Module 26: Contracts

Overview

Contract rules provide a foundation for many other law topics; consequently, a good understanding of the material in this module will aid you in comprehending the material in other modules.

A. Essential Elements of a Contract

B. Types of Contracts

C. Discussion of Essential Elements of a Contract

D. Written Contracts

E. Assignment and Delegation

F. Third-Party Beneficiary Contracts

G. Performance of Contract

H. Discharge of Contracts

I. Remedies

J. Jurisdiction over Defendant for Online Transactions

K. Interference with Contractual Relations

Key Terms

Multiple-Choice Questions

Multiple-Choice Answers and Explanations

Simulations

Simulation Solutions

It is important that you realize that there are two sets of contract rules to learn. The first is the group of common law contract rules that, in general, apply to contracts that are not a sale of goods. Examples of contracts that are covered by the common law include real estate, insurance, employment, and professional services. The second set is the contract rules contained in Article Two of the Uniform Commercial Code (UCC). The UCC governs transactions involving the sale of goods (i.e., tangible personal property). Hence, if the contract is for the sale or purchase of tangible personal property, the provisions of the UCC will apply, and not the common law. For every contract question, it is important that you determine which set of rules to apply. Fortunately many of the rules under these two areas of law are the same. The best way for you to master this area is to first study the common law rules for a topic. Then review the rules that are different under the UCC. Since the common law and the UCC rules have much in common, you will be learning contract law in the most understandable and efficient manner.

Contract law is tested by multiple-choice questions. You need to know the essential elements of a contract because the CPA examination tests heavily on offer and acceptance. Also, understand that an option is an offer supported by consideration. Distinguish between an option in the common law and a firm offer under the UCC; and understand how these are affected by revocations and rejections. You need to comprehend what consideration is and that it must be bargained for to be valid. The exam also requires that you understand that “past consideration” and moral obligations are not really consideration at all. You should have a solid understanding of the Statute of Frauds.

Once a contract is formed, third parties can obtain rights in the contract. An assignment is one important way this can happen.

If a contract is not performed, one of the parties may be held in breach of contract. Note that the possible remedies include monetary damages, specific performance, liquidated damages, and anticipatory repudiation. Before beginning the reading you should review the key terms at the end of the module.

A. Essential Elements of a Contract

B. Types of Contracts

C. Discussion of Essential Elements of a Contract

D. Written Contracts

E. Assignment and Delegation

F. Third-Party Beneficiary Contracts

G. Performance of Contract

H. Discharge of Contracts

I. Remedies

J. Jurisdiction over Defendant for Online Transactions

K. Interference with Contractual Relations

KEY TERMS

Suffixes “-or” and “-ee.” These suffixes are used frequently in the law, but especially in contract law. The “-or” indicates the person performing the action, for example, the promisor is making a promise, the assignor is making an assignment, the offeror makes an offer, etc. The “-ee” is the receiver of the action, for example, the promisee is a person to whom the promise is made, the assignee is someone who receives the assignment, the offeree is a person to whom an offer is made, etc.

Acceptance. An unequivocal expression to enter into a contract based on the terms provided in the offer.

Capacity. The mental ability to understand the nature of the terms of the contract.

Compensatory damages. The most common remedy for breach of contract. Designed to pay the nonbreaching party for the amount of loss that has been suffered.

Consideration. Something that has value in the eyes of the law that induces another to enter into a contract

Contract. Promises that the courts will enforce.

Counteroffer. When an offeree alters the terms of the original offer, which terminates the original offer. The offeree now becomes the offeror.

Formation defenses. These actions invalidate what otherwise would be mutual assent. The actions include duress, fraud, mistake, and undue influence. While offer and acceptance appear to be present on the surface, the presence of a formation defense shows a lack of true mutual assent.

Minor. A person who is younger than the legal age to enter into a binding contract. A minor’s contract is voidable by the minor.

Mirror image rule. An acceptance must precisely reflect (mirror) the offer to be a valid acceptance

Mitigation of damages. The nonbreaching party has an obligation to keep damages as low as is reasonably possible.

Mutual assent. Parties have voluntarily come to a common understanding of the terms of the bargain. Mutual assent is the combination of a valid offer and a valid acceptance.

Offer. An unequivocal expression of party’s willingness to enter into a contract.

Parol evidence rule. Prevents the introduction of any documents, testimony, or any evidence that contradicts the language of a written contract. This rule only forbids that evidence that arose prior to, or at the same time, that the written contract was created.

Promissory estoppel. An implied contract at law, where a court rules that a contract exists even though an element of a contract is missing. Court will possibly use this where a promissee has reasonably relied on a promisor’s promise and that reliance has injured the promisee.

Specific performance. A remedy that is available for unique items, where money damages would not be adequate to compensate the nonbreaching party. Effectively, the court orders the breaching party to perform the original promise under the contract.

Statute of Frauds. A rule of evidence that requires certain contracts be in writing or have written evidence to support the contracts’ existence. These include contracts that transfer interests in real property (real estate); cannot, by the terms of the contract, be possibly performed within 1 year; answer for the debts of another; or involve the sale of goods for $500 or more.

Void. Contracts that are void are not enforceable by either party.

Voidable. Contracts that are voidable are valid unless the party, with the option to do so, chooses to make the contract void.

Multiple-Choice Questions (1–56)

C.1. Offer

1. Carson Corp., a retail chain, asked Alto Construction to fix a broken window at one of Carson’s stores. Alto offered to make the repairs within three days at a price to be agreed on after the work was completed. A contract based on Alto’s offer would fail because of indefiniteness as to the

a. Price involved.

b. Nature of the subject matter.

c. Parties to the contract.

d. Time for performance.

2. On September 10, Harris, Inc., a new car dealer, placed a newspaper advertisement stating that Harris would sell ten cars at its showroom for a special discount only on September 12, 13, and 14. On September 12, King called Harris and expressed an interest in buying one of the advertised cars. King was told that five of the cars had been sold and to come to the showroom as soon as possible. On September 13, Harris made a televised announcement that the sale would end at 10:00 PM that night. King went to Harris’ showroom on September 14 and demanded the right to buy a car at the special discount. Harris had sold the ten cars and refused King’s demand. King sued Harris for breach of contract. Harris’ best defense to King’s suit would be that Harris’

a. Offer was unenforceable.

b. Advertisement was not an offer.

c. Television announcement revoked the offer.

d. Offer had not been accepted.

3. On June 15, Peters orally offered to sell a used lawn mower to Mason for $125. Peters specified that Mason had until June 20 to accept the offer. On June 16, Peters received an offer to purchase the lawn mower for $150 from Bronson, Mason’s neighbor. Peters accepted Bronson’s offer. On June 17, Mason saw Bronson using the lawn mower and was told the mower had been sold to Bronson. Mason immediately wrote to Peters to accept the June 15 offer. Which of the following statements is correct?

a. Mason’s acceptance would be effective when received by Peters.

b. Mason’s acceptance would be effective when mailed.

c. Peters’ offer had been revoked and Mason’s acceptance was ineffective.

d. Peters was obligated to keep the June 15 offer open until June 20.

4. Calistoga offers to sell her home to Drake for $300,000. Drake asks her if she would accept $250,000. Which of the following is true?

a. Drake’s response is mere inquiry; therefore, the $300,000 offer by Calistoga is still in force.

b. Drake’s response is a counteroffer effectively terminating the $300,000 offer and instigating an offer for $250,000.

c. Drake’s response is a rejection of the $300,000 offer, and there is no offer for $250,000 because it is too indefinite to be an offer.

d. Because of ambiguity, both offers are terminated by operation of law.

5. Opal offered, in writing, to sell Larkin a parcel of land for $300,000. If Opal dies, the offer will

a. Terminate prior to Larkin’s acceptance only if Larkin received notice of Opal’s death.

b. Remain open for a reasonable period of time after Opal’s death.

c. Automatically terminate despite Larkin’s prior acceptance.

d. Automatically terminate prior to Larkin’s acceptance.

C.2. Acceptance

6. On April 1, Fine Corp. faxed Moss an offer to purchase Moss’ warehouse for $500,000. The offer stated that it would remain open only until April 4 and that acceptance must be received to be effective. Moss sent an acceptance on April 4 by overnight mail and Fine received it on April 5. Which of the following statements is correct?

a. No contract was formed because Moss sent the acceptance by an unauthorized method.

b. No contract was formed because Fine received Moss’ acceptance after April 4.

c. A contract was formed when Moss sent the acceptance.

d. A contract was formed when Fine received Moss’ acceptance.

7. On February 12, Harris sent Fresno a written offer to purchase Fresno’s land. The offer included the following provision: “Acceptance of this offer must be by registered or certified mail, received by Harris no later than February 18 by 5:00 p.m. CST.” On February 18, Fresno sent Harris a letter accepting the offer by private overnight delivery service. Harris received the letter on February 19. Which of the following statements is correct?

a. A contract was formed on February 19.

b. Fresno’s letter constituted a counteroffer.

c. Fresno’s use of the overnight delivery service was an effective form of acceptance.

d. A contract was formed on February 18 regardless of when Harris actually received Fresno’s letter.

8. Kay, an art collector, promised Hammer, an art student, that if Hammer could obtain certain rare artifacts within two weeks, Kay would pay for Hammer’s postgraduate education. At considerable effort and expense, Hammer obtained the specified artifacts within the two-week period. When Hammer requested payment, Kay refused. Kay claimed that there was no consideration for the promise. Hammer would prevail against Kay based on

a. Unilateral contract.

b. Unjust enrichment.

c. Public policy.

d. Quasi contract.

9. On September 27, Summers sent Fox a letter offering to sell Fox a vacation home for $150,000. On October 2, Fox replied by mail agreeing to buy the home for $145,000. Summers did not reply to Fox. Do Fox and Summers have a binding contract?

a. No, because Fox failed to sign and return Summers’ letter.

b. No, because Fox’s letter was a counteroffer.

c. Yes, because Summers’ offer was validly accepted.

d. Yes, because Summers’ silence is an implied acceptance of Fox’s letter.

C.3. Formation Defenses and Consideration

10. Wick Company made a contract in writing to hire Zake for five years for $150,000 per year. After two years, Zake asked Wick for a raise of $20,000 per year. Wick at first refused but agreed to pay Zake a $60,000 bonus after Zake completed the fifth year of work. Zake put some pressure on Wick to get Wick to agree to these terms. After the fifth year, Zake left and demanded Wick pay Zake the $60,000 bonus and Wick refused. Zake sued Wick for the $60,000 bonus. Who wins?

a. Zake, because Wick agreed to the bonus.

b. Zake, if the bonus was agreed to in writing.

c. Wick, even though Wick agreed to the bonus.

d. Wick, because Zake had applied some pressure to get the bonus.

11. Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook’s part. Grove will prevail if he can establish that

a. Prior to Grove’s promise, Brook had already performed the requested act.

b. Brooks’ only claim of consideration was the relinquishment of a legal right.

c. Brook’s asserted consideration is only worth $400.

d. The consideration to be performed by Brook will be performed by a third party.

12. Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne’s books at $0.80 per book. Later, Dunne requested, in good faith, that the price be reduced to $.70 per book. Cook agreed orally to reduce the price to $.70. Under the circumstances, the oral agreement is

a. Enforceable, but proof of it is inadmissible into evidence.

b. Enforceable, and proof of it is admissible into evidence.

c. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence.

d. Unenforceable, due to the statute of frauds, and proof of it is inadmissible into evidence.

13. In which of the following situations does the first promise serve as valid consideration for the second promise?

a. A police officer’s promise to catch a thief for a victim’s promise to pay a reward.

b. A builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion.

c. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 liquidated debt.

d. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt.

14. Which of the following will be legally binding despite lack of consideration?

a. An employer’s promise to make a cash payment to a deceased employee’s family in recognition of the employee’s many years of service.

b. A promise to donate money to a charity on which the charity relied in incurring large expenditures.

c. A modification of a signed contract to purchase a parcel of land.

d. A merchant’s oral promise to keep an offer open for sixty days.

15. Rail, who was sixteen years old, purchased an $800 computer from Elco Electronics. Rail and Elco are located in a state where the age of majority is eighteen. On several occasions Rail returned the computer to Elco for repairs. Rail was very unhappy with the computer. Two days after reaching the age of eighteen, Rail was still frustrated with the computer’s reliability, and returned it to Elco, demanding an $800 refund. Elco refused, claiming that Rail no longer had a right to disaffirm the contract. Elco’s refusal is

a. Correct, because Rail’s multiple requests for service acted as a ratification of the contract.

b. Correct, because Rail could have transferred good title to a good-faith purchaser for value.

c. Incorrect, because Rail disaffirmed the contract within a reasonable period of time after reaching the age of eighteen.

d. Incorrect, because Rail could disaffirm the contract at any time.

16. Green was adjudicated incompetent by a court having proper jurisdiction. Which of the following statements is correct regarding contracts subsequently entered into by Green?

a. All contracts are voidable.

b. All contracts are valid.

c. All contracts are void.

d. All contracts are enforceable.

17. All of the following are effective methods of ratifying a contract entered into by a minor except

a. Expressly ratifying the contract after reaching the age of majority.

b. Failing to disaffirm the contract within a reasonable time after reaching the age of majority.

c. Ratifying the contract before reaching the age of majority.

d. Ratifying the contract by implication after reaching the age of majority.

18. Under a personal services contract, which of the following circumstances will cause the discharge of a party’s duties?

a. Death of the party who is to receive the services.

b. Cost of performing the services has doubled.

c. Bankruptcy of the party who is to receive the services.

d. Illegality of the services to be performed.

19. Which of the following would be unenforceable because the subject matter is illegal?

a. A contingent fee charged by an attorney to represent a plaintiff in a negligence action.

b. An arbitration clause in a supply contract.

c. A restrictive covenant in an employment contract prohibiting a former employee from using the employer’s trade secrets.

d. An employer’s promise not to press embezzlement charges against an employee who agrees to make restitution.

20. Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract?

a. Nonexpert opinion.

b. Appraised value.

c. Prediction.

d. Immaterial fact.

21. If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be

a. Void as a matter of law.

b. Void at the election of the buyer.

c. Valid as to both parties.

d. Voidable at the election of the seller.

22. If a person is induced to enter into a contract by another person because of the close relationship between the parties, the contract may be voidable under which of the following defenses?

a. Fraud in the inducement.

b. Unconscionability.

c. Undue influence.

d. Duress.

23. Long purchased a life insurance policy with Tempo Life Insurance Co. The policy named Long’s daughter as beneficiary. Six months after the policy was issued, Long died of a heart attack. Long had failed to disclose on the insurance application a known preexisting heart condition that caused the heart attack. Tempo refused to pay the death benefit to Long’s daughter. If Long’s daughter sues, Tempo will

a. Win, because Long’s daughter is an incidental beneficiary.

b. Win, because of Long’s failure to disclose the preexisting heart condition.

c. Lose, because Long’s death was from natural causes.

d. Lose, because Long’s daughter is a third-party donee beneficiary.

24. Petersen went to Jackson’s home to buy a used car advertised in the newspaper. Jackson told Petersen that “it is a great car” and that “the engine had been overhauled a year ago.” Shortly after he bought the car, Petersen began experiencing problems with the engine. When Jackson refused to refund his money, Petersen sued for fraud based on it was not a “great car” and also based on the fact, as learned later, the overhaul was done thirteen months ago, not a year. Will Petersen win his case?

a. Yes, Jackson’s statement that “it is a great car” is actionable fraud.

b. Yes, Jackson’s statement about the overhaul is actionable fraud.

c. Yes, both the statement that “it is a great car” and the statement about the overhaul are actionable fraud.

d. No.

25. A building subcontractor submitted a bid for construction of a portion of a high-rise office building. The bid contained material computational errors. The general contractor accepted the bid with knowledge of the errors. Which of the following statements best represents the subcontractor’s liability?

a. Not liable because the contractor knew of the errors.

b. Not liable because the errors were a result of gross negligence.

c. Liable because the errors were unilateral.

d. Liable because the errors were material.

26. Maco, Inc. and Kent contracted for Kent to provide Maco certain consulting services at an hourly rate of $20. Kent’s normal hourly rate was $90 per hour, the fair market value of the services. Kent agreed to the $20 rate because Kent was having serious financial problems. At the time the agreement was negotiated, Maco was aware of Kent’s financial condition and refused to pay more than $20 per hour for Kent’s services. Kent has now sued to rescind the contract with Maco, claiming duress by Maco during the negotiations. Under the circumstances, Kent will

a. Win, because Maco refused to pay the fair market value of Kent’s services.

b. Win, because Maco was aware of Kent’s serious financial problems.

c. Lose, because Maco’s actions did not constitute duress.

d. Lose, because Maco cannot prove that Kent, at the time, had no other offers to provide consulting services.

27. To prevail in a common law action for fraud in the inducement, a plaintiff must prove that the

a. Defendant was an expert with regard to the misrepresentations.

b. Defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive.

c. Misrepresentations were in writing.

d. Plaintiff was in a fiduciary relationship with the defendant.

D. Written Contracts

28. On June 1, 2013, Decker orally guaranteed the payment of a $5,000 note Decker’s cousin owed Baker. Decker’s agreement with Baker provided that Decker’s guaranty would terminate in eighteen months. On June 3, 2013, Baker wrote Decker confirming Decker’s guaranty. Decker did not object to the confirmation. On August 23, 2013, Decker’s cousin defaulted on the note and Baker demanded that Decker honor the guaranty. Decker refused. Which of the following statements is correct?

a. Decker is liable under the oral guaranty because Decker did not object to Baker’s June 3 letter.

b. Decker is not liable under the oral guaranty because it expired more than one year after June 1.

c. Decker is liable under the oral guaranty because Baker demanded payment within one year of the date the guaranty was given.

d. Decker is not liable under the oral guaranty because Decker’s promise was not in writing.

29. Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a down payment of $10,000. Nolan did not sign the agreement, but allowed Train to move into the house. Before closing, Nolan refused to go through with the sale. Train sued Nolan to compel specific performance. Under the provisions of the Statute of Frauds

a. Train will win because Train signed the agreement and Nolan did not object.

b. Train will win because Train made a down payment and took possession.

c. Nolan will win because Nolan did not sign the agreement.

d. Nolan will win because the house was worth more than $500.

30. Cherry contracted orally to purchase Picks Company for $1,500,000 if it is profitable for one full year after the making of the oral contract. An auditor would be brought in at the end of the year to verify this. Even though the company turns out to be profitable during the upcoming year, Cherry refuses to go through with the contract, claiming that it was unenforceable because it was not in writing. Is Cherry correct?

a. Yes, because the contract could not be completed within one year.

b. Yes, because the contract was for $500 or more.

c. No, because the company was profitable as agreed for one year.

d. No, because Picks Company relied on Cherry’s promise.

31. Which of the following statements is true with regard to the Statute of Frauds?

a. All contracts involving consideration of more than $500 must be in writing.

b. The written contract must be signed by all parties.

c. The Statute of Frauds applies to contracts that can be fully performed within one year from the date they are made.

d. The contract terms may be stated in more than 1 document.

32. Carson agreed orally to repair Ives’ rare book for $450. Before the work was started, Ives asked Carson to perform additional repairs to the book and agreed to increase the contract price to $650. After Carson completed the work, Ives refused to pay and Carson sued. Ives’ defense was based on the Statute of Frauds. What total amount will Carson recover?

a. $0

b. $200

c. $450

d. $650

33. Landry Company contracted orally with Newell to pay her $50,000 for the completion of an ethics audit of Landry Company. The report is to span a period of time of at least ten months and is due in fourteen months from now. Newell has agreed orally to perform the ethics audit and says that she will begin within three months, noting that even if she delays the full three months, she will have the report ready within the fourteen-month deadline. Does this contract fall under the Statute of Frauds?

a. Yes, because the contract is for $500 or more.

b. Yes, because the deadline for the contract is over one year.

c. No, despite the due date of fourteen months.

d. No, because both parties waived the Statute of Frauds by their oral agreement.

34. Rogers and Lennon entered into a written computer consulting agreement that required Lennon to provide certain weekly reports to Rogers. The agreement also stated that Lennon would provide the computer equipment necessary to perform the services, and that Rogers’ computer would not be used. As the parties were executing the agreement, they orally agreed that Lennon could use Rogers’ computer. After executing the agreement, Rogers and Lennon orally agreed that Lennon would report on a monthly, rather than weekly, basis. The parties now disagree on Lennon’s right to use Rogers’ computer and how often Lennon must report to Rogers. In the event of a lawsuit between the parties, the parol evidence rule will

a. Not apply to any of the parties’ agreements because the consulting agreement did not have to be in writing.

b. Not prevent Lennon from proving the parties’ oral agreement that Lennon could use Rogers’ computer.

c. Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.

d. Not apply to the parties’ agreement to allow Lennon to use Rogers’ computer because it was contemporaneous with the written agreement.

35. Where the parties have entered into a written contract intended as the final expression of their agreement, which of the following agreements will be admitted into evidence because they are not prohibited by the parol evidence rule?

36. In negotiations with Andrews for the lease of Kemp’s warehouse, Kemp orally agreed to pay one-half of the cost of the utilities. The written lease, later prepared by Kemp’s attorney, provided that Andrews pay all of the utilities. Andrews failed to carefully read the lease and signed it. When Kemp demanded that Andrews pay all of the utilities, Andrews refused, claiming that the lease did not accurately reflect the oral agreement. Andrews also learned that Kemp intentionally misrepresented the condition of the structure of the warehouse during the negotiations between the parties. Andrews sued to rescind the lease and intends to introduce evidence of the parties’ oral agreement about sharing the utilities and the fraudulent statements made by Kemp. The parol evidence rule will prevent the admission of evidence concerning thet

37. Joan Silver had viewed some land that she wished to purchase. It was offered for sale by Daniel Tweney over the Internet for $200,000. Silver believes this to be a good deal for her and thus wishes to purchase it. Silver and Tweney have communicated online and wish to make a contract for the land over the Internet. Which of the following statements is (are) correct?

I. Because this contract is covered by the Statute of Frauds, this contract cannot be accomplished over the Internet.

II. Because of the parol evidence rule, this contract cannot be completed over the Internet.

III. Because this contract is covered by the Uniform Commercial Code, it may not be accomplished over the Internet.

a. Only I is correct.

b. I and II only are correct.

c. I and III only are correct.

d. Neither I, II, nor III is correct.

E. Assignment and Delegation

38. Generally, which of the following contract rights are assignable?

39. One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must

a. Be supported by adequate consideration from the assignee.

b. Be in writing and signed by the assignor.

c. Not materially increase the other party’s risk or duty.

d. Not be revocable by the assignor.

Items 40 and 41 are based on the following:

Egan contracted with Barton to buy Barton’s business. The contract provided that Egan would pay the business debts Barton owed Ness and that the balance of the purchase price would be paid to Barton over a ten-year period. The contract also required Egan to take out a decreasing term life insurance policy naming Barton and Ness as beneficiaries to ensure that the amounts owed Barton and Ness would be paid if Egan died.

40. Barton’s contract rights were assigned to Vim, and Egan was notified of the assignment. Despite the assignment, Egan continued making payments to Barton. Egan died before completing payment and Vim sued Barton for the insurance proceeds and the other payments on the purchase price received by Barton after the assignment. To which of the following is Vim entitled?

F. Third-Party Beneficiary Contracts

41. Which of the following would describe Ness’ status under the contract and insurance policy?

42. Your client, Bugle, owns a parking lot near downtown San Francisco. One day Bugle is excited because he learns that Fargo, who owns a parking lot next door, has made a contract with ABC Company to sell her land. ABC Company can then construct a building that will contain several nice professional offices. Bugle figures that he will charge more for his parking. He later discovers that the contract fell through. He says that when he finds out who breached the contract, he will sue that party for lost profits that he would have earned. Which of the following is correct?

a. If Fargo was the one who breached the contract, Bugle may sue her if ABC had already made some payments on the contract.

b. If ABC was the party who breached, ABC is liable to Bugle.

c. Bugle may sue either party, and the nonbreaching party may then recover from the breaching party.

d. Bugle has no legal rights against either party.

43. Baxter, Inc. and Globe entered into a contract. After receiving valuable consideration from Clay, Baxter assigned its rights under the contract to Clay. In which of the following circumstances would Baxter not be liable to Clay?

a. Clay released Globe.

b. Globe paid Baxter.

c. Baxter released Globe.

d. Baxter breached the contract.

44. Mackay paid Manus $1,000 to deliver a painting to Mackay’s friend Mann. When they met and signed the contract, Mackay said she wanted the painting delivered as soon as possible because it was a gift for Mann’s birthday. Several months have passed without the delivery. Mann can maintain lawsuits against which parties to get the painting?

a. Manus only.

b. Mackay only.

c. Manus, but only if he also brings suit against Mackay.

d. Manus or Mackay at Mann’s option.

45. Ferco, Inc. claims to be a creditor beneficiary of a contract between Bell and Allied Industries, Inc. Allied is indebted to Ferco. The contract between Bell and Allied provides that Bell is to purchase certain goods from Allied and pay the purchase price directly to Ferco until Allied’s obligation is satisfied. Without justification, Bell failed to pay Ferco and Ferco sued Bell. Ferco will

a. Not prevail, because Ferco lacked privity of contract with either Bell or Allied.

b. Not prevail, because Ferco did not give any consideration to Bell.

c. Prevail, because Ferco was an intended beneficiary of the contract between Allied and Bell.

d. Prevail, provided Ferco was aware of the contract between Bell and Allied at the time the contract was entered into.

G. Performance of Contract

46. Parc hired Glaze to remodel and furnish an office suite. Glaze submitted plans that Parc approved. After completing all the necessary construction and painting, Glaze purchased minor accessories that Parc rejected because they did not conform to the plans. Parc refused to allow Glaze to complete the project and refused to pay Glaze any part of the contract price. Glaze sued for the value of the work performed. Which of the following statements is correct?

a. Glaze will lose because Glaze breached the contract by not completing performance.

b. Glaze will win because Glaze substantially performed and Parc prevented complete performance.

c. Glaze will lose because Glaze materially breached the contract by buying the accessories.

d. Glaze will win because Parc committed anticipatory breach.

47. Which of the following types of conditions affecting performance may validly be present in contracts?

H. Discharge of Contracts

48. Which of the following actions if taken by one party to a contract generally will discharge the performance required of the other party to the contract?

a. Material breach of the contract.

b. Delay in performance.

c. Tender.

d. Assignment of rights.

49. Which of the following actions will result in the discharge of a party to a contract?

50. To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a

a. Novation.

b. Release.

c. Rescission.

d. Revocation.

51. Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the

a. Contract is negotiated.

b. Contract is breached.

c. Construction is begun.

d. Contract is signed.

I. Remedies

52. Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye. To what relief is Hodges entitled?

a. Punitive damages and compensatory damages.

b. Specific performance and compensatory damages.

c. Consequential damages or punitive damages.

d. Compensatory damages or specific performance.

53. Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures which are of slightly lesser quality than Ace fixtures, but in all other respects meet White’s needs. Which of the following statements is correct?

a. White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.

b. White will not be able to recover any damages from Ames because the breach was inadvertent.

c. Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.

d. Ames must install Ace fixtures or White will not be obligated to accept the warehouse.

54. Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master’s computer system failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will

a. Win, unless the liquidated damage provision is determined to be a penalty.

b. Win, because under all circumstances liquidated damage provisions are enforceable.

c. Lose, because Accur’s breach was not material.

d. Lose, because liquidated damage provisions violate public policy.

55. Nagel and Fields entered into a contract in which Nagel was obligated to deliver certain goods to Fields by September 10. On September 3, Nagel told Fields that Nagel had no intention of delivering the goods required by the contract. Prior to September 10, Fields may successfully sue Nagel under the doctrine of

a. Promissory estoppel.

b. Accord and satisfaction.

c. Anticipatory repudiation.

d. Substantial performance.

56. Maco Corp. contracted to sell 1,500 bushels of potatoes to LBC Chips. The contract did not refer to any specific supply source for the potatoes. Maco intended to deliver potatoes grown on its farms. An insect infestation ruined Maco’s crop but not the crops of other growers in the area. Maco failed to deliver the potatoes to LBC. LBC sued Maco for breach of contract. Under the circumstances, Maco will

a. Lose, because it could have purchased potatoes from other growers to deliver to LBC.

b. Lose, unless it can show that the purchase of substitute potatoes for delivery to LBC would make the contract unprofitable.

c. Win, because the infestation was an act of nature that could not have been anticipated by Maco.

d. Win, because both Maco and LBC are assumed to accept the risk of a crop failure.

Multiple-Choice Answers and Explanations

Answers

Explanations

1. (a) Under common law, an offer must be definite and certain as to what will be agreed upon in the contract. Essential terms are the parties involved, the price, the time for performance, and the subject matter (quantity and type). The price element of the contract was not present.

2. (b) Advertisements in almost all cases are merely invitations for interested parties to make an offer. Thus, Harris has not made an offer, but is seeking offers through the use of the advertisement. Answers (a), (c), and (d) are incorrect since each of the answers assumes that an offer was made, but the advertisement does not constitute an offer.

3. (c) Generally an offeror may revoke an offer at any time prior to acceptance by the offeree. Revocation is effective when it is received by the offeree. Revocation also occurs if the offeree learns by a reliable means that the offeror has already sold the subject of the offer. In this situation, Peters’ offer was effectively revoked when Mason learned that the lawn mower had been sold to Bronson. Therefore, Mason’s acceptance was ineffective. Answers (a) and (b) are incorrect because the offer had been revoked prior to Mason’s acceptance. Answer (d) is incorrect because Peters was not obligated to keep the offer open. Note that if consideration had been paid by Mason to keep the offer open, an option contract would exist and the offer could not be revoked before the stated time.

4. (a) Drake did not intend to reject the $300,000 offer but is simply seeing if Calistoga might consider selling the home for less. Answer (b) is incorrect because a counteroffer takes place when the original offer is rejected and a new offer takes its place. Answer (c) is incorrect because Drake showed no intention of rejecting the offer by his mere inquiry. Answer (d) is incorrect because ambiguity is not one of the grounds to have an offer terminated by operation of law.

5. (d) An offer automatically terminates upon the occurrence of any of the following events: (1) the death or insanity of either the offeror or offeree, (2) bankruptcy or insolvency of either the offeror or offeree, or (3) the destruction of the specific, identified subject matter. Thus the offer automatically terminates at the date of Opal’s death. It does not matter whether Larkin received notice of the death. If Larkin had accepted the offer prior to Opal’s death, a valid contract would have been formed.

6. (b) Under the mailbox rule, an acceptance is ordinarily effective when sent if transmitted by the means authorized by the offeror, or by the same means used to transmit the offer if no means was authorized. However, the offeror may stipulate that acceptance is effective only when received by the offeror. In this situation, no contract was formed because Moss’ acceptance was not received by the date specified in Fine’s offer. Under common law, a method of acceptance other than the means specified in the offer or the method used to communicate the offer, is considered effective when received by the offeror.

7. (b) Fresno’s acceptance by overnight delivery was made by a method other than the methods specified by Harris in the written offer. When acceptance is sent by a method other than the method specified in the offer or different than the method used to transmit the offer, acceptance is considered valid only when actually received by the offeror. Late acceptance is not valid, but instead constitutes a counteroffer. A valid contract would be formed only if the original offeror (Harris) then accepts.

8. (a) A unilateral offer exists when the offeror expects acceptance of an offer by action of the offeree. A unilateral contract is then formed when the offeree accepts the contract through performance of the offeror’s required action. In this case, a valid contract is formed when Hammer accepts Kay’s unilateral offer by obtaining the artifacts within a two-week period. Answers (b) and (d) are incorrect because a quasi contract is an implied-in-law rather than express agreement which results when one of the parties has been unjustly enriched at the expense of the other. The law creates such a contract when there is no binding agreement present to keep the unjust enrichment from occurring. Answer (c) is incorrect because public policy causes enforcement of promises despite lack of any other legal enforcement of the contract. For example, public policy would normally allow enforcement of a promise by a debtor to pay a debt barred by the statute of limitations.

9. (b) Common law applies to this contract because it involves real estate. In this situation, Fox’s reply on October 2 is a counteroffer and terminates Summers’ original offer made on September 27. The acceptance of an offer must conform exactly to the terms of the offer under common law. By agreeing to purchase the vacation home at a price different from the original offer, Fox is rejecting Summers’ offer and is making a counteroffer. Answer (a) is incorrect because the fact that Fox failed to return Summers’ letter is irrelevant to the formation of a binding contract. Fox’s reply constitutes a counteroffer as Fox did not intend to accept Summers’ original offer. Answer (c) is incorrect because Summers’ offer was rejected by Fox’s counteroffer. Answer (d) is incorrect because with rare exceptions, silence does not constitute acceptance.

10. (c) Both Zake and Wick had a contract that was binding for five years. For them to modify this contract, both of them must give new consideration under common law rules which apply to employment contracts such as this one. When Wick agreed to the bonus, only Wick gave new consideration in the form of $60,000. Zake did not give new consideration because he would perform in the last three years as originally agreed. Answers (a) and (b) are incorrect because Zake did not give new consideration whether or not the raise was in writing. Answer (d) is incorrect because duress needed to make a contract voidable or void requires more than “some pressure.”

11. (a) Consideration is an act, promise, or forbearance which is offered by one party and accepted by another as inducement to enter into an agreement. A party must bind him/herself to do something s/he is not legally obligated to do. Furthermore, the consideration must be bargained for. Past consideration is not sufficient to serve as consideration for a new contract because it is not bargained for. Answer (b) is incorrect because relinquishment of a legal right constitutes consideration. Answer (c) is incorrect because even though the consideration must be adequate, courts generally do not look into the amount of exchange, as long as it is legal consideration and is bargained for. Answer (d) is incorrect as this performance by a third party is still deemed consideration.

12. (c) The rebinding of Dunne’s books is considered a service and not a sale of goods, therefore, common law applies. Under common law, modification of an existing contract needs new consideration by both parties to be legally binding. Since Dunne has not given any new consideration for Cook’s reduction in price, the contract is unenforceable. Additionally, the parol evidence rule prohibits the presentation of evidence of any prior or contemporaneous oral or written statements for the purpose of modifying or changing a written agreement intended by the payor to be the final and complete expression of their contract. However, it does not bar from evidence any oral or written agreements entered into by the parties subsequent to the written contract. Therefore, the agreement between Dunne and Cook is unenforceable, but evidence of the modification is admissible into evidence. Note that if the contract had been for the sale of goods (UCC), modification of the contract terms would have been enforceable. Under the UCC, a contract for the sale of goods may be modified orally or in writing without new consideration if such modification is done in good faith.

13. (d) A preexisting legal duty is not sufficient as consideration because no new legal detriment is suffered by performing the prior obligation. Answer (c) is incorrect because when a creditor agrees to accept as full payment an amount less than the full amount of the undisputed (liquidated) debt, the agreement lacks valid consideration to be enforceable. However, when the amount of an obligation is disputed, the creditor’s promise to accept a lesser amount as full payment of the debt is enforceable. Answers (a) and (b) are incorrect because preexisting legal duties are not valid as consideration.

14. (b) A promise to donate money to a charity which the charity relied upon in incurring large expenditures is a situation involving promissory estoppel. Promissory estoppel acts as a substitute for consideration and renders the promise enforceable. The elements necessary for promissory estoppel are (1) detrimental reliance on a promise, (2) reliance on the promise is reasonable and foreseeable, and (3) damage results (injustice) if the promise is not enforced. Answer (a) is incorrect because the failure to enforce an employer’s promise to make a cash payment to a deceased employee’s family will not result in damages, and therefore, promissory estoppel will not apply. Answer (c) is incorrect because the modification of a contract requires consideration, unless the contract involves the sale of goods under the UCC. Answer (d) is incorrect because an irrevocable oral promise by a merchant to keep an offer open for sixty days is an option contract that must be supported by consideration. A firm offer under the UCC requires an offer signed by the merchant.

15. (c) A minor may disaffirm a contract at any time during his minority and within a reasonable time after reaching the age of majority. When Rail disaffirmed the contract two days after reaching the age of eighteen, he did so within a reasonable time after reaching majority age. Answer (a) is incorrect because Rail could ratify the contract only after reaching the age of majority. Answer (b) is incorrect because although Rail could have transferred good title to a good-faith purchaser for value, Rail’s title was still voidable and subject to disaffirmance. Answer (d) is incorrect because Rail could disaffirm the contract only for a reasonable time after reaching the age of majority. Failure to disaffirm within a reasonable time serves to act as ratification.

16. (c) When a person has previously been adjudicated by a court of law to be incompetent, all of the contracts that s/he makes are void. Answer (a) is incorrect because the contracts are only voidable at the option of Green if there was no formal, previous court determination of incompetence for Green. Answer (b) is incorrect because once the court determines that Green is incompetent, all of the contracts that s/he makes are not valid but are void. Answer (d) is incorrect because the contracts cannot be enforced by either Green or the other contracting party.

17. (c) Ratification of a contract prior to reaching majority age is not effective. A minor may ratify a contract expressly or by actions indicating ratification after reaching the age of majority. Failure to disaffirm within a reasonable time after reaching majority age does act as ratification.

18. (d) An agreement is unenforceable if it is illegal or violates public policy. Therefore, if the personal services of the contract are illegal, the party will not have to perform them. Answer (a) is incorrect because the death of the party who is to receive the benefits does not terminate the duties under the contract. His/her heirs can still receive and pay for the personal services. Answer (b) is incorrect because making less profit or losing money are not grounds for getting out of a contract. Answer (c) is incorrect because bankruptcy of the receiver does not discharge the performer from the contract, although it can allow for forgiveness of all or part of the payment.

19. (d) An employer’s promise not to press criminal charges against an employee-embezzler who agrees to return the embezzled money is not legally binding. The promise not to press charges is an illegal bargain, and, even if the employee returns the money, the employer is free to cooperate in prosecution of the criminal.

20. (b) Fraud is the intentional misrepresentation of a material fact upon which a third party reasonably relies to his or her detriment. An intentionally misstated appraised value would be an example of a fraudulent inducement to make a contract. Answers (a) and (c) are incorrect because a third party cannot reasonably rely on a nonexpert opinion or a prediction. Answer (d) is incorrect because by definition, fraud applies to material facts.

21. (c) An immaterial unilateral mistake generally does not allow either party to void the contract.

22. (c) Undue influence is a defense that makes a contract voidable. Classic situations of this concept involve close relationships in which a dominant person has extreme influence over a weaker person. Answer (a) is incorrect because although fraud in the inducement can make a contract voidable, it typically does not occur between parties that have a close relationship. Answer (b) is incorrect because unconscionability involves an oppressive contract in which one party has taken severe, unfair advantage of another which is often based on the latter’s absence of choice or poor education rather than the parties’ close relationship. Answer (d) is incorrect because duress involves acts or threats of violence or pressure, which need not result from close relationships.

23. (b) An insurance policy is voidable at the option of the insurer if the insured failed to inform the insurer at the time of application of a fact material to the insurer’s risk (e.g., failure to disclose a preexisting heart condition on a life insurance application). The insured’s concealment causes the policy to be voidable regardless of the type of beneficiary designated or the nature of the insured’s death.

24. (d) One of the elements needed to prove fraud is a misrepresentation of a material fact. That statement that “it is a great car” is sales talk or puffing and does not establish this element. The fact that the overhaul was done thirteen months earlier instead of the stated one year is not a misrepresentation of a material fact.

25. (a) A mistake is an understanding that is not in agreement with a fact. A unilateral mistake (made by one party) generally does not allow the party to void the contract. However, a mistake unknown to the party making it becomes voidable if the other party recognizes it as a mistake. Particularly, this is the case in bid contract computations. The contract is voidable by the party making the mistake if the other party knew of the mistake or if the calculation was far enough off that the other party should have known that a mistake was made.

26. (c) Duress is any wrongful threat or act of violence made toward a person (or his family) which forces a person to enter into a contract against his will. For duress to be present a threat must be made and the threatened party must believe that the other party has the ability to carry out the threat. In this situation, Maco’s actions did not constitute duress. Kent’s safety and property were in no way threatened by Maco and Kent was able to validly consent to the contract. Answers (a) and (b) are incorrect because regardless of Kent’s financial problems and the FMV of Kent’s services, duress was not present in that Kent was able to enter into the contract at will. Answer (d) is incorrect because Maco does not need to prove that Kent had no other offers to provide financial services.

27. (b) To establish a common law action for fraud, the following elements must be present: (1) misrepresentation of a material fact, (2) either knowledge of the falsity with intent to mislead or reckless disregard for the truth (scienter), (3) reasonable reliance by third party, and (4) injury resulted from misrepresentation. If the misrepresentation occurs during contract negotiations, fraud in the inducement is present resulting in a contract voidable at the option of the injured party. Answer (a) is incorrect because the defendant need not be an expert with regard to the misrepresentation to establish fraud in the inducement. Answer (c) is incorrect because the misrepresentation may be written or oral. Answer (d) is incorrect because the presence of fraud in the inducement does not require a fiduciary relationship between the parties.

28. (d) The Statute of Frauds requires that a contract to answer the debt or default of another be in writing and signed by the party to be charged. The guarantee that Decker made was only oral. Answer (b) is incorrect, the reason Decker is not liable for the oral guaranty is not because it expires more than one year after June 1, but because a contract of guaranty must be in writing. Decker is not liable regardless of Baker’s confirmation letter; thus answer (a) is incorrect. Answer (c) is incorrect because Decker’s oral guaranty is not enforceable. The time period between the date of the oral guaranty and the date payment is demanded has no bearing in this situation.

29. (b) Any agreement to sell land or any interest in land falls under the requirements of the Statute of Frauds. Agreements within the Statute of Frauds require contracts to be in writing and signed by the party to be charged (the party being sued). An exception to the above rule is “part performance” by the purchaser. Part performance exists when the purchaser of property takes possession of the property with the landowner’s consent. Some states also require either partial payment for the property or permanent improvement of the property by the purchaser. Answer (b) is correct because even though Nolan failed to sign a written agreement, the part performance exception has been satisfied. Answer (a) is incorrect because the fact that Nolan simply failed to object to the agreement does not make the contract valid under the Statute of Frauds. Answer (c) is incorrect because the part performance exception has been met and Train will therefore prevail. Answer (d) is incorrect because no such requirement exists to alleviate Nolan’s liability. The part performance rule allows Train to prevail. Note that all sales of land are covered under the Statute of Frauds, and not just those greater than $500.

30. (a) Contracts that cannot be performed within one year must be in writing. In this case Cherry agreed to purchase Picks Company if an audit after one year shows that the company has been profitable. This would take longer than a year to perform. Answer (b) is incorrect because the $500 provision is in the Uniform Commercial Code for a sale of goods. Answer (c) is incorrect because despite the actual profitability, the contract could not be completed within one year of the making of the contract. Answer (d) is incorrect because although promissory estoppel may be used in the absence of a writing, there are not the facts sufficient to show promissory estoppel.

31. (d) Contracts which fall within the requirements of the Statute of Frauds are required to be in writing and signed by the party to be charged. It is not required that the contract terms be formalized in a single writing. Two or more documents may be combined to create a writing which satisfies the Statute of Frauds as long as one of the documents refers to the others. Answer (a) is incorrect because the Statute of Frauds requires that agreements for the sale of goods for $500 or more be in writing; however, contracts that come under common law are not included in this requirement. Answer (b) is incorrect because the Statute of Frauds requires that the written contract be signed by the party to be charged, not by all parties to the contract. Answer (c) is incorrect because the Statute of Frauds applies to contracts that cannot be performed within one year from the making of the agreement.

32. (d) The Statute of Frauds applies to the following types of contracts: (1) an agreement to sell land or any interest in land, (2) an agreement that cannot be performed within one year from the making of the agreement, (3) an agreement to answer for the debt or default of another, and (4) an agreement for the sale of goods for $500 or more. Since the agreement between Carson and Ives meets none of the above requirements, it is an enforceable oral contract under common law. Furthermore, under common law, modification of an existing contract needs new consideration by both parties to be legally binding. Since Ives received the benefit of additional repairs to his book, Carson’s increase in the contract price is enforceable. Therefore, Carson will recover $650.

33. (c) Under The Statute of Frauds, agreements that can be performed within one year of their making can be oral. In this case the ethics audit need only span ten months and the completion of the report will take less than one additional month for a total of less than one year. We know that the report can be done in less than a month because Newell points out that even if she delays start for three months, she will still complete the ten-month audit before the fourteen-month deadline. The fact that it might take longer than a year does not require it to be in writing since it possibly could be completed within one year. Answer (a) is incorrect because the $500 provision is for sales of goods not services. Answer (b) is incorrect because the contract can be completed within one year. Answer (d) is incorrect because there is no such provision involved here for the Statute of Frauds.

34. (c) The parol evidence rule provides that a written agreement intended by contracting parties to be a final and complete contract may not be contradicted by previous or contemporaneous oral evidence. The parol evidence rule does not apply to any subsequent oral promises made after the original agreement. Thus, the subsequent oral agreement between Rogers and Lennon regarding Lennon’s right to report on a monthly basis will be allowed as evidence in a lawsuit between the parties. Answer (a) is incorrect because the parol evidence rule applies to all written contracts regardless of the applicability of the Statute of Frauds. Answer (b) is incorrect because the parol evidence rule will prevent the admission into evidence of the contemporaneous oral agreement that Lennon could use Rogers’ computer. Answer (d) is incorrect because the parol evidence rule does apply to the contemporaneous oral agreement.

35. (b) The parol evidence rule provides that any written agreement intended by parties to be final and complete contract may not be contradicted by previous or contemporaneous evidence, written or oral. Thus, previous written agreements are prohibited by the rule. Exceptions to the parol evidence rule include proof to invalidate the contract between the parties, to show terms not inconsistent with writing that parties would not be expected to have included, to explain the intended meaning of an ambiguity, or to show a condition precedent. The parol evidence rule does not apply to subsequent transactions, such as oral promises made after the original agreement.

36. (c) The parol evidence rule prohibits the presentation as evidence of any prior or contemporaneous oral statements concerning a written agreement intended by the parties to be the final and complete expression of their contract. Therefore, the evidence related to the oral agreement regarding the payment of utilities would not be allowed. However, the parol evidence rule does not bar the admission of evidence which is presented to establish fraud.

37. (d) Even though this contract falls under the Statute of Frauds and, therefore, generally must be written and signed, most states have passed laws allowing contracts to be made over the Internet to facilitate commerce. The statutes encourage technology to overcome concerns over authenticity of such contracts. Therefore, answer (a) is incorrect. Answer (b) is incorrect because the parol evidence rule does not specify when a contract must be written and signed. Answer (c) is incorrect because a sale of land is governed by common law rules and not the UCC.

38. (b) Assignment is the transfer of a right under a contract by one person to another. Almost all contract rights are assignable as long as the parties agree to it, but there are some exceptions. Contracts involving personal services, trust or confidence are not assignable. If assignment would materially change the risk or burden of the obligor, it is not allowed. For example, a contract for insurance against certain risks is not assignable because they were made upon the character of the contracting party (the insured). Assigning the rights to another party would alter the risk. Therefore, malpractice insurance policy rights are not assignable. A further exception is that future rights are not assignable, with the exception under the UCC that future rights for the sale of goods are assignable, whether based on an existing or nonexisting contract. As the assignment of option contract rights does not fall under any exception, they would be assignable.

39. (c) Assignment is the transfer of a right under a contract by one person to another. Answer (a) is incorrect because consideration is not needed for valid assignment; this is known as a gratuitous assignment. Answer (b) is incorrect: Normally an assignment is done in writing, but any act, oral or written, is sufficient if it gives clear intent of the assignment. Only situations included under the Statute of Frauds are required to be in writing. Answer (d) is incorrect, although when consideration is given in exchange for an assignment, it is irrevocable. However, as a general rule a gratuitous assignment is revocable unless it is evidenced by a writing signed by the assignor, effected by a delivery of a writing used as evidence of the right (i.e., bill of lading), and the assignment is executed. A contract right cannot be assigned if it would materially change the risk or burden of the obligor.

40. (c) Assignment is the transfer of a right under a contract by one person to another. If the obligor has notice of the assignment, s/he must pay the assignee, not the assignor. The contract between Barton and Egan provided for both payments on the purchase price and the insurance policy in case of Egan’s death. Because Barton assigned his contract rights to Vim, Vim was then entitled to payments on the purchase price and the insurance proceeds. Since Barton received payments on the purchase price and insurance proceeds after the assignment, Vim is entitled to sue Barton for these amounts.

41. (d) When a debtor contracts with a second party to pay the debt owed to a creditor, the creditor becomes a creditor beneficiary. Barton contracted with Egan for Egan to pay Ness the business’ debts. The contract also required Egan to provide a life insurance policy to pay Ness if Egan died. In both the contract and the insurance policy, Ness was a creditor beneficiary. Neither the contract nor the insurance policy were entered into to confer a gift to Ness, and therefore he was not a donee beneficiary.

42. (d) Bugle would have received an unintended benefit under the contract between Fargo and ABC Company. Therefore, Bugle is an incidental beneficiary, not an intended beneficiary and, thus, has no legal rights against either Fargo or ABC. Answers (a), (b), and (c) are in correct: No matter who breached the contract, Bugle has no rights against either party.

43. (a) In an assignment, the assignee (Clay) acquires the assignor’s (Baxter) rights against the obligor (Globe) and has the right to performance. Baxter is still liable to the assignee if Globe does not perform. However, if Clay released Globe from the contract, Baxter would also be released and no longer liable to Clay. Answer (b) is incorrect because if the obligor has no notice of the assignment, s/he may pay the assignor, and the assignee must recover from the assignor. Thus, if Globe was unaware of the assignment and paid Baxter, Clay would have to collect from Baxter. Answers (c) and (d) are incorrect because even if Baxter released Globe or breached the contract, Baxter would still be liable to Clay.

44. (a) Mann is a donee beneficiary and, thus, can bring suit against the promisor, Manus, only. He cannot maintain a suit against Mackay, who was just giving a gift. Mann cannot maintain any action against Mackay either alone or in combination with Manus.

45. (c) When a debtor contracts with a second party to pay the debt owed to a creditor, the creditor becomes a creditor beneficiary. A creditor beneficiary has the right to enforce the contract which gives him the intended benefits and may commence an action for nonperformance against either of the contracting parties. For this reason, Ferco (creditor beneficiary) will prevail in a lawsuit against Bell because Ferco has an enforceable right to receive payment. Answer (a) is incorrect because Ferco, as a creditor beneficiary, has the right to recover from either Bell or Allied. Answer (b) is incorrect because the creditor beneficiary is not required to give consideration to have an enforceable right. Answer (d) is incorrect because having knowledge of the contract between Bell and Allied at the time the contract was made is not necessary to later enforce this legal action. Ferco must establish that he is a creditor beneficiary to maintain an action for nonperformance.

46. (b) Under the doctrine of substantial performance, a contract obligation may be discharged even though the performance tendered was not in complete conformity with the terms of the agreement. Under this doctrine, if it can be shown that the defect in performance was only minor in nature, that a good-faith effort was made to conform completely with the terms of the agreement, and if the performing party is willing to accept a decrease in compensation equivalent to the amount of the minor defect in performance, the contractual obligation will be discharged. Answers (a) and (c) are incorrect since the defect in Glaze’s performance was only minor in nature, and since Parc refused to allow Glaze to complete the project, Glaze will prevail in its action against Parc. Answer (d) is incorrect because anticipatory breach applies only to executory bilateral contracts. An executory contract is a contract wherein both parties have yet to perform. In this instance, Glaze has substantially performed its part of the agreement.

47. (a) The duty to perform a contract may depend upon a condition. Conditions that could be present include: condition precedent, which is one that must occur before there is duty to perform; condition subsequent, which is one that removes a preexisting duty to perform; or condition concurrent, which is mutually dependent upon performance at nearly the same time.

48. (a) Once one party materially breaches the contract, the other party is discharged from performing his or her obligations under the contract. Answer (b) is incorrect because a reasonable delay in the performance of the contract is not a breach unless time was of the essence. Answer (c) is incorrect because tender or offer to pay or perform obligates the other party to do what s/he promised. Answer (d) is incorrect because assignment of rights typically is allowed under contract law.

49. (a) The discharge of a contract can come about in several ways. The first is by agreement. Accord and satisfaction involves an agreed substitute for performance under the contract (accord) and the actual performance of that substitute (satisfaction). An agreement can also be entered into by three parties whereby the previous agreement is discharged by the creation of a new agreement (a novation). The second method of discharge is by release of the contract or parties from performance. Another method of discharging a contract is by performance of the specified action becoming impossible, such as destruction of the subject matter, or death of a party where personal service is necessary. Lastly, breach of the contract discharges the injured party.

50. (c) Rescission entails canceling a contract and placing the parties in the position they were in before the contract was formed. Answer (a) is incorrect as a novation is an agreement between three parties whereby a previous agreement is discharged by the creation of a new agreement. Answer (b) is incorrect because release is a means of discharging (abandoning) a contract but it does not place the parties in the same position as before the contract. Answer (d) is incorrect because revocation is used by an offeror to terminate an offer.

51. (b) The statute of limitations bars suit if it is not brought within the statutory period. The period varies for different types of cases and from state to state. The statute begins to run from the time the cause of action accrues (e.g., breach).

52. (d) The remedy of specific performance is used when money damages will not sufficiently compensate the afflicted party due to the unique nature of the subject matter of the contract. In a contract for the sale of land, the buyer has the right to enforce the agreement by seeking the remedy of specific performance because real property is considered unique. Another remedy for this breach of contract would be for the buyer to seek compensatory damages. If the buyer desires, s/he may seek this remedy instead of specific performance. Answer (b) is incorrect because Hodges could sue for either specific performance or compensatory damages, but would not be entitled to both remedies since awarding both remedies would be excessive compensation. Answers (a) and (c) are incorrect because an injured party is generally not allowed to seek punitive damages. Punitive damages are awarded only when the court is seeking to punish a party for their improper actions and are not usually granted in breach of contract actions.

53. (a) Under the doctrine of substantial performance, a contract obligation may be discharged even though the performance tendered was not in complete conformity with the terms of the agreement. If it can be shown that the defect in performance was only minor in nature, that a good-faith effort was made to conform completely with the terms of the agreement, and if the performing party is willing to accept a decrease in compensation equivalent to the amount of the minor defect in performance, the contractual obligation will be discharged. Because Ames’ breach of contract was both inadvertent and not material, the doctrine of substantial performance applies and recovery will be limited to monetary damages. The installation of fixtures other than those specified in the contract constitutes a breach, although the breach is considered immaterial. The doctrine of substantial performance applies in this situation and the contractual obligation will be discharged.

54. (a) A liquidated damage clause is a contractual provision which states the amount of damages that will occur if a party breaches the contract. The liquidated damage clause is enforceable if the amount is reasonable in light of the anticipated or actual harm caused by the breach. Excessive liquidated damages will not be enforceable in court even if both parties have agreed in writing. A clause providing for excessive damages is a penalty and the courts will not enforce a penalty. Materiality does not impact the enforceability of liquidated damage provisions.

55. (c) The doctrine of anticipatory repudiation allows a party to either sue at once or wait until after performance is due when the other party indicates s/he will not perform. This doctrine is in effect because Nagel told Fields that Nagel had no intention of delivering the goods (i.e., repudiation of the contract) prior to the date of performance. Answer (a) is incorrect because promissory estoppel acts as a substitute for consideration which is an element in the forming of a contract but is not relevant in this fact situation. Answer (b) is incorrect because accord and satisfaction is an agreement wherein a party with an existing duty or performance under a contract promises to do something other than perform the duty originally promised in the contract. Answer (d) is incorrect because the doctrine of substantial performance would allow for a contract obligation to be discharged even though the performance tendered was not in complete conformity with the terms of the agreement. In this case, Fields is suing Nagel for breach of contract.

56. (a) Events occurring after a contract is entered into usually do not affect performance. Some exceptions to this rule include subsequent illegality of the performance, death of a party, or destruction of the subject matter, all of which constitute impossibility of performance. In this case, even though Maco’s own potatoes were destroyed, it wasn’t specified that Maco’s own potato crop be used to fulfill the contract. It was not impossible, therefore, for Maco to perform, because he could have purchased potatoes from another grower to deliver to LBC. If there had been a worldwide infestation of the potato crop, Maco would have reason to not perform on the basis of impossibility.

Simulations

Task-Based Simulation 1

For each of the numbered statements or groups of statements select either A, B, or C.

Task-Based Simulation 2

Situation

On December 15, Blake Corp. telephoned Reach Consultants, Inc. and offered to hire Reach to design a security system for Blake’s research department. The work would require two years to complete. Blake offered to pay a fee of $100,000 but stated that the offer must be accepted in writing, and the acceptance received by Blake no later than December 20.

On December 20, Reach faxed a written acceptance to Blake. Blake’s offices were closed on December 20 and Reach’s fax was not seen until December 21.

Reach’s acceptance contained the following language:

“We accept your $1,000,000 offer. Weaver has been assigned $5,000 of the fee as payment for sums owed Weaver by Reach. Payment of this amount should be made directly to Weaver.”

On December 22, Blake sent a signed memo to Reach rejecting Reach’s December 20 fax but offering to hire Reach for a $75,000 fee. Reach telephoned Blake on December 23 and orally accepted Blake’s December 22 offer.

Items 1 through 7 relate to whether a contractual relationship exists between Blake and Reach. For each item, determine whether the statement is True or False.

	True	False
1. Blake’s December 15 offer had to be in writing to be a legitimate offer.
2. Reach’s December 20 fax was an improper method of acceptance.
3. Reach’s December 20 fax was effective when sent.
4. Reach’s acceptance was invalid because it was received after December 20.
5. Blake’s receipt of Reach’s acceptance created a voidable contract.
6. If Reach had rejected the original offer by telephone on December 17, he could not validly accept the offer later.
7. Reach’s December 20 fax was a counteroffer.

Items 8 through 12 relate to the attempted assignment of part of the fee to Weaver. Assume that a valid contract exists between Blake and Reach. For each item, determine whether the statement is True or False.

	True	False
8. Reach is prohibited from making an assignment of any contract right or duty.
9. Reach may validly assign part of the fee to Weaver.
10. Under the terms of Reach’s acceptance, Weaver would be considered a third-party creditor beneficiary.
11. In a breach of contract suit by Weaver, against Blake, Weaver would not collect any punitive damages.
12. In a breach of contract suit by Weaver, against Reach, Weaver would be able to collect punitive damages.

Items 13 through 15 relate to Blake’s December 22 signed memo. For each item, determine whether the statement is True or False.

	True	False
13. Reach’s oral acceptance of Blake’s December 22 memo may be enforced by Blake against Reach.
14. Blake’s memo is a valid offer even though it contains no date for acceptance.
15. Blake’s memo may be enforced against Blake by Reach.

Simulation Solutions

Task-Based Simulation 1

Explanations

1. (B) Party F gave S a gift in the past. S’s promise to now pay for the usage is not enforceable because F’s action is past consideration, and the contract needs consideration on both sides. Furthermore, S’s feeling of a moral obligation does not create consideration.

2. (A) This is an example of a requirements contract. F has given consideration because s/he gave up the right to sell that sugar to someone else.

3. (A) F refrained from doing something which she had a right to do. This constitutes consideration.

4. (C) This is not enforceable under contract law because S does not give any consideration in return. It is enforceable, however, as a will which does not require the elements of a contract such as consideration, but does require other formalities.

5. (B) F already had a preexisting legal duty to do a professional, quality audit of XYZ Company.

6. (B) F had a contract to work for S for five years for $100,000 per year. F is not giving any new consideration for the raise since during that five years, he already is obligated to complete the contract.

7. (A) F did something which he did not have to do in exchange for the agreed $1,000. This is a unilateral contract.

8. (A) F agreed to pay $200 and in exchange S agreed to sell the computer. Both have given consideration that is legally sufficient. Legally sufficient refers to the validity of the consideration, not the amount. Consideration does not have to be of equal value as long as it is legal consideration and bargained for.

9. (A) Both parties have given consideration for this output contract. F gave up the right to buy these parts elsewhere and S gave up the right to sell her output to someone else.

10. (B) F has a preexisting legal duty to pay the full $1,500. When S agreed to accept less, F gave up nothing. F still owes the remaining $500.

11. (A) In this case, both parties gave consideration. S, in agreeing to accept the $1,000, gave up the right to collect more of the disputed amount. F gave up the right to pay less of the disputed amount.

12. (C) Although the charity gave no consideration in exchange for the promised donation, the promise to donate to a charity is generally enforceable based on public policy reasons.

Task-Based Simulation 2

	True	False
1. Blake’s December 15 offer had to be in writing to be a legitimate offer.
2. Reach’s December 20 fax was an improper method of acceptance.
3. Reach’s December 20 fax was effective when sent.
4. Reach’s acceptance was invalid because it was received after December 20.
5. Blake’s receipt of Reach’s acceptance created a voidable contract.
6. If Reach had rejected the original offer by telephone on December 17, he could not validly accept the offer later.
7. Reach’s December 20 fax was a counteroffer.

Explanations

1. (F) Although the final contract has to be in writing to be enforceable since performance of contract would take longer than a year, the offer itself can be oral.

2. (F) The offer specified that the acceptance must be in writing. Since Reach put the acceptance in writing and faxed it to Blake, this was a proper method of acceptance.

3. (F) Common law applies to this fact pattern since the contract does not involve a sale of goods. Reach’s attempted acceptance stated $1,000,000 instead of $100,000 as contained in the offer. Reach’s attempted acceptance thus was instead a counteroffer. Under both common law and the Uniform Commercial Code, offers, revocations, rejections and counteroffers are valid when received.

4. (F) Blake’s offer specified that the acceptance must be received no later than December 20. Reach’s faxed acceptance was received in Blake’s office on December 20 on the fax machine. Therefore, Blake did receive the fax on time even though it was not seen until the following day.

5. (F) Reach’s attempted acceptance stated $1,000,000 instead of $100,000 as contained in the offer. Since the terms did not match, no contract was formed, voidable or otherwise.

6. (T) Since there is no firm offer or option contract, the rejection terminates the offer.

7. (T) Since the December 20 fax terms did not match the original offer’s terms, it serves as a counteroffer which rejects the original offer and creates a new offer.

	True	False
8. Reach is prohibited from making an assignment of any contract right or duty.
9. Reach may validly assign part of the fee to Weaver.
10. Under the terms of Reach’s acceptance, Weaver would be considered a third-party creditor beneficiary.
11. In a breach of contract suit by Weaver, against Blake, Weaver would not collect any punitive damages.
12. In a breach of contract suit by Weaver, against Reach, Weaver would be able to collect punitive damages.

Explanations

8. (F) Parties may typically assign the contract right to receive money to another party.

9. (T) When parties have a right to receive money, they may validly assign all or a portion of this right to a third party.

10. (T) The terms of Reach’s acceptance names Weaver as a third-party beneficiary to receive $5,000. Since the intent was to pay a debt owed by Reach to Weaver, this makes Weaver a creditor beneficiary.

11. (T) Punitive damages are not awarded for mere breach of contract cases such as this suit by Weaver against Blake.

12. (F) In a suit by Weaver against Reach, no punitive damages will be awarded since this would be only a breach of contract case.

	True	False
13. Reach’s oral acceptance of Blake’s December 22 memo may be enforced by Blake against Reach.
14. Blake’s memo is a valid offer even though it contains no date for acceptance.
15. Blake’s memo may be enforced against Blake by Reach.

Explanations

13. (F) Since the work would require two years to complete, the contract cannot be performed within one year and, therefore, must be in writing to be enforceable. The party to be charged must have signed the contract and Reach did not do this.

14. (T) An offer does not need to have a date for acceptance, in which case, the offer remains open for a reasonable time.

15. (T) Blake’s signed memo sets forth an offer which was later accepted orally by Reach. This can be construed as enough written evidence to satisfy the Statute of Frauds. Because Blake, the party to be charged, signed the memo, it is enforceable against Blake by Reach.