BUSINESS TORTS and PRODUCT LIABILITYChapter 7Meiners

BUSINESS TORTS and PRODUCT
LIABILITY
Chapter 7
Meiners, Ringleb and Edwards
The Legal Environment of Business, 13th Edition
©2018 Cengage Learning®. May not be scanned, copied or
duplicated or
posted to a publicly accessible website, in whole or in part,
except for use
as permitted in a license distributed with a certain product or
service or
otherwise on a password-protected website or school-approved
learning
management system for classroom use.
Torts in the Business Setting
• There is no such thing as a “business tort.”
• By definition, this means torts that concern businesses. A
major issue
for most businesses.
• Often cases with businesses are settled out of court.
• There are often big awards, as plaintiffs view businesses as

“deep
pockets.”
Categories of Business Torts
increasingly, statutes are playing an
important role in this area.
Torts Particular To Businesses
ardous Activities
Fraud
• Deliberate Deception
• The tort may be called fraud, misrepresentation, fraudulent

misrepresentation, or deceit
• Intentional Misrepresentation or Fraud
• Relationship of parties is a factor in creating legal duties
“Malice, intent, knowledge and other conditions of a person’s
mind may be alleged generally” when claiming fraud (Rule 9b,
Federal Rules of Civil Procedure)
• Claim often added to a suit of breach of contract
Intentional Misrepresentation or Fraud
• #1 Misstatement of an important or material fact
• Misstatement induces another to enter into a business
relationship
• Unrelated or unimportant misstatement cannot be a basis of
fraud, i.e.
hyping a product
• #2 Scienter or intent to defraud
• Intentionally misleading and deceiving another
• #3 Person knows or has reason to know that statement being
made is false
• #4 Recipient of false information justifiably relies on the
information and decides
to enter into the deal
• #5 Privity between the parties – relationship exists
• #6 Proximate Cause – logical link between reliance on

misstatement and losses
suffered by the plaintiff
• # 7 Damages
YAZDIANPOUR V. SAFEBLOOD TECHNOLOGIES, INC.
• Yazdianpour and Faisal Ali Mousa al Naqbi entered in to
licensing
agreement with Safeblood, owned by Worden.
• Bought exclusive rights to market patented technologies
overseas
• Worden told licensees that patents were marketed by another
company in U.S., but they would have exclusive rights
otherwise.
• Worden knew he missed deadline for his U.S. patents to be
eligible for protection in other countries.
• Foreign licensing rights were worthless.
• Plaintiffs, did not know truth of patents’ legal status.
Learned later they could not register them in other countri es.
• Sued Safeblood and Worden for fraud.
• District Court: Dismissed claim. Plaintiffs appealed.
Cont.
Yazdianpour v. Safeblood Technologies, Inc.
continued

• HELD: Reversed dismissal of fraud claim.
• Plaintiff required to investigate a misrepresentation only when
obvious
problem may exist.
• Requirement to investigate: Only when “facts should be
apparent . . .
or . . . have [been] discovered.”
• Even if plaintiffs could check status of patent with USPTO
website, not
required to investigate unless obvious they were were being
deceived.
• Worden knew the status of the patents overseas
Interference With Contracts
• Interference With Business Relations or
• Interference With Contractual Relations
• When breaking a contract will benefit a 3rd party:
• 1. Existence of a contractual relationship
• 2. 3rd party knows about the contract
• 3. 3rd party intentionally induces of breach of
contract or interferes with the contractual
relationship.
• 4. Absence of justification for the interference

• 5. Damages as a result of the interference
Interference With Prospective Advantage
• Similar tort is known also as
• Interference With Prospective Economic Advantage or
• Interference With Prospective Contractual Relationship
• One party makes it difficult/impossible for another party to
continue in some/all business dealings
• A business attempts to improve its place in the market by
interfering with another’s business
• Unreasonable, improper manner of interference
• Predatory behavior, not “merely competitive”
Hamby v. Health Management Associates
• Health Management Associates (HMA) contracted with
Emcare to provide
emergency room (ER) staff at a hospital.
• Emcare hired Dr. Hamby for ER on one-year contract.
• CEO of HMA demanded financial improvements. Emcare
chastised
physicians for missing opportunities to order more billable
testing. Hamby’s
patient charts were reviewed.
• Head of hospital wrote to HMA: “We continue to have issues

with low ER metrics from Dr. Hamby . . . . Please send me your
plan for how this will be resolved.”
• Emcare soon fired Hamby.
• He sued HMA, Emcare, and others for tortious interference
with
employment contract. Said he was fired before contract was up
for refusing
to run up patient bills.
• Trial Court: Dismissed suit. Hamby appealed.
Hamby v. Health Management Associates
• Appeals court reversed and remanded.
• HELD: Trial court abused discretion in dismissing tortious
interference
claim.
• Intentional interference occurs when:
• 1) Existence of valid contractual relationship or business
expectancy
• 2) Knowledge of relationship or expectancy
• 3) Intentional interference, inducing or causing breach or
termination of
relationship or expectancy
• 4) Resulting damage to party whose relationship has been
disrupted.
• Hamby may be able to prove these elements at trial.

Product Liability
Want companies to have incentives to ensure their products
are safe.
suffer while
using products improperly.
tort law
ments of contract law come into play
Consumer Products and Negligence
In the 19th century courts, there was the privity of contract
requirement – a contractual relationship between injured party
with the manufacturer was needed
Privity usually not present, so burden on consumer
If no privity, caveat emptor applied – “Let the buyer beware”
This changed with MacPherson v. Buick Motor
MacPherson v. Buick Motor Company
(1916 landmark case)
herson.

accident
that resulted in injury.
privity with
MacPherson; trial court holds that privity is not required;
MacPherson
wins. Buick appealed.
over product
design and safety.
which was
omitted.
ffirmed. Tort liability based on negligence of
maker becomes
the standard. Adopted nationwide over time.
Negligence in Tort
circumstances.
t can be
negligence

promotion.
design
defect and the injury.
Strict Liability under Contract Law
Implied Warranty
Implied warranty of safety at
common law:
Began with food
Safety Implied AT LAW – whether
the manufacturer wants to warrant
the product or not
From UCC:
Implied Warranty of Merchantability
Implied Warranty of Fitness for a
Particular Purpose
Express Warranty
Guarantee of safety or
performance
By model
By statement
By contract
By advertising

Misrepresentation of product
safety may be basis of strict
liability
Baxter v. Ford Motor Company (1932 case)
• Baxter buys Model A.
• Printed material states: “Triple
Shatter-Proof Glass,” “will not fly
or shatter under the hardest
impact. . .it eliminates the danger
of flying glass.”
• Rock hits windshield. Not
shatterproof – Baxter loses an eye.
• Trial court did not allow
advertising to be admitted into
evidence; said there was no privity
of contract.
• Baxter appealed.
the case from the jury.
false and Baxter relied on them.
glass as advertised.

a new trial allowing advertisement
to be admissible evidence.
Strict Liability In Tort
product or instrumentality?
of the injury?
reasonableness, etc.
Strict Liability Moves to Tort Law –
Greenman v. Yuba Power (1963)
• Wife buys husband power tool.
• Due to defect, two years later wood flies out of the machine,
striking Greenman’s head.
• He alleges breaches of warranties and negligence.
• However: S. Ct. of Calif. affirms trial court decision in favor
of
Greenman and says that the manufacturer is “strictly liable in

tort.”
• By mid-1970s every state supreme court had adopted strict
liability rule. Standard adopted in Section 402A of Restatement
(Second) of Tort.
Restatement (Third) of Torts on Products Liability
• The American Law Institute (ALI) definition of strict liability
in Sec. 402A of
the Restatement (Second) of Torts adopted by most states. ALI
wrote a new
standard for product defect in Restatement (Third) of Torts.
• State supreme courts consider the new concepts of law and
often gradually
adopt it.
• Restatement (Third) of Torts defines categories of defect in §2
concerning
(a) product departing from intended design, (b) foreseeable risk
of harm
could be reduced or avoided by an alternative design, or (c)
harm could
have been reduced by reasonable instructions or warnings.
• Restatement Third speaks of “risk-utility balancing.”
• Restatement Third encourages courts to move away from the a
distinction
between negligence and strict liability.

Primary Areas of Product Liability Law
Key Areas of Cases:
1) Defect in product from manufacturing
2) Manufacturer failed to warn consumer of risks of use or of
known hazards in certain uses of product.
3) Product had design defect that could have been avoided by
alternative design
4) Product resulted in latent injuries that may not become
known
for years.
Manufacturing Defect
• Straightforward. Liability is imposed when product comes off
assembly line with defect that causes danger.
• Consumers do not expect such defects – consumer expectation
test. Producers know such cases are difficult to contest. So
cases usually settled.
• Problem for consumer—product comes from maker in another
country with few assets.
Failure To Warn

known
after product has been in use
Parish v. ICON
• Parish was jumping on a backyard trampoline made by
Jumpking.
• Surrounded by a safety net made by ICON
• He did a back somersault, landed on his head, rendered
quadriplegic.
• Sued ICON and Jumpking for failure to warn of dangers in
using
products.
• District court granted summary judgment for manufacturers;
Parish
appealed.
• HELD: Affirmed. Warnings were not inadequate.
• Look at reasonable instructions or warnings if foreseeable
risks of
using a product.
• Numerous warnings provided.
• 3 warnings placed permanently on pad of trampoline.
death could
result; reduce chance of landing on head or neck by not doing

somersaults/flips; only1 person on trampoline at a time;
multiple
jumpers increase chances of loss of control, collision, falling
off; results
can be broken head, neck, back or leg; not recommended for
children
under 6 years of age.
Continued
Parish v. ICON, cont.
• Warning on each of 8 legs of trampoline – designed so
warnings
face out, visible to user.
• Jumpking sewed 2 printed warnings onto the trampoline bed.
• Warning placard for the owner to affix to the trampoline –
both
pictorial warning and language re: safe use of trampoline.
• Owner’s manual contains warnings found on trampoline, plus
added warnings about supervision and educational instruction.
• Warnings exceed the requirements of the American Society for
Testing and Material (ASTM).
• Warnings are also provided with safety net, which has separate
owner’s manual.
• Restatement says users must pay some attention for their own
safety.
• Consumers must “bear appropriate responsibility for proper

product use.”
• “Prevents careless users and consumers from being subsidized
by
more careful users and consumers” – damages paid from law
suits
are built into higher product prices.
• Warnings were adequate.
Kim v. Toyota Motor Corporation
• Kim driving 2005 Toyota Tundra pickup on wet, curvy road at
5o mph.
• Said car driving toward him crossed over center line. He
swerved to avoid the
vehicle. Right tires went off the road on to shoulder.
• Tried to regain control by turning back on the road. Truck
went off road and rolled
over. He suffered serious injuries.
• Sued Toyota for design defect: Truck lacked electronic
stability control (ESC) a/k/a
as vehicle stability control (VSC).
• Feature would have increased a chance of regaining control of
truck.
• Not standard equipment on vehicles at that time.
• Trial Court: Found for Toyota. Kim appealed. Decision
affirmed.
• California has set out two alternative tests to identify design
defect.

product fails to
perform as safely as ordinary consumer would expect.
-Benefit Test: Plaintiff must show evidence that design is
proximate cause
plaintiff’s injuries.
• Burden shifts to defendant to prove “the benefits of the
challenged design
outweigh the risk of danger inherent in such a design”
Continued
Kim v. Toyota Motor Corporation continued
• Trier of fact may consider:
ur
result from
an alternative design.
• Issue: Whether trier of fact may consider evidence of industry
custom and
practice in the risk-benefit analysis. Yes, it is appropriate to
consider
compliance with industry standard in risk-benefit analysis.
• Held: Risk-benefit balancing was appropriate in strict product
liability
cases. State of art at the time of product’s manufacture is

admissible in
strict products liability failure to warn cases.
Strict Liability and Unknown Hazards or
Latent Defects
• Dangers not known at the time
of the product’s manufacture.
• Hazard associated with the
product is not learned for
many years.
• Consumer Expectation
standard used by courts
• What is the expectation
of an ordinary customer
regarding safety of a
product?
• Claims are often class action
suits.
• Asbestos Industry – has paid
tens of billions of dollars to
tens of thousands of plaintiffs
in claims over decades.
• Manufacturers must have
recalls or warnings when
hazard is detected.

Joint and Several Liability
manufacturers
to share the liability created.
pay
for amounts of damages.
-manufacturers may be held responsible
for
all damages.
areas
(i.e. medical malpractice) in some states.
Defenses To Negligence and Strict Liability
• Product Misuse or Abuse
• Assumption of Risk
• Tobacco and alcohol use are controversial areas; legal
products
that are unavoidably dangerous.
• Sophisticated User Defense and Bulk Supplier Doctrine
• Usually in business settings
• Bulk supplier does not have to police details of what is done
as
product continues down the chain, as bulk products go to

producers.
• Sophisticated user or Knowledgeable purchaser is one who
“reasonably should know of the product’s dangers” e.g. another
manufacturer.
• Ex: Air Force employees who handled certain chemicals –
have a
knowledgeable staff.
• Some statutory limits exist.
Ultrahazardous Activity
lly Dangerous Activity
activities where utmost care is needed
dangerous chemicals, crop dusting, etc.
from oil refinery
BUSINESS TORTS and PRODUCT LIABILITY Torts in the
Business Setting Categories of Business TortsTorts
Particular To BusinessesFraudIntentional Misrepresentation or
FraudYAZDIANPOUR V. SAFEBLOOD TECHNOLOGIES,
INC.Yazdianpour v. Safeblood Technologies, Inc.
continuedInterference With ContractsInterference With
Prospective AdvantageHamby v. Health Management
AssociatesHamby v. Health Management AssociatesProduct
LiabilityConsumer Products and Negligence MacPherson v.
Buick Motor Company (1916 landmark case) Negligence in
TortStrict Liability under Contract LawBaxter v. Ford Motor

Company (1932 case)Strict Liability In Tort Strict Liability
Moves to Tort Law –�Greenman v. Yuba Power
(1963)Restatement (Third) of Torts on Products
Liability�Primary Areas of Product Liability Law
Manufacturing DefectFailure To WarnParish v. ICONParish v.
ICON, cont.Kim v. Toyota Motor CorporationKim v. Toyota
Motor Corporation continuedStrict Liability and Unknown
Hazards or Latent DefectsJoint and Several LiabilityDefenses
To Negligence and Strict LiabilityUltrahazardous Activity
Negotiable instruments,
Credit, and Bankruptcy
Chapter 13
duplicated or posted to a publicly accessible website, in
whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise
on a password-protected website or school-approved
learning management system for classroom use.
Negotiable Instruments

evice
The Concept of Negotiability
- Assignee has same rights and responsibilities as
assignor
- Transferee takes instruments
free of transferor’s
responsibilities
nts
“payable to bearer,” “to
cash,” or “pay to the order of cash”
– if lost, can be cashed by anyone
UCC Requirements for Negotiable Instruments

• Only negotiable instruments fall under the UCC
• If nonnegotiable, the common law applies
• To be negotiable it must:
• Be written
• Be an unconditional order or promise to pay
• Be signed by the maker or drawer
• Be payable on demand or at a specified time
• Be made out “payable to order” (order paper) or “to bearer”
(bearer paper)
• Must state a certain sum of money
Requirements for Holders in Due Course
• Person in possession of negotiable instrument may be ordinary
holder or
holder in due course
• Ordinary holder has same contract responsibilities as assignee
– holder in
due course does not
• To be holder in due course, transferee must:
• Give value for instrument
• Take instrument without knowledge it is overdue or defective
• Take instrument in good faith
Major Types of Negotiable Instruments
Drafts

Unconditional written promise to
pay
• Drawer orders drawee to pay
$$ to payee
• Time draft says at a specified
time
• Sight draft gets paid upon
presentation
•Sales draft – for sale of goods
•In international, called a bill of
exchange
•Bankers acceptance creates a
guarantee by a bank that draft is
good.
Checks
• “Draft drawn on a bank and
payable on demand”
• Checks used to be the major
method of payment.
• Now credit & debit cards have
largely replaced checks.
• On a cashier’s check the bank
is both drawer and drawee.
Contractors Source v. Amegy Bank National Association

• Contractors Source owned and run by Merri and Gary Brecher.
• Company bank account was at Amegy.
• Only Brechers could sign checks.
• Company hired Straten as bookkeeper. She misappropriated
$844,000 in
32 months before her check forgeries were discovered.
• Amegy confirmed that signature on forged checks did not
match
signatures on file.
• Bank refused to reimburse most of money lost.
• Said agreement on account said that forgeries must be reported
in 30
days of month statement.
• Contractors Source sued Amegy.
e for all losses.
• Trial court: Dismissed suit. Contractors Source appealed.
Contractors Source v. Amegy Bank National Association
• Affirmed. Contractors Sources failure to exercise ordinary
care. The
“repeat wrongdoer” rule of UCC bars recovery.
• When a bank provides periodic statements, customer is
required to
examine statements.

• Contractors Source did not produce evidence showing Amegy
did not act
in good faith.
• UCC governs these transactions.
• Unauthorized signature should be reported by customer to
bank after a
“reasonable period of time, not exceeding 30 days.”
Orders To Pay
Drafts
• Binding order to pay fixed sum of money
• Three parties
• Drawer: Orders
• Drawee: Usually a bank, to pay
• Payee: A certain sum of money
• Bill of Exchange: When a draft guarantees payment for goods
in international
trade
• Sight Draft: Usually paid “on sight”
• Time Draft (Term Draft): Payment later, time to make sure
ordered goods have
been delivered. Ex: 60 days from date of writing of draft
• Confirmation: Legitimate that drawer has funds to cover
payment.
• Payee may sell draft to another party: Get immediate cash

• Buyer of draft cashes it when it becomes due.
Promises to Pay
NOTES
Notes
certain $ to payee
CERTIFICATES OF DEPOSIT
certificate & promises to
repay customer payee
negotiable which allows
them to be sold, used to
pay debts or used as
collateral

• Creditor: Lends money
• Debtor: To whom money is lent
• Principal: The sum of money owed
• Credit Policy focuses on characteristics such as:
• Capacity (the debtor’s ability to pay)
• Capital (the debtor’s financial condition)
• Character (the debtor’s reputation)
• Collateral (the debtor’s assets to secure the debt)
• Conditions (the economic situation affecting the debtor’s
business)
CREDIT
Credit Accounts
• Open Account
• Must pay within fixed time period
• Installment Account
• Repay by regular (usually monthly) payments
• Revolving Account
• Make minimum payment & can add new debt – i.e.,
credit card
Credit with Security
• When creditor can take property of debtor to satisfy debt – can
happen

by agreement or by operation of law
- Depends if property is real or personal
- Promise by a third party to pay debt if debtor
doesn’t
– Provides a guarantee of payment to creditor
should
principal debtor fail to pay (often same as surety)
- As debt falls under contract law, there
are the
same defenses that the principal (debtor) has – including
impossibility,
illegality, duress, fraud
entitled to exoneration (court
order for principal to pay)
– Surety is entitled to rights of the creditor
against the debtor
General Electric Business Financial Services v. Silverman
• Warren Park Partners, Ltd. borrowed $34.8 million from GE
Financial to
develop land in Frisco, Texas.
• When loan was made, Silverman and partners signed a
guaranty
“absolutely, unconditionally” guaranteeing full payment.
• Warren Park defaulted; went into bankruptcy.

• GE demanded payment from Silverman. He did not pay; GE
sued.
• Silverman claimed affirmative defenses of fraud, extortion,
theft, and
economic duress.
• Said hours before signing the documents, GE notified them of
changes in
terms of the agreement.
• They had no time to contest, as loan was needed immediately.
• He signed agreement because he was trapped.
• Claimed GE employee told him new terms would not be
enforced.
• GE moved for summary judgment.
General Electric Business Financial Services v.
Silverman
• HELD: Summary judgment for GE.
• GE offered evidence of claims that defendants did not contest.
• Instead defendants asserted the affirmative defenses (above).
• GE argued even if affirmative defenses are true, allegations
are barred
by the Illinois Credit Agreement Act (ICAA).
• It bars all actions or defenses by a debtor based on an oral
agreement
(similar to Statute of Frauds).
• Defendants did not dispute that they made “credit
agreements.”
• Defendants say ICAA does not bar their affirmative defenses.
• They also argue “unclean hands” of the plaintiff, GE.

• The court was not swayed. The ICAA bars defendant’s
affirmative
defenses—stick to the written document signed by both parties.
Secured Transactions
- UCC Article 9
- be sure it is:
1. Attached (Attachment)
ler provided value
2. Perfected (Perfection)
property) are used as
security
Fordyce Bank & Trust v. Bean Timberland
timber from

landowners. Bean would cut timber and sell logs to Potlatch and
Idaho
Timber (P&I) which milled logs into timber. Bean’s proceeds
from timber
sales would repay loans.
with the
Secretary of State’s Office of Arkansas. Bean sold timber but
failed to
repay loans; went bankrupt.
timber sale
proceeds. Bank said P&I was negligent in its dealings for
failing to do a
lien search and did not “exercise good faith” required under the
UCC.
security interest
search in the “ordinary course of business.”
Fordyce Bank & Trust v. Bean Timberland
-9-320, a buyer in the
ordinary course of
business (P&I) “takes free of a security interest created by the
buyer’s
seller [Bean], even if the security interest is perfected [by the
bank] and
buyer knows of its existence.”

no duty to
perform a lien search. Even if they know of bank’s security
interest, P&I
can take free of Bank’s security interest.
ogs from timber cutters
without
performing a lien search is standard timber industry practice.
timber industry,
and they were therefore “buyers in the ordinary course of
business.”
to the bank to conduct a lien search every time
it bought
logs.
Real Estate Financing
• Mortgage: Created when real estate used to secure a debt
obligation
• Debtor is the mortgagor; creditor is the mortgagee
• Mortgage is a lien in most states
• In case of default, the mortgagee has the right to foreclose on
the property
• Deficiency judgment: If proceeds from foreclosure not
sufficient, a separate legal
action against a debtor is maintained.

• Most mortgages are non-recourse debt – Lender can seize
collateral/property but
not seek a deficiency judgment for money owed not covered by
sale of property.
• Statutory redemption: Period of time mortgagor has the right
to redeem the
property by paying the debt (normally within 6 months after
default)
Most states have this procedure.
Liens
Obtained by Operation of Law. No need for debtor’s consent.
technical; must
be removed before property is sold
anic’s Lien
construction or repair of
building or other real property places the lien
on lien
-Decreed Liens
-ordered seizure of goods through writ
of

attachment
debtor; If debtor
doesn’t pay judgment, creditor asks court for writ of execution
Summers Group, Inc. v. Tempe Mechanical, LLC
construction on
property owned by Metro Lofts. Rexel was not paid and
recorded a
mechanic’s lien on Metro Lots property. Other contractors on
the work
including Tempe Mechanical, also filed liens against Metro
Loft.
against Metro Lots
and other lienholders. Some of lienholders (contractors) did not
respond – so
had default judgments against them.
ed Rexel’s complaint
trustee ML
Manager. Parties agreed bankruptcy court would determine
priority of
payment of liens.
because it should
not be challenged and that Rexel should pay all attorney fees
related to
litigation.

Summers Group, Inc. v. Tempe Mechanical, LLC
other mechanics’ lien
claimants if they fail to file a lien themselves. Remaining Lien
claimants assert
their lien priorities.
Therefore ML
Manager had to defend its lien priority. Statute requires that
when sale is
ordered in mechanics’ lien foreclosure action, proceeds are
prorated over all
lienholders that have equal footing with the foreclosing lien.
Attorneys fees are
apportioned between successful and unsuccessful efforts.
ial court erred in holding Rexel solely responsible for
payment of ML Manager’s
attorney fees. These fees should be prorated among lien
claimants.
provided services
and materials, regardless of date work was performed.
Manager’s attorney fees in
proportion to their claims.

be paid.
r revision was The
Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005.
budgeting,
use of credit, etc.
Bankruptcy
Personal Bankruptcy
• Dept. of Justice’s U.S. Trustee Program approves
organizations to provide
mandatory credit counseling & debtor education.
• Credit counseling is taken before filing bankruptcy.
• Debtor education is taken after filing.
• Income and Means Testing
• Income test determines if person files under Chapter 7
(liquidation) or Chapter 13 (reorganization of debts).
• People with higher income less likely to have debts

extinguished.
• There is a test of income against expenditures – to see if
person
has above average income for a given area.
Chapter 7
involuntary
proceeding.
, such as car, clothing, appliances, some home
equity and
pension are exempt.
the debtor’s
property.
-exempt assets are liquidated and proceeds distributed to
creditors.
proceeding.
Chapter 13
proprietorship owned
by an individual may file under Chapter 13.

over 5 years.
bankrupt estate with
court-appointed trustee.
don’t try to “go
around” fixed payment schedule.
was approved
makes these payments.
plan.
-term secured debt (i.e. house mortgage) treated
differently.
discharge.
Priority Classes of Creditors

next
class
Tetzlaff v. Educational Credit Management Corp.
d. Lives with his 85-year-
old mother.
Florida
Coastal. Has not been able to pass the bar exam.
o finance
graduate
work.
Educational Credit.
t.

Tetzlaff v. Educational Credit Management Corp.
• Affirmed. Student loans generally not dischargeable, unless
debtor
proves “undue hardship on the debtor” if court does not
discharge.
• Brunner test for student loan discharge:
repay loan
to persist for significant
portion of repayment period.
ort to repay loan.
• Tetzlaff met 1st element of Brunner test; failed the other two.
• Discharge of student loans based on “certainty of
hopelessness, not
simply present inability to fulfill financial commitment.”
• Given Tetzlaff’s degrees, work experience, and age, he can
earn a living.
• Tetzlaff references obstacles related to his mental health but
Bankruptcy
court indicated he does not suffer from clinical levels of anxiety
or
depression. Court states he may be “exaggerating his
symptoms.”
Chapter 11

assets
issues before
debtor files, then court approves plan
ts as trustee, called debtor in possession, to run
business for benefit of all parties
In the Matter of Kmart Corporation
• Kmart consists of parent company and 37 affiliates and
subsidiaries.
• Kmart requested to pay, in full, claims of “critical vendors.” If
it did not pay
these vendors, they would not do business in the future and
were necessary
for Kmart to stay in operation.
• Bankruptcy judge agreed – granted order. No notice to
disfavored creditors.
• Kmart determined the critical vendors, paying 2330 suppliers
$300 million.
• Another 2000 vendors not paid, and 43,000 additional
unsecured creditors

received 10 cents on the dollar (mostly in stock of reorganized
company).
In the Matter of Kmart Corporation
• Some creditors appealed. District court reversed order of
payments to
critical vendors. Decision was appealed.
• Affirmed.
• Kmart argued that the District Court’s reversal order was too
late – money
had already changed hands.
• To order payment of critical vendors, it is necessary to show
• 1) Disfavored creditors will be as well off with reorganization
as
with liquidation (not demonstrated), and
• 2) That critical vendors would cease deliveries if old debts
were
left unpaid during litigation. This was not always true, i.e. some
of the critical vendors must continue business due to long-term
contracts.
Negotiable instruments, Credit, and BankruptcyNegotiable
InstrumentsThe Concept of NegotiabilityUCC Requirements for
Negotiable InstrumentsRequirements for Holders in Due
CourseMajor Types of Negotiable Instruments Contractors
Source v. Amegy Bank National AssociationContractors Source
v. Amegy Bank National AssociationOrders To Pay Promises to
PayCredit AccountsCredit with SecurityGeneral Electric
Business Financial Services v. SilvermanGeneral Electric
Business Financial Services v. SilvermanSecured

TransactionsFordyce Bank & Trust v. Bean TimberlandFordyce
Bank & Trust v. Bean Timberland Real Estate
FinancingLiensSummers Group, Inc. v. Tempe Mechanical, LLC
Summers Group, Inc. v. Tempe Mechanical, LLC Personal
BankruptcyChapter 7Chapter 13Priority Classes of
CreditorsTetzlaff v. Educational Credit Management
Corp.Tetzlaff v. Educational Credit Management Corp.Chapter
11In the Matter of Kmart CorporationIn the Matter of Kmart
Corporation
Chapter 13 Assignments and Objectives.htmlObjectives-Chapter
13
4.1 Identify, list and memorize all of the requirements for a
negotiable instrument and the major types of negotiable
instruments.
4.2 Explain and illustrate the steps to take when applying for
credit.
4.3 Illustrate, list and give examples of the different types of
credit accounts, where you apply for credit, and what security is
needed in order to obtain credit.
4.4 Review and summarize Article 3 of the Uniform
Commercial Code (located in Appendix D of your text), which
governs Negotiable Instruments and secured transactions.
4.5 Identify and list the three types of Bankruptcy, and the
elements of each.
There are many articles regarding negotiable instruments. View
this article that explains the different types of negotiable
instruments.
Readings
Read Chapter 13 carefully.
Chapter 13 Part 1:
Discussion Question, page 320 regarding the basic differences

between Chapters 7, 11, and 13 bankruptcy. Your discussion
answer must be complete and at least 500 words. There are a
lot of helpful articles online regarding bankruptcy. Here is
one article on the topic, but you need to search the web for
more for your discussion answer. You may also use your
textbook.
Be sure to review the rubric for this assignment. Chapter 13
Part 1 Rubric
Chapter 13 Part 2:
Case question #5. on page 321. You will need to review the
case of Krumme v. Moody, 910, P.2d., 993 Sup. Ct., Ok. (1996)
This is a good discussion of who is a surety and who is just an
"accommodation party" when signing a negotiable instrument
and who is obligated to pay. Fully answer the question
regarding whether or not Moody was obligated to pay.
Minimum of 500 words.
Part 2 Rubric
Important cases to remember for this chapter are: Fordyce Bank
v. Bean and In the Matter of K-Mart CorporationSubmission
InstructionsAll Assignments have a due date. The due date for
all Chapter 13 assignments is July 18th and I will not accept
them late. Be sure to upload your files into the appropriate
Dropbox. You can access the dropboxes by going to Tasks in
the top menu bar and selecting Dropboxes from the dropdown
menu.
Domestic and International Sales
Chapter 11

duplicated or posted to a publicly accessible website, in whole
or
in part, except for use as permitted in a license distributed with
a
certain product or service or otherwise on a password-protected
website or school-approved learning management system for
classroom use.
Uniform Commercial Code (UCC)
• Governs contracts for sale of goods (not services,
real estate or professional services)
• If contract is a “mix” of goods and services,
• UCC applies if dominant value in goods; common
law applies if dominant value in services
• However parties can agree that either UCC or
common law will apply to govern their contract
• States adopt model UCC statute with some variations.
• Purpose
• “simplify, clarify, and modernize the law governing
commercial contracts” (§1-102)
History of Commercial Law

• English courts looked to lex
mercatoria (“the law merchant”)
for guidance.
• Contract law could be more formal
than how businesses actually
interacted.
• In the early 20th century, each state
had different laws for commercial
transactions
• Made it difficult to do business in
different states
• UCC
• Uniform Commercial Code
• In 1950’s, UCC presented to
the states
• All States have adopted
except Louisiana has not
adopted Article 2
• Article 2 Covers contracts for sale
of goods
• Most countries rely on
Code Law to govern
commercial transactions.
Articles of the UCC

• Art. 1: General Provisions
• Purpose of the UCC: guidance and definitions
• Art. 2: Sale of Goods (2A Leases)
• Sale of goods (or lease of goods)
• Art. 3: Negotiable Instruments
• Use of checks, promissory notes, and other financial
instruments
• Art. 4: Bank Deposits and Collections (4A Fund Transfers)
• Rights and duties of banks and their clients and money
transfers between
banks.
• Art. 5: Letters of Credit
• Guaranteed payment by a bank that extends credit on behalf of
a client
• Art. 6: Bulk Transfers and Bulk Sales
• Auctions and sale of large part of a company’s assets
• Art. 7: Warehouse Receipts, Bills of Lading, and Other
Documents of Title
• Storage and bailment of goods
• Art. 8: Investment Securities
• Rights and Duties related to stock and financial assets
• Art. 9: Secured Transactions
• Sales in which seller holds a security interest in goods sold
Venable v. SunTrust Bank

• Venable bought a car in March 2006 from Ford Dealer in
Atlanta. SunTrust
provided financing. Contract for 75 monthly payments. If
Venable failed to pay,
SunTrust could take the car.
• Venable quit paying in November 2007. For no clear reason:
SunTrust did not
seize car for more than 4 years and then sold it at auction. Sale
proceeds were
applied to debt owed on car.
• SunTrust sued Venable in October 2012 to collect remainder
of debt owed.
• Venable argued the SunTrust could not sue. The sale of the car
was subject to 4-
year statue of limitations under UCC Article 2.
• SunTrust claimed the contract was subject to 6-year statute of
limitation that
applies to common law contracts.
• District Court: Held summary judgment for SunTrust.
• Venable appealed.
Continued
Venable v. SunTrust Bank, Continued
• Reversed. SunTrust’s suit is time barred.
• If a contract contains a blend of sale and non-sale elements,
look to

dominant purpose behind the contract.
• SunTrust had a security interest in vehicle, but it was not
intended to
operate only as a security transaction.
• The financing provision was incidental to the sales contract.
• Contract is not exempt from Article 2.
• Therefore applicable statute of limitations is 4 years.
• Statute of limitations began to run when breach occurred in
November
2007 when Venable stopped making payments.
• SunTrust did not file an action until October 2012 which was
outside the
4-year statute of limitations.
Merchants Under Article 2
• Merchants are held to a higher standard of
conduct than others – “good faith and honest
dealing” required.
• A merchant:
• 1) Regularly deals in the goods in question
• 2) Presents himself as having knowledge or
skill specialized to the transaction
• 3) Or has an agent who does the same
Goods, Sales and Titles Under the UCC

• Article 2
• Applies to sale of goods.
Goods must be moveable
things.
• All parties are bound to a
standard of good-faith, or
honest dealing. Sellers cannot
pass good title to stolen goods.
• Title must pass to be a sale.
One can hold title if:
• 1) Goods exist
• 2) Goods identified to
contract
• Title can pass as parties see fit - for
example when the goods:
• Arrive for shipment at a port
• Arrive at the buyer’s
warehouse
• Leave the seller’s warehouse
• Are halfway between buyer
and seller
• UCC says if not specified then title
passes when:
• Seller completes all obligations
regarding delivery of goods

• When seller delivers title
documents (if goods did not
need to be moved)
Forming a Sales Contract
the UCC definitions apply to a sale as
specified in Article 2.
required
Intent to Contract
• Offer & Acceptance rules relaxed
• Only need agreement between parties
• Indefinite Offer
• OK to be missing major terms such as price, delivery,
payment terms, if parties intended to be bound
• Usually need quantity, unless 1) output contract or 2)
requirements contract
• But courts require good faith dealing
fortune of the other due to unexpected large changes in

market conditions
• Merchants Firm Offers – Irrevocable
• When signed in writing that offer will remain open for given
period.
• If not stated, period is “reasonable time.”
Crest Ridge Construction v. Newcourt, Inc.
• John & Joe Brower set up their own company, Crest Ridge.
• Won a subcontract on job to provide wall panels. Wanted to
use
panels made by Newcourt. After discussions, price set at
$760,000
“subject to credit department approval.”
• Because Crest Ridge was a new company, not much credit
info.
• Over the next 6 months, detailed discussions regarding panel
specs
and shipment was set.
• Newcourt then demanded payment in full.
can give goods to
general contractor who would pay the bill).
• Crest Ridge could not make the advanced payment. Newcourt
cancelled the order.
• Crest Ridge had to find another supplier at a higher price.
• Crest Ridge sued Newcourt.

• Jury awarded $70,214 in damages.
• Newcourt appealed.
Continued
Crest Ridge Construction v. Newcourt, Inc. continued
• Affirmed. Breach of contract by Newcourt.
• The phrase “subject to credit department approval” did not
give
Newcourt the right to cancel at the last minute.
• UCC looks at “any manner sufficient to show agreement,
including
conduct by both parties . . .” to recognize that a contract
existed.
• Here. the parties exchanged price quotes, the purchase order,
and
documents usually binding in construction industry.
• For 6 months, parties exchanged designs to clarify project.
• Newcourt sent material samples; revisions of shop drawings;
fastening
details; stipulations about color; and final drawings concerning
installation.
• Parties left terms of payment blank. Payment was therefore
due either
on delivery or according to “general usage” in the industry.
• To ask for full payment in advance, was a breach of the
agreement by

Newcourt under Article 2 standards.
Acceptance Under Article 2
• Greater flexibility in communication of acceptance
• “Any reasonable manner” under the circumstances
• May be valid even if add new terms or change existing terms
• If there are “material alterations” in the acceptance, they
become part of
the contract only if the offeror accepts the new terms
• Conflicting Terms – the “battle of the forms”
• When offeree’s form does not match offeror’s form
• There is an acceptance, but offeror’s terms govern unless
special action taken
• Contract Modification
• Need not provide new consideration, but must have “good
faith dealing.” Modification must usually be in writing.
Orkal Industries v. Array Connector Corp.
• Orkal (New York company) bought airplane-related products
from Array (Florida company).
• Orkal would send purchase order forms.
• Array would confirm orders with “customer order

acknowledgment” forms.
• These forms contained a “forum selection clause.”
• Clause stated that in case of dispute, Array would have to
bring
suit in a Florida court.
• Orkal did not object to the clause.
• Later Orkal sued Array (defendant) in New York for breach of
contract.
• Array moved to dismiss due to forum selection clause.
• Trial court agreed. Case was dismissed. Orkal would have to
sue
Array in Florida. Orkal appealed.
Orkal Industries v. Array Connector Continued
me a part of a contract unless
specifically
objected to within a reasonable time or
terms are material changes
tion clause constitutes a material
alteration to initial contracts. Orkal never agreed to that term,
so
original terms held. No requirement to go to court in Florida.

Acceptance Under Article 2
• Statute of Frauds
• Basic rule: sale of goods for $500 or more is not enforceable
unless in writing and
signed by the party against whom enforcement is sought
• Sufficiency of writing under UCC is relaxed; not every
material term needs to be
specified, just enough writing to indicate intent.
• Failure to Respond To A Writing
• Section 2-201(2): if a writing in confirmation of a contract is
received, it satisfies the
writing requirements unless “written notice of objection” is
within 10 days after
writing was received.
• Parol Evidence
• More relaxed under the UCC than at common law.
• Section 2-202 says parol evidence cannot usually be used
against the writing but it
can explain customary trade dealings or the meaning of terms.
• However, if the intent is that the original writing is “a
complete and exclusive
statement of terms,” parol evidence may not be used to change
the terms.
Filling the Gaps
• Filling the Gaps – UCC fills parts of contract left open or

unclear, i.e. price
or delivery terms, so a contract can proceed.
• UCC will look to trade usage and past business dealings of the
parties in
determining the outcome of unclear terms.
• It will also apply “reasonableness” standard.
• If the contract not clear about price, §2-305 tells courts to
determine “a reasonable
price” – fair market value, past dealings, etc. may be used.
• Regarding quantity, §2-306 (1) recognizes requirements
contracts and output
contracts, where quantities unclear.
• Regarding delivery term, §2-309 states delivery must be
within “a reasonable time.”
• §2-311 states that seller has option to arrange shipment.
• §2-308 presumes delivery at seller’s place of business.
Griffith v. Clear Lakes Trout Co.
• Clear Lakes, a fish hatchery, had a 6-year deal with Griffith, a
trout grower.
• Griffith would buy tiny trout from Clear Lakes and sell them
back when
they had grown to “market size”
• After 3 years, Clear Lake’s customers demanded fish larger
than 12-16 oz.

fish delivered by Griffith.
• Clear Lakes began to take fewer fish; wanted larger fish.
• Griffith was left with too many fish and deeply in debt; could
not change
operations easily.
• Griffith sued Clear Lakes for breach of contract for not
accepting the trout
that Griffith had grown to “market size.”
• Clear Lakes claimed no contract existed because the parties
differed as to
what was “market size”
Griffith v. Clear Lakes Trout Co. Continued
• District court ruled in favor of Griffith.
• Court held that parties knew that market size was 12-16 oz.
• Clear Lakes appealed.
• Affirmed.
• Both parties understood the the industry meaning of “market
size.”
• Parties intended to make a contract and the it will not fail for
indefiniteness.
• Course of performance between Griffith and Clear Lakes over
three years
with 12-16 ounce trout indicates an understanding of the
“market size.”
• There is similar trade usage pre-dating their contract.

Assuring Foreign Buyers of Product Quality
markets, it needs
to demonstrate products are good quality.
has global
acceptance is a good mechanism.
used:
.
consider buying
goods.
organize
production
procedures.
-
assurance
procedures.
Performance and Obligations
• UCC Section §2-601 deals with seller’s delivery conforming

to agreement:
• If the goods fail in any respect to conform to the contract, the
buyer may:
• Reject the whole,
• Accept the whole, or
• Accept any commercial unit or units or reject the rest
• Tender of Delivery
• Valid and sufficient offer of performance under a contract
• Seller obliged to tender goods at buyer’s place of business
• Buyer may contract to accept goods at point of production
• “Perfect Tender Rule:” Seller must tender the quality, quantity
& delivery
method as specified in the contract
• If no perfect tender, buyer has right to reject goods and
rescind contract.
• Seller’s Right to Cure (UCC Section §2-508) holds if:
• Time for seller’s performance had not yet passed
• Seller notifies buyer of intent to cure defect, and
• Seller properly repairs/replaces defective goods within time
allowed
BUYER’S RIGHTS AND OBLIGATIONS
• Buyer’s duty is to accept conforming goods and pay for them.
(§2-507)
• Buyer has right of inspection before acceptance. (§2-513)
• Buyer may reject nonconforming goods and withhold payment.
(§§2-601; 2-
602)

• Buyer has duty to accept goods. If goods nonconforming but
accepted,
buyer may later revoke acceptance, if problem “substantially
impairs” value
of goods. (§§§ 2-606; 2-607; 2-608). (Parties can always
negotiate a lower
price.)
• Buyer has obligation to pay (§2-507) when goods are received.
Can inspect
before payment is made.
Sales Warranties
• Warranty of Title – Good title must be transferred free of
claims against it
(§2-312)
• Express Warranties – Created by seller’s promise as to
quality, safety,
performance, or durability of goods.
May be evidenced (§2-313):
• From sample or model
• By description of attributes
• By seller’s statements or promises
• Warranties may be disclaimed, but disclaimers must be
specific to the type
of warranty and must be conspicuous.

UCC Warranties
- For sales by merchants:
Particular Purpose
know” buyer’s particular needs; buyer relies on seller’s
expertise; then may have warranty
metal
building that will not chip and peel.
specific and the disclaimer must be conspicuous.
Lee vs. R&K Marine, Inc.
a
disclaimer for all warranties, express or implied (including
implied
warranty of merchantability or fitness for particular purpose).
hull.
Appraiser determined manufacturing defects – boat was a
complete
loss.
bankrupt; Lee sued R&K, claiming breach
of

warranties of merchantability and fitness for particular purpose.
-316(2) states to exclude these warranties,
writing
must be “conspicuous”.
ing was in capital letters and buyer signed contract.
Sellers’ Remedies for Buyers’ Breach
oBuyer repudiates before receiving goods:
• Cancel contract
• ID goods; minimize losses by completing or stopping
manufacture
• Withhold or stop delivery
• Resell goods in commercially reasonably manner
• Sue buyer for losses incurred
oBuyer repudiates after receiving goods:
• If buyer won’t pay, sue for payment & damages
• If buyer wrongfully rejects, can reclaim goods & remedy as
above; If can’t reclaim goods, sue for payment & damages
Buyers’ Remedies for Seller Breach
o Seller repudiates before delivery of goods

• Cancel contract
• Obtain goods from another supplier
• Sue seller
o Seller fails to deliver
• Cancel contract
• Obtain goods from another supplier
for measure of damages
• Sue seller
Buyers’ Remedies
Seller delivers nonconforming goods, buyer rejects:
Cancel contract
Obtain goods from another supplier
Sue seller
Sell rejected goods to recover advance payments
If no advance payments, store or reship goods
Seller delivers nonconforming goods, buyer accepts:
Deduct damages from price
Sue seller for damages
Sue for breach of warranty

Buyers’ Damages
• Cover
• Buy substitute goods and recover price difference
• Incidental damages
• Include: reasonable costs of inspecting, receiving,
transporting and taking care of goods
• Consequential damages
• Foreseeable damages that result from a seller’s breach
• May be with third parties, not necessarily seller
QVC, Inc. v. MJC America, Ltd.
-brand
electric heaters.
Made in China for Soleus. QVC sold 19,100 heaters in 2007-
2008.
• QVC stopped sales and had product evaluated.
• Showed quality problems.
returned the
product or returned electric cord to heater.
oleus contained strong warranty terms.
• Held seller responsible for all costs related to defects,
including
recall costs.

QVC, Inc. v. MJC America, Ltd., continued
• Court: Soleus breached warranty so awarded damages to QVC.
• Section 4 of Purchase Orders: Soleus agreed to indemnify
QVC for any
“direct, special, exemplary, and consequential damages and
losses of any
kind” including lost profits and attorneys’ fees “based upon or
resulting
from . . . any alleged or actual defect” in Heaters . . . .
• QVC sought damages for cost price of heaters, lost profits,
refunded
customer shipping costs, shipping costs and several other center
processing
and recall costs.
• HELD: QVC receives such damages for $1,681,806.84. (See
decision in text
for details of different kinds of damages.)
Convention on Contracts for the International Sale of
Goods (CISG)
– default rule of law for
commercial sale of goods by parties in countries that have
adopted CISG.

another law to govern the contract.
household use
CISG Similarities to UCC
circumstances for
interpretation
terms. Is
sufficiently definite if indicates goods and expressly or
implicitly
fixes/makes provision for determining the quantity and price.
within time stated or reasonable
time; sent
by reasonable means
is
counter-offer, not contract

buyer must
notify seller of defects within a reasonable time
to cure
breach – Nachfrist notice (period of grace) – notice of the
problem and a
chance for nonconforming party to cure before lawsuit); Duty to
mitigate damages
VLM Food International v. Illinois Trading Co.
• VLM (Canadian company) sold frozen potatoes to IT.
• 9 transactions without problems.
• IT ran into financial trouble; failed to pay VLM for shipments.
• Each transaction handled the same way.
• Invoice provision stated IT was liable for attorney’s fees if it
breach the
contract.
• VLM sued. IT admitted it owed money, but not responsible for
attorney’s
fees.
• District court: Agreed with IT; VLM appealed.
VLM Food International, Inc. v. Illinois Trading Co.

• CISG defines “loss” from breach of contract and does not
include
attorneys fees although parties can agree to that by contract.
• VLM must show the contract with IT expressly made IT liable
for the
attorney’s fees.
• Depends on when agreement became binding. Contract was
created
when IT received VLM’s confirmation e-mails.
• Attorneys fees provisions not part of the agreement described
in
purchase orders and e-mail confirmation.
• Term first appeared in trailing invoices mailed to IT after
VLM delivered
the product.
• VLM already bound itself to the contract. Any term not
“mirrored” in the
offer and acceptance is excluded.
• AFFIRMED: Attorneys fees not included in contracts.
International Sales Disputes:
The Dominance of Arbitration
Convention
on the Recognition and Enforcement of Foreign Arbitrable
Awards

ons
nation of one of the
parties or
require arbitration
have little reason to be in court
Domestic and International SalesUniform Commercial Code
(UCC) History of Commercial LawArticles of the
UCCVenable v. SunTrust BankVenable v. SunTrust Bank,
ContinuedMerchants Under Article 2Goods, Sales and Titles
Under the UCCForming a Sales ContractIntent to ContractCrest
Ridge Construction v. Newcourt, Inc.Crest Ridge Construction
v. Newcourt, Inc. continued Acceptance Under Article 2Orkal
Industries v. Array Connector Corp.Orkal Industries v. Array
Connector Continued Acceptance Under Article 2Filling
the GapsGriffith v. Clear Lakes Trout Co.Griffith v. Clear
Lakes Trout Co. Continued Assuring Foreign Buyers of Product
QualityPerformance and ObligationsBUYER’S RIGHTS AND
OBLIGATIONSSales WarrantiesUCC WarrantiesLee vs. R&K
Marine, Inc.Sellers’ Remedies for Buyers’ Breach Buyers’
Remedies for Seller Breach Buyers’ RemediesBuyers’ Damages
QVC, Inc. v. MJC America, Ltd. QVC, Inc. v. MJC America,
Ltd., continuedConvention on Contracts for the International
Sale of Goods (CISG)CISG Similarities to UCCVLM Food
International v. Illinois Trading Co.VLM Food International,
Inc. v. Illinois Trading Co.International Sales Disputes: �The
Dominance of Arbitration

duplicated or posted to a
publicly accessible website, in whole or in part, except for use
as permitted in a license
distributed with a certain product or service or otherwise on a
password-protected
website or school-approved learning management system for
classroom use.
CONTRACTS
Chapter 10
THE ROLE OF CONTRACT LAW
∗ Provides a legal mechanism to deal with others
∗ Law of contracts has evolved in commerce over the
centuries.
∗ Freedom of contract means responsibilities to those
who agree to create binding relationships.
CONTRACT LAW

∗ Common Law
∗ Judge-made law
∗ Each state differs some
∗ There is uniformity about general
contract principles that run through
state laws
∗ Years ago, English courts drew
guidance from lex mercatoria (the law
merchant).
∗ It originated in Roman law of
contracts covering the Roman Empire
and was comprehensive.
∗ UCC:
∗ Uniform Commercial Code.
Article 2. (next chapter)
∗ All States have adopted
except Louisiana
∗ Covers contracts for sale of
goods
∗ Many countries rely on
Code Law only for their
basic legal framework.
DEFINITION OF A CONTRACT
n Sir Wm. Blackstone: “An agreement, upon sufficient

consideration,
to do or not to do a particular thing.”
n Modern definition centers on a promise: “A promise or set of
promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes a duty.”
n The promise itself creates a manifestation of intent—a
willingness
to be bound.
n Contracts form legal relationships and duties between parties.
n Not all promises are enforceable contracts – must meet
requirements of a contract to be an enforceable promise.
Types of Contracts
Express Contracts
Direct statement by the
parties of the promises
made
May be oral or written
Key terms expressly
agreed upon by the
parties.
Implied Contracts
Actions and circumstances infer
and define the terms of the

contract.
May be words, conduct,
gestures
Contracts are implied at law.
Ex: At a check out counter at a
grocery store, actions of the
parties create
offers/acceptances.
ELEMENTS OF A CONTRACT
RULE:
If all elements
are present, the
contract is
generally
termed valid.

Element #1: Agreement
∗ The Offer
∗ Creates the Offeror and Offeree
∗ 1. Manifestation of Intent
∗ Preliminary Negotiations vs. Intent to Offer
∗ Most advertisements are regarded as invitations for others to
submit an offer to buy
∗ 2. Definite Terms & Conditions
∗ 3. Communication
∗ Person returns a dog but does not know of an award
Sometimes terms are presumed
i.e. shipped computer is packed properly
Restatement (2nd) of Contracts: “The manifestation of
willingness to enter into a
bargain, so made as to justify another person in understanding
that his assent
to the bargain is invited and will conclude it.”
TERMINATING AN OFFER
∗ Revocation
∗ Withdrawing of offer by the Offeror
∗ Rejection
∗ By Offeree
∗ Through lapse of time (Option Contracts are different)
∗ Counteroffers are created by rejecting the original offer but

keeping negotiations open by presenting new conditions –
a counteroffer.
∗ By Operation of Law
∗ Intervening Illegality
∗ Destruction of subject matter
∗ Death or insanity of offeror or offeree
ELEMENT #1: THE AGREEMENT
∗ The Acceptance – Expression of Assent
∗ 1. Unconditional
∗ Must be a mirror image of the offer
∗ If conditions are added, that creates a
counteroffer
∗ 2. Unequivocal
∗ 3. Properly Communicated
Pena v. Fox
• Pena and Fox were in an auto accident. Pena injured.
• Pena’s attorney sent settlement offer to Fox’s insurer, USAA.
• The offer was for payment of Fox’s policy limits to Pena.
• Offer letter stated the release would apply to Fox only. USAA
replied that payment would mean release of all claims

against anyone related to the accident.
• Pena considered reply as a rejection of offer and sued Fox.
• Fox requested trial court to enforce settlement agreement
offered by USAA.
• Trial Court Held: Valid agreement precluded lawsuit by Pena.
• She appealed.
Pena v. Fox continued
∗ Settlement agreements are governed by contract law.
∗ Formed when mutual assent and “meeting of the
minds.”
∗ Acceptance must be “mirror image” of offer in all
material respects.
∗ Otherwise it is a counteroffer that rejects the original
offer.
∗ USAA’s reply (for Fox) did not mirror Pena’s offer. It
changed who would release claims.
∗ No meeting of the minds and no settlement agreement
to bar Pena’s suit.
∗ REVERSE AND REMANDED.
∗ Case can go forward for further proceedings.
BILATERAL & UNILATERAL CONTRACTS

Bilateral Contracts
∗ 2 promises
∗ A promise in exchange for
a promise
∗ Ex: I promise to pay you
$250 to trim my trees; you
promise to trim my trees.
∗ If promise is broken, there
may be responsibility if
losses are incurred.
Unilateral Contracts
∗ Only 1 promise
∗ A promise in exchange for a
performance
∗ Ex: I promise to pay you $250
to trim my trees; you say
nothing but later trim them.
∗ Once performance has
occurred, the other party’s
duty arises to fulfill his/her
promise.
ELEMENT #2: CONSIDERATION
• Definition: Something of value or something

bargained for in exchange for a promise.
• This element keeps contract from being a gift.
• Traditional Rule: Must create –
• Legal detriment to the promisee or
• Legal benefit to the promisor
• The legal detriment and benefit usually occur at
the same time.
ADEQUACY OF CONSIDERATION
∗ Courts generally do not care if not fair market value.
∗ If a party bargains poorly, courts usually will not interfere.
∗ Those who bargain take on the risk of their own errors.
∗ There are exceptions such as fraud, duress, etc.
∗ The main concern is an exchange of mutual promises and
obligations by the parties.
Caley v. Gulfstream Aerospace Corp.
• Gulfstream adopted a dispute resolution policy (DRP) to
resolve all
disputes between Gulfstream and employees.
• Mailed policy to employees.
• Policy said DRP would begin in 2 weeks and would be “a
condition of

continued employment.” If an employee continued work, the
DRP was
accepted as binding.
• Some employees sued, saying there was no contract because
no
consideration so the DRP could not be enforced.
• District Court held for Gulfstream. Employees appealed.
• HELD: Affirmed.
• DRP is an offer and states it is a contract.
• Acceptance is continued employment by employees.
Acceptance can be
through a promise or an act.
• Here the act of continuing employment = acceptance of the
offer and a
contract.
• Employees had a choice to 1) continue employment, accepting
DRP or 2)
terminate employment (quit).
• There is “bargained for consideration” by mutual promises and
obligations.
ENFORCEABLE PROMISES WITHOUT
CONSIDERATION
∗ Promissory Estoppel or Detrimental Reliance

∗ Use of this equitable doctrine avoids injustice due to
promisee‘s reasonable reliance on the promisor’s promise.
∗ Promisor is estopped (prevented) from denying a promise.
∗ “A promise which the promisor should reasonably expect to
induce action or forbearance on the part of the promissee . . .
and which does induce such action or forbearance is binding if
injustice can be avoided only by enforcement of the promise.”
Restatement (2nd) of Contracts
∗ Courts do not impose the rule lightly.
∗ Sometimes used in promises to charities, especially if
organizations rely on
the promises to act in some way.
Hinson v. N&W Construction Company
• N&W Construction prepared to submit a bid to Mississippi Job
Corps Center
(MJCC) to build kitchen facility at training center. N&W
received bids from
plumbing subcontractors in preparing its bid to MJCC.
• Hinson quoted $92,000 as bid as plumbing sub; next lowest
bid was
$139,000. N&W used Hinson’s bid to prepare its bid.
• N&W was low bidder and awarded contract by MJCC. N&W
contacted
Hinson that it needed plumbing work to begin. Hinson refused
to do the

job.
• N&W then hired next lowest bidder; paid additional $47,000
to get work
done. N&W sued Hinson based on promissory estoppel.
• Trial court granted summary judgment to N&W, awarding
$47,000. Hinson
appealed.
Ct. of Appeals Affirmed.
Hinson admits he provided a quote. Testified
that he reviewed plans and specs for the building
and was satisfied with his quote of $92,000.
Hinson refused to do the plumbing because “I
just had a lot of other jobs going.”
Promissory estoppel arises when “making of a
promise, even though without consideration . . .”
that plaintiff (N&W) relied upon.
“Refusal to enforce it would be virtually to
sanction the perpetuation of fraud or would result in
other injustice.”
Hinson v. N&W Construction Company
Continued
ELEMENT #3 CAPACITY

∗ Refers to the legal ability to create a contract
∗ Some have limited capacity to contract
∗ Minors
∗ Intoxicated persons
∗ Insane persons
∗ If there is no capacity, the contract is void
∗ If there is partial capacity, the contract is voidable –
may disaffirm
Void and Voidable Contracts
VOID
∗ Contract does not exist at
law
∗ One of elements is
missing – lacks a
requirement of a contract
∗ i.e. Contract for an illegal
subject matter
∗ Courts won’t accept
disputes
VOIDABLE
ng
voided by a circumstance

right to avoid legal obligation
under influence of drugs
parties
MINORS
∗ Defined as a person under the
legal age of majority
∗ Traditionally, the age of majority
was 21
∗ Now it is 18 years old in all states
for most contracts
∗ Minors have partial capacity
∗ Contracts are voidable
∗ Policy to protect the young from
the “results of their own folly”
∗ General Rules
∗ #1: Minors may disaffirm contracts
at their option

∗ #2: If a minor disaffirms a contract
after receiving benefits, restitution
must be paid for the benefit
∗ Some contracts may not be
disaffirmed, i.e.
∗ Enlistment contracts
∗ Marriage contracts
∗ Educational loans
∗ Insurance loans
∗ Medical care
∗ After reaching majority, the minor
may ratify the contract
Element # 4: Legality
∗ If a contract is lacking legality, courts will not enforce
∗ Subject Matter Must Be Lawful
∗ Criminal activities; sale of prohibited drugs; gambling
activities
in some states
∗ Interest rates on loans that violate usury laws
Court may strike entire bargain as unenforceable or only
a part that concerns illegal subject matter
Unenforceable Contracts

∗ Contract is actually valid when made, but courts
will not enforce it
∗ i.e. Unconscionable contracts
∗ i.e. Exculpatory agreements
∗ Subsequent Illegality: Ex: Company agrees to
ship wheat to Iran. After shipment is at sea, U.S.
government declares no U.S. firms may trade
with Iran. Result: Unenforceable under U.S. law
even if seen as legal in Iran
CONTRACT CONTRARY TO PUBLIC POLICY
completely escape liability)
nconscionable Agreements (unequal bargaining power)
competition
e unless
employment
contracts

ELEMENT #5
REALITY AND GENUINENESS OF CONSENT
∗ Concerns people entering into agreements of knowingly with
free will.
∗ If real consent is missing, there is no meeting of the minds.
∗ If there is unilateral mistake over a simple error, the error
can
be avoided. (typographical error - $100,000 instead of $10,000;
the $100,000 not enforceable).
∗ Without this element, the contract is void or voidable.
∗ Examples:
∗ Fraud
∗ Misrepresentation
∗ Duress
∗ Undue influence
ELEMENT #6
CONTRACTS IN WRITING & THE STATUTE OF FRAUDS
(1677)
to be in writing to be
enforceable,
however written contracts are always good evidence of the
agreement in case of dispute.

omise to pay the debt of another, including debts of an
estate
∗ Writing must set out the material terms of
contract
∗ Names of parties
∗ Consideration
∗ Subject matter
∗ Invoices, E-mails, sales orders, checks,
confirmations may satisfy this requirement;
need not be a formal contract
Sufficiency of Writing
is contrary to terms of written contract.
terms to written contracts.
there is evidence of fraud, mistake, or
misrepresentation, then oral evidence may
explain the problems or agreement beyond what
was written.
Parol Evidence Rule

Deschamps v. Treasure State Trailer Court
• Rasmussen sold Deschamps a mobile home trailer park in
Great
Falls, Montana. 96 residential spaces for $1,445,000.
• Contract explained how Rasmussen would be paid over time.
• After sale was completed, Rasmussen died. His estate
inherited the
asset (revenue from sale).
• Deschamps found significant problems with park’s water
system.
Required $400,000 in repairs.
• Deschamps stopped making payments to the estate. Claimed
the
cost of the water system repairs made payments impossible.
• Estate sued; Deschamps countersued: contract breach/fraud.
• Deschamps contended Rasmussen said that water system was
in
good condition and that occupancy rate was higher than in fact
it
was.
• Trial Court held for estate, finding Deschamps’ claims were
precluded by parol evidence rule. He appealed.
Continued

Deschamps v. Treasure State Trailer Court, cont.
• HELD: Affirmed. When language of contract is clear and
unambiguous, look at the substance of the contract.
• Contract said Deschamps did not rely on any oral assurances
or
presentations by Rasmussen. He cannot claim otherwise.
• Deschamps signed a contract prepared by his real estate agent,
containing statement that Deschamps did not relied on
assurances by
Rasmussen.
• Agreement provided
• 1) Rasmussen had not conducted an inspection nor warranted
property’s
condition.
• 2) Deschamps had right/duty to inspect property prior to
purchase.
• 3) Special disclaimer of reliance on Rasmussen’s assurances.
• 4) Inspection was waived or satisfied.
• 5) Clause in agreement said this was entire agreement and
superseded any oral
agreements.
• 6) Agreement could only be amended by a writing.
∗ Substantial Performance (Usually in good faith)
∗ Usual remedy is the contract price minus damages resulting
from lack of complete
performance

∗ Material Breach
∗ Performance substantially less than required
∗ Damages now due to non-breaching party
∗ Executed Contract
∗ Fully performed; nothing left undone
∗ If fully performed, damages for the price of performance may
be sought as a remedy
∗ Executory Contract
∗ Not fully performed
∗ If partial delivery of products, buyer need not pay total price
DISCHARGE OF CONTRACTS
Delegation (transfer of duties to another)
exceptions are contracts for services.
-Party Beneficiary is a party not part of original
contract who acquires rights under the contract.
Common for credit contracts.
accordingly
contract price minus damages resulting from lack of
complete performance

Breach (non-breaching party is discharged)
Material breach: Performance is substantially
less than the contract provides
indicates inability or lack of desire to perform
Discharge by Agreement of the Parties: Rescission—
parties agree to walk away, Novation—parties
agree to substitute new contract,
Accord & Satisfaction—parties are satisfied by
alternative performance.
DISCHARGE OF CONTRACTS
Discharge by Impossibility
∗ An unforeseeable, unanticipated event occurs that
makes performance impossible
∗ “Extreme or unreasonable difficulty, expense, injury or loss .
. . .”
(Restatement (Second) of Contracts)
∗ One party dies or is incapacitated.
∗ Law passed making performance illegal
∗ Subject matter of contract is destroyed
∗ The impossibility doctrine has been extended to
commercial impracticability or frustration
∗ Wartime shortages
∗ Extreme weather causes crop failures
∗ Loss of needed supplies due to sudden international

embargoes
∗ Difficult to be enforced in courts – courts generally expect at
least part
performance
efforts to mitigate or lessen
losses.
∗ Monetary Damages ($$)
∗ Compensatory Damages
∗ Actual Damages
∗ Expectancy Damages
∗ Liquidated Damages
∗ Nominal Damages
∗ Punitive or Exemplary (if
there is tort related to
breach of contract)

∗ Special Damages
Remedies
Economic Loss Rule
• In breach of contract, if no tort involved, damages are only
those
related to economic losses suffered by the breach.
• Rule based on three policies
• 1. Maintain distinction between tort and contract law
• 2. Protect commercial parties’ freedom to allocate risks by
contract
• 3. Encourage the party best situated to assess the risk of
economic loss
• Damages are only those related to lost profits and costs due to
the
breach.
• Accounting evidence and specific calculations are necessary
evidence
to be presented.
• No punitive damages or mental distress awards. (Parties often
try to
assert a tort, usually fraud, along with breach of contract to try
to get
these damages.)

DeRosier v. Utility Systems of America
built, lot needed to
be filled with dirt.
it would dump some
of their excess dirt on his lot.
yards of fill to be
dumped on his property. Gave permit to USA. USA dumped
6,500 cu. yd., so
5,000 cu. yd. had to be removed.
$9,500. DeRosier
hired another firm for $22,829 to remove excess dirt.
damages paid to remove
the dirt. Also awarded him $8,000 in consequential damages for
delay of time
lost in constructing new house.
by not having USA
move the dirt for only $9,500 rather than $22,829 paid to
another contractor.
DeRosier v. Utility Systems of America
Continued

• Consequential damages refers to damages distinguished from
general
damages.
• Consequential damages flow naturally from the breach, but are
not
recoverable unless they are reasonably foreseeable by parties at
time of
breach.
• USA contended no claim for delay damages was in evidence.
• HELD: District Court erred in awarding DeRosier $8,000 in
consequential
damages.
• HELD: District court had sufficient basis for calculating and
granting
$22,829 in general damages.
• HELD: Regarding DeRosier’s duty to mitigate: Non-breaching
DeRosier
could decline the offer of USA to remove dirt for $9,500. Did
not
unreasonably reject USA’s offer and did not fail to mitigate his
general
damages.
• Reversed in part; affirmed in part.
Quasi Contract
(Also called quantum meruit)

∗ Quasi (means “almost”) – not a true contract
∗ Equity concept used by courts to prevent injustice
∗ Example: You watch as a crew (in good faith) come
to your house and pave your driveway. You cannot
let them do the job and not pay them anything for
their work.
Scheerer v. Fisher
• Scheerer, a real estate agent, helped arrange $20 mil lion deal
between
Seller and buyer (Fisher). Was due 2% commission from each.
Deal fell
apart.
• But Fisher formed a new company and had 3rd party buy the
property
and then sell it to Fisher’s company.
• Scheerer learned of deal and sued for compensa tion based on
quantum
meruit.
• Trial Court held no contract or basis of payment. Scheerer
appealed.
• HELD: Reversed.
• Defendants acted to deny Scheerer compensation for services
rendered.
• Although original contract failed, law implies a promise to
pay some

reasonable compensation for services rendered.
• Allegations state a valid quantum meruit claim.
CONTRACTSTHE ROLE OF CONTRACT LAW
CONTRACT LAWDEFINITION OF A CONTRACT Types
of ContractsELEMENTS OF A CONTRACT Element #1:
AgreementTERMINATING AN OFFERELEMENT #1: THE
AGREEMENTPena v. FoxPena v. Fox continued
BILATERAL & UNILATERAL CONTRACTS ELEMENT
#2: CONSIDERATION ADEQUACY OF CONSIDERATION
Caley v. Gulfstream Aerospace Corp.ENFORCEABLE
PROMISES WITHOUT CONSIDERATIONHinson v. N&W
Construction CompanyHinson v. N&W Construction
Company�ContinuedELEMENT #3 CAPACITYVoid and
Voidable ContractsMINORS Element # 4: Legality
Unenforceable Contracts CONTRACT CONTRARY TO
PUBLIC POLICYELEMENT #5�REALITY AND
GENUINENESS OF CONSENTELEMENT #6�CONTRACTS
IN WRITING & THE STATUTE OF FRAUDS
(1677)Sufficiency of WritingParol Evidence RuleDeschamps v.
Treasure State Trailer CourtDeschamps v. Treasure State Trailer
Court, cont. DISCHARGE OF CONTRACTSDISCHARGE OF
CONTRACTS Discharge by ImpossibilityRemediesEconomic
Loss RuleDeRosier v. Utility Systems of AmericaDeRosier v.
Utility Systems of America�ContinuedQuasi Contract�(Also
called quantum meruit)Scheerer v. Fisher
Chapter 10-Assignments and Objectives.htmlObjectives-Chapter
10
2.1 Identify and determine who is competent to contract and
who is not and why.
2.2 Memorize and explain all of the elements of a contract.
2.3 Explain why the law of contracts is so important in a
business setting.
2.4 Identify and explain the types of contracts that must be in
writing to be enforceable under the Statute of Frauds.

2.5 Memorize, explain and apply the following concepts:
Performance of a contract, discharge of a contract, and breach
of a contract.
2.6 Name, explain and apply all of the remedies for breach of a
contract.
The most important cases for Chapter 10 are: Deschamps v.
Treasure State Trailer Court; Derosier v. Utility Systems of
America, Inc.
Readings
Read Chapter 10 carefully.Assignments
Chapter 10 Part 1:
Chapter 10 - Star Chevrolet v. Green.
This is one of the leading U.S. cases regarding contracts with
minors. Which is never a good idea for someone in business.
Read the case synopsis and 1) summarize the issues in this
case, and; 2) explain how the court held in the case and why the
court held as it did. Relate the information contained in chapter
10 regarding contract with minors to the issues and holding in
this case.
It relates to General objectives 2, 3, 4 and 7.
Part 1 Rubric ]
Chapter 10 Part 2:
Case question #2 on page 238. Anglin v. Berry 912 S.W.2d 633,
App., Mo. (1995).
The case questions involve actual cases, so google those cases
and the citations given in the text and read about the actual
case. It will help in answering the question. This case has to
do with contract avoidance because the Plaintiff claims there
was no "meeting of the mind" with regard to the contract.
Be sure to review the Chapter 10 Part 2 Rubric for this
assignment.
Submission InstructionsAll Assignments have a due date. The
due date for all Chapter 10 assignments is July 18th and I will

not accept them late. Be sure to upload your files into the
appropriate Dropbox. You can access the dropboxes by going
to Tasks in the top menu bar and selecting Dropboxes from the
dropdown menu.

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