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Chapter One Contracts

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Chapter One Contracts

ELEMENTS OF A CONTRACT... 1-1 OFFERS AND ACCEPTANCE... 1-1

When Offers End

When Acceptances Are Effective

TYPES OF CONTRACTS ... 1-3 CONSIDERATION... 1-3 STATUTE OF FRAUDS ... 1-4 COMPETENT PARTIES: MINORS, DRUNKS & THE INSANE... 1-5 ILLEGAL CONTRACTS ... 1-5 FRAUD AND INNOCENT MISREPRESENTATIONS ... 1-5 MISTAKES, DURESS AND UNDUE INFLUENCE ... 1-6 PAROL EVIDENCE RULE... 1-7 THIRD PARTY RIGHTS AND ASSIGNMENTS... 1-7

Third Party Beneficiary Contracts

Assuming and Buying Subject To a Mortgage Assignments and Delegations

DISCHARGE AND CONTRACT REMEDIES ... 1-8 Performance & Discharge of Contract Duties

Contract Remedies

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Chapter One Contracts

ELEMENTS OF A CONTRACT

1. A contract is an agreement, a meeting of the minds.

2. A contract contains the following six essential elements:

a. an offer b. an acceptance c. consideration

d. in proper form (i.e. the Statute of Frauds may require a writing) e. for a lawful object

f. by two or more competent parties

Memory Device: Only Accuracy Can Pass Law Candidates 6 Elements of a Contract

Only = Offer

Accuracy = Acceptance

Can = Consideration

Pass = Proper form (Statute of Frauds may require a writing)

Law = Lawful object

Candidates = 2 or more Competent Parties

OFFERS AND ACCEPTANCES

1. An agreement requires both an Offer and an Acceptance 2. An Offer has 3 elements

a. it must be seriously intended (the test is whether a reasonable person would consider it to be a serious offer)

b. it must be communicated by either words or actions c. it must be definite in its terms (must include a price)

3. Advertisements and price quotes are not usually offers; they are invitations to deal 4. An Acceptance has 3 elements

a. an acceptance must be unconditional - the offeree must comply with all of the offeror's terms or a counteroffer is created

b. an acceptance must be communicated by words or actions (e.g. silence is rarely an acceptance unless there is a long course of dealing between the parties)

c. an acceptance may only be accepted by the party to whom it's made (e.g. offeree cannot assign his/her right to accept to accept an offer to a 3rd party)

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WHEN OFFERS END

1. Counteroffers end offers but they are only effective when they are received

Example: A mails an offer to B on April 1 which is received on April 3. On April 3 B mails a counteroffer to A. On April 4 B changes her mind and telephones an acceptance. On April 5 the counteroffer arrives.

There is a contract between A and B because the offer was accepted on April 4 before the counteroffer took effect.

a. requests and inquiries are not counteroffers

b. on the exam an inquiry will usually end in a question mark, not a period 2. Rejections end offers but they are only effective when received

3. Revocations end offers but they are only effective when received. Offeror may usually revoke anytime before acceptance even if (s)he promises the offer will be held open

a. exception: Option Contracts can't be revoked

1). the offeree pays consideration to keep offer open (note: there is no option contract until the consideration is actually paid by the offeree)

2). counteroffers will not end an option contract

Example: A pays X $1,000 for the right to buy X's house for the price of $250,000 anytime prior to June 1.

An option contract has been created and X may not revoke the offer to sell for $250,000. If on May 1 A offers X $225,000 for the house, the option contract will not end and A will still have until June 1 to buy for

$250,000

b. exception: In UCC Sales Firm Offers are irrevocable without consideration if: made by a merchant, in writing, and a guarantee the offer will be held open

4. Offers end at the time stated (if no termination time is stated, it ends at reasonable time) 5. Death or insanity ends offers immediately, but does not end most contracts

Example: X purchases goods on credit from A and dies prior to payment. The contract is still valid and X's estate owes A the balance of the purchase price)

6. Destruction or sale of the subject matter will end an offer

a. destruction of the subject matter ends the offer immediately

b. sale of the subject only revokes the offer when the offeree learns of it, not when the subject is sold

WHEN ACCEPTANCES ARE EFFECTIVE

1. MAILBOX RULE (also called the deposited acceptance rule) an acceptance is valid when sent if the offeree uses either of the following means of communication:

a. the express means (the form of communication the offeror said to use) OR b. any reasonable means if none is specified (the same means offeror used or faster)

Example: A mails an offer to B without specifying how acceptances are to be sent. If B mails a valid acceptance, the acceptance is effective when sent. If B telegraphs an acceptance, it is still effective when sent because a telegram is faster than the mail. There would be a valid contract even if the acceptance were lost or never arrived.

c. if a slower means of communication is used, it is valid when received

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1-3 2. Exceptions when the mailbox rule does not apply

a. if an offer states an acceptance must be received by a specified date, then the acceptance must be received by that date to be valid and cannot be effective when sent (reason: the offeree must comply with all of the offeror’s terms)

b. if the offeree has sent a previous rejection of the offer, for a later acceptance to be effective it must be received before the prior rejection

TYPES OF CONTRACTS

1. Bilateral and Unilateral contracts

a. a bilateral contract is a promise for a promise (most contracts are bilateral) b. a unilateral contract is a promise for an act (e.g. a reward)

1). note: the offeree must know of the reward to accept

2). if the offeree has made a substantial start on performing a unilateral offer, the offeror cannot revoke the offer

2. Requirement and Output contracts

a. in a requirement contract, one party agrees to purchase all their requirements from another. The contract is valid if the amounts requested are made in good faith and reasonable to normal amounts b. in an output contract, one party agrees to purchase the entire output of a factory or manufacturer.

The contract is valid if the amounts are produced in good faith and reasonable to normal amounts 3. Executed and Executory contracts

a. executed contracts are those that have been fully performed by both parties b. executory contracts are those that have not been fully performed by both 4. Valid, Void and Voidable contracts

a. a valid contract is legally binding and enforceable against both parties

b. a void contract is not enforceable against either party (e.g. it's not a legal contract)

c. a voidable contract is a legal contract wherein one or both of the parties has the right to disaffirm or rescind the contract (e.g. minor contracts are voidable by the minor and most fraud is voidable by the injured party)

***CONSIDERATION***

1. An essential element of a contract is that it be supported by adequate consideration a. consideration is giving up of a legal right (e.g. something you're legally free not to do)

b. consideration must be mutually bargained for (e.g. one promise was given in exchange for the other party's promise or act) and legally sufficient

2. Courts aren't usually concerned with the adequacy of consideration, only that it be present for both parties a. thus, there is no requirement that the consideration be of equal value

b. exception: courts will consider the adequacy of consideration if the contract is unconscionable (so grossly one sided that it shocks the conscience of a court)

3. Two cases where consideration is not present

a. past consideration is no good (e.g. an employer promises a cash payment to a deceased employee's family in recognition of the employee's years of service)

b. there is no consideration when a party is already contractually or legally obligated to perform 4. Additional consideration is needed from both parties to modify a contract

exception: in UCC Sales contracts can be modified without additional consideration

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5. Exceptions: some promises are enforceable without any consideration:

a. promises to donate to charity are often enforceable without consideration

b. a written promise to pay a debt barred by the Statute of Limitations can be enforced without consideration

c. promissory estoppel: a promise by one party relied upon by another can be enforced without consideration if the reliance was:

1). reasonable: a reasonable person would have relied on the promise

2). detrimental: party relying on the promise would be substantially harmed

***STATUTE OF FRAUDS***

1. There are 6 types of contracts that require some type of writing to be enforceable 6 TYPES OF CONTRACTS = GRIPE + MARRIAGE G sale of Goods of $500 or more - the writing must state a quantity R Real estate contracts

I contracts Impossible to perform in 1 year - begin measuring from when the contract is made - not when performance is to begin

P Promise to answer the debt of another

E Executor's promise to be liable for the debt of an estate Marriage contracts where Marriage is the consideration

2. Any type of writing that states the major contract terms can satisfy the Statute of Frauds

a. the writing need only be signed by one party but it is only enforceable against the one who signed b. the terms may be stated in more than one document

3. Exceptions: no writing is required even though it is one of the 6 types if:

a. the contract is fully performed by both parties (executed)

b. a contract impossible to perform in one year is enforceable without a writing if one side has fully performed (e.g. X orally promises an employee a $25,000 bonus, if the employee will remain with her for 4 years. If the employee works for X for the 4 years, X's oral promise is enforceable)

c. an oral real estate contract is enforceable in two different cases:

1). if the buyer is in possession of the land and has made a substantial payment or substantial improvements or

2). if the seller has completely performed (e.g. delivered the deed to the buyer)

d. a promise to answer the debt of another is enforceable if the main or primary purpose of the promise was to benefit the promisor and not the debtor

Example: X hires a contractor to build a house and the contractor subcontracts with a plumber. The plumber threatens to quit due to contractor's nonpayment. X, fearing the house will not be finished on time, orally promises to pay the plumber if the contractor doesn't. Although X's oral promise to pay the plumber is a promise to pay the debt of another, it is enforceable because the main purpose was to benefit X, not the contractor.)

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COMPETENT PARTIES: MINORS, DRUNKS & THE INSANE

1. A contract must be made by two or more competent parties

note: the exam normally tests competent parties with minors, drunks and the insane

2. Minors may disaffirm contracts anytime while a minor or a reasonable time thereafter (thus, minor contracts are voidable because the minor has the right to rescind)

a. minors cannot disaffirm real estate contracts while they are still a minor

b. minors cannot disaffirm necessary contracts (things like food, clothing or shelter)

3. To disaffirm a minor need only return what (s)he possesses or controls at that time 4. Minor may ratify a contract by words or actions (i.e. use of the object)

a. minors can only ratify after becoming an adult; they can't ratify while still a minor b. minors must ratify the entire contract - they can't ratify part and disaffirm part 5. Minors may disaffirm contracts, but they are liable in damages for torts (civil wrongs)

Example: A minor buys a car by misrepresenting that (s)he was an adult. After putting 200,000 miles on the car, the minor attempts to disaffirm. The minor may disaffirm the contract, but must pay damages for the tort of fraud.

6. A drunk may disaffirm only if (s)he was incapable of understanding what (s)he did 7. Insane may usually disaffirm, but once adjudicated insane all future contracts are void

ILLEGAL CONTRACTS

1. Illegal contracts are void - courts won't aid either party in an illegal contract 2. Failure to have a required license makes all your contracts void

exception: the contract is enforceable if the license was a mere revenue raising measure

3. Covenants not to compete in a sale of business or employment contract are valid if reasonable. They must meet 3 tests of reasonableness:

a. must be reasonably needed to protect a legitimate business interests b. must be reasonable as to time

c. must be reasonable as to distance

***FRAUD*** and INNOCENT MISREPRESENTATIONS

1. Actual Fraud has 5 elements - MS RID

5 Elements of Fraud = MS RID

M Must have a Material Misrepresentation of fact or a deliberate concealment - must be a fact (opinions don't count unless made by experts)

- no duty to disclose unless there is a known hidden defect, or to correct a previous representation later found out to be false or if the parties are in a fiduciary relationship

S Must have Scienter (an intent to deceive - made knowingly or intentionally) R Must have Reasonable Reliance (justifiable reliance)

I Must have Intent to rely D Must have Damages

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2. Constructive Fraud - has the same 5 elements as actual fraud but the intent to deceive element is fulfilled by a reckless disregard for the truth (making a statement without knowing if the statement is true or false) not scienter - MR RID

5 Elements of Constructive Fraud = MR RID M Must have a Material Misrepresentation of fact R Must have Reckless disregard for the truth

( making a statement without knowing if it is true or false ) R Must have Reasonable Reliance (justifiable reliance)

I Must have Intent to rely D Must have Damages

3. Fraud in the execution is void (defrauded party didn't know a contract was made)

4. Fraud in the inducement (party knows they made a contract but one or more terms are misrepresented) makes a contract voidable. This means the injured party has 2 choices:

a. rescission: cancel the contract and restore parties to their former positions b. or the injured party may accept the contract and sue in tort for money damages c. note: in UCC Sales a party may rescind and sue for money damages

5. An Innocent Misrepresentation has 4 of the elements of fraud but no scienter or reckless disregard for the truth

- the injured party may only rescind and cannot sue for damages - MR ID 4 Elements of Innocent Misrepresentation = MR ID

M Must have Material Misrepresentation of fact R Must have Reasonable Reliance (justifiable reliance)

I Must have Intent to rely D Must have Damages

MISTAKES, DURESS & UNDUE INFLUENCE

1. Most mistakes have no effect on a contract. There are 2 exceptions:

a. mutual mistakes of material facts make a contract voidable

b. with material unilateral mistakes, one may disaffirm only if the other party knew or should have known a mistake was being made

2. Duress is forcing someone into a contract by wrongful acts or improper threats of violence, economic devastation or criminal action

a. to constitute duress, it must actually induce the other party to enter the contract b. forcing someone into a contract by actual physical force makes the contract void c. forcing someone into a contract by improper threats makes a contract voidable

1). threat of economic devastation or criminal prosecution is voidable 2). threat of civil litigation is not duress, only threat of criminal action

3. Undue Influence is an unfair use of a position of trust, confidence or affection to overcome another's free will in contract. It makes a contract voidable

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PAROL EVIDENCE RULE

1. Evidence (oral or written) that contradicts a written contract is inadmissible in court

a. evidence of what occurred prior to or during (contemporaneous with) the writing is inadmissible if it contradicts the written agreement

b. note: may always introduce evidence of what took place after the date of the writing (even if it contradicts) because the parties may have agreed to change the writing

c. writing must have been intended to be the complete contract between the parties

2. The parol evidence rule does not preclude the introduction of evidence if any of the following apply (evidence is admissible) FAME

Evidence is admissible if: FAME

F can always introduce evidence of Fraud or other circumstances that would invalidate the contract (e.g.

illegality, duress, undue influence)

A can always introduce evidence of what took place After the date of the contract even if the evidence contradicts the writing

M can always introduce evidence of Mistakes

E can always introduce evidence to Explain the writing or to clear up ambiguities - parol evidence rule only precludes the introduction of contradictory evidence

THIRD PARTY BENEFICIARY CONTRACTS

1. A & B make a contract with the intent of benefiting a third party

2. For a 3rd party to have rights under the contract they must have been an intended beneficiary. There are two types of intended beneficiaries

a. donee beneficiary - someone you make a gift to (e.g. beneficiaries in most life insurance contracts are donee beneficiaries)

b. creditor beneficiary - may sue either A or B or both if there is a breach

Example: A owes X $500. A agrees to perform services for B for the sum of $500 with B to pay the money to X. If A performs the services and X does not receive the $500, X may sue either A or B or both of them because X is a creditor beneficiary

3. Incidental beneficiary obtain no rights under the contract

ASSUMING & BUYING SUBJECT TO A MORTGAGE

1. Assuming a Mortgage: buyer purchases land already encumbered by a mortgage a. buyer agrees to take over mortgage and the buyer is liable for the mortgage b. seller (original mortgagor) is still liable for mortgage

c. the creditor (mortgagee) is a 3rd party creditor beneficiary and may sue either buyer or seller if there is a breach

2. Buying Subject to a Mortgage: buyer purchases land encumbered by a mortgage a. buyer doesn't agree to take over the mortgage and is not liable

b. seller (original mortgagor) is the only one liable for mortgage c. buyer runs the risk of foreclosure if the seller doesn't pay

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ASSIGNMENTS & DELEGATIONS

1. Most contract rights can be assigned and duties delegated a. a writing is not usually required to assign

b. an assignment does not usually require consideration

2. Although there is a technical difference between an assignment and a delegation, an “assignment of all rights under the contract” is usually interpreted to be both an assignment of rights and a delegation of duties 3. You may not assign or delegate if the basic obligations of the parties would be changed

Contracts that cannot be assigned - PIPI P cannot assign Personal service contracts calling for special skill

I cannot assign if it would Increase risk or duty or materially alter performance P cannot assign if it is Prohibited by the contract or by law

exception: the right to receive money is assignable even if prohibited by contract I cannot assign Insurance contracts

4. Assignee or delegatee "stands in the shoes" of the assignor or delegator. They gain all of the assignor’s rights and have all of the assignor’s liability

a. if there is a breach, both the assignee and the assignor are liable

b. a defense that is good against the assignor is also good against the assignee 5. When a creditor assigns out his right to receive money (e.g. selling a receivable)

a. if the debtor is notified of the assignment, debtor must pay assignee not assignor

b. if the debtor isn't notified and pays the assignor, the assignee may only collect from the assignor and may not collect from the debtor

6. An assignor makes certain implied warranties

a. the claim assigned is valid (e.g. no fraud, duress, illegality, etc.) b. assignor has good title and all documents are genuine

c. assignor has no knowledge of facts that would impair the value of the assignment d. assignor will do nothing to defeat or impair the assignment

PERFORMANCE & DISCHARGE OF CONTRACT DUTIES

1. Discharge by performance or prevention of performance

a. performance or tender of performance of contractual duties discharges that party

b. prevention of performance by one party is a material breach and discharges the other party 2. Discharge by breach

a. a material breach by one side of a contract releases the other side from performing b. exception: if one party has substantially performed, no discharge occurs

1). the breach must be minor (i.e. the party substantially performed) 2). the breach must usually be unintentional

3). breaching party may still collect under the contract, but damages are subtracted for the minor breach

c. an anticipatory breach or anticipatory repudiation occurs when one party, before the time of performance, indicates they won't perform

1). injured party may sue immediately OR

2). wait until the time of performance and then sue if there is a breach

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Example: A contractor agrees to build a house for $150,000 and complete construction by August 15. If the contractor informs the homeowner on July 15 that the house will not be completed on time, the homeowner may immediately sue the contractor on July 15, or wait until August 15 and sue if the house is not completed.

3. Discharge by agreement

a. mutual rescission: both parties agree to cancel the contract

b. in a novation, the parties agree to replace one party in a contract with a new party 1). the creditor agrees to release the old party (i.e. old party is discharged) 2). the creditor agrees to look only to the new party for performance

Example: X owes 1st National Bank $200,000 on a mortgage and is in default. Y agrees to assume liability for the mortgage. If 1st National agrees to release X from the mortgage and look only to Y for payment, a novation has occurred

c. in an Accord & Satisfaction the parties agree to change a contract by substituting a new performance for an existing one (frequently on the exam, a promise of a debtor to pay a lesser amount than what is owed at an earlier date)

1). the Accord is the promise to change performance

2). the Satisfaction is the satisfactory performance of the accord

3). no discharge of the old contract until the accord is satisfactorily performed

Example: X owes Y $15,000 on a promissory note payable on December 1. Y agrees to accept $12,000 on June 1 in full satisfaction of the debt. The Accord is the agreement to pay the lesser amount 6 months early.

The debt will not be discharged until X actually pays the $12,000. (Satisfaction).

4. Discharge by operation of law

a. if a contract becomes absolutely impossible to perform, both parties are discharged (e.g. Death of a party to perform services discharges the personal service contract and destruction of the subject matter through no fault of either party discharges both parties)

b. the statute of limitations limits the time which a law suit may be brought

1). the statute of limitations does not discharge contractual obligations or make the contract void.

It merely bars access to judicial remedies

2). the time period is measured from the date of the breach, not the contract date and is usually six years in most states

3). a debt barred by the statute of limitations can be revived in most states by a new written promise to pay by the debtor

5. A condition is an event whose occurrence may affect the promisor's duty to perform

a. a condition precedent is an event that must occur before performance is due (e.g. X agrees to purchase Y's house for $200,000 providing that X can obtain suitable financing within 60 days) b. a condition subsequent is an event that will terminate a duty to perform (e.g. in a sale or return, the

buyer may terminate the contract within a specified period of time if not satisfied with the goods) c. concurrent conditions occur when the mutual duties of the parties are to take place at the same time

(e.g. in UCC sales, unless otherwise agreed, the buyer's duty to pay and the seller's duty to deliver occur at the same time)

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CONTRACT REMEDIES

1. Compensatory damages are monetary damages to compensate for all harm done

a. includes loss in value, consequential damages (e.g. lost profit or injury to property caused by the breach) and incidental damages (e.g. expenses to avoid further loss)

b. punitive damages are rarely awarded for contract or sales breaches

c. mitigation of damages: injured party is required to use reasonable efforts to keep damages low (e.g.

if a buyer breaches, the seller should use reasonable efforts to resell the goods because this will lessen the amount of damages the buyer must pay)

2. Liquidated damages occur when the contract states what damages will be for a breach a. most often involves forfeiture of a down payment by a buyer if there is a breach b. the damages must be reasonable to the harm actually done and not a penalty

3. Specific performance is an equitable remedy where the breaching party is required by court order to perform the contractual duties as promised

a. it is available only when money damages are an inadequate remedy

b. thus, it may only be used with rare and unique property and never in personal service contracts (e.g. land or any "one of a kind item")

c. if specific performance is available a party will recover either specific performance or compensatory damages, but not usually both

4. Rescission cancels the contract and restores the parties to their former position

5. Reformation: a court rewrites a contract to make it conform to the agreement of the parties

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Chapter One: Contracts Multiple Choice Questions

1Q-1 1. In order for an offer to confer the power to form a contract by acceptance, it must have all of the following elements except

a. Be communicated to the offeree and the communication must be made or authorized by the offeror.

b. Be sufficiently definite and certain.

c. Be communicated by words to the offeree by the offeror.

d. Manifest an intent to enter into a contract.

2. On September 10, Harris, Inc., a new car dealer, placed a newspaper advertisement stating that Harris would sell 10 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 p.m. 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 10 cars and refused King's demand. King sued Harris for breach of contract. Harris's 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 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.

4. 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.

5. Stable Corp. offered in a signed writing to sell Mix an office building for $350,000. The offer, which was sent by Stable on April 1, indicated that it would remain open until July 9. On July 5, Mix mailed a letter rejecting Stable's offer. On July 6, Mix sent a telegram to Stable accepting the original offer. The letter of rejection was received by Stable on July 8 and the telegram of acceptance was received by Stable on July 7. Which of the following is correct?

a. Mix's telegram resulted in the formation of a valid contract.

b. Mix's letter of July 5 terminated Stable's offer when mailed.

c. Stable was not entitled to withdraw its offer until after July 9.

d. Although Stable's offer on April 1 was a firm offer under the UCC, it will only remain open for three months.

6. Which of the following statements concerning the effectiveness of an offeree's rejection and an offeror's revocation of an offer is generally correct?

An offeree's An offeror's rejection is revocation is effective when effective when a. Received by offeror Sent by offeror b. Sent by offeree Received by offeree c. Sent by offeree Sent by offeror d. Received by offeror Received by offeree

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1Q-2 7. The president of Deal Corp. wrote to Boyd, offering to sell the Deal factory for $300,000. The offer was sent by Deal on June 5 and was received by Boyd on June 9. The offer stated that it would remain open until December 20. The offer

a. Constitutes an enforceable option.

b. May be revoked by Deal any time prior to Boyd's acceptance.

c. Is a firm offer under the UCC but will be irrevocable for only three months.

d. Is a firm offer under the UCC because it is in writing.

____________

Items 8 and 9 are based on the following information:

On March 1, Mirk Corp. wrote to Carr offering to sell Carr its office building for $280,000. The offer stated that it would remain open until July 1. It further stated that acceptance must be by telegram and would be effective only upon receipt.

8. For this question only, assume that Carr telegrammed its acceptance on June 28 and that it was received by Mirk on July 2. Which of the following statements is correct?

a. A contract was formed when Carr telegrammed its acceptance.

b. A contract was formed when Mirk received Carr's acceptance.

c. No contract was formed because three months had elapsed since the offer was made.

d. No contract was formed since the acceptance was received after July 1.

9. For this question only, assume that on May 10, Mirk mailed a letter to Carr revoking its offer of March 1. Carr did not learn of Mirk's revocation until Carr received the letter on May 17. Carr had already sent a telegram of acceptance to Mirk on May 14, which was received by Mirk on May 16. Which of the following statements is correct?

a. Carr's telegram of acceptance was effective on May 16.

b. Mirk's offer of March 1 was irrevocable and therefore could not be withdrawn prior to July 1.

c. Mirk's letter of revocation effectively terminated its offer of March 1 when mailed.

d. Carr's telegram of acceptance was effective on May 14.

____________

10. On January 1, Lemon wrote Martin offering to sell Martin his ranch for $80,000 cash. Lemon's letter indicated that the offer would remain open until February 15 if Martin mailed $100 by January 10. On January 5, Martin mailed $100 to Lemon. On January 30, Martin telephoned Lemon stating that he would be willing to pay $60,000 for the ranch. Lemon refused to sell at that price and immediately placed the ranch on the open market. On February 6, Martin mailed Lemon a letter accepting the original offer to buy the ranch at $80,000. The following day, Lemon received Martin's acceptance. At that time the ranch was on the market for $100,000. Which of the following is correct?

a. Martin's mailing of $100 to Lemon on January 5 failed to create an option.

b. Martin's communication of January 30 automatically terminated Lemon's offer of January 1.

c. The placing of the ranch on the market by Lemon constituted an effective revocation of his offer on January 1.

d. Martin's letter of February 6 formed a binding contract based on the original terms of Lemon's January 1 letter.

11. 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.

(14)

1Q-3 12. Nix sent Castor a letter offering to employ Castor as controller of Nix's automobile dealership. Castor received the letter on February 19. The letter provided that Castor would have until February 23 to consider the offer and, in the meantime, Nix would not withdraw it. On February 20, Nix, after reconsidering the offer to Castor, decided to offer the job to Vick, who accepted immediately. That same day, Nix called Castor and revoked the offer. Castor told Nix that an acceptance of Nix's offer was mailed on February 19. Under the circumstances,

a. Nix's offer was irrevocable until February 23.

b. No contract was formed between Nix and Castor because Nix revoked the offer before Nix received Castor's acceptance.

c. Castor's acceptance was effective when mailed.

d. Any revocation of the offer would have to be in writing because Nix's offer was in writing.

13. 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.

14. The mailbox rule generally makes acceptance of an offer effective at the time the acceptance is dispatched. The mailbox rule does not apply if a. Both the offeror and offeree are merchants.

b. The offer proposes a sale of real estate.

c. The offer provides that an acceptance should not be effective until actually received.

d. The duration of the offer is not in excess of three months.

15. 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.

16. Dye sent Hill a written offer to sell a tract of land located in Newtown for $60,000. The parties were engaged in a separate dispute. The offer stated that it would be irrevocable for 60 days if Hill would promise to refrain from suing Dye during this time.

Hill promptly delivered a promise not to sue during the term of the offer and to forego suit if Hill accepted the offer. Dye subsequently decided that the possible suit by Hill was groundless and therefore phoned Hill and revoked the offer 15 days after making it. Hill mailed an acceptance on the 20th day.

Dye did not reply. Under the circumstances,

a. Dye's offer was supported by consideration and was not revocable when accepted.

b. Dye's written offer would be irrevocable even without consideration.

c. Dye's silence was an acceptance of Hill's promise.

d. Dye's revocation, not being in writing, was invalid.

17. In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be

a. Of approximately equal value.

b. Legally sufficient.

c. Exchanged simultaneously by the parties.

d. Fair and reasonable under the circumstances.

(15)

1Q-4 18. In deciding whether consideration necessary to form a contract exists, a court must determine whether

a. The consideration given by each party is of roughly equal value.

b. There is mutuality of consideration.

c. The consideration has sufficient monetary value.

d. The consideration conforms to the subjective intent of the parties.

19. Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying upon lack of consideration on Brook's part sufficient to support his promise. Grove will prevail if he can establish that a. Prior to Grove promise, Brook had already

performed the requested act.

b. Brook's only claim of consideration was the relinquishment of a legal right.

c. Brook's asserted consideration is worth only

$400.

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

20. 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 60 days.

21. Which of the following requires consideration to be binding on the parties?

a. Material modification of contract involving the sale of real estate.

b. Ratification of a contract by a person after reaching the age of majority.

c. A written promise signed by a merchant to keep an offer to sell goods open for 10 days.

d. Material modification of a sale of goods contract under the UCC.

22. 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.

23. 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

24. On June 1, 1992, 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 18 months. On June 3, 1992, Baker wrote Decker confirming Decker's guaranty. Decker did not object to the confirmation. On August 23, 1992, 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.

(16)

1Q-5 25. Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne's books at $.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.

26. Baker and Able signed a contract which required Able to purchase 600 books from Baker at $.90 per book. Subsequently, Able, in good faith, requested that the price of the books be reduced to $.80 per book. Baker orally agreed to reduce the price to $.80.

Under the circumstances, the oral agreement is a. Unenforceable, because Abel failed to give

consideration, but proof of it will be otherwise admissible into evidence.

b. Unenforceable, due to the statute of frauds, and proof of it will be inadmissible into evidence.

c. Enforceable, but proof of it will be inadmissible into evidence.

d. Enforceable, and proof of it will be admissible into evidence.

27. 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 one document.

28. With regard to an agreement for the sale of real estate, the Statute of Frauds

a. Does not require that the agreement be signed by all parties.

b. Does not apply if the value of the real estate is less than $500.

c. Requires that the entire agreement be in a single writing.

d. Requires that the purchase price be fair and adequate in relation to the value of the real estate.

29. An oral contract to sell land will be enforceable if the a. Contract is capable of full performance within

one year.

b. Total sales price is less than $500.

c. Buyer has made a part payment.

d. Parties have fully performed the contract.

30. Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a downpayment 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 downpayment 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.

31. Sand orally promised Frost a $10,000 bonus, in addition to a monthly salary, if Frost would work two years for Sand. If Frost works for the two years, will the Statute of Frauds prevent Frost from collecting the bonus?

a. No, because Frost fully performed.

b. No, because the contract did not involve an interest in real estate.

c. Yes, because the contract could not be performed within one year.

d. Yes, because the monthly salary was the consideration for the contract.

32. Egan, a minor, contracted with Baker to purchase Baker's used computer for $400. The computer was purchased for Egan's personal use. The agreement provided that Egan would pay $200 down on delivery and $200 thirty days later. Egan took delivery and paid the $200 down payment. Twenty days later, the computer was damaged seriously as a result of Egan's negligence. Five days after the damage occurred and one day after Egan reached the age of majority, Egan attempted to disaffirm the contract with Baker. Egan will

a. Be able to disaffirm despite the fact that Egan was not a minor at the time of disaffirmance.

b. Be able to disaffirm only if Egan does so in writing.

c. Not be able to disaffirm because Egan had failed to pay the balance of the purchase price.

d. Not be able to disaffirm because the computer was damaged as a result of Egan's negligence.

(17)

1Q-6 33. Ruehl purchased a service station business from Lull. The purchase price included payment for Lull's goodwill. The agreement contained a covenant prohibiting Lull from competing with Ruehl in the service station business. Which of the following statements regarding the covenant is incorrect?

a. The value to be assigned to it is the excess of the price paid over the seller's cost of all tangible assets.

b. The time period for which it is to be effective must be reasonable.

c. The restraint must be no more extensive than is reasonably necessary to protect the goodwill purchased by Ruehl.

d. The geographic area to which it applies must be reasonable.

34. Kent, a 16-year old, purchased a used car from Mint Motors, Inc. Ten months later, the car was stolen and never recovered. Which of the following statements is correct?

a. The car's theft is a de facto ratification of the purchase because it is impossible to return the car.

b. Kent may disaffirm the purchase because Kent is a minor.

c. Kent effectively ratified the purchase because Kent used the car for an unreasonable period of time.

d. Kent may disaffirm the purchase because Mint, a merchant, is subject to the UCC.

35. 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. Impliedly ratifying the contract after reaching the age of majority.

36. Payne entered into a written agreement to sell a parcel of land to Stevens. At the time the agreement was executed, Payne had consumed alcoholic beverages. Payne's ability to understand the nature and terms of the contract was not impaired. Stevens did not believe that Payne was intoxicated. The contract is

a. Void as a matter of law.

b. Legally binding on both parties.

c. Voidable at Payne's option.

d. Voidable at Stevens' option.

37. West, an Indiana real estate broker, misrepresented to Zimmer that West was licensed in Kansas under the Kansas statute that regulates real estate brokers and requires all brokers to be licensed.

Zimmer signed a contract agreeing to pay West a 5%

commission for selling Zimmer's home in Kansas.

West did not sign the contract. West sold Zimmer's home. If West sued Zimmer for nonpayment of commission, Zimmer would be

a. Liable to West only for the value of services rendered.

b. Liable to West for the full commission.

c. Not liable to West for any amount because West did not sign the contract.

d. Not liable to West for any amount because West violated the Kansas licensing requirements.

38. Mix entered into a contract with Small which provided that Small would receive $10,000 if he stole trade secrets from Mix's competition. Small performed his part of the contract by delivering the trade secrets to Mix. Mix refuses to pay Small for his services. Under what theory may Small recover?

a. Quasi contract, in order to prevent the unjust enrichment of Mix.

b. Promissory estoppel, since Small has changed his position to his detriment.

c. None, due to the illegal nature of the contract.

d. Express contract, since both parties bargained for and exchanged promises in forming the contract.

39. To establish a cause of action based on fraud in the inducement, one of the elements the plaintiff must generally prove is that

a. It is impossible for the plaintiff to perform the terms of the contract.

b. The contract is unconscionable.

c. The defendant made a false representation of a material fact.

d. There has been a mutual mistake of a material fact by the plaintiff and defendant.

40. 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.

(18)

1Q-7 41. The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the

a. Defendant made a misrepresentation with a reckless disregard for the truth.

b. Defendant made a false representation of fact.

c. Plaintiff actually relied on the defendant's misrepresentation.

d. Plaintiff justifiably relied on the defendant's misrepresentation.

42. Steele, Inc. wanted to purchase Kalp's distribution business. On March 15, 1990, Kalp provided Steele with copies of audited financial statements for the period ended December 31, 1989.

The financial statements reflected inventory in the amount of $1,200,000. On March 29, 1990, Kalp discovered that the December 31 inventory was overstated by at least $400,000. On April 3, 1990, Steele, relying on the financial statements, purchased all of Kalp's business. On April 29, 1990, Steele discovered the inventory overstatement. Steele sued Kalp for fraud. Which of the following statements is correct?

a. Steele will lose because it should not have relied on the inventory valuation in the financial statements.

b. Steele will lose because Kalp was unaware that the inventory valuation was incorrect at the time the financial statements were provided to Steele.

c. Steele will prevail because Kalp had a duty to disclose the fact that the inventory value was overstated.

d. Steele will prevail but will not be able to sue for damages.

43. Sardy, a famous football player, was asked to autograph a pad of paper held by Maple. Unknown to Sardy, Maple had carefully concealed a contract for the sale of Sardy's home to Maple in the pad which Sardy signed. If Maple seeks to enforce the contract, Sardy's best defense to have the contract declared void would be

a. Fraud in the inducement.

b. Fraud in the execution.

c. Mistake.

d. Duress.

44. 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.

45. Johns leased an apartment from Olsen. Shortly before the lease expired, Olsen threatened Johns with eviction and physical harm if Johns did not sign a new lease for twice the old rent. Johns, unable to afford the expense to fight eviction, and in fear of physical harm, signed the new lease. Three months later, Johns moved and sued to void the lease claiming duress. The lease will be held

a. Void because of the unreasonable increase in rent.

b. Voidable because of Olsen's threat to bring eviction proceedings.

c. Void because of Johns' financial condition.

d. Voidable because of Olsen's threat of physical harm.

46. Carter owns a parcel of land. Smith, one of Carter's closest friends and an attorney, has persuaded Carter to sell the land to Smith at a price substantially below fair market value. At the time Carter sold the land he was resting in a nursing home recovering from a serious illness. If Carter desires to set aside the sale, which of the following causes of action is most likely to be successful?

a. Duress.

b. Undue influence.

c. Fraud.

d. Misrepresentation.

(19)

1Q-8 47. The primary distinction between an action based on innocent misrepresentation and an action based on common law fraud is that, in the former, a party need not allege and prove

a. That there has been a false representation.

b. The materiality of the misrepresentation.

c. Reasonable reliance on the misrepresentation.

d. That the party making the misrepresentation had actual or constructive knowledge that it was false.

48. To prevail in a common law action for innocent misrepresentation, the plaintiff must prove

a. The defendant made the false statements with a reckless disregard for the truth.

b. The misrepresentations were in writing.

c. The misrepresentations concerned material facts.

d. Reliance on the misrepresentations was the only factor inducing the plaintiff to enter into a contract.

49. 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.

50. Paco Corp., a building contractor, offered to sell Preston several pieces of used construction equipment. Preston was engaged in the business of buying and selling equipment. Paco's written offer had been prepared by a secretary who typed the total price as $10,900, rather than $109,000, which was the approximate fair market value of the equipment.

Preston, on receipt of the offer, immediately accepted it. Paco learned of the error in the offer and refused to deliver the equipment to Preston unless Preston agreed to pay $109,000. Preston has sued Paco for breach of contract. Which of the following statements is correct?

a. Paco will not be liable because there has been a mutual mistake of fact.

b. Paco will be able to rescind the contract because Preston should have known that the price was erroneous.

c. Preston will prevail because Paco is a merchant.

d. The contract between Paco and Preston is void because the price set forth in the offer is substantially less than the equipment's fair market value.

51. 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.

52. On April 6, Apple entered into a signed contract with Bean, by which Apple was to sell Bean an antique automobile having a fair market value of

$150,000, for $75,000. Apple believed the auto was worth only $75,000. Unknown to either party the auto had been destroyed by fire on April 4. If Bean sues Apple for breach of contract, Apple's best defense is

a. Unconscionability.

b. Risk of loss had passed to Bean.

c. Lack of adequate consideration.

d. Mutual mistake.

53. Under the parol evidence rule, oral evidence will be excluded if it relates to

a. A contemporaneous oral agreement relating to a term in the contract.

b. Failure of a condition precedent.

c. Lack of contractual capacity.

d. A modification made several days after the contract was executed.

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

Subsequent oral Prior written agreements agreements

a. Yes Yes

b. Yes No

c. No Yes

d. No No

(20)

1Q-9 55. 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 the

Oral agreement Fraudulent

regarding who statements

pays the utilities by Kemp

a. Yes Yes

b. No Yes

c. Yes No

d. No No

56. 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.

57. Jones owned an insurance policy on her life, on which she paid all the premiums. Smith was named the beneficiary. Jones died and the insurance company refused to pay the insurance proceeds to Smith. An action by Smith against the insurance company for the insurance proceeds will be

a. Successful because Smith is a third party donee beneficiary.

b. Successful because Smith is a proper assignee of Jones' rights under the insurance policy.

c. Unsuccessful because Smith was not the owner of the policy.

d. Unsuccessful because Smith did not pay any of the premiums.

58. Union Bank lent $200,000 to Wagner. Union required Wagner to obtain a life insurance policy naming Union as beneficiary. While the loan was outstanding, Wagner stopped paying the premiums on the policy. Union paid the premiums, adding the amounts paid to Wagner's loan. Wagner died and the insurance company refused to pay the policy proceeds to Union. Union may

a. Recover the policy proceeds because it is a creditor beneficiary.

b. Recover the policy proceeds because it is a donee beneficiary.

c. Not recover the policy proceeds because it is not in privity of contract with the insurance company.

d. Not recover the policy proceeds because it is only an incidental beneficiary.

59. Rice contracted with Locke to build an oil refinery for Locke. The contract provided that Rice was to use United pipe fittings. Rice did not do so.

United learned of the contract and, anticipating the order, manufactured additional fittings. United sued Locke and Rice. United is

a. Entitled to recover from Rice only, because Rice breached the contract.

b. Entitled to recover from either Locke or Rice because it detrimentally relied on the contract.

c. Not entitled to recover because it is a donee beneficiary.

d. Not entitled to recover because it is an incidental beneficiary.

60. Omega Corp. owned a factory that was encumbered by a mortgage securing Omega's note to Eagle Bank. Omega sold the factory to Spear, Inc., which assumed the mortgage note. Later, Spear defaulted on the note, which had an outstanding balance of $15,000. To recover the outstanding balance, Eagle

a. May sue Spear only after suing Omega.

b. May sue either Spear or Omega.

c. Must sue both Spear and Omega.

d. Must sue Spear first and then proceed against Omega for any deficiency.

61. Wilk bought an apartment building from Dix Corp. There was a mortgage on the building securing Dix's promissory note to Xeon Finance Co. Wilk took title subject to Xeon's mortgage. Wilk did not make the payments on the note due Xeon and the building was sold at a foreclosure sale. If the proceeds of the foreclosure sale are less than the balance due on the note, which of the following statements is correct regarding the deficiency?

(21)

1Q-10 a. Xeon must attempt to collect the deficiency from

Wilk before suing Dix.

b. Dix will not be liable for any of the deficiency because Wilk assumed the note and mortgage.

c. Xeon may collect the deficiency from either Dix or Wilk.

d. Dix will be liable for the entire deficiency.

62. Which of the following statements is(are) correct regarding a valid assignment?

I. An assignment of an interest in a sum of money must be in writing and must be supported by legally sufficient consideration.

II. An assignment of an insurance policy must be made to another party having an insurable interest in the property.

a. I only b. II only.

c. Both I and II.

d. Neither I nor II

63. Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost's rights under the contract are

a. Assignable only with Egan's consent.

b. Nonassignable because they are personal to Yost.

c. Nonassignable as a matter of law.

d. Generally assignable.

64. 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.

65. Wilcox Co. contracted with Ace Painters, Inc., for Ace to paint Wilcox’s warehouse. Ace, without advising Wilcox, assigned the contract to Pure Painting Corp. Pure failed to paint Wilcox’s warehouse in accordance with the contract specifications. The contract between Ace and Wilcox was silent with regard to a party’s right to assign it.

Which of the following statements is correct?

a. Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure.

b. Ace would not be liable to Wilcox if Ace had notified Wilcox of the assignment.

c. Ace’s duty to paint Wilcox’s warehouse was nondelegable.

d. Ace’s delegation of the duty to paint Wilcox’s warehouse was a breach of the contract.

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

Malpractice Option insurance contract rights policy rights

a. Yes Yes

b. Yes No

c. No Yes

d. No No

67. Pix borrowed $80,000 from Null Bank. Pix gave Null a promissory note and mortgage. Subsequently, Null assigned the note and mortgage to Reed. Reed failed to record the assignment or notify Pix of the assignment. If Pix pays Null pursuant to the note, Pix will

a. Be primarily liable to Reed for the payments made to Null.

b. Be secondarily liable to Reed for the payments made to Null.

c. Not be liable to Reed for the payments made to Null because Reed failed to record the assignment.

d. Not be liable to Reed for the payments made to Null because Reed failed to give Pix notice of the assignment.

68. On February 1, Burns contracted in writing with Nagel to sell Nagel a used car. The contract provided that Burns was to deliver the car on February 15 and Nagel was to pay the $800 purchase price not later than March 15. On February 21, Burns assigned the contract to Ross for $600. Nagel was not notified of the assignment. Which of the following statements is correct?

a. By making the assignment, Burns impliedly warranted Nagel would pay the full purchase price.

b. The assignment to Ross is invalid because Nagel was not notified.

c. Ross will not be subject to any contract defenses Nagel could have raised against Burns.

d. By making the assignment, Burns impliedly warranted a lack of knowledge of any fact impairing the value of the assignment.

(22)

1Q-11 69. Wren purchased a factory from First Federal Realty. Wren paid 20% at the closing and gave a note for the balance secured by a 20-year mortgage. Five years later, Wren found it increasingly difficult to make payments on the note and defaulted. First Federal threatened to accelerate the loan and foreclose if Wren continued in default. First Federal told Wren to make payment or obtain an acceptable third party to assume the obligation. Wren offered the land to Moss, Inc. for $10,000 less than the equity Wren had in the property. This was acceptable to First Federal and at the closing Moss paid the arrearage, assumed the mortgage and note, and had title transferred to its name. First Federal released Wren. The transaction in question is a(an)

a. Purchase of land subject to a mortgage.

b. Assignment and delegation.

c. Third party beneficiary contract.

d. Novation.

70. Dell owed Stark $9,000. As the result of an unrelated transaction, Stark owed Ball that same amount. The three parties signed an agreement that Dell would pay Ball instead of Stark, and Stark would be discharged from all liability. The agreement among the parties is

a. A novation.

b. An executed accord and satisfaction.

c. Voidable at Ball's option.

d. Unenforceable for lack of consideration.

71. On May 25, 1991, Smith contracted with Jackson to repair Smith's cabin cruiser. The work was to begin on May 31, 1991. On May 26, 1991, the boat, while docked at Smith's pier, was destroyed by arson.

Which of the following statements is correct with regard to the contract?

a. Smith would not be liable to Jackson because of mutual mistake.

b. Smith would be liable to Jackson for the profit Jackson would have made under the contract.

c. Jackson would not be liable to Smith because performance by the parties would be impossible.

d. Jackson would be liable to repair another boat owned by Smith.

72. Teller brought a lawsuit against Kerr ten years after an oral contract was made and eight years after it was breached. Kerr raised the statute of limitations as a defense. Which of the following allegations would be most important to Kerr's defense?

a. The contract was oral.

b. The contract could not be performed within one year from the date made.

c. The action was not timely brought because the contract was entered into ten years prior to the commencement of the lawsuit.

d. The action was not timely brought because the contract was allegedly breached eight years prior to the commencement of the lawsuit.

73. Which of the following statements correctly applies to a typical statute of limitations?

a. The statute requires that a legal action for breach of contract be commenced within a certain period of time after the breach occurs.

b. The statute provides that only the party against whom enforcement of a contract is sought must have signed the contract.

c. The statute limits the right of a party to recover damages for misrepresentation unless the false statements were intentionally made.

d. The statute prohibits the admission into evidence of proof of oral statements about the meaning of a written contract.

74. 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.

75 Which of the following statements is correct regarding the effect of the expiration of the period of the statute of limitations on a contract?

a. Once the period of the statute of limitations has expired, the contract is void.

b. The expiration of the period of the statute of limitations extinguishes the contract’s underlying obligation.

c. A cause of action barred by the statute of limitations may not be revived.

d. The running of the statute of limitations bars access to judicial remedies.

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