Deck 9: Consideration, Capacity, and Legality

Question 1

What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced?

Answer 1

The exculpatory clause is defined as the contractual provision which protects the party from liability of tort.
Usually, an exculpatory clause becomes enforceable by the court when they are in written form and got signature of impacted parties.
These clauses are not enforced when any party that gets the protection by clause purposely engages into harmful activities like wanton, gross negligence and recklessness.

Question 2

In September, Sharyn agrees to work for Totem Productions, Inc., at $500 a week for a year beginning January 1. In October, Sharyn is offered the same work at $600 a week by Umber Shows, Ltd. When Sharyn tells Totem's president about the other offer, he tears up Sharyn's contract and agrees that she will be paid $575. Is the new contract binding? Explain. (See Consideration.)

Answer 2

An executory contract is a contract that has not been fully performed. In the instant case the original contract is executory. The facts show by their actions that the parties rescinded it and agreed to a new contract. It is possible that had the party broken the contract to accept a contract with another employer there could be a liability for breach.

Question 3

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What is an exculpatory clause? In what circumstances might exculpatory clauses be enforced? When will they not be enforced?

Answer 3

Contract: It is an agreement that is entered into by two or more parties voluntarily that can be enforced in court. It is made to perform a promise in the future.
A contract include two parties, i.e. promisor, party which binds the other party to do or not to do certain acts and promise , who accepts the offer of the promisor and promises to do or not to do certain act in return of some consideration.
However there are some circumstances when a party can be relieved from its obligations, the clauses stating such circumstances are termed as Exculpatory Clauses.
Exculpatory Clause states the conditions wherein any of the party to contract can be released of its liability at any event of physical or monetary injury, no matter who is in fault.
These clauses are enforced only when the party looking for such enforcement is not involved in any business related that is in public interest.
In cases where public interest is involved or such enforcement contravenes public policy, exculpatory clause cannot be enforced.

Question 4

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What is consideration? What is required for consideration to be legally sufficient?

Question 5

Case Problem with Sample Answer In 2002, Farrokh and Scheherezade Sharabianlou were looking for a location for a printing business. They signed a purchase agreement to buy a building owned by Berenstein Associates for $2 million and deposited $115,000 in escrow until the time of the final purchase. The agreement contained a clause requiring an environmental assessment of the property. This study indicated the presence of tricholoroethene and other chemicals used in dry cleaning, and it recommended further study of the contamination. Because of this issue, the bank would not provide financing for the purchase. When the deal fell apart, the Berensteins sued for breach of contract. The Sharabianlous sought the return of their $115,000 deposit and rescission of the contract. The trial court awarded the Berensteins $428,660 in damages due to the reduced value of their property when it was later sold to another party at a lower price. The Sharabianlous appealed. Do they have a good argument for rescission? Explain your answer. [ Sharabianlou v. Karp, 181 Cal.App.4th 1133, 105 Cal.Rptr.3d 300 (1st Dist. 2010)]

Question 6

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What is required for consideration to be legally sufficient?

Question 7

Licensing Statutes. PEMS Co. International, Inc., agreed to find a buyer for Rupp Industries, Inc. A commission of 2 percent of the purchase price was to be paid by the buyer. PEMS analyzed Rupp's operational and financial conditions, paid legal fees, carefully managed Rupp's confidential data, and screened more than a dozen potential buyers. Using PEMS's services, an investment group that became Rupp Industries Acquisition, Inc. (RIA), acquired key information about Rupp and bought the company for $20 million. RIA changed Rupp's name to Temp-Air, Inc. No one paid PEMS's commission. PEMS filed a suit in a Minnesota state court against Temp-Air, alleging breach of contract. Temp-Air responded that PEMS had been acting as a broker in the transaction without having obtained a broker's license. Thus, because state law required a broker to have a license, PEMS was barred from maintaining this suit. PEMS argued that it had acted not as a broker but as a "finder." The applicable statute defines a broker as any person who deals with the sale of a business. What determines whether a contract with an unlicensed person is enforceable? Assuming that the statute in this case was intended to protect the public, can PEMS collect its commission? Explain. [ PEMS Co. International, Inc. v. Temp-Air, Inc., __ N.W.2d __ (Minn. App. 2011)]

Question 8

Contract Modification. Tabor is a buyer of file cabinets manufactured by Martin. Martin's contract with Tabor calls for delivery of fifty file cabinets at $40 per cabinet in five equal installments. After delivery of two installments (twenty cabinets), Martin informs Tabor that because of inflation, Martin is losing money and will promise to deliver the remaining thirty cabinets only if Tabor will pay $50 per cabinet. Tabor agrees in writing to do so. Discuss whether Martin can legally collect the additional $100 on delivery to Tabor of the next installment of ten cabinets.

Question 9

Consideration. In March 1997, Leonard Kranzler loaned Lewis Saltzman $100,000. Saltzman signed a written memo that stated, "Loaned to Lewis Saltzman $100,000 to be paid back with interest." Saltzman made fifteen payments on the loan, but these payments did not cover the entire amount. The last ten years after the date of the loan but less than two years after the date of the last payment-Kranzler filed a suit in an Illinois state court against Saltzman, seeking to recover the outstanding principal and interest. Saltzman admitted that he had borrowed the funds and had made payments on the loan, but he claimed that Kranzler's complaint was barred by a ten-year statute of limitations. Does Kranzler need to prove a new promise with new consideration to collect the unpaid debt? Explain. [ Kranzler v. Saltzman, 347 Ill.Dec. 519, 942 N.E.2d 722 (1 Dist. 2011)]

Question 10

Renee Beaver started racing go-karts competitively in 2008, when she was fourteen. Many of the races required her to sign an exculpatory clause to participate, which she or her parents regularly signed. In 2011, right before her birthday, she participated in the annual Elkhart Grand Prix, a series of races in Elkhart, Indiana. During the event in which she drove, a piece of foam padding used as a course barrier was torn from its base and ended up on the track. A portion of the padding struck Beaver in the head, and another portion was thrown into oncoming traffic, causing a multikart collision during which she sustained severe injuries. Beaver filed an action against the race organizers for negligence. The organizers could not locate the exculpatory clause that Beaver was supposed to have signed. Race organizers argued that she must have signed one to enter the race, but even if she had not signed one, her actions showed her intent to be bound by its terms. Using the information presented in the chapter, answer the following question.
Did Beaver have the contractual capacity to enter a contract with an exculpatory clause? Why or why not?

Question 11

A Question of Ethics Claudia Aceves obtained a loan of $845,000 to buy a home in Los Angeles, California. Less than two years into the loan, Aceves could no longer afford the monthly payments. U.S. Bank, which held her mortgage, declared her in default and notified her that it planned to foreclose on her home. (Foreclosure is a process that allows a lender to repossess and sell the property that secures a loan.) Aceves filed for bankruptcy. Filing a petition in bankruptcy automatically stays, or suspends, any action by a mortgagee (lender) against the debtor. Aceves hoped to set up a new, affordable schedule of payments. On learning of the filing, U.S. Bank offered to modify Aceves's mortgage if she would forgo bankruptcy. In reliance on that promise, she allowed the bankruptcy court to lift the automatic stay. Once the stay was lifted, the bank did not work with Aceves to modify her loan. Instead, it foreclosed on her home and initiated eviction proceedings. She filed a lawsuit in a California state court against the bank, alleging a cause of action for promissory estoppel. [ Aceves v. U.S. Bank, N.A., 129 Cal.App.4th 218, 120 Cal.Rptr.3d 507 (2 Dist. 2011)]
1 Is Aceves likely to succeed in her claim of promissory estoppel? Why or why not? How does this theory relate to the ethical principles discussed in Chapter 3?
2 Did either the borrower or the lender-or both-behave unethically in the circumstances of this case? Explain.

Question 12

ISSUE SPOTTERS
Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a passenger caused by the airline's negligence. If the cause of an accident is found to be the airline's negligence, can it use the clause as a de fense to liability? Why or why not? (See page 237.)

Question 13

Critical Thinking Legal Question Under what circumstances should courts examine the adequacy of consideration?

Question 14

In what circumstances might a promise be enforced despite a lack of consideration?

Question 15

Harvey v. Dow
Supreme Judicial Court of Maine, 11 A.3d 303, 2011 ME 4 (2011).
FACTS Jeffrey and Kathryn Dow own 125 acres of land in Corinth, Maine. The Dows saw the land as their children's heritage, and the subject of the children's living on the land was often discussed within the family. With the Dows' permission, their daughter Teresa installed a mobile home and built a garage on the land. After Teresa married Jarrod Harvey, the Dows agreed to finance the construction of a house on the land for the couple. When Jarrod died in a motorcycle accident, however, Teresa financed the house with life insurance proceeds. The construction cost about $200,000. Jeffrey performed a substantial amount of work on the house, including general carpentry, much of the foundation work, and helping to install the underground electrical lines. Teresa then asked her parents for a deed to the property so that she could obtain a mortgage. They refused. Teresa filed a suit in a Maine state court against her parents. The court rejected the claim that she was entitled to a judgment on a theory of promissory estoppel. Teresa appealed.
ISSUE Did Teresa detrimentally rely on her parents' promise to convey the land to her when she and her husband built a house on it?
DECISION Yes. The Supreme Judicial Court of Maine vacated the lower court's judgment and remanded the case for the entry of a judgment in Teresa's favor. The state's highest court held that the Dows showed a present commitment to transfer land to their daughter or to forgo a challenge to her ownership of it.
REASON The court reasoned that the Dows' support and encouragement of their daughter's construction of a house on the land "conclusively demonstrated" their intent. For years, they had made general promises to convey the land to their children, including Teresa. In addition, Jeffrey had approved the site for the house, obtained the building permit, and built much of the house himself. The court explained, "Statements or conduct representing a present commitment to do or refrain from doing something in the future reasonably can be expected to induce reliance and the promisee's reliance on such statements is reasonable."
FOR CRITICAL ANALYSIS-Legal Consideration On remand, the lower court was ordered to determine the appropriate remedy. Should Teresa be awarded specific performance to compel a transfer of the land? Or should she obtain damages? Discuss.

Question 16

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
In what circumstances might a promise be enforced despite a lack of consideration?

Question 17

Sturdza v. United Arab Emirates
District of Columbia Court of Appeals, 11 A.3d 251 (2011).
FACTS The United Arab Emirates (UAE) held a competition for the design of a new embassy in Washington, D.C. At the conclusion of the competition, the UAE informed Elena Sturdza-an architect licensed in Maryland and Texas but not in the District of Columbia-that she had won. Sturdza and the UAE began to negotiate a contract. For two years, they exchanged proposals. Then, without explanation, the UAE stopped communicating with Sturdza. No contract between the UAE and Sturdza was ever signed. About two years later, Sturdza learned that the UAE had contracted with a District of Columbia architect, Angelos Demetriou, to use his design for its embassy. Believing that Demetriou's design "copied and appropriated many of the design features that had been the hallmark of [her] design," Sturdza filed a suit in a federal district court against the UAE, alleging breach of contract. The court issued a summary judgment in the UAE's favor. Sturdza appealed to the U.S. Court of Appeals for the District of Columbia Circuit. This court asked the District of Columbia Court of Appeals "precisely how D.C. law applies" in this situation.
ISSUE Can an architect who is licensed in Maryland sue to enforce a contract under which she was to perform architectural services in the District of Columbia?
DECISION No. The District of Columbia appellate court answered the question it was asked by the federal court to resolve. According to the licensing statute, an architect cannot recover on a contract to perform architectural services in the District of Columbia if he or she lacks a District of Columbia license.
REASON Sturdza argued that the licensing statute should not apply to architects who submit plans in international architectural design competitions. The court held, however, that licensing requirements are necessary to ensure the safety of those who work in and visit buildings in the District of Columbia, as well as the safety of neighboring buildings. Besides, the statute contains no exception for international design competitions or any other type of client or service. "We must apply the statute as it is written and not create ad hoc [impromptu] exceptions by judicial decree based on nebulous [unclear] policy considerations."
FOR CRITICAL ANALYSIS-Global Consideration The architectural services at the center of this case were to be performed for a foreign embassy. Should the court have made an exception for such a circumstance? Why or why not?

Question 18

Intoxication. After Kira had had several drinks one night, she sold Charlotte a diamond necklace worth thousands of dollars for just $100. The next day, Kira offered the $100 to Charlotte and requested the return of her necklace. Charlotte refused to accept the $100 or return the necklace, claiming that there was a valid contract of sale. Kira explained that she had been intoxicated at the time the bargain was made and thus the contract was voidable at her option. Was Kira correct? Explain.

Question 19

Lhotka v. Geographic Expeditions, Inc.
California Court of Appeal, First District, 181 Cal.App.4th 816, 104 Cal.Rptr.3d 844 (2010).
FACTS Sandra Menefee and her son Jason Lhotka went on an expedition up Mount Kilimanjaro that had been arranged by Geographic Expeditions, Inc. (GeoEx). GeoEx's limitation-of-liability and release form, which both Lhotka and Menefee signed as a requirement for participating in the expedition, provided that each of them released GeoEx from all liability in connection with the trek and waived any claims for liability "to the maximum extent permitted by law." The release also provided that in the event of a dispute, the dispute would be mediated and then, if not yet resolved, arbitrated in San Francisco. The maximum recovery was limited to the amount paid for the trip with GeoEx. The release also stated, "I agree to fully indemnify [compensate] GeoEx for all its costs (including attorneys' fees) if I commence an action or claim against GeoEx based upon claims I have previously released or waived by signing this release." GeoEx led Menefee and Lhotka to believe that other travel companies required similar releases. Menefee paid $16,831 for herself and Lhotka to go on the trip. While on the trip, Lhotka died of an altitude-related illness. Lhotka's wife and others (the plaintiffs) sued GeoEx for wrongful death under various theories of liability. The trial court found that the release was unconscionable and refused to grant GeoEx's motion to compel arbitration. GeoEx appealed.
ISSUE Was GeoEx's arbitration clause procedurally and substantively unconscionable because it required all expedition participants to sign a release (without modification) limiting their potential recovery to the amount that they had paid for the trip?
DECISION Yes. The California appellate court affirmed the trial court's order denying GeoEx's motion to compel arbitration.
REASON Because GeoEx explicitly advised potential participants in its expeditions that they had to sign an unmodified release form to participate, and that other travel companies were no different, GeoEx led the plaintiffs to understand that no negotiations were possible. The court noted that "This [was] a sufficient basis for us to conclude that the plaintiffs lacked bargaining power." To be sure, the plaintiffs could have chosen not to sign. But this "take it or leave it" option created oppression that arose from an inequality of bargaining power and justified a finding of procedural unconscionability. As to the substantive unconscionability issue, the reviewing court pointed out that the arbitration provision in the GeoEx release limited any recovery that the plaintiffs could obtain to the amount they paid GeoEx. This provision guaranteed that the plaintiffs could not possibly obtain anything approaching full compensation for their harm. Further, GeoEx's arbitration scheme "provided a potent disincentive for an aggrieved client to pursue any claim, in any form-and may well guarantee that GeoEx wins even if it loses." Therefore, the arbitration clause was so one sided as to be substantively unconscionable.
FOR CRITICAL ANALYSIS-Economic Consideration What did the court mean when it said that GeoEx's one-sided arbitration scheme "may well guarantee that GeoEx wins even if it loses"?

Question 20

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract?

Question 21

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
Does a minor have the capacity to enter into an enforceable contract? What does it mean to disaffirm a contract?

Question 22

Preexisting Duty. Ben hired Lewis to drive his racing car in a race. Tuan, a friend of Lewis, promised to pay Lewis $3,000 if he won the race. Lewis won the race, but Tuan refused to pay the $3,000. Tuan contended that no legally binding contract had been formed because he had received no consideration from Lewis for his promise to pay. Lewis sued Tuan for breach of contract, arguing that winning the race was the consideration given in exchange for Tuan's promise to pay. What rule of law discussed in this chapter supports Tuan's claim? Explain. (See Consideration.)

Question 23

Under what circumstances will a covenant not to compete be enforced? When will such covenants not be enforced?

Question 24

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
Under what circumstances will a covenant not to compete be enforced? When will such covenants not be enforced?

Question 25

Substantive Unconscionability. Erica Bishop lived in public housing with her children. Her lease stated that only she and her children, who were listed on the lease, could live in the apartment, and that she was responsible for the actions of all household members. Any violations of the lease by any household member, including criminal activity, would be grounds for eviction. Bishop's son Derek committed an armed robbery at a store next to the apartment building. Bishop was given thirty days to vacate the apartment due to breach of the lease. She sued, arguing that Derek had moved out of the apartment months before the robbery, but she admitted he had been in the apartment right before the robbery. The trial court held that since Derek had visited the apartment right before the robbery, he was a household member and Bishop had to vacate. She appealed, contending that the lease was invalid because it was substantively unconscionable. Does Erica have grounds for a reversal in her favor? Discuss. [ Bishop v. Housing Authority of South Bend, 920 N.E.2d 772 (Ind.App. 2010)]