Bus 311 Business Law
5ToGo
bus311_front_matter.pdf
Suzy Rogers University of Wisconsin–River Falls
Essentials of Business Law
with contributions by Kent Kauffman, Indiana University–Purdue University, Fort Wayne
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Suzy Rogers
Essentials of Business Law
Bridgepoint Education, Inc.
VP of Learning Resources: Beth Aguiar
Editor-in-Chief: Steve Wainwright
Sponsoring Editor: Christina Ganim
Director of Editorial Technology: Peter Galuardi
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Assistant Editor: Laura Wilson
Editorial Assistant: Shaelyn Berg
Production Editor: Kimberly Purcell
Printing Services: Bordeaux
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Cover Image: Cultura Limited/SuperStock
Cover Design: W. Ryan Fleetwood
ISBN 10: 1621780325
ISBN 13: 978-1-62178-032-8
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Copyright © 2012, Bridgepoint Education, Inc.
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www.bridgepointeducation.com I content.ashford.edu
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Unit I: The Legal Environment of Business 2 Chapter 1: Sources of the Law and the Court System 5
Chapter 2: Torts 27
Chapter 3: Criminal Law 47
Unit II: Contracts 62 Chapter 4: Contracts: Offer, Acceptance,
and Consideration 65
Chapter 5: Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality 89
Chapter 6: Third Parties, Performance and Discharge of Contracts, and Remedies 111
Unit III: The Uniform Commercial Code 134 Chapter 7: Formation and Modification of the
Sales Contract 137
Chapter 8: Performance of the Sales Contract and Risk of Loss 157
Chapter 9: Warranties and Remedies for Breach 175
Chapter 10: Commercial Paper 193
Brief Contents
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BRIEF CONTENTS
Unit IV: Property, Employment, and Business Organizations 216
Chapter 11: Property: Personal, Intellectual, and Real 219
Chapter 12: Agency and Employment Law 243
Chapter 13: Business Organizations 267
Unit V: Business Law in the 21st Century 286 Chapter 14: Cyberlaw 289
Chapter 15: International and Environmental Law 307
Glossary 327
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About the Author xvii
Acknowledgments xix
Preface xxi
Unit I: The Legal Environment of Business 2 Chapter 1 Sources of the Law and the Court System 5
1.1 Sources of the Law 6
The Civil Law Tradition 6 The Common Law Tradition 7 Constitutional Law 9 Statutory Law 12 Administrative Law 12
1.2 The Courts 13
State Court Systems 13 Lower Courts 14 Trial Courts of General Jurisdiction 14 Intermediate Appeals Courts 14 State Supreme Court 15
The Federal Court System 15 Federal Courts of Limited Jurisdiction 15 U.S. District Courts 15 U.S. Circuit Courts of Appeals 16 The Supreme Court of the United States 16
Jurisdiction: The Power to Decide a Case 17 Federal Courts and Subject Matter Jurisdiction 17 Personal Jurisdiction 18 Venue 19
1.3 Chapter Summary 19
Critical Thinking Questions 23 Hypothetical Case Problems 23 Key Terms 24
Contents
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CONTENTS
Chapter 2 Torts 27
2.1 Types of Torts 29
2.2 Intentional Torts Against a Person 30
Battery 30 Assault 31 False Imprisonment 32 Intentional Infliction of Emotional Distress 32 Invasion of Privacy 33 Defamation 34 Fraud 35
2.3 Intentional Torts Against Property 36
Trespass to Land 36 Trespass to Personal Property 36 Conversion 37 Business Torts 37
2.4 Negligence and Strict Liability 37
Negligence 37 Defenses to Negligence 39
Strict Liability 40
2.5 Chapter Summary 41
Critical Thinking Questions 44 Hypothetical Case Problems 45 Key Terms 46
Chapter 3 Criminal Law 47
3.1 Classification and Elements of Crimes 48
Traditional Crimes 50 Business Crimes 51
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CONTENTS
3.2 The Constitution and Criminal Law and Procedure 54
Due Process 54 The Equal Protection Clause of the 14th Amendment 55 The Fourth Amendment 55
3.3 Chapter Summary 56
Critical Thinking Questions 60 Hypothetical Case Problems 60 Key Terms 60
Unit II: Contracts 62 Chapter 4 Contracts: Offer, Acceptance,
and Consideration 65
4.1 Types of Contracts 66
Express Contracts v. Implied Contracts 66 Bilateral Contracts v. Unilateral Contracts 67 Simple Contracts v. Formal Contracts 68 Quasi Contracts (Contract Implied in Law) 68
4.2 The Offer 69
Clear Intent: An Unequivocal Promise 69 Reasonably Certain Terms 70 Offers and Termination 71
Revocation 71 Lapse of Time 72 Rejection or Counteroffer by the Offeree 73 Death, Incompetence, Destruction, and Illegality 73
4.3 Acceptance 74
Communicating the Acceptance 76
4.4 Consideration 77
What Isn’t Consideration? 79 Past Consideration 79 Preexisting Duty 80 Illusory Promises 82 Distinguishing Illusory Promises and Requirement Contracts 83 Exceptions to the Consideration Requirement 83
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CONTENTS
4.5 Chapter Summary 84
Critical Thinking Questions 87 Hypothetical Case Problems 87 Key Terms 88
Chapter 5 Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality 89
5.1 Valid, Voidable, Unenforceable, and Void Agreements 90
5.2 Capacity 91
Capacity and Age: Minors 91 Emancipated Minors 93 Contracts for Necessities 93
Capacity and Mental Incompetence 94
5.3 Genuine Assent 94
Mutual Mistake of Material Fact 95 Fraud 95 Duress 97 Undue Influence 97
5.4 Unenforceable Contracts and the Statute of Frauds 97
A Promise to Pay the Debt of Another 99 A Promise That by Its Terms Cannot Be Performed Within One Year of the Date
the Contract Is Made 100 A Promise in Consideration of Marriage 100 Contracts for the Sale of Goods With a Price of $500 or More 101 Contracts Creating an Interest in Real Estate 102 Requirements of the Writing Under the Statute of Frauds 103
5.5 Illegality 103
Contract Interpretation and the Parol Evidence Rule 105
5.6 Chapter Summary 105
Critical Thinking Questions 108 Hypothetical Case Problems 108 Key Terms 109
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CONTENTS
Chapter 6 Third Parties, Performance and Discharge of Contracts, and Remedies 111
6.1 Third Parties 112
Third-Party Beneficiaries 113 Assignments 115 Delegations 117
6.2 Performance and Discharge of Contracts 119
Discharge by Condition 119 Discharge by Performance 119 Timeliness 120 Anticipatory Breach 120 Impossibility of Performance 121 Commercial Impracticability 121 Frustration of Purpose 122 Discharge by New Agreement 122 Discharge by Operation of Law 123
6.3 Remedies for Breach 123
Damages 124 Specific Performance 126 Election of Remedies 127
6.4 Chapter Summary 127
Critical Thinking Questions 131 Hypothetical Case Problems 131 Key Terms 132
Unit III: The Uniform Commercial Code 134 Chapter 7 Formation and Modification of the
Sales Contract 137
7.1 Offer and Acceptance of the Sales Contract 139
Merchant’s Firm Offers (§ 2-205) 140 Method of Acceptance (§ 2-206) 141 Additional Terms in Acceptance (§ 2-207) 141 Auction Sales (§ 2-328) 143
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CONTENTS
Defenses to Contract Formation 144 Unconscionable Contracts (§ 2-302) 144
7.2 Statute of Frauds (§ 2-201) 144
7.3 Modification of the Sales Contract 146
Voluntary Modification (§ 2-209) 146
7.4 Modification by Operation of Law 147
Casualty to Identified Goods (§ 2-613) 147 Substituted Performance (§ 2-614) 148 U nforeseen Circumstances, or Excuse by Failure of Presupposed Conditions
(§ 2-615) 148
7.5 The Parol Evidence Rule (§ 2-202) 149
Course of Dealing (§ 1-205(1)) 150 Usage of Trade (§ 1-205(2)) 150 Course of Performance (Practical Construction) (§ 2-208) 150 Interpretation of Sales Contract 151
7.6 Chapter Summary 151
Critical Thinking Questions 154 Hypothetical Case Problems 154 Key Terms 156
Chapter 8 Performance of the Sales Contract and Risk of Loss 157
8.1 Seller’s Obligations 158
Goods Not Shipped by a Carrier (§ 2-503) 158 Delivery by Seller to Specific Destination (§ 2-503) 159 Shipment by Seller Through a Common Carrier (§ 2-504) 160 F.O.B. and F.A.S. Shipping Contracts (§ 2-319) 160
8.2 Buyer’s Obligations 162
Duty to Pay (§§ 2-507, 2-511) 162 Right of Inspection (§ 2-513) 163 Insurable Interest (§ 2-501) 164
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CONTENTS
8.3 Defective Title and the Bona Fide Purchaser (§ 2-403(1)) 165
8.4 Risk of Loss (§ 2-509) 166
Non-Carrier Cases 167 Destination Contracts 168 Carrier Contracts 168
8.5 Chapter Summary 169
Critical Thinking Questions 172 Hypothetical Case Problems 173 Key Terms 174
Chapter 9 Warranties and Remedies for Breach 175
9.1 Warranties 176
Warranty of Title and Against Infringements (§ 2-312) 176 Implied Warranty of Merchantability (§ 2-314) 178 Implied Warranty of Fitness for a Particular Purpose (§ 2-315) 178 Express Warranties (§ 2-313) 180 Disclaimer of Warranties (§ 2-316) 181
9.2 Remedies 182
Buyer’s Remedies for Breach 182 Right to Reject Nonconforming Goods (§ 2-601) 182 Right to Sue for Damages (§ 2-713) 183 Right to Cover (Obtain Substitute Goods) (§ 2-712) 184 Right to Specific Performance (§ 2-716) 184
Seller’s Remedies for Breach 184 Right to Withhold Goods (§ 2-705) 184 Right to Recover Goods (§ 2-702) 185 Right to Force Buyer to Accept Goods (§ 2-709) 185 Seller’s Damages for Breach (§§ 2-708–2-711) 185
9.3 Chapter Summary 186
Critical Thinking Questions 190 Hypothetical Case Problems 190 Key Terms 192
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CONTENTS
Chapter 10 Commercial Paper 193
10.1 Requirements for Commercial Paper 194
10.2 Parties to Commercial Paper 196
10.3 Types of Commercial Paper 198
Note 198 Draft 199 Check 200 Certificate of Deposit (CD) 201
10.4 Holder in Due Course 201
10.5 Characteristics of Negotiable Instruments 203
10.6 Negotiation and Indorsers’ Liability 206
Types of Indorsements (§§ 3-204–3-205) 207 Liability of Indorsers (§§ 3-415, 3-501) 208 Warranties of Presentment and Transfer (§ 3-417) 208
10.7 Chapter Summary 209
Critical Thinking Questions 212 Hypothetical Case Problems 212 Key Terms 214
Unit IV: Property, Employment, and Business Organizations 216
Chapter 11 Property: Personal, Intellectual, and Real 219
11.1 Personal Property 221
Acquiring Personal Property 221 Purchase and Manufacture 221 Gifts 221
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CONTENTS
Found Property 222 Accession 224 Bailments 224
11.2 Intellectual Property 227
Patents 227 Copyrights 227 Trademarks 229
11.3 Real Property 229
Possessory Interests in Land 230 Fee Simple Absolute 230 Life Estate 230 Concurrent Ownership 230
Nonpossessory Interests 231 Adverse Possession 232
Landlord-Tenant Law 232 Types of Non-Ownership Tenancies 232 Tenant Rights and Responsibilities 233 Landlord’s Rights and Obligations 234
Regulation and Real Property 235
11.4 Chapter Summary 236
Critical Thinking Questions 239 Hypothetical Case Problems 239 Key Terms 240
Chapter 12 Agency and Employment Law 243
12.1 Agency 244
Types of Agencies 245 Formation of the Agency 246 Agent’s Duties 246
Agent’s Duty of Loyalty 247 Obedience 247 Performance 247 Notification 247 Agent’s Duty to Render an Accounting 248
Principal’s Duties 248 Cooperation 248 Compensation 248
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CONTENTS
Duty of Indemnification 249 Reimbursement 249
The Principal’s Liability for the Agent’s Contracts 249 Actual Authority 250 Apparent Authority 250 Ratification 250
The Agent’s Liability on the Contract 251 Disclosed Principal 251 Undisclosed and Partially Disclosed Principals 252
Tort Liability and Agency 252
12.2 Termination of Agency 253
Voluntary Termination 253 Act of Either Party 253 Lapse of Time 254 Termination by the Occurrence of a Stated Event 254 Achievement of the Agency Objective 254
Termination by Operation of Law 256 Death or Loss of Capacity 256 Bankruptcy 256 Impossibility of Performance 256 Impracticability of Performance 257
Irrevocable Agencies 257 Notice to Third Parties Upon Termination of an Agency 257
12.3 Employment and Labor Law 258
Labor Law 258 Employment Discrimination 258
12.4 Chapter Summary 261
Critical Thinking Questions 264 Hypothetical Case Problems 264 Key Terms 265
Chapter 13 Business Organizations 267
13.1 Partnerships 268
Must Be Association of Two or More Competent Persons 268 Must Carry On a Business 268 Must Be Co-Owners 269 Must Be for Profit 269
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CONTENTS
Partnership by Estoppel 270 Advantages and Disadvantages of Partnerships 270 Rights and Obligations of Partners 271 Dissolution and Termination of Partnerships 272 Limited Partnerships 273
13.2 Corporations 274
Advantages and Disadvantages of Corporations 274 W ho’s Who in Corporations: Incorporators, Promotors, Directors, Officers,
and Shareholders 276
13.3 Limited Liability Companies 277
13.4 Chapter Summary 279
Critical Thinking Questions 282 Hypothetical Case Problems 282 Key Terms 284
Unit V: Business Law in the 21st Century 286 Chapter 14 Cyberlaw 289
14.1 Jurisdiction and the Problem of Enforcement 290
14.2 Computer Crime 291
Hacking 291 Identity Theft 292 Fraud 292 Phishing 292
14.3 Cyber Torts 293
14.4 Privacy 294
Cookies and Privacy 294 E-Mail and Privacy 294 Commercial E-Mail and Privacy 295 The Constitution and Privacy 295 Computer Crime and Privacy 296
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CONTENTS
14.5 E-Contracts 296
Click-Wrap Contracts 296 Sales Tax 297
14.6 Intellectual Property 298
The Digital Millennium Copyright Act (DMCA) 298 The Stop Online Piracy Act (SOPA) 300
14.7 Chapter Summary 300
Critical Thinking Questions 304 Hypothetical Case Problems 305 Key Terms 305
Chapter 15 International and Environmental Law 307
15.1 International Law and Business 308
Sources of International Law 308 Treaties and Agreements 308 International Organizations 309
Some Basic Principles of International Law 309 Comity 309 Sovereign Immunity 310 The Doctrine of “The Act of State” 310
Conducting Business in the International Arena 312 The International Business Contract 313 Doing Business Internationally Within the Limits of U.S. Law 314
15.2 Environmental Law and Business 314
Types of Environmental Law 316 Air Quality Regulation 318 Water Quality 319 Toxics and Waste 320
15.3 Chapter Summary 320
Critical Thinking Questions 324 Hypothetical Case Problems 324 Key Terms 325
Glossary 327
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Suzy Rogers Suzy Rogers is an associate professor of business law at the University of Wisconsin–River Falls. She received her J.D. from the University of Illinois, and practiced both civil and criminal law in Illinois before turning to a career in academia. In addition to being the recipient of numerous teaching awards, most recently Outstanding Teacher in the College of Business and Economics in 2011, she also started a successful women’s ice hockey program at UWRF. Pro- fessor Rogers’s other interests include dogs, illustration, travel, and writing fiction.
Kent Kauffman, Contributor
Kent Kauffman, J.D., is assistant professor of Business Law at Indiana University–Purdue University, in Fort Wayne, Indiana. He is licensed to practice law in Indiana and is certi- fied as a mediator in Indiana. He is a summa cum laude graduate of Temple University and The Dickinson School of Law of the Pennsylvania State University. He has authored textbooks including Legal Ethics and Legal Terminology, and he is the author of The Legal Movie Guide: Key Scenes for the College Class.
About the Author
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It takes a team to write a quality textbook. I have been extremely fortunate to work with the wonderful crew from Bridgepoint Education, including Christina Ganim, Amanda Nixon, Laura Wilson, Dan Moneypenny, and Kim Purcell. Tom Finn’s development edit- ing was invaluable, and Shaelyn Berg not only did a wonderful job on artwork and videos but was unfailingly cheerful and encouraging as we met tough deadlines.
Thanks are also due to Kent Kauffman who contributed case studies and the “In the Media” features, which help to invigorate legal concepts.
I would also like to thank those who reviewed the manuscript: Angela Dash, Ashford University; Deloris Freemont, Ashford University; Saundra McDavid, Ashford Univer- sity; Carol M. Parker, Ashford University; Tony Sgarlatti, Ashford University; John G. Thomas III, Northampton Community College; William H. Volz, Wayne State Univer- sity; Patricia Vreeland, Ashford University.
This book is dedicated to my students: past, present, and future. You are the reason I am still teaching after 30 years.
Acknowledgments
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Business law is often a difficult subject for students. For many, this will be the first time they have encountered legal concepts, and this text faces the formidable task of trying to make an overwhelming amount of topics manageable for undergraduates.
To take on this task, this text combines coverage of a wide variety of business law topics into 15 chapters, using a succinct style full of examples to better enable student under- standing. Examples are drawn both from the most classic illustrations of a concept and from real life cases. Each chapter includes critical thinking questions and an ethics feature that encourage students to think beyond definitions and consider how law relates to busi- ness and societal issues. Each chapter also includes two case studies taken from classic and current court opinions, an “In the Media” feature that illustrates an often fun and new take on a legal topic, and case problems that provide an opportunity for students to apply chapter concepts to practical situations.
This text covers both the traditional business law topics, such as contracts and the Uni- form Commercial Code; agency and business organizations; and property and torts, as well as a final unit, “Business Law in the 21st Century,” where we explore the most timely issues in business law relating to the Internet, international law, and regulation of environmental issues.
In the business law courses I teach, I always remind students that “knowledge is power,” and point out that the more they understand business law, the more effectively they will be able to function in the business environment. I also remind them that “a little knowledge can be dangerous,” which cautions them that law is a vast field where one undergraduate course is not a substitute for a lawyer’s services. One of the purposes of a business law course, however, is to help students avoid legal pitfalls while working in business—so that in the future they will be less likely to need an attorney to unravel mistakes, and therefore can make better business decisions.
Suzy Rogers, J.D.
School of Business and Economics
University of Wisconsin–River Falls
Preface
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