Business Law: Contracts

Why this topic matters

Business Law is Area II of Taxation and Regulation (REG), 15–25% of the section, and contracts are its largest piece. Questions contrast common law (services, real estate, employment) with Article 2 of the Uniform Commercial Code (UCC) (sale of goods). Knowing which set of rules applies answers many questions on its own.

Elements of a valid contract

1. Agreement — an offer and an acceptance
2. Consideration
3. Capacity
4. Legality

Contracts may be void (no contract — illegal purpose), voidable (one party may cancel — minors, fraud, duress), or unenforceable (valid but can't be enforced — statute of frauds, statute of limitations).

Offer

• Requires present intent, definite terms, and communication to the offeree. Advertisements and price quotes are generally invitations to negotiate.
• Termination: revocation (effective when received), rejection (effective when received), counteroffer, lapse of time, death or incapacity of either party, destruction of the subject matter, or supervening illegality.
• Option contracts (supported by consideration) are irrevocable for the stated period.
• UCC firm offer: a merchant's signed, written offer to buy or sell goods that assures it will be held open is irrevocable without consideration for the stated time, or a reasonable time if none is stated — but not more than 3 months.

Acceptance

Rule	Common law	UCC (goods)
Terms of acceptance	Mirror image rule: acceptance must match exactly; added terms create a counteroffer	An acceptance with additional terms is still an acceptance (battle of the forms, §2-207). Between merchants, added terms become part of the contract unless they materially alter it, the offer limits acceptance to its terms, or the offeror objects promptly.
Timing (mailbox rule)	Acceptance is effective when dispatched if sent by an authorized (or reasonable) method; otherwise when received	Same — any reasonable method
Silence	Generally not acceptance	Generally not acceptance

Consideration

• A bargained-for exchange of legal value — a promise, act, or forbearance. Adequacy is generally not examined.
• Not consideration: past consideration, a pre-existing legal duty, illusory promises, and moral obligations.
• Modifications: under common law, a modification needs new consideration (the pre-existing duty rule). Under the UCC, a good-faith modification of a sale of goods needs no consideration.
• Promissory estoppel enforces a promise without consideration when the promisee reasonably and foreseeably relied on it to their detriment.
• Paying a smaller amount to settle an undisputed, liquidated debt does not discharge the rest; settling a disputed debt (accord and satisfaction) does.

Capacity and legality

• Minors' contracts are voidable by the minor, who may disaffirm before or within a reasonable time after reaching majority; ratification after majority makes the contract binding. Minors remain liable for the reasonable value of necessaries.
• Contracts of persons adjudicated insane are void; those of mentally incompetent (not adjudicated) or intoxicated persons may be voidable.
• Illegal contracts (usurious loans, unlicensed professional services requiring a license to protect the public) are void. Unreasonable non-compete clauses may be unenforceable.

Statute of frauds

These contracts must be in writing and signed by the party to be charged (memory aid: MY LEGS):

• Marriage — promises in consideration of marriage
• Year — contracts that cannot be performed within one year of their making
• Land — sale of real property or an interest in it (leases over one year)
• Executor — an executor's promise to pay estate debts personally
• Goods — sale of goods for $500 or more (UCC)
• Surety — a promise to pay the debt of another (a secondary promise)

UCC exceptions: specially manufactured goods not suitable for others, goods received and accepted or paid for, admissions in court, and the merchant's confirmation rule (a written confirmation between merchants binds the recipient who doesn't object within 10 days). The writing need not contain all terms except quantity.

Parol evidence rule

Evidence of prior or contemporaneous oral agreements cannot contradict a fully integrated written contract. Exceptions: evidence of fraud, duress, or mistake; later modifications; clarifying ambiguous terms; and conditions precedent.

Defenses

Defense	Result
Fraud in the inducement (misrepresentation of a material fact, intent, reliance, injury)	Voidable; damages available
Fraud in the execution (signer deceived about what they are signing)	Void
Innocent misrepresentation	Voidable (rescission only)
Duress (physical) / economic duress	Void / voidable
Undue influence (confidential relationship)	Voidable
Mutual mistake of material fact	Voidable by either party; unilateral mistake generally no relief unless the other party knew

Third parties

• Assignment of rights is generally allowed unless it materially changes the obligor's duties or is prohibited; the assignee takes subject to defenses.
• Delegation of duties is allowed except for personal services; the delegator remains liable.
• Third-party beneficiaries: intended beneficiaries (creditor or donee) can enforce the contract once their rights vest; incidental beneficiaries cannot.

Performance, breach, and remedies

• Substantial performance (common law): the performing party recovers the contract price less damages. The UCC requires perfect tender, but the seller has a right to cure within the contract time.
• Anticipatory repudiation: the non-breaching party may sue immediately or wait a commercially reasonable time.
• Discharge by performance, agreement (rescission, novation, accord and satisfaction), impossibility, or commercial impracticability.
• Remedies: compensatory damages (benefit of the bargain), consequential damages (foreseeable), liquidated damages (reasonable, not a penalty), rescission, and specific performance (unique items — land, art; never personal services). Punitive damages are generally not awarded for breach of contract. The non-breaching party must mitigate.
• UCC buyer remedies include cover (buy substitute goods and recover the difference); seller remedies include reselling the goods and recovering the difference.

UCC sales specifics

• Risk of loss: shipment contract (free on board (FOB) shipping point) → passes to the buyer on delivery to the carrier; destination contract (FOB destination) → on tender at the destination. Without a carrier, a merchant seller keeps the risk until the buyer takes possession. A breaching party bears the risk.
• Warranties: express (affirmation, description, sample); implied warranty of merchantability (merchants only — fit for ordinary purpose); implied warranty of fitness for a particular purpose (buyer relies on the seller's skill); warranty of title. Merchantability can be disclaimed only by mentioning "merchantability" (in writing if conspicuous); "as is" disclaims implied warranties.

How it is tested

• Decide when a contract is formed (mailbox rule, revocations, counteroffers).
• Apply the UCC's different rules for firm offers, additional terms, and modifications.
• Decide whether the statute of frauds applies.
• Choose the remedy for a breach.