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REG - Notes Chapter 5 http://cpacfa.blogspot.

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Contracts
Express contract formed by oral or written agreement Implied-in-fact contract formed by conduct Implied in law contract/Quasi contract not a contract at all. Its a remedy to prevent unjust enrichment Unilateral contract one promise, accept with complete performance (Ann promises to give Barb $ if Barb washes Anns car) Bilateral contract two promises, a promise is exchanged for a promise, accept with a promise (Barb promises to watch Anns car if Ann promises to pay Barb $) Executory contract duties remain to be performed Executed contract all the duties under the contract have been performed Sources of contract law Common law derived from courts - Apply when non-sale of goods, real estate, insurance, services, employment law (RISE) Uniform commercial code (UCC) - Apply when sale of goods 3 elements for a legally enforceable contract 1. An agreement made up of both an offer and an acceptance 2. An exchange of consideration (something of legal value), and 3. A lack of defenses (on part of the defendant) Agreement of mutual assent (offer and acceptance) agreeing to the same bargain at the same time, a meeting of the minds The offer can be express or implied To be an offer, the communication must create a reasonable expectation in the offeree that the offeror intends to make a contract There must be intent to make a contract - Obvious jokes are not an offer - Most advertisements are not offers they are invitations (some can be offers if they specify) Terms must be definite and certain - Common law must specify Parties, Price, Quantity, Type, and Time (PPQTT) - UCC must specify Quantity There must be a communication offeree must have knowledge of the offer Termination of offer to create a contract, an offer must be accepted before its terminated, otherwise its merely a counter offer. An offer can be terminated in 3 ways Revocation offeror revokes the offer anytime before acceptance - Exception: Irrevocable offers options contract, merchant offer under UCC sales, unilateral contracts Rejection offeree expressively rejects or counteroffers, silence generally means rejection Operation of law terminated due to the law such as death of a party, insanity, destruction of subject matter, or illegality The acceptance is the offerees assent to enter into a contact either by express or implied Offers are not assignable (only the person to whom the offer was made may accept), unless its an option contract

REG - Notes Chapter 5 http://cpacfa.blogspot.com

Under common law Mirror image rule applies acceptance must be unequivocal. An attempted acceptance that changes some of the terms or adds new terms is not valid acceptance, but rather a counter offer. Mailbox rule acceptances are effective when they are dispatch (mailed), So you have until the 1st to accept and you mail your acceptance on the 1st, you have a deal (doesnt matter if mail is lost or delayed) - Exception: can state in offer that acceptances must be received to be effective Revocations, rejections and counteroffers are effective when received. Both sides of the contract must be supported by legally sufficient consideration. There must be something of legal value given by each party and there must be a bargained for exchange The promise can not agree to so something that the party is already obligated to do Need not have monetary value - giving up smoking or graduating with a 4.0 Fairness generally not required, consideration does not have to be of near equal value Bargained for exchange something is not consideration unless it was given in exchange for other consideration (your promise induced my promise) Gifts promises to make gifts are unenforceable because the lack of consideration Past/moral consideration if someone already gives or performs, before the promise was made, can not enforce later. (I gave you CPR to save your life, now give me a reward) Exception: Doctrine of promissory estoppel or detrimental reliance a promise made by one party and detrimentally relied upon by another can be enforced without consideration. For the doctrine to apply the promise must be reasonably relied upon and detrimental Defenses Defenses can make a contract unenforceable (innocent parties duty to perform discharged Void unenforceable by either party (few options make contract void) Voidable contract my be avoided at the option of the party adversely affected Party can establish the defense of fraud if they party can prove: MAIDS Misrepresentation of material fact Actual and justifiable reliance by the plaintiff on the misrepresentation Intent to induce reliance on misrepresentation Damages were caused Scienter intent to deceive with a false statement or reckless disregard for the truth Fraud in execution deceived into signing something void Fraud in the inducement terms are materially misrepresented voidable Innocent/negligent misrepresentation all the elements of fraud except scienter (MAID) Duress use the threat of harm to induce contract Physical force contract is void Economic or social force contract is voidable Undue influence abusing a position of trust or confidence Mutual mistake voidable Non-existent subject matter stolen or destroyed contract void 2

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Unilateral mistake mistake by one party is not a defense to a contract Major exception: the other party knew or should have known of the mistake (obvious math errors) Illegality contract void (gambling contracts, usurious contracts - very high interest rates) Failure to have a license required to protect the public makes a contract void (CPA, doctors, lawyers) Failure to have a license merely to raise revenue, the contract is enforceable (vendors at a fair pay 25 licence fee) Most promises to not compete are illegal because they violate antitrust law Exception: meet three tests of reasonableness: - protect legitimate business interest - reasonable in duration - reasonable as to distance (geographic scope) Minors may disaffirm/cancel a contract anytime while a minor or even a reasonable time after becoming an adult Exception: minors will be bound to contracts for life necessities including food, clothing and shelter Minor can become bound to contract if ratify the contract as an adult Intoxication is a defense only if the intoxication prevents one party from knowing the nature and significance of the contract and the other party knew of the impairment Insanity incapable of understanding the contract voidable If adjudicated (pronounced by court) insane contract is void Statue of limitations 4 to 6 years to sue from time of breach Statue of frauds 6 contract types require the defendant to sign (person being sued) in order to be enforceable: MYLEGS Marriage Cannot be performed within 1 Year - Exception: contract to work for an employer for life need not be in writing since the employee could die the next day - If one party fully performed the contract, even if it was impossible to person in 1 year, no writing needed Land, sale or leases of real property for over 1 yr Executors pay estate debts out of personal funds Goods of $500 or more for sale Surety to pay the debt of another Contracts for services can be oral regardless of price as long as its possible to complete within 1 year Under common law, the writing must include all essential terms (PPQTT) Contracts for goods need only have a quantity term and a signature The terms may be stated in more than one document. There is no requirement that all terms be stated in a single writing An accord an agreement to substitute one contract for another Satisfaction the execution of the accord Accord and satisfaction discharges the original duty 3

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Substituted contract very similar to an accord and satisfaction, but the duties under the original contract are discharged immediately Novation substitute a new party for an old party and release the old party from the contract. All parties must agree to the release. Permissible conditions that affect a partys duty to perform Condition precedent condition must occur before the other party must perform - Ill buy the house if the inspection passes Condition concurrent conditions that must occur simultaneously - When you purchase good for money Condition subsequent condition that will occur after a partys duty to perform as risen and will cut of that duty - Marriage engagement ring Parol evidence rule prohibits the admission or evidence to contradict the terms of the contract you signed Remedies what to do when a party fails to perform something he or she is contractually obligated to do Material/substantial breach under common law, the nonbreaching party can be discharged from the contract Minor breach the nonbreaching party is not discharged, but is entitled to damages Anticipatory repudiation/early breach one person unequivocally indicated in advance that he/she will not perform contractual duties when the time comes. The non-repudiating party (good guy) has the following options: Immediately sue Await the time for performance Cancel the contract Damages purpose it to get money or property to put the nonbreaching party in as good a position as he would have been had there been no breach Compensatory damages awards the nonbreaching party enough money to obtain substitute performance Consequential damages collect damages that are reasonably foreseeable as a result of the breach (extra costs to store goods because warehouse wasnt built in time) Specific performance used with land or unique items Cannot be used for personal service contracts No specific performance and compensatory damages, have to choose one Liquidating damages a clause in the contract that specifies what damages will be if there is a breach, enforceable is the amount is reasonable in relation to the actual harm done and not a penalty Punitive damages meant to punish, only get is there is fraud involved Rescission or cancellation restores the parties to their former position Doctrine of substantial performance under common law, a party cannot rescind or cancel if a contract has been substantially performed

REG - Notes Chapter 5 http://cpacfa.blogspot.com

Quasi-contract damages when there is no contract, a court will sometimes act as if there were a contract to prevent unjust enrichment when one party confers the benefit on another Privity of contract only the parties to the contract have rights under the contract. However/exception, there may be intended third party beneficiaries Intended beneficiary (can enforce contract) purpose of the contract is to give benefit directly to third person Donee beneficiary receive their interest as a gift. (The reason Im painting your house is so I can buy my mom a gift) Creditor beneficiary receive their interest because a party owes them something An intended beneficiary can sue the promisor if they fail to perform Incidental beneficiary (cant enforce contract) no intent to directly confer benefits to third party Rights are assignable Duties are delegatable In general any right may be assigned and any duty may be delegated. Exceptions: When the assignment will change the obligors risk (insurance) The delegated duties involves specialized skills or relies heavily on the person performing Unless there is a Novation both the delegator and delegate are liable When a mortgage is assumed both the mortgagor/assignor and the assignee are personally liable If a person takes subject to the mortgage, it is not an assignment. Upon default, only the mortgagor/assignor is liable. Not the person who took subject to the mortgage Implied warranties of assignor impliedly warrants that he has the rights assigned assigned and that he will not do anything to interfere with those rights An assignment need not be in writing and need not supported by consideration. Notice must be given to the third party

Sales
The Sales Article of the UCC in Article 2 applies only to sale of goods, regardless of price Goods defined as all things moveable and most tangible property (cars, cows, groceries) Merchants that deal in goods of the kind are generally held to a higher standard The UCC imposes an obligation of good faith on both parties to a sales contract Under common law, consideration is needed to make an offer irrevocable. However, certain offers by merchants are irrevocable without consideration. To qualify as a merchants firm offer: Seller must be a merchant (regularly deals in goods of the kind sold) Offer must be in writing and signed by the merchant (could be a rain check) Offer must give assurances it will be kept open for a certain time Merchants offers are irrevocable for the time stated, or if not time is stated for a reasonable time but in no event longer than 3 months. 5

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R5-29 great pass key on Merchants firm offer rule Mirror image rule does not apply under UCC Under the Sales Article an acceptance will be effective even if it states new or different terms Prompt shipment (unilateral) or promise to ship (bilateral) valid acceptance Shipment of nonconforming goods is both an acceptance and a breach of contract Exception: Seller notifies the buyer than the nonconforming goods are shipped only as an accomadation to the buyer, then the shipment is not an acceptance but a counter offer Accommodation rule applies only when shipment is used as means of acceptance. Exam trick: If a party accepts an order by promising to ship, then discovers he lacks the goods and ships nonconforming goods as accommodation, its a breach not accommodation. Auctions With reserve seller does not have to sell unless an adequate bid is made Without reserve the goods must be sold to the highest bidder Exception: quantity does not have to be stated in a UCC contract if the contract is: Output contract a buyer agrees to buy the entire output of the seller Requirement contract seller agrees to supply a buyer with all of her requirements for a stated period of time Under UCC, a modification of a contract for the sale of goods is enforceable, even without consideration, as long as the modification is sought in good faith Statue of limitation is 4 years from time of breach Statue of frauds MYLEGS Contracts for the sale of goods of $500 or more must be evidenced by writing signed by the party being sued. There are four exceptions: SWAP Specially manufactured goods Written confirmation will bind the recipient if they do not object within 10 days Admitted in court Performance contracts have already been performed If the method of transportation called for in the contract is unavailable or commercially unreasonable cant use as a defense, the seller may use alternative methods and the buyer must accept. As a general rule, the sellers basic duty is to hold conforming goods for the buyer and give the buyer reasonable notice to enable the buyer to take delivery. If the goods are nonconforming, risk is always on seller regardless of shipping terms For risk of loss to pass to buyer, goods must be segregated or identified as goods for the specific buyer When there is no specific agreement on delivery or risk of loss, divide into two broad catergories Noncarrier case buyer will pick up goods at the sellers place of business. If the seller is a - Nonmerchant risk of loss passes to the buyer upon tender of delivery of goods to the buyer - Merchant risk of loss passes only upon actual delivery to the buyer (takes physical possession) 6

REG - Notes Chapter 5 http://cpacfa.blogspot.com

Carrier case common carrier is used and risk of loss depends on - Shipment contract risk passes on delivery to carrier - Free Along Side (F.A.S) requires seller to deliver goods along side a specified vessel - Cost, Insurance and Freight (C.I.F) contract price includes all three - Free On Board (F.O.B.) the sellers place - Destination contract risk passes when goods reach destination - Free On Board (F.O.B.) the buyers place (where the buyer is located) Sale on approval risk on seller until approval (a sale with a trail period) Both parties can have an insurable interest in the same good simultaneously So risk of loss in not determined by who has title Title is ownership Title can generally pass as parties agreed in the contract If parties didnt agree, title passes upon delivery (shipment or destination) If buyer rejects goods the title revests with seller

2 types of warranties: Express (those in the contract) and Implied Seller must make a perfect tender (delivery is perfect without defects), to do so, the goods must conform to all warranties. Express warranties (oral or written per the contract) Implied warranty of title Implied warranty of merchantability Implied warranty of fitness for a particular purpose Express warranties made by seller to induce purchase Must be part of the basis of bargain (played some part in the buyers decision to buy) Statements of value or opinions do not generally create an express warranty

Implied warranty of title implied in every sales contract is the warranty that the seller has good title and the right to transfer that title (no unstated liens or attachments on the goods) Can only be disclaimed specifically with I do not warrant title not with a general disclaimer as is or with all faults Implied warranty of merchantability in every sale by a merchant who deals in goods of the kind being sold, there is an implied warranty that the goods are fit for ordinary purposes This implied warranty is made only in sales by merchants Merchantability can be disclaimed with as is or with all faults Implied warranty of fitness for particular purpose When the buyer relies on seller (need not be a merchant), the seller must know of the particular purpose and that the buyer is relying on him to select the goods Can be disclaimed with as is or with all faults General disclaimers like we hereby disclaim any and all warranties wont work Things to remember about implied warranties Any implied warranty can be disclaimed, if the correct words are used (even by merchants) Implied warranties do not need writing. They are automatically implied in a sales contract Warranty of merchantability can only be made by merchants and is a warranty only that the goods will be fit for ordinary purposes 7

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Warranty of fitness can be made by any seller, and is in effect when the buyer relies on the seller to pick goods suitable for a particular purpose and that the goods will be fit for that purpose Warranties are independent from tort liability (negligence or strict liability) Under the UCC, warranty liability is not limited to privity. It extends to those in the buyers household and those who use the product Tort Liability wrongful act either intentional (fraud) or unintentional (negligence) Negligence failure to use reasonable care, focus on sellers conduct. Those injured by goods can sue negligent sellers if they can prove: Seller owed them duty of care Seller breached the duty Plaintiff suffered damages Damages were caused by the sellers negligence Strict product liability focus on product, sellers conduct is irrelevant, to sue must prove: Product was defective when it left the sellers hands Defect caused injury Defect made the product unreasonably dangerous Seller is a merchant or dealer (in the business of selling the good) Product reached the user without substantial change Privity is not required Negligence is not required. Sellers are strictly liable Remedies Punitive damages are not available under the sales articles Duty to mitigate damages can not recover for damages that could have been avoided Sellers remedies If the buyer breaches, the seller has right to resell the goods and sue for damages (usually difference between contract price and additional or incidental (foreseeable) damages) Even if there is no liquidating damage clause, if the buyer has made a down payment and breaches, the seller may keep the lesser of $500 or 20% of the price Buyers remedies Under the UCC, the seller must make a perfect tender a delivery free from any defects. If the goods do not conform to the contract, the buyer may reject all, some or none of the goods. The buyer may also sue for damages. Formal requirements for rejection Within a reasonable time and buyer must notify the seller Right to cure after the buyer rejects the seller has a right to cure the defect if there is any time remaining under the contract for the sellers performance If the buyer has paid for part or all the goods and the seller is insolvent, the buyer may recover the goods from the seller if the goods are identified As a general rule the seller cannot transfer any better title than the seller has (a thief who has no title, generally has no power to transfer good title to stolen goods. Exception: 8

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Entrusting owner of goods entrusts them to a merchant (not a bank). Merchant sells them in the ordinary course of business (not a bulk sale) to a bona fide purchaser for value, the purchaser gets good title, even though the merchant did not have good title Voidable title owner is defrauded/tricked into giving a thief title. If the defrauder has since sold the goods to a bona fide purchaser, the purchaser gets good title What income is subject to FICA Employees gross wages Self-employed persons net profits are subject About social security The employer must pay the tax and collect an employees portion of the tax All income derived from labor is taxed; unearned income is not taxed All employees are subject to the tax up to a maximum dollar amount for social security with no limit on the Medicare; self employment income is subject to both employer and employee taxation for income over $400 FUTA (federal unemployment tax act) The employer must pay tax if he employs an employee for at least 20 weeks in a year or paid $1,500 in wages in a quarter. The employee does not pay. Because the employer pays, the tax is deductible as a business expense. The employee cant deduct If an employers claims rate is low, he may get a deduction for state unemployment tax The employees benefits are not limited to the contributions made on his behalf Workers compensation enables employees to recover for work related injuries regardless of negligence An employee can collect whether he was negligent, grossly negligent or assumed risk Can not recover for injuries resulting from intoxication, fighting or self inflicted wounds

Step 1 what law applies? Common law or UCC?

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