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Business law final flashcards


A "fiduciary" relationship between a principal and agent, which relationship is based on trust and confidence

Elements of an Agency

Principal, Agent, Mutual consent from the principal that the agent will act on the principal's behalf, Agent is subject to the principal's control, Fiduciary duty - legal relationship of confidence or trust, Legal purpose and cannot be contrary to public policy (No consideration from the principal to the agent is required for an agency relationship; The principal but not the agent needs contractual capacity)

Agency Principal

The recipient (i.e. the person for whom an agent is acting)

Agent for Agency

The actor (i.e. the person who is acting on behalf of the principal)

Mutual Consent

Agreement between the principal and the agent.


Where the principal authorizes the agent to act (i.e. client - attorney; client - real estate agent) or by status the agent is authorized to act on behalf of the principal (i.e. corporation - CEO); Control over the time, manner, and method of executing the work

"Equal Dignity Rule"

Indicates that if the law requires a written contract, the Agent's authority from the principal must be in writing to be valid, except for officer acting for corporation or agent acting in the presence of the principal

Form agency by agreement (actual authority)

written agreement or oral agreement

Form agency by ratification (apparent authority)

Principal by act or agreement, ratifies conduct of a person who at the time of acting was not the principal's agent or did not have acting authority

Form agency by estoppel (apparent authority)

By the principal's actions or the environment (i.e. inferred by custom), (1) a third party believes that another person is the principal's agent and (2) the third party acts to his detriment in reasonable reliance on that belief

Form agency by operation of law (apparent authority)

The agent acting outside of the scope of his duty because of necessity or emergencies

Elements for Ratification

1- Agent acts on behalf of principal
2- Principal must affirm the the entire deal/ matter (if 3rd party, before the 3rd party withdraws from deal/matter)
3- Principal and 3rd party must have legal capacity to contract when agent made the deal/matter and the principal's legal capacity also must be at ratification
4- Principal must know all the material facts in the deal/matter


The agent must put her own needs second to the principal's interest

Duties of Agents to Principals

1. Duty of Loyalty- The obligation to act solely for the benefit of the principal and not in the agent's or a 3rd party's interest. Confidentiality is part of the duty of loyalty
2. Duty of Care- The obligation to exercise good business judgment and to use ordinary care in meeting the agency obligation

Duties of Principal to Agent

1. Compensation- Agreed upon in advance in writing to avoid legal disputes
2. Reimbursement
3. Indemnification- Subject to the terms of the agency agreement, the Principal is obligated to "make whole" the Agent for liabilities incurred because of performing authorized and lawful actions and transactions on behalf of the Principal
4. Cooperation and Safe Working Conditions

Employee vs Independent Contractor

-In an EE, the ER is liable for their actions in the scope of the agency (liable for taxes too like SS, protected under employment laws
-IC needs a "work for hire" agreement from ER

Terminate an Agency Relationship

1. Lapse of Time
2. Mutual Agreement
3. Terminate Provision- either party or both parties terminate the agreement after a reasonable time as provided in the agreement
4. Purpose Achieved
5. Occurrence of "Trigger Event"

Operation Of Law

1. Death or Insanity
2. Impossibility- due to the loss of the item or because of the law
3. Changed Circumstance
4. War or Other Political Prohibition- similar to the "force majeure" provision in a contract
(bankruptcy or Insolvency or the Inability to pay debts when due - Does not necessarily terminate the agency relationship)

At Will Employment

Employment relationship in which either party can break the relationship without liability, provided that there is no express contractual provisions providing otherwise and where the employee is not a part of a collective bargaining arrangement (i.e. union)

Contractual Employment

Employment arrangement pursuant to a formal agreement, specifying the terms of such employment arrangement

Employment Discrimination

Treating employees or job applicants unequally based on race, color, national origin, religion, gender, age, or disability

Protected Class

A group of persons protected by specific laws because of the group's defining characteristics (e.g. race, color, religion, national origin, gender, age, and disability)

Retaliatory Discharge

The firing of an employee in response to taking negative action against the Employer

Disparate-Treatment Discrimination

Intentional discrimination by an ER of persons in a protected class

Disparate-Impact Discrimination

The result to a protected class of persons who are adversely affected by an ER's practices and procedures, even though they may not appear to be discriminatory (i.e. unintentional discrimination; discrimination in effect)

Constructive Discharge

A termination of employment that occurs by making the EE's working conditions so intolerable that the EE reasonably feels compelled to quit

Immigration Reform and Control Act of 1986 ("IRCA")

Makes it illegal to hire, recruit, or refer for a fee someone not authorized to work in the United States

Immigration Act of 1990

Places caps on the number of visas (entry permits) that can be issued to immigrants each year by a U.S. business

Contract Law Purposes

1. Represents a reflection of social values, interests, policy, and expectations at a given point in time. (i.e. what promises should be upheld and acceptable excuses to society for breaking promises)
2. Sets a framework for enforcing the promises that society views should be upheld and allowing for excuses that society views as acceptable
3. Provides stability, predictability, and certainty for buyers and sellers and other contracting parties in the marketplace
4. Serves as a backup to moral obligations, protecting promises or giving relief

Sources of Contract Law

-Common Law: Governs all contracts except those that have been modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or administrative agency regulations
-UCC: Governs contracts regarding the sale and lease of goods (to the extent the UCC modified the common law)


Offer and Acceptance


Legally sufficient and bargained-for value received or promised to entice the offeree to make the arrangement

Legal Contractual Capacity

Characteristics recognized by law for one having the "quality" to engage in contractual activities

Bilateral Contract

A promise for a promise, K formed when the offeree makes response promise, Most K's are bilateral

Unilateral Contract

A promise for an act, K formed when offeree acts; K cannot be modified once Offeree starts performing, and K cannot be revoked upon substantial performance by the Offeree, unless terms specify otherwise

Formal Contract

Requires a special form for creation (i.e. international sales contracts)

Informal Contract

Requires no special form for creation, other than certain Ks must be in writing

Express Contract

K where the terms are stated, whether an oral or written K

Implied Contract

K formed, in whole or in part, by the parties' conduct

Executed Contract

Both parties have fully performed the contract; If one party has fully performed and the other party has not fully performed the contact, the completed portion is executed and the uncompleted portion is executory

Executory Contract

Neither party has fully performed the contract

Executory, Bilateral, Express Contract (becomes executed after Gloria completes acting and receives the final payment)

Identify types of Contract:
Producer says to Gloria, "I'll pay you $2 million to star in a my new romantic comedy, A Promise for a Promise, which we are shooting three months from now in Santa Fe." Gloria says, "It's a deal."

Unilateral Contract

Producer says to Theo, "I'll pay you $200 to be the set photographer on next Saturday for my new romantic comedy, A Promise for a Promise." Theo says nothing in response, but shows up to the set on Saturday and starts taking photographs.

Valid Contract

K with the necessary elements for K formation (agreement, consideration, legal contractual capacity of the parties, and legal purpose)

Enforceable Contract

A valid K that can be enforced because there are no legal defenses

Voidable Contract

A valid K where one or both parties have the option to avoid / RESCIND the K (i.e. K with a minor); If the K is voided, both parties are released, and if the K is ratified both parties are legally obligated

Unenforceable Contract

A valid K that cannot be enforced because of a legal defense (i.e. K requiring writing and no writing). The court will not enforce the contract

Void Agreement

No contract exists. Possible reasons: Purpose of "K" is illegal or a party does not have legal contractual capacity (i.e. was not competent)

b. Contract law gives parties a way to enforce many of the promises that are made to them

One of the main purposes of contract law is:
a. to ensure that one party does not threaten another.
b. to ensure that certain types of promises made among private parties are enforceable.
c. to discourage harms against society.
d. To discourage misuse of the environment.

c. To be valid, an agreement must include an offer and acceptance

An agreement to form a contract must include:
a. a fair bargain
b. a fair price
c. an offer and an acceptance.
d. a physical sample of the good for sale

a. A bilateral contract involves the exchange of promises. If all of the other requirements for a valid contract are met, both parties will be obligated to perform their respective promises

A bilateral contract is one in which:
a. two promises are exchanged.
b. a promise is given in return for an act.
c. a third party guarantees the promise of one of the parties.
d. a unilateral contract accomplishes an exchange of promises

b. Despite their drinking, boasting, and bragging, the parties created a valid contract, which had to be performed. The party seeking to void the contract would have to prove that he/she lacked the mental capacity to comprehend the legal consequences

The case of Lucy v. Zehmer involves an offer to sell property during an evening of drinking. If the decision turns on the element of legal contractual capacity, the court mostly likely will hold that:
a. because the parties were drinking, there was no valid contract.
b. despite the fact that the parties were drinking, there was a valid contract.
c. there was no clear acceptance of the contract terms.
d. the parties failed to clarify the essential terms of the contract due to excessive drinking.

a. Sam withdrew or revoked the offer prior to Rhonda accepting Sam's offer

Sam offers to Rhonda Sam's collection of rare books. Before Rhonda even has a chance to accept Sam's offer, Sam says, "Sorry, I changed my mind, no deal." This is an example of:
a. a revocation.
b. a rejection.
c. a counteroffer.
d. a restitution.

d. Once an acceptance is dispatched (sent, communicated) in an authorized way, it is effective

The mailbox rule states that:
a. an offer is valid only if mailed.
b. an acceptance is valid only if mailed.
c. an offer is valid once it is deposited in a mailbox.
d. an acceptance is effective upon dispatch by an authorized means of acceptance

b. Consideration is something of value that a person gives in exchange for a promise of some sort

Consideration may be defined as:
a. a socially approved way to provide for the poor.
b. something of value given in exchange for a promise.
c. an arrangement for transferring and allocating risk.
d. a way to promote healthy living

b. You have contractual capacity if you are legally able to enter into a contractual relationship

A definition of the term contractual capacity is:
a. the ability to enter into a void contract.
b. the ability to enter into a contractual relationship.
c. the ability to mitigate contractual damages.
d. the ability to physically with one's hand write a contract.

Current Intention to make an offer (element of a contract)

Intent is determined by the "reasonable person standard"
►Future intent ≠ an offer.
►Invitations negotiations (i.e. price lists) and RFPs ≠ an offer.
►Preliminary agreement (with all essential and no disputed terms) = offer
►Preliminary agreement (open essential terms but agreement to negotiate later) = offer

Definiteness of Offer (element of a contract)

The offer must have reasonably definite terms, including the following terms:
(1) parties (WHO);
(2) object or subject matter of, or work performance for the K (WHAT);
(3) consideration (HOW); and
(4) time of payment, delivery, or performance (WHEN)

Communication of offer to offeree (element of a contract)

The offer must be communicated to the offeree, which communication gives the offeree the power to transfer the offer to a binding, legal obligation with acceptance

Revocation (way to terminate an offer)

Unless the offer was made irrevocable, with notification to the offeree or offeree's agent (via express statement or action), the offeror can revoke an offer prior to the offeree's acceptance

Rejection (way to terminate an offer)

If the offeree rejects the offer, the original offer is terminated, effective when the offeror or the offeror's agent receives the rejection
1. Counteroffer: An offeree's response to a original offer, where the offeree rejects the original offer and issues a new offer
2. Mirror Image Rule: Requires the acceptance of an offer for the same terms as the offer, otherwise a counteroffer exists

Ways to terminate an offer by operation of law

(1) lapse of time;
**time starts counting when offer received
**midnight of the day specified in the offer
(2) death or incapacity of the offeror or offeree;
(3) subject matter destruction; and
(4) the K purpose has become illegal

Mailbox Rule

Used by a majority of courts, the acceptance occurs at the time the offeree sends or delivers the acceptance communication by the agreed upon delivery mode

2 Elements of Consideration

Legally Sufficient Value: doing or giving up something that the party has no obligation to do
Bargained-for-Exchange: The thing of value must be given in exchange for the return promise. This element distinguishes a gift from a K

c. Not a valid offer because Mary does not seriously intend to sell and one of the three elements of an offer is current intent to make an offer which is based on a "reasonable person" standard

Mary tries to start her car with no success. She yells that she will sell the car to anyone for $10. Nick, a passerby who owns Nick's Pre-owned Autos, hands Mary $10. This is
a. a valid acceptance because Mary is seriously frustrated.
b. a valid acceptance because Nick is a car dealer.
c. not a valid offer because Mary does not seriously intend to sell.
d. not a valid acceptance because Nick is a car dealer

c. This statement is a statement of future intent and thus not an offer. Because intent has to be current

Nate tells Opal, "I might sell the skis that I bought last fall since I haven't used them and the skiing season is almost over." This is
a. an acceptance of an offer.
b. an offer.
c. not an offer.
d. a firm offer

b. This statement is not a valid offer because the terms of the statement from Yvonne to Zach are not definite, and one of the three elements for an offer is definitiveness of terms.

Yvonne asks Zach, "Do you want to buy one of my fishing rods?" This is
a. a valid offer.
b. not a valid offer because the terms are not definite.
c. not a valid offer because Yvonne did not state an intent.
d. not a valid offer because Zach did not respond.

c. QT is not liable because the sale to Speedy for which Rapid has notice prior to Rapid's acceptance of the QT offer revokes the offer to Rapid

QT Transport, Inc. offers to sell a truckload of palettes to Rapid Delivery Company. Before accepting the offer, Rapid learns that the palettes have been sold to Speedy Trucking Corporation. QT is
a. Liable to Rapid for breach of contract.
b. Liable to Speedy for breach of contract.
c. Not liable because the sale revoked the offer to Rapid.
d. Not liable if QT offers substitute goods to Rapid

c. Paul rejected the original offer from NuCell and made a counteroffer because he rejects the original offer and makes a new offer

NuCell Phone Company offers to buy a laser printer, with a case of paper and an extra cartridge, for $200 from Office Products, Inc. ("OPI"). Paul, OPI's representative says, "Okay, but no paper and no extra cartridge." Paul has
a. accepted the offer.
b. made a counteroffer without rejecting the offer.
c. rejected the offer and made a counteroffer.
d. rejected the offer without making a counter offer

d. The court will most likely evaluate the adequacy of consideration if there is a gross disparity in the value of the consideration exchanged

Corporation A defends against a breach-of-contract suit by Company B claiming that the deal for the sale of assets was unfair because the consideration for their contract was inadequate.
A court is most likely to evaluate the adequacy of consideration if
a. a thing exchanged has no intangible value to one of the parties.
b. something exchanged is not of direct economic or financial value.
c. the items exchanged were of unequal value.
d. there is a gross disparity in the value of the consideration exchanged


Corporation A defends against a breach-of-contract suit by Company B claiming that the deal for the sale of assets was unfair because the consideration for their contract was inadequate.
If, as Corporation A claims, the consideration in this problem is inadequate, it may indicate a lack of
a. accord in Corporation A's satisfaction with the value of the deal.
b. bargained-for-exchange.
c. flexibility on the part of Company B.
d. "substance" or "weight" in the terms of the contract


Sal contracts with Tasty Pizza Company to deliver its products. Later, both parties change their minds and mutually agree to terminate the contract. After mutually terminating the contract, the next day, Sal again offers to deliver Tasty's products. Tasty is willing to deal with Sal, but at a new price. Sal and Tasty
a. can agree to a new contract, but it cannot include a new price.
b. can agree to a new contract that includes a new price.
c. must perform their original contract.
d. Must perform the part of their original contract that is executory.

Contractual Capacity

The legal ability to enter into a contractual relationship
Reasons not to enter in CC: minors, intoxication, mental incompetency

Legality (element of agreement)

An agreement to do something prohibited by statute or contrary to public policy= void agreement (i.e. K never existed)


Which of the following is not among the types of contracts that are often said to be contrary to public policy?
a. a contract for the sale of live farm animals.
b. an exculpatory contract.
c. an adhesion contract.
d. a contract in restraint of trade.


A definition of the term contractual capacity would be:
a. the ability to enter into a void contract.
b. the legal ability to enter into a contractual relationship.
c. the ability to physically write a contract.
d. none of the above.


Noni, a seventeen-year-old (in a state were the age of majority is eighteen), signs a contract to sell her car to OK Used Cars. The next day, Noni tells OK that she's decided not to sell the car. Noni is
a. liable to OK and must sell it a car of comparable value.
b. liable to OK and must sell it her car.
c. liable to OK for the amount of its profit on the deal.
d. not liable to OK.


Elle, a minor acting on her own without her guardian, signs a contract to buy a car. Later, after taking possession of the car, Elle disaffirms the contract. She
a. can keep the car.
b. must return the car.
c. can sell the car to her twenty-one year old brother.
d. none of the above.

Statute of Frauds

A state by state statute that specifies what types of contracts must be in writing and signed by the defending party to be enforceable

Contracts Requiring a Writing (MYLEG)

►Promise made in consideration of marriage
►Agreements that cannot by their terms be performed within one year from the date after the date of formation
►Agreements for an interest in land
►Promise made by an executor of an estate to pay debt personally (or promise to answer the debt of another) (e.g. executor or surety contracts)
►Agreements for the sale of goods at $500 (some states $5,000) or more - U.C.C

Parole Evidence Rule

When two parties make an integrated contract - intent to be final expression of agreement - neither party can use outside provisions to contradict, vary, or add to the written contract terms

Undue Influence

The situation in which the innocent party lacks free will in entering into the K, which makes the K voidable by the innocent party


►Use of threats, blackmail, or extortion to force / induce a party to enter into a K.
►Duress is both a defense to a K (i.e. allow K to be voidable by the innocent party) and allows rescission of the K by the innocent party.
►The threat to take legal action against someone ordinarily is not duress.


Jill and Karl contract for the sale of Jill's horse for $1,000. Unknown to either party, the horse has died. Karl is
a. entitled to another horse of equivalent value.
b. not required to pay due to the mutual mistake.
c. not required to pay due to the unilateral mistake.
d. required to pay because he assumed the risk the horse might die


Hillside Homes, Inc. and Idyll Builders, Inc. enter into a construction contract that includes six pages of detailed calculations. Later Hillside, whose project manager compiled the figures, discovers that some numbers were multiplied incorrectly—a significant, material mistake. Idyll refuses to make changes. A court would most likely


Gina induces Hu to enter into a contract for the purchase of a condominium about which Gina knowingly misrepresents a number of material features. When Hu discovers the truth, Hu can
a. not rescind the contract.
b. rescind the contract on the basis of fraud.
c. rescind the contract on the basis of mistake.
d. rescind the contract on the basis of undue influence


Rally offers to sell Sophie, who is seventeen years of age, a car about which Rally intentionally misrepresents several material facts. In reliance on the misrepresentation, Sophie buys the car. To prove fraud in this transaction, Sophie would have to show that
a. Rally intentionally deceived Sophie.
b. Rally made statements that were obviously exaggerated.
c. Sophie does not know anything about cars.
d. Sophie is under eighteen years of age


Rory threatens physical harm to force Susan to sell her business, Toney Tours, Inc., to Rory for a below-market price. This is
a. a legitimate business tactic.
b. duress.
c. fraud.
d. undue influence.


Dora, an accountant, uses undue influence to induce her client, Emily, to invest in Fiery Stocks, Ltd., a business with little potential. When Emily learns the truth, she can
a. do nothing as she has no defenses.
b. enforce the contract but not rescind it.
c. enforce the contract or rescind it.
d. rescind the contract but not enforce it


Clay contracts with Discount City Store to buy an MP3 player for $200 and a pair of stereo speakers for $600 from Discount City Store. Clay also downloads $300 worth of digital music from To be an enforceable contract, the contract that must be in writing is the purchase of
a. the digital music, the MP3 player, and the speakers.
b. the digital music and the speakers only.
c. the speakers only.
d. none of these items.

Privity of Contract

Traditionally only the parties to the K have rights and liabilities under the K

Third Party Beneficiary

One for whose benefit a promise is made in a K but who is not a party to the K

Intended Beneficiary

A third party for whose benefit a K is formed, who can sue the promisor if such a K is breached (i.e. privity of K exists between the promisor and the intended beneficiary)

Incidental Beneficiary

A third party who incidentally benefits from a K but whose benefit was not the reason the K was formed. Thus, such party has no rights in a K (i.e. no privity of K) and cannot sue to have the K enforced

Third Party Rights-- Assignments

Meaning of Assignments: A party to the contract assigns his contractual rights to a third party

Affects of Assignments

1. Unconditional assignment -The party making the assignment ("assignor") relinquishes all rights to the person receiving the assignment (the "assignee"), with the assignee having the ability to demand action from the other original party ("obligor"); The assignee however only has the contractual rights that the assignor had
2. Unassignable rights - Certain rights are unassignable: (1) prohibited by contract (subject to exceptions); (2) against statutory law or public policy; (3) materially increase or alter the risk or duties of the obligor unless agreed; and (4) personal in nature (unless all that remains is a money payment)

Exceptions to Prohibitions to the Assignment of Contracts

(1) the receipt of money;
(2) complete rights in real estate - (reason: against public policy for restraints on alienation); **a provision for the right of first refusal with respect to real property is permissible.
(3) negotiable instruments, including checks and promissory notes (reason: encourage the free flow of money and credit);
(4) in a contract for the sale of goods, the right to receive damages for breach of K or payment of an account owed.

Third Party Rights-- Delegations

The transfer of a contractual duty to a 3rd party

Affects of Delegation

The transferring party ("delegator") remains liable to the other party if the party to whom the duty has been delegated ("delegatee") fails to perform the contract obligation

Obligations that cannot be delegated

*Personal skills of the obligor contracted for
*Prohibited by contract
*Special trust placed on obligor
*When performance by a third party will vary materially from that expected by the obligee under the K

Third Party Rights - Third Party Beneficiaries Rights

Intended Beneficiary: As the intended beneficiary of the K, the 3rd party has legal rights and can sue the promisor directly for a breach of K.
Incidental Beneficiary: An incidental beneficiary cannot sue to enforce the K
(Most contracts will have language stating that there are no third party beneficiaries to the K. One reason that most Ks do not contain 3rd party beneficiaries is that the contracting parties want to make sure that the rights and obligations by K flow to the contracting parties)


The termination or completion of or release from a contractual obligation


The fulfillment of a contracting party's obligation arising under a K, and the typical way of discharging one's contractual responsibilities

Conditions of Performance

A qualification, provision, or clause in a K, the occurrence or nonoccurrence of which creates, suspends, or terminates the obligations of the contracting parties

Conditions Precedent

In contrast to an absolute promise, the condition in a K that must be met before a party's promise of performance becomes absolute. If the condition(s) precedent is not met or does not occur, the parties are discharged. With an absolute promise, nonperformance results in a breach of contract by the nonperforming party


Riley and Shelia enter into a written contract for the sale of Riley's condominium to Sheila. Sheila transfers her right to be recorded as the owner of the property to her daughter Tricia. This transfer is
a. a delegation.
b. an assignment.
c. a rescission.
d. a negotiation


Quality Contractors contracts to build a warehouse for Retail Storage Company. Quality completely performs pursuant to the contract. Retail Storage is entitled to
a. damages.
b. rescission.
c. specific performance.
d. nothing more.


Building Restoration, Inc. ("BRI") enters into a contract to refurbish an old train depot for Casual Dining, Inc. to open as Eat Up! Restaurant. BRI completes all but a minor piece of the work promised in the contract. BRI's performance is
a. absolute.
b. complete.
c. material.
d. substantial.


Building Restoration, Inc. ("BRI") enters into a contract to refurbish an old train depot for Casual Dining, Inc. to open as Eat Up! Restaurant. BRI completes all but a minor piece of the work promised in the contract. Casual Dining most likely is entitled to
a. damages for the uncompleted portion.
b. nothing.
c. reformation.
d. specific performance.


Bell Medical Education Service enters into a contract to employ Chris as an instructor for two years to begin May 1. One month before the term begins, Bell is underbid by a competitor and loses a major client, Delta Hospital Center. Bell now refuses to hire Chris. Bell's failure to hire Chris is
a. a material breach.
b. a minor breach.
c. Chris's breach.
d. no breach.


Bell Medical Education Service enters into a contract to employ Chris as an instructor for two years to begin May 1. One month before the term begins, Bell is underbid by a competitor and loses a major client, Delta Hospital Center. Bell now refuses to hire Chris. With respect to Chris's obligations, Bell's repudiation most likely
a. discharges Chris from the contract.
b. has no effect on Chris's obligations.
c. increases Chris's obligations under the contract.
d. suspends Chris's obligation to perform.


Roy and Sheila are parties to a contract. They subsequently agree that Tony should take Roy's place and assume all of his rights and duties under the contract. This is
a. a consideration.
b. a modification.
c. an accord and satisfaction.
d. a novation.

Purposes and Goals of Damages

•Compensatory: Compensates the nonbreaching party for the loss of the bargain of the deal and for the harm suffered as a result of the other party's wrongful act.
•Fairness: Place the nonbreaching party in the position it would have been in if the K was fully performed.
•Economic: Relieve the nonbreaching party for loss of profits (present or future).
•Deterrence: Punish the breaching party with the goal of deterring future bad behavior of that party and others.
•Predictability: Certain damages, such as liquidated damages or indemnification provisions, make the outlay and recovery of damages expectant for the parties

Compensatory Damages

To cover direct losses and costs to the nonbreaching party, compensating the nonbreaching party for loss of the bargain/agreement. Damages actually occurred and proved to arise directly from the breach of K. REMEMBER Privity of K

Consequential (or Special) Damages

To cover indirect and foreseeable losses, caused by special circumstances that does not directly or immediately result from the breach, such as lost profits

Punitive Damages (rare)

To punish and deter wrongdoing

Nominal Damages

To recognize wrongdoing when no monetary loss is shown

Liquidated Damages

To establish a predetermined damage amount

Equitable Remedies-- Purpose

Exist because damages are an inadequate remedy at law, so to seek justice or prevent unjust enrichment, the nonbreaching party may ask the court for an equitable remedy or seek it through the contract provisions

Types of Equitable Remedies and Sample K Situations

*Rescission and Restitution - Undo or cancel a K, returning the nonbreaching party to pre-transaction state and requiring the parties to return the goods, property, or funds previously conveyed.
*Specific Performance - Performance of the act called for in the K typically granted when monetary damages are inadequate. Sale of land and unique goods; personal services no because against public policy.
*Reformation - The situation where an agreement has been entered into, but the K or other memorializing instrument, in its written form, does not express the intent of the parties so the court could order the K be modified to reflect the intentions, agreement, and understanding of the parties. The courts role is to utilize the evidence and determine the intent of the parties in order to correct the K language. However, the court's role is not to develop a new K. Ks where fraud or a mutual mistake or CNCs in blue pencil states are most often when courts reform contracts.

Rescission and Restitution

Advantages: The parties are returned to their position prior to the K. There are no court obligations
Disadvantages: Not all contractual arrangements can be rescinded. If one party has performed a portion of the K, the other party has to compensate for value received - restitution. Under SOF, original contracts requiring a writing require a writing for rescission. The contracting parties have to make another K.

Specific Performance

Advantages: Attractive to nonbreaching party because it calls for the exact bargained for promise. Avoids problem of suing for damages, collecting the judgment and arranging another contract. For certain Ks, such as unique products, the actual performance is more valuable than the monetary damages
Disadvantages: Limited use as typically available only when monetary damages are inadequate. Not available for personal services Ks


Advantages: The parties' true intentions are reflected in the reformed agreement. The parties do not have to enter into a new K.
Disadvantages: There may be inadequate information to demonstrate the true intentions of the parties. The court has a large amount of control/discretion


Building Restoration, Inc. ("BRI"), enters into a contract to refurbish an old train depot for Casual Dining, Inc., to open at Eat Up! Restaurant. BRI completes most of the work promised in the contract. If Casual Dining can easily hire another contractor to complete the work, it is entitled to
a. damages.
b. nothing.
c. reformation.
d. specific performance


Carol pays Dick $10,000 to design an ad campaign for Carol's Coffee Stand chain. The next day, Dick tells Carol that he has accepted a job in New York and cannot design her campaign. Carol files a suit against Dick. Carol can hire another campaign designer for the same price without incurring any incidental expenses. As compensatory damages, Carol can recover
a. $100,000.
b. $10,000.
c. $1,000.
d. $0.


Development Associates ("DA") agrees to buy five acres of land from Eastside Properties for $15,000. Eastside fails to go through with the deal on the agreed date, when the market price of the land is $17,000. If DA cannot recover the land, DA may recover in damages in the amount of
a. $17,000.
b. $15,000.
c. $2,000.
d. $12,000


Eric holds 1,000 pounds of perishable fruit for Fresh Stuff Corporation which it was suppose to purchase. Fresh Stuff does not pay for the fruit. Eric sells the fruit to Green Grocers, Inc. This sale represents
a. a breach of contract.
b. a mitigation of damages.
c. rescission and restitution.
d. specific performance


Home Delivery Corporation and Interstate Transport, Inc. signed an agreement that provides for the payment of "$1,000 by whatever party commits a material breach of the contract that creates damages difficult to estimate but approximately $1,000." This is
a. a liquidated damages clause.
b. a mitigation of damages clause.
c. a no-damages clause.
d. a penalty clause


Rural Utility, Inc. enters into a contract with Shovel Excavation Service to dig up, replace, and rebury Rural's cables in a certain location. Rural advances Shovel 10% of its cost. If the parties rescind the contract, Shovel's refund of the payment would be
a. a penalty.
b. liquidated damages.
c. restitution.
d. specific performance


Ira orally agrees to buy a unique collection of sports memorabilia for $1,000 from Jane and sends her $250 as a down payment. When Ira sends Jane the rest of the purchase price, Jane refuses to ship Ira the collection. Ira should seek
a. damages.
b. reformation.
c. rescission.
d. specific performance


A contract for a sale of an apartment complex from Unique Properties, Inc. to Variety Investments Corporation contains an erroneous legal description, which neither party noticed. Both parties desire to continue with the contract. The most appropriate remedy for these parties is
a. damages.
b. reformation.
c. rescission.
d. specific performance

Alternative Dispute Resolution ("ADR")

The resolution of disputes in ways other than those involved in the traditional judicial process such as the court process and proceedings

Purposes and Goals of ADR

•Reduce Parties' Cost: To reduce the cost of resolving disputes, as litigation is an expensive process.
•Preserve Parties' Time: To expedite the resolution process since litigation is a time-consuming process. For example, it may take years for a case to be tried give case backlog in many courts.
•Enable Taxpayer Savings: To reduce the caseload of traditional courts and thus the costs to the public of paying for certain expenses of the court system.
•Give Parties' Flexibility: Given the various methods of resolving disputes and their processes, flexibility exists for the disputing parties in resolving disputes.
•Preserve Relationships: With litigation, the goal/environment is win/lose, "doing battle," and emphasizing how the parties' positions differ. With ADR, the goal is win/win, a mutual satisfactory resolution, trying to preserve the relationship, and emphasizing the common ground of the parties

Types of ADR

Negotiation is the simplest and least expensive form of ADR. It is where the parties come together, with or without their attorneys and try to reach a settlement without the involvement of a third party. As the attorneys are advocates for their clients, they must put their clients' interests first in the negotiation process.
Mediation is a form of ADR in which the parties select a neutral third party, the mediator, who helps the parties try to facilitate a resolution to the matter. The mediator lacks the power to resolve the matter for the parties, but may provide suggestions for resolution. In most cases, the mediation decision is final and non-appealable.
The form of ADR where a neutral third party expert or a panel of experts ("arbitrator" or "arbitrators") hear a dispute and imposes an often binding resolution on the parties.


The occurrence when an owner ceases to be associated in the continuation of the business.


The formal disbanding of an organization.

Corporation Types

Domestic Corporation - A corporation within its home state (i.e. the state of its incorporation).
Foreign Corporation - A corporation in any state outside of the home state.
Alien Corporation - A corporation formed outside of the United States but does business in the United States.
Public Corporation - A corporation that offers securities (stocks/shares or bonds/loans) for sale to the general public, typically through a stock exchange.
Private Corporation - A corporation that does not offer or trade its company's securities to the general public on through a stock exchange or over the counter market, but rather the company's securities are offered, owned, and traded or exchanged privately.
Close Corporation - A "small" corporation whose shares are held by family or relatively few persons. There is no trading market for shareholders. Shareholders are generally officers and board members.
Privately-owned Corporation - A government-owned corporation.
Nonprofit Corporation - A corporation that typically uses surplus profits to achieve its mission rather than distribute them as a dividend or use for shareholder value maximizing purposes. In the U.S., many nonprofits have the IRS designation 501(c).

Double Taxation

The taxation of profits at the corporate tax level, then again when shareholders receive dividends

Flow-through Tax Treatment

The tax treatment for entities where the income "flows through" to the investors/owners (i.e. the income of the organization is treated as the income of the investors/owners)

Limited Liability

The principle that liability is limited to an investor's capital contribution

Joint and Several Liability

A doctrine under which the owners (typically in a partnership arrangement) are liable regardless of his participation and for any and all of the liability. Thus, in a lawsuit, the 3rd party can sue all partners together or one or more partners separately to collect


The minimum number of parties within a group (e.g. directors or shareholders) that must be present to conduct official organizational business, which minimum number usually is a majority

Sole Proprietorship (Ownership Requirements)

•Simplest form of business.
•No separate entity. The owner is the business proprietor

General Partnership (Ownership Reqs.)

•Not a separate entity in most states. The owner is the partners. However, under the Uniform Partnership Act the partnership is treated as an entity.

Limited Partnership ("LP") (Ownership Reqs.)

•Name must include "Limited Partnership" or "LP".
•Legal entity separate and distinct from its owners.
•Has two or more partners one of which has to be a General Partner and the other a Limited Partner.
•Has no restriction on the type of owners.

Limited Liability Company ("LLC") (Ownership Reqs)

•Name must include "Limited Liability Company" or "LLC," as such denotes to the public the organization is a limited liability company.
•Legal entity separate and distinct from its owners.
•Can be a single member LLC, but most states require at least 2 owners. However, must have 2 or more members to be taxed as a partnership.
•There is no restriction on the number of members. Thus, in addition to individuals, members may be corporations, LLCs, or partnerships.
•Members may be residents of other countries.
•Permissible to classify membership interests into different classes.

S Corporation ("S-Corp") (Ownership Reqs)

•Name must include "Corporation," "Company," "Incorporated," "Limited," an abbreviation thereof, or another permitted.
•Legal entity separate and distinct from its owners.
•Shareholders can only be only individuals, estates,
or certain trusts.
•Cannot be a member of an affiliated group of corporations.
•Must have 100 or fewer shareholders.
•Must have only one class of stock, but shareholders in the one class of stock can have different voting rights.
•Shareholders must be U.S. citizens or residents.
*S-Corp automatically converts to a C-Corp if it does not meet the formation requirements.

C Corporation ("C-Corp") (Ownership Reqs)

•Name must include "Corporation," "Company," "Incorporated," "Limited," an abbreviation thereof, or another permitted.
•Legal entity separate and distinct from its owners.
•Has one or more shareholders, but no restriction on the type of shareholders.
•Has no restriction on the type of owners.

Sole Proprietorship (Formation and Restrictions)

No formation exists so used by one who does not want to create an organization

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