Business Law: a QuickStudy Laminated Reference Guide 1423238621, 9781423238621

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BarCharts, Inc.®

WORLD’S #1 QUICK REFERENCE GUIDE

CONTRACTS:

TORTS: PRIVATE (CIVIL) WRONGS AGAINST PERSONS OR PROPERTY FOR WHICH THE VICTIM CAN BRING A CIVIL LAWSUIT INTENTIONAL TORTS • TORTS TO THE PERSON 1.Assault-threat of harm, or contact that arouses a reasonable apprehension in another’s mind of an imminent battery 2. Battery -intentional, harmful or offensive touching of another without his consent 3. False Imprisonment - intentional confinement of another for an appreciable time without his consent 4. Defamation -publication of a false statement about another which harms his reputation. Two types: 1) libel (written or printed statements), and 2) slander (oral) 5.Invasion of Privacy-intrusion of privacy (Ex. wiretapping, harassing telephone calls); unauthorized public disclosure of private facts (Ex. sex life, humiliating illness); false light publicity (Ex. falsely associating an author to an inferior work); or unauthorized use of name (Ex. commercial falsely claiming sports star uses a product) 6. Infliction of emotional distress - extreme and outrageous conduct causes another severe emotional distress (Ex. sexual harassment, midnight bill collectors) 7. Misuse of legal proceedings - financial, emotional and/or reputation injury to another from wrongfully instituted legal proceedings (Ex. frivolous lawsuit, wrongful criminal prosecution)

• TORTS AGAINST PROPERTY 1.Trespass to land-entry onto; remaining on; or causing something or someone to enter onto or remain on another land without permission (Ex. tenant’s refusal to vacate) 2.Trespass to personal property- use without permission or damage to personal property (Ex. breaking a car’s window) 3.Conversion of personal property-failure to return or the destruction or loss of borrowed property

NEGLIGENCE & STRICT LIABILITY • NEGLIGENCE 1. An unintentional breach of duty causing injury using the objective standard of the reasonable person in similar circumstances a.Duty of care is the obligation one person owes to another to act reasonably so as not to cause harm b.Liability arises from causation in fact (actual cause) and proximate cause (legal cause) i. Ex. Corporation that is responsible for oil spill is not liable to member of clean-up crew who dies of heart attack

2. Defenses include Contributory or Comparative (relative fault) Negligence

• STRICT LIABILITY 1. Liability without fault a.Applies to abnormally dangerous activities considered ultrahazardous and carry an inherent high risk of injury i. Ex. Corporation is strictly liable for injury caused by explosion at hazardous waste facility

CRIMINAL LAW: BREACH OF DUTY TO SOCIETY FOR WHICH GOVERNMENT BRINGS LAWSUIT • WHITE COLLAR CRIMES 1.Fraud -Obtaining title to property of another through deception a.Use of mail, telephone, or telegraph for the purpose of defrauding another

2.Bribery-Offer of payment for a favor (Ex. kickback) 3.Forgery -Fraudulently altering a written document 4.Embezzlement -Fraudulent taking of employer’s property 5. Statutory violations - (Ex. RICO which makes racketeering illegal)

• CORPORATE LIABILITY 1. Crime committed by employees acting within scope of employment and for benefit of corporation 2. Individual who committed crime is personally liable

A PROMISE OR A SET OF PROMISES WHICH ARE ENFORCED UNDER LAW

ELEMENTS AGREEMENT: CONSIDERATION, CAPACITY & LEGALITY

CAPACITY •ABILITY TO UNDERSTAND ACTION TAKEN 1. Minors a.Generally under age 18 b.Right to cancel contract based on public policy

2. Mental Incompetence a.Contract void where judged insane

THE AGREEMENT Mutual Assent between two or more persons to the same terms of a bargain; requires an Offer and an Acceptance.

•OFFER 1. Requirements: a.Intent to be legally bound to the contract. Objective Intent—i.e. believable by the reasonable person standard b.Must contain definite terms, i.e. identities of parties, subject matter, time of performance and price. (The latter two may be implied in special cases) c.Communication of offer by Offeror to the Offeree

2. Termination of offer can be made by: a.Terms of Offer - which include a specified time limit and/or means of acceptance which are not met b.Revocation - withdrawal by Offeror c.Rejection - expressed through words or conduct of Offeree d.Counteroffer - creates new offer; Offeree becomes Offeror e.Operation of Law - lapse of time, death, insanity, destruction of subject matter, or by a supervening law

3. Special Offers: a.Advertisements - Are invitations to receive offers from the public; advertiser has option to accept, negotiate or reject public’s offer to buy. b.Rewards - become unilateral contracts in that the offeree must perform to receive the reward. c.Auctions - Are invitations for offers to buy which may be rejected by the seller, unless auction is “without reserve” where seller offers to sell for any price d.Bids - Advertisements for bids are invitations; bidders who offer their bid are treated as offerors e.Firm Offer - irrevocable offer in writing; if no time limit stated, reasonable time (max 3 months) applies. f. Option Contract - for a fee & at offeree’s option, offeror makes irrevocable offer to perform on or before a set date

4. Counteroffers: Are treated as new offers rejecting original offer; roles reverse. (Ex. I’ll give you $150 instead of the $200 you (now offeree) quoted me)

•ACCEPTANCE: “a manifestation of assent by the offeree to the terms of the offer in a manner invited or required by the offer” - Restatement (2nd) of Contracts 1. Who can accept? - Only the offeree can accept and create a contract; third persons cannot 2. Unilateral Contracts -only by offeree’s performance 3. Bilateral Contracts -when offeree promises to perform 4. Mirror Image Rule -Acceptance must mirror the offer in that offeree accepts offeror’s terms 5. Grumbling Acceptance -“Ok, I’ll take it, but I wish you would lower the price” is an enforceable acceptance. 6. Silence as Acceptance -Silence is not acceptance even if offeror states it is. Exceptions: Offeree states silence is; prior dealings establish it; or Offeree accepts the benefit of goods or services without rejection 7. Modes of Acceptance: a.Express Authorization - Is stated in the offer (Ex.“Acceptance may be by registered mail only”) b.Implied Authorization - Specific mode not required by offer, rather, the customary modes are implied c.Acceptance-Upon-Dispatch Rule - Acceptance is effective upon proper dispatch, even if lost in transit; it must be sent before revocation is received (“Mailbox Rule”) d.Nonauthorized modes of Acceptance - If sent contrary to offer’s mode, acceptance is upon receipt

b.Contract voidable where not judged insane

3. Intoxication a.Contract voidable where party was incapable of understanding transaction due to alcohol or drugs

•DEFENSES TO ENFORCEMENT 1.Mistake-erroneous belief about an aspect of contract a.Unilateral Mistake-one party is mistaken i. Contract not enforced where other party knew of mistake, clerical error, or enforcement would be unconscionable b.Mutual Mistake-factual assumption shared by both parties 2.Fraud a.Fraud in the Factum-deceived person does not know what s/he is signing [contract is void] b.Fraud in the Inducement-innocent party fraudulently induced to enter into contract c.Fraud by Concealment-specific action taken to conceal material fact 3.Duress-Innocent party is threatened creating non voluntary acceptance 4.Undue influence-Innocent party is taken advantage of 5.Misrepresentation of Fact a.Intentional-innocent party induced by misrepresentation of material fact b.Innocent-statement of fact believed to be true

LEGALITY • STATUTES 1.Usury Laws - Limit on annual interest rates 2.Gambling 3.Sabbath/Sunday/Blue Laws 4.Licensing Laws - Requirement of certain occupations to be licensed

• PUBLIC POLICY 1.Contract void where negative impact on society a.Contracts in restraint of trade b.Covenants not to compete c.Exculpatory Clauses - relief from tort liability

TYPES OF CONTRACTS • COMMITMENT: 2 contract types 1. Bilateral - Both parties make promises to each other, (Ex. Sale of House = promises to exchange money for property) 2. Unilateral - Only one party makes promise, (Ex.“I will pay you $10 to mow my yard.” ) Offer is for a unilateral contract - created only when yard is mowed. If you say or promise you will mow it, it becomes a bilateral contract

• DEGREE: 3 CONTRACT TYPES 1. Express - either written or oral agreement of terms by both parties. (Ex. written car purchase; oral agreement to buy friend’s stereo for $200) 2. Implied - unspoken understanding between parties (Ex. Doctor visit = he will help you, you will pay his bill) 3.Quasi-Contract-one party receives a benefit from the other party without a contract. (Ex. Bill silently watches Joe paint Bill’s house by mistake.) Courts have ruled Bill must pay because he knowingly accepted a benefit from Joe

CONSIDERATION: 2 ELEMENTS

• STATUS: 2 CONTRACT TYPES

The thing of 1) legal value that is 2) bargained for and given in exchange for act or promise

• VALID OR OTHERWISE:

• LEGAL VALUE -can be the performance of a service, a refrainment from doing something, tangible or intangible property, or something else of value. It must also be either: 1.a legal benefit to the Promisor, (Ex. Jane’s new hotrod), or 2.a legal detriment to the Promisee, (Ex. It’s no longer Dick’s)

•BARGAINED-FOR-EXCHANGE - the promisee’s act or promise must be bargained-for and given in exchange for the promisor’s act or promise (Ex.“If you stop smoking (promisee’s act), I’ll give you $100 a month for one year,” (promisor’s promise)). 1. Past consideration is no consideration

•PROMISSORY ESTOPPEL: Enforceable due to foreseeable reliance

1

1. Executed - both sides have fully performed; completed 2. Executory - either or both sides not yet fully performed 1. Valid Contract - contains all the essential elements 2. Unenforceable Contract - has the elements, but not enforceable. (Ex. expiration; oral when required written) 3. Void Contract - element missing. (Ex. underage party) 4. Voidable - party has right to cancel, (Ex. fraud, duress)

• CONTRACTS THAT MUST BE IN WRITING PER THE STATUTE OF FRAUDS 1. Executor/Administrator Contracts 2. Pre-nuptial consideration of marriage contracts 3. Interest in land contracts 4. Promises which cannot be performed within one year 5. Goods priced over $500 6. Contracts involving guarantors (Ex.Parent guarantees son’s car loan)

DISCHARGE

CONTRACTS continued

•OCCURRENCE OF CONDITION (Event which limits duty to perform) 1. Express [written] or Constructive [read into contract in fairness] 2. Timing: a.Condition Precedent: occurs before duty of performance b.Condition Concurrent: occurs at moment of performance c.Condition Subsequent: occurrence cuts off existing duty

BUSINESS ENTITIES:

OBLIGATIONS OWED TO COMPANY:

• DUTY OF CARE 1. Discharged in good faith with care of ordinary prudent person in manner reasonably believed to be in best interest of business 2. Liability limited to gross negligence or willful misconduct

PARTNERSHIPS

•BREACH BY OTHER PARTY 1. Material Breach a.Non-breaching party does not receive substantial benefit b.Action for total breach if ready, willing and able to perform but for the breach (recover all damages) c.May continue contract and sue for partial breach (recover damages caused by breach)

2. Doctrine of Substantial Performance a.Falls short of complete performance b.Damages limited to contract price less cost of cure

3. Anticipatory Repudiation a.Promisor indicates inability or unwillingness to perform duties b.Promisee may sue for performance, discharge contract, or wait-and-see if promisor will decide to perform

4. Protected Interests a. Expectation Interest - Interest in obtaining expected bargain b. Reliance Interest - Interest in being compensated for loss suffered by change of position in reliance on breaching party’s promise c. Restitution Interest - Interest in recovery of amount by which breaching party has been enriched

• CIRCUMSTANCES EXCUSING PERFORMANCE 1.Impossibility a.Duty could not be performed by anyone b.Death or physical incapacity c.Destruction of subject matter or means of performance 2.Impracticability a.Extreme and unreasonable difficulty or expense b.Difficulty not anticipated 3.Frustration - Purpose has become valueless by unforeseeable supervening act 4.Novation a.New contract substitutes new party to receive benefits and assume duties b.Requires assent of all parties 5.Accord and Satisfaction - Agreement to resolve dispute on existing contract 6.Waiver - Voluntary relinquishment of rights 7.Alteration - One party makes changes to written contract without other party’s consent

THIRD PARTY • BENEFICIARIES 1.Incidental - no rights of enforcement 2.Intended - may enforce when rights vest a. Creditor - receives performance in satisfaction of existing obligation owed b. Donee - receives performance as gift

• ASSIGNMENT (Transfer) OF RIGHTS Obligor: Owes Duty of Performance Assignor/Obligee: Owed Right to Performance Under the Contract Assignee: Recipient of Transferred Right to Performance Assignor…Assigns (Transfers)… to Assignee…Performance Owed 1.Adequate description and words manifesting intent to assign rights 2.Assignment extinguishes assignor’s rights 3.Revocable except where assignee gave consideration, relied to detriment, or received payment/performance 4.Obligor may assert defenses against Assignee or Assignor

• DELEGATION (Transfer) OF DUTIES Delegator/Obligor: Transferor of Duty Obligee: Party to Whom Duty Owed Delegate: Party to Whom Duty Transferred 1.All duties can be delegated except: a.If prohibited by contract or law, b.If personal skill, or c.Will materially change Obligee’s expectancy

2.Obligee must accept unless bargain materially altered 3.Delegator remains liable 4.Delegate must perform if consideration

DAMAGES • MONEY - COMPENSATORY 1. Put nonbreaching party in as good a position as if promise had been performed 2. Liquidated Damages - Agreed to by both parties at time of contract 3. Punitive Damages-Generally not available in contracts cases except if independent tort committed, such as fraud

CHARACTERISTICS •GENERAL PARTNERSHIP - UNIFORM PARTNERSHIP ACT (AND REVISED VERSIONS) 1. Association of two or more persons 2. Co-owners of business 3. Carry on business 4. For profit 5. Income is reported on individual partner’s tax return 6. All partners are liable for partnership debts

•LIMITED LIABILITY PARTNERSHIP - REVISED UNIFORM LIMITED PARTNERSHIP ACT 1. General partners manage business and are liable for partnership debts 2.Limited partners contribute capital; liability limited to amount contributed a.No personal liability except where appearance of management

•LIMITED LIABILITY COMPANY- UNIFORM LIMITED LIABILITY COMPANY ACT 1. Limited liability partners (members) with ability to manage the partnership

CREATION •GENERAL PARTNERSHIP (GP) - No formalities;

• DUTY OF LOYALTY 1.No self-dealing - intrinsic fairness test 2.No seizing of business opportunity 3.No disclosure of confidential information

TERMINATION • CAN OCCUR BY: 1.Agreement or the happening of event or after reasonable time 2.Operation of law (Death or loss of capacity, Bankruptcy, Change in value or loss of property)

LIABILITIES • CONTRACTS 1.Principal bound where agent has authority a.Exception: Principal lacks capacity

2.Agent bound a.By express agreement b. Adequate disclosure c.By contracting without authority

• TORTS 1.Doctrine of Respondeat Superior a.Employer liable if committed within scope of employment

2.Direct liability due to Principal's fault a.Intentional, reckless or negligent behavior

3.Independent Contractors a.Principal liability for negligent hiring; failure to perform nondelegable important duty; highly dangerous activity

4.Misrepresentation

CORPORATIONS

can be formed on a handshake

•LIMITED LIABILITY PARTNERSHIP (LLP) Requires registration with the State

•LIMITED LIABILITY COMPANY (LLC) - Requires registration with the State •JOINT VENTURE - Partnership limited to single project

•PARTNERSHIP BY ESTOPPEL 1. Party holding self out as partner 2. 3rd par’s justifiable reliance & injury

PROPERTY •GENERAL PARTNERS’ CONTRIBUTION 1. UPA test: All property originally brought in or subsequently acquired belongs to partnership

•OWNERSHIP OF PARTNERSHIP PROPERTY 1. Property owned as whole by partnership 2. Right of survivorship a.Interest passes to surviving partner(s)

3. Interest assignable to creditor a.Creditor entitled to receipt of profits

•LIMITED PARTNERSHIPS (LLP & LLC) 1.Usually limited to pro rata distribution

DISSOLUTION •GENERAL PARTNERSHIPS 1. Withdrawal of partner ends partnership 2. Business may be continued by agreement a.Creditors retain status b.Outgoing partner's liability eliminated by novation (release by continuing partners and creditor(s))

• WINDING UP 1.Assets sold, proceeds distributed to creditors and partners 2. Notice requirement

AGENCY

CHARACTERISTICS • LEGAL ENTITY CREATED BY STATE LAW 1. Powers are to sue or be sued; to own property; to carry out business 2. Owned by Shareholders who Purchase Stock of Corp.

• LIMITED LIABILITY OF SHAREHOLDERS

1. Piercing the corporate veil a.Liable for fraud, improper use of corp., or inadequate capitalization

ORGANIZATION • PROMOTERS 1. Organize business and raise capital 2. Negotiate contracts a.Joint liability on preincorporation contracts b.Novation - release from liability by agreement of all parties c.No liability with third party’s knowledge of nonexistent corp.

• INCORPORATION 1. File Articles of Incorporation with State 2. Adopt By - Laws [Rules] 3.Defective incorporation-failure to comply with all conditions a.DeJure - substantial compliance with statute b.DeFacto - good faith attempt to comply c.Estoppel - party intending corp. transaction stopped from denial to avoid contract

• FOREIGN CORPORATION 1. Organized in one State and doing business in another

REGULATION REVISED MODEL BUSINESS CORP. ACT (RMBCA) - Prepared by Amer. Bar Assoc.; basis for State statutes

• FEDERAL REGULATORY STATUTES - Securities (SEC), Sarbanes-Oxley Act

CHARACTERISTICS

MANAGEMENT

•2-PARTY RELATIONSHIP (Created by agreement) •EMPLOYER-EMPLOYEE(Master/Servant relationship)

• BOARD OF DIRECTORS

1. Principal may control physical details 2. Duties of Principal are to compensate, indemnify, and reimburse agents for expenditures a.Compensation b.Indemnification c.Reimbursement for expenditures

•INDEPENDENT CONTRACTOR 1. Produces result free from control

• EQUITABLE 1. Specific Performance - Balance hardship to breaching party versus benefit to nonbreaching party 2. Injunction - Court order requiring party to do/not do something • RESTITUTION (Compensation for value of benefit) 1. Ex: One party must return property to other party • QUASI-CONTRACT RELIEF 1. Prevention of unjust enrichment

2

1. Operates business, Elect/remove officers, Determine distributions 2. Generally no personal liability 3. Generally removal for cause only a.Conflict of interest and Self-dealing Prohibited

• OFFICERS 1. Express authority by statute, By-Laws, Board 2. Implied authority to take necessary actions 3. Generally no personal liability a.Exception: act beyond powers

• BUSINESS JUDGMENT RULE 1. Informed, rational decisions, with no conflicts of interest, protect managers from liability

• RIGHTS AND POWERS 1. Elect and remove directors 2.Inspect records 3. Make recommendations to Board 4.Vote 5. Amend By-Laws

• LIABILITIES 1. Return illegal distributions 2.Protect investment of shareholders in corp.

FINANCING

CORPORATIONS continued

• EQUITY-SHARES OF STOCK 1. Evidence of ownership a.Elect/remove directors; amend by-laws b.Liabilities [return illegal distributions]

UNIFORM COMMERCIAL CODE: SHOULD BE ADOPTED TO SIMPLIFY, CLARIFY AND MODERNIZE THE LAW GOVERNING CERTAIN COMMERCIAL TRANSACTIONS

2. Common Shares: Vested with Voting Rights a.Right to distribution of net assets b. Subordinate to claims of creditors

3.Preferred Shares (generally non-voting)

SALES (ARTICLE 2)

a. Priority over common in liquidation and distribution

•DEBT SECURITIES - PROMISE TO PAY 1. Evidence of borrowing 2. Debentures - Long term (unsecured) 3. Bonds - Long term (secured by collateral) 4. Notes - Short term (secured or unsecured)

• SECURITIES REGULATION- PUBLIC OFFERING 1. Federal Securities Acts a.Requirement of disclosure and registration

2. Exemptions a.Government bonds b. Private offerings c.Nonprofit organizations d. Small dollar amount offerings e.Securities regulated by other agencies

3. Rule 10b-5 liability

SCOPE •TRANSACTIONS IN GOODS 1. Goods are tangible items which are moveable, such as automobiles, clothes, textbooks, etc. 2. Requirements of good faith and commercially reasonable manner 3. Refer to each rule to determine applicability to Merchants and/or Non-Merchants

4. State securities laws (“Blue Sky laws”)

•VOLUNTARY 1. Majority vote; File Articles of Dissolution

•INVOLUNTARY 1. Secretary of State: Failure to follow law 2. Judicial: Break harmful deadlock

•LIQUIDATION 1.Assets sold, debts paid, surplus distributed to Shareholders

PRODUCT LIABILITY • EXPRESS WARRANTY 1.Seller’s promise that goods will conform to certain standards 2.Recovery available for basis of the bargain if warranty contributing factor in entering into contract 3.Statement of Opinion does not create warranty 4.Magnuson-Moss Warranty Act a.Covers written warranties relating to consumer products

•IMPLIED WARRANTY OF MERCHANTIBILITY 1.Fit for ordinary purposes for which they are used a.Must meet reasonable expectations b.Adequately contained, packaged, labeled c.Quality and quantity in each package must be consistent 2.Implied Warranty of Fitness for Human Consumption a.Applies to food and drink consumed on or off premises

• IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE: 1.Buyer relies on Seller’s skill

• NEGLIGENCE 1.Objective test: Seller failed to eliminate reasonable risk of harm, thereby causing injury 2.Improper manufacture or inspection of goods 3.Failure to provide adequate warning 4.Design defects

• STRICT LIABILITY [Sec. 402A of Restatement 2d of Torts] 1.Manufacture or sale of defective and unreasonably dangerous product 2.Applies to all parties in chain of distribution irrespective of fault

• WARRANTY OF TITLE 1.Goods are free of any security interest, lien or encumbrance

• PRIVITY [State determines coverage] 1.All in household, including guests 2.All reasonably expected to use goods 3.Extended beyond personal injury

•DISCLAIMERS - Must be conspicuous, in writing, and mention “merchantability” 1. Unconscionable disclaimers are unenforceable

•DEFENSES TO IMPOSITION OF LIABILITY 1.Supervening event-material alteration after leaving seller’s possession 2.Assumption of the risk - buyer knew of and voluntarily assumed risk 3.Generally known dangers-known by general population [i.e. guns] 4. Correction of defect - through recall and repair 5. Misuse - defense available only if unforeseeable misuse 6. Comparative negligence - damages are apportioned

DEFINITIONS • NEGOTIABLE INSTRUMENTS 1. Written promise to pay money - Promissory Note and Certificate of Deposit

2. Order to pay money - Drafts and Checks 3. Means of extending credit

• NEGOTIATION 1. Transfer of instrument where recipient becomes holder

FORMATION OF CONTRACTS Greater flexibility than common law

a.Fraud, Price manipulation, Insider trading

DISSOLUTION

NEGOTIABLE INSTRUMENTS (ARTICLE 3)

•OFFER 1. Includes conduct by both parties recognizing existence of contract 2. Merchant’s Firm Offer Rule: Assurance that offer held open for time stated or reasonable time and not revocable for lack of consideration 3.Gap-Filling Rule a.Contract does not fail for indefiniteness b.An open term can be read into contract i. For example, a “reasonable price” can be the market rate at time of delivery c.Quantity may be indefinite i. Output contract-Seller is bound to sell entire output to buyer ii. Needs contract - Buyer is obligated to purchase all of its requirements from Seller d.Other terms which can be left open include payment terms, place of delivery, time of performance, etc.

• ACCEPTANCE 1.Any reasonable manner 2. Battle of the Forms

• HOLDER 1. In possession

2.Has all necessary indorsements

• HOLDER IN DUE COURSE 1. Has good title to instrument 2.Paid value 3. Acquired in good faith 4. Takes instrument with no notice of its being overdue or dishonored, and without notice of any claims or defenses 5. Remains subject to real defenses affecting validity a.Minority, incapacity, duress, illegality, fraud, forgery, material alteration

• PAPER 1. Order (Payable to specific payee) 2. Bearer (Payable to bearer or cash)

• INDORSEMENT- Signature of Holder 1. Special instructions transferring paper (Order) 2. Blank (Bearer) 3.Restrictive - specific purpose 4. Qualified - disclaim or limit liability

CLASSIFICATION • PROMISSORY NOTES 1. 2-party instrument (Maker/Payee) 2. Unconditional promise to pay money at particular time or on demand

• CERTIFICATE OF DEPOSIT

a.Definite and timely expression of acceptance creates contract even if different or additional terms b.Extra terms part of contract except if expressly denied or evidence material alteration

3. Accommodation a.Shipment offered as replacement where goods ordered are unavailable i. Buyer is free to accept or reject shipment

4. Additional terms are permitted 5. Nonmerchants a.Additional terms are proposed additions and become part of the contract if accepted by original offeror b.If additional terms are not accepted, contract is formed on basis of original terms c.Ex. Buyer accepts offer to buy textbook only if bookmark [proposed addition] is included. If salesman refuses, contract consists of textbook alone [original offer].

6. Exceptions to Statute of Frauds a.Specially manufactured goods b.Admission in court that contract was made c.Part acceptance requires payment for quantity accepted

•CONSIDERATION 1. Modification does not require new consideration

•TITLE 1. Goods must be identified before title can pass from Seller to Buyer

PERFORMANCE

1. Acknowledgment of receipt of money 2. Promise to pay money plus interest

• DRAFTS 1. 3-party instrument a.Drawer - Party who writes order for Draft b.Drawee - Party who must pay amount stated in draft c.Payee - Party who receives money

• CHECKS 1. Type of Draft; 2. Drawer - Checking account holder 3. Drawee is always a bank; 4. Payable on demand; 5. Include ordinary checks and special checks, such as Certified, Cashier’s and Traveler’s Checks

RISK OF LOSS • DEFINED BY TERMS OF AGREEMENT 1. Borne by breaching party 2. Generally borne by party best able to protect against loss and most likely to be insured

• SHIPMENT CONTRACT 1. Risk passes to Buyer when Seller delivers goods to Carrier 2. F.O.B. [“free on board”] - delivered to Carrier 3. F.A.S. [“free alongside”] - delivered alongside vessel 4.C.I.F. [price includes cost of goods, insurance & freight] 5. C. & F. - Seller does not insure goods 6. C.O.D. [collect on delivery]

•DESTINATION CONTRACT 1.Risk passes to Buyer when Seller delivers to specific destination 2. F.O.B. [place of destination]

• CONDITIONAL SALES

•BY BOTH PARTIES 1. According to terms of contract, practices of trade, or past dealings 2. Buyer/Seller can demand assurance a.If not given within reasonable time, party considered to have repudiated

3. Excused from performance by commercial impracticability

•BY SELLER 1. Seller’s duty to deliver 2. Seller’s right to cure nonconforming goods

•BY BUYER 1. Buyer’s right to inspect and duty to pay 2. Buyer’s right to revoke acceptance where nonconformity substantially impairs value 3. Buyer’s right of rejection within reasonable time and upon proper notice a.Duty to follow Seller’s reasonable instructions [ship back, resell or store]

3

1. Sale on Approval - Risk of loss remains with Seller until Buyer accepts 2. Sale or Return - Risk of loss with Buyer while goods are in his possession and during return to Seller

• LIQUIDATED DAMAGES AGREED UPON

REMEDIES FOR BREACH •SELLER’S REMEDIES 2.Withholding delivery 1.Cancellation 3.Reselling goods 4.Recovery of profit from Buyer 5.Recovery of purchase price 6.Reclaim goods where Buyer insolvent

• BUYER’S REMEDIES 1.Buying other goods and recovering additional expense from Seller 2.Recovering difference between contract and market price 3. Recovering damages for nonconforming goods 4. Specific performance for unique goods 5.Consequential (lost profits) and incidental (extra expenses) damages

REGULATION

NEGOTIABLE INSTRUMENTS continued

•REQUIREMENTS 1.In writing and Signed a.Signature of authorized agent is acceptable b.Liability remains with Maker/Drawer

2.Unconditional promise to pay 3.Dollar amount must be fixed 4.Payable on demand or at definite time a.Prepayment, acceleration and extension clauses do not affect negotiability

5.Not contain another obligation unless authorized

•ADDITIONAL TERMS 1.Generally do not affect negotiability 2.Handwritten terms prevail

•EXCEPTIONS TO NEGOTIABILITY 1.Incomplete Paper-Material term is blank 2.Irregular Paper-Obvious alteration 3.Voidable Paper-Knowledge of fraud or already paid 4.Negotiation by Fiduciary

•SHELTER PROVISION 1.Transferee has rights of Transferor

•UNIFORM CONSUMER CREDIT CODE 1.Negotiable paper eliminated in consumer credit sales

•FEDERAL TRADE COMMISSION (FTC) 1.Consumer protection a.Unfair trade practice to make duty to pay independent of Seller's duty to fulfill obligation

CHECKS (ARTICLE 4) a.Liable for damages where wrongfully or mistakenly dishonored i. Direct damage - charge for returned check ii. Consequential damage - Injury to credit rating b.Stale Checks i. No duty to pay on check over 6 months old c.Forged and Altered Checks i. Bank liable for not following instructions ii. Customer’s duty to examine and report within reasonable time d.Incomplete Checks i. Bank makes payment in good faith ii. Drawer assumes risk of loss e.Postdated Checks i. Bank must have notice to hold payment

•CONTRACTUAL 1.Signature evidences contract 2.Liability depends on capacity of individual a.Authorized Agent i. Personal liability where no indication of representative capacity b.Unauthorized signature - Principal not liable

3.Primary Liability (Agreement to pay) a.Maker of Promissory Note b.Drawee Bank for Certified Check c.Accommodation Party (Co-Signer)

4.Secondary Liability (Guarantor) a.Required to pay if primary person defaults b.Drawer i. Check is dishonored and Drawer given notice ii. May disclaim by drawing without recourse c.Indorser i. May avoid liability by qualified indorsement

5.Presentment for payment a.Dishonored if not paid b.Holder can seek payment from Indorser after giving notice

•WARRANTY 1.Transferor-Transfers negotiable instrument a.Five warranties i. Good title; ii. Authorized signatures; iii.Instrument not materially altered; iv. No party has valid defense; v. No knowledge of insolvency

a.Where account overdrawn b.For amount originally drawn where subsequently altered

3. Stop-Payment Order a.Must be received in reasonable time b.Must contain sufficient description

4. Certified Check a.Bank agrees to accept when presented for payment b.Debits Customer’s account for amount

5. Cashier’s Check a.Bank is both Drawer and Drawee b.Bank primarily liable

6. Death/Incompetence

DOCUMENTS OF TITLE (ARTICLE 7) STORE/SHIP GOODS WAREHOUSE RECEIPT (STORAGE) OR BILL OF LADING (TRANSPORTATION) 1. Represents goods 2. Required terminology

•WAREHOUSEMAN/COMMONCARRIER 1.Bailee who contracts to store, transport, and/or deliver goods

•REQUIREMENTS OF NEGOTIABILITY 1.Must provide for delivery to Bearer or Order of named person 2. Negotiated in same way as negotiable instrument

•DUTY OF CARE 1. Exercise same degree of care as reasonably careful person under similar circumstances

•RIGHTS OF HOLDER 1. Bona Fide Holder a.Takes in good faith b.Takes in regular course of business c.Same rights as Holder in Due Course

2. Rights acquired a.Title to document b.Title to goods c.Right to goods delivered to Bailee. Obligation of issuer to adhere to terms of document

2.Presentment-present instrument for payment a.Three warranties i. Good title ii. No knowledge of unauthorized signature iii.Instrument not materially altered

•OTHER LIABILITY 1.Forgery 2.Negligence inviting alteration a.Drawer cannot claim alteration as defense

3.Impostor a.Drawer of check has responsibility

4.Fictitious Payee (dishonest employee) a.Employer responsible 5.Conversion a.Unauthorized assumption and exercise of ownership b.Bank becomes liable for honoring forgery

•DEFENSES AGAINST PAYMENT 1.Personal (not valid against Holders in Due Course) a.Failure of consideration; b. Breach of contract; c.Fraud; d. Material alteration; e. Nondelivery f. Lack of capacity, illegality or duress making contract voidable;

2.Real (valid against all holders) a.Lack of capacity, duress or illegality making contract void; b.Fraud; c.Material alteration; d.Bankruptcy; e.Minority; f. Forgery

CHECKS (ARTICLE 4) •PARTIES 1.Drawer a.Checking account holder and writer of check

2.Drawee a.Bank on which check is drawn

3.Payee a.Party to whom check is written b.Holder of check c.Right to demand payment or endorse check to 3rd party

•REGULATION 1.Deposit Agreement a.Cannot disclaim Bank’s responsibility to exercise ordinary care

•BANK’S OBLIGATIONS 1.Duty to pay where sufficient funds

ETHICS

2. Charge Customer’s account

a.Bank has right to pay until notice received

LIABILITY

ii.Deficiency Judgment brought where proceeds insufficient to satisfy debt 2. Right of redemption by debtor a. Payment of all obligations 3. Satisfaction of Judgment a. Attachment-seizure by creditor of debtor’s property b. Execution-postjudgment seizure and sale of debtor’s property c. Garnishment-directed against property in possession of third parties

SECURED TRANSACTIONS (ARTICLE 9) INTEREST IN PERSONAL PROPERTY TO SECURE PAYMENT OR PERFORMANCE OF OBLIGATION 1. Classification of collateral includes paper (checks, receipts, accounts), documents, intellectual property, consumer goods, inventory and farm products 2. Two-party: Buyer purchases goods on credit and Seller retains security interest in goods 3. Three-party: Buyer purchases goods through lender financing and lender takes security interest in goods

•CREATION OF SECURITY INTEREST 1. Security Agreement a.Agreement giving Creditor rights to collateral upon receipt of value (money or goods) b.Must be in writing, signed by Debtor, and describe collateral c.Attachment i. Creditor has enforceable interest and can satisfy debt out of designated collateral d.Purchase Money Security Interest (PMSI) i. Seller retains interest until goods paid for ii. Lender takes interest in goods acquired e.May include right to future advance and afteraquired property

ISSUES • LACK OF ACCOUNTABILITY • PRIMARY OBJECTIVE 1. Maximize Profits • SOCIAL RESPONSIBILITY 1. Requires increased costs • POLITICAL INFLUENCE 1. Lobbying 2. Contributions

SOLUTIONS

• MARKETING FORCES AFFECT SUBSTANDARD PRODUCTS 1. Business lost to competitors • SPECIFIC CONTROL OFFICES WITHIN CORPORATION 1. e.g. Environmental, safety • EDUCATIONAL REQUIREMENTS • COMPLIANCE OFFICERS 1. Relay information to proper corporate department

LEGAL CONTROLS • ADMINISTRATIVE 1.Governmental Powers a.Promulgate rules; adjudicate disputes b.Investigate and prosecute violations c.Impose fines and penalties 2.Executive and Independent Agencies a.OSHA (Dept. of Labor) b.Federal Trade Commission (FTC) i. Prohibits unfair competition and unfair or deceptive acts or practices

• CONSUMER LAWS 1.Magnuson-Moss Warranty Act a.Requires written warranties for consumer products 2.Consumer credit laws a.Truth in Lending Act - disclosure requirements

• ANTITRUST LAWS 1.Purpose a.Encourage and protect competition, Impose restraints, Control anticompetitive abuse 2.Sherman Act a.Prohibits monopolies and agreements in restraint of trade (e.g. price-fixing) 3.Clayton Act a.Prevent practices used to create monopolies b.Attack mergers 4.Robinson - Patman Act a.Prohibits price discrimination

• EMPLOYMENT LAW 1.Labor acts (FLSA) a.Right to organize and Collective bargaining b.Regulate wages and hours c.Title VII of 1964 Civil Rights Acts and other acts prohibit discrimination

• ENVIRONMENTAL LAWS 1.Improve quality of air and water 2.Reduce exposure to toxic substances

•CORPORATE LAWS 1.Securities Exchange Commission a.Regulate purchase and sale of securities 2.Sarbanes-Oxley Act b.Regulate corporate governance

•PERFECT (PROTECT) INTEREST 1. File public notice 2. Take possession of collateral 3. Automatic by attachment a.Creditor has PMSI in consumer goods

•PRIORITY 1. Secured Creditor has priority over unsecured interest 2. First in time to be fixed has priority 3. Subsequent Seller who files and notifies prior secured party takes priority 4. PMSI in non-inventory collateral prevails if perfected when Debtor takes possession 5. Buyer in ordinary course of business is protected

•REMEDIES 1. Repossession by creditor upon default of debtor a.Creditor may retain collateral b.Creditor may dispose of collateral in commercially reasonable manner i. Proceeds cover expenses, satisfaction of balance, satisfaction of subordinate interests

4

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