Download 420 Business ADCP Law Fall 2011 - LeMoyne

ADCP 420/Lecture/W Syllabus
Business Legal Environment
LeMoyne-Owen College
Fall Semester 2011
Tuesdays 6:00 pm – 10:00 pm
Durations:
Sections W
3 Credit Hours
Instructors:
Office:
Phone:
E-mail:
Office Hours:
Mischelle Best
WWH-REN. CTR. Room 003
(901) 545-3480 (office) or (901) 734-8621 (cell)
[email protected]
By appointment only
Required Texts
Miller, Roger Leroy, William E. Hollowell, Business Law Text and Exercises, 6th edition,
Southwestern-West Law Studies (ISBN (978-0324786163).
Course Description
This course is designed to acquaint students with principles of law involved in ordinary
business transactions with special emphasis on general contracts, negotiable instruments
and bailments, real and personal property, deeds, mortgages, torts, sales, and insurance.
Objectives
Upon completion of this course students should be able to:
 Define “law”, and list the major sources of law.
 Identify the supreme law of the land.
 Define business ethics, and its relationship to personal ethics.
 Compare and contract utilitarian and religion based ethics.
 Understand the “corporate balancing act” by businesses when dealing with ethics.
 Explain objective theory of contracts, requirements of contracts.
 Understand the differences among a valid, void, voidable and unenforceable contracts.
 Identify the requirement for a valid offer and acceptance.
 List the element of consideration, define preexisting duty, and the doctrine of
promissory
estoppel.
 Explain when contracts by minors, mentally incompetent persons, and intoxicated persons can
be valid.
 Understand when a contract is illegal or contrary to public policy.
 Explain the elements of fraudulent misrepresentation.
 Compare and contract unilateral mistakes and mutual mistakes.
 Define the “Statue of Fraud”, and identify contracts that must be in writing.
 Understand “Privity of Contract”, contract assignment and delegation.
420 Business ADCP Law Fall 2011
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Explain the difference between rights of intended beneficiaries and incidental beneficiaries in a
contract.
Explain the concept of identifying goods to a contract.
Understand the difference between destination and shipment contracts.
Explain the remedies available to seller and buyer when contract is breached.
Compare and contrast express and implied contracts.
Explain negligence as the basis of product liability, and requirements of strict product liability.
Define and list the requirements of negotiable instruments.
Understand blank, special, qualified, and restrictive endorsements.
Identify and explain the legal forms of business ownership
Understand how to use Business Law Partner CD-ROM® to create business documents.
Understand how to access legal sites on the Internet.
Classroom Strategies and Procedures
Classes are designed to facilitate learning by using a variety of methods of instruction, including
lectures, discussions, collaborative sessions, and activities. In accord with the College mandatory
attendance policy, roll will be taken. All assignments are due at the start of class. No late
assignments will be accepted. Specific topics are discussed in the class schedule below.
Cheating and plagiarism will not be tolerated. See the College Catalog for the Academic Honesty
policy.
To better prepare for the weekly quizzes, students are encouraged to go to the textbook chapter
review site and take the practice quizzes: http://www.academic.cengage.com/blaw/te.
Course Requirements and Evaluation Procedures
A
B
C
D
F
90-100
80-89
70-79
60-69
59 or lower
Excellent
Good
Satisfactory
Below Average
Unsatisfactory
Grades in this course will follow the above system of the College. Grades will be based upon
performance in the areas listed below. The weights will be as follows:
Individual or Group Presentation
Class Participation and Attendance
Homework Assignments (5)
Quizzes (3)
Comprehensive Final Exam
Extra Credit Assignments
15%
5%
30%
30%
20%
max 10%
420 Business ADCP Law Fall 2011
(1) Homework is due each week. The instructor will drop the lowest week’s homework
assignment grade; i.e. only four of the five homework assignments will count toward the
final grade.
(2) All quiz are worth the same number of points. At the instructor’s discretion she might
drop the lowest quiz grade.
Participation. Students must be present to receive credit for participation. Participation must be
relevant and demonstrate completion of all assignments including bringing necessary collateral
material(s). Students should thoroughly read each chapter, review and complete end of chapter
exercises as assigned, and review the online research exercises whether assigned for individual or
group presentation or not.
Essay Quizzes. Essay quizzes will be graded on the overall quality of your answer to the given
essay. Although only one of the assigned real world case problems will be given in the quiz,
students should be prepared to answer each of the case problems.
Quizzes will be graded on the following criteria:
 Relevance to question asked 15%
 Organization of ideas and information 40%
 Format 15%
 Grammar 30%
Guidelines to Case Summaries and Presentation.
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A brief synopsis of the topic (in your own words).
Discuss the key issues of the topic.
Mention the area of law or code that is applicable.
Discuss applications in today’s workplace.
Students will be judged on oral case presentation for poise, appearance, material content, and
references to the law or prior decisions.
The instructor reserves the right to make grade deductions, in accordance with college policy,
based upon the attendance (tardiness) and preparedness of the student. All class sessions will
require pre-class preparation in the form of reading assigned passages, completing writing
exercises, and/or Internet-based exercises. Extra credit assignments may be given by the
instructor throughout the term that can earn a maximum of 10% extra credit. No extra credit will
be assigned or accepted after the completion of the final project. Each student is required to
have an e-mail address.
Attendance Policy:
Due to the accelerated nature of this course, there are no excused absences. Since there are
multiple sections of this course, students missing their assigned section class meeting may attend
the alternate section provided that notification of the absence has been given to the instructor and
420 Business ADCP Law Fall 2011
the evening special coordinator. Students not able to make up the missed class may receive a
failing grade for the course. In such
circumstances, the student must notify the division chair. Each student will sign a class roll during
each class period.
Policies Related to students with Disabilities:
Should a student with a disability be unable to complete the course requirements as outlined by the
instructor, an alternative procedure will be developed by the instructor in consultation with the
student.
Class Schedule
Note: The instructor reserves the right to alter this schedule of class assignments and meeting dates as
circumstances may require. All changes will be announced in class prior to their initiation and/or by email. Go to the class website for reading and Internet assignments. Note “complete” refers to a written
assignment that will be due while “read” or “review” refers to non-written assignments for class
discussion
Before Class 1: ADCP 301
 Read Miller Chapters 1, 2, 3, 4; Resource Guide Sections 1 and 2
 Complete end of chapter exercises for Chapters 1, 2, 3, 4 (Hypothetical Questions,
True/False Questions, Multiple Choice Questions, and Issue Spotters)
 Complete “Real World Case Problems” for Chapters 2, 3, 4
 Review the textbook website: http://www.academic.cengage.com/blaw/te
Class 1: The Law and the Legal Environment
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Homework due
Discuss syllabus
Lecture on Chapters 1, 2, 3, 4
Review end of chapter exercises
Essay quiz on one of the “Real World Case Problems”
Assignments for week 2:
 Read Miller Chapters 7, 8, 9, 10; Resource Guide Section 3
 Complete end of chapter exercises for Chapters 7, 8, 9, 10 (Only do the True/False
and Multiple Choice Questions.
 Complete “Real World Case Problems” for Chapters 7, 8
 Review “Online Legal Research” Activities 7-1, 7-2, 8-1, 9-1, 10-1
 Other assignment(s) as assigned by instructor
420 Business ADCP Law Fall 2011
Week 2: Contracts
 Homework due
 Lecture on Chapters 7, 8, 9, 10
 Review end of chapter exercises
 Quiz on chapters 1-4
 Guest Speaker if possible
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Assignments for week 3
 Read Miller Chapters 11, 12, 13, 14; Resource Section 3
 Complete end of chapter exercises for Chapters 11, 12, 13, 14 (only do True/False
Multiple Choice Questions and Issue Spotters
 Complete “Real World Case Problems” for Chapters 11, 14
 Review “Online Legal Research” Activities 13-1 and 14-1
Week 3: Contracts
 Homework due
 Lecture on Chapters 11, 12, 13, 14
 Review end of chapter exercises
 Quiz on chapters 7-10
Assignments for week 4:
 Read Miller Chapters 18, 19, 20, 22; Resource Guide Sections 4, 5, 6
 Complete end of chapter exercises for Chapters 18, 19, 20, 22 (True/False
Questions, Multiple Choice Questions, and Issue Spotters)
 Complete “Real World Case Problems” for Chapters 18, & 22
 Review “Online Legal Research” Activities 18-1, 19-1, 19-2, 20-1, and 22-1
 If applicable, prepare for individual or group presentations.
Week 4: Sales and Leases and Negotiable Contracts
 Homework due
 Lecture on Chapters 18, 19, 20, 22
 Individual presentation on Case Research
 Review end of chapter exercises
 Quiz on Chapters 11-14
 Review for Final Exam
Assignments for week 5:
 Read Miller Chapters 26, 27, 28, 29, 30; Resource Guide Section 5
 Complete end of chapter exercises for Chapters 26, 27, 28, 29 (only do True/False
and Multiple Choice Questions)
420 Business ADCP Law Fall 2011
 Complete “Real World Case Problems” for Chapters 26, 27
 Present individual case research to class.
 Prepare for Final Exam
Week 5: Employment Issues and Business Organizations
 Homework due
 Brief overview of Chapters 26, 27, 28, 29 &30
 Finish individual case presentations and critic
 Review end of chapter exercises
 Final Exam
Assignments for week 1 of ADCP 340 Labor Relations and Negotiation:
 Read Mathis Chapters 15-16.
420 Business ADCP Law Fall 2011
ADCP 301 Business Law Resource Guide
Table of Contents
Section1 Introduction to the Law and Our Legal System
What Is Law?
Sources of American Law
Civil vs. Criminal Law
Page 1
Page 1
Page 1
Page 1
Section 2 Business Ethics
What Is Business Ethics
Theory of Utilitarianism
Ethical Standard Based on Religion
Professional Code of Ethics
The Corporate Balancing Act
Page 2
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Section 3 Contracts
Executed vs. Executory Contracts
Valid, Viod, Voidable, and Unenforceable
Offer and Acceptance
Consideration
Contractual Capacity
The Legality of Agreement
Written Contracts
Third Party Rights
Title and Risk of Loss
Performance and Breach
Section 4 Warranties and Product Liability
Express Warranty
Implied Warranties
Disclaimer of Implied Warranties
Section 5 Consumer Sales and Credit
Regulation Z
Equal Credit Opportunity Act
Fair Credit Report Act
Fair Debt Collection Practices Act
Section 6 Negotiable Instruments
Section 7 Legal Forms of Business Organization
Endnotes
Page 3
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Page 5
Page 6
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Page 11
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420 Business ADCP Law Fall 2011
Section 1: Introduction to the Law and Our Legal System
What is Law?
“Law consists of enforceable rules governing relationships among individuals and between
individuals and their society. There have been, and will continue to be, different definitions of
law. The Greek philosopher Aristotole saw law as a “pledge that citizens will do justice to
another.” Aristotole’s teacher Plato believed that law was a form of social control.”
Sources of American Law
Sources of American Law include:
Common Law includes judicial, and stare decisis – the rule of referring to past decisions
in deciding current cases.
Administrative Law comprises rules, regulations and decision issued by Federal
Administrative agencies such as Occupational Health and Safety Administration (OSHA).
Statutory Law comprises of laws made by U.S. Constitution. The Constitution of the
United States is the “supreme law of the land”. No laws can contradict the Constitution of
the United States. If a state law contradicts the United States Constitution, the U.S.
Constitution prevails.
Civil vs. Criminal Law
Civil law concerns legal duties and obligations that exist between two private parties,
while criminal law deals with crime against the state or the public as a whole, such as
rape, murder, forgery and fraud violation which may attract incarceration, fine or both.
For example, if BC Corporation fails to supply Shelby Corporation 20 bags of cement
as agreed in a contract, Shelby Corporations can sue ABC Corporation for breach of
contract and may recover monetary damages.
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Section 2: Business Ethics
What is Business Ethics?
Ethics can be defined as what citizens deem right or wrong. Business ethics focus on the
moral standard a company uses when transacting business. The difficulties faced by
businesses include the need to earn a profit. The management of a company that fulfills
all ethical obligations without making a profit will not be looked at favorably by
shareholders. Also, a company that violates all ethical principles will also not be looked
favorably by the shareholders.
Theory of Utilitarianism
Utilitarianism is a theory that believes that an action is morally right if it produces the
greatest amount of good for the greatest number of people. For example, if a U.S.
company pays a bribe to a foreign government in order to obtain a huge contract the will
bring economic benefits to the United States citizens, Utilitarians believe that in this case,
the act of briery is not unethical since the citizens of the Unites States will benefit, even
though bribery is illegal the under Foreign Corrupt Act of 1977.
Ethical Standard Based on Religion
This theory is based on the belief that whatever is defined as morally wrong in any
religious teachings is unethical. Such ethical theory may be based on Biblical Teachings
or the Koran. For example, it is unethical to steal, since the Ten Commandments (Bible)
teaches that “Thou shall not steal.”
Professional Code of Ethics
In order to self-regulate the behavior of their members, many organizations have a
Professional Code of Ethics. The American Society of Chartered Life Underwriters
(ASCLU) has adopted a Code of Ethics constituting of eight Guides to Professional
Conduct and six Rules of Professional Conduct. The American Institute of Certified
Public Accountants (AICPA) has promulgated a Code of Professional Ethics and
Interpretive Rules. Membership in the AICPA is suspended without a hearing if a
judgment of convictions is filed with the secretary of the institute as related to the
following:
1. A felony as defined under any state law.
2. The willful failure to file an income tax return, which the CPA is required to file.
3. The filing of a CPA’s tax returns fraudulently.
4. The aiding in the preparation of fraudulent income tax return of the client.
The Corporate Balancing Act
Companies have learned that shareholders do not want profits at all cost. Many companies will
“walk the tight rope” in order to balance the need for profit and maintaining ethical business
practices. “R.J. Reynolds created Joe Camel, a hip cartoon character, to advertise cigarettes. As a
result, the company now controls one-third of the cigarettes market for children under 18. Why is
it worse to sell cigarettes to children than to adults?” The Federal Trade Commission (FTC)
mounded a strong campaign against R. J. Reynolds, and due to public outcry of their unethical
advertising campaign that targeted children under 18, the company agreed to stop using Joe
Carmel in their advertisement, and agreed to run counter ad against smoking by children under 18.
This is a good example of corporate balancing act.
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Section 3: Contracts
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Executed Vs. Executory Contracts
An executed contract is a contract that has been completed on both sides. For example,
if John LeMoyne hires Shelby Builders Inc. to build a two car garage for him at an agreed
cost of $1500, the contract is executed when Shelby Contractors Inc. complete the job
and receive the agreed upon amount from Mr. LeMoyne. If Shelby Contractors Inc.
finished the job, but have not been paid by Mr. LeMoyne, the contract is executory on the
part of Mr. LeMoyne.
Valid, Void, Voidable and Unenforceable
A valid contract is one that contains al the six elements of a contract. A void contract is not a
contract, because it lacks the legal standing of valid contract. For example, if Mr. Indigo contracts
with his friend Joe to kill a person for the sum of $25,000, the contract is void because such an
agreement is illegal. A contract is voidable if one of the parties has the option of honoring the
contract or voiding it. An unenforceable contract is one that cannot be enforced due to certain
defenses against it.
Offer and Acceptance
Offer
An offer may be oral, written or implied. For an offer to be legal, it must contain the
following three elements:
1. The offer must show an objective intent. It must not be a jest, and when in doubt, the
courts will use the doctrine of a “Reasonable Person”.
2. The offer must be communicated to the offeree. If a person is not aware of an offer,
then he cannot accept the offer.
3. The offer must be definite and certain. There must be some reference to a subject
matter, indicating price, quantity, or other necessary terms.
Acceptance
In order for an acceptance to be legal, three requirements must be met.
1. There must be an objective intent to accept the offer. In general, silence does not
constitute acceptance, unless prior dealings or conduct of the parties indicates that they
assume that it does.
2. The intent must be communicated by proper means.
3. The term must satisfy or “mirror” the terms of the offer.
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Termination of an Offer
There are generally five methods of termination of an offer.
1. Lapse of time: Offer terminates at the end of the period specified in the offer.
2. Death or Incompetence: On the death or incompetence of one of the parties, the offer is
terminated
3. Destruction of subject matter: If a natural disaster or accident destroys the subject
matter contracted for, then the offer may be terminated.
4. Rejection by the offer: An offer is terminated once it is rejected by the offeree.
5. Revocation by the offer: An offer is terminated when the original offer is withdrawn by
the offeror.
Counter offer and Mirror Image Rule
A counteroffer is the rejection of the original offer, and simultaneously making a new
offer. For example, if Ms. Mary Smith offers to sell her 1999 Ford Mustang to Ms.
Josephine Jackson for $24,590, and Ms. Jackson say offers her $19,750, this is called a
counteroffer, because it terminated the original offer.
“Mirror image rule” means that the acceptance of the offer must satisfy or “mirror” the
terms of the offer. If I offered to sell my car for 5000 United States dollars, an offeree
cannot accept it by agreeing to pay 5,000 Canadian dollars. The acceptance must mirror
the original offer otherwise it becomes a counteroffer.
Consideration
Consideration
Consideration is something of value that one party gives in return for what he or she is
getting. Consideration can be money, promise, an act or forbearance. Courts look at the
legal sufficiency of consideration instead of the adequacy of consideration. Unless
consideration is grossly inadequate, the courts do not look at the adequacy of
consideration.
Preexisting Duty
The preexisting rule states hat no consideration is considered given if it involved
something that you have duty to perform. For example, a police officer cannot be paid for
recovering stolen goods, because he already has a preexisting duty to do that. In other
words, he has not given up anything.
Past Consideration
Promises made in return for past actions or events are not considered legal consideration. For
example, if John Smith a building contractor promised to build Jeremiah Shelby’s -his best
friend’s house, if Jeremiah buys the materials and the estimated value of Mr. Smith’s labor
amounted to $12,500, Mr. Smith cannot use his past kind gesture as consideration in a future
contract because an act done before the contract was made, which is ordinary, by itself cannot be
considered for a later promise to pay for the act.
Promissory Estoppel
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Under the doctrine of Promissory Estoppel also called the doctrine of reliance, a person
or organization that relied on the promise of another can recover monetary value. The
promissee must prove that he or she relied on the promise of the other party to incur
certain expenses that he would not have incurred had the other promisor not made his
promise. For example, if a donor pledged in writing to give $10 million dollars to a
University, and based on the promise, the University hired an architect and a building
contractor. If the donor changes his mind, the University can sue for the amount
pledged, because they relied on his promise, even though a bargain for exchange of
promise did not exist. The elements of promissory estoppel include:
1. There must be a promise, and the promissee must justifiably rely on the promise.
2. The reliance must have caused a substantial economic detriment to the promisee.
3. In order to avoid injustice, this promise must be enforced.
Contractual Capacity
One of the requirements of a valid contract is that the parties to a contract must be
competent. Contractual capacity is very important in the enforcement of a contract. The
courts do not want anybody to be taken advantage of, or to sign a contract that they don
not understand. The law therefore protects this group of people.
Minors
A minor is a person under the legal age of majority. In most states anybody under the
age of the 18 is considered minor. Minors cannot enter into contract, except for food,
clothing and shelter. A person under 18 cannot legally purchase an automobile. If he or
she buys one, he can disaffirm the contract, however he has the duty of restitutionreturning whatever left of the item is purchased. When a minor becomes of legal age, he
has a reasonable time to disaffirm the contract; the courts will ratify the contract. Parents
are not liable for contracts signed by minors unless they guaranteed the contract.
Intoxicated Persons
A contract entered into by an intoxicated person is either valid or voidable. The courts
generally look at the degree of intoxication. If the intoxicated party did not understand
what they signed, the contract is voidable at their option, even if intoxication was
voluntary. If the person was intoxicated, but understood the legal consequences, then he
is liable for terms of the contract signed.
Mentally Incompetent Persons
If the court had adjudicated a person insane, any subsequent contract he or she signs is
void- no contract exists. Only a legal guardian can enter into a binding contract for a
mentally incompetent person. Whenever there is no prior adjudication by the courts, any
contract signed by them is either valid or voidable. If they understand all the elements of
the contract, the contract can be declared valid, however if the mentally incompetent
person not adjudicated insane by the courts does not understand the terms of the
contract, then the contract is voidable at his or her option.
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The Legality of Agreement
Legality
Any contract in violation of Federal, state or local statues is “void”. This means that the
matter of agreement must be lawful. Legality of contract varies form state to state.
Contracts contrary to Federal of State Statutes include:
Usury
This is the statue that sets the maximum rate of interest that can be charged on a
loan. Any lender who exceeds the maximum set rate commits usury.
Gambling
If a gambling contract is entered into in a state where gambling is illegal, then the
contract is void. For example, if Buyers Casino rents a space from Memphis Hotel
for gambling activities, the contract will rule that the contract is void because
Memphis Hotel knows that the space would be sued for gambling, since gambling
is illegal in the state of Tennessee.
Licensing Statues
In order to protect the public form incompetent professionals, state statues may require
certain professionals such as accountants, doctors, lawyers, nurses and stockbrokers to
obtain a license.
If the purpose of the statue is to raise revenue, such a statue does not automatically
make the contracts entered into by the unlicensed practitioner void. The contract is
enforceable, although the unlicensed practitioner may be asked to pay a fine. If the
purpose of the law is to protect the public from incompetent professionals, then the
contract is illegal and unenforceable.
Contracts in Restraint of Trade or Non-Compete Agreements
The courts will enforce a non-compete agreement, however the time limitation and the
geographical area of non-compete must be reasonable-that is, no greater than necessary
to protect a legitimate business interest.
Other Legal Contracts
When a contract is grossly unfair, or unethical, the courts can declare it unconscionable.
While the courts do not look at the adequacy of consideration, any contract that forces
one part to accept the terms of a contract that in unfairly burdensome to them is void on
the basis of public policy.
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Written Contracts
Written Contract
Not all contracts need be in writing to be enforced. However, the Statue of Frauds
passed on April 12, 1677, by the English Parliament requires that certain contracts must
be in writing to be enforceable by the court. Contracts that must be in writing to be
enforceable include:
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3.
4.
5.
Contracts for the sale of an interest in land.
Collateral contracts, such as promises to answer the debt of another.
Contracts that cannot be performed in one year.
Contract for sale of goods over $500.
Premises made in the consideration of marriage.
Exceptions to the Statue of Fraud
1. Admission of the existence of a contract. If the defendant agreed that the
contract took place, statue of fraud is waived.
2. Under the Uniform Commercial Code (UCC), an oral contract is enforceable to
the extent that a seller accepts payment or a buyer accepts delivery of goods.
3. The court can enforce an oral contract using the doctrine of promisory
estoppel- in order to prevent unjust enrichment of one party to the contract.
Parol Evidence Rule
Parol evidence rule provides that the best evidence of the prior and contemporaneous
(current) intentions of the parties is a written contract. The parol evidence rule prevents
the introduction prior negotiations or dealings at trial. The exceptions to the parol
evidence rule include.
1.
2.
3.
4.
5.
Subsequent modification of the original contract.
An omission or ambiguity.
Fraud or misrepresentation.
Prior dealings, or sage of trade.
If contract was incomplete.
Third Party Rights
Privacy of Contract
This is the contractual relationship that exists between parties to contract. Privity
establishes the fact that third parties have no rights in a contract.
Assignments
An assignment is the current transfer of an existing right. Assignment of rights in a
contract to another person may be written or oral duty to perform. The following
contracts cannot be assigned:
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1.
2.
3.
4.
Assignments forbidden by statue.
Assignments that materially change the duty of the obligor.
If the original contract forbids the assignment.
If the contract is personal in nature.
Delegations
A delegation is the transfer of contractual duty to a third party. The party delegating the
duty (the delegator) to the third party (the delegatee) is still obliged to perform on the
contract if the delegatee fails to perform. The following contracts (duties) cannot be
delegated:
1. When the performance by a third party will vary materially from that expected
by the obligee.
2. If delegation was prohibited in the contract.
3. If services are personal in nature (e.g. substituting a lesser star for Diana
Ross.)
4. If delegations is prohibited by statue.
Intended Beneficiary vs. Incidental Beneficiary
An intended beneficiary is one who can sue the promisor directly under a contract,
because the contract was intended to benefit them, such as life insurance.
An incidental beneficiary may benefit from a contract, however has no right in a contract,
and cannot sue the promisor if the contract is beached.
Title and Risk of Loss
Identification
Identification occurs when goods to a contract are set aside. In some cases identification
may be specific, but in the case of fungible products- goods that are alike by physical
nature such as wheat, oil and wine, identification can be a part of a mass. For fungible
goods, title and risk of loss may pass to buyer without separation.
F.O.B. Shipping Point vs. F.O.B. Destination Contracts
In F.O.B. shipping point also knows as shipment contract, tile and risk of loss passes to
the buyer upon tender of delivery to buyer or a common carrier, such as Federal Express
or United Postal Service. For example, if Shelby Computers- a Memphis firm orders
twenty computes from IBM to be shipped from their Los Angeles warehouse under
shipment contract, title and risk of loss passes when there computers are tendered to
Shelby Computers or a common carrier in Los Angeles. In an F.O.B. Destination also
known as Destination contract, title and risk of loss does not pass to Shelby Computers
until the computers are delivered to their office or warehouse in Memphis. If no terms are
stated in a contract, it will be assumed to be a shipment contract.
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Sale on Approval vs. Sale or Return
In a sale on approval contract, tile and risk of loss does not pass until buyer’s approval.
For example, some car manufacturers are letting consumers test drive a car for a
specified period, at the end of the agreed period, the consumer can either buy the car
(approves the sale), or return the car. This is common with purchases by end-user. In a
sale or return contract, title and risk of loss is passed tot he buyer. There is an actual
sale with right to return as per agreed period. This is common with purchases by a
reseller.
Consignment Sales
In a consignment contract, the owner (consignor) delivers goods to another (consignee),
and the consignee agrees to pay the consignor when he sells the goods. The consignee
is usually paid an agreed fee or commission for selling the goods.
Insurable Interest
A person must have an interest in order to protect the goods under contract. A buyer or
seller cannot obtain insurance unless he or she has interest in the goods. A seller’s
insurable interest continues after risk or loss passes. The bank that financed a car still
has insurable interest because they want to continue receiving payments for the financed
car.
Performance and Breach
When both parties perform their duties and obligations in a contract, no problem arises.
It is the duty of the seller to tender conforming goods to the contract, on time, and in a
reasonable manner. If a place of delivery is not specified in the contract, the buyer must
pick up goods from the seller’s place of business.
Perfect Tender Rule
If the goods or the tender of delivery fail in any respect to conform to the contract, the
buyer or lessee has the right to accept the goods, reject the entire shipment, or accept
part and reject part.
One of the exceptions under the UCC is that the buyer must generally give notice to the
seller of any defects in the goods or sender of delivery and then allow the seller a
reasonable time to “cure” the defects.
Commercial Impracticability
If an unforeseen circumstance makes the performance of a contract unreasonably
expensive, injurious or costly to a party, one of the parties may be excused from his
obligations to perform. The unforeseen contingency must be one that that would have
been impossible to imagine in a given business situates. For example, if an oil company
in Arkansas contacted with a company in New York to deliver 200,00 barrels of Iranian oil
every month, and due to the Gulf war, delivery of the oil becomes commercially
impossible, and neither party anticipated that a war would break out, the contract
between both parties can be discharged.
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Anticipated Repudiation
One of the parties can sue immediately or wait for time of performance stated in a
contract if the other party clearly indicates that he cannot perform his duties in a contract.
Buyer’s Remedies upon Seller’s Breach
1. If non-conforming goods return or claim damages.
2. If no goods are delivered, buyer can “cover”- buy from other suppliers, and sue
for the difference between contracted price and price paid in the open market.
3. Ask for specific performance if contract involved real estate or unique goods.
4. Sue immediately upon learning of seller’s breach- anticipatory repudiation.
Seller’s Remedies Upon Buyer’s Breach
1. If buyer wrongfully rejects goods, the aggrieved seller may cancel the contract,
and sue for damages incurred.
2. If seller learns of buyer’s insolvency, the seller can stop goods transit to the
buyer.
3. Sellers to special order goods are entitled to contract price (plus reasonable
incidental damages).
An insolvent buyer has the “right of performance” if he pays cash.
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Section 4: Warranties and Product Liability
The Uniform Commercial Code (UCC) states that “an express or implied warranty may be
created in a sales or lease contract. Express Warranties are promises made by the seller
to the buyer stating that:
1. Product must conform to statement of promise (not puffing).
2. Goods must conform to sample or model.
3. The goods must conform to description, e.g. if you advertised a black car,
presenting a red car does not conform to the description.
An express warranty can be in writing or can be made orally. An express warranty can
be made by a merchant (seller of goods of a kind), or non-merchant.
Implied warranties are generally not written, and are one the law derives by implication
from the nature of the transaction.
1.
2.
3.
4.
5.
Warranty of “merchantability” (applies to merchants only).
Warranty transferring good title.
Warranty that product is free form an undisclosed lien.
Warranty of “Fitness for a particular purpose”.
Implied warranty against infringement.
Disclaimer of Implied Warranties
1.
2.
3.
4.
When buyer inspects product with obvious faults.
When seller states that item is sold “With all Faults”.
When seller states that item is sold “As is”.
When no warranties extend beyond the description of the face product.
Magnuson-Moss Warranty Act
The Magnuson-Moss Warranty Act of 1975 requires that all written warranties of
consumer products that cost $10 or more must be designates as “limited” or “full”. A full
warranty means that the manufacturer or dealer repairs or replaces the product during
the warranty period. A limited warranty can restrict the warranty period. The MagnusonMoss Warranty Act was enacted to prevent deception in warranties, by making them
easier to understand.
Product Liability
The seller and manufacturers of goods can be help liable to consumers, users or
bystanders for physical harm or property damage that is caused by products that
manufacture or sell. Product liabilities remedies are available as a alternative to
remedies for “breach of contract”. Sellers and manufacturers may be liable due to:
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1. Intentional Tort (Fraud)- Intentional misrepresentation of a material fact
2. Negligence by the Manufacturer – failure to exercise due care in the sale or
manufacture of a product.
Strict Liability
Under the doctrine of strict liability, one who sells any product in a defective condition is
liable for the results of their acts regardless of intentions. Privity of contract is not a
requirement for recovery of damages.
Requirements of Strict Product Liability
1. The product must be in a defective condition when the defendant sells it.
2. The defective condition must be the proximate cause of the harm.
3. The plaintiff must incur physical harm to self or property by use or consumption
of the product.
4. The product must be unreasonably dangerous.
5. The defendant must be engaged in the business of selling that product.
6. The goods must not have been substantially changed from the time the product
was sold tot he time the injury occurred.
Defenses to Product Liability
1. The plaintiff knew of the risk of using the products.
2. The plaintiff appreciated the risk created by the defective product.
3. Misuse of product by the plaintiff. Comparative negligence – Liability may be
allocated between plaintiff and defendant.
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Section 5: Consumer Sales and Credit
Regulation Z is a set of rules promulgated by the Federal Reserve System’s board of
governor’s to implement the provision of the Truth-in-Lending Act. It requires a system of
disclosing charges to enable consumers compare credit costs using a uniform standard
system.
The Equal Credit Opportunity Act (ECOA) of 1974 was enacted to eliminate all forms
of discrimination in granting credit, including those base on race, sex, color, religion,
national origin, marital status, receipt of public assistance, and the exercise of ones rights
under the act.
Fair Credit Report Act (FCRA) of 1970 was enacted by Congress to ensure that credit
information obtained by credit agencies would remain confidential. It also requires
creditor or lender to give notice to consumer whenever unfavorable credit information is
received from a consumer-reporting agency.
Fair Debt Collection Practices Act (FDCPA) of 1977 was enacted by Congress in
order to prevent harassment by creditors or debt collectors – entitles in the business of
collecting debt for others. It does not cover creditors, unless they misrepresent
themselves to the debtors. The act prohibits the following:
 Contacting third parties except family members or attorney.
 Contacting the debtors during “inconvenient hours or at work if employer objects.
 Intimidating the debtor by using abusive language, or posing as a lawyer or
policeman.
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Section 6: Negotiable Instruments
A negotiable instrument is a written and signed unconditional promise or order to pay a
specified sum of money on demand or at a definite time to order to a specified person or
bearer. Article 3 and 4 of the Uniform Commercial Code governs transaction relating to
negotiable instruments.
A check is an example of a demand instrument, and is due on demand, and the drawee –
institution required to pay the money must be a bank. The party instructing the bank to
pay the check is called a drawer, and the person whom the instrument is made payable is
called the payee. A draft is a three-party instrument. The drawee may be a bank or a
merchant.
A Promissory Note and Certificate of Deposit is a written instrument signed by a maker
unconditionally promising to pay a certain sum in money to a payee or a holder on
demand or on a specified date.
Attributes of a Negotiable Instrument: To be negotiable, an instrument must meet the
following requirements:
1.
2.
3.
4.
5.
6.
It must be in writing.
It must be signed by the maker or the drawer.
It must be an unconditional promise or order to pay.
It must be payable on demand, or at a definite time.
It must be a sum certain in money.
It must be payable order or to bearer.
Types of Endorsements
Blank
Endorsement
Special
Endorsement
Qualified
Endorsement
Restrictive
Endorsement
Signed
→
John Jones
→Pay to Mary Smith (Signed) John Jones
→Pay to Patrick Jackson, without recourse, (Signed) John Jones
→ Pay to Caroline Hill in trust for Patrick Jackson
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Section 7: Legal Forms of Business Organizationiii
When considering the proper legal structure for a business, there are two primary concerns: (1) tax
consequences and (2) legal consequences. It is strongly advised that a would be business owner
consult a legal and/or tax professional before deciding upon a business structure and/or begin
business operation. A brief description of forms of ownership is listed below. Additional
information may be obtained from www.nolo.com.
Sole Proprietorships
A sole proprietorship is a business in which the owner and the business are legally and for
tax purposes are inseparable. Although business losses and income flow directly through
to the owners without being taxed first, a sole proprietorship has unlimited legal liability
for the owner.
Partnerships
A business with more than one owner that is not incorporated or organized as an LLC is,
by default, a partnership. If you haven't yet drafted a partnership agreement spelling out
the relationship between you and your business partners, you're asking for trouble. A
special kind of partnership is a limited partnership. It has different rules regarding a
limited partner's management powers and personal liability.
Corporations
A corporation is legally separated from the individuals who own or operate it. Forming a
corporation limits your personal liability for business debts and obligations. However,
corporation owners have to pay “double” taxes: corporate taxes and personal taxes for
owners and/or shareholders.
Limited Liability Companies (LLCs)
LLC’s are a hybrid of a partnership and a corporation. LLC’s offer a new way of
organizing and managing your business. However, creating an LLC involves filing the
correct paperwork with the state. LLC’s offer flexible management structure, though
owners must comply with certain state and federal laws. It is strongly advised to consult
legal and tax professionals before organizing an LLC.
Non-Profit Corporation
Yes, a non-profit corporation is a business. It is a business enterprise with a tax
exemption. Formal non-profit status involves receiving designation from the
Internal Revenue Service under Section 501 (c) of the Internal Revenue Code of
1986. Special considerations for forming a non-profit corporation are its limitations
and the types of activities that would be most appropriate. The assets of a
nonprofit must be irrevocably dedicated to charitable, educational, religious or
similar purposes. If a 501(c)(3) nonprofit dissolves, any assets it owns must be
transferred to another 501(c)(3) organization. Such an organization cannot
campaign for or against candidates for public office, and political lobbying activity
is restricted. If a nonprofit makes a profit from activities unrelated to its exemptpurposes activities, it must pay taxes on the profit (but up to $1,000 of unrelated
income can be earned tax free).
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Organizations that should consider becoming nonprofit corporations include: child care
centers, shelters for the homeless, community health care clinics, museums, hospitals,
places of worship, schools, performing arts groups, and conservation groups.
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Endnotes
iRoger
Miller and William Hollowell, Business Law: Text and Exercises (West Educational Publishing)
2
Nancy K. Kubasek, Bartley A. Brennam and M. Neil Browne, The Legal Environment of Business (New
Jersey: Prentice Hall, 1999)
3Jeffrey
Beatty and Susan Samuelson, Business Law In The News (New York: Little, Brown and Company,
1996)
iii
Minor, Professor Michael O, Small Business Planning Guide, 2001
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