Business Law Contracts Test Questions – Flashcards

except when it is modified or replaced by statutory law, such as Uniform Commercial Code, or by administrative agency regulations. Contracts related to services,real estate, employment and insurance. Contracts for the sale and lease of goods, however, are governed by the UCC--to the extent that the UCC has modified general contract law.

agreements shall be kept.

the person making the promise

the person being promised

a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

The party may be required to pay damages for failing to perform the contractual promise or specific performance.

1. what the party said when entering into the contract 2. how the party acted or appeared(intent may be manifested by conduct as well as by oral or written words) 3. the circumstances surrounding the transaction

An agreement to form a contract includes an offer and an acceptance. One party must offer to enter into a legal agreement, and another party must accept the terms of the offer.

Any promises made by the parties to the contract must be supported by legally sufficient and bargained-for consideration(something of value received or promised, such as money to convince a person to make a deal.

Both parties entering into the contract must have the contractual capacity to do so; the law must recognize them as possessing the the characteristics that qualify them as competent parties.

The consent of both parties must voluntary. For example, if a contract was formed as a result of fraud, undue influence, mistake, or duress, the contract may nor be enforceable.

The contract must be in whatever form the law requires; for example, some contracts must be in writing to be enforceable.

If the offeror can accept simply by promising to perform. A bilateral contract is a promise for a promise. No performance, such as payment of funds or delivery of goods, need take place for a bilateral contract to be formed.

A promise for an act.

Require a special from for creation.

Requires no special form for creation.

Formed by words.

Formed by the conduct of the parties. Requirements for Implied Contracts: 1. The plaintiff furnished some service or property. 2. The plaintiff expected to be paid for that service or property, and the defendant knew or should have known that payment was expected. 3. The defendant had a chance to reject the services or property and did not.

No revoking in present time.

A contract that has been fully performed on both sides.

A contract that has not been fully performed.

1. an agreement, including an offer and acceptance of that offer. 2. support by legally sufficient consideration 3. parties who have legal capacity to enter into the contract 4. a legal purpose

A contract that does not meet the 4 requirements.

A valid contract that can be enforced because there are no legal defenses against it.

A party has the option of avoiding or enforcing the contractual obligations.

A contract exists, but it cannot be enforced because of a legal defense.

make valid

1. What the party said when entering into the contract 2. How the party acted or appeared(intent may be mani

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

The performance (usually payment) that takes place after the accord is executed. A basic rule is that there can be no satisfaction unless there is first an accord.

An amount has been ascertained, fixed, agreed on, settled, or exactly determined.

The amount of debt is not settled, fixed, agreed on, ascertained, or determined, and reasonable persons may differ over the amount owed.

A contract in which one party forfeits the rights to pursue a legal claim against the other party. 1. Given in good faith 2. stated in a signed writing (which is required in many states) 3. accompanied by consideration

Does not always bar further recovery. The parties simply substitute a contractual obligation for some other type of legal action based on a valid claim.

Statutes of limitations in all states require a creditor to sue within a specified period to recover a debt. If the creditor fails to sue in time, recovery of the debt is barred by the statute of limitations. A debtor who promises to pay a previous debt even though recovery is barred by the statute of limitations makes an enforceable promise. The promise needs no consideration. (Some states require it to be in writing) In effect, the promise extends the limitations period, and the creditor can sue to recover the entire debt or at least the amount promised. The promised can be implied if the debtor acknowledges the barred debt by making a partial payment.

the legal ability to enter into a contractual relationship.

1. age of minority/ terminated by emancipation 2.

1. Misrepresentation of Age 2. Contracts for Necessaries(worldly needs) 3. Introxication

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

1. the item contracted for must be necessary for the minor's subsistence 2. the value of the necessary item must be appropiate to maintain the minors standard of living 3. the minor must not be under the care of parent of guardian who is required to supply this

The act of accepting and giving legal force to an obligation that previously was not enforceable.(Express ratification takes place when the individual. on reaching the age of majority, states orally or in writing that he or she intends to be bound by the contract.) (Implied ratification takes place when the minor, reaching the age of majority, indicates an intent to abide by contract.

Parents are not liable for their children's contracts. Minors torts can reach the parent if they fail to exercise proper parental control.

An intoxicated person may either ratify or disaffirm a contract upon becoming sober.

The contract is voidable. If the person has the mentally capacity at the time of the contract or lucid moments then the contract will hold.

Bilateral - made by both parties Unilateral - made by only one of the parties A bilateral mistake of fact is a "mutual mistunderstanding concerning a basic assumption on which the contract was made." Either party can rescind.

Contract is enforceable unless -- - Other party knew or should have known that mistakes was made or - Mistake was due to substantial mathematical error, made inadvertently and without gross negligence

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract is normally enforceable.

Undue influence arises from special kinds of relationships in which one party can greatly influence another party, thus overcoming that party's free will. A contract entered into under excessive or undue influence locks voluntary consent and is therefore.(guardians, parents, physician-patient, husband-wife, guardian-ward. Sickness and fidicuary relationship is not enough.

Fiduciary relationships where the contract signer benefits financially undue influence is presumed.

There must be proof of a threat to do something that the threatning party has no right to do. The act ust be wrongful or illegal and it ust render the person incapable of exercising free will. Threat to exercise leagal right like threat to sue does not count.

Only when the person is exacting the price also creates the need.

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

Standard-form contracts often fine-print provisions that shift a risk ordinarily borne by one party to the other. Examples - life insurance policies, loan agreements.

1. Contracts involving interests in land 2. Contracts that cannot by thier ters be performed within one year from the day after the date of formation. 3. Collateral, or secondary, contracts, such as promises by the administrator or executor of an estate to pay debt of the estate personally-that is, out of her or his own pocket. 4. Promises ade in consideration of marraige. 5. Under the Uniform Commercial Code (UCC-see Chapter 19), contracts for the sale of goods prices at $500 or more.

A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written memorandum. Land is real property and includes all physical objects that are permanently attached to the soil, such as buildings, fences, trees, and the soil itself (see Chapter 50). The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land.

Contracts that cannot, by their own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable. The key for determining whether an oral contract is enforceable under the one-year rule is whether performance is possible within one year from the day after the date of contract formation—not whether the agreement is likely to be performed within one year. When performance of a contract is objectively impossible during the one-year period, the oral contract will be unenforceable. When performance is objectively possible within a year, the contract does not fall within the Statute of Frauds. For example, an oral contract for lifetime employment does not fall within the Statute of Frauds because an employee who is hired "for life" can die within a year, so the contract can be performed within one year.

A collateral promise , or secondary promise, is one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. In other words, a collateral promise is one made by a third party to assume the debts or obligations of a primary party to a contract if that party does not perform. Any collateral promise of this nature falls under the Statute of Frauds and therefore must be in writing to be enforceable. As a general rule, a contract in which a party assumes a primary obligation does not need to be in writing to be enforceable. contract in which a party assumes a secondary obligation does have to be in writing to be enforceable.

Second person that guarentees payment on a loan

An oral promise to answer for the debt of another is covered by the Statute of Frauds unless the guarantor's main purpose in incurring a secondary obligation is to secure a personal benefit. This type of contract need not be in writing.5 The assumption is that a court can infer from the circumstances of a particular case whether the "leading objective" of the promisor was to secure a personal benefit and thus, in effect, to answer for her or his own debt. Another typical application of the main purpose rule occurs when one creditor guarantees a debtor's debt to another creditor to forestall litigation. A creditor might do this because it allows the debtor to remain in business long enough to generate profits sufficient to pay both creditors. In this situation, the guaranty does not need to be in writing to be enforceable.

agreements made before marriage that define each partner's ownership rights in the other partner's property. A couple might make such an agreement if, for example, a prospective wife wishes to limit the amount her prospective husband can obtain if the marriage ends in divorce. Prenuptial agreements must be in writing to be enforceable. In addition, most states will not enforce a premarital agreement against a person unless she or he voluntarily entered into the agreement after the other party reasonably disclosed his or her assets.6

The Uniform Commercial Code (UCC) includes Statute of Frauds provisions that require written evidence or an electronic record of a contract for the sale of goods priced at $500 or more. A writing that will satisfy the UCC requirement need only state the quantity term; other terms agreed on can be omitted or even stated imprecisely in the writing, as long as they adequately reflect both parties' intentions. A written memorandum or series of communications evidencing a contract will suffice. The sales contract will not be enforceable for any quantity greater than that set forth in the writing. In addition, the writing must have been signed by the person against whom enforcement is sought—that is, by the person who refuses to perform or the one being sued. Beyond these two requirements, the writing normally need not designate the buyer or the seller, the terms of payment, or the price.

- PARTIAL PERFORMANCE - ADMISSIONS - SPECIAL EXCEPTIONS UNDER THE UCC

A court may grant specific performance (performance of the contract according to its precise terms) of an oral contract to transfer an interest in land when the contract has been partially performed. For instance, when the purchaser has paid part of the price, taken possession of the property, and made permanent improvements to it, the parties clearly cannot be returned to the positions they occupied before the contract was formed. Whether a court will enforce an oral contract for an interest in land when partial performance has taken place usually is determined by the degree of harm that would be suffered if the court chose not to enforce the oral contract. In some states, mere reliance on certain types of oral contracts is enough to remove them from the Statute of Frauds.7 Under the UCC, an oral contract for the sale of goods is enforceable to the extent that a seller accepts payment or a buyer accepts delivery of the goods.8 The existence and extent of a contract to supply computer kiosks for use in school cafeterias were in dispute in the following case.

Oral contracts for customized goods may be enforced in certain circumstances. Another exception has to do with oral contracts between merchants that have been confirmed in a written memorandum.

if a party against whom enforcement of an oral contract is sought "admits" in pleadings, testimony, or otherwise in court that a contract for sale was made, the contract will be enforceable.9 A contract subject to the UCC will be enforceable, but only to the extent of the quantity admitted.

Fully integrated: Intended to be a complete and final embodiment of the ters of ther parties agreement. Not fully integrated: Omits an agreed-on term that is consistent with the parties agreement Parol Evidence Inadmissable - Evidence from a prior negotiation that contradicts a term of the written contract would not be admitted.

a complete and final statement of their agreement, then it will not allow either party to present parol evidence (testimony or other evidence of communication between parties that are not contained in the contract itself).

1. Contracts subsequently modified. Evidence of any subsequent modification (oral or written) of a written contract can be introduced into court. Keep in mind that the oral modifications may not be enforceable if they come under the Statute of Frauds--for example, if they increase the price of the goods for sale to $500 or more or increase the term for performance to more than one year. Also, oral modifications will not be enforceable if the original contract provides that any modification must be in writing. 2. Voidable or void contracts. Oral evidence can be introduced in all cases to show that the contract was voidable or void(for example, included by mistake, fraud, or misrepresentation). The reason is simple: if deception led one of the parties to agree to the terms of a written contract, oral evidence attesting to the fraud should not be excluded. Courts frown on bad faith and are quick to allow such evidence when it establishes fraud. 3. Contracts containing ambiguous terms. When terms of a written contract are ambiguous and require interpretation, evidence is admissible to show meaning of the terms. 4. Incomplete contracts. When the written contract is incomplete in that it lacks one or more of the essential terms, the courts allow evidence to "fill in the gaps". 5. Prior dealing, course of performance, or usage of trade. Under the UCC, evidence can be introduced to explain or supplement a written contract by showing a prior dealing, course of performance, or usage of trade. This and sellers deal with each other over extended periods of time, certain customary practices develop. These practices are often overlooked in the writing of the contract, so courts allow the introduction of evidence to show how the parties have acted in the past. Usage of trade--practices and customes generally followed in a particular industry-can also shed light on the meaning of certain contract provisions, and thus evidence of trade usage may be admissible. 6. Contracts subject to an orally agreed-on condition precedent. Sometimes the parties agree that a condition must be fulfilled before a party is required to perform the contract. This is called a condition precedent. If the parties have orally agreed on a condition precedent and the condition does not conflict with the terms of a written agreement, then a court may allow parol evidence to prove the oral condition. The parol evidence rules does not apply here because the existence of the entire written contract is subject to an orally agreed-on condition. Proof of the condition does not alter or modify the written terms but affects enforceability of the written contract. 7. Contracts with an obvious or gross clerical error that clearlyof the parties. Parol evidence is admissible to correct an obvious typographic error. Suppose that Davis agrees to lease 1,000 square feet of office space from Stone Enterprises at the current monthly rate of $3 per square foot. The signed written lease provides for a monthly lease payment of $300 rather than the $3,000 agreed to by the parties. Because the error is obvious, Stone Enterprises would be allowed to admit parol evidence to correct the mistake.

The key in determining whether parol evidence will be allowed is whether the written contract is intended to be a complete and final statement of the terms of the agreement. If it is so intended, it is referred to as an integrated contract , and extraneous evidence (evidence derived from sources outside the contract itself) is excluded. An integrated contract can be either completely or partially integrated. If it contains all of the terms of the parties' agreement, then it is completely integrated. If it contains only some of the terms that the parties agreed on and not others, it is partially integrated. If the contract is only partially integrated, evidence of consistent additional terms is admissible to supplement the written agreement.17 Note that for both complete and partially integrated contracts, courts exclude any evidence that contradicts the writing and allow parol evidence only to add to the terms of a partially integrated contract. Exhibit 15-4 illustrates the relationship between integrated contracts and the parol evidence rule.

Assignments are important because they are involved in many types of business financing. Banks, for example, frequently assign their rights to receive payments under their loan contracts to other firms, which pay for those rights. If Tia obtains a loan from a bank to purchase a car, she may later receive a notice from the bank stating that it has transferred (assigned) its rights to receive payments on the loan to another firm. When it is time to repay the loan, Tia must make the payments to that other firm. Financial institutions that make mortgage loans (loans to enable prospective home buyers to purchase land or a home) often assign their rights to collect the mortgage payments to a third party, such as GMAC Mortgage. Following the assignment, the home buyers are notified that they must make future payments not to the bank that loaned them the funds but to the third party. Millions of dollars change hands daily in the business world in the form of assignments of rights in contracts. If it were not possible to transfer contractual rights, many businesses could not continue to operate. THE EFFECT OF AN ASSIGNMENT When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished.3 The third party (the assignee) has a right to demand performance from the other original party to the contract. The assignee takes only those rights that the assignor originally had, however.

The assignee's rights are subject to the defenses that the obligor has against the assignor. Assume that in the preceding scenario, Brower owes Horton the $1,000 under a contract in which Brower agreed to buy Horton's MacBook Pro laptop. When Brower decided to purchase the laptop, she relied on Horton's fraudulent misrepresentation that the computer had eight megabytes of memory. When Brower discovers that the computer has only four megabytes of memory, she tells Horton that she is going to return the laptop to him and cancel the contract. Even though Horton has assigned his "right" to receive the $1,000 to Kuhn, Brower need not pay Kuhn the $1,000—Brower can raise the defense of Horton's fraudulent misrepresentation to avoid payment.

In general, an assignment can take any form, oral or written. Naturally, it is more difficult to prove that an oral assignment occurred, so it is practical to put all assignments in writing. Of course, assignments covered by the Statute of Frauds must be in writing to be enforceable. For example, an assignment of an interest in land must be in writing to be enforceable. In addition, most states require contracts for the assignment of wages to be in writing.4 The circumstances in the following case illustrate some of the problems that can arise with oral assignments. The case also stands for the principle that an assignment, like any contract, must have consideration—in this case, a dance center's assumption of a choreographer's legal and financial duties associated with her choreography.

When a statute expressly prohibits assignment of a particular right, that right cannot be assigned. Suppose that Quincy is an employee of Specialty Computer, Inc. Specialty Computer is an employer under workers' compensation statutes in this state, and thus Quincy is a covered employee. Quincy is injured on the job and begins to collect monthly workers' compensation checks (see Chapter 34 for a discussion of workers' compensation laws). In need of a loan, Quincy borrows from Draper, assigning to Draper all of her future workers' compensation benefits. A state statute prohibits the assignment of future workers' compensation benefits, and thus such rights cannot be assigned.

If a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.5 For example, Brower signs a contract to be a tutor for Horton's children. Horton then attempts to assign to Kuhn his right to Brower's services. Kuhn cannot enforce the contract against Brower. Kuhn's children may be more difficult to tutor than Horton's; thus, if Horton could assign his rights to Brower's services to Kuhn, it would change the nature of Brower's obligation. Because personal services are unique to the person rendering them, rights to receive personal services are likewise unique and cannot be assigned.

A right cannot be assigned if the assignment will significantly increase or alter the risks to or the duties of the obligor (the party owing performance under the contract).7 For example, Horton has a hotel, and to insure it, he takes out a policy with Southeast Insurance. The policy insures against fire, theft, floods, and vandalism. Horton attempts to assign the insurance policy to Kuhn, who also owns a hotel. The assignment is ineffective because it substantially alters Southeast Insurance's duty of performance. An insurance company evaluates the particular risk of a certain party and tailors its policy to fit that risk. If the policy is assigned to a third party, the insurance risk is materially altered because the insurance company may have no information on the third party. Therefore, the assignment will not operate to give Kuhn any rights against Southeast Insurance.

The general rule that a contract can prohibit assignment has several exceptions. A contract cannot prevent an assignment of the right to receive funds. This exception exists to encourage the free flow of funds and credit in modern business settings.The assignment of rights in real estate often cannot be prohibited because such a prohibition is contrary to public policy in most states. Prohibitions of this kind are called restraints against alienation (transfer of land ownership).The assignment of negotiable instruments (see Chapter 24) cannot be prohibited.In a contract for the sale of goods, the right to receive damages for breach of contract or payment of an account owed may be assigned even though the sales contract prohibits such an assignment.8

Once a valid assignment of rights has been made, the assignee (the third party to whom the rights have been assigned) should notify the obligor (the one owing performance) of the assignment. For instance, in the previously discussed example, when Horton assigns to Kuhn his right to receive the $1,000 from Brower, Kuhn should notify Brower, the obligor, of the assignment. Giving notice is not legally necessary to establish the validity of the assignment: an assignment is effective immediately, whether or not notice is given. Two major problems arise, however, when notice of the assignment is not given to the obligor. If the assignor assigns the same right to two different persons, the question arises as to which one has priority—that is, which one has the right to the performance by the obligor. Although the rule most often observed in the United States is that the first assignment in time is the first in right, some states follow the English rule, which basically gives priority to the first assignee who gives notice.Until the obligor has notice of an assignment, the obligor can discharge his or her obligation by performance to the assignor (the obligee), and performance by the obligor to the assignor (obligee) constitutes a discharge to the assignee. Once the obligor receives proper notice, however, only performance to the assignee can discharge the obligor's obligations. In the Horton-Brower-Kuhn example, assume that Brower, the obligor, is not notified of Horton's assignment of his rights to Kuhn. Brower subsequently pays Horton the $1,000. Although the assignment was valid, Brower's payment to Horton discharges the debt. Kuhn's failure to give notice to Brower of the assignment has caused Kuhn to lose the right to collect the cash from Brower. If, however, Kuhn had given Brower notice of the assignment, Brower's payment to Horton would not have discharged the debt, and Kuhn would have had a legal right to require payment from Brower.

When special trust has been placed in the obligor or when performance depends on the personal skill or talents of the obligor, contractual duties cannot be delegated. For example, Horton, who is impressed with Brower's ability to perform veterinary surgery, contracts with Brower to have her perform surgery on Horton's prize-winning stallion in July. Brower later decides that she would rather spend the summer at the beach, so she delegates her duties under the contract to Kuhn, who is also a competent veterinary surgeon. The delegation is not effective without Horton's consent, no matter how competent Kuhn is, because the contract is for personal performance. In contrast, nonpersonal duties may be delegated. Assume that Brower contracts with Horton to pick up and deliver heavy construction machinery to Horton's property. Brower delegates this duty to Kuhn, who is in the business of delivering heavy machinery. This delegation is effective because the performance required is of a routine and nonpersonal nature.

When performance by a third party will vary materially from that expected by the obligee under the contract, contractual duties cannot be delegated. Suppose that Alex Payton is a wealthy philanthropist who recently established a charitable foundation. Payton has known Brent Murdoch for twenty years and knows that Murdoch shares his beliefs on many humanitarian issues. He contracts with Murdoch to be in charge of allocating funds among various charitable causes. Six months later, Murdoch is experiencing health problems and delegates his duties to Drew Cole. Payton does not approve of Cole as a replacement. In this situation, Payton can claim the delegation was not effective because it materially altered his expectations under the contract. Payton had reasonable expectations about the types of charities to which Murdoch would give the foundation's funds, and the substitution of Cole's performance materially changed those expectations.

Which Rights Can Be Assigned, and Which Duties Can Be Delegated? All rights can be assigned unless:A statute expressly prohibits assignment.The contract is for personal services.The assignment will materially alter the obligor's risk or duties.The contract prohibits assignment. All duties can be delegated unless:Performance depends on the obligor's personal skills or talents.Special trust has been placed in the obligor.Performance by a third party will materially vary from that expected by the obligee.The contract prohibits delegation. What If the Contract Prohibits Assignment or Delegation? No rights can be assigned except:Rights to receive funds.Ownership rights in real estate.Rights to negotiable instruments.Rights to damages for breach of a sales contract or payments under a sales contract. No duties can be delegated. What Is the Effect on the Original Party's Rights? On a valid assignment, effective immediately, the original party (assignor) no longer has any rights under the contract. On a valid delegation, if the delegatee fails to perform, the original party (delegator) is liable to the obligee (who may also hold the delegatee liable).

Another exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party. When the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person, the third person becomes an intended third party beneficiary of the contract. As the intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of the contract.

The third party materially changes his or her position in justifiable reliance on the promise.The third party brings a lawsuit on the promise.The third party demonstrates her or his consent to the promise at the request of the promisor or promisee.

Performance is rendered directly to the third party. The third party has the right to control the details of performance. The third party is expressly designated as a beneficiary in the contract.

a possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.1 If this condition is not satisfied, the obligations of the parties are discharged.

The condition precedes the absolute duty to perform.

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

an unconditional offer to perform by a person who is ready, willing, and able to do so. Therefore, a seller who places goods at the disposal of a buyer has tendered delivery and can demand payment. A buyer who offers to pay for goods has tendered payment and can demand delivery of the goods. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party then refuses to perform, the party making the tender can sue for breach of contract.

nonperformance of a contractual duty

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

If no time for performance is stated in the contract, a reasonable time is implied.9 If a specific time is stated, the parties must usually perform by that time. Unless time is expressly stated to be vital, however, a delay in performance will not destroy the performing party's right to payment.10 When time is expressly stated to be "of the essence" or vital, the parties normally must perform within the stated time period because the time element becomes a condition. Even when the contract states that time is of the essence, a court may find that a party who fails to complain about the other party's delay has waived the breach of the time provision.

rescission is the process by which a contract is canceled or terminated and the parties are returned to the positions they occupied prior to forming it

the parties must make another agreement that also satisfies the legal requirements for a contract. There must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract (the rescission). Agreements to rescind most executory contracts (in which neither party has performed) are enforceable, even if the agreement is made orally and even if the original agreement was in writing. Under the Uniform Commercial Code (UCC), however, agreements to rescind a contract for the sale of goods, regardless of price, must be in writing (or contained in an electronic record) when the contract requires a written rescission.11 Agreements to rescind contracts involving transfers of realty also must be evidenced by a writing or other record. When one party has fully performed, an agreement to cancel the original contract normally will not be enforceable unless there is additional consideration. Because the performing party has received no consideration for the promise to call off the original bargain, additional consideration is necessary to support a rescission contract.

A previous valid obligation.An agreement by all parties to a new contract.The extinguishing of the old obligation (discharge of the prior party).A new contract that is valid.

A compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law. Such an agreement will be substituted as a new contract, and it will either expressly or impliedly revoke and discharge the obligations under any prior contract. In contrast to a novation, a substituted agreementdoes not involve a third party. Rather, the two original parties to the contract form a different agreement to substitute for the original one.

For a contract to be discharged by accord and satisfaction, the parties must agree to accept performance that is different from the performance originally promised. As discussed in Chapter 12, an accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.12 A satisfaction is the performance of the accord agreement. An accord and its satisfaction discharge the original contractual obligation. Once the accord has been made, the original obligation is merely suspended. The obligor (the one owing the obligation) can discharge the obligation by performing either the obligation agreed to in the accord or the original obligation. If the obligor refuses to perform the accord, the obligee (the one to whom performance is owed) can bring an action on the original obligation or seek a decree compelling specific performance on the accord.performance that is different from the performance originally promised. As discussed in Chapter 12, an accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.12 A satisfaction is the performance of the accord agreement. An accord and its satisfaction discharge the original contractual obligation. Once the accord has been made, the original obligation is merely suspended. The obligor (the one owing the obligation) can discharge the obligation by performing either the obligation agreed to in the accord or the original obligation. If the obligor refuses to perform the accord, the obligee (the one to whom performance is owed) can bring an action on the original obligation or seek a decree compelling specific performance on the accord.

To discourage parties from altering written contracts, the law operates to allow an innocent party to be discharged when the other party has materially altered a written contract without consent. For example, a party alters a material term of a contract, such as the stated quantity or price, without the knowledge or consent of the other party. In this situation, the party who was unaware of the alteration can treat the contract as discharged or terminated.

As mentioned earlier in this text, statutes of limitations restrict the period during which a party can sue on a particular cause of action. After the applicable limitations period has passed, a suit can no longer be brought. For example, the limitations period for bringing suits for breach of oral contracts usually is two to three years; for written or otherwise recorded contracts, four to five years; and for recovery of amounts awarded in judgments, ten to twenty years, depending on state law. Lawsuits for breach of a contract for the sale of goods generally must be brought within four years after the cause of action has accrued.13 By their original agreement, the parties can reduce this four-year period to not less than one year, but they cannot agree to extend it.

A proceeding in bankruptcy attempts to allocate the debtors' assets to the creditors in a fair and equitable fashion. Once the assets have been allocated, the debtor receives a discharge in bankruptcy . A discharge in bankruptcy will ordinarily bar enforcement of most of the debtor's contracts by the creditors. Partial payment of a debt after discharge in bankruptcy will not revive the debt. (Bankruptcy will be discussed in detail in Chapter 30.)

After a contract has been made, supervening events (such as a fire) may make performance impossible in an objective sense. This is known as impossibility of performance and can discharge a contract.14 Performance may also become so difficult or costly due to some unforeseen event that a court will consider it commercially unfeasible, or impracticable.

Objective impossibility ("It can't be done") must be distinguished from subjective impossibility ("I'm sorry, I simply can't do it"). For example, subjective impossibility occurs when a party cannot deliver goods on time because of freight car shortages or cannot make payment on time because the bank is closed. In effect, in each of these situations the party is saying, "It is impossible for me to perform," not "It is impossible for anyone to perform." Accordingly, such excuses do not discharge a contract, and the nonperforming party is normally held in breach of contract. Note that to justify nonperformance of the contract, the supervening event must have been unforeseeable at the time of the contract's formation. Parties are supposed to consider foreseeable events, such as floods in a flood zone, at the time of contracting and allocate those risks accordingly through insurance and other means. Three basic types of situations, however, may qualify as grounds for the discharge of contractual obligations based on impossibility of performance:15 When one of the parties to a personal contract dies or becomes incapacitated prior to performance. For example, Fred, a famous dancer, contracts with Ethereal Dancing Guild to play a leading role in its new ballet. Before the ballet can be performed, Fred becomes ill and dies. His personal performance was essential to the completion of the contract. Thus, his death discharges the contract and his estate's liability for his nonperformance.When the specific subject matter of the contract is destroyed. For example, A-1 Farm Equipment agrees to sell Gudgel the green tractor on its lot and promises to have it ready for Gudgel to pick up on Saturday. On Friday night, however, a truck veers off the nearby highway and smashes into the tractor, destroying it beyond repair. Because the contract was for this specific tractor, A-1's performance is rendered impossible owing to the accident.When a change in law renders performance illegal. For example, a contract to build an apartment building becomes impossible to perform when the zoning laws are changed to prohibit the construction of residential rental property at the planned location. A contract to paint a bridge using lead paint becomes impossible when the government passes new regulations forbidding the use of lead paint on bridges.

An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases. Then, ordinarily, the parties must perform the contract as originally planned. If, however, the lapse of time and the change in circumstances surrounding the contract make it substantially more burdensome for the parties to perform the promised

When a super-vening event does not render performance objectively impossible, but does make it much more difficult or expensive to perform than the parties originally contemplated, the courts may excuse the parties' obligations under the contract. For someone to invoke the doctrine of commercial impracticability successfully, however, the anticipated performance must become extremely difficult or costly.19 The added burden of performance not only must be extreme but also must not have been known by the parties when the contract was made. In one classic case, for example, a court held that a contract could be discharged because a party would otherwise have to pay ten times more than the original estimate to excavate a certain amount of gravel.20 In another case, the court allowed a party to rescind a contract for the sale of land because of a potential problem with contaminated groundwater under the land. The court found that "the potential for substantial and unbargained-for" liability made contract performance economically impracticable

A theory closely allied with the doctrine of commercial impracticability is the doctrine of frustration of purpose . In principle, a contract will be discharged if supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract. As with commercial impracticability and impossibility, the supervening event must not have been reasonably foreseeable at the time the contract was formed. In contrast to impracticability, whichusually involves an event that increases the cost or difficulty of performance, frustration of purpose typically involves an event that decreases the value of what a party receives under the contract.