CH-8-10 Contract Performance Conditions, Breach, and Remedies – The Legal Environment of Business: A Managerial Approach: Theory to Practice : Book Guide

This Document Contains Chapters 8 to 10 Chapter 8: Contract Performance: Conditions, Breach, and Remedies OVERVIEW This chapter continues the discussion of contracts by focusing on issues related to performance. The opening material examines how parties allocate risk through conditions. The coverage then shifts focus to good faith performance and way that parties discharge a contract. Finally, students learn about the impact of a breach and remedies available to the nonbreaching parties. KEY LEARNING OUTCOMES Outcomes Accreditation categories Define what a condition is used for in a contract and apply the doctrines related to good faith performance, discharge of a contract, substantial performance and anticipatory repudiation. Knowledge, Application, Critical thinking Understand the ethical dilemmas that a manager faces in the context of good faith performance Ethics Identify events of breach, the appropriate remedy available to non-breaching parties and the rights of third party beneficiaries. Knowledge, Application, Critical thinking TEACHING OUTLINE A. Nature and Effect of Conditions [P.203] Points to emphasize: • A condition is an event that triggers a particular performance in order to allocate the risk that some part of a contract may not be completed. • Categories of Conditions: A condition is categorized as either a condition precedent (before performance is due), or a condition subsequent (after performance of one party). o Parties may also agree to concurrent conditions whereby each party is required to render performance simultaneously. o The law defines a condition as “an event, not certain to occur, which must occur, […] before the performance under a contract becomes due.” Concept Summary: Conditions [P.204] B. Good Faith Performance and Discharge [P.205] Points to emphasize: • If two parties to a contract complete performances faithfully to the mutual goals of the contract, and in good faith, it will result in discharge for both. Business Ethics Perspective: Good Faith and the Nuclear Condition Option [P.205] • Substantial Performance: If a party substantially performs only essential duties of the contract in a good faith effort, a court will enforce the agreement. o In applying the doctrine of substantial performance, the innocent party is still entitled to collect damages to compensate for the imperfect performance. Self-Check: Substantial Performance: Which of the following constitutes substantial performance? [P.206] Landmark Case 8.1 Jacob and Youngs v. Kent, 129 N.E. 889 (Ct. App. N.Y. 1921 [P.207] Facts: Jacob contracted to build a home for Kent which included the use of Reading brand pipe. Just before construction was completed, Kent discovered that through an oversight, some of the pipe used was not of Reading manufacture (though of comparable quality and price). Kent directed Jacobs to remove the non-Reading pipe; however, the pipe was already encased in the walls and, thus, costly demolition would have been necessary to repair the mistake. Jacob completed construction but refused to fix the pipe mistake and Kent refused to pay the remaining balance on the contract. Issue: Does the substitute pipe used by Kent constitute a substantial performance to satisfy the requirements of the agreement? Ruling: Yes. Although there are limits to the substantial performance doctrine, in this case, the omission of the Reading pipe was not a result of fraud or willfulness and there was no evidence of substantial change in the value of the contract. Answers to case questions: 1. A dissenting opinion in this case pointed out that JY’s failing to use the correct pipe was grossly negligent and, thus, JY should bear the cost of reinstalling the Reading pipe. Does that strike you as convincing? Why or why not? Answer: The dissent in this case is representative of a pure and historic textual approach. Modern courts share the perspective of the majority where a strict application of performance requirements in not always necessary. Under a more convincing modern framework, courts attempt to balance the scales of equity and justice to reach just results. Given the circumstances, the practical application to obtain fairness outweighed the strict application of performance requirements. 2. If Kent had a vested interest in the use of Reading pipe (suppose Kent was the heir to the Reading pipe fortune), what condition could he have inserted in the agreement that ensured the use of Reading brand pipe? Answer: Kent could have inserted a clause into the agreement stating that Kent offers to pay JY the cost of plumbing provided that JY uses Reading brand pipe (condition precedent). Kent could have also inserted a similar clause stating that full payment under this contract shall not be paid unless the use of Reading brand pipe is confirmed by Kent’s architect. C. Other Events of Discharge [P.208] Points to emphasize: • Parties’ obligations under a contract may also be discharged via mutual consent or operation of law. • Mutual Consent: If neither party has fully performed, the parties may agree to rescind the contract. o Under the doctrine of accord and satisfaction, one party can agree to render a substitute performance in the future (accord), promising to accept that substitute performance in discharge of the existing performance obligation. o Parties to a contract may immediately discharge their obligations by modification, whereby the original contract is replaced with a substitute agreement. o When the parties agree to substitute a third party for one of the original parties to the contract, the agreement may be discharged through novation. Solutions for Managers: Understanding Check Deposits as Accord and Satisfaction [P.209] • Operation of Law: A party may be discharged from the original terms of the contract by the operation of law if the contract has become impossible, impracticable, or its purpose has been frustrated. o Impossibility: No one can objectively do it. Narrowly applied unless the intervening events involve (1) destruction of the subject matter; or (2) death or incapacitation of one of the parties; or (3) the means of performance contemplated cannot be performed; or (4) performance of the obligation has become illegal subsequent to the contract but prior to performance. • Performance can be temporarily impossible for one or both parties; however, the parties’ obligation to perform is suspended until the impossibility ceases. o Impracticability: I can’t do it. May be used to discharge an obligation if the burden is unforeseeable and extreme in terms of cost burden. o Frustration of Purpose: Why would I want to do it now? May be used to discharge an obligation if, after the parties enter into an agreement, (1) a party’s principal purpose is substantially frustrated without fault; (2) some even occurred, when the nonoccurrence of the even was a central assumption of both parties; and (3) the parties have not otherwise agreed to who bears the risk of such an occurrence. • Parties may also be discharged through operation of law when (1) a contract is unilaterally altered by one party; (2) a contract is subject to relief of the bankruptcy code; and (3) expiration of the statute of limitations. D. Breach of Contract and Anticipatory Repudiation [P.213] Points to emphasize: • Total breach occurs when one party fails to perform its duties under the contract, and the nonbreaching party will be entitled to either suspend performance or to be discharged from her obligations and recover damages. • Partial breach is a failure to perform that is not substantial enough to discharge the nonbreaching party; however, the nonbreaching party may still recover damages related to the breach. • Anticipatory Repudiation: Allows a nonbreaching party to suspend performance and recover damages before performance is due if the other party has made an unequivocal statement or action suggesting that performance will not occur. • Repudiation occurs by a statement that, reasonably interpreted, communicates nonperformance; an action making performance impossible; or knowledge by the parties that one party will be unable to perform. Case 8.2 DiFolco v. MSNBC [P.214] Facts: DiFolco and MSNBC entered into a two-year employment agreement for DiFolco to work as a television commentator covering the entertainment industry. MSNBC had the right to terminate the agreement after the first year by giving DiFolco 60 days advanced notice. DiFolco’s first eight months of employment were tumultuous and she had several disputes with her supervisors over her assignments and working conditions. Through a series of e-mails, DiFolco complained to her supervisors about being forced off the air through MSNBC’s change in schedule and coverage. One of these e-mails indicated that she wished to have a meeting to discuss her exit from the shows and to give MSNBC ample time to replace her. In that same e-mail, though, DiFolco also wrote that she wanted to be part of the MSNBC team “for a long time to come.” Nonetheless, MSNBC took these e-mails to mean that DiFolco intended to repudiate her contract and sent her a proposed separation agreement claiming that she had resigned. Issue: Did the e-mails between DiFolco and MSNBC constitute DiFolco’s anticipatory repudiation of her contract with MSNBC? Ruling: No. The court held that repudiation only occurs when there is a definite and final communication of the intention to forego performance. In this case, the court analyzed several e-mail exchanges and concluded that DiFolco did not manifest a clear and unequivocal repudiation. The e-mails were ambiguous in terms of what DiFolco’s future plans may have been and included DiFolco’s statement that she did not resign and was merely speculating about future time frames. Answers to case questions: 1. Suggest language that a court might find an unambiguous intent to repudiate in this case. Answer: “I cannot return” “My intent is not to return unless we work this out.” “I can no longer live by the terms in my contract.” 2. If you received an e-mail from an employee that concerned her “exit”, would you believe they were quitting? Is the situation with DiFolco any different? Answer: Perhaps. But anticipatory repudiation requires an unambiguous expression and DiFolco’s statements were more along the lines of reconciling differences between DiFolco and her employer. Concept Summary: Breach of Contract [P.215] Self-Check: What is/are the source(s) and level(s) of law that govern the following business transactions? [P.215] E. Remedies [P.215] Points to emphasize: • For a breach of contract, courts will award monetary damages to the nonbreaching party to remedy the loss suffered by nonperformance. • Compensatory Damages: Money damages that compensate the nonbreaching party for direct losses from nonperformance. • Consequential Damages: Money damages that compensate the nonbreaching party for foreseeable indirect losses not covered by compensatory damages. o The rules that limit damages for which a nonbreaching party may recover were set out in Hadley v. Baxendale. A party injured by the breach of a contract may recover as damages those damages that are the direct, natural and immediate consequence of the breach and that can reasonably be said to have been in the contemplation of the parties when the contract was made. • Restitution: In the event that one party is in the process of performing the contract and the other party commits a material breach, the nonbreaching party is entitled to rescind the contract and receive fair market value for any services rendered. • Liquidated Damages: Damages that the parties agree to ahead of time in the contract. F. Equitable Remedies [P.217] Points to emphasize: • Equitable relief is given when the monetary damages are insufficient; it takes the form of (1) injunctive relief, (2) specific performance, or (3) reformation. • Specific Performance: A remedy whereby a court orders the breaching party to render the promised performance by ordering the party to take a specific action. o Specific performance is only available when the subject matter of the contract is sufficiently unique so that money damages are inadequate (i.e. real estate). o Specific performance is also available to personal services contracts where the parties agree that a specific individual will perform the services, and the individual possesses a unique quality or expertise central to the contract. • Injunctive Relief: A court order to refrain from performing a particular act. • Reformation: Rewritten contract by the court to conform to the parties’ actual intentions when the parties have imperfectly expressed their agreement and this imperfection results in a dispute. G. Avoidance and Mitigation of Damages [P.218] Points to emphasize: • The duty to mitigate is the nonbreaching party’s obligation to avoid excessive or unnecessary damages through reasonable efforts or else be barred from recovery for those avoidable costs of nonperformance. • In a breach of employment context, the employee has a duty to seek new employment if available in order to avoid damages resulted from the alleged breach by the employer. Concept Summary: Damages [P. 219] Case 8.3 Austin Hill Country Realty v. Palisades Plaza, 948 SW 2d 293 (Tx. 1997) [P. 220] Facts: Palisades Plaza entered into a five-year commercial lease agreement with Austin Hill Country Realty (Austin Hill) for office space. The lease called for Palisades to improve and configure the space according to Austin Hill’s specifications prior to them beginning the lease. Towards the end of the improvements, Palisades began to receive conflicting instructions on finalizing the space and requested that one of Austin Hill’s principals be designated to give instructions. Ultimately, the parties could not come to an agreement and Austin Hill never took occupancy of the leased space. Palisades notified Austin Hill that they considered the contract repudiated and sued them for breach of contract. At the same time, Palisades advertised the office space in a local newspaper, but did not advertise in a widely circulated commercial property trade paper that they had used in the past. Austin Hill argued that Palisades had not attempted to mitigate their damages and were not entitled to the full judgment for breach of the lease. Issue: Does a common law duty for Landlord’s to mitigate exist in Texas? Ruling: Yes. While acknowledging that existing Texas law did not require landlords to mitigate damages, the court referred to recent decisions in other courts and adopted a duty to mitigate rule for landlords in Texas. Answers to Case Questions 1. Do you agree that innocent parties who are injured due to breach of contract should have a duty to mitigate damages? Defend. Answer: This question is intended to spur a discussion on the duty to mitigate as applied in a business context. Issues of equity, fairness, breach of contract vs. breach of a lease. Yes, innocent parties should have a duty to mitigate damages to prevent further harm and promote fairness. This principle ensures that damages are reasonable and prevents parties from exploiting the situation for excessive compensation. 2. Why wasn’t the advertising done by Palisades sufficient to be considered mitigating damages? Answer: It was not commercially reasonable because it was not advertised in a widely circulated commercial–property trade paper. H. Contracts Involving Rights of a Third Party [P. 220] Points to emphasize: • A party to an existing contract can substitute another party in her place through assignment, delegation or third-party beneficiaries. • Assignment: The unilateral shifting of rights under a contract from one party to a third party and is permitted only in the absence of an antiassignment clause, material change to the burden, or legal prohibition. • Delegation: The assignment of contractual duties to a third party when the original party still remains liable for nonperformance and is permitted except in cases of special personal skills, a nondelegation clause, or where the delegatee is a competitor of the nondelegating party. o Third-Party Beneficiaries: A third party who benefits from a contractual promise between two other parties may only seek damages if she is an intended beneficiary as opposed to an incidental beneficiary. Concept Summary: Third-Party Rights [P.222] Case 8.4 Logan-Baldwin v. LSM General Contractors, 942 N.Y.S. 2d 718 (NY 2012) [P. 223] Facts: Logan-Baldwin and other owners (collectively Logan-Baldwin) contracted with L.S.M. General Contractors (LSM) to renovate a historic residence. LSM subcontracted to Henry Isaacs Home Remodeling (Isaacs) to perform roofing work as part of the renovations. Isaacs then contracted with Brewster to install a new roof on the residence. Soon after the roof was completed it showed signs of leaking and it became clear that the roof was not installed correctly. LSM and Isaacs attempted to fix the problems, but were unsuccessful and subsequently abandoned the project. Logan-Baldwin hired other contractors to fix the problem and sued LSM, Isaacs, and Brewster for breach of contract. Isaacs defended that he did not directly contract with Logan-Baldwin and therefore cannot be sued for breach of contract. Issues: Does Logan-Baldwin have contract rights over Isaacs as an intended third-party beneficiary? Ruling: Yes. Logan-Baldwin, as the owners of the house, were logically the intended beneficiary of the home renovations, they have rights as a third party beneficiary. Since they were intended third-party beneficiaries, the court ruled that Logan-Baldwin had the right to maintain a breach of contract claim against Isaacs. Answers to Case Questions 1. Does an intended beneficiary have to be named in a contract to have rights to enforce the contract? Explain. Answer: Not necessarily. This is no requirement that an intended beneficiary be named in the contract. The key is to examine whether the parties intended to confer a benefit to a third party. 2. Suppose that the plaintiff’s historical residence was typically open to the public for tours on weekends. Philip, a history buff, plans a trip to tour the home, but upon his arrival he finds it closed because the shoddy roofing work made the premises unsafe for the public. Does Philip have a cause of action against any of the defendants? Why? Answer: No. Phillip is an incidental beneficiary and therefore cannot sue to enforce contractual rights. Philip may have a cause of action if the shoddy roofing work directly caused the closure and affected his planned visit. He would need to prove that the defendants were negligent in their work and that this negligence caused his inability to visit the residence. END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 225] 1. This would not be a case where Ishmael’s obligations could be discharged through substantial performance. Substantial performance is rendered only in the context of good faith efforts to perform. Here, Ishmael asked to re-negotiate his contract and when ExportCo. refused to alter the terms, Ishmael unilaterally and materially altered his performance. [Ties to Substantial Performance]. 2. Because ExportCo.’s basis for asserting impracticability is purely economic, it is unlikely a court would rule in their favor. Impossibility must typically be a) destruction of the subject matter, b) death or incapacitation of one of the parties, c) means of performance is impossible, d) performance of the contract became illegal after formation of the agreement. [Ties to Impossibility]. 3. Ishmael may assert his rights immediately through the doctrine of anticipatory repudiation. ExportCo.’s actions/words were unequivocal and indicate intent to repudiate. Thus, Ishmael may file suit immediately and does not have to wait until Export actually breaches the contract by failing to pay him. [Ties to Anticipatory Repudiation]. 4. Ishmael’s primary remedy would be money damages. Certainly compensatory damages would be the best way to compensate Ishmael for ExportCo.’s breach. If Ishmael suffered any indirect damages, he would also be eligible for consequential damages (unlikely in this instance). If the parties agreed upon a liquidated damages clause in the contract, then Ishmael would also be entitled to liquidated damages. Equitable remedies, such as specific performance, are not very likely in this case since money damages can be used to make the non-breaching party whole. [Ties to Remedies]. 5. This is a case where Ishmael is attempting to substitute a third party to perform his obligation under the doctrine of delegation. Absent an antiassignment/antidelegation clause, duties may generally be delegated without mutual consent of the parties. However, certain duties may not be delegated including specialized personal skills (e.g., portrait artist). If Ishmael’s skill set is highly specialized, ExportCo., would argue that it does not have to accept the delegation. [Ties to Contracts Involving Rights of a Third Party]. Manager’s Challenge [P. 226] A sample answer to all Manager’s Challenge exercises are provided in the student and instructor versions of this textbook’s Web site. Case Summary 8.1: Good Faith and Specific Performance: Dalton v. Educational Testing Service [P.226] 1. Who prevails and why? Answer: Dalton prevails because implicit in all contracts is a covenant of good faith and fair dealing. Where the contract contemplates the exercise of discretion, this pledge includes a promise not to do so arbitrarily or irrationally. 2. Why is specific performance an option here as a remedy? Answer: Specific performance is an option here as a remedy because Dalton’s SAT score is sufficiently unique so that money damages are inadequate. Case Summary 8.2: Remedies: Pepsi-Cola Co. v. Steak ‘n Shake, Inc. [P.227] 1. Will a court award damages to Pepsi even though they admitted the damages could not be calculated exactly? Answer: Typically, speculative damages cannot be recovered unless the plaintiff can prove that they are reasonably likely to occur. 2. What other types of damages or relief could Pepsi seek? Answer: Pepsi could seek compensatory damages for recovery of actual damages suffered such as out-of-pocket damages and provable potential profits; Restitution in fair market value for any services rendered; and any liquidated damages that the parties agreed to ahead of time. Case Summary 8.3: Impossibility: Sechrest v. Forest Furniture Co. [P.227] 1. What are the standards for being discharged through impossibility? Answer: Impossibility excuses performance when an essential part of the contract has become impossible because a crucial, irreplaceable thing has been destroyed; a crucial person has died; a crucial means of performance no longer exists; or a crucial action has become illegal. 2. Does it apply here? Why or why not? Answer: No. In this case the subject of the contract, the drawer bottoms, were not destroyed and therefore the doctrine of impossibility does not apply. Case Summary 8.4: Assignment to a Third Party: Taylor v. Palmer [P.227] 1. Who prevails and why? Answer: The contractor would likely prevail regarding the claim of inappropriate assignment, as generally, all rights in a contract are assignable at the sole discretion of the assigning party in the absence of an antiassignment clause, a material change to the burden, or legal prohibition. Case Summary 8.5: Tender of Performance: Huang v. Ko [P. 228] 1. Did the Huangs tender performance on the contract? Why or why not? Answer: Yes. The Huangs deposited money as required and were ready, able, and willing to perform. 2. Did Ko tender performance on the contract? Why or why not? Answer: No. Ko could not provide an essential part of the contract: clear title. 3. Did a breach of contract occur? Explain. Answer: Yes. Ko failed to fulfill his obligations under the contract because he failed to deliver title. Case Summary 8.6: Third-Party Beneficiaries Plotkin v. Amagansett [P. 228]. 1. Is Max an intended or incidental beneficiary of the contracts to purchase the wood? What must be shown for Max to be classified under either category? Answer: He is an intended beneficiary. The key is to examine whether the parties intended to confer a benefit to a third party. If so, he is a third-party beneficiary. 2. Does it matter that Max was never named in any contracts? Answer: There is no requirement that an intended beneficiary be named in the contract. 3. How does the timing of the requests and purchases affect whether Max and others are intended or incidental beneficiaries of the contracts? Answer: Here the transaction was close enough in time to Max’s occupancy of the house to reasonably conclude that Max was an intended beneficiary. Quick Assignment Questions (QAQ) 1. According to the majority in Jacob and Youngs v. Kent, which of the following is true? a. Under the doctrine of substantial performance, trivial, and innocent omissions will not trigger a full breach. b. Any omission of an express term to a contract results in a repudiated breach of a condition. c. Under the doctrine of substantial performance, any omission is a breach of a condition. d. The doctrine of substantial performance does not apply where the breach relates to an express term in the parties agreement. e. None of the above Answer: a 2. Which of the following constitutes an equitable remedy? a. Consequential Performance b. Compensatory Damages c. Specific Performance d. Restitution e. a and c Answer: c 3. Which type of damages attempt to put the nonbreaching party in the same position she would have been in if the other party had performed as agreed? a. Consequential Damages b. Compensatory Damages c. Liquidated Damages d. Restitution e. Equitable Damages Answer: b 4. In order for a contract to be discharged under impracticability, the burden must be unforeseeable and extreme. Answer: True 5. The doctrine of anticipatory repudiation allows a nonbreaching party to suspend performance and recover damages after performance is due. Answer: False 6. The duty to mitigate arises out of obligation on the nonbreaching party. Answer: True Chapter 9: Contracts for the Sale of Goods OVERVIEW This chapter concludes the final part of the contracts chapters by examining contracts for the sale of goods covered under UCC Article 2. The chapter begins with a broad view of the differences between the common law of contracts and the UCC. Students then learn UCC notions of agreement, consideration, and the statute of frauds. The concept of title and allocation of risk is covered in detail and the chapter ends with coverage of UCC provisions related to breach and remedies in sales agreements. There is also some treatment of contracts for international sales of goods under UNCISG and INCO terms. KEY LEARNING OUTCOMES Outcome Accreditation category Articulate the fundamental purpose and role of the UCC in commercial transactions, which contracts are governed by Article 2, and why it is important to business owners and managers. Knowledge, Application Discuss the requirements for agreement in a sale of goods contract, what terms the UCC provides in a sales agreement with open or missing terms, and apply the statute of frauds requirements. Knowledge, Application, Critical thinking Express how risk of loss is allocated among the parties in a sales contract and steps managers take to limit risks and assure performance Application, Critical thinking Convey UCC requirements on the obligations of the parties and the consequences once a breach of contract occurred and identify the appropriate remedy and damages available to the non-breaching party. Application, Critical thinking TEACHING OUTLINE A. Introduction to Article 2 of the UCC [P.231] Points to emphasize: • Article 2 of the UCC is a model statute, adopted by every state except Louisiana that governs contracts for the sale of goods. • UCC Coverage and Definitions: The UCC defines goods as that which is (1) tangible and (2) movable from place to place. o Article 2 contains special provisions that apply only in transactions between merchants, defined as one that is regularly engaged in the sale of a particular good. • Function of the UCC: To promote commercial efficiency and promote the completion of a business transaction by providing more lenient rules and standardized procedures that merchants and consumers may rely upon. o Article 2 of the UCC acts to fill in only missing or open terms (where the parties have not expressly agreed otherwise) in a contract for the sale of goods. B. Agreement in a Sales Contract: Offer [P.233] Points to emphasize: • Article 2 lowers the bar for formation by allowing an enforceable contract to arise “in any manner sufficient to show agreement” between the parties. • Offers with Open Terms: An agreement is still valid despite the fact that delivery, pricing, or payment terms are left open: the UCC provides standards to fill the gaps left by the missing terms. o Quantity: While quantity is generally a required term necessary to create an enforceable contract, quantity may be an open term if: (1) the buyer agrees to purchase all of the goods that a seller produces (output contracts); or (2) when the buyer agrees to purchase all or up to an agreed amount of what the buyer needs for a given period (requirements contracts). o Other Open Terms: When a sales contract is missing other terms and the parties have not had an established course of past conduct, the UCC provides that: Buyer takes delivery at the seller’s place of business at a reasonable time under the circumstances; payment is due at the time and place where the seller is to make delivery and may be made in any commercially reasonable form; and the court determines a reasonable price at the time of delivery based on industry customs and market value. • Firm Offers by Merchants: A written offer by a merchant includes an implied promise to keep the offer open for a stated or unstated amount of time even absent consideration for the option. C. Agreement in Sales Contracts: Acceptance [P.235] Points to emphasize: • If the offeror does not clearly provide for a method of acceptance, the UCC allows the offeree to accept the offer in any reasonable manner, and the acceptance does not need to match the offer exactly. • Battle of the Preprinted Forms: The conflict between the terms written into standardized purchase orders (offer) and acknowledgement forms (acceptance), which differ in that one form favors the buyer and the other the seller. o The UCC provides that (1) a document may constitute acceptance even though it states additional or different terms from those offered by the offeror, and (2) in certain transactions the additional terms proposed in the acceptance may become part of the contract. o Nonmerchant Transactions: If one of the parties is not a merchant, the contract is formed as originally offered. o Merchant Transactions: The additional terms automatically become part of the contract unless (1) the offer stated explicitly the terms of acceptance, (2) the conflicting terms substantially change the duties of the contract or its value to one party, or (3) the new terms were rejected in a timely manner by the offeror. Self-Check: Does a sales contract exist? If so, what are the terms of the contract? [P.236] • Consideration: A sales contract can be modified without additional consideration. D. Statute of Frauds [P.236] Points to emphasize: • The UCC statute of frauds requires that contracts for the sale of goods valued at $500 or more be in writing, but requires only that the document contain (1) quantity, (2) the signatures of the party against whom enforcement is sought and, (3) language that reasonably shows the parties intended to form a contract. • All other terms and conditions may be proved via testimony concerning oral agreements, past practices, and industry standards. • A merchant who receives a signed confirmation memorandum from the other merchant will be bound by the memorandum just as if she had signed it, unless she promptly objects. Concept Summary: Formation under the UCC [P.237] Legal/Ethical reflection and Discussion: [P. 238] E. Title and Allocation of Risk [P. 238] Points to emphasize: • UCC gap filler function: Any risk allocation provision in the UCC does not displace the parties existing agreement for risk allocation or title transfer. • Title: The UCC provides that title (ownership) passes to the buyer at the time and place the seller completes performance by making a physical delivery of the goods. • Risk of Loss: The risk of loss is born by the party who has title to the goods. o All contracts are shipping contracts unless the parties have agreed otherwise, and title is transferred from seller to buyer when the goods are given to the courier. o In a destination contract, title passes when the goods are tendered to the buyer. Case 9.1 Merchants Acceptance, Inc. v. Jamison, 752 So. 2d 422 (Miss. App. 1999) [P.240] Facts: Jamison purchased a set of encyclopedias from Encyclopedia Britannica who then assigned the contract to Merchants to complete the delivery and receive payment. The contract contained shipping instructions and specified Jamison’s home address as the place of delivery. However, Jamison never received the encyclopedias because they were shipped via UPS to her P.O. Box. Jamison refused to pay the installments due on the purchase and cancelled the purchase. Issue: Does Jamison bear the risk of loss even though the encyclopedias were never shipped to her home address as specified? Ruling: No. The contracts terms included delivery and specified a place for delivery and, therefore, title to the books could only be transferred to Jamison when they arrive at her home. Answers to case questions: 1. Why would the law require Merchants to have title to something that was in Jamison’s own post office box? Answer: Merchants had title of the encyclopedias although they were in Jamison’s mailbox because the goods were never tendered at the specified destination, Jamison’s home address. This is necessary because it provides a delineation of which party bears the risk of loss. 2. Why did the court find it unnecessary to “delve into” the difference between a shipment and a destination contract? Answer: The court found it unnecessary to “delve into” the difference between a shipment and a destination contract because the specification of Jamison’s street address as the delivery term was prima facie evidence of a destination contract. • Goods Picked Up by the Buyer: If the goods are to be picked up by the buyer and the seller is a merchant, the risk of loss to goods held by the seller passes to the buyer only when the buyer takes physical possession of the goods; whereas, if the seller is a nonmerchant, the risk of loss to goods held by the seller passes to the buyer on tender of goods. Self-Check: Who bears the risk of loss? [P.241] Concept Summary: Title and Allocation of Risk [P.241] F. Performance of Sales Contracts [P.241] Points to emphasize: • Once the parties to a sales contract have agreed on its terms, the UCC imposes certain other duties and obligations in performing the contract. • Obligations of All Parties: Under the UCC, parties to a sales contract have an implied good faith obligation to be “honest in fact in the conduct of the transaction concerned.” Case 9.2 Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396 (1997) [P.242] Facts: Borden made clam chowder using clams purchased from commercial fishing boats, and in an effort to cut costs, promised to buy a minimum amount of clams from a fishing captain if he were to purchase larger boats capable of holding “Shuck-at-Sea” equipment. Based on this promise, the captain took out loans and complied by equipping the boats with the necessary equipment. Soon thereafter, Borden came under new management who concluded that the “Shuck-at-sea” project was not profitable, and dramatically reduced its buying from the captain’s boat. As a result, he could no longer pay off his loans used to purchase the larger boats. Issue: Did Borden breach their good faith obligation under the UCC in reducing their clam buying so dramatically? Ruling: Yes. Borden was not “honest in fact” as required by the UCC because they knew that Sons of Thunder depended on the income from its contract with Borden to pay back the loans and continuously breached anyways. Answers to case questions: 1. How should the new manager have acted when he saw that his predecessor had entered a bad contract? Answer: The new manager should have met with Sons of Thunder and discussed the situation in good faith. In doing so they possibly could have modified their contract in such a way that though not perfect, provides a just result for both parties without the need for costly litigation. Though ultimately Borden would have to pay to some extent for the predecessor’s poor business judgment, it is likely that this sum would be significantly less than an uncertain jury verdict. 2. What would have been a proper remedy for Sons of Thunder? Answer: A proper remedy for Sons of Thunder would have been the marginal lost profit on the shortfall between the minimum number of clams Borden agreed to purchase and the amount actually purchased, essentially putting Sons of Thunder in the position they would have been in had Borden performed in good faith. In this case, Sons of Thunder was actually awarded $412,000 in expectation damages, the total approximation of one year’s profit. • Seller’s Obligations and Rights: The UCC obligates the seller to tender the goods, give the buyer appropriate notice of the tender, and take any actions necessary to allow the buyer to take reasonable delivery. o Perfect Tender: Rule requiring the seller to deliver her goods precisely as the contract requires in every respect or risk the buyer’s lawful rejection of the goods. • The UCC also gives the seller certain rights intended to promote the completion of the contract: • Cure: If the time for performance has not ended after rejection, the seller may cure the breach by giving notice or by tendering conforming goods in replacement. • If the seller reasonably believes that the nonconforming goods would be acceptable to the buyer with or without a money allowance, then the seller gets additional time to cure after the time under the contract has passed. Solutions For Managers: Assuring Performance [P.244] Case 9.3: Car Transportation Brokerage Company v. Blue Bird (2009) [P. 245] Facts: Car Transportation (Buyer) purchased a Blue Bird luxury motor coach (Coach) from Blue Bird’s authorized dealer, Bleakly (Seller), for $650,000. Although neither the Buyer nor the Seller performed any pre-delivery inspection, the Seller provided assurances to the Buyer that the Coach was new and in working condition. On the day of the purchase, however, the Buyer’s principal drove the Coach from the Seller’s lot and began to notice certain defects with the Coach’s electrical system. The next day, the Buyer returned the Coach to the Seller for repairs and the Seller’s service technicians repaired several electrical problems to the Buyer’s satisfaction. The Buyer re-took possession of Coach and placed it into service for the Buyer’s business on January 5. Over the next two months, the Coach had additional electrical system defects and several other mechanical problems. Instead of returning the Coach to the Seller once again, the Buyer opted to return the Coach to the manufacturer for repairs. On February 18, the manufacturer returned the Coach to the Buyer, but the electrical problems were still not fully resolved. On March 22, the Buyer notified the Seller that they were revoking the acceptance of the Coach due to the mechanical problems. Eventually, the Buyer sued the Seller including, among other claims, revocation of the Buyer’s acceptance. The trial court found in favor of the Seller and the Buyer appealed. Issue: Was the Seller given the opportunity to cure as required by Georgia’s commercial law statutes? Ruling: For the Seller. The UCC’s opportunity to cure required the Buyer to provide the Seller with a reasonable time in which to attempt to make repairs. What constitutes a reasonable time in which to cure depends on the nature, purpose, and circumstances of a particular case. At the very least, the Seller was entitled to notice of the additional problems occurring after delivery and an opportunity to repair them at some time during the three months prior to the Buyer’s revocation. Answers to Case Questions 1. Does the right to cure under the UCC apply to manufacturers who are not the sellers in a transaction? Answer: No. The manufacturer was not the seller and the right to cure is a rightof the seller. 2. How does the UCC approach cases where a buyer suffers additional damages, and what is its stance on revocations of acceptance? Answer: It is a case by case basis depending on the goods sold. Will the buyer may suffer additional damages, the UCC promotes the completion of the transaction and disfavors revocations. • Commercial Impracticability: The UCC excuses performance when a delay in delivery or nondelivery has been made impracticably by the occurrence of an unanticipated event, so long as the event directly affected a basic assumption of the contract. • Buyer’s Rights and Obligations: Unless the parties agree otherwise, once the buyer has accepted the goods, the buyer must make full payment at the time and place that the goods are received. o Buyer’s Right of Inspection: Acceptance or Rejection: Unless the parties agree otherwise, the buyer has a reasonable time period to inspect the goods and may either (1) communicate acceptance to the seller; (2) do nothing, and acceptance is presumed; or (3) notify the seller in a timely manner that she is rejecting the goods (or part of the goods). • If the seller has shipped conforming goods, the buyer has the duty to accept them. • If the buyer accepts nonconforming goods, the buyer’s obligation to pay is then triggered and the buyer can later revoke acceptance only if the nonconformity substantially impairs the value of the goods. Self-Check: Buyer’s Rights and Obligations: Does the grocer have an obligation to pay? Why or why not? [P.246] • Special Rules for Installment Contracts: An installment contract permits delivery of goods in separate lots and payment at separate times, with the new right to accept or reject each time (the standard for rejection is more restrictive). Concept Summary: Performance of Sales Contracts [P.247] G. Breach and Remedies in Sales Agreements [P.248] Points to emphasize: • The UCC seeks to remedy breach by placing the nonbreaching party in the same situation as she would have been in had the contract been executed as written. • Anticipatory Repudiation in the UCC: Faced with anticipatory repudiation by the other party, a party under the UCC can either withdraw and sue for damages or suspend performance until the repudiation is retracted. • Remedies Available to the Seller: Available when a buyer breaches a sales contract by (1) rejecting conforming goods, or (2) wrongfully revoking acceptance, or (3) failing to pay as agreed, or (4) failing to meet contractual obligations. o Goods in Hands of Seller: If a buyer breaches before delivery then the seller may stop further performance, resell the goods, or if unable to resell, seek damages. o Goods in Hands of Buyer: If the buyer’s breach occurs after delivery, the seller may sue for full contract price or reclaim the goods and collect incidental damages. • In the case of wrongful rejection or wrongful revocation of acceptance, the seller may reclaim the goods and exercise the remedies provided for in the UCC when the goods are in the hands of the seller, including recovery of costs of reclamation. • Remedies Available to the Buyer: Available when a seller breaches a contract by delivering nonconforming goods or if the seller fails to make timely delivery of all or part of the lot. o Remedies Following Rejection of Goods: The UCC provides the buyers with the immediate remedy of rightful rejection of all or part of the lot following seasonable notification to the seller. o Cover: The buyer can cancel the contract, purchase substitute goods, and sue for damages incurred by the new purchase. o Lawsuit for Money Damages: When the buyer chooses not to seek cover, she can sue for damages for the difference between contract and market price at the time of breach. o Specific Performance: If the goods in question are unique, the buyer can obtain a court order that compels the breaching party to perform his obligation under the contract. Concept Summary: Breach and Remedies in Sales Agreements [P.251] H. Contracts for the International Sales of Goods [P.251] Points to emphasize: • U.N. Convention on Contracts for the International Sale of Goods: The UNCISG, the international counterpart to the UCC, is a treaty that governs sales contracts between businesses located in U.N. signatory countries. • Coverage and Major Provisions of UNCISG: The UNCISG covers contracts for the sale of goods only between merchants. o No Writing Required: A totality of the circumstances and industry practice may be sufficient to prove that an enforceable contract exists. o Offer and Acceptance: The offer requires only (1) a brief description of the goods, (2) quantity, and (3) price; and acceptance may be made within a reasonable time and is effective only when it is received by the offeror. o Remedies: The seller has an absolute right and obligation to cure, and buyers must allow the seller the opportunity to cure even if the time for performance is past due. • INCO: International Chamber of Commerce Terms: Standardized contractual terms and designations used in international sales contracts to avoid confusion due to language barriers and differing legal systems. Concept Summary: Contracts for International Sales of Goods [P. 252] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 255] 1. This is a battle of forms question. Here the buyer (GCI/Bentley) issued a purchase order to the seller (Armstrong). Because this is a merchant transaction (both parties are merchants), the additional delivery terms written in by Armstrong become part of the contract unless 1) there was an express limitation in the original purchase order, or 2) the additional term was a material change, or 3) the offer raises an objection in a timely manner. Since there is no indication of a express limitation or objection by Bentley, Armstrong’s additional terms would be part of the new contract unless they were deemed a material change (i.e., significantly alters the value of the contract or the parties’ obligations). [Ties to Agreement in Sales Contracts: Acceptance]. 2. Yes. Course of past dealing is relevant in determining whether agreement exists under the UCC. Also, if the parties diverged from their previous practices without agreement from the other party, the different practice may be determined to be a material change to the contract’s terms. [Ties to Agreement in Sales Contracts: Offer/Acceptance]. 3. Assuming that the additional terms added by Armstrong are part of the contract, the GCI-Armstrong agreement is a destination contract. Under the UCC, risk of loss in a destination contract passes when the goods are tendered at the specific destination. In the GCI-Armstrong transaction, title never passed because the goods were destroyed prior to delivery. Armstrong bears the risk of loss. This question is tied to Question #1 because it turns on whether or not Armstrong’s inclusion of additional terms on the purchase order are part of the contract. If they are not part of the contract, then the GCI-Armstrong contract is assumed to be a shipment contract and the title passes once Armstrong placed the goods with the carrier to be shipped. [Ties to Title and Allocation of Risk]. 4. Yes. The statute of frauds is satisfied because the purchase order contained quantity, signature, and terms indicating an intent to contract. [Ties to Statute of Frauds]. 5. Armstrong has shipped nonconforming goods, but since these nonconforming goods were newer and more expensive than the conforming goods, Armstrong has given himself more time to cure if GCI rejects the goods as nonconforming. GCI is not obligated to accept the substitute goods, but because Armstrong has acted on a reasonable belief that the newer and more expensive would be an acceptable substitute, the UCC permits Armstrong a reasonable time to cure even if the date for performance has passed. [Ties to Performance of Sales Contracts]. 6. Although GCI has accepted the nonconforming goods, they may still revoke the acceptance of the goods if the nonconformity is found to substantially impair the value of the goods. Because GCI has discovered the incompatibility of this part of the printing press, they may revoke their acceptance of the nonconforming goods. [Ties to Buyer’s Rights and Obligations]. 7. If GCI rightfully rejects the final shipment of goods based on nonconformity, they must give notice of the rejection to Armstrong and, subject to Armstrong’s right to cure, may cancel the contract and recover any money already paid (such as a deposit). GCI may then purchase substitute goods (cover) and recover any cover damages as well. [Ties to Remedies Available to the Buyer]. Manager’s Challenge [P. 256]] A sample answer to all Manager’s Challenge exercises are provided in the student and instructor versions of this textbook’s Web site. Case Summary 9.1: Requirements Contracts and Good Faith: Fisherman Surgical Instruments, LLC v. Tri-anim Health Services, Inc. [P.256] 1. Who prevails and why? Answer: Fisherman prevails because though quantity is generally a required term necessary to create an enforceable contract under the UCC, requirements contract are an exception whereby quantity may be an open term. The distribution agreement found here was akin to a requirements contract. 2. Is this a requirements contract or output contract? Answer: This is a requirements contract because Tri-anim agreed to buy whatever he needs from Fisherman, and Tri-anim may only buy from Fisherman. 3. If Tri-anim did not cancel the contract but instead bought nothing and sold nothing, would Fisherman have any cause of action against Tri-anim? If so, what would be the appropriate remedy? Answer: Yes, in this case Fisherman’s cause of action would be that Tri-anim violated their imposed duty of good faith and they would be entitled to expectation damages to put them in the position they would have been in had Tri-anim performed in good faith. Case Summary 9.2: Right of Rejection: General Motors Corp. v. Acme Refining Co. [P.257] 1. Was Acme’s rejection lawful? Answer: No, the contracted provided that the metal was to be taken “as-is, where-is,” therefore, GM shipped conforming goods as agreed and Acme has the duty to accept them and become the owner of the goods in accordance with concepts of title. 2. Did Acme give seasonable notification of rejection? Answer: No. Acme waited several weeks before properly rejected the goods, when the buyer has an obligation to affirmatively notify the seller of the rejection in a timely manner. Case Summary 9.3: Cover: Glenn Distributors Corp. v. Carlisle Plastics, Inc. [P.257] 1. Did Glenn make reasonable efforts to cover? Answer: Yes, assuming that Carlisle cannot prove that reasonably similar items were available and that it would have been reasonable for the purchaser to acquire them in asserting the affirmative defense. 2. Should Glenn have to cover the lost profits by buying products other than trash bags? Why or why not? Answer: No, Glenn is entitled to lost profits for the specific products he contracted for and because no similar items were available, he has the right to sue for damages sustained due to the breach (lost profits). Case Summary 9.4: Specific Performance: S.W.B. New England, Inc. v. R.A.B. Food Group, LLC [P. 257] 1. What are the specific requirements for a court to grant specific performance to SWB? Answer: For a court to grant specific performance to SWB, SWB must demonstrate that it is not feasible for SWB to use cover or a suit for money damages as a remedy. 2. Do these requirements fit this case? Answer: Most likely, a court would find that these requirements do not apply in this case. It is likely that alternate brands of kosher products are available to permit SWB to cover its loss and be compensated by damages based on the costs of such products, or that, even if Rokeach products are uniquely desirable in the relevant market, SWB may be fully compensated in damages for any sales that it loses because of its inability to supply that brand to its customers. Case Summary 9.5: Battle of the Forms: Movado v. Mozaffarian [P. 258] 1. Was the forum selection clause an additional term, a different term, or a confirmatory writing? Explain Answer: It was a term incorporated into the document. It cannot be an additional term because it was not added to the existing document. 2. Does that fact that Mozaffarian never requested to see the document have any bearing. Answer: No. The UCC does not require that one party actually see the document if they acknowledge the receipt of and agreed to be bound by its terms. Case Summary 9.6: Commercial Impracticability: Ner Tamid v. Krivoruchko [P. 258] 1. Do these articles act in any way to support or defeat Krivoruchko’s claim? Answer: No. Economic conditions cannot be the basis for commercial impractability. It is a risk for both parties and any shifting of risk must be via agreement in the contract. 2. Should the defense of commercial impractability be effective when prices are affected by economic changes? Answer: This question is intended to spur discussion on the topic of whether economic risks should be borne more by one party or the other. The defense of commercial impracticability may be effective if economic changes make performance excessively burdensome or impossible, provided that the changes were unforeseeable and significantly alter the nature of the contract. However, it does not apply simply due to increased costs; the impact must be substantial and beyond the parties' control. 3. How might Krivoruchko have protected himself under this contract? Answer: Financing contingency or shifting the allocation of risk. 4. How might Ner Tamid have protected itself under this contract? Answer: Additional deposit money until financing was secured. Quick Assessment Questions (QAQ) 1. The UCC statute of frauds typically requires which of the following to be in the writing? a. Quantity b. The signatures of both parties c. Price d. Delivery e. All of the above Answer: a 2. Which of the following constitutes a breach of a sales contract by the buyer? a. Rejection of conforming goods b. Wrongful revocation of acceptance c. Failure to pay the seller in accordance with the contract d. a and c e. a, b and c Answer: e 3. Which is true of major provisions of the UNICSG: a. Applies to nonmerchants b. It has no statute of frauds provisions c. The right to cure exists up until the time for performance has ended d. Acceptance is effective upon dispatch e. All of the above Answer: b 4. Article 2 of the UCC acts to fill in only missing or open terms, only when the parties have not expressly agreed otherwise in a contract for the sale of goods. Answer: True 5. Shipment contracts require the seller to deliver the goods to a specified destination. Answer: False 6. A requirements contract is when a buyer agrees to buy all the goods that the seller produces. Answer: False Chapter 10: Torts and Products Liability OVERVIEW The focus of this chapter is learning to recognize situations where a business venture may have potential liability based on tort or product liability law. It begins with coverage of the fundamentals principles, elements, and defense in the context of intentional torts and negligence. The chapter also features a section on strict liability that includes specific coverage of product liability theories. KEY LEARNING OUTCOMES Outcome Accreditation category Articulate a basic definition of a tort, identify the source of law governing various types of torts, and give specific examples of how tort law applies in the business environment. Knowledge, Application Apply the elements and defenses of intentional torts in the business environment (e.g., defamation) and understand their applicability in commercial relationships. Application, Critical thinking Recognize conduct classified as negligent, apply any potential defenses, and understand the differences between negligence and strict liability torts. Knowledge, Application Provide alternate theories of liability and defenses when a product is the cause of the injury and give specific examples of circumstances giving rise to product liability. Knowledge, Application TEACHING OUTLINE A. Overview of Tort Law [P.261] Points to emphasize: • A tort is a civil wrong where one party (tortfeasor) has acted or failed to act, and that action or inaction (tortious conduct) causes a loss to be suffered by another. B. Sources of Law [P.261] Points to emphasize: • Tort law is primarily governed by state common law principles with guidance from the Restatement of Torts. • Products liability laws may take the form of state common law or state statutes that expressly impose liability for injuries that result from products. C. Categories of Torts [P.262] Points to emphasize: • Torts fall into one of three general categories: o (1) An intentional tort is one where the tortfeasor was willful in bringing about the tortuous conduct; o (2) Negligence is an accidental even that caused harm to another party; o (3) Strict Liability torts, applies primarily in cases of defective products and abnormally dangerous activities and the tortfeasor may be held liable for an act regardless of intent or willfulness. D. Intentional Business-Related Torts [P.262] Points to emphasize: • Defamation: Defamation by libel (written) or slander (spoken) must be a false statement directed specifically at a party, company, or product, aired to a third party, and result in pecuniary harm to the victim. o Public Figure Standard: If the victim is a public figure, the defamation must have been committed with malice or reckless disregard for the truth (New York Times v. Sullivan [P. 263]). o Privilege Defenses to Defamation: If the injured party meets all of the requirements of a defamation claim, the defendant may still avoid liability if the defamatory statement falls into one of two categories of privileged statements: • (1) Absolute Privilege: The defendant need not offer any further evidence to assert the defense if the defamation claim is between government officials, judicial officers during proceedings, or state legislators. • (2) Qualified Privilege: The defendant must offer evidence of good faith and be absent of malice to be shielded from liability if they are employees of media organizations, or employers providing a reference for an ex-employee. Case 10.1: Belanger v. Swift Transportation, Inc., 552 F.Supp 2d 297 (Conn. 2008) [P.265] Facts: Swift operates a trucking company and hired Belanger as a driver. One of Swift’s safety policies involves five infractions that can lead to immediate termination of its drivers, including rear-ending another vehicle. In his third year of employment, Belanger rear-ended another vehicle and was terminated when Swift’s claims department concluded the accident was preventable. Swift recorded the incident on a clearinghouse data Web site that other companies used to check on commercial driving records, and as a result, Belanger was unable to find work and thus sued Swift for defamation. Issue: Is Swift’s report that Belanger did not meet Swift’s safety standards in the clearinghouse data Web site covered by the employer’s reference privilege defense? Ruling: Yes (in favor of Swift). There was no reason why employer candor regarding employee references should not be protected from defamation suits on the Web site since it was equally as important as one-on-one discussion, and Swift’s following of company procedures, independent investigation, and recording the accident on the Data Web site did not indicate malice. Answers to case questions: 1. What is the public policy behind giving privilege to employer references? Answer: Giving privilege to employer references promotes public policy because without such a privilege, employers would be reluctant to give out references that could lead to a defamation claim, increasing their liability. This means that prospective employers are not able to make hiring decisions based upon complete information and may even face exposure to liability themselves for negligent hiring. 2. Is it fair that Belanger has a permanent bad reference? Would you hire him? Answer: The fact that Belanger has a permanent bad reference may not be fair to him individually, but it is in the best interest of public policy. The isolated incident alone may not necessary help him find work, but it does not preclude him from ever driving again for another company. • Trade Libel and Product Disparagement Laws: In cases where a competitor has made a false statement that disparaged a competing product, an injured party may sue for trade libel. o Some states have passed product disparagement statutes intended to protect the interest of a state’s major industries such as agriculture, dairy, or beef. Teaching Tip: Veggie libel laws (Agricultural disparagement statutes) Students are fascinated by the type of statutory protection for state industries. Since many states have their own laws, I challenge my students to find 1) our own state’s agricultural disparagement standards, 2) an example of another state’s agricultural protection statute. • Fraudulent Misrepresentation: Also recognized as a tort where the victim can show intentional misrepresentation by the tortfeasor of a material fact, reliance on that fact, and damages resulting from that reliance. o Any statement made by a party that turns out not to be accurate may still allow the innocent party to recover if the tortfeasor’s statement was negligent. Legal Implications in Cyberspace: Protections for Online Content Providers [P.267] Along with the actual tortfeasor in a defamation case, the law imposes certain liability upon the publisher of the libelous statements as well (however not on the distributor). • The rules pertaining to publishers of online content in cyberspace are different and varied: o Cubby Inc. v. Compuserve: ISPs were to be treated as “distributors,” thus they were not subject to liability for any defamatory statements so long as they did not “edit, review or reformulate” the publication. o Stratton v. Prodigy Services Company: ISPs could be held liable as a publisher of defamatory material if they demonstrate a “conscious effort to maintain editorial control” over the content. • Communications Decency Act of 1996: A uniform standard that extended immunity to ISPs by protecting them from any defamation liability as a “publisher or speaker of any information provided by another information content provider.” • Blumenthal v. Drudge and America Online, Inc: One of the first cases to interpret and apply the CDA. • False Imprisonment: An intentional tort unless the tortfeasor is a merchant who temporarily and reasonably detains a suspected thief. • Table 10.1: Other Intentional Torts [P.269] • Business Competition Torts: Common law torts that arise when a tortfeasor (typically a competitor) interferes with an existing contract or hinders a prospective contract between two parties. o Tortious Interference with Existing Contractual Relationships: When one party induces another party to break an existing contract with another party, the inducing party may be liable for damages suffered by the innocent party if they had specific knowledge of the contract, actively interfered with the contract, and caused identifiable damages. • Interference does not occur when a competitor merely offers a better price to a competitor’s customer. Case 10.2 Mattison v. Johnston, 730 P.2d 286 (Ariz. App. 1986) [P.270] Facts: Mattison owned a beauty salon and hired Drowne as a hair stylist. Drowne signed a restrictive covenant contract for one year following termination. Over the next 10 months, Johnston, the owner of a competing beauty salon, actively solicited Drowne to leave Mattison’s employ and work for him. Eventually Drowne quit Mattison’s salon and began working for Johnston, and Mattison sued Johnston for intentional interference with the restrictive covenant contract. Issue: Did Johnston tortiously interfere with the restrictive covenant contract between Mattison and Drowne? Ruling: Yes. Johnston had known about the restriction and actively continued to induce Drowne to breach the restrictive covenant; competition is not a valid excuse to break a restrictive covenant that was created to avoid just such practices. Answers to case questions: 1. What are the conflicting public policy concerns in this case? Answer: Public policy is served by a promotion of fairness in business dealings generally. One view: free market should allow employee to work wherever they wish without restriction based on value to the market. Another view: Free market needs some private regulation between parties (contracts) and the overriding public policy interest in enforcing agreements made between individuals. 2. Why would Mattison sue Johnston for interference rather than suing Drowne for breach? Answer: Because an employer cannot compel an employee to continue employment against her will, an employer may sue for damages, such as the cost of locating and training a replacement. But even here this does not prohibit Drowne from working for Johnston, a direct local competitor. The purpose of the restrictive covenant was to avoid Drowne from working for a competitor, and given the circumstances, Mattison’s only course of action that achieves that objective is to sue Johnston for interference. Self-Check: Intentional Torts [P.272] o Tortious Interference with Prospective Advantage: The law also protects interference with potential business relationships under limited circumstances where the tortfeasor’s conduct was highly anticompetitive. Concept Summary: Business-Related Intentional and Competition Torts [P.272] E. Negligence [P.272] Points to emphasize: • Circumstances where one party fails to act reasonably and, even absent intention for harm, the party is still liable for any injuries or damages suffered by another party as a result of the unreasonable conduct. • Elements of Negligence: In order to recover for negligence, the injured party must prove duty, breach of duty, cause in fact, proximate cause, and actual damages. o Duty: Did a tortfeasor owe a duty to the inured party? • General Duty of Reasonable Conduct: The law imposes a duty on every party to act as a reasonably prudent person would under the circumstance. • No General Duty to Act: Injured parties may not hold a defendant liable for failing to act unless the parties had a special relationship to each other including: a common carrier to its passengers; innkeepers to guests; employers to employees; a school to student; landlord to tenants; and businesses to its visitors. • Landowners: Owe a general duty to parties off the land from any unreasonable risks to them caused by something on the land. • In a situation where a tenant is in possession of leased space, the tenant has the same special duties and level of liability that is imposed on landowners. • Table 10.2: Categories of Special Relationship Duties Owed by Landowners [P.275] o Breach of Duty: Did the tortfeasor breach the reasonably prudent person standard? • Violation of Safety Statute: If the legislature has passed a statute intended to promote safety and one party violated the statute, there is a strong presumption that the party violating the statute has also committed negligence per se. • States also pass statutes intended to establish reasonable behavior in certain circumstances (i.e. Dram shop laws). • Common Law Standards of Behavior: Where the legislature has been silent, state common law governs whether or not a breach occurred under certain standards of behavior. • Res Ipsa Loquiter: (“the thing speaks for itself”) A doctrine that allows an injured party to create a presumption that the tortfeasor was negligent by pointing to certain facts that infer negligent conduct without a showing of exactly how the tortfeasor behaved. o Cause in Fact: But for the breach of duty by the tortfeasor, would the injured party have suffered damages? • Scope of the “But For” Test: The broad sweep of the but for test requires a further step to establish liability – proximate cause. o Proximate (Legal) Cause: The injured party must prove that (1) the tortfeasor’s conduct was also the closest-in-proximity cause of the damages, and (2) the tortfeasor’s liability wasn’t canceled due to a superseding cause. • Closest-in-Proximity: That which helps draw the line that determines when a tortfeasor is “not liable for harm different from harms whose risk made the [tortfeasor’s] conduct tortuous,” applying foreseeability to define the risk. • Superseding Cause: When an intervening event takes place after the torfeasor’s negligent act that contributes to that negligence in producing additional damages, some (but not all) of these intervening acts may be the basis for limiting a tortfeasor’s liability, as defined by foreseeability. Landmark Case 10.3 Palsgraf v. Long Island Railroad Co., 162 N.E. 99 (Ct. App. N.Y. 1928) [P.278] Facts: Palsgraf was waiting on a platform for a train when a different train arrived on a platform 100 yards away. When the train began to depart, two commuters attempted to board the moving car and a package one of the passengers was carrying became dislodged when the conductor pulled him onboard. The package, which turned out to be fireworks, fell to the platform and exploded sending a shock with sufficient force so that large iron scales hanging over Palsgraf fell on her resulting in severe injury. Palsgraf sued the Long Island Railroad for the conductor’s negligent conduct of pulling the commuter onto the train that eventually caused the explosion and her injury. Issue: Was the conductor’s negligence the closest-in-proximity cause of Palsgraf’s injury? Ruling: No. Because the conductor could not have known the man he was helping onto the train had a box full of fireworks, the actions of the conductor was not a proximate enough cause to incur liability for Palsgraf’s injuries. Answers to case questions: 1. Are all the other elements of a negligence tort satisfied in this case? Answer: Yes. (Duty) The railroad had a general duty of reasonably conduct not to impart unreasonable risk to Palsgraf. (Breach) This duty was breached when the railroad failed to fulfill their obligations and put Palsgraf in jeopardy. (Causation) But for this breach of duty by the railroad, Palsgraf would not have suffered damages. (Damages) Palsgraf suffered severe injury. 2. Who else might have sued the Long Island Railroad? Who else might Palsgraf have sued? For what? Answer: Palsgraf could have sued the manufacturer of the scales, the company that installed the scales, or the individual that was carrying the fireworks. Such claims would likely be negligence unless any one party was willful in bringing about the explosion or falling of the scales. These parties could have then countersued the railroad, or perhaps passengers on board the train and on nearby platforms that suffered injuries could have brought negligence suits against the Long Island Railroad. Self-Check: Proximate Cause: Is proximate cause met in these situations? [P.278] o Actual Damages: Did the injury to person or property result in physical loss? • Many states also allow a spouse or children of an injured party to recover damages related to the negligence. • Defenses to Negligence Claims: The primary defenses to claims of negligence are comparative negligence and assumption of the risk. o Comparative Negligence: Whereby the injured party’s conduct has played a factor in the harm suffered, a jury divides up the proportion of negligence committed by the parties in terms of percentage (Table 10.3: Comparative Negligence Formula [P.279]). • Comparative Negligence is a cousin to the common law doctrine of contributory negligence, whereby even 1 percent of negligence on the part of the plaintiff was a complete bar to any plaintiff of recovery. o Assumption of the Risk: Asserted when the injured party knows that a substantial and apparent risk was associated with certain conduct, and accepted the risk by moving ahead with the dangerous activity anyway. Case 10.4 Zeidman v. Fisher, 980 A.2d 637 (2009 Pa. Super 161) [P.280] Facts: Zeidman and Fisher were participating in golf foursome and one hole, where the fairway was partially blocked, Zeidman agreed to take the golf cart and ride ahead to see if the course was clear for the group to hit. Zeidman made his observations and was returning to his foursome to report that the course was clear when Fisher hit his shot anyway. Fisher’s shot was errant and the ball struck Zeidman in the face causing serious and permanent injuries. Zeidman sued Fisher for negligence and the trial court dismissed his claim ruling that Zeidman had assumed the risk. Issue: Was the assumption of the risk defense properly applied? Ruling: No. The Superior Court reversed the trial court’s decision holding that an objectively reasonable person may have assumed that no risk existed because Ziedman had not yet completed his task of reporting back to the foursome and therefore, did not yet manifest a willingness to accept a known risk. Answers to case questions: 1. If Zeidman had signaled to his partners that all was clear from the fairway and was then hit while returning in the cart, would Fisher be entitled to a summary judgment based on assumption of the risk? Answer: If Zeidman had signaled that all was clear from the fairway, the trial court’s ruling would likely stand. Under these facts, Zeidman’s signaling to his partners from the fairway could be construed as a completion of his task and therefore a manifested willingness to accept the known risk. 2. What duty did Fisher owe Zeidman in the first place? Was it a special relationship duty? Answer: Fisher did not have a special relationship duty to Zeidman as set out in the Restatements; however, Fisher did owe Zeidman the general duty of reasonable conduct. The law imposes a general duty on every party to act as a reasonably prudent person would under the circumstances. Concept Summary: Negligence Analysis [P.280] F. Strict Liability Torts [P.281] Points to emphasize: • Strict Liability provides liability in certain cases where neither intent nor negligence needs to be proven, primarily for abnormally dangerous activities and for defective products. • Abnormally Dangerous Activities: A six factor test is used to determine whether these activities trigger strict liability for any harm caused by the activity: (1) high degree of risk, (2) likelihood of great harm; (3) exercising reasonable care; (4) uniqueness of activity (5) appropriate location; (6) community values that outweigh the danger. G. Products Liability [P.282] Points to emphasize: • Products liability refers to the liability of any seller (including the manufacturer, retailer, and any intermediary seller) of a product that, because of a defect, caused harm to a consumer. • Negligence: Theory of a products liability case where one who negligently manufactures a product is liable for any injuries to persons (and, in some limited cases property) proximately caused by the negligence (MacPherson v. Buick). • Warranty: Theory of a products liability case that protects buyers from either an express or implied warranty of the seller. [Note to Instructor: Warranties related to product quality and functionality are covered extensively in Chapter 22 – Consumer protection Law] • Strict Liability: Theory of a products liability case that holds a seller strictly liable when an article he places on the market proves to have a defect that causes injury to a human being. o § 402A of the Restatements imposes a strict liability on the seller so long as the injured party can show that the product was in a defective condition, and that the defect rendered the product unreasonably dangerous. o Defining “Defect”: In order to recover for an injury caused by a product, it must have been defective and have created a danger that is outside of the reasonable consumer’s expectations. • Design of Manufacturing Defect: A product may become dangerous if it is designed improperly in that foreseeable risks of harm posed by the product could have been reduced or avoided by some alternative design; or, by some mistake made during the manufacturing process. • Inadequate Warning: For products that are ostensibly safe but may carry risks unknown to a reasonable consumer, inadequate warnings and instructions may render the product unreasonably dangerous. • Improper Packaging: A product can be rendered unreasonably dangerous by defect in the packaging (Elsroth v. Johnson & Jonson [P.284]). • Unavoidably Unsafe: Courts are reluctant to impose strict liability for damages resulting from products that are inherently dangerous. Case 10.5: Barker v. Hennessy Industries, 206 Cal. App. 4th 140 (2012)[P. 285] Facts: Barker was a mechanic who repaired cars, trucks, tractors and similar vehicles from 1967 to 1995. Barker’s work required him to use heavy machinery to grind, sand, and cut components such as brake linings and brake shoes. These components contained asbestos which has been proven to cause disease in those who inhale the dust produced by the grinding and cutting of the components. The machines that Barker used to work on these components were manufactured by a predecessor company to Hennessey Industries. Barker died in 2008 from asbestos-related illnesses and his wife sued Hennessy under a strict liability theory. Barker’s wife argued that Hennessey was liable because they were aware that its product (machinery) was used in conjunction with the asbestos-containing products, but failed to warn users of the danger. Issue: Can Hennessy be strictly liable for injuries caused by another manufacturer’s product even if it was foreseeable that its machines would be used to repair products that contained asbestos? Ruling: The appellate court upheld the trial court’s dismissal of the suit because Hennessey showed that its machines were stand-alone products that did not contain asbestos or require asbestos to operate. Case Questions: 1. Who should have warned Barker of the dangers of working with asbestos? Answer: The court seems to indicate that the manufacturers of the brake parts could have been in a position to warn Barker. In any case, Hennessy did not manufacture the defective product (brakes) and thus have no duty to warn. 2. A dissenting opinion was written, saying that the case should have gone to a jury because Hennessy knew that its machines and lathes could be used only with dangerous asbestos-related products. Do you agree or disagree with the dissent? Why? Answer: On one hand, the idea is that foreseeability is an important part of products liability. On the other hand, it is unworkable to hold a manufacturer liable for a duty to warn about dangers arising from an entirely different product. 3. What would have to be proved for a defense of assumption of risk to be effective had this gone to trial? Answer: Assumption of the risk requires that the injured party knew of the risk and accepted the risk. 4. From an ethical perspective, do you agree or disagree with the court’s decision? Explain. Answer: This question is intended to spur debate on the legal standard versus the ethical standards. It is also a good opportunity to relate material from Chapter 5: Business, Societal, and Ethical Contexts of Law to a recent products liability case. o Causation and Damages: The injured party needs to prove only that the defective product was the cause of the injuries and the product caused an actual injury that resulted in damages. o Seller’s Defenses: The law recognizes several defenses for a seller even if the injured party has established all of the required elements for liability: • Substantial Change: In order for strict liability to apply, the product must reach the end user without substantial change. • Assumption of the Risk: A narrow defense applied if the party knew or should have known about the risk and disregarded this risk by continuing with the activity at issue for her own benefit. • Misuse of Product: Where the injured party may have not known of a certain risk, but failed to use the product in a manner that an ordinarily prudent person would. o Figure 10.1: Section 402A Liability [P.286] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 288] 1. CI owes BTF (at least) a general duty to act as a reasonable prudent installer. They did breach that duty by failing to install the wiring in such as away as to render the fire sprinklers inoperable. The real question of liability here comes down to causation. [Ties to Elements of Negligence – Duty]. 2. The crux of the question of liability is cause in fact versus proximate cause. There is no question that under the but for test, that CI was the cause in fact of the damages. But proximate cause is more problematic. Based on the Palsgraf standards, the secondary questions are 1) was CI’s conduct the closest-in-proximity? 2) Was there any superseding cause (intervening event) that took place after the tortfeasor’s negligent act? In this case, OC’s negligence qualifies as an intervening event and will probably result in a limit to CI’s liability. [Ties to Elements of Negligence- Cause in fact]. 3. Although OC’s intervening negligence (caused the fire through a carelessly placed lit cigarette) qualifies as a superseding cause, CI’s liability is not eliminated altogether. Liability for a superseding cause is determined by a fact-finder based on foreseeability of the risk and the original tortfeasor is relieved from liability for any aggravated injury. [Ties to Elements of Negligence- Proximate Cause]. 4. BTF’s failure to hire a security guard may be the basis for a defense of comparative negligence for OC and CI. If the fact finder determines that BTF’s conduct contributed to their own injury, then BTF’s award is reduced by the percentage of the injured party’s liability as determined by the fact finder. [Ties to Defenses to Negligence Claims]. 5. At least two potential torts occurred here. First, Data Management’s manager’s statements about CI may constitute slander (oral defamation) if CI suffered damages (such as losing a lucrative account) because the statements were 1) false, 2) distributed to a third party (such as City Hospital’s CIO), 3) specifically referring to CI. Also, Data Management’s conduct in offering a financial incentive to City Hospital to break their contract with CI may constitute tortuous interference with existing contractual relationship. This requires that Data Management had specific knowledge of the CI-City Hospital contract, 2) Data Management actively interfered with the project, and 3) CI suffered identifiable damages. [Ties to Intentional Business-Related Torts and Business Competition Torts] Manager’s Challenge [P. 289] A sample answer to all Manager’s Challenge exercises are provided in the student and instructor versions of this textbook’s Web site. Case Summary 10.1: Special Relationships: Maher v. Best Western Inn [P.289] 1. What duty did Best Western owe Maher? Answer: Best Western owed a general duty of reasonable conduct and a special duty of conduct as an innkeeper to Maher as a guest. Here, this special relationship included the duty to guard against foreseeable dangers. 2. Was it reasonable for Best Western to do more to prevent the attack? Answer: Ultimately this is a jury function to determine what precautions were reasonably required in the exercise of Best Westerns duty to care. It is conceivably reasonable that Best Western was to do more to prevent the attack because they created a foreseeable zone of risk which placed upon it a duty to either lessen the risk or take sufficient precautions to protect others from the harm of the risk posed, neither of which seem present in the facts. 3. Would a bystander have had a duty to prevent the attack if it occurred on the street? Answer: No, because the duty of care does not include a general duty to act or to rescue another unless a special relationships exists. A bystander would have no special relationship to Maher and thus would not be liable for a nonfeasance. Case Summary 10.2: Res Ipsa Loquitor: Wurtzel v. Starbucks Coffee Co. [P.289] 1. Was Starbucks clearly negligent without any need for witnesses? Answer: No. The circumstances are not such that negligence is automatic. 2. Who else may have been negligent? Answer: Wurtzel herself could have been negligent, or any other party that handled the cup after she left the store and it was out of Starbucks’ control. Moreover, the manufacturer of the lid, or even the manufacturer of the car cup holder could have been negligent in causing the spill. Case Summary 10.3: Negligence Per Se: Coker v. Wal-Mart Stores, Inc. [P.290] 1. Is Wal-Mart liable? Answer: Yes, it would likely be held that Wal-Mart was negligent per se in violating the federal Gun Control Act that was intended to promote safety, and therefore was liable for harm suffered to those protected by the law. 2. What if it was reasonable to assume that the two men were over 21? Answer: Wal-Mart would still be held liable because Wal-Mart had violated the federal safety statute and a court may find a breach of duty occurred without delving into a reasonably prudent person analysis. 3. Could Wal-Mart have foreseen the robbery anymore than the train conductor could have foreseen the bag full of fireworks in Palsgraf? Answer: The foreseeeability analysis in this case is in a different context then Palsgraf because the case at hand deals with the violation of a federal statute. Here, the happening of the very event the likelihood of which makes the actor’s conduct negligent and so subjects the actor to liability cannot relieve him from liability. Case Summary 10.4: Strict Products Liability: Gorran v. Atkins Nutritionals, Inc. [P.290] 1. Can a diet plan be considered a “product”? Answer: The court held that a diet plan and accompanying books etc., is not considered a product because they were not tangible enough. 2. Why would Gorran want to sue under products liability rather than just negligence? Answer: Gorran’s most appealing option for pursuing his case is the doctrine of strict product liability because here he need not prove the five elements of negligence, rather he need only prove that the product was placed on the market and that it has a defect which resulted in injury. Case Summary 10.5: Assumption of Risk: Aaris v. Las Virgenes [P. 290] 1. What must Aaris prove in order to hold her coach and the school district liable for her injuries? Answer: The injured party must prove that it was foreseeable that these stunts would cause injury and that the students were the cause and proximate cause of the damages. 2. For a defense of assumption of risk to be successful, what must the coach and school district prove? Answer: An assumption of the risk defenses requires the tortfeasor (school) to prove that the injured party knew the risk and voluntarily assumed the risk. Case Summary 10.6: Dangerous Condition: Burton v. MDC PGA Plaza, [P. 291] 1. Can a property owner be liable for injuries when a dangerous condition is open and obvious? Does the owner have a duty to warn when the dangerous condition is open and obvious? Answer: Potentially. Courts use a reasonableness standard to determine the point at which the landowner should have act. Landowners owe a special duty to certain parties. 2. Can a property owner be liable for injuries when a dangerous condition is open and obvious and the injured party was well aware of the dangerous condition? Answer: The landowner owes invitees (party invited to property for business purposes) a duty to warn about any known dangers. However, the duty to inspect only applied to hidden dangers. 3. Does Burton’s knowledge of the dangerous condition merely raise an issue of fact as to her own comparative negligence? Answer: It would a relevant fact both for establishing the breach of duty by the landowner and as a potential comparative negligence defense for the landlord in terms of whether Burton contributed to her own injury. UNIT TWO FLEXERCISE [P. 292] The nature of the flexercise is to stimulate debate and discussion. Many of the questions should be “Student answers will vary” the student is not wrong if they don’t state the “answers” provided below as long as the student’s reasoning is well thought out and defended. 1. Does a string of accidents directly attributable to original negligence create a question of proximate cause for the jury to decide? Answer: Yes. A string of accidents directly attributable to the original negligence would at least present a question for the jury to decide. Proximate cause requires a direct link between the negligent act and the plaintiff’s injury. 2. Can proximate cause still be a jury question if significant time has passed and conditions have changed, such as poor weather and visibility? Answer: Yes. After a four hour period, even with poor weather and visibility, the direct link to the original accident would be difficult to prove. Nevertheless, proximate cause is a jury question. 3. How does established precedent impact the flexibility of legal principles, and is it possible to overcome it? Answer: Student answers will vary. Established precedent is not “written in stone” but is difficult to overcome. Established precedent provides stability and predictability in the law but can limit flexibility. Overcoming it is challenging and usually requires a higher court’s ruling or legislative change to alter or overturn longstanding legal principles. 4. Why is it important to establish a reasonable point at which liability ends to prevent indefinite liability for a single negligent act? Answer: Without having to establish proximate cause, liability for a single negligent action could go on and on without controls. Even a tortfeasor must be relieved of liability at some point. At some reasonable point, liability must be ended to keep the situation manageable. Quick Assessment Questions (QAQs) 1. Which of the following cases was the first to enunciate the proximate cause theme? a. Zeidman v. Fisher b. Mattison v. Johnston c. Belanger v. Swift Transportation d. Palsgraf v. Long Island Railroad Co. e. Roe v. Wade Answer: d 2. Which of the following have a qualified privilege to a defamation claim? a. Government Officials b. Media c. State Legislators d. Judicial officers/proceedings e. a and d Answer: b 3. Which of the following parties have a special relationship in tort law? a. Employers to employees b. Businesses to patrons c. Landlord to tenants d. b and c e. a, b and c Answer: e 4. Libel is a spoken, untrue statement that caused a victim to suffer damages. Answer: False 5. The primary difference between intentional torts and negligence is the mindset of the tortfeasor. Answer: True 6. Comparative negligence is a defense to a negligence claim whereby even 1 percent of negligence on the part of the plaintiff is a complete bar to any plaintiff recover. Answer: False Solution Manual for The Legal Environment of Business: A Managerial Approach: Theory to Practice Sean P. Melvin, Michael A. Katz 9780078023804