Agency Formation and Duties

Introduction

• Agency=Principal and Agent.
• Agency is the most common and most important legal relationship.
• Understanding agency is crucial to understanding the legal environment of business.
• Principals use agents to be able to conduct multiple business operations simultaneously in various locations.  
• The principal has the right to control the agent in matters entrusted to the agent.

Agency Relationships

• Agency is a “fiduciary” relationship based on trust and confidence.
• Distinguish Employee vs. Independent Contractor  Relationships.

Employer Liability.

Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer.

• Tax Liability: Employer liable if employee.
• Contract Liability: Employer not necessarily liable.
• Tort Liability: Employer liable for torts of employee within scope of employment.
• Works for Hire.  
• Case 31.1:  Graham v. James  (1998).

Formation of the Agency Relationship

• Consensual Agreement.
• No consideration required.
• Principal needs contractual capacity, Agent does not.
• For any legal purpose.

Types of Agencies

• Agency by Agreement.
• Agency by Ratification.
• Agency by Estoppel.
• Agency by Operation of Law.
• Necessaries for family.
• Emergency.

Agency by Agreement

Formed through express consent (oral or written) or implied by conduct.
Case 31.2:  Acordia of Virginia Insurance Agency v. Genito Glenn (2002).
Agency by Ratification
Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

Agency by Estoppel

Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief.

Agency by Operation of Law

Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal.

• Necessaries.
• Emergencies.

Agent’s Duties to Principal
Performance: reasonable diligence and skill (special skills).
Notification to P.
Loyalty (no conflict of interest).
Case 31.3:  American Express v. Topel (1999)
Obedience. 
Accounting.

Principal’s Duties to Agent

• Compensation (Express or Implied).
• Reimbursement and Indemnification.
• Cooperation.
• Provide safe working conditions.

Rights and Remedies of Agents andPrincipals

Rights of Agents:

• Right to compensation, reimbursement, indemnification and cooperation.
• Agent can withhold performance and demand an accounting.
• Agent can recover damages for past services and future damages.

Principal’s Rights and Remedies:

• Contract remedies for breach of fiduciary duty and performance.
• Can sue in tort: libel, slander, trespass, deceit, fraud.
• Constructive Trust – money/ property agent steals from Principal.
• Avoidance of contract if agent does not do as told.
• Indemnification 

Read More

Liability, Defenses, and Discharge

Liability

There are two kinds of liability associated with negotiable instruments:

• Signature liability.
• Warranty Liability.

Signature Liability

Relates to signatures on instruments.
Signers of negotiable instruments are potentially liable for amount stated on instrument.

• Primary Liability: Makers/Acceptors.
• Secondary Liability: Drawers/Indorsers.

Primary versus Secondary Liability

Makers.

• Promises to pay the note.
• Obligated to pay terms of instrument at time of signing.
Acceptors.
• Drawee promises to pay an instrument when presented for payment.



Secondary Liability

Proper Presentment.
• Must be timely (checks w/in 30 days).
Dishonor.
Case 26.1: Messing v. Bank of America (2002).

Proper Notice.

• Manner of Notice in any Reasonable manner.
• Notice to Indorsers.



Accommodation Parties

Signs instrument to lend name as credit to another party on the instrument.
• Makers v. Indorsers.



Authorized Agents’ Signatures

• Agent agrees to act for Principal.
• Agents can hold Principal liable if authorized to sign.
• Principal must be clearly named.
• Agent is personally liable when Principal is not named or disclosed, unless check is drawn on Principal’s account.
Case 26.2: Caraway v. Land Design Studio (2001).

Unauthorized Signatures

Forgery does not bind owner but Bank is liable.
If Agent has no authority, Agent is personally liable, but Principal is not, unless ratified.
Exceptions:

• Ratification of signature.
• Negligence of party.
• Holder in Due Course.

Special Rules for Unauthorized Indorsements

Unauthorized indorsement does not bind maker/drawer except:

• “Imposter Rule”: imposter induces maker/drawer to issue check to imposter.
• When imposter signs as/on behalf of maker/drawer intending payee has no interest in the instrument.
• Fictitious Payee.

Warranty Liability

Extends to both signers and non-signers.
Breach of warranty can occur when the instrument is transferred or presented for payment.
Transferors make certain implied warranties regarding instruments they negotiate.
Liability not subject to dishonor, presentment, notice.
Liabilities: Transfer or Presentment.

Transfer Warranties

Following transfer warranties extend to all subsequent holders:

• Transferor is entitled to enforce the instrument.
• Signatures are authentic and authorized.
• Instrument has not been altered.
• Instrument not subject to defense.
• Transferor has no notice of insolvency.

Presentment Warranties

Person who presents an instrument makes the following presentment warranties:

• No missing or unauthorized indorsement.
• Instrument has not been altered.
• Person obtaining payment has no knowledge signature is unauthorized.

Case 26.3: First National Bank of Chicago v. MidAmerica Federal Savings (1999).

Defenses

Universal or Real - can be used to defeat a holder and a HDC. Personal - can be used to defeat a holder but not a HDC.

Universal Defenses

Forgery of maker’s or drawer’s signature.

• Or if an authorized agent exceeds his authority to the amount which exceeds his authority.

Fraud in the execution - the”autograph” situation, not fraud in the inducement.

Material Alteration.

• Do not have to pay the altered amount ($8 to $800), only a personal defense to the original amount ($8).
• Not a real defense if instrument left blank, (.. filled in $800), then have to pay all ($800).

Discharge in Bankruptcy.

Infancy (Minority).
Illegality - severe enough to make contract void.
Mental Incapacity (adjudicated by court).
Extreme Duress. If instrument signed under threat of immediate force or violence.

Personal Defenses

Valid against holders but not HDC’s.

• Breach of contract or warranty.
• Lack of consideration.
• Fraud in the inducement.
• Illegality - not severe enough to make void.

Mental incapacity - not severe enough to make void.

Discharge.

• By payment or cancellation.
• Unauthorized completion.
• Non-delivery of instrument.
• Ordinary duress or undue influence rendering contract voidable.

Federal Limits on HDC Rights

FTC Rule 433 (1976) abolished the HDC doctrine in consumer credit transactions.

• Allows Buyer to assert any defense she might have against the Seller of goods or services (Car Dealer), against the subsequent HDC (Bank) as well.
• So Buyer’s duty to pay is conditional on Seller’s full performance under contract.
Discharge from liability on an instrument can occur by:
• Payment.
• Cancellation or Surrender.
• Reacquisition.
• Impairment of Recourse.
• Impairment of Collateral.

Read More

Transferability and Holder in Due Course

Introduction

Negotiable instruments can be transferred to others by negotiation or by assignment.

Negotiation

Transfer by negotiation creates a holder, who at the very least receives the rights of a previous possessor.
AND
A holder in due course (HDC) acquires more rights in the instrument than the previous possessor. This means defenses that can be raised against the transferor may or may not be able to be raised against the transferee.

Two Ways to Negotiate

Negotiating Order Instruments endorsement and delivery required.
Negotiating Bearer Instruments—delivery only.

• Converting Order to Bearer and vice versa.
Converting Order Instruments to Bearer Instruments, and Vice Versa.
• Must be done at the time of negotiation.

Indorsements

Signature with or without additional words or comments:

• Blank Indorsements.
• Special Indorsements.
• Qualified Indorsements.
• Restrictive Indorsements.

Miscellaneous Indorsement Problems

Misspelled Names. Indorsement should generally be identical to name on instrument.

• Misspelled name OK.
Instruments Payable to Legal Entities.
• Negotiable by authorized representative of the entity.
Alternative or Joint Payees.
• In the alternative - either may indorse.
• Jointly - both must indorse.
Case 25.1: GMAC v. Abington Casualty (1992).



Holder vs. HDC

Holder is one in possession of order or bearer paper and the instrument is drawn or indorsed to the holder.
Holder in Due Course (HDC) results if the holder also meets the following requirements:
• Takes for Value.
• Takes in Good Faith.
• Takes without Notice of a Defense to Payment.



HDC: Taking for “Value”

No value if gift or inheritance. Not the same as consideration.
Holder can take for value by:
• Performing the instrument’s promise.
• Acquiring a security interest or other lien in the instrument.
• Taking instrument in payment for an antecedent debt.
• Giving a negotiable instrument as payment.
• Giving irrevocable commitment as payment.



HDC: Taking in “Good Faith”

Good faith is honesty in fact and the observance of reasonable commercial standards of fair dealing.”
Only applies to holder, not transferor.
Case 25.2: Maine Family Federal Credit Union v. Sun Life Assurance (1999).



HDC: “Taking With Notice”

Holder takes the instrument with notice if he knows/has reason to know:
• Instrument is overdue.
• Instrument has been dishonored.
• Actual knowledge or any suspicious event.
• That a claim or defense exists.
• So irregular, incomplete, or bears such evidence of forgery.
Case 25.3: Travelers Casualty and Surety v. Wells Fargo Bank (2002).



Holder through an HDC

“Shelter Principle”: Person is not an HDC but derives title through HDC.
Limitations on the shelter principle: no fraud, illegality, claim or defense.



HDC in International Context

Good Faith and Protected-Holder Status.
UN approved Convention on International Bills of Exchange and International Promissory Notes (CIBN)
CIBN affords Greater Protection for Protected Holders.

Read More

The Function and Creation of Negotiable Instruments

Articles 3 and 4 of the UCC

A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks.
Today, UCC Article 3.

The Function of Instruments

To function as a substitute for money or credit device.
In order for an instrument to operate practically, it has to be easily transferable.
Laws of assignment did not allow for ease of transfer because the assignee was always subject to the defenses that could be used against the assignor. Article 3 provided that some defenses could not be used against certain assignees.

Types of Negotiable Instruments

Drafts and checks are 3 party instruments: Drawer, Drawee and Payee.

• Checks (cashier’s, teller’s and traveler’s) are drafts on a bank.
• Trade acceptances seller is drawer and payee.
Case 24.1: Flatiron Linen v. First American State Bank (2001).
Promissory Notes are two party instruments:
• Maker (Promisor) and
• Bearer (Promisee).
Certificates of deposit (CDs): two party instruments.
Case 24.2: U.S. v. Durbin (1999).

Requirements for Negotiability

Writing signed by the maker or the drawer. Unconditional promise or order to pay a fixed amount of money.
Payable on demand or at a definite time.
Acceleration and Extension clauses.
Be payable to order or to bearer, unless it is a check. Case 24.3: Barclay’s Bank v. Johnson (1998).

Factors Not Affecting Negotiability

• Omission of date.
• Postdating or antedating.
• No place for payment: address or Drawee or maker or, if none, place of business or, if none, residence.

Factors Not Affecting Negotiability

• Handwritten over typewritten or printed.
• Words over numbers.
• With interest = judgment rate.
• Mention of collateral.

Read More

Sales and Lease Warranties

Overview

A warranty is an assurance of fact upon which a party may rely.
• Warranty of Title.
• Express Warranty.
• Implied Warranty of Merchantability.
• Implied Warranty of Fitness for a Particular Purpose.
• Implied warranty arising from the course of dealing or trade usage.

Warranty of Title

Automatically arises in most commercial sales transactions.
UCC-312 creates 3 warranties:

• Good Title.
• No Liens.
• No Infringements.

Warranty Title Disclaimer

Title warranty can generally be disclaimed only with specific language in contract.
Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale.

Express Warranties

Can be oral or written-- don’t have to use the words “warrant” or “guarantee.”

• Any Affirmation or Promise.
• Any Description.
• Any Sample or Model.
To create an express warranty, the affirmation of fact must become the “basis of the bargain.”
And Buyer must rely on warranty when he enters into contract.
Case 23.1: Genetti v Caterpillar Inc (1999).
Statements of Opinion and Value.
Generally excludes “puffing” – “Best car in town”, not an express warranty.
However, expert opinion is not puffery.

Implied Warranties

Warranty inferred at law based on the circumstances or nature of the transaction.
Under the UCC, merchants warrant the goods they sell are “merchantable”, i.e., fit for ordinary purpose for which such goods are sold.

Implied Warranty of Merchantability

• Automatically arises from merchants.
• Goods are of average, fair, or medium-grade.
• Adequately packaged and labeled.
• Conform to promises on label.
• Have a consistent quality and quantity among the commercial units.

Case 23.2: Webster v. Blue Ship Tea Room (1964).

Implied Warranty of Fitness for a Particular Purpose

Arises by any Seller who:

• Knows the particular purpose for which the goods are being bought; and
• Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

Implied Warranty Arising from Course of Dealing or Trade Usage

Arises when both parties to a contract have knowledge of a well-recognized trade custom. Courts infer that both meant this custom to apply to their transaction.

Overlapping Warranties

Occurs when two or more warranties made in a single transaction:

• If warranties are consistent, they are construed as cumulative.
• If inconsistent:
• First: implied warrant of fitness for a particular purpose.
• Then: express.

Warranties and Third Parties

At common law only the Buyer could sue the Seller because she is the one in privity of contract with the Seller.
UCC 2-318 provides 3 alternatives from which the states may choose.

Warranty Disclaimer

Express Warranties can be disclaimed:

• If they were never made (evidentiary matter).
• If a clear written disclaimer in contract with specific, unambiguous language and called to Buyer’s attention (BOLD CAPS UNDERLINED).
Implied Warranties:
• Merchantability: “As Is,” “With All Faults.”
• Fitness for a Particular Purpose: must be in writing and conspicuous.
• If Buyer has the right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.
Case 23.3: International Turbine Services v. Vasp Brazilian Airlines (2002).

Statute of Limitations

Action for Breach of Warranty:

• Begins to toll at tender.
• Buyer must notify Seller within a reasonable time.
• Buyer must sue within four years after cause of action accrues.
If warranty is for future performance, action accrues when performance happens and breach is discovered.

Magnuson-Moss Warranty Act

FTC enforces; Attorney general or consumer can bring action.
Modifies UCC for consumer sales.
Only applies when written warranties are made by Seller (including a service contract).

• If goods > $10 label “full” or “limited.”
• If goods > $15 Seller must make additional disclosures.
Full Warranty: Seller must repair or replace.
Limited Warranty must be conspicuous.
• If limit of time only must say, e.g., “full twelve-month warranty.”
UCC Implied Warranties:
• May not be disclaimed, but can be limited, but must correspond with time of express warranty.

Warranties under the CISG

Art. 35: uses the word “conformity” instead of warranty, but very similar to UCC.

Read More

Remedies for Breach of Sales and Lease Contracts

Contractual Provisions Affecting Remedies

Parties to a contract can vary their rights and duties that preempt UCC provisions. Parties can stipulate whether contractual provisions are “exclusive”. However, provisions limiting consumer rights may be unconscionable.

Lemon Laws

Automobile under warranty possesses significant defect that affects vehicles use or value that cannot be fixed within statutory period.
Buyer’s remedies include:

• A new car;
• Replacement of defective parts;
• Or full refund

Remedies for Breach of International Sales

CISG provides remedies similar to the UCC:

• Monetary damages that are foreseeable, consequential damages.
• Damages are difference between contract price and market price.

Parties can agree to what law they will use.

Seller- Goods in Seller’s Possession

Seller may withhold delivery of the goods:

• If material breach by Buyer, Seller can withhold delivery of all goods.
• If non-material breach, Seller can withhold delivery of this installment. Seller can withhold delivery of all goods if Buyer is insolvent.
• Seller may rescind the contract.
• Seller may identify the goods to the contract.
• Seller may sell raw materials for scrap or finish production.
• Seller may resell the goods; and Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages - expenses saved.
• If No Damages, Seller can sue for lost profits.
• Case 22.1: Brandeis Machinery v. Capital Crane Rental (2002).
• Seller may sue Buyer for breach of contract.
• Recover Damages = the market price at the time & place of tender + incidental damages.
• If there are no damages, Seller can sue for lost profits.

Seller-Goods in Transit

Goods are “in transit” when Seller has tendered goods to Carrier.
Goods are in transit until:

• Buyer is given negotiable document of title to goods.
• Buyer is given non-negotiable document of title or Bailee has acknowledged
Buyer’s right to have the goods.
• Buyer has had a reasonable time to pick up the goods.
Seller has the right to stop the goods in transit if:
• Buyer is insolvent - Seller can stop entire shipment of goods.
• Buyer is in breach - Seller may stop a whole truckload or whole container.

Seller-Goods in Buyer’s Possession

• Seller may sue for the purchase price.
• Seller may also sue Buyer if goods were “specially-made” which Seller cannot resell.
• Seller may also sue for the purchase price if the goods were destroyed and the risk had already passed to the Buyer.
• Seller can reclaim goods received by an insolvent Buyer if demand made within 10 days of receipt.

Buyer-Goods in Seller’s Possession

Buyer Wants Goods
• Specific performance or replevin
• Recover goods from Seller if Seller becomes insolvent within 10 days after receiving first payment.
Buyer Does Not Want Goods
• Rescind contract.
• Cover or do not cover and sue for breach of contract.
Case 22.2: KGM Harvesting v. Fresh Network (1995).

Buyer-Seller Delivers Nonconforming Goods

If Seller does not make perfect tender Buyer has the right to reject all or part of goods.
• Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions.
• Buyer is entitled to commission for selling perishable goods.
• Buyer may store the goods and retain a security interest in the goods for his costs.
If Buyer has accepted non-conforming goods, she may:
• Sue for breach of warranty.
• Sue for ordinary damages.
• Deduct damages from purchase price.
Case 22.3: China National Metal Products v. Apex Digital (2001).

Contractual Provisions Affecting Remedies

• Limitation of Damages.
• Limitation of Remedies.
• Waiver of Defenses.

Lemon Law

The majority of the states have enacted lemon laws in regard to automobile sales.
Seller’s limitations were too “good.”

Buyer must:
• Give notice.
• Seller gets four chances to fix.
• Arbitration: decision binding on manufacturer, not on Buyer.

Remedies for Breach of International Sales Contracts

CISG provides remedies similar to the UCC.
Article 74 provides for money damages, foreseeable consequential damages.
Damages are difference between contract price and market price.
Article 28 provides for specific performance where a country would normally grant it in their own law.
Parties can agree to what law they will use.

Read More

Performance of Sales and Lease Contracts

• Seller must transfer and deliver conforming goods.
• Buyer must accept and pay for conforming goods.
• In the absence of an agreement between Seller and Buyer, UCC Article 2 controls as set out below.

Good Faith Requirement

Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.
Merchants are held to a higher standard of care than non-merchants.

Seller-Lessor Obligations

Seller has a duty to “tender” delivery of “conforming goods.”
Tender means “delivery” to agreed place: With reasonable notice, At a reasonable hour, In a reasonable manner.
Exactly, unless otherwise agreed, Place of Delivery-Non-Carriers.
Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence.
If both parties know the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

Place of Delivery—Carriers

Shipment contracts.
Seller has a duty to:

• Put goods into hands of independent carrier.
• Make contract for transportation.
• Obtain and promptly deliver or tender to the Buyer any documents necessary.
• Promptly notify Buyer that shipment has been made.
• Destination contracts. Seller has duty to:
• Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule

If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to:

• Accept the goods;
• Reject the entire shipment; or
• Accept part and reject part.
• Exceptions to the Perfect Tender Rule

Agreement of the Parties.

• Cure, Substitution of Carriers.
• Installment contracts.
• Commercial Impracticability.
• Destruction of Identified goods.
• Partial Performance, Proceede

Buyer-Lessee Obligations

• Furnish facilities reasonably suited for receipt of the goods.
• Make payment at the time and place the Buyer receives the goods.
• Credit has to be prearranged.
• Credit period begins on the date of shipment.
• Pay with cash, credit card, and check.
• But if Seller asks for cash, Seller has to give Buyer time to get cash.

Buyer’s Obligations.

• Buyer has right to inspection before paying:
• Costs of inspection borne by Buyer.
• However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

Acceptance

Buyer can accept goods:

• By words or conduct.
• If Buyer had reasonable amount of time and failed to reject.
• Buyer performs an act which indicates he thinks he is the owner.
• Partial Acceptance.
• Revocation of Acceptance
• Notify Seller of breach.
• Revoke only if substantial nonconformity; and
• Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.

Anticipatory Repudiation Party communicates he will not perform by time of contract performance. No breaching party may suspend performance and: Treat the A.R. as material breach and pursue a remedy; or Wait a reasonable time.
Case 21.3: Banco International v. Goody’s Family Clothing (1999).

International Contracts and Letters of Credit Parties.

• Account: Buyer.
• Issuer: : Bank.
• Beneficiary: : Seller.

Issuer is bound to pay the beneficiary who has complied with the terms and conditions of the letter of credit, usually requiring a bill of lading to the issuer to prove shipment has been made.

Agreement of the Parties

Parties agree that some defective goods will be acceptable.
Parties agree that defective goods can be replaced or repaired within a certain time.

Seller’s Cure

Seller has the right to “Cure” (ship conforming goods to Buyer) if: Agreed time of performance has not yet expired; or If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

Substitution of Carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

Commercial Impracticability

Occurrence of an unforeseen contingency that makes performance impracticable.
Nonoccurrence was a basic assumption on which the contract was made.
If only partial impracticability, Seller must allocate what he/she has.
Case 21.1: Maple Farms v. City School District of Elmira (1974).

Installment Contracts

Installment Contracts can be rejected if:

• Installment is substantially non-conforming and can’t be cured.
• Non-conforming installment substantially impairs the entire contract.
Destruction of Goods
• If no fault of either party and it occurs,
• Before risk passes to Buyer then,
• Both Seller and Buyer are excused from performance.

Partial Performance

Sometimes unforeseen event only partially affects Seller’s capacity to perform.
In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance.
Buyer has the right to reject.
Case 21.2: Kock Materials Co. v. Shore Slurry Seal, Inc. (2002).

Read More

Title, Risk and Insurable Interest

Sale of goods requires different rules than real property transactions: risk should not always pass with title.
UCC replaces title with identification, risk, and insurable interest.

Identification

For any interest to pass to buyer, goods must be:

• In existence.
• Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others.
• Except for fungible goods which do not need separation).

Gives the buyer the right:

• To obtain insurance on the goods.
• To recover from third parties who damage the good.
Identification occurs:
• If goods are designated when contract is made.
• If goods are not designated when contract is made, then identified at time of designation.

When Title Passes

Title can pass:

• Upon physical delivery, or
• When agreed to by the parties, or
• If no agreement, depends on whether contract is shipment or destination contract:
• Shipment: title passes at time and place of shipment.
• Destination: title passes when goods are tendered at the destination.

Delivery Without Movement of Goods

Title passes when agreed by the parties, or
With document of title: when and where document delivered.
Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.

Sales or Leases By Non-Owners

Void Title: true owner gets goods back.
Voidable Title: good faith purchaser keeps goods.
Case 20.2: Memphis Hardwood v. Daniel (2000).
Entrustment rule: good faith purchaser keeps goods.
Seller’s Retention of Sold Goods: good faith purchaser wins.
Sham transactions or preferential transfers.

Risk of Loss

ROL does not necessarily pass with title. ROL is important because of insurance concerns. Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods.

ROL: Delivery with Movement

Shipment Contracts.
ROL passes to Buyer when tendered to Carrier. If goods damaged in transit, Buyer’s loss. Destination Contracts.
ROL passes to Buyer when goods tendered at particular Destination.
Case 20.3: Windows Inc. v. Jordan Panel System Corp. (1999).

ROL: Delivery without Movement of Goods

Goods Held by Seller:

• Document of Title is generally not used.
• If Seller is a merchant, ROL passes when buyer takes physical possession of goods.
Goods Held by Bailee (Warehouse). ROL passes when:
• Buyer receives document of title bailee acknowledges
• Buyer’s right to goods and buyer receives title and has reasonable time to pick up.

ROL: Conditional Sales

Sale on Approval.
ROL passes when buyer approves expressly or implicitly. Sale or Return.
ROL passes to buyer with possession.

ROL: Breach of Contract

Generally breaching party bears ROL. Seller’s Breach.
Rejection risk stays with seller.
Revocation of acceptance risk passes back to seller to the extent that buyer’s insurance does not cover the loss.
Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.

Insurable Interest

• Buyer has an insurable interest in goods that have been identified.
• Seller has an insurable interest in goods as long as they retain title or a security interest.
• Both buyers and sellers can have an insurable interest at the same time.

Bulk Transfers

• Covered by Article 6 of the Uniform.
• Commercial Code.

A bulk transfer is defined as:

• Major part of seller’s inventory.
• Not made in the usual course of business.

Read More

Formation of Sales and Lease Contracts

The UCC
Facilitates commercial transactions.
UCC Article 2: Sale of Goods.

• Modifies common law of contracts of some areas.
• UCC 2 preempts common law.
• Where UCC2 is silent, common law governs.

The Scope of UCC 2

Does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC2 does not apply.
Generally contracts for services are not governed by UCC2. What if Goods and Services combined?
Case 19.1: Micro Data Base v. Dharma Systems (1998).
UCC2 applies to the “sale of goods.”

• A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc).
• “Goods” are tangible and movable.
• A “merchant” has special business expertise and is not a casual buyer/seller.

Case 19.2: Ready Trucking Inc v. BP Exploration & Oil Co. (2001).

Scope of UCC 2A-Leases

• Contract for lease of personal goods between a lessor and a lessee.
• Consumer Leases (total payments less than $25,000)
• Finance Leases (involves a 3rd party-supplier).

Formation of Sales and Lease Contracts

At common law once a valid offer is unequivocally accepted, a binding contract is formed. UCC is more flexible, and allows for open pricing, payment, and delivery terms.

Offer-Open Terms

UCC 2-204: even if terms of are undetermined, a contract may still exist.

• Open Terms: “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.
• Open Quantity: generally courts will not impose a quantity. UCC2-306. Exceptions
• Requirements Contract: buyer agrees to purchase what the buyer needs or requires.
• Output Contract: buyer agrees to buy all of seller’s production or output.

Merchant’s Firm Offer

At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration.
At UCC, offer made by merchant in a signed writing is irrevocable for reasonable period of time. No consideration necessary.

Acceptance

Any reasonable means of acceptance under the circumstances is permissible.
Promise to ship or prompt shipment is acceptance.

• Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).

Acceptance: Additional Terms

If either party is a non-merchant, the contract is formed according to original terms of the offer. If both parties are merchants, contract incorporates new terms unless:

1. original offer expressly limits terms, or
2. material change, or
3. offeror objects within reasonable time.

Consideration

UCC requires consideration and modifications must be made in good faith.
Modification must be in writing if required by Statute of Frauds.

Statute of Frauds

• Sale of goods over $500 must have a signed writing to be enforceable.,/li>
• Exceptions to this rule:
  • Specially manufactured goods.
  • Admissions by breaching party.
  • Partial performance.
  • Merchant doesn’t object within 10 days.
• Oral agreement enforceable after written confirmation between merchants.

Parol Evidence

Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements.
Exceptions: consistent terms, course of dealing and trade.
Case 19:3: Puget Sound Financial LLC v. Unisearch Inc. (1976).

Unconscionability

Contract is one that is so unfair and one-sided it is unreasonable to enforce it.
Court can: set it aside, refuse to enforce the unconscionable provision, limit the contract.
Case 19:4: Jones v. Star Credit Corp. (1969).

International Sales

Applicability of the CISG.
Comparison of CISG and UCC.

• Mirror Image Rule.c
• Irrevocable Offers.
• Statute of Frauds.
• Necessity of a Price Term.
• Time of Contract Formation.

Special Provisions in International Contracts

Language and legal differences create special difficulties. Parties should agree to:

• Choice of Language.
• Choice of Forum (country).
• Choice of Law.
• Force Majeure Clause.

Read More

E-Contracts and E-Signatures

Most courts find E-Contracts involve basic principles of contract law, applied in the online context.

Online Contract Formation

Online Offers should include

• Remedies for Buyer.
• Statute of Limitations.
• What constitutes Buyer’s acceptance.
• Method of Payment.
• Seller’s Refund and Return Policies.
• Disclaimers of Liability.
• How Seller will Use Buyer’s Information (Privacy).

Dispute Settlement Provisions.

• Choice of Law.
• Choice of Forum.
• E-Bay uses online dispute resolution.

Displaying the Offer (via hyperlink). How Offer Will Be Accepted.

• Amazon.com--Checkout.
• “I Accept” Button to Click.

Online Acceptances

Click-on Agreements and Shrink-Wrap Agreements.

• Contract terms are inside the box.
• Party opening box agrees to terms by keeping merchandise.
Enforceable Contract Terms. (UCC 2-204).
Additional Terms.
Case 18.1: Klocek v. Gateway Inc. (2000).
Click-On Agreements occur when Buyer “checks out” or clicks on “I Accept” button on Seller’s website or when software is installed.
Case 18.2: i.LAN Systems Inc. v. NetScout Service Level Corp. (2002).



E-Signatures

E-Signature Technologies.
• Asymmetric Cryptosystem.
• Cyber Notary.
State Law Governing E-Signatures.
• Uniform Electronic Transactions Act (1999).
Federal Law.
• E-SIGN (2000) gives e-signatures and e-documents legal force.



Partnering Agreements

Sellers and Buyers agree as to protocols to create online agreements.
Useful for electronic inventory (Just in Time) ordering of parts and supplies.



UETA

• Purpose is to remove barriers to forming electronic commerce.
• E-Signature is “electronic sound, symbol or process associated with a record and adopted by a person with intent to sign the record.”

UETA applies only to e-records and e-signatures relating to a transaction.

UETA and E-SIGN

• E-SIGN explicitly refers to UETA.
• Provides that E-SIGN is pre-empted by state passing of UETA.
• But state law must conform to minimum E-SIGN procedures.

Highlights of UETA

Parties must agree to Conduct Transactions Electronically.
• A party can “opt out” of UETA terms. Attribution—process to ensure person sending an electronic record is in fact the real person. Electronic Errors.
“E-Mailbox” Rules.
• Dispatched when leaves control of sender.
• Received when enters recipient’s processing system.

UCITA

• Applies to computer information.
• Software is not a “good” but intellectual property.
• Software is licensed, not sold;
• License contract gives Buyer (Licensee) only specific rights.
• Attribution and Authentication.
• Mass Market Licenses.

Read More

Breach of Contract and Remedies

Introduction of Contract and Remedies

• Most Common Remedies:
• Damages.
• Rescission and Restitution.
• Specific Performance.
• Reformation.
• Recovery Based on Quasi Contract.

Damages

Compensatory Damages: direct losses.
Sale of Goods: Difference between contract and market price.
Sale of Land: Specific performance.
Construction Contracts: Varies. Consequential (Special) Damages - foreseeable losses.
Breaching party is aware or should be aware, because the injury party additional loss.
Case: Hadley v. Baxendale (1854).
Punitive Damages punish or deter future conduct.
Generally not available for mere breach of contract.
Usually tort (e.g., fraud) is also involved.
Nominal Damages no financial loss.
Defendant is liable but only a technical injury.

Mitigation of Damages.

When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered.
Duty owed depends on the nature of the contract.
Case 17.2: Fujitsu Ltd. v. Federal Express Corp. (2001).

Liquidated Damages.

A contract provides a specific amount to be paid as damages in the event of future default or breach of contract.
Penalties.
Specify a certain amount to be paid in the event of a default or breach of contract and are designed to penalize the breaching party.
Case 17.3: Green Park Inn v. Moore (2002).

Rescission and Restitution.

Rescission.
A remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions.
Restitution. Both parties must return goods, property, or money previously conveyed.
Note: Rescission does not always call for restitution. Restitution is called for in some cases not involving rescission.

Specific Performance.

Equitable remedy calling for the performance of the act promised in the contract.
Remedy in cases where the consideration is:

• Unique (land).
• Scarce
• Not available remedy in contracts for personal services.

Reformation

Equitable remedy allowing a contract to be reformed, or rewritten to reflect the parties true intentions.
Available when an agreement is imperfectly expressed in writing.

Recovery Based on Quasi Contract.

Equitable theory imposed by courts to obtain justice and prevent unjust enrichment.
Party seeking quantum meruit must show the following:

• A benefit was conferred to the other party.
• Party conferring did so with the reasonable expectation of being paid.
• The benefit was not volunteered.
• Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit.

Election of Remedies

• Doctrine created to prevent double recovery.
• Nonbreaching party must choose which remedy to pursue.
• UCC rejects election of remedies.
• Cumulative in nature and include all the available remedies for breach of contract.

Waiver of Breach

A pattern of conduct that waives a number of successive breaches will operate as a continued waiver.
Nonbreaching party can still recover damages, but contract is not terminated.
Nonbreaching party should give notice to the breaching party that full performance will be required in the future.

Contract Provisions Limiting Remedies.

Exculpatory clauses. Provisions stating that no damages can be recovered.
Limitation of liability clauses. Provisions that affect the availability of certain remedies.

Read More

Contracts Performance and Discharge

How does a party know when his or her obligations under the contract are at an end?
A party may be discharged from a valid contract by:

• A condition occurring or not occurring.
• Full performance or material breach by the other party.
• Agreement of the parties.
• Operation of law.

Conditions

Possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

Types of Conditions

• Conditions Precedent.
• Conditions Subsequent.
• Conditions Concurrent.
  • Express.
  • Implied in Fact.
  • Implied in Law.

Discharge by Performance

The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised.
Types of Performance

• Complete Performance.
• Substantial Performance (minor breach).
• Performance to the Satisfaction of One of the Parties or a Third Party.
• Case 16.1: Jacobs & Young v. Kent (1921).

Material Breach of Contract

Breach of Contract - the nonperformance of a contractual duty.
Material breach occurs when there has been a failure of consideration.
Discharges the non-breaching party from the contract.
In a non-material breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.
Case 17.2: Van Steenhouse v. Jacor Broadcasting of Colorado, Inc. (1998).

Anticipatory Repudiation

If before performance is due, one party refuses to perform his or her contractual obligation. Results in material breach.
The nonbreaching party should not be required to remain ready and willing to perform when the other party has repudiated the contract.
The nonbreaching party should have the opportunity to seek a similar contract elsewhere. Time for Performance.
Case 16.3: Manganaro Corp v. Hitt Contracting Inc. (2002).

Discharge by Agreement

• Discharge by Rescission
• Discharge by Novation.
  • Previous Obligation.
  • All parties agree to new contract.
  • Extinguishment of old obligations.
  • New Contract Formed.
• Discharge by Substituted Agreement.
• Accord and Satisfaction.

Discharge by Operation of Law

• Alteration of The Contract.
• Statutes of Limitations.
• Bankruptcy

Impossibility or Impracticability of Performance

• Objective Impossibility of Performance.
• Death or incapacitation prior to performance
• Destruction of the Subject Matter; or
• Illegality in performance.
Commercial Impracticability.
• Key: Circumstances not foreseeable.
• Case 16.4: Cape-France v. Estate of Peed (2001).
• Frustration of Purpose.
• Temporary Impossibility.

Read More

Contracts Third Party Rights

Only the Parties to a contract have rights and liabilities under the contract.
Exceptions:

• Assignment or Delegation.
• Third party beneficiary contract.

Assignments and Delegations

Transfer of contractual rights is an assignment.
Transfer of contractual duties is a delegation.
Assignments
Rights cannot be assigned:

• If the assignment is contrary to statute.
• When a contract is personal in nature.
• Assignment materially changes rights or duties of obligor.
• If the contract stipulates the right cannot be assigned.
Case 15.1: Forest Commodity v. Lone Star (2002).
Valid notice must be given to all parties.
Case 15.2: Gold v. Ziff Communications (2001).

Delegation

Contractual duties in a bilateral contract that are delegated to a 3rd party.

Duties That Cannot be Delegated

• When special trust has been placed on the obligor.
• When performance requires personal skill or talents.
• When performance will vary materially from obligee expectations.
• When the contract expressly prohibits delegation.

Effect of a Delegation

• Delegator remains liable.
• Delegatee liable if delegation contract creates a third party beneficiary relationship in the obligee.

Assignment of “All Rights”

Assignment of rights and a delegation of duties.

Third Party Beneficiaries

Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person.

Types of Intended Beneficiaries

• Creditor Beneficiaries.
• Donee Beneficiaries.
• Modern View: Does not draw such clear lines and distinguishes only between intended beneficiaries and incidental beneficiaries.

The Vesting of an Intended Beneficiary’s Rights

For third party beneficiary contract to be effective, rights under the contract must vest:

• Third party’s manifesting assent to the contract.
• Third party’s materially altering position in detrimental reliance on the contract.

Intended v. Incidental Beneficiaries

Intended:
Promisee intended to confer on the beneficiary the right to bring suit to enforce the contract.
Factors:

• Performance is rendered directly to 3rd party.
• 3rd party’s right to control contract details.
• 3rd party expressly designated as beneficiary.

Incidental.

• Contract between two parties is unintentional.
• Incidental beneficiary cannot sue to enforce the contract.

Read More

Statute of Frauds

Origins of the Statute of Frauds

1677 England passed the law “An Act for the Prevention of Frauds and Abuses.”
Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable.
Today, almost every state has a Statute of Frauds.

The Statute of Frauds

To be enforceable, the following types of contracts must be in writing and signed:

• Contracts involving interest in land.
• Contracts involving “One Year Rule.”
• Collateral or Secondary Contracts.
• Promise made in consideration of marriage.
• Contracts for the sale of goods priced at $500 or more.

Contracts Involving Interests in Land

Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself.
All contracts for the transfer of other interest in land: mortgages and leases.

The One-Year Rule

A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable.
One-year period begins to run the day after the contract is made.
Test: Whether performance is possible (although unlikely) within one year.

Collateral Promises

• Primary v. Secondary Obligations.
• “Main Purpose Rule” Exception .
• Estate Debts.

Promises Made in Consideration of Marriage

Prenuptial agreements must be in writing and signed to be enforceable.
Contracts must be supported by some consideration to be enforceable.
Prenuptial agreements may not be enforceable if the agreement is not voluntary.

Contracts for the Sale of Goods

UCC requires a writing or memorandum for the sale of goods priced at $500 or more.
Exceptions:

• Partial Performance.
• Admissions.
• Promissory Estoppel.
• Special Exceptions under the UCC.

Sufficiency of the Writing

Under the Statue of Frauds
Must name, identify subject matter, consideration, other essential terms, and must be signed by the the party against whom enforcement is sought.
Under the UCC.
Need only name the quantity term and be signed by the party to be charged.
Case 14.3: Interstate Litho Corp. v. Brown (2001)

Parol Evidence Rule

Oral representations or promises made prior to the contract’s formation or at the time the contract was created, may not be admitted in court.
Integrated Contracts.

Exceptions to the Parol Evidence Rule

• Contracts subsequently modified.
• Voidable or Void contracts.
• Contracts containing ambiguous terms.
• Prior dealing, course of performance, or usage of trade.
• Exceptions to the Parol Evidence Rule
• Contracts subject to orally agreed-on conditions.
• Contracts with an obvious or gross clerical error that clearly would not represent the agreement of the parties.

Read More

Genuineness of Assent

Contract may be unenforceable if the parties have not genuinely assented to its terms by:

• Mistake.
• Misrepresentation.
• Undue Influence.
• Duress.

Mistakes of Fact

Only a Mistake of Fact allows a contract to be canceled.
Bilateral (Mutual) Mistakes can be rescinded by either party.
Unilateral Mistakes cannot be canceled unless: If other party to the contract knows or should have known that a mistake of fact was made. If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.

Mistakes of Value

Generally, contract is enforceable by either party.
Exception: Mistake of value because of a mistake of material fact.

Fraudulent Misrepresentation

Contract Voidable by Innocent Party.
Elements:

• Misrepresentation of Material Fact.
• Intent to Deceive.
• Reliance on Misrepresentation.
• Injury to the Innocent Party.

Misrepresentation Has Occurred

Misrepresentation can be express or implied.

• Concealment.
• Misrepresentation of future facts and statements of opinion are not fraud, unless person professes to be an expert.
• Misrepresentation of Law is not fraud, unless person has greater knowledge of the law.
• Silence is not fraud, unless serious problem or defect known or asked and person lied.
• Case 13.1: Vokes v. Arthur Murray Inc. (1968).

Intent to Deceive

Scienter is an Intent to Deceive.

• Party knowledge that fact is not as stated.
• Party makes a reckless statement with disregard of the truth.
• Party implies that statement is based on personal knowledge or investigation.

Gross negligence is considered intent.
Case 13.2:Sarvis v. Vermont State Colleges (2001).

Reliance on Misrepresentation

Deceived party must have Justifiable Reliance.
Depends on the knowledge and experience of the party relying
Case 13.3: Folet v. Parlier (2002).

Injury to the Innocent Party

No proof of injury is required when the action is to rescind contract. Proof of injury is universally required to recover damages.

Nonfraudulent Misrepresentation

Innocent Misrepresentation.
Negligent Misrepresentation.

• Equal to Scienter.
• Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

Undue Influence

Contract is Voidable.

Confidential or Fiduciary Relationship.

Relationship of dependence.

Influence or Persuasion.

Weak party talked into doing something not beneficial to him or herself.

Presumption of Undue Influence.

Duress

Forcing a party to enter into a contract under fear or threat makes the contract voidable.
Threatened act must be wrongful or illegal.
Improper Threat

• Threat to exercise legal rights (criminal or civil suit).
• Economic or physical.

Adhesion contracts and Unconscionability

Adhesion Contracts.
Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract.
Unconscionability.
One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract.

• “Standard-form.”
• “Take-it-or-leave-it” adhesion contracts

Read More

Contracts Capacity and Legality

Contractual Capacity

The legal ability to enter into a contractual relationship.

• Full competence.
• No competence.
• Limited competence.

Legality

The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

Minors

In most states, a person is no longer a minor for contractual purposes at the age 18. A minor can enter into any contract that an adult can.
A contract entered into by a minor is voidable at the option of that minor.

Minor’s Right to Disaffirm

A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.

• Minor must disaffirm the entire contract.
• Disaffirmance can be expressed or implied.

Minor’s Obligation on Disaffirmance

In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control.
In increasing number of states, the minor must restore the adult to the position held before the contract was made.

Exceptions to Minor’s Right to Disaffirm

Misrepresentation of Age.

• Generally, minor can disaffirm the contract.
• But some states prohibit disaffirmance and hold the minor liable.

Contracts for Necessaries.
Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services.
Insurance.
Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid.
Loans.
Seldom considered to be necessaries
Exception:
Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

Ratification

Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.
Executed v. Executory contracts.

Parent’s Liability

Contracts.
Parents not liable (This is why parents are usually required to sign any contract made with a minor).
Torts (Statutes Vary):

• Minors are personally liable for their own torts.
• Liability imposed on parents only for willful acts of their minor children.
• Liability imposed on parents for their children negligent acts that result from their parents’ negligence.

Intoxication

Lack of contractual capacity at the time the contract is being made.
Contract can be either voidable or valid.

• Courts look at objective indications to determine if contract is voidable.
If voidable:
• Person has the option to disaffirm, or
• Person may ratify the contract expressly or impliedly.

Mentally Incompetent Persons

Void.
If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.
Voidable.
If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.
Valid.
If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

Legality

A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).

• Contract that calls for for a tortious act.
• Contract that calls for an act contrary to public policy.

Contracts Contrary to Statute

• Usury.
• Gambling.
• Sabbath Laws.
• Licensing Statutes.
• Contracts to Commit a Crime.

Contracts Contrary to Public Policy

• Contracts contrary to public policy are void.
• Unconscionable Contracts or Clauses.
• Procedural or Substantive Unconscionability.
• Exculpatory Clauses.
• Discriminatory Contracts.
• Contracts for the Commission of a Tort.
Contracts in Restraint of Trade
Anti-Competitive Agreements are void.
• Exception: Covenant not to Compete and Sale of Business.
• Exception: Covenant not to Compete in Employment.
Unconscionable Contracts/Clauses.

• Exculpatory clauses.
• Case 12.4: Beaver v. Grand Prix Karting (2001).



Exceptions to the General Rule

• Justifiable Ignorance of the Facts.
• Members of Protected Classes.
• Withdrawal from an Illegal Agreement
• Contract Illegal through Fraud, Duress, or Undue Influence.
• Severable or Divisible Contracts

Read More

Contracts Consideration

Consideration is legal value given in return for a promise or performance.

• Must have something of legal value or sufficiency.
• Must be a bargained-for exchange.

Elements of Consideration

Consideration for a promise must be either: Legally detrimental to the promisee, or legally beneficial to the promisor.
Legal Value:

• Promise,
• Performance, or
• Forbearance.

Case 11.1: Hamer v. Sidway (1891).

Adequacy of Consideration

A Court will not question the fairness of the bargain if legally sufficient.

• Law does not protect a person for entering into an unwise contract.
• In extreme cases, a court may find that a party lacks legal capacity or that contract was unconscionable.

Case 11.2: Powell v. MVE Holdings (2001).

Agreements That Lack Consideration

Preexisting Duty.
Promise to to what one already has a legal duty to do does not constitute legally sufficient consideration. Exceptions:

• Unforeseen Difficulties.
• Recession and New Contract.

Past Consideration is no consideration because the bargained-for exchange element is missing.

Problem Areas Concerning Consideration

• Uncertain Performance.
• Settlement of Claims.
• Promises enforceable without consideration.
• Uncertain Performance
• Illusory Promises.
• Promisor has not definitely promised to do anything (no promise at all).
• Option-to-Cancel Clauses.
• Requirements and Output Contracts.

Settlement of Claims

Debtor offers to pay a lesser amount than the creditor purports to be owed. Accord and Satisfaction.
Liquidated Debt.
Amount has been ascertained, fixed, agreed on, settled, or exactly determined.
Unliquidated Debt.
Parties give up legal right to contest the amount in dispute, and thus consideration is given. Release bars any further recovery beyond the terms stated in the release.
Case 11.3: Mills v. Berlex Laboratories (1999).
Convenant not to Sue is an agreement to substitute contractual obligation for some other type of legal action based on a valid claim.

Promises Enforceable Without Consideration

• Promises to Pay Debt Barred by a Statue of Limitations.
• Detrimental Reliance and Promissory Estoppel:
• Must be definite promise.
• Promisee must justifiably rely on the promise.
• Reliance is substantial.
• Justice will be served by enforcing promise.

Read More

Contracts Agreement

Agreement = offer and acceptance.
Parties must show mutual assent to terms of contract. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.

Requirements of the Offer

• Offeror’s serious intention.
• Definiteness of terms Location
• Communication to Offeree.

Offeror’s Serious Intention

Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer.
Offers made in anger, jest, or undue excitement are usually not offers. Expressions of opinion are not offers. Statements of Intention or preliminary negotiations are are not offers. Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers.

Offer-Definiteness of Terms

Terms (Expressed or Implied).

• Identification of the parties.
• Object or subject matter of the contract.
• Consideration to be paid.
• Time of payment, Delivery, or Performance.

Case 10.2: Satellite Entertainment Center v. Keaton (1997).

Offer-Communication

Offeree’s knowledge of the offer:

• Directly by the Offeror.
• Use of Agents.

Termination of the Offer

An offer may be terminated prior to acceptance by either:

• Action of the Parties or by
• Operation of Law.

Termination by Action of the Parties

Revocation of the offer by the Offeror:

• Offer can be withdrawn anytime before Offeree accepts the offer.
• Effective when the Offeree or Offeree’s agent receive it.

Exceptions

Irrevocable Offers.
Option Contract: Promise to hold an offer open for a specified period of time in return of consideration.

Termination by Action of the Parties

• Detrimental Reliance or Promissory Estoppel where Offeree relies on offer to his or her detriment, thus Offeror is barred from revoking the offer.
Rejection of the offer by the Offeree:
• Rejection by the Offeree (expressed or implied) terminates the offer.
• Effective only when it is received by the Offeror or Offeror’s agent.
• A counteroffer by the Offeree is a rejection of the original offer and making of a new offer.
Mirror Image Rule
• Offeree’s acceptance to match the the Offeror’s offer exactly.

Termination by Operation of Law

Lapse of Time.

• Offer terminates by law when the period of time specified in the offer has passed.
• If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time.
• Destruction of the Subject Matter.
• Death or Incompetence of the Offeror or Offeree.
• Supervening Illegality of the Proposed Contract.

Acceptance

Acceptance is the

• Voluntary act (expressed or implied),
• by the Offeree that,
• shows assent (agreement),
• To the terms of an offer.

Silence as Acceptance

Acceptance of Services by Silence.

• Sometimes Offeree has a duty to speak.
Prior Dealings and Acceptance.
• Silence can be acceptance if there are prior dealings.
Solicited Offers.
• Offeree has a duty to reject.\

Mode and Timeliness of Acceptance

Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance.

• Offeror specifies (expressly or impliedly) how acceptance should be made.
• Effective when dispatched (mailed, shipped).

Means of Acceptance

Exceptions:

• If acceptance is not properly dispatched by the Offeree.
• If Offeror specifies that acceptance will not be effective until it is received.
• If acceptance is sent after rejection, whichever is received first is given effect.
Unauthorized Means of Acceptance.
• Not effective until it is received by the Offeror. If timely sent and dispatched it is considered to have been effective on its dispatch.

Technology and Acceptance

• Traditional rules provide framework for digital age.
• But traditional rules may not apply to acceptances via Fed Ex, email, or fax.
• Generally, ‘mailbox rule’ does not apply to online offers.

Read More

Contracts Nature and Terminology.

Promise is a declaration that something will or will not happen in the future.
What is a Contract Contract is an agreement (based on a promise) that can be enforced in court.
What law governs

• Service contracts - common law of contracts.
• Sale and lease contracts - Uniform Commercial Code (UCC).

Function of Contract Law

Designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace.
Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

Definition of a Contract

A contract is a:

• Promise or set of promises,
• For which breach of which,
• The law provides a remedy, or
• The performance of which the law in some way recognizes as a duty.

Objective Theory of Contacts. Circumstances to determine intent of parties.

Elements of a Contract

The Following are the element of contract

• Agreement (Offer and Acceptance).
• Consideration.
• Contractual Capacity.

Types of Contracts

Types of Contracts Bilateral vs Unilateral

• Bilateral Offeree must only promise to perform (promise for a promise).
• Unilateral Offeree can accept the offer only by completing the contract performance (promise for an act).
• Irrevocable Offer cannot be revoked once performance has begun.

Types of Contracts Express v. Implied In Fact.

• Express Words (oral or written).
• Implied In Fact Conduct creates and defines the terms of the contract.

Quasi Contracts - Implied in law.

• Fictional contracts created by courts.
• Imposed on parties for the interest of fairness and justice.
• Equitable remedies.
• Quantum Meruit.

Executed : A contract that has been fully performed on both sides.
Executory : A contract that has not been fully performed on either side.
Valid. :Elements: Agreement, consideration, contractual capacity, and legality. .
Void. :No contract. .
Voidable (unenforceable). :Valid contract can be avoided or rescinded. .

Interpretation of Contracts

Plain Meaning Rule: Courts give terms their obvious meaning. .
Ambiguous Terms: If terms are ambiguous, court will attempt to interpret ambiguous contract terms in a reasonable, lawful, effective manner.

• Contracts are interpreted as a whole.
• Terms negotiated separately given greater weight.
• Ordinary, common meaning given.
• Specific wording given greater weight than general language.
• Written or typewritten given greater weight than preprinted.
• Ambiguous terms interpreted against the drafter.
• Trade usage, prior dealing, course of performance to allowed to clarify.
• Case: Dispatch Automation v. Richards (2002).

Read More

Criminal Law and Cyber Crimes

An act can have both civil and criminal consequences. (O.J. Simpson trials)

Essentials of Criminal Liability

To be convicted of a crime, a person must:

• Commit a guilty act (actus reus).
• Have the guilty mind (mens rea) during commission of the guilty act.

Corporate Criminal Liability

A corporation is creature of state statute. A corporate entity may be convicted of a crime. Punishment would be fines and/or denial of certain legal privileges.

Liability of Corporate Entity

Corporations may be convicted of criminal activity if:

• Crime is within agent/employee’s scope of employment
• Corporation fails to perform a legally required duty
• Crime authorized or requested by corporate principal/officer.

Liability of Corporate Officers

Corporate officers and directors are personally liable for crimes they commit.
Also, they may be criminally liable for acts of their under the “Responsible Corporate

Types of Crimes

Violent Crimes.
• Murder, sexual assault, rape, robbery.
Property Crimes.
• Burglary, larceny, theft of trade secrets, theft of services, arson, receipt of stolen goods, forgery.
“White Collar” Crimes
• Crimes occurring in the business context using non-violent means to obtain personal or business advantage.
  • Embezzlement.
  • Mail or Wire Fraud (federal).
  • Bribery.
  • Bankruptcy Fraud (federal).
  • Insider trading (federal).
  • Theft of Trade Secrets (federal).
Organized Crime
• Operates illegitimately by providing illegal goods and services:
  • Money Laundering.
  • RICO (criminal and civil liability).

Defenses to Criminal Liability

Involuntary Intoxication: is a defense if person was incapable of understanding act.
Insanity: defendant lacked substantial capacity to appreciate the wrongfulness of act or to conform act to law.

• Mistake.
• Duress.
• Consent.

Self-Defense of People and Property: use deadly force if reasonable belief of immanent death or serious injury; cannot use deadly force to protect property alone.
Necessity: criminal act necessary to prevent greater harm.
Entrapment: prevents government from encouraging crimes. Key issue: was the defendant pre disposed to commit the act?

Criminal Procedures

U.S. Constitution provides specific safeguards for those accused of crimes at federal and state level.
Criminal procedures are designed to protect against the arbitrary use of power by the government.

Cyber Crime

Computer crime: any act directed against computers or that uses computers as an instrumentality of a crime.

• Cyber Theft
• Financial Crimes.
• Identity Theft.
• Cyber Stalking.
• Hacking and Cyber Terrorism.

Read More