COMMON LAW
Common law is the basis of law in the United States. Often it is called case law. Common law is the framework of laws and guidelines that has been developed based on prior case decisions and opinions. A court’s decision is called a holding. Stare decisis means that the court should follow the direction of prior court decisions, especially superior court rulings. The requisites of the American legal system are that it is predictable, flexible, understandable, and reasonable. Two types of law based on the platform of common law play key roles in the system.
SUBSTANTIVE AND PROCEDURAL LAWS
Substantive laws are the actual rules and regulations that define legal behavior. These include the rights and obligations that people have in society. Procedural laws govern the way those rules and regulations are implemented or accessed within the system of justice, in an attempt to impose an order for using the system fairly and efficiently.
When lawyers actually apply the law, they refer to the state and federal codes called statutes. Statutory laws are the word-for-word substantive rules enacted by the state and federal legislatures or governmental agencies. These laws include criminal law, tax law, and governmental regulations. To investigate how those statutes were applied in actual case situations, a lawyer refers to the body of rulings or opinions called case law. By combining statutes and opinions, a lawyer can make a case for his or her client in court following procedural rules of the court.
For the MBA, business transactions are important, thus you hear a great deal about the Uniform Commercial Code (UCC). This is a special body of law that combines both the statutory and the case law for business purposes. It is a comprehensive statute adopted by each state that covers the major areas of business transactions, including sales contracts and commercial paper. Its “uniformity” provides a stable set of rules for interstate commerce. Without the UCC, doing business in each state would be like doing business in a foreign country.
THE LEGAL PROCESS
A standard legal action has nine steps:
1. Jurisdiction—For a court to hear a case, it must have jurisdiction to hear the subject matter and the power to bind the parties.
2. Pleadings—Pleadings are the necessary paperwork to begin the trial process. The plaintiff files the initial paperwork, called a complaint or petition. The plaintiff asserts that the defendant has done a wrong and requests a punishment or remedy. In law notes, plaintiff is written as the Greek letter pi (π) and defendant as the Greek letter delta (∆).
3. Discovery—Lawyers gather the required information and witnesses before a trial during discovery. Each side is allowed to see the evidence held by the other side. Unlike what you may have seen in the movies, there should be no surprises.
4. Pretrial Conference—Often held for federal civil cases, at this meeting lawyers and the judge try to organize and narrow the issues of the case to the most important ones to make the trial more efficient. Often out-of-court settlements occur at this point.
5. Trial—The trial is proceedings before the court. If a jury is selected, the process of selection is called voir dire. The location of the trial is called the venue. The jury decides the factual disputes, and the judge interprets the law and instructs the jury. If the plaintiff’s case has no merit, a summary judgment can be made by the judge, ending the case without further trial.
6. Jury Instruction by the Judge and the Verdict—The judge instructs the jury about the issues of law involved in its decision. The jury makes its determination about the facts and penalty within its authority.
7. Posttrial Motions—This step includes asking the court, for various reasons, for a retrial and indicating why a new trial is warranted. Errors of law and procedure, jury misconduct, or unusual damage awards can be the basis for an appeal. Rarely is new evidence the basis for a successful appeal.
8. Appeal—Generally each party of a lawsuit is entitled to one appeal at an appellate court. The paperwork outlining the basis for the appeal is called a brief. It is filled with the rather lengthy arguments and with citations of prior court decisions and applicable statutes to make the case for a new trial.
9. Secure or Enforce the Judgment—Send the person to jail or collect the money.
SETTLING A BUSINESS DISPUTE WITHOUT THE COURTS
If they want to avoid the courts to settle a dispute, the parties can bring in a neutral peacemaker.
Mediation—A mediator has a nonbinding authority to direct the parties to a fair settlement. However, the parties can back out if they do not like the decision.
Arbitration—An arbitrator has the power to bind the parties of a dispute. The decision is final and there are no appeals. These arbitrators are registered, trained professionals.
CRIMES AND TORTS
The law revolves around one person doing something wrong to another. A wrong can be classified either as a crime or a tort.
Crime—A crime is a wrong against society. It can be punished by jail, probation, and fines based on statutory law. Punishable crimes are committed with intent, called mens rea, or by negligence. Defenses include self-defense, necessity, and insanity.
Tort—A tort is a private wrong against a person or property. It includes acts such as strict product liability, fraud, assault, and theft, also called conversion. Torts result from intentional wrongful acts or negligent acts. Torts are punishable by monetary awards based on civil case law. To be found negligent, the offender must have breached a duty to the plaintiff or standard of care to act as a prudent person of ordinary skill. If a person is hired for a specialized skill, the standard would be that of the profession or trade. In addition, the accused person must have caused the act for which he or she is being charged, either directly or proximately. In the case of employers, they may be held responsible for the acts of their employees acting within the scope of their duties. This liability of employers is called respondent superior.
Burden of Proof—In criminal actions, guilt must be found “beyond a reasonable doubt.” In civil verdicts, guilt is based on a “preponderance of the evidence.”
Often cases have both a criminal and a civil component. For instance, in a criminal embezzlement case, the defendant can be sent to jail for stealing. In a civil proceeding, the plaintiff can try to recover the money and be awarded monetary damages by the court. Defenses to tort actions include the truth (refuting the allegation), consent (“done with my consent”), and insanity.
CONTRACTS AND PROPERTY LAW
In most business relationships people enter into contracts with one another for a benefit. Although the word contract is frequently used in conversation, a contract has a specific legal definition. In legal notes a contract is written as a K.
Contracts—A contract is a legally enforceable agreement, either express or implied, between two or more parties. Four conditions must be met for a contract to be valid:
1. Capacity of Parties—The parties must have legal authority and mental capacity to enter into the agreement. Minors can disaffirm their contracts, but adults cannot disaffirm a contract with a minor. The only exception is for items called necessaries such as food and shelter.
2. Mutual Agreement (Assent) or Meeting of the Minds—There must be a valid offer and an acceptance. The offer must clearly indicate an intent to make a contract, be definite as to its terms, and be communicated to the other party. Generally advertisements are not valid offers; rather they are “invitations to deal.” An offer can be withdrawn anytime before acceptance. Silence does not constitute acceptance.
3. Consideration Given—There must be value given for the promise to be enforceable.
4. Legality—You cannot enforce a contract dealing with illegal goods or actions.
PROPERTY
Business revolves around property, and gathering the most of it for yourself. Property is not only a thing, but also the collection of rights and responsibilities associated with the property. There are several classes of property:
Real Property—Land
/> Personal Property—Property not attached to land or building. Personal property is also called chattel.
Fixture—Personal property attached to real property
Intellectual Properties—Creative property that has no physical form
Patents—Patents are twenty-year rights to novel, useful, and not obvious inventions or processes. Before June 1995 patents lasted seventeen years.
Copyrights—A copyright is the right to written works for the life of the author plus seventy years. Before January 1978, a copyright could last up to seventy-five years.
Trademarks—These are renewable twenty-year rights for marks used in a trade of business.
UNIFORM COMMERCIAL CODE (UCC) ARTICLE 2: SALES CONTRACTS
The UCC mentioned previously covers many aspects of property-related transactions and contracts. It is such an important part of the law that it is covered in greater depth here and in separate sections that follow. The property-related part of the act defines a “merchant” as a person who regularly deals in the goods included in the contract. Transactions between merchants are considered special and have different levels of documentation required for a contract to be enforceable.
Bailment—A bailment is a temporary transfer of possession, not ownership, of property from a bailor to a bailee for a limited time and a special purpose. Sending your laundry to the cleaner is a bailment.
When a person delivers personal property in a bailment, the standard of care required by the bailee depends on the mutual benefit of the relationship. If the bailment is for the sole benefit of the bailor, only “slight degree of care” is required. “Do me a favor: Please keep this at your house for me while I’m away” is one example. If the bailment is for the mutual benefit of the parties, such as a paid warehouse, a “reasonable degree of care” is necessary. If the only benefit is for the bailee, an “extreme degree of care” is required. (“Can I use your car this weekend?”)
Sale—A sale is a permanent transfer of ownership in exchange for a consideration or payment. The seller can convey no more rights than he or she owns, with three exceptions:
1. A good title can pass to a “bona fide purchaser in good faith.” As a purchaser you have no knowledge that a bad title exists.
2. If you buy from a retailer, who has already sold the same type of goods to others, you are a “buyer in ordinary course.” The buyer can have good title even if the retailer may not.
3. If you buy from a dealer in a type of goods, even if the dealer has the goods on a bailment, you are a “buyer in ordinary course.” The buyer can have clear title even though the dealer did not own the goods.
Shipment Contracts—Several terms you may see on shipping documents and invoices indicate when the risk of loss passes from the seller to the buyer: the most common in FOB, free on board. At the FOB point the risk of loss passes to the buyer. CIF may appear on invoices as well. A CIF price includes cost of goods, insurance, and freight.
Product Liability—Product liability concerns the warranties that manufacturers and sellers make about the goods they sell. Express warranties are written or spoken promises about the performance of a product. Implied warranties are the promises made with the sale of goods that do not need to be written or said. Merchantability is an implied warranty meaning that the goods are fit for the ordinary purpose for which they were made. A pen is made for writing, not for performing surgery. A warranty of fitness is another implied warranty more specific to the particular purpose for which the seller knowingly sells the product. If the seller knowingly sells an item for a purpose, it should perform that function. Strict liability is also implied and it covers the failure of products when used properly to perform safely or effectively as reasonable persons would expect.
Statute of Frauds—The statute of frauds provision requires that certain important contracts be in writing to prevent fraud. Contracts concerning the following six subjects must be in writing:
1. Sales of goods of value greater than or equal to $500
2. Sale of land
3. Contracts for services not to be performed within one year’s time
4. Promise to pay the debt incurred by another person
5. Promises of an estate’s executor to pay the expenses of the estate out of his or her own pocket
6. Promises of a dowry in a marriage arrangement
The agreement does not need to be in one written document. If the basic terms of the agreement can be pieced together with several documents that were signed by the party being sued, these can be construed as a valid contract.
Parol Evidence Rule—The parol evidence rule prohibits the parties from disputing the written contract by citing evidence external to the contract. There are many exceptions to this rule, however, that make the parol evidence rule more of a guideline than a strict rule. For example, evidence that a contract was entered into under duress or by fraud can be admissible evidence that a court will consider outside the contract.
Privity Rule—The privity rule allows only those parties named in a contract to bring a lawsuit relating to a contract. The scope can be expanded to include those who are assigned rights created by the contract or third-party beneficiaries who receive the results of the contract’s performance.
Force Majeure—Acts of God, such as hurricanes or floods, can be valid excuses for nonperformance of a contract. Force majeure is often included as an express clause of a contract.
Novation—In a contract between two parties, one party may reassign his or her duties to a third party and be excused from the contract. The new third party assumes those duties and responsibilities to perform the contract as written. Assuming someone else’s home mortgage is an example.
Elements of a Contractual Lawsuit—Lawsuits must include the following elements:
1. Proof that a contract exists
2. Breach or nonperformance of the contract
3. Proof of damages
If a clause is included in the contract specifying the penalties for nonperformance, it is called liquidated damages.
UNIFORM COMMERCIAL CODE (UCC) ARTICLES 3 AND 4: COMMERCIAL PAPER
Commercial or negotiable paper is a document that can be traded for value by its holder independent of the parties that created it. Checks are negotiable paper. To be negotiable, a paper must have the following characteristics:
1. It must be in written form.
2. It must be signed by the party promising to pay.
3. It must include an unconditional promise to pay.
4. It must specify payment of a sum certain in money.
5. It must be payable on demand or by a point or points certain in time.
6. It must be payable to order of a specific person or to bearer.
When a negotiable paper is traded, people will often obtain it improperly and sell it to innocent buyers. A holder in due course (HIDC) can obtain more rights than the seller has if the HIDC buys it without knowledge of seller’s invalid ownership.
AGENCY AGREEMENTS
Agency is the legal relationship between two parties in which one person acts for another. Although it is not part of the UCC agency, it is a key component of business law. The legal relationship of agency can occur four ways:
1. Contract—In a written, oral, or implied contract, the parties enter into an agency agreement, and the person is liable for the agent’s acts on his behalf.
2. Ratification—The person accepts the results of the other person, who is acting for him or her as an agent. The person is responsible for the agent’s activity.
3. Estoppel—The person allows another to act as his agent and allows others to believe that this relationship exists. Liability arises when another party performs some act for that agent based on the agency relationship.
4. Necessity—If a person in a special situation cannot act and someone in good faith helps another, an agency agreement exists.
BANKRUPTCY LAW
There are no debtors’ prisons anymore. The bankruptcy laws
provide a mechanism for people and businesses to get a new start or to arrange payment on more favorable terms.
Chapter 7—A trustee liquidates the remaining assets of a business to pay debts as best as possible. After bankruptcy, the debts, except for special debts such as alimony and child support, are discharged.
Chapter 11—A court-appointed officer approves a restructuring plan to pay the debts over time. The person or business continues operating with the restructured debt load. The payments to creditors theoretically should not be less than they would have been under Chapter 7 bankruptcy.
Chapter 13—This form of personal bankruptcy is available to individuals with regular income and less than $100,000 of unsecured debts and less than $350,000 of secured debts. The debtor submits a payment plan to the court that can last a maximum of five years.
UNIFORM COMMERCIAL CODE (UCC) ARTICLE 9: SECURED TRANSACTIONS
A body of rules covers the acts of creditors to protect their interest in personal property and fixtures from other third-party claims. Those protected rights are called security interests.
A creditor can have a secured interest if a borrower pledges collateral to the creditor by giving it to him or her for safekeeping. Taking an item to a pawnshop is a good example of pledging collateral.
In the absence of actually holding the property, such as jewelry, the creditor attaches the property with a perfected security interest against third-party claims. The creditor can perfect his or her interest in two ways:
The Ten-Day MBA 4th Ed. Page 33
