Chapter 22 Business Law & Govt Regulation Copyright 2006 Prentice Hall Publishing Company 1 The...

Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11Chapter 22 Business Law & Govt Chapter 22 Business Law & Govt RegulationRegulation

The Legal Environment:Business Law

andGovernment Regulation

Elements of a Valid Elements of a Valid ContractContract AgreementAgreement

OfferOffer AcceptanceAcceptance

ConsiderationConsideration Contractual capacityContractual capacity LegalityLegality

Contract

Plus Two Supplemental Plus Two Supplemental Requirements:Requirements:

Genuineness of AssentGenuineness of Assent FormForm


AgreementAgreement

Governed by the Governed by the objective theory of objective theory of contractscontracts, which states that a , which states that a party’s intent to enter into a party’s intent to enter into a contract is measured by outward contract is measured by outward facts – words, conduct, and facts – words, conduct, and circumstances - rather than by circumstances - rather than by subjective intentions.subjective intentions.

Comprised of an offer and an Comprised of an offer and an acceptance.acceptance.


OfferOffer

A promise to do or to refrain from A promise to do or to refrain from doing something in the future.doing something in the future.

For a valid offer to exist, there must For a valid offer to exist, there must be:be: Serious objective intentSerious objective intent Reasonably certain termsReasonably certain terms Communication of the offerCommunication of the offer


OfferOffer

Generally, an offeror can revoke an offer at Generally, an offeror can revoke an offer at any time before the offeree accepts it.any time before the offeree accepts it.

Two exceptions:Two exceptions: Option contract – A separate contract in Option contract – A separate contract in

which a potential buyer purchases the which a potential buyer purchases the right to keep an offer open for a specific right to keep an offer open for a specific time period.time period.

Merchant’s firm offer – Under the UCC, a Merchant’s firm offer – Under the UCC, a merchant who makes an offer in a signed merchant who makes an offer in a signed writing to sell goods cannot revoke that writing to sell goods cannot revoke that offer for the stated period, which cannot offer for the stated period, which cannot exceed 3 months. exceed 3 months.


AcceptanceAcceptance

Mirror image rule - Common law Mirror image rule - Common law requires the offeree’s acceptance to requires the offeree’s acceptance to exactly match the offeror’s offer.exactly match the offeror’s offer.

If offeree changes the terms in the If offeree changes the terms in the offeror’s offer, he or she is making a offeror’s offer, he or she is making a counteroffer, which is a rejection of counteroffer, which is a rejection of the original offer. the original offer.

Generally, silence by an offeree does Generally, silence by an offeree does not indicate acceptance.not indicate acceptance.


ConsiderationConsideration

Something of Something of legallegal value, bargained value, bargained for, and given in exchange for an act for, and given in exchange for an act or a promise. or a promise.

Consideration does Consideration does notnot have to have have to have any economic value – just legal value. any economic value – just legal value.

Exception: Promissory estoppel:Exception: Promissory estoppel: Promise must be likely to induce reliancePromise must be likely to induce reliance Justifiable reliance on the promiseJustifiable reliance on the promise Justice is better served by enforcing the Justice is better served by enforcing the

promisepromise


Contractual CapacityContractual Capacity

The ability to enter into a contract.The ability to enter into a contract. Three groups:Three groups:

1.1. Minors – Most contracts that minors Minors – Most contracts that minors (those under the age of 18) create are (those under the age of 18) create are voidablevoidable at the minor’s option. at the minor’s option.

2.2. Intoxicated people – If a person’s Intoxicated people – If a person’s reason and judgment were so impaired reason and judgment were so impaired by alcohol or drugs at the time of by alcohol or drugs at the time of creating a contract that he cannot creating a contract that he cannot understand its consequences, the understand its consequences, the contract is voidable.contract is voidable.


Contractual CapacityContractual Capacity

The ability to enter into a The ability to enter into a contract.contract.

Three groups:Three groups:3.3. Insane people – A person who is Insane people – A person who is

insane cannot create a valid insane cannot create a valid contract; these contracts are void.contract; these contracts are void.


LegalityLegality

The purpose of the parties’ contract The purpose of the parties’ contract must be legal.must be legal.

Laws vary from one state to Laws vary from one state to another, but issues include: another, but issues include: Contracts that violate usury lawsContracts that violate usury laws Sabbath (Blue) lawsSabbath (Blue) laws Gambling contractsGambling contracts


Contract PrinciplesContract Principles

A written contract is preferred to an oral A written contract is preferred to an oral contract; however, most oral contracts are contract; however, most oral contracts are just as enforceable as written ones.just as enforceable as written ones.

Oral agreements should be followed up by Oral agreements should be followed up by written confirmations.written confirmations.

A contract for the sale of goods priced at A contract for the sale of goods priced at $500 or more $500 or more mustmust be in writing. be in writing.

Contract terms should be clear and specific.Contract terms should be clear and specific. Any handwritten changes to a written Any handwritten changes to a written

contract should be initialed by both parties.contract should be initialed by both parties.


A complete contract covers all material A complete contract covers all material items to be enforced.items to be enforced.

Past contractual practices have legal Past contractual practices have legal weight in a contract dispute.weight in a contract dispute.

As a buyer, you can reject goods that do As a buyer, you can reject goods that do not meet specifications or are defective.not meet specifications or are defective.

As a seller, you are entitled to prompt As a seller, you are entitled to prompt notification of shipment acceptance or notification of shipment acceptance or rejection.rejection.

Courts will likely interpret unclear terms Courts will likely interpret unclear terms against the party who wrote the contract.against the party who wrote the contract.

Contract PrinciplesContract Principles


Breach of ContractBreach of Contract

Failure to perform a contract as Failure to perform a contract as promised constitutes breach. promised constitutes breach.

Damages:Damages: Compensatory – monetary damages that Compensatory – monetary damages that

place a party in the same position had the place a party in the same position had the contract been performed.contract been performed.

Consequential – monetary damages that a Consequential – monetary damages that a plaintiff suffers as a result of the lasting plaintiff suffers as a result of the lasting effects of the damage.effects of the damage.

Punitive damages – monetary damages Punitive damages – monetary damages awarded in blatant cases of intentional awarded in blatant cases of intentional neglect or reckless endangerment. neglect or reckless endangerment.


The Uniform The Uniform Commercial Code (UCC)Commercial Code (UCC)

A comprehensive document drafted in A comprehensive document drafted in the 1940s that assembled a uniform the 1940s that assembled a uniform set of laws across the states to govern set of laws across the states to govern routine business transaction. Its routine business transaction. Its provisions reflect the way people provisions reflect the way people conduct business.conduct business.

The UCC contains ten articles, but The UCC contains ten articles, but Article 2Article 2, which governs the , which governs the sale of sale of goodsgoods, affects many small businesses., affects many small businesses.


The UCC applies to The UCC applies to everyevery sale of sale of goods, but it imposes a higher goods, but it imposes a higher standard on professional merchant standard on professional merchant sellers and sometimes includes rules sellers and sometimes includes rules that vary slightly or substantially from that vary slightly or substantially from basic contract law.basic contract law.

The Uniform The Uniform Commercial Code (UCC)Commercial Code (UCC)


Who Is a Who Is a Merchant?Merchant?

1. A merchant is one who deals in goods of 1. A merchant is one who deals in goods of the kind involved in the sales contract (e.g. a the kind involved in the sales contract (e.g. a sporting goods retailer buying sporting sporting goods retailer buying sporting goods).goods).2. A merchant is one who, by occupation, 2. A merchant is one who, by occupation, holds himself out as having knowledge or skill holds himself out as having knowledge or skill pertaining to the practices or goods in the pertaining to the practices or goods in the sale (e.g. a bank selling a repossessed car).sale (e.g. a bank selling a repossessed car).3. A person who employs a merchant as a 3. A person who employs a merchant as a broker or an agent has merchant status for broker or an agent has merchant status for that transaction (e.g. “gentleman farmer” that transaction (e.g. “gentleman farmer” who hires a broker to buy livestock for him).who hires a broker to buy livestock for him).

The UCC defines a merchant in three The UCC defines a merchant in three

ways:ways:


Sales WarrantySales Warranty

A promise or a statement of fact A promise or a statement of fact by a seller that a product will by a seller that a product will meet certain standards.meet certain standards.

Types of warranties:Types of warranties: Express warrantiesExpress warranties Implied warrantiesImplied warranties

Warranty of titleWarranty of title Warranty of merchantabilityWarranty of merchantability Warranty of fitness for a particular Warranty of fitness for a particular

purposepurpose


Product LiabilityProduct Liability

Negligence - when a manufacturer or Negligence - when a manufacturer or seller fails to do something that a seller fails to do something that a reasonable person would do. reasonable person would do. Negligent designNegligent design Negligent manufacturingNegligent manufacturing Failure to warnFailure to warn

Strict liability – when a manufacturer is Strict liability – when a manufacturer is liable for its actions no matter what its liable for its actions no matter what its intentions or the extent of its negligence. intentions or the extent of its negligence.


Protecting Intellectual Protecting Intellectual Property RightsProperty Rights

Three important tools:Three important tools: PatentsPatents Trademarks and service marksTrademarks and service marks CopyrightsCopyrights


PatentsPatents

Patent Patent - a grant from the U.S. - a grant from the U.S. Patent and Trademark Office Patent and Trademark Office (PTO) to the inventor of a (PTO) to the inventor of a product, giving the exclusive product, giving the exclusive right to make, use, or sell the right to make, use, or sell the invention in the U.S. for 20 years invention in the U.S. for 20 years from the date of filing the patent from the date of filing the patent application.application.

P.T.O. has issued more than 7 P.T.O. has issued more than 7 million patents to date. million patents to date.

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50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Patent Applications and Patents Granted

Patent Applications

Patents Granted


Obtaining A Obtaining A PatentPatent Establish novelty.Establish novelty. Document the device.Document the device. Search existing patents.Search existing patents. Study search results.Study search results. Submit the patent application.Submit the patent application. Prosecute the patent application.Prosecute the patent application.


TrademarksTrademarks

TrademarkTrademark - any distinctive word, - any distinctive word, symbol, name, logo, slogan, or symbol, name, logo, slogan, or trade dress that a company uses to trade dress that a company uses to distinguish its product from other distinguish its product from other goods on the market. goods on the market.

Any business claiming a trademark Any business claiming a trademark can use the can use the symbol. symbol.

Only those businesses that have Only those businesses that have registered their trademarks with registered their trademarks with the PTO can use the the PTO can use the ®® symbol. symbol.


TrademarksTrademarks

Trademarks can also cover Trademarks can also cover symbols, shapes, colors, and symbols, shapes, colors, and sounds - all part of “trade dress.” sounds - all part of “trade dress.”

A A service markservice mark, noted by the , noted by the SMSM symbol is the same as a trademark symbol is the same as a trademark except that it identifies and except that it identifies and distinguishes the source of a distinguishes the source of a service. service.


CopyrightsCopyrights

CopyrightCopyright - an exclusive right that - an exclusive right that protects the creator of original protects the creator of original works of authorship, such as works of authorship, such as literary, dramatic, musical, and literary, dramatic, musical, and artistic works – e.g., a video artistic works – e.g., a video game.game.

The The symbol denotes a symbol denotes a copyrighted work. copyrighted work.


The Law of AgencyThe Law of Agency

Agent’s duties:Agent’s duties: LoyaltyLoyalty PerformancePerformance NotificationNotification Duty of CareDuty of Care AccountingAccounting


The Law of AgencyThe Law of Agency

Principal’s duties:Principal’s duties: CompensationCompensation ReimbursementReimbursement CooperationCooperation Safe working Safe working

conditionsconditions


BankruptcyBankruptcy

Chapter 7: LiquidationChapter 7: Liquidation - Most common - Most common type (72% of all filings)type (72% of all filings) Business ceases to exist after bankruptcy Business ceases to exist after bankruptcy

proceeding is completed.proceeding is completed. Chapter 11: ReorganizationChapter 11: Reorganization - Company is - Company is

protected from creditors' legal actions protected from creditors' legal actions while formulating a “reorganization” plan.while formulating a “reorganization” plan.

Chapter 13: Individual debtorsChapter 13: Individual debtors – – Consumer version of Chapter 11 Consumer version of Chapter 11 bankruptcy.bankruptcy. Less complex and less expensive.Less complex and less expensive.

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10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Num

ber o

f Bus

ines

s B

ankr

uptc

ies

1989 1991 1993 1995 1997 1999 2001 2003

Year

Number of Business Bankruptcies


Government Government RegulationRegulation

Code of Federal Regulations now Code of Federal Regulations now consists of 201 volumes with consists of 201 volumes with 134,723 pages!134,723 pages!

NFIB study: For companies with NFIB study: For companies with fewer than 20 employees, costs of fewer than 20 employees, costs of complying with government complying with government regulations is $5,532 per employee regulations is $5,532 per employee vs. $2,979 per employee for large vs. $2,979 per employee for large companies. companies.



Trade PracticesTrade Practices Sherman Antitrust ActSherman Antitrust Act Clayton ActClayton Act Federal Trade Commission ActFederal Trade Commission Act Robinson-Patman ActRobinson-Patman Act

Consumer ProtectionConsumer Protection


Consumer CreditConsumer Credit Consumer Credit Consumer Credit

Protection Act (Truth-in-Protection Act (Truth-in-Lending Act)Lending Act)

Fair Credit Billing ActFair Credit Billing Act Equal Credit Opportunity Equal Credit Opportunity

ActAct Fair Credit Reporting ActFair Credit Reporting Act Fair Debt Collection Fair Debt Collection

Practices ActPractices Act



EnvironmentEnvironment Clean Air ActClean Air Act Clean Water ActClean Water Act Resource ConservationResource Conservation

and Recovery Act and Recovery Act


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Chapter 22 Business Law & Govt Regulation Copyright 2006 Prentice Hall Publishing Company 1 The...

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