Tiffany's counteroffer terminated the earlier offer. Discuss the case. Answer: If the acceptance changes the terms of the offer or adds new terms, it is not really an acceptance. It is a counteroffer, and negotiations continue. Tiffany merely made an inquiry, not a counteroffer, since she did not add any new terms. The mailbox rule states that the offeror cannot revoke the offer once the offeree has accepted it. Tiffany accepted Sarrah's $300,000 offer before Sarrah revoked the offer. Hence Sarrah is bound by the contract and must sell the house to Tiffany for $300,000. 83. Explain the mailbox rule. Answer: Unless the offeror specifies a particular time, the acceptance of an offer usually binds the parties when the offeree dispatches it. Since the offeree frequently mails the acceptance, the acceptance becomes binding when it is "deposited" with the postal service—hence the deposited acceptance rule, also called the mailbox rule. The importance of the mailbox rule is that the offeror cannot revoke the offer once the offeree has accepted it. An added significance is that an offeror's revocation is not effective until the offeree actually receives it. Thus, a deposited acceptance creates a binding contract even though a revocation is also in the mail. 84. Ptomaine is a chef who has opened a new restaurant. He agrees with Bob, a baker, that Bob will deliver 10 dozen hamburger and hotdog buns each morning at 6:00 a.m. as long as he doesn't call to cancel the next morning's delivery by 6:00 p.m. the evening before. This goes on for about ten days when Ptomaine realizes at 10:00 p.m. one evening that he has a surplus of buns. At 6:00 a.m. the next morning he refuses to accept the morning delivery. Discuss, with reference to common law, whether a contract exists. Answer: In most cases, silence does not constitute an acceptance. However, one common law exception is that if silence has been previously agreed to be a valid acceptance, a contract will exist. As a result, a valid and enforceable contract exists and Ptomaine will be liable for the rejected shipment. 85. Ray Contractors have agreed to build Yen's house for $25,000 in two years. However, six months after the work began, Ray Contractors demand an additional $5,000 from Yen to complete the work. Yen agrees, but when the work was completed, Yen pays Ray Contractors only $20,000. Ray decides to sue Yen. Analyze the case. Answer: A party to an agreement does not give consideration by promising to do something that he or she is already obligated to do. Ray Contractors will lose the lawsuit, as it is under a preexisting obligation to do the work for which Yen promised an additional $5,000. If the contractor promises to do something he was not already obligated to do, there would be consideration to support the promise of the additional $5,000. Promising to modify the design of the house would illustrates such new consideration. 86. Sherry Shoe Company sends an offer by fax to Hulk Retailers to sell 100,000 pairs of shoes at $150 each, and mentions that it will hold the offer open for Hulk for two months. Four months after receiving Sherry's offer, Hulk faxes an acceptance. However, at this time Sherry has already entered a contract with another retailer. Discuss the situation. Answer: The offer by Sherry is an example of a firm offer, where a merchant agrees to hold the offer open for a reasonable period of time, without any consideration. A firm offer exists when a merchant offering goods promises in writing that the offer will not be revoked for a period not to exceed three months. Since Hulk replied after the time limit, Sherry's offer is automatically revoked. Sherry Shoe Company can enter into a contract with another retailer. 87. Adam applied for a loan of $80,000, to purchase land from Chad. Chad makes an oral promise to Adam that he will allow Adam a period two months to accept his offer. Chad refuses to give this promise in writing. Discuss how Adam can ensure that the owner does not sell the land to another buyer in two months. Answer: In contracts that are not between merchants selling goods, a promise to keep an offer open for a certain time period must be supported by the offeree's consideration. Adam can create an option contract with Chad, by paying a consideration for the offer. With this consideration, Chad cannot revoke the offer during the two months. 88. Explain the doctrine of promissory estoppel. Answer: An important exception to the rule requiring consideration to support a promise is the doctrine of promissory estoppel. This doctrine arises when a promisee justifiably relies on a promisor's promise to his or her economic injury. The promisor must know that the promisee is likely to rely on the promise. Promissory estoppel is increasingly used when the facts of a business relationship do not amount to an express or implied contract. 89. Steve, 17, intentionally misrepresents his age while buying a TV set from Rainbow Electronics. His father discovers this and forces Steve to return the television set and get back the money. Steve visits Rainbow Electronics and disaffirms the contract to buy the television set. Analyze the case. Answer: A contract into which a minor has entered is voidable at the election of the minor. The minor can disaffirm the contract and legally recover any consideration that has been given an adult, even if the minor cannot return the adult's consideration. In a number of states, courts will hold a minor who has misrepresented his or her age to contractual promises. 90. Hailey and Ellen met with an auto accident, as a result of Ellen's over speeding. Hailey has suffered injuries, and due to an after shock and trauma, ‘cannot remember' what caused the accident. Ellen, who has suffered injuries herself, takes advantage of the situation and convinces Hailey that the accident was no one's fault. They sign a contract agreeing that neither will sue the other for damages. Analyze the case if the contract is challenged in court. Answer: The court is most likely to judge that Hailey is not in the mental or physical capacity to enter into any contract. In most cases involving adult capacity to contract, courts measure capacity by whether the adult was capable of understanding the nature and purpose of the contract. If a court judges a person to be mentally incompetent, the contract made by the person becomes voidable. Hailey can either claim damages from Ellen, or demand a consideration to give up her right to file a suit. Hailey can also file a suit against Ellen for fraud, because Ellen intentionally misstated that the accident was no one's fault, to induce Hailey to rely justifiably to her injury. 91. What is a covenant not to compete and under what conditions are they valid? Answer: A covenant not to compete is an agreement designed to protect employers and purchasers of businesses. A covenant not to compete can be used to prohibit employees from receiving training and then leaving to work for a competitor. They also protect the buyer of a business from having the seller set up a competing business. For the covenant not to compete to be valid, it must be reasonable with regard to time, location (space) and scope of prohibitions. 92. Kaylie and Josh visit Alice Jewels to buy a diamond engagement ring. The jeweler presents them a zircon ring and intentionally calls it a diamond. Kaylie loves the ring and Josh buys it, happy about gifting Kaylie a diamond ring. However, they later discover it is a zircon. Analyze on what grounds Josh can sue the jeweler. Answer: Josh can bring a lawsuit against the jeweler based on fraud. Fraud involves an intentional misstatement of a material fact that induces one to rely justifiably to his or her injury. Since the jeweler intentionally called the zircon a diamond, persuading Josh to purchase it on that basis, he can be sued in court for fraud. 93. Discuss how undue influence creates voidable contracts. Answer: Undue influence occurs when one is taken advantage of unfairly through a contract by a party who misuses a position of relationship or legal confidence. Contracts voidable because of undue influence often arise when persons weakened by age or illness are persuaded to enter into a disadvantageous contract. 94. Stephanie hires Tommy to renovate her farm house and repair some minor damages for $1,000. Tommy informs her that it will take him at least 6 months to complete the work. Discuss whether the parties in question have to enter into a written agreement for such a contract to be enforceable. Answer: The statute of frauds applies to a contract the parties cannot perform within one year after its making. An oral contract for a performance for less than one year is enforceable in court. 95. Jacob and Janice enter into an oral contract, stating that Janice will sell her house to Jacob. Jacob makes the part payment to Janice as per the contract. During the time that Janice is vacating the house, Jacob hires a contractor to build a fence around the backyard to ensure security. However, Janice revokes her offer saying that a third party is paying a higher price for the house, and her offer to Jacob was not in written form. Jacob, who has spent $5,000 on the fencing, decides to sue Janice. Analyze the case. Answer: The doctrine of part performance creates an exception to the requirement that sales of interests in land must be in writing. When a buyer of land has made valuable improvements in it, or when the buyer is in possession of it and has paid part of the purchase price, even an oral contract to sell is enforceable. The courts will enforce an oral agreement involving land title if the part performance clearly establishes the intent of the parties as buyer and seller. Janice will have to sell the house to Jacob. 96. Hume hired a security services agency to guard his warehouse. The arrangement of the security was such that Jim's house, located next to Hume's warehouse, was also protected. On one day, the security personnel don't show up, and Jim's house is burglarized. Jim files a lawsuit against the security services agency. Discuss the case. Answer: Jim is an incidental beneficiary in this case. An incidental beneficiary is a third party who unintentionally benefits from a contract. The incidental beneficiary has no rights under a contract. 97. Mark entered into a written contract to sell Dobby his music collection for $10,000 payable in five installments. Mark then sells Cathy the right to collect the proceeds of his sale. Discuss Cathy's legal rights. Answer: Mark has made an assignment. If the assignment is properly structured, the assignee can enforce the original contract. When an assignor assigns rights, an implied warranty is made that the rights are valid and enforceable. Mark will have to send a notice to Dobby notifying him of the assignment. Cathy can enforce her rights as the assignee to collect the proceeds of Mark's sale from Dobby. 98. Vanessa has assigned Leslie her rights to collect payments from Laura. Later, Vanessa assigned the same rights to collect her payments from Laura to Danielle. Discuss the legality of the case, and which assignee can claim rights to payments from Laura. Answer: A dishonest or careless assignor may assign the same contract rights to two different assignees. Notification of the obligor is especially important in this situation. In most states, the law says that the first assignee to notify the obligor has priority no matter which assignee receives the first assignment. In this case, enforcement of rights depends on whether Leslie or Danielle notify Laura first. 99. What is a novation? Answer: A novation is a three (or more) party contract wherein the original contracting parties agree to relieve the obligor from liability by substituting an assignee in the place of this party. Such agreements usually are found in business contracts when an organization is acquired through purchase or merger transactions. 100. Without permission, a duty that involves skill, character, or training cannot be delegated. Explain why. Answer: A duty requiring skill and expertise is the most likely reason why the party to perform the work was contracted with originally. If the duty, such as surgery, could be passed on to someone else without the permission of the other contracting party, then there is no reason to have a contract at all. The patient wanted that particular surgeon to perform the surgery; it was not merely the desire to pay that surgeon money for having the procedure done. Test Bank for The Legal and Regulatory Environment of Business O. Lee Reed, Marisa Pagnattaro, Daniel Cahoy, Peter Shedd, Jere Morehead 9780073524993, 9780077437336, 9781260161793
