R7: Business Law-Part 1

North, Inc. hired Sutter as a purchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Which of the following statements is correct? a. Sutter will be liable to Orr because Sutter's actual authority was exceeded. b. Sutter will not be liable to reimburse North if North is liable to Orr. c. North will be liable to Orr because of Sutter's actual and apparent authority. d. North will not be liable to Orr because Sutter's actual authority was exceeded.

c. North will be liable to Orr because of Sutter's actual and apparent authority. Explanation: Here, Sutter had no actual authority because actual authority is that authority which the agent reasonably believes he has, and here North told Sutter that he no longer had authority to make unlimited purchases. There is no requirement that actual authority granted in writing be rescinded in writing. Nevertheless, North will be bound because Sutter had apparent authority. Apparent authority arises from a third party's reasonable beliefs based on the principal's communications directed toward the third party. Here, North had given Sutter written authorization to make purchases for North without limitation, and Orr had been shown the written authorization. North's secret limitation on Sutter's authority has no effect on Sutter's apparent authority. Thus, North is liable to Orr for the purchase of all 500 recorders because Sutter had apparent authority.

Jefferson Hardware ordered three hundred Ram hammers from Ajax Hardware. Ajax accepted the order in writing. On the final date allowed for delivery, Ajax discovered it did not have enough Ram hammers to fill the order. Instead, Ajax sent three hundred Strong hammers. Ajax stated on the invoice that the shipment was sent only as an accommodation. Which of the following statements is correct?

Answer: Ajax's shipment of Strong hammers is a breach of contract. Explanation: The examiners were trying to trick you here. Under the Sales Article, an offer can be accepted by shipment, and shipment of nonconforming goods can constitute both an acceptance and an immediate breach unless the seller had notified the buyer that nonconforming goods would be shipped as an accomodation. The accomondation rules does not apply here since reasonable notice was not provided that nonconforming goods would be shipped as an accomondation to the buyer. Thus, the shipment of a different brand of hammers constitutes a breach of contract.

Blue, a used car dealer, appointed Gage as an agent to sell Blue's cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a subagent. To whom does Vond owe a fiduciary duty? A. Gage only. B. Blue only. C. Both Blue and Gage. D. Neither Blue nor Gage.

Answer: Both Blue and Gage. Explanation: A subagent is one who assists the agent in the performance of his or her duties. When a subagent is appointed by an agent with authority to appoint a subagent, the subagent owes a duty to both the agent and the principal.

Under the agent's duty to account, which of the following acts must a gratuitous agent perform?

Answer: Commingle Funds-No; Account for the principal's property-Yes Explanation: An agent is required to account timely and properly for money the agent spent while acting on behalf of the principal. As part of this duty, the agent must keep the principal's money or property separate from the agent's own money. Only choice "3" states that the agent must account for the principal's property, but cannot commingle funds.

Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?

Answer: Debtor has rights in the collateral-Yes; Proper filing of a security agreement-No; Value given by the creditor-Yes. Explanation: Attachment requires that: (i) the parties agree to create a security interest—evidenced by either an authenticated security agreement or the creditor's taking possession or control of the collateral, (ii) the debtor must have rights in the collateral, and (iii) the creditor must give value. There is no requirement that the security agreement be filed. (Filing is related to perfection.)

On December 1, Gem orally contracted with Mason for Mason to manage Gem's restaurant for one year starting the following January 1. They agreed that Gem would pay Mason $40,000 and that Mason would be allowed to continue to work for Gem if "everything worked out." On June 1, Mason quit to take a better paying job, alleging that the contract violated the statute of frauds. What will be the outcome of a suit by Gem for breach of contract?

Answer: Gem will lose because the contract could not be performed within one year. Explanation: As a general rule, under the statute of frauds, a contract that cannot be performed within one year from the time of its making is unenforceable absent proof of its material terms in a writing signed by the party being sued. Here, the contract by its terms could not be performed within a year from the time it was made and Gem cannot prove the material terms of the contract through a writing signed by Mason. Therefore, Gem would lose its breach of contract action.

Which of the following offers of proof are inadmissible under the parol evidence rule when a written contract is intended as the complete agreement of the parties: I. Proof of the existence of a subsequent oral modification of the contract. II. Proof of existence of a prior oral agreement that contradicts the written contract.

Answer: II only. Explanation: The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one intended as the complete agreement). Thus, II is prohibited. However, the parol evidence rule does not prohibit introduction of subsequent agreements; thus, I is not prohibited.

Under the Secured Transactions Article of the UCC, for which of the following types of collateral must a financing statement be filed in order to perfect a purchase money security interest?

Answer: Inventory. Explanation: By definition a purchase money security interest in inventory can only occur in one of two ways: (i) the creditor sells inventory to the debtor on credit and retains a security interest for the purchase price or (ii) the creditor lends money to the debtor so that the debtor can purchase the inventory. In either case filing is the only way to perfect when the debtor has possession of the inventory. If the debtor has possession of the inventory (which is almost always the case) the creditor cannot perfect by possession or control. In addition, the creditor cannot be automatically perfected with a purchase money security interest in inventory. Only a purchase money security interest in consumer goods is automatically perfected without the creditor's either possessing/controlling the consumer goods or filing a financing statement with respect to the consumer goods. Thus, the only way to perfect a purchase money security interest in inventory is to file a financing statement.

Which of the following statements is correct regarding the parol evidence rule?

Answer: It applies to prior or contemporaneous oral agreements that contradict the terms of final written agreements. Explanation: The parol evidence rule prohibits a party in a lawsuit involving a fully integrated written contract (that is, a written contract that appears to be intended to reflect the entire agreement between the parties) from introducing at trial evidence of prior or contemporaneous oral agreements that contradict the terms of final written agreements.

Brown cosigned Royal's $50,000 note to State Bank. If Royal is later adjudicated mentally incompetent, what would be Brown's liability on the note?

Answer: Liable to pay State on the due date of the note. Explanation: A surety is a person who agrees to be liable on someone else's debt. The cosigner of a note is a surety. A surety is liable on the date just like a principal, and the surety is not discharged by the principal debtor's bankruptcy or by the fact that the principal debtor became incapacitated.

Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement?

Answer: The amount of the obligation secured. Explanation: A security agreement need not include the amount of the obligation secured. The security agreement must include the name and address of the debtor, a description of the collateral (by type is sufficient), and the debtor's authentication (e.g., a signature or electronic substitute). Because choices "3", "1", and "2" all are required, they cannot be excluded and are incorrect choices.

Dan borrowed money from National Bank and used land he owned as collateral for the bank loan. Dan's friend Steve has agreed to act as surety for the loan. Soon thereafter, Dan stops making payments to the bank on the loan. Which of the following statements is correct regarding the bank's rights against Steve?

Answer: The bank can immediately demand payment from Steve without demanding payment from Dan or going after the land. Explanation: When a debtor defaults in a suretyship situation, the creditor may do any of the following: (i) Immediately demand payment from the surety (ii) Immediately demand payment from the debtor (iii) Immediately go after the collateral, if applicable The surety does not have the right to require the creditor to take any of the above mentioned action. A guarantor of collectability, however, would have the right to require a creditor to first proceed against the debtor or against available collateral.

If a party to a contract engages in an anticipatory repudiation of the contract, which of the following statements is correct?

Answer: The repudiation is a material breach of the contract. Explanation: Anticipatory repudiation is considered a material breach of contract, giving the nonbreaching party the right to sue immediately (among other options).

Under the Sales article of the UCC, which of the following statements is correct regarding a seller's obligation under a F.O.B. destination contract?

Answer: The seller is required to tender delivery of conforming goods at a specified destination. Explanation: Under an F.O.B. destination contract, the seller has the risk of loss until he places conforming goods into the buyer's hands at the named destination, not necessarily the buyer's place of business.

A principal will not be liable to a third party for a tort committed by an agent:

Answer: Unless the tort was committed within the scope of the agency relationship. Explanation: Generally, a principal is not liable for an agent's torts. However, there is an exception to this general rule for principals who are employers. An employer can be held vicariously liable for the torts of an employee that occur within the scope of agency/employment.

Bob telephoned Samantha, an electronics supply, and offered to buy 600 small LED flashlights at $1 per flashlight. Bob planned to give the flashlights away at the grand opening of his electronics store. A week before the grand opening, Samantha received an offer for the immediate purchase of most of her small LED flashlight inventory for $1.25 per flashlight. She telephoned Bob, explained the situation, and told him she would be able to send him only 200 flashlights. Bob responded that a deal is a deal and he expected delivery of all 600 flashlights. Upset, Samantha sent Bob a signed letter again explaining that she could not deliver the 600 flashlights for $1 each as promised but would be happy to deliver 200. Bob did not respond. The day before the grand opening, Samantha delivered 200 flashlights. To meet his grand opening obligations, Bob gave away 400 medium-size flashlights which cost him $1.75 each. Is Bob entitled to recover damages for Samantha's failure to deliver ask 600 flashlights?

Answer: Yes, because Samantha delivered only 200 flashlights. Explanation: Samantha was obligated to deliver 600 flashlights and delivered only 200. Generally, under the Statute of Frauds, a contract for the sale of goods for $500 or more is unenforceable unless evidenced by a writing signed by the party sought to be held liable and containing the material terms of the contract. Here, the contract was oral and it was for $600 worth of flashlights. However, it was also evidenced by a writing signed by the party sought to be held liable (Samantha). Samantha sent Bob a letter explaining why she could not deliver the 600 flashlights he ordered. The letter was signed by Samantha and included the quantity and price term of the contract. Thus, it was sufficient evidence of the contract under the Statute of Frauds. Since Samantha contracted to deliver 600 flashlights and she delivered only 200, she can be held liable for Bob's damages.

Which of the following actions will result in the discharge of a party to a contract? Prevention of Performance; Accord and Satisfaction

Answer: Yes; Yes Explanation: Prevention of performance results in a discharge for breach of the implied duty of cooperation. A party to a contract will also be discharged through an accord and satisfaction.