Exam 2 Flashcards
(256 cards)
1
Q
What is international Law?
A
formed as a result of international customs, treaties, and organizations - that governs relations among or between nations.
2
Q
What is National Law?
A
law of a particular nation
3
Q
What are the Principles of International Law?
A
International law is the result of attempts to reconcile the need of each country to be the final authority over its own affairs and the desire to benefit from relations with one another.
4
Q
What are the Sources of International Law?
A
– International Customs.
– Treaties and International Agreements.
– International Organizations.
5
Q
What are Common Law Systems?
A
courts independently develop rules by stare decisis for certain areas of law, not covered by statutory law.
6
Q
What are Civil Law Systems?
A
courts independently develop rules by stare decisis for certain areas of law, not covered by statutory law.
6
Q
What are Islamic Legal Systems?
A
sharia legal code is based on religious principles that govern a Muslim’s way of life.
6
Q
What is Comity?
A
The principle by which one sovereign nation will defer and give effect to the laws and judicial decrees of another sovereign nation
6
Q
What is the Act of State Doctrine?
A
– The judicial branch of one sovereign nation will not examine the validity of public acts committed by a recognized foreign government within its own sovereign territory.
– Often invoked to protect expropriation, and confiscation.
6
Q
What is Sovereign Immunity?
A
A doctrine immunizing foreign governments and governmental officials from the jurisdiction of U.S. courts under certain conditions.
7
Q
A foreign state is not immune from U.S. jurisdiction when:
A
- The foreign state has waived its immunity.
- The foreign state has engaged in “commercial activity” within or outside the U.S. that has a
“direct effect in the United States.” - The foreign state has committed a tort in U.S. or violated certain international laws.
8
Q
What are the Types of International Business Operations?
A
- Direct Exporting
- Indirect Exporting
- Agency Relationship with Foreign Firm.
- Distributorship
- Licensing/Franchising
- Manufacturing Abroad
- Investing in a Wholly-Owned Subsidiary or Joint Venture
9
Q
What are Import Controls?
A
- Prohibited Goods (e.g., Trading with the Enemy Act of 1917).
- Quotas and Tariffs. Quotas limit the amount of goods that can be imported. Tariffs are taxes upon imports.
- Political Factors (Retaliation).
- Antidumping Duties: less than fair value.
10
Q
What are the Minimizing Trade Barriers?
A
– European Union.
– NAFTA.
– CAFTA-DR.
– KORUS-FTA.
11
Q
What are the International Contracts?
A
- Choice-of-Language Clause
- Choice of Forum Clause
- Choice of Law Clause
- Force Majeure Clause
- Choice of Payment (Currency) Clause
(If no choice specified, under Hague Convention issue is governed by country where seller is located.)
12
Q
What are the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)?
A
International trade agreements often include arbitration provisions.
– (1) Written or recorded agreement.
– (2) Agreement provides for arbitration.
– (3) One party is not a U.S. citizen.
13
Q
When are U.S. Antitrust Laws Used?
A
Applied if foreign conspiracy has substantial effect on U.S. commerce
14
Q
What is the Foreign Corrupt Practices Act?
A
– cannot bribe any high-ranking foreign officials
– does not apply to lower officials (“mordida”)
15
Q
Who does the Civil Rights Act apply to?
A
– applies to US companies in the US
– applies to US employees of US companies around the world
– exceptions for foreign companies in US
– exceptions for foreign employees outside US
16
Q
What is Space Law?
A
- UN treaties establish registry of objects in space and maintain ownership by parties who
put them there (and potential liability) - No recognition of national sovereignty of any moons or planets in space; therefore, no recognition of any potential private property rights.
17
Q
You enter into a contract with Misha, a distributor from St. Petersburg, Russia. In your contract, you specify that US law will apply to the interpretation and enforcement of the contract. This would be called a:
a. force majeure clause.
b. choice-of-law clause.
c. choice of language clause
d. forum-selection clause.
e. destination clause.
A
choice-of-law clause.
18
Q
James is an American who works in London for a U.S. corporation. After working diligently and
receiving good job evaluations for over four years, James, who is a Muslim, is fired. He believes that his termination is the result of employment discrimination based on his religion. In this case:
a. James can do nothing because the problem occurred outside the United States.
b. Title VII only applies to U.S. citizens working abroad for foreign-owned companies.
c. James cannot bring a Title VII claim because his case involves religion.
d. Title VII applies to U.S. citizens who work for U.S. firms overseas, so he has a cause of action under Title VII.
e. James can recover because of British law, not American law.
A
Title VII applies to U.S. citizens who work for U.S. firms overseas, so he has a cause of action under Title VII.
19
Q
Al is trying to buy a car, but the dealer is concerned about Al’s credit. Al calls his uncle Sam to describe his problem. Sam says, “Get that dealer on the line!” and he proceeds to tell the dealer that he will stand behind Al on the loan. “I’ll personally guaranty Al’s payment of every cent!” Sam declares. The dealer makes the loan, but Al fails to pay. Will the dealer be successful in his suit against Sam?
a. No, because the guaranty agreement was not in writing.
b. No, because the dealer must first repossess the car.
c. No, because the agreement was not a suretyship.
d. Yes, because Sam made the promise and the dealer relied on it.
e. Yes, but only if Sam is assigned the authority to repossess the car.
A
No, because the guaranty agreement was not in writing.
20
Q
Ted is the owner of Ted’s Restaurant, Inc., a corporation, which owes debts of $300,000 and has assets of only $100,000. There is no possible way for Ted to stay in business, so in order to liquidate the assets and be discharged from the debt Ted must file for bankruptcy under:
a. Chapter 11
b. Chapter 9
c. Chapter 7
d. Chapter 13
e. either c. or d. above
A
Chapter 7
21
The type of bankruptcy proceeding used most commonly by corporations is a reorganization under:
a. Chapter 5.
b. Chapter 7.
c. Chapter 11.
d. Chapter 12.
e. Chapter 13.
Chapter 11
22
Case in Point 11.2
- Karen Goldberg's husband was killed in a terrorist bombing in Israel.
- She filed a lawsuit against UBS AG in a federal court in New York.
- UBS requested that the case be transferred to a court in Israel.
- The court refused to transfer the case.
- The court's decision was based on concerns about comity and enforceability.
23
Case in Point 11.3
- Spectrum Stores, Inc. filed a lawsuit against Citgo Petroleum Corporation in a U.S. court.
- Spectrum alleged that Citgo had conspired with other oil companies to limit production of crude oil and thereby fix the prices of petroleum products sold in the United States.
The U.S. court dismissed the case under the act of state doctrine.
- The act of state doctrine is a common law principle that holds that U.S. courts will not question the validity of the official acts of a foreign government performed within its own territory.
- The court reasoned that because Citgo is owned by the Venezuelan government, its actions in Venezuela were covered by the act of state doctrine.
- In other words, the U.S. court could not rule on whether Citgo's actions were illegal in the United States because the Venezuelan government had the authority to control its own oil reserves and to set its own oil production policies.
24
Case in Point 11.5
- The plaintiffs, descendants of Jewish art dealers in Frankfurt, sued Germany for the theft of their ancestors' art collection during the Nazi regime.
- The plaintiffs argued that the art dealers had been forced to sell the collection for much less than its market price.
- Germany claimed immunity under the Foreign Sovereign Immunities Act (FSIA).
- The federal judge disagreed, holding that Germany was not entitled to immunity in this case.
The court's decision was based on the following findings:
- The plaintiffs' claims were based on commercial activity, which is not protected under the FSIA.
- Germany's conduct was "not so closely connected with the exercise of the sovereign functions of the state" as to be immune under the FSIA.
- Germany's conduct was "not an act performed in the exercise of regular government agency functions."
- The court's decision is a significant victory for the plaintiffs and could pave the way for other victims of Nazi art theft to seek justice in U.S. courts.
25
Case in Point 11.4
- Hamas, a terrorist organization sponsored by Iran, carried out suicide bombings in Jerusalem, killing five people and injuring nearly two hundred.
- American victims of these bombings sued Iran under Section 1605A of the Foreign Sovereign Immunities Act (FSIA) and obtained a judgment of $71.5 million in damages.
- To collect on the judgment, the plaintiffs sued Iran in a federal district court under Section 1610(g) of the FSIA.
- Section 1610(g) allows attachment and execution against the property of foreign sovereigns for certain types of judgments, including judgments for terrorism-related injuries.
- The district court ruled that Iran's property was immune to attachment and execution under Section 1610(g).
- The Seventh Circuit Court of Appeals affirmed the district court's ruling.
- The plaintiffs appealed to the United States Supreme Court.
The Supreme Court's decision in this case will be closely watched by both parties. If the Court rules in favor of the plaintiffs, it could make it easier for victims of terrorism to collect damages from foreign sovereigns. On the other hand, a ruling in favor of Iran would reinforce the principle of sovereign immunity and make it more difficult for victims of terrorism to obtain compensation.
26
Case in Point 11.2
- Changzhou Trina Solar Energy Company is a Chinese firm that manufactures crystalline silicon photovoltaic (CSPV) cells and related products. Trina Solar (U.S.), Inc. imported these CSPV products into the U.S.
- The U.S. Department of Commerce determined that these imports were subsidized by the Chinese government. The imports were sold in the U.S. at less than fair value.
- The International Trade Commission (ITC) found that the domestic CSPV industry in the U.S. was materially injured by these imports.
- Changzhou and Trina challenged the ITC's determination at the U.S. Court of International Trade.
- The U.S. Court of International Trade upheld the ITC's determination and rejected the challenge. Changzhou and Trina subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit.
27
Case in Point 11.8
- Juridica Investments, Ltd. (JIL) entered into a financing contract with S & T Oil Equipment & Machinery, Ltd., a U.S. company.
- The contract was signed and performed in Guernsey, a British Crown dependency. The contract included an arbitration clause.
- A dispute arose between JIL and S & T.
JIL initiated arbitration proceedings in Guernsey. S & T filed a lawsuit in a U.S. court regarding the dispute.
- JIL filed a motion in the U.S. court to dismiss the lawsuit in favor of arbitration.The U.S. court granted JIL's
motion to dismiss and favored arbitration.
- S & T appealed the decision.
A federal appellate court upheld the decision and mandated arbitration under the New York Convention.
28
What are Contracts?
A contract is an agreement between two or more parties to perform or to refrain from some act now or in the future enforceable by the courts.
29
What are the Sources of Contract Law?
– Common Law for all contracts except sales and leases.
– Sale and lease contracts - Uniform Commercial Code (UCC).
30
What is the Objective Theory of Contracts?
- Contracts will be interpreted objectively (looking at the words and the circumstances at the time of
entering into the contract) as interpreted by a reasonable person.
- Subjective intent (what I meant to say) will not usually be considered
- Not reading all of terms and conditions is not an excuse
31
What is the Plain Meaning Rule?
- When a contract is clear and unequivocal, a court will enforce it according to its plain terms, set forth on the face of the instrument.
- There is no need for the court either to consider extrinsic evidence (oral testimony of “what we meant to say”).
32
What are the Requirements of a Contract?
- Agreement (offer + acceptance)
- Consideration
- Competent Parties
- Lawful Purpose
- Genuine Assent
- Legal Form
33
What to parties does every contract invlove?
the offeror/ promisor, who makes the offer/promise to perform,
and the offeree/promisee, to whom the offer/promise is made
34
What is a Bilateral Contract?
- a promise is given in exchange for a promise in return.
- For example: X promises to deliver a car to Y, Y promises to pay X an agreed price.
35
What is a Unilateral Contract?
- a promise is exchanged only for the offeree’s performance.
- For example: X offers Y $15 if Y will mow X’s yard.
36
What is an Express Contract?
not yet performed by all parties
37
What is an Executed Contract?
fully performed by all parties
38
What is a Quasi-Contract?
A fictional contract imposed on parties by a court in the interests of fairness and justice, typically to prevent the unjust enrichment of one party at the expense of the other.
39
What is an Agreement?
The process of agreement usually involves two steps: offer + acceptance
40
What is an Offer?
A promise or commitment to perform or refrain from performing some specified future act made by the offeror.
41
What is Acceptance?
- Unqualified, unconditional and unequivocal response that indicates agreement to the terms of the offer.
42
What is Contractual Intent?
- Statements made in anger/jest aren't offers
- Advertisements are not offer
- Social invitations are not offers
43
What is Reasonable Definiteness?
- Offer must contain all key terms
- Acceptance does not add any terms
44
What is the Required Communication to Offeree?
- Must be sent to offeree
- If accepted by someone else, it’s a new offer
45
What are the rules for E-Contracts?
Offer and Acceptance may occur by email
* Documents may be attached to emails
* Exchanged emails may be offer/acceptance
46
What happens when the Offer is Terminated?
The communication of an effective offer gives the offeree the power to transform the offer into a binding legal
agreement, or contract
47
What is Revocation?
Offeror takes it back
48
What is Rejection?
Once offeree says no, can't go back on offer; it's dead
49
What is a Counter-Offer?
- "Mirror image rule"
- if anything is changed in offer, it is now a counteroffer
50
What is Lapse of Time?
"Has to be accepted by 5pm on 10/10/2023"
51
What is Destruction of Subject Matter?
" Offers to buy house, it burns down"
52
What is Death or Incompetence?
"Just because you died doesn't mean you get out of contract"
53
When offeror dies **before** the offer is accepted, what happens?
The offer is terminated
54
When offeror dies **after** the offer is accepted, what happens?
The offer is binding on the offeror's estate
55
What is the "Mailbox Rule"?
- An acceptance becomes effective upon being placed in the mailbox by the offeree.
- revocation of an offer becomes effective upon its receipt by the offeree; an acceptance becomes
effective upon its dispatch by the offeree to the offeror
56
What are Click-On Agreements?
Click “I agree” online even if terms are never read
57
What are Shrink-Wrap Agreements?
- Contract terms disclosed after sale inside the box
- Can be construed as “additional terms”
58
What is the Federal E-Sign Act of 2000?
No signature may be denied legal effect because it is in electronic form
59
What is the Uniform Electronic Transactions Act?
- Digital signatures with encryption keys
- Signature dynamics
- Smart cards
60
What are the Elements of Consideration?
- Consideration must be given in order to make a contract legally binding
- Must be something of value to be a “bargained for exchange”
- Consideration must induce the party to incur a legal detriment and/or provide a legal benefit to the
other party sufficient to induce that party to commit itself.
- The adequacy of consideration is not usually taken into account
61
What is Legally Sufficient Consideration?
- Promising to do something that the promisor has no prior legal duty to do.
- Performing an action that the promisor is not otherwise obligated to undertake.
- Refraining from exercising a legal right which the promisor is entitled to exercise.
62
What is Pre-Existing Legal Duty?
under most circumstances, a promise to do (or refrain from doing) what one already has a legal duty to do (or refrain from doing) does not constitute legally sufficient consideration.
63
What is Past Consideration?
promises made in return for acts or events that have already taken place are unenforceable for lack of sufficient consideration.
64
What is Accord and Satisfaction?
- an agreement between the parties to accept different performance than originally promised.
- A debtor offers to pay, and a creditor agrees to accept a lesser amount than was originally owed on the
claim (can only used when amount is in dispute).
65
What is a Release?
agreement whereby one party forfeits its rights to pursue a legal claim against another party.
66
Releases are generally binding if they are:
- Given in good faith
- Stated in writing
- Accompanied by consideration
67
What is Promissory Estoppel?
Sometimes when a promisor makes a clear and definite promise on which the promisee justifiably relies, the promisor is bound by the promise, even if it was insufficient to form the basis of a valid, legally binding contract.
68
What are the Requirements for Promissory Estoppel?
- The promise was clear and definite.
- The promisee justifiably relied on the promise.
- The promisee’s reliance was substantial and definite.
- Enforcing the promise will avoid unjust enrichment.
69
What is Contractual Capacity?
- The minimum mental capacity required by law for a party who enters into a contractual agreement to be boundby it.
- Common law recognizes three classes of persons who are generally not considered to have sufficient capacity
to be bound by their contracts.
70
What is the Contractual Capacity for Minors?
- contract is voidable at option of minor (must disaffirm)
- minor is required to return consideration (what’s left of it)
- cosignor or guarantor is liable on contract
71
What is the Contractual Capacity for Parent's Liability?
- As a general rule, parents are not liable for the contracts made by their minor children unless parent co-signed
the obligation
- Minor may disaffirm or avoid contract anytime up until a reasonable time after reaching majority
- Minor may ratify contract upon reaching majority
72
What is the Contractual Capacity for Mentally Impaired or Incompetent Persons?
- Voidable if contract is made while party is mentally incompetent.
- Obligation to return consideration upon avoidance/disaffirmation.
- May be ratified after becoming competent.
73
What is the Contractual Capacity for Intoxicated Persons?
- Voidable if contract is made while party is intoxicated.
- No difference if voluntary or involuntary.
- May be ratified after becoming sober.
74
What is the Contractual Capacity for Women?
- Married women had no contractual capacity at common law.
- Only husband could enter into contracts.
- Abolished in Texas in 1960’s.
75
What are Contracts Contrary to Statute?
statutes sometimes proscribe certain types of contracts, contract terms, and/or contractual provisions.
76
What are Usury Statutes?
Virtually every state has a statute that sets the maximum rate of interest that can legally be charged for different types of transactions, including ordinary loans.
77
What are the 3 Elements of Gambling?
- Consideration
- Chance
- Prize
78
What are Blue Laws?
Some states and localities prohibit engaging in certain business activities on Sundays.
79
What are Licensing Statutes?
All states require that members of certain professions -- attorneys, doctors, and architects, etc. -- be licensed by
the state.
80
What does it mean for statutes to be Regulatory in Nature?
Contract with unlicensed person may be unenforceable
81
What does it mean for statutes to just Produce Revenue?
Contract with unlicensed person not affected.
82
What are Restrictive Covenants?
are generally permitted when they are ancillary to an otherwise enforceable contract for the sale of a business or for employment.
83
What are Unconscionable Contracts?
Contracts that require one party, as a consequence of disproportionate bargaining power, to accept terms that are unfairly burdensome to that party and unfairly beneficial to the party with greater bargaining power.
84
What are the Statute of Frauds?
statute which requires certain types of contracts to be in writing to be enforceable.
- Some contracts considered important enough that their terms must be memorialized in writing to
ensure reliable evidence of their existence and their terms
**M** - marriage
**Y** - not performable in one year
**L** - involving an interest in land
**E** - made by an executor to pay debts
**G** - for sale of goods over $500
**S** - surety agreement
85
What are the exceptions for the Statute of Frauds?
- Partial Performance
- Custom orders of Goods
- Acceptance of Delivery
86
What is the Sufficiency of the Writing?
- A writing signed by the party against whom enforcement is sought.
- A confirmation, invoice, sales slip, check, or fax, or any combination thereof.
- Several documents which, in combination, provide the terms for an agreement.
87
What is the Parol Evidence Rule?
A court will not admit evidence of the parties’ prior negotiations, prior oral or written agreements, or contemporaneous oral agreements if that evidence contradicts or varies the terms of a written contract.
88
What is Privity of Contract?
- As a general rule, only the parties to a contract owe any duties and enjoy any rights arising from the contract.
- The exceptions are assignment and delegation
89
What is Assignment?
a party to the contract (the assignor) transfers his rights to some third party (assignee)
90
What is Delegation?
party to the contract frees himself from duties by having a third party perform the duties.
91
What are the Liabilities of Parties?
- The assignor remains liable if the assignee fails to perform.
- The other party may sue both the assignor and the assignee.
- Assignee acquires no greater rights than held by assignor
92
What are Duties that may not be Delegated?
- Performance depends on the skill of the obligor.
- Special trust has been placed in the obligor.
- Performance by a third party will alter the expectation of the duty contract.
- Contract expressly prohibits delegation.
93
What is Notice of Assignment?
- The third party (the assignee) should notify the obligor of the assignment once an assignment has been made.
- The assignment is effective immediately, whether or not notice is given to the obligor.
- But the obligor is protected unless notice is received
94
What is the Third-Party Beneficiary?
- The law distinguishes between intended and incidental third-party beneficiaries.
- Only intended beneficiaries acquire actionable legal rights in a contract
95
Who is the Intended Beneficiary?
- A third party for whose benefit a contract is formed.
- Examples include life insurance, labor contracts, etc
96
Who is the Incidental Beneficiary?
A third party who benefits from the performance of a contract, but whose benefit was not the reason the contract was formed.
(Examples include construction contracts, etc.)
97
A bilateral contract is one in which:
a. A promise is given in return for an act.
b. A third party guarantees the promise of one of the parties.
c. Two promises are exchanged.
d. A unilateral contract accompanies an exchange of promises.
e. The contract is between two parties.
Two promises are exchanged.
98
When the offeror dies before an offer has been accepted, the offer:
a. May be rejected by the surviving spouse of the offeror.
b. May be accepted by the surviving spouse of the offeror.
c. May be accepted by the guardian for any minor children of the offeror.
d. Is automatically terminated by the death of the offeror.
e. Is binding on the offeror’s estate
Is automatically terminated by the death of the offeror.
99
Bill prepared and signed a contract providing for the sale of his business with the provision that the closing would have to occur no later than on December 31. Clay took the contract and signed it but changed the date of closing to on or before January 1. Bill refused to perform the contract. Decide.
a. Bill wins because a variance in an acceptance constitutes a counter offer.
b. Bill wins because the seller can never be forced to perform.
c. Bill loses because the change of date really helps him.
d. Bill loses because the contract was written instead of oral.
e. Both a. and b. above.
Bill wins because a variance in an acceptance constitutes a counter offer
100
A minor purchases a 2004 Toyota and pays $500 in cash with the balance of $8,000 payable in equal monthly installments for 4 years. Two weeks later, he drives the car into a brick wall and totally wrecks it. In Texas, what could he legally do?
a. Stop making payments and keep the car in hopes of getting it fixed later.
b. Return the demolished car to the seller and stop making payments.
c. Sell the car to a junk dealer for $500 and stop paying on the note.
d. Any of the above.
e. None of the above.
Return the demolished car to the seller and stop making payments.
101
In January Larry hires Moe to work for him for six months beginning the next September. The contract is made in January. Does the Statute of Frauds apply?
a. Yes, because it is an employment contract.
b. Yes, because it is not performable in a year.
c. No, because it is performable in a year.
d. No, because it is not for the sale of real estate
e. No, because it is not performable in a year.
Yes, because it is not performable in a year.
102
What is Genuineness of Assent?
- A party who demonstrates that he or she did not genuinely assent to the terms may avoid the contract.
- Genuine assent may be lacking due to mistake, fraudulent misrepresentation, undue influence, or duress.
103
What is a Unilateral Mistake?
- A mistake made by one of the contracting parties.
- Generally, a unilateral mistake will not excuse performance of the contract unless other party knew of the mistake
- OR substantial mathematical error
104
What is a Mutual Mistake?
- A mistake on the part of both contracting parties.
- In this case, either party may rescind.
105
What are the Elements of Fraud?
When an innocent party consents to a contract with fraudulent terms, he or she may usually avoid the contract, because he or she did not genuinely assent to the fraudulent terms.
Elements:
- misrepresentation of material fact
- made with the intent to deceive
- justifiable reliance
damages
106
What happens when an individual experiences Undue Influence?
- Contract lacks voluntary consent and is voidable.
- This/Persuasion is presumed if weak party talked into doing something not beneficial to him
or herself.
107
What happens when an individual experiences Duress
- Party who enters into a contract under fear or threat makes the contract voidable.
- Threatened act must be wrongful or illegal and render person incapable of exercising free will.
- Threat of civil suit is not unlawful
108
A party may be discharged from a valid contract by:
- A condition occurring -- or not occurring.
– Full performance or material breach by the other party.
– Agreement of the parties.
– Operation of law
109
What are Conditions?
A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a
legal obligation or terminate an existing obligation under a contract
110
What is a Condition Precedent?
- Condition that must be fulfilled before a party’s performance can be required.
- Requires absolute duty to perform.
111
What are Concurrent Conditions?
- When each party’s performance is conditioned on the other party’s performance or tender.
- Both parties required to perform their duties simultaneously.
112
What is Discharge?
the termination of a party’s obligations arising under a contract
113
Discharge occurs either when:
- Both parties have performed their contractual obligations.
- Events, conduct of the parties, and/or operation of law release parties from their obligation to perform
114
What is Performance?
fulfilling one’s contractual duties
115
What is Tender?
unconditional offer to perform an obligation by person who is ready, willing, and able to do so.
116
What is the difference between Complete and Substantial Performance?
- In order to qualify as substantial performance, the party’s performance must not vary greatly from that promised in the contract, and it must create substantially the same benefits as those promised in the contract.
- If one party substantially performs, the other party’s duty to perform remains absolute, but the other party may
be entitled to recover damages for the substantially performing party’s failure to fully perform.
117
What is Time for Performance?
– If no time is stated in contract, reasonable time is implied.
– If time is “of the essence” it becomes a condition precedent to performance.
– Failure to complain may be a waiver.
118
What is a Breach of Contract?
- A party’s failure, without legal excuse, to substantially perform the obligations he or she has promised to perform.
- If a party’s breach is non-material, the non-breaching party’s duty to perform may be suspended until the breach
is remedied or cured.
- A breach of contract entitles the non-breaching party to sue for money damages.
119
What is Anticipatory Repudiation?
- An action by a party to a contract that indicates that he or she will not perform a contractual obligation due to be performed in the future.
- Such a repudiation will excuse the non-repudiating party
from performing.
120
What is Recission?
- canceling a contract and returning the parties to their pre-contract position
- the process by which the parties cancel a contract and return one another to their pre-contract
status.
121
What is Novation?
substituting a new contract for an old one thereby terminating the parties’ rights and duties under the
old contract.
122
What is Discharge by Impossibility?
- A party may be relieved of his or her contractual duties when performance becomes either impossible or totally
impracticable through no fault of either party to the contract.
- An objective standard is used.
- A change in circumstances that makes performance temporarily impossible will suspend but not excuse
performance.
- Force Majeure clause
123
What are Compensatory Damages?
compensate the non-breaching party for the injuries or losses actually sustained due to
the breach.
124
What are the Calculations for Compensatory Damages?
- Cost of completing work
- Cost of obtaining replacement goods
- Price/Value of Contract
- Plus Incidental Damages (shipping, time lost, etc.)
125
What are Consequential Damages?
indirect losses which were reasonably foreseeable
126
What are Punitive Damages?
designed to punish a wrongdoer
127
What are Nominal Damages?
awarded if no actual damages are provable
128
What are Mitigation of Damages?
In most situations, when a breach of contract occurs, the non-breaching party has a duty to take whatever action
is reasonable to minimize the damages caused by the breach.
129
What are Liquidated Damages?
- Contract provisions specifying a certain sum of money to be paid by the breaching party in the event that he or
she fails to perform as required.
- Generally based on a reasonable estimate of the value of the promised performance.
- Cannot be a penalty
130
What is Restitution?
returning goods, property, or money previously transferred in order to restore the non-breaching party
to his or her pre-contract position.
131
What is Specific Performance?
requiring the breaching party to perform exactly as required (only granted only when money
damages would be an inadequate remedy and the subject matter of the contract is unique).
132
What is Reformation?
a remedy allowing the contract to be re-written to reflect the true intent of the parties
133
What is Temporary Impossibility?
Change in circumstances that makes performance temporarily impossible will suspend but not excuse of performance
134
Jane hired Peacock to paint her house for $5,000. Peacock began painting and had partially
completed the project when he stopped work because the project was costing him more than he
anticipated. It costs Jane $7,500 in reasonably necessary expenses to hire another painter to finish her
house. As a result, Peacock will:
a. Recover $2,500 for the value of his services.
b. Need to pay $2,500 in damages.
c. Recover $5,000 for the original contract price.
d. Need to pay $7,500 in damag
Need to pay $2,500 in damages.
135
Jay agrees in writing to sell a warehouse and the land on which it is located to Nora. When Jay refuses
to go through with the deal, Nora sues. Jay must transfer the land and warehouse to Nora if she is awarded
what remedy?
a. damages
b. rescission
c. specific performance
d. reformation
e. restitution
specific performance
136
Luther owned a drugstore. Because it kept him so busy, he decided to sell his boat, which he did not
have time to use. He advertised it in the local newspaper, and Richard answered the ad. Luther gave
Richard a signed offer allowing him 10 days in which to accept Luther's offer to sell the boat for $2500.
Several days later, Luther told Richard he had changed his mind and was keeping the boat. Richard sued
arguing that he may enforce Luther's "firm offer." Decide.
a. Luther loses because of the UCC "firm offer" rule.
b. Luther loses because he promised to keep the offer open.
c. Luther loses because he may not change his mind after an agreement is written.
d. Luther wins because he acted within the 10 days in revoking his offer.
e. Luther wins because he is not in the business of selling boats.
Luther wins because he is not in the business of selling boats.
137
Under the UCC, an action for breach of contract must be commenced within how many years after the breach occurs?
a. one year
b. five years
c. four years
d. two years
e. ten years
four years
138
Which of the following warranties arises automatically in all types of sales contract?
a. warranty of title
b. warranty against infringements
c. warranty of merchantability
d. all of the above
e. none of the above
warranty of title
139
What is the scope of U.C.C. Article 2?
- Article 2 of the U.C.C. governs contracts for the sale of goods.
- Title is transferred from seller to buyer in exchange for money.
- Article 2 governs only contracts for the sale of goods.
- Goods are, tangible, movable property that have a physical existence and that can be moved from place to place.
140
What does Article 2 not govern contracts for?
- services
- real property
- intangible property
- intellectual property
- stocks and bonds
141
What is the scope of U.C.C. 2A?
- Article 2A of the U.C.C. governs contracts for the lease of goods.
142
What are Open Terms?
- an offer must be definite enough for parties to ascertain its essential
terms.
- But under the U.C.C., many contract terms can be open.
143
What is an One Payment Term?
- if not specified, payment is due at the time and the place that the buyer receives the goods.
- the buyer can tender payment using any commercially acceptable means
144
What is an Open Delivery Term?
- if not specified, the buyer will take delivery at the seller’s place of business.
- if not specified, the seller will deliver within a reasonable period of time
145
What is an Open Quantity Term?
- Failure to specify quantity of goods is fatal at common law.
- The U.C.C. recognizes two exceptions: Requiremnets Contract and Output Contract.
146
What is a Requirements Contract?
An agreement by which the buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer needs or requires.
147
What is an Output Contract?
An agreement by which the seller agrees to sell all or up to a stated amount of what the seller produces.
148
What is an Open Price Term?
- if not specified, the court will determine a reasonable price at the time of delivery.
- if one of the parties is permitted to set the price, he or she must do so in good faith.
149
What is a Firm Offer?
- At common law, an offer may be revoked at any time prior to its acceptance by a buyer.
- The only exception recognized at common law is an option contract.
- The offeree pays consideration for the offeror’s irrevocable promise to keep the offer open for a stated period of time.
Written:
- signed by a merchant
- irrevocable for up to three (3) months
- no consideration required
150
Why does the UCC dispense the Mirror Image Rule?
Contract is formed if offeree’s response indicates a definite acceptance of offer, even if acceptance includes different terms.
151
What is the UCC Contractual Modification?
Unlike common law, the UCC requires no additional consideration to support a contractual modification.
152
What is the Passage of Title?
The U.C.C. provides that, unless a contrary agreement is made, title passes to the buyer at the time the
goods are physically delivered to the buyer at the seller’s place of business.
153
What is a Shipment Contract?
A contract for the sale of goods which:
requires the seller to ship the goods to the buyer via carrier and relieves the seller of liability for the goods once they have been delivered to the carrier.
154
What is a Destination Contract?
- A contract for the sale of goods which:
requires the seller to ship the goods via carrier to a particular destination, and
relieves the seller of liability only when the goods have been delivered to the designated destination.
155
What is Sale or Return?
A conditional sale is where title, possession, and risk of loss pass from the seller to the buyer who retains option to return goods, at buyer’s expense and risk of loss, during the period.
156
What are Sale on Approval?
- A conditional sale where buyer may take possession of the goods on a trial basis.
- Sale becomes final only when buyer approves of the goods being offered.
157
What is a Consignment Sale?
- A transaction in which the owner of the goods (the consignor) delivers the goods to another (the consignee) for the consignee to sell.
- Prior to sale by the consignee, the consignee holds title to the consignor’s goods and the consignor
bears the risk of loss
158
What are Non-Conforming Goods?
Risk of loss does not pass to the buyer until seller cures the breach or buyer
accepts the goods, despite their defects.
159
What is Insurable Interest?
A property interest in sold or leased goods that is sufficiently substantial to permit a party to insure against damage to the goods identified with the sale or lease contract.
160
What are the Obligations of the Seller?
- Seller “delivers” by making goods available at Seller’s place of business unless otherwise specified.
- Tender of goods must be at a reasonable time in a reasonable manner.
- Goods must be delivered in a single delivery unless otherwise agreed.
161
What are the Rights of the Buyer?
- Inspect the goods (exc. COD deliveries)
- Accept the goods
- Reject the entire shipment
- “Perfect tender” rule
- Accept part and reject part
162
What are the Obligations of the Buyer?
- Seasonably give notice of rejection (otherwise, the goods are deemed accepted)
- But See Case 14.3 in book where buyer did not discover alteration of baseball card until having it appraised two years later could recover based on warranty it was original
- Pay for goods upon delivery
163
What are the Rights of the Seller?
- Cure a defective tender of goods
- If tender of delivery is rejected because of nonconforming goods, and the time for performance has not yet expired.
- Require payment in good funds
- Reasonable time must be allowed for funds other than a check
164
What are the Rights of Both Parties?
- Force majeure clause automatically provided in all UCC contracts
- Delay due to “commercial impracticability”
not applicable to increases due to inflation or reasonably anticipated costs
- Destruction of subject matter
- Doctrine of anticipatory repudiation
165
What are the Seller's Remedies?
If the buyer breaches the contract before the goods have been delivered to the buyer:
- Seller may cancel and sue for damages
- Seller may withhold delivery
- Seller may insist on cash payment
- Seller may re-sell goods to another
166
What are the Damages of the Seller?
- Difference between the contract price and the fair market price of the goods plus incidental damages.
Lost profits on transaction
- If the seller has delivered the goods to a carrier or bailee, but the buyer has not yet received them:
Seller may stop delivery
Seller must timely notify the carrier or bailee.
Seller must bear any costs of holding or returning goods in transit.
- The seller’s right to stop delivery expires if:
The buyer has obtained possession of the goods.
The carrier or bailee has acknowledged the buyer/ lessee’s right to possession.
The buyer possesses the document(s) of title.
- If the buyer has received the goods:
Seller may sue for the purchase price or payments due
Seller may not repossess goods unless:
buyer was insolvent and seller acts within 10 days, or
if seller has a security agreement under Article 9
167
What are the Buyer's Remedies?
If the seller refuses to deliver the goods to the buyer:
- Buyer may cancel the contract
- Buyer may sue for damages
-
Buyer may sue for specific performance
168
What are the Damages of the Buyer?
- Right to cover (purchase goods from another source)
- Difference between contract price and fair market price
- Incidental damages
- Consequential damages
- No damages if savings to buyer result
169
What are the Statute of Limitations?
An action for breach of contract under the U.C.C. must be commenced within four years after the injured party knew or should have known of the breach.
170
What are Express Warranties?
A seller’s or lessor’s oral or written promise in connection with a sales or lease agreement, as to the quality, description, or performance of the goods being sold or leased.
- Under the U.C.C., express warranties arise when a seller indicates to the buyer that the goods conform to
any affirmation or promise of fact made about the goods.
- “Sales talk” and matters of opinion or “puffing” are not considered warranties.
171
What are Implied Warranties?
A warranty imposed by implication or inference from the nature of the transaction or the relative
bargaining positions or circumstances of the parties.
- Good Title
- No Liens
- Fitness for a Particular Purpose
- (These warranties apply to all sellers)
- No Infringements
- Merchantability (Fit for Normal Use)
- (These warranties only apply to merchants)
172
How does the UCC define Merchant?
a person who deals in the kind of goods involved in contract or a person
who holds self out as having a particular skill or knowledge peculiar to the practices or use of the goods
173
What is a Waiver of Warranty?
Any oral or written express warranty may be disclaimed by a clear and conspicuous written disclaimer which is called to the buyer’s attention at the time the contract is formed.
174
What are Waivers of Implied Warranty?
- Disclaimer must be clear and conspicuous
- AS IS or WITH ALL FAULTS
- Specifically mention “merchantability
175
What are Liens?
Encumbrance (claim upon) on property to satisfy a debt or protect a claim for the payment of debt.
176
What are Mechanic's Liens?
Security for labor, materials, or service on real estate (which secures the debt).
177
What are Artisan's Liens (Personal Property)?
- Lienholder must retain possession.
- Priority over other creditors’ liens on same property.
- Foreclosure on personal property possible.
178
What are Judicial Liens?
- arises out of a court decision.
- Writ of Attachment: court orders sheriff to seize non-exempt property.
- Writ of Execution: court order to seize and sell debtor’s non-exempt real and personal property to satisfy debt.
179
What is Garnishment?
- Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee).
- Typically the garnishee is the debtor’s employer.
- Both federal and state laws limit the amount that can be taken out of a debtor’s take home pay.
180
What is Suretyship?
- Contract in which third party agrees to be responsible for obligation of a party to a contract.
- Examples include guaranty, surety bond, etc.
- Must be in writing under Statute of Frauds
- Surety is “subrogated” to rights of creditor if surety is required to perform.
181
What are the Protections for Debtors?
Exempt Real Property.
– Homestead: state laws permit entirely or up to a certain dollar amount.
– Texas allows 10 acres for urban homestead and unlimited dollar value
Exempt Personal Property.
– Household furniture up to certain limit.
– Clothing and personal possessions.
– Vehicle for transportation. Certain classified animals.
– Equipment debtor uses in a trade or business, up to certain dollar amount.
182
What are the Goals of Bankruptcy Law?
– Protect debtor with fresh start.
– Ensure equitable treatment of all creditors.
– Bankruptcy Courts – Under the U.S. District Courts.
183
What are the types of Relief in Bankruptcy Law?
– Chapter 7 – liquidation.
– Chapter 11 – reorganizations.
– Chapter 12 - adjustment of debts of family farmers and fishermen with regular incomes.
– Chapter 13 - adjustment of debts of individuals with regular incomes.
184
What kind of Bankruptcy is in Chapter 7?
– Ordinary or straight bankruptcy
– Debtor turns all assets over to the bankruptcy trustee.
– Trustee sells nonexempt property and distributes the proceeds to the creditors.
– Remaining debts are discharged
– Available for any person, individual, corporation, partnership
- Not available for: railroads, insurance co’s, banks, S & L’s, investment co’s, or credit unions
– Commenced by the filing of a voluntary or involuntary petition with the bankruptcy court
* If a debtor files, it is voluntary
* If creditors file, it is involuntary
185
What is Voluntary Bankruptcy?
– Debtor(s) must receive credit counseling within 180 days of filing, and submit certificate
– Debtor must confirm accuracy of contents; attorney must file affidavit informing debtor about other
chapters.
186
What is Substantial Abuse Means Test?
- Determines whether debtor’s petition will be dismissed under Chapter 7.
- Basic Formula: debtor’s average monthly income is compared to median income in area where he lives. If below median income, no presumption of abuse
- Applying the Means Test to Future Disposable Income: if debtor’s income is above the median income, then further calculations are necessary, including calculations of disposable income.
- Can Debtor Afford to Pay Unsecured Debt?
- Order for Relief - If filing is proper, filing itself is an order for relief.
187
What is Involuntary Bankruptcy?
– If 12 or more creditors, need three or more with unsecured claims totaling at least $15,325 to join in petition. If less than 3 creditors, one or more creditors with $15,325 debt may file.
– Order for Relief. Debtor can challenge, but court will grant order for relief if:
* Debtor is not paying debts as they come due, OR
* The debtor was in receivership for 120 days before filing the petition.
188
What is an Automatic Stay?
Once a bankruptcy petition is filed voluntarily or involuntarily, virtually all other litigation or other
action by creditors or potential creditors against the debtor or the debtor’s property are suspended until
the bankruptcy is resolved and the stay is lifted.
189
What is Liquidation?
The sale of all nonexempt assets of a debtor and distribution of the proceeds to the debtor’s creditors.
Priorities in Distribution:
- Secured Creditors
- Categories of Unsecured Creditors
- Discharge of Debtor
190
What are the Rules of Fraudulent Transfers?
Trustee may avoid fraudulent transfers if made: (1) within two years of filing of
petition, or (2) with actual intent to hinder, delay or defraud a creditor.
191
What are the Exemptions to Bankruptcy?
1) A portion of equity in the debtor’s residence and burial plot (homestead).
2) Motor vehicle up to a limited value.
3) Household goods and personal effects (up to limit).
4) Jewelry (up to limit).
5) Tools (up to limit).
6) Unpaid wages.
7) Pensions.
8) Social Security and other public benefits.
9) Damages for personal injury (up to limit).
192
What are the Rules on Discharge?
Exceptions to Discharge: discharge of a debt may be denied (see p. 338).
– Objections to Discharge: court may deny claims based on debtor’s conduct.
– Effect of Discharge: voids, or sets aside any judgment and prohibits any collector action.
– Revocation of Discharge: within one year, if debtor acted fraudulently or dishonestly during
proceedings.
– Effect of Discharge: voids, or sets aside any judgment and prohibits any collector action.
– Revocation of Discharge: within one year, if debtor acted fraudulently or dishonestly during
proceedings.
193
What kind of Bankruptcy is in Chapter 11?
- business debtor and its creditors formulate a plan in which the debtor
repays a portion of its debts and is discharged from the remainder.
- Reorganization Plan - A plan to conserve and administer the debtor’s assets in the hope of an eventual
return to successful operation.
194
What kind of Bankruptcy is in Chapter 13?
- Not for partnerships, corporations.
- For individuals with regular income who owe fixed unsecured debts of <$420,000 or fixed
secured debts of <1,300,000. (adjusted by inflation).
- Filing the Petition: by voluntary petition or by court conversion of Chapter 7 based on
‘substantial abuse.’
195
What are the Bankruptcy Rules for Chapter 13?
**Good Faith Requirement**
- By debtor, when filing the petition and filing the plan. Code doesn’t define good faith, but based on circumstances.
**The Repayment Plan**
- Turn over to trustee such future earnings to execute the plan.
- Full payment through deferred cash payments of all priority claims, e.g., taxes.
- Identical treatment of all claims within a particular class.
- Debtor must use the ‘means test’ to determine disposable income.
- Length of the Plan: 3 or 5 years.
- Confirmation of the Plan: court holds hearing, and must confirm.
**Discharge. Generally all debts are dischargeable except**:
- Allowed claims not provided for by plan.
- Certain long term debts provided by plan.
- Certain tax claims and payments on retirement accounts.
- Claims for domestic-support obligations (See Case 15.3 on order to pay kids college
expenses).
- Debts related to injury or property damage caused with DWI or drugs.
- Student loans except in extreme hardship
196
What is Sole Proprietorship?
- Owned by a single person or family.
- Owner reports business income and expenses on personal income tax return.
- Owner is legally responsible for all debts and obligations without limit.
197
What is General Partnership
- Agreement by two or more parties.
- Purpose is for profit.
- Not necessarily in writing.
- Partnership information tax return - taxes assumed by partners directly.
- Partners have unlimited liability.
198
What is the Uniform Partnership Act (*UPA*)?
In the absence of a partnership agreement the UPA, as adopted by most states, governs the partnership
199
How does the UPA define Partnership?
- UPA defines as “association of two or more persons to carry on a business for profit.”
– Partnership presumed under UPA if:
* Sharing of profits or losses.
* Joint ownership of the business.
* Equal right to be involved in the management of the business.
200
What is the Difference between Entity and Aggregate?
Today, a majority of states recognize the partnership as a separate legal entity for the following purposes:
(1) To sue and be sued
(2) To have judgments collected against its assets, and individual partners’ assets.
(3) To own and convey partnership property.
201
What is Tax Treatment?
Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.
202
What is a Partnership Agreement?
Partnership Agreement.
– Can be written or oral, unless the Statute of Frauds requires a written agreement.
– Can be implied by conduct of parties. Case 16.2 in which party provided capital,
accounting and management help and was deemed a partner in restaurant business.
– Duration of the Partnership.
– Partnership for a Term Or at Will.
203
What are the Rights of Partners?
In the absence of a partnership agreement (oral or written) state statutes govern the partner rights.
– Management: equal, each one vote, majority wins; need unanimous consent for some actions.
– Interest in the Partnership: equal profits, losses shared as profits shared.
– Compensation: none.
– Inspection of the Books: always and also by rep. of deceased partner.
– Accounting: when fraud, embezzlement, wrongful exclusion, etc, it is just and reasonable.
– Property Rights.
– Property acquired by the partnership remains partnership property.
– An individual partner has no right to sell, mortgage, or transfer partnership property.
Each partner can:
– Use or possess property on behalf of the partnership.
– Assign her right to her share of the profits to another to satisfy individual debt.
204
What are the Liabilities of Partners?
If Partner is sued for Partnership debt, Partner has right to insist that other
partners be sued with him or her.
205
What is a Joint Liability?
third party must sue ALL partners as a group, but each partner can be held liable for the full amount.
206
What is Dissociation of a Parnter?
Dissociation occurs when one partner ceases to be associated in the partnership business.
– Allows partner to have interest purchased by the partnership.
– Terminates voting interest in the partnership.
Events That Cause Dissociation:
– Notice of Withdrawal.
– Triggering Event.
– Unanimous Vote.
– Court or Arbitrator Order.
– Partner’s bankruptcy, assignment of interest, incapacity, or death.
207
What is Partnership Termination?
The termination of a partnership occurs in two stages:
– Dissolution (is the legal “death” of the partnership), and
– Winding up and Distribution of Assets (collecting and distributing partnership assets).
208
What are the Rules of Dissolution?
by agreement, operation of law or judicial decree.
– Partners can Agree to Dissolve.
– By Operation of Law: ● Death of a partner.
* Bankruptcy of a partner.
* Bankruptcy of partnership.
* Illegality.
– By Judicial Decree: ● Insanity
* Incapacity.
* Business Impracticality.
* Improper Conduct.
* Other Circumstances (personal dissension)
209
What is a Franchise?
Owner of trademark, trade name, copyright, license or trade secret licenses its use to another by an
agreement in exchange for a fee.
- Franchisor - grantor of franchise
- Franchisee - recipient who provides capital and develops business.
210
What can a Franchisor Control?
– location of business
– source of materials and supplies
– type of business organization of franchisee
– nature of advertising
211
What are Payments to a Franchisor?
– location of business
– source of materials and supplies
– type of business organization of franchisee
– nature of advertising
212
What are Price Controls?
– Franchisor may suggest prices at which products will be sold.
– Franchisor may not mandate prices (violation of antitrust laws).
213
What are the Rules of a Franchise?
- Termination generally only “for cause”
- Reasonable notice required
- Examples include death of franchisee, bankruptcy, default under franchise agreement
214
Georgio’s Fashions defaults on a payment to the House of Dior, a supplier. The House of Dior sues
Georgio’s and each of the owners individually for payment of the debt. The court rules that each of the
owners is personally liable. What kind of entity is Georgio’s?
a. a limited partnership
b. a sole proprietorship
c. a limited liability company
d. a corporation
e. a general partnership
a general partnership
215
Who typically controls the day-to-day operations of a franchise?
a. the management of the franchisor
b. the shareholders of the franchisor
c. the employees of the franchisor
d. the franchisee
e. the franchisor
216
Mary is a member of the board of directors of XYZ, Inc. which operates a popular restaurant in the
city. In February, the directors meet to discuss the possibility of expanding by purchasing the property next
door, but it deferred taking any action. In March the owner of the property approached Mary with an offer
to sell the property and finance it at a below market rate. Mary immediately agreed because she could use
the land for another business venture she was planning. Has Mary violated any laws?
a. Mary breached the duty of confidentiality by disclosing that XYZ was interested in the property.
b. Mary breached the duty of loyalty to XYZ since it deferred action on the property.
c. Mary did not breach any duty to the corporation since it did not act on the matter in February.
d. Mary did not breach any duty to the corporation since it did not act on the matter within 90 days.
e. Both a. and b. above.
Mary breached the duty of loyalty to XYZ since it deferred action on the property.
217
]Georgia is the primary shareholder in Acme, Inc., a small corporation. After its corporate certificate
was issued by the state, there were no other formalities or documentation. In fact, Georgia does not keep
separate books for the corporation, and sometimes combines her personal assets with those of the
corporation. If she is sued individually by a corporate creditor, what would be the likely outcome?
a. Georgia would most likely be liable since the creditors could pierce the corporate veil.
b. Since Georgia is involved in corporate management, she loses her limited liability as a shareholder.
c. Corporate shareholders have limited liability, and therefore, Georgia would not be liable for claims
against the corporation.
d. Once a corporation has been authorized by the state, no further formalities need be performed;
therefore, Georgia would not be liable for corporate debts.
e. Corporate shareholders have limited liability, and therefore, Georgia would not be liable for claims
against the corporation, and once a corporation has been authorized by the state, no further
formalities need be performed; therefore, Georgia would not be liable for corporate debts.
Georgia would most likely be liable since the creditors could pierce the corporate veil.
218
Madison and Tilson agree to form a limited partnership with Madison as general partner and Tilson as
the limited partner, each to contribute $12,500 to capital. No papers were ever filed with the state;
however, and after six months the business failed with liabilities exceeding assets by $30,000. The
creditors want to hold both Madison and Tilson personally liable. Decide.
a. Madison is liable as the general partner.
b. Tilson is not liable because he is a limited partner.
c. Madison and Tilson are both liable because they both worked in the business.
d. Madison and Tilson are both liable because they never obtained a certificate from the state.
e. Madison is liable as the general partner and Tilson is not liable because he is a limited partner
Madison and Tilson are both liable because they never obtained a certificate from the state.
219
What is the Nature and Classification of Corporations?
- A corporation is a creature of statute, an artificial “person.”
- Corporations can have one or more shareholders, comprised of natural persons or other entities.
- A corporation is a legal “person” and enjoys the same rights and privileges as a natural person:
* Access to court systems.
* Constitutional guarantees of free speech, due process, and freedom from unreasonable search/seizures
220
What is Corporate Personnel?
– Responsibility for management of corp. rests with board of directors (elected by shareholders).
– Board of directors makes policy decisions and hires officers to run corporation on a daily basis.
– Shareholders can sue corporation and be sued by corporation and bring a derivative suit on behalf of the
corporation in some instances.
221
What is the Limited Liability of Shareholders?
- Generally, shareholders are not personally liable for corporate acts.
– But in certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders
personally liable
222
What are Corporate Earnings and Taxation?
- Profits can either be kept as retained earnings or passed on to the shareholders as dividends.
– Corporate Tax: can be taxed twice, first to corporation, then to shareholders on dividends.
223
What are Torts?
Under respondeat superior, liability for torts by agents within course and scope of employment
224
What are the Rules on Criminal Acts?
– A corporation can be liable for criminal acts, but cannot be imprisoned, only fined.
– However, under the ‘responsible officer’ doctrine, corporate officers may go to prison.
225
What are the Classifications of Corporations?
– Domestic corporation does business within its state of incorporation.
– Foreign corporation from in X state, doing business in Z state.
– Alien Corporation: formed in another country.
– Public and Private Corporations.
– Nonprofit Corporations.
– Closely Held Corporations
– Shares held by few shareholders.
– More informal management, similar to a partnership.
– Management of Closely Held Corporations May be Direct by Stockholders.
– Transfer of Shares Restricted by Shareholder Agreement.
226
What are "S" Corporations?
– Avoids federal “double taxation” of regular corporations at the corporate level.
– Only dividends are taxed to the shareholders as personal income.
– IRS requirements: Corporation is domestic, fewer than 100 shareholders, only one class of stock, no shareholder can be a non-resident alien or another entity.
227
What are Preliminary Activities?
– Before corporation is formed, promoters are the persons who take the preliminary steps of organizing
the venture and attracting investors via subscription agreements.
– Promoter’s Liability: Promoter is personally liable for pre-incorporation contracts on behalf of the
corporation, unless 3rd party agrees to hold future corporation liable.
228
What are the Incorporation Procedures?
– Select State of Incorporation.
– Secure the Corporate Name.
– Prepare the Articles of Incorporation or Certificate of Formation: which deals with shares, the
registered agent and office, incorporators, duration and purpose, and internal organization.
– File the Articles/Certificate with State.
229
What is the First Organizational Meeting?
– After the corporation is “chartered” (created) it can do business.
– Shareholders should approve the bylaws, elect directors, hire officers and ratify (novation) preincorporation contracts and activities.
230
What are Express Powers?
– Found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the
state and federal corporations.
– Corporate by-laws may also grant or limit a corporation’s express powers.
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What are Implied Powers?
– All acts reasonably necessary to accomplish corporate purposes.
– A corporate officer can bind corporation in contract in matters connected with the ordinary business
affairs of the enterprise.
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What are Ultra Vires Acts?
- Corporate acts beyond the express or implied powers of the corporation
- Articles of incorporation now adopt very broad purposes to prevent lawsuits against the corporation.
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What does Piercing the Corporate Veil mean?
In certain situations, courts will “pierce the corporate veil” and hold shareholders personally liable in the
interests of justice and fairness.
Factors a court considers:
– 3rd party tricked into dealing with a corporation rather than the individual.
– Corporation is set up never to make a profit or remain insolvent or is under-capitalized.
– Corporation is formed to evade an existing legal obligation.
– Statutory formalities are not followed.
– Commingling of personal and corporate interests or assets.
A Potential Problem for Closely Held Corporations.
– Separate status not preserved.
– Commingling of funds.
– No director meetings.
– Shareholder use of corporate property
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What is the Alter-Ego Theory?
Corporation is “alter ego” of majority shareholder and personal and corporate interests are commingled
such that the corporation has no separate identity.
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What are the Board of Directors?
- Every corporation is governed by a board of directors who has ultimate authority over the corporation.
- Individual directors are not agents of corporation, only the board itself can bind the corporation.
- A director can also be a shareholder, especially in closely-held corporations.
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What are the Duties of Directors?
- Attend Board Meetings
- Adopt Policies
- Authorize Major Actions
- Supervise Officers & Management
- Approve Dividends
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What are the Roles of Corporate Officers?
- Officers serve at the pleasure of the Board of Directors (and are elected by them) but have fiduciary duties to company as well.
- Run day-to-day operations of the corp.
- Their employment relationships are generally governed by contract law and employment law.
- Officers may be terminated for cause
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What are the Duties and Liabilities of Directors and officers?
Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders:
- Duty of Care, and
- Duty of Loyalty
- Failure to follow these duties may subject the officers and directors to personal liability
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What is Duty of Care?
Directors/officers are expected to act in good faith and the best interests of the corporation.
* Make informed and reasonable decisions;
* Rely on competent consultants and experts; and
* Exercise reasonable supervision.
* Directors and officers may be liable for negligent acts that breach the standard of due care:
* Crimes and torts committed by them individually and/or those committed by employees under
their supervision.
* Shareholder derivative suits where shareholder(s) sue directors on behalf of corporation.
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What is Duty of Loyalty?
– Loyalty to corporation & shareholders instead of personal interest
– Cannot compete with corporation
– Cannot usurp corporate opportunities
– No conflicts of interest
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What are Conflicts of Interest?
- Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may
benefit the director/officer personally.
- However, if transaction was fair and reasonable, it will not be voidable if approved by majority of
disinterested directors.
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What is the Business Judgement Rule (*BJR*)?
- Immunizes a director or officer from liability from consequences of a business decision that turned sour.
- Court will not require directors or officers to manage “in hindsight.”
- As long as decision was reasonable, informed, made in good faith and in the best interests of the
corporation, BJR will apply.
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Who are Shareholders and what are their Liabilities?
*Who They Are?*
- Ownership of shares grants a shareholder an equitable ownership interest in a corporation.
- Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly
by electing directors.
- Shareholders are generally protected from personally liability by the corporate veil of limited liability.
*Their Liabilities?*
- If the corporation fails, shareholders generally cannot lose more than their investment.
- Shareholders are generally not liable for the contracts or torts of the corporation. However, in certain
situations the corporate veil may be pierced:
- Mainly undercapitalization theory or alter-ego theory
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What are the Shareholders' Powers and Rights?
*powers*
– Amending articles of incorporation or bylaws.
– Approval of mergers or acquisition.
– Sale of all corporate assets or dissolution.
* Shareholders also elect and remove the board of directors.
*Rights*
* Vote in Person or by Proxy
* Vote by Number of Shares Owned
* Inspection of Books & Records
* Right to Transfer Shares (unless restricted by agreement)
* Right to buy newly issued stock (Preemptive Rights)
* Dividends and Rights on Dissolution
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What are Preemptive Rights?
- Common law concept which is a preference to existing shareholders to purchase a pro-rated share of newly-issued stock within a certain period of time.
- Provided for in the articles of incorporation.
- Significant in a close corporation to prevent dilution and loss of control.
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What is Termination?
consists of two phases:
– Dissolution (voluntary or involuntary legal “death” of the corporation); and
– Liquidation (assets converted to cash and distributed to creditors and shareholders).
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What is an LLC?
- Limited Liability Corporation
- hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.
- An LLC is a legal entity separate from its owners.
- LLC’s are increasingly the entity of choice for businesses.
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What is the Nature of the LLC?
* LLC’s are creatures of state law.
* Owners are called “members” (not shareholders) and their ownership is called “interests” (not shares
* Limited Liability of Members.
* Even when sued by employees or for defective products (See Case 17.1)
* Liability under the Alter-Ego Theory.
* As with corporations, courts may ‘pierce the veil’ of the LLC and hold members personally liable.
* Other Similarities to Corporations.
* Separate legal entity from owners.
* Can hold property separately.
* ‘Foreign’ designation, doing business in another state
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What is the Formation of the LLC?
* Requires filing articles of organization or certificate of formation with state.
* Contents of the Articles/Certificate:
* Name of Business.
* Principal Address.
* Name and Address of Registered Agent.
* Names of the Initial Members/Managers.
* Preformation Contracts.
* Prior to charter, owners of the firm are called promotors or organizers.
* If promoter forms a “preformation contract” prior to formation, they may be personally liable.
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What is Limited Partnership?
– Separate, artificial legal entity
– At least one general partner and at least one limited partner
– Tax liability and benefits assumed by partners directly
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What are the Liabilities of Partners in a Ltd. Partnership?
- General partner assumes all management and personal liability.
– Limited Partner has no management rights, and liability is limited to the amount of investment;
however limited partner can be liable if he participates in management
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What are Limited Liability Partnership?
- Designed for professional service firms, it allows limits on personal liability of the partners but allows
“pass through” tax advantages.
- Liability in an LLP.
- LLP allows professionals to avoid personal liability for the malpractice of other partners. (Same principals apply in professional corporations and associations.)
