Law of Business Exam 3

Agreement- The Acceptance Expression of Assent

(1) unconditional: must be a mirror image of the offer, if conditions are added that creates a counteroffer (2) unequivocal (3) properly communicated

True

(T/F): "I will sell you my car for $5,000." says A. "How about $4,000 instead?" says B. The offer to sell for $5,000 has been terminated

False

(T/F): A signs a contract to buy B's ranch for $900,000, but later learns that he overestimated the market value of the ranch by over $100,000. A will probably be able to avoid the contract for lack of adequate consideration

False

(T/F): Only 8 states have not adopted Article 2 of the UCC

True

(T/F): Someone who presents himself as having special knowledge or skills relating to a product may be held to the UCC standard of a merchant even if the person does not actually have such skilled knowledge

False

(T/F): The UCC's statute of frauds provision says that all service contracts must be evidenced by a signed writing

Elements of a contract

- An agreement, through offer and acceptance - consideration - contractual capacity - legality - genuine consent - writing, if necessary under statute of frauds - rule: if all elements are present, the contract is generally termed valid

Discharge by Impossibility

- An unforeseeable, unanticipated even occurs that makes a performance impossible: "extreme or unreasonable difficulty, expensive, injury, or loss (restatement 2nd of contracts); one party dies or is incapacitated; law passed making performance illegal; subject matter of contract is destroyed - impossibility doctrine has been extended to commercial impractical or frustration, worktime shortages, extreme weather causing crop failure, loss of needed supplies due to sudden international embargoes; difficult to be enforced in courts generally expect at least part performance

Contract

- Blackstone's Definition: "an agreement upon sufficient consideration, to do or not to do a particular thing" - Modern Definition: "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty" - the promise itself, creates a manifestation of intent-a willingness to be bound - form a legal relationships and duties between parties - not all promises are enforceable contracts- must meet requirements of a contract to be an enforceable promise

Buyer's Rights and Obligations

- Buyer's duty is to accept conforming goods and pay for them - buyer has right of inspection before acceptance - buyer may reject nonconforming goods and withhold payment - buyer has duty to accept goods if goods nonconforming but accept , buyer may later revoke acceptance if problem "substantially impairs" value of goods - buyer has obligation to pay when goods are received; can inspect before payment is made

CISG Similarities to UCC

- CISG does not have statute of frauds (unique to common law countries) - CISG does not have parol evidence rule - formality: need not be formal, nor in writing; look at circumstances for interpretation - offers: advertisements are not offers; can fill in missing terms. is sufficiently definite if indicates goods and expressly or implicitly makes provisions for determining the quantity and price - acceptance: must be made within time stated or reasonable time; sent by reasonable means - battle of the forms: if differences are material, then 2nd form is counteroffer, not contract - duties of parties: seller must deliver goods with good title; buyer must notify seller of defects within a reasonable time - remedies: behave in reasonable manner and give opportunity to cure breach (nachfrist notice-period of grace); notice of the problem and a chance for nonconforming party to cure before lawsuit; duty to mitigate damages

Contract Law

- Common Law: judge made; each state differs some; there is uniformity about general contract principles that run through state laws; years ago, English courts drew guidance from lex mercatoria (the law of merchants); it originated in Roman law of contracts covering the roman empire and was comprehensive - Uniform Commercial Code (UCC): all states have adopted excepted Louisiana; covers contracts for sale of goods; many countries rely on Code Law only for their basic legal framework

Express Contract

- Direct statement by the parties of the promises made - may be oral or written - key terms expressly agreed upon by the parties

Universal Agent

- Do all acts that can be legally delegated - durable power of attorney (intended to last and continue even if a person becomes incompetent - ex: general power of attorney

History of Commercial Law

- English courts looked at lex mercatoria (the law merchant) for guidance - contract law could be more formal than how businesses actually interacted - in the early 20th century, each state had different laws for commercial transactions - made it difficult to do business in different states - in 1950s UCC presented to the states - all states have adopted except Louisiana has not adopted Article 2 - Article 2 covers contracts for sale of goods - most countries rely on code law to govern commercial transactions

Consideration- Enforceable Promises Without Consideration

- Promissory Estoppel (or Detrimental Reliance): use of this equitable doctrine avoids injustice due to promisee's reasonable reliance on the promissor's promise; promisor is estopped (prevented) from denying a promise - restatement (2nd) of contracts: "a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee... and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise - courts do not impose the rule lightly - sometimes used in promises to charities, especially if organizations rely on the promises to act in some way

Performance and Obligation

- UCC deals with sellers delivery conforming to agreement: if the goods fall into any respect to conform to the contract the buyer may reject the whole, accept the whole, or accept any commercial unit of units and reject the rest - tender of delivery: valid and sufficient offer of performance under a contract; seller obligated to tender goods at buyer's place of business; buy may contract to accept goods at point of production; "perfect tender rule"-seller must tender the quality, quantity, and delivery method as specified in the contract; if no perfect tender, buyer has right to reject goods and resend contract - sellers right to cure: time of sellers performance had not yet passed, seller notifies buyer of intent to cure defect AND, seller properly repairs/replaces defective goods within time allowed

Filling the Gaps

- UCC fills parts of the contract left open or unclear; ex: price or delivery terms so a contract can proceed - UCC will look to trade usage and past business dealings of the parties in determining the outcome of unclear terms - it will also apply "reasonableness" standard - if the contract is not clear about price, the courts determine a reasonable price (fair market value, past dealings, etc.) - regarding quantity, the UCC recognizes that requirements contracts and output contracts have quantities that are unclear - regarding delivery UCC says it must be within a "reasonable time" - the seller has option to arrange shipment - presumes delivery at sellers place of business

International Sales Disputes: The Dominance of Arbitration

- United Nations encourages use of arbitration dealings through convention on the recognition and enforcement of foreign arbitrable awards - if a nation has adopted the convention: courts bound to recognize and enforce arbitration decisions; if proper procedure was followed - exception: if the procedure is in conflict with law of the nation of one of the parties or has gone beyond scope of the matter covered by arbitration - in US, parties to a contract written under the CISG who require arbitration have listen reason to be in court - duty of arbitrators to resolve dispute under CISG rules

Capacity- Void and Voidable Contracts

- Void: contract does not exist at law; one of the elements is missing (lacks a requirement of a contract); ex: contract for an illegal subject matter; courts won't accept disputes - Voidable: is valid but capable of being voided by a circumstance; one party to the contract has right to void legal obligations; ex: minors contracts, contracts with person under influence of drugs, fraud by one of the parties

Sole Proprietorship

- a person doing business for him/herself - usually the proprietor owns all of the business - responsible for control of the business, management, liabilities/debts, etc. - may hire agents-liable for all of them as well - capital must come from the owners resources or is borrowed - business profits are taxed personally to the proprietorship - record keeping formalities are at the owner's descretion

Capacity- Minors

- a person under the legal age of majority (used to be 21, now its 18) - have partial capacity, making their contracts voidable - policy to protect the young from the results of their own folly - general rules: (1) minors may disaffirm contracts of their option (2) if a minor disaffirms a contract after receiving benefits, restitution must be paid for the benefit - contracts that can't be disaffirmed: enlistment, marriage, educational loans, insurance loans, medical care - after reaching majority, the minor may ratify the contract

Implied Contract

- actions and circumstances infer and define the terms of the contract - may be words, conduct, or gestures - contracts are implied at law - ex: at a check out counter at a grocery store, actions of the parties creates offers/acceptance

Agent Acts for the Principal

- actual authority: principal sends signals to the agent to do something with a third party; express authority is oral or written instructions which creates authority; implied authority is the principal's conduct or trade customs create authority - apparent authority: principal sends signals to the third party that what the agent does binds the principal; there is appearance of authority that a third party could reasonably conclude

Agency Relationship

- agency is created when a person or company (an agent) agrees to act for or in place of another person or company (the principal) - the principal creates authority in an agent - the agent receives authority and carries out the principal's instructions - third parties make contracts or are involved in torts with the agent - result: the principal is generally bound by the agent's acts with a third party

Subagents

- agent delegates authority to other agents

Agency Coupled with an Interest

- agent has paid for the right to have authority for a business

Quasi ("almost") Contract

- aka quantum meruit - not a true contract - equity concept used by courts to prevent injustice - example: you watch a crew (in good faith) come to your house and pave your driveway. you cannot let them do the job and not pay them anything for their work

Limited Liability

- allows a person to invest in a business without placing their personal wealth at risk - allows investors to be passive toward internal management - sole proprietors and general partners have unlimited personal liability for debts of business including torts - liability of limited partners is limited to capital contributed to limited partnership - shareholders of corporation and members of limited liability companies risk only their capital investments if corporations fails- generally not personally liable for business debts or torts - limit on limited liability: piercing the veil- affects all limited liability organizations, prove legal form is a sham, owners will be treated as if proprietor or partners with unlimited liability, usually involves fraud, undercapitalization, or failure to follow corporate formalities; result- owners are personally liable for all corporate liability (torts, contracts, debts, etc.)

Partnerships

- an association of two or more persons to carry on business as co-owners for a profit - partners control the operations and profits equally unless agreement says otherwise - under most states laws, a partnership may be sued as an entity - most states have adopted the Uniform Partnership Act and the revised version; courts look there for guidance when partnership agreements are silent - not required to enter into a formal agreement for it to exist at law; however, agreements are preferable especially regarding finances, management, and dissolution issues - each partner has a fiduciary duty to other partner; Latta v. Kilbourn: one partner may not use partnership assets for own benefit - termination: dissolution occurs when an event takes place to dissolve the partnership; change of the composition of the partners; bankruptcy, death, or withdrawal of a partner dissolves the partnership; winding up of the partnership involves completing any unfinished business; if terminated partnership must be reformed - common: partnerships purchase life insurance on partners; proceeds used to buy back the interest of deceased partner from her estate

Creating a Corporation

- articles of incorporation and an application are send to the appropriate state offices - information includes: name and address of corporation, name and address of registered agent, purpose of business, class(es) of stock and par value, names and addresses of incorporations - the state issues a certificate of incorporation - incorporation holds a first organization meeting to: elect a board of directors, enact bylaws or rules that govern internal operations, and issue the corporations stock

Discharge of Contracts

- breach: non-breaching party is discharged; material breach; anticipatory breach or repudiation: a party indicates inability or lack of desire to perform - discharge by agreement of the parties: recession (parties agree to walk away); novation (parties agree to substitute new contract); accord and satisfaction (parties are satisfied by alternative performance)

Seller's Remedies For Buyer's Breach

- buyer repudiates before receiving goods: cancel contract, identify goods, minimize losses by completing or stopping manufacture; withhold or stop delivery; resell goods in commercially reasonable manner; sue buyer for losses incurred - buyer repudiates after receiving goods: if buyer won't pay, sue for payment and damages; if buyer wrongfully rejects, can reclaim goods, remedy as above; it can reclaim goods, sue for payment and damages

Creating an Agency

- by agreement of the parties: may be oral or written; legal document called power of attorney establishes agency and creates an attorney-in-fact - implied or expressed ratification by the principal: a principal accepts responsibility for acts of an agent going beyond their authority - agency by estoppel: actions of the principal lead others to believe an agency exists- the principal is estopped from denying the agency's existence - agency by operation of law: the agent acts beyond the authority granted; necessity or emergencies create agency existence; the agent may do acts and bind the principal by operation of law

Forming a sales contract

- common law governs a contract, unless the UCC definitions apply to a sale as specified in art. 2 - mostly, the UCC reduces the formality required - creates UCC based relationships

Reality and Genuine Consent

- concerns people entering into agreements of knowingly with free will - if real consent is missing, there is no meeting of the minds - if there is unilateral mistake over a simple error, the error can be avoided (typographical error $100,000 instead of $10,000; the $100,000 not enforceable) - examples: fraud, duress, misrepresentation, undue influence

Legality- Unenforceable Contracts

- contract is actually valid when made, but courts will not enforce it - examples: unconscionable contracts (unequal bargaining power); exculpatory agreements - subsequent illegality: example being a company agrees to ship wheat to Iran, after shipment is at sea US gov. declares no US firms may trade with Iran, result- unenforceable under US law even if seen as legal in Iran

Contracts in Writing

- contracts do not always have to be in writing to be enforceable, however, written contracts are always good evidence of the agreement in case of dispute - contracts that do require writing: sale of land or interest therein, contracts that cannot be performed within 1 year, promise to pay the debt to another (including debts if an estate), promises made in consideration of marriage - sufficiency: writing must set out the material terms of contract; names of parties, consideration, subject matter, invoices, emails, sales orders, checks, confirmation may satisfy this requirement; need not be a formal contract

Principal's Duties to Agent

- cooperation: with the agent to fulfill the agency purpose - compensation: for the services rendered; unless agent agreed to work for free - reimbursement: of "reasonable" expenses; no reimbursement for agent's misconduct - working conditions: as required by law and to meet legal obligations - indemnify (pay back): for legal liabilities incurred by the agent

Business and Taxation

- corporate profits are taxed at corporate tax rate - distributions dividends are then taxed at each individual shareholder's tax rate - in effect this is double taxation of the same profits - partnerships pay no income taxes; income passes to parties who pay income taxes - limited liability companies are treated like partnerships for federal tax purposes

Consideration- Adequacy

- courts generally do not care if not fair market value - if a party bargains poorly, courts usually will not interfere - those who bargain take on the risk of their own errors - there are exceptions like fraud and duress - the main concern is an exchange of mutual promises and obligations by the parties

Buyer's Damages

- cover: buy substitute goods and recover price difference - incidental damages: include reasonable costs of inspecting, receiving, transporting, and taking care of goods - consequential damages: foreseeable damages that result from a seller's breach; may be with 3rd parties not necessarily the seller

Professional Corporations (PCs)

- created by state laws - owners of PC can only be professionals involved in the firm itself; ex: MDs whose practices are tied together) - created to have limited liability for its members - stock not sold to outside investors - has special tax treatment with IRS

Agreement- Rejection

- done by the offeree - can occur through lapse of time: reasonable amount of time depending on the facts and circumstances; options contracts are different - counteroffers: created by rejecting the original offer but keeping negotiations open by presenting new conditions (must comply with the mirror image rule) - can occur by operation of law: intervening illegality (law changes between the time the offer is made and accepted), destruction of subject matter, and death or insanity of offeror or offeree

Employment-At-Will

- employers can hire and fire who they want - employees may work at-will or quit when they want; may sue for wrongful discharge under employment contract, but must establish why limits to employer's right to discharge; can be contractual limits to all at-will (express or implied contracts, implied covenants of good faith and fair dealing) - public policy exceptions regarding dismissal: refusing to violate laws; important public duty (jury duty); public right (filing for workers comp); "whistleblowing"

Legality- Contract Contrary to Public Policy

- exculpatory agreements: types of contracts written to completely escape liability - unconscionable agreements: outcome is grossly unfair to an innocent party - contracts in restraint of trade: contracts that restrain trade or unreasonably restrict competition; covenant not to compete may be restraint of trade unless, limited by time, geographic area, or scope (different states differ on this subject); covenants not to compete often used in sale of business or employment contracts

General Agents

- execute all transactions in connection with a business - ex: top level managers

Special Agents

- execute specific transactions or series of transactions - ex: real estate agent

Employment Handbooks

- explain companies polices, benefits, and procedures - discuss grounds for discipline and dismissal - may limit rights of employers to dismiss employees under employment-at-will doctrine - may be interpreted as creating express or implied contract between employer and employee; some employers place bold disclaimer in front of handbooks saying it is not a contract and have employees sign

Laws Developing for Franchises

- federal and state law protect investors - FTC Franchise Rule: Franchisor is required to give an offering circular (disclosure statement) to potential franchises - FTC v. Wealth Systems: FTC alleged that 3 entities violated rule selling home-based internet business opportunity by misrepresenting that purchasers will earn substantial income - when violations occur the result is usually that prompted activity is closed down - some states have laws to regulate franchises as well (ex: California) - many states have business opportunity disclosure requirements - most states use the Uniform Franchise Offering Circular as a basis of reporting - state agencies have authority to investigate franchise fraud and other bad business practices - some franchises give extra protection by state laws. examples include auto dealers and gas stations often have extra rights regarding termination

Executed Contract

- fully performed; nothing left undone - if fully performed, damages for the price of performance may be sought as a remedy

Uniform Commercial Code (UCC)

- governs contracts for sale of goods (not services, real estate, or professional services) - if contract is a mix of goods and services: UCC applies if dominant value is in goods; common law applies if dominant value is in services ; however parties can agree that either UCC or common law will apply to govern their contract - states adopt model UCC with some variations - purpose: simplify, clarify, and modernize the law governing commercial contracts

Acceptance under Art. 2

- greater flexibility in communication of acceptance - "any reasonable manner" under the circumstances - may be valid even if add new terms (seen as proposals, but not when both parties are merchants) or change existing terms - if there are "material alterations" in the acceptance, they become part of the contract only if the offeror accepts the new terms - conflicting terms: the "battle of the forms"; takes out the mirror image rule out of the UCC that's in common law; when offeree's form does not match offeror's form, major terms must match; there is an acceptance but offeror's terms govern unless special actions taken - contract modification: need not provide new considerations, but must have good faith dealing. modification must usually be in writing - statute of frauds: proves there was a contract; basic rule is that the sale of goods for $500 or more is not enforceable unless in writing and signed by the party against whom enforcement is sought; doesn't have to be a formal writing; sufficiency of writing is relaxed under UCC so not every material term needs to be specified, just enough writing to indicate intent - failure to respond to a writing: if any writing in confirmation of a contract is received, it satisfies the writing requirements unless "written notice of objection" is within 10 days after writing was received - parol evidence: more relaxed under the UCC than under common law; cannot usually be used against the writing but it can explain customary trade dealings or the meaning of terms; if the intent is "a complete and exclusive statement of terms" this may not be used to change the terms

S Corporation

- helps avoid double taxation - regular C corps can elect with the IRS to be classified as an S corp. - have only one class of stock - no more than 100 shareholders - only natural persons (US citizens or legal residents) can be shareholders-not another corporation or partnership) - primarily for tax considerations - profits/losses allocated to shareholders who pay income taxes - popular in small businesses

Principal's Liability

- if the principal directs the agent to do tortious acts, then the principal is liable (rare) - principal may give actual authority or instructs employee or agents to do a certain act, thereby the principal may ratify agents conduct - vicarious liability is imposed - "liability for unauthorized acts of the agent": was the agent acting "within the scope of their employment?"; courts use the doctrine of respondeat superior (let the master respond); employers may be liable for torts of employees due to negligent hiring or supervision

Economic Loss Rule

- in breach of contract, if no tort involved, damages are only those related to economic losses suffered by the breach - based on 3 policies: (1) maintain distinction between tort and contract law (2) protect commercial parties freedom to allocate risks by contract (3) encourage the party best situated to assess the risk of economic loss - damages are only those related to lost profits and costs due to the breach - accounting evidence and specific calculations are necessary evidence to be presented - no punitive damages or mental distress awards: parties often try to assert a tort, usually fraud, along with breach of contract to try to get these damages

Corporation Basics

- legal "entities" or "persons"; can sue and be sued; have liability; has constitutional rights (except self incrimination right) - must meet formal requirements according to state statutes, states issue corporate chapter - liable for agents actions and contracts - states have their own corporation laws and federal government plays very limited role

Negligent Hiriing

- liability may be imposed for intentional torts committed by an employee who is not acting in the scope of employment - obligations to check backgrounds of an employee; may conflict with EEO rules; restrict check to relevant issues - in some instances, can also be obligations to check independent contractor for doubtful history-ex: child molester shouldn't be in routine contact with children or bad driving record should not be permitted to drive a company truck

Organizational Features for Businesses to Consider

- limited liability, control, capital consideration, taxation, transferability of ownership interests, method of creation and termination, entity as a distinct status separate from its owners

Agent's Duties to the Principal

- loyalty: place the principal's interests about the agents interests; can not compete with principal without permission; Massachusetts Court- held CEO would forfeit all compensation paid to him during his disloyalty to the company - obedience and performance: to perform in compliance with the principal's instructions - reasonable care and skill: to perform as is "reasonable under the circumstances" (including emergencies) - account: for the funds and property of the principal (avoiding mixing personal funds with the principals) - notify and inform: as to all facts of the agency purpose

Business Judgement Rule

- makes directors and managers immune from liability - when problems result from honest mistakes in judgement - if there is a reasonable basis for their decisions; if they act in good faith

UCC Warranties

- merchantability: for sales by merchants; goods must be quality generally acceptable in trade; must be able to do what is expected - implied warranty of fitness for a particular purpose: buyer communicates to seller or seller "had reason to know" buyer's particular need, buyer relies on sellers expertise, then may have warranty; ex: a salesperson's recommendation of a certain paint on a metal building that will not chip or peel - seller may make disclaimers; language may need to be specific and the disclaimer must be conspicuous

Merchants Under Article 2

- merchants are held to a higher standard of conduct than others- "good faith and honest dealing" required - merchant: regularly deals in the goods in question, presents themselves as having knowledge or skill specialized to the transaction, or has an agent who does the same

Close Corporation

- minority of states allow - distinguished from "closely held corporations" - limited number of shareholders (30-50) - shares not sold openly - shareholders must have agreement that governs affairs - not subject to formal rules regarding shareholder and director meeting (unlike regular corporations)

Remedies

- monetary: compensatory, actual, expectance, liquidated, nominal, punitive (or exemplary), special - equitable: specific performance, injunction, restitution - mitigation of damages: injured party must make efforts to mitigate or lessen losses

Goods, Sales, and Title under UCC

- must be moveable things; tangible personal property - good title cannot pass from stolen goods - title must pass to be a sale - one can hold title if: goods exist, goods identified to contract - title can pass as parties see fit, examples being when goods: arrive for shipment at a port, arrive at the buyer's warehouse, lave the seller's warehouse, are halfway between buyer and seller, etc. - UCC says if not specified that title passes when: seller completes all obligations regarding delivery of goods, or when seller delivers title documents (if goods did not need to be moved)

Gratuitous Agent

- no payment is made to the agent - ex: a favor or a volunteer

Executory Contract

- not fully performed - if partial delivery of products, buyer need not pay total price

Intent to Contract

- offer and acceptance rules relaxed: only need agreement between parties - indefinite offer: okay to be missing major terms such as price, delivery, payment, etc. if parted intended to be bound; usually need quantity unless its an output contract or requirements contract - courts require good faith dealing - merchants firm offer-irrevocable: when signed in writing that offer will remain open for a given period; if not stated, period is "reasonable time" not to exceed 3 months

Agreement- Revocation

- one can change their mind anytime before acceptance, even if you as the offeror say it will be open for a certain period of time - the withdrawing of the offer by the offeror

Limited Liability Companies (LLCs)

- owners are the members; good for startups because of flexibility - treated like a corporation for liability for like a partnership for federal tax purposes - state laws have procedures to create LLCs: file articles of organization and state issues a certificate to operate the LLC - one person can form an LLC in most states - members have membership interests; have an outstanding agreement similar to the bylaws of a corporation - technically does not have perpetual life; death, resignation, retirement, or expulsion of member terminates the LLC (like a partnership); however, if remaining members consent, LLC can continue (should be set out in the articles of organization) - termination: there is a period of winding up, followed by payment to creditors and distribution of remaining assets

Material Breach

- performance substantially less than required - damages now due to non-breaching party

Social Media Rules in the Workplace

- policies making clear that organizations have the right to access emails that come to company computers or accounts - software scans emails for red flag words (sex, guarantee, social security number, etc.) - policies reduce: lost work time, litigation from harassment from emails with sexual content, loss of information that should be secure, etc. - Maryland: first state to ban employees from requesting access to social media account - some employers ask for voluntary access to social media but do not insist - remember everything once posted even if removed can be retrieved later

The Essential Employment Relationship

- principal-agent: agents act on behalf of the principal; agent has a degree of personal discretion; principal is usually liable for contracts made - master-servant or employer-employee: master servant is an old term still used by employer-employee is used more; employee's conduct is controlled by employer; the employee can also use an agent (distinction is sometimes blurred); employer is usually liable for contracts made by employee; may be responsible for some torts - employer-independent contractor (IC): not an employment relationship; employer does not control the details of the IC's performance; ICs are usually not agents, but can be (attorneys, auctioneers, etc.); employer is not liable for the ICs torts

The Role of Contract Law

- provides a legal mechanism to deal with others - law of contracts has evolved in commerce over the years/centuries

Convention on Contracts for the International Sale of Goods (CISG)

- pulls from civil law instead of common law - international sales covered by CISG default rule of law for commercial sale of goods by parties in countries that have adopted CISG - parties can specify to exclude application of CISG and choose another law to govern the contract - covers only sales between merchants, not the public - sales excluded: auctions, consumer goods bought for household use, contracts primarily for labor or other services, electricity, ships and aircrafts, securities such as stock, negotiable instruments, and money

Transferability of Ownership Interests

- refers to ability of an owner in a business to sell or pass interests to others - nontraded entities: in sole proprietorships, selling the business ends the existing proprietorship, price is FMV to be determined; if a partnership sells or assigns interest in the partnership, usually by agreement the partnership continues but the new person does not automatically become a partner- new person is just entitled to receive the share of profits the partner would have received, they cannot participate in management of partnership or right to partnership information without permission of other partners (often share is bought by other partners)

Capacity

- refers to the legal ability to create a contract - some have limited capacity to contracts: minors, intoxicated persons, insane persons, - if there is no capacity the contract is void - if there is partial capacity the contract is voidable (may disaffirm)

Parol evidence Rule

- restricts use of oral evidence when evidence is contrary to terms of written contract - oral evidence cannot contradict, change, or add terms to written contracts - if a written contract is incomplete, ambiguous, or there is evidence of fraud, mistake, or misrepresentation, then oral evidence may explain the problems or agreement beyond what was written

Buyer's Remedies

- seller delivers nonconforming goods buyer rejects: cancel contract, obtain goods from another supplier, sue seller, sell rejected goods to recover advance payments; if no advance payments, store or reship goods - seller delivers nonconforming goods buyer accepts: deduct damages from price, sue seller for damages, sue for breach or warranty

Buyer's Remedies for Seller's Breach

- seller repudiates before delivery of goods: cancel contract, obtain goods from another supplier, sue seller - seller fails to deliver: cancel contract, obtain goods from another supplier (called cover- price paid for substitute goods or markets price for measure of damages), sue seller

Major Parties in a Corporation

- shareholders: owners of the corporations; no day-to-day control of activities; meetings need quorum (usually more than half total shares present), most give their proxy to 3rd parties to represent them; elect board of directors; no legal relationship to creditors - board of directors: have management power over large decisions; can be removed from office by shareholders at an election or for cause (breach of duty, misconduct, etc.); have fiduciary duty of loyalty to the shareholders - managers: appointed/hired by directors to manage day-to-day decisions; have duties of care and loyalty to directors - employees: workers

Consideration

- something of value or something bargained for in exchange for a promise; keeps contracts from being a gift - traditional rule, must create: legal detriment to the promisee or legal benefit to the promisor, the legal detriment and benefit usually occur at the same time, preexisting duty rule (doing something you were already obligated to do, post consideration rule (has to be immediate or future to have consideration) - Hamer v. Sidway: changed the rules of consideration by emphasizing the consideration being something you have the legal right to do

Agreement- The Offer

- the offer: creates an offeror (person making the offer) and an offeree (person to whom to offer is made); sometimes terms are assumed (i.e. shipped computer is packaged property - between the offeror and offeree: (1) manifestation of intent (is the offer serious), preliminary negotiations vs intent to offer, ex: most advertisements are regarded as invitations for others to submit an offer to buy; (2) define terms and conditions; (3) communication, ex: person returns a dog but does not know of the reward - Restatement (2nd) of Contracts: "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it"

Franchise

- three types: product distributorships (ex: ford dealership), trademark/trade name licensing (ex: coca-cola), business format franchising (ex: McDonalds) - franchisor grants a right to sell goods or services to a franchisee in return for payment of a franchise fee - uniform product or services and the use of a trademark helps the franchise establish quickly in the market - the franchise agreement sets forth rights and obligations of the parties (ex: territorial rights, fees and royalties, termination, etc.) - termination: through explicit events that bring about franchise's termination; fixed expiration time; franchisor's right to termination reoccurrence of events: inspection problems or violations of franchisee, bankruptcy of franchisor

Limited Partnership

- two or more persons (partners) who have agreed to carry on a business venture for profit - must have a written agreement filed with the state; puts 3rd parties on notice that limited partner's assets are not available to satisfy any claims against the limited partnership -general partners: manage the business, are personally liable to creditors, have duty to account to the limited partners - limited partners: investors only; may not manage the business, are not liable for debts beyond their contributions (will only lose their investment) - limited partners become general partners at law if they participate in or manage the business - most states use some form of the ULPA or revised version

Substantial Performance

- usually in good faith - usual remedy is the contract price minus damages resulting from lack of complete performance

Sales Warranties

- warranty of title: good title must be transferred free of claims against it - express warranties: created by sellers promise as to quality, safety, performance, or durability of goods may be evidenced- from sample or model, by description of attributes, or by sellers statements or promises - warranties may be disclaimed, but disclaimers must be specific to the type of warranty and must be conspicuous

Assuring Foreign Buyers of Product Quality

- when a firm is unknown, especially moving into foreign markets, it needs to demonstrate products are good quality - certification of private organizations based in Switzerland that has global acceptance is a good mechanism - International Organization for Standardization (ISO): network of national standards bodies in 163 countries; coordinates the system and sets the standards; ISO certification is required by many firms before they will consider buying goods; firms apply for ISO certification, visited by a certified register, follow a complex procedure to document and organize production procedures; firms are audited for compliance, firms must demonstrate how they know and follow quality-assurance procedures

Legality

- without it, courts will not enforce the contract - the subject matter must be lawful (criminal activities, sale of prohibited drugs, gambling activities in some states are not lawful); interest rates on loans that violate usury laws - courts may strike entire bargain as unenforceable or only a part that concerns illegal subject matter

Liability for Contracts

1. disclosed principal: identity of principal is known by the third party at the time of making of contracts with the agent 2. principal is liable to a third party for a contract of the agent if the agent has actual authority 3. if there is apparent authority, the principal is contractually liable to the third party. however the principal may sue the agent for losses if agent has breached a duty 4. undisclosed principal: identity of the principal is unknown to third party which can be fine. agent does the work and will be indemnified by principal is agent acts within scope of authority

Termination of agency

1. either party may terminate (unilateral termination) 2. specific date set for agency to end 3. purpose of agency is fulfilled. notice of termination must be made to third parties to end the agents apparent authority 4. termination by operation of law: principal or agent dies; subject matter of the agreement is lost or destroyed

Articles of the UCC

1. general provisions: purpose of the UCC guidance and definitions 2. sale of goods 2A leases: sale of goods or lease of goods 3. negotiable instruments: use of checks, promissory notes, and other financial instruments 4. bank deposits and collections 4A fund transfers: rights and duties of banks and their clients and money transfers between banks 5. letters of credit: guaranteed payments by a bank that extends credit on behalf of a client 6. bulk transfers and bulk sales: auctions and the sale of large part of a company's assets 7. warehouse receipts, bills of landing, and other documents of title: storage and bailment of goods 8. investment securities: rights and duties related to stock and financial assets 9. secured transactions: sales in which seller holds a security interest in goods sold

Uncle Jim tells his niece as she goes off to State University that if she maintains a 3.5 average that he will buy her a BMW convertible when she graduates. She tells you have a deal! At graduation she has a 3.7 GPA and so she wants to BMW convertible. Uncle Jim says that he doesn't have to giver her the BMW convertible because what she did was for her own good. Niece wants to sue Uncle Jim to get the BMW convertible. There is probably:

A breach of valid contract

BLANK of the UCC governs the law relating to leases of goods

Blank: article 2A

In case of BLANK a person enters a contract because they are so dominated by another person, or have so much trust in that person that they are subject to improper persuasion

Blank: undue influence

Suppose parties to a contract that is under the UCC fail to specify some term. The UCC:

has rules to fill the gap about most silent terms

For Amy's 16th birthday her parents giver her money so she can make a down payment on a car she wants. She goes to a car dealership on her own and enters into a contract with the car dealer to make payments. This is a:

voidable contract