Week 3 - AssignmentElements of a ContractSuppose that the Fabu.docx

Week 3 - Assignment
Elements of a Contract
Suppose that the Fabulous Hotel hires you as head chef under a
two-year employment contract. After two years, another hotel
wants to hire you. However, in the original employment
contract you signed with the Fabulous Hotel, the following
paragraph appears:
“The below-signed agrees not to work as a chef for another
hotel in the same metropolitan area for a period of two years
after leaving our employ.”
· Describe and analyze the five elements of a contract that must
exist for this agreement to be enforceable.
· Explain why this contract is governed by common law or the
Uniform Commercial Code (UCC).
· Examine at least two circumstances in which this non-compete
agreement would be unenforceable.
Submit a four- to five-page paper (not including title and
reference pages). Your paper must be formatted according to
APA style as outlined in the approved APA style guide and
must cite three scholarly sources in addition to the textbook
Carefully review the Grading Rubric (Links to an external
site.) for the criteria that will be used to evaluate your
assignment.
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Chapter 5

Administrative Law
Administrative law governs and de�ines the powers of
government agencies. A number of political and
technological factors have led to an explosion in
the growth of government since the turn of the 20th
century, at both the federal and state levels. Even though
these bureaucracies fall under the executive
or legislative branch, their rapid growth has given rise to
what is commonly referred to as the "fourth branch of
government": administrative agencies.
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Comstock/Thinkstock
The Internal Revenue Service is one example of an
agency created by the federal government to
expand
its regulatorypower.
5.1 What Is the Purpose of an Administrative
Agency?
Beginning in the 1930s, the federal government has been
steadily expanding its regulatory powers
over business and individuals through the creation of
agencies such as the Federal Trade Commission,
Internal Revenue Service, and Food and Drug
Administration. Under the U.S. Supreme Court's broad
interpretation of the Commerce Clause, Congress has the

power to regulate nearly any matter that has
an impact on interstate commerce. However, the 535 men
and women that make up the 112th
Congress have neither the time nor the expertise to
become involved in the speci�ics of drafting
regulatory rules for each federal agency. What Congress has
done instead is to create administrative
agencies to oversee or carry out speci�ic governmental
functions and then empower those agencies to
create the rules by which they will operate. The same
holds true for the executive branch of
government, where the president uses administrative agencies
to help carry out the responsibilities of
the of�ice.
When an agency is created, Congress gives the agency the
power to draft its own agency rules—the
guidelines under which the agency operates and that must
be followed by persons over whom the
agency is given regulatory powers. When federal agencies
enact rules, they must follow the guidelines
set forth in the Administrative Procedure Act (APA), which
speci�ies the procedures agencies must
follow in promulgating new rules. As long as an agency
creates rules in accordance to the
Administrative Procedure Act, such rules have the force of
law.
Agencies have two main purposes: assisting in carrying
out vital government functions and exerting
regulatory control. They are the instruments through which
Congress and the president institute
policies and implement government regulation. As both
government and government regulation have
steadily grown, starting in the �irst half of the 20th
century, agencies, as the instrumentality of that

growth, have likewise swelled in size and power. While the
titular seat of power may rest with
legislative and executive branches of government, it is
administrative agencies that carry out the day-
to-day operation of governmental regulatory and service
functions, and they often take on a life of
their own.
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5.2 The Administrative Procedure Act
An independent federal agency is created through an act of
Congress that establishes the agency and empowers it to
perform whatever duties Congress
speci�ically delegates to the agency. The actual creation of
the agency and the scope of its authority are detailed in
the enabling legislation—the act of
Congress that creates the agency. The details of the
agency's operation are left to the agency, which creates its
own rules in accordance with the
guidelines set forth in the 1946 Administrative Procedure
Act (APA). The APA gives agencies broad rulemaking
powers, as long as they act within the
guidelines that the APA provides. Federal executive agencies
are usually created by presidential order. Like independent
agencies, executive agencies are
also subject to the guidelines of the APA.
What relevance does this have to you as a businessperson?
One effect could be that if an act by an administrative

agency exceeds the powers given to it
by its enabling legislation, and this impacts your business,
then the act by the administrative agency is unenforceable.
Rulemaking Requirements
Under the Administrative Procedure Act, agencies have the
power to create rules that have the force of law provided
that the guidelines of the APA are
observed. The basic requirements that all federal agencies
must observe in rulemaking are as follows:
Giving notice to the general public that a new rule or rule
change is being considered
by publication of the proposed rule in the Federal
Register
Providing an opportunity for all interested parties to
participate in the rulemaking
process by conducting public hearings and giving all
interested parties a reasonable
opportunity to voice their views on the proposed new rule
or rule change
Publishing in the Federal Register a draft containing the
essential factors relating to the
proposed rule and its purpose at least 30 days before the
rule is to take effect
Once the requirements of the APA have been met, the
proposed rule takes effect on its proposed effective date
and has the force of law.
Limits on Administrative Agencies
As previously noted, federal agencies have far-reaching

powers within the areas that they oversee. A congressional
grant of authority to an agency often
includes the ability to carry out investigations, create rules
that are the functional equivalent of statutes, hold hearings
to adjudicate alleged violation of
agency rules, and assess punishment (usually by way of
�ines) to those adjudicated to be in violation of the
agency's rules. Agencies with such powers,
such as the Internal Revenue Service, can act as legislator,
police, judge, and jury.
While this concentration of power leads to the swift
administration of justice, the average citizen facing an
administrative hearing may take comfort in the
knowledge that both agency rules and most agency
decisions are subject to judicial review on any of the
following grounds:
The agency acted beyond the scope of its authority under
the agency's enabling act;
The agency misinterpreted federal law (including its
enabling act) in its rulemaking
or in the adjudication of any matter before the agency;
Agency action violates the U.S. Constitution or any federal
law; or
Agency rules or the �indings of administrative law judges
are arbitrary or capricious.
Agency rules and procedures, as well as the adjudications
by administrative law judges of agency hearings conducted
as informal trials, are upheld by the
courts as long as they meet the noted requirements.

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Pablo Martinez Monsivais/Associated Press
Members of the president's cabinet direct
executive agencies such as the
Departments of State, Justice, and Homeland
Security.
5.3 Types of Administrative Agencies
Federal agencies fall into two basic categories: independent
and executive. Independent agencies are created by Congress
to assist it in exerting regulatory
control or to carry out governmental administration. Once
created, these agencies are headed by a director who is
appointed by the president and
con�irmed by the Senate. In order to distance these
agencies from the political process, independent agency
directors serve for set terms that are
staggered so as to prevent any given administration from
having too great an impact on such agencies through
presidential appointments.
Independent Federal Agencies
Independent federal agencies can wield tremendous
power. Congress often imbues these agencies with quasi-
judicial, quasi-legislative, and quasi-
executive powers: they create their own rules (a legislative
power), enforce these rules and conduct investigations
(executive powers), and adjudicate
disputes relating to these rules or their applications in

administrative hearings similar to trials (a judicial power).
Administrative law judges (ALJs)
preside over hearings, rule on issues of evidence, decide
the outcome of cases, and write opinions. Independent
agency directors are appointed by the
president and con�irmed by the Senate.
Independent agencies perform a vital function in areas where
speci�ic expertise is a requirement in order to perform a
governmental function or regulate
a speci�ic business. They include the Central Intelligence
Agency, the Environmental Protection Agency, the Equal
Employment Opportunity Commission, the
Federal Communications Commission, the Interstate
Commerce Commission, the Federal Trade Commission, the
Nuclear Regulatory Commission (NRC),
and the Securities and Exchange Commission, among many
others. Although Congress may have the right to regulate
aviation (because of aviation's impact
on interstate and international commerce), the civilian and
military use of nuclear energy, and intelligence gathering,
few senators or representatives have
the highly specialized knowledge necessary to effectively
regulate any of these areas. Rather than regulating these
areas directly, Congress can set up
agencies staffed with experts who can promulgate rules by
relying on their superior knowledge of the �ields they
regulate or operate in, with appropriate
congressional oversight. Consider the following examples.
1. The Nuclear Regulatory Commission (NRC),
concerned about safety in the nation's nuclear
power generating stations, wishes to impose
new
safety regulations affecting such power-generating
plants. After issuing a notice to the

general public that it is considering safety
rule changes,
the agency conducts hearings from interested persons in
the industry as well as from the general public
for a period of 60 days. At the
conclusion of thesehearings, it decides that it
would be in the best interest of the
industry to ban the sale of alcoholic beverages in
counties
where nuclear generating plants are located. It
then publishes a copy of the proposed regulation as
well as a general statement of the need for
such regulation in the Federal Register 30 days before
the regulations are to take effect. After
the effective date of the regulations, it is
challenged in a federal district courtof appeals
by liquor store owners in affected counties.
What is the result?
2. In the last example, assume that the NRC
followed the same procedure and promulgated a
rule that forbade nuclear generating plant
workers
from working with a blood alcohol level of .05%,
subjectingviolators to a �ine of $5,000. Is
such a regulation likely to be upheld if it
is
challenged in court? Explain.
3. The Federal Communications Commission,
concerned with the increasingviolence and hatred
depicted in the popular media, decides to
consider
new rules affecting the broadcasting of material of a
violent, sexual, or hateful nature. After
following the established procedures for

rulemaking
under the APA, it promulgates the following
new rules:
A. Material of a violent or sexual nature
can be broadcast only between the hours of
12:00 a.m. and 6:00 a.m.;
B. Music that advocates physical violence, the
degradation of women, or racial bigotry
cannot be broadcast at any time.
Will thesetwo regulations withstand courtchallenges?
Explain.
Executive Agencies
Federal agencies have also been created to assist the
executive branch in carrying out
its responsibilities. Notable executive branch agencies
include the Federal Bureau of
Investigation (Justice Department), the U.S. Customs Service
(Treasury Department),
the Food and Drug Administration (Health and Human
Services Department), the
Bureau of Indian Affairs (Interior Department), the
Immigration and Naturalization
Service (Justice Department), the Secret Service (Treasury
Department), the Federal
Aviation Administration (Transportation Department), and
the Social Security
Administration (Health and Human Services Department), to
name only a few.
Consider the following example.
The Federal Aviation Administration wants to

institute new safety
regulations relating to the use of drugs and
alcohol by pilots in civil
aviation. After conducting a study, the agency
decides that it would be in
the best interest of the general public to begin
weekly random drug testing
of all airline pilots effective immediately. At
the direction of the agency
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director, the FAA sends out notices to all airlines
that a new drug testing program is now in
effect. Is this regulation validunder the
facts given? Explain.
Unlike independent agencies, executive agencies are under
the control of the president, who can appoint and remove
their directors at will. Executive
agency directors, including members of the president's
cabinet, serve at the pleasure of the president. These
agencies are, therefore, much more
responsive to political issues and subject to the winds of
political change, at least at the top levels. Nonetheless, most
agency workers are civil servants,
not political appointees, and enjoy the relative job security
that status conveys. Thus, while the heads of executive
agencies may come and go with
changing administrations, the bureaucracy itself is well

entrenched and grows yearly as new agencies are created
and existing agencies expanded to help
implement government goals and programs.
StateAgencies
Agencies are used not only by the federal government but
also by state governments. State administrative agencies are
set up to assist the executive and
legislative branches to carry out their responsibilities. States
use agencies to assist with such matters as the
administration of workers' compensation,
social services, tax collection, and the regulation of
business. For example, each state has a tax division that
not only oversees the collection of state taxes
but also has a component with hearing boards that hold
"trials" or hearings presided over by government ALJs.
There is also an appeals component
wherein the loser can take the tax issue to another level
in the same agency. The decisions of the hearings are
published and become stare decisis for
further hearings. Businesses can easily consult these matters
to see the current state of the law.
Workers' Compensation Boards
Because workers' compensation is such an important
business-related topic, this section will focus on a "typical"
workers' compensation board and how it
makes law, but keep in mind that each state creates its own
workers' compensation law, so the rules discussed next vary
throughout the United States. If
you want to view your own state's workers' compensation
rules and procedures, search the words "workers'
compensation State C." The Colorado
workers' compensation can be found here

(http://www.colorado.gov/cs/Satellite/CDLE-
WorkComp/CDLE/1240336932511) ; Utah at
laborcommission.utah.gov;
and so on. Each state's website is detailed and provides
information unique to its systems and rules. For an
overview, the U.S. Small Business
Administration website sets out links for business managers
looking for workers' compensation information throughout
the states found here
(http://www.sba.gov/content/workers-compensation) .
How Workers' Compensation Boards Make Law
In the early 1900s, when the United States had a large
industrial base, many employees who were injured or killed
at work, or their families, could not
pay their medical expenses and often lost their jobs if their
injuries were serious. Workers' compensation laws serve an
important social and political
purpose in that they force employers to pay into an
insurance fund to guarantee that employees will have
medical and hospital coverage for injuries or
death on the job. The trade-off is that the employee cannot
sue the employer for negligence, a proceeding that would
most likely result in much larger
monetary compensation for the employee than the awards
available through workers' compensation.
When an employee is injured at work, the employee
submits any medical bills to the employer and the bills
are then paid. On occasion, an employer may
refuse to pay an injured employee's claim. Suppose, for
example, that an employee suffers a heart attack at work. The
employer may argue that the injury
is not work related, and thus the employer is not liable. The
employee, on the other hand, may disagree, contending that

the job caused his heart attack,
making him eligible for bene�its. Such a workers'
compensation claim is deemed controverted. When this
occurs, the employee may request a hearing
before a workers' compensation administrative judge. At the
hearing there will be doctors, the employer, the employee,
and the judge, who will listen to
the "testimony" and render a decision about whether or not
the employee is entitled to payment. Thus, the hearing
resembles a trial in which there are
witnesses and testimony and a decision by a judge.
Because the hearing is "like a trial" but does not have all
the formalities of a trial, it is called quasi-
judicial. The judge's decisions are written down and can
serve as precedent, thereby providing some predictability. In
this way, workers' compensation
hearings "make law." The following case excerpt (with
citations omitted) is an example of a controverted matter
before the New York Workers'
Compensation Board.
Cases to Consider: Richman v. Workers'
Compensation Board
Richman v. Workers' Compensation Board, 936 N.Y.S. 2d
722 (Jan. 2012)
Appeal from a decision of the Workers' Compensation
Board, �iled August 18, 2010, which ruled that claimant
sustained a compensable
injury and awarded workers' compensation bene�its.
On August 10, 2007, claimant, a court reporter, was found
unconscious at her workplace and rushed to a local
hospital, where she was
diagnosed with a subarachnoid hemorrhage caused by a

ruptured basilar artery aneurysm. Although claimant
survived, she apparently
remains unable to communicate. A workers' compensation
claim subsequently was �iled on her behalf, and the
employer and its workers'
compensation carrier (hereinafter collectively referred to as
the employer) controverted the claim, asserting that the
ruptured aneurism
was not related to claimant's employment. Following a
hearing, a Workers' Compensation Law Judge (hereinafter
WCLJ) found that the
employer did not overcome the presumption of
compensability set forth in Workers' Compensation Law §
21 (1). The Workers'
Compensation Board af�irmed the WCLJ's decision,
prompting this appeal by the employer.
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We af�irm. Pursuant to Workers' Compensation Law § 21
(1) a presumption of compensability exists where, as here,
an unwitnessed or
unexplained injury occurs during the course of the affected
worker's employment. "The employer may overcome the
presumption by
presenting substantial evidence to the contrary."

Here, we �ind no basis upon which to disturb the Board's
conclusion that the employer did not present suf�icient
evidence to overcome
the presumption. The record establishes that, prior to
claimant's collapse, she was under considerable stress at
work and her workplace
was loud and overheated. While the employer's expert
opined that claimant's ruptured aneurysm was unrelated to
her employment, the
Board agreed with the WCLJ that the expert's report and
testimony were not credible—in large measure because he
was evasive when
questioned as to whether workinduced stress could raise a
person's blood pressure high enough to cause an aneurysm
to rupture.
Notably, the expert acknowledged that high blood pressure
could be a factor in the rupture of an aneurysm and
conceded that he did not
know what claimant's blood pressure was at the time the
rupture occurred. Contrary to the employer's argument, the
Board, which "is the
sole arbiter of witness credibility" was not required to
wholly credit the expert's opinion on this point simply
because it was the only
expert proof presented. The employer's remaining arguments
on this point, to the extent not speci�ically addressed, have
been examined
and found to be lacking in merit.
ORDERED that the decision is af�irmed, without costs.
Read the full text of the case here
(http://law.justia.com/cases/new-york/appellate-division-
third-department/2012/512356.html) .
Questions to Consider

1. What did the court mean by a "presumption of
compensability"? What does this mean?
2. How does the employer overcome this presumption? Did
the employer succeed in this case? Why or why not?
How Workers' Compensation Boards Determine
Payment
When an employee is injured on the job, the next step in
the process is for that employee to receive medical
attention. The doctor will make a
determination about the extent of the injury, deeming it
either temporary or permanent. For example, if the worker
suffered a broken arm, the injury is
temporary; if the worker suffered a spinal injury, the injury
may be permanent. In the case of permanent injuries, the
doctor (or doctors) will make an
assignment of the percentage of injury, for example, 32%
permanent partial disability. That number will then be
converted using the state's permanent
partial disability schedules to an actual dollar amount. For
example, a right index �inger under the schedule might be
worth $2,500. The complexities of
determining a workers' compensation award are illustrated
in the excerpts from the following case, which shows the
ways in which claimants are
classi�ied and paid:
Cases to Consider: Schmidt v. Falls Dodge, Inc.
Schmidt v. Falls Dodge, Inc. New York State Court of
Appeals (2012)
Workers' Compensation Law §15(6) provides that

compensation for any disability, partial or total, shall not
exceed a �ixed maximum per
week. At issue in this case is the application of the cap
when an employee has received several awards for different
injuries, at least one of
which is a so-called "schedule loss of use" award being
paid periodically pursuant to the pre–2009 version of
Workers' Compensation Law
§25. We hold that in such cases an employee's total weekly
payment may not exceed the cap. The schedule award is not
nulli�ied by the
other awards, but must be deferred until the time comes
when the cap will not be exceeded.
I
Plaintiff worked as a collision shop technician, repairing
automobiles. He suffered several injuries on the job, of
which three, all occurring
in 2005, are relevant to this appeal. On February 21, he
slipped on ice, injuring his hip and back. On March 18, he
suffered a lower back
sprain. He left his job on June 27, and later reported
hearing loss beginning on that date, attributable to loud
noise at his place of work.
He applied for and received workers' compensation
bene�its for all three injuries.
For the hip and back injuries, the workers' compensation
carrier for claimant's employer was directed, in separate
awards, to pay claimant
a total of $400 per week—the maximum allowed, at the
relevant time. . . . Though the disabilities caused by the hip
and back injuries were
designated as "temporary," nothing in the record indicates
that these $400 weekly payments have ever been

discontinued.
On September 21, 2007, a Workers' Compensation Law
Judge made an award for the hearing loss claim. Claimant
was found to have a
permanent partial disability, entitling him to a schedule loss
of use award under Workers' Compensation Law §15. . . .
The Judge in this case found that claimant's hearing loss
entitled him to 32.145 weeks of bene�its at the rate of
$400 per week; the award
speci�ied a period from September 27, 2005 (the "date of
disablement" found by the Judge) to May 10, 2006. After
considering the
carrier's objections, the Judge concluded on November 23,
2007 that the schedule award was "currently payable in
full," notwithstanding
the fact that claimant had received during the period in
question, and was still receiving, $400 per week for his
other claims. The Judge
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found the issue to be controlled by Matter of Miller v.
North Syracuse Cent. School Dist. in which
the Appellate Division held that because a
schedule award "is not allocable to any particular period,"
it "cannot be deemed to overlap with" a temporary total

disability award.
II
Workers' Compensation Law § 15(6)(a) says, in relevant
part:
Compensation for permanent or temporary partial disability,
or for permanent or temporary total disability due to an
accident or disablement resulting from an occupational
disease that occurs . . . on or after July �irst, nineteen
hundred ninety
two [and before July one, two thousand seven], shall not
exceed four hundred dollars per week.
The Board and the Appellate Division have held in this
case that claimant was entitled to receive $800 per week
for a period of roughly 32
weeks. That result cannot be squared with the cap imposed
by section 15(6). The Appellate Division's decision in
Miller, which upheld a
similar award, is incorrect and should not be followed.
We therefore hold that periodic payments of a schedule
loss of use award must be deferred to the extent that those
payments, when
combined with payments of another disability award, would
exceed the cap imposed by Workers' Compensation Law §
15(6). We hold no
more than this, and do not decide what implications, if any,
our holding may or may not have for cases governed by
the 2009 amendment
to section 25(b): that section, as amended, now says that
schedule loss of use awards "shall be payable in one lump
sum, without
commutation to present value upon the request of the

injured employee."
Accordingly, the order of the Appellate Division should be
reversed, with costs, and the case remitted to the Appellate
Division with
directions to remand it to the Workers' Compensation
Board for further proceedings in accordance with this
opinion.
(http://www.nycourts.gov/ctapps/Decisions/2012/May12/7
6opn12.pdf) .
1. What different injuries did this employee suffer at work,
and what were his workers' compensation awards for each?
2. This case is concerned with the cap that a worker may
receive for workers' compensation. Why does the state
impose a cap? And
what possible effect does this have on an employee?
Workers' Compensation as the Exclusive Remedy
As mentioned above, workers' compensation serves an
important social function by guaranteeing that workers hurt
on the job are taken care of medically
and that their bills are paid. There is a trade-off for this
guarantee, however. Employees are not allowed to sue their
employers for injuries on the job that
are a result of the employer's negligence. Thus, we say that
workers' compensation is the exclusive remedy, meaning it is
the only remedy available to an
injured worker against an employer. If an employer does
not put up an adequate guard around a machine and an

employee is seriously maimed, the
employee's monetary award is limited to workers'
compensation rather than a lawsuit in court. (However, the
employee in such a situation could sue the
manufacturer of the machine, who, of course, is not the
employer.) (See Chapter 8, Negligence, Strict
Liability, and Product Liability
(http://content.thuzelearning.com/books/AUBUS670.12.2/sectio
ns/sec8.1#sec8.1) .) This is the maximum amount that an
employee could recover under workers'
compensation, whereas in a tort lawsuit, the same injury
might be worth millions of dollars, �iguring in punitive
damages, compensation for emotional
distress, and so forth. There is usually no choice; workers'
compensation is the only remedy afforded to employees
against employers, except in rare
exceptions.
One of those exceptions is if the employer intentionally
injured the worker, as discussed in the Washington State
case Brame v. Western StateHospital,
excerpted here with citations omitted:
Cases to Consider: Brame v. Western StateHosp.
Brame v. Western StateHosp., 136 Wash. App. 740, 150
P.3d 637 (2007)
In 1911, the legislature passed the Industrial Insurance Act,
which provided injured workers a system of certain, no-
fault compensation for
injuries on the job while granting employers immunity
from civil suits by workers. The act generally bars employee
lawsuits against
employers for on-the-job injuries.

This bar is subject to a limited exception when an
employer intentionally injures an employee:
If injury results to a worker from the deliberate intention
of his or her employer to produce such injury, the worker
or
bene�iciary of the worker shall have the privilege to take
under this title and also have cause of action against the
employer
as if this title had not been enacted, for any damages in
excess of compensation and bene�its paid or payable
under this title.
This exception prevents employers who engage in
egregious conduct from burdening the industrial insurance
risk pool. We interpret the
deliberate intention exception narrowly. Neither gross
negligence nor failure to observe safety laws or procedures
rise to the level of
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deliberate intention. Even an act that has a substantial
certainty of producing injury is insuf�icient to show a
deliberate intent to injure.

The Birklid Test
Until 1995, courts found deliberate intention only in cases
where an employer or its agent physically assaulted an
employee. But in Birklid
our Supreme Court interpreted the exception to include
conduct other than physical assaults. In that case, the
plaintiffs alleged that a
supervisor reported to management that fumes from a new
product were making employees sick; management denied a
request for
improved ventilation before increasing use of the product;
workers became ill after the product went into full
production; and Boeing
knew that the symptoms were the result of exposure to the
product. The court, �inding that the employees had alleged
suf�icient facts to
�ind deliberate intent on the part of Boeing to injure
them, held that deliberate intention exists where the
employer (1) has actual
knowledge that an injury is certain to occur and (2)
willfully disregards that knowledge.
***
Since Birklid, the Supreme Court continues to emphasize the
need to show actual, not substantial, certainty. For example,
in Vallandigham
employees alleged that the school district deliberately
intended to injure them because it willfully disregarded its
knowledge that a severely
disabled special education student would injure them. The
employees alleged that over the course of a school year the
student had injured
staff and other students about 96 times, resulting in 7
workers' compensation claims. The school district had taken

numerous steps to try
to modify the student's behavior, including implementing a
behavior plan, hiring a one-on-one aide, and creating an
isolation space. The
court rejected the employees' claims, holding that they met
neither prong of the Birklid test.
The court emphasized that the �irst prong "can be met in
only very limited circumstances where continued injury is
not only substantially
certain [to occur] but certain to occur." Foreseeability is not
enough to establish deliberate intent to injure an employee,
nor is an
admission that injury would probably occur. And the
plaintiffs' case could not meet this test because "the
behavior of a child with special
needs is far from predictable"; no one knew that the violent
behavior would not stop as quickly as it began. This was
unlike Birklid where
the employer knew that continued exposure to the chemical
would make employees sick absent increased ventilation.
In addressing the second prong of the test, the court
disapproved of two Court of Appeals cases that considered
whether the steps the
employer took to prevent injury were reasonable and
whether they were effective. These tests, according to the
court, adopted, at least in
part, a negligence standard; the court again emphasized that
the deliberate intent exception does not apply in cases of
negligence, even
gross negligence.
The Employees contend that the trial court erred in granting
the Hospital summary judgment because issues of material
fact exist as to

whether the Hospital deliberately intended to injure them.
They argue that the Hospital knew with certainty that
patients would assault
staff and that it willfully disregarded this knowledge. They
point to the history of patient assaults on staff as proof
that the Hospital knew
with certainty that patients would assault staff in the
future. And they assert that the Hospital willfully disregarded
this knowledge because
it did not effectively train staff in defending themselves
against patient assaults and instead implemented a non-
violence initiative aimed at
eliminating the use of physical restraint of patients.
Even taking the facts in the light most favorable to the
Employees, they cannot meet the stringent requirements of
the Birklid test. The
Employees do not contend that the Hospital knew that any
speci�ic assault would occur. They rely instead on the
history of patient-to-staff
assaults. But past patient-to-staff assaults demonstrate, at the
most, that such assaults are foreseeable, not that they are
certain.
Foreseeability is not suf�icient to establish deliberate intent
to injure an employee. In Vallandigham, 96 prior assaults
by one student were
not suf�icient to predict with absolute certainty any
particular future assault. Similarly, here the past assaults of
hospital patients on
hospital staff are not suf�icient to create a certainty that
any individual patient will assault any individual staff
member.
(http://caselaw.�indlaw.com/wa-court-of-
appeals/1432625.html) .

1. Under what circumstances may an employee sue his or
her employer for injuries sustained at work under this
court's theory?
2. Why does this court make an exception to the rule,
allowing employees to sue their employers? Do you agree
with this policy shift?
Employers' Duties Under Workers' Compensation
Law
Employers have many responsibilities under workers'
compensation too numerous to list here. Among the most
important requirements, however, are
that the employer must have in place insurance, either
through a private carrier or through the state fund. In
New York, for example, an employer's
failure to provide workers' compensation coverage is a
crime, punishable by �ines and/or criminal prosecution. If
an employer does not have coverage
and an employee �iles for workers' compensation, the
employer will be liable for the actual cost of medical care
and compensation payments, in addition
to penalties. If a corporation has failed to secure workers'
compensation coverage, the president, secretary, and treasurer
of the corporation are
personally liable for the medical care, compensation
payments, penalties, and possible criminal prosecution. This
applies to situations in which employers
might hire someone "under the table." If that person is
injured and is not listed on the books, there are numerous
workers' compensation violations
associated with such conduct, some of them criminal.

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Workers' compensation rules are detailed, but each state has
a website devoted to the issue. On it, the responsibilities
of the employer are clearly spelled
out.
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Key Terms
Click on each key term to see the de�inition.
administrative agencies
ns/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.
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State and federal governmental entities set up to assist with
the smooth operating of areas of business and industry
and to provide special
expertise.

administrative law judge
Government employee (state or federal) who presides over
agency hearings and writes opinions upon the conclusion
of the hearing that resemble
a judicial decision and are therefore quasi-judicial.
Administrative Procedure Act
Speci�ies the procedures that administrative agencies must
follow in promulgating new rules.
agency rules
Guidelines under which an agency operates and that must
be followed by persons over whom the agency is given
regulatory powers.
controverted
Refers to a workers' compensation case in which the
employer refuses to pay following a worker's injury or
death.

exclusive remedy
The concept that employees may not sue their employers for
injuries or death on the job but can seek a remedy only
through the workers'
compensation process.
executive agencies
Agencies that have been created to assist the executive
branch in carrying out its responsibilities.
independent federal agencies
Agencies created by Congress to assist it in exerting
regulatory control or to carry out governmental
administration.
permanent partial disability
A determination in workers' compensation that the
disability suffered by the employee covers part of the body
but will be permanent, thereby

converting it to a "schedule loss of use award." The injury
is given a �ixed number of lost weeks' compensation
according to the bodily member
injured.
private insurance carrier
An insurance carrier for an employer to cover matters like
workers' compensation claims.
state fund
A general statewide fund to which employers contribute
and which then pays out workers' compensation claims.
workers' compensation board
A state administrative agency that adjudicates cases
requesting compensation to workers for death or injury on
the job.
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Chapter 5 Flashcards
Critical Thinking and Discussion Questions
1. What is the basic purpose of government agencies?
2. What is the purpose of state administrative agencies?
3. What are the basic Administrative Procedure Act
requirements that agencies must observe in rulemaking?

4. What are the quasi-judicial and quasi-legislative powers
that some agencies are given in their enabling legislation?
5. Where does one look to �ind the exact power that
Congress has given to an independent federal agency?
6. Although agency heads change from time to time as part
of the political process, most agency employees are
unaffected by changes in political
administrations. Why?
7. Julian works in a shoe manufacturing plant putting the
soles on leather shoes using a machine similar to a lathe,
a rotating metal pipe. On the day in
question, Julian was preparing to place the leather into the
machine when a piece of his clothing became caught on
the lathe, pulling on his arm and
causing severe injuries. His employer refuses to pay for
any of his injuries, claiming that the injury is completely
the fault of Julian's negligence. What
options for remedy would Julian have? Assume that another
employee pushed Julian into the machine, and that is why
he suffered the injuries. Now
what would Julian's options for remedy be? Now assume
the employer pushed him into the machine, and that is the
sole reason he suffered the
injuries. In this situation what would Julian's options for
remedy be?
the smooth operating of areas of business and industry and to
Click card to see term �
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Unit II
Criminal Law and Torts
Comstock/Thinkstock
Chapter 6: Criminal Law
In this chapter you will:
Understand the elements and classi�ications of different
types of crime.
Identify defenses to criminal liability.
Chapter 7: Intentional Torts
Understand the elements and classi�ications of intentional
torts.
Chapter 8: Negligence, Strict Liability, and Product
Liability

Understand the elements of negligence and use of the
"reasonable person standard."
Identify defenses to negligence.
Distinguish between strict liability and product liability.
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Chapter 11
Contracts, Part III: Risk of Loss Rules, Negotiating Contracts,
and Working With an Attorney
In this chapter, which continues our examination of
contract law, we are going to study what are commonly
called risk of loss rules. These are the rules
that apply to transactions between sellers and buyers when
goods are lost, damaged, or destroyed between the time of
purchase and actual receipt by the
buyer. The question always is: Who will pay the cost of
the goods—the seller, the buyer, or someone else—in the
event that the parties suffer a loss? We
will also discuss the role of a manager in entering
contracts and working with an attorney.

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Elaine Thompson/Associated Press
A common carrier is a company that transfers
goods for the general
public, such as the U.S. Postal Service.
11.1 Risk of Loss Rules and Contracts
Before a risk of loss problem can arise, the buyer must
have enough ownership in the goods that he or she has
rights in their loss. Such rights are often
described as an insurable interest, that is, one that is
worthy of �inancial remuneration in the event that the
goods are lost, stolen, or damaged. To have
an insurable interest, the goods must �irst be picked out of
the larger mass, or identi�ied to the contract. If you
actually went into a large appliance
store, chose a particular �lat-screen television, and paid for
it, the employees would go back into the warehouse and
pull your set off the shelf. At the
moment it was pulled off the shelf, it would be identi�ied to
the contract as being your television.
A buyer obtains an insurable interest in goods that exist at
the time of entering into the contract, like the television
described above. But if future goods
are involved (goods that are not in existence at the time of
entering into the contract, such as those to be
manufactured or ordered by the seller for the
buyer), the buyer obtains an insurable interest as soon as

the goods are "shipped, marked, or otherwise designated by
the seller as goods to which the
contract refers" (UCC §2[501]). If the future goods are
crops or the unborn young of animals, for example, the
buyer obtains an insurable interest as
soon as the crops are planted or the animals conceived.
Sellers, on the other hand, retain an insurable interest in
goods for as long as they have title in
the goods or for as long as they retain a security interest
in them, which is a right by a creditor to have speci�ic
property sold to satisfy the debt.
When goods are damaged, lost, or destroyed between the
time that the buyer gains an insurable interest in them and
actually receives them, we say there
is a risk of loss problem. The easiest way to settle any
dispute concerning a loss of goods is to negotiate a
contract about the issue ahead of time, while
purchasing the goods. The contract could say something like
"In the event the automobile is damaged on the way to
the dealership, the manufacturer
agrees to bear all the costs of any such damages." This is,
of course, the safest and simplest way to avoid any
disagreements about damage or loss of the
goods (personal property).
In the event that the parties do not have the foresight to
agree about risk of loss before it occurs, the courts will
look to see whether either party
breached the contract. As a general rule, the party who
breaches the contract will bear the risk of loss, as illustrated
below:
A seller agreed to sell 1,000 pounds of
beans to the buyer with delivery to be on
or before May 15. However, the seller failed

to deliver
the goods on that date, and that night, the seller’s
factory burned down. Since the seller
breached the contract, the seller would incur
the risk of loss.
In the event that the parties do not agree ahead of time
who has the risk of loss, and if neither party breached the
contract, then the courts next look at
whether or not one of the parties is a merchant. Suppose,
for example, that when you purchased your �lat-screen TV
from a big-box store, you could not
take it home that day but planned to return the next day
with a truck to transport it. If the store burned down that
night, the loss would be incurred by
the merchant (store). If you purchased the same TV at a
garage sale, however, or from a nonmerchant, then the loss
would be borne by you (the buyer),
as soon as you paid for the goods.
Common Carrier Contracts
With the advent of the Internet, much more commerce is
being conducted via
shipping companies, or common carriers. A common carrier
is a company that
offers transportation services to the general public, such as
UPS; Federal Express; air,
train, and bus transportation companies; and the U.S. Postal
Service. The type of
method chosen for delivering goods can have an effect on
such factors as the risk of
loss of goods in transit and the time when the buyer
obtains an insurable interest in
them.

There are two basic types of arrangements one can make
with a common carrier: a
shipment contract or a destination contract. Whether the
contract is designated as
a shipment or destination contract has important legal
rami�ications for who bears
the risk of loss between the buyer and the seller.
Shipment Contracts
In a shipment contract, the risk of loss passes from the
seller to the buyer when the
goods are placed on the carrier in the seller’s city.
Suppose, for example, that the
seller is located in Maryland and that the buyer is located
in California. The seller is responsible for shipping the
goods to the buyer, so the seller makes
arrangements to place the goods onto the carrier in
Maryland. The shipping terms are "FOB Baltimore,
Maryland," the seller’s city. This scenario is
illustrated in Figure 11.1.
Figure 11.1: Shipment contract
In a shipment contract the risk of loss passes
from the seller to the buyer when goods
arrive at their place of shipment, in
this case when the goods are placed on the
carrier in Baltimore.
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You can recognize this as a shipment contract because the
seller is located in Baltimore and the FOB (free on board)
location is also Baltimore. (Some
students remember this rule by the device "S and S":
Shipment/Seller. Both begin with the letter S.). Accordingly,
because it is a shipment contract, when
the seller places the goods on the carrier in Baltimore, the
risk of loss passes to the buyer. Therefore, if the goods are
damaged or destroyed between
Baltimore and Los Angeles, the buyer will have to pay for
the goods anyway.
How do you know whether a contract is a shipment or
destination contract? Contracts with carriers have shipping
terms. As noted above, the buyer and
the seller entered into a contract "FOB Baltimore,
Maryland." Since it speci�ies FOB Baltimore, which is the
seller’s city, it is a shipping contract. If it had
said "FOB Los Angeles," we would recognize it as a
destination contract, because Los Angeles is the buyer’s
city, as discussed in more detail below. Thus,
the shorthand FOB [seller’s city] is part of a shipment
contract in which the risk of loss is on the buyer once the
seller places the goods on the carrier in
the seller’s city.
Destination Contracts
In a destination contract, the seller must, at his or her own
expense, deliver the goods to the buyer’s city and make
the goods available for pickup there.
You can recognize a destination contract by looking at the
city designated after the shipping terms. In Figure 11.2 the
city designated is Los Angeles,

where the buyer lives, so it is a destination contract. In a
destination contract, the risk of loss is on the seller until
the goods are tendered to the buyer.
Tendered means that the seller has noti�ied the buyer that
the goods are available for pickup.
Figure 11.2: Destination contract
In a destination contract the seller bears
the risk of loss until a shipment of goods
reaches its destination, in this case Los
Angeles.
Shipping terms are shorthand initials that designate what
type of contract is involved and various details regarding
cost and insurance of the goods. For
example, FOB and FAS are shipping terms that mean free on
board and free alongside a vessel, respectively. When
FOB and FAS, combined with the seller’s
city, are involved, the seller bears the responsibility (and
cost, if any) of transferring the goods into the possession
of the carrier. However, once delivered,
the risk of loss is on the buyer. If the contract calls for
FOB or FAS at a speci�ic destination or the buyer’s city
(e.g., FOB buyer’s plant or FAS buyer’s
port), then the seller bears the cost and risk of loss of
getting the goods to the named destination.
The acronyms CIF and C&F stand for cost, insurance,and
freight and cost and freight, respectively. In a CIF
contract, the cost of shipping and the cost of
insurance are included in the sale price, whereas in a C&F
contract, the cost of shipping (freight) is included in the
sales price but not the cost of
insurance, which the buyer must pay for and procure on
his or her own, if desired.

Sale on Approval Contracts
Another type of contract used frequently in business is a
sale on approval contract. In this type of contract, the
seller ships goods to the buyer so that
the buyer can try the goods and then decide whether or
not to keep them; if the buyer decides not to keep them,
the buyer ships the goods back to the
seller. Throughout the transaction, all the costs and risk are
borne by the seller, including shipping to and from the
buyer. If, however, the buyer decides
to keep the goods, the buyer has to pay for them.
Why would a seller enter into such a contract? In many
instances, it is just good business. If buyers are reluctant to
try out a product, the seller may be
willing to pay the expenses to get the goods into their
hands, con�ident that once they have enjoyed the products,
they will want to purchase them.
In some instances, the seller will offer the goods for
something like a "15-day trial period." In this scenario, if
the buyer keeps them for more than 15
days without shipping them back, the buyer will have
accepted the goods, and the risk of their loss will shift to
him or her.
Sale or Return Contracts
In a sale or return contract, the seller ships goods to a
buyer who is also a seller, as illustrated below:
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A music manufacturer shipsCDs to a gas station
to sell. The gas station is buying the CDs
from the manufacturer and selling to the
general public. If the gas station does not sell
the CDs, then under the sale or return
contract, the gas station can return the goods,
but
only at its own (the buyer’s) risk and expense.
As you can see from this illustration, the gas station is a
buyer because it is purchasing the goods from the
manufacturer; but the gas station is also a
seller since it is then offering the CDs for sale to the
general public. In cases such as these, the manufacturer is
providing the CDs to the gas station for
sale, and the gas station is taking the business risk that its
customers will be interested in purchasing music at a gas
station. The gas station is willing to
try selling the CDs because if it does not sell them, it can
return the CDs without paying for them. In the event of
returning the goods, however, if they are
lost, stolen, or accidentally destroyed in transit or while in
the buyer’s (gas station’s) possession, the buyer (gas
station) must pay for them, since the risk
of loss for goods in a sale or return rests with the buyer
(gas station).
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11.2 The Role of Managers Entering Into Contracts
Employees’ duties regarding entering into contracts run the
gamut. They can range from an entire of�ice that procures
goods for the business, and
therefore enters into multiple contracts every day, to those
who are involved in one contract during their entire
employment, which might be their hiring
contract. With the wide range of activities in mind, the
purpose of this chapter is to address some concerns that
might arise for you as a manager if you
are asked to become involved in the contract process.
Recommendation number one is to get legal advice and
make your contract subject to such review. Based on what
you learned in Chapters 9
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about contracts, it should be clear that entering into a
contract can be fraught with peril. The cost of hiring an
attorney up front is well spent when you
form a contract. Nevertheless, there is a great deal you can
do without an attorney. For example, you can negotiate a
contract and then make it subject to
attorney approval. That way, if you made any mistakes, the
escape clause of attorney review will allow you to get out
of the contract, or have your
attorney correct any errors, before implementing the
contract. For example, an employee could add a phrase like
this to an employment contract: "This
contract is subject to attorney approval and, in the event

such attorney approval is not obtained, this contract will be
considered null and void."
Many people think that informal conversations on the
telephone or by e-mail are completely harmless, but they
are not. Oral conversations can become
contracts, as can e-mails. In addition, even if they don’t rise
to the level of an enforceable contract, such written
documents, voice mails, or text messages
may be admissible in court as exhibits. When dealing in
business, it is best to remember that joking around, using
profane language, or making
discriminatory remarks may all come back to haunt you in
a court case. Think of every Tweet or Facebook posting as
possibly "going viral" and being
embarrassing, at the least, or evidence that can be used
against you in court, at the worst.
A Closer Look: Contract Best Practices
Entering into a contract is a serious business, and if you
have been given this responsibility by your employer, you
may be entering into a
binding agreement to which your employer must comply.
Obviously, you need to apprise your employer of all
conversations and tentative
agreements you are making. Phrases such as "subject to my
employer’s approval," "I will have to get permission to
agree to that," or
similar language that makes the contract provisional will
release you if there is a problem with the agreement or the
speci�ic language.
Keep in mind that the best written contracts are plain and
simple, and never be fooled by anyone involved in the
contract process who
asks you to "just initial this—it’s not the same as a

signature." Or by anyone telling you, "this is just between
you and me," "This doesn’t
count, it is just preliminary," or similar language. Initialing
is the same as a signature, and no agreement is just
between "you and me." It is
always better to check any agreements with your
supervisors and to make any agreements subject to
another’s approval. Click here
(http://smallbusiness.�indlaw.com/business-contracts-
forms/how-to-write-a-business-contract.html) to learn more
tips for writing contracts.
Working With an Attorney
Prudent business practice recommends that you work closely
with an attorney when entering into a contract. This
section is not meant to take the place
of legal advice, but it will show you steps you can take that
will be helpful and cut costs:
Keep all written material that pertains to the contract in an
orderly folder for easy reference.
Make sure your attorney knows about all paper, tangential
agreements, and conversations that have taken place with
regard to the transaction.
Save all e-mail and cell phone texts or any other
transmissions. At the very least, the attorney can sort
through what he or she believes to be
important correspondence.
Read all contracts carefully and thoroughly. It is surprising
how many people in business fail to do so. Treating a
contract with such utter disregard
will only present problems later on.

As you carefully and thoroughly read any contracts
presented to you, make notes in the margin about any
changes you want to make or questions
you have about the language.
Strive to understand every single part of the contract, and
insist on a clearly written document. There is no need for
any obscure or confusing
language in a document, and you should insist that any
ambiguous language be explained to you.
Unfortunately, some attorneys can act impatient when asked
questions. Remember that you, or your company, are paying
legal fees and have hired the
attorney to provide you with a service. Part of that service
is to clearly explain what is going on in a way that is
respectful of your concerns. It is usually
not unreasonable to have explanations written into the
contract so that its clear meaning is spelled out. It is, after
all, an agreement, and it should clearly
enunciate the intentions of the parties. If anyone involved
in the contract negotiations tells you, "Don’t worry about
that," then you need to be alarmed. In
short, a contract should be a simply and clearly written
statement of what each party is expected to do and when.
Negotiating a Contract and the Parol Evidence
Rule
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In Chapter 9
(http://content.thuzelearning.com/books/AUBUS670.12.2/s
ections/sec9.2#sec9.2) , Contracts, Part I: Introduction and
Formation, you learned about
the elements of a contract, how to form one, and some of
the defenses (how to get out of a contract). You will recall
that to start contract formation, you
must �irst have an offer and an acceptance. These can be
made orally or in writing. For this reason, it is important to
remember throughout your
negotiations that both oral and written information is
signi�icant. At this point in your studies, you should be
aware of the parol evidence rule (parol
comes from the French for word). On its face, the rule
seems daunting and dif�icult, but it actually makes a lot of
practical sense. Here is the rule in a
nutshell: All prior or contemporaneous, oral or written
agreements, that vary or contradict the �inal
written contract, are inadmissible.
Suppose that you entered into a negotiation with a seller
to purchase a large, complex computer system for your
of�ices. Table 11.1 illustrates the
discussions that take place, leading to a contract.
Table 11.1:Sample purchase negotiations using
the parolevidence rule

January 15 January 18 January 18 January 19
January 21
Telephone
conversation in
which you
discuss "specs"
for computer.
Seller tells you
the computer
comes with a
12-month
warranty.
You agree that
this is a good
term.
Seller sends you an e-mail that
says in part, "Also, this
computer has an outer shell
that is guaranteed against
corrosion."
You reply, "That’s good,
because that is a requirement
of our of�ice."
Telephone conversation in
which seller tells you that
the computer can be
delivered "on or before
February 1."
You reply, "That’s good,

because we must have it by
that date."
You send the seller an
e-mail asking, "Will
technical support be
available after
installation?"
The seller sends back
an e-mail that says,
"Yes."
You sign the written contract,
which describes a �ive-month
warranty and a delivery date of
March 15, on behalf of your
company.
Note that, on January 21, the parties signed a contract that
was supposed to memorialize or represent the entire
agreement they made with one another.
If they had read the contract before signing it, however,
they would have noticed that the warranty in the �inal
contract was for only �ive months (not the
12 months agreed to on January 15), nothing was said
about the outer shell (which was discussed on January 18),
and the computer would not be
delivered until March 15, not February 1 (as requested on
January 18).
The law assumes that when people enter into a �inal,
written contract, as these parties did on January 21, they
will incorporate all their understandings
into that agreement. The law also assumes that if the parties
have not agreed on a particular item, then this lack of

agreement will also be represented in
the contract by being absent. Note how the January 21
contract fails to include some of the oral and written
agreements. These are the prior oral or
written agreements referred to in the rule. Then note
how the prior oral or written agreements vary or contradict
the �inal written contract. For example,
the parties "agreed" on January 18 that goods would be
delivered on February 1, but the �inal written agreement
stated a delivery date of March 15. The
January 18 delivery date varies or contradicts the
delivery date in the �inal agreement. Because the parties
entered into a �inal written agreement, however,
this contradiction is resolved because the parol evidence
rule holds that those previous understandings of January
15, 18, and 19 are not part of the
agreement and are thus inadmissible in court.
"Inadmissible" means that the jury cannot hear any evidence
about the previous agreements, rendering
them useless: it is as though they had never taken place.
Why is the parol evidence rule a good one? This rule
gives integrity to written contracts by preventing people
from coming into court and saying, "Yes, I
did sign that contract, but we also agreed to something else
that should have been in the contract." If the parties
agreed to it, it should be in the contract.
The law challenges you to answer the question (if you
agreed to something else): Why didn’t you put it in the
contract? It therefore keeps all previous
understandings out of evidence unless one of the parties
can show that fraud was involved and that one of the
parties was duped. This rule is another
important reason you should carefully read all contracts
before you sign them and make sure they include all of the
terms agreed upon between you and

the other party.
https://content.ashford.edu/books/AUBUS670.12.2/sections/sec
9.2#sec9.2
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Key Terms
Click on each key term to see the de�inition.
C&F
Cost and freight (a shipping term). The cost of shipping
(freight) is included in the sales price but not the cost of
insurance.
CIF
Cost, insurance, and freight (a shipping term). In a CIF
contract, the cost of shipping and insurance are included in
the sale price.
common carrier

A form of transportation for goods or people that is
available to the public.
destination contract
A type of contract for the sale of goods in which the risk
of loss is on the seller until the goods are tendered at the
buyer’s city or destination.
escape clause
Contract language that says, if you made any mistakes
before the contract has been reviewed by an attorney, you
can be released from the
contract.
FAS
Free alongside a vessel (a shipping term). The seller bears
the responsibility (and cost, if any) of transferring the
goods into the possession of the
carrier or to a named destination.
FOB

A shipping term that means "free on board." The seller
bears the responsibility (and cost, if any) of transferring
the goods into the possession of
the carrier or to a named destination.
future goods
Goods that are not in existence at the time of entering into
a contract, such as goods to be manufactured or ordered
by the seller for the buyer.
identi�ication of goods to the contract
The moment at which a buyer’s goods are selected and
picked out as that particular buyer’s.
inadmissible
Evidence that a jury cannot hear because it is not part of
the �inal contract. Under the parol evidence rule, a previous
but unwritten agreement
between two parties to a contract.

insurable interest
Suf�icient property interest in goods so that one can obtain
insurance against his or her loss.
parolevidence rule
Holds that all prior or contemporaneous oral or written
agreements that vary or contradict the �inal integrated
contract are inadmissible in court.
2.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUB
US670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/boo
ks/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections
/fm/books/AUBUS670.12.2/sections/fm#

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risk of loss rules
Guidelines for determining who must pay for damages or
loss of goods in a contract or exchange.
sale on approval contract
A contract in which the buyer may try the seller’s goods
and keep them or send them back at the seller’s expense.
sale or return contract
A contract in which the buyer sells the goods to a third
party and returns whatever goods are not sold at his or her

own expense to the original
seller.
security interest
The right of a creditor to have speci�ic property sold to
satisfy a debt.
shipment contract
A type of contract for the sale of goods in which the risk
of loss is on the buyer once the seller places the goods
on a carrier in the seller’s city.
tendered
As part of a shipping agreement, the seller has noti�ied
the buyer that the goods are available for pickup.
Chapter 11 Flashcards
Critical Thinking and Discussion Questions
1. What are the differences between shipment contracts and
destination contracts?
2. In what situation would a sale on approval contract be

used?
3. What protection does the parol evidence rule offer?
4. Stephanie went to a hair salon for a wash, cut, and
perm. While performing these services the hairstylist used a
variety of products on Stephanie’s
hair, including shampoo, conditioner, and permanent solution.
Does the contract between Stephanie and the hair salon
fall under the UCC or the
common law? What test would the court use to determine
this? Suppose that Stephanie was severely injured by the
solution and wanted to sue the
hair salon for breach of warranty. Why would it make a
difference if the contract was under the UCC or the
common law?
5. Blake decided that he needed to purchase a new
automobile. He went to a dealership and looked at a new
car. "How much is the car?" he asked. The
salesperson told him. "Does it come with torsion bar
suspension?" Blake asked. "No, but we can order it installed
on the car for you," the salesperson
responded. "Can I have it delivered on August 15?" Blake
asked. "Yes," the salesperson said. After concluding their
conversations, Blake met with the
salesperson and signed a written contract that he did not
read. The car could not be delivered until December 1 due
to manufacturing problems, and
(freight) is included in the sales price but no
Click card to see term �
View this study set

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when it did arrive, it did not have torsion bar suspension.
Blake was furious, and he actually sat down and read the
contract. He noticed that there
was no mention of adding the torsion bar suspension and
that the delivery date in the written contract was September
2. Discuss the application of
the parol evidence rule to this problem.
6. Lindsay owns a gift shop where she sells all sorts of
new and used products to customers. Business is good, but
she needs to be cautious in terms of
what products she offers, so as not to be stuck with
inventory that does not sell. Alicia approaches Lindsay with
a new line of products that she
thinks will sell very well in Lindsay’s store. Lindsay is not
sure and is worried about taking on the new line of
inventory. Advise Lindsay on what type
of contract she could enter into with Alicia to sell the
goods with the lowest risk.
7. You are the manager for a large appliance big-box store
and have many customers who purchase goods and return
later to pick them up. On the
night in question, a customer purchased a washer and dryer
set and agreed to return the next day with a truck. The
customer paid in full for the
purchase. That night, the store burned down and all the
inventory was destroyed.
a. Who has the risk of loss in this situation? Why? What
rule applies?

b. Assume the same set of facts as above, but this time the
buyer purchased the washer and dryer at a garage sale and
agreed to return the next
day to pick them up. The buyer paid in full for the washer
and dryer. That night, the seller’s garage burned down. Who
has the risk of loss in
this situation? Why? What rule applies?
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Chapter 9
Contracts, Part I: Introduction and Formation
As a manager, you may �ind yourself dealing with
contracts on a regular basis. For instance, contracts may be
presented to you for signature or you may
be asked to hire an employee. Perhaps you will enter into
contracts to purchase goods for the business or to arrange
insurance coverage. In any event,
understanding the mechanics of contract law is essential to
effectively carry out your obligations.
This chapter presents an overview of contract law. It is not
meant to take the place of legal advice, nor will it make
you an expert in contract law. What
you should derive from these materials is an appreciation
of the complexities of contract law and a mindset for acting
preventively and strategically in

your business dealings. Warding off the possibility of a
contract lawsuit is a cost-saving measure. Furthermore, you
should acquire an understanding of
black letter law, that is, the theories of law in the
context of business and employment contracts.
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9.1 What Law Governs Your Contract?
Contract law is governed by either the common law or the
Uniform Commercial Code (UCC). As a student, the �irst
question you should ask yourself when
contemplating a contract problem is: What body of law is
this contract under? Fortunately, the answer is relatively
simple:
If the contract involves the sale of goods, it is governed by
the Uniform Commercial Code (whether the people involved
are merchants or
nonmerchants); and
If the contract deals with anything other than sales of
goods (e.g., real estate, insurance, or personal services), then
it is governed by the common
law.
As a manager, you will need to know which body of law
applies to a particular contract. For example, warranties
apply to goods sold pursuant to the UCC
but do not apply to contracts under the common law. When

you hire an employee to join your staff, you enter into a
contract that is governed by
principles of common law. Selling food in your restaurant,
however, creates a contract governed by the UCC. What
difference does it make which set of
rules applies? In the restaurant example, the UCC covers a
warranty about the quality of goods, whereas the common
law does not. An employee could
not sue for breach of warranty for the quality of his or
her of�ice, for example, but could for the quality of the
food in your restaurant. Table 9.1 provides
some examples of types of contracts covered under each
body of law. Many other differences between the two
regimes will be examined throughout this
chapter.
Table 9.1: Contracts governed by common law or
the Uniform Commercial Code
Examples of Common Law Contracts Examples of
Uniform Commercial CodeContracts
Real estate (e.g., selling a house) Sale of goods (e.g.,
purchasing an automobile or of�ice equipment) between
merchants or
nonmerchants
Insurance
Personal services (e.g., hiring an employee or
professional)
Sometimes a contract comprises both goods and services.
For example, if you hired people to build your house, they
would need to supply material

goods, such as the bricks, cement, wiring, and wood, as well
as services, that is, constructing the building. What law
governs such a contract? The answer
lies in the predominant test, which asks: Which is greater,
the cost of the goods (UCC) or the cost of the services
(common law)? If the cost of the goods
is greater, then the contract is governed by the UCC; if
the cost of the services is greater, then the contract is
governed by the common law. For example,
suppose that a buyer hires a contractor to construct a new
factory. The goods to build the new plant cost $450,000 and
the cost of the contractor's
services total $1 million. Under the predominant test, the
cost of the services is greater, and therefore, the contract is
governed by the common law.
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The Nature of Contract Law
9.2 Elements of a Contract
Although all contracts contain promises that are enforceable,
not all promises rise to the level of
a contract. Rather, only promises that meet certain criteria
are considered to be valid contracts.
For a valid contract to be formed that is enforceable by a
court, each of the following criteria
must be present:
1. Offer

2. Acceptance
3. Consideration (something of legal value given and
received by each party to the contract)
4. Capacity (mental capacity or legal ability)
5. Legality (of purpose)
We will discuss each one of these elements in the
following sections. The phrase enforceable by a
court is signi�icant because it means that a court can assess
monetary damages against a party
who does not comply with the terms of the agreement.
Thus, it is important to recognize these
de�ining elements, for example, when a seemingly innocent
statement becomes a binding
statement leading to contract formation.
Because an offer and acceptance are sent over
electronically by email, or in a Tweet or text
message, they are in a tangible form or in writing. As
such, the fact that it is an electronic form
does not affect contract formation. What matters is that it is
in writing—clearly an advantage over
contracts made by the parties that are oral; for a writing,
that means the terms are stated in the correspondence
itself.
What has changed with regard to electronic contract
formation is the signature. All states but three (New York,
Illinois, and Washington) have adopted the
Uniform Electronic Transactions Act. Although each state's
law as adopted has different components, the following is
an example of Montana's law:

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