We're discussing elements of a contract. As you recall from our CPA Review mnemonic, a cold sip of Cola. One of the seas was capacity, and here we're talking about the ability of one of the parties to actually contract. Now, in general, a minor is considered not an adult prior to the age of 18 that's the age of consent in most States.
If a party misrepresents their age, they could still disaffirm a contract, but they may be sued for fraud. Here's the general rule. A contract is voidable by a minor. That minor can disaffirm a contract while still in minority status or within one year of becoming an adult. After becoming an adult, the individual can reaffirm a contract, but a minor generally can never ratify a contract.
One minor exception provides that if a minor receives necessities of life, he or she must pay the reasonable value for those goods or services. Now, in the case of a mistake, a one-sided mistake is called a unilateral mistake and has no effect on the contract. The person who made the mistake is bound by the contract unless the offeror knows.
Or should have known of the mistake. In the case of a two-sided or a mutual mistake, there is still, there is no contract. So unilateral mistake, generally the contract prevails unless there is knowledge on both sides of the transaction in a two-sided or a mutual mistake, the contract is void. There is no contract.
Let's turn to a concept that arises out of English common law and carries over into American jurisprudence. It's called the parol evidence rule, and that rule states that if there is a written contract, it cannot be changed by either an oral or written contract made prior to, or at that same time as that original contract.
However. A contract can be modified by a later contract, and you can think about this. We see all the time amendments to contracts, but you cannot go back and contradict a written contract with something else at the same time. Made it the same time. Why what we're trying to do is say at the time you came to that contractual agreement, everything is embodied within the four corners of the written document, so we can change it later.
But we can't change it for something that happened before. We assume that all that free stuff happened prior to the contract and got incorporated into the contract when it was ratified. Now the parol evidence rule does not apply in the case of trying to clarify ambiguities in the written contract. So if two provisions don't quite tie together and there's an ambiguity, you are not bound by the parol evidence rule.
In addition, the parol evidence rule does not apply in the case of demonstrating that there is fraud in the contract. So that was capacity. We have a second, see if you remember it, a cold Colstrip of Cola, and that stands for consideration. Consideration is giving up a legal right while relying on a promise, and that constitutes consideration for the promise.
In contract law, all consideration must be legally sufficient and among other things, a promise for a promise, the mutuality of obligation is valid consideration. No consideration is required for a firm offer or a charitable contribution and buys for a firm offer. What I'm talking about is a merchant offering to sell.
Personal property goods that they are normally in the business of selling. So no consideration is required for that contract nor for charitable contributions. But in all other contracts, you do need to have valid legally sufficient consideration.
Another exception I'm going to have to throw out for you is there is no consideration and there's no obligation to pay on a contract when there's a promise after the act is performed or where there's a preexisting obligation.
In contract law, we talk about damages. What are liquidated damages? I don't know whether you're going to see this on the CPA Exam, but you need to be aware that liquidated damages are stipulated in advance in the contract. So for instance, in a sale of merchandise, the clause may say that goods are being shipped from Hong Kong to.
Honolulu for delivery. If there is damage to the goods liquidated, if there is physical damage to the goods, there may be a certain amount stipulated as the damages to be paid under the contract because obviously the buyer doesn't want to accept damaged goods. So they may say, if the container is damaged and we know what's in it, we will stipulate damages, liquidated damages of a hundred thousand dollars.
If the liquidated damages are reasonable, a court will enforce them. If the liquidated damages are unreasonable, a court will say that they are indeed more like a penalty and not damages, and they will not enforce the damage clause. Good. Now we've talked about some of the elements of contracts in various.
Little blocks. We've talked about competence, uh, consideration. We've talked about capacity, we've talked about offer, we've talked about acceptance. Let's come back and put it all together as a final review and walk through your pneumonic and the different components that you absolutely have to know for contract sections of the CPA exam.
A cold sip of Cola. We have to have an agreement between the parties. We have to have consideration and remember that is legally sufficient consideration. Although a promise for a promise may constitute consideration. In certain cases, we must have a written contract and that's the S the statute of frauds.
I also expect you to go back and look at the statute of frauds. Mnemonic, G, R, I, P, E, plus marriage, which I gave you the categories of contracts which must be in writing. You must know the rules about the statute of frauds. Continuing with our list of elements, we have the capacity, and we've talked about what allows a minor to discharge a contract, uh, issues of, uh.
Insanity. Uh, these different components are more fully explored in the text, but you must have the capacity in order to contract. We've talked about the offer that goes forward, which leads to acceptance. And we've talked about counter offers. Make sure you are clear on those when you have an offer, when you only have an inquiry, we also have the legal subject matter.
So whatever is being done in the contract must be legal. If it is illegal, uh, then of course, the contract is not going to be enforceable and it is an invalid contract. And finally, there must be an acceptance of the contract by the parties. So a cold sip of Cola is going to get you the seven elements of a contract.
I can't leave the program without telling you, as well as knowing the statute of frauds. Make sure you are very comfortable with actual versus constructive fraud. Misery versus mr ed. The difference between the center and reckless disregard. Keeping all these folk items in focus will help you complete the contract portion of the exam with flying colors.
Is your CPA Review on track for Exam Day?