Business Law I
CLASS NOTES
Chapter 1
Law is the entire body of principles which
governs society’s conduct, the observance of which is enforced by courts, when
asked to do so, and is a reflection of the concerns and attitude of the
political entity in control.
Sources of
Constitution- State and Federal- which
are often general provisions along with authorization for other entities to
create further, more specific laws.
Statutory Law- Federal, State &
local – Trend is to uniformity.
Administrative Regulations- Federal
& state- carry same weight as statutory law.
Case Law- Appellate court decisions as
followed by lower courts under doctrine of State Decisis.
Treaties, proclamations and Presidential
orders.
SUBSTANTIVE LAW includes the actual
rules that govern conduct whereas
PROCEDURAL LAW consists of the rules for
enforcing the law, such as filing and conducting a law suit.
Chapter 2
MOST CONFLICTS ARE SETTLED WITHOUT HAVING TO
TRY A CASE IN COURT.
If a lawsuit is necessary, the
plaintiff must file his suit in a court that has proper JURISDICTION over the
parties and the subject matter of the suit.
Every where in the
1. A suit involving the U.S. Government,
2. A conflict between parties from different states with damages of $50,000 or
more claimed or, 3. An allegation that the defendant violated federal law. Most
federal suits are begun in U.S. District Court, are appealed to the U.S. Court
of Appeals, when appeals are taken, and, if so desired, are further appealed to
the U.S. Supreme Court
.
State Courts of original
jurisdiction derive their authority to hear specific types of cases from
legislative acts. Most states have an intermediate level of appeal followed by
a court of final appeal which is usually named the “Supreme Court” of that
state.
In both the state and federal
systems the procedures are distinctly different between civil cases, which
involve disputes between private parties, and criminal cases which involve
actions brought by the government against another entity.
Civil suits are begun by the
plaintiff filing a complaint in the court which has jurisdiction over both the
subject matter and the parties. The defendant must generally then be served
with process which usually involves delivery of a copy of the complaint. The defendant
must then usually file an answer within 30 days in which he admits or denies
each allegation in the complaint. Prior to trial, the parties may engage in
“discovery” consisting of interrogatories, requests for production of documents
and other evidence, and depositions.
Criminal proceedings are brought by government prosecutors. Private
citizens may swear out complaints against others but the prosecutor will have
discretion as to whether to proceed. If the government does prosecute it must
prove its case “beyond a reasonable doubt”, whereas, the burden of proof in a
civil case is a “preponderance of the evidence. Defendants in a criminal case
cannot be made to testify unless given a grant of immunity but defendants in
civil cases cannot refuse to testify, if called to give testimony.
Chapters 3-6 Omit
Chapter 7
International Trade- A major concern in
international transactions is determining which law will apply in the event of
dispute. Solution: Specify which country’s law will apply in the contract or
provide for arbitration BUT, IN A NUETRAL COUNTRY. Trade between countries
& tariffs are largely a matter of treaties as are matters of taxation.
Trade may also be restricted by import quotas and prohibitions aimed at
modifying behavior of foreign governments & promoting national security.
Chapter 8
CRIMES
Criminal conduct is an act or omission which violates some law and,
thereby, creates harm for society at large. For example, violent crimes disturb
the peace and tranquility of society as well as cause harm to a specific
victim.
Serious crimes that are punishable by a year or more of incarceration
are FELONIES and those punishable by less than a year in jail are MISDEMEANORS.
When managers and employees choose to engage in criminal conduct in
doing business for their company, they will generally be personally liable for
their conduct and the company will likely be liable for that conduct, as well.
Managers who authorize or direct criminal conduct or who become aware of such
conduct on the part of employees and do nothing to stop it will likely be
liable for the crimes personally but, otherwise, will not be. Employees,
managers & professionals (attorneys, CPAS & Consultants for example)
will be personally liable if they destroy, alter or conceal records sought by a
Chapter 9
TORTS
Torts are civil wrongs against
a party or a party’s property arising from an act or omission other than a
breach of contract. Some conduct is both a crime and a tort in that it is
prohibited by statute and causes harm to an individual entity or group. The 3
categories of torts are:
INTENTIONAL TORTS consisting of:
FALSE IMPRISONMENT- Intentional
detention against a person’s will; but reasonable detention is allowed to
permit investigation for shoplifting when there is probable cause for
suspicion.
INTENTIONAL INFLICTION OF EMOTIONAL
DISTRESS- Deliberate conduct beyond reason which causes mental anguish- most
often arises in the business setting in collection cases.
INVASION OF PRIVACY- Consists of 1.
Intrusion into private affairs such as insurance investigator taking pictures
through claimants window. Also includes invasion of computer files. 2. Public
Disclosure of Private Facts- Such as revealing that a debtor defaulted on his
loan by posting a “deadbeat list”, and 3. Appropriation of name, likeliness or
image for commercial advantage- such as using pictures of a public figure to
promote a product.
DEFAMATION- A published (slander if
oral; libel if written), untrue statement about a person’s reputation, honesty
or integrity which results in harm to the party it was made about. Truth is a
defense to harmful statements, if public figures or public authority are the
target of the statement; the aggrieved party must prove “malice” which requires
a showing that the party who made the statement knew it was false or recklessly
disregarded the truth.
PRODUCT DISPARAGEMENT- Involves communicating
a false statement about another party’s product service, or business (oral =
slander of title; written = trade libel) to a third party which results in
harm.
WRONGFUL INTERFERENCE WITH A CONTRACT-
Intentionally inducing someone to breach an existing contract that he has with
another party.
TRESPASS- Unauthorized entry to realty,
use of personal property or contact with a person. Also included is
unauthorized entry into another’s computer.
ASSAULT- Creating apprehension of an
offensive touching.
NEGLIGENCE is a category of tortuous
conduct that arises when a person or property is harmed unintentionally.
The elements of negligence are:
A duty- often arising from statutory law
or common law
Breach of the duty
Which is the PROXIMATE CAUSE (cause in
fact in the eyes of the law) of
Harm or injury,
Resulting in Damages (punitive damages
are allowed, as well).
Defenses to negligence actions include
Contributory negligence on the
plaintiff’s part which may result in loss of recovery or reduction in the award
by virtue of a COMPARATIVE NEGLIGENCE approach.
Immunity- Generally limited to
governmental entities.
STRICT LIABILITY is imposed when a party
causes harm from an inherently dangerous activity even though there was no
intentional MISCONDUCT and no negligence. Such activity includes:
Blasting with explosives
Keeping wild animals
Chapter 10
INTELLECTUAL PROPERTY
The term “intellectual property”
refers to trademarks, copyrights, patents and trade secrets.
Trademarks identify products.
Likewise, service marks identify a service as being provided by a given source.
The first party to use a trademark or
service mark will have a common law right to its exclusive use. Marks may be
registered on the Principal Register which is maintained by the federal
government and is incontestable after 5 years, although during the 5 year
period of contestability, it is the first to use, rather than the first to
register, that governs. Once registered in the
COPYRIGHTS give the creators of
literature, music, and artistic work the right to exclusively exploit them for
a period of their life times + 70 years (business entities get the shorter of
95 years from publication or 120 years from creation). It is no longer
necessary to write “copyrighted” or “C” on a work to secure a copyright but is
advisable in order to give others fair warning. Under
PATENTS provide developers of a new
process or product, or substantial improvement on an existing product, an
exclusive 20 year right (14 years for “design patents” which involve
“ornamental features” rather than utility) to the developers to exploit them.
Patents must be obtained from the patent and Trademark Office in the
TRADE DRESS (Packaging) is
protected from infringement if it is distinctive and nonfunctional and the
infringers dress is confusingly similar.
TARDE SECRETS, which consist of
information not generally known by the public and which benefit a business, are
protected indefinitely by state law. Included are formulas, processes, machinery
design & even customer lists.
Chapter 11
CYBERLAW
With the widespread use of the
INTERNET issues have arisen concerning the laws affecting its use. As these
issues have arisen, they have largely been resolved by application of traditional,
long standing concepts which have occasionally been supplemented by statute or
expanded by court rulings to extend their application to electronic
communications and transactions resulting in the developments of the concept of
“Cyberlaw”.
Specific issues that have
been resolved include:
Do companies have the right to monitor
their employees email received or sent at work? Courts reviewing this issue
have ruled in favor of such review even when employees state that their policy
is NOT to review employee email.
Do the traditional torts constituting
invasion of privacy or defamation apply to electronic transmission? Courts have
held overwhelmingly that the fact that such transmissions are not in oral or
hard copy form does not prevent application of these traditional torts. In
fact, due to the fact that such transmissions are so rapid and so widespread
the extent of damages in such cases is much more likely to be quite large than
the traditional forms of transmissions. Appropriation of image, likeliness, or
name has become an especially hot issue.
RELATED ISSUE: Is it an invasion of privacy
for an internet company to reveal the identity of a subscriber? There are suits
pending on this issue, however, law enforcement agencies can most assuredly
obtain this information by warrants.
How can Contracts requiring a signature
be signed when they are entered into electronically? Federal law provides for
recognition of electronic signatures, known as E-sign, and state laws are
moving in this direction as they adopt the Uniform Electronic Transactions Act.
What are the consequences of sending
false information over the internet? The law is no different whether the
information is delivered electronically or otherwise. It becomes an issue of
whether the false information is defamatory, an invasion of privacy, or
constitutes fraud or misrepresentation.
To what extent do we need new criminal
laws to prosecute internet crime? For the most part, traditional criminal law
governs since most crime involving the internet is actually traditional
criminal conduct, such as theft or securities fraud, facilitated by the use of
a computer. Some computer specific statutes, such as those to prevent hacking
and spreading of viruses have been enacted. But, internet and other computer
activity also enjoy the protection offered by the Constitution, such as freedom
of speech and freedom from unreasonable search & seizure.
Does the use of INTERNET domain names
which are similar to others (variance of a single letter from an existing name
will enable a party to register their name) or “Cybersquatting” (reserving a
name of a company or famous person not for use but to sell to the company or
person) constitute a trademark infringement or misappropriation of identity? Use
of a trademarked name or famous person’s name is probably a violation since it
is likely to create confusion as to source or constitute a wrongful taking.
Since cybersquatting does not involve use, traditional laws dealing with
wrongful taking proved inadequate and Congress passed the Federal Anticybersquatting
Consumer Protection Act in 1999 to allow rightfully entitled parties to obtain
injunctions and to obtain use of the name and recovery of attorney’s fees.
It has become common practice for people
to tout stocks over the internet in order to induce a run-up and then sell
stocks that they had bought before touting them. This is a practice known as
“pump and dump”. It has been an illegal form of fraud long before advent of the
internet and the fact that the internet is used does not change that.
Chapter 12
Nature of Contracts
CONTRACTS are agreements which are distinguished from agreements in
general by the fact that if there is a loss from a breach of the agreement, a
court, upon proper proof, will award damages or other relief to the aggrieved
party.
In order for an agreement to
constitute a contract, the following elements (or a substitute) must be
present:
1.
Agreement, 2. Competent parties, 3. Genuine assent or the appearance of
genuine assent, 4. Consideration, 5. A legal purpose, and 6. Written evidence
of the agreement IF REQUIRED BY LAW.
The relationship between parties to a
contract is known as PRIVITY, which is usually required in order to give a
party standing to sue in the event of a breach of contract.
Centuries ago in
If the terms of a contract are set forth, either in writing or orally,
it is known as an EXPRESS CONTRACT. Many contracts arise from the actions of
the parties rather than words and these are known as IMPLIED CONTRACTS. They
arise when a party receives benefit under circumstances that he would reasonably
expect to pay for them in some manner. Since price is not negotiated in an
implied contract, that recipient of benefits will be obligated to pay their
fair market value. Implied contracts may be avoided by showing the existence of
an express contract or by showing that the benefits were given under
circumstances that would reasonably cause the recipient to believe that they
were a gift.
QUASI CONTRACT is not an actual contract but a legal theory used by
courts to permit recovery in the absence of a contract when benefits have been
bestowed upon someone under circumstances that allowing them to retain those
without paying for them would result in unjust enrichment. Plaintiffs in quasi
contract actions (often referred to as suits for quantum meruit) must prove
that unjust enrichment would result if they are denied relief AND will only be
able to recover the value of the benefit received viewed from the RECEPIENT’S
PERSPECTIVE.
VALID CONTRACTS- contain all the necessary elements for a contract to be
enforceable.
VOIDABLE CONTRACTS- are contracts that appear to be valid but one or
more parties to a given contract has a defense which, if they choose to assert,
renders it unenforceable.
EXECUTED CONTRACTS- are those that have been fully performed whereas
those with aspects of performance remaining are known as EXECUTORY.
BILATERAL CONTRACTS involve an exchange of a promise for a promise.
Example: I promise to paint your house if you promise to pay me $1000 for doing
so.
UNILATERAL CONTRACTS involve a promise
in exchange for performance. These are commonly seen in reward offers and
challenge offers such as “The first person to last 3 rounds with the ape man
gets $1000.”
Contracts entered into on-line are
governed by the same basic contract law that governs more traditional
contracts. The terms set forth in e-commerce offers are likely to become part
of the bargain between buyer and seller unless fraud or deception is involved.
Buyers should be sure to read all of the terms of an offer prior to acceptance
since failure to fully understand an offer is no defense for a party who
breaches an agreement.
Chapter 13
CONTRACT FORMATION: OFFER &
ACCEPTANCE
The most fundamental element of
contract formation is the agreement. An AGREEMENT is a meeting of the minds. It
requires that the parties are referring to the same thing at the same place at
the same time. It is generally arrived at by OFFER and ACCEPTANCE.
OFFERS require that the offeror
INTEND or APPEAR to intend to create a legal obligation.
Is an ADVERTISEMENT an offer?
Usually not. Does the inclusion of a price make it an offer? No. why are ads
usually not offers? So that merchants who have limited quantities of the goods
they sell will not be discouraged from advertising due to fear of over
subscription. What are advertisements if they are not offers? INVITATIONS TO
NEGOTIATE. What would make an ad become an offer? Quantity limitations within
the ad.
Other statements that appear to be offers but are not include: a. Social
invitations- as a matter of policy, b. Offers made in jest - but beware of
appearance of seriousness, c. Statements of intent – “I’ll try”, “ I plan to
sell my property.” d. Agreements to negotiate – often contained in existing
contracts in reference to intent of the parties to attempt to renew.
REQUIREMENT OF DEFINITENESS OF AN OFFER is imposed by the courts to
enable them to be able to determine the duties of the parties in order to
ascertain if there was a breach.
EXCEPTIONS to the requirement of
definiteness:
Some terms are commonly implied, such as
payment upon delivery if credit terms are not provided- many are implied by the
Uniform Commercial Code (UCC).
Divisible contracts give the courts the
option of discarding the vague parts and enforcing the sufficiently definite
ones.
REQUIREMENTS (agreements to buy/sell all
needed) and Outputs (agreements to buy/sell all produced) contracts contain no
specific quantity but, rather, a method for its determination.
Provisions to be filled in by a future
event or occurrence, such as obtaining a contract to manufacture certain goods,
also meet the requirement of definiteness.
Even if a statement contains the elements
to qualify as an offer, it will not be an offer unless it is communicated
directly to the offeree by the offeror or by a party directed to do so by the
offeror. Therefore, a statement by one party to another that he is willing to
sell something to a 3rd party at a given price is not an offer even if it is
repeated to the 3rd party by the person to whom the statement was made.
TERMINATION OF OFFERS
HOW MAY OFFERS BE TERMINATED?
Death or Disability affecting the
offeror’s ability to perform.
Subsequent illegality of the offered
performance.
Rejection, even when there is a stated
time for the offer to remain open, rejection eliminates any remaining time.
Counter offer, any deviation in terms
when there is a reply. Due to fact that counter offers are preceded by implied
rejection.
Lapse of stated time, or if none stated,
a reasonable time. Reasonable time depends on circumstances but often it is as
short as the duration of a conversation.
Revocation- the common law allows
revocation of offers by words or actions any time prior to acceptance even when
there was a signed, written promise to keep it open for a certain time, but UCC
Section 2-205 alters this rule.
When is a revocation effective? When,
“received” by (made available to) the offeree, even if learned of indirectly.
How can an offeree who doesn’t wish to
immediately accept an offer avoid having the offeror revoke it? By means of an
option Contract. Also, a showing of detrimental reliance may enable a party to
recover damages for an offeror’s early termination of an offer. PUBLIC OFFERS
should be revoked in the same manner that they were made. How are those who
wish to accept offers for unilateral; contracts protected from revocation
before they can complete performance? They are given a “reasonable time” to
complete performance once it is begun during which revocation is ineffective.
ACCEPTANCE OF OFFERS
What constitutes acceptance? Assent of
the offeree to the terms of the offer. At common law the “Mirror Image Rule”
applies which requires the offeree to fully & unconditionally accept the
offeror’s terms - any deviation is a counteroffer. What method should be
employed in order to accept a contract? If a method of acceptance is stated in
the offer, that method should be followed. Otherwise, employing an alternative
method of acceptance will not result in a contract unless the state law
involved considered the specified method to be a mere suggested method of
acceptance in which case it, or any reasonable method of acceptance, will
result in formation of a contract.
WHO MAY ACCEPT AN OFFER? Only those to
whom it is directed.
IF AN OFFER IS STATED IN TERMS WHEREBY
FAILURE TO REJECT WITHIN A CERTAIN TIME WILL BE REGARDED AS ACCEPATNCE, WILL
SILENCE CONSTITUTE ACCEPTANCE? No, unless there are prior dealings establishing
such as agreement, such as a CD club or book club, and recipients of
unsolicited merchandise by mail have no duty to return it or pay for it.
WHEN IS ACCEPTANCE EFFECTIVE?
By mail (if mail is an allowable
method), acceptance is effective when dispatched unless the parties have
specified otherwise.
By telephone (if an allowable method), acceptance
is effective when spoken into the telephone and effective WHERE acceptance is
spoken (that state’s law governs).
By FAX or Email (if an allowable
method), PROBABLY, although not established by cases yet, acceptance is
effective at the time & place of dispatch.
By bid at Auction, acceptance is
effective when the auctioneer’s gavel falls.
MUST AN OFEREE COMMUNICATE ACCEPTANCE OF
AN OFFER?
In a bilateral contract, yes; but not in
a unilateral contract.
Does clicking on an “order now” or
similar internet choice constitute acceptance? This aspect of the law is still
evolving. There is even a Uniform Computer Information Transactions Act
governing computer software sales adopted by only a few states. Of key
importance in such cases in general, however, is whether or not all terms and
conditions were fully revealed before acceptance was solicited.
Chapter 14
CAPACITY & GENUINE ASSENT
FACTORS AFFECTING CAPACITY TO CONTRACT
ARE:
Age, mental competency and intoxication.
AGE OF CONSENT is, determined by individual state law. It is 18 in 49 of the 50 states.
STATUS OF MINOR’S CONTRACTS is that they are generally VOIDABLE by the
minor anytime prior to affirmation but not by the adult who dealt with him
unless the minor misrepresented his age.
METHODS OF AVIODANCE include any words or actions which indicate an
intent to disaffirm a contract so long as they occur while a party is still a
minor or within a reasonable time of achieving majority without an affirmation
having occurred.
A MINOR’S DUTY UPON AVOIDANCE depends on his state’s law. Common law
requires mere return of property received by the minor under the terms of the
contract to the degree that he still has it in his possession. There is no
requirement to make restitution for property that was consumed or damaged or
lost by the minor but he is entitled to return of the full value of what he gave
up. The modern trend is toward restitution by the minor. Tracing property into
the hands of a B.F.P. is not allowed.
EXCEPTIONS TO A MINOR’S RIGHT TO AVOID CONTRACTS.
Contracts for necessities – food,
clothing, tools of trade, but only a very few states consider a car to be a
necessity.
Commitments for educational loans.
Contracts for medical care.
Contracts made in connection with
running a business.
Contracts approved by a Court.
Contracts made to fulfill a legal
obligation (agreements made by minors to pay damages for injuries that they
have caused).
Contracts arising from bank accounts,
insurance policies or stock.
Contracts that have been ratified. WHAT
CONSTITUTES RATIFICATION? Words or Conduct of a party, AFTER ACHIEVING
MAJORITY, which indicate intent to be bound by the contract that was previously
voidable. DOES PAYMENT OF AN INSTALLMENT CONSTITUTE RATIFICATION? If made to a
3rd party, no; otherwise it is often viewed as evidence of ratification.
ARE PARENTS LIABLE ON THEIR MINOR
CHILD’S CONTRACT?
Generally not, unless the child is
acting as the parent’s agent, the parent failed to provide the child
necessities or the parent co-signed the contract.
CONTRACTS MADE BY MENTALLY
INCOMPETENT PARTIES MAY BE VOIDED – THE TEST FOR INCOMPETENCY is that the party
does not know SHE is making a contract or doesn’t understand the consequences
of what SHE is doing AT THE TIME OF ITS MAKING – there is an exception for
lucid intervals.
Affirmations of an incompetent’s contracts may occur only after the
party regains sanity AND knows or has learned of or has reason to know of the
contract or the party dies and his executor/ administrator knows or has reason
to know of the contract. Passage of a reasonable time after one of the above described
events will result in affirmation in the absence of the avoidance. Those who
contract with insane persons have no right to void contracts due to the other
party’s insanity.
CONTRACTS ENTERED INTO BY INTOXICATED PERSON ARE VOIDABLE IF THE DEGREE
OF IMPAIRMENT LEFT THE PARTY UNABLE TO REALIZE THAT HE WAS ENTERING INTO A
CONTRACT OR THE CONSEQUENCES OF IT. The time for avoidance begins when he knows
or should have known of the contract following his sobering up.
OTHER FACTORS WHICH MAKE AN APPARENTLY
VALID CONTRACT VOID ARE:
MISTAKE – MUTUAL MISTAKE OF FACT will
usually serve as the basis for avoidance of a contract if it involves mistake
of whether performance is possible OR concerns the subject matter of the
contract, BUT NOT if it is a mistake as to VALUE. UNILATERAL MISTAKE will not
serve as a basis for avoidance unless the other party to the contract had
reason to know of the mistake. Since everyone is assumed to know the law,
neither mutual nor unilateral mistakes of law will serve as a basis for
avoidance of a contract unless one of the parties has, or claims to have,
superior knowledge of the law.
MISPREPRESENTATION in the form of FRAUD, the elements of which are i.
Misrepresentation, ii. Scienter iii. Intent to induce reliance iv. Reliance, v.
resulting in Damages.
Active Concealment – Equivalent to fraud
but the misrepresentation is in the form of an act.
INNOCENT MISREPRESENTATION – Party
believes he is telling the truth but is mistaken. Has the same elements as
fraud but NO scienter and reliance must be reasonable.
Failure to disclose details – Normally,
sellers are not under a duty to disclose defects. But there are exceptions:
If asked questions about what they are
selling, they must answer truthfully.
If there is a confidential relationship
between the parties, there is usually a duty to reveal information that a
reasonable person would consider to be relevant.
Some states have legislation requiring
disclosures.
UNDUE INFLUENCE can be used as a defense to
void what appears to be a valid contract. Undue influence is found when one
party dominates the will of another. It must involve more than mere persuasion
and THERE MUST BE A CONFIDENTIAL RELATIONSHIP BETWEEN THE PARTIES i.e. attorney/client,
accountant/client, or parent/child. Such contracts are voidable only by the
party whose will was dominated.
Chapter 15
CONSIDERATION
WHAT IS CONSIDERATION? A specified benefit given or detriment
suffered in order to obtain a promise or an act.
In order for a benefit or detriment to
constitute consideration, it must be:
BARGAINED FOR – It must have been agreed
upon rather than unilaterally sent.
NEW CONSIDEARTION – Promise must induce
the detriment AND detriment must induce the promise. EXCEPTION: Moral
Obligation.
SOMETHING THAT THE PARTY WAS NOT ALREADY
LEGALLY OBLIGATED TO DO. EXCEPTIONS:
Promise not to breach an existing
contract. There is a split of opinion – some say such a promise is not
consideration but others hold that giving up power to breach is consideration,
but if something new is included such as added work or early completion, that
is consideration.
SETTLEMENT OF A DEBT AT LESS THAN FACE
VALUE.
i. Binding if debt is unliquidated.
ii. If liquidated, look for additional
performance or state statute to the effect that written releases do not require
considerations.
MODIFICATION OF CONTRACTS FOR THE SALE
OF GOODS require no additional consideration UCC Section 2-209.
PROMISES MAY CONSTITUTE CONSIDERATION if
1. They are not illusory (“I’ll try” OR
contracts with unilateral right of rescision).
2. They otherwise meet the requirements
for consideration.
3. But, if not performed, this
constitutes failure of consideration.
If a party receives a check marked
“Final” or “Full” payment but which is less than he is owed, will negotiating
the check release its drawer from further obligation despite the lack of
consideration for the release? If the obligation is unliquidated it will; if
liquidated it may or may not depending on the state involved & the
circumstances.
4. Promises to make gifts are NOT
generally sufficient to constitute consideration.
TO WHAT EXTENT DO THE COURTS POLICE
CONTRACT FOR FAIRNESS AS TO CONSIDEARTION? They generally do not but with the
following exceptions: 1. Unconscionability (U.C.C. 2-302) - courts will not enforce
contracts so extremely one–sided that they are unconscionable. 2. if the
inadequacy is brought about by fraud. 3. No enforcement is available for
different amounts of identical good to be exchanged. 4. Equity courts require
all parties to have “clean hands”.
There are contracts that courts will
sustain without consideration.
They are:
1. Promise of charitable donations
(Public Policy).
2. Debts that are obligations of record
(Judgments).
3. By state statutory provisions – such
as signed release in TN.
4. U.C.C. 2-209 (1) cases and U.C.C.
2-205 (firm offer) cases.
5. Contracts under seal IF THE
JURISDICTION RECOGNIZES THEN.
6. When the theory of PROMISSORY
ESTOPPEL applies. – arises when promise is made for which no consideration is
paid but promisee reasonably relies on it to his detriment so that failure to enforce
it would be unjust.
7. The fact that a party to a contract
paid consideration but what he got in return went to someone else will not
constitute a lack of consideration as long as he negotiated for the
consideration to be paid as it was.
Chapter 16
LEGALITY & PUBLIC POLICY
An illegal contract is one that the
formation of or performance of is a crime, a tort, contrary to public policy or
unconscionable.
Illegal contracts are void and, thereby,
unenforceable.
However there are exceptions to this
rule, namely:
1. The party that the law was to protect
can still get relief.
2. When parties are not in pari delicto,
the less guilty party may still be entitled to relief.
3. When the illegality is
inconsequential.
4. When one changes his mind & seeks
return of money entrusted for an illegal purpose.
PARTIALLY ILLEGAL CONTRACTS: if
divisible, courts enforce the legal but not the illegal portion, if
indivisible, the entire contract is void.
Contracts with others to have them
commit a crime (i.e. murder) provide instrumentalities to commit a crime (i.e. materials
to commit arson) or to commit a tort (i.e. intentionally inflict emotional
distress) are all illegal. *BUT IF A PARTY DECIDES TO PERFORM A LEGAL CONTRACT
IN AN
WHAT IS AN UNCONSCIONABLE CONTRACT? One
in which the seller has been given too much advantage over the buyer due to
extremely disproportionate bargaining power. Remedy – NON-ENFORCEMENT.
WHAT CAUSES A CONTRACT TO BE CONSIDERED
TO BE AGAINST PUBLIC POLICY?
1. Agreements which deprive the public
of choices – such as a non-competition agreement which results in inadequate
medical facilities in an underserved area.
2. Bribery or corruption of government
officials.
3. Agreements to obstruct justice – such
as bribery of a witness.
4. Agreements to discriminate.
5. GAMBLING – Lotteries pose the
greatest threat to inadvertent violation – elements: A. a PRIZE, B. CHANCE of
winning the prize, and C. Consideration paid for the chance to win.
REGULATION OF BUSINESS:
1. Businesses are often required to
obtain a license in order to operate. Lack of license may result n
unenforceability of contracts.
2. Lack of labels or stamps may result
in lack of right to recover for goods delivered – Key: Mere revenue produce
doesn’t matter.
3. RESTRAINT OF TRADE:
A. Agreements constituting a restraint
of trade are almost always VOID as being against public policy.
i. Specific prohibitions:
a. Agreements not to compete between sellers.
A. Price fixing
B. Dividing territory
C. Bid rigging
b. Exception is made for agreements between employers & employees
and between sellers & buyers of businesses as long as the agreements are
REASONABLE as to A. GEOGRAPHICAL AREA, B. DURATION.
B. Price Maintenance Agreements between
distributor & retailer may be allowed by state law but federal law
otherwise prohibits them although price maintenance policy without agreement is
allowed.
C. Selling Below Cost is prohibited if
intended to destroy competition.
4. USURY – Charging interest on money
loaned that is in excess of the statutory limit (which is set by state law).
Interest includes service charges, placement fees, late charges, discount
points, lender’s profit on credit life insurance. Penalties are set by state
law.
EXCEPTIONS TO USURY:
A. Time–price differential when no money is actually loaned.
B. Loans to corporations are usually exempt.
Chapter 17
FORM OF CONTRACT & INTERPRETATION
BASIC RULE – Contracts made orally are
binding so long as the requirements of a contract are met and there was no
agreement that they would not be binding unless written.
Exceptions:
The STATUTE OF FRAUDS requires the following contracts to be written in order
to be binding:
1. Contracts which cannot POSSIBLY be
performed within one year.
A. Runs from date the contract is MADE, not date performance starts.
B. No writing required if EITHER party can perform within one year.
C. Performance for life requires no writing since death could occur
within one year.
D. The key is POSSIBILITY of performance within 1 year, even if
performance ultimately takes longer, although if there is no realistic
expectation of completion within 1 year a writing will likely be required.
E. Contracts that are silent as to time for performance, that terminate
at will, that are effective until retirement or that are to run for the life of
a business do NOT require writing.
2. Contracts for a sale of an interest
in reality must be written - includes buildings as well; does not include
contracts with real estate agent.
3. Promise to answer for the debt or
default of another.
a. Only applies to promises made to the Creditor, not to the debtor.
b. Exception: No writing is required if the party makes such a promise
primarily for his own benefit.
4. Promise by an Executor or
Administrator to be personally liable for claims against a decedent’s estate.
5. Promise made in consideration of
marriage.
6.
What type writing is required to satisfy the statute of frauds?
A written memorandum satisfying the requirement of definiteness also
signed by the party to be charged. Specifically:
1. It must contain sufficient terms to permit a court to interpret it.
2. Multiple documents may be used if linked together by their terms or
reference.
3. To be considered “signed” the provisions of U.C.C. Section 1-201(39)
apply.
4. Failure to comply with the statute of frauds renders a contract
VOIDABLE.
Exceptions:
A. Some states allow part performance to take a contract outside the
statute.
B. Detrimental reliance may estopp assertion of the statute of frauds.
C. If the contract violates the
statute but a party has performed at least part of the contract, he can usually
recover in quasi contract.
5. FAXES & COPIES will usually suffice
unless claimed to be fraudulent.
6. Writings can be used to satisfy the
statute of frauds even if drawn after the agreement.
7. Electronic signatures and electronic
delivery are now recognized as valid under the Electronic Signatures in Global
and National Commerce Act passed in 2000. Parties must merely have agreed
before hand that they will contract electronically and what will constitute a
“signature”. Wills, negotiable instruments and life and health insurance
cancellation notices are exempt from the Act.
WHEN A
CONTRACT IS WRITTEN AND SIGNED, TO WHAT EXTENT MAY ORAL TESTIMONY BE INTRODUCED
TO CONTRADICT IT?
In an effort to give stability to written contracts, courts have developed
the Parol Evidence Rule which forbids introduction of oral testimony which
modifies or contradicts the term of a signed contract that is written and
appears complete UNLESS there is a clear proof of fraud, accident, or mistake
that renders the writing incomplete, not the intended contract, or not a
contract at all.
EXCEPTIONS TO THE PAROL EVIDENCE RULE:
1. If the writing is not an INTEGRATION
(a final writing) the parol evidence rule does not apply.
2. If the writing is an integration, but
not a TOTAL integration, it may be supplemented, but not contradicted, with
additional terms. Even implied terms are not to be contradicted. The
determination as to whether a writing is an integration is based on:
A, The apparent intent of the parties.
B. Completeness of the writing.
C. Presence of a MERGER CLAUSE is strong evidence that writing is a
integration unless the clause was put in by fraud or the writing is obviously
incomplete.
3. If a contract contains AMBIGUOUS
terms, parol evidence is permitted to clarify whether it is a total or partial
integration.
4. Since the parol evidence rule, by its
own terms, does not apply when the writing is the product of fraud, accident or
mistake, parol evidence of such facts is permitted.
5. Parol evidence is allowed to show
that no contract exists due to a missing element (such as capacity or
consideration) or duress or undue influence.
6. Oral testimony is permitted to show
that there was a modification contract.
7. The COLLATERAL CONTRACT RULE permits
oral testimony concerning the fact that a contract was entered into in addition
to the written contract, albeit somewhat related, which did not require a writing
in order to be enforceable.
INTERPRETATION OF CONTRACTS
After reaching an agreement, the parties to the contract often get into
arguments over what the agreement means. Through the years courts and lawmakers
have developed rules of interpretation.
What do courts seek to ascertain in interpreting contracts?
The intent of the parties as it is
objectively expressed.
RULES OF INTERPRETATION:
1. Words are to be given their ordinary
meaning, however, words commonly used in a trade are to be given the meaning of
that trade.
2. Added documents, such as disclaimers,
handbooks or instructions will only be constructed to be a part of a contract
if incorporated by reference. Employee handbooks should specify such if NOT
part of the contract.
3. Limitations imposed after a contract
(such as on an invoice) will have no effect if not agreed to.
4. Contracts are to be considered as a
whole unless divisible.
5. In determining whether writing is to
be construed as part of a contract, courts determine whether a reasonable
person would regard those items are part of the contract.
6. CONDITIONS contained within the terms
of a contract will be controlling in determining whether a duty to perform
exists.
TYPES OF CONDITIONS:
A. Condition Precedent – Must occur before duty to perform.
B. Condition Subsequent – Occurrence terminates a legal obligation.
7. Contradictory and Ambiguous Contracts
will be interpreted by the following:
A. Hand written prevails over typewritten which prevails over pre-printed
provisions.
B. Words prevail over figures for the dollar amount of a check.
C. Courts will imply some terms but not the essence of the contract.
D. Prior Course of dealing & Custom
& usage of trade will be heavily relied on in interpreting language &
duty of a contract.
E. If a contract is ambiguous (open to more
than one meaning, some courts allow parol evidence to clear it up, some refuse
to enforce the contract, but most interpret them in the manner least favorable
to the drafter.
Conflict
of Laws
When a contract is entered into between parties from different states or
even different countries, unless the contract specifies which jurisdiction’s
laws will govern, the law of the place where the last act essential to
formation of the contract occurred will govern.
TREND: to apply the law of the
jurisdiction that has the most significant contacts with the transaction -
CENTER OF GRAVITY APPROACH.
Chapter 18
THIRD PERSONS IN CONTRACTS
Most contracts involve only two parties, usually a buyer and a seller,
and no one else has any rights or obligations under the contract. BUT there are
exceptions:
1. THIRD PARTY BENEFICIARY CONTRACTS – Those
which bestow at least part of the consideration bargained for, by at least one
of the parties to a contract, upon a stranger to the agreement.
Once a valid 3rd
party beneficiary contract is made, do the original parties to the contract
have a right to modify or rescind it to the detriment of the 3rd
party beneficiary? If the contract so provided, they can, otherwise if the 3rd
party’s interest has vested they cannot without the 3rd party’s
consent.
WHAT
CONSTITUTES VESTING OF A 3RD PARTY’S INTEREST IN A 3RD
PARTY BENEFICIARY CONTRACT? Acceptance of the contract by the 3rd
party (usually implied if 3rd party does not object upon learning of
a contract’s existence) OR a change in position by the 3rd party in
reliance on the contract.
NOTE: Only
intended 3rd party beneficiaries gain rights under a 3rd
party beneficiary contract; incidental beneficiaries do not. Incidental
beneficiaries are those upon whom the bestowing of benefit was not the purpose
of the contract, but rather, an unintended side effect.
2.
ASSIGNMENT – A transfer of rights obtained by contract to a party who was not
to originally receive those rights.
IN ANALYZING
ASSIGNMENTS THE COURTS SEE TWO BASIC TYPES:
A. Assignment of rights to money.
i. Strongly favored by the courts.
ii. The U.C.C. (Section 9-318(4) ) prohibits restrictions on assignability
of accounts receivable.
iii. Assignments are valid without
giving notice to the obligor but the assignee must give credit to the obligor
for any payments made to the assignor in the absence of such notice.
iv. Prohibitions on such assignments usually have no effect.
B. ASSIGNMENTS OF RIGHTS TO PERFORMANCE
are also favored by courts BUT will not be enforced if:
i. The rights or duties of the
obligor would be materially altered.
ii. Performance must meet the
buyers’ satisfaction.
iii. An employment contract is
involved (too personal).
iv. The duty to make payments is
also transferred (may be a bad risk).
WHAT RIGHTS DOES AN ASIGNEE AQUIRE FROM
AN ASSIGNMENT.
Generally, all the rights of the assignor unless limited by the
assignment or effectively limited by the original contract.
WHAT RIGHT DOES AN OBLIGOR HAVE AGAINST
AN ASSIGNEE?
Generally, any rights he would have had against the assignor.
HOW CAN AN ASSIGNEE PROTECT HIMSELF FROM
CLAIMS AND DEFENSES BEING ASSERTED AGAINST HIM THAT HAD ARISEN AGAINST THE
ASIGNOR?
A. Obtaining a statement from an obligor
that no claims or defenses exist regarding the assigned rights will estopp the
obligor from asserting those which he knew of or should have known of at
that time.
B. If the obligor is given notice of the
assignment, he will be barred from asserting claims that are NOT related to the
assigned contract rights.
3.
DELEGATION – Transfer of contractual duties to another to perform.
A. Duties that are delegable include:
i. Any, if the contract creating them
originally provides.
ii. Those that is not personal if
delegation is not specified.
B. WHEN DUTIES ARE DELEGATED, the delegator
remains liable for non–performance or other breach by the delegatee unless
there was a NOVATION: A substitution and release to which all parties agree.
Chapter
19
DISCHARGE OF CONTRACTS
A party’s obligations existing
from a contract may be discharged because something happens or fails to
happen. When an existing duty that arose
from a contract is extinguished due to the occurrence or non-occurrence of some
event, that event is known as a CONDITION SUBSEQUENT. When an agreement is
entered into that contains terms within it which require some event to occur or
fail to occur in order to cause contractual duties to arise, that event is
known as a CONDITION PRECEDENT.
DISCHARGE OF CONTRACTUAL DUTIES USUALLY
RESULTS FROM ONE OF THE FOLLOWING
1. PERFORMANCE
The determination of whether an
action constitutes performance will be made as follows:
A. If the performance is a payment
of money:
i. It must be paid upon
delivery of goods or services unless other arrangements are been made by
contract or prior dealings.
ii. Checks are mere
conditional payment until honored by drawee.
iii. Creditor must apply
payments where specified but, if not specified the creditor may choose where to
apply them.
iv. Refusal of valid tender
of payment will NOT satisfy the debt BUT will suspend the running of interest -
requires full amount in legal tender and must be kept open.
B. If performance involves the
doing of an act or delivery of goods:
i. Late performance is
sufficient if rendered within a reasonable time and time is not of the ESSENCE
(made VITAL to the contract).
ii. Recovery for partial
performance is available ONLY if the party has substantially performed and the
breach is not willful.
iii. Refusal of tender of
proper performance will result in a discharge of the aggrieved party if he so
chooses.
iv. If work is to be done to
another’s satisfaction, courts consider whether a reasonable person would have
been satisfied with the performance unless personal taste is an important
element, in which case actual satisfaction is required but, even then, the
recipient must act I good faith.
2. DISCHARGE BY POST CONTRACT ACTION OF
THE PARTIES INCLUDES
A. UNILATERAL ACTION
i. Consumer protection – such
as 3 day right of rescission – but this is generally limited to door-to-door
sales or re-financing of ones personal residence unless the seller has included
such a provision in his agreement with the buyer
ii. Exercise of right to VOID when
provided by law (i.e. choosing to void contract that violates the Statute of
Frauds.)
B. AGREEMENT
i. Within the original contract
by:
a. Happening of an event or
failure of an event to happen – CONDITIONS PRECEDENT AND SUBSEQUENT.
b. Providing for right of
termination – Reasonable notice.
c. Failure to provide
duration of a contract, or “lifetime” will usually result in its being deemed
terminable at will.
ii. OUTSIDE THE CONTRACT
a. Mutual rescission – puts
parties back where they started. Oral rescission of written contracts is
permitted unless the statute of FRAUDS requires otherwise.
b. SUBSTITUTION – Making a
new contract that is clearly inconsistent with the original contract. The new
replaces the old.
c. ACCORD AND STAISFACTION
– An agreement to perform a contract differently than originally agreed
(accord) followed by the rendering of the revised performance (satisfaction).
The earlier contract is not discharged until the new contract (accord) is
performed (satisfaction).
d. NOVATION – Transfer of
one party’s contractual obligation to another resulting in his release of
liability and forfeiture of rights under the contract. Consent of all parties
is required.
e. RELEASE – Party to whom
an obligation is owed surrenders his right to recover.
f. WAIVER OF RIGHT TO RECOVER FOR DEFECTS AND/OR
ACCEPTANCE OF THE BREACH – Failure to object to defective performance or
non-performance. Acceptance of the breach is available as a release only if the
breach goes to the root or essence of the contract AND the decision to accept
is communicated by unequivocal notice.
3. IMPOSSIBILITY OF PERFORMANCE –
Requires prevention of performance due to EXTRINSIC CONDITIONS rather than
personal inability.
Specific instances of impossibility
include:
A. Destruction of the subject matter –
Must not be due to the fault of either party AND contract must refer to a
PARTICULAR item.
B. Change of Law – Must render
performance impossible, not just hard.
C. DEATH OR DISABILITY of either party
if a PERSONAL RELATIONSHIP is involved. Does not affect the duty to pay money
unless so agreed.
D. Act of the other party – if failure
to co-operate renders performance impossible. But, if materials or service are
available elsewhere they should be obtained and charged for.
E. Temporary impossibility merely
suspends performance.
4. IMPRACTICALITY OF PERFORMANCE – Not
recognized widely
A. Commercial Impracticality –
arises when there is:
i. Occurrence of a contingency.
ii. Which was not allowed by
contract or custom.
iii. Which renders performance
impractical due to a quite large increase in cost to perform.
B. ECONOMIC FRUSTATION – A change
in circumstances which causes the performance which one of the parties the
contract was to receive to become worthless.
5. DISCHARGE BY OPERATION OF LAW
ARISES when:
A. One of the parties to the
contract intentionally materially alters it without the other party’s consent.
B. Physical destruction of a
written contract when it is symbolic of a mutual agreement to terminate the
agreement.
C. Bankruptcy can discharge a
debtor’s contractual obligations.
D. Running of the statute of
limitations will bar a claim for breach.
E. Contractual provisions which
shorten the statute of limitations will usually be enforced by courts.
F. Judgments supplant contractual
duties which are said to “merge” into the judgment.
Chapter 20
BREACH OF CONTRACT & REMEDIES
Breach of Contract consists of
A. Failure to perform as agreed when
performance is due.
B. Indicating in advance that performance will
not be forthcoming at the time it is due – Anticipatory
Breach.
i. Must be clear & unequivocal.
ii. Can be words or conduct (such as sale of an item specifically
promised in another contract)
iii. May be retracted if the other party has not changed position in
reliance on the anticipatory repudiation.
If a party breaches a contract, the
other party to the contract must be careful not to engage in conduct which
constitutes acceptance of the breach or otherwise he waives the right of
recovery. Such conduct may consist of words, action (such as acceptance despite
non–compliance) or failure to properly object when defective performance is
tendered.
REMEDIES FOR BREACH OF CONTRACT INCLUDE:
1. Suit for damages – Sufficient money
to put the injured party where he would have been had there been no breach.
A. Compensatory Damages – Difference in contract price and Fair Market
Value (FMV) U.C.C. Section 2-708 for seller; U.C.C. Section 2-713 for buyer.
B. Incidental damages (additional costs due to the breach) and
Consequential damages (reasonably foreseeable as flowing from the breach – most
commonly lost profit) if, when viewed at the time the contract was made, such
damages were within the contemplation of the parties and not too speculative.
C. Interest on the judgment amount will usually be awarded running at
least form the time the judgment was entered.
2. Action for Rescission – asking the
court to set aside a contract due to the other party’s material breach – often
accompanied by a request for restitution which is a return of what has been
paid over.
3. Specific Performance – a court order
compelling a party to perform as promised – only available if money damages are
inadequate – not available for personal service contracts.
4. Injunctions – Order by a court
compelling someone to cease doing some act – used in personal service contracts
as an alternative when the breaching party breaches in order to take another
offer.
THERE ARE REMEDIES THAT ARE COMMONLY
AWARDED IN SOME LEGAL ACTIONS BUT VIRTUALLY NEVER IN CONTRACT CASES. THEY ARE:
1. Nominal Damages – a small token award
for damages.
2. Punitive Damages – which are designed
to punish the offending party and make an example of him.
3. Attorney’s fees will NOT is awarded
unless there is provision for them in the contract.
ANYTIME THERE IS A BREACH OF CONTRACT
THE PARTY SEEKING DAMAGES IS UNDER A DUTY TO MITIGATE (minimize) them. Failure
to do so will result in the award of damages being reduced to the level they
would have been had they been mitigated.
AGREEMENTS CONCERNING DAMAGES that are
entered into by the parties to a contract as part of their agreement will
generally be enforced by courts. Among them are:
1.
Liquidated damages provisions – Agreements in advance as to what damages will
be in the event of a breach. In order to be valid
A. Damages
must be difficult to ascertain.
B. The damages
provided for must be reasonable – not punitive.
2. EXCULPATORY CLAUSES – Those which
limit liability (often to repair or replacement) or which eliminate liability
altogether.
For such a clause to be valid:
A. It must be clear and unambiguous.
B. It must not be unconscionable.
i. Limitations on the right to recover for personal injury from
defective products are unconscionable per se U.C.C. Section 2-719.
ii. Limitations will not be deemed to bar recovery for fraud or willful
misconduct.
iii. Limitations imposed by parties with vastly greater bargaining strength
are likely to be considered unconscionable.
Chapter 21
PERSONAL PROPERTY & BAILMENTS
Personal property consists of:
1. Tangible property.
2. Choses in action, such as right to
collect a debt.
3. Proprietary rights, such as patents
& copyrights.
OWNERSHIP OF PROPERTY IS SUBORDINATE TO:
1. Government rights – Police power,
zoning & eminent domain.
2. Creditors rights – Attachment.
3. Prohibition from unreasonable use by
the law of nuisance.
SOURCES OF PROPERTY ACQUISTION:
1. Creation – Patents, copyrights &
trademark law offer protection.
2. Accession – Natural improvement
(livestock) or by additions made by someone with inferior title which inure to
the benefit of the owner (improvements by a tenant or a thief).
3. Doctrine of confusion of goods – One
who willfully and wrongfully mixes his goods with another’s so as to render
those indistinguishable forfeits his interest in the goods unless they were
completely fungible.
4. GIFTS
A. Intervivos Gifts are those made by living donors; they require
i. Donative intent – Intention to make
a present gift.
ii. Delivery – Relinquishment of control – symbolic or actual.
B. Testamentary Gifts – By will upon the donor’s death.
i. Validity of a will is controlled by state law.
ii. Usually, wills must be signed & witnessed unless the state law
recognizes holographic wills.
C. Gifts Causa Mortis – Made in contemplation of impending death
i. Requires delivery – actual or constructive.
ii. The item must be returned if: (specified at time of delivery)
a. Donor does not die of the
feared peril.
b. Donor revokes the gift – can
be done anytime prior to death.
c. Donee dies before the doctor.
D. Conditional gifts - Those made with a condition precedent or
condition subsequent. Such conditions will be enforced by most courts.
5. FINDING LOST PROPERTY – Finder must
relinquish such property to the rightful owner but has a superior right to
possess the property compared to anyone else.
Exception: If property is found placed
where the owner is likely to return for it, the property must be “turned in”.
However, some states have statutes with provisions for a period of reclamation
after which the finder becomes the owner.
6. Acquisition by occupation of the
property – First to exercise control over abandoned (owner has voluntarily
relinquished control) property becomes the new owner.
7. ESCHEAT – Unclaimed property
eventually goes to the state.
8. TRANSFER BY NON-OWNER – U.C.C Section
2-403 provides that a transferee cannot obtain good title through a thief – a
true owner can redeem even from a B.F.P. but there is an exception for cash.
FORMS OF MULITPLE OWNERSHIP:
1. JOINT TENANCY – Ownership by two or
more persons – at common law, it is characterized by right of survivorship but
state law may require a notation to that effect. Attempts to alienate such an
interest convert it to a tenancy in common.
2. TENENCY IN COMMON – Ownership by two
or more parties whose interests are fully transferable by sale or gift.
3. TENANCY BY THE ENTIRETY – Estate held
by husband and wife has right of survivorship – assumed when property is
jointly owned by spouses – no right to partition.
BAILMENTS
One of the most striking aspects of personal property (personalty) is
that, unlike real property (realty) it can be bailed. In fact, the creation of
bailments is a fundamental component or by-product of numerous business
transactions even when the bailment itself was not the ultimate purpose behind
a given business transaction. Bailments are a fundamental part of the daily
lives of individuals as well as a fundamental part of many business-to-business
transactions.
WHAT IS A BAILMENT?
A bailment is an entrusting of property by one person (bailor) to
another (bailee) to hold for the benefit of the bailor or a 3rd
party.
Elements of a bailment include:
1. Agreement to bail- express or implied
– oral is permitted.
2. Delivery of personalty - may be
constructive.
3. Acceptance of property by the bailee
– allowing goods to be placed within his exclusive possessions and control.
Items in trunk of a car, pocket of a coat, etc. are not bailed if bailee had no
reason to know of them.
WHO MAY CREATE A BAILMENT? Anyone with
physical possession of property.
CAN A BAILEE CONVEY GOOD TITLE TO GOODS
ENTRUSTED TO HIM?
Generally not, but there is the exception
in U.C.C. Section 2-403(2) when goods are entrusted to a bailee who is a
merchant dealing in such goods. Also, if the bailor has caused others to
believe that the bailee is the owner of the goods he will later be estopped to
deny it if the bailee wrongfully conveys those goods.
TERMINOLOGY:
1. EXTRAORDINARY BAILMENTS – Those
involving unusual duties or liabilities.
2. Ordinary Bailments – All other than
extraordinary bailments.
3. CONTRACT BAILMENTS – Those for
compensation – also known as MUTUAL BENEFIT BAILMENTS or BAILMENTS FOR HIRE.
4. GARTUITOUS BAILMENT – One without
compensation.
5. CONSTRUCTIVE BAILMENT – Created by
operation of law when someone’s property falls into the hands of another
without consent.
Is a bailment created when one parks a car
on a lot for a fee?
It depends on the degree of control
exercised by the parking lot. Presence of an attendant is not enough – there
must be an attempt to guard the car.
DUTIES OF A BAILEE IN A BAILMENT
CONTRACT:
1. Basic duty at common law is to return
or deliver the EXACT goods bailed. EXCEPTIONS:
A. When FUNGIBLE GOODS ARE BAILED.
B. When bailee has an option to buy which he exercises.
2. Whether Bailee will be liable for
loss or damage to bailed goods depends on whether he breached his duty of care
that he was required to exercise toward those goods and the duty of care that
he is required to exercise depends on the nature of the bailment.
A. Gratuitous bailment for benefit of bailor – Only slight care.
B. Gratuitous bailment for benefit of bailee – High degree of care.
C. Mutual benefits bailment – DUE CARE – the same degree of care that
men of ordinary prudence exercise toward their own property under similar
circumstances.
3. Bailees are not insurers of goods
unless they have agreed to be contractually.
4. Bailees will be liable for
unauthorized us even if they have obtained waivers from the bailor.
5. Whether a bailee may get a bailor to
waive the right to recover for the bailee’s negligence is a matter of state law
– some disallow such waivers when necessary to protect the public interest - such waivers, even if allowed, will not
exclude willful misconduct.
6. Unless the bailee has agreed to be an
insurer of bailed goods, he will generally not be liable for damage caused by 3rd
parties, accident (no one was at fault) or act of God (natural phenomenon not
reasonably foreseeable).
7. Bailees will be liable for breach of
any contractual duty and the parties are free to impose more duties than are
imposed by law.
8. Assurance by a bailee that he will
“take good care of goods” entrusted to him does NOT increase his duty.
9. Bailees may retain goods under a
bailee’s lien when the bailor has failed to pay the bailee the agreed compensation.
If a bailee wrongfully withholds bailed
goods he may be liable for conversation or, alternatively, damages, including
punitive damages.
THE BAILOR’S DUTIES ARISING FROM A
BAILMENT DEPEND UPON THE NATURE OF THE BAILMENT:
1. Bailment for hire – Bailor must
furnish goods reasonably fit for the purpose contemplated throughout their use.
2. Gratuitous Bailment – Bailor must make
a reasonable inspection for defects & correct or notify bailee of defects.
3. Gratuitous Bailment for benefit of
Bailee – No duty to inspect but bailor must warn bailee of known defects.
4. Exceptions to Bailor’s duties:
A. If bailee already knows of defects but uses goods anyway; he has
assumed the risk and cannot recover for injuries caused by those defects.
B. There is no duty to warn of defects that are not discoverable by
reasonable inspection.
5. Bailor’s liability extends to
bailee’s employees, as well.
Bailee’s Liability to 3rd
persons:
1. Those that injure others while using
bailed property will generally be liable to the same degree as if they owned
the property.
2. Those that negligently repair bailed
property will be liable to 3rd persons subsequently injured as a
result.
BAILOR’S LAIBILITY to 3rd
PERSONS:
1. Bailors are generally not liable to 3rd
persons for harm caused by a bailee using bailed property, unless:
A. The entrusting itself was an act of negligence
i. Entrusting a dangerous item to one unaware of the danger.
ii. Entrusting a potentially harmful item to an incompetent or reckless
party.
iii. When a 3rd person is injured by a defect under
circumstances whereby the bailee would have been able to recover had he been
the one using the item.
iv. The bailor is vicariously
liable.
v. When the Family Purpose Doctrine applies.
Chapter 22
LEGAL ASPECTS OF SUPPLY CHAIN MANAGEMENT
Bailment Law is modified when parties
enter into EXTRAORDINARY BAILMENTS.
WAREHOUSEMEN – Store goods for the
public for a fee.
WAREHOSEMAN’S DUTY – DUE CARE. If a
warehouseman returns goods in a damaged state or is unable to return goods, he
is presumed liable unless he can show that the loss was not due to his
negligence or misconduct.
WAREHOUISEMAN’S RIGHTS – If unpaid for
his services, a warehouseman may retain goods entrusted to him and eventually
sell them in order to recover what he is owed.
COMMERCIAL APPLICATION OF WAREHOUSING
ARANGEMENTS:
Goods are placed in a warehouse and the warehouseman issues a warehouse
receipt. If the receipt is non-negotiable, the goods are to be delivered to the
depositor or other specified party and surrender of the receipt is not
necessary. If negotiable warehouse receipts are used, goods are to be delivered
to the holder of the receipts only, whereupon they must be surrendered for
cancellation.
THEFT OF GOODS CONTRATSED TO THEFT OF
WAREHOUSE RECEIPTS
If stolen goods are placed in a
warehouse in exchange for receipts which are negotiated to a B.F.P. , the
rightful owner may still recover the goods from the purchaser, BUT if
negotiable warehouse receipts that are in negotiable form (either made to
“bearer” or to a party’s order and that the party has endorsed them) are stolen
and conveyed to a B.F.P. , the owner will be unable to re-claim the goods.
Warehouseman may deliver goods to a rightful owner who has no negotiable
receipts and will not be liable (U.C.C. Section 7-403 (1) (a)) or can honor
negotiable receipts in good faith without liability (U.C.C. Section 7-404) when
in doubt, U.C.C. Section 7-603 offers a good alternative.
FACTORS sell goods on consignment. If
such a party makes a wrongful sale, U.C.C. Section 2-403 prohibits recovery of
the goods from an innocent 3rd party buyer.
SPECIAL BAILMENTS
Common Carriers, those who transport
goods for the public for a fee, are special bailees due to the fact that they
are virtually insurers of their customer’s goods unless loss or destruction was
due exclusively to one or more of the following:
1. Act of God – Natural phenomenon not
reasonably foreseeable.
2. Act of Public Enemy (not mere
robbers).
3. Act of Public Authority (quarentine
or confiscation).
4. Act of the customer (known as
consignor).
5. Inherent nature of the goods.
Common Carriers may limit their
liability but must offer customers a choice with a rate variance.
Common Carriers will be liable for
spoilage and price drops occasioned by UNREASONABLE DELAY but not if the delay
is reasonable (incidental to business).
TYPICAL COMMON CARRIER TRANSACTION
Goods are turned over to the carrier in
exchange for a BILL OF LADING. Negotiable Bills of Lading (must be on yellow
paper), which describe goods, serve as a receipt and contain shipment
instructions, MUST be surrendered in order to obtain goods. Straight bills of
lading do not have to be surrendered. Carriers may honor a negotiable bill of
lading and, if acting in god faith, will not be liable even if the rightful
owner had been deprived of it, in negotiable form, by theft, fraud, duress,
accident, mistake or undue influence. (U.C.C. Section 7-404). But the Carrier
may deliver to a true owner without the bill of lading without liability
(U.C.C. Section 7-403(1) (a)). Use of 7-603 is recommended. But, entrusting
stolen goods to a carrier in exchange for negotiable bills of lading which are
the transferred to a B.F.P. will not bar the original owner from recovery.
HOTELKEEPERS – Provide living
accommodations for transients.
Duties: 1. Accept fit members of the
public (Possible punitive damages for breach).
2. They are insurers of guest’s
property unless loss is caused by act of God, public enemy, public authority,
and inherent nature of property or guest’s own fault. Exceptions
A. Not liable in most states if
safe is provided.
B. Not liable for property of
guests of guests.
C. If guest stays long enough to
be considered a boarder, bailment becomes an ordinary one.
Chapter 23
SALES CONTRACTS
Contracts for the sale of the goods are
referred to as sales contracts and are defined as actual present transfers of
title to movable personal property in exchange for payment which may consist of
money, goods or services.
If free goods are given to buyers of
goods does the law governing sale of goods apply? Yes, it is assumed that part
of the payment for the goods was for the “free” ones.
The law concerning sale of goods does
NOT apply to:
1. Services – Goods which have some
incidental services such as installation will still be considered goods – look
for the major component. Some things, such as dentures, blood and human tissue
have been labeled as services by statute.
ARTICLE 2 of the U.C.C. governs sale of
goods and alters basic common law in the following ways:
1. A written signed offer made by a MERCHANT
stating a period of irrevocability is irrevocable for the stated
period (NOT TO EXCEED 3 MONTHS), or for a reasonable time if no time is stated,
even without consideration – U.C.C. Section 2-205 FIRM OFFER.
2. An offer to buy goods calling for
prompt shipment may be accepted as if it were an offer for a unilateral
contract, by shipping, or as if an offer for a bilateral contract, by promising
to ship, unless the offer specifies otherwise. U.C.C. Section 2-206.
3. Acceptance of an offer but with added
terms is not a counter offer as in common law, but is regarded as acceptance
with added terms pending acceptance which will become part of the agreement
unless acceptance was limited to the original terms in the offer, notice of
objection to the new terms is given or the new terms materially alter the
original offer. U.C.C. Section 2-207.
4. If price is not specified in a
contract between parties experienced in a given industry, price will be
determined by that industry’s customary method. U.C.C Section 2-305.
5. Long running sales controls that do
not specify duration will run for a reasonable time but are terminable at will
by either party upon reasonable notice. U.C.C. Section 2-309.
6. USAGE OF TRADE & PRIOR COURSE OF
DEALING are heavily relied upon in supplying missing terms and interpreting
sales contracts unless the agreement states that they are not be considered. U.C.C.
Section 2-208.
7. COMMERCIAL IMPRACTICALITY due to a
marked increase in the cost of goods to be supplied or unavailability, either
of which results from a contingency not covered by the contract or custom or
compliance with a government regulation will excuse performance. U.C.C Section
2-615.
8. Modifications of sales contracts are
binding without additional consideration. U.C.C. Section 2-209.
9. PAROL EVIDENCE is usually easier to
get in since courts usually imply that a written sales contract is not a total
integration.
10. Unless the statute of frauds
prevents it, oral modification of written contracts but will recognized even if
expressly prohibited.
11.
Courts will generally not imply quantity if not provided for in the
contract but will recognize outputs and requirements contracts and enforce them
IF: The parties act in good faith and
quantities turn out not to be disproportionate to past quantities.
WRITING REQUIREMENT AS TO SALES
OCNTRACTS:
A. Statute of fraud applies to sales of
goods for $500 or more.
B. As long as a writing exists showing
the existence of a contract and providing quantity, it will satisfy the statute
of frauds if signed by the party to be charged. Signatures are any mark or
symbol made or adopted with the intent to authenticate a writing.
C. A merchant dealing with another
merchant may satisfy the writing requirement by sending a letter of
confirmation which is not repudiated in writing by the recipient within 10
days. U.C.C. Section 2-201 (2).
D. Even correspondence after the breach
can satisfy the statute of frauds.
E. The statute of frauds may be satisfied
by a group of writings or a mere memorandum.
F. Electronic Signatures in Global and
National Commerce Act (E-SIGN) permits the writing requirement to be satisfied
electronically.
EXCEPTION TO THE STATUTE OF FRAUDS:
1. To the extent that goods are
delivered and accepted, the statute of frauds will not serve as a defense.
2. Payment, either partial or total,
will take a total indivisible contract, and the part of a divisible contract
paid for, outside the statute.
3. If special order goods not re-sellable
in the ordinary course of business are contracted for, the statute of frauds
will not offer a defense to a breach by a buyer if there has been a substantial
start on their prediction or acquisition.
4. Non-Compliance with the statute of
frauds is not a valid defense when the defendant has acknowledged the contract
in a legal proceeding or pleading.
LEASES OF GOODS – governed by Article 2A
of the U.C.C.
Article 2A differentiates the following
3 types of leases:
1. Consumer leases – Transfer of possession
or use of goods for a term by a merchant engaged in leasing or selling such
goods to a natural person for non-business use for payments not exceeding a
total of $25,000.
2. Commercial Lease – Transfer of right
of use or possession of goods for a term under conditions which fail to meet
the requirements for a consumer lease or a finance lease.
3. FINANCE LEASE – Upon being informed
of a customer’s needs an intermediary acquires the goods desired and then
transfers the right of use or possession of goods for a term for compensation
to the consumer.
Requirements for valid leases
1. If payment will total $1,000 or more,
the leases agreement must be written & signed by the party to be held
liable.
2. The written lease agreement must:
A. Describe the leased goods.
B. State the terms of the lease.
C. Indicate that a lease contract between the parties exists.
Warranties in leases
1. Lessors in a Consumer lease or
Commercial lease are deemed to make the same warranties they would if the goods
were sold.
2. Lessors in a Finance lease do not
normally make warranties but any warranties made by suppliers of goods to the
intermediary are passed through to the customer despite the lack of privity.
THE UNIFORM LAW FOR INTERNATIONAL SALES
Guidelines for CONTRCATS FOR THE INTRENATIONAL SALE SOF GOODS (CISG)
were developed at a United Nations Convention and have been adopted by many
nations, including those who are members of the EU, GATT and NAFTA. Its
provisions govern contracts between commercial (excludes family and household
purchases) buyers and sellers whose places of business are in different
countries sand both countries have ratified CISG. It is very similar to Article
2 of the U.C.C.
Chapter 24
PASSAGE OF TITLE & RISK OF LOSS
If goods that are the subject of a contract are destroyed or damaged,
will the seller or buyer bear the loss? It depends on whether the risk of loss has
passed to the buyer or remains with the seller. Determined as follows:
1. In a nonshipment contract (implied
that goods will be picked by buyer)
A. If the seller is a MERCHANT, risk of loss passes upon the buyer’s
actual receipt of the goods.
B. If the seller is NOT a MERCHANT, risk of loss passes when goods are
tendered (made available).
2. In shipment contracts (delivery terms
are covered)
A. Origin contracts – generally
distinguished by the term “FOB” followed by the city from which goods are
shipped – Both the title to the goods and risk of loss pass to the buyer when
the goods are delivered to the carrier. The terms C.F. (cost and freight),
C.I.F. (cost insurance and freight) and F.A.S. (Free along side-equivalent of
FOB for boats) also result in passage of title and risk of
loss to buyer
upon tender to the carrier.
B. Destination
Contracts – generally distinguished by the term “FOB” followed by the city to
which the goods are being shipped – Both the title to the goods and risk of loss
do not pass until the goods are tendered to the buyer at their destination.
If goods that are the object of a
contract are destroyed through no fault of either the seller or buyer before
reaching the buyer will the buyer have recourse against the seller for breach?
A.
If the risk of loss has passed to the buyer – he will have no recourse against
the seller and must look to 3rd parties.
B. If the risk of loss has NOT passed to
the buyer:
1. If goods were identified to the contract upon its making, the buyer
has no recourse. Buyer has the option to reject or accept if there is PARTIAL
DESTRUCTION.
2. If goods were NOT identified to the contract at the time of its
making, the seller must tender replacement goods or be liable for breach of
contract.
C. If the goods are nonconforming and
the buyer rejects them, the risk of loss remains with the seller.
SPECIAL SITUATIONS
A. Sale on Approval – Risk of loss
remains with the seller during shipment, inspection & return and will not
pass until the recipient accepts the goods by words, actions or failure to
return goods within a reasonable time.
B.Sale or Return – Risk of loss passes
the same as if goods were sold outright – risk of loss and cost of return fall
upon the buyer whose creditors may attach goods while in his possession.
C. Consignment sale – Treated the same
as “
STATE OF
BASIC RULE: Sellers of goods can give
buyers no better title than they have (UCC Section 2-403). Rightful owners may
recover stolen property even from a B.F.P. except in the case of currency.
Exceptions to the Basic Rule:
A.
When goods are entrusted to a merchant in such goods who makes a wrongful sale
of them, the owner cannot reclaim from a B.F.P.
Entrustments
occurs when goods are
1. Left with a
merchant of such goods although not for purpose of sale.
2. Left for
sale on consignment.
3. Left with
selling merchant after they are purchased.
B.
Owners will be estopped to deny representations that they make that their goods
actually belong to someone else.
C. Transfer of a wrongfully obtained
negotiable document of title, in negotiable form, to a B.F.P.
D. Transfer by a holder of Voidable
title to a B.F.P. Voidable title includes:
1. Title obtained by fraud, 2. Obtained by
a “bad” check, 3. Obtained in a “cash sale” when payment was not actually made.
Chapter 25
PRODUCT LIABILTIY: WARRANTIES & TORTS
Those who are injured by defective products, whether the injury takes
the form of personal injury, harm to property (including the defective product
itself) or loss of economic interests due to loss of use of the product, may
recover on one of the following theories:
A. Negligence; the elements of which
are:
1. Duty.
2. Breach of duty.
3. Proximate cause.
4. Damages.
B. EXPRESS WARRRANTY – Established by
U.C.C. Section 2-313 – Created By:
1. Affirmation of Fact or Promise of Seller.
2. Description of the goods – oral or
written.
3. Sample or Model.
Other characteristics of Express
Warranties include:
1. They can be created by a seller’s conduct.
2. Labels and advertisements can be the source of them.
3. There is no requirement that the word “warranty” be used.
4. They may be made at the time of sale or AFTERWARD.
5. No privity of contract is required to recover for breach.
6. “Salesman’s Puff’s” usually do not create a warranty unless reliance
on them is deemed reasonable.
C.
IMPLIED WARRANTY – Arises automatically by law due to the making of a sale.
Specific types include:
1. Warranty of Title – Transfer is rightful
and title is good with no liens unless noted. Applies to merchant &
non-merchant.
2.
Warranty of Fitness For a Particular Purpose – Buyer relies on seller for
guidance in selecting goods for a particular purpose and this reliance is known
to the seller. Buyer must actually rely and not use his own judgment. Applies
to both merchant and non-merchant.
3. Warranty of Merchantability – That goods
are fit for the ordinary purpose for which goods are used. Arises ONLY when
seller is a Merchant.
WARRANTIES MAY BE DISCLAIMED IF IT IS
NOT UNCONSCIONABLE TO DO SO (U.C.C. Section 2-316) unless state law holds
otherwise. To Exclude:
1. FITNESS OF PURPOSE – Exclusion may be
written or oral; if written must be CONSPICUOUS.
2. MERCHANTABILTIY – Exclusion must be
written, conspicuous and specifically mention the word “merchantability”.
3. Warranties of Fitness of purpose and
Merchantability are waived by the notation “AS IS” or “with all faults” or
other words of total exclusion.
4.
Implied Warranty of title can be waived ONLY by the phrase “There is no
warranty of title”.
5. Course of performance, Course of
dealing or usage of trade can serve as the basis for waiver or modification of
warranties.
6. Limitations on recovery for personal
injury are unconscionable per se according to U.C.C. Section 2-719.
IMPLIED WARRANTIES MAY NOT EVEN ARISE.
Among the situations:
1. If buyer examines the goods or
refuses to when reasonable examination would reveal defects, no implied
warranty will arise as to those defects.
2. There will be no implied warranty of
title when goods are bought under circumstances where one is not expected, such
as at a sheriff’s sale.
NOTE: Although warranties may be created
after a sale, they cannot be disclaimed afterward, such as by invoice or on
instructions.
D. STRICT LAIBILITY IN TORT – When a
merchant introduces goods into the stream of commerce in a defective condition
that is unreasonably dangerous to the user or his property, the merchant will
be liable for the harm caused. It is not a matter of negligence; therefore,
contributory negligence is NOT a defense nor is the seller’s use of all
possible care. The seller’s liability cannot be disclaimed by warranty
disclaimers or otherwise.
The nature of the defects in Strict Liability in Tort includes:
1. Improper manufacture.
2. Improper design.
3. Failure to properly instruct.
4. Failure to warn.
The Seller’s defenses in Strict Liability in Tort:
1. Assumption of Risk.
2. Abnormal Use (unless readily foreseeable).
Chapter 26
OBLIGATIONS & PERFORMANCE
Duties of parties in a sales contract:
A. Good Faith – Honesty in fact
concerning business transactions; if a merchant: observance of reasonable
standards of fair dealing in the trade.
B. Concurrent delivery & payment in
cash sale.
C. Seller must properly “deliver” goods
as described by the terms of the contract. Absent contract terms describing
delivery the U.C.C. implies:
1. Delivery is to be at seller’s place of business or, if none, then at
his home unless the goods are known to be elsewhere, then there.
2. Delivery is to be within a reasonable time if none is specified.
3. If a specified method of delivery becomes unavailable the seller must
choose a reasonable alternative and the buyer MUST accept it.
4. The buyer may insist on delivery of the
entire amount in a single lot sale but must pay for partial deliveries that are
accepted.
D. Buyer must accept proper delivery of
goods
1. Buyer has the right to examine goods for conformity except for COD
sales and goods claimed through a negotiable bill of lading.
2. Non conforming goods may be rejected
even if they substantially comply or the buyer may accept them and seek damages
for the breach. Only commercially reasonable units may be accepted.
3. If a buyer elects to reject goods, he
must do so within a reasonable time from tender and MUST communicate the
rejection within a reasonable time.
4. Once a buyer rejects nonconforming goods, he must comply with the
Seller’s U.C.C. Section 2-508 Right to Cure which provides that:
a. If time to perform has not
yet passed, seller is entitled to remaining time by merely giving notice of
intent to cure.
b. If time for performance has passed
AND Seller acted reasonably in making tender (expected acceptance either with
or without an allowance) he may notify buyer of intent to cure and will be
given additional reasonable time in which to perform.
5. Acceptance of goods is accomplished by:
a. Affirmative statement that goods conform or that the buyer will
accept them despite nonconformity.
b. Failure to reject within a reasonable time.
c. Actions inconsistent with rejection.
6. The consequences of acceptance of goods are:
a. They cannot be rejected.
b. The buyer must pay for the goods as agreed – assumed to be payment on
delivery in cash if not otherwise specified – checks may be rejected unless
there is an agreement that they are to be accepted or there is a prior course
of dealing or custom and usage of trade that is relevant, but, if taken, duty
to pay is suspended until the check clears.
7. After acceptance, buyer may be able to revoke acceptance
a. If the goods have a defect that substantially impairs their value
AND Either i. The defect was a
latent defect.
ii. The seller had assured conformity
upon delivery.
iii. The seller
had promised to cure a known defect.
b. The buyer must give notice within a reasonable time from when he
discovered or should have discovered the defect, not counting the time waiting
for a cure.
c. After revocation of acceptance, the buyer must not act inconsistently
with revocation.
RIGHT TO DEMAND ADEQUATE ASSURANCE
If either party to a sales contract has proper reason to believe that
the other party may not be able to perform, he may make written demand for
adequate assurance of performance which must be given within 30 days, or less
when this is unreasonable, and it must be “adequate under the circumstances of
the particular case” which is determined largely by the reputation of the
suspected party.
Chapter 27
REMEDIES
All actions for breach of contract must be brought within 4 years of the
cause of action arising, generally deemed to be when tender of delivery is made
even though the defect was not discovered yet unless performance is to run into
the future in which case 4 years run from then.
SELLER’S REMEDIES
A. In the event of an anticipatory
breach:
1. If goods are finished, seller should identify them to the contract in
order to establish damages upon re-sale.
2. If not finished, if seller acts reasonably, he may either suspend
production & seek damages or complete production and attempt a re-sale and
seek damages.
3. If goods have been shipped and buyer repudiates or becomes insolvent:
a. In the event of insolvency the seller
i. May halt delivery of any amount
of goods
ii. May reclaim goods already
delivered if done within 10 days of delivery. The 10 day limit is waived if the
buyer has made a false written statement of solvency within 3 months of the
sale. Normally a seller cannot repossess goods unless agreed.
b. In the event of repudiation, the seller has a right to halt only full
loads, but such right is lost if:
i. The goods have already been
delivered.
ii. The carrier is re-shipping
after acknowledging the buyer’s right.
iii. A bailee has acknowledged the
buyer’s right.
iv. The buyer has a duly negotiated
negotiable document of title.
B. If a buyer breaches a contract so as to substantially impair its value
to the seller, the seller may cancel it discharging both parties, but if
cancellation is unjustified, the seller will be in breach. Solution – DEMAND
ADEQUATE ASSSURANCE.
C. The Seller’s Basic Measure of Damages – Difference between contract
price and Fair Market Value at the time and place of tender plus incidental damages (expenses). BUT, if
seller has access to additional supply (typical of a dealer) he may recover the
gross profit he lost.
D. A Seller may recover Full Purchase Price if:
1. The goods have been accepted.
2. The goods were destroyed or damaged after risk of loss passed.
3. The goods cannot be re–sold elsewhere.
BUYER’S REMEDIES – Assuming the buyer
gave notice of defects to a seller within a reasonable time from when he
discovered or should have discovered the breach.
A. REJECTION OF NON–CONFORMING GOODS
1. Must involve commercially reasonable units if partial.
2. Buyer must not act inconsistently with rejection.
3. Buyer has a duty to hold and safeguard rejected goods.
B. REVOCATION OF ACCEPTANCE (detailed in
a prior chapter).
C. If Seller becomes insolvent and
possesses goods already paid for by buyer; the buyer may claim them within 10
days of 1st payment.
D. BASIC MEASURE OF BUYER’S DAMAGES is
the difference in contract price and Fair Market Value at the time of the
breach (if reasonable “cover” is effected, it will be deemed to be FMV) plus
incidental (expenses) and consequential (reasonably foreseeable as flowing from
the breach – i.e. lost profit) damages.
E. CANCELLATION is allowed by a buyer if
the seller substantially breaches but it must be timely, the buyer must not act
inconsistently with cancellation and must allow the seller the right to cure.
F. SPECIFIC PERFORMANCE is available for
unique goods.
G. If improper goods are delivered that
buyer has paid for, he may reject but retain the goods as security for his
payment.
LIMITATIONS ON DAMGES, such as
liquidated damages provisions, will be observed by courts unless they are
unconscionable. ALL PARTIES TO A CONTRACT MUST MITIGATE DAMAGES AND FAILURE TO
DO SO WILL LIMIT RECOVERY.
BUSINESS LAW II
CLASS NOTES
Chapter 28
NEGOTIABLE INSTRUMENTS (aka Commercial Paper)
TYPES OF COMMERCIAL PAPER:
A. Promissory Note – Written signed
unconditional promise of the MAKER to pay a sum certain in money, either to
order or Bearer, either on demand or at some future time. Creator is known as
MAKER and is the Primarily Liable Party (Party first presented to for payment).
B. DRAFTS – Written, signed,
unconditional order by one party (Drawee) to pay on demand or at a certain
future time a sum certain in money to a third party’s (PAYEE) order or to
bearer. Creator is always known as DRAWER. Primarily liable party is the DRAWEE
who is NOT obligated to the Payee to pay the instrument BUT if the Drawee
Agrees to pay the instrument at some future time, becomes known as ACCEPTOR.
C. CHECKS – A type of Draft 1. Always
payable on Demand, 2. Drawee must be a BANK. Post – Dated Checks under U.C.C. Section
3-114 are to be regarded as not being drawn until the date appearing on them. Under
the previous versions of the U.C.C., banks were liable for cashing such checks
before the date arrived, but the 1990 version of the U.C.C. frees the bank from
liability unless it was given notice of the postdated check.
VARIATIONS of CHECKS:
a. Cashier Check – Drawn by bank on
itself.
b. Bank Draft – Check drawn by one bank
on another bank.
OTHER PARTIES TO COMMERCIAL PAPER
1. INDORSER – One who transfers
commercial paper to another by signing his name on the back.
2. INDORSEE – One who receives
commercial paper by Special INDORSEMENT wherein they are named as recipient.
3. BEARER – One in physical possession
of commercial paper that is bearer paper.
4. HOLDER – One in physical possession
of order paper payable to his order or of bearer paper.
5. HOLDER for VALUE – Holder of
commercial paper who either gave consideration for it or took it in payment of
an antecedent debt.
6. ACCOMODATION PARTY – One who agrees
to be liable on commercial paper in order to add financial security for the
benefit of the creditor and thereby entice him to extend credit. Accommodation
Parties may recover payments they must make from the party accommodated but NOT
Vice Versa.
7. Guarantor – One who agrees to be
liable on commercial paper either without a request made of the debtor (Payment
guaranteed) or only after all attempts have been made to collect from the
debtor (Collection Guaranteed).
NEGOTIABLITY is the aspect of commercial
paper that raises it above a mere contract.
Elements / Definition of negotiability:
A written instrument signed by the maker or the drawer unconditionally
promising or ordering payment of a sum certain in money either on demand or at
a definite time to someone’s order or the bearer. (Note: ’90 version of U.C.C.
provides checks are negotiable even if NOT payable to order but payable to a
Named Payee i.e. “Pay to Tom”).
Analysis of Elements of Negotiability:
1. Writing – Typed, printed or
handwritten or mixed (pencil is legal but ill advised).
2. Signed – Mark made with intent to
authenticate (U.C.C. Section 1-201(39)) but witness may be required if
illegible. Agent may sign for principal but failure note agency may result in
personal liability. The 1990 U.C.C. requires no notation if check is drawn on
Principal’s account (Those other than principal who sign are assumed to be
agents).
3. Unconditional – Payment is not
predicated on occurrence of some event or performance of a duty or contract.
4. Promise or ORDER to pay – OBLIGATION
to pay or, in the case of a draft, COMMAND to pay rather than mere recognition
of a debt such as an I.O.U.
5. Payment in Money – Legal tender of
the place of exchange.
6. Sum Certain – Definite on its face as
to amount to be paid. Certainty is unaffected by interest (if rate is
definite), payment by installments, foreign exchange charges, collection costs,
additions in amount due to late or early payment.
7. ON DEMAND or at a DEFINITE TIME – If
payable at sight, presentation or “on demand”, the on demand requirement is
met. No time for payment specified is also “on demand”. Definite time
requirement is met if payable on or before a set date; a fixed period after a
set date or sight; or at a definite time but with provisions for acceleration,
extensions at the option of the holder, acceptor or maker, or automatic
extensions due to an event.
8. ORDER or BEARER – Must be bearer,
named person OR bearer, named person or his order or named person’s order. If
payable strictly to a named person, it is NON – NEGOTIABLE unless it is a
check.
Chapter 29
TRANFER OF NEGOTIABLE INSTRUMENTS AND
WARRANTIES
Negotiation
of Commercial paper is accomplished on the basis of its nature:
1. Order paper requires endorsement and
delivery by the named payee(s) or endorsee(s) or such party’s agent.
2. Bearer paper is negotiated by mere
change of possession. Bearer paper includes that payable to bearer, payable to
“cash”, unspecified payee (line for payee’s name is left blank) and order paper
with a blank or qualified endorsement.
Where there are multiple payees must ALL
indorse the instrument? If clearly payable jointly, all must indorse it. If it is unclear as to jointly or
alternatively made, the ’90 U.C.C treats it as alternatively and any of the
payees may negotiate it with just his signature, but prior U.C.C versions assumed it to be jointly made.
TYPES OF INDORSEMENTS AND EFFECT OF EACH
A. BLANK INDORSEMENT – Indorser signs
his name without ANY OTHER WORDS OF LEGAL SIGNIFICANCE. It passes ownerships
when it is the required indorsement, creates warranties and creates secondary
liability (if maker of note or drawee of a draft refuses to pay the instrument
the indorser is liable).
B. SPECIAL INDORSEMENT – Indorsee is
specified (i.e. – Pay to the order of…) It transfers ownership and creates
warranties and secondary liability.
C. Restrictive Indorsement – Limits use
of the instrument i.e. “for deposit only”. The restriction is binding on the
public and depositary bank. It transfers ownership AND creates warranties and
secondary liability.
D. QUALIFIED INDORSEMENT – Disclaims
indorser’s secondary liability – “without Recourse” but still transfers
ownership and creates warranties.
The type of indorsement used can change
the character from order paper to bearer paper (if a blank or qualified
indorsement is used) or from bearer paper to order paper (Special Indorsement).
Misspelled payee or indorsee names do
NOT affect negotiability. Intended persons may negotiate the instrument by
indorsing their correctly spelled names or the misspelled versions.
EFFECT OF FORGED OR UNAUTHORIZED INDORSEMENTS:
Same as NO INDORSEMENT AT ALL and the payor became liable to the
rightful owner unless the improper indorsement is RATIFIED or the rightful
owner’s negligence is so great as to bar recovery.
FURTHER EXCEPTIONS – THE FICTITIOUS
PAYEE RULES or Imposter RULES. Those appear to be forgeries but in choosing
between “innocent” parties to suffer the loss, the courts favor the payor and
treat the paper as effectively negotiated when ANY person indorses the
fictitious name. The instances in which the fictitious payee rules apply are:
A. Arises when an Imposter induces a
maker or drawer to write out an instrument to a named payee (real or
fictitious), then forges the indorsement and negotiates the instrument.
B. Instances in which a Maker or Drawer does
NOT truly intend to have named payee have an interest in the instrument but
intends to indorse it and keep the money but someone else steals the
instrument, forges the indorsement and gets the money.
C. Instances in which an agent or
employee persuades a maker or drawer to write an instrument to some payee (real
or fictitious) who the party does NOT intend to obtain an interest in the
instrument but who intends to forge the indorsement and keep the money.
EXCEPTION to this rule – If instrument is to an actual payee/creditor for a
correct amount owed, if the agent or employee forges the indorsement, the BANK will be liable.
WARRANTIES OF INDORSERS
A. Transferor has right to enforce the
instrument – this ’90 U.C.C. provision encompassed the Pre – ’90 provisions
that transferor has good title AND that act of transfer is rightful.
B. All signatures are genuine &
authorized.
C. The instrument has NOT BEEN ALTERED.
D. Instrument is NOT subject to any
defense or claim to it by any party against the transferor.
E. Transferor is without knowledge of
any insolvency proceedings against MAKER, DRAWER or ACCEPTOR, if accepted.
NOTE: These warranties apply to
Qualified as well as the non-qualified indorsers.
To whom do the warranties run? To the
transferee and subsequent transferees.
MAY WARRANTIES BE DISCLIAMED? Under the
Pre ’90 code they could but the ’90 code does NOT permit warranty disclaimers
on checks. Disclaimer is accomplished by adding “without warranties” to the
indorsement.
What warranties are created by one who
merely delivers bearer paper to another without indorsing it?
The same ones that indorsers create but
they run only to the immediate transferee.
NOTE: Warranties DO NOT include any
representation that there are sufficient funds available to pay the instrument
in the hands of any party. This is a matter of secondary liability.
Transfer of order paper without
endorsement gives the transferee the rights of assignee. If the transferee
gives value for the paper he has a legal right to require the necessary
indorsement but would be a holder ONLY From the time of indorsement.
Finders of lost instruments in order
form do NOT become holders since a necessary indorsement is missing but finders
of lost indorsement in bearer form DO become holders and are entitled to
enforce payment.
Chapter 30
LAIBILITIES OF THE PARTIES
When a holder of commercial paper seeks payment from a maker, drawer or
indorser, the party from whom payment is sought may have some excuse, usually
referred to as a “defense”, for not paying the instrument. Whether these
defenses are effective against the holder depends on whether or not the holder
is a FAVORED HOLDER.
What is a favored holder? A
HOLDER IN DUE COURSE (HDC) or one who takes through a holder in due
course.
What is a holder in due course? A holder
who takes the instrument:
A. For Value; AND
B. IN GOOD FAITH; AND
C. WITHOUT NOTICE THAT IT IS OVERDUE,
HAS BEEN DISHONORED OR THERE IS ANY DEFENSE AGAINST IT OR CLAIM TO IT by ANY
PERSON.
Analysis of the elements:
A. Holder – One in possession of either
bearer paper or paper payable to his order.
B. FOR VALUE – 1. Performance of an act
exchanged for the instrument (Promised but not performed acts are NOT
sufficient to constitute value), 2. Receipt as payment for prior or current
debt.
C. GOOD FAITH – Acting honestly in
acquiring the paper. ‘90 code requires observing reasonable standards of FAIR
DEALING. Most common cases of bad faith arise when the instrument is obtained
at a DEEP DISCOUNT.
D. WITHOUT NOTICE… - Must not have
knowledge that would put a reasonable man on inquiry or the party will be
regarded as having the knowledge that such an inquiry would have revealed.
Notice is found when the instrument is irregular (visible signs of forgery or
alteration or items calling attention to the instrument), the instrument is
acquired from shady dealers or a fiduciary negotiates an instrument in his own
behalf to the holder.
The test for determining whether a
holder is a HDC is applied AT THE TIME VALUE IS GIVEN BY A HOLDER. KNOWLEDGE
OBTAINED AFTER VALUE IS GIVEN HAS NO EFFECT ON HDC STATUS.
A HOLDER THROUGH A HOLDER IN DUE COURSE
GETS THE SAME PROTECTION AS A HDC UNLESS that party was involved in FRAUD or
ILLEGALITY AFFECTING THE PAPER.
What is the significance of being a
FAVORED HOLDER?
The FAVORED HOLDERS are NOT subject to Personal defenses (limited
defenses) but only to REAL (universal) Defenses, but a mere holder is subject
to both.
What are the personal defenses?
1. Missing element of a CONTRACT or
other contract defenses.
2. Incapacity OTHER THAN MINORITY.
3. FRAUD IN THE INDUCEMENT – Party knows
he is signing Commercial paper but is persuaded to do so by fraud.
4. Prior Payment or Cancellation with no
NOTATION ON THE INSTRUMENT.
5. FACT that instrument in negotiable
form was stolen.
6. FAILURE TO PERFORM A CONDITION or USE
of the instrument NOT specified on its face.
7. Duress in the form of threats
rendering instrument voidable.
8. Unauthorized Completion.
9. Fact that instrument in negotiable
form was found by a prior holder rather than delivered to him.
What are the REAL DEFENSES?
1. FRAUD IN THE FACTUM (as to essential
nature of instrument).
2. FORGERY unless ratified or
facilitated by negligence.
3. DURESS DEPRIVING CONTROL that is
severe enough to render it VOID.
5. MINORITY.
5. ILLEGALITY – instrument must be
invalid such as used in connection with gambling.
6. ALTERATION except where maker or
drawer was negligent BUT it is still enforceable to degree originally written.
To avoid abuse of consumers, courts formerly looked for close working
relationships between those negotiating instruments and those taking them and,
in such cases, imputed knowledge to the holders and barred their becoming a
H.D.C. IN 1976 the FTC ABOLISHED HDC PROTECTION for ANY PURCHASER OF COMMERCIAL
PAPER in CONSUMER INSTALLMENT CREDIT TRANSACTIONS and any purchasers of
such paper take it subject to any defenses available to the debtor
against his seller.
CONTRAST AND COMPARISON OF DRAFTS AND
NOTES AND METHODS OF DISCHARGE OF COMMERCIAL PAPER
Who are the primarily liable parties on negotiable instruments?
Note – The maker
Draft – Drawee or, if accepted, the Acceptor
Who are the secondarily liable parties?
Drawer of a draft and all non-qualified indorsers of drafts and notes.
Must the holder of an instrument demand payment in order to create a
duty of the primarily liable party to pay the instrument? No, suit may even be
brought without a prior demand for payment. Suit is demand.
Must a holder make demand of the primarily liable party in order to hold
the secondarily liable party liable?
Yes, the party must make presentment,
which is any clear demand for payment made by or on behalf of the holder to a
primarily liable party or his agent. This is to be made at the time and place
specified but if none is specified then at any reasonable time, except that if
the primarily liable party is a bank presentment must be made during banking
hours, and presentment must be made at the primarily liable party’s place of
business or, if there is none, then at his house.
At what time is presentment to be made?
When the instrument is due, if due on a set of date, within a reasonable time
of the date of its issue, if payable on sight, and within a reasonable time of
liability as to secondarily liable parties.
What affect does failure to make timely presentment have on a holder’s
right to payment? Secondarily liable parties are discharged (unless presentment
is excused) but MAKERS and DRAWERS are STILL LIABLE unless funds are in
specified 3rd party’s hands (drawee bank or agent in a domiciled
note) for a reasonable time after which the 3rd party becomes
insolvent still holding the funds thus causing them to be lost due to the
holder’s delay in, or lack of, presentment.
When is Presentment Excused?
A. When Waived (usual on notes but rare,
if ever, on drafts), B. When it can’t be done because the party to whom notice
was to be given could not be found despite due diligence to locate him, C. If
the party has died, D. If there was no reason for secondarily liable party to
expect the instrument would be paid (i.e. insolvency).
How long does a party have to honor an
instrument after proper present for it not to be considered dishonored?
1. As to Notes – Until close of business
the on day of presentment.
2. As to Drafts – Until close of
business on NEXT business day following day of presentment – can be extended by
holder for 1 more business day if done in good faith.
Note: Drafts may be presented for
Payment OR Acceptance and the law applies the same in either case.
If an instrument is turned down for
PAYMENT OR ACCEPTANCE (a mark such as a signature or words “certified” or
“accepted” on the face of the instrument constitutes acceptance but oral
assurance does not), proper NOTICE must be given to ALL SECONDARILY LAIBLE
PARTIES, unless excused, or they will be released.
WHAT IS REQUIRED IN ORDER TO MEET THE NOTICE REQUIREMENT?
Any REASONABLE METHOD is sufficient,
even oral, as long as it is given by the 30th day following dishonor
or receipt of notice thereof for NON- BANK HOLDERS. Banks have until
WHEN IS LACK OF NOTICE EXCUSED?
1. When Waived 2. When it can’t be given
despite due diligence 3. When the secondarily liable party had no reason to
believe that it would be paid.
METHODS OF DISCHARGING COMMERCIAL PAPER:
1. Payment to holder, agent or
authorized 3rd party. Payment by a secondarily liable party puts him
in the place of the party he paid.
2. CANCELLATION – If HOLDER cancels a
party’s liability by notation on the instrument, destruction, mutilation or
crossing out a party’s signature. Must be intentional but requires NO
consideration. The parties who had recourse against released party are ALSO
RELEASED.
3. RENUNCIATION – Surrender of the
instrument or a signed written renunciation on a separate sheet.
IMPAIRMENT OF RIGHT OF RECOURSE OR
COLLATERAL – Discharging an obligated party, extending time to pay, or causing
collateral to be lessened in value in any way.
5. Alteration – Releases those whose
duties have changed.
6. REACQUISTION BY A PRIOR PARTY –
Releases those who indorsed in between.
7. DELAY IN PRESENTMENT or LACK OF
NOTICE WHEN REQUIRED.
8. ALL PARTIES ARE DISCHARGED IF:
A. Primarily liable party on a note or a Drawer of a draft is
discharged.
B. Primarily liable party on a note or a Drawer of a draft reacquires
the paper.
NOTE – Discharge is NOT A DEFENSE
against a HDC who takes without knowledge of it. Discharge should be noted on
the paper.
Chapter 31
CHECK AND FUND TRANSFERS
Checks are characterized by the fact that the DRAWEE IS ALWAYS A BANK and
they are PAYABLE ON DEMAND.
What are the duties of the Drawer of a check?
A. If dishonored and proper notice is
given, the drawer must pay the check. Even if proper presentment is not made or
proper notice not given, the drawer still must pay the check unless deprived of
funds due to the drawee’s insolvency after passage of a reasonable time
following issue of the check.
B. If a bank honors its customer’s
overdrawn check this is regarded as a loan to the extent of the overdraw and
the drawer must repay the money.
What are the duties of the DRAWEE BANK?
A. Maintain secrecy as to the customer’s
account.
B. Payment of all checks on demand to
the extent of deposits – Exceptions: 1. If a check is more than 6 months old,
the drawee has discretion as to whether to pay or not. 2. Bank should not pay
checks beyond 10 days after learning of drawer’s death or upon notice to stop
honoring them by someone claiming an interest in the account.
What is a bank’s liability to a holder
upon wrongful dishonor of a check? The bank has no liability to the holder
unless the check had been ACCEPTED but would be liable to the drawer IF the
drawer could prove any damages – an unlikely occurrence.
STOP PAYMENTS – A drawer can order the
drawee bank to stop payment on a check UNLESS IT has been ACCEPTED (i.e.
certified). Oral stop payment orders are valid 14 days and written orders are
valid 6 months.
What is the bank’s liability for honoring a check on which payment has
been stopped? The bank is given a reasonable time to put the order in effect
(typically 24 hrs) after which time if they honor the check despite a valid
stop payment they will be liable to the drawer FOR PAYMENTS MADE WHICH COULD
HAVE OTHERWISE BEEN AVIODED BY THE DRAWER.
NOTE: BANK CUSTOMERS HAVE NO RIGHT TO
STOP PAYMENT ON CASHIERS CHECKS THEY HAVE CAUSED TO BE ISSUED.
To hold a secondarily liable party liable a check must be presented for
payment within a reasonable time or all indorsers and the drawer to the extent
of loss due to drawee’s insolvency after passage of a reasonable time will be
discharged.
WHAT CONSTITUTES A REASONABLE TIME?
The U.C.C. provides 30 days as to drawers
and indorsers.
If a check is dishonored the holder must give notice to the secondarily
liable parties unless Excused.
Notice is Excused: 1. If Waived, 2.
Party to whom notice is to be given cannot be located to give notice despite
due diligence, 3. Party not notified had no reason to believe it would be paid.
If a post-dated check is prematurely paid, is the bank liable for the
losses suffered by its customer as a result? Under the ’90 U.C.C. the bank is NOT liable unless the customer
had given the bank a post – dated check notice.
WHEN IS PAYMENT OF A CHECK BY A BANK
DEEMED IMPROPER?
A. When the drawer’s signature is forged
– unless the drawer’s negligence is so substantial as to have caused the
forgery.
B. When a required indorsement has been
forged or if it is missing and a rightful owner is deprived of funds.
C. Payment of an altered check – unless
drawer’s negligence is so substantial as to has caused the alteration, but,
drawer is still liable for original amount.
Customers of the bank have a duty to examine bank statements for
possible forgeries and alterations. Under the ’90 U.C.C. customers have one
year from the time they receive notice containing the improper item or entry to
give notice to the bank or they are barred from seeking recovery. If the same
party is responsible for a series of wrongful acts (i.e. forgeries) the
customer must alert the bank within 30 days of the first occurrence to look out
for that party or customer is liable for subsequent items.
Electronic Funds Transfers are governed
by the Electronic Funds Transfer Act which applies to:
A. ATM transactions.
B. Pay – by – telephone transactions.
C. Direct deposits and withdrawals.
D. FUND Transfers at PONT OF SALE by
terminal.
If there is an unauthorized use of an electronic funds transfer card, to
what extent is the customer liable for the charges?
A. If the customer notifies the issuer
of an EFT card of its loss or theft within 2 days of learning of its loss or
theft, Max. liability is $50.
B. Failure to notify the issuer within 2
days of discovery of loss or theft raises MAXIMUM liability to $500.
C. If financial institution can show
that loss was due to customer’s failure to report unauthorized transfer within
60 days of transmittal of a periodic statement which showed unauthorized
transfer, consumer must bear the entire loss.
Chapter 32
THE DEBTOR – CREDITOR RELATIONSHIP
CREDITORS WHO ARE UNCERTAIN ABOUT WHETHER DEBTORS WILL REPAY THEIR
OBLIGATIONS HAVE A NUMBER OF WAYS TO PROTECT THEMSELVES.
Suretyship involves an arrangement whereby a third party (surety) to a
contract to grant credit promises to pay the debt of the debtor (obligor). The
surety is primarily liable and his obligation to pay the debt is NOT contingent
on the obligor’s default. A creditor may demand payment of a surety simply
because it is more convenient than seeking out the obligor or because he feels
that such a demand of the obligor would be futile. Since sureties are primarily
liable on debts, the suretyship contract does NOT usually have to be written to
be enforceable. If the surety agrees to be liable at the inception of the loan,
granting of the loan is consideration for the surety’s obligation BUT if a
surety agrees to be liable on an existing loan, some consideration must be
given to bind the surety by contract.
Guarantors are generally only secondarily liable. Therefore, guarantors
are not liable on a debt on which they are guarantors until the creditor has
been refused payment by the obligor and, if the guarantor specifies “collection
guaranteed” rather than “payment guaranteed”, the creditor must exhaust all
collection remedies before the guarantor is liable. AN ABSOLUTE GUARANTEE
results in the guarantor having the same liability as a surety. Guarantyships
must be in writing under the statute of frauds since they involve a promise to
answer for the debt of another.
Rights of Sureties
1. Exoneration – Surety is released if
he warns creditor of need to take action against the debtor but creditor fails
to do so when he could have so acted.
2. Subrogation – If surety must pay
creditor he then acquires creditors’ rights to recover from debts.
3. Indemnity – Surety is entitled to
reimbursement from debtor for sums paid by surety in debtor’s behalf.
4. Contribution – If one surety among
several pays more than his pro–rata share of the debt he has guaranteed, he is
entitled to have the other sureties reimburse him for the overage paid.
Defenses of the Surety: These arise as
arguments made by the surety against having to ever pay the debt even when the
debtor defaults.
1. Defenses to the surety contract –
included are common contract defenses such as lack of capacity or fraud, as
where the creditor knew of facts unknown to the surety (such as a prior
default) which the surety would otherwise be unable to discover.
2. Suretyship Defenses –
a. the obligation of the debtor which the surety guarantees is invalid –
i.e. contract defense of the debtor.
b. Discharge of the debtor – by payment or otherwise.
c. Modification of debtor’s obligation without surety’s consent.
LETTERS OF CREDIT are signed writings
which bind the party signing them (issuer) to pay or accept a draft when the
conditions therein are met. The most common condition is production of a
document of title such as negotiable bill of lading or warehouse receipt. The
purpose of the letter of credit is to eliminate the risk that an issuer of a
draft may not have sufficient funds on deposit to cover it. The issuer of the
letter of credit must pay it when presented and the conditions to the payment
are met and, if the issuer of the draft has insufficient funds on deposit, the
issuer of the letter or credit must then seek recovery from the issuer of the
draft rather than refusing payment.
Chapter 34
SECURED TARNSACTIONS
If a seller sells goods to a buyer on credit and the buyer fails to pay
as promised, will the seller be entitled to repossess the goods?
Not unless he has gotten the buyer/debtor to agree to let him do so.
This is done by means of a security agreement.
SECURITY AGREEMENTS are agreements
between debtors and creditors in which the debtor grants to the creditor the
right to seize certain property known as COLLATERAL in the event of default in
the performance of his duties on the part of the debtor.
ELEMENTS of a SECURITY AGREEMENT:
a. Identification of both the debtor
& creditor.
b. Description of the collateral
sufficient to identify it.
c. Grant of a security interest in the
collateral by the debtor to the creditor, and authorization of the filing of
notice of it.
d. Description of the debtor’s
obligation – payment is generally foremost but preservation of collateral and
the like are often included, as well.
e. Must be written if the debtor is to
have possession of the collateral but an oral security agreement is acceptable
IF the creditor retains possession of the goods.
f. The agreement must be AUTHENTICATED –
a signature is the most common method but is not the only method – electronic inscription
is also acceptable.
In the absence of a security agreement, if a debtor defaults, the
creditor must sue the debtor, obtain a judgment, and obtain a Writ of
Attachment in order to recover his property. And, even then, he may be unable
to do so if the debtor has placed the property on his exempt list.
Security agreements give the creditor a binding security interest in the
described collateral which enables the creditor to seize the collateral without
a court order if it can be peaceably obtained, otherwise a court will directly
order its surrender without the creditor having to obtain a judgment and the
debtor cannot exempt the property from attachment.
A security agreement gives the creditor a SECURITY INTEREST in the
described collateral, which means that the described property will be regarded
as collateral for the described loan and that the creditor has the debtor’s
consent to seize it upon default, but the creditor’s rights to seize the
collateral will NOT be complete until his security interest ATTACHES to the
collateral.
The elements of attachments are:
a. A valid security agreement.
b. Value given by the creditor to the
debtor (money or goods).
c. Rights in the collateral obtained by
the debtor.
If a creditor has taken a security interest in collateral which has
attached, will this give him a superior claim in the event of a conflict with a
trustee in bankruptcy, judgment creditor, subsequent buyer or other third
party? Not unless he has PERFECTED his security interest.
Perfection of a creditor’s security interest is achieved depending on
the nature of the property serving as collateral.
There are 6 broad categories of
Collateral:
a. Consumer goods
b. Equipment
c. Inventory
d. General intangibles – Patents.
Copyrights, trademarks, account receivable, documents, instruments, deposit
accounts & other claims for payment.
e. Farm Products – crops & livestock
as well as items used or produced on the farm.
f. Fixtures – Items of personalty that
have been attached to realty.
The 2000 version of the U.C.C. favors a system of perfection whereby
creditors will file notice that they have a security interest in property. The
notice, known as a FINANCING STATEMENT printed on a form known as a U.C.C. FORM
I, is to be filed in a place where any prospective lenders can search and
discover its existence. The U.C.C. favors central filing, such as in the
Secretary of State’s office, but also suggests that local filing for fixtures
and farm products would be a reasonable alternative. Therefore, state laws as
to perfection are likely to vary a bit.
COLLATERAL IS TO BE CLASSIFIED ON THE BASIS OF HOW THE PARTY PLEDGING IT
IS USING OR INTENDS OT USE THE COLATERAL.
As an alternative to filing a financing statement, POSSESSION BY THE
CREDIOTR is a method for collateral capable of being possessed. However,
possession is often an impractical way to achieve perfection.
There are still other methods of perfection virtually all of which are
illustrated in the perfection of Consumer goods, as follows:
a. Possession (including constructive
possession)
b. Filing of a financing statement –
These describe the collateral, list the debtor’s and creditor’s names but
require no signature under the 2000 version of the U.C.C. since the security
agreement authorizes filing of notice of the security interest.
c. Special provisions contained in state
statutes – such as the provision for perfection of a security interest in motor
vehicles by the notation of a lien in favor of the creditor on the vehicle’s
title.
d. Automatic if the creditor holds a
PURCHASE MONEY SECRITY INTEREST (PMSI) in the collateral which occurs when the
debtor executes a security agreement in favor of the creditor AND the credit
extended is what enables the debtor to acquire the collateral. Use of the
automatic perfection, which applies to PMSI’s in CONSUMER GOODS ONLY, has the
disadvantage that if the debtor sells the collateral before it is paid for and
the buyer is unaware of the indebtedness, he takes it free of the security
interest.
Automatic perfection occurs for 4 months
on all types of collateral that is previously perfected by filing and is then
taken to another state.
DURATION OF PERFECTION
Perfection by means of filing a financing statement is effective for
FIVE YEARS. Before the end of the five year period, during the last 6 months, a
continuation statement (a renewal of the financing statement) may be filed to
extend perfection for another five year period. As long as the continuation
statement is filed within the 6 months period prior to expiration of the
statement, perfection is regarded as continuous.
Perfection by possession is lost when goods are returned voluntarily
unless there are contrary provisions and always if there is NO written security
agreement.
If consumer goods are moved to another state by the consumer, the
secured party who has perfected by filing a financing statement has a 4 month
grace period in which to perfect in the new state. If perfection is
accomplished within that time it is deemed continuous but, if not, perfection
ceases with removal of the collateral. Perfection by title Notation on motor
vehicles is UNAFFECTED by removal to another state unless the “new” state
issues a new certificate of title with the lien notation left off.
GOODS Purchased in the ordinary course of business from a merchant are
obtained free of any security interests perfected in the seller’s inventory
even if the buyer had actual knowledge of the perfection. U.C.C. Section 9-307.
Benefits to Creditor of Perfection:
Perfection protects creditor against
subsequent parties who may claim the collateral, including judgment creditors
and trustees in bankruptcy, as well as both secured and unsecured lenders and
creditors.
Resolution of Conflicting Claims by Creditors
A. Between perfected and unperfected
secured parties or unsecured creditor OR trustee in bankruptcy – Perfected
secured Party prevails against any of the three.
B. Between two perfected secured parties
– First to perfect prevails if perfection is still valid.
C. Between two unperfected secured
parties – First to Attach prevails.
SPECIAL PROVISIONS FOR COLLATERAL
CONSISTING OF INVENTORY.
Since creditors who take security interests in a debtor’s inventory
cannot follow the collateral into the hands of a B.F.P. in the ordinary course
of business and perfection of each item of inventory As it newly arrives would
be time–consuming and expensive, the U.C.C. provides for what is known as a “FLOATING
LIEN”. If on the U.C.C. Form I the creditor describes the collateral in a
general way, such as “mens clothing” or “used automobiles”, then as items of
inventory that fit that description are sold and replacement items of that type
are acquired by the debtor, the sold items leave the lien and the perfected lien
“floats” over to cover the newly acquired inventory.
Potential Problem for debtor who has granted a floating lien to a
creditor on inventory items:
If the debtor wishes to acquire inventory from another supplier other
than the one with the perfected security interest (or money from a lender other
than one with a perfected security interest) the new supplier (or lender) would
NOT want to extend credit if the newly acquired collateral would be caught by
the already existent floating lien.
Solution: U.C.C. Section 9-312(3)
provides that a new supplier or lender can get priority of perfection in NEW
inventory IF
1. The creditor takes a PURCHASE MONEY
SECURITY INTEREST in the new collateral. This insures that previously perfected
secured parties do not have to “share” their collateral since PMSI’s, by
definition, involve credit which makes acquisition of the collateral in
question possible.
2. New creditor perfects its security
interest BEFORE the debtor acquires an interest in the new collateral.
3. Other Parties using inventory as
collateral are notified of the new credit BEFORE debtor acquires an interest in
it.
Floating Liens may be used for collateral other than inventory – for
example “office equipment”. Thus, if new collateral of that class is acquired
it is automatically covered by the previously perfected lien. When the floating
lien covers collateral other than inventory and a NEW creditor wishes to give
the debtor credit to acquire additional collateral of that type, the NEW
creditor can get priority in the NEW collateral IF:
1. The creditor takes a PMSI in the new
collateral.
2. Perfection of the transaction is
accomplished within 10 days of the debtor acquiring an interest in the
collateral (But, there is no requirement of giving any actual notice to other
perfected creditors).
If a debtor pays off his debt secured by
collateral when the lien is perfected by a recorded financing statement, the
creditor is obligated to release the lien by means of a Termination Statement.
The termination statement can be presented to the recording officer whereupon
the U.C.C. Form I is removed from the public record and returned to the debtor.
SECURED CREDITORS’S RIGHTS IN THE EVENT
OF DEBTOR’S DEFAULT:
The creditor has the choice of suing for a monetary judgment or using
the collateral to satisfy the debt.
Where use of collateral to satisfy the debt is chosen:
The creditor may seize the collateral
without intervention by a court if the self–help repossession can be effected
peaceably. Creditor who has possession of collateral where the loan is in
default has the option of selling or retaining the collateral but there are certain
legal requirements involved in either choice
I.
A. Public Sale – to be commercially reasonable:
1. Must give reasonable advance notice to debtor of the sale – must
include time, place & (in TN) Terms.
2. The creditor may bid at the sale.
3. Notice is not required if goods are perishable or price is volatile
or goods are sold on an organized exchange.
B. PRIVATE SALE – to be commercially reasonable
1. Notice of time of the sale must be given to debtor.
2. Creditor may NOT bid.
C. Disposition of Proceeds from sale of Collateral:
1. Proceeds are applied first to cost of gaining possession of
collateral and the sale.
2. Next, Creditor’s claims are paid including interest and attorney’s
fees.
3. Any remaining moneys are paid to the debtor but creditor who is not
fully paid may sue & recover a deficiency judgment in the amount of the
unpaid balance.
II. RETENTION OF THE COLLATERAL BY THE CREDITOR
A. If debtor has paid 60% of purchase price OR debt, Creditor must sell
the goods within 90 days of possession after default UNLESS debtor waives his
right to have the collateral sold by means of a written statement signed by
him.
B. If the debtor has not met the 60% payment requirement, the creditor must
merely propose retention in satisfaction of the debt to both the debtor and
other creditors with a security interest in the collateral and if no objection
in writing is made within 21days of notice having been sent, the collateral may
be retained. If objection is timely made, the collateral must be sold.
If collateral is properly retained, the
creditor’s claim is fully and exactly paid. The debtor will not be entitled to
any overage obtained by the creditor from eventual sale nor will he be liable
for any deficiency judgments.
Debtors who act timely (see state law) may redeem repossessed property
by payment of the debt against it IN FULL.
Chapter 35
BANKRUPTCY
There are several types of bankruptcy. Among them are:
CHAPTER 7 – Individuals may file this type of bankruptcy and entirely eliminate
all but their non – dischargeable debts. Those whose incomes are less than the
median income in their state are eligible to file Chapter 7 bankruptcy if they
otherwise qualify. Those whose monthly incomes, less allowable expenses multiplied
by 60, yields a result of $6000 or less, and this is 25% or less of their
unsecured debt can still file Chapter 7 even though their income exceeds their
state’s median income. Otherwise they MUST file a 5 year Chapter 13 plan.
CHAPTER 13 – Requires bankrupt individuals
to file a payment plan in which creditors get at least as much as they would in
a Chapter 7, although the courts usually expect them to pay more. This form is
used to allow petitioners to escape from debt levels that they cannot pay but
gives creditors some degree of repayment. It is the choice for those who are
ineligible to file Chapter 7 and for those who wish to retain a significant
amount of assets.
CHAPTER 11 – Permits businesses to
restructure their debts and remain in business. Individuals may file Chapter 11
but few do so.
CHAPTER 12 – Permits farmers to
restructure debts.
Most bankruptcies are filed VOLUNTARILY
by debtors but creditors can force debtors into bankruptcy.
In a voluntary bankruptcy the debtor is
seeking:
1. A STAY – an order from the court to
all creditors to cease all collection efforts including repossessions and
foreclosures.
2. Relief from Debts in the form of a
DISCHARGE by
1. Liquidation of assets and payment of creditors to the extent possible
on a pro-rata basis – Chapter 7.
2. Restructuring of debt payments under a plan to make payments
manageable – Chapters 11, 12 and 13.
The revisions in the Bankruptcy Code that were put into effect in October
of 2005 were designed to prevent what was perceived as “abuse” of bankruptcy by
requiring those who could to pay creditors to the extent that they are able.
This determination is made on the basis of income using the previously
discussed “Means Test”. There is also a requirement that petitioners must have obtained
debt counseling within six months of filing bankruptcy – a move to encourage
petitioners to find alternatives to bankruptcy - and petitioners must complete
a financial management course before they can receive a discharge.
ROLE of the TRUSTEE in Bankruptcy –
The trustee represents the creditors as a group and assumes the rights
of the creditors which they possess by law. The trustee can take the property
of the debtor to sell it to satisfy claims and can even take property inherited
by petitioner within six months of filing the petition. Sometimes the trustee
will challenge secured parties in an attempt to get collateral for unsecured
creditor.
In a chapter 7 bankruptcy, the Trustee
becomes the beneficial owner of the bankrupt’s property and is charged with
seeing to it that all but the exempt property is collected and distributed to
secured parties who are perfected as to that collateral or that it is sold and
the proceeds distributed by law. In Chapters 11 and 13, the Trustee oversees
the debtor’s Plan including making sure that the creditors get at least as much
as they would under a Chapter 7 bankruptcy. Debtors sometimes attempt to
shelter their assets from the Court’s reach and the Trustee has the duty to
look for such attempts and the power to VOID transactions that lead to such a
result.
The two primary actions of debtors which
Trustees seek to set aside are:
A. Transfer or obligation incurred by debtor within 1 year of bankruptcy
if intent was to hinder, defraud or delay creditors.
B. Transfer by debtor which has the effect of rendering him insolvent
(debts exceed assets) or reduces debtor’s assets to an unreasonably low level.
II. PREFERENTIAL TRANSFERS – Payment by
the debtor to a creditor within 90 days of the filing of the bankruptcy
petition in payment of a pre-existing debt which results in the creditor
getting more than he would in liquidation
of the bankrupt’s estate had there been no such payment
The Preferential Transfer provisions do
not apply to cash sales or payments in the ordinary course of business within
the 90 day period.
MECHANICS OF ADMINSTRATION
II. The statute in a Chapter 7
bankruptcy provides for distribution of the Bankrupt’s property and proceeds of
liquidation in the following order:
A. Secured Creditors – perfected parties and mortgage holders are either
paid or the collateral restored to them.
B. Costs & Expenses including atty fees of administration of the
Bankruptcy
C. Delinquent alimony and child support
D. Claims arising from course of debtor’s business after commencement of
the case but before trustee is appointed.
E. Claims for wages, salaries, commissions, vacation pay, severance pay,
etc. of up to $4,650 incurred within 90 days of filing of petition.
F. Claims for unpaid contributions to employee benefit Plans up to
$4,650 within 180 days of filing
G. Farmers & fishermen for claims up to $4,650 against grain storage
& fish tank operations
H. Consumer creditor’s claims of up to $2,100.
I. Federal and state taxes due within 3 years of filing petition in the
form of income tax.
J. OTHER UNSECURED CREDITORS.
K. THE DEBTOR.
.
III. DISCHARGE IN BANKRUPTCY WILL BE
DENIED IF:
A. Debtor fraudulently transfers or conceals property within 1 year of
filing if done to hinder or defraud creditors.
B. Failure to keep proper financial records.
C. Making false oath or account.
D. Failure to satisfactorily explain loss of assets.
E. Refusing to obey lawful order of the Court.
F. Obtaining discharge within the last 8 years.
G. Filing written waiver of discharge approved by the Court.
IV. RIGHTS AND DUTIES OF THE BANKRUPT
DEBTOR:
A. Duties of the Debtor are to provide Court with a list of creditors,
schedule of assets and liabilities and statement of financial affairs. Debtor
must also appear for examination under oath at first creditor’s meeting.
B. RIGHTS OF DEBTOR
1. Exemption of property from
Trustee’s reach – a matter of State law – Tennessee provides$4000 in
personalty, $5000 realty, unemployment payments, social security, alimony &
child support.
2. DISHARGE FROM debts – Except for
following:
a. Tax (except for income tax
that has first come due more than 3 years after the filing of the petition),
customs duty or Tax penalty; b. Student loans; c. loans (including credit card
use) used to pay taxes; d. Loans made in reliance on false financial statements
made with intent to defraud; e. Debts not scheduled in time for allowance; f.
Liability for fraud in a fiduciary relationship; g. Child support &
alimony; h. Liability for malicious or willful injury of another or due to
driving while intoxicated; i. Debts that are Affirmed; j. Consumer debt per
creditor for luxury goods totaling over $1150 incurred within 60 days of stay
or for consumer credit cash advance over $1150 incurred within 60 days of issuance
of stay.
Chapter36
INSURANCE
Basically a contract – parties must be
competent.
In order for insurance contract to be valid, insured must have an
INSURABLE INTEREST.
1.
What is an insurable interest? Exists in property when its destruction
will cause direct pecuniary loss. Must exist at the time of loss (time of issue
of policy not required). As to life – Everyone has an insurable interest in his
own life and in any other party’s life in which its loss would result in
financial loss to the party seeking to purchase the insurance. Creditors
can insure to reasonable value of debt the life of a debtor. Life insurance –
insurable interest must exist when obtained.
2. Do insurance K’s have to be written?
Generally yes but temporary coverage while writing for issuance of a contract
can be effected by an oral binder.
3. When does an insurance K (as
distinguished from coverage) become effective? It depends on the nature of the
coverage and the parties involved as follows
A. Insured deals with broker – Broker is insured’s agent no coverage
until policy procured. Broker is insured’s may be liable.
B. Insured deals with insurer’s agent –
1. If binder issued (oral or written) – coverage is immediate
2. Agreement of issue at a later date - coverage when delivered or sent
3. Life insurance contingent on passing physical when premium already
paid – Coverage even before passing IF would have passed had he survived.
Payment of premium & delivery of
policy – Not essential to effect coverage – depends on contract terms.
4. When does coverage of risk under an
insurance contract commence?
Usually immediately but contract may provide waiting period.
Basic rule of interpretation of contract
terms – When insurance contract is ambiguous or date of effectiveness
uncertain, the contract will be interpreted against the insurer.
Late payments & Cancellations: When
one cancels a policy, he is entitled to refund of the unused portion of the
premium. Late payment of a life insurance policy will not result in its
cancellation until after the running of the 30 day (sometime 31) grace period.
Right of Cancellation on part of insurer
– matter of contract terms.
Procedure for recovery based in
Insurance contract – Insured shows loss, while insurance in force, which was
covered by policy. Insurer defends by showing loss was due to exception or
there is defense to claim including contract defenses.
Potential liability f insurer outside
insurance contract:
1. Negligent handling of claim
2. Mental distress of claimant OR
insured
3. Invasion of claimant’s privacy while
investigating – must be of “private area”. (Inside home).
Kinds of Insurance
Fire – Covers loses arising from hostile
fire – one uncontrollable or escaped from place intended. (indorsements can
include friendly fires). Loss must be proximately caused by fire.
Determining insured loss:
A. Basically – Diminishment in actual
cash value at time of loss.
B. Total loss – Destruction such that
the remaining portion is unfit for the purpose which property was used prior to
fire.
C. Limitations on Coverage:
1. Policies often limit recovery by giving insurer option to replace.
2. Failure to insure to value can result in a pro-ration of a claim for
loss. Logic of requirement - Example – Usually 80% required
Example:
Value of property=$100,000; Insurance coverage purchased=$50,000; Amount
of loss=$24,000; Coinsurance requirement=80%
Formula: Actual coverage ÷Required
coverage X Loss = Indemnity
Application of formula to example: $50,000÷$100,000 X $24,000 = $15,000
Fire insurance for dwellings is usually
included in a multi-peril policy known as “Homeowner’s” which includes extended
coverage with fire.
Fire insurance when mortgage exists –
debtor usually required to keep such under provision in which homeowner is
compensated for his respective interest and mortgage holder is compensated for
his.
AUTO INSURANCE: Explain
Liability
– Pays obligation to another arising from use of auto.
Party protected – Owner, members of
family and, if there is an omnibus clause, any party operating auto with owner’s
permission.
Insured’s duties:
A. Insured must not admit liability nor
disclose policy limit
B. aid in defense:
1. give insurer prompt notice of accident or claim.
2. furnish insurance
3. Cooperate with insurance company in preparing defense and at trial.
Insurer’s duties include not only paying
the valid claims of 3rd parties up to limits of policy but also to
defend both valid and unfounded claims.
Collision & Upset – Covers collision
with another car, object, or the earth. Upset – anything destroying the normal balance
of the car. Pays for loss to ones own car. Usually there is no recovery for
loss of use. Often there is a deductible.
Uninsured Motorists – Covers losses when
at-fault party is not covered by liability insurance or one is victim of
hit-and-run. Contact with vehicle required – being run off road or hit by
fallen object NOT sufficient. Usually only covers bodily injury but there is
coverage for property damage available in
Financial responsibility laws – Recent
Supreme Court decision holding that license can’t be revoked without a hearing
has generally impeded such provisions requiring harm to someone before steps
can be taken to revoke license.
Theft – Covers theft and ensuing damage
to car but NOT to contents.
Comprehensive Coverage – Covers nearly
all risks other than collision & upset and normal wear & tear.
Life Insurance:
A. Term – Pure insurance
B. Whole or straight life – Insurance
with savings plan.
C. Limited Pay life – Paid up insurance
at a certain number of years
D. Endowment – Pays lump sum at a
certain age or at death if sooner
Excluded risks: deaths from –
1. Suicide
2. Narcotics
3. Violation of law
4. Execution of Crime
5. War
6. Non-commercial Aircraft
Beneficiary – Party receiving proceeds
from coverage – May be 3rd party or decedent’s estate. Usually
should be 3rd party to save tax & administrative expenses.
Beneficiaries can usually be changed.
What is the affect of an incontestable
clause? If eliminates the defenses of fraud & misrepresentation in procuring
the policy – generally applicable after 2 yrs.
If an insured decides to discontinue a
whole life policy, what are his options?
A. he may elect to receive the cash
value.
B. he may elect a paid-up policy of a
lesser amount.
C. he may elect purchase of term insurance.
Lapsed policies can be reinstated by
payment of back premium but insured must pass another physical.
Businesses now have Comprehensive
General Liability policies available that reimburse the insured business for
any and all liability they may incur due to bodily harm or property damage from
everything from defective products to violation of environmental regulations.
Risks associated with transportation can be insured against by Marine
Insurance. Ocean Marine covers transportation on an international basis and is
available to cover losses to ships or their cargo as well as losses due to
liability or unpaid freight charges. INLAND MARINE covers goods transported
over land, by air, or on coastal or inland waterways. Also, inland marine policies
can be obtained to cover property that is the object of a bailment or being
used by a creditor to secure a loan.
Chapter 37
AGENCY
Agencies – Are fiduciary relationships in which one party acts in a
representative capacity for and binds another party. Likewise, third parties
are bound to the parties (principals) which are represented by the agents they
deal with. May be created for ANY lawful purpose unless against public policy
(Ex. giving testimony). Principal Must be Competent but no legal requirement
that the AGENT be.
TYPES OF AGENTS:
A. General – Authorized to conduct
business arising from a particular enterprise or business operation.
B. Special – Authorized to conduct a
specific act (Ex. Power of Attorney to transfer realty).
C. Universal – Authorized to carry out
all activities properly delegable.
CREATION OF AGENCY
The general rule is that creation of an agency requires some action on
the part of the principal. Specific methods include:
A. Appointment – Oral or written unless
authority for transfer of real estate which must be granted in writing. This
creates EXPRESS AUTHORUTY.
B. CONDUCT OF PRINCIPAL – Words
or action which creates the belief of existence of an agency in the mind of the
“agent” or in the mind of a third person. Action includes failure to object
when one learns that an unauthorized person is purporting to be his agent.
Creates: APPARENT Authority.
C. RATIFICATION – Adoption of an
unauthorized act – can be act in excess of an agent’s authority or act of someone
claiming to be agent but without any authority of any kind.
I. Methods of Ratification:
1. Words expressing intent to ratify (in writing if Statute of Frauds
applies).
2. Actions demonstrating intent to ratify.
Examples: i. Paying for goods, ii. Accepting benefits, iii. Bringing
action to enforce or defending an action, iv. Failure to renounce within a
reasonable time.
II. Conditions of RATIFICATION:
1. “Agent” must have represented himself as acting in behalf of a
“principal”.
2. “Principal” must have legal capacity to authorize act BOTH when done
AND when ratified.
3. Must ratify before 3rd party withdraws.
4. Act to be ratified must be legal.
5. “Principal” must know or should have known of material facts before
ratification.
D. OPERATION OF LAW – An exception to
the rule that conduct of the principal is necessary to create an agency.
Established due to social policy due to emergency such as when unforeseen
circumstances arise or if one fails to meet his legal obligation and someone
else meets it – Ex. wife or minor child not provided for are deemed to act as
husband/father’s agent in securing necessities themselves.
TERMINATION OF AGENCIES
A. Expiration – Reasonable time if none stated but terminable at will.
B. Agreement – Sometimes the
original agency contract states that the agency can be terminated by subsequent
agreement, but termination can be effected by agreement between the parties even
if not provided for in the original writing.
C. Under terms laid out in the agreement – Ex. buy out.
D. REVOCATION by PRINCIPAL – Requires Clear Intent –
Principal has Power to revoke unless agency is coupled with an interest.
If he has Right to revoke, the agency is terminable at will or termination is
due to breach by Agent, there will be no liability but, if NO right to revoke,
termination is a breach and principal is liable for damages.
E. RENUNCIATION BY AGENT – Refusal by agent to continue, or breach, such
as self-dealings, – Power exists but if not the right, agent will be liable for
breach.
F. OPERATION OF LAW
1. Death of either – Except agency coupled with interest which cannot be
revoked before expiration except by death or insanity of either.
2. Insanity of either – Temporary suspends – Not in case of an agency
coupled with an interest or DURABLE POWER of ATTORNEY (established by Uniform
Durable Power of Attorney Act).
3. Bankruptcy of either.
4. Impossibility of performance.
5. War of parties’ countries.
6. Unusual event which would lead a reasonable person to conclude that
Principal would have a contrary intent.
TERMINATION OF AUTHORITY AS to Third
Parties – Termination of an agency relationship eliminates authority as between
Agent and Principal but power to bind Principal to third parties exists in
Agent until parties dealt with receive actual notice & all others receive
constructive (publication) notice.
NON-AGENCY REALTIONSHIPS
A. Master-Servant (Employer-Employee) – Employee cannot bind employer
contractually but can create vicarious liability.
B. INDEPENDENT CONTRACTOR – Employing party has no right of control as
to how job is performed. Usually no liability to employing party for misdeeds
of independent contractor UNLESS:
1. Negligent in selecting contractor.
2. Activity is inherently dangerous.
3. Activity is a nuisance.
DUTIES and RIGHTS of Agent and Principal
Authority of Agent:
A. Express – Stated (verbally or by
actions – such as NO objection).
B. Implied – That necessary to carry out
an agency includes incidental (needed to carry out express) and Customary (that
usually thought to be part of express).
C. Apparent – Created by Action of
Principal (words or conduct) which creates belief in 3rd party of an
agency. NOT CREATED by representation of “Agent” alone.
If a Principal places limitations on an
agent’s authority will these operate against 3rd parties?
Only
if the 3rd party knew or should have known (limitation is obvious)
of the limitation.
Actions
clearly adverse to the Principal are deemed to be obviously unauthorized.
May an agent appoint sub-agents to carry
out his duties with the right to expect acceptance by the Principal?
Generally NO. Exceptions when an agent
can use sub-agents:
A. Principal Consents – Expressly or impliedly (No objection).
B. Duties are mechanized or Administrative.
C. When it is customarily done.
D. When emergency dictates use of subagents.
E. When contemplated by the parties ahead of time.
AGENT’S DUTIES TO PRINCIPAL
A. Loyalty – Strict Fiduciary relationship
1. No secret profits.
2. Undivided loyalty – Cannot represent both principals to a
transaction.
3. Cannot take Kick-backs or incentives from 3rd party.
4. Must not reveal principal’s secrets.
B. Obedience – Carry out tasks accepted.
C. Use Reasonable Care – Degree of care of a reasonable person or of one
with basic skill if a professional.
D. Make an ACCOUNTING – Keep Principal informed as to property of
Principal in agent’s possession – includes duty to reveal secret profits and to
refrain from co-mingling agent’s and principal’s property.
E. Keep Principal informed of relevant information.
Consequence of Secret Profit –
Forfeiture of profit and Agent’s fees
PRINCIPAL’S DUTIES TO AGENT:
A. Adhere to terms of Agency Agreement –
Retaining agent as agreed (duration & exclusivity), Payment as agreed (but
not if contingent upon something that doesn’t occur).
B. Reimbursement of authorized or
reasonably necessary expenses.
C. INDEMNIFICATION – Repayment of losses
arising from agency but though no fault of the agent. No indemnification for
misconduct or illegal acts.
If an agent overdraws commission
compensation can the principal recover overdraw? Not unless the agency
agreement so provides.
Chapter 38
LIABILITIES ARISING FROM AGENCIES AS TO 3RD
PARTIES
AGENTS LIABILITIES TO THIRD APRTIES: The
agent is generally not personally liable to 3rd parties he contracts
with for his Principal, But, THE AGENT WILL BE PERSONALLY LAIBLE FOR:
A. Unauthorized Acts – Agent lacks
authority AND principal does NOT ratify act and 3rd party is unaware
of lack of authority. Includes situation where agent assures 3rd
party that he will take care of some matter beyond normal scope of his
authority.
B. Principal is INCOMPETENT – Competent
Principal is implied promise.
C. Principal is NOT disclosed AND
Identity revealed – Thus agent is liable if Principal is either undisclosed or
partially disclosed.
D. Agent intentionally assumes personal
liability.
E. Contract is ambiguous as to whether
executed by party as an agent or personally – i.e. signed without notation as
to agency. Solution – Sign clearly as an agent such as Principal by Agent of
Principal OR
Agent for Principal. In ambiguous cases parol evidence is admitted
in conflict between original parties.
F. If Agent’s actions are tortuous or
criminal even if directed to act accordingly by the Principal.
How can an agent protect himself from
liability? Fully disclose agency relationships & identity of principal and
show any documents authorizing agency & obtain a release.
What is an agent’s liability for
accepting money from 3rd parties for the Principal which the
Principal is not entitled to?
If the agent is “innocent” and acted in
good faith, he will be liable for the return only of money still in his
possession. Otherwise he will be fully liable to the 3rd party.
If an agent has not disclosed his
Principal will he be personally liable to 3rd parties on any
contracts? YES.
Will an undisclosed Principal have a
right to recover from 3rd parties on contracts entered into on his
behalf if breached? YES as long as the contract is a simple contract, but NOT
if under seal in a state recognizing the seal.
What other instances may an agent
recover from a 3rd party for breach of contract? (Generally, the Agent
has no right of recovery)
A. Any contract in which he would be
liable personally to the 3rd party.
B. When the agent has an interest in the
contract (such as a commission).
C. When the 3rd party commits
a tort or crime against agent or his property in his care.
PRINCIPAL’S LIABILITY TO THIRD PATIES
Generally, a principal is liable to 3rd parties on all
contracts made by authorized agent or those which he ratifies whether disclosed
or not unless contract is under seal in a state recognizing seal in which case
Principal is not liable to 3rd party if not disclosed (but is liable
to agent) unless 3rd party has elected to sue agent on the contract
and obtained a judgment.
Other obligations of Principal to 3rd
Parties:
A. Principal must give full credit to 3rd
party for payments made to his authorized agent (actual or apparent authority)
even if money is not received from unauthorized agent for 3rd party.
B. Principal is bound by agent’s
statements made in course of business.
C. Principal is bound by knowledge of
agent pertinent to the scope of his employment (Ex. notice of defect)
Exceptions: 1. Knowledge outside the scope of the agency (Ex. Agent
charged only with delivery but who incidentally learned if buyer’s financial
problem – such knowledge not likely imputed to principal).
2. When agent is acting
adversely to principal’s interest in collusion with 3rd parties.
Is a Principal liable for his agent’s
torts? Under the doctrine of RESPONDEAT SUPERIOR, principal’s are vicariously
liable the torts committed by their agent’s if committed within the scope of
their employment. The same is true of the Employer/Employee relationship.
Sources of liability include:
1. Negligence of agent or Employee – Almost always creates vicarious
liability if within scope of employment.
2. Intentional Tort – Creates liability if done within scope of
employment (Ex. Use of force to collect money) but not if purely personal or
for no reason.
3. Fraud – Liable if authorized or known of; otherwise a split: Some
states hold liable if in scope of employment even though unknown, others hold no
liability if no knowledge.
4. Violation of Govt. Regulations – Sometimes leads to vicarious
liability, especially when public safety is at risk, in order to encourage
careful selection and supervision of workers.
Sources of PRINCIPAL & EMPLOYER
Liability other then Vicarious
1. Negligence in selecting employees.
2. Providing improper or defective equipment.
3. Instructing employees or agents to engage in wrongful conduct such as
criminal activity. Otherwise principal /employer is usually not liable for
crime of agent /employee.
Dealing with a Salesperson – Generally
doesn’t create a contract. Salesmen are held in the law as mere solicitors of
offers which are to then be either accepted, forming a contract, or rejected
(no contract) by his employer. Contrasted with an Agent – Once agent accepts,
contract is formed.
If one employer “lends” an employee to
another employer, which of them will be liable for the employee’s conduct? The
employer with the right of Control (known as the Borrowed Servant Doctrine).
Chapter 39
EMPLOYMENT RELATIONSHIP
Is a Consensual relationship generally created by Contract (express
sometimes but commonly implied) whereby one party (employee) performs work
under Direction & Control of another (Employer).
Written employment contracts set forth the conditions and duration of
employment. Some are very detailed (such as union/management collective
bargaining agreements) others more general. If no duration is provided for in
the employment contract, it is generally terminable at the will of either
party, known as the EMLOYMENT AT WILL DOCTRINE. Courts have been hesitant to
erode an employer’s right to dismiss workers even without cause. Exceptions –
A. Retaliation for whistle–blowing or filing a worker’s compensation claim. B.
Federal legislation prohibits dismissal for union activity (Wagner Act and N.L.R.A.),
or for race, religion, color, sex or national origin (Civil Rights Act) or due
to Age or becoming handicapped if with reasonable accommodation the person can
still perform.
If employment contracts provide that employees cannot be dismissed
without “good cause” courts have been rigid in insisting on employer’s meeting
their burden. WHAT CONSTITUTES “Good Cause”?
A. Non-performance, B. Fraud in
obtaining employment, C. Disobedience to proper instructions, D. Disloyalty, e.
Theft or dishonesty, F. Drug or Alcohol use, G. Misconduct, H. INCOMPETENCY.
Duties and RIGHTS OF an EMPLOYEE IMPLIED
BY LAW (unless contract expressly provides otherwise)
Duties: A. Stand ready to receive and
act on proper orders.
B. Serve honestly & Faithfully
& Exclusively during employment hours.
C. Obey reasonable regulations.
D. Keep trade secrets – May be
enjoined from using them to compete with employer after quitting.
Rights: A. Retain Inventions – Unless
contrary to contract or hired to invent. If discovered during work hours using
Employer’s supplies, Employer is entitled to use invention free (known as SHOP
RIGHTS).
B. Payment of Agreed wages –
Including severance pay & profit sharing.
C. Maintain rights to pension under
VESTED plans as provided under Employees Retirement Income
Security Act. Vesting cannot be postponed more than 5 yrs.
D. Terminate employment if
employer’s conduct is wrongful.
EMPLOYER’S DUTIES:
A. To Employees – To furnish employees a
reasonably safe place to work, reasonably safe tools, & adequate competent
fellow employees – largely replaced by Worker’s Compensation Legislation.
B. To 3rd Parties – Liable for harm
done by employees to 3rd parties including fellow employees if:
1. Employer expressly directed the act.
2. Employer caused it by too few or incompetent employees.
3. Employer Ratifies unauthorized Act.
4. Employee has acted within the scope of employment.
How do courts determine if an employee
has acted within the scope of his employment? The tests are:
A. Was it the kind of Act usually done by the employee?
B. Time, place & purpose of the Act.
C. Previous relationships between Employer/Employee.
D. Does Master have reason to expect the act?
E. Did Master furnishes any instrumentality needed.
Most Important: F. Was the ACT IN FURTHERANCE OF THE MASTERS
BUSINESS?
Is specific performance available in employment contracts? It is
virtually never available to employers and only rarely available to employees.
Chapter 41
Types of Business Organizations
There are several choices of business entities from which to choose. The
four primary types are sole proprietorships, which involve individual owners of
companies, partnerships, which involve two or more persons joined as owners in
pursuit of profit, corporations, which are artificial beings created by the
state and owned by investors who purchase stock, and Limited Liability
Companies (LLC’s) owned by their ‘members’.
Proprietorships and partnerships have similar advantages in that they
can be formed without having to
go through any prescribed process and the
income and losses are passed directly through the entity to the owners thus
resulting in taxation at only one level as well as the right t take a personal
tax write-off for losses. But, neither has permanency of existence since death
of a proprietor or of any partner destroys the company, neither allows for any
accumulation of retained earnings as corporations are allowed to do (sometimes
resulting in the tax savings to the owners), transfer of ownership can be
difficult compared to corporations and raising capital can also be a problem
although the partnership entity can sometimes help overcome this problem.
Corporations offer permanency
of existence with ease of transfer of ownership by sale of stock which may also
help in raising capital. As a separate legal entity, corporations may sue and
be sued and stand between creditors and other claimants and the stockholders
thus generally Limiting owners’ liability to the amount of their investment
whereas the owners of proprietorships and partnerships are liable to the full
extent of their personal assets for debts owed by the businesses they own.
Problems also arise from the separateness of entity in the form of costs of formation and continuance, a
corporate income tax, and possible reluctance by creditors to lend money to
companies when the owners have limited liability. However, there may be
instances that the owners of corporations actually benefit from the corporate
tax laws by being allowed to retain earnings and refrain from distribution to
owners until such time as their other income has declined.
The most recently developed types of business entities are the Limited
Liability Company( LLC) and the Limited Liability Partnership (LLP). The LLC
may be required to have a specified life (it is a matter of state law) but it
can be quite long, offers limited liability to its owners (known as “members”) and
does not require the stockholders’ and directors’ meetings and minutes that
corporations do. At present, there is the disadvantage that for members who
work in the business, in that there is a question as to whether or not all
monies paid to them by the LLC are subject to self-employment tax whether it is
paid as a salary or distribution. LLP’s
offer partners the considerable advantage of limited liability although
each partner will still be liable for his own misconduct and, in some states,
for the professional misconduct of fellow partners.
Specialized forms of Organization:
In addition to the three basic forms of business entity, specialized
forms of organization have been developed including:
A) Franchises- Contractual arrangements
whereby one party (Franchisor) allows another (Franchisee) to use its name or
processes or both in the making and or marketing of goods or services. The
contract involved governs the parties’ rights & duties but laws have been
passed protecting franchisees from bad faith conduct. Under case law, franchisors have been held not
to be liable for the misconduct of their franchisees (who have been held to be
independent contractors) unless they exercise actual control over the
franchisee’s operations or when product liability law results in liability.
B) Limited Partnerships- which involve
at least one General Partner aligned with at least one partner whose liability
is limited to his investment, a limited partner. Such agreements must be
written and recorded by local filing and the limited partner cannot exercise
control over the business nor can his name appear in the company name.
Failure to abide by these restrictions results in general partner status.
Limited partners, however, may file suit in behalf of the company against third
parties or the general partners when the general partners refuse to seek
recovery for injury to the firm. Revisions in the Uniform Limited Partnership
Act now permit limited partners to contribute services as well as property for
their share.
C) Joint Ventures- Are the equivalent of
single purpose partnerships. Each is deemed to have equal Right of control
although this is often delegated to other joint ventures. The relationship
usually lasts for the time agreed to, the duration of the venture involved or,
if neither of the above two apply, is terminable at the will of either party.
The negligence of each joint venture is imputed to the others.
D) Unincorporated Associations- The
equivalent of a partnership that is NON-PROFIT. Members are liable personally
only for acts they Authorized or ratified.
E) Co-operatives- Two or more persons or
companies which pool their efforts for some common objective.
Chapter 42
Partnership
Partnership- Is a voluntary legal relationship
of Two or more persons to carry on business for a Profit as
Co-owners.
Characteristics of Partnerships:
A) Voluntary- due to closeness & liability
- courts don’t imply.
B) Contributions by Partners- money, property,
labor, expertise.
C) Joint ownership – Assumed proportionate
unless specified.
D) Operated for Profit- Pecuniary profits.
Types of Partners:
A) General- Known by public & active
in the business.
B) Nominal- Represent themselves or
allow themselves to be represented as partners but actually are Not.
C) Silent – Publicly known but not
active in business.
D) Secret- Active in business but Not
publicly known.
E) Dormant- Not known publicly & Not
active in the business.
Formation of a partnership occurs with a
partnership agreement. Oral is acceptable unless statute of frauds (must be
possibly completed within one year) requires a writing. Most are oral but
written is very advisable.
Emerging trends in partnership law:
A) At common law partners in NON-TRADING
partnership were not liable on debts other than their own –Trend is contrary.
B) Partners are not required to use
their names in the Company name but if a fictitious name is used most states
require registration of the name & owners.
C) Corporations were not allowed to be
partners unless authorized by statute or corporate charter- trend is to allow
all corporations to become partners.
Disputes often arise as to whether
someone is a partner or a mere employee.
The tests used by courts are:
A) Right of control of the business – No
control = employee.
B) Sharing profits & losses –
Sharing losses is assumed if sharing profits is provided. Must be a sharing of profit not mere sharing of proceeds
(only slight evidence). Sharing of profits
is STRONG EVIDENCE of partnership but there will be No inference if share of
profits is shown to be paid for:
1)
Rent
2)
Interest
3)
Payment of a debt – as in a buy-out
4)
Wages – Commission
5)
Annuity – as to a deceased partner’s estate
6)
Purchase of realty or business goodwill
Fixed Payments Negate the Existence of a
Partnership
C) Contribution of property, skill or
labor
D) Co-ownership – not sufficient alone;
must include intent to operate for a profit
What is the consequence of a partnership
holding out a non-partner as a partner?
A) If the non-partner is aware of it and does not inform others to the
contrary, he will be bound by any who rely on the representation being estopped
to deny the relationship
B) If the non-partner acts in the firm name, the partners will be bound
by it being estopped to deny the relationship
C) There will be NO SHARING OF PROFITS.
What property rights do partners have in
partnership property? Each partner has the right to possess partnership
property for the benefit of the partnership ( but not for personal benefit)
through the Tenancy in Partnership.
As to individual partnership property:
A) A partner cannot sell or assign it.
B) If cannot be attached by an
individual partner’s creditors to satisfy claims against that partner.
C) A deceased partner’s interest will
not pass to his heirs but will vest in surviving partners.
A Partner’s rights as to his PARTNERSHIP
INTEREST include:
A) He can assign his right to receive
profits therefrom.
B) Profits therefrom can be attached by
creditors.
C) His heirs inherit the value of the
partnership interest.
Management of a Partnership is
accomplished by simple majority vote of the partners on matters within the
scope of ordinary partnership business. Matters in excess of the partnership
agreement require unanimity to legally authorize.
If partners are evenly divided on a
fundamental issue which prevents the partnership from doing business, then a
partner may petition a court for dissolution
Sources of a Partner’s Authority
A) The partnership agreement will govern
rights, duties, and limitations when one exists.
But, limitations on partnership authority, while binding between
partners, will not be binding against 3rd parties unless they knew
or should have known of the limitation.
Look to the following Factors:
1) Type of business- If act isn’t usual
for that business, 3rd parties deal at their own risk. Ex: Auto
dealer buying land to speculate.
2) Scope of business- If act is abnormal
for the type of activity within the business field chosen by the partnership
Ex: Auto Repair Partnership but partner buys used cars for re-sale.
3) Acts which cause Partnership to
terminate put 3rd parties on notice.
4) Acts obviously detrimental to the
Partnership put 3rd parties on notice.
B)
Most partners’ authority is IMPLIED & includes-
That which is necessary to carry out
partnership objectives.
The Key as to whether a power will be
implied is whether the act would fall within the scope of ordinary partnership
business. Commonly included are rights which an agent has in representing his
principal inasmuch as each partner is an agent of the partnership. Specifically
included are the right to enter into all
types of contracts (buy, sell, employment, loan agreements etc.) within scope
of Partnership business, defend against claims, carry forward claims or admit
liability and receive legal notice as to the entire Partnership.
By law there are some actions
specifically prohibited of partners unless expressly authorized to do so.
Included are:
1) Entering into a contract which would
cause firm to be unable to operate.
2) Agreeing to have partnership be a
surety on the debt of another.
3) Agreeing to submit partnership disputes
to binding Arbitration.
4) Confessing Judgment in behalf of the
partnership- Not a mere admission of liability but, rather, admitting liability
in court.
5) Assigning Partnership property to a
partner’s personal creditors.
6) Using Partnership assets to pay
personal debts
7) Minority of states prohibits partner
from binding Partnership by entering into a contract under seal.
Duties OF Partners (Parallel to those of an Agent).
A) Loyalty & Good Faith – FIDUCIARY
duty, self-dealing prohibited. Any income generated from work elsewhere will
accrue to Partnership unless agreed otherwise between partners. Valid
Non-Competition Agreement continues duty
beyond conclusion of Partnership.
B) Observance of Partnership agreement-
If breach results in loss to partnership, the partner is personally liable for
it.
C) Reasonable Care- Neglect results in
personal liability of partner but poor judgment does Not.
D) Inform other partners of things
pertinent to partnership.
E) Keep proper records of partnership
transactions engaged in or all transactions if charged with record keeping AND
make them reasonably available to all partners. (Known as Making an
Accounting.)
Rights OF PARTNERS: (May be altered by agreement)
A) Equal participation in Management of
Partnership regardless of unequal time spent or unequal contribution of
capital.
B) Inspect Partnership books.
C) Share equally in Partnership profits-
No other compensation is due. Some partners get a “draw” and settle as the end
of the year. Absent contrary agreement, unequal time spent doesn’t matter.
D) Repayment of loans not part of
capital contributions. Capital is to be re-paid only dissolution
often all otherwise paid.
E) Contribution – Repayment of
proportionate share to partner who had to pay more than his share.
F) Indemnification repayment for
partnership, expenses he personally paid unless he agreed to personally pay them.
Liability OF PARTNERS:
A) Contractual Liability on each
partner’s part for contracts entered into by any partner for the partnership if
within the scope of partnership business.
Liable even if partnership is undisclosed. But, not liable if partner enters
into personal contract. AND not liable for debt incurred by partner to purchase
partnership share.
B) Tort liability on each partner for
tort committed by any partner transacting Partnership business.
C) Liability for crimes of a partner-
generally not personally liable unless involved in or authorized it- exception,
if partnership commits crimes, such as selling contraband, all partners will be
liable, not just one making sale.
D) Harm caused by employees to 3rd
persons results in vicarious liability to all partners
Special Situations:
New Partner- Only liable for obligations
arising AFTER becoming a partner unless he assumes existing obligations.
Dissolution- Does not end liability
unless released by creditors. Exiting partner remains liable to creditors
unless there is a NOVATION.
Partners are also liable to other
partners when losses result from breach of partnership agreement. Partners are
also entitled to contribution if due to joint and several liability, they must
pay more than their pro-rata share of any claim.
Dissolving Partnership- Three basic
methods:
A) Act of the Parties
1) By agreement- Within original
agreement or by subsequent agreement.
2) Expulsion of a partner – As provided
for in the agreement.
3) Alienation (sale) of partner’s
interest – Not if done for benefit of creditors
4) Withdrawal by a partner- All partners
have power to withdraw
but don’t have right unless terminable at
will.
B) BY OPERATION OF LAW- Automatic upon
occurrence of
1) Death of any partner- Even if
agreement provides otherwise.
2) Bankruptcy (Not just insolvency) of
firm or any partner.
3) Illegality- Occurrence of an event
which renders partnership illegal
4) War between countries of the
partners.
C) By decree of court – Which can be
obtained by showing that one or more of the following occurred.
1) Partner has already been declared of
unsound mind in a prior proceeding
2) A party cannot perform his
partnership duties
3) Willful persistent breach of
agreement
4) Misconduct of a partner. i.e.
criminal conduct
5) When the partnership can only be
operated at a loss.
6) Any demonstration that dissolution is
equitable.
Power to bind the partnership is
extinguished between the partners immediately upon dissolution and as to 3rd
parties when they are given notice – Actual notice is required for those who
have dealt with the partnership otherwise notice by Publication is
acceptable. No Notice required when the
partnership is ended By Operation OF LAW.
Partnerships are ended by means of a Winding
Up Period in which all partners have authority to liquidate the bus.
Proceeds of the liquidation are
distributed:
1) First to creditors
2) 2d to repay loans from
partners
3) 3d Repayment of equity
contributions by partners
4) Any remaining funds are disbursed as
undistributed profits.
If a partnership is continued after a
dissolving event occurs it is deemed a technical dissolution and
reorganization.
Chapter 43
L,P.s L,L,P,’s & L,L,C,’s
Limited Partnerships involved at least
one general partner and as many limited partners as desire to become involved.
A certificate of limited partnership must be field with the Secretary of State,
the words “limited partnership” must appear in the firm’s name and the limited
partners cannot exercise control over the business although they may be
employees or contractors of the firm or act as agents or consultants to the
firm or the general partner.
Limited Liability Partnerships, which gives partners protection from
liability other than for the wrongful conduct they, or those that they
supervise, commit, offer a superior alternative to limited partnerships. They
are created by obtaining a certificate of existence from the state in which
they are located, fees for which are usually modest.
Limited Liability Companies are an
alternative to partnerships and corporations. They are formed by filing
Articles of Organization with the state that will sanction a given company. The
owners, who are called members, have limited liability as owner’s, but not as employee.
Members may elect to manage their LLC and eliminate the equivalent of a board
of directions.
LLC’s with more than one member can
elect to be taxed as if they were C Corporations or as partnerships by merely
checking a box on the appropriate IRS form. If an LLC has only one member, it can elect to
be taxed as if it were a C corporation or as if it were a proprietorship, but
cannot choose to be taxed as if it were a partnership. There is uncertainly as to whether
distributions to members beyond reasonable compensation for work performed is
subject to self-employment tax, whereas distributions to owners of S
Corporations beyond reasonable salary are not subject to self-employment
tax.
Chapter 44
CORPORATE FORMATION
Corporations are artificial legal beings.
They are created by obtaining authority
to operate from a state or, in some cases, the federal government. The
authority takes the form of a certificate of incorporation, Articles of
Incorporation or as in the case of
In
A) Prepare a Charter Application stating
the name, address, proposed business, duration of existence if it is not to be
perpetual (assumed perpetual unless stated otherwise) and whether the corp.
will operate for profit or as a non-profit company.
B) File the Charter Application along
with filings fees with the Secretary of State.
C) Appoint and register an agent to
receive service of process.
Among the distinctions between
corporations are:
Foreign –v- Domestic- A domestic
corporation has received its charter within the state or nation of reference; a
foreign corporation is chartered by another state or nation. Those chartered in
other nations are sometimes referred to as Alien Corporations.
Close (also known as closed or closely
held) corporations are those whose stock is closely held & not traded
publicly. Those whose stock is sold publicly are referred to as having “gone
public.” But, by definition a “Public Corporation” is one created by a
governmental entity for governmental purposes although private corporations
publicly traded are sometimes erroneously called public corporations.
Professional Corporations- Are organized
to carry on a profession. Only professionals can practice.
There is no limited liability for each
practitioner for his own negligence.
Regulation of Corporations is reserved
by the entity granting its existence but since they do have legal separate
existence they have certain guaranteed rights. (Ex. freedom of speech).
Corporate Powers:
Implied Corporate Powers include
incidental powers necessary to conduct corporate business & affairs.
Additionally most states have Corporate
Acts which specifically grant powers. The Tenn. Corporate Act includes the
following powers:
1) To exist perpetually – Assumed unless
charter provides otherwise
2) To sue and be sued in the corporate
name.
3) To own property in the corporate
name.
4) To receive gifts.