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INTRODUCTION: Commercial Paper & Agency Commercial Paper Commercial paper (under the category of negotiable instruments) is a document guaranteeing the payment of a specific amount of money, either a promise to pay or an order to pay, on demand, or at a set time, with the payer named on the document. [This is separate and distinct from unsecured promissory notes called commercial paper which are moneymarket securities issued (sold) by large corporations to obtain funds to meet short-term debt obligations.] Commercial Paper Obvious uses of commercial paper (negotiable instruments) include exchanging money and/or extending credit. Common examples: - Checks - Promissory notes - Bills of exchange Types of Negotiable Instruments Notes [promissory notes] - a two-party instrument in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. These are often unconditional and readily saleable. Examples: - Notes payable - Mortgage note Types of Negotiable Instruments Drafts - a three-party instrument in which one person (the drawer) orders a second person (the drawee) to pay a fixed amount of money to a third person (the payee), or another person specified by the payee, either on demand or at a particular time. [The drawee actually pays the payee with funds from an account the drawer maintains with the drawee.] Advantages of Negotiable Instruments Negotiable instruments are generally easier to enforce than ordinary contracts: 1. 2. 3. 4. Consideration is presumed Past consideration is presumed A holder in due course (HIDC) does not give consideration A HIDC is generally not subject to personal defenses Holder in Due Course - one Negotiation Title to a negotiable instrument can easily be transferred. The transfer process is called negotiation, and is transferred to a holder. Bearer paper such as checks made out to 'CASH' can be negotiated simply by a change in possession. Endorsements (indorsements) Endorsement - the signature of the holder that allows the interest in the instrument to be transferred to another holder 1. Blank endorsements - signature only, payable to the bearer 2. Special endorsements - signature plus the addition of the person to whom the instrument is now payable [making it order paper] 3. Restrictive endorsements - as the name implies a restriction is established: a. b. c. d. Setting a condition Prohibiting further transfer To facilitate a deposit or collection; example: \"For deposit only\" States it is for the benefit of someone; example: \"Pay to ABC Trust\" Holder in Due Course Holder in Due Course (HIDC) - one holding a check or promissory note, received for value (he/she paid for it), in good faith, and with no suspicion that it might be no good, claimed be another, overdue, or previously dishonored (a bank had refused to pay since the account was overdrawn). Such a holder is entitled to payment by the maker of the note. Requirements for a holder to qualify as a HIDC: a. b. Instrument must not have evidence of forgery or irregularities The holder must take the instrument: i. ii. iii. For value In good faith Without notice that it is overdue, has been dishonored, contains an unauthorized signature, has claims against it, etc. Defenses In general, defenses prevent the enforcement of a negotiable instrument. Real defenses - justification for a maker or drawer not to honor a negotiable instrument even if it has been transferred to a holder in due course because it makes the instrument \"void.\" Examples: 1. 2. 3. 4. 5. 6. Fraud in the execution (factum) - fraud inducing the obligor to sign instrument without a reasonable opportunity to learn of its fraudulent character Forgery Adjudicated insanity which renders the instrument void The obligor's infancy Material alteration of the instrument, i.e. the amount Duress at the time of making the instrument Defenses Personal defenses - cannot protect the maker against the claims by a holder in due course. Examples: 1. Lack or failure of consideration 2. Fraud in the inducement - misrepresentation about the consideration or other matters, not the amount 3. Ordinary contract defenses such as nonperformance and failure to pay 4. Undue influence, infancy (in some states), illegality 5. Acquisition of lost or stolen bearer instruments Liabilities Among Parties Parties to an instrument are either primarily or secondarily liable to meet the requirements of the instrument. There are two levels of liability: 1. Primary parties - drawers, makers, and acceptors. The primary party must pay on an instrument as it existed when drafted by the drawer or maker, or accepted by the drawee. 2. Secondary parties - indorsers. The secondary party has an obligation to pay when the person seeking payment first demanded payment from the primary party, and the secondary party received notice that the primary party refused to pay the instrument. Discharge The liability to pay an instrument has been terminated. A party may be discharged of their liability to pay by: 1. 2. 3. 4. 5. 6. Tender of payment Cancellation Fraudulent alterations Unexcused delay in presentation Unexcused delay in notice of dishonor ...and others Agency "He who acts through another does the act himself." ~a fundamental legal maxim of the law of agency. Without the ability of a principal to act through an agent, business would grind to a halt. Agency - Key Terms Agency - a legal relationship whereby one person acts for another Agent - a person authorized to act for another [principal] Principle - the person for whom an agent acts and from whom the agent derives authority Independent contractor - a person hired to undertake a contractually defined result (not an employee and not an agent) Basic Concepts 1. 2. 3. 4. Agency may include employment Agency may be created by a power of attorney Independent contractors are generally not agents Personal services cannot be performed by an agent Creation of Agency 1. By contract or agreement The agency relationship is always consensual Either party can terminate it at any time 2. By the conduct of the parties Because of the way persons act, third parties might assume an agency relationship exists 3. By ratification of an unauthorized act A 'principal' accepts the actions of an 'agent' Creation of Agency - cont. 4. By estoppel A 'principal' by his/her actions leads another to reasonable believe that the 'agent' is indeed authorized to act on behalf of the purported 'principal' 5. By necessity For example, acting on behalf of another in an emergency Duties of the Agent 1. 2. 3. 4. 5. 6. Obey instructions Act with skill Avoid conflict of interest Protect confidential information Notify the principal of all useful information Account for actions taken, funds received, etc. Duties of the Principal 1. Pay all expenses incurred by the agent 2. Inform the agent of works hazards 3. PAY UP! Liabilities of the Principal 1. For contracts made by the agent If the agent has either actual authority or apparent authority 2. For torts of the agent Direct liability - negligence on behalf of the principal Indirect liability - negligence on behalf of the agent while acting in the scope of employment for the principal REMEMBER - Even if an agent commits a tort (wrongful act that results in injury to another's person or property) while acting within the scope of their employment they are personally liable. Termination of Agency 1. By acts of the parties By any act that would terminate a simple contract Expiration of specified time Accomplishment of stated purpose Terminated by mutual rescission (either party) Principal should give actual notice of termination to third parties 2. By operation of law By death or permanent incapacity of either party Bankruptcy of either party Frustration of the purpose of the agency Illegality of the business venture Material breach of the agency contract by either party End Contracts, Commercial Paper & Agency 1. Which of the following is not an essential element of a valid contract: a) Each party to the contract must have the capacity to enter into the contract. b) There must be a meeting of the minds between the parties of the contract. c) The contract must be in writing. d) The contract must be for a legal purpose. 3. Which of the following is true regarding mistakes in a contract environment? a) A material mistake usually pertains to opinions of value. b) An incidental mistake will immediately cause a contract to be void. c) In the event of a mutual material mistake the contract is still generally still enforceable. d) In the event of a unilateral mistake a contract is generally still enforceable. 4. Which of the following would be considered a misrepresentation of a material fact, and therefore subject to a finding of fraud? a) Yogurt claiming to be '99% fat free' was found to have a fat level of 1.4%. b) You buy a new Chevrolet Corvette with a gas mileage rating of 23 MPG in the city. Your actual experience is 21 MPG. c) A used automobile listed for sale with 75,000 miles shows 75,252 miles on the odometer. d) You bought a diamond ring advertised as having a solitaire stone of 1.5 carats weight. You have the ring appraised and find that the stone is .60 carats. Scienter means: a) An intent or knowledge of wrongdoing b) A mistake due to lack of scientific knowledge c) Ignorance based on a lack of study skills in college d) Non-guilty knowledge While on vacation you are stricken with a severe illness requiring a hospital stay several hundred miles from home. While you are heavily sedated your spouse has you sign papers so \"the hospital bill can be covered.\" The truth is you have adequate insurance to pay the bill and the document you signed allows your spouse to sell your cabin on the lake, and your spouse uses the proceeds from the sale to buy a new Lexus GS SUV. This is an example of (choose the best answer): a) Unconscionability b) Innocent misrepresentation c) Undue influence d) Duress A contract made while being threatened with blackmail is voidable. a) True b) False The term 'capacity' relates to the ability of one mind to meet another mind. How does this term apply to a minor? a) Minors are never responsible for their actions, no matter how developed their minds are. b) A minor may have not developed the ability to have a 'meeting of the mind' and fully understand the requirements of a contract. c) A minor is assumed to be looking for dishonest gain. d) Minors cannot be released from a contract unless the other party agrees to do so. Some contracts are contrary to public policy, and are therefore illegal. As examples, these are contracts that: a) Allow gambling in certain geographic areas b) Set too low of speed limits and limit rates of usury c) Corrupt public officials and discriminate because of race or religion d) Require identification in order to vote in a national election The Statute of Frauds requires there be written evidence (called a memorandum) for certain kinds of contracts. Which type of contract does not meet this requirement: a) A promise made in consideration of marriage b) A promise to pay the debt of another c) An agreement that will be executed 18 months from now d) An agreement to mow someone's lawn each week for the next 4 weeks at $50 per week ESIGN: a) Is a federal law that regulates the use of electronic contracts and signatures for interstate commerce b) Stands for Electronic SIgnatures for the Government Nationally c) Requires all paper contracts to have an electronic counterpart d) Requires all electronic contracts to have a paper counterpart What is the meaning of the statement, \"The assignee stands in the shoes of the assignor\"? a) The assignor has the same rights as the assignee b) The assignee has exactly the same rights as the assignor c) Parties to the contract have to wear the same size shoes d) Contracts often end in 'toe to toe' conflicts An agreement to work for a person for the lifetime of that person is subject to the Statute of Frauds. a) True b) False Ted Nugent has been contracted to perform at the presidential inauguration. He decides he'd rather go fishing that day. He can delegate his duties to Madonna without a change in contract. a) True - both are well-known entertainers and can easily fill in for each other b) False - because Ted Nugent is a male and Madonna is a female c) False - because Ted Nugent has a different style of music and was originally selected for his specific talents d) True - Ted Nugent is willing to pay Madonna the full amount of the original contract Gerald has agreed to purchase Reta's home for $50,000. As part of the agreement, he must put down a deposit of $5,000. Both parties agree that if either of them does not follow the terms of the contract, the other person gets the $5,000 deposit. Gerald fails to follow through with the purchase; Reta keeps the $5,000. This is an example of: a) Compensatory damages b) Consequential damages c) Liquidated damages d) Punitive damages Refer to this information for both questions 22 & 23: A company that manufactures and distributes dietary supplements assures customers that their weight loss formula is a safe and effective way to lose weight, advertising the supplement as an \"all natural,\" and completely safe supplement. Amanda, who believed the company's claims, took the supplement for 30 days before becoming violently ill. Her doctors determined that at least one of the substances contained in the supplement reacts with a number of prescription medications, one of which Amanda was taking, and thus caused her serious illness. Amanda's medical bills amounted to nearly $5,000, prompting her to file a civil lawsuit against the company to recoup her medical expenses, as well as lost wages for the two weeks she was off work. Amanda claims in her lawsuit that the company knew, or should have known, that the contents of the weight loss formula were likely to react badly with certain prescription medications, and that they should warn consumers. At trial, the company insists it has not broken any laws or regulations, and makes it clear it has no plans to pull the product off shelves, or to alter its advertising campaign. In the end, the judge rules in Amanda's favor, awarding her damages for medical expenses and loss of income in the amount of $7,000. The court also admonishes the company, making it clear that the court's opinion is that the company has negligently and recklessly risked people's health. The judge then awards Amanda damages in the amount of $100,000, with the hope that a large hit to its bank account will convince the supplement company to change its ways, to be more serious about the safety of the supplements it manufactures. The damages of $7,000 can be classified as: a) b) c) d) Compensatory damages Consequential damages Liquidated damages Punitive damages Refer to this information for both questions 22 & 23: A company that manufactures and distributes dietary supplements assures customers that their weight loss formula is a safe and effective way to lose weight, advertising the supplement as an \"all natural,\" and completely safe supplement. Amanda, who believed the company's claims, took the supplement for 30 days before becoming violently ill. Her doctors determined that at least one of the substances contained in the supplement reacts with a number of prescription medications, one of which Amanda was taking, and thus caused her serious illness. Amanda's medical bills amounted to nearly $5,000, prompting her to file a civil lawsuit against the company to recoup her medical expenses, as well as lost wages for the two weeks she was off work. Amanda claims in her lawsuit that the company knew, or should have known, that the contents of the weight loss formula were likely to react badly with certain prescription medications, and that they should warn consumers. At trial, the company insists it has not broken any laws or regulations, and makes it clear it has no plans to pull the product off shelves, or to alter its advertising campaign. In the end, the judge rules in Amanda's favor, awarding her damages for medical expenses and loss of income in the amount of $7,000. The court also admonishes the company, making it clear that the court's opinion is that the company has negligently and recklessly risked people's health. The judge then awards Amanda damages in the amount of $100,000, with the hope that a large hit to its bank account will convince the supplement company to change its ways, to be more serious about the safety of the supplements it manufactures. The damages of $100,000 can be classified as: a) b) c) d) Compensatory damages Consequential damages Liquidated damages Punitive damages Name the purpose(s) of commercial paper (as a negotiable instrument). a) Allows companies with strong credit ratings to raise funds to pay debts or meet working capital needs. b) Helps to promote marketing plans and increase sales revenue. c) Serves as a way to extend credit and a substitution for money. d) Allows issuers to float funds and show greater levels of current asset Indorsing (endorsing) a negotiable instrument: a) Allows the title and the holder's interest to be transferred to a new holder b) Is a way of promoting the instrument when offering it for sale c) Prevents the instrument from ever being transferred again d) Only happens when an allonge is attached to the instrument itself A blank indorsement specifies the specific person to whom the negotiable instrument is payable. a) True b) False A \"defense\" prevents the enforcement of a negotiable instrument. Examples of \"real\" defenses include all the following except: a) Forgery b) The obligor's infancy c) Acquisition of lost or stolen bearer instruments d) Duress at the time of making the instrument An example of a \"personal\" defense, which cannot protect the maker against the claims by an HIDC, is: a) Forgery b) The obligor's infancy c) Acquisition of lost or stolen bearer instruments d) Duress at the time of making the instrument Various parties can find themselves either primarily or secondarily liable to meet the requirements of the instrument. Which of the following is an example of a party secondarily liable? a) The party must pay on an instrument as it existed when drafted by the drawer. b) The party must pay on an instrument as it existed when drafted by the maker. c) The party must pay on an instrument as it existed when accepted by the drawee. d) The party has an obligation to pay when the person seeking payment first demanded payment from the primary party, and the party in question received notice that the primary party refused to pay the instrument. To \"discharge\" means that a party no longer has the liability to pay on a negotiable instrument. Which of the following events can result in discharging that obligation? a) The instrument has been paid. b) The instrument has been fraudulently altered. c) The instrument was missing for 5 days and was found. d) Items \"a\" and \"b\" are true. The Pow Chemical Company operates a large manufacturing facility in Memphis, TN. Billy, the plant manager, has knowingly caused sulfuric acid from the facility to be dumped into the Mississippi River for several years. Which statement is the best response? a) The Pow Chemical Company is liable for Billy's criminal acts. b) Billy is solely liable for the dumping of sulfuric acid into the river. c) The Environmental Protection Agency (EPA) is responsible since the dumping happened over an extended period of time and they should have detected it. d) Sulfuric acid helps to control algae from growing in the river and keeps barge shipping open. Which statement is true regarding agents? a) An agent is under stricter control than an employee. b) An agent is under less control than an employee. c) An independent contractor is another form of agent. d) Once someone is appointed an agent, they are an agent for life. Which of the following is not true regarding the termination of agency? a) Once an agency is terminated, the principal should notify all third parties who knew of the agency relationship. b) An agency may be terminated upon the death of the principal. c) Both parties must agree to the termination of agency once it is established. d) An agency may be terminated if the agent fails to obtain a required certification to carry out his / her duties. An agency relationship may be established in which of the following ways: a) A principal ratifies the action of another. b) You find a student slumped over in a classroom and you call 911. c) A contract is signed between you and a principal for you to act on their behalf. d) An agency relationship can be established in each example above. Memphis, Light, Gas & Water (MLGW) hires Ditches R Us Company to dig a 30foot-long 10-foot-deep trench in Germantown. Sammy, the backhoe operator, is still hungover from the previous night's March Madness celebration and forgets to set up pedestrian barriers as required by the City of Germantown ordnance. Jesse, walking near the digging site and texting on her iPhone, falls into the trench and breaks her back. Which is the best statement? a) MLGW is liable for Jesse's injuries. b) Sammy and Ditches R Us are both liable for Jesse's injuries. c) Jesse is liable for her own injuries. d) The City of Germantown is liable for Jesse's injuries. INTRODUCTION: Contract Law What is a Contract ? A legally binding agreement. In other words... \"A promise or set of promises which the law will enforce\". The agreement will create rights and obligations that may be enforced in the courts. The normal method of enforcement is an action for damages for breach of contract, though in some cases the court may order performance by the party in default. The Nature of Contracts \"Contract law is a foundation upon which is built many other areas of business law, such as corporations, agency, employment, partnerships, sales, commercial paper, and secured transactions. The law of contracts is a framework to ensure that lawful expectations are met or that remedies are provided.\" Key Terms Agreement - meeting of the minds (a contract really exists in the mind) Consideration - something of value given in exchange for a promise Statute of Limitations - a statute prescribing a period of limitation for the bringing of certain kinds of legal action. Negotiation - the act or process of having a discussion in order to reach an agreement. Notion of Free Contract The parties must have entered into the agreement freely. The purpose of the agreement must not be illegal or contrary to public policy. Classification of Contracts 1. By type of formation 2. By type of performance 3. By enforceability Type of Formation Express contracts An express contract is overtly, consciously, and specifically arrived at either orally, in writing, or party oral and partly written. Implied contracts Implied contracts may be implied from conduct of the parties; a quasi contract may be created based on fairness and equity to avoid unjust enrichment of one party at the expense of another. Type of Performance Bilateral contracts A promise by one party in exchanged for a promise by another party A one to one contract Offeror The person who make the offer Example : Sale of goods contract The Buyer promises to pay the price The Seller promises to deliver the goods Offeree The person to whom the contract was made Unilateral contracts A promise by one party in exchanged for an action by another party A one to all contract 1 Offeror Many Offerees Example : X promises a reward to anyone who will find his lost wallet. X bound himself to the promise, but no one is bound to search for the lost wallet. But if Y, having seen the offer, recovers the wallet and returns it, he is entitled to the reward. Type of Enforceability Void contracts The whole transaction is regarded as a nullity, as though as there has been no contract between the parties. Any goods or money obtained under the agreement must be returned. Where items have been resold to a 3rd party, they may be recovered by the original owner. Voidable contracts A voidable contract will operates as a valid contract unless and until one of the parties takes steps to avoid it. Anything obtained under the contract must be returned, insofar as this is possible. If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them. Essential elements of a Contract 1) Agreement One party make the offer, another party accepts the offer and both achieve consensus ad idem (meeting of the minds) 2) Consideration Both parties must have provided consideration, ie, each side must promise to give or do something for the other. 3) Intention to create legal relations The parties must have intended their agreement to have legal consequences. The law will not concern itself with purely domestic or social agreements. 4) Capacity The parties must be legally capable of entering into a contract. 5) Absence of Vitiating factors Absence of factors that are going to invalidate a contract, ie : duress or undue influence, mistake, misrepresentation, illegality Requirements of an Offer A formal offer is the simplest way to form an express contract. 1. The offer must clearly demonstrate intent to make a contract. 2. The offer must be definite to demonstrate actual intent. 3. The offer must be clearly communicated. Acceptance of an Offer Acceptance of an offer must be clear and unconditional A conditional acceptance or counteroffer constitutes a rejection Except in rare circumstance silence does not constitute acceptance of an offer Consideration Something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. Promising to not act can also be consideration. An agreement to do one's duty is not consideration. Mistakes A mistake indicates that there was not a meeting of the minds. A trivial mistake will generally not affect the contract. A material mistake is one that goes to the heart of the matter. A material mistake can void the contract. In general there is no contract when the mistake is mutual. However, a unilateral mistake does not void the contract. [\"Let the buyer beware.\"] Fraud Fraud - an intentional misrepresentation. No meeting of the minds means there is no contract. Five elements must exist for there to be a finding of fraud: 1. 2. 3. 4. 5. Misrepresentation of a material fact, made knowingly, with intent to defraud, justifiably relied upon by the other party, and causing injury to the other party. Consequences of Fraud The defrauded party has options: 1. Cancel the contract and be refunded any consideration paid, or 2. retain the goods or value obtained and sue for damages. Fraud may be subject to criminal prosecution. Contracts as a result of innocent misrepresentation are voidable by the innocent party. Capacity of the Parties The mental ability sufficient to reach an agreement Those who may lack the capacity to enter into a contract: 1. Minors 2. The insane 3. Those intoxicated An adult who contracts with a minor does so at their own risk. The Statute of Frauds A requirement that there be written evidence (called a memorandum) for certain kinds of contracts. Six kinds of contracts that required written evidence: 1. Sale of land 2. One not to be performed within a year 3. To sell goods for $500 or more, or to lease goods with total lease payments equal to or more than $1,000 4. A promise to pay the debt of another 5. A promise made in consideration of marriage 6. A promise by the executor of an estate to pay a debt of the estate out of his/her own funds The Statute of Frauds (cont.) This does not mean that entire contract has to be in writing, but that there must be some written evidence. The minimum requirements are: 1. All essential elements of the transaction must be identified. 2. The document must have been signed by the party being sued in the event of a dispute. 3. Other parties to the agreement must be identified. Application: put all agreements in writing. Uniform Electronic Transaction Act (UETA) Electronic Signatures in Global and National Commerce Act (ESIGN) UETA's purpose is to harmonize state laws concerning retention of paper records (especially checks) and the validity of electronic signatures. Electronic signatures and records are just as good as their paper equivalents. ESIGN is the federal law that lays out the guidelines for interstate commerce. Privity Privity refers to a connection or bond between parties to a transaction. Privity of contract is the relationship that exists between two or more parties to an agreement... those having a legal interest. There are two important exceptions to the privity doctrine: 1. A party to the contract may assign their rights to someone else, and 2. An outside party intended to benefit from the contract may sue to obtain those benefits Assignment of Rights An assignment of contract occurs when one party to an existing contract (the "assignor") hands off the contract's obligations and benefits to another party (the "assignee"). Ideally, the assignor wants the assignee to \"step into his shoes\" and assume all of his contractual obligations and rights. An assignment doesn't always relieve the assignor of liability. An assignment of a contract will not be enforced in the following situations: 1. 2. 3. The contract prohibits assignment. The assignment materially alters what's expected under the contract. The assignment violates the law or public policy. Delegation of Duties Delegation is the act of giving another person the responsibility of carrying out the performance agreed to in a contract. Routine duties can be delegated. Duties requiring special skills cannot be delegated, nor can duties if the original party chosen was selected based reputation, standing, or talent. Discharge Discharge means either the termination or completion of a contract. There are several ways in which a contract can be discharged: 1. 2. 3. 4. 5. Substantial performance Conditions that change the contractual obligation Breach Agreement Operation of law a. b. c. d. Subsequent illegality Impossibility Bankruptcy Statue of limitations Damages Damages - the compensation due an injured party due to a breach contract. Elements necessary for a plaintiff to claim damages: 1. 2. 3. Proof that a contract existed Proof that the contract was breached by the defendant Proof that the plaintiff has been injured or damaged Types of damages: 1. 2. 3. 4. Compensatory - to make the plaintiff whole Consequential damages - damages beyond the direct damages, i.e. lost profits. Must be reasonably foreseeable. Liquidated damages - specified damages listed in the contract Punitive damages - damages to punish or serve as an example End