CH-46-47 International Business Law – Smith and Robersons Business Law : Chapter Notes

This Document Contains Chapters 46 to 47 Chapter 46 INTERNATIONAL BUSINESS LAW The International Environment [46-1] International Court of Justice [46-1a] Regional Trade Communities [46-1b] European Union NAFTA International Treaties [46-1c] World Trade Organization (WTO) United Nations Convention on the Law of the Sea (UNCLOS) Jurisdiction Over Actions of Foreign Governments [46-2] Sovereign Immunity [46-2a] Act of State Doctrine [46-2b] Taking of Foreign Investment Property [46-2c] Transacting Business Abroad [46-3] Flow of Trade [46-3a] Flow of Labor [46-3b] Flow of Capital [46-3c] International Contracts [46-3d] CISG Letters of Credit Antitrust Laws [46-3e] Securities Regulation [46-3f] Protection of Intellectual Property [46-3g] Foreign Corrupt Practices Act [46-3h] Employment Discrimination [46-3i] Forms of Multinational Enterprises [46-4] Direct Export Sales [46-4a] Foreign Agents [46-4b] Distributorships [46-4c] Licensing [46-4d] Joint Ventures [46-4e] Wholly Owned Subsidiaries [46-4f] The International Environment [46-1] International Court of Justice [46-1a] Regional Trade Communities [46-1b] European Union NAFTA International Treaties [46-1c] World Trade Organization (WTO) United Nations Convention on the Law of the Sea (UNCLOS) Jurisdiction Over Actions of Foreign Governments [46-2] Sovereign Immunity [46-2a] Act of State Doctrine [46-2b] Taking of Foreign Investment Property [46-2c] Transacting Business Abroad [46-3] Flow of Trade [46-3a] Flow of Labor [46-3b] Flow of Capital [46-3c] International Contracts [46-3d] CISG Letters of Credit Antitrust Laws [46-3e] Securities Regulation [46-3f] Protection of Intellectual Property [46-3g] Foreign Corrupt Practices Act [46-3h] Employment Discrimination [46-3i] Forms of Multinational Enterprises [46-4] Direct Export Sales [46-4a] Foreign Agents [46-4b] Distributorships [46-4c] Licensing [46-4d] Joint Ventures [46-4e] Wholly Owned Subsidiaries [46-4f] The International Environment [46-1] International Court of Justice [46-1a] Regional Trade Communities [46-1b] European Union NAFTA International Treaties [46-1c] World Trade Organization (WTO) United Nations Convention on the Law of the Sea (UNCLOS) Jurisdiction Over Actions of Foreign Governments [46-2] Sovereign Immunity [46-2a] Act of State Doctrine [46-2b] Taking of Foreign Investment Property [46-2c] Transacting Business Abroad [46-3] Flow of Trade [46-3a] Flow of Labor [46-3b] Flow of Capital [46-3c] International Contracts [46-3d] CISG Letters of Credit Antitrust Laws [46-3e] Securities Regulation [46-3f] Protection of Intellectual Property [46-3g] Foreign Corrupt Practices Act [46-3h] Employment Discrimination [46-3i] Forms of Multinational Enterprises [46-4] Direct Export Sales [46-4a] Foreign Agents [46-4b] Distributorships [46-4c] Licensing [46-4d] Joint Ventures [46-4e] Wholly Owned Subsidiaries [46-4f] Cases in This Chapter Obb Personenverkehr Ag v. Sachs Morrison v. National Australia Bank, Ltd. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Describe the purposes and major features of regional trade communities (especially the European Union and North American Free Trade Agreement [NAFTA]) and the World Trade Organization (General Agreement on Tariffs and Trade [GATT]). • Explain sovereign immunity, the act of state doctrine, expropriation, and confiscation. • Explain the legal controls imposed on the flow of trade, labor, and capital across national borders. • Explain the international dimensions of antitrust law, securities regulation, and the protection of intellectual property. • List and describe the forms in which a multinational enterprise may conduct its business in a foreign country. TEACHING NOTES Today’s economy is a global one and failure to compete —at home or abroad — may mean failure in the world of business. Conducting international business, however, brings a complicated set of rules since business laws vary from nation to nation. A basic understanding of international business law is essential. 46-1 THE INTERNATIONAL ENVIRONMENT International law deals with the conduct and relations between nation-states and between international organizations, as well as some of their relations with individuals; it generally cannot be enforced because international courts do not have compulsory jurisdiction. 46-1a International Court of Justice The United Nations has a judiciary branch called the International Court of Justice (ICJ), consisting of fifteen judges, no two of whom may be from the same nation or other sovereign state. The ICJ can hear only those cases brought by nations (not individuals or corporations), and has jurisdiction only over parties who agree to be bound by its decision. Countries displeased with an ICJ decision may simply ignore it. *** Chapter Outcome*** Describe the purposes and major features of regional trade communities; especially the European Union and NAFTA and the World Trade Organization (GATT). 46-1b Regional Trade Communities Regional trade communities, such as the European Union (EU), promote common trade policies among member nations. Other important regional trade communities include the Central American Common Market (CACM), the Caribbean Community (CARICOM), the Association of Southeast Asian Nations (ASEAN), the Andean Common Market (ANCOM), the Common Market for Eastern and Southern Africa (COMESA), the Asian Pacific Economic Cooperation (APEC), Mercado Comun del Cono Sur (Latin American Trading Group, MERCO-SUR), the Gulf Cooperation Council (GCC), Alianza del Pacífico (Pacific Alliance), and the Economic Community of West African States (ECOWAS). European Union — In 1993, the Treaty on European Unity changed the name of the European Community to the European Union (EU) and established its objectives, which include economic and monetary unity, a common foreign and security policy, stronger protection of citizens’ rights, and cooperation among members on issues of justice and home affairs. The EU has the power to make rules that are binding on member nations and can override members’ domestic laws. Until May 2004, the EU had fifteen members: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. In May 2004 ten eastern and southern European countries joined the European Union. The new members are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia. On January 1, 2007, Bulgaria and Romania became full EU members, bringing the total number of members to twenty-seven. Croatia became the EU’s twenty-eighth member on July 1, 2013. Five more countries have applied for EU membership: Iceland, Montenegro, Serbia, Turkey, and the Republic of Macedonia. The EU’s total population is approximately 500 million. In 2016, Britain voted to leave the EU. NAFTA — The North American Free Trade Agreement, took effect in 1994 to establish a free trade area among the US, Canada, and Mexico. In 2008 NAFTA’s last transitional restrictions governing agricultural trade were removed. Some of the other important regional trade communities include the Central American Common Market (CACM), the Caribbean Community (CARICOM), the Association of Southeast Asian Nations (ASEAN), the Andean Economic Community (ANDEAN), the Common Market for Eastern and Southern Africa (COMESA), the Asian Pacific Economic Cooperation (APEC), Mercado Comun del Cono Sur (Latin American Trading Group; MERCO-SUR), and the Economic Community of West African States (ECOWAS). 46-1c International Treaties A treaty is an agreement between or among independent nations having the force of law. Nations use treaties to facilitate and regulate trade, protect national interests, serve as constitutions of international organizations, establish general international law, transfer territory, settle disputes, secure human rights, and protect investments. Probably the most important multilateral trade treaty is the General Agreement on Tariffs and Trade (GATT), which the World Trade Organization (WTO) replaced as an international organization. The WTO officially commenced on January 1, 1995 and has at least 160 members accounting for about 95% of world trade. (Approximately twenty-five other countries are observers and are seeking membership.) Its basic purpose is to facilitate the flow of trade by establishing agreements on potential trade barriers such as import quotas, customs, export regulations, antidumping restrictions (the prohibition against selling goods for less than their fair market value), subsidies, and import fees. The WTO administers trade agreements, acts as a forum for trade negotiations, handles trade disputes, monitors national trade policies, and provides technical assistance and training for developing countries. Such agreements arise under GATT’s most favored nation provision, which states that all signatories must treat each other as favorably as they treat any other country. More accords were adopted in 1994 on matters such as agricultural products, textiles, technical barriers to trade, trade related investment measures, customs valuation, subsidies, and countervailing measures, trade in services, and protection of intellectual property rights. United Nations Convention on the Law of the Sea (UNCLOS) — The UNCLOS establishes a comprehensive set of rules governing all uses of the oceans and their resources. UNCLOS also provides the framework for further development of specific areas of the law of the sea. UNCLOS entered into force in 1994 and has been ratified by at least 165 nations. UNCLOS governs all aspects of the ocean, including economic and commercial activities, transfer of technology, environmental control, scientific research, and the settlement of disputes relating to ocean matters. A key feature of UNCLOS is that coastal nations have (1) sovereignty over their territorial sea up to a limit not to exceed twelve nautical miles, (2) sovereign rights in a 200-nautical mile exclusive economic zone (EEZ) with respect to natural resources and certain economic activities, and (3) sovereign rights to the continental shelf (the national area of the seabed) for exploring and exploiting it. The shelf can extend at least 200 nautical miles from the shore, and more under specified circumstances, but coastal nations share with the international community part of the revenue derived from exploiting resources from any part of their shelf beyond 200 miles. Disputes can be submitted to the International Tribunal for the Law of the Sea established under UNCLOS, to the International Court of Justice, or to arbitration. The Tribunal has exclusive jurisdiction over deep seabed mining disputes. 46-2 JURISDICTION OVER ACTIONS OF FOREIGN GOVERNMENTS In this section, we will focus on a sovereign nation’s power — and limitations on that power — to exercise jurisdiction over a foreign nation or to take over property owned by foreign citizens. More specifically, we will examine state immunities (the principle of sovereign immunity and the act of state doctrine) and the power of a state to take foreign investment property. *** Chapter Outcome*** Explain sovereign immunity, the act of state doctrine, expropriation and confiscation. 46-2a Sovereign Immunity Every nation has absolute and total authority over what goes on within its own territory. In order to maintain international relations and trade, however, a host country must refrain from imposing its laws on a foreign sovereign nation present within its borders. This immunity from the courts of a host country is known as sovereign immunity; it applies only to public acts, such as those concerning diplomatic activity, internal administration, or armed forces. When a foreign nation engages in trade or other commercial acts, it is under the jurisdiction of the host country’s courts. Congress enacted the Foreign Sovereign Immunities Act in order to establish when immunity would be extended to foreign nations in the United States. CASE 46-1 SAUDI ARABIA v. NELSON OBB PERSONENVERKEHR AG v. SACHS Supreme Court of the United States, 2015 577 U.S. __, 136 S.Ct. 390, 193 L. Ed. 2d 269 Roberts, C.J. The Foreign Sovereign Immunities Act shields foreign states and their agencies from suit in United States courts unless the suit falls within one of the Act’s specifically enumerated exceptions. This case concerns the scope of the commercial activity exception, which withdraws sovereign immunity in any case “in which the action is based upon a commercial activity carried on in the United States by [a] foreign state.” 28 U.S.C. §1605(a)(2). [Plaintiff] Carol Sachs is a resident of California who purchased in the United States a Eurail pass for rail travel in Europe. She suffered traumatic personal injuries when she fell onto the tracks at the Innsbruck, Austria, train station while attempting to board a train operated by the Austrian state-owned railway. She sued the railway in Federal District Court, arguing that her suit was not barred by sovereign immunity because it is “based upon” the railway’s sale of the pass to her in the United States. * * * [Defendant] OBB Personenverkehr AG (OBB) operates a railway that carries nearly 235 million passengers each year on routes within Austria and to and from points beyond Austria’s frontiers. OBB is wholly owned by OBB Holding Group, a joint-stock company created by the Republic of Austria. OBB Holding Group in turn is wholly owned by the Austrian Federal Ministry of Transport, Innovation, and Technology. [Citation.] OBB—along with 29 other railways throughout Europe—is a member of the Eurail Group, an association responsible for the marketing and management of the Eurail pass program. [Citation.] Eurail passes allow their holders unlimited passage for a set period of time on participating Eurail Group railways. They are available only to non-Europeans, who may purchase them both directly from the Eurail Group and indirectly through a worldwide network of travel agents. [Citation.] Carol Sachs is a resident of Berkeley, California. In March 2007, she purchased a Eurail pass over the Internet from The Rail Pass Experts, a Massachusetts-based travel agent. The following month, Sachs arrived at the Innsbruck train station, planning to use her Eurail pass to ride an OBB train to Prague. As she attempted to board the train, Sachs fell from the platform onto the tracks. OBB’s moving train crushed her legs, both of which had to be amputated above the knee. [Citation.] Sachs sued OBB in the United States District Court for the Northern District of California, asserting five causes of action: (1) negligence; (2) strict liability for design defects in the train and platform; (3) strict liability for failure to warn of those design defects; (4) breach of an implied warranty of merchantability for providing a train and platform unsafe for their intended uses; and (5) breach of an implied warranty of fitness for providing a train and platform unfit for their intended uses. [Citation.] OBB claimed sovereign immunity and moved to dismiss the suit for lack of subject matter jurisdiction. [Citation.] The Foreign Sovereign Immunities Act “provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country.” [Citation.] The Act defines “foreign state” to include a state “agency or instrumentality,” 28 U.S.C. §1603(a), and both parties agree that OBB qualifies as a “foreign state” for purposes of the Act. OBB is therefore “presumptively immune from the jurisdiction of United States courts” unless one of the Act’s express exceptions to sovereign immunity applies. [Citation.] Sachs argues that her suit falls within the Act’s commercial activity exception, which provides in part that a foreign state does not enjoy immunity when “the action is based upon a commercial activity carried on in the United States by the foreign state.” §1605(a)(2). The District Court concluded that Sachs’s suit did not fall within §1605(a)(2) and therefore granted OBB’s motion to dismiss. [Citation.] A divided panel of the United States Court of Appeals for the Ninth Circuit affirmed. [Citation.] The full court ordered rehearing en banc and, with three judges dissenting, reversed the panel decision. [Citation.] * * * [The full court found that the sale of the Eurail pass in the United States formed an essential element of each of Sachs’s claims and thus concluded that each claim was “based upon a commercial activity carried on in the United States” by OBB.] We granted certiorari. [Citation.] OBB contends that the sale of the Eurail pass is not attributable to the railway, reasoning that the Foreign Sovereign Immunities Act does not allow attribution through principles found in the common law of agency. OBB also argues that even if such attribution were allowed under the Act, Sachs’s suit is not “based upon” the sale of the Eurail pass for purposes of §1605(a)(2). We agree with OBB on the second point and therefore do not reach the first. The Act itself does not elaborate on the phrase “based upon.” Our decision in Saudi Arabia v. Nelson, [citation], however, provides sufficient guidance to resolve this case. In Nelson, a husband and wife brought suit against Saudi Arabia and its state-owned hospital, seeking damages for intentional and negligent torts stemming from the husband’s allegedly wrongful arrest, imprisonment, and torture by Saudi police while he was employed at a hospital in Saudi Arabia. [Citation.]. The Saudi defendants claimed sovereign immunity under the Act, arguing, inter alia, that §1605(a)(2) was inapplicable because the suit was “based upon” sovereign acts—the exercise of Saudi police authority—and not upon commercial activity. [Citation.] The Nelsons countered that their suit was “based upon” the defendants’ commercial activities in “recruit[ing] Scott Nelson for work at the hospital, sign[ing] an employment contract with him, and subsequently employ[ing] him.” [Citation.] We rejected the Nelsons’ arguments. The Act’s “based upon” inquiry, we reasoned, first requires a court to “identify[] the particular conduct on which the [plaintiff’s] action is ‘based.’” [Citation.] Considering dictionary definitions and lower court decisions, we explained that a court should identify that “particular conduct” by looking to the “basis” or “foundation” for a claim, [citation], “those elements ... that, if proven, would entitle a plaintiff to relief,” [citation], and “the ‘gravamen of the complaint,’” [citation]. Under that analysis, we found that the commercial activities, while they “led to the conduct that eventually injured the Nelsons,” were not the particular conduct upon which their suit was based. The suit was instead based upon the Saudi sovereign acts that actually injured them. [Citation.] The Nelsons’ suit therefore did not fit within §1605(a)(2). [Citation.] The Ninth Circuit held that Sachs’s claims were “based upon” the sale of the Eurail pass because the sale of the pass provided “an element” of each of her claims. [Citation.] Under Nelson, however, the mere fact that the sale of the Eurail pass would establish a single element of a claim is insufficient to demonstrate that the claim is “based upon” that sale for purposes of §1605(a)(2). The Ninth Circuit apparently derived its one-element test from an overreading of one part of one sentence in Nelson, in which we observed that “the phrase [‘based upon’] is read most naturally to mean those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case.” [Citation.] We do not see how that mention of elements—plural—could be considered an endorsement of a one-element test, nor how the particular element the Ninth Circuit singled out for each of Sachs’s claims could be construed to entitle her to relief. Be that as it may, our analysis in Nelson is flatly incompatible with a one-element approach. A one-element test necessarily requires a court to identify all the elements of each claim in a complaint before that court may reject those claims for falling outside § 1605(a)(2). But we did not undertake such an exhaustive claim-by-claim, element-by-element analysis of the Nelsons’ 16 causes of action, nor did we engage in the choice-of-law analysis that would have been a necessary prelude to such an undertaking. [Citations.] * * * Under this analysis, the conduct constituting the gravamen of Sachs’s suit plainly occurred abroad. All of her claims turn on the same tragic episode in Austria, allegedly caused by wrongful conduct and dangerous conditions in Austria, which led to injuries suffered in Austria. Sachs maintains that some of those claims are not limited to negligent conduct or unsafe conditions in Austria, but rather involve at least some wrongful action in the United States. Her strict liability claim for failure to warn, for example, alleges that OBB should have alerted her to the dangerous conditions at the Innsbruck train station when OBB sold the Eurail pass to her in the United States. Under any theory of the case that Sachs presents, however, there is nothing wrongful about the sale of the Eurail pass standing alone. Without the existence of the unsafe boarding conditions in Innsbruck, there would have been nothing to warn Sachs about when she bought the Eurail pass. However Sachs frames her suit, the incident in Innsbruck remains at its foundation. As we explained in Nelson, any other approach would allow plaintiffs to evade the Act’s restrictions through artful pleading. For example, any plaintiff “could recast virtually any claim of intentional tort... as a claim of failure to warn, simply by charging the defendant with an obligation to announce its own tortious propensity before indulging it.” [Citation.] To allow such “recast[ing]” of a complaint, we reasoned, would “give jurisdictional significance to [a] feint of language,” thereby “effectively thwart[ing] the Act’s manifest purpose.” [Citation.] * * * We therefore conclude that Sachs has failed to demonstrate that her suit falls within the commercial activity exception in §1605(a)(2). OBB has sovereign immunity under the Act, and accordingly the courts of the United States lack jurisdiction over the suit. The judgment of the United States Court of Appeals for the Ninth Circuit is reversed. 46-2b Act of State Doctrine The Act of State Doctrine provides that courts should not question the validity of actions taken by a foreign government in its own country. In the United States, there are several possible exceptions to the act of state doctrine. Some courts hold (1) that a sovereign may waive its right to raise the act of state defense and (2) that the doctrine may be inapplicable to commercial activities of a foreign sovereign. In addition, by Federal statute, the courts will not apply the act of state doctrine to claims to property based on the assertion that a foreign state confiscated the property in violation of the principles of international law, unless the President of the United States determines that the doctrine should be applied in a particular case. 46-2c Taking of Foreign Investment Property An expropriation or nationalization occurs when a government seizes foreign owned property or assets for a public purpose and pays the owner just compensation for what is taken. Confiscation is the term used when no payment (or inadequate payment) is given in exchange for the seized property, or when the property is seized for a nonpublic purpose. Confiscations violate generally observed principles of international law, whereas expropriations do not. One precaution that U.S. firms can take is to obtain insurance from a private insurer or from the Overseas Private Investment Corporation (OPIC), an independent agency of the U.S. government. OPIC was established to facilitate the participation of U.S. private capital and skills in the economic and social development of developing countries and countries in transition from nonmarket to market economies. OPIC, which charges market-based fees for its products, accomplishes this by helping U.S. businesses to invest overseas by complementing the private sector in managing risks associated with foreign direct investment. Currently, OPIC services are available for new and expanding business enterprises in more than 150 countries worldwide. To date, OPIC has supported more than $200 billion of investment in over 4,000 projects, generated an estimated $75 billion in U.S. exports, and supported more than 275,000 U.S. jobs. The World Bank established the Multilateral Investment Guarantee Agency (MIGA) to encourage increased investment in developing nations. The MIGA has at least 179 member countries. MIGA’s mission is to promote foreign direct investment into developing countries to help support economic growth, reduce poverty, and improve people’s lives. It does this by providing political risk insurance (guarantees) to the private sector for such noncommercial risks as deprivation of ownership or control by governmental actions, breach of contract by a government where there is no judicial recourse, and loss from military action or civil disturbance. *** Chapter Outcome*** Explain the legal controls imposed on the flow of trade, labor, and capital across national borders. 46-3 TRANSACTING BUSINESS ABROAD Business abroad may involve selling goods, information or services, or investing capital or arranging for movement of labor. 46-3a Flow of Trade A tariff is a duty or tax imposed on goods moving into or out of a country. Tariffs raise the price of imported goods, making it harder to compete against domestically produced items. Nontariff barriers include unilateral or bilateral import quotas, import bans, restrictive safety or manufacturing standards, complicated customs procedures and subsidies to local industry. Export controls, such as quotas, tariffs, or total prohibitions, are often associated with national defense, foreign policy, or the protection of scarce national resources, such as technologically advanced goods and data. At the same time they are attempting to limit some exports, countries generally encourage many other exports through export incentives and export subsidies. 46-3b Flow of Labor Almost all countries require foreigners to obtain passports before entering their borders. Visas may be issued to foreign citizens permitting them to enter a country for specific periods of time or for identified purposes. Foreigners may be given permission to work when they are to perform services that the unemployed in the host country cannot perform, or when they are transferred to the host country by their employers. The U.S. Citizenship and Immigration Services (USCIS), a component of the Department of Homeland Security, oversees lawful immigration to the United States. 46-3c Flow of Capital In 1945 the International Monetary Fund (IMF) was established to encourage the expansion and balanced growth of international trade, to help eliminate foreign exchange restrictions, and to facilitate the international balance of payments between the members of the fund. Currently, more than 185 countries are members of the IMF. At least 158 nations have signed the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. The Convention created the International Centre for the Settlement of Investment Disputes, which offers a form of arbitration for investment disputes between governments and foreign investors to promote increased flows of international investment. Nations have also joined to form international and regional banks, such as the International Bank for Reconstruction and Development (part of the World Bank), the African Development Bank, the Asian Development Bank, the European Investment Bank, and the Inter-American Development Bank. 46-3d International Contracts International contracts usually involve issues beyond the legal requirements inherent in domestic commercial contracts. These issues include differences in language, customs, legal systems, and currency. It is important for international contracts to: • specify the official contract language and include definitions of all significant legal terms, • specify the acceptable currency(ies) and method of payment, • include a choice of law clause designating what law will govern any breach or dispute, • include a choice of forum clause specifying whether the parties will resolve disputes through one nation’s court system or through third-party arbitration, and • include a force majeure (unavoidable force of nature) clause assigning the parties’ liabilities and responsibilities in the event of an unforeseeable occurrence, such as a typhoon, tornado, flood, earthquake, war, or nuclear disaster. The United Nations Commission on International Trade Law (UNCITRAL) was established by the U.N. General Assembly to further the progressive harmonization and unification of the law of international trade. The Commission is composed of sixty member states elected by the General Assembly and is structured to be representative of the world's various geographic regions and its principal economic and legal systems. One of its primary functions is to develop conventions, model laws, and rules that are acceptable worldwide. One example is the CISG (discussed below and in Chapters 21-25) and the arbitration rules mentioned above. Another is the UNCITRAL Model Law on Electronic Commerce, adopted in 1996, which is intended to facilitate the use of modern means of communications and storage of information. Legislation based on it has been adopted in at least sixty-seven nations and, in the United States, it has influenced the Uniform Electronic Transactions Act, promulgated by the Uniform Law Commission (ULC) in 1999 and adopted by nearly all of the States. In 2001 the UNCITRAL Model Law on Electronic Signatures was adopted to bring additional legal certainty regarding the use of electronic signatures. Following a technology-neutral approach, the Act establishes a presumption that electronic signatures, which meet certain criteria of technical reliability, shall be treated as equivalent to hand-written signatures. Legislation based on it has been adopted in at least thirty-two nations. CISG — The United States and at least eighty-four other countries have ratified the U.N. Convention on Contracts for the International Sale of Goods. The CISG governs all contracts for the international sale of goods between parties located in nations that have ratified the CISG. Letters of Credit — Governmental controls over the export or import of goods and currency are risks particular to international trade. The best way to manage these risks is the irrevocable letter of credit. The buyer enters into a contract with a local bank, called an issuer, calling for the bank to pay the agreed price upon presentation of specified documents. This commitment by the buyer’s bank is the letter of credit. Typically, a correspondent or paying bank located in the seller’s country makes payment to the seller. *** Chapter Outcome*** Explain the international dimensions of antitrust law, securities regulation, and the protection of intellectual property. 46-3e Antitrust Laws Section 1 of the Sherman Act provides for a broad, extraterritorial reach of the U.S. antitrust laws. Recent amendments to the Sherman Act and the Federal Trade Commission Act limit their application to unfair methods of competition that have a direct substantial, and reasonable foreseeable effect on U.S. domestic commerce, import commerce or export commerce. The U.S. Supreme Court has held that where price-fixing conduct significantly and adversely affects customers outside and inside the United States, but the foreign injury is separate from the domestic injury, the Sherman Act does not apply to a claim based solely on the foreign injury. CASE 46-2 MORRISON v. NATIONAL AUSTRALIA BANK LTD. Supreme Court of the United States, 2010 561 U.S.__, 130 S.CT. 2869, 177 L.ED.2D 535 http://scholar.google.com/scholar_case?case=3519216444119666685&hl=en&as_sdt=2&as_vis=1&oi=scholarr Scalia, J. [Respondent National Australia Bank Limited (National) was the largest bank in Australia. Its ordinary shares (common stock) are not traded on any exchange in the United States. National’s American Depositary Receipts (ADRs), which represent the right to receive a specified number of National’s ordinary shares, however, are listed on the New York Stock Exchange. In February 1998, National bought respondent HomeSide Lending, Inc., a mortgage servicing company headquartered in Florida. HomeSide’s business was to receive fees for servicing mortgages. The rights to receive those fees, so-called mortgage-servicing rights, can provide a valuable income stream. How valuable each of the rights is depends, in part, on the likelihood that the mortgage to which it applies will be fully repaid before it is due, terminating the need for servicing. HomeSide calculated the present value of its mortgage-servicing rights by using valuation models designed to take this likelihood into account. It recorded the value of its assets, and the numbers appeared in National’s financial statements. From 1998 until 2001, National’s annual reports and other public documents touted the success of HomeSide’s business, and senior executives of National and HomeSide did the same in public statements. But on July 5, 2001, National announced that it was writing down the value of HomeSide’s assets by $450 million; and then again on September 3, by an additional $1.75 billion. The prices of both ordinary shares and ADRs declined. Petitioners Russell Leslie Owen and Brian and Geraldine Silverlock, all Australians, purchased National’s ordinary shares in 2000 and 2001, before the write-downs. They sued National, HomeSide, National’s CEO, and three HomeSide executives in the United States District Court for alleged violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. According to the complaint, HomeSide and three of its executive officers had manipulated HomeSide’s financial models to make the rates of early repayment unrealistically low in order to cause the mortgage-servicing rights to appear more valuable than they really were. The complaint also alleges that National and its CEO were aware of this deception by July 2000, but did nothing about it. Respondents moved to dismiss for lack of subject matter jurisdiction * * * and for failure to state a claim on which relief can be granted * * *. The District Court granted the motion to dismiss for lack of subject matter jurisdiction. The Court of Appeals for the Second Circuit affirmed on similar grounds. The U.S. Supreme Court granted certiorari.] Before addressing the question presented, we must correct a threshold error in the Second Circuit’s analysis. It considered the extraterritorial reach of § 10(b) to raise a question of subject-matter jurisdiction, wherefore it affirmed the District Court’s dismissal * * *. [Citation.] * * * * * * The District Court here had [subject-matter] jurisdiction * * * to adjudicate the question whether §10(b) applies to National’s conduct. * * * Since nothing in the analysis of the courts below turned on the mistake, * * * we proceed to address whether petitioners’ allegations state a claim. It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” [Citation.] This principle represents a canon of construction, or a presumption about a statute’s meaning, rather than a limit upon Congress’s power to legislate, [citation]. It rests on the perception that Congress ordinarily legislates with respect to domestic, not foreign matters. [Citation.] Thus, “unless there is the affirmative intention of the Congress clearly expressed” to give a statute extraterritorial effect, “we must presume it is primarily concerned with domestic conditions.” [Citation.] The canon or presumption applies regardless of whether there is a risk of conflict between the American statute and a foreign law, [citation]. When a statute gives no clear indication of an extraterritorial application, it has none. * * * Rule 10b-5, the regulation under which petitioners have brought suit, was promulgated under §10(b), and “does not extend beyond conduct encompassed by §10(b)’s prohibition.” [Citation.] Therefore, if §10(b) is not extraterritorial, neither is Rule 10b-5. On its face, §10(b) contains nothing to suggest it applies abroad. * * * * * * [Contrary to the argument of the petitioners and the Solicitor General, a general reference to foreign commerce in the definition of “interstate commerce” does not defeat the presumption against extraterritoriality.] * * * The Solicitor General also fails to account for §30(a), which * * * contains what §10(b) lacks: a clear statement of extraterritorial effect. Its explicit provision for a specific extraterritorial application would be quite superfluous if the rest of the Exchange Act already applied to transactions on foreign exchanges—and its limitation of that application to securities of domestic issuers would be inoperative. * * * No one claims that §30(a) applies here. In short, there is no affirmative indication in the Exchange Act that §10(b) applies extraterritorially, and we therefore conclude that it does not. Petitioners argue that the conclusion that §10(b) does not apply extraterritorially does not resolve this case. They contend that they seek no more than domestic application anyway, since Florida is where HomeSide and its senior executives engaged in the deceptive conduct of manipulating HomeSide’s financial models; their complaint also alleged that Race and Hughes made misleading public statements there. * * * * * * [W]e think that the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.” [Citations.] Those purchase-and-sale transactions are the objects of the statute’s solicitude. It is those transactions that the statute seeks to “regulate,” [citation]; it is parties or prospective parties to those transactions that the statute seeks to “protec[t],” [citation]. [Citation.] And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which §10(b) applies. * * * * * * The probability of incompatibility with the applicable laws of other countries is so obvious that if Congress intended such foreign application “it would have addressed the subject of conflicts with foreign laws and procedures.” [Citation.] Like the United States, foreign countries regulate their domestic securities exchanges and securities transactions occurring within their territorial jurisdiction. And the regulation of other countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, what discovery is available in litigation, what individual actions may be joined in a single suit, what attorney’s fees are recoverable, and many other matters. * * * * * * Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States. This case involves no securities listed on a domestic exchange, and all aspects of the purchases complained of by those petitioners who still have live claims occurred outside the United States. Petitioners have therefore failed to state a claim on which relief can be granted. We affirm the dismissal of petitioners’ complaint on this ground. 46-3f Securities Regulation Foreign securities issuers who issue securities in the United States must follow the procedures of the 1933 Act. Those whose securities are sold in the secondary markets must register under the 1934 Acts. Most courts find US jurisdiction where there is either conduct or effects in the United States relating to a violation of Federal security laws. . In the 2010 case of Morrison v. National Australia Bank Ltd. (see Case 46-2), the U.S. Supreme Court rejected these cases, holding that Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 do not apply extraterritorially but only reach the use of a manipulative or deceptive device or contrivance in connection with (1) the purchase or sale of a security listed on a U.S. stock exchange or (2) the purchase or sale of any other security in the United States. The Supreme Court held that Section 10(b) and Rule 10b-5 do not provide a cause of action to foreign plaintiffs suing foreign or U.S. defendants for misconduct in connection with securities traded on foreign exchanges. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), discussed in Chapter 42, extends the reach of the antifraud provisions of the 1933 and 1934 Acts with respect to actions brought by the United States and the SEC. In such actions, jurisdiction would include “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the violation is committed by a foreign adviser and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” The Dodd-Frank Act also requires the SEC to study the extent to which private rights of action under the antifraud provisions of the 1934 Act should be governed by these new standards. On April 11, 2012 the SEC delivered to Congress its “Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934”, which provides several options but no specific recommendations. To date Congress has not taken any action. Thus the Dodd-Frank Act restores to the SEC and the Department of Justice—but not private litigants—the right to bring proceedings to enforce the antifraud provisions of the U.S. securities laws in cases with an extraterritorial component. The International Organization of Securities Commissions has a membership of more than 200 national securities agencies, which regulate more than 95 percent of the world’s securities markets. The member agencies have agreed (1) to cooperate to promote high standards of regulation to maintain just, efficient, and sound markets; (2) to exchange information to promote the development of domestic markets; (3) to work together to establish standards and effective surveillance of international securities transactions; and (4) to provide support to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offenses. 46-3g Protection of Intellectual Property US laws protecting intellectual property do not apply in other countries. Owners of intellectual property rights must comply with each country’s requirements. The United States belongs to multinational treaties such as the Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty. International treaties protecting trademarks are the Paris Convention, the Trademark Law Treaty, the Arrangement of Nice Concerning the International Classification of Goods and Services, and the Vienna Trademark Registration Treaty. In 2002 Congress enacted legislation implementing the Madrid Protocol, a procedural agreement allowing U.S. trademark owners to file for registration in any number of over sixty-five member countries by filing a single application in English and paying a single fee. Copyrights are covered by the Universal Copyright Convention and the Berne Convention for the Protection of Literary and Artistic Works. The Trade-Related Aspects of Intellectual Property Rights (TRIPS) portion of the World Trade Organization Agreement covers the range of intellectual property. The World Intellectual Property Organization (WIPO), one of the specialized agencies of the United Nations, attempts to promote—through cooperation among nations— the protection of intellectual property throughout the world. WIPO administers twenty-six international treaties dealing with intellectual property protection and includes at least 188 nations as member states. 46-3h Foreign Corrupt Practices Act In 1977, Congress enacted the Foreign Corrupt Practices Act (FCPA) which makes it unlawful for any U.S. person, and certain foreign issuers of securities, or any of its officers, directors, employees, or agents to offer or give anything of value directly or indirectly to any foreign official, political party, or political official for the purpose of (1) influencing any act or decision of that person or party in his or its official capacity, (2) inducing an act or omission in violation of his or its lawful duty, or (3) inducing such person or party to use his or its influence to affect a decision of a foreign government in order to assist the person in obtaining or retaining business. An offer or promise to make a prohibited payment is a violation even if the offer is not accepted or the promise is not performed. The 1988 amendments to the FCPA explicitly excluded routine government actions not involving the discretion of the official, such as obtaining permits or processing applications. This exclusion does not cover any decision by a foreign official whether, or on what terms, to award new business or to continue business with a particular party. The amendments also added an affirmative defense for payments that are lawful under the written laws or regulations of the foreign official’s country. Since 1998, the antibribery provisions also apply to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. In 1997 the United States signed the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention). In 1998 Congress enacted the International Anti-Bribery and Fair Competition Act of 1998 to conform the FCPA to the Convention. 46-3i Employment Discrimination Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, discussed in Chapter 42, apply to U.S. citizens employed abroad by U.S. employers or by foreign companies controlled by U.S. employers. Employers must comply unless compliance would violate the law of the foreign country in which the workplace is located. *** Chapter Outcome*** List and describe the forms in which a multinational enterprise may conduct its business in a foreign country. 46-4 FORMS OF MULTINATIONAL ENTERPRISES Factors to be considered in determining the form of a multinational business enterprise (MNE) include financing, tax consequences, legal restrictions imposed by the host country, and the degree of control over the business sought by the MNE. 46-4a Direct Export Sales Under a direct export sale, the seller contracts directly with the buyer in the other country. This is the simplest form of MNE. 46-4b Foreign Agents An agency relationship is often used by MNEs seeking limited involvement in an international market. The principal firm appoints a local agent to either enter into contracts in the agent’s country on the principal’s behalf or to solicit and take orders only. 46-4c Distributorships Unlike an agent, a foreign distributor appointed by a producer of goods in another country does take title to the merchandise it receives. As a result, the distributor, not the producer, bears many of the risks. The distributorship format is especially susceptible to antitrust violations. 46-4d Licensing This involves the sale of an intellectual property right, such as licensing a patent, trademark, trade secret, or innovative production technology. The foreign firm pays royalties in exchange for the use of the right. Franchising is a form of licensing in which the owner grants permission to a foreign business to use the intellectual property under carefully specified conditions. 46-4e Joint Ventures In a joint venture, two or more independent businesses from different countries agree to coordinate their efforts to achieve a common result. They share profits and liabilities according to a contract. Each company can be assigned responsibility for what it does best. Regional groups and countries frequently have restrictions on foreign joint ventures to assure local control. 46-4f Wholly Owned Subsidiaries Creating a foreign, wholly owned subsidiary corporation can offer a firm numerous advantages, most significantly the ability to retain authority and control over all phases of an operation. This is especially attractive to businesses wishing to safeguard their technology, although it requires more effort and participation on the part of the parent firm. Part Ten: Property CONTENTS Chapter 47 Introduction to Property, Property Insurance, Bailments, and Documents of Title Chapter 48 Interests in Real Property Chapter 49 Transfer and Control of Real Property Chapter 50 Trusts and Decedents’ Estates ETHICS QUESTIONS RAISED IN THIS PART 1. Under what circumstances should an insurance company be able to deny coverage to a person seeking health or life insurance? Some small businesses and others today claim they are arbitrarily classified as risks for health insurance. In a few cases single men in certain professions or who reside in certain areas of the country are classified as being at risk for AIDS even though they test negative for the AIDS antibody and can pass a physical examination. What criteria should an insurance company be able to use in assessing the risks of its insured or potentially insured clients. 2. What are the ethical responsibilities of a property owner when an insurance policy is in effect on the property? Does a small deductible clause in a policy make the property owner more or less likely to take precautions to prevent damage to the property? 3. What is the purpose of an implied warranty of habitability? Is there an ethical obligation to provide such a warranty even if the state where the property is located does not require one? Why? 4. Some retirement communities and homeowner's associations have clauses in the association agreement which prohibit the property owners from having children reside with them. Why would a homeowner's association not want children? Why might an individual homeowner want to have a child live in the complex? If an individual owner agrees not to have children live in the complex and later, because of changed circumstances wants to have a child live in the complex, should the no-children clause be enforced? Are there certain restrictive covenants that should not be enforced from an ethical perspective? If so, which ones are unethical? 5. Are there limits on the private ownership of property? Are there any items of property that should not be owned privately? In the issue of land use control, whose interests should prevail-the individual property owner or the public body seeking to impose such controls? ACTIVITIES AND RESEARCH PROBLEMS 1. Collect insurance policies of a particular kind from various insurance companies and compare the terms. 2. Have students interview one or more insurance agencies to determine how they handle applications for medical or life insurance when the prospective client has a serious medical problem such as AIDS or diabetes or cancer. Are there certain people who are uninsurable? If so, who and why? Then have students discuss and compare their findings. 3. Have students collect forms for various types of real estate transactions and then discuss the terms and conditions of each of these transactions. 4. Research the local zoning restrictions for the area in which you live and discuss the restrictions. 5. Have students attend a local planning commission meeting to hear current issues involving land use in your area. 6. Have students do research to find examples or cases involving each of the various types of trusts discussed in the chapter. You might refer them to form books or tax planning manuals. 7. Have students research the intestacy laws in your state. Then have them draft a proposed will of their own. Chapter 47 INTRODUCTION TO PROPERTY, PROPERTY INSURANCE, BAILMENTS, AND DOCUMENTS OF TITLE Cases in This Chapter Herron v. Barnard Mirvish v. Mott Hadfield v. Gilchrist Chapter Outcomes After reading and studying this chapter, the student should be able to: • Define (1) tangible and intangible property, (2) real and personal property, and (3) a fixture. • Explain (1) the ways to transfer title to personal property; (2) the three elements of a valid gift; and (3) the difference in the law’s treatment of abandoned property, lost property, and mislaid property. • With respect to property insurance, explain (1) the different types of fires, (2) insurance clauses, (3) other insurance clauses, (4) insurable interest, (5) valued and open policies, and (6) the defenses of misrepresentation, breach of warranty, concealment, waiver, and estoppel. • Define the essential elements of a bailment and describe the rights and duties of the bailor and bailee. • Explain what a document of title is and identify and describe the various types of documents of title. TEACHING NOTES INTRODUCTION TO PROPERTY & PERSONAL PROPERTY Property is an interest, or a group of interests, that is legally protected. The right to possess property, use it, sell it, and to control to whom it shall pass on the death of the owner are all included within the term “property.” In everyday life, people tend to think of property ownership in two ways: 1) as owning the physical thing itself (“I just bought a piece of property in Oakland,” referring to a house and lot.); and 2) a right or interest in a physical object, as when the owner of a pair of Chicago Bulls season tickets has a property interest in seats 129 and 130, Section D, on specified dates — without owning the seats, the United Center, or the team. 47-1KINDS OF PROPERTY *** Chapter Outcome*** Define (1) tangible and intangible property, (2) real and personal property, and (3) a fixture. 47-1a Tangible and Intangible Tangible property is a legally protected interest in physical objects such as a farm, a chair, and a household pet. Intangible property, in contrast, is a legally protected interest in things that do not exist in a physical form. The same item may be the object of both tangible and intangible property. If Ann buys a book published by Brown & Sons, she owns that particular copy; it is tangible property. However, Brown & Sons has the exclusive right to publish copies of the book, a right granted by the copyright laws. The courts will protect this intangible property of Brown & Sons, as well as Ann’s right to her particular volume. 47-1b Real and Personal Real property is land and all interests in it. Personal property is every thing or interest that is not real property. The transfer of real property during life can be accomplished only through certain formalities, including execution and delivery of a written instrument known as a deed. In contrast, personal property may be transferred with relative simplicity and informality. NOTE: See Figure 47-1: Kinds of Property. 47-1c Fixtures Personal property that becomes so firmly attached to land so as to become part of the realty. Unless otherwise provided by agreement, personal property remains the property of the person who placed it on the real estate. On the other hand, property that has been affixed so as to become a fixture (an actual part of the real estate) becomes the property of the real estate owner. When people have conflicting claims to ownership of personal property that has become a fixture, the parties’ intention, as expressed in their agreement, will control the settlement. When there is no express agreement, the following factors are relevant in determining whether any particular item is a fixture: 1) the physical relationship of the item to the land or building; 2) the intention of the person who attached the item to the land or building; 3) the purpose served by the item in relation to the land or building and in relation to the person who brought it there; and 4) the interest of that person in the land or building at the time of the item’s attachment. The most important test of whether an item is a fixture is whether it can be removed without material injury to the land or building on the land; if not, the item is generally held to have become part of the realty. However, the test of purpose or use applies if the item can be removed without damaging the property. CASE 47-1 HERRON v. BARNARD Missouri Court of Appeals, Western District, 2013 390 S.W.3d 901 Mitchell, J. On March 1, 2007, Barnard, acting on behalf of Baltimore Avenue Investors, LLC (collectively "Barnard"), executed a written lease agreement for a 1,442-square-foot office space at 2000 Baltimore Avenue in Kansas City, Missouri, with Boka Powell, LLC, a Texas-based architectural design firm. Herron was employed by Boka Powell to run the Kansas City office. The lease agreement was for a two-year term with a monthly rent payment of $1,562.17 and a right of first refusal regarding the lease of additional space within the building. The parties further agreed that Boka Powell, through Herron and at its own expense, would be permitted to remove existing partitions in order to reconfigure space for a kitchenette; relocate the plumbing, electrical, and waste lines for this purpose; add carpet; relocate the entry door; and paint the walls and ceiling. The lease further provided that Boka Powell was responsible for putting in a security system at its own expense. The space was then remodeled in accordance with the agreed-upon terms. After the space was remodeled, Herron arranged for the installation of a sink, cabinetry (including a pull-out waste receptacle and storage bin), appliances, and shelving in the kitchenette area; he also arranged for the installation of a custom-made, tempered-glass door and matching transom for the entrance, as well as a variety of new light fixtures and bulbs, a picture-hanging mechanism, filing cabinets, and a security system. Of these items, Herron, himself, purchased the appliances, the sink, the bookshelves, the door and transom, the picture hanger, all of the lighting, the wire storage bin, and the wastebasket. Boka Powell purchased the filing cabinets, the storage cabinets, and the security system, but later transferred ownership of these items to Herron as part of a separation agreement. Herron later testified that the particular items he selected were for the purpose of creating an architectural showpiece for his customers to demonstrate what the architectural firm could do with a space. * * * Before the original two-year term expired, Boka Powell agreed to renew the lease. Barnard offered two options: the first was a two-year extension with an increased rent based upon an increase in the square footage of the space from renovations, and the second was a one-year extension at the same increased rental rate with the option for an additional extension of one year at an even higher rental rate. Although Herron was hoping for the two-year extension, Boka Powell opted for the one-year extension with the one-year renewal option. When Herron conveyed Boka Powell's request to Barnard, Herron also told Barnard, "If at the end of the next year they decide to no longer participate or I have enough work to continue with my own company, I hope that we can still work out a future long term agreement." The term of the renewed lease was set to expire on April 30, 2010. Sometime in November 2009, Boka Powell decided to cancel the lease agreement. Boka Powell paid, in a lump sum, the rent due through April 30, 2010, but terminated its lease as of January 30, 2010, advising Herron to vacate the premises no later than January 29th. In a separation agreement between Boka Powell and Herron, Boka Powell agreed to compensate Herron for outstanding expenses by giving him eight workstations, eight chairs, eight file cabinets, eight conference chairs, and two "L file" cabinets that were, at the time, located in the leased space, with those items to be removed at Herron's expense. * * * On February 24, 2010, Herron advised Barnard that he was unable to secure a co-tenant and could not afford the rent on his own. Herron indicated that, although the original lease expired on April 30, 2010, he could make arrangements to move his property before then, and he requested that Barnard identify what he considered a reasonable move-out date. In response, Barnard simply suggested that they meet up the next week but provided no move-out date. At that meeting, Herron returned his keys, but Barnard indicated that if Herron needed back in the space, all he needed to do was contact Barnard, and Barnard would let him in. * * * While Herron (along with a small crew of workers) was in the process of removing the various items at issue in this appeal, Barnard showed up and advised Herron and his crew to stop what they were doing and leave because they were not authorized to be there, and Barnard considered them to be trespassing. Thereafter, Herron filed a lawsuit for conversion and replevin (among other claims), alternatively seeking return of the property or damages. Barnard filed an answer and an amended answer, raising, as affirmative defenses, claims that he owned the property because: (1) the property constituted fixtures that transferred to Barnard pursuant to the terms of the lease agreement; and (2) Herron had abandoned the property by leaving it on the premises beyond the expiration of the lease. The trial court, after hearing testimony from both Herron and Barnard, and after viewing numerous exhibits consisting of photographs, blueprints, emails, and contracts, denied all of Herron's claims. Neither party requested findings of fact or conclusions of law, and, accordingly, the trial court provided none. Herron appealed the judgment. "`A fixture is an article of the nature of personal property [that] has been so annexed to the realty that it is regarded as part of the land and partakes of legal incidents of the freehold and belongs to the person owning the land.'" [Citation.] "The elements of a fixture are annexation, adaptability and intent." [Citation.] "Each of the elements ... must be present to some degree, however slight." [Citation.] And "the general rule is that the burden of showing that the circumstances of the annexation are such as to make an article a fixture is on the party asserting it to be one." [Citation.] *** The annexation element refers to the physical attachment of the property to the realty, and where structures are removable with minimal or no damage resulting, the mere fact of annexation does not support a finding that the item was a fixture. [Citation.] On the other hand, "[a]nnexation that may be slight and easily displaced does not prevent an article from becoming a fixture when the other elements are found." [Citation.] The adaptation element means that "the characteristics of fitness or suitability for the building or premises in question are implied." [Citation.] In other words, if the premises were designed or built with the view of having the particular item made an integral part of the building, or if the alleged fixture was necessary for the particular use to which the premises are devoted, the element of adaptation is satisfied. [Citation.] But, to meet this element, one must prove that the property at issue is "peculiarly adapted to the real property," [citation], and "[a]n item usable at other locations is not peculiarly adapted for use on the land in question." [Citation.] Thus, although a space may be designed for the use of the property in question, unless there is something peculiar or unique about the property itself that requires only that particular item to be used in the space, the element of adaptation is not met. [Citation.] The intent element is "of paramount importance, at least in the case of controversies between ... landlord and tenant, where the controlling question is usually that of whether the intention in annexing the article to the realty was to make it a permanent accession to the land." [Citation.] * * * "When an annexation is made by a tenant and is such that the chattel may be removed without material injury to the realty, there is a presumption that he did not intend to make a permanent annexation to the real estate but intended to reserve to himself the title to the chattel annexed. [Citation.] * * * In the context of commercial tenancies, "[c]ase law appears to support the view that the extent of the furnishings necessary for the operation of a modern business negates an intention ... to make any gift to the landlord and that therefore all ordinary store fixtures, including showcases and shelving, business signs, and miscellaneous other appliances installed by (the tenant) may be considered to remain his personal property,' unless substantial damage' would be the result of removal." [Citation.] In examining the three elements, "[t]he latter two ..., adaptation and intent, are more important in determining whether a chattel became a fixture than the method by which the chattel is affixed to a freehold." [Citation.] *** We believe that there was substantial evidence to support adaptation, but only as to the custom door and transom. As for the remaining items, we do not believe that there was substantial evidence to support a finding that Barnard met his burden of demonstrating the element of adaptation. The evidence demonstrated that the door and transom went from floor to ceiling, which was a height of approximately fourteen feet. The transom had to be specially built into the walls by setting it inside a custom-built wooden track and then enclosing and concealing the track within the drywall. Removing the transom would have caused significant damage to the property. It is apparent that the space housing the transom was designed with the view of having that particular transom become an integral part of the building itself. The transom was custom made for the space, and the size of the transom (approximately six feet tall) made it unique. Although the door, itself, was only minimally attached to the space, it too was custom-built in combination with the transom. The two items were essentially a package set; thus, if the element of adaptation was met as to one of the items, it was satisfied for both. Thus, we believe that the evidence and reasonable inferences supported a finding by the trial court that the element of adaptation was met as to the door and transom. As to the remaining items, the evidence did not demonstrate that there was anything peculiar or unique about them or that they were somehow made an integral part of the building. In fact, Barnard testified that the picture hanger did not constitute an improvement to the space and that neither the filing cabinets nor the refrigerator were integral parts of the building. And while it is true that the renovations to the space were made with the idea that the new space would be used as a kitchenette and storage, the facts that (1) the bookshelves, appliances, wood cabinetry, wastebasket, storage bin, sink, lighting, and alarm system could have easily been replaced by different bookshelves, appliances, cabinetry, wastebaskets, storage bins, sinks, lighting, and alarm systems, and (2) these particular items could have easily been used at a different location, establishes that these items were not "peculiarly adapted for use on the land in question." [Citation.] Consequently, in the present case, there was not substantial evidence to support a finding that the element of adaptation was met as to any of the items with the exception of the door and transom. And without evidence to support this element, the remaining items could not have constituted fixtures. [Citation.] *** Here, we believe the evidence demonstrated that the majority of the items at issue constituted trade fixtures, *** that Herron was permitted to remove at the conclusion of his tenancy pursuant to both the common law and the express term of the lease agreement. * * * *** Consequently, we reverse the trial court's judgment as to all of the property except the door and transom, and we remand this matter to the trial court in order to determine Herron's remedy (whether it be return of the property, or if damages, what amount of damages to which Herron is entitled). We affirm the trial court's judgment with respect to the door and transom in light of the fact that substantial evidence supported a finding that these items constituted fixtures, thereby transferring ownership of them to Barnard. *** Chapter Outcome*** Explain (1) the ways to transfer title to personal property, (2) the three elements of a valid gift, and (3) the difference in the law’s treatment of abandoned property, lost property, and mislaid property. 47-2 TRANSFER OF TITLE TO PERSONAL PROPERTY Real property can only be transferred with certain formalities. Personal property may be transferred with relative simplicity and informality. The law concerning personal property has been largely codified. The Uniform Commercial Code (UCC or the Code) includes the law of sales of goods (Article 2), as well as the law governing the transfer and negotiation of negotiable instruments (Article 3) and of investment securities (Article 8). 47-2a By Sale A sale of tangible personal property (goods) is a transfer of title to specified existing goods for a consideration known as the price. Title passes when the parties intend it to pass; transfer of possession is not required for transfer of title. Sales of intangible personal property involve the transfer of title. Many of these sales are governed by UCC provisions, but some, such as copyrights and patents, are governed by federal legislation. 47-2b By Gift A gift is a transfer of property from one person to another without consideration. Lack of consideration is the basic distinction between a gift and a sale. For a gift to be complete there are three requirements: a) delivery, b) intent, and c) acceptance. Delivery — A gift must be completed by irrevocable delivery of the gift property to be effective. A gratuitous promise to make a gift is not binding. The term "delivery" includes but is not limited to manual transfer of the item to the donee. Constructive delivery is the delivery of something symbolic of control over the item. CASE 47-2 MIRVISH v. MOTT Court of Appeals of New York, 2012 18 N.Y.3D 510, 965 N.E.2D 906 http://scholar.google.com/scholar_case?case=7402616197320321465&hl=en&as_sdt=2&as_vis=1&oi=scholarr Read, J. Jacques Lipchitz, the Russian-born cubist sculptor, died in 1973 at the age of 81. He was survived by his wife, Yulla H. Lipchitz, who inherited many valuable works of art from her husband, including “The Cry,” a 1,100–pound bronze sculpture, cast three of seven, 1928–1929. After she was widowed, Yulla began a relationship with Biond Fury as early as 1980; the two of them lived together for 17 years prior to her death on July 20, 2003 at the age of 92. From time to time, Yulla would make gifts to Fury, including art created by her late husband. She memorialized these gifts by giving Fury a picture of the artwork with a writing describing the piece and declaring that it was a gift. After Yulla's death, Fury produced a photograph of “The Cry” with the following notation on the back, in Yulla's handwriting: “I gave this sculpture ‘The Cry’ to my good friend Biond Fury in appreciation for all he did for me during my long illness. With love and my warm wishes for a Happy Future, Yulla Lipchitz October 2, 1997, New York.” At the time, “The Cry” was apparently in storage in New York in the custody of the Marlborough Gallery, Inc. (Marlborough), the Manhattan art dealer. About a year later, the French minister of culture and communication approached Pierre Levai, Marlborough's president, to ask about the possibility of placing “The Cry” on exhibit in Paris for a period of five years, “with a view to its ultimately being purchased.” The minister proposed to include “The Cry” in a group of modern and contemporary works to be installed in the Tuileries Gardens near the Louvre Museum. On November 11, 1998, Levai wrote the minister that he had discussed the French government's request “with the Lipchitz family,” who agreed to loan the sculpture for three years, unless Yulla died earlier. At the conclusion of the loan, Levai continued, the family was “prepared to negotiate a sale of the work,” but if “[a]t the conclusion of the loan, ... the sculpture [was] not purchased, it [was] to be returned to the Lipchitz family in New York at the borrower's cost.” Levai discussed the loan of “The Cry” to the French government only with Mott, never with Yulla. Mott, who at the time did not know about the handwritten gift instrument conveying “The Cry” to Fury, is the executor and a residuary beneficiary of one third of his mother's estate. He is an attorney, and he handled Yulla's financial affairs and held power of attorney from her for many years prior to her death. Mott also performed legal work for Marlborough, beginning as early as 1980. According to Mott, he talked to his mother about the loan and, on her behalf, “consented that [‘The Cry’] should be put on display in the [Tuileries Gardens] in Paris and it was and it had [Yulla's] name on the loan.” The French government at some point also inquired if, once the exhibition was over, Yulla was willing to make a gift of “The Cry.” Mott testified that Yulla told him “No, of course not, but if they want to buy it, they can buy it”—i.e., that “we would [give] ... a right of first refusal.” “The Cry” was in Paris, subject to this agreement, when Yulla died. Her will did not mention “The Cry” or any other specific work of art. Fury claims not to have known that the sculpture was loaned to the French government in 1998. * * * [On March 9, 2004, Fury's attorney sent a letter and a copy of the deed of gift to Mott's attorney, demanding immediate delivery of “The Cry” to Fury. Mott claims to have sold “The Cry” and three other sculptures in a package deal in July 2004 to Marlborough International Fine Art Establishment (Marlborough International) for $1 million. But in a letter to the French minister dated January 10, 2005, six months after the purported sale of “The Cry” to Marlborough International, Mott informed the minister that Yulla had passed away in 2003; noted that “the agreement for the loan also provided that at its conclusion the Lipchitz family would be prepared to negotiate a sale of the Sculpture”; and inquired “[o]n behalf of the family . . . whether the Ministry [had] any interest in acquiring the Sculpture at this time before arrangements are made for its return.” On September 15, 2005, Fury sold his interest in “The Cry” to David Mirvish, an art collector and gallery owner in Toronto, for $220,000. On October 4, 2005, Mirvish's attorney notified Mott of the sale and demanded possession of the sculpture. In a letter dated October 14, 2005, the estate's attorney refused this demand, asserting “the Estate was the true owner of [‘The Cry’], which was never subject of a valid inter vivos gift from [Yulla] to Biond Fury”. Both Mott, as executor of Yulla's estate, and Mirvish filed petitions with the Surrogate's Court seeking resolution of their conflicting claims of ownership of "The Cry." The Surrogate's Court ruled in favor of Mirvish, concluding that Yulla had made a valid inter vivos gift of “The Cry” to Fury because the wording of the deed of gift was “in the past tense, i.e., ‘I gave this sculpture “The Cry” to my good friend Biond Fury,’” which was not only “indicative of an antecedent transfer,” but also “clearly identifie[d] the intended object and [was] consistent with [Yulla's] long pattern of making gifts of similar items to her companion.” The Appellate Division reversed the Surrogate Court’s decree.] * * * The principles of law that control the outcome of this appeal are a good deal less complicated than the history of the dispute, as is the application of those principles to the facts. In [citation] we held that [f]irst, to make a valid inter vivos gift there must exist the intent on the part of the donor to make a present transfer; delivery of the gift, either actual or constructive to the donee; and acceptance by the donee. Second, the proponent of a gift has the burden of proving each of these elements by clear and convincing evidence [citations]. Relatedly, mere possession of a gift after the donor's death creates a presumption of delivery to the donee during the donor's lifetime. * * * Here, Yulla's intent to make a present transfer of “The Cry” was clear on the face of the gift instrument, as the surrogate concluded. There is no suggestion Yulla was coerced; there is no question about her capacity. Nor is there any dispute that Fury accepted the gift. * * * Mott has not raised a triable issue of fact so as to overcome the presumption of delivery; Mirvish has established each of the elements of a valid inter vivos gift—intent, delivery and acceptance—by clear and convincing evidence. * * * Accordingly, the order of the Appellate Division should be reversed, with costs, and the order of Surrogate's Court reinstated. Intent — There must be intent on the part of the maker (donor) of the gift to make a present transfer, and there must be acceptance by the recipient (donee) of the gift. Acceptance — A voluntary, uncompensated delivery with intent to give the recipient title constitutes a gift when the donee accepts it. The law usually presumes that the donee has accepted, but the law will not require the recipient to accept an unwanted gift. Classification — An inter vivos gift is a gift made by a donor during her lifetime. A gift causa mortis is a conditional gift made in contemplation of the donor's imminent death. 47-2c By Will or Descent Title to personal property may be inherited through testate (by will) or intestate succession (without will). 47-2d By Accession An addition to one's property by increase of the original property (cow gives birth to calf) or by production from such property (A innocently converts the wheat of B into bread). 47-2e By Confusion Results when goods belonging to two or more owners become intermixed to the point where the property of any of them no longer can be identified except as part of a mass of like (fungible) goods. 47-2f By Possession In some instances, a person may acquire title to movable personal property by taking possession of it. • If the property has been intentionally abandoned or disposed of by the owner, a finder is entitled to the property. • A finder is generally entitled to lost property (property unintentionally left) against everyone but the true owner. (Exception: When the lost property is in the ground, the landowner has a claim superior to that of the finder.) • Mislaid property is intentionally placed somewhere by the owner, who then unintentionally leaves it. Most courts hold that if property has been mislaid, not lost, then the owner of the premises, not the finder, has first claim if the true owner is not discovered. This doctrine is often used for items found in restaurants or on trains, buses, and airplanes. • Treasure trove, which consists of coins or currency concealed by its owner, must have been hidden long enough that the owner is probably dead or undiscoverable. Treasure trove belongs to the finder as against all but the true owner. Many states now have statutes that provide a means of vesting title to lost property in the finder after a prescribed search for the owner proves fruitless. PROPERTY INSURANCE Insurance covers a vast range of contracts, each of which distributes risk among a large number of members (the insureds) through an insurance company (the insurer). insurance is a contractual undertaking by the insurer to pay a sum of money or give something of value to the insured or a beneficiary upon the happening of a contingency or fortuitous event that is beyond the control of the contracting parties. The McCarran-Ferguson Act, enacted by Congress in 1945, left insurance regulation to the states. Each state has statutes to regulate domestic insurance companies and establish standards for foreign (out-of-state) insurance companies doing business within the state. The law of insurance is a branch of contract law; therefore, the doctrines of offer and acceptance, consideration, and other rules of contracts also apply to insurance contracts. 47-3 FIRE AND PROPERTY INSURANCE Protects the owner of real or personal property (or another person with an insurable interest, such as a secured creditor or mortgagee) against loss resulting from damage to or destruction of the property by fire and certain related perils. Most fire insurance policies cover damage caused by lightning, explosion, earthquake, water, wind, rain, collision, and riot. *** Chapter Outcome*** With respect to property insurance claims, explain (1) the different types of fires, (2) insurance clauses, (3) other insurance clauses, (4) insurable interest, (5) valued and open policies and (6) the defenses of misrepresentation, breach of warranty, concealment, waiver, and estoppel. 47-3a Types of Fire Covered Fire insurance policies generally cover damage from “hostile” fires but not “friendly” fires. A friendly fire is one contained in its intended location, such as a fireplace or furnace. A hostile fire is any other fire — one outside its intended or usual locale. A friendly fire becomes hostile if it escapes from its usual confines. 47-3b Co-Insurance Clauses Co-insurance is a means of sharing the risk between the insurer and the insured. through a reduction in benefits for underinsuring the value of the property based on a percentage stated in the insurance policy and the amount underinsured. A person insures property for less than its full or stated value and agrees to share the risk of loss. The formula for recovery is: Recovery = Face Value of the Policy Fair Market Value of Property x Co-insurance % x Loss Thus, if the co-insurance percentage is 80 percent, the value of the property is $100,000, and the policy is for $80,000 or more, the insured is protected against loss not to exceed the amount of the policy. But if the policy amount is less than 80 percent of the property value, the insured receives only a proportion of the loss amount, as determined according to the formula above. Some states do not favor co-insurance clauses and strictly construe the applicable statute against their validity. In addition, property insurance is not held to be co-insurance unless the policy specifically so provides. 47-3c Other Insurance Clauses Recovery under nonlife insurance policies is typically limited by other insurance clauses. These clauses generally require that liability be distributed pro rata among the various insurers. 47-3d Types of Policies Property insurance may either be a valued policy or an open policy. A valued policy is a policy in which the insured and the insurer specifically agree upon the full value of the property at the time the policy is issued. At the time of total loss the insurer must pay this amount, not the actual or fair market value of the property. An open policy is a policy with no agreement as to the specific value of the property; instead, the insurer pays the fair market value of the property immediately prior to the loss. Insurance of property under a marine policy (insurance covering marine vessels and cargo) is generally considered to be valued, while non-marine property insurance is presumed to be unvalued or open. 47-4 NATURE OF INSURANCE CONTRACTS 47-4a Offer and Acceptance Legally it is the customer who makes the offer to purchase insurance, be it life, fire, or property insurance. The contract is created when the agent of the insurance company takes the customer’s offer to the company and the company accepts it. In fire and casualty insurance, agents often have authority to make the insurance effective immediately by means of a binder, which is a temporary, preliminary insurance contact that is legally binding until the completion of the formal insurance contract. Should a loss occur before the company has actually issued a policy, the binder will be effective on the same terms and conditions the policy would have had if it had been issued. 47-4b Insurable Interest The concept of insurable interest has been developed over many years, primarily to eliminate gambling with regard to lives and property and to lessen the moral hazard. If a person could obtain an enforceable insurance policy on the life of anyone or a fire insurance policy on property that he did not own, he would be in a position to profit by the death of a stranger or by the destruction of property in which he had no interest. The purpose of insurance is protection against the risk of loss, not the realization of a profit. Thus, an insurable interest is a financial or close personal relationship in someone’s life or property that justifies insuring that life or property; an insurable interest must exist at the time the property loss occurs. (Some courts require insurable interest at the time of insuring and at the time of loss.) Ownership creates an insurable interest in property. Also, a right arising under a contract concerning the property also gives rise to an insurable interest. Shareholders in a closely held corporation have been held to have an insurable interest in the corporation’s property. Lessees and mortgagees have insurable interests. 47-4c Premiums Premiums are the consideration paid for an insurance policy. The rates charged for fire and various kinds of casualty insurance are regulated by state law. Regulatory authorities have a duty to require that companies’ rates be reasonable, not unfairly discriminatory, and neither excessively high nor inordinately low. *** Chapter Outcome*** Compare the defenses of misrepresentation, breach of warranty, concealment, waiver, and estoppel. 47-4d Defenses of the Insurer Misrepresentations — A representation becomes a warranty if the insured's application is incorporated into the contract. Also, if the insurer relied on the false representation to its detriment, recovery, i.e., rescission, will be permitted. Breach of Warranty — May be based on a condition subsequent or a condition precedent. Current policy is to allow an insured to be relieved of its responsibility only if the breach of warranty is material. Concealment — Failure of an applicant to reveal material facts. Must also be fraudulent. The principal remedy of the insurer on discovery of concealment is rescission of the contract. 47-4e Waiver and Estoppel Where an insurance company is entitled to deny liability it may be estopped (prevented) from doing so by its own conduct or it may waive its right through the intentional action of its agents. 47-4f Termination Most contract of insurance are performed according to their terms, and due performance terminates the insurer’s obligation. Cancellation by mutual consent is another way of terminating an insurance contract. If the insurer alone cancels a policy, the insurer remains liable until the time that the cancellation is effective. To cancel a policy, the insurer must return the unearned portion of the premium to the insured. BAILMENTS AND DOCUMENTS OF TITLE 47-5 BAILMENTS A bailment is the temporary transfer of personal property to another person. Specifically, a bailment is the relationship created when one person (the bailor) transfers the possession of personal property by delivery, without transfer of title, to another (the bailee) for the accomplishment of a certain purpose, after which the bailee is to return the property to the bailor or dispose of it according to the bailor’s directions. Bailments include the transportation, storage, repair, and rental of goods. 1. Bailments for the Bailor’s Sole Benefit include the gratuitous custody of personal property and the gratuitous services that involve custody such as repairs or transportation. 2. Bailments for the Bailee’s Sole Benefit are usually limited to the gratuitous loan of personal property for use by the bailee. 3. Bailments for the Mutual Benefit of Parties include ordinary commercial bailments such as when goods are delivered to a repair technician, jewelry to a pawnbroker, or an automobile to a parking lot attendant. *** Chapter Outcome*** Define the essential elements of a bailment. 47-5a Essential Elements of a Bailment (1) delivery of possession from a bailor to a bailee; (2) delivery of personal property, not real property; (3) possession without ownership by the bailee; (4) a determinable period for which possession will last; and (5) absolute duty on the bailee to return property or to dispose of it according to bailor’s directions. Delivery of Possession — Possession by a bailee involves (1) the bailee’s power to control the personal property and (2) either the bailee’s intention to control the property or awareness that the rightful possessor has given up physical control of it. Personal Property — A bailment can exist only with respect to personal property, but the bailed property need not be tangible. Intangible property that is evidenced by written instruments and is therefore deliverable is frequently the subject matter of bailments — for example, promissory notes, corporate bonds, shares of stock, documents of title, and life insurance policies. Possession for a Determinable Time — To establish a bailment relationship, the person receiving possession must be under a duty to return the personal property and must not obtain title to it. If the identical property is returned, even in an altered form, the transaction is a bailment. But if other property of equal value is returned, or if the money value of the original property is returned, then the transaction is a sale, not a bailment. Restoration of Possession to the Bailor — The bailee has a legal duty to return the property to the bailor when the bailment is terminated. The requirement that a bailee return the identical goods is subject to an exception, where fungible goods are involved. Fungible goods are interchangeable, e.g., grain, oil, or equivalent goods such that each unit is the equivalent of every other unit. *** Chapter Outcome*** Describe the rights and duties of the bailor and bailee. 47-5b Rights and Duties of Bailor and Bailee Bailee’s Duty to Exercise Due Care — The bailee must exercise due care not to permit injury to or destruction of the property by himself or by third parties. The degree of care depends on the nature of the bailment relationship and the character of the property. The duty of care ranges from least where the bailment is for the sole benefit of the bailor to greatest where the bailment is for the sole benefit of the bailee; the duty of care is ordinary when the bailment is for the mutual benefit of the bailee and bailor. But the amount of care also will vary with the character of the property. In a commercial bailment, from which both parties derive mutual benefit, the law requires the bailee to exercise the care that a reasonably prudent person would exercise under the same circumstances. When the property is lost, damaged, or destroyed while in the bailee’s possession, the law aids the bailor by presuming that the bailee was at fault. The bailor is merely required to show that certain property was delivered by way of bailment and that the bailee either has failed to return it or has returned it in a damaged condition. The burden is then on the bailee to prove that he exercised the degree of care required of him. NOTE: Figure 47-2: Duties in a Bailment. CASE 47-3 HADFIELD v. GILCHRIST Court of Appeals of South Carolina, 2000 343 S.C. 88, 538 S.E.2d 268 http://scholar.google.com/scholar_case?case=10116899322085945623&q=538+S.E.2d+268&hl=en&as_sclt=2,34 Anderson, J. Mark Hadfield filed this action against Sam Gilchrist, d/b/a Gilchrist’s Service Center, and d/b/a Gilchrist Towing Company (Gilchrist) for damages sustained by Hadfield’s vehicle while impounded on Gilchrist’s lot. * * * Facts/Procedural Background Gilchrist owns a motor vehicle towing service and maintains a storage facility for the retention of the towed vehicles. Gilchrist operates under a license issued by the City of Charleston. Hadfield, a medical student at MUSC, went to retrieve his 1988 Lincoln Continental from the parking spot where his wife parked the vehicle. The parking spot, located near MUSC, was on private property owned by Allen Saffer. Hadfield’s wife parked the vehicle on Saffer’s property without Saffer’s permission. The vehicle was not in the parking spot when Hadfield arrived as Saffer had called Gilchrist to have the vehicle removed. Gilchrist towed Hadfield’s car to his storage facility. Gilchrist maintained a chain link fence around the storage area, and had an employee on the lot around the clock. The employee’s duties included periodically leaving the office to check on the storage area, which was some distance away from the office. Hadfield called to retrieve his vehicle, but was informed he would have to wait until the next morning and pay towing and storage fees. Upon Hadfield’s arrival to pick up his car the following morning, he paid the fees. When he went to the storage area to collect his vehicle, Hadfield discovered the vehicle had been extensively vandalized. The vandals stole the radio/compact disc player, smashed windows, and pulled many electrical wires out of the dashboard. The vehicle depended heavily upon computers and never functioned properly after the incident. The vandals entered the storage area by cutting a hole in the fence. They vandalized between six and eight vehicles on the lot that night. The magistrate, in summarizing Hadfield’s testimony, concluded Hadfield’s attempts to persuade Gilchrist to pay for the damages were futile. Hadfield secured estimates for the damage to the automobile * * * at $4,021.43. * * * After more than 60 days elapsed, Hadfield sold the vehicle for $1,000.00. The magistrate found Gilchrist liable for the damages as a bailee, and entered judgment in favor of Hadfield for $4,035.00. Gilchrist appealed to the Circuit Court, which affirmed the decision of the magistrate. * * * Issues I Did the Circuit Court err in applying the law of bailments? II Did the Circuit Court err in finding Gilchrist was responsible for damages? Law/Analysis Neither the magistrate nor the Circuit Court judge made a finding as to the type of bailment created in this case. The type of bailment created may determine the standard of care the bailee, Gilchrist, must meet. Therefore, we review the law of bailments. Bailments A bailment is created by the delivery of personal property by one person to another in trust for a specific purpose, pursuant to an express or implied contract to fulfill that trust. [Citations.] Bailments are generally classified as being for (1) the sole benefit of the bailor; (2) the sole benefit of the bailee; or (3) the mutual benefit of both. [Citation.] Bailments which benefit only one of the parties, the first and second classifications, are often described as gratuitous. [Citation.] A. Gratuitous Bailment “A gratuitous bailment is, by definition, one in which the transfer of possession or use of the bailed property is without compensation.” [Citation.] For instance, a gratuitous bailment arises if the bailment is undertaken as a personal favor or is involuntary. [Citations.] A “gratuitous bailee” acts without expectation of reward or compensation. [Citation.] To show the bailment was for the sole benefit of the bailor, the bailee must establish that it was not expecting compensation. * * * B. Bailment for Mutual Benefit By contrast, a bailment for the mutual benefit of the parties arises when one party takes the personal property of another into his or her care or custody in exchange for payment or other benefit. [Citations.] C. Constructive Bailment Although a bailment is ordinarily created by the agreement of the parties, the agreement of the parties may be implied or constructive, and the bailment may arise by operation of law. [Citation.] Such a constructive bailment arises when one person has lawfully acquired possession of another’s personal property, other than by virtue of a bailment contract, and holds it under such circumstances that the law imposes on the recipient of the property the obligation to keep it safely and redeliver it to the owner. [Citations.] A constructive bailment may occur even in the absence of the voluntary delivery and acceptance of the property which is usually necessary to create a bailment relationship. Gilchrist argues he towed the vehicle pursuant to the Charleston Municipal Ordinances, and the ordinances are for the sole benefit of the vehicle owners. Accordingly, he contends, the relationship created is a gratuitous bailment. We disagree. * * * Clearly, the [applicable Charleston] ordinances provide for the payment to the city or its agent, the towing service, for the costs of towing and storage. Gilchrist charged Hadfield towing and storage fees. * * * We conclude a constructive bailment, for the mutual benefit of Hadfield and Gilchrist, was created. Bailment Action/Nature of Theory Although contractual in nature, and involving the conveyance of personal property, an action for breach of the duty of care by a bailor sounds in tort. [Citations.] * * * Bailee’s Degree of Care/Burden of Proof The degree of care required of a bailee for mutual benefit is defined as ordinary care, or due care, or the degree of care which would be exercised by a person of ordinary care in the protection of his own property. [Citations.] In a bailment action alleging a breach of the duty of care, the bailor is entitled to be compensated for all losses that are the natural consequence and proximate result of the bailee’s negligence. [Citation.] * * * * * * Hadfield testified before the magistrate regarding the “nice” condition of the vehicle prior to being towed, and the damage to his vehicle, and the other vehicles on the lot. In addition, he introduced photographs depicting the damage. Thus, Hadfield made out his prima facie case * * *. The burden then shifted to Gilchrist to show that he used ordinary care in protecting the vehicle while in his care. Gilchrist impounded the cars in a storage lot surrounded by a chain link fence. There was an individual on the clock at all times. The person on duty spent time in the office and only visited the storage lot to check on it. The vandal cut a hole in the fence and broke into six to eight cars on the night in question. The fact the guard was not on duty at the impound lot and, considering the only other security for the vehicles was the chain link fence, the magistrate and Circuit Court judge could have concluded Gilchrist failed to exercise ordinary care. * * * * * * Accordingly, the order of the Circuit Court is AFFIRMED. Bailee's Absolute Liability to Return Property — Generally the bailee is free from liability if he has exercised the degree of care required of him while the property was in his control. But there are important exceptions, where the law imposes an absolute liability (strict liability) on the bailee. • Where the bailee has an obligation by express agreement with the bailor or by custom to insure the property against certain risks but fails to do so, and the property is destroyed or damaged through such risks, the bailee is liable for the damage or nondelivery, even though he has exercised due care. • Where the bailee uses the bailed property in a manner not authorized by the bailor or by the character of the bailment, and during such use the property is damaged or destroyed without fault on the bailee’s part, the bailee is nonetheless absolutely liable for the damage or destruction. The wrongful use by the bailee automatically terminates his lawful possession: he becomes a trespasser as to the property and, as such, is absolutely liable for whatever harm befalls it. Bailee's Right to Limit Liability — Certain bailees — common carriers, public warehousers, and innkeepers — may limit their liability for breach of their duties to the bailor only as provided by statute. Other bailees, however, may vary their duties and liabilities by contract with the bailor. Where liability may be limited by contract, the law requires that any such limitation be properly brought to the bailor’s attention before he bails the property — especially in the case of “professional bailees,” such as repair garages. A variation or limitation in writing contained, for example, in a claim check given to the bailor or posted on the walls of the bailee’s place of business will not bind the bailor (a) unless the bailee draws the bailor’s attention to the writing and (b) informs the bailor that it contains a limitation or variation of liability. Often, courts will not enforce limitations on liability that they find to be unconscionable. Bailee's Right to Compensation — A bailee who by express or implied agreement undertakes to perform work on or render services in connection with bailed goods is entitled to reasonable compensation for those services. The bailee is still entitled to compensation if, after completion or performance of work but before the goods are redelivered to the bailor, the goods are lost or damaged through no fault of bailee. Bailor's Duties — In a bailment for the sole benefit of the bailee, the bailor warrants that she is unaware of any defects in the bailed property. In all other cases, the bailor has a duty to warn the bailee of all defects she knows of or should have discovered upon a reasonable inspection of the property. Article 2 implied warranties and strict liability may apply. If Article 2A is adopted, it imposes implied warranties on the lease of goods. 47-5c Special Types of Bailments Warehousers, innkeepers, and common carriers are said to be extraordinary bailees, whereas all other bailees are ordinary bailees. This distinction is based on the character and extent of the liability of these classes of bailees for the loss of or injury to bailed goods. Whereas an ordinary bailee is liable for only the loss or injury that results from his failure to exercise ordinary or reasonable care, the extraordinary bailee has absolute liability. The extraordinary bailee insures the safety of the goods without regard to the question of his care or negligence. Pledges — The bailee (secured party) takes possession of the property in order to secure a debt. The secured party does not take title but may assign her interest in the property despite objections by the debtor. Warehousing — A warehouser is a bailee who, for compensation, receives goods to be stored in a warehouse. Under the common law, a warehouser’s duties and liabilities were the same as those of an ordinary bailee for compensation, who must exercise reasonable care to protect the safety of the stored goods and to deliver them to the proper person. Today, however, warehousers are subject to extensive state and federal regulation. Also, the receipts warehousers issue for storage are documents of title and are governed by Article 7 of the UCC. Safe Deposit Boxes — A majority of States hold that persons who rent a safe deposit box from a bank enter into a bailment relationship. As a mutual benefit bailment the bailee bank owes the customer the duty to act with ordinary due care and is only liable if negligent. Carriers of Goods — Anyone who transports goods from one place to another, either gratuitously or for compensation, is a carrier. Carriers are classified primarily as common carriers and private carriers. A common carrier offers its services and facilities (called “carriage”) for compensation to the general public. Common carriers include railroad, steamship, aircraft, public trucking and pipeline companies. Common carriers are extraordinary bailees, approaching the status of an insurer. Still, a common carrier is permitted, by contract with the shipper, to limit its liability, provided the carrier gives the shipper notice of this limitation and the opportunity to declare a higher value for the goods. The person who delivers goods to a carrier for shipment is known as the consignor or shipper. The person to whom the carrier is to deliver the goods is known as the consignee. The instrument containing the terms of the contract of transportation is called a bill of lading. A private or contract carrier is one who carries the goods of another on isolated occasions or who serves a limited number of customers under individual contracts without offering the same or similar contracts to the public at large. A private carrier is an ordinary bailee. • Duty to Carry — Common carriers are under a duty to serve the public • Duty to Deliver to the Right Person — Both private and public carriers owe a duty to deliver the goods to the consignee. • Liability for Loss or Damage — Common carriers are subject to stricter liability for damage to or loss of the goods. They may limit liability but may not absolve themselves of liability for negligence. Innkeepers — At common law, innkeepers (hotel and motel owners or operators) are held to strict or absolute liability for their guests’ belongings. This rule applies only to those who furnish lodging to the public for compensation as a regular business and extends only to the belongings of lodgers who are guests. Today, in almost all jurisdictions, the common law liability of the innkeeper has been modified substantially by case law and statute. *** Chapter Outcome*** Explain what a document of title is and identify and describe the various types of documents of title. 47-6 DOCUMENTS OF TITLE To be a document of title, a document must be issued by or addressed to a bailee, covering goods that are in the bailee’s possession and that are either identified or fungible portions of an identified mass. A document of title symbolizes ownership. 47-6a Types of Documents of Title Warehouse Receipts — Issued by a person engaged in the storage business. Warehousers are held to a standard of reasonable care but may limit liability to a maximum amount by express provision. Such a limitation is precluded if the warehouser converts the goods. In order to assure payment of charges and expenses, a warehouser has a lien on the goods under his control which enables him to sell them at public or private sale to satisfy the debt. Bills of Lading — Issued by a carrier upon receipt of goods for transportation, it serves as a receipt, evidence of the contract, and as a title document. Issuers are under a duty to deliver the goods to the proper person. When a bill of lading provides that the goods be delivered to a second carrier for further transportation, the liability to the holder of the bill of lading remains with the originating carrier. Carriers have a right to impose a lien on the goods to cover fees and expenses. 47-6b Negotiability of Documents of Title Documents of title are negotiable if the goods are to be delivered to bearer or to order of a particular person. A nonnegotiable document may be transferred by assignment but may not be negotiated. An individual has “control” of an electronic document of title “if a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.” 47-6c Due Negotiation A transfer completed in the regular course of business, in good faith, without notice of defenses or claims, and for value. The holder of a negotiable title document has: a) title to the document, b) title to the goods, c) all rights based on agency or estoppel, and d) the obligation of the issuer to hold or deliver the goods according to the document. If a nonnegotiable document is transferred or a negotiable document is transferred without due negotiation, the transferee acquires all of the title and rights that the transferor had or had actual authority to convey. A negotiable electronic document of title running to the order of a named person or to bearer is negotiated by delivery. Indorsement by the named person is not required to negotiate an electronic document of title. Delivery of an electronic document of title means voluntary transfer of control. 47-6d Warranties Transferor warranties include: a) that the document is genuine, b) no knowledge of impairment, c) that the negotiation was rightful. 47-6e Ineffective Documents of Title Carriers and warehousers who receive goods from a thief or finder and deliver them as instructed are not liable to the lawful owner. The bill of lading or warehouse receipt in such a situation, however, is not a document of title, because the goods were not delivered to the issuer of the document by the owner of the goods. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637