INTRODUCTION TO US SYSTEM

Chapter 1

Business Activities and the Legal Environment

Business operations exist within a framework governed by various laws and regulations. The legal environment consists of
rules that influence how businesses engage with their customers, employees, government entities, and other businesses.
Knowing the relevant legal principles and ensuring compliance is essential to avoid litigation, penalties, and loss of reputation.

Courts play a crucial role in interpreting and enforcing these laws, as decisions made by courts define legal boundaries and
shape business activities. It's vital for businesspersons to understand the legal environment and how court decisions, also called
case law, impact their day-to-day operations.

Sources of American Law

The American legal system draws from various sources, each playing a unique role in shaping legal standards. The key sources
are:

1. Constitutional Law: The U.S. Constitution is the foundational legal document. It sets up the structure of government and
outlines the rights and freedoms of individuals. All other laws must align with the Constitution.
2. Statutory Law: These are laws passed by legislative bodies, such as Congress at the federal level and state legislatures at the
state level. Local ordinances also fall under statutory law, addressing issues like zoning or public safety.
3. Administrative Law: Agencies, such as the Environmental Protection Agency (EPA) or the Federal Communications
Commission (FCC), create regulations to enforce statutory laws. Administrative law governs the actions and powers of these
agencies.
4. Case Law/Common Law: This is law established by judicial decisions in court cases. Judges make decisions based on past
rulings, also known as precedent. This body of law evolves through interpretations of statutes and constitutional principles.
5. Customary Rule: The rule created by the elderly, based on tradition, differs from place to place.

The Common Law Tradition

The U.S. legal system has roots in the English common law tradition, which relies on judicial precedents. Under this system,
courts follow the principle of stare decisis, meaning they adhere to previous rulings (precedents) when deciding new cases.
This system ensures consistency and predictability in legal rulings. Courts will generally follow past decisions unless there is a
compelling reason to depart from them, such as changes in social attitudes or ethical considerations.

Stare decisis: is a common law in which the judge must follow the precedents established. It help the court to be more
efficient and the law more stable and predictable.

Ethics in Law: Stare Decisis vs. Spider-Man

This section contrasts the legal doctrine of stare decisis with a moral dilemma highlighted in popular culture. In stare decisis,
the court adheres to established precedents to maintain consistency. However, like Spider-Man's famous phrase, "With great
power comes great responsibility," the judiciary must sometimes balance legal precedent with evolving ethical standards. In
rare cases, courts may overturn past rulings when justice and morality demand it, even if this breaks with tradition.

Schools of Legal Thought

Different schools of thought guide the interpretation of laws and shape how judges make decisions:
1. Natural Law: Believes that law should be based on moral principles inherent in human nature. Laws that conflict with these
natural rights are deemed unjust.
2. Legal Positivism: Argues that laws are rules created by governments, and their validity doesn't depend on moral reasoning but
on their enactment by legitimate authority.
3. Historical School: Focuses on the historical development of laws and sees the legal system as an evolving set of traditions that
reflect societal changes.
4. Legal Realism: Advocates for a more pragmatic approach to the law, emphasizing that judicial decisions should consider
social, economic, and contextual factors. This approach believes that law is not static and must adapt to the realities of modern
society.

Classifications of Law

Laws are grouped into several categories based on their function and scope:

1. Substantive Law: These laws define the rights and duties of individuals and entities. For example, contract law outlines the
rules governing agreements between parties.
2. Procedural Law: Procedural laws provide the steps or processes for enforcing substantive laws. This includes rules for filing
lawsuits, conducting trials, and appealing decisions.
3. Civil Law: This area deals with the rights and responsibilities between private individuals or organizations. Civil law covers
areas such as torts, contracts, and family law.
4. Criminal Law: Criminal law focuses on actions deemed harmful to society and includes offenses like theft, assault, and
murder. It outlines punishments for those who violate these laws.

How to Find Primary Sources of Law

Primary sources of law include:

 Constitutions (federal and state)

 Statutes: Laws passed by legislative bodies.
 Regulations: Created by administrative agencies.
 Case Law: Judicial decisions.

Legal professionals use databases like Westlaw and LexisNexis to search for relevant case law, statutes, and regulations. Legal
citations are used to locate specific cases or statutes, such as “N.W.2d” or “U.S.C.”

How to Read and Understand Case Law

Understanding case law is essential for legal research and applying legal precedents. A court opinion typically contains several
components:

1. Case Title and Terminology: A case title (e.g., Adams v. Jones) includes the names of the parties involved. If the case is
appealed, the order of the names may change, depending on the appellant (the party appealing) and appellee (the party
responding to the appeal).
2. Judges and Justices: Judges in appellate courts are often called "Justices," and their opinions might be referenced with
abbreviations like J. (for Justice) or C.J. (for Chief Justice).
3. Court Decisions and Opinions:
o Unanimous Opinion: All judges agree.
o Majority Opinion: A majority of the judges agree.
o Concurring Opinion: A judge agrees with the decision but for different reasons.
o Dissenting Opinion: One or more judges disagree with the majority.

Legal researchers typically brief cases by summarizing the facts, issues, decisions, and reasoning provided by the court.
2–1 The Constitutional Powers of Government

2–1a A Federal Form of Government

Federal Powers:
The U.S. Constitution establishes a federal government system dividing power between the national and state governments.
Federal powers are enumerated (explicitly stated, e.g., regulating commerce and national defense) and implied through the
Necessary and Proper Clause, which allows Congress to enact laws essential for carrying out these powers.

Regulatory Powers of the States:

States retain police powers to legislate for the health, safety, morals, and welfare of their citizens. For instance, states regulate
zoning laws, building codes, and public health standards. However, state laws must not conflict with federal laws or the U.S.
Constitution.

2–1b Relations among the States

The Privileges and Immunities Clause:

Under Article IV, citizens of one state must be treated equally by other states regarding fundamental rights, such as property
ownership or employment. Exceptions exist for valid local interests, like higher tuition for out-of-state students.

The Full Faith and Credit Clause:

States are required to respect the public acts, records, and judicial proceedings of other states. For example, a marriage or
court decision valid in one state must be recognized in all others, ensuring legal consistency across state lines.

2–1c The Separation of Powers

The Constitution divides power among three branches of government—legislative (makes laws), executive (enforces laws),
and judicial (interprets laws). A system of checks and balances prevents any branch from becoming too powerful, such as the
president’s veto power, Congress’s ability to override vetoes, and judicial review established in Marbury v. Madison.

2–1d The Commerce Clause

The Expansion of National Powers under the Commerce Clause:

The Commerce Clause gives Congress authority to regulate trade between states, foreign nations, and Native American tribes.
Broad interpretations, such as in Gibbons v. Ogden, have enabled Congress to oversee nearly all commercial activities.

The Commerce Clause Today:

While the clause continues to justify federal regulation in areas like civil rights and labor, modern rulings like United States v.
Lopez have restricted its application in areas not directly linked to interstate commerce, such as gun possession in schools.

The “Dormant” Commerce Clause:

States cannot pass laws that unduly burden interstate commerce. Courts use a balancing test to evaluate whether the local
benefits outweigh the restrictions on trade between states.

2–1e The Supremacy Clause and Federal Preemption

Preemption:
Federal laws take precedence over conflicting state laws under the Supremacy Clause. When Congress legislates
comprehensively, federal laws may “preempt” state action in the same area.

Congressional Intent:
Federal preemption occurs when Congress explicitly states its intention to preempt state laws or when the federal framework
implicitly dominates the field, leaving no room for state regulation.

2–1f The Taxing and Spending Powers

Congress has constitutional authority to impose taxes and spend for the general welfare. Taxes must be uniform across states
and can be used to influence behaviors, such as tax credits for renewable energy use. Spending power also allows Congress to
attach conditions to federal funding provided to states, encouraging compliance with national objectives.
 2–2 Business and the Bill of Rights

2–2a Limits on Federal and State Governmental Actions

The Fourteenth Amendment:

The Bill of Rights, initially applicable only to the federal government, was extended to state governments through the
Fourteenth Amendment’s Due Process and Equal Protection Clauses.

Judicial Interpretation:
Courts interpret constitutional rights dynamically, balancing governmental interests (e.g., public safety) with individual
freedoms, such as free speech or privacy.

2–2b Freedom of Speech

Reasonable Restrictions:
The government may impose content-neutral restrictions on the time, place, and manner of speech but must pass strict scrutiny
for content-based restrictions.

Commercial Speech:
Speech that promotes commerce, such as advertisements, is protected but may be regulated to prevent false or misleading
claims. Restrictions must serve a significant governmental interest and be narrowly tailored.

Unprotected Speech:

 Threatening Speech: Incitement to imminent lawless action or credible threats of violence are not protected.
 Obscene Speech: Obscenity, as defined by community standards (Miller v. California), is excluded from First Amendment
protections if it lacks literary, artistic, or scientific value.

2–2c Freedom of Religion

The Establishment Clause:

Prohibits the government from establishing an official religion or favoring one religion over others.

The Free Exercise Clause:

Ensures individuals’ rights to practice their religion freely, barring laws specifically targeting religious practices without a
compelling state interest.

2–2d Searches and Seizures

The Fourth Amendment guards against unreasonable searches and seizures. Authorities must obtain a warrant based on
probable cause, though exceptions exist, such as exigent circumstances or consent.

2–2e Self-Incrimination

The Fifth Amendment protects individuals from being compelled to testify against themselves in criminal cases. This includes
protections during custodial interrogations, established in Miranda v. Arizona.

2–3 Due Process and Equal Protection

2–3a Due Process

Procedural Due Process:

Ensures the government provides adequate notice and a fair hearing before depriving an individual of life, liberty, or property.
 Substantive Due Process:
Evaluates whether laws themselves are fair and reasonable, protecting fundamental rights unless narrowly tailored to serve a
compelling governmental interest.

2–3b Equal Protection

Strict Scrutiny:
Applied to laws affecting fundamental rights or involving classifications based on race, religion, or national origin. Laws must
serve a compelling interest and be narrowly tailored.

Intermediate Scrutiny:
Used for classifications based on gender or legitimacy, requiring laws to be substantially related to important governmental
objectives.

The “Rational Basis” Test:

Applies to all other classifications, requiring a legitimate governmental interest with a rational link to the law’s objectives.

2–4 Privacy Rights

2–4a Federal Privacy Legislation:

Federal laws, such as the Privacy Act, regulate the use of personal data by public and private entities to protect individuals’
privacy.

2–4b The USA Patriot Act:

Enacted after 9/11, this law expands the government’s surveillance authority to combat terrorism. It allows access to personal
data and communications, raising privacy concerns about the balance between national security and civil liberties.

3–1 Ethics and the Role of Business

3–1a The Relationship of Law and Ethics

The relationship between law and ethics is critical but often complex. While laws set the minimum standards for conduct,
ethical considerations frequently extend beyond these legal requirements. Businesses must navigate this overlap, especially in
situations where the law may be unclear or inadequate.

 Gray Areas in the Law: Legal compliance does not always equate to ethical behavior. Some situations may arise where the
law is ambiguous, incomplete, or silent, leaving businesses to rely on ethical principles to guide decisions. For example,
emerging technologies and practices often outpace legal regulations, creating "gray areas" where ethical judgment becomes
essential.
 The Moral Minimum: At a minimum, businesses are expected to obey the law. However, ethical behavior often demands
more, requiring companies to proactively address societal expectations and act in ways that benefit all stakeholders, even when
not legally obligated.
 Private Company Codes of Ethics: Many companies adopt their own codes of ethics, which act as internal guidelines for
decision-making. These codes typically address issues such as honesty, fairness, conflicts of interest, and workplace conduct.
By setting clear expectations, businesses aim to foster a culture of integrity and accountability among employees.
 Industry Ethical Codes: Beyond individual companies, professional and industry organizations often develop codes of
conduct to promote ethical behavior across an entire field. These codes help establish standards for professionalism and ensure
that all members adhere to shared ethical principles. Violations of these codes can lead to reputational damage and loss of
public trust.

3–1b The Role of Business in Society

The role of business in society has evolved significantly. Traditionally focused on profit maximization, businesses are now
expected to play a broader role in addressing social and environmental issues.
 Business as a Pure Profit Maximizer: In the past, businesses operated primarily to maximize shareholder value, often at the
expense of broader societal concerns. This perspective, rooted in classical economic theories, views social and environmental
considerations as secondary to profit-making.
 Business as a Corporate Citizen: Modern businesses are increasingly recognized as "corporate citizens" with responsibilities
that extend beyond generating profits. This includes contributing to societal well-being through ethical behavior, sustainable
practices, and philanthropy.
 A Four-Part Analysis: To fulfill their role as corporate citizens, businesses must balance four key responsibilities:
1. Economic: Generating profits and ensuring financial stability.
2. Legal: Complying with laws and regulations.
3. Ethical: Acting in ways that align with societal values.
4. Philanthropic: Voluntarily giving back to communities through charitable initiatives and social programs.

3–1c Ethical Issues in Business

Ethical issues in business arise when decisions impact stakeholders in ways that challenge moral principles. Examples include
conflicts of interest, workplace discrimination, and environmental harm. Businesses must carefully navigate these dilemmas to
maintain trust and uphold their reputations.

3–1d The Importance of Ethical Leadership

Ethical leadership is crucial for fostering a culture of integrity and accountability within organizations. Leaders play a pivotal
role in shaping employee behavior and organizational values.

 Attitude of Top Management: The ethical tone of an organization is often set by its leadership. Managers who demonstrate
ethical behavior inspire employees to act with integrity and prioritize ethical decision-making.
 Unrealistic Goals for Employees: Pressuring employees with unattainable goals can incentivize unethical behavior, such as
falsifying data or cutting corners. Leaders must set realistic expectations to promote fairness and honesty.
 Fostering Unethical Conduct: When leadership prioritizes results over ethics, it creates an environment where unethical
practices flourish. Ethical leaders focus on transparency, fairness, and the well-being of all stakeholders.

3–2 Ethical Principles and Philosophies

3–2a Duty-Based Ethics

Duty-based ethics emphasize the importance of moral obligations and principles, regardless of outcomes.

 Religious Ethical Principles: Religious frameworks often guide moral behavior by emphasizing virtues such as honesty,
compassion, and justice. These principles provide a foundation for ethical decision-making in business.
 Principles of Rights: The rights-based approach focuses on protecting individual rights, such as life, liberty, and property.
Businesses must respect these rights in their operations.
o Conflicting Rights: Ethical dilemmas often involve conflicts between competing rights, such as an employee’s right to privacy
versus an employer’s right to monitor productivity.
o Resolving Conflicts: Resolving such conflicts requires careful ethical analysis to balance and prioritize rights fairly.
 Kantian Ethical Principles: Rooted in the philosophy of Immanuel Kant, this approach emphasizes treating individuals as
ends in themselves, not merely as means to an end.
o People Are Not a Means to an End: Businesses must avoid exploiting employees, customers, or other stakeholders for profit.
o Categorical Imperative: Decisions should be guided by the principle of universalizability—if an action is morally right, it
should be acceptable for everyone to do the same.

3–2b Outcome-Based Ethics: Utilitarianism

Utilitarianism evaluates decisions based on their consequences, aiming to maximize overall happiness or utility.

 Cost-Benefit Analysis: A systematic process of weighing the benefits and harms of a decision to determine the best course of
action.
 Problems with Utilitarianism: This approach can justify actions that harm minorities if they benefit the majority, raising
concerns about fairness and equity.
 3–2c Corporate Social Responsibility (CSR)

CSR reflects a company’s commitment to ethical practices and societal well-being.

 The Corporate Aspects of CSR: Businesses engage in CSR initiatives to enhance their reputation, build consumer trust, and
align with ethical expectations.
 The Social Aspects of CSR: CSR efforts often address social issues such as poverty, education, and environmental
sustainability.
 Stakeholders and CSR: Effective CSR involves engaging with all stakeholders, including employees, customers, suppliers,
and communities.

3–3 Sources of Ethical Issues in Business Decisions

3–3a Short-Term Profit Maximization

Focusing solely on short-term financial gains often undermines ethical considerations and long-term sustainability.

3–3b Social Media

Social media presents unique ethical challenges in business:

 The Use of Social Media to Make Hiring Decisions: Employers may use social media to assess candidates, raising concerns
about bias and privacy.
 The Use of Social Media to Discuss Work-Related Issues:
o The Responsibility of Employers: Monitor online behavior without infringing on employee rights.
o The Responsibility of Employees: Avoid sharing confidential or damaging information about their company.

3–3c Awareness

Businesses must be aware of potential ethical issues and proactively address them to prevent harm.

3–3d Rationalization

Rationalizing unethical behavior undermines accountability and integrity within organizations.

3–3e Uncertainty

Ambiguity in ethical situations necessitates the use of structured frameworks to guide decision-making.

3–4 Making Ethical Business Decisions

3–4a A Systematic Approach: IDDR (“I Desire to Do Right”)

1. Step 1: Inquiry: Identify the facts, stakeholders, and ethical issues.

2. Step 2: Discussion: Consider alternatives and their potential consequences.
3. Step 3: Decision: Select the most ethical course of action.
4. Step 4: Review: Reflect on the outcome and refine policies as needed.

3–4b Applying the IDDR Approach—A Sample Scenario

This approach helps businesses systematically address ethical dilemmas by focusing on transparency, stakeholder impact, and
long-term outcomes.
 3–5 Business Ethics on a Global Level

3–5a World Religions, Cultural Norms, and Ethics

Global business requires understanding diverse cultural and religious norms while adhering to universal ethical principles.

3–5b Outsourcing

Outsourcing raises concerns about labor practices, environmental impacts, and supplier ethics.

3–5c Avoiding Corruption

Corruption undermines ethical business practices and trust. Companies must implement anti-corruption policies and train
employees to handle such challenges ethically.

3–5d Monitoring the Employment Practices of Foreign Suppliers

 Wages and Working Conditions: Companies face scrutiny for supplier practices. For instance, Nike faced backlash over
worker mistreatment in Thailand.
 Corporate Watch Groups: Nonprofit organizations monitor and expose unethical practices, prompting companies like Apple
to audit their supply chains and address violations.

TORT LAW

Chapter 6: Tort Law

The Basis of Tort Law

 6–1a The Purpose of Tort Law: Tort law aims to provide remedies for individuals harmed by the wrongful acts of others,
offering compensation to those who have suffered losses or injuries. It serves as a civil mechanism to right wrongs and deter
future harm by holding individuals or entities accountable for their actions.
 6–1b Damages Available in Tort Actions:
o Compensatory Damages: These are intended to compensate the plaintiff for actual losses. They include special damages
(quantifiable monetary losses like medical expenses or lost wages) and general damages (non-monetary aspects such as pain
and suffering).
o Punitive Damages: Awarded in cases where the defendant’s behavior was particularly egregious, these damages aim to punish
the wrongdoer and deter similar conduct in the future.
o Legislative Caps on Damages: Many states impose limits on the amount of compensatory and punitive damages that can be
awarded to prevent excessive verdicts and ensure consistency in compensation.
 6–1c Classification of Torts: Torts are broadly classified into two categories: intentional torts and unintentional torts
(negligence). Intentional torts involve deliberate actions to cause harm, whereas negligence arises from a failure to exercise
reasonable care, resulting in unintended harm.
 6–1d Defenses: Defendants in tort cases can challenge the plaintiff’s claims by arguing that certain elements required for
liability are missing or by invoking affirmative defenses like assumption of risk or contributory negligence.

6–2a Assault

 Definition: Assault is an intentional act that creates a reasonable apprehension or fear in another person of imminent harmful
or offensive contact. It does not require physical contact between the parties; the focus is on the perception of threat. For
example, raising a fist as if to strike someone can constitute assault if it causes the other person to fear that they will be struck.
 Elements of Assault:
o Intent: The defendant must intend to cause apprehension of harmful or offensive contact. Even if the defendant did not intend
to physically harm, they must have intended to create a fear of harm.
o Reasonable Apprehension: The apprehension experienced by the plaintiff must be reasonable. This means that a reasonable
person in the plaintiff’s situation would have perceived the threat. For instance, if a person points an unloaded gun at someone
who believes the gun is loaded, this could constitute assault.
o Imminence: The threat must be of imminent harm. A threat to harm someone at a later time does not qualify as assault
because it does not create an immediate sense of danger.
 6–2b Battery

 Definition: Battery is the intentional and wrongful physical contact with another person without their consent that results in
harmful or offensive touching. Unlike assault, battery requires physical contact but not necessarily a visible injury.
 Elements of Battery:
o Intent: The defendant must have intended to make contact. It is not necessary for the defendant to intend to cause harm; it is
sufficient if they intended to cause the contact that led to harm. For example, touching someone’s shoulder to get their
attention may not be battery, but forcefully shoving them might be.
o Harmful or Offensive Contact: The contact must be harmful (causing physical injury) or offensive (violating a reasonable
sense of personal dignity). Even minor contacts, such as spitting on someone, can be considered battery if they are offensive.
o gi For instance, during a consensual sports game, some contact is expected, but actions that exceed the scope of consent, such
as hitting a player outside of the game rules, may still constitute battery.
 Defenses to Battery:
o Consent: If the plaintiff consented to the contact (e.g., in sports), the defendant may use this as a defense.
o Self-Defense or Defense of Others: The defendant may argue that the contact was necessary to protect themselves or another
person from immediate harm.
o Defense of Property: A defendant may use reasonable force to protect their property from being damaged or stolen.

6–2c False Imprisonment

 Definition: False imprisonment occurs when an individual is intentionally confined or restrained against their will within a
bounded area without legal justification. It infringes upon a person’s freedom of movement.
 Elements of False Imprisonment:
o Intent to Confine: The defendant must have intended to confine or restrict the plaintiff’s movement. Accidental confinement
does not meet this requirement.
o Complete Confinement: The plaintiff’s freedom of movement must be completely restricted. There must be no reasonable
means of escape known to the plaintiff. For instance, locking someone in a room constitutes false imprisonment, but if there is
a safe, easily accessible way out (such as an open window), it may not.
o Awareness of Confinement: The plaintiff must be aware of the confinement or suffer harm as a result of it. If a person is
unaware that they were locked in a room while unconscious, they may not have a claim for false imprisonment unless they
experience harm.
 Methods of Confinement: Confinement can occur through physical barriers (e.g., locking doors), threats of physical force, or
false claims of legal authority (e.g., pretending to be a police officer).
 Defenses to False Imprisonment:
o Consent: If the plaintiff agreed to the confinement, it may be a defense.
o Shopkeeper’s Privilege: This is a specific defense that allows merchants to detain suspected shoplifters for a reasonable
period and in a reasonable manner, while investigating the suspected theft.

6–2d Intentional Infliction of Emotional Distress (IIED)

 Definition: IIED is a tort in which a defendant’s extreme and outrageous conduct intentionally or recklessly causes severe
emotional distress to another person.
 Elements of IIED:
o Intent or Recklessness: The defendant must have acted intentionally or recklessly, meaning that they either wanted to cause
emotional distress or acted with disregard for the high probability that their actions would cause it.
o Extreme and Outrageous Conduct: The conduct must be so extreme and outrageous that it exceeds the bounds of decency
accepted by society. Mere insults or annoyances do not qualify; the conduct must be truly atrocious. For example, threatening a
person’s life or intentionally revealing deeply private and damaging information could constitute IIED.
o Causation: The defendant’s conduct must have directly caused the emotional distress experienced by the plaintiff.
o Severe Emotional Distress: The distress suffered must be severe enough that a reasonable person would not be expected to
endure it. This is more than just trivial or fleeting emotional upset.
 Limitations by the First Amendment: The right to free speech can limit claims for IIED, especially when the speech involves
public figures or matters of public interest. For example, in cases involving parodies or protests, courts may weigh First
Amendment rights against claims of emotional distress.

6–2e Defamation

 Definition: Defamation involves a false statement made about a person that harms their reputation. It can take two forms: libel
(written or published) and slander (spoken). The key is that the statement must be presented as a fact, not an opinion.
 Elements of Defamation:
o False Statement of Fact: The statement must be false and purport to be a fact, not merely an opinion. If a statement is true, it
cannot be defamatory.
o Publication: The false statement must be communicated to at least one person other than the plaintiff. “Publication” does not
require mass distribution; a conversation with a single individual can suffice.
o Harm to Reputation: The false statement must cause damage to the plaintiff’s reputation. Harm is presumed in cases of libel,
but in slander, the plaintiff must typically prove actual damages (except in cases of slander per se).
o Slander Per Se: Certain statements are considered so harmful that damages are presumed. These include accusations of
serious crimes, claims that a person has a loathsome disease, allegations that harm a person’s profession, or claims of serious
sexual misconduct.
 Defenses to Defamation:
o Truth: A statement that is true cannot be defamatory, no matter how damaging it may be.
o Absolute Privilege: Certain situations provide immunity from defamation claims, such as statements made during judicial or
legislative proceedings.
o Qualified Privilege: This applies when a statement is made in good faith and with a legitimate interest, like during job
reference checks.

6–2f Invasion of Privacy

 Definition: This tort protects an individual’s right to privacy and autonomy against certain intrusions. It encompasses four
distinct actions:
o Intrusion into Private Affairs: Involves intentionally intruding into a person’s private life, such as spying on them in their
home or eavesdropping on private conversations.
o Public Disclosure of Private Facts: Occurs when someone publicly discloses truthful information that is not of public
concern and would be highly offensive to a reasonable person, like sharing someone’s medical history without their consent.
o False Light: Involves spreading information that portrays someone in a misleading way, even if it is not defamatory. For
example, publishing a misleading headline that creates a false impression.
o Appropriation of Name or Likeness: Using someone’s name, image, or identity for commercial gain without their consent.

6–2g Fraudulent Misrepresentation

 Definition: This tort involves deliberately deceiving someone into acting based on a false representation of a material fact.
 Elements:
o False Representation of a Material Fact: The statement must be about a fact that would influence the other party’s decision.
A mere opinion is not enough.
o Knowledge of Falsity: The defendant must know the statement is false or act with reckless disregard for the truth.
o Intent to Induce Reliance: The statement must be made with the intention that the plaintiff will rely on it.
o Actual and Justifiable Reliance: The plaintiff must have reasonably relied on the misrepresentation.
o Damages: The plaintiff must have suffered a loss as a result of their reliance on the false statement.

6–2h Abusive or Frivolous Litigation

 Definition: This tort addresses legal actions that are initiated without reasonable grounds and for purposes other than resolving
a legitimate legal dispute.
 Examples: It includes malicious prosecution (suing without probable cause) and abuse of process (using legal procedures for
an ulterior purpose).

6–2i Business Torts

 Wrongful Interference with Contractual Relationship: When a third party intentionally induces a party to breach an
existing contract, they can be liable for damages resulting from the interference.
 Wrongful Interference with a Business Relationship: Occurs when a third party intentionally disrupts a business’s economic
relationships with its customers or partners. For example, using unethical methods to lure customers away from a competitor
can constitute wrongful interference.

Intentional Torts against Property

 6–3a Trespass to Land:

o Establishing Trespass: A person who enters another’s property without permission or legal right can be considered a
trespasser.
o Liability for Harm: Trespassers may be held liable for any damage caused to the property, and property owners may have
limited duties toward trespassers.
o Defenses against Trespass to Land: Includes situations where entry is justified or where the trespasser had permission.
 6–3b Trespass to Personal Property: This occurs when someone intentionally interferes with the personal property of
another without permission.
 6–3c Conversion:
o Failure to Return Goods: This involves wrongfully taking or retaining someone else’s property, depriving the rightful owner
of its use.
o Intention: Conversion requires intent to exercise control over the property, but it does not require intent to permanently
deprive the owner of it.
 6–3d Disparagement of Property:
o Slander of Quality: Making false claims about another’s product or property, leading to economic loss.
o Slander of Title: Involves false claims that cast doubt on someone’s legal ownership of property.

Unintentional Torts—Negligence

 6–4a The Duty of Care and Its Breach:

o The Reasonable Person Standard: Courts determine negligence by asking how a reasonable person would act in similar
circumstances.
o The Duty of Landowners: Landowners must protect individuals on their property from foreseeable risks.
o The Duty of Professionals: Professionals are held to a higher standard of care due to their expertise and training.
 6–4b Causation:
o Courts Ask Two Questions: (1) Causation in fact (whether the injury would have occurred "but for" the defendant’s action).
(2) Proximate cause (whether the harm was a foreseeable result of the action).
o Foreseeability: Determines whether the connection between the action and the harm is strong enough to impose liability.
 6–4c The Injury Requirement and Damages: For a negligence claim, the plaintiff must prove a legally recognizable injury.
Damages may include compensatory and, in cases of gross negligence, punitive damages.
 6–4d Good Samaritan Statutes: These laws protect those who voluntarily aid others in emergencies from being sued for
negligence.
 6–4e Dram Shop Acts: Bars or hosts serving alcohol can be liable for injuries caused by intoxicated patrons if they served
alcohol recklessly.

Defenses to Negligence

 6–5 Defenses to Negligence: Defendants may argue that the plaintiff failed to establish one of the key elements of negligence
or use affirmative defenses.
 6–5a Assumption of Risk: If the plaintiff knowingly entered a risky situation, they may be barred from recovery. This
requires proof that the plaintiff was aware of the risk and voluntarily assumed it.

CONTRAC LAW

Chapter 11: Nature and Terminology

 11–1 An Overview of Contract Law

11–1a Sources of Contract Law

Contract law originates from two primary sources:

1. Common Law: Derived from court decisions and legal precedents, this governs contracts involving services, real estate,
employment, and insurance. It provides a flexible framework for interpreting various contractual agreements.
2. Uniform Commercial Code (UCC): This standardized code governs the sale and lease of goods across states in the U.S. It is
particularly useful in commercial transactions to ensure consistency in business practices.

11–1b The Function of Contract Law

The main purpose of contract law is to:

 Provide predictability and stability in personal and commercial transactions.

 Define legal obligations clearly, ensuring each party knows their rights and duties.
 Offer remedies for breaches, ensuring that parties are compensated fairly when one side fails to meet their obligations.

11–1c The Definition of a Contract

A contract is a legally binding agreement formed by two or more competent parties. It requires mutual promises or exchanges
of actions, with an understanding that failure to perform may result in legal consequences.

11–1d The Objective Theory of Contracts

This principle evaluates contracts based on the objective intent of the parties, as judged by a reasonable person. Courts focus
on:

 The language used in the contract.

 The actions and circumstances surrounding its formation.
Subjective beliefs or undisclosed intentions of the parties are irrelevant unless expressed in a way that affects the agreement.

11–2 Elements of a Contract

11–2a Requirements of a Valid Contract

A valid contract must meet these criteria:

1. Agreement: Composed of an offer (a promise to perform) and acceptance (a clear assent to the offer).
2. Consideration: Both parties must exchange something of value, such as money, services, or promises.
3. Capacity: Parties must have the legal ability to contract. This excludes minors, mentally incompetent individuals, or those
under the influence of substances.
4. Legality: The contract’s purpose must align with the law and public policy. Agreements for illegal activities, such as gambling
where prohibited, are void.

11–2b Defenses to the Enforceability of a Contract

Even if a contract satisfies the above elements, it may still be unenforceable due to:

1. Lack of Voluntary Consent: If consent was obtained through fraud, duress, undue influence, or misrepresentation, the
contract can be voided.
2. Failure to Meet Required Form: Certain contracts, such as those involving real estate or agreements exceeding a specific
duration (e.g., one year), must be in writing under the Statute of Frauds.
 11–3 Types of Contracts

11–3a Contract Formation

1. Bilateral vs. Unilateral Contracts:

o Bilateral Contracts: These involve a mutual exchange of promises. Both parties commit to perform specific actions, such as
agreeing to sell and purchase goods.
o Unilateral Contracts: These are formed when one party promises something in exchange for another’s performance. For
example, rewards for finding lost items. Performance constitutes acceptance.
 Revocation: Offers for unilateral contracts cannot be revoked once the offeree begins performing, ensuring fairness.
2. Formal vs. Informal Contracts:
o Formal Contracts: These require a specific format, often dictated by statutes. Examples include checks, promissory notes, and
letters of credit.
o Informal Contracts: All other contracts, whether written or oral, provided they meet basic requirements like agreement and
consideration.
3. Express vs. Implied Contracts:
o Express Contracts: Terms are explicitly stated, whether written or verbal.
o Implied Contracts: Formed based on the behavior of the parties. For example, a person who orders and consumes food at a
restaurant implicitly agrees to pay for it.
 Requirements for Implied Contracts:
 Goods or services are provided.
 The recipient has an opportunity to reject but accepts the benefit with an expectation of payment.
o Mixed contracts may include both express and implied terms, such as a written agreement supplemented by customary
practices.

11–3b Contract Performance

Contracts are categorized based on performance:

 Executed Contracts: Fully performed by all parties.

 Executory Contracts: At least one party has not yet fulfilled their obligations.

11–3c Contract Enforceability

1. Voidable Contracts: These are valid but may be voided by one or both parties. Examples include contracts involving minors,
intoxicated individuals, or fraud.
2. Unenforceable Contracts: Valid in essence but rendered unenforceable due to legal defenses, such as not meeting writing
requirements under the Statute of Frauds.
3. Void Contracts: These are not contracts at all. For example, agreements involving illegal purposes or mentally incompetent
parties declared so by the courts.

11–4 Quasi Contracts

Definition

Quasi-contracts are court-imposed obligations designed to prevent unjust enrichment when no actual contract exists. They are
based on fairness rather than strict legalities.

11–4a Limitations on Quasi-Contractual Recovery

Quasi-contractual recovery is unavailable if:

 The benefit was conferred unnecessarily.

 It resulted from misconduct, negligence, or actions that were not equitable.

11–4b When an Actual Contract Exists

 Quasi-contracts cannot override an existing contract. If a contract governs the matter in dispute, remedies must be pursued
through breach of contract claims.

11–5 Interpretation of Contracts

11–5a The Plain Meaning Rule

When a contract’s language is clear and unequivocal, courts enforce it based on its plain terms, avoiding extrinsic evidence.

Ambiguity

A contract is ambiguous if:

1. The intent of the parties is unclear.

2. Terms are missing or incomplete.
3. Provisions are open to multiple interpretations.

Extrinsic Evidence

If ambiguity exists, courts may allow external evidence, such as:

 Testimonies.
 Correspondence between parties.
 Past practices.
If the contract is clear, external evidence is inadmissible.

11–5b Other Rules of Interpretation

1. Rules the Courts Use: Courts aim to interpret contracts fairly and uphold legality and intent. They resolve ambiguities against
the drafting party.
2. Express Terms Given Most Weight: Written, clear terms take precedence over implied or supplementary evidence.

12-1: Elements of Agreement

The fundamental elements that make an agreement legally binding involve certain criteria that must be met for a contract to be
enforceable. The following sections break down the elements of an agreement in detail:

12-1a: Requirements of the Offer

For an agreement to exist, there must be a valid offer. The offer must meet several requirements:

1. Intention: The offeror must have a clear intention to enter into a contract. This intention is judged based on how the offer
would be perceived by an objective reasonable person. Offers made in jest, as a result of social pleasantries, or in casual
settings may lack the requisite intention to create a binding contract.
2. Situations in Which Intent May Be Lacking (Agreements to Agree): In cases where parties are only discussing terms or
intentions without a clear commitment to enter into a contract, no valid offer exists. For example, "Let’s agree on terms later"
would not constitute an offer because there is no final agreement.
3. Definiteness of Terms: An offer must contain definite terms, meaning it must be clear enough for the parties to understand
their obligations. Vague or ambiguous terms could prevent an offer from forming a binding contract.
4. Communication: The offer must be communicated to the offeree, who must have knowledge of the offer for it to be effective.
An offer that is not communicated cannot result in acceptance.

12-1b: Termination of the Offer

 The offeror has the right to withdraw an offer before it is accepted. Offers can also be terminated by action or law. The
following points explain how offers can be terminated:

1. Termination by Action of the Parties:

o Revocation: The offeror can withdraw the offer anytime before it is accepted. The revocation must be communicated to the
offeree.
o Irrevocable Offers: In some situations, offers may become irrevocable, typically when the offeree has already begun
performance or where a contract is made under an option agreement.
o Rejection: If the offeree refuses the offer, it is terminated.
o Counteroffer: When the offeree proposes new terms, it terminates the original offer and becomes a new offer.
2. Termination by Operation of Law:
o Lapse of Time: Offers have an expiration date. If the offer is not accepted by the time specified, it automatically expires.
o Destruction, Death, or Incompetence: If the subject matter of the offer is destroyed, or if either party dies or becomes legally
incompetent before acceptance, the offer terminates.
o Supervening Illegality: If a law is enacted that makes the contract illegal after the offer is made, the offer is automatically
terminated.

12-1c: Acceptance

Acceptance is the offeree’s expression of agreement to the terms of the offer. There are specific rules governing how
acceptance occurs:

1. Unequivocal Acceptance: The acceptance must be clear and unambiguous. If the acceptance varies from the terms of the
offer, it may be considered a counteroffer.
2. Silence as Acceptance: Silence generally does not constitute acceptance. However, if the offeree has a duty to respond or has
previously indicated that silence will constitute acceptance, it may be binding.
3. Communication of Acceptance: The offeree must communicate acceptance to the offeror unless the offer specifies otherwise.
For example, an offeror may specify that acceptance occurs upon performance (such as beginning to work on a task).
4. Mode and Timeliness of Acceptance:
o The Mailbox Rule: Acceptance is generally effective once it is sent, not when it is received by the offeror. This rule applies to
mailed communications.
o Authorized Means of Acceptance: If the offer specifies a method of acceptance (e.g., email, phone call), the acceptance must
follow that method to be valid.
o Substitute Method of Acceptance: If an offeree uses an unauthorized means of acceptance but the offeror accepts it, the
agreement may still be binding.

12-2: Agreement in E-Contracts

The increasing role of electronic transactions and agreements has given rise to the need for special rules concerning e-
contracts.

12-2a: Online Offers

1. Displaying the Offer: An online offer is typically presented on a website or app. To be enforceable, it must include clear
terms that users can access, including essential information like price, delivery terms, and warranties.
2. Provisions to Include: An online contract may contain terms such as:
o The subject matter of the contract.
o Payment terms.
o Delivery obligations.
o Warranties or disclaimers.
o Dispute resolution provisions.
3. Dispute-Settlement Provisions:
o Forum-Selection Clause: Specifies where disputes will be litigated or arbitrated.
o Choice-of-Law Clause: Specifies which jurisdiction’s laws will apply to the contract.
 12-2b: Online Acceptances

1. Click-On Agreements: This is when users accept terms and conditions by clicking an "I Agree" button or similar action on a
website. It is a valid form of acceptance in e-contracts if the user has had adequate notice of the terms.
2. Shrink-Wrap Agreements: These agreements are typically found in packaged goods like software. By opening the package
and using the product, the buyer accepts the terms.
o Shrink-Wrap Agreements and Enforceable Contract Terms: Courts may enforce shrink-wrap terms if the buyer had an
opportunity to review them and implicitly accepted them by using the product.
o Shrink-Wrap Terms That May Not Be Enforced: Some terms, such as arbitration clauses or forum-selection clauses, may
be unenforceable if the buyer had no prior notice or opportunity to accept them.
3. Browse-Wrap Terms: These terms appear on a website but do not require users to explicitly accept them. For instance, users
may see links to terms and conditions at the bottom of the page, and using the site constitutes acceptance. Courts often find
these unenforceable because users may not be aware of the terms.
4. Partnering Agreements: These agreements are between parties who frequently do business electronically and establish pre-
agreed terms for all future transactions, reducing the likelihood of disputes.

12-3: U.S. Laws Affecting E-Contracts

Several U.S. laws govern e-contracts, providing a framework for their validity and enforcement.

12-3a: The E-SIGN Act

The Electronic Signatures in Global and National Commerce (E-SIGN) Act allows electronic signatures to hold the same legal
weight as traditional signatures. The E-SIGN Act:

 Provides that contracts, records, and signatures cannot be denied legal effect solely because they are in electronic form.
 Requires that the parties agree to use electronic signatures.
 Excludes certain documents (e.g., wills, prenuptial agreements, court papers) from its scope.

12-3b: The UETA

The Uniform Electronic Transactions Act (UETA) establishes that electronic signatures and records are as valid as their paper
counterparts. Key aspects include:

 The Scope and Applicability of the UETA: It applies to electronic records and signatures in business, commercial, or
governmental transactions. It excludes wills and certain other legal documents.
 The E-SIGN Act and the UETA: If a state adopts the UETA without modification, the E-SIGN Act does not preempt it.
However, if the UETA is modified, the federal law takes precedence.

Highlights of the UETA:

1. Attribution of Signatures: An electronic record or signature can be attributed to a person if it is executed or adopted by that
person. For example, typing one’s name at the end of an email is considered a signature.
2. The Effect of Errors: If a security procedure is in place and one party fails to detect an error, they may be able to avoid the
effect of the error.
3. Timing: An electronic record is considered sent when it leaves the sender's control or enters the recipient's processing system.

12-4: International Treaties Affecting E-Contracts

As e-commerce expands globally, international treaties are evolving to address cross-border electronic transactions.

1. United Nations Convention on the Use of Electronic Communications in International Contracts: This treaty aims to
improve commercial certainty by:
o Determining an Internet user's location for legal purposes.
o Establishing standards for equating electronic communications with paper documents.
o Recognizing e-signatures as equivalent to traditional signatures.
2. The Hague Convention on the Choice of Court Agreements: Although not directly addressing e-commerce, this treaty
clarifies jurisdictional issues and the recognition of judgments, providing greater legal certainty for both offline and online
international transactions.

Chapter 13

Consideration
Consideration is a fundamental element in contract law, referring to something of value exchanged between parties in forming
a binding agreement. It ensures that each party is either providing or promising something in return for the other party’s
actions or promises. Without consideration, a contract is generally unenforceable.

Elements of Consideration

For consideration to be valid, it must consist of a bargained-for exchange between the parties, resulting in a legal detriment to
the promisee or a benefit to the promisor. The two primary elements include:

 Legal Detriment/Benefit: The promisee must give up something of value or engage in a behavior they are not otherwise
obligated to perform.
 Bargained-for Exchange: There must be a reciprocal exchange where each party gains something from the agreement.

Example Analysis: In Problem 13-1, Martin’s attempt to increase the price per cabinet after already agreeing to a specific
price demonstrates the concept of a preexisting duty. Here, Martin cannot legally collect the additional $100 because they were
already obligated to deliver the cabinets at $40 each. No new consideration was provided by Martin, making the modification
unenforceable.

Agreements That Lack Consideration

Certain types of agreements are unenforceable due to a lack of consideration:

 Preexisting Duty Rule: A promise to do something that a party is already legally obligated to do does not constitute valid
consideration.
 Past Consideration: An act performed before a promise is made cannot be used as consideration for that promise.

Example Analysis: In Problem 13-2, Daniel’s father, Fred, promised to pay $500 to the elderly couple after they had already
provided food and shelter to Daniel. Since the services were rendered before the promise was made, they constitute past
consideration and do not provide a legal basis for an enforceable contract.

Case 13-4 Analysis: In the Sharabianlou case, the buyers sought rescission of a contract for the purchase of a property after
discovering an environmental issue that devalued the property. Rescission may be allowed where significant new information
impacts the value of the transaction, suggesting a substantial change that was not anticipated when the contract was formed.

Settlement of Claims

Settlement agreements involve resolving disputes where the terms and conditions are mutually agreed upon to avoid litigation.
The resolution is often tied to the concept of accord and satisfaction, where a debtor and creditor agree to settle a disputed debt
for a specific amount, which the creditor accepts as full settlement.

Case 13-3 Analysis: In the case of Merrick and Maine Wild Blueberry Co., a dispute over payment arose, but Merrick
accepted a check marked “final settlement.” By cashing the check, Merrick implicitly agreed to the terms, resulting in an
 accord and satisfaction. The court would likely rule against Merrick in any further claims for additional payment due to his
acceptance of the settlement offer.

Exceptions to the Consideration Requirement

There are specific situations where consideration may not be required to enforce a promise:

 Promissory Estoppel: When one party relies on a promise to their detriment, even if no formal consideration exists, the
promise may still be enforced.
 Partial Payments and Acknowledgment: In certain jurisdictions, partial payments on a debt can reset the statute of
limitations, as seen in Problem 13-5. Here, Saltzman's acknowledgment of the debt through partial payments allowed Kranzler
to bring a claim despite the elapsed time.

Example Analysis: In Problem 13-5, Saltzman made partial payments, which reset the statute of limitations for the debt,
allowing Kranzler to sue for the outstanding amount. Kranzler does not need new consideration because the partial payment
acts as an acknowledgment of the debt.

Spotlight on Consideration and Employment Agreements

Case 13-6 Analysis: In the employment context, mutual promises are required to ensure a contract's enforceability. For
example, Sniezek's agreement with the Kansas City Chiefs to arbitrate disputes lacked mutual consideration, as the Chiefs did
not provide any reciprocal promise. A valid arbitration agreement requires both parties to give up something of value, which
was missing in this case, making the arbitration clause potentially unenforceable.

Case 13-7 Analysis: In the dispute between Citynet, LLC, and Ray Toney, the employee incentive plan was deemed to have
vested rights, which implies that the plan constituted a contract. Toney’s claim for his vested balance was based on the benefit
promised through his continued employment, serving as consideration. Even if Citynet attempted to limit redemptions, the
promise of a vested balance upon employment termination created enforceable rights for Toney.

Spotlight on Nike—Case 13.3 Already, LLC v. Nike, Inc.

This case illustrates how businesses handle disputes involving contracts and settlement offers. The focus is on when an
agreement can be binding and what constitutes acceptance of terms in a dispute resolution. It aligns with the principles of
settlement of claims where an acceptance of a settlement offer, explicitly or implicitly, can prevent further claims.

Case 13-8 Analysis: Agreements That Lack Consideration

In the Arkansas-Missouri Forest Products, LLC v. Lerner case, the court considered whether the “Telephone Deal” was
supported by valid consideration. Garnett’s promise to forgo ownership interest in BCR in exchange for a future 30% stake in
Midwest projects constituted a legal right that was given up. This exchange suggests a bargained-for agreement, implying that
there was sufficient consideration to support the promise.

A Question of Ethics—The IDDR Approach and Illusory Promises

Case 13-9 Analysis: The IDDR approach (Inquiry, Discussion, Decision, Review) can be applied to evaluate UniFirst’s
handling of Caldwell's medical needs:

 Inquiry: Analyze the circumstances of Caldwell’s injury and UniFirst’s actions in response to medical recommendations.
 Discussion: Consider the fairness of UniFirst’s refusal to accommodate Caldwell’s medical needs and the imbalance in the
arbitration agreement.
 Decision: Review whether UniFirst’s actions align with ethical standards, especially concerning fairness and employee
welfare.
 Review: Assess whether the injunction provision in the arbitration agreement creates an illusory promise, as it only allows
UniFirst to bypass arbitration without showing harm, leading to the court's refusal to enforce arbitration due to the lack of
mutuality.

This analysis highlights the importance of fair and reciprocal agreements in both employment and contract law, emphasizing
the need for genuine consideration to create enforceable and ethical agreements.

14–1 Contractual Capacity

14–1a Minors

· Disaffirmance: Minors, typically defined as individuals under the age of 18, possess a unique right known as
disaffirmance, which allows them to void contracts at their discretion. This legal protection is grounded in the understanding
that minors often lack the experience and maturity necessary to make informed decisions regarding contractual obligations.
Consequently, any contract entered into by a minor can be disaffirmed either explicitly or implicitly, and this right can be
exercised during their minority or within a reasonable time after reaching the age of majority. The ability to disaffirm serves to
protect minors from being bound by agreements that they may not fully comprehend or that may exploit their inexperience.

· Exceptions to a Minor’s Right to Disaffirm: Despite the broad rights afforded to minors, there are notable
exceptions that limit their ability to disaffirm contracts. Specifically, minors cannot disaffirm contracts that are for necessities,
such as food, clothing, medical care, and shelter, as these agreements are deemed essential for their welfare. Additionally,
contracts ratified by minors upon reaching the age of majority become binding and cannot be disaffirmed thereafter. Court-
approved contracts, such as those involving the sale of property or agreements for education, are also exempt from
disaffirmance to ensure the minor's best interests are upheld.

· Ratification: Upon reaching the age of majority, a minor has the option to ratify or affirm contracts made during
their minority. Ratification can occur through explicit statements or actions that indicate an intention to be bound by the
contract terms. Once ratified, the contract becomes legally enforceable, and the minor relinquishes their right to disaffirm. This
principle underscores the importance of individual agency and responsibility as minors transition into adulthood.

· Parents’ Liability: Generally, parents are not held liable for contracts entered into by their minor children, reflecting
the legal principle that minors should be shielded from the full weight of contractual obligations. However, there are
exceptions; parents may be liable for contracts related to necessities or if they have co-signed or guaranteed the contract.
Additionally, parents may be held accountable for the tortious conduct of their minor children, especially in cases of
negligence or wrongful acts.

14–1b Intoxication

 Contracts entered into by individuals who are intoxicated may be deemed voidable if the intoxication level impairs their ability
to comprehend the nature and consequences of the agreement. Courts assess the degree of intoxication to determine whether
the individual could understand the contractual terms at the time of formation. If the intoxicated party later seeks to void the
contract, they must demonstrate that their intoxication prevented them from understanding the contract. Importantly, this
principle does not apply to situations where a party voluntarily intoxicates themselves; in such cases, the intoxicated party may
be held to the contract terms. Furthermore, once the intoxicated individual has regained sobriety, they must act promptly to
void the contract, typically by returning any benefits received.

14–1c Mental Incompetence

· When the Contract Will Be Void: If a party is declared legally incompetent by a court, all contracts they enter into
are considered void from the outset. This includes individuals who have been adjudicated as mentally incompetent due to
mental illness, developmental disabilities, or severe cognitive impairments. The void nature of such contracts means that they
have no legal effect, and neither party can enforce any obligations under the agreement.

· When the Contract Will Be Voidable: Contracts made by individuals who are mentally incompetent but have not
been declared so by a court can be voidable at the option of the incompetent party. This means that the mentally incompetent
individual has the right to affirm or reject the contract based on their ability to understand its nature and consequences at the
time of formation. If they choose to void the contract, they must return any benefits received.
· When the Contract Will Be Valid: If a mentally incompetent individual possesses sufficient mental capacity at the
time of entering the contract, the agreement is considered valid and enforceable. Courts evaluate the individual's mental state,
focusing on their ability to understand the terms and consequences of the contract. This nuanced understanding of mental
competence ensures that individuals who are capable of engaging in contractual relationships are afforded the legal protection
they need.

14–2 Legality

14–2a Contracts Contrary to Statute

· Contracts to Commit a Crime: Any agreement that involves the commission of a crime is inherently illegal and
unenforceable. This includes contracts that directly facilitate unlawful activities, such as drug trafficking or robbery, and
contracts that require parties to engage in behavior that violates local, state, or federal laws. Such agreements are void ab initio,
meaning they are treated as if they never existed.

· Usury: Contracts that impose interest rates exceeding the legal limits set by state law are considered usurious and are
unenforceable. Usury laws exist to protect borrowers from predatory lending practices and ensure fair lending conditions. If a
loan is deemed usurious, the lender may lose their right to collect interest altogether and may only recover the principal
amount.

· Gambling: Contracts based on gambling activities may be illegal, depending on the jurisdiction and the specific
circumstances of the gambling arrangement. States have varying laws regarding the legality of gambling, and contracts related
to illegal gambling or that violate state-specific gaming regulations are unenforceable.

· Licensing Statutes: Contracts requiring a license for performance—such as contracts for professional services by
doctors, lawyers, or real estate agents—are unenforceable if one party lacks the necessary licensing. This legal framework
ensures that only qualified individuals engage in activities that require specialized knowledge and skills, protecting the public
from unqualified practitioners.

14–2b Contracts Contrary to Public Policy

· Contracts in Restraint of Trade: Agreements that impose unreasonable restrictions on trade or commerce are
generally considered void. This includes contracts that create monopolies or significantly limit competition within a market.
Courts scrutinize such agreements to ensure that they do not unfairly limit the ability of individuals or businesses to engage
freely in economic activities.

· Unconscionable Contracts or Clauses: Contracts that are excessively unfair or oppressive to one party may be
deemed unconscionable and thus unenforceable. Courts look for substantive unconscionability (unfair contract terms) and
procedural unconscionability (unfair bargaining processes) to determine whether a contract should be invalidated due to its
oppressive nature.

· Exculpatory Clauses: Clauses that relieve a party from liability for negligence or wrongful acts may be
unenforceable if found to contravene public policy. Courts typically disfavor such clauses in contexts involving essential
services or safety, where a party should not be allowed to escape responsibility for harm caused through negligence.

14–2c Effect of Illegality

· Justifiable Ignorance of the Facts: In certain cases, a party who is unaware of the illegal nature of a contract may
recover benefits conferred under a partially executed agreement. This principle applies to situations where one party acted in
good faith without knowledge of the contract's illegality.

· Members of Protected Classes: Individuals belonging to protected classes may be permitted to enforce contracts
even when the other party cannot due to the contract’s illegal nature. This legal protection helps safeguard the rights of
vulnerable populations who may be unfairly disadvantaged by the contract’s illegality.

· Withdrawal from an Illegal Agreement: If one party has not performed under an illegal contract, they may
withdraw from the agreement and recover any benefits conferred. This right protects parties who seek to extricate themselves
from a legal arrangement that is illegal or contrary to public policy.
 · Contract Illegal through Fraud, Duress, or Undue Influence: If a party enters into an illegal contract due to
fraud, duress, or undue influence, they may have the right to recover benefits or seek redress. This provision ensures that
parties who were coerced or misled into illegal agreements can seek justice and protection from exploitative practices.

· Severable, or Divisible, Contracts: Courts may enforce the legal portions of a divisible contract while invalidating
the illegal portions, provided that the illegal terms do not undermine the agreement's essence. This allows parties to benefit
from enforceable parts of the contract while maintaining a clear distinction between lawful and unlawful provisions.

15–1 Mistakes

 15–1a Unilateral Mistakes of Fact: A unilateral mistake occurs when only one party is mistaken about a material fact in a
contract. Generally, the mistaken party is bound by the contract, as they cannot avoid the obligations merely due to their own
error. However, exceptions exist: if the non-mistaken party knew or should have known about the mistake, or if the mistake
arose from a simple mathematical error that was made without gross negligence, the mistaken party may have grounds to
rescind the contract. This principle underscores the importance of diligence and transparency in contractual negotiations.
 15–1b Bilateral (Mutual) Mistakes of Fact: Bilateral or mutual mistakes occur when both parties share a misunderstanding
regarding a material fact that significantly impacts the agreement. In such cases, either party has the right to rescind the
contract because the mutual error undermines the foundational agreement. However, if the mistake pertains to the value or
quality of the subject matter, either party can enforce the contract. This means that while the law recognizes the right to rescind
for mutual mistakes, it also protects parties who, despite a misunderstanding, have acted in good faith regarding the terms of
their agreement. Furthermore, when parties reasonably interpret a term differently, courts may allow for rescission based on
the misinterpretation of that term.
 15–1c Mistakes of Value: Mistakes concerning the value of the subject matter—such as believing an item is worth more or
less than it actually is—generally do not allow either party to rescind the contract. The rationale is that both parties bear the
risk of misjudging value, and such mistakes do not affect the enforceability of the agreement. This principle reinforces the idea
that parties must conduct due diligence and bear responsibility for their valuations in contractual transactions.

15–2 Fraudulent Misrepresentation

 15–2a Misrepresentation Has Occurred: Fraudulent misrepresentation involves a false statement regarding a material fact
that induces the other party to enter into a contract. This misrepresentation can manifest in several forms:
o Statements of Opinion: Generally, expressions of opinion do not constitute misrepresentation unless the speaker holds a
position of trust or expertise that creates a duty to speak truthfully.
o Misrepresentation of Law: Generally, misrepresentations concerning legal matters are not actionable, as parties are expected
to understand the law. However, if one party has superior knowledge of the law and misrepresents it, they may be liable.
o Misrepresentation by Silence: Failing to disclose pertinent information can also be grounds for misrepresentation if the
parties are in a fiduciary relationship or if disclosure is mandated by law.
 15–2b Intent to Deceive: For a fraudulent misrepresentation claim to succeed, there must be an intent to deceive the other
party:
o Innocent Misrepresentation: This occurs when the false statement is made without intent to deceive. While the party may not
be liable for damages, the contract may still be voidable.
o Negligent Misrepresentation: This arises when a party makes a statement they believe to be true without having reasonable
grounds for that belief, thus breaching a duty of care to the other party.
 15–2c Justifiable Reliance on the Misrepresentation: The innocent party must show that they justifiably relied on the
misrepresentation in entering the contract. This reliance must be reasonable under the circumstances; if the innocent party had
knowledge of the truth or should have discovered it through reasonable investigation, they may not be able to claim damages.
 15–2d Injury to the Innocent Party: To collect damages, the innocent party must demonstrate that they suffered an injury as
a direct result of the fraudulent misrepresentation. This injury can manifest as a financial loss or other detriment directly linked
to the reliance on the misrepresentation.

15–3 Undue Influence

 15–3a One Party Dominates the Other: Undue influence occurs in situations where one party exerts excessive pressure on
another, effectively undermining the latter’s free will and ability to make decisions independently. This typically arises in
special relationships, such as between a caregiver and the elderly, where one party may be vulnerable due to dependence or
emotional factors.
 15–3b Presumption of Undue Influence in Certain Situations: In certain scenarios, courts may presume that undue
influence occurred, particularly when a relationship is characterized by trust and reliance. For example, transactions involving
fiduciaries, such as attorneys and clients, or between family members, often fall under this presumption, requiring the
dominant party to prove that the agreement was fair and voluntary.
 15–4 Duress

 15–4a The Threatened Act Must Be Wrongful or Illegal: Duress is characterized by the use of threats to compel a party to
enter a contract against their will. For duress to be actionable, the threatened act must be wrongful or illegal; simply making a
threat without the element of wrongdoing may not constitute duress.
 15–4b Economic Duress: Economic duress arises when one party uses economic pressure to coerce another party into a
contract. For example, threatening to withhold essential services or goods unless a contract is signed may be considered
economic duress, allowing the coerced party to rescind the contract.

15–5 Adhesion Contracts and Unconscionability

 15–5a Standard-Form Contracts: Adhesion contracts, often referred to as standard-form contracts, are typically drafted by
one party (the dominant party) and presented to the other party on a "take-it-or-leave-it" basis. These contracts often contain
non-negotiable terms, resulting in an imbalance of bargaining power.
 15–5b Unconscionability and the Courts: Courts may deem a contract unconscionable if it is so one-sided that it shocks the
conscience, reflecting a gross imbalance in bargaining power. Unconscionability may apply to adhesion contracts, leading to
potential rescission or modification of the contract terms. Courts will consider both procedural unconscionability (how the
contract was formed) and substantive unconscionability (the actual terms of the contract) in their evaluation.

Breach of Contract and Remedies

19–1 Damages

· Compensatory Damages: These are intended to compensate the nonbreaching party for losses directly resulting
from the breach. They are designed to make the injured party "whole" again, covering both direct and consequential losses.

· Consequential Damages: These damages arise from the special circumstances of the case and are not directly
caused by the breach but are a consequence of it. For example, loss of profits from a breach affecting a business deal can be
classified as consequential damages.

· Punitive Damages: Unlike compensatory damages, punitive damages are awarded not to compensate for loss but to
punish the breaching party for egregious conduct and deter future misconduct. Courts award them rarely in contract cases.

· Nominal Damages: These are awarded when a breach has occurred, but the nonbreaching party has not incurred a
quantifiable loss. They serve to recognize that a breach occurred, even if no actual damage is suffered.

19–1b Mitigation of Damages

· Rental Agreements: Tenants are generally required to mitigate damages by seeking new tenants when a lease is
breached, ensuring that landlords do not suffer excessive losses.

· Employment Contracts: Employees who are wrongfully terminated must also make reasonable efforts to find new
employment, which minimizes the damages recoverable from the employer.

19–1c Liquidated Damages versus Penalties

· Enforceability: Liquidated damages provisions are enforceable if they meet specific criteria: they must be a
reasonable estimate of potential damages at the time the contract was made and applicable in cases where damages are hard to
quantify. In contrast, penalty clauses intended to punish the breaching party are unenforceable.

· Common Uses of Liquidated Damage Provisions: These provisions are often found in construction contracts,
employment agreements, and real estate contracts, where the parties anticipate that damages from a breach may be difficult to
ascertain accurately.

19–2 Equitable Remedies

· 19–2a Rescission and Restitution

 o Restitution: This remedy restores the injured party to their pre-contract position, typically involving the return of any
benefits conferred. It can be sought alongside rescission or as a standalone remedy when a contract is unenforceable.

o Restitution Is Not Limited to Rescission Cases: It can be sought even when rescission is not applicable, such as in quasi-
contract situations where one party confers a benefit upon another.

· 19–2b Specific Performance

o Sale of Land: Courts are likely to order specific performance in real estate transactions due to the unique nature of land, as
monetary damages may not suffice.

o Contracts for Personal Services: Specific performance is typically not granted for personal-service contracts, as it may
amount to involuntary servitude and involve complex issues of personal judgment and talent.

· 19–2c Reformation

o Fraud or Mutual Mistake Is Present: Courts may reform contracts to reflect the true intentions of the parties when fraud
or a mutual mistake (e.g., clerical error) is evident.

o Written Contract Incorrectly States the Parties’ Oral Agreement: When the written contract does not accurately reflect
the parties' oral agreement, courts can reform it based on the actual terms discussed.

o Covenants Not to Compete: Courts may reform restrictive covenants to ensure that they are reasonable in scope and
duration, thereby allowing enforcement that protects legitimate business interests.

19–3 Recovery Based on Quasi Contract

· 19–3a When Quasi Contract Is Used: Quasi contracts can be applied when there is no actual contract, allowing
recovery for benefits conferred under unjust circumstances. This remedy often arises when a party has partially performed
under an unenforceable contract.

· 19–3b The Requirements of Quasi Contract: To recover under a quasi-contract, the claimant must demonstrate
that:

1. A benefit was conferred on the other party.

2. The benefit was conferred with the expectation of payment.
3. The claimant did not act as a volunteer.
4. The other party would be unjustly enriched if they retained the benefit without compensating the claimant.

19–4 Waiver of Breach

· 19–4a Consequences of a Waiver of Breach: When a party waives a breach, they relinquish the right to take action
on that breach, effectively treating the contract as if the breach never occurred. However, this waiver applies only to the
specific matter waived.

· 19–4b Reasons for Waiving a Breach: Businesspersons may waive breaches to salvage benefits from the contract,
accepting partial or delayed performance to maintain the contractual relationship.

· 19–4c Waiver of Breach and Subsequent Breaches: A waiver does not automatically apply to future or unrelated
breaches. A pattern of waiving minor breaches may suggest a change in contract performance expectations, but the waiving
party can still pursue action for subsequent, unrelated breaches.

19–5 Contract Provisions Limiting Remedies

· 19–5a The UCC Allows Sales Contracts to Limit Remedies: The Uniform Commercial Code permits parties in
sales contracts to limit remedies, including specific provisions for the repair or replacement of goods, providing flexibility in
commercial transactions.
 · 19–5b Enforceability of Limitation-of-Liability Clauses: The enforceability of these clauses depends on the nature
of the breach they address. Clauses that attempt to exclude liability for fraud or illegal acts are generally not enforceable.
However, in cases of negligence, such clauses may be upheld if the parties have equal bargaining power and the limitations are
reasonable.

LLC

Chapter 38: Limited Liability Companies and Special Business Forms

38–1: The Limited Liability Company (LLC)

The Limited Liability Company (LLC) is a flexible and popular business structure that combines the advantages of
corporations and partnerships. LLCs are formed to provide business owners with limited liability, flexible management, and
tax benefits. This chapter explores the nature, formation, advantages, and disadvantages of the LLC.

38–1a: The Nature of the LLC

1. Limited Liability of Members:

o One of the main attractions of an LLC is the limited liability protection it offers to its members (owners). LLC members are
typically not personally responsible for the debts, obligations, or liabilities of the LLC. This protection shields personal assets
from creditors unless a member has personally guaranteed the business's debts or committed fraud.
2. When Liability May Be Imposed:
o While members of an LLC enjoy limited liability, certain circumstances may lead to personal liability, such as:
 Piercing the Corporate Veil: Courts may "pierce the veil" and hold members personally liable if the LLC is used for
fraudulent purposes, there is commingling of personal and business assets, or the LLC fails to follow formalities required by
law.
 Personal Guarantees: Members who personally guarantee business loans may be held liable.
 Misconduct or Fraud: Members can be held liable if they engage in wrongful conduct or illegal activities.
3. Other Similarities to Corporations:
o LLCs share several characteristics with corporations, such as:
 Legal Entity Status: An LLC is a distinct legal entity, separate from its members. It can enter contracts, sue, and be sued.
 Continuity: The LLC does not dissolve when a member leaves or dies, ensuring continuity of business operations.
 Property Ownership: LLCs can own property and incur debt in their own name.
 Transferability of Interest: Ownership interests in an LLC can be transferred, though this may be subject to restrictions in the
operating agreement.

38–1b: The Formation of the LLC

1. Articles of Organization:
o To form an LLC, members must file Articles of Organization with the Secretary of State or other relevant state authorities.
These documents typically include:
 The LLC's name (must include "LLC" or "Limited Liability Company").
 The LLC's principal business address.
 The name and address of the LLC's registered agent (the person designated to receive legal notices).
 The names of the members or managers (depending on the state).
2. Preformation Contracts:
o Prior to the LLC's formal creation, potential members may enter into preformation contracts to make arrangements for the
LLC's activities. These agreements may include negotiations for leases, supplies, or other necessary business operations.
o Once the LLC is formed, it may adopt these contracts, effectively making them the LLC's obligations.

38–1c: Jurisdictional Requirements

 LLCs must comply with the jurisdictional rules of the state in which they are formed. This impacts where the LLC can operate
and litigate.
o Impact on Federal Jurisdiction: The LLC is considered a "citizen" of each state where its members reside. This can affect its
ability to invoke federal diversity jurisdiction, as the LLC’s citizenship may align with that of opposing parties, preventing
access to federal courts.

38–1d: Advantages of the LLC

1. Limited Liability:
o One of the main reasons for choosing an LLC is the protection of personal assets from the company's debts and liabilities.
Members' liability is limited to their capital contributions, similar to shareholders in a corporation.
2. Flexibility in Taxation:
o LLCs offer tax flexibility. By default, LLCs are taxed as pass-through entities, meaning the profits and losses pass through to
the members' individual tax returns, avoiding double taxation that corporations face. However, LLCs can choose to be taxed as
a corporation, if that structure is more beneficial for reinvestment or other business purposes.
3. Management Flexibility:
o LLCs offer flexibility in how they are managed. They can be:
 Member-Managed: All members are involved in the daily management of the LLC.
 Manager-Managed: Members elect managers (who may be non-members) to handle the LLC’s operations, allowing members
to take a more passive role.
4. Foreign Investors:
o LLCs can accept foreign members or investors, which facilitates international business ventures and investments. This makes
LLCs attractive for global collaborations.

38–1e: Disadvantages of the LLC

1. Varying State Laws:

o LLCs are governed by state laws, and these laws vary widely across states. This can lead to complexities and inconsistencies in
the treatment of LLCs, especially for businesses operating in multiple states.
2. Limited Case Law:
o As LLCs are relatively new compared to corporations and partnerships, there is less established legal precedent for resolving
disputes, which can lead to uncertainty in legal outcomes.

38–2: LLC Management and Operation

 38–2a: Management of an LLC

 Member-Managed LLC:
o In a member-managed LLC, all members are involved in the day-to-day management of the company. Each member has an
equal right to participate in business decisions, unless the operating agreement specifies otherwise.
 Manager-Managed LLC:
o In this structure, members appoint one or more managers to oversee the operations. These managers may or may not be
members. This setup is useful for LLCs with passive investors or large-scale operations.

38–2b: Fiduciary Duties

1. Duty of Loyalty:
o LLC members and managers must act in the best interests of the LLC, avoiding conflicts of interest. They must not use the
LLC’s resources for personal gain, and they must disclose any potential conflicts that could harm the LLC.
2. Duty of Care:
o Members and managers must make decisions with the care, diligence, and skill that a reasonable person would use. Gross
negligence or reckless decisions can lead to liability.

38–2c: The LLC Operating Agreement

 The operating agreement is an essential document that governs the internal affairs of the LLC. It outlines:
o Membership Rights: How members join or exit the LLC and how ownership is transferred.
o Profit and Loss Allocation: How profits and losses are divided among members.
o Management Structure: Whether the LLC is member-managed or manager-managed and how decisions are made.
o Dispute Resolution: Procedures for resolving conflicts among members.
o Dissolution: Terms under which the LLC may be dissolved and how assets will be distributed upon dissolution.

38–3: Dissociation and Dissolution of an LLC

38–3a: Effects of Dissociation

 Dissociation refers to when a member withdraws from an LLC, either voluntarily, by expulsion, or due to death or incapacity.
Dissociation ends the member's ability to participate in management and may trigger the buyout of their interest. The LLC may
continue operating unless otherwise specified.

38–3c: Winding Up

 After dissolution, the LLC must go through the process of winding up, which involves:
o Collecting Assets: Gathering any outstanding accounts receivable and property.
o Paying Debts: Settling debts and liabilities.
o Distributing Remaining Assets: Distributing any remaining assets to members according to the operating agreement or
ownership percentages.
 38–4: Special Business Forms

38–4a: Joint Venture

 Similarities to Partnerships:
o A joint venture is a temporary collaboration between two or more entities, often for a specific project or purpose, resembling a
partnership.
 Liability and Management Rights:
o Joint venturers share liabilities and generally have equal rights in managing the venture unless otherwise specified in the joint
venture agreement.
 Authority to Enter into Contracts:
o Joint ventures may enter into contracts, bind each other, and assume joint responsibility for obligations.

38–4b: Syndicate

 A syndicate is a group of individuals or entities that pool resources to finance large projects, such as real estate developments,
oil explorations, or large investments. Syndicates are typically temporary and dissolve once the project is completed.

38–4c: Joint Stock Company

 A joint stock company is a hybrid business form that combines characteristics of both partnerships and corporations. It is not
a perpetual entity like a corporation but shares the limited liability aspect and the ability to issue shares of stock to raise capital.

38–4d: Business Trust

 A business trust involves a trust structure where trustees manage the assets for the benefit of beneficiaries. This structure is
commonly used for holding and managing large investments in real estate or other assets.

38–4e: Cooperative

1. Incorporated Co-ops:
o An incorporated cooperative is a legal entity where members pool resources for mutual benefit. It operates on democratic
principles, with members having equal voting rights regardless of their financial contributions.
2. Unincorporated Co-ops:
o Unincorporated co-ops operate similarly to incorporated co-ops but lack legal status as separate entities. They are typically
governed by agreements among the members and are more informal.

Chapter 39: Corporate Formation and Financing

39–1 The Nature and Classification of Corporations

 Corporate Personnel:
Corporations consist of shareholders, directors, and officers. Shareholders own the corporation but do not manage it.
Management responsibilities rest with the board of directors and officers.
 Limited Liability of Shareholders:
Shareholders’ liability is typically limited to the extent of their investments. They are generally not personally liable for
corporate debts or obligations.
 Corporate Earnings and Taxation:
o Corporate Taxation: Corporations pay taxes on their profits, and shareholders may also pay taxes on dividends (double
taxation).
o Holding Companies: These are corporations formed to hold shares in another company, often located in tax-friendly
jurisdictions to minimize tax liabilities.
 Criminal Acts:
Corporations can be held criminally liable for the actions of their agents and employees if such actions are within the scope of
their duties.
 Tort Liability:
Corporations are liable for torts committed by their employees if the actions occur within the scope of employment.
 Classification of Corporations:
o Domestic, Foreign, and Alien Corporations:
A corporation is domestic in the state where it is incorporated, foreign in other states, and alien if formed outside the United
States.
o Public and Private Corporations:
Public corporations are formed by the government for public purposes, while private corporations are owned by private
individuals for profit or nonprofit purposes.
o Nonprofit Corporations:
These corporations operate without a profit motive, often for charitable or educational purposes.
o Close Corporations:
Shares are held by a small group, often family members, and there is typically no public trading of shares.
 Management of Close Corporations: Managed informally without strict adherence to corporate formalities.
 Transfer of Shares: Share transfers are often restricted to maintain control within the group.
 Misappropriation of Close Corporation Funds: Courts scrutinize personal use of corporate funds or assets to prevent abuse.
o S Corporations:
 Important Requirements: Limited to 100 shareholders who must be individuals, estates, or certain trusts, and all must be
U.S. residents.
 Effect of S Election: Offers pass-through taxation, avoiding double taxation while retaining corporate liability protection.
o Professional Corporations:
Formed by professionals (e.g., doctors, lawyers) who provide specific services.
o Benefit Corporations:
For-profit corporations with the goal of generating public benefits alongside profits. These corporations must consider social
and environmental impacts in decision-making.

39–2 Corporate Formation and Powers

 Promotional Activities:
Before incorporation, promoters undertake activities to organize and attract investors for the corporation. They may also enter
contracts on behalf of the future corporation.
 Incorporation Procedures:
o Select the State of Incorporation: Corporations often choose states with favorable corporate laws (e.g., Delaware).
o Secure an Appropriate Corporate Name: The name must comply with state laws and avoid duplication or infringement on
existing trademarks.
o Prepare the Articles of Incorporation: Essential document stating the corporation’s name, purpose, duration, number of
shares, and registered agent.
o File the Articles with the State: Filing with the secretary of state creates the corporation as a legal entity.
 First Organizational Meeting to Adopt Bylaws:
At this meeting, bylaws are adopted, directors are appointed, and operational details are formalized.
 Improper Incorporation:
o De Jure Corporations: Properly formed in compliance with state law.
o De Facto Corporations: Recognized despite some formation defects if good faith efforts were made.
o Corporation by Estoppel: Prevents individuals from denying corporate status if they have acted as a corporation.
 Corporate Powers:
o Express Powers: Defined in the corporation’s articles of incorporation, bylaws, and state law.
o Implied Powers: Allow the corporation to perform acts necessary to achieve its purpose.
o Ultra Vires Doctrine: Prohibits corporations from acting beyond their stated purposes.
o Remedies for Ultra Vires Acts: Shareholders or the state may seek remedies for unauthorized corporate actions.

39–3 Piercing the Corporate Veil

 Factors That Lead Courts to Pierce the Corporate Veil:

Courts may disregard the corporate entity and hold shareholders personally liable when:
o Corporate formalities are not observed.
o Personal and corporate funds are commingled.
o The corporation is undercapitalized.
o Fraud or wrongful actions occur.
 A Potential Problem for Close Corporations:
Close corporations are particularly vulnerable to issues of commingling funds and personal use of corporate assets. Courts
typically require evidence of fraud or malfeasance to hold shareholders personally liable.
 The Alter-Ego Theory:
Applied when a corporation is so dominated by individuals or groups that its separate identity ceases to exist. This theory is
used to prevent fraud or injustice by holding the controlling individuals personally liable.

39–4 Corporate Financing

 Bonds:
Debt securities issued by corporations to borrow funds, with fixed interest payments and a maturity date for principal
repayment. Bonds are commonly used for long-term financing.
 Stocks:
o Common Stock: Represents ownership with voting rights, but no guaranteed dividends. Shareholders assume the greatest risk
and are last in line for payment.
o Preferred Stock: Grants priority in dividends and asset claims, often with fixed dividends but no voting rights.
 Venture Capital and Private Equity Capital:
o Venture Capital: High-risk investments by professional investors in exchange for ownership and managerial control of start-
ups.
o Private Equity Capital: Wealthy investors or firms purchase, reorganize, and eventually resell corporations, often through
IPOs.
 Crowdfunding:
Start-ups raise capital online by pooling funds from numerous investors. SEC regulations allow companies to raise up to $1
million annually through crowdfunding, with disclosure requirements to protect investors.

Chapter 40: Corporate Directors, Officers, and Shareholders

40–1 Role of Directors and Officers

40–1a Election of Directors

 Election: Directors are elected by shareholders to manage the corporation.

 Removal of Directors: Shareholders can remove directors for cause or, in some cases, without cause.
 Vacancies: Vacancies on the board may arise due to resignation, death, or removal and are typically filled by shareholders or
remaining directors.

40–1b Compensation of Directors

 Directors are compensated for their services. Compensation is often in the form of fees, stock options, or other benefits.

40–1c Board of Directors’ Meetings

 Meetings must be regular and include minutes to ensure compliance with corporate governance. Directors must be notified,
and a quorum is required for decisions to be valid.

40–1d Committees of the Board of Directors

 Boards may establish committees, such as audit or compensation committees, to oversee specific areas of corporate activity.

40–1e Rights of Directors

1. Right to Participation: Directors are entitled to participate in board meetings and influence decision-making.
2. Right of Inspection: Directors can access corporate books, records, and facilities.
3. Right to Indemnification: Directors may be indemnified for legal costs incurred due to their role, provided they acted in good
faith.

40–1f Corporate Officers and Executives

 Officers (e.g., CEO, CFO) are appointed by the board to manage daily operations. Their duties are dictated by corporate
bylaws and employment agreements.

40–2 Duties and Liabilities of Directors and Officers

40–2a Duty of Care

 Directors and officers must act with the care that a reasonably prudent person would use in similar circumstances.
1. Duty to Make Informed Decisions: Decisions should be based on adequate information and research.
2. Duty to Exercise Reasonable Supervision: Officers and employees under the director’s oversight must be monitored
effectively.
3. Dissenting Directors: Directors who disagree with decisions must formally dissent to avoid liability.

40–2b The Business Judgment Rule

 Protects directors/officers from liability for honest mistakes of judgment, provided:

1. They acted in good faith.
2. They made informed decisions.
3. The actions were in the best interest of the corporation.

40–2c Duty of Loyalty

 Directors/officers must prioritize the corporation’s interests over personal gain, avoiding self-dealing and conflicts of interest.

40–2d Conflicts of Interest

 Transactions involving conflicts must be disclosed and approved by the board or shareholders. Failure to manage conflicts can
lead to liability.

40–2e Liability of Directors and Officers

 Directors/officers may be liable for negligence, fraud, or breach of fiduciary duties. They can be held accountable for corporate
losses caused by their actions.

40–3 The Role of Shareholders

40–3a Shareholders’ Powers

 Shareholders have the power to elect/remove directors, amend bylaws, and approve major corporate changes (e.g., mergers).
 40–3b Shareholders’ Meetings

1. Notice of Meetings: Proper notice must be given for annual and special meetings.
2. Proxies: Shareholders can authorize another person to vote on their behalf.
3. Shareholder Proposals: Shareholders may submit proposals for consideration, subject to corporate rules.

40–3c Shareholder Voting

1. Quorum Requirements: A minimum number of shares must be represented for voting to occur.
2. Voting Requirements: Decisions typically require majority approval, but some actions require a supermajority.
3. Cumulative Voting: Allows minority shareholders to concentrate votes on specific directors to enhance their influence.

40–4 Rights of Shareholders

40–4a Stock Certificates

 Evidence of ownership in the corporation, though many corporations now issue shares electronically.

40–4b Preemptive Rights

 Allow existing shareholders to purchase newly issued shares before they are offered to others to maintain their ownership
percentage.

40–4c Stock Warrants

 Rights to purchase shares at a specified price, often issued to attract investors or reward employees.

40–4d Dividends

1. Illegal Dividends: Shareholders may be required to return dividends paid illegally from the corporation’s capital.
2. Failure to Declare a Dividend: Shareholders cannot compel directors to declare dividends unless bad faith is proven.

40–4e Inspection Rights

 Shareholders can inspect corporate records for a proper purpose but cannot abuse this right to harass management.

40–4f Transfer of Shares

 Shareholders generally have the right to transfer shares unless restricted by agreements.

40–4g The Shareholder’s Derivative Suit

 Shareholders can sue on behalf of the corporation if the directors fail to act on a valid claim.
o Written Demand: Shareholders must first request the board to take action.
o Damages: Any recovery goes to the corporation, not the suing shareholder.

40–5 Duties and Liabilities of Shareholders

40–5a Watered Stock

 Definition: Shares issued for less than their fair market value.
 Liability: Shareholders who receive watered stock must pay the difference to the corporation and may also be liable to
creditors.
 Example:
If property worth $500,000 is exchanged for shares valued at $1,000,000, the shareholder must pay the $500,000 difference.

40–5b Duties of Majority Shareholders

 Majority shareholders owe a fiduciary duty to the corporation and minority shareholders.
 Oppressive Conduct: Includes “freezing out” minority shareholders by withholding dividends, excluding them from
management, or denying access to records.
 Remedy: Minority shareholders can sue majority shareholders for breaches of fiduciary duty and seek damages.

Chapter 42: Investor Protection, Insider Trading, and Corporate Governance

42–1 The Securities Act of 1933

42–1a What Is a Security? (The Howey Test, Many Types of Securities)

A security is a tradable financial asset, and its definition under the Securities Act of 1933 covers a broad range of instruments,
including stocks, bonds, and options. The Howey Test is used to determine whether a transaction qualifies as an investment
contract (and hence a security). This test involves evaluating whether there is an investment of money in a common enterprise
with the expectation of profits derived from the efforts of others. Types of securities include:

 Equity securities (e.g., stocks),

 Debt securities (e.g., bonds),
 Derivatives (e.g., options and futures contracts),
 Investment contracts (e.g., certain partnership interests and collective investment schemes).

42–1b Registration Statement (Contents of the Registration Statement, Registration Process, Prefiling Period, Waiting
Period, Posteffective Period)
The registration statement filed with the Securities and Exchange Commission (SEC) is a key document in the Securities
Act of 1933. It must contain:

 Prospectus (detailed description of the securities, the offering, and the financials),
 Information on the issuer (business operations, management, financial statements),
 Risk factors (potential risks investors should be aware of). The registration process involves several stages:
 Prefiling Period: The issuer cannot offer or solicit sales of securities before filing.
 Waiting Period: After filing, there is a waiting period during which the SEC reviews the filing, and the company may begin
preliminary sales efforts, though no offers can be finalized.
 Posteffective Period: Once the SEC declares the registration effective, the issuer may complete the offering and begin selling
securities.

42–1c Well-Known Seasoned Issuers

A Well-Known Seasoned Issuer (WKSI) is a company that has a proven track record of compliance with SEC regulations.
These companies have the advantage of being able to file shelf registrations, which allow them to register securities in
advance and offer them over a longer period without needing to update the registration statement each time.

42–1d Exempt Securities

Certain securities are exempt from registration under the Securities Act of 1933. Exempt securities include:

 Government-issued securities (e.g., U.S. Treasury bonds),

 Securities issued by regulated entities (e.g., banks, insurance companies),
 Short-term notes (e.g., commercial paper) with a maturity of less than 270 days.

42–1e Exempt Transactions

Exempt transactions are those that do not require registration, such as:

 Regulation A Offerings: Allows small offerings to be exempt if they meet specific conditions.
 Changes Made by Regulation A1: This expanded the scope of Regulation A offerings by allowing larger amounts to be
raised.
 Testing the Waters: Issuers can test the market before filing a registration statement.
 Small Offerings—Regulation D: Regulation D offers exemptions for private offerings:
o Rule 504: Allows offerings up to $10 million in a 12-month period.
o Rule 506: Allows offerings to accredited investors with no limit on amount.
 Intrastate Offerings—Rule 147: Exempts offers confined to a single state under certain conditions.
 Resales and Safe Harbor Rules:
o Rule 144: Provides a safe harbor for the resale of restricted securities.
o Rule 144A: Allows the resale of securities to qualified institutional buyers.

42–1f Violations of the 1933 Act (Remedies, Defenses)

Violations of the Securities Act of 1933 can lead to both civil and criminal penalties. Investors have remedies such as:

 Rescission: The ability to rescind the purchase of a security and get a refund.
 Damages: Investors can sue for damages if they were harmed by false or misleading statements.
Defenses to violations include:
 Lack of knowledge of fraud (due diligence defense),
 Statute of limitations (actions must be brought within a specific time frame).

42–2 The Securities Exchange Act of 1934

42–2a Section 10(b), SEC Rule 10b-5, and Insider Trading

Section 10(b) of the Securities Exchange Act of 1934, along with SEC Rule 10b-5, prohibits fraudulent practices in
connection with the purchase or sale of securities. This includes:

 Insider Trading: Insider trading occurs when someone buys or sells securities based on material nonpublic information
(MNPI) that they obtained through their position in the company.
 Disclosure under SEC Rule 10b-5: Requires companies to disclose material information that could affect the market price of
their securities.
 Outsiders and SEC Rule 10b-5: The rule applies to insiders and outsiders who misappropriate information.
 Tipper/Tippee Theory: A tipper can be held liable for trading on information they provided to a tippee.
 Misappropriation Theory: An individual can be liable for trading on material nonpublic information obtained from an
employer or other source, even if they are not an insider.
 Insider Reporting and Trading—Section 16(b): Requires insiders to report their transactions and prohibits insider trading
profits from being realized within a six-month period.
 The Private Securities Litigation Reform Act: Limits the ability of investors to sue based on securities fraud claims.

42–2b Regulation of Proxy Statements

The SEC requires that proxy statements be filed when shareholders are solicited to vote on company matters. These
statements must disclose all material information about the proposal, including:

 The background and reasons for the proposal,

 Financial details,
 The potential risks involved.

42–2c Violations of the 1934 Act (Scienter Requirement, Scienter Not Required for Section 16(b) Violations, Criminal
Penalties, Civil Sanctions)
Violations of the 1934 Act, including insider trading or failure to file necessary reports, can result in:

 Scienter Requirement: Many violations under the 1934 Act require proof of scienter, meaning a defendant acted with intent
or knowledge of wrongdoing.
 Section 16(b) violations do not require scienter, only that insiders profited from short-swing trades.
 Penalties: Violations can lead to severe criminal penalties and civil sanctions, including fines and imprisonment.

42–2d Securities Fraud Online and Ponzi Schemes (Investment Newsletters, Ponzi Schemes)
Securities fraud is not limited to traditional market manipulation and can also occur in online environments:

 Investment Newsletters: Fraudulent newsletters that manipulate stock prices through misleading information.
 Ponzi Schemes: These fraudulent schemes involve paying returns to earlier investors using the investments of new investors,
rather than legitimate profits.

42–3 State Securities Laws

 42–3a Requirements under State Securities Laws
State securities laws, often called Blue Sky Laws, regulate securities offerings at the state level. These laws are designed to
protect investors from fraud and ensure that securities offerings are legitimate. Companies must register their offerings at the
state level, unless an exemption applies.

42–3b Concurrent Regulation

Securities offerings are subject to both federal and state regulations. While federal laws regulate the broader aspects of
securities transactions, state laws often provide additional protection and oversight.

42–4 Corporate Governance

42–4a Aligning the Interests of Officers and Shareholders

Corporate governance involves aligning the interests of company officers with those of shareholders. Key issues include:

 Problems with Stock Options: Stock options can incentivize officers to focus on short-term gains instead of long-term
growth.
 Outside Directors: The presence of independent directors helps ensure that management decisions align with shareholder
interests.

42–4b Promoting Accountability

To promote accountability, corporate governance emphasizes strong oversight mechanisms:

 Governance and Corporate Law: Ensures that boards and officers act in the best interests of shareholders.
 The Board of Directors: The board’s role includes overseeing management, ensuring compliance with laws, and protecting
shareholder interests.
 The Audit Committee: Oversees financial reporting and auditing processes, ensuring that they are accurate and compliant.
 The Compensation Committee: Oversees executive compensation, ensuring it is aligned with the company’s long-term
performance.

42–4c The Sarbanes-Oxley Act (More Internal Controls and Accountability, Exemptions for Smaller Companies,
Certification and Monitoring Requirements)
The Sarbanes-Oxley Act (SOX) introduced significant reforms in corporate governance, specifically:

 More Internal Controls and Accountability: The act requires public companies to establish and maintain effective internal
controls over financial reporting. Senior executives must certify the accuracy of financial statements, and companies must
reassess their internal control systems annually.
 Exemptions for Smaller Companies: Initially, SOX required all public companies to have an independent auditor report on
their internal controls, but it later exempted companies with a market capitalization under $75 million.
 Certification and Monitoring Requirements: Senior executives (CEOs and CFOs) are personally responsible for the
accuracy of financial statements. They must certify that the financial reports fairly represent the company’s financial position
and performance.

Problem solving question

1. Nature of the Instrument:

 Bond: A bond is a debt instrument issued by a corporation or government entity. It represents a loan made by the
bondholder to the issuer, with the issuer agreeing to pay interest (coupon) and repay the principal at maturity.
 Share: A share represents equity ownership in a corporation. Shareholders own a portion of the company and have
rights to vote on certain corporate matters and share in profits (dividends) if declared.

2. Ownership vs. Creditor Status:

 Bond: Bondholders are creditors of the company, not owners. They are paid interest and receive principal repayment
but do not participate in management or decision-making.
 Share: Shareholders are owners of the company. They have the right to vote in shareholder meetings and can influence
the company’s direction through decisions like electing directors.
 3. Risk and Return:

 Bond: Bonds are generally considered lower risk because bondholders have priority over shareholders in case of
liquidation (i.e., they are repaid before shareholders). However, the return is fixed, and bondholders are entitled to
interest payments regardless of the company’s performance.
 Share: Shares carry higher risk because shareholders are paid last in case of liquidation. However, shareholders have
the potential for higher returns if the company performs well, such as through appreciation in share price and
dividends.

4. Tax Treatment:

 Bond: Interest paid to bondholders is typically tax-deductible for the corporation, which reduces its taxable income.
 Share: Dividends paid to shareholders are not tax-deductible for the corporation. Shareholders may face taxes on
dividends and capital gains when selling their shares.

5. Duration:

 Bond: Bonds have a fixed term (e.g., 5, 10, or 30 years) at the end of which the principal is repaid.
 Share: Shares have no maturity date. Shareholders can hold the shares indefinitely unless they choose to sell them.

6. Legal Status and Protection:

 Bond: Bonds are governed by debt contracts, specifying interest rates, maturity dates, and obligations of the issuer.
 Share: Shares are governed by the corporation's bylaws and the rights and obligations outlined in the corporation's
charter.

Conclusion:

 Bonds are debt instruments offering fixed returns with lower risk and no ownership in the company.
 Shares represent ownership, with variable returns and higher potential risks and rewards.

I: identify the issue (Whether kmart is liable for false imprisonment for Avadne loss)
R: the rule
A: application apply he rule to the fact of the case
C conclusion ( draw the result from the Application issue, short answers question to answer for the Identify issue .

1. While Jamie is shopping at her local grocery store, she notices a sign in one
aisle that states: “SPECIAL OFFER, PUMPKIN $3 EACH”. Jamie puts a pumpkin into
her basket, dreaming of pumpkin soup. At the checkout, the shopkeeper tells her that the
pumpkin is actually $5. Jamie is furious, argues that the stock displayed with a price is an
offer, and insists on paying $3. The shopkeeper argues that the sign is not an offer.

Is Jamie or is the shopkeeper correct? With reference to the rules of offer and acceptance in
contract law, explain how much Jamie must pay for the pumpkin.

- Issue: The sign: “Special offer, pumpkin $3 each”. Jamie buys 1. Shopkeeper
says $5. Jamie disagrees.

- Rule. Offer-Acceptance. Invitation to Treat. Display at the store.

- Application: The act is seen as an invitation to cheat rather than an offer in this circumstance.
This invitation extends an invitation to others to make an offer. Jamie made an offer to buy the
pumpkin for the price shown on the placard. The shopkeeper, on the other hand, has the option
to accept or reject the offer. And Jamie got turned down/ was rejected.

- Conclusion: Jamie must pay 5$.

2. Rena-Agnes Promise

Rena has been in Singapore for the past six years. Agnes lives alone and
invites Rena to accompany her to Australia. Agnes told her that she would be the
sole beneficiary of her substantial estate. Rena left their jobs and apartment in
Singapore to live with Agnes in Australia. Then Agnes informed Rena that she had moved out
and had removed her name from the will.

- Issue: Rena has been in Singapore for the past six years. Agnes lives alone and invites Rena
to accompany her to Australia. Agnes told her that she would be the sole beneficiary of her
substantial estate. Rena left their jobs and apartment in Singapore to live with Agnes in
Australia. Then Agnes informed Rena that she had moved out and had removed her name from
the will.

- Rule: Domestic Family/Agreement, intention to create a contract: For there to be a contract,

certain essential elements must be present. In the absence of one or more 9of these elements,
the agreement between the parties will not constitute a contract and will not be enforced by the
courts. The essential elements of a contract are as follows: (a) an offer by one party and its
acceptance by the other indicating the parties have concluded an agreement; (b) the intention of
the parties to create legal relations; (c) valuable consideration (unless the promise is made by
deed); (d) legal capacity of the parties to act; (e) genuine consent by the parties; and (f) legality
of the object of the agreement.

- Application: Rena was told by Agnes that if she came to Australia and lived with her, Agnes
would nominate Rena as the sole beneficiary of her estate. Rena and her husband relied on this
assurance, giving up their careers and Singapore apartment. Rena's actions show that she has
accepted and relied on Agnes' commitment. Rena's reliance on Agnes' promise, as well as the
consequences, establishes the case for promissory estoppel. Depending on the applicable laws
and jurisdiction, the court is likely to enforce the agreement or offer appropriate remedies to
Rena.
- Conclusion: the promise is enforceable.

3. Michael’s Exceeding Authority

Michael is the managing director of Hunter Winery Pty Ltd. The board of directors
passes a resolution limiting Michael's authority. He is not permitted to enter into a
contract that commits more than $25,000 of company funds without express authority
from the board. Michael decides that a picnic area with a children's playground will
enhance business, so he signs an agreement with a contractor for $35,000 on behalf of
Hunter Winery, without consulting the board. Is the board bound to pay $25,000 or
$35,000?

- Issue: Michael signs a $35,000 contract for a new playground without consulting the board, exceeding
the $25,000 limit set by the board.

- Rule: Actual express and actual implied authority, authority to not implied, apparent authority.

- Application: In this case, the board of directors of Hunter Winery Pty Ltd enacted a resolution
limiting Michael's authority. According to the resolution, Michael is not entitled to engage in a contract
that commits more than $25,000 of business cash without the specific permission of the board.
However, Michael determines, without consulting the board, that a picnic area with a children's
playground will benefit the firm. On behalf of Hunter Winery, he signs an agreement with a contractor
for $35,000. Michael has exceeded his permitted power because the deal exceeds the $25,000 limit
specified by the board decision.

- Conclusion: the board is bound to pay 25,000$.

Rule: A managing director's power is normally drawn from the board of directors and can be regulated
or restricted by board resolutions. If a resolution limits the managing director's power, they must
acquire express board approval before entering into a contract that commits company funds in the
specified amount.

4. Jonas’s Negligence
Jonas is digging a hole for a backyard pool with a mechanical shovel when he damages an
electrical cable. This affects the electricity supply to Kieran's factory machinery four
kilometers away and Kieran suffers a financial loss until the cable is repaired. Is Jonas
liable for Kieran's financial loss due to his negligence?
- Issue: The issue at hand here is whether Jonas is responsible for Kieran's financial loss as a
result of destroying an electrical line while digging a hole for a backyard pool.

- Rule: To establish liability for negligence, the following elements must be proven:
1. Duty of care: The defendant must owe a duty of care to the plaintiff.
2. Breach of duty: The defendant must have breached the duty of care.
3. Causation: The defendant's breach of duty must have directly caused the plaintiff's harm.
4. Damages: The plaintiff must have suffered actual damages as a result of the defendant's
actions.

- Application: In this case, Jonas was digging a hole for a backyard pool with a mechanical
shovel when he damaged an electrical cable. As a result, Kieran's factory machinery, located
four kilometers away, experienced a loss of electricity supply, leading to financial losses for
Kieran.
 Duty of care: Jonas owes a duty of care to Kieran to avoid causing harm through his actions.
Digging a hole with a mechanical shovel carries a foreseeable risk of damaging underground
utilities, including electrical cables.
 Breach of duty: By damaging the electrical cable, Jonas likely breached his duty of care. A
reasonable person would exercise caution and take appropriate measures to avoid damaging the
cable while digging.
 Causation: Jonas's actions in damaging the electrical cable directly caused the loss of
electricity supply to Kieran's factory machinery, resulting in financial losses until the cable was
repaired.
 Damages: Kieran suffered actual financial losses due to the disruption of the electricity supply.

- Conclusion: Based on the application of the negligence components, Jonas is most certainly
accountable for Kieran's financial loss as a result of his negligence. He had a duty of care to
prevent breaking the electrical cable while digging, and by breaching that duty, he caused the
interruption of the electricity supply to Kieran's manufacturing machinery, resulting in
financial losses. Kieran should consult with legal professionals to assess the specific laws and
regulations in their jurisdiction and determine the appropriate course of action.

5. Directors Failing in Duty of Care Frank, Sally, and Guldo are diréctors of a property
development company. Their chief accountant Robin oversees the financial team and
reports to the board of directors occasionally. The directors trust Robin's financial
expertise and decide not to check over her reports or even ask her any questions about
the company's financial position Penalty proceedings are commenced against the
company when it is discovered that the company's financial reports have under-reported
liabilities and over-reported profits for many years. ASIC launches civil penalty
proceedings against the directors of the company for falling in their duty to exercise
proper care in managing the company. Explain this duty to them. applied irac

- Issue: The directors of the property development company are facing civil penalty
proceedings by ASIC for failing to exercise proper care in managing the company.

- Rule: Directors have a responsibility to manage a firm with care. This obligation compels
them to operate as directors honestly, diligently, and with reasonable competence and care.
They must make informed judgments, use independent judgment, and act in the best interests
of the firm. Directors must take reasonable efforts to assure the accuracy and dependability of
financial reports, such as supervising the chief accountant's work, analyzing financial
information, asking questions, and verifying reported data.

- Application: duty of care. In this scenario, Frank, Sally, and Guldo have a duty to exercise
due care in managing the property development firm as directors. They have delegated
financial report preparation to the head accountant, Robin, and have opted not to review or
challenge her reports. The board may have breached its duty of care by relying only on Robin's
financial competence without actively checking or confirming the reports. The revelation of
under-reported obligations and over-reported earnings in the company's financial records
demonstrates a failure to perform its responsibilities. The board of directors should have taken
reasonable efforts to assure the financial reports' correctness, such as analyzing the material,
asking appropriate questions, and checking the data. They may have violated their obligation to
use due care in managing the firm by failing to do so.

- Conclusion: Based on the facts stated, the property development business's directors, Frank,
Sally, and Guldo, may be held accountable for failing to take appropriate care in managing the
company. The civil penalty actions initiated by ASIC against them are the result of their failure
to execute their obligations as directors, which resulted in under-reported liabilities and over
reported earnings in the company's financial reports. To fulfill their duty of care, directors must
actively participate in the company's financial operations, analyze reports, ask questions, and
take reasonable efforts to
verify the accuracy and integrity of financial information.

6. Mary’s Implied Authority in Partnership Peter, Paul, and Mary are partners in a
stationery business. Mary's primary role in the business is to process customer orders
and ensure that items are in stock. In her spare time, Mary enjoys scouring trade shows
searching for unusual stationery Mary has implied authority to make this purchase on
account of the firm. Innovations. At one trade show, she spies an amazing new automated
pencil sharpener, which she believes is superior to the version the business usually stocks.
She orders one hundred sharpeners for the stationery business. When the goods are
delivered, Peter and Paul refuse to pay the bill and claim that Mary is solely responsible
for the debt. Discuss the authority of partners, and discuss whether Mary has implied
authority to make this purchase on account of the firm. applied irac

- Issue: The issue at hand is whether Mary, as a partner in the stationery business, has implied authority
to make a purchase for the new automated pencil sharpeners on behalf of the company.

- Rule: Partners in a partnership often have implied authority to bind the firm in areas of the
partnership's activity. The position of the partner and the nature of the partnership's operations give rise
to implied authority.

- Application: In this case, Mary is a company partner whose major responsibility is to handle client
orders and guarantee that products are in stock. While her primary role may not expressly entail looking
for new stationery, her implied authority extends to making purchases that are necessary for the
partnership's operations. In this case, Mary is a company partner whose major responsibility is to
handle client orders and guarantee that products are in stock. While her primary role may not expressly
entail looking for new stationery, her implied authority extends to making purchases that are necessary
for the partnership's operations.

- Conclusion: Mary has implied authority to make the automated pencil sharpener purchase on behalf of
the stationery company. Her involvement in processing client orders and ensuring that things are in
stock, in combination with the nature of the partnership's operation, gives her the right to make such
purchases. As business partners, Peter and Paul cannot simply blame Mary for the debt acquired as a
result of the transaction. As partners, they share joint liability, and Mary's acts are regarded as binding
on the firm unless there are particular agreements or limits in place under the partnership
agreement.
Issue:
Anh is a 25-year-old woman who is walking across the street at a crosswalk on her way to work. Bao is a 60-year-old man
who is driving his car to work. Bao is driving over the speed limit and is not paying attention to the road. He is talking on his
cell phone and is eating a sandwich.
Anh sees Bao's car coming, but she assumes that he will stop at the crosswalk. However, Bao does not stop, and he hits Anh
with his car. Anh is thrown into the air and lands on the ground. She is seriously injured, including a broken leg, a concussion,
and internal bleeding.
Anh is taken to the hospital, where she undergoes surgery for her injuries. She spends several weeks in the hospital and then
several more weeks in physical therapy. She is unable to work for several months, and she loses a significant amount of
income.

Questions:
1. What torts has Bao committed?

Based on the scenario it would be concluded that Bao has committed negligence torts as a result of his reckless driving.
Although battery could also be considered depending if there is enough evidence there was intentional physical contact but
considering the context it is highly unlikely that Bao action was intentional regarding his reckless driving thus Battery would
be considered as strictly as a hypothetical.

2. What are the elements of each tort?

Negligence:
Duty: Defendant owed plaintiff a duty of care.
Breach: Defendant breached that duty.
Causation: Defendant's breach caused the injury.
Damages: Plaintiff suffered legal injury
Battery (hypothetical)
Intent: The defendant must have intended to make contact. It is not necessary for the defendant to intend to cause harm
Harmful or Offensive Contact: The contact must be harmful (causing physical injury) or offensive (violating a reasonable
sense of personal dignity)
Lack of Consent: The plaintiff must not have consented to the contact.

3. Does Bao satisfy the elements of each tort?

Bao satisfies the element of the Negligence tort. As all drivers owe a duty to operate their vehicles safely, especially around
pedestrians. He failed to fulfill this duty by exceeding the speed limit, using his cell phone, and eating while driving. These
actions fall below the standard of care expected of a reasonable driver(Palermo, Mario,2023). Bao's negligent behavior was the
direct cause of the collision. Regarding the battery aspect despite satisfying the Harmful or offensive contact and Lack of
Consent element. The Intent element is up for discussion. Thus we can conclude that Bao is liable for Negligence with a
possibility of battery.

4. What defenses might Bao raise?

Contributory or Comparative Negligence: “Under contributory negligence the plaintiff bears even partial fault, they cannot
recover damages. On the contrary, under comparative negligence, a plaintiff may still recover damages. However, damages are
generally reduced by the percentage of the plaintiff's fault.”(The Zimmerman Law Firm) Bao might argue that Anh contributed
partially to the accident by assuming he would stop without taking additional precautions

Assumption of Risk: According to Legal Information Institute, Assumption of Risk refers to a plaintiff’s inability to recover
for the tortious actions of a negligent party in scenarios where the plaintiff voluntarily accepted the risk of those actions. Bao
might claim that Anh assumed the risk by crossing the street when she saw his car approaching.

The success of his defense depends on whether the jurisdiction follows contributory negligence where any fault on Anh's part
might bar recovery or comparative negligence where recovery is reduced by the percentage of Anh's fault. However, the
defense of assumption of risk is unlikely to succeed because pedestrians using a crosswalk have a reasonable expectation that
drivers will stop for them.

5. What damages might Anh recover?

Compensatory Damages: Anh may be entitled to several types of damages after an accident, including economic damages
which are medical expenses, such as hospitalization, surgeries, medication, rehabilitation, and future medical expenses as well
as future earnings if the injury prevents her from continuing her job.

Punitive damages: According to Legal Information Institute, are the damages awarded separately from the actual damages
from an event. Courts generally award punitive damages only when it is determined that the defendant has acted in a
particularly harmful way. So if the court considers Bao’s actions to be egregiously reckless, they might consider additional
punishment in order to deter others from committing similar acts.

6. What are the policy considerations behind the torts of negligence and battery?
Tort law distinguishes between negligence and battery as each serves a unique purpose to civil liability. The tort of negligence
aims to uphold a standard of reasonable care and ensure that individuals take responsibility for actions that foreseeably harm
others.In contrast, battery aims to protect personal autonomy, consent, deterrence, compensation for victims, and punishment
and accountability. The element that made them different is intent as this reflects the varying level of culpability in tort law.

7. What is the impact of the case on Anh and Bao?

Anh:
Physically: she suffers serious injuries requiring long-term medical treatment and rehabilitation.
Psychologically: she may experience trauma and anxiety, particularly when walking near traffic.
Financially: she faces medical bills, lost income, and potentially reduced earning capacity.
Bao:
Physically: Despite not being mentioned, Bao may have gotten injured in the accident.
Psychologically: The traumatic incident may cause Bao to experience guilt or remorse over causing serious harm to another
person.
Financially: Bao may face substantial financial liability for Anh’s damages, higher insurance premiums, and possible loss of
driving privileges depending on the decision of the court.

8. What is the role of tort law in deterring wrongful conduct and compensating victims?

According to the Congressional Research Service, tort law serves three fundamental purposes:
· Compensation: Facilitating compensation for injuries resulting from wrongful conduct.
· Deterrence: Preventing harmful behavior by making wrongdoers face legal consequences.
· Punishment: Providing a means of punishing those who wrongfully injure others.
For additional context a Study from the University of Pennsylvania will be used. The involved a survey where participants
were presented with hypothetical scenarios involving tort cases. They were asked to provide their opinions on appropriate
compensation for victims and penalties for wrongdoers.

Compensation:
· Purpose of Compensation: Tort law aims to make victims “whole" by awarding them monetary compensation to any
type of damages they received. This financial redress helps restore victims as much as possible to their premeditated state.

· University of Pennsylvania Study Insights: The study revealed that 61 out of 92 participants believed that victims
should receive compensation when they suffer harm, highlighting the moral importance of addressing the victims’ needs out of
fairness and justice. Interestingly, many participants felt that direct compensation from the wrongdoer to the victim was more
appropriate. This is out of a desire for a tangible link between the injurer’s actions and the victim's recovery.

Deterrence:
· General Deterrence: Tort law deters harmful conduct by signaling to individuals and companies the legal consequences
of wrongful actions. This can discourage them from engaging in similar behavior in the future.
· Specific Deterrence: It also aims to specifically deter perpetrators from repeating harmful behavior.
· University of Pennsylvania Study Insights: The study found that 23 out of 74 respondents considered imposing a lower
penalty when they believed it would affect broader public welfare—such as a company deciding not to produce flu vaccines if
punished. This indicates that people recognize the need to balance deterrence with societal impact, suggesting that excessive
penalties might deter beneficial activities alongside harmful ones.

Punishment:
· Purpose of Punishment: While tort law's primary focus is compensation and deterrence, it also serves as the punishment
for wrongdoers. While some might consider the Compensation aspect of tort law’s already serve as the punishment some don't.
· University of Pennsylvania Study Insights: The study's experimental setup also showed how punishment and
compensation are perceived differently. Many subjects viewed penalties separate from compensation, with the former serving
more as a mechanism to express societal disapproval and discourage future misconduct. This highlights the complex role of
tort law’s as depending on the context it could be considered methodologically as the Judge, The jury and the Executioner.

Hypothetical Scenarios
1. What if Bao had been driving under the influence of alcohol?
Driving under the influence would be considered even more reckless, potentially increasing Bao’s liability by giving the judge
more reason to call punitive damages due to the fact that driving while intoxicated is widely recognized as a serious danger.
2. What if Anh had been crossing the street illegally?
If Anh had been jaywalking or crossing outside a designated crosswalk, Bao could raise comparative negligence as a defense,
arguing that Anh’s actions contributed to the accident.
3. What if Bao had stopped at the crosswalk, but Anh had slipped and fallen in front of his car?
In this scenario, Bao will not be liable, as his actions did not lead to any harm of Anh thus he is no longer liable toward
Negligence due to not breaching any of its elements. Instead, the focus would shift to the result of another party’s negligence