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Table of Contents yii
Introduction PART [. l aw 101
OJ
Ciassjfica!joos of the I aw
03
2. Civilliligalion ... . ...... . ... . " . ... . ... .. ..... ..... . . ... ... .... . 13 3.
Alternati~
4
FEhin an d the I aw
3S
5
HowDpBusjnessesFjtjn'
4S
Dispute Resolution . .......... .. .... . ........ . . .. . .. . 25
S5
PARI II ' Civil law j[) Oetajl
6. TheRecipeforaTort ........................................ . ... 57 7. TheRecipeforaContract
....... . . . . . . .............. 7 1
8. Contracts, Do You Always Have 10 Do What You Promised!
9. Wh at Contracts Mus! Be io Writing? 10. Wbat About Mel Third-Party Rights in Contracts . PART III - Contrac ts in Business II
Sa les Contracts and Remedies for BrN ch
.. 87
... 101 .1 11 123
125
12. Warranty Contracts and Products liability ...................... 137 13
Se(ll redTransactjoDs
lSI
VI
T" BLE OF CONTENTS
PARI IV' Trends jn Bu siness 14
E.Commerre
15. Intellectual Property 16
Global a,lS;n .. ss and International I aw
Ackn owledgements ...
165 167
.... 177 193 . . . . "' .. 205
Test You[}elf Answers
207
Glossary • .. • . , .
,233
Index
251
Abolill he Author
263
,.
Introduction s an asp iring MBA student, an cxccuth'c or professional in the work loree, o r as an even everyd ay conSUlller, yuu WIlW across 1''guJ issues aU the time. You hear abou t lawsuits all the time in the night!), news. You
A
rcaJ legal notices on product la bels. Maybe you ljIlO!" materials from scvcrdl bw)ks ill a paper pm an: wriling a paper for class, making sure not to viola\(' anyo ne's co pyright. Or you agree to cBay's teTms of agreement in orde r to become a member. You pul your old baseball ca rds up for sale, and subseque ntly ent er into an agreement with a guy in Seattle who wants to buy them. All of these situations h,lVe legal implica tions. "lhc purpose of th is hook is no! 10 make a lawyer out o f you. Whether you rea d it straight th rough or consult the sections you need for I'I'fcrence, this bo ok will instead give you the basic tools you need to help you to think clearly and logically abou t how business and lcgdl mulle rs illlcrtwine. It is also meant to aid to people who want to beco me mo re familia r with «legalese" or co mm on leg"J.1 situation s, or they simply may want a "refresher course" o n certain aspec ts of law. In fact, this book can eve n hell' YOll to beco me a hetter consumer and to keep you IIp-to.{late with the glohal and technological realities of today's marketplace . As rou read through the day -to -day, true-to -life situations I have u_~cd as examplrs, rou will rcaliT.e tha t you know a Jot mOTe 'Ihout this sulljeCl than you tho ught. Together, we will refine yo ur critical thin king abou t events and we will organize concepts to ma ke them easier to relate to and remember. I usc a lot of c"okillg analOgies to remind stu dents th at eve ryone starts wi th the basics and build, o n them . In no time, with a little prdetice, you can be applying co mmon recipes to interpret many business dealings.
,
"
Urheberre<;htlich ge5chlitltes Material
... LAW 101
Welcome to MBA Fundamentals Business Law. In Part I, we will start with the basics. When you begin cooking, you first learn your way
around the kitchen. In "Law 101 ; we' lllearn the basic divis ions of the law and the steps that a lawsuit follows. We'll also explofe some vari-
at ions on the typical litigation process by reviewing methods of alternative dispute resolu tion. We will keep our legal analysis healthy by adding ethical considerations to our ingredients. Finally, we will
see how a[1 these elements mix with the business world.
Jrhch~"
11 h
I"
Urheberre<;htlich ge5chlitltes Material
Classifications of the Law
T
he law
Involve~
the
mo~t
ancie nt of arts - storytelling. Actually. all of
life's activities invo lve storytelling-some fi cti on, some nonnction. My
car sta rts to make 11 grinding sound when I sta rt the ignition. I g o to the mechanic and he translates my story into "bad spark plugs and corrosion on
the cables: I get a terrible sore throat "nd my ('ii'S hurt.' go to the doctor and she translates my story inl0 ·strep throat, 11 septic bacterial infection 10 be treated wi th antibiotics." Practitioners of the law do the silme thing. They label th ings in their own way, but they a re just eKpressing you< story in anot her way. Don't be too intimidated by the silly terms and ancient
phrases. It Is Just storytelling. and you too can understand tho:. language and translate the ideas wit h a linle
Criminal Law Mi~demeanor
Felony Standard of Proof
pra ~t ice, patien~e,
and
~ommon
Civil Law Contracts Torts Intentional Reckless Negligen t Standard of Proof
sense.
PA~T I: LAW 101
4
IN THE REAL WORLD In June 1994, Orenthal Jam es Si mp son, a.k.a O. I. Simpson, H foo thall running h,ICk kgend, was arrested and charged with the murder of his eK"wife, Nicole Brown Simpson, and a Los Angeles wailer, Rnnald Goldman, Ms. Simpson and Goldman were found brutally murd"fl'(l oulsi,\c her homl' in Brentwood, CaHrornia. 11le SWte of Ca lifornia chargl-d Simpson with two counts of fint desrce murder. Oneofthe mol"(' bizarfl' aspects of the case was that before beingarrested, Sim pso n was on the run in a famouslytcbised car chase through the .Itreets of LA , t\ jury trial ensued. High-powcfl'd lawyers were present. And, despite the endles> p re~~analysi5, the televised m urt scssio n5, th e dozens of witnesses, ,md the incriminating eM cha.>;e, Sim pso n w~. /i,und not gui lty. 11u'reafter, the families of Nico le Brown Simp son aud Ronald Goldman Simp_,,,n civilly f"r wrongfu l death. They cbime d th,11 he was T,'spon-
_~ucd
sihle (or the loss of their love d ones. A jury trial en,ued. H igh.powe red bwycfS WeT" present. An d dl'sp ile thl' fact that Simpson was found not guilty of the crime, he was found liable to the Gol d man family and ordered to pay $8.5 million in damages. lie was also found guilty of committ ing battcry on his ex,wife, although no d"m~ges were sought by th e Brown fa mily. llow ea n this b~? You ca n't be tried twice fo r the same crime_ can )'ou? If a crim in al jury fin ds you not guilty-beyond a rcasonabll' dou bt-h ow ca n a civ il jury punish yo u? And why wasn't the jig up when Simpson tried to dude the poli ce in his Ford Bronco with a wad of cash , his passport, a nd a falo;c heard?
KEY CONCEPTS 111e law is a set of ru les "hout acc"ptab le conduct. Lega l types categorize the rul es that talk ahout conduct. lhc first main categories arc crimin,\! law and civil law.
Criminal Law Criminal law regulates pub lic standards of c<mduct. Each o f m lives in a community, or more accumtcly, in layers of comm unitk.~-a city, a c" unty, a st~tc, a nation. Th ere ,He principles of co ndu ct that your comm unity h
CHAprr~ I • Cl .... SSlflCATIONS Of THE lAW
agn'lod upon,
~nd
5
oy heing a mellloer of your community, you arc heM to
those stan dards_I n my(ommunity. you must drive tlO more th an 25 miles pe r hou r in a schoo l wn .... you catillOt Icg
ycar~
old. and it is against the law to break into you r neighbor's
bouS<.' and take h is p roperty. we all agree to t hese rul es. If you violate a public st~ndard of conduct. you arc not always in big Irouhk. Sometime", a minor rule is broken, This crime is called
iL
misde-
meanor- and your in fraction c~n bc remcd ied by paying a fine or losing
a pril·il
c;J. n
goof up quite a
few l imcs and ~tilJ keep you r rights an d pri\,ikgl's, although your pockel. book may be a little lisbter. If you violate a public standa rd in a serious way- on e thJ t Cluses da m· age to property o r injury to person .• - you may have a 101 to lo~e. When you commit a seril>u~ crime. called ,1 fdony. the conSC'iu ~nces ti,r viobting the puh li c .~tambrd of "'nduct could include large fines, hig los, of privileges, and even the loss uf your freedom to be in that sodety, (ommonly rderred to as priso n ti me. Because a felony co nvictio n cu ul d polI.'n tia lly deprive a citi7.en of const itutionally guaranteed
ri Sh\.~- lire.
liberty. and
propcrty~
the Slakes arc "c ry hiSh and the law goes out of its way to get it righ t. With felony charges comes a list of protections for thc accused citizen. includ ing the r ight to co u nse l. the right to trial by jury, t he right to confro nt accuscr.~. and the r ight against >e/f-incrh.jil1a lion. Breaches of public standards of con duct arc pmse
rcprescn tat iv~- t he
U. S.
allo rncy, state's attorney, or cnunty att orneY - Jlld the public pays, via th rir taxes, for these o ffi ci al. to uphold the standards th at their commun ity has set. [f any fines or monetary damages arc due because u f vioia tio ns of con duct. they He paid in to tbe public coifers. not to individua ls who may have
been hurt . You can almost ahv"Jys ide ntify a crimina l ClS<.' by the way it is n amed. or 'Iylcd. as thcy say in thl-Ieg-d l world . The case will bc one brought by thc public against the accused. such as U.S. Peopl~
1'. Timothy MrVdgh. Slate 1'. Simpjon. v. l,a rry Fly/II, ur COmm0ll1vellltl1 v. Uzzj~ [lorden. 11le sllIndard of
6
PA~T I: LAW 101
prooj, or the d~:gree with which the ch,n-ge nee ds 10 he prove n aga inst the accused in a criminal (".lSI.', is heyDlld rl rerlsonahlc doubl, which is the high<:st sta ndard in Ih<: law. It mea ns that the accused is presumed innocent unlil the decider oj jact (t he judge or the jury) hclic ves beyond any douht that there is no other possihle explanation for what happened and who caused it. 'Ihey have to be [00 percent and IInanimou~ly convinced that the p("TSon accused did what he was accus("d of to find criminalliabi[i t)". This isa nOlhcr way in whkh the individu al is protected against unfair governnl en t act ion.
Civil Law The [aw aL~o irnpu.~e.~ pcrs"'lal n"pu"sihility on ci t ize"'~ in the com munit y. '[his is (iI·illaw. lhc area of civil law is further di vided into co ntract cases and tort ca~es. A COn/rarr has to do with a private promise between ind ividuals to do so m("th ing, such as provide a product, hui[d a ho u.~c, or (" Ilter into a marriagc. A lOr/ is a wrong you do to another person or his property. Torts arc so metim es called pen onal injuries. It is human nalure to so metimes hreak a pmmise ()T fail tu be a.~ careful as you sho uld in your deali ngs wit h others. Ex~ mpl e~ of torts could he the followi ng: l.
Joe gets druo k at a bar 00 Saturday night and inlentionally hreah his best friend's jaw oycr a comment nhout a pool shot. An intcntional injury to a citize n is quite serious. Our civil bws slrh'c to protect citizens from this type of behavior.
2. Vice President Dick Cheney accide ntally 5hoots his hUllting partner, [larry Whittington, in the face . 'this is not an intentional act, hut when so meo ne is ca reless or rccklc~' and had things happen, civil law allows the injured pUl}' tn recover. 3.
Your neighhor ta kes yo ur daughter 10 the swi mming 1'001one hot aftern""n with her children. She f;\iL~ tn keep her eye 0 11 y"ur child every moment. Yo ur child slips on the wet pool d<:ck, hits her chill, and n"luires three st itches. This is a ncgligl'n t act, bu t luckily, nul a serio us fault of your neighb or or a serious injury to rour child.
'Ihcre is no pub lic pro se~ U1or for these cases. Many of these cases arc settled wi th out recmlf.
•
CHAprr~ I • Cl .... SSlflCATIONS Of THE l AW
7
parties, ca ll ed phlinliffs, have to hire their ow n lawyers a nd file their ow n laws uit s. -Ille person s accused of violating these priva te standards arc call1'd defenda nl s an d also hir~ re p rese ntative s to help them tell their side of the .~tory. If the plaintiff win s, he cannot put a defe ndant in jail o r take away his privileges. Civil claims arc all about da mages. or mone tary amounts, to compell s,lt e the pla in tiffs for the broken promises or injuries. 'Ihc euo;c, arc bro ught in the parties' names, ware styled, for example, as Smilh v. /tmes or Doc 1'. \1' ,I1· :\1arl, o r HOlll eow"" r \'.
Bili/d~r
ur Crdil
Cllrd CO. I'. CU lloma. The slamla rd of prouf, ur degree wilh which Ihe cl aim needs to b e proven against a civil defenclan l, is a lesse r st,mdard th an tbe cr iminal
~tandard
of proof. In a civil case, the plaintiff has to prove bis
claim by a prepollderan(c oj Ihe
~vidcnu,
which mean s that more likely
Ihan nOI, Ihe defendanl causcd Ihe damages that arc claimed. It is not a unanimous standard, and a plaintiff c-an recover some damages e'-c n if th,"re arc othcr p];msible or likely cont ributing f~ctors to the ~itll ,l tion that may have c-a used sume harm . Su metim es the prcponJemnce of tbe evi de n" " standard is (a iled the 51 pe rce nt rule hl"Cau_~e all the decider of fact (j udge o r jury) needs to find is that the defenda nt is more Ihan halfway
~I
fault in Ihe situatio n. You cannot he charged Iwice for Ihe samc c rime. The U.S. ConstitUlion says so in the Fifth Ame ndment , which forbids double jeop~rd)'. But th at doesn't mean that an ,let on yo ur part ca nn ot result in a number of charges. It ~11 depends on what standards. pu hlic u r prin k, that yll u violate. If you
run a sto p 5ign, y"u co uld he ch arged with multip le public viohltio ns: fail ing to stop, ca u_,ing an accident, exceedi ng th e speed limit, perhaps even failure to wear your scat belt or driving without ,1 valid licen!'e. Aud all yu u we re doing was ge Uing a '-luact of milk from the co rn er Shire. In ad dilion, yo ur actions could have violated a private standard. to nol run into others' cars, causing perso na l an d property damage. You co uld then be sued civilly for damages by Ih e owner of Ihe car and any hurt parties. So. one action could remit in a criminal and a tort chargc- or severa l charges. Also, it cou ld result in c hJfges again,t roo fro m many levels of gove rnme nt. If you rob the local bank before going fo r the milk, you have committed both a federal and a .• tatc ainU".
J,
*
~I
h
8
PA~T I: LAW 101
THE LAW IN ACTION 0. J. Simpson was aCC\1S1:d of two hdnous crime.~-hreaches of puhlic standard" of condoct- that if>, t,lking the life of two human beings, Thc State of California, which is where the incident occu rred, brought the charges against him. The ease was styled Slare 1'. Simpson . This was a felony charge. a serious crime. with penalties upon conviction up to and indud ing the death penalty. The defe ndant was presumed innocent until pro\'en guilty. '!"he dcfendant's actions bcfo re being taken into custody were not pa rt of the record and (ould not he construed as admissions of guilt. lhe defendant was atforded all the rights reservcd to him hy the law and the U.S. Constituti on. induding the righ t \<) a sp~"Cdy trial, the right to confront his aCCllsers. and the right tn be free ofinaiminating himself. A tria l was held w!l<'o.: a jury of 12 citi1.cns heMd all the nidence. The evidence presented focused un the defendant's motives and oppu rtunitie s to commit the crime. It included forens ic and crime scene evidcnce and testimony about where the defendant was during the commission of the crime. The defendant ha d e\"Cry right to que stion the evidence presented and present alternate theories of what happcned. One alternative theory presented was that this was a mcially based case and that a det~clive in the e-.lse wished to fl"Jnte the defendant hy planting a bloody glove at thc crime scene. 'lhe ddendant di d not take the stand in his own defense, and thi s fact could not be constru~d against him bee-J use of his Fifth Anwmlment right "gainst self-incrimination. TIle matter of the pre-arrest Uigh! was never brought up to the jury. It was not relevant to the homicides. After a 133-day trial and Icss than (our hours of jury dc1iber.ltion, the defendant was found not guilty on both cou nts of murder and Simpson was free to go. Fo rever after, he would be legaUy not guilty of thesc felonious claims in the eyes of th(, law, although many bystanders (media, citi7.ens) quest ioned the vrrdicl.111CTe was no appeal. The state had iLl chance to try the "ISC and th"t was it. Fo r better or worse. Sim p'lm's crim in al case wasov~r.
But one act can be a crime (breach of J public standard of co nduct) and also a tort (breach of a personal standard of conduct). TIIC families of the victims sued Simpson in state court, in a case styled Rufo v. Simpson
CHAprr~ I • Cl .... SSlflCATION S Of THE lAW
9
(Ronald Go ldman'5 rlIolher'~ name is ShMOU Rufo). The cl;lirll here was lhat Simpson had some Involvement- SI perce nt or more- in the deaths of the vi,li ms and Ihose dealhs lefl lh e surviving loved ones wilhoullhe support, com forI, and company of Iheir fam il y members. This is ca lled a case for wrOrlgful dcarh . Here, the ev idence ce nt ered on how mu ch the victims supported and aided their familie}, how their deat h~ would result in llIore costs- to nlisc children. be wilhout (he "ssistilllce of Ihe l(wed one, etc. Economic matters were at i ~su e, not forensic fi ndings. In this trial, Ihe defendaut's failure tn testify in his ow n defense cnuld he CUllstrued aga inst him and Simpson did take tIl<.' stand to deny his invnh-elllcnt. The fac t ()flh e rleqllilhl t in Ihe crim inal trial was nol relevan l in thi.~ lrial. A jury of 12 citizens heard all the evide nce in a trial lastin g
Simpson was nnt charged twice for the same crime. He had multiple criminal charges against him, th e result of one acl of violence. He had multiple civil charge~ agai nst him, the result of the same act. The criminal trial and the ch'i! trial focused on entirely diiferent evidence, an d had enti rely dilferent judges presiding an d juries dcdding. l he poten tial co nSC' luences - Jcath or luts of mo ney- wac on «) 01 plctcly di ffe rent levels. '[he burden of proof in each case was co mpletely d itre~nt ; they d" not atfec t each ot her and une does not determine the o ut conll' of the o ther.
TEST YO URSELF In 2002, Tri-State Crematory, Inc. in Noble, Geo rgia, was in th e news. It was discovered th,1\ the business had not cremated bodies sent to them from area funeral homes. In fact. over 330 bodies were found on the 16-acre site of the business. some dating back to th e early 19905.
10
PART I: LAW 101
The ~ta te of Georg ia
ha~ law~
prohibiting the
abu~ing
of a
corp~e.law~
prohibiting individuals from making false statements on death certifl" cares. and laws prohibiting theft by deception. All l he~e criminal viola" tions aTe classified as felonies. The crema tori um had cont racts with many area funeral homes to provide the cremation services for their customers. In milny instances. the crematory de livered concrete mixing powder to gr ievin g families instead of remains, Tri-S tate was paid for their services by the famil ies of the deceased through the various funeral homes. 1.
Cou ld Tri-State be charged with a crime? Could they be charged wlth more than one crime?
2.
Who wou ld prosec ute this cri me?
3.
What could the comequences of committing such a crime be?
4.
Cou ld anyone sue Tri-Stale on a civ il cha rge? If so, who could sue and wha t would it be based on-a contract or a tort?
S.
Whilt could the comequences of civil liability be for Tri-State?
Brain Teaser 6.
Is it easier to prove the criminal case than it is to prove Ihe civil case?
Questions Future Chapters Wi ll Answer 7. 8.
Cou ld thiS be a federal case? How ca n Tr i-Sta te Crematory, Inc., which is a corporation. be put injail?
9.
Cou ld the families sue anyone other than Tr i-Sta le (or their damages?
Answers can be found on pages 207- 208.
"' "
•
CIi .... PTE~ 1 • CL.... SSIFICATIONS OF TIi E LAW
K'E tJ P,OINTS TOl REMEMB.ER . The law love~ to label thlng~.legal termi no logy categorizes ideas, just like a grocery store categorizes produce and canned goods; with a road map, legal terms make sense. The law is all about regulating conduct among peop le in a community. It does not dem(lnd the best of us, but it sets minimum st(lnd(lrds of conduct. Two big c(l tegories of th e law Me cr imi n(lilaw (lnd civill
,
"
\ \
Urheberre<;htlich ge5chlitltes Material
Civil Litigation have a n olde r b rother who, when asked to do chores as a teenager, would
I
always seem to have a comment on them for my mother. This caused
my mother to develop a feisty comeback of her own; "Mike, you could make a federa l case out of anyth ing," It wasn't until I got to law school that
I realized my mother was wrong. You (ilnnot make a federal Cilse out of anything, and in this chapter you'll learn why.
History of Civil Dispute
Sources of the Law
Resolution
Steps in a Lawsuit
Federa l COUft Cases
State Cou rt Cases of Law and Equity
IN THE REAL WORLD [n 2005. Acme Constructio n Company. located in D~\'cnport. Scntt Coun ty, Iowa, signed a contmct to do a commercial build-ou t just across Ihc Mississippi River. 'lhcy were constructi ng a new BijpII Jewciry for Jim ,HId Jerry Ballard, who were eXI)and ing from (heir sI11311 family store in C3mbridgc.
14
PARr I: LAW 101
Henry County, lIlin o'-', tn the new King Mall in Moline, Rock Island Cnunty, Illinois, which is about 20 miles away. '[he Ballards wa nted a glitzy store worthy of the big city and the new mall, complete with custom-b uilt display (;\SC~ and flashy lighting. Acme had hecn recommended by business co ntacts a nd gave an alfordable estimate and workable timetabl e. Work proceeded, an d. as is com mon, chan ge5 were mad e. 'Ihe Ball;!rds asked for morc d isp];IY areas Ihan first hid an d for s.(l me upgr;u.lcs in fi nish
materi~ls.,
like th e gt.lnite on the w~lls and Hoo r. So me of the~ change orders wac reduced to wr itin g, some were IIOt. The add itions to the co nt T'dCI look mon."t im e to comple!e, so when May I Cdme, the .~tore was not ready for the gT'dnd openi ng that was plann ed and highl)' anticipated. Aeme put ill overti me and Bijou had a sparkly, albei t span;cly ;Itlendcd. opening on Mar 8. Acme sent the final bill to the Ballards for $22.000 on May 10, having al ready received $60,000 in progress payme nts. On May 11, the Ballards told Acm e tha t dlle to the latc opening. the absence of an agreement In P;IYovertime, a nd the co~t overruns, they were not paying one more dim e. Bdtlre eithe r p;lrty run~ to th e cuurthollsc, Acme and the Ballards try tl) resolve their dispute. Acme is reluctao t to sue be<:ause this job was recomm~nded by other Acme cllstomers and word wOlild gct back to them. Plus, there is a lot "f interest in Acmc's talents br other mall stores, induding one of the hig anchor stores. [Iowever, the $22,000 balance already rellcels some concessions 10 Bijou for the job tim ing. In addition, the Ballards made the cha nges, nnt Acme. 'fhe lIallards arc nervo ll.s hec~Il'>C Ihey ha"e already e"pended th eir budget for the m'lll location and thc gTa nd open ing was lightl y auended.lhey lIl ay have I" go to the hank for s.(lmeextTd wo rking capil al all d don't wan l to look 1i101i,h ahollt their cx p,msion or tardy in thei r hill paying. Afh.'r MJ U1C initial discus_~ion , ndth'" party i~ happy. Doesl"ilherparty have a cause of act ion they could take to co urt? Where should th e laWSUit be filed?
KEY CONCEPTS GcneT'.Illy, when a person comm its a misdemCdno r, _~hc pays the tine a ll d it is over. Often, even mo re se rious crimes, like failing to stop at a light, arc resolved wilh a tine, lo ss of drh'j ng privileges, Of a course at driving schooL There i~ an ;l(ci(knt in the slo re pa rking lot. MOTe than li kely, the patt ies
CH .... PTER 2 ' CIVIL LITIGATION
\
5
willl'xchange informatioll, insur,\IlCc c"mp'lIlies will be c"lI t~ctcd, and the matter will be rcsulved through business channels. We even hea r about public prosecutors accepting nl'goti;lt cd );.Culements in serious criminal maUers.ln fact, it is estimated that 1>5 to 90 percem of criminal mutters never result in a trial and approximatcly95 perce nt of civil matte rs lieule by agn'elnent. However, wme cases arc nut settled, and if the panks feci that a pub lic or priv~te standard bus been viol~ted and the aclor must be pu nished, the reCOIlTS(' in th is country is to lake your ca use of action (case) to c"urt.
History of Civil Dispute Resolution The handling of disputes wasn't always that war- In ancient times, it was often the officials of society, frequently religious leaders, who resolved dis pu tes, many times wit h a trial by torture to test if the wrongdoer was evil or untruthful. If the acc used recovered after the tortu re. he was exoncrawd.111c American law syste m isb a..... d on the Engl ish sptem. [n medieval times, dispotcs were settled with a trial by orJelll. l he ~cc used would unde rgo some awfu l aerci.o;e involving a hot pohr o r boiling water o r po isonous poti"n_~, and ifh (, came out alive, it was determined that God was on his side and he was truthful. "Jhen often, the accuser was pun ished. Among the aristocrats, there was a more civilized way of dispute resolution, calkd trial',y combat or judicial duel. This was also an accus ato ry procedure. and the accused was duty bou nd to defend his honor by fighting to prove truthfulness. Again, God WM th,' judge. So me nobles ,,"~rc hetter fighters Ihan Hth ers, and over lime. it was ugr~cd that YOll could hire an ",/meatus (advo C'J te- usually a knight) to defend for you. This hclp ~d the survival r"te among peers, but stll! w~s not the best way to solve disputes. In the laler Midd le l\ges., tri'll by omh beC'"mc popular. In this system, the parties would need to prove their claims by collecting oaths or sworn statements supporting them from lords., p,'crs, or ot hers of high estate. The party wit h the best backup won. Ag-ain, advocates were us~d to help litiga tors through the system. bUI in this ca.... their weapons we re or~tory .• kills and knnwkdge of the law. 'Ihe accu.o;er ~n d accused could not kstify themsclws allom their own maliN, as it was assumed they woul d lie. A jury from the communit)' (of their pl"ers) IIMlally det('rmin('d the o ut C<Jme.
16
PARr I: LAW 101
The ,~ysteJl1 has continued tu evoh'e, but the basics art' recognizahle back to the Middle Ag~s, Today, if you have a dispute to settle ~nd must g" to court, you first need to decide what court to go to. There are 51 major court sy.~tems in the United States- the federal court system and 50 statc court systems. Each has its own rules about what it docs. But you cannot make a (,-dcI'd l case out of everything. You cannot take a matter about divorce 10 ,m;L11 claims courl oor (a o you take a Intlfic cit~tion to probate (ou rl. [)epending on the nature of the case, the parties involved, ,1IId the amount of money at issue, there is a rigbt CO\lrt for every dispute.
Federal Court Cases '10 get int o (cdcrdl court, yuu mu st he charged with il fedcrJ I aim" or have
an eligible civil case. In add ition, fedent l courts will hear any dispute involving the Constituti on of the United St'ltes. Interstate kidnapping and hank robbery arc crimes Ihal viola te fedentl law and go to federa l court. Cases involving civil rights or a frl~dom g uaranteed in the Bill of Rights go to fl-derJI co urt. Your fender bender usually docs not. The reason isjwlicilll economy. 'Ihe feder.!.l co urts want to take the most important C.lses they CJn and cases that ma), not be fJirly heard in other jurisdictions. To get yuur ell'il dispule in fcdeml courl, you n~cd to have a fedeml issue, a federal crime, a matter between stJtes nr between a state of the United Stute" il nd d foreign country. or a matter that qualifics for divusily jl'riWictioil. Diversity jurisdiction is how must prh'ate claimants get \u fcd~rJI ",urI. It means thaI the ph1intiffs (thuse suing) need to live in a stale dilfe ren t from the defendants (t hose being sued). Fedi'ral cou rt s figure, if yo u both li ve in 10"'a, you can go to Iowa to re so lve your dispute. But if a party lives in Cali fornia, and was hit by my car while on vacation in Iowa. it may not he fair for me to go to San Lui s Obispo o r for them to come to Davenport Iowa, and be judged by a jury of Jocals with loca l sym pathies and eth ics. In addition, ju~t so the workloud doe .• n·t set too pNty, to qualify for fedent! diva~i ty jurisdictio n the ll<1 rties mu,t hal'c alle,lst $75,000 in dispute. Once il is llccidcd that you will seck a public solution to rour dispute, you have to dec ide when: to go, 'nlat is a questi on "fjurisdiai"'I. Thl'rc ,1re 51 ma in jurisdictions aud many subjurisdictio ns wit hin the United States. If you have a fedeml matter, yo u check a map and see which federal district
•
CH .... PTER 2 ' CIVIL LITIGATION
\
7
you arc in, 'flu, country is divided into II sectimu, Of fl'der..1court d i5/rictJ, and you file your f~der~l case in the closest courthouse to wh~re you r~siJe, whe re the Jef~ndants reside, or where the accident happe ned, Often, [oct! feder~lcourt districts have oHices in your nearest fedcr~1 building, StatcsalMl ha'-e divided their court system s into districts, sometimes called circuits, to give a litigmll as local a pl,ICc as possible to conduct his trial. County scats arc olkn where state district courthou.'I(:.~or circuit courthouses arc l"cated. It is also common fo r courts to be dh'ided further by the mattcrs they hear. Your local courthouse may have a small daims division (for ddims that involve low dollar amounts ami when: litigants can argue their own cas<:s without lawyers), tralfic ,jivisions, juveoile c"urts, family courts, probate courts (for wills and estar.: matters), and district courts for everything elsc. You have to eva lu ate what you arc asking for to know which (Ourt to go to.
State Court Cases of Law and Equity Sometimes state COUfts are divided into law an d equity divisions. This is also a th rowback to medieval English legal tmditioll. The realm used to belong to the sovereign- the king. He panled estates and honors to fellow nobles.. but he could take them away. When disputes between lords and peers arose. the king was the arbiter of dispote,,," since it was all ahout him anyway. Q,-cr time, the king didn't want tn ~ I way~ hold court listenin g \0 complaints. I Ie had heller thing~ to do, So he dclegilted the dl'(:isionmaking in cuur t to his lords. The y could dedJe disputes based o n the king's direct ions- the statements he had made before_ Sometimes claim ants Cdme to cou rt an d asked for somethi ng Ihal didn't fit th e mold. They didn't want an injury paid for or a hill re~()lvcd, they wanted the coort 10 decide an issue of fairness, called cqu ;/y_They asked the court to orJer so meone to mar ry someone else o r to turn over a ~hipmcnt of "min. Thh left the lords a li ttle confused. There were no clear directions aho ut fairness anJ it wa.~n'I even certain the)' were qualified to rule on the~e que.,tions. The king set up ,1 separate court system; now the people could .'\I:ek recours<: in the law C"Url "r in eq ui ty courl, and in ~'
18
PART I: LAW 101
cou rthouse or your fl..teral cou rthou~e to lile a CJse, yo u CJn comhiue requests for legal and equitable dedsions in one fillng. An example might be in a divorce case. where there is not only a lega l ruling ending the mar· ital status, but also an c<./uitablc ruling kceping the parties from hafJssing each other at their rcspcctil"c homes. So, how do you know which court 10 go lo! You considcryour matter. Is it a federal case? If not, what state court could )'I/U go to? Thb depends on where the plaintiff !"Csides, where the defendant resides, and where the incid~nt that is th~ suhje
Sources of the l aw Since there arc 51 court systems in this country, there arc 51 different sets of laws that could he applied to YOllr case. Wherc do the courts look to decide your matter? I'irst, they look to the U.S. Constitution, which is the supreme law "fl he land. No olher bw th,11 the fcdcrJI gnvl'rnmcnl uf any stale govcrnm entp Jsse s can conllic t with the U.S. Constitution. Next, each cou rt sys tl'm looks to the laws passed by the legislature of that jurisdiction. Federal courts look at laws passed by COII!)rcss. State co urts look at state laws, often compiled into codes. such as the Iowa Code, or statute books., such as Illino is Compiled Statntes. Finally, if neither the U.S. Constitution nor fedeml or slate laws give guidance on the issue before th e COllrt, the court could loo k to the former case law, called commol1 /<111'. to decide a situation. III our country, ",<,like predictability in the law, 50 if YOll ca n find a previo ll .• ca."", with similar fa cts as ynllrs that w{'nt to co urt ,md ri.xdvcd a rutin!) frum ~ judge or a jory, Y()II c~n rdy "n th~t "utcome to predict what
•
CH .... PTER 2 • CIVIL LITIGATION
\
9
wi ll happen in your case. This is calkd a precedent . Cou rt s must oh_.erve wha t wenl before and be in conformance with it. "Ihis is also calleJ the doctrine of 5r~r~ deci5i5, which mea ns " lcllh~ previo us ruling ~t.md ." Some ,tales allow .~amc·scx unions, some stales gf"~nl libcf"~1 child support. and somc states have low lax f"Jtcs for corporations. Dcpc nJing on whal you want a court to comidcr for you, you may be able to predict a beller outcome in o ne jurisdiction over '1I10ther. If you bring your fender hclldcr case ill Kam.as, that state's lort law will apply. If you bring yo ur case in California, you may be abl~ to predict a higser award fi)r pain an d Ml lfering than in Kansas, Thest' laws th"t have to do wil h the subject m~lIerofthe ca,c arc C
Steps in a Lawsuit Whether yo u bring you r claim in federal or state court, there is a predictable step-by-step proc~ss of pursuing a lawsui t. first. you til e a complain/. someti mes called a pleading. Th is st"t:ms apprnpri'1tc since yo u arc bringing up something you are c(»np laini ng abuut and you are plea ding for help 10
20
PARr I: LAW 101
rc.~olve it. TI1C filer of a complaint is called the plainti!f or thc "eli/;oneT, since you are being pbintiv~ with the court and asking for (pelitioning for) relief. The papers you file aw served on the person you arc ')Tguing with, called the defendant (defending himself again.lt ynur charges). Snmetimes the defendant is called the respondent (because he is responding 10 your complaint and it sound~ more neut!";)l tha n to call him the defendant, which implies guilt), lhc defendant "
ecunom)'. If the defense argues that Ihe)' arc nOlliablc to the plaintiff becau~ someone clse was to bla me for the incident. that someo nc clsc may as well he there to get thi~ all worked o ut. The .• e pleading~ sent hack and forth can tak~ mon t h~ to exchange. All the claims have to he .~Iat~d and re.~p ondcd to hetween all the parties inn,lved. (f there are multip le plaintiffs and/or multiple defendants, the pleading process can be qui te co mplex. Next, there is a process of dis.:overy that takes place ],dwccn the partics. Dis(())"ery i~ the process of gathering Ihe relevant evidence to prove your case. It could include taking writte n o r oral statements and gathering witness~s, diagl"Jms, tests, expert testimony, or scil'ntilic research on the issue. Ihh 'tel' is cnstl), and time consuming, bUI it helps the parties cbrify where they (;leh stand and the veracity of the claims being made. Ma ny cases settle at snme pu inl dur ing the discuvery procc,' s hecause the parlies mo re clearly view thei r respective positions amI cut their los~.'. Interr<>s,' /oric$ (wri ll,'n 4ue~lion s ami an ....vcr~ hetwe,'n partie~) ,1I'Id dep"siti"ns (sworn statements by parties and Witnesses) arc used widely in discovery. When discovery is nearing wmplction, a trial date is usually sd, which OIn easily he t\\'o years or more from the dale the case was filed depending on the jurisdiction. At trial, the parties each gcl a chance to do their storytelling-with te~limony, exhibits, and crllM·cxami nat inn-to attempt to convince the trier of fi, et, who is a judge or a jury, of what happened. Whoever t ell~ the most bdievah!c story wins. In a civil C-dM:, if th,' plaintiff wins, she
CH .... PTER 2 • CIVIL LITIGATION
21
gets ~ judgmenl for d,unages ill an amou nt Ihal Ihe ~ou rt d('[ermi nes. If the p[a i ntifflos~s. Ih~ def~ndant just has to pay his attorney for d~fcnding him. If on.: side is unhappy wi th the res ull of the trial. it is possible. bu t not a guar,\ntccd right, to appea/the judgment to a higher court. which is a U.S. court of appeals or a state appel/ale co urt. 'Ihe appell ate court does not retry the case. '1hey do not hear Ihe witnesses ag~ i n; they do not view the exhibits. In oor syskm, the trial co urt determines the facts of a (;I.\C because the tTi,,1court sce.~ it "ll- Ihe wit nrss.cs. the rcdct ions. the cx hih i t~. 'Ihey make a fi luling offacl that stick. with the cast: f"rever. Wh .. t is appealed is a poin t of law o r a pruceduml po illl aboUl the triaL If the trial court misapp lied the law in ,[ul'slion, the appellate court may re"en;c the ruli ng. If a piece of evidence that the appelbte co urt fdt was proced ura lly necessary was not allowed in at th e Irial, the trial court ru ling co uld be changed. The facts arc never changed on appeaL So you have one shot to get it right. If ),o u can not prove O. J. Simpson guilty hcyond a reasona hlc doubl tn the jury of hi s peeTll at trial, you (annot have another chance to prow your c.. ~e_ Simpson is fi)rcVfr no t ,t murderer of Nic o[e Brown Simpson or Rooald Gold man.
THE LAW IN ACTION Despitc the fJct that fili ng a [aw5uit could ruin business relations hips, ge nerate bad pub licity, a nd cost tholl.~ands of doilars in Iq;;d rces, S22,000 h tno mu ch for Acme to los<: an d too much fo r th~ B allard.~ to pay. Either partYC<>llld!ile a law.,u it. H doesn't matt er in a civil action who is the plaintilf. It does not mean you a rc the good guy. Being til(> defendant docs nnt mean you arc the bad guy. If Acme sues the Ball ards to collect mo ney due under the construction co ntract. th e Ballards will certa inl y cnu ntenlle Acme fo r ovcn;harging without change orders an d failing to mcet the opening date. If the Bal la rds sue on the theory of breach of contract, so the contract amou nt is reduced and the cOnlrac! is considered paid in full, Acme will (atain[y countcnue for a1lthc pricey marble ,lnd the [,lhor to install it. 'Ihe lawsuit could be fil ed in SCOll County, Iowa, where Acme ",-,e.~ Illlsiness amI where the co ntrac t was entered into, or it could he filed in Henry County. Illi nois, where the Ball ards live and still operate their fi rs t
22
PART I: LAW 101
store. The bwsuit COlild also he fi led in Ro ck " land County, illinois, where the work wasdonc. Although the case could have been filcd in federal court if no mo ney was paid along the way, it cannot he filed thcre now. Th,' reljuirements for federal diversity jurisdiction arc plaintiffs having di/ferent citizensh ip from defendants (which is true here) an d more than 575.000 at issue (which is not trlle due to the progress payments). When more than one ",urt has jurisdiction ovcr a di spute, it is " Ilied CO llcurrell t juri5lhcT. When considering the choice in this case. the parties would weigh the costs of filing in each location, the timing for gelling a mailer to trial , the location of the witnesses and interested panics needing to be present at trbl, the average award amounts made on contract dispute cases in each jurisdiction, and the substanti ve klw to be applied. If Iowa h;ld rules that were more lenient on contract change order:;, Ac me would lVan t to be there. If Illino is had more contra ct ca~cs that interpreted timing in co ntract, as critical, the llullards would want to be thnc.
TEST YOURSELF Tho:. winto:.r of 2006 wa~ quite cold in Ga l e~burg, tllinoi~. The Lynch family lI~ed a portilble kerosene heater in their ba~ement to help keep warm. One Sunday
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CH .... PTER 2 • CI VIL LITIGATION
1.
Does Mr. Lynch or Sam have a cause of acti on to pursue'
2.
Is this case based 00 a contract or a tort?
3.
Who would be the defeodaot(s) in this case ?
4.
In what state(s) could a lawsuit be soughtl
23
S. Can this case be fi led in federal court? In state court? In more than one state court?
Brain Teaser 6.
If yo u had the choke to go to federal court or state court with this case and you knew that federal juries were very cooservative 10 awarding damages in death cases but state juries in Chicago we re very libe ral, which court would you choose to file in?
Questions Future Chapters Will Answer 7.
When does the locat ion of a corporation's headquarters come into pl ay?
8.
When a case is as serious and comple:< as this one, is it mandatory to have a trial?
An swers can be found on pages 208-2 1O.
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24
PARr I: LAW 101
the injured party is to try to work to a conclusion by agreement or negotia tion, If a matter cannot be resolved through private agreement, the injured p(lrty m(lY seek recourse in (I court of I(lw; in other words. you have a cause of action. Depending on the type of m
iIt
the law, which com{'s from
the U.S. Constitution. statutes, and past case decisions. cal led common law, When litigating. the court applies substantive laws (about what type of case you have)and procedural laws (about how to go about the court proceeding). The steps in a lawsuit take time and re sou rces-but each step makes sense and keeps the process as orderly as possible. If yO" do"', lik' yO""';,' '0"" """, yO" m,y b, ,bI, "'PP'" your case, but an appeal is not 11 new trial.
, Ii
I
Alternative Dispute Resolution
M
y husband 1elis a great story a bou t compromise. When his mOlher 11.'1 him and his younger brother have a candy bar, one son would
get to cut the candy bar into two pieces and the other son would gel 10 choose which piece he wanted. This at least appeilred to promote fairness with minimal squabbling. Everyone got a li tt le of what they wanted.
This chapter is about alternillivl.'s 10 liligation as methods of dispute resolution, or a kinder, gentler way to resolve disputes so that everyone can get a little of what they want.
Negotiation
Arbi tration
Medi
IN THE REAL WORLD 'Ihc dispute discussed in chapter 2 between Acme Construction Co, and lim and lerry Ballard is a good example of a C"JSC that may benefit from S()m~ lIlleri'l l/l ive dispute resolutio" (ADR). lhe parties arc disputing th e remaining conlmcl balance of $22.000 thH t Acml' demanded. but Ihe
26
PART I: LAW 101
B'llIards rcfuwd to pay hec4u,;c of e~till1ate overruns and delays with the store projeci in King Mall, lhe parties all' at an impasse: neither wants to throw out a figure, bulth~ difference is too great 10 walk away. In chaplI.'r 2, some complications we re di.\.Cusscd about where a lawsuit could be flied, how long it may take, and what resources it may COSI before there is any solulio n for either side. In thb ca.s.c, the parties may benefit by trying to negotiate, mediate, or arbi(l"
KEY CONCEPTS Alternative dispute resolution has been around for a lung time. It was popubr in Illcdkval EngJand hccau~e it allowed for part i e,~ to he appeas~:d lI'ilhout resorting to lhe humiliating and sometimes deadly outcomes of Irials by combat described in chapter 2. There were many inform'll pressures to compromisl', especiaUy among merchants who needed to con tinue doing busine~s with each other in small towns. Th~r~ were family pll'ssures put upon arguing p.lrties, and the pos"ihility of being shunned in your own co mmunity was a slrong deterrent 10 a susta ined argumen t. In fact, resolutions of di,put es made outside of the courtroom were so fre'lUent th~lthe p"pulace had th~ir owo word for a mediated settle ment. It was a /owdtly. I doubt that YouTube and the record industry are going to have a loveday soon, bUI there is good reason for disputing parties to Iry to avoid a prolonged court fight. Most disputes today arc set tled without trials. So me matters get settled before there ever is the need to con~ider filing a lawsuit. Some get s.:ttlcd afler a law,llI it is filed, but before the parlic,~ go so far in lo it as to havc totally prepared for trial .lIld set a (I~tc. There arc many factors that determine if a dispute will be senled OUI.• ide of (ourl or with a trial. Usually sm'lll matters thai can he ignnr,'d or disagreements invo lving small amounts of moncy jusl fade away. When a matter is too serious 10 be ignored, Ihe parties still musl weigh the time involved in po~uing a legal rem"dr, the costs, Ih,' energy that goes into a legal resolution, and the pUblicity a cou rt matter will generate. In addi ti on, when a matter goes to court, there is usually a declared winner and a declared loser. No "ne wants to 01.' a losef.
,
"
ClM PTER 3 • ALHRNATIVE OISPUH RESOLUTION
27
Negotiation The simplest and most common altunativc to J court Glse is for the parties \0 negotiate. Negoliar ion can take m.my forms, from a very informal meding over ,,,tree 10 a roundlable dis<:us.~ion wil h attorney.1 present on e.Kb .• iln
'0
Mediation Mcdill/jorl is a billllore complex than negotiation because it involves a third
pa rty- the mediator. Mediation still has to be voluntary. so both sides of the dispute must agree to try mediation, but this time, they do it in front of a maSler of ceremonies. The media/or is a neutral party prescnt tn help the sides .li.<;cuss their is.sue.." but also 10 take an active role hy sugscsting
28
PART I: LAW 101
solutio ns, compromi.~es, or hargains that may facilitate ,I se ttleme nt. The parties ca n have their attorneys wi th them at mediation, but the mediator is in charge. Often mediation will startll'i[h each side tell ing thcirMo ry to the other side and the mediator. After this, the mediator may split up the shies to the dispute and talk to one party about the ~trengths and weaknes~es of their argoment an d press them fnr their scU lemellt nlllge. lhen, that side will be escorted to Ill{' wdiling room while the mediator ~bedl5 up~ o n the other side. 111i5 h a chance fur each party ltl get a n elltr~l reac tion to their CaSe. This is different from the plaintiff's managc mem telling them what a good position they arc in or their atlorney.~ tellin g them that the case is strong; rJthcr, this may be the first "ou t sjde~ voice they have gotten, and soml"limes it is a surprise. Not ewryone sees matters as th .., IitiS-Jnts do. Not everyone gets as emotional an d incensed as the parties to a lawsuit. It is a great ICl'eler. Se.• sions may go hack .llld forth for a while, joint mectinp may be had ;lg" in; the proce.IS will go along as long as Ihe medialUr feds it is helpful. As with negntialion, lhcTl' is no requirement to reach a sctlleml'nl. But Sl'U [C· ment o r no, the process and the feedback gain~>d from the session ca n be "ery helpful to the realistic .1SM'ssment of the case at hand. Meoiators arc chnsen by the pa rties and .~hnulo be neutr,\l or inde· pendent. They may be chose n for lheir legal expertise. Many mediato rs are anorneys or retired judges. Some mediators He chosen for their knowl· "dgc in tbe field. For example, in a medical m" lpradicc cas.:, pcrbap.s a physician would serve as a mediator. In a construction casc, an engincer or architect may he tbe he~t judge of wbat is going on. There are many sources to [ocak mediators. among ttwm har associations and arbitration and mediation groups. The partic.~ to the di~pute u.~ually agree ou how to pay the mediator, whosc fees are not bas.:.-d on the outcome of the C"JSC (natumUy), but Me gcncrJ.l[y an hourly or daily mtc. "-'Iany employment contracts call for disputes 10 be mediated. as do many supplier contrJct!, conslmction mattcrs. consumer purchases, and even billing disputes. Like negotiation, mcdi;ltion (an be accomplished f,lste r than a trial. Depending on the jurisdiction inl'o[l'ed, getting a ca..... to trial could take hch"l"C1l two and five years. You cou ld agree \0 negotiate next week Of lind d
ClM PrER 3 • ALHRNATIVE OISPUH RESOLUTION
29
mediator for 10 days from now. Both negotiat ion and mcdiation ,Irc cheaper than a trial because th.-y arc less [o rmaL You do not have to develop your evidence as ~t rictly as with a courl trial. You nwy choose 10 have fewer witncs,e~ and experts 10 present to a mediator than yuu would to a judge or jury. It is a lc~s Ihreatening and forbidding setting than a court house, so parlies often arc more at case an d bettcr al telling their stories Ih an in fron t of a judge. jury, court reporter. and gallery. And like negotiation, medi
Arbitration Arbilr(1!ion is the most formal of the alternative dispule resolution formats. This process uses a neu tral third party o r. on occasion, ncutrJI third parties or panels. Arbitration is volun tary. so hoth partics must agree to resort to this technique. ArbitrJtors arc found thmugh har as.~nciations or arbitra lion and mediation groups and rellcet thc expertise needed to conside r the subject at is.\ue.lhe part i~s tu th.- dhp ut e Cdn agree 10 make the arbitrdtklll hinding. wh ich mea ns whatever result the arbitrator or arhitrators come up with will end the maUer. Binding arbilmlion means agreeing tu let the arhilrator he the judge in your ca.' e. The part ies Cd n ,I[SO agree 10 nonl>iniling arbilml j"n. But why go through the who le process and get a ~dccisio nn from the arbitrJtur if no one is bound by it? B~cau sc evcn th ough nonbinding arbitration may nu t end a case, it still gives the parties a dry run of their trial. They get feedback and a more realistic idea of the strength of their Cdse by having arbi trate d. If the parties want to hedge their bets. they can agree tn nonhinding arbi· tration and if they both like the decision, they CHn agree tu make it hinding. Because arhilrJli nn is more formal and com p[ex than mediati'lll
30
PARr I: LAW 101
nq;otiation, it can be costly. In SOll1ecase~, it is a,cos tly as going tn trial, bu t still prt'fcrred becaUSf' it is more private than a public trial and the mit's of evid~nce are more relax<.'d than in court. Today, there is wide usc of ADR
cl au~es
in con tr..lCIS. Employe rs may
require employees to mediate a work dispute, union membel":'i may have to arbitrate Ihcirwork condition. su ppliers may contractually have to mediate dispUk S with clients. and custom~r.\ may have to mediate with aU lo com panies to get Ih<,ir ~ I clllon» cars repaired. When part ies agree 10 usc ADR, they give up a constitutionally
goar~ nte<-..I
right tn seck redress of the ir
grievances in court. Th is is an important right for citizens and busim·s.o;~s. The issue has been r..lised whether contr..lcts that require ADR arc constitutional. In other words, do you have to sCitle your muller as the contract s;J.ys, or could yo u go dinxtlyto co urt and su<' o\-cr yourdbagre<'ment? The law has upheld ADR contract terms so long as the parties to the contmct arc clearly aware of these terms al the signing of the agreement. and
Alternative dispute resolution is here to stay. Its usc grows every YC;lr. n~w form .~ of negotiating sdtl~ll1ents are hdng <.leI-doped inlhe bw and
in private indu~try. One reason rorit~ l'opul;lTity is that the parties rcally have nothing to lose. lhe fact tlwt ADR has taken place, and any olfers of se ttlement that we rc made in an ADR ll,,&o tiation. are not admissible if the mailer eventually goes 10 trial. It is a way for panks to a dispute to get on with what they do best- running their busi nesses mther than being mired in a lawsuit with aU its expenditures of money, time, and ~nergy. It is also a way for the panics 10 he pan oftbe ",olulion to the proh lem. [f lhe coun dderrninc., Ihe facts of the case, those arc the facL' forever aftcr: the re isa win neran<.l a loser. A DR is a way to resolve d isputes",J every\>Ile gcts a little of what they want.
THE LAW IN ACTION Could Acme Constnt<::tion resolw the $22,000 issue with the Ballards without go ing to trial ? Sure they could, bUI they may need some hdp. Before this case would even be filed, the panics wou ld probably try to ncgoti atc a sett l~m~nt through their attorneys. r.,·rayhc they arc so emotional and scarcd right nol\" that this will go nuw here. Ndtherparty milyhe willing to star t the hidding.
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ClM PTER 3 • ALHRNATIVE OISPUH RESOLUTION
31
Perhap, agreeing "" a neutrallhird parly c"uld be su((es,ful. A mediator in the construction indostry might be able \0 evaluate th~ reasonableness of the ov~rtime and materi;II costs as well as the degree uf difficulty the change orders added to the job. An outside commercial attorney or retired judge may evaluate the strength of the kgal arguments to persuade Ihe parties \0 come to a &culemen\. Mediation could occu r relatively quickly, or after some of the discovery has taken place. Witnesses including the BalJards and Ihe construction ~upervisor and crew could appear in a cdsual setting and give their information informally. The mediator could :15k them direct questions tu gd aU the details that arc important. The mediator could «lean unn each side 10 make so me compromises in amounts, but also on equitable or fairness questions. Perhaps the Ballards could have 90 days to pay the balance due giving them a period of time \0 see how popular the new store becomes; perhaps they could have the remaining marble not used on th e job. A me diator familiar with the complicatinlls of change orders co uld explain to the Bal1"rds that Ihdr c~tr~ cabinets and upgrades could not re~sunabl)' have been done "n thl" _'ame timetahle. Maybe th,l\ mediator c"uld impress upon Acme that they were in a superior position \0 know there would be a timing probll'm and should ha"e explained this better 10 the cuslomcr. By chance, there could be _"ome punch list items left to complete and the Ballards might be worried that Acme won't complete them unless the entire bi ll is paid. With mediation, each party could express what is really important to them, establish what their settlement rJnge is.. and gct a little something they want. 'Ihere wnuld be no winner or loser. But mayhe each party is en trenched in their posi tion. The matter may he at a stakmate- $22,OOO on une side and not a dime on t hrother. Binding arbi trJtion could Sl'UIe the mailer more quickly and cheaply than a trial. Each side would have input imo the sekction of the arbitrJtor or arbitT'dtors, unlike in a trial, where you take the judge you gct or work with \he jury pool you have. Arbi tration would he less public. Thc Ballards don't want the main chapter in their expansion history to be about a bill disp ute. ,\cme wants to do more business in the mall. They both want to get on wi th what they do best- construction and sales. Mnch like a judge, all arbitrator could weigh the matter and present a workou t. which is what in circe!
32
PARr I: LAW 101
the ,ourt wou ld do at trial. The arilitrJtor lIlight t'lke ~"Iuli()n suggestions from bOlh sides so the parties could [ive with the OU lcome, Again, there wouiJ be no winner or loser.
TEST YOURSELF Dog'~ Be~t
Friend Co, i~ a manufacturer of dog food that i5 ~old to three
leading dog food companies fo r distribut io n under the ir own labels. Las t month, a shipment o f ingredients from the Far East conta ined a contam inant Ihat wa~ mixed in to canned dog food distributed in 10 states, Before the contamination was discovered, 22 dogs in eight states fe ll serio usly ill with kidney fai lure. Fifteen dogs died. The manu facturer immediately issued a reca ll of all cans distributed, but more ca~es
of ailing dogs are being reported eac h day.
Review Questions 1.
Do the pel owners have a cause of action (case) against Ih e manufac turer of the dog foodlls it based on a contract or a torll
2.
Dog's Besl Friend Co. is located in California, but all the co ntamin a led food was delivered to Midwest a nd southern states. Since no contaminated food got to consumers in Ca lifornia, the company feels it is safe from any lawsu its. Do you ag ree ?
3.
In the worst case scenario. Dog's Best Friend pres iden t, Mr. Hound, fee ls the company might have to reimburse customers for the cos t of the bad dog food. Is Mr. Hound correct?
Test Yourself on Th is Chapter 4.
list three reasons why Dog's Best Friend should consider using ADR to resolve daims about contaminated dog food.
S.
What kind of experience should a mediator in this
ca~e
h'lYel Whyl
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•
ClMP TER 3 • ALH RNATIVE OI SPUH RESOLUTIO N
33
Brain Teaser 6.
What could be some creative and equitilb le points to indude in a negotia ted settlement that wou ld make the manufilcturer look better and the victims feel better?
Question Future Chapters Wi ll Answer 7.
Is n't there a law that products shou ld be fit for their purpose? Where WilS the FDA?
Answers can be found on p
Alternative dispute resolution (ADR ), which is growing in popu· larity, is used to resolve business and perlOnal litigation matters quickly, cheaply, informally, and more privately than litigation. Alternative dispute resolution options indude negotiiltion, mediil ' tion, and ilrbitration. In business, there is a big advantage to resolving disputes at the cheapest, quickest level a nd getting on with what you do bestmore business. ADR allows the parties, rather than a judge or jury, to dedd e what is most impOrtant to them , and it allows for more equitab le and ethical considerations in outcomes. Negotiation allows the pa rt ies to get together, either personally Or with iln advocilte, to discuss the issues involved and \0 work out the dispute. Mediation uses a third p
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34
PAR T I: LAW 101
Arbitration
i~
the
u~e
of a third party or parties that co nsider pre~·
entations from each side and make a determina tion on how the issues should be resolved. Arbitr ation can be binding or nonbinding on the part ies to the dispute. Even if ADR fails to conclude a dispute, the process g l ~es the parties a more realistic idea of their argumen ts and poss ible outcomes. The fact that ADR has taken place, and any offers of senlement milde d uring ilny ADR, ilre no t ildm issible pieces of informiltion at trial if the pilrties fail to reach 11 neg ot iated reso lution of the case.
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"
Ethics and the Law rhies is the study of right behavior or how people should act. In
E
Victorian times, it was unheard of for a si ngle lady to be in a man's
presence unchaperoned. If she found he rse lf in that situation, her re putation was ruined. In Victorian t imes, many a gentleman engaged in buying and selling human beings as slaves. If he found himself In that business, his
rep ut"tion was made. Tim es change and ethics change. Even in the same time frame, in the same cultu re, eth ics collide. In this chapter, we will d iscuss the relationship
between what is legal and w hat is eth ical. As we discussed earlier, th e law
does not require perfect behavior. In 'e"lily, it sets minimal standa rds of conduct. Ethics, o n the other hand, is about goodness and ideals. A legal act. such as choosing not to recycle. could well be wrong conduct acco rding to your conscience. But an ethica l act for you, such as compmti ng all your garbage in your backyard, which is in city limits, could be illegal. In th is chapter, we will diSCUSS some of the Influences on legal and ethical decision-making. We wi ll also d iscuss how your business decis ions involvin g ethics can ruin or make your reputation.
Jrhch~"
tl h
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36
PARr I: LAW 101
v.[jlj AT'S I A ~E A D Businesses
Stakeholders to Consid er
Theo ries of Ethical
If it's legal, is it eth ica l? If it's
Behavior
ethical, is it legal?
Businesses and Ethics
IN TH E REA L WO RLD In 195 1, a D.wcnport, Iowa, art ist started a small .sculpture !lusines.<. lsa hel Bluum had .\ tudied art wi lh Grant Wo od at the Siolle Ci ty Art Colony
in th e 1930s. I ler style WaS thoroughly America n, realistic, and ti ed to tire heartland. Her .~( ulptures ,,'ere made from Mi~sis~ipl'i River day and (UIl· cre te, lovi n81y Irand -fin isllt.'d in tire sh ape of nl bb its, owls, hedSe!I011s, a nd roly.poly childr,'n, then finished wi th a greenish hand.rubbing and signed by the artist. The sillall business was a local fixtuI"C fo r rears and a source of auth entic prairie gifts for travelers and natives. 'lire .scnll'tures were modemtely priced and therefore popular birthday, grd dnat io n, wedding, and anniversary presents. As Isabel ,'nkred Iwr rightics, shl' .<01.1 th.., bnsincs.", Isabel Bloo m, 1.1.1., to three local hosinesslll~n. TIle y co ntino ed to r un th~ " peration from ils Vill age of East Davenl' ort location (wcr loukins the river; but they also expanded produ ction and sta rted distributing the sculptrrl"l's to Midwestern gift Slores, induding stores in Chicago snb urbs. Sales grew. l he handma de techniques continued until early 2006, when the owners an · nounced that the production of Isabel llioom statues would be mOI'ed to Chi na. The move would mean lower p rod uction costs and !letter distribution
pos~ibilitics
in the United States. l he move wo uld a lso mean the luss
of 50 johs in Davenport and no mor.: hand-finishing ur Mississippi River cl~y. lhe items wou ld st ill be signed ISAIIU BlOOM on the bottom. It w~s purely a busi ness decision.
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CHAPTER 4 , HHICS AND THE LAW
37
KEY CONCEPTS 'Jhe discipline of ethics concerns the study of what is considered good and had hehavior. The d iscipline of running a busine's conccrns mak inga profit. Ethical principles an d business principles arc both alfccteJ by the times in which they operate Jnd by the traditions t1wy han' known , yt't in the end, a business is gnnd when it h prufitahle and bad when it is not.
Businesses and Lega lit y To he pmfitahle. Ill" ,t bosinesses nbserve the law. "lhere is a defi nite and usoally swift consequence for violating a public or private standard of co nduct. With a climinal vinlat ion, a company mal' he charged a mnnetary fine, which ce rt ainly impacL~the hOllom linc. /I criminal penalt)'could also indudca loss ofJicensc orplivi1cgc, which would affect future prufits.lf a busin,'55 b reaches a contract. a civil violation has occorred, which could resu lt in the company having to compensate the damagL>d part)' with money. If a business commits a tort - injuring SOnl~'One "r damaging his property- the law will requirt· the business to pot the injored party hack in the position he was in bdim: th~ tort occ nrred , which 'lgain coold mean Significant cOllll'cnMtion going to the vic, li lll. TIlcrefnre, bUsine.I.les tr), to refrdin fmm cnmmitting illt"g".I1 acts. Businesses arc not only ~xp~ctcd to opemtc l~gaHy, the)' arc also expected to operate ethicaU)'. Howel'er, what is right bchal'ior for som~: is not right behal' ior for others. Indl\"iduaJ.~' ethical sensib il ities diffa wild ly, and so do those of businesses. In thc long run, a fail urr to be aware of and sensitive to ethical concer n.1 can alrecl a Ou.~iness\ profit as much as an il lega l acl can. TIle puhlic responds to clhiC"JI cnncerns, and eV('t1 though a may he opc r~tlng wilhin the law, if it m,lkcs poo r ethical choices
busines.~
fo r its times and audience, it will lose pmfits a nd thereby be olf purpose.
Theories of Ethical Be havior Ethics 3rc nebulous- often as dou dy as Ihe Milky Wa),. Ph ilosophers have hthelc d some hasic theories ahou t l·thical beh'IViu r. I'o r example, onc widely recognized et hical theor)' is the principle ojulilily. A utilltarian makes
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38
PART I: LAW 101
o.Iec i5io ns of ri~ht and ",mng f()",u,~i n~ on the outcome that provides the ~rcat· est good forthe g reat~ st number of p<-'Opk. Anolhercthica.! th~'()ry is Ihepril'!· (ipk of egoism. An ethical egoist would not care a bit how a decision alfected another; he valucs whatever is in his own bcst in terest, an ll by definition, thai must be thc best cboice, ~omeone who believes in the pr inciple of the (d upon him. In other words, a hc1icver in the CJlcgorical imperative would consider il elhicallo lic 10 anolher if he agrees that anyone else edn li e h> him. These are jost three ethical the"ric~ nut of many, People in all places and:1I all times have disag~ed "bOUI what is right hehavioT. One ethiedl tllL~)ry is not superior 1<> an ot her. just di lferent frnm it.
Busi nesses and Ethics When an elhical question arises, how can a bus iness. whose ma in goal is to make a profit. get it right? 'Ihe simple answer is that a busi ness Glnnot get it righl all the time. There will always be an alldienc~ Ihat di sagrees wilh its decisions. However, a business's ethical dwices can alfect profits just as ,<;cri· <)II51y as illegal choiccs. For example. \V'II·Mart. Ihe \\'orlo.l'~ lal);est rctailer, continually gets feedback on its choices. Locking employees in at the work· placc is a b~d choke. OlTering personal weUness programs is a good choice. Nike uses celebrities 10 promote their sports shoes. This is good choice. Nike uses Indonesian manufacturing facilities with poorworking conditions. That is a bad choice. Alcoa is Ih e leading manufacturer of aluminum. Manufac· turing aluminum creMes some ~rious environmelltal hy.products. Alcoa choo,," to sponsor m,lOY envirnnmental Cduses ami education program'. This is probably a ddibcrak cho ice 10 enhance the Ctl mpan y's reputation as a good neighbor and an environmentally responsible organization. To gUide them in making ethical cho ices. many businesses :ldopt dhi· cal codes, mission SliUal1cnts. or sbtcments of purpose. These pronounce· ments give somc insight into the values of a wmpany. Also, a company can be cvaluated for its good or bad behavior by lookin g at its choices of wage Icvels and thc fringe benefits it offcrs employees, its hours of operJtion. or ils co mpany morale and CIlm munity involvement If the react ion 10 a business decision is extremely Ilq;at ive. the co mpany may cha nge its choice, If a business's choices are considered
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CHAPTER4. HHICS AND THE LAW
39
sc riOlIS violation" of ethical ~t'lflJ ard5, th(· i s~ue may hc addressed by lhe public ur legislature, resulting in steps tu make the act ivity illega L I:or ex.lmple, in 200 1, th~ en.'rgy company En ro n wllapsed 'lfter diKlosures that the fi nancial statements they were is~u i ng, which were ce rtified hy their accou ntants, Arthur Andersen, LLI'. were fa lse and mislead ing. 'Ihou~ands of sharcholdas. incl uding many Enron emploYl·es. suffered <;"
Stakeho lders to Consider Ho w can a business generate maximum profi ts wi th minimum viobtiuns oflaw s and values? The besl advice is for a business to evaluate the effects of its actions o n all its COlIStilUcnts. ThL\ is a tedious procc\s, as the inkrested parties. or stakt>holdcrs. include the following: L
'Ihe slwreholilers or owners of Ihe lJUsincss . The main d ut y to th is group is for the bu s i n~ss tu make a profit and k~ p a sterling reputation to encourage new illl'csto rs.
2.
1he e",plo)',,~s of the bllsjn~ss. A co mpany has a d ut y to deal f~i rly with those who wo rk to ma ke ils profit. 'lhis includes a dury of loyalty to employees, a duty to provide a safc working environment, and a duty to keep th .. empl oyees inform ed of decisions affecting thei r welfare.
3.
'1/1C bminc55 partners of th e company. This constituency in d ud~s the suppliers. manu fJ cturcrs, and di stributors Ihat the company docs business with on a regubr basis. Wilh out ethical treatm ent 10 those who the hu,\ine.ls depends upon to pmdnce ~nd distribute its product, serious problems co ul d result, an d prohlcms ,lamage pro fi ts.
4. '[he (uMomers of lh~ business, TIlis gmup huys the proJuct or service th e husiness prov id es. Custome r di sapproval is rdlcctcd clearly ami imnK.Jiatcly in salcs numoers, whic h ~frcc l pro fits.
40 5.
PART I: LAW 101
111" pullU, alliITge or /lI e w mnlUnily /lIe bu
Thi.~
co n-
stituency cuuld be very large and only minimally iovolved in Ihe subject of the ["Iusiness, but a company is a residen t or where it does business and has a dut)' to be a good neighbor.
6.
'1he e'"Il'irol1rnent. In today's ewnomy, the neighborhood is the planet. Many business decisions affect the environm,'nt now and for years to come. Resources arc finite: the urge to consume is unlimited. No bU5ines~ can alford to ignore the environmcntal consequences of its actions in today's world.
If it's legal, is it ethica l? If it's ethical, is it lega l? To rccap. an ethical decision could bc eithn kgal or iUegal. l'or example, Tim may belie'"c it is ethirully correCI to pay his employees more than minimum wage. "lhat belief was fo nn ed from his cultuml, religious, and wcial inte ractions. Wage and hour laws T<'quirc only that he pay minimum wage. but he docs morc. lllat i~ a gn.)d ethical choice for Tim, and a kgal choice. Maybe Sam bclkve\ th at all
cmploy,·c.~
should earn theirw,lgcsovera period
of time an d no employee should start ou t making more tha n $1.50 au hour. This could be a strong cthical bdid for Sam based on his family tmditions and ethnidty. But it would be against the bw fur Sam to exercise that ethiml belief with his employces. Wage and hour laws require emplorc.·rs to pay minimum wage. That isan agT<'ed upon standard in our socieljr, regardles.~of Sam's personal se nse of right and ..... rong. So all individual's personal ethics could mean that he i.. mOfe generous or less gencrous than the law requires. Could a k1\al d ecision be an unclhical one? Yes. il could he unethical for you. For examp le, many people beli,,"e it is unethical to IISC birth control. 11leir euhure, religion. and/or lraditious teach thai children sh ould be openly .....{'Icomro into families. Il owevrr, the la ..... does not forbid the usc of hirth control. Every state, ..... hich regulates Ihe health and ..... elfare of its citizens, has sct forth the conditions under which birth control can bc avaibblc to it residents. In this instance, somc pcople's pcrsonal cthical hdiefs n13ke th em label
tbi.~
law unethiG'!.
Businesses do not have to do 1110re than the law requires. but because they arc livingorgallizati()l1S, Ihey hal'e an ethical.~tancc " r uutlook. lflheir
•
CHAPTER 4 ' ETHICS AND THE LAW
41
ethic~ C~USl'
them to ran short of the legal stano.laro.l.~, they will face .ome unpleasant conse'l\l~nces. To al'oid violating specific laws, they may find another jurisdiction in which Ihey can do the desired ,1(lion; for example, the y may move Ihe company 10 (heape r bhor cenlers or tn lo(alions with fewer environ mental restrictions. However, Iher<: arc good reasons why husiocs~cs may cxcrd~c generous et hi cal standards. ·Ihese rea50ns indude meding the ir .\Iatell purpo.sc and heing nn track with their goab and outlook, hut they may ,1150 include some Jcs.s nohlc o r mixed motives, ~ uch as the des ire ror good employee rdalimls, community approval. and heller sales.
THE LAW IN ACTION The dedsion to move Isabel Dloom, ltd., to China was not popular. I lead· lines screamed, "S he would he spinning in her grave." nhe artist died in 2001.) Endl ess mau- on-t hc-strcet interviews <Juotcd ",lIectors Silying. "rll nl'Va buy another M:ul pture. Co mpany officials relcased stalemcnts confirming Ihal il was a wry dilficult dl·cisinn and emphasized Ihat wnrkl'f!; woul d be given lengthy notice befo re the close. Is the Ikdsion a kgal one? Ab5O lutel y. A husinesscan opeulc anywherc it wishes. ·[his is a company that ultimately is responsible to its shareholdH
ers, and opera ting more efficiently mcans bigger profits. Positioning itself to promote nationwide sales also mcans higger profiL~, Is thi s decisi on all cthiat l one? It depcllds on what your standanls an'. If the bu.,illes' applies the principle of utility, its goal is to enSUTe the grea test gooJ for the great~st numher. A utilitarian focus "'ould iuvt)lv~ emplo ying 1110re people, making more pro fits for shareholdns, and selling more products. If the business applles the principle of (1:\0isl11, its goal is to do anything for more take -hom e dollars for the top people. If the business applies the principle of the· categorical imp.'rali"e, ils goal would be to do to the employees and shareholders only those actions that it was willing to lluivcrsalize. In the en d. why was this de cision made? Acco rding to the company's statement, management decided to mak~ this move hecause do ing so allowed for production ...... vings and better positioning for the co mpany to
42
PART I: LAW 101
distrihute its pmdllCI nationwide. Prof,t C"'lel'rns .Hld hu.~illess i~sues appe~r to have trulllp~d histurical and community concerns. When the announcement 10 move to China was made february 9, 2006, however, the uproar ove r the dl"
TEST YOURSELF Since th is chllpt er emphasized that ethical decisions are reilitive, it would not be appropriate to ask questions with definite answers. Rather, I wou ld like to illustrate some choices companies have made about their ethical decisions and ask you to weigh in on the ir propriety and the principles at wOIk. 1.
In 1978, Ben Cohen and Jerry Greenfield stilned
iI
small ke Cleam
company in Vermont. Ben & Jerry's was commi tted to doing business in a social ly responsib le way. One choice the owners milde was to cap executive compensation at seven times that of the lowest paid worker in the company. This measure not only estab li shed a sense offair play with in the organiUltion, bot also helped the company make fair payments to the local dairy farmers they used as suppliers and kept the morale levels of the company high. There was nothin g illega l aboot this compensation
~ca le,
althoogh th e market woold
bear a much higher wage for a CEO of a company this size. The compensation ra te did not hurt the profits of the bus iness. WhIch of the three ethical principles mentioned in this chapter is operating in this choice-the principle of utility. the principle of egoism. or the principle of the categorical imperative ? Why? 2.
In December of 2000, Robert Nardelli became CEO of Home Depot. He ran the company for five years, increasing the revenue ilnd profits
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CHAPTER4. HHICS AND THE LAW
43
of the bu~iness. The ~hare price however, lost ground. Shareholder return over the period was down 13 percent. Since Mr. Nardelli's compensation package was made public in each yearly repo rt, by 2006, it was wide ly known that he had earned over $200 million in salary and bonuses and was set to keep earning bonuses regard less of the company', performance. Mr. Nardelli resigned in January of 2007. There was nothing illegal about th is compensation scale, a nd in the market. Nardelli cou ld get a similar package elsewhere. The compe nsat ion rate did not hu rt the profiu 01 the business. Which of the three ethica l principles mentioned in this chapter is operating in th is cholcel Whyl 3.
In Ma rch of 2005, the American College of Phy~icia n Executives re leased results of a survey of physician leaders. When as ke d about their concerns, 78 pe rcent of those responding indicated they were "very concerned" or "moderately co ncerned" about physicians over treating patients to boost income, a nd 76 percent were "very concerned" or "moderately concerned" about the influence on physicians by phillmaceuticill companies. Which of the thlee ethical principle~ ment ioned in thiS chapter is operilting in these responseslWhyl
4.
In early 2007, Ihe Attorney Generil l of New York begiln investigating the relationship between student loan companies a nd un iversities. Initial evide nce suggested some finilnciil l aid ildministrators at the universities had investments in the ~tudent loan compan ies that they were putting on "preferred lende r" lists and recommending to students seeking finilncia l ilid. ln some Cilses, the finilncial ilid staff me mbers had sold shares for larg e
profit~.
One of th e universities
involved has specific ru les in their employment handbook specify ing that employees ~hould not directly or indirectly have an interest in a business that is in co nni ct with the employee's du ties with the school. Which of the three ethical principles mentioned in this chapter is operating in th is situa tion with the financial aid employees! Why? Answers can be found o n pages 212-213.
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44
PART I: LAW 101
Ethic~ i~
the
~tudy
of how people ~hould act. People are innuenced
in their ethical deci~ion~ by their culture, religion, and Ethic~ do('~
tradition~.
not label any culture, religion, Or tradition
another; it e valuates how people make the as they do.
choice~
~uperior
they do
10
to
act
Businesses a re engaged in commerce to make a profit. Their ethical choices ca n affect profit. An ethica l decision cou ld be an illegal decision; a legal decision (ould be an uneth ica l decision. Ethical decisions are not a lways based on a belief about right action; they can be motiva ted by a desire for good publicity, social approval, and increased profit.
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How Do Businesses Fit In? van or tru ck owned by a business is involved in a traffic accident
A
res ulting in properly damage a nd injuries. It happens every day. Can
the business be charged with a crime, such as exceeding the speed limit
or failing to stop at a red light? Can a business be sued civilly? Whilt if the vehicle owned by the business was not at fault? Could the business then
sue another? In what court "nd for what recovery? Does the dispute h.we
to go to cou. t, Or can a business take advan tag e of alternative dispute resolution? And finally, is a business governed by the U.S. Constitution. statutes, and case law precedent? Is a bus iness entitled to a speedy trial, the tight to free speech, and the protection against self-in criminat ion?
In this chapter, we will review the introductory chapters as they apply specifically to business rights and responsibilities,
Businesses, Civil Litigiltion,
Businesses and Constit ... tional Gua rantees
and ADR
Businesses, Sta tutory Law,
Businesses in Court
and Common Law
Businesses and Self-Inctim inat ion
Businesses and Crimes
46
PARr I: LAW 101
IN THE REAL WORLD l\cfor~ Novcmnerof2005. Gregg I'notogT'Jphy, In c., WM ope rating a small hu siness in Des ''''Iuines, Iowa. The owners were parents Tom ,md C indy Gregg and thelr son, Bob. 'n I l' business specialized in photogT'J phy for grad oatio ns, anniversaries, ncw babies, and othn e"cnts, but its bread and huller was its wed
tnct to photograph the ('vent, provide proofs. Jnd finish photogT'Jphs. It ofte n received a down paymen t or upfront money on the scrvices. In Novem be r of 2005, num erous complaints were made to the Polk Co unty att orney's ollice abo ut Gregg Photogra phy, Inc. Ten custome rs we re i,knti fic d as having problems with Gregg's servi(cs; eight of those ha,1 filed criminal compl ainl.~ with the po li c~ departmen t. Appa rently Gregg was lwldin g over $9,000 of costu me r deposi ts fur se rvices the custo mers never received. Has Gregg Photography. Inc., committed a crime? Can the business be put in jail? Do the dissatisfied customers have any recourse against the co mpa ny? I low c,m they pursue this? What do th,' y ,,",t nt fro m Gregg PhntngT'Jphy?
KEY CONCEPTS The co un applies the u.s. Consti tu tion, statutes, and common law to busi ness.;s jusl as it docs 10 peopk Busine.lses arc therefore liable if they violat" puhlic standa rJs of co ndu ct, just like indiviuual citiu ns- but there are some dilr~rences in Ih e WJ), this plays out.
Businesses and Constitutional Guarantees Language in the commerce chinsc of the Constitution (article I, section 8) gives the national government the risht to regulate co mmerce in the Uni te d States. lhat means the federal govern ment can pass rules binding a bminess's dealings with other businesses, customers, and the puhli c. Examples of these regllhltions include laws regul atin g interslate transpo rta tion, equ al employ ment opportu nity, and t,[xes. In addition,
CH~PTE~ 5 · HOW DO BU SINESSES FIT IN?
47
states posse'" po/icc powers and arc allowed under the Constitution to pass laws regarding the health, safety, morals, and genentl w clfar~ of its citizens, That means the statc government can pass Tules binding a busi· neH. Examples of state regulation 01 hosiness include restaur..l nt health standards, licensing of medical professio nals, and workers' co mpensa' tion laws. l he Con,ti tution also gUaranll"t:S 10
J,
*
~I
h
48
PART I: LAW 101
BlIsinesus, Slatu/or), l .al\; ulld COIIJIIW" Law, A husiness i~ ',11.", bound
by Ih e fcd~ral and state statules that regulate it. Not every statute a legisla. ture passes pertains to a business, so not every rule applies, hut a business has 10 bc al,'a re of the rules and regulations rC<.juired in its industry to keep ils opemtion lcl,'1l1. A bu~iness is also bound b)' the decisions that havc been rendered in p.lst fcderJl ~nd state court cases, Precedent applies to a com pany just .IS it doe~ 10 iLn indivi JU '11 ~nd helps a business predict holl' its claim o r dispute rna)' turn o ul.
Businesses and Crimes We can all think of ways in which a business can commit a crime, A local financia l !irm may commingle its money with that of its clients, 'That is a crime. A brg{' corporation ma), misle ad inv{'stors and ('mp lo)'ees about its financial h{'ulth with exaggerated profit and loss reports. Tha t is a crimc. A sandwic h shop could serve tainted food to custo mers. Tha t is a crime. Or a craft husiness could hav{' unsafe wiring that causes a cus tnmn to susta in a st·,'cre electrical shock. That is a crimI'. fiusinesscs can commit misdemeanors or felonies. Ihey can pay fines aodlose Iicl'Mes and privileges, but a business can nut bl' put in jail. If a business commits a felony, for which the consequence could be a prison sentence. the responsible representatives of the business are charged and suhjecl to this pcnalty. lhe p{'r:son charged is Ihc pcrson most direct l)' responsible to r the felonious activity- usually an officer or director of the cumpan)' if the crime rdatc' to ~ bl1sines..~ decision, or the employee invoked ifthe crjm~ relates to an accident ur inju ry. A business charged with a crim e ca nno t he subject to double jeopardy and enjoys the risht to a sp~... dy criminal trial the righl to have assiSlance of counsel, and the right tu confront the witnesses against them. A business could also he tbe victim of a crime. such as robbery, employ{'c cm bez;;l mlClIl, or purchase of supplies that He never Tl'ceivoo. The puhlic proS('cu tor represents business victims as well as individual victims of cr im e. Again, a compa ll )' rep",.lentative would he making the complaint on h1.'ha l( o( the businc.'5. If the accu.«! is !(luml gui lt y o( till.' cri m{', any fine is paid into the public cotfer.l . The purpu.le of a business's pursuing a
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CH~PTE~ 5 · HOW DO BUSINESSES FIT IN?
49
criminal complai nt is 10 uphold Ihe standards Sci hy S"eil'ty and ke<'p the public safe from a recurrence oflhis Iyp<: uf event.
Businesses, Civil Litigatio n, and ADR A llusines .• may 11<: 1i,lhle to another for a ch'il mallcr- hased eithn 0 11 a hreach of co nlraCI or a lorl. If ace usct! of violating ,I personal .• tand'lrd of co ndUCllo another, a business has to hire legal represenlation and defend itself.lf lhe business is found liab le, it may beordcred to pay damages to the injured parly. A side ctfect ofhcing inl'oll'ed in a legal claim co uld be had publicity and lost &ood",iU. Because the publicity could be as detrimental as the cl,li m it~clf, hu~inesses favor the usc nf alternative dispute reso lotion. ~uch as n~"8otiati o n. med iation, and arbitra tkln_ ADR is cheaper, faskr, and much less puhlic than a civil trial. A husine~s may s\l e others f(l f civil da m· ages. To do so, it must hire legal representation and pursue th e mailer. The business goes through the same processes as an individual claimant to try to recover damage.~.
Businesses in Court Businesses may f('solve disputes in fedeml court if they qualify- that is, if the Ill,llter involved is Jbout a fede rJI questio n o r if there is diversity jurisdiction. To qualify for fcderJI div~rsity jurisdiction, the plaintiff and the defendant in the lawsuit have to be from different states. liut in what state docs 3 hu~in es.' reside? Fede ral rules state th~t J business reside s in every state where it docs business. Businesses may also 3vailthemsdves of state cOllrls to resolve any dispu tes. They h,l\"c acee...' to C(l urt in any state in which they do busin ess. Li ke every other crim inal defendant, a husi IWSS is presu illed illnoccut until prove n guilty of a cri minal charge beyond a reasonable doubt. Like every o th er civil defendant, a business needs to prove its case by a preponderance of the evidence. /Jusin cssf!S and Self-Incrimination. Ihne is one significant limitation on a bosiness in a criminal situation. TIle Fifth Amendment to the Co nstitu· tion provides that no pe rso n in a crimilwl case ~s hall be co mpelled .. to he a witness ag~inst himself.' This right guam nt~cs thaI a perso n charged
50
PART I: LAW 101
with a crimc has no obliga tion to provide person;11 incriminating recurd ... to prosecutors, although prosl'cutors may try to obtain rdevant wriuen rl'-
curds by discuvery. TIlis right ,I lso guarantees that an accused can refuse to te.~tify on his ow n behalf io a criminal malter and that this failure to testify cannot be construed against the acc used. 'I his is notthl' case for a business. A business cannot refnse to provide business record s, even if they contai n incriminating information against the husine.'s or an employee. olfieer, or contact of the business. 'Ihc Fifth Amend mcnt protection is for pers<ms, not for husinesses. Uhwisc, a husiness Cd unot tl'stify in a criminal maner. It ..... ould be unwieldy to put Ford Motor Company on the willH:sS stand. A busines ... appear., in co urt throu gh il.~ reprl'scnt,llives, mainly individu als who arc o/ficl'rs or directors ofthl' company. Thosl' indiv id ua ls canno t claim the Fifth Amendment and refuse to testify because what they say rna)' be incriminating to the business entit),. Those individuals could asscrt the Fifth }\ mendment for themsclves; however. ifa[JY of the questions wou ld elicit information, that may incriminate the lI"it ncsse~ pcr.,oll
THE LAW IN ACTION According to the Iowa Code, dl'priving anothcrofhis pro pl'rty is thdt. The crime of theft is classified acco rding to degrees.. depending on the s<:riousness of the theft. The am,)unt of money Gregg Photography. Inc., held for it, complaining customers fell into thc category of second-degrcc theft, which is punishahle hy ~ fine of between $5,000 and S7,000 and a prison sentence of up to five yea rs. Taking ano ther's moncy at this levd is a fclony. Thl' Polk Count y alloflll'y charged Gn'gg Pho tography. Inc., , .. ith o nl' count (charge) oft heft. The Greggs voluntarily talked to the police and the pros..'cutor, explaining that Tom and Cindy were really not part o fth~ businl'ss; the)' had only agreed to give Bob soml' money to start up his business and in return got so me shares of stock in the corpor.:Jtion. Bob was the one who ran the husiness day to day and did alllhe photography. Appar~ntly thillgs had gotten tight, with (he rent on the IOClt i!)n. the unexpected expCIll'C of some nCll" e'luipmen t, and ,I slow fall ."a'on. Bob was doing
CH~PTE~ 5· HOW DO BU SINESSES FIT IN?
51
the best he could, hut he fell hehind in johs and mi.,sed some o ther job, completely, He was ignoring the calls from angry custom<,fS but never mean t for anyone to be hanned. Despite all the causes of the diflicuhy, GuS!; PhotogT'Jphy, In c., had commilled theft. It had deprived others of their property. "lhe bu~i n ess could be tried on the cha rge and could be liable to pay a significant fine. Because this olfens<, was a felony, iLlld the IlOssibil ity of jail time was also an issue, the Polk COlillty attorney had to make a decisio n a.• to whilt hu,ines.~ owncrs or olficers should be charged with the crime. Oh"iou~ l y, tlw business itsdf C"dllilot 1)0 to prisoll. III this C"d5e, tlw county attorn~y determined that Boh was the managing owner and the one who shnuld h~ve prevented the situation. Since they were all ow ners of a small business. Tom and Cindy could also be charged with brl'aking this law, but the county attorney used his discretion and did not charse them. [fBob and Gregg PhotogT'dphy, [nc., were found guilty beyond a reasonable doubt of committing theft, the company would he liable for a big fine ,llld probably also lose it\ license [0 ()pemt~ within the cHy of l)~s Moill<'5. I:nr a small business already in financial difficulty, a guilty verdict would meao the end- of money, of au thority to opeT'Jtc, of customers, of goodwill. For Bob, ,1 gui lty verdict would nh.'an a big monetMy debt and prison time. 111 prcpaT'Jtion for the criminal trial of SlIIrc 1'. Gregg Photograph}", IrlC., the defendants would be ab le to confront the complaining customers and havl' counsel re present them (although not a public defendl'r, beC"Juse they arc not ind igent). The state would have the right to ,~ubpocna business record, ,howing the con tracts and depos its n.'ceived. Bob Gfl'gS could not ohject tn providing these hu,iness records because they are the busine.'s', property, not his I'ersnnally, an d a business has no fifth Amendment right against self-incrimination. The defe nd,lIlIs wou ld also be entitled tn a speedy trial and the presumption of inn ocence until provcn gllilty berond a reasonable doubt. To pro"c the caS<', the county attorney would call the customers as witncsses, show the business Rxords of the deposits received, and (('fur to the Iowa statute that defines the otfense. In thi, case, the Po lk County
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PARr I: LAW 101
forward and agreed to P,IY any deficient 'Imoun ts. nob agH'ed to plead guilty to a less serious degree of Iheft and pay a fine. '[he business \OSI its liccn~c to opemtc in Des Moines. [(Bob evcr tried to gcl a business license in Iowa in the future, the theft conviction would preyent him from doing so. lustice was served. '[he resolution recognized the crime, the defendants paid a liM, and the public was protected from Ihis happening again. The Greggs were not c() mplctdr otT the hook. th()ugh. '!bere were still angry customers. Allhough thc parents had resources to rcturn all down payments, smne customer. still felt they had a came of action against the busi ness for produ cts that were never re.::eil-ed. Sonw custo m<'rs demanded the services they already contTJding album, since precious memories 10Sl arc hard to value. Sinc~ tbis incident caused bad pubHcitr gencl"Jl1y for photogl"Jphers in the area, a number of colleagues ofG regs I'hutogmphy, Inc., stepped Ill' und offered 10 finish developing photos or rctak.' photos for injllr"d custome rs at no cnst. "lhis helped a rclIow ph<JtoSI'~p b er meet his obligations and softcned the bad pres~ all photographers WCTC suffering.
TEST YO URSELF 1.
DaviS Couoty wanted to irlCrease the local sales tax by 1 percent to provide more reVenUe for county roads and Infrastructu re repairs. The IOC
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CH~PTE~ 5 · HOW DO BU SINESSES FIT IN?
2.
53
In the year 2000. it wa~ disdosed that the federal government had been investigating the Royal Caribbean Cruise Lines for environmental violations. Evidence showed th~1 the comp~ny had use d tactics ~uch as hidden piping and night dumping to discharge thousands of gallons of waste products, induding oily bilge, photo· developing chemiCills, and dry ·cleaner fl u ids. Affected waterways incl uded the New YOl k harbor, the Port of Miami. and the Alaskan Inside Pas5
3.
Mr. Paul Max has run Max Tax Service, Inc .• for six years. Although the business is incorporated, he is the only owner of shares and makes "II the manag",ment d",cisions. Max Tax Service, Inc., is being audit",d by th'" Intern,,1 R",venue Service regarding its corpor"te tax li"bility for the year 200S. The IRS has subpo",na",d som", corporat", tax J",cords, but Mr. M"x does not wish to provid", them. He is pleading rhe Fif/h, which means he is invoking his right not to incriminate himself accorded to him by the Fifth Amendment of the Constitution. Will he be successful?
Brai n Teaser 4.
In a 2002 advertising campaign, Nike,lnc., claimed that it protected rights of laborers in overseas factories that made its footwear. A labor activist. Marc Kasky, did not believe this was a va lid claim and sue d the corporat ion in the state of California for false advertising. Nike defended the suit saying that it was protected by the First Amendment right to freedom of speech. Who s hould win this dispute and why?
Answers Clin be found on pages 213-2 14.
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PART I: LAW 101
A business entity can commit a crime or have a crime committed agaimt it. A busin('Ss "ntity can commit a civil violation or hav(' a civil violation committed against it. The Constitution of the Un ited St" te, grants some rights to businesses just as it doe, to individu"ls. but 11 business does not enjoy all the protections granted to individual citizens. A business can sue and be sued in federa l and state courts depending on wh('r(' it does busin('ss. A business can use alternative dispute resolutkm to resolve claims.
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· .. CIVIL LAW IN DETAIL
Now thaI we have some background information about the law, the p rocess of litigation, and alternative dispute resolution, w e are ready to examine civil law in mo re detail. Part II outl ines how to dete rmine liabil ity for a tort or for a breach of contract. In addition, this section provides defenses to such claims so that a business faced wi th these actions might know how to establish rightful cla ims and respond to
wron gful ones.
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Urheberre<;htlich ge5chlitltes Material
The Recipe for a Tort
W
hen I got mar ried, J was a 25-year-old law school graduate with w hat I thought was a 'ertain level of sop histication. I don't know
why it hit me with such shock when I realized that my st udent specialties of
ham sandwiches and cheap sp
I was offering my mate Chicken Supreme and Boeuf Bou/guignon.1 swear if I had lea rn ed to make the Eminen<::(' Brune-a bittersweet, d ense choco-
late cake-earlier. he woul d have proposed two years before. This chapter is not about tortes. the dessert, but it is about recipes. The law is a 10\ like cooking. If you have all th e necessary ingredients, you
can (fea te th e des ir ed prodUC1. Cooking up a civillor t claim is a matter of having all the right elements fall into place, and in this chapter we'll put together an easy-to-follow. foolproof recipe.
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PART II; CIVIL LAW IN DETAIL
v.[jlj AT'S I A ~E A D Types ofTorts In t entional
Defenses to Claims of Negligence Coment
Reckless
Assumption of Risk
Negligent Ingredients for 11 Tort of
Contributory Or
Negligence
Comparative Negligence
Damages in Tort Cases
Strict Liability
IN TH E REA L WOR LD In 1999, a t rdgic acc iden t occurred nca r J~nes,'ille,
Wi~onsin,
involving a
van !ilkd with h igh school and college stud(· nts working to sell magatine sub scriptions o n their Eastn break. Youth Employment
S~Tvices,
LLC,
and its related company, Subscriptions Plus. inc., operated out or Iowa and Oklahoma, respec tivel y. The y hired 20-yea r-o ld Jeremy Holmes to work as a d river and handler for groups traveling to v,lrious communities to sell
,ub.~cription,
door-tu-doo r. On thl' evening of ~'I~rch 25. a Mihon
Township police officer d ocked a van on 1-90 going ahout 80 miles per hour. I Ie pulled ,mto the interstate to follow ,lnd .' aw the vehicle veer off the roa d,
h~'Sjn
to roll, and th row about 12 people ontu the highway.
F' mrk'en peopll' were in the van; seve n were killed an.l fke were seriously injured. [s what happened a tragic accident? An act ufGod? II crime? II tort?
KEY CONCEPTS A tort is a personal injury. The law allows a person who is injured by the actions of another to recover from that person if all the right elements arc in place. Tort law is d b ranch of civil law, which concerns the rights of individuals to rcco"er against one another. '[he usual method of recovery is to Sill' for damages. One action Oln result in both a crime and a tort
CHAPTEII6 • THE RECIPE FO R A TORT
59
claim becausc one action can violate a public and a private stan<.lar<.l of conduct.
Types of Torts If my neighbor misses a stoplight an<.l runs his caf into my lovely 1998 I lunda Ikcord, this could oe a crime ,md it could abo be was probably reckless. Reck· le.'s is the description used in the law for behavior about ..... hich you should have known better. My neighbor should have known b('tte rthJn to drive his car considering that he knew the bT"Jkes were getting funny. Or. he should have known better than to talk on the phone while driving. Being reckl('ss is troubl ing hehavior; the law usually doesn't ignore this type of actio n, hilt it doesn't co nsider it as diab olical as intentio nalmi.o;.co nduc t. Maybe he was jllst negligcnt. N~gligelll is the de!'Cription uscd in the law for oehavior thai i.~ can'less. H(' didn't mean to cause an accident. He had no w,lrning th,lt something might h~pl'en, but he wasn't being as careful as he should have been. Negligellcc describes a truc accid,'n1, uninh.'llded dnd unforesl'cn, but damaging nevertheless. Negligence is v('ry common and llsuaUy not ~s serio ous in its consequences as recklessness or intentional acts. To determine how to cIas.~ify the S<.'riousness of a tort. you U.\.C the terms intentional, reckless. and negligent. which arc the SJmc words used to clas· sify crime•. TIll: more .'
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PART II; CIVIL LAW IN DETAIL
Ingred ients for a Tort of Negligence To establish negligence, the law requires certain ingredients to be present. These includl' duty, oTeach, damage, and cJu'ation. Since ch'illaw gives a place (or people to recowr (or p~rson" l brcachc~ o( conduct, negligence in· vokes ,I hre'leh of a rule or comluct, or ,I duty. To weigh the duty involved, the law creates tbe reI/,0/1IIM" p,'rs(!n by asking, ~What would a reasonab le person do in these cirClllnstancl's?H Would a reaso nabll' pawn bdil've there was a duty? Would a reaso nable person think she should bc able to drive to the corner store for a quart of milk without getting plowed in to at a :;toplight? Of w urse she would. Laws and regulations imply th at members of society have duties to one anot her. We bav" trallic laws and regulations on who can drive. Drivers have a duty to otha drivers. Employers have a duty to their employees to provide a .'
CHAPTEII6 • THE RECIPE FOR A TORT
61
law~uils a., k for pain ,HId mffering or emotional d istrcS5 damage_,. arc gen..,rally hard for the la w to value and arc likely 10 r..,sult in mone}, damage; only if they go along with real physical injuries or d'imaged property. Finally. tort law requires Ihe liable party to he a c-dUSC of the hurt. My neighbor's actions have to diredly contrib ute to th e injury that result~. 'Jhis is where many tort claims fuil in part or in tot 'll. As " society, we arc quick 10 hlaillc olhers when thing~ go wrong. l'or exa mple. he did run th'lt stol' light, but the city hung the light in un awkward spot nn that corner, and he (ouldn't sec it dearl y. Or, h.., did run that stoplight, but h.., just had his car serviced and the mechanic must have dam"s(oJ the br"kcs. Or, he did run that stoplight , but he was late for work and would lose his job if he didn't get there on time. so il was his bOM'~ fault. Cml$ation i~ aiM) hard tu
injury
'lhc~
prove on occasion because injuries result from more than one cause. for example, my neighbor did run that stoplight, but [ was not watching the intersecti on as dusely ,IS r shou ld have oeen hcforc proceeding. So ther~ you have iI, th e recipe ti'T a toli. To hold th~ peno n committing a tort - called a torlf"~ $"r- liablc for his action, you havl' to prove duty, breach, damage, and causation. If you don't have all four, you don't have a torI. Wh,lt do you have ? Well, you could have an accident, such as knocking a person's booh out of her hands in a crowded hallway. [n a crowded hallway, it is I"<'asonable thaI this may happen, and if there
62
PART II; CIVIL LAW IN DETAIL
wedding, some fnod disasler, or a sp"'lIal1eou.~ foul·up. Often anim,11 anl ics arc invulved. lh~se fall short of torts,
b~C"~usc
they generJlly don·t highlight
injuri~s
olher Ihan damaged pride, and the properly damage is minimal Ihough cssenl iallo the slapslick qualilY.
Damages in Tort Cases If you do havl' ~ winning recipe and all the ingredients of a tort claim ~re presenl, you recover damages. TIlal is, you ,11"1;· compcn.~alcd f(,ryourlos.'. On uccasion, dama ges include mo re Ihan jusl the immediate lusses thai occur. I may llel>tl a Tl'nlal car for lwo days while the Ho nda is heing fixed, and the only Tt'ason I need it is because my neighbo r damaged my ca r, so he sho uld also pay for the renlal car. This type of add itional damage is called incidentlll (because it goes along wilh the original tort) or cclHcqucntial (be cause it is a result of the original to rt), so the tortfcasor is liah!e. If I am hurt in the accident wilh my ncighh or, my damages may include payme nl of cosls fur medi ca l tTt'aIllH'nt and recovery, includ ing hospital bills, physicaltherap)' cnsl.', and lost wages while I am o ff work. GcneTJ.lly these am()un t.~ aTe supposed to PUI me back in the position [ would have i:> l"Cn in if the acciden l had no t occurr<>ccause of third-,legrce hurns she
~ uffered
when a Styrofoam
~ up
of co ffee purch a",.,J through a
drive-uJ' winrluw spilled in her lap. A jury awa rded her S200,000 in damages and $2 .7 mill ion in punitive damages. McDonald·s was punished for this accident beC"auS<' it was brought to lhe jury's attention tha i the restaurJnt had had more than 700 burn claims over 10 years beC"ausc o f ils sc al ding-hot co tfee. McDonald·s kept its coffee at a temperature sign ificantly hottcr than any othe r rcstaumnt"s to protect Ihc flavor, it cla imed, but also to sa"c th e prod uct longer before having to throw it away. This knowledge of the danger of the p ro duct, coupled with the profit mot ive in,'Olvcd, pml>al>ly persuaded t h ~ jury th'Hlhi s was not a case "f negligence but rather a C"J.se of reckless, willflll beha vior un the
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CHAPTEII6 • THE RECIPE FO R A TORT
63
part of the tortfeasnr to va lue profit ove r safety. The awanl of 52.7 million is a stagg~ril1sly la!);e amount; it is also the profit /vlcDonald's J\13UC on two days' worth of coffee sales. Sometimes, civil courts allow for punitive damases to motivate a tortfcaSoT to 1113ke so me siSnificant chanses in the way he doe~ busilll'SS. Immed iately after this caS(', the temper-Ilure of l\kDona ld's wifeI' dropped from 190 degrees to 155 desrees. After similar puuitive damasc.~ awards, tnha cco comp'lllies gol serio us aboul their warning progra ms and changed their marketing tcchn i que~ and Ford and Piresl"'le re~
Defenses to Claims of Negligence It is haru to defend yourself if you commit an intentio nal tort. In sum,' instances, you Gin argue self-defense or defense of others if your actious harm a person. Recklessness, by its very definition. means you should have known better th an to do yuur acli,)fi, ' 0 it is ditficult 10 defend yourself in thiscasc, because it pres umes a certain cal1ousllessor willfu lness in the face "fbetter judgment. However, there arc some defenses that a perwn accused of co mmitting a negligent tort may use to shield hersdffrom liability. Th~y inclu.!e the following:
I.
Gm;<enl. In some Glses, the injured party knows that a possibility of harm may result from th e actio ll taken. Bungec jumping otf a bridge or clitf i., frd ught with danger. TIlat is part of it~ appeal. Things ca n go wrong, and jfthcy do, the result is usually se rious. 'Ihcreforc, Ihe service pro"ider may rcquir~ Ihe customer to sign a COnSl'llt form or a waiverofliahilit y, recognizing the fact thaI the custo mer agrees In hold the service provider lurm less from any damage that may occur. Businesses usc conse nt s and waivers alilhe time. Every time you park in a parking garJge, there is a wah'er form Oil your ticket stub. 'Ihe owner of the gJrage is not liable for any da mage that may occur 10 your car while il is p'lrhd there. Every car wash i",nter-al'your
64
PARr II; CIVIL LAW IN DETAIL
2.
ConrriJJII/ory IJ r wmjmrariw lIegligena. This i., the cbSl;ic dcf~nse to a tOr( claim. When a tonfeasor 3rgU~S contributory negligence, she i~ saying that even if she co mm itted a ton, she should not be liable hecaose soml"(lne else cnntrihuted to the harm caused. The usual cn n· tr ibutor is the victim himself. My neighbor should bave stopped at the red light hut since I was not driving as ,,<,fely as I shuuld have been, my neighho r is otf Ihe hoo k. I Ie could not be the causc of the h'lrm becausc ! w~ s in the wmng, 100. Conr rilJll tory negligence is a harsh ruk If verified, it usually b" rs the victim from recovery. Few victim, arc blamc!ess. Few accidenu have o ne ca use 11Il 1y; the y often arc a collahnT"Jtivc efforl. $0 tod"y, most states have abandoned Ihe contributory negligence doctrinl' for th,' rul e of OJm paT"Jlive negligence. With comparatit"C negligencc. a judge o r jury co n weigh the cJusation of an accident and apportion the bb me amo ng the parties, ordering each to pay his fair ~harc of the damages. In my car accid ent, perh,lps Illy nl' ighbor i~ I\() perc~nt 10 blame and I am 20 percent ",spon.•ihle. If my loss<,s w<,re $100, he would have to p,ty S80 and I would have to ah>l<Jrh the rest of my loss. Compamti,'" negliger"e is r~ally abou t determin ing the ca usation ingredie nt of a lort hy co nsidering all thc parties thai may cause a lort. There is a time limit to C"Jus'ltio n. In a pnso nal injury case, it is usuaUya year and a day. If th., victim doesn't die within that time, the lortfeasor is pmhahly not Iiahle for c~ u sing the victim's death. whenever it does occur. !nkrvening and supersedi ng causes can diminish a t()rtfca'or'~ Iiahi li ty also. 1:"r example, if the ambu lance la king me tu the hospital fnr stitches after Illy cnllision with my neighbor is in volved in a serious accidcnt, my neighhor is probahly not held rc.~po ns ib l e for m)' hroken neck.
3.
Assu mption of lh e risk . This is relaled to consent and to co ntrihutory nq;ligcnce. With Il~SI.4l11pliol1 of th e risk, the tortfC"Jsor argues that the vict im assumed some responsibility for whal happe ned. If you enga ge in extreme fighting, you could set hurt; if you go hunt ins, you could he the vict im of an accident; if yo u choose to exit if burning building via the elevuto r, yo u co uld SCI inj ured severely.
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CHAPTEII6 • THE RECIPE FO R A TORT
65
Strict liability There ure u few instances in which the law recognizes liability for a tort even if all the clements arc not present. This liability without neglig(·n ce i.~ cal1~d strict liability. The law take.~ this ullllSlial ,tep he(;\usc certain situation, are impossible to make safe and when they cause hHm, the injury is usually quite sewre. ThcTl'fore the law impoSt's an absolnte duty thallhe victim be co mpensated by the person causing the harm. Strict liahility generally applies to thn sc who deal in an ultrahazardous business nr with defective product s. Examples of ultrahazardous bU5incsses arc chemical companies, rock (Iuarric.~. and manufacturers that produce to"ic waste. E~am p lcs of defective products can he found in chapter 1 t.
THE LAW IN ACTION TIle accidellt outside of/allesl'ilIc, Wisconsin, was a tragedy. It aho resulted in criminal charges against the driver, the colllpany that employed him. and the owners oflhe company. In addition. child labor law viobtions were filed against the companies in Oklahoma and Wisconsin. but we wun t 10 analyze the fach to ~ce if any tort liability is present. 'Ihal el'ening 14 yoongsters. aged 15 to 25 years. were riding in th e van driwn hy Jeremy 1I0lmes. The v;m h~d adeq ua te scat belts. hut none "f th e passengers were wearing one. After Jeremy sped past the police e
66
PARr II; CIVIL LAW IN DETAIL
The first ingred ient nece,~sary to prove a tnrt hased o n negligence i.~ duty. lhe employer, Yuuth Employment Services, LLC, had:.l dut y to provide a safe working environment fur its employees. One issue in this case was that the co mpany argued that the youth were not employCt:s of the co mp any, hut rather independe nt contnlCtors selling on commission. '[his point h irrelevant in the analysi s of duty, a~ even an independent contractor forced to rioJc in the principal's vehi cle should expect safc trall~port . 'lhe driver. jeremy Ilolmes, had a duty to Gl re for his crew safely. lIe breached that oJuty hy driv ing 110 milcs per hour ill an unregi'tered. unlkenxeoJ \·.,hic1e without valid authorit y to drive. The owner of the company, Choan Abn Lane, had a duty to act re.lp,utsih ly as a company owner and otficer. He did not do so in that he falsified reco rd s abo ut the \"an's usc. knew the vehicle was unlicell5ed and unregistered, and knew Jere my Holmes was unfit to drive and lead a crew. All three potential defendant s had a duty to each victim. Did th e defendant.' actions es\"blish the "econ tl clement of a to rt claim-that is. " breach of dut)·1 Ye.~, in each CdSC. because each defendant was carcles~, if nnt rcckk.s. to allow this ch"in of cve n\.~ tn gn forward. lhe third clemen t in a tort claim is damages. Did the breach of duty cause damages? Tragically, seven youth WHC killed and five WHe serio usly injured. In the CaS," of a deceased victim, hi~ or her representative usually sues the tortfeasor for wrongful death. A judgme nt findin g the to rtfeasor liable- for wrongful death would order him to pay damages. The tcrm guilty i, no t used in civil cascs; the defendant is found to he eithe r liahle or not liable. Damages for a lost lit.... would depend 0 11 the age of th e vktim. his eco nomic prospects had he sur.·ived, and the co n"equcn tial amI incidental ex penses due tn the death. such ~s expenses t.) depeudants and loved ones who no lo nger ha n' the services and ,tffccti ou of the victim. One of tbe cra~h vktims suffered seve re brJin damage. His damages include future medica l expenses and treatment costs. lost income potential, and special livi ng armngements necessary for the rest of his life. O ne IS-year-old girl wa~ paralyzed from the waist down and has minimal use of her arms and fingers. I Ju pamlpis h'l s led to many co mplications
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CHAPTEII6 ' THE RECIPE FOR A TORT
67
including lung problems and bladdcr infcction~. In one yeH her bills ,II one hospital exceeded $200,000. -nle gi rl's mother worked as a lab technician, but sbe had to give up the job to provide round-the-clock c,lre for her daughter. Clearly, these two vktims have substantial and ongoing damages from this in cident. 'lhe timll clement in a tort claim is causation. Did the defendants' acti onscuu.lC Ih e dam'lge.\ thaI o"urr~>d1 Are there any defenses thill would prolect th e defen dants from liability? It is true that all the victims signed up to work for this tr:.wcling maga~ine sales cump'lny. They k new travel ing in it va n was part of the job, but Ihis knuwledge is not conse nt to b.. involvcd in ,I highway accident. They also did nOI u.~e the seat belt.s available in the vehicle. Failure to usc sca t bellS is II contributing factor to the vklims' injuries. but by fur the biggest GlUS,' o(this tragedy was th,' ncgligence orthe driver and the company employing him. Could Ihe lortfeasors claim Ih at the rcal cause of th e accid ent was the policc officer by the side of the road who clocked the vall .•cared the unlicensed drivcr, ,1110.1 precipitated the ""ident? No, Ihe police omcer had tl'ery right I" be thcre, and a rtason~ble person would knnw that. A rCdsnnab le person wou ld not h,lYe drivcn with Ihe n'Cord Ihat }~remy Holmes had. A reasonable employer woul d nOI have aUow,>(\ such an employee to superv ise a salcs crc'~ aud drive a vall. A reasonable company owoer would nol have PUI into commercial usc a van thJt was unlicensed, unregistered, and improperly insured. l his ewnt satisfies aU Ihe requirements of a tort of groM negligence wi th grd"c damages. Gross negligencc is m()st serious because it is a conscious. ,>o luntary act that 'I mounts to a reckless disr"Sanl of a legal duty. Y'JU ca nnot ~y that any nflhe tnrtfeasofS intended 10 harm the victims, hut hy their ulla indifrtrcncc tn the welfare of otha.~, they came vcry close to intentional behavior. TIle vic tims d id receive some co mpensation fur Iheir damages from insurance that was available, bUI not cnough \0 mcet their future ne~ds or compensate for the losse5. Exact figurcsonlhc dantages vic lims recovered aTe un availab le because of settled claims and scaled court records. The fOrtfe3sors were wiped out financially, and they h,we also faced fclony criminal charges stemming from this incident.
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PART II; CIVIL LAW IN DETAIL
TEST YOURSELF As a tribute to television past and present, I'd like to take th e exerdse examples from classical moments on the sma ll screen _ 1.
In the opening credits to The Dick Van Dyke Show, a jolly Rob Petrie comes home to New Rochelle, New York, after a busy day writing comedy. He kisses his wife, Laura. He wa lks into the living room and takes a dass;c pratfall over the ottoman, arms and legs fla il ing. He bounces one las t time onto h is feet, smiling and happy. Tort o r no tort?
2.
In a 1991 episode of LA. Law, the senior partner, Le land McKenzie, is speaking with a fellow attorney and former paramou r, Rosa lind Shays, as they leave the office. They are getting heated in their remarks. The eleva tor door opens, Rosalind wal ks into the e levator with one last zinger to Lela nd, and-Ahhhh!- the audience hea rs a fad in g scream and a splat. The elevator was no t funct ion ing properly. The episode was tit led "Good to the Last Drop." Tort or no tort?
3. In a 200S ep isode of Las Vegas, new casin o owner Monica Mancuso is on the roof arguing with Danny McCoy. She is dressed in a wild, kimono -sleeved gow n. A hug e gust of wind comes along and flies her off the roof while Styx's 'Come Sail Away· is playing for the fade· out. We leam in th e next episode that she lands in the front window of a high-end shoe store. Tort or no tort? 4.
CBS had nex t year's rating s in the bag when they ended the 1979- 60 season of Dallas with the mother of all cliff-hangers, Who shot.JR! Tort or no tort?
Answe rs can be found on pages 214-215.
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CHAPTEII6 • THE RECIPE FO R A TORT
K'E tJ P,OINTS TOl REMEMB.ER . A tort is a personal injury for which the law gives a remedy, usually damages, to put the injured party back in the position he was in before the incid ent happened. Torts, like crimes, can be caused by intentional, reckless, or negligent conduct. The more serious the intention to cause harm, the more serious the consequences; the more se riou s the harm caused, the more serious the consequences. To recove r for a to rt, you need to have al l th e se ing redients: duty, breach, dama ges, and causation. If the recipe falls short of an ingredi en t, you do not have a to rt. You may have an emballanment, or a blund e r, or a leally good entry for America's Funniest Home Videos. If you have a winning recipe, you can recover fo r your losses and some related expenses. In ra re instances, tori cla ims can result in punitive damages. To prolecl yourself against a tort claim, YOll may be able to use defenses to offset liability. Defenses indude consent, assumption of the risk, and contributory and comparative negligence, On occasion, the law doesn't care if you have the recipe exactly rig ht to establish a tort. It imposes strict liability on ind ividuals who engage in unusually dangerous activity.
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Urheberre<;htlich ge5chlitltes Material
The Recipe for a Contract
T
oday
I~
a typlcaIThur~day. It
entered in to or
e~erdsed
I~
10:45 in the morning. and I have already
my rights in a11ea5110 contracts.
I we nt out to my"" at about 7:10 A.M. to drive my husband to his job. I was confident doing so because I know I have adequa te ca r insurance in
force to protect me. my car, ilnd my sleepy hus bilnd. Westopped at the bagel shop. I contracted for a plain bagel and a coffee.
On the way out. I purchased a newspilperfrom the stand on the corner. I dfOpped my husband off at work, because he has 11 contract to b", there by 8:00 A.M .. and I hea ded hom e. Befo re I cou ld beg in work. I needed 10
check {hI" news, and thanks to an ag reement with the local ca ble provider, I
am able 10 do t hat by switch ing on the television.
Fi nally, it is time to get to wo rk , so I fire up t he new I"ptop, stili under w"rmnty, "nd do some online research thanks to my contract with the Internet provi der. At about 10:00, I go to the refrigerator for some or"nge juice that I purchilsed ilt the locill groceryesterd"y. I getil cali from the w"ter compilny about com ing to ,ead the inside meter at a tim e when I am home. We have a contr"c! that provides for periodic, inside checks. With ali t his contracting going on, it Is a wond er t here is any time to write, and this chapter Is d ue, by con trac t, before th e en d of th is month!
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72
PART II; CIVI L LAW IN DETAIL
Th ere i, noth ing to be int imida ted about when you consider .tudying contracts. You have been using them every day, all day, toryears. This chapter will put that knowledge into fow •.
v.t.tl.AT' 5 , A l;I.E A D Contract Types
Capacity
Agreements That Are Not Contracts
Legality Vo lun tariness
Offer
Quasi Contrac t and
Acce ptance
Promi.sory Es toppel
Consideration
IN TH E REA L WORLD Mr. a nd Mrs. Buyer we re Ihrilled 10 be [nuking fo r their first ho u,,:. TIley had .1list of ewryth ing they \\"antt·d: an older home, ,I yard fN the kids, and hardwood !lOOTS. They had Ihis im3ge ofthdr family lounging in the living room - fire in the firepl3ce, Christmas tm: in the comer. and gleaming oak beneath their feet. When they saw Mr. and Mrs. Selle r's 1920s brick home at 123 Cherry Lane. th ey were interesk'11 anxious and excited that they called the Sellers til .~e,' if
CHAPrElI 7 ' THE REC IPE FOR A CONTRACT
73
Ihey could come over 10 m,'asure for drapes. No convenient time could hi' found. About ]0 da)'s before the closing, the Buyers tried to arrange a tim e to review the ups tairs layout, but ag ai n, the Sellers were just too busy. It was hard to wait, but the Buyers di d, until the night hefore the closing. 'Ihe Sellers had moved o ut that da y and the Buyers did not sec the harm in driving over to look around. 'lhey wal ked up the front sleps, ~ Iq)ped onto the hig front porch, and lovi ngl y looked through the pict ure window,s into the living roo m. What? Could it he? lhey pee red in again, and confirmed that Ihe middle of the IS' x 20' li\"ing room was not glea min g hanlwood, but mw plywood. Onl y about two feet uf the room's edges wen;, oak HOOTing. The Sellers had had a large arca rug in this room. The Realtor's descriptioo of th e tloors throughout th e house read SOME IIARO WO O D FLOORS .
Did the BuyeVl and Sellers have a good contract? Did it con tain all the necessary ingredients to be enfo rceable? What ifthe Buyers did not go through with their ;lgreemcnt? Could thc Sellen .'ue them for damages? What WOUhllho.,c damage., be? Do the Buyers have any reC" Ufl;e undl'r the circurll .• tancu to defl'nd themselves against a claim tha t they breachc.,] their promise 10 buy the house?
KEY CONCEPTS Co ntract actions, along with torts, mak" up the two main categories of civil law. In the last chapter, we reviewe.,] torts, or perso nal injuries, thnt often arise from an unexp"cted and unanticipated event. Co ntracts, on the other hand, itTe u.,ually wmful agreements that people enter inlo, but they co me in many shapes and sizes. It i., ea$y to get illlimi.,]at~d with JlI the sp~cia l ized contrdClte rm s that legal and husincss texts throw amund, but many uf these term s make perfect sense if yo u thin k JboUI them with examp les.
Co ntract Types ContrJctscan he wri tt en. like it leasc "grccmcnl lilT yo ur apartment. " rthe y ..tn he oml, like going into a paint store ilnd getting it ):\ullon ofCOnktnplation GreelL. Some peuple g<'l all excik'<.l about Ihis point and think a valid
74
PART II; (IVIL LAW IN DETAIL
c"ntrad must he written d"wn, hut that is n"t lrue in mosl (ases, Ay far, the majority of contmcts peo ple elller into arc or~l. Contracts may be express o r im pli~d. If they arc expressL'tI. they have been e~prcsscd ora lly or in writing. If they arc implied, no words of cnn· trJCling hal'e been spoken. For example, the paperb oy delivers the Vlli/y Times to my fro nt door at about 5:00 A.M. He docs not knock on the do or 0'1'0'1)' d"y and wake me to ask if! w~nt the paper; he just throws it vcr)' hard against the front door. r go to a grocery checko ut counter, hold up my candy har, depmi l 50 cen ts o n the cou nt er, and walk o ut. I don't want a witnessed, wrilten record of that tr:lllsaction; I don't CWll have to utt er a II'0rd bec;\u.le my act inns say it all. Co nt rJcts can he e~ecll ted or execlltory. These terms refer to the time it ta kes to complete the agreC Illl'nt. My candy bar purchase is an cncuted contract. The deal is done, fu lly performed when I give money and get the chocolate bar. My apa rtment lease is an execulory contract. lt is going 10 be performed over ,I period of tim e. It is $til l ongoing, alth ough the terms hav~ hee n sct and ",on't change Juring the length oflhe l ~ase. r am huyin g my ca r with an executory cont ract. r did not pay l'lT it all at once, out r will be p~ying over the nex t 36 months. Finally, cont r~cts can be vali d, "oid, voidable, or invalid, These tefms just descrihe how bi nding the agreement is. A ,'alid cont ract is another name for an enforceable co nl rac\. A I'oid contrJct might look like it fils the recipe, hut it is not enforceable because of a term Of condition. A l'Oida/.JIc co ntr~ct docs fit the recipe, hut the law may stiH rcfuS\: tl) enforce it for some rca~on. A nd an inyalid contract is the same as an unenforceah le contract; it does not have all the ingredients nece'~ry to he enforceable.
Agreements That Are Not Contracts We make a lot of agree ments thaI the law will nol enforce, and those should be distinguished from contracts. For example, I tell my son Ihat r will take him to the zoo if he dean s hi s room. He canno t sue me in acourl ofb w if I fa il to get him to the zoo thaI day. I was just giving hi m some motivation. I may leUmy sister that I will gow ith herto visit Aunt Peggy. If I have to work that Jay and do not ma ke the Irip, my sister ca nn ot slie 111('. I jnsl thonght it would he a nice gesture to acco mp any her. If my neighbor drops a hag " f
CHAPrElI 7 • THE RECIPE FOR A CONTRACT
~mce ries unloadin~
75
her car and I we she has $p illed a quart of milk, I may
run o\'~r and give her the cxtrJ quart I have in my refrigerator, I C'.tn't sue hcr if she doesn't reimburse me; I was offcring a gift. O ther types of agreement~
that the law will not enforce include ethical obligatiom ("Our policy
is no refonds withoot a receipt, but yo u arc a rcgular customcr~) and sales pitches (~' Ihi~ will be the last du~t mop you eyer have to buy~).
The Recipe for a Co ntract Co ntmd s arc all abollt hargains . .~a le s, deals. and agr~'<'ments, 111e law will enforce the ones that follow th e redpe by haVing an olfer, an acce pt ance, co nsidcT"Jtio n, C'Jpaci t)'. legJli ty. and yol un tar incss. Offer, The first dement or ingredient is an offer. Somdimes people arc just talking oot a possible sccnario: "[ migbt scn m)' car~; "I'm thinking about a ne w high defillition tdevision"; or "Call't you just S('c you rself in this sports car? ~
'!he'e preli mirHlry di$cussion$ and ,\alc$ pitches arc Ilot offers. Dlfers
most be definite and they must come from a person who has an intentio n to he bound. Newspaper advertisements ~re not oifers; the)' He too gener~1 and nut made to specific individuals. That is why th" store can get away with not llJ vill g the adverlised ~deal" when you get there. So someonc has to start the ball rolling, and this is thc offeror. The offeror makes a promise to do so mething, buy something, exchange some thing, etc. An example of a specific olfer would be ~ rll give you S20 for )'OUf algebm book." It could also he a nonverbal olfer. such as unloadi ng your groce ry cart conlents on the checkout lane al the supermarket ami nodd ing your head that )'011 found every thin g you neede<1. Whether you put it into words or not. your behav ior indicates you arc olfering to purchase those items. An offer has to be received to be elfective, so the offeror must be specific and communicate it to the offeree. I cannot step into anotber person',; negotiation and expect the S
76
PART II; CIVIL LAW IN DETAIL
for a
rea.~onahle
lime. A reaso nable lime I" respond 10 huying a load of Cln be a much shurle r lime than a reasonable lime 10 respund to an offer 10 pur,halOl.' a house. Whal is reasunable dep(.'I1ds un Ihe subject of Ihe conlrJct. If timing is very important, the otfem r cao .~pecify ~Estimate good for 30 days" or whatever other timing he re<.jui res. ban~nas
Acceplrmce. Once ,\11 "tfer has been cum municated hy the otfcror 10 the
offeree , there ,m' some choices. 'lhc otferec may agree to the terms. 'Ihis
i.~
an Maplar"", TIle acceptdnce must be in the same f"rm as the "ffer. You cannut mak .. any cha nges, su iflhe offer is "I will sdl yuu Illy car for $],000," the acceptance rnu~t he something like ~okay" or ~dear or · SI,OOO it is." The acceptanc ... CJnn o{ be HO kay, $] ,000 for your car and an extra sct of ti res." This requirement that the offeree
CHAPrElI 7 • THE RECIPE FOR A CONTRACT
77
accep t.UICe for it to be dfedive. TIlis is calkd the m"iibox rule. TIle law likes to Interpret that an agreemcnt bctween the parties has taken place as soon as poss ible. so once there is an offer
1ll01l~y).
If you in1crprct "J will pay YOIl $2,000 if YOIl paint my house" unilateral contract. you have tn paint my whole ho u~ hcl<}fe [owe you
a penny, bec.tuse 1 promised and )'OU must act. 1 could walk ou t of my aircondition.od living roo m into th ... 1 lO-d~grce heat you aft.' working in and SO the prefe rence is 10 interpret Jil contracts 3" bilaleral co ntracts, o r two -p romi.o;c deal-. If yo II interpret "I will pay y\'U $2,000 i f yo u paint my house" as a bilateral co ntract, J am prom isingt" payyoll if you
promi~
to paint my hOIL.'c. Once tht.'l'l"Omises
Jre exchanged. there is a deal (assuming all the other ingH'dients arc preselu ) and the action is co mp lete. TIlerefore, 1 CJnnUI renege un my half of the deal bdore the ofTcre,' is finished with the action. Bibteral contracts arc considered fairer and more cificient in recognizing the bargain immediate lyupon the "meeting of the minds" to con lm et. Of course, there is still good usc for unilalera l contracts, and some times the offeror who is in conlrol of the terms wants to specify that he reqlLires completed action on the pJrt of the olfe ree befoTe he acts. For example, if I contracted fOT a cu"t(Jlll-made
78
PARr II; CIVIL LAW IN DETAIL
gown to wcar to my sou\ wedding, I would want to specify that I wil! not pay in full unlll I am satisfied with the workmanship and fit. CoII$;tirrIlIiIJII, ·[he third ingredient in a binding contnlct is cOI1.itimlliol1. Co nsideration is not politeness, although polite hu.'ines.~ dea lings arc always cncour~g~-J. Coosidt')""ation has a special meaoing in the law and rden; to the fact that the parti~s ~nter into a bargained-for exchangc. This exchange of something onegal value distinguishes a bindin g contract from a gift.llw something oflegal valuc is otien mone y, atlcast on onc side of the deal, but money is not the only consid e)""ation gi"en in contracl5. The cxchange could he an item foran item, or an ih' m for some type of conduct. Co nsidenlti on is doing so methillg that you are not legally o blib'Olted to do. I am not obligated to go to work every day. [ could sit home 'Illd cat honbOllil, but [ choo>c to exchange Illy daytime huu rs for payment from mr h05.l. Cott~idcmtion is also refrJining from doing something you have evcry kgal right to do. Fo r example, my nephe w is over IS anJ has every right to smoke. r Jo not like smoking. I promis~ him $500 if he quits smoking for six months. He quits, and the only reason he docs is because I madl' an agreement with him . He is giving up something he has every right to do specifirully in exchange for my promise to pay him $500. lfhe quits for six months, 1owc him $500.1 Ie has ncry kg al right to colkd th at frolll tnt'. I OUlIIot s;lyto hilll, ~Ah , you should l];Ivl' 'lu it anyway, and I did YO Il a big favor." I havl' to pay. Capacity. ·Ihe next ingredient in a bi nding co ntract is capac ily. ·lhe law rcstricts so mc individuals from making binding contrach. ~'linors c~n not entcr int o hinding contracts unless th ey dre for nec~.'iS ities, like food aml ., helter.ll1is law prcVl'1l1s disreputah lc indi vidna ls and busin esscs from taking advantage of minors who may not be mature cnough to ~nter into contrdC\s knowl~d geahly. In most states, minori ty termina tes at 18 years of age. "Ihe law also protec ts those opemtins under a mental imp airme nt from enter ing into binding contmcts.l'1'lcntal impairment docs not relate to a ce rtain IQ or ase; it relates to whether an individual has an appreciation of the consequences of his act io ns. Ofte n elderly or infi rm individuals bave questio nahle conl mct cJ pacity, but 50 can healthy 30-year-olds after majo r surgery Of duri ng a significant illness,
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CHAPrElI 7 • THE REC IPE FOR A CONTRACT
79
Legulity. TIle fifth ingreJ ient in a h indingconlrdct is!eg,IIity.TIle law will no! enforce a contrdcl for an illegal purposc.lhcreforc, cu nlracts regarding prostilution, il1~'Sal gambling, ;11'1.1 agwcm~nts \0 co mmit torts arc not enforceahle. Anothertype nfcnntract thaI is lad::ing in legalilY ho ne Ihal is contr.lry 10 public pnlicy. -Ihese contracls wnuld includc agrccmcnt scontaining cxculpalory clauses. An e.nulpatory dame i~ a provision tha t atlemph 10 relieve o ne ]Xlrty from liah ility. A surg~on wou ld be using an e~cu lpatory clau se if he asked his pa tient.~ 10 ~ ign an agreement promising never to sue him under any circomstances. This is d iJfercnl frum signing an infi.,rmcd c<",sent Ihat a surgical procedure ma), be dangerous. An exculpatory clause \\"ould attem pt tn exculpate. or free, the _~u rgeon from li ah ility even ifth~ surg~"On was negli gcnt in his care. Annlher examp le nf a contr.lCI cn nlrJry 10 puhlic pnlicy is a conlrJcll hal is so one -si,jcd asto be un conscionable. An unwn,cionablc con-
tra ct is one Ihal is OUlrJg~"OUS or unscrupulous, usually oeCiusc the parties have such unequal barg
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A cu nt rJct is misrepresented if one party gi ve.~ falo;c in ti.rmaliun abuu t a fact that may alfect the ag rcem en1. I'or cKamplc, maybe myculVorkcr and i were not thinkin g about ditferent cars. We both intended our transaction to refer to the Miata, but befor~ he olfers me $17,000, he asks me if [ have had any trouble with the convertible leaking. I say [have not, although Ihat is the prime reason I am gelling rid of it. ·Ihis misreprnentatioll could affect the vo lulltarilless of thi s hiLrgain. 1\'l y coworker wuul d not have otfered $17,001) fo r a leaky ca r. de.~pitc its sleek eKterior. A contnlCt is fraudulenl if one parly deliberately ur int en tion ally misrepresents a fact ailtlut the suhject of the agreemen t. When you make a fmud ulcnt statement in a COlllnlcl negotiation, you inlend to deceive the other party. [t could he fraud if [ went on the say tn my coworker, "The /l.tiata has never leaked; you have not hing 10 worry aboutlhere:' This d early affects th e voluntarincss of the agreement, and if fm ud is presenl, the contrJct can be v(>ided lOr ca ncell ed. [f all si." clements of a contract arc present and one party docs not perform ;IS promi.,cd, the injured party c"uld sue in cou rt for d amage~. CQlltr,/c/ dam ages HTe calculated 10 give the i nju~d pany the heneflls of the bargai n and;tTe discussed in detail in chapter 10. [fyou wantvcry dctd as a unilateul con tract , put it in your agTl't'llicnl. Contl'"ct~ arc between ind ividuals in society, anrJ freedom of cont ract is a basic, funrJamenlal right rcs('rv('d 10 the people by the Fifth and Fourteenth Amen rJ mcnls 10 Ihe u.s. Constitution. Indivi duals and busin~.'sses arc very free to ente r into c"ntl'acts ahout any legal subject.lhe law docs not care if your cont ra ct is a good dcal. ·Ihe Jaw will e uforce a cont ract in which o ne p"ny overpays for an item. The I
Quasi Co ntract and Pro missory Estoppe l Somelimesau in gre dient is missing. You lo ok so me sleps. did some work, paid some money. but technically you don·1 have a good contract. In thi s case. Ihe law may give )'ou some relief cven though you goofed lIl). One thiog the ,0"11 may do is liste n ttl an argnment in quas i c(ln/r.W , or
CHAPrElI 7 ' THE REC IPE FOR A CONTRACT
81
~almost w ntr.td." [n thi' case, yuu thruw yourself on the mercy o r the court, admit that yo u w<, re a little lacking in the r<'cip~ , but ask for some relief to u\'oid a tnriblc injustice. Sornctim<,s you r<'ally miss 'l ui te;1 few ingredient.~ to a goo d co ntract. In that case you may argue promissory estoppel, hegging the court to estop, or prevent, Ihe other party from de ny ing the deal because you. the injured party, have significantly relied on this faulty harg'lin, and allowi ng the " Iher parly 10 gel "ut ufth e agree ment would unjustly enrich him . Quasi coni tJct and promissory cstoppel arguments are l"1 uitahle remedic.. (see chapter 2) and the court is allo wed to acl, no l b~cause it is interp reting a legally ~nforccablc agreemenl, hut heca u.<;c it is preventing an unfairness. TIll.' classic pnuni~s"ry estoppel eKample is the roofing company that comes 10 your house and h,'gins to put on a new roof, which yo u go oul and watch them imtaJl,
el'e n Ihough you know they mean t to do the neighhor's roof. Significant value was given to YOIl in a new roof. YOIl could have spoken up and prevcnted th e .itu 'ltion that ha_, unju~ t ly (Onrichcd you. Technically, there is no co ntra ct helwecn yo u and the roofmg co mpan )', hut it w"uld he an injustice 1101 tn provide the cnm pany with some relief- that is, money for the job, 'Ihese noncontracl argumellts are bro ughllo court morc often than you may Ihink, mainly hecause a 101 of people try 10 do their ow n contracl~ without legal advice, goo fup in the particulars, and then need help enforcing th eir rights.
TH E LAW IN ACTION Do the Buyer.> and Sellers have a legally enforceJh1c agreemene Let's check the ingr~x1ienb: 1.
lhe Buyers mad e a wr!ItI.'n oITer to Ihe Sellers. [I was dear and dcfinile-123 Cherry Lane fo r $91 ,000. It was com municJted to the Sellers through the Realtor. This was a bilatcrJl agreement, completed when Ihe olfer to purchase was signed. 'Ihe Buyers promised 10 buy and the Sellers promised to sell. The deJI would be completed within one mo nth, at the actual dosing of the sale. but the pfl)mises binding the parties to Ih<, conlract were mad~ when each party signed Ihe olrer t<) purchaw.
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The Sellers accept<'d the olfer. TI,ey thought aoout it fi,r a hit, out they signed it and dispatched their 3cceptance by returning the signed offer to purchase. TIle}' did not chJnge the terms and counterofrer a price of $95,(}()0, 3Jt hoogh that is wh3 t the y hoped to get in it ially. They accepted the offer that was made to them with no changes.
3. There was considerJtion. Considerdtion is a barg3incd-for exchange. lhe Sellers are selling their house, which they arc not lcg;illy obligated 10 do. The Buyers arc gh'ing S9l ,000 of their moncy to the Sellers. whi ch they al1' not obligated to do. Both a 11' gelling somethi ng of value. 4.
Both the Buyers and th e Sellers have' capacity 10 en ter into binding con tracts. TIley arc of legal age and there al1' no disaOilitics oper.lling in this ca.",.
5.
The con tmct meets thc rcqu irement of legalit y. Buying and se ll ing real ~state is leg;d everyw here in this country.
o.
[t appears that Ihis (onl mel was voluntarilycnlered into. No one forced the Scllel"$ to take this otfer or to mo\"C in the first pb'e. 'Ihc Buyrr.• certainly took thd r time and looked at th is house on three oCCJsio ns b"forc deciding to m;lkc all ol rer.
Th.· parties' respective positio ns vary. As fa r as the SeUns arc concerned, there is a binding contmct th~t the law sho uld enforce. "l he Buyers shou ld be made, by a court, to complete the transaction no matter what issues they haw wit h the living room 1I00r. After nil, they arc gelling a gre~t house. '[hey can pul down a rug or even install hardwood !loo rboards if they wish. The Seller., belil'\'e a wurt ,h(}uld award thelll d;lmage.• in the amoun t of $95.000 if the Buyers don' t follow through on the deaL As for the Buyers, they arc in shock. How cou ld this have happened? Did n't they ~ sk specifically about the 1100rs? We re there ulterior motives at play when the Sellers would never be av-.lilable to let th em measure for curtains? If the SelleTh lied about the Iloor, what other haurds lurk? Sure, there was an offer, acceptance, considerat ion, capacity, a nd legality, but not so fast on th e vo lun ta ri ness. 'lh e Buyers bal"'6'l in ed for a house with hardwood fl oors in the living roo m. not plywood. At a minimum there was a mistake. The dealings prohably point mo re to a mi.
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,,,urt should n"t enfurcc this , ,,ntr,let due to the lack of vo luntary agreement. However, the lluyers adm it that hardwood Jloorb oards could be installed in the li ving room for abo ut 52,200, which is about 2 percent of the purchase price, Hove you decided whom you arc moting for! Keep
re~ding
to discover
the conclusion to this case in chapter 8.
TEST YOURSELF 1,
David Doright h
"r~en
t~ l ev ision
in his living room and tunes in to his favorite 'how, Anriques Roadshow. Ton ight's program idrom St. l ouis, his hometown. Although it is stric tly a hobby for him, David fancies h imse lf pretty savvy about aotiq ues. Ha lfway through the show, a ,mall chest of drawers is featured. The owner, a young man, tells that he bought it about six months ago a t a garage sale to furnish his first apartment. The chest looks familiar to DaVid. As he leans in to get a better view, David realizes that this is the old chest from his basement, which he sold at his I
Judy sta rts her day with a piping hot cup of coffee from the vending mac hine in the lunchroom. Today, she puts in her dollar and out comes the aromatic vanil la cappuccino- right onto the floor and her new suede shoes. The cup failed to fall int o p lace. Is this a breach of con tract Or a tort?
3.
Sally's son, Rex, is an active boy_ He is also q uite big for a seven-yearold. Last Saturday, Sally was picking up a wedding present in the china shop. and while checking out, she let go of Rex', hand for jUH a minute. (ra.lh! A lovely Waterford vase was sma.lhed to bits. The owner has a clear sign at the entrance, You BREA K IT, YOU BUY fT. What happens next?
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Brain Teasers 4.
Arthur Roberts is a famous architect. He is in demand to design unique houses for the rich and famous. Mr. Roberts just finished an eight·month·long project-a Malibu estate for Mr. and Mrs. Rock Star, At the dosing today, the Stars refused to pay the balance due to Roberts of $560,000 because they just learned that Mr. Roberts let his architect's license lapse by failing to send in his renewal fee of $25 on time. The Sta rs afe claiming that this is an illegal contract since
Mr. Robem was not legally licensed throughout the contract. Is the con tr~ct
5.
illegal. and thus unenfo rceilble!
Dan contracted with Eric to do the sno w removal on his property this last winter. They agreed that (or all snow removal needed from November though March, Dan would pay $200. Dan paid Eric in (ull o n November 8. Throug h Match 31, it only snowed two times. Can Dan ask for a refund? What if it had snowed 30 times last winter? Cou ld Eric alk for more compensation? Could promissory estoppel a pply here?
Question Future Chapters Wi ll Answer 6.
What will happen to the Buyers and Sellers of 123 Chl!rry lane? I( thl! Buyers brea ch a legal a greement, what w ill the consequences be? Are there any defenses the Buye rs (Quid raise so they don't have to go through with this deal? In tort situations, there ale some defenses that ciln be raised such as contributory or comparative negligence . Would this approach help here ?
An swers can be found on pages 215 - 218.
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CHAPrElI 7 • THE REC IPE FOR A CONTRACT
K'E tJ P,OINTS TOl REMEMB.ER . Contract law is a category of civil law concerning private rights between parties who make an agreement. Contracts come in many forms: writt('n and oral. implied and
('~.
press, executed and ex ecutory, and unilateral and bilateral. These are ~II terms that descr ibe an aspect of th e agreement. A contract is an agreement the law will enforce. The recipe for a binding contract is offer, acceptance, consideration. capacity. lega lity, and voluntarineH. If you don't have all the ingredients to form a binding contract, you may have a gift. ethical obligation. sales pitch. or motivationa l promise, but not a lega lly e nforceable ag reement. If you have al l the ingredients to fo rm a bind ing con tract, the law will protect you so that you get what you bargained for. To be sure you have a winning recipe for
be sure to
yourcontr~ct,
ask for al l the extra ingredienl! that a re important to you. If your recipe almost works, but falls short of an ingredient, the law may enforce your promises using an equitable remedy ca ll ed promissory estoppe l.
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Urheberre<;htlich ge5chlitltes Material
Contracts: Do You Always Have to Do What You Promised? recent ly had to replace the printer I use at home. I shopped around,
I
looked
advice. After considerable deliberation,l bought a name-brand model with
a wireless feature from a big box electronic Sio re. That wasan easy contract. By the t ime I had done a ll the research , I just went in, pointed to the one I
wanted, and chec ked out. Contract co mpleted. Then th e trouble began. The printer was very hard to hook up and didn't function wi relessly. I hired a computer wiza rd to help with the set up.
When he could get the printerto work, it was very slow - much slower than advertised-and it made a loud grinding noise in the proces s of printing.
After two attemph at wirele~~ hookup, I attempted to
u~e
the printer with
a cable, a nd that wa~ no more reliable. I thought I knew what I wanted and needed in a home printer, but thl~ is not it. I am not happy with my co ntract. The big box store claims in adver· ti~emen t~
that they want
sati~fied
ctlstomers, ~o they shou ld not be happy
either. Can I get out of my ba rgain? Can I get reimbu rsed for the bills I paid to the computer wiza rdl
Jrhch~"
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v.[jlj AT'S I A ~E A D Discharge by Imposs ibility
Material Breach
Discharge by Operation
Defenses to Contract
of liIw
Per/ormance
Discharge by Rescission
Mistake
Conlract Breach
Misrepresentat ion
Spedfic Performance
Fraud
Substantial Perfo rman ce
IN THE REAL WORLD In chap ter 7. we met the Sellers and the Buyers. 'lhey entcred into a legally contr.r.ct to excha nge owne rsh ip of a house (or S9 1,000. The promises were mad,'; the deal w~s don,·. All that was left "'as the ,,/fi cidl
enforceab l ~
dosin g. The nir,ht before tbe sched uled dosing. the Buyers learned that the hou se "'as not as they expcCk"d. The beautiful hardwood living room floor was mostly plywoo d that h~d been cove red by a rug. 'Ihe Buycrs arc now questio ning every assurance the Sellers made about the home. They want to hack o ut of the deal hut don't exactly know wh~t that mean s. Can they he forced to huy the house? Cr the Sellers) knew nothing aOOnt thl' 110M "prob l.'m: TIl{' Sell.,TS had told the ir Reallor lh atlhe house had "some hardwood tloo rs," which w~s lrue, as one bedroo m was carpeted and the kitchen was tiled. No one had pulled back the rug in the living room to look nnderne,rth. The Sellers did not olfer the plf\" ood information at any time, although thcy admit they were asked some general questions ab out the floors before the olfer was made. The Sell ers have moved out. TIley lMVe taken significa lll and .~Ub.~talllial steps in rdiance Oil this deal. from their poi nt of vi~w> the Hoor "p rohl~ m" is minHr cu mpared to the gr~at piece of rea l estale the Buyers are getti ng. Even
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Ihe Buyers adlllillhallhey wanled an older home and wi lh il. Ihey e~pcclcd sollie surpriS<'s. Well. here is snrpriS<' nUlllberonc: [n Ihe 1920s. sOllie honse, were built wilh hardwood tloor$ only allhe cdges of Ihe room$. Area rugs and Ihi~ building fealure were commonly u!;cd 10 save COSIS. II wou ld lake about $2.2UO 10 put hardwood flooring in the midd le of the room if the Buyers 50 chose. ·Ihe Sellen know for a fact that thc Buyer~ werc going to ~pend Ihis much o n new dr~pcs for the living mom. Can Ihe Sellers force Ihe Buyers 10 buy the house? Can the Sellers keep Ihe home and al50 get damages frum the Buyers for breach of contract? I [ow much can they get? Whatever happened to ~uyer br w~re? ISlillhere SOme kind oflaw?
KEY CONCEPTS Chapler 7 outlined the ingredients n~"
Co ntract Breach When a party fai ls to perform what he promised. he brl'ilches, or breaks. the cuntf.lct. Thi~ failure hascon_,cqucnce. not on ly fur the party breaching the deJI but also for the injured part)!. [f my neighbor, Philip. hreaks his agreement to drive mc to work today.ll<.' isthe one who failed to pnforrn . bu t as a consequence, I have to pay $3 to take the bus to work. ~'ly agreement with Philip is that [ pay him $2 per day. so his failure has cost me $1. As a genel'J I rule, the person breaking the conlract should compensate the injured party by giving hi m the benefit of Ihe bargain. In that case, I should not have to pay Philip for the Iran5portalion that I did not receive an d I shou ld gct S t from him to cover the e~ tm costs I paid 10 lake the bus. Bul, [ also arril'ed latc at work and that was a pwblcrn. I often am slow gctting started in the morning and alll usually latc getting back from
90
PARr II; CIVIL LAW IN DETAIL
lu nch. Today, whcn I was running in, the bo., infor med me that I wou ld be gett in g a negative review this mo nth due to tardiness, so no bonus for me. Can I sul' my neigh bo r for the los t bon us that his missed ridl' caused? No, [ ('.Innot. Co nt l"",\C! damages arc limited to compemating the injured porty for the benefit of the bargain. not for items that are nOI foreseeable or reuwnably related to thc deal. The hIW i\ very liberal in the ru les that allow pa rties to enter in to contrJcts, w, in cases of breach of co nt ract, th e law docs not award punitive damages, a. it does in some tort ca'ICs. Adults and bus ines'ICs arc free to enler in to an)' barllains they desire tha t are leSal. If yo u make a bad (o llt mct, 11w law is not gOillS to pun ish the oth er side with excessive damagcs.ln my ca.~e, I should have a reasonable backup plan, which I do, with m)' SJ bus ride. If Philip proves himself unrcliabk' repeatedly, I am free 10 contrJcl elsewhere.
Discharge by Impossibility. So mN imes things happen that mokc 0 eo ntm et im possible to perform. Ex amples of impossib il ities include tbe death of a party to a CO nim ct, the J~stru ctio n of an item that is the ~u bject of the co nlmet. or an aet of God. Whcn a conlract is legally impossible to pe rfor m, Ihe CO ni!"".l Ct is vo ided and therefore it is uv~r. [(K itt y Carlislc had Jgreed to sing the nmn·s he irs could stiU sell me the hous~. if th ey wislll'd, but the agr,'cmcnt bdween me and the de ceased cou ld be \'o id ed if the hdrs wished to void il. [fthe man's house burned dow n before the dosins. I cOlil d void the contract duc to destruc tion of the subject matter of the deal. I need a house to live in. not a ve ry emply lot eve n if it is otfered with a brge check from Ihe insuranCl' company for the homc·s valu e. Similarly, a contract ca n be voided by an /l ei o[God, which refers to a natuml occurre ncc. such as a lIood o r tornado, th"t coul d not have been prevented or foreseen . When an act of God strikes, the subjec t matter of Ihe contract L\ usually dcstruyed.
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Disdw rge b,· Opendio'l of Law. There arc al.1n a few specific laws th at forgil'e performance of a co nt ract. '[he fint one is the statute of limitations. The ,Iature ofJimilariom is a procedural law that says a legal claim must be brought within a certain period of time. Most contract claims havc a sta tute oflimitation s of 10 years. You mu st sue to enforce a cont ract within 10 years of the breach, or the cause of action is too stale. 'Ihislaw protects against ancien t claims bein g brought to co urt where ev idence is old and memories arc poor. 'I he ot her law that mar (orgive per(ormance i.~ the hankruptcy act. Ce rtain deb tors are discharged fro m performing their C'lllt r~ct obligation., ifthe y arc de cb red legall y bankrupt. Discllarge by Resdssio fl. Occasionally, both parties to a contr~ct may
change theiT minds. This is callcd a contract rcninion. In effect, a rcscis· sion voids the deal. Rescission mllSl be a mutual decision by the parties, not a one·sidcd backing oul of the de al. Techni caUy, when parties ab'Trc to rescind a co ntra ct. they enter int o a ne w offe r and acceptance. ag~ei n g not to perfo rm on their previo us pro rni'ICs. The consideration for the rescis sion is their mutual nonenforcement of th e origi n~l term s. In th .. case o( a reM: issio n, eJch party should be put back in the place th ey were befure the contact wa,~ entered into, as if th e deal had ne"u h'lppencd. An example ()f a co ntrJct rescissi on could in"ol"e your choice of gnl(Juat e school. If yo u werl' accepted at a school you likl'd and indie-dled yo u would altl'nd, but then your number one choice accepted yo u, you an d !he first school may mutually agree that you will accept the new otfer. 'lhe first school docs not reaUy mind since it has a wait ing Ii,_t of othercan didatc~ anxio us to get in. So, to rec;!]), o nce you emer imo a co n!r.ld, you could perform it to its com pletion. That is a disd large hy perfo rm ance. You coul d be excused fro m performa nce becd use of a death , destru ction, ur act ofGoJ. Th is is J di scharge by imp ossib ility. You cOlild be excused from perfo rm ance be· Ca USe oflh e statute oflimitations ordue to a bankruptcy. 'lhis is a discharge by operJtion oflaw. Or you could mutually decide to cancel the deal. This is a discharge by rescissi on.
Specific Performunce. In the mre instance where compensatio n for the henefit of the hargain is not satisfactory, th e law will co nsid er o rder· in g the hreaching party t" specifically perfor m the contract. Specific
92
PARr II; CIVIL LAW IN DETAIL
paforma>1Cf is unusual hl'causl' it is rMe Ih,lt monelary damages can n" t lake c..tre oflhe breach. For the cou rt to a ..... ard specific performa nce, the casl.' has 10 in\,ol,,1.' unique or rare items. If I had J contr..tct to bu y a KUTt Vonncb'llt drJwing (ye.l, he was an artist as well
a.~
an author) for $2,500
and the ..leakr selling it changed his mind. I would not want to accept my $2,500 hack. I want that particular dmwing. 'Iherc is not anothcr onc likc
it and I madc a deal. 1he filet that the dealer got scntimental is too bad. 'Ihc fact that Kurt Vonncgul died beforc Ihe drawing was delivered 10 me, so that now its "alu~ is much
high~r,
is also too had fm the J~aler. Money
ca nn ot gh'e me the be nefit of the bargain. Only the item itsc!f wiH do, and in rare, uniquc cases like this, the court may on.l cr the parties to co Ulp1c\c the contrJ.cI as made.
SlibSlalltiul Performance. AsdiSQl&Scd in chapter I, the law docs not require a perso ll or husines.1 to be perfect. Sometimes things do 1I0t go as planned. 'Ihcre arc co nlra ct rules thai cover !C:;S than perfect performance. If you do all of what you promised. you get the benefit of rOUT barga in. If ),ou ,10 most of what YOli pwmislxl, shouldn't YOli Sd mnst of what you bargained fiJT? The law thinks that you should and exhibits this b~l i efin the doctrine of sub!r(H1 -
tial performance. If a person subslantiallyperformson a co ntrdct, he does not do a perfect job, but he makes an honest and eameSI atlc'mpi to perform com pletely. Fo r example, my brother-in· law builds bouses. He is a great builder and rarely hasa complaint from clients. I Ie has a solid reputation in the com munity for nlfering a fine product and excelle nt workmanship. If on the closing date for a houS<' ht· has built. one thing rema ins incomplete- the ki tchen doOT handles (18 of them) are not in duc 10 a hack order-hds hc ., ubst'lnlially comple ted th~ hOllse? Of course he has. The con tmct should becomplekJ. he should he paid in full, and the cont ra ct sholdd be disch arged. He is going to prol"iddhe door h andles when they arrive and install them in a workm anlike manner. No one should want to hold up a moving \'..tn, a loan commitment for the bU >'ers, a comt ructionloan to pay olf for the builder, and the kids getti ng enrolled in their new school fur 18 door hand les. On occasion. a who le order docs not come in as planned, but 80 pe rcentofit can bc{lclil"crcd to the custom~r today and the nest in two days. Co ntl"m:ting parti es who have rclitxl on the agreement si nce the time the promiscs where exchanged Jo not wam to Slart ol"er IlOW. They want \(} make
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CflAPTE~ 8
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93
do, as well as they Cd n, and get complete perlimnallce as .1(1)11 as Ilossible. .Even if complete perfo rmance is nut possible, in many cont racti ng situations SO percent p~rrormance is prcr~rJbII.' to:wro pe rcent perfonnancc. In cases whe re perfect perform ance can never be achk ved, the parties might agree to amend their contract to cover what Cd n be supplied. For example, the selle r would provide 80 percen t of the urderand the buyer wuuld pay 80 percent or the purcha..... pri ce. 'nlis is c~lIed an accord and mtis/action. Ihe partksco me to an accord, or agreement. and conside r the contrJct Mlisfied.
Ma/crilll En'll' /! . On uccasiun. th cr~ is less tha n substantia lpcdurmance. This is called a material breach, meaning signific ant breach of co nlrac \. Under the se circumstances, one party gets Sig nifica ntly less than he expectNl in performance from th e other party, such that, for all intents and purposes, the con trJct is breached and some damages ,Ire owed. for exampl e, I am movi ng my IJW office from one IDcation to Jllother Jnd need some huild'out servicc.~ in my new locatio n. I hire A & S, In impmv~ment company. tD wa ll off a larg~ area into two otfices. hang new doors through out the slMce, install a check-in window in the recep tion area. and apply a fresh coa t <)f paint to Ih e space. All the work needs 10 be done in 60 dJYs. We a gr~ o n a contract price of $3,800 and I pay an $800 dl'pusit toward th e cost of supplies. After 60 days, I have terminated my rental agreement al my former location, packed up all my Dffice equipment and supplies, rented a moving ".In, and arranged fo r a hookup of all new ut ilit ies in the new location. A & S has removed JII the Did doors. put in a crooked wind ow in the recepti on Jr<'u that looks like it is fro m Ma and I'a Kcttk's hou"c, and pullip half the drywall. It i.1 moving day and Ihe space luoks worse than it ""a has. A & S has not done a complde job, or even J substanti al perrormance o r the (o utmCl . Its actions co nstilote a malrrial breach of comruct. Because of the deficiencies, I do nUl have to pay the remaining $3,000 contract price since I have not receh·ed the work this represe nt s, und I may have additional tort damages to claim again.<;t A & S because of the harm they caused tD my business by breaching our Jgreement. A & S co uld argue that they arc en titled to so me consideration, meaning mDn~y. fo r the work that they did .1 1,1; hDwever. th~ wDrk dDne fall~ so f~lr sho rt of th e work promised tha t a <':oll rl w
94
PARr II; CIVIL LAW IN DETAIL
Defenses to Contract Performance In considering defenses to co ntract performance, it is important to revisit the discu.,.ion of mi~takc, mi~rt'prcscntat ion, and frdud, begun in chapter 7. When any of these even ts occur, Ill<' vo luillarincss of a co nt mct can be questinned, hut, oil occasioll, these even ts arc also ll.<ed 10 defend ag'lin .• t the Cllfnrcemcnl of a con trac\' It is nol always easy to fi gure out if a mistake $hould negaW the demenl or vuluntar incss o r nol. Since contract htw does not protect against had bargains, the parties to a deal have the ohlig.. tion to be proxise and dearahou! the terms tbey desire. A daim that "I di dl}t know that old book was a " .. Iua ble first edition» will not defeat a valid contTdCt. However. lfthe mistake is made be,"rcprescl1lal ion usually notes a fa lse or misleading statemen t made with Ih,' intent to deceive. Usually
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the P,lrty m,lking the ,'tatement knows th,ll it docs not '~(Iuare with the facts. Misr~presentat ioos cao be ol'l' rly zealous guarantees like '''Ihis product will strip olf Sl.'yen layers of paint in flY(.' minult's.H They can he care· less stakmen\.~ like laheling a product "low fa( whe n it docs not meet the Food aod Drug Administrat ion staodards for a low-fat food. Misrcprcscotat ions can also he rcddc &5 or nq;ligent statemcnh like "Safe for childrcn undcr J" on a prol!uct with many .Imall jliLrts that children may choke 011. So, Sillc.• pitche1O, or Pfccontr,l(ting persuasion, arc not part of t hc contract, but false, misleading, nr reckless ,;.ales pitches could he so influential to the bargaining as tu be cunsidered a mi5r"prescnt~tioo, which intuTll, could n~b,lte ~ contract. TIle key to co nsidering whether a misreprcscntatioo can bl' used to n"gall" a contract is whether a party relied on it in making the deal. If a statemen t is material- that is, an imponant part of the deal - and it turns out to be false. perhaps the agreement should not be uphdd. II n example of a material misrrprc,'-Cntali on i, ,10 em ployer ldling an inlerviewee that thc husines,~ will always have a , trong presenc~ in th~ IOC'd l community even though he knnws the bllsines$ is set to mOye to Mexico in three months. Fnlilil is a dcllbcm\l' disregard of the truth. A person making a fraudul"nl statement in a con tract negotiation is telling a lie for the purpose of inducing the olher party to enter into Ihe bargain. TIlis He could be the telling of an unt ruth, which is frJu d by commission, or the concealing of a fact that should bc disdos~-J, which is frJud b)' omission . Such intentional misinformation docs ca,~t doubl on lh" y"luntarine.~s of the ilgrcement, and thus, whelher there was a JcgJlly enfo rceable agree ment in the fint place. 1luwever, in the imtance of concealing a fact lhat should he revea led, the frdll
96
PARr II; CIVI L LAW IN DETAIL
an invl'.ltor to inve.~t in a .~tllck that immediatciy lo,t ~ign i fi~ant va lue. Th e investo r wo\~d no t have boughl the slOck if the stockbroker had disclosed the risk facto rs present thai he knew bUI withheld from his customer.
THE LAW IN ACTION In the mailer of the Boyers all() lhe !-idlers of 123 Cherry La ll I'. there is a contracl that has not yet bl'en fully performed hecause thc d osing ha,' not taken pbce. With the discovay of the plywood living wom lIooT, the Buyers don'l want Ihe dos ing to lake place ~s planned. The house is slill intact, so it is not impossible to perform th is contc-dC\. No one has died and there has heen 110 acl of God; however, Ihe Buyers would like to change thcir minds. They don'l want the house as il i" Perhaps iflhl' Sellas would reduce Ihe price by an amount equal 10 the cost of installing hardwood IIooring, the n they could come to an acco rd and sa tisfaction. BUI. the Sellen; arc not willing to do this. The ScilcTll feci th,1I ,I deal i., a deal and IhallhL. is a uni<jue house. They are nol willing 10 rescind Ihe contract. In fact, they fecl .~" strongly ahoulthc deal thai they ,Ire threat· cniog 10 sue the Buyers for specific perform~nce of the contrJcl. In uther wurds, Ihey wanl the court lu force Ihe Buyers 10 dose un the huuse. The Sellen' fall hac k position is to ask for damages. Damages should give them Ihe benefil of the hargain. which is, according to their figures. u S20,OOO nel profit from the sale ofthl' house. Ifthc' house has to bc put back on the market an d res<)l d. it may sell for k,,~ thall the $91,O()OIhe Buyers were willing to pay. In fact, it proba hly will scll for less now that it i" sitting empty incur Ihe e"pense nfkeeping with ~ll its Haw' exp'Jsed. 1 he Sellers wi ll the house until it resells. TIlest "'''pen,ses indmJ.: Ihe mortgage payments, t,lxes, utilities, insurance, and yard maintenan ce. In other words, the Sellers coold suffer thousands of dullars in damages if thc Buyers arc allowed to \"oid this contract.
,ii,,,
The Buyers could argue Ihat Ihey should nOI be forced to pcrfonn on Ihe contract due to a material breach. To win on this argument they would have to convince the (ourt Ihat ,I hardwood living room floor wa.' a vcr)' impo rtanlle rm for Ihem. 'Ihis was an item on their ~must have" list. but so was a y;ml for Ihe kids and an ulder home. Everyo ne admi ls Ihal Ihe
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Jlour C;Hl he made tu fit the Buyers' expectations with a $2,200 expenditure. Obviously, the Sellers wlll argue that this is a smallltcm that is not material to the deal and a very minute portion of the purchase pli,e. The Sellers woul d urge the coun to rule that they had subSlantially performed on the contract, even if their performa nce was not perfect. 'Ihe Buyers can also argue a defense of mist,lke, misrepresentation, or fraud. As di\.Cuss.:d in chapter 7. these p~) int' nlise questions ahuut Ihe voluntarincss of the contr-a", hut it is possible for the Buyers to admit that there is a legally enforceahle agreement here and that their cunsent to the dc~1 was "uluntary, but stHl raise Ihes<: poin ts as a ddellse tu p<'Trorman(c. To I"in this argument, the Buyers ne~xl to concentrate on the facts and circ umstances thaI show imentionaI misreprescnt:!lion or even actke concealment by the Sdlcrs. Key points to their argnment aT,' the spccifi' qucs lions they asked the Sellers when viewing Ihe ho me and the inability 10 vicw the home after making the offer to purchase. Let'.t.",y th at the lIuyers refuse to dose on thc hllu.'e. Thc Sellers cou ld Sll~ the llu)'~ rs for specific performanc~, a.tking Ihe court 10 order them 10 buy the hOllse. Th is i.1 a uoi' llie ,md extraordin,lry remedy th,lt the court may be lillwilling to enforce again5\ the Buyers. In the alternative, the Sellers could also ask the court to award them damages for the Buyers' failure to dose on the deal. If the house is resold for $79,000 heforc the (;j,te gd~ 10 trial, the claim for spccifk perfonnan,c would have to be dismissed bec.msc the house is no longer available lor the Buyer:; to purch,ls,', but the damages d aim wo uld .tlill be before the ,ourt. With these f~ct.", if the Buyers losc, they face damages in eX"M of S12,OOO due to the difference between the purch'lse prices. If the Buyers win and prove misrepresen tation or fr-~ud that rCM: inds the contra ct, ther would gct hack till' $ 1,(I()(J earncst m')l1ey that they had p:!id the Sellers. The Slakes arc high for each si de. After:! Iwo-d~y trial, the judge rules in fal'or or the Buyers. The judge didn't go so far as to fmd fraud on the part of the Sellers, but she did fllld misreprescntation that was deliber-Jte on thc part uf the Sellers and male· rial to the Buyers. As is usual in contract cases, each side has to p:!y their own attorney fees, which amounted to ab out $3,50n CJ,h. Con tr-a'ting is not for the faint of h<'Jrt. Careless ness in hu siness agreements can cos t dearly, eve n if YOIl will your , asc.
J,
*
~I
h
98
PART II; CIVI L LAW IN DETAIL
TEST YOURSELF 1.
Cal~in
soaped the left rear panel of his car backing out of the
gilTage. Thi~ made him m"d, not be<:
Lou and Linda were scheduled to be married on May 20 in longview Park. When arrang ing the detilil~ with city hall, they discovered that Judge Judy was to perform the
~ervices
on thil t dilY. Judge Judy fe ll
ili on May 18 and arranged for Judge Joe 8rown to su bstitute. He d id, but th en the newlyweds sued Judge Judy for specific performance. Will they win? 3.
The Browns always have a golden retriever. The ir first dog, Maggie, was iI r<'
"' "
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Brain Teaser 4.
Roz has a contract to submit 10 cartoom a month to The New Yorker magazine. In return , she receive~ $2,500. The re is no guarantee that any ca rtoon will be used in th e magazine, but for each cartoon published. ~he re<eives an additiorlill 52.500. Her contr"ct states th~t the 10 cartoons are due by the 151h of the month and that failure to deliver all the cartoons for the month by that date is a material breach of the contract for which Roz wi ll pay The New Yorker $3.000. April has been a very unfunny month, and by the 15th Roz only has nine cartoon~ to deliver. On April 17 she delivers the 10th. Has Roz sub~tantially
performed? Has she committed a material breach of her
contract? What damages does she owe The New Yorker. if any? What if none of the ca rtoons from the April s ubmission~ were printed? Wh" t if the one submitted April17 we re printed? Answer~
can be found on p
Mmt con tracts a re discharged by being performed according to their terms . If a party substantially performs his promises. he has met his conlract obligations. Sometimes the parties to a contract mutually decide to change a term and agree o n another term. This is called an accord and sat· isfaction. which voids the origina l agreement and replaces it wi th anot her bargain. If a party to a contract fails to perform, she has breached the con· tract and could be liable to the other party for damages. Contract damages are calculated to give the p
ba rgain.
Contract damages do no t include pllnitive damage awards.
,
"
100
PA.RT II; CIVlllA.W IN DETA.ll
A co ntract can be voided due to destruction of the subject matter of the contrac t, death, or an act of God. This is ca lled dis charge by impossibil ity. A contract can be legally unenforceable because of a statute of limit ations or the bankruptcy of a party. This
~
called discharge by
operation of law. If th e parties to a contract mutually decide to call off the deal, the contract is rescinded. This is called discharge by rescission. If a party contracts for rare or unique item s, the court may award him the item itself rather than damages for breach of the d eal. This is a rare remedy called specific performance. If a party does not substantially perform, this is ca lled a material breach, and the party breaching the contract may be liable for damages. Sometimes mistake, misrepresentation, and fraud can be used as defenses to performing a contract.
,
"
What Contracts Must Be in Writing?
W
e learned in chapter 7 that co ntracts can be oral or written. We also
learned that there is no secret handshake that must be made to
seal 11 deal, that thefe are no magic words that make a contract valid, and
no dollar bi ll s that have to be exchanged to make it stick. We reviewed examples of ex tre m ely informal agreements that make up co ntracts in our everyday lives, such as making a purchase from a vend ing milchine or using an ATM. However, some bargains th at you make 1Ire 100 important 10 handle informally. They involve great reliance or great expense. There are
some Ciltegories of contracts that the law req uires be put in writ ing for t he parties' safety and for ease of resolving disputes, shou ld th ey arise. There aren't many, but they are important to know.
The Statu te of Frauds: MY LEGS The Elements of a Written Contract
The Paro l Evidence Rul e
102
PA.RT II; CIVlllA.W IN DETA.ll
IN THE REAL WORLD jod is w mad. l ie just c"mpleted his second ),ear "r law sch ool an d looking liJrw ard to his slimm er dl'r kin g job in a law firm in
W'I.\
h i~ h o me~
town. He worked at Stevens and Sissel last summer. W hen he was hired last May 10, old Mr. Strvcns said he cou ld wo rk with th e linn every until he wa s oul uf law sch oo\. Jo cl coun,,'d on
thi~
job to gaio
~umml'T
e~pcricncl'
in research and some d ecent pocket money. J lowcwr, old Mr. Stevens died last C hristma s an d thl' new managing partner, Mr. Sissel, jmt told Joel that he docs not have a job Ihere Ihis summer. Can loci enforce th is ora l contTJct that
W,IS
supposed to last th ree summers? JocI now wishes he wa.' a
hetter stud ent lotsl year in Mr. Berman's cu nlr,te l cI ass.
KEY CONCEPTS The idea o f requiring writing for some cont r,"IS is very old and dates back to a 1677 English law. The UnileJ Stat es adopted this rule and r~'qoirc.~ co n tT,lds that ha\'c to do wit h MY LEGS to be in writing. Of CO UTSt', It.·IY LEGS is an acro nym, one tha i I lea rned alm o.\t )0 years ago from
my co ntra cts
professor in law schoo!.
The Statute of Frauds I he stat ut e of fumh sounds like it shou ld he about fmud. It is, in a way, r.ut the 'Ialute of fraud .1 refers tn laws ar. oot wh ich types of co ntr;lcts must r. e in writing to avoi d frau,\. Fir,_t, it is impor tant to understand how 3n orJI (o ntract ca n be su bj ect to frauJ. If l.ord Neuman and I, !'CrfEll en, had an oral agre cme nt ah out splittins t he rn'cnuc from the (:fOpS J Srow eve ry year, it could work out just fine if we werc getting alo ng and buth had gre at mcmuries. However, ycar to year. our recollection of the exact t,'rms could fade. I co uld get greedy. Lord Ne um an (ould want to get me out of his fiel ds and get sc rfWilliam in bec-.l llSl' he is stronger and younger and willing to take a smaller percen tage. Lord Ncmn;m could d ie and lcavc me to dca l with his evil If we havc a disput~ over term s, and the 'lgrcemcnt is merely way we can prove ou r case in ,I court of law is
~on,
EJgar.
oT~ I , t h~
on ly
r.youruwn testimo ny. Tha t
CHAPTER 9 ' WHAT CONTRACTS MUST BE IN WmTINGl
103
is no pmhlem for I.ord Neuman. He is very well spoken. I, on thl' other hand, am a serf, and going to (ourt is a bit da ullting for me. 1 (o uld he perfectly exact in my mem ory of details hut less Ihan convincing in my orJI testimony. I.ord Neuman could have a personal relationship with the judge. It just could be unfa ir. A written docu ment would he better evidence of our terms and it co uld be interpreted o n its flce-that is, hy reading its Cl/ ntcn[.\, r~ l hcr Ih,ln hy lislening to o ur spin on Ihc deal. Such sitoations developcd as co mmerce grew in Engla lld in the late 16005., and the formal iting of COJltrdCls with the poteJltial for frdud became important. Tuday, the slatut~ offmuds rC4uir~s six kinds of contmcls 10 be in writing to be enforccahle. !fthr.w COnlracts arc nul in wriling, they still can be agr~'ed to and enforced by Ihe parties to the co ntr..lC1 as long as th ings go wcll; but in thl' cvcnt of disputc, unless your contract is in writing, thl' court will nOI enforce your deal based un orJllcslimony. You wi!! be limited to your writing, and if YOIl have none, the court will not help you enforce you r rights. lh~ M in "IY 1.EGS stands ti,f lIl(!rrj(lge. Contrdcts made in comidemti()n of marriage mu.~t be in wr iting. In hygone timc.~, this rdcrred to (onlmcts 10 cxchange money- given by the wifc's family- to the husbandto-he f,x his taking the
104
PA.RT II; CIVll lA.W IN DETA.l l
an important agreeme nt and one that
~h"ulo.l
b(, a5 complcte and detailed
as possib1c. lfY01l3rc rcm ing an apartmcm rn ont!Ho-llIomh, you Illay stay for longer th,m one year, but all you can expec t is to stay through the nl'x t month. If )'ou lease an apartmcn t for two years, you can cnu nt on stayinl:: there as lonl:: as you med your terms of the bargain, which usua lly involves paying rent and not having wild partie5. The I;" st;lnds for exautors or "dmin;,/rMors. Contracts that involvc executor:; or administr;ltors mU ,st be in wriling. An exulitor is th e person who 5eules t he estate of a deceased party. Technica lly, an executor is named in a will, If a person dies wit hout a will, he will have an admil1istml or, TIle executor's job is to collect all thc money the deceased had com ing to him, pay all his bills, and distribu te the balance to whomever the deceased named in his will The administr'\tor does the s.amc th ing. An examplc clearly indicates the reason for requiting executor's agreements to be in wtiting. Let's say Joe Farme r dics leaving [,000 acrcs of farmland in Miswuri to his son, Joe Jr. The dece;lsed named his ;lttOTilCY, Peter Kmegcr, to he his executor. I'der collects all the money tha I Joe has coming to him, induding a wrongfu l deat h daim , hl'cau,<\' Jne
wa,~
killed in;\U auto-
mobile accident. He pays all ofJo.:'s bllls and then distributes the balance of the est ate, which amoun lS to $ 150,000, to Joe Jr. Needless to say, Jo.: Jr. is a lillI e surpriS<.-d. He was expecting much morc, but Petcr explains that there were a 101 of fces to pay 10 the Jltorney who hand led the lawSllil- who hap pened to be Peter's partner- and loe Sr. had wme hill s thilt needed to be paid that amouo ted to a lot ofmoncy.ln addition, the land, although
grc~t
fann -
bnd, only wid for $ 100 an acre. Joe Jr. wants to see th e documents.I'eterlci ls him it is all oral. 1his will never do. An executor stand, in a position of trust working for Ihird parlies. EVl"rything lhat he does should he .\o(umentl,,1 aud aboveboard to avo id rraud . lhercfore, the actions o f executors' and admillistrJ tors' dealinl::s on estate matters must be documented in writ ing. The G stands for goods. Contracts for the s..le of goods vahllxl at more t han $500 must be in writing to be enforceable. This contract qualifies for special treatment because it involves a significant amount of money and unclear terms could lea d to serious conseq ucnces for the parties. 'Ihe S sta nds for sureties. Co nlr,\c ls involving sureties must be in wriling to he enfor,eable.
Surdi~j
dre in di vidua ls wh" gnaranlee or promise to
Ie1J
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106
PA.RT II; CIVll lA.W IN DETA.l l
What Type of Writing Do You Need? Once you have identified that the type of contract you afl' entering into n~'Cds to be in writing, the next quc~tion to raise is what type of writing do,es il haw 10 he? 'Ihere i.\ no rc<.[uifl'l11~ntthat the writing he on high, qua li ty Il'g'II·,ize paper, The writing can CO llsist of form ... suc h
CHAPTER 9 • WHAT CONTRACT S MU ST BE IN WmTINGl
107
Courts will interpre t the language of your contracts using the clcar dictionary definition of the terms you usc. If you mean something di/feren t or specializi.'d, spell it out in the contrac\' Tenns written into a contrac t control if there is a conlliCl wit h preprinted tcrm~ Ambiguities arc u.~ual1y resolved at~inst the party who dJ'~fled the agreement.
The Parol Evidence Rule The parol cvide/lcc rule underlines the imponance of writing down eve rything that is important in an agreement, because it prevents a party from introducing (·vi dcncc of any o ral agrfcments that ch,mge or "'Iry thc written terms. 1111.' co urt views the wr iting as til<' best evidence of the agree ment and gives no credence to any chan ges, additions, or moditications Ihal a l)arty ma y say occurred. If those details wcr.. imponan t to you, you should know enough to wrile th em down. This rule is especially important for businesses to bc aware of as they enter into contJ'~(ts with sup pliers or cont racto rs. If quantity needs cha nge, writc them down. If job specifications change, write them down . If you arc caught wit hout thc docu mentatio n. you will probably be bar red in co urt from tcsti fying to an oral agreement about the ik111. Failing to be di ligent ahout this has co~t many a business big nlUnq.
THE LAW IN ACTION Joe! \hinh he has a (ontract for three summers' worth oflaw clerking, but al! he has is an oral ag reement from a party who is no longer avail ab le to confirm or den)' ,my of it . Since Jo el's agreelllcn t could not bl' fully performed within one year. this agreement should havc been in writing to bc enforccable. loc i can try to persuade Mr. Sissel that cthically hc should hi rc him fo r th(· SUllllller. o r he could try to beg for a job, but he dnes not havc" ("nlract rig ht t" wnrk for the fi rm this summer. I(he h"d only li.'tC1H'J better in co ntracts class, mayhc he woulJ h'lVe asked fur a mem ura ndum uf agrcement last year. Such a document could be interpre ted acco rding to its written term s whether Mr. Stevens is available to verify it or not.
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108
PA.RT II; CIVlllA.W IN DETA.ll
TEST YOURSELF 1.
Farmer Dan has always wanted to get h~ hands on Farmer Bob's 40 acres that adjoin D
2.
Mr. Doogan has decided to give up driv ing. His f
3.
~chool.
h Ihis
Time has flown by and Jeffis now21. He is re
Question Future Chapters Wi ll Answer 4.
Gecrge wo rks part time at a grocer in the produce department while
CHAPTER 9 • WHAT CONTRACT S MU ST BE IN WmTINGl
109
writing to be enforceable, and a ll the important terms should be in the writing with no last-minu te oral changes or mod"flcations, George knows for a fact Ihat Food Fair is always changing orders with their produce supplie~. For e~ample.last week the store ordered 10 oates of bananas and 10 crates of pineapples, but the supplier delivered 12 crates of bananas and 8 crates of pineapples. Sometimes the supplier su bstitu tes a different fruit than what was ordered or sends something extra. Are these written purchase orders any good? Should George be accepting these shipme nts tnat are not what the contract outlines? Answers can be found on pages 220- 221.
The statute of frauds requires certilin types of contracts to be in writing to be e nforceable, Contracts tnat must be in writing (MV LEGS) include tne following, Contracts in contemplation of mam'age Contracts tnat take more tnan one year to be completed Contracts regardi ng land Contracts involving executors aradministmtors of estates Contracts for the sale of goods wit h a value in excess of 5500 Contracts involving 5Ureties, or guarantors If a con tract is redu ced to writing. all the important terms should be included in the writing. If a contrilct that should have been in writing is not in written form, the court will not enforce it because it violates the statute of frauds. Interpretation of written agreements will be based on the ord inary meaning and common usage of the WOlds in question. If a contract is in writing, the court will not listen to oral testimony about cha nges or modifications of terms that don't appear in the writing.
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Urheberre<;htlich ge5chlitltes Material
What About Me? Third-Party Rights in Contracts n loday's fasl-paced business env ironment, you can open 1'1 bank account
I
one day .. nd by Ihe time you get you r ATM '(I,d. you can be de .. ling with
1'1
comp letely different entity. Du e to mergers and co rporate takeovers, my
bank has changed names four times in the las t t wo yea rs. My car 10iln is
not held by Ihe o riginal lender and my mortgage paymen t goes to some post office box in Sout h Da kota. I've never been \ 0 South Dakota. Do I have
"nylh ing to say about this 's le ight of hand " going on with my doct;m e nts?
Do Ihe new parties I am dea li ng wit h really know Ihe terms of Ihe ba rgain I struck? Why is this so p revale nt?
Third-Party Beneficiary Contr
Intended Benefi cia ries Incidental Beneficiaries Assignmenh
Assumptions With Release Withou t Release Powers of Att orn ey and Proxies
112
PA.RT II; CIVlllA.W IN DETA.ll
IN THE REAL WORLD Virginia's parents hought her a life insumnct p<Jlicy whtn she was th",,, months old. TIley thought it WdS a financi,llly re~ponsiblc thi ng to Jo and it was quill' inexpensive 10 insure Vjrgini~'s life for SIO,OOO.lh cy named them· se!vesas bene~cia riesoflh" policy and as the alt ernate, they named Virginia's kg"l heir. 1111' poli cy "'a~ p""id up and th rown into a drdwcr Jc(".".lc~ ago. Virginia died lasl month at the age of 85. Both her parents died years ago. Virginia is survived by her husband. Walter. She had no ch ildren. Who gets the life insurdnce mooey and how do they claim it?
KEY CONCEPTS Con trJct law is abo lllpriV,lI e parties making b ar!)Jins. For Ihe most parI. the law won't impose itself in to Ihe deal bnt rather wil! leave the paTtics 10 sd out Ihe terms thai arc importan t 10 Ihem. Contracl! aw doesn't generally let third panks intrude into o thers' deals either. For example, if m)' sister gels an awful haircut from the salon. I ("J ilt go harging in ~nd tlcm:lIlti a refund. Ie's none of my business. ",ven if it is painful fo r me to sec her with that mullet.
Third-Party Beneficiary Contracts There arc some types of con tract s thai, by Iheir O
simplest Iype uf Cl>ntrac t that hen~fits a third person is an insur-
ance agrct'lllcnL The insurance company is the prot>lijor that agrees, upon a de3th, to payout money. The promisee is the owner of the policy or the o ne who purch3S<'s il and pays the premium. The third party who benefits from this wnlraCI is Ihe jnt~ndcd bellejir:iar), whom Ihe promisee has named 10 obtain the proceeds from the promisor when he tlies. Th is arrangement is basically a gift. 'Ihe beneficiary who receives the insur~ncc pfoceeds docs not make the hargain or give any co nsider~lion fo r Ihe benefits he receil'es. but he is inknded to benefit from the deal. If the insurdnce co mp any does IIt)t pay uu t un the pulicy. this intended henefic iary has rights 10 sue fi, r
CHAPTE~ 10 • WHAT ABOUT MEl THI RD-PA RTY RIGHTS IN CONTRACTS
113
enforce menl of the contrac\. Thc intcnded beneficiary docs not haw rights to sue under this contract un til his interest vests, or becomes duc. So, if I decide 10 ca ned d lifc insorancc policy I have, the hcndiciary Ih
doe.~
interest does not gmnt yoo righ ts to sue under an agr<,cmcnt to which you arc not a party. For example, ( livc in Davenport, (owa, on lite ca_~t side right ne~t \0 Bettendorf. The City Coun cil of Bettendorf has proposed to build ncw knn is coorts in WiUiams Park, which is ab out four blocks front my home. ( would love 10 hal'c ncw, lighted tennis courts so close. In fact, (am planning my summcr activities now and those tennis courts playa big part in my pl a n ~ . If in the co ming wecb the City of Bettendorf.'-CTi1ps that plan. ca n I sue 10 force the city 10 m~et my expectation.~~ Un fonunald y, ( ca n't, cvell thoogh 1 am really, n',llly interc~ ted in thi.~ projec t. I am o ill y an incidental beneficiary of this deal. ! have not mad e a promise of my own or olfered co nsiderdlion such that I am bound to any part of the bargai n . Incidental ben eficiaries, evc n if they arc L]uite in terested, ca nnot suc 10 en force bargains that only indirectly benefit them.
Assignments On n"a_lon, a third part y Illay get involved in a cnnlract becau,c of an IIssigmllml . TIlis "ccllrs when either the origina ll'com isor or promisee of a
co ntract wi~hes to be relieved of his obl iga tion and substitut e a new party in his place. This also usuall y relates to contracts IhJt arc cxec lltor y in natllre, o r performed over time. For example, Ron purchast-d his car two years ago fro m Big ToyotJ dealership. (-Ie could not pay for the car all at o nce, so he got a loan fro lll I' irst Bank. First Bank save him IlOpercent of th e purchase price and he paid 20 percent of the purchase price fro m his .o;avi ngs. To drive the car off the lot, Ro n paid Big Toyota tho' full purch".e price f'l r the ca r. J lis co nlmClwith lh e dea lership is fully executed and discharged,
114
PA.RT II; CIVll lA.W IN DETA.l l
hut his agrecmcnt with Fi rst Ran k lu pay hack S20,OOO is unguing and will be performed OI'Cr the next 36 months_lhis is an cxc<:utory contrac t and ei ther the prorni~or or the promisee could be interested in assigning his rights to a third party. Whether a."-\ignmcnt is permitted or not is up to the parties of the contrJ-cL Most written contrJCts specify whether interests in them may be assigned or nol. Whcn onll contracts arc in question, st .. te hlW and casc precedents determine whether they can he assigned. In the Jhove examplc, Hon may want to assign his interest in this con trdct with the hank ifhc wishes to -,ell his cJrhcfure the loan is fully paid. Of course, if Ro n wishes to sell th.. ('ar within three years, th .. simplest '''ay to do so i.\ to ask for enough nli>nl'y to PJy the hank IOJIl ulf and sell the OIr outright to a third p~rty. However, som('!imes the third p~rty docs not havI' aU thl' cash to do this. If Ron tll'I-rlS to sell thl' car soon after the purchase and Ihe buyer could pay 20 percent of the price in cash, an easy way to complete the deal would be to le t the third party suhstitute for Ron with the h;lnk. Run cuuld hi' out of this deal, nice ~nd de~n. But the b~nk wou ld have something to say about thaI. The hank WaS one of the original pTOmisoni to the cuntr.lct, ;ll1d it promised to loan the money 10 Hon hasl'd on his credi t, his inco me, and his financial abilitks to pay the money back. The bank does not have 10 settle for doing business with anyone Hon may choose to sub_~titutc into Ih~ bargain, nor docs il have to olfer the same deal to the third party. For this reason, most written contracts prohibit assignment on the part orthl' promisee. Tu determine whether ordl contr-.lcts arc assignab le or not, ~tatuks and Cdse law generally focus on the n~turc of the contract. l'e rsonal5-Crvice ,ontra.t, arc not as_'ignable. It does make a ditference whether Wolfgang Pnck caters your wedding reception or ifloc's T<wern shows up with a kq:\. Bargains for services arc spl'
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h
CHAPTE~ 10 • WHAT ABOUT ME l THIRD-PARTY RIGHTS IN CONTRACTS
115
Pmmisors usually sland in a [rc'cr position than prombce~ when il comes to assignment. Promisors generdlly reserve the right to assign their ~ide of written agreements, and 0(;11 agreements arc usually interpre ted 10 allow promisors to as\igo their interests. This is hecause promisors u.suaJly coIle~1 payments. It docs not matter 10 !lon if he makes his monthly payments to ['irst [lank or State Bank or Citibank, as long ~s Ihe loan is paid olfin three )'ears. So pnJmisor.s often assign thdr interests in a contrJCt 10 Ihird pJrties th'll slep inlo their shoes. Third parties that are a-"ign~ d Ihe righu to a c"ntract can only get wha t the ,mignor had. In other words, State Bank cannot call Ron's loan due in two years and Citibank cannot up Ihe interest rate 10 12 percent. An lt5signee o nl )'gels what the assignor had to give. TIle underlying agreement slays the same. This is Iru,' of the rights under the agrec·menl, such as to re ceivc the monthly payment. and it is al.~o true of Ihe obligations under the agreement. such as to send monthly notices to the customer and to scnd ~dditionalnotkcs if p'lyments arc klte. Assignment of loan documents is so popular because it i_\ a flllHndal tool fo r businc's ...·.~. Maoy banh and financial in.ltitutions have lcmling restrictions that require them to keep a certain percentage of liquid assets. If J bank is assressivdy lending ils assets, it could be "loaned up» and unable to meet demand. To rectify this problem, a .strong .~econdary lending market has developed over the last 25 y"ars. For example, a bank may pacbge a group of I00 loans, representing 52,000,000 10 bl' paid ovcr the nl'Xl three years at 6 percent intereS! an d sel1thcm tod.1Y, at a discount. to a secondary lender for cash. "lhis gives Ihe bank more mo ney to loan oul now. and the sold Juans prnvide a prL-Jiclable return t"r the secondary lender. ]j'lnks and fi nancia l institutions package mortgag.- loans, consumer IOJns. auto loa ns. and bus iness loans for .~a1c on the ~econd'lry market. Some husines_les bundle their aCCOUn!s receivable and sell them to investors at a discount 10 I'aise Glsh. This practice. cal1cdjllrtoTing, is'l common tool to increase liquidity. In both sccondary market sales and factoring, Ihere is an assign ment of the rights and interests of the seller to the buyer. The seller can olfer only the rights she has and the bu)'er can cxerci,", only Ihe interests the seller had in the original agrfflllent; but the lransaction results in a suhsti tu tion of parties such that the co nI me! no longer involves one of the
116
PA.RT II; CtVll lA.W IN DETA.l l
original partie_•. When the of igin al prmni ~ee pays o lf hi.~ obl igation to the promisor, the rele ase of lh e debt or "paid" loa n document comes from the third party Ihal now h o l d~ Ih., righls to Ihe contTdC\.
Assum ptions A~umplion
is also a lerm used in the law, which implies Ihal a th inl par-
ty has stepped into a contra ct. An assumptinn is th e act of taking on the
obligation of ano ther. As_~ump ti()ns arc not different from as~ignments; they arc ju_~t the ot her side of the s.a mc coin. 'I he original contT"c t promisor assigns his rights in a co ntract to a third party and the third party ass umes the obligutioll. It almost ..ounds like an offe r and acceptance- the two stcp~ in forming a contract in the fint place-and it is a bit like thaI. Not only does the original pro misor have to turn o\'cr, or assign, his rights 10 a third party, hut th e third pa rt y also has to ack nowledge, or accep t, being placed in the position of the promisor to th e original promisee. Therefore, to accomplish an assignment, there must be two docu ments, and all three parties nccd to be illl'olvcd. Sometime s the assignment and assumption is co mbined in one document signed hy all Ihr~'C conlrJcting parties. Assumptions. like assignments, can nnly apply to the rights that th e or iginal pany had. Assumpt ions arc not oppnrtu nities to ch.mge th e terms ofthe origin<]1 ~grecmcnt. [t is most importallt for all p'lrtic~ involved in an assum pti on to be clear on whdher the agreemenl is ~n assumption wi th a rdea.~e or without a rdeas.c. An 1J5$umplion with (I release means that the new party to the deal is now the promisor to the original pro mis.ce. In ot her wo rd s, the third pa rty has rcpbced the promLmr in the agrc.'mcnt and the original promissory is olfthe hook. If the contract is not performed properly in the future. the only recourse' the promisee will have is with the third party. An 115.Hlmption wilhout II releil SC is an agreement by the original prom is.cc to add a party to the agreement. and look to that th ird par ty fiTht for perfOf mance, but it d()e~ not Ict the originall'romisor ou t o r the de.]1. If the contmct is not perru rm ed as it .d wuld be, the promisee may still sue the origin al I'rom isllT, o r the new third pHty, or bo th, fin da m']ge •. Assu mpt ions of mortgage loa ns were very popular in the I980s when interest rates were very high. Most mortgage loans at that tim e allowed
CHAPTE~ 10 • WHAT ABOUT MEl THIRD-PARTY RIGHTS IN CONTRACTS
117
assnmpti"n.~
of the ,ontr
Powers of Attorney and Prox ies Powers of attorn ey and proxies arc "Iso aSrc<:ment.~ that inVolve third pa rties, but they arc not third-party beneficiary wntrdch. Powers of attorney ant! proxies arc documents that "llow a third party to stand in fur one of the contracting partie.• and exercise hi.~ right., fur him. ('owns of allorney and proxies do nut allow third parties to take the place of the promisor ur promisee in the original contract.
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118
PA.RT II; CIVll lA.W IN DETA.l l
A pl> werl>j IlJJl>rlley is a dOlCunlcnt that grants a party the puwer to sta nd in for another. lhe term power ojiUlOrrwy also refe rs to the person gra nted this authority. Powers of attorney arc used when people ar(' una'"ailah le or unable to act for themselves. If Rick Steves is leaving for Europe tomorrow hut his new house is scheduled to dose the Jay after, he may need someo ne to represent him at the dosing. lie could sign a power of allorney document and name ',omeonc In be his agent at the dosing to sign paper~, accept keys, and do anything cl.o;e Ri ck ,,"ould need to do if he were there. If a relative is age d or infirm, she ma)' give you a puwer of anurn<'y- Ihal is, sign a form allowing )'00 10 be her rcprc,;cntative ,It the hank-so you can deposil and withdraw funds for her and pay her hills. Givin g a power of anorney to someone is not a sign that you cannot h,md le your own affairs. It is an ag('ncy relationship and every so often anyone (an need an agent. Siu((' the power of attorney do(ument must be in writing (sec chapler 9),
it not only names the individu'l] or individuals to act for yoo, it also outlines just what you want and nc~'<.llhe person 10 du. Pie>lary powers of al\o rncy give the agent authority to do auy and all things that the iodividual (nu ld do herself. Du not gil'e someo ne a pl.-nary power of attorn<,y li ghtly. He (o \lld dean you out. limited powers of atto rney may define a certain time frame or a certain i~~ue for which the agent (an perform for the prinCipal. For example, [ could give a li mited power of attorney to my brother to 5upc rvi~e m)' )"ard landscaping while [am on vac;ltion. He cou ld stand in my ..m{)es and tell the landscapers what t wa nt and answer '1uestions for me if they arise. My bro ther is not assuming financial rcspomibility for the pruj<'
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CHAPTE ~ 10 • WHAT ABOUT ME l THIRD-PARTY RIGHTS IN CONTRACTS
119
A proxy is a dOCUnl,'llt Ihat is similar to a powe r of allomey. A proxy names a person to ac t for the party signing it. It genl'rally gmnts power to do a specific act for the principal. The word proxy refers 10 the person appointed and thc document itself. In World War II, many couplc.~ got married by prm.:y. If one party to tbe marriage was away in the serv ice. he could choo5-C someone to stand in for him at the wedding c('remony and sign the marriage license on his behalf. !:inphb Loren and Carlo Pont i were married hy proxy in Mexico. Neither party was present for the ceremony. Prox ies arc also usel] in cn rpor.lte ~etting~, especially to cas t vutes at annu,,1 sharehuldas meetings. If a ,mall shHeholde r do ~, no t pbn un attending the medins> she can designate a proxy to vo te her shares at the meeting. Proxies may allow the principal to tdl the proxy how to vote or Ihl'y maygenaally grant the proxy power to cast the principal's votes using his own discretion. Proxks are also used in companks to allow a designated individual to speak tor another at a meeting.
TH E LAW IN ACTIO N At the time th e pulicy was p~lrchascd, Virginia's parents thought it would ~ nefitthem. Parents often buy insUI'dnce un children because it is cheap, and ifthc unthinkable bappens, they will have funds fora prop('rburial. Virginia:parents h~I'~ died. so when their rights und('rthe pol icy I'est. or become duc, upon Virginia's dC'ath , they arc not al-dihlble to take tbe procl.'i:ds as the hl'ne ticiarics. As h common in insurJncc contrdcts, tbey named an alt('rn~t(' hen eficiary 10 take the proceeds iflhc primary beneficiary is unavailable to do so. 'l'he alternate bene ficiary i.s Virginil, heir. !:ihe has no children. In most states, Walter, as her surviving spo use, is her heir ami entitled to thc' insnTanc(' pro cccd~. Walt,'T may never even have know n about the co ntrJct, but he nOli" has rights to enforce the bargain Virginia's parents made almost 85 years ago. He is the intended beneficiary of the money and CJn claim it by showing Virginia's death certificatc, the death certificates of her parents (..... ho arc not available as beneficiaries), and proof that he is Virgin ia's heir. E\'en if you
120
PA.RT II; CIVll lA.W IN DETA.l l
o.Ic'llings ynu may need to work with third-part y eon trJets, and you don't wanl 10 pay the wrung person.
TEST YO URSELF 1.
Fritz hired P. J. to paint hi~ hou~e thi~ ~ummer. P. J. started the house, but two weeb later. she had to have an emergency appendectomy. She will be laid up for two month,. She has a colleague, Bruce, who has some extra time lind is willing to step in for P- J. lind finish paint ing Fritz's home. FriO; and P. 1. had an oral agreement and Frltl has already paid P. 1. in full for the job. Is this contract assignable?
2.
Fritz wanted his house painted because his only daughter, Julia, is gelling married in a backyard ce remony in September. The reception is at the home, but Fritz has contracted with The Outing Club, th e oldest. fanciest country dub in town, for the foo d. On August 30, Jo seph, Ihe main chef at The Outing Club, resigns and accepts a job al The Golf Club. Can Joseph assign this conllatl to The Golf Club and have them cater the reception?
3.
Mom ne eds a hip replacemenl. She signs a power of allorney document na ming her so n, BUSIer, as her power of allolney for health care decisions. She tells BUSIer th e night before she goes in for th e surgery that she wanlS everylhing done Ihal can be done to make this surge ry a success and keep her a live. About one hour into the surgery, the doctor comes 10 fluster in the wailing room and repolls that all is going well. bUI Mom needs some donated blood 10 keep up her blood pressure. The doc lor want, fluster', perm ission to do th is. BUSIer does nOI believe in blood donations and transfU5ions. What should he do?
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CHAPTE ~ 10 • WHAT ABOUT ME l THIRD-PARTY RIGHTS IN CONTRACTS
121
Brain Teaser 4.
JoAnn Smi th re<:eived a refund check from her eye doctor for 5250. She had made a deposit on an eye e)Cam that was covered by her insurance. This was a nice surprise as JoAnn just told her college-a ge son. James. that she wou ld make a 5250 deposit into his local checking account so he could buy booh for this term at college. Can JoAnn assign her rights in this check to James1 How? Does the bank have to accepllll
An$wers ca n be found on pages 221-222.
A principal can dire<:t his pro)Cy to perform in a specific way or Ihe principal may leave the de<:ision-making up to the proxy's discretion. Some contracts are intended to benefit third parties. Intended third-pa rty beneficiaries of contracts have rights to sue, ge t Information, and dema nd performance of contracts that benefit them. Incidental third -party beneficiaries of contfaCtS do not haw" rights to demand the pe rformance of a contract, even if the contract interests them or they feel the deal will impact th em. II is possible 10 bring a Ihird party inlo your conlraClIO represenl you, such as a proxy or power of attorney. Th is delegation of your authority, which must be in wriling, really gives Ihe third party no personal rights in Ihe contract. It is possible loass ig n Ihebenefitsyou may receive under a contract to a third party. You can assign only the righg that you have in a contract; you cannot ch,mge the deal. It is possiblefof someone to assume the rights you have in a contract.
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PA.RT II; CIVll lA.W IN DETA.l l
A penon ca n assum e on ly the rights that Ih e original parly has in the contract; he cannot change the deal. AS5umptions of contracts can be with release or wilhout release of the o riginal party. The term power of attorney ca n refer to either a document or a person who sta nd s in the positio n of another. The des ignated power of attorney should act a~ the principal would in the situation at hand and nOI exercise his own wish es. The term proxy ca n refer to e it her a document or a person who stands in for another in a corporate se ttin g. either to spea k for the principal or to vote for the principal in meetings. A principal can direct his proxy to perform in a specific way Or the principal may leave the decision-making up to the proxy's discretio n.
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· .. CONTRACTS IN BUSINESS
Using the contrac t knowledge fro m the previous sec ti on, we now are going to look at some specialized types of contracts. P(lr\ III wi ll con~
centrateon contracts used in business every day. First, sales contracts will be reviewed and we will discuss why some contract rul es need to
be relaxed between merchants in the fast-paced commercial world. Next, we will review cont racts that offer warranties and review what rights consumers have against manufacturers, distributors, and sellers. Th en, we will look at deals involving security, in which
a promise to repay a business debt is not enough and the credito r needs something extra to protect his interests. However, this conclusion depends on our assump ti on of population (dates) normality. We may also have committed a Type II error due to low sample outl iers. The Millennium Proj ect may have worked, but our small sample did not compel us to reject it. r
I. rr
Urheberre<;htlich ge5chlitltes Material
" Sales Contracts and Remedies for Breach f you have read stra ight through this book and have just finished th e
I
multiple chapters on contracts. you ... re probilbty wonderi ng how you
lived so long without major legal problems. If you really get into the sub·
ject there are so many details and rules .. bout cont racts thilt it could drive 11 person crazy. How does anything ever get done? Luckily. most people
enter into agreements with the intention of performing them as promised. Bu t there st ill'lre an awfullo! of specifics to follow. How am businesses do their brisk trade every day with requirements like Ihe mirror image rule and
the mailbox rule? The answer is they can" and they don't have to. Contract
rules are eased 11 little between those "in the business; a nd in this chapt er we will analyze how sales contracts keep commerce moving.
The Uniform Commercial
Review of Contract
Code
Damages
Article 2: Contract5 for the
Contract Damage5 in
Sale of Goods
Sales Transactions
126
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
IN THE REAL WORLD Ito.\.e just op~l1ed her flower .~hop. She bordering cut l1ower.~ from a rq;ional \\"holeS
KEY CONCEPTS Contr.tct rules arc important. lhey give evayone an even playing field. I know [ am not going to b,' bound to sell m y car if, in a fit of rJge o\'(r the muffler falling otf, [ olfe r it 10 Shelia for $ 100. I know tha t if my son puIS up a lemonade stand in the front yard, offering a cool driuk for SO cen rs, that the neighbor can't suc him ifhe runs o ut of juice. The sign was o nly an ad\·ertiscm~llt, not ,U1 olfer. I know that if someone docs nol perform her promises as agrec,·l,Hly I)f these ru le.' ,]re C
The Uniform Commercia l Code Early in the history ofthi' ,ounlry, the sliltes were (Iuite indepe ndcnt. rh cy could coin the ir own mo ney and set their own larilfs. lhis wasn't wo rk able for lon g so our I,}uuding fathers provided in th e U.s. Co nstitution th,]t the
ClMPTE~ 11 ' S ~ LES CON1RACTS AN D REMEOIES fOR BREAC H
127
fedl'ral guvl'Tnme nt wuuld he respon~ihle for coining the monl'y and providing the rules for interst~le commerce, This helped merchants in Bos/un know how to gd thcir producls to Baltimore, Howevcr, there were still is.lues ofintrdstJte commerce lhal each ~lale rcguIalcd wilhin ilS borders. Also, contract laws differed from state to state, as did commo n law. or co urt opinion~ ~bout interpreting contract teTim. For private citi ze ns., this mishmJsh of state laws didn't make J hig difference. In the t940s you still went to the lucal hardware store for YOUT furnace filters, the gmcer (or vegetable"" and the hutcher for meat. Dut for merchants, it was fast becuming an illtimid,uint', maze, So, in 1952, after more than 10 years of debate, the first Unif
Article 2: Contracts f or Sale of Goods Article 2 of the
uee: concerns the sale of goods, such as a car, a coat, or a
compact di sc. ]t docs not co ncern the sale of services, nor docs it JPply to real ~state purchases or I~ases . To interpret service and real estate contrac!.<, Y"ll ~till need t" lonk to statutes and common l.. w (cJr guidance. All .
128
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
mirmr image ruk It i~ a good rule to keel' people fmm bei ng bound to terms that one party may "slip into" the negotiation.ilut how many businesses read every word of a pUrCh,l5e order faxed to them befo re they re spond with their own preprinted invoice or shipping receipt? Such deta iled revicw offorms is not pr~Clical.lt is also not pmcticallo cre~te un individual acceptance to each kind of olfer you get in business. Everyone has his own fonnat for purchase orders, with items he needs on his limns li)r his own tracking. iLccounling, etc. ·Ihe uee provides that dcccptance can be made in any reasonable nml ncr to ,how as-'en!, eve n if thcre are some additional term, included, such a' yuu r ill1ernal file numbers and Imcking information. (n common law, a contracl will fail to be formed if the parties arc nN deta iled and specific about Ibe sobject of the contrac\' Undcr Article 2, (ontf'dch can haw opm (emH, such as no specified price, and st ill I'll· valid. This docs not mean th at ~ seller of No.2 pencils can charge S20 a pencil. When a price tcrm is left open, the code provides that the parties mean a rea.,omlblc price. Why would d company order prod uct, with an open price term?
B~cau,\e
ilnceds the 50n component p.rls it puts in its prod-
vee
aho all"w.~ uct, and will pa.~s o n the CI"I in its own pricing later. TIle pa rties 10 enter into rC'll
output (send me all you can make) contr
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ClMprE~ 11 ' S ~ LES CON1RACTS AN D REMEOIES fOR BREAC H
129
Article 2 even a llow ~ the accept,mee of an otrer tn he for addition,11 or differc nt terms from those ordered. For cxample, Deere & Co, ma y put in ,I ru~h order for 5,000 Number 553 holts to Bolts, Inc. Unfo rtunately, the compa ny ju,t shipped its last available Nu mber 553 boh.~ to Mitsuhishi, but it knows that Deere & Co. can use Num be r 552 bolts to complete its job wit h no problem. It fills the' o rd er wi th Numher 552 boh .• for a oumber of re asons: It wants (he husiness, it kn"w s these will work, Deere kn ows th ese will work, evnyo ne stays h~ppy. In business, thi s works. Merchants C'1n even moJi fy the co nt rdct krms ~nJ maintain a valid agreement. For example, my fabric store orders 50 bolts of var i· ous Hallowee n fab r ic~ o n August 30 for delive ry o n September 5, My di str ibutor only ha s 40 bolts on han d but will get more on Septe'mb,'r 10. Both of us wan t th e deal to work. H,' wants the sal e and I want the fabric. Even if I can o nly get ,10 bolts by September 5, I'll take them and he know.~ that I will. So. the di~tributor shi p$ 40 bolts now and ]0 bolts on September 10. All the sewi ng mo th er.~ and future goblins are happ)' wi th their ,election, and well hct,ne tIl\.' holid,IY (will h,lYe what! need for the seaso n, The UCC do es proviJe some safeguarJ s aga inst sellers just sendin s any old thing to fill an order. Buyers have riSht s to li mit acceptance of adJitional or modified goods within time limits, which puts the o nu s on buyers to inspect thl'ir products in a timely fashion. !n ad ditio n, the UCC doe,~ not change the extreme freedom of wntl'dct th at the law all nws. tf a specific item or term is important to a trans'Ktio n in goods, you must wri te it in the CO lltr~ ct. Specific re'luirements or the partie' written into agreem ents sti ll control ovuthe relan'd Art ide 2 ru le,•. Fina lly, thedratlcr.• of the· code trb.lto promo\c' fair dealing ,Iod high standards of bl'ha"ior in the marketplace. There arc specific Art icle 2 se"ions ahout the duty of all wntracting pa rties to act in good faith. The code als.o Tl'coSnizes the concept of an un co nscionable contr"ct, or o ne that is Srossly unfairnr onesided. The code gives the cou rts powers to remedy such unfairness. The code aiM) imposes ccrtai n st,mdards of qua li ty on ~ellc rs of goo d~ by pro· viJing imp lieJ warranties on goods. Wa rra nties will he discuss,'...! further in chapter 12.
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PA.RT II I, CO~ TRJ\C TS IN BUSINESS
Review of Contract Damages The legal remedy of damages is designed to compensate the Ilo nbreaching party a nd pu t them in >lpproxim atcly the .'ame position they would have becn in if no breach had occurr~'<.I _ 1his means th;lt when ~ contract i.• breached, the ge ne ral rule is 10 compensate Ihe party fnr the losses thai he sutTered because of the breach. Co mpensatory (bmages usually include such things as tlh.' cost of procuring "Ubslitutc performance, lost pro fits, and incidental expenses because of thc breach. Consequential damages, or losses that ar ise as >I conseqnence of tbe breach. may al so be applied if the breaching party knew of your specific ne<,d.1, and there arc addilionallo,,-'cs that lI ow fro m Ihe "reach. Punitive damages, or amou llts to punish th e wrongdoer, are not usually awarded in contract ca-es; those are llmiled to tort claim s. ['o r example, I wanl a particular c() lor of pink geranium for my front porch. It is hard 10 find. La.~t year, Grel'n Garden had so me perfoc t l. igh t Pink Ame ricana ge raniums, so this spring I went in the shop ~!ld re,;.:rw d and paid for eight plan ts at 53.50 per plant. Now it is May and I am re~d y to fill the flowe r box. However, Green Garden d id not receive ~ shipment of Light Pink Americana thi s year. All they have is Dark Pink Amrric-a na which rC
Contract Damages in Sa les Transactions Let's fdo.' it busincss pl'QpJe an: ou t to make a buck. As much as everyoO\.' wants to honor their promises, it isn't always economically or co mmacially feasible. In the fall of ]996, if I would have had a contract to ship my SOO Tickle Me Elm o dolls to Toys "R" Us for 510 a doll , I would ha\'C been despondent. 'Ihose dolls wenl for upward ofS2,OOO a pkce in the Christmas frc n~.y. Even if r cu uld have gutkn o nly an awrd gc of SI.OOO per doll (in
•
ClMPTE~ 11 • S ~LES CON1RACTS AN D REMEOIES fOR BREAC H
131
other ",ord.'\, jf! would've hreach~oJ that conlract). I ",o uld ha" c "'alhoJ ,Iway with almost half a million dollars. In that sit oation, I would have wanted to know what w uld happ en to me if I brea",hed my agreement with Toys "R" Us.
Tickle Me Elmo may be an extreme example. hUlthcre arc good businen reason~ to breach contracts all the time. 'Ihe uee in Ar1iclc 2 pro vides clear guidelines for the conSCljuences of doing Sll, imd it rcc"gnizes th,1l 0 11 occas ion it makes good eco nomic sellse to brc,\k a deill. Also, wi th the
fa~t-movillg
naturc of goods and wmmercc.
Articl~
2 recognizes that
somt'tim~s a
Ilwrchalll callno t perform on a promise because tlw t',oods arc not uv,lilublc, des pite a good faith drllrt to pl\)\'ide them. The code explains
how d amages in Ihis situation should be handled. The hasic rule of compensatory damages is applicable in (()ntr;lCt~ for sales of goods.. but sometimes.. rou may need to figure out what really compensates a busin ess for a loss. To illustrate. let's assume The I.ady's Shop orden SO of the latest neoncolored watches from T ime of Your uk Inc .. for S IOO per watch to be d elivered on J\pril 10. 111at date comes and goc', and no watches arrive. fo r three days the owner, Eve, attempts to confirm the order and shipment. finally Ew spend~ three more days and $60 in long distance phone caUs trying to find an alternate supplier. She locates SO neon-colored watche,~ at Moments, Inc., for $130 each. She has saved $50 in shipping, however, be cause Time of Your Life, Inc., was requiring Eve to pay this and Moments, Inc.. included it with the order. What will compensate Eve for her los,? She expected to pay SIOO per watch time5 50 wMches. or S5,OOO plus $50 ship ping. for a t"tal of$5.0S0. Sh~ did pay S l30 per watch times 50 watches. or $6,500. 11le di!feTl.'lKe is $1 ,450. She .11M> spe nt $60 on phU1w (".Ills ami lost o ne week's worth of sales. Is Eve cntitI~oJ to nothing beC"Jose sh e didn't pay any money down, or is she entitkd to Sl,ol~? Yon could aT81u.' that she should get nothing because hefore she placed the order, she had no watches.. and aftcrshe placed the order, she had no WJtches. I lowever, if this were the mle between merchants, how coul d any husiness ever rely on huying or selling their product, until the deal was don e? 'Ihis would rcally put th e br.l!':cs o n business. Also. sa les of goods. especially Silk' of goods helween merch;mts, on have widcre,mS'-"qllc IlCC5. In
132
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
thi\(a,;e, Eve ordenxlolher llIerchandi.'IC for her slore 10 go wilh Ihi.~ accc.''' ... ry. Shc lost o\'crone wcek in sales lime 10 procure allernale product. Her budget for Ihis dcpartm~nt of her shop is alfl'C ling her ability 10 order shoes. And \,'h al aboul the $60 phone hill? What ifFve did not try 10 fi nd replacement goods? Could she suc the supplier for the $5,000 o riginal conlract amount? When the sener breaches Ihe contract, (o mpen.s.atory damages are figured by Ihe market price Ih,lt Ihe huyer must pay \I) cover Ihe mis., ing product, less th.. contract price that was agreed upon. In this case, the market price of the replacements " 'as $6,500, and this is $1,450 different than the conlmct prke with Time o{Your Life, Inc. In addition, Iher" was $60 spent nn phone hills, which werc dir~'CtI)' incurred hccauSl' of lhis hrcach of conlraCI and should be addi.'d to Evc·s damages, for a 10lal ofS1,510. Eve should nol get a windfall ofSS,ooo, which is the original con tract amount. This measure of damages is punilive, and no ,;ellerwould ever commillo fin orders unless he had the goods in hand, with this potential liability hang ing over his head. The lo~t week of "ales is so mething thaI Eve will have to ;lbsorb ~s a COSI of doing business. Who can tell if any watches would baw sold io thaI time or lIot? lbus, when a se ll er breach e~ a conlrJcl for Ihe sak of goods under Arlicle 2 of the vee, Ihe measur~ of damages is the cost 10 cover Ihe breach. Wh)' \\'ould a ,;ell a f~illo perform his (omract? It could be becau.se he ca n not provide the goods he promiS£'d th rough no fault of his o\\'n, such as shipping delays of component parts. It is harsh to hold a ,;elkr responsible fordamages ifhe did all he could, bu t remember, he will probably be receivi ng co m l'e n ~tj on for the bIT,teh of contr~ct he ,utTered, and he wa~ free 10 refr;l in from co ntr~cting until he had ti ll" gnods in his ha nds ifhc wanled to he ex lrd safe. Sellers lake risks to keep commerce mov ing, and they pr ice acc"r
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ClMprE~ 11 ' S ~ LES CON1RACTS AN D REMEOIES fOR BREAC H
Article 2 docs not lel
~
133
jilted bu yer sit back and gl't unjust ly enriched,
'Ihe nonbl1.'aching party to a cotllr.J.ct has a duty to mitigate his damages. This mean s he must try to reduce or lessen the dam'lges by t,]king steps to preve nt the loss by gelling replacement
produCl.~
for a slightly higher price
or using a Icssexpens ive bot compatible component part. Eye can't mitigate the breach by buying watches for $500 a piL'ce. 'Ihis is not reasonable, and mitigatiQI"I must be reasonahle. Ifit h repl~cement
iml){)_~sihle
to mitig"te Ihe loss wi th
gO{) ds, contract damages wo uld he figured on the cnntr,l(t
pr ice. In this case, since Eve paid no down payment for the merchandi se, hc r damag~s would be limited to the $60 expense sh e incurrcd because of the cnnlrJ ct hreach. If she had made a depmi t o r paid for the watches, she would be e nt itled to a return of her consi deration given. Wha t if the tables were tu rnl'd in The Lady's Shop situat ion? W hat if, alier ordering thc
n~'<.)n
watc hes. [I'e changes her mind and calls Time of
Your Life, [nc., on April 6 Jnd cancels her order? Time of Your Life, inc., now h~s to milig~te itsdam']ge. by trying to rescll th<' product. If they can re ..,."lIlhe watches for more than $ I 00 ~picce, they will he happy and kecp the honus they made due to Eve", hreach , If thl'y
C~1l
resell the ,,",Itches for
SIOO apiece, they will cOllie out even. If they sdl the watches for less, they will have lost profit. I( the merchandise se lls (o r $75 apiece, the damages neces ....ry to
compen.~a te
Time of Your Life, Inc.. are $25 per watch times
50 watches, or $1,250. Why would a buyer breach a cont ract for which they arc Ii,tble for $ 1,250 in
d
One rcason could be that they no longer
need the matcri"ls, Perhaps the matching neon ()lIllits arc on hack order, or pe rhaps fashioll ha~ changed, [t could he cheaper to pay damages than spend
S5,000 on merc handi.e that y')\] know will not sell. Perhaps the price of ne,"] wat ches has gOlle down signifi c'l!ltly, ~uch that Eve can now gd 50 comparahIe watchc.~ for $20 'lpiece. She could hreach her contract with Tillie ofY"ur Life, [nc .. spend $ 1,000 for the s:.lme amount of merchandise, pa), $ 1,250 in dan1Jin, onl'coul d argUl' tha t there arc no damages forTime ofVour Life, [nc., hrcause before the cancellation they had 50 watches and after the cancellation they had 50 watches. but this approach "'(mId allow buyefl' to cancel t heir contracts for no b"Ood reason. On occasion, goods arc so speci al that they an' essentially of no usc to an),o ne but the co nt ract parties, lu that instance, ~pecific performance is
134
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
a rl'mcdy that is ,wailable to the injured party. Spedfi' perfimnwl1:e i_, the equitable r~quest to a court to order the exact performance of the contr~ct bcc~uS-e damages will nol su1fice. If I special ordered a unique Volkswagen Beetlc with a pink polka dot cxterior and hlue fur interior, I'm probahly stuck with it.
THE LAW IN ACTION Ros~ is in the Huwer business now. Sh~ is a merchant. and sh~ is ordering from her wholesale distrihutor. Con trdcting rules can be relaxed for the sale of goods between merchants, and this is a good example of how that may occur. Rather than stand on th e formality of sending an acceptance to Rosc's olfer to purchase, the wholesaler sends a shipping r.:ceip!. This culs 10 Ihe chasl'. lhc conlract is a done dC'al and the mcrchandisc' is on the way. Rather than detailing the price on each order. the wholcSilkr indicat<'s '"marke( price, which is Ihe reasonahle wholesale nlle for the flowers that day. Whatever lhal pricc is, and Rose will know from the invoice Ih;lt acco mpanic.~ the order, she will charge the cu~tomeT accordingly to maintain her profit ll1ugin. Ir il is Ihe market r,lle, customer.' willnollhink Rose's prices arc OUI ofHne. Her 111.;rchand is~ is wdlon its way and will h~ dv~ iI able in plenly of lime for the St Patly's Day cel~bmlions. If this casualness mak~s Rose nervous. she can sti ll request a formal ac cep tance and confirmation orthe day's prices hcfoTe any orders arc placed. You alwar.; have thc righllo ask for spccifics that arc imporlanllo you in ,ontrJcting, hUI it may slow you down a bit.
TEST YO URSELF 1. Jane wa5 graduating from Millikin University. She arranged 10 lease a storage unit in Seff-Store for SSO per month to keep her (Ollege items in Decatur, Illinois, until she found a job. She paid a deposit of $1 00 and was set to move her items into storage space H-3 on June 1. However. on May 25, Jane got a job offer in Stlouis. She wouldn't be needing the storage after all and had 10 can cel the arra ngement. How does Art icle 2 of the UCC handle this contract breach and the damages?
ClMP TE~ 11 • S ~LES CO N1 RACTS AND REMEOIES f O R BR EACH
2.
135
Nick has contracted with Ed to buy a set of 12 antique lion figurine s for $600. Nick had loved lions his whole life and he had never seen a collection like this; it con tained the exact figurines he needed to complete his 10o- piece set. Two days before Nick expected delivery. Ed called to say that he had been offered 51 .000 for the pieces and Nick would have to match it or lose out. What can Nick do?
3.
Pat has always been good at spotting trends. Last winter her leather goods company ma de huge purses studded with nail heads and adorned with chains. She had a modest contract with Saks Fifth Avenue to provide 1,500 purses for spring at S 100 each. Saks prepaid Pat for the order. Saks p lanned to retail the purses for 5200 each. By March. every major department store was ordering big purses (rom Pat (aster than she (auld make them. Today, she could wholesale those 1,500 purses for $2S0 each. If Pal cancel led the Silks order
Question Futu re Cha pters Wi ll Answer 4. Mr.
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PA.RT II I, CO~TRJ\C TS IN BUSINESS
Contract~
between merchants, Or those in the business of buying
an d selling products, must move quickly. The Un iform Commercial Code is a compilation of rules about contracting that was designed to promote uniform and predictable agreement5. The UCC is not law, but it ha s bee n adopted, in some vefs ion. by each st
,
"
Warranty Contracts and Products Liability h, for the old days, when everyone lived in Mayberry, USA. If your car
O
needed work. you went to Gomer Pyle. He fixed everything. You
didn't go to Goodyear for tires , and Midas for mufflers, and Ziebart for rustproofing. If you had a complaint about your haircut, Floyd would gladly fix
it. If you needed a fa ct from the coun ty cle rk, you we nt to Howard Sprague and gal a per sonal , although windy. answer. No voice mail there.
Our world d oesn't operate the way Mayberry did . Many of leday's purchases come with warranties thaI includ e pamphlets of information in
microscopic print a nd the .etum postcard to verify th e date and place of
pu rchase along with your age and income information. Is the wa rra nty effective jf you don't return all that stuff? How do you know who to go to if the product isn't right? We are heari ng about 50 many more product5 Ii
138
PA.RT III, CO~ TRJ\CTS IN BUSINESS
v.[jlj AT'S I A ~E A D Definition of a Warranty The Relationship Between Warrant ies and Products Liability Types of Wa rranties
Products Liability Claims De(ec t ive Manufacture Defec tive Design FaliuretoWarn Defenses to Products
ExpressWarranty
Liability Cla ims
Extended Warranty
Strict Liability
Implied Warranty
IN THE REAL WORLD In 2005, a diner at a W~ndy's re.
KEY CONCEPTS A warramy is a guarantee give n by one of the contr~ctjns parties Ihat makes .
CHAPTER 12 • WARRMHY CONTRACTS 11"10 PRODUCTS LIABILITY
139
who arc ~p endi n !\ mone)' U ll Ih,· product wan t a'sura n ce~ th,11 the .'lClier wlll stan d b~hind the product if it does not perform as promised. No t every cont ract situation involws a warrant)'. To attach to the contract. the promise has to be in writing and has to be give n at the time of the purchaSl'. Ifthe wr itten agreeme nt is silent on the subject. it is likel y no warmnty appli es. Sometimes ,l.dlers ,l.pecificaUy indicate that Ihere arc no guanlnlces ilhoOllhc cmllrad and Sl'1I ,1l1 ite m as il. 1his means th~ bu)'e r belief look closely occau~e he is taking th e item wilh all its faults.
The Relationship Between Warranties and Products Liabil ity If a wa rran ty is involved in a cuntrJct, what the buyer gl.'ts is a promise that thl.' Sl'I1 cr wil l indemnify the buyer if the facts warrJn!cd prove untrue. To indemnify means to make good any loss or da mage that occurs. It is different from ,I promi~ to pay compensatory damages. If a .'tove warranted again." pil,)t light failur~ CdUses a gas le;,k and exp losion he ca use the pilol lighl m'llfuncliulls. Ihe wamm ty promises to m,lke the pilot light right wit h a repair, rcpl~ ce mcnt, or maylle refond of pu rchase price_It docs not promise to par for a nell' ki lchen because of the ensuing explosion . A warr-d nly provides a contract reme dy to indemnify, or make righ\. Often a oreach of warT:lnly results from a malfunctioning product, Such a product often causes an ,Iccident or injury with penonal and property damages. So. the breach of wa rrJ nty hegel.~ a tnrt claim. 'Ihe tort claims that result from malfunc ti onin g items Jrc ca ll ed products /ialli/ity claims b~caU5e they invo lv~ products tha I havecau'ed liability forth~ se ll er, man,,facturer. of distributor.
Types of Warranties 'lhere arc three types of wa rrJntics you arc likely to come JCross: cxpres.s . extended, and implied. Let's look at these ill more detail.
Jo:.xl,rcss Warrlllzty_ ju,t a' the name implics. Ihis is a warn,nly created hy wo rd$-writtcn wo rds. It co uld oe olfe red to guardntce the proper performance of the ikrn for a period of time. II could he offered to assure Ihe
140
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
buyer tlt,lt hi,~ "sat isfactio n is guaral1!ced'" The fact that a warranty appl i e.~ to an item may make a buyer fed morc confidcnt abuut the reliability or
longevity of the scller's business. The (act th,lt a warrJnty is offered could case the pain of shelling out a lot of money fnr an item. They can he nlfered for a year, a number of years, o r the lite of the product. WarrJntics fo r the life of th e compa ny may M"em like a guod deal. hut dep ending on the con dition of the company, that term may he very short. Warranties for the life orthe product arc usually for the usu,lllife ofa usual product. Gnmdma canno t take that apple core r back to the hardware store 50 rears later and <'xpccl a rcplJcc mcnl. Since a warranty is a !crm olfcrcd by a seller, the ~cller i.~ free to sive whatever protection he wishes, Therefore, it is importa nt to read the exac t terms of the warranty. The sellrr may require thaI you r<'lurn an item to a manufacturer instead of the seller. The seller may exclude some aspects of repair from the warrJ nty, it may warrJnt parIs, for exa mple, but nOllabor to fix an item. Thi ~ type of protection i~ sometimes calkd a lillli'ed warrllllty. In addi tion, a s.:ller may require you to usc Ihe pr",J Uct as dir~cted, or th l' warra nty wiU not appl y. And finall)'. a seller co uld m~kc ,1 w,lrraoty nontr~ns fe rab le or appHc~b le un ly to personal, not business, usc of the item. WarrJnties arc available 10 read before a purchase and arc often post I,d online at product we hsiteJ. Unless the wa rra nty is nontmnsferablc, it attach es to the product, not the person buying it. So it is not necessary to return the postcard with deml)gr~phic infurmalion to make the warrJll ty applica hle. "These cards can help you and the co mpany determine when an ite m was purchased, bu t a "dies receipt docs the samc thing. It is assumed that most items in C<Jl1l1l1 er(c loday will haw multiple users. Others driv(' my car, a neighhor somdime~ u~e,~ our lawn mower, and on occasion, my son l'ven throws his ow n load of bundr )' into the washer and dryer. E.~tcllded
Warranty. An cxtcnded warrant)' is reall)' not a warrJnty at all. It is a u rvice COll lmel. If a seller otfersa limited-time warmntyon a product, say one year. he may aJr.o offer an extended warr.lnty that would provide addi tio nal COWrJge on repair costs beyond Ihal lime. This addit iOllal wa rrJnty is sold. u., uallr at the lime of the origi nalp urchasr. Ilo"'cvcr, it is nol a WarrJllly
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CHAPTER 12 • WARRMHY CONTRACTS 11"10 PRODUCTS LIABILITY
141
dea l; it is cxtrd conside r-Ilion paid fur an addili onal promise. [I may cu,1 I~ss than obtaining the service from another if th~ product needs repair, and it m;IY give the purchaser a certain pe,lcc of mind, bUI it is a service contract, nevertheless. Imp/it'd Wurnmty. An imp/i(J wi/mmty is unt that ari,\.ts hy opemlion uf law. This means the warmnty is imposed by a law, T"dtha than hy a wrillen promise from the selle r. Bee-duse suciety wishes to protect purch,lsers, who
rely on the claims of sellers, federal and Slale laws have been passed to require basic fitnes.' in the marketplace. In addition, thc VCe, in Article 2, which deals with sales of goods, imposes minimum guar-Jotees on sales transactions. An implied warranty promise51hal the product is merchantable- that i.s. that it i.s fit for thl.' ordi nary purpo",e", for which it i.s used. So, my hairdryer should be fit 10 dry hair. my lamp fit 10 light my mom, and my fan fit to cool my house. I should not expect wires h,lllging o ut oftht hair dryer or a loose sucket in the lamp or ope n hl~des whirling Hound Ull the fan. nlis illlplied warr.lnty of II1I.'Tchalltabilily can also pmtl'C\ the s.:l1er because it also means that [sho uld nut a,;,;ume my hair drrer i~ appropriate to steam the wallpaper off my kitchen. A pmduct should be fit for what it is intended for, and ifit is misused, pcrhaps thc seller is not liable for damagcs that result. Article 2 of the VCe. in section 2-31 4. se ts forth some tests for merch;!ntahililY in additio n to fitness for the purpose for whic h the product is s()IJ.lhc.\c conditions "f llIerchanlilblllty include the following: [. Goods should conform to any promises or statcnl<'nls of fact made on the contain er label 2. Goods shou ld be adcqu;!tdy packCil and bbclcd. 3.
Goods should be of the ~me kind, quality, and quantity within ....dch unit.
4.
fungib le goods, such as grdin or coal, should be of aver,)ge quality for the kin d of goods described in the contract.
5.
Goods should conform closely enough to the description in the contract to be acceptable to others in the trade or business.
The law also recognizes Ih;!1 con.~umcrs IheSt.' days may not he as knowledgeahle ahou t product... since there are so many of them , as the .~rllc rs or reta ilers. $mnetimes I think 1know what pmduCllnced. hut I alll not sure.
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PA.RT II I, CO~ TRJ\CTS IN BUSINESS
Not long ago,! wanted to repaint my hathroom ce iling.! know that hathrooms
n~ed
dtll"".tble paint becallsc of the moisture and! know that there
arc some products that claim to retard or prevent mildew stains. Ol fl go to the hardware store. I stand in the paint department and ask a 17- year·old boy about bathroom pain\. He points me to a product ~per fcet'· for my job-mildcw-ITsistant. stain-resistant. scmiglos:;., low-odor paint. I tdl h im that my bath room ceiling h'l~ a small cl""Jck in the plaster and [wan! the paint to covcrthHt uI' .' 0 it doesn't show th rough. J Ie tells me this is ~j\l"'t the thing.n [huy a gallon. III this situ'Ition, all implied warr~nty, offitlless fo r a particular purpos<,. ha s been created. Whenever a buyer asks a se ller or manufacturer f,.r advice or counscl about a product, such that the seller k nows Ihe particular purpose the item will be used for, and if the sclln gives spl'cific advice about product choice based on the particulars. a special implied warranty is crealed. It is more than just a guara nt ee that the product is fit; it is an aSSlll""JllCe that this product will ml'et your specific rl'ljuiremenls. This w,lrranly can be created by a 1 7-y~ar-ohl boy on Ihe sales lIoo r wi th a co mment sllch as ~jllst the thing.n This w,nranty is drcctivl· against the retailer and the manufacturer. so in clfect, manufacturers shou ld know who is selling their products in the market ,md what they are saying about them. bcc;mse the cnuld be binding the manufac turer to warr.lntics. Therefore. manufacturer's represe ntatives visit rdail sites regubrly to see how thcir
,~alcspeoplc
proJuch Hl' displayed and to educate the Sillc5 statf on the correcl uses of the items.
·Ihe uee grJnts another implied warranty that protccl5 buyers. Thi~ is the implb.1 warrunl)' of tille. whic h means that in a sale o f goods, the seller implicitly warrants o r guardl1tees to the blly~r tha t Ill' has gond title amI ownersh ip to the item being sold and that the goods arc free and clear o f any claim by another. Therefo re, buyers ".tn be co nfident thai upon giving their consideT
Products Liability Cla ims Products li ahility claims arc rdale,l to
warrJntie.~.
As we saw in
chapt~r
6,
the law imposes liability IOn parties for nC!;ligcllce. In a .'klies transa ction, if an item docs nOI perform as pmmis~>d lOr expec ted, negligence co uld
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CHAPTER 12, WARRMHYCONTAACTSIINOPRODUCTSLIABILITV
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he involved, in Ih'ltthe manufac turer or seller could havl' hreachl'd a duty to the co nsumer and caused damages. Perhaps someone was no t as carefu l .IS he should have been, The baby c-.!rrin manufacturer should have done more tests to dio;.cover that the carricr tilts at a dangefl)U_~ angk when removed from a C.l r, "lhe bike helmet manufacturer should have know n that the chinstra p would snap on impacl, causing the helmet to tly otf. 'Ihe soup manufacturer shollhl have checked oth er ba tches of tomato ';1)111) made Ihe Silme day to know that too much S
primas of th is lIlake and nwdcl wurk just fine, hut mine is a bUlllmer. It is alwaysgcll ing a paper jam, makes lerrible gri ndin g noises, and is (xlI-"mely slow to sian a job. The pankulars c1aimlhal it prints 33 pages per minute, but r ve never s.:e n that happen. rve had my comp uter geek friend tu my house two times. so I know I didn't goof up the installution. Still. I lose connection with Ihe netwo rk all the time. I got a dud and the man ufacturer or seller should rep];Ke it. Unfortunatcl)', defective manufacture can ap ply to items more serious and dangerous than my printer. Tainted food is o ne exumpk .md the damages Gill go far beyond replac in g a m n of soup. Ddcclive manufacture of an alllol11ohile ca n c.!use dea th s 3ml signiflcallt
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PA.RT II I, CO~ TRJ\CTS IN
BUSINESS
property damage, To a"o id Cl;lilll.~ of defective manufacture, .~dlcrs should keep production standards high and inspectiun vigilant. As in other dam>lge si tuations, the buyer or uscr has a duty to mitig'lte damages, '\0 if you koow the hrJkcs on your car arc not de pendable. per· haps you should refrJin from using it until you get it inspe<:ted. Howcver, this mitigation might invoke other costs-a rental car in this instancc-so damages e
Defec/ive Design. A products liability cas,' based on dejectil'C dC$ign is hold ing up the whole of the product as fJulty. A manufacturer docs not have to design an absolu tely safe product. for example, table saws have to he sha rp. I [owever. if the design of an item is unreasonubl), da ngerous. such that it will Cilu ,~e J amages to the puh lic as ma de, it ,. hould he taken otf the market or redesigned. l'or example, a tahle saw wi thout a hlade guard could he unreasona hly dangerous 10 distribute to the public. TIle manufacturer kn ows that accid,'nt.~ will hapP"n >lIHlthe manut;Kturer also knows that the small adJed expense of a blade guard could avo id must of the risk. The law requires that a manufacturer design products frn' of unreasonahle risk to protect the buyers who arc no t as know ledgeable from great harm. Often poorly designed products do make it to the market, only to reveal some defect, such as a toy with a part children can choke on. [n this inst'IIKe, manutacturers u,~ually rccdll the product to prevent damages cases, and the product warranty reimburses the custnl1lCT for the cost "fthe item. Failure to Wa rn. A products liability case based on fa ilure 10 warn can occur if a product caused an injury that the manufacturer failed to warn about. There is 110 duty to warn against obviolls dangen;, such as «This product is sharp" on a paring knife's pacbging. '[here is also no duty to warn against misuse. such as interior house paint con taini ng a warning «Not suitahle for exterior usc." A suitabk warn ing co uld be «Do not in hale fUllles. Use outdoors ()r in well-ventilated area," [n to day's litigious society,
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we arc seeing more and mnre warnings on more .Hld more pmduCIs, even about obvious situations. 'Ihese are probably the outgrowth of some lawsuit or claim in the past. and manuf;lclurers do get clrricd away with these labels nn occasion.
Defenses to Products Liability Claims As with oth~r neglig~nce claims, a manufJCIU",r can us~ a number of defensc,' 10 Iry 10 avo id liabilit y fo r products liability cbims. One COnlnW Il defense is obviousll(·ss.ln oth~r wurds. any reas(Onahlc person should have known better than to blindly CUI through that waH with a hacksaw. 'lhc victim's hums n:sulting from culting through a HI'e electrical wire were CJ Uscd by his owo ncgligence, not that of the hacksaw manufa ct urer. Another common defcn se is alteration, or misuse, of the product. This defense never fa il.l to remind me of my fJther, who was forever fiddling with everything. I Ie would rig up an ex ten sion to this or add a fan to that. 'Ihe words r(ll50nl!blc Imd ort!inury jjSf were not in hi- vocabu lary. If yuu lISC an iron fire pok~r for a fly swatter, yo u may have holes in your walls. Finaliy. a manufacturer coultl defend igelf 'lgain.lt liability if a case is brought too late. Slatute~ of limitation appl), 10 products liability cases. While the exac t timc limits YJry from statc to state. an injured party (;Innot sit on his rights indctinitl'ly. All parlks dcserve timely notke of an injury, the right to oo!lect evidence before it becomes ~tale, and the ability to exam ine the product in question.
Strict liability As m~ntiun c d in dUI'h.'r 6, Ihe la w so melimes imposes liability on a party without rcgart! 10 n~gligence. This is called srrid liubility. The law imposes it on manufacturers and dis tributors of ulirahazart!ous or extremely dan gerous products.. In other words. if a child drowns in a pool of water in a rock quarry, it doesn't malier how many NO TRESPASSING signs the company hung on the high fences. The company. which dcals in a dangerous tr...le attractive to children. will he liahle. Likewise. those who d~al in manuf'l cturing cxplo,ivcs o r keeping wild allima ls .lTi.' liahle for accidents and injurie.s regardless offault.
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PA.RT II I, CO~ TRJ\CTS IN BUSINESS
THE LAW IN ACTION A hum an finger segment in a bo wl of chili is a hreach of an implied wa r· ranty of fitness. Chili 5hould be fit tl) cat. 1\ breach of this warranty can caose the manufacturer of the ch ili tn he liable, as well as the rda il seller, After Jll, Wendy's had a duty to c hl'ck its product for fitness before sl'rving it. Hnweve r, ~II the breach of warranty dncs is give the customer a refund on the bowl of chili or a replacement bowl, her choice. Did the customer (Jce ot her damJgcs that could liab il ity claim? Can ., he
~sscrt
le~d
to a products
a claim based on negligence for serving;1
tainted p roduct? To prove negligence, the cll sto mer has to 5how a duty, hrcach, d;unage", and ~ the hospital, no r di d she incur medk,ll e.-;penses or lost work tim~. She may be oil' chili for a while, but that is undentandablc, She could not have acquired HIV, hepatitis, or a virus because the finger was cooked to a safe tempemture. No damages, no tort. Ilowevcr. tha t did not stop (he customer from considering a lawsui t or Wendy's from talking to her 10 try to scttk the matter withou t li tigation. Aft er three weeks of investigation, it was discovered that the cu.~tllmer h ad a long history of filin g lawsui ts against companies. Wen dy's co uld find no problem in the (lI,lnufacturc ur dislrihu tion of the ch ili that coul d e.-;p lain the event. The incident was affecting Wendy's bottom line. In addition to the noneKiste nt chili sales, Wendy's restaumnts across the country
W('fC
experiencing declining sales, which resulted in layoffs and red uced hours. Further investigation revealed Wendy's had a good defense to any claim of products liabil ity hccause forensic tests showed that the customer had ncver hiUen down on the finger. It (urns ou t sh~ planted the finger in the chili her:;clf. She is now serving nine years in prison for e.-;tortiol1, a nd h~r husband is servi ng moTt' (han 12 reM'S. H~ got the severed a coworker who had lost it in a workplace acciden t.
fmg~r
from
,
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CHAPTER 12· WARRMHY CONTAACTS IINOPRODUC TS LIABILITV
147
TEST YOURSELF 1.
I was ready for my lim car. My dad looked in th e ads and found the perfect starter auto for me- il 1972 Ford subcompact cillied a Pinto. It had a lot of body rust, which we ti ll ed and sanded before taking il 10 Eilrl Schieb for a $29 pilintjob. Soon I had my bright yellow Pinto with black interior. My sister thought I looked like a bumblebee driving around town. I loved that car, even though Pintos had some problems. Apparently Ford had placed the gas tilnk in a posit ion that was very vulnerable when rear-end collisions occurred. It turns out th e doors weren't designed so well either. They tended to jam up in accidents. There were milny ins tances of deildly fi res. Some cillied the Pinto "the barbeque thilt seil\S four~ Is this iI wilrranty problem? Express or implied7 Could a malfunction result in a products liabi lity case?
2.
My father-in-law, Floyd, had a window and awning business. He was working on a hou, e and fell off his new ladder. "It just gave way; he said, He fell onlo a concrete patio and broke his jaw. He had his jaw wired shut and a couple of really black eyes for weeks, but he wa s lucky_ I WilS feeling he might have a warranty ilnd products liability claim because of the ladder's malfunction. When he was abl{> to talk about it,llearned he had put the ladder on a front stoop, like a step, and as he climbed higher, the ladder switched poSitions, fell offth{> S\{>p, and caus{>d th{> fall. Do{>s Floyd have a good warranty Or produclsliability casel Why or why no t?
3. My mother was having company vis it and was sprucing up a little in the living room. She bought the product you spri nkle,like powd{>r, onto yo ur carpet il nd then vil<=uum up. It is supposed to make your hous{> smell good. Mom had sprinkled, and now she was vacuu ming, going backward as she did it. Whoah- the foots \ool! Mo m fell over th e stool ilnd broke her wrist. She cal led me from the emergen<=y room and said, "ElIl!n,1 have two things to tell you. First, nl!Vl!r vacuum oockward, and second, that can should have had a warning on it say ing, "Do not vacuum backward. You could fall." Is Mom right?
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PA.RT II I, CO~ TRJ\CTS IN BU SINESS
Brain Teaser 4.
It appea r5 that Daim ler-Chrysler has struck a dea l with Ce rb eru5 Cap ita l Management to buy the U.S. auto division, Ch rysler. I am sure g lad I did n't just buy a Chrysler-mad e auto. Now a ll those new cars don't have warra nties anymore. True or false7
Review and Question Futu re Chapters Wil l Answer S.
In May 2007, Purdue Pharma,l.P., th e makers of OxyCo ntin, agree d a p lea deal which requires th em to fX'y nearly $20 million to p rosecutors for false marketing. The drug OxyContin has been
to
sold wide ly in the last six yea rs as a pai nkille r that is less addictive, less subject to being abused by patients, and less like ly to cause wit hd rawal than other prescr iption pa inkillers. In fact, the company knew from the beginning of its sales ca mpaign that physician focus g loups disagreed wi th this claim. Do any OxyConti n customers have b leach of warranty or products liability cla ims agains t the company] If the cases were not reso lved with a plea, how would the government put the corpora tion in jail if it we re found g uilty for fraud? Would anyone be put In }all? Answers can be found on pages 224-226.
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K'E tJ P,OINTS TOl REMEMB.ER . A wa rranty
i~
a written gua rantee
gi~en
by the se ll er at the time of
a purchase to guarantee ~ome level of performance to the buyer. A warra nty can b", to repair Or repla ce a malfunction ing item for any reason or under limited conditions. Breach of wa rran ty claims a re based on th e cont ract
Warranties of fitness for a particular purpose can be crea ted at contracting if th e se ller knows the buyer's specific needs. Products liability claims are tort claims based on negligence. Manufacturers of products can be negligent for
defecti~e
manu -
facture, dt!fective design, Or failing to warn of a haza rd . Deft!nst!s to products liability cla ims include obvious danger, alteration o r misuse of th e product, an d statute of limitations. The doctrine of strict liab ility imposes liability rega rd le ss of negligence in lim ited circumstances.
,
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Urheberre<;htlich ge5chlitltes Material
Secured Transactions refer
I
\0
5€cured rransaClions as a promise plus. The promise relates to
the underlying con tract or agreemen t between the parties to do
something-usually provide financing for an acquisition. The plus refers
to some secu rity, sometimes , .. lied co ll
a wong credit history. is ilsking for
it
101 of money, or is in a business with
a low profi t margin. In this chapter, we will analyze the requirements of
promise plus agreements.
Types of Collateral
BUYE-'s in the Ordinary
Attachmen t of Colliller,,1
Course of Business
Perfection of Your Security Interest
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PA.RT II I, CO~ TRJ\CTS IN BUSINESS
IN THE REAL WORLD Millie. a talented ~Ild creative 52-year-old, has bt~n sewing for years, She also kn ows everyone in town. Over the years .he has uscd her sewing and emhroidering skills to make children's do th es. decoMe shirts for the ci ty's bowling Icagll~s. and provide seasonal accessories. such as eyeglass cases and qUilted bags, to thc local departmcnt storc. Shc has bccn asked to expand her business to produce eyeglass (".lSI'S and bags for 20 of their "'lidwest stores. This single o rder for ove r $60.000 worth of wholesale products should net Millie a profit ofS26,()OO. Millie wanh to IioCt lip the business from her home. which already has d 5Cparatl' cntr;mcc, adee to repay the loan. Docs Millie han' anything to otfer?
KEY CONCEPTS Con tra ct law requires the pJrties to a bargain to perform on their prom ises. As we know and have discllssed in Part JJ of Ihis book, parties to a contract do not always do what they pro milioC, In the event of a breach of contract. the nonbreach ing parly has th~ right to r<->cove r damages agains t the wronl)
OMPTE~ 13 • SECURED TRANSACTIONS
parties, Ihi .• is 001 enough. They want Ihe pmmise,
plu~
153
collaleral. The law
of secureu lr~ns:tClions is all aboul collateral, anu the rules for crc~tlng se· curity iotefl.'sts arc fouod in Article 9 of the Uniform Commercial Coole.
Types of Collateral CoUalero l i~ ~omethiog. u$ually an ils,"'l of il<mlC kind, that a con tracting party has recourse to if the contract is breached. C"llater,l l t'1kes many limns. It can he an item that the co ntra cting party tak!.'s possession of while th!.' promis!.' is outstalluing. Forcxaml'k my brother ICflds me 5200 until Ju ly I, .md I give him my Movado wristwatch to holu until I pay him back. My brother is holding something o f va lue, anu if I breach our agreement and do not re turn 5200 by July I, he could h'ep the w'1tch, which is worth at least 5200, o r sell the watch for cash and get his money back. lIe docs not have to sue me to get me to enforce my prom i ~; hc is holding the solution in his h,mds. It could also be all ilSSd that Tt'pTt'~nts cash. for example, I h"I'c a life illsuTallce poli cy thilt has a cash value of 5800. I could give this tn my hrother 10 hold until I repay the $200. If do not pay him as agrcl'd, he could set $200 cash value out of my life insurance policy and be in the position hl' would have bel'n in if I hadn't breached my promi~c. Other instruml'nts that Tt'PTt'~nt cash that can be used as collateral are drafts, checks. notes, and certificates of deposit. You can also pledge, or promise. s.o me goods to repay the d cht. If I had a lO.speed bike and helmet. I could pledge these goods to my brother to c"nvince him to mak<' me a $200 jO'ln until July I. 1-1e i~ get ting more than just my promise to repay him; h!.' is gdting the 1,'Sal right to take possession of my bike and he lmet if] breach my prom i$('. In ,1 business con text. gouds oft~n include it!.'ms ill im·emory and raw materials. Documems oftitlc, like the title to my automobile. can also be coUat· era!. !f I pledged my Cd r 10 my hrother as collateral for my loa n. I could give him the titl e to hold until the money is repaid, I-Ie could use the title to reduce my CJT to cash- that is, scll it-if I do not pay in a timely manner. In a husiness context, document' of titl~ include pmof of ow nership, such as bills of lading (regarding goo ds in the han ds of shippas), ,md w~rehou>e receipts (r~"Sard i ng Buods in slorage).
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PA.RT II I, CO~TRJ\C TS IN BUSINESS
Collatel'dl could indude a"ou nts. If! h,ld an accou nt duc to mc from my neighbor who owcs me $250 for lawn mowing on July 5, I could give that acco unt or IOU to my brother to hold until I paid him back his S.WO. If I goofed up, he could go to my neighbor, present my accou nt sta tement, and collect my mo ney. thus satisfying his debt. In a business context, accounts could refer to the business\ hank accounts. which take in receip ts cvery day. l:inally, collatel'dl could include g~ner'll il1l<1ngil>lcs- ilcms thaI rep resent muncy but art not mont), in and ofthemwlvts. If I had a wpyright on a piece of Ill llsic for which I was cnti tled 10 d ro)"
OMPTE~ 13 • SECURED TRANSACTIONS
155
up and down thl' chain "fcmumCfce keep dcaL~ moving and the l'conomy growing. To rcc~p, colb tcral can take the following (orm$: Possessiun of an item orvalue ur an asset that represents cash Rights to goods Rights \0 inventory nights to documents of title Right, to accounts Rights to geneml in tang ibles nights \0 chattel paper
Attachment of Co llateral Because collateralized tmnsactions usually in\'Olve the sale of goods in excess ofS500 and performance time of nver olle year, it would make sense 10 get these agr~'Cmc1l1s in wr iting per the sL,tutc offrJuds_In fact, Arti cle 9 dthe vee n"luires any security agreements that don't involve po,ses~ioo ufthe collaterJl to be in writing. '[his ro le is a protectio n for both contr~ ct ing parties. The 'T~d'lor, or the party accepting the security intnest, wanls a record of what he may be entitled to if the pmmi!IC to repay is breached. lhe delJ/or, o r the party giving the security interest, wallts a clear I1.'cord of what has been pledged and under what terms. Ihe debtor is sometimes called the obligor. hecause he is ohligated to repay money or perform so me other task. l)ecallse secuTed trd[lsactiom involve two sets of prumises, they arc the kinds of deals that involve a lot of papcrwnrk and doc umentation. The tirst Sd of pap~rs, called the note, is the hu)'cr".~ or dc'htor', prom is... to rep'1Y the amuunt of credit he receives. When Tom bu ys a house, the bank has him sign a promis50ry note, which is his promise to rc'pay $100,000 .115 percent intaest in monthly payments amoniud over the next 30 years. That prom ise doesn't b'Tant the bank a security interest. There is annther document for that called a mortg(lge . When Tum ~iglls the mortgage, he is promising that if he docs not repay the prornis." 'ry note as agreed, the oank may loo k to the collateral- whi ch is his
156
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
house- Io repay thl' loan. Thl' mortgage goe.~ un to explain Ihat the bank may fureclose :.tgainsllhe house and sdl iI, keep ing the muncy gained to apply against the lu;m bala n ~e. All the tcrm~ and conditiuns ,)re explained in the mortgage and there arc s.omc proteClions for the borrower- such as notice provisions and righls 10 cure any default in payments- but at the end of the day, the ban k could take the huuj.C out from under Tom to satisfy the promise made in tbe note. In retail purchases with col1a!cral, there arc often two documents to sign also: fir't, ,1 note, which is a pmmise to pay, and sccond, a security agreement, which is a statement of the rishts in the (uliatcmt. 0 11 oc(asiulI, Icndeu combine the two d(Kuments ilUO one, usually calkd ,) nate and seC llrity (lgrCClI1cl1I, but tbis document con tains at least two promises- one about the debt an d one about the coIlateral. An agreement is said to atta.-h when the creditor either takes possession of the coUaterJI or receives a written statement in which the debtor acknow l edge~ the creditor', right", in the collaterJI. In addition, the M'(urity ;lgrt~ment sbould d~!
OMPTE~ 13 • SECURED TRANSACTIONS
157
TIlat inventory is automatically pkd,l,\l'd to the en,ditor, even though it did not belung to the debtor at the time of the adV:l.llcc. [n addition, eredi· tors often stipulat~ that they hJ"c a IOCcurity interest in th~ proceeds of the collateraL Thus, when the debtor sells inventnry and deposits thc receipts into the business bank account, the creditor has al.so alrl'ady attached those fun ds as colbteral.
Perfection of Your Security Interest [n addition 10 attaching Ihl' security interest 10 the collakral, the (fl'd ito r also ne~d s to "p~r r~~ln Ihat inlerl's\. Att(lChm01t pT<Jtec\.~ the creditor in ensuring that the debtor acknowledges thc security agrcemcnt. Perfection protectsthecrnlito r in assuring that C"l'I)'oneelse in the world knows about th~' security agreement. Perfection is accomplished by filing a stalement abou t the security interest publicly, l\rtiele 9 o utlines how and where to file the 1I0tice- usually locally in thc coullty where the collateral i, localcd, hUI s{)melim~s c~ntra lly with the secretary of state in Ihe stale wh .. re the ,,,lI ateral is l"" lled. Article 9 also ollt line.~ wlt,llihe notice should con tain, which has been standanlized in a form us~d nationwide called a uee-1. Thc lIotice, ca lled a fin~n ,jng ,tMement, contains the names and addresses of the deblor and creditor, a description of Ihe collaterJI, the date Ihe secu' rity interest att ached, and the signature of the dehtor, Ihe notice does not need to contain the underlying information about the loan or financing, That inti,rmation L\delailed in the promissory no\c, .\igned hy Ihe contracting parties. 'Ih ose spccifiC5 arc 1I,\ually kept pri'l'Jte, and thai is why most credilors U.'ie s~pardte noles and ~cc urity agree ments rJthcr than a co mhincd fi >rlll. Filings arc gn"d for fiVl' years, aftcrwltich lime they expire, If a sccllfl'd IT;IMaction lasts longer Ihan five year.", the cn,ditor mu,~t file a co ntinoation stalement to keep his security interest pcrkctcd. The need to perfect a s~'1:urity in taest undl'rlines thl' n'lture of com merce in Ame rica. II moves fast and much of it is done on credit. If Colleen's bank did not perfect its secu rity interest in the Prius by filing, then Coll een cnuld decide to scll the car to Larry in jctfeJ'lion C ity, Missouri, when she tired of it. Larry co uld pay Colleen and never know that she was not enlilled In sell il until lite lo,m was l'aid o tf. The hank could be left witlt
158
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
no collateral for Collee n'51oan when she 5topp,'" making paylllenL~. The ban" could possibly find larry in Jdferson Cily. knod on his door, and ask for Ihe car hack, hut Ihis would also he aw kward. Th., law needs a syslcm to make business Ir.lnsactions work dearly and fairl)', and Ihal ~ystem is allachmenl and perfection. With attachment, Collecn knows clearly the terms of the securi ty agreement. With perfection. other in terested parties have a place to check for existing (ina ncing statements that would put Ihem on notice nolto pay olf the seller before being assured thaI the ~"Cur it y interest has been sa tisfied. Thus, an interested huyer, like brr)', could check in the county where ColI~"Cn lives to sec if a financing statement i.~ on file for a 2006 Prius auto mobile wilh a debtor named Colleen Smith. larry would discover who the debtor was and how to conlact him to see if the underlying loan has bl'en sutisfied. If it has, the financing statement could be released. If it hasn't and part or all of Larry's purchase price would satisfy the loan, Larry should not be paying C olleen directly. He should pay Ihe bank thc amount ~l1f tkienlt<> rel~asc (he lie>! and pay Collten the halancc. If brry finds that the amount owed the hank is in l'xceu "fwhat he is willing to P,IY, he can1I0t purchase the C".Ir free and dear. Larry should walk away from Ihe dea l. Of course, in automobi le sale!\, the certificale of ti lle is another place that sl"Curity interests arc no ted, and many lenders actually hold auto titles until they arc paid in full, so more than likely, Larry would discover the lien by looking at Colleen's car title. Not all pledged aSSC\5 have certificates of title, however. so if I.arry were buying Colle<'u's bu,\inc.' s computers. he wo uld go th rough the samc pron:dure, checking for puhlic notice th;lt these items had heell pledged 10 another. An example of perfection in a bu.siness cUlltnt could involve John , ,>'110 need.~ $10,000 10 buy more cOlllpon<'nt parts to lIlanUf,Kturc his Uni· versa l Remote. John's bank will lend him the moncy. hut they want some collateral. John has a purchase order from Betta Bu), for S20.000 worth of product, due to be delivered in 30 days with payment on delivery. The bank could take a securi ty intc rest in the account reccivable, which is the purchase order, to collateralize Ihc loan. John signs a promissory note and Sl'curity agreement and also a uee-1 financing .~tatemen\' which the bank file..
OMPTE~ 13 • SECURED TRANSACTIONS
159
wi th the county ckrk in the co unty where Jolm's husines.~ is lo~-atcd. John's signing of the s<:curity ag~ement attaches the collatemi to the debt. 'lhe H'<:urity interest is perfected when the vee·1 form is filed. If John is nego· tiating with anyone else for credit and offers that purchase oroer as co ll atcrJI. an)' interested purty could check the pu blic records and see that John i~ not free to pledge t.hat anet for collater..1. As long as that aS5et is pledged to another, John will not get additional credit agdinst thaI ;1ss<:l. Ihe origin~llcndcr willprcscn'e ih finl right 10 that collatc r~l, ,1nd other pOlcnli~1 lenders will be knuwledgcahle in their dealings with John. In some trdnSil(tiullS a creditur uf co nsumer goods may perfect his security interest without filinga financing statement. Article 9 provides thaI <;cllcrs wOO give a pUr(hilS~ 111011(')' sewri,)' il1ler.'s/ in household gO(lds have automatically perfected their licn5 without filing. Conmmer goods arc d cfin~d as those used for pasona~ family, or household use. Purchase 1I10ne), is money advanced by the creditor to allow the consumer to buy the collateraL Sometime~ all thi~ pledging and perfecting gets confusing. I)erhap.~ John had already given PirslBank a S<'curity illlerc$t in some bus i nc s.~ equipment ~nd after-acquir~-J property. TIle underlying Joan 10 firstBank has nut bee n paid off. Ducs the purchase order from Better Buy cu nstitute after-acquired prope rty? Perhaps it docs. It depends on how l'irstB,mk de,~cribcd their conaleral on the financing slatemcnt. ContHct.~ can occur. Lenders can even agree, on occasion, to he in a secondary position to a previous lender if the a:;scl has a Jot of value 10 il. l'or the scope of this chapter, il is .\utficient to recognize thatlcndcrs have an ohligation to check cxisting rccord5 and filed information about thcircollateral if they eng-dgc in .\.Ccured Ir~n .• acti<Jns. '1h"~e inlere.'led in furthcr rule s ~h(}llt c"ntHcts in financing will enjoy 5111dying Art icle 9 pr iority rules ami hankrllplcy rules.
Buyers in the Ord inary Course of Business To keep commerce moving, buyers of goods have to be confidelll that the sel1{'fs have good title to them. After all, I don't "'·.. nt some area farmer knocking nn my dnM tn repos~ess the corn nn thl· cob I am serving my family because I'"ud Mart didn't pay ilS hill. We learned in chapler 12 lhat one warranty th~t "...tIers of gouds imply to huyer .• j.. ,1 warranty of good
160
PA.RT II I, CO~ TRJ\CTS IN BUSINESS
titk. Huwever, nut every se ller is perfectly scrupulous. At times,
sdk~
cau
try to sell goous even though they don't have perfe<.:t title to them because of financing they ha"c obtaineu. According to Article 9, buyers in the ordinary coursc
ofhu sine.~~
take
goods free of a secur ity interest gi"en by the seller. even though the security interest is perfected. A /luyer in tile ordinary cOlme of ilIH ine" h a person who boys goods in good faith from a seller who routindy deals in such goods. ·Ih erdore, when I go to the ollice store for some fo ld ers and copy paper, I do not have to check first with the county derk to see if the store has gil-en a financing statement to a creditor covering these items. I can huy in good faith and ohta in good title to my purchases. Likewise, ( can confidently purchase apples from the grocery store, shop for aspiri n from the drugstore, and buy gas from the serv ice station. Othawisc, commerce would be vcry slow and risky. Genemlly, the secured party is protccted in this context because he knows the business probably has customers in the usual course ofhu~iness. (n fact, they w;mt customers to be buying goods and generating profits ti,r their borwwcrs. Also, (he pHtk~ holding secu· rity interests in the inventory prohahly at..o havl' a security inlen'st in the proceeds o r thaI inventory.
If you come across somconl' selling Rolcx watches out of the trunk of his car. you probahly C"Jnnot buy that item in good faith. If you have reason to believe that an item cou ld be stolen or not owned outright by th .. seller, you do not gain good title to it. Buying out of car trunks is not buying in the ordinary counc ofbusines",.
THE LAW IN ACTION Millie·s hanker will gil'e her a loan for $15,000, hut he wants a promise plus cnllatcral. Millie has a numher of assets to consider ()(fl·ring for collateral. She has some existing equipment-her sewing and embroide ry mach ines. She will acquire ;ldditional equipment with thl' loan proceeds that could also serve as collateral. She will also have olliec equipment such as tables.. lighting. and computer software that could seryc as collateral. She will have TJW materials on hand that could h{" pledged. She will be turning these raw materi .. h intI) in ventory th;lt can alw .\erve as collalcm l. In addition, she
OM PTE~ 13 • SECURED TRANSACTIONS
ha.~
161
a large purchase ordl·r and could pledgc that aCI.:ount receivable. As (he
goods she sells arc rl.Ju ced to cash, the
b~nk
wuIJ take a security interc51 in
aftchlcquircd property or proceeds to further proteI.:! rcp
rep~y
the $15.000 on a certain
schedulc. She will also be asked to sign a security agr~"Cmcnt that lists cx~ctly wha t assets she is pledging as co llat cr~l for this loan. That security agreement is the instrument whcreby the cnl1.dcral is attached. The bank will als" ask )..·tilli c 10 s ign a UCC- I form, which it will file 10 perfect their Sffurity interest ~nd give nOlicc to ewryoJH: cls<, ill th e world " fits position in rcl ,di on to thi.~ collate!";lJ. When fo,'IilIie pay.~ Ihe loa n ole the bank will release Ihe financing 5l~lement that is public record. If Millie docs not pay
hn loan as agreed. the bank will havc rcwu Tse 10 thc assl"ts shc has pkdged to pay olflhc loan. The bank will repossess the coll~leral and se ll it for cash to apply 10 the loa n balance.
TEST YO URSELF t.
On September 1. Tony takes his drum set to A-I Pawn Shop and pawns it for $150. The ~hop ow ner keeps the drums and g ive5Tony a re ce ipt with his money saying that he (an reclaim the drums for S170 until October I. After that date, Tony cannot redeem hi~ drum~ and Ihe shop owner is free 10 sell them 10 someone else. Is this a secured tranl-action ? Ho w can the debtor attach th e security agreement?
2.
Lily had a business meeting out oflown. While driving home, she drove through Port Byron, which is a sm",11 town "'bout 20 miles from her home. She passed a garage sale that had nice-looking furniture in the yard. She stopped and discovered a great dining room table, four ,hairs, ",nd '" dresser that her daughter could use this fall when she headed to wllege. Lily go t the lot for $200 and loaded it into her pickup truck on Ihe spot. Three weeks I
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PA.RT II I, CO~ TRJ\CTS IN BUSINESS
Both Michael and Kathy Ivers need new cars. Th ey go to their bank and get one loan for $50.000. With that money, they buy two 2007 Honda vehicles-one Accord sedan and one Element. The plan is to pay th is loan off In six years. Can the bank IiIke one security Interest in two cars! Will the security interest last for six years?
Brain Teaser 4.
Suzy likes to get her Christmas shopping done early. In October, she goes around looking for all the gifts she needs fo r her large family and because she does not have the money to purchase a ll the presents in October, she puts many items o n layaway at local stores. To do this , she makes a small d epos it on the items, the store puts the items aside, holding them for Suzy. and she has 30 to 60 days to come In and pay the balance of the purchase price and get th e items. There is "s"ally a service charge of about $S for the layaway, whic h is nonrefundable. Does this transaction involve a security agreement! Why or why not?
Answers can be found on pages 226-228.
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163
K'E tJ P,OINTS TOl REMEMB.ER . Secured transactions are contracts involving co llateral. Collateral can be obtained by possession ofthe item being pledged to satisfy the debt. Collateral can be obtained by a pledge of an inte rest in goods, inventory, documents of title, accounts, general intangibles, or chattel paper. Secured transact ions involve two promises- one to pay the under· lying debt and one to g ive rights in some collateral to the cred itor. A creditor must attach his security interest to the col lateral. Attach· ment is accompli~hed when a written agreement clearly describ· ing the terms and collateral is signed by th e debtor. A creditor must perfect his security in te rest to the collateral to give notice to the public that the asset is pledged. Perfection is accom· plished when a financing statement is filed in the public records dearly noting the security pledged to the creditor. A creditor who takes possession of the collatera l has attached it and has automatically perfected it. A credito r who gives the purchase money to procure consumer goods used for persona l, family, or household us e has automa ti· cally attached and perfected his security interes t. A bu yer in the ordinary course of business, who obtains an item in good faith for va lu e, takes the item free from any sec urity inte rest given to another by the seller.
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Urheberre<;htlich ge5chlitltes Material
· .. TRENDS IN BUSINESS
In this fina l section, we will look at some of the trends in business for the next decade and beyond. Challenges for future entrepre-
neurs wil l come from many sources, but we will examine the effect
e-commerce has had on business in the last 20 years and highlight some remain ing challenges to the development of clear cyber-
contracting rules. We will also examine the place of patents, copyrights, trademarks, and trade secrets in loday's business world. At the
start of th e 21s t century, the value oflhe wo rl d's intellectual property was greater than the va lue of all the physical property on earth. This trend will just continue. The final trend we wi ll review is the global revolution. Included will be some basics that business practitioners should know about this sh rinking world and how to succeed in it.
Jrhch~"
11 h
1"
Urheberre<;htlich ge5chlitltes Material
E-Commerce y dad
M
wa~
a ham radio operator. This hobby
in~o lved
having a corner
of the basement rigged up with his equipment. which cons isted of
large metal boxes that held wires and tubes that glowed funny colors. His control panel had as many switches as a t:ommand center in a 1950's sci-fi movie. He used a semiautomatic "bug key' to send Morse code me:<;sages 10 hams throug hout the world. Whe n he was ,e
signals, the black-and-white television set in the living room would gel all fuzzy. and my mom would worry that the neig hbors might also be getting
the interfere nce. In
OUf backy~rd
was a gigantic ham rad iO tower with a
revolving antenna on top. We moved a 101 for his engineeri ng jobs and he
always chose the house we would live in ba~ed on the same criterion-he needed the highest e levation in town for his tower. In those days. only hams were making regula r contact with people in other parts of the world. Things are different now. last year, my son, Nick, was doing a
seme~ler
of
~tudy
in london. When I wanted to talk 10 him,
I us ed my cell phone or se nt him an instant message. Obviously, these changes in communication have implicat ions for bus iness. What does e-(Ommerce have in store for Nick's fu ture?
168
PART W; TRENDS IN BUSINESS
IN THE REAL WORLD Maric makes Ma in e blueberry jam. She sdls it in her
f~thds
shop in down-
town Kenncbunkport, madc wry popular as a "ac~ tion destination be(,Jose of the Bmh famil y compoond. Mona Jackson bought six jars of jam on holiday lasl summer and they were a big hit in her hometown of Qmaha. In fact, all /l, lona'5 friends have a.~ked ifthey coold ge t so me more jam online. ]",Iona's siste r has a craft and arlisans' shop, and she al50 wanls to find oul how she can get so me jam in stock since she is sllre it will be a brisk scller. Mona calls Marie and asks her if her prodoct is olfe red onlin e. In fact. Marie has been asked this many ti mes. so she isconsidc ring se tting up an online slore. Whal arc th e poi nts Ma rie must consider before do ing business in cyberspace?
KEY CONCEPTS Our discussion of e-COI11I1](."rce will include a review of howe-contracts arc made and if the c(>n tract ing rules ditfer mu ch from the
basic.~
we have
learnC'd and applied so far. There arc some adjn stment s for the dectronic system of co nt racti ng, but many of the common law and vee rules ('an guide YOllr way on these deals. Then, we will discuss alternatives when ".-contracts arc breached. The effective enforcement of breached contracts poses one of the bi ggest challenges for the futme.
Entering into E-Contracts eyber:;pace has changed the way parties do co ntracting. Individuals nowa days arc rarely facc- to-facc making barg-ains using mirror imagc language and noti ng impo rt ant terms. It is cstimated that almost 30 pe rcent of all holiday shopp in g is )H/W done o nline. 'I'he law sti ll uses man)' COlll lll on law principles to interprct co ntrJcts made onli ne. but some of th." old ru les just
Jr~ -,I
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14 ' E-COMMERCE
169
don't fil. Inkrnet commerce nl't!',h laws that recognize this .~p('ed and ca.~e of contracting as well as the lack offacc·to~face dea li ngs. We Me all familiar with mrink·wrap agreement>. which arc those small prinl papers inside a hox when you open the new computer or .~oflware. 'Ihese agreements contain the term s and conditions of Ihe product and warmnties. Few, if any, consumers read the.se agfl'emcnts. However, almost al! customers plug in the computer or install the Sut"twilrc and indialte, !lefore they get very f,lr, that they "accept" these terms and conditions for usc hy clicking the mouse. Arc these d ick -an Ilgru mm!> hinding cuntrJCls? TIll'y sound an awful lot like unconscionable agr~cmcnts, with all til/: bargaining puwer on one sioJc-the sellds- anoJ a "take it or lea"c i( option. However, couns have ruleoJ that shrink-wrJP agreements and dick-on agreements do form a valid co nt ract between parties and that the terms included in the small print hecome part of the ,kal. Sellers oflen include language requiring co ntract disputes to be mediated or to be tried according t" th.: hiws of th e st,l te that the seller chooses, which i. ge ner;lll y more libeml towa rd seller~. In som.: caS('s, agreements require ,I signat ure or acknowledgement from the buyer. Tuday there is technology to provide ,til e-sign<1 lure, usually involving so me cod,'ti or encrypted keys that sen'e 10 verify the buyer's agreement to thc term~. This procedure is already hc-ginning to s
170
PA.RT W: TRENDS 11'1 BUSIN,SS
Once an item is chosen and acknowledged, there is generally a chcrkout feature nuting personal information about the buye r and shipping terms. These chl'l:kout si tes may be secuTed- that is, prokctcd with encoding, orcnrryption- or they may he unsecured. A huyer needs to TCview the information thai the seller provides on the website about security, shipmem, and claims or complaints. In the law. pa rties arc just as free to contrdct online as they arc in person. If an item is impol1;lnt to you, .\cl it out in the deal. With this adage in mind, a close reading of the sellds weosite may reveal that items are sold ~as is:' no returns or refunds ,lre offered, and no informHlion is guamnkcd secured. Since unline sellers do not have the luxury of meeting their buyers, they may ,11"" include statements on their websites that require buyers to acknowlcdge that they have reached their majority and arc othl'rwisc fit to contract. Online se!lcrs of goods provide an implied warmnty of title according to Article 2 of the vee. llowever, online sellers have been known to offer item .• they do not own, or do not own outright, for MIl.'. /I ouyer in the ordinary course ofhusiness, even if it is husiness onlin e, gels good title 10 an i1cm ifhe bu)', in good f'lith. Warranties can be created in online s,lIes, so if a point is important to a buyer, he should el1l,lil the seller wi th specific quest ions ,lbout the product or its appljc
Enforcing E-Contracts: On line Dispute Reso lution We 1<-arlll'd in chapter 2 that partie.~ to a di.~pute may ohtain jurisdiction, or the right \0 sue 10 enforce a claim, in the state where 1he plaintiff resides, the state where th~ defendant resides, or the place whnc thecause of action aros-c. Where docs a cyherspace transac1ion take place! Many times an online buyer of goods has no idea where the seller is located and doesn't really care. If a company doc,. business via the Internet in Ala,.b, Gm it be sued in Alaska even though it has no reta il outleh, .\alespeopk or marketing efforts in the st,lte? The law is still developing on the jurisdictional
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CHAPTE~
14 • E-COMMERCE
171
reac h of the courts to husinesses that ex isl within their honJers only online. Some Sla tes have found that a selling company has made a sufficient con· 1(;lct with the sl
i!i.~uc,
but rather look allhe amount
of business an indil'idual plai ntiff or defe nda nt docs in the slate 10 dete r· mine jurisdklion on a ca5C ·by ·c~sc hasis. llccausc jurisdictional issues "111 he confusing
IW ;on, ur ODR, has been n:cognil'.cd. As you mi&lll imagi ne, this dispute re<;(ljution pmceS$ occurs online and is often accessed thmugh the origi nal purchase site.
~'Iosr
onli ne disputes involve auctions or e·salcs o f goods,
and most complaints involve issues about recei pt of paymen t or quality of th,' goods heing trdnsicrred. About 40 percent of on line disputes involve rights over domain ndmes. A dom,lhl name is Ihe p~rt of an In ternet ;lddre ..... th;lt is &ekclcd ;md regi...· t~red by the user. Owr90 percen t of all donmin namcs arc regi.'
Amazon is Ihe domain Ilame for Amazon.cum. Of Cllurse, a co mpany named Amazon wuuld like ly want the dOm;lin name Am~zon ; howcv .. r, any per· son can register any domain name. NSI usually
rcgiSkr,~
a domain name to
the first registrant aski ng for it. Some individuals and businesses ha"c tried 10 profit by registeri ng ma ny trade names for popu[;lr companies or CJtchy phrJSC"' in Ihe hopes that one day other.• will wanl to usc them. When anoth· er en tity tries to U.o;{' .<;omeon,'s domain name, a dispute can
OT
services wi th a proven rel' ut;d ion and estab lished
172
PA.RT W: TRENDS 11'1 BUSIN,SS
\rJdemark. For example, I could he the first to rl"llister the domain name Opmlis Opinions. To my knowledge, Oprah docs nOI POSI o pinions on a separate Internet ~ite ,lt this tim e, hut she Ill,ly want to in the future and I am squattins on her wc11·know n name. Moreol"er, anyone goinS to my website could well bel ieve that it is somehow associated with Oprah Winfrey, which it is nul. Oprah could request mediation through NS I and unoo ubtcdly k c~ p me from registering and us ing a sill.' (h'lt could easily be mist,j ke n for hers. Anothe r organ ization th at monitors assigned ll
THE LAW IN ACTION Maric has a nice lillie busincss going. She could makc it ewn bigger ifshe created a website and so ld online. Marie could register a domain name with NS I. It couldn' t be Smucker's Blueberry Jam. but it could he Maric·s Maine Blueberry Jam.
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173
In setting up her wehsite, :"ofarie would have \0 consider her prici ng, shipping methods. ~nd p~yment mel hods. She should post her policies about sales o n her website, if not directly on the chlx:kout pages. Marie could usc the s~me website to market her product ~s well. A recipe section could hiShlight various uses of the jam. A cu~tomc r com ment page could provide te~t imonials. l\hric couk! even place ~ pict ure of herself, in an apron. holding up a jar uf jam in her father's quaint sture. In entering c-commerce, however, Marie is exposing her.self to claims in jurisdictions she has not even imagined. She could eaSily sell jam throughout the Unili'd States ~ Ild Ca nad a and eW Il in for.. ign countr ies. Thi.~ would re'luin: ['>"Iaric to hecome familiar wi th food shipping re'luire mems in other states and countries, hut she prohably wouldn't run into many probk'ms since blu,'berries aren't ,'ndungercd or dangerou s in oth,'r ven ue s. The likelihood ofliahilil)' is small also, as Maric's jam contains no prcseIYJtives o r additives and is pacbgcd in hCJ'1""eight plastic jeUy jars. Marie could have ~orne expo.~ure to liability if ~he shipped large amounts of I'mduct on a~Jit. In the ewn t the~ o rders were nol paid, ,,'Iarie might h,w,' to go out of state an d .,tart lcgall'mcecdings to collect her money, but again, she is in control of the CO I1(nlCt. If she is smart, she will not o rfer large amou nts of credi t fr~'l'ly, and she can use onl ine dispute resolution in li eu of litigation to rc'\Olvc payment issues.
TEST YOURSELF 1.
A local compu ter consu lting firm doing busin ess since 1999 has just discove red that another business is using their Delaware business corporaOon name, Trident Te chn ology. as a domain name on the Internet. The local company was using the name TridentTechnologies as a domain name. but up to now. th ere had been no conflict or misdlr('cted commonkatlons. Upon r('at1Zing th is, the firm immediately fi led to use the domain name TridentTechnology with NSI. The inte rloper is a New York City individ u~1 just starting a party planning servke. What else should Trident Technology do in this situation!
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PA.RT W: TRENDS 11'1 BUSIN,SS
Noah wished to sel l his extra Irombone o n eBay. He listed the item. with picture and complete description. His policy stated that all sales were final and that the instrument was being sold "as is," Jeremy, a high school trombone student, saw the ad and asked his dad to obtain a money order in their name to buy the instrument. A deal was struck, Jeremy sent the money order lor S1SO and Noah sent th e trombone to Jeremy. But the trombone pictured had a mouthpiece on it and the instrument sent did not include a mouthpiece. A more sophiiticated trombone player might have known that mouthpieces are extra, but Jeremy expected to receive what he saw in the picture. which was a rather expensive colle<:tor's mouthpiece that Noah just happened to have on the instrument when he snapped the picture. Was this a good contract? What can Noah dol What can Jeremy dol
3.
Ryan was an MBA stud ent in Chicago. His apa rtment lease was year" round, but he a lways went home to Houston in the summer to work in the family business. He went to craigslist, an online forum for personal ads, housing, and jobs, and sought a summer occupant. Adam from Virginia was coming to Chicago lor a summer class and needed an apartment for two months. The parties exchanged a few emails a bout the terms and timing. Ryan attached some pictures of the place. Could a series 01 emails create a binding con tract between two parties from different states about real estate in a third state?
Answers can be found on pages 228-229.
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•
CHAPTE~
14 • E-COMMERCE
175
K'E tJ P,OINTS TOl REMEMB.ER . The parties to an e-contract a re still in control of the terms, as with common law, so if a n item is impo rtant to a party, it should be specified in the e-(ontract. The UCC ru II's about the sale of goods apply to e-contracts, allowing merchants to ease up on the mirror image rule and other common law contracting ru les, due to the need fo r a fast business pace. agreements, which are 't~ke it or le~ve it" terms for a buyer, have been enforced as val id and voluntary co ntracts.
Shrink-wr~p
Click-on a greements to programs and webs ites hav e been enforced as valid and vo lun tary contracts. Technology allows for e-sig natures to verify on line documents needing a uth entication from a buyer or seller. Onl in e sales agree ment. can include warranties and terms requiring mediation of disputes. About 60 percent of online disputes have to do with items sold online th~t ale not delivered or paid for. About 40 percent of online d isputes have to do with rights over domain names. Domain names may be registered w ith Network Solutions, Inc., known as NSI. Domain name disputes are often mediated by NSI. Because of th e number of online disputes, many natio nal and international mediat ion and arbitration businesses are ava ilable to resolve ( ompl
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Urheberre<;htlich ge5chlitltes Material
Intellectual Property n 1995 Jo Raw ling was a divorced, unemployed mOlher living on stale
I
benefits. In 2006 Forbes magazine named her the second richest fe male
entertainer in the world, with a personal fortune of over one bi llion dollars. What kind of job PilYS one hundred million dollars a year?
The hula hoop Is an idea as old as time and Its usee .. n be traced back to ancient civilizations' dimee rituals. In 1958 Richard Knerr and Anhur"Spud" Melin, founders ofWham-O Company. reinvented hula hoops in plastic and so ld 20 million of them for S1.98 each in six months. How can a reinvention
of an old idea gross almost seven million
doll~rs
a month?
In 1986, an Indian former bank clerk started manufacturing mosquito
repellent mats and selling them under the trademark JET, Ten years later, one of India's largest industrial groups was looking to enter the mosquito repellent market. They negotiated to buy the JET trademark for $6.5 million. The acquisition price was for the trademark only, and its value was so great because the founder had delivered ilnd milrketed qUillity prod ucts identified with the JET in signia. Do you have a n idea worth millions of dollars, too? In this chapter we will discuss the fastest growing and most lucrative area of the law-intellectual property, including trademarks, patents, copyrights, and trade secrets,
178
PART W; TRENDS IN BUSINESS
WHAT'S Al;!EAD Trademarks
Palents
Service Marks and Certmcalion Marks
Copyrights Trade Secrets
IN THE REAL WORLD Ike was an unlikely b'lly to gct into a paknl dispute , By day, hc was a lalentcd upholsterer. On weekends, he loved to go to dmg races. rm no expert in this, because alii know I learncd from Ike, but drag racing involves two can; usually racing against the clock, side by side, on the track. There is a light tower that starts the drivcrs off. "lhe tower first flashes a red li~t on the top. Then the orange bulbs in the middle light up. Finally, the drivers gd the green light at th~ bollom and begin the mc~, at which poi nt the timer starts ticking. Races arc won and lost by ten ths or even hundredths of a .~ccon d , Ike had a thought about a device Ihal would help a driver with the timing situation. He saw racers trying to guess whl'n th,l t final grN'n light would go on. AU the lights were limed in sequcnce, but many driwrs counted from the first rt'd light and miSC"alculated the optimum time to hit the accclcmtor. Starting too early disqualified you for the day- an expensive mistake if it happened early in a rdce day- and starting too latc by a .second or so ""us deadly. The cars ,,"cren't that different in their co ndition and power; it really wa~ a muttcrof liming. Ike built a digital delay bux that al\;lched to tlw acceleratur oflhe race car. When the driverSdw the first red light, h,' hit the pl'd'll. The delay box counted exactly the time until the grt'en light and automatically engaged the accelerator at the optimum .second to win the race. No more counting dowu. The driver needed to respo nd to the first light only, not the entire three. and it made a big differt'nce.lke could not build the boxes fast enough. Soon every driver had to havc one just to be even with the others. Ike was making thousands of dollars .1.1 his hobby. I II' never thought of a palent. It ""as just fun to do. Was there any downside to Ike's proceeding in this fashion? Jr~ -,!
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KEY CONCEPTS (mel/celu(1/ properly is tht term u.;cd to descrihe the inld l ~ctual and creative processes that c ulminate in 3 prodllct- I'utting words or music together to sound a certain way, designing a s
Trademarks A tra demark is a disti nctive mark or logo that is put o n a product. A manufacturer pu ts the mark on his product.\ to idenlify them as coming from him. lf y"u go to McDonald·s. you will see trademarks all o\'"r the place. Usually a trad ..'mark is identified hy a TM ora T M in a circle (S), after the m,nk or logo heing protected, 3 r~'I>istcred mark is noted hy 3n R or an R in a eircl., (IV). Marks can just be put into use, registered o n th" slaW level. o r trademarked on the f,'derJllevc! for protection. The mark can he one word or a ph rus~. for example, at McDonald's, eve ry time the word McDollald's is used. a TM appcar5 after it. Likewise. the words Ronald AlcDonald and the golden arches logo arc idcmificd as tradem~rks. A McDonald's drin k cu p has no fewer than eight trudcm ark notations o n it. A product is marked If) identi fy its origin 00 the marke t. Usn,ll1y, a per· son who uses a ma rk ur
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Othcr lrJdemarh ea.lily recng niz;lhk are Xemx, Mkmsoti, Pep.i, Nih, an d Hershey's. With each of Ihese terms, a product or compan y comes tu mind. It represents lu you a certain slandard uf prodUCI, a ceflain price rJnge. and a certain quality. The repulation precedes the item ilscIfby \'irtue of the trJdemark, If pricc is no object, consumers prefer Starbucks cotfce to Foigels. a Coach leather bag 10 une from P~ylcss. and a Lexus 10 a Saturn. Of COU TW, p~rt "f what YUII arc paying for in tbose pricier "ptioos is the protect ion of the image, the ':1,ln of the product. BefofC 19·16, people and busine.~ses aCl[uired tr~dem'irks by use. [f y"u marked or identified a product ur name, you gained excl usive rights to usc it. Of course, therc could have been an ice cream vendor in California using Freezce Pop as a namc for a frozen trcat and a vcndor in Con necticu t using Freezee Pop also. [t is unlikely that vendors this far apart would run into confusion or problems. However. distribution in the United States changed dramatically after World War II. [t was recognized that with more national cnmmefce, comp~nic~ that u",ed simibr marks could (onfu,o;c con.,umer .•. "lhc fcdcI'd1 govcrnm~nt pa.\SI..'<.l the Lanham Tmdemark Act in 1946 to provide some na tional guidelinl's. Up to this time, vendol"); aCl[uircd fights 10 marks by uS(' or by state registrJtion systems, bul cumpa nies expanding nationwid ... w ... r... concerned that the ir marks could be dilutL'<.l or diminished in value if confused wilh lho.~c of another busincs.\. This was also a liability concern. Johnson & Joh nson di d not want to expoS(' it.self to a lawsuit because of rancid b;lby lotion distributed by Bud Johnson in Peo na under the name /ohnson\ ].otion. lhcrc(orc, protection extendcd not only to idential marks, but a1.o;o to similar lllaTh that could cause confusion to the public. Trademarks began to be registered federally with the u.s. Patent and Trade mark Office in Washington, D,C. To be eligible for a fedl'rdltradcmark, a vendor has to put the mark to usc. A party CJ.nnOI speculate on future m'irks Jnd business nallles Of phrJses and file to protect them. RL'SistrJtion is renewable between the fifth and sixth year after the initial registration. Thereafter, registration can be renewed every 10 years. If you cease using the mark, you cannot renew your rights tn it. A tradem ark gives the holder the exclusive right to use that phrase or mark. If someonc clse alleml'ts tu usc your mark, thc owner has an action
CHAPTER 15 • INTElLECTUAL PROPERTY
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against her for tl',ldcmark jnjringmlent, which means use without autho· rizatioo. Infringers can be ordered to cease osing the mark, uestroy any prouucts with the mark, anu pay u'llllag~s to the ho luer or the mark. Not every phl'... sc is eligihle tor a trauemark. por example, de.~crjp. ti,'c terms, personal names., anu geog rJphic locations arc not distinctive enough to qualify for exclusivc usc until or un less they get a second'lry meaning. A ,econdary meaning ilri'\Cs from usc. Ihe king of seco ndary meanings i ~ Donald Trump. lie has applied for anu received trademarks for The Trump Towcr, The Trump Taj "'-lahal, anu many other I·enlures. lie fill...! for a tmucrnark o n Ilw phmse ~Yo u'r~ Fired" in February of 2004 tu go along with the launch of his tclevi~i()n se ries, 7hf Al'l'rrnlic:e. A determi na tion still ha s not been made o n th is application. AppliC"ations generally takc about one year to bl' completed, but the U.S. Patent and TI'... uemark Olfice recdl'eoS over 185,000 requests for trJdemarks each year, anu at the time of Mr. Trump's application, three other competing applican ts arose. These included a silwll Mkhig,mbu.liile .• s, You're Fired, Inc.. which uid not register the mark, but ha s u~~u it ("r years un coffee mugs, T-shirts, boxer sh"rts, and tote 1,,18_', Recent dcvelopments in the televisio n lineup may nl1;a te the need for Mr. Trum p to pursue his tradem ark of "You're Fin'(e Generic term s cannot be trauemarkloJ. In a 1999 case, AOL claimeu to ow n the phrase "You've got mail." The court founu these wnrds had eve ryday, common meaning J nd could not be protected. Neithe r can words like "ca rpct~ or "wu llpuper~ or phrases like"l lovl' you." Everyone has a right to use the.'\C common worus orphruses without fear of infringing o n anothe r's ow nership interest. O f course, th e copyright experts touay arc prob"hly th~ p~~,p le in your company's marketing ucpartnwnt . The creatiVl" minds that work with product names anu auyertising slogans need a hen knowledge of no t only what the public will huy but also what is eligible for protection. Millions of dollars go into dCI'eloping the campaigns that establish marks in the public's mind. Millions of uollars go into protecting marh from infringement. Whe n a millio n-dollar idea comes to the marketing executive, the ensuing tradem ark is tikd un be half of the company that own s it. The employee, who is doi ng the work for hire, ma)' gl'l a great hunus but he docs not ow n this intdlcctual property.
J,
*
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h
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PA.RT W: TRENDS 11'1 BUSIN,SS
Service Marks and Certification Marks A service mark is like u tmdemark. but it distingnishes the services of one (nmpany from anothe r. The mark (ould h" any word. name. logo. ~ym b.,1 or c.,lor used in commerce to identify a pruducl. For exam ple. the car rent,ll agencies Hert/.• Avis. Enterpr ise. and Budget all have m,Hks or insig· nia associated with their names. O ft en companies usc their otlkialname or a shor1ened vers ion of their ollicial name for service marks.. sudl as "Citihank~ as the sefl';';c mark for Citibank, N.A., nr "Greyhound" as the service mark for "Greyhound Lines..lnc. Usually the service mark is identified by ~n SM after the mark being prote(tcd. Srrvke marks can also be images like the leaping deer sym hol used hy Deer,· & Co. on its pm(]ucts or even colors like th e distinctive Deere & Co. green . In practice. th e legal prot ~ctiom for tT:.ld"nlarks and servke marks are th e same. Like trademarks, service marks estahlish a recugni1.ablc image or pruduct with the inventor. manufactu rer. or distr ibuto r. A service mark such as the uLVn design on a Louis Vuillon handl.>ag is so recugniuble and so closely identified with li.lXury goods that infcrior imitations of the product copy the · LV~ mark ratha than any other design dctailto (onvince the consumer to buy. A certiJiw/ioll IImrk is also similar to a tmdemark. [t may be Tl'lj,istercd to 5how that the vendor hclongs to a group or association. The Ul TESTE D stamp is a certification mark of the Undrrv.. ritds labomtory. '1his lah allows th e u.•c of the mark to ap pear on m~mbers' products that mec! the lcsting standards ofth~ l~b(}rJtory. Hav ing this mark "n an electrical product tells a purchaser something abuulthc 4.uality of the itcm an d adds value to thc product. Other cl,rtifiC;ltiun marh include the GOOD HousF.KHI'ING SIlAL or union tags. n
Patents Patents arc all about inventions. A polem is a grant from the federal governmen t allowi ng an inven tor exclusive rights to his product for 20 yC"drs. This means the im'cntor has control of the production. usc. and distribution ...... hich can he a wry valu able and lu cratiw right. like an inventor. ,1 designer can apply for a patent; a patcnt on a dc.,iSn is good for 14 yea rs. T" he patentable. an invention or a design ne.ods to be genuine,
CHAPTER 15 • INTEl LECTUAL PROPERTY
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novel, useful, and not obvious. TheM: terms ha"e a SPCCi'lllcg'll mean in g, and in the app li ca tio n for a patent, the inventor or designer bas to describe thc process he went through to develop the idca, note that th e jdea is not us.:d for this purpose presentl)·, prove that the idea has a useful app li cation that meets a need, and ex plai n why this application is nnt readily available or obvious to others. A succes.~ful appli ca nt will gd the grant of a patent, which entitles him 10 mark hi5 dcsign o r product with thc word parenl o r pal. and incl ude the numher of the patent, if desired. Many ,lppli ca nts mark ite ms distri buted before a pakll1 is gf".lnu..J asp"lenr pending to put uther.; un nutice that thi s de.~ign o r idea has heen put ill usc. In the United States, patent protection is given to the first party to inve nt a design o r prodoct, as opposed to the first perwn to app ly for it. Mosl other countries gr,Ult pall"nts to th ..· firs t to file for palent protection. The U.S. method means that disputes can arise du ring the pMenting process from claimants alleging th ey put products into prior lI .• e or invented the product sooller hut never put it into lISC. An il1\'~ntor ca n choose not to put his product in osc. I k ~ till has rights to gd a patent an d .kal with the pruduct cxclusiycJy fo r the patent pcriod. If a patented invc ntion or design is osed withou t aothorization, that pa tent is jrifring~d . A p,lll'nt infringer can f,lee th e sam e type of damages as a trademark infringer, "'hiclt inclodc.~ an order to cease the infringement, destruction of all the infri nging prod uct. and monetar y damages to the patent holde r. Patent infringement ca n occu r even if only part of the paten ted product is copied o r lls~xI; not all fcaturcs have to he infringed upon 10 haye J case for da mages. If an infrin ger wan ts to co nti no (' h ) usc tlte patented f('a turcs of the product, he must nt'go tiate wi th the p.dent holder fora Iice nSl." or a right to usc thl' prot,,'c tl'd in vention Of design for a period " ftim e. 1\ licl'll.~e call he gf",lIltcd hy the patent holder or not. dependi ng on his wishes. Afte r 20 years of exelllsi\"(' rights to the in"cntion or design. a paten t expires. The patent owner can still pro doce and distribu\c the product, but competiti on can. too. The exclusivity period of a patent allows the crealorto recoup some of the dc,'elopmcnt costs, which ca n bl' cxten.,ivc. and henefi t from his application. llowever. co mme rce moves O il. and a free market is impnrtant to ou r cC()llomy. After 20 year . . rishts must he shared with the
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PA.RT W: TRENDS 11'1 BUSIN,SS
puhlic at large. Of (ourM:, Ill.my inven tors II" on to phase two ur phase three ofthdr in ventio ns well before the patents expire. Many products invented and put into u~e 20 yeJrs Jgo art' totally obsolete today. In the pharmaceutical industry, where research and development co,ts arc astronomica l, there has been a move to extend patent ljfe b)' developing a ~econda!)' usc for a drug. For example, if an antidepressant'~ paten t is exp iring in three years, the nlJnufacturer wu ld wnd uct tri'lb with the drug to see if another appliCJlion i ~ helpful. Pcrhaps that drug co uld also he osed elfectively as J weight-loss treatment. If a secondary ose is verified, th<' pate nt hold!:r could try to prevent or delay patent expi ration (and th!." ensuing competi tion ) for a numher "f years. TIlis strJtegy to su rvive palent cxpimlion has not been totally snccessful. Drug companies arc facing patent expirJlion on many high-income dr ugs between 2005 and 2009. Upon expiralion. the generic market ca n find il wnnhwhile 10 produce the drugs in a cost-etfcrti\"e manner- that is, "ithout the worry of paying a royalty or 1i cen~ing fl'e - and gain a huge market .,hare of the sales. ['"\cn!s must be granled!o individual.~. no l corporJ!ions. Art ':ry and Spencer Silver- Ihe 3M Company chemkall'ngineers wh" invented PoStit No tes- own the patellt. lhcy developed the product while work in g for the co mpany, so their 'ompl'n~alion fOT thei r work for hire pJ id them for the inven tion. As i~ the com moo prJClice in indus try research and development, the employees grJ lltcd an excl usive license to 3M Company upon receiving the patent. "lhis license, which was granted in a contract between Fry and Sikcr a,~ inveoh)Ts and 3M Compa ny as the licen.~ee in elk't trdoSfcrred all rights tn UM: the paten t. manufacture the product, and market it, to 3[\"1 in excha nge for a modest fc c. Fry and Silver remain .)wners of the patent, hut all development potenti al has oeen grante.! to 3M in this contrdct. Lie,'nsing agreements generally last for a ternt of years and (".Ill he rClll·wed. The in vento rs conti nued to work fur 3M and wun the company's highest honors for research, as well as many intcrn,ltional engineering awards. In the fashion \\"orld, Pa risian deSigner Ch ri stian DiOT was once the king of licens ing. By [948 he was licensing his name 10 be uS('d in the sales of furs. stockings, and perfume. Later, you ((luld huy Dior watche,'. luggage. underwear. and sheets. 'Ihese
CHAPTER 15 • INTEl LECTUAL PROPERTY
185
and it wa.~ a status symbol of sorts to have a Dior item. Ry 19f!O, however, 86 po.'rcent of Dior's sales came from goods made and sold ou tside France through more than 160 licl'nsing agrccm,'nts. Needless to say, the quality control suffered. A Dior item does not carry the sam c cache t that it once did , ·lhus. OI'crzealous usc oflicc nsi ng can diminish a product's un iqucness and CJuse the owna of th e product idea 10 lose control of its marketing. imaSC. and \juali ty co ntroL In to day's fashi on worlJ, Ralph Lauren is the kin g of liccnsins. His company prefe r~ licensing over m,111ufactoring. Presently. Ra lph lau ren provide, the des ign ~l1d the jjfestyl;: image, and it licenses with 350 m~nu facture!"> worldwide to crea te its pmducts. The compa ny has strict .~t'l n dards for production and pricing points, and it keeps a dose watch on its licensees. If you buy a Ralph Lauren i1l'm. yon know what you will gct and you gct whal you expect.
Copyright Copyrights arc all "hollt npression. The Copyright Act of 1976 protects origin~1 work that falls intu the following c.uegor ies: lite r.\ry works; musical wo rks; dramatic works; p'lIltolllimes and dlOreoSrJp hic works; pktorial, grJphic, and sculptural wnrk!>; films and other audiovisual works; and sound recordings. Software has been addeJ to Ih\' types of expression that can be protcckd bythcComputerSoftw<1re Copyright /lct of I ~80, To be protected , th,- work mu.~t he in a m,>,jium th~t can he peTcd"ed, reproduced, orcommunicat ed. It is not possihle to copyright an idea; only an applica ti on of an idea can be protected. A copy right is a grant hy the federal gove rnlll \'ut to the creator of a literary or arti stic production of the exclll~i\'e' right to the prope'r ty for Ih\' life of the author plus 70 yea rs. Fur copyrights owned by puhlishi ng houses, the protection is for ~5 yean; fro m th\' first dati' of pnblication or 120 years from the dale of crea tion, whicheveris first. Thus, co pyrights have a longer initial life th an d thcrtradcmarks or patents, I lowevcr, yon arc not rcqoircJ to registcr with th{" U.S. Copyright Officc in W<1shington, D.C., to get protection dyour work.. 'lh is h heCllIse the United Sla(cs,lnd 162 other ,,,urllrie,' Mrb,..:rihe to the Berne CIlIlVention of \886 amI its <1lllcndrnent..,
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which provi <.l e for intcrnat iol1;ll copyright protection for wurks puhli' he<.l aft~r March 1, 1989, Also, a copyright ow ner docs notllccd to plac~ ~ copyright symbol on his work, Whil~,' some works include a C in a circle (oJ, the abbrevia tion (OPf" or th e wo rd wpyrigilt on the wo rk, such symhols aTe Ull n ece~sar)', In today's world, if you create it, you ow n il, Copyrights. li ke Irddemarks and paten t:>, call be infringed if an una\1 t hori~.ed pe rson u .se.~ all o r I'"rl of the original item. Infringers can be ordered to ceasc using the protected materi'll, destroy all copie,~. and pay damages hased on the harm ("dused or the amount of damage~ pmvided in the Copyright Act, which is not tu exceed $150,000. An infringer can also be Hahle to ansl,'er for a crime in addition to the civil damage.~ owed the owner of the copyright. Copyright infri ngemen t is a fo rm of theft for which thc damages (an be fines or impr isonment. There is a fair usc exccption provided in the Copyright Act which allows perso ns or orga nizations to usc copyrighted material in certai n circumst;mces. including crilki~m. cnmmcnt;lry. news repo rti ng, teaching. scholarship. and res~3rch work. Fair use also d ~p~ n ds on how much of the c"pyr i ~hl,-d material is used for the ;lh"ve purpose .•. U~i ng a oUc"miuute dip of John Wayne's image in a documentary aboot the Wild Wes t wo uld pro bably be okay. Inserting John Wayne into a Super Bowl Sunday beer co m mercial is prohably no\. O f cou,..;c, if a compa ny were intcre.ltcd io tha t type of adver tisi ng, it could aJways contact Joh n Wayne's heirs and nego tiate a roY-Jlty 10 pay for usc of the copyrighted materia l.
Trade Secrets Trade secrets ar.. jllst as valu able to a hus ine.lS as a patent or a lrademark. bu t they arc notllll'ant fo r puhlic consumption. A rrade secrer is infor mation or a process that gives a company a competitive advantage, and tha t advant age is meant to be protected. Tra<.le secrets include the recipe for Kentucky Fried Chicken and the form ula for Coca-Cola. It could be a customer list and pricing information. If 1 were competin g for a government co nl ract, I would love to know how Illy chief ril'al can price his pro ducts so low. If I wer.. working fo r Vogl,e maga1.ine, I wouldn't want the Easter COVl'r idea to be known to Harper's R'lz,wr.
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CHAPTER)5 • INTElLECTUAL PROPERTY
187
Tr;ldc st'crct protection often depend s on the dilige nt dror!.~ of the company trying to keep the secret. Companies use protl'Ckd soft ..... are, divide sensitive for mulas among kq emplop.'t.'s, and use confiden tiality agreements with stilf monetary penalties for breach. Once a s.ccrct is dis· closed, it is almost impossible to staunch the damages. 'I he consequences for a comp any can be gra'·e. I lowever, if any<m e out th ere ha,~ the recipe for that fiUing in an Orco cookie, feel free to pass it along to me.
TH E LAW IN ACTION Ike came up with an idea of how to beat the dock. An idea is not patent· ablc, bu t an appli cation is. His application wa s to invent a prod uct Ihat to ok the «human erro r factor" ou t of the timing. To his surpriS<.', his side venture generated a lot of intere.t and a lot of money. I Ie wa s selling digital del ay boxes all O\'a th .. co untry. In fact, he was sharing design tips wi th his friends at the track and some bmldies werc rc.engincering Ike's boxes into fancier units. Ike did not take steps to pro tec t his invention for his exclusive us.c, but it was a hobby and he was making /ols of money. I\ltl'nts are not like copyrights. You can daim a co pyright just by writ· ing something down. No other steps are requircd. With inventions, how eve r. if you put it out there in the market and don't protect it, others Girl l:Jkc you r idea. 1·low many of us have had hula hoop - sil.ed ideas, hut nCI'er did anything with tlwm? So mrtimes. if you sno oze. you lose. O ver a period ofthc next two tn threc year." Ikc's digit,l l delay hox improved lu sleeke r mod~ls and mure accnm le timers. from time tu time. other small vendors appeared and disappeared with their ve rsio ns of the de vice, hut Ihey n~vu made it as big as Ike. Then one day Ike got a notice fro m a Mr. Sanlllc!s, a Californian claiming to be the inventor of the device warni ng Ike to cease and desist from selling the item due \0 his pending patel)t of the device. The notice al.lo de mande d royalties or licensing rev· enue from Ik e for all the boxes he had sold as an infringer. Luck ily for Ike, the patent had not yet bee n is.~ued 10 Mr. Samuels. Ike steppcd in to the pakntinl; process to prove that 1l{' was the prior inven tor of the digital dd ay hux. To prove this, Ike needed to ro und up some of the
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original boxe.l, dig through his pile of old
~hcnlatics,
get sOJUe drJg rdC-
ing buddies to make out sworn statements, and come up with any other evid~nce he had. The ensuing bailIe had high risks and high rewards. If Mr. Samuels won, [ke would owe thousands and thnu.lands o f dollars in
royalties to him and be put out
ofbu~incss,
Sa muels would gct the patent
and basically own the industry because his disposition was to ch;dlenge any co mpetitor out of exi.,tence. If Ike won, he slill would not get the patent granted 10 him. I'or o ne thing, il was not his patent applica ti on. For another. pUlling his invention int o popular usc withoul prok'(:lion for years had mad .. it no 10ng.:r uni<.[ue. TIle idea was in the public domain. BUI a Il'ln for Ike wo uld mean that Samuels wou ld not gel [ke's big bank account. nor would 11<' put Ike oul of business in Ih., future. With Ihese high stakes, the parties sd tled the issue. Ike did not
conte.~t
the palenl and did nOI pay damages. He was
granted a relatively cheap licen5C on his fulure productio n of his inven ti on. Mr. Samuels contin ued his m,lrch to patent approval. But hoth p;lrtics
sp.. nt thous;llld s of dollars in legal
fc~s 10
resolve this malter.
TEST YOURSELF 1.
Martha and Gary Minor of Heath, OhIo, want to start a small video
s10re. They wish to lise the name MGM Videos. Inc. Will this be a
p roblem? Why or why nOl? 2.
Joya Williams worked as a sec retary to CoclI·Cola's global brand director. She stole contidentia[ documents aod samples of products from the company and in May 2006 offered them to the "highest bldder.· One
company receiving the offering [etter was Pepsi, which warned Coca· Cola. What should Coca ·Cola do? ShOlJld Ms. Williams be concerned?
3.
Lauren writes music and performs it with guitar accompanimen t. She
is only in college, but she is a natura l al putting together haunting words and melodies. She has scored her music ming her comp uter software. She has [aid down some tracks us ing her computer's record ing capability. Sh", has even had a work performed by her high school choir. Does Lauren hold the copyright to these creations?
CHAPTER 15 • INTElLECTUAL PROPERTY
189
Brain Teaser 4.
In February 2005. three twentysomething guys mmed a video shar ing site called YouTube_The contents of the site come from subscribers uploading mo~ie clips, blogs, and original ~ideos for others to enjoy_Anyone c.. n w.. tch most ~ideos, bu t subscribers h
An sw,." s can b,., found o n pag"'s 229-231.
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PA.RT W: TRENDS 11'1 BUSIN,SS
In tellectua l property
I~
the
faste~t
growing a rea of property rights
worldwide. Intellectual property i n clude~ trademarks, pat
CHAPTER 15 • INTElLECTUAL PROPERTY
191
It is not neceuary to fi le fOJ copyright protection for a wOlk; but rilt her, redudng it to a form lhilt (an be communicilted to others is suffidentto protect the work. Copyright infringement is the uSe of protected creative work of another without permission. Copyright laws have lair use provis ions a ll owing use of parts of creative works lor scholarly and news-related circumstances. Trade se(fets include information about a business that gives it a competitive edge.
I . Trade secrets include formulas, recipes, marketing plans, customer ~.ilnd pricing.
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Global Business and International Law ast yea r, family friends in Iowa hosted a foreign exchangE' student from
L
Germany. Hans was a very bright 16-year-old attending h;gh school
and ilssoc iilting with others his age. In Berlin. Hilns enjoyed drinking wine with his family and in public. He was quite put out that he cou ld not enjoy
alcohol as freely in the Uni ted Slates. After
yea~.
What law should apply?
We've all hea rd the adage"When in Rome. do as Ihe Romans do~ In this global age, it Is mote importa nt than ever to know just what the Romans do,
sodal custom can be problematic in a foreign setting. Hans has to follow the drinking laws in Iowa. His host fam ily cannot slip him a bo ttl e of wine for his room as a courteous gesture without risk ing a call from Ch ildren and Family Services. When the host family's son, Alex. is an exchange student in Germany next year, the flip side of this issue will be in play. Like this personal example. it is important in business to recognize cultural differences and be prepa red to deal with them. In this chapter we will discuss some of th e similarities between globa l business practices and some differences. We will also look at the trends and issues to watch in the near future.
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PA.RT W: TRENDS 11'1 BUSIN,SS
v.[jlj AT'S I A ~E A D The Prin(ip les of Comity
Ethics and Internationill
ilnd Sovereign Immunity
Business
Doing Business
Intelle(tuill Property Issues
Internationally
in Global Commerce
International
Understanding Cultu ral
Payment
Differences
IN THE REAL WORLD In rec~ nt y~an;. Jack Canfleltl h~s become a highly su cce,~sful aU lh or. With "'hrk Vielur Hansen, Mr. Canfield wrol e the Chicken Soup book series. whi ch otf('rs homespon ad vice. and i mpir,,(ion~l stori es in over 105 titles, including such spe{: ialties as Ch icken Soup jor the Christion Soul, Chicken SOl4P for the NASCAR Soul, and Chicken Soup for the Preleen Soul. Their booh have sold ove r 100 million copies and arc available in S4 lan guages. Olle untapped market is China, which has the potential to make 100 million hooks look like a d rop in the bucket. Arc there any contmd or intdlcctual property iss ues to wo rk ou t before going into th is markd? Are there any Chicken S
KEY CONCEPTS lus t as each state in the United States has the ab ility to make its own laws that apply within the state. each cou ntr)' on the planet has the abili ty and authority to govern those within its boundaries. On some issues, countrie s have joi ned to fi nd cumm un ground. and various countries have furmed alli ances Of agreeme nts for those purposc~. The North America n l'ree Trdde Agrecment is one example of countriesagrecing on term s of tradc and taritr~ bc\w~en them .lhe EUf<)pean Union is now an alliance ,,( 27 membef stat es th"t usc a common curren cy. a single m~rhl. an d a common trd de
Cf;~PTE~ 16 • GLOB~L BU SINESS ~NO INTE~NATIONAL LAW
195
policy. Many cou ntries agree to work togl·t her on part icular iSSUl· ... aud those apecments arc mcmo rialiud in trea ties between co un tries or alii· ances for purpOI>eS such as nonprolifera tion of nuclear weapons. environ· mental protection, and disease research and treatme nt.
The Princip les of Co mity and Sovereign Immunity At the hea rt of international tnlll.\.actions is comi ty. C"",il)" is the princi· pic thaI ",1(h coun try should give elfectlo Ihe laws ami wurt decisio ns of another CO Ull lry. enm ity is ba.lcd on respect be twee n n ati()n.~ an d diplo. matic courtesy. Although the Un ited States docs not have a monarchy. it respects diplomatic channels and deals app rop riatel y with the sitting man archsoffo rcignco unt rics. When Pr~sio.lcnt Bush welcomed Queen Eli nbelh II to the United States, he afforded her aU th e courtesy and respect a for· <:ig n leader expect.", including a .. late di nner at the' Wh ik t louse. For her part. Queen Eli7.ahcth II ha.~ welcome d every United States president since Dwight D. E i~n h(}wcr with the ~ame pomp and ci rcumstance. regardles, of each ex~c u t i \"e's indil'idual political affiliations. Related to the idea o r comit y i~ the principk of $Q\'ereign immunity. El'ery country is sOl'creign, or indepe ndent. Th is idea pro tects nations and th<."ir digni tarics from having to answer to an d appear in fo reign co urts. Fordgn embassies locakd in the United States arc not pa rt of the United States. bu t small isla nds of a fore ign cou ntry. Ukewise. a U.S. emhassy ~hroad is essen tially Ame rican soil in that co untry. Fo reign diplomats work iog in the Ullikd Stak~ h,\\'e diplomatic immu nity, which protec t ~ them from ha"ing to he subject 10 Amcric,llI cour t jurisdictio n. ·nli., docs not me,tu that aU emhassy ~ m ployee,~ C.lll do as th(·y pll·ase in the United St'l te~. The protectio n of sovereign immunity applies only to activity carried on in the United States by the foreign nation. Failure to pay for a personal spl'eding ticket ca n sl i1l land a diplomat in trouble.
Doing Bu siness Internationa ll y It C,U\ he very attract i,'e to ma nu fact ure or dist ribu te products lor .~al~ slo j,ally. Dccrea.
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PA.RT W: TRENDS 11'1 BUSIN,SS
low pmductiun cust~ in some fM<'ign countril'.~ have proven irresistible to Americall companies in the bst decade. No t only is labor cheaper ~bro~d, but foreign venues often have less regulation involving environmental issues rdatcd to productinn. On the !lip side, forcign nations SCI' hcnefi ts in locating in the United States. for example, Japan has fou nd that manu facturing ce rtain automobiles in America is a good way to fill growing orders quick ly and rcspund to warranty and postmallufacturillg isslles dficiently. Selling your product to huyers in other countries invo lves exporting. Companies call directly o:xporl their goods to overseas purchasers or sell their g()od_~ through an agent or foreign representative. Either way. going glohal invokes complex contracts and requi res an understanding of for~.'ign bws to avoid costly mistakes. Larg<' finns in major cities practice in tcrnationallaw, and olien they have branchcs of their !inns in the foreign location to assist businesses with shippi ng, distribution, and tax issues. Many co mpanies choose not to sct up th<:ir own businesses abroad bUI rJlher to license the right 10 another elltity to conduci a particul;tr bu~iness in a foreign pbCl-. In .~ome countries, the law red there. This requirement " til be Ille t if businesses franchise, or contract, I"ith foreign intcres\s to run the business abroad. McDollald\ i~ a fixture in Jlmost every country in the ,vorld by virtue of grJllting licenses and franchise agreements to others. "lhest: complex ou,iness deals arc almost always redoced to writing. Ilowever, there arc unique issues with foreign cont ra cts. For cX
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BUSINESS
~NO INTE~NATIONAL LAW
197
of faxes or elcctrOllic co mmun ications .<;c nt hct',..'cn Ih(· p'lrlies r'lther Ihan one docu men t formall y signed by each party in one location at the ~'Im c tim e.
International Payment Ekctronic banking makes payment between international menhant5 easy an d fast. [t a[.ro mahs these payments vulne rab[e to online theft and frau d. Anothe r issue wi th in tcrnationallrade is the currenc y exchange r;lles thaI app[y h>the tmn .'
Ethics and International Business Business sC"J.ndals h~\'e not been limited to Ihe Un ited States. Co rporate greed. olliccr and director misco nduct, and irrcguJ~r accounling Il'(hniq uc s h~ve .~u Tf;lced in must induslriali1,ed cou ntries in recent years. Bad ethical decisions have not hecl! limited to Enron , Arthur And crso n. and Wnrld Co m. One of my favo rite forrign sca ndal s is the Pa rmalal case from Italy. Parmalat is a dairy and food co rp oT;lt iou foun ded in Parma. Italy, by Cali slo Tanzi in 1961. The co mpany expanded to b<: a principal Europea n milk prod ucer. In Ihe latc 19905 the company so ught 10 expand inlo in lernational markcts and dilwsify by m~king speculalive investments. At its height. Parmabt owned the Parma soccer team, a travel gro up, a Iclcvi5ion network, and many offshore firm,•. Unfo rtunately, many ofthcS<.' in" e~t ment .• were 110t sound and not a(C UT;lldy reprcsen\td "n the co mpany'.• balance sheet. The busincss wa .• ;I[W fun ne ling moncy from one wholly
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PA.RT W: TRENDS 11'1 BUSIN,SS
ow ned otr."hore firm to another. One of th e otr.~I\Ore groups wa.~ eVl'1I named Huconero, which means black hole. Parmalat officials were not ,llone in this scheme. Many m'ljo r banb hel ped fuel the problem by providing risky investment deals to huild up and manage these speculutive moves. not only to keep Parmalat alloat hut al so to mak e the banb' substantial invest ments look mOTe solid. Un fortunatel y. as in Ihe Enron situation, many of the inve.'itors in th e high · risk otrcring.~ were workers and retirees wh o ultimatel y lost oul cO lllplctdy. The scheme came tu an end in 2003 when liquidit y problems began to hit hard. III total, the co mpany had ahoul an eight-hill ion-cum short'lge. whi ch is equivale nt to approximately t6 hillion doll ars. Irregularities included intentional forgeries to "beef up" the liqu idity of the business, am ong them a $3.95 billion account at the Bank of AmeTi", that did not exist. Evidence of the account, used to finance other credit, was manufac tured hy co mpany otficiah usi ng a K
J,
*
~I
h
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Intellectua l Propert y Issues in Globa l Com merce There are some importam international agreemcms and treaties abo ut intcllo:<:tual property protection. The Pa ris Conl'c nti on of IgR3 allow.• par1ie.1 fmm one counlry to "pply ]i) r pal ~n l an d trademark pmt~Cli"n in other mcmbeT w untrics, 111e Berne Co nn'n tion of18RI1 and amendments theretn provide for int ernational co pyr ight recogn ition among signing countri es. i\!ore rt'cently. the TrJde· Rchltcd Aspects of lntdlL'C tual Proper ty Rights. or TR IPS. Agreement of ]994 adopts 5tandards for international protection of intellectual property rights. However. not every nation enforces intellectual property Tigh ts vigorously. ,Some husincsws avoid (;e rtain foreign markets hCCd USC " fthe dange r of rcvcrS<'-engincering and counterfei tin g that could irrcparJhly dam age property interests. China aud olher Far Ea,'tern cnuntTi e.• eng,lge in all active cou nkrfe iting of goods. partly bec,Hlse it is cos t·effective ,1Ild partIr bi.·cau .~e Ihc concept of intd lectu,llpropert y belo nging 10 one pel"o n or entit y is not a well -established cultu ml principle. At times, copyrigh ted, pah.'n ltx!, or trJdemarked items may be slightl y modifilx!. but their product ion is an infringement nevertheless. Popular items for cop)'ing arc handbags., watches, DVDs. and videos. Pursuing infringement CJses can be vcry tim e-consuming and costly. It ca n ,ll w be J lot like trying to hit a movi ng target since manyopcrJlo rs set up shop quickly, sdl a product. and move on to othe r item~ and location'. One recent internat ional exa mple or the scope of intellectu al property di sputes invu]""s the Zippu Ma Hli (;lcturillS Co mpany ufBrJMord. Pennsylvania, This co mpany, _~ta rt'x! in t 936, _~t il! makes ciga rette ligh ters in BrJdford and employs only 800 people. yet Ihe company's product is recognized wo rldwid (' and is a colkclor's item to many. The company holds many patents Jnd ha s tmdemarkcd il5 uniqoe lighler case design. wilh its rounded corn ers and edges and Hip top. 'I his small compa ny usuaUy spends more than $2.5 milli on per year to protect its tmdeillarh worldwide. Presently fo ur Chin ese produce rs arc al leged to he infri nging Zippo'., tmdcmark and selling milliuns of ligh t(·r.~ in Chin a. An infrin gement caS-\: is pending in which Zippo estimates it will SIWlld upward of $10 million to attempt to .'nforce its rights in Chi na.
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PA.RT W: TRENDS 11'1 BUSIN,SS
Understanding Cu ltural Differences Success in international businC.loS endeavors involves spcritic knowledge of tnlde laws, banking regulations, ~nd con trdct principles, but it Jlw involves understanding the people rou arc dealing wilh and respecting thdrcustoms ~ml cthics.Crnss·culturdl ditferences~ho uld not he ignored. There isa w(sting study in this area was done hy Dr. Gecrt J lofstede from the Ncthcrb nd s. llctween 1967 and 1973 he studkd how values in the workplace arc intloenced hy culture and summarized hi s tindinl:is using fnur primny di mensions. I lis insigh tful results arc hdpful forthe in tl·rnational husinessperson. For exam pk, h,' finds that workers in the United States r,lnk high un individ ualism. Amcrkans are self-reliant and capablc of looking out fo r thcmsch·cs. Ame riGlns attach a low vai li c tu meding socie ty's oblig-,1tions and appreciating cuhurd] tmditions. In contrast, Arab workers arc highly rul e-oriented and expect a controlled society. This ,lttitudc i., due in part to the predominJnt Muslim (,lith, but it also reflects on expectations of class inequality and limited upward mobility. The p"puJdce has a low level of tol~rdnce for uncertainty and wish('s its leaders to coo trol e\'erythinl:i to avoid thc unexpected. A low valoe is givcn to individualism, bu t a coll,'ct iw appreciation for cultu re aml lollg-tcrm commitmenL~ ranh high in value. Knowing these dilferences in cuh urdl norms and expectations co uld help you avoid costly mistakes and miscues when doing husiness abroad.
THE LAW IN ACTION I alll SUfe Mr. Canfield and Mr. Ilansen will get eX]ll'Tt advice hefore they get into thc Chinese market, hull am also sure that this market is too big for them to il:illore. Some issucs in co ntrdctillg for pruduction in China include choice of language fo r the COJl\rJct and choice of jurisdiction in
Cf;~PTE~ 16 • GLOB~L BUSINESS ~N O INTE~NATI ONA L LAW
201
which to resolve disputes. Thq also must decide if the hoo h will he pmdu ced elsewhere and exported to China. If they a re, they need a Jist ribution network. If no l. they need produc tion f;lcilities in China. Of course, the monetary det;lils will ha~'e to be wo rked out betweeo authors, puhli.~h crs, and vendors with appropriate electronic accountin g and transferring of fun ds. One i,;.\oe the au thors must review carefully is the control of their copyrighted Ill,derial in th e Chinc.o;c TIl Mket. t. hderi~l this popuhlr can he altractive to co unterfeiting. P~n of the 50cce.s of this series is its dependable product. These hooks pn:S<.' nt shon, inspiring, real -life storks. If the series i, dimini.lhed in (lu~li ty nr t,lste by pUM translati ons, it wi11lnse it, appe~l as a unique product. 1111.1 is going to be espec i~ll y hard to monitor hecause, to my knowledge. the authors do not speak allllH-' YJrious dialects used in China, although 1>1r. Canfield majored in Chinese history at Haryard University. fina lly, there may he some cu ltu nll co nsideratio ns in chon.,ing the titles to o lfer in China. lhe p"pu l~tion values stro ng rdat io nships. culture, and gT
TEST YO URSELF 1.
A form er e mploy ee of Schaeffer Milnufacturing Co. of For t M~dison, Iowa. attempted to sell the company·s proprietary information about fountain pen nib design to a Chine se pen co mpany. The employee worked in eng in eering at th e co mpany until 2003, when he was laid off as the Fon Madison plant shut down _The Schaeffer Manufactur ing Co. and BIC Corp. are engaged In a lawsuit against this former employee. Why should Schaeffer ca re about this matter?
2.
A small Nebraska jeweler was co ntac ted via th e Internet by a French jeweler asking if the Nebras kan would be his contact in the United States fOI CUSiom wo rk the Fre nch fi rm provided to very exclu sive
202
PA.RT W: TR EN DS 11'1 BU SIN, SS
American
customer~.
All the Nebraska dealer had to do
wa~
agree to
accept payments into his local store account and then wire them out as the French jeweler directed. For his trouble. the American contact was offered 10 percent of the deposits as compensation. Are there any concerns with this arrangement? 3.
Many ph~rmaceutiC
inve~tors.
The Chinese government has been trying to convin.::e the drug manufa.::turers to solve the problem by lowering the cost of their drugs in China. This would make the patented items unattractive to counterfeiters who could not make rnu.::h of a profit On any copies. However, drug compani<:!s have not been willing to cut prices to g",neric levels on still-patented treatments, China has recently threatened to do What some other coun tries like Brazil and South Africa have been forced to do - go to the World Trade Organization and ask for special permhsion to break the patents of the pharmaceutical companies and begin producing and distributing cheap generics to save their dtizens from an epidemic. What do you think l~ the best argument in faVQr of the pharmaceutica l companies'position? Answers can be found on pages 231 - 232.
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K'E tJ P,OINTS TOl REMEMB.ER . Count,;e~
ag ree 10 common goal~ and
objective~
through
Ireatie~.
The principle of comity controls internat iona l dealings. Comity requires th at each country should give effect to th e laws and cou rt deci~ion~
of anoth er country.
Sovereign immu nity recognizes that each country is independen t and not subject to the jurisdictio n of foreign courts. Succes~
in interna tional
bu ~ineH
d ea li ngs require~ co ntract knowl-
edge, especially about the issue of choice of language for the contract, choice of laws, an d di~pute re~ol ut ion. Succes~ in international busi ness deal in gs requires knowledge of the commercial banking system and foreign e Kchang e policies.
Success in interna tiona l business involves unde~ta n d ing offoreign countries' imp ort, eKporl, an d tax r"'9ulations as we ll as manu facturi ng and d istri bution process. In ternational business eKposes intellectual property rights to infringement that cou ld be diffi cu lt a nd expensive to con tro l. Success in international bus iness requ il es knowledge of cultural differences. foreign customs, and ethics to avoid costly mistakes and miscues.
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Ac knowledgements I would lik.' to th~nk some individ ual s who helped make this book pos~ibk AI Kaplan Unh'CTsily, Davenport, Iowa, my thanks go to Dr. Juhn Nea l and Dr. Mich ad Woods who made it poss ihle for me to work halftime while wrili ng this book. I would also like 10 thank Nancy Humes for he r proofreading and co mments and Velda Palos fo r her co ntinu ous enthusiasm and support. ,\\ Kaplan Publishing. [ must th ank ltl)' great aC<juisiliuns editor, Shllllllon
Berning, for her faith in me and her patience with 3 oew writer. I also thank I'>'!onica Lugo. my development editor, for her encouragement and insightful questions. 1 ;\111 als\1 indchkd to justin' Lind a K. Nt'uman for hn kiml su pport ami he r introducing me to Tom Judge, who WJ.~ a g re at reader and reviewer of the text. J wuld no t have do ne this project without the loving support of my son and my husband. Nick. thank YOll fo r an th e suggestions and ethical insights. I rely o n )'oor couns..! and respect your wisdom. Tim, this hook is ded icated 10 yoo,
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Urheberre<;htlich ge5chlitltes Material
Test Yourself Answers CHAPTER 1 l.
Yes, Tri·Slate coultl bl'
,h~rgrd
with nwoy crimes. In fact, they were
cCmrgcd with over 330 counts or charges of theft by deception, almost
as many connts of abuse of a corpse, and dozens of claims of mak ing fillse siall'lllcnts on deat h certificates. For each body they agreed to crcrnak, hut didn't, they could he charged with at lea.11 three criminal violations. 2. 3.
The Slate of G~orsia throu!:\h the Walker County district attorney would prosecute criminal charges 011 behalf of the public. If fou nd guilty "I' iloy ,,(
Ihc.~r ,rimc.~,
which arc fcl onic'\, Tri·Statc
cou ld be punished wilh time in prison. 4.
Ye.•. the families o f the Ul'CC,ISCJ could bring civil charges in Walker
Cou nty District Court fo r their damugcs. They could sue for breach of contJ'Jct bec~use they did not Sd what they paid for{prop('r cremation services), The families could also sue for lort damases because they have been personally injured by the pain and Srief they have suffered because of the actions ofTri-State. S. If found liable of the civil claims, Tri-State cou ld be ordered to pay mone)' damages to the families of the deceased for their inlliClion of emotional distress, pa in and sorrow, and rdated costs.
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"
208
TESTYOURSHF ANSWER S
Brain Teaser 6. Neither is easier than the other. They an' just different. In the criminal QI.\.C, the ~tate has to prove it, case bC}1md
Questio ns Fut ure Chapt ers Wi ll Answer 7. &OC chapter 2 for a d iscu~ion on what ca,es can be heard in fcrlcraJ court an d why. lhi' caM: could be eligible fi,r feder.. l o,urt jurisdiction, bill il was tried ill the Georgia stale court. Read 011 in the hook 10 find oot why. 8.
It would be pretty hard 10 round up th"t building and put it in jail. So, how do cor pnralions pay fi,r their crimes? Sec chapter 5 fo r a discussjon ofhnsine.~s liability for crimes. [n the Tri-$tate case, the owner uf the corpuration was hdd liable and is now serving a 12-year prison se ntence fur his criminal cunvictiuns.
9.
We ufte n hear about bwsuits involving many parties. Sumetimes there arc many plaintifrs, sometimes many defendants. In this case, many families banded together and sued Tri -State in o ne lawsuit be<:unsc they all experienced the same treatment. 'lhe (amilie~ also sued the funer~l home~ with which they had contr-tcted for the services on the theory that the fun~ ral homes picked Tri-Statc for crcmator)' s~rvkes an d should have been more aware of what was going on. In chapler 2 yo u will fl1ld a discussion ahout why plaintiffs try to su~ ~wry I)arty who may owe them d 'lm agc.~.
CHAPTER 2 I. Yes, hOlh Mr. Lynch and Sam haw a cause of action, or case, to bring as a result of this accident and the damages it caused. 2.
Mr. Lynch has a caUSt' uf act ion for breac h of contract. He buughl a heater that he though! was fit to heat his house safely. It obvin usly did
TESTYOliRSE l f ANSWERS
209
not work !Iafdy ifkernscne co uld splash and cause "u(h imm<'rtioning da mages fairly among thost: respnnsiblc. Remcmoer, if the plaintitf rails to sue a party who should be pre!>ent to fully hear the la.~e, the defendant may join the party in the law.~uil by a cross·claim. Remember also, the more defendants, the more possible parties (rom which to rccova damages. 4. Thc pbintitfs reside in lUinois. Heat-all Industries resides in Minnesota. Sears corporate headqnarters is in Chicago, Illinois, so it certainly residcs thcrc. hut it docs husinc.\S in evcry st~tl' of the union. Iherefure, Scar,~ may he sued in any statc of the union. 5.
Yes. this CJ.,O;C can he filed in federal coun if thc l.)'ncheHue only [-leatall Industries. There i~ diveThity of citizens hip hetween the plaintitfs and Ihc defendant and there is more than $75,000 at issue for each (Of the pl~intiffs. lfth~ plaintitl;; want ttl sue Seilfs, which resides in Illinois also, there is no diversity jOfisdiction, and the case will h,,\'c tu he filed in the Illinois circuit court. The case could also be flied in Minnesota stale cou rt where the defendants reside. Heat-all Industric.~ i~ lucated there and Scars docs ousiness there.
Brai n Teaser 6_
With these t;lets, the best choice is probaoly hI file in Cook Coun ty, Ill inois, and sl"t:k a state cou rt resolution of the case. A federJ.I co urt case is not autom~tically mul\' important o r morc prestigious than ~ state cuurt. You gu to the pbce that can "~pcak the bw" that rou wan t tu hear. One is not superiur tn the other.
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TEST YOURSELF ANSWER S
Questions Future Chapters Will Answer 7.
See chJpter 5 fora discussion on the impact of whne businesses reside. Chapter 14 discusses some isslles involved in doing bus iness online.
8.
Even complex cast's can be settled without a trial. See chapter 3 to discover other way.' of negotiating a dispute to a rcwlution without a trial.
CHAPTER 3 Review Questions I.
Yes. the pel owners have a cause of action again.
2.
[fDoS·s Best Frie nd Co. docs busincss in th e 10 Midwestern and Southern slates, they arc subjed 10 rcsponding to luwsuils there. If you arc in for a penny. you arc in for a pound. They are willing 10 t~kc profits frtJI1l these .,tates; Ihercf<m:, they arc bound to respond to claim., against thcm in these statcs.
3.
Mr. Ilound i. a little st ingy. Mr. Hound is COTTecl th,)t customer, who arc rewming dog fo od porsllan t to the recall will cxp~ct thdr money back. til' is mistaken about such limi ted dam,)gc~ to familic~ who have sick pets and very deceased pets.
mi~taken
.. hout limits like this t() familie s who have
Test Yourself on Th is Chapter 4.
A scttlcmelll rea ched by negotiation, mediation. or arb itr.lIion wo uld
Jo the (i>lIowing; Be quicker Be cheal)er
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TEST YOURSE lf ANSWERS
2\ \
Involve less publi city Not be au admis~ion of guilt or liahility Pre serve cu~t o mcr relationships Prese rve rdationships with the dog food companies they do husiness with Show the community that they ,1re seriously concerned and re~p"llsive
5. Fro m !Jog's Best Frien d Co,'s point of vie\\', I would want a mediator with legal experience to weigh how unilltenti\lIl al and unavoidable this incident was. I would want so nH.'onc who would note how quickly Dog's Best Friend respo nded once they kne w of the problem. I would also wd nt an unemotionaJmediator who would q uestion how responsive pet owners werl' to signs of illnl'ss in their pets and how quickly they noticed the recall and sto pped using the product.
From the I'd ownns' point of view, ! would want a vctninarian who would know how much pain and suffering this injury caused to the pets and the owners. I would want someone who knew ab out dog pedigrees and breed va lu es to co rr~'< lly eva lu ate the dam~ges done to thc sickencd an imals and the va lu c of the dt"Ccased dogs.
Brain Teaser 6.
No amount of money wiU bri ng back a dcad dog. Perhaps !Jog's Ucst Friend could olfer to pay ex penses and th e value of the animal ~ but avo id other clai ms like emoti o nallo.~ses for the owners. Instead, they c(lol.1 olfer to put $10,000 inlo a resl:aTcb pruject on kidney diM:ase in dogs, or tO Wilnl a dog shdt~r, or to developing 5a ferca nn~d dog (\lod. This typ e of f:.1ir and concerned respo nse could help Dog's Best f riend regain market trust and customer goodwill by showing conccrn and also promoting prevention measures.
Question Future Chapters Wi ll Answer 7. Yes, there is it requirement that goo ds distributed to the public be tit for th cir ,ldwrtiscd purposes. In cha pter t2 we review thc htw of warranties in detaiL
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TEST YOURSELF ANSWERS
CHAPTER 4 I.
Yes, capping an ~xcco(ive sabry related to worker pa), is illl tlhical decision. :-"bny co mpil1lirs have used this trchni'llI e, with different multipliers, to Illake a statement about the value of eyery worker. This is not an "'!loistic choice on the part of the m~nagcrlH.'nt of Ben & /c rr{s h,·cause an cgoi.~licchoice ,~ouIJ emphasize the highest possible salary forthe CEQ, with the hopes that infbted levels of pay would run through aJi top management tiers. This could he a utilitarian choice by the compan)', to provide the greatest good for the greatest number, hu t this choice docs so indirectly, by freeing funds to pay supplieTh and workers fairly. Thi., is definitely a choice by the owners to foJlow the principle of the e~tegorica l irnperJt iye, which operates out of pure IlwtivC'. "The owners arc willing to live with this choice because it is a clUJicc they an: willing to have iml'oscd on them by others.
2.
Yes, r,·,civing all esecutive comp,'nMtion package thil t relleets what the market will bear is ethical. Many companies USc this technique 10 attrJct tht, brightest and the best to lead their businesses. The willing market determines Ihe scales paid and the benefits included. ·Jbis is not necessarily a decision that respects the categorical imperative. Those who wi~h 10 o utbid for talent do not genrrallywant to be outbid thcmsclv~s. Th is is not a uti lita rian approach to compensalion. offering the !)reatc.' t b,'ncfit.~ to the Brcat,'~t lllllllb",rs. ·Jbi,. al'pro~ch is "'Boistic. TIle company tha t pays 101' dollar want s what is best for iI, amI the CEO who accepls tol' dolla r is gelling what is best fo r hinl.
J.
These sur\"~y results could r~ise legal concerns, heca use they cuu ld show that physicians llSC facto rs other than thei r best clinical judipncnt \0 trea t patients. In cases where out co mes arc nut good, thiscuuld cause conce rns abou t levd of CdT(' and conflicts of in teres I. Chapter 6 on tort law discusses personal injury cases and the concept of TIL'!lligcnce. These su rvey T('su lts can also rdise et hiedl concern .• hCClUse the stati~tical re~ults indicate that phy"icians arc being inflm'na-d by personal. eg<) istical concerns, such as inct)1ne level and rcbtionship to pharmaceu· tical cmnl'anics, rather than the greatest goud for the greatest lHnnb<'T (u tilit arian concerns) Of the categorical impcrJ tlve (pure motives).
TEST YOURSE lf ANSWERS
4.
UnoJi sdoscoJ
sclf-i n\cre.~t
2\3
in a loan maoJe 10 an other co uld he a crime.
It is defi nitely against some finan cbl aid representatives' (On lntcts of
hire. It could al so be rnisrcpresent,ltion or fraud - principles discu ssed in detail in (hapI~n; 7 and 8. Ethically. this prJClicc could be problematic. An egoist could be comfortable intluencing others to choose loans Ih al oJirectly benefi ted him. 'l his pra ctice is nOI one Ihal many believe .,hould he unil"eN'1. sO it is no l (oslering the principles ofl he C'~l egori cal impera tive. Neither doc,. this pr'lctice necessarily olrer the greatest guod to the greatest number, as there may he many hetter financial aid packages for sIudents that arc never presented because of the selfinterest of the financial aioJ rcpre.~cntalive.
CHAPTER 5 I.
Yes, any business that wishes to may contribute \0 the effort to oJcfeat th e sal"s tax. llusi n csse.~ are guaranteed the right to free speech hy the Constitution ~nd this means th"tthey can sopport any caust they wish with curporate sponsorship o r contributio ns. TJking a side in this matter, or any othe r public oJispute, may aliena te some customers and business stakeholders, so businesses may be reluctant to disclose their politics or social views in some instances.
2.
Royal CaribbC"~n Cruise Lines couloJ be liable for environme nt"l vio lations o n the state and fedeml lcvd. PoUution viobtions arc criminal charges that arc punishable with large fines and possible sanctions. including corpo rate probation. In fact, the Royal Caribbean Cruisc Lines plc;loJed gu ilty to a scriesof envi ro nmental '~olations and to d,lt e h
3.
"-Ir. Max would sure like to keep from incriminating him self, bUl he won't succeed here. The record~ th e IRS sceh arc corporate records fo r Max Tax Sen' ice, In c. A business docs not h",'c Ih e t:ifth Amendmen t pri v ileg~ aga insl self-in cri minat ion. lIs r<'curds must be disclosed eVen if thaI disclosure might implicate others in crim inal activity.
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TEST YOURSHF ANSWERS
Brain Teaser 4. Nike, Inc., has every right to freedom of speech under the First Amend· ment. This right ofa husin c.ss to S
CHAPTER 6 I.
To analyze this pratfall for its to rt potential, you must first 'lSI::. who Ql u.\.ed the hurt in this case? The <>1I ()01~n, pmbably. Was there a du ty o n thl' part ufthc' ott oman nlallufact urrr to i5slI <' a warnin!; with the sale: "Caution, thi, otto man may cause pL'O pic to trip ,I ud fall ," Probably not, but we ta lk ab out warnings in chapter II. Did LaurJ filii to rep lace the ottoman to its usual resti ng spot after vacu uming? Even if she did, it was in plain Sight and it is Rob's ow n li ving room. He shouhl know whJt hazards lurk there. We UTe weak on duty so the fact that an incident happened h not enough. Blessedly. Rob was not hurt in this fall. He lived to wri te (o mcdy for years an d year.•. No tort.
2. Does the management of a building hal'e a duty to warn vis itors that the devator is not working? Probably yes, and in breaching that duty, hy not posting a sign or loc king the ('levator d<>ors or lurning otfthc
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2\5
po wer to the ekv~t or, the man~l!ement hr.'ached ihduty. Poor RO!l;lliud fcllto her death, which se ttl es the damages ljucstio n. Was th e management of the building th e cause of her death? Maybe if she had not b~'t.'n so zealousl)' arguing with Leland, she would have noticed the empt y shaft. so perhaps the tonfeasor hasa defense of contributory negligence, but not a strung one. Walking into an opening c1evJtor might be assum ing the risk that you could stumble on th e door frame or gct yo ur finger Clught in the do~inl!doors.1t doesn't mean you shou ld hc cxpccting "thc last dmp." All th~ element s ~re met. TIl is is a tort on the part of th e management of the building. TIle owners and manag;:rs the y hir,"'no may have been a crime, hu t thi.~ in cident is not ~ to rt . Who is ;It fault? Mo th er Na ture? There is no clear duty here, alth ough th,'re arc horri hle ddfnagcs. No tort. 4.
JR Ewing is sil1ing at his dc sk working latc, comforted by the thoug ht that in thc last t 3 episodes he h~sa!icn~ted ~very perso n he knew. Every family member, work collcague, and competito r h~s a reaso n to dcspise him. Some h~vc good reason to fight b'lCk. But the pe rso n who ope ned the office door and cased in the barrel of a revolver was breaching a duty to the o il gian t. [vii o r not, a re aso nable pcrso n doesn't cxpect to he shot sitting at his de.sk. The t o rtf~ as"r did shoot and i( was deilr JR was s~riou~lywoundcd; theTt'forc, damage ha s !>ccn dou~. Thc final eI~ ment to cstithlish is that the tortfcasor causcd thc dam agc. Clea rlr th;lt person did, in a I)rossly negligent. ifn ot intenlional, fashion. It was n't until the beginning of the next season that we knew the shootcr was Kristin Shepard, IRs sister-in-law and mistress_Tort.
CHAPTER 7 l.
David is obviously not as knowk.Jgcablc abo ut antiques as h,' th ought. He sold a I'ery valuable chest for one one-thousandth of its worth. Six mo nths ago, at the timeofthe sale, there wasan offer and an acceptan ce. The parties had capacity to enter into thi s co nt ract. which wa s legitl and voluntary. 'Ihe issue Dav id rtall y wants \0 rJise is co nsid crd tion,
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TEST YOURSELF ANSWER S
hut he will lose his claim. The law docs "0\ ca re if con~iderati<>n i., Cair in monetar y terms and wi ll not protect people from entering into ha d deals. Forconsideration to be v;l1i d there must be I n exchange of promisc.\ or itcms of vJ lue - not necessJ(i1 y equal valuc. Pcoplc over· pay and underpay all the time. and the law all ows co nt racting p~rties to make their ow n dcals with out inkrferenCI'. Commercc would not be very dependable if e"cry disgrun tled seller «)uld reclaim an item he rq~ret.~ selling or if a buyn could ha" e remorse ove r t he price paid and return his pu rchase., at whim . 2. The o tfer was the depositing of S1 into the vending machine. 1111.' acce ptance was the giving ofproduCl. Co nsideration wa.~ present. lhcre was no illegali ty or incapacity or illvulun tarin t'ss involved, so this W;1S a good con tr;ICl. When a pHty to a contract doe.~ !lOt get whal was promised, a breach has occu rred. Tht' vending machine malfunc tionl'd, and although thl" colfel' was not delivered as expected, the machine did perform. Judy has a brcach uf contract act ion against the ve nding machine co mpany. She will probably just forget about a $1 cup of cappuccino, but if the ruin ed shoes wcre valmlblc, ~he may ask for co mpensatio n fo r tho se as a damage incidental to the lllaifunction. Shc co uld also con.
J,
*
~I
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TEST YOURSE l f ANSWERS
2\7
Brain Teasers 4. Therc'5 no qucstion hcre th~t there was a binding offer and acceptance with consider;llion. The houS(· hOI.' heell in progress for over eight mmuhs. '1he parlk .• have capacily, and il WaS a vo lum ary bargain. 'Ihe only issue being questioned is legality. Is illegal for this architect, with a bpscd license, to ge t paid $560,000 (ur completing the house, or has he invalidated the cuntract due to the lapsed license? Wh l'n it comes to legality. there is a difference between a contrJct being for an ille· gal purpose, like gambling, prostitution. or murder. and a contr~cting party having a ll"chnical ditliculty in a li cense or fcc is~ue. There is no problem with Icg~lity here. The Stars have tn pay. S.
Wc don't know in this casc who made the offer, Dan or Eric, but th at doesl!t maUer. If Dan made the olfer. he controlled the terms. and when he offered 5200 for the scason of snow removal, Eric accepted it. [fEric made the olrer and it WaS nu t tn Dan's li king, he could have cuu ntc roffered more a({cptahlc term s. Regardless of who uffered ;]ml who accepted, the.~e parties agreed on snow renhwal. They ~cl a pric~.', which was guod consideration- moncy in cxchang~ for services. They arc botb oflcgal age and neither bas disabilities. No one hl'ld a gun to their heads forcing them into this bargain, so it was voluntary. Snow rem oval is a legal subject for a contract. Uut is it a f.lir agreement? What ahout equity and fairner.s? For Dan, 5100 per snow removal M:ems unfair. For Eric. not quite 57 per snow removal seems sti ngy. Por bett er or worse, the law docs no' care "hout a fair agreement; the lawcare.~ about legal conside ration. Dan gaw up his money-either " lot "fit or a little depending o n the weat her, but he ;lgrced to the deal. Eric gave up his freedoJll, which is legal considem tion. All winter, Eric had to be ready in case ufstorm. He could nevcrgo out oflol'l"n, unless he provided backup services. He had to have his c,/uipment in wo rk ing orde r at all times. He was being paid as much for his availability as for his services. If either pa rty was nervous about how the winter would turn out. Ihey could have agreed on a per se rvices charge for ,_now removal. The law will enforce the agrel·ment made. Only Mother Nilture will decide who bargained wisely.
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TEST YOURSELF ANSWER S
An argum ent hased un promiS'IO ry estoppel i.1 not availallle to Dall or Eric Quasi cn ntract and promissory estopI'd are ~'<.jujtablc remedies that the court may consider if one side to an ag reem ent is unjustly enriched duc to rdiance nn an agrccmentthat doe.~ not meet the requirements of a contrJCI. [n this case, there is a hind ing co ntrJCi. "l he I~w will interpret the agreeml:'nt the parties have, not what thl:'Ywished they had.
Qu estion Future Chapters Wi ll Answer 6,
[n chapter Il we revisit the Buyers and Sell er:s as we discuss whe ther you always have to do what you promised. This chapter will explain i ~sues ahou t contmct performance ,md defenses to chargl:'s of nonperfor mance.
CHAPTER 8 I.
Calvin and Lang Auto Body made a contract. TIlere was an otTer and acceptance, consideration, capJcity, legality, and voluntariness. TI ley exchanged promises when Cal vin took the car in for the es timale. Bul due to circumstances, neither party performed. Calvin cann ot sue Lang for fa ilu re to repai r and Lang cannot sue Calvin for paymen t. Neither party is oUi anything in this armng~ment so far, so the re is nothing for a court to enforce. If b ng had ordered a special part, good onl)' o n Calvin\ car, he may have a claim f()T the cos t of that itcm. If Calvin had givcn Lang paymelll for sc rvices he lleVer receive d, he may he owed a rdund. It is not uncom mon for parties h) mean to (\!Inplete their deals but fail to do so through no fJuit of their ow n. lfno action has been taken, therc arc no damages. If Calvin does gct his act togdher, he could scI up anothe r repair dJte, but depending on the terms of the estimate, Lang may claim that the commitment for that price has expired.
2.
Lou and Li nda may he in love, but they arc not savvy about co nt mcu. They ha"e hCl:'n legally married hy Judge Jnc Urown; Ihe re is no re aso n to ask a COllrt fOT specific pe rfor man ce. The purpose of the contra ct W,lS fo r Lou and Lind a to be married, not to be ma rr ied hy a certain
TEST YOURSE lf ANSWERS
2\9
judge. I" this (".\.1 1', nile judge is a.1 good as another. Judge Judy is ont uoillue. "llley gut the benefit uf their bargain- whic h is marriage - so there arc 0 0 damages. J.
),,-!any businc.lses want to create st ro ng: rcbtlo oships with their customers. Not only do satisfied customers corne back, they al so oftcn provide invaluable adl'crtising and promotion to others. When businesses olfer "Siltisfaction gu aranteed ,H they arc saying that the customer has the power to re scind the bargJin an d the business will agrce. When a bargain is rescinded. the consideration given fo r the deal is returned on each si..!c of the cnntr,lel. In this case, ifthc Browns arc not sati died with the dug, the hn:eder will take it hack and give th e Brown~ a refund of thei r purchase price. There haw.' been in cide ntal cxpcns<:s for six mo nths in fo od, groom ing, and veterinary cxpc n~c.~, hut the Brow ns chose to incur them before they dedded if th ey were satisfied. It is not unusu~1 fo r vendors to put a time limit on customer satisfaction, but this would dc p"'nd on the item and the relationship that th ..' husincSli was trying to establish.
Brain Teaser 4.
J>-Jftics arc frcc to contract for any terms that arc lega l. Often tim e is of the cSlience in an agreement. You must have a co mp onent part by a certain datc to finish the project on time. The supplies have to be here by race day. I he catercr must he set up hy6:00 P.M. T iming is critical when missed deadline s mean addi tional se tup costs. delays. o r idle wo rke rs. If timing i.• important to contracting parties, ofte n it is deemed to he a material dement o( the co ntract, a breach of wh ich implies dmnages to he paid by th e breaching party. Often the amou nt of d,lInages is ~c t out in the contract and can be substa ntial to mirror the material nature of the breach. At least the parties know what is important to each side and where they stand. Nin e cartoons o n April 15 may seem like substanti al performancc because it is \10 percent of what is due, however, thc contract itself defin es it as a material breach, so it is. Ro~ is out her usual S2,500 for the munth plus an extra SsOO. It doe.m't matt~r whet hcr ,my o r all o( the ("d r/oo ns she sll hmittcJ were printed. If they were, she ea rned monc y ()Il those. If they weren't, sh~ (cit the sting of
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TESTYOURSHF ANSWERS
breaking her I' romiM'. If the Apr il 17 otre rillg w~~ publishl'J, Roz still oweJ the $3,000 penult)' for her m:ucrial breach. Who knows what ext ra lengths anJ special setups 71u New lork~r staff went through to gd that tarJy cartoon in thc nc~t issue~ That is Iheir bu.~illess. If it is used, Roz will gel paid, hut in the fulure shc will prohably su hmit 10 cartoons a month, whdher she thi nks they arc funny or not.
CHAPTER 9 1.
To J etermine if this agre<:menl is a valid conlrJC\, you first must evaluate it for aU th e ingredients it should havc. Here we have an olfe r, an acceptance, consideration, a legal contract purpose, capacity of the parties, and a voluntary ugreemen\. Th is appears to be a good conlr~ct. Next, wc must evaluate whether it must be in written form. Sincc this is a CuntT;lct fur Jand, it must be in writing to be enfon~able. Finally, we mu~t evuluate whether the wr iting is suHicicnl. A greasy paper napkin is Ilutthc usual place tu memorialize a $60,000 deal, but it is kgal. The napkin identifies the parties, the subject of the con tuct, a date for the contrJct to be perfonned, and it is signed by both parties. When Bob gets aTOund 10 signing the deed owr 10 Dan, that agreement will have to include the complete legal description of the 40 acres, hUllhc de."ripti,," on thc napkin is sullieicot for edch party 10 know whatbnd they arc talking about, so it is va lid.
2. This is a fine contraclwith ~ll the ingredients; offer, acceptance, consideration, legality, C'apacity, and voluntariness. Since it is for the sale of gnud~ va lued io execs_. "f S5oo, it should Iw in writing h ) he enforceable, hut th .. parties did not put this agr~ell1ent in writing. l1ut is okay in this cas~ since no 011<' has a problem or complaint with thl' dcal. If Jeff or his parents were unhappy about the Buick's condition once they ow ned it, or if they thought that it was not operating as it should, they may hal'e an issue with the contrac\' In that CJSC, il would be hard to enloree in court hecause of the lack of writing, bu t if everything is going fine, it doesn't matter. Many people excha nge property with values in exccs.~ ofS500 ev~ry day with no had conscqu~nccs, but to b~ ellfu rceahle in cou rt. these deals .• huuld he in writinS' Incidenta ll y, when yuu sdl a car, you transfer a title. GenerJlly this title includes the name
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221
o f the owner and a desc ription of th(· vehicle, a nd to transfer it to a bUF r, the selle r signs h is nam e to it, fills in the buyds nam e. and usu· ally stales Ihe pri, ... ora range the price falls within. In effect, Ihis litl e is thc written documcnt mcmorializing the ,~alc of a vehiclc, so there was a writing after all. 3.
I have no problem wilh letf wanting to tr"de in the Buick, but now he is a forger and has committed fr.lUd in his haste. If letf did not make the payme nts as schedukd on the Mu~tang. the bJnk could not coUect from jeWs parents. You arc o nly liable on an instrument if you sign it. )elf's pHcnts d id not sign th e gU'lr,lntff, 50 the bank cann ol hold them liable. [I d{)e~ not mallet that Idf's paren ts were willing 10 sign the paper. 111eir signatures don't appear on the suret y paper. so they arc oft" the h()ok. It is llnlikcJy Ihat thi.~ would r.::ally happen howl'vcr. since any self· respecting banker would require kif's parents to come 10 the b,mk to sign this form .
Question Future Chapters Wi ll Answer 4.
Geo rg.:: isn't th c only student with this question. AIIl1 ()st everyone in the dass has had p
CHAPTER 10 l.
Because: thi s is an oral co ntract. Ihe partks have no document to lnok at that m
as~ign
her ohligation to finish the
pHinting to Bruce ,1lId Bruce would H,'SIl11le the
re.~pollsibility
tu co mplete
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thl' job. Of c"ur:;c, P. J. can Hilly a,;.~ign what she has, ani.!
atthi.~
time, it
is the duty to complete the job. Fritz docs not have an obligation to pay Bruceorto pay more for the job than originally contracted. P. J. ,lOd Bruce would have to work out the (ompensation between them. Perbaps this is a trade-off fora favor 1'. I. did last sum men perbaps she will shure some of the fee with Bruce. Of course, before he agrees to the arrangement, h itz may want ."ome informalkm about lIrucc\ painting experie nce "r some references from him so he ca n check out past painting jobs. 2. l' ritz's contract is with 'Ihe Outing Clu b, not with Joseph. If Fritz rea ll y W,lnt{'"{) the particular skills of Joseph, he should havc co ntr-acted (or them. Ihe Outing Club kitchen is still working and tbe oew head chct~ Andrew, is very qualified. On ly the original "arties who ha"c righls in a contr-act can enter into assignmen\.~. 3.
Buster should exercise Mom's wishes, nol his ow n. As Mom's power of attorney, he stands in her place and should act as she would act if she were able. Mom has made hcr wishes known. If Bustcr cannot follow thcm due to his own convictions, he should decline to be her power of allorney, or Mom should know better and pick someone who she knows won't stru!»le with thi,~ typc of decision.
Brain Teaser 4.
Assignment of checks is not unusual. Checks arc already three-party instruments involving tbe pllyCC, the drawer (check writer), and the dr
~ndo rs~
it. This is uSHall)' done hy signing tb~ hack. Th"rt:
or
arc lllHny Iypes en.jo rsement, including payment to a third party. To do thiS, JoAnn cou ld sign the back of the clll'Ck as follows: Pay to Ja mc s Smith Jo Ann Smith Or she could sign: Deposit to Ace!. No.: (James' account numb er] JoAnn Smith
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CHAPTER 11 I.
Leases for stontge units ;tre nol covered hy Article 2 ofth" code. In thi.~ _,i luation, the vee docs not help at aiL Article 2 (lnly deals with ~alcs of goods. Goods arc movab le items, not real estate, leases, or services. Th e statutes of Illinois and case law wOllld w ntro l thi s casl', a~ would the term s of the lease agreement that Jane signed. More than likely, ., he would get her deposit retuTlll'd to her and Self-Store would rent space H·3 to MlffieOne else in June.
2.
Apparl'ntiy Ed made a deal with Nick before he checked around for potential buyers. Unfortunately, Ed has made his agreement an d can not now change the consideration terms just because he has a better orfer. Since this is a unique w llectio n, Nick docs not have to be sa ti sfied wit h compensatory damages, which would be minimal if he did not make a deposi t. Nic k Cd n sue for specific performance "fthis contract for the sail' of goods hecause they ar,' rare, ami damages will not adc,!uatdy co mpensate him for the breach.
3,
If Pat breached her CDluract wit h Saks and resold the 1,500 purses for $250 each, she wo uld make $375,000. o r Illore than doub le the amount .,hc would have made if she had honored thc Saks contract. Pat would owe Saks their prepayment back, which woold be SI50,OOO. l'~t would also owe Saks their lost profit o nthc deal, wh ich would be the difference hdwecn the rCh,iI price and the wholesale price of the purses, anolher $ 150.000, for a to tal of $300,000 in damages, Pat could br~ach this CO rltt'dct and pay dam"ges to Sa ks and still m"ke S75.000 mor~ than sh~ would if she honored th~ commct. Should she do it? That depends on her relationship with Suks and how they will vi cw this hreach, bot it sure looks worthwhile.
Question Future Chapters Wi ll Answer 4.
To ddcTlnine if Article 2 provides any re((lurse for the Roth s, we first must examine if Article 2 applies. Mr. Goodyear provi ded a go od (the tax returns) and a service {the labor to prepare them}. Article 2 deals
224
TESTYOURSHF ANSWERS
only with the sa!<- of lIoods, not services. Butt,\>: prcpardtioll, like many OI her co nsumer ~ndeavors, involves a combination of goods and services. When I take my car in for;1ll oil change, is that buying goods o r services? When I go to a lawyer to g~t a willwrincn, am I con tractint: lor a good or a service~ It gets trkky. Genera li y, the law tries to eV"alua tc how much of the co ntract involves goods and how much of it involves services. If il is about ha lf goods, Article 2 should app ly. Mr. Goodyear did not do an adequate joh of pruviding the good., he sold (or S300. TIle dmnages tha t the Roths must pay lotal S255. It is very likely that Mr. Goodyear will have to co mpensate the Roths this amount for his breach of co mrJ.ct. The outcome, howel'er, would really depend on Ihl' written contract, if any, bc\wecn the parties and the warranties, if any. Mr. Goodyear o!lcrcd on his work. Chupter 12 disc usses warra nt ies in detail.
CHAPTER 12 I. Ct'rtainly an au tomobile, which isa good according to Article 2 of the vee. should huve an imp lied warranty of merchantability or fitne~ to be used as an auto, nOI as a barbcque. '[hc automobile also had an express warranty from Ford thm the doors would function properly and thut the gas tank would hold gas in reasonably predictahle ci rcumstances, including rcu r-end collisions. So. thcrc were some issues ofhrca ch ofimplil'tl and express warranties with lhi., make o( ca r. BccauS<' had accidents with Pintos GIlLS<'d so mu ch personal injury amI propcrty damage, Ford \\'a ~ subject to a numbe r o(products liability lawsuits. It was discovered in investigations rt'garding the se acciden ts and subsequen t iJwsuits that Fo rd knew the car had a serious design flaw but chose to igno re it. The company figured that it wo uld be cheaper to payoff on lawsuits tha n to perform a relatively small and cheap redesign that co uld have avoided the big problem. Because Fo rd too k such a careless attitude ahout con.'UIl1~r safety. its r~putation W,IS seriously tarn ished by this mode!, which has been dubbed ,IS o ne (Of the wurst cars uf all time s. Ikcuus<' uf this careless ~ltitude abou t a
TESTYOliRSE lf ANSWERS
225
known design dcrl'C t, Ford was ' lapped with many large judgments from the litigation involving this model, including a 198 1 California case invo lving two Pinto passengcr~- one who was killed and one who was sel'erely burned. The jury awarded the hurn victim $2.5 million in damages and $1 25 million in punitil'C damages. mainly bl'CJ USe the evidence showed lhat Ford ignored the problem. An appellate court later reduced Ihe punitive dam"ge award to $3.5 millio n. Se rioos proJuets liability cases can involve serio usly pun ishing damages. 2. 'Ihe ladder did not just ugh'e way" as I had envisioned. Luckily. 1'[0),0.1 recovcrl'd just fine from Ihis serious inc idl'nl, hut he did not have a tu pursue. If it had faikd to support his weight nr if a rung had broken, it could have been a warranty C"dst' and a products liability case for tIl<' damages. And there .:crtainly werc damages in thi s case includi ng a badly bruised face, broken jaw, cracked teeth, scratches and scrapes, and a few wCl'ks otfwork, nol to mention the
warr~nty c~s c
medical bill$. Unfortunately. the lad der company has a good ddense to this accident inlhat Floyd mi sused the ladder. It came with a dear warning to o~c on a tlat ~urf;lCe. 'This wa s a warning th;lI Floyd ignored to his peril. 3.
My mom is probably right about nol vacuuming backward: howeve r. sh~ is prohah[y wro ng about the warning o n the ca n. It is obvious th at this produc t is !:loing tn have to be vacuu lIl l'tl up afte f usc. A regllbr co nsumer is charged wit h kn owin g the furniture iH YO ut in her own living foo m. and th e co mpany does not h;we to warn against the obvious,
Brain Teaser 4.
Any agreement involVing a corpom!e acquisition must delineate how the partie~ arc going to handle the co ntl'Jct oblil{ations - including the warranties- that a p;lrty has made to Ihird parties. Daimler-Chrysle r can sell o nly what they have. and what they have is a combination of w ille assets aml w ille liabilities. In the liabilities column arc the out.~tanding wa rran ti~s they hal'c given to ot hers. In th e negotiation. Dai m[{'r and Cements will determine whic h party will ho nor these obliga tion s and what the y are wo rth in considera tioll. Although it is
226
TESTYOURSHF ANSWERS
unclear who will assume
thi~ rc'~l' ons i hi l ity
at
thi.~
poiut, nl'W Chrysler
ow ners will have thdr warranties honured.
Review and Question Futu re Chapters Will Answer 5.
Yes. manyOxyContin users may have breac h ofwarrautyclaimsasainst the cumpany. In marketing and product infurm,dion. the company knowinsJy included a false claim that the product was less addictive than com pal"'Joic pail1kilkr,~. This is at ka~t a misn'prl'sl'nt,dion and probab ly fmud. Moreo"er, users of the drug who relied on the express warranty probab ly have more damages than just the cost of the dru gs ove r the years. Addictive drugs cause many incidenta l and consequential damages, so th e&c users have prod ucts liability claims against the company, including many dea th claims. TIle $ 20 million from the criminal plea agreeme nt ",ill go to the f~xlcra l sove rn nll'nt and states ,lnd oe used in law enforceme nt ami medical programs. Since the Ctlmpany knowingly viola ted the law, its president, ils top bwyer, and its chief llllxlical ulficer have all pleaded guilty 10 criminal charges and have agreed to pay almost 5635 million in additional fines. Although the company cannot be put in jail these officials could face jail time iffound guilty at trial.
CHAPTER 13 I.
Tony's arrangement wi th the' A- I Pawn Shop is a secured transa ction. Tony is the debtor and A-I is Ih(, creditor. Tuny pmmiSl'~ to fl'pay the debt in 30 days, plus a little interest on the money loa ned. A- ! wan ts mure than just Tony's prumise, so the y take pussession ufhis co ll ateral, the drum ~et. A-! doe~ not have tn do anything c1~e to attach or perfect its securi ty in terest becJu&C it has a possessory interest in the collate ral. After the 10J n matures, if it is not paid, A· I is holding the co llateral and can reduce it to ca,.h, or the owner ca n t,lke up pl'lying the drums .
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TESTYOliRSE lf ANSWERS
2.
227
GarJge !;ale!\, tag sale" auction s, and estat e sa les 'l!l.' common an d popular. Buyers ca n get great deals and s<:Hers CJn unload a basemen! full of cxcess. It wo ul d not work very smoothly if cverr hidder at an auction had to he on the phone to the county clerk 10 sec if that blender being held up was pledged to any secured creditor, 'ihe implied wa rranty of title gives t he buyer conlidellc(' t!wtthe selkr is free to o lfer the it em. "lhe fact that th ese buyers arc gcnerJlly g('Uing consumer go() d_~ Ii,r perM)n;d. family, or household usc and taking thelll in the o rdinary course of business pro tects the buyers from ChaTJ cters like 'vIr. Black shOWing up at t he door. Lily should advise him 10 go back to Ihe bank and brush up o n Article 9 of the
3.
One loa n
Of
vee.
extens ion of credit can be co llateralized with more than
on(' item. The bank will note its lien on b oth vehicle titles ,IUd pafcct il wilh public nolice. A financing stalemern is only good for fi ve years, so if thi s is
J
six -year loan, 111,' bank may have to file a continuation o r
renewal statement after five years to keep ih lien noted. In cidenta lly, if aftcr three and a half years. t he Elcmen t were
110
longer neede.! for hauling and ch('loan balan ce were down to 522,000, th e Ivers could ask the bank Co release che lien on Chat whicle so ch~y co uld Inde it in
0 11
anothe r sedan. If the bank felt sec ure enough in
th e col lale ral or lh e 2007 I-I onda AcconL it could just keep the lien o n that one pi ece of collat er-alto secure the remaining balance. If the bank fdt it needed more secu rity, il could release the Elem ent and ask for the title of th e new auto t he Ivers b uy to Sive them enough collateral to secure the re mainins balance of the original loan.
Brain Teaser 4.
..\ layaway 1.1 not a secured tmn saction T11~T\' is no creditor an d th ere is no debt or. Th e cusco mer is notlJuying che i!ems over time; .dll' is holding them for an agree" upon pcriod until she can purchase thcm outright. In dfect, she is entering into an option contract with the store. She is gdting the option to porchase the items within 30 Dr 60 days and for that option. she is givi ng con~idemtion of S5. If she buys the it ems. she has exercised her optiun and pays the full purcha '" price. If
228
TESTYOURSHF ANSWER S
she docs not exercise her o ption within the (ime period, (he store has earned $5 fo r Ihe trouble of holding the ikms, wh ich c.t n be placed hack on the shelf for sale ( 0 ,mother customer. Suzy needs to check with cach ~ tore individually on their policy about geuing her do wn payment on Ihe purchuses return ed.
CHAPTER 14 I. Trident Techno logy ha s ~tartcd to take the' steps necessary to protect th emselves by for mally registering the name TridentTechnology as a do main name. Next , the locallirm sho uld try to ident ify how to con tact the New York ind ividual to .... nd a notice to ccaSt' using the d" m ~in name because of prior UI,e ,md confusion with ,Ul estahlishc.! business. Sin ce an aClUalllotice and receipt th ereofis necessary in this case, an email would not be su1ficient and the local firm should send a registered Idter. If th e inte rl opl'T docs not stop usi ng the naIll(', the lo cal firm could re sort to NSI o r another o nline mediation service to try to resolve the issue. A New York party planne r probab ly docs not want to get confused wi th a co mputer consulting fir m. so he sho uld want to make an adjustment in the name he u.• e5. In a co nllict, the IOCJ I firm wou ld probably win rights to the name because il was the fIrst hI register th e name and it ha s J histo ry of using it. 2.
Eve n though this was an o nline asre~m~nt. you can verify tha t it WaS a co ntract hy ap pl yi ng th e recipe. Noah'.• listing was an in vit ation to bid, llot an offe r. Jeremy did bid $150. which cO llsti tuted an olfer. No ah accepte d. The considerJtion was the exchange of money for the instru ment. The purpose of the contrJc t was k gal. It was volu ntary, an d the part y who se nt th e payment. Jeremy's dad. was oflegal age. '[hefl' cou ld he J bit of an is.• ue uhout capacity since Jeremy stnlck the deal, but Noah was made aware tha I JeTCm y's dad would be purchasing the ite lli via hi .• money order. \Va .• there ,I mist,lke thJt could vuid the olfer? TIlls COlltract pr incipk CJ n apply heTC ~ven though th~ COlltract WaS an online ag r~ement.
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TESTYOliRSE l f ANSWERS
22 9
There surl' wa5 a mi~understanding ahQutthe mouthpk'ce, an d in this situatiu n Nuuh's claim of "as is" works agaimt him, because he pictured th e goods wilh the expensive mou thpiece. Both parties were a little inexperienced in thest: dealings and did not cla rify the terms as much as they should have. Ooe solut ion could be a m~xlialion. Noah coold provide a stand;Lrd, les.~ expensive mouthpiece 10 Jeremy .w the tmmhone is useful tu him. 'Ihat pre.scrve~ the Mle ami satisfies the bu yer. In lieu of an .lgrcrd workout, the parties could cunsult the dispute re"olutiun reference un d~ay tu sl'l.'"k mediation of this matte r. 3.
Ry-an's and Adam's back and forth emails can constitute a wntract. Adam answered Ryan's adwrliseml.'"nt. Ryan provided pictures illustrating the subject nftbe conlracl- ;L fiO ·day ka.~e inlere~t in an apart ment. The parties agreed on a price and effectil'e dates of the comtJct. Promises WeT<." vol untarily exchanged between capable parties ab out a legal subj\."ct. Thb is a contmct about land, ~o il should be in writing. 'Ihis dea l is in a fl.'"w writings- thl.'" various emails necessary to ~t rik e ~
dl.'"al. Incidentally, ~ir"e thrl.'"e stale' arc repre~(·ntl.'"d in th i .~ deal, it coul.l get sti cky if Adam refused to leaw th e ~partment at thl.'" end of hi.' summer ~uhlct and Ryan had 10 take legal action to regain hi< place. Would the law of Virginia, Texas, o r Illinois apply? This is an easy one because most demerrts of the conttJct arc in Illinois- the apartment, the hol dover knant, and the main tenant, so thc Illinois courts would be the most appropriatl.'" jurisdiction to resolve any disputl.'".
CHAPTER 15 L ""IGM is a logo and ItJdcmark associated with II-kt ro-Goldwyn,Maye r Inc. 'Ihe company started out as a movie production studio, hut today is involved in video .•, mu .• ie, tcievi .•ion, enll'rtainment venues, and more. lhe MGM tt~dcmark. a maring li(> n in a circle, is .~o famous that even occasion;ll movkgo<'fll can picture it. A hus in css with the n~mc MGM Videos, Inc., could easily be confused with the larger company, especially sin ce they buth deal in sume of the same items. If M~rtha
230
TESTYOURSHF ANSWER S
and Gary \PI<.: this name fi,r their busines.\, it is highly likely they will get :.IlcUer, sooner r,uher than later, from the l(.'gal department of the ot her MGM notifying them to cease and desist using the name and trademark tbat bclong~ to the company foun ded in ]924. 2. Coca-Cola ~hould take sh.'ps to protect il~ vcry valuable trade sccrdsincluding the formu la for Coi::c. In this case, Pepsi took the ethic-al high ground and informed Coca-Cola of th e lettcr they received. The FBI W,l~ called in to investig;lte and determined the writer was an accom plice of Ivls. Williams. No t only was Ms. Williams immediately fired from her job, but she was al50 ch'lrgcd with criminal conspiraq" to sell trade secrets for at least S].5 million. "Illis is a seriuus federal fd uny fur whkh she was jllst se nt e n c~'<.! to eigh t years in prison. In sen tencing heT, the judge 110kd th at this is the kind of offense that canno t he tolerated in our society, Her accomplice awaits sentencing. 3.
Lauren docs have a co pyright by usc. It is not Il~ccssary to :.Ipply for official copyright protection from the U.S. Copyright Office or mark her music ,md recordings with J notation of copyright status. The Berne Convention gives her international copyright protection to her works if she records them in a durable medium. If there were any que stions about authurship ur ownership of Lmlren's music, sh~ could ~ huw the dates "fh~r so ngs. wh ich it would be wise to no te on all her c r~a ti\'C works, and prove her right.'. Of cu urse, if Lauren we~ C"drdess about mun itori ng or unconcerned about the uses of her songs, she could creale an ope nin g for someone to infringe o n her rights. Intellec tual property rigbts need a lot of upkeep.
Brain Teaser 4.
You Tube h~d a policy that stated that users could not upload copyrighted materials without p.: rm ission, TIIC system, how~wr, was, and still is. self-policing. Unless someone with a proprietar y interest in tbe matcrial sees it 011 YnuTube and complains, pmtcct~"'<.! materials could be broadcast with impunity because the site has grown so large.
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•
TEST YOURSE l f ANSWERS
231
Y"uTuhe will shut down ,1 ,~ite if a violation is hmught t" its allenlion, but some interest~d panics who could complain abou t a violation do not hecause it gi>'cs th~m inv'llua bl.. poblicity and promolion. YouTllhe, and now Googlc, have also been sued for infringement because uploaded materials contained links put in by the poster to copyrighted materials. Google Wa5 reccnt ly found l10lliabk in a case about linking. If timing and usc determined the issue, Un;'"cr.';;!l Tube & Rollform equipment Corporation should win and get to keep the domain name Utube. Yo uTube should be barr..d frolll using ~ con fusingly simibr dom~ in name. However, as ,1 prJcticJI matter, how dn you argue with 63 million hits a month? TII;S case hasn't heen decided, but it's incvitabk that Utubc will keep gelling YouTube infomlation, and it may he easier to modify its domain name th an to sort through millions of misdirected items.
CHAPTER 16 l,
Schaeffer and BIC may no longe r be produci ng these fountain pens that have th., great nibs., but that dOl'sn't mean that the companies' trade secrds should bc rc~-ealed. The companies still havr a valuable asset that they may somrda)' usc or scll or license to another. You don't have to be ~ CUTTcnt cmplorcc to be guilty of breaching trade ~ccrets. Once il secrd, always a secret.
2.
"I hi~
Nebrasb jeweler should quickly delete this email or fon'"~ rd it to the loca l olliee Oflhe state attorney general 10 investigate. No reputable fre llch jeweler nl"cds a Nehrdska front fo r trJllsfrrring funds. There Jre commercial banks to do thi., 'luit<, ellidclllly and c1feclivcly. This deal rc<'ks of money laundering and fraud. I doubt there is a French jeweler within J 00 miles ofthi5 deal.
3.
Dr ug companies could argue their ultimate mission- which is to make a profit. lhey are, after all, businesses with responsibilities to the ir shareholders, their employees, and thdr business partners. 'Ihe
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232
TESTYOURSHF ANSWERS
dl'vc1o l' ment of new
dru~s
is a multimilli on·d ollar e ndl'avor that is
und~nak~ll b~C"~uS('
the high in vestment (ost O(:(asionally yields high rewards. Inlernalion,ll h usiness d,,,,isi ulls are difficult because of the differing standards of living and cultu)"",,! norms of S()c1et ics., but businesses wou ld choose not to dcvd op lifesaving drugs if they had to be give n away. Investors wou ld not support th l'S(' bU5incs~cs., and ('very cu ltu re would be the woTSc o lf.
J, ....
*
~I
h
Glossary Acquittal: A finding that a defendant in a criminal trial i~ not guilty. Act of God: An event that is nOI caused
by man. such as a flood or
tornado. Administrator: The parly named by the court to oversee the affairs of a dec{'uscd who dies wi thout a will, including the collection of asse ts, payment of debts, and distribution to heirs. Ad"oc~te:
II repr{"scn lath'c, one who speaks for another.
Afler·~cquired
property: Properly corning to a debt or after he has given a security interest in that property to a creditor.
Al te ration: II defense to a p rod ucts liability case that sta tes the product has heen modified or changed in a way not suited to the item. Altern.,tive dispute resolutio n (A DR ): A method of resolving a lega l di spute out o f court. ADR form s incl ude negotiation, mediatio n, and am ilrdlion.
Antenuptial agreement: Sec pn:nuptial agreement. Appeal: An ac tion !ak~n by a party to litigation after trial to ask a higher cour! to review the decisiu ll. Appellate court: The second tier of courts in the state and fcderdl system that reviews cascs that have already bec n tried.
,
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234
GLOSSARY
Arbitration: A fo rm of alt ernative di~pu t e re ~"lut ion u~il1g a neutral third party o r panel to hea r the cI'Idence and render a decisio n o n the ISsues. Arbitmtion may be binding or nonbinding on the parties to the dispu te. Binding arbitration: ArbitrJtion wherein the parties agree to abide by the decisio n of the Jrbitrdtor to n.'50lw the dispn te. Nonbinding arbitration: Arbitration wherein the parties do not agree to co ncl ude the dispute with th.., arbitrator's recom mendation. As is: A manner in whi ch a good may he offered fo r sale tha t indicates there arc no warrdl1tics or guaran tcc~ olfercd on the good. Assignee: The person in an assignment who is assigning rights. Assignmeot: The t r~ n s fe rri ng of rights in a conlrdct to anolhe r party. Assignor: 111C I'cr~on in an as.,ign nH:nl who is assigned rights. Assumption: An agreement whereby a third party steps into the pusitiun of onc of the ori gina l co ntract promisoJ'l; to complete the deal.A ssump tio ns can be with a release or withont a release. Assumption with ~lea~: Agreem ent to accept a third pa rty into a COl1t rJCI in which thc cont rJCI party assigning his rights is released from liabili ty on the "u t't~ndi ns cont ract. Assu mption without release: Agre ... melll to accept a third party into a con trdct in which the cuntract party rcm~i ns liable on the out~ tandin g co ntrdct and the third party is an additionu l party li~ blc to perform, Assumption of risk.: A defense to a lort claim which statc.~ tha t the injured parry kncw and agreed to the risk of his actions. Attachm e nt: Thc step in a secured transaction in which the creditor gets written ~cknow l edgement uf the collateral pledged for repayment uf a deh t. Attachment can also nccu r by pmscssion of the collateral by the creditor. Authentication: Th e accepting of a writ ing as one's o", n.
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GLOSSARY
235
'0
B~rga; n ed· fo r "xch ~ ng":
A legal term of ~rt used in contract law describe the consideration requirt'111ent of a conlmct. The giving of value of e~ch party to a cont ract.
B"och trial: A court trial in which the presiding judge renders the decision. Beyond a rea~on abledo u b t: The slandarJ ofproof in a criminal case which requires the judge or jury to find unanimous ly that the defendant per· formed the ;lcttha! he isaccuscd of and tha t nn other possihle explana. tion exists which could cause any doubt in that conclusion. Bill of I"di ng: A document showing an interest in goods in the hands of a shipper. Billof Rig hts: ·Ihe first 10 amendments to the U.~. Constitution which were passed in 179 1 to guaran tee rights to pri\".J.te citizens. Some Bill of Rights guardn!ces found in the fint iO .ullendmen!s: Firs!: FR.... do m of religion. freedo m of speech. freedom of the press. !he right to assemb le. the righ t to peti t;')n government for a redress of grievances Second: The right 10 keep and bear arms I'ourth: The right to be free from unreasonable searches and seizures I' Hm: The right 10 be formally charged in a capital or criminal malter,
fTt"'edo111 fmm double jeopardy. the righ t to decline 10 be a witness against you['l;df. the right to life. liberty. and property which ca nnot b,' taken by govcrnm"nl action without due process of law SL'{th: The' right to speedy criminal trial, the right to be informed of charges and witnesses against you. the right to confront accusers, the righl!O assL,tance of c
,
"
236
GLOSSARY
Breach of contract: The failure of a party to uphold his promises. Buyerin the ordinary (ourseofbusiness: A huyer of good" fi,rva lue in good fa ith. A buyer in the ord in ary course of business takes goods fr~e an,l dear of any outstanding security interest. Capadty: The legal ability to enter into a contract. To have capacity, a party needs to kn ow what his assets arc an d what he wants to do with them. Impediments to capacity could be min ority o r a legal disab il Hy. Legal disability: A person's lack of abi li ty- throogh mental impairment. illness, or injury- to know what his assets arc and wha t he wants to do with them. A person who is aged may be under a legal disability, and therefore unable to contrdc tleg-,d ly. However, agc is not an automatic disability, nor is mc!Ual impairment, low IQ, of terminal illness. Legal disability is more about mental functioning Ihan physical abilities. Minority: In state law, being under thc agc of consent, usuall y 18, and therefore notleg-,1Uy capablc of entering into contrdcts. Catego rical imperative: An ethi cal philosophy that finds an action ethical if it ca n b~ univcrsalized, A believer in the catcgorical imperative will find an action ethical. and therefore do it, if it i. an action th at he is willing to have done to him. Causation: The reason an event happens. In lort law, it is important to figure out if the person you arc trying to hold liable for an injury to you in fdct caused the ewnt to happen or set a ,'<'rks "f events in motion resulting in injury. Certification mark: A distinctiw mark granted by a group or assuciati"n certifying th at the marked goods meet certain standards of the orga nization. Chattel paper: Chattel paper r~pr~sents someonc's rights to receive moncy for S<.>ods. Circui ts: One name used (or the divisions o( a court system within a state. Click-on agreement: ContrJct terms that arc accepted by an Internet user clicking a hUUlm.
,
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GLOSSARY
237
Codes: Ru les, laws. Many co mpiled laws arc referred In as cndes. For ex:mnple, the U.S. Code contains ~1l the laws passed by Congress Ihat arc currently in elfec\. Col"'lerlll: An item or ite ms of value pledged orgiven to a cred itor to secure repaymen t of a loan. Comity: Princi ple in international law that each co untry should give elfect to th~ laws and court decisions of ano ther coumry. Comming le: To ml" togetbe r, for ex:ample, a hu.shand and wife may comm ingle their paychecks in one checking accou nt. Common law, al,o caU...d c~se law: Previ()u~ cou rt decisions that can be looked to for gu idance on how a current matter may be reso ll'ed. Compa rative negligence: The relalive faolt of each party in a lorl case, uscd to apportion damages. Complaint: lhe pape r that is filed 10 hegin a lawsuit. Sometimes called a petition. Concurre nt jurisdiction: lhe authority of either a state court or a federal court to h...Jr a matter. Consent: A slatement that a party knew and agreed to the possib le harm o r hi.. actions, $<)llIelimcs used as a defense to a lort claim. Constituents: Parties to whom you arc responsible. Co nsomer claose: A clause in Articl e I of the U.S. Const it ution staling th at Co ngress ca n make laws rl'gulating in terstate com merce. Contract: A k-gally enforceahle ag reement _ A contr~ct needs the following 10 be valid: offer, acceptance, consideratio n. capacity, legality, and voluntariness. Some common contract terms: Bilat~ral
cont ra ct: A promise for a promise.
Execot~d
tontract: A c()nlT"d~t th at has bel-n fully performed.
Ex~cotory Expr~ss
con tract: A contract that is performed ove r time.
co ntract: All agreement fo rmed with wo rds or writing.
Implied contract: An agreem ent formN from
J pen;on'~
actions.
238
GLOSSARY
Mat"rial br""ch: Significant failure in performance of a conlract'.• tenns. Oral contract: A contnte' thai is not ",rit tell. Spe.:ifi c performance: An extrao rd inary legal remedy wherein a party is ordered to perform a contract in liell of paying damage .•. Substanti al perfo rma nce: Perform ing almosl all of a contract's terms. Th ird- party benefi ciary cont ract: A contr~CI illtendtd \0 benefit a pe rso n who is not a party to the original agree ment. Uni lli te ral co ntrllct: A promise for an act. Valid co nt.llct: A co ntract that S
A claim m~d~ by a party being sued against the pa rt y suing him. Courts want defen dants 10 hring counterclaims, if th ey hal'e the m, as
Co un teroffer. The the offer.
re~poMc
to an "lftr that Jdds or changes the k rms of
Cove r. The measure of damages due a co ntract buye r upon hreach by a seller. COl'er is Ihe market price less the contract price.
GLOSSARY
239
Cr"ditor: The party mak ing ~ loa n. Criminal law: The body oflaw tha t rcgub tcs public condu ct. Cross-claim: A claim made between pb in tilfs to a lawsuit or defendants to a lawsuit. Cyberlaw: Law governi ng transactions occurring over the Internet. Cybe rsquatting: Filing fora domain nanwth at th e filer is not plan ni ng to use hut is merely holding in hopt's someo ne else ""ill wan t to pu rchase it. Damages: Money given In successful civil law claima nts to pay th em fn r their injurks. CompenSlltory damllges: Money \0 compensa te a party for his injur ie.~. For example, the amount of money nceded to repair a car damaged in an acdde nt. Consequential damages: Money 10 pay expenses incu rred as a consequence of the harm , Fur example. Ihe amount of mooey needed fur a rental car while repairs arc made to the dam aged car. In cid"ntal damag"s: Money to pay expenses incurred as an in ciden t of the harm. POT exa mpl e, the amoun t of money needed t
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240
GLOSSARY
Discharge: A forgiveness of li ability. A party can obtain a discharge by opera tion of law, such as a stat ute of limi tatio ns that ba rs a claim, o r by a statutory gr.m t, such as the bankruptcy law that provides for a forgi\'~ness of d~b ts. Discove ry: A phase of the lawsu it process in wh ich the partie~ IrJthe r all the relevan t evidence to be used at trial. Distric t: A div ision of the co urt system in a state or in the United States. Diversity jurisdiction: The a uthority to take a case to federal cu urt based on the facts that all the plai milfs reside in d ifferen t states than all the defen dan ts a nd more than S7S,OOO is at is.sue. Docume nt of title: A paper showing the owne rship of goods. such as the certifi cate of tit le to an auto mobile. Do main name: The Internet address chosen by th e entity- for example, wcstbw is the domain name of WWw.IW5t/aw.com . Do uble jeopardy: Being tried twice for the same crime, 'The Fift h Amen dment of the U.S. Constitu tion forhids the federJI or state govern ments from cxacising double jeopardy. Draft: An order by one person to pay anoth er through a third person: a check. Dra wee: The party o n whom the check is drJwn: the bank. Dra we r: The perwn by whom a check is drJwn: the c beck writer; tbe make r of a check. E-comme rce: A business tr~nsaction that occu rs in cyherspace. Embnzlem.mt: The fraudulent tak ing of the property of ;motheT. En crypti on: Th e codi ng of infor ma tion on line w as to ma ke it access ible to .~ome U$er.\. Equ ity: Justice or faimeM: the pr incip le of jurisprudence that a ll ow~ court ~ to ren der decisions based o n justice and fairness when legal proced ures arc inadequate to gm nt relief. E-slgnature: An acknowledgemenl of a party sent el ectronically.
GLOSSARY
241
Ethics: The ~tml y of right human bdlavior; moral behavior. Exculpatory clause: A contr~ct provisiun that seeks to hold a contract party harmless in adva nce fi,r any negligence that may occ ur. Executor: The party named in a last wi ll and testamen t to oversee the affa irs of a deceased including the collection of asse ts. payment of debts. and distribution to heirs. Express warranty: A guamntee about the performance of a product give n in wri ting by the seller to the buyer to induce the pu rchase. Extended warranty: A contract between the buyer and seller of goods where in the scHer agrees for a prepaid fcc to repair or fl.-plan" goods cOl'ered for a set per iod of tim e; this is re ally no t a warranty at all, but a service cont ract. Factoring: The process of buying accounts receivable at a discount. Fair use: An exception to copyright protection that allows usc of portions of copyrighted material without permissio n for scholarly an d news reporting purposes. Felony: A se rious crim e or breach of public standards punishable by fines and prison time. Financing state ment: 1111' form fi led publicly to _, how a credito r's interest in a debtor's collateral. Fnoud: A purposeful untruth or concealment of a fact told tn induce a party to enter an agreement. General intangible: An item which represents mone y, but is not in and of itself of \",d ue, such as a patent, a co pyright, a tr"demark, or goodwill. Goods: Movable property other than money; merchandise. Article 2 of the UCC deals with the sale of go ods. Guarantee: An assurance s h'en by one pUl y to be responsible fo r the contrJct of another. Homicide: The wrongful killing uf anuther.
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242
GLOSSARY
Impli~ w~"'mly
of mercha ntability, In Ihe sale of goods, a warran ly given by Ihe seller to the buyer guarJnleeinglhat Ilw goods are fit to be sold and used for the purposes for which they arc offered.
I mp li~
warra nty of title, A wurr.mty involved in the Sille of goods which guur"'..lnlees to the buy,'r that th e seller is free to sell the goods and that no other pany has an interest in them.
Incidental beneficiary: A peJ":SOn or organization that may benefit from the con trJcts of others but is not meant to be th e object of allY bounty from the contracting parties. Infringement: Using of intellectual property of annther without permis' sion. A tr"'Jdemark, copyright, or patent can be infringe d by an unau· thorized use r. Intangible property: Properly that siands for something of value, such as a stock certific'l t,·, pa tent, copyright, or goodwill. Intended beoeficiary: A person or org~nizatio n that is meant to bendit (rom the con tr"'.!ct of othe rs. For exa mple. my husband is intended to benefit from my New York Life Insurance policy on my death. Intentional: With the purpose of accomplishing the outcome; purposeful. Intentional infliction of emotional distre5s: An intentional tort in which one pany's oulmgeous conduct causes extreme emotional harm to another. Internet Corporation for Assigned Names and Numbers, also ICANN: A nonprofit organization that conducts international onli ne Urbitr.ltions rcsolving domain name and trademark issucs. Interrogatories: Written qllestinns and answers between parties to a lawsuit during the discovery stage of a trial. Inventory: Goods on hand for future sale. Invoice: Writtcn mcmorJndum of an order and its cost: a bill. Judi cial duel: A medi~v~l di$pute resolution process used by aristocrdts in vo lving com bat to prove truth fulness; sec trial by combut.
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GLOSSARY
243
Judidal .. mnomy' The lega l pr in ciple Ih al r~'qu i res parties lu a lawsu it to bring all claims th ey hal'e in common in a ~ingle ac tio n 10 sal'e co urt time and resources. Juri5diction: The right of a court to hear a claim an d give a decision. Fcdeml courts h~ ve jurisdiction to hear federa l clai ms, small daimscourts haV<.' jurisdiction 10 hear cases invo lvin g sma ll amou nts of money, t r~ffic courts hear tr"lfic cases. Jury tri al: A criminal or civil case that is decided by a grou p of the defen dant's peers. Ua ble: Lega lly ublig-d ted, rl·~"ponsib l c. Uce nse: The right to usc intellectual prope rt y owned by another. A license can be grd ntcd to a manufact ure r, distributor, or seller of a good fo r a specific time period or for a part icular geog rd phic area. Uen: A II'gal right o r interest in property th at a creditorgds from a borrower um il a debt is satisfied. Utigant: A party to a lawsuit. U!igato r: Th e atto rney trying a lawsniL l ost profit: The measure of damages due a conlracl selle r upon hreach by a huyer. Lust pro fi t i$ Ihe contracl price less Ihe resale price. Loveday: A medieval t<:rm for a day in which a settlement to a disput e is l1(·gotiated. Mailbox rule: Th e co ntrdcl ru le slati ng that acceptan ces arc c1fective upon d i.~palch, or when they arc deposited int o Ihe mailbox. whe ther they an: ever received o r not Market price: The price that an item will bring at sale. Mediation: An alternative di ~pute resolution pmce~s using a oentrol third party to hdp Ihc partics 10 reach an agreeable sCHlemeo t. Mediator: Th e ne ntral third party who fadlitatcs a mediation. M.... ting of the mind~: The contract proce55 of offer and acceptance th at resu lts in an agreement.
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244
GLOSSARY
Mirror image rule: The common law co ntract ru le slaling Ihallhe accepta nce musl be in exactly th e sa me form as Ihe offer: otherwise. it is a cou nteroffer. Misd emea nor: A minor crime or infringe ment of the law that is punishable by a fine or loss of privil.'Se. Misrepresentation: A I:'llse or misleading statement. Mission statement: A written statement of purpose for an individual or organizati on stating ethics, v"lues, and goals. Mistake, An errorof fac t lhal may serve 10 void an agreement. Mislakes can he unilaleral (one-~ided) ur bilater"l (two-s ided). Mitiga ti on: Taking steps to
r~d uce o ne's
dam ages.
Money damages: Monetary award given 10 a successful civil Htigant. Mortgage: A documenl filed publidy to show a creditor's collateral interest in real estate until th e rcpaym~n t of a debt. Negtigence: The failure to exercise a standard of care th'1t a reasonable pe rson would exercise in the circumsta nces. Negotiation: A fo rm nf alternative dispute re solu tion in wbich the parties to a di spute meet. with or wi thout others. to attempt to resolve their issues by agreement. NetworkSolutions, Inc.,also NSI: A private co ntracto r th at registers Internet domai n names. Obli gee: The party 10 whom a debto r is respo nsible: the creditor. Obligor: A party making a promise to do so mething: the debtor. Online dispute resolution, or ODR: A form of dispute resolution conducted nnline. Open terms: Terms in a cont ract thm arc not specified, SUdl as amount of product and price. Article 2 of the vee allows cont mcts between merchan ls to co nt ai n open te rm s.
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GLOSSARY
P~in
and .uffering: A type of damage cla imed in tort cases 10 the claimant (or Ihe clfeets of an injury.
245
,ompen~ale
Parol evidence rule: A conlracl rule Ihal rcquir~s written con lracts to contain all important te rms and forbids oral testimony that modific~ adds to, or contradicts written terms. Patent: A federal grant to an inventor or designer of exclusive rights to his prodoct for a period of ycars. PaYI!@:Theperson being paid with a chL'Ck. Perfectio n: The step in a secured tran saction in which the credito r files puhlic noliee "fhis inleresl in the deht"rs collateral. Petitioner. The pcrson Iiling a lawsu it; the pla intiff. Plaintiff: Th., person filing a lawsui t; the petitioner. Pledge: To promise an item of property to a creditor as collateral fo r a debt. Pleadings: Written court papers filed in a lawsuit. Police powers: Powers granted to stales tn Tl"Subte matters concerning the health and gener.d welfare of its cit ize ns. Possession: Having ac tual control o( an item. Possessory lien: An interest in a piece of colla teral by virtue "f having possession of it. Power of attorney: A written document in which one party, the principal, grJnts authority tu Jnnthcr, the power of aUorney, t" d" acts .m the principal's behalf. Lim ited powerof attorney: ·The granting to another a lim ited or specific ability to act for the principaL Plenary power of attorney: The granting to another the ability to act for thc princip~l in every C"dl'acity. Powerof al\orney for health care: The granting to anolher the ah il ity to act for the principal on decisions involving health care issues.
246
GLOSSARY
Prec...dent: A de cided caM: that ~ t s a standard or gui del ine for future similar cases; sec also star( decisis, Pren uptill illgrl!l!men t: A written agreement between panies to be married outlining their rights in eac h other's assets should the marriage fail. Also kn own as an anknuptia l agreement. Preponderance of th e evidence: Th e standa rd of proof in a civil case. This standa rd requires the trie r of fa ct, which is the judge or the jury, to find that lOon.' likely than not, the plJint ilf should receive damages from the defen dant; so metimes referred to as th e 51 perce nt rule. Principle of egoism: The e th ical hc1icftbat right adion is anything that hendiu the individua l decider. Principle of utility: The ethical bdief that right action is what creates the most good fo r the highest number of people. Privilege: A special leg"JI right granted to a person or group of persons. Privity of contract: Mutual in terests of the partics to a contract. Procedural laws: Rul es about how the court system functions, slIch as due dates, filing fecs. and courtroom co nduct. PrtKl!l!ds: What is rece ived upon sale or disposal of collateral. Products liability claim: A category of tort law dealing with products man ufactured, distributed, o r sold in com merce that do not function as promis<'°d. Claim" fi,r pwd ~l ct s liability can he haSlod on dcfextive manufactufe of a product. defective design of a product, o r failure to warn the public of a product's hazards. Promisso ry estoppel: An cquitable remcdy in which tbc court gf"Jnts relicf to a pany who relied to his det riment on the promise of anoth~r; sec quasi contf"Jct. Promissory note: The written agTt'cment to repay a debt. Pro.e<: u!or: The legal representative fur the fcdef"J l government or a state in a criminal matt~r; the US. attornc)" state attorney. or county attorney,
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GLOSSARY
247
Proxy: A penou who speaks fi,r or votcs for a corporate sharchoMer in a meeting. Purchase money 5e
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248
GLOSSARY
~curity agr~m~nl:
l he wri tl en ducument hctween a credito r and a dehlo r outlining the term s of the deht Ihe exact collater..l pledged. and Ihe circumstances under which the creditor may repossess the col1atcnll to satisfy th e debt.
~curity
inte rest: Th e interl.'sl that a ll.'nder takes in the colta tl'm l of the borrowH in a secured tra nsaction.
~lf-Inc rlmlnatl on:
Doi ng or saying someth in g 10 im plicate yourself in a cri mi nal activ ity. Thr fift h Amen dm ent of the U.S. Constitution protects a citizen from being a witness if her testimony may be selfincriminating.
~rvlce
contract: A contract between the buyer and seite r of goods wh erei n the sdk r agrees for a prepaid fC'e 10 repai r' lf r"plac,' goods , overed fo r a $Ct period of ti me; S<)metim es referred to as an exte nded warranty.
~rvite m~ rk:
A disti nctive mark used in the sale of .•ervices 10 ident ify one's 5.Crviccs.
Shrink-wrap ag r~eme nt: A conlract ahout terms of usc pllt inside Ih e wrap ping of a product. Stakeholder: An in dividual or group that may have an int erest in an endeavor. CorporJ te stakeholders include Ihe sharehold ers, employees, husin ~ss partn~rs, customers, commu nity, and the env iro n ment. Stand~rd
of proof: The level or llIea.~ure of pwof requ ired in a trial to det ermi ne Ihe gui lt of a party.
Stare decisis: Latin phra~e whic h means Uletthe pr ior ru li ng sta nd.~ This ph rase refers 10 a court's following of the pl'<.'cedent set by a previo us decision in a case with similar circu mstances. Statute of frauds: A contract principle that requires cer tain type s of con tT'acls to be in wri ting to be enforcC"able in court. Strict liability: In lort law, the respons ibility for injuries regardless of negligence. Strict liah ili ty generally applie .• to ultrahazardous husinesses.
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GLOSSARY
249
Styled: The legal terminology 10 refcr to a casc. The Q\,~C of a claim hetween Mr. Marbury and Mr. Madison would be "slyled" asMarlmry v. Madison (the last name of the plaintiff versus the last name of the defendant). Substantive law: The body of law that creates and defines the rights and duti~s of citizens. Surety: A person di rectly liable to pay another's debt. Term of art: A woro or phrase that has a specific legal meaning: legal jargon. Tort: In civil law. an inju ry 10 a person or propert),. Tortfeasor: 'Ihe person who commits a to rt. Trademark: A distinctive mark or logo attached to goods to iden tify them with their produc..r. Trade secret: A recipe, formula, customer list, price list, or other documen t owned hy a business that is kept secret hecause of the sensit il'c and valuable nature of the information. Trial by co mbat: A medie val dispute resoluti on pro cess used by arist ocrats involving cnm hat to prove t rutbfulne.~~; .\.Ce judicial dueL Trial by oath: A medi eval di spute resolutio n process when'by th<' parties to a dispute collected sworn statements from witnesses and characte r r~fcre n ces to provc truthfulner.s. Tria l by ordeal: A medil'l'al dispute resolut ion method involving a physical challens,' or onlcal to determine truthfulnes". Trier of fact: The persnn tlr persnns who determiue the outcome ,)f a case, eilher the judge or a jury. UCC-l : The common form used 10 file a financing statement. Unconscinnab le co ntract: A cuntT'JCI that is so unfd ir or ollt-sidtd as lu offend the conscience of a party. Adhes ion contT'Jcls. which nffer the buyer a "take -it-o r-lcavc-it" deal, aT(' often unconscionable.
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250
GLOSSARY
Uniform Comme,d,,1 Code IUCCI: A hody of ru l e~ covering commercial dealings that individual siales have adop ted to promole uniform ity in comme rce. Article 2 of lhe vee deals with sales of goods.Artide 9 of the vee deals with secured Inmsactions. Unjust enrichment: Receiving a benefit from another without paying compemulion. Warehou~e
recelplS: Documents show in g own ershi p of goo ds helng hel d in storage.
W"rr"oly: A promise abou t the quali ty or performance of a goo d fo r sa le thai the ~eHer gives 10 the buyer to induce him 10 make a purchase. W"rr"oty for fitness for " specific purpose: A type of guarJntec Ihat a selle r creates through his words or actions at purchase which gives th e buye r a right to expeclthe product to be suitable for a spe<:ific or pa rticula r usc. Wi llful : With in ten tio n. Wrongful de"th: The tOI1 claim for the unlawfultuking of a life.
,
"
.......1'\1
Ql
'-
E ~
Q..
Index "
App""I. ll..!J.
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