General Business Law

A Practical Approach

General Business Law

Chapter 1. Legal, Business, and E-Commerce Environment

Chapter 2. Agency

Chapter 3. Partnership

Chapter 4. Corporations

Chapter 5. Estates and Trust

Chapter 6. Contracts

Chapter 7. Contract Performance

Chapter 8. Rights and Duties

Chapter 9. Guarantors

Chapter 10. Personal Property, Bailments and Computers

GalileeCollege ©

Chapter 1. Legal, Business, and E-Commerce Environment

Definition of law
Law is a body of rules of action or conduct prescribed by controlling authority, and having binding legal force. That which must be obeyed and followed by citizens subject to sanctions or legal consequences is a law.

Functions of law

Keeping the peace
Shaping moral standards
Promoting social justice
Maintaining the status quo
Facilitating orderly change
Facilitating planning
Providing a basis for compromise
Maximizing individual freedom

Flexibility of the law
Law responds to cultural, technological, economic, and social changes. Laws that are no longer viable are often repealed, although it may take years for that to happen. Sometimes, because of error or misuse, the law does not reach a fair result.

Schools of jurisprudential thought

NaturalLawSchool—believes law is based on what is correct. Emphasizes that law should be based on morality and ethics
Historical School—believes that law is an aggregate of social traditions and customs
AnalyticalSchool—believes that law is shaped by logic
SociologicalSchool—believes law is a means of achieving and advancing certain sociological goals
CommandSchool—believes law is a set of rules developed, communicated, and enforced by the ruling party
Critical Legal Studies School-believes legal rules are unnecessary and legal disputes should be solved by applying arbitrary rules based on fairness
Law and EconomicsSchool—believes that promoting market efficiency should be the central concern of legal decision making
FeministSchool—believes that the female perspective should be taken into account when legislators and judges develop, interpret, and apply law

Development of the US legal System
The US court system developed from English common law. Under traditional English common law, there were three types of courts:
Law courts—courts that developed and administered a uniform set of laws decreed by the kings and queens after William the Conqueror. Legal procedure was emphasized over merits
Chancery (equity) courts—courts that granted relief based on fairness
Merchant courts—courts established to administer the "law of merchants"

Adoption of English common law in the US All states except Louisiana base their legal systems primarily on English common law.
Because of its French heritage, Louisiana bases its legal system on civil law.

Sources of US law

Constitution of the US—supreme law of the US
Treaties—compacts made between two or more nations
Codified law
Statutes—written law enacted by the legislative branch of federal and state governments that establishes certain courses of conduct that must be adhered to by covered parties
Ordinances—laws of local government bodies
Executive orders—orders issued by a member of the executive branch of government
Judicial decisions—decisions about an individual lawsuit issued by federal or state courts
Administrative agency regulations and orders—rules and regulations adopted by agencies created by the legislative and executive branches of government

Doctrine of stare decisis
Precedent is a rule of law established in a court decision. Lower courts must follow the precedent established by higher courts. The doctrine of stare decisis means "to stand by the decision" or adherence to precedent.

Other countries' legal systems
There are other major legal systems in addition to the Anglo-American common law system. Major systems include:

Romano-Germanic civil law system
Sino-Soviet Socialist law system
Hindu law system
Islamic law system

E-commerce and Internet Law
Our legal system has adapted to the reality of e-commerce and the Internet. For example, contracts on the Internet are treated as any contract is treated under the law. However, there are many issues, such as taxation of sales on the Internet, pornography, intellectual property, etc., that still need to be addressed.

Critical Legal Thinking Critical legal thinking is the process of specifying the issue presented by a case, identifying the key facts in the case and applicable law, and then applying the law to the facts to come to a conclusion that answers the issue presented. Use the "case for briefing" exercise at the end of the chapter as a tool to teach students critical legal thinking.

Terms

case brief—a summary of each of the following items of a case: case name and citation, key facts, issue presented, holding of the court, court's reasoning
common law—Developed by judges who issued their opinions when deciding a case. The principles announced in these cases became precedent for later judges deciding similar cases.
Constitution of the United States of America—The supreme law of the United States.
court of chancery—Court that granted relief based on fairness. Also called equity court.
critical legal thinking—the process of specifying the issue presented by a case, identifying the key facts in the case and applicable law, and then applying the law to the facts to come to a conclusion that answers the issue presented.
executive order—An order issued by a member of the executive branch of the government.
judicial decision—A decision about an individual lawsuit issued by federal and state courts.
jurisprudence—The philosophy or science of law.
law court—A court that developed and administered a uniform set of laws decreed by the kings and queens after William the Conqueror, legal procedure was emphasized over merits at this time.
law—That which must be obeyed and followed by citizens subject to sanctions or legal consequences; a body of rules of action or conduct prescribed by controlling authority, and having binding legal force.
merchant court—The separate set of courts established to administer the "law of merchants."
ordinances—Laws enacted by local government bodies such as cities and municipalities, counties, school districts, and water districts.
precedent—A rule of law established in a court decision. Lower courts must follow the precedent established by higher courts.
stare decisis—Latin: "to stand by the decision." Adherence to precedent.
statute—Written law enacted by the legislative branch of the federal and state governments that establishes certain courses of conduct that must be adhered to be covered parties.
treaty—A compact made between two or more nations.

Class Questions

Name at least six of the eight functions of law.
List seven different schools of jurisprudential thought.
Describe the difference between law courts and chancery courts.
Explain the difference between executive orders and judicial decisions.

True or False

Answer True or False for each of the following statements:

All laws in the United States are based on English common law.
Once a law is recorded, it can never be changed.
The feminist legal theory considers the perspectives of women as they relate to legal decisions.
The analytical school of jurisprudence is based upon morality and ethics.
If a case is decided the same way that a similar case was decided five years ago, the CommandSchool of jurisprudence was used.
Followers of the SociologicalSchool of jurisprudence are known as commercialists.
Law courts developed and administered a uniform set of laws decreed by kings and queens after William the Conqueror.
Law courts emphasized the merits of the case rather than legal procedure or precedence.
Our basic laws regarding commerce came from the English Law merchant.
The Romano-Germanic law system is commonly known as the foundation of criminal law.
Congress has the power to enforce the law.
Powers not given to the federal government by the Constitution are reserved for the states.
A member of the executive branch of the government issues an executive order.
Members of the legislature hand down judicial decisions.

ESSAY QUESTIONS

Define law.
List and describe the functions of law.
Describe the flexibility of the law.
List and describe the schools of jurisprudential thought.
Explain the development of the US legal system.
Explain how English common law was adopted in the US.
List and describe the sources of law in the US.
Define the doctrine of stare decisis.
Describe other countries' legal systems.
Describe the development of E-Commerce and Internet law.
Apply critical legal thinking in analyzing judicial decisions.

GalileeCollege ©

Chapter 2. Agency

A. Formation and Termination

Fundamentals. Agency is an express or implied consensual relationship formed when two parties agree that one, the agent, will represent the other, the principal, in dealing with third parties. The agent is subject to the principal's control and can affect the principal's legal relationships with third parties. Absent special circumstances,only the principal is legally responsible for transactions negotiated by an agent. The principal ordinarily has contractual liability to third parties for contracts entered into by the agent on behalf of the principal. Thus, the principal-agent relationship is representative. The agent has derivative authority to act for, and in place of, the principal. The agent is an extension of the principal.

The principal must manifest consent that the agent may act on the principal's behalf. The test for the existence of an authorized agency is objective.
The requirements to form an agency relationship are an agreement between principal and agent on the relationship and subject matter, legality of the subject matter, and capacity of the principal.
Master-servant is old terminology (which you may still run across) for employer-employee. A servant is a type of employee whose actions are entirely subject to control by the employer during the relationship. The servant/employee is employed to do physical acts and perform services for the employer, rather than act as a business representative. Other employees may qualify as agents and be subject to lesser physical control.
An employee's action are entirely subject to control by the employer during the relationship. An independent contractor is generally hired to achieve certain results without much control over his/her performance. Other factors to be considered are the mode of payment, whether the contracting parties are in distinct businesses or occupations, whether the work is supervised and performed with the employer's tools and supplies, the length of the employment, and the degree of skill involved.

Oral agreement usually suffices to form an agency, but purchase of land is subject to the statute of frauds. Under the equal dignities rule, an agency relationship must be willing if the object of the agency is subject to the statute of frauds.

An agent's acts are deemed to be the acts of the principal
The agency relationship is terminated by operation of law when the subject matter of the agency relationship was destroyed.

An agency is based on the consent of both principal and agent and may be terminated by an act of either party.

Thus, it may be terminated by the agent's giving notice of renunciation to the principal.
An agency relationship is terminated by operation of law when the principal is declared incompetent in a judicial proceeding.

A power of attorney is a written authorization for the agent to act on behalf of the principal. It can be general, or it can grant the agent restricted authority.

In the absence of a special rule, an agency and the agent's power to bind the principal terminate instantly upon the death of the principal because the principal must exist at the time the agent acts.

An agency coupled with an interest is one in which the agent has a specific, present, beneficial interest in property which is the subject matter of the agency. A principal does not have the right or power to terminate an agency coupled with an interest. In any agency relationship, the agent may terminate at any time without liability if no specific period for the agency has been established.

An agency relationship is terminated by operation of law if the principal becomes legally incompetent
Apparent authority ceases upon termination that occurs by operation of law.

When a principal discharges an agent, (s)he must give actual notice of the discharge to those the agent had previously dealt with and constructive notice to others who might have known of the agency.

B. Principal's Liabilities

The principal has a duty to disclose known risks involved in the task for which the agent was engaged if the principal knows the agent is unaware of the risks.

The duty applies if the principal should know of the risk and if the principal should know the agent is unaware of the risk.
Most agency relationships are governed by contract, and thus fundamental duties are set forth in the agreement. The fundamental duties set forth in the agency agreement may be expressed or implied.

Two implied fundamental duties of a principal to an agent are to compensate the agent for his/her services and to indemnify or reimburse the agent for authorized expenses incurred on behalf of the principal.
Any renunciation of these duties would require an express agreement.

Apparent authority is what third parties believe an agent possesses because of the actions of the principal or the outward appearances of the agency relationship. It is a form of estoppel.

Express limitation do limit an agent's actual authority. But if they are not known by third parties, they do not affect apparent authority.

A principal is strictly liable for a tort committed by an agent within the scope and during the course of the agent's employment (vicarious liability). This liability is without regard to fault of the principal.

Vicarious liability does not apply when the agent performs as an independent contractor. A person is liable for his/her own negligent acts, even if performed as an agent of another.
A principal is liable to third parties for all acts of its employees committed within the course and scope of their employment (even if the employee was instructed not to do the act). A principal is generally not liable for the acts of an independent contractor if not subject to the control of the employer. There are exceptions, e.g., if the principal authorizes frauds.
A principal is strictly liable for the torts of an agent committed within the course and scope of the agency agreement, that is, in furtherance of the purpose of the agency. The principal's liability to the third party would be for acts of the agent within the scope of the agent's actual or apparent authority.

C. Disclosed and Nondisclosed Principlals

Actual authority is conveyed by the principal's manifestation of consent to the agent to bind the principal to third parties. Actual authority is not affected by failure to disclose the principal.

When a principal is nondisclosed, the third party believed (s)he is dealing directly with the agent. Thus, under general contract law, an agent is liable to the third party intended to deal only with the agent. An agent who discloses the principal and acts within actual or apparent authority ordinarily binds only the principal.
The third party can look to either the agent or the nondisclosed principal for performance of the contract.
The third party is entitled to enforce a contract against the agent of a nondisclosed principal and against the nondisclosed princip[al when the third party discovers the principal and elects to hold him/her liable.
An agent's actual authority is conveyed by communication to the agent from the principal. It is not practical to expressly state each act authorized to perform the agent's purpose. So the law recognize an agent to have both expressed and implied actual authority. Implied actual authority is for acts reasonably necessary to execute express authority.

Remember: A principal is liable on contracts made by the agent with actual or apparent authority.

A third party may elect to hold a nondisclosed principal liable once the principal is disclosed. A principal, whether nondisclosed or not, can always be held liable for a valid contract entered into by an agent acting within the scope of actual authority, regardless of whether the principal ratifies the contract.

A nondisclosed principal is generally not liable for acts of the agent beyond the scope of actual authority.
The third party may recover for breach of contract from the agent of a nondisclosed principal and from the nondisclosed principal when the third party discovers the principal and elects to hold him/her liable.

An agent owes a fiduciary duty to the principal. An agent must act soley in the interest of the principal, and not in his/her own interest or the interest of the third party.

An agent has express and implied actual authority, which is conveyed by manifestations of the principal to the agent. Implied authority is to do what is reasonably necessary to accomplish that which was expressly authorized.

The person who ratifies becomes legally bound on a contract that was entered into by another who, without authority, purported to act as the principal's agent. To ratify a contract, the principal must have full knowledge of the material facts.

Reminder Note: Apparent authority arises by words or conduct of the principal manifested to a third party which induces the third party to rely on the agent's authority.

A disclosed principal is liable on contracts entered into with a third party by an agent with actual or apparent authority.
An agent who acts within actual or apparent authority is not liable on the contract to the third party.
An agent acting within the scope of actual or apparent authority who contracts with a third party on behalf of a disclosed principal is generally not liable on the contract to the third party.
The agency is liable to the principal for losses resulting from the agent's breach of duty (contractual or otherwise) to the principal. Even if the agent has the power to act beyond express or implied actual authority, the agent does not have the right to do so.

As agent, must pay to the principal any profits received from the agency relationship without the principal's consent.
All persons are liable for their own negligence.
Implied authority is inferred from words or conduct of the principal to the agent. It is incidental authority to do that which is necessary to exercise actual authority.

Agency relationship are terminated by an act of the parties or by operation of law.

Agency relationships are terminated automatically by operation of law upon the death or insanity of either party, bankruptcy of the principal, destruction of the subject, and war.
Other terminations are by an act of the parties and are not automatic. An agent's disregard for the express limitation of his/her authority would be cause for termination by the principal, but termination would not occur automatically.
A terminated agent continues to have apparent authority to bind the principal until actual notice is given to parties that have done business with the agent. Others who may know of the agency relationship are entitled to constructive notice by publication. Notice is not required when the termination is by operation of law.

ESSAY

General Business Law