Business Law revision summary. insurable interest in good, requirements for a valid contract, cancel a contract as rescission and statute of frauds

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Summary

Rescission of a contract

This occurs when the agreement between two or more parties is canceled and treated as if the contract never existed. When rescission occurs, the rights and duties of the parties are as well removed and each party must return any possible benefit they might have accrued before the cancellation.

Rescission mostly occurs at the beginning of the contract before either party fully performs its respective duties. If there is proof of material error in a contract, evidence of fraud, misrepresentation, undue influence, or duress, the contract may be rescinded.

This can be achieved in various ways depending on the existing circumstances. If the parties agree, they can cancel the contract. The plaintiff can seek rescission from the court of law when the other party does not accept to rescind mutually.

Contract reformation

Contract reformation is a remedy for cases involving contract disputes like breach or mistake. It is different from rescission as this does not involve canceling the contract, rather, the party seeks to make specific terms of the agreement clearer or rectify a certain mistake. Reformation cannot be used to change the conditions of the contract to deceive one party.

There are requirements for contract reformation to be considered a remedy

• First, the contract needs to be valid by meeting requirements of what constitutes a valid contract. Reformation is not available to void or voidable contracts.
• A valid ground for reformation is required. Either because of a mistake on certain terms of the contract or as a result of the misrepresentation.
• Lastly, contract reformation can be done if there are no defenses.

If reformation may cause rewriting of the contract terms which have harmful consequences to either party, then the court may not consider reformation a valid remedy as it may affect the performance and credibility of the contract.

Statute of Frauds

The statute of frauds requires certain contracts to be in writing in order to be enforceable and considered valid. Generally, there are contracts that are considered valid when oral, and some others which must be in writing.

Statute of frauds covers several types of contracts:

• Contracts for the sale of real estate or property like land
• Contracts that may require a period of more than one year to be performed
• Collateral contracts such as promises to the guarantor for another person
• All promises made in consideration of marriage which is also called prenuptial contracts must be in writing so as to be considered enforceable.
• Contracts for the sale of goods that cost value greater than $500.

Valid Contract

The following are requirements for a valid contract

An offer – The person giving the offer is called the offeror and is one who promises to do or refrain from doing something.

A consideration – There must be something of value that will be exchanged if the two parties decide to enter the contract. The offer has a given value that induces the offeree to accept the agreement, and the same case applies to the offeree consideration.

Acceptance – For a contract to be considered valid, the offeree must accept the offer. Acceptance may be expressed through words, actions, or in writing when necessary. The acceptance is not considered a valid acceptance if its terms do not mirror those of the original offer itself.

Mutuality – Every contract has more than one party involved, which requires all parties involved accept to perform in accordance with the contract terms

In summary, valid contract requires

1. Agreement – Offer from one party and acceptance by the other party
2. Consideration – Something of value must be exchanged between the parties if an agreement is attained
3. Contractual capacity – both parties must be competent to enter the contract
4. Legality – The purpose of the contract must be a legal one
5. Genuineness of assent of both parties
6. Form e.g. written, under seal, etc.

Types of contracts

• Unilateral contract –  This kind of contract involves an offer that can only be accepted by the performance of the offeree rather than words. For example, when party A offers party $100 to mow his land.
• Bilateral contract – This type of contract occurs when both parties are required to perform their part of the promises. In other words, a promise is given in exchange for another promise.
• Express contract – This kind of contract occurs when terms are explicitly stated either in writing or orally.

Implied-in-fact contract

This contract is based on the conduct of the parties which requires:

1. The plaintiff to have provided some service or property
2. The defendant reasonably expected payment and the defendant reasonably expected such service or property to be paid for
3. And, the defendant has an opportunity to reject the provision of service or property.

Other types

• Implied-in-law contract –  This type of contract is fictional is mainly based on fairness and justice between two parties to prevent one party benefits at the expense of the other party.
• Formal contract – A formal contract requires a set of rules to be followed so to be enforceable such as a letter of credit, negotiable instrument among others
• Informal contract – This type of contract may be formed without having to follow legal guidelines or methods.

Validity and execution of contracts summary

Executed contract – This is a contract that has fully been performed by both parties as outlined in the terms. If one or more party has not performed their part of the contract, such a contract is called executory contract.

Valid contract – A contract is considered valid only when it satisfies all requisites such as agreement, consideration, capacity, legal purpose, and form all as outlined by law.

Valid contract can either void, voidable, or enforceable

• Void contract – This is a contract that has no legal force and is not binding.
• Voidable contract – This is a contract that valid, but maybe avoided by one party if they wish to do so. Such a contract can be canceled, avoided, or annulled.
• Unenforceable contract – This is a contract that is valid, but has been rendered unenforceable by a certain law of statute for instance if the contract is oral and is required to be in writing.

A seller who retains a security interest in a good he sold will also retain an insurable interest in the good – This statement is in accordance to the UCC section 2, 501 which holds that as long as the seller retains the security interest (money owed), he/she also has an insurable interest in goods not paid.

Revision

What is an insurable interest (4)

• it is the relationship between the insured and the object of insurance
• loss or destruction of that interest triggers insurance payment
• this is required for valid insurance contract
• This distinguishes the insurance contract from wagering

What is the rationale for the insurable interest requirement

• Furthers indemnity principle – recovery limited to actual loss
• it discourages wagering
• It avoid moral hazard. Reduces incentives to facilitate loss because you care about x so you are likely not to prompt x’s destruction
• prompts public safety (you’r unlikely to burn down your own house if you have an insurable interest in it)

Discuss insurable interest with regard to the leading case on the subject

Kosmopolus.

• The facts of this case was that a business person was the sole proprietor of a business. he was also the soul shareholder. But the business was incorporated. The insurance for the business was in his name, and not in the name of the company. There was a fire, his business was destroyed. Old law stated that in order to have an insurable interest you had to be the owner of the item. This is switched out for the legal expectancy test

What kind of interest in a thing gives you an insurable interest

• legal
• equitable
• contractual
• pecuniary

Implied Contract

• Conduct of the parties, rather than their words, creates and defines the terms of the contract.

Executed Contract

• A contract that has been fully performed on both sides.

Executory contract

• A contract that has not been fully performed by the parties.

Valid Contract

• Has the elements necessary to entitle at least one of the parties to enforce it in court.

Voidable Contract

• Is a valid contract but one that can be avoided at the option of one or both of the parties.

Unenforceable Contract

• Is one that cannot be enforced because of certain legal defenses against it.

Void contract

• Is no contract at all.

Quasi Contracts

• Or contracts implied in law, are not actual contracts.

Offer

• Is a promise or commitment to do or refrain from doing some specified action in the future.

Three elements of an offer

• Serious intention. Terms are definite. Offer must be communicated to the offeree.

Counteroffer

• Is a rejection of the original offer and the simultaneous making of a new offer.

Mirror image rule

• Requires the offer’s acceptance to match the offeror’s offer exactly-to mirror the offer.

Acceptance

• Is a voluntary act by the offeree that shows assent to the terms of an offer.

Rescission

• Is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made.

Past consideration

• You can bargain for something to take place now or in the future but not something that has already taken place. Therefore no consideration.

Accord and Satisfaction

• A debtor offers t pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed.

Promissory Estoppel

• (also called detrimental reliance) A person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery.

Disaffirmance

• The legal avoidance, or setting aside, of a contractual obligation.

Ratification

• Is the act of accepting and giving legal force to an obligation that previously was not enforceable.

Usury

• A lender who makes a loan at an interest rate above the awful maximum.

Unconscionable contracts or clauses

• Are considered so unscrupulous or grossly unfair as to be “void of conscience” Contracts are so oppressive that the oculist relieve innocent parties of part or all of their duties.

Procedural unconscionability

• Often involves inconspicuous print, unintelligible language, or the lack of an opportunity to read the contact or ask questions about its meaning. Arrises when a party’s lack of knowledge or understanding of the contract terms deprived him or her of an meaningful choice.

Substantive unconscionability

• Characterizes those contracts, or portions of contacts, that are oppressive or overly harsh.

Undue Influence

• One party can greatly influence another party, thus overcoming that party’s free will.

Adhesion Contracts

• Are written exclusively by one party and presented to the other party on a take-it-or-leave basis.

Collateral promises

• Or secondary promise, is one that is ancillary (subsidiary) to a principle transaction or primary contractual relationship.

Prenuptial agreements

• Agreements made before marriage that defines each person’s ownership rights in the other partner’s property.

Parol Evidence Rule

• If a court finds that parties intended their written contract to be a complete and final statement of their agreement, then it will not allow either party to present parol evidence (testimony or other evidence of communications between the parties that is not contained in the contract itself).

Condition

• Is a possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation.

Condition Precedent

• A condition that must be fulfilled before a party’s performance can be required.

Condition subsequent

• When a condition operates to terminate a party’s absolute promise to perform.

Concurrent conditions

• When each party’s performance is conditioned on the other party’s performance or tender of performance (offer to perform)

Tender

• Is an unconditional offer to perform by a person who is ready, willing, and able to do so.

Breach of Contract

• Is the nonperformance of a contractual duty. The breach is material when performance is not at least substantial.

Anticipatory repudiation

• Before either party to a contract has a duty to perform, one of the parties may refuse to carry out his or her contractual obligations.

Mutual Rescission

• The parties must make another agreement that also satisfies the legal requirements for a contract.

Impossibility of performance

• After a contract has been made, supervening events (such as fire) may make performance impossible in an objective sense. Can discharge a contract.

Commercial Impracticability

• When a supervening event does not render performance objectively impossible, but does make it much more difficult or expensive to perform than the parties originally contemplated, the courts may excuse the parties’ obligations under the contract.

Frustration of purpose

• A theory closely allied with the doctrine of commercial impracticability is the doctrine of ________

Consequential Damages

• Foreseeable damages that result from a party’s breach of contract

Nominal damages

• When no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award

Liquidated damages

• Provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract.

Penalty

• Specifies a certain amount to be paid in the event of a default or breach of contract and is designed to penalize the breaching party.

Restitution

• To rescind a contract both parties must return to each other the goods, property, or funds previously conveyed.

Specific Performance

• Call for the performance of the act promised in the contract.

Reformation

• Is an equitable remedy used when the parties have imperfectly expressed their agreement in writing. _______ allows a court to rewrite the contract to reflect the parties’ true intentions.

Waiver

• Under certain circumstances, a non breaching party may be willing to accept a defective performance of the contract. Knowing relinquishment of a legal right (that is, the right to require satisfactory and full performance) is called a _________