The Legal and Social Environment of Business (part 2)/Contracts (part 1)
The Legal Environment of International Trade
In domestic operations, US firms compete against imports.
For the most part, the U.S. Law of contracts and the Uniform Commercial Code (UCC) are the laws governing sales in U.S. when the two parties are domestic.
When international contract is made, must determine which country's laws apply (seller's or buyer's).
Choice-of-law clause is a clause in a contract that states which law will govern should a dispute arise.
Major trading countries have treaties. When contracts between citizens/businesses of these countries do not have choice-of-law clauses, the treaty is used to determine rights and liabilities.
To avoid lengthy relationship ending litigation, arbitration can be used to resolve disputes.
US companies in foreign lands face problems, such as China requiring all lawyers involved be Chinese, and the arbitrator be Chinese.
To avoid, parties generally agree that arbitration will be in a neutral country.
Decision is final and binding with very limited judicial review possible.
Law is the result of the desire of the lawmaker to achieve certain goals.
Social forces have influence on the law, making them ethical in the eyes of the lawmaker.
Not all agree on what international law should be because different people have different ideas as to what is right.
Example: Not all countries dislike cartels, so some allow merchants to form a trust to create greater bargaining power in dealing with the U.S. and other foreign merchants.
There is no international currency.
Contract must state what currency is to be used.
Common for buyer to furnish a letter of credit – commercial device used to guarantee payment to a seller.
Issuer of letter of credit (usually a bank) agrees to pay the drafts drawn against the buyer for the purchase price.
GATT = General Agreement on Tariffs and Trade 19994
Tariff is a tax on imported or exported goods.
Subscribed to by 126 member governments.
Includes original 1947 GATT, multilateral agreements negotiated since 1947, Uruguay Round Agreement, and agreement establishing WTO.
WTO took over policing objectives of the former GATT on 1/1/1995.
Goal of GATT has been to liberalize world trade and make it secure for furthering economic growth and human development.
Based on fundamental principles
Trade without discrimination
Protection through tariffs.
Most-favored-nation clause – Clause in treaties between countries whereby any privilege subsequently granted to a third country in relation to a given treaty subject is extended to the other party to the treaty.
Basically means that if country A has MFN status with country B, and country B makes an agreement with country C, country A cannot have an agreement that is less advantageous than country C's agreement.
In application of import/export duties under GATT, all member countries grant each other equal treatments, so no country gives special trading advantages to another.
Exceptions to this rule are made with regional trading agreements such as the EU and NAFTA, as well as agreements with developing countries.
WTO = World Trade Organization
Provides DSB – Dispute Settlement Body – Means to resolve trade disputes rather than engage in unilateral trade sanctions or a trade war.
If GATT violations are found, and not removed by the offending country, trade sanctions authorized by a panel may be imposed on that country in an amount equal to the economic injury caused by the violations.
United Nations Convention on Contracts for the International Sale of Goods
Came into effect 1/1/1988
Between the US and 60 other nations.
Uniform rules governing international sales contracts.
National law has to fill in gaps in areas not covered by the CISG.
Different from the UCC.
Excludes sale of goods for personal, family or household uses and the sale of watercraft, aircraft, natural gas, electricity, letters of credit, and auctions and securities.
Often viewed as neutral body of law.
Absent an express “opt-out” clause, it preempts all state actions.
United Nations Conference on Trade and Development
Represents interests of less developed countries.
Treaty of Rome created the European Economic Community in 1958.
Changed name to European Union (EU) 11/1/1993.
Originally signed by 6 nations.
Made up of four main institutions.
1. European Council – consists of heads of state of the member countries and sets broad policy guidelines.
2. European Commission – implements decisions of the council, initiates actions against those that violate EU law (individuals, companies, or member states).
3. European Parliament – advisory legislative role with limited veto powers.
4. European Court of Justice (ECJ) and lower Court of First Instance – Judicial arm of the EU.
Single European Act eliminates barriers to the free movement of goods, persons, services, and capital between EU countries.
Treaty of European Union set goals for:
Single monetary and fiscal policies.
Common foreign and security policies.
Cooperation in justice and home affairs.
North American Free Trade Agreement.
Effective 1/1/1994 with US, Mexico and Canada.
Included Mexico into the Canada Free Trade Agreement of 1989.
Eliminates tariffs among the three countries for 15 years.
Products qualify only if they originate in one or more of the three countries.
Except for certain low value items, a Certificate of Origin is required.
Does not crate a common labor market as the EU does, but allows for temporary access for business persons across boarders.
Numerous agreements between developing countries have been established in recent years.
IMF – World Bank
International Monetary Fund.
Purpose is to facilitate the expansion and balanced growth of international trade, and shorten the duration and lessen the disequilibrium in the international balance of payments of members.
Administers a complex lending system.
Special Drawing Rights (SDRs) – Rights that allow a country to borrow enough money from other IMF members to permit that country to maintain the stability of its currency's relationship to other world currencies.
International Bank for Reconstruction and Development = World Bank.
Organization of Petroleum Exporting Countries.
Producer cartel (or combination).
Main goal was to raise the taxes and royalties earned from crude oil production, and to take control over production and exploration from the major oil companies.
Early success led other nations that export raw materials to form similar cartels.
Direct sale to customers in a foreign country.
US firm is not present in the foreign country.
Export is subject to tariff by the foreign country, but exporting firm is not subject to local taxation by the importing country.
US manufacturer may make limited entry into foreign country through an agent.
Agent – person or firm who is authorized by the principal or by operation of law to make contracts with third persons on behalf of the principal.
Principal – person or firm who employs an agent.
Agents receive commission income for sales made on behalf of the US principal.
Subjects the firm to local taxation because the company is “doing business” in that country.
Distributor – entity that takes title to goods and bears the financial and commercial risks for the subsequent sale of the goods.
Care must be given to not violate EU antitrust laws when designating an exclusive distributorship.
Transfer of technology rights to a product so that it may be produced by a different business organization in a foreign country in exchange for royalties and other payments.
May fall into categories of patents, trademarks, and “know-how” (trade secrets and unpatented manufacturing processes outside the public domain).
Franchising – form of licensing granting permission to use a trademark, trade name, or copyright under specified conditions.
Wholly Owned Subsidiaries
If firm seeks to maintain control over its own operations including protection of technologies, may choose this path to do business in foreign country.
Poses many taxation problems for the governments in the countries where the US firm does business.
US has tax treaties with many countries to avoid double taxation.
Potential for tax evasion by US corporations selling goods to overseas subsidiaries.
Internal Revenue Code (IRC) allows the IRS to reallocate the income between parent and foreign subsidiary.
Parent company can prevent this by showing that its charges were “at arm's length” (based off fair market value, and cost of production, for example).
Relationship in which two or more persons or firms combine their labor or property for a single undertaking and share profits and losses equally unless otherwise agreed.
China has two forms of joint ventures
Contract joint venture – allows parties to operate as separate entities governed by a contract.
Equity joint venture – each party owns a portion of the business.
These are governed by the Chinese Foreign Equity Joint Venture Law.
Must form a Chinese LLC, and foreign participant must contribute at least 25% of firm's capital.
U.S. regulates exports due to (1) national security (2) foreign policy (3) short supply of domestic products
Export Administration Act of 1979 (expired 1994, extended by Executive Orders by Clinton and Bush)
Bureau of Industry and Security (BIS) - part of the Department of Commerce.
Prior to 1996, every export required a license.
1996 Simplification Regulations, no license required unless regulations affirmatively require a license.
When no license is required, exporter must fill out Shipper's Export Declaration and attach to bill of lading.
Determining if a License is Needed
Exporter should consult Commerce Control List (CCL) to determine if BIS export licenses is required.
Listed products have Export Control Classification Numbers (ECCNs)
If on the list, ECCN will provide reason why.
Examples are national security, missile technology, nuclear nonproliferation, chemical/biological weapons, anti terrorism, crime control, short supply, or UN sanctions.
Exporter should then consult Commerce Country Chart to determine whether a license is needed to send to proposed destination.
If country is on a list that would normally have an exported item denied (such as a certain type of steel that can be used in nuclear weapons being sent to a country that is not part of the Nuclear Non-Proliferation Treaty), then purchaser must complete a Statement of Ultimate Consignee and Purchaser identifying the end use of the product.
Falsification of the information in the license application process is a criminal offense.
Arms Control Export Act – civilian items that contain components with military application must have an export license.
Freight forwarder = One who contracts to have goods transported and in turn, contracts with carriers for such transportation.
Provide assistance to exporters in determining if license is needed.
Provided by the Department of Commerce's Exporter Assistance Staff.
Experts in U.S. Department of Commerce export license requirements.
Intellectual property rights are trademarks, copyrights, and patent rights protected by law.
Importing of goods bearing counterfeits of U.S. companies' trademarks violates Lanham Act.
Possible remedies for violations include injunctive relief, seizure and destruction of counterfeit goods that are found in the US, damages, and attorney fees.
U.S. firms may recover triple damages from counterfeiters.
If U.S. firm licenses a foreign business to use trademark overseas, and those products are then imported to the U.S., they are gray market goods.
Also, if a U.S. firm has a product overseas that is different, but uses the same name (Lever Brothers vs Lever U.K with Shield and Sunlight soaps/dishwashing detergent), and that product is brought into the U.S., then it is also a gray market good.
Basically = ok overseas, all licenses for use intact, but shouldn't be brought into the states as this creates a conflict for the U.S. firm.
Antitrust – Laws designed to protect against unfair business practices
Effects Doctrine – states U.S. courts assume jurisdiction and apply antitrust laws to conduct outside of the U.S. when the activity of business firms has direct and substantial effect on U.S. commerce. Been modified to require the effect also be foreseeable.
Jurisdictional Rule of Reason – Rule that balances vital interests (including laws and policies) of the U.S. with those of a foreign country.
Based on comity
Comity = principle of international law that the laws of all nations deserve the respect legitimately demanded by equal participants in international affairs.
Defenses – three are commonly raised to extraterritorial application of U.S. antitrust laws, and attack jurisdiction in other legal actions involving international law
Every sovereign state must respect the independence of every other sovereign state.
Courts of one country will not sit in judgment of another government’s acts done within its own territory.
Considered to be political, not judicial, in nature
The Sovereign Compliance Doctrine
Allows a defendant to raise as an affirmative defense to an antitrust action the fact that the defendant’s actions were compelled by a foreign state.
To establish, compulsion by the foreign government is required.
The Sovereign Immunity Doctrine
Doctrine that states that a foreign sovereign generally cannot be sued unless an exception to the Foreign Sovereign Immunities Act of 1976 applies.
Foreign Trade Antitrust Improvements Act of 1982 was passed due to business uncertainty as to when the antitrust laws apply to international transactions.
Act requires a direct, substantial, and reasonably foreseeable effect on U.S. domestic commerce or exports by residents before business conduct abroad may come within the grounds of U.S. antitrust laws.
Attitudes differ in other countries towards cartels and business combinations.
Japan has strict consumer protection laws, but is less restrictive than U.S. on mergers, stock ownership, etc.
Treaty of Rome prohibits agreements and concerted practices that:
even indirectly fix prices of purchases or sales or fix any other trading conditions;
limit or control production, markets, technical development or investment;
share markets or sources of supply;
apply unequal terms to parties furnishing equivalent considerations, thereby placing one at a competitive disadvantage; or
make a contract’s formation depend on the acceptance of certain additional obligations that, according to commercial usage, have no connection with the subject of such contracts.
Securities and Tax Fraud Regulation in an International Environment
U.S. district courts have jurisdiction over violations of antifraud provisions of Securities Exchange Act of 1934 when losses occur from sales to Americans in the U.S.
Secrecy laws = confidentiality laws applied to home-country banks, prohibit disclosure of business records or identify of customers.
Blocking laws = prohibit disclosure, copying, inspection, or removal of documents located in enacting country in compliance from foreign authorities.
1977 Treaty of Mutual Assistance in Criminal Matters between U.S. and Switzerland served to deter secrecy laws to conceal fraud.
Only applies if activity violates both U.S. and Swiss law.
Switzerland and other countries with banking secrecy have given way to U.S. and EU pressures to help cut down on tax evaders.
U.S. and Switzerland agreed on amended tax treaty to increase amount of tax information they share.
Most common barrier to free movement of goods across barriers are tariffs.
Tariff = import or export duty or tax placed on goods as they move into or out of the country.
Tariff raises the total cost and price of imported products.
U.S. Customs and Border Protection Service (Customs) imposes tariffs on imported goods at the port of entry.
Merchandise is listed on a schedule which lists each type of merchandise and corresponding duty rate (or percentage).
Wide range of restrictions that inhibit the free movement of goods between countries.
Import quota limiting the number of a product that can be imported into one country from another.
Turtle Law prohibits the importation of shrimp from countries that allow the harvesting of shrimp with commercial fishing technology that could affect endangered sea turtles.
U.S. export controls have been used as instruments of foreign policy.
U.S. sought to deny goods and technology of military importance to unfriendly nations.
U.S. has also denied goods to certain countries to protest or punish activities considered violative of human rights or world peace.
Dumping = selling goods in another country at less than their fair value.
Proceedings are conducted by two federal agencies which separately examine two distinct components.
International Trade Administration (ITA) of the Department of Commerce (commonly referred to as “Commerce”) investigate whether specified foreign goods are being sold at less than fair value (LTFV).
International Trade Commission (ITC) determines if there is an injury to a domestic industry as a result of such sales.
Findings of both LTFV sales and injury must be present before action can be taken.
Commerce and ITC decisions may be appealed to the Court of International Trade.
Relief is provided for industries, communities, firms, and workers when any one or more of them are adversely affected by import competition.
Retaliation and Relief Against Foreign Unfair Trade Restrictions
U.S. exporters may encounter unreasonable, unjustifiable or discriminatory import restrictions.
Importers to the U.S. may take advantage of trade agreement concessions that allow producers access to the U.S.
Omnibus Trade and Competitiveness Act of 1988 contain broad authority to retaliate against unreasonable, unjustifiable or discriminatory acts by a foreign country.
Authority to retaliate is referred to as Section 301 authority.
Enforcement is to the U.S. trade representative (USTR).
Mandatory retaliation is required if the USTR determines:
rights of U.S. under trade agreement are being denied
actions or policies of foreign country are unjustifiable and a burden or restrict U.S. commerce.
Expropriation - “to deprive possession” “to take out of an owner's hands”
Firms in extraction of natural resources, banking, communications, and defense related industries are susceptible to nationalization.
Takeovers of U.S. owned businesses in foreign countries may be motivated by short-term political advantage or desire to demonstrate political clout.
May also be due to long term plans for development of the country's economy.
Overseas Private Investment Corporation (OPIC) is U.S. agency that supports private investments in less developed friendly countries.
The Foreign Corrupt Practices Act
Disallows payment to foreign governments/officials for getting business from their government.
Foreign Corrupt Practices Act of 1977 requires strict accounting and internal control procedures to prevent hiding of improper payments to foreign officials.
Sanctions of up to $1 million to the company, and fines and imprisonment for individuals involved.
Act does not apply to payments to low level officials for expediting the performance of routine government services.
Crime = violation of the law that is punished as an offense against the state or government.
Misdemeanor = criminal offense with a sentence of less than one year that is neither treason nor a felony.
Felony = criminal offense punishable by confinement in prison for more than one year or by death, or that is expressly stated by statute to be a felony.
Basis of Criminal Liability
Consists of two elements:
mental state (scienter or intent)
Does not require awareness or knowledge of guilt.
For most crimes, voluntary commission of the act is sufficient for proving mental state.
Ignorance that a law is being broken does not mean there is not mental state
Specific statutes define conduct that (when combined with mental state) constitutes a crime. Example: writing a check knowing there are not enough funds to cover it.
Harm may result, but is not an essential element of a crime.
Corporations are held liable for the act of their employees, or if the employees fail to act when required.
More than one person in a business can be convicted of the same business crime.
Managers whose employees commit criminal acts can be held liable. If the manager authorizes the act, or knew about it and did not act reasonably to prevent the employee from committing the act.
When the defendant is convicted of a crime, courts may declare that the defendant's rights in any property used or gained from a crime be confiscated.
Criminal penalties for businesses are different from those for individuals.
Instead of a comparatively small fixed amount, such as $100,000, businesses may be penalized 10 or 20 percent of earnings.
There is mandatory prison sentences for officers and directors who are convicted of crimes committed as they led their corporations.
Federal Sentencing Guidelines = federal standards used by judges in determining mandatory sentence terms for those convicted of federal crimes.
Following collapse of Enron, WorldCom and Adelphia, U.S. Sentencing Commission (USSC) pushed for passage of 2001 Economic Crime Package; Consolidation, Clarification, and Certainty.
Corporate managers found to have masterminded any criminal activity must be sentenced to prison time.
Sarbanes-Oxley Reforms to Criminal Penalties
White-Collar Crime Penalty Enhancement Act of 2002 – federal reforms that provide for longer sentences and higher fines for both executives and companies.
Indemnification of Crime Victims
Penalties are paid to the government.
Victim typically does not benefit from the criminal prosecution and conviction, although courts can order the restitution be paid to victims.
The Victims Crime Act of 1984 creates a federal Crime Victims Fund.
The Victim and Witness Protection Act of 1982 authorizes in federal district court, under certain circumstances, judge to order defendant to make restitution to the victim.
Criminal prosecution is not undertaken for financial benefit of victim, but victim can sue in civil court for damages.
Company or individual found violating federal antitrust laws is liable for three times the damages actually sustained.
If an innocent person is wrongly convicted, state legislature typically pays the person damages to compensate the wrong that has been done.
Imprisonment while awaiting trial and then being found not guilty does not entitle a person to indemnification – they are not found innocent, they are simply not proven to be guilty beyond a reasonable doubt.
White-Collar Crimes – crimes that do not use nor threaten to use force or violence or do not cause injury to persons or property. Generally considered business crime.
Conspiracy = agreement between two or more persons to commit an unlawful act.
Crime is the agreement itself, whether or not any actual plan has been carried out.
Crimes Related to Production, Competition, and Marketing
Shipment of improper goods or transmission of improper information in interstate commerce is a federal crime.
To protect investing public, statutes regulating the issuance and sale of public stocks and bonds have been adopted.
Money Laundering Control Act (MLCA)
Prohibits the knowing and willful participation in a financial transaction designed to conceal or disguise the source of the funds.
Racketeer Influenced and Corrupt Organizations Act (RICO) = initially designed to prevent those involved in organized crime from investing money obtained through racketeering in legitimate businesses.
RICO gives criminal and civil actions against anyone using income derived from racketeering to invest in, control, or conduct an enterprise through a pattern of racketeering activity.
Pattern must be established by proving at least 2 acts within 10 years (called predicate acts).
Unless there is a prior criminal conviction, securities fraud is not a predicate act per the Private Securities Litigation Reform Act of 1995.
Bribery - Act of giving money, property, or any benefit to a person to influence that person's judgment in favor of the giver.
Commercial Bribery - Bribery of a purchasing agent in order to induce the agent to enter into a transaction.
Extortion = illegal demand by a public officer acting with apparent authority.
Blackmail = extortion demands made by a nonpublic official.
Crime for public official to hold financial interest in or receive money from an enterprise that seeks to do business with the government.
Public officials must file disclosure forms annually about their financial positions as well as provide a disclosure of all gifts and their value.
Foreign Corrupt Practices Act (FCPA) = federal law that makes it a felony to influence decision makers in other countries for the purpose of obtaining business.
Does not prohibit grease or facilitation payments (legal payments to speed up or ensure performance of normal government duties)
Counterfeiting - Making a document or coin that appears to be genuine but is not because the person making it does not have the authority to do so.
Forgery = fraudulently making or altering an instrument that apparently creates or alters a legal liability of another.
Uttering = crime of issuing or delivering a forged instrument to another person.
Knowingly giving false testimony in a judicial proceeding after having been sworn to tell the truth.
Giving false answers in a situation other than in court or the litigation process is called false swearing.
Crime to provide a false claim to an insurance company or government office.
Federal false statute makes it a crime to knowingly and willfully make a false material statement about any matter within the jurisdiction or agency of the U.S.
Obtaining Goods by False Pretenses
Examples include writing bad checks, false representations as to future profits in a business, entering into a contract with no intent of performing as detailed in the contract.
Federal crime to obtain money from an ATM by the unauthorized use of the depositor's ATM card.
Federal crime to make false statements in a loan application to a federally insured bank.
Also a crime for a land owner to put a false value on land transferred to a bank as security for a loan.
Under a bad check statute, it is a crime to use or pass a check with the intent to defraud with knowledge that there is insufficient funds in the bank to cover the check.
Crime to steal a credit card.
Using credit card without the permission of the owner to obtain goods or services is a crime.
Using a credit card knowing it has been canceled is guilty of the crime of obtaining goods by false pretenses.
Embezzlement = fraudulent conversion of another's property or money by a person to whom it has been entrusted.
Felony to “alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States.”
If a corporate officer fails to comply with all financial statement certification requirements, or certifies financial statements that contain false material information, the officer and company have committed corporate fraud.
Larceny – wrongful or fraudulent taking of the personal property of another by any person with fraudulent intent (example: shoplifting)
Robbery – taking of personal property from the presence of the victim by use of force.
Burglary – at common law was breaking and entering during the night into the dwelling house of another with the intent to commit a felony, but current statutes have omitted the when and where, or that even an actual entry took place.
Arson – at common law was burning of another's dwelling.
Riots and Civil Disorders – damage to property is generally covered under other statutes, but assembling of a riotous mob and engaging in civil disorders (even if there is no destruction or theft of property) is generally a violation of disturbing the peace or modern antiriot statutes.
Computer crime = wrongs committed using a computer or with knowledge of computers.
Theft of Hardware – computer itself is stolen
Theft of Software – taking software, whether in the form of a program written on paper or on a disk or memory stick.
Intentional Damage – physically destroying the computer, or gaining access and erasing or altering the data, or interfering with air conditioning so the computer overheats and causes damage, or planting a virus that causes the computer to malfunction are forms of intentional damage.
Unlawful use of a computer belonging to someone else is also a crime.
Taking information from a computer without the consent of the owner.
Sending goods instead of to the intended receiver, to another place where the wrongdoer or a confederate receives them.
Economic Espionage Act (EEA) – federal law that makes it a felony to copy, download, transmit, or in any way transfer proprietary files, documents, and information from a computer to an unauthorized person.
Electronic Fund Transfers Act (EFTA) makes it a crime to use any counterfeit, stolen, or fraudulently obtained card, code, or other device to obtain money or goods in excess of a specified amount through an electronic fund transfer system.
Digital Millennium Copyright Act (DMCA) makes it a federal offense to circumvent or create programs to circumvent encryption devices that protect copyrights.
Sending of unsolicited emails.
Fourth Amendment provides privacy protection and prohibits unauthorized searches and seizures.
Search warrant = judicial authorization for a search of property where there is the expectation of privacy.
Fourth amendment applies equally to individuals and corporations.
Exceptions are emergencies (such as a burning building) and the “plain view” exception.
Also, officers are allowed to enter when they are needed to give aid because of an ongoing criminal act (such as they are able to see a fight through the window of a house)
Also, person gives permission for entry and for the search (waives rights)
Some records may be in the hands of others (accountants, attorneys, etc) rather than the person who committed the crime.
Warrants are still required to obtain these records.
Privileged relationship is one where the records and notes resulting from the contact between the individuals cannot be seized even with a warrant (with some exceptions)
Examples are attorney-client, accountant-client, doctor-patient, priest-parishioner
Fifth amendment protects against self-incrimination and also guarantees due process.
Applies only to individuals – corporations cannot plead the fifth to prevent disclosure of books and records.
Officers and employees of a corporation can assert the fifth amendment, but the records belong to the corporation, not the individuals.
Miranda warnings = warnings required to prevent self-incrimination in a criminal matter.
Consist of the right to remain silent, anything said can be used against, right to an attorney present, one can be provided if not affordable.
Failure to give means that any statement made, including a full confession, is inadmissible in court.
Due process = right to be heard, question witnesses, and present evidence before any criminal conviction can occur.
Sixth amendment guarantees a speedy trial (trial will be completed in a timely fashion). (Question for teacher: how does judicial triage impact the sixth amendment?)
Nature and Classes of Contracts: Contracting on the Internet
By mutual agreement, the parties create enforceable duties or obligations to do, or refrain from doing, certain acts..
Elements of a Contract
1. An agreement
2. between competent parties
3. based on the genuine assent of the parties that is
4. supported by consideration
5. made for a lawful objectives in the form required by law, if any.
>Contracts may relate to the performance of personal services (such as employment contracts) or transfer of property (such as sale of a house or car).
Person who makes a promise is the promisor
Person to whom the promise is made is promisee
If promise is binding, creates a duty or obligation. Individuals are then known as obligor (promisor) and obligee (promisee).
Privity = succession or chain of relationship to the same thing or right, such as privity of contract, privity of estate, privity of possession.
Privity of contract = relationship between a promisor and promisee.
Example: college and construction firm agree to the building on the college campus of a new building. They are in privity of contract. A subcontractor working on the project is not in privity of contract, and cannot sue on the contract.
In written contracts, parties (and the contracts) are given special names to identify each party such as landlord/tenant (lease), lessor/lessee (lease), shipper/carrier (transportation contract), vendor/vendee (sales contract), insurer/insured (insurance policy).
One or more persons may be on each side of a contract.
Contract is based on an agreement.
Offeror is the person who makes an offer
Offeree is the person who the offer is made to
There must be an offer, and an acceptance, for there to be a contract.
There must be an intent to make a contract that is binding for there to be a contract.
arties may be in general agreement, but because details are not “hammered out” there is no actual contract.
Other than when there are grounds for making a contract void or voidable, parties may make contracts as they choose.
Law does not require parties to be fair, kind, reasonable, or share gains/losses equally.
Written contracts enforced because the formality with which they are created is considered sufficient to show the parties intend to be bound to the terms.
Include contracts under seal – contract executed by affixing a seal or making an impression on the paper or on some adhering substance such as wax attached to the document.
Include contracts of record – obligations that have been entered before a court of record, sometimes called a recognizance.
Include negotiable instruments.
Informal Contracts - Simple oral or written contracts, enforceable not because of the form of the transaction, but because they represent agreement of the parties.
Express Contracts - Simple contract in which the terms of the agreement of the parties are manifested by their words, whether spoken or written
Sometimes called contract implied in fact
Agreement is shown not by words (written or spoken) but by acts and conducts of the parties.
a person renders services under circumstances indicating that payment for them is expected
the other person, knowing such circumstances, accepts the benefit of those services.
Valid Contracts – Agreement that is binding and enforceable
Voidable Contracts – Agreement that is otherwise binding and enforceable, but because of circumstances surrounding its execution or lack of capacity of one of the parties, it may be rejected at the option of one of the parties.
Void Agreements – Agreement that is without legal effect, because the performance of an act is prohibited by law, and therefore is incapable of enforcement.
Executed Contracts – One that has been completely performed.
Executory Contracts – Agreement by which something remains to be done by one or both parties.
Contract can be executed by one party, and still be executory by the other. Example: A sells house to B, with monthly payments over 30 years. When A gives house to B, it is executed by A. B still has to make payments, so it is executory to B.
Bilateral Contract – Agreement where one promise is given in exchange for another.
Unilateral Contract – Contract where offeror promises to do something or pay a certain amount only when the offeree does an act, such as a reward is offered, contest is announced, etc.
Offeree does not accept offer by agreement, but rather by performance.
Option Contract – Contract to hold an offer to make a contract for a fixed period of time. A contract that gives a right to one of the parties to enter into a second contract at a later date.
Right of First Refusal Contract – Contract that gives the right of a party to meet the terms of a proposed contract before it is executed, such as a real estate purchase agreement.
Quasi contract = court imposed obligation to prevent unjust enrichment in the absence of a contract.
A successful claim for unjust enrichment usually requires:
a benefit conferred on the defendant
the defendant's knowledge of the benefit
a finding that it would be unjust for the defendant to retain the benefit without payment.
Quantum meruit = as much as deserved; an action brought for the value of the services rendered the defendant when there was no express contract as to the purchase price. Restitution damages.
When recovery is allowed in quasi contract, plaintiff recovers the reasonable value of the benefit conferred on the defendant, or fair and reasonable value of the work performed, depending on jurisdiction and circumstances of the case itself.
Many websites exist to check a seller's reputation
Generally, the web site terms become the contract of the parties and are legally enforceable.
Laws that prevent deception by brick-and-mortar businesses also apply to internet sites.
Basic legal rules that govern contracts offline are the same rules that govern online contracts, and basic civil procedure rules apply.
Formation of Contracts: Offer and Acceptance
Offer = expression of an offeror's willingness to enter into a contractual agreement.
Invitation to Negotiate - First statement made may not necessarily be an offer, but an invitation to negotiate an offer, or preliminary discussions.
No contract exists when the parties merely agree that, at a future date, they will consider making a contract or will make a contract on terms to e agreed on at that time, unless an agreement is reached on all material terms and conditions and nothing is left to future negotiations.
An offer and the resulting contract must be definite and certain.
If the offer is indefinite or vague, or an essential provision lacking, no contract arises form an attempt to accept it.
Minor, ministerial, and nonessential terms left for future determination does not make an agreement too vague to be a contract.
Law does not favor destruction of contracts, so when a claim of indefiniteness, courst will do best to find the intent of the parties, and thereby reach the conclusion that the contract is not too indefinite.
Offer and contract that by themselves may appear to indefinite may be made definite by referencing another writing, such as a lease agreement referencing to follow the standard form with which both parties are familiar, or by reference to the prior dealins of the parties and trade practices.
Some omitted terms may be implied by law.
“Best Effort” Clauses
Decades ago it was generally accepted that a duty defined only in terms of best efforts was too indefinite to be enforced, such a view is no longer widely held.
Contracts with two or more parts calling for corresponding performances of each part by the parties.
Excpetions to Definiteness
Cases may come up where a contract needs to be written with good faith performance due to factors such as market price, cost to complete, production, or sales requirements.
Requirements contract – contract to buy all requirements of the buyer from the seller.
Output contract – contract of a producer to sell its entier production or output to a given buyer.
Both are binding even though they do not state how much is to be bought or sold by specific amounts.
Communication must be by the offeror or at the offeror's direction.
In a unilateral contract, performance does not constitute acceptance if the offeree did not know of the offer, and the offeree is not entitled to the reward for leading to an arrest of someone, for example.
An offer can be revoked at any time before it is accepted.
What Constitutes A Revocation?
No particular form or words are required.
Until communicated, either directly or indirectly, offeree has reason to believe that there is still an offer that may be accepted.
A letter revoking is not effective until the offeree receives it.
If offeree accepts an offer before it is effectively revoked, a valid contract is created.
An exception to the ability to revoke.
The option is a contract to refrain from revoking an offer.
Another exception to the ability to revoke.
Firm offer = offer that states that it is to be irrevokable for a stated period of time
Counteroffer is where the offeree rejects the original offer, and makes a different one.
If counteroffer is rejected, cannot go back and accept the original offer – it's already been rejected.
Attempt to accept original offer becomes a new offer by the original offeree (roles become reversed).
Any departure from or addition to the origianl offer is a counteroffer even though the origianl offer was silent on the point added by the counteroffer.
Communication that the offer is rejected ends the offer, even if the offeror agreed originally to keep it open to a point in time after the time that it is rejected. Example: A makes an offer good for 15 days. B rejects on the third day. Offer is invalid at that point, even though A had agreed originally to keep it open another 12 days. B cannot go back and accept 7 days later, even though it's still within the original 15 day time limit.
If offer states it is open until a certain date, offer terminates on that date if not yet accepted.
If no time is set, it will lapse after a reasonable amount of time determined by the circumstances of each case.
If either party dies or becomes mentally incompetent before the offer is accepted, the offer is automatically terminated.
If the performace of the contract becomes illegal after the offer is made, the offer is terminated (Question for teacher: using example to sell semiautomatic handguns to a commercial firing range, and then a new law prohibiting these is passed, what if the contract had been not only offered, but agreed upon and a legal written contract written up? Still void, or does a contract become subject to a grandfather clause?)
Acceptance = assent of the offeree to the terms of the offer.
No particular form of words or mode of expression is required, but must be a clear expression that the offeree agrees to be bound by the terms of the offer.
If offeree reserves the right to refuse, no acceptance is made.
Fact that there had been a series of contracts between the parties and that one party's offer had always been accepted before by the other does not create any legal obligation to continue to accpet subsequent offers.
Acceptance creates a binding contract.
Neither party can then withdraw from or cancel the contract without the consent of the other party.
Acceptance may be indicated by an informal “okay”, affirmative not od the head, or by performance of the act called for (in cases of unilateral contracts).
If offeree does not accept the offer exactly as made, the addition of any qualifications becomes a rejection and counteroffer.
Only persons whom an offer is directed at may accept.
If A makes an offer to B, and C hears it and tries to accept it, it becomes an offer by C to A instead of an acceptance. A has the right to refuse C's offer (even though it's the same offer A made to B).
If offer is made to a specific class rather than individual, anyone in that class may accept.
If offeror specifies manner and time of acceptance, offeree must adhere to this manner.
Any attempt to accept other than in the specified manner will not create a contract.
Normally, an offer cannot be made in a way that silence, or non-rejection of the offer, can be taken as acceptance of the offer.
Unordered Goods and Tickets
Seller may send a letter to someone they have no prior dealing with stating that unless the person notifies to the contrary, the seller will start sending goods to that person that the person will have to pay for. This is not a contract. Silence is not acceptance.
Rule applies to all kinds of books, goods, magazines, and tickets sent through the mail when they have not been ordered.
Fact items are not returned does not constitute an acceptance.
Postal Reorganization Act states that anything sent unsolicited through the mail may be used by the recipient in any legal way they feel, without obligation to the sender.
Special rule for when parties are negotiating at a distance from each other.
Properly addressed postage paid acceptance takes affect as soon as it is placed into the control of the U.S. Postal Service, or a private third-party carrier such as FedEx or UPS.
It is effective upon dispatch, even before it arrives and is received by the offeror.
The offeror may avoid this rule by stating in the offer that acceptance shall take effect upon receipt by the offeror.
Medium of communication is reasnoable if it is one used by the offeror or if it is customary in similar transactions at the time and place the offer is received.
Acceptance by mail is ordinarily reasonable when the parties are negotiating at a distance even if the offer is not made by mail.
Most U.S. courts apply the mailbox rule, stating that the telephoned acceptances are effective where and when dispatched.
If offeror states acceptance must be made by a specific date, and the dispatch is sent on that date, it is timely and the contract is formed, even though the offeror actually receives the acceptance well after the specified date has passed.
Statements made by auctioneer are invitations to negotiate.
Bids are offers, which are not accepted until the auctioneer indicates that a particular bid is accepted (usually by banging the gavel).
Bidder may withdraw bid at any time prior to being accepted by the auctioneer.
Once a bid is accepted, auctioneer cannot cancel the sale.
If the auction is without reserve, then the highest bid, no matter how low, must be accepted.
Capacity and Genuine Assent
Contractual capacity – ability to understand that a contract is being made and to understand its general meaning.
vEveryone is assumed to have capacity unless it is proven that capacity is lacking, or they have status incapacity.
vJust because you don't understand everything in a contract does not mean you are incapable of entering a contract.
In previous times, married women, aliens, persons convicted of felonies, and others in certain classes were identified as not being able to enter into contracts.
Today, about the only one left is minors (see below).
May exist because of a mental condition caused by medication, drugs, alcohol, illness, or age.
If the person has enough mental capacity to understand (to a reasonable extent) the nature and effect of what he is doing, then no incapacity exists.
Minors may make contracts, but to protect them, law has treated minors as a class lacking contractual capacity.
At common law, a person under 21 years of age is a minor.
Currently, under 18 years of age.
At common law, and still followed today, minority ended the day before the person's birthday.
With exceptions noted later, a contract made by a minor is voidable at the election of the minor.
Minor may disaffirm a contract by any expression of an intention to repudiate the contract.
Minor can disaffirm a contract only during minority and for a reasonable time after attaining majority. After the lapse of a reasonable time, the contract is considered ratified and cannot be avoided.
Generally, that a minor misrepresented their age does not affect the minor's power to disaffirm the contract.
The other party may disaffirm because of the minor's fraud.
If minor still has what was received from the other party, on avoidance, the minor must return it to the other party – minor must put things back as they were and restore status quo ante.
Status quo ante – original positions of the parties.
If minor does not have what was received because it has been spent, destroyed, damaged, etc., minor may still disavoid the contract, and is required to only return what remains.
When minor disaffirm, the other party must return any property received from the minor.
If the property was sold to a third person who did not know of the minor's minority, the property cannot be returned. The person in the original contract with the minor must make monetary restitution to the minor.
Minor may disaffirm a contract for necessaries, but must pay reasonable value of necessaries furnished.
What constitutes necessaries?
Things indispensable or absolutely necessary for the sustenance of human life.
Examples are food, shelter, clothing, as well as health, education, and comfort of the minor.
When third party supplies parent/guardian with goods or services the minor needs, minor is not liable because the third person's contract is with the parent/guardian.
When necessary medical care is provided a minor, parent is liable at common law for the medical expenses.
However, minor can be held liable for medical expenses when parent is unable or unwilling to pay.
Former minor cannot avoid a contract that has been ratified after reaching age of majority.
Any words or conduct manifesting an intent to be bound by the terms of a contract made while as a minor.
No special form is required for ratification.
Person can disaffirm a contract at any time during minority and for a reasonable time after, but can ratify a contract only after attaining majority.
Many states have statutes where minors cannot avoid an educational loan, contract for medical care, contract made while running a business, contract approved by a court, contract made in performance of a legal duty, and contract relating to bank accounts, insurance policies, or corporate stock.
Ordinarily, parent is not liable on a contract made by a minor.
Parent may be liable if child is acting as agent of the parent.
Parent is liable for reasonable value of necessaries
Cosigner is bound independently from the minor in the contract.
If minor avoids it, cosigner is still bound by it.
If minor disaffirms a sales contract, but does not return the goods, the cosigner remains liable for the purchase price.
Mentally Incompetent Persons
Effect on Incompetency
may avoid in same manner as a minor.
Upon becoming competent, formerly incompetent person may either ratify or avoid the contract.
Person, or estate, is liable for reasonable value of necessaries.
Current trend is to treat contract as binding when terms and surrounding circumstances are reasonable and the person is unable to restore status quo ante.
If court appoints a guardian, contract made before the appointment may be ratified or disaffirmed by the guardian.
If person makes contract after the appointment of a guardian, it is void and not merely voidable.
If person knew that a contract was being made, validity of contract is not affected by impairment of alcohol.
If degree of intoxication is such that a person does not know that a contract is being made, contract is voidable by that person.
Mistake made by only one of the parties.
When mistake is unknown to the other party, does not affect the contract.
Party making the mistake may avoid the contract if the other contracting party knew or should have known of the mistake.
Both parties have entered into a contract mutually mistaking a basic assumption of fact, or law, on which the contract is made.
Contract is voidable by the adversely affected party if the mistake has a material affect on the agreed exchange.
Contract based on mutual mistake in judgment is not voidable by the adversely affected party.
Mistake in the Transcription or Printing of the Contract: Reformation
If parties make an oral agreement, and during the writing or printing of the contract a phrase, term, or segment is inadvertently left out of the final, signed document, aggrieved party may petition the court to reform the contract.
Reformation = remedy by which a written instrument is corrected when it fails to express the actual intent of both parties because of fraud, accident, or mistake.
Deception - If one of the parties deliberately misled the other, the contract is voidable at the innocent party's option.
Fraud is the generic term used, but is classified in law as a tort.
Tort = civil wrongdoing for which an action for damages may be brought.
Fraud = making of a material misrepresentation or false statement of fact with:
knowledge of its falsity or reckless indifference to its truth
the intent that the listener rely on it
the result that the listener does so rely
the consequence that the listener is harmed.
To prove fraud, must be a material misrepresentation of fact.
Matters of opinion of value or opinions about future events are not ordinarily regarded as fraudulent.
Statement that is mere sales talk cannot be the basis of fraud liability.
Statement of opinion may be fraudulent when the speaker knows of past or present facts that make the opinion false.
Fraudulent statements made by one party has no importance unless the other party relied on the statement's truth.
Proof of harm is required to recover damages.
Injured party has the right to have the court rescind or cancel the contract that has been induced by fraud.
The speaker failed to exercise due care regarding material information communicated to the listener but did not intend to deceive.
When this leads to harm to the listener, the contract is voidable at the option of the injured party.
When nondisclosure consists of active concealment, may make a contract voidable.
Ordinarily a party to a contract has no duty to volunteer information to the other party. Nondisclosure of information not asked for does not impose fraud liability or impair the validity of a contract.
Exceptions – following are exceptions to the general rule of nonliability for nondisclosure
Unknown defect or condition
If seller knows of a serious defect or condition, a duty may exist to disclose the information to the other party where the defect is unknown to the other person.
Seller that did not know of the defect cannot be held liable for failure to disclose it.
Confidential relationship = relationship in which, because of the legal status of the parties or their respective physical or mental conditions or knowledge, one party places full confidence and trust in the other.
Failure to disclose may be regarded as fraudulent, and silence has the same legal consequence as a knowingly made false statement.
Example would be in attorney-client relationship.
If nondisclosure consists of a positive act of hiding information from the other party by physical concealment, or knowingly or recklessly furnishing the wrong information.
Influence that is asserted upon another person by one who dominates that person.
If dominating person obtains any benefit from a contract made with the dominated person, the contract is then voidable.
Essential element is that the person making the contract does not exercise free will.
In absence of confidential relationship (such as parent/child), court may take attitude that person was persuaded, not dominated, and that there was no undue influence.
Conduct that deprives the victim of free will and that generally gives the victim the right to set aside any transaction entered into under such circumstances
Physical Duress – threat of physical harm to person or property.
Economic Duress – threat of financial loss
Consideration = promise or performance that the promisor demands as the price of the promise – what each party gives up to the other in making the agreement.
Bargained-for Exchange – I will give you this much money for that object.
Benefit-Detriment Approach – I will give you this much money to perform this service, such as painting my house.
Promises to make a gift are unenforceable because of lack of consideration.
A completed gift, however, cannot be rescinded due to lack of consideration.
Charitable subscriptions are binding to the extent that the donor should have reasonably realized that the charity was relying on the promise.
In the absence of fraud or other misconduct, courts will usually not interfere to make sure that each side is getting a fair return.
Forbearance = refraining from doing an act.
Illusory promise = promise that in fact does not impose any obligation on the promisor.
Cancellation Provisions – Crossing out of a part of an instrument or a destruction of all legal effect of the instrument, whether by act of party, upon breach by the other party, or pursuant to agreement or decree of court.
Conditional Promises = promise that depends on the occurrence of a specified condition in order for the promise to be binding.
Promising to do something you're already under a legal obligation to do, or refrain from doing something that is illegal, is not consideration.
Contractor refuses to complete a building unless owner promises more money – promise to pay is not binding, as the completion is part of the original contract.
If there are extraordinary circumstances caused by unforeseeable difficulties, and the additional amount promised is reasonable under the circumstances, then good faith adjustments are allowed
When contract is for the sale of goods, any modification made in good faith is binding without regard to the existence of consideration for the modification.
Promise to pay part of a debt for the release of the debt is not consideration and does not prevent the creditor from demanding the remainder later.
Debtor puts on the check “paid in full” and creditor cashes check, but amount is less than the full amount of the debt, then the cashing of the check discharges the entire debt.
Composition of Creditors
Agreement among creditors that each shall accept a part payment as full payment in consideration of the other creditors doing the same.
Past Consideration – something performed in the past and therefore cannot be consideration for a promise made in the present.
Moral Obligation – In most states, promises made based on moral obligation lack consideration and are not enforceable. Considered gratuitous promises.
Traditional consideration is not required in these situations:
For public policy reasons, reliance on a charity for the pledge in undertaking a project is deemed a substitute for consideration.
Uniform Commercial Code
In some situations, UCC abolishes need for consideration.
Under code, consideration is not required for:
1. merchant's written, firm offer for goods stated to be irrevocable
2. a written discharge of a claim for an alleged breach of a commercial contract.
3. An agreement to modify a contract for the sale of goods
Sometimes called doctrine of detrimental reliance is applicable when:
1. promisor makes a promise that lacks consideration
2. the promisor intends or should reasonably expect that the promissee will rely on the promise
3. the promisee in fact relies on the promise in some definite and substantial manner
4. enforcement of the promise is the only way to avoid injustice.