CH-8-11 The International Legal Environment of Business – The Legal Environment of Business: A Critical Thinking Approach : Book Guide

This Document Contains Chapters 8 to 11 Chapter 8 The International Legal Environment of Business Introduction Chapter Eight addresses these questions: • What are the dimensions of the international environment of business? • What are the methods through which companies engage in international business? • What are the risks of engaging in international business? • How does legal and economic integration serve as a means of encouraging international business activity? • How are disputes between companies doing business in the global arena resolved? Chapter Eight is significant because it presents information managers must know to be competitive in a borderless economy. The international arena offers both risks and opportunities. Managers need to be aware of both. Achieving Teaching Excellence How to Achieve Teaching Excellence When Your Class Size Is Large Some instructors have probably read this Instructor’s Manual, and said, “Sure. I’d like to improve my teaching skills and move toward teaching excellence, but that would be very difficult for me. I’d like to have a student-centered classroom, encourage discussion, ask better questions in class, and receive better responses from my students, but I teach large classes. I can achieve only so much, and teaching several students in one class reduces my chances for achieving teaching excellence.” In part, instructors are right. It is more difficult, more challenging, to achieve teaching excellence when the class size is large. However, it is possible to improve and move toward teaching excellence no matter how many students instructors teach during a class session. First, what is “large”? Instructors usually teach 35 students in a class, and it can be assumed that this number is a medium-size class. Let’s assume that large is some number more than 40 students. Many professors teach classes with 100 or more students in them. What can instructors do to achieve teaching excellence when they lecture large classes? In an article by Margaret Morganroth Gullette, former assistant director of the Derek Bok Center for Teaching and Learning at Harvard, she explains how to lead discussion in a lecture course. Gullette explains that a good format for teaching large classes is to use a discussion–lecture format. She suggests the instructor mix mini-lectures with discussion, always searching for a rhythm that matches student attention. Gullette urges instructors to question students, even in large classes. She points out something many instructors know from their law school experiences: “For a student to speak in a lecture class constitutes an event.” She also writes something insightful about discussion in a large class. Gullette writes, “Until a student hears herself expounding or questioning, she may not know what she thinks.” Gullette says that speaking empowers future learning and speaking. Gullette also presents five maxims for instructors who teach large classes to keep in mind. Many of these are useful even for teaching in small classes. Her maxims are: 1. No impression without expression. Gullette writes that when instructors speak in class, the fact of an audience magnifies their discourse. When instructors speak in public, their expression comes back to them, and they receive some reactions to what they said. They read their success or failure by reading bystanders’ eyes. 2. No verbal expression without encouragement. She writes that the best discussion leaders are both bright and kind. Gullette suggests instructors wait before they jump in to comment or judge something a student says. Instructors should look interested and thoughtful. 3. No learning without muddle. She explains instructors are bound to have muddle in their classrooms when they engage in discussion because discussion disrupts the simplicity of lectures. Confusion is good. 4. No real discussion—and no engagement—without conflict. Gullette points out what most lawyers know well. “No discussion occurs without some level of conflict, or if you prefer, difference of ideas.” 5. Conflict and focus come through the document. By this, Gullette means that instructors must provide the context in which questioning is interesting. Skillful teachers focus this discussion by giving students a “document.” This can be opening remarks, new background, or reminding them of key factors. In the Kubasek, Brennan & Browne text, the document could be the critical thinking questions, and the discussion questions in this Instructor’s Manual. Finally, Gullette reminds instructors why encouraging certain kinds of classroom discussions is important, even in large classes. She writes, “It is probably true that a class matters more to everyone if there is some rise in the intellectual temperature at some point, and that dispute sharpens points. A good teacher can plan this rise in temperature.” That is especially true when the teacher encourages his or her students to engage in critical thinking. As instructors work with their students they should remember to encourage classroom discussion … even if the class is large. Reference • Margaret Morganroth Gullette, “Leading Discussion in a Lecture Course: Some Maxims and an Exhortation,” CHANGE 32 (March/April 1992). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview At the outset of Chapter 2, it was noted that U.S. managers can no longer afford to view their firms as doing business on a huge island between the Pacific and the Atlantic Oceans. Existing and pending multilateral trade agreements open vast opportunities to do business in Europe and Asia, throughout the Americas, and indeed throughout the world. If present and future U.S. managers do not become aware of these opportunities, as well as the attendant risks, they and their firms will be at a competitive disadvantage vis-à-vis foreign competitors from all over the world. Students will find this chapter interesting because many of them are interested in the global economy. The first section of the chapter is especially interesting because it helps students realize the different kinds of law people in other cultures follow. Students will also be interested in the organizations that help bring down tariff barriers and thus encourage companies of all nations to engage in international business. After the topic outline, discussion questions will encourage students to think about material from throughout the chapter. This manual will place special emphasis on dimensions of the international environment of business, and organizations that help bring down trade barriers. Topic Outline I. Dimensions of the International Environment of Business A. Political Dimensions B. Economic Dimensions C. Cultural Dimensions D. Corruption and Trade United States v. Kay E. Legal Dimensions National Legal Systems F. Selected National Legal Systems International Law Crosby v. National Foreign Trade Council II. Methods of Engaging in International Business A. Trade B. International Licensing and Franchising C. Foreign Direct Investment In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp. III. Risks of Engaging in International Business A. Expropriation of Private Property B. Sovereign Immunity Doctrine Keller v. Central Bank of Nigeria IV. Act-of-State Doctrine Republic of the Philippines v. Ferdinand E. Marcos A. Export and Import Controls Export Controls Import Controls V. Legal and Economic Integration as a Means of Encouraging International Business Activity A. The World Trade Organization Purpose and Terms General Impact Impact on Corporate Investment Decision Making B. The European Union Purpose Structure Impact C. North American Free Trade Agreement Purpose Structure Impact V. Global Dispute Resolution A. Arbitration B. Litigation C. Globalization: Hurts or Helps VI. Summary Discussion Questions for Chapter Eight 1. Explain why someone might think it’s true that a business manager must do a country analysis before doing business in another nation state. A country analysis is important because a nation’s economic performance is affected by many factors, including economic growth, inflation, the nation’s budget, and trade deficits. The text lists additional factors. For instance, it is important in some industries to know how much disposable income citizens in a particular country enjoy. If disposable income is limited, it does not make sense to sell luxury items. Another example is the country’s infrastructure. A business must know the availability and condition of roads. 2. Explain relationships between Islamic law and Hindu law. One relationship between the two is that both are religiously based and govern certain aspects of daily life for individuals. A difference is that Hindu law is followed primarily in India, whereas Islamic law is followed all Muslims in approximately thirty countries. 3. Explain relationships between common law and Romano-Germanic Civil Law. One major relationship between the two is that common law is based primarily on case law, whereas civil law is based upon codes and statutory law. Another relationship is that civil law countries have inferior public law, whereas common law countries have developed public law. Although it’s unclear from reading the text, it seems that high-income and middle-income countries are more likely to follow civil or common law than other families of law the book describes. 4. Evaluate this statement: International law comes exclusively from treaties between nations. The statement is flawed because international law comes from many sources, including treaties. Other sources include custom, judicial decisions of international courts, decisions of national and regional courts, scholarly writing, and international organizations. 5. Explain relationships between international licensing and foreign direct investment. International licensing involves a contractual agreement in which a company (licensor) makes intellectual property available to a foreign individual or company (licensee) in return for royalties or other compensation. Foreign direct investment occurs when a company creates a foreign subsidiary in a host company or enters into a joint venture. Foreign direct investment is riskier than international licensing because it involves actually doing business in the host country. Foreign direct investment also requires that the company be restricted by the host country’s governmental restrictions. International licensing also places restrictions, but because the activity itself is limited, so are the kinds of legal restrictions that apply. 6. Which risk of engaging in international business is the most significant? It depends. Students would need to look at particular facts of a situation to decide. Possible risks include expropriation of private property by the host foreign nation, the possibility that a firm will claim sovereign immunity, export and import controls, and currency fluctuations. Expropriation is less likely than currency fluctuations, but if expropriation did happen the loss would probably be larger. 7. Why does the text include a discussion of China? The book discusses China as part of its discussion of import controls. The book uses China as an example of how a country can impose import barriers to retaliate against another country. The United States wanted to use import barriers against China because it had pirated intellectual property, failed to meet WTO tariff standards, and violated the human rights of its citizens. Note that China has recently become a member of the WTO. 8. Why did NAFTA generate so much controversy before it was passed? NAFTA eliminated barriers to the flow of goods, services, and investments over a fifteen-year period. Some constituencies believed NAFTA would hurt them, and their concerns triggered controversy. For instance, some American workers believed they would lose their jobs if barriers were removed because goods and services are cheaper if produced outside the United States. Those industries that would have difficulty remaining competitive if trade barriers were removed felt threatened by NAFTA, so they were understandably concerned. 9. What groups would not be happy about the creation of the WTO? The WTO has the power to enforce a new trade accord. Those countries that are unable to comply with WTO standards will not appreciate the WTO. Additionally, some businesses will have difficulty competing when tariffs are reduced. Those businesses that have benefited from their government’s protection in the past will not appreciate WTO’s efforts toward encouraging reduction of protection. Also, environmentalists and consumer groups are concerned that the WTO will overrule environmental laws of the United States. 10. Explain relationships between the WTO and the European Union (EU). The WTO and EU are similar as both are committed to achieving free movement of goods and services across borders. Another similarity is that their structures both include councils to make policy decisions, and panels that rule on disputes. One difference is that the EU wants to form a political and economic community with a single currency and common external tariff barriers toward nonmembers. The WTO does not try to create such a community. Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. It is difficult enough for people who speak the same language to communicate. It is not uncommon within one’s own country and culture for people to supply different meanings to ambiguous words and phrases. This process is even more complicated when people speak different languages and come from different cultures. International business negotiations are affected by a variety of cultures and languages. These differences make it important to define ambiguous words and phrases. 2. These questions are important because knowing a country’s primary ethical norms helps people decide what assumptions they can make and what definitions they can supply for ambiguous words or phrases. For instance, if people know a country values security (to be safe from those wishing to interfere with their property rights) they can use this information to interpret an agreement. If they are interacting with a country that values security they know the negotiators will be sensitive to deals that affect property rights. 3. Those who value freedom (to act without restriction from rules imposed by others) are likely to enter into agreements with foreign companies. Many people believe that free trade benefits consumers by allowing them to have access to goods at lower prices. Case Summary—United States v. Kay This case deals with bribes and the FCPA, or Foreign Corrupt Practice Act. David Kay and Douglas Murphy ran the company ARI (American Rice, Inc.) in the Republic of Haiti. Both are U.S. citizens. For a four-year period, they and other employees and officers of ARI paid bribes to Haitian customs officials so shipments would be understated and therefore the company would have to pay the duties on bigger shipments. They also bribed other officials to again understate the total of rice so the company would not have to pay more in sales tax. Both Kay and Douglas knew about the bribes and authorized the payment. However, the district court ruled that they did not violate the FCPA because the bribes did not obtain business. The Appellate Court ruled in favor of the United States, pointing to the fact that the FCPA prevents businesses from using bribes to unlawfully forward the profits of their business. In this case, the bribes protected funds that would have otherwise been expended. Suggested Answers to Critical Thinking about the Law Questions 1. Unlike bribery, an innocuous payment is one that does not give the business an unfair advantage over all other businesses. Grease payments are only allowed when they speed up the process or prevent unlawful acts. The business cannot avoid payment of money that would otherwise have to spend by all other businesses. 2. The Court obviously wants the system to be fair and to prevent corruption. They do not want to reward businesses for unethical behavior. Businesses must have a fair shot at business and if one business is using bribes to hold on to money, then it puts all others at a disadvantage. Case Summary—Crosby v. National Foreign Trade Council This case deals with state power to enact trade legislation. The state of Massachusetts enacted a law that prevented trading with Burma. The U.S. Government also passed a law placing sanctions on the country. The National Foreign Trade Council sued, citing the fact that Massachusetts unconstitutionally infringed on the federal foreign-affairs power, violated the Foreign Commerce Clause, and was preempted by federal legislation. Two courts sided with the council, but Massachusetts appealed to the Supreme Court. The Court upheld the decisions, citing the Foreign Commerce Clause. Massachusetts cannot make a law that falls under the jurisdiction of the federal government. Case Summary—In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp. This case considers a claim by the Government of India (GOI) and several private class action plaintiffs (Indian citizens) against Union Carbide India Limited (UCIL) and the parent corporation, Union Carbide Corporation (UCC) for more than $1 billion following a disaster at a chemical plant operated by UCIL in 1984. A federal district court had granted UCC’s motion to dismiss on the ground that India (not the United States) was the appropriate forum. The U.S. Court of Appeals affirmed, and the case was heard in India rather than the United States. The U.S. Court of Appeals had decided the case should not be heard in the United States because India had a greater ease of access. The court also explained that the plant had been constructed and managed by Indians in India. Americans were rarely even on the property. The court also pointed out that many relevant documents were written in Hindi or other Indian languages. The Indian government regulated UCIL. India had considered the plant to be an Indian one, and the disaster to be an Indian problem. Suggested Answers to the Critical Thinking about the Law Questions 1. Dear Judge Mansfield: Before you decide whether to uphold the federal district court’s decision to grant UCC’s motion to dismiss, please review the facts of the case. If you do, you will see that UCC’s involvement in UCIL was extensive, and that the federal district court was incorrect in granting UCC’s motion to dismiss. First, UCC owns more than half the stock in UCIL. This is not “limited” involvement. Also, UCC provided a summary process design package for construction of the plant. Some of UCC’s technicians monitored the progress of UCIL in detailing the design and erecting the plant. Although most people who worked on the plant, then later in the plant, were Indian nationals, UCC has always controlled UCIL, even if UCIL carried out UCC’s plans. UCC’s involvement has been extensive and controlling. Thank you, and I trust you will overturn the decision of the federal district court. 2. No. An analogy is judged based on how similar or different one case is to another. The UCC case involved a plant owned primarily by an American Company, but owned and operated by Indians in India. The hypothetical involves a plant owned by Americans, operated in America, with foreigners (Germans) involved in the engineering. In the UCC case, Mansfield wrote about the convenience of having the trial in India, where records and witnesses were located. In the hypothetical, the records and all the witnesses except the German engineers would be in the United States. It would be more convenient to keep the hypothetical suit in the United States. The two cases can be compared, but when this is done, it can be seen that Judge Mansfield’s decision would not help the American company in the hypothetical scenario to avoid a lawsuit in the United States. 3. It would help if the “American” plant were owned in large part by a German company, if company records were written in German, if Germans were in charge of maintaining records, and many employees were German. Case Summary—Keller v. Central Bank of Nigeria This case focuses on the definition of a commercial activity under the Foreign Sovereign Immunities Act (FSIA). The court looks at how the Nigerian government acted, and considers whether a private party would behave the same way. Here, the court ruled in favor of an American sales representative, Keller (plaintiff). The court ruled that when a foreign government acts like a private player, the government’s acts are “commercial” under the FSIA. Suggested Answers to the Critical Thinking Questions 1. The most important facts related to the nature of the Nigerian government’s actions—whether they are similar to those of a private party, or whether they are traditional governmental acts. 2. The case would have had a different ending if the Nigerian government had been acting as a “market regulator.” Case Summary—Republic of the Philippines v. Ferdinand E. Marcos In this case, the Marcoses wanted a court of appeals to overturn a lower court’s injunction that precluded them from disposing of their assets except to pay attorney fees, and their living expenses. The Republic of the Philippines sought the injunction because it believed the Marcoses had stolen public money. The U.S. Circuit Court of Appeals failed to overturn the injunction, so the Plaintiff, Republic of the Philippines, won. Suggested Answers to the Critical Thinking about the Law Questions 1. A key ambiguity is the phrase “acts of state”. The ambiguity affects the reasoning because the outcome of the case might be different depending on whether the judge views the phrase “minimally” or “maximally”. 2. The Marcoses offered no evidence at all to support their classification of their acts as “acts of state”, and the burden was on them to provide this evidence. 3. It can be decided which norm is implicit in the Marcoses’ struggle against the preliminary injunction by process of elimination. Which ones seem inconsistent? The choices are: efficiency, freedom, security, and justice. Efficiency seems inconsistent. The Marcoses do not seem to seek to minimize costs. Justice also seems inconsistent. The injunction does not seem unfair (especially if they stole public money). They are either striving for freedom (e.g., “We should have the freedom to spend our money the way we want.”) or security (e.g., “We want to spend it here to protect our future interests.”) Answers to Review Questions 8-1. Although the common law and socialist law are both major families of law, they are very different. One difference is that common law is used in more countries than socialist law. Another difference is the purpose of the law and legal system. Socialist law is used to preserve the authority of the state over land and all means of production. Common law is used to settle disputes between private individuals and companies. 8-2. Trade (exporting or importing) is generally considered the least risky means of doing international business because there is little involvement with a foreign buyer or seller. 8-3. a. Expropriation is the risk companies take when they engage in international business, in which the host country government takes their private property for political or economic reasons. b. Doctrine of sovereign immunity is the risk which allows a government expropriating foreign-owned private property to claim that it is immune from the jurisdiction of courts in the owner’s country because it is a government rather than a private-sector entity. c. Act-of-state doctrine holds that each sovereign nation is bound to respect the independence of every other sovereign state, and that the courts of one nation will not sit in judgment on the acts of another done within its own sovereign territory. d. Arbitration clause is a clause in a contract that requires parties to resolve their disputes through arbitration rather than through litigation. e. Choice of forum clause is a clause included in some contracts that lets parties know what law will govern their dispute and what nation’s courts will be used. 8-4. The GATT Pact, which created the WTO, is important because it enforces a trade pact in which more than 140 nations agreed to reduce their tariffs by an average of one-third on most goods in the next decade. 8.5. Arbitration is preferred to litigation because it is often cheaper, faster, and arbitrators who understand the complexity of international business are available to resolve disputes. Answers to Review Problems 8-6. Royal Bed should bring suit according to the jurisdiction in Brazil, since contract mentions the Brazilian Civil Code as the law to be applied in the event of any dispute. Their contract is with the Brazilian manufacturer, so the dispute must be resolved according to terms set out in that contract. 8-7. X is not correct. If X wanted to require disputes to be resolved in the United States, X needed to change the terms of the contract with C, something X was free to do. 8-8. No, the U.S. court does not have jurisdiction to decide the dispute. The choice-of-forum clause says the dispute will be decided before the London Court of Justice. This clause should be enforced. The purpose of the clause is to provide certainty about where the dispute should be resolved. If Zapata wanted disputes resolved in the United States, the company should have chosen that forum and put their wishes in the contract. 8-9. The act-of-state doctrine defense holds that each sovereign nation is bound to respect the independence of every other sovereign state, and the courts of one nation will not sit in judgment on the acts of the courts of another nation done within that nation’s own sovereign territory. One exception is when the foreign government is acting in a commercial capacity. Here, OPEC will lose. OPEC is not a “sovereign nation”. Plus, it is engaging in commercial activity. 8-10. A variety of factors can be applied to decide whose law should apply. Ask students to relate the Union Carbide facts to this case. Ordinarily, Dr. Pirkey would be bound by the terms of the agreement he made. It will be a challenge to use political factors to change the terms of the agreement. 8-11. The United States will say that as the parent of the subsidiary, the laws of the United States should apply, and it was OK to order the subsidiary to stop delivery of the compressors. Ask students to generate a list of questions about the parent and subsidiary companies that will help them answer this question. Answers to Case Problems 8-12. The court ruled that the commercial activity exception to sovereign immunity did apply. In this case, the sovereign defendants stepped into the shoes of a financially troubled “private player,” and, consequently, the defendants’ guarantee of the underlying material contract was commercial activity under the FSIA. Defendants’ motion to dismiss is denied. 8-13. The Court did rule in DaimlerChrysler Corp.’s favor in granting a partial duty exemption. This is because painting is both decorative and preventative, regarding corrosion and rust. Because painting is an ambiguous concept in reference to the statute, the Court found that it does qualify. It can be used for practical purposes that help maintain the quality of the vehicle. The levy was wrong. 8-14. No. The court ruled that the manufacturer’s sample and small-quantity home market sales were within the ordinary course of trade. The manufacturer was not entitled to an adjustment. Thinking Critically about Relevant Legal Issues 1. One could argue that as long as she was hired in the United States and the United States regulated the company, she could file a claim in the United States. In this case, it seems as though she was hired as a U.S. citizen and therefore has the rights of all U.S. citizens. Because the company does business in the United States and since she was hired in the United States and then transferred abroad, she can file a claim. The ethical issues would center on a discussion dealing with the legality of her termination. Chapter 9 The Law of Contracts and Sales—I Introduction Chapter Nine addresses the following questions: • How can we define and classify contract law? • What are the elements of a legally valid contract? • Which contracts must be in writing to be enforceable? • What is the parol evidence rule? • What are third party beneficiary contracts and assignment of rights? Chapter Nine is significant because business managers work with contracts regularly. They need to understand the basics of contract law so they will understand their legal obligations. Also, they need to know how to protect their own business interests through the use of contracts. Achieving Teaching Excellence Encouraging Students to Interact with Peers in Class Chapter Nine continues with the Teaching Excellence theme of improving what happens in the classroom. In addition to focusing on teacher–student interaction in class, this manual encourages instructors to focus on student–student classroom interactions as one way to improve class discussion. For some instructors, this section will serve as a reminder. Instructors know that they could improve students’ intellectual development through carefully planned exercises that ask students to interact with their peers. Yet, it is difficult to follow through and encourage this kind of classroom exchange. It is difficult because the “muddle” increases even more when students interact with one another. Instructors can control the discussion even less. They need more skill to encourage student–student exchanges that are worthwhile. Newer teachers might be reluctant to try techniques that encourage student–student interactions. If questions are carefully designed, this type of interaction can be exciting and rewarding to both the instructor and their students. Look at the following questions that would promote student–student interactions, but would probably not be very effective: 1. “Josette, what did you think of Paul’s response to question six?” Most students will say, “Paul’s response was great.” They do not want to evaluate their peers. Even worse, if you have not encouraged your students to listen to one another, they are likely to respond, “Could Paul repeat what he said?” 2. “Samantha, discuss with Devon the principle of estoppel.” This question is too broad. Instructors probably don’t even want to hear Samantha chat with Devon about estoppel. The class would be more interested in a discussion that requires Samantha to be more precise. The following questions would probably be more effective: 1. “Tim, after listening to Ian’s comments about the majority decision in the Sindell case, can one identify which ethical norm Ian prefers?” A good follow-up question might be, “Does Ian prefer the same ethical norm the majority decision prefers?” 2. “Chauntee, Yukiko has just presented three reasons she agrees with the court in the Harris case. Which of her reasons seems the strongest? Why?” 3. After instructors have trained their class well, they can ask a riskier question. After they know it is okay to make frequent mistakes, and that the classroom is a place to work on material (not quiz on the material), instructors can ask a question such as this, “Jamie, what is flawed about the argument Chris just made about reforming the product liability system?” Notice that the better questions encourage higher-order thinking, only between students rather than between professor and student. The questions also help instructors find out what students are learning, although the students are not interacting directly with the instructor. Instructors must plan questions carefully. The “muddle” this questioning creates is productive muddle. Try encouraging students to interact with one another in class! If instructors do, they’ll be taking another step toward Achieving Teaching Excellence. Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview It is a fundamental requirement of a free-enterprise economy that entities in the private sector and at all levels of government be able to enter into agreements that are enforceable by courts of law. Without the assurance that business agreements are legally enforceable, everyday commercial dealings would be difficult to carry out. Contract law has evolved to provide enterprises with the predictability and security they need to flourish and to produce quality products. This chapter begins with a definition and classification of contract law. It analyzes the six elements of a contract and then explains which contracts must be in writing in order to be enforceable. The parol evidence rule, the nature of third-party beneficiary contracts and the assignment of rights completes Chapter 9. This edition of the book continues the second edition’s split of the contracts and sales material into two chapters. This split allows students to consider the finer points of laws that govern contracts and sales. In both Chapters Nine and Ten of the seventh edition, students will learn important principles from the cases. The authors did a great job of finding unusually intriguing contract law cases. Instructors will want to spend time on this chapter in class. Most of the legal principles this chapter considers are straightforward, so instructors can move quickly through the chapter. The discussion questions encourage instructors to work on some parts of the chapter more than others. Topic Outline I. Definition, Sources, and Classifications of Contract Law A. Definition B. Sources of Contract Law Case Law Uniform Commercial Code C. Classifications of Contracts Express and Implied Contracts Fox v. Mountain West Electric Unilateral and Bilateral Contracts Audito v. City of Providence Void, Voidable, and Valid Contracts Executed and Executory Contracts Quasi-Contract II. Elements of a Legal Contract A. Legal Offer Baer v. Chase Methods of Termination of an Offer Rejection by the Offeree Revocation by the Offeror B. Legal Acceptance Intent to Accept Communication of Acceptance The Private Movie Company, Inc. v. Pamela Lee Anderson et al. Satisfying, or “Mirroring,” the Terms of the Offer Internet and E-Contracts: Acceptance Online C. Consideration Adequacy of Consideration Preexisting Duty Rule Promises Enforceable without Consideration Liquidated and Unliquidated Debts D. Genuine Assent Fraud Duress Stambovsky v. Ackley and Ellis Realty Undue Influence Mistake E. Competent Parties Minors Insanity Intoxication G. Legal Object Statutory Law Case Law Moore v. Midwest Distribution, Inc. III. Contracts that Must Be in Writing A. Contracts for the Sale of an Interest in Land B. Contracts to Pay the Debts of Another C. Contracts Not Performable in One Year D. Sale of Goods of $500 or More Iacono v. Lyons E. Nonbusiness Contracts IV. Parol Evidence Rule V. Third-Party Beneficiary Contracts and Assignment of Rights A. Types of Third-Party Beneficiary Contracts B. Assignment of Rights VI. Summary Discussion Questions for Chapter Nine Teaching Excellence Reminder: Use follow-up questions that encourage students to interact with their peers! 1. Explain relationships between express contracts and implied contracts. An express contract is an exchange, oral or written, which expresses promises between parties that are enforceable in a court of law. An implied contract is one established by the conduct of a party rather than by his or her words. One relationship between the two is that the parties to an express contract create less confusion because the contract is stated, either orally or in writing. Implied contracts are more ambiguous. People are likely to disagree about what a party’s behavior suggested he or she should be willing to do under an implied contract. 2. Explain relationships between unilateral contracts and bilateral contracts. A unilateral contract is an exchange of a promise for an act. A bilateral contract involves the exchange of one promise for another promise. Thus, they are different in that promises are exchanged for something different—either an act (unilateral) or promise (bilateral). 3. Explain why someone might think this statement is true: A quasi-contract does not meet the general definition of a contract. A quasi-contract is an equitable remedy. It is a court imposed agreement to prevent unjust enrichment when the parties have really not agreed to an enforceable agreement. Quasi-contract remedies are imposed when the agreement does not meet the general definition of a contract, and the result is inequitable. 4. Of all the elements of a legal contract, which ones probably trigger the most legal disputes? Which ones are unlikely to be the focus of many legal disputes? Explain. This question does not have one right answer. Let students debate this one. Have them look at the cases in the chapter. Have them discuss the elements that triggered the lawsuits in the book. They can look at how typical each lawsuit looks when the facts are considered. 5. Explain why someone might think this statement is true: The Statute of Frauds prevents lawsuits. The Statute of Frauds prevents lawsuits because it requires certain contracts to be in writing, which makes it less likely that parties to the contract will argue about the terms of the agreement. 6. Explain why someone might think this statement is true: The parol evidence rule makes people more careful about writing contracts. The parol evidence rule says that when parties have executed a written agreement, which is complete on its face, oral agreement made prior to or at the same time as the written agreement that alters, varies, or contradicts it, will not be allowed to be introduced in evidence by most state courts. This rule means people cannot go back and explain what they meant, but did not write, in the contract. What is on paper is what the court will rely on. That makes people more careful about the precise terms of the agreement. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. What would society gain by holding all people to their agreements? The ethical norm of security would be especially important to someone who wanted to hold people to their agreements. One definition of security is to be safe from those wishing to interfere with an individual’s rights. If people know that their agreements will be held, they do not have to worry about surprise situations in which someone tries to change the terms of the deal, thereby interfering with their rights. 2. The ethical norm that could make a business seek to encourage courts to be more flexible in enforcing agreements is efficiency. One definition of efficiency is to minimize costs. Sometimes a business might want to change the terms of an agreement to minimize costs. For instance, consider that an auto manufacturer agreed to purchase a certain number of parts at a certain price. Then the new government regulations made the manufacturer want to cancel the order for the parts because they were not consistent with new federal regulations. In such cases, to minimize costs, the business would want courts to be flexible. Case Summary—Fox v. Mountain West Electric This case is about the breach of a contract for specific services. Fox was contracted by MWE to help build fire alarms for an independent company. Throughout the project, many changes were made between MWE and the independent company. Fox and MWE disagreed on the implementation of the new changes. There were disagreements regarding the compensation for the project and Fox ultimately left after shipping the last parts to MWE, who finished the project with another company. Fox filed a claim to receive compensation for the parts shipped and used, but never paid for. MWE counterclaimed that Fox breached the original contract. The Court ruled that the contract stood because that just because prices kept changing, that did not mean that the original contract between Fox and MWE was invalid. The Court found in favor of MWE. Suggested Answers to Critical Thinking about the Law Questions 1. The issue in this case is compensation. Because the orders from the original company kept changing, Fox’s fees were also changed. 2. If there was a clear meeting of the minds, then MWE would have to hold up their end of the agreement, namely pay for all parts and equipment provided by Fox. But because there was no meeting, MWE was not obligated because Fox was the one to violate the original contract. Case Summary—Audito v. The City of Providence The City of Providence hired a new class of police officers after all of them took a certain numbers tests and were enrolled in the Police Academy. Those who scored the best were offered a place in the academy in the form of a letter that stated that it was an offer of enrollment. However, the new police chief changed the hiring policy that caused thirteen people, including Audito to no longer qualify. The Court ruled that those who had been sent the letter had to be allowed to take the medical and psychological tests if they accepted because the letter was a genuine offer of enrollment. It did not guarantee spots; it only was to give those who received it an opportunity to attend the Academy. The federal district court ruled in favor of Audito et al. Suggested Answers to Critical Thinking about the Law Questions 1. There must be fairness to the system. If under the old system, some people qualified but not under the new one, they did not apply under the new system. There needs to be consistency in contracts, so one party cannot change the rules whenever it is beneficial. 2. Here, those who applied under the old system were held to those standards and expected certain things. Those cannot be changed when there is a group who is expecting the old system. Also, once a contract is offered, it cannot be rescinded without good cause. In this case, there was no good cause to rescind the contract of enrollment. Case Summary—Baer v. Chase This case is in the book to show to the issue of implied-in-fact contract claims between Baer and Chase. Chase, the creator of ‘The Sopranos,’ met Urbancyk and Baer on several occasions to discuss about the concept of the show, which he had in mind. There were several occasions where chase had mentioned of paying compensation to Baer for his services. However, he had rejected all these offers stating that he would accept compensation when the show succeeded. There was no discussion or agreement as to the meaning of “success” of The Sopranos. The district court rejected Baer’s claim to recover under a theory of implied-in-fact contract as it the agreement was very vague and this unenforceable. Case Summary—The Private Movie Company, Inc. v. Pamela Lee Anderson This case focused on whether an agreement had been reached between The Private Movie Company and Pamela Lee Anderson for her to star in a movie called, “Hello, She Lied.” The issue was whether a deal had been made when the parties allegedly had not agreed on certain contract provisions related to nudity and the sexual content of the script. The court looked at issues related to oral and written contracts, especially the consent of the parties. The court said that consent must be mutual. A change in terms of the offer means a rejection of the offer. Also at issue was whether Pamela Lee’s agent/manager could bargain for her. The court ruled in Pamela Lee Anderson’s favor by deciding The Private Movie Company did not prove by a preponderance of the evidence that Lee entered into an oral or written agreement to perform in the movie. Suggested Answers to Critical Thinking about the Law Questions 1. Here, one item that was especially important was the concept of consent. The court said that, in determining whether there was mutual consent, it considers the words and conduct of the parties. Additionally, it considers the circumstances under which the words are used and the conduct occurs. 2. Here, the court ruled that Lee had not entered into an oral or written contract to perform in the movie. Case Summary—Stambovsky v. Ackley and Ellis Realty This case is in the book to show an action for fraud. The plaintiff, Stambovsky, brought an action for rescission of a contract for the sale of a house. He argued that the reputation of the house (it was possessed by poltergeists) impaired the present value of the property and its resale value. He argued that the failure of the defendants to disclose that the house was haunted was fraudulent. The defendants argued that the principle of caveat emptor applied, and that they had no duty to disclose nonmaterial matter. The court ruled in favor of Stambovsky. In an amusing opinion, they argued that under the unique facts of the case, the purchaser was entitled to equitable relief. The dissent, which seemed to follow the law more carefully, disagreed and thought the action by the plaintiff should be dismissed. Suggested Answers to Critical Thinking about the Law Questions 1. The judge writing the majority opinion prefers the ethical norm of security. This judge wants Stambovsky to be free from psychological harms caused by a haunted house. The defendants were obligated to let Stambovsky know about the ghosts. 2. The dissenting judge prefers the ethical norm of freedom—the defendants should not have to rely on others’ opinions about what they need to disclose to buyers. 3. One key piece of missing information is whether the house is haunted. The potential damage to Stambovsky has not been raised in the context of whether the ghosts were friendly or not. Case Summary—Moore v. Midwest Distribution, Inc. This case considers the definition of “legal object.” In particular, the case focuses on whether it is reasonable to enforce a contract with a non-compete clause. In this case, the court refused to enforce a contract when it precluded Moore from working in nine states. Case Summary—Iacono v. Lyons This case deals with contracts that cannot be performed within one year and for goods worth more than $500. Iacono (plaintiff) and Lyons (defendant) went to Las Vegas and agreed to share winnings and losses 50/50. During the course of the night, after the plaintiff begged the defendant to stay, the defendant hit a jackpot of almost $2,000,000 on a machine that the defendant fed the coin in. The defendant proceeded to keep the winning and was sued. The suit was dismissed because the money would not be paid by the casino, in full, within a year. The Court uses the analogy that a smaller winning would have been split because it would have been paid in one year. However, this contract could not be completed because the money would not be received within one year. Answers to Review Questions 9-1. A contract is generally defined as a legally enforceable exchange of promises or an exchange of a promise for an act. 9-2. A void contract is one that at its formation has an illegal object or serious defects, whereas, a voidable contract is one in which one of the parties to a contract has the option of either withdrawing from the contract or enforcing it. An executed contract is one in which all the terms have been performed, whereas an executory contract is one in which all the terms have not been completed or performed. Unilateral is defined as an exchange of a promise for an act, whereas a bilateral contract involves the exchange of one promise for another promise. 9-3. For an acceptance to be valid, the offeree must show an intent to accept, it must be communicated by proper means, and it must satisfy or mirror the terms of the offer. 9-4. For an offer to be valid, the offer must show objective intent to enter into the contract, be definite, and be communicated to the offeree. 9-5. An offer can be terminated in the following ways: • Lapse of time • Revocation of the offer by the offeror before acceptance by the offeree • Rejection by the offeree • Death of the offeror or offeree • Destruction of the subject matter of the offer 9-6. A liquidated debt exists when there is no dispute about the amount or other terms of the debt. An unliquidated debt exists when there is a dispute between the parties as to the amount owed by the debtor. Answers to Review Problems 9-7 The fact that Catani is a minor should allow him to disaffirm. However, if Catani ratified the agreement by failing to disaffirm it before age 18 or shortly thereafter, he will not be allowed to disaffirm. The key here will be whether Catani ratified the agreement. 9-8. The duress must be felt when a person is signing the agreement, not later. 9-9. Osborne won. There was detriment to him. He agreed not to work for anyone else. That would count as consideration. 10-10. In order to prove fraud more facts are required. Fisher would have to show an intentional misrepresentation on Division West’s part. Also, the fact that Fisher is inexperienced will help his case. Still, it is very difficult to prove fraud. 9-11. The court upheld the agreement by finding that consideration existed to support the contract. “Any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise.” Abandoning tobacco, swearing, and playing cards or billiards for money were sufficient to show consideration. Answers to Case Problems 9-12. The promissory note did not have to be paid because it was signed under duress. Daigle was going through a divorce and in the middle of the trial; his attorney presented him with a promissory note for payment of fees accrued. Because the attorney told his client that if he did not sign, he would have to find a new lawyer or continue by himself, he thought he had no choice. Therefore, he was forced to sign it and is invalid because of duress. 9-13. The company and its employees had a unilateral agreement. A unilateral contract is defined as an exchange of a promise for an act. The company promised its employees 5 percent of the value of the sale or merger as long as the employees acted by remaining with the firm. This case is not a bilateral agreement because a bilateral contract is an exchange of a promise for another promise. The employees were not required to promise their allegiance to the company, they were expected to act by staying with the company. Therefore, the two parties had a unilateral agreement. 9-14. The Court found in favor of the New York University Medical Center for two major reasons. First, the Scalisi parents waited more than three and a half years before they brought an action against the Medical Center. By saying the Medical Center breached its contract, the Scalisi family is, in essence, alleging medical malpractice. A medical malpractice action’s statute of limitation is two and a half years, making the Scalisi family one year late in their allegation. Second, under the parol evidence rule, the written contract is the primary legal document between the Scalisi family and the Medical Center, not the oral agreement. The written document stated that there was no guarantee against autism and, therefore, the oral agreement had no standing in court. 9-15. The appellant court reversed the trial court’s ruling and found in favor of Locke. The appellant court found that Locke was an intended third-party beneficiary of the contract because the contract’s language suggested that a third party was anticipated. Police protection was provided to help with the administration and supervision of the games and umpires are a part of that administration and supervision. Therefore, Locke was protected by the contract and because no police protection was present when he was injured, the court found in his favor. 9-16. The Court found that there was no breach of contract because the NCAA was not arbitrary in the application of its rules. Bloom was a third-party beneficiary because the media deals were not vital to his skiing career. He would only financially benefit, which goes against NCAA rules. Thinking Critically about Relevant Legal Issues 1. The issue here is whether a contract must be in writing and if it is not, whether both parties were in agreement of what the icon meant. 2. The language of the agreement is most ambiguous here. There is no clear-cut way to lay out an agreement. Article 2 deals with the sale of goods. There needs to be an agreement between the parties, but the medium of that agreement is not specifically spelled out. 3. There seems to be no account of this e-mail system. To make a full finding, one must find out what this system entails and if it is used elsewhere. More information is needed about sending contracts via e-mail. 4. Douglas would only need to prove that Mega widget knew what the icon meant. If both had accepted it as a way to agree to contracts, then Mega widget has no case. Douglas could show that this system had been used before and understood as a binding agreement before. As long as there was a meeting of the minds, Douglas would win the case. Chapter 10 The Law of Contracts and Sales—II Introduction Chapter Ten addresses the following questions: • How are contracts discharged? • What are remedies for breaching contracts? • What are e-contracts? • How do global trends affect contract law? Chapter Ten is a continuation of Chapter Ten’s topic of contract law. This chapter outlines what happens at the end of the contractual relationship. Achieving Teaching Excellence Peer Observation of Teaching Peer observation of teaching could help instructors get an outside perspective on what is happening in their classroom. In a recent article, information about peer observation of teaching as a true developmental opportunity is provided. Before instructors use the idea of peer observation of teaching, it should be made sure that they set the stage for success by reviewing the context in which peer evaluation will take place. For instance, invite a colleague whom the instructor can trust and respect to provide feedback on their classroom performance. Second, make sure that the observation will be developmental, rather than evaluative. Third, make sure the observer is as prepared as the students are for the class session. Finally, the observer should be given specific direction about what the instructor wants them to look for—for example, whether the instructor is asking higher-order thinking questions, whether their wait time is appropriate, or whether their students are interacting with one another during class time. The person observing the instructor should have some skill in providing feedback. Helpful feedback is feedback the receiver understands, is willing to accept, and is able to change. Once the observer gives them feedback, they should refrain from being defensive. Instructors should also be assertive. They should ask for specific examples if they are unclear about the observer’s comments. This idea of peer observation is most likely to help instructors if they work in an environment that encourages freedom, innovation, and cooperation. If so, peer observation will help instructors work toward Teaching Excellence. References • Anthony J. Mento and Andrea Giampetro-Meyer, “Peer Observation of Teaching as a True Developmental Opportunity” (submitted to COLLEGE TEACHING). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Chapter Ten is significant because it continues with Chapter Nine’s theme of explaining the importance of making sure contracts are enforceable. In Chapter Ten, the book moves beyond making and interpreting contracts and considers how contracts are discharged and what happens when someone breaches a contract. The chapter also considers certain sections of the Uniform Commercial Code that affect those who operate in the legal environment of business. E-contracts are highlighted and the concepts underlying them are distinguished from traditional contract principles. This chapter also addresses the international dimensions of contracts and sales agreements. Topic Outline I. Methods of Discharging a Contract A. Discharge by Performance Plante v. Jacobs Uniform Commercial Code and Performance and Convention on International Sale of Goods B. Discharge by Mutual Agreement C. Discharge by Conditions Precedent and Subsequent Condition Precedent Architectural Systems, Inc. v. Gilbane Building Co. Condition Subsequent D. Discharge by Impossibility of Performance E. Discharge by Commercial Impracticability F. Contracts with the Government and the Sovereign Acts Doctrine Facto v. Pantagis II. Remedies for a Breach of Contract A. Monetary Damages (“Legal” Remedies) Compensatory Damages Punitive Damages Nominal Damages Liquidated Damages Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr. B. Equitable Remedies Rescission Reformation Specific Performance Injunctions C. Remedies for Breach of a Sales Contract (Goods) Remedies for the Seller Remedies for the Buyer Fitl v. Strek III. E-Contracts A. E-Signatures B. The Uniform Computer Information Transaction Act Scope of the UCITA The Business Community: Criticisms of the UCITA IV. Global Dimensions of Contracts and Sales Law V. Summary Discussion Questions for Chapter Ten 1. How is the idea of substantial performance related to the idea of conforming goods? The idea of substantial performance makes it clear that contracts can be discharged even though they have not been fully completed. Substantial performance allows the contract to be discharged as long as nearly all the terms have been completed, there was an honest effort to complete the terms, and there was no willful departure from the terms. This doctrine does not apply to the sale of goods. Instead, courts require the seller to deliver conforming goods. This standard is more demanding than a substantial performance standard. If the goods or tender of delivery do not conform to the contract in any respect, the buyer may reject all the goods, accept all that are tendered, or accept any number of units the buyer chooses to, and reject the rest. 2. Why does it matter that discharge by impossibility of performance is judged by an objective standard? It matters because it means an individual can discharge a contract if he or she thinks it is impossible to perform the terms of the agreement. If a subjective standard was used, many more people would try to justify their nonperformance. 3. Explain relationships between monetary damages and equitable remedies. Monetary damages include compensatory, punitive, nominal, and liquidated damages. Equitable remedies include rescission, reformation, specific performance, and injunction. One relationship between the two is that courts impose equitable remedies only when dollar damages are inadequate or impracticable. 4. Evaluate this statement: If you sued someone, you would rather get nominal damages than punitive damages. This statement is inadequate because an individual would prefer receiving punitive damages. Nominal damages are usually only $1. Punitive damages can be thousands, depending on how willful, reckless, wanton, or gross someone’s behavior was in a specific situation. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law 1. Here, in the ruling for Jennifer, the court probably prefers the ethical norm of efficiency. The judge does not want to waste resources. If the judge rules for Juan, Jennifer will not be able to use the tickets. 2. If Juan knew Jennifer was allergic to sunlight and he knew the concert was outside, he induced her unfairly. That would make the judge sympathetic to Jennifer. 3. Ambiguous words and phrases that might be troublesome are: outdoors, afternoon, and extended periods of time. If the concert is at 5 pm, and the sun goes down at 6 pm, or there is a partial covering of the concert area, then Juan will have an argument that Jennifer could attend the concert and cannot avoid the contract. Case Summary—Plante v. Jacobs Plante v. Jacobs started when a contractor made mistakes in building a house for Jacobs. The Jacobs refused to pay the balance due to Plante because they were concerned about the misplacement of a wall that caused their living room to be smaller than they wanted. Plante also conceded he failed to finish minor parts of the job. The Jacobs family argued there was a material breach of the contract and no substantial performance. The trial court ruled for Plante, and the appeals court affirmed. The court said that although defendants received a house they were dissatisfied with in many respects, the trial court was not in error in finding the contract was substantially performed. Suggested Answers to Critical Thinking about the Law Questions 1. The diminished-value rule was preferred by the court instead of the cost-of-replacement rule as there was no evidence that the defendants had demanded or requested the replacement of the wall that was specified during the course. Tearing down the wall and rebuilding it would cause additional damage that would lead to economic waste which is unreasonable and unjustified. 2. The court reasoned that performance of a contract didn’t necessarily mean that each and every detail had to be performed and something less than perfect would be accepted. However, the essence of the contract has to be maintained which was carried out in this case. Additionally, there were no detailed construction plans that were made of the house. Therefore, this cannot be viewed as binding terms or conditions. The ethical norm of efficiency underlies the court’s preference. Case Summary—Architectural Systems, Inc. v. Gilbane Building Co. This case shows discharge of a contract by a condition precedent. The court has no sympathy for ASI when it signs an agreement that says Gilbane is not obligated to pay ASI until it receives payment by the owner. ASI should not have agreed to the condition precedent. Case Summary—Facto v. Pantagis This case focuses on the concept of discharge by impossibility of performance. The appellant court ruled that the defendant, Snuffy Pantagis Enterprises, Inc. was not responsible for performance when there was a power failure during the Facto wedding. However, the court also ruled that the power failure also relieved the Factos from their obligation to pay for the entire contract price of the reception. Case Summary—Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr. This case is about enforcing a contract. Klyap was hired by the school district to teach middle school and to oversee the sports program. He signed a contract for the 1998–1999 school year with a liquidation clause for $4,100. About two weeks before the school year, Klyap resigned. The district was able to find a new, less experienced teacher. They sued Klyap to enforce the liquidation clause. The Court ruled in favor of the school because the clause was not for too much money and because of the resignation, the school was put at an undue hardship. Therefore, the clause was enforceable. Suggested Answers to Critical Thinking about the Law Questions 1. Klyap would have to prove that the liquidation clause was unfair and that he did not know the terms of its enforcement. The contract could have also been proven to violate the laws of the land, and therefore could not be enforceable. 2. A clause for 40 percent could have been seen as exorbitant and unreasonable. There would be no way someone could pay 40 percent of his or her salary for breaching an employment contract. It would also be unwise for the school because they would have a harder time hiring employees. Many teachers could be turned off by that clause because sometimes better opportunities arise. Many teachers would not sign the contract and so the school would not have enough teachers. Case Summary—Fitl v. Strek This case deals with recovery of damages for misrepresented merchandise. Strek, a baseball card seller, sold Fitl what he claimed to be a near-mint condition Mickey Mantle Topps basketball card for $17,750. Fitl put the card in a safety deposit box. Later, wanting to sell it, it was appraised as almost worthless because it had been doctored. A second opinion confirmed that. Fitl sued and Strek claimed that there was a window of seven days to one month to return the card. The Court found in favor of Fitl, citing that two years is a reasonable length of time to return the card for the money back because its worth had been misrepresented. Answers to Review Questions 10-1. Courts consider the following three standards in determining lost profits: • The plaintiff-buyer must show it was reasonably foreseen by the defendant-seller that if it did not deliver the promised goods, the buyer would have no alternative source and, thus lose profits. • The plaintiff-buyer must show the amount of the damages with reasonable certainty; the buyer cannot just speculate about what this amount is. • The plaintiff-buyer must show that it did everything possible to mitigate the damages—that is, it looked for other possible sources of the goods. 10-2. The CISG is the Convention on Contracts for the International Sale of Goods. It is important because it strives to provide uniformity in international transactions. 10-3. Compensatory damages are monetary damages awarded for a breach of contract that results in higher costs or lost profits for the injured party. The purpose of compensatory damages is to place the injured (nonbreaching) party to a contract in the position in which that party would have been in had the terms of the contract been performed. 10-4. Rescission is defined as the canceling of a contract. Plaintiffs who wish to be put back in the position they were in before entering into the contract often seek rescission. 10-5. Mitigation of damages insists that a person (even though they have not breached a contract) cannot sit by and watch the person who breached the contract suffer unnecessarily. As a matter of public policy people do not want to promote strategies rooted in the idea of revenge. 10-6. E-contracts should include the following: • Remedies that are available to the buyer if any of the goods contracted for are defective, • A statement of the referral policy of the seller. • A statement of how the goods are to be paid for. • A forum selection clause, which indicates the location and/or forum where a dispute will be settled should one arise. • Disclaimer-of-liability provision by the seller for certain uses of a good sold. • The manner in which an offer can be accepted (e.g., by “click on”). Similarly, an acceptance may be made under traditional principles or by the provisions of article 2 of the UCC. • Click-on terms that indicate agreement to the terms outlined in an offer. • Browse-wrap terms that are enforceable (or binding) without the offeree’s active consent, as with click-on terms. Answers to Review Problems 10-7. According to the Uniform Commercial Code for a sale or lease to take place the seller or lessee has to accept and then pay for the conforming goods. However, the buyer would have to give a notice to the seller in case the goods are defective and give them time to cure the defect. In this case, the seller was not given the time to rectify the problem which made the plaintiffs’ case weak, and they would be likely to lose the case. 10-8. The plaintiff’s motion to dismiss all claims was denied by the court. The court stated that it could not determine whether Internet Archive was aware of copying the defendant’s site and thus accepting the contract as it couldn’t determine whether an individual or a web crawler was responsible for copying the site. However, Internet Archive promptly removed the content when the defendant requested them to do so. Even then the court dismissed the claim that the defendant was unaware of the terms and conditions, and copyright infringement. 10-9. In case, McDonald decided to keep all five hundred pairs of shoes then she could demand compensatory damages. This way the defendant would be able to cover the damages that were incurred. However, they would have to establish the amount of damages with certainty without speculating about this amount. 10-10. Kirk did make repeated efforts to get in touch with Doolittle prior to the shipment time. Apart from that he had sent Doolittle correspondence regarding this in writing, which Doolittle did not respond to. Doolittle probably lost the case against Kirk as he did not give the seller a reasonable opportunity to learn the facts that were necessary for the negotiation. 10-11 Dr. J probably won. He might have to pay some sort of damages to the Squires, but a court would not make him play for the Squires. 10-12. Regarding impossibility of performance, an objective standard would be applied. Students could ask whether “no person or company could legally or physically perform the contract.” Using an objective standard, it is likely TWA could make the payments, even if the payments were made from other streams of revenue. Commercial impracticability will work if performance is impracticable because of unreasonable expense, injury, or loss to one party. Answers to Case Problems 10-13. American Brass can argue that the Westmin Corporation had assured them that they would test each shipment before selling it to Nufeeds. Apart from that they could also argue that they were experts in animal feed. Another argument that they could use in their defense was the fact that Westmin bough dust from other sources as well. American Brass would probably win the case. 10-14. Shah lost the case because the termination was not a result of the employer, but rather was caused by Shah’s incompetence. He took a 10-week vacation and after returning, he did not do his job. Because of this, Shah did not uphold his side of the contract and was terminated because he breached the contract, not the employer. 10-15. The court ruled that the liquidation clause was not a penalty, but rather to ensure that the payments were made. Because the lessors gave Moore another chance to pay off the debt, they made a good faith effort to allow for payment. Moore signed the contract knowing the terms and therefore was ordered to be held to those terms. 10-16. SoftMan would prevail in this case as it did not assent to the EULA due to which its terms and conditions weren’t binding. Additionally, Adobe would have to establish that it suffered from irreparable injury. The court denied the application for preliminary injunction by Adobe. 10-17. Bechtel is correct. West made no effort to find comparable employment. Consequently, as a matter of law, he failed to mitigate his damages. Thinking Critically about Relevant Legal Issues 1. The conclusion is that punitive damages must be awarded in breach of contract cases in order to deter large companies from breaching contracts and paying relatively small amounts. The reasons given are that there are too many breach of contract cases and that large companies can just swallow the costs. The author also cites a survey of 100 first-year business students. 2. There is no source for this survey. It is not known where it is from or what students were asked. It is, therefore, not reliable. 3. There needs to be more details about breach of contract cases to see if there are multiple businesses or just a few. Students would also need to see the outcomes to see if the businesses are made to pay a large sum of money. Lastly, students would need to know more about the survey. 4. The opposition would argue that many times contracts need to be breached for business reasons, especially if a business can no longer afford to finish the contract. It could also be argued that the judge has no authority to dole out punitive damages. It would be very hard to come up with an amount that is justifiable if the contract breach was for a relatively small amount of money. Chapter 11 The Law of Torts Introduction Chapter Eleven addresses these questions: • Why is tort law important to managers? • What are the goals of tort law? • What kinds of damages can plaintiffs receive in tort cases? • How can we classify torts? • What are the legal definitions of each of the major torts? • What are the global dimensions of tort law? Chapter Eleven is significant because three out of every four civil jury trials involves tort law. Tort law is one of the areas of law that managers need to understand the most. Managers need to know how to engage in behavior that prevents lawsuits. They also need to know how to minimize the damages they will have to pay if they are involved in a tort case. Managers need to know the definitions of tort law before they become involved in a civil action. Achieving Teaching Excellence Weak-Sense and Strong-Sense Critical Thinking This chapter of the Instructor’s Manual explains weak-sense and strong-sense critical thinking. These ideas are important because instructors need to encourage their students to become strong-sense critical thinkers. If students become strong-sense critical thinkers, they will develop opinions that are based upon the best available evidence. If instructors can encourage their students to become strong-sense critical thinkers, they will be one-step closer to achieving Teaching Excellence. M. Neil Browne and Stuart M. Keeley explain weak-sense and strong-sense critical thinking in their book, Asking the Right Questions. Specifically, they explain Professor Richard Paul’s distinction between these two kinds of critical thinking. Browne and Keeley explain that critical thinking can be used to either defend instructors’ initial beliefs, or evaluate and revise their initial beliefs. People who engage in critical thinking to defend their initial beliefs are engaging in weak-sense critical thinking. They explain that “[t]o use critical thinking in this manner is to be unconcerned with moving toward truth or virtue. The purpose of weak-sense critical thinking is to resist and annihilate opinions and reasoning different from yours.” Professors Browne, Keeley, and Paul are concerned about weak-sense critical thinking because its purpose is to achieve victory over those who disagree with instructors. Weak-sense critical thinking “ruins the potentially humane and progressive aspects of critical thinking.” Strong-sense critical thinking is different. It requires people to apply critical thinking skills to all claims, including their own. Evaluating one’s own claims protects them against self-deception and conformity. Browne and Keeley explain that strong-sense critical thinking does not necessarily force instructors to give up their initial beliefs. “[I]t can provide a basis for strengthening those very beliefs, for understanding through reflection why they do make sense.” Instructors and their students will be particularly proud of a particular opinion if it is selected from alternative opinions that have been understood and evaluated. In Chapter Eleven, instructors should explain to students the difference between weak-sense and strong-sense critical thinking. Tell them why the distinction matters. Give them exercises that encourage them to use critical thinking skills to reconsider their initial beliefs about a particular topic. Encourage them to consider alternative perspectives before stating their opinion on a controversial issue. References • M. Neil Browne & Stuart M. Keeley, ASKING THE RIGHT QUESTIONS: A GUIDE TO CRITICAL THINKING 8 (1994). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Although a given set of actions may constitute a crime or a wrong against the state and thus may give rise to a criminal prosecution, the same set of actions may also constitute a tort, a civil wrong that gives the injured party the right to bring a lawsuit against the wrongdoer to recover compensation for the injuries. A tort is defined as an injury to another’s person or property. This chapter and the next one on product liability were especially interesting and fun for students when the first edition of this text was used. The students were especially interested in debating whether and how reforms should be made in the legal system in personal injury cases. Many of the students had strong opinions, so it was challenging to encourage them to consider alternative perspectives on this topic. Because many think it would be a good idea to reform the legal system, these chapters were great ones for encouraging students to engage in strong-sense critical thinking. In terms of the legal content, the tort chapter was one of the easier chapters for students to understand. For this reason, when instructors teach this lesson more class time can be used on critical thinking exercises. The discussion questions that follow the Topic Outline come from throughout the chapter because the chapter was consistent in terms of difficulty. Topic Outline I. The Goals of Tort Law II. Damages Available in Tort Cases A. Compensatory Damages B. Nominal Damages C. Punitive Damages Young v. Becker & Poliakoff III. Classifications of Torts IV. Intentional Torts A. Intentional Torts against Persons Assault and Battery Defenses to Battery Defamation Nemet Chevrolet, Ltd. V. Consumeraffairs.com, Inc. Defenses to Defamation Privacy Torts Ellen Johnston v. One America Productions, Inc. False Imprisonment Intentional Infliction of Emotional Distress B. Intentional Torts against Property C. Intentional Torts against Economic Interests V. Negligent Torts A. Elements of Negligence B. Defenses to Negligence Venkateswarlu Thota, and North Texas Cardiology Center, v. Margaret YOUNG VI. Strict Liability Torts VII. Global Dimensions of Tort Law VIII. Summary Discussion Questions for Chapter Eleven 1. Explain why someone might think this statement is true: A plaintiff in a tort case would prefer to receive compensatory and punitive damages over nominal damages. This statement is true because both compensatory and punitive damage awards have higher dollar amounts than nominal damage awards. Compensatory damages make the victim whole again, and include money for medical bills, lost wages, property repair bills, and compensation for pain and suffering, that is, to put the victim in the position he or she would have been in had the tort never taken place. Punitive damages can be high. These damages punish the tortfeasor for willfully engaging in extremely harmful conduct, and to deter others from engaging in similar conduct in the future. Nominal damages are much lower. They are damages in name only, and are likely to be one dollar. 2. Why does the book devote so much space to punitive damages? Congress, state legislatures, and courts have all considered limiting punitive damages plaintiffs can receive in personal injury cases. The topic is timely, and of great interest to managers. Managers generally want to see such restrictions on punitive damages because they want to be efficient, and punitive damages make them reluctant to take business risks for fear the cost will be prohibitive if someone sues them successfully. 3. Explain relationships between intentional and negligent torts. One relationship between the two is that they differ in terms of the degree of willfulness of each kind of tort. Intentional torts are those wherein the defendant took some purposeful action that he or she knew, or should have known, would harm the plaintiff. Negligent torts involve carelessness on the part of the defendant. 4. Explain relationships between disparagement and defamation. Defamation is an intentional publication (communication to a third party) of a false statement that is harmful to the plaintiff’s reputation. Disparagement is a kind of defamation. Disparagement is defamation of a business product or service. 5. List the elements a plaintiff must prove in a negligence case. Which would often be the most difficult to prove? Which is usually the easiest to prove? The elements of negligence are: duty, breach of duty, causation, and damages. Generally, damages and duty are relatively easy to prove. Breach of duty and causation are harder to prove. Duty is the standard of care the defendant owes the plaintiff. The law establishes what the particular duty is in a case, and usually some kind of duty exists. Damage means a person has a compensable injury. A plaintiff can usually present information about lost wages and medical bills to prove this part of the claim. Breach of duty requires the plaintiff to show the defendant’s conduct was not consistent with the duty required by law. It is often hard to show the defendant did not behave like a reasonable person. Causation includes actual cause and proximate cause. Actual cause is a factual matter. Proximate cause is a legal question, and is defined as foreseeability. Cause is often hard to prove. Ask students to give examples of situations in which it would be hard to prove cause. 6. Explain relationships between negligence and res ipsa loquitur. One relationship between the two is that res ipsa loquitur makes it easier for plaintiffs to recover in negligence cases when direct proof of the defendant’s negligent conduct does not exist because it was destroyed and there were no witnesses to the negligent act. Res ipsa loquitur allows the judge or jury to infer that the defendant’s negligence was the cause of the plaintiff’s harm when there is no direct evidence of the defendant’s lack of due care. Res ipsa loquitur means “the thing speaks for itself.” 7. Explain why someone might think this statement is true: Even if a plaintiff proves the elements of negligence, he or she could still lose the case. A plaintiff who proves the elements of negligence could still lose the case if the defendant can establish any of these defenses: contributory negligence, comparative negligence, and assumption of the risk. 8. Evaluate this statement: Strict liability torts consider whether a person or company was at fault. This statement is inadequate because strict liability torts do not consider fault. Under this theory, the defendant is engaged in an activity that is so inherently dangerous under the circumstances that no amount of care can make it safe. People are allowed to engage in such activities, but they are held strictly liable for any damages caused by these activities. Fault is irrelevant. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. In the area of tort law, a preference for freedom would mean a judge wants to refrain from restricting people. Suppose the judge wants businesses to work with fewer restrictions, so he or she makes it difficult for plaintiffs to prove negligence. In this situation plaintiffs would prefer security. They would want the judge to prevent disorder. They would want to achieve the psychological condition of self-confidence, such that, risks are welcomed. People need to trust that businesses will comply with the duty of care they owe customers. 2. A person who values efficiency would spend a lot of time talking about the alleged litigation explosion and the out-of-control jury system. Efficiency means “to minimize costs,” including costs from lawsuits. Justice means to treat all humans identically, regardless of class. Justice asks businesses to be held accountable when they breach their standard of care. They put aside the power of the corporation and place an equal emphasis on the rights and needs of stakeholders. 3. One aspect of the ambiguity is whether the injury must be physical. Some torts respond to psychological injuries. If injury means physical injury, the number of tort cases will go down. If injury includes harm to a person’s sense of well-being, tort cases will go up. The more a person values efficiency, the more he or she will want injury to mean only physical injury. Those who value security or justice will be more likely to allow an expansive definition of injury. Case Summary—Young v. Becker & Poliakoff In this case, Becker & Poliakoff was hired by Jacquelyn Young to represent her in a lawsuit against her employers. One of the firm’s associates attached the wrong document while filing the suit. As a result, this case was dismissed and they did not re-file the claim with the right documents. After more than a year the firm informed Young that the case had been dismissed and she sued the firm for legal malpractice. Case Summary—Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. This case considered defamation in the context of Internet communications. The court ruled when a false statement made over the Internet constitutes defamation, and who can be held liable if defamation exists. In this case, the court judged in favor of the defendant, the Internet service provider, Consumeraffairs.com, Inc., because the corporation is protected under the Communications Decency Act of 1996 (CDA). Suggested Answers to Critical Thinking about the Law Questions 1. The court concludes that that the defendant, Consumeraffairs.com, Inc., is immune from liability for allowing users to post their opinions about Nemet Chevrolet, Ltd. because of the Communications Decency Act of 1996. Additionally, Nemet Chevrolet failed to prove its claim that Consumeraffairs.com is responsible for the twenty posts about Nemet Chevrolet on the Web site. 2. The main reasons provided by the court to support their conclusion are as follows: • The Communications Decency Act (CDA) provides immunity to publishers and distributors. • Nemet Chevrolet failed to show that Consumeraffairs.com acted with malice. • Consumeraffairs.com did not contribute to the fraudulent comments and, therefore, was not responsible for them. • The Court is interested in balance public interest in privacy and free speech. 3. The court prefers the ethical norm of freedom, for example, to be free from restrictions imposed by others. Case Summary—Ellen Johnston v. One America Productions, Inc. This case deals with defamation. In the movie Borat, the star goes to a Pentecostal camp and experiences a fake religious experience and speaks in tongues. Johnston is shown in the movie for three seconds, raising her hands in praise for Borat’s “conversion.” She sued on the grounds that she was defamed by unknowingly participating in a mock of her faith. The film company counterclaimed, saying that Johnson failed to state a claim. The Court denied the motion to dismiss, ruling that evidence would need to be gathered during discovery to show, one or the other, if Johnston’s faith could be questioned by viewers. In other words, there needs to be a determination if the film would lead to the questions of the seriousness of her religion. Suggested Answers to Critical Thinking about the Law Questions 1. Dismissing cases should be hard because many times, issues are those of fact. If it was easy to dismiss a case, people would not have time to go over alternate theories and many times new, important facts come out in trial. Most decisions about cases should be made when all facts are one the table. 2. To dismiss the claim, it would have to be obvious to the viewer that those in the fictional film are not actors and are real people. The viewers would also have to understand that the film is fictional and those people in the movie know they are in a film. Case Summary—Venkateswarlu Thota, and North Texas Cardiology Center, v. Margaret YOUNG This case demonstrates an interesting defense to negligence. Preceding his death, Ronnie additionally suffered from angina, hypertension, a rare blood disorder called polycythemia vera, and coronary artery disease. In 2001, Ronnie went to cardiologist Venkateswarlu Thota for chest pains. Medications did not work and finally Thota recommended a procedure called coronary angiography. Ronnie underwent many surgeries in the following months as a result of Thota’s surgery. Eventually Ronnie died from leukemia that was caused by his struggle with polycythemia vera. Ronnie’s wife brought a lawsuit against the hospital and Thota claiming Thota was negligent due to the following reasons: • Not obtaining Ronnie’s full medical history • Not considering Ronnie’s other medical problems might interfere with Thota’s procedure • Lacerating not only an artery but the wrong artery during the procedure • Not seeing the artery tear before Ronnie was discharged • Not being able to diagnose and treat the artery tear Answers to Review Questions 11-1. Students’ answers may vary. Overall, the availability of punitive damages is good for society. Although some companies suffer, they do so only if their behavior is particularly outrageous or willful. The possibility of punitive damages can serve the role of bringing out the best in corporations. Fear of large damage awards can make companies exhibit careful behavior. 11-2. The two involve different degrees of willfulness. Intentional torts involve more willful behavior than negligence, which focuses on carelessness. 11-3. An assault is the intentional placing of another in fear or apprehension of an immediate, offensive bodily contact. A battery is an intentional, unwanted, offensive bodily contact. Usually, the two go hand-in-hand. When an assault occurs, so does a battery. An example would be a bar room brawl in which a person knows they are going to get hit, then gets hit. Sometimes, an assault can occur without a battery, and a battery can occur without an assault. Have students give examples to test their understanding of the definitions of these torts. 11-4. It is harder to win a defamation case for public figures because of the conditional privilege called the public figure privilege. If a defendant makes a false statement about a public figure, the defendant will raise the public figure privilege as a defense to charges of defamation. If the defendant proves that the plaintiff is a public figure, the plaintiff will have to additionally prove that the defamation was made with malice in order to recover for defamation. 11-5. Both trespass to personalty and conversion are intentional torts against property. Trespass to personalty occurs when one intentionally exercises dominion and control over another’s personal property. Conversion is a more extreme wrong. It requires the defendant’s permanent removal of the property from the owner’s possession and control. 11-6. This question would also make a good essay question or short paper assignment. Food disparagement laws provide ranchers and farmers a cause of action when someone spreads false information about the safety of a food product. Ranchers and farmers prefer the ethical norm of efficiency. The law protects farmers and ranchers from economic loss. The clashing ethical norm is freedom. Those who talk about food, such as Oprah Winfrey, want to be free to state their opinions about food. They do not want a law to place restrictions on their ability to talk about food. Students’ answers may vary. Answers to Review Problems 11-7. On the claim of defamation, Bob will lose. He will lose because he showed the letter to several colleagues, as well as to his boss. He damaged his own reputation. He will lose the intentional infliction of emotional distress claim too. Karen’s behavior was not extreme or outrageous, and Bob’s emotional distress is probably not severe enough for him to succeed on this claim. 11-8. Assumption of risk would not be a valid defense. That defense requires the defendant to show that the plaintiff voluntarily and unreasonably encountered a known risk. The defendant must establish that the harm suffered was indeed the risk assumed. Madeline might have assumed the risk that she would get hurt in the water, but she probably did not expect the risk of an exploding stove. 11-9. If Jones quits, there is a tort. The tort would be intentional interference with contract. Creative Ads will have to pay damages to Action Advertising. The remedy could include compensatory, nominal, and punitive damages. 11-10. Tort laws vary from state to state. In general, Suzanne would sue Sam for negligence and try to show: duty, breach of duty, cause, and damages. If she succeeds, Sam will assert defenses. The most likely one is contributory negligence, or comparative negligence (depending on which defense is available in the state). 11-11. Eva should be able to win on the battery claim, she might be able to win on the negligence claim, and she probably won’t win on the intentional infliction of emotional distress claim. Whether a court agrees with this depends on the judge and the state law involved. The battery claim would focus on Bill’s intentional behavior. His contact in having sex with Eva was intentional and offensive. Whether it was wanted is unclear. Eva might have wanted it at the time, but now, looking back she regrets it because of the herpes. The negligence claim seems less likely to succeed. It could be argued that Bill was careless in not wearing a condom (Do condoms prevent the spread of herpes? Perhaps the students will know). He was also careless in not choosing his lover more carefully. The intentional infliction case seems the least likely. It will be hard to show that giving one’s spouse herpes is extreme and outrageous, given that herpes is an epidemic and that many people have affairs and spread the disease (Did the wife assume the risk?). Eva probably hasn’t suffered severe emotional damage. 11-12. This is a strict liability case, and Ron will probably win. Devo Dynamite was engaging in unreasonably dangerous behavior. Ron will probably win because it can be assumed that if anyone should have to pay, it should be Devo because the company is in a better position to pay for Ron’s injuries. Answers to Case Problems 11-13. The appellant court agreed with the trial court and found that Principal Banks did have probable cause. When Banks walked into his office he observed the women in a physical altercation—yelling, flailing their arms, and pulling each other’s hair. The facts showed that a reasonable person, at that time, could have easily seen all parties as being equally involved in the dispute. Therefore, Banks had probable cause to sign a criminal complaint. 11-14. The court found in favor of Mzamane with regards to the intentional infliction of emotional distress. The damage to Mzamane was sufficient to cause emotional stress and, therefore, it did not matter that no physical injury was inflicted. Mzamane also attempted to sue Winfrey for defamation and false light invasion of privacy but neither of these claims was granted. 11-15. The district court’s decision is affirmed with respect to six of the appellants, reversed with respect to two, and remanded for proceedings consistent with this opinion with respect to the remaining two. 11-16. Branham had to prove that Nazar had a duty to care, that he breached this duty that and as a result, there was injury, and this injury is the proximate cause of Nazar’s failure to care. Ultimately, the appellant court reversed the trial court’s decision by finding in favor of Branham. 11-17. The court dismissed this case and it was considered to be a landmark judgment. This is because the court ruled that if a person was falsely accused of being gay, bisexual, or lesbian it was no longer considered to be ‘slander per se’ as per New York tort law. The court stated that it was the State’s responsibility to ensure the civil rights of people irrespective of their sexual orientation. 11-18. In a summary judgment the court ruled in favor of the defendants. A suit for negligence was dropped. The court stated that injuries sustained by the plaintiff were a result of the animal wandering off unattended on the highway. Since there was no existence of either vicious or abnormal propensity that caused the accident and according to the law based on this, the defendant was not legally responsible for the accident. However, it is considered negligent on the defendant’s part for allowing the cow to wander in the roadway in such an hour. So, the court should rule in favor of the plaintiff. 11-19. In this case, liability would not be imposed on the restaurant or the distributor of the alcohol that Montgomery had consumed. Even if the common negligence law or the Dram Shop Act were applied no action would be taken against either of the two parties. 11-20. Yes, Hatfill had to show actual malice because he was a “conditional public figure” and according to the law, those people must prove malice. Hatfill was unable to prove that Kristof acted with actual malice so the appellant court confirmed the trial court’s ruling in favor of Kristof. Thinking Critically About Relevant Legal Issues 1. The issue here is whether giving 75 percent of the punitive damages in tort cases to the state to fund needed programs is a good idea for states. The conclusion states that this is a very good idea because it helps the state, the victim, and it still punishes the perpetrator. 2. One needs more information about the California program. One argument made is that juries will award more in damages because that means more will go to the state. More information is needed about punitive damages in California when the bill was in effect. 3. The author is focused on public good and punishing those who have done wrong. But the focus is on the public good because that is the main reason for enacting a bill like the one described. 4. The opposition would argue that punitive damages help the victim. If they get all the damages, then they can remedy the injustice done to them, especially in a personal injury or medical malpractice case. Also, if businesses know that their money will go to help the public, an element of deterrence has been lost because the money is not just going to remedy the injustice they caused, but rather to help all people, including those who hurt the victim/s. Solution Manual for The Legal Environment of Business: A Critical Thinking Approach Nancy K. Kubasek, Bartley A. Brennan, M. Neil Browne 9780133546422, 9780134074030