Book Opener

interactive student edition

Gordon W. Brown, J.D.Member of the Massachusetts BarProfessor Emeritus of LawNorth Shore Community CollegeBeverly, MassachusettsPaul A. Sukys, J.D.Member of the Ohio BarProfessor of Law and Legal StudiesNorth Central State CollegeMansfield, Ohio

Program ComponentsYour Understanding Business and Personal Law program provides a rich and diverse offering of resourcesfor learning, teaching, reinforcing, and enriching the individual and classroom learning experience.Program Resources• Student Edition• Teacher Wraparound EditionReinforcement• Student Activity Workbook• Supplemental Cases• PuzzleMakerEnrichment• Enrichment Masters• Internet Resources• Ethics and Business Law Activities• Business and Competitive Events in Law• Poster PackageTeacher Resources• Student Activity Workbook TAE• Lesson Plans• Transparency Binder• Blackline Masters• Reproducible TestsTechnology-Based Resources• Interactive Lesson Planner (ILP) CD-ROM• Assessment Binder (ExamView ® Pro Testmaker CD-ROM)• PowerPoint® Presentation• National Mock Trial Championship Video• CourtTV Trial Stories Video Package• Glencoe Business Video Package• Understanding Business and Personal Law Web siteubpl.glencoe.comCopyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permittedunder the United States Copyright Act, no part of this publication may be reproduced ordistributed in any form or by any means, or stored in a database or retrieval system, without priorwritten permission of the publisher.Printed in the United States of America.Send all inquiries to:Glencoe/McGraw-Hill21600 Oxnard StreetSuite 500Woodland Hills, California 91367ISBN: 0-07-861878-92 3 4 5 6 7 8 9 10 11 027 09 08 07 06 05

LearningAbout theLawThe Importance ofUnderstanding the LawHave you ever made a promiseand wondered what wouldhappen if you broke it? Haveyou ever purchased clothingand considered whether youcould get your money back ifyou returned it to the store?Have you ever dreamt of startingyour own business andbeing your own boss, wanted to get married, buyyour own house, save for college, or plan for retirement?These are important issues in business andpersonal law, and they and countless others likethem affect your daily life and future. Learningabout these laws can be fun and exciting, and understandingthese laws will greatly enrich your life—not just as an individual who knows and obeys thelaw, but as a contributing member of your schooland community, as a participant in the Americansystem, and as part of the world in which you liveand work with others.The Structure of Your Book Your book hasbeen organized to make learning the law easy,thought provoking, and enjoyable. It is divided intoseven units. The first unit introduces you to law andethics, civil and criminal law, and our legal system.The next unit introduces you to the law of contracts,which serves as the foundation of business andemployment law, and much of personal law. Theremaining units cover topics that you are likely toencounter in your daily life and in your future. Theseissues include renting or buying a home, getting married,finding a job, starting a company, planning forretirement, and writing a will, among others.Personal law topics are covered with a life-cycleapproach, presenting the material chronologically asit may arise in your life.Connectingthe Law toYour WorldThe law is a thriving realworldenterprise that evolvesover time to meet the needs ofour diverse population and ourchanging society. In this book,you will be introduced to howthe law relates to your life andthe world. You will find manyfascinating features on communityinvolvement, cultural diversity,international law, and thepractical issues and circumstances of your daily life.You will also draw connections between what you learnand other academic disciplines, from business to thehumanities, and discover features that challenge you tothink creatively, critically, and to explore new ideas. Youwill even be asked to question the law itself, why it’simportant, to consider whether it is ethical or practical,and to apply legal principles in a variety of situations,both real and imaginary. And you will learn from realpeople working in legal fields, both those profiled inyour book and people practicing in your community.Being an ActiveParticipantLearning about business and personal law is aparticipatory enterprise, and you will play an activerole, both individually and as part of a team. You willlearn by conducting library and real-world researchand sharing your findings with the class. You willargue for or against a point of view, keep a JusticeJournal and write reports, and learn to organize andchart your research findings in legal workshops. Youwill take part in role-playing and advocacy activitiessuch as mock trials, and work with others, both incooperative and adversarial situations. The greatbreadth, scope, and variety of learning activities mirrorsthe diversity in the law itself. It creates a compelling,lively environment that makes learning aboutthe law fun, easy, and fulfilling.Introducing Your Book iii

Studying Case LawApplying What You Learn Understandingbusiness and personal law means not only knowingwhat it is, but also knowing how to apply it. Towardthis goal, your book is full of dynamic, real-worldexamples and cases for you to study. Each chapterbegins with an intriguing vignette that offers insightinto how the law may affect your life and that introducesyou to key legal issues covered in the chapter.Chapters include numerous examples that illustratekey concepts and ideas. Real and hypothetical casesabound throughout your book and the UnderstandingBusiness and Personal Law program—in section andchapter assessments, supplements, the course Website, and videos, to name a few.Landmark Cases You will not just study cases,but also learn about important cases. At the end ofeach unit, you will be introduced to a landmark case,a significant milestone in the law that you will studyin depth. You will also be directed to the course Website, where you can access multimedia features(including actual audio footage) for many of thelandmark cases. Throughout, you will be introducedto how real cases are decided by real courts, learnhow courts reason and how cases are won and lost,and learn about the important legal principles thatyou study in each unit.Using TechnologyTechnological innovations have had a profoundimpact on the law and legal education. For this reason,your Understanding Business and Personal Lawprogram makes extensive use of technology, technology-relatedfeatures, and technology resources.These devices include:• Technology-related activities that involveusing the Internet, software applications, andother technology resources• A course Web site (ubpl.glencoe.com) thatsupplements, enriches, and expands upon thematerial in your book• Technology-related features covering thelegal issues involved in technology, includingintellectual property, e-commerce, e-business,Internet privacy, and Internet crime• Multimedia resources, including video andCD-ROM supplements• Internet-related study and assessmentopportunities, including an Internet Resourcessupplement and additional activities in theStudent Activity WorkbookThese and other technology resources not onlyintroduce you to the technology-related issues inbusiness and personal law, but also ensure that youwill have the basic skills necessary to use technologyto research and better understand the law.AssessingWhat YouLearnStudy Tools andPassing ExamsYour book makes iteasy to study for andpass exams. Each sectionbegins by emphasizing what you will learn and whyit is important, and identifies the key terms you willlearn. Reading strategies are suggested in each unit,and every section and chapter concludes with extensivestudy and assessment exercises. Chapter summariespinpoint important material from every section of thebook, and self-check quizzes are available on the courseWeb site. Thorough assessment and study devices notonly test your understanding of the law, but also askyou to use legal language, think critically about thelaw, debate legal issues, and apply what you learn.Enriching Your Life The ultimate measure of yoursuccess in this course is the degree to which it enrichesyour life and contributes to your involvement inyour school, community, nation, and the world.Understanding Business and Personal Law providesyou with insight into the system in which you live andteaches you how to help others, plan for the future,and more easily reach your goals in life. It’s a fascinating,fun, and exciting process—good luck!iv Introducing Your Book

UNIT 1Knowing About the Law 2CHAPTER 1Ethics and the Law 4SECTION 1.1 Defining Ethics 6Section Assessment 13SECTION 1.2 Sources of Law 14Section Assessment 21Chapter Assessment 22CHAPTER 2The Court System 26SECTION 2.1 A Dual Court System 28Section Assessment 33SECTION 2.2 Trial Procedures 34Section Assessment 49Chapter Assessment 50CHAPTER 3Criminal Law 54SECTION 3.1 What Is a Crime? 56Section Assessment 61SECTION 3.2 Particular Crimes 62Section Assessment 73Chapter Assessment 74CHAPTER 4The Law of Torts 78SECTION 4.1 Intentional Torts 80Section Assessment 87SECTION 4.2 Negligence and Strict Liability 88Section Assessment 93Chapter Assessment 94Table of Contentsv

UNIT 1 Law Workshop: Using Legal Tools 98UNIT 1 Landmark Case 100UNIT 2Entering Into Contracts 102CHAPTER 5How Contracts Arise 104SECTION 5.1 Contracts 106Section Assessment 113SECTION 5.2 Offer and Acceptance 114Section Assessment 121Chapter Assessment 122CHAPTER 6Genuine Agreement 126SECTION 6.1 Fraud and Misrepresentation 128Section Assessment 132SECTION 6.2 Mistake, Duress, and Undue Influence 133Section Assessment 139Chapter Assessment 140CHAPTER 7Contractual Capacity 144SECTION 7.1 Contractual Capacity 146Chapter Assessment 158CHAPTER 8Consideration 162SECTION 8.1 Consideration 164Section Assessment 172SECTION 8.2 Agreements Without Consideration 173Section Assessment 179Chapter Assessment 180viTable of Contents

CHAPTER 9Legality 184SECTION 9.1 Agreements that Violate Statutes 186Section Assessment 193SECTION 9.2 Agreements Contrary to Public Policy 194Section Assessment 199Chapter Assessment 200CHAPTER 10Form of a Contract 204SECTION 10.1 The Statute of Frauds 206Section Assessment 214SECTION 10.2 Special Rules and Formalities 215Section Assessment 217Chapter Assessment 218CHAPTER 11How Contracts Cometo an End 222SECTION 11.1 Performance and Agreement 224Section Assessment 230SECTION 11.2 Impossibility of Performance andOperation of Law 231Section Assessment 235Chapter Assessment 236CHAPTER 12Transfer of Contracts andRemedies for Breach 240SECTION 12.1 The Transfer of Contractual Rights and Duties 242Section Assessment 249SECTION 12.2 Remedies of the Injured Party 250Section Assessment 255Chapter Assessment 256UNIT 2 Law Workshop: Using Legal Tools 260UNIT 2 Landmark Case 262Table of Contentsvii

UNIT 3Understanding Consumer Law 264CHAPTER 13Contracts for the Saleof Goods 266SECTION 13.1 The Sale and Lease of Goods 268Section Assessment 275SECTION 13.2 Ownership and Risk of Loss in Sales or Goods 276Section Assessment 283SECTION 13.3 E-Commerce and the Law 284Section Assessment 287Chapter Assessment 288CHAPTER 14The Importance of Warranties 292SECTION 14.1 Express and Implied Warranties 294Section Assessment 304SECTION 14.2 Exclusion of Warranties, Privity, andDuty to Notify 305Section Assessment 309Chapter Assessment 310CHAPTER 15Consumer Protection andProduct Liability 314SECTION 15.1 Consumer Protection 316Section Assessment 326SECTION 15.2 Product Liability 327Section Assessment 331Chapter Assessment 332CHAPTER 16Owning a Vehicle 336SECTION 16.1 Acquiring a Vehicle 338Section Assessment 350SECTION 16.2 Motor Vehicle Insurance 351Section Assessment 355Chapter Assessment 356viiiTable of Contents

CHAPTER 17Personal Property andBailments 360SECTION 17.1 Personal Property 362Section Assessment 367SECTION 17.2 Bailments 368Section Assessment 379Chapter Assessment 380UNIT 3 Law Workshop: Using Legal Tools 384UNIT 3 Landmark Case 386UNIT 4Being an Agent and Getting a Job 388CHAPTER 18Creation of an Agency 390SECTION 18.1 Agency Relationships 392Section Assessment 401SECTION 18.2 Creation and Types of Agents 402Section Assessment 407Chapter Assessment 408CHAPTER 19Agency Relationships andTheir Termination 412SECTION 19.1 Authority and Duties 414Section Assessment 423SECTION 19.2 Termination of Agency Relationships 424Section Assessment 427Chapter Assessment 428CHAPTER 20Employment Law 432SECTION 20.1 Employment Relationships 434Section Assessment 441SECTION 20.2 Legislation Affecting Employment 442Section Assessment 447Chapter Assessment 448Table of Contentsix

CHAPTER 21Employment Protection andEqual Opportunity 452SECTION 21.1 Laws Relating to EmploymentConditions and Benefits 454Section Assessment 464SECTION 21.2 Laws Regulating Employment Discrimination 465Section Assessment 471Chapter Assessment 472UNIT 4 Law Workshop: Using Legal Tools 476UNIT 4 Landmark Case 478UNIT 5Using Your Purchasing Power 480CHAPTER 22Borrowing Money andBuying on Credit 482SECTION 22.1 What Is Credit? 484Section Assessment 492SECTION 22.2 Credit Protection Laws 493Section Assessment 495SECTION 22.3 Managing Your Debts 496Section Assessment 499Chapter Assessment 500CHAPTER 23Negotiable Instruments 504SECTION 23.1 Purpose and Types of Negotiable Instruments 506Section Assessment 510SECTION 23.2 Requirements of Negotiability 511Section Assessment 515Chapter Assessment 516xTable of ContentsCHAPTER 24Writing Checks 520SECTION 24.1 Checking Accounts 522Section Assessment 528SECTION 24.2 Other Payment Methods 529Section Assessment 535Chapter Assessment 536

CHAPTER 25Transferring NegotiableInstruments 540SECTION 25.1 Transferring Instruments 542Section Assessment 544SECTION 25.2 Indorsements 545Section Assessment 553Chapter Assessment 554CHAPTER 26Collecting NegotiableInstruments 558SECTION 26.1 Holders of Instruments and Defenses 560Section Assessment 567SECTION 26.2 Liabilities of Parties 568Section Assessment 571Chapter Assessment 572UNIT 5 Law Workshop: Using Legal Tools 576UNIT 5 Landmark Case 578UNIT 6Starting a Business 580CHAPTER 27Sole Proprietorship andPartnership 582SECTION 27.1 Sole Proprietorship 584Section Assessment 587SECTION 27.2 The Partnership 588Section Assessment 599Chapter Assessment 600CHAPTER 28Forming and Financing aCorporation 604SECTION 28.1 Corporations 606Chapter Assessment 620Table of Contentsxi

CHAPTER 29Operating a Corporation 624SECTION 29.1 Managing the Corporation 626Section Assessment 632SECTION 29.2 Management Responsibilities 633Section Assessment 639Chapter Assessment 640CHAPTER 30Corporate Regulationand Expansion 644SECTION 30.1 Government Regulation of a Corporation 646Section Assessment 653SECTION 30.2 Corporate Expansion and Dissolution 654Section Assessment 661Chapter Assessment 662UNIT 6 Law Workshop: Using Legal Tools 666UNIT 6 Landmark Case 668UNIT 7Planning for the Future 670CHAPTER 31Marriage 672SECTION 31.1 Marriage Formalities and Restrictions 674Section Assessment 680SECTION 31.2 Marriage Laws 681Section Assessment 687Chapter Assessment 688CHAPTER 32Divorce and Its LegalConsequences 692SECTION 32.1 Ending a Marriage 694Section Assessment 701SECTION 32.2 Divorce Settlement 702Section Assessment 705Chapter Assessment 706xiiTable of Contents

CHAPTER 33Renting A Place to Live 710SECTION 33.1 The Rental Agreement 712Section Assessment 718SECTION 33.2 Responsibilities of Landlord and Tenant 719Section Assessment 723Chapter Assessment 724CHAPTER 34Buying a Home 728SECTION 34.1 Evaluating Housing Alternatives 730Section Assessment 735SECTION 34.2 The Home Buying Process 736Section Assessment 745Chapter Assessment 746CHAPTER 35Insurance Protection 750SECTION 35.1 The Insurance Contract 752Section Assessment 754SECTION 35.2 Life and Health Insurance 755Section Assessment 761SECTION 35.3 Property Insurance 762Section Assessment 765Chapter Assessment 766CHAPTER 36Retirement and Wills 770SECTION 36.1 Retirement Income 772Section Assessment 778SECTION 36.2 Estate Planning 779Section Assessment 785Chapter Assessment 786UNIT 7 Law Workshop: Using Legal Tools 790UNIT 7 Landmark Case 792Appendix A: The Constitution of the United States 794Appendix B: The Declaration of Independence 810Glossary 814Case Index 832Index 833Table of Contentsxiii

Exploring the UnitUnderstanding Business and Personal Law is organized into seven units,each beginning with a unit opener. The unit opener uses visuals and activitiescreated to simulate thinking about the topics that will be covered in theupcoming chapters.Unit OverviewThe Unit Overview offers a briefsummary of the topics covered inthe unit and provides insight intohow these concepts affect your life.Your Justice JournalThis feature presents the opportunity foryou to reflect on specific legal, ethical, andcivil situations through written activities.UNITUNIT OVERVIEWGetting married, purchasingyour first home,and planning for yourretirement are importantlife events that manyanticipate. It is necessaryto know your legalrights and responsibilitieswhen you reachthese life events so thatyou can plan accordingly.In this unit, youwill learn about the lawsthat govern the followingtopics:l Marriage and divorce,and their legalconsequencesl Renting and buying aresidencel Insurance protectionl Retirement and willsPlanning forthe FutureMoving Day You are about to rentyour first apartment. You have packedyour furniture, purchased necessaryhousehold items, and changed yourmailing address. Before you movein, you must sign the lease.In your Justice Journal, writeabout what you should knowbefore you sign. Is the lease alegal document? Explain youranswer.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 7: Planning for the Future 671The Unit Opening PhotographThis photograph appeals to the visual learnersin your class, providing connections to dailylife that will stimulate memory and reinforceconcepts that are covered in the chapter.Power Reading StrategiesThese strategies challenge you tostrengthen your active reading skills toincrease retention, generate interest, andfoster creative and critical thinking.xivExploring Your Book

Exploring the ChapterEach chapter of Understanding Business and Personal Law provides anopening structure that is both visually appealing and easy to comprehend. Itprepares you for learning and sets the stage, both visually and textually, fornew concepts that will be covered in the chapter.The Chapter Opening PhotographThis photograph provides a visualstimulus, provoking thought and reflectionabout the events depicted andhow they relate to the chapter topic.The Opening SceneThe Opening Scene is a vignette that presents adynamic real-world situation that you may encounterin your own life. It introduces key legal and ethicalissues to be covered in the chapter and offers insightinto how law affects the real world in which you live.CHAPTERContractual CapacityUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 7: Contractual Capacity—Chapter Overviews to preview thechapter information.Understanding Business and Personal Law OnlineThis feature directs you to the Chapter Overview thatis found on the Understanding Business and PersonalLaw Web site at ubpl.glencoe.com. You will find agreat deal of interesting and useful material on theWeb site, including new features, study resources,and enrichment activities.The Opening SceneIt’s Saturday morning, a few days after Jake boughthis “new” car. Alena, Viktor, Jake, and their collegefriend, Arkadi, are at the used car lot.A Minor’s Major ReturnALENA: You’ve dreamed up a crazy plan, Arkadi. Idon’t think this is going to work. The dealershipis not going to return Jake’s money. Maybe hedoesn’t even deserve to get it back. His decisionwas pretty stupid.JAKE: Thanks a lot, Alena. Why do you always haveto act like such a know-it-all?ARKADI: Trust me. When I was a kid like Jake, asimilar thing happened to me. We’ll get Jake’smoney.JAKE: Who are you calling a kid? I’m not inelementary school.ALENA: (Ignoring Jake.) But you were 14 when youbought that defective stereo system, Arkadi. Jakeis 16 right now.ARKADI: It doesn’t matter. Jake’s still a kid. (Turning toJake.) Are you ready? Do you have the paper wetalked about?JAKE: I’m prepared. Here it is. And stop calling me akid. I’m not a kid.(A salesperson in a cheap suit approaches the group.He grins broadly and greets the group with excessiveenthusiasm.)MR.BARENBLATT: Hello there, boys and girls.Barenblatt’s the name. Cars are my game. Wehave a lot of good deals today-–plenty of usedcars and trucks that are perfect for first-time buyers.How’d you like to take this little beauty for a spin?JAKE: I know who you are. You sold me a bogusvehicle the other day.(Mr. Barenblatt takes a closer look at Jake, recognizeshim, and smiles.)MR.BARENBLATT: Oh yeah. I thought that I knewyou from somewhere. I sell a lot of cars. Sometimesit’s hard to remember everyone. Hi there, kid.How’s your car running?JAKE: It’s not.MR.BARENBLATT: What are you trying to say? It’snot running?JAKE: No. It’s not my car anymore. Here you go–I guess you’ll want to read this.(Jake hands him the paper. Mr. Barenblatt reads itquickly.)MR.BARENBLATT: What is this, some kind of stupidjoke?ALENA: It’s no joke, friend. He’s a minor, and hewants out of the bogus deal that you forced himinto. Next time, you’ll think twice before you tryto hustle a minor.MR.BARENBLATT: You can’t do that! We had anagreement, and you can’t just change your mindand pull out of it now. You signed a contract!JAKE: (Smiling.) It makes no difference. After all, I’mjust a kid.1. When is a person considered a minor?2. Why does the law permit minors to void theircontracts?3. Are there any exceptions to the rule that saysthat minors can void their contracts?4. What individuals, besides minors, can void theircontracts?Chapter 7: Contractual Capacity 145What Are the Legal Issues?This feature expands upon the The OpeningScene by challenging you to criticallyexamine the legal issues that appear in thevignette. You are asked to hypothesize aboutthe answers to legal questions, stimulatingyour thought on the legal terms and conceptsthat are involved in the scene. This featurealso helps you to focus on the importanttopics that are discussed in the chapter.Exploring Your Book xv

Exploring the SectionChapters of the Understanding Business and Personal Law text are dividedinto easy-to-grasp sections of information. An organized flow of conceptdevelopment, punctuated by point-of-use assessment opportunities, helpsyou build new knowledge in easily managed increments.What You’ll LearnEach section lists the mostimportant concepts and highlightsthe skills and knowledge that youwill master after study of thesection is completed. Establishingthese goals helps you engage thematerials in an active manner. Youcan also use these bulleted items asstudy guides to the importantconcepts covered in each section.Why It’s ImportantThis feature explains therelevance of the section. It helpsyou connect concepts to yourdaily life, business relationships,society, and the legal system asa whole.l When to apply theLegal TermsEach section includes a list of thevocabulary terms that are introducedin the section discussion. These termsare printed in boldface type andhighlighted in yellow the first timethey are introduced in the text. Clearand contextually relevant definitionsaccompany each term. Studying theselegal terms is an excellent way toprepare for quizzes and exams.law of sales in yourdaily lifel How to describe thespecial rules for salescontractsl How to determinewhen sales contractsmust be in writingl How to explain therules for auctions andbulk salesAs you learn more aboutthe law of sales, you willbe better able to protectyour legal rights andyour money when buyingor selling a product.The Sale and Leaseof GoodsSalesl salel pricel goodsl Uniform CommercialCodel contract to selll merchantl usage of tradel firm offerl output contractl requirement contractl auction with/withoutreservel bulk transfer268 Unit 3: Understanding Consumer LawIn the previous eight chapters, you studied general contract law,which governs contracts for such things as real estate, employment,and personal services. This chapter explains a different type of law—the law of sales—that governs contracts for the sale and lease ofgoods. A sale is a contract in which ownership of goods is transferredfrom the seller to the buyer for consideration. The consideration is alsoknown as the price , or the money that is paid for goods. Goods areall things that are moveable, such as your clothing, books, pens, food,car, and even the gas you put in your car. Money, stocks, and bonds arenot considered goods.The law of sales grew from the practices of business people, merchants,and mariners in early English times. In those days, merchantsadministered the law in their own courts. As time went on, the early lawof sales combined with English common law and eventually was putinto a code (a collection of laws) called the English Sale of Goods Act.In 1906, a code of law called the Uniform Sales Act was introducedin the United States. It was similar to the English Sale of GoodsAct, and over a period of years, was enacted by the legislatures of35 states. However, it proved to be inadequate. As interstate commerce(trade between the states) developed, the need arose to make uniformthe many commercial laws in effect among the states. The result wasthe development of the Uniform Commercial Code (UCC) in 1952.The Uniform Commerical Code is a collection of laws that governsvarious types of business transactions. When you enter a contractinvolving goods, the UCC will apply.Example 1. Malika got a summer job at a Smoothie Shop on thesame day that her parents bought a new house. To celebrate, herfamily went out to dinner. The day’s activities involved threedifferent contracts. Malika’s oral employment contract and herparents’ written contract to buy the house are governed by thelaw of contracts discussed in Unit 2. In contrast, the family’soral contract with the restaurant for dinner is a sale of goodsand is governed by the UCC.One purpose of UCC is to combine the laws relating to commerceinto a single uniform code. Another purpose of the UCC is simplify,clarithirdthrorulnoUCFrbUtxvi Exploring Your Book

Reviewing What You LearnedExploring Section AssessmentEach section and chapter ends with assessment questions and activitiesdesigned to evaluate your understanding of the section material. The SectionAssessment provides you with a chance to review and evaluate your comprehensionof the important topics immediatelybefore moving on to new concepts.must sell the goods to the highest bidder. The goods cannot be withdrawnfrom bidding unless no bid is made. An auction sale is withreserve unless it is expressly stated that it is without reserve.Have you visited an online auction Web site when searching for anew CD or plane tickets? Internet auctions have become increasinglypopular. They offer opportunities to buy and sell goods locally andworldwide. Internet auctions can be person-to-person or business-toperson.In person-to-person auctions, sellers offer items directly toconsumers. The highest bidder must deal directly with the seller toarrange for payment and delivery. In contrast, operators of businessto-personauctions have control of the items and handle the paymentand delivery of goods.Internet auction fraud is a concern. Sometimes sellers don’t deliverthe goods, or they deliver something less valuable than the item theyadvertised. At other times, sellers fail to deliver an item when they saythey will. The Federal Trade Commission (FTC) provides informationabout Internet auctions in its free brochures and at its Web site.Social StudiesBefore people exchangedmoney for goods, peopletraded goods for goods.This type of sale iscalled barter. The discoveryof nonlocal objectsat many archaeologicalsites suggests thatbarter existed in prehistorictimes.Research ActivityReviewing What You LearnedThese questions require you torecall important section materialsand key terms.Bulk TransfersSometimes a business transfers all merchandise and supplies atonce, known as a bulk transfer . The UCC rules require that the buyerof the bulk goods notify all of the seller’s creditors at least 10 daysbefore the transfer will take place. The creditors then have the opportunityto take legal steps to get the money that is owed them before thetransfer of the goods. Before this rule existed, merchants owing moneycould sell out their entire stock for less than it was worth.Anthropologists havefound bartered goodsthroughout the world.Research a countrythat still uses barteras an important methodof exchange. Find outwhat types of goodsare bartered and howa value is placed onthose goods. Write aone-page paper thatexplains your findings.1. When do you use the law of sales?2. What special rules apply to sales contracts?3. When must sales contracts be in writing?What are the exceptions?4. What are some rules for auctions and bulksales?installed in your home, how should you determinewhether to apply the law of sales?Legal Skills in ActionCritical Thinking ActivityLaw of Sales When you contract for somethingthat includes both goods and services,such as having wall-to-wall carpetingAuctions Conduct a two-part mock auction ofmusic CDs in front of your class. Have yourclassmates bring in CDs to be auctioned. (Besure to mention that everything will bereturned to the rightful owners after theauction.) Arrange for the first part of the roleplayto be an auction without reserve and forthe second part an auction with reserve.Critical Thinking ActivityThis activity requires you todemonstrate an understanding ofthe concepts introduced in thesection by interpreting, analyzing,comparing, or making judgments.Chapter 13: Contracts for the Sale of Goods 275Legal Skills in ActionThis question focuses on using basicmathematical, communication,interpersonal, writing, language arts,and thinking skills to explain conceptsstudied in the section.Exploring Your Book xvii

Exploring Chapter AssessmentChapter Assessment activities are designed to be flexible and to address themultiple learning styles of your students.Chapter SummaryThe Chapter Summary provides aconcise overview of the main conceptsof the chapter. Organized by section,bulleted points highlight the mainlearning objectives of the material.You can use the summaries to preparefor exams and ensure that youunderstand the important conceptsintroduced in each of the chapters.Using Legal LanguageUsing the legal vocabulary terms introduced in the chapter,you are asked to complete written, oral, and creativeactivities that require recollection of the terms and theirdefinitions. Many of these activities require you to work aspart of a team and participate in classroom activities.CHAPTER ASSESSMENTSection 11.1 Performance and Agreement● A reasonable time for completing a contractvaries, but it is generally defined as the time thatis suitable, fair, and proper to the objective of thecontract. For example, the reasonable time forselling perishable food would not be the same asthe reasonable time for selling a car or house. Ifthe parties specify a time limit for carrying outthe terms of the contract, the court will usuallyallow a longer time for performance unless timeis of the essence. Time is of the essence when itis a vital or essential element of the contract.● Satisfactory performance is completion of aservice that a reasonable person would deemperformed to his satisfaction. In determiningwhether satisfactory performance has beenmade, the court asks, “Would a reasonableperson consider the job to be completed in asatisfactory manner?” A judge or jury wouldthen decide the matter based on the answer tothis question. Unlike satisfactory performance,however, substantial performance is notcomplete performance. Nonetheless, if the majorrequirements have been fulfilled, the courts willallow the performer to recover the contractamount minus the cost of completing the job.● A tender of performance is an offer to perform acertain act to fulfill a contract. It is important tomake tender even if you know the other partywill not perform his or her part of the contract. Insome states, making tender is necessary to test theother party’s willingness and ability to perform.● Contracts can be terminated by mutual releaseand accord and satisfaction. A mutual release isan agreement between two parties to end anagreement. Whatever parties agree to do in thefirst place, they may later mutually agree not todo. Accord and satisfaction occurs when oneparty to an agreement agrees to accept performancefrom the other party that is different fromwhat was agreed upon in the original contract.Accord and satisfaction is often used to settlean honest disagreement or unforeseen circumstancesregarding an amount owed.Section 11.2 Impossibility of Performanceand Operation of Law● Some contracts come to an end despite whatthe parties intend or what they actually do. Acontract becomes legally impossible to performand becomes discharged in the case of (1) deathor illness that prevents the performance of apersonal service contract, (2) destruction of theexact subject matter or the means for performance,and (3) illegality. The death or illness of a partymay be an excuse for nonperformance only if thecontract requires the personal service of theperson who has died or become ill.● A contract may be discharged by operation oflaw in the following cases: (1) when one of theparties commits a wrongful act, (2) when thestatute of limitations has expired, and (3) whenthe debtor declares bankruptcy.● The statute of limitations limits the time withinwhich a legal action may be brought. The statuteof limitations for failure to perform contracts forthe sale of goods is four years in most states.● Educational loans, debts for taxes, alimony,support, and maintenance are not affected by ageneral discharge of debts in bankruptcy.Consider the key terms in the list below. Then use these terms tocomplete the following exercises.discharged legal tenderperformance operation of lawaccord and satisfaction statute of limitationssubstantial performance bankruptcy lawstender reasonable time1. With a team of three or four, role-play a situation in which acontract is coming to an end. Use as many of the terms listedabove as possible.2. Present the role-playing exercise to the class. Be animated andenergetic in your presentation.3. Have your classmates critique your team’s performance.4. Read your classmates’ comments and briefly discuss with yourteam how you could improve your role-play.Answer the following questions. Refer to the chapter for additional reinforcement.5. Will a court allow a longer time for performance of a contract than the contractspecifies? Explain your answer.6. What is the test called that the courts use to determine satisfactory performance?7. What is it called when one contract is substituted for another? How often is thisprocedure used?8. Can the death or illness of a party be used as an excuse for nonperformance of acontract? Explain your answer.9. What situations “stop the clock” on the statute of limitations?10. Why do some states require a party to make tender, even if the other party cannotfulfill the terms of the contract?11. Why does the law require that some debts be retained after a person declaresbankruptcy?12. What is legal tender?Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 11:How Contracts Come toan End—Self-CheckQuizzes to prepare forthe chapter exam.Chapter 11: How Contracts Come to an End 237236 Unit 2: Entering Into ContractsThe Law ReviewThese questions askyou to recall specificlegal concepts foundin the chapter.Understanding Business andPersonal Law OnlineThis feature directs you to theWeb site at ubpl.glencoe.comwhere the chapter’s Self-CheckQuiz is located.xviii Exploring Your Book

Linking School to WorkThis feature is designed torelate legal studies to your workexperiences and to those of yourfamily, friends, or communitymembers. For this feature, youare required to apply practicaland analytical legal skills.Grasping Case IssuesThese cases present scenarios inwhich you are asked to interpretbusiness or personal situations,identify a legal principle that applies,and state a decision on the issue.These case studies are hypothetical.Analyzing Real CasesThis real-world featurechallenges you to readand interpret actualcases, identify the legalissues at work, and applyapplicable laws.CHAPTER ASSESSMENTAcquiring and Evaluating InformationDuring your lifetime, you will sign your namethousands of times—on checks, loanapplications, and other business-relateddocuments. Electronic signatures are now legal,but many people are skeptical about them.Conduct research about electronic signaturesand answer the following questions:14. How are they created?15. What measures are in place to ensure theirsecurity?16. How long will they last?17. What economic impact will they have ononline business?Risk of LossWhile reading the newspaper want ads, Marciadiscovers a stereo system for sale. When shecalled the phone number listed in the ad, sherealized it was her neighbor Tom who wasselling the stereo. Tom was asking $550 for thesystem, and Marcia agreed to purchase it forthat price. Marcia gave Tom a $100 deposit.Because Marcia was leaving the next day togo on vacation, she asked Tom to deliver thestereo to her home when she returned.A week later, while Tom was transportingthe stereo to Marcia’s home, he dropped it andit smashed to pieces. Marcia wants her depositback; Tom wants the other $450. He toldMarcia he was just doing her a favor bydelivering the stereo to her and she still owedhim for the system.Debate18. If Tom took Marcia to court for the $450,would he win? Explain your answer.290 Unit 3: Understanding Consumer LawLet’s DebateThis advocacy-relatedfeature integratescritical thinking andcommunication skillsinto the exploration oflegal issues introducedin the chapter.19. If Marcia took Tom to court, what legalarguments do you think she could make?Explain your answer.For the following cases, give your decision andstate a legal principle that applies.20. Brian buys a CD player from Kerri andreceives his bill of sale. The next day, Briangives the CD player to his sister, Heidi, asa birthday present. Six months later, Briantries to sell the CD player to Jodie, showingher the bill of sale as evidence of his titleto the CD player. Can Jodie rely on thisevidence? Explain your answer.21. Renee is hired by a large manufacturingcompany to work as a computer softwareengineer. Is her employment contractgoverned by the UCC? Why or why not?22. One week after planting tomatoes, Ursulaenters into a contract with a canningcompany, promising to sell the company allof her tomatoes for a particular price. Isthis a sale? Explain your answer.23. Vera agrees to buy a car from Marcus, andMarcus agrees to sell the car to her. Theydo not, however, agree on the price. Isthere a contract? Why or why not?24. Athena and Yvonne, co-owners of a hairsalon in San Jose, California, decide tomove to Portland, Oregon. They sell theirbusiness to Enrique and Shawn. The hairsalon has unpaid debt for equipmentinstallation and beauty supplies. DoEnrique and Shawn have any responsibilitiesunder the bulk transfer section of theUCC? Explain your answer.Ethics and TechnologyTodd’s classmates bully him at school. As a result,Todd decides to create a Web site on which he poststhe names and addresses of each of the bullies; healso includes derogatory remarks about each ofthem. When Todd’s classmates discover the site,many complain that they have a right not to bementioned, that their addresses are private, and thathis comments constitute defamation.ConnectLegal LinkThis technology feature consists of atwo-part activity designed to enhanceyour Web skills. The first partestablishes a scenario or fact thatrelates to the legal issues introducedin the chapter. The second part asksyou to research elements of thescenario and present your findings inwritten or oral formats.In each case that follows, you be the judge.25. Title and Risk of LossClouser agreed to buy a boat from Roger and Sharon Russell, owners of Performance Marine,for $8,500. Clouser made an initial payment of $1,700 and agreed to pay the balance at delivery.Performance Marine was to replace the boat’s engine and drive train before Clouser tookdelivery. No documents of title were to be delivered by the seller. While Performance Marinewas testing the boat, it hit a seawall and was completely destroyed. Who had title to the boat atthe time of the accident? Who had the risk of loss? Explain your answer.Russell v. Transamerica Ins. Co., 322 N.W.2d 178 (MI).26. AuctionsColeman bid $2,050 for a D-7 tractor at a public auction. It was not stated that the auctionwas with reserve. The auctioneer yelled, “Sold,” accepting Coleman's bid. Later, the owner ofthe tractor refused to sell it for $2,050, saying that the auction was with reserve and that hecould refuse to accept the bid. Did the owner have to sell the tractor to Coleman for $2,050?Why or why not?Coleman v. Duncan, 540 S.W.2d 935 (MO).27. Research the ethical implications of legislationresulting from the use of current technology.Can you find any legislation that addresses theethical issues in this case? If yes, what arethese laws, and how would they apply?28. Develop procedural guidelines forimplementing appropriate legislation. What aresome of the steps that companies, agencies,and others can follow to make sure that theyand their employees are obeying the law?29. Predict What problems might exist if theUCC were not a single uniform codethroughout the United States?30. Connect Have you ever ordered anythingthrough a catalog, a television-shoppingnetwork, or over the Internet? How werethe goods shipped to you?31. Question Do you think it is fair for abuyer to refuse to accept goods afterordering them? Why or why not?32. Respond There are only a few laws inplace to protect consumers who buyonline. If you were a lawmaker, whatlaws would you write for the world ofe-commerce?Chapter 13: Contracts for the Sale and Lease of Goods 291Power Reading StrategiesThese strategies incorporateactive learning methods into yourassessment experience. Predict,Connect, Question, and Respondquestions extend learning byasking you to reflect on newlylearned materials, relate thismaterial to previous knowledge,and add personal conclusions tothe discussion.Exploring Your Book xix

Exploring the Law WorkshopsLaw Workshops are presented at the close of each unit of your book.These workshops focus on a legal issue presented within the unit. Hands-onapplication of the concept provides for active learning and fosters a deeperunderstanding of the materials presented.Step A: PreparationThis part of the workshop introducesyou to the problem and objectives ofthe workshop. You are also providedwith effective strategies that will beemployed to complete the activity.Step B: ProcedureThis section provides you withspecific instructions forcompleting the workshop.Step C: Creating a ModelIn all of the workshops, you are asked to create effectivemodels to be used for comparison, presentation,and analysis. You may also be asked to share yourmodel with the rest of the class.Step D:Workshop Analysis ReportUsing the model created in Step C,you will be required to interpret anddraw conclusions about the topiccovered in the workshop.xx Exploring Your Book

Exploring the Landmark CasesLandmark Cases are extensive, two-page case studies found at the end ofeach unit. Actual cases have been selected that feature legal issuescovered in the unit. These cases are also presented in a way thathelps you understand the study of case law by clearly identifyingthe issue, facts, opinion, and holding in each case.IssueThe issue explicitlyidentifies the legalquestion(s) that thecourt must resolvein the case.UNITDenny v. Ford Motor Co.New York Court of Appeals662 N.E.2d 730 (NY)acts Nancy Denny was injured when her FordFactsLandmark CaseIssue Is a claim of strict product liability identical to a claim of breach of impliedwarranty liability, making it inconsistent to find a defendant liableunder one cause of action but not the other?Bronco II rolled over after she slammed herbrakes to avoid hitting a deer. She sued FordMotor Company, asserting claims for negligence,strict product liability, and breach of implied warrantyof merchantability. Denny introduced evidenceshowing that the vehicle was moredangerous than ordinary passenger automobiles,but Ford argued that the design features werenecessary for the vehicle’s off-road capabilitiesand that the vehicle was not intended to be soldas a conventional passenger vehicle. The juryfound that the Bronco II was not “defective” forpurposes of strict product liability theory, but thatthe defendant was still liable for breach of warrantyof merchantability. On appeal, Ford arguedthat the two claims are the same and that thejury’s verdict was inconsistent.Opinion The New York Court of Appealsfocused on the development of product liabilitylaw as the courts tried to keep pace with a radicallychanging economic landscape. It pointed out thattraditionally the judiciary had relied on contractualwarranty theories as the only way of awarding economicrecovery for injuries that people suffer as aresult of defective goods. This approach made goodsense in an economic world in which most386 Unit 3: Understanding Consumer LawFactsThe facts present the relevantinformation and sequence ofevents involved in the case.transactions occurred in a marketplace in whichbuyers and sellers interacted on a personal basis. Insuch cases, it was relatively easy to establish the requirementof a relationship of privity and to recovercompensation for injuries.However, the court recognized that as thefundamentals of the economy changed, courtshad to change with them if injured parties wereto recover damages: “Eventually, the contractuallybased implied warranty theory came to beperceived as inadequate in an economic universethat was dominated by mass-produced productsand an impersonal marketplace.” As a result,courts began to realize the need for a new, moreflexible tort cause of action.Development of Strict Product LiabilityThe new cause of action was called the strictproduct liability. This cause of action “significantlydiminished the need to rely on the contractuallybased breach-of-implied warrantyremedy as a means of compensating individualsinjured because of defective products.” While theapplicable principles and available defenses differ,the court reasoned that there is a great dealof overlap between the substantive aspects ofthe two causes of action. The court even admittedthat it had earlier observed, in dictum, thatOpinionThe opinion section of the case explains the court’sinterpretation and application of the law. It alsogives you the court’s reasoning and allows you tounderstand the grounds for their holding in the case.“strict liability in tort and implied warranty in theabsence of privity are different ways of describingthe very same cause of action.”Nevertheless, the court explained that the tortcause of action did not completely replace the olderbreach-of-implied warranty cause of action and thatthey were not identical in every respect. In rulingagainst Ford, the court emphasized two points:• The warranty approach is still alive, andits vitality is evidenced by its “retention andexpansion in New York’s version of theUniform Commercial Code.”• The core element of “defect” in each cause ofaction is subtly different given its differenthistorical and doctrinal origins.Distinguishing the Causes of ActionHoldingThe holding identifies the final rulingof the court in the case. It answers thequestion(s) identified in the issue.In distinguishing the two causes of action,the court pointed out that under New York law,injury due to a design defect was actionable understrict product liability “if the product is not reasonablysafe.” The existence of a design defect isdetermined under New York lawby asking whether “if the designdefect were known at the time ofmanufacture, a reasonable personwould conclude that the utility ofthe product did not outweigh therisk inherent in marketing a productdesigned in that manner.” Thisanalysis requires a weighing ofthe product’s dangers against itsoverall advantages.In contrast, the UCC-basedconcept of a “defective” productrequires an inquiry only intowhether the product at issue is“fit for the ordinary purposesfor which such goods are used”(UCC 2-314[2][c]). This analysisfocuses on the expectationsof a product when used in “thecustomary, usual, and reasonably foreseeablemanners.” Under this cause of action, an injuredparty can recover by showing that the product wasnot minimally safe for its expected use “withoutregard to the feasibility of alternative designs orthe manufacturer’s ‘reasonableness’ in marketingit in that unsafe condition.”As a result of these differences, the court explainedthat “defect” analysis in strict product liabilityactions are more concerned with socialpolicy and risk allocation. In contrast, “defect”analysis in breach-of-implied-warranty actionsoriginates in contract law and focuses upon a purchaser’sdisappointed expectations.Holding Given the historical and doctrinaldifferences between the two causes of action, thecourt ruled against Ford and held that “under thecircumstances presented here, it is possible to beliable for breach of implied warranty even thougha claim of strict product liability has not been satisfactorilyestablished.”1. Why was Ford’s argument flawed?2. What was the primary weakness of the breachof warranty theory in product liability cases?3. When may a design defect be actionable undera strict product liability theory?4. What is the New York standard for determiningthe existence of a design defect?5. What inquiry must be made to determinewhether a product is defective under the UCC?6. How do the origins of breach of impliedwarranty actions and strict product liabilityactions differ?Go to the Understanding Business and Personal Law Web Site at www.ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 17: Personal Property and Bailments 387Web ResourcesThis feature directs you to the courseWeb site, where you can find additionalresources on each of the Landmark Cases.Questions for AnalysisThese questions ask you to understand the specificsof the case, identify the legal issues, and explain howthe court interpreted and applied the law.Exploring Your Book xxi

FeaturesYour Understanding Business and Personal Law book includesseveral features, each varying in length, scope, and focus. The purpose ofthese features is to enrich your learning experience, help you understandthe practical applications of the concepts and skills you learn throughoutthis program, and encourage your curiosity, critical thinking, andcreativity. They also connect what you learn to legal careers and to otheracademic disciplines, encourage you to become actively involved in yourcommunity, and suggest a variety of research projects to extend, enrich,and assess your understanding of business and personal law topics.Community WorksThese features focus on law and community involvement. They introduceyou to issues such as volunteer work, neighborhood watches, substanceabuse, graffiti, and handicap accessibility laws, among many others. Asuggested activity at the end of each feature will give you ideas forbecoming more involved in your community and in community service.Adopt a Pet 20Guns in School 45Crime and Punishment 58Student Privacy 90Student Loans 118Voidable Contracts 137Draft Registration 156Gifts 166Politically Correct 189Debt 211Earth Day 226Pets that Bite 248Food for Thought 272Charitable Gifts 306Health Hazard 328Donating Automobiles 347Gift of Life 375Talent Agent 400Dress Code 415Employment Discrimination 435Cesar Chavez 468Paying for College 490Rubber Checks 513Traveler’s Checks 531Safe Driving 550Win-Win 561Independence Day 592Prestigious List 6184-H 631Taking Stock 656Wedding Bells 677Alcohol Abuse 695Subsidized Housing 721The Loss of Wildlife Habitat 741Helmet Laws 759Retired Hire 773xxii Touring the Features

Learn more about the law from an actual practitioner who works in a legalfield. In this feature, you will be introduced to their career in their ownwords and learn about their motivations and interests. You will also learnabout the constructive role they play in the profession and in thecommunity, and find information about the personal and educationalrequirements for pursuing a similar career.Forensic Scientist 46Corporate Attorney 89District Court Judge 135Court Reporter 174Civil Process Server 210Corporate Lawyer 254Intellectual Property Attorney 307Parole Officer 340Law Librarian 395Labor Union President 443Nonprofit Attorney 487Canine Enforcement Officer 530Professor of Philosophy 565Law Editor 615State Legislator 658Fingerprint Expert 700Criminal Court Judge 734Legal Columnist 782Careers in LawTouring the Features xxiii

A Global Perspective: Laws Around the WorldAs businesses expand and people travel, it is important to learn about other countriesand cultures. This feature will spotlight the judicial system or other legal facts ofinterest in other countries and societies. The purpose is to provide you with insightinto other cultures and how those cultures are organized and expressed in law. Youwill also learn basic facts about the countries profiled, including their population,geographical area, capital, language, religion, and life expectancy. The feature willalso include a critical thinking question to encourage further exploration of thecountry and legal issues discussed.Ghana 8Native American Groups 67Antarctica 107China 147Greece 187South Africa 227Russia 271Haiti 319Canada 364Brazil 421U.S. Citizens Workingin Other Countries 457U.S. Companies Operatingin Other Countries 512Israel 551Iceland 595Argentina 635India 684Australia 717The Netherlands 764xxiv Touring the Features

It’s a Question of EthicsThis feature presents real-life situations relating to topics covered in your book andraises ethical questions (and the dilemmas they often present) for you to consider anddiscuss. You are encouraged to think not just about what the law says and how itapplies, but also to identify the ethical issues involved and ethical courses of action.The feature encourages you to think critically and creatively, and to apply yourproblem-solving skills to circumstances in which clearly right or wrong solutionsmay not be available.Confidentiality 12Giving Evidence 47Ethical Crime? 63Smashing Grapes and Slippery Floors 84Seller’s Choice 121Leaking Information 136Eat, Drink, and Be Merry? 157Gestures of Kindness 165Winner Takes All 188Green Acres 209Barn or Beach? 233Keeping Your Word 246Buying More Than He Can Afford? 274Beads and Business 303Using the Cooling-Off Rule 329Selling “As Is” 348Leaping Dolphins 365An Undisclosed Third Party 403Disparaging Remarks 417Determining When to Discipline 436Affirmative Action 459Using Credit Cards 486Negotiating with IOUs 515Bad Check or Bad Practice 533Change of Fortune 546Financial Difficulties 569Becoming a Sole Proprietor 585The Inside Information on Nonprofits 614Revealing Relationships 637Ethics and Advertising 659Love or Legal Status? 685Child Support and Visitation 701Decorating Disaster 720Eminent Domain and Sidewalks 742Who Pays the Bill? 760Laid-Off or Early Retirement 783Touring the Features xxv

Law & AcademicsThe law is related to a variety of other academic disciplines, and this feature drawsconnections between business and personal law and other interesting areas of thecurriculum. Examples include business, social studies, mathematics, andanthropology, to name only a few. The interdisciplinary approach of this feature willhelp you perceive and pursue interesting links between the law and other academicfields. Each feature also includes a research activity for you to pursue individually orin a group.Professional Ethics 16Courthouses 41Forensic Science 69Tort Law 93Employment Contracts 117Duress 131Minors 149Latin 177Sunday Statutes 196Perjury 217Computer Technology 235Bible Laws 251Barter 275Vehicle Warranties 309Technology and the Bar 331Buying a Vehicle 349International Patents 373Independent Contractors 405Postal Service 419Mass Layoff 439Civil Rights Act of 1964 469Research and Development 499Money 508Checking Account 528Counterfeiters 549United Nations Commissionon International Trade Law 563Investment Clubs 598Corporations 608Insider Trading 628Corporation Regulation 651Arranged Marriages 686Divorce Rate 699Rental Leases 723Computer Technology 725HMOs 761Future of Technology 781xxvi Touring the Features

Have you ever wanted to start a band? When you get in trouble, do you wish that youcould be judged by a court of your fellow teens? Are you curious about minimumwage laws, or whether you are bound by your promises? These questions andcountless others like them point to the fact that the law is an integral part of yourdaily life. These features emphasize the diverse ways in which the law is part of yourlife, and they encourage you to think about its real-world applications. Each featurealso includes critical thinking questions for you to consider or a research activity foryou to pursue.Limits of Free Speech 18Serving on a Jury 29Teen Courts 59Privacy on the Phone 85Take It or Leave It 109Choosing a Lawyer 130Let’s Rock 152Promising Not to Compete 167How to Find aSupreme Court Decision 195Contracts for UnmarriedCouples 216A Contract with Cupid 228Lawyer-Client Confidentiality 247Gift Certificates 282Extended Warranties 302Blowing Smoke 324Fighting a Traffic Ticket 353Return to Sender, or Not? 370Pay Up 399Service of Process 418Organizing and Participatingin a Union 438It’s Your Right 458Your Credit Report 488Neither a Borrower orLender Be 507Laws in Your LifeFlee Fees 526Restrictive Indorsements 543Paying Twice Is Not So Nice 562Taxing the Sole Proprietor 586New and Hybrid BusinessEntities 619The Benefits of Nonprofit Status 636Business Blues 648Domestic Violence 676Claim Your Name 698Roomies 722Don’t Fence Me In 737The Need for Home Inventory 753Death and Taxes 774Touring the Features xxvii

Legal BriefsThese short features discuss fun, interesting facts that add to yourunderstanding of legal or law-related issues. They may also add backgroundor context to the chapter material, or encourage thought-provokingclassroom discussions.The Golden Rule 10Fear in School 43Criminal Law 64Reputation 86Work Strategy 116Copyrights 129Minors 148Consideration 168RMS Titanic 199Unions 208Breach of Contract 232Roman Law 245Rightful Owner 270Consumer Protection Rights 304Fraud 322“Lemon Laws” 342U.S. Patents and Trademarks 378Agency Law 396Agents 420Mediation 441Rental Cost 460Teen Spending 488Demand for Payment 510Debit Cards 535Forgery 553Negotiable Instruments 571Sole Proprietorship 594Shareholders 607“Black Thursday” 632Brands 660Napoleonic Code 679Separation and Divorce 703“Quiet Enjoyment” 718Fannie Mae 739Life Insurance 757Euthanasia 778Your Justice JournalTo be successful in a legal profession, you must have excellentwriting skills. For this reason, you will be asked to keep a journalthroughout this course. This feature appears with every unit in yourbook. Its emphasis is writing in your journal and how important it isfor you to be able to clearly and effectively communicate your ideasin written form. The subject matter of your journal is diverse; youmay be asked to write on some aspect of the law, something youlearn in the unit, or something pertinent to your daily life. You willbe required to solve problems, think creatively, and criticallyexamine the law and related issues.Birthday Bonus 3Web Work 103Buyer Beware 265Working the Night Shift 389Money Problems 481Be Your Own Boss 581Moving Day 671xxviii Touring the Features

Virtual LawTechnology is becoming an increasingly common and important part of everyone’slife. With computers, cell phones, the Internet, and other technologies have arisennew and exciting issues in the law. Do you have a right to privacy over the Internet?How safe is it to shop online? Are contracts made over the Internet binding on theparties? These and many other intriguing issues are the focus of these features. Youwill be asked to research issues involving law and technology, and to utilize currenttechnology in developing and managing legal documents.Whose Name Is It Anyway? 19Cybercourt 30Investigating Cyber Crime 71Privacy in Cyberspace 83Online High School 110E-Book Publishing Rights 138H1-B Worker Status 154Protecting Minors Online 171Uniform ComputerInformation Transaction Act 198Legal Guidance Withouta Lawyer 208Breach of Contract 243Contracts and the Computer 280Internet Retailers Finedfor Delays 301Internet Auction Fraud 317Maintenance Online 354The Napster Case 372From Employee-Agent toIndependent Contractoron the Net 404Author Agents in a Digital World 422Using E-mail at Work 444Bias in the Workplace 462Credit Card Security 498Electronic Checks 514Electronic Banking forthe Visually Impaired 522E-Signatures 552Selling on Credit toInternet Companies 564Online Legal Advice 596Tax Law and Nonprofits 617Shareholder Suits 638Marriage and the Internet 675Divorce.Com 704Eviction in the Land ofHigh Tech 713Online Mortgage Providers 740Insurance Online 758Teachers’ Fund Invests inHigh Technology 775Touring the Features xxix

GORDON W. BROWN studied lawto become a more knowledgeable teacherwith expertise in the legal field.He attended Suffolk University LawSchool, Boston, MA, at night for fouryears, while teaching during the day.After law school, he became a memberof the Massachusetts Bar and took aposition as a professor at North ShoreCommunity College, Danvers, MA,where he taught for the next thirty years.Before ending his thirty-eight yearteaching career, he taught business, secretarial, andparalegal subjects at Pepperell High School,Pepperell, MA; Endicott College, Beverly, MA; andNorth Shore Community College. In addition toteaching, he also opened a law office in Beverly,MA, and enjoyed a full-time career ofpracticing law, writing textbooks, andbeing a husband to his wife Jane, thefather of six very special children, anda grandfather to twelve grandchildren.In 1998, Mr. Brown was awarded theOutstanding Educator Award from hisalma mater, Salem State College. Inaddition to this text, Mr. Brown is theauthor of Legal Terminology, publishedby Prentice Hall, and Administration ofWills, Trusts, and Estates, published byWest, Legal Studies. He is also co-author of BusinessLaw with UCC Applications, published byIrwin/McGraw-Hill. Currently, Mr. Brown continuesto be a practicing attorney and is an active member ofthe Massachusetts and Federal Bars.PAUL A. SUKYS is professor ofhumanities, law, and legal studies in theArts and Sciences Division of NorthCentral State College in Mansfield, OH.In addition to teaching business lawcourses at North Central State College,he specializes in teaching interdisciplinarycourses including, “The Legal andEthical Aspect of Health Care,” Science,Art, and Literature, “The History of theFuture,” “Contemporary Ethical Issues,”and “The Philosophy of Technology.” In2001, he received the Pushing the Envelope Award atNorth Central State and in 1998 was named NorthCentral’s Outstanding Teacher of the Year. He is theauthor of Lifting the Scientific Veil: ScienceAppreciation for the Nonscientist and co-author oftwo additional books, Business Law With UCCApplications and Civil Litigation. He was chairpersonof the Business Law Committee in the developmentof the National Standards for BusinessEducation established by the National BusinessEducation Association (NBEA). Along with CynthiaRedmond of Bozeman High School in Bozeman,MT, he developed the business law lessonplans for Entrepreneurship TeachingStrategies, jointly sponsored by theNBEA and the Kauffman Foundation. Atpresent, he is working on the businesslaw chapter for NBEA’s 2003 Yearbook.In 1966, he was a member of theDANTES Ethics in America NationalWriting Committee sponsored by theChauncey Group International. A memberof the Ohio Bar, Professor Sukysreceived his bachelor’s and master’sdegrees from the John Carroll University inCleveland and his law degree from Cleveland StateUniversity. He also attended additional classes atNew York University and Kenyon College. He ispresently working on his doctorate in applied philosophyand art history at the Union Institute inCincinnati. He has also taught at John CarrollUniversity, the Fairmount Center for Creative andPerforming Arts, and Cuyahoga Community College.Currently he is writing a new book entitled QuantumRelativity: The Philosophical, Artistic, and LiteraryDimensions of the Theory of Everything.xxx Meet Our Authors

We gratefully acknowledge the contributions of the reviewers of this program:Arthur James AkinsAssistant PrincipalAdministration of StudentAffairsHillsborough High SchoolTampa, FloridaCarmen CantrellBusiness EducationDepartment Head andInstructorNampa High SchoolNampa, IdahoDeborah ClarkBusiness TeacherPrinceton High SchoolPrinceton, West VirginiaDelores S. CottonBusiness EducationDepartment HeadHenry Ford High SchoolDetroit, MichiganCoralee DahlBusiness TeacherWells High SchoolWells, NevadaAmber DayBusiness TeacherNova High SchoolCoral Springs, FloridaClaire DillionBusiness TeacherPotomac Falls High SchoolSterling, VirginiaMichael DuncanBusiness and MarketingTeacherCastle High SchoolNewburgh, IndianaJeane GeurinBusiness TeacherMt. Vernon High SchoolMt. Vernon, IndianaSandy HanshawBusiness TeacherNicholas City High SchoolSummersville, WestVirginiaDiane P. HoganProgram Specialist,Business EducationOrange County PublicSchoolsOrlando, FloridaLynn HugginsBusiness InstructorInstitute for GlobalCommerce andGovernmentTracy, CaliforniaBergie R. JonesBusiness EducationInstructorJim Hill High SchoolJackson, MississippiFrancis MichelleKirklandBusiness TeacherVidor High SchoolVidor, TexasPatrick W. KnowlesVocational DepartmentHeadMarketing/BusinessInstructorWest Valley High SchoolSpokane, WashingtonAnn Lori LarsenBusiness EducationInstructorSunny Hills High SchoolFullerton, CaliforniaDr. William C. LauerChairman, BusinessEducationOcean City High SchoolOcean City, New JerseyRichard M. LazeroffBusiness EducationInstructorRush Henrietta CentralSchool DistrictHenrietta, New YorkJohn MarshBusiness EducationInstructorFargo South High SchoolFargo, North DakotaRobert L. MataAcademic Dean, CedarRapids CampusHamilton Business CollegeCedar Rapids, IowaTrina McLeanBusiness TeacherPhoebus High SchoolHampton, VirginiaJudy MitchellBusiness DepartmentChairThomas More High SchoolHays, KansasCynthia RedmondBusiness TeacherBozeman High SchoolBozeman, MontanaRaymond P. RoginaChairperson, BusinessEducation InstructorSt. Charles North HighSchoolSt. Charles, IllinoisDonna ScheuererBusiness TeacherFarmingdale High SchoolFarmingdale, New YorkGardenia S. SlighBusiness EducationInstructorColumbia High SchoolColumbia, South CarolinaMoira SweetingBusiness TeacherMcArthur High SchoolHollywood, FloridaKay TippettBusiness EducationInstructorBozeman High SchoolBozeman, MontanaWe also wish to extend special thanks to JaneA. Brown for her work on the Student ActivityWorkbook and for her many suggestions thathelped to improve this law program.Gordon W. BrownPaul A. SukysReviewers 1

UNITUNIT OVERVIEWLaws generally reflectand promote the valuesof our society. Our legalsystem is intended toprotect the welfare, safety,and diverse interests ofindividuals and societymore generally. Lawsthat protect our freedoms,encourage positiveinteraction with others,and prohibit harmfulbehavior help improveour society. In this unit,you will study:l Ethics and the lawl The court systeml Criminal lawl The law of torts

Knowing Aboutthe LawBirthday Bonus You received apopular computer game for yourbirthday. When your friends foundout, they asked you to burn a copyfor them on your CD writer.In your Justice Journal, writeabout the legality of copying theprogram, the ethical dilemma youface, and what you would tellyour friends.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 1: Knowing About the Law 3

CHAPTEREthics and the LawUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and click onChapter 1: Ethics and the Law—ChapterOverviews to preview the chapterinformation.

The Opening SceneStarting in this chapter, you will meet Jamila andTrai, who attend New Hope High School. They arehaving a discussion in their sixth-period law class,taught by Mrs. Ovelia Martinez.A Debate about EthicsMRS.MARTINEZ: Okay, class, let’s get settled. The bellrang two minutes ago. Our first order of businesstoday involves something a little out of the ordinary.I think many of you will find it interesting. I needvolunteers! The principal wants to know if anyonein this class wants to volunteer for peer mediation.TRAI: I volunteer Jamila.JAMILA: Peer what?MRS.MARTINEZ: Very funny, Trai. Haven’t you heardof peer mediation, Jamila? It is when students helpdecide disputes. A three-day training program isscheduled next weekend at Centerburg High.TRAI: A three-day training program? Does that meanI can miss three days of school if I volunteer to be apeer mediator? If yes, you can count me in! I coulduse a break from school.MRS.MARTINEZ: If I were you, Trai, I wouldn’t rushinto this. The program’s not a vacation—you’ll beinvolved in some extensive training. It’s not easy tobe a peer mediator. Peer mediators have to makecomplicated decisions. Plus, it’s not easy to makefair decisions when you’re dealing with friends andclassmates.TRAI: Who needs training? All you have to know isthe difference between right and wrong.JAMILA: Well, not everyone knows the difference.TRAI: That’s not true. Your religion tells you thedifference.JAMILA: Not everyone is religious. You can’t assumethat every family is like yours, Trai.FELICIA: It depends on how you’re raised. Yourparents should tell you what’s right and wrong.PEGGY: My Dad says everything I do is wrong.DANIEL: When I do something wrong, I get a queasyfeeling in my stomach.TRAI: That’s your lunch.PEGGY: I thought right and wrong come from theConstitution—if it says something is wrong, thenit’s wrong.MRS.MARTINEZ: You are partially right, but lawschange. Does that mean right and wrong change?DANIEL: Maybe right and wrong are just a matterof opinion.JAMILA: If that’s true, then maybe morality is nobig deal.MRS.MARTINEZ: Oh, I think it’s a very big deal.Judging from some previous class discussionswe’ve had, I think that you think morality is a bigdeal, too.TRAI: I agree with Mrs. Martinez. For instance, I betshe would never punish somebody for somethingthey didn’t do. Isn’t that right, Mrs. Martinez?MRS.MARTINEZ: Of course. That would be wrong.TRAI: Sweet!MRS.MARTINEZ: Why?TRAI: Because I didn’t do my homework.1. What is the source of morality and ethics?2. Should ethical decisions be based on a person’sfeelings or opinions?3. Do ethical and legal issues ever conflict?4. Do ethical standards ever change?5. Does the law ever change in the United States?Chapter 1: Ethics and the Law 5

Defining Ethicsl How ethical decisionsare madel When to apply thegreatest goodprinciplel When to apply theGolden Rule principlel How to explain thenature of ethicalcharacter traitsl When law relates toethicsl How to explain theimportance of lawl How ethics and thelaw might sometimesconflictLearning how to applyethical principles willhelp you make ethicaldecisions.l moralityl ethicsl honestyl justicel compassionl integrityl lawHow Ethical Decisions Are MadeDetermining the difference between right and wrong can be difficult.Individuals use different methods to choose the right thing to doin any given situation. Some people follow their conscience. Othersjust make certain that they always follow the rules. Some people lookto religious teachings or professional codes of conduct. Others do astheir parents taught them.Defining morals and ethics can be difficult. Morality involvesthe values that govern a society’s attitude toward right and wrong.Ethics , in contrast, are the means for determining what a society’svalues ought to be. In this text, the words ethics and morality will beused to encompass both ideas.Throughout your life, you will face many ethical problems.Adopting a consistent ethical standard can help you deal with big orsmall moral problems, from deciding how much to tip a waiter towhether to support military spending.Feelings and OpinionsIn The Opening Scene, Daniel said that he knows he is doingsomething wrong when he gets a queasy feeling in his stomach. Laterhe suggests that right and wrong may be a matter of opinion. Bothideas imply that right and wrong can change depending on a person’sfeelings and opinions.The view that ethics are based on changing feelings is popular inthe United States. Our nation was founded on a tradition of toleranceand encourages a free exchange of ideas, feelings, and opinions onevery subject, including ethics. In addition, the United States is acountry of immigrants from a variety of cultures, many of which havedifferent ethical values. In an attempt to respect all cultures, we oftenconclude that each culture is right, even when its values clash withothers.Some people, however, see a problem with this view. They arguethat if ethics are just a matter of opinion or feelings, then no one canever do anything that is wrong.Example 1. Harriet comes from a poor family, but Frank’s familyis wealthy. Harriet believes that Frank has more money thanhe needs. When Frank leaves his backpack unattended, Harriet6 Unit 1: Knowing About the Law

steals it. She defends her actions by saying that she needs thebackpack and that Frank can buy another one.Most of us would say that Harriet’s theft is wrong, even though shethought she was right. In fact, most of us would say she is wrong evenif there were no law against theft. How do we make that decision? Oneway is to consider how an action helps or hurts people who are affectedby it. As you will learn later in this chapter, Harriet’s theft is wrongfor two reasons: because it hurt Frank and because it set a bad examplefor others.The Greatest GoodMost people are not hermits; instead, they live and work togetherin society. Because of these relationships, every action has the potentialto affect other people. When a person does something that hurtsinnocent people, many others would judge that person’s action aswrong. Such a decision is based on whether an action will create thegreatest good for the greatest number of people. The more good thatresults, the more ethical the action.Some people see the greatest good principle as a natural way tomake ethical decisions. Others, however, believe it is often misapplied.Example 2. Alame knows that 10 of her 20 classmates cheatedon their last law exam. The teacher mistakenly believes thatonly one innocent student is guilty of cheating. Alame decidesshe will keep silent because doing so will ensure the greatestgood for the greatest numberof people.TAKING ADVANTAGESome people believe thatthey can do as they pleasebecause ethical standardsare flexible and changing.Why would such an attitudecause difficulties in theworld today?Alame has misapplied thegreatest good principle. Herfailure to identify the 10guilty students helps only thecheaters. Alame has also notconsidered the unethicalexample that her decision willset for the whole school orhow the decision may affectthe school’s academic standards.In addition, Alame’sdecision to keep quiet is notfair to the innocent student,who must take the blame forthe guilty parties.Chapter 1: Ethics and the Law 7

GhanaA law can be a decree, a prohibition, a statue, a treaty, or any rule or principlethat must be obeyed. Laws can also take the form of traditions—unwritten lawsor doctrines handed down from generation to generation. In Ghana, festivals aresuch an important part of tradition that citizens were once given time off from workfor celebrations. Fines were even levied against those who did not attend festivals.Ghana’s most important festival, Odwira, celebrates the harvest of the yams.Forty days before the festival all noise, including singing and dancing, is banned.On each day, the event follows a strict set of rules or observances—from sweepingthe path to the mausoleum of the past chiefs to an entire day of silence whenthe whole village honors its dead. The festival’s highlight, the durbar, comes onthe last day. All neighboring lesser chiefs march through town escorted by drummersand servants carrying guns and swords of gold. Then with singing, dancing,and feasting, the chiefs settle in the main square and pledge their respectand loyalty to the regional chief. Odwira is a time of thanksgiving, remembrance,and fellowship. Here’s a snapshot of Ghana.Geographical area 92,100 sq. mi.Population 20,244,154CapitalAccraLegal Systembased on English commonand customary lawLanguageEnglish, African languagesLife expectancy 57Critical Thinking Question What are some of the reasons that peoplecelebrate traditions? What are some of your family or school traditions? Formore information on Ghana, visit ubpl.glencoe.com or your local library.The Golden RuleAs commonly expressed, the Golden Rule holds, “Do unto othersas you would have them do unto you.” Many people prefer this rulebecause of its consistency and its universal appeal. Although somemay identify the Golden Rule with Christianity, many religionsembrace its principles. Buddhism, for example, states, “Hurt not otherswith that which pains thyself.”8 Unit 1: Knowing About the Law

The heart of the Golden Rule is empathy, which means puttingyourself in another person’s position. One way to test the morality ofan action under the Golden Rule is to ask yourself, “Would I want tobe treated this way?” If your answer is “no,” then the action probablyviolates the Golden Rule. The principle of good sportsmanship thatyou learn in athletics is an outgrowth of the Golden Rule.Example 3. Steve is the star pitcher on New Hope High School’svarsity baseball team. During a tough inning against the Vikingsof St. Joseph High, Steve gets frustrated and throws two pitchesat the Vikings’ best batter. When the umpire ejects Steve fromthe game, his coach does not argue. The coach tells Steve, “Youwere wrong. If it’s right for you to throw at their batters, then itwould be right for their pitchers to throw at our batters.” Steveagrees that he would not want to be a pitcher’s target.Although the Golden Rule appears easy to follow, it can be difficultto fully understand. Some people may also abuse the rule by placingtheir own self-interest above the interests of others.Example 4. Stanley was judging a debate held in social studiesclass. He gave Abia a better grade than she deserved because heknew she might be assigned to judge his debate. He wanted herto give him a good grade in return, regardless of whether hedeserved it.Even if he does not realize it,Stanley violated the spirit of theGolden Rule.The Golden Rule or similar moralprinciple has been adopted by manyof the world’s major religions fortwo reasons. First, the rule respectsthe dignity and worth of individuals.THE GOLDEN RULEThe Golden Rule has been adopted as aguiding moral precept by most of themajor religions of the world. Why wouldmost religions find it comfortable toassimilate this moral precept?Chapter 1: Ethics and the Law 9

People want to be treated with respect. The Golden Rule says that thosewho wish to be treated with respect must first be respectful of others.The Golden Rule, or theethic of reciprocity, isoften regarded as themost concise and generalprinciple of ethics.Example 5. Vanessa’s older sister, Mary Eileen, frequently goesinto Vanessa’s room while she is not there and borrows clothingwithout permission. When Vanessa approaches Mary Eileenabout this problem, Mary Eileen laughs it off and points out thatshe is the older sister, not the one who should take orders. Thisupsets Vanessa because she always asks permission before shetakes something from her sister’s room.10 Unit 1: Knowing About the LawVanessa is expressing what most people consider the guiding principleof the Golden Rule—people want to be treated with respect.The second reason the Golden Rule has been widely accepted isthat, if followed properly, it can be applied in almost every situation.A rule that cannot be followed consistently may be abused by thosewho wish to justify their own immoral actions.Example 6. Freida and her boyfriend, Emil, have just had aserious argument. To make Emil jealous, Freida tells Luke thatshe will go to the movies with him on Friday night, even thoughshe has no intention of doing so. When Emil finds out aboutFreida’s date with Luke, he and Freida make up. Freida thenbreaks her date with Luke.Freida has adopted a rule that says, “I will make promises to getwhat I want even if I don’t intend to keep those promises.” If everyoneacted in this manner, people would refuse to trust the promises ofothers and a complete breakdown in society would result. A worldwithout promises would be a world without commerce, credit, law, orsocial engagements.Freida’s rule violates the spirit of the Golden Rule. Consider thisopposite case.Example 7. Esther likes Quon, who is Irma’s boyfriend.Although Esther would love to go to the homecoming dancewith Quon, she promises Michael she will go with him. ThenQuon breaks up with Irma and asks Esther to go to the dance.Even though she really wants to go with Quon, she says, “Sorry,I already promised Michael I’d be going with him.”By keeping her word, Esther has adopted a principle that is consistentwith the Golden Rule. If everyone acted in this manner, therewould be a stable social order based on trust. Unfortunately, not everyonein our society abides by the principle of the Golden Rule.

Figure 1.1TraitHonestyFairnessCompassionIntegrityEthical CharacteristicsDefinitionHonesty allows a person to be open and truthful with other people.Fairness allows a person to treat other people with justice andequality.Compassion allows a person to care for others.Integrity allows a person to do what is right, regardless of personalconsequences.Ethical Character TraitsIn trying to determine what makes a person ethical, it helps tothink of some ethical people. Many of the same names come up asanswers: Abraham Lincoln, Albert Schweitzer, Mother Theresa,Mohandas Gandhi, and Martin Luther King, Jr. Fictional charactersoften mentioned include Don Quixote, Nick Carraway, SherlockHolmes, Superman, and Wonder Woman. See Figure 1.1 for a list ofthe character traits that many of these people share. What charactertraits do those people have that make them ethical?ETHICALCHARACTERISTICSPeople in history andfiction who have ledexemplary lives oftenhave key ethical traits.Who are some famouspeople in history orfiction who displaymore than one of thenamed charactertraits?HonestyA character trait of a person who is open and truthful in dealingswith others is called honesty . We admire honesty because it is noteasy to be honest in every situation. Most of us want to have honestfriends and would like to be described by others as honest. An honestperson is someone who tells the truth and can be trusted to keep his orher promises.JusticeAnother character trait ethical people share is justice . A person issaid to be just if he or she treats people fairly and equally. Being justalso means that a person is capable of treating everyone fairly, not justrelatives and friends. Because most of us want to be treated with justice,it makes sense to treat others with justice as well. A just personwill see that everyone gets his or her fair share of those things that areavailable to a group.CompassionAnother trait attributed to ethical people is compassion. A personshows compassion when he or she is sympathetic to the difficultiesof others and wants to help alleviate their problems. Compassion alsoinvolves a respect for other people and their right to make their ownChapter 1: Ethics and the Law 11

decisions. Compassionate people try to understand other people’sshortcomings and forgive their mistakes.ConfidentialityThe ethics of confidentialityare crucial in abusiness environment.Consumers expect thatsome information,such as credit cardnumbers, medicalrecords, online passwords,and so on,will remain private.Businesses that fail toensure that such informationis kept safe,secure, and privaterisk driving customersaway, or worse, faceserious lawsuits.Imagine that you operatea small business.What kinds of precautionswill you taketo keep your customersinformationconfidential?IntegrityA person of integrity is willing to do the right thing, regardless ofpersonal consequences. People with integrity stand up for their convictions,even if the majority is against them. They are willing to riskmany things for the sake of their moral convictions.The Relationship betweenEthics and LawWe have already considered three ways to make ethical decisions:relying on opinions and feelings, gauging the greatest good for thegreatest number of people, and following the Golden Rule. If thesetechniques always reached the same ethical result, and if everyonealways acted by those results, there would be no need for law. In thereal world, however, some people engage in certain types of conductthat most people agree are immoral or wrong.Why Law is NecessaryEthics tell us what we ought to do. Law is needed because peopledo not always do what they should. Law is the system of rules of conductestablished by the government of a society to maintain stabilityand justice. It defines the legal rights and duties of the people. Lawalso provides a means of enforcing these rights and duties through lawenforcement agencies, courts, legislatures, and regulatory agencies.Law cannot always make people or businesses do what is best.However, law does have the power to punish people or businesses fordoing things that are wrong. Consider the contrast between honest ordishonest and legal or illegal business practices.Example 8. World Cars, Inc. advertises its cars by saying“They’re the best on the market!” even though it knows that,while functional and safe, they are quite ordinary. Best AutoCorp., a competitor, uses a similar slogan, but its cars violateseveral safety laws and are frequently involved in accidents.Although World Cars, Inc. is in an ethical sense dishonest, theirbusiness practices are legal; the law cannot force them to make whatare literally the best cars on the market. However, the law can punishBest Auto Corp., not because its slogan is dishonest, but ratherbecause its business practice (of making shoddy cars) is illegal.12 Unit 1: Knowing About the Law

Ethical and Legal ConflictsBecause law is made by people, it is imperfect. Legislators andjudges bring their personal views on ethics and morality to the lawmakingprocess. As a result, ethics and law will sometimes conflict.Example 9. Clark is the editor of the Richmond High Herald.Rita tells Clark that another student is selling drugs on campus,but asks Clark not to reveal her identity in his news article or tothe police. Clark agrees. When the article appears and the studentis arrested, Clark has to testify at the trial. He refuses toidentify his source and is held in contempt of court.Clark has obeyed the ethics of journalism by refusing to identifythe source of his story. He has, however, violated the law by refusingto obey the order of a judge.While the law and ethical and social attitudes sometimes conflict,they also influence each other in various ways. Changes in individualor social ethics often prompt changes in the law; conversely, changesin the law that originally face resistance may gradually become generallyaccepted. While our ethical and social attitudes sometimeschange, having law is better than letting each individual set their ownrules or handle disputes in haphazard or even violent ways.Reviewing What You Learned1. Explain how ethical decisions are made.2. How can the greatest good principle leadto ethical decisions?3. How can the Golden Rule lead to ethicaldecisions?4. What are four ethical character traits?5. Analyze the effects of unethical and illegalpractices on a business and on consumers.What are some consequences of suchbehavior?6. Contrast honest or dishonest with legal orillegal business practices. Why are ethicsand the law not always the same?7. How might ethics and the law conflict?Critical Thinking ActivityEthics and Law Why is it important to distinguishbetween actions that are ethical andactions that are not? Why is it important todistinguish between ethics and law?Legal Skills in ActionBusiness Ethics Analyze the effects of unethicaland illegal practices on a business and onconsumers. Create a chart with two columns.In the left column, list several unethical andillegal practices. In the right column, list theeffects of such practices on a business and onconsumers.Chapter 1: Ethics and the Law 13

Sources of Lawl How to recognize thevarious parts of theU.S. Constitutionl How to explain thecomponents ofcommon lawl How to explain thepurposes of statutorylawl How to identify thevarious ways thatcourts make lawl How the governmentmakes administrativeregulationsThe Five Main Sources of U.S. LawIn general, law in the United States today comes from five mainsources. Although these sources may seem different, they all pertain tothe law in some way. See Figure 1.2 for a summary of these sources.Constitutional LawWe have already defined law as rules of conduct established by thegovernment of a society to maintain stability and justice. A country’sconstitution spells out the principles by which the government operates.In our country, the most fundamental law is the U.S. Constitution.The Constitution of the United States Our Constitution setsforth the fundamental rights of citizens. It also defines the limits withinFigure 1.2Sources of Today’s LawLearning how the law ismade will help you makedecisions regarding yourlegal responsibilities.Federaland stateconstitutionsEnglishcommonlaw*Statutes*Except in Louisianal constitutionl common lawl precedentl statutesl legislaturel unconstitutionall administrative lawCourtdecisionsAdministrativelawTHE SOURCES OF U.S. LAWThe law as it exists in the United States today comes from fivesources. Which of these sources is shared by the federal andthe state governments?14 Unit 1: Knowing About the Law

Figure 1.3United States ConstitutionARTICLE I.Section 1Section 2Section 3Section 4Section 5Section 6Section 7Section 8Section 9Section 10ARTICLE II.Section 1Section 2Section 3Section 4ARTICLE III.Section 1Section 2Section 3ARTICLE IV.Section 1Section 2Section 3Section 4ARTICLE V.ARTICLE VI.ARTICLE VII.The Legislative BranchCongressHouse of RepresentativesSenateElections and MeetingsOrganization and RulesPrivileges and RestrictionsPassing LawsPowers of CongressPowers Denied to theFederal GovernmentPowers Denied to the StatesThe Executive BranchPresident and Vice PresidentPowers of the PresidentDuties of the PresidentImpeachmentThe Judicial BranchFederal CourtsJurisdiction of the Federal CourtsTreasonRelations among StatesOfficial ActsMutual Duties of StatesNew States and TerritoriesFederal Protection of StatesThe Amending ProcessNational SupremacyThe Ratification of theConstitutionAmendments to the Constitution1st Amendment (1791)2nd Amendment (1791)3rd Amendment (1791)4th Amendment (1791)5th Amendment (1791)6th Amendment (1791)7th Amendment (1791)8th Amendment (1791)9th Amendment (1791)Religious andPolitical FreedomRight to Bear ArmsQuartering TroopsSearches andSeizuresRights of AccusedPersonsRight to Speedy,Fair TrialRight to Jury TrialBail and PunishmentRights NotEnumerated10th Amendment (1791) Powers Reservedto the States11th Amendment (1798) Suits against States12th Amendment (1804) Election of Presidentand Vice President13th Amendment (1865) Abolition of Slavery14th Amendment (1868) Limitations onState Action15th Amendment (1870) Right to Vote16th Amendment (1913) Income Tax17th Amendment (1913) Direct Electionof Senators18th Amendment (1919) Prohibition19th Amendment (1920) Women’s Suffrage20th Amendment (1933) "Lame Duck"Amendment21st Amendment (1933) Repeal of Prohibition22nd Amendment (1951) Limit on PresidentialTerms23rd Amendment (1961) Voting in the Districtof Columbia24th Amendment (1964) Abolition of Poll Tax25th Amendment (1967) Presidential Disabilityand Succession26th Amendment (1971) Eighteen-Year-OldVote27th Amendment (1992) Instant CongressionalPay Raises AbolishedTHE UNITED STATES CONSTITUTIONThe United States Constitution consists of seven articles and27 amendments. Which of the amendments requires thatstate governments give their citizens the same rights that thefederal government must give to U.S. citizens under the FifthAmendment?Chapter 1: Ethics and the Law 15

Language ArtsThe legal profession hasa core of professionalethics. They are principlesof conduct thatmembers of the professionare expected toobserve when they practicelaw. These principlesstress that the lawyer’schief interest lies in servinghis or her client andin securing justice.Research ActivityWhat if high school studentshad a code of professionalethics? Workwith three or four classmatesto write the ethicalprinciples that youthink students in yourschool should observe.which the federal and state governments may pass laws. In addition,the Constitution describes the functions of the various branches anddivisions of our national government. See Figure 1.3 for an outline ofthe federal Constitution.Articles I, II, and III of the Constitution set forth the structure andthe powers of the three branches of the federal government. Article IVrequires each state to give “full faith and credit” to the laws of all otherstates. That is, each state must accept the laws of other states. Article Vtells how the Constitution may be amended or changed.Article VI contains the supremacy clause. This clause states that theU.S. Constitution and the laws of the United States and treaties shall bethe supreme laws of the land. Article VII, the last article, provided forratification of the Constitution. This event took place in 1787.The first 10 amendments, ratified in 1791, are called the Bill ofRights. They limit the powers of the government. The basic purpose ofthe Bill of Rights is to protect two kinds of rights: rights of individualliberty and rights of persons accused of crimes.The Constitution now has 27 amendments. Let’s take a look at oneof them. The Fourteenth Amendment provides that no state shall“deprive any person of life, liberty, or property, without due process oflaw; nor deny to any person within its jurisdiction the equal protectionof laws.” This is known as the equal protection clause. As a major principleof justice, this amendment requires equal treatment of all peopleunder the law. The Fourteenth Amendment requires state governmentsto give to their citizens the same rights that the federal governmentmust give to U.S. citizens under the Fifth Amendment.16 Unit 1: Knowing About the LawExample 10. Joe Hogan was denied admission to theMississippi University for Women School of Nursing solelybecause of his gender. The university is supported by fundsprovided by the state government. In 1982, the U.S. SupremeCourt held that the single-sex admissions policy of the stateschool violated the equal protection clause of the FourteenthAmendment. The court said that the policy continued thestereotype of nursing as a woman’s job. Hogan was admitted tothe school of nursing.State Constitutions Each state has its own constitution. Althoughsimilar, state constitutions are not identical to the federal Constitution.They can be more protective, narrower, and more restrictive than thefederal Constitution.Example 11. Lawmakers in Massachusetts wanted to have agraduated income tax like the federal income tax. A graduatedtax requires people with larger incomes to pay a higher tax rate

than people with smaller incomes. Such a tax couldn’t bepassed, however, because the Massachusetts constitutionrequires all people to be taxed at an equal percentage rate.Common LawThe legal system of all states, except for Louisiana, (where the influenceis more French) is rooted in English common law. The earlyAmerican colonists came from England, so it was natural for them toadopt the law of England in their new land.In the early days of English history, the kings tried to centralize theEnglish government and establish a court system. Judges, called justicesor magistrates, traveled in circuits around the countryside decidingcases. Because there was no written law, judges often made decisionsbased on the customs and traditions of the people. Judges shared theirdecisions with other judges and made every effort to share the samelaw “in common” with everyone else throughout the country. Thispractice formed the basis of common law .Eventually, court decisions were written down and a body of casesdeveloped. Judges could then refer to past cases when making theirdecisions. This practice led to the doctrine of precedent . Under thisdoctrine, a judge is required to follow an earlier court decision whendeciding a case with similar circumstances. It is also sometimes calledthe doctrine of stare decisis, which means, “let the decision stand.”Over time, the English common law eroded in the United Stateswith the passing of state statutes and court decisions. Nevertheless,parts of the common law still exist today in some states’ laws exactlyas they did in England.COMMON LAWCommon law depends onthe doctrine of precedent.Under the doctrine ofprecedent, a judge isrequired to follow anearlier court decisionwhen deciding a casewith similar circumstances.Do any parts ofcommon law exist withinthe legal system today?Chapter 1: Ethics and the Law 17

Limits of Free SpeechThe First Amendment guarantees Americans the right to express theirthoughts and opinions. However, this freedom is not absolute. Some typesof speech are not protected by the First Amendment, and engaging in suchspeech may result in civil or criminal penalties.For example, you may not make any public statement on private propertywithout the owner’s permission, nor can you urge listeners to commit acrime. Also, you cannot, either publicly or in private conversations, knowinglymake untrue, damaging statements about a person. Obviously, threatsof violence and statements that constitute sexual harassment are not protectedforms of expression, nor is obscene language in many situations.Be aware that “speech” involves more than spoken words. Signs,posters, pamphlets, printed T-shirts, and other “writings” are among manymodes of expression that the courts consider to be speech.Ask First Would passing out flyers to advertise a school event in a store’sparking lot be a First Amendment right? Call a few businesses to find outtheir policy regarding flyers.18 Unit 1: Knowing About the LawStatutory LawStatutes are laws specifically passed by a governing body that hasbeen created for the purpose of making laws. A statute can be createdto declare the law on a particular issue or governing certain circumstances.Statutes may also order people to do something. For example,a statute may require citizens to pay taxes or to sign up for the militarydraft when they reach 18 years of age. Other statutes forbid peoplefrom doing things. One statute prevents people from discriminating inemployment or housing matters on the basis of race, color, creed,gender, or national origin.Laws passed by the U.S. Congress, state legislatures, local citycouncils, or town meetings can all be called statutory law. Statutorylaw is found in state and federal statutes, city ordinances, and townbylaws. The different terms tell us at which level of government a lawwas passed.Federal Statutes Laws that are passed by the U.S. Congress andsigned by the president are called federal statutes. The United States

Congress is a legislature , or a body of lawmakers, that has the job ofcreating statutory law under the powers given to the federal governmentby Article I of the Constitution. These powers include suchthings as the power to spend, tax, and borrow money.One important clause in the Constitution is Article I, Section 8,Clause 3. Called the commerce clause, it gives Congress the power tomake laws regulating commerce among the states. Over the years,the courts have interpreted this clause very widely. This broadinterpretation has given Congress enormous power, perhaps more thanwas originally envisioned by the framers of the Constitution in 1787.As noted previously, the U.S. Constitution is the supreme law ofthe land. Consequently, Congress may not pass laws that conflict withthe U.S. Constitution. The Supreme Court may declare any statute thatgoes against the Constitution unconstitutional , or invalid.State Statutes Each state also has its own legislature, or body oflawmakers, and most state legislatures are organized much likeCongress. Ohio, for example, divides its General Assembly into aSenate and a House of Representatives. Although the names of thestate legislatures may differ, their basic function is the same—to makestatutory law. Like Congress, the state legislatures cannot pass statutesthat conflict with the U.S. Constitution.Court DecisionsMost people are surprised to learn that courts make law. Courtmadelaw is often called case law, court decisions, and judge-madeWhose Name Is It, Anyway?An Internet domain name company has been taken to court, accused oftricking thousands of people. According to the Federal Trade Commission(FTC), the company sent faxes to Web site owners telling them that someoneelse was about to register an almost identical domain name. The purposewas to mislead people into paying a $70 fee to have the company blockthe domain name application. The FTC has asked the court to stop thisunethical practice. They also asked that the court shut down Web sites thattry to promote the activity. (Source: New York Times, p. C3, Feb. 16, 2001)Connect Search the Internet for a domain name registration, and researchthe site to review the processes involved.Chapter 1: Ethics and the Law 19

Adopt a PetAre you consideringadopting a pet from ananimal shelter? Don’tbe surprised if youmust choose frommany dogs or cats.Most shelters are fullor overcrowded.Government shelterstry to control overcrowdingby euthanizinganimals that aresick, dangerous, ornever adopted. Doyou think euthanizinganimals is anethical issue, a legalissue, or both?law. Courts make law in three ways: through the common law tradition,by interpreting statutes, and by judicial review.Decisions made by the highest court of any state become the lawof that state and must be followed by other courts in that state thereafter.In general, if not altered by statute, these precedents will continueto rule. It is possible, however, for the highest court of a state tochange a line of precedent.A second type of judicial decision involves interpreting statutes.When a statute seems to be confusing, incomplete, or unclear, it is thecourt’s job to figure out what the statute means. A judge cannot interpreta statute, however, unless that statute is involved in a disputebetween two parties in a lawsuit before that judge.Get InvolvedBefore you buy a petfrom a pet store,check with your localanimal shelter. Findout if your city’s animalshelters euthanizeanimals, and if yes,under what conditions.Write a report foryour class.STATUTORY LAWStatutory law is made by a legislature. The federal legislature isknown as the U.S. Congress and is made up of the House ofRepresentatives and the Senate. Statutes can order us to dosomething or forbid us to act in a certain way. What are someexamples of statutes that command or prohibit us?20 Unit 1: Knowing About the Law

The courts can also decide whether laws and other governmentactivities are consistent with the Constitution. Any laws or governmentactions that violate the Constitution can be declared unconstitutionalby a court. The Supreme Court of the United States is the final authorityregarding the constitutionality of all laws and government actions.Administrative RegulationsFederal, state, and local legislatures sometimes find it desirable toregulate certain kinds of activities. Legislators, however, often do nothave expert knowledge of a particular field. They also do not have thetime to give their complete attention to any one kind of activity. Forthese and other reasons, legislatures often give the power to regulate aparticular kind of activity to an administrative agency. Also called aregulatory agency, these agencies are departments of governmentformed to administer particular legislation. For example, the FederalCommunications Commission (FCC) regulates broadcasting.Administrative agencies tend to have an unusually wide range ofpowers. They can make their own rules, enforce their rules, investigateviolations of their rules, and decide the guilt or innocence of thosewho violate their rules. Administrative law consists of those rulesand procedures established by regulatory agencies.Although regulatory agencies are constitutional, there are checksand balances on their power. The legislature that created an agencyhas the power to end that agency’s existence or to change its powers.Any final decision by an agency can be reviewed by a court.Reviewing What You Learned1. What are the various parts of the U.S.Constitution?2. What are the components of common law?3. What are the purposes of statutory law?4. How do the courts make law?5. Compare common law, statutory law, andagency regulations.Critical Thinking ActivitySources of Law Why is it important to beable to distinguish between the U.S.Constitution and statutory law?Legal Skills in ActionArticles of Confederation The U.S.Constitution is not the original governingdocument for the United States. At one time,the national government was organized andoperated under the Articles of Confederation.The Articles lasted only a decade, however.With a partner, conduct a research project touncover the weaknesses of the Articles ofConfederation.Chapter 1: Ethics and the Law 21

CHAPTERASSESSMENTSection 1.1 Defining Ethics● Ethical decisions can be made by relying onopinions and feelings, by applying the greatestgood principle, or by following the Golden Rule.● A decision made by applying the greatest goodprinciple leads to an action that will create thegreatest good for the greatest number of people.Although making decisions by using the greatestgood principle may make many people happy,applying this principle does not always bringabout ethical actions.● The Golden Rule is traditionally associatedwith Christianity. However, the Golden Ruleprinciple is present in many world religions.Applying the Golden Rule leads to an ethicaldecision much of the time because it requires aperson to put the interests of others ahead ofpersonal interests. The Golden Rule requires aperson to “do unto others as you would havethem do to you.”● Four ethical character traits are honesty, justice,compassion, and integrity. Honesty is the abilityto be open and truthful in dealings with others. Aperson is said to be just if he or she treats peoplefairly or equally. A person displays compassionwhen he or she is sympathetic to the difficultiesof others and wants to help people with theirproblems. Integrity refers to a person’s refusal tocompromise his or her values, regardless ofpersonal consequences.● Ethics tell us what we should do. However,ethics may be subjective, varying from person toperson. People do not always do what theyshould do. In contrast, laws are defined. Theyprovide an objective standard of behavior.● Law is important because society needs a systemof rules to maintain stability and peace. Peopleneed to know what their rights and duties are sothat they may choose to follow them or acceptthe consequences for failure to follow them.●Ethics and the law can conflict in a variety ofcircumstances. Professional ethics are notalways consistent with the rule of law. In othercases, personal or religious ethics may conflictwith the law.Section 1.2 Sources of Law● A country’s constitution spells out the principlesby which the government operates. The U.S.Constitution, which consists of seven articles and27 amendments, enumerates the fundamentalrights of citizens. It also defines the limits withinwhich federal state governments may pass laws.The Constitution sets forth the functions ofvarious branches of our national governing body.Each state has its own constitution.● A body of cases called common law originatesfrom England. These cases and their offspringcan be applied to interpret statutory law. Thedoctrine of stare decisis, or precedent, is used toanalogize or distinguish a case at hand from aprevious case. Some parts of common law stillexist today in some states’ laws much as they didin England.● Statutory law consists of rules of conductestablished by the government of a society tomaintain stability.● Courts make laws through the common lawtradition, by interpreting statutes, and bydeciding issues of constitutionality. Decisionsmade by the highest court of any state becomethe law of that state.● Legislatures form regulatory agencies, whichhave wide-ranging powers to create, enforce, andadjudicate rules and procedures. However, thereare limits imposed on regulatory agencies. Thelegislative body that formed the agency has thepower to terminate that agency. In addition, anyfinal decision by an agency is always subject tojudicial review.22 Unit 1: Knowing About the Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.moralityethicshonestycompassionjusticeintegritylawconstitutioncommon lawprecedentstatuteslegislatureunconstitutionaladministrative law1. Using the key terms, pictures, drawings, and symbols, create aposter that promotes ethical and legal principles. Be creative.2. Working with a partner, explain each of the principles depicted inyour poster. Why was it selected and what messages were youhoping to convey?3. Compare your poster with your partner’s poster. In what ways areyour posters similar? In what ways are they different?Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.comand click on Chapter 1:Ethics and Law—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. How can the greatest good principle be misapplied?5. Name someone you think has strong ethical principles. Which ethical character traitsdoes this person hold? Explain your answer.6. How can ethics and the law sometimes conflict?7. What are the five sources of law in the United States?8. What is the supreme law of our country?9. What is the Bill of Rights and what is its purpose?10. Compare and contrast common law, statutory law, and agency regulations.11. Describe the doctrine of precedent.12. How do courts make law?13. Why do legislatures create administrative agencies?Chapter 1: Ethics and the Law 23

CHAPTERASSESSMENTConnect with ScienceIn March 2000, scientists in Scotland createdpig clones by using genetic material taken froma cell of an adult female pig. The researchersbelieve that pig clones might serve as sources oforgans for human organ transplants. Will thisscientific advancement lead to human cloning?14. Research the current ethical concernssurrounding human cloning.15. Find out if there are laws being written thatwill regulate the cloning industry.16. How do you feel about cloning?Write a two-page paper stating your opinionabout the future of human cloning. Include bothethical and legal implications in your paper.Animal ResearchJason, a high school senior, works at a medicallaboratory near his school. He dreams ofbecoming a medical researcher and finding acure for cancer.Last week, when he arrived at work, Jasonsaw several animal rights activists blocking theentrance to the lab. Jason knew that his lab usedanimals for research and medical experiments.Although he was able to get into the lab andwork that day, he began to think about theethical issues surrounding using animals forresearch.Debate17. Should animals be used for medicalresearch and experimentation?18. What ethical and legal issues are involved?For the following cases, give your decision andstate a legal principle that applies:19. Amy Adler is a psychiatrist and treatspatients who suffer from a variety ofmental illnesses. One of Amy’s patients isarrested by the Secret Service for writingthreatening letters to the president of theUnited States. When the patient goes totrial, Amy is asked to testify. However, sheknows that the patient does not want her toreveal the nature of their conversations.Identify the ethical and legal conflicts thatAmy faces.20. Alex Barsky witnesses a mugging whilewalking home from school. He continueson his way instead of getting involved. Canthe law force Alex to testify? What can thelaw do about the mugger? How does thisdemonstrate why law is necessary?21. Lucy Demps wants to quit high school.However, a state law forbids minors fromdropping out of school. The same statutegives juvenile court judges the right tosuspend the driver’s license of any minorwho has dropped out of school. Lucyargues that statutes passed by thelegislature may be able to forbid certainacts, such as stealing, but they cannot orderher to attend school. Is she correct?Explain your answer.22. Angela Gannon received a speeding ticketfor driving 80 miles per hour in a 65-mileper-hourzone. She was also cited for notwearing her seat belt, a violation of statelaw. One day earlier, however, the statesupreme court had declared the seat beltlaw unconstitutional. How would youdecide Angela’s case?24 Unit 1: Knowing About the Law

In each case that follows, you be the judge.23. JurisdictionEwing, a medical student at the University of Michigan, failed a qualifying examination.Knowing that everyone else who had failed the test had been allowed to retake it, he also askedfor a chance to take the test again. However, the university refused to allow Ewing to retake theexam. Ewing sued, arguing that the university had acted unconstitutionally, depriving him of dueprocess as promised by the Fourteenth Amendment to the U.S. Constitution. Can the court judgethe constitutionality of a state university’s action? Why or why not?Ewing v. Board of Regents of the University of Michigan, 742 F.2d 913 (6th Circuit).24. VaguenessA parent allegedly insulted his daughter’s teacher in the presence of several students. Theparent was charged with violating the following Kentucky state statute: “No person shallupbraid, insult, or abuse any teacher of the public schools in the presence of the school orin the presence of a pupil of the school.” The parent argued that the statute is unconstitutionallyvague. Do you agree? Why or why not?Com. v. Ashcraft, 691 S.W.2d 229 (KY).Federal Laws and Computer CrimeThe Internet and other computer technologies havechanged the way we live and work. Unfortunately,they have also created opportunities for criminalsto commit computer crime, fraud, and abuse,including stealing personal information, destroyingfiles, and disrupting national security. As a result,the U.S. government has begun creating laws toaddress Internet- and computer-related crimes.ConnectUsing a variety of search engines, research the currentInternet-related legislation under discussion by thefederal government. Report on the following:25. Current and pending legislation surroundingcomputer crime, fraud, and abuse26. The purpose of cookies and their impact on acomputer user’s privacy27. Security and encryption policies thatbusinesses and the government can use28. Predict How do you know the differencebetween right and wrong?29. Connect Who is the most honestperson you know? Who is the mostcompassionate?30. Question Why do think individual stateshave their own constitutions, their ownlaws, and make many of their owndecisions?31. Respond How important is ethics to ourlegislators and other governmentaldecision makers?Chapter 1: Ethics and the Law 25

CHAPTERThe Court SystemUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 2: The Court System—Chapter Overviews to preview thechapter information.

The Opening SceneMrs. Martinez’s law class is on a field trip to thecounty courthouse. The students are gathered on thefront steps.A Trip to the CourthouseMRS.MARTINEZ: (Taking attendance.) Where’s Trai?Jamila, I thought he was supposed to ride with you.JAMILA: He was, but that was before.MRS.MARTINEZ: Before what?JAMILA: Before he made other plans. He’ll be alongsoon.DANIEL: Hey, Mrs. Martinez. Is this a federal or statecourt?MRS.MARTINEZ: It’s a state court.DANIEL: Do we have a federal court in this state?MRS.MARTINEZ: Sure. Every state has at least onefederal court.JAMILA: Are we going to see a trial like the ones yousee on television?MRS.MARTINEZ: Yes. But it will be a civil case, not acriminal trial.DANIEL: What’s the difference?MRS.MARTINEZ: Good question. Can anyone explain?PEGGY: In a criminal case they can put you in jail, but ina civil trial they just take your money. Right, Mrs. M?MRS.MARTINEZ: Well, that simplifies it a bit, but youhave the right idea.(Trai comes out of the courthouse door.)MRS.MARTINEZ: You’re fifteen minutes late, Trai. Wealmost started without you. Where have you been?TRAI: I actually got here early, so I figured I’d goinside the courthouse for a little while. I waslooking for my friend, Fred.MRS.MARTINEZ: Why is your friend in thecourthouse? Is he in trouble?TRAI: He just got in a little bit of trouble a couple ofmonths ago. Today is his juvenile court hearing. It’snothing serious.JAMILA: My parents thought it was a big deal. Theysaid that this isn’t the first time that Fred has gotteninto trouble with the law.TRAI: Mind your own business, Jamila. I’m tellingyou, it was no big deal. Fred’s not a troublemaker.He just came home a little late.MRS.MARTINEZ: You mean he violated curfew.TRAI: Something like that, yeah.DANIEL: That’s not fair. Why do we have to be offthe streets by midnight?MRS.MARTINEZ: There are different rules forjuveniles.PEGGY: That’s not fair either.MRS.MARTINEZ: No, I don’t suppose it seems fair,does it?JAMILA: So what can we do about it?MRS.MARTINEZ: Well, first you have to knowsomething about how the courts work. That’s whywe’re here today. We’re ready to get started. Let’sgo inside.1. How is the federal court system structured?2. How are most state court systems structured?3. How do the courts treat juvenile offenders?4. What is an alternate dispute resolutionprocedure?5. What are the steps in a civil lawsuit?6. What are the steps in a criminal prosecution?Chapter 2: The Court System 27

A Dual Court Systeml How to determine acourt’s jurisdictionl How to explain thestructure of thefederal court systeml How to explain therole of the UnitedStates Supreme Courtl How to explain thestructure of the statecourt systeml How to describe thedifference between ajuvenile who is unrulyand one who isdelinquentLearning the structure ofthe court systems in theUnited States will helpyou understand how thelegal system works.l jurisdictionl diversity of citizenshipl original jurisdictionl appellate courtsl intermediate courtsl appellate jurisdictionl limited jurisdictionl general jurisdictionl delinquent childl unruly childl neglected or abusedchildThe Federal Court SystemThe United States system of justice has two major parts—the federalsystem and state court systems. Federal courts hear cases involvingfederal matters and matters involving diversity of citizenship. Statecourts have their own rules.Jurisdiction is the power and authority given to a court to hear acase and to make a judgment. Federal courts have jurisdiction overseveral types of cases. These cases include the following:l Actions in which the United States or one state is a party, exceptthose actions between a state and its citizensl Cases that raise a federal question, such as interpreting theConstitutionl Diversity of citizenship cases, which involve citizens of differentstates and in which the amount of money in dispute exceeds$75,000l Admiralty cases, or those pertaining to the seal Patent and copyright casesl Bankruptcy casesExample 1. Local police of a large city caught a woman breakinginto a federal government building. The police arrested thewoman, but because the crime was committed against federalproperty, she was turned over to federal authorities for trial inthe federal district court.Federal courts are arranged in three steps: U.S. district courtslocated throughout the United States, U.S. courts of appeals, and theSupreme Court of the United States.District CourtsDistrict courts have original jurisdiction over most federal courtcases, meaning they try a case the first time it is heard. Most federalcases begin in one of the U.S. district courts, and both civil and criminalcases are heard in these courts.Courts of AppealsThe U.S. courts of appeals, also called appellate courts , areintermediate courts , which are courts between lower courts and the28 Unit 1: Knowing About the Law

highest court. They hear appeals and review cases from lower courts.Intermediate courts have appellate jurisdiction , meaning that anyparty to a suit decided in a federal district court may appeal to the federalcourt of appeals in the circuit where the case was tried. The UnitedStates is divided into thirteen judicial circuits. Each circuit has severaldistrict courts and one court of appeals.A panel of three judges is responsible for rendering decisions inmost U.S. court of appeals cases. No witnesses are heard, no evidenceis presented, and no jury is present. Only questions of law can be raisedon appeal, not questions of fact. Appellate courts only determinewhether the lower court correctly applied the law in the circumstances.Special U.S. CourtsCongress has established several special federal courts. Thesecourts have jurisdiction in certain kinds of cases, including suitsbrought by citizens against the federal government, disagreementsover taxes on imported goods, and disputes between taxpayers and theInternal Revenue Service.Serving on a JuryIf you are registered to vote or have a driver’s license, you may becalled for jury duty. To serve on a jury, you must be a United States citizenand at least 18 years old. You also must understand English and not havebeen convicted of a felony. Should you receive a jury summons, be sure tofollow its instructions. Failure to do so is a crime.When you appear for jury duty, you become part of a pool from whichjurors are chosen. During the selection process, you may be questioned bythe judge and by attorneys for each side in a case. Respond honestly, even ifthe questions seem embarrassing or irrelevant. If you are not selected, do notbe offended. Someone merely felt you were not right for that particular case.It is possible to be excused from jury duty. However, remember that justas a jury trial is a citizen’s right, jury service is a citizen’s responsibility.Interview a Juror Find people from your school or city who have served on ajury. Ask them to recall their impressions of the experience. Report yourfindings to the class.Chapter 2: The Court System 29

Supreme CourtThe U.S. Supreme Court is the highest court in the land. It hasoriginal jurisdiction in all cases involving ambassadors, consuls, otherpublic ministers, and cases in which a state is a party. Appellate jurisdictionis the Court’s main function. The Court must hear all cases thatinvolve the constitutionality of a federal law. The Court also decides,by a vote of at least four of its nine justices, which additional cases itwill hear from the U.S. courts of appeals or the state supreme courts.State Court SystemsEach state has its own court system. However, the general patternis the same in all states.Local Trial CourtsLocal courts are courts of limited jurisdiction, meaning they handleminor matters, such as misdemeanors and civil actions involvingsmall amounts of money. Justice of the peace courts, also called magistrate’scourts, were the only local courts in the early days of our country.They tried small claims and punished petty crimes in local communities,a function that they still serve today. Minor cases are also heardby traffic courts, police courts, and municipal courts. Special localcourts deal with juveniles, family disputes, and small claims.“Cybercourt”The state of Michigan has taken the novel step of creating a virtual statecourt in which lawyers can file briefs online and court appearances, includinglawyers’ arguments, can be made by streaming video. The court will nothave a jury, but judges will be assigned cases by the state Supreme Court.Jurisdiction of the court is limited to business and commercial disputes thatinvolve at least $25,000. Cases can be transferred to the state circuit courtsystem, and like other cases, they can be contested in appellate courts.Other states, including Maryland, are also experimenting with cybercourts.(Source: Newsbytes, January 14, 2002.)Connect Visit the Web site of the Michigan state courts and search formore information on the state cybercourt. Report your findings in a onetotwo-page paper.30 Unit 1: Knowing About the Law

General Trial CourtsEach county in most states has at least one general trial court, orcourt of general jurisdiction . These courts, which can be calledcounty court, superior court, court of common pleas, or circuit court,handle criminal and civil cases.Special CourtsCourts have been established in many states to handle specializedcases. For example, probate courts hear cases involving the propertyof deceased persons, even if no will exists. Some probate courts alsohandle adoptions. A number of states have mayor’s courts, in which themayor judges cases involving traffic violations. Many states also havetwo other special courts: domestic relations courts and juvenile courts.Domestic Relations Courts In most states, each county has afamily or domestic relations court to handle divorce, annulment, anddissolution proceedings. The domestic relations court is also responsiblefor matters concerning distribution of property at the end of a marriage,including alimony and child support.Juvenile Courts Juvenile courts have special jurisdiction overdelinquent, unruly, abused, or neglected children up to a certain age.Procedures in juvenile courts differ from those in other courts, andhearings are often held in a more informal setting than a courtroom.Young people who appear before a juvenile court have no right to atrial by jury or to be released on bail. However, the Supreme Court hasheld that there must be proof beyond a reasonable doubt to convict achild as an adult.Every state has passed statutes that distinguish between delinquentand unruly children. A delinquent child is a minor under a certainage (generally 16–18) who has committed an adult crime. Recently,some states have expanded their definitions of delinquent to includejuveniles who purchase or attempt to purchase a firearm. Anunruly child is generally a minor who has done something inappropriatethat is not considered an adult crime, such as violating curfew,skipping school, or using tobacco. Many states have created a thirdcategory of children. A neglected or abused child is one who ishomeless, destitute, or without adequate parental care. The court maymake such a child a ward of the state.Many states have imposed stricter standards for the treatment ofyouthful offenders, especially when drugs or violence is involved. Astate may try a minor beyond a certain age (usually 14) as an adult incriminal court, especially if the minor has been in serious troublepreviously or has committed a very violent offense. In decidingChapter 2: The Court System 31

whether to transfer the case, the court may consider the seriousness ofthe offense; the minor’s family, school, and social history; the minor’scourt record; protection of the public; the nature of past treatment; andthe likelihood of rehabilitation.Figure 2.1Court Systems in the United StatesSpecial U.S. CourtsCourt of Appeals forthe Federal CircuitHears cases on appealfrom the U.S. ClaimsCourt and the Court ofInternational Trade;hears certain appealsfrom U.S. district courtsU.S. Claims CourtHears cases from citizensinvolving claims againstthe federal governmentU.S. Supreme CourtHears appeals fromfederal and state courts;has original jurisdictionin cases in which a stateis a party, and in casesinvolving Americanambassadors, ministers,and consulsU.S. Courts of AppealsHear cases on appealfrom district courts andcertain other federal courtsState Supreme CourtsHear appeals from lowerstate courts; have originaljurisdiction in cases inwhich the state is a party,and in cases that involvethe state constitutionAppellate Courts*Hear cases on appealfrom general trial courtsand lower trial courtsU.S. Court ofInternational TradeHears civil casesconcerning tariffs andimport taxesU.S. Tax CourtHears cases dealingwith tax lawsTerritorial CourtsHears cases dealing withterritorial and federal lawsin the territories of theUnited StatesU.S. District CourtsHear criminal andcivil casesIndicates route of appealsFederal Court SystemState Court SystemGeneral Trial CourtsDistrict, County, Circuit,Common Pleas, or SuperiorCourts; hear major criminaland civil cases; may hearcertain cases on appealfrom lower courtsLower Trial CourtsJustice, Magistrate’s, andMunicipal Courts; hearmisdemeanors and civilcases that involve smallamounts of moneyCourt of Military AppealsHears appeals ofcourt martials*Found in about two-thirdsof the statesCOURT SYSTEMS IN THE UNITED STATESThe courts in the United States are divided into federal and statesystems. In which court system would a criminal trial be heard?32 Unit 1: Knowing About the Law

Intermediate Appellate CourtsIn most instances, intermediate appellate courts hear appeals fromcourts of general jurisdiction (see Figure 2.1). Appeals may be madeto a state intermediate court if the parties believe they did not have afair trial in the lower court or that the judge did not properly interpretthe law. State appellate courts hear appeals only on questions of law,not on questions of fact. Instead of hearing witnesses, appeals judgeshear oral arguments from attorneys and study the documents andrecords in the case.Example 2. Slocum sued Archbold for injuries suffered whentheir cars collided. The case was tried in a county court, and thecourt found for the defendant, Archbold. Slocum’s lawyer mustlook for errors in the court’s interpretation of the law or the conductof the trial to file an appeal.Supreme CourtsThe highest court in most states is known as the supreme court. Astate’s highest court typically decides matters of law appealed fromlower courts. Supreme courts don’t retry a case and reconsider thefacts. Instead, they decide whether an error in interpreting or applyingthe law was made in the lower courts. Usually, this court chooses thecases it hears.Reviewing What You Learned1. What are the differences among originaljurisdiction, appellate jurisdiction, limitedjurisdiction, and general jurisdiction?2. How are the federal courts structured?3. What is the role of the United StatesSupreme Court?4. How are most state courts structured?5. Explain the differences among unruly,delinquent, and abused or neglectedjuveniles.Critical Thinking ActivityJuvenile Law Why is it important to be ableto distinguish among unruly, delinquent, andabused or neglected juveniles?Legal Skills in ActionStructure of the Court System Your 30-yearoldbrother says he has no faith in the legalsystem, and for that reason, will never sueanyone. With a partner, role-play a responseto your brother’s argument. Explain whyunderstanding the structure of the federalcourt system might benefit him, even if henever intends to be a plaintiff in a lawsuit.Chapter 2: The Court System 33

Trial Proceduresl How to seek alternativesto litigationl How to differentiatebetween civil and criminalcasesl How to explain thesteps in a civil lawsuitl How to exercise yourrights if you’re arrestedl How to explain thesteps in a criminal prosecutionl How to apply courtprocedures to juvenilecasesCivil Trial ProcedureCriminal and civil trials begin differently. The government bringscriminal cases for offenses committed against the public at large. Incontrast, individuals who believe they have been injured initiate civilcases. The injured party begins the suit by filing a complaint with thecourt. When an individual brings a civil case to an attorney, the lawyerinvestigates the case, which can be expensive. As a result, people havebegun to explore alternatives to lawsuits.Alternative Dispute ResolutionAlternative dispute resolution (ADR) is an increasingly popularprocess that occurs when parties try to resolve disagreements outsideof the usual adversarial system by using creative settlementtechniques. In ADR, the methods used are relatively quick and inexpensive.They can be classified in two ways: reactive methods andproactive methods (see Figure 2.2).Learning the alternativesto litigation will help youhandle disputes thatarise.l alternative disputeresolution (ADR)l alternative disputeresolution (ADR)l complaintl answerl verdictl judgmentl specific performancel injunctionl arrestl baill indictmentl arraignmentl detention hearingALTERNATIVE DISPUTE RESOLUTIONThere are many reasons alternative dispute resolution hasbecome increasingly popular. Can you think of reasonswhy it might be preferred over litigation?34 Unit 1: Knowing About the Law

Figure 2.2Reactive MethodsMediationArbitrationMed-arbEarly Neutral Evaluation(ENE)Summary Jury TrialPrivate Civil TrialProactive MethodsPartneringSettlement WeekNegotiated Rule MakingScience CourtAlternative Dispute Resolution TechniquesMediation happens when the parties to a dispute invite athird party into the decision-making process to help themfind a solution.Arbitration happens when the parties actually transfer thepower to settle their dispute to a third party.Med-arb combines the best aspects of mediation andarbitration.During ENE, an evaluator examines the facts and the law,makes an impartial evaluation of the legal rights of eachparty, and determines the amount of the award.A summary jury trial is a short trial that runs less than a daybefore a real jury, which then comes up with a verdict.In a private civil trial, the parties can hold the trial at a timeand a place of their own choosing.Partnering involves a process by which the parties to along and involved contract agree to meet to get to knowone another in advance.During settlement week, a court's docket is cleared of allbusiness except for settlement hearings.During negotiated rule making, an agency that is about tocreate a new rule or revise existing rules meets with theparties who will be affected by the new rules. The partiesthen write the new rules together.The science court acts as a forum for disputes involvingscientific and technological controversies. These disputesinvolve matters such as genetic engineering, nuclearenergy research, and so on.ALTERNATIVE DISPUTERESOLUTIONThis chart outlines themost popular newmethods of alternativedispute resolution. Whichtechnique would youprefer? Explain youranswer.Reactive Methods These types of ADR are used after a disputehas arisen. The oldest forms of reactive ADR are mediation and arbitration.Mediation occurs when parties to a dispute invite a third party,usually called a mediator, to help them find a solution. A mediatorpersuades the parties to reach a compromise without making theirdecision for them. On the other hand, when the parties give the powerto settle their dispute to a third party, the process is called arbitration,and the person engaged is called an arbitrator. A new form of ADRknown as med-arb combines the best aspects of mediation and arbitration.The disputing parties first go through mediation. If the problemis not solved, they move on to an arbitration hearing.Chapter 2: The Court System 35

Another new form of ADR is known as early neutral evaluation(ENE). An evaluator examines the facts, determines the legal rights ofeach party, and decides the amount of award that should be rendered,if any.A summary jury trial is a short trial that runs before a real jury,which renders a verdict. The verdict is advisory but helps the partiessee how a real jury would react to the case. In some states the partiescan hold a private civil trial, choosing a judge whose decision isbinding.Proactive Methods Proactive methods are discussed before a disputeeven arises. These methods can be effective in preventing majordisputes among parties involved in business dealings. Some businessesagree in advance to use one of the ADR tools if a disagreementbetween the parties arises later. An ADR contract clause says thepeople who are about to enter a business deal promise to use an alternativedispute resolution technique when disagreements arise. In otherwords, the parties promise not to sue one another. In partnering,parties to a long and involved contract agree to meet to get to knowone another in advance. During this meeting, they create rules forresolving disagreements.Some states provide a proactive ADR technique known as settlementweek. During this period, a court’s docket is cleared of all businessexcept for settlement hearings, which are handled throughmediation.Another proactive ADR method is negotiated rule making. In thisprocess, an agency that is about to create a new rule or revise existingrules works with people who will be affected.Finally, the government might get involved in ADR through a proposedscience court, which acts as a forum for disputes involving scientificand technological controversies, such as genetic engineering.PleadingsCivil trials begin with pleadings, the formal papers filed with thecourt by the plaintiff and defendant. These papers express the plaintiff’sallegations, or claims, in the form of a complaint (see Figure 2.3). Thedefendant’s response to those allegations is known as the answer (seeFigure 2.4).Methods of discovery are employed to bring facts out before trial.Methods of discovery include depositions, interrogatories, requests fordocuments and other evidence, physical and mental examinations, andrequests for admission. If a case cannot be settled at this point, thecourt clerk places the case on the calendar, or court docket, for trial.36 Unit 1: Knowing About the Law

Figure 2.3COMMONWEALTH OF MASSACHUSETTSDISTRICT COURTS OF MASSACHUSETTSCountyESSEX, SSFIRST DISTRICT COURT OF ESSEXCivil Action No. 87-316STEVEN GRAZIO, a minor byMATTHEW GRAZIO, his fatherand next friend,PlaintiffV. COMPLAINT}WAYNE WILLIAMSON, Defendant1. On or about April 10, 20- -, a motor vehicle belongingto the plaintiff, was lawfully standing on North Street,a public highway in the town of Georgetown, county ofEssex, Massachusetts.Name of courtDocket numberPartiesTitle of documentAllegations2. The defendant then and there operated a motorvehicle so negligently, carelessly, and improperly that itran into the plaintiff's automobile and greatlydamaged it.Wherefore the plaintiff demands judgment againstthe defendant in the sum of $3,000 and costs.November 15, 20- -By his attorney,Susan L. Powers28 Main StreetBeverly, MA 01915Relief sought by plaintiffDate of suit important; itmust be before the statuteof limitations expiresName and address ofplaintiff's attorneyA CIVIL COMPLAINTA complaint is the first pleading that is filed ina civil lawsuit. Was this complaint filed in thefederal system or in a state court?Pretrial HearingBefore the actual trial takes place, a pretrial hearing usuallyoccurs. This hearing is an informal meeting before a judge. It isintended to simplify the issues and discuss matters that might help disposeof the case.Chapter 2: The Court System 37

AN ANSWERAn answer is the defendant'sofficial responseto the plaintiff's complaint.How does thisanswer respond to thecomplaint in Figure 2.3on page 37?Figure 2.4ESSEX, SSCOMMONWEALTH OF MASSACHUSETTSDISTRICT COURTS OF MASSACHUSETTSFIRST DISTRICT COURT OF ESSEXCivil Action No. 87-316STEVEN GRAZIO, a minor byMATTHEW GRAZIO, his fatherand next friend,PlaintiffV. DEFENDANT'S ANSWER}WAYNE WILLIAMSON, Defendant1. The defendant has no knowledge or informationsufficient to form a belief regarding the truth of the allegationof paragraph one of the complaint.2. The defendant denies the allegations of paragraph twoof the complaint.3. Further answering, the defendant says that at the timeof alleged accident, the plaintiff's motor vehicle was parkednext to a fire hydrant. This violated the law and caused orcontributed to the causing of the damages complained of.By his attorney,December 10, 20- -George Rodriguez792 Washington StreetPeabody, MA 01960Steps in a Jury TrialThe trial begins by selecting the jury and continues through openingstatements, introduction of evidence, closing arguments, instructionsto the jury, the jury’s verdict, and the judgment (see Figure 2.5).Selecting the Jury The judge calls the court to order and has a jurydrawn from a pool of citizens who have been called to serve. The jurymust determine the facts of the case and apply the law to those facts.The lawyers question each juror selected from the pool, trying to38 Unit 1: Knowing About the Law

Figure 2.5The Litigation ProcessAvoiding LitigationLitigation may be avoidedby compromise, mediation,or arbitration.In a civil case, the steps in a lawsuit appearstraightforward. However, there are manypoints at which the process can be delayed.Commencing an ActionCommencement of theaction occurs when acomplaint is filed anda defendant is served.Answers, counterclaims,cross claims, and thirdpartycomplaints mayalso be involved.Preparing for TrialTrying the CasePretrial procedures include discovery1 , pretrial motions 2 , andpretrial conferences.Executing a JudgmentCases that are tried may involvejury selection and proceed toa trial, verdict, and judgment.Appeals must involve a legalerror made at trial.The judgment is executedafter it’s delivered. A writof execution may beneeded.(1) Discovery may involve depositions,interrogations, and request for real evidence.(2) Motions, if granted, may end the case;the losing party may appeal.Chapter 2: The Court System 39

predict whether a juror will be fair or prejudiced. Attorneys considerthe juror’s background, education, experience, relationships, attitudes,and employment.Opening Statements After jurors are selected, attorneys for eachside make opening statements, explaining what they intend to prove.The plaintiff’s attorney goes first. In some states, the defendant’s attorneymay decide to postpone an opening statement until after the plaintiff’sevidence has been presented.Introduction of Evidence The plaintiff’s attorney presents all ofthe plaintiff’s evidence. Types of evidence include the following: documentaryitems, such as written contracts, sales slips, letters, oraffidavits (sworn statements); physical objects, such as weapons,photographs, and items from the crime scene; and witness testimony.INTRODUCTION OF EVIDENCEPhysical objects are one type of admissibleevidence. Is DNA information from bloodor hair samples admissible evidence?40 Unit 1: Knowing About the Law

Witnesses respond to a subpoena, or order to appear, to testify. Someattorneys present expert witnesses who give authoritative opinions forthe case.The defense attorney has the chance to cross-examine the plaintiff’switnesses, asking questions to test the truth of statements andbring out evidence that was not developed on direct examination.When the plaintiff’s attorney rests, the defendant’s attorney presentsevidence favorable to his or her client. Defense witnesses and anyother evidence important to the defendant’s case are put forward. Theplaintiff’s attorney may then cross-examine the defendant’s witnesses.When the attorneys have introduced all of their evidence, they resttheir cases.Closing Arguments The plaintiff’s attorney is the first to presentclosing arguments, followed by the defense attorney. Each attorneysummarizes the evidence and suggests reasons why the judge or juryshould find in favor of his or her client.Instructions to the Jury The judge must explain the law to thejury in a process called jury instruction. Attorneys from both sidesmay suggest instructions.Verdict and Judgment Members of the jury go to the jury roomto deliberate upon their verdict , or decision. In a civil case, the jury,influenced by the evidence that carries the most weight, finds “in favorof ” one of the parties. There are variations from state to state as to thenumber of jurors who must agree to reach a verdict. In Massachusetts,for example, five-sixths of the jury members must agree on verdicts ina civil case.Following the jury’s verdict, the court issues a judgment , thecourt’s determination or decision in the case.HistoryIn 1932, William HowardTaft persuaded Congressto authorize a new buildingfor the United StatesSupreme Court. Thiscourthouse was finishedin 1935, and its architecturaldesign representsthe dignity and importanceof the Court. Manyother courthouses acrossthe United States haveinteresting architectureas well.Research ActivityResearch the architecturaldesign of the courthouseof the UnitedStates Supreme Court.Find out who designed it,the style used, and whythis style was chosen.Then research theSupreme Court buildingin your state. How arethe buildings similar?How are they different?RemediesWhen a defendant is found liable in a civil trial, the plaintiff is entitledto a remedy. American courts generally provide two categories ofremedies: the payment of damages or an equitable remedy (which asksthe court to do what is fair and just). The plaintiff may want the defendantto do what he or she promised in a contract, which is known asspecific performance . Sometimes the plaintiff wants to prevent thedefendant from doing something that he or she is planning to do or hasalready begun doing. In this case, the plaintiff seeks an injunction , anorder to stop the defendant from performing an action.Chapter 2: The Court System 41

Execution of JudgmentAfter a trial determines a winning party and a losing party, thejudgment of the court must be carried out. The defendant may have topay the plaintiff in settlement or may retain property claimed by theplaintiff. Sometimes the winning party must return to court to seekenforcement of a judgment. A judgment is enforced by the issuance ofan execution by the court. The judge, for example, might order thesheriff to take property belonging to the person who lost the case. Thesheriff must sell the property at an auction and use the proceeds to paythe amount of the judgment to the person who won the case. The executionmay also be an order to the sheriff to remove a person orproperty to another location.Figure 2.6No arrest• Crime occurs• Citizen calls police• Police officer dispatched• Preliminary investigation• Crime report prepared• Arraignment• Case preparation• Pretrial motionsGuilty pleaNo chargesInvestigation by detectivedivisionDismissal/acquittal• Trial (juryselectionand trial)• Bench trialConvictionArrestBooking• Presentenceinvestigation• SentencingReversalAppealsAffirmanceDiversionNot bound over,no indictmentCharges brought• Initial appearance• Preliminary hearing• Bind over, grand jury• Prepared for arraignmentIncarceration• Communitycorrections• Jail• PrisonParole• Supervisedprobation• HomeconfinementOther Options:• Fine, restitution• Suspendedsentence• Conditionaltreatment (forexample, drugtreatment)• UnsupervisedprobationExitNote: Sentencing may include several of the options(for example, prison and a fine). Parole is being eliminatedin many places.THE STEPS IN A CRIMINAL PROSECUTIONIn a criminal prosecution, the defendant's rights must be guarded at every step. Whatare some of the points at which the defendant's rights must be especially protected?42 Unit 1: Knowing About the Law

Criminal Trial ProcedureCriminal cases often start with the arrest of the defendant (seeFigure 2.6). The law requires an immediate court hearing to protect thedefendant’s rights. The trial is scheduled later to give the prosecutingattorney and the defendant’s attorney time to prepare their cases.Arrest of the DefendantAn arrest occurs when a person is deprived of his or her freedom.A police officer may arrest a person at any time if the officer has awarrant. An officer may arrest a person without a warrant if he or shebelieves the person has committed or is committing a felony, or if theperson has committed a misdemeanor involving a breach of the peacein the officer’s presence. Various state statutes also allow officers toarrest people for specific misdemeanors done in their presence, evenif there is no breach of peace.In 1995, 12 percent ofstudents ages 12through 18 reportedthat they were sometimesor most of thetime fearful at school.This percentagedropped to 7 percentin 1999 and 6 percentin 2001.Rights of the Defendant Arrested people must be informed oftheir constitutional rights as set forth in the case of Miranda v. Arizona.The Miranda warnings require that people be told what crimes they arebeing arrested for and the names of the police officers making thearrest. Arrested people also have the right to make a telephone call. Aperson who has been arrested can sometimes be released on bail. Bailis money or other property that is left with the court to assure that aperson who has been arrested, but released, will return to trial.People who are arrested have the right to remain silent. If theyanswer questions, they have the right to talk to an attorney first andmay have an attorney present during the questioning. If a defendantcannot afford an attorney, the court must appoint one at no cost. Underthe Constitution, accused individuals also have a right to a fair trialand are presumed innocent until proven guilty.Search and Seizure A police officer may search a person, car,house, or other building only if permission is given or if the officer hasa search warrant. The search must be limited to the area mentioned inthe warrant. An officer may conduct a limited search, called a frisk, ifhe or she believes that a person is carrying a weapon. When the searchis over, the person must be released or arrested.Persons who have been arrested may be searched without a warrant.When police arrest someone in a house or building, they mayconduct a limited search of the area in which the arrest takes placewithout a search warrant. They need a warrant, however, to search theentire building. When an arrest takes place in a car, police mayconduct a limited search of the vehicle without a warrant. A morecomplete search may be made if there is good reason to believe the carChapter 2: The Court System 43

SEARCH WARRANTThe scope of a search warrant isdetermined by the object that is beingsearched for. How might the searchareas differ for a large televisionversus a small handgun?contains something illegal. In addition, the police may impound (takepossession of) a car until a search warrant is obtained from the court.Example 3. In 1976, police impounded a car in South Dakotafor a number of parking violations. While making a list of thecar’s contents, police found a bag of marijuana and charged theowner with possession. The Supreme Court of the United Statesheld that the search without a warrant was constitutionalbecause standard procedure called for police to list the contentsof every car they impounded.44 Unit 1: Knowing About the Law

Police may seize items (such as illegal drugs or weapons) that arein plain view without obtaining a warrant. This rule is known as theplain-view exception. In 1981, the Supreme Court said police maysearch the entire passenger area of a car without a search warrant oncethe occupants are placed under arrest. A year later the Court modifiedthat position. Police officers who have legitimately stopped anautomobile and have probable cause to believe that contraband (illegalgoods or substances) is hidden inside may search the vehicle withouta warrant, including compartments and containers within the vehiclewhose contents are not in plain view.In 1991, the U.S. Supreme Court held that once police have probablecause to believe a crime is being committed, they do not needa warrant to seize a vehicle and search it, as well as any closed containerinside. In that same year, the Court said that once a motoristgives police permission to search a car, officers may open bags or containerswithin the car.The Supreme Court has also held that school officials may searchstudents without a warrant. However, the officials must have reasonablegrounds to believe the search will turn up evidence that thestudent has violated school rules.The ArraignmentThe suspect is brought before the court as soon as possible afteran arrest, informed of the nature of the complaint, and made aware ofhis or her rights. At this time, the judge may find cause to dismissthe complaint or decide if there is probable cause that a crime wascommitted.Depending upon the jurisdiction, the prosecuting attorney eitherprepares an information or presents the case to the grand jury. Aninformation is a set of formal charges drawn up by the prosecutingattorney. A grand jury is a jury of inquiry made up of citizens whomust decide whether there is enough evidence to justify accusing certainpersons of certain crimes.A grand jury conducts a preliminary hearing in secret to determinewhether someone must stand trial. A petit jury decides on the guilt orinnocence of the person tried. A trial jury is a petit jury because it hasfewer members than a grand jury.The grand jury hears evidence and testimony of witnesses. Ifjurors decide a crime has been committed, they issue an indictment ,or written accusation charging the individual. This issuance does notmean that the named person is guilty but that the grand jury believesthere is a possibility he or she is guilty.Following the indictment or information, the accused is brought tocourt for arraignment . The suspect is read the indictment orGuns in SchoolAccording to a recentreport on state implementationof the Gun-Free Schools Act, 55percent of expulsionsfor bringing firearmsto school involvedhigh school students,33 percent involvedmiddle school students,and 10 percentinvolved elementaryschool students. Howcan you make yourschool safer?Get InvolvedLocate local, state,and national children’sadvocacy groups todetermine what programsin your areahelp educate teensabout gun violence.Find out how you andyour friends can forma group at school thatpromotes nonviolentsolutions and encouragesmediation.Chapter 2: The Court System 45

Forensic ScientistIf you’re a fan of mysteries, you might wonder howhomicide detectives really discover “whodunit.” Chancesare, they’ve received some help along the way from aforensic scientist.“Forensics just means something relating to law,” saysMidori Albert, professor of anthropology and forensics consultant at theUniversity of North Carolina, Wilmington. “People in many different fields—chemistry, engineering, botany, even bug scientists—can help to solve a crime.”Although most of Albert’s time is spent teaching anthropology, she is also partof a team of crime sleuths who tackle about 30 cases per year in North Carolina.Simply by studying bones, she can reconstruct many characteristics of victims,including their age, gender, ethnic background, previous disease and boneinjury, and sometimes the cause of death. This information is useful inreconstructing the scene and circumstances of a crime and ultimately help tosolve cases.“A lot of people think forensic scientists are into gore,” Albert says. “That’snot true. This is a science based on observation and logic. We’re dealing withpeople’s lives, and we care about the victims of these crimes. Our work oftenhelps a victim’s surviving family and friends to come to some resolution.”SkillsPersonalityEducationPhotography and videography, computer, statisticalanalysis, organization, communication, archaeologicalfield techniquesPatient, discreet, sociable, detail orientedAcademic forensic scientists are usually required tohave a Ph.D. People interested in the technical aspectsof forensics will need a bachelor’s degree in generalforensic science.For more information on forensic science, visit the American Academyof Forensic Sciences Web site at www.aafs.org, ubpl.glencoe.com, or yourlocal library.information and is asked to plead guilty or not guilty. The accused isinformed of his or her rights. If the person pleads guilty, the judge maythen impose the sentence. If the person pleads not guilty, the case proceedsto trial.46 Unit 1: Knowing About the Law

The TrialIf the defendant requests a jury trial, selection of jurors proceedsand attorneys make opening statements and introduce evidence.Otherwise, the case is tried before the judge, who decides the verdict.The trial ends with the attorney’s closing statements and the judge’sinstructions to the jury.In a criminal case with a jury, the verdict must be unanimous—either guilty beyond a reasonable doubt, or not guilty. A mistrial iscalled if the jury cannot agree, and a new trial may be held at theoption of the prosecution. If the defendant is not guilty, he or she isreleased. If the defendant is found guilty, the judge imposes a sentencein the form of a fine, imprisonment, or both.SentencingAfter a person has been convicted of a crime, he or she is sentencedby the court, which means the judge decides the punishment.The law provides certain sentencing guidelines and penalties, includingfines, imprisonment, and even death.Fines A fine is the payment of money as a penalty for committinga crime, generally a minor one. Fines are also attached to more seriouscrimes and may be levied by the judge along with imprisonment.Imprisonment States deal with imprisonment in different ways. Insome states, the judge may hand down an indefinite or indeterminatesentence, ordering a minimum and maximum amount of time the convictedcriminal may spend in prison. A prisoner might be sentenced tofive to ten years; however, good behavior might shorten his or her timebehind bars.Other states insist on compelling the judge to use a definite sentence.The judge must state the exact period of time a criminal willspend in prison. Some states have created mandatory sentences forcertain crimes, which cannot be altered for any reason.Giving EvidenceImagine that yourfriend’s brother hasbeen arrested for committinga crime thatoccurred last weekend.You saw your friend’sbrother at a party atthe time the crime wascommitted and arecertain that he is innocent.However, yourparents told you not toattend the party, andyou’re sure that youwill get in trouble ifyou come forward withyour evidence. Shouldyou report what youknow to the police?Why or why not?The Death Penalty Our Constitution says death penalty laws mustinclude guidelines to ensure fair treatment. Death penalty laws requirethree phases:l The jury determines whether the defendant is guilty.l The judge or jury listens to attorneys’ arguments and determinesthe punishment under state laws that clearly set forth factors to beconsidered in a presentencing hearing.l An appeal is taken to the state’s highest court.Chapter 2: The Court System 47

Figure 2.7CAWAORNVAge Limits For Juvenile Court JurisdictionIDAZUTMTWYCONMNHVTNDMNWINYSDMIPAIANEIL INOHWV VAKS MO KYNCTNOK ARSCALGAMSLATXFLMEMARICTNJDEMD151617AlaskaHawaiiTHE AGE LIMITS FOR JUVENILECOURT JURISDICTIONMost states hold 17 as the oldest age forjuvenile court jurisdiction. What is the agelimit in your state?Disposition of Juvenile CasesCases involving juvenile offenders are handled by the juvenilecourt, which has limited jurisdiction (see Figure 2.7). The juvenilecourt system is designed so that each case and special circumstancesare considered individually.As a first step, the judge usually holds a detention hearing tolearn whether there are good reasons to keep the accused in custody.The court’s probation department or a child welfare agency begins aninvestigation into the minor’s background and home life. The judgemight dismiss the charges upon hearing the investigation findings.There may be special circumstances; the matter may be deemed notserious enough to pursue further; or the judge may feel the youth waswrongly accused.If the charges are not dismissed, the judge conducts an adjudicatoryhearing. This is the informal, actual hearing of the case by thecourt. The judge may question the youth and his or her parents, listento witnesses, and seek advice from the probation officer. Some courtsdecide what action to take at this point. Other courts hold a third hearing,called a dispositional hearing. After one of these hearings, the48 Unit 1: Knowing About the Law

judge decides the outcome of the case. The matter is generally settledin one of three ways:l The judge may allow the offender to return home on probation fora period of time, under the supervision of a probation officer.Failure to meet probation requirements may result in more severepunishment.l The judge may place the offender in an agency or foster home.The natural parents will then be required to pay what they cantoward the offender’s support.l The judge may commit the offender to a training or reformschool. This option is usually a last resort, employed when bothprobation and foster care have already been tried and have failed,or when those options seem unlikely to work.The judge can also order the juvenile offender to pay for the damageswith money, work, or both. The parents of the offender may haveto repay the victim in some cases. Sentences for youthful offenders areset with rehabilitation in mind. They are generally limited to probationunder court supervision, confinement for not more than three years ina reformative institution, or another course of action designed to help,rather than to punish.Reviewing What You Learned1. What are some alternatives to litigation?2. What is the difference between a civil caseand a criminal case?3. Specify the steps in a civil lawsuit.4. What rights do people have when they arearrested?5. Specify the steps in a criminal lawsuit.6. How do the courts treat juvenile cases?Critical Thinking ActivityResolution Proceeding Using the newspaper,Internet, or your school library, research howconsumers might use dispute resolution toresolve conflicts with businesses. Then makean oral presentation on an actual resolutionproceeding.Legal Skills in ActionDispute Resolution Centers In this chapter,you learned about alternative dispute resolution,an increasingly popular approach toresolving disputes out of court and avoidingthe time and cost of trial. Contact the officeof the district court administrator to locatedispute resolution centers.Chapter 2: The Court System 49

CHAPTERASSESSMENTSection 2.1 Dual Court System● Jurisdiction is the power and authority given acourt to hear a case and to make a judgment. Acourt with original jurisdiction hears a case triedfor the first time in its court. A court withappellate jurisdiction reviews a case on appealfrom a lower court. Courts with limitedjurisdiction handle minor matters, such asmisdemeanors. General jurisdiction means that acourt has the power to hear most types of cases.● Federal courts are arranged in three levels: U.S.district courts located throughout the UnitedStates, U.S. courts of appeals, and the SupremeCourt of the United States.● The U.S. Supreme Court has original jurisdictionon certain types of cases involving ambassadors,consuls, and cases in which a state is a party. TheSupreme Court hears the majority of its cases inits appellate capacity. It considers cases that havebeen tried in lower courts and cases that havebeen selected for review by four of nine SupremeCourt Justices.● State court systems generally consist of localtrial courts, courts of general jurisdiction, andappellate courts. At the highest level, each statehas its own supreme court.● A delinquent juvenile is a child who commits anadult crime. An unruly child is generally a minorwho has done something that wouldn’t be acrime if committed by an adult, such as violatingcurfew, skipping school, or using tobacco. Aneglected or abused child is one who is withoutadequate parental care or one who is homeless.Such a child will become a ward of the state.Section 2.2: Trial Procedures● There are several different alternatives totraditional litigation. Mediation and arbitration,med-arb, early neutral evaluation (ENE),summary jury trial, and private civil trial are●●●●●some reactive examples of Alternate DisputeResolution (ADR). Reactive methods of ADRare used after a dispute has arisen. ProactiveADR methods, such as partnering and settlementweek, are used before a dispute arises.A criminal case often starts with an arrest. Toprotect the defendant’s constitutional right to aspeedy trial, the criminal trial is scheduled morequickly than a civil trial. A plaintiff in a civil casemay wait years before having her day in court. Incivil court, the plaintiff sues the defendant for aremedy. In a criminal proceeding, the districtattorney prosecutes on behalf of the governmentagainst the defendant for a different type ofprice—his or her freedom.The steps in a civil trial are: (1) jury selection,(2) presentation of opening statements, (3) introductionof the evidence, (4) presentation ofclosing arguments, (5) instructions to the jury,(6) the jury verdict, and (7) the court’s judgment.People placed under arrest may exercise theirrights in several ways: (1) they may remainsilent; (2) they may call an attorney; and (3) ifthey choose to answer questions, they may havean attorney present.After a defendant is arrested, evidence of thecrime is presented to a grand jury. If the grandjury decides there is enough evidence to go totrial, it issues an indictment. The defendant isarraigned. At the time of arraignment, thedefendant pleads guilty or not guilty. Defendantspleading not guilty proceed to trial, and thosepleading guilty are sentenced by the judge.In a juvenile case, the judge may: (1) place theoffender on probation and allow him or her toreturn home, (2) place the offender in an agencyor foster home, or (3) commit the offender to atraining or reform school.50 Unit 1: Knowing About the Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.jurisdictionoriginal jurisdictionappellate courtlimited jurisdictiondelinquent childabused childmediationmed-arbprivate civil trialanswerjudgmentbailarraignmentdiversity of citizenshipintermediate courtappellate jurisdictiongeneral jurisdictionunruly childalternative resolutionarbitrationsummary jury trialADR contract clauseverdictarrestindictmentSelf-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 2:The Court System—Self-Check Quizzesto prepare for thechapter exam.1. Your business law professor has asked you to create a reference manual for newstudents. Provide a definition for each key term.2. The reference manual will be organized according to groups of related terms. Placeeach key term into one of three to five categories that you create.Answer the following questions. Refer to the chapter for additional reinforcement.3. What are the two court systems in the United States?4. What is the source of the federal court system’s authority?5. In what kind of case does a federal district court have original jurisdiction?6. When are the police allowed to search a vehicle without a warrant?7. How does a verdict differ from a judgment?8. Describe the rights of an arrested person.9. There are likely dispute resolution centers in your area. Contact the office of thedistrict court administrator to define the scope of their jurisdiction.10. What happens if a jury cannot agree on a verdict?11. Under what circumstances might a judge commit a juvenile offender to areform school?Chapter 2: The Court System 51

CHAPTERASSESSMENTConnect with Language ArtsJeremy is a 15-year-old student. One night,after his parents thought he was asleep, he andtwo friends went to the golf course. As a prank,they drove five golf carts into a nearby lake.All the carts were destroyed, and Jeremy andhis friends were arrested. In juvenile court,Jeremy and his friends were fined and placedon probation for two years, and their parentswere required to reimburse the owner of thegolf course for the golf carts. Analyze thefollowing issues:12. Is this result fair to the juveniles’ parents?13. Is this result fair to the golf course?Write a paragraph explaining your opinion.Next, write another paragraph defending theperspective of the golf course. Finally, write aparagraph as if you were representing Jeremy.Privacy and Drug TestingYour school has decided that it will requirerandom drug testing for students who areinvolved in extracurricular activities. Manystudents in the school feel this is illegal. Othersbelieve that all students, including those whodo not participate in extracurricular activities,should face the same rules.Debate14. Do you think school districts shouldimpose this type of policy?15. Do you think random drug testing of highschool students involved in extracurricularactivities is legal?16. If you were the principal, would you requirerandom drug testing? Why or why not?For the following cases, give your decision andstate a legal principle that applies.17. Kepano brought a lawsuit in his home stateinvolving a contract claim against anotherresident of that state. When Kepano lost, hedecided to take the case directly to theUnited States Supreme Court. Is theSupreme Court required to hear the case?Why or why not?18. Shahnaz and Vasu Harinath decide to get adivorce. Because they want to keep thematter as quiet as possible in theircommunity, they elected to have theirdivorce heard by a federal district court. Dofederal courts have jurisdiction overdivorce cases? Why or why not?19. When Ivan Gagarin was at the mall, he wasserved with a copy of a complaint and asummons in a lawsuit. Certain that he hasdone nothing wrong, Ivan decides to donothing about the lawsuit. What willhappen to him?20. Speculate on which of the following casesthe U.S. Supreme Court might decide toreview: (1) a libel case involving a localhigh school football coach; (2) a caseinvolving a student who has been deniedadmission to a college program because ofher religion; (3) a case involving whetherthe American flag can be burned in protestover new taxes. Explain your answer.21. Abel Agapois was given a speeding ticketfor going 65 miles per hour in a zone thatonly permitted the speed of 25 miles perhour. His case was heard in mayor’s court,and the mayor fined him $275. Abelbelieves the fine constitutes cruel andunusual punishment, and he intends toappeal to the federal district court. Will hebe permitted to do so? Why or why not?52 Unit 1: Knowing About the Law

In each case that follows, you be the judge.22. Search and SeizureThe police received a tip that marijuana was being grown in Michael Riley’s greenhouse. Policecould not see inside the greenhouse from the road, but the investigating officer did see marijuanaplants in the greenhouse from a helicopter circling the property. Riley argued the helicoptersearch was an unconstitutional violation of the Fourth Amendment. Could this case be appealedto the United States Supreme Court? Why or why not?Florida v. Riley, 102 L.Ed. 2d 835 (U.S. Sup. Ct.).23. Equal ProtectionThe city council of Richmond adopted a minority business utilization plan. Primary contractorsof any city construction project were required to subcontract a minimum of 30 percent oftheir work to at least one minority business enterprise. However, any contractor that wasowned by minority group members was not bound by this rule. The plan was challenged infederal district court. What is the jurisdictional basis for bringing the case to federal court?Is this the type of case that could be brought to the United States Supreme Court? Why orwhy not?Richmond v. Croson Co., 488 U.S. 469 (U.S. Sup. Ct.).Who’s Who on the U.S. Supreme CourtAfter studying the justices of the Supreme Court inyour American History class, you decide you wantto know more.ConnectSelect one of the current U.S. Supreme Courtjustices. Using a variety of Internet search engines,conduct research to find out more about thatjustice. Answer the following questions:24. Where and when was he/she born?25. Where did he/she go to law school?26. Which president nominated the justice to theU.S. Supreme Court?27. Where is he/she seated on the bench?28. What is the significance of the quill pen?29. Describe the conference handshake.30. Predict What do you think would happen ifwe didn’t have the 51 court systems in theUnited States?31. Connect Under what circumstances, if any,do you think a minor should be treated asan adult in a murder case?32. Question What do you think wouldhappen if there were juries in the appealscourt?33. Respond How do you think lawyersdetermine whether a juror will be biasedor prejudiced?Chapter 2: The Court System 53

CHAPTERCriminal LawUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal Law Website at ubpl.glencoe.com and click onChapter 3: Criminal Law—Chapter Overviewsto preview the chapter information.

The Opening SceneDuring lunch in the cafeteria, Jamila, Trai, Peggy,and Daniel discuss their plans for the Friday nightfootball game in a neighboring town.Crime and PunishmentJAMILA: Hey Trai, I need a ride to the football gametonight. I figured that I could catch one with you.What time can you pick me up?TRAI: (Looking in Daniel’s direction.) I’m always thedriver. In fact, I drove last week. I was hoping tocatch a ride with Daniel.DANIEL: (Sheepishly.) I know that it’s my turn, butit’s not going to happen. My dad said it’s toodangerous to go to a game at Danville High. Heread the newspaper article about what happenedin the chemistry lab last month. I tried to beg him,but he wouldn’t change his mind. You know howhe is.PEGGY: Are you kidding? Your father is so overprotective!Danville isn’t dangerous. Does your dadknow what really happened over there?TRAI: Yeah, it’s just a case of a small fire that onekid started. It doesn’t mean the whole school isdangerous. You can’t judge an entire school basedon the behavior of one person. Plus, they caughtthe guy who did it, and he’s been charged witharson.JAMILA: Arson! Wow! I’m not sure, but I think thatmay be a federal offense. I bet the penalty for thatis tough—students there are going to be on theirbest behavior for a long time.PEGGY: I think the guy who did it got in trouble forsomething he was doing on the Internet, too. Hesounds like he has some big problems. What’sgoing to happen to him, anyway?TRAI: I read in the paper that his lawyer is going toplead insanity.DANIEL: (Throwing his hands up in the air.) Great!He’ll end up getting off with nothing. It’s not fair.He deserves to be punished.PEGGY: (Frowning.) I’m not sure that I consider alengthy stay at a state mental institution a goodtime. Mental institutions are not luxury hotels,you know.JAMILA: I don’t think it’s fair for him to be able toplead insanity. Can’t anybody claim insanity justto get out of going to jail?TRAI: (Crumpling up his lunch bag.) How should Iknow? Maybe you’d better check with Mrs.Martinez. Right now, let’s worry about getting tothe football game tonight. That kid will get what hedeserves, whatever that may be. Daniel, mymom’s car is in the shop, and my dad is out oftown on a business trip. You’ve got to drivetonight, or we won’t be able to go.PEGGY: Tell your dad what we just talked about. Youcan convince him. Better yet, I’ll help you talk tohim. Your dad likes me.DANIEL: (Reluctantly.) I guess we can talk him intoit. How about if I pick everybody up aroundsix o’clock?1. What is the difference between federal andstate law?2. What are some specific crimes that are part ofour legal system?3. What statutes have been passed to addresscomputer crimes?4. What defenses are available for criminaldefendants?Chapter 3: Criminal Law 55

What Is a Crime?l How to tell the differencebetween seriousand less seriouscrimesl How to explain thedifference betweenstate and federalcriminal lawl How to explain theelements of a crimel How to define thevarious defenses tocriminal liabilityLearning the essence ofcriminal law, the types ofcrimes that can be committed,and the natureof criminal defense willhelp you understand ourcriminal justice system.l crimel plaintiffl prosecutorl defendantl felonyl misdemeanorClassifications of CrimesCrime is considered an act against the public good. Our laws inthe United States detail crimes and provide punishment by fine,imprisonment, or both. In a criminal proceeding, the state or federalgovernment, representing the public at large, is the plaintiff , or theparty that accuses a person of a crime. The prosecutor is the governmentattorney who presents the case in court against the personaccused, called the defendant .FeloniesA felony is a major crime punishable by imprisonment or death.The punishment set for a particular crime determines whether it is afelony. Murder, manslaughter, burglary, robbery, and arson are examplesof felonies. Some states, such as New Jersey, do not use the wordfelony. New Jersey labels its most serious crimes “high misdemeanors.”See Figure 3.1 to view statistics on crime in the United States.MisdemeanorsA less serious crime with a less severe penalty is a misdemeanor .Misdemeanors are penalized by a fine or brief imprisonment in acounty or city jail. Driving an automobile without a license, lyingabout one’s age to purchase alcohol, and leaving the scene of an automobileaccident are examples of misdemeanors. Some states also classifylesser crimes as minor misdemeanors or petty offenses. Typicalexamples of these types of offenses include some traffic and parkingviolations.Criminal Law in theAmerican SystemThe American legal system actually consists of two systems: thefederal system and the state system. Both systems make and enforcecriminal law, but the source of their power for making criminal lawdiffers.56 Unit 1: Knowing About the LawState Criminal LawEach state government has inherent police power, allowing it tomake statutes to protect the public health, safety, welfare, and morals.

Figure 3.111109812OneCRIME INDEX OFFENSEevery 2.7 seconds7612345OneVIOLENT CRIMEevery 22.1 secondsOnePROPERTY CRIMEevery 3.1 secondsOneMURDERevery 33.9 minutesOneFORCIBLE RAPEevery 5.8 minutesOneROBBERYevery 1.3 minutesOneAGGRAVATED ASSAULTevery 34.6 secondsOneBURGLARYevery 15.4 secondsOneLARCENY / THEFTevery 4.5 secondsOneMOTOR VEHICLE THEFTevery 27.1 secondsAlthough state laws closely resemble each other, the exact definitionsand penalties for crimes may differ from state to state. For instance, acrime that is called assault in one state may be called battery in another.Federal Criminal LawUnlike state governments, the federal government has no policepower. When the Constitution was written in 1787, its authors imposedlimits on the powers granted to the national government. One limitationwas the act of withholding the general police power enjoyed bythe states. Consequently, the federal government is able to create criminalstatutes only in areas over which it has jurisdiction. For example,the federal government has created laws against counterfeitingbecause it has the power to coin money.Today, however, the federal government does have a criminal codeand several national police agencies, including the Federal Bureau ofInvestigation (FBI) and the Drug Enforcement Agency (DEA). The federalgovernment’s power to establish these agencies comes primarilyfrom the commerce clause of the U.S. Constitution, which requiresA CRIME INDEXAs this crime index indicates,the rate at whichcrimes are committed in thiscountry is quite consistent.Why does the crime rateremain so steady despitethe efforts of our lawenforcement officials andthe criminal court system?Chapter 3: Criminal Law 57

Congress to regulate commerce among the states. As a result, federalcriminal law statutes must involve some sort of interstate activity.Crime andPunishmentThe U.S. SupremeCourt has ruled that itis unconstitutional toexecute mentallyimpaired criminals.According to theCourt majority, thereis a “national consensus”against such executionsand theywould violate theEighth Amendment’sprohibition of “crueland unusual” punishment.Do you agreewith the Court? Doyou think similarconsiderationsshould precludeapplying the deathpenalty to juveniles?Why or why not?Get InvolvedFind out what theEighth Amendmentsays about “cruel andunusual” punishmentand research how theSupreme Court hasinterpreted thisphrase. Then write toyour congresspersonand express how youfeel about placingjuvenile offenders ondeath row.Treason Treason is one crime named and defined in the U.S.Constitution. A confession in open court or the testimony of two witnessesverifying the same overt act of treason is required to convictsomeone of treason.Double Jeopardy The federal and state systems of justice sometimesoverlap. For example, both federal laws and state laws addressthe manufacture, sale, and use of illicit drugs. This overlap can createa problem for a person who has been accused of a crime that could beconstrued as both a federal and a state crime. The Fifth Amendment ofthe Constitution guarantees that no person can be tried twice for thesame crime, a principle known as double jeopardy. In practice, however,the courts have held that although an individual may not be triedtwice for the same crime in the same court, he or she may be triedtwice for the same actions in two different courts.Elements of a CrimeA crime is defined by two elements: the criminal act and therequired state of mind. The two elements may be defined somewhatdifferently by the states, but definitions are similar enough to allowcertain generalizations.Criminal ActMost criminal statutes specifically explain conduct that is forbidden.For example, a statute that makes stealing a crime specificallyprohibits the wrongful taking of another person’s personal property.Some criminal law statutes, however, make failure to act a crime. Forinstance, a young man who fails to register for the draft after reachinghis eighteenth birthday has committed a crime.A criminal act must also involve voluntary conduct. Similarly, aperson cannot be accused of a crime if that accusation is based onone’s physical or mental status or condition. For example, the governmentcould not make it a crime to be an alcoholic because alcoholismis a physical condition. However, the government can have lawsregarding at what age a person can consume alcohol.Required State of MindThe second element establishing a crime is the required state ofmind. A statute defining murder forbids the intentional taking of a person’slife; the required mental state is intent. In contrast, a statute58 Unit 1: Knowing About the Law

defining involuntary manslaughter outlaws the accidental taking of aperson’s life. In both statutes the criminal act involves taking a life, butthe crime changes according to the state of mind of the person committingthe act.MotiveWhen television and movie detectives hunt for a criminal, theyalways seem to make the motive for a crime a crucial part of their case.This is misleading because motive actually plays no part in provingcriminal liability. If a person has committed a forbidden act with therequired state of mind, then he or she is criminally liable, regardless ofmotive.Defenses to CrimesIf you were a defense attorney, your job would be to try to showthat the prosecution failed to prove the required elements for the crimecharged to your client. The most common defenses include insanity,entrapment, self-defense, and defense of family members.Teen CourtsAuthorities have long sought ways to reduce teen crime. One approachthat many communities have adopted is to establish teen courts. In teencourts, teenagers serve as jurors, defense attorneys, and prosecutors. Thecourts hear the cases of teens who have committed a minor, first-timeoffense. These offenders get a chance to avoid the record that would resultfrom a juvenile court proceeding. They also learn a valuable lesson in howthe law works.Teen courts began in Texas in the 1970s and have since spread to morethan 30 states. They often are supported by funds from school districts, traditionalcourts, or by civic groups that hope to reach young offenders beforethey become hardened criminals. Statistics show that teen crime is generallydown in communities where such programs exist.Conduct Research Call or write the municipal governments in your area todetermine whether they have teen courts and how these courts work.Chapter 3: Criminal Law 59

InsanityAmerican law recognizes that people cannot be held responsiblefor their actions if they do not know what they are doing. This recognitionmakes insanity a valid defense to criminal conduct.The oldest legal test of insanity is the M’Naughten Rule, developedin England in 1843. To be deemed legally insane under this rule, adefendant must be proven to suffer from a mental disease so seriousthat he or she did not know the nature or moral inappropriateness ofan illegal action at the time it was committed. This test is still used inabout two-fifths of U.S. states.The American Law Institute (ALI) has developed a more moderntest for insanity. A person is not considered responsible if “as a resultof mental disease or defect he or she lacks substantial capacity eitherto appreciate the criminality of his conduct or to conform his conductto the requirements of law.” About three-fifths of U.S. states follow theALI test.People who are found not guilty by reason of insanity do not automaticallygo free. Rather, they are committed to institutions and mustundergo periodic psychiatric examinations. These people are releasedonly when they are found to be sane.EntrapmentIf a law enforcement officer induces a law-abiding citizen to commita crime, the person can use a defense known as entrapment. Thedefense must show that the crime would not have been committedwithout the involvement of the officer.Example 1. Several students told Mrs. Martinez that Grantoffered to sell them drugs. When she reported this to the police,an undercover officer was sent to the school. Grant tried to sellthe officer some drugs, and the officer arrested Grant. Thedefense of entrapment could not apply because Grant wouldhave sold the drugs regardless of the officer’s intervention.Self-DefenseWhen people have good reason to believe they are in danger ofserious injury or death, they can use force to protect themselves. Thisdefense is known as self-defense. A person claiming self-defense musthave tried to retreat before resorting to force. If an attack occurs inone’s own home, however, a person does not need to retreat.Defendants must also show that they did not start the altercation andthat they did not use excessive force to stop the attack.60 Unit 1: Knowing About the Law

Defense of Family MembersMost states will not punish someone for using force to rescue a familymember from attack. As in self-defense, the rescuer must have goodreason to believe the victim was in danger of severe bodily injury ordeath. Figure 3.2 displays the criminal defenses available to defendants.Example 2. Mark returned home one evening to find his sisterbeing attacked in their living room. He struck and injured hissister’s assailant. Most states would allow Mark to use defenseof family members to explain his actions.Figure 3.2Criminal Liability and DefensesCriminal LiabilityThe act:Criminal behavior specifically outlinedby statuteThe mental state:Mental state specifically outlined by statutePurposeKnowledgeRecklessnessNegligenceCriminal DefensesDefenses to the act:Act as defined is “status” onlyAct as defined is ambiguousAct as defined is overbroadDefenses to the mental state:InsanityEntrapmentJustifiable forceMistakeCRIMINAL LIABILITYAND DEFENSESA proper understandingof the relationshipbetween theelements of criminalliability and the chiefcriminal defenses is atthe heart of criminallaw. Which of the twoelements of criminalliability does the insanitydefense seek toeliminate?Reviewing What You Learned1. What determines the difference between afelony and a misdemeanor?2. How do state and federal criminal lawdiffer?3. What are the elements of a crime?4. What are the major criminal law defenses?Critical Thinking ActivityLegal Defenses Why is it crucial to understandthe different defenses to criminalliability?Legal Skills in ActionThe Insanity Defense Many people havemisconceptions about the insanity defense inthe American legal system. They often seeit as a way for criminals to go free withoutserving time for their offenses. Imagine thatyou are a legal columnist for a newsletterintended for people who support civil liberties.Write a column in which you defend theinsanity defense as a necessary part of theAmerican legal system.Chapter 3: Criminal Law 61

Particular Crimesl How to define majorcrimes against peoplel How to define majorcrimes againstpropertyl How to define majorcrimes that involvecontrolled substancesl How to define majorcrimes that involvecomputersLearning how to distinguishamong variouscrimes will help youunderstand criminalliability.l murderl manslaughterl batteryl assaultl kidnappingl burglaryl larcenyl embezzlementl robberyl arsonl vandalisml shopliftingCrimes Against PeopleGenerally, crimes can be grouped under three headlines: crimesagainst people, crimes against property, and crimes against businessinterests. The killing of one human being by another is known as homicide.Justifiable homicide takes place when a police officer kills a criminalin the line of duty or in self-defense. This type of homicide alsotakes place when a soldier kills the enemy in battle. When someone iskilled by accident, the death is an excusable homicide.MurderUnder the law, murder is the unlawful killing of another humanbeing with malice aforethought, which means the killer had evil intent.In many states, murder is divided into first-degree murder and seconddegreemurder.The definition of first-degree murder, also called aggravated murder,differs from state to state. However, first-degree murder generallyinvolves one or more of the following circumstances: killing with premeditation(thinking about or planning the crime in advance); killing ina cruel way, such as with torture; and killing while committing a felony,such as rape or robbery. If none of these conditions apply, the crime isconsidered second-degree murder. The distinction between first- andsecond-degree murder is important because in some states those foundguilty of first-degree murder are subject to the death penalty.ManslaughterThe unlawful killing of another human being without malice aforethoughtis known as manslaughter , which can be divided into twocategories: voluntary and involuntary. Voluntary manslaughter occurswhen one person intends to kill another but does so suddenly and asthe result of great personal distress. The wrongdoer must have becomevery upset before the killing.Example 3. Alex Fielder’s son was kidnapped and murdered.When the police caught the kidnapper, he immediately confessed.The next day, while being interviewed at the policestation, Alex saw the kidnapper being transported to anotherpart of the jail. In a sudden rage, Alex grabbed a nearby62 Unit 1: Knowing About the Law

officer’s service revolver and shot the kidnapper dead. Alex wascharged with voluntary manslaughter.Involuntary manslaughter occurs when one person, while committingan unlawful or reckless act, unintentionally kills another.Example 4. Rosco McMurphy and Max Cavendish live in astate in which drag racing is a misdemeanor. They challengedeach other to a drag race on the outskirts of town. Both cars hita top speed of 95 miles per hour in an area where the speed limitwas 45 miles per hour. Rosco lost control of his car and crashedinto a crowd of spectators, killing two of them. Consequently,he was charged with involuntary manslaughter.If drag racing were a felony in the state in which the race occurred,then Rosco, Max, and anyone else who had taken part in the drag racecould be charged with murder. A killing that takes place during afelony is murder.Assault and BatteryThe unlawful touching of another person is known as battery ,and it usually involves the forceful use of a person’s hand, knife, or gunagainst another. Battery may also be committed by giving poison ordrugs to an unsuspecting victim, spitting in someone’s face, commandinga dog to attack someone, or even kissing someone who doesnot want to be kissed. Accidentally bumping someone in the cafeterialine at school would not be battery, because the crime requires criminalintent or at least reckless behavior.An assault is an attempt to commit a battery. Pointing or shootinga gun at someone is the assault; the bullet striking the person is thebattery. Some states no longer follow the common law distinctionbetween assault and battery. Ohio, for example, has eliminated theterm battery from its criminal code and substituted assault by itself.Simple assault and battery are generally misdemeanors.Aggravated assault and aggravated battery, however, are felonies inmost states. To qualify as an aggravated offense, the assault or batterywould have to be committed with a deadly weapon, or with the intentto murder, commit rape, or commit robbery. Some states call aggravatedassault felonious assault.Ethical Crime?Is there such a thing asan ethical crime? Inother words, if an actis a crime, is it automaticallyunethical aswell? Consider thestory of Robin Hood,who stole from therich and gave to thepoor. Imagine a clerkemployed at a multibilliondollar corporationwho embezzlesmoney and donates itto a homeless shelter.Would you consider theclerk’s behavior ethicalor unethical?KidnappingThe unlawful removal or restraint of a person against his or herwill is called kidnapping . Often, a kidnapping victim is forced to beChapter 3: Criminal Law 63

a captive. Kidnapping usually includes unlawful imprisonment forransom, terrorism, torture, rape, or to commit a felony.The television showAmerica’s Most Wantedwas started by hostJohn Walsh after hissix-year-old son wasabducted and murdered.Because ofthe television series,755 criminals havebeen apprehended,as of July 2003.Sex OffensesIn the past, the crime of rape included only two types of situations:a male forcing a female to have sexual intercourse and a male havingsexual intercourse with an underage female. Today laws haveexpanded the crime to include other types of sexual misconduct. Thecrime of statutory rape applies to situations in which the victim isunderage. The consent of the underage person does not make thesexual encounter legal. Furthermore, a minor can also be prosecutedfor having sex with another minor. Statutes defining rape do not specifythe age of the offender.Sexual assault by a friend or date has been recently recognized asa sex offense. Such crimes are usually labeled date rape or acquaintancerape.Sexual assault is a very serious crime. Victims are hurt not onlyphysically but also emotionally and psychologically. For these reasons,sex offenses carry very serious penalties. In one state, for example, therape of a child under the age of 13 carries the penalty of life in prison.Domestic ViolenceMany children, spouses, and elderly people suffer harm frommembers of their own families. Any reckless form of physical or mentalabuse within a family or household is known as domestic violence.Children are protected by child endangering or child abuse statutes,which prohibit neglect, ill treatment, and abuse. These laws provide forthe relocation of mistreated children from abusive homes to placeswhere they will be treated properly. The laws also provide for punishmentof the abusers.The law also protects a married individual from being abused byhis or her spouse. Many communities have shelters where abused andbattered spouses can seek safety. Abused spouses may also seek legalprotection from the courts. They may request a protective order, whichbars the abusing spouse from maintaining any contact with the victim.Such orders are enforced by the local police.Hate CrimesMany states have tried in recent years to make it a crime to use certainsymbols, writings, pictures, or spoken words to cause fear oranger in people because of their race, religion, color, or gender. Suchactions are sometimes referred to as hate crimes and hate speech.The courts have held that hate crime statutes must be drafted verynarrowly, which means the statutes must not specify the content of the64 Unit 1: Knowing About the Law

hate speech. A legislature can pass a statute that outlaws language orsymbols that are designed to rouse fear or outrage regardless of thecontent of that speech. However, a statute making it illegal to usespeech designed to incite outrage or fear based only on race, religion,color, gender, or any similar category would not be correct.Crimes Against PropertyThe most common crimes against property include burglary, robbery,arson, larceny, and embezzlement. Crimes against property canbe classified as felonies or misdemeanors, depending on the severityof the crimes. See Figure 3.3 and Figure 3.4 for statistical data onviolent crime in the United States.VIOLENT CRIME RATESBY AGE OF VICTIMThe crimes represented bythe statistics in this tableinclude murder, sexualoffenses, robbery, andassault. Which age groupsof victims have the highestcrime rates for the twomost recent years in thetable?Figure 3.3Violent Crime Rates by Age of VictimAge of Victim (Adjusted victimization rate in percent per 1,000 persons age 12 and over)Year 12–15 16–19 20–24 25–34 35–49 50–64 65 +1979 78.5 93.4 98.4 66.3 38.2 13.6 6.21980 72.5 91.3 94.1 60.0 37.4 15.6 7.21981 86.0 90.7 93.7 65.8 41.6 17.3 8.31982 75.6 94.4 93.8 69.6 38.6 13.8 6.11983 75.4 86.3 82.0 62.2 36.5 11.9 5.91984 78.2 90.0 87.5 56.6 37.9 13.2 5.21985 79.6 89.4 82.0 56.5 35.6 13.0 4.81986 77.1 80.8 80.1 52.0 36.0 10.8 4.81987 87.2 92.4 85.5 51.9 34.7 11.4 5.21988 83.7 95.9 80.2 53.2 39.1 13.4 4.41989 92.5 98.2 78.8 52.8 37.3 10.5 4.21990 101.1 99.1 86.1 55.2 34.4 9.9 3.71991 94.5 122.6 103.6 54.3 37.2 12.5 4.01992 111.0 103.7 95.2 56.8 38.1 13.2 5.21993 115.5 114.2 91.6 56.9 42.5 15.2 5.91994 118.6 123.9 100.4 59.1 41.3 17.6 4.61995 113.1 106.6 85.8 58.5 35.7 12.9 6.41996 95.0 102.8 74.5 51.2 32.9 15.7 4.91997 87.9 96.3 68.0 47.0 32.3 14.6 4.41998 82.5 91.3 67.5 41.6 29.9 15.4 2.81999 74.4 77.5 68.7 36.4 25.3 14.4 3.82000 60.1 64.4 49.5 34.9 21.9 13.7 3.72001 55.1 55.9 44.9 29.4 23.0 9.5 3.22002 44.4 58.3 47.6 26.4 18.2 10.7 3.4SOURCE: Rape, robbery, and assault data are from the National Crime Victimization Survey (NCVS).The homicide data are collected by the FBI’s Uniform Crime Reports (UCR) from reports from lawenforcement agencies.Chapter 3: Criminal Law 65

Figure 3.4Violent Crime Rates by Race of VictimYear White Black1979 19.6 33.21980 18.7 34.01981 19.7 40.41982 19.0 36.91983 16.3 33.11984 17.1 32.71985 15.6 28.91986 15.6 25.21987 15.0 33.81988 16.0 31.41989 16.1 29.51990 15.4 31.81991 16.2 31.31992 16.9 33.01993 17.8 34.31994 17.1 33.51995 13.5 26.41996 13.3 26.31997 12.9 20.71998 11.6 19.21999 10.2 19.52000 8.7 16.22001 8.4 12.72002 6.6 13.0NOTE:Serious violent crime victimizationrates by race.Rates per 1,000 persons age 12 +.Serious violent crime includeshomicide, rape, robbery, andaggravated assault.SOURCE: Rape, robbery, and assault data are from the National Crime Victimization Survey (NCVS).The homicide data are collected by the FBI’s Uniform Crime Reports (UCR) from reports from lawenforcement agencies.VIOLENT CRIME RATES BYRACE OF VICTIMThe crimes represented by the statistics in this tableinclude murder, sexual offenses, robbery, andassault. What trend is evident over time in the dataon crime victimization by racial group?66 Unit 1: Knowing About the LawBurglaryCommon law defines burglary as the breaking and entering of adwelling house at night with the intent to commit a felony. Today, statelaws have expanded the definition of the crime to include breaking andentering in the daytime, breaking and entering places other thanhomes, and breaking and entering with the intent to commit amisdemeanor. If any part of the definition of burglary cannot beproven, the defendant cannot be found guilty.

Native American GroupsThe people we have come to know as American Indians or NativeAmericans came to the North American continent from Northeast Asia by wayof the Bering Strait. Most historians and scientists agree these people begantheir migration before 30,000 BC and were the Americas first inhabitants. Yet ittook less than 200 years for European settlers to decimate these natives. In time,however, organizations like the American Indian Movement (AIM) pressured thefederal government to take action. Finally, a series of laws were passed in the1970s to promote the welfare of the Native Americans. These acts encouragetribes to set up and govern their own communities, health care, housing, lawenforcement, and schools. They also provide funding for teachers, counselors,and educational materials, like computers.Native Americans still face manyhardships, but one statistic in particularmay reflect a hopeful future. The 1890U.S. census recorded just over 200,000Native Americans. The 1990 census showsa Native American population of close to twomillion. Many experts believe these to be the highestfigures since European colonization.Critical Thinking Question Although Native Americans no longer have to live onreservations, about one-third of the population still does. What would be someof the advantages of staying on a reservation? What would be some of thedisadvantages? For more information on Native American Groups, visitubpl.glencoe.com or your local library.Example 5. Todd was jogging after dark and noticed a housewith a partly opened window. He raised the window farther,climbed inside, and stole expensive shoes. A neighbor saw Toddleaving and called the police, who arrested him nearby andcharged him with burglary. Applying the common law definition,a court could not find Todd guilty because there was nobreaking—the window of entry was open. However, most statestatutes now say that a breaking has occurred even when someoneraises a partially opened window.Chapter 3: Criminal Law 67

68 Unit 1: Knowing About the LawLarcenyThe unlawful taking and carrying away of the personal property ofanother with the intent to deprive the owner of the property is calledlarceny , the legal term for stealing. In many states, larceny is classifiedas petty or grand, depending on the value of the property taken.Petty larceny is a misdemeanor; grand larceny is a felony. In somestates, stealing property with a value of $300 or less is a misdemeanor;stealing property valued at more than $300 is a felony. Shoplifting is aform of larceny.EmbezzlementThe crime of embezzlement is the wrongful taking of another’sproperty by a person who has been entrusted with that property.Example 6. Virginia Waddell worked as a supermarket cashierto help pay for college. A customer bought groceries and paidwith cash. Virginia put the money directly into her pocketinstead of the cash register. This act was embezzlement becauseVirginia was entrusted with the money before she stole it.RobberyThe wrongful taking and carrying away of the personal property ofanother through violence or threats is the crime of robbery . Robberyinvolves taking “from the person”; that is, from the body or close to thebody of the victim, by using force, violence, or threats. Naturally, thepenalty for robbery is greater than the penalty for larceny.Example 7. Suppose, in Example 6, that someone came into thestore, pointed a gun at Virginia, and demanded money from theregister. This act would be armed robbery because the robberused a weapon to forcefully take the money from Virginia’s personalcustody.ArsonUnder common law, arson was defined as the willful and maliciousburning of the dwelling house of another. Most states have addedarson statutes to cover the burning of buildings other than dwellinghouses. The scorching or blackening of a part of a building is notenough to be considered arson. Some portion of the building mustactually have been on fire so that the wood or other building materialis charred.VandalismVandalism is a serious problem in many communities today. Thecrime of vandalism involves willful or malicious damage to property

and may also be called malicious mischief or criminal damaging. Tobe guilty of vandalism, a person does not have to be the one who actuallydoes the damage; anyone who supports the crime of vandalism byacting as a “lookout” can also be charged.ShopliftingThe act of stealing goods from a store, called shoplifting , is aform of theft that costs American consumers billions of dollars eachyear. Shoplifting losses and the cost of extra security increase retailprices considerably. The severity of a shoplifting charge depends onthe value of the goods stolen. In some cases, a person can be chargedwith stealing before the act is completed. Many states have laws thatregard the concealment on one’s person of an article of merchandise tobe persuasive evidence of the intent to steal.ScienceDo you like solvingproblems? Do you findscience fascinating? Ifso, forensic sciencemight be a career possibilityfor you. Forensicscientists use highlytechnical skills andprocedures to uncoverevidence from a crimescene. They can findclues in blood, hair, andskin that often lead tothe arrest and convictionof criminals.Research ActivityInvestigate forensicscience. Research itshistory and the toolsand equipment used byforensic scientists. Thenfind out what educationis needed to become aforensic scientist. Isforensic science for you?PRIMA FACIE EVIDENCEShoplifting has become one of the mostwidespread crimes in America today. Whywould the law permit the mere concealmentof merchandise on your person to beprima facie evidence of shoplifting?Chapter 3: Criminal Law 69

DRAG RACING AND LIABILITYMany states have statutes that specifically outlawdrag racing. Who would be criminallyliable if these students decided to engage inan illegal drag race?Motor Vehicle ViolationsA license to drive a motor vehicle is a privilege and may be suspendedtemporarily or permanently if abused. Young drivers whobreak traffic laws are not offered special protection as juveniles inmost states. They may be tried in traffic court and can be fined or havetheir licenses suspended or revoked.Many states have statutes that specifically outlaw drag racing andjoyriding. Drag racing generally includes the unauthorized racing oftwo vehicles side by side and the timing of vehicles that separately runa prearranged course. Joyriding occurs when someone temporarilytakes a motor vehicle without the owner’s permission. It is importantto remember that in both drag racing and joyriding, all those who participatecan be held liable, not just the driver(s).70 Unit 1: Knowing About the Law

Crimes Involving ControlledSubstancesAnother serious problem facing society today is drug abuse.Alcohol and tobacco may be considered drugs because they are notlegal for teenagers or children.AlcoholAlcohol is the major chemical found in beer, wine, whiskey, andother distilled beverages. It is the most commonly used drug in theUnited States. A merchant or bartender convicted of selling an alcoholicbeverage to someone under the legal drinking age may be imprisoned,fined, or both, and may lose the license that is required to sellsuch beverages. The underage individual also may be prosecuted formaking the illegal purchase, for lying about his or her age, or for both.DrugsDrugs are chemicals that alter the functions of the mind or body.Possession, distribution, or sale of certain drugs may violate a federalInvestigating Cyber CrimeThe federal Computer Fraud and Abuse Act makes it a felony for anyoneto “knowingly cause the transmission of a program, information, code orcommand, and as a result of such conduct, intentionally cause damage withoutauthorization to a protected computer.” A protected computer is oneused in interstate commerce or communication.John Michael Sullivan was convicted under this law. In retaliation forreceiving a poor performance review, Sullivan inserted a “code bomb,”including a date trigger for noon on September 23, 1998, to cause hiscompany’s computers to become inoperative. The company’s operationswere disrupted for several days, and its direct loss as a result of Sullivan’sconduct was more than $100,000. (Source: U. S. Department of Justice,www.cybercrime.gov)Connect Visit the U.S. Department of Justice Web site at www.usdoj.gov.Research what efforts are being taken in the criminal division towardinvestigating Internet crime. (Source: U.S. Department of Justice,www.cybercrime.gov)Chapter 3: Criminal Law 71

COMPUTER CRIMEBoth the state and the federal governmentshave used innovative tactics to deal with theincreased incidence of computer crime. Whatare some examples of tactics used by thestates and the federal government?law, a state law, or both. Each state sets its own penalties in relation todrug offenses. The sale of drugs is always considered a more seriouscrime than the mere possession or use of drugs. It is also a crime togive drugs away.Computer CrimesAlthough computers and network devices have helped make ourlives easier, they have also introduced new ways to commit crimes.Both state and federal government statutes address this new legalproblem in a variety of ways.Federal Crimes and LawsThe federal government has extended the interpretation of manycriminal statutes already on the books so that these statutes will alsoapply to computers. For instance, statutes prohibiting mail fraud and72 Unit 1: Knowing About the Law

wire fraud have been used to apprehend computer criminals.However, these attempts were not always successful, so the federalgovernment has now passed statutes that are directly related tocomputer crime. These statutes include the Computer Fraud andAbuse Act and the National Information Infrastructure Actof 1996.The Computer Fraud and Abuse Act is specifically aimed atcomputer hackers. Hackers gain unauthorized entry to a computersystem, generally to do some sort of mischief. The NationalInformation Infrastructure Act is designed to outlaw the practiceof extorting money or other favors in exchange for not causing acomputer system to crash.State Crimes and ComputersSome states have created the crime of computer trespass,which simply outlaws using a computer to commit any crime.Other states have passed computer fraud statutes, which make itan offense to use a computer to acquire property, services, ormoney by fraud. Some states have a detailed list of computerrelatedcrimes, including theft of computer services, destructionof equipment, and misuse of computer information.Reviewing What You Learned1. What are the major crimes committedagainst people?2. What are the major crimes committedagainst property?3. What are the major crimes that involvecontrolled substances?4. Identify federal legislation pertaining tocomputer crime, fraud, and abuse.Critical Thinking ActivityComputer Crime Using the Internet, library,or other resource, identify state legislationpertaining to computer crime, fraud, andabuse. List and describe some of the laws inyour state, and then compare them with thelaws of another state. How are they the same?How are they different?Legal Skills in ActionHate Speech Many states have made it acrime to use certain symbols, writings,pictures, or spoken words to cause fearor anger in people because of their race,religion, color, or gender. The courts haveheld that hate crime or hate speech statutesmust be drafted very narrowly. Imagine thatyou are a television newscaster for a cablenews network. Write an opinion piece inwhich you argue that the courts are wrongin their rulings regarding hate speech.Chapter 3: Criminal Law 73

CHAPTERASSESSMENTSection 3.1 What Is a Crime?● Crime is considered an act against the publicgood. Crimes can be classified as felonies ormisdemeanors. A felony is a major crime punishableby imprisonment or death. Murder, manslaughter,burglary, robbery, and arson areexamples of felonies. A less serious crime iscalled a misdemeanor. Driving an automobilewithout a license, lying about one’s age to purchasealcohol, and leaving the scene of an automobileaccident are examples of misdemeanors.To determine felonies from misdemeanors, onecan examine the severity of punishment for anygiven crime.● Each state government has inherent policepower, and enacting criminal statues is a part ofthis power. In contrast, the federal governmentwas created with no general police power. Thefederal government is able to create criminalstatutes only in areas over which it has jurisdiction.However, the federal government hasinterpreted its power under the commerce clauserather expansively to legislate a body of criminallaw. The commerce clause requires Congress toregulate commerce among the states.● A crime is defined by two elements: the criminalact and the required state of mind. A criminal actmust involve voluntary conduct. A person cannotbe accused of a crime if that accusation is basedon the one’s physical or mental state.● Criminal defendants can argue the followingdefenses: insanity, entrapment, self-defense, anddefense of family members. In many states, aperson is considered legally insane if “as a resultof mental disease or defect he or she lacks substantialcapacity to appreciate the criminality ofhis conduct or to conform his conduct to therequirements of the law.” A person can use thedefense of entrapment if a law enforcementofficer induces him or her to commit a crime.The defense of self-defense can be used if aperson uses force to protect himself or herselffrom attack. Similarly, most states will not punishpeople who can prove that they used force torescue a family member from attack.Section 3.2 Particular Crimes● Crimes against people include murder, manslaughter,assault, battery, kidnapping, sexoffenses, domestic violence, and hate crimes.Murder is the unlawful killing of anther humanbeing with malice aforethought. Manslaughter isthe unlawful killing of another person withoutmalice aforethought. Battery is the unlawfultouching of another person, and assault is anattempt to commit battery. The unlawful removalor restraint of a person against his or her will iscalled kidnapping. Sex offenses include variousforms of rape. Reckless physical or mental abusewithin a family constitutes domestic violence.Hate crimes occur when a perpetrator usesspecific symbols, writings, or speech to causefear or anger in people because of their race,religion, color, or gender.● Crimes against property include burglary, larceny,embezzlement, robbery, arson, vandalism, andshoplifting.● Selling an alcoholic beverage to an underageperson is a crime. It is also a crime for theunderage individual to purchase alcohol or evento lie about his or her age to attempt to purchaseit. The sale, possession, or free distribution ofdrugs is considered a criminal offense.● States have enacted different laws to deal withcomputer crimes. Some states have created thecrime of computer trespass; others have passedcomputer fraud statutes. Some states have legislateda list of computer-related crimes, includingtheft of computer services, destruction of equipment,and misuse of computer information.74 Unit 1: Knowing About the Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.crimeprosecutordefendantfelonymisdemeanormurderassaultkidnappingburglaryrobbery1. Imagine that you are a rookie police officer. You are assigned towork with a veteran who is helping you understand the criminaljustice system. Create a script of a conversation with your partner.Use the key terms in the script.2. Carry out the conversation in front of the class, using gestures,voice inflections, and props to emphasize your key points.3. Discuss with your partner ways in which you could haveimproved your conversation.4. As a class, vote to select the best presentation. If possible, winnersshould arrange to videotape their presentation.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 3:Criminal Law—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. Who is always the plaintiff in a criminal case? Who is the prosecutor? Who isthe defendant?6. What is the one crime named and defined in the U.S. Constitution?7. Explain the difference among first-degree murder, second-degree murder,and manslaughter.8. Why does the crime of rape carry very serious penalties?9. Why is the penalty for robbery greater than the penalty for larceny?10. What is double jeopardy?11. What is embezzlement?12. How does burglary differ from robbery?13. What are some examples of motor vehicle violations?Chapter 3: Criminal Law 75

CHAPTERASSESSMENTAcquiring and Evaluating InformationDalia dated Alfonso, a coworker, a few timesand decided that he was not for her. Alfonso,however, had other ideas. He began to sendDalia flowers regularly and followed her homefrom work most days. On the weekends,Alfonso would show up at the restaurants whereDalia was eating. Dalia became frightened, andon several occasions, she asked Alfonso to stopfollowing her because she believed she wasbeing stalked. Today, all U.S. states have ananti-stalking law.14. Find out when your state enacted an antistalkinglaw and the circumstancessurrounding why it became law.15. Research if there are federal laws againststalking. Write a 250-word paper aboutyour findings.Vigilante JusticeEnnis Gonzales works as a computer programmerfor a large corporation. He is consideredan expert in his field. Recently, he embarked ona campaign against child pornography. Ennishas been able to hack into Web sites that featurechild pornography and disable them. So far, hehas destroyed about 50 sites.Debate16. Is destroying someone else’s Web siteillegal?17. Do you think a court of law would findEnnis guilty if he were arrested?18. What is your opinion of Ennis’s actions?For the following cases, give your decision andstate a legal principle that applies.19. Several years ago, four Los Angeles policeofficers were tried in the state court of Californiafor assaulting Rodney King whileattempting to arrest him after a lengthy carchase. The jury found the defendants notguilty. Despite this state court decision, thedefendants were put on trial again in federalcourt. Did the second trial violate the FifthAmendment prohibition against doublejeopardy? Why or why not?20. Julius Davidson is arrested for shoplifting.He asks his attorney to plead not guilty byreason of insanity. Davidson believes thathe will be free if he is found not guilty byreason of insanity. Is he correct? Why orwhy not?21. Shane and Kira were riding through townone Saturday evening when two classmateschallenged them to a drag race. Shane, whowas driving, agreed. When they were pickedup by the police, Kira believed she would notbe criminally liable because she was just apassenger. Is she correct? Why or why not?22. Pyrrah is part of a group of students whodecide to break into the high school andspray paint the hallways. Pyrrah agrees toact as lookout, believing that she will notbe criminally liable if they are picked up bythe police. Is she correct? Why or why not?23. Ben Feeney runs a pawn shop. He oftenaccepts stolen merchandise, sells it, andsplits the profits with the thief. Lt. JoseUrena sends several undercover policeofficers to the shop, and they catch Ben inthe act of fencing stolen goods. At trial,Ben’s attorney tries to use the defense ofentrapment. Will this defense work? Whyor why not?76 Unit 1: Knowing About the Law

In each case that follows, you be the judge.24. Property CrimesReese entered a fast food restaurant through a rear door, having arranged for an accomplice whoworked there to leave the door unlocked. Reese pushed one employee against a soda machine,and while holding a gun on the manager, forced the manager to open the safe. Reese then lockedthe employees in a cooler and left with more than $5,000. Has Reese committed burglary,robbery, or larceny? Explain your answer.State v. Reese, 113 Ohio App. 3d. 642 (OH).25. Hate CrimesSeveral teenagers burned a cross on the lawn of a black family in their neighborhood. One ofthe youths, a minor, was charged under a city ordinance that stated it was a crime to place onprivate property “any symbol, object, appellation, characterization or graffiti. . . which oneknows or has reasonable grounds to know arouses anger, alarm, or resentment in others onthe basis of race, color, creed, religion, or gender.” The defendant argued that the ordinancewas unconstitutional. Was it? Why or why not?R.A.V. v. St. Paul, 505 U.S. 1992 (U.S. Sup. Ct.).Teen CriminalsAlthough most teenagers do not commit crimes,some do. Perhaps with additional education, at-riskteenagers would think twice about committingcrimes. Create a pamphlet that highlights thosecrimes that are most often committed by teenagersin your state. Share the pamphlet with othermembers of your class.ConnectUse a variety of search engines to complete thefollowing exercises.26. Locate information about crimes committedby teens.27. Find statistics that show the numbers of teenswho commit crimes.28. Determine the usual punishments imposed.29. Discuss the impact on the teenager’s recordnow and when he or she is an adult.30. Predict Most people are honest and hardworking. Are all the laws we have in thiscountry really necessary?31. Connect Do you watch any televisionshow about the police, criminalinvestigations, lawyers, or court cases?Which ones seem most realistic? Explainyour answer.32. Question Discuss why driving a car is aprivilege, not a right.33. Respond Many of the people in jail aredrug addicts who were arrested forpossession of controlled substances. Doyou believe they should be incarcerated?Can you think of any other optionsfor them?Chapter 3: Criminal Law 77

CHAPTERThe Law of TortsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 4: The Law of Torts—Chapter Overviews to preview thechapter information.

The Opening SceneAfter the football game, some New Hope High studentsarrive at The Corner Café, a local hangoutpopular with students.The Corner CaféJAMILA: You drive like a fool, Trai! The way you tookthat last corner could have caused an accident! It’stoo bad that Daniel’s dad wouldn’t let him drive.I’m never getting in a car with you again!TRAI: You’re not exactly a great driver either, Jamila. Idon’t know why you have to make such a big dealout of everything. If you don’t like my driving, youcan feel free to walk home tonight—I don’t care!JAMILA: Walk five miles? I don’t think so. I guess I’lljust have to deal with your driving for tonight.TRAI: Well, then I guess you’ve assumed the risk, asMrs. Martinez would say.DANIEL: Yeah, just like that kid who was attacked bythose tigers.TRAI: Tigers? As usual, Daniel is miles away! Whatare you talking about?DANIEL: I’m talking about the Tiger Zoo. Maybe youshould try reading the paper sometime, Trai.TRAI: The what?DANIEL: The Tiger Zoo! It’s located out on Route 229.PEGGY: Danny’s right, Trai. I took my little sisters therelast month. The zoo has six or seven baby tigers,and you can pet them and everything. They’rereally cute!DANIEL: You can’t pet the tigers anymore. One ofthem bit a kid, and they shut the place down. Itwas all over the papers last week.(A waiter arrives and takes everyone’s orders. Trai,Peggy, and Jamila order burgers and fries. Danielorders only a soda.)JAMILA: Aren’t you going to order some food,Danny? If you’re short on money, I can lendyou some.DANIEL: A girl who ate here last week got really sick.There’s no way I’m going to allow that to happento me.TRAI: You’re full of good news tonight.PEGGY: Once again, he’s right. This girl ate somebad fish and got really sick. Now she’s suingthis place.TRAI: Why? It was an accident. You can’t sue somebodyfor an accident. Besides, what are the oddsthat it’ll happen again? Order up, Danny boy.DANIEL: No way. I don’t believe in takingunnecessary risks.JAMILA: Then you’d better not ride in a car that Trai’sdriving. He’s the most negligent driver on earth.PEGGY: You can’t be negligent until you actually hurtsomebody.TRAI: Thanks, Peg.PEGGY: Stupid, yes. Negligent, no.1. What is the difference between a crime anda tort?2. What are some specific intentional torts in ourlegal system?3. What is involved in the tort of negligence?4. What defenses exist for negligence?5. What is involved in the tort of strict liability?Chapter 4: The Law of Torts 79

Intentional Tortsl How to tell the differencebetween a crimeand a tortl How to explain thenature of tort lawl How various torts canbe committedl How to define variousintentional tortsLearning the differencebetween a tort and acrime, as well as thetypes of intentionaltorts, will help youunderstand how thejustice system protectspeople from injury.l crimel tortl intentional tortl tortfeasorl trespassl nuisancel false imprisonmentl defamationl invasion of privacyThe Difference between CriminalLaw and Tort LawWhen people commit a crime , they harm not only specific individualsbut also the general welfare. The role of government is to preservethe safety and well-being of the entire social structure. A crimeis considered an offense against the public at large and is thereforepunishable by the government.In contrast, a tort is a private wrong committed by one personagainst another. It involves one person’s interference with another person’srights. A tort will lead the wronged party to try and recovermoney as compensation for the loss or injury suffered. However, suchan offense does not call upon the government to punish wrongdoersand to protect society.In some situations, however, a single action can be both a tort anda crime.Example 1. Dr. John Boyle was prosecuted, tried, and convictedof strangling his wife, Noreen. After being criminally prosecutedfor aggravated murder, a wrongful death suit was brought undertort law on behalf of Noreen’s two minor children. The singleact of killing his wife involved Dr. Boyle in two court actions:one brought by the state for a crime and the other filed onbehalf of the children for a tort offense. The law punished thedefendant with a sentence of life imprisonment and also gavethe children the right to recover money as compensation for thedeath of their mother.The law of torts is grounded in the concept of rights. Under tortlaw, all people are entitled to certain rights simply because they aremembers of our society. These rights include, among others: the rightto be free from bodily harm, the right to enjoy a good reputation, theright to conduct business without unwarranted interference, and theright to own property free from damage or trespass.Other rights arise under special circumstances. For example,patients who enter a hospital have the right to expect competent carefrom the healthcare providers assigned to their cases.The law imposes a duty on all of us to respect the rights of others.Tort law governs this interplay between rights and duties. The word80 Unit 1: Knowing About the Law

tort, from the Latin word tortus, meaning “twisted,” is used to refer toa wrong against an individual.Intentional TortsTorts are classified as intentional or unintentional. Anintentional tort occurs when a person knows and desires the consequencesof his or her act. Conversely, the person who commits anunintentional tort does not have this mental determination. The mostcommon intentional torts are listed and defined in Figure 4.1. Let’stake a closer look at some intentional torts and selected situations towhich they apply.Assault and BatteryAssault and battery are two separate torts, which may or may not becommitted together. The tort of assault occurs when one person deliberatelyleads another person to believe that he or she is about to be harmed.Rushing toward someone with a raised knife while shouting threatswould constitute an assault, even if the victim is not touched. The assaultoccurs because the victim fears immediate bodily harm. The tort ofFigure 4.1TortAssaultBatteryTrespassNuisanceInterference with contractual relationsDeceitConversionFalse imprisonment (false arrest)DefamationInvasion of privacyMisuse of legal procedureInfliction of emotional distressIntentional TortsDescriptionThreatening to strike or harm with a weapon or physical movement,resulting in fear.Unlawful, unprivileged touching of another person.Wrongful injury or interference with the property of another.Anything that intereferes with the enjoyment of life or property.Intentionally causing one person to break or refrain from entering acontract with another.False statement or deceptive practice done with intent to injure another.Unauthorized taking or borrowing of personal property of another for theuse of the taker.Unlawful restraint of a person, whether in prison or otherwise.Wrongful act of injuring another’s reputation by making false statements.Interference with a person’s right to be left alone.Bringing of legal action with malice and without probable cause.Intentionally or recklessly causing emotional or mental suffering to others.INTENTIONAL TORTSIn criminal law when someone commits a wrong, the action is called acrime. In civil law when someone commits a wrong, the action is calleda tort. Which of the torts listed do you think is the most serious?Chapter 4: The Law of Torts 81

attery involves the unlawful, unprivileged touching of another person,even if the physical contact is not harmful. The essence of battery is theunwanted touch, regardless of the intent of the wrongdoer.The tort of assault is different from the crime of assault, whichyou learned about in Chapter 3. The essential difference between thetwo lies in the fact that the victim of a tort assault must know that thetortfeasor , or person who committed the tort, meant to commitharm. Otherwise, the victim has not been frightened, and no harm hasresulted. In criminal law, however, an assault is an attempted battery,and the intended victim need not be aware of the attempt at all.For example, a criminal assault can be carried out against an unconsciousvictim. Trying an individual for the crime of assault is done onbehalf of society as a whole. On the other hand, a person is tried forthe tort of assault to compensate a victim for personal anguish orstress suffered.TrespassA trespass is the wrongful damage to or interference with theproperty of another. Property refers to anything you may own, includingmovable items (cars, VCRs, CD players, purses, wallets) and nonmovableitems (real property). Real property includes land and thingsbuilt on the land, growing on the land, or located within the land. Thetort of trespass refers most commonly to real property.Example 2. Sorensen and some friends went hunting onLashutka’s private ranch without her permission. This constitutedthe tort of trespass, and the landowner could bring a lawsuitagainst Sorensen and the others. Notice that Sorensen and hisASSAULTPhysical touching is notnecessary for a person tocommit an assault. Whichof the two people in thisphotograph would youconsider to be in theprocess of committingan assault?82 Unit 1: Knowing About the Law

friends did not actually harm Lashutka’s property. This makes nodifference because the law of torts presumes injury merely fromsomeone’s unwelcome presence on the property of another.Under common law, ownership of real property extended from thecenter of the earth to the highest point in the sky. A person owned notonly a portion of the earth’s crust but also the ground below and the airspaceabove. Today, however, most states have rewritten laws to limit aproperty owner’s claim to the airspace far above his or her land. Doingso ensures that private ownership will not interfere with air travel.NuisanceThe tort of nuisance is anything that interferes with the enjoymentof life or property. Loud noises at night, noxious odors, or smokeor fumes coming from a nearby house are examples of nuisances. Apublic nuisance is one that affects many people. In contrast, a privatenuisance affects only one person. A complaint by local residents aboutthe noise at The Corner Café in The Opening Scene could make itsowner the target of a lawsuit for creating a public nuisance.False ImprisonmentLaw enforcement officers must have probable cause or a warrantto arrest someone. Consequently, they can be sued for falseimprisonment , or false arrest, if they make an arrest without meetingPrivacy in CyberspaceMany companies that rely on the Internet are paying more attentionto their privacy policies. Supporters of privacy rights say that somee-commerce companies violate consumer privacy. Laws are being consideredto require companies to reveal how they gather and use information aboutconsumers. As a result, many companies are hiring Chief Privacy Officers.These executives set up information-gathering policies and create programsthat inform and educate employees on privacy policies. Chief Privacy Officerswould also review privacy policies as they relate to new products andservices. (Source: New York Times, p. A7, Feb. 12, 2001)Connect Search several Web sites of corporations that do business online.Compare their privacy policies on sharing consumer information with othercompanies.Chapter 4: The Law of Torts 83

Smashed Grapesand SlipperyFloorsYou’re going to be latefor soccer practiceagain! As you hurrythrough the producedepartment of the grocerystore where youwork, you notice somesmashed grapes on thefloor. Cleaning thefloors is your job, butyou’ve already clockedout and if you’re latefor soccer practiceagain, you’ll getbenched. You don’tsee anyone aroundimmediately that youcan tell. What do youdo? Are you ethicallyresponsible for cleaningup the grapes?for taking time tonotify someone? forbeing on time forsoccer practice?these requirements. However, because of the prevalence of shopliftingin our society, most states now have laws that allow store managers anddetectives to detain suspected shoplifters. Store personnel must havereasonable grounds to suspect that shoplifting has occurred, and theymust detain the suspect in a reasonable manner for only a reasonablelength of time. Determining what is “reasonable” can be difficult.Example 3. Betty Brandon, a store detective for the BrennanDepartment Store, thought she saw customer Gwen Forsytheplace lipstick in her purse. The detective apprehended thewoman and locked her in a storeroom for questioning.However, Betty and the store manager became satisfied thatGwen was innocent and released her. Gwen sued for falseimprisonment, and the court ruled that the store employees hadacted unreasonably. Gwen won a large sum of money as compensationfor her humiliation and emotional suffering.DefamationThe wrongful act of injuring another’s reputation by making falsestatements is called defamation . Defamation is divided into two categories:libel and slander. Libel is a false statement in written or printedform that injures another’s reputation or reflects negatively on thatperson’s character. Radio and television broadcasts, newspaper stories,video and audio recordings, movies, photographs, signs, and evenDEFAMATIONFreedom of the press andthe right of individuals tobring a defamation suitoften clash in this country.How has the United StatesSupreme Court createdsafeguards to help preservefreedom of the pressand the right to sue fordefamation?84 Unit 1: Knowing About the Law

paintings and statues may be subject to charges of libel. All such formsof communication reduce a false statement to a permanent form. Incontrast, slander is a false statement that is made orally to a third party.You can usually sue for libel if the permanent statement in questiondamages your reputation, is false, and is communicated to at least oneother person. People are allowed to speak the truth, however, as long asit is done without spite or ill will. In addition, statements made by senatorsand representatives on the floor of Congress and statements madein a court of law are privileged. This means they are not vulnerable toa defamation lawsuit. The concept of privileged speech is intended toprotect the open debate of legislative and judicial matters.People in the public limelight also have more difficulty than theaverage person in proving damage to their reputations in defamationlawsuits. Public officials such as politicians and judges, as well as avariety of other public personalities including movie stars, pop singers,Privacy on the PhoneInnovations in telephone technology have made communication muchmore convenient. Cordless, cellular, and digital phones allow varyingdegrees of mobility while talking on the telephone. When you use suchphones, however, you are transmitting signals through the air that aresimilar to a radio broadcast. Anyone with a receiver tuned to the rightfrequency can overhear your conversation. Digital phones offer the mostprotection against eavesdropping, but special decoders can convert evendigital transmissions into voice audio.Federal laws offer some protection of telephone privacy. Although it isnot unlawful to overhear a phone call, it is against the law to divulge theconversation or to use it for someone’s benefit. The manufacture or sale ofscanning devices that can intercept cellular or digital calls is also illegal.With some exceptions, the recording of telephone conversations without theknowledge or consent of both parties is a violation of federal and state law.Survey Your Class How many people in your class use a cordless, cellular, ordigital phone regularly? How many of your classmates are concerned thattheir conversations may not be private? Contact the Federal CommunicationsCommission to obtain more information about laws protecting telephone use.Chapter 4: The Law of Torts 85

Defamation is writtenor spoken injury to aperson or organization’sreputation. Libelis the written act ofdefamation, and slanderis the oral act ofdefamation.sports figures, and other entertainers, are considered people in thepublic limelight. Under guidelines established by the U.S. SupremeCourt, these public figures must prove that false statements aboutthem were made with actual malice. In other words, it must be proventhat the offending statement was made with the knowledge that it wasfalse or with a reckless disregard for whether it was true.Public figures are held to a more difficult standard because theyhave voluntarily chosen a lifestyle that naturally exposes them to closescrutiny by the press. They can respond to damaging statements in away the average person can’t, such as by calling a news conference,appearing on a television talk show, buying newspaper space, buyingair time on radio and television, or issuing a press release.Invasion of PrivacyInvasion of privacy is interfering with a person’s right to be leftalone, which includes the right to be free from unwanted publicity andinterference with private matters. In most states, the invasion of privacyis a tort. Some states, such as New York, have established this right bystatute. The state of California, on the other hand, has established theright of privacy by amending the state constitution.The Federal Privacy Act of 1974 provides safeguards for individualsagainst the invasion of privacy by agencies of the federal government.With some exceptions, the act requires federal agencies to letyou determine what personal records will be kept by any agency. Youalso have the right to know what records are being kept about you, toreceive copies of any records, and to correct any errors. Agencies mustget permission to use records for purposes other than those for whichINVASION OF PRIVACYKeeping personal recordsprivate is important tomany people. The right toprivacy may be invaded bypeople or businesses withaccess to computer records.How can people protectthemselves against aninvasion of their privacyby computer?86 Unit 1: Knowing About the Law

they were gathered. People in business who are entrusted with confidentialrecords must make great efforts to ensure that the records arenot made public. Failure to protect such confidential matters couldresult in an invasion of privacy lawsuit.Your right to privacy does not merely involve written records. It isalso considered an invasion of privacy for any group or agency to useyour photograph, likeness, or name without your permission for advertising,publicity, or publication purposes.New privacy concerns have arisen with increased use of computersbecause computers store a great deal of information about an enormousnumber of people. For instance, the right to privacy is violated whenunauthorized people use the computer to gain access to confidentialinformation. Other invasions of privacy occur when unnecessary datais recorded and stored by an organization or business, inaccurate informationis kept on file, and private information is revealed to the publicwithout appropriate authorization.Two important federal statutes designed to protect privacy includethe Fair Credit Reporting Act and the Right to Financial Privacy Act.Under the Fair Credit Reporting Act, credit bureaus must, on request,inform you about information they have on file about you. The Rightto Financial Privacy Act forbids financial institutions from openingyour records, most of which are kept in computer files, to the governmentwithout appropriate authorization from you or without an officialcourt order.Reviewing What You Learned1. What is the difference between a crime anda tort?2. What concept is at the heart of tort law?3. How can a tort be committed?4. What are the most common intentionaltorts?Critical Thinking ActivityTort Law If criminal law is responsible fordealing with individuals who commit wrongfulacts, what purpose does tort law serve?Why do you need to understand the differentintentional torts?Legal Skills in ActionComputer Privacy Many people, businesses,and government agencies today haveincreased access to computers. Although thisaccess may be a great convenience, it is alsoa source of danger, especially to privacy.Write a research paper in which you trace thedevelopment of the computer along with theincreased threat to privacy represented by itsdevelopment.Chapter 4: The Law of Torts 87

l How to definenegligencel How to explainthe elements ofnegligencel How to define themajor defenses tonegligencel How to define strictliabilityBecause any person is apotential victim and aperpetrator of negligence,understandingthis vital area of tort lawwill help you protectyourself legally.l negligencel strict liabilityl breach of dutyl proximate causel contributorynegligencel comparativenegligencel assumption of riskNegligence andStrict LiabilityUnintentional TortsA person can breach his or her duty in our society through otherways than by committing an intentional tort. For example, you may actin a careless manner and, as a result, cause injury to a person, damageto property, or both. Your participation in an activity that is consideredvery dangerous, such as keeping a tiger in your backyard, may alsocause harm to others. Injury that is caused by a person’s mere carelessnessis known as negligence ; injury caused by an individual’sparticipation in ultrahazardous activity is known as strict liability .NegligenceNegligence is an accidental or unintentional tort and is the tort thatoccurs most often in society today. Negligence is the failure to exercisethe degree of care that a reasonable person would have exercised in thesame circumstances. Negligence may be present, for example, in anautomobile accident or when someone trips on a broken floorboard.Elements of NegligenceThe law has established specific standards to prevent people fromsuing innocent parties for negligence. To succeed in a tort suit for negligence,the plaintiff must prove all of the following elements:l The defendant owed the plaintiff a duty of care. In otherwords, the defendant failed to act as a reasonable personwould have acted.l This failure to use the degree of care required under thecircumstances is called a breach of duty .l The breach of duty by the defendant was the proximate causeof the injury to the plaintiff.l The plaintiff suffered some actual harm or injury.Duty of CareAs noted earlier, the law of torts is grounded in the concept ofrights. Because every person has certain rights in our society, all of ushave a duty to not violate those rights. This concept of duty of care isespecially crucial in negligence lawsuits. If the plaintiff cannotdemonstrate that the defendant owed him or her a duty of care, thenthere is no need to look at any other elements.88 Unit 1: Knowing About the Law

Corporate AttorneyKendall Meyer is a corporate and business law attorneyfor one of Chicago’s oldest law firms. He’s worked onhis share of “big” cases, but nothing quite as big as Sue.“Sue” is the nickname of the largest Tyrannosaurus Rexskeleton ever found. Two years after Sue’s 1990 discoveryin South Dakota, a dispute arose about who actually owned the fossil. After aseries of court cases, the landowner was allowed to sell the bones at auction.When Chicago’s world-renowned Field Museum of Natural History decided itwanted to bid on the bones, museum directors asked for help from the museum’soutside counsel, Kendall Meyer. Meyer first determined who owned legal titleto the bones—much like an attorney would when a client wants to buy ahouse. “I just asked classic legal questions in a unique context,” Meyer says.As the museum’s legal representative, Meyer was also involved in securingfunds for the new acquisition. Corporations such as Walt Disney WorldResorts and McDonald’s offered financial assistance to the museum to buy the65-million-year-old fossil skeleton. In the end, Sue was auctioned off in aneight-minute war of nerves between nine bidders. The winner—with an offerof $8.36 million—was Meyer’s client, the Field Museum of Natural History.SkillsPersonalityEducationAn understanding of basic business principles, research,negotiationSociable, outgoing, likable, enjoys working with businesspeopleBusiness, accounting, finance, contractsFor more information on corporate and business attorneys, visitubpl.glencoe.com or your public library.Example 4. While using the diving board at a public pool, Juliafell and was injured. The injury could have been avoided if thediving board had a guardrail. Julia later sued her state’sDepartment of Health, arguing that the department had inspectedthe pool but did not do anything about the missing guardrail.The state supreme court ruled against Julia. The court said thatthe state’s sanitary code gave the Department of Health the dutyto inspect water-related facilities for health problems, but not aduty to inspect for safety problems. Because there was no needto examine the other elements, the Department of Health had noduty to Julia.Chapter 4: The Law of Torts 89

Student PrivacyThe searching ofschool lockers is acontroversial issue. Insome states, courtshave ruled that a student’slocker is schoolproperty, enabling theschool to search it atanytime. However, inother states, schoolofficials must have“reasonable suspicion”that a studentis hiding somethingillegal before theycan search the locker.What do you thinkconstitutes “reasonablesuspicion” forsearching a student’slocker?Get InvolvedDetermine whetherofficials at your schoolrequire a “reasonablesuspicion” to searchyour locker. Contactthe American CivilLiberties Union atwww.aclu.org to learnabout your rights andcivic responsibilities.Breach of Duty You may commit breach of duty to another personby not exercising the degree of care that a reasonable person wouldexercise in that same situation. This “reasonable person” test is anobjective test. As a result, the judge in a tort case must be careful whengiving instructions to the jury. The use of the descriptive term reasonableis of particular importance. The judge cannot alter the test bytelling jurors to determine what they would have done in this situation,nor can the judge substitute such words as “average person,” “normalperson,” or even “logical person.” The jury must be told to determinewhat a “reasonable person” would have done in this situation.Proximate Cause The third element of negligence is proximatecause , which is the legal connection between unreasonable conduct andthe resulting harm. Without proximate cause, the result would not haveoccurred. Proximate cause is not the same as actual cause. An action bythe defendant may actually cause the plaintiff’s injury but still not be theproximate cause. Courts apply the foreseeability test to determine proximatecause by asking: “Was the injury to the plaintiff foreseeable at thetime that the defendant engaged in the unreasonable conduct?”Example 5. Mrs. Palsgraf was waiting for a train on the platformof the Long Island Railroad Company. As another trainwas pulling out of the station, a man carrying a package ran tocatch it. A railroad attendant on the platform helped push theman forward, and an attendant on the train pulled the manupward. In the process, the man’s plainly wrapped package fellto the ground. It contained fireworks, and the resulting explosionshook the platform and knocked over some scales, whichhit Mrs. Palsgraf and caused extensive injuries. To seek compensationfor her injuries, Mrs. Palsgraf decided to sue the railroadfor negligence. The court ruled that the railroad employeescould not reasonably foresee that pushing and pulling a manonto a train would injure a woman standing many feet away.Actual Harm Because the essence of any tort suit is a violation ofa duty that results in injury to the plaintiff, a successful case mustestablish proof of actual harm. That is, did the plaintiff suffer physicalinjuries, property damage, or financial loss? Without actual harm,even the dumbest mistake or the most careless conduct will not resultin liability for negligence.Example 6. In The Opening Scene, Jamila says that Trai’s foolishdriving amounts to negligence. Peggy reminds her that actualharm must result before Trai’s conduct would be negligent. She is90 Unit 1: Knowing About the Law

Figure 4.2ElementLegal dutyBreach of dutyProximate causeActual harmThe Elements of NegligenceDefinitionA determination that legal duty exists between parties must be madeto establish liability through negligence. This is solely a question ofwhether the tortfeasor should have reasonably foreseen a risk ofharm to the injured party.The judge or the jury must determine whether the person accused ofnegligence has breached the duty owed to the victim. To determine ifthe alleged tortfeasor has met the appropriate standard of care, thecourt uses the reasonable person test.For the tortfeasor to be held liable, the unreasonable conduct mustbe the proximate cause of the victim’s injuries. Proximate cause is thelegal connection between the unreasonable conduct and the resultingharm.The injured party in a lawsuit for negligence must show that actualharm was suffered.NEGLIGENCENegligence is the failureto exercise thedegree of care that areasonable personwould have exercisedin the same circumstances.A suit fornegligence mustprove four elements:duty of care, breachof duty, proximatecause, and actualharm. Which of theelements do youbelieve would be themost difficult to provein a lawsuit?correct. However, she is also correct in pointing out that Trai’sreckless driving is very stupid.Defenses to NegligencePeople can defend themselves in anegligence suit by eliminating one ofthe four elements (see Figure 4.2).Specifically, they can argue that theyowed no duty to the plaintiff; their conductconformed to the reasonable personstandard; their conduct was not theproximate cause of the plaintiff’sinjuries; or that the plaintiff suffered noinjuries. In cases in which the defendantscannot attack one of these elements,they may try to use one of thefollowing defenses: contributory negligence,comparative negligence, orassumption of risk.Contributory Negligence Behavior by the plaintiffthat helps cause his or her injuries may fall under the doctrineof contributory negligence . If the defendant canprove that the plaintiff’s own negligence helped cause theinjuries, then the plaintiff loses the lawsuit. It does notmatter how slight his or her negligence was. Many statesDEFENSES TO NEGLIGENCEMany individuals engage in very riskysports as a matter of routine. Whatdefense might the defendant in sucha negligence case have if one of theparticipants in a dangerous sportwere injured?Chapter 4: The Law of Torts 91

no longer follow this doctrine, however, because it is unfair to plaintiffswho may have been only slightly negligent. These states haveadopted another standard called comparative negligence.Comparative NegligenceThe negligence of each party is compared under the doctrine ofcomparative negligence , and the amount of the plaintiff’s recovery isreduced by the percent of his or her negligence. Comparative negligenceprotects plaintiffs from realizing huge losses for comparativelyminor acts of negligence.Example 7. Jason Cohen sued Mark Goodhue for damages sufferedin an automobile accident. The jury found the damages tobe $100,000, and also found that Jason was 10 percent negligentand Mark was 90 percent negligent. As a result, Jasonrecovered $90,000 instead of the full amount of damages.Most states that use comparative negligence follow the 50 percentrule. The plaintiff is allowed to recover part of the award as long as hisor her negligence was not greater than that of the defendant. If theplaintiff’s negligence exceeds 50 percent, he or she recovers nothing.Assumption of RiskIf the defendant can show the plaintiff knew of the risk involvedand still took the chance of being injured, he or she may claimSTRICT LIABILITYStrict liability involvesthe performance of anultrahazardous activity.What activities mightyou classify as ultrahazardous?92 Unit 1: Knowing About the Law

assumption of risk as a defense. Baseball clubs have successfullyused this defense when sued by spectators injured by baseballs hit intothe stands. People who are injured while participating in extremesports may also be unable to bring lawsuits for negligence because ofthe defense of assumption of risk.Strict LiabilitySome activities are so dangerous that the law will apply neither theprinciples of negligence nor the rules of intentional torts to them.According to strict liability, if these activities injure someone ordamage property, the people engaged in the activities will be heldliable, regardless of how careful they were and regardless of theirintent. This rule applies only to ultrahazardous activities that involve agreat risk to people and property. The risk must be of such a nature thatno amount of care will eliminate it. Using explosives, keeping wildanimals, and storing highly flammable liquids in densely populatedareas have all been labeled as ultrahazardous.In recent years, the doctrine of strict liability has also been appliedin product liability cases. When people are injured from defects inproducts that they bought in the marketplace, the firm that manufacturesthe products is liable for injuries, regardless of fault.Product liability does have its limits. Most courts have held thatproduct liability does not apply if the seller of the defective productdoes not usually engage in the sale of such items. For example, a corporationthat auctions off some machinery after one of its plants closeswould be labeled an occasional seller. The corporation would not beliable for an injury caused by a defect in one of the machines.Social StudiesIn the United States, atort can be defined as aprivate wrong committedby one personagainst another. Thelegal systems in othercountries use differentterms. For example,Germans speak ofunlawful acts, andthe French use theexpression civilresponsibility. SinceWorld War II, tort lawhas expanded everywhere,but especiallyin Europe.Research ActivityChoose England,Germany, or France andresearch the tort law inthat country. Then compareit to U.S. tort law.Reviewing What You Learned1. What is negligence?2. What are the elements of negligence?3. What are the major defenses tonegligence?4. What is strict liability?Critical Thinking ActivityDefenses to Negligence Which defense tonegligence do you feel is the most effective?Legal Skills in ActionStrict Liability Historically, some activitiesthat we take for granted today were originallyconsidered ultrahazardous. One such activityis the flying of an airplane. Imagine you area lawyer who wants to change the law inrelation to strict liability. Research and writea report on strict liability in relation toairplanes, and demonstrate how the doctrinebecame obsolete in regard to that activity.Chapter 4: The Law of Torts 93

CHAPTERASSESSMENTSection 4.1 Intentional Torts● A crime is an offense against the public at large.The role of the government is to preserve thesafety and well-being of the entire social structure.As such, the government can punish the perpetratorof a crime. In contrast, a tort is a privatewrong committed by one person against another.Such an offense does not call upon the governmentto punish wrongdoers and protect society.A tort, therefore, involves one person’s interferencewith another person’s rights. In some situations, asingle action can be both a tort and a crime.● The law of torts is grounded in rights. Under tortlaw, all people are entitled to certain rightssimply because they are members of our society.The law imposes a duty on all of us to respect therights of others. Some of the rights of membersof our society include: the right to be free frombodily harm, the right to enjoy a good reputation,the right to conduct business without unwarrantedinterference, and the right to own property freefrom damage or trespass. Anyone who violatessuch rights has committed a wrongful act, andoften this wrongful act can be classified as a tort.● Torts can be committed intentionally and unintentionally.Unintentional torts can be furtherclassified as negligence or strict liability.● The major intentional torts are assault, battery,trespass, nuisance, false imprisonment, defamation,and invasion of privacy. Assault involvesthreatening to strike or harm another person witha weapon or physical movement. Battery is theunlawful, unprivileged touching of anotherperson. Wrongful injury or interference with theproperty of another is known as trespass. Nuisancerefers to anything, such as noise or unpleasantodors, that interferes with the enjoyment of lifeor property. False imprisonment occurs when aperson is unlawfully restrained, whether in prisonor otherwise. Defamation is the act of injuringanother’s reputation by making false statements,and invasion of privacy is interference with aperson’s right to be left alone.Section 4.2 Negligence and Strict Liability● Negligence is an accidental or unintentional tortand is the tort that occurs most often in societytoday. Negligence is the failure to exercisethe degree of care that a reasonable personwould have exercised under the same set ofcircumstances.● A suit for negligence must prove four elements:duty of care, breach of duty, proximate cause,and actual harm. To prove duty of care, theplaintiff must show that the defendant owed himor her a duty of care. The failure to use the degreeof care required under the circumstances isbreach of duty. Proximate cause requires that theplaintiff prove that the defendant’s breach of dutycaused the injury. The plaintiff must also provethat he or she suffered some actual harm orinjury to succeed in a suit for negligence.● People can defend themselves by finding flawsin one of the previously mentioned elements. Ifthe defendant cannot find a flaw in one of theelements of negligence, he or she can still argueaffirmative defenses to negligence, whichinclude contributory negligence, comparativenegligence, and assumption of risk.● According to the doctrine of strict liability, thosewho engage in ultrahazardous activities will beheld liable for any injury or damage that occursbecause of that activity, regardless of intent orcare. The doctrine of strict liability has also beenapplied in product liability cases. When peopleare injured from defects in products that theybought in the marketplace, the firm that manufacturesthe products is liable for injuries,regardless of fault.94 Unit 1: Knowing About the Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.tortintentional tortassaultbatterytrespassnuisancefalse imprisonmentdefamationinvasion of privacynegligencebreach of dutyproximate causestrict liabilitycontributory negligencecomparative negligenceassumption of risk1. In groups of two, define each term in the vocabulary.2. Create an infomercial, in which one student has completedChapter 4 and is trying to convince another student to study thechapter material. The first student will explain what he haslearned using the terms above.3. Present your infomercials to the class.4. As a class, vote to choose the best infomercial.5. In a paragraph, explain the strengths of the infomercial that youchose. How could you have improved your infomercial?Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.comand click on Chapter 4:The Law of Torts—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter foradditional reinforcement.6. How is an intentional tort different from an unintentional tort?7. Under today’s laws, to what extent do property owners own the airspace abovetheir land?8. What does the Federal Privacy Act of 1974 require federal agencies to do?9. What defenses can you use if you are faced with a negligence suit?10. Explain the difference between contributory negligence and comparative negligence.11. Explain how the tort of assault differs from the crime of assault.12. What types of people have a difficult time proving damage to their reputation aspart of defamation lawsuits?13. Why have some states started using the standard of comparative negligence?14. Under what circumstances may a defendant to a negligence suit claim the assumptionof risk defense?Chapter 4: The Law of Torts 95

CHAPTERASSESSMENTWorking with TechnologyEric Rolfe Greenberg of the AmericanManagement Association estimates that 45percent of large U.S. companies monitorelectronic communications, including e-mail,voicemail, and fax machines.15. If you are employed, find out whether youremployer monitors the electroniccommunications at your place of business.16. If you are not employed, find out whetherthe teachers’ and students’ e-mail ismonitored at your school.17. Share your findings with the class.As a class, debate the issue of whetherelectronic monitoring is an invasion of privacy.Trespassing and ConversionFriends often have an understanding that theycan borrow each other’s things. One day, Becky’slawnmower wouldn’t start, so she took the lawnmowerfrom Alice’s garage. Alice had plannedto mow her lawn at the same time and becameangry with Becky for taking the lawnmowerwithout asking. She accused Becky of trespassing(entering her garage) and conversion(unauthorized removal of another’s property).Debate18. Was this a crime or a tort?19. How could this fight have been prevented?20. What could Becky and Alice do to improvetheir communication skills?For the following cases, give your decision andstate a legal principle that applies.21. Jake Richards decided to play a practicaljoke on Ursula Brakestone. As Ursulaprepared to sit down at her table in thecafeteria, Jake pulled the chair out fromunder her. Ursula fell to the hardwoodfloor and fractured her hip. Jake says hecommitted neither assault nor battery.Is Jake correct on either count? Why orwhy not?22. A photographer took a photo of Maria Laowithout permission while Maria was sunbathingby the pool in her own backyard.Maria later discovered that the photohad been used in an advertisement forsuntan lotion. What tort, if any, has beencommitted?23. Al asks to borrow Juanita’s videocassettelibrary. He likes several of the videocassettesso much that he decides to keepthem. Despite repeated requests fromJuanita, Al refuses to return the cassetteshe borrowed. What tort, if any, has beencommitted?24. Philip Carstairs kept a poisonous spider inhis locker at school. He was very careful tokeep it locked up so that it would not harmanyone. One day, while Philip was in class,two students got the spider out of Philip’slocker and let the spider loose in the girl’sgymnasium. Judy Norton was bitten by thespider. Is Philip legally responsible forJudy’s injuries? Explain your answer.25. An elderly woman was beaten and robbedby an unknown person. Emily Simpsontold several people that Max Newmark wasguilty of the crime. This was a falsestatement. Has Emily committed a tort forwhich Max can recover damages?96 Unit 1: Knowing About the Law

In each case that follows, you be the judge.26. Duty of CareRamona Booker entered a drugstore by pushing her way through one door and then through asecond. She had to use two hands to push the heavy doors open. As a result, she dropped hercane, which caught on the exposed coil of a security device and caused her to fall and hurtherself. Ramona brought suit against Revco DS, Inc. to recover for her injuries. Did the drugstoreowe a duty to its customers to provide an establishment that was safe? Why or why not? Is thislawsuit based on an intentional tort or negligence? What test would be used to judge whether thedrugstore owners should be held liable for Ramona’s injuries? Explain your answer.Booker v. Revco DS, Inc. 681 N.E.2d. 499 (OH).27. NegligenceMyers slipped and fell and was injured on ice on the front walkway of the Canton CentreMall. The mall was owned and run by Forest City Enterprises. Certain employees from ForestCity were supposed to keep the walkways clear of ice. They had cleared the ice from thewalkway a short time before Myers fell. One of the employees guessed that after they hadcleaned the walk, passing cars may have splashed water on it, which froze. Was Forest Citynegligent in failing to keep the walk clear of ice at all times? Why or why not? What testwould be used to judge Forest City’s conduct? Explain your answer.Myers v. Forest City Enterprises, Inc. 635 N. E. 2d 1268 (OH).State Laws and Computer CrimeState governments are creating legislation toaddress the problems of computer crime, fraud, andabuse. States are also adopting existing laws andpassing new legislation to protect consumerprivacy, particularly when it involves onlinebusiness transactions and other private issues.ConnectUsing a variety of search engines, research thecurrent Internet-related legislation under discussionby some of the state governments. Report on thefollowing:28. Current and pending legislation surroundingcomputer crime, fraud, and abuse.29. Steps taken by state governments to protectcomputer users’ privacy.30. Predict Why do you think we have tortlaw? Would life be less complicated if weonly had criminal law?31. Connect Can you think of a case that hasbeen both a tort and a crime? If not, createan example.32. Question Do you think it is fair that peoplein the public limelight must prove moredamage to their reputations than the averageperson when involved in a defamationlawsuit? Explain your answer.33. Respond Why do you think the doctrine ofstrict liability exists?Chapter 4: The Law of Torts 97

UNITLaw Workshop:Using Legal ToolsHow Would You Conduct aJury Trial?You have learned about the court system,trial procedures, and how criminal lawdiffers from civil law. By completing thisworkshop, you will have the opportunity toput your knowledge into action.Step A: PreparationProblem: How would you organize and conduct a jury trial?Objectives: In this workshop, you will work with a team to perform amock jury trial for your class.l Research legal issues that you find interesting.l Analyze data associated with the trial, and organize the datameaningfully.l Research court procedures.l Conduct a trial that mimics how a real court case might be handled.l Evaluate the classroom verdict.98 Unit 1: Knowing About the Law

Step B: Procedure1. Form a team of five or six students.2. Research interesting or controversial legal issues that have beencovered recently in local or national publications.3. As a team, choose a legal topic around which to build a court case.Read as much as you can about your topic, and organize theinformation so that both sides of the issue can be presented to theclass as a trial.4. Assign each team member a role in the trial. Your team shouldinclude a defending attorney, prosecuting attorney, judge, andseveral witnesses, including a plaintiff and a defendant. (Witnessescan play several parts.)5. Write a script for a mock trial based on thesteps for a jury trial presented inChapter 2. (Create imaginary evidence ifnecessary.) Your script should not include averdict; a jury will determine the verdict.The rest of the class will serve as the jury.The judge should direct the jury to select aforeman to act as a spokesperson. Followyour state’s law regarding the minimumnumber of jurors who must agree for a juryverdict to be considered valid.6. Perform your mock trial for the class. Havethe foreman deliver the jury’s verdict andexplain its decision.Step C: Create a Model to Analyze the Verdict7. After hearing the jury’s verdict and its reasons for the decision,prepare a chart that organizes this information. You should categorizethe jury’s reasons. For example, if the jury votes in favor of theplaintiff, you might use a two-column table with the labels “Forthe Plaintiff ” and “Against the Defendant.” List several reasons ineach column.Step D: Workshop Analysis ReportConsider the chart your team created and answer the questions below.8. What was the verdict?9. How did the jury reach this verdict?10. Do you agree with the jury’s verdict? Why or why not?11. How might the mock trial have been conducted differently to reacha different verdict?Chapter 4: The Law of Torts 99

UNITLandmark CaseCipollone v. Liggett Group, Inc.United States Supreme Court505 U.S. 504 (1992)Issue Does a federal law requiring warning labels on cigarette packagespreempt a smoker’s state law tort claims against cigarette manufacturers?FactsAfter 42 years of smoking, Rose Cipollonedied of lung cancer. During the last 15 yearsof her life, cigarette packages contained the followinglabel: “WARNING: THE SURGEONGENERAL HAS DETERMINED THAT CIGA-RETTE SMOKING IS DANGEROUS TO YOURHEALTH.” 1Rose and her husband brought suit in federalcourt against three cigarette manufacturers. Theyblamed the cigarette makers for Rose’s cancerand sought compensation based upon New Jerseytort law.The manufacturers held they were not liablefor state law tort claims arising before 1966. Theyfurther argued that the Federal Cigarette Labelingand Advertising Act of 1965 and the PublicHealth Cigarette Smoking Act of 1969 preemptedsuch claims.Rose died before trial. The jury ruled in favorof the manufacturers, stating that Rose had voluntarilyassumed the risks of smoking. However,the jury did award Rose’s husband $400,000 ascompensation for his losses, holding that Liggett,a cigarette manufacturer, had breached its expresswarranties that smoking was not hazardous. Bothsides appealed.100 Unit 1: Knowing About the LawOpinion In 1965, Congress passed the FederalCigarette Labeling and Advertising Act, whichrequired cigarette packages to contain the followinglabel: “CAUTION: CIGARETTE SMOKINGMAY BE HAZARDOUS TO YOUR HEALTH.”Congress later passed the Public Health CigaretteSmoking Act of 1969, which required a strongerlabel to be placed on cigarette packages: “WARN-ING: THE SURGEON GENERAL HAS DE-TERMINED THAT CIGARETTE SMOKING ISDANGEROUS TO YOUR HEALTH.”The Petitioner’s ComplaintThe petitioner’s complaint alleged that thecigarette makers were responsible for Rose’s illnesson the following grounds:• Design Defect The cigarette manufacturersdidn’t use a safer alternative design, and thedangers created by cigarettes outweighedtheir social value.• Failure to Warn There was no adequatewarning about the health dangers of cigarettes,and manufacturers were negligentwhen “they tested, researched, sold, promotedand advertised” cigarette products.• Express Warranty The cigarette makers expresslywarranted that their cigarettes did notpose serious health dangers.

• Fraudulent Misrepresentation The cigarettemanufacturers tried to negate federal healthwarning labels and ignored scientific evidencedemonstrating the hazards of smoking.• Conspiracy to Defraud The cigarette makerstried to deny scientific evidence about thehazards of smoking.The Defendant’s ReplyThe cigarette manufacturers replied that federallaws preempt New Jersey’s tort laws. Accordingto the supremacy clause of the U.S.Constitution, if a state law conflicts with a federallaw, the federal law overrules the state law. Thepetitioner claimed that state tort law should applyin this case because, unlike the 1969 Act, statetort claims for damages do not impose “requirement[s]or prohibition[s]” by statutes or regulations.Instead, the petitioner seeks compensationbased upon prior court decisions (common law).The Relationship ofFederal and State LawIn its opinion, the Courtrejected the petitioner’s argument.It held that state common law tortactions are based on the existenceof a legal duty, which imposes“requirements and prohibitions.”The Court also cited an earliercase in which it said that “[state]regulation can be effectivelyexerted through an award of damagesas through some form of preventiverelief. The obligation topay compensation can be, indeedis designed to be, a potent methodof governing conduct and controllingpolicy.” Consequently, theCourt rejected the petitioner’sclaim that common law tortclaims brought by individuals do not constitutematters of state law, and therefore ruled that theycould be overruled by federal law.After clarifying the applicable law, the Courtexamined each of the petitioner’s claims to determineif it was preempted by the federal law. Todetermine whether a state law is preempted, theCourt said that it must look to the intent of Congress.It ruled that federal law does not preemptstate law unless it is “the clear and manifest purposeof Congress” that a federal law supersede astate law.Holding The Court held that the 1965 Act didnot preempt state tort claims because Congress didnot intend that result. The Court further held that,although the 1969 Act preempted state claims basedon failure to warn, it did not preempt claims basedupon express warranty, intentional fraud and misrepresentation,or conspiracy.1In 1984, Congress amended the law to require four differentwarning labels to appear on cigarette packages on a rotating basis.1. On what New Jersey tort law theories did theCipollones base their claims against thecigarette manufactures?2. What five specific grounds for recovery werestated in the Cipollones’ complaint?3. Why did the jury deny Rose Cipollone’s claimfor compensation?4. What defense did the cigarette manufacturersraise in this case?5. Describe the general provisions of the PublicHealth Cigarette Smoking Act of 1969.6. What is the effect of the supremacy clause inthe U.S. Constitution?7. When does federal law preempt state law?Go to the Understanding Business and Personal Law Web site at ubpl.glencoe.com for information about howto access online resources for the Landmark Cases.Chapter 4: The Law of Torts 101

UNITUNIT OVERVIEWYou regularly takepart in a wide variety ofcontracts. Whether it’scutting your neighbor’sgrass or buying a cellphone, contract law isintended to protect theinterests of buyers andsellers, facilitate trade,and promote fairness andefficiency. In this unit,you will learn about:l Contracts and theirelementsl Genuine agreement,capacity to contract,and considerationl Legality and the formof a contractl The end of contracts,transfer of contracts,and remedies forbreach of contract

Entering intoContractsWeb Work Imagine you have yourown Web site design company. Youhave several contracts with smallbusinesses in your community. Inaddition to doing design work, youhost Web sites, keep the informationupdated, and troubleshoot problemsfor these companies.In your Justice Journal, writeabout the importance of having acontract, what type of informationis included in your contract,and how to bring your contract toan end.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Chapter 5: How Contracts Arise 103

CHAPTERHow Contracts AriseUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 5: How Contracts Arise—Chapter Overviews to preview thechapter information.

The Opening SceneStarting in this chapter, we meet the Benes family.Mr. Benes is a widower with four teenage children:Alena, 18; Viktor, 16; Hana, 15; and Emil, 13. Thechildren attend Euclid High School, a large publicschool in a major urban area in the Midwest.Mr. Benes owns a concession business and has justreturned home from work.Contractual ChaosMR.BENES: Vik, you promised to have the garbage atthe curb before I got home. I wish that I didn’t haveto get on your case about the same things over andover again.VIKTOR: You’re home early.MR.BENES: I left work early to go to the newspaperand renew that ad about my lost laptop.VIKTOR: Your ad’s been running for three weeks, andyou haven’t received a single response. I don’tthink you’re going to get your laptop back.MR.BENES: Don’t change the subject, Vik. Why doyou always insist on waiting until the last minute todo your chores?HANA: That’s not true. Vik doesn’t do his chores mostof the time. He pays Emil to do them.VIKTOR: Hana! Would you mind your own businessfor once? Nobody asked for your input on this!MR.BENES: Since when has Viktor been paying Emilto do his chores?HANA: Since he found a job. Vik’s been working afterschool lately.MR.BENES: You found a job?VIKTOR: It’s just for some extra spending money, Dad.MR.BENES: What’s the job?HANA: He works for Mrs. Garcia.VIKTOR: There you go again, Hana! Stay out of this!MR.BENES: You’re working at a gun shop?VIKTOR: My job has nothing to do with the guns. Ijust sweep out the back room and stock the shelvesand stuff.MR.BENES: I don’t care what you do there. You canjust quit.VIKTOR: I can’t quit. I have a contract.(Alena arrives at home.)ALENA: Hey, Vik. Get your skateboard out of my car,will you?VIKTOR: Shut up, Allie.MR.BENES: You bought a skateboard?VIKTOR: Not exactly.MR.BENES: How am I supposed to interpret thatstatement?(Emil enters the house.)EMIL: It means that he offered Jake 50 bucks for it,but he didn’t pay him yet. Vik still owes me for fiveweeks of chores.VIKTOR: Shut up, Emil.MR.BENES: Well, I guess that I need to come homeearly more often. It’s the only way I can find outwhat’s going on with my family!1. Does the promise to do a favor create a bindingcontract?2. What characteristics do contracts share?3. When does a contract legally come intoexistence?4. What constitutes a legal offer?5. What constitutes a legal acceptance?Chapter 5: How Contracts Arise 105

Contractsl Explain the elementsof legal contractsl How to identify valid,void, voidable, andunenforceablecontractsl How to distinguishbetween express andimplied contractsl How to identify unilateraland bilateralcontractsl How to distinguishbetween oral andwritten contractsIdentifying a contract’selements will help youmanage your affairs inan intelligent andeffective manner.l contractl offer/acceptancel genuine agreementl capacityl considerationl legalityl void/voidable contractl unenforceable contractl express/impliedcontractl bilateral/unilateralcontractUnderstanding Contract LawWhen was the last time you made a contract? If you bought yourfirst car last year or sold your old skis at a flea market, you probablyknow that these activities involve contracts. Many common dailyactivities may also involve contracts, from buying a fast food meal tofilling your car with gas. Most people think a “contract” is a long,preprinted, formal document that they sign when buying a vehicle,selling their house, or purchasing insurance. Such formal documentsrepresent only a small fraction of the contracts that you will make inyour lifetime. The truth is that you create a contract any time you agreeto exchange things of value.Because contracts pervade your life, you need to know about theirnature, purpose, and effect. Further, contract law forms the foundationfor all other areas of the law that we will explore in this text.Understanding contract law is necessary to grasp the law of sales, consumerlaw, agency law, property law, employment law, partnership law,corporate law, and computer law. We will begin with the most basicconcepts: what contracts are and how they come into existence.The Nature of a ContractA contract is any agreement enforceable by law. You shouldnever enter into a contract without understanding the legal responsibilitiesinvolved. Not all agreements are contracts, however. In TheOpening Scene, Vik’s promise to take the garbage to the curb beforehis father returned home is probably not a contract. In contrast,Mr. Benes’s agreement to run an ad in the newspaper is undoubtedly acontract. Similarly, if someone answers Mr. Benes’s advertisement andreturns his lost laptop, he will owe that person what he promised as areward in the ad. Whether Vik’s deal with Jake about the skateboard isa contract depends on the circumstances of the agreement.The Three Theories of Contract LawThe legal responsibilities associated with contracts are based onwhat the involved parties do and say to one another. In the past, courtsasked whether the parties to a contract exchanged things of equalvalue. This approach was called the equity theory of contract law.However, the advent of industrial capitalism and the need to support a106 Unit 2: Entering into Contracts

AntarcticaIn 1959, officials of 12 nations (Argentina, Australia, Belgium, Chile,France, Great Britain, Japan, New Zealand, Norway, the Soviet Union, SouthAfrica, and the United States) signed the Antarctica Treaty. This treaty isdesigned to protect one of earth’s most pristine and cold environments, and itstates that Antarctica can be used only for peaceful purposes, such as scientificexploration. It prohibits military troops, except those assisting research efforts,and outlaws using nuclear weapons or dumping nuclear waste on Antarctica.The treaty also asks scientists to freely share their research. Today more than 30scientific stations have been set up to study the icy continent. Scientists describeAntarctica as a natural laboratory. It is ideal for examining weather data, collectingrock and mineral samples, and observing animal behavior. Antarctica isalso ideal for studying something that affects the entire world—the “ozone hole”that lies directly overhead. Here’s a snapshot of Antarctica.• About 98 percent of Antarctica iscovered year round in ice up to15,000 feet thick.• Winter temperatures can drop below–114° Fahrenheit.• Geologists have found copper, gold, silver,and zinc on the Antarctic Peninsula.• Traveling by dogsleds and skis, Roald Amundsen and fourother Norwegians were the first people to reach the geographic South Poleon December 14, 1911. The 1,860-mile trip lasted 99 days.Critical Thinking Question Some tourists pay huge sums to visit Antarctica. Theycome by ship, dinghy, or helicopter. Can you think of reasons why allowingsightseers to visit Antarctica might be both a good and bad idea? For moreinformation on Antarctica, visit ubpl.glencoe.com or your local library.profit-making system forced the courts to shift their focus. Whenasked to settle a contract dispute, the courts would ask whether theparties had agreed to the terms set forth in the agreement. This newChapter 5: How Contracts Arise 107

theory was called the will theory of contract law because it focused onthe exercise of each party’s free will. The courts no longer asked if thecontract was fair; instead they pondered, “Did the parties really agreeto these terms?”One problem with the will theory is that it was difficult to knowwhat the parties were actually thinking when they entered into anagreement. Consequently, the courts studied actions and words todetermine if the parties reached a “meeting of the minds.” Gradually,this approach led to a search for certain fixed elements to contracts. Ifthese elements existed, the courts would hold that a contract existed.This approach became known as the formalist theory because it reliedon the form of the agreement.ELEMENTS OF ACONTRACTAn agreement is not a contractunless it contains thesix elements of contracts:offer, acceptance, genuineagreement, capacity, consideration,and legality. Ofthe six elements, which isthe most crucial to settingup a valid contract?The Elements of a ContractThe six elements of a contract, as shown in Figure 5.1, are offer,acceptance, genuine agreement, consideration, capacity, and legality.To be legally complete, a contract must include all six elements.Notice that the list does not include anything written. Not all contractshave to be in writing to be enforceable.An offer is a proposal by one party to another intended to createa legally binding agreement. An acceptance is the second party’sFigure 5.1ElementOfferAcceptanceGenuine AgreementConsiderationCapacityLegalityElements of a ContractDescriptionA proposal made by one party (the offeror) to another party (the offeree) indicatinga willingness to enter a contract.The agreement of the offeree to be bound by the terms of the offer.Offer and acceptance go together to create genuine agreement, or a meeting of theminds. Agreement can be destroyed by fraud, misrepresentation, mistake, duress, orundue influence.Consideration is the thing of value promised to one party in a contract in exchange forsomething else of value promised by the other party. The mutual exchange binds theparties together.The law presumes that anyone entering a contract has the legal capacity to do so.Minors are generally excused from contractual responsibility, as are mentallyincompetent and drugged or drunk individuals.Parties are not allowed to enforce contracts that involve illegal acts. Some illegalcontracts involve agreements to commit a crime or a tort. Others involve activitiesmade illegal by statutory law.108 Unit 2: Entering into Contracts

Take It or Leave ItContracts come in many forms. One form is the contract printed on theback of tickets. On airline tickets, for instance, you’ll find several importantlegal notices. These notices include “Conditions of Contract,” “Notice ofIncorporated Terms,” “Notice of Baggage Liability Limitations,” “Notice ofOverbooking,” or the specific terms and conditions related to nonair transportationor services.On the back of a concert ticket, you’re likely to find language statingthat the ticket you bought is a “revocable license.” Terms typical of suchlicenses include conditions stating that you may not resell the ticket at aprice greater than its face value. Such language often includes a termstating that the ticket may be taken and admission refused upon refundingthe ticket price.Many courts have held that these so-called “take it or leave it” contractsare binding. In many states, the small print is just as binding as the largeprint, except where it is found to be grossly unfair or unreasonable.Critical Thinking Next time you fly on an airplane or attend a concert, checkthe fine print on the back of your ticket. What are the terms of the contractyou just entered? Would you agree with these terms if you had a choice?unqualified willingness to go along with the first party’s proposal. If avalid offer is met by a valid acceptance, a genuine agreement exists.Some circumstances, such as fraud, misrepresentation, mistake, undueinfluence, and economic duress, can destroy the genuineness of anagreement.The fourth element, capacity , is the legal ability to enter a contract.The law generally assumes that anyone entering a contract hasthe capacity, but this assumption can be disputed.The fifth element, consideration , is the exchange of things ofvalue. In The Opening Scene, Mr. Benes gave nothing to Vik inexchange for his promise to deliver the garbage to the curb, so therewas no consideration in that agreement.People cannot enter into contracts to commit illegal acts.Consequently, legality is the final element of a contract.Chapter 5: How Contracts Arise 109

Characteristics of a ContractContracts can be created in different ways and can assume diverseforms. A contract can be described by any of the followingcharacteristics:l Valid, void, voidable, or unenforceablel Express or impliedl Bilateral or unilaterall Oral or writtenAny contract can have characteristics from one or more of thesefour groups. That is, a contract can be valid, express, bilateral, andwritten. Let’s take a closer look at what these characteristics indicateabout a contract.Valid, Void, Voidable, or UnenforceableThe word valid means legally good, meaning that a valid contractis one that is legally binding. On the other hand, a contract that is voidhas no legal effect. An agreement that is missing one of the previouslyOnline High SchoolOne of the many advantages of the Internet is its potential to provide animmense amount of information to anyone anywhere with an online connection.This amazing capability has intrigued many educators, who are increasinglydrawn to the Internet as a way of communicating ideas, exposing students totechnology, and reaching students who may not otherwise have access to theinformation that the Internet can provide. Many states have even startedexperimenting with state-run online high schools. These schools can delivercourses to hundreds of students, including those who are taught at home bytheir parents. This trend has caught the attention of commercial companies thatwant to enter contracts with school districts to offer online programs.Not everyone supports virtual high schools. Some teachers and parentshave expressed concern about the quality of education received online. Theyare also worried that students might not be getting a well-rounded educationwithout peer contact. (Source: New York Times, February 15, 2001, p. D1)Connect Visit the Web sites of your state or local school board to seewhether online classes are being offered, and explore how such courses arebeing handled.110 Unit 2: Entering into Contracts

discussed elements would be void, such as any agreement to do somethingillegal.When a party to a contract is able to void or cancel a contract forsome legal reason, it is a voidable contract . It is not void in itself butmay be voided by one or more of the parties. A contract between twominors, for example, could be voidable by either of them.An unenforceable contract is one the court will not uphold,generally because of some rule of law, such as the statute of limitations.If you wait too long to bring a lawsuit for breach of contract, thestatute of limitations may have run its course, making the contractunenforceable.Express or ImpliedAn express contract is stated in words and may be either oral orwritten. An implied contract comes about from the actions of theparties. People often enter into implied contracts without exchanginga single word.Example 1. Herb Schneider wentto a self-service gas station thatrequires payment before the attendantwill turn on the pumps. Hehanded the attendant $10, returnedto his car, pumped $10 worth ofgas into his tank, and drove off.Neither party spoke a single word,yet an implied contract arose fromtheir actions.Bilateral or UnilateralThe word bilateral means twosided.Thus, a bilateral contractcontains two promises. One partypromises to do something in exchangeIMPLIED CONTRACTSAn implied contract can be createdby the action of the parties. Whenyou pump gas at a self-service gasstation, your actions indicate a willingnessto pay for the gas. Whatactions are displayed by the gascompany?Chapter 5: How Contracts Arise 111

for the other’s promise to do something else. If a friend says, “I’ll sellyou my DVD player for $150,” and you say, “I’ll buy it,” a bilateralcontract comes into existence. Each of you has made a promise—youhave promised to buy, and your friend has agreed to sell. Most contractsare created in this way.In contrast, the word unilateral means one-sided. A unilateralcontract contains a promise by only one person to do something, ifand when the other party performs some act. If your friend says, “I’llsell you my DVD player for $150 if you give me the cash before noontomorrow,” he or she will not be required to keep the promise unlessyou hand over the cash before noon on the following day. See Figure 5.2for a visual representation of bilateral and unilateral contracts.A reward offer is one of the most common instances of a unilateralcontract. The acceptance of the reward offer must precisely complywith the offer.Example 2. In The Opening Scene, Mr. Benes placed an advertisementin the local newspaper offering a reward for the returnof his lost laptop. However, Mr. Benes’s offer of a reward alonedid not create a contract. The contract would come into existenceonly when someone returns the laptop. Mr. Benes wouldthen owe the finder the reward.Oral or WrittenAn oral contract is created by word of mouth and comes into existencewhen two or more people form a contract by speaking to eachother. One person usually offers to do something, and the other partyagrees to do something else in return. Most contracts are oral contractsof this nature.HOW PARTIES REACHAGREEMENTA contract may beunilateral or bilateral. Inwhich type of contractdo both parties, theofferor and the offeree,make promises?Figure 5.2OfferPromise byofferorOfferPromise byofferorHow Parties Reach AgreementUnilateral ContractAgreementBilateral ContractAgreementAcceptanceAct performedby offeree atofferor's requestAcceptancePromise madeby offeree atofferor's request112 Unit 2: Entering into Contracts

UNILATERALCONTRACTSA classic example of theunilateral contract principleis a reward advertisementplaced on a bulletinboard or in a newspaper.When you read an advertisementoffering a rewardfor a lost item, a contractdoes not yet exist. Whendoes the contract comeinto existence? Whatwould happen if someonewho had never read thead found and returned thelost item?Sometimes, however, it is desirable to put contracts in writing. Awritten contract assures that both parties know the exact terms of thecontract and also provides proof that the agreement was made. A law, theStatute of Frauds, requires that certain contracts must be in writing to beenforceable. We will learn more about this law in Chapter 10.Reviewing What You Learned1. Explain the elements of legal contracts.2. What are the differences among valid,void, voidable, and unenforceablecontracts?3. What are the differences between expressand implied contracts?4. What are the differences between unilateraland bilateral contracts?5. What are the differences between oral andwritten contracts?Legal Skills in ActionElements of a Contract Your friend, Arkadi,has begun teaching contract law classes at alocal senior citizens’ center. Write a paragraphin which you explain the six elementsof a contract in a way that will help Arkadicreate his course outline. Remember toinclude information on the historical developmentof the will theory, which led to the needto develop the six elements included withinthe formalist theory of contract law.Critical Thinking ActivityHistory How did the Industrial Revolutionchange the court’s attitude toward interpretingcontract law?Chapter 5: How Contracts Arise 113

l How to recognize therequirements of anofferl How to distinguishbetween an offer andan invitation tonegotiatel How to recognize therequirements of anacceptancel How to distinguishbetween anacceptance and acounterofferl How to recognizewhen an offer hasterminatedYou need to know whenan offer has been madeand when an acceptancegoes into effect to makesound contracts.l invitations tonegotiatel mirror image rulel counterofferl revocationl rejectionOffer andAcceptanceRequirements of an OfferBecause the six elements of a contract form the heart of contractlaw, we will build our study of contracts around them. Understandingthe elements of offer and acceptance is necessary before moving on toother matters, such as which contracts must be in writing, how contractrights are transferred, how contracts end, and what happens when oneparty breaches a contract.As noted earlier, an offer is a proposal by one party to anotherparty to enter a contract. The person making the offer is the offeror,and the person who receives the offer is the offeree. An offer has threebasic requirements. It must be:l Made seriously.l Definite and certain.l Communicated to the offeree.Serious IntentAn offer must be made with the intention of entering into a legalobligation. An offer made in the heat of anger or as a joke would notmeet this requirement. For example, a friend complaining about herunreliable car might say, “Give me five bucks and it’s yours.” Thisstatement may sound like an offer, but your friend cannot be forced tosell her car for five dollars.Often an invitation to negotiate is confused with an offer. Sellersusually have limited merchandise to sell and cannot possibly sell anadvertised product to everyone who sees an ad. For this reason, mostadvertisements in newspapers, magazines, and catalogs are treated asinvitations to negotiate rather than as offers. They are also calledinvitations to deal, invitations to trade, and invitations to make anoffer.Example 3. An advertisement in the newspaper read, “LavaLamps, $49.98.” Carole Lauretig went to the store the next dayand said, “I would like to buy a Lava Lamp.” A clerk apologized,saying the lamps had sold out within an hour after thestore opened.114 Unit 2: Entering into Contracts

INVITATION TONEGOTIATEVery often invitationsto negotiate are confusedwith genuineoffers. Is a price tagon a sale item anoffer or an invitationto negotiate?The advertisement in Example 3 was merely an invitation to thepublic to come in, see the lamps, and make an offer. When Carole said,“I would like to buy a Lava Lamp,” she was actually making an offerto buy at the advertised price of $49.98. The storeowner is free toaccept or reject the offer.There are exceptions to this rule. The courts consider some advertisementsas offers when they contain specific promises, use phrasessuch as “first come, first served,” or limit the number of items that willbe sold. In such cases, under the terms of the advertisement, the numberof people who can buy the product becomes limited, making theadvertisement an offer rather than an invitation to negotiate.Price tags, signs in store windows and on counters, and pricesmarked on merchandise are treated as invitations to negotiate ratherthan as offers. This rule of law probably stems from days when peoplenegotiated for products more than they do today.Definiteness and CertaintyAn offer must be definite and certain to be enforceable. A landlordof an apartment with faulty plumbing might agree to pay “a share” ofthe cost if the tenant fixes the plumbing, but the court would notenforce the contract because it was not possible to determine what theparties meant by “a share.”Example 4. Joe Vasquez was offered a position as an accountexecutive with the International Corporation at a salary ofChapter 5: How Contracts Arise 115

Letting your officemanager know that youare researching otherjob opportunities cansometimes work inyour favor, causing yourcompany to give you araise, promotion, bettertraining, or more interestingassignments.However, timing is thekey when using thisstrategy. Be sure thatyou are in demand byobjectively assessingyour skills, performance,and overallmarketability.$2,400 a month plus a “reasonable” commission on total sales.Is this a definite and certain offer? No, because it would be difficultto determine exactly what a “reasonable” commission is.The court, however, could fix a commission based upon generalpractices of the trade.Communication to the OffereeOffers may be made by telephone, letter, telegram, fax machine,e-mail, or by any other method that communicates the offer to theofferee.Example 5. Jean Lefevre found a wallet. A driver’s license identifiedthe owner, and Jean returned the wallet. The ownerthanked her but did nothing more. Later in the evening, whilereading the newspaper, Lefevre discovered that the owner hadoffered a reward for return of the wallet. However, she cannotclaim the reward because the offer was not communicated toher. She did not know about the reward when she returned thewallet.Requirements of an AcceptanceThe second element of a legally binding contract is acceptance ofthe offer by the offeree. As in the case of an offer, certain basicTHE MIRRORIMAGE RULEIn real estate andservice contracts,the acceptance mustrepeat the exact termsthat are used in theoffer. What can a coupledo if they want topurchase a house butcannot afford theprice at which thehouse is listed?116 Unit 2: Entering into Contracts

equirements must be met: the acceptance must be unconditional andmust follow the rules regarding the method of acceptance.Unconditional AcceptanceThe acceptance must not change the terms of the original offer inany way. This principle is called the mirror image rule . Any changein the terms of the offer means the offeree has not really accepted theoffer but has made a counteroffer . In that case, the original offeror isnot obligated to go along, and no contract results. Instead, the offerorbecomes an offeree and may accept or reject the counteroffer.Example 6. Art Clifford sent a letter to Marge and NormGrayson, offering to buy their home for $80,000. The Graysons,who had advertised their house at $85,000, wrote a reply stating,“We accept your offer. However, we would like the price setat $83,000.”The Graysons didn’t really accept Clifford’s offer, as their letterclaimed. Instead, they made a counteroffer, which Art is free to acceptor reject. He may choose to make a counteroffer of his own, agreeingto buy the home for an amount somewhere between $80,000 and$83,000. Then the initiative to accept or reject would shift back to theGraysons. This process could continue until the terms of the offer andthe acceptance “mirror” each other. The parties could also decide theywill never agree on a mutually satisfactory price.Contracts for the sale of goods are exceptions to the mirror imagerule. These exceptions include contracts for personal property such asclothing, furniture, food, motor vehicles, appliances, and other items.The primary exceptions are created by the Uniform Commercial Code(UCC), which is a set of statutes that covers the law of sales as well asother areas of commercial law. It was drafted to make trade among thestates easier and has been adopted with minor variations by 49 states.Only Louisiana has not adopted all of its provisions.One UCC exception involves nonmerchants. Nonmerchants arepeople who do not regularly buy or sell goods and do not claim to beexperts on the goods. In nonmerchant situations, the offeree may makeminor changes, and a contract will still be created. For example, ifsomeone says to you, “I’ll sell you my camera for $150,” and youanswer, “I’ll buy it and pay you next week,” a contract is created. Theadded term, “I’ll pay you next week,” may be accepted or rejected bythe offeror. Remember that this rule applies only to goods.A second exception involves sale-of-goods contracts betweenmerchants. When both parties are merchants, the additional or differentSocial StudiesIn 2001, pilots fromDelta Airlines threatenedto go on strike if theycouldn’t reach an agreementon their contractfor pay and benefits.Hollywood’s screenwritersmade a similarthreat. NBA playersnegotiate their contractsbefore they sign with abasketball team. Manybusiness professionalsdo the same thing.EvaluateDuring the next twoweeks, use newspapers,magazines, and theInternet to locatethree current eventsthat involve a contract.Analyze how thecontracts came intoexistence, the issuessurrounding the contracts,and predict whatyou think will happenin each situation.Chapter 5: How Contracts Arise 117

Student LoansThere are many waysto pay for college.Taking out a governmentstudent loanthat is repaid afteryou graduate is oneway to pay for school.Currently, there arethousands of unpaidstudent loans. Whena loan is not repaid,the government cantake legal action tocollect payment. Therecovery of unpaidloans allows futurestudents to borrowmoney for college.Should the governmentbe allowed totake your tax refundif you don’t repayyour student loan?Why or why not?Get InvolvedResearch the U.S.Department ofEducation for moreinformation aboutstudent loans. Getthe facts, and borrowresponsibly.terms become a part of the contract. This exception applies only if thefollowing conditions are met:l The new or different terms do not make a material or crucialdifference to the nature of the contractl The offeror does not object to the new or different terms within areasonable timel The original offer did not expressly limit acceptance to the termsin that original offerMethods of AcceptanceThe time at which an acceptance takes place is important becausethat is when the contract comes into existence. When the parties aredealing face-to-face or on the telephone, no special problem exists.One party speaks, and the other listens and communicates the offer orthe acceptance.Special rules, however, govern acceptances that take place whenthe parties are separated by a distance and must communicate by letters,telegrams, or fax. According to common law, an acceptance thatmust be sent over long distances is effective when it is sent. Anymethod of communication that has been expressly or impliedlyendorsed by the offeror would qualify. Common law also says that anacceptance is implied when the offeree accepts by the same or a fastermeans than that used by the offeror.The authorization of an acceptance can also be implied by any reasonablemeans, including past practices between the parties, the usualmethod in the trade, or the customary means in comparable transactions.Naturally, the offeree must correctly address the acceptance sothat it is delivered to the right place. If the address is faulty, the acceptanceis not complete until delivery has been made to the offeror. It isalso possible for the offeror to specify the time by which the acceptancemust be received to be effective.This rule applies to contracts for real estate and services. For saleof-goodscontracts under the UCC, the acceptance takes place when itis sent, as long as the method of communication is reasonable.Consequently, the acceptance of a mailed offer for goods would beeffective when it is sent electronically, via fax, or through an overnightcarrier. If the offeror states in the offer what method the offeree mustuse to accept, that method must be followed.Sometimes an offer specifies that it must be accepted by an action.In these cases, the action must take place before there is an acceptance.For example, Larry McNulty promised to pay Floyd Little $50 to dona gorilla suit and march with the band at a football game’s halftime.Floyd would have to perform the action to accept the offer.The offeror cannot impose silence on the offeree as the means ofacceptance unless he or she has previously agreed to this condition or118 Unit 2: Entering into Contracts

LONG DISTANCE ACCEPTANCEProblems arise when the acceptance of a contract musttravel over long distances. How can people make certainthat an acceptance is valid and effective when it must travelto a distant location?has allowed silence to signal acceptance in the past. In contrast, if theofferor has established silence as the means of acceptance, then he orshe will have to live by that condition if the offeree accepts by remainingsilent.Example 7. Bradley wrote a letter to Franz offering to sell hismotorcycle. “If I do not hear from you, I shall assume that youhave accepted my offer,” he said. However, Franz’s silence afterreceiving the offer would not bind him to pay. A person cannotbe forced to respond to avoid a binding agreement. On the otherhand, if Franz intended to accept the offer and complied withBradley’s directions to remain silent, then Bradley must honorthat silence as his acceptance.Termination of an OfferEven though an offer has been properly communicated to theofferee, it may be terminated. This termination may occur in any of thefollowing five ways.Chapter 5: How Contracts Arise 119

RevocationRevocation is the taking back of an offer by the offeror. Theofferor has a change of mind or circumstances and decides to withdrawthe offer before it has been accepted. Two important rules governrevocation: an offer can be revoked any time before it is accepted, anda revocation becomes effective when it is received by or communicatedto the offeree.Example 8. Rob Garceau offered to sell his CD burner to JodiCosta for $250. Jodi examined the CD burner and found that itwas in good condition. However, Jodi couldn’t decide if shewanted to spend so much money for a used piece of equipment.She told Rob that she would consider his offer. In the meantime,Rob decided that he didn’t want to sell his CD burner after all.He telephoned Jodi and informed her of his decision. Rob couldrevoke his offer because Jodi had not yet accepted it.RejectionRejection , or refusal, of an offer by the offeree brings the offer toan end. For example, if someone says to you, “I’ll sell you my camerafor $150,” and you say, “I don’t want it,” then the offer has come toan end.Example 9. Diane Amato decided that she wanted to makesome extra money by selling some dried floral arrangementsthat she had made using flowers from her own garden. Dianespoke to her neighbor, Shawna Washington, about the flowerarrangements and offered to sell them for $40 each. Shawnaliked the descriptions and decided to take a look at Diane’swork. When Diane showed the arrangements to her, however,Shawna realized that they were not what she had expected.Shawna decided to reject Diane’s offer.CounterofferA counteroffer ends the first offer. If someone says to you, “I’ll sellyou my camera for $50,” and you say, “I’ll give you $35 for it,” no contractcomes into existence unless the original offeror accepts your newoffer. If you later say, “Okay, I’ll give you $50 for the camera,” you willbe making a new offer, which the original offeror may accept or reject.Expiration of TimeIf the offeror sets a time limit for the acceptance of the offer, itmust be honored. Assume that Bradley has offered to sell Franz hismotorcycle for $1,745. Bradley tells Franz the offer will remain open120 Unit 2: Entering into Contracts

until noon of the following day. To create the contract, Franz mustaccept within that time.If no time for acceptance is stated in the offer, it must be acceptedwithin a reasonable time. Otherwise, no contract exists. What is a reasonabletime depends on the circumstances. For example, a reasonabletime to accept an offer for purchasing a truckload of ripe tomatoeswould be different from a reasonable time to accept an offer for purchaseof a house.When an offeree pays money or other consideration to an offerorto hold an offer open for an agreed period of time, an option contractcomes into existence. An option is a binding promise to hold an offeropen for a specified period of time. It offers to the holder of the optionthe exclusive right to accept the offer within the agreed time, subjectto the terms of the option. For example, you might offer a seller $50 tohold an offer open for two days. Such a contract is legally binding. Foran entire contract to be completed, the option must be exercised by theperson holding the option. This requires an absolute, unconditional,unqualified acceptance exactly according to the terms of the option.Death or InsanityIf the offeror dies or becomes insane before the offer is accepted,the offer comes to an end. Although death ends an offer, it does not enda contract, except for contracts related to personal services.Seller’s ChoiceYou are selling yourcar. You offer to sellit to Martin for $800if he pays you bySaturday. On FridayMaria offers you$1,000 for it. Ethically,should you wait to seeif Martin brings the$800 on Saturday? Isit okay to sell the carto Maria on Friday?What is your ethicalresponsibility?Reviewing What You Learned1. What are the requirements of an offer?2. What is the difference between an offerand an invitation to negotiate?3. What are the requirements of anacceptance?4. What is the difference between anacceptance and a counteroffer?5. When is an offer terminated?Critical Thinking ActivityIdentifying an Offer Why is it importantto be able to distinguish between an offerand an invitation to negotiate?Legal Skills in ActionInvitations to Negotiate Tina believes thatshe can compel a used car dealership to sellher a car that was advertised in the newspaper.She tells you that she believes theadvertisement is an offer that she intendsto accept tomorrow. Write a short letter toTina that explains why advertisements in anewspaper are considered invitations tonegotiate rather than offers.Chapter 5: How Contracts Arise 121

CHAPTERASSESSMENTSection 5.1 Contracts● A contract is any agreement enforceable by law.There are six elements of a contract: offer,acceptance, genuine agreement, consideration,capacity, and legality. An offer is a proposal byone party to another intended to create a contract.An acceptance is the second party’s unqualifiedwillingness to go along with the first party’sproposal. Genuine agreement occurs when avalid offer is met by a valid acceptance. Capacityis the legal ability to enter a contract. Considerationis the exchange of things of value. Legalityrefers to the fact that a legally binding contractmust not require people to commit illegal acts.● Valid contracts are legally binding. A voidcontract has no legal effect because one of theelements of a contract is missing. A voidablecontract is not void, but it may be voided by oneof the parties because of some defect. For instance,a contract between two minors could be voidableby either of the parties. An unenforceable contractcannot be enforced because there is some rule oflaw, such as the statute of limitations, that makesit unenforceable.● An express contract is stated in words. It may bewritten or oral. An implied contract is impliedfrom the actions of the parties.● Bilateral contracts are formed by promises thateach party makes to the other. A unilateral contractcontains one party’s promise that it will fulfill ifand when the other party performs an act.● Oral contracts are created when a party promisessomething by speaking that promise and theother party responds with a spoken promise. Incontrast, a written contract is one in which thepromises are in writing.Section 5.2 Offer and Acceptance● An offer is a proposal by one party to anotherparty to enter a contract. An offer must be (1)seriously intended, (2) definite and certain, and●(3) communicated to the offeree. An offer madein the heat of anger or as a joke would not beseriously intended. An offer must include clear,specific terms to be considered definite andcertain. When communicating an offer, theofferor may use a telephone, letter, telegram,fax machine, e-mail message, or any othermethod of communication.An invitation to negotiate may look like an offer,but it is not. Moreover, any such invitation cannotbe made into an offer by agreeing to the terms ofthe invitation. For example, an advertisement isnot an offer, but rather an invitation to negotiate.It means that a merchant does not have to sell toa buyer who says, “I’ll take it” in response to anad in the paper. The customer’s statement that heor she will buy acts as the offer in this case, andthe merchant may then choose to accept or rejectthis offer to buy.● An acceptance must meet two requirements: (1)it must be unconditional; and (2) it must followthe rules regarding the method of acceptance.Unconditional acceptances do not seek to changethe terms of the original offer in any way. Whenparties are dealing face-to-face or on the telephone,no special problems exist with regard to methodof acceptances. One party speaks, and the otherlistens and communicates the offer or acceptance.However, special rules govern acceptances thattake place when parties are separated by adistance and must communicate by letters,telegrams, or fax.●●An offer must be accepted without changing itsterms. As a result, when an offeree changes theterms of an offer, the offeree cannot be said tohave accepted. Instead, he or she is deemed tohave made a counteroffer, which the originalofferee then may choose to accept or reject.An offer is terminated by revocation, rejection,counteroffer, expiration of time, death, orinsanity.122 Unit 2: Entering into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.contractmirror image rulecounterofferconsiderationcapacitylegalityacceptanceinvitation to negotiategenuine agreementrevocationrejectionoffer1. Write a poem or short play about two people who are planningto enter into a contract, using all of the terms listed above. Becreative and humorous.2. Share your poem or play with the rest of the class, using variousother forms of expression (music, silent modern dance, mime,etc.) to communicate important details.3. As a class, vote to select the best performance.4. Encourage the winner to present his or her poem or play to otherclasses that are studying business law.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.comand click on Chapter 5:How Contracts Arise—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. Describe the formalist theory of contract law.6. Explain the elements of legal contracts.7. Why are most advertisements in the newspaper treated as invitations tonegotiate? Are there exceptions? What are they?8. What are the exceptions to the mirror image rule?9. When an acceptance is sent over a long distance, when does it becomeeffective?10. How can genuine agreement be disrupted or destroyed?11. Under what circumstances might contract be voidable?12. Why is it desirable to put some contracts in writing?13. What two rules govern the revocation of contracts?Chapter 5: How Contracts Arise 123

CHAPTERASSESSMENTInterpret and Communicate IdeasInterview the manager of a business orgovernment agency located in your community.Find out when and why contracts are beingused in the course of doing business. Shareyour findings with your class. Then as a class,determine:14. How contracts are used across yourcommunity.15. The similarities or differences amongbusinesses/government agencies and howthese similarities or differences aremanifested in their business contracts.Is There a Contract?Tara and Victor had a deal. Each week, Victorcleans Tara’s house. In return, Tara pays Victor$50. For the past few weeks, however, Victormissed a few things. One week he forgot toclean the oven; the next week he forgot to dustthe living room. Tara wasn’t happy anddeducted $10 from his fee. Victor argued thatTara should not have deducted $10 becausethey had a contract and his forgetfulnessconcerned minor things, but Tara disagreed.Debate16. Do Tara and Victor have a valid contract?17. Is it voidable?18. What should happen if Victor “forgets” afew things while cleaning?19. If you were Tara, what would you do?For the following cases, give your decision andstate a legal principle that applies.20. The Galaxy Research Center e-mailed anoffer to the owners of Twin Pines, a farm inrural Arkansas. The e-mail message stated:“Please consider this our offer to purchasebetween 9,000 and 11,000 acres of your15,000-acre tract of farmland land nearTwin Pines, Arkansas. Our offering price isbetween $15,000 and $19,000 per acre.Please respond soon.” Is this e-mailmessage a legally effective offer? Why orwhy not?21. Connie Adler agreed to go to the homecomingdance with Fred Wolfe. Later,Steve McNamara, the captain of thefootball team, asked Connie to be his datefor home-coming. Connie broke her datewith Fred to go to the dance with Steve.Does Fred have a legal claim againstConnie? Explain your answer.22. Bob Goodman made a verbal agreement tobuy a pocket calculator from HowardHermann for $35. When Hermanndelivered the calculator, Goodman refusedto accept it, stating that he was not boundby his verbal agreement. Was he correct?Explain your answer.23. Home Furniture Company advertised itswaterbeds in a local newspaper. The newspapermistakenly advertised the beds for$49 instead of $249. Must Home Furnituresell the beds at the advertised price? Explainyour answer.24. Victor Archer mailed an offer to SallyMiles. Sally mailed a properly addressedand stamped letter of acceptance 10 minutesbefore she received a revocation fromVictor. Was the revocation effective?Explain your answer.124 Unit 2: Entering into Contracts

In each case that follows, you be the judge.25. Terms of AdvertisementThe following advertisement was placed in a Minneapolis newspaper by the Great MinneapolisSurplus Store: “Saturday 9 A.M. 2 Brand-new Pastel Mink 3-Skin Scarves selling for $89.50—Out they go Saturday. Each...$1.00. 1 Black Lapin Stole. Beautiful, Worth $139.50...$1.00. FirstCome, First Served.” Lefkowitz was the first customer admitted to the store on Saturday, and heattempted to purchase the Lapin stole. The store said it would not sell him the stole because theoffer was intended only for women. Lefkowitz sued. Was the offer definite enough to allowLefkowitz to tender a valid acceptance, or was it an invitation to negotiate?Lefkowitz v. Great Minneapolis Surplus Store, 86 N.W.2dd 689 (MN).26. Terms of AcceptanceTockstein wrote, signed, and delivered an offer to Rothenbeucher stating that he wished topurchase Rothenbeucher’s house. The offer included a statement that acceptance must bemade within 24 hours. After 24 hours, the offer would be revoked unless Rothenbeucherhad accepted. Rothenbeucher signed the agreement within 24 hours but did not deliver it toTockstein personally, as Tockstein had done with the offer. Instead, Rothenbeucher gave itto his real estate agent, who delivered it to Tockstein after the 24-hour period had expired.Tockstein claimed the offer was revoked when Rothenbeucher did not deliver it within thespecified time period. Was he correct? Why or why not?Rothenbeucher v. Tockstein, 411 N.E.2d 92 (IL).Automobile AccidentsThe greatest risk facing teens today is not drugs,alcohol, school violence, or suicide—it’s motorvehicle crashes.ConnectUsing a variety of search engines, research teenmotor vehicle crashes.27. Locate statistics, major causes, and ways tohelp teens become safer drivers.28. Create a contract between you and your parentor guardian that will help you manage the useof your vehicle.29. Predict Contracts seem to be a part ofeverything we do. Why are they soimportant?30. Connect Have you ever faced a situationwhere you wished you had a contract inplace?31. Question Can you think of a situationwhere an oral contract would be better thana written contract? Explain your answer.32. Respond Why do you think that althoughdeath ends an offer, it does not end acontract? Is that fair?Chapter 5: How Contracts Arise 125

CHAPTERGenuine AgreementUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 6: Genuine Agreement—Chapter Overviews to preview thechapter information.

The Opening SceneViktor and his friend Jake are pushing Jake’s “new”car six blocks to the Benes’ home. Mr. Benes, Alena,and Hana are sitting out in front of the house.Transmission TroublesALENA: Look, Hana, a horse-drawn chariot—withoutthe horse.HANA: Having trouble, guys? Is there anything I cando to help?VIKTOR: No.ALENA: I guess, you’re just pushing that thing aroundto impress people. Where on earth did you get thatpiece of junk?VIKTOR: Shut up, Allie. We don’t need to hear anyof your smart comments right now. We’re not inthe mood.JAKE: I’ve been cheated!ALENA: Do you actually mean that someone got thebest of Jake? Now there’s a shocker!MR.BENES: Take it easy please, Allie. Whathappened, guys?JAKE: The stupid transmission gave out. I’ve only hadthe car for three days. I can’t believe I’m havingcar problems already.MR.BENES: Don’t get too excited—we don’t knowwhat’s wrong yet. Maybe it’s not that serious. Letme take a look.HANA: I like the color. It’s so . . . red. Where’d youget it?JAKE: Nowhere.ALENA: Sure, Hana. See, Jake woke up this morningand, “boom,” the car was on his front lawn, justlike that.JAKE: All right, all right. I bought it at that Buy-a-Heapused car place in Shelby. I got it for a pretty goodprice.ALENA: Didn’t you see this coming? Anyone whobuys something at a place called Buy-a-Heapdeserves what he gets.VIKTOR: Shut up, Allie. The sales guys said that thecar was just fine. He seemed like a nice guy.MR.BENES: Here’s your problem, Jake. Looks likesomebody put sawdust in the transmission to makeit run smoothly for a while. It’s an old trick.JAKE: What?MR.BENES: I said, somebody put sawdust. . . .JAKE: I heard you the first time, Mr. B. I’ve beencheated, haven’t I? Great, what am I going todo now?ALENA: Duh! You should have known better!HANA: Maybe it was a mistake.ALENA: I doubt that.VIKTOR: Oh, yeah. The guy reached for thetransmission fluid and got the sawdust by mistake.What are the odds?HANA: It could happen, I guess.MR.BENES: C’mon, Jake. I’ll drive you and Vik backto . . . what was the name of the place?ALENA: Buy-a-Heap.MR.BENES: Right. Buy-a-Heap.1. Do customers have the right to expect salespeopleto tell the truth about important factsin a contract?2. Can fraud be committed by words?3. Can fraud be committed by actions?4. Will a mistake void a contract?Chapter 6: Genuine Agreement 127

l How to identify theelements of fraudl How to distinguishbetween fraud andconcealmentl How to distinguishbetween fraudand innocentmisrepresentationl How to distinguishbetween the remedyavailable for fraudand the remedyavailable formisrepresentationLearning the elements offraud may prevent youfrom being victimizedor help you claim yourrights if you aredefrauded.Fraud andMisrepresentationDefective AgreementsIf the offeror makes a valid offer, and the offeree has made a validacceptance, then a genuine agreement has been reached. The courtsdescribe this type of agreement as a “meeting of the minds.” Assumingthe other three elements—consideration, capacity, and legality—arealso present, a valid contract exists between the parties.Sometimes, however, something goes wrong and what seems likea valid contract turns out to be nothing of the kind. In these cases, wesay that the agreement is defective. Several circumstances might createa defective agreement: fraud, misrepresentation, mistake, duress, andundue influence.FraudFraud is a deliberate deception intended to secure an unfair orunlawful gain. If you have been induced to enter into a contract by fraud,you have a choice: You may rescind , or cancel, the contract, or you maysue for money damages. Because of the deliberate deception involved infraud, you may also try to collect punitive damages. Damages aredesigned to punish the wrongdoer for his or her conduct and can greatlyexceed the amount of money needed to pay back the victim.Figure 6.11. A false representation of fact.The Elements of Fraud2. Knowledge of the falsity by the party making the false representation.l fraudl rescindl material factl concealmentl misrepresentation3. Intent to deceive by the party making the false representation.4. Reasonable reliance by the innocent party.5. Actual loss suffered by the innocent party.128 Unit 2: Entering Into ContractsELEMENTS OF FRAUDGenuine agreement can be disrupted byfraudulent representation made by oneparty to another. Why does the law usethe expression, “false representation”instead of just using “lie”?

To succeed in a lawsuit for fraud, the following five elements mustbe demonstrated (see Figure 6.1):l There must be a false representation of fact.l The party making the representation must know it is false.l The false representation must be made with the intent that it berelied upon.l The innocent party must reasonably rely upon the falserepresentation.l The innocent party must actually suffer some monetary loss.False Representation of FactFraud requires a false representation of a material, existing fact. Amaterial fact is a fact that is important; it matters to one of the parties.It cannot be a promise of something that will happen in the future,nor can it be someone’s opinion.The law does allow salespeople to use a certain amount of “salestalk,” sometimes called “sales puffing” or “sales puffery.” A statementsuch as, “This car is really flashy,” is an example of sales puffery.Another example of sales puffery is, “You’ll get plenty of dates withthis car,” which is not only the seller’s opinion, but also a promise ofsomething to happen in the future.Material false representations are not confined to oral or writtenstatements. Actions intended to deceive are considered to be false representations.See Figure 6.2 for a listing of false representations.Under some circumstances, individuals can make false representationby choosing not to reveal important information. This is known asconcealment , also called passive fraud or nondisclosure, and it maybe just as fraudulent as actively deceiving an innocent party. For example,if the seller of a house knows about some hidden problem that cannotbe easily discovered by the potential buyer—a problem with theheating system or leaky pipes in the bathroom—that knowledgeCopyright is a form ofprotection provided bythe laws of the UnitedStates (Title 17, U.S.Code) to the creatorsof “original works ofauthorship,” includingliterary, dramatic, musical,artistic, and otherintellectual works.When material is copyrighted,the work ofauthorship immediatelybecomes the propertyof the author whocreated the work.AGREEMENTS MADEDEFECTIVE BYFALSEHOODGenuine agreement canbe disrupted by fraud,concealment, andmisrepresentation. Whichof the three agreementsmade defective by falsehoodis the least serious?Figure 6.2ElementFraudConcealmentMisrepresentationAgreements Made Defective by FalsehoodDescriptionFraud is a deliberate deception to secure an unfair or unlawful gain in acontractual situation.Concealment, also called nondisclosure and passive fraud, occurs when oneparty does not say something that he or she is obligated to reveal. Obligationsarise in situations involving hidden problems and in special relationships.Misrepresentation occurs when a false statement is made innocently with nointent to deceive.Chapter 6: Genuine Agreement 129

creates a duty to reveal the hidden problem. Put another way, if oneparty has special knowledge about the subject, and the other partyrelies on that party’s expertise, the knowledgeable party is obligated toreveal any facts.Representation Known to Be FalseTo be held accountable for fraud, the party making the false representationmust be aware that the representation is false. This may beshown by proving actual knowledge, or by showing that the statementwas made recklessly, without regard for the truth.Example 1. Jeff Banner purchased a used car from Al Reed’sQuality Used Autos. The salesperson at the lot assured Jeff thathis car had never been involved in an accident. While lookingthrough his car’s glove box a week after purchasing it, Jeff discoveredrepair receipts that indicated the car had been in amajor accident. As a result, Jeff is able to pursue a claim of falserepresentation.Choosing a LawyerHaving to sign a document you do not completely understand is justone reason that you might need a lawyer. Some lawyers are general practitioners.Others specialize in certain areas, such as personal injury, divorce,or criminal law. When in need of a lawyer, look for an attorney who specializesin handling the type of situation that confronts you.The best way to find a lawyer is to talk with relatives and friends whohave used lawyers. If their legal problems were similar to yours, ask if theywould recommend their lawyer. Another good source is the Martindale-Hubbell Law Directory, found in every courthouse library. This book listsnearly every lawyer in the United States by specialty. Your county barassociation can also refer you to a competent attorney. The attorneyreferral services listed in the Yellow Pages are usually businesses thatsome attorneys pay for referrals.If possible, talk with two or more candidates before hiring your attorney.Many attorneys offer a first meeting for free.Make a List Create an imaginary situation that would require you to hire alawyer. Prepare a list of topics and questions that you would ask an attorney.130 Unit 2: Entering Into Contracts

False Representation Intendedto Be Relied UponTo prove fraud, one must show that the false representation wasmade with the intent that it be relied upon. That is, the person makingthe misrepresentation must intend that the other party rely upon theinformation as part of the contract negotiations.Example 2. Suppose that Eduardo met Mr. Johnson, a manwhose car he admired. He asked Mr. Johnson, “Is this car a1964 Mustang?” Mr. Johnson, with no intention of selling hiscar but with knowledge that it was really a 1965 model said,“Yes, it’s a 1964.” If Eduardo then went out and purchased a carlike Mr. Johnson’s, believing it was really a 1964 Mustang, hecould not win a lawsuit against Johnson for fraud. Johnson didnot make the statement with the intent that Eduardo rely on it.False Representation Actually Relied UponIf fraud is to be proven, the false representation must be reasonablyrelied upon by the other party when the agreement is made. Sometimespeople make misrepresentations to others who pay no attentionto those misrepresentations. In these cases, the party cannot bring suitfor fraud.Example 3. Suppose that Johnson wants to sell his car and tellsEduardo that it is a 1964 Mustang. However, Eduardo is accompaniedby George Timmer, an antique car expert. Timmer takesEduardo aside and tells him that the car is actually a 1965 andis worth far less money than a 1964. If Eduardo still insisted onbuying Johnson’s car at an inflated price, he could not later wina lawsuit for fraud because he did not actually rely on Johnson’sfalse statement.Language ArtsMany screenwriters formovies and televisiondevelop story lines thatrevolve around legal situations.For example,screenwriters mightdepict a person enteringinto an agreement underduress as part of a storyline. In old westernmovies, ranches wereoften sold for a fractionof their value because ofduress. Many moviesabout organized crimedepict small businessowners who are forcedto turn over part of theirearnings to the “family”to stay in business.Research ActivityWith a partner, write amini-screenplay witha story line involvingduress.FALSEREPRESENTATIONFraud involves false representationsmade to enticean innocent party into acontract. In The OpeningScene, assume that noteverything the salespersontold Jake about thecar was true. If this is thecase, how has Jake beena victim of fraud?Chapter 6: Genuine Agreement 131

Resulting LossYou may choose to enter into a contract as the result of false statementsmade by the other party. Unless you suffer loss as a result, however,you cannot win a lawsuit for fraud. For instance, if you paid afriend $75 for a CD player that was said to be “in perfect working order”and then discovered the track selection feature did not work, you havelost $75 and may make a claim for fraud. If, however, you agreed toaccept the CD player in exchange for a favor, such as helping your friendperform a community project, you suffered no monetary loss. In such asituation, you would not be legally entitled to make a claim for fraud.Innocent MisrepresentationSometimes a person will make an innocent statement that turns outto be false. However, that person honestly believed the statement wastrue at the time it was made. Such an act is a misrepresentation , oran untrue statement of facts, and the law gives you the right to rescindthe contract. You may not win damages if the false representation isinnocently made.Example 4. Fred bought a mountain bike from Matt, an acquaintanceat school. Matt said he believed the bike did not need anyrepairs. After a weekend ride at a local reservoir, Fred discoveredthe back wheel was severely misaligned. Fred could cancel thedeal and ask for his money back. He is not entitled to damagesbecause Mike genuinely believed the bike was in good shape.Reviewing What You Learned1. What are the elements of fraud?2. What is the difference between fraud andconcealment?3. What is the difference between fraud andinnocent misrepresentation?4. What is the difference between the remedyavailable for fraud and the remedy availablefor misrepresentation?Critical Thinking ActivityFraud Why do courts permit fraud to disruptgenuine agreement in a contractual setting?Legal Skills in ActionToo Good to Be True? You recently receiveda phone call from a travel agency offering avacation package to Europe for less than$200. To take advantage of the offer, youwere told to send $200 in cash within 24hours or to supply a credit card number onthe spot. Working in a small group with yourclassmates, discuss whether this sounds likea case of potential fraud. Begin by listing theelements of fraud.132 Unit 2: Entering Into Contracts

Mistake, Duress, andUndue InfluenceMistakeThe purpose of contract law is to fulfill the reasonable expectationsof the parties to a contract. People sometimes enter into contractsbelieving that certain information is true when it is actually not, or thatinformation is not true when it really is. When the truth is learned, oneor both of the parties may wish to avoid the contract. Canceling thecontract may or may not be possible. See Figure 6.3 for the types ofmistake that can disrupt an agreement.Unilateral MistakeA unilateral mistake is an error on the part of one of the partiesto the contract. A person usually cannot avoid a contract because ofsuch a mistake. Through words or actions, one party has created reasonableexpectations on the part of the other party to the contract.Those expectations should not be blocked because one of the partieshas made an error.Example 5. The town of Sharonville received four bids for constructionof a new city hall. Angelini Construction won the contractbecause its bid was the lowest. A few days later, Angelini’sgeneral manager discovered the bid should have been $2 million,not $1.5 million. The error was discovered too late. Thecompany is bound by the bid it made to build the city hall for$1.5 million.Mistake as to the Nature of the Agreement A mistake as to thenature of the agreement is one type of unilateral mistake. It cannot bean excuse to avoid a contract. Let’s say you sign a contract to mowyour neighbor’s lawn through the summer, and the written agreementsays this means mowing every week. You would be obligated to fulfillthat schedule—even if you believe that you agreed orally to mow thelawn only every other week.People who sign an agreement are bound to it, even if they havenot read it or are mistaken about what it says. Your signature showsthat you agree that the contract sets forth the terms of the agreement.This rule even applies to those who cannot read English. People whodon’t understand English are expected to have the agreement read andexplained to them by someone they trust.l How to distinguishbetween unilateraland bilateral mistakel How to recognize thetypes of mistake thatwill allow rescissionof a contractl How to recognizethe requirementsof economic duressl How to recognizethe requirementsof undue influenceRecognizing how mistake,duress, and undueinfluence can affectagreements will helpyou make better decisionsin such situations.l unilateral mistakel bilateral mistakel duressl economic duressl undue influenceChapter 6: Genuine Agreement 133

Figure 6.3Unilateral Mistake1. Mistake as to the nature of the agreement.Rescission will not be granted.Agreements Made Defective by MistakeBilateral Mistake1. Mistake as to possibility of performance.Rescission will be granted.2. Mistake as to the identity of a party.Rescission may be granted.2. Mistake as to the subject matter.Rescission will be granted.AGREEMENTS MADEDEFECTIVE BY MISTAKEGenuine agreements canbe disrupted by unilateraland bilateral mistake. Whichof the two types of mistakeswill grant rescission mostoften?Mistake as to the Identity of a Party Another type of unilateralmistake involves the identity of a party to a contract. Unlike the previouscases, however, this mistake may be cause to void a contract.Example 6. Genevieve Sands sent a letter offering baby-sittingservices at a certain rate to Jill Gomez, a mother of toddlers in theneighborhood. The letter carrier mistakenly delivered the letter toanother Jill Gomez, who happened to live across town and alsohad children. This other Jill Gomez liked Genevieve’s offer andaccepted it. However, the contract was voidable because this JillGomez was not the person Genevieve had in mind.If Genevieve had made a baby-sitting offer face-to-face with awoman she thought was Jill Gomez, but who really was not, the mistakenidentity would not prevent a binding contract. Genevieve wouldhave made an offer facing the person who could accept it.UNILATERAL MISTAKEUnilateral mistake usuallywill not allow rescission of acontract. What type of mistakewas made by AngeliniConstruction when theirrepresentatives promisedto build the Sharonville cityhall for $1.5 million?134 Unit 2: Entering Into Contracts

District Court JudgeAt age 12, Annette Scieszinski knew that she wantedto be part of the legal system. “I thought that lawyersshould do the right thing and serve the public,” she saysfrom her office in Ottumwa, Iowa. “I still think that.”Today, Scieszinski is a district court judge who presidesover a wide range of civil and criminal cases. She spends about half ofher time handling trials and the proceedings leading up to them. One day shemay be in her chambers, helping lawyers resolve issues in a contract dispute.The next day she may be in court, instructing a jury about a murder case.The other half of Scieszinski’s time is spent researching the law, updatingjudicial forms, and deciding what documents she needs to help settle a case.In nonjury trials, she also devotes at least one afternoon to “ruling time.”“‘Ruling time’ is kind of like study hall,” she says. “When I preside over anonjury trial, I’m the one who decides the verdict. So after I’ve taken evidenceand heard testimony, I use ruling time to study the law and write my opinion.”Scieszinski says that judges can make a difference in peoples’ lives. “This is agreat job,” she says. “It gives you an opportunity to creatively help people solvetheir problems and understand that even if they lose their case, justice is done.”SkillsPersonalityEducationOral and written communication, logic, library and databaseresearch, interpersonalEven-tempered, self-motivated, conscientiousMany undergraduate majors, but English and economicsare particularly useful; law degree; broad practice (notjust trial work)For more information on district court judges, visit ubpl.glencoe.com oryour public library.Bilateral MistakeSometimes both parties to a contract are mistaken about an importantfact. This is usually known as a bilateral mistake , but is sometimescalled a mutual mistake. When this mistake occurs, either partymay avoid the contract.Mistake as to the Possibility of Performance A bilateral mistakecan be a mistake as to the possibility of performance. Supposeboth parties entering into a contract believe that the duties described inChapter 6: Genuine Agreement 135

the agreement can be performed when, in fact, they cannot. In thistype of situation, either party may get out of the contract because ofthe bilateral mistake.LeakingInformationShanelle wants toupgrade her campingequipment becauseshe has had the sametent and sleeping bagsince she was in thesixth grade. She runs aclassified ad in theschool paper to sellboth items for $45each. Andrew is interestedin buying thetent, but he wants toknow if it leaks.Shanelle had the tentrepaired for leaks afew years ago. DoesShanelle have an ethicalresponsibility to tellAndrew that she hadthe tent repaired, evenif it hasn’t leakedrecently?Example 7. Robert Houlihan agreed to sell his car to CynthiaStamatopoulos for $1,000. Unknown to both of them, however,was the fact that overnight the car had been sideswiped andseverely damaged by a hit-and-run driver as it sat in front ofRobert’s house. Either party may now avoid the contract on thegrounds of bilateral mistake as to the possibility of performance.Mistake as to the Subject Matter Both parties can be mistakenas to the identity of the subject matter when they enter into a contract.In this type of bilateral mistake, the contract may be avoided by eitherone of the parties.Example 8. Ellery Weimer agreed to sell Alvin McCormick fivevacant lots on Indiana Avenue in Parkersburg. McCormickrefused to go through with the agreement when he discovered thatthe land he thought he was buying was on another Indiana Avenue,also in Parkersburg. Weimer sued McCormick for breach of contract.However, because there was a bilateral mistake as to thelocation of the land in the contract, Weimer lost the case.DURESSAn individual’s free willmay be disrupted by violence,threats of violence,or by economic threats.Which type of duress isthe most serious?136 Unit 2: Entering Into Contracts

Figure 6.4ElementPhysical DuressEmotional DuressEconomic DuressDuressAgreements Made Defective by DuressDescriptionActual physical violence is used to force a person toenter a contract.Threat of physical force is used to force a person toenter a contract.Threats to a person’s business or professional reputationare used to force a party to enter a contract.AGREEMENTS MADE DEFECTIVE BY DURESSGenuine agreement can be disrupted by duress. Which of the typesof duress is used most often to gain commercial advantage?Parties to an agreement must enter into it voluntarily, not underduress. Duress is overcoming a person’s will by use of force or bythreat of force or bodily harm. Agreements made under duress areeither void or voidable. Figure 6.4 explains the specific types of duressrecognized by the law. Criminal figures who threaten to hurt merchantsif they do not pay fees for “protection” are using duress tosecure an agreement.When actual physical force is used to cause another to enter a contract,the contract is void. When a threat of physical force is used, thecontract is voidable. Such a threat may be made against the party to acontract or against a member of that person’s family. The innocentparty may avoid the contract if he or she chooses to do so.Another type of duress is economic duress . It consists of threatsto a person’s business or income that cause him or her to enter a contractwithout real consent.Example 9. Baby-sitter Genevieve Sands sat with the childrenof one mother several times for an agreed price. One day themother said that she wished to now pay 50 cents less per hour.The woman threatened to spread rumors around the neighborhoodthat Genevieve was a careless baby-sitter if Genevieverefused to agree to the pay cut. This was an attempt to reach anagreement by threatening economic harm to the baby-sitter’sfuture business.Voidable ContractsThe contracts of mentallyimpaired personsare voidable, andguardians are oftenappointed to help protectthese individuals.The elderly are particularlyvulnerablebecause they maysuffer from dementiarelatedillnesses suchas Alzheimer’s disease,which slowly destroysthe brain. How dothese victims managetheir day-to-dayaffairs and avoidbecoming victims?Get InvolvedInquire about volunteeringat the geriatricdepartment of alocal hospital. Becomea volunteer reader ata local nursing homeor hospice. Offer tohelp elderly familymembers.Note, however, that a threat to exercise one’s legal rights is notduress. For example, to enforce an agreement, a party with grounds tosue may threaten to do so or demand satisfaction.Chapter 6: Genuine Agreement 137

UNDUE INFLUENCEGenuine agreementscan be disrupted byundue influence. Whattype of relationshipsmight lead to thetemptation to useundue influence?Figure 6.5ElementA DependencyRelationshipUnfair or ImproperPressureA Beneficial ContractElements of Undue InfluenceDescriptionOne party in a relationship is dependent on the other partybecause of ill health, old age, or mental immaturity.The independent person uses excessive pressure to forcethe dependent person to enter a contract.The contract that results benefits the independent party atthe expense of the dependent party.Undue InfluenceThe exercise of undue influence is another factor that can cause acontract to be voidable. Undue influence occurs when a person usesunfair and improper persuasive pressure to force another person toenter into an agreement. (See Figure 6.5 for the elements of undueinfluence.) Circumstances such as ill health, old age, or mental immaturitymay put a person in a weaker position. The stronger person substituteshis or her will for the will of the weaker person.E-Book Publishing RightsUntil recently, few book contracts specified who owned the rights topublish electronic versions of printed books. This issue has become increasinglyimportant because income from the sale of electronic books has grown as thisformat has become more popular. Publishers argue that they own the right tosell digital editions of printed books, even when their contract with an authormight not address the issue. Publishers compare their industry to the filmindustry, where studios have the right to sell videotapes of movies. Publishershave started to change their contract language over the past several years torefer specifically to electronic books. Most authors argue that there is nogenuine agreement on this issue until such language is included. (Source: NewYork Times, February 28, 2001, p. C5)Connect Go to the Web site for Text and Academic Authors (TAA) and seewhat this group has to say about electronic rights.138 Unit 2: Entering Into Contracts

Example 10. Paulding, an elderly woman,lived with her son, Emory, her only child andsole caretaker. Emory persuaded his motherto sell him some land that was worth$150,000 for only $50,000. Shortly before thetransfer of title, Paulding discovered her sonplanned to resell the property for $175,000 toVisconti, a developer who planned to build anapartment complex. Paulding had thought herson planned to use the property as a lot forbuilding a vacation home. She did not expecther son to deceive her. The mother refused togo through with the sale. In the breach of contractsuit that followed, the court ruled thatEmory had taken advantage of his mother’strust in him to persuade her to sell the land.Paulding could avoid the contract.UNDUE INFLUENCEAn individual’s free will may be disrupted bythe undue influence of someone upon whomthey depend. Why is undue influence difficultto prove?Reviewing What You Learned1. What is the difference between unilateraland bilateral mistakes?2. What types of mistake will allow rescissionof a contract?3. What are the requirements of economicduress?4. What are the requirements of undueinfluence?Critical Thinking ActivityTypes of Mistakes Why is it important to beable to distinguish between a unilateral andbilateral mistake?Legal Skills in ActionUndue Influence Suppose that a close friendhas sent you an e-mail message saying thatshe believes her grandfather was tricked intosigning over all of his property to his live-incaretaker. Your friend asks for your advice onhow to proceed with the problem. Write ane-mail reply to your friend in which youexplain the elements she would have to proveto demonstrate that her grandfather signedover his property because of undue influence.Chapter 6: Genuine Agreement 139

CHAPTERASSESSMENTSection 6.1 Fraud and Misrepresentation● Fraud is deliberate deception to secure an unfairor unlawful gain. To succeed in a lawsuit forfraud, the party bringing suit must prove fiveelements: (1) false representation of fact,(2) representation known to be false, (3) falserepresentation intended to be relied upon,(4) false representation reasonably relied upon,and (5) resulting loss. Fraud requires a falserepresentation of a material, existing fact. Itcannot be a promise of something that willhappen in the future, nor can it be someone’sopinion. Material false representations are notconfined to oral or written statements. Actionsintended to deceive are considered to be falserepresentations.● Concealment, also called nondisclosure andpassive fraud, is a type of fraud. This type offraud is employed when a party keeps silentabout a material fact of which the other partyhas no knowledge. The other person relies onthe first person’s special knowledge and getshurt. Concealment can occur when a seller keepsquiet about a hidden defect that cannot be easilydiscovered by the buyer. Concealment can bejust as fraudulent as actively deceiving aninnocent party.● An innocent statement of supposed fact thatturns out to be false is a misrepresentation. Thelaw gives an injured party the right to rescind acontract because of misrepresentation. You maynot win damages if a false representation isinnocently made.● If you have been induced to enter a contract byfraud, you have several remedies available. Youmay cancel, or rescind, the contract. You mayalso sue for damages. Damages are designed topunish the wrongdoer for his or her conduct andcan greatly exceed the amount of money neededto repay the victim. If a person has merely madea misrepresentation, remember that, althoughyou can rescind the contract, you cannot windamages.Section 6.2 Mistake, Duress, and UndueInfluence● Unilateral mistake is an error on the part of oneof the parties to the contract. A person usuallycannot avoid a contract because of such a mistake.A unilateral mistake may be a mistake as to thenature of the agreement or a mistake as to theidentity of a party. When both parties to a contractare mistaken about some important fact, abilateral mistake has been made. A bilateralmistake may be a mistake as to the possibilityof performance or a mistake as to the subjectmatter.● When you make a unilateral mistake, you arebound to the contract, except when you make amistake as to the identity of the party. Whenthere has been a bilateral mistake, either partymay rescind the contract.● Duress is defined as overcoming a person’s willby using force or by threat of force or bodilyharm. Economic duress occurs when a personthreatens another person’s business or income tocause someone to enter a contract without trueconsent.● Unfair and improper persuasive pressure used bya person to force a close friend, family member,or otherwise vulnerable person into entering intoa contract is called undue influence.140 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.fraudrescindmaterial factconcealmentmisrepresentationunilateral mistakebilateral mistakeduresseconomic duressundue influence1. Imagine one of your friends is facing a defective agreement witha recent contract. Write a story about the situation using as manyof the key terms in the story as possible.2. Exchange stories with a classmate and review the terms that youeach used in your stories.3. Present your story to the class.4. As a class, vote to choose the best story.5. Post the winning story somewhere in the classroom.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 6:Genuine Agreement—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.6. Name five circumstances that might create a defective agreement.7. What are the two options for seeking recovery if you are induced to enter afraudulent contract?8. Describe a situation in which one party might be tempted to conceal informationthat would discourage the other party from entering into a contract.9. What are two kinds of bilateral mistakes? Who may avoid a contract that containsa bilateral mistake?10. What is the essential difference between duress and undue influence?11. What is a material fact?12. How does emotional duress differ from physical duress?Chapter 6: Genuine Agreement 141

CHAPTERASSESSMENTInterpreting and Communicating IdeasUsing the newspaper, news magazines, or theInternet, locate an article about a contract casein which punitive damages were awarded.13. Review the facts of the case from theplaintiff’s and the defendant’s viewpoints.14. Write a one-page paper explaining whetheryou would have awarded similar damages.15. Present your case and decision to the class.FraudSerina called Erik to inquire about a washerand dryer that he is selling. Erik told Serina thatthe washer and dryer are in top-notch conditionand haven’t been used much. He told her thathe is selling the appliances because he dislikestheir color. You know for a fact, however, thatErik is not being totally honest with Serina. Thewasher doesn’t rinse well, and the dryer cannotrun for more than 20 minutes.Debate16. Is Erik misrepresenting his offer?17. Is this a fraudulent situation?18. Is nondisclosure involved?19. What should Erik do?For the following cases, give your decision andstate a legal principle that applies.20. The Oxford Art Gallery, operated by AllenOxford, owned two 1907 photographs thatdepicted immigrants arriving in America.One of the photographs, taken by thefamous photographer Alfred Stieglitz, wasworth a substantial sum of money. Theother photo, taken by a relatively unknownphotographer named Alexander Sergent,was worth about $50. Ginny Thomasarranged to buy one of the photos, thinkingthe agreement was for the photo by Sergent.Oxford understood that the sale was for theStieglitz. Was there a true meeting of theminds in this case? Would the circumstancessupport an action for rescission of thisagreement? Why or why not?21. Akeo Shimazu signed a form withoutreading it. He assumed the form was arequest for a sample copy of an expensivebook. When his order arrived, he found thathe had actually signed an order form forthe book itself. Shimazu refused the book,claiming he was not bound by the agreementbecause of his mistake. Is Shimazulegally bound by the agreement? Explainyour answer.22. The basement of Rodney Wiseman’s houseflooded every time it rained. Nevertheless,when Phelps, a potential buyer, asked aboutwater in the basement, Wiseman said thatthe basement was dry. Phelps had an expertcheck the basement for dryness before hepurchased the home. After a heavy rain,Phelps’s new home’s basement flooded.Can Phelps recover damages from Wisemanfor fraud? Explain your answer.23. Estelle Petkins put her summer cottage upfor sale. Edith Ong, who was interested inbuying the cottage, asked if it had termites.Petkins was not aware of a termite problem,so her answer was no. Ong bought thecottage and later found termites. DoesOng have any recourse against Petkins forfraud? Explain your answer.142 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.24. Intentional MisrepresentationWalker and Cousineau were in the gravel business. Walker wanted to sell a tract of land. Heclaimed that he had an engineer’s report showing the land held 80,000 cubic yards of gravel.However, Walker knew the land held substantially less gravel. Cousineau bought the land andquickly discovered that the land held only about 6,000 cubic yards of gravel. He sued Walker,asking the court to rescind the contract. Will Cousineau win the case? Why or why not?Cousineau v. Walker, 613 P.2d 608 (AL).25. Forced PromisesDuring a riot at the Iowa State Penitentiary, prisoners held staff members hostage. Thehostages were released after the warden agreed in writing that the prisoners would experienceno reprisals. Afterward, however, some of the prisoners were punished. One prisoner, Wagner,was placed in solitary confinement for 30 days and received 180 days of administrative segregation.He also lost 1,283 days of good time earned. On what legal grounds can the wardenrefuse to keep his promise to the inmates, and why?Wagner v. State, 364 N.W.2d 246 (IA).Last-Minute ChangesSeig hired “Deiter’s Delights” to cater hisdaughter’s wedding reception. Deiter, the owner ofthe service, told Seig that his company wouldprovide all of the serving dishes, plates, and cups.On the day of the wedding, Deiter told Seig thatthere would be an extra charge for the dishes.Although Seig paid the bill in full, he has decidedto hire a lawyer to determine whether this is a caseof misrepresentation or fraud.ConnectUsing a variety of search engines:26. Help Seig find a lawyer online.27. Create a short checklist of criteria that youwould use when locating a lawyer.28. Predict How will understanding theelements of fraud help you avoid being avictim of fraud in the future?29. Connect Create sample statements of “salespuffery” that border on being fraudulent.30. Question In Example 5, given thatAngelini Construction made an honestmistake when bidding the project torebuild city hall, is it fair to bind themto the unreasonably low price theysubmitted? Explain. (Locate the textthat corresponds with this item near theexample under unilateral mistake.)31. Respond In negotiating a contract, isthe use of duress and undue influenceunethical as well as illegal? Explainyour answer.Chapter 6: Genuine Agreement 143

CHAPTERContractual CapacityUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 7: Contractual Capacity—Chapter Overviews to preview thechapter information.

The Opening SceneIt’s Saturday morning, a few days after Jake boughthis “new” car. Alena, Viktor, Jake, and their collegefriend, Arkadi, are at the used car lot.A Minor’s Major ReturnALENA: You’ve dreamed up a crazy plan, Arkadi. Idon’t think this is going to work. The dealershipis not going to return Jake’s money. Maybe hedoesn’t even deserve to get it back. His decisionwas pretty stupid.JAKE: Thanks a lot, Alena. Why do you always haveto act like such a know-it-all?ARKADI: Trust me. When I was a kid like Jake, asimilar thing happened to me. We’ll get Jake’smoney.JAKE: Who are you calling a kid? I’m not inelementary school.ALENA: (Ignoring Jake.) But you were 14 when youbought that defective stereo system, Arkadi. Jakeis 16 right now.ARKADI: It doesn’t matter. Jake’s still a kid. (Turning toJake.) Are you ready? Do you have the paper wetalked about?JAKE: I’m prepared. Here it is. And stop calling me akid. I’m not a kid.(A salesperson in a cheap suit approaches the group.He grins broadly and greets the group with excessiveenthusiasm.)MR.BARENBLATT: Hello there, boys and girls.Barenblatt’s the name. Cars are my game. Wehave a lot of good deals today-–plenty of usedcars and trucks that are perfect for first-time buyers.How’d you like to take this little beauty for a spin?JAKE: I know who you are. You sold me a bogusvehicle the other day.(Mr. Barenblatt takes a closer look at Jake, recognizeshim, and smiles.)MR.BARENBLATT: Oh yeah. I thought that I knewyou from somewhere. I sell a lot of cars. Sometimesit’s hard to remember everyone. Hi there, kid.How’s your car running?JAKE: It’s not.MR.BARENBLATT: What are you trying to say? It’snot running?JAKE: No. It’s not my car anymore. Here you go–I guess you’ll want to read this.(Jake hands him the paper. Mr. Barenblatt reads itquickly.)MR.BARENBLATT: What is this, some kind of stupidjoke?ALENA: It’s no joke, friend. He’s a minor, and hewants out of the bogus deal that you forced himinto. Next time, you’ll think twice before you tryto hustle a minor.MR.BARENBLATT: You can’t do that! We had anagreement, and you can’t just change your mindand pull out of it now. You signed a contract!JAKE: (Smiling.) It makes no difference. After all, I’mjust a kid.1. When is a person considered a minor?2. Why does the law permit minors to void theircontracts?3. Are there any exceptions to the rule that saysthat minors can void their contracts?4. What individuals, besides minors, can void theircontracts?Chapter 7: Contractual Capacity 145

Contractual Capacityl How to explain thelegal concept ofminorityl How to identify therights of minors inrelation to contractsl How to identifycontracts that arevoidable by a minorl How a person canratify a contract madein minorityl How to identify others,besides minors, whocan rescind contractsThe Requirement of CapacityThe last two chapters established that a legally binding contract requiressix elements. The first two elements, offer and acceptance, combineto make the third, which is genuine acceptance. Remember that ifgenuine agreement is disrupted by fraud, misrepresentation, mistake,duress, or undue influence, a contract may not be considered binding.Three other elements are also required of legally valid contracts. Thesefinal elements are capacity, consideration, and legality. Capacity relatesdirectly to the involvement of minors in contracts.Understanding the rightsafforded to minors incontract law will enableyou to exercise yourrights and help others.l capacityl rebuttablepresumptionl majorityl minor/minorityl emancipatedl abandonedl ratifyl necessariesl guardianl aliensCONTRACTUAL CAPACITYThe law permits minors to rescind their contracts. This law isintended to protect minors from unscrupulous adults whomight try to take advantage of their inexperience. If the ideabehind granting minors the ability to withdraw from contractsis to protect minors from adults, why does the court permitminors to rescind contracts with one another?146 Unit 2: Entering Into Contracts

ChinaDo you have brothers or sisters? Can you imagine your life without them? InChina, many children grow up as only children by order of the Chinese government.In 1979, the government introduced the one-child policy to make sure the country—the world’s most populous—could feed and support all of its people. The policy, witha few exceptions, permits couples to have only one child per family. Failure to obeythe policy results in a heavy fine to cover the additional child’s “cost to society.”Sanctions against parents might also include loss of employment or benefits, or evensterilization. Officials say that 250 million births have already been prevented since1980. China’s goal is zero population growth by the middle of the twenty-firstcentury. In 2050, China’s population is expected to top 1.5 billion. Here’s asnapshot of China.Geographical area 3,705,820 sq. mi.Population 1,284,303,705CapitalBeijingLegal SystemComplex mix ofcustom and statuteLanguageChinese, Mandarin,many dialectsReligionMany, but officially atheistLife expectancy 70 yearsCritical Thinking Question If you were a Chinese citizen and could decide the fate ofthe one-child policy, would you vote to abolish or preserve it? Explain your answer.For more information on China, visit ubpl.glencoe.com or your local library.Minor’s Rights and ObligationsCapacity is the legal ability to enter a contract. When individualsenter into contracts, they are permitted by law to presume that the otherparty or parties have the capacity to contract. This presumption, knownas a rebuttable presumption , can be challenged in a court of law. Thepresumption of capacity plays a key role in contracts made by minorsbecause the law permits minors, within certain limits, to rescind or voidChapter 7: Contractual Capacity 147

their contracts. The court has established specific standards regardingwho is considered a minor and what is meant by the term minority.State laws protectminors by providing thatstatutes of limitationsdo not begin runninguntil plaintiffs who areminors attain majority,which is the day beforetheir 18th birthday.Definition of MinorityA person who has not yet reached the age of legal adulthood, knownas the age of majority , is considered a minor . Sometimes we say thata person below the age of majority is still in his or her minority .Legal Age In 1972, when the voting age was lowered from 21 to 18,most states also lowered the age of majority from 21 to 18. For manyyears following this change, the age of majority and the age at whichyoung people could purchase alcoholic beverages were the same. Now,however, most states have revised this policy. The age of majorityremains 18 nationwide, but most states have raised the legal drinking ageto 21.For legal purposes, people reach a particular age at the beginning ofthe day before their birthday. The reason is that the date of a person’sbirth is counted as the first day of his or her life; the law does not considerfractions of a day. As a result, on a person’s eighteenth birthday,that person is considered 18 years and 1 day old.Emancipation and Abandonment Some states have declared thatminors who are no longer under the control of their parents areemancipated . This means that they are responsible for their contracts.A minor who marries or leaves home, giving up all rights to parentalsupport, is considered emancipated. Such individuals are said to haveabandoned the protection afforded them as minors. Although emancipatedminors are fully responsible for their own contracts, manyEMANCIPATIONMinors who are no longerunder parental control areemancipated. Why doesthe law withdraw the rightto disaffirm contracts fromemancipated minors?148 Unit 2: Entering Into Contracts

Social StudiesThe laws affectingchildren under age 18vary from country tocountry. Some countriesallow children as youngas five years old to work.Other countries allowchildren to drink alcoholwhen they turn 14. Stillothers won’t allowchildren to apply for adriver’s license until theyare over 21.MISREPRESENTING AGEMinors who lie about their age or use phony identificationto misrepresent their age are in violation of the law.Should an adult who permits minors to use their IDs tomisrepresent their age also be held liable?merchants are still reluctant to deal with such minors because the merchantsassume that the shield of minority still protects them.Misrepresentation of AgeIf a minor claims to be over the age of majority, then he or she hascommitted fraud. Fraud is a wrongful act, and minors are responsible fortheir wrongful acts. In some states, when a minor lies about his or herage and then disaffirms a contract, the other party may sue the minorfor fraud. Such a suit would be successful only if all of the five elementsof fraud were present and could be proven by the adult party,including the element of actual loss. Consequently, if the adult party toa contract cannot prove that the minor’s lie caused financial loss, a fraudcase would not succeed.Some states still follow an older law stating that minors cannot besued for fraud, even when they lie about their age. However, most statesstill consider it a criminal offense for a minor to lie about his or her ageto buy age-restricted products. Some states require people whose agesare in question to fill out a form similar to the one shown in Figure 7.1when purchasing alcohol. The New York Alcoholic Beverage ControlLaw has made it illegal to misrepresent one’s age to buy alcohol. Thisrestriction prohibits giving any written evidence of age, such as a driver’slicense or other photo identification, that is false, fraudulent, or not trulyResearch ActivityChoose a country and findout how old a child inthat country must be todo the following:l Enter into a legalcontractl Work and earn moneyl Apply for a driver’slicensel Get marriedChapter 7: Contractual Capacity 149

PROVING MAJORITYSome states requirepeople whose ages are inquestion to fill out a formbefore they are permittedto purchase alcohol.What procedure is usedin your state?Figure 7.1, 20I, , hereby represent to ,a permittee of the Connecticut Department of Liquor Control,that I am over the age of 21 years, having been born on, 19 , at . Thisstatement is made to induce said permittee to sell orotherwise furnish alcoholic beverages to the undersigned.I UNDERSTAND THAT TITLE 30 OF THE GENERALSTATUTES PROHIBITS THE SALE OF ALCOHOLIC LIQUORTO ANY PERSON WHO IS NOT TWENTY-ONE YEARSOF AGE.I understand that I am subject to a fine of one hundreddollars for the first offense and not more than two hundredfifty dollars for each subsequent offense for willfullymisrepresenting my age for the purposes set forth in thisstatement.(Name)(Address)owned by the person presenting it. The law prohibits minors from purchasingalcohol as a protective measure. Many minors lack the maturityand judgment required to successfully regulate alcohol consumption.Contracts of MinorsThe law shields minors in making contracts as a protective measure.Immaturity, inexperience, lack of education, or na¨ıveté could allow anunscrupulous adult to take advantage of a minor. The law does not intend,however, to give a minor the right to take advantage of other people.150 Unit 2: Entering Into Contracts

EXCEPTIONSTO THE RULEAs is the case withmost rules, the rulethat holds thatminors can rescindtheir contracts hasexceptions. Whydoes the law notpermit minors todisaffirm militaryenlistmentagreements?Voidable ContractsContracts made by minors are voidable by the minor. As a result,minors may disaffirm, or avoid, their contracts if they so choose. To disaffirma contract means to show the intent not to live up to the contractby a statement or some other act.Example 1. In The Opening Scene, Jake, who is 16, attempts todisaffirm his contract with the Buy-a-Heap used car lot. He givesa letter that states his intent to Mr. Barenblatt. Jake is a minor, andas a result, Buy-a-Heap will have to comply with his request.In essence, by permitting minors to have the privilege of disaffirmingcontacts, the law provides young people with a second chance whenthey use poor judgment. Young people may disaffirm contracts even ifthey damage or destroy an item purchased as part of a contractualagreement. In a few states, however, an amount can be deducted fordamaged or soiled items returned by a minor. Young people also havea reasonable amount of time after reaching majority to disaffirm theircontracts.Chapter 7: Contractual Capacity 151

Returning the Merchandise If a minor still has the merchandisehe or she received upon entering a contract, that merchandise shouldbe returned when the contract is disaffirmed. This requirement can befulfilled by a tender, or offer to return the item. In fact, most states willpermit a minor to disaffirm a contract and still get back the full amountpaid for an item, even if the minor no longer has the item.Disaffirming the Whole Contract A minor may not affirm partsof a contract that are favorable and disaffirm the unfavorable parts.Rather, a minor must disaffirm all or none. A minor may, however, disaffirmone (or both) of two separate contracts. A letter written by aminor to disaffirm a contract is shown in Figure 7.2.Disaffirming Contracts Made With Other Minors When twominors enter into a contract with each other, both parties have the rightto disaffirm the contract. Consequently, both enter the contract with therisk that the other may attempt to get out of that contract. When only oneLet’s RockSuppose you decide to form a band with your friends, all of whom areminors. A few questions arise: Can you enter a legally binding contract withthe other band members? Can the band enter a legally binding contract withoutside parties who may want to do business? As your textbook explains,minors lack the capacity to enter into a binding contract unless it is a contractfor necessaries. This is true whether the contract is between minors and adultsor all minors. If a minor signs a contract but decides later to get out of it, oftenhe or she can legally do so.One way to enter into a binding contract with fellow band members is tohave each member’s parent or guardian sign the agreement on behalf of theminor. By the same token, any agreement signed by members of the band witha manager, concert promoter, or record company must also be cosigned by aparent or guardian for it to be enforceable.Research Some states give limited capacity to minors who are engaged inbusiness in their own name to make contracts that are essential to running theirbusinesses. What is the law in your state? How might the law apply to forminga band and entering contracts with outside parties?152 Unit 2: Entering Into Contracts

Figure 7.2Attn: Buy-A-Heap Used CarsMr. Fred Barenblatt660 Lexington AvenueChicago, IL 3148017810 Windward RoadChicago, IL 31485September 9, 20––DISAFFIRMINGCONTRACTSIt is generally best to makesure any attempt to disaffirma contract is inwriting. Would it also benecessary to use a writingto ratify a contract?Seller’s nameand addressDear Mr. Barenblatt,Please take notice that I, Jake Novak, of 17810 WindwardRoad, Chicago, Illinois, hereby disaffirm the contract enteredinto between you and me on September 8, 20––, at yourplace of business (Buy-A-Heap Used Cars) at 660 LexingtonAvenue, Chicago, Illinois, for the purchase of a Ford Mustang,serial number LTR 4565293433 xa.Minor’s nameand addressDate and placeof contractingOn the date of the contract, I was 16 years of age and aminor under the laws of this state. Demand is hereby made ofyou for a return of all money paid to you by me under thecontract, which was $500.00.I will return the Ford Mustang to your auto lot at 10:00 A.M.on September 10. I am sorry to tell you that thetransmission is no longer operating properly.Time and placeto returnconsiderationCordially yours,Jake Novakof the parties to a contract is a minor, that person is the only one whocan avoid the contract. If the minor chooses to enforce the contract, heor she may do so.Example 2. Rob, who is 15, offered to sell his mountain bike toCorey, who is 16. Corey initially agreed to buy the bike but thenchanged his mind. Because Corey is a minor, he has the right toavoid the contract. The fact that Rob is also a minor makes nodifference.Chapter 7: Contractual Capacity 153

Ratification of Minors’ ContractsAfter reaching the age of majority, a person can ratify , or approve,contracts made during minority (see Figure 7.3). Ratification ends theprivileges that a person had while still a legal “child.” Ratification canonly be done upon reaching majority, and it may be accomplished orally,in writing, or by one’s actions. Ratification need not consist of a formalprocess in which one writes a letter or takes deliberate action to renewa contract. In fact, a number of actions or behaviors constitute ratificationof a contract made in minority. Using or selling items obtained bycontract after reaching the age of majority has the effect of ratifying thecontract. Making an installment payment on an item or keeping an itemfor a reasonable period of time after reaching majority is also consideredratification.Example 2. Colleen Gregory bought a car when she was 17 yearsold. She made a down payment and promised to pay the balancein installments over the next two years. After she reached 18, shecontinued to make her installment payments. Gregory’s act ofmaking payments after reaching majority was a ratification. Shecould no longer return the car and demand the return of hermoney. Even if she had made no payments, she would be boundto the contract if she had kept the car for a reasonable time afterreaching the age of majority.H1-B Worker StatusTechnology companies face a thinning pool of qualified workers fromwhich to hire. These companies are looking overseas for skilled programmers.At the same time, they are lobbying the government to loosen currentrestrictions on H1-B visas. H1-B is a category under the U.S. Immigration andNaturalization Act. It allows foreign nationals to enter the United States andwork for a limited time. The work the foreign nationals do must fall within aspecialized field. Programmers and other technicians in the computer fieldcan enter the United States under this law. Technology workers who do nothave H1-B visas lack the legal capacity to contract with employers to work inthe United States. (Source: Bureau of Citizenship and Immigration Services)Connect Search the Internet to find out more about H1-B restrictions.154 Unit 2: Entering Into Contracts

Figure 7.3RATIFICATIONOfferContracts made by a minor are generally voidablecontracts. However, these contracts canbe ratified after the minor reaches the age ofmajority.AcceptanceA business advertisement in a newspaper canconstitute an offer of sale, even if theadvertisement is aimed toward minors.If a minor agreesto the terms of anoffer, then avoidable contractis created.Reaching MajorityRatificationWhen a minor reaches the age ofmajority, his or her contracts canbe ratified.Using or selling an item obtained by contractfor a reasonable time after reaching the age ofmajority has the effect of ratifying the contract.Ratification can also be accomplished orally orin writing.Chapter 7: Contractual Capacity 155

Draft RegistrationCelebrating your 18thbirthday? If you area young man in theUnited States, youhave just reached theage for mandatorydraft registration.Started during the CivilWar, the draft has notalways been popular. Itwas so unpopular afterthe Vietnam War that itwas abolished from1973–1979. Congressbrought the draft backin 1980 for men 18–25years old. What aresome other ways thatthe governmentcould get young mento join the military?Get InvolvedFind out how the draftboard selects who willbe drafted and underwhat conditions. Shareyour findings withyoung men who willneed to register for thedraft soon.“Reasonable time” has no exact definition. It varies under differentcircumstances, and is determined by a judge or a jury acting on a judge’sinstructions. A reasonable time for a person to return a perishable itemsuch as a birthday cake, for example, would be less than a reasonabletime for returning a nonperishable item, such as an automobile or aCD player.Contracts for NecessariesA minor is held responsible for the fair value of necessaries.Necessaries , sometimes called necessities, include food, clothing, shelter,and medical care. Under common law, one’s “station in life” has abearing on whether an item is a necessary. A $150 pair of custom-madeshoes may be a necessary for someone who has a foot injury. In contrast,a pair of designer shoes could be considered a luxury for someone else.If a minor pays more than the fair value for a necessary, he or she is entitledto the difference between the fair value and the price actually paid.Example 3. Suppose that Eddie DeFino purchased a sweater, hat,jacket, and pair of boots from a retail store. If these items werethings he actually needed, Eddie would be bound to keep themand pay the fair value for them. However, Eddie must actuallyneed the clothing. In addition, it must be shown that he was notbeing adequately provided for by his parents or guardian. If he alreadyhad plenty of winter clothing or if his parents were willingand able to support him, then the items would not be considerednecessaries, and he could disaffirm the contract in the regular way.Special Statutory RulesMany states have made changes in their statutes that control thecapacity of minors to enter into contracts. For example, many statesgive minors the capacity to enter into contracts for car insurance andlife insurance. Some states give limited capacity to minors who areengaged in businesses in their own names to make contracts that areessential to running that business. Other states treat married minors asadults. Still others consider the renting of an apartment as a necessary,regardless of whether the minor actually needs it. These are just a fewof the many differences in state statutes regarding minors. Minors shouldcheck the statutes of their own states to find out about special contractualcapacities that they may be allowed.Minors are protected by the special rights given to them, but theirrights are limited at the same time. In effect, the law warns adults againstcontracting with minors, except for necessaries. Consequently, minorsmay be required to have their parents make major purchases for them.Parents may also need to guarantee contracts made by their children.156 Unit 2: Entering Into Contracts

Other Contractual Capacity RulesAs you have seen, parties to a contract must have the capacity toenter into the contract. Under certain conditions, a minor may disaffirma contract into which he or she has entered. Other classes of personsare also able to avoid contracts.Mentally Impaired PersonsThe right given to minors to disaffirm contracts is also given to thementally impaired, and for the same reason. They are considered unableto make sound judgments. Before a guardian is appointed, a mentallyimpaired person’s contracts are voidable. A mentally impaired person isresponsible for the fair value of necessaries. If a mentally impaired personhas been declared insane or incompetent by a court action, and aguardian has been appointed to look after his or her affairs, the mentallyimpaired person’s contracts are absolutely valid.Intoxicated PersonsPersons who are intoxicated by alcohol or drugs at the time theyenter a contract are sometimes able to disaffirm those contracts. Theircontracts are treated in much the same way as the contracts of minorsand the mentally impaired. To disaffirm a contract for this reason, aperson must have been so intoxicated at the time of the contracting thathe or she did not understand the purpose, nature, or effect of the transaction.The judge or the jury must decide that question. Intoxicatedpersons, like minors and the mentally impaired, are responsible for thefair value of necessaries.Other Capacity LimitationsOther classes of persons lack the capacity to enter into certain typesof contracts. In a few states, convicts have certain limitations placed ontheir powers to contract. Aliens —people who are living in this countrybut owe their allegiance to another country—may also have limitationsplaced on their capacity to contract. In times of war, foreign-bornpersons who are designated as enemy aliens are denied certain legal capacities.Even in peacetime, some states prevent aliens from enteringinto certain types of contracts.When an international crisis calls for severe measures, the governmentmay freeze most or all of the assets belonging to a foreign nationon deposit in this country’s financial institutions. This drastic actionlimits the ability of the country owning the frozen assets to make contracts.Following the terrorist attacks of September 11, 2001, and thewars in Afghanistan and Iraq, many foreign assets in this country werefrozen. Some foreign nationals who remained in this country becameenemy aliens, and their capacity to contract was limited.Eat, Drink, andBe Merry?Pang Woo is a salesrepresentative for acarpet retailer. She isresponsible forcorporate accounts andselling to large officebuildings. Whenfinalizing contracts withclients, she likes to takethem out for lunch ordinner and a few drinks.She insists that theyeat, drink, and be merrybefore discussingbusiness. While she,herself, drinks very littlealcohol, she sees to itthat everyone else hasplenty. Only after herclients have had a fewdrinks will she finalize acontract. Are Ms. Woo’sactions ethical? Do theclients have an ethicalresponsibility to avoiddrinking before signinga contract?Chapter 7: Contractual Capacity 157

CHAPTERASSESSMENTSection 7.1 Contractual Capacity● A person who has not yet reached the age oflegal adulthood, known as the age of majority, isconsidered a minor. A person under the age of18 years is considered a minor. In most states,however, the age of majority does not entitle aperson to legally purchase alcohol. A person’sminority ends when he or she reaches the daybefore his or her 18th birthday. The reason forthis policy is that the law does not considerfractions of a day. As a result, on a person’s 18thbirthday, that person is considered 18 years and 1day old.● The law gives minors the right to disaffirm theircontracts. To disaffirm a contract means to showthe intent not to live up to the contract by astatement or some act. This rule protects minorsfrom unscrupulous adults who might try toinduce minors to enter unfair agreements bypreying on the lack of experience and knowledgethat often accompanies youth. The legal policyalso frees minors from the consequences of poordecisions. The law is not intended, however, togive minors the right to take advantage of peopleby using this privilege. Emancipated minors, orminors who are no longer under the control oftheir parents, are fully responsible for theircontracts. However, many merchants are stillreluctant to deal with such minors because themerchants assume the shield of minority stillprotects them.● Minors have broad rights to disaffirm contracts,and they may do so even if they damage ordestroy the item they purchased under thecontract. However, there are some limitations.After the contract is disaffirmed, the minor mustreturn the purchased item. The contract also must●●be disaffirmed in its entirety. A minor may notaffirm parts of a contract that are favorable anddisaffirm the unfavorable parts. Minors are alsoresponsible for the fair value of necessaries,which include food, clothing, shelter, and medicalcare. A minor who claims to be over the age ofmajority has committed fraud, and he or she canbe sued in some states.A person may ratify or approve contracts that heor she made as a minor when he or she reachesthe age of majority. Ratification may be accomplishedorally, in writing, or by actions. Manydifferent types of actions can ratify a contractmade in minority. For example, using or sellingitems obtained by contract after reaching the ageof majority has the effect of ratifying the contract.Making an installment payment on an item orkeeping an item for a reasonable period of timeafter reaching majority is also considered ratification.“Reasonable time” has no exact definitionand varies under different circumstances.The right to disaffirm contracts is also given tomentally impaired people and to people who areintoxicated at the time they enter a contract.Intoxicated persons can disaffirm contracts ifthey can prove that their state of mind impairedthem to the extent that they were not able tounderstand the purpose, nature, or effect of thetransaction. Moreover, certain limits are alsoplaced on an alien’s ability to contract. An alienis a person who lives in this country but owes hisor her allegiance to another country. In times ofwar, foreign-born persons who are designated asenemy aliens are denied certain legal capacities.Even in peacetime, some states prevent aliensfrom entering into certain types of contracts.158 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.capacityratifymajorityminorminorityabandonedemancipatednecessariesguardianaliens1. Write a one- to two-page report explaining contractual capacity toanother classmate. Use the key terms listed above in your report.2. Ask a classmate to critique your report, making sure it was easy toread and understand.3. Use your classmate’s suggestions to improve your report.4. Share your revised report with your classmates.5. As a class, vote to select the best report.6. Post the winning report somewhere in the class.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 7:Contractual Capacity—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.7. What are the two age-related milestones that many states have?8. Why does the law shield minors in the making of their contracts?9. May a minor affirm and disaffirm parts of the same contract? Explain your answer.10. May a minor avoid a contract with another minor? Why or why not?11. Are intoxicated persons always able to disaffirm their contracts? Explain your answer.12. What is an emancipated minor?13. What are necessaries?14. What is capacity?15. When are the contracts of a mentally impaired person considered valid?Chapter 7: Contractual Capacity 159

CHAPTERASSESSMENTAcquiring and Evaluating InformationResearch the special statutory rules in yourstate regarding the capacity of minors to enterinto contracts. Find out whether a minor canenter into a contract:16. For car and/or life insurance.17. When it involves his or her own business.18. If married.19. To rent an apartment.Money MattersIt seems parents have many moreresponsibilities than rights when it comes totheir minor children. According to the law,parents are obligated to provide their minorchildren with all of the necessities of life.However, parents have the legal right to themoney their children earn.Debate20. Why do you think parents have this right?Do you think it’s fair? Explain your answer.For the following cases, give your decision andstate a legal principle that applies.21. Tom Molinero, 17, buys a car from ClydeTait for $1,500. Two weeks later, while stilla minor, Molinero is involved in anaccident that occurs because Tait neglectedto replace a faulty wire. The car is damagedbeyond repair. Molinero wants Tait toreturn the $1,500. Is Molinero entitled tothe money? Explain your answer.22. Max Fisher, 16, bought a used personalcomputer from an electronics store. Thebox the computer came in indicated that itcarried a 90-day manufacturer’s limitedwarranty. The computer stopped workingtwo months later. The clerk in theelectronics store tells Fisher that thewarranty applied only when the machinewas new and suggests that Fisher return itto the factory for repair. Is another remedyavailable to Fisher?23. Dana Niebuhr, 17, buys an electric guitar.She tells the owner of the shop that she is 19.Two months later she returns the guitarand demands the return of her money. Theowner refuses to comply. Can Niebuhravoid the contract? Explain your answer.24. Joel Petro, 17, operates a VCR repair business.He finds that he has ordered moresupplies for his business than he needs, sohe contacts one of his suppliers to cancelhis contract. The supplier refuses to cancelthe contract. What might Petro do?25. Two months before reaching the age ofmajority, Helen Smythe buys a motorcyclefor $3,000. Three years later, she seeks tovoid the contract, claiming that she was aminor at the time of the purchase. Is shelegally bound by the contract? Explainyour answer.26. Tina Kepler makes an agreement to purchasecertain clothes from a local departmentstore. Kepler has been declaredlegally insane, and a guardian has beenappointed to take care of her. Is the agreementbinding on Kepler? Why or why not?27. Marty Eng, 16, sells his car to Joseph Lutz,19, for $1,500. Two days later, Martychanges his mind. He asks Joseph to returnhis car and offers to refund the $1,500.Joseph refuses. Does Joseph have the legalright to do so? Explain your answer.160 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.28. Legal AgeLeo’s left hand was seriously injured in a job-related accident at 12:45 P.M. on August 3, 1977.Under the Workers’ Compensation law, minors are entitled to triple damages. Leo was born onAugust 3, 1959, at 3:56 P.M. The age of majority is 18. Is Leo entitled to triple damages? Explainyour answer.Leo v. Maro Display, 412 A.2d 221 (RI).29. Rescinding a SaleBefore reaching the age of 18, Brenda Sanchez sold property to Norman and Mary AnnSanchez for $3,000. Upon reaching the age of 21, Brenda signed an official acknowledgmentthat she had sold the property to Norman and Mary Ann. Brenda then attempted to rescindthe sale on the grounds that she was a minor at the time of the sale. May she do so? Why orwhy not?Sanchez v. Sanchez, 464 So.2d 1009 (LA).Doing Business OnlineFreda, a student in your business law class,wonders if minors can legally enter into contractsover the Internet. She is interested in purchasingitems such as books, CDs, and plane tickets, andhas also considered bidding for some itemsavailable on a popular online auction site. Sheasks for your help.ConnectUsing a variety of search engines:30. Help Freda answer her question.31. Explain the issues that surround minors,e-commerce, and the Internet.32. Predict Why do you think minors areallowed to rescind or void the contractsthey make?33. Connect Have you, as a minor, enteredinto a contract? Did you void it or carryout the terms of the contract?34. Question Why do you think minors, thementally impaired, and intoxicated personsare held responsible for necessaries in acontract situation?35. Respond Do you think it is fair that enemyaliens are prevented from entering certaintypes of contracts?Chapter 7: Contractual Capacity 161

CHAPTERConsiderationUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 8: Consideration—Chapter Overviews to preview thechapter information.

The Opening SceneIt’s Saturday afternoon, the same day Jake returnedhis “new” car and disaffirmed his contract with Buya-Heap.Alena, Viktor, Jake, and Arkadi are havinglunch at a local restaurant.To Pay or Not to Pay?JAKE: Well, I sure showed Barenblatt. I am so gladthat I got out of that mess. I saved myself a lotof money.ALENA: You showed him? If it weren’t for Arkadi,you’d be stuck with that heap of junk. You wouldnever have thought to disaffirm your contract withBuy-a-Heap. In fact, I think that you should payArkadi for helping you.JAKE: What Arkadi did was a favor. You mustbe joking.ALENA: Why do you think I’m joking? You know thatI never joke.JAKE: No, that’s true. You don’t have a sense ofhumor, do you?ALENA: You are so funny. So, are you going to payArkadi or not? You need to decide soon.ARKADI: Hey, Allie, it’s okay. I don’t want any money.I just wanted to help Jake.JAKE: See! Some people actually feel good whenthey help others.ALENA: (Ignoring Jake.) But if it weren’t for you,Arkadi, Jake wouldn’t have known that trick aboutbeing a minor and being able to disaffirm hiscontracts. You saved Jake a lot of money.ARKADI: Thanks, Alena, but it wasn’t some secrettrick. It’s the law.ALENA: Well, sure it’s the law and all, but it’s alsoa pretty good trick. You deserve to make somemoney for your knowledge. You didn’t haveto help.JAKE: Okay. Okay. I’ll pay him something onMonday.(Jessica, the waitress, approaches the group andplaces the check on the table. Viktor picks up thecheck and reaches for his wallet. His facialexpression changes as he looks at the bill.)VIKTOR: Hey! This bill is too much! You added a tipon our bill. You can’t just add a tip on your own.That’s not fair!JESSICA: Sure I can. Read the menu next time. It saysparties of four or more get the tip added in,automatically. You’re a group of four, so I get toadd the tip. (She turns and leaves.)VIKTOR: That’s stupid. We should be able to decideour tip. I’m not paying this.ALENA: You better pay, kid, if you want to go the ballgame with Jake tomorrow.JAKE: Hey, you can’t do that. You promised to takeboth of us!VIKTOR: Yeah! Jake and I have been lookingforward to going all week.ALENA: Promises to little brothers aren’t binding,right Arkadi?ARKADI: Right, Alena.1. When is a contract sealed with consideration?2. Does the law permit past actions to serve asconsideration in a new contract?3. Is there any recourse in the law when peopledisagree on the amount owed in a contractualsituation?4. Are promises to fulfill social engagementssupported by consideration?Chapter 8: Consideration 163

Considerationl How to explain thelegal concept ofconsiderationl How to explain thetypes of considerationl How to identify certainproblems regardingconsiderationl How to identify theprinciples that apply toconsideration ineveryday lifeBy understanding theconcept of consideration,you will be able to avoidproblems that frequentlyresult when agreementslack this importantcontractual element.l gratuitousl considerationl benefitl detrimentl forbearancel bargained-forexchangel unconscionablel releasel accord and satisfactionRequirements of ConsiderationThe law has always refused to enforce most gratuitous , or free,agreements. The terms of an agreement must be bargained for if they areto be binding on the parties. An agreement is bargained for when eachside is compelled to surrender something of value in exchange for somethingelse of value. This exchange, or the promise to exchange things ofvalue, is what binds the parties to each other in a contractual relationship.This binding element is known as consideration.Consideration distinguishes a legally binding agreement from othertypes of agreements. Many agreements are not legally binding becausethey lack consideration. For instance, social agreements that contain anoffer and an acceptance, such as an agreement to accompany someoneto the homecoming dance, are not contracts. Because of the centralimportance of consideration to all contractual relationships, it is crucialto understand the nature of consideration.The Legal Concept of ConsiderationConsideration is the exchange of benefits and detriments by partiesto an agreement. A benefit is something that a party was not previouslyentitled to receive. A detriment is any loss suffered. There arethree types of consideration. The first type of consideration involvesgiving up or promising to give up something that you have the legalright to keep. The second type involves doing something or promisingto do something that you have the legal right not to do. The final typeof consideration, which is known as forbearance , is not doing somethingthat you have the legal right to do.The Characteristics of ConsiderationWhen we began our study of contracts, we noted that all contractshave certain characteristics. The same is true of consideration. Considerationhas three key characteristics:l Promises must involve the concept of a bargained-for exchange .l Something of value must be involved.l The benefits and detriments promised must be legal.164 Unit 2: Entering Into ContractsBargained-for Exchange The law supports agreements that havebeen bargained for. An agreement involves a bargained-for exchange

when a promise is made in return for another promise, an act, or a promisenot to act. Bargaining requires that a party will be injured if the otherparty does not keep his or her promise. Of course, the opposite is alsotrue. Both parties gain something when the promises are kept and theexchange is made. Figure 8.1 illustrates an example of a common typeof agreement that involves consideration.Figure 8.1Benefit: The right toreceive the money.PromisorI'll sell youmy car for$3,500.PromiseeLegal Detriment: The promiseto give up the car.ConsiderationLegal Detriment: The promiseto give up the $3,500.PromiseeI'll buy itfor that price.Joseph Duffey1122 Reeling WayFlatwood, MOPromisorBenefit: The right toreceive the carGestures ofKindnessMichael Baird’s carwould not start. He wasstuck in the parkinglot of Turner Field at11:00 P.M. with a deadbattery. As Rich andMarg Spratling droveby, they offered tohelp by jump-startingMichael’s car. The jumpstartworked, and theengine of Michael’s carcame to life. As Richwas disconnecting thejumper cables, Michaelasked for their address.He wanted to sendthem $25 for theirtrouble. Is Michaellegally or ethicallyobligated to sendthe money?CONSIDERATIONConsideration is an exchange of benefits and detriments by theparties to an agreement. Is consideration necessary to make acontract legally binding?Example 1. Abha agreed to let Ulick use her snowboard for theweekend. There was no understanding that Ulick would pay Abhafor using the snowboard. On Friday afternoon, Abha told Ulickthat she would not lend her snowboard to him. Although it isunfair for Abha to change her mind, the agreement contained nobargained-for promise from Ulick in exchange for using thesnowboard. As a result, there was no contract.Something of Value The law has no specific value requirements onconsideration. Consequently, a promise to help a friend clean her roomcan be considered something of value promised. In addition, the valueof the goods or services involved in a contract do not have to be theChapter 8: Consideration 165

GiftsA gift is somethingthat is given freelywithout consideration.Gifts can come in theform of money, time, orvaluable items such asclothes, books, orsupplies. Giving gifts isa wonderful wayto enrich the lives ofothers. What kindof gift do you giveregularly?Get InvolvedGive the gift of shelter.Contact organizationslike Habitat forHumanity, which buildshomes for low-incomefamilies, and find outhow you can getinvolved.same as the market value of those goods or services. All that matters isthat the parties agreed freely on the value and the price. Most of thetime, the courts will not even consider whether the value of the considerationis adequate. The reason is that the courts permit individualsto devise their own agreements. The courts are merely concerned withenforcing these agreements. However, there is one exception to this rule.There are times when the courts believe that the consideration in acontract is completely out of line. In such a situation, a contract isdeemed unconscionable . This situation usually occurs when a greatinequality in bargaining power exists between the parties, and the partywith all or most of the power takes advantage of the other party. Thecourt may do one of three things to rectify an unconscionable contract.It may refuse to enforce the contract. It may enforce the contract minusthe unconscionable clause, or it may limit the application of the unconscionableclause.Legality of Consideration The courts require that the considerationinvolved in an agreement be legal. If the consideration is illegal,the contract is invalid. As a result of this requirement, a party cannotagree to do something that he or she does not have the legal right to do.Nor can a party agree to give up something that he or she does not legallyown. In addition, a party cannot promise to stop doing something thatis illegal.Types of ConsiderationGenerally speaking, money, property, and services all qualify asvalid consideration. Other special types of consideration includepromises not to sue and charitable pledges.TYPES OFCONSIDERATIONMost of the time, considerationtakes the formof money or credit.What other forms ofconsideration canyou identify?166 Unit 2: Entering Into Contracts

Promising Not to CompeteEmployers in businesses that involve specialized skills will sometimes askemployees to sign contracts not to compete. A non-compete contract relies on apromise by the employee to refrain from working for a direct competitor for acertain period of time after the employee leaves the company. Non-competecontracts have obvious advantages for the employer. However, they can alsopresent severe disadvantages for an employee, especially if an employeeworks in an area with limited work opportunities.Courts will not uphold non-compete contracts if they place unreasonableburdens on a person’s right to earn a living. Such clauses may be foundunreasonable if they last for too long or cover too wide a geographic area.Nor will a non-compete contract be upheld if the type of business activity that itcovers is too broad.When asked to sign to a contract not to compete, it is wise to negotiate theterms so that finding employment after leaving the company is not too difficult.Negotiate Can you think of some negotiating strategies that an employee coulduse to lessen the burden of a non-compete contract?Money as ConsiderationUsually, one party will offer money in exchange for another party’spromise or performance. Unless price limits have been placed on certaintransactions by administrative regulations, legislative fiat, or executiveruling, the parties are free to exchange any amount of money that theynegotiate. In the past, the price of such things as rent, fuel, oil, andnatural gas have been controlled by the government. Similarly, employersmust follow certain pricing regulations set by the government,such as the minimum wage rate established by the federal Fair LaborStandards Act.Property and Services as ConsiderationBefore money was accepted as a medium of exchange, it was commonto use property and services as consideration. Some parties stillprefer to engage in barter agreements that involve goods and servicesrather than money. For example, a promise by one comic book collectorto another collector to exchange an issue of The Uncanny X-Men ® for anissue of The Fantastic Four ® would represent a valid agreement.Chapter 8: Consideration 167

Common law judgesrarely entertainarguments about theadequacy of consideration.They only makeexceptions to thisstandard when theyencounter a situationthat they believe isunconscionable. Oneexception is the case ofSchnell v. Nell, an 1861agreement in which aman promised to pay$600 in return for theloan of one penny.A Promise Not to SueIf one party has the right to sue another party but gives up that rightin exchange for something of value, the court will generally uphold theexchange as valid consideration. A promise by one party not to sueanother party is a clear example of forbearance. Pending lawsuits arefrequently settled in this manner.Example 2. Abigail was eating a tuna steak for lunch at Martini’sEatery when she began to suffer terrible stomach pains. She wasrushed to a local hospital. In the emergency room, she was diagnosedwith food poisoning. The type of food poisoning that shehad could only have resulted from the improper refrigeration ofthe tuna that she had for lunch. Abigail elected to sue Martini’s,alleging the restaurant was negligent in not properly refrigeratingthe tuna. Martini’s offered her $5,000 if she would drop her lawsuit.Abigail agreed. The thing of value that Abigail transferredto Martini’s was her right to complete her lawsuit.In Example 2, after Abigail accepted the offer and agreed not to sueMartini’s, her right to sue was terminated, at least on the groundsdescribed in the agreement. The agreement she would be asked to signis called a release . Often, agreements not to sue are negotiated evenafter a lawsuit has started. In fact, such agreements can even be negotiatedin the middle of a trial.PROMISES NOT TO SUEOften an insurancecompany will want anindividual to sign a releasepromising not to sue thecompany in exchange fora monetary settlement.Is a promise not to sue validif the parties later discoverthat the party promising notto sue really had no legalgrounds to sue in the firstplace?168 Unit 2: Entering Into Contracts

CHARITABLE PLEDGESPledges to charities forspecific projects areenforceable when theproject begins. Why doesthe law enforce charitablepledges, even whena specific project is notinvolved?Charitable PledgesCharitable organizations and nonprofit institutions often dependupon contributions. This dependency has led the court to enforce charitablepledges just as if they were contracts. If a specific project isinvolved with a pledge, the charity must carry out its side of the deal bycompleting the project. In such a situation, the pledges would be consideredunilateral agreements.Example 3. Father Olaf Laubacher, pastor of St. Carmela’sCatholic Church, announced that the parish was beginning a campaignto raise funds for an addition to the church’s parking lot.Parishioners at St. Carmela’s pledged more than $12,000. Relyingon these pledges, St. Carmela’s began work on the parking lot.Each pledge became an enforceable agreement at that point, nomatter how small.Some charities use pledges for their general operation and maintenance,not for a specific project.Problems With ConsiderationWhen parties disagree about the amount of money that the debtorowes the creditor, a problem has arisen over the consideration involvedin the contract. The resolution of this kind of problem depends uponwhether the transaction involves a genuine dispute as to the amount ofmoney owed.Chapter 8: Consideration 169

Disputed AmountsIf the parties to a contract cannot agree as to the actual amount owed,that amount is said to be in dispute. A dispute can be settled by accordand satisfaction if the creditor accepts a payment that is less than theamount due as full payment. The acceptance by the creditor of less thanwhat has been billed to the debtor is accord . The agreed-to settlementas contained in the accord is the satisfaction . The dispute must be real,must occur in good faith, and must not be trivial.Example 4. Claudette and Ludwig Cerny contracted with RobertaStoner for installation of a roof on their cottage. Stoner chargedthe Cernys $50 per hour for a job that lasted 200 hours. TheCernys received a bill for $11,250. When they examined the bill,they saw that Stoner had charged them one extra hour each day forlunch. The Cernys felt that it was unfair to have to pay Stoner toeat lunch. They subtracted $1,250 (25 lunch hours at $50 per hour)and sent Stoner a check for $10,000. On the check they wrote,“In full payment for the installation of the roof at 280 KentonRow, Lakeside, Ohio.” When Stoner cashed the check, sheaccepted the lesser amount that the Cernys offered in good faithand as full payment of the amount in dispute.DISPUTED AMOUNTSCustomers and businesspeople sometimesdisagree over the exactprice of a service afterthe service has beenperformed. In what wayscan such disputes beresolved?170 Unit 2: Entering Into Contracts

Protecting Minors OnlineIn 1996, Congress passed The Communications Decency Act, whichattempted to prohibit knowingly selling or distributing obscene material overthe Internet. The U.S. Supreme Court later ruled that the act was anunconstitutional violation of the First Amendment and struck it down, butCongress persisted. On the ground that “the protection of the physical andpsychological well-being of minors by shielding them from materials that areharmful to them is a compelling governmental interest,” Congress later passedthe Child Online Protection Act of 1998, which prohibits anyone from knowinglyusing the Internet to communicate to minors for commercial purposes anymaterial that is harmful to them.Connect Research the First Amendment and see what protections it offers todifferent kinds of speech. Write a short paper explaining whether differentkinds of speech receive different degrees of Constitutional protection.Undisputed AmountsIf the parties have mutually agreed to a set amount of money in thecontract, then the amount cannot be disputed. The debtor might haveremorse over the amount that he or she has agreed to pay in the contract,but he or she would still owe that amount. This would be true evenif the debtor later discovered that another party was offering the samecontractual arrangements at a lesser amount.Example 5. Irene Georgetown paid the Fairchild Paving Company$9,876 to pave her driveway with concrete. She felt thatFairchild’s rate was a reasonable fee for such a job. Two dayslater, Georgetown saw a booth at the Delaware County Fair andlearned that Greenbrier Cement, Ltd. would do the same job for$7,810. Georgetown sent a check to Fairchild for $7,810, addingthe notation, “In full payment of the asphalt driveway laid at 2300Hamilton Avenue, Marburg, Montana.” Fairchild deposited thecheck and demanded payment of the balance. Georgetown wouldstill be obligated to pay that balance.In Example 5, no good faith dispute over what Georgetown owedto Fairchild existed. Georgetown was just trying to pay less than the feeto which she had already agreed.Chapter 8: Consideration 171

Consideration in Your Everyday LifeAs an essential element of any valid contract, consideration is somethingthat you will encounter regularly. Remembering the following principleswill help you in the agreements that you make in your daily life.l Consideration is the contractual element that distinguishes a legallybinding agreement from all other types of agreements.l For something to amount to consideration, the act performed orpromised must be legal.l To constitute consideration, an act or a promise must bebargained for.l If a person pays a debt in advance, it is something that he orshe is not legally bound to do. Paying in advance would beconsideration for settling the debt for a lesser amount.llllllThe courts enforce charitable pledges as if they were contracts.A promise by one party not to sue another party is generally provenby evidence of a release.Usually, a party will offer money in exchange for another party’spromise or performance.Some people prefer barter agreements that involve goods andservices rather than money.Generally, the courts do not get involved in determining how muchconsideration is enough.Forbearance is a type of consideration that involves promisingnot to do something that you are legally entitled to do.Reviewing What You Learned1. What is consideration?2. What are the types of consideration?3. What problems can arise regardingconsideration?4. What are the principles that apply toconsideration in everyday life?Critical Thinking ActivityIs Enough Really Enough? Why do the courtsusually refuse to get involved in disputes overthe adequacy of consideration?Legal Skills in ActionAccord and Satisfaction Your older sister isabout to be married. She purchased herwedding dress at the Duquesne DepartmentStore. Later, she had the dress altered andadded a special lace trim. Today she saw thesame dress at another store for $245 less thanthe price she paid. When she pays Duquesne,she intends to subtract $245 from the bill. Ina small team setting, discuss whether yoursister is entitled to use accord and satisfactionin this case.172 Unit 2: Entering Into Contracts

Agreements WithoutConsiderationEnforceable AgreementsWithout ConsiderationIn most situations, a contract is invalid if it does not includeconsideration. However, there are some agreements in which therequirement of consideration is eliminated. This is true despite the factthat these agreements may appear to offer the necessary element ofconsideration.Some courts have chosen to eliminate the requirement of considerationin certain kinds of agreements. As is often the case, it is difficultto generalize about such things because states differ in the rules theyapply to promises made in such agreements. Nevertheless, we can discusssome of the most common agreements that fall into this category:promises under seal, promises after discharge in bankruptcy, debtsbarred by the statute of limitations, promises enforced by promissoryestoppel, and options.l How to identifyagreements that areenforceable withoutconsiderationl How to explain thelegal concept ofpromissory estoppell How to identifyagreements that arenot enforceablewithout considerationl How to distinguishbetween pastconsideration andpreexisting dutiesPromises Under SealA seal is a mark or an impression placed on a written contractindicating that the instrument was executed and accepted in a formalmanner. Today, most of the states that still require a seal will permit theseal to be indicated by the addition of the word “seal” or the letters L.S.(locus sigilli, which translates to “place of the seal”) after the signatureof a party.Using a seal in sale of goods contracts is not required by the UCC.However, some states still require the use of a seal in contracts involvingreal property and in certain other contracts specified by law. Becausethe law varies so much from state to state, it’s a good idea toresearch individual state requirements.Promises After Discharge in BankruptcyIt is possible for a person who has had his or her debts dischargedin bankruptcy to decide to pay such debts voluntarily. To prevent abuseby creditors who might pressure debtors into making such promises,Congress reformed the law governing bankruptcy. Court hearings mustnow be held when the reaffirmation of a debt is intended. In theseUnderstanding thedifference betweencontracts that requireconsideration and thosethat do not will enableyou to avoid commonproblems associatedwith consideration orthe lack thereof.l seall promissory estoppell optionl firm offerl illusory promisel past considerationl preexisting dutyChapter 8: Consideration 173

Court ReporterSally Harmon provides a vital legal service, and shedoes it by using a machine invented more than a centuryago. Harmon owns Bredeman & Associates, Inc. and is afreelance court reporter in Jefferson City, Missouri. Courtreporters record what is said during legal proceedings,including depositions and trial. Harmon’s record of depositions and courtroomproceedings can be used as evidence in a trial.Although court reporters appear to be typing, they are actually using astenotype machine, which uses a specialized form of shorthand developed justfor recording legal proceedings.“Stenotype is a fascinating invention,” Harmon says. “It’s phonetic, notalphabetical, so it records speech according to how it sounds. And stenotypeuses its own system for those sounds. So, for instance, the word as is written az.The sound made by the letter D actually is written in stenotype as tk.”Court reporters are highly skilled professionals. “People sometimes say thatcourt reporters will be replaced by computers,” Harmon says. “But even in courtrooms,people can interrupt or talk over each other. Our brains are able to sortthese things out and tune out extraneous noise in a way that computers can’t.”In addition to recording court proceedings, court reporters must alsoproofread their work. Harmon says that for every hour of recording, she performsfour hours of proofing and document preparation.SkillsPersonalityEducationListening, reading, punctuation, language skillsMust like to work alone, detail-oriented, excellent listenerMore than 150 reporter-training programs are offered acrossthe country in schools, community colleges, and universities.For more information on court reporters, visit ubpl.glencoe.com or yourpublic library.hearings, the debtor must be informed of the legal consequences ofassuming the debt. The debtor must also be reminded that reaffirmationof the debt is optional. Under most state laws, no new considerationneeds to be provided in support of this reaffirmation. Instead, thereaffirmation must be supported by contractual intent. A writing is alsorequired by some states.174 Unit 2: Entering Into Contracts

BANKRUPTCY COURTHearings are now neededwhen someone who hasdeclared bankruptcyreaffirms debts that weredischarged under thebankruptcy proceeding.Why does the law nowrequire such hearings?Debts Barred by Statutes of LimitationsA statute of limitations establishes the time frame within which aparty is allowed to bring suit. Different states set different time limitsfor the collection of a debt. Such variations can run from three to tenyears. When the document of indebtedness is under seal, some statesallow more time for collection. No new consideration is needed for adebtor to reaffirm a debt barred by the statute of limitations. The partialpayment of the debt will result in affirmation. After the debtor affirmsthe debt, the creditor is permitted the full term as provided by the statuteof limitations.Promises Enforced by Promissory EstoppelUnder the doctrine of promissory estoppel , a promise may beenforceable without consideration. The word promissory means “containingor consisting of a promise.” The word estoppel means “restrainton a person to prevent him or her from contradicting a previous act.” Thedoctrine is used to prevent injustice when a person changes his or herposition significantly in reliance on another person’s promise, and thepromise is not fulfilled. The court will “estop” the person who made thepromise from claiming that there was no consideration.Figure 8.2 shows that certain conditions must be met before a courtwill apply the principle of promissory estoppel:l The promise must be made to bring about action or forbearance byanother person who gave no consideration.l The party that gave no consideration must have relied upon thepromise and changed his or her position in a significant way.l Injustice can be avoided only by enforcing the promise.Chapter 8: Consideration 175

Figure 8.2The Elements of Promissory Estoppel1. The promise must be made to bring about action or forbearance by anotherperson who gave no consideration.2. The one who gave no consideration must have relied on the promise and changedhis or her position in a significant way.3. Injustice can be avoided only by enforcing the agreement.THE ELEMENTS OF PROMISSORY ESTOPPELPromissory estoppel was created to prevent injustice.Which of the three elements of promissory estoppelwould be the most difficult to prove?176 Unit 2: Entering Into ContractsExample 6. Zeke knows that his niece, Chalese, wants to go toart school but has little money to do so. When she gets into theschool of her choice, he promises to give her $50,000 to help herpay off her loans after she graduates. Chalese is very excitedabout her Uncle’s promise and takes action immediately. Shequits her job, borrows money, accumulates a great deal of debt,and eventually graduates from art school. Zeke then notifiesChalese that he has changed his mind. Chalese is devastated. Toprevent injustice, the court may stop Zeke from claiming thatChalese gave no consideration for his promise.OptionSometimes an offeree will give consideration to an offeror inexchange for a promise from the offeror to keep an offer open for aspecified period of time. This is known as an option . Under the UCC,an exception exists to the rule requiring consideration for an option.When a merchant makes a written offer stating the period of time duringwhich an offer will remain open, consideration is not needed. The offer,which is called a firm offer , or an irrevocable offer, must be signedby the offeror. The time permitted for acceptance cannot exceedthree months.Unenforceable AgreementsWithout ConsiderationThe promises previously described are exceptions to the general rulethat consideration must support an enforceable contract. The exceptionsare allowed by state statute or because the courts, in the interest of fairnessor justice, find it inappropriate to require consideration.

There are certain promises, however, that the courts will not enforcebecause they lack even the most basic qualities of valid consideration.Included in this category are illusory promises, promises of future gifts,promises of legacies, promises based on past consideration, promisesbased on preexisting duties, and agreements to attend social engagements.Illusory PromisesFor a binding contract to be formed, both parties must be under anobligation to do something. If this is not the case, then neither party isbound to do anything. Some contracts are illusory, meaning they appearat first glance to be contracts but on further scrutiny are revealed to behollow. Such agreements are said to involve illusory promises .Example 7. Sun-Hi and Badr reached an agreement. Sun-Hiagreed to sell Bahr any apples that he might need over a threemonthperiod. Sun-Hi and Badr developed a fixed price for allapples that might be sold during this time frame. However, becauseBadr might not order any apples within the next threemonths, he is not bound to do anything. The contract is illusory.Future GiftsIf a person promises to bestow a gift at some future time or in a will,that promise is not enforceable if no consideration is given for the promise.This rule would also include promises to provide free services or to lendsomething without asking or expecting any benefit in return.Language ArtsLatin was the language ofancient Rome and theneighboring territory ofLatium. As the RomanEmpire grew, Latin spreadthroughout Europe andother parts of theMediterranean.Many words used in thelegal profession are derivedfrom Latin. L.S., orlocus sigilli, which means“the place of the seal,” isstill used in some statesto execute a contract.Research ActivityResearch five legal termsthat have their roots inLatin. Supply the Latinroots from which thewords originated, andexplain how they arecurrently used.Past ConsiderationThe act of giving or exchanging benefits and detriments must occurwhen a contract is made. Past consideration , or consideration thattook place in the past or that is given for something that has alreadybeen done, is not regarded as legal by the courts.Example 8. In The Opening Scene, Jake promises to give Arkadia sum of money for his legal advice. However, Arkadi has alreadyadvised Jake that he does not expect payment. As a result, Jakewould have no legal obligation to pay Arkadi. Jake’s promise isthe result of Arkadi’s past performance. No consideration passedfrom Arkadi to Jake for the money. In addition, note that Jakehas actually offered to give Arkadi a gift. A promise of a gift cannotbe enforced.Preexisting DutiesIf a person is already under a legal obligation to do something, apromise to do that same thing is not consideration. These obligationsare called preexisting duties .Chapter 8: Consideration 177

PREEXISTING DUTIESPreexisting duties cannot bemade considerationin a new contract. Why doesthe law prevent preexistingduties from beingconsideration in a newcontract?178 Unit 2: Entering Into ContractsExample 9. A county commissioner offered a reward to anyonewho gave information that led to the arrest and conviction of aperson who had been vandalizing subway stations in the county.The commissioner also hired extra security officers to guardsubway stations in the evenings. The night security guard at oneof the stations caught the person who had been vandalizing thestations. She then sought the reward. The court held that she wasnot entitled to the reward because she was under a legal duty tocapture the alleged vandal. Consequently, she had not furnishedconsideration to the county for the promise to pay the reward.Police officers, fire fighters, and other public officials, who mightpromise special services in exchange for monetary or other rewards fordoing what is actually their job, would also be affected by this rule. Suppose,for example, that a police officer promises to provide a homeownerwith added protection against crime by making additional rounds of theneighborhood in return for some money. This arrangement cannot beenforced by either party because it is an empty promise. An officer isalready required by law to provide these services.Promise to Attend a Social EngagementAll contracts consist of agreements, but not all agreements consistof contracts. An agreement to meet a friend for lunch or another socialengagement would not be a legally binding agreement because the friendhas given nothing in exchange for the promise. As a result, that agreementlacks consideration. See Figure 8.3 for a listing of the legal statusof various agreements without consideration.

Figure 8.3AgreementPromises under sealPromises after discharge inbankruptcyPromise to pay debts barredby statute of limitationsPromises enforced bypromissory estoppelOptionIllusory promisesPromise of a giftPast considerationsPreexisting dutiesAgreements without ConsiderationLegal StatusEnforceable in some states for contracts not involving goods; unenforceableunder the UCC for contracts involving goodsEnforceable in most statesEnforceableEnforceable only if offeror knew that offeree would rely on the promise andofferee places himself or herself in a different and difficult positionas a result of that promiseEnforceable under the UCC if made by a merchant, in writing, and stating thetime period over which the offer would remain openUnenforceableUnenforceableUnenforceableUnenforceable as a consideration in a new contractAGREEMENTS WITHOUT CONSIDERATIONThe law recognizes many agreements without consideration.However, few of these agreements are enforceable.Which of the unenforceable agreements do you believeshould be enforceable?Reviewing What You Learned1. What agreements are enforceable withoutconsideration?2. What is the legal doctrine of promissoryestoppel?3. What agreements are not enforceablewithout consideration?4. What is the difference between pastconsideration and preexisting duties?Critical Thinking ActivityPublic Policy Why does the law support thedoctrine of promissory estoppel?Legal Skills in ActionPromissory EstoppelYour cousin, Geri, hasjust called you from California. She recentlyquit her job, broke the lease on her apartment,emptied her bank account to buy a used car, andmoved to California because a movie producerpromised her a job. Now in California, sherealizes that the job offer was an empty promise.Write a letter to the producer in which youexplain how the doctrine of promissory estoppelapplies in this situation.Chapter 8: Consideration 179

CHAPTERASSESSMENTSection 8.1 Consideration● Consideration is the exchange of benefits anddetriments between parties to an agreement. Abenefit is something that a party was not previouslyentitled to receive; a detriment is a losssuffered. Consideration has three key characteristics:(1) promises must involve the concept of abargained-for exchange; (2) something of valuemust be involved; and (3) the benefits anddetriments promised must be legal. An agreementinvolves a bargained-for exchange when apromise is made in return for another promise,an act, or a promise not to act. The law has nospecific value requirements on consideration.Therefore, a promise to help a friend clean herroom can be considered something of valuepromised. In regard to legality, a party cannotagree to give up something that he or she doesnot legally own. Nor can a party promise to stopdoing something that is illegal as consideration.● There are three types of consideration: (1) yougive something that you have the legal right tokeep; (2) you do something that you have thelegal right not to do; and (3) you refrain fromdoing something that you have the legal right todo. Money, property, services, promises not tosue, and charitable pledges are some commonforms of consideration.● There are instances in which a problem occursregarding consideration. A genuine dispute overthe amount of money owed could occur.Additionally, a party with all of the power mighttake advantage of the other party, in which casethe resultant contract is deemed void.● The following are some principles pertaining toconsideration: (1) a party will offer money,goods, or services in exchange for anotherparty’s promise or performance; (2) generally,the courts do not get involved in determininghow much consideration is enough; (3) forsomething to amount to consideration, the actperformed or promised must be legal; (4) if aperson pays a debt in advance, it is deemed to beconsideration; and (5) because many charitiesdepend upon contributions, the courts enforcecharitable pledges as if they were contracts.Section 8.2 Agreements withoutConsideration● Agreements enforceable without considerationinclude promises under seal, promises afterdischarge in bankruptcy, debts barred by thestatute of limitations, promises enforced bypromissory estoppel, and options.● The doctrine of promissory estoppel involves aperson promising to do something in exchangefor your action or forebearance, and your relyingon that promise and changing your position in asignificant way to your detriment. In these cases,a sense of fairness will compel a court to enforcethe promise, although there is no consideration.This enforcement is based on the doctrine ofpromissory estoppel.● Agreements that are unenforceable withoutconsideration include illusory promises,promises of future gifts, promises of legacies,promises based on past consideration, promisesbased on preexisting duties, and socialengagements.● Past consideration is consideration given for apromise or an act that took place in the past, andis not regarded as sufficient by the courts. If aperson is already under a legal obligation to dosomething, a promise to do that same thing iscalled a preexisting duty and is also not deemedsufficient consideration.180 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.gratuitousconsiderationbenefitdetrimentfirm offeraccord and satisfactionpast considerationsealpromissory estoppelforbearanceunconscionablerelease1. Write a brief play in which two or more of the characters areinvolved in a contract negotiation. Make sure that the dialogue youcreate uses each of the key terms.2. Select members of your class to play each of the character roles inyour play. Practice your lines together, and make sure that you useeach of the key terms correctly.3. Present your play to the class. When you are finished, have classmembers in the audience critique your performance. Next, haveyour classmates provide definitions of each of the key terms basedon the play that you present.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 8:Consideration—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. Name the three promises that, when made, constitute a bargained-for exchange.5. What does the term unconscionable mean as it pertains to consideration? Describethe circumstances that frequently exist when an unconscionable agreement arises.6. How does the court view charitable pledges? Explain your answer.7. What is an illusory promise? Provide an example.8. Can a preexisting duty be consideration? Why or why not?9. What is a release?10. What is an option?11. What is accord and satisfaction?Chapter 8: Consideration 181

CHAPTERASSESSMENTAcquiring and Evaluating InformationContact a local attorney or use the Internet todetermine if your state requires the use of a seal.If so, write a paragraph about the following:12. What type of contracts require a seal.13. What a seal looks like, and how it mustbe applied.If your state does not require the use of aseal, research a state that does to determinethe answers.Repaying a DebtSeven years ago, Abdul borrowed $10,000from his friend Tony to open a business. Afteronly one year, Abdul sold his business and fledto another state. Although Tony tried severaltimes to collect his $10,000 from Abdul, he hasnot been successful.Debate14. Do you believe that Abdul owes Tony the$10,000 he borrowed to start his business?Under what circumstances might youranswer change?15. What factors do you consider mostimportant in evaluating this scenario?16. What steps can Tony take to ensure thereturn of his money?17. What are some of the advantages anddisadvantages to borrowing money fromfamily or friends?For the following cases, give your decision andstate a legal principle that applies.18. Carrie Johnson agreed to let Richard Frankuse her truck for a move from Bellville toCenterberg. There was no understandingthat Frank would pay Johnson for using thetruck. Johnson later refused to let Frankuse the truck. Is there a breach of contractin this case? Why or why not?19. Horace Kushner was injured in an accidentwith Vic Ling. Kushner promises not to sueif Ling promises to pay $1,000. Ling agrees.Is Ling legally bound to his promise?20. Tammy Carson’s car runs out of gas. NedGrover, driving by, sees Carson and offersto tow her car to the next service station.Carson accepts the offer. After they reachthe service station, Carson tells Grover shewill send him a check for $25 for hiskindness. Is she legally bound to do so?Why or why not?21. Lisa Lowe takes her car to the BrowningGarage and agrees to pay $75 for a tuneup.Before the job is completed, Lowe tellsthe owner, “I’ll pay you $10 extra if you doa good job.” Is Lowe bound to her promise?Explain your answer.22. Carmen Sanchez’s debt to Bernie Martin isdue on June 1. On May 20, Martin signs awritten promise to give Sanchez an additionaltwo months to pay the debt. Is thispromise binding? Why or why not?23. Demi Grayson works for Viorst Caterers.Grayson’s doctor has recommended thatshe have surgery. If she has the surgery, shewill be unable to work for a month. Theowner and president of Viorst says, “Don’tworry, your job here is safe. When you’rewell enough, come back.” When Graysonreturns one month later, she is fired fortaking so much time off. Explain the legaltheory that might give Grayson a cause ofaction against Viorst.182 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.24. A Promise Not to SueKoedding engaged N.B. West Contracting Co. to repave his parking lot. After the job wascompleted, Koedding was not satisfied with the quality of the work and threatened to sue. Westagreed to reseal the lot and to guarantee the job for two years if Koedding agreed not to sue.Koedding was still not satisfied after the second paving was completed. Will the agreement notto sue stop Koedding’s lawsuit? Why or why not?Koedding v. N.B. West Contracting Co., Inc., 596 S.W.2d 744 (MO).25. Preexisting DutyVignola Furniture Company sold Trisko a loveseat. Unfortunately, the loveseat was damagedwhen it arrived at Trisko’s home. The furniture company agreed to repair the loveseat inexchange for Trisko’s promise not to sue. Trisko agreed but later sued anyway, arguing thatVignola had a preexisting duty to deliver an undamaged loveseat. This preexisting duty couldnot be consideration in the new agreement. Is Trisko correct? Why or why not?Trisko v. Vignola Furniture Company, 299 N.E.2d 421 (IL).Cyber Contract?Tara uses the Internet all the time. She makespurchases, downloads music and software, and usesit for finding information at a moment’s notice.Recently, Tara has been wondering if she has beenentering into a contract every time she clicks “IAccept.”ConnectUsing a variety of search engines:26. Locate a Web site that has an online agreementwhere the user must click “I Accept” to validatethe transaction.27. Print the agreement, and bring it to class.28. Generate a discussion about whether theagreements downloaded would be consideredvalid contracts.29. Predict Why is consideration the centralfocus of most contractual relationships?30. Connect Can you think of an example ofconsideration that pertains to youreveryday life?31. Question Why do you think the UniformCommercial Code eliminated the use ofthe seal? In what ways might using a sealbe impractical?32. Respond Do you think a police officershould receive the reward money forlocating a missing person? Why or whynot? Does your answer depend on whetherthe officer is on or off duty?Chapter 8: Consideration 183

CHAPTERLegalityUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal Law Website at ubpl.glencoe.com and click onChapter 9: Legality—Chapter Overviewsto preview the chapter information.

The Opening SceneIt’s Sunday afternoon. Viktor, Alena, Hana, and Emilare at the local shopping mall.A Trip to the MallJAKE: I’m so glad that I got my money back from Buya-Heap.I just saw the best stereo system. I think I’mgoing to buy it. This time, though, I’m going to doa little research before I make a major purchase.I don’t want to make another big mistake.ALENA: We’re so happy that we won’t have to bailyou out of another disaster, Jake. Then again, Iguess I shouldn’t count on that yet. I’m sure you’llfind a way to mess up.JAKE: Thanks for the vote of confidence, Alena. Iknew you wouldn’t miss out on an opportunity tocut on me.VIKTOR: Would you guys stop arguing. It’s gettingreally boring—just like this mall. I’m ready to moveon. I’m sick of shopping. I don’t know how youguys can stand to waste your day at the mall. It’sgorgeous outside.ALENA: You don’t have any money, Viktor. That’s whyyou have no interest in shopping. If you’d save fora little bit, you’d actually be able to make apurchase.VIKTOR: I do need to start saving my money. Dad’sgoing to be really mad at me if I ask to borrowmoney again.JAKE: I’m ready to do something else, too. Let’s headdown to the food court. I could go for a burger.ALENA: You can’t. It’s Sunday.JAKE: What does Sunday have to do with anything?ALENA: The food court is closed on Sunday.JAKE: That’s stupid. Why would the food court beclosed on Sunday?ALENA: It’s the law.JAKE: You’re making that up. See you later.EMIL: Is the food court really closed on Sunday?ALENA: Don’t be dumb. Of course not. It used to be,back when it was illegal to have any stores openon Sunday. But if that were true now, then thewhole mall would be closed.EMIL: Why were stores closed on Sunday?ALENA: How should I know?HANA: The stores were closed on Sunday so thatpeople could stay home and watch football.EMIL: You don’t know what you’re talking about.HANA: Wanna bet?ALENA: Betting is illegal.HANA: No it’s not! You’re lying.ALENA: Lying is also illegal.EMIL: That wouldn’t stop you.ALENA: Sure it would. I’d never lie, and I’d never doanything illegal.EMIL: Oh, yes you would.ALENA: Wanna bet?1. What makes a contract illegal?2. Why were Sunday contracts made illegal?3. Is a gambling contract valid and enforceable?4. What consequences are associated with makingillegal contracts?Chapter 9: Legality 185

l How to explain whatmakes a contractillegall How to identify theconsequences ofillegality in relation tocontract lawl How to identifycontracts that areillegal by statutory lawl How to identifydifferent types oflicensesBy understanding theconcept of illegality incontract law, you will beable to avoid problemsthat might arise whenyou consider entering acontract.l conspiracyl interestl usuryl lotteryl licenseAgreements thatViolate StatutesThe Nature and Consequencesof IllegalityThe last of the six elements that make up a valid contract is theelement of legality. As we’ve seen, a contract must involve many elements:a valid offer, an effective acceptance, genuine agreement, competentparties, and valid consideration. Even if a contract contains all ofthese elements, however, it may still be invalid if it lacks a legal purpose.A contract can be made illegal in several ways. For example, a contractmay involve an agreement to do something that violates statutorylaw. In such a situation, the illegality of the action would render the contractvoid. Moreover, if the agreement were carried out, it would alsosubject the parties to whatever penalty is specified in the statute. In fact,even making the agreement itself may be illegal. For example, individualswho agree to commit crimes for a promised consideration areinvolved in what criminal law calls conspiracy .Illegality in Entire AgreementIf it’s impossible to separate a contract into isolated promises andacts, each of which can be performed independently of the others, thenthe entire contract is rendered illegal. If any part of an agreement is contaminatedby illegality, a valid contract cannot result. This would be trueeven if specific sections of the agreement would have been legallyenforceable.In Pari Delicto and Divisible ContractsIf certain promises and actions in a contract can be successfully performedby themselves, then the contract is said to be divisible. In sucha case, the courts may enforce those parts of the agreement that are legaland revoke the parts that are not.Example 1. Fraser Connery, a truck driver, agreed to drive nonstopfrom Maine to Nevada to deliver a shipment. Regulationsestablished by the Interstate Commerce Commission prohibitdrivers from driving more than eight hours without layover andrest. Fraser’s nonstop trip would take longer than that eight-hourlimit.186 Unit 2: Entering Into Contracts

GreeceThe Greek culture is extremely proud of its ancient cultural achievements in thearts. In April of 1990, 285 objects of “immense archaeological value” were stolenfrom the Museum of Corinth. These 2,500-year-old artifacts included terra cottaheads and figurines, finely crafted glass vessels, exquisite vases, and bronze statues.The heist, carried out by a gang of four, was the largest theft of Greek antiquities inmodern times. The Greek authorities acted quickly, informing border stations, airports,the international police force, embassies and consulates, the International Councilof Museums (ICOM), and the United Nations Educational, Scientific, and CulturalOrganization (UNESCO). Under Greek law, such action prevents stolen treasurefrom being exhibited anywhere else and makes an immediate claim for repatriation.Descriptions and photographs of the artifacts also appeared in a special Interpolpublication, ensuring that the artifacts could not be easily sold. Eager to tightensecurity, the country’s Cultural Minister plans to submit a landmark bill to parliament,asking for strict measures for crimes “against the state, the Greek people, andhistorical memory.” The bill calls for stiff punishment for those who steal, damage,or illegally transfer antiquities. Thieves will get up to fifteenyears in prison. Vandals will receive sentences of up toone year. Unlike other countries, Greece alsocondemns any sale of artifacts.Geographical area 50,962 sq. mi.Population 10,645,343CapitalAthensLegal systemBased on codifiedRoman lawLanguageGreek, English, FrenchReligionGreek OrthodoxLife expectancy 78 yearsCritical Thinking Question Greece isn’t the only country that has had trouble protectingits precious cultural possessions. In the United States, we are also familiar withantiquity theft. In particular, we have problems with people we call pot hunters—individuals who loot historical or archaeological sites. Laws aside, why is it soimportant for artifacts to be left in situ (in place)?Chapter 9: Legality 187

Winner Takes AllBecause she lives inDurham, NorthCarolina, ChristineJordan is a big fan ofcollege basketball. InMarch, she organized abasketball tournamentpool. She charged $5for each participantto play. Participantspredict the winner ofeach tournamentgame, and the personpredicting the mostwinners gets to keepall of the money. Wouldyou take part inChristine’s pool? Doyou think it is ethical?Why or why not?The main purpose of the agreement, to deliver goods, is legal andcan be separated from the illegal part. Consequently, that part of thecontract is valid, and Fraser must be paid for delivering the goods.Parties to a contract are said to be in pari delicto (in equal fault) ifthey both know that the agreement is illegal. In such cases, the courtwill aid neither party. On the other hand, if one of the parties is innocentor unaware of wrongdoing, then the parties are not in pari delicto.In that situation, the courts may grant relief to the innocent party. Thisprinciple may be applied when one party does not know that a law isbeing broken and has no intent to break the law.Example 2. Leonard Graham agreed to remodel a cottage ownedby Harriet Gavin so that it could be used as a bed and breakfast.Gavin paid Graham $18,000 in advance with a promise to paythe balance after the job was completed. Graham accepted themoney, even though he knew that zoning laws would prohibit theplacement of a bed and breakfast within the village limits. Gavinknew nothing about the zoning prohibition. The court would rulethat Gavin might recover her money because the parties were notin pari delicto.Agreements that Violate StatutesState legislatures pass laws declaring that certain types of agreementsare illegal and void. These agreements are illegal and void becausethey violate the state’s civil or criminal statutes, usury statutes, gamblingstatutes, licensing statutes, or Sunday statutes.188 Unit 2: Entering Into ContractsCivil and Criminal StatutesAgreements that require one party to commit a tort or a crime areillegal. Common torts are slander, libel, and fraud. Crimes include burglary,larceny, murder, and arson. An agreement is illegal if it is madeto interfere with or violate the rights of another person.Example 3. Sanger, a candidate for mayor, agreed to payMcLaughlin, a newspaper reporter, $1,000 to write an articlecontaining false statements that would damage the reputation ofBonney, Sanger’s opponent. Because this agreement requiredMcLaughlin to commit libel, it was illegal. A court would notenforce the agreement if Sanger refused to pay McLaughlin.Agreements to protect one party from the consequences of torts orcrimes committed are also illegal.Example 4. The mayor persuaded one of her campaign workersto break into the home of an opponent in the upcoming election.

The worker was told to remove papers that would be helpful inthe mayor’s reelection campaign. The mayor agreed to pay thecampaign worker a large sum of money and to protect the workerfrom criminal charges if he were caught. The agreement wasillegal and void. The mayor and the campaign worker would bothbe criminally liable for their illegal acts.Usury StatutesEach state sets a maximum interest rate that lenders can charge forloans by statute. Interest is the fee the borrower pays to the lender forusing the money. The interest rate the lender and borrower agree uponmust not exceed the maximum rate allowed by state law. Charging morethan the maximum legal interest rate is usury .Example 5. Linda Chavez wants to buy a car when she turns 18.To make the down payment, Linda borrows $600 from RobertLightner. Linda promises to pay Lightner $100 per month for 12months—a total payout of $1,200 for the use of $600. The lawwould not require Linda to pay the full $1,200. She has promisedto pay a higher rate of interest than the law permits. The bargainis illegal, and the courts would not enforce it.The Truth in Lending Act is one step the federal government hastaken to make consumers aware of the cost of borrowing money. Undersuch legislation, the lender must clearly convey the annual percentagerate (APR) on each loan to the borrower. Before you sign any loan agreement,be sure to look for a statement of the true rate of interest.Gambling StatutesState statutes also prohibit gambling agreements. Gambling agreementsare those in which one party wins and another party loses, evenif some skill may be involved. Gambling agreements may include playingcards for money, money wagers or bets on elections or sportsevents, or buying tickets in a sports pool. Giveaway games by storesor businesses for promotion are legal as long as you are not requiredto buy a ticket or product to participate. Casual gamblers may not enforcetheir gambling agreements in court because they are performingan illegal act.Politically CorrectVolunteering to workon a political campaignis one way to becomeinvolved in politics.Ideally, a politicalcampaign should beorganized, enthusiastic,and ethical. Unfortunately,some campaignsuse unethical andillegal tactics to gainvoter support. Libelis one of the mostcommon unethicaltactics used by politicians.Do you thinkit is ever justified tospread false ormisleading rumorsabout a politicalopponent?Get InvolvedBecome politicallyinvolved at school byjoining your studentcouncil or by runningfor class president.Volunteer to work on alocal, state, or nationalpolitical campaign inyour area.Example 6. Emil and Rita live in a state where gambling agreementsare illegal. They made a $200 bet on the World Series.When Emil won the bet, Rita refused to pay the $200. Emil thenthreatened to sue Rita in small claims court. Because the bet wasillegal, Emil could not collect from Rita.Chapter 9: Legality 189

At one time, most states prohibited gambling. In recent years, however,many states have changed their laws to allow some types of regulatedgambling. For example, betting at racetracks is allowed in NewYork, Illinois, California, Massachusetts, Ohio, and some other states.However, even in these states, certain forms of off-track betting areunlawful. Lotteries, other than those run by the state government, arealso considered illegal in many states. A lottery is a game that consistsof drawing lots, typically tickets with different combinations ofnumbers printed on them, in which prizes are distributed to the winnersamong persons buying a chance. A state-run lottery must be approvedby the state legislature and administered by an agency of the state government.Legalized lotteries are sources of additional money for stategovernments and are popular in some states.Although a state may legalize one form of gambling, a person cannotassume that other types of gambling are legal in that state. Only regulatedtypes of gambling are legal, and these types of gambling are legalonly when conducted strictly in accordance with state law.SUNDAY AGREEMENTSFormerly, most states outlawedthe making of contracts onSunday. This practice hasgradually changed over the last100 years. What considerationsmotivated lawmakers to relaxthe ban on Sunday agreements?190 Unit 2: Entering Into Contracts

Sunday StatutesUnder common law, contracts could be made on Sunday. However,today it is illegal in some states to make or perform contracts on Sunday.Many states chose to pass special Sunday statutes, also called blue laws,making Sunday contracts illegal. These statutes vary greatly from stateto state. Since the 1960s, some states have begun to do away with Sundaylaws altogether. In those states that still hold Sunday contracts illegal,the following rules apply: an agreement made on a Sunday is void; anoffer made on a day other than Sunday but accepted on a Sunday is void;and an agreement made on a Sunday with a date other than a Sundayplaced on the paper is void. Furthermore, states that still observe Sundaylaws often apply the same restrictions to legal holidays.Licensing StatutesAll states have statutes that require persons to have a license to practicecertain trades or professions (see Figure 9.1). A license is a legaldocument stating that the holder has permission from the properauthorities to carry on a certain trade or profession. Engaging in such atrade or profession without a license is illegal. Licensing laws areFigure 9.1COLLIER COUNTY OCCUPATIONAL LICENSE TAXLOCATION:DISPLAY AT PLACE OF BUSINESS FOR PUBLIC INSPECTIONFAILURE TO DO IS CONTRARY TO LOCAL LAWS3033 50TH ST SWLIC. FEE 18.00 20--/-- COLLIER COUNTY TAX COLLECTORPENALTY .00 2800 NORTH HORSESHOE DRIVETR. FEE .00 NAPLES, FLORIDA 33942COLL. FEE .00 813/643-8477PREV. FEE .00PREV. PEN .00TOTAL 18.00NAME & ADDRESSTHIS LICENSE EXPIRES SEPTEMBER 30, 20 -- GERBEC, ANTHONY ECLASSIFICATION3033 65TH ST SWCABINET &NAPLESMILLWORK CONTRACTOR FL 33999LICENSINGAGREEMENTSThe absence of alicense in someagreements will notrender a contract void.Why do local governmentsrequire trade oroccupational licenses?CODE 02107501 11/25/-- 12 12 SMY T 8282 R 80SEATING CAPACITY LIC OC 911316ROOM COUNT $18.00 CA P-A-I-DNUMBER OF EMPLOYEESGuy L. Carlton1-10 EMPLOYEES LICENSE NUMBER 911316NUMBER OF VENDING MACHINESPHONE COUNTChapter 9: Legality 191

THE GREAT SEAL OF THE STATE OF OHIOdesigned to protect people from dealing with unqualified persons. Inmost states, trade and professional workers such as nurses, surveyors,funeral directors, barbers, and plumbers must be licensed. An agreementmade with an unlicensed person working in such capacities is illegal.Some state statutes require licenses simply to raise revenue (seeFigure 9.2). Any person paying the fee gets the license; there is no needto show competence. A law requiring a seller to have a vendor’s licenseis designed to raise revenue for the local government that issues thelicense. Because the purpose of such licenses is merely to raise revenue,agreements made with unlicensed vendors are valid. However, the unlicensedperson is subject to a penalty for violating the licensing statute.Example 7. For $250, Ardner hired Wheeler, an auctioneer, tosell his household goods at a public auction. The state’s onlyrequirement for an auctioneer’s license, which Wheeler did notVENDORS LICENSELocal governments canrequire sellers to obtainand display a vendor’slicense. How would youobtain a vendor’s licensein your area?Figure 9.2PRESCRIBEDSALES TAX FORMNO. ST 3 (REV. 5-86)LICENSE NUMBER ASSIGNEDBY COUNTY AUDITORTHIS LICENSE MUST BE RENEWED ANNUALLY AT A FEE OF $10.00COUNTY OFSTATE OF OHIODEPARTMENT OF TAXATIONP.O. BOX 530, COLUMBUS, OHIO 43266-0030VENDOR’S LICENSEDATETHIS IS TO CERTIFY, that the vendor herein named, having complied with theprovisions of Sec. 5739.17 of the Revised Code of Ohio, is hereby authorized to maketaxable sales, at the location specified below. THIS LICENSE SHALL TERMINATE ANDBE NULL AND VOID: IF THE BUSINESS IS MOVED TO A NEW LOCATION; IF THEBUSINESS IS SOLD; IF AN INDIVIDUAL OR PARTNERSHIP INCORPORATES HIS ORTHEIR BUSINESS; IF A PARTNERSHIP IS DISSOLVED; IF A CORPORATIONDISSOLVES, OR IS CANCELLED, FOR CAUSE, BY THE TAX COMMISSIONER.#NAMECORPORATION CHARTERTRADE NAME OR DBA, IF OTHER THAN ABOVEBUSINESS ADDRESSCITY ZIP CODE TELEPHONE NO.KIND OF BUSINESSCODE NUMBER, County Auditor By DeputyThe Ohio Sales Tax Law provides that no vendor shall fail to collect the full and exacttax as required by Sections 5739.01 to 5739.31, inclusive, of the Revised Code, or fail tocomply with such sections and the rules and regulations of the tax commissioner.Whoever violates this provision shall be fined not less than twenty-five nor more thanone hundred dollars for a first offense; for each subsequent offense such person shall, ifa corporation, be fined not less than one hundred nor more than five hundred dollars, orif an individual or a member of a partnership, firm, or association, be fined not lessthan twenty-five nor more than one hundred dollars, or imprisoned not more than sixtydays, or both.192 Unit 2: Entering Into Contracts

honor, was the payment of a $35 fee. After the auction, Ardnerlearned that Wheeler was not licensed. As a result, Ardner refusedto pay Wheeler the $250. Because the statute was for revenuepurposes only, Ardner must pay Wheeler the $250. Wheeler, however,is guilty of violating the licensing law.OCCUPATIONAL LICENSINGMany mechanical, technical, and trade professions requirelicensing to practice. What considerations might have motivatedlawmakers to require licenses for some activities?Reviewing What You Learned1. What makes a contract illegal?2. What are the consequences of illegality inrelation to contract law?3. What contracts are illegal by statutory law?4. What are the different types of licenses?Critical Thinking ActivityIllegal Contracts Why does the law usuallyrefuse to uphold illegal contracts?Legal Skills in ActionDiscouraging Illegal Contracts Inez andChris have been in business together for threeyears. Their business is doing badly, so Chriscomes up with a plan that involves makingcontractual arrangements with illegal alienswho are willing to work for low pay. Howwould you help Inez talk Chris out ofimplementing this scheme?Chapter 9: Legality 193

l How to explain thelegal doctrine ofpublic policyl How to identifyagreements that arecontrary to publicpolicyl How to identifycontracts that involvean unreasonablerestraint of tradel How to explain thenature of a restrictivecovenantAgreements Contraryto Public PolicyThe Nature of Public PolicyNot all illegal agreements directly violate statutory law. Someagreements are illegal because they violate a time-honored legal doctrineknown as public policy.The ability to regulate the health, safety, welfare, and morals of thepublic is a power that belongs to the government. The states have thispower because they possess legitimate governmental authority. The federalgovernment has this ability because of various interpretations ofthe U.S. Constitution. The underlying principle that nobody should getBy understanding publicpolicy and contracts thatare contrary to publicpolicy, you will be able toavoid common problemsassociated with violationsof this important legaldoctrine.l restraint of tradel restrictive covenantl price fixingl competitive biddingAGREEMENTS TO DEFEAT COMPETITIVE BIDDINGThe principle of public policy makes agreements to defeatcompetitive bidding unenforceable. What considerations mighthave motivated lawmakers to outlaw agreements to defeatcompetitive bidding?194 Unit 2: Entering Into Contracts

How to Find a Supreme Court DecisionA law library, or even the library in your local courthouse, may have morethan a thousand volumes containing legal cases. How can you find informationabout a particular Supreme Court case? If you know the parties in a case, youcan look in a “Digest” of cases. If you look up “Olmstead,” for example, youwill find “Olmstead v. United States, 277 U.S. 438.” This citation means thatthe report of the Olmstead decision begins on page 438 of volume 277 of theUnited States Reports.Reports discussing Supreme Court legal cases are published by theGovernment Printing Office several times each year and date back to the veryfirst year of the Court’s history. Possibly an easier way to locate a case is byusing the Internet. A federal government home page will allow you to choosethe Supreme Court’s Web site. From there it is simple to locate cases if youknow the parties or even the approximate year the case was decided.Research a Case Choose an interesting Supreme Court case from the past tenyears, and research it. Take notes, and prepare to share your findings withthe class.away with doing something that harms the public at large is the basis forevery public policy decision made.Violations of Public PolicyIf an activity harms the health, safety, welfare, or morals of thepublic, that activity violates public policy. The most common agreementsthat violate public policy include the following:l Agreements that involve an unreasonable restraint of trade , or alimitation on the full exercise of doing business with others—Contracts not to compete—Price-fixing agreements, or competitors’ agreements on certainprice ranges within which to set their own prices—Agreements to defeat competitive bidding, or the process in whichrivals submit bids for a projectlAgreements to obstruct justiceChapter 9: Legality 195

llAgreements inducing fraud or a breach of dutyContracts interfering with marriageHistorySunday statutes, or bluelaws, regulate personaland public conduct, particularlyon Sunday. Bluelaws originated in Virginiain 1624, and legend hasit that they were firstprinted on blue paper.One early example ofa blue law requiredcolonists to observe theSabbath strictly. Anotherblue law limited theamount of money acolonist could spend onclothing and personalitems.Research ActivityResearch Sunday statutesin your community. Createa timeline describingwhen they were startedand when they wererelaxed or discontinued.Agreements that Unreasonably Restrain TradeThe law protects the rights of persons to make a living and do businessin a market economy. If a contract takes away these rights, thelaw will restore them by declaring such a contract void. A restraint oftrade is a limitation on the full exercise of doing business with others.Three types of contracts are generally considered to violate this rule:agreements not to compete, price fixing, and agreements to defeatcompetitive bidding.Outright Contracts Not to Compete When a person buys a business,such as a deli, print shop, or specialty clothes store, that person isalso buying the seller’s goodwill. This is the continued public approvaland patronage of the business. In some sales contracts, the seller agreesnot to open a competing business within a certain area for a period oftime after the sale. This agreement is called a restrictive covenant , ora promise not to compete, and will be upheld by a court if it is reasonablein time and geographic location (see Figure 9.3).For instance, an agreement by the seller of a barbershop not to openanother shop anywhere in the United States for the next 99 years wouldnot be reasonable. It would not be reasonable in either time or geographicarea. If the restraint is unreasonable considering the nature ofthe business sold, then the restraint is illegal and unenforceable.Promises not to compete also are sometimes found in employmentcontracts. Employees agree not to work at similar jobs for a period oftime after they leave the company. Such contracts are enforced only asnecessary to protect the former employer from unfair competition.Price Fixing The law views competition in the marketplace as anefficient way of determining prices. Producers compete to provide betterproducts at attractive prices. Price fixing occurs when competitorsagree on certain price ranges within which to set their prices.Sometimes, competitors agree to sell a particular product or service atan agreed price. Other times, manufacturers dictate the price at whichretailers must sell a product. Price fixing discourages competition andraises prices. Because they are contrary to public policy, price-fixingagreements will not be enforced by courts. In fact, competitors whoseek to fix prices may be prosecuted by state or federal agencies.196 Unit 2: Entering Into Contracts

Agreements to Defeat Competitive Bidding A bid is an offerto buy or sell goods or services at a stated price. Laws often requiregovernments to construct public works or buy goods and servicesthrough competitive bidding . In this process, rivals submit bids for aproject. The firm with the lowest qualified bid wins the contract. If,before bids are made, the bidders get together and agree not to bidlower than a certain price, then they are not bidding fairly. The agreementsand contracts are not enforceable.Example 8. Central City planned to build three new parks. Onlythree contractors were available to bid on the projects. Local lawrequired the city government to open the contracts to competitivebidding and to accept the lowest bid for each park project. Beforethe bidding began, however, the contractors met secretly. Theyfixed the bids so that each of them would be awarded one of thepark projects. This agreement among the contractors is void.Figure 9.3RESTRICTIVE EMPLOYMENT COVENANTIn consideration of my being employed by HawthorneSavings and Loan, I, Vytataus Angelitus, the undersigned,hereby agree that when I leave the employment of Hawthorne,regardless of the reason I leave, I will not compete withHawthorne, or its assigns or successors.The phrase "NOT COMPETE" stated above means that Iwill not directly or indirectly work as a loan officer for asavings and loan association or any other financial institutionthat is in competition with Hawthorne.RESTRICTIVEEMPLOYMENTCOVENANTSSome restrictive employmentcovenants are upheldby the courts. Would thisrestrictive employmentcovenant be upheld bythe court?This restrictive employment covenant will extend for aradius of five miles from the present location of Hawthorne at6802 East 185th Street, Cleveland, Ohio. This covenant will bein effect for six months, beginning on the date of thetermination of employment.Signed this second of March, 20––.EmployeeChapter 9: Legality 197

Agreements to Obstruct JusticeAny contract that interferes with the administration of justice isillegal. Such agreements include protecting someone from arrest,encouraging lawsuits, giving false testimony, or bribing a juror. Thiscategory also includes an agreement to pay a nonexpert to testify at atrial, or an agreement not to prosecute a person who has committed acrime in return for money.Example 9. Kelly, an employee at Van City, stole $5,000 fromthe company safe. Kelly returned the stolen money, and Van Citypromised not to prosecute if Kelly paid them $1,000. Kellyagreed, but then refused to pay Van City the money. The companycould not enforce this illegal agreement in a court of law.Agreements Inducing Breach of Duty or FraudMany persons hold positions of trust. They have a responsibility forthe well-being of other people. Your representative in Congress, yourstate senator, and all other public officials fall within this class. Theseofficials owe a duty to work for the best interest of the public. AnyUniform Computer Information Transaction ActIn March of 2000, Virginia was the first state in the country to pass a lawcovering Internet contracts. This act, the Uniform Computer InformationTransactions Act, creates uniform provisions for contracts made over theInternet. Software licenses, such as the one that appears when downloadingAcrobat Reader, are an example of such contracts. The law would allowsoftware companies to send binding legal notices about software restrictions bye-mail to software users. Because contract law varies by state, many softwarecompanies support some uniformity. However, many consumer groups opposethe law, arguing that it turns a simple buying decision into a bindingagreement. Virginia lawmakers will study the impact of the new law within thestate. Similar bills are also being debated in Hawaii, Illinois, Maryland, andOklahoma. (Source: EE Times, March 15, 2000)Connect Visit the state of Virginia’s Web site. Search for the text of theUniform Computer Information Transactions Act and see what is says aboutsending binding legal notices to customers.198 Unit 2: Entering Into Contracts

contract that tries to influence these representatives to use their positionsfor private gain is unenforceable. This rule also applies to private personswho are in positions of trust.Agreements Interfering with MarriageThe law encourages marriages and protects family relationships.Contracts that discourage, harm, or interfere with good family relationshipsare illegal, and as a result, are unenforceable in the courts. Forinstance, if Mr. Novak promises to give his daughter, Juleanne, $1,000if she never gets married, the contract would be void. The same wouldbe true if, once Juleanne were married, Mr. Novak promised her $1,000to leave her husband.Effect of IllegalityIn general, a court will not aid either party to an illegal contract.Instead, it will leave the parties where they placed themselves. Neitherparty can enforce the agreement, nor can they receive aid from the court.However, an exception occurs when the parties are not equally at fault.In such cases the court may aid people who are less at fault in recoveringany money or property they may have lost.Occasionally there may be a case in which only part of the contractis illegal. If the legal part can be separated from the illegal part, the legalpart can be enforced. If the legal part cannot be separated from the illegalpart, however, the entire agreement will be void.On April 14, 1912,the RMS Titanic struckan iceberg offNewfoundland, Canada,and sunk. At the time,the Titanic was thelargest and mostluxurious ship ever built,and many deemed itunsinkable. As a resultof the Titanic disaster,ships around the worldwere required to carryenough lifeboats foreveryone on board.The U.S. Coastguardalso established theInternational Ice Patrol,which continues tothis day.Reviewing What You Learned1. What is the legal doctrine of public policy?2. What contracts are considered to be contraryto public policy?3. What types of contracts involve anunreasonable restraint of trade?4. What is a restrictive covenant?Critical Thinking ActivityPhilosophy of Law What is the legalphilosophy behind public policy as a groundsfor law?Legal Skills in ActionRestrictive Employment Covenant YourUncle Larry has just been offered a job at acomputer software company. His employer hasasked him to sign a restrictive covenant thatwould not permit him to work for anothersoftware company located anywhere in theUnited States for the next seven years. Write aletter to your uncle telling him whether thisrestrictive employment covenant would beupheld by the court.Chapter 9: Legality 199

CHAPTERASSESSMENTSection 9.1 Legality● A contract may be illegal if it involves anagreement to do something that violatesstatutory law. In addition, a contract may beillegal if it violates public policy.● If a contract is tainted by illegality and it isimpossible to separate the contract into isolatedpromises and acts, the entire contract is renderedillegal and is void. In contrast, if certain promisesand actions in a contract can be successfullyperformed by themselves, the contract is said tobe divisible, and the court may enforce thoseparts of the agreement that are legal and rescindthe parts that are not. If both parties to a contractknow that the agreement is illegal, neither partywill be aided by the court in enforcing the illegalagreement. On the other hand, if one of theparties is innocent of wrongdoing, then thecourts may grant relief to the innocent party.● Some state statutes make some of the followingcontracts illegal: gambling agreements, contractsmade on Sunday, agreements involving licensingrequirements, and usury.● A license is a legal document stating that theholder has permission from the proper authoritiesto carry on a certain trade or profession.Engaging in such a trade or profession without alicense is illegal. Licensing laws are designed toprotect people from dealing with unqualifiedpersons. In most states, trade and professionalworkers such as nurses, surveyors, funeraldirectors, barbers, and plumbers must belicensed. Some state statutes require licensessimply to raise revenue. Any person paying thefee gets the license; there is no need to showcompetence. Because the purpose of suchlicenses is merely to raise revenue, agreementsmade with unlicensed vendors are valid.However, the unlicensed person is subject to apenalty for violating the licensing statute.Section 9.2 Agreements Contrary toPublic Policy● Governmental bodies regulate the health, safety,welfare, and public to prevent harm to the publicat large. Public policy considerations are a significantpart of the legislative process. The underlyingprinciple that nobody should get away withdoing something that harms the public at large isthe basis for every public policy decision made.● Contracts that are contrary to public policyinclude: (1) agreements involving unreasonablerestraint of trade, (2) contracts not to compete,(3) price-fixing agreements, (4) agreements todefeat competitive bidding, (5) agreements toobstruct justice, (6) agreements inducing fraudor a breach of duty, and (7) contracts interferingwith marriage.● A restraint of trade is a limitation on the fullexercise of doing business with others. If acontract takes away a person’s right to make aliving, a court will restore that right by declaringsuch a contract to be void. Three types of contractsare generally considered to violate this rule:agreements not to compete, price-fixing agreements,and agreements to defeat competitivebidding. Agreements not to compete couldrestrict employees from working at similar jobsfor a certain period of time after they leave acompany. Price-fixing agreements occur whencompetitors agree on certain price ranges withinwhich to set their prices. Agreements to defeatcompetitive bidding occur when bidders gettogether and agree not to bid lower than a certainprice, thereby artificially raising overall prices.● A restrictive covenant is a promise not to compete,which is commonly included in the sale of abusiness. This covenant limits the seller of thebusiness from opening a competing businesswithin a geographic location for a specifiedamount of time.200 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.conspiracyinterestusurylotteryrestraint of tradelicenserestrictive covenantprice fixingcompetitive bidding1. Using all of the key terms listed above, create a crosswordpuzzle. Make sure to provide definitions for each term.2. Exchange crossword puzzles with a partner and complete yourclassmate’s puzzle.3. Check your classmate’s performance on your crossword puzzle,and have him or her check your performance. Make sure thateach of you fully understand each term by verifying that thedefinitions provided are accurate and the puzzles are completedcorrectly.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 9:Legality—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. What makes a contract divisible? How does the court treat a divisible contract?5. What is a gambling agreement? Is gambling legal? Explain your answer.6. What agreements are void under Sunday statutes?7. Why do states have statutes that require people in certain trades or professionsto have licenses?8. Do all illegal agreements violate statutory law? Why or why not?9. What is usury?10. Why do some states choose to run legal lotteries?11. What duty related to public policy do elected officials have?12. What are some examples of agreements to obstruct justice?Chapter 9: Legality 201

CHAPTERASSESSMENTParticipate as a Member of a TeamIn a group of two or three, research thelicensing laws in your state. Select oneprofession or trade that requires a license andanswer the following questions:13. What are the requirements of the license?14. How much does the license cost?15. What is the penalty for violating thelicensing statute?16. Why do you think your state requires amember of this profession to have alicense?Gambling PoolsYou work in an office where there are gamblingpools for almost every sporting event. Althoughgambling is illegal in your state, your co-workerstell you that office gambling is just a friendlygame and there is nothing wrong with it.Debate17. Is office gambling just a friendly game?18. Is it ethical?19. Would you participate in office gambling?Why or why not?slot machines from New York to Atlanta.When Jackson arrived in Atlanta, he andthe person who had hired him were arrestedby federal agents. Both men were chargedwith transporting illegal cargo across statelines. Jackson still demands to be paid forhis trip, arguing that the contract is divisible.He claims that the driving portion of thecontract is legal and can be separated fromthe illegal part, which involves loadingand unloading the shipment. Is Jacksoncorrect? Why or why not?21. A state statute requires real estate brokersto obtain a license. Burke, without gettinga license, buys and sells real estate forothers. He sues one of his clients to collecta fee. Is he entitled to judgment? Explainyour answer.22. Jose Hope sells Suzie Tanaka a camerarepair shop located in Rochester, New York.Hope signs a contract agreeing never toengage in a similar business in New YorkState. Five years later, Hope opens a camerarepair shop in New York City. Is Hopeliable for breach of contract? Why orwhy not?23. Olive Mower, a defendant, promises to pay$300 to Sue Dorsey if she will testifyfalsely for Mower at her trial. Dorseytestifies as agreed. Is she legally entitled tothe $300? Explain your answer.24. Ann Perkins promises her daughter, Sue,$10,000 if she never marries. Is Sueentitled to collect this amount from hermother’s estate if she is not married whenher mother dies? Why or why not?For the following cases, give your decision andstate a legal principle that applies.20. Phil Jackson agreed to drive a truck transportinga shipment of illegally manufactured202 Unit 2: Entering Into Contracts

For the following cases, you be the judge.25. GamblingThe members of the “last man’s club” purchased a lodge in upstate New York to serve as theirheadquarters. As a part of their arrangement, the members agreed that the last surviving memberof the club would assume ownership of the lodge. The last surviving member turned out to beCrawford. According to the agreement, Crawford claimed exclusive title to the land. Quinn, thedaughter of a deceased club member, contested Crawford’s ownership. She argued that thecontract was actually a wagering agreement and was therefore illegal. Is Quinn correct? Whyor why not?Quinn v. Stuart Lakes Club, Inc., 439 N.Y.S.2d 30 (NY).26. Market CompetitionThe Major League Baseball Players Association and the Topps Chewing Gum companyentered exclusive contracts for the services of baseball players. Under the agreement, Toppswould have the exclusive right to use photographs of major league baseball players onbaseball cards distributed for five years. A rival company, the Fleer Corporation, sued for$16 million. Fleer argued that the contracts were an effort to eliminate competition and thereforeconstituted “an illegal restraint on trade.” Topps said that Fleer could still compete bymaking contracts with players in the minor leagues. Topps concluded that their competitiveefforts were not unreasonable. Is Topps correct? Why or why not?Fleer Corporation v. Topps Chewing Gum, Inc. 501 F. Supp. 485 (E.D. PA).Legal LotteriesMany states currently run lottery games as a sourceof additional money for the government.ConnectUsing a variety of search engines, research thelottery games available in your state. Find out:27. When the lottery was first established.28. What type of games are available.29. What the state uses the money for.30. Whether you can purchase lottery ticketsonline.If your state does not have a lottery game,choose a state that does.31. Predict Do you think it’s possible for acontract to be invalid, even if it containsall six of the proper elements? Explainyour answer.32. Connect Have you ever participated in agiveaway game that a store or business wasconducting for promotional purposes?Explain your answer.33. Question Do you think we should stillhave strict Sunday laws? Why or why not?34. Respond Do you think the governmentshould be responsible for the health, safety,welfare, and morals of the public? Why orwhy not?Chapter 9: Legality 203

CHAPTERForm of the ContractUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 10: Form of the Contract—Chapter Overviews to preview thechapter information.

The Opening SceneViktor, Alena, Hana, and Emil are spending a Sundayevening at home with their father.The Ever-Elusive CarVIKTOR: I’m not going to make the same mistake Jakemade when he bought his car.ALENA: You mean you’ve decided that Buy-a-Heapisn’t good enough for you?VIKTOR: Exactly. I’m buying a car from someoneI know. Keith from school has agreed to sell mehis old convertible for $1,500.ALENA: Wow! That sounds like a good deal. That’s anice car—I’ve seen Keith driving it. Did you get thedeal in writing?VIKTOR: Well, sort of. I wrote on my deposit checkhow much the total cost would be.EMIL: Did you win the lottery? Since when do youhave that kind of money?ALENA: I know! How much did Keith want you to putdown on the car?VIKTOR: Just $500. I told you that Keith would giveme a better deal than some sneaky used carsalesperson.ALENA: You’re forgetting something that’s veryimportant. Where do you plan on getting theremaining $1,000?VIKTOR: Relax, will you? I’ve already thought aboutthat. I’ll take out a loan from the bank and get Dadto co-sign for me.MR.BENES: Excuse me? Did I just hear you say thatyou expect me to co-sign for a car loan?ALENA: (Snickering.) Yep. You heard right. Vik has aplan, and you’re definitely involved.MR.BENES: I hate to disappoint you, Viktor, but there’sabsolutely no way that I’ll co-sign a loan for you. Ihope you didn’t do anything foolish.VIKTOR: But Dad. . . .MR.BENES: It’s completely out of the question, Viktor.I’ll never co-sign for another loan, ever. I’ve learnedmy lesson when it comes to that.ALENA: What are you talking about? Whathappened?MR.BENES: Have you ever heard of an accelerationclause before?VIKTOR: No.ALENA: Me neither.MR.BENES: Well, neither did I until I co-signed thepapers for your Aunt Agatha’s home improvementloan.EMIL: What happened?MR.BENES: Aunt Agatha didn’t pay, and I ended uphaving to give $2,000 to the contractor right thenand there.(The phone rings and Viktor answers. He becomesincreasingly upset as the conversation progresses.)VIKTOR: Come on, Keith, we had a deal! You can’tdo that! You took my check. I thought that I couldtrust you. (Viktor hangs up the phone in disgust.)MR.BENES: That doesn’t sound good.VIKTOR: Keith says he was thinking about it and nowwants $2,000 for the car. Now I have to borrow$1,500. Can he do that?MR.BENES: Sounds like a breach of contract to me.I think there are laws against that.1. What is the purpose of the Statute of Frauds?2. What is the legal status of a contract that is notin formal writing?3. Which contracts must be in writing?4. What elements must be included in a writtencontract?Chapter 10: Form of the Contract 205

The Statute ofFraudsl How to explain thepurpose of the Statuteof Fraudsl How to explain thelegal status of acontract that is not inwritingl How to identify theelements that must beincluded in a writtencontractl How to deal withcontradictory andambiguous terms in awritten agreementl How to identify whichcontracts must be inwritingUnderstanding whichcontracts must be inwriting, as well as theelements of a writing, willhelp you avoid pitfallsassociated with theStatute of Frauds.l breach of contractl perjuryl Statute of Fraudsl memoranduml goodsl real propertyPurpose of a WritingIn early England contracts did not necessarily have to be written tobe fully enforceable. Persons could be brought to trial for breach ofwritten or oral contracts. A breach of contract is a wrongful failure toperform one or more promises of a contract. The accused could not testifyon his or her behalf, however. Only persons who were not parties to thecontract could be witnesses in court. To protect their friends or their owninterests, witnesses often made false statements under oath in court.Making such false statements is called perjury and is a crime.To discourage such practices, the English Parliament passed a specialstatute in 1677. It required certain contracts to be evidenced by awriting to be enforceable. This statute, entitled an “Act for the Preventionof Frauds and Perjuries,” became known as the Statute of Frauds.A better name might be the Statute of Writings, however, because thestatute states that certain contracts must be in writing.Most states in the United States now have a Statute of Frauds ,which are state laws requiring that certain contracts be evidenced by awriting. We commonly say such contracts must be “in writing.” Puttinga contract in writing can help to clarify an agreement for both partiesand for the courts, if necessary.Elements of a WritingA writing need not be formal to satisfy the Statute of Frauds. Thewritten evidence of an agreement is known as a memorandum . It mayconsist of such things as a letter, a sales slip, an invoice, a telegram, orwords written on a check. The writing should typically identify the place,date, involved parties, subject matter, price and terms, and intent of theparties. It should also contain the signature of the party who may becharged on the agreement. See Figure 10.1 for a sample memorandum.Example 1. In The Opening Scene, Viktor agreed to buy Keith’scar for $1,500. On his deposit check for $500, Viktor wrote,“Down payment on 1987 convertible. Total price $1,500.” Keithsigned the back of the check and put it in his bank account.Although Keith later told Viktor he wanted $2,000 for the car, acourt would hold that the oral contract for $1,500 was enforceablebecause the words on the check satisfied the requirementsof a written agreement.206 Unit 2: Entering Into Contracts

Figure 10.1Elmsford, New YorkSeptember 1, 20––ELMSFORD LANDSCAPING AND JEANNINE MASON herebyagree as follows:ELMSFORD LANDSCAPING agrees to build a flagstone terracefor JEANNINE MASON at her residence, 52 Locust Drive,Elmsford, New York, for the sum of $2,750. The dimensions ofthe terrace are to be 20 feet in length by 15 feet in width and4 inches in thickness. All material used is to be of good quality,conforming with standard specifications of the AmericanSociety for Testing Materials.THE REQUIREMENTSOF A WRITINGThe Statute of Frauds isdesigned to preventfraud and perjury byrequiring a writtenmemorandum asevidence of the agreementand its terms.Does this writtenmemorandum satisfythe Statute of Frauds?ELMSFORD LANDSCAPINGByPresidentJeannine MasonEvaluating Contradictory TermsSometimes parties to an agreement will make handwritten changeson a typewritten or printed contract. When the handwritten terms contradictthe typed or printed terms, the handwritten terms will prevailbecause the court will presume that these terms were placed in thewriting after the contract was typed or printed. For that reason, the handwrittenchanges likely represent the final intent of the parties. Generally,handwriting prevails over typewriting or printing, and typewriting prevailsover printing. When there is a discrepancy in an amount written inboth words and figures, as in a check, the amount written in words willprevail over the amount written in figures (see Figure 10.2).Figure 10.2FIRST NATIONAL BANK 0000AYTO THEPORDER OFFOR" 002130" 029200000 " 0240 0688"20 56-292213$DOLLARSCONTRADICTORYTERMSSometimes theterms of a writtenmemorandum willcontradict oneanother. Whichamount will the bankpay in this case?Chapter 10: Form of the Contract 207

Unions were formed tohelp protect the rights,health, and welfare ofworkers. The AFL-CIO(American Federationof Labor and Congressof Industrial Organizations)was createdin 1955 and is avoluntary federationof 65 national and internationallabor unions.These unions representteachers, musicians,miners, firefighters,farm workers, bankers,bottlers, and manyothers.Evaluating Ambiguous ClausesSometimes written contracts can be understood in different ways.When such ambiguous language exists, the court will lean in favor of theparty who did not draft the contract and against the one who drafted it.Example 2. Katharine Black was involved in an automobile accident.The insurance company refused to pay Black, interpretingan ambiguous clause in her policy against her. When Black sued,the court interpreted the clause in her favor because the companyhad drafted the ambiguous policy.Contracts That Must Be in WritingEvery state has a law requiring that certain kinds of contracts be inwriting to be enforceable. However, this Statute of Frauds does not pertainto all contracts. The law does not eliminate the essential elementsof a valid contract: offer, acceptance, genuine agreement, capacity, consideration,and legality. Instead, it merely adds the requirement of writtenevidence that a contract exists. The following types of contracts must bein writing:l Contracts to pay the debts of othersl Contracts in which executors and administrators of estates agree topay the debts of deceased personsl Contracts requiring more than a year to performLegal Guidance Without a LawyerAsking lawyers to draft contracts can be very costly. Instead of payinglawyers to draft contracts, some companies are turning to the Internet to buygeneric contracts. Such contracts can be found for a variety of business uses.Companies can use these contracts simply by filling in the blanks, or they canask a lawyer to customize the contracts at a savings of several hundred dollarsapiece. Businesses that sell generic contracts on the Internet have helpedconsumers by providing them with information that until now has only beenavailable from lawyers. Web sites now offer generic contracts and other legaldocuments for under $50. Chat sessions with lawyers are also available at veryreasonable rates. (Source: New York Times, February 22, 2001, p. D1)Connect Go to the Web site of your state bar association and see whether thesite refers to any online resources for consumers.208 Unit 2: Entering Into Contracts

lllContracts in consideration of marriageContracts for the sale of goods valued at $500 or moreContracts to sell an interest in real propertyIn addition to these contracts, some states require that other kindsof contracts be in writing. Also be aware that the Statute of Fraudsapplies only to executory contracts; that is, to contracts that have notbeen fully performed. If two parties perform an oral contract that shouldhave been in writing, then neither party can try to have it set aside laterbecause it was not in writing (see Figure 10.3).Contracts to Pay Debts of OthersA contract that one person makes with another to pay the debts ofsomeone else must be in writing to be enforceable. Under this type ofagreement, the debtor still owes the money; the person promising tocover his or her debt does so only if the debtor fails to pay.Figure 10.3THIS AGREEMENT, made the 12th day of May, 20––, by and betweenCRESTWOOD REALTY CORPORATION of Crestwood, Texas, and hereinaftercalled the OWNER, and JAMES M. LEW, hereinafter called the ARCHITECT,WITNESSETH, that whereas the Owner intends to build a one-family dwelling inCrestwood, Texas, of approximately 16,500 cubic feet in volume, and will furnisha survey of the property to the Architect, NOW, THEREFORE, the Owner and theArchitect, for the considerations hereinafter named, agree as follows:The Architect agrees to perform for the above-named work the followingprofessional services:Prepare plans and specifications suitable for the construction of said dwellingand for obtaining the approval of local building authorities having legal jurisdiction.Architect will furnish three sets of plans and specifications to Owner.Additional sets will be furnished to Owner at cost.The Owner agrees to pay the Architect the sum of Six-Thousand Dollars($6,000), payable as follows:As a retainer upon signing of this agreement $2,000When preliminary designs and plans are approved $2,000When plans and specifications are completed andthree sets are furnished to Owner $2,000The Owner and the Architect further agree that the Standard Conditions ofAgreement between Owner and Architect as now published by the AmericanInstitute of Architects shall be part of this Agreement insofar as they areapplicable hereto.The Owner and the Architect hereby agree to the full performance of thecovenants contained herein.IN WITNESS WHEREOF, the said parties have executed this Agreement onthe day and year first above written.CRESTWOOD REALTY CORPORATIONWitnessWitnessPresidentArchitectGreen AcresAt a family picnic, JesusPerez discussed selling10 acres of pasturewith his brother-in-law,Eduardo. Jesus wasasking $6,000 peracre—$1,000 per acreless than the marketprice. Eduardo knew agood deal when heheard it and quicklyaccepted the offer.After taking six weeksto organize financing,Eduardo called Jesusto arrange payment.Jesus said the landhad already been sold.He apologized andexplained that someonehad offered him $7,500an acre, a total of$15,000 more thanEduardo was goingto pay. Did Jesus havean ethical obligationto sell the land toEduardo? Does Jesus,who wants to send hischildren to college, havean ethical obligationto earn the greatestpossible profit?FORMAL CONTRACTTo satisfy the Statute ofFrauds, a writing need notbe as formal as this one.Why can this contract beconsidered executory?Chapter 10: Form of the Contract 209

Civil Process ServerIt’s a good thing Harry McKenney likes people because,as a civil process server, he encounters a lot of them—and notalways in ideal situations. Under the American legal system,citizens have the right to be informed that legalaction is being taken against them. As a result, the courts oragencies involved in the legal action must tell people they are involved. Theperson who informs defendants or witnesses that they have been summoned toappear in a legal proceeding is called a “process server.” Being a process servercan be stressful.“I know sometimes I’m entering a difficult moment in someone’s life,”McKenney says, “and I try not to embarrass them or make them feel like they’rebeing harassed.”Civil process servers let people know they are defendants or witnesses incases involving divorces, evictions, foreclosures, landlord-tenant disputes, unpaidbills, or other noncriminal cases. McKenney is deputized and gets paid for eachsuccessful service of process. Unlike process servers shown on television shows,McKenney does not hide in bushes to surprise people with official papers.Instead, he usually serves people with the documents at their front doors.“Usually they understand that I’m just like a mailman,” he says. “People don’tget mad at the mailman for bringing bills, and they usually don’t get mad at me.”However, when people do purposely avoid him, McKenney is sometimesforced to serve process in other settings, even while defendants and witnessesattend weddings and funerals.“I mostly love this job,” says the former Xerox sales representative. “It’s reallyexciting and is a bridge between being a cop and being a lawyer. I get to readall the legal documents, and have learned a lot of law in the process.”SkillsPersonalityEducationCommunication, mediation techniquesAssertive, confident, patient, appreciative of many differentkinds of peopleIn Maine, civil process servers must complete 100 hours oftraining in the police academy as a sheriff’s reserve; mustundergo retraining with weapons twice yearly; and mustpass 40 hours of continuing education within two yearsof certification.For more information on process servers, visit ubpl.glencoe.com or yourpublic library.210 Unit 2: Entering Into Contracts

Contracts to Pay Debts of Deceased PersonsExecutors and administrators handle the estates of deceased persons.They gather the property of the deceased, pay all debts, and dividethe remaining property according to the terms of a will. Theexecutor is not personally responsible for the deceased person’s debts;these are paid out of the estate. If the estate lacks the money to pay alldebts, the executor may promise to pay the debts with his or her ownmoney. Such an agreement must be in writing to be enforceable.Example 3. When Morgan died, he had an estate worth $10,000but owed creditors $12,000. Morgan’s son, who was the executorof the estate, wanted to clear his father’s name. He made anoral agreement with the creditors to pay the additional $2,000owed by his father out of his own pocket. This oral agreement,however, would not be legally enforceable by the creditors.Contracts Requiring More Thana Year to PerformAll contracts must be written if they cannot be performed withinone year of the date they are made. The year legally begins when thecontract is made, not when the performance is to start.Example 4. Jake and Mr. Lucas enter an agreement in which Jakepromises to help paint the offices of the new Lucas Companybuilding on Michigan Avenue. Because the job is estimated totake 14 months, the contract must be in writing to be enforceable.In Example 4, if Jake had contracted to work for “as long asMr. Lucas continues to be president of the Lucas Company,” then theagreement would not have to be in writing because the time involvedwould be uncertain. Lucas might continue to be president of the companyfor many years. On the other hand, he might be president for onlya short time, and the contract could be completed in less than a year.DebtEasy credit and thehigh cost of living leadfar too many of us intodebt. Many peoplewho are in seriousfinancial trouble filefor bankruptcy to wipeout their debt. Didyou know that abankruptcy filing canstay on your recordfor 10 years and canaffect your ability toget a loan, acquire acredit card, and rentan apartment?Get involvedTake a money managementcourse at yourlocal communitycollege to learn howto budget, save, andinvest your money.Research differencesamong employersponsoredsavingsplans, IRAs, and RothIRAs.Contracts in Consideration of MarriageWhen two persons agree to marry, they enter into a valid, bindingcontract. The promises they make to each other serve as the considerationfor the contract. Agreements to marry have never required a writtencontract. Under present-day law, an agreement between two peopleto marry is generally not enforceable. Consequently, either party canbreak the agreement without being liable to the other.Chapter 10: Form of the Contract 211

MARRIAGE CONTRACTSAlthough the law does not require that the marriageagreement itself be in writing, certain contracts thatare associated with marriage must be in writing. Whywould two people enter into a prenuptial agreement?Example 5. Paul Vincenti proposed to his girlfriend, JoannaPanos, after six years of dating. Joanna accepted the proposaland immediately sent an announcement to the local newspaper.Three weeks after his marriage proposal, Paul changed his mindand informed Joanna that he didn’t want to get married after all.Paul is not liable to Joanna for backing out of the wedding, andJoanna will have to accept his decision.If one person agrees to marry another person in return for a thirdperson’s promise of money or property, the agreement must be in writing.A promise to adopt a child from a former marriage or to care for anotherrelative in return for a promise of marriage also must be in writing tobe enforceable.212 Unit 2: Entering Into Contracts

Contracts for Sale of Goods of $500 or MoreA contract for the sale of goods for the price of $500 or more mustbe in writing to be enforceable. Goods consist of movable items,including specially manufactured items. Furniture, books, livestock,cultivated crops, clothing, automobiles, and personal effects of any kindare considered goods.Example 6. Al Jaworski agreed to buy a motorcycle from hisfriend, Evan Allard, for $950. This agreement was not in writing.A short time later, Al changed his mind and told Evan he didn’twant to buy the motorcycle. The agreement was not enforceablebecause there was no written contract. There are four exceptionsto this rule, which will be explained in Chapter 13.According to the UCC, a writing is sufficientif it indicates that a contract for sale hasbeen made between the parties and it is signedby the party (or his or her representative)against whom enforcement is sought. TheUCC does not require that all the terms of thecontract be in writing (or even that they bestated accurately).Contracts to SellReal PropertyContracts for the sale of real propertymust be in writing to be enforceable. Realproperty is land and anything permanentlyattached to it. One important contract for realproperty that you may enter into is the contractto buy or sell a home. The contract ofsale, sometimes called a purchase and saleagreement, consists of an offer by the buyerand an acceptance by the seller. The purchaseand sale agreement must also contain theother elements of a contract.CONTRACTS IN WRITINGContracts for the sale of goods costing$500 or more must be in writing to beenforceable. Would the purchase of a bikeon sale for $499 require a written contractif the bike’s original price was $550?Chapter 10: Form of the Contract 213

An exception to the requirement that a contract for the sale of realproperty must be in writing is known as equitable estoppel. Accordingto this doctrine, a party is prevented or “estopped” from claimingthe Statute of Frauds when the other party changes his or her positionbased on an oral promise. Sometimes this exception is called partperformance. It applies to an oral contract to sell real property wheneither the buyer or the seller makes improvements on the property orchanges his or her position in an important way, based on the other’srepresentations.Example 7. Gladys Green orally agreed to sell a lot to Thomasand Patricia Hickey for $15,000. The Hickeys told Green theyintended to sell their present home and build a new house on thelot. They immediately advertised their house for sale. Within10 days, the Hickeys found a buyer and signed a written contractto sell their house. Green then decided to sell her lot to someoneelse for $16,000. The court held, however, that Green’s oral contractwith the Hickeys was enforceable because the Hickeys hadchanged their position in reliance upon the agreement by sellingtheir house. For that reason, Green could not cancel the oralcontract.Reviewing What You Learned1. What is the purpose of the Statute ofFrauds?2. What is the legal status of a contract that isnot in writing?3. What are the elements that must be includedin a written contract?4. How are contradictory and ambiguous termsin a written agreement interpreted by a court?5. What contracts must be in writing?Critical Thinking ActivityContract Disputes The legal system impactsbusiness by establishing rules for legal contracts.Research and evaluate the facts of a contractdispute involving a business and one of the lawsdiscussed in this chapter. What were the facts inthe case, how did the court rule, and how wasbusiness impacted by the court’s decision?Legal Skills in ActionHistory of the Law Clark and Fiona believethat the Statute of Frauds was originallyintended as a criminal provision designedto catch con artists who prey on innocent,unsuspecting victims. Write a report in whichyou explain the actual historical context inwhich the Statute of Frauds was first enactedin England.214 Unit 2: Entering Into Contracts

Special Rules andFormalitiesSpecial Rules for Written ContractsIt is crucial to understand which contracts must be in writing to beenforceable in a court of law. You also must know the essential elementsto include within a writing that purports to represent an agreement.However, all of this knowledge would be useless if you do not alsounderstand some special rules that apply to written contracts. Theserules include the parol evidence rule and the best evidence rule.Parol Evidence RuleIt is important to make sure that a written contract contains everythingthat was agreed upon between the parties. By ensuring that all ofthe terms are in writing, neither party can go to court and claim a contractis incorrect or fails to show the parties’ real intentions. This longestablishedrule is called the parol evidence rule . Parol means word ofmouth; evidence, in this instance, means anything presented as proof ata court trial. The rule says that evidence of oral statements made beforesigning a written agreement cannot be presented in court to change oradd to the terms of that written agreement. The court presumes that awritten contract contains all of the terms and provisions intended bythe parties.Example 8. Sylvia Cohen needed a car to get to and from hernew job. She chose one because the dealer said, “This car has a90-day guarantee, but if it breaks down during the next year we’lllend you a car for free while it’s being repaired.” Although Sylviasigned a written agreement to buy the car, the writing did notcontain the dealer’s promise. Eight months later, when the carbroke down, the dealer refused to lend Sylvia a car. The parolevidence rule would prevent Sylvia from relating the dealer’sstatement in court.l How to explain theparol evidence rulel How to identify theexceptions to the parolevidence rulel How to explain thebest evidence rulel How to change acontractual writingBy understanding theparol evidence and bestevidence rules, you willknow what businessrecords to keep whenyou enter a contractualrelationship that requiresa writing.l parol evidence rulel best evidence rulel duplicate originalsParol evidence may be introduced in some particular instances. Itmay be introduced to explain some point that is not clear in a writtenagreement. Parol evidence may also be used to show that certain termswere agreed to but incorrectly typed in the written contract. In addition,it may be presented to prove that someone was persuaded by the fraudof the other party to make a written contract.Chapter 10: Form of the Contract 215

The Best Evidence RuleThe courts usually require that the original copy of a written agreementbe submitted into evidence rather than any sort of copy. Thisrequirement is generally referred to as the best evidence rule . The rulemeans a court would look with disfavor at photocopies or carbon copiesof the written agreement, preferring instead to see the original agreement.Copying a contract can make it easier for an unscrupulous party to concealany misleading alterations to the original agreement. For this reason, whena contract is reduced to writing, each party receives an original version ofthe contract. Such original versions are generally referred to as duplicateoriginals . When you enter into a contract, do not accept a photocopy ora carbon copy of your agreement because such a contract will not be acceptableto the court if you should need to pursue legal action.Contracts for Unmarried CouplesWhen unmarried couples live together, or cohabit, certain legal rulesapply. For the most part, these rules have come about as a result of courtcases rather than state law. The leading court case to address legal principlesinvolving the rights of cohabiting couples to make contracts was decidedin California.In Marvin v. Marvin, the court set forth several principles related to contractformation and cohabiting couples. First, cohabiting couples may make writtenor oral contracts. If there is no contract, a court may look to the couple’s actionsto find out whether an implied contract exists. If there is no implied contract, thecourt may presume that “the parties intend to deal fairly with each other.”The Marvin case was tried in California, but other states have sinceapplied its principles to cohabitation contracts, including contracts betweengay and lesbian partners. Many states now recognize contracts between gayand lesbian partners, but some states require such contracts be in writing. Afew states prohibit contracts between cohabiting couples on the principle thatsuch contracts foster immorality.Research What is the law in your state regarding the enforcement ofcohabitation contracts? What are some things that can be covered in suchcontracts?216 Unit 2: Entering Into Contracts

Changing the WritingA contract is an agreement between two or more parties. Any writingshould be an expression of their mutual consent. Signing a businessor legal document starts a chain of events that may be difficult to control.When you are asked to sign an order blank, sales slip, or otherprinted form, be aware that such documents may contain small print onthe front or reverse side. The words are often difficult to read and thelanguage may be difficult to understand. Quite often, the small print isnot written in your favor. Follow these guidelines when you are askedto sign your name to any document:l Read the entire text of the document before you sign it.l If you don’t understand something or don’t agree to it, cross itout before you sign. Have the other party initial what you havecrossed out.lllDon’t be afraid to make changes on a printed form. If any promisesare made to you, write them in.Refuse to sign if you do not agree with everything contained inthe writing. You are sometimes in a better position with an oralagreement than with a written agreement that is not in your favor.If a contract contains a lot of complicated or ambiguous language,consider asking a lawyer to review the agreement before you sign it.Although you will probably be obligated to pay for the advice, youmay find that the protection and peace of mind afforded by qualifiedlegal counsel is worth the price.Social StudiesDid you know the wordsjury and perjury arerelated? One olddefinition of jury is “acompany of persons(originally men) sworn torender a ‘verdict’ or trueanswer upon somequestion(s) officiallysubmitted to them. . . .”When perjury was firstused, it meant, “. . . theoffense of jurors in givinga willfully false verdict.”Research ActivityUse a comprehensivedictionary and look upthe etymology of thewords just and judge.Find out how they arerelated.Reviewing What You Learned1. What is the parol evidence rule?2. What are the exceptions to the parolevidence rule?3. What is the best evidence rule?4. What rules govern the changes in a writtencontract?Critical Thinking ActivityParol Evidence What is the legal philosophybehind the parol evidence rule?Legal Skills in ActionParol Evidence Rule Your friend, Pete, is aboutto lease an apartment. Although he intends tostay in the apartment for an entire year, hethinks he might have to move to another statebefore that time. Pete tells you the lease he isabout to enter has an acceleration clause, whichsays that if he breaks his lease, the rest of therent is due at that precise moment. The landlordhas told Pete to ignore that particular clause.Write to your friend explaining how the parolevidence rule affects his lease.Chapter 10: Form of the Contract 217

CHAPTERASSESSMENTSection 10.1 Statute of Frauds● The Statute of Frauds is designed to preventfraud and perjury by requiring written evidenceof the terms of a contract. Putting a contract inwriting can help to clarify an agreement for bothparties and for the courts, if necessary.● A contract that falls under the Statute of Fraudsbut is not in writing is deemed unenforceable.Oral contracts that do not fall under the statute offrauds are valid.● The following elements must be in a writtencontract: (1) place, (2) date, (3) parties, (4)subject matter, (5) price and terms, (6) the intentof the parties, and (7) signatures of the parties.● Generally, handwritten terms prevail over typewrittenor printed terms. The court will presumethat the handwritten terms were placed in thewriting after the contract was typed or printed.For that reason, the handwritten changes likelyrepresent the final intent of the parties. Generally,handwriting prevails over typewriting or printing,and typewriting prevails over printing. Whenthere is a discrepancy in an amount written inboth words and figures, as in a check, the amountwritten in words will prevail over the amountwritten in figures. Sometimes written contractscan be understood in different ways. When suchambiguous language exists, the court will favorthe intent of the party who did not draft thecontract.● The following are types of contracts that must bein writing: (1) contracts to pay the debts ofanother, (2) contracts to pay the debts of adeceased person, (3) contracts requiring morethan a year to perform, (4) contracts inconsideration of marriage, (5) contracts to sellreal property, and (6) contracts for the sale ofgoods costing $500 or more. Be aware that theStatute of Frauds applies only to executorycontracts; that is, contracts that have not beenfully performed. If two parties perform an oralcontract that should have been in writing, thenneither party can try to have it set aside laterbecause it was not in writing.Section 10.2 Special Rules and Formalities● The parol evidence rule presumes that all theterms of a contract are within the document. Noevidence of oral statements made before signinga written agreement can be presented to changeor add to the written agreement. Parol meansword of mouth; evidence, in this instance, meansanything presented as proof at a court trial.● Exceptions to the parol evidence rule permit oralstatements to be used to: (1) explain some pointthat is not clear in a written agreement, (2) showthat certain terms were agreed to but incorrectlytyped in the written contract, and (3) prove thatsomeone was persuaded by the fraud of the otherparty to make a written contract.● The best evidence rule is the preference given bythe courts to the original copy of an agreement.The court looks with disfavor at photocopies orcarbon copies of a written agreement. Copying acontract can make it easier for an unscrupulousparty to conceal any misleading alterations to theoriginal agreement. For this reason, each partyreceives an original version of the contract.● Because the parol evidence rule presumes thatall the terms of a contract are contained withinthe document, if you do not agree to the termsof a preprinted contract, you may cross out theoffensive terms. You may also write in promisesmade to you that are not evidenced on the preprintedcontract. To insure the validity of the newterms, both parties must initial the changes. If acontract contains a lot of complicated or ambiguouslanguage, ask a lawyer to review theagreement before you sign it.218 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.breach of contractperjuryStatute of Fraudsmemorandumgoodsreal propertyparol evidence rulebest evidence ruleduplicate originals1. With a team of three or four, role-play a situation in which acontract must be in writing. Use as many of the terms listedabove as possible.2. Present the role-playing exercise to the class. Be animated andenergetic in your presentation.3. As a class, vote for the best presentation.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 10:Form of a Contract—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. Why did the English Parliament pass the “Act for the Prevention of Frauds andPerjuries” in 1677?5. Must a writing be formal to satisfy the Statue of Frauds? Explain your answer.6. When does the equitable estoppel exception apply to an oral contract to sellreal property?7. When may the parol evidence be introduced?8. What guidelines should you follow when you are asked to sign your name toany document?Chapter 10: Form of the Contract 219

CHAPTERASSESSMENTAcquiring and Evaluating InformationIf you are employed, ask permission to bringto class copies of invoices, sales slips, receipts,letters, etc. from your place of business.9. As a class, review the documents tosee if they meet the requirements ofa memorandum.WarrantySergeant had an irrigation system installed inhis yard. The company that did the work toldSergeant the system had a one-year warrantyfor parts and labor. After six months, theirrigation system no longer worked. Thecompany refused to honor the promise of thewarranty. Sergeant discovered the warranty wasnot in writing anywhere in his signed contractor on the sales receipt.Debate10. Would the promise of the warranty hold upin court? Explain your answer.11. Would the parol evidence rule come intoplay? Why or why not?12. What would you do if you were Sergeant?For the following cases, give your decision andstate a legal principle that applies.13. Rubenstein hired Mason to audit her chainof 92 art galleries. When they made theagreement, Rubenstein insisted that, as apart of the auditing process, Mason wouldbe required to spend one week at eachgallery. Mason demanded a written agreementbefore he would agree to Rubenstein’sterms. Is Mason correct in making such ademand? Why or why not?14. Frank Larson orally promises to give GenaLittle $10,000 if she will marry Larson’snephew, Charles Cohen. Little marriesCohen, but Larson refuses to pay. CanLittle have the promise enforced? Whyor why not?15. A.R. Norton orally agrees to sell her farmto E.J. Dillon for $20,000. She gives Dillonthe following memorandum: “On this dateI hereby agree to sell my farm to E.J. Dillonfor $20,000. A.R. Norton.” Dillon laterrefuses to carry out the agreement. MayNorton recover from Dillon for breach ofcontract? Explain your answer.16. Carlos Beck orally agrees to buy propertyfrom the Bitner Realty Company. He writes,signs, and gives to the realty company amemorandum of the agreement. Thecompany does not sign the memorandum.When Beck fails to buy the property, theBitner Realty Company brings an actionfor damages. Is the realty company entitledto judgment? Why or why not?17. David Abrams agrees to buy printing equipmentfrom Aaron Ackerman. A contractto serve as evidence of the agreement isdrafted and typed, but before signing, bothparties add a handwritten clause. It is laterdiscovered that the handwritten clausecontradicts a typewritten clause. Whichclause will the court follow in determiningthe intent of the parties?220 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.18. Separate DocumentsWheeler and Butler entered a lease-purchase agreement. Under terms of the agreement, Butlerleased and had the option to purchase land that was owned by Wheeler. The agreement wasreduced to writing. However, the agreement was written on two separate documents. When adispute later arose over Butler’s right to buy the land, Wheeler argued that the entire agreementwas unenforceable because it was contained in two documents. Is Wheeler correct? Why orwhy not?Butler v. Lovoll, 620 P.2d 1251 (NV).19. Stock OptionsBuzzy and Hall entered an employment agreement. As a part of the agreement, Hall waspromised that he would receive an option to buy 1,000 shares of the company stock at$20 per share. Later the company refused to sell Hall the shares. What legal argumentmight be used by the company to justify its refusal to sell the shares to Hall?Hall v. Horizon House Microwave, Inc. 506 N.E. 2d. 178 (MA).Common Law in Early EnglandBert has chosen the topic of “Early EnglishCommon Law” for his history paper that is duenext week. He wants to find out more about howthe laws in early England influenced the laws in theUnited States.ConnectUsing a variety of search engines:20. Help Bert conduct the research he needs for hispaper. List 3–4 Web sites that may be useful forconducting the necessary historical research.21. Find at least five English laws that influencedthe U. S. legal system.22. Predict Are written contracts alwayspreferable to oral contracts? Explainyour answer.23. Connect Have you ever signed a contractor other document without reading the fineprint? Why is this a good idea?24. Question Why do you think the Statute ofFrauds does not pertain to all contracts?Explain your answer.25. Respond Why do the courts prefer theoriginal copy of a written agreement ratherthan a photocopy?Chapter 10: Form of the Contract 221

CHAPTERHow ContractsCome to an EndUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 11: How Contracts Come toan End—Chapter Overviews to previewthe chapter information.

The Opening SceneViktor and Alena are outside their high school, chattingwith their friends, Trevor and Micha.The Burning BarnVIKTOR: I’m not buying Keith’s car, after all. Weagreed that the deal wouldn’t work. I’m reallydisappointed. I was counting on getting a carbefore the end of the month. What am I supposedto do now? Dad has already made it clear that hewon’t co-sign for a car loan.ALENA: It’s not that bad. Look on the bright side ofthings. At least you got your $500 deposit back.You’d be in much worse shape if that hadn’thappened.VIKTOR: But I still don’t have a car. It doesn’t look likeI’m going to get one anytime soon, either.MICHA: Did somebody just mention that he neededa car?ALENA: Just my genius brother.MICHA: What’s the problem? Why do you look sodown, Viktor?VIKTOR: Simple. I need wheels, but I don’t have anymoney.MICHA: I have a great idea! Maybe you can take mybrother’s car.VIKTOR: Your brother has a car for sale? How muchdoes he want for it?MICHA: His car is not exactly for sale. He owesmoney on it, but he can’t make the paymentsanymore because he got sick and had to quit hisjob. Maybe you can work something out with him.ALENA: He can’t just stop paying his bills becausehe’s sick.VIKTOR: Yes he can!ALENA: That’s stupid. Do you think that’s fair? I’d bepretty mad if your brother owed me money andtold me he wasn’t going to pay me because of anillness.TREVOR: You need a job, Viktor.VIKTOR: No thanks. A job means work.ALENA: Yeah, a job would be a stretch for you. Ican’t imagine you working for money.VIKTOR: Hey! I had a job once. Remember when Iworked for Mr. Olsen?ALENA: You can’t count that as a job. You helped himpaint the Granger barn for one afternoon!VIKTOR: So?ALENA: So the barn burned down, and that was theend of your job.TREVOR: Did you ever get paid?VIKTOR: No.TREVOR: Well, there you are.VIKTOR: Where am I?TREVOR: Get your money from Mr. Olsen.MICHA: One day’s pay won’t buy my brother’s car.TREVOR: Maybe you can sue for damages.ALENA: The statute of limitations has probably longsince passed.VIKTOR: Maybe, but maybe not. It’s worth a try.TREVOR: Good. Let’s meet after school to talksome more.VIKTOR: Done.1. What happens if one party to a contract is notsatisfied with the other party’s performance?2. Will a slight deviation from the promised performanceamount to a breach of the entire contract?3. Can a contract be ended by mutual agreement?4. What happens if the subject matter of a contractis destroyed?Chapter 11: How Contracts Come to an End 223

l How to identify whentime is important in acontractl How to distinguishbetween satisfactoryand substantialperformancel How to explain tenderof performancel How to explain howcontracts can bedischarged byagreementUnderstanding whencontracts come to anend will help youdetermine your legalrights and obligationsin such situations.l dischargedl performancel complete performancel reasonable timel substantialperformancel tenderl legal tenderl mutual releasel accord and satisfactionPerformance andAgreementEnding a ContractWhen contracts eventually end, they are said to be discharged . Theparties to the contract may enforce their rights and must perform theirduties up to the time of discharge. The law specifies how contracts endso that people will know when their rights and duties expire. In thissection, we will see that contracts can be discharged by performanceand by agreement.Discharge by PerformanceMost contracts are discharged by performance , meaning theparties fulfill the terms of the contract by doing what they promisedearlier. As long as all terms have been carried out properly and completely,the contract is discharged by complete performance .Time for PerformanceThe time for completing a contract may be important to one or bothof the parties. If the time for performance is not stated in a contract andthere is a question of performance, the court will say that the actions orduties associated with the contract must be completed within areasonable time . A reasonable time will vary with the circumstancesof each individual case. However, it is generally defined as the time thatis suitable, fair, and proper to the objective in view. For example, theSUBSTANTIALPERFORMANCESometimes smalldeviations occur whena long and involvedconstruction contractis entered into byvarious parties. Whathappens if there is aslight deviation fromthe original terms ofthe constructioncontract?224 Unit 2: Entering Into Contracts

SATISFACTORYPERFORMANCESometimes one person willagree to perform servicesfor another “to the other’ssatisfaction.” In such asituation, if a party isdissatisfied with theservices performed by theother party, can that partyrefuse to comply with thepayment terms ofthe contract?reasonable time for selling a crate of ripe tomatoes would not be thesame as the reasonable time for selling a house.If the parties specify a time limit for carrying out the terms of thecontract, the court will usually allow a longer time for performanceunless time is of the essence. Time is of the essence when it is a vital oressential element of the contract.Example 1. Carol Wolloff contracted Peter Miles to paint herhouse. As part of the agreement, Peter promised to begin the jobon or before June 1. He showed up on June 3 to do the job. Acourt would probably excuse his tardiness because there wasnothing to show that time was of the essence.However, if the agreement said that Peter was to finish the job byJune 10 because Carol was having a party on June 12, a court wouldlikely enforce the time period because the contract implied that timewas of the essence.Example 2. The Seasons Store agreed to buy 5,000 chocolaterabbits from Northern Confectioneries. The contract specifiedthat delivery was to be made three weeks before Easter and statedthat time was of the essence. The rabbits arrived just one weekbefore Easter, by which time Seasons had ordered and receivedsubstitute products from another supplier. Seasons refused thelate delivery of rabbits. The court would probably uphold SeasonsStore’s refusal.Chapter 11: How Contracts Come to an End 225

Earth DayYour local museummay have displays ofwhat scientists believethe earth was likebefore the developmentof modern industrialsociety. Todaythere are concernsthat, because of humanindustry, the earth andits atmosphere are notin good health. As aresult, organizationshave formed to protectthe earth from furtherharm. Members ofthese organizationsbelieve that there is anunbreakable contractwith future generationsto leave those generationsa healthy planet.What concerns youmost about theenvironment?Get InvolvedFind out when EarthDay is celebrated andplan to participate inrelated community orschool events. Writea report on the lawsthat help protect yourdrinking water and airfrom pollution.Satisfactory PerformanceWhen people perform services for others, the law requires that thoseservices be done in a satisfactory manner. Sometimes contracts saynothing about satisfaction; other times, contracts specifically state thatwork must be done “in a satisfactory manner.” In both situations, whenone party believes the job is unsatisfactory, the court uses the reasonableperson test. The court asks, “Would a reasonable person consider the jobto be completed in a satisfactory manner?” The dispute will then be settledbased on the answer to this question as determined by a judge or jury.Occasionally one party will agree to perform services for another “tothe other’s satisfaction.” In such a case, the other party must be satisfiedto be bound to the contract.Example 3. Marc Marcel, an artist, agreed to paint Juleanne’sportrait “to her satisfaction” for $500. When the painting wascompleted, all of Juleanne’s friends, relatives, and acquaintancesthought that it was a perfect likeness of her. However, Juleannethought the portrait was hideous, believing the nose was too longand the mouth too big. In many states, if Juleanne honestly didnot like the portrait, she would not have to pay for it. Because aportrait is a highly personal matter and subject to one’s personaltaste, and because Marcel had agreed to paint it “to her satisfaction,”Juleanne could reject it. However, Juleanne could not keepthe painting if she opted not to pay for it.Substantial PerformanceAs previously noted, both parties must fully perform their parts ofthe bargain to discharge a contract by complete performance. Someonewho has not fully performed his or her duties cannot, in most instances,win a lawsuit against the other party for money owed or other damages.An exception to this rule is known as the doctrine of substantialperformance . Substantial performance is slightly less than full performance.Someone who has fulfilled the major requirements of a contractin good faith, leaving only minor details incomplete, hassubstantially performed. The courts will allow the person to recover theamount agreed upon under the contract, minus the cost of completingthe job. Courts permit recovery if they can determine that it would beunfair to deny payment. The doctrine of substantial performance is oftenapplied to construction contracts.Example 4. Mr. Lucas insists that Ziming Enterprises should teardown and completely rebuild the second floor of his new officebuilding on Michigan Avenue because the construction companyinstalled the wrong type of tile in the bathrooms. Lucas’s attorneycorrectly points out that the doctrine of substantial performance226 Unit 2: Entering Into Contracts

South AfricaIn Afrikaans, one of South Africa’s 11 official languages, apartheid means“apartness.” Apartheid also defines a strict policy of racial segregation mandatedby an all-white South African government from the 1940s to the 1990s. Manycountries worldwide opposed apartheid, and some countries expressed theirdisapproval by refusing to trade with South Africa.By law, apartheid denied the nonwhite majority the right to vote and requiredthe separation of races in housing, school, employment, transportation, and publicfacilities such as movie theaters, restaurants, and parks. Many South Africansopposed segregation and staged boycotts, demonstrations, and strikes in protest. Inresponse to growing domestic and international pressure to end apartheid, theSouth African government began repealing the laws in the 1970s. The last of theselaws were abolished in 1991. In the spring of 1994, political activist NelsonMandela triumphed over his white opponent to become South Africa’sfirst black president. On the day of his election, Mandela rejoiced:“To the people of South Africa and the world who arewatching: this is a joyous night for the human spirit.This is your victory, too. . . . Free at last!”Here’s a snapshot of South Africa.Geographical area 471,445 sq. mi.Population 43,647,658CapitalsPretoria, administrativeCape Town, legislativeBloemfontein, judicialLegal systemBased on Roman-Dutch law andEnglish common lawLanguageAfrikaans, English, Ndebele, Pedi, Sotho,Swazi, Tsonga, Tswana, Venda, Xhosa, ZuluReligion68% Christian, 2% Muslim, 15% HinduLife expectancy 45 yearsCritical Thinking Question Nelson Mandela and the South African people made theworld a better place by standing up for their beliefs. List some of the things that youmight do to make your community a better place. For more information on SouthAfrica, visit ubpl.glencoe.com or your local library.Chapter 11: How Contracts Come to an End 227

would prevent such a drastic and unfair condition. Lucas wouldhave to pay Ziming Enterprises for the construction of the building.However, Lucas may deduct the cost of replacing the tile orany other damages suffered as a result of Ziming’s failure toperform correctly.Tender of PerformanceA party can fulfill the terms of a contract by performing an act orby paying money. A tender is an offer to do what you have agreed todo under a contract. If you agree to buy a car, for example, makingtender would be offering to pay the money at the agreed time for performance.If you were selling a car, making tender would be offering togive the car to the buyer at the agreed time. It is important to make tendereven if you know the other party will not perform his or her part ofthe contract. In some states, making tender is necessary to test the otherparty’s willingness and ability to perform. If neither party has madetender, then neither party is in a position to bring suit against the other.A Contract with CupidMatchmaking services are plentiful these days. Many people are lookingfor love but have no time to find it. Some matchmaking and dating servicesrequire an up-front payment of half the total fee upon signing a contract.Contracts usually stipulate a specific number of referrals or dates. The balanceof the fee is often due on completion of the service.Most matchmaking contracts obligate the customer to make full payment,regardless of whether he or she finds true love. Even if the customer never usesor refuses to continue using the service at some point before the agreement hasexpired, the contact is enforceable once it is signed.One cannot simply end a contract because he or she becomes bored witha service. However, a few states give customers 30 days to cancel a contractfor dating services. If state law offers no relief, other options may beconsidered. These options include selling the membership to someone else orappealing to the manager’s sense of customer relations in refunding all or partof the purchase price.Research Check to see if your state has a law regulating dating services. If so,is there a refund policy mandated by the state?228 Unit 2: Entering Into Contracts

An offer to perform a certain act to fulfill a contract is a tender ofperformance. If a person who must perform an act makes a tender ofperformance and is rejected, that person is excused from fulfilling thecontract. The same principle does not apply to debts. An offer to pay acertain amount to fulfill a contract is a tender of payment. If a personmakes a tender of payment and is rejected, that person is not excusedfrom the debt. He or she is only excused from paying further interest onthe debt.Example 5. Kenneth Hanson owed Carla Miller $500, which wasdue on the first of July. Kenneth did not tender payment until thefirst of August. Carla refused to take the money at that time, saying,“You didn’t pay the money whenit was due. Therefore, I’m going tosue you.”Kenneth still owes Carla $500. IfCarla did sue, she could collect the $500plus interest at the legal rate only for theone month between the due date and theactual tender of payment.The person offering to pay the requiredamount of money must offerlegal tender ; that is, the person mustoffer U.S. coins or currency. Offering acheck is not a valid tender of payment,even if it is certified. However, the personwho offered the check must be givenreasonable time to obtain legal tender.Discharge byAgreementContracts are created by mutualagreement and may be terminated bymutual agreement.Example 6. Jodi Plume has always admired Mark Jackson’s redconvertible. At school, she hears a rumor that Mark wants to sellhis car. Jodi approaches Mark and offers him $6,000 for the car.Although he really had not planned to sell his car, Mark agreeswhen he hears such a high offer. Later that night, Jodi telephonesMark when she realizes that she can’t afford the car. Mark ishappy to call off the agreement because he has decided he wantsto keep his car, after all.DAMAGED GOODSSometimes purchasedgoods are damaged afterthey are sold but beforethey are delivered. If thebuyer agrees to acceptthe altered goods, isthe original contractdischarged?Chapter 11: How Contracts Come to an End 229

Mutual ReleaseJodi and Mark mutually agreed to end their agreement. A mutualrelease is an agreement between two parties to end an agreement. Bymutual agreement, the contract no longer exists. Whatever parties agreeto do in the first place, they may later mutually agree not to do. Otherwise,there would be no consideration for the promised release.Accord and SatisfactionA contract also can be discharged when one party to an agreementagrees to accept performance from the other party that is different fromwhat was agreed upon in the original contract. In effect, one contract issubstituted for another, which is known as accord and satisfaction .Accord and satisfaction is often used to settle an honest disagreementor unforeseen circumstances regarding an amount owed.Example 7. Lawrence Langham contracted to sell his tractor toJerry Bodoni for $1,200. Before the sale is completed, Bodonisuffers several financial reversals and no longer has the cash to payfor the tractor. Bodoni explains the situation to Langham and offersto give Langham his DVD player, video camera, and color televisioninstead of the $1,200. If Langham accepts these items, Bodoni’spromise to pay the $1,200 is discharged. However, Langham mustactually accept the items. The promise to accept the items is theaccord. The carrying out of the promise is the satisfaction.Reviewing What You Learned1. What is a reasonable time for completing acontract?2. What is the difference between satisfactoryand substantial performance of a contract?3. What is tender of performance?4. How can contracts be discharged byagreement?Critical Thinking ActivityDischarge by Agreement Why does the courtpermit certain contracts to be discharged byaccord and satisfaction?Legal Skills in ActionAccord and Satisfaction Last week, yourfriend Cynthia used a credit card to purchase asnowboard for $277.89. This week she saw thesame snowboard on sale for $250.43 at anotherstore. Cynthia believes she can use accord andsatisfaction to pay the lesser amount when hercredit card bill comes in the mail. Send Cynthiaan e-mail message explaining why accord andsatisfaction will not work in this case.230 Unit 2: Entering Into Contracts

Impossibility ofPerformance andOperation of LawInvoluntary DischargeIt is crucial to understand that some contracts come to an end despitewhat the parties intend or what they actually do. In these situations, theobligations that exist under the contract may also expire. The two primaryways contracts are discharged are by impossibility of performanceand by operation of law.Discharge by Impossibilityof PerformanceA contract that becomes legally impossible to perform generallymay be discharged and both parties released from the obligation. The situationsin which the courts will allow a discharge for impossibilityof performance are death or illness that prevents the performance ofa personal service contract; destruction of the exact subject matter or themeans for performance; and illegality, or situations in which the performanceof a contract becomes illegal.Death or Illness in a Personal Service ContractThe death or illness of a party to a contract may be an excuse fornonperformance only if the contract requires the personal service of theperson who has died or become ill. In Example 3, for instance, if Marcelwere to die before completing the portrait for Juleanne, the contractwould be discharged. She selected him for his ability to do the work.Suppose, however, the contract is such that the party who becameill or died had the right to hire someone else to perform the obligation.In this situation, neither death nor illness will discharge the contract. Inthe case of death, the person appointed to settle the deceased person’saffairs would be obligated to hire someone else to carry out the contract.Destruction of the Exact Subject MatterIf the subject matter that is essential to the performance of the contractis destroyed through no fault of either party, the contract is discharged.The destruction must occur after the contract is entered into,but before it is carried out.l How to explainsituations in whichthe law will permita discharge byimpossibilityl How to identifydischarges that occurby operation of lawl How to define thestatute of limitationsl How to identify debtsthat cannot bedischarged inbankruptcyUnderstanding whencontracts are dischargedby impossibility and byoperation of law will helpyou know your legalrights and obligationsin such situations.l impossibility ofperformancel operation of lawl statute of limitationsl bankruptcy lawsChapter 11: How Contracts Come to an End 231

Money damages are themost common remedyfor breach of contract.Minors are not bound bycontracts but are generallyheld responsible forreturning goods thatthey received as a resultof willfully entering acontract.Example 8. Harold is negotiating a contract for the purchase ofan antique printing press from Mr. Frolock. The price was set,and the printing press was to be delivered the next day. That night,however, the press was destroyed when the delivery truck carryingit was involved in an accident.This contract would be discharged because of the destruction of the particularsubject matter that had been identified in the contract.However, compare Example 8 with the following example:Example 9. Broz Kucan went into the Kenney Industrial SupplyShop and selected a particular type of sewing machine for histailoring business. The salesperson told Kucan that the shop hadmany of the machines in the warehouse and that one would bedelivered to him the next day. That night, a fire destroyed theKenney Industrial Supply Shop’s warehouse and all of its contents.The shop would still be obligated to obtain another sewingmachine for Kucan. Although a type of model had been selected,the exact machine had not been chosen.Sometimes the means for performance of a contract is destroyed sothat the contract cannot be completed. For example, suppose a personcontracts to reshingle the roof of a house, but the house is destroyedbefore the job is done. The contract is dischargedbecause the house must exist for the job to beperformed.IllegalityAnother type of impossibility of performancearises when performance of the contract becomesillegal. As previous chapters discuss, acontract is considered void if its performancewould be illegal at the time the agreement was232 Unit 2: Entering Into ContractsLEGALITYSome street vendors contract with abusiness to sell their goods on the street.If an unlicensed vendor made such anagreement with a business and a lawwas later passed that required streetvendors to be licensed, would thecontract between the vendor and thebusiness be legal?

initiated. The same general rule applies when performance becomesillegal after the contract has been initiated.Example 10. Mr. Novak has contracted to print the labels andinstructional brochures for the Toth-VonMeader PharmaceuticalCompany’s new wonder drug, biotheramyacin. At the time theagreement was made, the drug was legal. Shortly afterward, however,the Food and Drug Administration made the drug illegal.Because the manufacture, distribution, sale, and use of the drugare now illegal, Mr. Novak and Toth-VonMeader have no choicein the matter. The contract must be terminated. Legal performancehas now become impossible.Discharge by Operation of LawAt times, the best interests of society demand that a contract beterminated. Under these circumstances, the law declares contractsdischarged by operation of law .Wrongful AlterationSometimes wrongful acts of one of the parties will discharge a contractby operation of law. One of these wrongful acts is altering, orchanging, a contract.Example 11. A written contract provided that Peter Merkle wasto buy Bart Little’s canoe for $95. Bart secretly inserted thenumeral “1” in front of the “95” and then attempted to collect$195 from Peter. The contract was discharged as a result of Bart’swrongful alteration. Not only may Bart not collect $195, but heis no longer entitled to enforce the original contract at all. Thecontract, however, is not discharged if Peter chooses to enforceit. If Peter still wants the canoe at $95, he can purchase it orcollect damages if Bart will not deliver.Barn or Beach?Sean agreed to workon his grandfather’sfarm for the summer for$1,000—a rate of $100a week for 10 weeks.After eight weeks,Sean feels exhausted.Mucking out stalls isthe hardest work he hasever done! He justreceived a call from hisfriend Marcus, whowants him to come tothe beach for the lasttwo weeks of summervacation. Sean reallywants to go, but hedoesn’t want to let hisgrandfather down.What is Sean’s ethicalresponsibility? Whatwould you do if youwere Sean?Statute of LimitationsIf you make a contract that is breached by the other party, youordinarily have a right to sue that party. Under some circumstances,however, this right may be taken away when the law specifies the timewithin which a contract may be enforced. All states have a law that specifiesin what time a legal action may be brought on a contract, which iscalled the statute of limitations .Example 12. Suppose that Smart Shoppes, Inc. owed the GouldCorporation $1,000 for a shipment of dresses but did not pay.For more than ten years, Gould did not bring any action againstSmart Shoppes to collect. In most states, Gould has waited tooChapter 11: How Contracts Come to an End 233

long to seek payment. You may not “sleep on your rights” andthen expect the law to help you collect.The statute of limitations for failure to perform contracts for thesale of goods is four years in most states. For that reason, an action mustbe begun within four years after the contract is broken. The parties mayreduce the period of limitation to not less than one year by the originalagreement. They may not, however, extend the period to more than thelimit set by their state. The time begins to run the moment that the failureto perform occurs. However, a “time out” is called when a creditoris a minor or is mentally ill. These situations “stop the clock” on thestatute of limitations.Example 13. Suppose Olive Briggs breached her contract andrefused to pay $1,000 that she had borrowed from Jill Hamilton.A month later, Jill was declared mentally incompetent and committedto a state mental hospital. Even though she may remain inthe hospital for 10 years, Jill could still bring suit for the moneydue her as soon as she is declared mentally competent andreleased from the hospital. The time of Jill’s mental incapacitywould not be counted in the statutory limitation period.Termination of Technology ContractDaw Technologies helps to build computer semiconductor factories. It wasawarded a subcontract to install a “clean room” system at a semiconductorplant in Utah. The general contractor notified all subcontractors that thecompletion date of the project had been delayed by 18 months. This delaycaused suspension of all work on the project. The cessation of work requiredthe contractor to terminate all subcontracts. The total amount of the subcontractwas $15 million. Daw’s contract with the contractor was conditionedon the building project remaining on schedule. Both parties had agreed thatthe contract would be terminated in the event of a major delay in the project.(Source: TechWeb News, February 24, 2001)Connect Use the Internet to research the law of contract. Can you think of anyscenarios under which Daw Technologies might seek a remedy, even thoughthis discharge is by agreement?234 Unit 2: Entering Into Contracts

Under the law of some states, people who are in prison suffer “civildeath.” They lose the right to vote, to contract, and to bring and defendagainst civil lawsuits. In these states, the statute of limitations on contractsoften stops running while a person is in prison. Also, in someinstances, the debt may be renewed. If a debtor makes a partial paymentor admits that the debt exists after the time period has passed, the debtis renewed for another time period set by the state statute. In New Yorkand some other states, such a new promise must be in writing. Thereare many special statutes of limitations in every state. To protect yourselffully in important business relationships, you should refer to themost recent statutes in your state.BankruptcySometimes people and businesses get hopelessly in debt and cannotpay their debts as they become due. Under Old English common law, suchpeople were placed in debtors’ prisons and had no hope of recovering.The drafters of the U.S. Constitution opposed such treatment of debtors.They gave Congress the authority to pass bankruptcy laws . These lawsset procedures for discharging a debtor’s obligations. These obligations stillexist, but the debtor can no longer be imprisoned for failure to pay.Certain debts cannot be discharged under bankruptcy laws. Educationloans, for example, usually cannot be discharged during the firstfive years of the repayment period. In addition, debts for taxes, alimony,support, and maintenance are not affected by a general discharge ofdebts in bankruptcy.ComputerTechnologyElectronic money willbecome legal tender inSingapore by the year2008. Every merchantin the country will berequired to accepte-money from customers,regardless of the price ofthe item being purchased.E-money will be loaded inelectronic purses storedon smart chips locatedin devices such as mobilephones or personal digitalassistants.Research ActivityPredict when electronicmoney will be used in theUnited States. Explainwhether you believee-money will ever totallyreplace our paper currency.Reviewing What You Learned1. When will the law permit a discharge byimpossibility?2. When will the law permit a discharge byoperation of law?3. What is the statute of limitations?4. What debts cannot be discharged inbankruptcy?Critical Thinking ActivityBankruptcy What is the legal philosophybehind the idea that certain contracts cannot bedischarged in bankruptcy?Legal Skills in ActionDebts after Bankruptcy Your friend Charlottesays her parents are about to go to bankruptcycourt. She believes that all of the family’sdebts will vanish as a result of the bankruptcyproceedings. Write a letter to your friendexplaining that some of her family’s debts willremain even after declaring bankruptcy. Namesome of the kinds of debt that cannot bedischarged.Chapter 11: How Contracts Come to an End 235

CHAPTERASSESSMENTSection 11.1 Performance and Agreement● A reasonable time for completing a contractvaries, but it is generally defined as the time thatis suitable, fair, and proper to the objective of thecontract. For example, the reasonable time forselling perishable food would not be the same asthe reasonable time for selling a car or house. Ifthe parties specify a time limit for carrying outthe terms of the contract, the court will usuallyallow a longer time for performance unless timeis of the essence. Time is of the essence when itis a vital or essential element of the contract.● Satisfactory performance is completion of aservice that a reasonable person would deemperformed to his satisfaction. In determiningwhether satisfactory performance has beenmade, the court asks, “Would a reasonableperson consider the job to be completed in asatisfactory manner?” A judge or jury wouldthen decide the matter based on the answer tothis question. Unlike satisfactory performance,however, substantial performance is notcomplete performance. Nonetheless, if the majorrequirements have been fulfilled, the courts willallow the performer to recover the contractamount minus the cost of completing the job.● A tender of performance is an offer to perform acertain act to fulfill a contract. It is important tomake tender even if you know the other partywill not perform his or her part of the contract. Insome states, making tender is necessary to test theother party’s willingness and ability to perform.● Contracts can be terminated by mutual releaseand accord and satisfaction. A mutual release isan agreement between two parties to end anagreement. Whatever parties agree to do in thefirst place, they may later mutually agree not todo. Accord and satisfaction occurs when oneparty to an agreement agrees to accept performancefrom the other party that is different fromwhat was agreed upon in the original contract.Accord and satisfaction is often used to settlean honest disagreement or unforeseen circumstancesregarding an amount owed.Section 11.2 Impossibility of Performanceand Operation of Law● Some contracts come to an end despite whatthe parties intend or what they actually do. Acontract becomes legally impossible to performand becomes discharged in the case of (1) deathor illness that prevents the performance of apersonal service contract, (2) destruction of theexact subject matter or the means for performance,and (3) illegality. The death or illness of a partymay be an excuse for nonperformance only if thecontract requires the personal service of theperson who has died or become ill.● A contract may be discharged by operation oflaw in the following cases: (1) when one of theparties commits a wrongful act, (2) when thestatute of limitations has expired, and (3) whenthe debtor declares bankruptcy.● The statute of limitations limits the time withinwhich a legal action may be brought. The statuteof limitations for failure to perform contracts forthe sale of goods is four years in most states.● Educational loans, debts for taxes, alimony,support, and maintenance are not affected by ageneral discharge of debts in bankruptcy.236 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.dischargedperformanceaccord and satisfactionsubstantial performancetenderlegal tenderoperation of lawstatute of limitationsbankruptcy lawsreasonable time1. With a team of three or four, role-play a situation in which acontract is coming to an end. Use as many of the terms listedabove as possible.2. Present the role-playing exercise to the class. Be animated andenergetic in your presentation.3. Have your classmates critique your team’s performance.4. Read your classmates’ comments and briefly discuss with yourteam how you could improve your role-play.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 11:How Contracts Come toan End—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. Will a court allow a longer time for performance of a contract than the contractspecifies? Explain your answer.6. What is the test called that the courts use to determine satisfactory performance?7. What is it called when one contract is substituted for another? How often is thisprocedure used?8. Can the death or illness of a party be used as an excuse for nonperformance of acontract? Explain your answer.9. What situations “stop the clock” on the statute of limitations?10. Why do some states require a party to make tender, even if the other party cannotfulfill the terms of the contract?11. Why does the law require that some debts be retained after a person declaresbankruptcy?12. What is legal tender?Chapter 11: How Contracts Come to an End 237

CHAPTERASSESSMENTParticipate as a Member of a TeamIn groups of three or four people, interview abusiness owner or manager in your community.Find out if he or she has ever ended a contractbased on:13. Satisfactory performance.14. Substantial performance.15. Mutual release.16. Accord and satisfaction.Ask about the details of the situation, and ifpossible, share your information with the class.Impossibility of PerformanceMilka hired Albert Cole, a landscape architect,to design a patio and backyard landscape forher home. It would include a custom designedbarbeque grill and fishpond. When he wasalmost done with the design, Albert became illand his son, Albert Jr., also a landscapearchitect, finished the project.Debate17. Does Milka have to accept the son’sdesign? Explain your answer.18. Is the contract discharged by impossibilityof performance? Why or why not?19. Does Milka have to wait until Albert getswell, or can she legally discharge thecontract? Explain your answer.For the following cases, give your decision andstate a legal principle that applies.20. Ferguson had seriously overextended himselffinancially until he was faced with filingfor bankruptcy. He was especially anxiousto file quickly because he had an enormouspayment of back taxes due in April. He alsohad child support payments due, as well asseveral enormous credit card bills. Whichof these debts can be excused in bankruptcyand which cannot? Explain your answer.21. Earl Kirton agrees to put vinyl siding onBen Finkel’s house for $4,500. After almostcompleting the job, with only one more rowof clapboards to be covered, Kirton cannotstand Finkel’s watching his every move anylonger. Kirton picks up his tools and leaves;Finkel argues that he does not have to payKirton because Kirton did not finish thejob. Is Finkel correct? Why or why not?22. Ruth Collins finds an antique table she likes.She tells the proprietor that she will buy it.She has no money with her, so she agreesto pick it up and pay for it the next day.That night the antique shop and its contentsburn to the ground. Is the contract to buythe table discharged? Explain your answer.23. Otto Mandel enters into a contract with theHewlett Lumber Company for purchasing50,000 feet of yellow pine. Mandel intendsto use the wood in the manufacture ofpinball games. After the contract is made, astate law is passed making the manufactureand sale of pinball games illegal. Does thisnew law relieve Mandel from liability onthe contract? Why or why not?238 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.24. Partial PaymentWeaver and Brewer hired Grafio to paint their house for $5,650. After the job was completed,Weaver and Brewer discovered a footprint left on the roof. The damage would require $50 to fix.Weaver and Brewer stopped payment on a check made to Grafio for $1,845, which representedthe last installment payment. Would Grafio be permitted to recover the money owed to him forthe paint job? Why or why not?Weaver v. Grafio, 595 A.2d 983 (DC).25. Impossibility of PerformanceParker entered a contract with Arthur Murray, Inc. to learn how to dance. The contract eliminatedany possibility of getting a refund. Later, Parker suffered a permanent disability thatmade it impossible for him to dance. The dance company pointed to the anti-refund provisionand refused to give Parker his money back. Parker sued, arguing that the impossibility of performanceended the contract. Arthur Murray argued that the anti-refund provision overruledthe impossibility of performance doctrine. Who is correct? Explain your answer.Parker v. Arthur Murray, Inc. 295 N.E.2d 487 (IL).Felon’s RightsSome states take away some of the civil rights ofconvicted felons. Felons may lose the right to vote,to contract, and to bring and defend against civillawsuits. Some states have even consideredrequiring felons to register their genetic profiles.ConnectUsing a variety of search engines, research:26. The laws in your state regarding the loss ofrights for a convicted felon.27. Any special statute of limitations that mightaffect people in prison.28. Predict Why do you think time is soimportant in a contract?29. Connect Can you describe a situation inwhich you have made tender?30. Question Do you think it is fair that felonslose some of their civil rights while inprison? Explain your answer.31. Respond Do you think the drafters of theU.S. Constitution were correct when theygave Congress the right to pass bankruptcylaws? Why or why not?Chapter 11: How Contracts Come to an End 239

CHAPTERTransfer of Contracts andRemedies for BreachUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 12: Transfer of Contracts andRemedies for Breach—Chapter Overviewsto preview the chapter information.

The Opening SceneAfter school, Viktor and Alena meet Trevor andMicha on the school’s athletic field.An Imaginary SettlementVIKTOR: Hey, Micha! Thanks for meeting me. I’vebeen thinking about our conversation a lot today.I think you might have the answer to all of mymoney problems. So, if I sue Mr. Olsen, what doI get?MICHA: You’ll get money, of course. That’s what youwant, isn’t it?VIKTOR: Yeah, but how much do you think that Ican get?MICHA: Well, for starters, I’m sure you can get theamount that he was supposed to pay you for thepaint job.VIKTOR: That’s not much. It’s no more than $20, tops.TREVOR: I have an idea! Maybe you can get someextra money to compensate you for your pain andsuffering.ALENA: Oh, please! You guys are too much. Whatpain did Vik suffer, other than having to do somework? If I remember correctly, he was actuallyhappy that the job ended early. He wanted out ofthe deal before the fire even occurred. It’s not fairfor you to sue Mr. Olsen.VIKTOR: Allie’s right for once, guys. I didn’t suffermuch. . . . Well, maybe just a little on the accountof having to walk all the way over there. I think thatI may have gotten up really early that morning, too.MICHA: That’s something. Now we have something togo on. What about punitive damages?VIKTOR: I don’t know what you mean. What arepunitive damages?MICHA: It’s when the court makes you pay so muchthat it hurts.ALENA: Come on, Vik. Let’s drop this right nowand move on. You know that you’re not goingto sue him.VIKTOR: No, I don’t suppose it would be fair to bringa lawsuit, but it has been fun imagining a biglawsuit settlement. I could really use the money. I’mnever going to be able to afford a car.TREVOR: So maybe that job idea is the best thingafter all?VIKTOR: Yeah, maybe so. I guess I have no otherchoice than to get a job. I’m going to look foranother job on the Internet tonight.MICHA: Well, I was saving this news for last, so Iguess now is the time.VIKTOR: What news?MICHA: Mrs. Miniver hired me to mow her lawnevery week this summer, but now my dad says I’vegotta go with him to Florida. Maybe I can giveyou my job. Mrs. Miniver pays pretty well, and thejob’s not that hard. Even you could handle it, Vik.It won’t cut into your social life at all. What do youthink? The job’s yours if you want it.VIKTOR: That would be great. Sweet! Thanks,Micha!MICHA: No problem. That’s what friends are for.1. What happens when one party to a contractdecides to assign his or her rights under thecontract to a third party?2. How is a novation formed?3. What remedies are available in a lawsuit forbreach of contract?4. What is the difference between specificperformance and an injunction?Chapter 12: Transfer of Contracts and Remedies for Breach 241

The Transfer ofContractual Rightsand Dutiesl How to explainthe nature of anassignmentl How to identifycontractual rights thatcan be assignedl How to explain thenature of a delegationl How to explain thenature of a novationl How to identify asituation involvingprivity of contractUnderstanding whencontractual rights andduties can be assignedwill prepare you to dealwith such situations whenthey arise.l assignmentl delegationl novationl privity of contractl third-party beneficiaryTransfer of RightsAt the beginning of our study of contracts, we learned that whenindividuals enter contracts, they receive rights (benefits) and incur duties(detriments). In the vast majority of cases, people retain their rights andperform their duties on their own. At times, however, these rights andduties are transferred from the original parties to someone new. Thereare a variety of reasons why people choose to transfer their contractualrights and duties. Some people transfer their right to receive paymentsto other parties to pay off debts. Other people take on more work thanthey can handle and need to transfer some of their duties to other qualifiedparties. The law permits this sort of transfer, with a few exceptions.When transferring contractual rights and duties, there are manydetails that you should know.You may legally transfer your rights under any contract to whichyou have agreed, as long as the contract does not specifically say youcan’t. The transfer of a right under a contract is called an assignment .The party who transfers the right is called the assignor, and the party towhom the right is transferred is called the assignee. The assignee is athird person who is not a party to the original contract.Example 1. Anthony Cuomo entered into a contract with CathyMichaud to rebuild the front steps of her house for $1,800. Thecarpenter was pleased to get the contract because he owed $1,800to his landlord, David Brown. Before beginning work, Anthonyassigned the right to receive the payment for the work to his landlord.When payment was due, Cathy paid the $1,800 to DavidBrown directly.How Rights May Be AssignedNo consideration is necessary for an assignment to be valid. In mostcases, the law does not specify how one party may assign a right toanother. It’s best to put an assignment in writing, however, because anoral assignment can be difficult to prove. Let’s consider why it wouldbe important for an assignment to be in writing. Suppose that the partyto whom money is owed decides to assign the rights to the money. Theparty who owes the money is entitled to notice of the assignment. If the242 Unit 2: Entering Into Contracts

party who owes money or duties is notified or shown such a writtenassignment, then that party is legally bound to pay or render services tothe assignee only; payment to the assignor will not discharge the debt.Example 2. Nathan Ecker, who rents out two rooms of his house,is moving temporarily to another state. To make sure rent is collectedduring his absence, Nathan assigns one tenant, RichardTaft, the duty to collect the $700 rent from Jerry Golden, theother tenant. He also gives Jerry a note asking him to pay Richardhis monthly rent. Richard then has the right to receive the $700from Jerry. However, if Nathan merely told Richard to collectrent, Jerry would not know this was actually the case.What Rights May Be AssignedMost rights may be assigned unless the assignment changes theobligations of the other party to the contract in an important way. InExample 1, when Anthony assigned the right to receive the $1,800 to hislandlord, Cathy’s obligation to pay the money did not change. Theassignment was valid. However, not all assignments are valid.Example 3. Cathy Michaud decided, after contracting for the stepreplacement with Anthony Cuomo, that the steps at the home ofBreach of ContractA telecommunications company recently cut off service to two Internetservice providers and their customers. These providers were under contract tomake payments for their telecommunications service. When millions of dollarsin bills became past due, the telecommunications company treated the lack ofpayment as a breach of contract. As a result, they cut off service. One of theInternet service providers accused the telecommunications company of shuttingoff service in an effort to steal its customers. If true, this would also be a breachof contract. (Source: New York Times, February 16, 2001, p. C3)Connect Find out which Internet service providers are in your area and whichtelecommunications companies support their service. Research any legal optionsthat you may have if your service were to be cut off prior to the end of yourservice contract.Chapter 12: Transfer of Contracts and Remedies for Breach 243

her neighbor, Helen Kane, were in worse condition. Helen, anelderly woman, might easily be injured on the dilapidated steps,and Cathy knew that Helen didn’t have the money to pay for newsteps. Cathy decided that she wanted to change her contract withAnthony. She now wanted Anthony to fix Helen’s steps instead.However, this materially changed Anthony’s obligation, and suchan assignment would likely be void. Rights to receive personalservices are usually not assignable.An assignor can assign nothing more than the rights that he or shepossesses. An assignee takes those rights, subject to other people’sdefenses.Example 4. In Example 1, suppose that when Anthony Cuomoassigned the right to receive the $1,800 to his landlord, Anthonythen did a poor job of fixing the steps. Cathy Michaud could thenraise the defense of a poor repair job if she were sued by theassignee, who wanted to collect the $1,800.AN ASSIGNMENTAssignments transfer aparty’s rights in a contractto a third party. Is italways necessary foran assignment to be inwriting?Figure 12.1ASSIGNMENTKNOW ALL MEN BY THESE PRESENTS:That I, John P. Beney, residing at 1131 39th Street,New York, in consideration of ($) paid by LYDIA A.BENIQUEZ, residing at 24379 Riverdale Parkway, New York,New York, (herein called "the Assignee"), hereby assign tothe Assignee all my rights, title, and interest in the moniesdue me from JOSEPH ORMOND, for work, labor, andservices as a carpenter performed by me, betweenMay 1, 20––, and May 31, 20––, which services wereperformed at the request of said JOSEPH ORMOND,and were of the agreed value of two thousand, twohundred dollars ($2,200).IN WITNESS WHEREOF, I have hereunto set myhand and seal this 1st day of June, 20––.244 Unit 2: Entering Into Contracts

Rights to the payment of money (wages, money owed on accounts,royalties on books, etc.) and rights to the delivery of goods are the mostcommon types of rights that are assigned. After the assignment, theassignor no longer has an interest in the right that was assigned. Thisright now belongs exclusively to the assignee.Generally, no special form is required to make an assignment. Anywords that clearly indicate a person’s intent are sufficient (see Figure 12.1).This assignment may be made on a separate paper, or it may be written onthe back of a written contract containing the rights to be assigned.Transfer of DutiesDuties may be transferred to someone else. The transfer of a dutyis called a delegation . A delegation should not be confused with an assignment.An assignment is a transfer of rights; a delegation is a transferof duties. In a transfer of duties, a party to a contract delegatesanother person to perform the obligation in his or her place. In TheOpening Scene, Micha could make a delegation to Viktor involving hisjob of mowing lawns at Mrs. Miniver’s property.In the “Institutes” ofJustinian, the preceptsof ancient Roman lawwere described as “tolive honestly, to injureno one, and to giveevery man his due.” Inancient Rome, civil law,or publici juris, relatedto the state or publicworship. Private law, orjuris private, related tothe legal interrelationsof citizens.DELEGATION OF DUTIESSometimes the dutiesagreed to under a contractcannot be delegated toanother party. When is aparty unable to delegate acontractual duty?Chapter 12: Transfer of Contracts and Remedies for Breach 245

Keeping YourWordRachel agreed to babysitfor the McCannonsevery Saturday for threemonths while theirhouse was undergoingremodeling. However,on the Thursday beforeher first Saturday ofbaby-sitting, Rachel wasoffered a job at a localgift shop. The job at thegift shop would requireher to work on someSaturdays. Rachelpassed up the job offerbecause she felt itwas too late for theMcCannons to findanother sitter. Do youagree with Rachel’sdecision? Why orwhy not?Example 5. Ivan Remec, owner of the Eastern Print Shop, wasin financial trouble. He had overextended himself and could notmeet all of his printing contracts. When the time came to print themonthly newsletter for the high school’s Parent Teacher Association,he transferred his contract obligation to another printer,Stanley Novak of ABC Press, who was not a party to the originalcontract.Figure 12.2Mr. Carl Newfield:Bryant, Inc.6225 St. Clair AvenueCleveland, OH 44103June 15, 20--You are hereby notified that Pendleton Architects Limited of Euclid,Ohio, has assigned to Bryant, Inc. all rights to its claim against youin the amount of $750.You are further notified to direct all payments to Bryant, Inc. at theabove address to ensure credit for payment.Sincerely yours,Norbert BryantVice President246 Unit 2: Entering Into ContractsNOTIFICATION OF AN ASSIGNMENTWhen an assignment is made, the original partyshould be notified of the assignment. Whatethical reasons could be given for notifying theother party of an assignment?

Although the performance of an obligation may be delegated, theresponsibility for it may not. In Example 5, Eastern Print Shop continuesto be liable for the terms of the contract. If both parties understand thesituation, it is all right to delegate the duty of doing the work to someoneelse. This is really a form of subcontracting and occurs often inbusiness contracts. It is quite common, for example, in building contracts.When an assignment is made, however, it is generally consideredethical and courteous to inform the original party (see Figure 12.2).Delegating duties can make business and personal obligations mucheasier to fulfill. Duties may not be delegated, however, in any of thesescenarios: a party agrees to perform the service personally; the contractcalls for the exercise of personal skill and judgment; or the contractitself prohibits delegation.Example 6. Suppose, in Example 5, that Ivan Remec had toldMrs. Kolenich, the president of the PTA, that he would personallyLawyer-Client ConfidentialityAs members of state bar associations, lawyers are subject to rules ofprofessional conduct. One important rule is the obligation of confidentiality,which requires lawyers to protect the private and confidential information thatthey receive from their clients. This obligation is preserved even after thetermination of the attorney-client relationship. The purpose of this rule is tofoster trust, honesty, and openness in the attorney-client relationship, and tomake people feel comfortable sharing information with their lawyers.There are exceptions to a lawyer’s obligation of confidentiality. A lawyermay release private information with the client’s consent. He or she mayalso release information if it is necessary to establish a defense in a legalcontroversy with the client. There are also exceptions when confidentiality isinconsistent with the interests of society. An attorney may alert the properauthorities if he or she reasonably believes that the information will preventa client from committing a criminal act likely to result in death or substantialbodily or financial harm to others.Research What other professions have rules about protecting your confidentiality?What, if any, are the exceptions to these rules?Chapter 12: Transfer of Contracts and Remedies for Breach 247

do her printing job. He could not then delegate the job toABC Press.Pets that BiteLawsuits are oftenbrought against petowners when their petsbite people. The victimcan receive compensationfor medical costs,lost pay, and pain andsuffering. Placing petsin good homes, wherethey will be properlytrained and cared for,would eliminate someof the problems. If youwere bitten by yourneighbors’ dog,would you sue them?Why or why not?Get InvolvedContact your localanimal shelter or yourlocal branch of theHumane Society andlearn how you canvolunteer. Speak toyour science teacher,and volunteer to takecare of the animals inyour science classroom.Duties that require personal skill and judgment, such as the workof teachers, writers, artists, or entertainers, cannot be delegated to others.Such persons are selected to perform their services because of their particularskills or talents. Another person would not be able to performthe services in same manner.The offeror and the offeree may include in their contract a statementthat the contract may not be assigned or delegated. In this case, bothparties are restrained.Example 7. Herbert Ryan contracted to build a garage forRoberta McGovern. The contract said Herbert would do the workhimself and could not assign or delegate the contract to any outsidethird party. Ordinarily a contract of this type could beassigned or delegated to another competent builder, but the wordsof this particular contract would prevent any such action.If you have the right to delegate a contractual obligation and decideto do so, choose your third party carefully. As explained earlier, you retainresponsibility for any job duties that you subcontract, or assign toa third party. If you select an unreliable third party, you may end upcausing yourself a great deal of anxiety or frustration.NovationYou don’t need the permission of the other party to assign contractrights or to delegate duties to a third person. If you do receive permissionto do so, however, and the other party agrees to deal with theassignee, the resulting contract is called a novation. A novation is anagreement whereby an original party to a contract is replaced by a newparty. The other terms of the new contract generally remain the same asthose in the original contract. To be effective, the substitution requiresthe consent of all of the parties involved.248 Unit 2: Entering Into ContractsExample 8. One of the jobs that Ivan Remec delegated to ABCPress was printing a book of poetry for Henrietta Gladstone. ABCPress agreed to do the work, and Ivan assigned the right to receivethe money to ABC’s owner, Stanley Novak. Henrietta agreed torelease Eastern Print Shop from all obligations and deal solelywith ABC Press. This substitution of parties was a novation.Third PartiesA contract is a binding agreement that establishes a relationshipbetween the parties to the contract. This relationship between the parties

is termed privity of contract . It determines who can sue whom overa question of performance required by a contract. Usually the partiesto a contract have standing to sue.Example 9. In The Opening Scene, Micha does not succeed inconvincing Viktor to sue Mr. Olsen for back pay and damages.Could Micha go ahead and sue Mr. Olsen himself? No, becausehe was not a party to the original contract between Viktor andMr. Olsen. Micha might argue that he would have received somebenefit under contract if his friend were to win a lawsuit againstMr. Olsen, but this would be only an incidental benefit. Micha hasno reasonable standing to bring suit.A third person may sometimes enforce a contract when it is madespecifically for that person’s benefit. A person who is not a party to acontract but still benefits from the contract is called a third-partybeneficiary .Example 10. Uncle Leo bought a life insurance policy that namedhis nephew, Andrew Wollack, as beneficiary. When Uncle Leodied, the insurance company refused to pay off on the policy,claiming that Uncle Leo had not disclosed to them that he hadcancer. Andrew said that his uncle did not know he had the illnesswhen he took out the policy. Because Andrew was anintended third-party beneficiary of the life insurance contract,he has standing to bring suit against the insurance company.Reviewing What You Learned1. What is an assignment?2. What contractual rights can be assigned?3. What is a delegation?4. What is a novation?5. What is privity of contract?Critical Thinking ActivityThird Parties Why does the law grant thirdpartybeneficiaries standing to bring lawsuits?Legal Skills in ActionPrivity of Contract Your brother is the generalmanager of a restaurant in Capital City. He hasjust learned that the Brotherhood of InternationalElectronic Workers (BIEW) has canceledits plans to hold its annual convention inCapital City. This cancellation will cause yourbrother’s restaurant to lose an enormousamount of money. He has decided to bring alawsuit against the BIEW. Discuss with severalof your classmates whether your brother hasstanding to bring a lawsuit against the BIEW.Chapter 12: Transfer of Contracts and Remedies for Breach 249

l How to explain theconcept of anticipatorybreachl How to identifyremedies available forbreach of contractl How to define specificperformancel Why you mustminimize the damagesinvolved in a breach ofcontractUnderstanding theremedies available whena contract is breachedwill help you pursuesatisfaction if thishappens to you.l breach of contractl anticipatory breachl damagesl actual damagesl incidental damagesl liquidated damagesl mitigation of damagesl specific performancel injunctionRemedies of theInjured PartyBreach of ContractA breach of contract occurs when one party to a contract fails toperform the duties set out in the terms of the agreement. If you fail tofulfill your obligations by not carrying them out or by performing themin an incomplete or unsatisfactory manner, then you are said to havebreached the contract.Contracts are usually breached after the performance date. Sometimes,however, parties to a contract notify the other party that they willnot go through with the contract before the time for performance. Theyhave breached, or violated, the agreement before they were required toact. This is called anticipatory breach . Formerly, the injured party hadto wait to bring suit until the time for performance had passed. Manystates now permit the injured party to bring an action for damages immediately,without waiting for the actual time for performance to arrive.Example 11. A youth group to which you belong has made acontract with a carpenter to build a teen activity center. The carpenteris supposed to begin work on June 20, but she calls thedirector of your group on January 9 to explain that she will notbe able to fulfill her obligation. Your group can bring an actionfor damages against the carpenter for an anticipatory breach anytimeafter January 9.The principle of anticipatory breach does not apply to promises topay money at some future date. Someone who refuses to pay moneyowed on a future date cannot be sued until after the payment is due.DamagesWhen a contract is breached, the injured party has a choice of remedies.A remedy is a legal means of enforcing a right or correcting awrong. If you are the injured party, you have three options. You may:accept the breach; sue for money damages; or, in some cases, ask thecourt for an equitable remedy.Acceptance of BreachIf one party breaches a contract, it is an excuse for the other partynot to perform. For example, if someone failed to perform under a contractwith you, you may simply accept the breach and consider the250 Unit 2: Entering Into Contracts

contract discharged. This is often the best choice, especially if no damageshave been suffered. Damages awarded to recognize a breach ofcontract that did not cause loss often amount to less than one dollar.These damages are intended merely to recognize that a breach of contracthas occurred. Your legal fees for pursuing and winning such a suitwould likely far outweigh any damages you would receive.Money DamagesIf you suffer a loss as the injured party, however, you may sue formoney damages resulting from the breach of contract. Damages arepayment recovered in court by a person who has suffered an injury (seeFigure 12.3). The money damages should, by law, place you in the positionyou would have been in if the contract had been carried out. Let’stake a closer look at some selected categories of damages. To recoverdamages, the injured party must make tender; that is, the injured partymust offer to do what he or she agreed to do under the contract.Actual and Incidental DamagesIn actions for breach of contract, the injured party may recover theactual damages caused by the other party’s failure of performance.Actual damages are damages directly attributable to another party’sbreach of contract. For instance, if someone contracts to buy land at acertain price but the contract is breached, he or she can seek damagesamounting to the difference between the agreed price of the land and itsmarket value at the time of the breach. If a seller of goods breaches acontract, the measure of damages for the prospective buyer is the differencebetween the market price at the time of the breach and the contractprice, plus incidental damages. Incidental damages are anyreasonable expenses, resulting from a breach, that have been incurredby the buyer.HistoryIn the book of Exodus inthe Old Testament, manyof the old Hebrew lawsare cited. One states,“Wherever hurt is done,you shall give life for life,eye for eye, tooth fortooth, hand for hand, footfor foot, burn for burn,bruise for bruise, woundfor wound.” (Exodus21:23–25, The NewEnglish Bible)Research ActivityToday, we award moneydamages. Research alawsuit in which acontract has beenbreached and moneydamages have beenawarded. Make an oralpresentation to your classoutlining the case andwhether you believe theaward was sufficient.Example 12. Yukio Tanaka contracted with a local bookstore tobuy a set of encyclopedias at a price of $1,500. The store failedto deliver the books according to the agreement. Tanaka learnedthat he would have to pay $1,800 to buy the same set of books atanother store across town. He is entitled to sue the first store forhis actual damage of $300, which is the difference between$1,500 and $1,800, plus any other expenses incurred in gettingthe books at the other bookstore. These incidental damages mightinclude transportation or delivery costs.Liquidated DamagesDamages agreed upon by the parties when they first enter into acontract are called liquidated damages . The parties agree beforehandChapter 12: Transfer of Contracts and Remedies for Breach 251

Figure 12.3TypeActual DamagesCompensatory DamagesConsequential DamagesIncidental DamagesLiquidated DamagesNominal DamagesPunitive DamagesSpeculative DamagesDamagesDescriptionAn amount of money awarded for damages directly attributable to another party’s breachof contract or tort; for example, physician’s fees when one party wrongly injures another,and financial losses resulting from failure to deliver goods already contracted for.An award of an amount of money that compensates a plainiff for the injuries suffered andnothing more.Damage, loss, or injury (such as loss of profits) that does not flow directly and immediatelyfrom the act of the party but only from some of the consequencesor results of the act.Reasonable expenses that indirectly result from a breach of contract. They include expensessuch as those incurred in stopping delivery of goods, transporting goods, and caring forgoods that have been rightfully rejected by a buyer.An amount of anticipated damages, agreed to by both parties and contained in a contract,to be the basis of any award in the event of a breach of the contract.Damages awarded by a court when a successful plaintiff has proven a legal injury but noactual resulting damages; six cents by common law, usually $1 today.Damages in excess of losses suffered by the plaintiff awarded to the plaintiff as a measureof punishment for the defendant’s wrongful act. Also called exemplary damages becausethey set an example of punishment awaiting other wrongdoers.Damages not founded on fact but on the expectations that a party may have hoped forfrom a contract that has been breached; not allowed in any claim for money damages.DAMAGESSuing for money damages isone remedy for breach ofcontract. What is theobjective of awardingdamages to the injuredparty in a contract case?what damages may be recovered if either one breaches the contract. Thelaw requires that liquidated damages be reasonable.Example 13. The Young Supply Company ordered a sortingmachine for its new distribution center, which was being built inSacramento. The machine was a vital link in delivering manyproducts to the firm’s customers. The Young Company insertedin its contract with the machine seller the following terms: “TheYoung Company will be paid $500 each day beyond the dateagreed upon for delivery of said machine if the machine isdelivered late.” Considering the profits that might be lost throughdelay in delivery, the liquidated damages provision would be consideredreasonable and proper.Minimizing DamagesAn injured party must take all reasonable steps to minimize the damagesthat might result from the other party’s failure of performance. At252 Unit 2: Entering Into Contracts

all times, you must protect the other party in a contract from any unnecessarylosses. This principle is known as mitigation of damages .Example 14. Peter Lister contracted to deliver 1,000 baskets oftomatoes from his farm to a cannery for a certain price. Whenhe tried to deliver the tomatoes, however, the canner would notaccept them. Under the mitigation of damages principle, Listerwould be obligated to try to find another buyer for the tomatoes.If he didn’t make as much money, he could demand paymentfrom the cannery for the difference between what he was paidfor the produce and what the cannery had agreed to pay.Equitable RemediesThe remedy of money damages is not always enough to repay aninjured party for breach of contract. In these cases, the injured partymay seek an equitable remedy (see Figure 12.4). Two chief equitableremedies are specific performance and an injunction.Specific PerformanceSometimes the remedy of money damages is not enough to repay abreach of contract. In that case, one party may sue the other for specificperformance by asking the court to order the other party to do specificallywhat he or she originally agreed to do. However, this remedy canonly be used when money damages are not sufficient to give relief.Example 15. Doreen Russell contracted to sell Betsy Keller avaluable original oil painting. Doreen then breached the contractand refused to sell. Money damages would not be adequate inthis case because the painting could not be purchased elsewhere.The court would order Doreen to turn the painting over to Betsyfor the agreed price.As Example 15 illustrates, specific performance can be grantedwhen the subject matter of the contract is rare or unique. It would notFigure 12.4TypeSpecific PerformanceInjunctionEquitable Remedies TypeDescriptionSpecific performance requires the other party to carryout the terms of the contract as originally agreed.An injunction is an official order of the court compellinga party to stop the performance of some action.EQUITABLE REMEDIESMoney damages are not theonly remedy that might beavailable in a contract case.When might damages bean insufficient remedy in abreach of a contract case?Chapter 12: Transfer of Contracts and Remedies for Breach 253

Corporate LawyerRichard Negrin is a tough, talented attorney at one ofthe most prestigious law firms in the country. Prior to joiningthe firm of Morgan Lewis, Negrin worked five years as aprosecuting attorney. Today he litigates parts liability casesfor his clients, which include Fortune 100 companies; butwhen Negrin was growing up in Elizabeth, New Jersey, noone in his family even knew a lawyer.“We lived in the poor section of town and my first language was Spanish,”says the Philadelphia attorney whose family emigrated from Cuba. “We thoughtof lawyers as mysterious and inaccessible.”Negrin graduated from Rutgers University Law School, and today—in additionto his role as an attorney—he serves as president of the Hispanic Bar Associationof Pennsylvania (HBA). In that role, Negrin raises scholarship money, encouragesHispanic students to pursue careers in law, and helps worthy law students to getnoticed by potential employers.“Hispanic students are often kids from a lower economic background,”Negrin says. “Their parents don’t socialize in the same circles as local lawyers andjudges, and their application might be buried in a pile of resumes. If a Hispanicstudent has done well in law school, we try to help her resume get the notice itdeserves.”In addition to serving as HBA president, Negrin also gives back to thecommunity by serving on the boards of the local Red Cross and Community LegalServices. Negrin also performs pro bono (free) legal work for clients who are toopoor to pay for his services.Each year, the 138 Hispanic Bar Association members raise scholarshipfunds for about 12 local students.“It’s a good way to network and develop mentors,” Negrin says. “And itallows members to use our abilities and experience to help those who follow.”SkillsPersonalityEducationResearch and writing, speaking, organizational,managerial skills.Outgoing, hardworking, logical.Undergraduate degree, law degree. Serving on communityservice boards usually requires some volunteerexperience with the organization.You can find more information about HBA at www.hba-pa.com.For more information about corporate attorneys, visit ubpl.glencoe.com orvisit your public library.254 Unit 2: Entering Into Contracts

e ordered in the case of contracts involving common goods or easilyobtained services.This particular rule is especially important in real estate contracts.The law considers each parcel (separate piece) of real estate to be unlikeany other, if for no other reason than that the locations are different.Consequently, it is usually possible to sue for specific performance ofan agreement to buy or sell real estate.InjunctionAn injunction is a court order that prevents a party from performingan act of some sort. An injunction is only available in specialcircumstances, such as when money damages will be inadequate to compensatethe injured party.Example 16. Alicia Swartz owns a house in the countryside onlyfive miles from the nearest airport. The airport needs anotherrunway and contracts with a local firm to build the runway. Planesusing the new runway would descend directly over Swartz’shouse. Swartz decides to sue the airport, seeking an injunction tostop construction of the runway.An injunction may be temporary or permanent. A temporary injunctionis issued as a means of delaying further activity in any contestedmatter until the court determines whether a permanent injunction shouldbe entered or the injunction should be removed entirely. One who disobeysan injunction does so under penalty of contempt of court.Reviewing What You Learned1. What is involved in an anticipatory breachof a contract?2. What remedies are available to an innocentparty when a breach of contract occurs?3. What is specific performance?4. Why is it necessary to minimize thedamages involved in a breach of contract?Critical Thinking ActivityDamages What is the principle that forms thebasis of the theory of damages in contract law?Legal Skills in ActionAnticipatory Breach Harriet Iafigliano owesyour friend, Andy, $500 that she is supposed topay to him on May 20. Harriet sent an e-mail toAndy in April indicating that she could notpay him on that date. Andy believes that thedoctrine of anticipatory breach applies in thissituation. Write a letter to Andy explainingwhether anticipatory breach applies in his case.Chapter 12: Transfer of Contracts and Remedies for Breach 255

CHAPTERASSESSMENTSection 12.1 The Transfer of ContractualRights and Duties● The transfer of a right under a contract is anassignment. The party who transfers the right isthe assignor. The party to whom the right istransferred is the assignee. No consideration isnecessary for an assignment to be valid. It’s bestto put an assignment in writing, because an oralassignment can be difficult to prove.● Most rights can be assigned unless the assignmentchanges the obligations of the other partyto the contract in an important way. Rights to thepayment of money (e.g., wages, money owed onaccounts, or royalties on books) and rights to thedelivery of goods are the most common types ofrights that are assigned.● Duties may sometimes be transferred. The transferof a duty is called a delegation. Duties maynot be delegated when a party agrees to performthe service personally, the contract calls for personalskill and judgment, or the contract itselfprohibits delegation. Usually, the work of teachers,writers, artists, or entertainers cannot be delegatedto others. Such persons are selected to performtheir services because of their particular skills ortalents. Another person would not be able toperform the services in the same manner.● A novation is the resulting agreement when anoriginal party to a contract is replaced by a newparty and all the involved parties agree to theassignment. The other terms of the contractgenerally remain the same as those in theoriginal contract.● A contract establishes a binding relationshipbetween parties. This relationship is called privityof contract. With the exception of third-partybeneficiaries, only parties with privity havestanding to sue under a contract.Section 12.2 Remedies of the Injured Party● Contracts are usually breached after the time ofperformance has begun. Sometimes, however,one of the parties notifies the other before thetime of performance that he will not perform.This breach is called anticipatory breach. Manystates now permit the injured party to bring anaction for damages immediately, without waitingfor the actual time for performance to arrive.The principle of anticipatory breach does notapply to promises to pay money at some futuredate. Someone who refuses to pay money owedon a future date cannot be sued until after thepayment is due.● When a contract is breached, the injured partyhas a choice of accepting the breach, suing fordamages, or asking the court for an equitableremedy. Accepting the breach is generally thebest choice if no damages have been suffered.Damages awarded to recognize a breach thatdid not cause loss often amount to less than onedollar. Suing for damages allows the injuredparty to recover compensation that would placehim or her in the position that he or she wouldhave been if the contract had been carried out.An injured party may seek an equitable remedywhen money does not adequately compensatefor the loss suffered by the breach of contract.Two chief equitable remedies are specificperformance and an injunction.● Sometimes no amount of money damages issufficient to fix a breach of contract. In suchcases, courts will order the other party to dospecifically what she agreed to do. This remedyis called specific performance, and it will beinvoked to satisfy a unique subject matter such asa painting or a parcel of land.● The principle of mitigation states that even if youare the innocent party, you must try to minimizedamages that might result from the other party’sfailure of performance.256 Unit 2: Entering Into Contracts

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.assignmentdelegationnovationprivity of contractthird-party beneficiaryanticipatory breachdamagesmitigation of damages1. Write a short story about a contract that has been transferred andbreached, using as many of the terms as possible.2. Create illustrations to highlight the important points in yourstory. Include these illustrations in your story.3. Exchange stories with a classmate. Read your classmate’s story,noting interesting perspectives and styles.4. Offer constructive criticism to help your partner improve his orher story. Point out strengths and weaknesses. Make sure all legallanguage is used correctly.5. Reflect on your partner’s suggestions regarding your story.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 12:Transfer of Contractsand Remedies forBreach—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.6. When rights are transferred, who is the assignor? Who is the assignee?7. Why is it important for an assignment to be in writing?8. What duties cannot be delegated to others?9. Define the principle of mitigation of damages.10. Describe the two chief equitable remedies.11. What is an injunction?12. How do actual damages differ from incidental damages?13. Why is it usually a bad idea to sue for breach of contract that did notcause actual loss?14. What is a third-party beneficiary?15. Why do courts award damages to injured parties?Chapter 12: Transfer of Contracts and Remedies for Breach 257

CHAPTERASSESSMENTAcquiring and Evaluating InformationWorking with contracts is a regular part of mostbusinesses. Companies make contracts withtheir customers and employees, and often withgovernments and other businesses.16. Using newspapers, magazines, or theInternet, locate an article relating to abreach of contract in the workplace. Writea summary of the breach and the remedy.Next, evaluate the ethical nature of thebreach. Share your findings with the class.Concert CancellationPeter purchased a $50 ticket to see his favoriteband perform. He waited all week for theconcert, only to find out the day before thescheduled event that it had been cancelled.Debate17. Do you think that Peter should be refundedthe money for his ticket? What are Peter’srights?18. Has there been a breach of contract?19. What remedies are available to Peter andthe other ticket holders?For the following cases, give your decision andstate a legal principle that applies.20. Horton contracted with Findlay to purchasea used computer for $500. When Findlayrefused to go along with his part of theagreement, Horton went to the localcomputer specialty shop and purchaseda new computer for $2,500. He thendemanded $2,000 from Findlay as damagesfor Findlay’s breach. Is Horton entitled tothis much money as the measure ofdamages? Why or why not?21. Don Blair contracts to work as a mechanicfor Henry Lee for one year. A month later,Lee assigns his right to receive Blair’sservices to Titus. Must Blair work for Titus?Explain your answer.22. The Turner Company sells goods to PierreMoreau on credit. After waiting severalmonths for Moreau to make a payment onhis account, the Turner Company informsMoreau that it is assigning its rights to acollection agency. Is this legally possible?Why or why not?23. Janine Drake owes Duncan Coe $500. Coeassigns the right to receive the money toAbram Burke in payment of a debt. Coethen moves out of town and takes up a newresidence. No one notifies Drake of theassignment. She mails the $500 to Coe athis new address. Can Burke sue Drake forfailing to honor the assignment? Explainyour answer.24. Dea Duk Sung buys a $100,000 life insurancepolicy naming Yung Shen Sung asthe beneficiary. If the insurance companyrefuses to pay the proceeds of the policy toYung Shen when Dea Duk Sung dies, doesYung Shen have standing to sue? Why orwhy not?258 Unit 2: Entering Into Contracts

In each case that follows, you be the judge.25. Assignments in WritingThe terms of the Blackstone divorce decree required that Mr. Blackstone pay child support of$600 per month to his former wife. Payments were to be made via the office of the clerk ofcourts. The right to receive the payments was transferred to the Department of Human Resourcesby the clerk’s office. Must the assignment in this case be in writing? Why or why not?Blackstone v. State Ex. Rel. Blackstone, 585 So.2d 58 (AL).26. Assignments after BankruptcyThe Washington Post Company had a contract with The Chicago Tribune, requiring that theTribune supply The Post with several comic strips, including Dick Tracy, Winnie Winkle,Gasoline Alley, and The Gumps. After The Post’s bankruptcy, the bankruptcy trusteesassigned the right to receive the comics to a reorganized company, owned by Meyers. TheTribune canceled the contract and entered a new contract with The Washington Tribune, givingthe Tribune the right to receive the comic strips. When Meyers objected, The ChicagoTribune argued that the rights to the comic strips could not be assigned. Is The ChicagoTribune correct? Explain your answer.Meyers v. Washington Times Co., 76 F2d. 988 (DC Cir.).Computer SecurityMartin is a lawyer practicing in New York. All ofthe contracts he creates are saved on the computerin his office. Recently, Martin asked for adviceregarding his duties to implement and practicecomputer security.ConnectUsing a variety of search engines, help Martin find:27. Information about his legal and ethicalresponsibilities in this area. What standard ofcare should Martin observe in protecting theconfidentiality and privacy of his clients’records?28. Predict Why do you think consideration isunnecessary for an assignment of rights tobe valid?29. Connect Have any rights or duties everbeen transferred to you? Explain youranswer.30. Question Why do you think that althougha performance of an obligation can bedelegated, the responsibility for it maynot be?31. Respond Can you think of a time whenyou might have breached a contract youmade with a friend or family member?Explain your answer.Chapter 12: Transfer of Contracts and Remedies for Breach 259

UNITLaw Workshop:Using Legal ToolsHow Would You Write aContract?In this unit, you learned many thingsabout contracts, including the elementsof a legally enforceable contract, theform of a contract, and how contractscome to an end. In this workshop, youwill work with a partner and use what youhave learned to prepare a written contract.Step A: PreparationProblem: How would you write a contract with another person?Objectives: In this workshop, you will write a contract between yourselfand a partner.l Research contract forms.l Negotiate the type and terms of the contract with your partner.l Write the contract, and use technology to prepare it.l Compare your contract with the contracts of other pairs of students.l Analyze the essential elements of the contracts.260 Unit 2: Entering Into Contracts

Step B: Procedure1. Choose a partner.2. Review the text in this unit and make a list of the essential elementsof a contract. Use the Internet to locate online contract forms. (Hint:www.morebusiness.com offers sample business agreements online.)3. With your partner, create a businessscenario that would require a writtencontract between the two of you.4. Write the contract based on yourknowledge and research. Use the Internetto download a form for an agreement, orcreate a contract by using wordprocessing software. Make copies foreveryone in the class.5. Describe the business scenario thatrequires a written contract and presentyour contract to the class.Step C: Creating a Model to Compare the ContractsAs a class, compare the contracts presented. Create a chart that presentsand describes the type of agreement created and the responsibilitiesinvolved. Make sure that you have also accounted for each of the elementsrequired for a valid and enforceable contract.Step D: Workshop Analysis ReportLook at the charts your classmates have created and answer thefollowing questions:1. How many and what types of contracts were presented?2. Did all of the contracts presented include all the necessary elements?3. If not, how does the absence of the element(s) affect the contract(s)?4. How was your contract similar to and different from the othercontracts presented?Chapter 12: Transfer of Contracts and Remedies for Breach 261

UNITLandmark CaseMastrobuono v. Shearson Lehman Hutton, Inc.United States Supreme Court514 U.S. 52 (1995)Issue Does a contract that does not address punitive damages authorizesuch damages if the parties agreed to arbitrate controversies under rulesthat allow for such damages, but a conflicting provision in the contractappears to prohibit such damages?FactsAntonio Mastrobuono and his wife startedan investment account at Shearson Lehman Hutton,Inc. When they opened their account, the Mastrobuonossigned a contract provided by ShearsonLehman Hutton. The contract required that the partiesarbitrate any disputes that might arise. The contractalso contained a provision stating that it wouldbe governed by New York state law. In an arbitrationproceeding, the parties present their disputeto an impartial third person or panel and agree toabide by the arbitrator’s lawful decision. Becausearbitration is considered less time consuming andless costly than litigation, many contracts containa provision in which the parties agree that disputesbe resolved through arbitration.For a variety of reasons, the Mastrobuonosbecame dissatisfied with the investment servicesthey received from Shearson Lehman Hutton. Theyclosed their account and sued Shearson LehmanHutton, alleging that their account had been mismanaged.Because of the contract’s arbitration provision,Shearson Lehman Hutton suspended thelitigation and forced the Mastrobuonos to go beforea three-member panel of arbitrators. The panelawarded the Mastrobuonos compensatory damagesof $159,327 and punitive damages of $400,000.Compensatory damages are awarded to compensatean injured party for actual losses. Punitivedamages may be awarded in limited circumstancesto punish a person or company for wrongful conduct.Punitive damages are also awarded to preventother companies from behaving in a similar unlawfulor unethical manner. In many cases, the threatof suffering financial loss by way of punitive damageswill discourage a company or individual fromengaging in unscrupulous behavior.Shearson Lehman Hutton paid the compensatorydamages but obtained a court order vacatingthe award for punitive damages because New Yorklaw permits only courts to award punitive damages.Opinion The Court observed that contractbetween the parties in this case contained noexpress provision about punitive damages.Because the parties agreed to arbitrate a dispute,the Mastrobuonos claimed that the parties werebound by the arbitration panel’s decision. ShearsonLehman Hutton argued that the contract limitsthe matters that may be arbitrated because theparties agreed that the contract would be governed262 Unit 2: Entering Into Contracts

y New York law, which only authorizes courts toaward punitive damages. As a result of thesediffering views, the Court had to interpret themeaning of the contract.Determining the Intent of the PartiesThe Court said that when interpreting a contract,it must determine the intent of the parties atthe time that they entered into the agreement. Theoriginal intent of the parties would be used to guidethe court’s decision. In this contract, the partiesagreed that arbitration would be conducted inaccordance with rules of the National Associationof Security Dealers (NASD), which states thatarbitrators may award “damages and other relief.”The NASD manual further provides that “Noagreement [between a member and a customer]shall include any condition which . . . limits theability of a party to file any claim in arbitration orlimits the ability of an arbitrators to make anyaward.” However, the contract also states that it isgoverned by New York law, which permits onlycourts to award punitive damages. These conflictingprovisions create an ambiguity in the contract.Ambiguous TermsUnder common law, ambiguousterms in a contract are interpretedagainst the party thatdrafted the contract. Ambiguousterms can be understood in differentways. This view of ambiguityprotects the party who did not preparethe contract. A party that hadno input in drafting a contract cannotbe blamed for that contract’sambiguities. As stated in theRestatement (Second) of Contracts§ 206, Comment A (1979):“Where one party chooses the terms of a contract,he is likely to provide more carefully for theprotection of his own interests than for those of theother party. He is also more likely than the otherparty to have reason to know of uncertainties ofmeaning. Indeed, he may leave meaning deliberatelyobscure, intending to decide at a later datewhat meaning to assert. In cases of doubt, therefore,so long as other factors are not decisive, thereis substantial reason for preferring the meaning ofthe other party.”Because Shearson Lehman Hutton preparedthe contract for the Mastrobuonos’ signatures,any ambiguity must be interpreted in favor of theMastrobuonos.Holding The contact between the parties isambiguous. Under well-established rules of commonlaw, ambiguities in a contract are construedagainst the party who wrote the contract. As a result,the arbitration panel’s award of punitive damageswas upheld.1. What type of contract is involved in this case?2. Why did Shearson Lehman Hutton force theMastrobuonos to participate in arbitration?3. Why didn’t Shearson Lehman Hutton agreewith the full decision of the arbitration panel,when they were the party who wanted thedispute to be resolved through arbitration?4. What does a court attempt to determine whenit interprets a contract?5. What common law rule does a court applywhen interpreting an ambiguous contract?6. What is the purpose of the rule addressed inquestion 5?Go to the Understanding Business and Personal Law Web site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 12: Transfer of Contracts and Remedies for Breach 263

UNITUNIT OVERVIEWThroughout yourlife, you will take part intransactions involvingthe sale of goods. Lawsintended to promoteefficient economic relationshipsand protectyou as a consumer governthese contracts. Inthis unit, you will learnabout these laws bystudying the followingtopics:l Contracts for sellinggoodsl The law of warrantiesl Consumer protectionlawl Purchasing and sellingautomobilesl Personal property,intellectual property,and bailments

UnderstandingConsumer LawBuyer Beware Your best friendbought a used car. From the day hebought the car, he has had nothingbut problems. Now he needs a newtransmission. He would like to takethe car to the junkyard, but he stillowes $900 on it.In your Justice Journal, writeabout precautions your friendcould have taken to be a betterconsumer and what you think heshould do now.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 3: Understanding Consumer Law 265

CHAPTERContracts for theSale of GoodsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 13: Contracts for the Sale ofGoods—Chapter Overviews to previewthe chapter information.

The Opening SceneStarting in this chapter, you will see how laws regulatingsales affect the lives of the Lee family. MeiLee, 22, is a senior in college. Her brother, An Lee,16, is a high school sophomore. They both livewith their parents. Mei is trying on wedding gownsat The Blushing Bride, a local bridal shop. Hermother is with her.The Blushing BrideMei: (Stepping out of the dressing room with asmile.) How about this one, Mom?MRS.LEE: It’s stunning!PROPRIETOR: Gorgeous!MEI: (Viewing herself in a mirror.) I like it, too. Canwe afford $869 for this dress, Mom?MRS.LEE: (Frowning.) I was hoping to pay less, butit is beautiful. Let’s go to one more store beforewe decide.MEI: (To the proprietor.) Can you hold this dress fora week while I think about it?PROPRIETOR: I’ll be glad to. (The proprietor gives Meia sales slip stating that the dress will be held forone week, at the price of $869.)MEI: (Five days later, talking with her brother.)An, have you ordered your tuxedo for thewedding yet?AN: Don’t worry. I’m going to look for one tonight onan Internet auction site.MEI: You don’t have much time. I’m supposed to pickup my wedding dress tomorrow. Did you hear? Atthe last store we visited we found a pretty dress forjust $400 if we paid cash.MR.LEE: (That evening, reading the newspaper.)Mei, didn’t you buy your dress from a shop on thecorner of 60th Street and 8th Avenue? It says herethat the building burned down last night.MEI: Oh, no! My wedding dress was in there!MRS.LEE: We should call that other store, TheBlushing Bride, and tell them you’ll take thatexpensive dress.AN: (Sauntering into the room.) I just got a tux online.Perfect size, too. They’ll mail it to me when theyreceive the money. Dad, can you spare $50? Theywant me to send cash. Don’t worry about mypaying you back. One of Mei’s college friendssays he will buy the tux from me for $55 when thewedding’s over.MR.LEE: Are you sure you know what you’re doing?Is it safe to send cash?MEI: (Next day, on the phone with the proprietor ofThe Blushing Bride.) This is Mei Lee. I’ve decidedto buy that wedding dress you’re holding for me.PROPRIETOR: Oh, I’m sorry. You didn’t leave anydeposit, so we sold it to someone else.AN: (The day before the wedding.) My tuxedo justcame, but the pant legs are six inches too short!MR.LEE: We’ll just call you “the blushing usher.”1. Is the proprietor’s promise to hold the weddingdress binding without payment of a deposit?2. When the other store burned, who had title toMei’s dress? Who had the risk of loss? Is Meientitled to get her money back?3. What risks did An take when he bought his tuxat the Internet auction? Does he have a legalremedy against the seller?4. Was An’s plan to sell the tux to Mei’s friend alegal sale? Can the friend get good title from An?Chapter 13: Contracts for the Sale of Goods 267

The Sale and Leaseof Goodsl When to apply thelaw of sales in yourdaily lifel How to describe thespecial rules for salescontractsl How to determinewhen sales contractsmust be in writingl How to explain therules for auctions andbulk salesAs you learn more aboutthe law of sales, you willbe better able to protectyour legal rights andyour money when buyingor selling a product.l salel pricel goodsl Uniform CommercialCodel contract to selll merchantl usage of tradel firm offerl output contractl requirement contractl auction with/withoutreservel bulk transferSalesIn the previous eight chapters, you studied general contract law,which governs contracts for such things as real estate, employment,and personal services. This chapter explains a different type of law—the law of sales—that governs contracts for the sale and lease ofgoods. A sale is a contract in which ownership of goods is transferredfrom the seller to the buyer for consideration. The consideration is alsoknown as the price , or the money that is paid for goods. Goods areall things that are moveable, such as your clothing, books, pens, food,car, and even the gas you put in your car. Money, stocks, and bonds arenot considered goods.The law of sales grew from the practices of business people, merchants,and mariners in early English times. In those days, merchantsadministered the law in their own courts. As time went on, the early lawof sales combined with English common law and eventually was putinto a code (a collection of laws) called the English Sale of Goods Act.In 1906, a code of law called the Uniform Sales Act was introducedin the United States. It was similar to the English Sale of GoodsAct, and over a period of years, was enacted by the legislatures of35 states. However, it proved to be inadequate. As interstate commerce(trade between the states) developed, the need arose to make uniformthe many commercial laws in effect among the states. The result wasthe development of the Uniform Commercial Code (UCC) in 1952.The Uniform Commerical Code is a collection of laws that governsvarious types of business transactions. When you enter a contractinvolving goods, the UCC will apply.Example 1. Malika got a summer job at a Smoothie Shop on thesame day that her parents bought a new house. To celebrate, herfamily went out to dinner. The day’s activities involved threedifferent contracts. Malika’s oral employment contract and herparents’ written contract to buy the house are governed by thelaw of contracts discussed in Unit 2. In contrast, the family’soral contract with the restaurant for dinner is a sale of goodsand is governed by the UCC.One purpose of UCC is to combine the laws relating to commerceinto a single uniform code. Another purpose of the UCC is simplify,268 Unit 3: Understanding Consumer Law

clarify, and modernize the law governing commercial transactions. Athird purpose is to encourage the expansion of commercial practicesthrough custom, usage, and agreement of the parties. Thus, the manyrules governing the various phases of a business transaction may benow found in a single code that is uniform throughout the land. TheUCC is the law, at least in part, in every state. Louisiana, a formerFrench possession, has developed its legal system after the pattern setby the Roman Code. Its legislature has adopted part, but not all, of theUCC. Louisiana has not adopted Article 2 governing the sale of goodsthat is discussed in this chapter.The Sales ContractA sales contract may involve either a sale or a contract to sell .Every time you buy goods and take ownership of them, a sale occurs.On the other hand, if you will take ownership at some future time, theagreement is a contract to sell, not a sale.Example 2. Darnell mows lawns in his neighborhood to makemoney in the summer. He went to a store to buy a new powermower, but the model he wanted was out of stock. The storeSPENDING MONEYBuying and selling is a part of everyday life.Is the purchase of clothing from a designeroutlet store a contract governed by the UCC?Chapter 13: Contracts for the Sale of Goods 269

A multimillion-dollarmasterpiece paintedby Monet entitled“Nympheas, 1904” thathad been plundered bythe Nazis during WorldWar II was identified bythe granddaughter ofits rightful owner whenit was displayed atthe Boston Museum ofFine Arts in 1998. Themuseum had borrowedthe painting from aFrench museum. Uponlearning that it wasstolen, the French governmentreturned thepainting to the heirs ofits rightful owner.clerk agreed to order the mower for Darnell to pick up in aweek. Darnell knew that his friend, Foster, was interested inbuying his used mower. He offered to sell the mower to Fosterfor $25. Foster accepted his offer and paid Darnell.Darnell’s contract with the hardware store is a contract to sellbecause he will not take ownership of the mower until a week later. Incontrast, his deal with Foster is a sale because Foster took immediateownership of the mower for the agreed price.Contracts for Both Goods and ServicesWhen a contract includes both goods and services, the dominantelement determines the type of contract. For example, if your parentsbuy a furnace and have it installed, the sale of goods—the furnace—is dominant and the laws of the UCC apply. However, if your parentshave their furnace serviced and some new parts are installed, the performanceof services is dominant and the common law of contractsapplies instead.Special Rules for Sales ContractsWith some exceptions, the UCC applies to all sellers and buyers ofgoods. A merchant is a business or person who deals regularly in thesale of goods or who has a specialized knowledge of goods. A nonmerchantis a casual or occasional seller. For example, you are a nonmerchantwhen you sell a used CD to a music store.Example 3. Farley, owner of a shoe store, bought 100 pairs ofsneakers from Best-Ever Sneakers, Inc., a manufacturer. BothFarley and Best-Ever are merchants because selling is theirprofession.A sales contract must contain the same elements as other contracts,but the UCC has relaxed some of the strict rules of contract law. Thefollowing flexible rules apply in all contracts for the sale of goods.Good FaithParties to a sales contract must treat each other fairly.Methods of Dealing and Usage of Trade When parties havepreviously dealt with each other, those methods of dealing may beused to supplement or qualify the terms of their sales contract. Thisrule is true with any usage of trade , which is the method of dealingthat is commonly used in the particular field.270 Unit 3: Understanding Consumer Law

RussiaWhat if you were forbidden to listen to your favorite music, read a popularbook, or attend church? Suppose you weren’t even allowed to express youropinions. For much of the twentieth century, Russian citizens were denied thesebasic rights. In the late 1980s, however, under the leadership of Mikhail S.Gorbachev (1985–1991), the policy of Glasnost (openness) was officiallyadopted by the former Soviet Union. In an effort to free up many aspects ofSoviet life, Glasnost removed bans from books, movies, and plays, and evenpermitted criticism of the political system. In 1990, the former Soviet Unionpromised religious freedom. The parliament also passed a new press lawbanning manipulation of the mass media, including newspapers, radio, andtelevision. For many Russians, freedom of expression still comes at a highprice. Nevertheless, says Gorbachev, “tremendous gains allowed Russia togo forward. It will never return to the past.” Here’s a snapshot of Russia.Geographical area 6,592,692 sq. mi.Population 144,978,573CapitalMoscowLegal systemBased on civillaw systemLanguageRussianReligionRussian OrthodoxLife expectancy 67 yearsCritical Thinking Question Is censorship of public information and restriction ofsocial or political activities ever appropriate? List several examples. For moreinformation on Russia, visit ubpl.glencoe.com or your local library.Formation of a Sales Contract You may make a contract in anymanner that shows that the parties have reached an agreement. It maybe oral (with some exceptions) or in writing. A contract may be createdeven if the time it was made cannot be determined or any terms havebeen left open.Acceptance of an Offer In most situations, you may accept anoffer by any means and in any reasonable manner. However, the partyChapter 13: Contracts for the Sale of Goods 271

making the offer may request a particular method to be used for theacceptance. A contract comes into existence when the acceptance issent and the method used is reasonable.Food for ThoughtWith all of the hungeraround the world,it seems a waste thatsome food becomesgarbage. School cafeterias,grocery stores,and farmers’ marketsthrow away food thatthey think is no longerfit for sale. Are thereways to get some ofthis food to peoplewho need it?Get InvolvedFind charitable organizationsin your areathat could use thisfood if they receivedit. Check with yourcity’s health departmentabout laws thatmay prevent restaurantsand other businessesfrom donatingthis food to charities.Report on yourfindings to the class.Different or Additional Terms An acceptance may have differentor additional terms added without a complete rejection of the offer.These different or additional terms are treated as proposals for additionsto the contract if both parties are not merchants. If both partiesare merchants, the revised terms become part of the contract unlessthey require a major change or the party making the offer objects.Firm Offer A firm offer is a merchant’s written promise to holdan offer open for the sale of goods. It does not require payment to bebinding. A merchant cannot revoke a firm offer during the time statedin the offer or for a reasonable time if none is stated. However, no offercan stand for longer than three months.Open-Price Terms A sales contract may be made without a settledprice. Unless the parties agree on a price prior to delivery, a reasonableprice can be settled at the delivery time.Output and Requirement Terms Output and requirement contractsare allowed even if they are not definite. For example, a retailermight agree to buy all of a backpack manufacturer’s backpacks. Anagreement to buy all of a manufacturer’s goods is an outputcontract . On the other hand, Tri-State Petroleum Distributors mightagree to sell all of the gasoline needed by the Gabriel TruckingCompany. This agreement is a requirement contract , which occurswhen a seller agrees to supply the needs of a buyer.Modification No consideration is necessary to change a contract forthe sale of goods. The modification may be oral, unless the originalagreement is in writing and states that it must be modified in writing.This kind of statement is only effective when signed by the customer.Leasing GoodsYou can apply the sale-of-goods rules to the leasing of goods, witha few modifications. Rentals for items such as a DVD player, tuxedo,computer, or car are governed by the UCC.Form of Sales ContractsMany sales contracts are oral rather than written. They are oftenmade by telephone, at a store counter, or face-to-face between private272 Unit 3: Understanding Consumer Law

Figure 13.1CONTRACT FOR SALE OF GOODSAGREEMENT made by and between Ozzie Caldwell (Seller) and Geordi Hasenzahl (Buyer).It has been agreed between the two parties that:1. Seller agrees to sell, and buyer agrees to buy the following described property: oneregulation-size pool table now located at the residence of Ozzie Caldwell, RD #1,Box 118, Ashberry, Kentucky.2. Buyer agrees to pay Seller the total price of $850.00, payable as follows: $600.00 depositherewith and $250.00 balance by cash or certified check at time of transfer.3. Seller warrants he has full legal title to said property, authority to sell said property, andthat said property shall be sold free and clear of all claims by other parties.4. Said property is sold in “as is” condition. Seller hereby excludes thewarranty of merchantability and fitness for a particular purpose.5. Parties agree to transfer title on February 7, 20--, at RD #1, Box 118, Ashberry,Kentucky, the address of the seller.6. This agreement shall be binding on all parties, their successors, assigns, and personalrepresentatives.7. This writing is intended to represent the entire agreement between the parties.Signed under seal this nineteenth day of January, 20--.BuyerSellerparties or businesspeople. As long as the price is less than $500, anoral contract for the sale of goods is enforceable. If the price is $500or more, a sales contract must be in writing to be enforceable (seeFigure 13.1). This rule, however, does not apply when:l A written confirmation of an oral contract between two merchantsis sent within a reasonable time, and no objection is made within10 days.l The contract involves specially manufactured goods that cannotbe resold easily.FORMAL WRITINGUNNECESSARYAny writing signed by theparty against whomenforcement is sought willsatisfy the writing requirement.This would includewords on a check, a pieceof scrap paper, or even anapkin. Would skywritingby an airplane pilot satisfythe writing requirementsof the UCC?Chapter 13: Contracts for the Sale of Goods 273

Buying MoreThan He CanAfford?Angelo was promotedto district managerof a chain of musicstores. His new jobwould require him totravel, and he wantedto travel in style. Heimmediately went to acar dealer to buy anew car. He ordered acustom color, a CDplayer, leather seats,and a moon roof.By the time the newcar was delivered tothe dealer, Angelorealized he had overestimatedthe raise hereceived with the promotionand couldn’tpossibly afford the car.What are the ethicalissues in this case?Should Angelo buy thecar even though hecan’t afford it?llThe buyer receives and accepts the goods or pays for them.The parties admit in court that they entered into an oral contract.Other Sales Governed By UCC RulesThere are other sales that are governed by UCC rules. These salesinclude auction sales and bulk transfers.Auction SalesHave you ever attended an auction at your school or in your community?In an auction sale, the auctioneer presents goods for sale andinvites the audience to make offers, or bids. This process allows peopleto negotiate, or set their own prices. At a live auction, bidders in thecrowd respond with their offers, and the auctioneer accepts the sale.Bids may be withdrawn at any time before the acceptance. If a new bidis made while the gavel is falling, the auctioneer can either reopen thebids or declare the goods sold.In an auction with reserve , the auctioneer doesn’t have to sell thegoods for the highest bid if it’s lower than the reserve amount. The auctioneermay withdraw the goods at any time before a sale is completed.On the other hand, in an auction without reserve , the auctioneerIDENTIFIABLE GOODSGoods must be identifiedbefore title to them can betransferred to someoneelse under a sales contract.Under what circumstancesmight identifiablegoods, such as fruit, betreated as a future good?274 Unit 3: Understanding Consumer Law

must sell the goods to the highest bidder. The goods cannot be withdrawnfrom bidding unless no bid is made. An auction sale is withreserve unless it is expressly stated that it is without reserve.Have you visited an online auction Web site when searching for anew CD or plane tickets? Internet auctions have become increasinglypopular. They offer opportunities to buy and sell goods locally andworldwide. Internet auctions can be person-to-person or business-toperson.In person-to-person auctions, sellers offer items directly toconsumers. The highest bidder must deal directly with the seller toarrange for payment and delivery. In contrast, operators of businessto-personauctions have control of the items and handle the paymentand delivery of goods.Internet auction fraud is a concern. Sometimes sellers don’t deliverthe goods, or they deliver something less valuable than the item theyadvertised. At other times, sellers fail to deliver an item when they saythey will. The Federal Trade Commission (FTC) provides informationabout Internet auctions in its free brochures and at its Web site.Bulk TransfersSometimes a business transfers all merchandise and supplies atonce, known as a bulk transfer.The UCC rules require that the buyerof the bulk goods notify all of the seller’s creditors at least 10 daysbefore the transfer will take place. The creditors then have the opportunityto take legal steps to get the money that is owed them before thetransfer of the goods. Before this rule existed, merchants owing moneycould sell out their entire stock for less than it was worth.Social StudiesBefore people exchangedmoney for goods, peopletraded goods for goods.This type of sale iscalled barter. The discoveryof nonlocal objectsat many archaeologicalsites suggests thatbarter existed in prehistorictimes.Research ActivityAnthropologists havefound bartered goodsthroughout the world.Research a countrythat still uses barteras an important methodof exchange. Find outwhat types of goodsare bartered and howa value is placed onthose goods. Write aone-page paper thatexplains your findings.Reviewing What You Learned1. When do you use the law of sales?2. What special rules apply to sales contracts?3. When must sales contracts be in writing?What are the exceptions?4. What are some rules for auctions and bulksales?Critical Thinking ActivityLaw of Sales When you contract for somethingthat includes both goods and services,such as having wall-to-wall carpetinginstalled in your home, how should you determinewhether to apply the law of sales?Legal Skills in ActionAuctions Conduct a two-part mock auction ofmusic CDs in front of your class. Have yourclassmates bring in CDs to be auctioned. (Besure to mention that everything will bereturned to the rightful owners after theauction.) Arrange for the first part of the roleplayto be an auction without reserve and forthe second part an auction with reserve.Chapter 13: Contracts for the Sale of Goods 275

Ownership andRisk of Loss inSales of Goodsl How to differentiatebetween passage oftitle and risk of lossin sales contractsl What you can dowhen someonebreaches a salescontractBeing informed aboutownership and risk ofloss when you makesales contracts will helpyou protect your investmentwhen buying orselling products.l titlel bill of salel voidable titlel risk of lossl identified goodsl future goodsl carrierl f.o.b.l destination contractl bill of ladingl warehouse receiptTitleThe right of ownership to goods is known as title. People who owngoods have title to them. A bill of sale is formal evidence of ownership(see Figure 13.2). You receive this document when you buy ajacket at a department store or a new stereo system at an electronicsstore. A bill of sale only proves that you once had title, not that youstill own the goods.Example 4. Steven bought a snowboard from his neighborSylvia for $200 and received a bill of sale. He then sold thesnowboard to his friend, Mohammed. The day after this sale,Steven wrongfully contracted to sell the same snowboard toJamie. He presented the bill of sale from Sylvia as proof of hisownership. This meant nothing, however, because Steven nolonger had title.Voidable TitleAnyone who obtains property as a result of another’s fraud, mistake,undue influence, or duress holds only voidable title to the goods.Voidable title means title that may be voided if the injured party electsto do so. This kind of title is also received when goods are bought fromor sold to a minor or a person who is mentally impaired. Anyone withvoidable title to goods is able to transfer good title to others.Example 5. Mariah, 16, bought a used car for $700. Six monthslater, she sold the car to her 19-year-old cousin, Jason, for $750.Mariah had voidable title because she was a minor, but Jasonreceived good title because he was a good-faith purchaserfor value.Buying from a MerchantThe UCC has a special rule that allows merchants who have notitle to goods to pass on good title to their consumers. This occurswhen you entrust your own goods to a merchant who sells them in theordinary course of business.276 Unit 3: Understanding Consumer Law

PriceName andaddress of buyerReceiptGoods soldWarrantyDateSignatureof sellerName andaddress of sellerFigure 13.2BILL OF SALEIn consideration of Two Hundred Dollars ($200) paid by➤Steven Forman, 7 Maple Ave., Youngstown, OH, the receipt of➤which is hereby acknowledged, I, Sylvia Boswell, do hereby➤ sell and convey to Steven Forman one HomeCraft snowblowerNo. F3711.And hereby covenant that I am a lawful owner of the➤goods and agree to warrant and defend their sale against anylawful claims and demands of all persons.➤ Witness my hand and seal this 15th day of February 20--.➤➤➤Sylvia Boswell11 Hemlock DriveYoungstown, OHExample 6. Mrs. Chin left her watch at a jewelry store to berepaired. The jewelry store sold used watches as part of its regularbusiness. A salesperson at the jewelry store sold Mrs.Chin’s watch to a customer by accident. The customer whobought the watch received good title to it and will be able tokeep it. Mrs. Chin’s claim is against the jewelry store for the tortof conversion.WHO OWNSTHE GOODS?A seller gives you a bill ofsale as formal evidence ofownership. Does it provethat you own the goods?The UCC’s law governing merchants gives you confidence you willreceive good title when you buy from a merchant. However, UCC lawssuch as the one described in Example 6 do not apply in the case of stolengoods, because only the rightful owner has title to stolen property.Passage of Title and Risk of LossSometimes it is necessary to determine who has title to goods—theseller or the buyer. In a bankruptcy case, for example, only goods towhich the debtor has title can be taken by the court to satisfy creditors’claims. Some of the goods in the debtor’s possession may be owned bysomeone else; other goods that have left the debtor’s possession maystill be owned by the debtor; still other goods that have not yet beendelivered to the debtor may be owned by the debtor.Chapter 13: Contracts for the Sale of Goods 277

Similarly, it is sometimes necessary to determine who must bearthe risk of loss , or the responsibility for loss or damage to goods. Thereason is that goods may be stolen, damaged, or destroyed after thesales contract has been entered but before the transaction is completed.Title to goods cannot be transferred under a sales contract until thegoods have been identified. Identified goods are goods that presentlyexist and that have been set aside for a contract.After the goods are identified, title passes to the buyer when theseller does what is required under the contract to deliver the goods.Goods that are not both existing and selected are known as futuregoods , such as crops that are not yet grown or items that have not yetbeen manufactured. No one can have title to future goods. They mayonly be the subject matter of a contract to sell at a later date.TITLE ANDRISK OF LOSSUsually title and risk ofloss pass at the sametime. When do title andrisk of loss pass whenno delivery is required?Shipment ContractA shipment contract is one in which the seller turns the goods overto a carrier for delivery to a buyer. A carrier is a transportation company.In a shipment contract, the seller is not responsible for seeingthat goods get to their destination. Both title and risk of loss pass to thebuyer when the goods are given to the carrier (see Figure 13.3).Shipment contracts are often designated by the term f.o.b., whichdesignates the place of shipment, such as Boston (see Figure 13.4).The term f.o.b. , or free on board, means that goods will be deliveredfree to the designated place. The buyer must pay the freight chargesfrom the shipping point to the destination. Thus, f.o.b. Boston meansthat the seller will put the goods on freight cars or trucks in Boston,but the buyer will pay all expenses from there.At the shipping point, the goods become the responsibility of thebuyer. Title and risk of loss are transferred when the seller delivers thegoods to the carrier for shipment.Figure 13.3Passage of Title and Risk of LossTerms of Contract Title Passes Risk of Loss PassesShipment contract When goods are deliverd to carrier When goods are delivered to carrierDestination contract When goods are tendered at destination When goods are tendered at destinationNo delivery required When contract is made Merchant seller: When buyer receives goods;Nonmerchant seller: When seller tendersgoods to buyerDocument of title When document of title is given to buyer When document of title is given to buyerAgreement of the parties At time and place agreed upon At time and place agreed upon278 Unit 3: Understanding Consumer Law

Figure 13.4Abbreviationf.o.b. New Yorkf.o.b. Los Angelesc.o.d.c.i.f.c.f.f.a.s.AbbreviationsMeaningFree on board to New York(This would be a shipment contract if shipped from New York.)Free on board to Los Angeles(This would be a destination contract if shipped from New York.)Collect on deliveryCost of goods shipped, insurance and freightCost of goods shipped and freightFree alongside vessel or at a dockSHIPPING TERMSIn a shipmentcontract, the sellerhas no responsibilityfor seeing that thegoods reach their destination.Who has thisresponsibility?Example 7. A business in New York ships 100 DVD players toFlorencia, a customer in Los Angeles. The shipping terms aref.o.b. New York. Title to the DVDs and risk of loss would betransferred to Florencia as soon as the DVD players are deliveredand accepted at the freight depot in New York.Destination ContractWhen a contract requires the seller to deliver the goods to a destination,it is a destination contract. Both title and risk of loss pass tothe buyer when the seller leaves the goods at the place of destination.Destination contracts are often designated by the expression f.o.b.shipping destination. Goods shipped under such terms belong to theseller until they have been delivered to the destination; also, risk ofloss remains with the seller until that point.Example 8. If Florencia, from Example 7, did not wish toaccept the responsibility of ownership during shipment of theDVDs, she could have the delivery made f.o.b. Los Angeles.The seller, under such terms, would pay the freight chargesfrom New York to Los Angeles.When no delivery is required and the contract calls for the buyer topick up the goods, title passes to the buyer when the contract is made.Example 9. Aleksei contracted to buy a camcorder from Maria.Neither party to the contract was a merchant. Aleksei gave Mariaa $50 deposit at the time of contracting and agreed to pick up thecamcorder and pay the balance in two days. Title to the camcorderpassed from Maria to Aleksei at the time of contractingbecause Maria could make delivery without moving the goods.Chapter 13: Contracts for the Sale of Goods 279

When goods are not to be shipped by carrier, the passage of risk ofloss depends on whether the seller is a merchant or a private party. Ifthe seller is a private party, the risk of loss passes to the buyer whenthe seller delivers the product. This occurs when the seller offers toturn the goods over to the buyer.Example 10. Suppose that in Example 9, Maria offered to turnthe camcorder over to Aleksei at the agreed time. However,Aleksei refused to take it at that time, saying that he would pickit up in two weeks. Three days later, the camcorder was stolenfrom Maria’s house. Because Maria is a private party, Alekseimust suffer the loss and still pay the contract price to Maria.If the seller is a merchant, however, the risk of loss is transferredfrom the seller to the buyer when the buyer receives the goods. Thus,if Aleksei had been in the same situation with a dealer, he would nothave suffered the loss. The merchant would have been responsible forthe loss. Instead of following these rules, the parties may agree toother times and places regarding the risk of loss.Documents of TitleSometimes when you buy goods you receive a document of title,rather than the actual goods. A document of title is a paper giving youthe right to receive the goods named in the document. When you givethe document of title to the holder of the goods—a warehouse orContracts and the ComputerA university was having problems tracking students who failed to payfinancial aid loans. To address this problem, the university took two steps. First,it bought a new mainframe computer. This contract involved only hardwareand was a sale-of-goods. Second, it bought software from the same companyand had the company write programs to handle its software needs. Becausethe software purchase was secondary to the computer purchase, this combinationof contracts is a sale-of-goods. Software packages that are bought onthe open market are considered to be sale-of-goods contracts.Connect Using the Internet, find a copy of a standard sale-of-goods contract. Thendevelop a sample contract that may be used in the scenario presented in this feature.280 Unit 3: Understanding Consumer Law

WAREHOUSE RECEIPTSA warehouse receipt canserve as a document titlewhen goods are stored ina warehouse. How might awarehouse receipt serveto transfer title?carrier—you can receive possession of them. Both title and risk of losspass to the buyer when the document is delivered to the buyer.One type of document of title is a bill of lading. A bill of ladingis a receipt for shipment of goods given by a transportation company(known as a carrier) to a shipper when the carrier accepts goods forshipment. Another type of document of title is a warehouse receipt. Awarehouse receipt is a document given to a customer by the warehousethat is storing his or her goods.Example 11. Sanchez stored a large quantity of wheat in a grainelevator, and in return, was given a warehouse receipt. Later,Sanchez sold the wheat to Karen. Upon receipt of the money forthe wheat, Sanchez signed and delivered the warehouse receiptto Karen. Karen received title to the wheat when the documentwas delivered to her.Remedies for Breachof Sales ContractThere are some remedies that can be used when there is a breachof a sales contract. These specific remedies for both the buyer and theseller are prescribed by the UCC.Seller’s RemediesSometimes buyers refuse to accept goods after ordering them.Buyers may do so because they are dissatisfied with products theyreceive or because their needs have changed since the time when theyChapter 13: Contracts for the Sale of Goods 281

originally purchased the products. They may also refuse to pay for thegoods. In such situations, the seller may:l Cancel the contract.l Withhold delivery of goods.l Stop delivery of any goods that are still in the possession ofa carrier.l Resell any goods that have been rightfully withheld, and bringa claim against the buyer for the difference between the agreedprice and the resale price, plus expenses.l Bring a claim against the buyer for the difference between theagreed price and the market price, plus expenses (only if thegoods cannot be resold).l Bring a claim against the buyer for the price of any goods thatwere accepted by the buyer.Gift CertificatesTransactions for the sale of goods sometimes involve the purchase of agift certificate. Some merchants place expiration dates on gift certificates,usually requiring that the certificates be used in six months to one year.Frequently, gift certificates expire before recipients have a chance toredeem them.Only a handful of states have laws dealing with expiration dates on giftcertificates. For example, in New Hampshire, gift certificates under $100are not permitted to have an expiration date. In California and RhodeIsland, it’s against the law to put an expiration date on any gift certificate.In Hawaii and Massachusetts, sellers must honor gift certificates for aperiod of at least two years.In states without laws covering expiration dates on gift certificates, it isstill worthwhile to press the merchant to honor a gift certificate even whenan expiration date has passed. Most merchants are concerned about theirbusiness reputations and can often be persuaded to honor an expired giftcertificate or refund the cash value.Think About It Should gift certificates have expiration dates? Why or whynot? Find out if there is a law in your state regulating expiration dates ongift certificates.282 Unit 3: Understanding Consumer Law

Buyer’s RemediesSometimes the seller fails to make delivery of the goods afteragreeing to do so. The seller may also send improper goods, which aregoods other than those that were ordered. They may also be damagedor defective goods. In these cases the buyer may:l Cancel the contract.l Bring a claim against the seller for the return of any money thathas been paid.l Bring a claim against the seller for the difference between theagreed price and the market price at the time the buyer learned ofthe breach, plus expenses.l Refuse to accept the goods if they do not conform to the contract.The buyer must notify the seller of the rejection of the goods, andthe seller then has a reasonable time in which to correct the erroror defect.l Cover the sale, or buy similar goods from someone else and bringa claim against the seller for the difference between the agreedprice and the cost of the purchase, plus expenses.l Give notice to the seller that the goods have been accepted butthat they do not conform to the contract. If no adjustment is made,the buyer may bring a claim against the seller for breach of contractor warranty.l Revoke the acceptance and return the goods if a serious defectwere undetectable, or if the buyer were led to believe that theseller would fix the defect.Reviewing What You Learned1. When does title pass from the seller to thebuyer in a sales contract? When does therisk of loss pass?2. What remedies are available when a sellerbreaches a sales contract? When a buyerbreaches a contract?Critical Thinking ActivityFairness Suppose you leave your ring at ajewelry store to be appraised and the storesells it by mistake to an innocent purchaser.Under the UCC, the innocent purchaserreceives good title to your ring. Is this rulefair? Support your argument.Legal Skills in ActionContracts Involving Minors If you areunder the age of 18 when you buy goods,you can return them and get your moneyback. You lose this right when you become18. Present a point of view to the classregarding whether this rule is reasonable.Chapter 13: Contracts for the Sale of Goods 283

E-Commerceand the Lawl Tips for safer Internetshoppingl How to identifyconsumer-friendlyWeb sites for internationalonlineshoppingl How to describe thelaw that permits theuse of electronicsignatures oncontractsl How to identifylegal safeguards toprotect your right tocomputer privacyElectronic commerce ison the cutting edge oftoday’s business world.As you learn more aboutelectronic commerce,you will advance furtherin today’s society.l electronic commercel electronic signaturel online privacyl Federal TradeCommission (FTC)Electronic CommerceHave you ever shopped online? Computers, software, books, wirelessphones, DVD players, CDs, clothing, cars, toys, games, sportsequipment, and beauty supplies are just a few examples of items thatyou can purchase online. Because all of these items are goods, the samelaw of sales applies as when you purchase something from a store.Technology has allowed many changes to come about quickly, inour personal lives and the business world. Electronic commerce, alsocalled e-commerce, is the buying and selling of goods and services, orthe transfer of money, over the Internet. As the world moves forwardwith new technological developments, however, the law sometimeslags behind. This is particularly true in the rapidly developing field ofe-commerce.Shopping Safely on the InternetShopping online offers many benefits. You can shop at any timeyou please, and you can find almost anything you want, often at bargainprices. While shopping on the Internet can be as safe as shoppingin a store, there can be some dangers. There are some ways that youcan shop safely on the Internet, however, and avoid these dangers (seeFigure 13.5).Shop with Companies You Know Anyone can establish anInternet business. If you’re not familiar with a business, ask for acatalog to learn about the company. Find out about return and refundpolicies before placing your order.Keep Your Password Private Be creative when you establish apassword for purchasing goods online. Avoid using a telephone number,birth date, or a portion of your Social Security number. Instead,use a combination of letters, numbers, and symbols that a strangerwould have a hard time figuring out. Most importantly, never give yourpassword to anyone.Pay by Credit or Charge Card You will be protected by the FairCredit Billing Act (see Chapter 22) if you pay by credit or charge card.This method of payment gives you the right to dispute certain charges284 Unit 3: Understanding Consumer Law

Figure 13.5INTERNET AUCTIONSKnow the SellerInternet auctions provide excellent opportunitiesto find good buys, but they can be risky. Do yourhomework before buying online.Know the ProductVerify the seller’s identity (including telephonenumber), and find out what form ofpayment the seller will accept before you bid.Know the Auction SiteBefore placing a bid, know exactlywhat you’re buying and try to determineits value.Know How to BidFind out how the auction worksand what protections the siteoffers buyers before bidding.Never bid on an item you don’t plan to buy.Establish your top price, and stick with it.Protect your privacy by never giving out yourSocial Security number, driver’s license number,or bank account number.Chapter 13: Contracts for the Sale of Goods 285

and temporarily withhold payment while a creditor investigates. Verify theonline security before giving your credit card number.Keep a Record Print a copy of your purchase order and confirmationnumber for your records. Keep in mind that the federal Mail-and-Telephone Order Rule (see Chapter 15) covers orders made over theInternet. Consequently, unless stated otherwise, merchandise must bedelivered within 30 days, and the company must notify you of delays.Worldwide ShoppingOnline shopping has opened up a worldof available goods. With the click of amouse, you can order sombreros fromMexico or spices from India. Shoppingelectronically (especially when dealingwith sellers in other countries) raises manyquestions. Are the prices listed in U.S. dollarsor another currency? Does the companyship internationally? How long willdelivery take? Will unexpected taxes orduties be added to the price? Who can helpyou resolve any problems? Answering thesequestions will help you determine whethera Web site is safe for international onlineshopping.SHOP AT HOME Thereis no limit to the kinds ofitems that you can buyon the Internet. How canyou safeguard Internetshopping?Electronic SignaturesE-Sign (Electronic Signatures in Global and National CommerceAct) is a federal law that permits the use of electronic signatures andrecords. An electronic signature is a method of signing an electronicmessage. It identifies a particular person as the source of the message.It also indicates that person’s approval of the information in the message.Under this law, an electronic signature can be used on a contractif the parties agree. The Uniform Electronic Transactions Act (UETA),adopted by numerous states, is a similar law.Online PrivacyDo you ever worry about your privacy on the Internet?Online privacy is a part of your more general right to privacy. It concernsyour identity, movement, and personal and commercial activitieson the Internet. Privacy rights can be violated when the wrong peoplegain access to secret computer records. Many legal safeguards exist toprotect your right of privacy.The common law tort of invasion of privacy is grounded inyour right to maintain personal privacy. The U.S. Constitution protects286 Unit 3: Understanding Consumer Law

you from unreasonable governmental intrusion into your private life.The Fair Credit Reporting Act (see Chapter 22) protects you againstthe issuance by credit bureaus of inaccurate personal information.In addition, the Right to Financial Privacy Act forbids financial institutionsfrom opening your records to the government without your permissionor a court order.Because of their lack of worldly experience, children are protectedby special statutes. The Children’s Online Privacy Protection Act of1998 requires children’s Web site operators to:l Post comprehensive privacy policies on their sites.llNotify parents about their information practices.Obtain parental consent before collecting personal informationfrom children under the age of 13.Many state legislatures are beginning to adopt laws regulatingInternet privacy. However, one result of this move is that each state’slaws could be different. A lack of consistency in legislation can createconfusion among consumers. There is a movement for the U.S.Congress to set national standards that override state legislation.Under this plan, the Federal Trade Commission (FTC) would investigateviolations of the FTC Act. This act states that “unfair or deceptiveacts or practices in or affecting commerce are hereby declaredunlawful.” The FTC Act would also regulate e-commerce privacy.Reviewing What You Learned1. What are some tips for safe Internetshopping?2. How can you determine the consumerfriendliness of a Web site when shoppinginternationally?3. Describe the law that permits the use ofelectronic signatures on contracts.4. Identify legal safeguards that protect yourright to computer privacy.Critical Thinking ActivityInternet Transactions Indicate as true orfalse whether the UCC law of sales governsthe following transactions made overthe Internet:l Buying a used computerl Hiring lawn care servicesl Buying stocksl Selling a parcel of landl Buying unborn puppiesLegal Skills in ActionInternet Fraud With your classmates, brainstormabout various types of Internet fraud.Discuss ways to avoid becoming a victimof fraud.Chapter 13: Contracts for the Sale of Goods 287

CHAPTERASSESSMENTSection 1 The Sale and Lease of Goods● The law of sales applies when ownership ofgoods is transferred from a seller to a buyer forconsideration. When a contract includes bothgoods and services, the dominant element of thecontract determines whether it is a contract forgoods or a contract for services.● Special rules for sales include: (1) contracts mayresult from the parties’ conduct; (2) an offer maybe accepted by any reasonable means; (3) anacceptance may include terms that differ fromthose in the offer; (4) the price need not besettled; (5) output and requirements contracts areallowed; (6) contracts may be modified withoutconsideration; and (7) no consideration is neededfor a firm offer.● Contracts for the sale of goods of $500 or moremust be in writing except in: (1) oral contractsbetween two merchants when a confirmation issent and no objection is made; (2) oral contractsfor specially manufactured goods; (3) admissionsin court; and (4) executed oral contracts.● In an auction sale, people place bids that theauctioneer accepts for a sale. In an auction withreserve, the auctioneer need not accept thehighest bid. In an auction without reserve, theauctioneer must accept the highest bid. A bulktransfer occurs when a business transfers allmerchandise and supplies at once. The UCCrequires that the buyer of bulk goods notify all ofthe seller’s creditors at least 10 days before thetransfer will take place.Section 2 Ownership and Risk of Loss inSales of Goods● Title to goods is passed from a seller to a buyerafter the goods have been identified and theseller does what is required under the contract todeliver the goods. The risk of loss is born by theparty responsible for loss or damage to goods.Usually, title and risk pass at the same time.●When a buyer breaches a sales contract, theseller may: (1) cancel the contract; (2) withholddelivery; (3) stop delivery of goods in the possessionof a carrier; (4) resell goods and bringa claim for the difference between the agreedprice and the resale price; (5) bring a claim forthe difference between the agreed price andthe market price; or (6) bring a claim for anygoods that were accepted by the buyer. When aseller breaches a sales contract, the buyer may:(1) cancel the contract; (2) bring a claim for thereturn of any money paid; (3) bring a claim forthe difference between the agreed price and themarket price; (4) reject nonconforming goods;(5) cover the sale; (6) accept nonconforminggoods and bring a claim if no adjustment ismade; and (7) revoke the acceptance.Section 3 E-Commerce and the Law● When shopping on the Internet: (1) shop withcompanies you know; (2) keep your passwordprivate; (3) pay by credit or charge card; and(4) keep a record.● When buying from another country on theInternet, research the currency of prices,shipping policies, delivery time, additional taxesor duties, and customer service policies.● The federal law that permits using electronicsignatures is called E-Sign. Electronic signaturescan be used on a contract if the parties agree todo so.● Legal safeguards that can protect your right tocomputer privacy include: the common law tortof invasion of privacy, your right against unreasonablegovernment intrusion into your privatelife, the Fair Credit Reporting Act, the Right toFinancial Privacy Act, and the Children’s OnlinePrivacy Protection Act.288 Unit 3: Understanding Consumer Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.auction without reservebill of ladingbulk transfercarriercontract to selldestination contractdigital signaturedocument of titlee-commerceelectronic signaturefirm offerf.o.b.future goodsgoodsidentified goodsmerchantoutput contractpricerequirement contractrisk of losssaleshipment contracttitleUniform Commercial Codeusage of tradevoidable titlewarehouse receiptSelf-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 13:Contracts for the Saleof Goods—Self-CheckQuizzes to prepare forthe chapter exam.1. Write 8 to 10 sentences, using as many of these legal terms as possible.2. Rewrite the sentences, leaving a blank line in place of the legal term.3. Working with a partner, see how many of each other’s sentences you can complete correctly.Answer the following questions. Refer to the chapter for additional reinforcement.4. When does the passage of title generally occur?5. What does it mean to have the risk of loss? Do passage of title and risk of loss occurat the same time?6. How may an offer for the sale of goods be accepted?7. Under the law of sales, what does the term goods mean?8. What is an output contract? a requirements contract?9. When must a contract for the sale of goods be in writing? What are the fourexceptions to this requirement?10. To what does the law of sales apply, as defined by the UCC?11. What are seven special rules for contracts for the sale of goods?12. When a contract for the sale of goods is breached, what remedies are available to theseller? to the buyer?13. When does the risk of loss pass to the buyer?Chapter 13: Contracts for the Sale and Lease of Goods 289

CHAPTERASSESSMENTAcquiring and Evaluating InformationDuring your lifetime, you will sign your namethousands of times—on checks, loanapplications, and other business-relateddocuments. Electronic signatures are now legal,but many people are skeptical about them.Conduct research about electronic signaturesand answer the following questions:14. How are they created?15. What measures are in place to ensure theirsecurity?16. How long will they last?17. What economic impact will they have ononline business?Risk of LossWhile reading the newspaper want ads, Marciadiscovers a stereo system for sale. When shecalled the phone number listed in the ad, sherealized it was her neighbor Tom who wasselling the stereo. Tom was asking $550 for thesystem, and Marcia agreed to purchase it forthat price. Marcia gave Tom a $100 deposit.Because Marcia was leaving the next day togo on vacation, she asked Tom to deliver thestereo to her home when she returned.A week later, while Tom was transportingthe stereo to Marcia’s home, he dropped it andit smashed to pieces. Marcia wants her depositback; Tom wants the other $450. He toldMarcia he was just doing her a favor bydelivering the stereo to her and she still owedhim for the system.Debate18. If Tom took Marcia to court for the $450,would he win? Explain your answer.19. If Marcia took Tom to court, what legalarguments do you think she could make?Explain your answer.For the following cases, give your decision andstate a legal principle that applies.20. Brian buys a CD player from Kerri andreceives his bill of sale. The next day, Briangives the CD player to his sister, Heidi, asa birthday present. Six months later, Briantries to sell the CD player to Jodie, showingher the bill of sale as evidence of his titleto the CD player. Can Jodie rely on thisevidence? Explain your answer.21. Renee is hired by a large manufacturingcompany to work as a computer softwareengineer. Is her employment contractgoverned by the UCC? Why or why not?22. One week after planting tomatoes, Ursulaenters into a contract with a canningcompany, promising to sell the company allof her tomatoes for a particular price. Isthis a sale? Explain your answer.23. Vera agrees to buy a car from Marcus, andMarcus agrees to sell the car to her. Theydo not, however, agree on the price. Isthere a contract? Why or why not?24. Athena and Yvonne, co-owners of a hairsalon in San Jose, California, decide tomove to Portland, Oregon. They sell theirbusiness to Enrique and Shawn. The hairsalon has unpaid debt for equipmentinstallation and beauty supplies. DoEnrique and Shawn have any responsibilitiesunder the bulk transfer section of theUCC? Explain your answer.290 Unit 3: Understanding Consumer Law

In each case that follows, you be the judge.25. Title and Risk of LossClouser agreed to buy a boat from Roger and Sharon Russell, owners of Performance Marine,for $8,500. Clouser made an initial payment of $1,700 and agreed to pay the balance at delivery.Performance Marine was to replace the boat’s engine and drive train before Clouser tookdelivery. No documents of title were to be delivered by the seller. While Performance Marinewas testing the boat, it hit a seawall and was completely destroyed. Who had title to the boat atthe time of the accident? Who had the risk of loss? Explain your answer.Russell v. Transamerica Ins. Co., 322 N.W.2d 178 (MI).26. AuctionsColeman bid $2,050 for a D-7 tractor at a public auction. It was not stated that the auctionwas with reserve. The auctioneer yelled, “Sold,” accepting Coleman's bid. Later, the owner ofthe tractor refused to sell it for $2,050, saying that the auction was with reserve and that hecould refuse to accept the bid. Did the owner have to sell the tractor to Coleman for $2,050?Why or why not?Coleman v. Duncan, 540 S.W.2d 935 (MO).Ethics and TechnologyTodd’s classmates bully him at school. As a result,Todd decides to create a Web site on which he poststhe names and addresses of each of the bullies; healso includes derogatory remarks about each ofthem. When Todd’s classmates discover the site,many complain that they have a right not to bementioned, that their addresses are private, and thathis comments constitute defamation.Connect27. Research the ethical implications of legislationresulting from the use of current technology.Can you find any legislation that addresses theethical issues in this case? If yes, what arethese laws, and how would they apply?28. Develop procedural guidelines forimplementing appropriate legislation. What aresome of the steps that companies, agencies,and others can follow to make sure that theyand their employees are obeying the law?29. Predict What problems might exist if theUCC were not a single uniform codethroughout the United States?30. Connect Have you ever ordered anythingthrough a catalog, a television-shoppingnetwork, or over the Internet? How werethe goods shipped to you?31. Question Do you think it is fair for abuyer to refuse to accept goods afterordering them? Why or why not?32. Respond There are only a few laws inplace to protect consumers who buyonline. If you were a lawmaker, whatlaws would you write for the world ofe-commerce?Chapter 13: Contracts for the Sale and Lease of Goods 291

CHAPTERThe Importance ofWarrantiesUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 14: The Importance ofWarranties—Chapter Overviews topreview the chapter information.

The Opening SceneAn Lee is waiting for the school bus with his friend,Michael.Wedding Gifts Gone AwryAN: My sister and her new husband get back fromtheir honeymoon tomorrow, but I haven’t gottenthem a present yet.MICHAEL: How about one of those bird clocks thatchirps every hour? My neighbor has one. She toldme she wants to sell it because the noise bothers her.AN: Cool! Maybe I’ll buy it.(Next evening, newlyweds Mei and Bruce are openingwedding presents at the home of Mei’s parents.)MEI: Oh, it’s beautiful!BRUCE: It’s a lamp shade with feathers.AN: If you ask me, that thing’s for the birds. Whynot open my present over there? (He points to acrudely wrapped box.)MRS.LEE: They’ll get to your present soon, An.BRUCE: We’ll open yours after this one from AuntHarriet. (He reaches for a large, heavy, flat box.)MEI: Oh, look! A mirror in a beautiful gold frame.BRUCE: Look, Mei, the mirror is cracked!MRS.LEE: Harriet will be so upset. Do you think it’scovered by a warranty?MEI: I hope so! Now for An’s gift. (Opening thepresent.) How nice! A bird clock.AN: It chirps every hour with different birdcalls.MEI: What a wonderful gift! Thank you.BRUCE: (Examining the clock.) We’ll think of youevery hour. Uh-oh! The small hand is missing. Didyou get it at a local store?AN: (Embarrassed.) I didn’t notice that. I’ll take it back.MRS.LEE: One more present, and then we’ll havesome dessert. I have pie and An’s favorite carrotcake in the freezer.MEI: This gift is from Uncle Max.MR.LEE: You can bet it’ll be good. Max says thesalesperson claimed it was the best on the market.MEI: (Slightly forlorn, holding up an object to herhusband.) I think it’s a feather duster, don’t you?MRS.LEE: (Screaming from the kitchen.) Almosteverything’s melted in the freezer! It must havestopped working. That meat we bought for $100last week is all ruined. At least the pies and cakeare still good!MR.LEE: Don’t worry. The freezer is still underwarranty.AN: I really love this carrot cake. (He takes a biteand suddenly puts his hand to his mouth.) Ow!Something cut me!MRS.LEE: Are you all right, An?AN: (Removing something from his mouth.) A pieceof glass! How did that get there?MR.LEE: Your mouth is bleeding badly. Come on, I’lldrive you to the hospital.MEI: (To Bruce.) I guess the honeymoon’s over.1. Does Aunt Harriet have any legal recourse fromthe store for the damaged mirror? Do Mei andBruce have recourse from the store, even thoughthey did not purchase the mirror?2. Does the used clock that An bought from hisfriend’s neighbor have a warranty?3. What are the legal implications of the statement,“It’s the best feather duster on the market”?4. Does a freezer’s warranty cover replacing the foodspoiled as a result of a mechanical breakdown?5. What legal recourse does An have for the injuriesto his mouth?Chapter 14: The Importance of Warranties 293

l How to describe thethree ways an expresswarranty can be madel How to state the obligationsof merchantsunder the Magnuson-Moss Warranty Actl How to contrast alimited warranty witha full warrantyl How to differentiatebetween the impliedwarranty of fitness fora particular purposeand the impliedwarranty ofmerchantabilityl How to explain thewarranty of titleUnderstanding warrantieswill keep you from losingmoney.l warrantyl express warrantyl full/limited warrantyl implied warrantyl warranty of fitness fora particular purposel warranty ofmerchantabilityl usage of tradel warranty of titleExpress and ImpliedWarrantiesLaw of WarrantiesHave you ever bought a radio that wouldn’t work when you took ithome? Have you found an impurity or a foreign substance in a saladyou were served in a restaurant? Have you ever experienced technicalproblems with a new computer?The UCC provides protection in these and other situations under itslaw of warranties. A warranty is another name for a guarantee. Abreach of warranty is a breach of contract.Express WarrantiesAn express warranty is an oral or written statement, promise, orother representation about the quality, ability, or performance of aproduct. Express warranties apply to goods that are sold or leased. Thesewarranties are conveyed in three ways:l By a statement of fact or a promise made by the sellerl By a description of the goodsl By the use of a sample or modelStatement of Fact or PromiseAn express warranty is created when a private party or a merchantsells goods and makes a statement of fact or a promise about the goodsto the buyer. The use of formal words, such as warranty or guarantee,is not necessary, provided the statement relates to the goods and is partof the transaction.An express warranty may be a statement of fact or a promise ofsomething that may happen in the future. The following example illustratesa statement of an existing fact.Example 1. Maebelle wanted to sell her car to Waterio. To makeher car seem more appealing, she told him the vehicle’s enginehad been rebuilt. Waterio bought the car but soon discovered theengine had not been rebuilt. Maebelle’s statement of fact was anexpress warranty. Waterio may recover damages from her forbreach of express warranty.The following example illustrates a promise of something that mayhappen in the future.294 Unit 3: Understanding Consumer Law

Example 2. Nils purchased a car from Robin. As partof the deal, Robin promised the car would pass thenext required inspection. When Nils had the car inspected,however, it failed. Robin’s promise was anexpress warranty that was not fulfilled.Express warranties are often found in salesbrochures, circulars, and advertisements.Example 3. The maker of a liquid drain cleaner advertisedthe product as “safe” and capable of “fast action.”A child was severely injured when she was accidentallysplashed with the product. The court held thatthe advertisement created an express warranty that theproduct was safe. The child’s parents won their caseagainst the company for breach of express warranty.To be useful, a warranty must be stated in precise and understandableterms. Suppose that a seller says to you, “This product is warranted,”or “This product is guaranteed.” These words alone are not enough togive you protection. You need to know exactly what the seller will do foryou in the event that a problem arises.Example 4. Virginia bought a hair-curling iron that was advertisedin the newspaper. The ad said simply that the item was guaranteed.She used the curling iron for six months, and then itstopped working. When Virginia returned it to the store, she wastold that the guarantee had been for only 90 days.REBUILT ENGINE?A statement from a cardealership that an engineis rebuilt creates an expresswarranty. Can expresswarranties be made byprivate parties?Always seek written warranties. Although express warranties do nothave to be in writing, oral statements are difficult to prove. Also, underthe parol evidence rule, a court may refuse to consider oral statementsif a written contract exists.Warranty law allows a certain amount of sales talk, called “puffery,”that does not qualify as a warranty. A statement about the value of goodsor a seller’s opinion is not a warranty. “This car gets great gas mileage,”or, “This is the best item on the market,” are examples of puffery oropinion, not express warranties. However, a statement like, “This cargets 30 miles per gallon,” is an express warranty because it is a statementof fact.Availability before SaleWritten warranties on consumer products costing more than $15 mustbe made available before you buy the product. A store must put writtenChapter 14: The Importance of Warranties 295

warranties close to the product or display a sign stating that warrantiescan be examined upon request. Manufacturers must provide retailers withmaterials needed to meet their warranty requirements, such as warrantystickers, tags, signs, or posters. Manufacturers can also print the warrantyon the product’s package. Similarly, door-to-door salespeople must offeryou copies of any written warranties before you buy their products.Advertising Express WarrantiesAn advertisement stating that a product iswarranted must tell you how to get a copy of the warrantybefore you buy the product. The followingexamples of print and broadcast advertisements meetthis legal requirement:l “The Bigwheel bicycle is warranted for five years.Some restrictions may apply. See a copy of ourwarranty wherever Bigwheel bicycles are sold.”l “See our full two-year warranty at the storenearest you.”l “We offer the best guarantee in the business. Readthe details and compare wherever our fineproducts are sold.”WARRANTYAVAILABILITYWritten warranties onconsumer products costingmore than $15 must beavailable for you to readbefore you buy the product.Why do we have this law?This rule also applies when you place a mail, telephone, or Internetorder. The following are examples of legally sound warranty disclosures:l “BigSmile digital cameras are backed by our two-year warranty.Write to us for a free copy.”l “Write for a free copy of our full warranty. You’ll be impressed athow we stand behind our product.”l “Supersharp knives are guaranteed. Read about our 90-day limitedwarranty in this catalog.”Advertisers who use expressions such as “Satisfaction Guaranteed,”“Money-Back Guarantee,” and “Free Trial Offer” must refund the fullpurchase price of their product at the purchaser’s request. Any conditions,such as the return of the product, must be stated in the ad. Here’san example:l “Money-Back Guarantee! Just return the TellTime watch in itsoriginal package, and TellTime will fully refund your money.”Advertisers who warrant products for a lifetime must fully explainthe terms of their promises (see Figure 14.1). The following advertisementsare correct:l “Our battery is backed by our lifetime guarantee. Good for as longas you own the car!”296 Unit 3: Understanding Consumer Law

Figure 14.1Lifetime GuaranteeLifetime GuaranteeTACITURNMUFFLERSMUFFLERSMUFFLERSMUFFLERSWHOSE LIFE?Advertisers who warrantproducts for a lifetimemust disclose the life towhich it refers. Why isthis ad illegal?l“The lifetime guarantee on the Taciturn Muffler protects you for aslong as your car runs—even if you sell it, trade it, or give it away!”Magnuson-Moss Warranty ActThe Magnuson-Moss Warranty Act is a law affecting only the saleof goods sold in interstate commerce (business activities that touch morethan one state). This federal act gives added protection to consumerswhen written express warranties are made. A consumer is someone whobuys or leases goods for personal, family, or household use. When awritten warranty is offered on consumer goods costing more than $10and sold in interstate commerce, the warranty must be labeled as full orlimited. A full warranty promises to fix or replace a defective productat no charge to the consumer. This promise must be honored by a companywithin a reasonable amount of time after a complaint is made. Afull warranty is good for the period mentioned in the warranty, regardlessof who owns the item when it breaks. If the product cannot be fixed,Chapter 14: The Importance of Warranties 297

FULL WARRANTYA full warranty is onein which a defectiveproduct will be fixed orreplaced for free. Whydoes a manufactureroffer a warranty?Figure 14.2REFRIGERATOR/FREEZERFULL ONE-YEAR WARRANTYFull Five-Year Warranty on Sealed System Componentsand Food Compartment LinerFIRST YEAR Amana will repair or replace any defective part free of charge.SECOND THROUGH FIFTH YEARS Amana will repair or replace free ofany charge any defective sealed system component (evaporator,condenser, motor compressor, interconnecting tubing), and will repairfree of charge any defective food compartment liner. The inner door lineris only covered in the first year.Warranty service must be performed by an authorized Amana servicer.For warranty service contact an authorized Amana servicer or see yourUse and Care Manual for procedures. Service will be provided duringnormal business hours.Owner's responsibilities include providing normal care and maintenance,providing proof of purchase upon request, replacing light bulbs or otherowner-replaceable items where directions appear in the use and careinstructions, and having the appliance reasonably accessible for service.Warranty begins at date of original purchase and applies only to normalhome use within the United States and Canada; however, in Alaska,U.S. Territories, and Canada, Amana's obligation during the second throughfifth years shall be limited to providing replacement warranty parts, f.o.b.Amana, Iowa, and related labor by an authorized Amana servicer.Warranty is void if serial plate is defaced, or where defect is due todamage, product alteration, connection to an improper electrical supply, orwhere product is not used in accordance with the use and careinstructions. IN NO EVENT SHALL AMANA BE RESPONSIBLE FORANY INCIDENTAL OR CONSEQUENTIAL DAMAGES.This warranty gives you specific legal rights, and you may have othersthat vary from state to state. For example, some states do not allow theexclusion or limitation of incidental or consequential damages, so thisexclusion may not apply to you.AMANA REFRIGERATION, INC. AMANA, IOWA 52203C8982302Printed in U.S.A.298 Unit 3: Understanding Consumer Lawthe owner may choose to receive a new product or a full refund. SeeFigure 14.2 for an example of a manufacturer’s full warranty.A limited warranty is any written warranty that does not meet therequirements for a full warranty. It does not promise free repair orreplacement. A common limited warranty covers only parts, not labor.Other limited warranties give you only a partial refund when somethinggoes wrong with an item, such as when a tire with a 50,000-mileguarantee fails at 30,000 miles. Some limited warranties require you topay for shipping a product back for service. Other limited warrantiescover a product only as long as it is owned by the original buyer.

Under the Magnuson-Moss Warranty Act, such a warranty must belabeled “limited warranty.” When you see these words, read the warrantycarefully to learn about its limitations. See Figure 14.3 for an exampleof a limited warranty.Figure 14.3DIGICAM CORPORATIONLimited WarrantyWhat Does This Warranty Cover? This warranty covers any defects ormalfunctions in your new Digicam Camera.How Long Does the Coverage Last? This warranty lasts as long as youown your Digicam camera. Coverage terminates if you sell or otherwisetransfer the camera.LIMITED WARRANTYA limited warranty givesyou something less than afull warranty. What mustyou do under this warrantythat you would not have todo if it were a full warranty?What Will Digicam Do? Digicam will replace any defective ormalfunctioning part at no charge. You must pay any labor charges.What Does This Warranty Not Cover? Batteries, or any problem that iscaused by abuse, misuse, or an act of God (such as a flood) are notcovered. Also, consequential and incidental damages are not recoverableunder this warranty. Some states do not allow the exclusion or limitation ofincidental or consequential damages, so the above limitation or exclusionmay not apply to you.How Do You Get Service? To be eligible for service under this warrantyyou MUST return the warranty registration card attached below within30 days of purchasing the camera.If something goes wrong with your camera, send it postage paid with a briefwritten description of the problem to:Digicam Corp.Box 10000Digicam, OhioWe will inspect your camera and contact you within 72 hours to give theresults of our inspection and an estimate of the labor charges required tofix the camera. If you authorize repairs, we will return the repaired camerato you COD within 72 hours. You must pay any labor charges upon receiptof the repaired camera.If you inform us that you wish us to provide necessary parts to you but youwish to have repairs performed elsewhere, we will return the camera andreplacement parts to you within 72 hours.There is no charge for inspection.How Does State Law Apply? This warranty gives you specific legalrights, and you may also have other rights that vary from state to state.Chapter 14: The Importance of Warranties 299

Description of the GoodsAny description of the goods that is part of a transaction also createsan express warranty. The seller warrants that the goods will be the sameas the description.Example 5. Earnest ordered a handheld Global PositioningSystem (GPS) receiver from a catalog. The catalog described thedevice and showed a picture of it. When the system arrived,Earnest discovered it was not the same unit that he had seen picturedand described in the catalog. A breach of express warrantyhad occurred.Sample or ModelAny sample or model that is part of a transaction creates an expresswarranty. When displaying a sample or model, the seller warrants thatthe goods sold will be the same.Example 6. Suppose Earnest went to a store to buy the GPSreceiver. The salesperson showed him several different models,and Earnest selected the one he liked best. At the checkoutcounter, he was given a sealed carton. At home, however, Earnestfound that the carton contained a different model receiver thanthe one he had been shown. This is a breach of express warranty.DESCRIPTION OF GOODSA description of goods thatis part of the transactioncreates an express warranty.What does the sellerwarrant?300 Unit 3: Understanding Consumer Law

Internet Retailers Fined for DelaysBased on consumer complaints, the Federal Trade Commission chargedseven Internet retailers with failure to give buyers enough notice of shippingdelays. These delays took place during the holiday shopping season. Someretailers had promised specific delivery dates, even though delivery by thosedates was virtually impossible. They also agreed to change their proceduresfor delivering orders. The retailers were accused of violating the mail andtelephone order rule, which requires retailers to ship orders by the datewarranted by their promise. The rule also states that if no date is promised, thegoods must be delivered within 30 days of the order. In settling this dispute, theretailers agreed to pay fines. (Source: InternetWeek, July 26, 2000)Connect Go to the Web sites of two or more online retailers, and check theirdelivery procedures and warranties.Implied WarrantiesAn implied warranty is a guarantee of quality imposed by law.An implied warranty is not in writing. Under the UCC, implied warrantiesapply only to goods that are sold; they do not encompass contractsfor services. A sale is the passing of ownership of a particularitem from a seller to a buyer for a price. There are three types of impliedwarranties:l Warranty of fitness for a particular purposel Warranty of merchantabilityl Warranty that comes from a course of dealing or usage of tradeWarranty of Fitness for a Particular PurposeA warranty of fitness for a particular purpose is created whenthe seller knows the purpose for which the goods are needed. The selleradvises the buyer in making a purchase, and the buyer relies on theseller’s knowledge and advice. In this way, the seller warrants byimplication that the goods will be fit for the purpose for which they areto be used. This warranty exists whether the seller is a merchant or aprivate party.Example 7. Susan Eng went to a paint store and told the proprietorshe needed the best paint to use on an outdoor concrete patio.The proprietor selected a gallon of paint from a shelf and toldChapter 14: The Importance of Warranties 301

Susan it would be perfect for that type of job. She bought thepaint and resurfaced the patio, following the directions on thecan. Two weeks later, during a heavy rainstorm, the paint washedoff the patio. The proprietor had breached the implied warrantyof fitness for a particular purpose because Susan had relied onthe proprietor’s knowledge and judgment in selecting the paint.Warranty of MerchantabilityOne of the most beneficial warranties to look for when buying somethingis the implied warranty of merchantability . Under this warranty,the merchant warrants that the goods being sold are merchantable.This warranty is given only when the seller regularly sells goods of thatkind. Unless disclaimed, retailers, wholesalers, and manufacturers implysuch a warranty in every sale, giving assurance that their products arefit for the purpose for which they are purchased. Private parties do notprovide the warranty of merchantabililty.Extended WarrantiesAlmost any time you purchase stereo or electronic equipment, the salespersonwill encourage you to buy an extended product warranty or servicecontract. The sale of such warranties represents big profits to the merchant.Profit margins can be up to 50 percent of the price of the extended warrantycontract.The value of buying an extended warranty can be debated. Originalproduct warranties cover any breakdowns that might occur early in the life ofthe product. Most of the time, major defects will show up within the periodcovered by the original warranty.If the item breaks after the original warranty expires, most states offerrecourse under certain conditions. If you had repairs made under the originalwarranty, the seller or manufacturer must extend your warranty to cover thedefect if it happens again. This is true even if the original warranty has expired.Compare and Contrast Visit a local electronics or appliance store. Ask to see anoriginal warranty. Then ask to see an extended warranty contract. Does thecost seem worthwhile in relation to the risk of breakdowns beyond the originalwarranty period?302 Unit 3: Understanding Consumer Law

Example 8. Norma bought a secondhand VCR from Kenneth.She saw his ad in the classified section of the newspaper. Kennethwas not in the business of selling VCRs. The VCR stoppedworking on the day after Norma purchased it. Because Kennethis not a merchant, Norma does not have the benefit of the warrantyof merchantability.Merchantable goods must:l Pass without objection in the trade under the contract description.l Be fit for the ordinary purposes for which such goods are used.l Be adequately contained, packaged, and labeled as the agreementmay require.l Conform to the promises or statements of fact made on the containeror label, if any.Example 9. If Norma had purchased the VCR from a local electronicsstore, she would have had legal recourse for breach ofwarranty of merchantability. Even a secondhand VCR is not merchantableif it breaks down the day after someone buys it. It is notfit for the ordinary purpose for which VCRs are used.Some other examples of items that courts have held to be nonmerchantableinclude:l Day-old chickens that had bird cancer.l Contaminated blood received in a blood transfusion.l Weed killer that also killed a farmer’s squash.l A boat motor that produced excessive amounts of black smoke.l A used car that was not reasonably fit for the general purpose forwhich it was sold.l Applesauce that was inedible because of poor taste and smell.l Contaminated cheese.l Any food containing such impurities as bits of wood, metal, or glass.Beads andBusinessRashmika and Juliahave a business makingand selling beadednecklaces, bracelets,and earrings at a fleamarket on weekends.Some of the necklacesand bracelets are strungon elastic so that theyfit snugly. One SaturdayJulia found some oldelastic thread for $1 ayard. She bought 10yards of it. Rashmikawas concerned thatover time the old elasticwould stretch or breaktoo easily. Julia thoughtthey could make a lotmore money using theless expensive thread.What are the ethicalissues in this case? DoRashmika and Julia havean ethical responsibilityto their customers toprovide the strongest,most durable productfor the price?Usage of TradeAnother implied warranty arises from the customary ways in whichthe parties have dealt in the past, or usage of trade . For example, whena person sells a thoroughbred horse, there is an implied warranty thatthe seller will provide papers certifying the horse is a thoroughbred.The reason this implied warranty arises is that providing such papershas become a well-established custom among people who trade inhorses.Warranty of TitleWhen a merchant or a private party sells goods, the seller warrantsthat the title being conveyed is good and that the transfer is lawful. ThisChapter 14: The Importance of Warranties 303

President Kennedyspoke of four basicconsumer protectionrights in his message toCongress in 1962: theright to safety, the rightto be informed, the rightto choose, and the rightto be heard.is called the warranty of title . It includes an implied promise that, tothe seller’s knowledge, the goods will be delivered free from any lien,or claim by another.If someone buys goods that turn out to be stolen, the rightful owneris entitled to return of the goods. The innocent purchaser may recoverhis or her loss from the seller for breach of warranty of title.Example 10. College student Ted Grossman sold a diamondwatch to a friend, Beth Bardley, for $400. A short time later,another student, Jill Lardner, saw the watch on Beth’s wrist andclaimed ownership. Jill said the watch had been stolen a weekearlier from her dorm room, and she was able to produce theoriginal purchase receipt to prove ownership. Although Ted didn’tknow the watch was stolen, he did not have good title. As a result,he could not transfer good title to Beth. Ted was therefore liablefor breach of the warranty of title. Ted could also sue the personwho sold the watch to him for breach of the same warranty.Reviewing What You Learned1. What are the three ways an express warrantycan be made?2. What are the obligations of merchants underthe Magnuson-Moss Warranty Act?3. What is the difference between a limitedwarranty and a full warranty?4. What is the difference between the impliedwarranty of fitness for a particular purposeand the implied warranty ofmerchantability?5. What is the warranty of title?Critical Thinking ActivityOpinion or Fact A statement of fact by a sellerabout a product is a warranty; a seller’s opinionis not. Talk with another class member andcompare the following pairs of statements.Classify each statement as fact or opinion.1. These goods are 100 percent wool.This is the finest wool around.2. This truck has never been in an accident.This truck is solid.3. This ink will not stain clothes.This ink is safe to use.4. This is an IBM-compatible computer.This computer is as good as any IBM.5. This watch is waterproof.This watch is durable.Legal Skills in ActionWritten Guarantees Turner is planning to sellhis computer system to Lynne. It is only twoyears old and has a modem, color monitor, andCD-Rom drive. According to Turner, the systemhas never had a problem. Lynne is a littlenervous about buying a used system and wantsa written guarantee. In groups of two, helpTurner write a warranty on his computer system.304 Unit 3: Understanding Consumer Law

Exclusion ofWarranties, Privity,and Duty to NotifyExclusion of WarrantiesTo exclude the warranty of merchantability, the word merchantabilitymust be mentioned specifically. If the exclusion is in writing, the wordmust be written prominently. The warranty of title may not be excluded.Example 11. Purvis bought a used car from Best Motors. Printedon the sales slip were the following words in large, bold capital letters:“THE SELLER HEREBY EXCLUDES THE WARRANTY OFMERCHANTABILITY AND FITNESS FOR A PARTICULAR PUR-POSE.” The car broke down two days later, but Purvis had no recourseagainst the car dealer for breach of either implied warranty.Implied warranties can also be excluded by the words “as is” and“with all faults.” Having buyers examine goods before the sale is anotherway to exclude warranties. When this is done, there is no implied warrantyto cover defects because the examination should have revealedany defects in the goods.Example 12. Teresa Quigley paid cash for a computer desk shebought from a retail furniture dealer. The sales tag attached tothe desk read: “Reduced from $198 to $75, sale final, with allfaults.” When the desk was delivered to Teresa’s home, she foundthat the drawers stuck and that one side was badly marked andscratched. Despite these flaws, Teresa would have no recourse inmany states because of the terms of the sale. The sales tag madeclear that Teresa assumed all risk as to quality. She is protectedonly by an implied warranty of title.Under the Magnuson-Moss Warranty Act, any clause that excludesor limits consequential damages for breach of warranty must appearconspicuously on the face of the warranty. Consequential damagesare losses that do not flow directly from an act but only from some ofthe consequences or results of the act.l How to recognize waysthat warranties areexcluded (not in force)l How to determinewho is covered bywarranties madeunder the laws ofyour statel How to explain thebuyer’s duty to notifythe seller of a defectKnowing how warrantiesare excluded, to whomwarranties are made, andnotification requirementswill help you protect yourrights and the money youspend.l consequentialdamagesl privity of contractl duty to notifyExample 13. Souci bought a freezer that was warranted for oneyear. This sentence appeared in boldfaced type on the writtenChapter 14: The Importance of Warranties 305

Charitable GiftsGiving to charities is agreat way to support acause that is importantto you. The UnitedWay and the AIDSFoundation are justtwo examples oforganizations thatneed support throughoutthe year, not justduring the holidayseason. Unfortunately,some organizationsthat promote themselvesas charitiesmay not actually becharities. How canyou tell if a charityis legitimate?Get InvolvedContact the BetterBusiness Bureau fortips on how to guardagainst misrepresentationand fraud.Organize a donationdrive at your school tocollect old clothes andfurniture to donate toa well-known charityin your area.warranty: “In no event shall this company be liable for consequentialdamages.” Souci filled the freezer with $1,500 worth ofmeat. Several days later, the meat spoiled when the freezer brokedown. Under the warranty, the company has to repair or replacethe freezer. However, it is not responsible for the loss of the meat,which would be considered a consequential damage.Consumer ProtectionThe Magnuson-Moss Warranty Act limits the exclusions of impliedwarranties to consumers. Under this law, if a seller makes a written expresswarranty to a consumer, the implied warranties cannot be disclaimedor excluded. This law also applies if the seller gives the buyera service contract. Implied warranties may be limited to the length oftime of the express warranty, unless it is too short to be reasonable. Ifthe length of time is limited, however, the agreement becomes a limitedwarranty rather than a full warranty.Some states have gone further to protect consumers by saying thatimplied warranties cannot be excluded when goods are sold. If TheresaQuigley bought the computer desk in Massachusetts, New Hampshire,Oklahoma, or Rhode Island, for example, she would have receivedadditional protection. Those states do not allow sellers to excludeimplied warranties when goods are sold to consumers.Privity of Contract Not RequiredPeople who contract directly with each other are said to be inprivity of contract . In the past, warranties extended only to the actualbuyer of a product.Example 14. A man purchased a can of salmon from a store.While eating the salmon, the man’s young son was injured bybits of metal that were in the fish. Suit was brought on behalf ofthe son against the store for breach of warranty of merchantability.The case was lost, however, because the son had not purchasedthe salmon. There was no privity of contract between thestore and the son.The boy would have won the case if the incident had occurred today.The UCC has abolished the requirement of privity of contract. Instead, itprovides states with three alternatives. In all of the alternatives, expressand implied warranties extend to people who would reasonably be expectedto use, consume, or be affected by the goods purchased by the buyer.l Alternative A gives sellers’ warranties to any person injured by abreach of warranty who is in the family or household of the buyer.Guests of the buyer are also protected. Sellers cannot exclude thisprovision. Warranties are not extended to corporations.306 Unit 3: Understanding Consumer Law

Intellectual Property AttorneyNot many corporate lawyers have collections of boardgames in their office, but not many corporate lawyers haveclients like those of Jennifer Jolley. Jolley is an associate atStratton Ballew. She specializes in protecting the creativework, or intellectual property, of writers and other artiststhrough patents, copyrights, and trademarks.“People come to me with sketches for logos or trademarks,” she says, “andI conduct a search to find out whether their work is similar to something alreadyout there. I also try to make sure that the creative work of our clients—includinglogos, trademarks, writing, and new technology—isn’t being copied or misusedaround the world.”One of her clients is Pictionary, Inc., the creator of the popular board game.If, for example, she discovers someone is using the logo or name that most of usassociate with Pictionary, she writes a polite but firm letter to that individual orcompany asking them to stop. If that doesn’t work, the company has the optionof going to court.“The law requires us to protect our intellectual property,” says Jolley. If acompany just lets things go for a few years, the court will eventually say theyhave no reason to complain.”Jolley especially enjoys meeting the actual inventors and creators behindthe work she protects.“Pictionary was invented by a couple of guys in an apartment,” she says.“When they first started, they ran into a manufacturing snag, so they hosted a‘card-sorting party’ and asked their friends to come help get everything sortedand boxed up.” It worked, and Pictionary has sold more than 30 million copies.SkillsPersonalityEducationOrganizational, reasoning, and communication skillsPatient, hardworking, logicalUndergraduate and law degrees. A few upper-leveldegree programs specialize in intellectual property.It helps to have a background in a technical field.For more information about intellectual property lawyers, visitwww.uspto.gov, www.toc.gov/copyright, ubpl.glencoe.com, or yourpublic library.lAlternative B gives sellers’ warranties to any person injured by abreach of warranty. Warranties are not extended to corporations.Sellers cannot exclude this provision.Chapter 14: The Importance of Warranties 307

lAlternative C gives sellers’ warranties to any person or corporationinjured by a breach of warranty. Sellers may exclude this provisionwith respect to injuries to corporations, but not to individuals.Figure 14.4Most states have adopted one of the three alternatives. A few states,however, have written their own versions of the law. See Figure 14.4 fora listing of the alternatives that have been adopted by the states.Duty to Notify andRemedies for BreachTo succeed in a claim for breach of warranty, the buyer must satisfyhis or her duty to notify . This duty requires that the buyer notifyUCC Alternatives to PrivityState Alternative State Alternative State AlternativeAlabamaBKentuckyANorth Dakota CAlaskaALouisianaNAOhioAArizonaAMaineOVOklahomaAArkansasAMarylandAOregonACaliforniaNAMassachusettsOVPennsylvaniaAColoradoBMichiganARhode IslandOVConnecticutAMinnesotaCSouth CarolinaADelawareBMississippiASouth DakotaBDistrict of ColumbiaAMissouriATennesseeAFloridaAMontanaATexasOVGeorgiaANebraskaAUtahCHawaiiCNevadaAVermontBIdahoANew HampshireOVVirginiaOVIllinoisANew JerseyAWashingtonAIndianaANew MexicoAWest VirginiaAIowaCNew YorkOVWisconsinAKansasBNorth CarolinaAWyomingBSTATE ALTERNATIVESMost states have adopted one of the three alternatives to privityof contract. What alternative does your state follow?308 Unit 3: Understanding Consumer Law

the seller within a reasonable time after the defect is discovered. Failureto do so will prevent the buyer from recovering.Example 15. Norma Simms, in Example 9, waited for six monthsbefore telling the local store about the defective VCR. This waitwould probably be considered beyond a reasonable time. Becauseof the delay in notification, Norma would most likely losethe right to recover from the store for breach of warranty ofmerchantability.Often, when sellers are notified that a product is defective or that awarranty has been breached, they will arrange to correct the situation.Sellers usually exchange defective goods for undamaged goods or givethe buyer a refund. When sellers do not offer an exchange or refund,the buyer may bring a claim for damages. If the buyer keeps the goods,the buyer is awarded damages that reflect the difference between thevalue of the goods accepted and the value the goods would have had ifthey had been as warranted. If the buyer has not yet received the goods,the buyer may refuse to accept them and bring a claim for any losses thatwere suffered.When the warranty of title is breached, the buyer has a claim againstthe seller for damages. This could be the cost of clearing the title, or aswith stolen goods, the purchase price of the goods.Language ArtsAll new cars come withwarranties. These warrantiesusually cover thecost of the parts andlabor needed to repairdefective items on yourcar. These warrantiesare usually for a limitedperiod of time or alimited number of miles.Research ActivityContact car dealerships inyour area and ask aboutthe warranties they offer.Consider which onesseem most appealing toyou, and which offer youthe most benefits.Reviewing What You Learned1. To whom are warranties made under thelaws of your state?2. How may warranties be excluded under thelaws of your state?3. What is the buyer’s duty to notify the sellerof a defect?Critical Thinking ActivityWarranties Clip an advertisement thatmentions a warranty from a newspaper ormagazine. Is the warranty express or implied?Is it full or limited? Does it offer goodprotection to the buyer?Legal Skills in ActionCalculating Warranty Protection Corey paid$600 for new tires for his truck in March 2000.He chose the warranty protection the companyoffered, which would allow him to pay a reducedprice to replace one or more of the tires duringa four-year warranty period. When he had toreplace a tire in March 2001, Corey paid only25 percent of the retail cost for a new tire. Whenhe had to replace another tire in March 2003,Corey paid 50 percent of the retail cost for anew tire. Assuming that the price of a new tiredid not change during that time, what was thetotal cost of Corey’s replacement tires?Chapter 14: The Importance of Warranties 309

CHAPTERASSESSMENTSection 14.1 Express and ImpliedWarranties● An express warranty is an oral or writtenstatement, promise, or other representation aboutthe quality, ability, or performance of a product.Given by manufacturers or sellers, expresswarranties can be made in one of three ways:(1) by a statement of fact or a promise made theseller; (2) by a description of the goods; or (3) bythe use of a sample or model. The use of formallanguage, such as warranty or guarantee, is notnecessary to convey an express warranty.● Merchants must label written warranties as either“full” or “limited” for consumer products costingmore than $10 under the Magnuson-MossWarranty Act. The Magnuson-Moss WarrantyAct is a federal act that applies only to goodssold in interstate commerce (business activitiesthat touch more than one state).● A full warranty promises to fix or replace adefective product at no extra charge to theconsumer. The promise must be honored by thecompany issuing the warranty within a reasonableperiod of time. A full warranty is good forthe period of time mentioned in the warranty,regardless of who owns the product at the time itbreaks. A limited warranty is any warranty thatfalls short of a full warranty. Some of the stipulationsor terms of a limited warranty may include:(1) the consumer pays for repair or replacement;(2) parts are covered, but labor is not; (3) only apartial refund is given; (4) the consumer pays forshipping a product back for service; or (5) theoriginal buyer must own the product.● A seller is responsible for an implied warranty offitness if he or she knows the purpose for whicha good is needed and makes a recommendationto the buyer. In offering advice, the seller issuggesting that he or she has expert knowledge●on which the buyer should rely. This warrantyexists whether the seller is a merchant or aprivate party. In contrast, sellers who regularlysell goods of a particular kind imply a warrantyof merchantability in every sale, assuring thattheir products are fit for the purpose for whichthey are purchased. Private parties do not providethe warranty of merchantability.A warranty of title is made when sellers warrantthat the title on a good being sold is valid andthat the transfer is lawful. A warranty of titleincludes an implied promise that, to the seller’sknowledge, the goods will be delivered free fromany lien or claim by another. This warrantycannot be excluded.Section 14.2 Exclusion of Warranties,Privity, and Duty to Notify● A seller may exclude the warranty ofmerchantability by expressly mentioning that itbe excluded on a warranty document. If thewarranty of merchantability is excluded bywritten notice, the exclusion must be writtenprominently. Implied warranties can also beexcluded by including the words “as is” or “withall faults” on a warranty document. Having abuyer examine and accept goods as being defectfreeis another way to exclude warranties.● Warranties are made to buyers of goods.Warranties also extend to those who wouldreasonably be expected to use or be affected bygoods purchased by the buyer. People affected bya good purchased by a buyer may include peoplewho live in the buyer’s household.● To succeed in a claim for breach of warranty, thebuyer must notify the seller of the defect within areasonable time after the defect is discovered.Failure to do so will prevent the buyer fromrecovering.310 Unit 3: Understanding Consumer Law

Consider the key terms in the list below. Then use these termsto complete the following exercises.usage of tradewarranty of titlewarrantyexpress warrantyfull warrantyconsumerimplied warrantylimited warrantyconsequential damagesmerchantablewarranty of merchantability duty to notifywarranty of fitness for a particular purposeprivity of contract1. Prepare a speech that explains the importance of the law ofwarranties to consumers. Be sure to differentiate among thevarious types of warranties discussed in this chapter. Refer tothe chapter when necessary. Use all of the terms listed abovein your speech.2. Practice delivering your speech until you feel confident andcomfortable. Then present your speech to the class.Visit the UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 14:Consumer Protectionand Product Liability—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.3. In what three ways may express warranties be created?4. Why should you try to obtain written warranties whenever possible?5. What is the difference between a full warranty and a limited warranty? Whenmust these warranties be mentioned?6. When does the implied warranty of fitness for a particular purpose arise?7. When and by whom is the warranty of merchantability given?8. What does a warranty of title guarantee?9. In what ways may warranties be excluded?10. What is a lien?11. What might happen if you accidentally purchase stolen goods?12. Explain the significance of usage of trade as it applies to warranties.13. What are consequential damages?14. What is privity of contract?Chapter 14: The Importance of Warranties 311

CHAPTERASSESSMENTAcquiring and Evaluating InformationConsumers face a risk when buying a computer.Consumer Reports recently conducted a surveyof 54,000 readers who reported that 11 percentof computers they purchased had seriousproblems within the first month of ownership.Recently, Pennsylvania’s state legislatureconsidered the nation’s first PC lemon law.The law was based on the automobile lemonlaw. Computer trade groups believe thatconsumers already have protection under theMagnuson-Moss Warranty Act. Conductresearch on the PC lemon laws and answerthe following questions:15. Has your state passed a PC lemon law?16. Does the Magnuson-Moss Act have anyloopholes? What can you do to protectyourself against a lemon PC?Report your findings in a one-page paper.WarrantiesJulia and Franco live in California and recentlypurchased new furniture for their living room.They ordered it from an outlet located in NorthCarolina. When the furniture arrived, the fabricon the couch was ripped. Obviously, Julia andFranco were disappointed. However, when theycontacted the furniture outlet, they were toldthat a repairperson would come the next dayto fix the furniture. Julia and Franco want itreplaced, not fixed.Debate17. What are the legal issues involved?18. Do Julia and Franco have an impliedwarranty from the furniture outlet?19. Does the warranty of merchantability coverthe furniture?20. Can the furniture outlet legally repair thefurniture instead of replacing it?For the following cases, give your decision andstate a legal principle that applies.21. Neal Sanborn buys a used car from aprivate party. While he is driving to workthe next day, the car breaks down. Neallearns that the car needs major repairs. Heclaims breach of the warranty ofmerchantability. Is this claim correct?22. Allison Rantz orders a sports jacket froma store catalog. The jacket she receives isdifferent from the one pictured in thecatalog. On what legal grounds may sheobtain relief from the store?23. Ursula Hurkin, who knows little aboutfurnaces, tells the proprietor of the HollandHeating Supply Co. that she wants a furnaceto heat her new building. The supply companymeasures the building and selects afurnace. After installation, Ursula discoversthe furnace is too small and does not adequatelyheat the building. On what legalgrounds may she obtain relief?24. Jennifer Harrington purchases a new televisionat a discount store. The following isprinted on the sales slip: “THE WARRANTYOF MERCHANTABILITY IS HEREBYEXCLUDED.” Jennifer takes the televisionhome, unpacks it, and turns it on. It doesnot work. A written limited warranty fromthe manufacturer is packed in the box.Does Jennifer have a claim against themanufacturer for breach of warranty ofmerchantability? Explain your answer.312 Unit 3: Understanding Consumer Law

In each case that follows, you be the judge.25. Breach of WarrantyRomedy bought a car from Willett Lincoln-Mercury, Inc. He did not inspect it until four or fivedays after it was delivered to him. Three weeks later, he notified the dealer that the car did notcontain the equipment the dealer had said it would contain. However, Romedy did continue tomake payments on the car. Later, he brought suit against the dealer for breach of warranty.Should he be eligible to recover damages? Explain your answer.Romedy v. Willett Lincoln-Mercury, Inc., 220 S.E.2d 74 (GA).26. LiabilityDavid Gentile suffered severe head injuries while playing in a high school football game. Hishelmet, furnished by the school, was seven years old. Each year the school sent the helmetto a reconditioning company for repair. Gentile brought suit against the manufacturer of thehelmet and the reconditioning company for breach of warranty. Can the reconditioning companybe held liable? Why or why not?Gentile v. MacGregor Mfg. Co., 493 A.2d 647 (NJ).Extended WarrantiesBlake spent his summer savings on a new DVDplayer, which he purchased at a local electronicsstore. The salesperson tried very hard to sell Blakean extended warranty on his new equipment, butBlake wasn’t sure what the extended warrantywould provide.ConnectUsing a variety of search engines; help Blake learnmore about extended warranties. Find out:27. What extended warranties cover.28. How much they cost.29. Where they can be purchased.30. If there are any laws in your state coveringextended warranties.Create a handout explaining your research that youcould share with others.31. Predict Do you think similar productsshould have similar warranties? Wouldn’tthat make it easier to comparison shop?32. Connect When you plan to purchase aproduct, do you research the warranty anduse it as a factor in making the decision topurchase?33. Question Why do you think somecompanies offer only limited warranties?34. Respond What would you do if youpurchased a defective product and theseller from whom you purchased it refusedto correct the situation?Chapter 14: The Importance of Warranties 313

CHAPTERConsumer Protectionand Product LiabilityUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 15: Consumer Protection andProduct Liability—Chapter Overviews topreview the chapter information.

The Opening SceneMrs. Lee is talking with a salesperson in the livingroom of the family’s house.Trouble with the MailSALESPERSON: (Writing up an order.) This is the bestvacuum cleaner on the market, ma’am. Believeme, you can’t go wrong with this model. Sign righthere. (Hands her the order sheet.)MRS.LEE: (Signing.) When will it be delivered?SALESPERSON: In about two weeks. Thank you.(Mrs. Lee lets the salesperson out just as Anita, theneighborhood mail carrier, comes up the walk.)ANITA: (Handing her some letters and a smallpackage.) Good afternoon, Mrs. Lee. I’ve got a lotfor you today.MRS.LEE: (Disappointed.) Oh, I’ve been expecting alarge package.ANITA: That’ll come by truck. I only carry small items.MRS.LEE: Thanks. Have a nice day.(As she begins to close the front door behind her,Mrs. Lee hears a noise. She turns to see Anitasprawled on the front sidewalk beside Jason, theyoung boy who lives next door. A silver scooter liesnearby, and mail is all over the yard.)ANITA: Ooowww, my back!JASON: (Upset.) I didn’t mean to hit her. The wheel ofmy scooter fell off!MRS.LEE: Let me help you. (Assisting Anita to herfeet.) That’s a brand-new scooter, isn’t it, Jason?JASON: I got it yesterday.MRS.LEE: Let’s help pick up the mail.(She and Jason help Anita pick up the mail. Thecarrier limps off, just as the school bus stops at thecorner down the street.)MRS.LEE: Come inside, Jason. You’ve scraped yourelbow. Let me wash it and put a bandage on it.AN: (Bouncing into the house and heading toward therefrigerator.) What’s in the mail, Mom?MRS.LEE: (Opening a package.) Greeting cards? Ididn’t order these. Look, there’s a note asking meto return them if I don’t want them. Well, maybewhen I get around to it. . . . (Tossing the packageonto a table.) I was hoping your father’s birthdaypresent would come. I ordered it more than sixweeks ago.(Two hours later, Mr. Lee arrives home.)MRS.LEE: Honey! You’re home early!MR.LEE: I thought I’d surprise you. (He carries alarge box into the kitchen.)MRS.LEE: What’s that?MR.LEE: Something for you. Go on, open it.MRS.LEE: (Opening the box.) Oh, my! (Her faceturns red.) A new vacuum cleaner!MR.LEE: I got it wholesale through one of oursuppliers. He said it’s the best one on the market!1. What is the meaning of the claim, “It’s the bestvacuum cleaner on the market”?2. On what legal grounds might Mrs. Lee return thevacuum cleaner she bought from the salesperson?3. Is Mrs. Lee obligated to return the greeting cards?Must she pay for them if she keeps them?4. Does Mrs. Lee have any recourse against thecatalog company for the lateness of the birthdaypresent she ordered?5. Does the mail carrier have recourse againstanyone for her injuries?Chapter 15: Consumer Protection and Product Liability 315

Consumer Protectionl How to explain themain differencesbetween state andfederal consumerprotection lawl How to describe twounfair and deceptivepracticesl How to recognize baitand switch advertisingl How to identifyfour Federal TradeCommission rules thatprotect consumersKnowledge of consumerprotection laws willprevent you from fallingvictim to fraud anddeception.l caveat emptorl caveat venditorl consumerl unfair and deceptivepracticel fraudulentmisrepresentationl cease and desistordersl bait and switchl cooling-off rulel telemarketersThe Development of ConsumerProtection LawYears ago, smart shoppers understood the Latin phrase, caveatemptor , which means, “let the buyer beware.” The reason is that consumerswho bought faulty merchandise in the past had few ways to seekcompensation for damages other than through the contract law discussedin Unit 2. When they were injured by dangerous products, they oftenhad no recourse because they were not in privity of contract withmanufacturers.Society, however, now demands that manufacturers be held responsiblefor foreseeable injuries to people who use their products. Lawshave changed, and the phrase that now guides consumer transactions iscaveat venditor , which means, “let the seller beware.”Federal and State ConsumerProtection LawsConsumer protection laws apply to transactions between consumersand people conducting business. A consumer is someone who buys orleases goods, real estate, or services for personal, family, or householdpurposes. When you buy a ticket to a concert or rent skis for personal usefrom a business, consumer protection laws protect you. However, if youacquire the same things from another consumer, then consumer protectionlaws in most states do not protect you. Nor do consumer protectionlaws protect you if you buy a product to use in a business.State consumer protection offices provide information and helpenforce state consumer protection laws. Sometimes the offices assistconsumers with individual problems. Consumer protection offices arelocated in state and county offices, and in some cities, in the mayor’soffice.Federal consumer protection law applies to businesses that sell realestate, goods, or services in interstate commerce, or business activitythat touches more than one state.Example 1. Levina Yepez grows vegetables on her farm, and shesells them to a local store and at her roadside stand. Because herbusiness is local, federal consumer protection law does not apply.316 Unit 3: Understanding Consumer Law

Instead, the consumer protection laws andother laws of her state regulate her business.The Federal Trade Commission (FTC) is theagency of the U.S. government that promotesfree and fair trade competition. The Bureau ofConsumer Protection safeguards consumersagainst unfair, deceptive, or fraudulent practices.Both organizations investigate violationsof federal consumer protection law.Unfair and DeceptivePracticesAn unfair and deceptive practice is anact that misleads consumers. Most states haveenacted either the Uniform Deceptive TradePractices Act or their own similar laws. In Texas, for example, the TexasDeceptive Trade Practices Act (DTPA) was enacted to protect consumersagainst false, misleading, and deceptive business and insurance practices,and unconscionable actions and breach of warranty. Although statelaws differ, all are similar to federal law. If you believe you are the victimof an unfair or deceptive practice, you might start by contacting thebusiness with your complaint. Figure 15.1 provides an example of acomplaint letter that you might send.CONSUMERPROTECTIONFederal ConsumerProtection law applies tointerstate commerce.Does federal consumerprotection law apply to alocal farmstand business?Internet Auction FraudBy far the most reported Internet-related offense is Internet auction fraud.According to the Internet Fraud Complaint Center, Internet auction fraudcomprised over 46 percent of referred fraud complaints in 2002, nearly8 percent more than the previous year. Nondelivery and payment comprised31 percent of complaints and credit/debit card fraud were nearly 12 percent.(Source: IFCC 2002 Internet Fraud Report)Connect Visit the Web site for the Federal Trade Commission or relatedgovernment site and find out what is being done to combat Internet auctionfraud.Chapter 15: Consumer Protection and Product Liability 317

COMPLAINT LETTERA complaint letterdocuments a problemand asks for specific relief.To what organizationmight you send a copyof such a letter?Figure 15.1Appropriate PersonCompany NameStreet AddressCity, State, Zip CodeYour AddressYour City, State, Zip CodeDateDescribe your purchaseName product and serial ormodel number or serviceInclude date and location ofpurchase and other detailsState problemGive history of problemAsk for specific actionEnclose copiesof documentsState reasonabletime for actionInclude your address, work,and home phone numbersKeep copies of your letterand all related documentsand informationDear (Appropriate Name) :Last week I purchased (or had repaired) a (name of productwith serial or model number or service performed). I made thispurchase at (location, date, and other important details of thetransaction).Unfortunately, your product (or service) has not performedsatisfactorily (or the service was inadequate) because. Therefore, to solve theproblem, I would appreciate your (state the specific actionyou want). Enclosed are copies (copies—not originals) of myrecords (receipts, guarantees, warranties, cancelled checks,contracts, model and serial numbers, and any other documents).I am looking forward to your reply and resolution of myproblem, and will wait three weeks before seeking third-partyassistance. Contact me at the above address or by phone at(home and office numbers).Sincerely,Your Name318 Unit 3: Understanding Consumer LawFraudulent MisrepresentationA fraudulent misrepresentation is any statement that deceivesthe buyer. A fraudulent misrepresentation usually occurs when a sellermisstates the facts about something that is important to the consumer.Example 2. Worried about the safety of her drinking water,Kristin Holt answered a newspaper ad that read, “free home watertesting.” A company representative came to her house and addedsome tablets to a glass of tap water. The representative said thewater would change color if it were unsafe. Sure enough, thewater quickly turned blue. Believing this “proof,” Kristin boughtan expensive water-treatment device. She discovered later, however,that the tablet used to test her water caused all water to turnblue. She really didn’t need a water purifier.

HaitiIt is becoming increasingly common for U.S. citizens to adopt children from LatinAmerica, including Haiti. Conservative figures estimate that close to 500,000children under age 18 live on Haiti’s streets. Even so, the adoption laws for would-beAmerican parents are rigorous. Children, for example, are only eligible for adoptionif they meet the U. S. immigration law’s definition for “orphan”—a child under age16 whose parents are deceased, have disappeared, or are incapable of providingcare. Adoptive parents or a single parent must be over age 35 (compared to age25 in U.S. adoptions). One parent may be under the age limit, but only if the coupleis childless and has been married for 10 years. Furthermore, Haitian law allowschildren out of the country only after specific requirements have been fulfilled. First,a surviving parent or guardian must sign a release form. The form then must beturned over to the Haitian Ministry of Social Affairs who, before authorizing,investigates the medical and psychological fitness of the parties involved. Finally,the Haitian Civil Court accepts the authorization and issues the official adoptiondecree—or the “Acte d’Adoption.” The entire process may take only a couple ofmonths or more than a year. Here’s a snapshot of Haiti.Geographical area 10,714 sq. mi.Population 7,063,722CapitalPort-au-PrinceLegal systemBased on Romancivil law systemLanguageFrench, CreoleReligion80% Roman CatholicLife expectancy 50 yearsCritical Thinking Question The Internet advertises children for adoption from allaround the world. Do you think this is a good or bad idea? Why? For moreinformation about Haiti, visit ubpl.glencoe.com or your local library.Making false statements about the construction, durability, reliability,safety, strength, condition, or life expectancy of a product is anotherdeceptive practice. It is also deceptive not to disclose any fact that wouldcause a buyer to avoid entering into a contract. For example, it would beChapter 15: Consumer Protection and Product Liability 319

unlawful and unethical for a realtor to avoidinforming a consumer about major structuralproblems in a house.WORKING AT HOMEHome employment schemesare often examples of fraud.Why do you think theseschemes are one of theoldest kinds of classifiedadvertising fraud?Work-at-Home SchemesYou may see ads in newspapers and magazinesthat make offers similar to the following:“Would you like to earn hundreds of dollars aweek at home in your leisure time? Let us tellyou how. . . .”This offer sounds attractive, especially if youcannot leave your home to work or if you arelooking for extra money. Some ads even targetstudents directly. However, you need to be cautiousabout work-at-home ads, especially if theypromise large profits in a short time. Some workat-homeplans are legitimate, but home employmentschemes are among the oldest kinds ofclassified advertising fraud. Many of these adsfail to say, for example, that you may have to workmany hours without pay. You may also have to payfor newspaper ads or job supplies. Consumers deceived by these ads havewasted thousands of dollars, not to mention valuable time and energy.Unordered MerchandiseHave you ever received something you did not request in the mail,as Mrs. Lee did in The Opening Scene? Under federal and state laws,such unordered merchandise may be considered a gift. You can keep itwithout paying anything.Only two kinds of products can be sent legally through the mailwithout the consumer’s consent: manufacturers’ free samples and merchandisemailed by charities. It is illegal for anyone who sends free samplesto include a bill. Similarly, you don’t have to contribute to a charitythat sends you something free.False AdvertisingThe FTC regulates false advertising on the national level and hasthe power to issue cease and desist orders . These orders are legallybinding orders to stop a practice that would mislead the public.320 Unit 3: Understanding Consumer LawExample 3. A company ran an advertisement that said, “Yes, it’strue. There is a safe, harmless medicated liquid called Cleerexthat dries up pimples overnight. . . . Many users report that theyhad a red, sore, pimply face one night and were able to surprisetheir friends the next day with a clear complexion.” A doctor

testified at a hearing that Cleerexwould dry up and remove pimples, butnot overnight. The FTC ordered thecompany to stop advertising that theproduct would work that quickly.Bait and SwitchAdvertisingIn bait and switch advertising, astore advertises bargains that do not reallyexist to lure customers in hopes that theywill buy more expensive merchandise.This practice is illegal because the advertiseris trying to sell a different productthan the one advertised.Example 4. Irma was looking for anew digital audio player and saw one advertised on sale for$99.98 at The Mayday department store. When Irma went to buyone, the clerk discouraged her by pointing out the player’s faults.Instead, he tried to get her to buy a unit that cost $299.95.Bait and switch is a violation of FTC regulations and many statelaws. The following sales practices may be signs of a bait and switch:l Refusing to show, demonstrate, or sell the advertised productl Attempting to discourage customers by criticizing the advertisedproductl Claiming the advertised products are out of stockl Refusing to promise delivery of the advertised products within areasonable period of timel Demonstrating products that are more expensive than the advertiseditemsFTC Trade Regulation RulesThe FTC has established trade regulation rules for interstate commerceto correct wrongdoing in the marketplace. These rules protectyou when you buy goods.BAIT AND SWITCHBait and switch is an illegaladvertising practice. In thisphotograph, what is thebait? What is the switch?Negative Option RuleWhen you subscribe to a magazine, CD club, or other plan that sendsproducts regularly, the negative option rule applies. Under such plans,the seller sends you announcements describing the current selection. Ifyou want the selection, you do nothing; the seller will ship it to youautomatically. If you do not want the selection, however, you must tellChapter 15: Consumer Protection and Product Liability 321

Credit identity theftoccurs when someonewrongfully uses a consumer’spersonal identification,credit, oraccount information.Although it is impossibleto prevent alldistribution of yourpersonal identificationand credit information,there are a few thingsthat you can do to helpprevent fraud. Do notroutinely carry yourSocial Security card,birth certificate, orpassport; carefullyreview your credit cardstatements and utilitybills (including cellulartelephone bills) forunauthorized use assoon as you receivethem; and tear up ATMand credit card statementsat home whenyou no longer needthem.the seller not to send it, and there is a deadline for notification. Underthe negative option rule, sellers must tell you:l How many selections you must buy, if any.l How and when you can cancel your membership.l How to notify the seller when you do not want the selection.l When to return the “negative option” form to cancel shipmentof a selection.l When you can get credit for the return of a selection.l How postage and handling costs are charged.l How often you will receive announcements and forms.Be sure to read the contract carefully before signing up with anysuch plan. Consider the overall cost, including any shipping charges. Ifyou do subscribe, keep copies of the seller’s promotional materials andany forms that you return to the seller. Also record the dates that you mailthese forms.The Cooling-Off RuleHave you ever attended a jewelry sale or craft fair at someone’s homeor a local school? When you buy something at a location that is not theseller’s permanent business location, you may be able to cancel the transaction.The cooling-off rule gives you three business days to cancelcontracts for most purchases made away from the seller’s regular placeof business. The rule applies to purchases of $25 or more made at thebuyer’s home, workplace, or dormitory. It also applies to consumerproduct parties given in private homes and to sales made in rented hotelrooms, fairgrounds, and restaurants.Under the FTC rule, the salesperson must inform you of your rightto cancel at the time that the sale takes place. The salesperson must alsogive you two copies of a cancellation form (one to keep and one to send)and a copy of your contract or receipt. The contract or receipt mustbe dated, show the name and address of the seller, and explain yourright to cancel. If you decide to cancel, sign and date one copy of thecancellation form. Then mail or deliver it by hand to the address givenfor cancellation before midnight of the third business day after the contractdate. Keep the other copy for your records. Send the cancellationform by certified mail for proof of mailing. You do not have to give areason for canceling. The seller must do the following within 10 days:l Cancel and return any papers you signedl Refund your moneyl Tell you whether any product left with you will be picked upl Return any trade-in322 Unit 3: Understanding Consumer LawThis cooling-off rule does not apply to contracts for real estate,insurance, securities, or emergency home repairs.

Telemarketing Sales RuleThe Telemarketing Sales Rule protects you from abusivetelemarketers , the people who try to sell you products by telephone.See Figure 15.2 for tips that will help you handle telemarketing calls.The rule gives consumers the power to stop telemarketing calls. It alsogives state law enforcement officers the authority to prosecute fraudulenttelemarketers. Under the Telemarketing Sales Rule:l It’s illegal for telemarketers to call you if you’ve asked not to becalled. If telemarketers persist in calling, hang up and report themto your state Attorney General’s office.Figure 15.2When Someone Tries to Sell You Somethingover the Phone• Don’t give your credit card, checking account, or Social Security number tounknown callers.• Don’t pay for something merely because you’ll get a “free gift.”• Get all information in writing before you agree to buy.• Check out a charity before you give. Ask how much of your donation actuallygoes to the charity. Ask that written information be sent to you so you can makean informed giving decision.• Don’t invest your money with an unknown caller who insists you make up yourmind immediately.• If the offer is an investment, check with your state securities regulator to see ifit is properly registered.• Don’t send cash by messenger or overnight mail. If you use cash ratherthan a credit card in the transaction, you may lose your right to disputefraudulent charges.• Make sure you know the per minute charge for any 900 number call you make.• Be cautious of statements that you’ve won a prize—particularly if the callersays you must send money to claim it.• Don’t agree to any offer where you have to pay a registration or shipping fee toreceive a “prize.”• Check out unsolicited offers with the Better Business Bureau, local consumerprotection agency, or state Attorney General’s office before you agree tosend money.• Beware of offers to “help” you recover money you may have lost previously.Be wary of callers saying they are law enforcement officers who will help youget your money back “for a fee.”TELEMARKETING TIPSThese tips can help youavoid trouble when atelemarketer calls. Whyshould you not give privateinformation, such as yourSocial Security number, tounknown callers?If you have been a victim of telemarketing fraud, call 1-877-987-3728;write to P.O. Box 45600, Washington, DC 20026-5600; or visitwww.consumer.gov/knowfraud.You may contact your local law enforcement agency. The Telemarketing SalesRule gives local law enforcement officers the power to prosecute fraudulenttelemarketers who operate across state lines.You may also wish to contact the Federal Trade Commission about your complaint.Although the FTC cannot represent you directly in a dispute with a company, itcan act when it sees a pattern of possible law violation. Contact the ConsumerResponse Center by phone, toll-free at 1-877-FTC-HELP (382-4357), TDD:202-326-2502; by mail: Consumer Response Center, Federal Trade Commission,Washington, DC 20580; or use the online complaint form at www.ftc.gov.Chapter 15: Consumer Protection and Product Liability 323

Blowing SmokeThere is no doubt that smoking tobacco is harmful to your health. For thisreason, cigarette packs display warning labels about the health risks of smoking.Tobacco companies use these labels as the basis for their defense in productliability suits. They point out that smokers are aware of the risks of smoking butchoose to smoke anyway. This defense relies on the legal theory that the personassumed the risk of harm when using the product. Beginning in the mid-1990s,documents were discovered showing that tobacco companies were aware thatnicotine is addictive. These documents also showed that company officials wereaware that smoking poses health risks such as heart disease, lung and mouthcancer, and emphysema. These companies were later found to have deliberatelywithheld much of this information from the public.Join the Debate Is it fair to make tobacco companies liable for the harm causedby smoking if smokers are aware of the risks? Can you think of other productsthat are legal but known to cause great harm? Should the makers of theseproducts be held liable in the same way that the cigarette makers are nowbeing held liable?llllllCalling times are restricted to the hours between 8 A.M. and 9 P.M.Before beginning their sales pitch, telemarketers must inform youthat they are making a sales call and identify the company thatthey represent.It’s illegal for telemarketers to make false statements about theirgoods or services.Telemarketers must tell you the total cost of the products or servicesoffered and any restrictions that apply. In a prize promotion, theymust tell you the odds of winning and that no purchase or payment isnecessary to win. If you’re asked to pay for a prize, hang up.It’s illegal for a telemarketer to withdraw money from your checkingaccount without your permission.You do not have to pay for: credit repair (promises to change or eraseinaccurate negative information from your credit report); recoveryroom (promises to recover previously lost money to telemarketingscams); or advance-fee loans (promises to guarantee a loan for a feepaid in advance).324 Unit 3: Understanding Consumer Law

900-Telephone-Number RulesMany people confuse 900 numbers with 800 numbers. However, ifyou dial a 900-area-code telephone number, you are charged for the call.Sometimes consumers have been charged excessively for 900-numberservices or have not received the services advertised after calling. Some900-number scams may disclose a cost per minute but do not reveal thatyou must listen for many minutes to hear all of the information. Otherservices use announcers who speak so quickly that you need to callback to understand the message. You should protect yourself against900-number scams (see Figure 15.3).FTC regulations say that when you dial 900 numbers, you must bewarned of the cost of the calls. You must also be given a chance to hangup before being charged. Further, telephone companies must block serviceto 900 numbers at your request. Telephone customers must be sent payper-calldisclosure statements annually and any prefix other than 900 isprohibited for use as a pay-per-call service. Telephone companies cannotdisconnect phone service to customers who refuse to pay for 900-number calls. Rules have also been established to resolve billing disputes.Shopping by Mail, Telephone, Fax, or InternetThe FTC has established rules to protect you when ordering goodsby mail, telephone, fax, and the Internet. Sellers must ship goods withinthe time they promise in their catalogs or advertisements. If no time isstated, sellers must ship goods within 30 days after receiving an order.You have the right to cancel orders and get your money back if timelimits are not met. Sellers must notify you of any delay in shipment andgive you a postcard or other free means of responding to the delay.900-NUMBER SCAMSThere are several ways toprotect yourself against900-number scams. Whyshould you not confuse900 numbers with800 numbers?Figure 15.3Protect Yourself Against 900-Number ScamsDeal only with reputable companies.You may see well-known companies or organizationssponsor such 900-number services asopinion surveys or sports information. The costs,usually low, are stated upfront. If you are interestedin these services and are willing to pay forthem, these are usually legitimate 900-numberoperations to call.Think twice before calling a 900 number fora “free” gift.You may see television ads or receive postcardsor phone calls urging you to call 900 numbers for“free” gifts when you make the 900-number call.Know precisely what the 900 call will cost—before you make the call.Companies should state costs upfront as flatrates or—if the cost is per minute—the maximumnumber of minutes for the call. Unfortunately, evenwith this information, you may still pay to hearsales pitches for bogus products or services.Don’t confuse 900 numberswith toll-free 800 numbers.You pay for a900-number call.The company paysfor an 800-number call.Chapter 15: Consumer Protection and Product Liability 325

Figure 15.4Dear Customer:See Figure 15.4 for an example of such a notice. When buyers are notifiedof a delay in a shipment of goods, they may either cancel the orderand get their money back or agree to a new shipping date.Thank you for your order. We are sorry to inform you that there willbe a delay in shipping the merchandise you ordered. We shall makeshipment by the revised shipping date of (date). It is quite possiblewe could ship earlier.You have the right to consent to this delay or to cancel your orderand receive a prompt refund. Please return the card in the enclosedpostpaid envelope with your instructions indicated by checkingthe appropriate block.Unless we hear from you prior to shipmentor prior to the revised shipping date,it will be assumed thatyou have consented to adelayed shipment on orbefore the definite revisedshipping date stated above.Sincerely yours,Name & Title of SignerCompany NameAddressEnclosure: EnvelopeYes, I will accept a further delay in shipment of my orderfor this item until(Insert date which is 30 days or less.)I cannot wait. Please cancel my order for this item andpromptly refund my money.Please Sign HereMAIL ORDERThis letter might be sentby an Internet seller to abuyer when there is adelay in shipment ofgoods ordered. Whatfederal agency requiressuch a notice of delay inshipment?Reviewing What You Learned1. What are the main differences between stateand federal consumer law?2. Describe two unfair and deceptive practices,and using examples, identify givenconsumer transactions.3. What is bait and switch advertising?4. What are four FTC rules designed to protectconsumers?Critical Thinking ActivityLaws of Retail and Commercial Sales Usingthe Internet, library, or other resource, researchconsumer protection laws. Distinguish betweenthe laws that apply to retail and commercialsales, for example, the Uniform CommercialCode and Deceptive Trade Practices Act.Legal Skills in ActionYour Rights as a Consumer Consider one ofthe ways in which you might purchase goods.Research cases of appropriate consumerprotection laws. Present your findings in a briefone-page paper.326 Unit 3: Understanding Consumer Law

Product LiabilityWhat is Product Liability?Have you ever heard about a car being recalled for the repair ofdefective parts at no cost to the owner? Did you ever read in the newsabout a food, drug, or other item being recalled because it was unsafe?Such recalls occur because manufacturers and sellers have productliability.Example 5. In 2001, Firestone Tire and Rubber Companyrecalled thousands of tires mounted on sport utility vehicles andgave customers new tires. Defects in the tires may have causedmany motor vehicle accidents.Under product liability law, someone who is injured from a product’sunsafe or defective condition may recover damages. Manufacturers,sellers, and suppliers of goods can all be held responsible.Strict LiabilityYou do not have to prove a negligent act on the part of the manufactureror seller if you are hurt using a defective product. Strictliability makes manufacturers or suppliers responsible for selling goodsthat are unreasonably dangerous. This is true even when the manufactureror seller has not been negligent. It is also true when the user of theproduct is not the one who bought the item. People who are injured orwho suffer property damage from a defective product may recover fromthe manufacturer or seller if they can prove all of the following:l The manufacturer or seller was engaged in the business of sellingthe product.l The product was unreasonably dangerous to the user or consumer.l The defective condition was the cause of the injury or damage.l The defective condition existed when the product left the hands ofthe manufacturer or seller.l The consumer suffered physical harm or property damage as a resultof using the product.l How to differentiatebetween productliability and strictliabilityl How to describe thepurpose of theConsumer ProductSafety Actl How to identify theprohibitions containedin the Food, Drug, andCosmetic Actl How to determinewhere to get consumerprotection assistanceLearning about productliability law will help youtake effective action ifyou or a family membersuffers injury from faultyproducts.l product liabilityl strict liabilityl adulteratedl intrastate salesThe defective condition may arise through faulty product design orfaulty manufacturing. Inadequate warning of danger and improperinstructions for the product’s use are also considered defects.Chapter 15: Consumer Protection and Product Liability 327

Health HazardFor many people,smoking is a habit thatbecomes an addiction.They continue to smokedespite the health risksand the warning labelson cigarette packages.Many new governmentregulations have beenimposed on the tobaccoindustry and the salesof their products todiscourage teens frombecoming smokers. Doyou think that thetobacco industryshould be allowed todirect its advertisingtoward teens?Example 6. Jackson leased a truck from Ryder Truck Rental.When he stopped at a traffic light, the brakes failed, and Jacksonhit the car in front of him. Martine, the driver of the other car, wasinjured. The Delaware Supreme Court ruled that Ryder could beheld liable, even without proof that the company was negligent.It was only necessary for the injured party to prove the truck hadan unreasonably dangerous product design that caused personalinjury or property damage.Not every state has strict liability laws. In some states you mustprove that your injuries or damages resulted from the negligent, reckless,or intentional misconduct of the manufacturer.Federal and StateConsumer Protection LawsBoth the federal and state governments pass laws to protect consumersin the marketplace. These laws are necessary because some statelaws may apply only to those goods that are produced and purchasedwithin one state. The laws protect consumers from harmful or defectiveproducts, foods, drugs, and cosmetic products, as well as fromunethical businesses.Get InvolvedResearch the lawsgoverning cigarettesales, and encouragelocal storeowners todisplay signs on theircounters that warnthat the sale of cigarettesto minors isillegal.328 Unit 3: Understanding Consumer LawRECALLManufacturers and sellers can be liable when aproduct is defective. Why do manufacturersrecall products that are defective instead oftaking the risk of being sued?

Consumer Product Safety ActThe federal Consumer Product Safety Act protects you from unreasonablerisk of injury while using consumer products that are soldin interstate commerce. Defects in products are divided into threecategories:l Manufacturing defects (e.g., a ladder with missing rivets)l Poor design (e.g., a toy with small parts that can be easily removedand swallowed)l Inadequate instructions and warnings about the safe use of theproduct (e.g., a chain saw that does not include instructions aboutusing the safety guard)Manufacturers and sellers who place items on the market must testthe quality and reliability (fitness) of all products before shipping. Theymust prove that the product has been tested and is safe. All manufacturersand sellers have the capability to recall the product if the needarises, and they must act quickly to address any valid complaints madeby users of the product.Food, Drug, and Cosmetic ActOne of the most important federal laws regarding product liabilityis the Food, Drug, and Cosmetic Act. This law prohibits the manufactureand shipment of faulty products in interstate commerce. Faultyproducts include any food, drug, cosmetic, or health-related device thatis injurious, adulterated, or misbranded.A food or drug is said to be injurious if it contains any substancethat may make it harmful to health. An adulterated food or drug isone that contains any substance that will reduce its quality or strengthbelow minimum standards. A food or drug is misbranded if its labelingor packaging is false or misleading.The Food, Drug, and Cosmetic Act requires that packaged drugsbear the name and address of the manufacturer and a statement of thequantity or weight of the contents. Labels on nonprescription drugs mustgive the common name of the drug if a trade name is used, and the labelsmust detail directions for the drug’s use. Labels must also caution againstany use that may be unsafe for children or harmful to the consumer ingeneral. The label must also indicate if the drug is addictive. The actprescribes criminal penalties for firms or individuals who violate this law.The federal government has the right to remove from the marketany food or food additive shown or believed to cause cancer in humansor animals. The government also uses several other methods to discouragethe sale of goods considered harmful to the public health. Thesemethods include the following:l Unusually high taxes. For example, there are special taxes known asexcise taxes on liquor and tobacco.Using theCooling-Off RuleA door-to-door salesrepresentative for vinylreplacement windowscontacted your neighbor,Joseph, at home.Joseph, a salesmanhimself, was aware ofthe cooling-off rule andagreed to buy the windows,knowing he hadthree days to cancel thecontract. Joseph knewhis windows did notneed to be replaced. Hejust wanted to annoythe salesman becausethe salesman hadbothered him at home.Is it ethical to buy aproduct if you know youare going to return it?Chapter 15: Consumer Protection and Product Liability 329

WARNINGSWarning labels mustbe placed on cigarettepackages. Why doesthe federal law requiresuch warnings?Figure 15.5SURGEON GENERAL’S WARNING: Smokingby Pregnant Women May Result in FetalInjury, Premature Birth, and Low Birth WeightSURGEON GENERAL’S WARNING: QuittingSmoking Now Greatly Reduces SeriousRisks to Your HealthSURGEON GENERAL’S WARNING:Cigarette Smoke Contains Carbon MonoxideSURGEON GENERAL’S WARNING: SmokingCauses Lung Cancer, Heart Disease,Emphysema, and May Complicate PregnancyllLabeling and packaging. The Food and Drug Administrationrequires warning labels and tamper-proof packaging of certainnonprescription drugs and cosmetics. Warning notices must also beplaced on cigarettes (see Figure 15.5). Beverage companies mustdisclose how much fruit juice they put into their drinks.Outright prohibition. For example, cigarette advertising is bannedon television.330 Unit 3: Understanding Consumer LawState and Local LawsIf goods are manufactured and sold only within the boundaries of astate, the federal government has no control over the goods. For thisreason many states have enacted their own product liability laws, whichapply to intrastate sales (sales within a state). Most states and localgovernments have their own pure food laws and health laws to protectthe public. Nearly all states and localities license and regulate establishmentsthat sell food. Most states also have laws regulating meat andmilk, and laws regulating the processing and canning of food.Consumer Protection AssistanceMany state and local governments have offices of consumer affairsto educate consumers and help protect them against fraud. The businesscommunity is also increasingly policing itself, trying to protect consumersfrom questionable practices.The federal Consumer Product Safety Commission establishes safetystandards for consumer products. It has the power to recall unsafe

products and to impose fines on violators. For information or to reportunsafe products, you can telephone its hot line at 1-800-638-CPSC.Better Business BureauThe Better Business Bureau (BBB) is an example of a nongovernmentagency that hears consumer complaints at the local and state levels.It also tries to steer consumers to reliable businesses. The BBB’s missionis to promote highly ethical relationships between businesses andthe public. It pursues this goal through voluntary self-regulation, consumerand business education, and service excellence. Some servicesthat the BBB provides include the following:l Providing information on a business’s past dealings with peoplel Helping resolve complaints by such methods as conciliation,mediation, and arbitrationl Providing information on charitable organizations that solicitdonations from the publicl Publishing a wide variety of consumer publications, videos, andInternet advisoriesl Alerting businesses, consumers, and law enforcement agenciesabout current marketplace scams and fraudsl Providing Internet reliability and privacy “Trustmark” seals toinform consumers that a Web site meets specific standardsComputerTechnologyThe development ofcomputer technologieshas had a tremendousimpact on nearly everyfield of study. It’s crucialfor lawyers to be aware ofhow new technologiesaffect their profession.Many state barassociations offertechnology-relatedresources to attorneyspracticing in the state.Research ActivityResearch what the barassociation in your stateis doing to educateattorneys about computertechnology and the law.Reviewing What You Learned1. What is the difference between productliability and strict liability?2. What is the purpose of the ConsumerProduct Safety Act?3. What prohibitions are contained in the Food,Drug, and Cosmetic Act?4. Research cases of appropriate agencies.Critical Thinking ActivityConsumer Protection Agencies Using theInternet, library, or other resource, researchcases involving consumer protection laws andpresent cases of appropriate consumer agencies.Legal Skills in ActionConsumer Protection Laws In this section,you learned about several important consumerprotection laws. Now imagine situations inwhich these laws may apply. Next, researchthree to four actual cases by using the Internet,the library, or other resource. In each case,identify the facts, the issue that the court needsto decide, the basis of the court’s decision, andthe consumer protection laws involved. Thenpresent cases of appropriate consumerprotection laws to the class in a brief oral report.Chapter 15: Consumer Protection and Product Liability 331

CHAPTERASSESSMENTSection 15.1 Consumer Protection● Federal consumer protection law applies totransactions between businesses and consumers.Consumers are people who buy or lease goods,real estate, or services for personal, family, orhousehold purposes. Federal consumer protectionlaw applies only to interstate commerce, whichis business activity that touches more than onestate. State consumer law protects consumerswho conduct local transactions.● A false statement about the construction,durability, reliability, safety, strength, condition,or life expectancy of a product is a fraudulentmisrepresentation. It is also deceptive to purposelyavoid disclosing any fact that would causea buyer to avoid entering into a contract. Anotherexample of an unfair and deceptive practice isfalse advertising, which is advertising that misleadsthe public. Some ads that advertise lucrativework-at-home opportunities are examples offalse advertising. Sending unordered merchandiseto consumers is another unfair and deceptivepractice employed by some unscrupulous businesses.Individuals who receive items in the mailthat they did not order are not required to pay forsuch goods.● When a store advertises bargains that don’t reallyexist to lure customers to buy more expensivegoods, it is engaging in bait and switch advertising.The following sales practices may besigns of a bait and switch: (1) refusing to show,demonstrate, or sell the advertised product;(2) attempting to discourage customers bycriticizing the advertised product; (3) claimingthat the advertised products are out of stock;(4) refusing to promise delivery of the advertisedproducts within a reasonable period of time;and (5) demonstrating products that are moreexpensive than the advertised items.●Some rules designed to protect customers arethe negative option rule, the cooling-off rule,the Telemarketing Sales Rule, and the 900-Telephone-Number Rules. The negative optionrule applies to plans that send products regularly,such as magazine subscriptions. The cooling-offrule gives you three days to cancel contracts forpurchases made away from the seller’s usualplace of business. The Telemarketing SalesRule protects you from abusive or unethicaltelemarketers. The 900-Telephone NumberRules protect you from scams associated withcalling 900 numbers.Section 15.2 Product Liability● Manufacturers and sellers have product liabilitywhen they place defective, unhealthy, or unsafeitems on the market. Manufacturers and sellersare strictly liable, without regard to fault, whenthey sell unreasonably dangerous products tothe public.● The Consumer Product Safety Act was developedto protect consumers from unsafe goods. Underthe Consumer Product Safety Act, products mustbe tested for safety. Manufacturers and sellersmust prove the quality and fitness of theirproducts. In the event there is a problem, manufacturersare required to take action, sometimeseven recalling unsafe products.● The Food, Drug, and Cosmetic Act prohibits themanufacture and shipment of faulty products ininterstate commerce. A food or drug is said to beinjurious if it contains any substance that may beharmful to health.● Consumer protection can be obtained from stateand local consumer protection agencies, such asthe Consumer Product Safety Commission andthe Better Business Bureau.332 Unit 3: Understanding Consumer Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.bait and switchcaveat emptorcaveat venditorcooling-off ruleconsumertelemarketersproduct liabilitystrict liabilityadulteratedintrastate salesunfair and deceptive practicefraudulent misrepresentationcease and desist orders1. Write a brief paragraph about consumer protection using at least10 of the legal terms listed above.2. Rewrite the paragraph, replacing the terms with blank spaces.Exchange your rewritten paragraph with a partner, and fill inthe blanks.3. Discuss with your partner any inaccuracies in your paragraphs.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 15:Consumer Protection—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. What are your rights if you receive unordered goods in the mail?5. Analyze the effects of illegal practices on business and on consumers. How do suchpractices harm each, and what are some of the reasons that businesses should do theirbest to obey the law?6. Is it possible to cancel a contract made with a door-to-door salesperson? Explainyour answer.7. What protection do you have when buying goods by mail, telephone, fax, orthe Internet? Research cases of appropriate consumer protection laws.8. If you are hurt by a defective product that you purchased, is a manufacturer or sellerresponsible? What if you are hurt by a product that someone else purchased? Explainyour answer.9. If you are hurt by a product that you purchased from another consumer, is thatconsumer liable? Explain your answer.10. In this chapter, you learned about some of the laws intended to protect consumers andthe agencies responsible for enforcing these laws. Using the Internet, the library, orother resource, research cases of appropriate agencies. What were the facts of eachcase, and how did the court decide the issues?11. What are three types of defects against which the Consumer Product Safety Actseeks to protect consumers?Chapter 15: Consumer Protection and Product Liability 333

CHAPTERASSESSMENTAcquiring and Evaluating InformationLois wants to make some extra money. Whenshe read about an opportunity to knit babybooties at home for pay, she jumped at thechance. She paid a $100 fee and received herfirst shipment of yarn and instructions. Shefollowed the directions, knitted 50 pairs ofbooties, and sent them to the company. All 50pairs of booties did not meet the “standards” ofthe company. Lois felt that she had been rippedoff. Research the following topics:● Ways to prevent falling victim to work-athomeschemes● Information required to produce a one-pageconsumer alert document about this type offraudulent activity● How to avoid being scammedOrganize and share your document with otherstudents in the class.Unethical and Illegal Business PracticesDrugtech Sciences, Inc. designed a drug calledSleepPro that was intended to help people whohave problems sleeping. After years of costlydevelopment, it was approved and marketedto the public. Unfortunately, it was laterdiscovered by the company that using the drugposed serious health risks and it was incorrectlylabeled. However, the company decided to hidethe risks from consumers, and not to correct thelabeling.Debate12. Analyze the effects of unethical practiceson consumers. If Drugtech continues tomarket SleepPro, what are some of theethical consequences?13. Analyze the effects of illegal practices onconsumers. What are some of the risksfaced by consumers, who use SleepPro?14. Analyze the effects of illegal practices onbusiness. If government regulators becomeaware of the problems with SleepPro, whatare some of the consequences?15. Investigate laws and regulations resultingfrom unethical practices. What importantfederal law applies in this case, and how?For the following cases, give your decision andstate a legal principle that applies.16. Nick orders a digital camera over theInternet. After 40 days, he still has notreceived the camera, nor has he heard fromthe company. Nick asks for his moneyback. Must the company return his money,even if it is now ready to send the camera?17. A cosmetics company mails perfumesamples to people at random and then billsthem for the merchandise. Is the companyviolating a law? Explain your answer.18. Trailblazers, Inc. fails to complete all itssafety tests before shipping a newly manufacturedbike. A defect in the bike’s designcauses Juan Ramirez, 11, to suffer injury.Does the Ramirez family have any recourseagainst the company? Explain your answer.19. Belinda attends a holiday gift party. Shebuys and pays for several items totaling$88.77. The following day, Belinda realizesshe should not have spent so much money.Does Belinda have the right to get hermoney back? Explain your answer.20. Bobbi-Lee is awakened at 10:00 P.M.by atelemarketer selling magazine subscriptions.A week earlier, she had told a differentperson from the company to stop calling her.Has the company violated a law?334 Unit 3: Understanding Consumer Law

In each case that follows, you be the judge.21. Recovery of DamagesWilliam Everett, Jr. was a member of the New Preparatory School hockey team. During a game,a hockey puck fractured William’s skull by penetrating his helmet through a gap between sectionsof shock foam. Can William recover damages from the helmet’s manufacturer? Why or why not?Everett v. Bucky Warren, Inc., 380 N.E.2d 653 (MA).22. Cancelled TransactionDelores Bierlein paid a $200 deposit to rent a banquet room at Alex’s Continental Inn for herdaughter’s wedding reception. Three months before the wedding, Bierlein notified the innthat the wedding reception had been cancelled. The inn refused to return Delores’s deposit,arguing that this was not a consumer transaction. Does the inn have the right to retain thedeposit? Why or why not?Bierlein v. Alex’s Continental Inn, Inc., 475 N.E.2d 1273 (OH).Can I Trust You?If you surf the Web, you might find a site with anInternet reliability and privacy “Trustmark” sealset, which was issued by the Better BusinessBureau.ConnectUsing a variety of search engines, research thereliability seal program and the privacy sealprogram. Answer the following questions:23. What are the standards that companies mustmeet for both programs?24. Are there fees that companies must pay tobelong to the programs?25. How are consumer complaints handled throughthe program?Locate at least one site with either the reliabilityseal or the privacy seal.26. Predict What do you think wouldhappen if there were no laws to protectconsumers?27. Connect Do you believe everythingyou see on TV? Have you ever seen acommercial and wondered if it werereally true?28. Question Do you think strict liabilitylaws are fair to manufacturers who havenot been negligent?29. Respond Why does the U.S. governmentprovide consumer education to the public?Does it have a responsibility to do so?Chapter 15: Consumer Protection and Product Liability 335

CHAPTEROwning a VehicleUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 16: Owning a Vehicle—Chapter Overviews to preview thechapter information.

The Opening SceneNewlyweds Mei and Bruce are looking at advertisementsfor used cars in the newspaper.The Test DriveMEI: Here’s a good deal. A new car for only$403.93 a month, and with nothing down.BRUCE: How many months do you have to pay?MEI: The ad doesn’t say.BRUCE: What’s the interest rate?MEI: I don’t see anything about interest. Wait, there’ssome small print at the bottom. Oh no, this ad is forleasing the car, not buying it.BRUCE: Let’s go over to that used car lot on Broadwayand look around. We don’t have to buy anything.(A short time later, Mei and Bruce visit the used car lot.)BRUCE: This one’s real sharp (Kicking the tire of acar.). The sign says $5,988. I’ll bet they’ll take$5,000.MEI: I wonder if it has a warranty?BRUCE: The sign doesn’t say.SALES ASSOCIATE: (Approaching with outstretchedhand.) Hello, my name’s Tamara. Can I help you?MEI: What kind of warranty does this car have?TAMARA: Thirty days, parts and labor. This one’s ahoney! It belonged to a retired couple who hardlyever drove it. See the mileage? Only 30,000.BRUCE: Do you mind if we take it for a spin?TAMARA: I’ll get you the key.(With Bruce sitting on the passenger side, Mei drivesthe car out of the lot.)BRUCE: How does it feel, honey?MEI: Smooth. Wonder what all these buttons andlights are on the dash?BRUCE: (Opening the glove compartment.) Here’s theowner’s manual; let’s check. Say, look at this. (Hetakes a paper out of the manual.) It’s a receipt forwork done on this car six months ago. It says it had97,000 miles on it then!MEI: What? (Suddenly, the car in front of them stops,and Mei slams on the brakes.) The brakes aren’tholding! (CRASH! The cars collide, and the frontcar’s rear bumper and trunk are dented. The carMei is test-driving is not damaged.)MEI: Are you all right, Bruce?BRUCE: Sure, we weren’t going fast.MOTORIST: (Approaching Mei’s car.) What’s thematter? Didn’t you see me stop?MEI: The brakes are no good! We are just testdrivingthis car. It belongs to a dealer.MOTORIST: Look at that! You ruined the back of mycar and didn’t even scratch yours.BRUCE: They don’t make bumpers like this car’sanymore. Don’t worry. The dealer’s collisioninsurance will cover it.MOTORIST: I sure hope so.1. Does a newspaper ad that states the monthly paymentto lease a car have to include informationabout other costs?2. Must a dealership display information aboutwarranties on used cars?3. Does the buyer of an automobile have any legalprotection against having the odometer (mileagemeter) turned back?4. Does a consumer have any protection againstweak bumpers placed on automobiles bymanufacturers?5. Does collision insurance pay for damages tosomeone else’s car?Chapter 16: Owning a Vehicle 337

Acquiring a Vehiclel How to identifyimportant parts of aloan agreementl How to trade in avehiclel How to identify thepros and cons ofleasing a vehiclel How to compareoptions for buying apre-owned vehiclel How to pursue legalremedies if you buy adefective vehiclel How to recognize somefederal laws designedto protect you whenyou buy a vehiclel How to summarizethe legal aspects ofrepairing your vehicleKnowing about financing,buying, and leasing avehicle will enable you tomake better purchasedecisions.l finance chargel annual percentagerate (APR)l Used Car Rulel Buyer’s Guidel repossessl adhesion contractLaws of OwnershipYou will probably buy many automobiles in your life. The law thatapplies to these purchases comes from several different sources. Becausecars are considered goods, the Uniform Commercial Code (UCC)applies to their sale and lease. If you buy a car for personal, family, orhousehold purposes, both federal and state consumer protection lawsmay also apply. In addition, if you finance the car, special laws regulatecredit.Financing a VehicleOne of the first steps in buying a car is to decide how much you canafford to pay. This determination depends on your savings, monthlyearnings, living expenses, and any debt that you have.When buying a car, you will save money by paying cash becausecar loans require you to pay interest. Offering to pay cash also puts youin a better position to negotiate a lower purchase price. If you decide toborrow money to purchase a car, you may save money by shoppingaround for credit. Federal law requires lenders to disclose the financecharge and annual percentage rate (APR) to borrowers. The financecharge is the cost of the loan in dollars and cents, and the annualpercentage rate (APR) is the true interest rate of the loan.Before you sign any documents, you should know the followinginformation:l The exact price you’re paying for the vehiclel The amount you’re financingl The finance chargel The APRl The number and amount of paymentsl The total sales price (the sum of the monthly payments plus thedown payment)Dealers sometimes offer very low financing rates for specific modelsbut may not be willing to negotiate. They also may require a large downpayment. As a result, it is sometimes better to pay higher financingcharges on a car with a lower price or to purchase a car that requires asmaller down payment.Many people get deeply into debt buying things on credit that theyreally can’t afford. Making monthly payments may seem easy at first,338 Unit 3: Understanding Consumer Law

A BANK LOANRegulation Z requireslenders to disclose twoimportant things to youwhen you borrow money.With this information, youcan compare the cost of aloan from different lenders.What information mustlenders disclose to you?but before you realize it the total amount of money you owe may bemore than you can pay.Example 1. Antonia found a used truck that she liked, but shecouldn’t afford the monthly payments under a 24-month paymentplan. She bought the truck under a 36-month plan; however, twoyears later, the vehicle broke down completely and was not worthfixing. Antonia still had to make the monthly payments on thevehicle for a full year after it stopped working.A Federal Trade Commission (FTC) regulation gives consumersprotection when they buy vehicles on credit.Example 2. Chandra bought a used car from a local dealer. Shepaid $500 down and signed a contract to pay the balance of$5,500 plus interest in 24 monthly installments. The dealerreceived the $5,500 the same day by transferring the contract toa finance company under a prearranged agreement. Chandra wasthen required to pay the finance company the monthly payments,including interest, for the next 24 months.Under the FTC regulation, Chandra has the same protection againstthe finance company that she has against the car dealer. If somethingwent wrong with the car and the dealer refused to repair it, she could usethe breach of warranty of merchantability defense if sued by the financecompany for the debt. This rule does not apply if you borrow moneyto buy a car from a lending company that has no arrangement withthe seller.Chapter 16: Owning a Vehicle 339

Parole OfficerAs a parole officer for the state of Texas, Chu Luu devoteshis life to trying to keep 89 people out of trouble. It isn’t aneasy job. His clients are parolees—convicted murderers,robbers, and drug dealers who have been allowed out of jailafter many years.“Sometimes people have been given sentences of 50 years,” Luu says. “Butthere just isn’t room for all the prisoners, so the state might let them out after 25 or30 years. It’s my job to help them reintegrate into society.”Luu tries to increase an ex-convict’s chances of success by helping him or herfind a job, and if necessary, by arranging for treatment for alcoholism and drugaddiction. Ex-convicts are parolees for the rest of their term of sentence, whichmeans they must continue to work and check in with their parole officer. If theyfail to do so, they will be returned to prison.Luu checks up on his clients by visiting their homes or their places of employment.“Of course, sometimes people disappear,” he says. “But other times, peopleget out of prison, get a job, and follow the routine. They’ve learned a big lesson.”Luu says his job can be high pressure. “We’re dealing with criminals,” hesays, “and when you’re supervising criminals, it’s not like dealing with otherpeople. You can only trust them 50 percent of the time and when you tell them todo something, they’re probably going to do it differently than you or I.”SkillsPersonalityEducationListening, creative problem solving, counselingPatient, able to take a high-pressure job, sensitive to diversityCollege degree plus five weeks at parole academyFor more information on parole officers, visit ubpl.glencoe.com or yourpublic library.Example 3. Kita borrowed $5,500 from her local bank, agreeingto pay the money back in 24 monthly installments at the currentinterest rate. She used the money to buy a van from a usedcar dealer; however, the vehicle broke down two days later. Thevan was not merchantable, and Kita could use breach of warrantyof merchantability as grounds to get her money back from thedealer. However, because there was no financing arrangementbetween the bank and the dealer, Kita still has to pay the bankthe full $5,500 plus interest, as agreed.340 Unit 3: Understanding Consumer Law

Buying a New VehicleIf you prepare before starting to shop for a vehicle, you can makethe process easier and save money. Use the library or online resourcesto research and learn about the cars that you may be interested in buying.Some magazines devote entire issues to rating cars based on their maintenancerecords, safety, performance, and affordability.Your research will make you better able to negotiate the price. Dealersare often willing to bargain on their profit margin between 10 and 20percent, which is generally the difference between the manufacturer’ssuggested retail price (MSRP) and the invoice price. See Figure 16.1 formore information about buying a new vehicle.Trade-InIf you are trading in a vehicle, do not discuss it with the dealer untilyou’ve negotiated the best price for your new car. You should know thevalue of your trade-in, which can be found on the Internet or at thelibrary. Some Internet sites will calculate a reasonable price for yourtrade-in car based on its mileage, condition, options, and the location inwhich you live. You might get a better price selling a vehicle yourself,rather than trading it in. However, many people opt to trade-in carsbecause of the convenience it affords them.Figure 16.1Invoice PriceBase PriceMonroney StickerPrice (MSRP)Dealer Sticker PriceCar Buying TermsThe manufacturer’s initial charge (including delivery) tothe dealer. This is usually higher than the dealer’s final costbecause dealers receive rebates, allowances, discounts, andincentive awards.The cost of the vehicle with standard equipment andwarranty but without optional equipment. This price isprinted on the Monroney sticker.The information printed on the Monroney sticker. It showsthe base price, the manufacturer’s transportation charge,and the fuel economy of the vehicle. The sticker is requiredby federal law to be affixed to a new vehicle’s window.Only the purchaser may remove it.The Monroney sticker price plus the suggested retail priceof the dealer-installed options, such as additional dealermarkup (ADM) or additional dealer profit (ADP), dealerpreparation, and undercoating. This price is usually on asupplemental sticker.PRICING A VEHICLEThe same vehicle can havedifferent prices. What is theMonroney sticker?Chapter 16: Owning a Vehicle 341

Purchasing a defectiveautomobile has beena major consumercomplaint for manyyears. To address thiscomplaint, individualstates have enacted“lemon laws.” Theselaws are designed toprotect consumers whenthey buy defectiveautomobiles. The lemonlaws of most states areexplained at www.cartalk.cars.com/Tools/lemon-states.pl.Leasing a New VehicleA popular alternative to buying a vehicle is leasing one, but thismethod is the most expensive way to acquire a car. A low down paymentand smaller monthly payments are the main advantages of leasing(see Figure 16.2). Leasing is also useful for young professional peoplewho have high incomes but little or no savings accumulated. Leasing isnot the most desirable way for average consumers to obtain cars, however,because you make a lot of payments and end up with nothing totrade in toward your next vehicle.llllWhen you lease a vehicle, you have the right to:Drive it for an agreed-upon number of months and miles.Turn it in at the end of the lease, pay any end-of-lease fees andcharges, and “walk away.”Buy the vehicle if you have a purchase option.Take advantage of any applicable warranties or recalls.However, you may be responsible for excess mileage charges, excesswear charges for body damage or worn tires, and charges for endingyour lease early.Consumer Leasing ActThe Consumer Leasing Act is a federal law requiring businessesto tell you about all of the terms of a lease of personal property. Thisinformation can be used to compare different leases or to compare thecost of leasing with the cost of buying.Federal law also regulates advertisements of leases. When certaintriggering terms are used in a lease ad, they trigger the need to discloseadditional information. These terms include the amount of any paymentand a statement of other required payments. If an ad mentions theamount or number of payments, specifies a particular down payment,or states that no down payment is required, it must also disclose the totalnumber of regular payments, the consumer’s responsibility at the endof the lease, and whether the consumer may purchase the property.Buying a Pre-Owned VehicleA pre-owned vehicle may be purchased from a new car dealer, aused car dealer, a car rental company, or a private party. Sometimesbanks and loan companies sell cars and trucks that have been claimedbecause someone didn’t make payments. You can also search for a preownedvehicle online.Buying from a DealerA used car dealer may have a large selection of cars, but often doesnot maintain facilities to service the car after you buy it. New car dealers,342 Unit 3: Understanding Consumer Law

Figure 16.2Leasing or Buying a New VehicleOwnershipUp-front costsMonthly paymentsEarly terminationVehicle returnFuture valueMileageExcess wearEnd of termLeasingYou must return the vehicle at the endof the lease, unless you choose to buy it.Up-front costs may include the firstmonth’s payment, a refundable securitydeposit, a capitalized cost reduction(like a down payment), taxes, registrationfees, and other charges.Monthly lease payments are usuallylower than monthly loan paymentsbecause you are paying for the vehicle’sdepreciation during the lease term, plusrent charges (like interest), taxes, andfees.You are responsible for any earlytermination charges if you end thelease early.You may return the vehicle at leaseend, pay any end-of-lease costs, and“walk away.”The lessor has the risk of the futuremarket value of the vehicle.Most leases limit the number of milesyou may drive (often 12,000–15,000per year). You will likely have to paycharges if you exceed those limits.Most leases limit wear to the vehicle.You will likely have to pay extra chargesif you exceed those limits.At the end of the lease (typically 2–4years), you may have a new paymentto finance the purchase of the existingvehicle or to lease another vehicle.BuyingYou own the vehicle and get to keep itat the end of the financing term.Up-front costs include the cash price ora down payment, taxes, registrationfees, and other charges.Monthly loan payments are usuallyhigher than monthly lease paymentsbecause you are paying for the entirepurchase price of the vehicle, plusinterest and other finance charges,taxes, and fees.You are responsible for any pay-offamount if you end the loan early.You may have to sell or trade thevehicle when you decide you want adifferent vehicle.You have the risk of the vehicle’s futuremarket value.You may drive as many miles as youwant, but higher mileage will lower thevehicle’s trade-in or resale value.There are no limits or charges for excessivewear to the vehicle, but excessivewear will lower the vehicle’s value.At the end of the loan term (typically4–6 years), you have no further loanpayments.LEASE OR BUY?There are advantages and disadvantages toleasing and buying a vehicle. Why are monthlypayments usually higher when you buy avehicle than when you lease a vehicle?Chapter 16: Owning a Vehicle 343

on the other hand, often sell used cars that they have taken in for tradeand have service facilities.Warranties When selling a vehicle, a dealer gives an implied warrantythat the vehicle is merchantable, unless this warranty is excluded.By offering the warranty of merchantability, the dealer warrants thatthe vehicle is fit for the ordinary purposes for which such vehicles areused. The warranty of fitness for a particular purpose also applies whenyou buy a vehicle based on the seller’s advice that it is suitable for aparticular purpose. Be careful to make sure that these warranties arenot excluded or disclaimed by the dealer.PRE-OWNED VEHICLEMuch information isavailable to help you makedecisions when you areshopping for a pre-ownedvehicle. Where can you findinformation about buyingpre-owned vehicles?Example 4. Ed purchased a used car from a dealer. The dealerwrote “as is” on the sales slip that Ed signed. The car’s transmissionjammed four days later, but Ed had no legal recoursebecause the UCC says that all implied warranties are excluded byexpressions such as “with all faults” or “as is.”Another way some dealers exclude implied warranties is by usingformal printed language on the front or back of the sales slip. The printing,often in special typeface, may state: “The implied warranties ofmerchantability and fitness for a particular purpose are hereby disclaimed.”Implied warranties cannot be excluded when express warrantiesare made, according to the Magnuson-Moss Warranty Act. Somestates do not allow merchants to disclaim or exclude implied warrantiesat all when they sell motor vehiclesto consumers.Another advantage of buying aused car from a dealer is that dealersoften give you a 30-day, 60-day, or90-day guarantee. This express warrantycan be for parts and labor or forlabor only. Sometimes the warrantymay be a 50-50 guarantee, in whichthe buyer pays for half of the partsand labor.The Used Car Rule The FTC’sUsed Car Rule requires all usedcar dealers to place a large sticker,called a Buyer’s Guide , in thewindow of each used vehicle theyoffer for sale (see Figure 16.3). Theguide explains any specific warranty344 Unit 3: Understanding Consumer Law

protection that is provided. It also states whether there is no warranty,an “as is” warranty, or an implied warranty. The guide also suggests thatyou have the car inspected by your own mechanic before you buy andthat you should get all promises in writing. Finally, the guide lists someof the major problems that may occur in any car. The buyer’s guidebecomes a part of your sales contract and overrides any contrary provisionsthat may be in that contract.Figure 16.3BUYER'S GUIDEIMPORTANT: Spoken promises are difficult to enforce. Ask the dealer to put allpromises in writing. Keep this form.VEHICLE MAKE MODEL YEAR VIN NUMBERDEALER STOCK NUMBER (Optional)WARRANTIES FOR THIS VEHICLE:AS IS - NO WARRANTYYOU WILL PAY ALL COSTS FOR ANY REPAIRS. The dealer assumes no responsibilityfor any repairs regardless of any oral statements about the vehicle.FULLWARRANTYLIMITED WARRANTY. The dealer will pay ___% of the laborand ___% of the parts for the covered systems that fail duringthe warranty period. Ask the dealer for a copy of the warrantydocument for a full explanation of warranty coverage, exclusions,and the dealer’s repair obligations. Under state law,“implied warranties” may give you even more rights.BUYER’S GUIDEThis form must appearin the window of usedvehicles sold by dealers.Does it become part ofthe sales contract withthe dealer?SYSTEMS COVERED:DURATION:SERVICE CONTRACT. A service contract is available at an extracharge on this vehicle. Ask for details as to coverage, deductible, price,and exclusions. If you buy a service contract within 90 days of the time ofsale, state law “implied warranties” may give you additional rights.PREPURCHASE INSPECTION: ASK THE DEALER IF YOU MAY HAVE THISVEHICLE INSPECTED BY YOUR MECHANIC EITHER ON OR OFF THE LOT.SEE THE BACK OF THIS FORM for important additional information, includinga list of some major defects that may occur in used motor vehicles.Chapter 16: Owning a Vehicle 345

Buying from a Private PartyYou might find the lowest price for a car by buying from a privateparty. Buying from a friend is usually best because he or she can fillyou in on the vehicle’s history. Buying from a stranger can be riskybecause private parties do not provide the implied warranty of merchantability.You must buy the car “as is” and will have no recourse ifsomething goes wrong.An exception occurs if the seller gives you an express warranty. Forexample, the courts have held that a statement by the seller that a car isin good condition and runs properly amounts to an express warranty. Thiswarranty prevails over a further statement that the car is sold “as is.”Other pitfalls in buying from a private party include the possibilitythat the car may have been stolen. In this case, a bank or loan companymay have the right to repossess , or take back the car, regardless of whopresently owns it. A repossessed vehicle purchased from a bank orfinance company may be a good buy. However, sellers of repossessedvehicles give no warranty, either express or implied.Before you buy, be sure to:l Inspect the vehicle carefully or have it inspected by a mechanic.l Test-drive the vehicle.l Ask for the vehicle’s maintenance record.l Talk to previous owners.l Ask to see the certificate of title.Be sure that the name of the person selling the vehicle appears onthe certificate of title. Usually, the names of persons or institutions holdingliens on the vehicle (the right to repossess it) are written on the backof the certificate. Lien holders often havepossession of the certificate of title. Visit thecourt clerk’s office in the seller’s communityand ask if there are any liens filed thereunder the seller’s name. Liens, or securityinterests, are explained in Chapter 22.346 Unit 3: Understanding Consumer LawPRIVATE PARTIESBuying a pre-owned vehiclefrom a private party can be risky.What can you do to protectyourself before you buy avehicle from a private party?

Buying from Rental CompaniesRental companies often buy fleets of new vehicles and sell themwhen they are a year or two old. These cars can be a good buy, but keepin mind that such vehicles may have had heavy use and will probablyhave high mileage. On the other hand, rental vehicles usually have hadregularly scheduled maintenance and come with warranties.The Contract to Buy a VehicleUnder the UCC, a contract for the sale of goods valued at $500 ormore must be in writing to be enforceable. When private parties enter intoa contract, they can simply write on a piece of paper that one party agreesto sell and the other party agrees to buy the vehicle. The contract mustidentify the vehicle and must be signed by the party charged—thedefendant—in a lawsuit. It is also advisable to include the price of thevehicle, although the UCC does not require it. All of this information canbe placed on the check given for a deposit. Law does not require a deposit,but the seller has the right to require it as a condition of the contract.When a contract is entered into between a private party and a dealer,the private party is usually at a disadvantage. The dealer asks the buyerto sign a printed form. A sentence on the front of the form says that thebuyer agrees to the terms on the reverse side. The back of the formcontains a full page of small-print terms that favor the seller. Such astandard-form contract is called an adhesion contract . Smart buyersread the small print and cross out items with which they disagree.What to Do If You Buy a Defective CarSome cars, whether purchased new or used, continually havemechanical problems. If you have bought such a car, you should notifythe seller immediately. The seller can be asked to fix the problem, topay to have it fixed, or to give your money back. The seller, dependingon the circumstances, may be liable on any of the following grounds:l Breach of an express warranty, if a specific guarantee was made andwas not keptl Breach of warranty of merchantability, if the seller was a dealer andthe car was not fitl Fraud or breach of an express warranty, if the seller made anystatements of fact about the car that were not truel Breach of the state consumer protection law, if the buyer purchasedthe car for nonbusiness useDonatingAutomobilesBuying your first car isconsidered to be amilestone in life. Thispurchase establishesindependence andfreedom. Did you knowthat many people givetheir cars away? Usedcars, running or not,are often donated toorganizations that helpraise money for communityworks andservices. What organizationsin yourcommunity acceptautomobiledonations?Get InvolvedLook for an organizationin your area thataccepts donated cars.Organize a donationdrive in your area,persuading friends andneighbors to donateautomobiles that arenot being used.Revoking the Acceptance If you buy a car that doesn’t conform tothe contract, you may be able to revoke your acceptance, even aftertaking possession of the vehicle. This revocation is allowed under theUCC if the defect is serious and undetectable. It may also be exercisedChapter 16: Owning a Vehicle 347

in cases in which you are led to believe that the seller would fix a defectand the seller does not do so. The revocation must be made within areasonable time after the defect is discovered.Selling “As Is”The engine in Ji’s carleaks oil and makes aclanging noise whenthe oil is low. She knowsHyun is looking for acheap car to get to workafter school, so shewipes off the engine,puts in an extra quartof oil to temporarilystop the noise, and sellsthe car to Hyun “as is.”She does not tell himabout the oil leak orthe noise. In youropinion, is this actionethical? Why orwhy not?Notifying the Seller about Defects Buyers must notify sellers ofdefects in vehicles within a reasonable time after the purchase. If youfail to do so, you may lose the right to recover. You can also lose thebenefits of an express warranty by failing to notify the seller of a defectbefore the warranty expires. Notification can be made in a number ofways. Doing so by certified mail with return receipt requested is bestbecause it gives you proof that the seller was notified of the defect.State Lemon Laws Many states have passed “lemon laws” to protectconsumers when they buy defective vehicles, either new or used. InMassachusetts, for example, you can return a vehicle and get back themoney paid if the vehicle does not pass the state’s required inspectiontest and it will cost more than 10 percent of the purchase price to repairthe vehicle so that it will pass. Dealers in Massachusetts must also givea warranty on used vehicles for 30, 60, or 90 days, depending on thecar’s mileage. In addition, private parties must disclose defects that theyknow of when they sell a vehicle to any buyer.A “lemon” is defined in one state as “a substantially defective newcar that has been at a dealer’s three times for the repair of the same defector any combination of defects.” The car must be no older than one yearand must not have mileage in excess of 15,000 miles to qualify as alemon. If you purchase such a car, you may write a letter to the dealerand manufacturer demanding the replacement of the defective part orparts or a refund. A refund is based on a formula that takes into accountthe use of the car. You have 18 months to request arbitration; that is, youcan have the complaint heard by a neutral party called an arbiter. Ifeither party is dissatisfied with the arbiter’s report, it may be contestedin court.348 Unit 3: Understanding Consumer LawFederal Consumer ProtectionThe federal Motor Vehicle Information and Cost Savings Act hasestablished bumper standards for passenger vehicles. If you are injuredfrom vehicles not in compliance with the law, you may seek damagesfrom vehicle manufacturers. The act also establishes average fueleconomy standards for motor vehicles. Automakers must reach a prescribedaverage of miles per gallon in the cars they sell or make eachyear. The law also requires a label (see Figure 16.4) to be placed on eachnew car when it is sold. The label must show the fuel economy for eachvehicle, estimated annual fuel cost of operating the automobile, andrange of fuel economy of comparable automobiles.

Figure 16.4Compare this vehicle to others in the FREE GAS MILEAGE GUIDE available at the dealer.CITY MPGGas MileageDOEEPAHIGHWAY MPG17 26InformationACTUAL MILEAGE 1992 CAMARO FOR COMPARISON SHOPPING,WILL VARY WITH OPTIONS, 5.0 LITER V8 ENGINE ALL VEHICLES CLASSIFIED ASDRIVING CONDITIONS, DRIVING FUEL INJECTION, AUTO LOCKUPHABITS, AND VEHICLE'S4SPD TRANSSUBCOMPACTCONDITION. RESULTS REPORTED CATALYST, FEEDBACK FUEL SYSTEM HAVE BEEN ISSUEDTO EPA INDICATE THAT THEMILEAGE RATINGSMAJORITY OF VEHICLESRANGING FROMWITH THESE ESTIMATES WILL ESTIMATED ANNUAL FUEL COST: $900ACHIEVE BETWEENTO MFG CITYAND14 AND 20 MPG IN THE CITY TO MFG CITYAND BETWEENHIGHWAY22 AND 30 MPG ON THE HIGHWAYNOT AVAILABLEMathematicsBuying a new car requireslots of work. First, youwill need to determinehow much money you canspend on a car. Then youmust research which kindof car you want. Whenyou are ready to buy, youmight need to financeyour car. Be sure to readthe fine print on financingpaperwork and take timeto evaluate what it means.Research ActivityUsing the local newspaper,choose two advertisementsfor new carsand compare the APR andfinance charges for each.1G1FP23E1NL101104 09063 FEAUSEFUL INFORMATIONA label such as this one must appear on a newcar when it is sold. What federal legislationrequires such a label?Odometer ProtectionIt is illegal for a vehicle owner to turn back or disconnect the odometer,or mileage indicator, of a vehicle. The federal odometer law requireseveryone who transfers a vehicle, unless it is more than 25 years old, toprovide a written mileage disclosure statement. This statement must beprovided whether the vehicle is sold or given away. The disclosure statementmust show the odometer reading at the time of the transfer. If theseller has reason to believe the mileage reading is incorrect, the statementmust indicate that the actual mileage is unknown.Chapter 16: Owning a Vehicle 349

When an odometer is repaired and cannot be adjusted to show the truemileage, it must be set at zero. The owner of the vehicle must also attachto the left door frame a written notice showing the true mileage before therepair or replacement and the date that the odometer was set at zero.Vehicle buyers may sue anyone who violates the odometer law. Youmay recover three times the amount of the damages suffered, or$1,500—whichever is greater. To recover, you must prove the violationwas committed with the intent to defraud. Some states also impose criminalpenalties for violating this law.Repairing a VehicleMany states require motor vehicle repair shops to be licensed andregistered. Laws are being adopted in many states requiring such thingsas repair estimates, advance disclosure of prices, and specific trainingfor mechanics. Some states require automobile repair shops to bebonded. The bonding company is an insurer who must pay the consumerfor losses suffered as a result of wrongdoing on the part of the repairshop. Automobiles are becoming more complex each year, requiringspecial knowledge and equipment to repair them. New car dealers maycharge more than others for repair work, but their mechanics are oftenfactory trained and have superior skills to make the repairs.Reviewing What You Learned1. What six aspects of the loan agreementshould you be sure you understand beforeyou sign the loan documents?2. What should you do before you buy anew car?3. Discuss the advantages and disadvantagesof leasing a car.4. Why might it be risky to purchase a preownedvehicle from a private party?5. What should you do if you buy adefective car?6. What is the purpose of the federalodometer law?7. Why do some states require auto repairshops to be bonded?Critical Thinking ActivityBuyer’s Guides Visit a used car dealer andread the Buyer’s Guides displayed on several ofthe cars. Decide whether you would be willingto purchase the cars based on the informationprovided in the Buyer’s Guides.Legal Skills in ActionAutomobile Warranties In teams of four,contact three automobile dealerships or carrental companies that sell used cars. Askabout the warranties they provide on the usedcars they sell. Make sure you find out if thewarranties cover both parts and labor. Next,as a group, come to consensus as to whichwarranty is best.350 Unit 3: Understanding Consumer Law

Motor VehicleInsuranceFinancial ResponsibilityAnyone who owns or drives a car should have protection againstpersonal injury or damage to the property resulting from accidents. Youalso need protection against loss for injuries to others or damage to theproperty of others.Every state has a financial responsibility law , which requiresvehicle owners to prove they can pay for damages or injury caused byan automobile accident. You may show proof of financial responsibilityby depositing money, depositing bonds or other securities, or carryinginsurance. As of 2000, more than 40 states had laws requiring peopleto carry automobile insurance. In the remaining states, most people buyautomobile insurance by choice.Types of Motor Vehicle InsuranceThe coverage provided by automobile insurance falls into two categories:protection for bodily injury and protection for property damage(see Figure 16.5).l How to explain thepurpose of financialresponsibility lawl How to describe thetypes of automobileinsuranceKnowing about thedifferent types ofautomobile insurancecoverage will help youbuy the best policy foryour needs.Figure 16.5Bodily injuryliabilityPropertydamageliabilityAutomobile Insurance CoverageBodily Injury CoveragesMedicalpaymentscoverageProperty Damage CoveragesCollisionPROTECT YOURSELFBuying bodily injury and property damage coverage can reducethe financial impact of an accident. What type of expenseswould be paid for by bodily injury liability coverage?Uninsuredmotorist'sprotectionComprehensivephysicaldamagel financial responsibilitylawl bodily injury liabilityinsurancel medical paymentsinsurancel uninsured motoristinsurancel underinsured motoristinsurancel property damageliability insurancel collision insurancel comprehensiveinsurancel no-fault insuranceChapter 16: Owning a Vehicle 351

VEHICLEINSURANCEThe insurance typeslisted here are oftenincluded in a packagepolicy. Does your staterequire vehicle ownersto carry liabilityinsurance to registera vehicle?Figure 16.6Type of InsuranceBodily Injury LiabilityProperty Damage LiabilityCollisionComprehensiveTypes of Automobile InsuranceWhat It CoversInjuries to other persons if the insured is at fault.Damage to the car(s) or property of others if theinsured is at fault.Damage to the insured’s car.Loss or damage to the insured’s car caused by fire,flood, storm, theft, or vandalism.Medical PaymentsUninsured orUnderinsured MotoristMedical expenses incurred by anyone occupyingthe insured’s car.Injuries to the insured if another is at fault andhas little or no insurance or the insured is involvedin a hit-and-run accident.Bodily Injury CoverageThe main types of bodily injury coverage are bodily injury liability,medical payments, and uninsured motorist’s protection (see Figure 16.6).Bodily injury liability insurance protects the insured againstclaims or lawsuits for injuries or death caused by negligence. To recoverfrom the insurance company, the injured person must prove that thedriver of the motor vehicle was at fault.Two numbers, such as 100/300, are often used to describe bodilyinjury liability coverage. These amounts represent thousands of dollarsof coverage. In the previous example, $100,000 is the maximum amountthat the insurance company will pay for the injuries of any one personin any one accident. The second number, $300,000, is the maximumamount the company will pay for all injured parties in any one accident.Medical payments insurance pays for medical, and sometimesfuneral, expenses resulting from bodily injuries to anyone occupyingthe policyholder’s car in an accident. In some states, this type of policypays the medical bills of all family members who are struck by a car orwho are riding in someone else’s car when the car is in an accident.Uninsured motorist insurance provides protection when theinsured is injured in an automobile accident that is caused by a driverwho has no insurance. This coverage also protects parties who areinjured by a hit-and-run driver. Underinsured motorist insuranceprotects you when another driver has insurance, but not enough to payfor any injuries.352 Unit 3: Understanding Consumer Law

Property Damage CoverageThe main types of property damage coverage are property damageliability, collision, and comprehensive insurance.Property damage liability insurance applies when you damagethe property of others, including such things such as another car, a house,a telephone pole, or a tree. The person bringing the claim must showthat the driver of the vehicle was at fault.Collision insurance covers damage to your vehicle when it is inan accident and pays for vehicle repairs, regardless of who was at fault.The amount you collect is limited to the actual cash value of the vehicle.The cost of collision insurance can be reduced if you carry part ofthe risk, known as a deductible clause. For example, under a $500-deductible policy, you pay for the first $500 of any loss and the insurancecompany pays the remainder of any loss more than $500. If you useFighting a Traffic TicketDeciding whether to fight a traffic ticket or simply take your lumps shouldbe based on the circumstances surrounding your case. When evaluating yourchances of winning, it’s a good idea to look at several factors. Determinewhether it’s worth the fight. If you’re a good driver with a clean record, youmay want to simply pay the fine and get it over with. Some states offer trafficschool as a way to keep your record clean.If you decide to fight a ticket, develop a proper strategy before going tocourt. Study the law under which the ticket was issued. Application of the lawis usually open to some interpretation. Knowing the exact wording may helpyou present your case in a way most favorable to you.Before coming to court, make a diagram or take photographs of the sceneto help you explain the situation to the judge. If you have witnesses, ask themto testify on your behalf. Present whatever evidence you can to help the judgeunderstand what happened.Research Find the traffic laws of your city or state and research U-turns. Afterreading the law, can you identify any circumstances under which making aU-turn would be legal? Explain your answer.Chapter 16: Owning a Vehicle 353

Maintenance OnlineAutomakers are beginning to offer car buyers online help for automobilemaintenance. Many automakers offer online tips on how to maintain yourvehicle, but a few car companies go further than that. Subaru allows customersto create their own MySubaru Web page to track dealer maintenance on theircars. This site links to a database that tracks individual vehicle identificationnumbers. The dealer is able to update the service records whenever it works ona car. The system is especially useful for tracking warranty work or upkeep performedunder maintenance programs purchased by customers. The system alsomakes it easier for car owners to support a claim under the warranty. (Source:InternetWeek, January 2, 2001)Connect Visit Web sites of other car companies to see if they offer similarsystems.a bank or other lender to finance the purchase of a car, you will probablybe required to carry collision insurance.Comprehensive insurance applies to damage to your vehicle fromsources other than collision, including fire, theft, lightning, flood, hail,windstorm, riot, and vandalism. The insurance company’s liability isNEGLIGENCEMotor vehicle accidents canbe caused by negligence.What type of insurancecovers damage to anotherperson’s vehicle when youcause an accident? Whattype of insurance coversyour own vehicle?354 Unit 3: Understanding Consumer Law

limited to the actual cash value of the damaged property at the time ofthe loss. Carrying a deductible can reduce the cost of comprehensiveinsurance.Example 5. Jason’s car was covered by a comprehensive insurancepolicy. When it was stolen and presumed unrecoverable,Jason claimed the insurance company was liable for the replacementcost of the car. Instead, the company offered the actual cashmarket value of the automobile at the time of the theft. The insurancecompany was correct in its settlement.No-Fault InsuranceUntil the end of 1970, an automobile accident victim could collectdamages for injuries only after proving that the other driver caused theaccident. Courts became clogged with lawsuits involving the questionof fault. Accident victims sometimes had to wait years before beingcompensated. In addition, lawsuits resulted in inconsistent decisions.Costs, including insurance premiums, legal fees, and court costs, continuedto rise. To solve this problem, no-fault automobile insurance wasdeveloped. Under no-fault insurance , regardless of who caused theaccident, all drivers involved collect money from their own insurancecompanies. Because no-fault systems vary by state, you should investigatethe coverage provided by no-fault insurance in your state.Reviewing What You Learned1. Describe bodily injury liability insurance.What does it cover?2. What type of insurance protects parties whoare injured by hit-and-run drivers?Critical Thinking ActivityFair Rates Teenage boys pay a much higherrate for automobile insurance than teenage girlsdo. Is this fair? Explain why or why not. Thentake an informal survey of the students in yourclass who have had tickets or accidents. Are theboys or girls better drivers?Legal Skills in ActionMotorcycle Helmet Laws Florida recentlypassed a law allowing people to ride motorcycleswithout wearing helmets. However,Florida law requires unprotected riders tocarry medical insurance in case of injury.With a partner, debate whether people shouldbe allowed to ride motorcycles without helmets.Does the requirement for insurance makea difference?Chapter 16: Owning a Vehicle 355

CHAPTERASSESSMENTSection 16.1 Owning a Vehicle● Before you sign any documents to purchase a car,you should know the following facts:(1) the exactprice you are paying for the vehicle; (2) the amountyou are financing; (3) the finance charge; (4) theAPR (the annual percentage rate); (5) the numberand amount of payments you will be required tomake; and (6) the total sales price (the sum of themonthly payments plus the down payment).● Before you buy a new car, do some calculationsand research. Determine how much you canreasonably afford to pay for a new car. If youdecide that you must borrow money, shop aroundfor the best credit terms. If you are planning ontrading in a vehicle, do not discuss it with thedealer until you’ve negotiated the best price foryour new car. Consider selling your old vehicleyourself, instead of trading it in.● Leasing a car is ultimately more expensive thanbuying the same car. Although leasing has theadvantage of a low down payment and smallermonthly payments, you will have to return the carat the end of the lease period and will have nothingto trade in when you need to obtain anothervehicle. If you choose to lease a car, you may alsobe responsible for excess mileage charges, excesswear charges for body damage or worn tires, andcharges for ending your lease early.● If you have bought a defective car, you shouldnotify the seller of any major defect immediately.You may also be able to revoke your acceptanceif the seller has sold you a car with serious andinitially undetectable defects.● Buying a car from a dealer usually entitles you tothe protection afforded by the warranty of merchantabilityand the warranty of fitness for aparticular purpose. Another advantage of buying aused car from a dealership is that dealers oftengive you a guarantee. Buying a car from a privateparty is sometimes cheaper than buying a car froma dealership. However, buying from a private●●party does not give you the benefit of the impliedwarranty of merchantability. You must buy the car“as is,” and as a result, you will have no recourse ifsomething goes wrong with the car. The car mayalso be stolen, and it may be repossessed by therightful owner, even though you have purchased itin good faith. If you choose to buy from a privateparty, it is generally a good idea to buy from afriend or associate. Buying a rental car might be agood option, but keep in mind that such vehiclesmay have had heavy use and will probably havehigh mileage. On the other hand, rental vehiclesusually have had regularly scheduled maintenanceand come with warranties.The federal odometer law requires everyone whotransfers a vehicle, unless it is more than 25 yearsold, to provide a written mileage disclosurestatement showing the odometer reading at thetime of the transfer. This law is an attempt toprevent odometer fraud.If an auto shop is responsible for some wrongdoingwith regard to your car, the bondingcompany is an insurer who must pay you forresulting losses suffered. This requirementprotects consumers from unscrupulousness orincompetence of auto repair shops.Section 16.2 Motor Vehicle Insurance● The purpose of financial responsibility law is toprotect against injury or damage to propertyresulting from an accident.● Bodily injury liability insurance protects theinsured against claims or lawsuits for injuries ordeath caused by his or her negligence. The maximumamount of coverage is $100,000 for anyperson in any one accident, and $300,000 for allinjured parties in any one accident. Uninsuredmotorist insurance protects you from a driverwho commits a hit-and-run or a driver whois uninsured.356 Unit 3: Understanding Consumer Law

Consider the key terms in the list below. Then use the terms tocomplete the following exercises.finance chargeBuyer’s Guidecollision insuranceno-fault insurancefinancial responsibility lawbodily injury liability insuranceuninsured motorist insuranceproperty damage liability insuranceUsed Car Rulerepossesscomprehensive insuranceadhesion contractUsing as many of the key terms as you can:1. Create a public service awareness poster on one of thefollowing topics:● How to Buy a New Car● Car Insurance: Why it is Important● How to Buy a Used Car● How to Seek Relief if You Purchase a Defective Vehicle● How to Decide between Buying and Leasing a Car2. On a separate sheet of paper, describe your public serviceawareness poster. Explain why you chose the images you selected.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 16:Owning a Vehicle—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.3. What two things must a prospective lender disclose under the requirements issuedby Regulation Z?4. What information should you know before signing any financing documents?5. Given the financial disadvantages of leasing, why do some people still choose tolease new cars?6. What does the Used Car Rule require?7. What are the advantages of buying a used car from a dealership?8. On what grounds might a seller be liable for damages if a car is defective?9. Name the principal kinds of automobile insurance. What kind of loss doeseach cover?10. Describe no-fault insurance.Chapter 16: Owning a Vehicle 357

CHAPTERASSESSMENTAcquiring and Evaluating InformationCarlos is a young executive with a phone-basedpersonal digital assistant and Internet-enabledcell phone. He is connected to the World WideWeb no matter where he is, even in his car.He becomes distracted, however, talking to adisgruntled client, checking his stocks, anddriving at the same time.Research11. What are the current statistics about caraccidents that can be attributed to usingcell phones while driving?12. Are there any laws prohibiting the use ofcell phones while driving?13. How does the United States compare withEurope on this issue?Leasing a CarBena just graduated from law school and needsa new car. She has little savings but has juststarted a new job at a prestigious law firm.Bena is eager to project the image of asuccessful attorney by driving a nice car. Benadecides to lease a car because doing so willenable her to afford a more impressive vehicle.The salesperson at the dealership tells Bena shehas made a wise decision.Debate14. Does Bena have a good reason to lease acar?15. Under what circumstances is it a good ideato lease a car?16. What would you do if you were Bena?For the following cases, give your decision andstate a legal principle that applies.17. After graduating from high school, Megangot a job as a legal secretary. She needed acar to get to work. The salesperson at adealership told her that she should lease anew car for three years. Was this goodadvice? Explain your answer.18. Hagley buys a used car from a dealer, whoarranges financing with a local financecompany. The car has a 30-day warranty.Two days after Hagley drives off the lot,the car’s engine quits. The next day thedealer goes out of business. Must Hagleystill pay the loan? Why or why not?19. Rosita test drives a truck at a used cardealership. She notices that the truck hasno Buyer’s Guide attached to it. When sheasks about it, the salesperson replies thatthe Used Car Rule does not cover a truck,which need not have a Buyer’s Guide. Isthe dealer correct? Why or why not?20. Millie buys a used SUV from a privateparty. The seller makes no statements aboutthe quality of the vehicle. That night, Milliediscovers the car’s engine has a crackedblock. Does she have any legal recourseagainst the seller? Explain your answer.21. Akira buys insurance for his van, providingfor $20,000 property damage and 20/40bodily injury liability. An accident occursin which Akira is at fault. He is not hurt,but three people in the other car sufferbodily injuries to the extent of $80,000.The other car is damaged to the extent of$4,000, and Akira’s car is damaged to theextent of $6,000. How much and to whomwill Akira’s insurance company pay as aresult of this accident?358 Unit 3: Understanding Consumer Law

In each case that follows, you be the judge.22. Buyer’s RemedyKathleen Liarkos purchased a used Jaguar XJS from Pine Grove Auto Sales. After the carexperienced various mechanical problems, Liarkos discovered that the vehicle’s odometer hadbeen turned back. Liarkos notified the seller that she revoked her acceptance of the vehicle.When is this remedy available to a buyer?Liarkos v. Mello, 639 N.E.2d 716 (MA).23. Insurance ProvisionsBayer took his car to Whitaker’s auto repair shop for repairs. Whitaker took the car for a testdrive, with Bayer seated in the passenger seat. During the test drive, a car drove onto thewrong side of the road and collided with Bayer’s vehicle, injuring Bayer. The driver whohit Bayer’s car was not insured. Bayer also lacked insurance. However, Whitaker carriedinsurance on his own vehicles, including uninsured motorist insurance. Could Bayer recoverfrom Whitaker’s insurance company under the uninsured-motorist provision of the policy?Why or why not?Bayer v. Travelers Indemnity Co., 267 S.E.2d 91 (VA).Time to TradeArun wants to buy a new car and trade in his 1992Toyota Tercel. Arun’s Tercel has 102,000 miles, andhe just put new tires on it. Arun knows he needs toresearch what his Tercel is worth. In addition, hewants to research the new car he might like to buy.Arun has asked for your help.ConnectUsing a variety of search engines:24. Research the value of Arun’s Toyota Tercel.25. Find three cars that you think Arunwould like.26. Research the prices and options of thesevehicles. Then look for consumer informationregarding the reliability of the cars. Prepare achart summarizing your findings.27. Predict Is it really worth going into debtto buy a new car? Explain your answer.28. Connect If you bought a used car fromsomeone you did not know, what wouldyou do to make sure the car was in goodcondition?29. Question Teenagers pay high rates forcar insurance. Do you think that this is fairto teenagers who are good, responsibledrivers? Why or why not?30. Respond Imagine that a truck ran astoplight and hit your car, causingthousands of dollars worth of damage.Because you live in a no-fault state, yourinsurance company pays the damage andraises your rates. How do you feel aboutno-fault insurance? Explain your answer.Chapter 16: Owning a Vehicle 359

CHAPTERPersonal Propertyand BailmentsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 17: Personal Property andBailments—Chapter Overviews to previewthe chapter information.

The Opening SceneAn and his friend, Naomi, are working on a termpaper at the library.Cars and PlanesAN: I told my Dad I’d pick him up at the airport thisafternoon. Want to go? The plane gets in at 3:00.NAOMI: Sure. I’ll call my mom and tell her wherewe’re going. (Naomi uses her cell phone to callhome and returns the phone to her book bag.)AN: (Showing Naomi a page in a book.) This is somereally cool stuff for my term paper. I’ll use thecopier and work on it at home.NAOMI: I don’t think you’re supposed to copy from abook like that.AN: Who’s gonna know? We better get going. I don’twant to keep my dad waiting.NAOMI: (On the way to the airport.) I love yourcar, An.AN: Actually, it’s not mine. I’m keeping my friendMichael’s car while he’s away. I told him I wouldn’tdrive it out of town, but I’m sure he won’t mind atrip to the airport.NAOMI: The airport’s only twenty miles out of town.Uh-oh! I left my book bag with my money andcell phone at the library!AN: We’ll pick it up when we get back. (He stops infront of a video store.) I just have to drop off thisvideo I found under my bed. It’s a year overdue.(At the airport parking garage, An takes a parkingticket from a dispenser. The gate opens, and he findsa parking space. In the airport, An sees his father atthe luggage carousel.)AN: Hi, Dad. This is Naomi. How was your flight?MR.LEE: Hi, Naomi. Actually, my flight was terrible!Someone took my laptop from the overhead bin.NAOMI: Oh no!MR.LEE: (Spotting his luggage on the revolving belt.)There’s my bag, but look. Someone’s opened it!(He pulls the empty, torn-open bag from theluggage carousel.) I guess this isn’t my day.NAOMI: (Later, approaching the car in the parkinggarage.) I didn’t notice that big dent in yourfriend’s car before, An.AN: That’s because it wasn’t there! Oh, man, wait untilMichael sees this. I’ve caught your bad luck, Dad.MR.LEE: I think the parking garage will pay to havethat fixed.AN: I hope so. It wasn’t my fault!(An and Naomi drop Mr. Lee off at his home anddrive back to the library. However, Naomi doesn’tfind her bag where she left it.)NAOMI: (To the librarian.) I left my book bag besidethat table. Did anyone find it?LIBRARIAN: Yes, a girl said she’d look you up andreturn it.NAOMI: Do you have her name?LIBRARIAN: No. I don’t know who she was.1. Can An copy material from a book withoutviolating copyright laws?2. Did An violate a duty owed to Michael by drivinghis car out of town?3. Did An violate a duty owed to the video store byreturning the video a year late?4. Is the parking garage responsible for the damagedone to Michael’s car? Who has the burden ofproving fault?5. Is an airline responsible for lost goods that werestored in an overhead bin on a plane? For luggagechecked at the gate?6. Does the person who found Naomi’s bag in thelibrary have the legal right to hold it?Chapter 17: Personal Property and Bailments 361

Personal Propertyl How to identifytangible andintangible personalpropertyl How to decide whena gift of personalproperty is completedl How to distinguishbetween lost,misplaced, andabandoned propertyl How to explain the lawthat applies to stolenpropertyl How to discuss the lawof patents, copyrights,and trademarksKnowing the law aboutpersonal property willhelp you safeguard yourpossessions.l real propertyl personal propertyl tangible/intangiblepersonal propertyl donor/doneel abandoned propertyl intellectual propertyl patentl copyrightl fair use doctrinel trademarkTypes of PropertyReal property is land and anything permanently attached toit; the earth below and the air space above is also included.Personal property is everything that can be owned that is not realproperty. Tangible personal property is something that has substanceand can be touched, such as CD players, vehicles, and even food on thetable. In contrast, intangible personal property has no substance andcannot be touched. If someone owes you money, for example, the rightto receive the money is intangible personal property.Example 1. Natalia got a $47 check for baby-sitting. The paperon which the check was written was tangible, yet it had no value.However, the words written on the check were valuable becausethey ordered the bank to pay Natalia money. Natalia’s right toreceive the money was intangible personal property.Gifts of Personal PropertyA gift of personal property is completed when three requirementsare met:l The donor (the one making the gift) must intend to make the giftl The gift must be deliveredl The donee (the one receiving the gift) must accept the giftExample 2. Mrs. Nadeau said to Lydia, “I’m giving you this setof china. I’ll keep it here in my china cabinet for now, but I wantyou to consider it yours.” The gift was not complete because thechina was not delivered to Lydia.Lost PropertyIf you find a watch, you have a legal duty to try to find the trueowner. If the owner can’t be found, you may be able to keep the watchafter following the requirements of your local laws.Local Laws Some states provide for the special handling of lost articles.Local laws may, for example, require you to advertise for the trueowner of the item or to deposit the article at the police station while theowner is being sought. If you find a lost item, check with local authoritiesto determine the legal policies that apply. Do not keep any items thatyou may find without researching such policies.362 Unit 3: Understanding Consumer Law

COMPLETED GIFT?A gift cannot be taken backafter three requirementsare met. What are therequirements of acompleted gift?Rewards and Reimbursement To be entitled to a reward, you mustknow about the offer when you return the property. If you learn aboutthe reward after returning the property, you are not entitled to it.Misplaced PropertyIf property is found in a public or semi-public place, it is consideredmisplaced rather than lost. The owner will probably recall whereit was left and return for it. If you find an article in such a place, youshould leave it with the proprietor or manager. The proprietor must notknowingly allow misplaced property to be taken by anyone other thanthe rightful owner.Example 3. While trying on a dress, Alice found a purse in a fittingroom of the Fashion Dress Shop. She immediately gave thepurse to the owner of the store. Alice was not entitled to keep thepurse because she found it in a public area.Abandoned property is property that has been discarded by theowner without the intent to reclaim ownership. With some exceptions,anyone who finds abandoned property has the right to keep it and obtaingood title to it.Something that is found in a corridor or place where it was probablynot placed intentionally would be considered lost rather than misplaced.Stolen Personal PropertyA thief acquires no title to goods that are stolen and cannot givegood title to anyone else. An innocent purchaser who acquires a stolenChapter 17: Personal Property and Bailments 363

CanadaAt the University of Montreal in December 1989, tragedy struck. One man witha gun took the lives of 14 young women. Known as the Massacre of Montreal, thereis a commemoration each year near the scene of the crime.l Pass a Canadian Firearms Safety Course test.l Obtain a renewable firearms license for restricted (handguns) and nonrestricted(rifles and shotguns) firearms and ammunition.l Register for each firearm acquired.l Obtain permission from the Chief Firearms Officer before selling or giving afirearm to someone else.These provisions were implemented to decrease criminal offenses, keep firearmsaway from dangerous people, confiscate dangerous firearms from privateownership and businesses, and regulate the sale, use, transportation, and storage offirearms. “Prevention = Public Safety,” reasons one Canadian firearms manual.Here’s a snapshot of Canada.Geographical area 3,849,670 sq. mi.Population 31,902,268CapitalOttawaLegal systemBased on Englishcommon law, exceptin Quebec, where civillaw system based onFrench law prevailsLanguageEnglish, FrenchReligion46% Roman Catholic, 36% ProtestantLife expectancy 80 yearsCritical Thinking Question Gun control is as controversial in the United States as it isin Canada. Many citizens are adamant about defending their right to bear arms,but others feel that strict gun control would greatly reduce the nation’s rate of violentcrime. The Second Amendment of the United States Constitution states that it’s “theright of the people to keep and bear arms.” The Constitution was drafted in 1787;do you think that the Second Amendment is still relevant in the twenty-first century?For more information on Canada, visit ubpl.glencoe.com or your local library.364 Unit 3: Understanding Consumer Law

item in good faith is obliged to return it to the owner. Title to stolengoods never leaves the owner, who can always regain possession.Intellectual PropertyIntellectual property is an original work fixed in a tangiblemedium of expression. Patents, copyrights, and trademarks assure thatthe rightful owners of intellectual property will have exclusive rights totheir creations. Figure 17.1 discusses how intellectual property lawsprotect property rights to software, hardware, and other technologies.PatentsA patent gives an inventor the exclusive right to make, use, or sellan invention for 17 years. To be patented, a device must consist of a newprinciple or idea. In addition, it must be useful and not obvious to peoplewith ordinary skill in the field. The device may consist of a process,an article of manufacture, or a composition of matter.To be legally protected, a patented item must be marked with theword “patent” followed by the patent number. If this mark is not made,anyone making the same item without knowledge of the patent cannotbe sued for damages. Some inventors put the words “patent pending” or“patent applied for” on their products. This notice informs others thatan application for a patent has been filed.CopyrightsA copyright is a right granted to an author, composer, photographer,or artist to exclusively publish and sell an artistic or literary work. Copyrightedworks are protected for the life of the author plus 70 years.A copyright is registered with the U.S. Copyright Office in Washington,D.C. To protect a work in the past, it was necessary to put thenotice ©, or the word “copyright,” followed by the date and the name ofthe owner on the work. The use of the copyright notice is now optional.With exceptions, copyrighted material may not be reproduced without thewritten permission of the holder of the copyright.Under the fair use doctrine , copyrighted material may be reproducedwithout permission in certain cases. The amount and use of thematerial must be reasonable and not harmful to the copyright owner.Copying is allowed for literary criticism, news reporting, teaching,school reports, and other research. Downloading and uploading musicon the Internet for others’ use is a violation of copyright law and subjectto civil and criminal penalties.Leaping DolphinsAlphonse has found animage on the Internetof three dolphins leapingout of the ocean.It’s a photograph thathe has seen before in amagazine. He is able tosave the image to adisk and create a T-shirttransfer. Then he appliesthis image to a T-shirtthat he wears to school.Several of Alphonse’sfriends want similarshirts. Should Alphonsemake the T-shirts?What are his ethicalresponsibilities inthis case?TrademarksA trademark is a distinctive mark, symbol, or slogan used by abusiness to identify and distinguish its goods from products sold byothers. It may consist of a word, name, symbol, or other device. OwnersChapter 17: Personal Property and Bailments 365

Figure 17.1Intellectual Property and TechnologyWith the advance of the Internet and other technologies, property owners insoftware and hardware increasingly rely on copyright and trademark protectionin these emerging areas of intellectual property.Trade SecretsA trade secret is specialized knowledge associated with a particular firm.These secrets include the business or manufacturing plans, unique technology,customer lists, and other sensitive information that, if known by a competitor,would put the company at a competitive disadvantage. Trade secretsare often protected by restrictive covenants, which are agreements withemployees not to work elsewhere in similar employment, or by agreements notto compete, which prohibit a person from operating a similar business in a certaingeographical area or for specified period of time.Computer software makers frequently treat their works as trade secrets. Thisapproach has the advantage of not having set time limits on legal protection.Many software producers have also attempted to use licensing laws to protecttheir work by requiring users to register their purchased software, often onlineat the producer’s Web site.Trademark ProtectionTrademark law is important to protecting property rights in software andhardware. For example, the law of trademarks applies to domain names.A domain name, such as Amazon.com®, is the Web address that uniquelyidentifies a firm on the Internet. This domain name is usually part of thelarger Universal Resource Locator (URL), such as http://www.amazon.com.Because companies want to protect the goodwill associated with their nameand want it to uniquely identify them in customers’ minds, they may usetrademark law to protect their domain name.The Anti-Cybersquatting Consumer Protection Act of 1999 makes it illegalfor someone to buy a domain name and then resell it to a company thatowns the trademark. To win a case under this law, a company needs todemonstrate that it owns the trademark and that the cybersquatter acted inbad faith in buying the domain name.Copyright ProtectionThe Computer Software Copyright Act of 1980 protects software makers.This act defines a computer program as a “set of statements or instructionsto be used directly in a computer in order to bring about a certain act.”Purchasers may make copies for themselves, but the law protects ownersfrom the kinds of widespread copying that result in loss of revenue.PROTECTING RIGHTS TO TECHNOLOGYThe laws are evolving to protect intellectual property rights in technology. Ifsomeone creates a Web site aimed at disparaging a business, should thebusiness be able to sue for damages?366 Unit 3: Understanding Consumer Law

of trademarks have the exclusive right touse the particular word, name, or symbolthat they have adopted as their trademark.Trademarks may be established byusage, state trademark laws, and registrationwith the U.S. Patent and TrademarkOffice. A registered trademarkcontinues for 10 years and may be renewedfor additional 10-year periods.The ® symbol indicates that a trademarkis registered.CORPORATE TRADEMARKSMany companies spend largeamounts of money to develop andprotect their trademarks. How aretrademarks established?Reviewing What You Learned1. Give two examples of tangible personalproperty and one example of intangiblepersonal property.2. What are the three requirements of acompleted gift?3. Explain the differences between lost,misplaced, and abandoned property.4. Cite methods of acquiring ownership ofpersonal property.5. Describe the difference between a patent,copyright, and trademark.6. Differentiate between personal and reallyproperty.Critical Thinking ActivityIntellectual Property Using the Internet,library, or other resource, research and identifyfederal and state trademark or copyright lawspertaining to hardware and software. In a onetotwo-page paper, briefly describe each lawand the protections it provides.Legal Skills in ActionPersonal Property Myra found a diamond andruby necklace on the sidewalk near her home.She was very excited because rubies are herbirthstone and she loves diamonds. Is thenecklace considered lost, misplaced, orabandoned property? What should Myra dowith the necklace? What laws apply to thissituation? Write a letter to Myra offeringyour advice.Chapter 17: Personal Property and Bailments 367

Bailmentsl How to define abailmentl How to describe kindsof bailmentsl How to explain whohas the burden ofproof in bailmentlawsuitsl How to explain hotelkeepers’ dutiesl How to identify therights and duties ofcommon carriersl How to discuss theobligations of commoncarriers towardpassengersUnderstanding the law ofbailments can help youavoid difficulties.l bailmentl bailor/baileel mutuuml gratuitous bailmentsl gross negligencel slight negligencel reasonable carel ordinary negligencel tortious baileel carrierl common carrierBailments of Personal PropertyYou may have rented movies at a video store, left your car at a shopto be repaired, or dropped clothes off at the cleaners. In these situations,you entered into a relationship called a bailment. Bailments give rise tospecific rights and duties.A bailment is the transfer of possession and control of personalproperty to another with the intent that the same property will bereturned later. The person who transfers the property is the bailor . Theperson to whom the property is transferred is the bailee .Example 4. Eric’s English teacher assigned a lengthy term paper.Eric had to type his paper but did not own a computer. He borroweda laptop from his friend, Quanna. This situation illustratesa bailment. Eric was the bailee, and Quanna was the bailor. Evenin this simple transaction, basic legal rights and duties exist.In a bailment, neither the bailor nor the bailee intends that title to theproperty should pass. The bailee has an obligation to return the sameproperty to the bailor at a later time. A bailment does not occur whenthe person in possession of the property has no right of control over it.Example 5. Sewall parked his car in a commercial parking lotand took the keys with him. An attendant was on duty in themorning and left the lot unattended for the rest of the day. In theafternoon, Sewall’s car was stolen. This was not a bailmentbecause the attendant had no right of control over Sewall’s car.Instead, Sewall had simply rented a parking space.In contrast, a bailment exists when someone parks a car in a garageor lot that has an attendant present at all times to check cars going in andout. Similarly, the courts have held that a bailment takes place when acar owner surrenders his or her car keys to a parking lot attendant.When you loan goods to someone with the understanding thatthey will be used and later replaced with different identical goods, amutuum has occurred.Example 6. Liang borrowed a cup of sugar from her neighbor tomake cookies. She returned a cup of sugar to her neighbor the368 Unit 3: Understanding Consumer Law

BORROWING FROMNEIGHBORSIt’s common for neighborsto borrow sugar, milk, flour,or similar goods from eachother. These situationsillustrate a mutuum. Whyis a mutuum different froma bailment?next day after grocery shopping. The loan of the sugar was amutuum because the parties did not intend that the identical granulesof sugar that were borrowed would be returned.Main Types of BailmentsThere are three types of bailments: bailments for the sole benefit ofthe bailor; bailments for the sole benefit of the bailee; and mutualbenefitbailments. In the first two types, called gratuitous bailments ,property is transferred to another person without either party giving orasking for payment. Gratuitous bailments are usually considered favors.In reality, however, definite legal responsibilities are placed upon boththe bailor and bailee.Bailments for Sole Benefit of BailorWhen a personal possession is transferred to another person forpurposes that will benefit only the bailor, a bailment for the sole benefitof the bailor results.Example 7. Your friend asks you to look after her car while sheis away for a week. You agree to keep your friend’s car in yourgarage. This bailment will be a bailment for the sole benefit ofthe bailor. Your friend is the only person benefiting from thearrangement.In a bailment for the sole benefit of the bailor, the bailee owes aduty to use only slight care, as the bailee is receiving no benefit fromChapter 17: Personal Property and Bailments 369

Return to Sender, or Not?When you receive something in the mail that you did not order, you areunder no obligation to pay for it. If you receive bills or get threatening letters forpayment, insist that proof of your order be provided. Contact the sender inwriting, informing the sender that unless such proof is provided, you willconsider the item a gift unless the sender pays for return of the item. If thisapproach is not effective, file a complaint with the consumer protection agencyin the state where the sender is located.If you have accepted an offer of merchandise for free or for a trial periodand are now being billed, check the fine print. You may have unwittinglyjoined a purchase club or obligated yourself to pay for shipping and handling.If so, write to the merchant to say that you felt you were misled and ask that themerchant accept return of the merchandise with no strings attached.Check It Out Visit your local prosecutor’s office. Ask how you would file a fraudcomplaint, and how many times per year the office receives complaintsinvolving the situation discussed. Alternatively, contact local newspapers, ortelevision or radio stations to see if they have a regular feature for consumercomplaints. Ask them the same question. Report your findings.370 Unit 3: Understanding Consumer Lawthe arrangement. The bailee is required only to refrain from grossnegligence (very great negligence).The bailor has a duty to reimburse the bailee for expenses involvedin the care of the property. However, the bailee has no implied right touse the bailor’s property. Suppose that, in Example 7, your friend doesnot give you permission to use her car, but you drive it anyway. If youwere involved in an accident, you would be liable for damages.Bailments for Sole Benefit of BaileeWhen personal property is transferred for purposes that will benefitonly the bailee, a bailment for the sole benefit of the bailee occurs.Example 8. George offered his truck to his friend, Trina, whowas moving to a new apartment. This offer was a friendly gestureon George’s part; he had no expectation of payment. Trinaaccepted the offer and used George’s truck for her move. This

ailment was a bailment for the sole benefit of the bailee. Georgewas the bailor; Trina was the bailee.In this type of bailment, the bailee is required to use great carebecause possession of the goods is intended solely for the bailee’s benefit.The bailee is responsible for even slight negligence , which is thefailure to use the care that persons of extraordinary prudence and foresightuse. The bailee has the right to use the property only for the purposefor which the bailment was created. Use for another purpose orfor a longer time than agreed upon makes the bailee liable for anyresulting damage.Mutual-Benefit BailmentsA mutual-benefit bailment (see Figure 17.2) is one in which both thebailor and the bailee receive some benefit. Leaving a car at a garage tobe repaired is an example of a mutual-benefit bailment. Other examplesare placing one’s property in storage, and leaving a diamond ring at apawnshop as security for a loan. In a mutual-benefit bailment, the baileeowes a duty to use reasonable care , or the degree of care that a reasonablyprudent person would use in the situation. The bailee is responsiblefor ordinary negligence , or failing to use the care that a reasonableperson would use under the same circumstances.Example 9. Champine paid to store his boat in Field’s buildingfor the winter. Champine expressed some doubts about the soundnessof the building, particularly the roof, but Field assured himit was safe. The roof collapsed after a winter snowstorm, damagingChampine’s boat. In allowing Champine to recover fromField, the court said the relationship imposed a duty on the baileeto use ordinary care, which he failed to do.MUTUAL-BENEFITBAILMENTSIn a mutual-benefit bailment,the bailor and the baileereceive some benefit. Whatare some examples ofmutual-benefit bailments?Figure 17.2Mutual-Benefit BailmentsBailment Bailor BaileeService or repair Owns the item to be serviced or Performs the repair or service workrepairedStorage or parkingSecurity for a loanRenting or leasingBailments bynecessityOwns the item to be stored orparkedPledgor, debtor—borrows moneyRents an item to someoneGives up possession of propertyIs responsible for the storing orparkingPledgee, creditor—lends moneyPays to use an itemAccepts or protects the propertyChapter 17: Personal Property and Bailments 371

Many courts today apply the reasonable care standard to all types ofbailments, including bailments for the sole benefit of the bailor andbailments for the sole benefit of the bailee.Short-term storage may also create a bailment. For example, whena customer delivers a coat to the checkroom attendant of a hotel or restaurant,a bailment takes place. In contrast, when a customer hangs a coaton a hook in a shop or restaurant, a bailment does not usually exist becausethe shop or restaurant owner has no control over the property.Sometimes a bailment is coupled with the loan of money. Propertyof the borrower, such as a stock certificate, may be turned over to thelender to hold as security for the loan. The property left as security iscalled the pledge, or pawn.Tortious BaileesA tortious bailee refers to a person who wrongfully keeps the lostproperty of another or knowingly possesses stolen property. One whouses a bailed article for a purpose other than agreed upon or who refusesto return property at the termination of the bailment may also beconsidered a tortious bailee. If you found a watch and knew who theowner was and refused to return it, you would be considered a tortiousThe Napster CaseNapster was created by a college student who wanted to share music onlinewith friends. He used software that allows anyone to download copies of musicfrom the Internet. This software made it possible for people to log on to Napsterfor free music downloads. Many of the songs are copyrighted.At trial, the court said that Napster must prevent users from downloadingcopyrighted music. The court found that Napster knew the downloading of freemusic from its system violated copyright law and harmed copyright holders.Nevertheless, the type of song trading system used by Napster is not goingto go away. Eventually the music companies will use similar technology tocreate subscriber-based services that will allow musicians to receive payment.(Source: Associated Press, 2/12/01; Cox News Service, 3/3/01)Connect Check the Web sites of major recording companies. See which, if any,have agreements covering the sharing of downloaded music. Create a contractthat would address important legal issues.372 Unit 3: Understanding Consumer Law

ailee. Tortious bailees are responsible for all damage to property intheir possession, regardless of the degree of care exercised and the causeof the damage.Burden of ProofSometimes items are damaged, lost, or stolen when they are in thepossession of a bailee. The bailor is not in a position to know whatcaused the loss. If a bailor brings suit for damages, most courts shiftthe burden of proof to the one who is in the best position to know whathappened: the bailee. As a result, the burden is on the bailee to prove alack of negligence.Special BailmentsCertain types of bailees have special obligations in addition to theduties imposed on all bailees. These include hotel keepers and commoncarriers.Hotel KeepersHotel keepers are special bailees because of the special nature oftheir business. A hotel keeper, also called an innkeeper, is the operatorof a hotel, motel, or inn that regularly offers rooms to the public for aprice. The common law imposed the duty upon innkeepers to accept allpeople who requested lodging if rooms were available. In addition,innkeepers were considered to be insurers of their guests’ property. Withexceptions, this is still the law today.The relationship between a guest and a hotel keeper begins whenthe hotel keeper accepts a person as a guest. This usually occurs whenthat person checks into the hotel. However, a person may become a guestby giving his or her luggage to a hotel porter or to a person operatingthe hotel’s limousine service. Once established, the relationship of hotelkeeper and guest continues until the bill is paid and the guest departs.A transient is a person whose stay at a hotel is uncertain in length.Transients want temporary lodging and may leave at any time. In contrast,a lodger, also called a roomer, is a person staying at a hotel, motel,or rooming house for a definite period of time. Thus the arrangementbetween a rooming housekeeper and a roomer is of a more permanentcharacter than the relationship between a hotel or motel and a guest.Social StudiesAs the global economycontinues to expand, aneed has arisen formutual patent agreementsbetween countries.In general, inventors mustapply for patents in eachcountry where they wishto manufacture, use, orsell their inventions.International efforts havebeen made to assist inthis process. In 1970, thePatent Cooperation Treatywas signed, and in 1977,the European PatentConvention was implemented.These kinds ofefforts have helpedsimplify the process ofobtaining patents.Research ActivityFind out what the PatentCooperation Treaty providesto inventors. Thendetermine what the EuropeanPatent Conventioncreated and why it hasbeen important to internationalrelations. Writea two-page paper thatdiscusses your findings.Example 10. Rhoda Quezada was able to secure a comfortableroom at the Mainliner Motel. After three days’ residence, shedecided that the Mainliner was ideally located for her business.She made arrangements to rent the room for six months at a specialrate. Although Quezada was originally a transient guest, thenew arrangement changed her status to that of a roomer, orlodger.Chapter 17: Personal Property and Bailments 373

RIGHT OF PRIVACYHotel keepers mustrespect their guests’ rightof privacy. For what tort arehotels liable for breach ofthis duty?Duty to Accept All Guests Assuming that rooms are available, a hotelkeeper must accept all people who are not dangerous to the health, welfare,or safety of others and who are able to pay for their lodging. The CivilRights Act of 1964 makes it a crime for hotel keepers to refuse a room toanyone on the grounds of race, creed, color, sex, or national origin.The requirement to provide lodging for those willing to pay has beenthe rule for hundreds of years. It dates back to a time in history whentravel was not safe. Robbers and highwaymen abounded, and it was notsafe to stay on the road overnight. Hotels, or inns, were places of refuge;to refuse guests lodging was to leave them at the mercy of those whowould rob them. Travel is comparatively safe today, but the genuineneed for convenient overnight accommodations remains.Example 11. Bob Freytag sought lodging at the Mainliner Motelbut was refused. The clerk could give no reason for his refusalother than her personal dislike for Freytag’s political affiliation.Freytag was a member of a minority political group that washolding a convention in the town at the time. Freytag could holdthe motel liable for any damages that had resulted from themotel’s failure to accept him as a guest.374 Unit 3: Understanding Consumer Law

Duty of Reasonable Care Hotels and motels must provide a minimumstandard of comfort, safety, and sanitation. Minimum standardsinclude reasonable heat and ventilation, clean beds, reasonably quiet surroundings,and freedom from disturbances by hoodlums, criminals, andpersons of immoral character. Hotel keepers must use reasonable carein protecting their guests from harm. They are responsible for injuriesto guests caused by the negligence of the hotel or its employees.Example 12. A section of carpeting in the hall outside Susan’sroom at the Main Street Motel had torn loose, and the motelhousekeeper had neglected to repair it. Susan tripped over thecarpeting, suffering painful injuries. She may hold the motelresponsible for damages resulting from the injury.Hotel keepers must respect their guests’ right of privacy. Guests areguaranteed exclusive and undisturbed privacy of rooms assigned by thehotel. Interruption of the guests’ privacy through uninvited entry byhotel employees or other guests creates a liability in tort for invasion ofprivacy.Example 13. Eliza stopped at the Ocean Breeze Motel for thenight. After taking a shower, she opened the bathroom door anddiscovered a couple bringing suitcases into her room. The motelclerk had assigned the room to the couple by mistake. Eliza mayseek damages against the motel for invasion of privacy.Hotel keepers have a greater duty of care toward their guests’ propertythan is imposed in the usual mutual-benefit bailment. With exceptions,hotel keepers are held by law to be insurers of their guests’property. The insured property includes all personal property broughtinto the hotel for the convenience and purpose of the guests’ stay. In theevent of loss, the hotel keeper may be held liable, regardless of theamount of care exercised in the protection of the guests’ property.Most state statutes require hotel keepers to provide a secure place,such as a hotel safe, for guests to store valuables. If guests do not usethe hotel safe, the hotel keeper is not liable as an insurer for any loss.Gift of LifeBlood is one of thehuman body’s mostprecious assets. Aroundthe world there is anongoing need for blooddonors. In the UnitedStates, the Red Crosscollects about 50 percentof the blood forthe nation’s bloodbanks. Licensed by theFood and Drug Administration,blood banksscreen blood anddonors for infectiousdiseases, such as hepatitis,AIDS, and malaria.How do you feelabout donatingblood?Get InvolvedCheck with your localRed Cross about volunteeringwith theirBlood Drive campaigns.Find out if there arelaws that prevent somepeople from beingdonors, and writea report.Example 14. Isabel rented a room at the Evergreen Hotel. Shehad in her possession a valuable diamond necklace, which disappearedduring the night. The hotel proved that there was a goodlock on the door and that all reasonable precautions had beenmade to protect the hotel against theft. The hotel escaped liabilitybecause Isabel should have put her necklace in the hotel safe.Chapter 17: Personal Property and Bailments 375

Guests are permitted to keep in their rooms valuables that they wouldordinarily have on their person, such as a watch, jewelry, and a reasonableamount of cash. Hotel keepers are not liable as insurers in thefollowing cases:lllLosses caused by a guest’s own negligenceLosses to the guest’s property due to acts of God (events such asearthquakes, floods, or cyclones) or due to acts of the public enemy(people such as terrorists or wartime enemies)Loss of property because of accidental fire in which no negligencemay be attributed to the hotel keeperHotel Keeper’s Lien and Credit Card Blocking Hotel keepershave a lien on their guests’ property. If a guest cannot pay the bill, thehotel keeper is permitted to take possession of the guest’s property assecurity for payment at some later time.Credit card blocking is a common method used by hotels to securepayment for a room. Under this system, guests are asked for a creditcard number when they register. The hotel then contacts the card companywith the estimated cost of the bill. If the card issuer approves thetransaction, the guest’s available line of credit is reduced by the estimatedamount. This procedure is known as a block (or authorization).The final actual charge for the room will replace the block within a dayor two after the guest checks out.Common CarriersA carrier is a business that transports persons, goods, or both. Acommon carrier is a carrier that is compensated for providing transportationto the general public. As with hotels, common carriers cannotturn away people who ask for their services.Common Carriers of Goods Common carriers of goods are liablefor damages to all goods they ship, regardless of whether they are negligent.However, as Figure 17.3 shows, carriers are not liable whendamages occur as a result of the following:l Acts of Godl Acts of a public enemyl Acts of public authoritiesl Acts of the shipperl The inherent nature of the goods (such as perishable goods,evaporating and fermenting liquids, and diseased animals)In addition, common carriers must accept without discrimination allgoods offered to them for shipment. Discrimination either through theselection of customers or through the use of preferential rates is illegal.376 Unit 3: Understanding Consumer Law

Figure 17.31. Act of God2. Act of a Public Enemy3. Act of Public AuthorityExceptions to Carrier LiabilityLoss or damage as a result of natural causes such asfloods, earthquakes, tornados, and lightning.Loss caused by the seizure or destruction of goodsby military forces of an opposing government orpirates at sea.Loss as a result of seizure by public authorities.INSURERS OF GOODSCommon carriers areinsurers of all goods theycarry with the exceptionslisted here. How are theobligations of commoncarriers similar to theobligations of hotelkeepers?4. Fault of the Shipper5. Nature of the GoodsLoss due to (1) improper packing by the shipper,(2) fraudulent labeling of the contents or concealmentof the true value of the goods, and/or(3) improper addressing so that goods are lost.Loss due to damage particular to the good beingshipped, such as decay (fruits and vegetables),evaporation or fermentation (liquid), or injury(animals).AnActofGodAPublicEnemyAn Actof aPublicAuthorityFaultoftheShipperInherentNatureof theGoodslllllNevertheless, common carriers:Are not required to accept goods they are not equipped to carry.May refuse goods that are inherently dangerous.May refuse goods that they do not haul.May refuse goods that are improperly packaged.May refuse goods that are not delivered at the proper place and time.Common carriers will not be excused from liability for lossesbecause of strikes, mob violence, fire, and similar causes. Labor unionsare required to give notice of impending strikes weeks in advance ofthe strike dates to allow carriers to reject shipments that might be damagedby delays during a strike. The carrier is required to ship goods tothe proper destination, protect them during shipment, and deliver themto the proper person.A common carrier has the right to payment of fees agreed upon forthe shipment of goods. It also has a lien on all goods shipped for theamount of the shipping charges due. Should the shipper and the partyreceiving the goods fail to pay the charges, the carrier may sell the goodsat public sale.Chapter 17: Personal Property and Bailments 377

Under Article 1,Section 8 of the U.S.Constitution, the U.S.Patent and TrademarkOffice (USPTO) ischarged with promotingthe advancement ofscience and the usefularts by providinginventors with exclusiverights to their respectivediscoveries for limitedtimes. Such protection isessential not only to thesciences, but tobusiness: According tothe USPTO, over half ofall U.S. exports dependon some form ofintellectual propertyprotection.Common Carriers of Passengers A passenger is a person whoenters the premises of a carrier with the intention of buying a ticket fora trip. A carrier must use reasonable care in protecting passengers. Thecarrier is not responsible, however, if injuries are not foreseeable orpreventable.A carrier’s duty of care to its passengers ends, in most cases, whenthe passenger leaves the carrier’s premises. An exception exists when acarrier has a continuing obligation for the care of its passengers, as inthe case of a cruise ship. In that instance, the carrier has a duty to warnpassengers of known dangers in places where they may reasonably beexpected to visit while on the cruise.Example 15. Mildred and Michael Kushner took a cruise shipto an island in the Caribbean. The members of the ship’s crewknew that there were areas on the island where tourists weresometimes robbed but did not warn the passengers of this danger.The Kushners were robbed while visiting one of these areas.The cruise ship had violated its duty to warn passengers of dangerand was susceptible to a lawsuit for the Kushner’s injuries.A common carrier must accept all persons who seek passage overits lines, with two exceptions. They may reject passengers when all availablespace is occupied or reserved, and when passengers are disorderly,intoxicated, insane, or infected with a contagious disease.Example 16. Howard Anderson, while in a railway coach, starteda disturbance that was displeasing to all and possibly dangerousto some. As the train slowed to about five miles per hour througha small town, Anderson was forcibly put off. He suffered an injuryand collected damages from the railroad company. The court heldthat although the carrier was justified in removing Anderson, thetrain should have come to a full stop before he was removed.Bumped Airline Passengers When an airline flight is overbooked,the airline must ask for volunteers to give up their seats for seats on thenext available flight. If there are not enough volunteers, other passengersmay be denied a seat. Airlines are required to establish and publishpriority rules for determining which passengers holding confirmedreservation space may be denied boarding on an oversold flight.Passengers who are denied boarding involuntarily, or “bumped,”may be entitled to compensation plus the money back for their tickets.If the airline can arrange alternative transportation that is scheduled toarrive at the passenger’s destination within one hour of the originalarrival time, there is no compensation. However, if the alternate flight378 Unit 3: Understanding Consumer Law

gets to the destination between one and two hours late, the passenger isentitled to a cash payment of up to $200. This amount is doubled if thepassenger is more than two hours late. Instead of cash payment, airlinesmay offer free or reduced-rate air transportation, as long as this rateequals or exceeds the cash payment requirement. Passengers may refuseall compensation and bring private legal action instead.Passengers’ Baggage Carriers are obligated to accept a reasonableamount of passengers’ baggage. Luggage carried aboard an airliner andkept at one’s seat does not generally count toward the weight limits permittedeach passenger, and you may ship excess baggage by payingadditional fees.A carrier is an insurer of all luggage that is checked through thebaggage desk. However, a carrier is not responsible for items that youkeep at your seat or in overhead compartments.Federal rules place limits on the liability of airlines for lost luggage.For travel within the U.S., the maximum liability is $2,500 per passenger.Excess valuation may be declared on certain types of articles.However, some carriers assume no liability for fragile, valuable, orperishable articles.Reviewing What You Learned1. What is a bailment? Who is the bailor, andwho is the bailee?2. Name the three main types of bailments.3. Who has the burden of proof in a bailmentlawsuit?4. What are the hotel keepers’ duties of care totheir guests?5. Common carriers are liable for damages togoods unless the damage comes within oneof five exceptions. Name the exceptions.6. When does a carrier’s duty of care to itspassengers end?Critical Thinking ActivityLiving Bailments The agricultural class atyour school raises small animals such ashamsters, rabbits, and guinea pigs. Everyweekend several students take the animalshome to feed them. Is this a bailment? Whatis the extent of care that applies? Explainyour answer.Legal Skills in ActionAirline Responsibilities Airlines face a publicrelations nightmare almost every day. Planestake off late, flights are cancelled, and luggageis lost. Most people don’t realize that commoncarriers have rules they follow regarding thetransportation of passengers. Using publishingsoftware, create a brochure that outlines theairline’s responsibilities and exceptions. Includeinformation about bumping and baggage.Chapter 17: Personal Property and Bailments 379

CHAPTERASSESSMENTSection 17.1 Personal Property● Personal property is divided into two categories:tangible, which can be touched; and intangible,which cannot be touched. Examples of tangibleproperty include CD players, vehicles, and food.The right to receive money owed to you is anexample of intangible property.● A gift is completed after three requirements aremet: (1) the donor must intend to make a gift;(2) the gift must be delivered; and (3) the doneemust accept the gift. After a gift is completed, theoriginal owner cannot take it back.● Lost property must be returned to the owner ifthe owner can be found. Misplaced property isproperty unintentionally left in a public or semipublicarea, which must be turned over to theproprietor of the place where it is found. Abandonedproperty is property that has been intentionallydiscarded by the owner and may be keptby a finder.● A thief does not acquire good title to items that arestolen and consequently cannot convey good titleto others. Even if a person innocently purchasesstolen goods from a thief or other party, therightful owner still retains title to the goods.● A patent gives an inventor the exclusive right tomake, use, or sell an invention for 17 years. Acopyright is a right granted to an artist toexclusively publish and sell an artistic or literarywork for the life of the artist plus 70 years.Copyrighted material may be reproduced withoutpermission in some instances. The amount anduse of the material must be reasonable and notharmful to the copyright owner. Copying isallowed for literary criticism, news reporting,teaching, school reports, and other research.Trademarks are distinctive marks, names,slogans, and symbols that identify and distinguisha product from other products. A trademarkowner has the exclusive right to use thetrademark for 10 years. A trademark registrationmay also be renewed for additional 10-yearperiods.Section 17.2 Bailments● A bailment occurs when someone transferspossession and control of personal property toanother with the intent that the same propertywill be returned later.● The main types of bailments are: (1) bailmentsfor the sole benefit of the bailor; (2) bailmentsfor the sole benefit of the bailee; and (3) mutualbenefitbailments. The first two types of bailments,bailments for the sole benefit of the bailorand bailments for the sole benefit of the bailee,are called gratuitous bailments.● If an item that was in the possession of a baileebecomes damaged, lost, or stolen, most courtsshift the burden of proof to the bailee, the onewho is in the best position to know whathappened, to prove lack of negligence.● Hotel keepers are required to accept all guestsunless there are no vacancies. They must usereasonable care in protecting guests from harm,and they must respect their guests’ rights ofprivacy. With some exceptions, hotel keepers areliable as insurers of guests’ property, up to anamount set by state statute.● Common carriers of goods must accept withoutdiscrimination all goods offered to them forshipment. Common carriers are liable as insurersof the goods they ship, regardless of whetherthey have been negligent. They are not responsible,however, for damages caused by certaincircumstances beyond their control.● Common carriers of passengers must accept allpersons who seek passage, and they must usereasonable care in protecting their passengers. Inaddition, a carrier is an insurer of checkedluggage, but not carry-on items.380 Unit 3: Understanding Consumer Law

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.donordoneepatentcopyrighttrademarkbailmentbailormutuumreasonable caretortious baileepersonal propertytangible personal propertyintangible personal propertyabandoned propertyintellectual propertygross negligencegratuitous bailmentsslight negligenceordinary negligence1. Prepare a two-minute speech about personal property andbailment. Use at least 12 of the key terms listed above inyour speech.2. Give your speech in front of a classmate, and listen carefullywhile your classmate does the same.3. Compare and contrast your speeches. What terms were used byyour classmate? What are the differences between your speeches?What are the similarities?Visit the UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 17:Personal Propertyand Bailments—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. Who may obtain: (1) patents, (2) copyrights, and (3) trademarks?5. What rights does each of the items listed in question 4 grant, and for how longare these rights granted?6. In what way does a mutual-benefit bailment differ from a gratuitous bailment?7. Cite methods of acquiring ownership of personal property.8. What is the difference between a transient and a lodger?9. What is credit card blocking, and why is it used?10. Under what circumstances may common carriers refuse goods?Chapter 17: Personal Property and Bailments 381

CHAPTERASSESSMENTAcquiring and Evaluating InformationInvite a local hotel keeper to make apresentation to your class. Find out how thehotel keeper interprets the special obligationsthat are imposed on him or her as a bailee. Askabout the following topics:● The duty to accept all guests● The duty of reasonable care● The guests’ rights of privacy● Credit card blocking11. As a class, prepare your questions ahead oftime. After the presentation, write a onepagereport about what you learned.Damaged JacketYour friend Emily lends you her school jacket.While you are walking home, a passing cargoes through a puddle and splashes mud onEmily’s jacket. You want to take good care ofthe jacket, so you wash it. Unfortunately, thejacket shrinks. You neglected to read the tagthat says the jacket is “dry clean only.” NowEmily’s jacket is ruined.Debate12. This situation represents what type ofbailment?13. Were you required to use slight care orgreat care during the time you hadpossession of the jacket?14. What can Emily do if you refuse to buyher a new jacket?For the following cases, give your decision andstate a legal principle that applies.15. Leigh finds a lady’s purse under her chairat a restaurant. She shows the hostess thepurse, and the hostess tells Leigh to keep it.Is the hostess correct? Why or why not?16. Evita copies several pages from somebooks while doing research for a termpaper at the library. She takes the copieshome so that she can continue working onthe paper. Her brother tells her she violatedthe copyright law when she copied thepages at the library. Is he correct? Explainyour answer.17. A shipment of grain is lost when the lakesteamer on which it was shipped collideswith another boat and sinks. Will thecarrier’s claim, that the loss was caused byan act of God, excuse the carrier fromliability? Why or why not?18. Lan purchases an airline ticket, complyingwith all of the carrier’s ticketing, check-in,and confirmation requirements. At theboarding gate, however, she is told that theflight is overbooked, but the carrier willarrange alternate transportation. Must thecarrier do anything else for Lan in thissituation? Explain your answer.19. Mr. and Mrs. Kirby are registered guests atthe Region Hotel. They keep a large sumof cash in their room, even though thehotel provides a safe for guests’ use. If themoney were stolen, would the hotel be heldliable for the loss under most present-daystate statutes? Explain your answer.382 Unit 3: Understanding Consumer Law

In each case that follows, you be the judge.20. TitlePollard found a valuable first edition book that someone dropped on the street. She took the bookhome and placed it with others in her personal collection of first editions. The owner’s namecould not be found in the lost book, and Pollard made no effort to locate the owner. Did she havetitle to the book? Why or why not?Doe v. Oceola, 270 N.W.2d 254 (MI).21. NegligenceJoe Scott left his automobile to be repaired at Purser Truck Sales. The business took theautomobile to Lonz Radford to make the repairs, but the car was demolished while in themechanic’s possession. In a suit brought by Scott against Purser Truck Sales, the trial courtheld in favor of Purser because Scott presented no evidence indicating that Purser wasnegligent. Was the trial court correct? Why or why not?Scott v. Purser Truck Sales, Inc., 402 S.E.2d 354 (GA).Technology and Intellectual PropertyImagine that you and your technologically savvyfriends have designed a unique computer, and thatyou have written software for the new machines.Things turned out so well that you are thinking ofstarting your own company. You have even createda logo for your company and a Web site with acatchy domain name.ConnectUsing a variety of search engines, research andidentify federal and state copyright and trademarklaws. Then complete the following activities.22. What federal or state laws might protect yourright to the unique design of your computer?23. What federal or state laws might protect yourright to the software you have written for thecomputers?24. What federal or state laws might protect yourcompany’s logo and the domain name of theWeb site you’ve created?25. Predict What would you do if you founda watch in the cafeteria at school?26. Connect Look around your classroom.Can you find at least five trademarks?27. Question Do you think credit-cardblocking is the best way to ensure thathotel keepers will get the money that isdue to them? Is it fair to the consumer?Explain your answer.28. Respond Have you ever been bumpedfrom an airline flight? If so, explain thesituation. What type of compensation, ifany, did you receive?Chapter 17: Personal Property and Bailments 383

UNITLaw Workshop:Using Legal ToolsDo You Know How toShop for a Car?In Chapter 16, you learned about thelaws involved in acquiring a vehicle, includingthe application of contract law,applicable consumer protection laws, andthe law of warranties. Automobiles aregenerally very expensive; as such, purchasinga vehicle is an important decision,and you should be familiar with the process.Step A: PreparationProblem: What is the smartest way to shop for a car?Objectives: In this workshop, you will work with a partner to describethe process of shopping for a car.l Research the shopping strategies needed to compile prices, features,and warranties of a car that you wish to purchase.l Investigate different automobile insurance plans for the car that youwish to purchase.l Compare the product information you have gathered.l Describe your final choice and how you came to your decision.384 Unit 3: Understanding Consumer Law

Step B: Procedure1. Choose a partner. Imagine that the two of you have received $15,000to buy a car to share.2. Locate a copy of the Consumer Reports that rates the features andperformance of different cars. Look for cars in your price range.3. Use newspaper ads and the Internet to find prices and features on carsin your price range. Based on your research thus far, narrow yourchoice of cars to two.4. Use the Internet or interview an automobile insurance agent to findout about the cost of coverage for automobile insurance for the cars ofyour choice.5. Contact the seller to find out about the warrantyavailable with the cars of your choice. Are they expressor implied warranties?6. Create a role-play in which one partner is a car dealerand the other is a car buyer. Using what you learnedabout contracts and warranties, make a list of questionsfor the car buyer to ask. Present your role-play to theclass.7. Write a summary comparing the two cars you have beenresearching.Step C: Creating a Model to Compare CarsAs a class, create a chart that shows the information gathered about differenttypes of cars. Create your chart using the categories listed below.Interpret and compare the data, and rank the cars based on prices, features,performance, and warranties.llllllMake/ModelPriceConsumer Reports RatingFeaturesInsurance Cost and CoverageWarranties AvailableStep D: Workshop Analysis ReportLook at the chart and answer the following questions.1. Which car would be the smartest purchase? Why do you think so?2. Would you buy this car? Why or why not?Chapter 17: Personal Property and Bailments 385

UNITDenny v. Ford Motor Co.New York Court of Appeals662 N.E.2d 730 (NY)Landmark CaseIssue Is a claim of strict product liability identical to a claim of breach of impliedwarranty liability, making it inconsistent to find a defendant liableunder one cause of action but not the other?Factsacts Nancy Denny was injured when her FordBronco II rolled over after she slammed herbrakes to avoid hitting a deer. She sued FordMotor Company, asserting claims for negligence,strict product liability, and breach of implied warrantyof merchantability. Denny introduced evidenceshowing that the vehicle was moredangerous than ordinary passenger automobiles,but Ford argued that the design features werenecessary for the vehicle’s off-road capabilitiesand that the vehicle was not intended to be soldas a conventional passenger vehicle. The juryfound that the Bronco II was not “defective” forpurposes of strict product liability theory, but thatthe defendant was still liable for breach of warrantyof merchantability. On appeal, Ford arguedthat the two claims are the same and that thejury’s verdict was inconsistent.Opinion The New York Court of Appealsfocused on the development of product liabilitylaw as the courts tried to keep pace with a radicallychanging economic landscape. It pointed out thattraditionally the judiciary had relied on contractualwarranty theories as the only way of awarding economicrecovery for injuries that people suffer as aresult of defective goods. This approach made goodsense in an economic world in which most386 Unit 3: Understanding Consumer Lawtransactions occurred in a marketplace in whichbuyers and sellers interacted on a personal basis. Insuch cases, it was relatively easy to establish the requirementof a relationship of privity and to recovercompensation for injuries.However, the court recognized that as thefundamentals of the economy changed, courtshad to change with them if injured parties wereto recover damages: “Eventually, the contractuallybased implied warranty theory came to beperceived as inadequate in an economic universethat was dominated by mass-produced productsand an impersonal marketplace.” As a result,courts began to realize the need for a new, moreflexible tort cause of action.Development of Strict Product LiabilityThe new cause of action was called the strictproduct liability. This cause of action “significantlydiminished the need to rely on the contractuallybased breach-of-implied warrantyremedy as a means of compensating individualsinjured because of defective products.” While theapplicable principles and available defenses differ,the court reasoned that there is a great dealof overlap between the substantive aspects ofthe two causes of action. The court even admittedthat it had earlier observed, in dictum, that

“strict liability in tort and implied warranty in theabsence of privity are different ways of describingthe very same cause of action.”Nevertheless, the court explained that the tortcause of action did not completely replace the olderbreach-of-implied warranty cause of action and thatthey were not identical in every respect. In rulingagainst Ford, the court emphasized two points:• The warranty approach is still alive, andits vitality is evidenced by its “retention andexpansion in New York’s version of theUniform Commercial Code.”• The core element of “defect” in each cause ofaction is subtly different given its differenthistorical and doctrinal origins.Distinguishing the Causes of ActionIn distinguishing the two causes of action,the court pointed out that under New York law,injury due to a design defect was actionable understrict product liability “if the product is not reasonablysafe.” The existence of a design defect isdetermined under New York lawby asking whether “if the designdefect were known at the time ofmanufacture, a reasonable personwould conclude that the utility ofthe product did not outweigh therisk inherent in marketing a productdesigned in that manner.” Thisanalysis requires a weighing ofthe product’s dangers against itsoverall advantages.In contrast, the UCC-basedconcept of a “defective” productrequires an inquiry only intowhether the product at issue is“fit for the ordinary purposesfor which such goods are used”(UCC 2-314[2][c]). This analysisfocuses on the expectationsof a product when used in “thecustomary, usual, and reasonably foreseeablemanners.” Under this cause of action, an injuredparty can recover by showing that the product wasnot minimally safe for its expected use “withoutregard to the feasibility of alternative designs orthe manufacturer’s ‘reasonableness’ in marketingit in that unsafe condition.”As a result of these differences, the court explainedthat “defect” analysis in strict product liabilityactions are more concerned with socialpolicy and risk allocation. In contrast, “defect”analysis in breach-of-implied-warranty actionsoriginates in contract law and focuses upon a purchaser’sdisappointed expectations.Holding Given the historical and doctrinaldifferences between the two causes of action, thecourt ruled against Ford and held that “under thecircumstances presented here, it is possible to beliable for breach of implied warranty even thougha claim of strict product liability has not been satisfactorilyestablished.”1. Why was Ford’s argument flawed?2. What was the primary weakness of the breachof warranty theory in product liability cases?3. When may a design defect be actionable undera strict product liability theory?4. What is the New York standard for determiningthe existence of a design defect?5. What inquiry must be made to determinewhether a product is defective under the UCC?6. How do the origins of breach of impliedwarranty actions and strict product liabilityactions differ?Go to the Understanding Business and Personal Law Web Site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 17: Personal Property and Bailments 387

UNITUNIT OVERVIEWMost of us must playan active, productiverole in the workplaceto make a living andsupport ourselves or ourfamilies. Agency relationshiplaws andemployment laws helpprotect individual’srights in the workplace.In this unit, you willlearn about these lawsby studying the followingtopics:l Creating an agencyl Agency relationshipsand their terminationl Employment lawand employmentprotectionl Equal opportunity

Being an Agentand Getting a JobWorking the Night Shift You area 17-year-old waiter at a small diner.Recently, your manager asked you tostart working the night shift, from6:00 P.M. to 2:00 A.M. The child laborlaws in your state do not allowstudents under the age of 18 to workpast 11:00 P.M.In your Justice Journal, writeabout what you would do in thissituation.To get the most out of your reading:Predict what the section will beabout.Connect what you read with yourown life.Question as you read to make sure youunderstand the content.Respond to what you’ve read.Unit 4: Being an Agent and Getting a Job 389

CHAPTERCreation of an AgencyUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal Law Website at ubpl.glencoe.com and click onChapter 18: Creation of an Agency—Chapter Overviews to preview thechapter information.

The Opening SceneStarting in this chapter, we meet the Gant family.Broderick and Keeley Gant own a farm in rural Pennsylvania.They have four children: Caterina, 17, whowants to be a reporter for the local newspaper; Lazzaro,16, who wants to work on the farm; Matilda,14, who wants to be a surgeon; and Betina, 12, whojust wants to be a kid. The scene opens at the storefrontoffice of The Greensburg Gazette. Mack Pellis,editor of the paper, is talking to Caterina.Hook, Line, and SinkerMR.PELLIS: So why do you want to be a reporter?CATERINA: I guess because I like to write and I liketalking to people.MR.PELLIS: That’s a good start, but it takes a lot moreto be a reporter.CATERINA: Like what?MR.PELLIS: Well, like having a nose for news andbeing able to find the “hook” in a story.CATERINA: The hook?MR.PELLIS: A hook pulls the reader into the story.CATERINA: You mean, like something different orunusual?MR.PELLIS: That’s the idea.CATERINA: That doesn’t sound too hard.MR.PELLIS: Sometimes it’s not, but sometimes it is.CATERINA: If you give me a chance, I bet I can find ahook in just about anything.MR.PELLIS: Okay, we’ll see. I’ll hire you on a trialbasis for one month.CATERINA: Great!MR.PELLIS: Your first assignment is to watch theoffice while I go over to the courthouse.CATERINA: What should I do?MR.PELLIS: Just watch the office. Nothing else.CATERINA: Right, chief.MR.PELLIS: And don’t call me chief!(After Mr. Pellis leaves, Mrs. Tui comes onto theoffice.)MRS.TUI: Where’s Mr. Pellis?CATERINA: At the courthouse.MRS.TUI: Can you take this ad copy and mypayment?CATERINA: I’m not supposed to.MRS.TUI: Well, I can always go to The Tribune.CATERINA: Okay, I’ll do it.(Mr. Pellis returns, and Caterina tells him sheaccepted the ad.)MR.PELLIS: I told you not to do anything!CATERINA: But she was going to go to The Tribune.Plus, she paid cash.MR.PELLIS: Really? I guess you’re forgiven.(Just then the phone rings. Mr. Pellis answers. Whenhe hangs up, he is clearly distressed.)CATERINA: What’s wrong?MR.PELLIS: That was my lawyer. The deliveryservice that handles my out-of-state edition had anaccident, and I’m being sued.CATERINA: Now there’s a hook for a story!1. How is an agent appointed?2. Can a nonagent bind a principal to a contract?3. Can a principal validate a contract made by anonagent?4. Can a person injured by an employee sue theemployee’s employer?Chapter 18: Creation of an Agency 391

l How to explain thenature of an agencyrelationshipl How to distinguishbetween a servantand an independentcontractorl How to explain thenature of contractliabilityl How to explain thelegal doctrine ofrespondeat superior inrelation to tort liabilityIdentifying the nature ofan agency relationshipwill help you know yourrights and duties in sucha situation. Understandingthe doctrine ofrespondeat superior willhelp you protect yourselfagainst tort liability in avariety of situations.l agencyl agentl principall masterl servantl independentcontractorl respondeat superiorAgencyRelationshipsAgency and Similar RelationshipsNone of us have the ability, education, training, experience, andbackground to do everything that must be done in our personal and professionallives. We frequently need to accomplish things that requireexpertise beyond our own abilities. An agency relationship lets us actthrough other people to accomplish tasks that might be difficult orimpossible to do on our own. The law governs these relationships.The term agency describes a relationship in which one person, calledan agent , represents another person, called a principal , in some sortof business transaction with a third party (see Figure 18.1). An agentcan negotiate business deals, enter into contracts, and perform a varietyof other business tasks for the principal, who is normally legally boundby those agreements.The terms agent and principal, however, are used freely in the businessworld to describe different types of relationships, and not all of therelationships described using these terms are true agency relationships.However, the name given to a relationship has little legal effect. Theessence or true nature of the relationship is what matters to a court.Principal-Agent RelationshipThe principal-agent relationship is a true agency relationship. Theparty who needs a representative is the principal, or the client; the partywho becomes that representative is the agent. The relationship isFigure 18.1PrincipalPerson for whomthe agent actsPrincipal-Agent RelationshipAgentPerson who acts forprincipal in businesstransactions withthird partiesPRINCIPAL-AGENT RELATIONSHIPAgents have the right to make independent decisionsjust as if they were making transactions on their ownbehalf. Are agents employees?Third PartyPerson the agentdeals with onbehalf ofthe principal392 Unit 4: Being an Agent and Getting a Job

USING AN AGENTMost people deal with merchants directly when buyinggoods and services, especially important items like houses,or expensive goods like boats. When might someone wantto deal with merchant indirectly through an agent?consensual because both parties agree to it. However, the relationshipis not always contractual. An agent can represent a principal withoutreceiving consideration for his or her efforts. An agent who receives noconsideration is called a gratuitous agent. The relationship between theagent and the principal is also fiduciary in nature, which means that itis based on trust between the agent and the principal.An agency relationship is very powerful. Legally, we distinguish anagent from other types of representatives by noting that the agent has thepower to transact business for the principal. When someone acts for aprincipal, the legal effect is the same as if the principal had acted. Someagents, but not all, are employees.Example 1. Patricia Thompson asked Al Albrecht to sell her carwhile she was on vacation. When he agreed to become her agent,Al gained the power to legally bind Patricia to a sales contractfor her car. This agreement formed a consensual relationshipChapter 18: Creation of an Agency 393

voluntarily agreed upon by both parties. It also is a fiduciaryrelationship because Patricia has placed her trust in Al to negotiatea deal for her. Finally, because Al is not being paid for representingPatricia, he is a gratuitous agent.Master-Servant RelationshipThe terms master and servant are no longer used in our everydaylanguage. Nevertheless, these terms identify a specific type of relationshipin the law. A master is a person who has the right to controlthe conduct of another who is performing a task for the benefit of themaster. A servant is a person whose conduct in the performance of atask is subject to the control of another. If a servant has the power toconduct business transactions for the master, he or she is also an agent.Example 2. Mary Torino, an elderly widow, lives alone. SallySexton, Mary’s neighbor, cleans house for Mary once a week.Sally knows that Mary is very fussy about her house, so shecleans exactly as directed. Sally also knows that Mary cannotafford to pay her, so she never asks for nor receives any moneyfrom her neighbor. Sally is a servant without being an employee.Proprietor-Independent ContractorRelationshipIn the proprietor-independent contractor relationship, anindependent contractor works for but is not under the control of aproprietor. Thus we may say that the proprietor is a person who choosesto have someone perform a task on his or her behalf but has no controlover the way that task is carried out.The only control over the activity ofthe independent contractor is the right to specify a particular outcome.Example 3. Ronnie Hampton purchased a home with a threeacrelot. Because Ronnie’s job required him to travel, he had littlefree time to maintain his property. He hired Mike Crawford, aprofessional gardener, to care for his lawn. Ronnie’s only orderto Mike was to make his lawn the best-looking lawn in town.Mike did his own work with his own tools at his own pace andat a time of his own choosing. He is an independent contractor.Independent contractors carry out many kinds of tasks. Some contractors,such as plumbers, delivery truck drivers, and electricians, performphysical labor. Other contractors, such as writers, musicians,computer programmers, and healthcare professionals, provide services.Independent contractors are typically not agents, but there are someexceptions.394 Unit 4: Being an Agent and Getting a Job

Law LibrarianLeah Sandwell-Weiss has lived two lives in the law.Several years ago, she retired as a major in the Air Forceafter serving 14 years as a military judge advocate. Today,she is a law librarian at the University of Arizona in Tucson.“The Air Force sent me to law school after I had beenworking as a librarian,” Sandwell-Weiss says. “It was fascinating work, and Iwas stationed at very interesting places.”When Sandwell-Weiss was ready for a new career, working in a law libraryseemed to be the perfect fit. Today, she serves University of Arizona Law Librarypatrons as a reference librarian.“I help people find specific answers to their questions or direct them tosources about their more general research,” she says. “One thing I can’t do isoffer legal advice.”Sandwell-Weiss says that sometimes people who are not lawyers don’tunderstand that she can’t answer questions such as, “What does this mean?”“That’s something a lawyer should answer for his or her client,” she says. “Ido, however, point patrons in the right direction so they can continue to researchand understand the law better.”In addition to serving the public, Sandwell-Weiss assists students, facultymembers, and lawyers who are researching legal points. She also investsconsiderable time educating herself about the latest Internet legal resources.SkillsPersonalityEducationInterpersonal, research, computerLikes solving mysteries, visionary but practical, likes technicalaspects of workLaw librarians at universities usually need a law degreeand a master’s degree in library science. Law librarianswho work in private firms or county law libraries need onedegree or the other.For more information about law librarians, visit ubpl.glencoe.com or yourpublic library.Example 4. Pittsburgh Petroleum spent more than six monthstrying to collect a fuel bill owed by Transunion Transport beforehiring a collection agency, Andrews Intercontinental Collections(AIC). Pittsburgh Petroleum gave AIC only one order: to collectthe money due. Because AIC is to conduct a business transactionChapter 18: Creation of an Agency 395

In the early developmentof agency law,the principal was alsoknown as the “constituent”and the “chief.”for Pittsburgh, the collection agency is an agent. However,because AIC may decide on its own how to make that collection,AIC is also an independent contractor.Why Are These DistinctionsImportant?Finding out the true nature of a relationship can be crucial in determiningliability. Recall that the labels themselves—principal-agent,master-servant, and proprietor-independent—are not controlling. Callinga servant an independent contractor does not change the relationship ifthe master still controls the servant’s conduct. Figuring out the truenature of the relationship can be crucial in determining liability.Contractual LiabilityA principal is generally bound to the terms of a contract made by anagent unless the agent has no authority to enter the contract. Furthermore,unless a servant is also an agent, he or she does not have the authorityto negotiate contracts for the master. Also, an independentcontractor would have no power to bind the proprietor to a contract, unlessexpressly permitted to do so. This rule applies even if the contractbenefits the proprietor or is needed to carry out the independent contractor’sassigned task.Example 5. In Example 3, Ronnie Hampton hired Mike Crawfordto care for his lawn. Mike decides he should reseed a portionof the lawn. He negotiates a deal with Taylor’s Treehouse topurchase several bags of grass seed on credit. He includes thecost of the seed in his bill when Ronnie pays him. Later, however,Mike fails to pay the money he owes to Taylor’s. The supplystore cannot seek payment from Ronnie, even though Mike purchasedthe seed for Ronnie’s lawn. The contract did not involvethe homeowner.Keep in mind, however, that it is possible for an independent contractorto also be an agent. This situation is illustrated in Example 4,where Pittsburgh Petroleum hired AIC to collect the overdue debt fromTransunion. Another example of an independent contractor who worksas an agent is a real estate broker.Example 6. Penelope Petrovsky, who lived in San Diego, founda new job at an advertising agency in Sacramento and had to startimmediately. Because she needed to sell her San Diego condominiumquickly, Penelope hired the Intra-California Agency(ICA) to negotiate the sale. The only direction she gave was to396 Unit 4: Being an Agent and Getting a Job

find a buyer who would pay $250,000. ICA negotiated a dealwith Ted Martineau, who agreed to that price. In this situation,ICA is both an independent contractor and an agent.Tort LiabilityThe distinction between the master-servant relationship and theproprietor-independent contractor relationship is also important in determiningtort liability (see Figure 18.2). All people are responsible fortheir own tortious conduct. Sometimes, however, the person who hiredthe tortfeasor may also be held liable. This situation is known as vicariousliability, and it is founded on the principle of respondeat superior , orlet the master respond. Typically, respondeat superior applies to masterservantrelationships because the master has the right to control thephysical conduct of the servant. In contrast, a proprietor usually doesn’thave that right with an independent contractor.The right to control the physical conduct of the servant is not theonly distinction between these relationships. The court may considerseveral other factors by asking any of the following specific questions:Figure 18.2Servantcommits tortagainstthird partyBoth masterand servantare liableYesWasservant actingwithin scope ofauthority or course ofemployment?Master may haveto pay damagesunless servantagrees to payRESPONDEATSUPERIORThis chart shows theflow of master/servanttort liability under therespondeat superiordoctrine. How do thecourts defend the useof respondeatsuperior in tort cases?NoOnly servantis liableIf master is suedand is forced to paydamages, then heor she can seekindemnificationfrom servantChapter 18: Creation of an Agency 397

llllllllDoes the hiring person supply the tools for the worker?Is the worker paid by the hour?Does the hiring person set the worker’s hours?Is the worker employed only by the person responsible for hiring?Is the business of the worker the same as the business of the hiringperson?Does the worker lack authority to hire or fire other workers?Does the worker perform his or her tasks in a highly supervisedenvironment?Is very little skill required to perform the worker’s job?The more questions that require “yes” answers, the more likely it isthat a master-servant relationship exists. If a master-servant relationshipis determined to exist, the master could be liable for the servant’stortious conduct. Conversely, the more “no” answers, the more likely itis that a proprietor-independent contractor relationship exists.Example 7. In The Opening Scene, Mr. Pellis hired a deliveryservice to transport his out-of-state edition. The truck collidedwith a car en route. The driver of the car wants to sue Mr. Pellis,INDEPENDENTCONTRACTORSHome owners frequentlyhire workers to make repairsor improvements to theirhomes. Are such workersconsidered independentcontractors?398 Unit 4: Being an Agent and Getting a Job

“Pay Up”Being an independent contractor has its advantages. Independence iscertainly among these advantages. Independent contractors have full controlover the way an activity is carried out, as long as the particular outcome isachieved. An independent cotractor may choose his or her own hours. Mostindependent contractors also play a critical role in determining how much theywill be paid for their services. However, getting paid by the proprietor isn’talways easy for independent contractors, even when they have satisfactorilycompleted the work.Unlike regular employees, independent contractors do not enjoy a fullrange of government protection. They are generally at the mercy of the proprietorwhen it comes to getting paid. Some proprietors are deliberately slowto pay, and others simply refuse to pay.Informal methods that an independent contractor may use to attain paymentfrom an unethical proprietor include being a “squeaky wheel.” Letters, phonecalls, e-mail messages, and personal meetings are just a few ways to get yourpoint across. More formal ways of proceeding include suing the proprietor insmall claims court or municipal court. The type of court depends on the amountof money involved. Sometimes an independent contractor agreement willcontain an arbitration clause, which takes the place of a court proceeding andis binding on the parties.Evaluate What factors might you consider in determining how much to chargefor your work as an independent contractor?who has a contract with the delivery service. Is the deliveryservice an independent contractor or a servant?In Example 7, Mr. Pellis does not have the right to control the physicalconduct of the delivery service drivers. As a result, the service is anindependent contractor. However, Mr. Pellis’s lack of control over thephysical conduct of the service is not the only factor that proves thisrelationship is not a master-servant arrangement. By applying thequestions listed previously, you can gain a more complete picture of therelationship between Mr. Pellis and the delivery service. Remember, theChapter 18: Creation of an Agency 399

Talent AgentTo get a job in television,film, or radio,you need to hiresomeone to representyou. Your representative,or agent, shouldbe affiliated with alicensed talent agency,such as William Morrisin New York, New York,or Creative ArtistsAgency in Beverly Hills,California. Experiencein stage work will alsohelp you land a job inthe entertainmentindustry. What do youthink are the charactertraits of a successfulagent?Get InvolvedJoin your high schooldrama club and participatein plays. Locatelocal communitytheaters and audition.more of these questions that the court can answer “no,” the more likelyit is a relationship between a proprietor and an independent contractor.l Does Mr. Pellis supply the tools for the worker? No. The deliveryservice supplies drivers with the “tools of their trade” (the deliverytrucks).l Are the drivers paid by the hour? No. In this situation, Mr. Pellispays by the delivery rather than by the hour.l Does Mr. Pellis set the drivers’ hours? No. This issue is determinedby the delivery service.l Are the drivers hired to work for Mr. Pellis only? No. The driverswork for a number of different customers.l Is the business of the driver the same as the business of Mr. Pellis?No. The driver is in the delivery business; Mr. Pellis is in thenewspaper business.l Do the drivers have any authority to hire or fire other workers?Unclear. This determination would depend on the authority of aparticular driver. Clearly, however, the delivery service has theauthority to hire and fire its workers; Mr. Pellis does not.l Are the drivers closely supervised? No. The drivers are relativelyindependent.A close examination of the relationship between the delivery serviceand Mr. Pellis reveals that the delivery service is an independent contractor.Mr. Pellis is not liable for any injuries or property damage inthe accident involving the delivery truck. However, if the same questionsabout the relationship between the delivery service and its driverswere asked, it would be discovered that the delivery service is a masterand the driver is a servant.A master may escape vicarious liability, however, if the servant wasnot acting within the scope of employment. When the tort was committed,the worker must have been performing the task for which he orshe was hired. Suppose the driver had taken a side trip to a store to runan errand without the permission or knowledge of the supervisor. Whilebacking out of a parking space at the store, the driver knocked over alarge sign that fell onto a parked car, shattering the car’s windshield andinjuring a family pet waiting in the vehicle. The driver’s employer couldescape liability because the side trip is not within the scope of the driver’semployment.Vicarious liability is usually limited to negligence rather thanintentional torts. There are exceptions, however. For example, a departmentstore may be liable if a security guard injures a suspected shoplifterwho is resisting capture.Just as a master can sometimes be liable for the torts of a servant, aproprietor can also be liable for the torts of an independent contractor.400 Unit 4: Being an Agent and Getting a Job

For example, a proprietor is liable if he or she is negligent when checkingqualifications and hires someone who is incompetent. In this situation,called negligent hiring, the proprietor will be held liable should an innocentthird party be injured by the negligence of the incompetent independentcontractor.A newly emerging doctrine, similar to negligent hiring, is negligentretention. This situation arises when a proprietor fails to fire a contractorafter learning that he or she is incompetent. If the contractor injuressomeone, the proprietor may be liable.Another situation that can open a proprietor to liability arises whenan independent contractor has been hired to perform a task that involvesa nondelegable duty. A nondelegable duty is one that the proprietor cannotpass off to another party.Example 8. To cut down on expenses, Rochester Railway decidedto hire an independent maintenance firm, Ilium Company (IC),to service its railway system. IC made several serious errors thatcaused a train wreck injuring several people. The injured partiessued both IC and Rochester. Even though Rochester could showthat IC was an independent contractor, it could not escape legalliability for the crash. A common carrier, such as a railroad, cannotdelegate its duty to maintain a system that protects the safetyof its passengers.Reviewing What You Learned1. What is an agency relationship?2. What is the difference between a servant andan independent contractor?3. What is the nature of contract liability?4. What is the legal doctrine of respondeatsuperior?Critical Thinking ActivityTort Law Why does the law permit an injuredparty to bring a tort law case against both anemployee and his or her employer?Legal Skills in ActionAgencyYour friend, Louis, has just hired Francoas his delivery driver. One afternoon while heis supposed to be making a delivery on the westside of town, Franco decides to take a 15-miledetour to the east side to pick up his drycleaning. While entering the parking lot of thedry cleaners, Franco makes an illegal turn andcollides with a police car. Louis fears he willbe liable not only for Franco’s traffic ticket butalso for all damages to the police cruiser. Writea letter to Louis in which you explain why youthink he won’t be liable for the traffic ticket orthe damage to the police cruiser.Chapter 18: Creation of an Agency 401

l How to recognize thecreation of an agencyrelationship byagreementl How to recognize thecreation of an agencyrelationship byoperation of lawl How to distinguishbetween a generalagent and a specialagentl How to distinguishamong a subagent, acoagent, and anagent’s agentKnowing when an agencyrelationship has beencreated will help youmake sound judgments inbusiness activities.l general agentl special agentl agency by estoppell ratificationCreation and Typesof AgentsTypes of AgentsLike most relationships in the law, there are several ways to createan agency relationship. Similarly, there are several types of agents. Thetype of agent with whom a third party deals depends on the agent’sauthority and his or her relationship with other similarly situated agents.We can distinguish between types of agents in two ways. We examine(1) the extent of the agents’ authority, and (2) how the agents relate toone another.Extent of AuthorityThe two types of agents are distinguished on the basis of extent ofauthority. General agents have more authority than special agents.General Agent A person who has been given authority to performany act within the scope of a business is a general agent . The managerof a department store, for instance, would be a general agent. Generalagents are sometimes called discretionary agents because they havethe right to use their judgment or discretion in all matters pertaining tothe agency. General agents may decide to hire or fire employeesaccording to the needs of the business.Example 9. Allen Ambrose was the managing editor of the TiroTelegraph. When the Gulf War began, he hired several newprinters so the newspaper could put out an extra edition. Whenone of the presses broke down, Ambrose called a mechanic torepair the damage. As managing editor of the paper, he had theauthority to make decisions such as these and to bind hisemployer Paul Winfield, the publisher, to the contracts thatresulted from those decisions.Special Agent A person who is employed to accomplish a specificpurpose or to do a particular job is a special agent . Sales representativesare special agents. They can sell and pass title to specific goodssold, but that is the extent of their authority. They can’t make purchasesin the principal’s name, and they usually aren’t authorized to collectpayment unless they actually deliver the goods to the buyer. Other402 Unit 4: Being an Agent and Getting a Job

special agents are hired for other purposes. The real estate broker mentionedin Example 6 is a special agent.How Agents Relate to One AnotherAgents may be classified according to the nature of their relationshipswith other agents.Subagents A subagent is an agent lawfully appointed by anotheragent. A limited number of situations permit an agent to legally appointa subagent:l A principal may give an agent express power to appoint subagents.l Agents can usually appoint subagents to perform routine or simpleclerical tasks.l An agent faced with an emergency can generally appoint a subagentto act in his or her place.l An agent’s authority to appoint subagents is often recognized in thebusiness world as part of the power that goes with being an agent.Example 10. Andy Porter is hired to be general manager of theMonarch Hotel. The day after he starts the job, the hotel workersgo on strike and Andy can’t get in touch with Patricia Arden, theowner of the hotel. Andy is nervous about what lies ahead forthe hotel and has little legal expertise. Uncertain of the hotel’slegal responsibilities, Porter hires Oscar Spencer, an attorney, tonegotiate a contract with the union.The new manager can argue he has legal authority to hire Spenceron two grounds. First, the emergency nature of the strike made itabsolutely necessary to hire the attorney. Second, hiring an attorney toprotect the hotel’s legal rights is a power that all hotel managers havebecause of their position as general agents.An UndisclosedThird PartyNot all agency relationshipsmust be disclosedto third parties. Imaginethat a “famous” writer,George Bowlegs, waslooking for a new homein a small suburb ofTucson, Arizona. Bowlegshired a real estateagent, Janelle McCain,to find and negotiatea price for a housemeeting certain criteria.George asked Janellenot to reveal that shewas representing him.George was afraid thatif the seller knew theagent representedsomeone famous, theprices of the real estatewould go way up. AreGeorge’s actions ethical?What would you do ifyou were George?Agent’s Agent If an agent has no power to appoint a subagent butdoes so anyway, he or she has appointed an agent’s agent. Suppose inExample 10 that there had been no strike and Patricia Arden hadexpressly forbidden Andy Porter to hire anyone. The hiring of OscarSpencer to negotiate the union contract would not then have beenauthorized. Andy would have hired an agent’s agent. The difference issignificant. If the lawyer were merely an agent’s agent, he could notbind the owner of the hotel to any deal he might negotiate with the union.If Patricia did not want to honor the agreement, she would not have to.Furthermore, she would not have to pay the attorney. That responsibilitywould fall on Andy’s shoulders.Chapter 18: Creation of an Agency 403

Coagents If the principal hires two or more agents, he or she has createda coagent situation. Coagents are subject to the authority of the principalbut are not subject to one another unless the principal so authorizes.All authority in this case flows from the principal to the agents.How Agency RelationshipsAre CreatedGenerally, any business you can transact personally can also be transactedthrough an agent. Because agents act not for themselves but fortheir principals, anyone can be appointed as an agent. A principal-agentrelationship can develop in a number of ways.By AgreementMost agency relationships are created by agreement. These agreementsare usually, but not always, contracts. No contract exists if anagreement does not involve consideration. As noted earlier, an agencyagreement that does not involve a contract is called a gratuitous agency.Example 11. Perry Chaney was getting married on Saturday andhad several errands to run. He asked his best man, Arnie Alvarez,to pick up his rented tuxedo and to buy the flowers for thewedding. Arnie agreed to do these things, and no considerationwas given. No binding contract was created, but an agencyFrom Employee-Agent toIndependent Contractor on the NetInsurance companies, like many other businesses, seek to cut costs whilemaintaining a level of quality. One way that insurance companies reduce costs isby using the Internet to sell policies. Insurance companies are also encouragingemployee-agents to become independent contractors. In this way, insurancecompanies reduce their work force and avoid the expenses normally associatedwith having an employee on the payroll. At the same time, policies sold overthe Internet or through an independent contractor are just as binding aspolicies sold by an employee-agent. (Source: InternetWeek, January 26, 2001)Connect Visit the Web site of the U.S. Department of Labor. Find out howmany high-tech and Internet workers are independent contractors.404 Unit 4: Being an Agent and Getting a Job

elationship existed because Arnie was authorized to carry outtransactions for Perry.Many agreements are express, but others are implied. An expressagreement is one that involves clearly stated terms of agreement. If theparties draw up some sort of written contract, they have created a powerof attorney. At other times, however, the parties may imply by words oractions an agreement to the agency relationship.Example 12. Stan Williams is Paula Paxton’s chauffeur. A writtenagreement says his only duty is to drive Paula and her familyaround town. One morning, Paula tells Stan to take care of hercar while she vacations in Europe for a few weeks. Stan agreesto do so. Stan is now an agent. His original agreement was simplyto act as a chauffeur, which made him a servant but not an agent.However, Paula’s orders have changed his status. The ordersimply that Stan now has the power to make certain types of contractsin Paula’s absence, such as arranging for maintenance,hiring mechanics, and buying gas.The agency agreement does not have to be in any particular form andcan be oral or written. However, the equal dignities rule presents anexception to this standard. If the Statute of Frauds requires that a contractnegotiated by an agent be in writing, then the contract creating theagency relationship must be given “equal dignity” by also being madein writing. When a formal writing is used to confer authority on anagent, it is known as a power of attorney.By Operation of LawAgency relationships may be created automatically by operation oflaw. Sometimes the law creates an agency relationship by circumstance; atother times agency relationships arise through enactment of specific laws.Law and AcademicsA power of attorney is awritten instrument bywhich one person, aprincipal, appointsanother as agent andconfers the authority toperform certain specifiedacts on behalf of theprincipal. This power mayinclude the authority toenter into transactions onbehalf of the principal.Research ActivityPower of attorney can begranted in numerouscircumstances and givethe appointed agent avariety of methods forconducting transactions.Using the Internet,library, or other resource,research some of thecircumstances in whichthe power of attorneymight be granted and themethods in which I mightbe used to conducttransactions.Agency by Estoppel When the law creates an agency relationshipby circumstance, it is called agency by estoppel , also known asapparent authority. The circumstances usually involve some sort of communicationbetween the principal and a third party, which leads the thirdparty to reasonably believe that a nonagent is an agent.Example 13. In The Opening Scene, Mr. Pellis had told Mrs. Tuithat someone would be in the newspaper office to accept her ad.Because Caterina was there when she walked in, Mrs. Tui couldreasonably assume Caterina was Mr. Pellis’s agent. As a result,the newspaper publisher could not deny Caterina’s authority totake the advertising copy and the money from Mrs. Tui.Chapter 18: Creation of an Agency 405

AGENCY BY ESTOPPELOften agency relationships are created bycircumstance. When is it reasonable to assumethat someone in a store has agency authority?When might making this assumption beunwise or unreasonable?Mr. Pellis told Mrs. Tui that someone would be in the office at noon.He said something that led her to wrongly conclude that Caterina wasan agent. Agency by estoppel can also arise by actions or appearancesalone. For example, when a retail establishment opens, the owners arecommunicating to the public that salespeople will be present to helpthem. If an impostor enters and pretends to be a salesperson, the storewill be liable for any loss incurred by an innocent third party duped bythe phony salesperson.By Statute Sometimes a state legislature decides that certain situationsjustify automatic creation of agency relationships by statute.Usually, the state has some special interest to protect. For example, inmany states the law requires corporations to appoint an agent who canbe served with a complaint and summons in case the corporation is sued.406 Unit 4: Being an Agent and Getting a Job

If a corporation’s appointed agent leaves the state, the secretary of stateautomatically becomes its statutory agent for service of process. Thestate has a special interest to protect in these cases: It wants to make certainthat its citizens have a way to sue a corporation that has injured them.By RatificationAt times a person may act as an agent without the authority, or anagent who has the authority to negotiate one type of contract overstepsthat authority and negotiates another type of contract. Ratificationoccurs if the principal, with full knowledge of the facts, accepts the benefitsof the unauthorized act. The act is thereby approved or ratified. Aprincipal’s failure or refusal to ratify the unauthorized act makes thewould-be agent or the agent who has overstepped his or her authorityliable to the third party.Example 14. In The Opening Scene, Caterina was not Mr. Pellis’sagent nor was she an agent of his newspaper when she tookmoney from Mrs. Tui to pay for advertising. However, Mr. Pellisis bound by this transaction because he ratified the agreementbetween Caterina and Mrs. Tui when he accepted Mrs. Tui’smoney from Caterina.Reviewing What You Learned1. How are most agency relationships created?2. How are agency relationships created byoperation of law?3. What is the difference between a generalagent and a special agent?4. What are the differences among a subagent,a coagent, and an agent’s agent?Critical Thinking ActivityTypes of Agents Why is it important to be ableto distinguish between a general agent and aspecial agent?Legal Skills in ActionApparent Authority Tony believes that Sara isa salesperson working in the appliance departmentat the Alomar Brothers Department Store.It turns out that she is actually a disgruntledformer employee who is now impersonating asalesperson. Tony gives Sara $100 as a downpayment for a new DVD player, and she runsoff with the money. Write a paragraph thatexplains whether the Alomar Brothers DepartmentStore will be compelled to return the$100 to Tony.Chapter 18: Creation of an Agency 407

CHAPTERASSESSMENTSection 18.1 Agency Relationships● An agency relationship is one in which a personrepresents another person in some sort of businesstransaction with a third party. Agencyrelationships let us act through other people toaccomplish things that might be difficult orimpossible to do on our own. The party forwhom an agency acts is known as the principal.● A servant is a person whose conduct in theperformance of a task is subject to the control ofanother person, called the master. In contrast, anindependent contractor works for, but is notunder the control, of a proprietor. The only controlthat the proprietor has over the contractor is theright to specify a particular outcome. Determiningthe distinction between a servant and a contractoris essential to determining liability. When determiningif a party is a servant or contractor, thecourt will ask the following questions: (1) Doesthe hiring person supply the tools for the worker?(2) Is the worker paid by the hour? (3) Does thehiring person set the worker’s hours? (4) Is theworker employed only by the person responsiblefor hiring? (5) Is the business of the workerthe same as the business of the hiring person?(6) Does the worker lack authority to hire or fireother workers (7) Does the worker perform hisor her tasks in a highly supervised environment?and (8) Is very little skill required to perform theworker’s job? The more questions that require“yes” answers, the more likely it is that a masterservantrelationship exists.● A principal is generally bound to the terms of thecontract made by an agent unless the agent hasno authority to enter the contract. An independentcontractor would have no power to bind theproprietor to a contract unless expressly permittedto do so by the proprietor. This is true even ifthe contract benefits the proprietor or is needed●to carry out the independent contractor’sassigned task.The doctrine of respondeat superior, whichmeans let the master respond, makes a masterresponsible for the acts of the servant. Becausea master has the right to control the physicalconduct of a servant, the person who hires thetortfeasor is vicariously liable if he or she is in amaster-servant relationship. However, when thetort was committed, the worker must have beenperforming the task for which he or she was hired.Section 18.2 Creation and Types of Agents● Most agency relationships are created by agreement.These agreements are usually, but notalways, contracts. As a result, they follow therules of contracts.● A agency relationship may be created by operationof law if the circumstances are such that a partyis reasonably believed to be an agent by a thirdparty. This situation is known as agency byestoppel, or apparent authority.● A general agent is a person who has been giventhe authority to perform any duties within thescope of running a business. General agents havemore authority than special agents. A specialagent is employed to accomplish a specificpurpose or to do a particular job.● A subagent is an agent lawfully appointed byanother agent. If an agent has no power toappoint a subagent but does so anyway, he hasappointed an agent’s agent. If the principal doesnot want to honor the agreement made betweenthe agent and agent’s agent, the responsibility ofhonoring the agreement falls upon the agent’sshoulders. An unauthorized act is ratified if theprincipal, with full knowledge of the facts, acceptsthe benefit of that act. A principal who hiresmore than two agents creates a coagent situation.408 Unit 4: Being an Agent and Getting a Job

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.agencyagentprincipalservantratificationrespondeat superiorgeneral agentspecial agentagency by estoppelindependent contractor1. Caterina Gant wants to be a reporter. Imagine that you would alsolike to be a reporter. Write an article about the creation of anagency and use the terms listed above in your article.2. Exchange your article with another student in the class so thatyou can read and critique each other’s articles.3. Discuss the strong aspects of the article and the aspects thatneed improvement.4. Select one of the articles, and present it to the class.5. As a class, select the best essay and post it somewhere inthe classroom.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 18:Creation of an Agency—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additionalreinforcement.6. Why is the agency relationship considered powerful?7. Explain vicarious liability.8. What is negligent hiring and negligent retention?9. Define the equal dignities rule.10. How is an agency by estoppel created? What do the circumstancesusually involve?11. What is ratification?12. What happens if a principal refuses to ratify the unauthorized actionsof an agent?13. How does a general agent differ from a special agent?14. How does a servant differ from an independent contractor?15. What are some advantages of working as an independent contractor?Chapter 18: Creation of an Agency 409

CHAPTERASSESSMENTInterpreting and CommunicatingInformationIn groups of four, discuss the proprietorindependentcontractor relationship.● Explore the ways in which teens areinvolved in this type of relationship.● As a class, create a list of the ways in whichteens work as independent contractors.Discuss the liability issues that might impactteens who work as independent contractors.Liability RiskAnna is the principal of one of the largest highschools in Texas. She hired some formerstudents to take care of the school’s landscapingduring the year. Anna paid the students casheach week for their services. While mowing,the students lost control of the school’s lawnmowerand crashed into three cars in the staffparking lot.Debate16. Who is liable? Explain your answer.17. Were the former students working asindependent contractors or employees?18. If your car were damaged in an accidentlike this, whom would you blame?For the following cases, give your decision andstate a legal principle that applies.19. Uniforms, Ltd. hired Styles as their deliverydriver. One morning, while he is supposedto be delivering uniforms to O’Riley’s Barand Grill, Styles makes a side trip to theRichland Mall to purchase a watch for hisgirlfriend. On his way to the mall, he runs astop sign and collides with a school bus. IsUniforms Ltd. responsible for the damage tothe school bus? Why or why not?20. Mary Drouhard sells a set of antique dishesto Betty Sloane. Bruce Richards offers todeliver the dishes and collect the money forDrouhard as a favor. Is Richards an agent?21. Gary Sharp, an agent of the State RanchInsurance Agency, is involved in an automobileaccident and cannot run his office.Sharp has his wife, Mona, run the officefor three days while he recuperates. IsMona an agent? Why or why not?22. Joanne Neptune hires Raymond’s Roofersto reshingle her Roof. Neptune tellsRaymond what she wants done but leavesthe details to Raymond and his workers.While on Neptune’s roof, one of Raymond’sroofers drops his tool box onto neighborTed Cafferty’s new car, smashing the windshield.Is Neptune liable? Why or why not?23. Shaun Nyquist works as a radiology technicianfor Dr. Regina Ingram. The doctor isusually present when Nyquist gives a radiationtreatment. One day, however, Ingramtells Nyquist he is on his own. While Nyquistis conducting a patient’s radiation therapy,the patient falls and breaks his ankle.Would Ingram be liable if Nyquist is foundto have been negligent? Why or why not?24. Phil Nicholson hires Ted McGraw asgeneral manager of the NicholsonRestaurant. In this capacity, McGrawschedules a wedding reception at therestaurant on a Friday night. Nicholsongets upset because Friday night is therestaurant’s busiest night. He cancels thereservation, claiming that McGraw had noauthority to make such arrangements. IsNicholson correct? Explain your answer.410 Unit 4: Being an Agent and Getting a Job

In each case that follows, you be the judge.25. Respondeat SuperiorElliot was an inmate at the Chillicothe Correctional Institution. While serving his sentence, hewas hit in the face by a corrections officer. Because the institution was run by the state, Elliotsued the officer and the state. He used the doctrine of respondeat superior. The state claimed theguard had been reckless in his conduct and that his actions were therefore outside the scope ofhis employment. Was the guard acting within the scope of his employment when he injuredElliot? Why or why not?Elliot v. Ohio Department of Rehabilitation and Correction, 637 N.E.2d 106 (OH).26. LiabilityHoddesons was shopping for furniture at the Koos Brothers Department Store. A mandressed in a suit showed her around the furniture floor, pointing out several pieces of furniture.Eventually, Hoddesons picked out several furniture items. Because she believed the manwas a salesperson, Hoddesons gave him the correct amount of cash to cover her purchases.The man told her the items would be shipped to her soon. When the furniture never arrived,Hoddesons complained to the store and eventually learned the man in question was animpostor who did not work for the store. Will the department store be liable to Hoddesons?Why or why not?Hoddesons v. Koos Brothers, 135 A.2d 702 (NJ).Online AgentsThere are many types of agents that serve thepublic—travel agents, real estate agents, talentagents, and even shopping agents.ConnectConduct research on the Internet. Use a variety ofsearch engines to complete the following exercises:27. Research an online agent.28. Determine the type of agent and how theagency relationship is created.29. Determine whether hiring an agent via theInternet is different from hiring an agent in amore traditional manner.30. Predict Why do you think laws governingagency relationships came into being?31. Connect Have you ever needed to be intwo places at once? Have you ever beenasked to accomplish tasks beyond yourexpertise? What did you do about it?32. Question What is the difference betweenan express and implied agreement?33. Respond Can a person act as an agentwithout the authority to do so? Explainyour answer.Chapter 18: Creation of an Agency 411

CHAPTERAgency Relationshipsand Their TerminationUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 19: Agency Relationships andTheir Termination—Chapter Overviewsto preview the chapter information.

The Opening SceneCaterina has found a job as an editorial assistant atThe Greensburg Gazette. Mack Pellis, the newspaper’seditor, is giving her instructions in the publication’sstorefront office.Check the FaxMR.PELLIS: Cathy, I have to go see my lawyer. Takecare of the office while I’m gone—and make sureyou don’t get conned into buying something from atelemarketer or a door-to-door salesperson, okay?CATERINA: Sure, Mr. Pellis, no problem.(Immediately after Mr. Pellis disappears out the door,Mr. Bronowski enters the office.)MR.BRONOWSKI: Hello. I’d like to place an ad in yourpaper.CATERINA: No problem. What’s the ad for?MR.BRONOWSKI: I have a fax machine to sell.CATERINA: A fax machine? Mr. Pellis, my boss, wasjust saying he needs a new fax machine becausesomebody stole the last one he had. What are youasking for it?MR.BRONOWSKI: Well, I don’t know if I can sell it toyou. You look kind of young.CATERINA: That has nothing to do with it. I work forMr. Pellis, so I’d be buying it for him.MR.BRONOWSKI: Well, I can’t take less than $200.CATERINA: Sold.MR.BRONOWSKI: Just like that?CATERINA: Sure.MR.BRONOWSKI: Well, I guess it’s okay.(Caterina goes to the back room and gets $200 incash out of Mr. Pellis’s desk. Mr. Bronowski fetchesthe fax machine from his car, takes the money, andleaves. Mr. Pellis returns 30 minutes later.)MR.PELLIS: Where did this fax machine come from?CATERINA: I bought it to replace the stolen one.(With concern on his face, Mr. Pellis examines themachine.)MR.PELLIS: I don’t believe it!CATERINA: I know. It was only $200. Great deal,right?MR.PELLIS: That’s not what I mean. This fax machineright here, the one you just bought with my hardearnedmoney . . .CATERINA: (Interrupting.) What about it?MR.PELLIS: You see this service sticker on the back?CATERINA: Oh, no, you mean . . .MR.PELLIS: Yes, Caterina, it says The GreensburgGazette. You just bought back my stolen faxmachine!CATERINA: Oh! I’m awfully sorry, Mr. Pellis.MR.PELLIS: Well, I can always stop payment on thecheck.CATERINA: Uh-oh!MR.PELLIS: You didn’t pay cash, did you?CATERINA: (Whispering.) Well, yes.MR.PELLIS: You’re fired.1. What is the difference between express andimplied agency authority?2. What is the difference between actual andapparent agency authority?3. What are the duties of an agent to a principal?What are the duties of a principal to an agent?4. How do agency relationships terminate?Chapter 19: Agency Relationships and Their Termination 413

Authority and Dutiesl How to define expressand implied authorityl How to define actualand apparent authorityl How to identify theduties owed by anagent to the principall How to identify theduties owed by aprincipal to the agentAgents and PrincipalsMany different factors, including the way an agency relationshipstarts, can affect an agent’s authority. No matter what type of authorityis involved, all agents owe certain duties to their principals, and all principalsowe certain duties to their agents. Moreover, agents and principalshave certain responsibilities in relation to third parties who dealwith the agency. It is important to understand the nature of agencyauthority, the duties and rights that exist between agents and principals,the responsibilities that extend to third parties, and the ways that agencyrelationships can end.Types of Agency AuthorityAgents act within the scope of their authority and contract with athird party on behalf of the principal. The contract that results is betweenKnowing the extent ofagency authority and thenature of agency dutieswill help you know yourrights and duties whenyou enter such a relationship.Understanding anagent’s liability to thirdparties will protect you ina variety of situations.l express authorityl implied authorityl obediencel good faithl duty to accountl reimbursementl indemnificationl cooperationAN AGENT’S DUTIESWhen a client engages an attorney, that attorney may beempowered to act as the agent of that client. In such asituation, what duties would the attorney have in relationto his or her client?414 Unit 4: Being an Agent and Getting a Job

the principal and the third party. The agent’s authority in negotiating thecontract with the third party may be actual or apparent.Actual AuthorityActual authority is the real power a principal gives to an agent toact on the principal’s behalf. Such actual authority may be expressed inwords or implied from the nature of the relationship or the conduct ofthe parties.Express AuthorityExpress authority includes all of the orders, commands, ordirections a principal directly states to an agent when the agency relationshipis first created. These instructions may be very general or veryspecific.Example 1. While vacationing in Europe, Joanna DiBlasi asksAbe Eney to be her agent in selling her motorcycle. In a writtendocument, Joanna specifically instructs Abe to accept no lessthan $2,000 for the motorcycle. She also includes in the agreementa clause telling Abe to accept cash only. Finally, the agreementexpressly forbids selling the motorcycle to a minor. All ofthese instructions make up Abe’s express authority as an agent inthe sale of Joanna’s motorcycle.Implied AuthorityMentioning every single act that the agent is allowed to perform inan agreement with a principal is unnecessary. Doing so would make theagreement cumbersome and confusing. The law allows some actualauthority to be implied or understood from the express terms that createthe agency relationship, which constitutes an agent’s impliedauthority .Example 2. In Example 1, Abe Eney had express authority tosell Joanna DiBlasi’s motorcycle for no less than $2,000 in cashto anyone who had reached the age of majority. From theseexpress powers would come the implied authority to allow aprospective buyer to inspect the motorcycle, take it for a testdrive, and have an impartial mechanic examine it. All of thesepowers can be reasonably implied from Abe’s authority to sellthe motorcycle, even though the agreement does not specificallyaddress these matters.Dress CodeIf you wear a uniformto school, you don’thave to worry abouta dress code. Schoolswithout uniformscreate dress codes fortheir students.Sometimes, studentsare suspended fromschool for wearingclothing thatadministrators deemoffensive. In some ofthese cases, studentsrespond with a lawsuitclaiming their FirstAmendment rightswere violated. Howdo you feel aboutstudents wearingT-shirts that featureracial, ethnic,or religiousstereotyping?Get InvolvedOrganize a group ofstudents and teachersat your school todiscuss issues ofcultural sensitivityand stereotyping. Findout how the FirstAmendment applies tofreedom of speech intoday’s society.Implied authority is simply a form of actual authority because it alsoarises from the instructions that the principal communicates to the agent.Chapter 19: Agency Relationships and Their Termination 415

Consequently, the key to determining implied authority is to focus onwhat took place between the principal and the agent.Going Beyond Implied AuthoritySometimes a dispute arises over what powers can be implied fromthe express authority given to the agent. The court draws the line bysaying that implied authority must be “reasonably derived from theexpress power.” What is reasonable in a given situation is determined bylooking at the actions that are customarily performed by other agents insimilar situations.Example 3. Abe Eney decides that purchasing a new suit willhelp him sell Joanna DiBlasi’s motorcycle. He purchases a suitand sends the bill to Joanna. Joanna would probably not haveto pay for Abe’s suit because such expenses are not typically partof an agent’s authority in this kind of sales situation.Apparent AuthorityApparent authority exists when the principalhas somehow led a third party to believe that anonagent is an agent, or that an agent has a powerthat he or she does not truly have. In contrast toimplied authority, the key to understanding apparentauthority is to focus on what happenedbetween the principal and a third party. As discussedin Chapter 18, apparent authority is sometimesreferred to as agency by estoppel becausethe principal cannot deny that the nonagent actedon his or her behalf.APPARENT AUTHORITYApparent authority exists when the principal hassomehow led a third party to believe that a nonagentis an agent. Is the management of a departmentstore responsible if an impostor poses as a salespersonand absconds with a customer’s cash?Example 4. Pierre Trudeau told Theresa Jacksonto come to his jewelry store at 9 A.M. onTuesday. He said that someone would be thereto sell her a diamond ring. At 8:30 A.M. onTuesday, Pierre left the shop to run a few errandsand asked his niece, Amy, to keep an eyeon the store. Theresa arrived at 9 A.M., and assumingthat Amy was a clerk, purchased aunique diamond ring from Amy. When Pierrereturned, he was upset because that ring hadbeen promised to another customer. He calledTheresa, but she refused to return the ring.Theresa was within her rights because Pierrehad created a situation that caused her toassume that Amy had authority to sell the ring.416 Unit 4: Being an Agent and Getting a Job

UNDISCLOSED PRINCIPALSWorks of art are often bought at auction by agentsacting for undisclosed principals. In what other typesof situations would it be to the principal’s advantageto remain undisclosed?The apparent authority was created because of something thatPierre, the principal, had said to Theresa.Agent’s Duties to the PrincipallllllAn agent owes a principal the following five duties:ObedienceGood faithLoyaltyAccounting for all of the principal’s money handled by the agentExercising judgment and skill in the performance of theassigned workDisparagingRemarksReal estate agent KristaScherer found severalproperties for MartinShockley that metmany, but not all, of hiscriteria. Martin made itclear to Krista that hewas very unhappy withher choices. Krista feltshe was doing her bestand that Martin’scriteria were toorestricting. While Kristawas showing Martinproperties, he wastelling friends andcolleagues how disappointedhe was withKrista’s performanceand that he wouldterminate the contractwith her as soon aspossible Is Martin’streatment of Kristaethical? Do you thinkMartin is doing theright thing? Why orwhy not?ObedienceAn agent owes the principal the duty of obedience , which meansthe agent must obey all reasonable orders and instructions within thescope of the agency agreement. Even a gratuitous agent must followinstructions. If an agent disobeys instructions, he or she becomes liableto the principal for any loss that results.Example 5. In The Opening Scene, Mr. Pellis gives Caterinainstructions to not get conned into buying something while he isgone. Caterina disobeys Mr. Pellis when she gives Mr. Bronowski$200 in cash for the fax machine.Chapter 19: Agency Relationships and Their Termination 417

Good FaithAn agency relationship is a fiduciary relationship. Principals oftenentrust their agents with their business, property, money, and sometimeseven their good reputation. This places a duty of good faith on the agent.To have good faith simply means to deal honestly with another partywith no intent to seek advantage or to defraud. Good faith also requiresan agent to notify the principal of all matters pertaining to the agencyrelationship.LoyaltyAgents may not work for others who are competing with their principals,nor may they make deals to their own advantage at the expenseof their principals. The only exception to these rules is when the principalknows and approves of the agent’s role in representing a competingprincipal, or if the principal knows the agent is working to the agent’sadvantage.Service of ProcessWhen an individual, an organization, or a corporation files a civil lawsuit,the defendant is served with a copy of the complaint and a summons. This iscalled service of process.Most states require out-of-state corporations to have an agent for service ofprocess if the corporation does business in that state. It is necessary to completeservice of process by serving an officer of the corporation or the corporation’sagent within in that state.Before being permitted to do business in most states, corporations mustdesignate an agent for service of process. This is usually done through the statesecretary of state’s office. Corporations are generally required to make surethat contact information about their agents is always current.Sometimes a corporation has a registered agent within the state but has notactually done any business in the state. In that case, service of process must becompleted in the corporation’s own state.Conduct Research Contact the office of your state’s secretary of state by phoneor through its Web site. Find out about the requirements for having an agent tocomplete service of process on out-of-state corporations. Then contact a corporationwith headquarters in another state. Find the contact information for thecorporation’s designated agent for service of process.418 Unit 4: Being an Agent and Getting a Job

Duty to AccountAn agent who handles money for the principal owes a duty toaccount for every cent of that money. The duty to account means theagent must keep a record of all the money collected and paid out andmust report this to the principal. The agent must keep the principal’smoney safe and separate from others’ money. The agent must also turnthe principal’s money over to the principal in keeping with his or herinstructions. If the agent mixes the principal’s money with his or herown funds to the extent that it is impossible to determine whose moneyis whose, the agent loses all claim to the money. The entire amount thenbelongs to the principal.Judgment and SkillAgents must use all of the skill and judgment that they have whenperforming work for principals. However, agents are not perfect. Eventhe most well-informed agents make mistakes from time to time. Forthis reason, agents are not held liable for honest mistakes if they haveperformed to the best of their ability.Example 6. Peggy Reinhardt entrusted Avery Wilson with$500,000 and told him to invest it in the best possible stocks.Avery decided to invest in the Van Meader Chemical Company,a new corporation that was clearly one of the best investmentopportunities at the time. One week later, a chemical gas leak ata Van Meader plant in Brazil destroyed millions of dollars worthof real estate. Van Meader stock fell, and Reinhardt lost herinvestment in the company. Avery couldn’t be held liable for thisloss because he had done his best.Principal’s Duties to the AgentAgents also have rights guaranteed to them by law. The law imposesspecific duties on the principal in dealing with the agent. The sameduties are found in the employer-employee relationship, which we willdiscuss in Chapter 20. These duties include compensation, reimbursement,indemnification, and cooperation.Social StudiesSince Benjamin Franklinwas named the first PostmasterGeneral in 1775,the post office has usedtechnology to deliver themail. In 1823, navigablewaters were used. In1862, the postal servicestarted using trains.Today, the U.S. PostalService delivers hundredsof millions of messagesand billions of dollars infinancial transactionseach day to 8 millionbusinesses and 250million Americans.Research ActivityAccess the U.S. PostalService Web site andreview the institution’shistory. Determine whensignificant changes weremade in the use of technology,and create atimeline to describethese changes.CompensationAn agent who is working on behalf of a principal is entitled to bepaid for services rendered, unless he or she is a gratuitous agent. Theprincipal must pay any compensation agreed upon in the contract. If nospecific amount has been set, a reasonable sum must be paid for anyauthorized acts performed by the agent for the principal. Sometimes itis possible to figure out this reasonable sum by checking the customarysalaries or wages paid to other agents performing the same kinds oftasks for their principals.Chapter 19: Agency Relationships and Their Termination 419

In seventeenth centuryEurope, most monarchsappointed a favorite,who acted as an agentin carrying out themonarch’s private andpublic affairs. Thefavorite was often themonarch’s confidant,companion, proxy, andenvoy. One famousexample is CardinalRichelieu (1585–1642),who served as the royalfavorite of King LouisXIII of France.Reimbursement and IndemnificationAgents are entitled to reimbursement , or repayment, when theyspend their own money for the principal’s benefit. In addition, if anagent suffers any loss as a result of the principal’s instructions, he orshe is entitled to indemnification ; that is, he or she is entitled to repaymentof the amount lost.CooperationThe duty of cooperation means working together toward acommon end. The principal, having given the agent the duty to performcertain tasks, must not interfere with the performance of those tasks. Ifthe principal makes the agent’s job difficult or impossible, he or she hasbreached the duty of cooperation.Example 7. Phoebe Parkes told Justin Alvarez that he would haveexclusive rights to sell the Curren-Bartlett line of cosmetics doorto-doorin Willowick, a small town with a population of 5,000.She also told him that to keep his job, he would need to make aquarterly profit of $10,000. Later, Justin learned that Phoebe hadhired four other agents to sell the same cosmetics line in Willowick.This action made it impossible for Justin to make $10,000quarterly because there were not enough customers in the town.Justin could argue successfully that Phoebe had violated her dutyto cooperate.Agent’s Liability to Third PartiesThe agent is a go-between who brings the contracting partiestogether and “stands in the shoes of the principal” in making the contract.Sometimes individuals and businesses may prefer to keep theirconnection to a transaction a secret. Other times principals may wishto disclose the relationship. If the agent represents a disclosed principal,one whose existence and identity are known to the third party, theagent assumes no contractual liability for the resulting contract. Theprincipal alone assumes the responsibility. Agents may be held responsiblefor contracts negotiated for the principal when the agents do notdisclose the identity or the existence of the principal, or when agentswrongfully exceed their authority.When the Principal Is Not DisclosedA partially disclosed principal is one whose identity is neverrevealed, even when the third party knows the agent is acting for someoneelse. If the third party later learns the identity of the principal, then420 Unit 4: Being an Agent and Getting a Job

BrazilBrazil’s Amazon is a region of superlatives. It is home to the world’s largestrainforest (approximately two million square miles) and the world’s mightiest river. Itis also a habitat for the greatest variety of animal life known on earth. Brazil’sanimal life includes giant spiders, piranha, jaguars, howler monkeys, parrots, and30-foot anacondas. The area’s plant life is also impressive. The forest trees grow indistinctive layers. Some trees adorned with a variety of air plants, reach heights ofup to 165 feet. Plant and animal species number in the millions—so many that somebelieve millions remain unidentified and uncounted. For years, this rich environmenthas been the focal point of two opposing camps: environmentalists and developers.After satellite photos revealed record deforestation in the mid-1990s, Brazil’sgovernment used a Presidential Transitory Act to strengthen the 1965 Forest Code.The rainforest’s protected area was increased from 50 to 80 percent. Thedevelopers, however, including loggers, farmers, and ranchers, want to relaxrestrictions so more trees can be cut for cropland and pasture.The conflict may never end, but for now the preservationistshave formed a strong coalition and seek tomake protective legislation a permanent law. Here’sa snapshot of Brazil:Geographical area 3,286,488 sq. mi.Population 176,029,560CapitalBrasíliaLegal systemBased on Roman codesLanguagePortuguese, Spanish, EnglishReligion80% Roman CatholicLife expectancy 64 yearsCritical Thinking Question What are some of the most important reasons forprotecting the rainforests? For more information on Brazil, visit ubpl.glencoe.comor your local library.Chapter 19: Agency Relationships and Their Termination 421

he or she has the option of holding either the agent or the principal liableshould the contract not be performed.Example 8. Janet Moffet, a famous entertainer, hired a real estateagent, Fred Patterson, to search for a home for her. Fred wasdirected not to reveal the identity of the person he was representing.Imagine that Fred found a house and told the seller, MaryTeicholz, that he represented a buyer who wished to conceal heridentity. After a contract was entered, however, Janet defaultedand refused to buy the house. If the seller, Mary Teicholz, wereto uncover Janet Moffet’s identity, she could sue Moffet for breachof contract. If not, Mary could bring the breach of contract suitagainst the agent, Fred Patterson. If Fred were to lose the suitand be forced to pay damages out of his own resources, however,Janet Moffet would have to indemnify him for the money paid outto satisfy the award.Sometimes agents have instructions to not reveal the existence ofan agency relationship. They are then said to be working on behalf ofan undisclosed principal. If you were a third party, you would have noidea that the person you were dealing with was really acting for someoneelse. Should there be a breach, you would have a cause of actionagainst the agent. However, as long as the agent has fulfilled his or herresponsibilities, the principal is bound to the contract despite your lackof knowledge of the principal’s identity.Author Agents in a Digital WorldAuthors’agents have a duty to battle with publishers over the rights to selldigital versions of printed books. Recent lawsuits highlight the struggle authorsand agents have with publishers over this issue. One issue involves who ownsthe electronic rights for books. Authors and their agents argue that digitalrights belong to the author, unless the publishing contract says otherwise.Publishers argue that the print publisher automatically owns the digital rightsto a book. The other main issue is money. Authors and agents must negotiatewith publishers over how much authors are paid for digital sales of their books.(Source: New York Times, February 28, 2001, p. C5)Connect Visit the Web site of an online bookseller. Find out who publisheselectronic books. See if a different publisher publishes the print version of anyof those books.422 Unit 4: Being an Agent and Getting a Job

Example 9. Ann Prospect managed a produce stand for Phil Armstrong.The business was called “Ann Prospect’s Produce,” andno one who dealt with Ann knew that she was actually Phil’sagent. Acting under Phil’s instructions, Ann entered a contractwith Terminal Tower Corporation for the purchase of a new storefront.Phil is bound to this contract just as if he had negotiated ithimself.When Agents Wrongfully ExceedTheir AuthorityAgents may bind a principal to a contract only when they act withinthe scope of their authority. If agents enter into contracts on behalf oftheir principals without authority to do so, the agents themselves areliable for the contract.Example 10. People’s Printing Company told Anita Arnett, anemployee, to buy a word processor for no more than $1,400. Shefound one for $1,050 and used the remaining $350 to buy a CDplayer for the office. Her employer refused to accept the CDplayer, which Anita had no authority to buy. She would berequired to pay People’s Printing Company $350.Reviewing What You Learned1. What is the difference between express andimplied authority?2. What is the difference between actual andapparent authority?3. What are the duties owed by an agent to aprincipal?4. What are the duties owed by a principal to anagent?Critical Thinking ActivityDuty Why does the law extend duties to boththe principal and the agent?Legal Skills in ActionDuty to Account Your friend Tammy wasrecently hired as a salesperson in Harriet’s dressshop. One evening when closing the shop,Tammy forgot to place the day’s proceeds in thesafe. On her way home, she decided to place allof Harriet’s money in her own bank account,along with some cash of her own that she hadjust received for her birthday. The next day,Tammy forgot to retrieve the money. By thetime she remembered to get the money out ofher account, she couldn’t recall how much ofHarriet’s money she deposited. Write an e-mailmessage to Tammy in which you explain whyyou believe she has lost all rights to the moneyin her bank account.Chapter 19: Agency Relationships and Their Termination 423

l How to recognizewhen an agencyrelationship isterminated byoperation of lawl How to recognizewhen an agencyrelationship isterminated by an actof the partiesl How to determinewhen individuals areentitled to actualnotice of an agencyterminationl How to determinewhen individuals areentitled to notice bypublication of anagency terminationYou need to know whenan agency relationshiphas been terminated soyou may determine yourliability as an agent or aprincipal. You also needto know your rights ofnotification when you area third party who hasdealt with the agent.l bankruptcyl actual noticel notice by publicationTermination of AgencyRelationshipsTerminating the RelationshipEven the most cordial and successful agency relationships musteventually end. Because many such relationships involve contractualarrangements, the usual rules that apply to the termination of contractsare applicable. As a result, agency relationships can be terminated eitherby operation of law or by the acts of the parties involved. Figure 19.1shows how liability is determined after the termination of a relationship.By Operation of LawWhen a significant change of circumstances alters the original reasonfor the agency relationship, a court may hold that agency relationshipterminated. These changes are sometimes said to terminate agencyagreements by operation of law.Death of the Principal or AgentThe death of an agent will terminate the agency relationship. Thismakes sense because an agency relationship is based on the personalservices of the agent. The death of the principal will also terminate theagency relationship.BankruptcyBankruptcy of the principal terminates an agency relationshipbecause it cancels all of the principal’s ordinary contracts. Bankruptcyalso gives a trustee title to the principal’s property for the benefit ofcreditors.Bankruptcy of the agent will terminate the agency relationship ifthe agent has used his or her own funds to conduct the principal’s business.If not, however, there is no reason to terminate the agency becausethe agent’s bankruptcy will not prevent him or her from doing the jobin the regular way.Impossibility of PerformanceAn agency relationship is terminated when the essential subjectmatter is destroyed or the incapacity of the agent makes performance impossible.Suppose you entered into an agreement to sell a friend’s boatto a third party. Before the contract was signed, the boat sank throughno fault of anyone involved. The agency would be terminated becausethe essential subject matter of the contract, the boat, has been destroyed.424 Unit 4: Being an Agent and Getting a Job

Figure 19.1When adischarged agentcontracts withoutauthority ofthird partyDidagent haveprior dealings withthird party on behalfof principal?YesDidthird partyreceive notice thatagent wasdischarged?NoAgent hasapparentauthority tocontract andbind principalNoYesPrincipal isnot liable oncontractPrincipal isnot liable oncontractPrincipalis liable oncontractAgent’s Objective Becomes IllegalIf, after an agency agreement has been entered, the purpose of theagency is declared illegal, then the agency is terminated by operation oflaw. If only part of the agent’s required activity becomes illegal, onlythat part of the authority ends. The remaining authority to perform legalactivities remains in effect.By Acts of the PartiesMost agency relationships are terminated when the parties have fullycarried out their duties. The parties may also terminate their relationshipby mutual consent before the contract is fully performed. Moreover,certain acts by agents or principals may be enough to terminate arelationship.TERMINATION OF ANAGENCY RELATIONSHIPThis chart indicates howliability is determined aftertermination of an agencyrelationship. Why does thelaw permit a third partyin some cases to hold aprincipal liable even afterthe principal has dischargedan agent?PerformanceIf an agent is appointed to accomplish a certain result, the agencyterminates when the result is achieved. In other words, when the job isdone, the agency ends.Mutual AgreementThe principal and the agent may mutually agree to terminate theagency. Termination may result from the passing of a preset time period.However, the principal and the agent may agree to end the relationshipat any other time, even if the task is left undone or the time period hasnot yet elapsed.Chapter 19: Agency Relationships and Their Termination 425

ACTUAL NOTICE OFTERMINATIONThe law gives an extradegree of responsibility to aprincipal when the principalhas permitted an agent tobuy on credit from thirdparties. What is the besttype of mail service to usewhen extending actualnotice of the terminationof an agency relationshipto a third party?426 Unit 4: Being an Agent and Getting a JobAgent’s WithdrawalAn agent may terminate the agency at any time. However, if terminationinvolves a breach of contract, the agent may be liable for anydamages suffered by the principal.Agent’s DischargeThe principal may terminate an agency relationship at any time byfiring the agent. There are some limits on the authority of the principalto fire an agent, however. When an agent has an interest in the subjectmatter of the agency, he or she is said to have an irrevocable agency,which cannot be discharged by the principal.Example 11. Pamona Pratt borrowed money from a financialinstitution, Associated American, to remodel her office building.To repay the loan, she appointed Associated American as an agentfor the collection of rent money from her tenants. The understandingwas that the rent money was to be applied to repayment of theloan and that the agency would last until the loan was fully repaid.Notice to Third PartiesThird parties who have done business with the principal through anagent or who knew of the agency relationship are entitled to notice ofits termination. A principal who fails to notify third parties when anagency has ended may be liable for future acts of the agent.

Example 12. Shortly after Vince Arbaugh was discharged by PenroseProducts, he visited one of Penrose’s customers. While there,he accepted a payment of $125 that the customer expected himto turn over to Penrose. Penrose had given no notice to the customerthat Vince had been fired. If Vince does not turn the moneyin, Penrose will still have to credit its customer for the paymentbecause Penrose failed to give proper notice of the employee’stermination.The type of notice given to a third party depends on how the formerbusiness relations were carried out. There are three situations toconsider:l When the third party has given credit to the principal through theagent, the third party is entitled to actual notice . Notice by certifiedmail is perhaps the best way to give actual notice, because receipt ofthe notice can be obtained from the post office.l When the third party has never given credit but has done a cashbusiness with the agent, or knows that other persons have dealt withthe principal through the agent, notice by publication in anewspaper is sufficient.l When the third party has never heard of the agency relationship, nonotice of any kind is required. The third party who is dealing with anagent for the first time has a duty to investigate and determine theexact extent of the agent’s authority.Reviewing What You Learned1. How can agency relationships be terminatedby operation of law?2. How can agency relationships be terminatedby the acts of the parties?3. Which individuals are entitled to actualnotice of an agency termination?4. Which individuals are entitled to notice bypublication of an agency termination?Critical Thinking ActivityActual Notice Why is certified mail the bestway to give actual notice of the termination ofan agency relationship?Legal Skills in ActionNotice of Termination Ted has just dischargedDavid, who has served as his agent for fiveyears. Morris, who has often extended creditto Ted through David, and Sophie, who hasdealt with Ted through David on a cash basisonly, have not yet been given notice of thistermination. Write a letter to Ted explainingwhat type of notice he must give to Morrisand Sophie. In both cases, recommend apractical course of action for Ted to pursuein giving notice.Chapter 19: Agency Relationships and Their Termination 427

CHAPTERASSESSMENTSection 19.1 Authority and Duties● Express authority includes all of the orders,commands or directions that a principal directlymakes to an agent when the agency relationshipis created. These instructions may be general orspecific. Mentioning every act that the agent isallowed to perform is cumbersome and unnecessary.The law allows some actual authority to beunderstood from the express terms that create theagency relationship. The powers that can reasonablybe derived from the express terms of anagency agreement constitute an agent’s impliedauthority. Implied authority is a form of actualauthority because it also arises from the instructionsthat the principal communicates to the agent.● Actual authority is the real power a principalgives to an agent to act on his or her behalf. Incontrast, when the principal has led a third partyto believe that a nonagent is an agent or thatan agent has a power that he or she does notreally have, the principal has created apparentauthority. Apparent authority is also referred toas agency by estoppel.● The five duties that an agent owes to a principalare obedience, good faith, loyalty, an accountingof the principal’s money handled by the agent,and the exercising of judgment and skill in performingthe assigned work. The duty of obediencerequires the agent to obey all reasonable ordersand instructions within the scope of the agencyagreement. To have good faith, an agent mustdeal honestly with the principal and harbor nointent to seek advantage or defraud. To be loyal,agents must not work for others who arecompeting with their principals, nor may theymake deals to their own advantage at the expenseof their principals. The duty to account meansthat the agent must keep a record of all of themoney collected and paid out and must reportthis to the principal. Agents must also use all of●the judgment and skill that they have whenperforming work for principals.The law imposes specific duties on a principal indealing with an agent. These duties includecompensation, reimbursement, indemnification,and cooperation. Compensation is payment givenby the principal to the agent in return for theagent’s services. Reimbursement is repaymentthat an agent receives when he or she spends hisor her own money for the principal’s benefit.Similarly, if an agent suffers any loss as a resultof the principal’s instruction, he or she is entitledto indemnification, or repayment of the amountlost. Cooperation refers to the principal’s duty torefrain from interfering with the agent’s duties.Section 19.2 Termination of AgencyRelationships● An agency relationship may be terminated byoperation of law in the case of the death of eitherparty. Other circumstances such as bankruptcy,impossibility of performance, or subsequentdeclaration of illegality of the act may alsoterminate the agency relationship.● Most commonly, agency relationships areterminated when the parties have fully carriedout their duties. The parties may also terminatetheir relationship by mutual consent before thecontract is fully performed. An agent may alsoquit his or her job or give up the agency, or aprincipal may fire the agent, all of which wouldresult in termination of the agency relationship.● Actual notice of the termination of an agencyrelationship must be given to those third partieswho have extended credit to the principalthrough the agent.● Notice of the termination of an agency relationshipmay be given by publication to those thirdparties who have conducted business with theagent without extending credit.428 Unit 4: Being an Agent and Getting a Job

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.express authorityimplied authorityobediencegood faithduty to accountreimbursementindemnificationcooperationbankruptcyactual noticenotice by publication1. In a small group, create a bulletin board explaining agencyrelationships and their termination. Use as many of the termslisted above as possible.2. As a class, discuss the best qualities of each board, noting legalreferences, creativity, and use of terms.3. Display the bulletin boards in the classroom.4. Write a brief essay explaining how your group could haveimproved its bulletin board.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 19:Agency Relationshipsand Their Termination—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. What is the difference between an agent’s actual authority and an agent’sapparent authority?6. What duties does a principal owe to an agent?7. Explain good faith as it relates to an agency relationship.8. Is it legal for an agent to keep secret the identity of the principal whom he or sheis representing? Explain your answer.9. What happens if a principal fails to notify third parties that an agency relationshiphas ended?10. Under what circumstance may an agent legally represent competing principals?11. What happens if an agent mingles the principal’s funds with his or herpersonal funds?12. What is a gratuitous agent?13. What is indemnification?14. Under what circumstance might bankruptcy end an agency relationship?Chapter 19: Agency Relationships and Their Termination 429

CHAPTERASSESSMENTInterpreting and CommunicatingInformationConduct research to find out more aboutagents. Use the want ads from the newspaperor the Internet to complete the followingexercises.15. Locate advertisements listing qualificationsthat would be consistent with thoseof an agent.16. As a class, make a list of the duties of thevarious agents they found in the ads.17. Choose one job that interests you. Wouldyou be good at this job? Why or why not?Conflict of InterestYou and Karl agree that he will act as youragent, promoting your services as a lawn careand gardening specialist. You are planning touse your earnings to pay for technical school.Ms. Vincenza wants some landscaping done,but she likes Karl and insists that he do the work.Karl tells you that he will do the work and giveyou the money, but you know this isn’t fair.Debate18. If Karl does the work, has he damaged theagency relationship in any way?19. Would you terminate your agencyrelationship with Karl? How? What wouldyou do in this situation?For the following cases, give your decision andstate a legal principle that applies.20. Priit Xavier was a European actor whowanted to purchase a home in California.Because it was clear that the price wouldskyrocket if a seller knew the identity ofthe buyer, Xavier hired Mattia Doubilet toact as an agent in purchasing the property.Doubilet negotiated a deal with GeorgesMilan for the purchase of Milan’s home.When the deal fell through, Milan wantedto bring a lawsuit against Doubilet. CanMilan bring suit against Doubilet, or musthe first uncover the identity of theprincipal? Explain your answer.21. Ted Van Dine owes Oliver Wayne $320 forgoods shipped to Van Dine’s shop. Eachmonth for the past two years Wayne hassent his collection agent, Kent Brewster, tocollect on Van Dine’s account. Unknown toVan Dine, Wayne fires Brewster. Brewstercontinues to collect money from Van Dineand keeps it for himself. After Van Dinepays Brewster, does he still owe Wayne?Explain your answer.22. Leo Anderson hires Shirley Johnson as hisliterary agent to find a publisher for hisbooks. When Johnson reads Anderson’slatest manuscript, she realizes it is a bestseller. She tells Anderson the book is so badthat no publisher will want to publish it. Sheoffers to pay him $200 for the manuscript.He agrees. Johnson then sells the manuscriptto a publisher for $1 million. What duties hasJohnson breached? Explain your answer.23. Aztron, Inc. hires the Millstern Ad Agencyto begin an advertising campaign. Thiscampaign involves placing 30 billboards on30 highways, each one 10 yards from theroad. Before the billboards are placed, thestate legislature passes a statute thatrequires all billboards to be placed at least50 yards from the road. Millstern wants tocontinue the campaign, but Aztron says theagency has been terminated by operationof law. Has the agency been terminated?Why or why not?430 Unit 4: Being an Agent and Getting a Job

In each case that follows, you be the judge.24. Apparent AuthorityStahl brought her car to LePage’s service station for repairs. LePage indicated that he could notdo the work but would permit his employee, Donley, to use his garage to make the neededrepairs. Donley did a bad job, at one point installing the wrong engine in Stahl’s car. When Stahlattempted to sue LePage, the garage owner argued that, in this case, Donley had not acted ashis agent. Stahl argued that the doctrine of apparent authority could be used to hold LePageliable. Is Stahl correct? Why or why not?Stahl v. LePage, 352 A2d 682 (VT).25. ComminglingLloyd was an attorney who acted as the legal guardian of Parker and Hockenberry. He alsorepresented Isaac in the purchase of some land. Lloyd deposited several settlement checksfor those clients into his own bank account, commingling the funds with his own. He alsoused these funds to pay some of his own bills. What duties has Lloyd violated in relation tohis clients? Explain your answer.Office of Disciplinary Counsel v. Lloyd, 643 N.E2d 1086 (OH).Sales AgentJuan Valdez-Colon runs a chocolate factory inColorado. He would like to export his candy tobuyers in the Middle East. He doesn’t know whereto begin, but he realizes he might need the help of aforeign sales agent.ConnectUsing a variety of search engines, help Juan findout more about exporting products from the UnitedStates to countries overseas.26. Locate information about foreign sales agents,freight forwarding agents, or exportmanagement companies that conduct this typeof work.27. Predict What duties do agents owe to theirprincipals? What duties do principals oweto their agents?28. Connect What is a real-world example ofimplied authority?29. Question Do you think it is fair for anagent to act for a principal who is neverrevealed to the third party? Why orwhy not?30. Respond Why do you think we need lawsgoverning the termination of agencyrelationships?Chapter 19: Agency Relationships and Their Termination 431

CHAPTEREmployment LawUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 20: Employment Relationships—Chapter Overviews to preview thechapter information.

The Opening SceneCaterina has just arrived at home. Her parents arepreparing dinner. Her brother, Lazzaro, is also home.Second ChanceMR.GANT: Say, you look upset. What’s wrong,Caterina?CATERINA: Nothing.LAZZARO: She got fired.CATERINA: How do you know?LAZZARO: The rumor’s all over school. I heard aboutit in my English class.CATERINA: Great.MRS.GANT: Did Mr. Pellis fire you already? Didyou do something to make him angry? Whathappened, Caterina?CATERINA: Nothing.LAZZARO: She bought Mr. Pellis’s own fax machineback from the guy who stole it last week. Nowonder he was angry. Now Mr. Pellis is out $200because of Caterina’s mistake.CATERINA: Shut up.MRS.GANT: Is that true, Caterina?CATERINA: No. Well, yes, sort of.MRS.GANT: Sort of?CATERINA: Okay, so it’s true, but it’s not fair that hefired me. I was just trying to help. How could Ihave known the machine was stolen?LAZZARO: Sounds fair to me.CATERINA: Shut up.MRS.GANT: Why isn’t it fair?CATERINA: I don’t know.MRS.GANT: Then it must be fair.CATERINA: Okay. It’s not fair because he promised methat he wouldn’t fire me, as long as I did exactlywhat he asked me to do. Besides, his manual saysI should get a second chance.MRS.GANT: Manual? What are you talking about,Caterina?CATERINA: He gave me this employment manualto read when he hired me, and it says right onpage five that all employees get what he callsprogressive discipline. I didn’t get progressivediscipline. Mr. Pellis fired me for making onemistake.LAZZARO: All of his employees? You’re his onlyemployee.CATERINA: Shut up.MR.GANT: Well, it’s too bad that you got fired,especially after all that time you spent getting awork permit. I guess you’ll just have to look fora new job.LAZZARO: Oh, she never got a work permit. She saidit wasn’t important.CATERINA: Shut up.MR.GANT: You didn’t get your work permit?CATERINA: Not exactly.MR.GANT: Caterina.CATERINA: Yes?MR.GANT: Not getting a work permit is veryirresponsible. Maybe it’s better that you gotfired after all.1. What is the doctrine of employment-at-will?2. What employment situations do not fall within thedoctrine of employment-at-will?3. What are the exceptions to employment-at-will?4. What are the federal laws that regulate employmentrelationships?Chapter 20: Employment Law 433

l How to defineemployment-at-willl How to identify thosesituations that falloutside of the doctrineof employment-at-willl How to identify theexceptions toemployment-at-willl How to distinguishbetween impliedcontract and impliedcovenantUnderstanding the natureof at-will employmentwill help you determinewhether your rights havebeen violated if you aredischarged by anemployer.EmploymentRelationshipsEmployment-at-WillThe doctrine known as employment-at-will is the general rulegoverning employment in most states. According to this doctrine, anemployer is permitted to discharge an employee at any time, for any orno reason, with or without notice. This doctrine is based on the notionthat both parties in an employment relationship must be free to leavethe employment arrangement at any time. If employees were not freeto leave an employment relationship at any time, then they would actuallybe slaves. Enslavement, of course, violates the Thirteenth Amendment’sprohibition against involuntary servitude.Unionized EmployeesThe doctrine of employment-at-will does not apply in certain situations.Employees have the right to organize and participate in a union.A union is an organization of employees that is formed to promote thewelfare of its members. Employees who belong to labor unions havehiring and firing procedures built into their collective bargaining agreements.A collective bargaining agreement is a contract negotiatedby the employer and representativesof the laborunion, and it covers issuesrelated to employment.l employment-at-willl unionl employment-at-willl unionl collective bargainingagreementl grievance procedurel severance payl promissory estoppell implied contractl disclaimerl public policy tortl implied covenantUNION ACTIVITYA union is an organization ofemployees that is formed topromote the welfare of itsmembers. Employees whobelong to labor unions havehiring and firing proceduresbuilt into their collectivebargaining agreements. Whatprocedures are available tounion members should anemployer violate a collectivebargaining agreement?434 Unit 4: Being an Agent and Getting a Job

Union members select representatives to negotiate a contract with theemployer through a series of discussions known as bargaining.Collective Bargaining AgreementsA collective bargaining session generally concerns issues such asworking conditions, wages, benefits, job security, layoffs, and firing policies.For example, a contract might stipulate that an employer must havea legitimate, employment-related reason, or just cause, for discipliningor discharging an employee. Collective bargaining agreements generallyinclude the steps that must be followed in a grievance procedure. Agrievance procedure establishes a series of steps that an employeemust follow to appeal the decision of an employer who may have violatedthe collective bargaining agreement. Many nonunion companies alsoinclude a grievance procedure as part of the employment contract.Example 1. Edward Ewing worked on the assembly line forStewart Motors, Inc. He was also a member of the Organizationof American Automotive Employees (OAAE). Ewing was dischargedbecause he was late for work on one occasion. The collectivebargaining agreement between Stewart Motors and OAAEdid not permit the firing of a worker for a single incident of lateness.Also, according to the agreement, all violations for latenesswere to be reported in writing, and the employees were tobe given a second chance. After going through the grievance procedure,Ewing was restored to his position.Layoffs and Plant ClosingsDespite the many advantages associated with collective bargainingagreements, they do not guarantee that employees will have a job forlife. Sometimes, economic conditions force layoffs or plant closings.When such events occur, some or all employees may lose their jobs.Massive layoffs and plant closings can pose great hardships to communitiesand individual families. Collective bargaining agreements oftenprovide a negotiated procedure under which such layoffs occur. A collectivebargaining agreement may also provide for severance pay ,which is a set amount of money to compensate employees for being dischargedand to help them through the time that they remain unemployed.Severance pay is calculated by using a variety of factors, including theposition and salary of the person being laid off.The federal government also endeavors to aid employees who losetheir jobs or are laid off. For example, Congress enacted the WorkerAdjustment and Retraining Notification Act (WARN). This legislationcompels some companies to give employees at least 60 days advancenoticeof a factory shut down or massive layoff. Only companies thatEmploymentDiscriminationWorking at a part-timejob helps provide asense of responsibility,pride, and freedom.Sometimes, however,companies discriminatewhile hiringbecause of the race,gender, or nationalorigin of certainapplicants. Whatwould you do if thecompany for whomyou worked refusedto hire certainminorities?Get InvolvedContact organizationslike the ACLU or lookup the ACLU’s Web siteat www.aclu.org tofind out how theorganization helpsprotect citizens fromdiscrimination.Chapter 20: Employment Law 435

employ more than 100 workers are bound by this requirement. Noticeof lay off or shut down is not always necessary, especially if it is theresult of an emergency situation.DeterminingWhen toDisciplineCira Valdez is principalat Morningside Elementary.She is the onlydaughter of elderlyparents. For the pastthree years, she hasmissed many days ofwork to care for herparents. The superintendentof her schooldistrict, Adya Perkins,has warned herrepeatedly about herabsences, and the viceprincipal,Don Mattison,has complained aboutthe extra work thatCira’s absences havecaused him. In March,Mrs. Perkins suspendedMs. Valdez. Parents andteachers were furious.They felt Mrs. Perkinsshould have takendisciplinary measuresin the summer whenthe students would notbe affected. What areMrs. Perkin’s ethicalobligations in the case?Do you agree withher actions? Why orwhy not?Illegal DiscriminationEven when an employee is not covered by a collective bargainingagreement or a professional employment contract, he or she cannot bedischarged for a reason that is discriminatory in nature. According to theCivil Rights Act of 1964, a discharge is discriminatory if it occursbecause of a person’s race, color, creed, national origin, or gender. Similarly,the Age Discrimination in Employment Act protects people frombeing discharged because of their age. The Civil Rights Act of 1964 andthe Age Discrimination in Employment Act are covered in more detailin Chapter 21.Rights and Duties of Employers and EmployeesEmployers and employees have certain mutual expectations in theirworking relationships. Some of these expectations are determined bythe nature of the job, but other expectations are implied or imposed bystate and federal statutes. Employers expect their employees to have theexperience, education, and skills that they claim to possess. Employersalso expect a reasonable amount of work from employees within a reasonableamount of time. They have the right to tell employees what tasksto perform and how to perform them.Employees are expected to be loyal, honest, and dependable, andthey must abide by the employer’s rules. Employees can expect theiremployers to provide regular pay, a safe work environment, appropriatejob training, opportunities to earn raises and promotions, and safe tools.They can also expect to be able to make reasonable complaints.Exceptions to Employment-at-WillDespite all of the protection afforded to employees, most workers arestill subject to the principles outlined in the doctrine of employmentat-will.As explained previously, this doctrine states that an employer ispermitted to discharge an employee at any time, for any or no reason,and with or without notice. Terminating an employment contract underthe doctrine of employment-at-will has occasionally resulted in injustices.As a result, many courts challenge the employment-at-will doctrineby ruling against the wrongful discharge of employees.Wrongful DischargeWrongful discharge, also called unjust dismissal, provides employeeswith grounds for legal action against employers who have treatedthem unfairly. The courts have established five standards it will consider436 Unit 4: Being an Agent and Getting a Job

egarding an unjust termination. These five standards include promissoryestoppel, implied contract, public policy tort, intentional inflictionof emotional distress, and implied covenant.Promissory Estoppel Promissory estoppel has been used bysome courts as proper grounds for unjust dismissal lawsuits. However,to build a solid case based on promissory estoppel, four elements mustbe proven. These elements include the following:l The employer makes a promise to an employee that the employer canreasonably expect the employee to rely upon.l The employee actually relies upon that promise, and as a result, doesor doesn’t do something.l The employee ordinarily would not have acted or refrained fromacting had it not been for the employer’s promise.l The employee is in some way harmed by the employer’s failure tohonor the promise.If all of these elements exist, then the court may prevent theemployer from denying responsibility for the loss suffered by theemployee as a result of that reliance.Example 2. Nigel Harrington worked as abookkeeper for Federated Shipping, Inc. InJune, he was arrested and charged with embezzlement.Harrington’s supervisor told himthat he would be suspended pending the resultsof the case. The supervisor assured Harringtonthat he would have his job back withfull seniority rights if the case were resolvedin his favor. In reliance on this promise, Harringtondidn’t seek another job, and insteadconcentrated on clearing his name. When thecharges were dropped, Harrington attemptedto get his old job back only to find that Federatedwould not employ him.PROMISSORY ESTOPPELIf an employer makes a promise toan employee and that employeerelies on the promise and suffers aloss as a result, then the employeemay be permitted to bring awrongful discharge lawsuit based onpromissory estoppel. What are theelements of promissory estoppel?Chapter 20: Employment Law 437

Harrington’s case clearly fits within the guidelines set up by thecourts for a case of unjust dismissal based on promissory estoppel. IfHarrington were to bring a wrongful discharge suit based on promissoryestoppel against Federated Shipping, he would likely succeed.Implied Contract Another exception to employment-at-willinvolves implied contract. The implied contract exception arises whenan employer has said, written, or done something to lead the employeeto reasonably believe that he or she is not an at-will employee. Whendetermining whether an employer has created an implied contract, thecourt can look at all of the facts involving that employment relationship,not just the oral promises made by the employer. The court canexamine the nature of the employment relationship, the way that theparties have dealt with one another in the past, the length of the employmentarrangement, the customary way that the employer has dealt withother employees, and employment policies and procedures. An employer’spolices and procedures are generally outlined in an employee handbookor other company documents. If the handbook contains promises oflifelong employment, fair and just treatment, discipline or dischargeOrganizing and Participating in a UnionEmployees have a right to organize into unions if they share commonemployment interests, do not have supervisory duties, and do not have aconfidential role in creating management-labor policies. To establish a union,organizers must have a sufficient number of the prospective bargaining unitmembers sign authorization cards. A bargaining unit consists of a group of eligibleemployees whose contract is negotiated as a group. Authorization cards, signed byemployees who are eligible for membership in a union, indicate that the workerswant their employment to be represented by a particular union. If a certainpercentage of workers sign authorization cards, the union may ask management tobe recognized as the exclusive bargaining unit for the employees it represents. Ifmanagement refuses to voluntarily recognize a union, organizers can ask theNational Labor Relations Board (NLRB) to conduct hearings and certify the union.Conduct Research Investigate an employee’s right to organize and participate ina union, based on current legislation. What are some of the laws governingmanagement’s conduct during the process of establishing a union? What aresome of the laws governing the conduct of prospective union members?438 Unit 4: Being an Agent and Getting a Job

only for certain offenses, or progressive discipline, then the employermay have created an implied contract. However, before the plaintiff ina wrongful discharge lawsuit can make such allegations, he or she mustconvince the court that the employer intended the employment manualto be a part of the employment relationship. This can usually be done ifthe employer required the employee to read and sign the handbook as acondition of employment.Most federal and state courts that have recognized that the impliedcontract exception will still allow employers to maintain an employment-at-willarrangement by using a disclaimer. A disclaimer is a statementthat holds that, regardless of any provisions, policies, or oralpromises to the contrary, an employment-at-will situation still existsbetween the employer and its employees. To be effective, a disclaimershould include the following statements:l Neither the employee handbook nor any other communication toemployees is intended to create an employment contract between thefirm and its employees.l The employer reserves the right to discharge an employee at anytime with or without notice and with or without reason.l No one other than the president of the firm is empowered to makeany oral or written change in this disclaimer.Example 3. Mary Barnes applied for a job with the KosarBrothers Department Store. The employee manual contained adisclaimer that preserved employment-at-will. The disclaimerspecifically said that employees could be discharged with or withoutnotice at any time for any or no reason. Only the president ofthe store could alter this provision. Barnes told Jack Gower, theassistant manager, that she would not work under such provisions.Gower told her to ignore the disclaimer and promisedPorter a job for life. Gower’s oral representation would have nolegal effect in light of the ironclad nature of the disclaimer. Barnesrealized this and sought employment elsewhere.MathematicsIn May 2001, the U.S.Department of Laborreported 1,426 mass layoffactions by employersduring that month. Amass layoff action meansthat a single companylays off at least 50 people,regardless of the durationof the layoff.Research ActivityLook at the chart below.Mass TotalLayoff No. ofActions WorkersJan–May 2001 7,426 878,387Jan–May 2000 5,873 627,520What is the percentageincrease in the numberof mass layoffs andindividual workers laid offbetween January and Mayof 2000 and betweenJanuary and May of 2001?Although the disclaimer provides a way for an employer to preserveemployment-at-will, many employers are reluctant to include such astatement in their employee handbooks. It may lower morale to remindemployees that they can be fired at any time without warning or cause.Some employers qualify the disclaimer by saying that “employees canbe dismissed at any time for just cause,” or “employees who violatecompany rules can be terminated at any time.” Such qualifying provisionscan weaken the disclaimer to the extent that it no longer has theeffect of preserving employment-at-will, making it possible for a dischargedemployee to sue for breach of an implied employment contract.Chapter 20: Employment Law 439

PUBLIC POLICY TORTIf an employee is fired forrefusing to violate the law,such a discharge wouldviolate public policy. Whydoes punishing someonefor obeying the law violatepublic policy?440 Unit 4: Being an Agent and Getting a JobCourts in some states have held that a disclaimer may also benegated if overwhelming evidence suggests that an employer has providedfor a detailed dismissal procedure. Providing such detail hasestablished an implied employment contract.Public Policy Tort Many states now permit a fired employee torecover compensatory and punitive damages in a public policy tort ifhe or she can prove the firing violated public policy. Public policy holdsthat no one should be allowed to do anything that tends to hurt the publicat large.Example 4. Allen Kiefer was ordered to appear for jury duty onDecember 3. The law in his state says that anyone who disobeyssuch an order can be fined and imprisoned. The same statute alsoforbids an employer from firing an employee who is ordered toappear for jury duty. Despite this prohibition, Kiefer’s employerfired him for being absent from work on December 3. Kiefer canbring a wrongful discharge suit based on public policy tort.Intentional Infliction of Emotional Distress Some courts havepermitted discharged employees to bring a tort lawsuit against their formeremployers for intentional infliction of emotional distress. For example, ifthe conduct of an employer in discharging an employee caused severemental and emotional trauma, the employee may bring lawsuit based onthis provision. However, an employer’s conduct must be extremelyoutrageous to qualify as intentional infliction of emotional distress.

Example 5. Marvin Pardew’s employer, Ron Wilson, was havinga very bad day. When Wilson discovered several careless errorsmade by Pardew, he flew into a rage. In the process of firingPardew, Wilson publicly insulted Pardew using loud, offensivespeech. He then grabbed Pardew by the arm and dragged him tothe exit of the building. Wilson’s behavior caused Pardew to experiencefeelings of extreme humiliation. Pardew might be able towin a tort lawsuit against his employer.Implied Covenant Another exception to employment-at-will is theprinciple of implied covenant . This principle holds that any employmentrelationship is based on an implied promise that the employerand employee will be fair and honest with one another. Unlike impliedcontract, the existence of an implied covenant exists simply becausethe employment relationship exists.When mediation isused in an attempt tosettle cases of sexualharassment in theworkplace, 85 percentof the cases are successfullyresolved outsideof court.Example 6. Ella Ernst was to receive a 25 percent commissionon all computer sales she made for her employer, Clarkson ComputerCompany (CCC). Ernst made a $10 million sale to the federalgovernment, earning a $2.5 million commission. CCC firedher and refused to pay the commission. Ernst sued CCC for unjustdismissal based on the existence of an implied covenant. Thecourt held that CCC had violated an implied covenant of fairdealing and honesty. Ernst was entitled to her commission.Reviewing What You Learned1. What is employment-at-will?2. What situations fall outside of the doctrineof employment-at-will?3. What are the exceptions to employmentat-will?4. What is the difference between impliedcontract and implied covenant?Critical Thinking ActivityEmployment-at-Will Why have thecourts begun to carve out exceptions to theemployment-at-will doctrine?Legal Skills In ActionEmployment Rights and Duties Your UncleIan was recently approached at work by arepresentative of a union that is attempting toorganize the workers at his plant. Uncle Ianbelieves that as a union member, he will beguaranteed a job for life. Send an e-mailmessage to your Uncle Ian explaining why theunion can’t guarantee him lifelong employment.Chapter 20: Employment Law 441

l How to recognizethose areas ofemployment that mustbe included in anycollective bargainingprocessl How to identify theobjectives of the Taft-Hartley Actl How to identify thegoal of the Landrum-Griffin Actl How to identify childlabor lawsYou need to know thelaws that protect unionactivities because youmay be asked to join aunion in the future.l closed shopl union shopl right-to-work lawsl featherbeddingl child labor lawsLegislation AffectingEmploymentRegulating Collective BargainingAs mentioned earlier in the chapter, employment contracts are oftennegotiated by groups of employees organized into unions. Called collectivebargaining, this process is now firmly established as a way ofdefining working conditions and industrial relations. The governmenthas played an active role in regulating collective bargaining. As we shallsee, the government at both the federal and state levels is also very interestedin regulating the employment of minors.In the past, the courts held collective bargaining to be an illegal conspiracy.As attitudes changed, the courts began to accept collective bargaining.Eventually, the government began to encourage collectivebargaining, and people felt that the government should regulate theprocess to some extent.Wagner ActThe first federal law addressing collective bargaining was theNational Labor Relations Act of 1935, also called the Wagner Act. Thepurpose of this act was to encourage collective bargaining, discouragecertain unfair labor practices, and provide federal assistance in obtainingfair bargaining.The Wagner Act also established guidelines for determining whichemployment concerns had to be included in the collective bargainingprocess. The act states that employers must negotiate “wages, hours,and conditions of employment.” Subsequent court decisions have helpedinterpret what “conditions of employment” might include. For example,business decisions that are at the very heart of an executive’s abilityto control the company, such as decision on how to invest corporatefunds, would be outside the scope of collective bargaining.Example 7. Wilma Durrell, chief executive officer of Collier-Ansen Laboratories, Inc., decides to discontinue a line of overthe-countermedications that had been the object of tampering.Unfortunately, the discontinuation caused the shutdown of one ofCollier-Ansen’s manufacturing plants. The union incorrectlyclaimed that the decision to close the plant should have been submittedto collective bargaining. The decision to discontinue thatline of medication was clearly within the discretion of corporatemanagement.442 Unit 4: Being an Agent and Getting a Job

Labor Union PresidentEvery day, thousands of farmworkers who do not ownland work long, backbreaking hours to produce the foodserved at American tables. Many of these farmworkers andtheir families “follow the crops,” migrating from one area ofthe country to another as the need for farm labor changeswith the changing seasons.Ramon Ramirez is the president of Pineros y Campesinos Unidos del Noroeste(Northwest Treeplanters and Farmworkers United), a labor union that represents5,000 farmworkers in the Willamette Valley of western Oregon. Ramirez and hisPCUN staff of 14 are trying to establish better working conditions, higher wages,and better housing for union members.“The median annual income for a farmworker in the United States is about$7,500,” he says. “They are the lowest-paid work force in the country. After agrueling day working in the fields, some of our members don’t even go home to ahouse. They live in cars, even chicken coops.”The PCUN helps farm workers tackle their employment and housing problemsby monitoring enforcement of the state minimum wage and occupational healthand safety laws. In addition, Ramirez tries to improve working conditions by negotiatingwith the growers who hire the farm workers. If all else fails, the PCUN canlaunch a boycott to encourage consumers not to buy produce from certain farms.Ramirez believes that the most effective way to improve the lives of farmworkers is through education. Ramirez goes into the fields to inform workersabout the union and how it can help them. The PCUN helps them understandtheir legal rights and establish economic development projects.“Education empowers people,” Ramirez says. “We know when we’ve doneour job, because people no longer need our services. They will have learnedenough to take control of their own working lives.”SkillsPersonalityEducationReading, writing, and multi-lingual, especially Spanishand English.Committed to the struggle for social change and justice;interested in helping people live better lives.Willing to get on-the-job training. Volunteer or propose toperform an unpaid internship with a union.You can find more information about PCUN at www.pcun.org. For more informationabout labor activists, visit ubpl.glencoe.com or visit your public library.Chapter 20: Employment Law 443

Using E-Mail at WorkA large company that makes chemical products fired as many as 40 peopleat a Texas factory for their e-mail use. The employees were sending messagescontaining sexual and violent images over the company’s e-mail system. Asimilar review of complaints by the company had led to the firing of 50 peoplesome months earlier. Employees should not assume that their e-mail on companycomputers is private. In fact, just the opposite is true. Action can be takenagainst employees for inappropriate e-mail use. (Source: InformationWeek,August 23, 2000)Connect Send an e-mail to the human resources department of one or morelarge companies. Ask if they have a policy on use of e-mail at work.444 Unit 4: Being an Agent and Getting a JobTaft-Hartley ActMany people felt that the Wagner Act gave too great an advantageto the union bargaining unit. Consequently, it was amended in 1947 bythe Labor-Movement Relations Act, popularly called the Taft-HartleyAct. The purpose of the Taft-Hartley Act was to equalize the power oflabor and management. The act provided, among other things, thatunions must provide a 60-day notice before calling a strike. If a strikewould endanger the nation’s health or safety, the president can obtain aninjunction to stop the strike for 80 days.The Taft-Hartley Act also made the closed shop illegal. A closedshop is a business or company that requires a person to be a unionmember before being hired. In contrast, a union shop , or a business inwhich a worker must join the union within 30 days after being employed,is allowed under the act. The act also allows states to pass right-to-work laws . State right-to-work laws prohibit union shops. The Taft-Hartley Act prevents a labor union from requiring an employer to retainemployees who are no longer needed. Featherbedding , or assigningmore employees to a job than are actually needed, and pressure exertedby a union to retain unnecessary employees are two more acts prohibitedby the Taft-Hartley Act.Landrum-Griffin ActThe Wagner Act was further amended in 1959 by the Labor ManagementReporting and Disclosure Act, usually referred to as the Landrum-GriffinAct. The primary goal of the Landrum-Griffin Act was to

stop corruption in the unions. Under provisions of this act, all unionsmust register their constitutions and bylaws with the Secretary of Labor.Moreover, unions must submit yearly reports on their financial condition.The report must include assets, liabilities, receipts, sources of revenue,loans to union members, and other money paid out of the uniontreasury. The act also includes the union members’ “bill of rights,” whichensures that all members of the union have the right to be involved inrunning the union.Regulating the Employmentof MinorsIn the industrial revolution, children wereoften exploited by employers. For example,some mine owners would use children to workdeep in mines because they could crawl intosmall cracks and crevices. Even though thiswork was dangerous, the children were paidvery low wages. Children couldn’t refuse todo the work because jobs were scarce. To preventsuch abuse, laws were enacted to protectchildren who enter the labor force.CHILD LABOR LAWSBoth state and federal lawsregulate child labor. Whydoes the law permit childrento work in agriculture as longas the work takes place afterschool hours?State Child Labor LawsChild labor laws , or laws that controlthe work that children are permitted to do, developedslowly. In 1842, Massachusetts andConnecticut passed laws limiting the amount of hours that a child couldwork. However, these two states were far ahead of their time. Even aslate as 1930, only 44 states had child labor laws dealing with nonmanufacturingoccupations. In 1934, the annual Conference on Labor Legislationadopted a set of standards for state child labor legislation, andthese standards have had a great influence on child labor laws.As part of these laws, many states (see Figure 20.1) specify certaintypes of activities that cannot be performed by minors on the job. Suchprohibitions include working on or around dangerous machinery. Theselaws are designed to protect minors who, because of inexperience, mightnot understand the dangers involved on a specific job.Federal Child Labor LawsA positive step in federal child labor laws was the child labor portionof the Fair Labor Standards Act of 1938, as updated in 1974. Thisact prohibits the interstate or foreign trade shipment of any goods producedin factories in which “oppressive child labor” had been usedwithin 30 days of the removal of the goods. The act also prohibits theChapter 20: Employment Law 445

Figure 20.1Child Labor LawsThis chart summarizes the state laws (printed in regular type) and the federal Fair Labor Standards Act (FLSA)laws (printed in italics), governing the employment of minors in California. If an employer is covered by bothstate and federal laws, the higher standard–the provision which gives the most protection to employees–applies. In general, the provisions of FLSA shown in this chart are the higher standard, and therefore prevail.SPREADOF HOURSRESTRICTEDOCCUPA-TIONSAll minors under age 18 Minors age 16 –17 Minors age 14 –15 Minors age 12 –13Work must be performed between 5 A.M. and10 P.M. Exception: Public messenger servicemust be performed between 6 A.M.. and 9 P.M.Work experience programsup to 12:30 A.M.–see minors ages 16 and 17.Day preceding nonschoolday up to 12:30 A.M.–seeminors ages 16 and 17.See also EntertainmentIndustry employment.If enrolled in a work experienceprogram, may workuntil 12:30 A.M. on any evening.Minor may work until12:30 A.M. on any day precedinga nonschool day.FLSA: No limitationsCannot sell or serve alcoholic beverages. Cannotbe employed for the purpose of driving a motorvehicle on the highways or streets.FLSA–NO MINOR UNDER 18 MAY BE EMPLOYED INany occupation declared hazardous by theSecretary of Labor, including, but not limited to:Explosives manufacturingoccupations.Motor vehicle occupations.Mining occupations.Logging and sawmillingoccupations.Power-driven woodworkingmachine and powerdrivenmetal forming,punching, and shearingmachine operations.Occupations involvingexposure to radioactivesubstances, and to ionizingradiations.IN ADDITION TO THE ABOVE, FURTHER LIMITATIONS APPLYTO ALL MINORS UNDER AGE 16: (See Child Labor Bulletin 101)Employment is limited to certain occupations not requiringperformance of any duties in work places where goods aremanufactured, moved, or processed. Some permittedoccupations in retail and food services include:Office and clerical.Cashiering and selling.Price marking andpackaging.Bagging.Occupations in slaughtering,meat packing andrendering plants.Bakery machine operations.Paper products machineoperations.Brick, tile, and kindredproducts manufacturing.Wrecking, demolition, andship-building operations.Roofing work, includingapplication of weatherproofingmaterials andsubstances.Excavation operations.Clean-up maintenanceof grounds (cannot usepower-driven mowersor cutters).Kitchen work.Work must be performed between 5 A.M. and10 P.M. Exception: Public messenger service must beperformed between 6 A.M. and 9 P.M. (Can beemployed as a messenger only in cities having lessthan 15,000 inhabitants.)FLSA: Work must be performedbetween 7 A.M.and 7 P.M. Exceptions:From June 1 to Labor Daycan work to 9 P.M.In selling or servingalcoholic beverages.In hazardous occupations.In operating an auto or truck.In delivering goods, merchandise,commodities,papers, or packages froma motor vehicle.In the vicinity of movingmachinery.In or about any manufacturingor transportation ofexplosives.In or about the functioningparts of unguarded and dangerousmoving equipment,aircraft or vessels, or functioningblades or propellers.In or about a gasolineservice station.FLSA: Minors under 14years of age may not beemployed in firms subjectto the FLSA.NO MINOR UNDER 16 MAY BE EMPLOYED:In selling to passing motoristsnewspapers, candy,flowers, or other merchandiseor commodities.In door-to-door selling ofnewspapers or magazinesubscriptions, candy,cookies, flowers or othermerchandise, or commoditiesunless the followingconditions are met:1) Minors work in pairsas a team2) One adult supervisorfor 10 or fewer minors3) Within sight or soundof the supervisor onceevery 15 minutes4) Returned to home orrendezvous point dailySEE TEXT OF THIS DIGEST FOR A MOREDETAILED LIST & CONDITIONSFLSA: CHILD LABOR PROVISIONS DO NOT APPLY TO:Children under 16 years of age employed by their parentsin occupations other than manufacturing, mining, or occupationsdeclared hazardous by the Secretary of Labor;Children employed as actors or performers in motionpictures, theatrical, radio, or television productions.Children engaged in the delivery of newspapers tothe consumer.CHILD LABOR LAWSFederal and state laws restrict theemployment of minors. What kinds ofrestrictions does this state impose?446 Unit 4: Being an Agent and Getting a Job

employment of oppressive child labor in any enterprise engaged in commerceor in the production of goods for commerce. Oppressive childlabor is defined as employment of minors under the age of 16 in any ofthe jobs covered by the act and the employment of minors under 18 injobs declared especially dangerous by the Secretary of Labor.Minors between 14 and 16 may be employed in jobs other than thosecovered by the act, but only if the Secretary of Labor determines thatsuch employment does not interfere with their schooling. There aremany exceptions to the minimum wage and maximum hours rules inthe Fair Labor Standards Act. They include children working in agricultureafter school hours, child actors, children working for their parentsin jobs other than manufacturing, and children deliveringnewspapers.Industry-Education CooperationEffective control of child labor requires the help of industry andschools. Many industries have their own codes that restrict child laborto an even greater extent than do the laws. Other industries, however,conform only if forced by law.Education and the child labor problem are closely associated. Oneof the great evils of child labor is its interference with the education ofchildren. Public schools work with the enforcement officers of childlabor acts to protect children. Work permits, for example, are oftenissued by the public school system. A work permit is a document thatallows a minor below a certain age to work. Laws regulating workpermits vary from state to state.Reviewing What You Learned1. What employment areas must be included inany collective bargaining process?2. What are the objectives of the Taft-HartleyAct?3. What is the goal of the Landrum-GriffinAct?4. What are child labor laws?5. Investigate an employee’s right to organizeand participate in a union. Explain the legaldevelopments that govern this right.Critical Thinking ActivityCollective Bargaining Why did the courtsonce believe that collective bargaining was anillegal conspiracy?Legal Skills In ActionChild Labor Your friend, Felicia, hasthreatened to complain to the Secretary ofLabor because her parents have put her towork on the family farm after school. Writea letter to Felicia explaining whether hercomplaint is justified.Chapter 20: Employment Law 447

CHAPTERASSESSMENTSection 20.1 Employment Relationships● Employment-at-will is the general rule governingemployment in most states. According to thedoctrine of employment-at-will, an employer ispermitted to discharge an employee at any time,for any or no reason, with or without notice. Thisdoctrine is based on the notion that both parties inan employment relationship must be free to leavethe employment relationship at any time.● The doctrine of employment-at-will does notapply to employees who are protected by aunion. A union is an organization of employeesthat is formed to promote the welfare of itsmembers. In addition, an employer cannotinvoke the doctrine of employment-at-will todischarge an employee for a reason that isdiscriminatory in nature. It is unlawful todiscriminate against employees because of theirage, race, color, creed, national origin, or gender.● Exceptions to employment-at-will includewrongful discharge. Wrongful discharge, alsocalled unjust dismissal, provides employees withgrounds for legal action against employers whohave treated them unfairly. The courts haveestablished five standards it will considerregarding an unjust termination: promissoryestoppel, implied contract, public policy tort,intentional infliction of emotional distress, andimplied covenant.● When an employer does something to lead anemployee to reasonably believe that he or she isnot an at-will employee, an implied contract iscreated. All employment relationships are basedon an implied covenant that the employer andemployee will be fair and honest with one another.Section 20.2 Legislation AffectingEmployment● The first federal law addressing collectivebargaining, the National Labor Relations Act of●●●1935, also called the Wagner Act, states thatemployers must include wages, hours, and conditionsof employment in the collective bargainingprocess. Business decisions that are at the veryheart of an executive’s ability to control acompany, such as decisions on how to investcorporate funds, would be outside the scope ofcollective bargaining.The objective of the Taft-Hartley Act was toequalize the power of labor and management.It provides, among other things, for a 60-day“cooling off ” period, which the President of theUnited States could invoke to postpone a strikefor up to 60 days under special circumstances.The act also made it illegal to have a closed shop,which requires a person to be a union memberto be considered for hiring. In contrast, a unionshop, or a business in which a worker must jointhe union within 30 days after being employed, isallowed under the act. The act also allows statesto pass right-to-work laws, and preventsfeatherbedding.The primary goal of the Landrum-Griffin Act wasto stop corruption in the unions by mandating,among other things, that all unions must registertheir constitutions and bylaws with the Secretaryof Labor. Under the Landrum-Griffin Act, unionsare also required to submit yearly reports on theirfinancial condition. These reports must includeassets, liabilities, receipts, sources of revenue,loans to union members, and other money paidout of the union’s treasury.Child labor laws control the work that childrenare permitted to do. They specify certain types ofactivities that cannot be performed by minors onthe job. Federal child labor laws prohibit shipmentof goods produced in factories in which“oppressive child labor” had been used.448 Unit 4: Being an Agent and Getting a Job

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.promissory estoppelunioncollective bargaininggrievance procedureseverance paypublic policy tortimplied contractemployment-at-willdisclaimerimplied covenantunion shopright-to-work lawschild labor laws1. Imagine you are a friend of Caterina (in “The Opening Scene”)and are discussing her recent firing. Write a dialoguebetween the two of you. Use as many of the terms listedabove as possible.2. With a partner, role-play your dialogues.3. With your partner, practice your dialogues and present themto the class.4. As a class, vote to choose the best dialogue.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 20:EmploymentRelationships—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. What is the doctrine known as employment-at-will based upon?6. Do collective bargaining agreements guarantee employees a job for life? Why orwhy not?7. Describe an employee’s and employer’s duties and rights to each other.8. What must a disclaimer include in order to be effective? Why are many employersreluctant to include a disclaimer in their employee handbooks?9. Name the first federal law dealing with collective bargaining. What was its purpose?10 What is a grievance procedure?11. Why do employee handbooks often play important roles in lawsuits regardingtermination of employment?12. How has the attitude of the court changed regarding collective bargaining?13. Why is the public school system involved in regulating the number of hours workedby minors?Chapter 20: Employment Law 449

CHAPTERASSESSMENTInterpreting and CommunicatingInformationResearch the child labor laws in your state.Locate the answers to the following questions:14. When and why were the laws were passed?15. How many hours is a child allowed to workper day and per week?16. What types of work are children notallowed to perform?17. What (if any) exceptions are there to thelaw (e.g., students enrolled in school workstudyprograms, apprenticeship programs)?Write a one-or two-page paper summarizingyour findings.You learn that your friend Wendy, who is 15, isleaving school early every Tuesday. Her newemployer told her she must work on Tuesdaysor she will lose her job. You remind Wendy thatthe child labor laws are being violated andsuggest that she ask for a change of schedule.Debate18. If Wendy wants to work on Tuesdays andkeeps her grades up, is there really aproblem? Explain your answer.19. Whose responsibility is it to comply withthe child labor laws? Is it the employer’s?Is it Wendy’s? Explain your answer.For the following cases, give your decision andstate a legal principle that applies.20. Luther McConnell is discharged by ErinPublishing for incompetence. When hepassed his probationary period 14 yearsearlier, McConnell received a copy of Erin’sstandard letter to employees. The letterwelcomed McConnell and said, “Now thatyou’re a permanent employee, you’ll alwayshave a home at Erin.” All efficiency reportson McConnell rated him very highly. DoesMcConnell have grounds for a lawsuit basedon unjust dismissal? Explain your answer.21. At the height of a flu epidemic in the UnitedStates, workers at several pharmaceuticalcompanies that produce flu vaccinesthreaten to strike. The flu tends to incapacitatepeople for a week to 10 days. Whatoptions might the President of the UnitedStates have in this situation?22. David Canidy was employed as a server atthe Kirkus Tea Room. Canidy was unfairlyaccused of stealing money. As it turnedout, Louis Whittaker, the manager of therestaurant, had simply misplaced somemoney. However, before discovering his ownerror, Whittaker fired Canidy in a loud andpublic display. During the firing, Whittakeraccused Canidy of the theft and insulted him.What kind of a wrongful discharge lawsuitmight Canidy bring against Whittaker andthe Kirkus Tea Room? Explain your answer.23. Sidi Hassam was hired as a salesperson bythe Georgian Plate Glass Company. Whenhired, he was asked to read and sign thecompany’s employment manual. Themanual, which did not include a disclaimer,promised that all employees would be permittedto submit any grievance to a specialcommittee headed by the Director of HumanResources. When Hassam was disciplinedfor something he did not do, he asked thedirector to assemble the committee toreview his complaint. The director refused,and Hassam was fired. What kind of awrongful discharge lawsuit might Hassamcontemplate bringing against the company?Explain your answer.450 Unit 4: Being an Agent and Getting a Job

In each case that follows, you be the judge.24. Age RequirementsNeil Bagge, 17, got a job at a construction site where dump trucks were used. State law preventedanyone under 18 from operating a “motor vehicle of any description.” Bagge’s employer did nothire him to operate a dump truck; however, the employer did assign Bagge to work around and onthe trucks. Would such an assignment violate the state law forbidding the employment of minorsto operate motor vehicles? Why or why not?Bagge’s Case, 363 N.E.2d 1321 (MA).25. Wrongful DischargeJuergens worked as a staff accountant at Strang, Klubnik, and Associates, Inc. The employmentmanual published by the company included an overtime pay provision. Klubnik made a mistakein calculating Juergens’s overtime payments. He promised her that it would not happen againwhen she worked overtime. Later Juergens was asked to assume additional duties. She declinedto do so and was discharged. She brought a wrongful discharge suit based on implied contract,arguing that the overtime pay provision and the promise of future overtime pay amounted to animplied promise of continued employment. Is Juergens correct? Why or why not?Juergens v. Stahl, Klubnik, and Associates, Inc., 644 N.E.2d 1006 (OH).Union PrideLawson has been working in the office at theTennessee Valley Authority for six months.Recently, several of his friends at work have askedhim to consider joining the union. Lawson doesn’tknow enough about unions to make an informeddecision, so he looks to you for help.ConnectUsing a variety of search engines, research a unionand answer the following questions:26. What are the benefits of joining?27. Who is the president of the union?28. Why and where was the union first started?29. Who belongs to the union?30. Predict Why do you think people joinunions?31. Connect Have you or has someone youknow ever been fired? What were thecircumstances?32. Question Why do you think some stateshave passed right-to-work laws whileothers have not?33. Respond Do you think the child labor lawsare really necessary? Why or why not?Chapter 20: Employment Law 451

CHAPTEREmployment Protectionand Equal OpportunityUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 21: Employment Protection andEqual Opportunity Chapter Overviews—to preview the chapter information.

The Opening SceneCaterina is sitting on the front steps of the porch,reading a newspaper. Her brother, Lazzaro, and hisfriend, Dylan, have just arrived at home. They havespent the afternoon at a baseball game.Paper ChaseCATERINA: It’s about time you got home. Where haveyou been?LAZZARO: Why should I tell you? It’s none of yourbusiness.DYLAN: We were downtown at a ball game. What’sin the paper?LAZZARO: She’s looking for another job. She got firedfrom her last job. I’m sure that you heard about itat school.CATERINA: Shut up.DYLAN: Are you getting unemploymentcompensation?CATERINA: What’s that?DYLAN: I’m not sure exactly, but every time my AuntCaitlin gets laid off, she gets unemploymentcompensation.CATERINA: She gets money for not working? Thatsounds too good to be true.DYLAN: That’s right. She gets money for not working,no strings attached.LAZZARO: That’s right up your alley.CATERINA: Shut up. Where can I find out about thatunemployment compensation stuff? I’m definitelyinterested.DYLAN: There’s an office downtown. You could stopby one day after school.LAZZARO: Did you find any job prospects in thepaper?CATERINA: Nothing I can do.LAZZARO: No surprise there.CATERINA: Shut up.(Dylan picks up the paper and looks at the want ads.His eyes rest on one ad.)DYLAN: What about this ad for a Gal Friday? Maybeyou could do that.CATERINA: Gal Friday? What’s that?DYLAN: I have no clue.CATERINA: Maybe I should just try to get some of thatunemployment compensation. Did you say theoffice is downtown?DYLAN: On Euclid Avenue where it crosses NinthStreet.CATERINA: I have one more question. Will I need asocial security number?DYLAN: Probably.CATERINA: Then I better go to the Social SecurityOffice first.LAZZARO: You mean you never got a social securitycard?CATERINA: That’s right. It didn’t matter. Mr. Pellis paidme in cash.LAZZARO: Maybe it’s a good thing that you got firedafter all.1. What is the Occupational Safety and HealthAdministration?2. What rights do employees have regarding wages,hours, and benefits?3. What privacy rights do employees have?4. What classes are protected from unlawfuldiscrimination in employment matters?5. What rights do employees have in relation toequal employment opportunities?Chapter 21: Employment Protection and Equal Opportunity 453

l How to recognize therole that OSHA plays inensuring workplacesafetyl How to identifyemployers’ legalrequirements withregard to wagesand hoursl How to identify thestatutes designed toprotect employeeprivacy rightsl How to distinguishbetweenunemploymentcompensation andworkers’compensationUnderstanding the rightsthat are legally due toemployees will help youdetermine your rights.l Occupational Safetyand HealthAdministration (OSHA)l equal pay rulel pension planl social securityl unemploymentcompensationl workers’ compensationLaws Relatingto EmploymentConditions andBenefitsEmployment ConditionsIn the early days of the Industrial Revolution, employers demandeda great deal from workers and often gave little in return. Some employershad little regard for their workers’ safety and quality of life. The governmenteventually passed laws regulating employment conditions. Workerswere provided with a variety of benefits and a guarantee that theywould have equal employment opportunities. Today there are many federaland state laws that deal with labor conditions and worker benefits.Employment conditions can be divided into three areas: health andsafety, right to fair wages and benefits, and privacy rights. To guaranteethese rights, the government has created a variety of laws to protectemployees.Health and SafetyThe federal Occupational Safety and Health Act of 1970 was enactedby Congress to ensure that employees are protected in the workplace.The act established the Occupational Safety and Health Administration(OSHA) , the agency within the federal government that setssafety and health standards for many companies within the UnitedStates. Businesses with 11 or more employees that engage in interstatecommerce must meet OSHA’s health and safety standards. Figure 21.1shows the type of safety and health standards that employers must postfor all employers to see.OSHA uses two approaches to accomplish its mission. First, itimposes upon employers the affirmative duty to maintain a safe andhealthy work environment. Second, OSHA creates rules that outline thesafety steps that businesses must maintain. These rules are enforced byinspections and fines.InspectionsTo make certain that employers adhere to OSHA regulations, theagency randomly inspects workplaces. OSHA also endeavors to inspect454 Unit 4: Being an Agent and Getting a Job

Figure 21.1SAFETY AND HEALTHPROTECTION ON THE JOBChapter 88-Code of Iowa provides job safety and health protectionfor workers throughout the State of Iowa.The Iowa Division of Labor Services has the responsibility foradministering this Chapter. The Division of Labor adopts federaloccupational safety and health standards as State of Iowa standards.Employers and employees are required to comply withthese standards.SAFETY ON THE JOB IS EVERYBODY'SRESPONSIBILITY!EMPLOYERS: Chapter 88 requires that all employers must furnish toemployees employment and a place of employment free from recognizedhazards which cause or are likely to cause death or seriousphysical harm to employees and comply with occupational safetyand health standards adopted under this Chapter.EMPLOYEES: Chapter 88 requires that each employee comply withoccupational safety and health standards and all rules, regulations,and orders issued pursuant to this Chapter that are applicable tothe employees own actions and conduct.COMPLIANCE WITH SAFETY ANDHEALTH REQUIREMENTSTo ensure compliance with safety and health requirements, the IowaDivision of Labor conducts periodic inspections of places of employment.Inspections are conducted by trained compliance safety andhealth officers. Chapter 88 requires that an authorized representativeemployer and a representative authorized by the employees be givenan opportunity to accompany the inspector for the purpose of aidingthe inspection. Where there is no authorized employee representative,the compliance safety and health officers will consult with areasonable number of employees concerning safety and health conditionsin the workplace.STATE OFIOWAFor assistance and information, including copies of Chapter 88 andof specific safety and health standards, contact:Iowa Division of Labor1000 East Grand AvenueDes Moines, Iowa 50319-0209Telephone(515) 281-3606COMPLAINTS ABOUT STATE PROGRAMADMINISTRATIONAny interested person or representative of such a group of personsor group of persons may submit a complaint to the Federal governmentconcerning the operation or administration of any aspect theIowa Division of Labor’s occupational safety and health activitiespursuant to Chapter 88-Code of Iowa.Complaints may be submitted orally or in writing to:Assistant Regional AdministatorU.S. Department of LaborOccupational Safety & Health Administation911 Walnut, Room 496Kansas City, Missouri 64106Phone: (816) 426-5861Any such complaint should describe the grounds for the complaintand specify the aspect or aspects of the administration or operationof Iowa’s program that is believed to be inadequate.If upon receipt of the complaint, the Assistant Regional Administrator(ARA) determines that reasonable grounds exist to believethat an investigation should be made, the ARA shall cause suchinvestigation, including any workplace inspection, to be made assoon as possible.a business when a death or a disaster has occurred, or when an employeefiles a complaint. Such complaints must be in writing and must be filedat the nearest OSHA office by the employee or someone representingthe employee. The law protects employees who file such complaints frombeing discharged from the job. Employers may be fined for each violationreported by an employee or discovered during an OSHA inspection.STATE REQUIREMENTSIn addition to federal OSHArequirements, the statesoften mandate their ownOSHA standards. To whatdoes this poster alertworkers?Example 1. Talia L’sar worked on the loading dock for ChamberlainIndustries. She discovered that Chamberlain was storingdangerous chemicals in the garage area of the loading dock.When she reported this to her supervisor, her complaint wasignored. Accordingly, she filed a complaint with the local OSHAoffice, which then scheduled an inspection. Should Chamberlaintake retaliatory action against Talia, that action would be illegal.Chapter 21: Employment Protection and Equal Opportunity 455

Wages, Hours, and BenefitsThe government’s interest in regulating employment extends to theconditions under which employees perform their jobs. In the 1930s, thegovernment responded to many of the hardships suffered by workersduring the Great Depression by regulating wages, hours, and benefitsof workers by passing several laws that set standards for employment inAmerican businesses.Fair Labor Standards ActThe federal Fair Labor Standards Act, also known as the Wage andHour Law, requires certain employers to pay their workers a legal minimumhourly wage rate, plus time-and-a-half for all work over 40 hoursper week. The Fair Labor Standards Act also regulates the employmentof minors. The act covers employees who produce goods for transportin interstate commerce and workers such as certain hospital, retail,restaurant, and school employees. Professional employees, administrators,and executives are not covered by this act.Equal Pay ActIn 1963, Congress passed the Equal Pay Act as an amendment tothe Fair Labor Standards Act. The amendment established the equal payrule, which states that employers engaged in interstate commerce mustpay women the same rate of pay as men holding the same type of job.The equal pay rule covers hourly workers, executives, administrators,professional employees, and outside salespeople who receive salariesand/or commission.Employment Retirement Income Security ActA pension plan is a program established by an employer or a unionthat is designed to provide income to employees after they retire. A pension’samount is typically based on an employee’s salary and length ofservice with a company. Previously, funds in some employee pensionplans were poorly invested, or the funds deposited in retirement accountswere used for other business expenses. These practices resulted in lossesof retirement benefits to workers and severe economic hardship to themand their families.The Employment Retirement Income Security Act (ERISA) waspassed to prevent such abuse. One requirement of the act is thatemployers must place employee contributions to pension plans in a trustfund that is independent of the employer’s control. Another ERISArequirement imposes a duty of good faith on those who manage pensionplans. Other ERISA requirements include informing employees of theirretirement benefits and submitting reports on the plan to the Secretaryof Labor.456 Unit 4: Being an Agent and Getting a Job

U.S. CitizensWorking in Other CountriesToday, thousands of Americans and their families live and work abroad.Typically, a U.S. citizen must obtain a work permit and a resident visa before beingallowed to work in a foreign country. In most cases, these requirements must besatisfied before entering the country to work. The easiest way to meet theserequirements is to have an employment contract with a company that will obtain thenecessary permissions and documents for you.Americans who live in foreign countries retain their U.S. citizenship andcontinue to pay federal income taxes, even on income earned in a foreign country.A child born to two U.S. citizens while in a foreign country is automatically grantedU.S. citizenship. The child may also be granted citizenship in the foreign country,resulting in dual citizenship.U.S. citizens living in other countries are subject to the laws of the host country,which may differ substantially from those of the United States. Legal procedures inother countries may also provide fewer protections than the Constitutional rightsavailable to persons residing in this country. Americans imprisoned in foreigncountries may request aid from the U.S. Department of State, as well as the U.S.Embassies and Consulates in those countries. Although these entities advocate forthe fair treatment of Americans, they cannot change the laws of the foreign countryor force the country to release an American prisoner.In a volatile international environment, Americans working abroad may obtaininformation about different countries from consular information sheets furnished bythe U.S. Department of State. If conditions in a particular country threaten the safetyof Americans, the U.S. Department issues a travel warning for that country.Consular information sheets and travel warnings may be accessed at the StateDepartment’s Web site.Critical Thinking Question Do you think it’s fair for Americans working abroadto be subject to regulations that may be contrary to the laws of the United States?For more information on the rights of Americans working in foreign countries,visit ubpl.glencoe.com.Chapter 21: Employment Protection and Equal Opportunity 457

Family and Medical Leave ActUnder the Family and Medical Leave Act, an employee of a companywith at least 50 employees is entitled to 12 weeks of leave during any12-month period because of the birth or adoption of a child, or to carefor a spouse, child, or parent who has a serious medical condition. Afterthe leave, the employee is entitled to return to his or her previous positionwith the same or equivalent pay and benefits. To be eligible forsuch leave, the employee must work for at least one year and accumulatesufficient service time.Employee Privacy RightsIn recent years, the subject of employee privacy rights has becomeof central concern in the workplace. Three areas of primary concerninclude: privacy for governmental employees, testing employees fordrug use, and using polygraph (lie detector) test results in the hiringand firing of employees.It’s Your RightAsserting your rights in the workplace can be intimidating. When you feelyou have been unlawfully discriminated against at work, you are entitled totake certain steps to remedy the situation, and you should be able to do sowithout fear of reprisal from your employer.A talk with your manager or your manager’s manager is the first place tostart. A frank discussion at this point can often resolve the problem and avoidfurther legal hassles. Before approaching your employer, try to becomefamiliar with your legal rights. Also try to be as objective as possible, stick tothe facts, and avoid being overly emotional in making your point.Conclude the conversation by asking what steps will be taken next. Yourmanager might conduct a formal investigation, or he or she might simply wantto speak with other employees about the problem. Be sure to schedule a followupmeeting to monitor progress. It’s also a good idea to document your side ofthe story by taking notes of conversations and gathering information to supportyour claim.Research Go to the library or visit the Internet. What is the law in your stateregarding the time limit (statute of limitations) for filing a lawsuit for workplacediscrimination?458 Unit 4: Being an Agent and Getting a Job

Federal Privacy ActBecause of our general aversion to governmental interference inpersonal rights, the privacy of government employees is often givengreater emphasis than the privacy of employees in the private sector.For instance, the Federal Privacy Act directly addresses the privacy ofgovernment employees. Under this act, government employees are giventhe right to restrict inspection of their employment files, be informed oftheir employment files, be informed of the contents of those files, andfix any mistake that they might find in those files.Drug-Free Workplace ActThe Drug-Free Workplace Act, which applies to companies that havecontracts with the federal government, aims to create a drug-free workenvironment. Under the act, firms must initiate a plan to make sure thatemployees do not use drugs on the job. The statute does not, however,order companies to include drug testing in their plans. If a drug test isperformed improperly, it can violate the Fourth Amendment to theUnited States Constitution, which prohibits unreasonable search andseizure.The Supreme Court has provided a guideline for such a situation.The Court has held that, when drug tests do not involve criminal activity,the employee’s privacy rights must be balanced with the government’sduty to protect the public.AffirmativeActionEmployers that havediscriminated in thepast are often requiredby the courts to submitan affirmative actionplan. Such plans arealso frequently requiredof firms that contractwith the government,and many privatecompanies andinstitutions alsoimplement affirmativeaction plans. What arethe goals of these plans,and how do theyaddress the problemof unlawfuldiscrimination?Example 2. Rachel Goetz applied for a position as a securityguard for the Jackson Biological Product Company. All securityofficers for Jackson were required to carry firearms. Consequently,Goetz was obligated to undergo a drug test. In this case,Goetz should understand that the public’s need to be protectedfrom armed guards who might be under the influence of drugswould outweigh her right to privacy.Some states have passed statutes that regulate drug testing in theprivate sector. The guidelines often include making certain thatemployees or applicants are notified of the testing procedures. Companiesare also required to keep the results of such tests confidential. Theymust communicate the results to the employees or applicants and initiatea backup test when the initial test proves positive. Finally, they mustgive the applicant or employee a chance to challenge the test results.Employee Polygraph Protection ActAs with drug testing, polygraph or lie detector testing can violate theprivacy rights of employees. Congress passed the Employee PolygraphProtection Act to regulate such testing procedures. The act prohibitsChapter 21: Employment Protection and Equal Opportunity 459

Recent studies suggestthat it is increasinglydifficult for low andmoderate incomefamilies to affordhousing. According toNicolas P. Retsinas,director of HarvardUniversity’s Joint Centerfor Housing Studies,“there is no state inwhich full-timeminimum wage workis enough to afford, at30 percent of income,a two-bedroomapartment at the federalfair-market rent.”employers from using lie detector tests either for screening of employmentapplicants or for random testing of employees.There are several exceptions to the rules prohibiting such tests. Forexample, the statute does not apply to businesses involved in securityor the handling of controlled substances. Thus, drug firms and privateinvestigation companies would be permitted to use polygraph tests.Laws Providing Worker BenefitsAs industrial society developed, people recognized an increasingneed to protect workers and their families. Hitherto, workers who reliedon the common law, such as negligence suits against employers incase of injury, were not often successful. As a result, legislatures beganto pass laws that protect workers who have left their job because of retirement,injury, disability, or layoffs. Social security, unemploymentinsurance, unemployment compensation, and workers’ compensationare all government initiatives to protect workers.Social Security ActSocial security is a government program that provides continuingbut limited income to workers and their dependents. It provides benefitsto employees and their families when their earnings stop or are reducedbecause of retirement, disability, or death. The Social Security Act of1935 and its amendments set up a social insurance program funded bycontributions from both employers and employees. Employers must automaticallydeduct a certain amount from employees’ paychecks, contributean equal amount, and send both contributions to the InternalRevenue Service. Congress sets the amount of the employee’s contributionas a percentage of annual wages.People become eligible to receive social security benefits by workingfor a certain time period in a job or jobs covered by the program or bybeing a dependent of a person who meets that requirement. When earningsstop or are reduced because the worker retires, dies, or becomesdisabled, monthly cash benefits are paid from these funds to replacepart of the lost income.You have one social security number to use throughout your life.The Social Security Administration, the Internal Revenue Service, andcertain other federal organizations use social security numbers in theirprograms. Social security records, which contain a lifetime account ofa person’s earnings, are confidential.Unemployment Compensation LawsWhen people are out of work, they cannot buy goods. When goodsgo unsold, the factories that make the goods and the retail stores thatsell the goods lay off workers. These workers cannot buy goods, so moreworkers are laid off, and the cycle continues. To lessen the effects of460 Unit 4: Being an Agent and Getting a Job

unemployment, and to provide for the families ofout-of-work workers, the government has set upa means of protecting unemployed workers.Unemployment compensation is a system ofgovernment payments to people who are out ofwork and looking for a job. Payments are madefrom an unemployment insurance fund financedby payroll taxes on employers or unemploymentinsurance premiums paid by employers.A section of the Social Security Act providesfor a joint federal-state system of unemploymentcompensation. According to the FederalUnemployment Tax Act, each state operates itsown unemployment compensation system, subjectto certain conditions imposed by the federalgovernment. The states determine the tax rateeach employer must pay to fund the unemploymentbenefits.Benefits vary among the states, as do minimumand maximum payments, length of work requirements for coverage,and maximum benefit periods. Generally, unemployed workersapply at state employment offices for benefits and for suitable work.Workers may be disqualified for benefits for a limited period if theirunemployment arises out of a strike or a lockout. Each state determinesthe period of the worker’s disqualification. Workers are also disqualifiedif they refuse suitable work without cause, have been discharged formisconduct, or have quit their jobs without “good cause.”WORKERS’ BENEFITSThe federal and stategovernments have passedlaws that benefit workers.How do workers qualify forsuch benefits?Example 3. In The Opening Scene, Dylan tells Caterina thatunemployment compensation is paid by the government “withno strings attached” to workers who have been fired or who havequit their jobs. This interpretation is not accurate. Workers arenot eligible for benefits if they have been discharged for misconductor have quit their jobs without “good cause.”Employees who believe they have been denied unemployment compensationfor an unjust reason may appeal the decision. Most appealsare resolved at the local level.Workers’ Compensation LawsLoss of income due to accidents, illness, or death on the job becamea serious problem with the introduction of machines to industry. Facedwith this situation, several state legislatures passed laws in the early1900s creating workers’ compensation programs. By 1959, all 50 statesChapter 21: Employment Protection and Equal Opportunity 461

had programs in place. Workers’ compensation is an insurance programthat provides income for workers who are injured or develop a disabilityor disease as a result of their job (see Figure 21.2). In Texas,workers’ compensation law was first enacted in 1913 and the TexasWorkers’ Compensation Program evolved over time to address a varietyof workplace needs. The Texas Workers’ Compensation Act of 1989 wasadopted to consolidate and strengthen workplace health and safety programs,improve benefits and benefits delivery, assist in resolving claimdisputes, ensure compliance with workers’ compensation laws, and developmedical fee and treatment guidelines to help control medical costs.Texas has also established the Texas Workforce Commission (TWC), thestate agency that provides workforce development services to employersand job seekers in Texas. Employers are offered recruiting, retention, training,and outplacement services, as well as labor market statistics. Jobseekers are provided with access to job search tools, training programs,and career development information, among other job-related resources.Employers bear the cost of workers’ compensation. In most states,employers must pay a tax on their payrolls to fund the state’s workers’compensation insurance fund. In some states, employers have the optionof contributing to a state fund or purchasing such insurance from aprivate insurer. In other states, all employers must purchase workers’compensation insurance from private insurers. As a result, state workers’compensation laws vary.Work Opportunity LawsIn 1996, Congress responded to problems within the governmentsystem for providing assistance to poor Americans with dependentBias in the WorkplaceRecently, Microsoft Corporation was hit with a $5 billion lawsuit fordiscrimination. Several present and former African-American employeesclaimed the company discriminated against them in employee evaluations andpay. These workers also claimed wrongful termination in some cases. The suitasserts that the company does little to hire and promote African Americans andthat there is a “glass ceiling” at Microsoft for African Americans. The companydenied these claims, but the lawsuit underscores the importance of encouragingdiversity in the workplace. (Source: TechWeb News, January 3, 2001)Connect Read more about bias claims by visiting the Web site of the U.S.Department of Justice, Office of Civil Rights.462 Unit 4: Being an Agent and Getting a Job

Figure 21.2WORKERS’ COMPENSATION ACTState of New MexicoWORKERS’ COMPENSATION ADMINISTRATIONEach employer who is subject to the Workers’ CompensationAct must conspicuously display this poster wherevernotices to employees and applicants for employment arecustomarily posted, pursuant to Chapter 52, NMSA 1978,Section 52-1-29.Each employer and employee enjoys certain rights underthe provisions of the New Mexico Workers’ CompensationAct. Generally, each employer of three or more workers isrequired to provide workers’ compensation insurance.However, certain categories of employers and employees areexempt under the act; farm and ranch laborers, privatedomestic servants, and real estate salespersons are notrequired to be covered by Workers’ Compensation insurance.Employers of these categories may file with the Director anelection to be subject to the Workers’ Compensation Act.A worker injured on the job is entitiled to medical care.Either the worker or the employer may choose the healthcareprovider for the initial sixty (60) day period. The partywho did not choose the initial healthcare provider may selectthe healthcare provider for the remaining medical benefitperiod. Either may challenge the healthcare choice of theother by notifying the director, in writing. A Workers’Compensation Administration Judge will hear the challengeand render a final decision within seven (7) days.Wage disability benefits are not paid for an injury thatresults in seven (7) or less days of disability. If an on-the-jobinjury results in more than seven (7) days of disability,benefits are paid at the rate of sixty-six and two-thirds (66 &2/3) percent of the average weekly wage at the time of theaccident, not to exceed the maximum specified by law, or$297.19 for 1991. For information about prior-yearmaximum-wage benefits, contact the Workers’ CompensationAdministration at the address or phone number listed below.The first wage disability benefit payment or notice of denial isdue to the claimant fourteen (14) days after the Employer’sFirst Report of Accident (WCAE1.1) is filed. If you believe apayment is due to you and you have not received it, contact aWorkers’ Compensation Administration Ombudsman throughone of the telephone numbers listed below.NOTICE OF ACCIDENTA worker claiming entitlement to workers’ compensationbenefits must file a NOTICE OF ACCIDENT with theiremployer. However, this is not necessary.ACTA DE COMPENSACIÓN DE LOS TRABAJADORESEstado de Nuevo MéxicoADMINISTRACIÓN DE COMPENSACIÓNDE LOS TRABAJADORESCada empleador que está bajo el Acta de Compensaciónde los Trabajadores debe mostrar este cartel en forma visibledonde que se acostumbra poner las notificaciones para losempleados y las personas que solicitan trabajo, segun elCapítulo 52, NMSA 1978, Sección 52-1-29.Cada empleador y cada empleado goza de ciertosderechos bajo las disposiciones del Acta de Compensación delos Trabajadores de Nuevo México. En general, cada empleadorde tres empleados o más debe ofrecer el seguro decompensación de los trabajadores. Sin embargo, ciertascategorías de empleadores y de empleados están exentasbajo el acta: no se exige que los obreros agrícolas, sirvientesdomésticos o agentes inmobiliarios recibir el seguro decompensación de los trabajadores. Los empleadores de estascategorias pueden dar notificación al Director que ellos van aproveer seguro bajo el Acta de Compensación de losTrabajadores.Un trabajador lastimado en el trabajo tiene derecho acuidado médico. El trabajador o el empleador puede elegir elproveedor de cuidado médico para el periodo inicial desesenta (60) días. El que no eligío el proveedor de cuidadomédico inicial puede elegir el proveedor de cuidado médicopara el resto del periodo de beneficios médicos. Cualquiera delos dos puede protestar la elección de cuidado médico delotro notificando al Director por escrito. Un Juez de laAdministración de Compensación de los Trabajadores considerarála protesta y pronunciará una decisión final dentro desiete (7) días.No se pagan beneficios sobre el salario debido a incapacidadpor una lesión que resulta en siete (7) días o menosde incapacidad. Si una lastimadura producida en el trabajoresulta en más de siete (7) días de incapacidad, se pagan losbeneficios a razón del sesenta y seis y dos tercios (66 & 2 /3)por ciento del salario semanal promedio en el momento delaccidente, sin exceder la cifra máxima especificada por ley, osea $297.19 para 1991. Para información acerca de losbeneficios salariales máximos de años anteriores, póngase encontacto con la Administración de Compensación de losTrabajadores en la dirección o número de teléfono abajomencionado. El primer pago salarial por incapacidad o lanotificación de denegación debe llegar al reclamante dentrode los catorce (14) días después de que se presenta el PrimerAviso de Accidente del Empleador (WCA E1.1). Si usted creeque se le debe un pago y no lo ha recibido, póngase encontacto con un.WORKERS’ COMPENSATIONWorkers’ compensation laws vary widely, and in somestates, must be posted in a second language. Who bearsthe cost of workers’ compensation?Chapter 21: Employment Protection and Equal Opportunity 463

children. This system, known as welfare, was criticized for many reasons.One criticism was that the welfare system deterred people fromlooking for employment because the system penalized people who foundwork by lessening their welfare payments if they made money at a job.Congress acknowledged this criticism, as well as several others, byenacting the Personal Responsibility and Work Opportunity Act of 1996.This novel act instituted a new program entitled Temporary Assistanceto Needy Families (TANF). Under TANF, a majority of all recipientsmust hold a job, enter career programs, or face a loss of payments. Thisrequirement becomes effective after a recipient has received benefitsduring a two-year period. The new system also has a fund that providespayments for child care.The new system includes many restrictions. For instance, to be eligiblefor benefits, minors who are parents must maintain their education orbe enrolled in a career program. Such minors must also reside in a homethat is managed by an adult. In addition, TANF does not provide funds forimmigrants, regardless of their legal status as residents of the UnitedStates. There is a limit of five years to receive benefits under the act.Reviewing What You Learned1. Using the Internet, library, or other resource,identify current legislation that insuresemployee safety in the workplace.2. What legal requirements are placed uponemployers with regard to wages and hours?3. What federal statutes are designed to protectemployee privacy rights?4. What is the difference betweenunemployment compensation and workers’compensation?Critical Thinking ActivityRight to Privacy What justification can begiven for the fact that the privacy rights ofgovernment workers are often given moreattention than the privacy rights of employeesin the private sector?Legal Skills in ActionWorkplace Health and Safety While workingon a summer job at a local manufacturing firm,you learn that one of your fellow employeeshas made a complaint to OSHA about certainunsafe practices at the plant. You overhear adiscussion in the lunchroom that reveals thatthe worker who filed the complaint will likelybe discharged. Organize a role-playing sessionin which one participant is the worker who filedthe complaint and another person represents acoworker. In the course of the discussion, explainthe nature of OSHA and the safeguards givento employees who file complaints. Also explainthe consequences that result if a violation of anOSHA regulation is discovered at the plant.464 Unit 4: Being an Agent and Getting a Job

Laws RegulatingEmploymentDiscriminationDiscriminationIn the second half of the twentieth century, the federal governmenttook steps to make the law as fair as possible in the area of employmentopportunities. Title VII of the Civil Rights Act was an important step inthis direction. Other steps include the Age Discrimination in EmploymentAct, the Americans with Disabilities Act, and the Pregnancy DiscriminationAct (see Figure 21.3). Many of these laws and regulationswere the result of unethical practices. We will examine how these actsregulate employment opportunities to discourage discrimination ,which is the unequal treatment of individuals based on sex, age, race,nationality, or religion.The Civil Rights Act of 1964Title VII of the Civil Rights Act of 1964 prohibits discrimination inemployment based on race, color, religion, sex, or national origin (seeFigure 21.4). These five categories, along with age, are often referredto as protected classes.Discrimination occurswhen employment relateddecisions are made basedupon any combination ofthese protected characteristics.Employees whobelieve they have beenEQUAL EMPLOYMENTOPPORTUNITIESThe federal and stategovernments have passedlaws that attempt to makeemployment opportunitiesas open as possible for allpeople. What types ofemployment opportunitieshave been opened forpeople because of the CivilRights Act of 1964?l How to definediscriminationl How to identify theobjective of theCivil Rights Actl How to identify thegoal of the AgeDiscrimination inEmployment Actl How to explain themission of theAmericans withDisabilities ActYou need to knowthe laws that outlawemployment discriminationto be able toidentify instances ofdiscrimination.l discriminationl disparate treatmentl bona fide occupationalqualification (BFOQ)l disparate impactl business necessityl quid pro quoharassmentl hostile workenvironmentl disabilityChapter 21: Employment Protection and Equal Opportunity 465

Figure 21.3LawCivil Rights Act (Title VII) 1964(amended 1972, 1991)*Federal Laws Against Employment DiscriminationProtection*Forbids discrimination based on sex, race, color, national origin,or religion.Age Discrimination EmploymentAct (ADEA) 1967 (amended 1978)*Older Workers’ Benefit ProtectionPlan (OWBPA) 1990*Americans with Disabilities Act(ADA) 1990*Vietnam Era VeteransReadjustment Act (VEVRA) 1972**Immigration Reform and ControlAct (IRCA) 1986**Forbids discrimination against any person aged 40 or older in hiring,firing, promotion, or other aspects of employment.*Forbids discrimination against older workers in handling their employeebenefit and retirement plans; amended ADEA above.*Forbids discrimination on the basis of a physical or mental disability ifdisabled individual can perform “essential function of the job despitethe disability.”*Encourages employment of veterans of armed forces who served inVietnam between 1965 and 1975; also covers reservists called up foractive duty; applies to federal contracts only.*Prohibits private employers from recruiting and hiring aliens who areineligible for employment in the United States; also prohibits employmentagencies from referring ineligible aliens.*Administered by Equal Employment Opportunity Commission**Administered by Veteran’s Employment ServiceFEDERAL LAWSAGAINST EMPLOYMENTDISCRIMINATIONFederal laws establishprotected groups ofpeople who may not bediscriminated against inemployment. What federalagency administers mostof these laws?discriminated against can file their complaints with the Equal EmploymentOpportunity Commission (EEOC). The EEOC has the power tostop unfair employment practices by seeking a court injunction or bysuing the employer for damages. Should the EEOC elect not to pursuea case, the complaining party may seek a private remedy in court.Disparate Treatment Discrimination can take place in a numberof ways, most prominently through disparate treatment and disparateimpact. The most obvious and direct way to discriminate is throughdisparate treatment. Under disparate treatment , the employer intentionallydiscriminates against an individual or a group of individualsbelonging to one of the protected classes. For instance, an employerwho holds a general policy that declares, “We do not hire female engineers”or, “We do not hire male nurses” would be practicing this typeof discrimination.Example 4. Walther Maggitti owns a large auto repair shop in asuburb of a major midwestern city. Having been a mechanic formost of his life, Walther has firm opinions about how to run abusiness in the automobile industry. When Linda Fitzgerald466 Unit 4: Being an Agent and Getting a Job

Figure 21.4EQUAL PROTECTION IN EMPLOYMENTProhibiting DiscriminationThe federal government has taken many steps tomake the law as fair as possible in the area ofemployment opportunities. One of the major lawsin this regard is the Civil Rights Act of 1964.Hiring PracticesThe Civil Rights Act of 1964 prohibitsdiscrimination in employment based onrace, color, creed, religion, sex, ornational origin.Fair TreatmentEmployers are not permitted todiscriminate in hiring practiceseither directly through disparatetreatment, or indirectly throughdisparate impact.The protection granted to employees underthe Civil Rights Act includes not only hiringpractices but also treatment on the job.Chapter 21: Employment Protection and Equal Opportunity 467

Cesar ChavezUnions exist withinmany industries. In1952, a migrant workernamed Cesar Chavezbegan working for theethical treatment offield workers. By 1972,he was the presidentof the United FarmWorkers Union. Becauseof Cesar Chavez’sefforts, field and citrusworkers have betterpay and working conditions.Cesar Chavez isthe first union leaderin U.S. history to behonored with a stateholiday. In California,Cesar Chavez Day iscelebrated on March 31.Do you think thatCesar Chavez shouldalso be recognizedwith a nationalholiday? Why orwhy not?Get InvolvedDo a report on CesarChavez, and share it inclass. Ask your parentsand neighbors aboutthe advantages anddisadvantages ofbelonging to a union.applied for a position as an auto mechanic at his shop, Waltherrefused to consider her as a candidate, in spite of her excellentqualifications and experience. He later told an employee that he“didn’t believe in hiring female mechanics.” Walther chose tohire a young male mechanic who had little experience and formaltraining. If sued, Walther could be found guilty of practicing discriminationthrough disparate treatment.Employers have a defense against the charge of disparate treatment.This defense is termed a bona fide occupational qualification(BFOQ) . If the employer can show that the qualification in question isa bona fide (good faith) employment qualification, then the discriminationmay be justified. For example, requiring that all applicants for ajob modeling women’s bathing suits be female would be a bona fideoccupational qualification. However, the BFOQ defense can never beused to justify discrimination based on race.Disparate Impact Discrimination can also take place via disparateimpact , which is indirect discrimination. Discrimination through disparateimpact occurs when an employer has an employment policy orcriteria that appears neutral on the surface but has an unfair impact onthe members of one or more of the protected classes. For example, anemployer who only hires people who are over six feet tall may be discriminatingthrough disparate impact.Example 5. Marcus Kachur, the owner of Allied Trucking andHauling, stipulated that all employees must be able to benchpress150 pounds. Nearly all women who applied at Kachur’sfirm were unable to meet this requirement. Kachur justified hispolicy by stating that employees needed to be able lift heavy objectsto perform their daily job duties. However, Kachur’s employeeswere primarily in charge of driving goods to theirdestinations. Very seldom did Kachur’s employees actually loador unload goods. If sued, Kachur could be found guilty of practicingdiscrimination through disparate impact.Employers have a defense against a charge of disparate impact, knownas business necessity . If the employer can show that qualification isrequired to perform the job, then it may be permitted despite its disparateimpact on a protected class. For instance, a requirement that all applicantsfor a job as a surgeon have a medical degree might have a disparate impacton one of the protected classes. However, because a medical degree isneeded to do the job, this qualification is a business necessity.468 Unit 4: Being an Agent and Getting a Job

Civil Rights Act of 1991The Civil Rights Act of 1991 was enacted by Congress for severalreasons. It was intended to strengthen the doctrine of disparate impact,which had been weakened by a 1989 Supreme Court case. The new lawmakes it clear that in disparate impact cases, the employer has the burdenof proving the existence of a business necessity. Moreover, theemployer must also prove that the hiring or promotion qualification isdirectly related to the specific job involved in the case rather than togeneral business objectives. A second reason for passing the new civilrights act was to allow plaintiffs who believe that they have been discriminatedagainst because of sex, religion, national origin, or disabilityto recover not only any back pay owed to them, but also compensatoryand punitive damages. Before this new act, only people discriminatedagainst because of race had this right.Sexual HarassmentSexual harassment can occur either through a quid pro quo activityor through the creation of a hostile working environment. Neitherthe expression quid pro quo harassment nor the expression hostilework environment appears in Title VII of the Civil Rights Act of 1964.Nevertheless, the courts have consistently recognized both types ofdiscrimination. Quid pro quo harassment occurs when one workerdemands sexual favors from another worker in exchange for someemployment-related decision, such as a raise or a promotion. In contrast,the creation of a hostile working environment occurs when apattern of severe and pervasive sexually demeaning behavior has alteredthe workplace, making it a distressing, humiliating, or hostile place.Such demeaning behavior could include sexually explicit comments,jokes, photographs, cartoons, posters, gestures, and so on.An employer may be liable for sexual harassment committed by anemployee’s supervisor, or someone else in a position of power, if somesort of employment action occurs as a result of that harassment. Employmentaction has been defined by the courts to include termination, disadvantageousreassignment, or demotion. In the absence of this type ofemployment action, the employer may escape liability by demonstratingreasonable care was taken to prohibit or eliminate such harassment.This can be shown if the employer has an effective anti-harassmentpolicy in place. Even with such proof, the employer must also show thatthe complaining party did not take advantage of the procedures outlinedin the anti-harassment policy and that the failure to use the proceduresin the policy was unreasonable.Social StudiesThe Civil Rights Act of1964 prohibited discriminationin employmentbased on race, color,religion, sex, or nationalorigin.Research ActivityResearch the events inhistory that led up to thepassing of this act byconsidering the followingquestions:l What major civil rightsevents took placebetween 1954 and1965?l Who were the leadersin the civil rightsmovement?l Which civil rightsevent do you thinkwas most important?Why?Write a two-page reportbased on your findings.Pregnancy Discrimination ActTo ensure the fair and equal treatment of pregnant women, the PregnancyDiscrimination Act was enacted. The law makes it unlawful toChapter 21: Employment Protection and Equal Opportunity 469

AMERICANS WITHDISABILITIES ACTThe federal government hasattempted to open employmentopportunities for workers withdisabilities by passing theAmericans with Disabilities Act.What accommodations mighta company have to make for anemployee who is blind?470 Unit 4: Being an Agent and Getting a Jobdiscriminate against a woman because ofchildbirth or physical problems associatedwith pregnancy or childbirth. In addition,the law prohibits an employer from creatingan employee benefits package thatdiscriminates against women who arepregnant.Age Discrimination inEmployment ActThe Age Discrimination in EmploymentAct (ADEA) of 1967, amended in1978, prohibits employment agencies,employers with 20 or more employees,and labor unions of more than 25 members from discriminating on thebasis of age. This act forbids discrimination against any person aged 40or older in hiring, firing, promotion, or other aspects of employment. Thelaw does not apply if age is a true job qualification, as in the modelingof children’s fashions.The ADEA was amended by Congress in 1990 to make it clear thatthe act forbids discrimination against older employees with regard totheir retirement and pension plans. In addition, the amendment that isknown as the Older Workers’ Benefit Protection Plan Act (OWBPPA)gives workers a legal way to remedy a situation in which they have beencheated or coerced into surrendering their ADEA rights by signinga waiver.Americans with Disabilities ActThe Americans with Disabilities Act of 1990 forbids discriminationon the basis of a disability if the disabled individual can do the “essentialfunctions” of a job. The act defines disability as any “physical ormental impairment that substantially limits one or more of the major

life activities.” Employers cannot discriminate against those with disabilitieswhen screening or hiring, granting promotions, offering payraises, or offering on-the-job-training opportunities. Both direct andindirect discrimination are outlawed. Indirect discrimination occurswhen an employer makes a hiring decision based on a qualification thatis not related to job performance but has the effect of eliminating thedisabled individual.Example 6. Melinda Breakwater, who has a visual disability,applied for a position as an accountant with the Rawlings DepartmentStore. Ross Benteen, the store’s Human Resources Director,tested her eyesight by having her read a chart written inextremely fine print. Breakwater failed the test and was rejectedsolely on that basis. Breakwater can argue that Rawlings hasviolated the ADA if she can show that she would not have to readsuch fine print on the job, or that she could have been reasonablyaccommodated if provided with a magnifier.In Example 6, if the job Breakwater had applied for involved drivingand her eyesight prevented her from driving, she would not have a discriminationcase under the ADA. Moreover, employers are not withoutsome protection. For example, if a proposed accommodation wouldcause “undue hardship,” then the employer would be excused. Factorsused in determining whether a proposed accommodation will causehardship include the nature and cost of the accommodation needed aswell as the financial ability of the company to provide the necessaryaccommodation.Reviewing What You Learned1. What is discrimination?2. What is the objective of the Civil Rights Actof 1964?3. What is the mission of the Americans withDisabilities Act?Critical Thinking ActivityEthical and Social Attitudes Select one of thelaws discussed in this chapter. Then in one totwo paragraphs, relate ethical and socialattitudes to changes that occur in the law. Howhave ethical and social attitudes changed overtime, and how are they reflected in changes inthe law?Legal Skills in ActionSexual Harrassment Your friend, Alison,believes that she has been the victim of sexualharassment. She is apprehensive about reportingthe harassment to the Human ResourcesDirector at her place of employment, which is arequirement of the company’s anti-harassmentpolicy. Write a letter to Allison explainingwhether she should file the complaint.Chapter 21: Employment Protection and Equal Opportunity 471

CHAPTERASSESSMENTSection 21.1 Laws Relating to EmploymentConditions and Benefits● Businesses with 11 or more employees thatengage in interstate commerce must meet thehealth and safety standards of the OccupationalSafety and Health Administration (OSHA).OSHA makes sure the businesses adhere tosafety regulations by conducting randominspections and imposing fines for violations.● The federal Fair Labor Standards Act of 1938,also known as the Wage and Hour Law, requirescertain employers to pay their employees aminimum hourly wage rate, plus time-and-a-halffor all work in excess of 40 hours per week. Inaddition, the Equal Pay Act states that employersengaged in interstate commerce must pay womenthe same rate of pay as men holding the sametype of job. Pension plans are protected by theEmployment Retirement Income Security Act(ERISA). ERISA requires employers to placeemployee contributions to pension plans in atrust that is independent of the employer’s control.Another ERISA requirement imposes a duty ofgood faith on those who manage pension plans.Other ERISA requirements include informingemployees of their retirement benefits andsubmitting reports on the plan to the Secretaryof Labor.● The Drug-Free Workplace Act applies tocompanies that have contracts with the federalgovernment. Under the act, companies mustimplement a plan to make sure employees do notuse drugs on the job, and drug testing may beused under certain circumstances. The EmployeePolygraph Protection Act prohibits employersfrom using lie detector tests for screening ofapplicants or for random testing of employees.● Unemployment compensation is a system ofgovernment payments to people who are outof work and looking for a job. You may bedisqualified for unemployment benefits for alimited period if your unemployment arises outof a strike or lockout. Workers are also disqualifiedif they refuse suitable work without cause,have been discharged for misconduct, or havequit their jobs without “good cause.” Workers’compensation is an insurance program thatprovides income for workers who are injured ordevelop a disease as a result of their jobs.Section 21.2 Laws Regulating EmploymentDiscrimination● An employer cannot discriminate on the basis ofsex, race, color, national origin, religion, age,disability, or pregnancy.● The Civil Rights Act of 1991 was enacted byCongress to strengthen the doctrine of disparateimpact of employment discrimination by requiringthat the employer prove the existence of a businessnecessity that justifies discriminatingagainst an employee. In addition, the Civil RightsAct allows plaintiffs who believe that they havebeen discriminated against because of sex, religion,national origin, or disability to recover backpay, and compensatory and punitive damages.● The Age Discrimination Act (ADEA) of 1967,amended in 1978, prohibits some employers andlabor unions from discriminating on the basis ofage. The act forbids discrimination against anyperson aged 40 or older in hiring, firing, promotion,or other aspects of employment.● The Americans with Disabilities Act of 1990forbids discrimination on the basis of a disabilityif the disabled individual can do the “essentialfunctions” of a job. Employers cannot discriminateagainst any “physical or mental impairmentthat substantially limits one or more of the majorlife activities” when screening or hiring, grantingpromotions, offering pay raises, or offering onthe-job-trainingopportunities.472 Unit 4: Being an Agent and Getting a Job

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.OSHAdisparate treatmentequal pay rulepension plansocial securitydisparate impactunemployment compensation business necessitydisabilityharassmentworkers’ compensationdiscriminationhostile work environmentbona fide occupational qualification (BFOQ)quid pro quo harrassment1. These terms will help you remember important informationabout your rights as an employee. Write a summary ofChapter 21 for a friend who is not taking this class. In yoursummary, use and explain each of the terms listed above.2. Save a copy of your summary for future reference.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 21:Employment Protectionand Equal Opportunity—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.3. What is OSHA, and what is its purpose?4. What is the purpose of the Drug Free Workplace Act? Does it require that companiesdrug test their employees?5. Describe the Social Security Act. How many workers in the United States participatein the social security system?6. What defense do employers have against the charge of disparate treatment? Explainyour answer.7. In what situation might an employment qualification that would encourage disparateimpact be permitted?8. Identify an employee’s right to continued employment by examining currentlegislation, for example, unlawful termination, sexual harassment, family leave,Americans with Disabilities Act, and employee privacy. Select four such laws, andwrite a one- to two-sentence explanation of each.9. What is quid pro quo harassment?Chapter 21: Employment Protection and Equal Opportunity 473

CHAPTERASSESSMENTInterpreting and CommunicatingInformationIn this chapter, you learned about various lawscovering employment protection and equalopportunity, and government agenciesresponsible for enforcing these laws.10. Research the findings on a governmentagency audit, for example, compliancewith regulations of wage and hours, safetyand health, and equal employment. Writea two-page report on your findings.11. Select three laws that regulate the workplaceand research which governmentagencies are charged with enforcing thelaws. Then interview workers and employeesin your community that are affectedby this legislation and ask them if andhow the laws have affected their lives.You hear a coworker telling your employer—forthe third time in two months—that the handrailin the stairway to the shop’s basement needs tobe replaced. A week later, the rail is still broken.Debate12. If you know that the handrail is broken, doyou have an obligation to be careful on thestairway? Who is responsible for safety inthe workplace?13. Is there anything you can do to preventan injury?For the following cases, give your decision andstate a legal principle that applies.14. Wilma McAtee is CEO of NortexInternational. Douglas Sweeney, a Nortexengineer, believes that several operations inthe main plant are endangering workers. Hefiles several internal complaints. When hegets nowhere, he files a complaint withOSHA. McAtee learns that Sweeney filedthe complaint and fires him for it. Is McAteewithin her rights? Explain your answer.15. In January, Oxotech Petroleum hires LydiaTruell as a research scientist, at a salary of$65,000 per year. In March, Oxotech hiresGary Carr to do essentially the same job at asalary of $72,000. The two scientists havesimilar education and experience backgrounds,and they work side by side. Doesthe law have any provision covering this sortof inequity? Explain your answer.16. Jerry Figliano applies for a job as anarmored-car driver. Because armored-carpersonnel carry firearms, Figliano isrequired to take a drug test. He refuses,arguing that the test violates his privacyrights. Is he correct? Explain your answer.17. Franklin Vasquez wants to become a flightattendant. He is discouraged from applyingby a supervisor, who tells him that thecompany only hires people who took homeeconomics in high school or were membersof Future Stewardesses of America. IfVasquez files a complaint with the EqualEmployment Opportunities Commission,which of the two theories of discriminationwould form the basis for his complaint?Explain your answer.18. Robert Patton works as an accountant. Hehas never received an unfavorableperformance review. At age 55, Pattondevelops problems with his eyes that requirehim to use a special lamp and to takefrequent breaks to prevent eye strain. Uponlearning of the required changes, Patton’ssupervisor fires him and hires a youngerperson. What law or laws might protectPatton? Explain your answer.474 Unit 4: Being an Agent and Getting a Job

In each case that follows, you be the judge.19. Unemployment BenefitsPamela White was hired by Inside Radio/Radio Only, Inc. as a newsletter editor. The companytold her she would occasionally have to work 10 extra hours per week. Several assistants quit, andWhite was forced to work more than 80 hours per week for four weeks. During that time, Whitehad to do the assistants’ work and had to create the newsletter manually. She was forced to skipmeals, and eventually suffered from nutritional problems, a mild case of depression, and a moresevere case of nervous exhaustion. White quit her job and filed for unemployment compensation.Should she receive benefits? Why or why not?Inside Radio/Radio Only, Inc. v. Board of Review, 498 A.2d 793 (NJ).20. Employment ExtensionsAs part of its retirement system, the state of Wyoming required state employees who were 65years of age to apply for yearly extensions of their employment. Six state workers, Anderson,Bosshardt, Chessborough, Kuatholz, Nelson, and Ventling, filed a complaint with the EEOC.Do the state workers have a cause of action against Wyoming? Should the state workers wintheir case? Why or why not?EEOC v. The Wyoming Retirement System, 771 F.2d 1425 (10th Circuit).Payroll DeductionNow that Harvey is receiving a steady paycheck,he notices that his employer is deducting a smallamount for social security taxes (often calledFICA) each week. Harvey doesn’t know muchabout social security.ConnectUsing a variety of search engines, help Harveyanswer the following questions:21. Who runs the Social Security Administration?22. What benefits does social security provide?23. Can you predict how much money Harvey willreceive from social security when he retires?24. How can Harvey replace his social securitycard if he loses it?25. Predict Why do you think the governmenthas created so much legislation to protectemployees?26. Connect What safety features are in placein your school to protect students fromdanger?27. Question Identify legislation and agenciesthat regulate an employer’s obligation tosupply a safe and accessible workplace.Interview workers and employees affectedby this legislation, and write a one-pagereport on your findings.28. Respond Are there any new workplaceissues that employees face? Do you thinkthe federal government will create a law todeal with the issues? Explain your answer.Chapter 21: Employment Protection and Equal Opportunity 475

UNITLaw Workshop:Using Legal ToolsWhat Is a Sports Agent?In Unit 4, you learned about theauthority and duties of an agent to aprincipal. In this workshop, you willapply this knowledge to better understandthe relationship between a professionalathlete and a sports agent.Step A: PreparationProblem: What duties does a sports agent perform for a professionalathlete?Objectives: In this workshop, you will investigate the career of a sportsagent, and create an agreement between yourself (as an agent) and a hypotheticalprofessional athlete. You will also create a contract between theathlete and a hypothetical corporate sponsor.l Research the sportsagent career.l Analyze a number ofagreements and contracts.l Create an agreementbetween yourself anda hypotheticalprofessional athlete.l Use technology toproduce a contract.476 Unit 4: Being an Agent and Getting a Job

Step B: Procedure1. Use the Internet and library to locate information about sportsagents. Two helpful Web sites are www.prosports.com andwww.sports-management.com.2. Write a brief report about being a sports agent.3. Based on Chapter 18 and your own research, write an agreementbetween yourself (as a sports agent) and a hypothetical professionalathlete.4. Write a contract between the athlete you represent and a corporatesponsor. (Corporate sponsors are businesses that pay celebrities toendorse their products.)5. Present your agreement and contract to the rest of your class. Explainhow your agreement and contract fulfill your duties as an agent to theprincipal and how they fulfill the principal’s duties to you.Step C: Creating a Model to Analyze Your AgreementsCreate two charts; one should list the agent’s duties to the principal, andthe other should list the principal’s duties to the agent. Check the dutiesthat you believe are addressed in your agreement and contract. Shareyour checklist with your class.Step D: Workshop Analysis ReportAnalyze the charts you created, and answer the following questions:1. How are the agent’s duties to the principal expressed?2. How are the principal’s duties to the agent expressed?3. Are any duties implied, rather than expressed, in these agreements?If so, what are they?Chapter 21: Employment Protection and Equal Opportunity 477

UNITLandmark CaseAutomobile Workers v. Johnson Controls, Inc.United States Supreme Court499 U.S. 187 (1991)Issue Can an employer exclude a female employee from certain employmentpositions to protect the health of a fetus if the woman should becomepregnant?Factsacts Johnson Controls, Inc. manufactures batteriescontaining lead. Concerned about the safetyof its employees, Johnson Controls adopted safetymeasures directed at its female workers. Becauseexposure to lead can pose serious health risks to afetus, Johnson Controls encouraged women whoexpected to give birth to choose positions that wouldnot expose them to lead. The company requiredany woman who wished to work in such a positionto sign a statement advising her “that womenexposed to lead have a higher rate of abortion.”After eight female employees with high levels oflead became pregnant, Johnson Controls excludednearly all women from positions that exposed themto lead.. . . [I]t is [Johnson Controls’] policy thatwomen who are pregnant or who are capable ofbearing children will not be placed into jobsinvolving lead exposure or which could exposethem to lead through the exercise of job bidding,bumping, transfer, or promotion rights.”Several female employees filed a class actionsuit against Johnson Controls, alleging that thecompany’s “fetal protection policy” constitutedunlawful discrimination on the basis of gender.Opinion Congress has adopted legislationprohibiting discriminatory practices in employmentbased on gender. The Civil Rights Act of1964, as amended, prohibits gender-based classificationsas a term or condition of employmentand prohibits such classifications in other mattersaffecting an employee’s status in a company. TheCivil Rights Act was amended by the PregnancyDiscrimination Act of 1978, which provides thatgender discrimination includes discrimination“because of or on the basis of pregnancy, childbirth,or related medical conditions.”Is the Policy Discriminatory?The Court determined that Johnson Controls’fetal protection policy is discriminatory becauseit excludes only women with the ability to becomepregnant from certain positions. Although evidenceexists about the adverse effects of lead onthe male reproductive system, Johnson Controls’policy excludes only females from the designatedpositions. An employer’s good intentions for suchdiscrimination do not cure the discriminatorypractice.478 Unit 4: Being an Agent and Getting a Job

A Bona Fide Occupational Qualification?Although the Court determined that JohnsonControls’ policy was discriminatory, it examinedwhether the policy fell within the exception inthe Civil Rights Act that allows an employer todiscriminate on the basis of “religion, sex, ornational origin in those certain instances wherereligion, sex, or national origin is a bona fideoccupational qualification reasonably necessaryto the normal operation of that particular businessor enterprise.” Johnson Controls argued thatits policy fits within the BFOQ exclusions forsafety reasons. The Court concluded such anexception is limited to those situations in whichgender or pregnancy interferes with theemployee’s ability to perform the job. The Courtnoted that fertile women can manufacturebatteries as well as other employees.The above-cited Pregnancy DiscriminationAct of 1978 provides that unless pregnantemployees differ from other employees “in theirability or inability to work,” theymust be “treated the same” asother employees. The Courtfurther stated that “[w]omen ascapable of doing their jobs astheir male counterparts may notbe forced to choose betweenhaving a child and having ajob.”The Court observed that“[d]ecisions about the welfare offuture children must be left to theparents who conceive, bear, support,and raise them, rather thanto the employers who hire thoseparents.”Holding The Court held that an employermay not exclude a female employee from certainemployment positions to protect the health of afetus if the woman should become pregnant. Sucha policy constitutes sexual discriminationprohibited by the Civil Rights Act of 1964, asamended by the Pregnancy Discrimination Actof 1978.The Court also explained that Johnson Controlswould not likely be held liable for potentialfetal injuries or defects of the children of its femaleemployees. As long as an employer informsemployees of a potential risk, it has not acted negligently.Any actions on the part of Johnson Controlsto avoid hiring women because of fear ofliability, therefore, would not be justified.1. What was the purpose of Johnson Controls’policy of excluding women from employmentpositions that would expose them to lead?2. On what two federal acts did the SupremeCourt base its decision that Johnson Controls’fetal protection policy constituted unlawfulsexual discrimination?3. Did it matter that Johnson Controls possessedgood intentions when it implemented its fetalprotection policy?4. In what instances is an employer permitted todiscriminate against employees based ongender?5. Give an example of a situation wherein anemployer may discriminate based on gender.Go to the Understanding Business and Personal Law Web site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 21: Employment Protection and Equal Opportunity 479

UNITUNIT OVERVIEWMost people usesome form of currencyto purchase goods, butthey do not always usecash. As a consumer,you need to be awareof your rights and obligationswhen you writechecks, borrow money,use credit to makepurchases, and manageyour debts. In this unit,you will study:l Borrowing money andbuying on creditl Negotiableinstrumentsl Writing checksl Transferring andcollecting negotiableinstruments

Using YourPurchasing PowerMoney Problems Managingmoney is not your strong suit. Youowe your parents $500, have morethan $1,000 in credit card debt, andrecently bounced two checks becauseyou didn’t have enough money inyour checking account.In your Justice Journal, writeabout the legal and ethical troubleyou can get into by being a poormoney manager.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 5: Using Your Purchasing Power 481

CHAPTERBorrowing Money andBuying on CreditUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 22: Borrowing Money andBuying on Credit—Chapter Overviewsto preview the chapter information.

The OpeningSceneStarting in this chapter, you willmeet David and Melanie Mueller,a newly married couple. David istinkering with a laptop computerin the couple’s small third-floorapartment when the telephone rings.Careless CashDAVID: Hello?MELANIE: (From her cell phone.) Hi, honey. I’malmost home. Did you miss me?DAVID: Of course I did! How was work?MELANIE: Super, but I missed you. Any luck findinga job?DAVID: Not yet. I was looking for leads on the Webwhen my laptop stopped working.MELANIE: Your laptop?DAVID: I bought it on sale today, but it’s defective. Ihave to take it back. Get a pizza on your wayhome, will you?MELANIE: Okay, we’ll celebrate our anniversary—it’s been six months, you know. See you soon.(Later, Melanie enters the apartment, and Davidgreets her with a gift-wrapped box.)DAVID: Happy anniversary, Sweetie!MELANIE: (Opening the box and finding a papershredder.) Oh, David! You’re so romantic.DAVID: I got it when I bought my new laptop. The signsaid, “No Refunds.”MELANIE: Where did you get the money?DAVID: I charged it.MELANIE: Oh, did you find your credit card?DAVID: No, it still hasn’t turned up. I used theother one.MELANIE: David, the APR on that card is19.8 percent!DAVID: No problem. Did you get the mail on yourway in?MELANIE: Yes, you got a letter from your aunt anda bill.DAVID: (Opening the letter.) Aunt Mae heard I gotlaid off and sent us a check for $500.MELANIE: What a wonderful aunt.DAVID: This bill is for the credit card I lost. But, hey! Ididn’t make any of these charges. The bill says weowe $1,697!MELANIE: Oh, no! Didn’t you notify them when youlost the card? (The telephone rings.) I’ll get it. (Shelistens a moment, becoming agitated.) You can’tdo that, can you?DAVID: What is it?MELANIE: (Hanging up the phone and going to thewindow.) The bank says they just repossessed ourcar for lack of payments. Yes, it’s gone from theparking lot!DAVID: Can they do that?MELANIE: (That evening.) David, where is the checkfrom Aunt Mae?DAVID: On the table next to the laptop.MELANIE: I looked there. I can’t find it anywhere.DAVID: No problem. It’s around somewhere.1. What can you do if you buy something defectiveusing a credit card?2. What is the meaning and purpose of APR?3. To what extent is a cardholder liable when acredit card is lost?4. How must repossession of a vehicle beconducted?Chapter 22: Borrowing Money and Buying on Credit 483

What Is Credit?l How to distinguishbetween the differenttypes of creditl How to explain theTruth and Lending Actl How to describesecured loansl How to guard againstcredit card problemsKnowing the laws thatapply and the difficultiesthat can arise in usingcredit will help you avoidproblems in your personalfinances.l creditl interestl creditorl debtorl open-end creditl line of creditl closed-end creditl secured loanl collaterall security interestl secured partyl repossessl smart cardThe Meaning of CreditCredit is an arrangement through which you may receive cash,goods, or services now and pay for them in the future. The cost of usingsomeone else’s money is called interest . The party who sells the goodson credit or lends the money is called the creditor , and the party whobuys the goods on credit or borrows the money is called the debtor .Types of CreditThere are different kinds of credit that you can use. The two mainkinds are open-end credit and closed-end credit.Open-End CreditOpen-end credit is credit that can be increased by the debtor bycontinuing to purchase goods or services on credit, up to a certain limit.You are given a line of credit , or a maximum amount of money madeavailable to you. Charge accounts and credit cards are examples of openendcredit. Your first bank credit card, for example, may have a creditlimit of $2,000. You can buy whatever you want until the total of yourpurchases reaches that level.Closed-End CreditClosed-end credit is credit given for a specific amount of moneyand cannot be increased by making additional purchases. Buying aLOOK BEFOREYOU LEAPBefore taking out aloan, you should sitdown and figure outyour finances. Whatis perhaps the mostimportant point youshould consider?484 Unit 5: Using Your Purchasing Power

vehicle and paying for it in monthly installments is an example of closedendcredit. Many bank loans are also closed-end credit arrangements.Borrowing MoneyYou will be asked many questions when you apply for a loan froman institution. Lenders want to make sure that you are a reliable candidatebefore they issue you a loan. Figure 22.1 shows some sampleapplication questions. You should shop around before borrowing moneyor buying on credit because lenders charge different rates of interest.Finding a competitive interest rate can save you a lot of money in thelong run.Truth in LendingThe Truth in Lending Act requires that lenders tell you both thefinance charge and the annual percentage rate (APR) of the loan. Withthis information you can compare the cost of a loan from differentlenders.Example 1. When shopping for a truck, Jill asked each dealershe visited what the APR would be to finance the purchase. Thefirst dealer said 7.9 percent, another dealer quoted 8.2 percent,and her bank said that it would be 12 percent. Jill went back tothe first dealer, confident that she had found the best deal whenshopping around for credit.Secured LoansA secured loan is one in which creditors obtain an interest in somethingof value, called collateral , from which they can secure paymentif you do not pay. The interest that is given to creditors is known as asecurity interest . The lender or seller who holds the security interestis known as the secured party .WHO ARE YOU?A potential lender will requireyou to answer a number ofspecific questions on a creditapplication. Why do you thinkthat a creditor would wantto know the names andaddresses of your presentand previous employers?Figure 22.1 Sample Credit Application Questionsl Amount of loan requestedl Other income and sources of other incomel Proposed use of the loanl Have you ever received credit from us?l Your name and birth datel If so, when and at which office?l Social security and driver’s license numbersl Checking account number, institution, and branchl Present and previous street addressesl Savings account number, institution, and branchl Present and previous employers and their addresses l Name of nearest relative not living with youl Present salaryl Relative’s address and telephone numberl Number and ages of dependentsl Your marital statusChapter 22: Borrowing Money and Buying on Credit 485

Example 2. When Jill bought the truck in Example 1, the dealertook a security interest in the vehicle. To protect the seller’s rightsin the vehicle, notice of the security interest would be written onthe back of Jill’s certificate of title to the truck.Using CreditCardsBefore Natasha left forcollege, her parentsgave her a MasterCardwith a $1,000 creditlimit for textbooks andsupplies for which theyagreed to pay. Natashaalso has her own VISAwith a $500 credit limitthat she uses for clothesand entertainment.Natasha pays the VISAbill. During her firstsemester, she chargedabout $375 for booksand supplies with theMasterCard. She alsoquickly reached thelimit on her VISA. NowNatasha wants to go toa concert. She knowsshe can’t charge it onher VISA, so she chargesit to her parents’MasterCard withouttheir permission. WasNatasha’s action ethical?Why or why not?Sometimes, creditors file a financing statement in a public officeto give notice of their security interest. Anyone can check the recordsthere to see if title is clear on items of personal property.Repossession If the debtor does not pay back the loan, the securedparty has the right to repossess , or take back, the goods. Repossessionmust be done without breaching the peace (i.e., without causing a disturbance).If the debtor refuses to surrender the goods, legal processmust be used to obtain them.After repossessing goods, a secured party may keep them (withexceptions) or sell them. The sale may be a public auction or privatesale. If the goods are consumer goods for which the debtor has paid60 percent or more of the price, the secured party cannot keep them—they must be sold. The debtor must be notified and is entitled to receiveany surplus of the sale after debts and expenses have been paid.486 Unit 5: Using Your Purchasing PowerSECURITY INTERESTWhen you buy a motor vehicle on credit, theseller will take a security interest in the vehicle.Why is notice of the security interest writtenon the back of the certificate of title?

Nonprofit AttorneyAlthough Yvonne Knight is an attorney, she works fora special kind of law firm that focuses on a particular areaof law. Knight works for the Native American Rights Fund(NARF), a non-profit organization that provides legalrepresentation and technical assistance to Indian tribes,organizations, and individuals. She is a specialist in “Indian Law,” whichconsists of hundreds of treaties and court decisions, and thousands of statutes,regulations, and administrative rulings that determine and protect the rights ofNative American tribes and individuals.“Because of the historical development of the relationship between the UnitedStates and Indians, the federal government maintains a special trust relationshipwith Indian tribes,” says Knight, who is a member of the Ponca Tribe of Oklahoma.“That means that as an attorney, I deal mostly with federal law.”Shortly after joining NARF in 1971, Knight was assigned to help the MenomoneeTribe of Wisconsin restore its status as a tribe and reservation.“The Menomonee had been terminated as a tribe in the 1950s,” Knight says.“By the mid-70s, they sought to restore the rights and protections that tribal andreservation status would provide. That meant convincing Congress that thoserights needed to be restored.”The effort succeeded, and Knight then worked for three years helping theMenomonee Tribe draft a constitution. That tribal constitution, which had to beapproved by members and the Secretary of the Interior, effectively governs thetribe today.Since then, Knight has continued to fight for Native American rights in trialand appeals courts and around negotiating tables. One of her recent casesinvolved securing water rights for the Chippewa Cree Tribe of Montana. The caserequired years of negotiation, but the state of Montana and tribal representativerecently reached an agreement. In addition to dividing on-reservation water rightsbetween tribal and non-tribal users, the compact between the tribe and the statealso allows the tribe to use water from a federal reservoir.SkillsPersonalityEducationReading, persuasive writing, and articulate speaking.Hardworking, detail-oriented, persuasive.Undergraduate degree and law degree. Although Knight’sundergraduate degree was in education and English, shealso recommends political science and debate.You can find more information about NARF at www.narf.com. For moreinformation about nonprofit attorneys, visit ubpl.glencoe.com or visit yourpublic library.Chapter 22: Borrowing Money and Buying on Credit 487

According to a recentstudy, the average teenspends $104 a week. In2001, teens collectivelyspent $172 billion.Unfortunately, teens donot always spend wisely.The fastest growingage group of peoplefiling for bankruptcy is25 and under. Thesestatistics point to theimportance of solidfinancial planning.Cosignature Loans can also be secured by having a second person,called a cosigner or surety, sign the contract, agreeing to pay the loanif necessary. Often, young people buy their first automobile by havingtheir parents act as cosigners to the loan.Credit CardsCredit cards have become an important part of our culture. Theamount of credit card debt in the U.S. mushroomed to $680 billion in2001, with the average family holding 13 different credit cards. Theproblem was that the average credit card holder had $8,000 in outstandingcredit card debt and was paying 17 percent interest on thatamount. Figure 22.2 can help you choose a credit card.Example 3. John charged many items on his credit card, up to its$2,000 limit. Each month he pays $40 on the account, the minimumrequired by the card issuer. The interest rate is 19 percent.If John maintains the same payment rate, it will take him 33 yearsYour Credit ReportBefore credit card companies will give you credit, they will check yourcredit report. Credit reports contain information about your financial status,including your job history, how much you earn, and how much you owe.Credit reports also contain information about how long you have lived at yourcurrent address and whether you pay your bills on time. Credit card companiesalso want to know whether you own property such as a car or house that canbe sold to pay what you owe. Companies that are authorized to gather andreport this type of personal information will generate credit reports upon request.The law requires credit card companies to treat all applicants fairly. Theirconduct is regulated by the federal Equal Credit Opportunity Act. This lawstates that a credit card company may not refuse you credit if you qualify.In determining whether applicants qualify, this law requires credit cardcompanies to follow the same rules for everyone with similar income, bills,and credit histories.Check It Out Contact a credit reporting agency in your area. Does a creditreport exist for you? How can you obtain a copy?488 Unit 5: Using Your Purchasing Power

Figure 22.2Choosing a Credit CardWhen you choose a credit card, it pays to shop around. Follow these suggestions tofind the card that best meets your needs and to use it wisely:1. Department stores and gasoline companies are good places to obtain your firstcredit card.2. Bank credit cards are offered through banks and savings and loan associations.Annual fees and finance charges vary widely, so shop around. Shopping aroundcan save you a lot of money.USING CREDITRESPONSIBLYBefore you enter the worldof credit, you need tounderstand the variousoptions that are availableto you. Which of thesefactors would be mostimportant in your choiceof a credit card?3. If you plan on paying off your balance every month, look for a card that has agrace period and carries no annual fee or a low annual fee. You might have ahigher interest rate, but you plan to pay little or no interest anyway.4. Watch out for creditors that offer low or no annual fees but instead charge atransaction fee every time you use the card. Such charges can add up quickly.5. If you plan to carry a balance, look for a card with a low monthly finance charge.Be sure that you understand how the finance charge is calculated.6. Watch out for cards with variable interest rates. Your interest rate may rise andfall unpredictably.7. Not all cards offer a grace period. When you use such a card, the bank beginscharging you interest on the day you make the purchase or the day the purchaseis recorded on your account.8. If your card offers a grace period, take advantage of it by paying off your balancein full each month. With a grace period of 25 days, you actually get a free loanwhen you pay bills in full each month.9. If you have a bad credit history and have trouble getting a credit card, look for asavings institution that will give you a secured credit card. With this type of card,your line of credit depends on how much money you keep in a savings accountthat you open at the same time.10. Travel and entertainment cards often charge higher annual fees than most creditcards. Usually, you must make payment in full within 30 days of receiving your bill,or no further purchases will be approved on the account.11. Many banks and credit card issuers may charge hidden fees, such as servicecharges. Make sure that you know what they are.12. Think twice before you make a telephone call to a 900 number to request acredit card. You will pay from $2 to $50 for the 900 call and may never receivea credit card.Sources: American Bankers Association, Understanding Credit Card Costs (San Francisco:Consumer Action), March 1994. Choosing and Using Credit Cards (Washington, DC: FederalTrade Commission), January 1999. American Institute of Certified Public Accountants.U.S. Office of Consumer Affairs. Federal Trade Commission.Chapter 22: Borrowing Money and Buying on Credit 489

to erase the debt! He will pay $7,000 in interest on the $2,000 thathe borrowed to make his purchases. John could save a lot ofmoney by doubling his monthly payments and making every effortto bring the account balance down to zero as soon as possible.Paying for CollegeGoing to college canbe an incredible experience,but with therising cost of tuition,some students feel it isa financial impossibility.Loans are a goodway to pay for college,but many studentsavoid loans becausethey know that loansmust be repaid. Grantsand scholarships areavailable, but earningthem usually requiresexceptional grades.How can you maximizeyour chances ofearning a scholarshipor grant?Get InvolvedInvestigate requirementsfor scholarships,researching not justacademic scholarshipsbut those that areaffiliated with yourethnicity, your religiousaffiliation, and yourextracurricularactivities. See yourschool counselor forother options.Smart CardsA smart card is a new kind of card with a computer chip that canstore a large amount of data. Smart cards can hold debit and credit cardbalances, identification information, and much more. New data andapplications can be downloaded without a new card having to be issued.Smart cards can provide more security for online purchases, especiallythose made by cell phones. In addition, with new electronic signaturelaws (see Chapter 13), you will be able to sign online with your privatedigital signature stored in your smart card. Figure 22.3 offers some tipsfor buying online with a credit card.Disputed PurchasesIf you have a dispute with a credit card purchase, do not pay the billfor the disputed item. Instead, notify the credit card issuer by telephoneimmediately. The company or bank that issued the card must put thedisputed amount on hold and send you a form to fill out explaining thedispute. The card issuer will attempt to resolve the dispute and informyou of the results. If the problem is not corrected and the credit cardissuer brings suit, you may use as a defense the fact that unsatisfactorygoods or services were received.For this law to apply, the initial transaction must have taken place inyour state or within 100 miles of your mailing address. Creditors cannotgive you a poor credit rating for exercising your rights under this act.Lost or Stolen Credit CardsYou are responsible for only $50 of any unauthorized charges madebefore you notify the credit card issuer of the loss, theft, or unauthorizeduse of your card. You are not responsible for any unauthorizedcharges made after the company has been notified.Example 4. Tipper lost her credit card but did not notify the cardissuer for a week. Meanwhile, someone who found the card hadcharged a purchase of $175 with it. Tipper will have to pay $50toward this unauthorized purchase. If she had notified the cardissuer before the illegal purchase happened, however, she wouldnot have had to pay anything.490 Unit 5: Using Your Purchasing PowerCredit Card BlockingWhen you use a credit card to rent a car or to check into a hotel, theclerk usually gives an estimated bill to the credit card issuer. If the

Figure 22.3Online Credit Card Tipsl Don’t give out your credit card number online unless the latest security protocolsare in place and you know and trust the company in question. To ensure thesecurity of your account, your credit card information should be encrypted usingthe latest technology.l Don’t trust a site just because it claims to be secure. Before using a secured transactionsite, check out the encrytion software it uses. Some sites may claim to beencrypted when they actually are not. If you are not sure, ask for an alternatemethod of payment.ONLINE CREDITCARD TIPSPeople are defraudedsometimes when theyuse their credit cardsonline. How do youthink this occurs?l Read the fine print. If you receive an offer for a pre-approved credit card or if someonesays they’ll help you get a credit card, find out the details first. You need toknow what interest rate you will be paying and for how long. Some credit cardsoffer low rates that are raised after a certain period of time or special rates thatapply only to balances transferred from other cards. You also need to know aboutany annual fees, late charges or other fees, and whether there are grace periodsfor payment before interest is applied. If the terms of the offer aren’t provided oraren’t clear, look for a credit card somewhere else.l Shop around. Interest rates and other terms vary widely. There are also differenttypes of cards, such as secured cards that require a deposit to cover any charges thatare made, cards that can also be used as telephone calling cards, cards that allowyou to charge something and pay later or deduct the charge from your bankaccount immediately, and cards that can only be used to charge merchandisefrom a catalog.l Don’t pay fees up front to get a credit card. Legitimate credit card issuers don’t askfor money up front, unless you’re applying for a secured card. If you are applyingfor a secured card, make sure you understand how your deposit will be used.Don’t pay someone to help you get a credit card; if you have good enough credit,you can get one yourself.l Use your credit wisely. Many Americans are in debt because they have taken onmore credit than they can handle. Don’t apply for more cards than you absolutelyneed, and don’t charge more than you can afford. To maintain a good credit rating,pay bills promptly. Avoid interest charges by choosing a card that offers a graceperiod and paying the entire balance due each month. If you cannot afford to payyour entire balance, pay as much as you possibly can.l Get help if you feel you’re in over your head. Consumer Credit Counseling Service,a nonprofit organization, provides low or no cost services to consumers who needa plan to repay debts and improve their credit. To find the nearest CCCS office, calltoll-free, 1-800-388-2227.If you need advice about an Internet or online solicitation, or you want to report a possiblescam, use the Online Reporting Form or Online Question & Suggestion Form features on theCCCS Web site, or call the NFIC hotline at 1-800-876-7060.Chapter 22: Borrowing Money and Buying on Credit 491

CREDIT CARD BLOCKTo be sure you don’texceed your credit cardlimit, a hotel puts a blockon your funds. How canthis cause a problem?transaction is approved, your available credit is reduced by this amountimmediately. This procedure is called a block. It is used to make sure youdon’t exceed your credit.If you pay your bill with the same card you used when you checkedin, the final charge should replace the block in a day or two. If you payyour bill with a different card, or with cash or a check, the issuer of thecard you presented first might hold the block for up to 15 days. Toprevent problems, have the clerk tell the card issuer that you paid anotherway so that the block is removed.Reviewing What You Learned1. What is the difference between open-endcredit and closed-end credit? Give anexample of each.2. What does the Truth-in-Lending Act requirelenders to tell you?3. Describe a secured loan.4. How much does the average credit cardholder have in outstanding credit card debt?What is the average interest rate he or she ispaying?Critical Thinking ActivityEconomics React to this statement: “America’seconomic strength is in part due to the abilityof people to borrow money and makepurchases on credit.” Do you agree or disagree?Explain your answer.Legal Skills in ActionResponsible Use of Credit Many teenagersuse credit cards—either their parents’ or theirown. Some teenagers use credit cards foremergencies only; others use them for everydaypurchases and activities. With a partner, debatethe role of credit in society today. Explain yourphilosophy on using credit. Describe how youthink credit problems could be prevented.492 Unit 5: Using Your Purchasing Power

Credit ProtectionLawsCredit Protection LawsThe government has established laws to protect not only your rightsas a consumer, but also your credit. You should be familiar with theselaws to ensure that you are being treated fairly.Equal Credit Opportunity ActThe Equal Credit Opportunity Act ensures that both businessesand consumers are given an equal chance to obtain credit. The law protectsyou when you deal with any creditor who regularly gives credit. Thelaw makes it illegal for banks and businesses to discriminate againstcredit applicants because of their sex, race, marital status, national origin,religion, age, or because they get public assistance income. The detailsof this law are set forth in Figure 22.4.Fair Credit Reporting ActThe Fair Credit Reporting Act prohibits the abuse of a valuableconsumer asset—credit. The act deals with unfavorable reports issuedby credit bureaus. These reports, which often contain much personaldata, character studies, and so on, are frequently issued to banks, insurancecompanies, businesses, and prospective employers.You have the right to know all personal information that is in a consumerreporting agency’s files and the sources of the information. Creditreports can be ordered on the Internet or from the following sources:l Equifax, P. O. Box 740256, Atlanta, GA 30374, (800) 685-1111l Trans Union, P. O. Box 1000, Chester, PA 19022, (800) 916-8800l Experian, P. O. Box 949, Allen, TX, 75013, (888) 322-5583You may be charged a fee of up to $9.00 for the request. You alsohave the right to be told the name of anyone who received a copyof your credit report in the past year (and in the past two years if thecredit report relates to a job application). You may correct errors in thereport. If the credit reporting agency retains information that you believeis inaccurate, your version of the facts must be inserted inthe file.l How to identify anddescribe creditprotection lawsl How to explain yourrights and duties undercredit protection lawsKnowing about creditprotection laws will helpyou be a smarterconsumer.l Equal CreditOpportunity Actl Fair CreditReporting Actl Fair Credit Billing Actl Fair Debt CollectionPractices ActFair Credit Billing ActWhen errors are made in bills sent by credit card companies andbusinesses that give credit, the Fair Credit Billing Act can help you.If you believe an error has been made on a bill, notify the creditor inChapter 22: Borrowing Money and Buying on Credit 493

EQUAL CREDITOPPORTUNITY ACTThe Equal CreditOpportunity Act ensuresthat you are given anequal chance to obtaincredit. If your creditapplication is rejected,do you have the right toknow why?Figure 22.4Equal Credit Opportunity ActThe Equal Credit Opportunity Act ensures that you are given an equal chance to obtaincredit. Here are some of your rights:l When you apply for credit, you may not be asked to reveal your sex, race, nationalorigin, or religion; whether you’re widowed or divorced; your marital status unlessyou’re applying for a joint or a secured loan (marital status may be asked in thestates of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, andWashington—all of which are community property states); your plans for havingor raising children; or whether you receive alimony, child support, or separatemaintenance payments.l When deciding to give you credit, a creditor may not consider your sex, maritalstatus, race, national origin or religion; whether you have a telephone listing inyour name; the race of people in the neighborhood where you want to buy,refinance, or improve a house; and your age, unless you’re a minor or areconsidered favorably for being over 62.l You have a right to: have credit in your birth name, your first and your spouse’s lastname, or your first name and a combined last name; get credit without a cosigner,if you meet the creditor’s standards; have a cosigner other than your husband orwife, if one is necessary; keep your own accounts after you change your name,marital status, reach a certain age, or retire, unless the creditor has evidence thatyou’re not willing or able to pay; know whether your application was acceptedor rejected within 30 days of filing a complete application; and know why yourapplication was rejected or why you were offered less favorable terms than thoseyou applied for.494 Unit 5: Using Your Purchasing Powerwriting within 60 days of the date of the statement. State your name,account number, the charge in question, and why you believe there is anerror. Figure 22.5 shows a form you can follow to write your letter. Thecreditor must acknowledge your letter within 30 days. Also, the creditormust investigate and explain why the charge is correct or fix the mistakewithin 90 days. You do not have to pay the amount in dispute whilewaiting for an answer from the creditor, but you must pay all charges notin dispute. Creditors may not report you as being delinquent becauseof the disputed charge.Fair Debt Collection Practices ActUnder the Fair Debt Collection Practices Act , it is illegal for debtcollectors to threaten consumers with violence, use obscene language,or contact consumers by telephone at inconvenient times or places. Debtcollectors are not allowed to impersonate government officials or attorneys,obtain information under false pretenses, or collect more than islegally owed.

Figure 22.5DateYour NameYour AddressYour City, State, Zip CodeYour Account NumberName of CreditorBilling InquiriesAddressCity, State, Zip CodeSample Dispute LetterBILLING DISPUTEIf you believe an error hasbeen made on a bill, youshould send a letter like thiswithin 60 days of the dateof the statement. Sendyour letter by certified mail,return receipt requested.How soon must thecreditor acknowledgeyour letter?Dear Sir or Madam:I am writing to dispute a billing error in the amount of $on my account. The amount is inaccurate because (describethe problem). I am requesting that the error be corrected, thatany finance and other charges related to the disputed amountbe credited as well, and that I receive an accurate statement.Enclosed are copies of (use this sentence to describe anyenclosed information, such as sales slips, payment records)supporting my position. Please investigate this matter andcorrect the billing error as soon as possible.Sincerely,Your nameEnclosures: (List what you are enclosing.)Reviewing What You Learned1. What is the purpose of the Equal CreditOpportunity Act?2. What does the Fair Debt Collection PracticesAct make it illegal for debt collectors to do?Critical Thinking ActivityCredit Protection Laws Do you think creditprotection laws are necessary? Why or why not?Legal Skills in ActionCredit Protection Careful use of credit cardsand maintaining good credit are importantfinancial objectives. Choose one of the creditprotection laws discussed in this section andresearch when and why it was made into a law.Write a one-page report about your findings.Chapter 22: Borrowing Money and Buying on Credit 495

Managing Your Debtsl How to recognizewarning signs of debtproblemsl How to identifyfinancial counselingservicesl How to distinguishamong the chaptersof the federalbankruptcy lawMost people havefinancial problems ofsome kind. Recognizingthem and knowing whatto do will improve yourlife.l bankruptcyl family farmerl homestead exemptionWarning Signs of Debt ProblemsIt is important to manage your money in a fiscally responsible manner.Here are some warning signs that you may be in financial trouble:l You make only the minimum monthly payment on credit cards orhave trouble paying even that much. The total balance on your creditcards increases every month.You miss loan payments or often pay late.You receive second or third payment due notices from creditors.You borrow money to pay off old debts.You exceed the credit limits on your credit cards.You’ve been denied credit because of a bad credit report.If you experience two or more of these warning signs, it’s time torethink your priorities.lllllFinancial Counseling ServicesIf you’re having trouble paying your bills, you have several options.You can contact your creditors and work out an adjusted repayment plan,or you can contact a nonprofit financial counseling program.Consumer Credit Counseling ServiceThe Consumer Credit Counseling Service is a nonprofit organizationaffiliated with the National Foundation for Consumer Credit. Localbranches of the CCCS provide debt-counseling services. Check thewhite pages of your telephone directory, the Internet, or call 1-800-388-2227. All information is kept confidential.Declaring BankruptcySometimes people and businesses get hopelessly mired in debt—so hopelessly that they cannot meet the demands of their creditors.Under old English law, such debtors were put in debtors’ prisons. Thedrafters of the U.S. Constitution opposed this treatment of debtors andgave Congress the authority to help people in this dilemma.Bankruptcy is the legal process by which a debtor can make afresh start through the sale of assets to pay off creditors. Bankruptcylaws are named after the chapters where they may be found in the federalbankruptcy code. The bankruptcy and dissolution options for differenttypes of business organizations are explained in Figure 22.6.496 Unit 5: Using Your Purchasing Power

Figure 22.6Types of Bankruptcy ProceduresChapter Who Can File? When Used? Special FeaturesChapter 7:OrdinaryBankruptcyEveryone is eligible, exceptbanks, railroads, and insurancecompanies; filing can bevoluntary or involuntaryUsed when debtor wants todischarge most debts andbegin with a clean slateDebtor’s property is liquidated;some property is exempt; somedebts cannot be dischargedChapter 11:ReorganizationIndividuals, partnerships, andcorporations can file; railroadscan file; only commoditybrokers and stockbrokerscannot file; filing can bevoluntary or involuntaryUsed when debtor, usually abusiness, wants to continueoperating, but needs toreorganize and liquidatedebtsDebtor-in-possession feature;debtor files plan within120 days; plan must be fair,equitable, and feasible;creditors can also file plans;confirmation neededChapter 12:Family FarmerDebtAdjustmentFamily farmers can file,including partnerships andcorporations; debt ceiling of$1.5 millionUsed when a debtor is afamily farmer who needs adebt adjustment plan tokeep the farm runningDebtor-in-possession feature;debtor files plan within 90 days;plan lasts three years (withtwo-year extension possible);plan must be confirmedChapter 13:Individual DebtAdjustmentIndividuals only; no corporationsor partnerships; noinvoluntary filings allowed;debt ceiling of $450,000.Used when an individualdebtor with a steady incomevoluntarily decides to adopta debt adjustment planOnly the debtor can file a plan;payments must start 30 daysafter plan submitted, a fewdebts cannot be discharged;plan lasts three years (withtwo-year extension possible)Chapter 7 bankruptcy may be brought either voluntarily by thedebtor or involuntarily by creditors. Three creditors must file the petitionfor bankruptcy if the debtor has 12 or more creditors. The combineddebt owed to the three must exceed $11,625. A single creditor who isowed a debt of more than $11,625 can also file if the debtor has fewerthan 12 creditors.Chapter 11 bankruptcy offers a method for businesses to reorganizetheir financial affairs and still remain in business. When a petitionfor reorganization under Chapter 11 is filed, a reorganization plan forthe business is developed. Once the plan is approved by a certain numberof creditors and the court, it will go into operation. If the plan is successful,the business will continue. If not, it will be forced to close.Chapter 12 bankruptcy helps family farmers create a plan for debtrepayment that allows them to keep their farms running. A familyfarmer is defined as one who receives more than one-half of his or hertotal income from the farm. To file Chapter 12 bankruptcy, 80 percentof the debt must result from farm expenses.BANKRUPTCY LAWSBankruptcy rules applydifferently to individualsand businesses. Afterexamining Figure 22.6,compare personal withbusiness bankruptcy law.What options are availableto individuals? How arethey different than theoptions for businesses?Chapter 22: Borrowing Money and Buying on Credit 497

FAMILY FARMThe family farm is avanishing breed in theUnited States. How is afamily farmer defined forbankruptcy purposes?Chapter 13 bankruptcy permits an individual debtor to develop arepayment plan. During the period of repayment—usually three years—creditors may not continue collection activities.Exemptions As part of the “fresh start” policy of the BankruptcyAct, some assets can be kept by the debtor. These so-called exemptionscan be doubled for married couples filing jointly. Debtors can elect touse either their own state exemptions or the federal ones. The followingfederal exemption amounts were in effect in 2004, but they are subjectto adjustment in the future.Credit Card SecurityCases of theft and fraud on the Internet are on the rise. As a result, creditcard companies are working with online merchants to improve security. Thesecompanies have Web sites that help merchants review and improve theirsecurity policies. With this help from credit card companies, merchants areable to meet industry standards for protecting against online fraud and theft.Making payment methods more private is one way credit card companies aretrying to improve security. Improved security can be achieved by requiringadditional forms of user identification. Ideally, a user fingerprint will protecta customer’s identity. (Source: InternetWeek, October 13, 2000)Connect Visit the Web sites of several major credit card companies, and checktheir online security policies.498 Unit 5: Using Your Purchasing Power

Debtors can keep a maximum of $17,425 in equity in a personalresidence—the homestead exemption . They can also keep a maximumof $925 for any individual item of furniture, household goods,clothes, appliances, books, crops, animals, or musical instruments. Thetotal of all exemptions taken in this category cannot exceed $9,300.Debtors are also allowed to exempt $1,150 in jewelry beyond the $9,300mentioned previously. In addition, they may keep any other propertynot exceeding the value of $925, plus up to $8,725 of any unused amountof the $17,425 homestead exemption.Debtors may also keep certain necessary items. They include a maximumof $1,750 in professional tools, instruments, and books; up to$2,775 in a motor vehicle; and any medical supplies that have beenprescribed for the health of the debtor. Alimony and child supportpayments can also be excluded. Social security and benefits receivedunder a disability program and certain life insurance policies are alsoexempt.The bankruptcy act has modified the common law so that a personwho is hopelessly in debt may be relieved of further obligation on contractsif the court grants that person relief. However, debts associatedwith fraud or wrongdoing are revived even after the debts have beendischarged in bankruptcy.Exceptions to Discharge Some debts cannot be discharged. Theseinclude debts caused by the debtor’s fraud, back taxes, and student loansthat do not impose a hardship on the debtor.ScienceResearch and Development(R&D) is thedepartment withinmost businesses that isresponsible for developingnew products andreformulating old ones.Many companies mustborrow money for theirR&D. Using the Internet,locate the annual reportof a pharmaceutical,biotechnology, or otherscientific business.Research ActivityFind out how much thecompany spent on R&Dlast year. Do you thinkthat the companyborrowed money topay for its R&D? Explainyour answer.Reviewing What You Learned1. What are the nine warning signs that youmight be in financial trouble?2. What service is provided by the ConsumerCredit Counseling Service?3. Discuss the differences between declaringChapter 7 and Chapter 13 bankruptcy.Critical Thinking ActivityDebt Problems Do you recognize any of thewarning signs of debt problems? Do they applyto you or someone you know? How might youcorrect these debt problems or advise someoneelse to do so? Why is it important to addressdebt problems as soon as possible?Legal Skills in ActionCredit Counseling Unfortunately, many peoplerealize they are in financial trouble when it istoo late to correct the problem. Create a skitbetween a young adult who has too muchdebt and a credit counselor. Have the creditcounselor offer advice. Next, act out the skitwith a partner.Chapter 22: Borrowing Money and Buying on Credit 499

CHAPTERASSESSMENTSection 22.1 What is Credit?● There are two main types of credit. Open-endcredit is credit that can be increased by the debtorby continuing to purchase goods or services oncredit, up to a limit set by the creditor. Closedendcredit is extended only for a specific amountof money.● The Truth in Lending Act requires that lenderstell you both the finance charge and the annualpercentage rate (APR) of the loan. The purposeof this act is to assist consumers in makinginformed decisions when shopping for credit.● A secured loan is one in which you give acreditor a right to something of value, calledcollateral, in exchange for money it lends you.You have possession and use of your collateral,but the creditor has a security interest and thelegal right to repossess your property if you donot pay.● If there is a problem with a good or servicecharged on your credit card, and the initialtransaction took place in your state or within100 miles of your mailing address, you maydispute the charge with your credit card issuer.If your credit card is lost or stolen, credit cardprotection will cover unauthorized charges,except for the initial $50, which you are requiredto pay. However, you should notify your creditcard company immediately if you lose yourcredit card.Section 22.2 Credit Protection Laws● The federal government has passed several creditprotection laws to protect consumers. The EqualCredit Opportunity Act prevents credit issuersfrom discriminating against applicants becauseof gender, marital status, age, religion, race,national origin, or because they get publicassistance income. The Fair Credit Reporting Acthelps you know the source of a credit report andto correct any wrong information in it. The FairCredit Billing Act establishes a procedure for theprompt handling of billing disputes. The FairDebt Collection Practices Act makes it illegal fordebt collectors to threaten consumers withviolence, to use obscene language, or to contactconsumers at inconvenient times or places tocollect debts.Section 22.3 Managing Your Debts● If you experience two or more of the followingwarning signs, you may be in financial trouble:(1) you make only the minimum monthlypayment on credit cards or have trouble payingeven that much; (2) the total balance on yourcredit cards increases every month; (3) you missloan payments or often pay late; (4) you usesavings to pay for necessities such as food andutilities; (5) you receive second or third paymentdue notices from creditors; (6) you borrowmoney to pay off old debts; (7) you exceed thecredit limits on your credit cards; or (8) you havebeen denied credit because of a bad credit report.● If you’re having trouble paying your bills andneed help, you can contact your creditors and tryto work out an adjusted repayment plan, or youcan contact a nonprofit financial counselingprogram. The Consumer Credit CounselingService is an organization that can offer help.● Chapter 7 bankruptcy permits debtors toliquidate their assets and pay off creditors.Chapter 11 bankruptcy allows businesses toreorganize their financial affairs while remainingopen for business. Chapter 12 bankruptcy isreorganization for family farmers. Chapter 13bankruptcy permits an individual debtor todevelop a repayment plan during which periodof repayment creditors may not continuecollection activities.500 Unit 5: Using Your Purchasing Power

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.annual percentage rate (APR)creditcreditorsecured loandebtorcollateralopen-end creditsecurity interestline of creditsecured partyclosed-end creditrepossessfinance chargebankruptcyinterest1. With a partner, create a script that highlights the duties betweena lender and a credit applicant. Use all of the terms listed above.2. Act out the scenario with your partner.3. Present your scenario to the class.4. As a class, vote to select the best scenario. Ensure that thewinning script correctly uses each of the key terms.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 22:Borrowing Money andBuying on Credit—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. Why should you shop around before borrowing money?6. What should you do if you have a dispute with a credit card purchase?7. What is credit card blocking, and why is it used?8. Describe the purpose of the Fair Credit Reporting Act and the Fair Credit Billing Act.How do these acts protect consumers?9. Which debts can’t be discharged when someone declares bankruptcy?10. How must a creditor go about repossessing a debtor’s property?11. When extending credit, why do lenders sometimes require cosigners?12. Compare personal with business bankruptcy.Chapter 22: Borrowing Money and Buying on Credit 501

CHAPTERASSESSMENTParticipating Effectively as a Memberof a TeamIn groups of four or five, contact a consumercredit counseling service in your area. Arrangea brief interview with a counselor. Pose thefollowing questions:13. What services are offered?14. What fees are charged for the services?15. What educational materials are availableabout the wise use of credit?If possible, invite someone from one of theservices to your class to provide additionalinformation about the best way to handle credit.BankruptcyMargarita graduated from college and found ajob that paid $2,000 per month. She immediatelyrented an apartment for $800 per month, boughtfurniture that she paid for on credit, andinvested in a new wardrobe. In addition, shehas student loans to repay and a $350 monthlycar payment. Margarita is drowning in debt andfigures she should just declare bankruptcy andstart over.Debate16. Should Margarita declare bankruptcy?17. What other options does she have?18. How can she prevent a problem like this inthe future?For the following cases, give your decision andstate a legal principle that applies.19. Shirlene lost her job. She was unable tofind work for several months and fellbehind in paying her bills. A debt collectortelephoned her at 11:45 P.M., usedprofanity, and threatened to “take care ofher” if she didn’t pay the amount owed.Were Shirlene’s rights violated? Explainyour answer.20. Mary and Frank are four months behindon the payments for their living roomfurniture. Two bill collectors come to theirhouse and attempt to break in to repossessthe furniture. Mary becomes quite angryand orders the bill collectors to leave herfurniture alone. Is the finance companywithin its rights? Why or why not?21. David’s wallet, which contained his creditcard, is stolen. David does not notify thecard issuer of the loss. The next month, hereceives a $510 bill for an unauthorizedpurchase. Will he have to pay? If so,how much?22. Mary was recently married and goes to abank to request a loan. The loan officerasks if she plans to have a child in the nextfew years. Mary refuses to answer and isdenied the loan. Did the bank officer breakthe law? Explain your answer.23. Ellen always pays her bills on time. Becauseof a computer error, however, she is givena poor credit rating. Several firms refuseto give her credit, citing her poor ratingwith the credit reporting agencies. DoesEllen have any legal recourse? Explainyour answer.502 Unit 5: Using Your Purchasing Power

In each case that follows, you be the judge.24. Discharging LoansLisa and William Leeper filed a Chapter 13 bankruptcy petition. One of the debts they listed wasan amount owed to attend college under a guaranteed student loan program. Will the loan toattend college be discharged by the court? Why or why not?Leeper v. Pennsylvania Higher Education Assistance Agency, 94-3372 & 94-3373, U.S. Courtof Appeals (3rd Cir.).25. Truth in LendingStewart and Marjory Selmans applied to the Manor Mortgage Company for a loan of $23,000to be used for personal purposes. They were told that if they incorporated, they would begiven a loan. Under Michigan law, money could be loaned to corporations at a higher rateof interest. The Selmans formed a corporation, received the loan, and then dissolved thecorporation. Does the transaction fall within the Truth in Lending Act? Why or why not?Selman v. Manor Mortgage Co., 551 F.Supp. 345 (MI).Teach OthersYou and a group of friends have decided to createa program that could be offered to high schoolstudents. This program would help students learnabout the issues and laws surrounding the useof credit.ConnectUsing a variety of search engines, locateinformation that could be used in your program.Be sure to include the following information:26. How to use credit wisely27. How to recognize potential credit problems28. How the credit protection laws work29. Why bankruptcy is a last resort measure30. Predict How would life in the UnitedStates be different if there were no credit?31. Connect Do you have a credit card? If so,what do you use it for? If not, when do youthink you will get one, and what will youuse it for?32. Question How does knowing about thecredit protection laws make you a smarterconsumer?33. Respond Why are bankruptcy lawsnecessary? Why do you believe that thebankruptcy laws in the United States donot include the possibility of incarcerationin a debtor’s prison?Chapter 22: Borrowing Money and Buying on Credit 503

CHAPTERNegotiable InstrumentsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 23: Negotiable Instruments—Chapter Overviews to preview the chapterinformation.

The Opening SceneDavid Mueller arrives home from work and greetshis wife, Melanie.Checks and BalancesDAVID: (Handing his wife an envelope.) Here it is,Melanie, my first paycheck since I got the new job.I can’t wait to cash it.MELANIE: We’ve waited a long time. (She readsaloud the words on the check.) Pay to the orderof David Mueller. That’s odd—the words say fourhundred twelve dollars, but the figures say $422.I wonder which amount is right?DAVID: (Taking the check.) Oh, you’re right. Look!There’s no date on the check, either. I hope it’sstill good.MELANIE: It better be, after all your hard work. Wereally need the money. We have a lot of bills. Iguess that you could always ask your boss foranother check, though.DAVID: I wish we could pay the furniture company,but we have so many other bills. We’ve got tomake a payment on the credit card, too. Whatshould we do?MELANIE: It would be great if Julio would pay you themoney he owes you. It should be almost due, right?I remember that we were making our weddingplans when you loaned him the money. That wasabout a year ago.DAVID: You’re right. Let’s look at the promissory notehe gave me. (David leaves the room and returnswith a piece of paper.) The whole thing is in hishandwriting. It says, “One year from date, I, JulioRueda, promise to pay to the order of DavidMueller the sum of $1,000 with interest at therate of 8 percent per annum.” It’s not due foranother month. Say, I just noticed he never signedon the bottom. Maybe this is no good! Now I’mreally worried!MELANIE: Don’t worry. He wrote his name at thebeginning, right? Anyway, I’d trust him even if hedidn’t put it in writing. Julio is our friend, and hewouldn’t let us down. Maybe we should call himand remind him of the debt.DAVID: I think I might give him a call. This amountis the same amount that we owe the furniturecompany. Wouldn’t it be great if Julio could signa paper to pay the money directly to the furniturecompany? That way, I wouldn’t have the chanceto blow the money.MELANIE: Maybe he can. I’m going to ask him todo it. The furniture company shouldn’t care wherethe money comes from. We should really lookinto that.DAVID: I think I’ll write out a few checks right now. Ican mail them on the way to work early tomorrowmorning.MELANIE: I think you’re being hasty. Shouldn’t youdeposit your paycheck first? We don’t want tobounce any checks!DAVID: I’ll just postdate the checks a few days. Thatway they won’t be able to cash them until mypaycheck clears.1. What sum controls on a check when the amountwritten in words is different from the amountwritten in figures?2. Is an undated check valid and negotiable?3. What is the legal effect of a signature writtenat the beginning of an instrument instead of atthe end?4. Is there a type of negotiable instrument thatcan be used to transfer debts?5. Is it legal to postdate a check?Chapter 23: Negotiable Instruments 505

l How to state thepurpose of negotiableinstrumentsl How to identify thetypes of negotiableinstrumentsl How to name theparties to each type ofnegotiable instrumentKnowing the purpose andtypes of negotiableinstruments will help youmanage your financialaffairs throughout life.l negotiable instrumentl notel makerl payeel certificate of deposit (CD)l draftl drawerl draweel acceptorl sight draftl time draftl checkPurpose and Typesof NegotiableInstrumentsPurpose of Negotiable InstrumentsThroughout history, people have found it necessary to transactbusiness without carrying around large sums of money. People havealso devised arrangements to purchase items that they will pay for at alater date. The law of negotiable instruments was developed to meetthese needs.The use of checks, notes, drafts, electronic banking, and credit cardshas increased dramatically in recent years. More people are openingchecking accounts and signing drafts and promissory notes than everbefore. These instruments are used conveniently and safely as a substitutefor money and to obtain credit.A negotiable instrument is a written document giving speciallegal rights to the transferee that may be transferred by indorsement ordelivery. There are two basic kinds of negotiable instruments: notes(including certificates of deposits) and drafts (including checks).NotesA note (often called a promissory note) is a written promise by oneperson, called the maker , to pay money to another person, called theFigure 23.1No. 20On demand, the undersigned, for value received, promise(s) to pay to the order ofCAMBRIDGE TRUST COMPANYDollars,at its offices in Boston, Massachusetts, together with interest thereon from thedate thereof until paid at the rate of percent per annum.Address506 Unit 5: Using Your Purchasing PowerDEMAND NOTEA demand note is payable whenever the payee demandspayment. Who is the maker of this note? the payee?

“Neither a Borrower Nor a Lender Be”If you disregard this time-honored advice, as almost everyone does, use awell-drafted promissory note. When borrowing money from a bank, you willbe required to sign a promissory note. Banks typically use a standard form. Ifyou borrow from a friend or relative, then you’ll need to come up with yourown form. You can obtain fill-in-the-blank promissory note forms at most officesupply stores.It is well worth the effort to sign a promissory note when dealing withfamily members or friends, especially if you want to keep those relationshipsintact. Using a promissory note will help avoid misunderstandings about suchbasic things as how much is owed and when repayment is to occur. It is alwayswise to use a promissory note, even if the family member or friend insists onkeeping things informal.If you’re operating a business and you borrow money on its behalf, then itis important to know that partners and sole proprietors are always personallyobligated to repay a business loan. If your business is a corporation, then thebusiness is obligated unless you personally guarantee the loan.Research and Evaluation Visit a local bank or office supply store. Review thevarious promissory note forms. Which would you use to keep initial paymentsas low as possible?payee . When two persons sign a note, they are known as comakers.Creditors who loan money or extend credit ask debtors to sign notes asevidence of debt. An advantage of using a note is that it can be negotiated(transferred) to other people without much difficulty.There are various types of notes. A demand note is a note that ispayable when the payee demands payment (see Figure 23.1). In contrast,a time note is a note that is payable at a future date, which is written onthe face of the note. An installment note is a note that is paid in a seriesof payments. People often sign this type of note when they borrowmoney to buy a car or a house.Example 1. Keith bought a car from Laura’s Used-Car Exchangefor $4,900. He paid $1,000 down and signed a note promisingto pay the balance, along with interest at the rate of 18 percentChapter 23: Negotiable Instruments 507

Social StudiesThe use of metal formoney can be tracedback over 4,000 years.The first coins were madeof electrum—a naturalmixture of gold and silver.They were crude lumps ofmetal bearing a primitivemark that certified itsweight or fineness. Beads,shells, and even leatherwere also used to createmoney.Research ActivityFind out what mostUnited States coinsare made of today.per year, to the dealer in monthly installments over a two-yearperiod. To get the money immediately, Laura’s Used-CarExchange negotiated the note to the Ace Finance Company,which accepted it for a small service charge. Now Keith will haveto make monthly payments to the holder of the note—the AceFinance Company.Certificates of DepositA certificate of deposit (CD) is a note provided by a bank. A CDis a bank’s written receipt of money and its promise to pay the moneyback, usually with interest, on the due date (see Figure 23.2). CDs arewritten for a specific time period, such as six months, one year, twoyears, or five years. Banks pay higher interest for longer-term CDs. Theinterest paid on a CD is higher than the amount paid on a regular savingsor checking account because the depositor cannot withdraw the moneybefore the due date without penalty. In certain circumstances, peoplewho have certificates of deposit can obtain money by negotiating the certificatesto other people or by pledging them as security for a loan.DraftsIn contrast to a note, which is a promise to pay money, a draft isan order to pay money. Drafts are more complicated than notes becausethey involve three parties instead of two. Also called a bill of exchange,CERTIFICATE OFDEPOSITA certificate of deposit isbasically a promissorynote issued by a bank.Why do people buy CDs?Figure 23.2CSB Columbia Savings BankCERTIFICATE OF DEPOSIT1200 North StreetColumbia, South Carolina Date: July 1, 20 --This acknowledges that there has been deposited with the1,000.00one thousand and 00/100------------------------------------------------Alana Donley1st Julyundersigned, the sum of $which is payable to the order ofDollarson theday of , 20 , upon presentation andsurrender of this certificate, and bears interest at the rate of4%per annum calculated and credited at maturity. No payment may bemade prior to, and no interest runs after, that date.COLUMBIA SAVINGS BANKByVice President508 Unit 5: Using Your Purchasing Power

a draft is an instrument in which one party(the drawer ) orders another party (thedrawee ) to pay money to a third party (thepayee).Drawees, although ordered to pay money,are not required to do so unless they haveagreed to the arrangement. They agree to adraft by writing the word accepted on the document(usually on the front) and signing theirname. A drawee who has done this is calledan acceptor and can be required to pay thedraft.Businesses and private parties frequentlyuse drafts to transfer debts from one party toanother. In The Opening Scene, for example,we discover that the $1,000 that Julio owes toDavid is exactly the amount that David andMelanie owe to the furniture store. This situationcan be easily resolved by using a draft.David can draw a draft ordering Julio to paythe $1,000 to the store. If Julio agrees by writingaccepted and signing the face of the draft,he will then be obligated to pay $1,000 to thefurniture dealer, thus paying David andMelanie’s debt.A sight draft is a draft that is payable as soon as it is presented tothe drawee for payment. A time draft is a draft that is not payable untilthe lapse of the particular time period stated on the draft (see Figure 23.3).ChecksA check is a draft drawn on a bank and payable on demand. It isthe most common kind of draft in use today. When issuing a check, youWHOM DO I PAY?In Example 1, Keith signed anote promisingto pay themoney back to Laura’sUsed-Car Exchange. Whymust he pay the money tothe finance company?Figure 23.3$ 500.00 Wilmington Delaware, May 26, 20--In or within 60 days----------------------------------------------------------------- Pay tothe order ofDavid Connors---------------------------------------------------------------Five hundred and 00/100----------------------------------------------------------DollarsValue received and charge the same to account ofTo Walter AhearnNo. 412 Oxford, Maryland }TIME DRAFTA time draft is not payableuntil the lapse of the particulartime period stated onthe draft. What is the legaleffect of the words“Accepted, Walter Ahearn,June 5, 20 – –” on thefront of this draft?Chapter 23: Negotiable Instruments 509

An action to enforcethe obligation of theacceptor of a certifiedcheck or the issuer of ateller’s check, cashier’scheck, or traveler’scheck must be commencedwithin threeyears after demand forpayment is made to theacceptor or issuer.put money in the bank and then order the bank to pay your money toothers by writing out checks.You can write out a check to be paid at a later date by postdating it;that is, you put a date on the check that is later than the date on whichthe check is written. Failing to put a date on a check does not affect itsnegotiability. A more detailed discussion about writing checks appearsin the next chapter.NO CHECKSSome merchants donot accept personal checks.Why do you think this is so?Reviewing What You Learned1. What is the purpose of a negotiableinstrument?2. Name the two basic kinds of negotiableinstruments.3. Define the parties to each kind of negotiableinterest.Critical Thinking ActivityCertificates of Deposit What do you thinkthe bank does with the money you depositinto a CD?Legal Skills in ActionAnalyze Earned Interest Ed’s grandmothergave him $1,000 for his 16th birthday. Hedecided to deposit it into a savings accountuntil he turns 18. LaToya’s aunt gave her $1,000for her 16th birthday. LaToya decided todeposit her money in a CD until she turns 18.Explain why LaToya will be earning moreinterest than Ed.510 Unit 5: Using Your Purchasing Power

Requirements ofNegotiabilityDrafting InstrumentsTo be negotiable, an instrument must satisfy specific criteria (seeFigure 23.4). It must:l Explain the elements of negotiable instruments.l Bear the signature of the maker or drawer.l Be an unconditional promise or order to pay.l Be made out for a fixed amount of money.l Be payable on demand or at a definite time.l Be payable to order or to bearer.Figure 23.4Definite Time Payable Order Unconditional Written Promise$ 3, 250.00 Newark, New Jersey, January 16, 20--Ninety days after date I promise to payTo the order ofPamela LemkowitzThree thousand two hundred fifty and 00/100------------------ DollarsPayable atSecond National BankValue received with interest at 8.5%No. 3260 Due April 16, 20--l How to state therequirements ofnegotiabilityl How to describe theimportance of dateson negotiableinstrumentsl How to identify thecontrolling wordson negotiableinstrumentsRecognizing thenegotiability andcontrolling words ofinstruments will helpyou make meaningfulbusiness and financialdecisions.Fixed AmountSignatureREQUIREMENTS OF NEGOTIABILITYThe requirements of negotiability are indicatedon this 90-day note. Would the instrument benegotiable if it were for pesos instead of dollars?l demand paperl definite-time paperl words of negotiabilityWritten InstrumentThe promise, or order, to pay must be in writing. It can be printed,typed, handwritten in pen or pencil, or expressed by using any othertangible form of writing. A negotiable instrument written in pencil is,however, an invitation for forgery. The person who drew the instrumentwould be responsible for any loss caused by the negligent drawing ofthe instrument.Chapter 23: Negotiable Instruments 511

U.S. CompaniesOperating in Other CountriesMany U.S. companies operate facilities in other countries. Like individualcitizens, the activities of U.S. companies are regulated by the laws of the hostcountry. Foreign governments require companies to comply with local rules andregulations and may prohibit companies from participating in specific activities,such as providing utilities and entering into defense contracts, which are reservedfor domestic companies. Laws governing contracts, employment practices, propertyrights, and environmental liability may be more or less favorable to a company thancorresponding laws in the United States. Although operating in a foreign country,U.S. companies are still subject to many U.S. laws, including the Foreign CorruptPractices Act (FCPA), which prohibits U.S. companies and their employees frombribing foreign officials.The creation and form of a business entity (e.g., corporation, partnership,etc.) must conform to the laws of the country in which the business operates. Theadvantages and disadvantages of any particular form of business depend upon thelaws of the host country. Many resources are available to assist companies that wishto do business in particular foreign countries. You can find out more aboutinternational business by conducting research on the topic in your library or byusing the Internet.Companies that do business in other countries may risk expropriation, whichoccurs when a host country nationalizes an industry or seizes a company’s assetswithout just compensation. To reduce the losses suffered by expropriation, U.S.companies may purchase insurance for certain types of activities through theOverseas Private Investment Corporation (OPIC)Critical Thinking Question Many countries protect native businesses by imposingstrict laws on foreign companies doing business within their borders. Do you thinkthis kind of protection is fair? For more information on U.S. companies operatingin other countries, visit ubpl.glencoe.com.512 Unit 5: Using Your Purchasing PowerSignature of Maker or DrawerThe maker must sign a note, and the drawer must sign a draft. A signaturemay be any mark, such as one’s initials, that is placed on theinstrument with the intention of serving as a signature. Of course, thesignature on a check should match the signature card on file with thebank. The signature may appear in the body of the instrument as wellas at the end.

Unconditional Promise or OrderThe promise in the note, or the order in the draft, must be unconditional.If either is qualified in any way, the instrument is not negotiable.Example 2. Jasmine’s uncle gave her a promissory note for$3,000. The note was complete and regular in every way, exceptthat it bore the statement, “Payable only on Jasmine Sullivan’sgraduation from high school.”This note is a valid promise to pay. When Jasmine graduates fromhigh school, her uncle will owe her $3,000. The note, however, is not negotiablebecause it is conditional on its face. Statements requiring thatcertain things be done or that specific events take place make the instrumenta simple contract rather than a negotiable instrument.Fixed Sum of MoneyA negotiable instrument must be payable in a fixed sum of money.Usually it can be payable in any money that has a known or establishedvalue. An instrument payable in a foreign currency or any medium ofexchange accepted by a foreign government is negotiable.Payable on Demand or at a Definite TimeNegotiable instruments must be payable on demand or at a definitetime. This requirement makes it possible to determine when the debtoror promisor can be compelled to pay.Rubber ChecksManaging a checkingaccount can be done intwo easy steps. Thefirst step is to balanceyour checkbookregularly to minimizethe risk of bouncing acheck. Most banks andretailers charge a feefor bounced checks.The fee is usually takenfrom your accountwhen funds are available.The second stepis to resist the temptationto spend moremoney than you havein your account. Whatdo you think is a fairfee for bouncing acheck?Get InvolvedRead the returnedcheck policy displays ofthe stores you shop in.Call different banks inyour area and ask themhow much they chargetheir customers forbounced checks.CONDITIONAL PROMISEA promissory note with a condition(such as graduating from highschool) is not negotiable. Is this trueeven when the condition is met?Chapter 23: Negotiable Instruments 513

Electronic ChecksA group of banks have signed up with TeleCheck Services, a checkacceptance company, to use an electronic payment service. The service iscalled Electronic Check Acceptance. It converts paper checks presented atretail stores into electronic transactions. The system delivers funds directly intothe merchant’s account. It also eliminates having to chase down bad checks.Consumers sign a receipt for the electronic transaction. They then receive thecancelled check along with a copy of the receipt. Electronic check returnsbecome TeleCheck’s responsibility. (Source: TechFocus, December 1, 2000,Issue #3712, p. 26)Connect Visit the Web site of one or more of your area banks. See if they offersimilar electronic check acceptance services.Demand Paper An instrument is payable on demand when it sostates, or when it is payable “on sight” or “on presentation.” These instrumentsare called demand paper . The key feature of demand instrumentsis that the holder can require payment at any time by making thedemand upon the person obligated to pay.Definite-Time Paper Instruments meet the definite-time requirementwhen they are payable on or before a stated date. Instrumentspayable “one year after date” and “thirty days after sight” also meet therequirement. These instruments are called definite-time paper .In contrast, an instrument payable only upon an act or event, thetime of whose occurrence is uncertain, is not payable at a definite time.For instance, an instrument payable when a person marries or reachesa certain age would not be negotiable.Example 3. If Jasmine’s uncle had given him a note that said“payable 30 days after my death,” the note would not be negotiablebecause it is not payable at a definite time. No one can becertain when Jasmine’s uncle will die.Payable to Order or BearerNegotiable instruments, except for checks, must be payable to orderor to bearer. The words to the order of and to bearer are called thewords of negotiability . The maker or drawer may stipulate “Pay to theorder of Jane Doe,” “Pay to Jane Doe or order,” or “Pay to Jane Doe or514 Unit 5: Using Your Purchasing Power

her assigns.” If such words are omitted in instruments other than checks,the instruments are not negotiable.Example 4. Suppose that the note given to Jasmine in Example 3read, “I promise to pay Jasmine three hundred dollars.” Theimplication is that the uncle would pay Jasmine but no one else.Thus the instrument would not be negotiable.In the case of a draft, the drawee must be indicated with reasonablecertainty. If an instrument named the drawee as “Global Bank, NewYork,” and there were several Global Banks in New York, the draft wouldbe nonnegotiable.Dates and Controlling WordsThe omission of the date does not affect the negotiability of aninstrument. When the date is omitted, the date on which the instrumentis received is considered to be the date of issue.Handwritten terms control typed and printed terms, and typed termscontrol printed terms. Words control figures, except when the wordsare unclear.Negotiatingwith IOUsD’Marco borrowed $20from you on Friday andgave you a written IOU.On Monday, you needyour $20 back, butD’Marco can’t repayyou until this weekend.Would it be ethicalto offer the IOU toJermaine to borrow $20from him? What wouldyou do if D’Marcorefused to pay the $20to Jermaine?Example 5. Kayleen received a check from Roni. The check wasmade out for “Seventy-seven Dollars” in words and $87 infigures. The bank would most likely honor the check for theamount that was written in words.Reviewing What You Learned1. Explain the elements of negotiableinstruments.2. Explain why it is important to have a date ona negotiable instrument.3. When do words control figures, and what isthe exception?Critical Thinking ActivityNegotiable Instruments Why do you think aperson who writes a negotiable instrument inpencil would be responsible for any loss causedby negligence? Explain your answer.Legal Skills in ActionRequirements of Negotiability You are aclerk for a negotiable instrument attorney.It is important that you remember the sixrequirements of negotiability. In groups offour or five, write a skit, rap song, poem, orsilly story that will help you remember therequirements. Present your creative work tothe entire class.Chapter 23: Negotiable Instruments 515

CHAPTERASSESSMENTSection 23.1 Purpose and Types ofNegotiable Instruments● Popular negotiable instruments include checks,notes, and drafts. Negotiable instruments weredeveloped because people wanted to transactbusiness without carrying around large sums ofmoney and to purchase items that they could payfor at a later date. The use of checks, notes, drafts,electronic banking, and credit cards has increaseddramatically in recent years. More people areopening checking accounts and signing draftsand promissory notes than ever before. Theseinstruments are used conveniently and safely asa substitute for money and to obtain credit.● A negotiable instrument is a written documentgiving special legal rights to the transferee thatmay be transferred by endorsement or delivery.There are two basic kinds of negotiable instruments:notes and drafts. When two persons sign anote, they are known as comakers. Creditors wholoan money or extend credit ask debtors to signnotes as evidence of debt. An advantage of usinga note is that it can be negotiated (transferred) toother people without much difficulty. There arevarious types of notes. A demand note is a notethat is payable when the payee demands payment.In contrast, a time note is a note that is payable ata future date, which is written on the face of thenote. An installment note is a note that is paid ina series of payments. People often sign installmentnotes whey they borrow money to purchasea car or house. A certificate of deposit is a noteprovided by a bank. A CD is a bank’s writtenreceipt of money and its promise to pay themoney back, usually with interest, on the duedate. Most CDs are written for a specific periodof time, such as six months, one year, two years,or five years. Banks pay higher interest forlonger-term CDs. Sometime people who holdcertificates of deposit can obtain money by●negotiating them to other people or by pledgingthem as security for a loan. A check is a draftdrawn on a bank and payable on demand. Checksare the most common type of draft in use today.When you write a check, you order the bank topay the money in your checking account to others.A note is a written promise by one person, calledthe maker, to pay money to another person, calledthe payee. A draft is an order to pay money. Adraft is an instrument in which one party (thedrawer) orders another party (the drawee) to paymoney to a third party (the payee). A sight draftis a draft that is payable as soon as it is presentedto the drawee for payment. A time draft is a draftthat is not payable until the lapse of the particulartime period stated on the draft. Businesses andprivate parties frequently use drafts to transferdebts from one party to another.Section 23.2 Requirements of Negotiability● To be negotiable, an instrument must be inwriting, must be signed by the maker or drawer,and must contain an unconditional promise ororder to pay. In addition, the instrument must bemade out for a fixed amount of money, payableon demand or at a definite time, and be payableto order or to bearer.● The omission of the date does not affect thenegotiability of an instrument, but the omissionallows the presumption that the date on whichthe instrument is received is the date of issue.● Handwritten terms control typed or printedterms, and words control figures. Handwrittenterms control typed and printed terms becausethe court assumes that they represent the finalintent of the parties to the contract. Words controlfigures because it is much harder to make amistake when writing in words the amount ofthe negotiable instrument.516 Unit 5: Using Your Purchasing Power

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.negotiable instrumentnotemakerpayeecheckcertificate of deposit (CD)drawerdraweeacceptorsight drafttime draftwords of negotiability1. With a partner, create a script in which you discuss negotiabilitywith a banker. Use all of the terms listed above in your role-play.2. Act out the scenario.3. Perform your skit in front of the class.4. Have your classmates critique your performance.5. Read your classmates’ comments and reflect on how you couldimprove your performance.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 23:Negotiable Instruments—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the text for additional reinforcement.6. What is a certificate of deposit?7. What is an acceptor?8. Explain the elements of negotiable instruments.9. Explain the definite-time contract.10. What are the words of negotiability?11. Why do some people feel that it is safer to use negotiable instruments than cash?12. Why do CDs pay higher interest than regular savings accounts?13. What does it mean to postdate a check?14. Why do businesses and private parties opt to use drafts?15. How would a drawee indicate that he or she agrees to the draft?16. Why is it a bad idea to write a written instrument in pencil?17. Where should a signature appear on an instrument?Chapter 23: Negotiable Instruments 517

CHAPTERASSESSMENTInterpreting and CommunicatingInformation18. Rewrite the following passage from acertificate of deposit in words that a youngteen can understand. Test it on severalstudents in your school.“Except as otherwise provided herein,in the event of any withdrawal ofprincipal from this account prior to amaturity date, the account holder shallforfeit an amount equal to the lesser ofall of the interest earned for the termor renewal term or one half the termin months of interest whether earnedor not, on the amount withdrawn atthe nominal (simple) interest rate beingpaid on the account, regardless of thelength of time the funds withdrawnhave remained in the account.”Negotiable CheckCarlos works at a local video store called VideoFun. Yesterday, he accepted a check for $22.34payable to Video Fun. The customer had purchaseda new movie release. After the customerleft, Carlos took a second look at the check. Thecheck was postdated; there was an “x” insteadof a signature; and the figures and the wordsfor the amount of the check did not match. Totop it off, the check was written in pencil.For the following cases, give your decision andstate a legal principle that applies.22. Percy owns the Country Collectibles Shop,which specializes in buying and sellingrare coins, stamps, comic books, gold andsilver bars, and other collectors’ items. Inexchange for a loan of $10,000, Percygives Kimberly a signed promissory notethat reads, “In 60 days, I promise to pay tothe order of Kimberly Tate $10,000 worthof silver bars.” Is the note negotiable? Whyor why not?23. John writes a check to Donna for $75 and,by mistake, omits the date. As a result ofJohn’s error, Donna’s friend Linda claimsthat the check is not negotiable. Is Lindacorrect? Explain your answer.24. Cynthia gave Glen a signed note that read,“On May 20, 2004, I promise to pay GlenFife one hundred dollars.” Is this anegotiable instrument? Why or why not?25. After agreeing to the terms of theircontract, Judd gave Henry a signed notethat read, “I promise to pay to the order ofHenry Lloyd two hundred dollars whenhe completes the painting of my house.”Is this a negotiable instrument? Why orwhy not?26. Pierre gave his attorney a promissory notein exchange for legal services. The noteread, “I promise to pay to the order ofCharles E. Jones, in or within 60 days, thesum of five hundred French francs.” Is theinstrument negotiable? Why or why not?Debate19. Is the check negotiable? Why or why not?20. Debate whether each flaw causes nonnegotiabilityin and of itself.21. If you were Carlos, what would youdo now? Explain your answer.518 Unit 5: Using Your Purchasing Power

In each case that follows, you be the judge.27. Borrowed MoneyIn a suit against Dominic Loweth, Philip Fazio introduced into evidence the following writteninstrument, dated November 15: “This is to certify that I borrowed $15,000 from Philip N. Fazioon this day, to be returned within 10 days.” This was followed by what appeared to be thesignature of Loweth. Fazio claimed that the instrument was negotiable. Do you agree? Whyor why not?Fazio v. Loweth, 490 N.Y.S.2d 859 (NY).28. Promise to PaySandra McGuire signed the following note as part of a business transaction: “For valuereceived, Thomas J. McGuire and Sandra A. McGuire, husband and wife, do promise to payto the order of Pascal L. Tursi and Rebecca L. Tursi of 110 Curtis Lane, Moorestown, NJ, andof The Green Mountain Inn, Stowe, VT, the sum of sixty-five thousand dollars ($65,000).” Isthe note a negotiable instrument? Why or why not?P.P. Inc. v. McGuire, 509 F.Supp. 1079 (NJ).Bert has heard of banking online, but he doesn’treally understand how it works. How is moneydeposited? Can you write checks electronically? Isit safe? Bert has asked you to help him find moreinformation.ConnectUsing a variety of search engines:29. Research online banking.30. Find out what services are offered online.31. Explain how to apply for a checking account.32. Discuss privacy issues that surround bankingonline.33. Find out how digital signatures are used.34. Predict How do you think Americanswould transact business if there were nonegotiable instruments?35. Connect Why might CDs be a goodinvestment for someone saving to goto college?36. Question Why do you think it is importantthat the maker sign a negotiable note?37. Respond Scott’s uncle signed a promissorynote in the top left corner of the document.Is the note still negotiable? Why orwhy not?Chapter 23: Negotiable Instruments 519

CHAPTERWriting ChecksUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 24: Writing Checks—Chapter Overviews to preview thechapter information.

The Opening SceneDavid and Melanie Mueller are relaxing in theirapartment when they hear an unexpected knock onthe door.Lucky Day?MELANIE: (Opening the door.) Julio! How are you?JULIO: Hi, Melanie! Today’s your lucky day!DAVID: (Walking into the room from the kitchen.) Julio!It’s good to see you.JULIO: (Entering.) I have what you’ve been waitingfor. Here’s a check for the amount I borrowed fromyou, plus interest.MELANIE: (Taking the check.) Great, we can sure useit! I’ll put this in a safe place. (She opens the deskdrawer and lifts up some papers.) David! Lookwhat I found! It’s the check from Aunt Mae we lost.It was under these papers all this time. What alucky break!DAVID: Am I glad to hear that! That check must beabout seven months old. I thought for sure it hadbeen stolen.JULIO: I told you this was your lucky day!DAVID: Will you have time to go to the banktomorrow, Melanie?MELANIE: Yes. I’ll deposit both checks.DAVID: While you’re at it, you can cash the paycheckI got today. I’ll indorse it right now.JULIO: Well, I have to go. I’m meeting a friendfor dinner.DAVID AND MELANIE: Thanks, Julio!JULIO: No problem. See you later.MELANIE: I’ll write a check for the last payment to thefurniture company. It’ll be good to have that takencare of. We only owe $125.(The next evening, David and Melanie discuss theirfinances after dinner.)DAVID: Did you cash my paycheck today?MELANIE: The bank said I’d have to wait a few daysfor it to clear, so I just deposited it.DAVID: We should sue that bank! I think they have tocash it.MELANIE: They wouldn’t take Aunt Mae’s check,either. They called it a stale check. I was prettydisappointed.(Two weeks later, Melanie is trying to reconcile thebank statement.)MELANIE: There’s something wrong somewhere! Thisthing won’t balance.DAVID: What a month! First the bank wouldn’t cashmy paycheck; then Julio’s check bounced. Whatelse could go wrong?MELANIE: (Looking through the cancelled checks.)This is funny, David. According to the check stub,that check you wrote to the furniture company wasfor $125.DAVID: That’s right.MELANIE: But look at the cancelled check. It’s writtenfor $425!DAVID: (Looking at the check.) You’re right!Somebody changed it. The furniture companymust have raised the amount on the check I wrote!1. Can you sue a bank for not cashing yourpaycheck?2. Must a bank honor a check that is sevenmonths old?3. What are the possible legal consequences ofwriting a bad check?4. When a bank pays an altered check, who suffersthe loss?Chapter 24: Writing Checks 521

Checking Accountsl How to describe theprocess of openinga checking accountand some of thedepositor’s rightsl How to explain theproper way to write acheck and discussproblems associatedwith checkingaccountsl How to summarize theprocedure forbalancing a checkbookKnowing about checkingaccounts and writingchecks will help you useyour money wisely.l stale checkl outstanding checksl bad checkl forgeryl utteringUsing a Checking AccountThe check is the most common kind of negotiable instrument in usetoday. Checks are a safe method for sending funds through the mail,and they provide convenient receipts for the people who write them.Opening a Checking AccountYou open a checking account by depositing money in a bank andsigning a signature card. The bank agrees to pay money out, up to theamount you have deposited when you write a check.If your bank refused to cash your check when sufficient funds wereon deposit, this would be a breach of the bank’s contract. You couldbring a claim against the bank for any damages suffered as a result. Onlythe depositor has the right to bring a claim against the bank for failingto pay a check. The bank’s agreement to cash checks is with the depositoronly. An exception to this rule occurs with certified checks, whichare discussed later in this chapter.A bank may refuse to pay a check that is more than six months oldwithout incurring liability. Such a check is known as a stale check . Abank also has the rightto refuse to pay a checkif it is submitted 10 daysafter the death of thedrawer. The bank is notliable, however, for payinga check of a deceasedperson if it doesnot have notice of thedrawer’s death or incompetence.PAYING BILLSMany people pay monthlybills by check. Others preferthat automatic paymentsbe made electronically bytheir banks. Which methodwould you choose? Why?522 Unit 5: Using Your Purchasing Power

Balancing Your CheckbookYou should balance, or reconcile, your bank statement as soon aspossible after receiving it. Carefully compare the check register balancewith the bank statement balance to make sure that they agree (see Figure24.1). Don’t forget to take into consideration outstanding checks , orchecks you have written that have not yet been returned to the bank forFigure 24.1Bank Account Reconciliation Using a FormAmerican National BankWESTOVER, OREGONKenneth Buckley7828 Carl DriveWestover, OR 98123FDICAccount Number: 303079Statement Date: 7/15/--Balance Deposits & Other Credits Checks & Other Debits BalanceLast Statement No. Amount No. Amount This Statement00.00 2 700.00 5 482.00 218.00Description Checks & Deposits &Other Debits Other CreditsDate BalanceBalance Forward 00.00Deposit 500.00 7/01 500.00Check 101 273.00 7/04 227.00Check 102 27.00 7/07 200.00Check 103 50.00 7/08 150.00Deposit 200.00 7/10 350.00Check 104 100.00 7/14 250.00Check 105 32.00 7/14 218.00PLEASE EXAMINE YOUR STATEMENT AT ONCE. IF NO ERROR IS REPORTED IN 10 DAYS,THE ACCOUNT WILL BE CONSIDERED CORRECT AND VOUCHERS GENUINE. ALL ITEMSARE CREDITED SUBJECT TO FINAL PAYMENT.BANK RECONCILIATIONThe adjusted bank balanceshould agree with yourcheckbook register. Whyshould you reconcile yourchecking account witheach new statement?BANK RECONCILIATION FORMPLEASE EXAMINE YOUR STATEMENT AT ONCE.ANY DISCREPANCY SHOULD BE REPORTED TOTHE BANK IMMEDIATELY.1. Record any transaction appearing on this statementbut not listed in your checkbook.2. List any checks still outstanding in the space providedto the right.3. Enter the balance shown on thisstatement here.218 004. Enter deposits recorded in yourcheckbook but not shown on this___ __statement here.5. Total lines 1 and 2 and enter here.with your checkbook balance.6. Enter total checks outstanding here.7. Subtract line 4 from line 3. Thisadjusted bank balance should agree21869149000000CHECKS OUTSTANDINGNumber Amount106 25 00107 14 00108 30 00TOTAL 69 00Chapter 24: Writing Checks 523

PERSONAL CHECKNever write a check inpencil, and always writelegibly. Why do you haveto write the amount bothin words and in numerals?Figure 24.2Printed name and address of depositorKENNETH BUCKLEY 51-160 1067828 CARL DRIVE 111WESTOVER, OR 981231 July 1520--PAY TO THE 2ORDER OF Bob’s Service Station 3$4Twenty five and 00/1006OREGON STATE EMPLOYEESCREDIT UNIONoil changeA Personal CheckMEMO:00000000 : 1 505 303079"' 1065PayeeKenneth BuckleyCheck number25.00DOLLARSName of financialinstitution (drawee)Magnetic ink charactersCheck numberDepositor's account number524 Unit 5: Using Your Purchasing Powerpayment. The bank statement shows only checks that have already beenpaid from the account.Writing ChecksBanks provide regular and special printed check forms. These checksdisplay a series of numbers printed in magnetic ink that make it possiblefor computers to process the checks quickly and accurately (seeFigure 24.2).Parties to a Check A check is a draft drawn on a bank and payableon demand. The person who writes the check is called the drawer. Thebank that is ordered to pay the money is called the drawee. The personto whom the check is made payable is called the payee. As you can see,the parties to a check are the same as the parties to a draft, except thatthe drawee is always a bank.Avoiding Negligence You should take care to write checks thatcannot be changed easily or signed by a forger. You are responsible foraltered or forged checks only if your negligence contributed to thealteration or forgery. It would be negligent to write a check in a waythat would make it easy for a forger to change the amount.When writing a check, print the figures very close to the dollar signand keep all of the figures close together. Always start at the extreme leftwhen writing amounts of money in words, and draw a line through any

Figure 24.3NUMBER DATEDESCRIPTIONOF TRANSACTIONCheck RegisterPAYMENT/DEBIT(-)FEE(IF ANY)(-)DEPOSIT/CREDIT(+)BALANCE$106 7/15 Bob's Service Station$25 00$ $-25 00oil change 193 00107 7/15 Cutler Enterprises 14 00 -14 00magazine subscription 179 00108 7/16 Motor Vehicles Dept. 30 00 -30 00driver's license 149 00KEEPING TRACKThis sample check registershows how to keep track ofchecks as you write them.What else would yourecord in your checkregister?extra space that remains after you’ve written the amount. This preventssomeone from adding words and figures that alter the value of the check.Be sure that the figures are the same as the written amount. If there isa difference between the figures and the words on a check, the bankwill honor the written amount. Write the name of the payee close to thewords “Pay to the order of,” and fill in all unused space with a line.Make a note of the reason for the check.Sign your name so that it looks as much as possible like the one onthe bank signature card. Never sign a blank check, and never cross outor change a check onceit has been written. Ifyou make a mistakewhen writing a check,write a new check andprint VOID across theincorrect one. Don’t forgetto write the wordVOID in the check register,too, to keep yourNEGLIGENCE?Writing a check with apencil makes alteration ofthe check by a dishonestperson much easier. Whenare you responsible ifsomeone else alters acheck you wrote?Chapter 24: Writing Checks 525

ecords accurate. Fill out the check register before you write the checkso you won’t forget to do it later.Bad Checks A bad check is a check drawn on an account in whichyou have insufficient funds. Writing a check on an account with insufficientfunds is larceny or attempted larceny, unless it is accidental.Example 1. The Lotus Loan Company received Renee Cronyn’scheck for $125, due on an installment note. After it was deposited,the check was returned to Lotus with the notation “InsufficientFunds.” The financial institution sent Renee a certified letter notifyingher of the bad check. If she fails to make the check good,a criminal complaint can be filed against her.Bad-check laws are used as an effective means of debt collection.When notified that they are subject to prosecution, most people makeevery effort to pay the creditor the amount of the check. Banks andstores generally charge a penalty fee for bad checks.Flee FeesChecking accounts incur fees, and these days banks may charge a fee foralmost any service related to your account. Almost all banks charge for suchthings as printing checks, stopping payment, and bounced checks, but manybanks have gone even further in recent years. Many banks now charge afee for using an ATM, using a teller, keeping a low balance, and receivingcancelled checks. These fees are legal and within the bounds of regulatorypractice.If you want to avoid paying excessive fees for having a checking account,you might want to shop around for a bank that charges less for its services.Start by examining your banking habits and needs. In doing so, you mightwant to answer the following questions. Do you often use the ATM? Do youhave trouble maintaining a minimum balance? Do you write many checkseach month? Do you like to receive your cancelled checks with your monthlystatement? Do you transact business at the bank often?Make a List Make a list of your banking habits as suggested above. Ask yourbank for a list of fees related to its banking services.526 Unit 5: Using Your Purchasing Power

Electronic Banking for the Visually ImpairedSeveral large banks have recently settled lawsuits filed by visually impairedpersons over ATM access. Advocacy groups for the visually impaired sued thebanks under the Americans with Disabilities Act. One major bank settled thelawsuit against it by providing visually impaired customers with another methodof using the ATM. Visually impaired customers can now call a toll free numberto reach a specially trained bank employee. This employee will guide themthrough the ATM transaction. The customer would make the call with a cellphone or by using a phone supplied at the ATM. Other banks have addressedthis problem by providing “talking” ATMs for visually impaired customers.(Source: CMP Media, Inc., February 1, 2001, Issue No. 3802, p. 9)Connect Visit the Web site of a major banking institution. See if they havea way of providing ATM access for the visually impaired.Many banks offer overdraft protection service as a safeguard againstany mistakes that you might make in balancing your checkbook. If youhave overdraft service, the bank will honor small overdrafts, saving youthe inconvenience and embarrassment of having a check bounce.Forged Checks Forgery is the false making or material alterationof a writing where the writing has the apparent ability to defraud and isof apparent legal efficacy with the intent to defraud. A forged check isa check that is signed by someone other than the drawer without thedrawer’s authority. Forgery is a crime, subject to a fine and imprisonment.If a bank pays a forged check and the drawer was not negligent,the bank must bear the loss. It is the bank’s duty to know the signaturesof its depositors. The bank must also bear the loss of the amount addedif a check is changed from its original amount to a higher amount. Acheck that is altered in this manner is a raised check.Example 2. Lance Yerkes wrote out a $400 check, in a propermanner, to Robin Anderson. Before taking the check to the bank,however, Robin raised the amount to $4,000. If Lance’s bank paysthe full $4,000 to Robin, it can deduct only $400 from Lance’saccount when the fraudulent alteration is discovered. The bankmust either get the money back from Robin or suffer the loss.Chapter 24: Writing Checks 527

MathematicsWhen you open a checkingaccount, there are oftenseveral fees involved.You might have to pay amonthly service charge,a per check charge, ora per transaction fee.You probably will alsopurchase your checksfrom the bank.Research ActivityContact at least twobanks, and find out howmuch it costs to dobusiness at those banks.Compare the costsbetween banks. If youbased your decision onlyon cost, which bank wouldyou choose to open yourchecking account?You are guilty of a crime if you knowingly offer a forged check,even if you did not personally commit the act of forgery. When an offerordeliberately submits a forged instrument to another, the resulting crimeis called uttering .If one of your checks is forged, you must notify your bank within areasonable time. Failure to give timely notice relieves the bank of liability.Although you are granted a “reasonable” amount of time to notifyyour bank of one forged check, you must notify the bank within 14 daysafter receiving your statement if you discover multiple forged checks.Stopping Payment of a Check You may order your bank to stoppayment on a check that has not yet been paid by the bank. If the bankpays the check anyway, it is liable for any loss you suffer as a result. Anoral stop-payment order is binding on the bank for 14 calendar days,unless the order is confirmed in writing within that period. A writtenorder is effective for six months, unless it is renewed in writing. If youstop payment on a check given in payment of an amount actually owed,you still owe the amount of the debt. Also, in many situations you cannotavoid liability on a check by stopping payment on it if it has been transferredto a holder in due course. A holder in due course is one who takesthe instrument for value, in good faith, and without notice that anythingis wrong with it.Reviewing What You Learned1. How is a checking account opened?2. Describe the proper way to write a check.3. Summarize the process of balancing yourcheckbook.Critical Thinking ActivityBanking Fees Why do you think banks chargea fee to process an order to stop payment?Legal Skills in ActionCalculating Costs You deposit a $100 checkfrom your friend Ted into your checkingaccount and then write a $46.18 check to payfor groceries. Four days later, you receive anotice from the bank that Ted’s check was badand your account was debited $25 for theunpaid deposit. Because the funds from yourdeposit did not become available, your checkwas returned to the grocer unpaid. Your accountis debited another $25 for the unpaid check.The next day you receive notice from yourgrocer that you must pay a fee of $25 for thereturned check and replace it with a bank checkor money order. You pay 75 cents for the moneyorder. Calculate how much you really spent topurchase the $46.18 worth of groceries.528 Unit 5: Using Your Purchasing Power

Other PaymentMethodsOther Types of ChecksWriting a check is a convenient way to make a payment. However,personal checks are sometimes unavailable or unacceptable. Other kindsof checks have been developed for use in these situations.Certified ChecksA certified check is a check that is guaranteed by the bank (seeFigure 24.4). At the request of either the depositor or the holder, the bankguarantees that sufficient funds have been withheld from the drawer’saccount to pay the amount of the check. A prudent person requests a certifiedcheck when involved in a business transaction with a stranger.The drawer may present a check to a bank for certification beforeit is put in circulation, or the holder may present the check for certificationafter it comes into the holder’s possession. The bank stamps “certified”on the face of the check and withdraws the money from thedrawer’s account. If the drawer had the check certified, the drawer andall indorsers remain liable. If, on the other hand, the holder had the checkcertified, the drawer and all indorsers are discharged because the holderFigure 24.4No. $DATETOFORDOLLARS CENTSBALANCEAMT.DEPOSITED"TOTALAMT.THISCHECKBALANCENo.Fairfield, N.J. 20PAYTO THEORDER OF $STATE STREET BANKFairfield, New Jersey:0217"’0502 : 0323"’5072"’CERTIFIED CHECKA certified check is the same as an accepteddraft. Why would a prudent person requesta certified check when doing business witha stranger?No. Date 20CERTIFIEDPayable only atoriginallydrawn andwhen properly endorsed.STATW STREETMain officeFairfield, N.J.Authorized signatureDo not destroy.55-502217DOLLARSl How to describe fivetypes of checks otherthan personal checksl How to explain thefederal law regardingavailability of fundsl How to describeelectronic fundtransfers and therules regulatingsuch transfersUnderstanding and usingdifferent checkingdevices and electronicfund transfers will putyou on the cutting edgeof modern financialactivity.l certified checkl cashier’s checkl bank draftl money orderl traveler’s checkl electronic fundtransfer (EFT)l debit cardChapter 24: Writing Checks 529

Canine Enforcement OfficerChristine Oxendine works in a job where partners canmake a big difference. Oxendine describes her partner as ahairy, driven workaholic who scratches a lot and sometimesslobbers. Meet Draden, U.S. Customs Service canineextraordinaire.Six years ago, Oxendine devoted 16 weeks to training Draden, a black labmix, to help her find illegal drugs that are brought into Texas. The two partnersstill train every day and average about three illegal drug seizures each month.“I really enjoy working with animals,” says Oxendine, who served in theAir Force prior to joining Customs. “Every day, even if we don’t go out andunearth illegal activity, I’m rewarded just by training Draden and seeing thathe’s rewarded, too. Besides, he’s a partner that doesn’t talk back!”Oxendine trains Draden with a rolled up towel that smells like a narcotic.“His natural instinct is to retrieve,” she says, “so I throw the towel or hide it, andthen we play tug-of-war after he finds it. On command, Draden looks for the towelthat is saturated with a pseudo-narcotic. In a real-life situation, he’ll be looking forthat smell, which ends up being the illegal narcotic.”SkillsPersonalityTraining(HUMAN) Communication (with dogs and people), computer,physical fitness. Bilingual agents receive higher pay.(DOG) Able to retrieve and communicate a discovery byscratching and biting appropriate objects.(HUMAN) Self-motivated, patient, focused, honest, able towork under various levels of stress.(DOG) Very determined, intelligent, and easy to train; wantsto find and retrieve things.(HUMAN) Must complete a regular tour of military duty orhave 60 hours of college with a grade point average of3.5 or better. Must also complete 16 weeks of trainingat the U.S. Customs Canine Enforcement Academy.(DOG) 16 weeks of training at the same academy. Mostdogs in the program have been rescued from the pound.For more information on canine enforcement officers, visit ubpl.glencoe.comor your public library.530 Unit 5: Using Your Purchasing Powercould have cashed the check instead of having it certified. Unless otherwiseagreed, a bank is not obligated to certify a check. (Because we arediscussing the law of negotiable instruments, we will use the termindorse. In other applications, the term endorse is more commonly used.)

Cashier’s ChecksA cashier’s check is a check drawn by a bank upon itself. It issimilar to a certified check. However, the bank issues a cashier’s check,and payment on it cannot be stopped. Either the bank transfers the amountof the check from the depositor’s account to its own, or the depositorwrites a check to the bank for that amount. With the money in its control,the bank then issues a check for the amount. No matter where acashier’s check is sent by the bank or by a customer who purchases itfrom a bank, it must be returned to that bank for final payment. Peoplewho will not accept personal checks will often accept cashier’s checks.Bank DraftsA bank draft , sometimes called a teller’s check or treasurer’scheck, is a check drawn by a bank against funds the bank has on depositwith another bank. People will often take a bank draft when they willnot take someone’s personal check because they have faith that a bankwill honor its own check.Money OrdersA money order is a type of draft that substitutes for a check andmay be purchased for a fee from banks, post offices, stores, traveloffices, and automobile clubs. Instead of being drawn on an individual’saccount, a money order is drawn on the funds of the organizationthat issues it.When purchasing a money order, you fill in your name and addressand the name of the payee on the instrument and then receive a receiptfor the money order. If the money order is lost and you have the receipt,it will be replaced if it has not already been cashed. Postal Money Orderscan be purchased for amounts up to $1,000.U.S. International Postal Money Orders are often used to send moneyto foreign countries. Telegraphic money orders can be used to sendmoney quickly. Under the UCC, a bank money order is a check, eventhough it is described on its face as a money order. Money orders arenot as freely negotiable as other instruments because they may be transferredonly once.Traveler’s ChecksIndividuals who travelto foreign countriessometimes usetraveler’s checks, whichcan be purchased at avariety of locations invarious currencies.Travelers can easilyget refunds if theirtraveler’s checks arelost or stolen. Whatare some otheradvantages ofpurchasing traveler’schecks?Get involvedLearn about differentcurrencies such as thepound, yen, and theEuro. Investigatepossible careers thatinvolve internationaltravel.Traveler’s ChecksA traveler’s check is similar to a cashier’s check in that the issuingfinancial institution is both the drawer and the drawee. As with moneyorders, the buyers pay the full amount of the checks, plus a service fee.You are required to sign traveler’s checks in the presence of the issuerwhen they are purchased. To cash a check, you write the name of thepayee in the space provided and countersign it in the payee’s presence.Only the purchaser can negotiate traveler’s checks, and the issuing bankeasily replaces them if they are stolen.Chapter 24: Writing Checks 531

Availability of FundsIn the past, banks were not uniform in the amount of time theyrequired before they would make funds available on checks depositedin customers’ accounts. Some banks held funds longer than others, andmany banks did not disclose their holding policy to their customers.Example 3.Yvette Espinal received a check in the mail from herfather, who lived in a distant city. She deposited it in her checkingaccount and was told that she would not be able to draw acheck on the funds for 10 days. Yvette’s friend inquired at herbank about its holding policy and was told that it would havemade the funds available in five days.To address this issue, Congress passed the Competitive BankingAct. Under the Act, the Federal Reserve Board of Governors issuedRegulation CC.Regulation CC requires banks to make funds available to depositorsaccording to a prescribed schedule (see Figure 24.5). Exceptions aremade for new accounts, accounts that are repeatedly overdrawn, anddeposits of a suspicious nature. In addition, some state laws require evenshorter time periods for banks to make funds available.Regulation CC also requires banks to disclose in advance their policyfor making funds available to depositors. Such disclosures must be madewhen the account is opened as well as on conspicuous notices at tellerstations in the bank.Electronic BankingA popular method of banking, called an electronic fund transfer(EFT) , uses computers and electronic technology as a substitute forchecks and other paper forms of banking. You can go to an automaticCHECK-HOLDINGLIMITSBanks must makefunds available todepositors accordingto a prescribedschedule. Howlong can a bankhold someone’sgovernment checkbefore paying it?Figure 24.5 Maximum Check-Holding Limits Under Federal Law*Type of CheckHolding LimitLocal2 business daysNonlocal5 business daysCashier’s check1 business dayCertified check1 business dayGovernment check1 business dayNew accountsIndividual bank policy appliesDeposits made at automatic teller machines5 business days*Some state banks have shorter holding periods.532 Unit 5: Using Your Purchasing Power

ATM CARD PROTECTIONConsumers are protected against lost or stolen ATMcards provided they notify their bank of the loss or theftwithin certain time limits. What is your liability for theunauthorized use of your ATM card when you notifythe bank two business days after its theft? threedays afterward?Bad Check orBad Practice?Xin works at The PlaceUpstairs as a salesclerk. She is paid twicea month. Frequently shefinds that she runs outof money before hernext paycheck.Xin has learned thatbecause her paycheckis deposited directly toher checking account,she can write a checktwo or three daysahead of payday. Thecheck doesn’t clear forthree days. Recently, afriend showed her howto fold a check so thatit must be processedmanually, making ittake even longer toclear. Are these practicesethical? Why or whynot?teller machine (ATM) 24 hours a day to make bank deposits andwithdrawals.A debit card (also called a check card or cash card) is used to electronicallysubtract money from your bank account to pay for goods orservices. You insert your debit card into the ATM and enter your secretpersonal identification number (PIN) to withdraw cash, make deposits,or transfer funds between accounts. You can also use your debit card tobuy goods at many retail stores. See Figure 24.6 for tips on managingyour EFT card wisely.Chapter 24: Writing Checks 533

Figure 24.6MANAGE YOUR EFT CARD WISELYTake Care of Your CardYou can incur serious losses if your EFT(debit card) is lost, stolen, or used withoutauthority. If you decide to use EFT,keep these tips in mind.Choosing a PINKnow where your EFT (debit)card is at all times; if you lose it,report it as soon as possible.Keep ReceiptsChoose a PIN that is different from personalinformation (such as the names of friends,family, or pets) or private information (such asyour social security number or birthdate).Using a different number will make it moredifficult for a thief to use your EFT card.Know the MerchantKeep and compare your EFTreceipts with your periodicstatements so that you can finderrors or unauthorized transfersand report them.Make sure you know and trust the merchantbefore you provide any bank account informationto pre-authorize debits to your account.534 Unit 5: Using Your Purchasing Power

Under the Electronic Fund Transfer Act, you are entitled to receivea written receipt when you use an ATM. In addition, the transactionmust appear on your periodic statement. You have 60 days to notify thebank of any error on the periodic statement or ATM receipt. After beingnotified, the bank has 10 business days to investigate the error. If thebank needs more time, it may take up to 45 days to complete the investigation,but only if the money in dispute is returned to your account.A debit card offers you less legal protection than a credit card. Unlikea credit card, a payment cannot be stopped if your purchase is defectiveor if your order is not delivered. Your liability for the unauthorized useof an ATM card is limited to $50, as long as notice of the loss or theftof a card is given to the issuer within two business days. Your liabilityincreases to $500, however, if notice is delayed beyond that time, andit becomes unlimited when notice is not given within 60 days. The unauthorizeduse of an ATM card is a criminal offense punishable by a$10,000 fine and/or 10 years in prison.Electronic Check ProcessingSeveral large banks are now linking their check processing systemto ATM networks. When you give your check to a retailer, for example,the retailer will scan it to verify that there is enough money in youraccount. If so, the money will be deducted instantly from your checkingaccount. The check itself operates like a debit card, and the time it takesto process a check, called the float, disappears.The debit card hasincreased in popularityover the years. In thepast, debit cards wereused simply to withdrawmoney from a bankaccount, but now withthe imprint of chargecard logos, they can beused to make purchasesat businesses. When apurchase is made, themoney is deducteddirectly from a bankaccount.Reviewing What You Learned1. Describe the five types of checks other thanpersonal checks.2. How soon must funds be made available toyou when you deposit a local check in yourbank? a nonlocal check?3. What is electronic fund transfer? Under theETF Act, what are you entitled to receivewhen you use an ATM?Critical Thinking ActivityWaiting Periods Why do you think banksrequire a waiting period before making fundsfrom a check deposit available to the depositor?How do you think the length of the waitingperiod specified by Regulation CC wasdecided?Legal Skills in ActionCalculating Costs Ginger uses the ATMmachine three times per week. It is located inher office building and for that reason it isvery convenient. For every transaction, shehas to pay a fee of $1.75. How much willGinger spend in a year on ATM fees?Chapter 24: Writing Checks 535

CHAPTERASSESSMENTSection 24.1 Checking Accounts● A checking account is opened by depositingmoney in the bank and by signing a signaturecard. The bank agrees to pay money out, up tothe amount on deposit, when you write a check.If the bank fails to cash your check despitesufficient funds in the account, you can sue thebank for damages. Only the depositor has theright to bring a claim against the bank for failingto pay a check. The bank’s agreement to cashchecks is with the depositor only. An exceptionto this rule occurs with a certified check.● It is important to write checks so that they cannotbe altered or signed by a forger. Print the figuresclose to the dollar sign and keep all of them closetogether. Always write from the extreme left anddraw a line through any extra space that remainsto the right after you’ve written the amount.Write the name of the payee close to the words“Pay to the order of,” and fill in all unused spacewith a line. Make a note of the reason for thecheck. Your signature should be consistent withthe one on the bank signature card. Never sign ablank check, and never cross out or change acheck once it has been written; instead, void theentire check. If you deliberately write a check onan account in which you have insufficient funds,you can be held liable for larceny. Banks andstores generally charge a penalty fee for badchecks. Forging checks is a crime, and you canbe fined or imprisoned. A forged check is acheck that is signed by someone other than thedrawer without the drawer’s authority. If the bankpays a forged check and the drawer was notnegligent, the bank must bear the loss. The bankmust also bear the loss of the amount added if acheck is changed from its original amount to ahigher amount. A check that is altered in thismanner is a raised check.●You should balance your checkbook as soon aspossible after receiving it. Compare the checkregister balance with the bank statement balanceto make sure the two balances agree. Take outstandingchecks into consideration, because yourstatement shows only checks that have alreadybeen paid from the account. Also save andcompare any receipts that you have from debitcard transactions to make sure they agree withthe entries posted on your statement.Section 24.2 Other Payment Methods● Certified checks are guaranteed by the bank onwhich they are drawn. A cashier’s check is drawnby a bank upon itself. A bank draft is drawn by abank against funds the bank has on deposit withanother bank. Personal money orders may bepurchased at banks, post offices, stores, traveloffices, and automobile clubs, and they are drawnon the funds of the organization that issues them.Traveler’s checks are signed by the purchaserwhen they are bought and then signed again whencashed. If lost or stolen, they can be replaced.● Federal Regulation CC requires banks to makefunds available to depositors according to aspecific schedule.● Electronic fund transfers (EFTs) are made withthe use of computers, ATMs, and debit cards.Under the Electronic Fund Transfer Act, you areentitled to receive a written receipt whenever youuse an ATM. In addition, the transaction mustappear on your periodic statement. Debit cardsoffer less legal protection than do credit cards.Your liability for the unauthorized use of an ATMcard is limited to $50, as long as notice of theloss or theft of a card is given to the issuer withintwo business days. Your liability increases to$500, however, if notice is delayed beyond thattime; the liability becomes unlimited whennotice is not given within 60 days.536 Unit 5: Using Your Purchasing Power

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.stale checkbad checkforgeryoutstanding checkscertified checkelectronic fund transfer (EFT)traveler’s checkcashier’s checkbank draftutteringdebit cardmoney order1. With a partner, practice using the key terms listed above bywriting a conversation between a bank officer and a customer.Use all of the terms in your conversation.2. Present your conversation to the class.3. Have your classmates critique your performance.4. Read your classmates’ comments and reflect on how you couldimprove your performance.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 24:Writing Checks—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. What happens when a bank refuses to pay a check and sufficient funds areon deposit?6. Who are the three parties to a check?7. Why do most banks offer overdraft protection?8. What is the difference between a certified check and a cashier’s check?9. Which offers you more legal protection—a credit card or a debit card? Explain.10. Why do many vacationers opt to use traveler’s checks instead of cash?11. Why might a person stop payment on a check?12. What type of instrument would you most likely use if you needed to send moneyto a foreign country? Why?13. What is a stale check?14. Why is it important to balance your checkbook?15. Why should you choose an ATM PIN that is different from your street address,birthdate, or social security number?Chapter 24: Writing Checks 537

CHAPTERASSESSMENTIn groups of two or three, contact banks whereseveral different types of automated tellermachines are located. Find out what bankingtransactions can be made at each machine.Compare the results.16. What transactions can be made at all themachines?17. What transactions can be made at some ofthe machines?18. Are there banking transactions that cannotbe made through an ATM?Bank Error?John Kim paid $655 to have his motorcyclerepaired. Two days after the repairs were made,the motorcycle broke down again. Johnimmediately called his bank and put an oralstop payment order on the check. He paid a $20fee for the order. One month later, John foundout that the bank honored the $665 check.Debate19. Who is liable for the loss?20. Can John sue the bank?21. What would you recommend John do now?For the following cases, give your decision andstate a legal principle that applies.22. Nancy Watson receives a check fromHarvey Balsam for $500. For no goodreason, Harvey’s bank refuses to pay it.Can Nancy sue Harvey’s bank? Does shehave a claim against Harvey? Why orwhy not?23. Revisit the previous case. Does Harveyhave a claim against his bank?24. Rita Vicente writes a check for $400payable to Norma Collins. When Normareceives the check, she has it certified bythe bank on which it was drawn. She thengives the certified check to the SawyerAppliance Company in payment for atelevision. Is Rita liable if the check is notpaid? Why or why not?25. Revisit the previous case. Would youranswer be different if Rita, instead ofNorma, had the check certified? Why orwhy not?26. While attending college in Massachusetts,Mark Unger receives a check from hisfather, who lives in Wyoming. When Markdeposits the check in his checking account,the teller informs him that he cannot drawon it for 10 days. Is the teller correct? Whyor why not?27. Colby Sewell wrote a check for $47 toFederal Storage Facilities. Sewell wrote thecheck using a pencil because she was in ahurry and could not find a pen. WhenSewell received her cancelled check andbank statement, she noticed that someonehad altered her check by raising the amountto $550. Even though the check had clearlybeen erased and rewritten, Sewell’s bankcashed it. Is the bank liable for this mistake?Why or why not?28. Paul Bianco’s wallet, which contained hisATM card, was stolen while he was at abaseball game. At the end of the game,Bianco telephoned his bank to inform it ofthe theft of his ATM card. In the meantime,the thief had figured out Paul’s PIN andhad made a withdrawal of $500. Who isliable for the unauthorized use of Bianco’sATM card? Explain your answer.538 Unit 5: Using Your Purchasing Power

In each case that follows, you be the judge.29. Raised CheckEmmett McDonald, representing an estate, wrote a check to himself as follows: “Pay to theorder of Emmett E. McDonald; Ten hundred seventy-five dollars; $10,075.00.” The bank paidMcDonald $10,075, which was stated in figures on the check, and McDonald left town withthe money. The estate sued the bank to recover the $9,000 difference between the amountwritten in words and the amount written in figures. For which party would you decide? Explainyour answer.Yates v. Commercial Bank and Trust Co., 432 So.2d 725 (FL).30. Postdated CheckOn September 14, David Siegel delivered to Peter Peters a check for $20,000, which waspostdated for the following November 14. Peter immediately deposited the check in his ownbank. David’s bank overlooked the date and deducted the money from Peter’s account early,on September 17. Does David have a valid reason to bring suit against his bank? Why orwhy not?Siegel v. New England Merchants National Bank, 437 N.E.2d 218 (MA).Checkbook SoftwareHaven wants to use a software program to keeptrack of the checks she writes and the deposits shemakes. She’s heard that the programs are easy touse, and she is anxious to give one a try.ConnectUsing a variety of search engines, help Havenresearch two different checkbook programs andcompare the following:31. Available features.32. Cost of the software.33. Required hardware to run the program.Next, help Haven make a decision as to whichprogram she should buy.34. Predict Why are checks considered to bea safe method for sending funds throughthe mail?35. Connect Why do you think it is importantto balance your checkbook?36. Question Can you think of a situation thatmight require you to use a cashier’s check?37. Respond Do you have a debit card? Whatdo you use it for?Chapter 24: Writing Checks 539

CHAPTERTransferring NegotiableInstrumentsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 25: Transferring NegotiableInstruments—Chapter Overviews topreview the chapter information.

The Opening SceneMelanie shuffles through a stack of letters and flyersas she opens the door of the apartment.Pay Day!MELANIE: David, the mail’s here! We got a letter fromthe furniture company, but these others are all ads.Oh wait; here’s a letter from Aunt Mae.DAVID: What do you think the furniture companywants now? I told them I’d call the police if theydidn’t make good on that check they raised.MELANIE: (Opening an envelope.) Aunt Mae sent usanother $500 check. She says she’s sorry the bankwouldn’t cash the one we lost and then found later.DAVID: She’s so nice! (He opens another envelope.)Well, well! This is a letter from the president of thefurniture company apologizing for raising ourcheck. They fired the employee who did it, andthere’s a $300 check here to cover the amount thebank cashed over our check. It’s made out to Davidand Melanie Mueller.MELANIE: Wow, two checks in one day! (There is aknock at the door.) I’ll get it. (Opening the door.)Julio! Come in.JULIO: Hi! Hey, I’m sorry about that bounced check.I thought I had enough to cover it.MELANIE: No problem. It’s easy to make that mistake.DAVID: How are things, Julio?JULIO: I just sold my car and the buyer, MariaReynolds, gave me this check. It’s the sameamount, so will you take it for the one thatbounced? (He hands the check to David.)MELANIE: Are you sure this one’s good?DAVID: I think you have to indorse it, Julio. It’s madeout to you.JULIO: I’ll sign the back. (He writes his name on theback of the check.) Well, I have to run.DAVID: Thanks, Julio. See you later. (Julio leaves.)MELANIE: Isn’t this great? One minute we’re broke,and the next minute we have three checks.DAVID: Let’s cash one and put the others in the bank.MELANIE: I’ll cash Aunt Mae’s check and deposit theother two at the bank tomorrow. Her check is madeout to you. Why don’t you indorse it over to me?DAVID: Okay. (He writes on the back of the check,“Pay to the order of Melanie Mueller [signed]David Mueller.”) I guess we both have to indorsethis furniture company check. (David writes on theback of that check, “Pay to the order of First Bankand Trust Company for deposit only,” and theyboth sign under the writing.)(The next evening, Melanie arrives at home with atroubled expression on her face.)MELANIE: (Very upset.) I’m usually so careful when Igo shopping! I can’t believe I was robbed!DAVID: It wasn’t your fault.MELANIE: I’m sure my purse was in the shoppingbasket. I left it for just a second to get some potatochips. When I came back, it was gone!DAVID: Don’t worry. We’ll work it out somehow.1. Who can cash a check that is indorsed simply withthe payee’s name?2. Does a special indorsement, such as “Pay to theorder of Melanie Mueller,” prevent others fromcashing a check?3. Do both David and Melanie have to indorse thecheck from the furniture company?4. Can anyone cash a check indorsed “Pay to theorder of First Bank and Trust Company fordeposit only”?Chapter 25: Transferring Negotiable Instruments 541

TransferringInstrumentsl How to distinguishbetween anassignment and anegotiation of aninstrumentl How to explain howbearer paper isnegotiatedl How to explain howorder paper isnegotiatedKnowing how to properlynegotiate financialinstruments is essentialwhen you open achecking account andbegin to spend yourmoney.InstrumentsWhen an instrument is signed by the maker or drawer and given toanother person, it is issued. When the person to whom it is issued givesit to a third party, the instrument is transferred. Instruments can be transferredby assignment or negotiation.AssignmentAn assignment is the transfer of your rights under a contract tosomeone else. Negotiable instruments are assigned when a person whoseindorsement is required on an instrument transfers the instrument withoutindorsing it. An assignment also occurs when an instrument istransferred to another person and does not meet the requirements ofnegotiability. In such transfers, the transferee has only the rights of anassignee and is subject to all defenses existing against the assignor (seeChapter 12). An assignment of a negotiable instrument may also occurby operation of law, as well as when the holder of the instrument diesor becomes bankrupt.NegotiationNegotiation is the transfer of an agreement in such a way that thetransferee becomes a holder. When an instrument is properly negotiated,the one who receives it can legally collect payment on it. A holderl assignmentl negotiationl holderl order paperl indorsementl bearer paperBANK DEPOSITIt is usually a negotiationwhen you deposit in thebank a check that you havereceived from someoneelse. Why is a negotiationbetter than an assignment?542 Unit 5: Using Your Purchasing Power

Restrictive IndorsementsDelinquent debtors are sometimes desperate enough to try anything to getout of paying their debts. One trick is writing the restrictive endorsement “paidin full” when paying only a fraction of a debt. The debtor thinks that if thecreditor deposits the check, the debtor will be off the hook for the balanceowed. In most states this simply will not work.In many states, a debtor must first inform the creditor in writing that he orshe intends to send a check for less than the amount owed as payment in full.The creditor will then have a certain amount of time (usually 15–30 days) inwhich to object. If the creditor fails to object, the debtor can then send a checkwith the restrictive endorsement making reference to the written notification. Ifthe creditor cashes the check, then the debtor is relieved of having to pay thebalance.If the debtor sends a check with “paid in full” written on it without priornotification, then the creditor may simply cross out the restriction, cash thecheck, and collect on the balance owed.Conduct Research What is the law in your state with regard to using this type ofrestrictive indorsement?is a person who possesses a negotiable instrument payable to the orderof the person holding it, or to the bearer. You are a holder, for example,when you receive a check made out in your name. You may then transferthe instrument, as David does in The Opening Scene by signing hischeck from Aunt Mae and writing, “Pay to the order of Melanie Mueller”on the instrument. From this time forward, any transfer in the propermanner to a subsequent holder is a further negotiation of the instrument.A negotiation is better than an assignment because it gives greater rightsto a transferee than the transferor possessed.Negotiation of Order PaperIf an instrument says something like, “Pay to the order of,” it iscalled order paper . Nearly all checks feature the printed phrase “Payto the order of ” before the line on which you write the payee’s name.To be negotiated, order paper must be indorsed by the payee anddelivered to the party to whom it is transferred.Chapter 25: Transferring Negotiable Instruments 543

Example 1. Hanako Lin wrote a check to the order of Wireless,Inc. in payment of her cell phone bill. When Wireless indorsedthe check and deposited it in its bank, the check was negotiated.An indorsement is the act of placing one’s signature on an instrument,usually on the back, to transfer it to another. The person whowrites the indorsement is called the indorser, and the person to whomthe instrument is transferred is the indorsee. (As noted in Chapter 24,because we are discussing the law of negotiable instruments, we use theterm indorsement, rather than the term endorsement, which is commonlyused in other applications.)Negotiation of Bearer PaperIf an instrument is payable to bearer or cash, it is called bearerpaper and may be negotiated by delivery alone, without an indorsement.When order paper is indorsed with a blank indorsement, it isturned into bearer paper and may be further negotiated by delivery alone.Example 2. Henry Dubrosky bought two soccer game tickets fromMolly Prince. Henry handed Molly a check that he had gotten fromsomeone else, which said it was payable to the order of “cash.”This delivery constituted a proper negotiation of bearer paper to aholder. Molly would be wise to demand Henry’s indorsement as aprecaution, even though an indorsement is not required for negotiation.If the bank were to refuse to pay the check when presentedwith it, Molly would then expect Henry to pay it.Reviewing What You Learned1. What is an assignment? How is it differentfrom a negotiation?2. How is bearer paper negotiated?3. How is order paper negotiated?Critical Thinking ActivityIndorsement What problems might occurwhen you write a check payable to the order of“cash” instead of to a particular person orcompany?Legal Skills in ActionTransferring Instruments Your friend Joelagrees to buy your old car stereo for $50 andwants to give you a check that he received fromAnita, whom you do not know. He indorses thecheck to you. Your bank refuses to cash thecheck but takes it for collection. Later, thecheck is returned to you due to insufficientfunds. Write a letter to Anita explaining whathappened and asking her to send a new check,payable to you.544 Unit 5: Using Your Purchasing Power

IndorsementsMain Kinds of IndorsementsAn instrument is indorsed when you write your name on it, indicatingyour intent to transfer ownership to another. Indorsements maybe written in ink, typed on a typewriter, or even stamped with a rubberstamp. For convenience, the indorsement is usually placed on the backof the instrument. To be acceptable, the indorsement must be writtenfor the entire amount stated on the instrument.Example 3. Wireless, Inc. receives many checks each day frompeople making payments on their cell phone bills. To simplifyand make the indorsements uniform, the cashier uses a rubberstamp containing Wireless, Inc.’s indorsement.Regulation CC, issued by the Federal Reserve Board under the CompetitiveBanking Act, has established standards for check indorsements(see Figure 25.1). Under the regulation, the back of a check is dividedinto specific sections designed to protect the indorsement of the depositorybank (the bank of first deposit). The first 1 1 /2 inches from the trailingedge of the check is reserved for the payee’s indorsement. Banks thathandle the check after the depository bank should limit their indorsementsto the three-inch space beginning at the opposite end (leadingedge) of the check. The section between the payee’s indorsement sectionand the subsequent bank’s indorsement section must be reserved for thedepository bank’s indorsement.In addition, only depositorybanks can usepurple ink.l How to describe thefour main kinds ofindorsementsl How to determine whomust indorse aninstrument payable tomore than one personl How to state the legaleffect of a forgedindorsementl How to discuss thewarranties that youmake when youindorse negotiableinstrumentsl How to explain thecontract you makewhen you indorsenegotiable instrumentsUnderstanding the typesof indorsements will helpyou handle your financeswisely.BLANK INDORSEMENTA blank indorsementconsists of a signaturealone. Why should a blankindorsement be used onlyat a teller’s window?l blank indorsementl special indorsementl restrictiveindorsementl conditionalindorsementl qualified indorsementChapter 25: Transferring Negotiable Instruments 545

Figure 25.1Check FaceChange ofFortuneBob is down on hisluck—again! Since hequit school in December,Bob’s life has taken adownturn. His girlfrienddumped him, and hisdad kicked him out ofthe house. Work’s beeneasy to find, but thepay is lousy. Then Bobfinds a tattered checkfor $150 near his mailbox.The drawer’s nameis given on the checkalong with a driver’slicense number, butthere is no other identification.The payee’sname is illegible, andthe check carries ablank endorsement.Bob doesn’t recognizethe drawer’s name.What should he do?The Whalen Company, Inc. 1231025 Main StreetBoston, MA 02110 2-113/1034PAY 20TO THEORDER OF $Bay BankBay Bank BostonMassachusettsFORTrailingEdgeRESERVEDFORDEPOSITORINDORSEMENTThis area isdirectly behind"Pay to the order of"Check BackRESERVED FORDEPOSITORY BANK(Bank of first deposit)INDORSEMENTDOLLARSRESERVED FOR THEINDORSEMENT OFBANKS THAT HANDLECHECK AFTERDEPOSITORY BANK1.5" 3"LeadingEdgeINDORSEMENTSRegulation CC has issued check indorsementstandards. Where should you indorse a check?546 Unit 5: Using Your Purchasing PowerEach type of indorsement fulfills a special purpose. There are fourprincipal types of indorsements:l Blank indorsementsl Special indorsementsl Restrictive indorsementsl Qualified indorsementsBlank IndorsementA blank indorsement consists of the signature alone on the instrument.By signing an instrument in this way, you are saying in effect,

Figure 25.2INDORSE HEREBELOW THIS LINE$Conrad's Restaurant20DOLLARSBLANK INDORSEMENTA blank indorsement turnsorder paper into bearerpaper and may betransferred by deliveryalone. Why should a blankindorsement be used onlyin limited situations?By“This instrument may be paid to anyone.” An instrument indorsed inblank becomes bearer paper and may be transferred by delivery alone.It is not safe to carry around this type of indorsement on an instrumentor put such an instrument in the mail. If the instrument is lost or stolenand gets into the hands of someone else, that person can cash it by presentingthe check for payment. For this reason, a blank indorsementshould be used only in limited situations, such as at a bank teller’s window.Figure 25.2 shows a blank indorsement.When an instrument payable to you misspells your name or rendersyour name incorrectly, you may indorse the back of the instrument withthe incorrect name, the correct name, or both. Whoevercashes the check may require signatures in both names. Figure 25.3Special IndorsementA special indorsement (also called an indorsementin full) is made by writing the words pay to the order ofor pay to followed by the name of the person to whom theinstrument is to be transferred (the indorsee) and the signatureof the indorser. When signed this way, the instrumentremains an order instrument and must be indorsedby the indorsee before it can be further negotiated (seeFigure 25.3).INDORSE HEREDO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*Example 4. Frank Cully withdrew $3,500 from hissavings account to buy a car from Glendale Motors,Inc. When he made the withdrawal, Cully received acheck from the bank payable to him for $3,500. Hetook the check to Glendale Motors, indorsed it witha special indorsement, and received title to the car. Becausethe check could not be legally transferred or negotiatedfurther until Glendale Motors indorsed it, allparties were protected.SPECIAL INDORSEMENTA special indorsement (indorsement infull) creates order paper, which requiresthe signature of the indorsee. Whosesignature is required to negotiate thisinstrument further?Chapter 25: Transferring Negotiable Instruments 547

Figure 25.4INDORSE HEREDO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*RESTRICTIVE INDORSEMENTA restrictive indorsement limits thesubsequent use of the instrument. Whatmust be done before this instrument canbe negotiated any further?Restrictive IndorsementA restrictive indorsement is one inwhich words have been added, in addition to thesignature of the transferor, to limit its use. Arestrictive indorsement does not prevent furthertransfer or negotiation of the instrument. However,prior to further transfer, it must be usedfor the purpose stated in the indorsement. Forexample, when a check is indorsed “for depositonly,” as in Figure 25.4, that amount of moneymust be added to the indorser’s bank accountbefore it is negotiated further. Retail storesoften stamp checks “for deposit only” whenthey are received. This provides protection inthe event that the checks are stolen.Example 5. Sharon Clausewitz received hermonthly paycheck at the end of the month.Because she knew she could not deposit itfor several days, she indorsed it, “For depositonly—Sharon Clausewitz.” This is a restrictive indorsement. Ifthe check were to be stolen or lost, the only way that it could benegotiated by someone else would be to deposit it into Sharon’sbank account.Figure 25.5INDORSE HEREDO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*CONDITIONAL INDORSEMENTA conditional indorsement makes the rightsof the indorsee subject to a certain event orcondition. What event must occur for JamesIngram to have the right to cash this check?Banks often use restrictive indorsementswhen they send checks through the collectionprocess. They do this by stamping “Pay anybank” or “For collection only” on the back ofeach check.A conditional indorsement , a type of restrictiveindorsement, makes the rights of theindorsee subject to a specific event or condition(see Figure 25.5).Example 6. George Gallo wished to transfera dividend check to his grandson, JamesIngram, as a birthday gift. Because Georgedid not want James to cash the check beforehis 18th birthday, a conditional indorsementwas used. Until the condition presented in theindorsement was satisfied, James did not havethe right to cash the check.548 Unit 5: Using Your Purchasing Power

Figure 25.6INDORSE HEREDO NOT WRITE, STAMP, OR SIGN BELOW THIS LINERESERVED FOR FINANCIAL INSTITUTION USE*QUALIFIED INDORSEMENTA qualified indorsement limits the contractualliability of the indorser. What is the effect of thewords without recourse on this indorsement?Qualified IndorsementA qualified indorsement is one in which words have been addedto the signature to limit the liability of the indorser. The words withoutrecourse added to an indorsement, for example, mean the indorser isnot liable in the event the maker or drawer does not pay the instrument(see Figure 25.6).A qualified indorsement transfers title to the instrument. This formof indorsement is frequently used when the instrument is backed bysecurity such as a mortgage or collateral. In case of default by the maker,the indorsee must look to the security for payment of the instrumentrather than to the indorser.Language ArtsA counterfeiter issomeone who makes fakemoney and passes it offas real money. Today,counterfeiters have anally in advanced technology.Printing and copyingequipment make it easierto produce realisticcounterfeit money andfinancial instruments suchas commercial checks,traveler’s checks, andmoney orders.Research ActivityResearch the measuresthat our government andprivate businesses haveput in place to protectnegotiable instrumentsfrom being counterfeited.Example 7. A $100,000 check was made payable to AttorneyCarl Pierce in payment of a client’s claim. Pierce indorsed thecheck to the client, George Anderson, writing “without recourse.”By using this indorsement, the attorney would not be responsiblefor payment if the check failed to clear.Multiple PayeesIf an instrument is payable to either of two payees, only one of thepayees needs to indorse it to make it negotiable. On the other hand, if aninstrument is payable to both of two payees, as in the case of the checkmarked “Payable to David and Melanie Mueller” in The Opening Scene,both payees would need to indorse the check for proper negotiation.Chapter 25: Transferring Negotiable Instruments 549

Safe DrivingAutomobile crashes arethe leading cause ofdeath for Americansaged 15–20. In 2001,according to theNational HighwayTraffic SafetyAdministration, 8,13715- to 20-year-olddrivers were involvedin fatal crashes, 3,608were killed, and337,000 were injured.Drunk driving, drugs,speeding, andinexperience arecommon causes ofauto accidentsinvolving teens. Howcan states reducethe number of teenswho are in vehicleaccidents?Get InvolvedStart a safe drivingcampaign in yourschool or community.When you’re driving,be alert and responsible.When you’re apassenger, be firmwith your friendsabout your safety.A bank that has taken an instrument from a customer to send throughthe bank collection process may supply any indorsement of the customerthat is necessary to title. This rule is designed to speed up bank collectionsby eliminating the need to return to a depositor any items that werenot indorsed. A bank, however, may not supply an indorsement if theinstrument contains the phrase “payee’s indorsement required.”Forged IndorsementsA forged indorsement is not valid, and anyone who takes a forgedinstrument does not acquire title and is not a holder. Order paper requiresthe indorsement of the person to whose order the instrument is madepayable. The indorsement may be made by that person or by someoneelse on that person’s behalf (an authorized agent), but not by someoneacting without authority. Anyone who pays an instrument on which thereis a forged indorsement is liable to the true owner for the amount of theinstrument.Warranties of IndorsersTo encourage people to accept negotiable instruments from others,a system of implied warranties is part of the law of negotiable instruments.An indorser who receives consideration for an instrument makesfive warranties to subsequent transferees of the instruments:1. Indorsers who receive consideration warrant that they have good titleto the instrument.Example 8. Josephine Enquist gave Wireless, Inc. a check inpayment of her cell phone bill. The check contained a blankindorsement by Hannah O’Leary. Later, Wireless, Inc. learnedthat Josephine had found the check on the street and that the realowner, Hannah O’Leary, had issued a stop-payment order.Josephine, by her indorsement, had warranted that she was thetrue owner of the instrument. She would be held liable on thiswarranty for any loss suffered by Wireless, Inc. She also couldbe vulnerable to criminal prosecution.2. Indorsers who receive consideration warrant that all signatures aregenuine or authorized. If a signature is forged, then the indorser maybe held responsible to a subsequent holder for payment of theinstrument.3. Indorsers who receive consideration warrant that the instrument hasnot been altered.4. Indorsers who receive consideration warrant that no defense of anyparty is good against the indorser. If the instrument is dishonored fora valid, legal reason, then the holder can still recover against theindorser.550 Unit 5: Using Your Purchasing Power

IsraelIf you’re almost 18 in the United States, you might be preparing for college oryour first real job. Perhaps you’re even thinking about taking some time off to travel.If you were a resident of Israel, you’d be getting ready to serve in the Israel DefenseForces (IDF). Since Israel’s birth as a nation in 1948, the IDF has been described asthe army of the people—a melting pot of young and old, privileged and poor,native Israelis and immigrants. On the other hand, Israel’s regular army is primarilycomposed of conscripts, or draftees, and a large reserve force.Required service in the IDF is three years for most Israeli men. After completingthis requirement, men generally go on to serve in the reserves until their 40s.Although exempt from combat, women serve in the army for almost two years. Israelis the only country in the world that mandates service for women. Because of agrowing population and more specialized defense needs, some Israelis think avolunteer army might better serve the country. Many believe, however, that the IDF’straditions are a common denominator among the people. The IDF “looks forward tothe challenges of the future, strengthened by the past,” explains a militaryspokesperson. Here’s a snapshot of Israel.Geographical area 8,019 sq. milesPopulation 6,029,529CapitalJerusalemLegal systemMix of English common law,British Mandate regulations,and Jewish legal systemLanguageHebrew, Arabic, EnglishReligion80% JewishLife expectancy 79 yearsCritical Thinking Question List both positive and negative effects of compulsorymilitary service. If the United States reestablished the draft, would you be willing toserve? For more information on Israel, visit ubpl.glencoe.com or your local library.Example 9. Evelyn Siegel, a minor, gave a $350 personal checkto Max Horvitz in payment for a second-hand motorbike. Sheused the vehicle for one day, decided she didn’t want it, andstopped payment on her check. Two days after Evelyn hadstopped payment on her check, Max indorsed and cashed it atChapter 25: Transferring Negotiable Instruments 551

E-SignaturesElectronic signatures now carry full legal weight since being signed intolaw. The signatures will help expand business that can be done over theInternet. Federal law does not set minimum standards for verifying orprotecting electronic signatures. Consequently, just about anything two partiesagree to call an electronic signature will be treated as one. As a result, there is awhole new set of risks for consumers and businesses. Cost savings are expectedto increase with the use of electronic signatures, but putting standards in placewill be important for the future success of electronic signature technology.(Source: TechWeb, September 29, 2000)Connect Visit an online financial services business. Ask about its electronicsignature policy.552 Unit 5: Using Your Purchasing Powerhis bank. Evelyn then notified him she was disaffirming hercontract to buy the motorbike. When her check was returned toMax’s bank because of the stop-payment order, the bank could recoverthe $350 from Max. By indorsing the check, he warrantedto the bank that no defense (including that of minority) was goodagainst him.A qualified indorsement warrants only that the indorser hasno knowledge of any defense.5. Indorsers who receive consideration warrant that they have noknowledge of any bankruptcy proceeding that would affect theinstrument.Warranties arising from or connected with the transfer of negotiableinstruments are transferred to every subsequent holder if the transfer isby indorsement. If the transfer is by delivery alone, the warranty appliesto the immediate transferee only.Example 10. In payment for cleaning services, Harry Adamsgave William Bell a $50 check, which was written properly toavoid alteration. However, William altered the check to $500,indorsed the back, and gave it to Mary Carlson in payment for adebt. Mary indorsed the $500 check and deposited it in her bankaccount. Harry’s bank then deducted $500 from his account.Later, when the alteration was discovered, Harry was entitled to

a return of the $450 from his bank. His bank could recover the$450 from Mary Carlson’s bank, Mary, or William Bell, if theyare given proper notice, based on their warranty that the instrumenthad not been materially altered. Similarly, Mary’s bank canrecover from either Mary or William to receive the appropriatemoney. Finally, Mary may recover the money from William forthe same reason.Contract of IndorsersUnless an indorsement states otherwise (e.g., by such words as withoutrecourse), every indorser agrees to pay any subsequent holder the faceamount of the instrument if it is dishonored. To enforce this obligation,the holder must do two things:l He or she must present the instrument for payment to the maker ordrawer when it is due. If that person refuses to pay the instrument, ithas been dishonored.lThe holder must notify indorsers of the dishonor before midnightof the third full business day after the date of the dishonor. Failureto make presentment and to give timely notice of dishonor to anindorser discharges him or her from liability on the contract to paysubsequent holders of the instrument.Signing the name of aperson who cannotwrite can be considereda forgery. A convictionfor forgery can be madesolely on proof of intentto commit a fraudulentact. No use of theforged document isrequired of the offender.Reviewing What You Learned1. What are the four main kinds ofindorsements?2. If an instrument is payable to both of twopayees, as in the check that is payable toDavid and Melanie Mueller, who mustindorse it?3. What are the legal effects of a forgedinstrument?4. List the five warranties of indorsers.5. What two things are necessary to enforce thecontract of indorsers?standards for check indorsements? What doyou think would happen if there were nostandards?Legal Skills in ActionThe Impact of Technology With the adventof electronic signatures, digital contracts, andthe explosion of e-commerce, are hardcopynegotiable instruments becoming obsolete?Write a paragraph describing the impact oftechnology on negotiable instruments, suchas checks.Critical Thinking ActivitySetting Standards Why do you think theFederal Reserve Board has establishedChapter 25: Transferring Negotiable Instruments 553

CHAPTERASSESSMENTSection 25.1 Transferring Instruments● An assignment is the transfer of your rightsunder a contract to someone else; the transfereehas only the rights of an assignee, subject to alldefenses existing against you. In contrast, whenyou negotiate an instrument, you transfer it insuch a way that the transferee becomes a holderby way of your indorsement. An indorsementoccurs when you write your name on theinstrument indicating your intent to transferownership to someone else.● Negotiation of bearer paper occurs upon deliveryof the bearer paper.● Negotiation of order paper occurs when it isindorsed by the payee and delivered to the partyto whom it is transferred.Section 25.2 Indorsements● A blank indorsement is the simple act of signingan order instrument on the back. By signing aninstrument in this way you say, in effect, “Thisinstrument may be paid to anyone.” An instrumentendorsed in blank becomes bearer paperand may be transferred by delivery alone. If theinstrument is lost or stolen and gets into thehands of someone else, that person can cash itby presenting the check for payment. For thisreason, a blank indorsement should be used onlyin limited situations, such as at a bank teller’swindow. A special indorsement is the act ofwriting an order to pay a specified party. Tocreate a special indorsement, you simply writethe words pay to the order of or pay to followedby the name of the person to whom the instrumentis to be transferred (the indorsee) and thesignature of the indorser. When signed in thisway, the instrument remains an order instrumentand must be indorsed by the indorsee before itcan be further negotiated. A restrictive indorsementis one in which words have been addedlimiting the use of the instrument. A restrictive●●●●indorsement does not prevent further transfer ornegotiation of the instrument. However, prior tofurther transfer, it must be used for the purposestated in the indorsement. Retail stores oftenstamp checks “for deposit only” when they arereceived. This provides protection in the eventthe checks are stolen. A qualified indorsement isone in which words have been added limiting theliability of the indorser. The words indicate thatthe indorser does not guarantee payment of theinstruments. A qualified indorsement transferstitle to the instrument. This form of indorsementis frequently used when the instrument is backedby security such as a mortgage or collateral. Incase of default by the maker, the indorsee mustlook to the security for payment of the instrumentrather than to the indorser.If an instrument is payable to two payees, bothpayees must indorse the check for propernegotiation.A forged indorsement is not valid, and anyonewho takes a forged instrument does not acquiretitle and thus is not considered a holder. Anyonewho pays an instrument on which there is aforged indorsement is liable to the true ownerfor the amount of the instrument.Indorsers who receive consideration warrantthat: (1) the title is good; (2) all signatures aregenuine or authorized; (3) the instrument has notbeen altered; (4) no defense of any party is goodagainst the indorser; and (5) they have no knowledgeof insolvency proceedings that wouldaffect the instrument.To enforce the obligation of the indorser, theholder of an instrument must present it to themaker or drawer when it is due. If it is dishonored,the holder must notify the indorserwithin three business days after the date ofdishonor.554 Unit 5: Using Your Purchasing Power

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.instrumentdepository bankassignmentblank indorsementnegotiationspecial indorsementholderrestrictive indorsementorder paperconditional indorsementindorsementqualified indorsementbearer paper1. Imagine that you have just been hired to work as a bank tellerand must learn a whole new vocabulary. Create a set of flashcards that define the legal terms listed above.2. On the flash cards, draw pictures to represent each definitionto help you remember the terms.3. With a partner, review the definitions by using your newflash cards.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 25:Transferring NegotiableInstruments—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement:4. Explain why an order instrument must be indorsed, and why a bearer instrument neednot be indorsed.5. Describe a situation wherein each of the four main types of indorsements would beused. Explain why each type of indorsement would be particularly appropriate for thesituations you describe.6. Describe the standards for check indorsements.7. What type of indorsement is required when the name of the person to whom thecheck is made payable is misspelled?8. What contract does every indorser make if the indorsement does not state otherwise?9. Why should you only use blank indorsements in limited situations?Chapter 25: Transferring Negotiable Instruments 555

CHAPTERASSESSMENTParticipating as a Member of a TeamIn groups of three or four, interview a bankteller or other official to find out what kindsof mistakes people make when writing andindorsing checks. Use your notes to preparea detailed presentation.10. Report your findings to the class.11. Structure your presentation so that eachgroup member has a chance to speak infront of the class.12. Use visual aids or presentation softwareto enhance your presentation.13. Compare notes with the other groups.14. Evaluate your group’s presentation. Whatdid you do well? In what areas could youimprove?Signature StampAntonia sells cosmetics through a catalog. Hercustomers pay her directly for the products theypurchase. Antonia receives hundreds of checkseach month, all made payable to her. Instead ofindorsing all of the checks by hand, she decidedto have a rubber stamp of her signature made.Using a rubber stamp will save Antonia a greatdeal of time.Debate15. If Antonia uses the rubber stamp, are thechecks considered indorsed?16. Is it legal to use a rubber stamp to indorsechecks?17. What are some possible disadvantages ofusing a rubber stamp?For the following cases, give your decision andstate a legal principle that applies.18. A check was payable to Quan and Jie Lee.Can the check be indorsed by either one ofthem to be negotiated? Why or why not?19. Michael Reed finds a check payable toIrene Lupi on a downtown street. IsMichael a holder? Why or why not?20. Suppose the check Michael found in theprevious case had been indorsed in blankby Irene Lupi. Would Michael beconsidered a holder? Why or why not?21. Suppose the check Michael found inproblem 19 was indorsed by Irene Lupi, witha special indorsement to Charles MacLean.Is Michael a holder? Why or why not?22. Suppose, in problem 20, that Michael alsoindorses the check and cashes it at a bank.On what two legal grounds does the bankhave recourse against him if the check doesnot clear?23. Jessica Patton unknowingly lost a blankcheck that she kept in her wallet for emergencysituations. Abby Turner found thecheck in the restroom of a local mall andmade the check out to herself for the sumof $500, forging Patton’s signature. Patton’sbank did not catch the forged signatureand cashed the check. Does Patton haveany recourse against her bank? Explainyour answer.24. Ted Wilmot, a landscaper, received a checkfor $350 from a client. Wilmot was indesperate need of money and planned tocash the check immediately. When hereached the drive-up window at his bank,Wilmot noticed that the check was madeout to Theodore Wilmot. Ted’s given namewas simply Ted. What might Wilmot’s bankrequire him to do?556 Unit 5: Using Your Purchasing Power

In each case that follows, you be the judge.25. Restrictive IndorsementHolland Farms wrote a check payable to the order of La Sara Grain Company in the amount of$62,000. The check was indorsed by La Sara Grain Company “For deposit only” and taken to thebank by the company’s general manager, Harold Jones. The bank deposited $40,000 of the checkinto Jones’s personal account and $22,000 into La Sara Grain Company’s account. Does La SaraGrain Company have recourse against the bank for the loss of the $40,000? Why or why not?La Sara Grain v. First National Bank of Mercedes, 673 S.W.2d 558 (TX).26. Special IndorsementHumberto Decorators, Inc., a general contracting firm, renovated the Restaurant ArgentinoTango, Inc. for an agreed price of $27,415. When the work was completed, a check for thecontract price was given to the restaurant by the Plaza National Bank as part of the proceedsof a loan. The check was payable to the order of Humberto Decorators, Inc. Instead of deliveringit to the contractor, the restaurant deposited the check in its own bank account at thePlaza National Bank. Humberto Decorators, Inc. never received the money. May it recoverthe money from the bank? Why or why not?Humberto Decorators, Inc. v. Plaza National Bank, 434 A.2d 618 (NJ).A Victim of TheftIdentity theft is the fastest growing crime inAmerica, affecting approximately 900,000 newvictims each year. You need to take precautions toprotect yourself from this crime.ConnectUsing a variety of search engines:27. Locate information about identity theft,including how to protect yourself and what todo if you are a victim of this crime.28. Predict What do you think Melanie shoulddo now that she has lost three checks?29. Connect Have you ever received a checkfrom someone? If yes, how did youindorse it?30. Question Must the indorsement be placedon the back of the instrument? Why orwhy not?31. Respond Why do you think retail storesstamp checks for deposit only when theyare received?Chapter 25: Transferring Negotiable Instruments 557

CHAPTERCollecting NegotiableInstrumentsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 26: Collecting NegotiableInstruments—Chapter Overviews topreview the chapter information.

The Opening SceneMelanie discusses the theft of her purse with anofficer at the local police station.Reality CheckPOLICE OFFICER: (Handing Melanie her purse.)Whoever stole this must have been scared off.Some children found it in a grocery cart not farfrom the store where you reported it lost. Lookthrough it to see what’s missing.MELANIE: (Looking through her purse.) Everythingseems to be here—my driver’s license, creditcard—oh, oh. There are only two checks here.Aunt Mae’s check for $500 is missing.POLICE OFFICER: You’re very fortunate. Most stolenpurses that we find are completely empty.(A week later, Melanie and David discuss theirfinances over dinner.)MELANIE: I wasn’t the least bit surprised when thecheck that Julio gave us bounced. He should havegotten cash when he sold his car to a stranger. Itwas stupid of us to accept that check.(A sharp knock at the front door interrupts theirconversation.)MELANIE: I’ll get it. (She opens the door.) Julio! Wewere just talking about you.JULIO: (Entering.) Hi! How’s everything?DAVID: Not so great. That check from the sale of yourcar bounced on us.JULIO: What? Are you kidding?DAVID: No. The bank returned it with a stop-paymentnotice attached. I called Maria Reynolds, the girlwho made it out, and discovered that she’s a minor.Her father won’t let her keep that junk car of yours.Thanks a lot for your help!JULIO: This is the first I’ve heard of it. When did thebank return it?DAVID: Yesterday.MELANIE: I don’t think we’re ever going to get thatmoney you owe us.JULIO: Why don’t you sue the girl I sold the car to?She’s not supposed to stop payment on a checklike that!MELANIE: We should sue you, Julio! You endorsedthat check from her before you gave it to us.JULIO: Don’t worry, I’ll pay you.DAVID: Aunt Mae must think we’re crazy. We lost thefirst check she gave us. Then someone stole thesecond one, forged Melanie’s indorsement, andcashed it. She’ll never give us a third check. I’d beembarrassed to even ask for another.MELANIE: It’s a good thing Aunt Mae knows mysignature. She got her money back from the bank.JULIO: Really? Do you have to pay the bank back?MELANIE: I hope not!JULIO: If you do, you can probably sue Aunt Mae toget your money back.DAVID: Are you kidding? She gave us those checksout of the goodness of her heart! Is that all you canthink about Julio—sue, sue, sue?1. Was David a holder in due course of the checkgiven to him by Julio in Chapter 25?2. Would David win the case if he brought suitagainst Maria Reynolds for the amount of thecheck on which she stopped payment?3. What kind of liability would Julio have on thecheck that he indorsed over to David?4. Must Melanie pay back the bank for the amountof the check containing her forged indorsement?Chapter 26: Collecting Negotiable Instruments 559

l How to determine if aperson is a holder indue coursel How to contrastpersonal defenses withreal defensesRecognizing the partiesand defenses tonegotiable instrumentswill keep you alert toproblems regardingnegotiable instruments.l holder in due coursel holderl valuel good faithl shelter provisionl personal defensesl real defensesHolders ofInstruments andDefensesHolder in Due CourseA holder in due course is a holder who takes an instrument forvalue, in good faith, and without notice. Holders in due course aretreated more favorably than mere holders are treated. They receive morerights in negotiable instruments than other parties. For this reason, negotiableinstruments are passed almost as freely as money from one personto another.HolderTo be a holder in due course, you must first be a holder . Being aholder means that the instrument must have been issued or indorsed toyou, to your order, or to bearer.When an instrument is properlynegotiated, the person towhom it is transferred is a holder.This is important because only aholder can collect the money thatis due on an instrument. It is alsoimportant because if no defensesare introduced in court, the holdercan collect the money simply byproving that the signature on theinstrument is authentic.Example 1. John and NancyAnderson obtained a commitmentfor a mortgage loanfrom a bank to build theirhouse. Periodically, the bankissued checks payable to John,Nancy, and the constructioncompany. The final check wasdeposited in the constructioncompany’s account withoutNancy’s indorsement. Thebank that received the checkHOLDERYou must first be a holder to be a holderin due course. What are therequirements to be a holder?560 Unit 5: Using Your Purchasing Power

for deposit was not a holder because without Nancy’s indorsement,the check was not indorsed to it, to its order, or to bearer.Even when certain defenses are introduced in court, if a holder haspreferred status, the holder may still be able to collect on the instrument.ValueA person must give value for an instrument to qualify as a holder indue course. You give value when you give the consideration that wasagreed upon or when you accept an instrument in payment of a debt. Ifan instrument were negotiated to you as a gift, then you would notqualify as a holder in due course.Good FaithTo be a holder in due course, the holder must take the instrument ingood faith. Good faith means honesty in fact and fair dealing. Itrequires that the taker of a negotiable instrument act honestly. Whethera person took an instrument in good faith is determined at the time oftaking the instrument. If a person acted in good faith at the time, butlater learned of disturbing facts, he or she is still regarded as havingtaken the instrument in good faith.Without NoticeTo be a holder in due course, a holder must not have notice of anyclaim or defense to the instrument, or notice that the instrument is overdueor has been dishonored. A claim is an argument asserted by a personclaiming the instrument. A defense, on the other hand, is typically somethingthat is asserted as a reason not to pay it. A holder has notice of aclaim or defense if the instrument bears visible evidence of forgery oralteration. The same is true if the instrument is so incomplete or irregularthat its legal acceptance is doubtful. Notice of a claim or defense is alsogiven if the holder notices that the obligation of any party is voidable.Win-WinNegotiations areusually aimed at theparties eventuallyreaching an agreement.For example,striking laborers andcompany managementoften enter negotiationsknowing whatthey want, but eventuallyboth sides haveto compromise to getat least part of whatthey originally desired.What kind of negotiationsoccur in yourdaily life?Get InvolvedLearn mediation techniquesto become abetter negotiator.Related topics aresometimes covered inhigh school psychologycourses, and courses onnegotiation are oftenavailable throughcommunity colleges.Example 2. Eva, 17, borrowed $500 from Krista. She gave Kristaa promissory note, promising to pay the money back in 90 days.Krista indorsed the note and sold it at a discount to David, tellingDavid that it came from a minor. David was not a holder in duecourse because he knew that Eva was a minor and could disaffirmthe contract to pay back the money.Holder Through a Holder in Due CourseA holder who receives an instrument from a holder in due courseacquires the rights of the holder in due course, even though he or sheChapter 26: Collecting Negotiable Instruments 561

Paying Twice Is Not So NiceA mechanic’s lien, often used in the construction industry, is a claim againstproperty. Contractors and subcontractors might use a mechanic’s lien to enforcepayment for goods or services they have rendered. For instance, if a contractorfails to pay a subcontractor, the subcontractor can file a mechanic’s lienagainst the property. This is often unfair to property owners because generallythe contractor is responsible for paying the subcontractor.Property owners can protect themselves by taking certain steps to makesure everyone gets paid. Usually, the property owner pays the contractor whoin turn pays the subcontractor. However, if the property owner writes a checkpayable to both the contractor and subcontractor, the subcontractor must signthe check for the contractor to be paid. This type of check helps to ensure thatthe subcontractor will be paid because the subcontractor can withhold his orher signature until he or she is assured of payment by the contractor. Makingthe check negotiable only if both parties indorse it will reduce the risk of amechanic’s lien being filed against the owner’s property.Critical Thinking What would happen if the owner wrote a check to both acontractor and subcontractor and the contractor cashed it without thesubcontractor’s indorsement?does not qualify as a holder in due course. This provision is called ashelter provision . It is designed to permit holders in due course totransfer all of the rights they have in the paper to others. The shelterprovision does not apply to a holder who has committed fraud or anillegal act.Example 3. Alfonso wrote out a check to Brisa. Brisa indorsedthe check and gave it to Clara in payment for a debt. BecauseClara took the check for value, in good faith, and without notice,she was a holder in due course. Clara indorsed the instrumentand gave it to her niece as a gift. Clara’s niece wasn’t a holder indue course because she didn’t give value for the instrument. However,she had the rights of a holder in due course because shereceived the check from a holder in due course.562 Unit 5: Using Your Purchasing Power

Defenses to Negotiable InstrumentsSometimes people charged with paying instruments may try to preventpayment by raising defenses against the holder. Two kinds of defenses arerecognized: personal and real. Holders in due course can avoid personaldefenses and require payment because of the special position they occupy.Only real defenses may be used against holders in due course.Personal DefensesThe favorable treatment that holders in due course receive is thatthey take an instrument free from all claims to it on the part of anyperson. They also take an instrument free from all personal defenses ofany party with whom they have not dealt. Personal defenses (alsocalled limited defenses) are defenses that can be used against a holder,although they can’t be used against a holder in due course. The mostcommon personal defenses are breach of contract, failure or lack ofconsideration, fraud in the inducement, lack of delivery, and payment(see Figure 26.1). For example, fraud in the inducement occurs whensomeone is persuaded to enter into a contract because of a misrepresentation(false statement) of some fact regarding the contract.It is risky to sign a check or other negotiable instrument withoutfilling it out completely. If such an instrument is lost or stolen, the finderor thief could fill in any amount or other information and negotiate itto someone else. It would have to be paid by the person who signed it,Figure 26.1DefenseBreach of contractMost Common Personal DefensesDescriptionOne of the parties to a contract has failed to do what heor she has previously agreed to do.Social StudiesThe United Nations Commissionon InternationalTrade Law (UNCITRAL)was created in 1966. ThisUnited Nations commissionrecognized thatthroughout the world,countries had manydifferent laws governinginternational trade. Thesedifferences createdbarriers to the flow oftrade worldwide. To many,it seemed logical thatUNCITRAL could help theUnited Nations reduce oreven remove the barriers.Research ActivityWrite a short paperabout UNCITRAL thatincludes the followinginformation:l The countries thatare currently on thecommissionl Where the countriescarry out their workl Major areas of workFailure of considerationLack of considerationFraud in the inducementLack of delivery of anegotiable instrumentPayment of anegotiable instrumentOne of the parties to a contract has failed to furnish theagreed consideration.No consideration existed in the underlying contract forwhich the instrument was issued.The drawer or maker of an instrument is persuaded toenter into a contract because of a misrepresentation ofsome fact regarding the item purchased.A payee forcibly, unlawfully, or conditionally takes aninstrument from a maker or drawer. The maker or drawerdid not intend to deliver the instrument.The drawer or maker of an instrument has paid theamount of the instrument.PERSONAL DEFENSESHolders in due course arenot subject to personaldefenses. What defensesare holders in due coursesubject to?Chapter 26: Collecting Negotiable Instruments 563

FRAUD IN THEINDUCEMENTWhen someone uses fraudto persuade another to enterinto a contract, it is calledfraud in the inducement.What kind of a defense isfraud in the inducement?regardless of the amount that was filled in, if it reached the hands of aholder in due course. This same danger exists when someone signs aninstrument, gives it to someone else, and tells that person to fill it out.If an innocent party happens to come into possession of a check thathas been fraudulently filled in, the loss must fall upon the party whoseconduct in signing the blank paper has made the fraud possible.Example 4. David sold his sports car to Kristina for $1,200. Tomake the sale, David told Kristina that the brakes had beenrelined two weeks earlier; however, this was not true. Kristinagave David a check for $1,200. While driving the car home,Selling on Credit to Internet CompaniesInternet companies are increasingly in financial trouble. It makes sense thatthe credit managers of businesses that sell to Internet companies are beingmore careful when selling to them. As precautionary measures, these vendorsare restricting shipments and limiting their financial risks. They are requiringmore security from their Internet customers before handing over goods oncredit. Some vendors are demanding that Internet companies sign notes withthe goods delivered serving as collateral. In this way, if the Internet companygoes bankrupt, the vendor will have a better chance of getting some of itsmoney back. (Source: New York Times, February 26, 2001, p. C5)Connect Visit a Web site related to credit management in an e-commerceenvironment. See if they have any information on this issue.564 Unit 5: Using Your Purchasing Power

Professor of PhilosophyRon Moore believes that young people in this country“have a real stake in thinking about philosophy. Beforethey’re occupied with making and spending money, youngpeople should be exploring these issues that affect us all.”An associate professor of philosophy at the University ofWashington in Seattle, Moore says it’s important for people to debate the meritsof important concepts such as beauty, justice, and morality.“The word ‘philosophy’ means ‘love of wisdom,’” Moore says. “Philosopherstry to develop strong, clear justifications for their beliefs and then weave thosejustifications into schemes for understanding the world around them.”While attorneys practice law, philosophers reflect on the nature of law, justice,judicial decision making, punishment, and fairness. These issues have far-reachingeffects on who we are and how we function as a society.Moore notes that good philosophers do more than argue their own point ofview—they also can argue the opposite point of view.“Philosophers are fascinated by ideas,” he says, “and are able to weighseveral points of view. They take delight in sometimes being found wrong.”He adds that philosophers are concerned with more than just abstractthinking. They also think about the real-world effects of their arguments andbeliefs, and ask themselves, “What happens to the world if my ideas are right?”Moore believes that in the past, many of our finest Supreme Court justiceswere more than just brilliant lawyers—they were also philosophers of law.“They were concerned with listening to and weighing all the sides of anargument,” he says, “as well as the effects of their decisions. They carefully consideredall the issues involved with tough issues such as what constitutes cruel andunusual punishment, what are the boundaries of privacy, and when to abandonsegregation.”SkillsPersonalityEducationShould know something about the content and practice oflaw; must be able to marshal evidence in support of anargument and draw conclusions; write a clear and convincingargumentCurious about the world; puzzled and fascinated by “the bigquestions”; patient, open-minded, and logicalTo teach philosophy at the university level, must have aPh.D. and probably some training in law, art, or anothersubject specialtyFor more information on philosophers of law, visit ubpl.glencoe.comor your public library.Chapter 26: Collecting Negotiable Instruments 565

Kristina learned that the brakes had not been relined and stoppedpayment on the check. David, however, had indorsed the checkin blank and had given it to Eugene, a holder in due course.Eugene could collect the full $1,200 from Kristina. Even thoughKristina was defrauded, she cannot use that defense against aholder in due course because fraud in the inducement is apersonal defense.Real DefensesSome defenses can be used against holders in due course. Thesedefenses are known as real defenses (also called universal defenses).No one is required to pay an instrument when there is a real defense.Real defenses include infancy and mental incompetence, illegality,duress, fraud as to the essential nature of the transaction, bankruptcy,unauthorized signature, and alteration (see Figure 26.2).Example 5. The Easy Loan Company issued a $5,000 check onan automobile loan. John Bates altered the check to $8,000,indorsed it, and presented it for payment to an out-of-town bank.When the check was returned to Easy’s own bank for collection,the bank refused to honor the check, noting the alteration. If thebank that cashed the check sued Easy Loan Co., Easy would haveREAL DEFENSESEveryone, includingholders in duecourse, is subject toreal defenses. Whatis another name fora real defense?Figure 26.2DefenseInfancy and mentalincompetenceIllegalityDuressFraud as to the essentialnature of the transactionBankruptcyUnauthorized signatureMaterial alterationMost Common Real DefensesDescriptionThe maker or drawer of the instrument was a minor ormentally incompetent.The underlying contract for which the instrument was issuedwas illegal.The instrument was drawn against the will of the maker ordrawer because of threats of force or bodily harm.A false statement was made to the maker or drawer aboutthe nature of the instrument being signed.An order for relief was issued by the federal court that endedall of the debtor’s outstanding contractual obligations.Someone wrongfully signed another’s name on an instrumentwithout authority to do so.The amount of the instrument or the payee’s name waschanged wrongfully after the instrument was originally drawnby the maker or drawer.566 Unit 5: Using Your Purchasing Power

FRAUD AS TO THEESSENTIAL NATUREFraud as to the essentialnature of a contract ismore serious than fraudin the inducement. Whattype of defense is this typeof fraud?an obligation to pay only the amount for which the check wasoriginally drawn, $5,000, because alteration is a real defense.Another example of a real defense is fraud as to the essential natureof the instrument. This kind of fraud occurs when someone makes afalse statement about the nature of the instrument being signed. Thisreal defense can be used against anyone, even a holder in due course.Example 6. Jerry told Carmen, who could not speak English,that the paper she was signing was a receipt. It was actually apromissory note. Carmen would not have to pay the instrumenteven if it were transferred to a holder in due course because ofthe fraud as to the essential nature of the instrument.Reviewing What You Learned1. What requirements must a holder in duecourse meet?2. What is the difference between a personaldefense and a real defense? Provide anexample of each.Critical Thinking ActivityForgery What recourse, if any, is available to aholder in due course when a real defense suchas forgery is used to avoid payment of anegotiable instrument?Legal Skills in ActionHolder in Due Course Guillermo bought abox of used computer parts from Miguel. Hepaid for the parts with a check for $50. Miguelindorsed the check and gave it to Roger aspayment for a debt. Roger indorsed the checkand gave it to his sister as a birthday gift. Makea chart indicating who is (are) the holder(s) indue course and who has the rights of a holderin due course.Chapter 26: Collecting Negotiable Instruments 567

Liabilities of Partiesl How to explainprimary liability andname the partieswho are primarilyliable on negotiableinstrumentsl How to explainsecondary liability andname the parties whoare secondarily liableon negotiableinstrumentsKnowing about theliability of parties willmake you better able totackle problems withnegotiable instruments.l primary liabilityl secondary liabilityl presentmentl dishonorLiability of PartiesLiability refers primarily to responsibility for paying the instrument.The UCC divides the liability of the parties into two groups: primaryliability and secondary liability.Primary LiabilityPrimary liability is an absolute liability to pay. A party with primaryliability has promised to pay the instrument without reservations ofany kind. Two parties have primary liability: the maker of a note and theacceptor, if any, of a draft. Each of these parties has personally promisedto pay the obligation represented by the instrument without reservation.When there are comakers on notes, they have primary liability and areconsidered makers, regardless of whether they receive any consideration.SecondaryLiabilitySecondary liabilityis a liability to pay onlyafter certain conditionshave been met. Two typesof parties are secondarilyliable on negotiable instruments:the drawer of a draftand the indorsers of eitherSECONDARY LIABILITYThe drawer of a draft andindorsers of either a note or adraft are secondarily liable onnegotiable instruments. Whatdoes secondary liability mean?568 Unit 5: Using Your Purchasing Power

a note or a draft. Three conditions must be met before the drawer orindorsers have liability to pay:l The instrument must be properly presented to the primary party ordrawee, and payment must be demanded.l Payment must have been refused by the primary party (this kind ofrefusal is called dishonor).l Notice of this refusal must be given to the secondary party within thetime and in the manner prescribed by the UCC.Presentment A demand made by a holder to pay or accept an instrumentis called presentment . Presentment may be made by using anycommercially reasonable means, including oral, written, or electroniccommunication. If requested by the person to whom presentment ismade, the person making presentment must exhibit the instrument andprovide identification. A holder need not make proper presentment tohold secondary parties liable in some situations (see Figure 26.3).For some instruments, presentment is made twice—once for acceptanceand once for payment. To be sure that a secondary party (draweror indorser) will be liable on an instrument, the holder must make properpresentment for payment unless excused. This means that the holdermust present the instrument to the maker or drawee and ask for payment.If such presentment is not made at the proper time, all indorsersare discharged from their obligation. They will not have to pay the holderof the instrument. In addition, if such presentment is not properly madeand the drawee cannot pay because of insolvency (inability to pay debts),the drawer is discharged from all obligation.Time for Presentment Presentment must be made on the date theinstrument is due. If there is no due date stated on the instrument, presentmentmust be made in a reasonable time after the maker or drawerbecomes liable on it. The definition of a reasonable time for instrumentsother than checks will vary according to the circumstances. A reasonabletime for a check is 30 days with respect to the liability of the drawerand 7 days with respect to the liability of an indorser.FinancialDifficultiesDominique does yardwork for a dozen homeownersin her neighborhood.One of her clientsis Mrs. Belfield, anelderly widow. Some ofDominique’s clients payher when she comes totheir homes, but othersmail their checks. Mrs.Belfield has requestedthat she be allowed tomail her check, eventhough she’s homewhen Dominique isworking there. For thepast three months, Mrs.Belfield’s checks havebeen late. They havebecome so late that sheis now two paymentsbehind. The last checkshe sent bounced.Dominique has triedto talk to Mrs. Belfield,but Mrs. Belfield claimsshe is having financialdifficulties. Whatshould Dominique do?Example 7. Joanne Lawler made out a check to Doris Maddenfor $100. Madden indorsed the check and cashed it at a grocerystore near her home. The store kept the check for eight daysbefore taking it to the bank. If the check did not clear, the storecould not hold Madden liable on the instrument. She would nothave to pay it because the store did not present the check to thebank within a reasonable time to hold the indorser responsible.Chapter 26: Collecting Negotiable Instruments 569

Figure 26.3DIRECT REDUCTIONMORTGAGE NOTEAccount No.$ 50,000.00 April 14, 20 --FOR VALUE RECEIVED we jointly and severally, promise to pay toPaul J. Kelleheror order the sum of Fifty Thousand ($50,000)––––––––––– Dollarsin or within twenty-five years from this date, with interest thereon at therate of 12 per cent per annum, payable in monthly installments of $ 526.62on the first day of each month hereafter, which payments shall first beapplied to interest then due and the balance thereof remaining applied to principal;the interest to be computed monthly in advance on the unpaid balance,together with such fines on interest in arrears as are provided.We reserve the right to make additional payments on account of saidprincipal sum on any payment date.Failure to pay any of said installments within thirty (30) days from the datewhen the same becomes due, notwithstanding any license or waiver of anyprior breach of conditions, shall make the whole of the balance of saidprincipal sum immediately due and payable at the option of the holder thereof.The makers, endorsers, and guarantors or other parties to this note, andeach of them, severally waive presentment, notice, and protest.Signed and sealed in the presence ofPROPER NOTICEThe holder of this note does not have to makeproper presentment or give proper notice tohold secondary parties liable. Why is this so?570 Unit 5: Using Your Purchasing PowerIf payment is made, the instrument must be handed over then andthere to the person paying the money. This is important because, if theparty paying does not get the instrument back, it might show up later inthe hands of a holder in due course, and the holder would have to payit again.Dishonor The party who presents a negotiable instrument is entitledto have the instrument paid or accepted. If the party to whom the instrumentis presented refuses to pay or to accept it, the instrument isdishonored . The instrument is also considered to be dishonored if the

presentment has been excused and the instrument is past due and unpaid.The presenting party then has recourse against the indorsers or othersecondary parties.Example 8. A note was presented to Charro for payment on thedue date. Charro refused to honor it, claiming the note was a forgery.The holder would have to proceed against the indorsers toobtain payment. The note is considered dishonored because ofCharro’s refusal to pay it.Notice of Dishonor Obligations of indorsers and drawers of instrumentscannot be enforced unless the indorsers and drawers are givennotice of the dishonor. Notice of dishonor may be given by any reasonablemeans, including oral, written, or electronic communication,and is sufficient if it identifies the instrument and indicates that theinstrument has been dishonored or has not been paid or accepted. Thereturn of an instrument given to a bank for collection is sufficient noticeof dishonor.Holders other than banks must give notice of the dishonor to thedrawer and indorsers within 30 days following the day of dishonor.Banks taking instruments for collection must give notice before midnightof the banking day following the day the bank was notified of thedishonor. Delay in giving notice of dishonor is excused when the holderhas acted carefully and the delay is due to circumstances beyond theholder’s control. Presentment and notice of dishonor are also excusedwhen the party waived the right to presentment or notice of dishonor.A negotiable instrumentis an object that can beused to do business. Theterm negotiate comesfrom the Latin termnegotiari, which means“to do business.”Reviewing What You Learned1. What is primary liability? What parties areprimarily liable on negotiable instruments?2. What is secondary liability? What partiesare secondarily liable on negotiableinstruments?Critical Thinking ActivityEnforcing Obligations Why do you think thatthe obligations of indorsers and drawers ofinstruments may not be enforced unless theyare given notice of the dishonor?Legal Skills in ActionTaking Precautions The local video storeaccepts checks for renting and purchasingvideos and DVDs. Recently, the store hasaccepted many bad checks. As a team, createa document listing the precautions the storeclerks might take to be sure that they willcollect the funds.Chapter 26: Collecting Negotiable Instruments 571

CHAPTERASSESSMENTSection 26.1 Holders of Instrumentsand Defenses● Even when certain defenses are introduced incourt, if a holder has preferred status, the holdermay still be able to collect on the instrument.Preferred status is given to a party called a holderin due course. A holder in due course is a holderwho takes an instrument for value, in good faith,and without notice. To be a holder, the instrumentmust have been issued or indorsed to you. Youmust give value when you accept an instrument;a gift would not allow you to qualify as a holderin due course. You give value when you give theconsideration that was agreed upon or when youaccept an instrument in payment of a debt. Theholder must also act honestly to qualify under the“good faith” requirement. Whether a person tookan instrument in good faith is determined at thetime of taking the instrument. If a person actedin good faith at the time, but later learned ofdisturbing facts, he or she is still regarded ashaving taken the instrument in good faith. Aholder must not have notice of any claim ordefense to the instrument. A holder has notice ofa claim or defense if the instrument bears visibleevidence of forgery or alteration. The same is trueif the instrument is so incomplete or irregularthat its legal acceptance is doubtful. Notice of aclaim or defense is also given if the holder noticesthat the obligation of any party is voidable. Holdersin due course are treated more favorably thanmere holders are treated. They receive more rightsin negotiable instruments than other parties. Forthis reason, negotiable instruments are passedalmost as freely as money from one person toanother. To be a holder in due course, you mustfirst be a holder.● Two kinds of defenses against a holder are recognized:personal and real. Real defenses may beused against holders in due course; personaldefenses may not. Personal defenses such asbreach of contract, failure or lack of consideration,fraud in the inducement, and lack of delivery andpayment may not be used against holders in duecourse. A real defense is a defense directedagainst the instrument itself. The contention isthat no valid instrument ever came into existence;therefore, the instrument could not be real orgenuine. Some examples of real defenses areinfancy and mental incompetence, illegality andduress, fraud as to the essential nature of thetransaction, bankruptcy, unauthorized signature,and alteration.Section 26.2 Liabilities of Parties● Primary liability is an absolute liability to pay.A party with primary liability has promised topay the instrument without reservation. Makersof promissory notes and acceptors of draftshave primary liability. When there are comakerson notes, they have primary liability and areconsidered makers regardless of whether theyreceive any consideration.● A party with secondary liability has a liability topay only after certain conditions have been met:(1) the instrument must be properly presented tothe primary party or drawee; (2) payment mustbe demanded; (3) payment must be dishonored(refused by the primary party) or be impossible;and (4) notice of refusal must be given to thesecondary party within the time and in the mannerprescribed by law. There are two types of partieswho may have secondary liability for the paymentof an instrument. They are (1) the drawer of adraft (a check is the most common kind of draft)and (2) the indorser or indorsers of either a draftor note.572 Unit 5: Using Your Purchasing Power

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.holder in due courseholdervaluegood faithshelter provisionpersonal defensesreal defensesprimary liabilitysecondary liabilitypresentmentdishonor1. Write a letter to a bank explaining recent problems you have hadwith a negotiable instrument.2. Role-play with a partner how the banker may respond to yourletters. As the banker, make sure to address all the terms used inthe letters.3. Practice your role-play activities until you and your partner feelcomfortable.4. Present your role-play activities to the class. If possible, dress incostumes and use appropriate props.5. After you have finished delivering your role-play activities, askyour classmates for constructive criticism.6. Reflect on you could have improved your role-play activities.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 26:Collecting NegotiableInstruments—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.7. When is value for an instrument given?8. Explain what it means to be a “holder through a holder in due course.”9. Can personal defenses be used against holders in due course? Why orwhy not?10. What are the three conditions that must be met for secondary liability?11. Banks that take instruments for collection must give notice of dishonorby when?12. What is good faith?13. Describe the shelter provision.14. What is fraud in the inducement?15. What might a person be requested to do when making presentment ofan instrument?Chapter 26: Collecting Negotiable Instruments 573

CHAPTERASSESSMENTInterpreting and CommunicatingInformationInterview the managers of two local businesses,either in person or on the phone, about:16. What their check policies are.17. The reasons for those policies.As a class, compare your findings.Altered CheckFatima gave your friend Isabel a check for $4as payment for a book. Isabel alters the checkand endorses it over to a finance company,presenting it as a $400 payment on her car.Debate18. Who is the holder in due course?19. Is there a holder through a holder in duecourse?20. Does the shelter provision apply?21. Explain the primary and/or secondaryliability in this situation.Explain all of your answers.For the following cases, give your decision andstate a legal principle that applies.22. Cynthia, a minor, purchased a used truckfor $1,500 from a dealer. In payment, shegave $500 in cash and a promissory notefor the balance to be paid in three months.The dealer indorsed the note and negotiatedit to a bank. A week later, Cynthia wasinvolved in an accident, and the vehiclewas damaged beyond repair. Must Cynthiapay the amount of the note to the bankwhen it is due? Why or why not?23. Moynihan executed and left on her desk anote made out to Pappas. Moynihan owedPappas the money specified on the note forthe purchase of a lawn tractor. Pappas wasadmitted to Moynihan’s office, saw the notemade out to her, picked it up, and departedwithout seeing Moynihan. Pappas negotiatedthe note to her bank through indorsementand delivery. When the bank presentedthe note for payment, Moynihan refused,claiming she had not delivered the note tothe indorser. Did Moynihan have a defenseagainst the bank? Why or why not?24. Daniel, a minor, gives Carmenza a $200check in payment for a VCR. Daniel usesthe VCR over the weekend, decides toreturn it, and stops payment on the check.Carmenza cashes the check at her bank,which becomes a holder in due course.What defense, if any, may Daniel useagainst Carmenza’s bank if suit is broughtfor payment of the money?25. Steve forges the name of Joanne Newman,a well-known merchant, on a $500 note.He then negotiates the note to WilliamKester, an innocent purchaser, for value.Kester sues Newman when payment isrefused at maturity. Is Newman required topay the note? Why or why not?26. Louise Torelli presented a note to DukeFairfax for payment on the due date. Fairfaxhad become insolvent and could not honorthe note. There were four indorsers on thenote, and Torelli gave notice of dishonor tothe indorser immediately ahead of her. Thatindorser failed to give notice to the otherindorsers. If Torrelli cannot collect from theindorser to whom notice was given, mayshe then proceed against each of the othersfor payment? Explain your answer.574 Unit 5: Using Your Purchasing Power

In each case that follows, you be the judge.27. Indorsement AuthorityRefrigerated Transport Co., Inc. employed a collection agency to collect some of its overdueaccounts. The collection agency indorsed, without authority, checks made payable toRefrigerated Transport and deposited them in the agency’s own checking account. Was thebank that accepted the checks for deposit a holder in due course? Why or why not?Nat’l Bank v. Refrigerated Transp., 248 S.E.2d 496 (GA).28. Transferring NotesJohn and Beverly Girner executed a $5,000 promissory note payable to the order of FirstRealty Corporation. The note was to be paid in monthly installments. First Realty transferredthe note to Imran Bohra in exchange for property. When the note was six months past due,Bohra transferred the note to his attorney in exchange for legal services and told the attorneythat the note was past due. Is the attorney a holder in due course? Why or why not?Richardson v. Girner, 668 S.W.2d 523 (AK).Legal LingoToyka and Lindsay are taking a business law coursetogether in high school. This week they have beenlearning about negotiable instruments and thecollection of those instruments. Lindsay oftenstruggles with all of the legal vocabulary, so Toykahas decided to help her by locating online legaldictionaries that Lindsay and other classmatescould use.ConnectUsing a variety of search engines:29. Create a list of at least five Web sites that offerlegal dictionaries.As a class, combine the sites to create a comprehensivetool that all the students can use.30. Predict Why do you think holders in duecourse are treated more favorably thanholders?31. Connect What would you do if a friendforged a check to be used as payment fora new DVD player?32. Question Why are personal defensessometimes called limited defenses?33. Respond What are some of the reasonsa bank would dishonor a negotiableinstrument?Chapter 26: Collecting Negotiable Instruments 575

UNITLaw Workshop:Using Legal ToolsCan You Explain NegotiableInstruments?The law of negotiable instruments enablesbusinesses to engage in transactionswithout carrying around excessive amountsof cash. As a result, negotiable instrumentsare very practical in business contexts.Negotiable instruments include checks, notes,and certificates of deposit.Step A: PreparationProblem: How do negotiable instruments work?Objectives: In this workshop, you will work in small groups to analyzenegotiable instruments and legal situations in which they are involved.l Investigate what information must appear on notes, certificates ofdeposit, and checks.l Produce a note, certificate of deposit, or check, and explain thedocument to the class.llDemonstrate a situation involving a holder in due course.Explain the legal issues present in the situation you choose todemonstrate.576 Unit 5: Using Your Purchasing Power

Step B: Procedure1. Form a team of three or four students, and create an imaginary namefor a bank.2. Use markers, poster board, and information in Chapter 23 to produceone of the following items:l A promissory note received by your bank from alocal business owner who wants to borrow$10,000llA certificate of deposit issued by your bankA cancelled check from a checking accountestablished at your bank3. Present your negotiable instrument to the class, andexplain why it qualifies as a negotiable instrument.4. Write and perform two role-playing skits involvinga holder in due course. Demonstrate situations inwhich a party tries to prevent payment. Use apersonal defense in one case and a real defense inthe other.Step C: Creating a Model to Compare DefensesCreate a chart that illustrates the different defenses used by your group.Explain the elements that make the defense personal or real. Use the followinglabels, and display your chart for the class.Step D: Workshop Analysis ReportReview the charts displayed by the class, and answer the followingquestions:1. Is there a common element among the explanations of personaldefenses? If so, what is it?2. Is there a common element among the explanations of real defenses?If so, what is it?3. Explain why a personal defense cannot be used against a holder indue course.Chapter 26: Collecting Negotiable Instruments 577

UNITBeach v. Ocwen Federal BankU.S. Supreme Court523 U.S. 410 (1998)Landmark CaseIssue If the lender in a consumer credit transaction did not deliver requiredforms to the borrower or failed to accurately disclose important terms of thecontract, can a borrower rescind a loan agreement that is secured by his orher home more than three years after the date of the loan?Factsacts The Truth in Lending Act, an act passed toprotect borrowers, seeks to ensure that consumerswill not be victimized by unfair or opportunisticlending practices. The act provides that when a loanin a consumer credit transaction is guaranteed bythe borrower’s principal residence, the borrower hasthe right to rescind, or cancel, the loan if the lenderdoes not deliver certain forms or render the terms ofthe loan accurately. However, the act also providesthat the borrower’s right to rescind expires after threeyears or after the sale of the property in question,whichever event occurs first.David and Linda Beach obtained a constructionloan for $85,000 from Fidelity FederalSavings Bank, secured by a mortgage on the housebuilt with the loan. A few months later, theBeaches refinanced their loan by using OcwenFederal Bank. Five years later, the Beaches ceasedmaking their mortgage payments. The bank beganforeclosure proceedings against the Beaches. TheBeaches admit the default in the payment of theirloan, but they allege, as an affirmative defense,that the bank failed to disclose informationrequired by the Truth in Lending Act. They claimthat, as authorized by the act, such failure givesthem the right to rescind the mortgage and toreduce their indebtedness to the bank. TheBeaches also hold that they are justified in makinga claim against their lender, despite the expirationof the three-year period stipulated by the Truth inLending Act, because they are making their claimas an affirmative defense.The Circuit Court of the 15th Judicial Circuitof Florida, the state’s intermediate appellate court,and the Supreme Court of Florida all found thatthe Beaches right to rescind the mortgage hadexpired when the three-year time limit passed.Opinion Congress passed the Truth in LendingAct “to assure meaningful disclosure of creditterms so that the consumer will be able to comparemore readily the various credit terms available tohim and to avoid the uninformed use of credit, andto protect the consumer against inaccurate andunfair credit billing and credit card practices.” Theact requires lenders in consumer credit transactionsto accurately inform borrowers of the terms of thecontract, such as finance charges, annual percentagerates, and borrower’s rights.578 Unit 5: Using Your Purchasing Power

NoncomplianceA lender that fails to comply with the act maybe subject to criminal liability and may be requiredto compensate the borrower in a civil action broughtby the borrower. The Truth in Lending Act alsostates that a borrower whose loan is secured by theborrower’s principal dwelling may rescind the loanagreement if the lender fails to deliver requiredforms or accurately disclose important terms of thetransaction. Upon such rescission, the borrower “isnot liable for any finance or other charges, and anysecurity interest (mortgage) given by [him] . . . becomesvoid,” and the lender must “return to the [borrower]any money or property” paid by theborrower. The right to rescind usually terminatesthree years after the date of the loan or when theproperty is sold, whichever is sooner.Time LimitationsAlthough more than three years had passedsince the date of the loan, the Beaches argued thatthey could still exercise their right of rescissionbecause it was brought in theform of an affirmative defense tothe bank’s mortgage foreclosureaction. The Court was not persuadedby this argument. Afterreviewing the act, the Court concludedthat Congress intendedthat the right to rescind expirethree years after the date ofthe loan, regardless of thecircumstances.The Court expressed that“Section 1635(f) [of the Truth inLending Act], however, takesbeyond any question whether itlimits more than the time forbringing a suit, by governing thelife of the underlying right as well.The subsection says nothing interms of bringing an action but instead providesthat ‘the right of rescission [under the Act] shallexpire’ at the end of the time period. It talks not ofa suit’s commencement but a right’s duration,which it addresses in terms so straightforward asto render any limitation on the time for seeking aremedy superfluous.”Holding The Court concluded that Congressintended that the act permits “no federal right torescind, defensively or otherwise, after the 3-yearperiod of §1635(f) has run” and affirmed the judgmentof the Supreme Court of Florida. As a resultof the Court’s decision, a borrower in a consumercredit transaction cannot rescind the loan agreementsecured by the borrower’s home more than threeyears after the date of the loan, even if the lenderfailed to deliver required forms to the borrower orfailed to accurately disclose important terms of thetransaction as governed by the federal truth-inlendinglaw.1. What was Congress’s purpose in adopting theTruth in Lending Act?2. To what types of loans does the Truth inLending Act apply?3. What information must a lender provide to theborrower in a transaction subject to the Truthin Lending Act?4. What are the consequences a lender may faceif it does not comply with the disclosurerequirements of the Truth in Lending Act?5. During what time period may a borrowerusually exercise the right to rescissionauthorized under the Truth in Lending Act?Go to the Understanding Business and Personal Law Web site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 26: Collecting Negotiable Instruments 579

UNITUNIT OVERVIEWMost Americans areemployed in business,and all Americans purchasegoods and servicesfrom business people.Businesses come in avariety of forms, fromsole proprietorships tolarge corporations. Eachtype of business has itsown characteristics,advantages anddisadvantages, andindividual legal rules.In this unit, you willlearn about:l Sole proprietorshipand partnershipl Forming, financing,and operating acorporationl Regulation andexpansion

Starting aBusinessBe Your Own Boss Have youever considered going into businessfor yourself? If you start your ownbusiness, you would be an entrepreneur.Seven out of ten high schoolstudents want to start their own businesses,and you could be one of them.In your Justice Journal, writeabout a business that you mightlike to open. Provide as manydetails as possible about yourpotential business.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 6: Starting a Business 581

CHAPTERSole Proprietorshipand PartnershipUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 27: Sole Proprietorship andPartnership—Chapter Overviews topreview the chapter information.

The Opening SceneStarting in this chapter, you will witness the growthof JAC Industries from a partnership to a corporation.The business is owned and operated by Jakob andAaron Kowalski and Cecilia Bronislawa. Jakob,Aaron, and Cecilia are touring a warehouse outsidethe city limits.Setting Up ShopCECILIA: I’m not sure that I like it here. Just how muchdo they want for this place?JAKOB: About $2,700 per month. I think that’s areasonable rate.CECILIA: Are you crazy? I disagree. That’s too muchfor only one floor.AARON: It’s for the whole building.CECILIA: It’s still too much. Besides, I don’t like theneighborhood.JAKOB: (Exasperated.) What’s wrong with theneighborhood?CECILIA: It’s too . . . industrial. I wanted something alittle more refined.AARON: You were expecting green lawns andswimming pools, maybe?CECILIA: No. I wasn’t expecting a palace. But we’renot a manufacturing firm, and everything elsearound here looks like a factory.JAKOB: That’s because everything else around herereally is a factory.CECILIA: See, that’s just what I mean. Did you evencheck with the zoning board? It might not even belegal for us to operate here.AARON: Yes. We picked this place precisely becausethe zoning board said this area is okay for our kindof work.CECILIA: Well, I suppose it will have to do. I guessI can live with it.AARON: Thank you, Ms. Perfection. Anyway, I thoughtyou were going to be a silent partner. You certainlyhave raised a lot of fuss for a silent partner. I’m notsurprised by your behavior, though.CECILIA: Secret—a secret partner, not a silentpartner.AARON: What’s the difference?JAKOB: If you’re a secret partner, no one knows thatyou’re part of the business. If you’re a silent partner,everyone knows you’re a partner, but you can’tmanage anything.AARON: Well, I don’t care what we call her, as longas she signs the partnership papers tomorrow. Areyou planning on signing, Cecilia? You’d better notlet us down or cause any problems.CECILIA: Don’t worry; I’ll sign.AARON: And you’ll have your capital contributionin hand?CECILIA: Every penny. What about you guys? CanI count on you to have the money?AARON: Every red cent.CECILIA: I guess we have a deal.JAKOB: Agreed.CECILIA: Then that makes us JAC Industries.AARON: Absolutely.CECILIA: I still think we paid too much for this place.1. What is a sole proprietorship?2. What are the advantages and disadvantages ofa sole proprietorship?3. What is a general partnership?4. What is a registered limited liability partnership?5. What is a limited partnership?Chapter 27: Sole Proprietorship and Partnership 583

Sole Proprietorshipl How to define soleproprietorshipl How to create a soleproprietorshipl How to identify theadvantages of a soleproprietorshipl How to identify thedisadvantages of asole proprietorshipUnderstanding the natureof a sole proprietorshipwill help you decide whento form that type ofbusiness associationrather than the otherassociations that areavailable in the markettoday.Creation and Operation of aSole ProprietorshipA sole proprietorship is a form of business that is owned andoperated by one person. However, that owner may have any number ofagents or employees. A sole proprietorship is the most common type ofbusiness and is the easiest to form. Typical sole proprietorships are repairshops, small retail stores, and service organizations.A person who goes into business as a sole proprietor can choose tooperate under his or her own name or can make up a name. If a soleproprietor uses anythingbut his or her own name,the law calls the made-upname a fictitious name .In selecting a fictitiousname, sole proprietorsmust not choose a companyname already in use.In some states, the firstuser of a fictitious namecan get a court order toprevent another sole proprietorfrom doing businessunder that name.l sole proprietorshipl fictitious namel employeridentification numberl unlimited liabilitySOLE PROPRIETORIn a sole proprietorship, oneperson is responsible forrunning the entire business.What advantages anddisadvantages existfor a sole proprietor?584 Unit 6: Starting a Business

There usually are few formal requirements in establishing a soleproprietorship. However, some sole proprietorships, such as restaurantsand motels, are required to have licenses to legally operate as businesses.Other sole proprietors, such as barbers or plumbers, must have occupationallicenses as well as certain types of liability insurance. Somestates require a formal filing when a sole proprietorship begins or if thesole proprietorship chooses to use a fictitious name. Zoning ordinances,which prohibit businesses in certain parts of the community, can alsoaffect sole proprietorships.Example 1. Jennifer Edwards operated an accounting firm namedAccountants International, Inc. Jennifer had some trouble collectingon the account of a local corporate client that owed herseveral thousand dollars. When Jennifer decided to sue, she discoveredthat under state law, she could not sue in court becauseshe had not filed her business name with the city clerk’s office.She also found out that zoning ordinances prohibited businessesin homes in her neighborhood.Advantages of a Sole ProprietorshipSole proprietorships offer specific advantages. These advantagesinclude ease of creation, total control, retention of profits, freedom fromexcessive governmental control, and one-time taxation of profits.Ease of Creation A sole proprietorship is the easiest form of businessassociation to form. To create a sole proprietorship, a person needsonly to begin the operation of the business.Although some government regulations need to be addressed, mostapplicable regulations have nothing to do with the actual operation ofthe business. For instance, it may be necessary to check local zoningregulations or to research governmental licensing requirements. Furthermore,when a sole proprietor decides to hire workers, he or she willhave to contact the Internal Revenue Service to obtain an employeridentification number , which is assigned for income tax purposes.Becoming aSole ProprietorElsie Begay has beenworking for a localday care center,The ABCDaycare Center, forseveral years. Lastmonth she attended ameeting in which newideas for improvingservice were discussed.Some ideas wereinnovative and wouldhelp The ABC LearningCenter stand out fromits competition. Elsiehad been thinkingabout starting her ownday care center, so shedecided to open a centerthat implemented theideas discussed at themeeting. Is Elsie’sdecision an ethical one?Why or why not?Total Control Sole proprietorships offer business owners completecontrol over the operation of the business. All decisions are up to the soleproprietor. However, a sole proprietor is always free to seek the adviceof experts such as accountants, attorneys, and financial planners.Retention of Profits Another advantage of a sole proprietorship isthat the proprietor gets to keep all of the profits that the firm makes.Proprietors must still pay taxes on the profits that they make, however.Chapter 27: Sole Proprietorship and Partnership 585

Taxing the Sole ProprietorOne advantage of operating a sole proprietorship is that business profitsand losses are combined with the sole proprietor’s other income for taxpurposes, so that the owner is taxed only once. When filing an income taxreturn, the sole proprietor must keep several factors in mind when reportingbusiness profits. Profits are total sales minus expenses. The more tax deductionsa business can take, the lower the taxable profit. As a result, more money staysin the sole proprietor’s pocket at the end of the year.Paying attention to Internal Revenue Service rules is the key to takingadvantage of legitimate tax deductions. For instance, auto expenses related tooperating the business are deductible. Costs associated with getting started inbusiness are also deductible. Other deductions include legal and professionalfees, business travel and moving expenses, and the cost of advertising andpromotion. A percentage of business entertaining costs and certain taxes paidby the business are also deductible.Many business deductions are often overlooked. As a result, it is importantfor the sole proprietor to learn as much as possible about business taxprovisions.Conduct Research Use the Internet to find IRS form Schedule C and instructions.Identify some other business deductions not previously mentioned.586 Unit 6: Starting a BusinessFreedom from Excessive Governmental Control As previouslynoted, a sole proprietorship must follow some government regulations.However, these regulations are not cumbersome when compared to thepaperwork associated with limited partnerships, registered limited liabilitypartnerships, corporations, and limited liability companies. A soleproprietorship allows the proprietor to have a great deal of flexibilityand leeway.One-Time Taxation of Profits Sole proprietorships do not paytaxes as a business. Rather, the individual sole proprietor who owns thebusiness pays taxes based upon his or her income. A full-time soleproprietor will pay income taxes on all profits that are made in the courseof a year. If the business is only a part-time venture, then those profitsplus all other income made by the sole proprietor will be taxed by thegovernment.

Disadvantages of a Sole ProprietorshipSole proprietorships have several disadvantages. These disadvantagesinclude limited capital, unlimited liability, limited human resources,and limited lifetime.Limited Capital An obvious shortcoming of a sole proprietorshipis the fact that the business owner has limited access to capital. Allmoney used to finance the business must come from the proprietor’ssavings or income, or from loans obtained by the proprietor.Unlimited Liability Perhaps the biggest disadvantage of a soleproprietorship is unlimited liability. Unlimited liability means that thebusiness owner is responsible for all losses experienced by the business.Limited Human Resources As the only person responsible for thedecisions that affect the business, a sole proprietor is subject to tremendousstress. This stress is multiplied when the owner must make decisionsthat are outside his or her areas of expertise. Even if he or sheconsults an expert in such cases, the decision-making responsibility stillfalls upon the owner.Limited Lifetime Unlike a corporation, which has perpetual existence,a sole proprietorship lasts only as long as the proprietor. When theproprietor dies or chooses to sell or close the business, the company nolonger exists.Reviewing What You Learned1. What is a sole proprietorship?2. How does a sole proprietorship begin?3. What are the advantages of a soleproprietorship?4. What are the disadvantages of a soleproprietorship?Critical Thinking ActivityLicensing Requirements Why does thegovernment interfere in the formation andregulation of some sole proprietorships bycreating licensing requirements?Legal Skills in ActionThe Responsibilities of a Sole ProprietorYour Aunt Matilda, a sole proprietor, ownsa store called Scrapbook Heaven. She hasdecided to hire you and your friend Ted towork in the store on the weekends. AuntMatilda is convinced that hiring you and Tedwill not involve any new entanglement withthe government. Send Aunt Matilda an e-mailmessage that explains the responsibilities of asole proprietor who hires additional workers.Chapter 27: Sole Proprietorship and Partnership 587

The Partnershipl How to define generalpartnershipl How to identifythe ways that apartnership canbe createdl How to identifypartnership rights inrelation to propertyl How to explainthe effects of thedissolution of apartnershipUnderstanding the natureof a partnership will helpyou decide when to formthat type of businessassociation.The Nature of PartnershipPartnership law is largely found in the Uniform Partnership Act(UPA). Many states have adopted at least part of the UPA. The UPAdefines partnership as “an association of two or more persons to carryon a business for profit.” Partnerships have several advantages over soleproprietorships. More capital and credit is usually available to a partnership,and the burden of all the work does not fall on one person.Furthermore, a partner does not have sole responsibility for any lossessuffered.On the other hand, one disadvantage of a partnership is that the partnersshare in the liabilities. Each partner is responsible for the otherpartners’ actions within the scope of the partnership. Another disadvantageto a partnership is that the partners must share any profits.Because all partners have a voice in running the business, bickering cancause problems. Furthermore, the death of a partner also dissolves thepartnership.Forming a General PartnershipWhen two or more competent parties combine their money, labor,and skills for the purpose of carrying on a lawful business, they createa general partnership . The partners will share in the profits and lossesarising from the undertaking. General partnerships can be formed inone of three ways: by agreement, by proof of existence, or by estoppel.l general partnershipl articles of partnershipl partnership by proofof existencel partnership byestoppell tenancy in partnershipl joint liabilityl dissolutionl registered limitedliability partnership (RLLP)l limited partnership588 Unit 6: Starting a BusinessBy Agreement Forming a general partnership by agreement requiresthe valid assent of all parties. Such an agreement is usually express andmay be written or oral. However, under the Statute of Frauds, if a partnershipis to last more than a year, it must be evidenced in writing. Followingthe same principle, a partnership formed to sell, buy, or leasereal property must also be in writing. The partnership agreement isknown as the articles of partnership , or as the articles of copartnership(see Figure 27.1).There are many possible points of difference between partners, sothe agreement should be clearly and fully explained. Some importantissues that should be covered include the following:l Parties to the agreementl Specific nature, scope, and limits of the business

llllPlanned duration of the businessAmount of each partner’s original investment and procedures forfuture investmentsProvisions regarding salaries, withdrawal of funds, and the divisionof profitsTerms under which a partner may withdraw from the partnershipFigure 27.1ARTICLES OF PARTNERSHIPThis agreement, made March 17, 20 – –, between Cecilia Bronislawa of 291Cedar Lane, Jackson, Mississippi, and Jacob Kowalski and Aaron Kowalski of1892 Mosley Avenue, Jackson, Mississippi.1. The above named persons have this day formed a partnership that shalloperate under the name of JAC Enterprises, located at 1856 ChadwickDrive, Jackson, Mississippi 39204, and shall engage in manufacturing andselling petroleum products.2. The duration of this agreement will be for a term of five (5) years, beginningon March 17, 20 – –, or for a shorter term if agreed upon in writing by bothpartners.3. The initial investment by each partner will be as follows: Cecilia Bronislawa,cash of $100,000; Jacob Kowalski, cash of $50,000; Aaron Kowalski, cash of$50,000. These investments are partnership property.4. Each partner will give his or her time, skill, and attention to the operation ofthis partnership and will engage in no other business enterprise unlesspermission is granted in writing by the other partners.5. The salary for each partner will be as follows: Cecilia Bronislawa, $50,000per year; Jacob Kowalski, $40,000 per year; Aaron Kowalski, $40,000 peryear. No partner may withdraw cash or other assets from the businesswithout express permission in writing from the other partners. All profitsand losses of the business will be shared as follows: Cecilia Bronislawa,50 percent; Jacob Kowalski, 25 percent; Aaron Kowalski, 25 percent.6. Upon the dissolution of the partnership due to termination of this agreement,or to written permission by each of the partners, or to the death orincapacitation of one or all partners, a new contract may be entered into bythe partners; or the sole continuing partner has the option to purchase theother partner’s interest in the business at a price that shall not exceed thebalance in the terminating partner’s capital account. The payment shall bemade in cash in equal quarterly installments from the date of termination.7. At the conclusion of this contract, unless it is agreed by all partners tocontinue the operation of the business under a new contract, the assets ofthe partnership, after the liabilities are paid, will be divided in proportion tothe balance in each partner’s capital account on that date.Cecilia BronislawaJacob KowalskiAaron KowalskiDateDateDateARTICLES OFPARTNERSHIPPartners share profits,losses, and managementdecisions. How will theprofits and losses beshared in this partnership?Chapter 27: Sole Proprietorship and Partnership 589

PARTNERSHIPFORMATIONA partnership can beformed in one of threeways. What is the mosteffective way to forma general partnership?Figure 27.2FormPartnership by contractPartnership by proofof existencePartnership by estoppelDefinitionPartnership FormationExpress agreement drawn up by partnersArticles of partnershipIndividuals form partnership because of their method ofdoing businessSharing of profits is prima facie evidenceThird party led to believe a partnership existsNo true partnership createdBy Proof of Existence Drawing up the articles of partnership is notthe only way to form a partnership (see Figure 27.2). Sometimes a partnershipcan be formed because of the way that two or more people conducttheir business together. Such a partnership, which forms regardlessof the label given to the enterprise or the intent of the parties involved,is termed a partnership by proof of existence . The UPA provides alist of characteristics to determine whether a partnership actually exists.The sharing of profits is at the top of this list. If two or more peopleshare the profits of a business venture, it will be difficult for them todeny that a partnership exists. However, there are exceptions to the rule.A person may share profits and not be able to claim partnership statusif the share that is paid is one of the following:l Repayment of a debtl Wages to an employee or rent to a landlordl An annuity to the widow or the widower of a deceased partnerl Interest on a loanl Consideration for the sale of a businessExample 2. Patrick Tyler opened Planetary Videos, a video rentalstore. At first, he worked in the day-to-day operation of the business.However, he gradually became interested in other venturesand hired Molly Petro to take care of the details of the business.Most of the time, Petro was in charge. Tyler showed up on Fridaysto collect his 60-percent share of the profits. Each week Petrowould draw her 40-percent share of the profits according to theagreement with Tyler. This arrangement went on for five years.Then the state government took the video store by eminentdomain for a new highway project. Petro claimed that, as a partner,she was entitled to a share of this money. Tyler disagreed,and Petro sued. The court held that she was a partner because590 Unit 6: Starting a Business

she had shared in the profits and had contributed a great deal ofher time and expertise to the business.By Estoppel If someone does or says something that leads a thirdparty to believe that a partnership exists, then a court may treat thearrangement as a partnership by estoppel . This type of partnership isnot a real partnership. It is a way for the court to prevent injusticebecause someone has relied on the words or actions of another partyand has acted accordingly.Example 3. Perry Welsh and Paula Porter were partners in a fastfoodrestaurant. The business needed a loan quickly or it wouldbe forced to close down. Unknown to Welsh, Porter convincedRoscoe Standard to cooperate in a charade to convince the bank’sloan officer that Standard was a partner in the restaurant. Theloan officer checked Standard’s credit record and extended a loan.If the partnership defaulted on the loan, the bank could hold Standardliable along with the partners.Note, however, that a real partnership was not created here. Standardwould not have any partnership rights in relation to the fast-foodrestaurant.Types of PartnersThere are five types of partners: general, secret, silent, dormant,and limited (see Figure 27.3). Each of these partners is a co-owner ofthe business and has some liability for the debts of the firm.Figure 27.3Types of PartnersType of Participation Relationship Degree ofPartner in the Business to the Public LiabilityGeneralActiveKnownUnlimitedSecretActiveUnknownUnlimitedSilentNot activeKnownUnlimitedDormantNot activeUnknownUnlimitedLimitedNot activeKnownLimitedTYPES OF PARTNERSA partnership is more complicated than a soleproprietorship. Is there a limit on the number ofpeople who may form a general partnership?Chapter 27: Sole Proprietorship and Partnership 591

Independence DayAs a citizen of theUnited States, you area partner to millions ofother American citizensthat live in this country.The Fourth of July is theday America celebratesits independence. Howmuch do you knowabout the historicalevents that are associatedwith IndependenceDay? The resultsof a national telephonesurvey show that morethan five million teensdon’t know from whatcountry Americadeclared its independence.Do you?Get InvolvedIn teams, create a quizfrom the Declarationof Independence andswap quizzes withother teams. On theFourth of July, takesome time to considerwhat it truly means tobe an American.Every partnership must have at least one general partner. In mostfirms, the partners are general partners. A general partner plays an activerole in the management of the partnership and is publicly known as apartner. A general partner has unlimited liability for the firm’s debts.A secret partner is a general partner who has an active role in themanagement of the partnership, but whose connection with the partnershipis kept a secret. A secret partner also has unlimited liability forthe firm’s debts.A silent partner is a general partner who takes no active role in themanagement of the partnership. A silent partner is known publicly as apartner and has unlimited liability for the firm’s debts.Example 4. In The Opening Scene, Aaron describes Cecilia as asilent partner in JAC Industries and tells her that she has no rolein managing the business. However, Aaron has incorrectly labeledCecilia’s role. Cecilia will be a secret partner because she willtake part in the management of the partnership while her identityremains a secret to the public.A dormant partner is a general partner who takes no active part inthe management of the firm and whose connection with the firm is keptsecret. A dormant partner, however, has unlimited liability for the firm’sdebts. In contrast, a limited partner is one whose liability does not extendbeyond his or her investment. This liability arrangement is known as alimited partnership.Partnership PropertyCertain rights and limitations arise regarding partnership property.For this reason, it is important to distinguish between property thatbelongs to the partnership and property that belongs to individual partners.Property contributed directly to the partnership when the partnershipis created is partnership property. The UPA also states thatpartnership property includes property that is bought with partnershipfunds. In other circumstances, the question of ownership of a piece ofproperty is difficult to answer. Other indicators can help a court makethe determination. For example, a court may ask the following questions:l Has the partnership consistently used the property?l Has the partnership listed the property on its account books?l Has the partnership paid expenses involving the property?l Has the partnership improved or repaired the property?l Has the partnership paid taxes on the property?Each “yes” answer makes it more likely the court will decide that theproperty belongs to the partnership.592 Unit 6: Starting a Business

PARTNERSHIP PROPERTYA partner may not use partnership property forpersonal or other nonpartnership purposes.How can this agreement come about?Property Rights of the PartnersCertain rights arise regarding property that belongs to the partnership.These rights include the right to use the property, the right tomanage the firm, and the right to share in the profits.Right to Use Property Partners are co-owners of all the real andpersonal property included in the partnership. As a result, the partnerscan use the property for partnership business. The property cannot beused for other business unless the other partners give their permission.This co-ownership, called tenancy in partnership by the UPA, givesrise to other limitations. For example, a partner cannot, on his or herown, transfer ownership of the property. Also, the property cannot betaken by a partner’s personal creditors. Moreover, when a partner dies,the right to use partnership property passes to the other partners.Example 5. The articles of partnership for a business called HDJEnterprises include a tenancy in partnership provision. In a matternot involving HDJ Enterprises, Holden, a partner in HDJ enterprises,is sued by Karen Yeltsin. Yeltsin wins the suit, but findsChapter 27: Sole Proprietorship and Partnership 593

Starting a soleproprietorship can beaccomplished byopening a checkingaccount for thebusiness; purchasingwhatever businesslicense your town, city,or county requires; andby registering yourbusiness name.that she cannot collect from Holden because his personal assetsare insufficient to cover the amount that he owes her. Yeltsin thentries to seize several of HDJ Enterprise’s computers to coverHolden’s debt to her. The court would prevent such a seizurebecause the computers are not Holden’s individual property. However,if the judgment had been granted against the entire partnership,then the computers could be seized to pay the debt.Right to Manage the Firm Unless a partner’s rights are limited inthe partnership agreement, each partner has an equal voice in managingthe partnership’s business. As a result, each partner can bind thepartnership on any matter within the scope of its business affairs. In adisagreement about ordinary business matters, the decision of themajority is final. If there is an even number of partners and the vote issplit, then no decision can be made. If such deadlocks persist, thepartners must consider ending the partnership.The UPA provides that some partnership decisions cannot be madewithout the consent of all the partners. For example, a new partnercannot be admitted to the firm without unanimous consent. Similarly,it takes a unanimous vote of all partners to change the essential natureof the business or to embark on a new line of business not originallyprovided for in the articles of partnership. A unanimous vote is neededto amend the original articles of partnership. Also, any agreement todispose of the partnership’s goodwill requires unanimous consent. Ifthe partners are considering an action that would make continuing thepartnership impossible, such action would require unanimous approval.Right to Share in the Profits Unless there is an agreement to thecontrary, partners share equally in the profits, regardless of their initialcapital contribution or the time devoted by each partner to the business.This right can be assigned to others and passes to the partner’s heirsupon the partner’s death. This right also includes the right to anaccounting at the end of the partnership.Duties of the PartnersPartners must trust one another. Each partner is an agent of the otherpartner and has duties comparable to those of an agent. Partners havethe following duties:l To always act in good faith and in the best interests of the firml To always use their best skill and judgment in looking after thefirm’s affairsl To be loyal to the firm and put the firm’s interests first.594 Unit 6: Starting a Business

IcelandIf you could cure any disease in the world, what would it be? Multiple Sclerosis?Cancer? One day, this question might be outdated. In 1999, Iceland’s parliament,in the first legislation of its kind, gave a local biotech company permission to builda database from the health files of all its citizens. Many scientists believe that thiscollection of medical information can help unravel the genetic, or hereditary, causeof disease.Iceland makes the perfect laboratory for such an endeavor. Icelanders are amostly homogenous people whose families have lived in isolation on the island formore than 1,000 years. In such an environment, medical and genealogical datacan be matched to pinpoint diseases that run in families. This information enablesscientists to search for the genes that cause specific diseases. As one scientistexplains, “If you’re trying to find a diabetes gene in the American population, it’salmost impossible because we all have very different histories and ancestries.” InIceland’s “simpler genetic landscape,” however, the mutant gene should stand outlike a beacon. After the mutation is discovered, a treatment is that much closer.Here’s a snapshot of Iceland.Geographical area 39,769 sq. mi.Population 279,384CapitalReykjavikLegal systemCivil law basedon Danish lawLanguageIcelandicReligion87.1% Evangelical LutheranLife expectancy 80 yearsCritical Thinking Question A gene is a minute part of a cell that gives us our mother’scurly hair, our father’s straight nose, and maybe even our grandmother’s outgoingpersonality. What traits or characteristics do you have that are like those of otherfamily members? For more information on Iceland, visit ubpl.glencoe.comor your local library.Chapter 27: Sole Proprietorship and Partnership 595

Because each partner is an agent of the firm, each may bind the firmby any act that is part of the firm’s business. Any act of a partner thatis not a part of the firm’s business is not binding on the firm. Similarly,if the majority of the partners vote not to enter a particular contract, andone of the partners ignores the vote and enters that forbidden contract,then that partner alone is bound to that contract.Liability of the PartnersPartners have unlimited liability for all of the debts of the partnershipincurred while they are partners, even to the extent of their personalassets. Partners are liable to other members of the firm for theirshare of the firm’s debts. Partners share losses in the same proportionthat they share profits.In addition, partners are jointly liable with their partners on contractsentered into by any member of the firm acting within the actualor apparent scope of the firm’s business. Joint liability means that inthe event of a lawsuit, all the partners must be sued together. Partnersare jointly and severally (separately) liable for torts committed withinthe scope of the firm’s business. As a result, an injured party has thechoice of suing all the partners together or one or more of them separately.This liability is possibly the most significant drawback to thepartnership approach to doing business. One result is that an innocentpartner can be held responsible for the wrongdoings of other partners.Online Legal AdviceSmall business owners can get legal forms such as contracts and leases fromthe Internet. There are Web sites that exist especially for this purpose. The feesfor access to these legal documents vary. The amount charged depends on thecomplexity of the document. For very complex documents, fees can be brokeninto parts or can be paid by subscription. There are also several Web sites thatoffer consumer documents such as marriage separation agreements. So far therehave not been any widespread efforts to regulate online legal activities. However,some state bar associations have issued strong opinions about offering legaladvice on the Internet. (Source: New York Times, February 22, 2001)Connect Search the Internet for online providers of legal advice. Notice thefine line between making information available and offering legal advice.596 Unit 6: Starting a Business

Example 6. Suppose that one year after the articles of partnershipfor HDJ Enterprises are signed, Holden (a partner) loses controlof a delivery truck and crashes into Thompson Industries’ laboratorybuilding. Boris Thompson is severely injured. Thompsoncould sue Holden’s partners even though they were not personallyinvolved in the accident.Dissolving a PartnershipA dissolution is a legal detachment. The dissolution of a partnershipis a change in the relationship of the partners that occurs when anypartner stops being associated with the business. Dissolution is not thesame as the termination of the business. When a partner dies or voluntarilywithdraws from the firm, the firm is dissolved. The firm also maybe dissolved by court decree. The partners then are no longer carryingon as co-owners of a business for profit. In contrast, dissolution occursat the moment that one partner ceases to be associated with the firm. Thebusiness operations, however, cannot be stopped on a moment’s notice.It takes time to close the firm’s affairs and formally bring the firm to anend. During this period, the partners are not carrying on business.Effects of DissolutionDissolution does not necessarily bring the business to an end. Otherpartners may want to continue in business together. If so, there must bean accounting of the old firm’s affairs. New financial arrangementsmust be made regarding the new firm. A new agreement must be drawnup regarding the conduct of the new firm. Public notice must usually begiven to relieve retiring partners from liability for any new debts.Distribution of AssetsUpon dissolution, an accounting of the firm’s financial affairs isnecessary to determine how the firm’s assets will be distributed ordivided. The firm’s liabilities are paid in the following order:1. Money owed to creditors other than partners2. Money lent by partners to the firm3. The original money paid into the partnership by each partner4. The surplus, if any, owed to the partnersExample 7. Suppose that one year after forming JAC Industries,Cecilia loans $50,000 to the business. If JAC Industries is dissolved,the firm’s creditors would be the first to be paid. Ceciliawould be next in line for payment. After Cecilia’s loan was repaid,the three partners could then recover their initial contributionsto the partnership.Chapter 27: Sole Proprietorship and Partnership 597

Social StudiesMost people areinterested in makingmoney. One way to makemoney is to join aninvestment club. Investmentclubs are groups ofmen, women, and teenswho study, research, andinvest regularly in thestock market. Mostinvestment clubs areorganized as generalpartnerships.The club’s income orlosses are reported onthe individual member’stax return.Research ActivityUsing the library orInternet, researchinvestment clubs. Ingroups of four, create apartnership agreementfor a new investmentclub that you might liketo organize.If the business is insolvent, its assets must be sold to pay the creditors.In addition, the partners are individually liable for any unpaidbalance that the sale of the assets will not cover. If both the businessand one or more of its partners are insolvent, liability for debts is distributeddifferently. The firm’s creditors have the first claim on the partnership’sassets; the personal creditors of the individual insolventpartners have first claim on the insolvent partner’s personal assets.The Revised UniformPartnership ActSince the UPA was written in 1914, it has undergone extensiverevision. The revision process resulted in a new variation of the act,which is referred to as the Revised Uniform Partnership Act (RUPA).This new act has already been adopted in many states. As a result,it is a good idea to check the current status of the UPA in your homestate. Some of the major revisions that are now found in the RUPAinclude the elimination of the concept of tenancy in partnership and theestablishment of a way to file a statement of authority with the stategovernment.Registered Limited LiabilityPartnershipsIn recent years a new type of partnership, generally referred to as aregistered limited liability partnership (RLLP) , has been created.A RLLP is designed to eliminate a major disadvantage of the generalpartnership, namely, joint and several liability. Under terms of a statutepermitting the formation of RLLPs, partners can escape joint and severalliability for the torts, wrongful acts, negligence, or misconduct ofother partners by registering with the appropriate state office. The registrationstatement usually includes the following information:llllllThe RLLP’s name (Usually, the name must include either theexpression Registered Limited Liability Partnership, the wordsLimited Liability Partnership, or an abbreviation such as RLLPor LLP.)The purpose of the partnershipThe number of partners in the partnershipA statement of the intent to form an RLLPThe address of the partnership’s main place of businessThe name and address of a statutory agent for service of processAll the partners, or at least the partners holding a majority interestin the partnership, must file the statement. The registration statementmust be updated annually. RLLPs are to be taxed as general partnerships.598 Unit 6: Starting a Business

Limited PartnershipsA limited partnership is quite different from a general partnership.RUPA defines a limited partnership as “a partnership formed by two ormore persons . . . having one or more general partners and one or morelimited partners.” Limited partners are investors who have no controlin managing the partnership, and their names may not appear in thepartnership name. A limited partner’s liability for the partnership’s debtsdoes not extend beyond his or her investment in the partnership. Thus,the term limited in the title of the partner refers to the partner’s liability.Limited partnerships are often used in real estate ventures and taxshelter investments. Investors want the tax advantages of a partnership,but not the general liability that goes with being a general partner. Forinstance, if someone sells you a $10,000 limited partnership interest ina $3 million real estate deal and the whole thing goes bankrupt, youwill be out only your original $10,000.Limited partnerships must meet more stringent formalities than generalpartnerships. The partners must file a certificate of limited partnershipwith the appropriate state or county office. The business namemust also indicate that it is a limited partnership. These requirements arenecessary to warn third parties that certain partners possess limitedliability. The limited partner could lose limited liability if the limitedpartnership certificate is not filed or is filed improperly. In terms ofliability, the limited partnership falls between the general partnership,in which all owners have unlimited liability, and the corporation, inwhich all owners have limited liability.Reviewing What You Learned1. What is a general partnership?2. How can a partnership be created?3. What are a partner’s rights in relation toproperty?4. What are the effects of the dissolution of apartnership?Legal Skills in ActionPartnership Liability Clay, who is a generalpartner in Harrington Enterprises, believes hewill not be liable for a tort committed by Ian,another partner in the firm. Write a letter toClay explaining whether he will be liable forIan’s tort.Critical Thinking ActivityLimited Liability Partnership Why did somestate legislatures decide to create registeredlimited liability partnerships?Chapter 27: Sole Proprietorship and Partnership 599

CHAPTERASSESSMENTSection 27.1 Sole Proprietorship● A sole proprietorship is a business that is ownedby one person. It is the most common kind ofbusiness and is the easiest to establish. Typicalsole proprietorships are repair shops, small retailstores, and service organizations. Many locallyowned businesses in your community areprobably sole proprietorships.● A sole proprietor can choose to operate under hisor her own name, or he or she can make up a fictitiousname for the business entity. In selecting afictitious name, sole proprietors must not choosea company name already in use. In some states,the first user of a fictitious name can get a courtorder to prevent another sole proprietor fromdoing business under that name. Some requirementsmay affect sole proprietorships such aslicenses, insurance, or zoning requirements forconducting business. Barbers and plumbers areexamples of sole proprietors who must haveoccupational licenses as well as certain types ofliability insurance. Zoning ordinances prohibitbusinesses from operating in certain parts of thecommunity.● Sole proprietorships are easily created, and thesole proprietor has total control of how the businessis run and of the profits. The governmentdoes not overly regulate sole proprietorships,and profits are taxed only once.● Most disadvantages of sole proprietorships arerelated to limitations of capital and humanresources. All money used to finance a soleproprietorship must come from the proprietor’ssavings or income, or from loans obtained bythe proprietor. Human resources are limited inthat a sole proprietor is responsible for makingall decisions that affect the business. Aside fromfacing limitations in available capital and humanresources, a sole proprietorship also has a limitedlifetime. When the proprietor dies or chooses tosell or close the business, the company no longerexists. Another disadvantage to the sole proprietoris that there is no limit to the liability she or hecould incur. As a result, the proprietor’s personalassets are at risk if the business fails.Section 27.2 The Partnership● A general partnership is created when two ormore parties combine their money, labor, andskills for the purpose of carrying on a lawfulbusiness. The Uniform Partnership Act (UPA)defines partnership as “an association of two ormore persons to carry on a business for profit.”● General partnerships can be formed byagreement, proof of existence, or estoppel. Alimited partnership is a partnership formed bytwo or more persons having one or more generalpartners and one or more limited partners.Limited partners are investors only. They investin the business and share in profits. They have nomanagement rights, and their liability is limitedto their investment.● In a partnership, a partner has the right to use thepartnership property, manage the partnership,and share in the profits.● The dissolution of a partnership is a change inthe relationship of the partners that occurs whenany partner stops being associated with thebusiness. The business operations cannot bestopped on a moment’s notice. It takes time toclose the firm’s affairs and formally bring thefirm to an end. During this period, the partnersare not carrying on business. Upon dissolution,liabilities are paid in the following order:(1) debts to creditors other than partners;(2) money lent by partners to the firm; (3) theoriginal money paid by each partner; and(4) surplus owed to the partners.600 Unit 6: Starting a Business

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.sole proprietorshiptenancy in partnershipfictitious nameemployer identification numberjoint liabilitydissolutionunlimited liabilityRevised Uniform PartnershipAct (RUPA)Uniform Partnership Act (UPA)general partnershiparticles of partnershippartnership by proof ofexistencelimited partnershippartnership by estoppel1. Imagine you are a business attorney and have been hired by anew business owner to discuss the legal forms of businessassociation. With a partner, create a role-play in which you area business attorney, and your partner, a new business owner,has hired you to discuss the legal forms of business association.2. Perform your dialogue in front of the class.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 27:Sole Proprietorship andPartnership—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.3. Why is a sole proprietorship the most common type of business and easiest to form?4. What are the advantages and disadvantages of a partnership?5. What are the differences among a secret partner, a silent partner, and adormant partner?6. What questions might the court ask to determine whether certain property belongsto the partnership?7. What are the duties of the partners to each other?8. In some states, what can a sole proprietor do to prevent other companies fromadopting his or her fictitious name?9. What is tenancy in partnership?Chapter 27: Sole Proprietorship and Partnership 601

CHAPTERASSESSMENTAcquiring and Evaluating InformationResearch the local requirements for starting abusiness in your state. Find out:10. What types of businesses require a license11. What the local requirements are12. How to select a fictitious name13. How to acquire an occupational license14. What type of zoning ordinances might bean issueWrite a two-page paper explaining your findings.Tax EvasionRichard and Emilio own a plumbing supplybusiness. They sell parts and tools to plumbers,irrigation specialists, and homeowners. Richardfiles the tax return each year and purposelyprovides inaccurate information so that neitherhe nor Emilio will have to pay taxes. Emilio isunaware of what Richard is doing.Debate15. Is Emilio legally responsible for the taxreturn Richard filed for their business?Why or why not?16. If the IRS decides to audit the business, isEmilio financially liable for any backtaxes? Why or why not?17. What would you do if you were Emilio andyou discovered what Richard was doing?For the following cases, give your decision andstate a legal principle that applies.18. Nancy Myers’s law office is in theprestigious Brown & Brown Law OfficeBuilding. To help her business, Myers hasbusiness cards printed that read, “NancyMyers of the Brown & Brown Law Office.”When Samuel Brown, one of the Brownpartners, discovers what Nancy has done,he laughs and tells her she is very clever.Relying on the information on the businesscard, Bob Wash loans Myers $5,000. WhenMyers does not pay the money back, Washsues both Myers and the Brown partnership.Who will be liable to Wash for the moneyMyers borrowed? Explain your answer.19. Ruth Drummond, a general partner, purchasesall merchandise for the partnership.A manufacturer gives Drummond a10-percent discount on goods she purchasesfor the partnership. Drummond never tellsthe other partners about the discount andkeeps the difference for herself. Whenthe other partners learn of the discount,they demand that Drummond turn overthe money she pocketed. Are the partnerscorrect in their demand? Explain youranswer.20. Max Massie is a general partner in theconstruction firm of Massie, Briggs, andYates. While operating a forklift at aconstruction site, Massie collides with alimousine owned by the mayor. The mayorsues all three partners. Yates and Briggsargue that because Massie was at fault, themayor has no cause of action against them.Are they correct? Explain your answer.21. Alan Gallagher and Norma Kendall eachcontribute $20,000 to begin their partnership.At one point, the venture is in trouble,so Gallagher lends the partnership an additional$10,000. Eventually, the partnershipis dissolved. After the creditors are paid,$50,000 of assets remain. Kendall claimsthat each of them should receive $25,000.Is Kendall correct? Why or why not?602 Unit 6: Starting a Business

In each case that follows, you be the judge.22. Partnership by Proof of EvidenceGeorge and Clarence Simandl, brothers, jointly owned a gas station-delicatessen-magazine stand.All building permits were issued in both names, and both parties signed all of the businesscontracts. They carried on the business and shared profits and losses for 40 years, until George’sdeath. When George died, his wife, Albina, carried on his part of the business. When Clarencedied, his sister claimed that all property was in Clarence’s estate. Albina disagreed, contendingthat a partnership had existed and that she was entitled to a share of the assets. Is Albina correct?Why or why not?Simandl v. Simandl, 445 N.E.2d 734 (OH).23. DissolutionAs a partner, Hanes contributed $19,875 to a new partnership as his capital contribution. Theother partners, Giambrone, Hayes, and Medley, made no capital contribution, although theyhad agreed to do so. Medley withdrew some of the money contributed by Hanes without theunanimous consent of the partners, although such consent was required by the articles. Medleyalso failed to make mortgage payments which caused the firm to default on the loan. Hanesasked a court for a dissolution. Is Hanes entitled to a dissolution? Why or why not?Hanes v. Giambrone, 471 N. E. 2d 801 (OH).Find Resources for EntrepreneursTaquita is ready to become a sole proprietor. Shejust finished a business degree at the local communitycollege and has saved over $25,000 by workingwhile she was going to school.ConnectUsing a variety of search engines, help Taquita:24. Research 10 Web sites that provide resources toentrepreneurs and small business owners.25. Prioritize the sites according to the importanceof the information they might be able toprovide.26. Predict Why would a small business ownerchoose to use a fictitious name instead ofhis or her own?27. Connect Would you like to own a businessone day? Why or why not?28. Question Do you think it is fair that thelaw holds each partner responsible for theother partners’ actions within thepartnership? Why or why not?29. Respond How is a business partnershiplike a marriage? How is it different?Chapter 27: Sole Proprietorship and Partnership 603

CHAPTERForming and Financinga CorporationUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 28: Forming and Financing aCorporation—Chapter Overviews topreview the chapter information.

The Opening SceneJakob and Aaron Kowalski and Cecilia Bronislawahave decided to change their business from a partnershipto a corporation. In this scene, they are holdinga lunch meeting at an expensive restaurant todiscuss some of the details associated with the incorporationprocess.Free Lunch, Inc.JAKOB: This is a pretty expensive place.CECILIA: We can afford it.JAKOB: You can afford it. You were taking 50 percentof the profits from the partnership.CECILIA: I wasn’t taking anything. That’s what weagreed to. But if it makes you happy, I’ll pick up thecheck.JAKOB: It makes me very happy.AARON: If you two are through bickering, let’s getdown to business.CECILIA: Sure thing, chief.AARON: Okay, the main thing we have to deal withtoday is getting this incorporation process started.CECILIA: So what do we need to do first?AARON: Well, first of all, we need to get our hands onthose incorporation forms as soon as possible.CECILIA: Don’t worry. After lunch, I’m going to thecapitol to buy some equipment for us. I can pick upthe incorporation papers at the attorney general’soffice.JAKOB: Oh no, you can’t.CECILIA: What’s wrong? Are you getting cold feetagain?JAKOB: No. You’re talking about the wrong office.You’re supposed to go to the secretary of state’soffice.CECILIA: That’s right. Sorry.AARON: Maybe we should use a promoter.CECILIA: We don’t need a promoter.AARON: I know we don’t need one. I just thought thatmaybe we could use one to handle thecomplicated stuff.CECILIA: There’s nothing complicated about this.AARON: I hope you’re right.JAKOB: Don’t forget the forms for the statutory agent.CECILIA: The what?JAKOB: The statutory agent.CECILIA: I heard what you said. I just don’t knowwhat it is.JAKOB: The statutory agent is for when we get sued.AARON: Once again, my brother, the optimist.JAKOB: Once again, your brother, the realist.CECILIA: Once again, I’m leaving. I’ll see you later.(Cecilia exits quickly.)JAKOB: Well what do you know? She did it again.AARON: Did what?JAKOB: Stuck us with the check!AARON: (Aaron jumps up.) Cecilia!1. What is a corporation?2. What are the advantages and disadvantages of acorporation?3. What state office regulates the incorporationprocess?4. Are promoters necessary during the incorporationprocess?5. Why are statutory agents required for allcorporations?Chapter 28: Forming and Financing a Corporation 605

Corporationsl How to definecorporationl How to distinguishamong various typesof corporationsl How to create acorporationl How to finance acorporationl How to distinguishbetween a corporationand a limited liabilitycompanyUnderstanding the natureof a corporation will helpyou decide when to formone rather than the otherassociations that areavailable.l corporationl shareholderl sharel promoterl articles ofincorporationl certificate ofincorporationl common stockl dividendsl preferred stockl limited liabilitycompany (LLC)The Nature of a CorporationAlthough partnerships and sole proprietorships are excellent formsof organization for some kinds of businesses, about 90 percent of allbusiness in the United States is done by corporations. A corporationis a body formed and authorized by law to act as a single person, distinctfrom its members or owners. The word “corporation” generallybrings to mind large businesses such as McDonald’s and AOL TimeWarner. Not all corporations are large, however. In fact, approximately40 percent of all corporations employ fewer than five employees.Regardless of their size, all corporations have the same basic form.An individual who owns shares of a corporation is called ashareholder or a stockholder. A share is a single unit of ownershipof a corporation. Each shareholder has one vote for each share of stockthat he or she owns in the corporation. Shareholders cast their votes toelect a board of directors whose duty is to direct the corporation’sbusiness.Advantages of a CorporationThere are several advantages in doing business as a corporation. Forexample, selling shares enables a corporation to tap into a large sourceof capital that is unavailable to partnerships and sole proprietorships.Each shareholder’s liability is limited to the amount of money he or shepaid for shares in the corporation. Another advantage of a corporationis that it is a legal entity, or a legal person, created by the state. Consequently,it has the power to make contracts, buy and sell goods, sue, andbe sued. Another distinct advantage to the corporation is that it has continuityof existence. This means that a corporation continues to exist,regardless of the lifespans of its founders, shareholders, managers, anddirectors.Disadvantages of a CorporationLike sole proprietorships and partnerships, corporations have disadvantages.For instance, a corporation’s income may be taxed morethan once. This happens when a corporation distributes part or all of itsprofits, after taxes, to its shareholders in the form of dividends. Theshareholders’ dividends become part of their taxable income. In this606 Unit 6: Starting a Business

way, profits of a corporation are taxed twice—once when earned bythe corporation and again when shareholders receive their portion ofthe profit.Corporations, especially larger ones, must also face extensive governmentregulation. Part of that regulation involves the actual formationof the corporation. The incorporation process must be followedexactly if the founders are to avoid legal difficulties, as outlined later inthis chapter. Another disadvantage is that the original founders of thecorporation can lose not only the control, but also the actual ownershipof the corporation. Because of the prominence of some corporations,business decisions by their directors and officers are often subject toclose scrutiny.Types of CorporationsCorporations may be classified as public or private corporations,stock or nonstock corporations, and domestic or foreign corporations(see Figure 28.1). Public corporations include incorporated politicalunits, such as towns, villages, cities, and school districts. Private corporationsmay be classified as profit or nonprofit corporations. Profitcorporations, private corporations organized for the purpose of makingmoney, are found in nearly every major field of economic activity,Although theshareholders of acorporation are theactual owners, they arenot agents of thecorporation. As a result,shareholders cannotcommit the corporationto any contractualarrangements.Figure 28.1PublicTypes of CorporationsPrivateIncorporatedPolitical UnitsStates, cities, towns,counties, townships,school districts,water districtsDomestic: incorporated in the stateForeign: incorporated in another stateAlien: incorporated in another countryFor-Profit(Stock Corporations)BusinessNonprofit(Nonstock Corporations)ReligiousEducationalSocialCharitableTYPES OF CORPORATIONSThere are many different types of corporations,and each has a generally accepted label. In youropinion, which of these corporate forms is themost effective?Chapter 28: Forming and Financing a Corporation 607

Social StudiesImagine you have beenoperating a small businessfor several years.The business is growing,and you would like toexpand. To expandquickly, you would liketo set your business upas a corporation.Research ActivityWhat procedures wouldyou follow to set up acorporation in your state?What forms would youhave to complete? Whatfees would you have topay? Conduct research tofind out. Then researchthe laws in another state.Compare and contrastthe laws in both states.including transportation, manufacturing, business, technology, entertainment,financial, and service fields. These corporations are regulatedby the laws of the states in which they operate. If they are engaged ininterstate commerce, they are also regulated by federal regulations. Anycorporation formed for business purposes is operating for a profit andhas capital stock. A bank, a railroad, and a trading firm are stockcorporations.Nonprofit corporations, such as the Red Cross, are formed foreducational, religious, charitable, or social purposes. A nonprofit corporationin which membership is acquired by agreement, rather than byacquisition of stock, is also a nonstock corporation. Many nonprofitfraternal organizations are nonstock corporations.Corporations may also be classified as domestic or foreign. A corporationis considered a domestic corporation in the state in which it isincorporated. In all other states in which it may operate, the corporationis considered a foreign corporation. A foreign corporation should not beconfused with an alien corporation. An alien corporation is one that isincorporated in another country but is doing business in this country.Forming a CorporationEach state legislature has passed its own version of corporate law.Most state legislatures have followed the pattern established by theModel Business Corporation Act (MBCA). Other states have opted tofollow the Revised Model Business Corporation Act (RMBCA), anupdated version of the MBCA. Still other states have created their ownstatutes. Even those legislatures that have adopted either the MBCA orthe RMBCA have made changes designed to fit the business climate,customs, and traditions of their states. This creates a great deal of varietyamong state incorporation laws. Despite this variety, some generalizationsabout the incorporation process can be made.The Incorporation ProcessA corporation cannot come into existence by itself—people musttake the necessary steps to bring it into legal existence. Sometimes theowner of an existing sole proprietorship or the partners in an existingpartnership will elect to incorporate. At other times, a business will startout from scratch as a corporation. Whatever the case, the as-yet-uncreatedcorporation will need promoters to direct the incorporation process.(See Figure 28.2).Corporate Promoters A promoter carries out the incorporationprocess by taking the initial steps to organize and finance a business.These steps may include assembling investors, leasing office and warehousespace, purchasing supplies and equipment, and hiring employees.608 Unit 6: Starting a Business

Figure 28.2THE INCORPORATION PROCESSChoosing a NameA corporation cannot come into existence spontaneously.It must be organized by people who takethe steps outlined by a valid incorporation statute.Completing theArticles ofIncorporationOne of the first steps in setting up a newcorporation is choosing a corporate name.Under most state statutes, the wordscorporation, incorporated, or company, oran abbreviation of one of the words, must bein the name.Receiving theCertificate of IncorporationSometimes people who are alreadyin business as sole proprietors oras partners decide to incorporate.Other times, people just startingout in business decide to incorporate.Whatever the case, the articlesof incorporation must be filledout properly.After the articles of incorporation have beenapproved by the secretary of state’s office, acertificate of incorporation will be issued. At thattime, the corporation has been officially formed.Chapter 28: Forming and Financing a Corporation 609

STOCK CERTIFICATESCorporations issue stockcertificates when shares ofstock are bought and sold.How important is it to havepossession of a stockcertificate?Promoters are personally liable for the contracts they make in the nameof the corporation. This liability can be avoided if the promoter convincesthe corporation to officially adopt the contracts and remove thepromoter from liability.Corporate Name One of the first steps that the promoters take is tochoose a corporate name. Under most state statutes, these words corporation,incorporated, or company, or an abbreviation of one of thewords, must appear as a part of the corporate name. The corporationcannot use the name of an existing corporation, either foreign ordomestic, or a name that is so similar to an existing name that peoplewould be confused by that similarity. Even in situations where a specificstate does not prohibit the use of similar names, the court will preventsuch duplication if confusion or unfair competition results. Oftenthe secretary of state’s office can tell promoters if a name has been taken.It is also possible to reserve a name for a limited time, usually for asmall fee. It is sometimes possible to obtain the permission of an existingcorporation to use its name. Generally, written evidence of this consentmust be filed with the secretary of state’s office.Articles of Incorporation Promoters are responsible for drawingup and filing the articles of incorporation , an application for incorporationof a business that describes a corporation’s organization,powers, and authority (see Figure 28.3). Generally, this requirement canbe met by obtaining a form from the office of the secretary of state. Thearticles of incorporation usually include the following information:l Name of the corporation, including the words company,incorporated, or corporation, or appropriate abbreviations610 Unit 6: Starting a Business

lllllllProposed duration of the corporationPurpose or purposes of the corporationNumber, classes, and value of corporate sharesShareholders’ rights in relation to shares, classes of shares, andspecial sharesAddress of the original registered or statutory agent (persondesignated to receive service of process should the corporationbe sued)Names and signatures of the initial directorsNames and signatures of the incorporatorsFigure 28.3ARTICLES OF INCORPORATIONof(Name of Corporation)The undersigned, desiring to form a corporation, for profit, under Sections1701.01 et seq. of the Revised Code of Ohio, do hereby certify:FIRST. The name of said corporation shall be.SECOND. The place in Ohio where its principal office is to be located is, County.(City, Village, or Township)THIRD. The purposes for which it is formed are:To engage in any or all other lawful acts or activities for which corporationsmay be formed under Sections 1701.01 to 1701.98, inclusive, of the OhioRevised Code.FOURTH. The number of shares that it is authorized to have outstandingis 750 common shares.FIFTH. The amount of stated capital with which the corporation shallbegin business is five hundred dollars ($500.00).IN WITNESS WHEREOF, We have hereunto subscribed our names, thisday of , 20 .(Name of Corporation)ARTICLES OF INCORPORATIONThe principles for creating a corporation areessentially the same in all states. What stateoffice processes applications for incorporation?Chapter 28: Forming and Financing a Corporation 611

CORPORATE NAMESA new corporation cannot use the name of an existingcorporation, either foreign or domestic, or a name sosimilar to an existing name that people would beconfused by the similarity. Why are corporate namesconsidered to be so important?Some states have additional requirements, such as a minimumamount of capital on hand, often between $500 and $1,000, or a minimumnumber of incorporators.Paying the filing fee completes the application. See Figure 28.4 fora list of the steps in the incorporation process. After the application isapproved by the secretary of state, the corporation receives a certificateof incorporation. A certificate of incorporation is a corporation’sofficial authorization to do business in the state. In some states, the certificateof incorporation is called a charter.Structure of the Corporation The initial shareholders of the newlyformed corporation elect a board of directors who replace the originalincorporators. Frequently, the original incorporators serve on the board.612 Unit 6: Starting a Business

Figure 28.4Promoters Do PreliminaryPreformation WorkArticles ofIncorporationSTEPS IN THEINCORPORATIONPROCESSThe incorporation processmust be followed to create alegally formed corporation.What term is used todesignate a legally formedcorporation?Statutory AgentAppointedArticles Filed with Secretaryof State (Filing Fees Paid)Articles Approved bySecretary of State andCharter IssuedOrganizationalMeeting HeldAdoption/Novation ofPreformation ContractsSome or all of the directors may be shareholders. Depending on the sizeof the company, there can be from one to about 35 directors. The boardelects a chairman to speak for it. The directors, in turn, elect the topofficers of the corporation to manage the company and carry out theboard’s policies and decisions. Officers can be members of the board,or they may be hired employees.Chapter 28: Forming and Financing a Corporation 613

The InsideInformation onNonprofitsBeth Richards andJavier Perez founded apolitical watchdoggroup for their region.The organization wasformed as a nonprofitcorporation, andmembers receive aregional magazinecalled The Insider,which reports on localand regional politics.Because of intensepolitical change in theirregion, membershipand the income frommembership duessoared in the first year.Beth and Javier gavethemselves hugebonuses and tooklavish “fact-finding”trips because, as anonprofit corporation,there was no needshow a profit. Are theiractions ethical? Why orwhy not?Corporate FinancingA corporation may seek financing through the sale of stock. Sharesof stock represent a shareholder’s interest in a corporation, and withshares in a corporation come certain rights. Companies may also seekfunding through the sale of bonds, which are notes issued in return formoney borrowed to fund various corporate activities.Types of Stock All public corporations issue common stock; itis the basic form of corporate ownership. Holders of common stockhave voting rights in a corporation—as a group, they elect the corporation’sboard of directors. Common stock sometimes pays dividends , orprofits, to the shareholders based on the corporation’s performance. If thecorporation does well, dividends will be high; if it does poorly, dividendswill be low. Holders of common stock are the last shareholders to bepaid. Common stock is sold on either at par or no-par value basis. Parvalue is the value printed on the stock certificates of some companies.In some states, par value is used as the basis for determining state incorporationtaxes. Because the par value is arbitrary, most corporationsissue no-par value stock.The second type of stock a corporation issues is preferred stock .Holders of preferred stock have no voting rights. However, they do havethe right to receive a fixed dividend. Holders of preferred stock havepriority over holders of common stock; they are the first shareholdersto be paid. There are two types of preferred stock: cumulative andnoncumulative. If the shareholder owns cumulative preferred stock, andthe corporation is unable to pay a dividend on time, it must make upthe payment at a later date. Shareholders owning noncumulative sharesdo not have this right.Stock Purchases Purchasers of stock may buy the stock directlyfrom the corporation or from individual owners of stock. They may buystock personally or through agents called brokers. A broker fills theorder to buy stock in one of two ways. The stock to be purchased maybe traded on a stock exchange. A stock exchange is a continuous publicauction in which stocks are bought and sold. The largest and best-knownstock exchange is the New York Stock Exchange. Other exchangesinclude the Nasdaq Stock Market and the American Stock Exchange, aswell as several regional exchanges. A broker may also purchase stocksover-the-counter, or outside the organized exchanges. Once the stocksare purchased, a stock certificate will be issued.All stock is originally sold by the corporation itself. At the time thecorporation is being organized, the promoters seek subscriptions frominterested persons. These stock subscriptions are contracts to buy stockwhen the corporation completes its organization and is authorized by614 Unit 6: Starting a Business

Law EditorIn a democracy, laws must be effectively communicatedto citizens. To do so, legislatures have created rigoroussystems for reporting official versions of the law. The lawsare then published so they can be used by lawyers andother citizens. Andrea Hansen helps make sure thoseofficial versions are correctly published in books and online, and that they areavailable for reference.Hansen works as a senior editor for West Group, a law publisher headquarteredin Eagan, Minnesota. She is an attorney, although not all editors at theprominent publishing house have law degrees. Hansen works specifically on thelaws created by the Missouri legislature—statutes known as the Missouri Code.“After laws are passed by the legislature, they are written up and approvedby the governor’s office,” she says. “We then publish them online and in books.A lot of my job is writing the historical and statutory notes that provide extrabackground information for lawyers.”The information Hansen provides is very important. She carefully studies thenew law, compares it to the old, and then highlights important changes solawyers, judges, scholars, and other citizens know what the law truly is. Hansenalso informs readers of the date when a law takes effect.What if legislators seem to pass laws that contradict one another? “Well, thenwe publish both versions and let the courts figure it out,” Hansen says.SkillsPersonalityEducationReading, writing, teamwork, computerDetail oriented, able to focus, comfortable doing the samething for several months, able to meet deadlinesAt least a high school diploma, many with college andlaw degreesFor more information on editing and on state and federal codes, visitwww.westgroup.com, ubpl.glencoe.com, or your public library.the state to sell stock to the public. These subscriptions are similar to anyother contract to sell, and the subscribers don’t become stockholdersuntil the organization is completed and stock certificates are issued tothem. The corporation may continue to sell shares after its incorporationis complete, up to the number of shares authorized in its articles ofincorporation. Like any other form of personal property, stocks may betransferred or assigned.Chapter 28: Forming and Financing a Corporation 615

LIMITED LIABILITY COMPANIESA new form of doing business that has becomecommon today is known as the limited liabilitycompany. One of the chief advantages of alimited liability company is that it is taxed like apartnership. What formalities must be followedto create a limited liability company?616 Unit 6: Starting a BusinessCorporate Bonds A corporation may also finance its activitiesthrough bonds, which are notes issued for money that the corporationborrows. When a company makes bonds available, it is called a bondissue. Unlike stocks, bonds accrue interest and must be repaid in thefuture. If a company files for bankruptcy, bondholders’ claims to companyassets are paid before those of shareholders.Forming a Limited Liability CompanyA limited liability company (LLC) is a new type of businessenterprise that has been adopted by all states. An LLC combines thebest features of a partnership and a corporation. Like a corporation, itoffers limited liability to its owners. Like the partners in a partnership,the owners of an LLC escape double taxation. LLCs are statutory entities,which means they can be formed only if the owners follow the legalsteps required. The owners of an LLC are known as members, and thepeople who run the LLC are known as managers.Generally, the law permits one legal person to form an LLC. Thefirst step in forming an LLC is to draw up the articles of organization.

This can be done by obtaining the proper forms from the secretary ofstate’s office. The articles of organization include the following:l The name of the LLC, including either the words limited liabilitycompany, limited, or the abbreviations, LLC or Ltdl The length of time that the LLC will existl The address where the operating agreement and the bylaws of theLLC are storedLike a corporation, an LLC must also have a statutory agent forservice of process. Filing fees must also be paid.Members of a newly formed LLC will often want to draw up anoperating agreement. An operating agreement will set up the bylawsunder which the LLC will operate. Although some states permit oraloperating agreements, it is best to express the terms of the operatingagreement in writing.Incorporation ProblemsStates differ in their interpretation of when the life of a corporationactually begins. Some states declare that the legal existence of a corporationbegins when the articles have been filed. Others hold that acorporation begins when the articles have been approved by the secretaryof state. Whatever the case, assuming that all formalities have beencompleted, once the legal existence of the corporation begins, it is saidto be a de jure corporation. The term means “lawful” or “in law.”Sometimes, however, problems occur that disrupt the incorporationprocess. At other times people fail to incorporate, yet they act as if theyTax Law and NonprofitsNonprofit groups and charities are turning increasingly to the Internet forfund-raising. As they do so, the IRS is preparing to issue guidelines on applyingtax law. These guidelines will have an effect on the taxes paid by nonprofits andcharities on income received through online fund-raising. Charitable groups arealso concerned with being taxed on sales from referring visitors to other Websites, as well as the treatment of their tax exempt status. (Source: New YorkTimes, p. B1, 2/12/01)Connect Visit the Web site of a local or national charity. See what type ofonline activities they engage in that might affect their tax status.Chapter 28: Forming and Financing a Corporation 617

have incorporated. To deal with these problems, the courts have developedtwo doctrines: de facto corporations and corporation by estoppel.Other problems occur when a corporation has been properly formed butis not permitted by the owners to become an independent entity.Prestigious ListHave you ever heardof a “Fortune 500Company” but weren’tquite sure what it is?The Fortune 500 is alist of America’s largestcorporations. Becauseit is considered to be aprestigious list, earninga place among theFortune 500 is difficult.Other lists are beingcreated that are held ina similar high esteem.The Global 500,America’s Best Companiesfor Minorities, andthe 100 Best Companiesto Work For arelists that potentialemployees now consultto decide where theywould like to investtheir talents. Which ofthese lists appeals toyou? Would you usethese lists as possibleresources?Get InvolvedGo online and investigatethe companieslisted under the titlesmentioned above.De Facto CorporationEven while making a good faith attempt to incorporate, promoterssometimes inadvertently make an error in filing, or fail to complete theincorporation process. Technically, if the incorporation process isincomplete, the corporation doesn’t legally exist. However, as long asthe incorporators made a good faith attempt to incorporate under anexisting state incorporation statute, and as long as the would-be corporationhas acted like a corporation, few people can attack its existence.The law says that, although the corporation does not exist in law (dejure), it does exist in fact (de facto). This type of corporation is calleda de facto corporation.Some states have simplified the incorporation process and have abandonedthe doctrine of de facto corporation. These states believe that thereis little chance that the incorporation process will not be completed properly.The rule in these states is that if the incorporation process has beenfollowed, then the corporation exists. However, if the incorporationprocess has not been followed, the corporation does not exist.Corporation by EstoppelLike other estoppel doctrines, corporation by estoppel stops peoplefrom denying the consequences of their own actions. Corporation byestoppel usually occurs when some party has been willing to treat aperson or a group of people as a corporation, generally reaping somebenefit from the relationship. When this happens, the court will notallow that party to then deny the existence of the corporation becausedoing so would be unfair.Piercing the Corporate VeilOne of the primary advantages of forming a corporation is thelimited liability of the individual shareholders. After incorporation iscomplete, shareholders reasonably expect to be insulated from the corporation’sliabilities. Nevertheless, there are extreme circumstances inwhich the courts will deny shareholders the benefits of limited liabilityand hold them personally liable. Courts use colorful language to describethis situation, known as piercing the corporate veil. This expressionmeans that the corporate entity, which is normally a veil shielding theshareholders from liability, will be pierced to reach the shareholders.618 Unit 6: Starting a Business

Depending on the facts, the court may rely on one of two theoriesto pierce the corporate veil:l The alter ego theoryl The justice theoryThe alter ego theory is used when the corporation has not been permittedto become an independent entity. The court looks at several thingsto determine whether a subsidiary is independent. For instance, the courtlooks at the management structure of the subsidiary and the parent company.If they shared the same directors and officers, and if decisionsthey made were always in the best interests of the parent company, itwould suggest the need to pierce the corporate veil.The justice theory is used when an individual or a parent corporationforms a corporation to defraud, to circumvent the law, to avoidpaying a legally owed debt, or to violate the law in some way.New and Hybrid Business EntitiesA relatively new type of business is called a sub-chapter S corporation.In contrast with a corporation, an owner of an S corporation avoids doubletaxation at both the corporate and individual ownership levels. Rather, he orshe is taxed only as an owner, meaning that losses can be deducted from workincome in bad years and profits can only be taxed once during good years. Tobecome an S corporation, a business must incorporate in the usual fashion andthen apply to the Internal Revenue Service.Another new business entity is the limited liability corporation (LLC). An LLC is across between a partnership and a corporation. Like a corporation, an LLC offersthe protection of limited liability to its owners, and like a partnership, the owners’profits are only taxed once. An LLC is distinguished from an S corporation becauseunlike the latter, it does not have a limit to the number of shareholders.In 1991, Texas created the limited liability partnership (LLP). This form wascreated to make it easier for existing partnerships to gain the advantages of anLLC, a process that hitherto had been complicated by the process of dissolvinga partnership and recreating it as an LLC. Like an LLC, an LLP avoids doubletaxation and typically limits the liability of partners against torts committed byothers involved in the partnership.Research Activity Using the Internet, library, or other resource, research howeach of these kinds of businesses are formed. Share your findings with the class.Chapter 28: Forming and Financing a Corporation 619

CHAPTERASSESSMENTSection 28.1 Corporations● A corporation is an entity created by law to act asa single person. About 90 percent of all businessin the United States is done by corporations. Acorporation is authorized by law to act as a singleperson, distinct from its members or owners. Notall corporations are large. Approximately 40 percentof all corporations employ fewer than fiveemployees. An individual who owns shares of acorporation is called a shareholder or stockholder.A share is a single unit of ownership of a corporation.A shareholder is entitled to one vote pershare of stock that he or she owns in a corporation.Shareholders can cast their votes to electa board of directors whose duty is to direct thecorporation’s business. The principal advantageof doing business as a corporation is the limitedliability of the shareholders. Another advantageof a corporation is the fact that it has continuityof existence. This means that a corporation continuesto exist, regardless of the lifespans of itsfounders, shareholders, managers, and directors.● Public corporations are political units. Publiccorporations include towns, villages, cities, andschool districts. Private corporations may beclassified as profit or nonprofit corporations.Private corporations are not government run.Profit corporations are organized for the purposeof making money, and they have capital stock.Profit corporations are found in nearly everymajor field of economic activity, including transportation,manufacturing, business, technology,entertainment, financial, and service fields.These corporations are regulated by the laws ofthe states in which they operate. In contrast, nonprofitcorporations are formed for educational,religious, charitable or social purposes, andmembership is acquired by agreement ratherthan by acquisition of stock. Many nonprofit●●●fraternal organizations are nonstock corporations.A corporation is deemed domestic in thestate in which it is incorporated and is consideredforeign in other states. An alien corporation isone that is incorporated in another country but isdoing business in this country.A corporation cannot come into existence byitself—people must take the necessary steps tobring it into legal existence. A promoter carriesout the incorporation process by taking the initialsteps to organize and finance a business. Thesesteps may include assembling investors, leasingoffice and warehouse space, purchasing suppliesand equipment, and hiring employees. To createa corporation, the promoters must first choose aunique name and file the name with the secretaryof state. Under most state statutes, the wordscorporation, incorporated, or company, or anabbreviation of one of the words, must appear aspart of the corporate name. Articles of incorporation,which describe a corporation’s organization,powers and authority, must also be filedwith the secretary of state. Paying the filing feecompletes the application process. After theapplication is approved by the secretary ofstate, the corporation receives a certificate ofincorporation.A corporation is funded via subscription. At thetime the corporation is being organized, thepromoters seek out people who are interested inentering into contracts to buy stock when thecorporation completes its organization and isauthorized by the state to sell stock to the public.A limited liability company combines the bestfeatures of a partnership and a corporation. Likea corporation, it offers limited liability to itsowners, and as do the partners in a partnership,the owners of an LLC escape double taxation.620 Unit 6: Starting a Business

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.corporationshareholdersharepromoterarticles of incorporationcertificate of incorporationdividendslimited liability company (LLC)common stock1. In groups of four, create a board game about corporations using allof the key terms. The purpose of the game will be to help theplayers develop an understanding of how to create, finance, anddistinguish among various types of corporations.2. Play your newly created game.3. Present your game to the class.4. As a class, vote to select the best game.5. Play the winning game as a class.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 28:Forming and Financinga Corporation—Self-Check Quizzes to preparefor the chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.6. What is a corporation? Who are its owners?7. Discuss the advantages and disadvantages of forming a corporation.8. What is the promoter’s role in the incorporation process?9. What must be included in the articles of incorporation?10. What two kinds of stock are issued by a corporation?11. What are the differences between these types of stock?12. What are the two main types of corporations?13. Identify new and hybrid business entities, including sub-chapter S corporations,limited liability partnerships, and limited liability corporations. Briefly explain each,and identify their distinguishing characteristics.14. In Chapters 27 and 28, you learned about a variety of different businessorganizations: proprietorships, partnerships, corporations, and new and hybridbusiness entities such as an LLC or sub-chapter S corporation. Identify the duties andresponsibilities for those interested in each type of business organization.15. Under most state statutes, what words must be included in the nameof a corporation?16. What are dividends?17. What is a stock exchange? What are some of the most prominentstock exchanges?Chapter 28: Forming and Financing a Corporation 621

CHAPTERASSESSMENTAcquiring and Evaluating InformationConsider the different business organizations.18. Contrast the legal documentation requiredin forming different types of businessorganizations (proprietorship, partnership,and corporation).19. Describe the significance of each type ofdocumentation, noting the similarities anddifferences.20. Name three businesses in your localcommunity, and identify the type oforganization that each exemplifies.Corporate ExpansionTim and Eric own a small corporation calledBe a Good Sport, Inc. Tim wants to keep theemphasis on court sports. Eric wants to expandby opening a subsidiary that would sell skiequipment and clothing.Debate21. What should Tim and Eric consider whentrying to make this decision?22. How can Tim and Eric resolve theirdifferences without harming theirrelationship or their business?23. Would the resolution be any different iftheir business were a partnership?24. What would you recommend they do?For the following cases, give your decision andstate a legal principle that applies.25. Ethel Holmes, Chris MacLeod, and AliciaStevens decide to incorporate their printingbusiness, naming it HMS, Inc. GeorgeKitchel, their attorney, assures them thatthe articles will be approved. Because of amisunderstanding between Kitchel and acoworker, the articles are never filed. WhenWilliam Blake is injured by an HMSdelivery truck, he sues Holmes, MacLeod,and Stevens as individuals because theincorporation papers were not filed. Howcould the owners protect themselves?26. Alice Pryor and Jessica Tunney operate theirbusiness for several years as a partnership.Pryor convinces Tunney that it would be agood idea to incorporate. Tunney agrees, sothey change the name of the business toPryor and Tunney, Inc. They do nothingfurther, although they tell their customersand creditors that they have formed a corporation.What would be their legal status ifthey were involved in a tort-based lawsuit?27. Dennis Tharp and Merle Coffman decideto incorporate. They call their corporationFord Motors because they figure that usinga well-known name would attract business.They draw up the articles and include thecorporation’s name, proposed duration, andpurpose; the number, classes and par valueof corporate shares; and the names andsignatures of the original directors and theincorporators. They then take the articlesto the state attorney general’s office forfiling. Name four mistakes they made.28. Martin Greenlawn, Gladys Chilcote, andLillian Brunner decide to incorporate theirflower shop, calling it the Hearts andFlowers Florist Shop, Inc. They file articlesof incorporation with the appropriate stateoffice, not knowing that they need astatutory agent. Through an oversight, acertificate of incorporation is issued.Eventually the state office discovers theerror. Does the Hearts and Flowerscorporation exist? Why or why not?622 Unit 6: Starting a Business

In each case that follows, you be the judge.29. Choosing a Corporate NameLegal Aid Services, Inc. was incorporated as a nonprofit organization providing free legalservices. Four years later, American Legal Aid, Inc. was incorporated as a for-profit legalinsurance corporation selling memberships to subscribers. When American Legal Aid began anextensive selling campaign, Legal Aid Services discovered that many people were confusing thetwo entities. The confusion hurt Legal Aid Services’ image and threatened its funding.Consequently, Legal Aid Services sought an injunction prohibiting American Legal Aid fromusing the words legal aid in its corporate name. Should Legal Aid Services be granted theinjunction? Why or why not?American Legal Aid, Inc. v. Legal Aid Services, Inc., 503 P.2d 1201 (WY).30. Personal AssetsIn his role as a promoter for a new business, Spence purchased an employment agency fromHuffman. The new corporation never generated enough money to pay Huffman. As a result,Huffman elected to sue Spence directly to obtain payment. Spence argued that his personalassets should not be placed at risk. Was Spence correct? Why or why not?Spence v. Huffman, 486 P.2d 211 (AZ).Bankruptcy OptionsIn our competitive, free-market system, somebusinesses are successful, while others are not.Sometimes businesses are dissolved because theirowners are no longer interested or the market for itsgoods no longer exists. In other cases, a businesscannot survive for financial reasons and goesbankrupt.ConnectUsing a variety of search engines, comparebankruptcy and dissolution options for differenttypes of business organizations. Then answer thefollowing questions.31. What are some of the different kinds ofbankruptcy, and in what ways do they apply ornot apply to the different types of businesses?32. Does bankruptcy always cause a business todissolve? Explain your answer.33. Predict Why do you think 90 percent of allbusiness in the United States is done bycorporations?34. Connect Do you own stock in a corporation?If so, what is the name of the corporationin which you own stock?35. Question Can you explain the differencebetween public and private corporations?36. Respond Explain the doctrine known as“piercing the corporate veil.”Chapter 28: Forming and Financing a Corporation 623

CHAPTEROperating a CorporationUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 29: Operating a Corporation—Chapter Overviews to preview the chapterinformation.

The Opening SceneJakob and Aaron Kowalski and Cecilia Bronislawaare meeting in the boardroom of JAC Industries, Inc.They are discussing the corporation’s upcomingshareholders meeting.The Shareholders MeetingCECILIA: Don’t worry about the meeting. We’ve donea good job. We’ll be reelected as directors. Wealways are.JAKOB: Don’t worry? Is that the best you can comeup with?AARON: That’s the only thing she can come up with.Did you expect something more?CECILIA: You two don’t know anything about runninga business. Look, you guys wanted to go publicand sell stock to strangers. When you do thatyou’ve gotta be prepared for a shareholderproposal sometime.JAKOB: A what?CECILIA: You need to do some reading. You’ve neverheard of a shareholder proposal? That’s when ourstockholders suggest changes in corporate policy.AARON: That could be risky.CECILIA: Maybe so, but the other shareholders stillhave to vote on it.JAKOB: Hey, you’re talking about everything we own.Let’s be a little less cavalier about it.AARON: So what’s this shareholder proposal,anyway?CECILIA: Something about human rights and doingbusiness with countries that don’t respect suchrights.JAKOB: What? I don’t understand what the problemis. We don’t do any business with those kindsof countries.AARON: Someone thinks we do.CECILIA: Look, we’ll just state our position and let theshareholders vote.JAKOB: So what’s our position?CECILIA: That all we’re concerned with is making aprofit for our shareholders.JAKOB: What about the environment, the economy,the community? Shouldn’t we talk about issueslike that?CECILIA: That means nothing to us. We’re in businessto make money.AARON: Are you sure about that?CECILIA: About as sure as I am about thisshareholder lawsuit.JAKOB: Shareholders can’t sue their owncorporation, can they?CECILIA: Evidently. That’s what this guy is doing.(She tosses some papers toward Jakob.)AARON: Something about not granting him reemptiverights.CECILIA: That’s preemptive.JAKOB: Whatever! Now I’m really worried! Did weor did we not do this?CECILIA: Do what?AARON: GRRRR! (He storms out of the boardroomin frustration.)CECILIA: He’s very high-strung, isn’t he?1. What do corporate directors do in relation tocorporate management?2. What responsibilities do corporate officers have?3. What rights do corporate shareholders possess?4. What is the business judgment rule?5. What is the fairness rule?Chapter 29: Operating a Corporation 625

l How to definecorporate directorl How to definecorporate officerl How to identifyshareholders’ rightsl How to identifyshareholder votingtechniquesUnderstanding thenature of corporatemanagement will helpyou protect your rights asa corporate shareholder.l directorsl officersl shareholderl proxyl voting trustl pooling agreementl shareholder proposall direct suitl derivative suitManaging theCorporationCorporate ManagementA corporation is just a legal concept: an artificial “person” createdby the state and given many rights, powers, and duties. Managing a corporationis not simple. Unlike a sole proprietorship or a partnership, inwhich power is concentrated in the hands of a few individuals, power ina corporation is scattered among many individuals and institutions.Board of DirectorsCorporations are managed by a group of directors , who meet andvote as a board to set the policies. They are responsible for seeing thatthe corporation acts within its powers. The board might also suggestbusiness policy. For example, it may decide to buy a new business siteor build a new factory. It might vote to produce a new product or institutea new pension plan for employees. The board also oversees a widerange of employee-related policies.You don’t need special qualifications to be a director of a corporation,and usually the shareholders elect and also remove directors. However,a corporation’s certificate of incorporation or its bylaws mayspecify that one director must be a shareholder and one must be a stateresident.Generally, directors serve for a set number of years and must thensit for reelection by the shareholders. Often, corporate bylaws call forstaggered elections so that all of a corporation’s directors are not electedat the same time. Directors meet regularly, at a time and place of theirchoosing.Directors are not entitled to notice of regular meetings. However,they must be properly notified of any special meetings. If some of thedirectors hold a special meeting without notifying other directors, allactions taken at that meeting are invalid. The board of directors of a corporationis subject to the duty of due care and the duty of loyalty to thecorporation.OfficersCorporate officers are appointed by and can be removed by thecorporation’s directors. Officers include a president, vice-president(s),secretary, treasurer, assistant officers, and other agents. Officers’ jobsare to implement the policies of the directors by carrying out day-to-day626 Unit 6: Starting a Business

operations of the corporation. Officers areagents of the corporation, and principalagentrules apply.If the directors have decided to purchasea new business site, the corporation’s officerswould have authority to arrange thedeal. This might involve a number ofdetailed steps, such as hiring an appraiser,employing an attorney, ordering a titlesearch, and other tasks.Like directors, officers are subject to theduties of loyalty and due care. Each officer’sduties are generally spelled out in thecorporation’s by-laws. Managing a corporationcan become complex because keyfigures often play more than one role.Often, directors are also officers and shareholdersof the corporation.ShareholdersCorporations need money, called capital, which is obtained by sellingunits, or shares, of stock in the company. If you buy one or more shares,you become a shareholder (also called a stockholder), a member ofthe corporation.Shareholders are sometimes called owners or investors in the corporation.It would be a mistake to use one label without the other, however,because shareholders of a corporation are really both owners and investors.Shareholders are often individual people, but not always. A corporationcan also be a shareholder in another corporation. General andlimited partnerships can be shareholders in a corporation, and so canlabor union retirement funds or a state workers’ pension funds.CORPORATEMANAGEMENTMost corporations aremanaged by a board ofdirectors elected by theshareholders. What is therelationship between theboard of directors and theofficers of a corporation?Shareholder RightsOwners of stock in a corporation acquire certain rights. These rightsinclude the following:l The right to receive dividends as declared by the board of directorsl The right to receive and possess a stock certificatel The right to have ready access to the corporate recordsl The right to transfer all sharesl The right to maintain a proportionate share of stock in thecorporation (preemptive rights)l The right to exercise a vote for each share of stock ownedChapter 29: Operating a Corporation 627

Language ArtsAt one time, insidertrading was an acceptablebusiness practice. Peopleassumed that the boardof directors, officers, andtheir friends would profitfrom their exclusiveaccess to information.However, this practice isnow considered illegaland unethical.Research ActivityResearch the laws thatmake insider tradingillegal. Find out what ledto the creation of the lawand when it was firstimplemented. Write aone-page paper with thisinformation. Then preparean oral presentation abouthow insider trading candamage the stock marketand harm companies andshareholders.Right to Receive DividendsDividends are profits distributed to stockholders. They are usuallypayable when declared by the board of directors. Dividends must bedistributed proportionately among shareholders.Example 1. During its second year of operation, HoloscopeEnterprises, Inc. made a nice profit. The board of directorsdeclared a $38,000 dividend, to be divided among the 6,080shares of common stock. Shareholders received $6.25 for eachshare of common stock they owned.Directors do not have to declare a dividend when the corporationhas made a profit. Sometimes they may feel that it’s best to retain theprofit. When a dividend is declared, it becomes a liability of the corporation,and shareholders can enforce payment of it. The dividendbelongs to the shareholders of record, those listed as owning the stockon the date set down by the board. A dividend can be in the form ofshares or cash.Example 2. During Eurotech Corporation’s fifth year of operation,a new venture resulted in tremendous profits. The board ofdirectors declared a dividend to all shareholders of record onMarch 17. Everyone who owned shares on that date would participatein the dividend, even though they might sell their sharesbefore the dividend is actually distributed.Right to Receive a Stock CertificateA stock certificate is proof that you own a part of the corporation,so the right to receive this document is considered an essential shareholder’sright.628 Unit 6: Starting a BusinessRight to Examine Books and RecordsThe law requires a corporation to keep accurate records of its businessaffairs. These records should include a list of all shareholders, anaccurate accounting of all transactions, and the minutes of all meetingsheld by the directors and shareholders. Shareholders have a statutoryright to see these records. To gain access to them, a shareholder mustmake a written request stating the purpose of the examination. As longas the request is made for a reasonable purpose, a shareholder cannotbe denied access to records of a corporation.Right to Transfer Shares of StockAnother shareholder right is the ability to sell or transfer shares ofstock. If you sell stock, you are the transferor, and the recipient is the

Figure 29.1Voting PowerProxyShareholder ProposalPooling AgreementVoting TrustDefinitionShareholder Voting PowersOne shareholder votes in place of another; regulated by SEC.One shareholder adds proposal to annual shareholdersmeeting agenda; regulated by SEC.Shareholders agree to vote the same way; each retainsown stock.Right to vote shares turned over to a trustee; usually irrevocable;time limit of 10 to 21 years.SHAREHOLDERVOTING POWERSShareholders’ rights tovote depend onwhether the stock heldis nonvoting or votingstock. Which type ofstock is generallynonvoting?transferee. The transferee has the right to have the stock transfer recordedin the corporation’s books. The transferee then becomes the shareholderand is entitled to all of the rights enjoyed by other shareholders.Right to Maintain a Proportionate ShareShareholders usually have the right to purchase a proportionate shareof every new stock issue before the corporation offers it to the public.This right is called the shareholder’s preemptive right. However, thisright can be limited or denied by the corporation’s certificate of incorporation,by its bylaws or regulations, or by state law. The idea behindpreemptive rights is to prevent directors from taking control of the corporationby issuing more shares and buying them all themselves. Othershareholders can foil such attempts if they have the right to purchaseenough shares to maintain the voting balance. Preemptive rights arecommon in small corporations, where control is an important issue.EXERCISINGSHAREHOLDERVOTING POWERShareholders of corporatestock have voting powerbecause their sharesrepresent part ownershipin the company. How canshareholders exercisetheir voting power?Right to VoteBecause shareholders have voting powersas part owners, they can be involved in a corporation’smanagement (see Figure 29.1 fora listing of shareholders’ voting powers). Acorporation can grant full voting rights onlyto holders of common stock. Holders of preferredstock usually have no voting rights,although they are sometimes granted limitedvoting rights.The incorporation statutes of most statesand the Model Business Corporation Actprovide that a meeting of a corporation’sshareholders be held annually. Most statesallow the meeting to be held anywhere, andChapter 29: Operating a Corporation 629

many large corporations rent halls to encourage attendance. The purposeof the annual shareholders meeting is to elect the board of directorsand to conduct other necessary business. The president or chairmanof the board usually presides at shareholders meetings.A majority of the shareholders must be present or represented byproxy before business can be conducted at a shareholders meeting. Aproxy (see Figure 29.2) is the right to vote another shareholder’s stock.It is a power of attorney, authorizing another to vote.Proxy Voting Sometimes shareholders try to control the election ofthe board of directors by buying a majority of the shares. If the shareholdersdo not have enough money to buy the necessary shares, or ifthey cannot find enough shares for sale, they solicit the proxies of othershareholders.Voting Trusts Under the terms of a voting trust , shareholderstransfer their voting rights to a trustee. A voting trust attempts to controlthe corporation by concentrating voting power in the voting trustees.The voting trust generally cannot be changed for a specified time period.Most state limits run from 10 to 21 years. Voting trusts must be inFigure 29.2THE BACK-PACK CORPORATIONProxyThe undersigned hereby appoints GEORGE KINNARD and MARY ANNCONNERLY and each of them, proxies, and with power of substitution(i.e., power to name replacements), to attend the Annual Meeting ofshareholders of The Back-Pack Corporation, at the company’s main office inGreen Bay, Wisconsin, on April 15, 20--, commencing at 10 A.M. and anyadjournment thereof, and there to vote all the shares of the undersigned forelection of directors, and on any other business that may properly come beforethe meeting.Dated: March 20, 20 -- Roberta J. Hogan (L.S.)SignatureProxy # 125413Account # 0590363Roberta J. Hogan37 Winona LaneDes Moines, Iowa630 Unit 6: Starting a BusinessPROXIESA shareholder can appoint another shareholderto vote his or her shares of stock by signing aproxy. Under what circumstances might ashareholder grant a proxy to anothershareholder?

writing and must be filed with the corporation. They ensure that futuredisputes will not prevent the participating shareholders from controllingthe corporation.Pooling Agreements Instead of a voting trust, a group of shareholdersmay make a pooling agreement , or a contract to vote in a certainway on a particular issue. Pooling agreement are also called shareholderagreements or voting agreements. These agreements differ from proxiesand voting trusts because the participating shareholders retain controlof their own votes. Also, pooling agreements may be perpetual and maybe kept secret.Shareholder Proposals Shareholders have the right to participatein shareholder meetings, including a chance to speak and offer proposals.A shareholder proposal is a resolution or policy suggested by a shareholder.It may be an amendment to the corporation’s articles, a limit onthe corporation’s charitable contributions, a ceiling on the pay of thecorporation’s top executives, or some other suggestion.Right to SueShareholders have the right to sue the corporation to enforce theirrights and to sue others on behalf of the corporation to enforce rights ithas neglected.Shareholders may bring a direct suit if they believe that they havebeen deprived of rights that belong to them. Shareholders may also bringa class action lawsuit against a corporation on behalf of all shareholdersin their position.In a derivative suit , shareholders sue the corporation’s managementon behalf of the corporation. A derivative suit is based on an injuryto the corporation. The shareholders’ right to sue is derived from theinjury to the corporation. A shareholder may bring a derivative actionsuit against the chief executive officer on behalf of the corporation forthe benefit of the corporation.Example 3. Steve White is the president and chairman of theboard of the OTTO Corporation. To cover several outstandingpersonal debts, he diverts money from the company. Because hecontrols the board of directors, they are not inclined to do anything.However, Rachel Kent, a shareholder of OTTO stock,decides to bring a derivative suit against the president on behalfof the corporation for the benefit of the corporation.Derivative suits are more difficult to bring than direct suits becausecertain prerequisites must be met before a shareholder is eligible to filesuch suits. For example, the shareholder must have owned stock in the4-HJoining clubs or groupsis an easy way to meetpeople who share yourinterests. One club youmay not know aboutis 4-H. The purposeof 4-H, whose namestands for the wordsHead, Heart, Hands,and Health, is to helpyoung people discoverand develop theirpotential. 4-H achievesthis goal by encouragingyou to set yourown goals.The 4-HMember’s Creed endswith this pledge: “Ibelieve in my country,my state, my community,and in my responsibilityfor theirdevelopment. In allthese things I believe, Iam willing to dedicatemy efforts to theirfulfillment.” Is thisa pledge that youcould make? Why orwhy not?Get InvolvedFind out more informationabout a 4-H club inyour area. Research thelaws that governmentfinancedclubs andorganizations mustobey.Chapter 29: Operating a Corporation 631

October 24, 1929, called“Black Thursday,” wasthe day the New YorkStock Exchangerevealed a 30-percentdecline in the value ofthe Dow Jones IndustrialAverage. Shortly thereafter,the United Statesentered into The GreatDepression, and it took25 years for the Dow toreturn to its previoushigh.corporation when the alleged injury occurred. This requirement is knownas the rule of contemporaneous ownership. Without this rule, a personcould search out a corporation whose activities he or she disliked, buya few shares in that corporation, and then bring a derivative suit againstthe corporation’s management.Another prerequisite in bringing a derivative suit is that the shareholdermust have exhausted all means of resolving the dispute bycommunicating with the board of directors and other shareholders.In some states, a third prerequisite requires the shareholder to deposita sum of money as security to cover the corporation’s expenses in fightingthe lawsuit. This rule discourages individuals who might hunt for corporationsengaged in questionable activities, purchase several shares, andbring a derivative suit to win the damages awarded by the court, or alternatively,to force a large settlement from the corporation’s management.Example 4. Joe Rafferty owned shares in Synectech, Inc. He discoveredthat Karl Schmidt, Synectech’s chief executive officer,had the corporation purchase several large tracts of overvaluedreal estate that were owned by Schmidt’s brother. As a shareholder,Joe meets the prerequisite of contemporaneous ownership.However, before bringing a derivative suit, he must ask theboard and the shareholders to take action to rescind Schmidt’sdeal or to require him to pay back any unjust profit made at thecorporation’s expense. Then Joe may be required to post a bondto cover corporate expenses in the lawsuit. After meeting theseprerequisites, Joe will be allowed to bring suit.Reviewing What You Learned1. What is a corporate director?2. What is a corporate officer?3. What rights do shareholders possess?4. How can shareholders exercise their right tovote their shares?Critical Thinking ActivityShareholder Rights Why should shareholdersbe able to sue their own corporation?Legal Skills In ActionShareholder Proposals Your cousin, Julianne,has decided to initiate a shareholder proposal intime for the next meeting of YellowrockPharmaceuticals, Inc. Write a letter to Juliannein which you remind her of all the requirementsshe will need to meet before presenting herproposal.632 Unit 6: Starting a Business

ManagementResponsibilitiesThe Duties of Directors and OfficersA corporation’s directors and officers have a fiduciary relationshipwith the corporation. Recall that fiduciary means they are in a positionof trust in relation to the corporation and the shareholders.As agents of the corporation, the officers’ fiduciary duties are similarto those of agents. Directors are a different matter, however. Theirduties resemble those of agents and employees, but when they act asdirectors they are actually neither of the two. Directors must performtheir duties in good faith and in a manner they believe will be in thebest interests of the corporation. The duties are outlined in Figure 29.3.The Business Judgment RuleAccording to the Revised Model Business Corporation Act, a corporatemanager must execute all responsibilities, “in good faith, withthe care an ordinarily prudent person in a like position would exerciseand in a manner he reasonably believes to be in the best interests of thecorporation.”What does this requirement mean? The courts have tried to clarifythe concept of due care to encourage competent people to become andremain corporate directors and officers. They have often given a liberalinterpretation to the duty of due care, applying a formula known as thebusiness judgment rule . This rule presumes that a board or a directoracts with due care. The courts defer to managers’ business decisionsunless they find instances of fraud, a clear lack of good faith, an abuseof discretion, or an illegal act. In addition, there must be no conflict ofinterest in the decision. To prevent judges from becoming “Mondaymorning quarterbacks,” the rule focuses not on whether a particulardecision was the “right” decision but on how the decision was made.Directors and officers are allowed to make mistakes as long as theyact legally and in good faith and have not been negligent in performingtheir responsibilities. A few states add that directors and officers will beheld liable only if they are grossly negligent in carrying out their duties.Directors and officers are not obligated to ensure that the corporationmakes a profit. If the corporation suffers a loss from a transaction theboard authorized, the directors are not liable to the shareholders unlessthey violate the business judgment rule.l How to explain thebusiness judgment rulel How to explain thefairness rulel How to define thecorporate opportunitydoctrinel How to distinguishbetween a membermanagedLLC and amanager-managed LLCUnderstanding the dutiesof corporate managerswill help you judge howthey conduct theirbusinesses.l business judgment rulel fairness rulel insider tradingl corporate opportunitydoctrineChapter 29: Operating a Corporation 633

Figure 29.3Duties of Corporate ManagersRuleBusiness judgment ruleSituationManager does not profit fromdecision.ExplanationDecision stands if it is made: (1) ingood faith, (2) with due care withinthe law, and (3) in corporation’s bestinterest.Fairness ruleInsider trading ruleCorporate opportunity doctrineManager profits from decision.Manager possesses inside informationnot available to outsiders.Manager learns of a business opportunitythat might reasonably interestthe corporation.The decision must be fair to thecorporation because managers mustremain loyal to the corporation.Manager must either reveal theinformation or refrain from tradingon that information.Manager must offer the opportunityto the corporation before taking itfor personal gain.DUTIES OF CORPORATE MANAGERSDirectors and officers owe fiduciary duties tothe corporation. Are corporate managersrequired to show a profit every year to fulfillthose fiduciary duties?How can directors or officers be negligent in performing theirduties? One way is by not acting in a situation that demands action. Forexample, a director or officer who enters a deal with another corporationwithout doing research into the benefits and detriments of the transactioncould be negligent. A director or officer who fails to take stepsto remedy a major company problem also harms the corporation by nottaking action.Another way to be negligent is by making hasty management decisions.Negligent directors might spend only minutes reviewing reportsand records about a proposed transaction, when they should have spentseveral days. In contrast, if the directors do their best and act carefully,their decisions will stand. Shareholders cannot fault directors for thaterror. Shareholders can, however, vote against these directors in the nextcorporate election at the annual shareholders meeting.Some states have recently enacted antiliability statutes to limit theliability of directors. These statutes usually protect directors, rather thanofficers, because the directors are not involved in the day-to-day activityof the corporation. Still, some states have also extended the protectionto officers.The typical antiliability statute allows a corporation to add to itscharter or bylaws a provision that will protect directors from liability634 Unit 6: Starting a Business

ArgentinaWe can’t see or smell it, although we can sometimes feel and hear it. It can blastor ripple, and theorists say it would take only one percent of its force to generateenough electricity for the entire world. What is it? The wind!Looking to the future, Argentina has enacted a wind energy law that waspassed in 1998. Plans for building “wind parks” to power a number of the country’sprovinces are in the works. The new legislation also calls for connecting the nationalelectrical system to the wind energy systems already in operation. The wind-powerprogram not only offers economic benefits—jobs, investment opportunities, fairprices—but, for Argentina, it’s an environmental landmark as well. “This law is anessential step to put Argentina on the road toward the development of clean energysources; it will prove . . . that their implementation can be made possible by politicalwill,” says the campaign coordinator. Although a growing international trend today,harnessing the wind to make life easier is an idea that has been around for centuries.As far back as the seventh century, Persians used simple windmachines to grind grains. Here’s a snapshot of Argentina.Geographical area 1,068,302 sq. mi.Population 37,812,817CapitalBuenos AiresLegal systemMix of U.S. and WesternEuropean systemsLanguageSpanishReligion92% Roman CatholicLife expectancy 75 yearsCritical Thinking Question List some of the reasons why using wind as an energysource is a better idea than using fossil fuels. For more information on Argentina,visit ubpl.glencoe.com or your local library.for their decisions, provided there is no breach of loyalty, reckless ordeliberate misconduct, illegal activity, or personal benefit to the director.Other antiliability statutes automatically extend this protection todirectors, unless the shareholders amend the bylaws or the certificate ofincorporation to exclude the protection.Chapter 29: Operating a Corporation 635

Many antiliability statutes simply protect the directors from havingto pay damages. The result is that shareholders can still bring a suit toforce a reversal of the decision, but cannot collect compensation.Duty of Loyalty and the Fairness RuleManagers have a duty of loyalty to their corporation. Directors andofficers must not exploit their positions for personal gain at the expenseof the corporation. Their main motivation should be to act with the bestinterest of the corporation, and they should not engage in any activitythat would deliberately damage the corporation. A director’s or anofficer’s duty of loyalty may be questioned if he or she has a personalinterest in a particular business decision.Disclosure and Approval Requirements Note, however, that justbecause a director or an officer has an interest in the transaction, thecourts should not automatically invalidate the decision. The transactionmay stand despite the personal profit if one of three conditions is met.The first two conditions require the director or the officer to discloseinvolvement in the decision, including all the terms and how much profithe or she has made. If, after disclosure, the director or officer obtainsThe Benefits of Nonprofit StatusThere are many financial benefits to being a nonprofit corporation. Forexample, nonprofit corporations are tax exempt, meaning they do not have topay certain taxes, such as income and property taxes. Tax exempt status alsoenables a nonprofit corporation to apply for public and private grants. Anonprofit corporation can solicit tax deductible contributions. This benefitallows donors to deduct their gifts from state and federal income tax returns.Incorporating as a nonprofit organization also provides protection frompersonal liability. Like for-profit corporations, nonprofits can be sued, but thedirectors are protected from personal liability. This protection is especiallyuseful when the nonprofit organization advocates an unpopular position. Otherbenefits of nonprofit status include reduced postal rates for mass mailings.Research Activity Visit the library or the IRS Web site at www.irs.gov. How arenonprofit corporations taxed on “unrelated” activities?636 Unit 6: Starting a Business

the approval of a majority of the directors or the approval of the shareholders,then the decision will stand.Fairness Rule The third condition that could allow a director’s decisionto stand despite a personal interest in the transaction is the basic fairnessof the decision to the corporation. If the director or officer has not met oneof the disclosure and approval requirements, then he or she has the burdenof proving that the decision is fair to the corporation. This requirementis called the fairness rule , but proving it can be a problem.The director or officer can try to show that the decision in questionwould have had the same conditions, prices, or terms if it had been madebetween two disinterested parties. (This is called dealing at arm’s length.)Beyond that, it is difficult to generalize about fairness, and most determinationsof fairness are made on a case-by-case basis. Nevertheless,two corollaries of the fairness rule have evolved.Insider Trading RuleAn insider typically is a corporate director or officer who has informationabout a publicly traded corporation that is not available to thepublic. He or she may not buy or sell shares in the corporation if the transactionis based on “inside” information. Any such transaction is referredto as insider trading and is unfair to the corporation and outsiders.Some examples of insider trading include buying or selling stocksjust before some major development occurs that will affect their price,or passing valuable information to an outsider who trades in the corporation’sstock and subsequently repays the insider. Under the insidertrading rules, directors or officers who possess inside information musteither refrain from acting on it or reveal it publicly before acting on it.Example 5. Ervin Edwards, CEO of Treen Corporation, foundout that Hiroshike Communications, Inc. planned to buy all ofTreen’s outstanding shares at a price far above the current marketvalue. Without revealing this inside information to the public,Edwards bought as much Treen stock as he could and resold it toHiroshike at an enormous profit. In doing so, Edwards violatedthe rule that forbids insider trading.RevealingRelationshipsMichael Appleby is oneof seven directors onthe board of OmegaCorporation. When theposition for chief financialofficer becameavailable, Michaellobbied for JoshuaStevens. Because ofMichael’s standing withother board members,Joshua was offered thejob. A year later, duringa conflict between theboard and Joshua, thedirectors discoveredthat Joshua and Michaelwere cousins. While norules were actuallybroken, the otherdirectors were angrythat this informationhad not been madeknown. Were Michaeland Joshua actingunethically? Why orwhy not?Corporate Opportunity DoctrineAnother extension of the duty of loyalty is the corporateopportunity doctrine . According to this doctrine, directors and officerscannot take a business opportunity for themselves if they have sureknowledge that the corporation would want to take that opportunity foritself. The directors must first present the opportunity to the corporation.If the corporation turns it down, then the directors or officers can takethe opportunity for themselves.Chapter 29: Operating a Corporation 637

Shareholder SuitsA shareholder suit was filed in U.S. District Court in New Jersey againstLucent Technology. The suit claimed that certain corporate executives issuedmisleading statements to the market about earnings. These statements servedto artificially boost the price of Lucent’s stock. Lucent announced at one pointthat its earnings would be good. A few weeks later it announced just theopposite. Statements about a company’s performance that might affect stockprice must be accurate. Shareholders have a right to protect the value oftheir shares of stock from misleading company statements. (Source: CRN,November 30, 2000)Connect Visit the Web site of a publicly traded company and search for itsmost recent earnings report. Next, search the Web to see if the company metearnings estimates, and if not, if the company may have previously made anerror in estimating its earnings.Example 6. Edward Costello, president of Doublestone Corporation,learned that Riversarian, Inc. was selling several lots ofprime real estate at reduced prices. The president knew that Doublestonehad been trying to buy the land to expand operationsfor several months, but he could not buy the land for himselfwithout first telling the other officers and the directors of theopportunity.The only exception to this rule is if the director or officer knowsthat the corporation is financially incapable of taking the opportunity,despite its interest. In such a situation, the director or the officer wouldbe permitted to take the opportunity without violating the doctrine.Managing a LimitedLiability CompanyIn a limited liability company, the owners can either manage thefirm on their own, or they can choose to enlist the services of outsideadministrators.Member-Managed LLCsAs the name suggests, the owners themselves run member-managedLLCs. Management authority is apportioned based upon the money638 Unit 6: Starting a Business

contributed by each member. The higher the capital contribution, themore authority that falls to a member manager. The member managersare actually acting as agents of the LLC. In this sense, they functionvery much like the partners of a general partnership. The LLC is thereforebound by any action performed by a member manager that fallswithin the apparent authority of the member. Nevertheless, some actionsare outside the apparent authority of each member. Such actions wouldinclude submitting a claim of the LLC to arbitration and disposing ofthe firm’s goodwill. Of course, recall that an LLC’s operating agreementcan change any of these arrangements.Manager-Managed LLCsOutside managers, hired by the members of the LLC, run managermanagedLLCs. In this scenario, the LLC is run much like a corporation.If one manager runs the LLC, he or she acts like the CEO of acorporation. If the members hire a group of managers, they would actlike a board of directors. The business judgment rule and the fairnessrule apply to the decisions of such managers.Fiduciary DutiesRegardless of whether an LLC is run by the members themselves orby managers, a fiduciary duty still exists between those who run an LLCand the LLC itself. The same duty also exists between those who directthe LLC and the owners. However, it is a good idea to spell out theextent and nature of management duties in the operating agreement.Reviewing What You Learned1. What is the business judgment rule?2. What is the fairness rule?3. What is the corporate opportunity doctrine?4. What is the difference between a membermanagedLLC and a manager-managedLLC?Critical Thinking ActivityAntiliability Statutes Why have some statespassed antiliability statutes to protect directors?Legal Skills in ActionThe Fairness Rule You have decided to bring alawsuit against the directors of a corporation inwhich you own stock, alleging that the officersgave themselves an overly large salary increase.Write a speech in which you explain how toapply the fairness rule to judge the conduct ofcorporate directors and officers.Chapter 29: Operating a Corporation 639

CHAPTERASSESSMENTSection 29.1 Managing the Corporation● Corporate directors manage a corporation. Theyare responsible for broad policy decisions madeby a corporation, and are subject to corporatebylaws and state laws regulating their behavior.You don’t need special qualifications to be adirector of a corporation, and usually the shareholderselect and remove directors. However, acorporation’s certificate of incorporation or itsbylaws may specify that one director must be ashareholder and one must be a state resident.Directors generally serve for a set number ofyears and then must sit for reelection by theshareholders. Often, corporate bylaws call forstaggered elections so that all of a corporation’sdirectors are not elected at the same time.Directors meet regularly, at a time and placeof their choosing.● Corporate officers carry out the day-to-dayoperations of the corporation. Officers are agentsof the corporation and principal-agent rulesapply. Like directors, officers are subject to theduties of loyalty and due care. Each officer’sduties are generally spelled out in the corporation’sbylaws.● Shareholders are owners of stock in a corporation.They have the right to: (1) receive dividendsas declared by the board of directors; (2) receiveand possess a stock certificate; (3) have readyaccess to corporate records; (4) maintain a proportionateshare of stock in the corporation; and(5) exercise a vote for each share of stock owned.● To vote, a shareholder can attend the annualshareholders meeting in which the board ofdirectors and officers present corporate businessto be voted upon. Most states allow this meetingto be held anywhere, and many corporations renthalls to encourage attendance. The president orchairman of the board usually presides at shareholdersmeetings. A majority of the shareholdersmust be represented either in person or by proxybefore business can be conducted. Shareholderscan vote independently or under the terms of avoting trust or pooling agreement.Section 29.2 Management Responsibilities● The courts have tried to clarify the concept ofdue care to encourage competent people tobecome and remain corporate directors andofficers. They have often given a liberal interpretationto the duty of due care, applying thebusiness judgment rule. Corporate directors arepresumed to be acting with due care, and thecourts will defer to their judgment and decisionsunless the directors lack good faith, commitillegal acts, or have conflicts of interest.● A director’s decision will stand, despite a conflictof interest in the transaction between the corporationand another party, if the director can provethat the decision would have involved the sameconditions, price, or terms if it had been made atarm’s length.● An extension of the director’s duty of loyalty tothe corporation prohibits a director from taking abusiness opportunity for himself or herself if heor she has knowledge that the corporation wouldwant to take that opportunity for itself. If thecorporation turns down the opportunity, thedirector is then free to take it without conflict.The only exception to this rule is if the directoror officer knows that the corporation is financiallyincapable of taking the opportunity, despiteits interest. In such a situation, the director orofficer would be permitted to take the opportunitywithout violating the doctrine.● In a limited liability company, the owners caneither manage the firm on their own, or they canchoose to enlist the services of outside administrators.A member-managed LLC is one that isrun by the owners themselves; a managermanagedLLC is one that is directed by anoutside manager.640 Unit 6: Starting a Business

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.shareholderdirectorsofficersproxyvoting trustpooling agreementshareholder proposaldirect suitderivative suitbusiness judgment rulefairness ruleinsider tradingcorporate opportunitydoctrine1. Form groups of four, and plan a mock shareholders meeting.2. Role-play an election of the board of directors.3. Vote on an issue.4. Plan for a future event of your choosing.5. Finally, write down a brief description of the shareholdersmeeting. With what did you have the most difficulty? What didyou enjoy most?Visit the UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 29:Operating a Corporation—Self-Check Quizzes toprepare for the chapterexam.Answer the following questions. Refer to the chapter for additional reinforcement.6. Who elects the board of directors?7. Are all shareholders individuals? Explain your answer.8. Describe the two types of suits a shareholder might bring against a corporation.9. Identify the people with legal responsibility for the acts (civil and criminal) of thebusiness organization. What are the duties of directors and officers?10. What is the insider trading rule? Give two examples.11. Under what circumstances might a corporation decide not to issue a dividend?12. What is a voting trust?13. Why are the elections of corporate officers often staggered by corporate bylaws?14. Describe the exception to the corporate opportunity doctrine.Chapter 29: Operating a Corporation 641

CHAPTERASSESSMENTAcquiring and Evaluating InformationSchool districts are often structured like corporations.For example, they have boards ofdirectors (school boards) and officers. Thecitizens and parents are similar to the shareholders.Complete the following tasks:15. Research the structure of the school districtyou attend.16. Create a poster showing how it operates.17. Write a one-page paper comparing yourschool district’s operation to that of acorporation.Business JudgmentYvette Ortiz serves as a director of GordinoCorporation, a maker of skin care products.After a short lunch meeting, Yvette made thedecision to buy $1 million dollars worth oflotion from a friend whose company was goingout of business. Unfortunately, the lotion’smain ingredient was determined to be toxic,and Gordino Corporation had to dispose of theentire lot. The shareholders were upset andwanted to file a lawsuit against Yvette.Debate18. Will the business judgment ruleprotect Yvette?19. Why or why not?For the following cases, give your decision andstate a legal principle that applies.20. Josephine Sackman owns 50 shares ofstock in Sinclair Industries, Inc. Sinclairdeclares a dividend on August 18. Josephinesells her shares to Chuck McManis onAugust 19. When the dividend is paid onAugust 25, Chuck claims it belongs to him.Is he correct? Explain you answer.21. Marcia Quonset purchases 200 shares ofcommon stock in Enright International,Inc. She becomes upset when she learnsthat Enright intends to close several plants.What options are available to her, besidesexercising her voting power or bringing asuit against the managers?22. Margie Fairfield, Louis Delaney, and LorettaJacubekz are minority shareholders inShelby Aluminum Corp. To consolidatetheir voting power, they decide to form avoting trust that would last for 25 years.They do not put the deal in writing or tellanyone at corporate headquarters. Havethese shareholders formed a valid, bindingvoting trust? Explain your answer.23. Oberlander Film Processing, Inc. recoverssilver from used photographic negatives.Patricia Robinson, CEO of Oberlander,owns a photography studio that sells usednegatives to Oberlander. Justine Shepherd,a shareholder in Oberlander, discovers thatthe CEO is overcharging the corporationfor the used negatives. After voicing herconcerns, Justine sues to compel Robinsonto return her excessive profits to thecorporation. What type of suit does shebring? What rule will be used to judgeRobinson’s conduct? Why?24. The directors of Bibliotech, Inc. decided toraise funds to save their failing corporationby creating a subsidiary and selling shares.Unknown to investors, all the subsidiary’smoney would go directly into Bibliotech.When the subsidiary fails, will the investorshave a cause of action against Bibliotech?Explain your answer.642 Unit 6: Starting a Business

In each case that follows, you be the judge.25. Internal RemediesSeveral shareholder derivative suits were brought by shareholders against the directors andofficers of Public Service Company of New Hampshire to halt construction of a nuclear powerplant. Robert Markewich wrote several letters of complaint to the board. Denied a personalappearance, Markewich sent the board another letter indicating his intent to sue. The board toldMarkewich that they would discuss the matter at an upcoming meeting. Markewich did not waitfor the results of that meeting, but filed suit. Did Markewich’s letters constitute sufficient demandon the directors so that he had exhausted internal remedies? Why or why not?Seidel v. Public Service Company of New Hampshire, 616 F. Supp. 1342 (NH).26. Duty of LoyaltyNorman Reisig, a shareholder in Normat Industries, Inc., became suspicious when companypresident Matthew Carter indicated continuing construction delays on a major condominiumproject. He discovered that the company owed more than $25,000 in construction fees, despitea recent loan of $200,000. Further investigation revealed that Carter had used the $200,000to pay personal expenses. Reisig brought suit, claiming that Carter had breached his duty ofloyalty to the company. Is Reisig correct? Why or why not?Normat Industries, Inc. v. Carter, 477 So.2d 783 (LA).Who’s Who?Boards of directors of major corporations areusually business and education executives withmany years of experience. They often represent avariety of businesses such as banking, publishing,legal, retail, and manufacturing.ConnectUsing a variety of search engines, complete thefollowing tasks:27. Research a major corporation.28. Find out the names, titles, and occupations ofthe board of directors.29. Prepare a chart, spreadsheet, or other visualexplaining your findings.30. Predict What do you think might happen ifthe board of directors began to dictate theday-to-day operations of the business?31. Connect Do you own any stock? If not,do you think you will one day? Why orwhy not?32. Question Why do you think the courtsgive a liberal interpretation to the duty ofdue care?33. Respond Do you think there is atemptation for directors to take a lucrativebusiness opportunity for themselves?Explain your answer.Chapter 29: Operating a Corporation 643

CHAPTERCorporate Regulationand ExpansionUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 30: Corporate Regulation andExpansion—Chapter Overviews to previewthe chapter information.

The Opening SceneJakob and Aaron Kowalski and Cecilia Bronislawa aremeeting in the boardroom of JAC Industries, Inc., discussinga possible merger with Collins Industries, Inc.The Big MergerAARON: Thanks for your cooperation, Cecilia andJakob. I’m glad that we could meet on such shortnotice. We have some really important mattersto discuss.CECILIA: No problem. Of course I would make timefor this meeting. We’re facing the biggest decisionof our corporate lives, and we don’t have a cluewhat to do. I’m hoping this meeting will help usdecide on the right course of action.JAKOB: We’ll figure something out. We always do.Plus, we can’t feel too bad about ourselves. We’relearning as we go along, and I don’t think we’redoing a bad job.CECILIA: Thanks for the pep talk. I guess we betterstart discussing the matter at hand. What do youthink we should do, Aaron?AARON: What we need is a valuable asset to improveour bargaining position.CECILIA: Look, we took the chance when you wantedto go public and sell stock, and it turned out great!Now we have to be prepared to take anotherchance. You can’t expect to get anywhere in businessif you’re not prepared to take a few risks!JAKOB: That’s what you said about last month’sshareholder proposal.CECILIA: Well, was I wrong? I seem to remember thatwe survived that, didn’t we?AARON: Barely.CECILIA: Yes, but we survived. Remember, let’s focuson the positive!AARON: Let’s figure out one very important point first.What exactly does Collins want to buy?CECILIA: What do you mean?AARON: Do they want the assets of the company, itsstock, or the entire company?JAKOB: Wait a minute! Did either of you consider theidea that Collins may just be trying to eliminatecompetition? Sometimes companies buy outsmaller companies in their industry just to get ridof competition.CECILIA: I suppose it’s possible, but that doesn’tmatter to us. Let’s focus on how much money wecould make.JAKOB: Let’s consider the legality of this wholesituation. Do you think this merger would violateantitrust law? It’s better to be safe than sorry.Maybe we should call the SEC.AARON: I think you mean the FTC.JAKOB: Whatever.CECILIA: One thing’s for sure—we need to considerall options carefully.JAKOB: We’re not completely vulnerable. Won’t thebusiness judgment rule protect us?CECILIA: Maybe, but we still have to be fair toeveryone involved.JAKOB: Well, whatever happens, our lives willcertainly be changed forever.CECILIA: And hopefully we’ll get rich!1. What is the source of the federal government’spower to regulate business?2. What two statutes regulate the sale of securities?3. What statutes regulate antitrust activities?4. What are the differences among a merger, anasset acquisition, and a stock acquisition?Chapter 30: Corporate Regulation and Expansion 645

l How to identify thesource of the federalgovernment’s powerto regulate businessl How to identify thetwo statutes thatregulate the sale ofsecuritiesl How to identify thestatutes that regulateantitrust activitiesl How to identify thestatutes that regulateenergy and theenvironmentGovernmentRegulation ofa CorporationRegulating Corporate GrowthThe law generally views the growth and expansion of corporationsas a good thing, as long as it does not restrain competition. Not everybodyagrees, however. Some people feel that expanding a corporationdoes not necessarily increase productivity and may actually reduce competition.On the other hand, some claim that expansion allows foreconomies of scale, and may save a fading company that might notsurvive otherwise. Adding to the debate are the problems that arise whenexpansion takes place. Setting things right often falls on the shouldersof the government. The federal government has passed a series of actsto regulate corporate expansion. These acts seek to protect the interestsof both corporations and shareholders.Understanding how thegovernment regulatescorporate activities willhelp you protect yourrights as a corporateshareholder, especiallyif a corporation getsinvolved in antitrustactivities.l commerce clausel securityl Securities andExchange Commission(SEC)l registration statementl prospectusTHE SECURITIES AND EXCHANGE COMMISSIONThe Securities and Exchange Commission was created bythe Securities Exchange Act of 1934. What is the primaryrole of the Securities and Exchange Commission?646 Unit 6: Starting a Business

POTENTIAL INVESTORSPotential investors review avariety of publications anduse an assortment of othersources to learn aboutinvestment opportunities.Which type of source isgenerally the mosteffective for acquiringinvestment information?Business and the ConstitutionThe federal government derives its power to regulate businessfrom the commerce clause of the United States Constitution. Thecommerce clause says Congress has the power to regulate commerce“among the several states,” meaning the federal government has thepower to regulate interstate commerce. During the last century, the U.S.Supreme Court gradually enlarged the scope of the government’s powerto regulate business. Now the federal government can regulate any businessactivity that affects interstate commerce, even one that occurs completelywithin the boundaries of a single state.Securities RegulationAfter the stock market crash of 1929, experts identified the sale andpurchase of worthless securities as a major cause of the collapse. Tocombat this problem, Congress passed the Securities Act of 1933 andthe Securities Exchange Act of 1934. These acts were intended to protectChapter 30: Corporate Regulation and Expansion 647

Business BluesMany small corporations are equally owned by two people. In such cases,it can be troublesome when one owner wants to sell the corporation and theother does not. The owner who wants to sell can’t simply choose to dissolve thecorporation. However, he or she can go to court to force a dissolution. This actis called an involuntary dissolution. Involuntary dissolutions are sometimespermitted when shareholders are hopelessly deadlocked.To avoid deadlock, shareholders of small corporations should sign a buysellagreement at the time of the corporation’s formation. Such an agreementwould help avoid costly lawsuits.Conduct Research Visit the library or use the Internet to research corporate lawresources. In addition to deadlock, what other grounds for involuntarydissolution will courts consider?648 Unit 6: Starting a Businessinvestors by ensuring that purchasers can learn the true nature of securitiesthey buy and by providing a way to discover fraud and unfair practices.The Securities Act defines a security as a money investment thatseeks to make a profit solely because of another’s efforts. Many thingsare included within this definition, such as corporate stocks, interestsin savings and loans, interests in racehorses or sports teams, and evensales of coins.The Securities Exchange Act created the Securities and ExchangeCommission (SEC) in 1934 to administer federal securities law. TheSEC is an independent agency consisting of five commissionersappointed by the president. The SEC employs lawyers, accountants,securities analysts, and others. It regulates sales of securities and thebrokers, dealers, and bankers who sell securities. A crucial function ofthe agency is making sure that potential investors are informed about thenature of their investments. One way to accomplish this aim is throughthe registration requirement. Any company that falls under the jurisdictionof the SEC must file a registration statement and a prospectuswith the agency before it offers securities for sale.The registration statement is a general description of the securitiesand of the company making the offer. The prospectus containsa detailed view of the stock offering for potential investors. The

corporation cannot offer stock for sale until the SEC has approved theregistration statement. Violating this requirement by failing to file orby filing false information is punishable by fine and imprisonment. Inaddition, the SEC and the injured investors can bring suit. The SEC canseek an injunction to stop an offering already in progress and also hascertain administrative remedies available. The registration processapplies to a new stock issue, meaning the first time new stock is offeredfor sale. The SEC also functions as a watchdog over trading on the stockexchanges and regulates other corporate activities.Antitrust LawsDuring the 1800s, many large corporations in the United Statesattempted to form monopolies. One technique for seizing control of anindustry was to form a trust, in which the voting power of the stock ofvarious companies would be transferred to a single trustee. Eventually,the term “trust” came to describe all monopolies, even though many werenot really trusts in the most accurate sense of the word. Figure 30.1 summarizesantitrust regulation enacted by Congress.Sherman Antitrust ActCongress passed the Sherman Antitrust Act in 1890 to try to stop theformation of monopolies. It worked for a short time. Then a case decidedFigure 30.1Securities regulation:Securities Act of 1933Securities ExchangeAct of 1934Williams Act of 1968Antitrust regulation:Sherman AntitrustAct of 1914Clayton AntitrustAct of 1914Federal Trade CommissionAct of 1914Robinson-PatmanAct of 1936Securities and Antitrust LegislationRegulates the issuance of new securities.Established the Securities and Exchange Commission; dealswith subsequent trading in securities.Requires stricter reporting and procedural requirements.Prohibits contracts and combinations in restraint of trade; alsoprohibits monopolies, attempts to monopolize, andconspiracies to monopolize.Prohibits specific practices such as tying agreements andinterlocking directorates.Established the Federal Trade Commission; promotes free andfair competition, and prohibits unfair and misleading practices.Deals with product pricing; advertising and promotionalallowances.SECURITIES ANDANTITRUSTLEGISLATIONThe federal governmentregulates manyaspects of Americanbusiness. Where doesthe federal governmentget its power toregulate business?Chapter 30: Corporate Regulation and Expansion 649

y the U.S. Supreme Court held that contracts or combinations wouldbe illegal only if they formed an “unreasonable restraint of trade.” Thisstep displeased Congress, which took steps to counteract the negativeeffect.Clayton ActCongress passed the Clayton Act in 1914. In contrast to the ShermanAct, the Clayton Act made specific practices illegal. For example,a business could not sell goods to one company for less than the priceit charged another company if the effect of the price difference was toreduce competition. It also became illegal to sell goods on the conditionthat a buyer would not buy products from the seller’s competition.Federal Trade Commission ActCongress also passed the Federal Trade Commission Act in 1914.This measure was designed to protect businesses from the wrongful actsof other business firms. It stated, “Unfair methods of competition incommerce are hereby declared unlawful.”The Federal Trade Commission Act, however, does not define anunfair method of competition. Instead, it allows the courts to determinethese methods on a case-by-case basis. The act also created the FederalTrade Commission (FTC) and charged it with preventing businessesfrom violating the Federal Trade Commission Act.Robinson-Patman ActThe Robinson-Patman Act is an amendment to the Clayton Act. Itsays companies cannot sell goods at lower prices to high-volume purchaserswithout offering the same discount to smaller purchasers if thispractice lessens or eliminates competition or creates a monopoly. TheRobinson-Patman Act is not limited to discrimination on pricing. Ingeneral, it requires sellers to treat all buyers equally. Any fraud, such aspreferential delivery schedules that help one seller but hurt others, hasbeen outlawed.Later AmendmentsThe Federal Trade Commission Act was amended in 1938 and 1975.The latest amendment provides protection to consumers as well as businesspeople. The act now says, “Unfair methods of competition in oraffecting commerce, unfair or deceptive acts or practices in or affectingcommerce are hereby declared unlawful.” The FTC also now has thepower to make rules and regulations that define specific activities thatare considered unfair and deceptive.650 Unit 6: Starting a Business

Sarbanes-Oxley Act of 2002In 2001, the Enron Corporation, one of the world’s largest traders ingas, electricity, and related commodities, collapsed in scandal anddeclared bankruptcy. Enron was accused of many crimes, includingdeceiving investors, inflating profits, and hiding debts. Arthur Anderson,the company’s accounting firm, was later convicted of obstructingjustice by shredding documents related to its work on Enron’s accounting.Finally, WorldCom, then the world’s second largest long-distanceprovider, suffered the largest bankruptcy in American history after itwas revealed that it had improperly booked over $7 billion in earnings.As a result of these high-profile scandals and to shore up faith inthe American economy, President Bush signed the Sarbanes-Oxley Actof 2002. The act contains important rules affecting the reporting andcorporate governance of public companies and their directors andofficers. Major provisions include requiring CEOs and CFOs to certifyperiodic reports filed with the SEC. It also prohibits most loans todirectors and executive officers, and forces company insiders to reportchanges in beneficial ownership within two days after a transaction hasbeen executed.Other Forms of RegulationThe government regulates corporate activities in ways other thanthrough securities and antitrust regulation. These regulations includesuch things as the impact that corporate activities have on energy conservationand environmental protection.Energy RegulationThe energy crisis of the 1970s drew the attention of the nation towardenergy conservation. The federal government addressed the problem bycreating the Department of Energy and the Federal Energy RegulatoryCommission. The Nuclear Regulatory Commission regulates nuclearenergy.Social StudiesCorporations in theUnited States evolved asthe nation grew. Federalcharters for corporationswere granted to both ofthe banks of the UnitedStates and to certainrailroads after the CivilWar. Laws were enactedas problems arose, andcommissions werecreated to administerthe laws. In general, thehistory of corporationsin the United States hasbeen marked by variousfederal regulations.Research ActivityUsing the medium of yourchoice, create a pictorialrepresentation of corporateregulation in theUnited States. Include thelaws, commissions, andgovernmental regulationsaffecting corporations.Federal Energy Regulatory Commission The Federal EnergyRegulatory Commission (FERC) controls the wholesale price of naturalgas and electricity sold for use in interstate commerce. However,utility companies can apply to FERC if they believe an increase in pricesis warranted. Intrastate prices are regulated by state utility agencies. TheFERC also makes rules regulating interstate transportation of electricityand natural gas.Nuclear Regulatory Commission The Energy Reorganization Actcreated the Nuclear Regulatory Commission (NRC). The commissionChapter 30: Corporate Regulation and Expansion 651

THE ENVIRONMENTALPROTECTION AGENCYThe Environmental ProtectionAgency exercises significantregulatory power over U.S.businesses. What programsare covered by the EPA?regulates the licensing, constructing, and opening of nuclear reactors.The NRC also handles the possession, use, transportation, and disposalof nuclear material. The rules and regulations that govern licensednuclear activities are made and carried out by the commission.Environmental Protection RegulationIn the structure of the federal government, the responsibility forenvironmental protection falls on the shoulders of the EnvironmentalProtection Agency (EPA). The EPA is an independent regulatory agencythat is a part of the executive branch. One of its major jobs is to implementthe Environmental Policy Act. However, the EPA is also responsiblePOLLUTION CONTROLThe National EnvironmentalPolicy Act sets up a nationalprogram to fight pollutionand clean up the environment.What are some ofthe requirements for environmentalprotectionestablished by the act?652 Unit 6: Starting a Business

for implementation of other environmental laws that deal with air, water,solid waste, toxic substances, and noise pollution. The EPA also carriesout executive orders related to the environment.National Environmental Policy Act Congress passed the NationalEnvironmental Policy Act in 1969 to establish a national program tofight pollution and clean up the environment. Under terms of the act, adetailed statement explaining the environmental consequences mustprecede any major federal governmental action that affects the qualityof the environment. The statement must also include any alternativesthat might be taken instead of the proposed action. The objective is toprevent or eliminate damage to the environment and protect the healthand welfare of the public.Environmental Protection Agency In 1970, the EPA received theauthority to administer all major federal antipollution programs dealingwith air, solid waste, toxic substances, and pesticides. Under thisauthority, the EPA can do research, create and administer pollution controlguidelines, and monitor programs to make sure that pollution abatementstandards are met. The agency can also administer grants to helpeliminate pollution under state-run programs. The EPA has the authorityto act against entities that pollute the environment, even when a givenact of pollution is unintentional.Reviewing What You Learned1. What is the source of the federalgovernment’s power to regulate business?2. What are the two statutes that regulate thesale of securities?3. What are the statutes that regulate antitrustactivities?4. What are the statutes that regulate energyand the environment?Critical Thinking ActivityContract Disputes The legal system impactsbusiness by regulating its formation, operation,and expansion. Using the Internet, library, orother resource, evaluate the facts of a contractdispute involving a business and governmentregulations of energy and the environment.What are the facts of the case, how did thecourt rule, and why?Legal Skills in ActionResponsibilities of the SEC Your grandfatheris thinking about investing part of his savings ina new corporation that is about to place itsstock for sale on the stock exchange. Write himan e-mail message in which you explain theresponsibilities of the Securities and ExchangeCommission. Make certain to mention thepurpose and nature of a registration statement,as well as the purposes of a prospectus.Chapter 30: Corporate Regulation and Expansion 653

l How to distinguishamong a merger, anasset acquisition, anda stock acquisitionl How to describe atender offerl How to define a suitorand a targetl How to distinguishbetween the voluntaryand involuntarydissolution of acorporationl How to identify thecircumstances underwhich a limitedliability company candissolveUnderstanding the natureof corporate expansionand dissolution will helpyou determine your rightsas a shareholder.l mergerl asset acquisitionl stock acquisitionl tender offerl suitorl targetCorporate Expansionand DissolutionIncreasing Shareholder ValueInvestors buy shares in a corporation because they hope to makemoney through what is known as a return on their investment. Thedirectors and officers of a corporation try to make the business earn aprofit that can be returned as dividends to the shareholders, or to increasethe value of the shares of the corporation so that those shares can besold at a profit. One way to increase the value of a corporation’s sharesis to expand the business.Types of Corporate ExpansionWays for a corporation to expand include buying new land, buildingnew manufacturing plants, opening new sales outlets, expanding productlines, and entering new fields of business. Growth and expansion canoccur by joining with another corporation through a merger, an assetacquisition, or a stock acquisition (see Figure 30.2).Merger and ConsolidationMerger and consolidation are common methods of business expansion.In a merger , one corporation continues its existence andabsorbs another corporation, which gives up its corporate identity.By contrast, in a consolidation two or more companies join to forma new corporation. The new company is a composite of the old companies.As far as results are concerned, there is no significant differencebetween a merger and a consolidation, and the terms are oftenused interchangeably. Most of the time, the term merger is now usedto describe both scenarios.The boards of directors and shareholders of the corporations beingjoined together must approve the merger or consolidation. Generally,a two-thirds majority of the shareholders is required, although somestate statutes require a super majority as high as four-fifths. Shareholderswho dissent from a merger or a consolidation are entitled tobe paid for their stock if they want to pull out of the new corporation.Often, dissenters have to give written notice of their dissent beforea vote is taken. The cost of paying these dissenters must beconsidered a cost of the merger. The assets, stock, and debts of the oldcorporation flow to the new or surviving corporation. Likewise,654 Unit 6: Starting a Business

Figure 30.2Corporate Expansion TechniquesCategory Description Example LiabilitiesMerger andConsolidationIn merger, one company mergeswith another; in consolidation,two companies merge and a newcompany results.Approval by boards andshareholders of bothcorporations.Debts and product liabilityflow to the new orsurviving company.Asset AcquisitionOne corporation buys all theproperty of another corporation.Approval by board andshareholders of acquiredcompany.Debt usually does notflow to the buyer;product liability may flowto the buyer.Stock AcquisitionOne corporation (the suitor) makesa tender offer to the shareholdersof another company (the target); ifenough of the target shareholdersaccept and sell, the suitor takescontrol of the target.Approval of enoughshareholders to give thesuitor control.Debt and product liabilityflow to the suitor.CORPORATE EXPANSIONTECHNIQUESBusinesses are organized in the hope ofexpanding and making money. If youwere a shareholder, which expansiontechnique would you prefer?shareholders of the disappearing corporation become shareholdersof the new corporation. Liabilities may also flow to the new corporation,including potential lawsuits, such as those for product defectsor for dumping toxic waste.Asset AcquisitionAs the name suggests, in an asset acquisition one corporationagrees to purchase the assets or property of a second corporation. Forinstance, a corporation might sell its building and all of its equipment.The shareholders and the board of directors of the corporation sellingthe assets must approve this transaction. One advantage to asset acquisitionis that, in general, the debts and the liabilities of the selling corporationdo not transfer to the buying corporation. The reason is thatthe only thing actually transferred is ownership of the property. If a corporationis heavily in debt, it might decide to sell its assets to anothercorporation to raise cash quickly to pay off those debts.Chapter 30: Corporate Regulation and Expansion 655

Taking StockOnline investing hasallowed averageAmericans to begininvesting in aconvenient way. Infact, according toBusinessWeekmagazine, more thanhalf of Americanhouseholds now ownstock, and about onefifthof the householdsmade their firstinvestment during thepast four years. Inwhat type ofcompanies wouldyou like to invest?Get involvedLook at the financialsection of your majornewspaper, and reviewthe type of stocksyou’d like to buy. Keeptrack of the rate ofincrease or decrease invalue. Look online tofind similar methods ofmonitoring stocks andstock options.Stock AcquisitionAnother type of expansion is a stock acquisition , which occurswhen an individual or a corporation purchases enough shares of stockin a corporation to control it. A stock acquisition often begins with atender offer to shareholders of the corporation. This is an offer to buya number of shares at a specified price. Tender offers are often referredto as takeover bids and are usually communicated to the prospectiveselling shareholders through a newspaper advertisement. The corporationmaking the tender offer is referred to as the suitor , and the corporationto be taken over is called the target . The suitor does not haveto buy all the stock of the target, but just enough to control the electionof directors. The suitor can also sidestep the directors and appeal directlyto the shareholders.Example 1. Wentworth, a multimillionaire, has decided that hewould like to purchase Radlech Electronics, Inc. He approachesthe board of directors with his plan and finds that the directorsare not interested. The next day, in The Wall Street Financial, heplaces an advertisement, offering to purchase shares of Radlechat $49 per share. The current market price of a share of Radlechis $35. Any and all shareholders who deal with Wentworth standto make a big profit. Wentworth will not have to buy all the sharesof Radlech. He needs to purchase only enough to allow him tocontrol the election of directors. Wentworth has sidestepped thedirectors and appealed directly to the shareholders.Because the suitor often wishes to restructure or even dismantle thetarget corporation, its directors and officers often object to a tenderoffer. They may fear the loss of their positions, or they may see thetakeover bid as a threat to the very existence of the corporation. Underthese conditions one of the first steps the managers often take is tolaunch a public relations campaign to discredit the suitor. In such a campaign,they may refer to the tender offer as a “hostile takeover bid” andto the suitor as a “corporate raider.” They may also use other measuresto combat a hostile takeover bid. These include techniques such as invitinga friendly suitor to purchase a valuable asset of the corporation tomake it a less attractive target, offering to buy back the shares the hostilebidder has already purchased, but at a higher price, or inviting anindividual or another corporation to outbid the hostile bidder.656 Unit 6: Starting a BusinessGovernment Regulation ofCorporate ExpansionA flurry of takeovers took place in the 1960s and 1980s. Many ofthese conglomerate mergers, which were valued in billions of dollars,

involved bitter struggles between the suitors and the target companies.The activity created concerns that the mergers stifled competition,controlled markets and pricing, and discouraged innovation. As a result,Congress, state legislatures, and the courts have become involved inregulating the corporate takeover process.Federal RegulationA federal statute known as the Williams Act strictly controls takeoverbids. Under this act, when a suitor offers to acquire more than fivepercent of a target, the suitor must file a statement with the SEC indicatingwhere the money for the takeover is coming from, why the suitoris purchasing the stock, and how much of the target the suitor owns.The goal is to make certain shareholders know the qualifications and theintentions of the suitor. The Williams Act also gives shareholders whohave purchased stock from the suitor 15 business days to change theirminds. This provision takes some of the pressure off shareholders whomay feel compelled to sell their shares to meet the suitor’s deadline.JUDICIAL SCRUTINYThe courts have taken the primary motiveapproach when applying the businessjudgment rule to corporate takeovers. Whatare the problems with this approach?Chapter 30: Corporate Regulation and Expansion 657

State LegislatorOliver Robinson got a taste of fame at the tender ageof 13. “I was a pretty good elementary school basketballplayer, and one day my name and picture landed in theBirmingham paper,” says Robinson.“Pretty good” eventually turned into “San Antonio Spursgood.” The Alabama native played with the professional basketball team for twoyears, but Robinson’s determination and ambition eventually turned him towardanother competitive arena: politics. Today, the Birmingham businessman is amember of the Alabama House of Representatives.After college, Robinson worked for several years for AmSouth Bancorps,where he eventually became vice president and manager for the company’soffice of community affairs. There he managed the large bank’s communityreinvestment program, guiding corporate investments in low- and moderateincomecommunities. He also handled AmSouth’s public relations and dealt withfederal regulators. Robinson says the experience he gained in each of these jobshelped him tremendously when he decided to start his own business, ABI CapitalManagement. ABI underwrites bonds for educational institutions.Robinson also began to focus on state politics. The Alabama Democrat waselected to his first four-year term in 1998. Robinson enjoys his involvement inpolitics because it enables him to make a difference in the lives of others. Heespecially enjoys protecting the interests of the less fortunate. He representsJefferson County and the eastern side of Birmingham and is a member of theJudiciary and Banking and Insurance Committees. He recently sponsored a bill toestablish a police review board in Birmingham, a city that has a long history ofcivil rights advocacy.“Even though the House didn’t approve the bill,” Robinson says, “I’m veryproud of our efforts to get it through the legislature, and we’ll keep trying until it isapproved. It’s an honor for me to represent the interests of the people I grew upwith and try to improve their lives.”SkillsPersonalityEducationNegotiation, communication, public speaking, analyticalAble to compromise, adaptable, outgoing, sense of humor,concern for the welfare of othersNo specific education (although Robinson’s background inpolitical science and urban affairs has served him well)For more information on legislators, visit ubpl.glencoe.com or your publiclibrary.658 Unit 6: Starting a Business

State Legislative RegulationState legislatures have dealt with the concerns surrounding stockacquisitions in a number of ways. They have passed antiliability statutesto protect corporate directors whose companies are involved in takeovers.Several state legislatures have also enacted antitakeover statutes to discouragesuitors from targeting companies within their states. One formof antiliability statute automatically gives directors the protection of thebusiness judgment rule when the corporation is subjected to a takeoverbid. This kind of law says that change of control in the corporation doesnot imply disloyalty or unfairness on the part of the directors. Anothertype of antiliability statute allows corporations to amend their bylawsto include this type of protection for their directors. This approach wouldpermit the corporation to adopt the protection only if the shareholdersgave their consent. A third type of statute extends this protection notonly to directors but also to officers.Judicial ScrutinySometimes a corporation’s directors and officers who successfully resista takeover bid end up being sued by dissatisfied shareholders. Typically,the shareholders complain that the suitor’s takeover would have beenmore profitable for them. These shareholders contend that the directorsand officers selfishly sacrificed gains the shareholders could have made.In such lawsuits, the courts must evaluate the decisions made by thecorporation’s directors and officers. One critical question courts mustponder is whether the business judgment rule should apply. Recall thatthe business judgment rule presumes that a director acts with due careand provides that a director’s decision is immune to attack. However,the business judgment rule does not apply if the director acts illegallyor based on a conflict of interest.The obvious question in assessing resistance of a takeover bid iswhether the manager’s desire to maintain control of the corporation istoo self-serving. Some courts have taken the primary motive approachin considering these cases. Under this approach, if the primary motiveof the directors and officers is to maintain control of the corporation,they have a personal interest in the takeover and do not deserve the protectionof the business judgment rule. The burden of proof is then on thedirectors to show that their decisions regarding the takeover were fair tothe shareholders and corporation. The problem with the primary motiveapproach is that it is difficult to separate primary and secondary motives.Dissolution of a CorporationThe government is as concerned about the end of a corporation asit is about the beginning of one. The end of a corporate entity is oftenreferred to as the dissolution of the corporation, and it can come aboutEthics andAdvertisingThe Metro Daily Newsreceives 35 percent ofits advertising revenuefrom Neuhaus DepartmentStores. In fact,Neuhaus is the singlelargest advertiser withthe newspaper. WhenMetro Daily Newspublished a story aboutdiscriminatory hiringpractices at Neuhaus,the department storethreatened to quitadvertising. What arethe ethical issues?Chapter 30: Corporate Regulation and Expansion 659

in two ways. The corporation can decide to end, or a corporation’s dissolutioncan happen involuntarily. The law is also now concerned withthe dissolution of limited liability companies.Brands are among acompany’s mostimportant assets.Consumers depend onand recommend brandsthey know and trust, andthis familiarity results invalue to a company’sbottom line. In 2002,Interbrand, a unit ofOmnicom Group Inc.,created a list of theworld’s most valuablebrands by consideringfactors such as howmuch a brand is worth interms of contributing topresent and futureearnings. According toInterbrand, the mostvaluable brand is Coca-Cola at $69.6 billion,followed by Microsoft at$64.1 billion and IBM at$51.2 billion.Voluntary DissolutionWhen a corporation ends, the demise must be reported to the government.The reason is that the government grants corporate chartersand regulates the activities of all corporate entities. One way for a corporationto end voluntarily is through a unanimous vote of all of itsshareholders. The directors may also vote for its end, provided they getthe support of two-thirds of the shareholders. After the decision to endthe corporation has been made, a statement of intent to dissolve mustbe filed with the secretary of state’s office. The corporation must notifycreditors by certified mail of its dissolution. The public must be notifiedby publication.The creditors are the first to be paid when a corporation ends. If asurplus remains after the creditors have been paid, it goes to the shareholders.A receiver may be involved if the current assets cannot meet allobligations. A receiver is appointed by law and has the job of holdingthe property subject to all claims against the corporation. The receiverdivides the assets among the creditors. Articles of dissolution must alsobe presented to the secretary of state.Involuntary DissolutionThe secretary of state can ask the state attorney general to bring aquo warranto action against a corporation if the corporation hasrepeatedly conducted business illegally. If such an action is taken, thecorporation could lose its charter and would no longer be authorized todo business in the state. The grounds for bringing such an action includefailure by the corporation to file annual reports, failure to pay franchisetaxes, or failure to maintain a statutory agent for service of process. Acorporation may also be subject to a quo warranto action if it exceedsits authority or is formed fraudulently.When a shareholder brings an action, the courts have the authorityto liquidate the assets of the corporation. However, the shareholder musthave appropriate grounds to seek the involuntary dissolution of the corporation.Such grounds include but are not limited to evidence of illegalactions, evidence of fraud, evidence of the waste of corporate assets, andevidence that a dissolution is needed to protect the shareholders’ rights.Dissolving a Limited Liability CompanyState law also regulates the dissolution of a limited liability company.The reason is that an LLC is just as much a statutory entity as a660 Unit 6: Starting a Business

corporation. State statutes generally outline the circumstances underwhich a limited liability company can be dissolved.Circumstances of Dissolution The members of a limited liabilitycompany can initiate its dissolution by unanimous agreement. It is alsopossible for the dissolution to be triggered by the expulsion of a member.A member’s bankruptcy and his or her withdrawal can also activate the dissolution.Many state statutes, however, now restrict a member’s withdrawal,generally allowing it only if it is authorized by the LLC’s operatingagreement. It is also possible for the operating agreement to spell out thecircumstances under which a limited liability company can be dissolved.Effects of Dissolution The dissolution of the LLC does not stop thebusiness of the LLC. A dissolution differs from a winding up. Thewinding up process, which effectively puts the LLC out of business,involves completing the company’s business, selling its property, andsatisfying the company’s debts. A winding up need not follow a dissolution.The LLC can be continued if the remaining members choose todo so. The operating agreement can also say that unanimous consent ofthe members is not needed to continue the business of the LLC. On theother hand, it is not possible for the LLC to continue to operate if thenumber of members falls below that required by state statutory law.Reviewing What You Learned1. What are the differences among a merger, anasset acquisition, and a stock acquisition?2. What is a tender offer?3. What is the difference between a suitor anda target?4. What is the difference between voluntaryand involuntary dissolution of a corporation?5. What are the circumstances under which alimited liability company can dissolve?Legal Skills in ActionInvoluntary Dissolution You have justdiscovered that a corporation in which you holdstock is going to be subject to a quo warrantoaction. Write an entry in your Justice Journaloutlining all of the possible reasons why thestate may have decided to take this step againstthis company. Also remind yourself of thepossible consequences of this action.Critical Thinking ActivityAsset Acquisitions What advantages comewith an asset acquisition?Chapter 30: Corporate Regulation and Expansion 661

CHAPTERASSESSMENTSection 30.1 Government Regulation of aCorporation● The federal government derives its power toregulate business from the commerce clause ofthe U.S. Constitution. The federal governmentcan regulate any business activity that affectsinterstate commerce, even one that occurs completelywithin the boundaries of a single state.● Congress passed the Securities Act of 1933 andthe Securities Exchange Act of 1934 to protectcorporate investors by ensuring that informationregarding securities is available before purchase.These acts protect purchasers by enabling themto learn the true nature of securities they buy andby providing a way to discover fraud and unfairpractices.● In 1890, Congress passed the Sherman AntitrustAct that declared monopolies to be illegal. Inaddition, Congress passed the Clayton Act in1914, which made specific practices that fosterthe formation of monopolies illegal. To combatunfair competition, the Federal Trade CommissionAct was passed to protect a business from thewrongful acts of unfairly competing companies.The Robinson-Patman Act made it illegal forcompanies to sell goods at lower prices to highvolumepurchasers without offering the samediscount to smaller purchasers.● Among the federal acts that regulate energy andthe environment are the Energy ReorganizationAct and the National Environmental Policy Act.The Energy Reorganization Act created theNuclear Regulatory Commission (NRC). Thecommission regulates the licensing, constructing,and opening of nuclear reactors. The NRC alsohandles the possession, use, transportation, anddisposal of nuclear material. Under the termsof the National Environmental Policy Act, adetailed statement explaining the environmentalconsequences must precede any major federalgovernment action that affects the quality of theenvironment.Section 30.2 Corporate Expansion andDissolution● In a merger, one corporation continues itsexistence and absorbs another corporation,which gives up its corporate identity. In contrast,a consolidation of two or more companies is theformation of a new corporation. In an assetacquisition one corporation agrees to purchasethe assets or property of a second corporation. Astock acquisition occurs when an individual or acorporation purchases enough shares in acorporation to control it.● Before a stock acquisition, the buyer makes anoffer to shareholders of a corporation to buy anumber of shares at a specified price. A tenderoffer is also referred to as a takeover bid, and it isusually communicated to the prospective sellingshareholders through a newspaperadvertisement.● A suitor is the party making the tender offer tobuy shares to achieve a stock acquisition. Thetarget is the corporation that is considered fortakeover by the suitor.● A corporation may dissolve itself voluntarily bya unanimous vote of all of its shareholders. Thedirectors may also vote its end with the supportof two-thirds of the shareholders. In contrast, thestate can bring an action against a corporationfor repeated wrongdoing and force its dissolution.In addition, a shareholder can bring an actionto dissolve a corporation to protect the shareholders’rights from the consequences ofdestructive board decisions.● The members of a limited liability company caninitiate its dissolution by unanimous agreement,by the expulsion of a member, or by a member’sbankruptcy and withdrawal from the company.662 Unit 6: Starting a Business

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.commerce clausesecuritySecurities and ExchangeCommission (SEC)registration statementprospectusmergerasset acquisitionstock acquisitiontender offersuitortarget1. Create a crossword puzzle using all of the key terms. Be sureto include an answer key.2. Exchange puzzles with another student and solve eachother’s puzzles.3. Check your partner’s work and correct any mistakes that heor she made.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 30:Regulation and Expansionof a Corporation—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. What are the four major federal antitrust laws? Give a brief description of what eachlaw does.5. What are the responsibilities of the Environmental Protection Agency (EPA)?6. What happens when a shareholder dissents from a merger and desires to pull out ofthe new corporation?7. How are takeover bids regulated?8. Does the dissolution of a LLC stop the business of the LLC? Explain.9. What was one of the major causes of the stock market crash of 1929?10. What is a prospectus?11. How does a merger differ from a consolidation?12. What are the two ways that a shareholder can make money on his or her investmentin a corporation?13. Why might a corporation resist a suitor’s attempt to take over the business throughstock acquisition?Chapter 30: Corporate Regulation and Expansion 663

CHAPTERASSESSMENTAcquiring and Evaluating InformationUsing the newspaper, the Internet, or the locallibrary, research a recent corporate merger.Explain:14. The circumstances surrounding the merger.15. Problems or issues that occurred during themerger process.16. The advantages or disadvantages of themerger to the shareholders.Write a two-page paper discussing yourfindings.Takeover or Merger?In the 1990 movie Pretty Woman, EdwardLewis’s company sets out to execute a takeoverbid for James Morse’s company. Lewis eventuallydecides on a merger rather than a takeover.Debate17. Assuming that Morse’s company wouldhave been dismantled and sold after thetakeover, what effect might Lewis’sdecision have had?18. What impact would Lewis’s decision havehad on both companies, their owners(shareholders), and their employees?19. Do you think Lewis make the rightdecision? Why or why not?For the following cases, give your decision andstate a legal principle that applies.20. Ilsa Garthwaite owns Future-graphics, Inc.a fashion-design business specializing increating clothing for the super rich. Sheasks four of her best clients to choose aseason’s clothing line to sponsor. Shesuggests that each contribute $1 millionand explains that the return on the investmentwould depend on Future-graphics’sprofits. Does Ilsa’s sponsorship plan qualifyas a security? Explain your answer.21. Weldon Sackman and Frank Chandler arecompetitors and the only two farm equipmentdealers in the county. They make anagreement to divide the county’s territory,raise prices, and stop competing. If onebreaches the agreement, may the other suefor breach of contract? Explain your answer.22. Janet Juliano, an owner of stock in a corporationthat merged with another corporation,claims she was not notified of the mergeruntil after it was completed. Is this likely?Explain the usual procedure in a merger,and how a shareholder would be involvedin the process.23. Swallow & Ascot Books, Inc., a largechildren’s book publisher, owns threepercent of Pyatt, Inc., a leading comic-bookpublisher. Swallow decides to launch atakeover bid, with Pyatt as the target.Swallow offers the Pyatt shareholders $34per share. The current market value is $22per share. George Tackett sells his 50 shares,then changes his mind the next day. Is thereanything he can do? Explain your answer.24. The directors of the Mount Vernon ResearchCorporation sold tracts of land in itsdiamond mines under a series of landcontracts. In return, the purchaser of eachtract of land would be entitled to a returnon his or her investment based on the yearendprofits and in proportion to the numberof land contracts that he or she owned.Would the SEC consider each of thesecontracts a security? Explain your answer.664 Unit 6: Starting a Business

In each case that follows, you be the judge.25. Preferred TreatmentAfter being hired to build homes, the Centex-Winston Corporation contracted to purchaselumber, for resale, from Edward Hines Lumber Company. Hines consistently failed to deliverorders on time due to its preferential treatment of several Centex-Winston competitors. Centex-Winston sued Hines, claiming the preferential delivery violated the Robinson-Patman Act. IsCentex-Winston correct? Why or why not?Centex-Winston v. Edward Hines Lumber Co., 447 F.2d 585 (7th Circuit).26. True IntentIrwin Lampert, Leonard Levy, and Paul Scuderi purchased more than 12 percent of GeneralAircraft’s stock. Because the purchase exceeded 5 percent, they filed the SEC form requiredby the Williams Act, stating that the purchase was for investment purposes only. For the nextyear, Lampert, Levy, and Scuderi caused a great deal of trouble for General Aircraft’s management.They eventually engineered a change on the board of directors, giving themselvesmore influence on corporate decision making. They then entered a proxy solicitation contest,challenging management for total corporate control. Management filed a complaint, claimingthat the Williams Act filing had been fraudulent; the stock purchase had not been for investmentpurposes. The complaint asked the court to order Lampert, Levy, and Scuderi to amendtheir filing and to stop buying shares or soliciting proxies until the amendments had beenproperly processed. Should the court order be granted? Why or why not?General Aircraft Corporation v. Lampert, 556 F.2d 90 (1st Circuit).Another Crash?On October 12, 1987, the Dow Jones IndustrialAverage plunged 508 points. When the closing bellrang, the market was worth 22 percent less than ithad been that morning. It was the worst crash since1929 and the Great Depression.ConnectUsing a variety of search engines:27. Research the days leading up to October 12.28. Develop a timeline of events that you thinkhelped cause this event.Then present to the class the reasons why youbelieve this stock market crash did not cause amajor depression in the United States.29. Predict Do you think the growth andexpansion of a business could actuallyreduce competition? Explain your answer.30. Connect Can you think of a company thathas not been able to expand because of theantitrust laws that are in place?31. Question Is it the government’s responsibilityto protect the environment frompollution? Why or why not?32. Respond When a corporation ends,why must you report the event to thegovernment?Chapter 30: Corporate Regulation and Expansion 665

UNITLaw Workshop:Using Legal ToolsDo You Have an Idea for aBusiness?Owning your own business can befinancially and personally rewarding,but it demands a lot of work and dedication.Starting a business, whether it’sa sole proprietorship, partnership, orcorporation, also requires knowledge ofbusiness law.Step A: PreparationProblem: How would you organize a corporation and convince others toinvest in it?Objectives: In this workshop, you will work with partners to write thearticles of incorporation for a business. You will also try to convince theclass to buy your company’s stock.l Research and create a product idea.l Use technology to prepare the articles of incorporation for yourbusiness.llInvestigate how to finance a corporation by selling stocks.Present your ideas, and try to persuade other members of your classto invest in your company.666 Unit 6: Starting a Business

Step B: Procedure1. In groups of three or four, use the Internet andlibrary to research new business ideas. Readbusiness publications such as BusinessWeek orThe Wall Street Journal.2. Develop a product for your new business. Yourcompany can offer goods, services, or both.3. Write the articles of incorporation for yourbusiness. Use real-life information to create aninteresting andrealistic product.4. Research how stocks are promoted byreading corporate annual reports andaccessing Web sites for investor relations.Then give a sales presentation to theclass, offering stock subscriptions foryour corporation.5. After all of the presentations have beengiven, vote for the three corporations thatyou would most likely invest in. Cast yourballots anonymously.Step C: Creating a Model to Compare CorporationsAs a class, count the ballots and list the results on the board. Make achart that shows which three businesses received the most votes, alongwith the reasons that the businesses were chosen.Step D: Workshop Analysis ReportConsider the information on the chart that the class has compiled, andanswer the following questions:1. What products were the top three businesses selling?2. Is there any relationship among the three types of products? If so,what is it?3. Compare the reasons given for choosing the businesses. Is theresimilarity among the reasons? If so, what is it?Chapter 30: Corporate Regulation and Expansion 667

UNITVirginia Bankshares, Inc. v. SandbergU.S. Supreme Court501 U.S. 1083 (1991)Landmark CaseIssueCan false statements phrased as opinions and beliefs in a proxy solicitationviolate SEC Rule 14a-9, which prohibits the soliciting proxies byusing materially false or misleading statements?FactsSandberg owned stock as a minorityshareholder in First American Bank of Virginia. Aspart of a “freeze-out” merger, the bank directors ofFirst American Bank of Virginia recommended thatthe bank merge into another bank, Virginia Bankshares,Inc., which was a subsidiary of the petitionerFirst American Bankshare, Inc. The directorssolicited proxies for the merger proposal. A proxyis a document in which a shareholder appointsanother person to act as his or her agent to vote thecorporate stock. The directors stated “that they hadapproved the plan because of its opportunity forthe minority shareholders to achieve a ‘high’value. . . for their stock.” The executive committee ofFirst American Bank of Virginia, along with itsboard of directors, approved a price of $42 pershare for the minority stockholders. After themerger was completed, the minority stockholderswould lose their interest in the bank. Sandbergrefused to give a proxy authorizing another personto vote for approval of the merger. Sandberg wasnot satisfied by the offer of $42 per share and didnot believe that the statements made by the leadershipof First American Bank of Virginia werefair to the minority stockholders.After the merger was approved without hervote, Sandberg brought a civil action against bothbanking corporations and the directors of First668 Unit 6: Starting a BusinessAmerican Bank. In her complaint, Sandbergalleged that the directors of First American Bankhad not believed that the price offered for thestock was “high”. Instead, she alleged that theymade the recommendation for merger so that theycould remain on the board of directors. Sandbergclaimed that the directors violated the Rule 14a-9of the SEC, which prohibits using materially falseor misleading statements in soliciting proxies. Attrial, the jury awarded Sandberg an additional $18per share, the sum she would have received if thestock had been properly valued. The jury alsoinformed Sandberg that she could prevail in herlawsuit without seeking to prove that she relied onFirst American Bank’s misstatements. Rather, sheonly needed to prove that the misstatements werematerial and that the proxy solicitation wasessential to the success of the merger.OpinionThe federal government createdthe Securities and Exchange Commission inresponse to the stock market crash of 1929. Priorto the stock market crash, worthless securities werebeing traded, and many investors fell victim toscams. The Securities Exchange Act of 1934 gavethe Securities and Exchange Commission theauthority to declare rules that regulate solicitingproxies. As a result, the SEC adopted Rule 14a-9,

which prohibits soliciting proxies by using materiallyfalse or misleading statements.Statements of OpinionIn this case, the bank directors stated in theirproxy solicitation “that they had approved the planbecause of its opportunity for the minority shareholdersto achieve a ‘high’ value . . . for theirstock.” The bank directors argue that these phrasesare merely statements of opinion and cannot beconsidered misstatements of material fact withinthe meaning of Rule 14a-9. They further arguethat such statements of opinion do not violateRule 14a-9 when included in a proxy solicitationthat contains statements of fact from which shareholderscan draw their own conclusions. The bankdirectors implied that they did not intend for theminority stockholders to rely heavily upon thestatements included in the proxy solicitation, butinstead assumed that stockholders would beguided by a variety of factors, including their ownpersonal opinions and research, when makingtheir decisions.Reasonable ShareholderRelianceIn rejecting these arguments,the Court observed, “We thinkthere is no room to deny that astatement or belief by corporatedirectors about a recommendedcourse of action . . . can take onjust that importance. Shareholdersknow that directors usuallyhave knowledge and expertnessfar exceeding the normal investor’sresources, and the directors’perceived superiority ismagnified even further by thecommon knowledge that statelaw customarily obliges them to exercise theirjudgment in the shareholders’ interest.” In makingmisleading statements to protect their own interests,the directors had behaved unethically andhad violated the rules issued by the Securities andExchange Commission.Holding Knowingly issuing false statementsby directors of a corporation in a proxy solicitation,even when phrased as opinions and beliefs, may bematerially misleading within the meaning of SECRule 14a-9. These types of statements are misleadingbecause of the confidence placed in the opinionsof directors by the shareholders as a result ofthe shareholders’perception of the directors’knowledgeand expertise. The directors’ positions andknowledge obligate them to make decisions thatwill benefit the corporation and its stockholders.Furthermore, shareholders expect the directors toact in the best interests of the shareholders, as requiredby state law.1. What is a proxy?2. What is the Securities and Exchange Commission,and what is the source of its authority?3. What does SEC Rule 14a-9 address?4. Under the Court’s decision, can a conclusorystatement in a proxy solicitation be consideredmaterially misleading within the meaning ofSEC 14a-9?5. Explain the Court’s reasoning for concludingthat statements of opinion by the directors ofa corporation could be materially misleadingto shareholders.Go to the Understanding Business and Personal Law Web Site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 30: Corporate Regulation and Expansion 669

UNITUNIT OVERVIEWGetting married, purchasingyour first home,and planning for yourretirement are importantlife events that manyanticipate. It is necessaryto know your legalrights and responsibilitieswhen you reachthese life events so thatyou can plan accordingly.In this unit, youwill learn about the lawsthat govern the followingtopics:l Marriage and divorce,and their legalconsequencesl Renting and buying aresidencel Insurance protectionl Retirement and wills

Planning forthe FutureMoving Day You are about to rentyour first apartment. You have packedyour furniture, purchased necessaryhousehold items, and changed yourmailing address. Before you movein, you must sign the lease.In your Justice Journal, writeabout what you should knowbefore you sign. Is the lease alegal document? Explain youranswer.To get the most out of your reading:PREDICT what the section will beabout.CONNECT what you read with yourown life.QUESTION as you read to make sureyou understand the content.RESPOND to what you’ve read.Unit 7: Planning for the Future 671

CHAPTERMarriageUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 31: Marriage—Chapter Overviews to preview thechapter information.

The Opening SceneStarting in this chapter, you will meet Robin Johnson,22; her fiancé, Patrick Regan, 23; her sister, Tatiana,15; and her brother, Dane, 17. Robin is arguing withher sister in the living room of the family’s home.Marriage PlansTATIANA: I don’t care what you say, Robin! You don’tknow what you’re talking about. I’m going tomarry Alan, even if he is 24 and I’m only 15. Youknow I’m very mature for my age! I don’t want tojust move in together—I really want to get married.ROBIN: You are way too young to get married. Howdo you know that you’ll even like this guy five yearsfrom now? You are mature for your age, but peoplechange a lot in their late teens and early twenties.Plus, I don’t understand why Alan can’t find someonehis own age. He’s really strange. I guess Ishouldn’t worry too much, though. You can’t getmarried without Mom and Dad’s permission,anyway. There’s no way they’re going to go alongwith your plans.TATIANA: It doesn’t matter what Mom and Dad say.Alan said we could elope! I would be willing toelope if we had to! It’s pretty romantic!ROBIN: Tatiana, listen to me. Teenage marriages don’tsucceed very often. Wait until you’re older. Finishhigh school and get more education, like Patrickand I are doing. Look at Pauline and Mark. They’rewaiting until they finish college to get married.That’s a smart plan.TATIANA: Yes, I know they’re waiting, but Pauline saysthey’ll have to go to another state to get marriedbecause they’re first cousins. They won’t be legallymarried here and can’t even come back to thisstate to live!ROBIN: That doesn’t seem right. If they get legallymarried in another state, then that should makethem married everywhere. (Dane bounds into thehouse, drops his book bag on the floor, and opensthe refrigerator door.)ROBIN: You’re home later than usual. How waspractice, Dane?DANE: (Ignoring the question.) I found out somethinginteresting at school today, Tatiana. Did you knowthat your boyfriend, Alan, lived with a girl for ayear, and now she’s claiming to be his commonlawwife? She says he’s the father of her child, too.I bet Alan didn’t tell you any of that information.Alan is a real loser. I don’t have any idea whyyou like him.ROBIN: Oh, no!TATIANA: (Stunned.) Alan never mentioned anythingabout living with a woman and having a child. I’msure it’s not true. You must be kidding! I know thatAlan wouldn’t lie to me.DANE: No, it’s true. I heard it from someone wholives in Alan’s apartment building. The guy that Italked to said that Alan has been living with thiswoman for the past year. He’s even seen themtake the baby places together. I think it’s time todump Alan.TATIANA: But Alan wants to marry me! I still don’tbelieve you.DANE: He can’t marry you if he’s already married.That’s bigamy! Anyway, you’re too young to getmarried.1. Can a 15-year-old girl marry without her parents’consent?2. Is a marriage between first cousins legal?3. Are first cousins related by affinity?4. What is a common-law marriage and is it legal?5. What is the name and legal effect of having twospouses at one time?Chapter 31: Marriage 673

l How to state when themarriage contractactually takes placel How to describe therights and dutiesinvolved in themarriage contractl How to explain therequirements of apremarital agreementand state when theyare importantl How to identifymarriages that areprohibited by lawThe more you know aboutmarriage laws andrestrictions, the less likelyyou are to enter anunstable marriage.l premarital agreementl consanguinityl affinityl bigamyl polygamyMarriage Formalitiesand RestrictionsGovernment’s Role in MarriageMarriage is viewed by many as the basis of the family unit and istherefore considered vital to the preservation of values and culture. Eachstate is permitted, following U.S. Constitutional guidelines, to prescribewho is allowed to marry and how a marriage can be dissolved. However,each state must also recognize the laws and court decisions of otherstates. Eight states (Arizona, Colorado, Illinois, Kentucky, Minnesota,Missouri, Montana, and Washington) have adopted the Uniform Marriageand Divorce Act.The Marriage ContractMarriage is a personal relationship between a man and a woman,but it is also a civil contract that comes into existence when you becomeengaged. At the time of engagement, there is an agreement containingconsideration (a promise to give up the legal right to remain single)between two parties who have the capacity to contract, by mutualconsent and for a legal purpose. While a couple is engaged, the marriagecontract is in its executory stage. The contract is executed whenthe wedding occurs. Under common law, if one of the parties failed togo through with the marriage after becoming engaged, the other partycould sue for damages caused by breach of the marriage contract. However,this is no longer the law in most states today.Example 1. Ramon Hernandez asked Dulce Torres to marry him,and she accepted. A few months later, Dulce changed her mindand called off the engagement. If the parties lived in a state thatstill follows common law on this point, Ramon could sue Dulcefor any damages he suffered because of the breach of contract.In some states, a man is entitled to the return of the engagementring when a marriage is called off. The theory is that the ring is a contingentgift, dependent upon the realization of the marriage. In otherstates, however, courts have allowed a woman to keep the ring if theman ended the engagement.Rights and DutiesWhen you enter into an ordinary contract, your rights and duties arecreated by agreement. The marriage contract, however, changes your674 Unit 7: Planning for the Future

BEING ENGAGEDThe marriage contractcomes into existence atthe time of the engagement.If the engagementfalls through, must theengagement ringbe returned?legal status, and the law gives both husband and wife new rights andduties, which are intended to provide protection to both parties. Peoplewho live together without being married do not receive this special protection.The following rights are some of the rights given by law whenyou marry:l The right to support by your spouse when necessaryl The right to inheritance from your deceased spouseMarriage and the InternetDo you have friends or relatives who would be unable to attend yourwedding because of travel, cost, health, or distance? The Internet now makes itpossible for people anywhere in the world with access to a computer to see yourwedding in real time. All you need is a Web camera, a computer, and anInternet connection, or to hire a company that can provide this service for you.You can also place video clips from your wedding on the Internet and weddingpictures in an online photo album.Connect Using your favorite search engine, research some of the other ways inwhich the Internet might be used for purposes of preparing for a wedding.Chapter 31: Marriage 675

Domestic ViolenceUnfortunately, domestic abuse sometimes occurs in a marriage. Victims ofdomestic abuse may pursue several legal options to address the situation. Onesuch option involves filing a criminal complaint against the abuser with thelocal prosecutor’s office.Suing the abuser in civil court for damages related to injuries received isalso an option. When someone harms another, the harmful act is called a tort.Torts include the act of battery or the unlawful use of bodily force againstanother. In the case of domestic abuse, the abuser may be subject topunishment in both criminal and civil courts.In the past, most states did not allow family members to sue each other fortorts. The idea was that this might lead to a breakdown in family relationships.Today, almost all states allow such civil suits to be filed against family members.Some states still prohibit family members from suing each other except in thecase of intentional torts. The courts nearly always view acts of domesticviolence as intentional torts. As such, lawsuits against the abuser are usuallyallowed to proceed.Conduct Research Using the library or the Internet, find out more about legalhelp available to victims of domestic abuse.lllThe right to property if the marriage endsThe right to compensation to continue your standard of living if themarriage endsThe right to file a joint income tax return676 Unit 7: Planning for the FutureMost employers also give certain rights to their employees’ spouses.These rights normally include health insurance coverage and retirementbenefits.The primary duty that arises from the marriage contract is the dutyof being faithful to your spouse. This duty cannot be relinquished, evenby agreement. Other duties, in general, flow from the rights previouslydiscussed. If your spouse has the right to receive support, for example,then you have the duty to provide it.All people, married or not, must refrain from causing bodily harmto those they live with. In addition, both parents, whether married ornot, have the duty to support their children.

Premarital AgreementsSometimes, before they marry, people enter into written agreementsconcerning the real and personal property they will own during theirmarriage. They set forth how their property interests will be handled ifthe marriage ends by death or divorce. A premarital agreement , alsocalled an antenuptial or prenuptial agreement, is made between prospectivespouses in contemplation of marriage and becomes effective uponmarriage. Figure 31.1 shows a sample premarital agreement. In makinga premarital agreement, you must make honest statements, and you andyour partner must fully disclose your assets to each other. In some states,a different attorney must represent each party.A premarital agreement must be in writing and signed by bothparties. Although laws vary from state to state, parties to a premaritalagreement generally may contract with respect to the following issues:l The rights and obligations of each of the parties with regard to any ofthe property of either or both of theml The right to buy, sell, manage, and control real and personal propertyl The disposition of real and personal property upon separation,divorce, or deathl The change or elimination of supportWedding BellsHome Economicsclasses are not just forgirls anymore. Increasingly,boys are takingthese classes, whichteach everything fromsewing to balancinga checkbook. Someclasses pair boys andgirls to work as couplespreparing for marriage.At the end of thesemester, havinglearned how to managea household, thecouples are married ina mock wedding ceremony.What could besome of the benefitsof premarital classesfor engaged couples?Get InvolvedFind out if there aremarriage laws in yourstate that are notcommon in other states.Write a report basedon your findings.RESOLVING POTENTIAL PROBLEMSSecond or third marriages can involve manydecisions and responsibilities. How would apremarital agreement help a couple resolvesome of these details?Chapter 31: Marriage 677

Figure 31.1Premarital AgreementAgreement made this 10th day of June, 20––, between JosephTaft of 1273 Holly Lane, Amesburgh, PA, and Susan Jacobs, of299 Oak Lane, Amesburgh, PA.Whereas a marriage is shortly to be solemized between theparties hereto;Whereas Susan Jacobs now owns a large amount of propertyand expects to acquire from time to time additional propertyunder a trust established by her uncle, Henry Jacobs;Whereas Joseph Taft has agreed that all of the property nowor in the future owned by Susan Jacobs, or her estate, shall befree of all rights that he might acquire by reason of his marriageto her; it is agreed as follows:1. Susan Jacobs shall have full right and authority, in allrespects the same as she would have if unmarried, to use, enjoy,manage, convey, mortgage, and dispose of all of her present andfuture property and estate, of every kind and character, includingthe right and power to dispose of same by last will and testament.2. Joseph Taft releases to Susan Jacobs, her heirs, legalrepresentatives, and assigns, every right, claim, and estate that hemight have in respect to said property by reason of his marriageto Susan Jacobs.IN WITNESS WHEREOF the parties have hereunto set theirhands and seals the day and year first above written.PREMARITAL AGREEMENTMarried people have certain economic rightsand duties that a premarital agreement mayexclude. When does a premarital agreementbecome effective?llThe making of a willOwnership of and benefits from life insurance policies678 Unit 7: Planning for the FuturePeople who have children from other relationships often enter intoprenuptial agreements to protect their children. For instance, upon the

death of the biological parent, the assets of that parent can pass to thenew spouse, and in effect, disinherit the children of the deceased parent.Written agreements are also important for people who live togetherwithout being married. In such arrangements, people don’t receive theprotection that is given automatically to those who are married. Writtenagreements can address such issues as financial responsibility andproperty ownership, as well as the other issues mentioned previously.Prohibited MarriagesCertain types of marriages are illegal because they are opposed topublic policy. Prohibited marriages are those between certain relatives,marriages by one party to two or more people at the same time, and inmost states, marriages between persons of the same sex.Marriage Between RelativesStatutes in many states prohibit marriage between certain personswho are related by consanguinity (blood) or affinity (marriage). Inthese states, such marriages are void. Some states base their law on thecommon law, which made it illegal to marry certain relatives. Figure31.2 shows which relatives it is illegal to marry under the common law.If you married any relatives listed in Figure 31.2, then the marriagewould be void, and any children born of the union would be illegitimate.Under the common law, it would be illegal to marry a person related byaffinity, even after the relationship that binds the parties ends by deathor divorce.Under the NapoleonicCode, people under 30years of age could notmarry without theirfather’s permission. Inaddition, a father couldhave his child incarceratedfor as long as sixmonths based on hisword alone.Figure 31.2ConsanguinityMother or FatherGrandmother or GrandfatherDaughter or SonGranddaughter or GrandsonAunt or UncleSister or BrotherNiece or NephewAffinityStepmother or StepfatherStep-grandmother or Step-grandfatherStepdaughter or StepsonStep-granddaughter or Step-grandsonMother–in-law or Father-in-lawGrandmother-in-law or Grandfather-in-lawDaughter-in-law or Son-in-lawGranddaughter-in-law or Grandson-in-lawMARRIAGES BETWEEN RELATIVESMarriage to these relatives was prohibited bycommon law. Many states have changed thislaw. How is being related by consanguinitydifferent from being related by affinity?Chapter 31: Marriage 679

Example 2. Gerard Ingels and Ramona Parker, whose marriagelasted for six months, were divorced. Ramona later wanted tomarry Gerard’s father, a widower. In a state that follows thecommon-law rule regarding marriage between family membersrelated by affinity, they could not marry.Although the marriage of first cousins is allowed under commonlaw, many states prohibit such relationships. Almost half the states haveno prohibition against marriage of persons related by affinity.A marriage between close family members constitutes more than asocial stigma or legal dilemma. Children born to blood relatives aremore likely to suffer from birth defects because there is a greater chancethat the two parents could share and pass on harmful genes.Bigamy and PolygamyA marriage that is contracted while either party is already marriedis void in all states, unless the prior marriage is ended by annulment.Bigamy is the act of having two spouses at the same time. Polygamyis the act of having more than two spouses at once. Any children bornof a man and woman whose marriage is void are illegitimate. Bigamyand polygamy are crimes under the laws of every state in this country.In some states, if one of the parties entered into the marriage withoutknowing the other party was married, the second marriage maybecome valid on the death or divorce of the partner to the first marriage.Reviewing What You Learned1. When does the marriage contract actuallycome into existence? Explain your answer.2. List five rights that are given by law topeople when they marry.3. What is a premarital agreement, and why isit important?4. Provide three examples of marriages that areprohibited by law.Critical Thinking ActivityFairness Ian and Rochelle decided to breaktheir engagement of six months because theybelieved that they just weren’t right for eachother. By law in their state, Ian is entitled to thereturn of the engagement ring. Do you thinkthis is fair? Why or why not?Legal Skills in ActionThe Role of Marriage In Your Life Marriageis a personal relationship arising out of a civilcontract. It is a serious contract that mostpeople believe will last forever. In 2–3paragraphs, describe the role, if any, thatmarriage might play in your future life.680 Unit 7: Planning for the Future

Marriage LawsThe Requirements of MarriageEach state has its own laws regulating marriage. Figure 31.3 summarizesmarriage laws in the different states.Age RequirementsWith exceptions in Mississippi and Nebraska, you can be marriedat age 18 without your parent’s consent. You can be married at a youngerage if a parent or guardian gives permission. In some states, the permissionof the court is also required if you are below a certain age.Example 3. Joseph Klein wanted to marry Krista Ogden, 14.Under Massachusetts law, the couple could marry only if one ofKrista’s parents and the probate court judge gave permission. IfKrista’s parents or the judge denied permission, the couple wouldhave to wait until Krista turned 18 to marry.Marriages between teenagers are more likely to end in divorce. Asa result, the law requires parental permission to prevent minors fromentering into foolish or otherwise unsuitable marriages.Common-Law MarriageIn England, under the common law, people did not need to have aformal ceremony to bind them in wedlock. Instead, they only had toagree between themselves that they were married. No witnesses wererequired, and the agreement could be either oral or written. This informaltype of marriage, called a common-law marriage , came to Americawith the early colonists. Today, 11 states and the District of Columbiastill recognize common-law marriages.With a few exceptions, the states that recognize the common-lawmarriage require the following elements:l The parties must agree, by words in the present tense, that they arehusband and wife.l The parties must cohabit, or live together, for a certain time period,which varies among the states. The parties must represent themselvesas being husband and wife so that the public recognizes theirmarital status. This representation may be accomplished by actionssuch as introducing your partner as your spouse, and by sharing ajoint bank account.l How to describe themarriage laws in yourstate with regard toage requirements,ceremony, medicalexams, and licensel How to differentiatebetween a commonlawmarriage and aceremonial marriageUnderstanding thevarious marriage lawswill make you betterprepared when the timecomes to choose aspouse.l common-law marriagel solemnizel marriage licensel proxy marriageChapter 31: Marriage 681

Figure 31.3U.S. Marriage Laws Summary TableState Age Waiting Blood Cost Validity ResidencyRequirement Period Test of Licensefor License for LicenseAlabama 18 None None $25 30 Days NoneAlaska 18 3 Days None $25 90 Days NoneArizona 18 None None $50 1 Year NoneArkansas 18 None None $30 60 Days NoneCalifornia 18 None None $50-$80 90 Days NoneColorado 18 None None $20 30 Days NoneConnecticut 18 Varies Varies $35 25-35 Days NoneDelaware 18 24 Hours Yes $35 30 Days NoneDistrict of Columbia 18 3 Days Yes $35 Indefinitely NoneFlorida 18 3 Days None $56-$88.50 60 Days NoneGeorgia 18 None Yes $40 None NoneHawaii 18 None None $50 30 Days NoneIdaho 18 None None $28 Indefinitely NoneIllinois 18 None None $15-$20 60 Days NoneIndiana 18 None None $18 60 Days YesIowa 18 3 Days None $30 None NoneKansas 18 3 Days None $50 6 Months NoneKentucky 18 None None $34.50 29 Days NoneLouisiana 18 3 Days None $25 30 Days NoneMaine 18 3 Days None $20 90 Days NoneMaryland 18 2 Days None $55 6 Months NoneMassachusetts 18 3 Days Yes $25 60 Days NoneMichigan 18 3 Days None $20-$35 33 Days NoneMinnesota 18 None None $70 6 Months NoneMississippi 21 3 Days Yes $21 90 Days NoneMissouri 18 3 Days None $50 30 Days NoneMontana 18 3 Days None $50 30 Days NoneMARRIAGE LAWSMarriage laws differ fromstate to state and oftenchange. How would youfind out your state’s currentmarriage requirements?A few states do not regard the last two elements as essential to avalid common-law marriage. If a common-law marriage is properlyentered into in a state that recognizes such relationships, then it will beregarded as a valid marriage in any other state, as Robin suggests inThe Opening Scene.682 Unit 7: Planning for the FutureExample 4. Henry Lewiston and Elka Swenson say to each otherthat they are married. They cohabit in the state of Rhode Islandand introduce themselves as husband and wife to people theymeet. However, they have never had a marriage ceremony. Later,they move to Massachusetts, which does not recognize the common-lawmarriage. That state would nonetheless regard Henry

Figure 31.3 (Continued)U.S. Marriage Laws Summary TableState Age Waiting Blood Cost Validity ResidencyRequirement Period Test of Licensefor License for LicenseNebraska 19 None Some $15 1 Year NoneNevada 18 None None Varies Indefinitely NoneNew Hampshire 18 3 Days None $45 90 Days NoneNew Jersey 18 72 Hours None $28 30 Days NoneNew Mexico 18 None None $25 Indefinitely NoneNew York 18 1 Day None $20-$30 60 Days NoneNorth Carolina 18 None None $40 60 Days NoneNorth Dakota 18 None None $35 60 Days NoneOhio 18 None None $45 60 Days NoneOklahoma 18 None Yes $25 10 Days NoneOregon 18 3 Days None $60 60 Days NonePennsylvania 18 3 Days None $25-$40 60 Days NoneRhode Island 18 None None $24 3 Months NoneSouth Carolina 18 1 Day None $25 Indefinitely NoneSouth Dakota 18 None None $40 20 Days NoneTennessee 18 None None $31 30 Days NoneTexas 18 3 Days None $36 30 Days NoneUtah 18 None None $40 30 Days NoneVermont 18 None None $20 60 Days NoneVirginia 18 None None $30 60 Days NoneWashington 18 3 Days None $52 60 Days NoneWest Virginia 18 None None $23 Indefinitely NoneWisconsin 18 5 Days None $50-$60 30 Days YesWyoming 18 None None $25 Indefinitely None*Please use the above information as a guideline. Verify all information by contactingyour local county clerk.and Elka as legally married because the Rhode Island law, whichallows the common-law marriage, was properly followed.A divorce is required to end a common-law marriage. Henry andElka, in Example 4, would have to go through a formal divorce procedureif they decide to end their common-law marriage.Ceremonial MarriageFrom early colonial times, a marriage ceremony could only beofficiated by a cleric or magistrate. Today, most states still require somekind of ceremony or other serious rite to solemnize marriage. However,as long as the parties declare that they take each other as husbandChapter 31: Marriage 683

IndiaTo know India, you must understand Hinduism, one of the world’s oldest faithsand the major religion of India. Even in contemporary India, which especially inurban areas has experienced rapid technological development and modernization,the ancient tenants of Hinduism remain important influences on a follower’s life.One of traditional Hinduism’s most important structures is the caste system,which divides society into a hierarchy of separate classes. At the top of the castesystem are the Brahmans, traditionally the priests and scholars. Next are theKshatriyas, the rulers, warriors, and landowners, followed by the Vaisyas, theartisans and merchants. The lowest caste is the Sudras, the farmers and peasants.Beneath these four main castes are the so-called “untouchables,” which includebeggars, butchers, and sweepers. Traditionally, the higher one’s caste, the greaterone’s rights and privileges. Over time, India has expanded the caste system toinclude thousands of castes based on these original divisions.Today, India is a democratic and politically secular country, and discriminatingagainst a person based on caste is legally forbidden. The practice of “untouchability”was officially abolished under India’s constitution in 1950, and the government haspassed numerous laws to help educate and employ people who might haveotherwise suffered discrimination under the traditional caste system. The governmentalso passed social legislation such as the Hindu Marriage Act, allowing an Indian tomarry a person of a different caste. Although the traditional caste system is stillimportant, especially in rural areas, modern India offers its citizens more freedom,mobility, and opportunity than ever before. Here’s a snapshot of India.Geographical area 1,269,346 sq. mi.Population 1,045,845,226CapitalNew DelhiLegal systemBased on Englishcommon lawLanguageHindi, 14 otherofficial languages, EnglishReligion81.3% Hindu; 12% MuslimLife expectancy 63 yearsCritical Thinking Question List several U.S. laws that help minorities or the disadvantagedget ahead, and briefly describe each. For more information about India, visitubpl.glencoe.com or your local library.684 Unit 7: Planning for the Future

and wife in the presence of a person authorized by state law to solemnizemarriages, no particular form must be followed. Some courts haveheld that a marriage that is properly solemnized is valid even when amarriage license was not obtained before the ceremony.Covenant MarriageThe covenant marriage, adopted in Arkansas, Arizona, and Louisiana,is an attempt to reduce divorce and protect children. The parties to acovenant marriage must undergo counseling before the wedding andduring the marriage to solve conflicts. In most cases, the couple candivorce only after a specified period of separation, or if one spouse isguilty of adultery, spousal or child abuse, abandonment, or a felony.Marriage LicenseIt is generally necessary to get a license to be joined in a ceremonialmarriage. A marriage license is a certificate issued by a governmentoffice that gives permission to two people to marry. Once issued,the license becomes effective after any waiting period required by statelaw. The license will expire if the couple doesn’t marry during theprescribed time period.Waiting PeriodUnder common law, notice of a forthcoming marriage had to bepublished and posted to give people who might oppose the marriage theLove orLegal Status?During March 2001,marriages in New YorkCity were up 125 percentover the previousyear. Under a new lawcalled the Legal Immigrationand FamilyEquity Act (LIFE Act),certain immigrants haduntil April 30 to legalizetheir status as Americancitizens. Marriage to aU.S. citizen was oftenseen as the best andsimplest route to gaincitizenship. Althoughthe penalty for a fraudulentmarriage is up tofive years in prison or afine of up to $250,000,or both, a fraudulentmarriage is difficult toprove. Do you think itis ethical to marry togain citizenship? Whyor why not?PLANNING A MARRIAGETo get married, a couple willhave to follow certain steps.What steps are usuallyincluded in this process?Chapter 31: Marriage 685

Social StudiesArranged marriages arecommon in India. Citingthe high divorce rate inthe United States, manyIndians argue thatarranged marriages aremore successful thanromantic marriages. ManyIndians believe thatromantic love alone doesnot necessarily lead to agood marriage. Instead,they feel that true loveflows from a properlyarranged union betweentwo compatible people.Research ActivityResearch arrangedmarriages in India. Findout who makes thearrangement and if theprospective bride andgroom meet or datebefore entering marriage.chance to object. These notices were called marriage banns. Today, moststates have a waiting period before a license is issued, instead ofrequiring that marriage banns be published.Why do states require a waiting period? The motivation is to give theman and woman time to reconsider their decision. In addition, a waitingperiod may allow evidence of fraud, force, or jest to be uncovered. Thedelay also gives interested parties, such as the parents of the prospectivemarriage partners, an opportunity to object on other grounds.Blood Test/Physical ExaminationSome states require a blood test or physical examination before amarriage license is issued. These tests may screen prospective spousesfor such conditions as AIDS, venereal disease, sickle cell anemia, rubella(German measles), and infectious tuberculosis. The type of test and particularconditions involved vary from state to state. Under a typical statestatute, if a venereal disease, such as syphilis, is found and is in the noncommunicablestage, both parties are informed about the disease and thepossibility of transmitting such an infection to the marital partner or totheir children. If syphilis is found to be in the communicable stage, amarriage license is not issued.In a state that tests for rubella, the test must certify that the female,if she is of childbearing age, is immune to rubella infection. If she686 Unit 7: Planning for the FutureBLOOD TESTSome states require a blood test or physicalexamination before issuing a marriage license.If a venereal disease in a communicable stageis found, the license will not be issued. Do youthink there are any other reasons that amarriage license should not be issued?

efuses the test, the doctor must advise her of the risks of contractingrubella during childbearing years and of the vaccine available to eliminateor protect against such risks.Example 5. William Matera and Lynn Newkirk decided to getmarried. They went to the clerk’s office in their town and appliedfor a marriage license. They were told they would have to waitat least three days before the license could be issued and that theywould have to have their blood tested.Proxy MarriageIn a proxy marriage , one or both of the parties can’t be presentfor the wedding, and an agent acts on their behalf. Such a marriage,which is allowed in some states, still requires a ceremony. The UniformMarriage and Divorce Act provides that a person who can’t come to thesolemnization of his or her marriage may authorize, in writing, a thirdperson to act as proxy. The person solemnizing the marriage must besatisfied that the absent party is unable to be present and has consentedto the marriage.Use of Various NamesUnder common law, people may use any name provided they do notdo so to commit fraud. A wife does not have to adopt her husband’s surname(last name), for example. Although widely followed, this practicecame about through custom and was not required by common law.Today, many married women continue to use their maiden names orthey hyphenate it with their husband’s surnames.Reviewing What You Learned1. Under today’s law, at what age may a personin most states marry without parentalconsent?2. What is the difference between a commonlawmarriage and a ceremonial marriage?Legal Skills in ActionMarriage Laws Using a software program,design a table of the marriage laws in your statethat you need to consider before gettingmarried. Do your best to address all the lawsdiscussed in this chapter.Critical Thinking ActivitySurnames Are there any reasons why ahusband and wife having different surnameswould be impractical? Explain your answer.Chapter 31: Marriage 687

CHAPTERASSESSMENTSection 31.1 Marriage Formalities andRestrictions● Each state is permitted, following U.S. Constitutionalguidelines, to prescribe who is allowed tomarry and how a marriage can be dissolved.However, each state must also recognize the lawsand court decisions of other states. Marriage is acivil contract that comes into existence when youbecome engaged. At the time of engagement,there is an agreement containing consideration (apromise to give up the legal right to remain single)between two parties who have the capacity tocontract, by mutual consent and for a legalpurpose. While a couple is engaged, the marriagecontract is in its executory stage. The contract isexecuted when the wedding occurs. Under commonlaw, if one of the parties failed to go throughwith the marriage after becoming engaged, theother party could sue for damages caused bybreach of the marriage contract. However, this isno longer the law in most states today.● The marriage contract imposes rights and dutiesthat provide financial protection to both partiesto the marriage. If you are married, you have thefollowing rights: (1) the right to support by yourspouse when necessary; (2) the right to inheritancefrom your deceased spouse; (3) the right to propertyif the marriage ends; (4) the right to compensationto continue your standard of living ifthe marriage ends; and (5) the right to file a jointincome tax return. The primary duty that arisesfrom the marriage contract, however, is the dutyof being faithful to your spouse.● A premarital agreement must be in writing andsigned by both parties prior to getting married. Inmaking a premarital agreement, you must makehonest statements, and you and your partnermust fully disclose your assets to each other. Insome states, a different attorney must represent●each party. Although laws vary from state tostate, parties to a premarital agreement generallymay contract with respect to the following issues:(1) the rights and obligations of each of the partieswith regard to any of the property of either orboth of them; (2) the right to buy, sell, manage,and control real and personal property; (3) thedisposition of real and personal property uponseparation, divorce, or death; (4) the change orelimination of support; (5) the making of a will;and (6) the ownership of and benefits from lifeinsurance policies.Certain types of marriage are prohibited,including marriages between relatives, marriagesthat result in bigamy or polygamy, and marriagesbetween persons of the same sex. Bigamy isthe act of having two spouses at the same time.Polygamy is the act of having more than twospouses at the same time.Section 31.2 The Requirements of Marriage● Most states require a marriage to be solemnized.In most states, a person can be married at the ageof 18 without a parent’s consent and at a youngerage with permission. Most states have a waitingperiod before a marriage license is issued, andsome states require a blood test to screen forcertain infectious diseases or conditions affectingchildbirth.● Eleven states and the District of Columbiarecognize common-law marriage. In thosejurisdictions, a common-law marriage occurswhen the parties agree, by words in the presenttense, that they are husband and wife. They mustcohabit for a certain time period, and they mustpresent themselves to the rest of the world ashusband and wife. A divorce is required to end acommon-law marriage. A ceremonial marriage issolemnized by a ceremony or serious rite.688 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.premarital agreementconsanguinityaffinitybigamypolygamycommon-law marriagesolemnizemarriage licenseproxy marriage1. As a review activity, create an original speech explaining the mainpoints outlined in this chapter. Use as many of the review terms aspossible. Refer to this chapter for extra help if necessary.2. Working with a partner, practice delivering your speech.3. Deliver your speech to the class.4. As a class, choose the best speech. Make sure that the speechselected correctly uses the key terms.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 31:Marriage—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. What is the primary duty that arises from the marriage contract?6. What is consanguinity? affinity? How are marriages between those related byconsanguinity and affinity viewed by the law?7. What is bigamy? polygamy? How does law view bigamy and polygamy?8. Describe a covenant marriage? Where has it been adopted?9. What is the purpose of a waiting-period requirement?10. Why do most states require parental permission if a child below a certain agewishes to marry?11. What is a marriage license?12. What is a proxy marriage?13. Why do most states impose a waiting period before a marriage licenseis issued?Chapter 31: Marriage 689

CHAPTERASSESSMENTInterpreting and CommunicatingInformationWrite a one-page paper comparing the rightsand duties that arise when you enter into amarriage contract with the rights and dutiesthat come about when you enter into a regularcontract.14. What are the similarities?15. What are the differences?Curtis and Myrna are engaged to be marriedearly next year. They are madly in love and areplanning a large church wedding. Curtis wantsto write a premarital agreement in case theirmarriage ends in divorce. Myrna is opposed tothis idea because she believes marriage isforever.Debate16. Do Curtis and Myrna need a premaritalagreement? Explain why or why not.17. How would you answer Myrna when shesays, “We don’t need one; marriage isforever”?18. Do you believe that all engaged couplesshould have premarital agreements? Whyor why not?For the following cases, give your decision andstate a legal principle that applies.19. Vadim Petrenko asks Lada Nureyev tomarry him and presents her with a diamondengagement ring. Lada accepts. Threemonths later, Lada cancels the engagement.Vadim threatens to sue for breachof contract. May he do so?20. Garrett Robins and Mary Lyman livedtogether in Vermont as husband and wifefor 20 years. They agreed that they weremarried and presented themselves to othersas husband and wife. They had no marriageceremony. When Garrett died withoutleaving a will, Mary claimed she shouldinherit his assets because she was hiscommon-law wife. Do you agree?21. Brigitte Samuels wants to marry her uncle,Raynard Prost. Will their marriage be valid?What will be the legal status of any childrenof the marriage?22. Tsong Lee, 22, wants to marry Mei-GuiYan, 14. They both live in Massachusetts.Mei-Gui’s parents refuse to give permissionfor the marriage. Can the couple legallymarry? Why or why not?23. Five years after Carlos Soledad and NoviaChavez marry, Novia discovers that Carlosnever divorced his first wife, who is livingand still uses the surname Soledad. Is themarriage between Carlos and Novia valid?Explain your answer.24. Michelle Weibel was married to AlbertWeibel for twelve years. Several years afterAlbert’s death in an automobile accident,Michelle received a marriage proposalfrom Albert’s widowed stepfather, Terry.Is Michelle free to marry Terry? Explainyour answer.25. Jacqueline Pesci recently married MarvinLeary. A resolute feminist, Pesci asks herhusband to assume her maiden name as asurname. Leary is willing to assume thename Pesci but is unsure of the legality ofusing his wife’s surname. What are Leary’slegal rights in this situation?690 Unit 7: Planning for the Future

In each case that follows, you be the judge.26. Broken PromiseCharles Gill gave Dianne Shively an engagement ring, worth $3,600, when they became engaged.Less than a month later, Shively told Gill that she was not ready for marriage. Gill requested thatShively return the engagement ring, but she refused to do so. Is Gill entitled to the return of thering? Why or why not?Gill v. Shively, 330 So.2d 415 (FL).27. Too Many WivesTwo months after divorcing Bobby Gunter, Gloria Gunter married Edward Peters. Gunter wasnot well acquainted with Peters and assumed that he was not married. She later learned thatPeters was still married and had deceived her into thinking he was divorced. What legalwrong did Peters commit? What is the legal effect of Gunter’s marriage to Peters?Gunter v. Gunter, 418 N.E.2d 149 (IL).Wedding BellsAfter dating for a few years and discussing it withtheir families, Meena and Manoj want to getmarried in your state. However, they are not sure ofthe laws governing marriage.Connect28. Using a variety of search engines, help Meenaand Manoj find the following information:● The required ceremony to solemnize themarriage● The necessary waiting period● Blood tests/physical exam requirements● Age requirements and exceptions29. Predict Why do you think we need lawsgoverning marriage in this country?30. Connect How old do you think you will bewhen you get married, and what factorswill you consider in making the decision toget married? Explain your answer.31. Question Do you think it is necessary tohave laws that prohibit certain types ofmarriages?32. Respond Do you think covenant marriagesshould be adopted in all 50 states? Why orwhy not?Chapter 31: Marriage 691

CHAPTERDivorce and ItsLegal ConsequencesUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 32: Divorce and Its LegalConsequences—Chapter Overviews topreview the chapter information.

The Opening SceneRobin Johnson and her fiancé, Patrick Regan, aretalking in the living room of the Johnson residence.Caught in the MiddleROBIN: Has Bill had any luck finding a job since hegot laid off?PATRICK: Didn’t I tell you? This will blow your mind!Bill left Betty and the twins and moved to Alaska.ROBIN: Bill and Betty split up? What a shocker! I neverwould’ve thought that could happen. They seemedto have such a strong marriage. When did he go?PATRICK: About two weeks ago. I think losing his jobwas just too much for Bill to handle. I heard he waspretty depressed. Betty’s devastated about thesituation. I hear she’s gonna file for divorce thisweek on grounds of desertion.ROBIN: Isn’t that rushing things? Maybe he’ll comeback. How could he leave those beautiful twins?Why, he took care of them all of the time after helost his job.PATRICK: True. When Betty went back to work, Billstayed home.ROBIN: I don’t understand what’s happening thesedays. So many people are getting divorced! It’sreally discouraging!PATRICK: Either that or they’re having their marriagesannulled.ROBIN: Whatever. Isn’t an annulment the same as adivorce?PATRICK: I’m not sure.(Six months later, Robin meets Betty at the supermarket.The twins are sitting in the grocery cart. Betty lookstired and unhappy.)ROBIN: Hi, Betty. The twins are so big I hardlyrecognized them!BETTY: Well, you’d better take a good look. Theymay not be here much longer.ROBIN: I don’t understand! What do you mean? Areyou moving?BETTY: No, I’m staying right where I am. But Bill istrying to get custody of the twins. I thought thatmothers always have the right to keep theirchildren.ROBIN: I don’t know how the courts decide things likethat. But you probably don’t have to worry.Everyone knows you’re a great mother. Don’t letthis worry you.BETTY: Thanks, Robin. I appreciate that.ROBIN: Things must be pretty tough for you rightnow. Does Bill send you anything for support?BETTY: That’s another problem. Bill says he won’tpay the support payment the judge ordered if hedoesn’t have custody. How can I force him to paywhen he’s in Alaska?ROBIN: I see what you mean.BETTY: Well, the twins are getting restless. I’d betterfinish my shopping. It’s nice to see you, Robin.ROBIN: Thanks, Betty. It’s good to see you, too.Good luck!1. Can a spouse file for a divorce on the grounds ofdesertion two weeks after the other spouse hasleft home?2. What is the difference between a divorce and anannulment?3. Do mothers always have the right to custody oftheir children?4. Does the law provide a method for obtainingsupport payments from spouses who live outof state?Chapter 32: Divorce and Its Legal Consequences 693

Ending a Marriagel How to describe anannulment, a legalseparation, and adivorcel How to list the generalgrounds for anannulmentl How to contrast alegal separation with adivorcel How to name anddescribe the mostcommon grounds fordivorcel How to distinguishbetween one’sresidence and one’sdomicile and discusswhat this means in adivorce proceedingLearning about divorcelaws will help you betterdeal with the processshould you ever beinvolved in a divorce.How Marriages EndA marriage comes to an end in one of three ways: the death of oneof the parties, annulment, or divorce. An annulment is a declarationby the court that the marriage was never effective; it was void from thebeginning. Although the laws vary from state to state, marriages generallycan be annulled on the grounds of duress and fraud. When someoneis forced to marry against his or her will, it is considered duress.When a person is persuaded to marry by misrepresentation, it is fraud.Some common examples of fraud that are grounds for annulmentinclude being below the state age to marry, secretly intending never tohave children, or concealing pregnancy by someone other than thehusband.Legal Separation and DivorceA legal separation , also called a limited divorce or a separationfrom bed and board, is a court judgment ending the right to cohabitation.In making a separation judgment, the court will temporarily decidethe issues of child custody andsupport, but you and your spouseremain married until there is anabsolute (final) divorce.In contrast, a divorce (calleddissolution of marriage in somestates) is a declaration by the courtthat a valid marriage has come toan end.l annulmentl legal separationl divorcel no-fault divorcel adulteryl desertionl domicilel residenceBECOMING DIVORCEDNearly half of marriagestoday eventually end indivorce. Why do you thinkthis is so?694 Unit 7: Planning for the Future

Grounds for DivorceThe grounds for divorce vary among the states. Figure 32.1 summarizesthe divorce laws of different states.No-Fault DivorceAlmost all states have a no-fault divorce law, which eliminates theneed to prove that one party is to blame. States give different names tothe breakdown of the marriage relationship, including incompatibility,irretrievable breakdown, and irreconcilable differences.The Uniform Marriage and Divorce Act, which has been adoptedby Arizona, Colorado, Illinois, Kentucky, Minnesota, Missouri, Montana,and Washington, has eliminated the traditional grounds for divorcein favor of the no-fault approach. In these states, the procedure isreferred to as a dissolution rather than a divorce, and the grounds for adissolution is called irretrievable breakdown.A few states have for many years allowed divorce on the grounds ofincompatibility. One spouse does not have to prove that the other spouseis at fault. All that is required is evidence indicating that the couple hasa personality conflict so deep that there is no chance for a reconciliation.Many states require that you live apart from your spouse for a periodof time before a divorce is allowed. Reconciliation bureaus have beenestablished in some states in an attempt to reunite couples and save marriages,and various states have established procedures for couples toseek reconciliation. Some states have enacted simplified dissolution ofmarriage procedures that end marriages quickly, often without the needfor a lawyer.Traditional Grounds for DivorceThe grounds for divorce vary from state to state. In most states, however,you only need to prove that the marriage relationship has brokendown to get a divorce.Alcohol AbuseAs you learned in thischapter, alcoholism isgrounds for divorcein most states. Thisdisease affects millionsof Americans. A personwho is dependanton alcohol suffersincreased risks forcancer, heart disease,liver disfunction, anddepression. Did youknow that manyteens suffer fromalcoholism? Whatcan you do if yoususpect that one ofyour friends suffersfrom an alcoholrelatedproblem?Get involvedLearn the signs thatindicate a potentialproblem with alcohol.Volunteer at a teencrisis center thatspecializes in chemicalabuse issues.Adultery Having a voluntary sexual relationship with someone otherthan your spouse is called adultery . It is a crime in some states, inaddition to being grounds for divorce. Because of its private nature,adultery is most commonly proven by circumstantial evidence (evidencethat is indirect). It is often proven by showing the person charged hadthe opportunity to commit adultery and the inclination or tendency todo so. Establishing these two elements is usually enough for a court togrant the complaining party a divorce. However, criminal adultery mustbe proven beyond a reasonable doubt.Chapter 32: Divorce and Its Legal Consequences 695

Figure 32.1Grounds for Divorce and Residency RequirementsSTATE No Fault No Fault Incompatibility Parties Legal MustSole Plus Available Must Live Separation Live inGround Traditional Apart Available StateAlabama x x 2 years x 6 monthsAlaska x x 2 years x 6 monthsArizona x x 1 x 90 daysArkansas x 18 mos. x 60 daysCalifornia x x 6 monthsColorado x x 90 daysConnecticut x 18 mos. x 1 yearDelaware x x 6 mos. 6 monthsDistrict of Columbia x 1 year x 6 monthsFlorida x 6 monthsGeorgia x 6 monthsHawaii x 2 years 1 x 6 monthsIdaho x x 6 weeksIllinois x 2 years x 90 daysIndiana x x 60 daysIowa x x 1 yearKansas x x 60 daysKentucky x 60 days x 180 daysLouisiana x 2 6 months 3 x 6 monthsMaine x x 6 monthsMaryland x 1 year 1 yearMassachusetts x x NoneMichigan x x 6 monthsMinnesota x x 180 daysMississippi x 6 monthsMissouri x 1–2 years x 90 daysMontana x x 180 days x 90 daysNebraska x x 1 yearDIVORCE LAWSMost states have otherdivorce laws in addition tothose listed here. Divorcelaws can change, however,and a check of current statelaws is advised. How wouldyou learn about your state’scurrent divorce laws?Example 1. Ralph Aronson sought a divorce from his wife, June,in Illinois. He charged that she committed adultery with DavidBernhardt, who roomed in the same house with them. There wasevidence that a sexual relationship between Ralph and June hadnot existed for many years, and that June often visited bars andwent on dates with other men. The court granted the divorce,saying that both the opportunity and the inclination to commitadultery existed.696 Unit 7: Planning for the FutureIn Example 1, if June had been charged with criminal adultery, thecircumstantial evidence would not have been enough to convict her. To

Figure 32.1 ContinuedGrounds for Divorce and Residency RequirementsSTATE No Fault No Fault Incompatibility Parties Legal MustSole Plus Available Must Live Separation Live inGround Traditional Apart Available StateNevada x 1 year x 6 weeksNew Hampshire x 2 years 1 yearNew Jersey x 18 mos. 1 yearNew Mexico x x x 6 monthsNew York x 1 year x 1 yearNorth Carolina x 1 year x 6 monthsNorth Dakota x x 6 monthsOhio x x 1 year 6 monthsOklahoma x x 6 monthsOregon x x 6 monthsPennsylvania x 2 years 6 monthsRhode Island x 3 years x 1 yearSouth Carolina x 1 year x 3 months(both residents)South Dakota x x NoneTennessee x 2 years x 6 monthsTexas x 3 years 6 monthsUtah x 3 years x 90 daysVermont x 6 months 6 monthsVirginia x 1 year x 6 monthsWashington x 1 yearWest Virginia x 1 year x 1 yearWisconsin x x 6 monthsWyoming x x x 60 days1. Grounds are either marriage irretrievably broken or two years separation.2. Covenant marriage statutes establish specific grounds for divorce for covenant marriages.3. Two years for covenant marriages.convict someone of any crime, the state must prove the defendant guiltybeyond a reasonable doubt.Cruelty Until the introduction of no-fault divorce laws, cruelty wasthe most common ground for divorce. Generally, to prove cruelty, youmust show that there has been personal violence that endangers yourlife or health and that makes living together unsafe or unbearable.Usually, more than one act of violence is required. Sometimes, however,it is possible to obtain a divorce because of mental suffering alone.In these cases, you must prove that the mental suffering was caused byyour spouse and that it damaged your health.Chapter 32: Divorce and Its Legal Consequences 697

Example 2. Elise Carruthers persisted in going out with othermen against the objections of her husband, Stan. He became soupset over her conduct that his health deteriorated. The courtgranted a divorce on the grounds of cruelty, even though therewas no physical violence.Desertion The unjustified separation of one spouse from the otherwith the intent of not returning, for a time set by law (normally one year)is called desertion . The spouse seeking the divorce must want the otherspouse to return. He or she cannot consent to the other spouse’s absence.Alcoholism or Drug Addiction Habitual intoxication, either withalcohol or drugs, is grounds for divorce in many states. The habit must beconfirmed, persistent, voluntary, and excessive. It is the abuse of alcoholor drugs, rather than the mere use of them, that is grounds for divorce.Nonsupport If you seek a divorce for nonsupport, you must showthat your spouse had the ability to provide economic support butClaim Your NameWhen a man and woman marry, the woman sometimes chooses to followestablished custom by taking the husband’s last name. Upon divorce, thewoman may decide to change back to her former name and also change thelast name of her children. In most states, the judge hearing the divorce will alsoentertain a petition to restore a spouse’s former name. If the judge orders suchrestoration in the divorce decree, that’s all the paperwork needed to apply fora name change on personal records and identification. If the divorce decreedoes not address this issue, a name change can usually be accomplishedinformally by resuming use of the former name consistently. Then the spousecan request that it be changed on all personal records.A child’s name may be changed from that of the father only upon petitionto the court. The court will order a name change if it is in the best interest of thechild. The court weighs factors such as whether the mother is remarrying andthe need to identify with a new family unit.Conduct Research Research your state laws regarding name changes forchildren. How does a name change affect parental rights and responsibilities?698 Unit 7: Planning for the Future

NONSUPPORTNonsupport is one of thetraditional grounds fordivorce still available insome states. What must aspouse seeking such adivorce prove in court?willfully failed to do so. In the past, nonsupport could be used as groundsfor divorce only by the wife and only in the states that recognized it. Inrecent years, however, more states have begun to allow the husband touse nonsupport as grounds for divorce.Social StudiesAttitudes about divorceare very different in manyother countries. In someEuropean countries, ifa couple has children, awaiting period of severalyears is required beforea divorce is granted.Divorce is unusual inKorea. In Israel, thedivorce rate has beenincreasing steadily overthe last few years.Research ActivitySelect a country andresearch the divorcelaws and attitudes aboutdivorce in that country.Write a two-page papercomparing the laws andattitudes with those inthe United States.Conviction of a Felony Many states allow a divorce if either partyis convicted of a felony, an infamous (disgraceful) crime, or a crime ofmoral turpitude (one that is morally wrong). Some states also permit adivorce if one spouse is imprisoned for a certain number of years afterthe marriage occurs.Domicile and ResidenceRequirementsFor a court to hear a case, it must have the authority, or jurisdiction.In a divorce case, the court’s jurisdiction is based on where the personseeking the divorce makes his or her home.DomicileThe person asking for the divorce must be domiciled within the geographicarea over which the court has jurisdiction. A domicile is yourprincipal place of abode. It is the place to which, when you are absent,you have the intent of returning. A domicile cannot be abandoned orChapter 32: Divorce and Its Legal Consequences 699

Fingerprint ExpertKevin Teddy is an expert in fingers and toes. For the last16 years, the Michigan State Police officer has helped convicthundreds of criminals by identifying the unique patterns ofloops, arches, and whorls on their fingers—and sometimes,their toes.“The use of forensic DNA is an up-and-coming science,” says Teddy, whorecently was appointed director of the Michigan State Police Forensic ScienceDivision’s Grayling Lab. “But in most investigations, fingerprints are still thenumber one piece of evidence.”Despite the identification of hundreds of thousands of fingerprints during thelast century, no two have ever been found to be identical. In fact, Teddy says,each of the fingerprints from a single individual is unique.Investigating officers collect fingerprints by dusting the surface of an objectwith special fine powders that enhance the natural oils left behind by a hand. Theprint is photographed and then “lifted” with an adhesive strip. A clear, rigid pieceof plastic is attached to the adhesive strip to preserve the fingerprint as evidence.The item is identified according to where the print was found, the date and time,and the officer’s initials.Although the best surfaces for fingerprinting are hard and shiny, Teddy hasgotten good prints from paper, tightly woven cloth, and even a tomato. As a fulltimefingerprint specialist, he identified more than 300 suspects per year throughthe patterns on their fingers or toes.“Before I became the head of the lab, I examined thousands of prints everyday,” Teddy says. “I love it—it’s a science that’s part art. You need to be able tosee patterns and form an opinion as well as understand the technical and scientificaspects. And I like the fact that I’m providing a service to people by catching thebad guys.”SkillsPersonalityEducationStandard and digital photography; computer; artisticPatient, meticulous, dedicatedDegree in chemistry for fingerprinting techniques; policeacademy training and crime scene experience.For more information on fingerprinting, visit the International Association forIdentification, www.theiai.org/; the Web site of the Southern CaliforniaAssociation of Fingerprint Officers, www.scafo.org; ubpl.glencoe.com; or yourpublic library.700 Unit 7: Planning for the Future

surrendered until another domicile is acquired. You may have severalresidences, but you can have only one domicile at any given time.Members of the military are presumed to retain the domicile of theirhome state, unless they are able to prove otherwise. Under the UniformMarriage and Divorce Act, however, a member of the armed servicesmay obtain a divorce in the place where he or she is stationed.Residence RequirementsA residence is a place where you actually live, or reside. It may ormay not be your domicile.Example 3. While attending college, Kathleen Zacharias livedin a dormitory in California (her residence). She spent thesummer working at Yellowstone National Park in Wyoming(another residence). Her domicile during this entire period, however,was her home in Kansas because it was her principal placeof abode and she intended to return there to live in the future.In addition to requiring that persons seeking divorces be domiciledin their jurisdiction, most states have particular residence requirements.Example 4. Myrna Clouser lived with her husband, Pete, in Arizona.When marital difficulties arose, she left and went to livewith her parents in New Mexico. Upon seeking a divorce in thatstate, however, she was told she would have to live in New Mexicofor at least six months before bringing the divorce action.Child Supportand VisitationLouis Ingram’s parentsare divorced. Hismother has custodyof him and his twosisters, and his fatherhas visitation rights.Last month Mr. Ingramlost his job, and hestopped paying childsupport. Louis’s motherrefuses to allow hisfather further visitation.Should Louis’s motherallow visitation? Shouldhis father pay somethingtoward childsupport?Reviewing What You Learned1. What is the difference between an annulment,a legal separation, and a divorce?2. Explain the general grounds for anannulment.3. In legal terms, contrast a legal separationwith a divorce.4. Describe the common grounds for divorce.5. How does distinguishing between one’sresidence and one’s domicile relate to adivorce proceeding?Critical Thinking ActivityNo-Fault Divorce Why do you think moststates have a no-fault divorce law?Legal Skills in ActionDivorce Law Several top lawyers from aroundthe country have been debating the currentdivorce laws. Imagine you have a chance to addto their discussion. Write a letter to the lawyersexplaining what you would like to see changedabout the current divorce laws in this country.Chapter 32: Divorce and Its Legal Consequences 701

Divorce Settlementl How to identify factorsconsidered indetermining alimonypaymentsl How to describe theway marital propertyis distributed when acouple divorcesl How to explain thelaws regardingcustody and support ofchildrenUnderstanding the lawsabout alimony, propertydistribution, custody, andsupport can help youthrough a difficultdivorce.l alimonyl equitable distributionlawsl sole custodyl joint custodyAlimonyThe word alimony comes from Latin and means “sustenance,” or“nourishment.” In the legal context of divorce, alimony is an allowancefor support and maintenance made to a divorced person by a formerspouse. It is not intended as a penalty.Temporary alimony is granted to one of the spouses while he or sheis waiting for a divorce or separate support action to be completed. It issometimes called alimony pendent lite, meaning “alimony pending alawsuit.” Usually, the spouse who is found to have been at fault duringthe marriage will not be awarded alimony.Example 5. Stephen Gagne obtained a divorce from his wife,Eliza, on grounds of cruelty. The court did not order him to payanything to Eliza because her misconduct during the marriage(her cruelty to Stephen) eliminated her entitlement to alimony.There is no fixed rule for determining the amount of alimony. Suchfactors as your income and earning capacity, financial resources, futureprospects, current obligations, the number of dependents, and thenumber of former or subsequent spouses are taken into consideration.Also considered are your spouse’s situation in life, earning capacity,separate property, contribution to your property, age, health, obligations,and number of dependents.If a spouse who is receiving alimony gets married again, that doesn’tnecessarily end the obligation to pay. Usually, however, the court willchange its order relative to alimony in such a circumstance. In moststates, the death of either party ends the obligation to pay alimony. Thelaws of a few states require the deceased husband’s estate to continuepaying alimony.Marital PropertyMost states have laws intended to assure equitable distribution ofmarital property when a couple divorces. Equitable distribution lawsallow judges to distribute property equitably, or fairly, between a husbandand wife, regardless of who has title to the property. In dividing the property,judges consider such things as the age and individual earning powerof each spouse, the length of the marriage, and the contributions of eachspouse to the marriage, including the value of homemaking services.702 Unit 7: Planning for the Future

On divorce, property is distributed differently depending uponwhether a state is community or non-community property state. In noncommunitystates, assets and earnings gained during marriage are dividedequitably; that is, as the court deems fair. For example, the higherwage earner might take two-thirds of the assets and the lower wageearner may receive only one-third. In community property states, eachspouse is said to own a one-half interest in property acquired during themarriage. Property owned before marriage or received as a gift remainsseparate property unless it is commingled with community property ortreated as such.Custody and Support of ChildrenWhen marriages fail, the custody and support of the couple’schildren is a major concern of society. Many states have passed laws toprotect children in such circumstances.Custody of ChildrenThe parents of children born within a marriage are considered to bejoint guardians of their offspring. If they break up, each parent has anequal right to custody of the children, and state law governs most custodymatters. Most states divide custody into two parts: legal custody andphysical custody. Legal custody is the parent’s right to make majordecisions about the child’s health, education, and welfare. Physical custodydeals with the daily living arrangements of the child.Sole custody gives all parental rights, duties, and powers to one parent.Joint custody divides the rights, duties, and powers between theparents. Under sole custody, the children live with the custodial parent, andvisitation rights are given to thenoncustodial parent. Under jointcustody, the children live with eachparent at different times.In awarding custody, the courtattempts to determine what is in thebest interests of the child. Parentsare allowed to compete for custodyon an equal footing, but the decisionis based on the child’s needs.Some states favor awarding custodyto the primary caretaker in the marriage.The primary caretaker is theparent who spent the most time caringfor the child. Many states alsogive great weight to the child’swishes in determining custody.Married couples aremore likely to staytogether than couplesthat only cohabitate.According to agovernment study in2002, the probabilityof a first marriageending in separation ordivorce after 10 yearsis 33 percent, comparedto 62 percent forcohabitations.CHILD CUSTODYWhen parents break up,each parent has an equalright to his or her child’scustody. What does thecourt attempt to determinewhen awarding custody?Chapter 32: Divorce and Its Legal Consequences 703

“Divorce.Com”The Internet is a vast source of information. Almost any legal topic can beresearched on the Internet. Some Web sites focus only on one specific legalissue, such as divorce. There are several Web sites that offer information ondivorce laws in each of the states. These sites also offer ways to allow consumersto calculate child support. Consumers can also go to these sites to get divorcedocument packages. (Source: New York Times, February 22, 2001)Connect Search the Internet for Web sites that offer legal informationpertaining to divorce. Determine the extent of advice available.704 Unit 7: Planning for the FutureSupport of ChildrenChild support is a basic obligation of every parent. This obligationexists regardless of which parent has custody.State Guidelines Federal regulations require that every state adoptchild support guidelines. The guidelines must:l Take into consideration all earnings and income of the noncustodialparent.l Have specific criteria and a mathematical formula that determine thesupport obligation.l Provide for the children’s healthcare needs, through insurancecoverage or other means.Federal regulations also recommend that states adhere to the followingprinciples in their establishing guidelines:l Both parents should share responsibility for support of their childrenin proportion to their income.l The subsistence needs of each parent should be considered, but thechild support obligation should never be set at zero.l Child support must cover a child’s basic needs, plus ensure that thechild is entitled to share in a parent’s standard of living.l Each child has an equal right to share in his or her parent’s income,subject to the child’s age, the parent’s income, income of a currentspouse, and other dependents.l Each child is entitled to support, even if the parents were not marriedat the time of his or her birth.l A guideline should encourage the involvement of both parents in thechild’s upbringing.

Enforcement A legal order for child supportis necessary to assure enforcement ofchild support. The legal order can be obtainedfrom a judge, or in some courts, from an administrativehearing officer. The supportorder must follow the state guidelines previouslymentioned.The Uniform Interstate Family SupportAct (UIFSA) allows support orders of onestate to be enforced in every state. The actalso provides for the registration of supportorders in different states so that people whodo not pay can be found more easily. Out-ofstateemployers can withhold support paymentsfrom an employee’s paycheck for childsupport. Federal and state income tax refundscan also be sidetracked to pay for support, andliens can be placed on out-of-state real estate.Passports may also be denied to enforce childsupport orders.CHILD SUPPORTStates are required to adopt child support guidelinesthat take into consideration all earning and incomeof the absent parent. How should parents shareresponsibility for supporting their children?Reviewing What You Learned1. What factors are taken into considerationwhen determining the amount of alimony tobe awarded?2. Explain the equitable distribution laws.3. Describe the difference between sole andjoint custody.Critical Thinking ActivityEnforcement What do you think might happenif the Uniform Reciprocal EnforcementSupport Act were not enforced in all states?Legal Skills in ActionAsset Distribution Milka and Marvin aredivorcing after 25 years of marriage. Togetherthey own a home worth $125,000, furnitureworth $56,500, and two cars worth $22,300,and they have approximately $45,630 in cash.Based on the contributions of each spouse tothe marriage, the judge has ruled that Milkawill receive 66.6 percent of their total assets.What is the dollar value of Milka’s distribution?Chapter 32: Divorce and Its Legal Consequences 705

CHAPTERASSESSMENTSection 32.1 Ending a Marriage● A marriage comes to an end in one of three ways:the death of one of the parties, annulment, ordivorce. An annulment is a declaration by thecourt that a marriage was never valid. Althoughthe laws vary from state to state, marriagesgenerally can be annulled on the grounds ofduress and fraud. In contrast, a divorce is adeclaration by the court that a valid marriage hascome to an end. A legal separation declares thathusband and wife no longer have the right tocohabit, but they are still considered married. Inmaking a separation judgment, the court willtemporarily decide the issues of child custodyand support, but you and your spouse remainmarried until there is an absolute (final) divorce.● Although laws vary from state to state, a marriagegenerally can be annulled when someone isforced to marry against his will or when someoneis persuaded to marry by the use of a misrepresentation.When a person is persuaded to marryby misrepresentation, it is fraud. Some commonexamples of fraud that are grounds for annulmentinclude being below the state age to marry, secretlyintending never to have children, or concealingpregnancy by someone other than the husband.● A legal separation is a court judgment ending theright to cohabit, but the parties remain marrieduntil the absolute divorce.● The grounds for divorce vary from state to state.In most states, however, you only need to provethat the marriage relationship has broken downto get a divorce. The most common grounds fordivorce are no-fault, adultery, cruelty, desertion,alcohol or drug addiction, nonsupport, convictionof a felony, and withholding knowledge of thedesire not to have children.● For a court to hear a case, it must have theauthority, or jurisdiction. In a divorce case, thecourt’s jurisdiction is based on where the personseeking the divorce makes his or her home. Aperson asking for the divorce must be domiciledwhere the court is located. A domicile is theprincipal place of abode, and the place to which,when you are absent, you have the intent ofreturning. A residence is a place where youactually live, which may or may not be yourdomicile. A domicile cannot be abandoned orsurrendered until another domicile is acquired.You may have several residences, but you canhave only one domicile at any given time.Section 32.2 Divorce Settlement● Alimony is not intended as a penalty. Usually, thespouse who is found to have been at fault duringthe marriage will not be awarded alimony. Thereis no fixed rule for determining the amount ofalimony. Some factors in determining an awardof alimony include each spouse’s income andearning capacity, financial resources, futureprospects, separate property, current obligations,the number of dependents, age, health, and thenumber of former spouses.● Equitable distribution laws allow judges to distributeproperty equitably, or fairly, between ahusband and wife, regardless of who has title tothe property. In determining equitable distributionof marital property when a couple is divorced,the court considers the age and earning power ofeach spouse, the length of the marriage, and thecontributions of each spouse to the marriage.● When spouses divorce, each parent has an equalright to the children’s custody. The court willaward the form of custody that is in the bestinterest of the child. Every state has adoptedchild support guidelines, and to enforce childsupport, a legal order is necessary.706 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.annulmentresidencelegal separationalimonydivorceequitable distribution lawsadulterysole custodydesertionjoint custodydomicileno-fault divorce1. Your best friend’s parents are getting a divorce. Using the legalterms provided, role-play a conversation you might have with yourfriend discussing the legal aspects of divorce.2. Share your feelings of this discussion in a paragraph. Was this aneasy conversation? Do you believe you could assist a friend whoseparents are getting a divorce? Why or why not?3. With your partner, discuss other general issues relating to divorce.Why has the rate of divorce increased dramatically in recentdecades? How can divorce be prevented? What are the long-termsocietal implications of divorce?Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 32:Divorce and Its LegalConsequences—Self-Check Quizzes to preparefor the chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. Is circumstantial evidence enough to prove criminal adultery? Why or why not?5. What kind of cruelty may be grounds for divorce?6. When a divorced spouse remarries, how might his or her alimony be affected?7. When dividing marital property, what do judges usually consider?8. Name the three ways custody arrangements can be made. Must the court approvethem all?9. What is a no-fault divorce?10. How has the Uniform Interstate Family Support Act (UIFSA) helped to protectchildren of divorced parents?Chapter 32: Divorce and Its Legal Consequences 707

CHAPTERASSESSMENTInterpreting and CommunicatingInformationInterview a local divorce attorney, mediator,family court advocate, or someone else whoworks with the divorce laws in your state.11. Ask questions regarding the specifics ofthe law such as annulment, legal separation,grounds for divorce, adultery, alimony,and custody issues.12. Prepare an oral presentation of yourfindings.13. Share your report with the class.14. As a class, discuss any surprising ordisturbing information.Choosing Between ParentsAfter 15 years of marriage, your aunt and unclehave decided to divorce. They have asked theirtwo children to decide with whom they want tolive. Your cousins don’t want to choose becausethey don’t want to hurt either parent’s feelings.They ask you for help in deciding what theyshould do.Debate15. What would you ask your cousins to thinkabout when making their decision?16. What would you advise them to do andupon what grounds would you base yourrecommendation?17. What would you do if you were in yourcousins’ shoes?For the following cases, give your decision andstate a legal principle that applies.18. Roger Bates believes that his divorce fromhis wife, Lisa, will not affect his ownershipof the house because the title is in his nameonly. Is he correct? Why or why not?19. Mike Trudeau divorces his wife, Eileen,on grounds of her adultery. Eileen seeksalimony from Mike. Is the court likely toaward it to her? Explain your answer.20. Henry and Gloria O’Brien divorce. Henryis ordered to pay $200 a week towardsupport of their children. He moves toanother state and stops making payments.Can Gloria enforce the court order? Whyor why not?21. Jean Darnelle, whose domicile is inMichigan, wants to divorce her husband,Philip. She is planning to spend a monthvacationing in Florida and thinks it wouldbe a good idea to get the divorce while she isthere. Can she do so? Explain your answer.22. Marta Pastore believes that her husband,Vicente, has committed adultery. Sheknows he often goes to a bar and leaveswith a woman, and that they often go to thewoman’s apartment. When Marta threatensto divorce Vicente on grounds of adultery,he claims she can’t prove it and thereforecan’t divorce him on those grounds. Doyou agree? Why or why not?23. To convince Jennifer Lind to marry him,Robert Crane informs Lind that he is amultimillionaire. During the couple’s courtship,Crane showers Lind with expensivegifts and promises to pay off all of her debts.However, after marrying Crane, Lind discoversthat he is destitute. On what grounds,if any, may Lind seek an annulment of themarriage?708 Unit 7: Planning for the Future

In each case that follows, you be the judge.24. AlimonyFrancis and June Connor were divorced. Although Francis was permanently and totally disabledand unable to support himself, the court ordered him to turn over his half of their house to June asalimony. Francis appealed the decision and asked the appellate court to order June to pay himalimony. Should the appellate court reverse the lower court’s decision? Why or why not?Connor v. Connor, 372 So.2d 130 (FL).25. Custody RightsPrior to their divorce, Tammy and John Tropea entered into a child custody agreement thatwas made part of the divorce judgment. Tammy was to have sole custody of their children,and John was granted visitation on holidays and “at least three days of each week.” The judgmentbarred the parties from relocating outside of their home county of Onondaga, New York,without court approval. A year later, Tammy asked the court for permission to relocate withthe children to the Schenectady area, which is over two hours away. She planned to marry anarchitect who had an established firm there. She stated that she was willing to cooperate in aliberal visitation schedule that would afford John frequent contact with his children. Shewould also drive the children to and from their father’s home. In awarding custody, what doesthe court attempt to determine?Tropea v. Tropea, 665 N.E.2d 145 (NY).Transfer of PropertyIn Section 32.2, you were introduced to the differentproperty laws in community and non-communitystates. Using the Internet, research and outline theprocess of transferring property ownership of realproperty in community property states. Then outlinethe process of transferring property ownership ofreal property in non-community property states.Connect26. In community property states, can propertyacquired during marriage be transferredwithout the consent of both spouses? Why orwhy not?27. In non-community property states, how isproperty transferred after a marriage ends indivorce?28. Predict Should the government make itdifficult to get a divorce? Why or why not?29. Connect What do you think couples cando before they are married to reduce theirchances of a divorce?30. Question Why do you think the groundsfor divorce are different in each state?31. Respond Do you think it is right thatemployers can withhold money fromemployees’ paychecks for child support?Chapter 32: Divorce and Its Legal Consequences 709

CHAPTERRenting a Place to LiveUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 33: Renting a Place to Live—Chapter Overviews to preview thechapter information.

The Opening SceneRobin and Patrick, whose wedding date is rapidlyapproaching, are looking for a place to live. In thisscene, they pull up in front of a two-family house.Apartment MishapsROBIN: I’m really beat. Every place we’ve seen hasbeen too expensive or too run-down.PATRICK: Or it’s already been rented.ROBIN: Can you believe that place where the ownersaid he never rented to young couples becausethey might have children?PATRICK: How about the one who wouldn’t allowdogs? Dusty has never bothered anyone. He’s justa big, lovable softie.ROBIN: I guess some people don’t like Great Danes.PATRICK: (Knocking on the door.) This place lookspretty good from the outside.OWNER: (Opening the door.) Hello, can I help you?PATRICK: Hi. We’d like to look at the apartment youadvertised. Is it still available?OWNER: Yes, it is. Come on in. I have two apartmentsupstairs, and the one on the right is vacant. I’llshow it to you. (On the way up, Robin stumblesand Patrick grabs her.) Watch out for that brokenstep! A couple of nails came out. I’m gonna fix itnext week. (Unlocking the door.) Here you are,take a look around.ROBIN: It’s nice!PATRICK: I don’t like that light fixture. The rest of theplace looks good, though.OWNER: This place never stays empty long.PATRICK: Is it okay to have a dog?OWNER: Sure. I like little critters.(After a careful inspection, Patrick and Robin tell thelandlord they will take the apartment.)OWNER: I’ll need a security deposit and the first andlast months’ rent.PATRICK: Do we need to sign a lease?OWNER: No way. I don’t bother with that written stuff.(A few weeks later, Robin and Patrick are nowmarried and settling into the apartment.)PATRICK: It’s great to have our own place!ROBIN: It’s wonderful! That new light fixture is justperfect. You did such a good job wiring. I wonderif we should have thrown out the old fixture, though.(A month later, Patrick and Robin are sitting in thedark with candles burning.)ROBIN: I can’t believe the landlord shut off ourelectricity just because he doesn’t like Dusty. Hesaid he’s going to keep the light fixture and oursecurity deposit, too—all because of Dusty!PATRICK: I’m going downstairs to set him straight!(Patrick rushes out the door, but he trips on theloose board on the stairs and tumbles to thebottom of the stairway.) Oooh! I think my leg’sbroken!ROBIN: Oh, no!1. Is it against the law to refuse to rent to peoplewho might have children in the future?2. Must the rental of an apartment be evidencedby a writing, or may it be oral?3. May a landlord legally shut off a tenant’selectricity?4. May a landlord keep a security deposit becausehe or she doesn’t like a tenant’s dog?5. Who owns fixtures that are installed by thetenant?6. Is the landlord or the tenant responsible forinjuries caused by a defect in a common areaof an apartment building?Chapter 33: Renting a Place to Live 711

The RentalAgreementl How to define themain types oftenancies available topersons who rent realpropertyl How to describe someof the commoncovenants found ina leasel How to summarizerent control lawsTenancyIf you rent real property, such as an apartment or house, you are atenant. If you own real property and rent it to someone else, you are alandlord. The contract between a tenant and landlord is called a lease.In a lease, the tenant is known as the lessee , and the landlord is thelessor .Types of TenanciesAlthough they rent from someone else, tenants own an interest in thereal estate they lease, called a leasehold estate or tenancy . The typesof tenancies are tenancy for years, periodic tenancy, tenancy at will, andtenancy at sufferance. Figure 33.1 shows some considerations to keepin mind when renting an apartment.Knowing all you canabout rental agreementsand the types oftenancies will help youchoose a place to live andknow how to addressdisputes that may arise.Figure 33.1Locationl Near school, workl Near church, mosque, synagoguel Near shoppingl Near public transportationl Near recreation: parks, museumsWhat to Look for in Selecting an ApartmentFinancesl Amount of monthly rentl Amount of security depositl Cost of utilitiesl Length of leasel lesseel lessorl tenancyl tenancy for yearsl periodic tenancyl rent dayl tenancy at willl tenancy at sufferancel leasel subleaseBuildingl Condition of building and groundsl Parking facilitiesl Recreation on premisesl Security systeml Condition of hallways, stairs, andelevatorsl Access to mailboxesLayout and Facilitiesl Size and condition of unitl Type and controls of heating andcooling systemsl Plumbing and water pressurel Type and condition of appliancesl Condition of doors, locks, windows,closets, and floorsAPARTMENT SEARCHMany considerations go into renting an apartment. Which of the fourbroad categories listed here would be most important to you?712 Unit 7: Planning for the Future

Eviction in the Land of High TechThe tight housing market in San Francisco and the Silicon Valley becameeven tighter during the late 1990s. Along with the boom times during theInternet economy came an increasingly large work force. Rental housingbecame scarce. Home prices went so high that many landlords started to stepup evictions so they could cash in by selling their rental units. Some tenantsrecognized this trend and were able to negotiate with their landlords to paytens of thousands of dollars to leave their apartments. (Source: San JoseMercury News, February 18, 2001, p. 3B)Connect Visit the Web site of an apartment location service in a major urbanarea. See what landlord-tenant issues are highlighted.Tenancy for YearsA tenancy for years is the right to occupy property for a definiteor fixed period of time. It may be for 1 week, 6 months, 1 year, 5 years,99 years, or any other period of time, as long as the time period is definite.A tenancy for 100 years or more has the effect of transferring absoluteownership to the tenant. For this reason, leases are occasionallywritten for 99-year periods. Some states require a tenancy for years tobe in writing because it is a transfer of an interest in real property.Other states require a tenancy to be in writing only if it’s for longerthan a year.Periodic TenancyA periodic tenancy , also called a tenancy from year to year (ormonth to month, or week to week), is a tenancy that continues for successivefixed periods. One of the parties may terminate this tenancy bygiving advance notice to the other party. If such proper notice is notgiven, the tenancy continues for another like period. The notice requirementdiffers from state to state, but it is often the period between rentdays. The rent day is the day on which the rent is due.Example 1. Enrica Pastore rented an apartment on a year-to-yearlease, which expired on December 31. On November 15, she toldher landlord she wanted to terminate the lease. In her state, however,three months’ notice is required to terminate a year-to-yeartenancy, so Enrica’s landlord could hold her to an additional year.Chapter 33: Renting a Place to Live 713

Tenancy at WillA tenancy at will is an interest in realproperty that continues for an indefiniteperiod of time. No written agreement isrequired to create this tenancy. It is terminatedwhen either the landlord or the tenantgives the notice required by state law, whichis usually 30 days.TENANCY AT WILLA tenancy at will continuesfor an indefinite period oftime. How is a tenancy atwill terminated?Tenancy at SufferanceA tenancy at sufferance arises when atenant doesn’t leave the premises after his orher tenancy has expired. This situation oftenoccurs when a tenancy for years expires orwhen a tenancy at will has been properlyterminated by the landlord but the tenantremains in possession. A tenant at sufferance,also called a holdover tenant, is awrongdoer who no longer has legal interestin the property. Generally, a tenant at sufferanceis not entitled to notice to vacate but isliable to pay rent for the period of occupancy.If a landlord accepts rent from a tenant after a tenancy has expired,a periodic tenancy or a tenancy at will may come about instead of atenancy at sufferance.The Lease AgreementA written agreement between a lessor and a lessee is called alease . The lease creates the landlord-tenant relationship. It provides thetenant with exclusive possession and control of the real property of thelandlord. The general rules of contract law apply to this form of agreement.Figure 33.2 shows a sample lease.714 Unit 7: Planning for the FutureTerms in a LeaseThe terms of a lease, known as covenants, set forth the rights andduties of the landlord and the tenant. The basic right that the tenantwants is possession and a continued occupancy, free from interferenceor annoyances. The landlord wants rent and possession of the propertyin good condition at the term’s end.Security Deposit In addition to the first month’s rent, landlords oftenrequire you to pay a security deposit and the last month’s rent at thebeginning of a tenancy. These requirements are intended to secure thepayment of rent or repairs for damages to the property. The security

Figure 33.2Description of the property,including its addressNames of ownersand tenantsDates duringwhich the leaseis validAmount of thesecurity depositAmount and duedate of monthlyrent and penaltiesfor late paymentList of restrictionsregarding pets,remodeling,activities,and so onTenant s rightto sublet therental unitConditions underwhich the landlordmay enter theapartmentCharges tothe tenantfor damage,moving out ofthe unit early,or refusing topay rentA Typical Lease AgreementRENTAL AGREEMENT OF PROPERTYAT 4744 LEMONA STREET, EAST TROY, WISCONSIN 53120Parties in agreement are Corey Lucas and Paula Yates. Corey has rented the second-floor apartmentto be used as a private residence, for his or her (one person) use only and for no other purpose, fora term of six months.The term of this agreement will be from June 1, 20--, to November 30, 20--, at which time anothersix-month agreement will be drawn.The rent will be $540 per month. There will be a security of one and one-half months’ rent, for a totalof $810. The monies held as security will be held until such time that the tenant desires to move oruntil he/she is asked to vacate the premises. The security deposit along with any interest it accrueswill be returned to the tenant, minus any monies held for repair or damages, rubbish removal, orcleaning to be done.Rent will be due from the tenant on the first of each month and not later than five days after the firstof each month. A late penalty of 5% of the monthly rent will be assessed for any rent not paid by theend of the five-day grace period.The tenant is personally responsible for paying the monthly expenses, including electric, telephone,and cable service. These expenses are not included in any monthly rent payment.The tenant was advised that there is to be NO SMOKING in the apartment while he/she is inresidence at this address.There will be no pets allowed at any time in the apartment while he/she resides here.If the tenant or landlord decides that the tenant must vacate the apartment, a thirty (30) day noticemust be given before the first of the month.The tenant may not sublease (rent to another person) this property without the landlord’s writtenpermission.The tenant must provide his/her own insurance on the contents of the apartment, such as furniture,jewelry, clothes, etc. The tenant will not hold the landlord or landlord’s agent responsible in the eventof a loss.The tenant agrees to let landlord enter property at reasonable hours to inspect or repair the property.Landlord will notify the tenant 24 hours in advance and give the time and reason for the visit.This place of residence shall be occupied by no more than (1) person.At the expiration of the tenancy, the tenant will surrender the premises to the landlord in as goodcondition as when received. The tenant will remove all rubbish from the premises. If he or she failsto do so, the tenant will forfeit part of the security deposit in order for the landlord to pay for removal.If the tenant breaks the lease for any reason, the landlord may keep the security deposit.This agreement is between Corey Lucas and Paula Yates. On this day, this agreement is signed byboth parties.Tenant Date Landlord Datedeposit often equals one month’s rent. Some states limit the amount ofa security deposit and require that interest be paid on it on an annualbasis.Decoration and Repairs The landlord has no obligation to decoratethe premises, unless the lease says so or unless it is required bystatute or local ordinance. The landlord, however, must make any repairsLEASEA lease is the agreementbetween the lessor and lesseethat puts in writing the detailsof the landlord-tenant relationship.Which componentsof a lease are likely to bemost negotiable?Chapter 33: Renting a Place to Live 715

necessary to keep the premises fit for living.For instance, a landlord would be requiredto address a major repair such as aleaky roof or a broken furnace. This obligationis known as the implied warranty ofhabitability. Basically, the tenant owns theproperty for the stated period and is obligatedto maintain the premises and makeany repairs that are not the obligation of thelandlord.SECURITY DEPOSITMost leases for apartmentscall for a security deposit toprotect the lessor againstnonpayment or propertydamage. What is the usualamount of a securitydeposit?Assignment and Subletting An assignmentof a lease occurs when you transferthe remaining period of time in a leaseto someone else. A sublease occurs when you transfer part of the termof a lease, but not the remainder of it, to someone else.Example 2. Charles and Nancy Olson held a three-year lease ona house in Wellesley. The house was near the college campuswhere their daughter went to school. One summer, while the leasewas still in effect, the Olsons went on an extended vacation. Theysublet their house to a friend, John Bennis, who had been hiredby the college for the summer. John and his family lived at thehouse until the Olsons returned in the fall.DECORATING AND REPAIRINGThe landlord has no obligation todecorate the premises unless it isprovided for in the lease. In whatcondition must the premises bewhen the tenant leaves?716 Unit 7: Planning for the Future

AustraliaIn 1982, Eddie Koiki Mabo, a native leader of Murray Island just north ofQueensland, stood in Australia’s High Court. He and several neighbors sought legalrights to land their ancestors had occupied for generations. The islanders disputedthe claim of terra nullius (land belonging to no one), which was the concept usedby the British Crown to possess the Australian continent. It took 10 years, but onJune 3, 1992, the Court ruled that the islanders were entitled to the “possession,occupation, use and enjoyment” of their land. The Mabo decision changed therelationship between Aboriginal natives and European settlers. For the first time,Aboriginal people could claim title to land that they believed was rightfully theirs.In response to the High Court decision, the Australian government enacted theNative Title Act of 1993. During its passage through Parliament, Australia’s PrimeMinister said, “. . . we give the indigenous people of Australia, at last, the standingthey are owed; as original occupants of this continent . . . as workers, soldiers,explorers, artists, sportsmen and women, . . . as people who have survived the lossof their land and the shattering of their culture.” Here’s a snapshot of Australia.Geographical area 2,966,153 sq. mi.Population 19,546,792CapitalCanberraLegal systemBased on Englishcommon lawLanguageEnglish, indigenouslanguagesReligion87% ChristianLife expectancy 80 yearsCritical Thinking Question The Aboriginal people will never reclaim all the land thatbelonged to their ancestors. Think of several ways the Australian government mighthelp compensate them for their loss. For more information on Australia, visitubpl.glencoe.com or your local library.If a landlord doesn’t want a tenant to assign or sublet the property,a covenant in the lease must say that. Otherwise, a tenant may eitherassign or sublet the property to someone else. However, the originaltenant is still responsible to the landlord for the rent.Chapter 33: Renting a Place to Live 717

When renting, keep thevolume on your stereolow. Most leases containa “quiet enjoyment”clause that basicallysays you can’t disruptyour neighbors, and ifyou do, you could be inviolation of the termsof your lease. Your landlordcould very well goto court to evict youfor playing your stereotoo loudly.Cases in some states have held that an implied covenant of goodfaith and fair dealing exists in every lease of business property. Underthis rule, landlords may not withhold consent to the sublease or assignmentof long-term leases to commercial premises without a good reason.Option to Renew or to Purchase Many leases contain a provisionallowing renters the option to renew the lease for one or more additionalperiods. This provision gives renters the right to a new lease, under thesame terms, for an additional period. Similarly, a renter can be givenan option to purchase the property. This is an agreement by the lessorto sell the property to the lessee for a stated price. To exercise an option,a renter must notify the lessor on or before the date set forth in the lease.Rent ControlSome large communities have passed rent control laws to keep rentwithin an affordable range. These laws limit what landlords can chargefor rental property and also often contain procedures that must be followedbefore tenants can be evicted. In a number of areas, rent controllaws have caused landlords to turn their apartments into condominiums,leading to shortages in rental apartments. Such laws differ from placeto place. Some states, including Massachusetts, have done away withrent control laws altogether.Reviewing What You Learned1. What is the difference between a tenancyfor years, a periodic tenancy, and a tenancyat will?2. Name the common covenants found ina lease.3. Explain rent control laws.Critical Thinking ActivityElements of a Contract Use the Internet,library, or other resource to find a copy of astandardized lease for an apartment. Thenexplain the elements of legal contracts asthey apply in the context of renting a place tolive.Legal Skills in ActionMaintaining the Premises The groundssurrounding the apartment complex where youlive are full of trash. The grass hasn’t beenmowed for weeks, and it looks pretty shabby.You’ve mentioned the problem to the landlord,but no action has been taken. Write a petition tocirculate among the tenants to ask the landlordto hold a meeting to discuss the difficulty.718 Unit 7: Planning for the Future

Responsibilities ofLandlord and TenantThe Landlord’s DutiesLandlords have specific duties imposed by law, in addition to thosefound in a lease. These duties include refraining from practicing discriminationin renting property, maintaining the premises, and deliveringpeaceful possession.Refrain from DiscriminationIn selecting tenants, landlords are bound by various laws againstdiscrimination. Laws such as the Civil Rights Act place special emphasison human needs and rights. In nearly all states, it is against the law fora landlord to refuse to rent or lease property to any person because ofrace, religion, color, national origin, sex, age, ancestry, or marital status.Refusing to rent to a member of the armed forces, a blind person, or aperson who might have children in the future is also against the law.Maintain the PremisesRental property offered for dwelling purposes must be fit for humanhabitation. This means that it must be relatively clean, properly heated,furnished with utilities, and safe.In some states, if you think the premises are not fit for human habitationand violate the sanitary code, you may pay rent to the court insteadof the landlord, pending correction of conditions. In other states, aftergiving notice to the landlord, you can correct the defect at your ownexpense and withhold rent up to the amount of that expense.Deliver Peaceful PossessionTenants are entitled to the exclusive peaceful possession and quietenjoyment of the rental premises. Quiet enjoyment is your right toundisturbed possession of the property. The landlord cannot interferewith these rights as long as you abide by the conditions of the lease andthose imposed by law.The Tenant’s DutiesTenants have the duties of paying rent, abiding by the terms of thelease, avoiding waste, and returning fixtures.Abiding by the Terms of the LeaseAs a tenant, you have the duty to pay rent to the landlord when it isdue. You must also observe the valid restrictions contained in the lease.l How to explain theduties of landlords andtenantsl How to describeeviction proceedingsl How to identify tortliability of landlordsand tenants to thirdpartiesThe better you understandthe responsibilitiesof landlords and tenants,the better prepared youwill be when you rent orlease property.l quiet enjoymentl wastel fixturesl trade fixturesl evictionl constructive evictionChapter 33: Renting a Place to Live 719

Failure to abide by the restrictions gives the landlord the right to seekeviction. Figure 33.3 shows some smart steps that tenants can follow tomake sure their rights are protected.DecoratingDisasterNehru and Ian agreedto share an apartmentthe year after theygraduated from highschool. Without consultingNehru or thelandlord, Ian paintedone wall in his bedroomblack. He thought itlooked cool. When theyear was up and Ianand Nehru moved out,the landlord refusedto return the depositbecause he saidrepainting the blackwall would take a lotof time and paint.Nehru wanted Ian topay him his portion ofthe deposit because itwas Ian’s fault that thedeposit wasn’t beingreturned. What are theethical issues? ShouldIan pay Nehru for thedeposit?Avoid WasteTenants also have a duty to avoid damaging or destroying the property,acts also known as committing waste. Waste is defined as substantialdamage to premises that significantly decreases the value of theproperty. You must return the premises to the landlord in as good a conditionas when you moved in, except for reasonable wear and tear. Ifyou have been guilty of waste, you must pay the landlord for the damage.Example 3. While renting a house in Public Square, ConnieMayles placed an electric heater in one of the rooms. The unit’sthermostat was broken, and the heater became red hot, burninga hole in the floor. This damage was not the result of ordinarywear and tear. Connie will be held responsible for having thefloor repaired.Return FixturesThe tenant must turn over to the landlord all fixtures in the premisesat the expiration of the tenancy. Fixtures are items of personal propertyattached to real property, such as built-in stoves and dishwashers,kitchen cabinets, and ceiling light fixtures. Unless otherwise agreed,Figure 33.3Step 1: The Searchl Choose a location and a price thatfit your needs.l Compare costs and featuresamong possible rental units.l Talk to people who live in theapartment complex or theneighborhood.Finding and Living in Rental HousingStep 2: Before Signing a Leasel Be sure that you understand andagree with all aspects of the lease.l Note the condition of the rentalunit in writing. Have the unit’sowner sign it.CHOOSING RENTALHOUSINGRenting involves morethan just finding a desirableapartment. In whatways do these stepsprotect the rights of bothtenant and landlord?Step 3: Living in Rental Propertyl Keep the place in good, cleancondition.l Notify the owner of any necessaryrepairs.l Respect the rights of neighbors.l Obtain renter’s insurance toprotect personal belongings.Step 4: At the End of the Leasel Leave the unit in at least as goodcondition as it was when youmoved in.l Tell your landlord where to sendyour refunded security deposit.l Ask that any deduction from yourdeposit be explained in writing.720 Unit 7: Planning for the Future

FIXTURESUnless otherwise agreed, fixtures become part of the realproperty and belong to the landlord, even when installedby the tenant. What are some examples of fixtures?they become part of the real property and belong to the landlord, evenwhen installed by the tenant.In determining whether an item is a fixture, courts consider thefollowing questions:l Has there been a temporary or permanent installation of the personalproperty?llCan the fixture be removed without damaging the building?What was the intent of the parties at the time the attachmentwas made?When fixtures are installed in such a way that their removal wouldruin the appearance of a room or building, they become part of the realproperty and cannot be removed.Subsidized HousingThe cost of renting anapartment or home canbe a large financialburden on some families.There are governmentprograms that can helpthose that have a realneed for subsidized orassisted housing. Seniorcitizens as well as victimsof natural disastersmay also qualify forgovernment help inrenting subsidizedhousing. Do you thinkthat the governmentshould assist inhousing poor ordisplaced people?Get InvolvedCall the Housing andUrban DevelopmentDepartment (HUDD) formore information onsubsidized housing.Write a report on thelegal qualifications forrenting governmentassisted housing.Example 4. Rene Fox rented an apartment from Tower Gardens.She did not like the light fixtures in the apartment and had themreplaced with ones she liked better. Rene also replaced the wallto-wallcarpeting that covered a plywood floor in the living room.Both items would now be considered fixtures and would belongto the landlord when Rene moved out.Chapter 33: Renting a Place to Live 721

RoomiesWhen two or more people sign a rental agreement, they become cotenants.This arrangement means that they share the same rights and responsibilitiesunder the lease. If one tenant behaves badly, it can have a negative effect onall the other cotenants.Under a cotenancy, each tenant is “jointly and severally” liable under theterms of the lease. In other words, a landlord can hold all tenants or just asingle tenant responsible for meeting the terms of the lease, including paymentof rent. For example, if one tenant skips on the rent, the other tenants are stillobligated to pay the full amount due to the landlord. If one tenant violates thelease in some way, all tenants can be evicted.One way to avoid potential problems with irresponsible roommates is tohave a written agreement covering issues that are likely to arise during the termof the lease. Such issues include rent, space allocation, household chores, foodsharing, noise, overnight guests, and moving out. Landlords aren’t bound bysuch agreements, and courts may not enforce anything but the financial terms.However, roommate agreements help put all parties on notice of the expectations.Writing What issues might be covered in a roommate agreement? Draft somesample terms.Trade fixtures are items of personal property brought to the premisesby the tenant that are necessary to carry on the trade or business towhich a rental property will be devoted. For example, if you leased astorefront for a small mending business, you might install sewingmachines, special lights, and perhaps a refrigerator to keep food. Whenyou leave at the conclusion of the lease, you could take these items withyou. Contrary to the general rule, trade fixtures remain the personalproperty of the tenant and can be removed at the end of the term ofoccupancy.Eviction ProceedingsEviction occurs when a landlord deprives a tenant of the physicalpossession of the premises. You can be evicted for things such as notpaying rent, remaining after the expiration of the lease, damaging thepremises (commission of waste), and violating provisions in the lease.722 Unit 7: Planning for the Future

It is illegal in every state, however, for a landlord to use force toevict a tenant. The landlord must first obtain a court order. The court willgenerally appoint a sheriff or other authorized officer to carry out theeviction order.A constructive eviction occurs when a landlord breaches a dutyunder the lease. This breach may take place if the landlord deprives youof heat, electricity, or some other fundamental service that was calledfor under the lease. When constructive eviction occurs, you may considerthe lease terminated, leave the premises, and stop paying rent. Decidingwhether a constructive eviction has occurred, however, is usuallya matter handled by a court.Tort LiabilityWhen someone is injured on rented or leased property, both thelandlord and the tenant may be liable. Whoever is in control of the areawhere the injury occurs is generally liable if the injury is caused by negligence.The landlord can be liable for injury caused by a defect in thecommon areas over which he or she has control, such as hallways orstairways. Likewise, as a tenant, you can be liable for injury caused bydefects in the portion of the premises over which you have control.MathematicsWhen renting an apartmentor house, youshould read and understandthe lease you areabout to sign. You shouldalso investigate all thecosts involved.Research ActivityResearch apartments inyour area. Select one thatyou would like to rent.Find out how much itwould cost to actually livethere. Include costs suchas first and last month’srent, security deposits,and utilities deposits andinstallations. Prepare abudget by using spreadsheetsoftware to recordyour findings.Reviewing What You Learned1. What are the duties of the landlord? Whatare the duties of the tenant?2. Under what circumstances may a landlordevict a tenant? How must eviction becarried out?3. Who is liable when someone is injured dueto a defect in an apartment house stairway?Why?Critical Thinking ActivityReasonable Wear and Tear What do you thinkis considered reasonable wear and tear on anapartment you have rented for one year?five years?Legal Skills in ActionLandlord LiabilitiesYou have rented a secondstoryapartment at the beach for the summer.The complex has a common picnic area withbarbeque grills, a swimming pool, and tenniscourts. You know you will have visitors allsummer long and wonder what might happen ifsomeone gets hurt. Make a list of the parts ofthe premises where the landlord would be liablefor injuries to one of your guests.Chapter 33: Renting a Place to Live 723

CHAPTERASSESSMENTSection 33.1 The Rental Agreement● Several types of tenancies exist. A tenancy foryears is the right to occupy property for a definiteor fixed period of time. It may be for 1 week,6 months, 1 year, 5 years, 99 years, or any otherperiod of time, as long as the time period isdefinite. A tenancy for 100 years usually has theeffect of transferring absolute ownership to thetenant. For this reason, leases are occasionallywritten for 99-year periods. Some states require atenancy for years to be in writing because it is atransfer of an interest in real property. A periodictenancy continues for successive fixed periods,subject to termination by advance notice. One ofthe parties may terminate this tenancy by givingadvance notice to the other party. If such propernotice is not given, the tenancy continues foranother like period. The notice requirementdiffers from state to state, but it is often the periodbetween rent days. A tenancy at will is the rightto occupy for an indefinite period of time, and itis subject to termination when either the landlordor tenant gives requisite notice. No written agreementis required to create this tenancy. A tenancyat sufferance arises when a tenant doesn’t leaveafter the expiration of her or his tenancy. A tenantat sufferance, also called a holdover tenant, is awrongdoer who no longer has legal interest inthe property. Generally, a tenant at sufferance isnot entitled to notice to vacate but is liable to payrent for the period of occupancy. If a landlordaccepts rent from a tenant after tenancy hasexpired, a periodic tenancy or a tenancy at willmay come about instead of a tenancy at sufferance.● Some covenants found in a lease are the following:(1) the landlord requires a monetary deposit assecurity deposit; (2) the landlord must makerepairs necessary to keep the premises fit forliving; (3) a tenant may assign or sublet the●leased property; and (4) the tenant may renewthe lease or purchase the property.To keep rent affordable, some communities haverent control laws that limit the amount of rentthat landlords can charge. These laws alsoinclude certain procedures that must be followedto evict tenants.Section 33.2 Responsibilities of Landlordand Tenant● Landlords have several duties. They must refrainfrom practicing discrimination in renting theirproperty. In nearly all states, it is against the lawfor a landlord to refuse to rent or lease propertyto any person because of race, religion, color,national origin, sex, age, ancestry, or maritalstatus. Refusing to rent to a member of the armedforces, a blind person, or a person who mighthave children in the future is also against the law.Landlords must also keep property for dwellingpurposes fit for human habitation. Tenants areentitled to the exclusive peaceful possession andquiet enjoyment of the property. Duties belongingto tenants include the duty to pay rent when it isdue and the duty to observe the valid restrictionscontained in the lease. Tenants also have a dutyto avoid damaging or destroying the property,acts known as committing waste. Waste isdefined as substantial damage to premises thatsignificantly decreases the value of the property.● A tenant can be evicted for failing to pay rent,remaining after the expiration of the lease,committing waste, and violating the provisionsof a lease. It is illegal in every state for a landlordto use force to evict a tenant.● The landlord can be liable for injuries caused bydefects in the common areas of leased property.The tenant can be liable for injuries that occur inthe area over which he or she has control.724 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.lesseelessortenancytenancy for yearsperiodic tenancytenancy at willtenancy at sufferancesubleasequiet enjoymentwastefixturestrade fixturesevictionconstructive eviction1. Imagine you are a landlord of a small apartment complex. Usingas many of the key terms as possible, write a lease for someonewho is planning to rent one of the apartments.2. With a partner, role-play a scenario in which a prospective, firsttimetenant asks questions about various parts of the lease. Try tobe as realistic as possible.3. Present your skit to the class.4. As a class, vote to select the best skit.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 33:Renting a Place toLive—Self-CheckQuizzes to prepare forthe chapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.5. How does a tenant become a tenant at sufferance?6. How does an implied warranty of habitability affect the landlord? the tenant?7. How does assigning a lease differ from subletting?8. In deciding a case that involves a dispute over ownership of a fixture, what factorsshould a judge consider?9. When constructive eviction occurs, what may a tenant consider about the lease?10. What are some factors that you should consider when renting an apartment?11. Why do most landlords require tenants to submit a security deposit?12. If a landlord does not a want a tenant to sublet his or her property, how can he or sheconvey this restriction?13. What is meant by the expression quiet enjoyment?14. What are trade fixtures?Chapter 33: Renting a Place to Live 725

CHAPTERASSESSMENTParticipating as a Member of a TeamObtain a standard lease form. With a partner,identify and explain the clauses that benefitthe landlord and the clauses that benefit thetenant, then:15. Compare leases with another team inyour class.16. Look for similarities and differences inthe leases.17. Choose the lease that you would prefer ifyou were seeking to rent. Justify yourchoice in a brief paragraph.Apartment MaintenancePete is a junior in college. He rents anapartment in a complex near the universitywhere he attends classes. Pete always pays hisrent on time. However, each month there aremore maintenance problems that go unfixed.The hot water heater has been broken for twoweeks, and the front door really needs painting.Pete is becoming frustrated and wants to breakhis lease and find a new place to live.Debate18. Can Pete legally break his lease? Why orwhy not?19. What else could Pete do besides move?Evaluate his various options with the helpof your classmates.20. If you were Pete, what would you do?For the following cases, give your decision andstate a legal principle that applies.21. Chanda Epstein rents an apartment for$500 a month. She does not sign a lease,and nothing is said about the length of herstay. Can Chanda end the tenancy whenevershe wishes, without giving notice tothe landlord? Why or why not?22. Bruce Yerkes rents an apartment fromScenic Acres, Inc., signing a three-yearlease. After living there for one year, Bruceassigns his lease to Pamela Pelletier andnotifies Scenic Acres, Inc. of the assignment.Pamela, however, fails to pay therent for three months. Can Scenic Acres,Inc. legally collect from Bruce? Explainyour answer.23. Maria Manzueta rents an apartment toGregory Shenker for $450 per month.Gregory loses his job and falls behind inhis rent payments. Maria threatens to throwhim out if he does not leave. Can Mariaforcibly evict Gregory? Why or why not?24. The furnace that heats Elizabeth Cain’sapartment breaks down. She notifies thelandlord, but the furnace is not repaired.Winter is approaching. On what legalground may Elizabeth seek relief?25. Michael Fernandez signs a one-year leasefor an apartment in the Executive Suites.During the winter, ice and snow pile upover the front entrance to the building, andthe janitor makes no effort to remove it. Afriend who visits Michael slips and falls onthe ice, suffering a serious injury. The landlordclaims that Michael is liable for theinjury. Do you agree? Explain your answer.726 Unit 7: Planning for the Future

In each case that follows, you be the judge.26. Injury LiabilityThe Kings lease a residential dwelling from a partnership called JA-SIN. The lease agreementprovides that the tenants are to “take good care of the house” and “make, at their own expense,the necessary repairs caused by their own neglect or misuse.” A guest of the Kings trips on aloose tread on an outside stairway and is injured. Who is responsible, the landlord or the tenant?Explain your answer.Ford v. JA- SIN, 420 A.2d 184 (DE).27. EvictionLolita Pentecost rents an apartment from M. Harward, an apartment manager. According toHarward, Pentecost did not pay her rent. Pentecost alleges that Harward forcefully evicted herand her two children and kept her furniture and possessions. Harward claims that he keptPentecost’s possessions because she did not pay the rent. Can a landlord forcefully evict atenant and keep the tenant’s possessions for nonpayment of rent? Why or why not?Pentecost v. Harward, 699 P.2d 696 (UT).Texas BoundSelina has received a huge promotion at work,and as part of her new job duties, she is beingtransferred to Austin, Texas. She will be renting anapartment in Austin for at least a year and needs tofind a new place to live.ConnectUsing a variety of search engines:28. Help Selina research apartments online.29. Use apartment locator services and onlineapartment guides as a place to start.30. Predict Why do you think it is important tohave a written lease when you rent a placeto live?31. Connect Who is liable if the apartmentyou sublet to a friend is damaged?32. Question Do you think a landlord has theright to enter the premises you rent?Explain your answer.33. Respond What can you do to make surethe premises where you live are as safeas possible?Chapter 33: Renting a Place to Live 727

CHAPTERBuying a HomeUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com andclick on Chapter 34: Buying a Home—Chapter Overviews to preview thechapter information.

The Opening SceneRobin and Patrick are sitting in their car in front ofa house with a “For Sale” sign on the front lawn.Home BaseROBIN: We’re really lucky. Not many people inheritenough money for a down payment on a house.Your Aunt Florence was really generous to us.PATRICK: She always did have a soft spot for me.ROBIN: This house is really cool.PATRICK: Yes. It’s nice. And the property around here iswell kept. That garage next door looks brand new.(A car drives up and stops behind their car.)BROKER: (Getting out of the car.) I see you found it allright. Isn’t this a beauty? Come on, I’ll show youthe inside. (They walk into the house.)BROKER: You’re going to love this place. It has threebedrooms, an updated kitchen, and a nice littleyard. Best of all, there’s a little apartment over thegarage that you can rent out.(After looking through the house, Patrick and Robindecide to buy it.)BROKER: You won’t be sorry. This house is the bestbuy I’ve had in a long time. Sign right here.PATRICK: Shouldn’t we have our lawyer look at thiscontract before we sign it?BROKER: That’s up to you, but you better hurry. Thisopportunity won’t last long.ROBIN: What kind of deed will we get?BROKER: The best kind—a quitclaim deed.PATRICK: Will the house be in both our names?BROKER: It sure will. You’ll own it as tenants incommon. That way, if one of you should passaway, the other will own the house outright.(Two months later, Patrick is measuring the length ofthe front yard with a tape measure. A car stops infront of the house, and a man gets out.)PATRICK: Hello.BUILDING INSPECTOR: Hello. I’m a building inspector.I saw your “Apartment for Rent” sign.PATRICK: Yes. We have an apartment for rent overthe garage.BUILDING INSPECTOR: You can’t rent an apartment here.This part of town is zoned for single families only.PATRICK: Really? We didn’t know that.BUILDING INSPECTOR: Sorry. (He drives off.)NEXT-DOOR NEIGHBOR: (Approaching.) Hi, Patrick!How’s everything?PATRICK: I just found out that we can’t rent ourapartment over the garage.NEIGHBOR: Is that right?PATRICK: And I’ve just measured my front yard,and it doesn’t seem to come out right. My deedsays that our front yard is 150 feet, but fromthat boundary over there, it goes two feet intoyour garage.NEIGHBOR: Are you sure? They built my garage onpart of your land?PATRICK: It looks that way.1. Is it important to have a lawyer check an agreementto buy a house before signing?2. Is a quitclaim deed the best kind of deed to have?3. What does owning property as tenants in commonmean?4. Do people always have the right to rent out anapartment in their house?5. Can someone gain title to another’s real propertyby placing a garage on it?Chapter 34: Buying a Home 729

l How to compare theadvantages anddisadvantages ofbuying a homel How to determine theamount of downpayment you will needand the approximateamount you canborrow to buy a homel How to describevarious types of homeownershipBeing able to evaluatehousing alternativeswill help you to decidewhether to purchasea home.l mortgagel equityl mortgagel equityl debt ratiol cooperativel condominiumEvaluating HousingAlternativesDeciding to Buy a HomeBuying a home may be the most important purchase you will evermake. You will need to weigh the advantages and disadvantages of homeownership, consider how much you can afford, and determine the typeof home that will best fit your needs (see Figure 34.1). You will probablyconsider taking out a mortgage to help you with the costs. A mortgageis a written instrument by which the buyer (the mortgagor) pledges realproperty to the lender (the mortgagee) as security for a loan.Advantages to Home BuyingA key advantage of owning your home is the ability to do with it asyou wish without having to answer to another owner. The gradual increasein equity , or the difference between the fair market value andthe mortgage, in the property is another important advantage of homeownership. Equity increases as you pay off the mortgage and as theproperty increases in value. Except during times of recession, you canoften sell a house for more than you paid for it. You can also deductproperty taxes and interest paid on your mortgage from your incometax return.Disadvantages to Home BuyingThere are some disadvantages to owning a house. They include theinconvenience and cost of upkeep, as well as the inability to move easilyand quickly if necessary.How Much Can You Afford?The first step in buying a house is determining the price range thatyou can afford. This information can be obtained by talking with a loanofficer at a bank. The officer can give you an idea of the amount ofdown payment you will need and the approximate amount you canborrow, based on your income and expenses.Down Payment Down-payment requirements range from zero to30 percent of the purchase price. Qualified veterans can obtain a Veteran’sAdministration (VA) loan to buy a house up to $240,000 with nodown payment. Mortgages backed by federal agencies, such as FannieMae and Freddy Mac, are available with a 3 percent down payment.730 Unit 7: Planning for the Future

Figure 34.1Renting an ApartmentEvaluating Housing AlternativesAdvantagesEasy to move; low maintenanceresponsibility; low financial commitment.DisadvantagesNo tax advantage; limitations on activities;less privacy.Renting a HouseOwning a HouseOwning aCondominiumOwning a Mobile HomeEasy to move; low maintenanceresponsibility; low financial commitment;more space.Pride of ownership; plenty of space; taxbenefits.Pride of ownership; fewer maintenancecosts or responsibilities than a house;tax benefits; access to recreation andbusinesses.Less expensive than other ownershipoptions.Higher utility expenses; some limitationson activities; no tax advantage.Financial commitment; high livingexpenses; limited mobility.Financial commitment; less privacy than ina house; need to get along with others;typically small and limited space; may behard to sell.May be hard to sell; possible poorconstruction quality.HOUSING ALTERNATIVESChoosing a type of housing is a decision thatinvolves many trade-offs. What are the threeadvantages or disadvantages on this list thatseem most important to you right now?FHA loans (loans insured by the Federal Housing Administration) canbe obtained with a down payment of 3 to 5 percent. Conventional bankloans require down payments ranging from 10 to 30 percent. See Figure34.2 for more information on loans.Loan Qualifications A lender will judge your ability to repay yourloan based on your credit report and your debt ratio , or the amount ofyour monthly payments compared to your monthly income. Your mortgagepayment, including taxes and insurance, should not exceed 28 percentof your monthly gross income. Total monthly debt payments(including your new mortgage, credit cards, car payments, and so on)should not exceed 36 percent of your income.Example 1. Ariel’s gross pay is $40,000 a year ($3,333 a month).The most she can afford for a monthly mortgage payment at 28percent is $933. Her total monthly debt payments at 36 percentshould not exceed $1,200.Chapter 34: Buying a Home 731

Figure 34.2AFFORDING A MORTGAGEYour financial condition and the value of the property you wish to buy determineshow much you can afford for a house. How much in other monthly debt payments,in addition to your mortgage, can you have if you buy a $100,000 house?732 Unit 7: Planning for the Future

A HAPPY DAYThe day you buy your firsthouse will be a memorableoccasion. Why is your debtratio important when youbuy a house?Types of Home OwnershipYou have many choices in selecting a home, depending on how muchyou can afford and the desired size of the house and its location. SeeFigure 34.3 for more information on buying a home.Single- and Multifamily HomesSingle-family homes are the most popular type of home. They offerthe most privacy and usually have more overall usable space than othertypes of housing.BUYING A HOUSEPurchasing a house is acomplicated process. Whatare some possible results ofnot thinking through all theelements discussed in thischapter?Figure 34.3The Elements of Buying a HouseIt’s important to consider the following issues when making a home purchase.Location. Consider both the surrounding community and the geographic region. The samehome may vary greatly in cost depending on where it’s located: in Kansas or California, on abusy highway or a quiet street, in a suburb or an urban neighborhood.Down Payment. A large down payment reduces your mortgagecosts, but how much can you afford to pay up front?Mortgage Rates and Points. You’ll have to choosebetween a lower mortgage rate with points and a highermortgage rate without points. You’ll also need to consider whattype of mortgage to arrange. When you apply for the loan, beprepared to provide the lender with copies of your financial recordsand other relevant information.Closing Costs. Settlement costs may range anywhere from two tosix percent of the total amount you borrow. That’s in addition to thedown payment.Monthly Payments. Your monthly payment for interest, principal,insurance, and taxes will be among your largest, most enduring expenses.Beware of buying a home that costs more than you can afford.Maintenance Costs. Homes require a lot of repair and maintenance. Be sureto set aside funds for these necessities.Chapter 34: Buying a Home 733

Criminal Court JudgeWhen Dianne Jones puts on her judge’s robes eachmorning and strides into Dallas County Criminal Court, shebrings years of knowledge and experience with her.“Before I became a judge,” Jones says, “I tried anddefended many cases as an attorney. You have to be quickon your feet when you are in charge of a courtroom, and criminal litigation helpsyou gain that ability.”Jones’ court handles misdemeanor cases, half of which concern family violencemisdemeanors. This category of crime includes stalking, violations of protectiveorders, and some kind of assault. She is especially interested in these kinds ofcases because they allow her to affect the lives of children.“It’s wonderful to think you might make a difference in these situations,” Jonessays. “I try to bring together defendants, victims, lawyers, and sometimes otherfamily members to try to resolve the family problems for the long term.”Often this means court-ordered counseling for the defendant. For most firsttimeoffenses, Jones places the convicted individual on probation and requiresthem to participate in regular counseling. If an individual does not fulfill theserequirements, Jones can be tough.“People on probation must show that they have seriously participated in therequired counseling within one month of my sentence,” she says. “If they can’t doso, they have violated their probation.” That usually means jail time.Jones prefers that people do fulfill her requirement for counseling. “The morepeople we catch at the front end of a misdemeanor,” she says, “the less likely themisdemeanor will become violent. It’s important to save children from beingexposed to this kind of behavior—both to protect them now and to keep themfrom growing up to repeat the kind of adult behavior they have witnessed.”Because Jones’ judicial position is an elected office, she also is very involvedin the political process. Every four years, she must campaign for re-election—aprocess that includes public speaking, raising campaign funds, and listening tothe issues brought by people in the Dallas community.SkillsPersonalityEducationPublic speaking; quick thinker; lots of litigation experience,if possible as a prosecutor and a defense attorneyRelaxed, but firm; willingness to listen to all sides; comfortableletting attorneys try their cases without micromanaging.Undergraduate degree; law degree; practical experienceas a trial lawyer.For more information about judges, visit ubpl.glencoe.com or visit yourpublic library.734 Unit 7: Planning for the Future

Multifamily dwellings are less expensive to own because of theincome from nonowner-occupied units. The owner’s monthly mortgageand tax payments can often come from rental income. Ownership of amultifamily dwelling can be a way to afford your first house.Mobile HomesMobile homes represent a sizable portion of the dwellings in thiscountry. Mobile homes, also known as manufactured homes, are lessexpensive to purchase than other types of houses and cost less to keepup. They usually can be sold quickly and easily.CooperativesA cooperative (co-op) is a form of home ownership in whichbuyers purchase shares in the corporation that owns an apartment buildingand holds the mortgage on it. Shareholders have a proprietary leasethat gives them the right to their individual units. Each shareholder hasthe right of possession of an apartment and must pay a share of the operatingexpenses, mortgage, and taxes.CondominiumsIn a condominium (often called a condo), each owner has anabsolute individual interest in an apartment unit and an undivided commoninterest in the common areas of the condo project. These commonareas include stairways, yards, swimming pools, parking areas, elevators,heating systems, and the like. An association made up of the condominiumowners manages the condominium.ComputerTechnologyBill Gates has one. Somedayyou might, too. Automatedhouses, also calledsmart houses, with computerizedcontrol systemsare gaining popularityaround the country. Toucha wall-mounted controlpanel and have yourchoice of hundreds ofmusical selections pipedthrough the house. Callyour house from your caron the way home fromwork and tell it to turnon the lights.Research ActivityPredict the future of the“smart house.” Write aone-page paper andinclude illustrations withyour vision for the future.Reviewing What You Learned1. What are the advantages and disadvantagesof buying a home?2. Is it possible to buy a home with no downpayment? Explain your answer.3. Describe the five types of home ownership.Critical Thinking ActivityLender Criteria If you were planning toborrow money to buy a home, why would youremployment history be important to a lender?Legal Skills in ActionCalculating the Down Payment Using thefollowing scenarios, determine the downpayment required on a house that costs$240,000. (Assume all other costs arealready included.)l VA loan to a qualified veteranl Fannie Mae loan: 3 percentl FHA loan: 4.5 percentl Conventional loan: 15 percentChapter 34: Buying a Home 735

l How to identify somesuggestions to followbefore signing acontract to buy ahousel How to describedifferent types ofmortgagesl How to compare thetypes of co-ownershipof real propertyl How to discuss thevarious deeds incommon usel How to explain waysthat title to propertycan be lostThe Home BuyingProcessContracting to Buy a HouseWhen you have found a house you like that is within your pricerange, the next step is to enter into a purchase and sale agreement withthe seller (see Figure 34.4). The agreement should be subject to yourgetting a mortgage to purchase the property. To obtain the best legalprotection, have a lawyer review the agreement before signing it.Applying for a MortgageLenders need security, a way of getting their money back in casethe borrower does not pay. Satisfying this need is the purpose of a mortgage.If the buyer, or mortgagor, pays the money back as agreed, thenthe mortgage is discharged, and the homeowner owns the propertyFigure 34.4Average Sales Prices of New Single-Family Homes$300,000$250,000Knowing about the homebuyingprocess will makethe experience easier foryou when that timecomes.$200,000$150,000$100,000$50,000l tenancy in commonl joint tenancyl tenancy by the entiretyl deedl easementl zoning lawsl eminent domainl adverse possession$01970 1975 1980 1985 1990 1995 2000NortheastSouthMidwestWestSELLING PRICEThe average selling price of homes in the United States has risen steadily since1970. Which region of the country experienced the greatest gain? the lowest?736 Unit 7: Planning for the Future

Don’t Fence Me InWhen property boundaries are in dispute, it is usually because a neighborwants to build a fence or cut down a tree close to the property line. One easyway to resolve such conflict is to hire a land surveyor to mark off the properlines. However, this option may be expensive. It can cost between $300 and$3,000 for a land survey, depending on the market and the complexity ofthe project.A less costly way to resolve such disputes is to agree on where you wantthe boundary to be located. Then it’s simply a matter of signing deeds thatproperly describe the new boundary. It is helpful to have an attorney draft thedescription to appear in the deed. Doing so will help avoid any potentialproblems with property transfer in the future, especially if there is a mortgageon the property. After the deed is signed, it should be recorded at the countyoffice of land records. Recording the deed will put others on notice of the newlegally recognized boundary.Research Activity Visit your County Recorder’s Office (sometimes called the LandRegistry Office) and ask about how they record deeds. Describe the process.outright. If the mortgagor does not pay the money back according tothe terms of the agreement, the lender, or mortgagee, can have the propertysold to pay off the loan.Types of MortgagesBecause different lenders charge different interest rates, you cansave money by shopping around for a mortgage. Because home buyerstypically mortgage large sums of money, even a slightly lower interestrate can translate into thousands of dollars of savings. There are varioustypes of mortgage loan plans available. A conventional mortgage typicallyoffered by a bank involves no government backing by either insuranceor guarantee. The loan is made by a private lender who exclusivelycarries the risk of loss. Such a loan usually requires a sizable downpayment, and interest rates vary from one lender to another. Althoughconventional loans are often written for a 30-year period, a shorter periodreduces the cost of the loan.Chapter 34: Buying a Home 737

Example 2. Monica and James Dipirro took out a mortgage loanof $80,000 at 9.5 percent for 30 years. They paid $672.68 eachmonth for principal and interest. The total cost of the loan overthe 30-year period was $162,165. Had they taken a 20-year loaninstead, their monthly payments would have been $745.70, but thecost of the loan over the 20-year period would have been$98,968—a savings of $63,197.To help meet borrowers’ needs, there is a variety of creative financingavailable (see Figure 34.5). A fixed-rate mortgage stays the samethroughout the life of the mortgage, but it requires a large down payment.An adjustable-rate mortgage (ARM) has an interest rate that moves upand down, following an index to which it is tied. A graduated-paymentmortgage has a fixed interest rate during the life of the mortgage, but theDIFFERENTMORTGAGESReal estate loans aremade with a variety offinancing plans. Whattype of mortgage allowslower monthly paymentsat the beginning of theloan when your incomeis lowest, and increasesas your income rises?Figure 34.5TypeFixed Rate MortgageAdjustable RateMortgageBalloon-PaymentMortgageGraduated-PaymentMortgageShared-AppreciationMortgageAssumable MortgageSeller Take-BackMortgageWraparound MortgageSome Methods of Financing a HomeDescriptionFixed interest rate, usually long-term; equal monthlypayments, including principal and interest, until debt ispaid in fullInterest rate changes based on a financial index, resultingin possible changes in monthly payments, loan term,and/or principal; some plans have rate or payment capsMonthly payments based on fixed interest rate, usuallyshort-term; payments may cover interest only withprincipal due in full at term’s endLower monthly payments rise gradually then level off forduration of term; with flexible interest rate, additionalpayment changes possible if index changesBelow-market interest rate and lower monthly paymentsin exchange for a share of profits when property is sold oron a specified date; many variationsBuyer takes over seller’s original, below-market ratemortgageSeller provides all or part of financing with a first orsecond mortgageSeller keeps original low-rate mortgage; buyer makespayments to seller who forwards a portion to the lenderholding original mortgage; offers lower effective interestrate on total transaction738 Unit 7: Planning for the Future

monthly payments increase over the life of the loan. A balloon-paymentmortgage has relatively low fixed payments during the life of the mortgage,but it is followed by one large final (balloon) payment. There are alsoother creative ways of financing the purchase of real property.Example 3. Joan Ackley wants to borrow $100,000 to expandher business. She owns a valuable building on which there isalready an existing mortgage of $50,000 at 8 percent interest.Ackley does not want to disturb this mortgage because theinterest rate is so low. Henry Baker agrees to loan Ackley$150,000 at 11 percent. Baker will give Ackley only $100,000cash, however, and take over her payments on the $50,000 firstmortgage. Ackley will pay $150,000 plus interest back to Bakerover the life of the loan. The mortgage that Ackley gives Bakeris called a wraparound mortgage because it includes the firstmortgage in its payment plan.Federal ProtectionThe Real Estate Settlement Procedures Act (RESPA), a federal law,gives you protection when you apply for a loan. Under this law, thelender must give you a copy of a booklet that explains the real estatesettlement procedure. The lender must also give you an estimate of thecosts that you will incur in obtaining the loan. Later, a uniform settlementstatement must be filled out, which will show you the exact costof the settlement. You have a right to see the completed form on the daybefore the closing if you wish. The lender must also give you a truthin-lendingstatement showing the true costs of the interest and financecharge on the mortgage loan.Since it began in 1968,Fannie Mae has helpedmore than 49 millionfamilies achieve theAmerican dream ofhome ownership. GinnieMae estimates thatit has helped over25.5 million Americanfamilies since it beganoperating in 1968.Freddie Mac openedits doors two yearslater and has financedhomes for an estimated30 million families.A HOME AT LASTThere are different typesof co-ownership of realproperty. Which type ofco-ownership allows titleto pass automaticallyto the co-owner if theother owner dies?Chapter 34: Buying a Home 739

Taking OwnershipOwnership of property can be taken in your name alone or withsomeone else as a co-owner. There are different types of co-ownershipas well as different types of deeds in common use.Co-ownershipThere are three main forms of co-ownership of real property. Theseinclude tenancy in common, joint tenancy, and tenancy by the entirety.Tenancy in Common Tenancy in common is a type of co-ownershipin which two or more people own an interest in the whole property.An owner may deed away his or her interest without permission ofthe other owners. An owner’s heirs inherit that person’s share of theproperty upon death.Example 4. Wendy Chow, Beverly Rojas, and Mark Rojas ownedreal property as tenants in common. When Chow died, her onethirdshare of the property was inherited by her husband and twochildren, giving each of them a one-ninth interest in the property.They became tenants in common with the Rojases, who eachstill owned a one-third interest in the property.Joint Tenancy Joint tenancy (also called joint tenancy with theright of survivorship) is a type of ownership in which two or more peopleOnline Mortgage ProvidersApplying for a home loan online is becoming a popular way to get amortgage. Online loans are subject to the same disclosure laws that governtraditional home loans. After a borrower that uses the Internet receives a loanoffer from a lender, that lender is required to make the loan. Some onlinemortgage lenders are experimenting with automated approval systems. Thesesoftware programs would apply all the normal rules of loan decisions to a givensituation. The idea is to imitate the human decision-making process and makethe loan approval procedure much more efficient. (Source: New York Times,February 26, 2001, p. C5)Connect Visit the Web site of a major mortgage lender. See if they have anonline loan application process.740 Unit 7: Planning for the Future

own an interest in the whole property. An owner may deed away his orher interest without permission of the other owners. Upon the death ofone joint tenant, the entire ownership goes to the other joint tenants.Example 5. If Wendy Chow, Beverly Rojas, and Mark Rojas, inExample 4, had owned the property as joint tenants instead oftenants in common, there would have been a different result afterChow’s death. The Rojases would have assumed ownership ofthe entire property as joint tenants. Chow’s husband and childrenwouldn’t have received any interest in the property.Tenancy by the Entirety Only a husband and wife may hold atenancy by the entirety . This kind of tenancy is based on a commonlawdoctrine that held that a husband and wife are regarded by the lawas one. In theory, each spouse owned the entire property, which neithercould transfer without the other’s consent. The husband, however, hadthe entire control over the property. He alone had the right to enter thepremises and the right to receive the rent and profits from it. Wheneither spouse died, the property was owned outright by the survivingspouse. The advantage of this type of ownership is that the propertycannot be taken away from one of the spouses, even by a court, unlessboth spouses are sued together.Example 6. Harry and Wanda Quinn owned their residence astenants by the entirety. Mrs. Quinn was involved in an automobileaccident that injured another driver. Suit was brought againstMrs. Quinn but not against Mr. Quinn. Their home could not betaken from them in court to sell to satisfy a judgment, even ifMrs. Quinn was held to be responsible, because the couple ownedthe property as tenants by the entirety.Some states have updated this law to give women and men equalrights to possession of the property, as well as to the rent and profitsfrom it. Other states have done away with this type of ownershipaltogether.The Loss ofWildlife HabitatWhen the economyprospers, Americanconsumers tend topurchase more homes.Unfortunately, animalsoften lose their homesat an alarming ratebecause of our buildingexpansion and development.Under whatcircumstances, if any,do you think corporationshave the rightto tear down foreststo build condominiums?What can youdo to help protectthe wildlife?Get InvolvedContact national wildlifeorganizations suchas Defenders of Wildlifeand the U.S. Fish andWildlife Service to learnhow to help protectthe environment.DeedsA deed is a written instrument that transfers ownership of real property.The person transferring ownership is the grantor. The one to whomownership is given is the grantee. Title is transferred when the deed issigned and delivered. The deed should be recorded in a public office togive notice to the public that the grantee now owns the property.A general warranty deed contains express warranties that title to theproperty is good. The warranties are the personal promises of the grantorthat if title is discovered to be faulty, the grantor will make up for anyChapter 34: Buying a Home 741

Eminent Domainand SidewalksJordan is a small, ruraltown. Although manypeople live in thecountry, the school islocated in town. Mostof the students take thebus to school, but thereare also some peopleliving in town whowant to walk to school.Unfortunately, there areno sidewalks that leadto the school, andparents are afraid it isunsafe for children towalk along the road.The city council ofJordan refuses to exerciseits right to eminentdomain and claim theproperty necessary toconstruct sidewalks.They say they will onlybuild the sidewalks ifthe property ownersagree to have the sidewalksbuilt. Do youagree with the parentsor the city council?What is the ethicalissue in this case?loss suffered by the grantee. A general warranty deed is the most desirableform of deed because it gives the grantee the most protection.A special warranty deed contains express warranties that no defectarose in the title during the time that the grantor owned the property butnot before. Unlike a general warranty deed, no warranties are made asto defects arising before the grantor owned the property. See Figure 34.6for an example of a deed.A bargain and sale deed transfers title to property without givingwarranties. A bargain and sale deed requires consideration to be valid.As a result, it cannot be used to make a gift of real property.A quitclaim deed transfers whatever interest the grantor has in theproperty, but it does not warrant that the grantor has any interest. Itmerely releases the grantor’s rights to the property.Example 7. Rebecca Hartney learned that several years ago theseller of the house she had purchased had given a neighbor theright in a deed to cut across the rear of the property. Hartneydidn’t want the neighbor to continue this practice. In return fora small consideration, the neighbor gave up the right by signinga quitclaim deed.Limitations on Property UseThere are often limitations on property use that you should be awareof when becoming a homeowner. These limits may affect how you buildon your land, as well as how you can use the land that you own. SeeFigure 34.7 for more information.Zoning LawsCommunities use ordinances and bylaws to regulate the use of realproperty within their boundaries. Most cities and towns have zoning lawsthat prescribe the use that may be made of property in specified areas. Onearea, for example, might be zoned for single-family houses only, anotherfor multifamily dwellings, and another for business and industry.When a zoning law is enacted, it does not apply to existing uses ofthe property. These uses are called nonconforming uses and may continue,although they cannot be expanded.Eminent DomainEminent domain is the right of the government to take privateland, with compensation to its owners, for public use. The governmentcan take private land for such things as public buildings, highways,school buildings, power projects, housing projects, parks, and manyother public uses. The private owner must be paid the fair value of theland taken.742 Unit 7: Planning for the Future

Figure 34.6DeedI, Mae Lee Pete, of Georgetown, Essex County, Massachusetts, for consideration paid and infull consideration of $186,500, grant to Rodrigo Martinez and Conchita Martinez, husbandand wife, of 72 Lakeshore Drive, Georgetown, MA 01833, as tenants by the entirety, withwarranty covenants the land with the buildings thereon situated at 72 Lakeshore Drive,Georgetown, Massachusetts bounded and described as follows:EASTERLY:NORTHERLY:WESTERLY:SOUTHERLY:by Georgetown Lake Drive, seventy-five (75) feet;by the north portion of Lot #116 on Plan hereinafter referred toapproximately one hundred twenty-four and 5/10 (124.5) feet;by land now or formerly of Georgetown Lakeshores Inc. fifty-nine(59) feet; andby Lot #117 on said plan one hundred twenty-three (123) feet.Being lot #117 and the south half of Lot #116 as shown on a plan entitled “GeorgetownLake Shores” Section 1, surveyed by Clinton F. Goodwin, Reg. Eng., recorded with the EssexSouth District Registry of Deeds in Plan Book 27, Page 72 on May 31, 1986.Being the same premises conveyed to me by deed of Wayne B. Gadsby and Deidre J.Gadsby, date May 31, 1996, and recorded with Essex South District Registry of Deeds in Book12739, page 218.Witness my hand and seal this 12th day of August, 20 ––.Mae Lee PeteThe Commonwealth of MassachusettsEssex, ss Aug. 12, 20 ––Then personally appeared the above-named MAE LEE PETE and acknowledged theforegoing instrument to be her free act and deed, before meHarvey X. Sylva, Notary PublicMy commission expires 6/28/––DEEDA deed is a written instrument that transfersownership of real property. Which is the mostdesirable form of deed?Chapter 34: Buying a Home 743

Figure 34.7The Nature of Real PropertyAir RightsYou own the airspace above your property toas high as you can effectively use. Leaningwalls, projecting building eaves, and electricand telephone wires that extend overanother’s land have all been held to betrespasses. It is also unlawful to fire shotsover the land of a neighbor.Real property is the ground and everything permanentlyattached to it. Included are buildings, fences,trees, and perennial plants on the surface; earth,rocks, and minerals under the surface; and the airspaceabove the surface.TreesA tree belongs to theperson on whose landthe trunk is located.You can trim thebranches of yourneighbor’s tree thatoverhang yourproperty, but only up toyour property line.VegetationRiparian RightsSubterranean RightsFlowers, shrubs,vineyards, and fieldcrops that grow eachyear without replanting(perennials) areconsidered real property.They belong to the newowners when realproperty is sold.You own the ground belowthe surface of your propertyto the center of the earth.Property owners sometimessell subterranean rights iftheir property is in an areawhere mines or wells areoperated.Different owners of land on theopposite sides of a stream ownto the bank if the stream isnavigable, and to the stream’smidpoint if it is not navigable.Owners do not have title to thewater or to the fish that swim inthe water.744 Unit 7: Planning for the Future

Adverse PossessionOwnership of real property can be lost by adverse possession . Thisloss occurs when someone who doesn’t own property takes possessionof it for a period set by state statute, such as twenty years. The possessionmust be open, not secretive, with a claim that it is being done rightfully.The continuous possession by others, one after the other, withoutinterruption by the real owner, is counted toward this time period.Example 8. Bruce and Jennifer Lue bought a house and lived init for 25 years. Later, they discovered that the property line ranthrough the middle of their house. Their neighbor actually ownedthe land under half their house. The Lues could petition the courtfor title to the land under their house by adverse possession.Liens, Licenses, and EasementsProperty use can be limited by liens, licenses, or easements. A lienis a right in another’s property as security for a financial obligation. Forexample, in Chapter 17, we saw that a hotel keeper has a lien over aguest’s property. A license is a temporary, revocable right to limited useof another’s land. An easement is an irrevocable right to make limiteduse of another’s land. It might be a right to cross someone else’s land ata particular place, such as a driveway, or for a particular purpose, suchas drainage. An easement is a property interest that, onceestablished, cannot be terminated without the consent of the owner ofthe right. Usually, an easement is bought and paid for, either in moneyor by some other consideration.Reviewing What You Learned1. Describe legal aspects of a mortgage.Include information on the types ofmortgages and the federal protection offeredto borrowers.2. Describe the differences among a fixed-rate,an adjustable-rate, a graduated-payment, anda balloon-payment mortgage.3. Examine the forms of co-ownership of realproperty. Briefly describe each form.4. What types of deeds are discussed in thischapter? How are they alike? How arethey different?5. Distinguish between liens, licenses, andeasements.Critical Thinking ActivityZoning Laws Why do you think mostcommunities have zoning laws to stipulate theuse of property in certain areas?Legal Skills in ActionContracts to Purchase a Home Imagine youare a lawyer hired by Robin and Patrick (fromThe Opening Scene). Write a letter to themexplaining what they should have done beforesigning the contract to purchase their home.Chapter 34: Buying a Home 745

CHAPTERASSESSMENTSection 34.1 Evaluating HousingAlternatives● Advantages of owning a house include the abilityto do with it as you wish, the gradual buildup ofequity in the property, and the ability to deducttaxes and interest from your income tax return.Disadvantages include the inconvenience andcost of upkeep and the inability to move easilyand quickly.● Down-payment requirements vary between zeroto 30 percent of the purchase price depending onthe type of loan for which you qualify. Qualifiedveterans can obtain a Veteran’s Administration(VA) loan to buy a house up to $203,000 with nodown payment. Mortgages backed by federalagencies, such as Fannie Mae and Freddie Mac,are available with a 3 percent down payment.FHA loans (loans insured by the Federal HousingAdministration) can be obtained with a downpayment of 3 to 5 percent. Conventional bankloans require down payments ranging from 10 to30 percent. The amount you can borrow alsovaries depending on how much you earn. A lenderwill also judge your ability to repay your loanbased on your credit report and your debt ratio.Your debt ratio is the amount of your monthlypayments compared to your monthly income.● The types of home ownership include a singlefamilyhome, a multifamily home, a mobilehome, a cooperative, and a condominium. Singlefamilyhomes are the most popular type of home.They offer the most privacy and usually havemore overall usable space than other types ofhousing. Multifamily homes are less expensiveto own because of the income from nonowneroccupiedunits. The owner’s monthly mortgageand tax payments can often come from rentalincome. Mobile homes, also known as manufacturedhomes, are less expensive to purchase thanother types of houses and cost less to keep up. Acooperative is a form of home ownership inwhich buyers purchase shares in the corporationthat owns an apartment building and holds themortgage on it. In a condominium, each ownerhas an absolute individual interest in an apartmentunit and an undivided common interest in thecommon areas of the condo project.Section 34.2 The Home Buying Process● The purchase and sale agreement should besubject to your getting a mortgage and should bereviewed by a lawyer before being signed.● The types of mortgages include conventional,fixed rate, adjustable rate, graduated payment,and balloon payment.● Co-owners may take title as tenants in common,joint tenants, or if husband and wife, as tenantsby the entirety. Tenancy in common is a type ofownership in which two or more people own aninterest in the whole property. An owner’s heirsinherit that person’s share of the property upondeath. Joint tenancy is a type of ownership inwhich two or more people own an interest in thewhole property. Upon the death of one jointtenant, the entire ownership goes to the otherjoint tenants. Only a husband and wife can ownproperty by tenancy by the entirety. In theory,each spouse owns the entire property, whichneither can transfer without the other’s consent.● The principal kinds of deeds are a generalwarranty, a special warranty, a bargain and saledeed, and a quitclaim deed. A general warrantydeed contains express warranties that title to theproperty is good. A special warranty deedcontains express warranties that no defect arosein the title during the time that the grantor ownedthe property, but not before. A bargain and saledeed grants no warranties. A quitclaim deedreleases the grantor’s rights to the property.● Property owners can lose title to their propertyby eminent domain, adverse possession, and bygiving easements to others.746 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.equitydebt ratiocooperativecondominiummortgagetenancy in commonjoint tenancytenancy by the entiretydeedzoning lawseminent domainadverse possessioneasement1. Using the local real estate section of your newspaper as a guide,write a brief description of the home in which you would liketo live. Be sure to include the cost, the location, and the size ofthe home.2. With a partner, role-play a scenario between a real estate attorneyand a person who is buying a home. Use as many of the key termsas possible in your role-play exercise.3. Present your role-play to the class.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 34:Buying a Home—Self-Check Quizzesto prepare for thechapter exam.Answer the following questions. Refer to the chapter for additional reinforcement.4. What information does a lender use to judge your ability to repay your mortgageloan?5. What type of home ownership is the most popular? Explain your answer.6. What is the purpose of the Real Estate Settlement Procedures Act (RESPA)?7. What common law doctrine is tenancy by entirety based upon? What is theadvantage of this type of ownership?8. Why do local governments and public utilities usually obtain easements?9. What is a debt ratio?10. Why are single-family homes more popular than other types of housing?11. Distinguish between liens, licenses, and easements.Chapter 34: Buying a Home 747

CHAPTERASSESSMENTAcquiring and Evaluating InformationCreate a picture of your dream home. Include adetailed description of both the interior andexterior, and then:12. Look at the real estate ads in thenewspaper.13. Compare your dream home with the homesthat are advertised. Based on the prices ofthe homes in the ads, how much would yoube able to sell your home for?Buying a Home?You agree to buy Kyle Chilcote’s house. Hegives you a purchase and sale agreement andasks you to sign it. You ask your attorney toreview the contract, and he suggests somechanges. You ask Kyle to put the suggestedchanges into the contract. Kyle refuses.Debate14. What are your options?15. You really want the house. What could youdo to convince Kyle to add the changes tothe contract?16. What might have happened if you hadsigned the contract without your attorneyreviewing it?For the following cases, give your decision andstate a legal principle that applies.17. Henry DiRito and Oskar Henrich owna parcel of real property as tenants incommon. When Henrich dies, who ownsthe property? Explain your answer.18. Cordero and Miel Rueda want to buy ahouse that costs $100,000. How muchmonthly income would they need toafford a 7 percent, 30-year mortgage(see Figure 34.2)?19. How much of a down payment wouldCordero and Miel need in Case 2 to obtaina mortgage?20. Assume the Ruedas in Cases 2 and 3 taketitle to a property as tenants by the entiretyin a state that follows the common-lawdoctrine on that subject. One day, Corderorefuses to allow Miel to enter the premises.Is Cordero within his legal rights? Explainyour answer.21. Two years after Smith starts raising pigson her property, the neighborhood inwhich she lives is rezoned. The newzoning law prohibits raising of certainanimals, including pigs. Must Smith stopraising pigs? Why or why not?22. Rob and Lucy Whitney, newlyweds, areinterested in buying a home. Their incomeis relatively small right now, but theyexpect to make more money in the future,when Lucy finishes law school. What typeof mortgage might Rob and Lucy wishto consider?23. The county government has determinedthat Shrewsbury needs another elementaryschool. Martha Jones owns a large tractof land in the area in which the school isneeded. The government offers to purchasethe land from Jones for a fair price. Jones,however, refuses the offer and claims thatshe does not have to sell her property. Whatrights, if any, does Jones have in resistingthe government’s offer?748 Unit 7: Planning for the Future

In each case that follows, you be the judge.24. Transferring Interest in PropertyWalter and Emma Barrett jointly executed a warranty deed conveying three lots of land toChandler and Jean Clements as joint tenants with the right of survivorship. Six years later, JeanClements conveyed her one-half undivided interest in the property to Wheeler. Chandler claimedthat Jean could not sell her interest to another person without his approval. Was Chandler correct?Why or why not?Clements v. Wheeler, 314 So.2d 64 (AL).25. Adverse PossessionGeorge Woodruff owned a land lot in Beatrice, Nebraska. For seven years, he planted a vegetablegarden on a vacant lot next to his land, with the owner’s permission. Later, he placed afence about three feet beyond his property line, on the vacant lot. He planted a row of cedartrees on a line appearing to be a continuation of the fence line. Is it possible for Woodruff toobtain title to the three-foot strip of land next to his lot? Why or why not?Hadley v. Ideus, 374 N.W.2d 231 (NE).Confusion AboundsRochelle and Octavio are planning to purchasetheir first home. After reviewing their income anddebt, they believe they can purchase a home in therange of $85,000. Now it is time to researchmortgage loans. Rochelle and Octavio are confusedand have asked you for help.ConnectUsing a variety of search engines, explore the Websites for Fannie Mae and Freddie Mac mortgages.Find out the following information:26. The purpose of Fannie Mae and Freddie Mac.27. The similarities and differences between thetwo organizations.28. Whether Rochelle and Octavio would be ableto secure a mortgage backed by Fannie Mae orFreddie Mac.29. Predict Why do you think people considerhome ownership the “Great AmericanDream”?30. Connect Do you plan to own a house oneday? Why or why not?31. Question Do you think you would be ableto obtain a mortgage while you are still inhigh school?32. Respond How would you feel if thegovernment decided to take your landfor public use? Is that really fair?Chapter 34: Buying a Home 749

CHAPTERInsurance ProtectionUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 35: Insurance Protection—Chapter Overviews to preview thechapter information.

The Opening SceneRobin and Patrick are about to sit down at their diningroom table. They have invited their neighbors,Liz and Jeff, to join them for dinner.The NeighborsROBIN: It’s great to get together with you guys.LIZ: Did you hear what happened while you wereaway yesterday?ROBIN: No. What happened?JEFF: We had a fire in the neighborhood, and therewas a shootout!ROBIN: A shootout?JEFF: Yeah. The police came with a warrant to arrestMrs. Vicker’s son, Robert. The Vickers live up thestreet, you know. The police wanted Robert forarmed robbery.PATRICK: Mrs. Vickers is a nice lady, but I’ve never mether son.JEFF: Well, when Robert saw the police outside thehouse, he started shooting out the window.ROBIN: I don’t believe it!LIZ: He wounded two officers, and the officers finallyhad to kill him.ROBIN: Oh my. Poor Mrs. Vickers!JEFF: And later in the day, Steve and Linda’s housecaught on fire.LIZ: Yeah, Steve lit the grill on the back porch andwent inside for a minute. When he came out, theporch was on fire.PATRICK: Did it do much damage?JEFF: It ruined the porch and damaged the kitchenquite a bit.ROBIN: I hope their insurance will cover it.PATRICK: Steve and I were talking about our fireinsurance coverage just last week. He said hishouse was insured for about half its value.ROBIN: That should cover any fire damage, then.PATRICK: Say, I just remembered something. I loanedSteve my laptop last week. I hope it wasn’tdestroyed in the fire.JEFF: Your homeowner’s insurance should cover that.PATRICK: Speaking of insurance, I don’t knowwhether it’s better to get term life insurance orstraight life insurance.JEFF: I think term insurance is best. I heard it buildsup a loan value that you can borrow from.ROBIN: Dinner’s almost ready. I can smell the steakcooking on the grill.PATRICK: I hope you’re watching it! We don’t wantour house to burn down!JEFF: Hey, here’s an idea! Why don’t Liz and I takeout life insurance on your two lives, and you take itout on ours. That way, if you get killed in a shootout,we can collect.LIZ: Don’t joke about that, Jeff. It’s not funny.ROBIN: Poor Mrs. Vickers. I hope she had insuranceon her son’s life.1. Is the full amount of a loss covered when a houseis insured for half its value?2. Does a homeowner’s policy cover damage topersonal property left at someone else’s house?3. Can policyholders borrow money on a terminsurance policy?4. Can people take out life insurance on anyonethey want?5. Is an insurance company liable if the insured iskilled while trying to avoid capture by the police?Chapter 35: Insurance Protection 751

l How to explain themeaning and purposeof insurancel How to define keyinsurance termsUnderstanding howinsurance works andknowing key insuranceterms will help youchoose good policiesthroughout your life.l insurancel insurerl policyl policyholderl insuredl beneficiaryl riderl insurable interestl premiuml face valuel cash valueThe InsuranceContractWhat is Insurance?Our lives are filled with risks, including the loss of property, loss ofhealth, loss of income, and loss of our lives. Insurance can protect youagainst such losses (see Figure 35.1). The basic purpose of insuranceis to spread the losses among a greater number of people. Insuranceis a contract under which, for consideration, the insurer , or the insurancecompany, agrees to compensate you for a specific loss.Insurance TermsThe policy is the written contract between a person buying insuranceand the insurance company that sells it. When you buy the policy,you are the policyholder . The insured is the person whose life orproperty is insured. The beneficiary is the person named in the policyto receive benefits paid by the insurer in the event of a loss. A rider isan attachment to an insurance policy that modifies the policy’s terms.Figure 35.1Examples of Risk Management StrategiesRisksStrategies for ReducingPersonal Events Financial Impact Financial ImpactDisability l Loss of Income l Savings and investmentsl Increased expensesl Disability insuranceDeath l Loss of income l Life insurancel Estate planningProperty Loss l Catastrophic storm damage l Property repair and upkeepto propertyl Auto insurancel Repair or replacement l Homeowner’s insurancel Cost of theftl Flood or earthquake insuranceLiability l Claims and settlement costs l Maintaining propertyl Lawsuits and legal expenses l Homeowner’s insurancel Loss of personal assets and l Auto insuranceincome752 Unit 7: Planning for the FutureMANAGING RISKSRisk management strategies help reduce the financialimpact of various risks. Can you think of any other strategiesthat would apply to the risks mentioned in the chart?

The Need for Home InventoryWhen buying a house, the lender will require that hazard insurance beacquired before the loan is finalized. This insurance protects the bank’s investmentin the event of fire, falling trees, wind, vandalism, theft, and other suchacts. Homeowner’s insurance policies cover damage to the physical structure,as well as loss or damage to personal items and home furnishings.When personal belongings are stolen or destroyed, you will have a muchbetter chance of full recovery if you have prepared an inventory of your belongings.One way to put together an inventory is by taking photographs and notingspecific characteristics of each item of value. Itemize such things as jewelry,music CDs, electronic equipment, bikes, tools, furniture, and collectibles. Makesure you record any serial numbers, model numbers, or other identifying marks.This information might assist the authorities in the recovery of your property.Also keep a record of receipts, appraisals, and other documents that reflect themonetary value of each item. When the inventory is complete, make sure youkeep it in a safe place and update it when necessary.Conduct Research Visit the Web site of an insurance company or contact yourfamily’s insurance agent. What guidance is available for doing an inventory?You can’t take out insurance unless you have an insurable interestin the person or property you want to insure. Consequently, you canonly take out insurance on a person or property if the loss of that personor property would pose a financial burden to you. For life insurance,the insurable interest must exist at the time you buy the insurance. Forproperty insurance, the insurable interest must exist at the time of loss.Example 1. If you lend $10,000 to a friend, to be repaid at the endof three years, you create an insurable interest in your friend’slife to the extent of $10,000 for three years. You should be ableto get an insurance policy on your friend’s life for $10,000, if heor she can pass the required physical examination and meet allthe other requirements of the policy.Risk is the peril, loss, or event insured against, such as fire, theft, ordeath. An insurance policy lists the coverage, or amount and extent ofrisk, that the insurance company will cover.Chapter 35: Insurance Protection 753

INSURABLE INTERESTYou cannot take outinsurance unless youhave an insurable interestin the person or propertyinsured. For life insurance,when must the insurableinterest exist?The premium is the amount of money you pay to the insurancecompany for insurance coverage. Proceeds are payments by insurancecompanies to beneficiaries for losses covered by the policy.The face value is the amount of protection stated in a life insurancepolicy, meaning the amount of money a beneficiary would receive ifthe insured died. This amount is also called the death benefit or proceeds.It usually includes interest added to the face value of the policyand deductions for outstanding loans. The cash value of a life-insurancepolicy is the amount of money you can take by either borrowing againstor cashing in the policy. When a policy is cashed in, the death benefitno longer applies.Reviewing What You Learned1. What is the purpose of insurance?2. Explain why insurance is a contract.3. What is the difference between thepolicyholder and the beneficiary?Critical Thinking ActivityLife Insurance Why do you think you can’ttake out insurance on anyone you want?Legal Skills in ActionElements of a Contract Use the Internet,library, or other resource to find a copy of astandardized insurance contract. Then explainthe elements of legal contracts as they apply inthe context of an insurance policy.754 Unit 7: Planning for the Future

Life and HealthInsuranceLife InsuranceLife insurance is an insurance contract that provides monetarycompensation for losses suffered as a result of someone’s death. Premiumsfor life insurance are based on several factors, including the ageand health of the insured, coverage, and type of policy. It is less expensiveto buy life insurance when you are young because the death ratefor young people is very low, and their health is usually at its peak (seeFigure 35.2).Straight Life InsuranceStraight life insurance , also called ordinary life insurance andwhole life insurance, requires the payment of premiums throughout theinsured’s life. The premiums remain constant throughout the policy.Upon the insured’s death, the beneficiary is paid the face value of thepolicy. Because straight life insurance builds up a cash and loan value,it provides savings as well as protection.Universal life insurance , a form of straight life insurance, allowspolicyholders to change the terms of the policy as their needs change.Coverage can be increased or decreased, and cash can be withdrawnwithout canceling the policy. The premiums vary according to thechanges in the policy.Limited-Payment Life InsuranceLimited-payment life insurance allows you to stop paying premiumsafter a stated length of time—usually 10, 20, or 30 years. Thebeneficiary will receive the amount of the policy upon the death of theinsured, whether it occurs during the payment period or after.Endowment InsuranceEndowment insurance provides protection for a stated time, generally20 to 30 years. The face value of the policy is paid to the insuredat the end of the agreed period. If the insured dies before the end of theagreed period, the full amount is paid to the beneficiary at the time ofdeath.Example 2. Don Ray purchased a $10,000, 20-year endowmentpolicy naming his wife, Rose, as beneficiary. He died after thepolicy had been in force only three years, at which time Rosel How to describe themain types of lifeinsurancel How to recognize risksthat are not coveredby insurancel How to explain themain types of healthinsurance and theplans that areavailableKnowing how todetermine your life andhealth insurance needswill help you handle yourfinances when dealingwith unexpected events.l life insurancel straight life insurancel universal life insurancel limited-payment lifeinsurancel endowment insurancel annuityl term insurancel Medicarel MedicaidChapter 35: Insurance Protection 755

Figure 35.2Life Expectancy Table, All Races, 1996Age Both Sexes Male Female Age Both Sexes Male Female0 76.9 74.1 79.51 76.4 73.7 79.05 72.5 68.8 75.110 67.6 64.9 70.115 62.6 59.9 65.220 57.8 55.2 60.325 53.1 50.6 55.430 48.3 45.9 50.635 43.6 41.3 45.840 38.9 36.7 41.045 34.4 32.3 36.350 30.0 27.9 31.855 25.7 23.8 27.460 21.6 19.9 23.165 17.9 16.3 19.270 14.4 13.0 15.575 11.3 10.1 12.180 8.6 7.6 9.185 6.3 5.6 6.790 4.7 4.1 4.895 3.5 3.1 3.5100 2.6 2.4 2.7LIFE EXPECTANCYThis table helps insurance companies determine insurancepremiums. Use the table to find the average number of additionalyears a 15-year-old male and female are expected to live.756 Unit 7: Planning for the Futurereceived the $10,000 proceeds. If Don had lived until the policyhad been in effect for 20 years, the insurance company wouldhave paid the $10,000 to him at that time.AnnuityAn annuity is a guaranteed retirement income that is purchased bypaying either a lump-sum premium or making periodic payments to aninsurer. You may choose to receive an income for a certain fixed numberof years, with a beneficiary receiving what is left of the annuity whenyou die. Alternatively, you may choose to receive payments as long asyou live, losing what is left of the annuity upon death.Accidental Death andDismemberment InsuranceAccidental death and dismemberment insurance provides benefitsonly when the insured is killed in an accident, loses the use of one ormore limbs, or loses sight in one or both eyes. Commonly, if one hand,one foot, or the sight in one eye is lost, the policy pays half the benefitthat would be paid for loss of life. Some policies contain a doubleindemnity clause. If the insured dies accidentally, the beneficiaryreceives double the amount of the face value of the policy. A policy mayalso provide monthly payments to the insured for becoming totally disabled.There is often a waiver of premium provision, which means thatpremiums do not have to be paid as long as the insured is disabled.

ACCIDENT INSURANCEAccident insurance policies only pay benefits when the insured dies or isinjured in an accident. How much do accident insurance policiescommonly pay when an insured loses one hand in an accident?Young families withlarge financial obligationsare usually betteroff with term lifeinsurance rather thanwhole life. Thesubstantially lowerpremiums may enablethem to purchaseneeded coverage toprotect against loss ofincome at a time whenthey need it most.Term InsuranceTerm insurance is issued for a particular period, usually five orten years. It is the least expensive kind of life insurance because it hasno cash or loan value. Premiums for term insurance increase at the endof each term because the insured is older and is considered a greaterrisk (see Figure 35.3).Figure 35.3Term Life Insurance PremiumsTwenty-Year Guaranteed Level Premium Term InsuranceNonsmoker Premiums$300,000 Policy $400,000 Policy $500,000 PolicyAge Annual Monthly Annual Monthly Annual Monthly25 192.00 16.70 236.00 20.53 280.00 24.3630 216.00 18.79 268.00 23.32 320.00 27.8435 270.00 23.49 340.00 29.58 410.00 35.6745 540.00 46.98 700.00 60.90 860.00 74.8255 1,140.00 99.18 1,500.00 130.50 1,860.00 161.82TERM INSURANCE PREMIUMSPremiums for term insurance increase at theend of each term. Why is term insurancethe least expensive kind of life insurance?Chapter 35: Insurance Protection 757

When buying term life insurance, you should select a policy thatcan be renewed at the end of each term, regardless of your health. Youshould also ask for a convertible policy, one that can be exchanged fora cash value policy at a later date, regardless of the state of your health.Term insurance offers protection alone, in contrast to straight life insurance,which combines protection with a savings plan.Exemptions from RiskSome states do not allow beneficiaries to receive life insurance proceedsif the insured is legally executed or if the insured is killed by thepolice while trying to avoid capture. In most cases, the courts allow abeneficiary to receive benefits under a life insurance policy when theinsured is murdered, except when the murderer is the beneficiary.Sometimes people lie about their age to obtain insurance at a lowerpremium. In such cases, the insurer will still be required to pay a claim,but only based on the amount of insurance that could have been purchasedon the basis of the true age of the insured for the premiums thatwere paid.The insurer may cancel the policy if the insured makes false statements.It is unjust and unlawful, however, for the insurer to collect premiumsfor many years and then, upon the death of the insured, refuseto pay because of misrepresentation.Insurance OnlineEntering into agreements to buy insurance is sometimes frustrating.Shopping for the right coverage on the Internet can be convenient. It can alsobe confusing because there are so many companies out there. Several majorinsurance companies have recently joined forces to create one “market place”site. This site will allow consumers to compare coverage offered by thesecompanies. Customers will be able to immediately buy coverage from this sitewith a credit card. Until now, customers had to hop from one company’s Website to another. Then they had to contact the company directly. The new sitepromises a more convenient way to shop for insurance. (Source: New YorkTimes, February 14, 2001)Connect Visit the Web sites of a large insurance company to see if it is part ofthis new way of shopping for insurance.758 Unit 7: Planning for the Future

Health InsurancelllllBasic health insurance often includes the following benefits:Inpatient and outpatient hospital carePhysician careSurgeryPrescription drugsDental and vision careMajor medical coverage pays for expenses beyond those covered bya basic plan, including long-term hospitalization and the cost of catastrophicillness.Insurance PlansHealth insurance companies offer a variety of health insurance plansto make some degree of health insurance coverage available to mostpeople. The type of coverage people carry depends on the their individualsituations.Group Plans Many people get their health insurance through a groupinsurance plan where they work. Insurance companies can offer lowerpremiums to large groups, and many employers pay part of the premiumfor each employee. See Figure 35.4 for a listing of basic features that alltypes of health insurance should offer.A federal law known as the Consolidated Omnibus Budget ReconciliationAct (COBRA) allows employees to keep their group insurancefor a specific period of time after being laid off. Under COBRA,Figure 35.4A health insurance plan should:Health Insurance Must Havesl Offer basic coverage for hospital and doctor bills.l Provide at least 120 days’ hospital room and board in full.l Provide at least a $1 million lifetime maximum for each family member.l Pay at least 80 percent for out-of-hospital expenses after a yearly deductible of$500 per person or $1,000 per family.l Impose no unreasonable exclusions.l Limit your out-of-pocket expenses to no more than $3,000 to $5,000 a year,excluding dental, vision care, and prescription costs.Helmet LawsBicycling is a great wayto exercise outdoors,but like any sport, thereis a chance of injury.Concerned about thepossibility of headinjuries to cyclists, somestates have passedmandatory helmetlaws. There are manyarguments for andagainst these laws. Doyou think there is aneed for mandatoryhelmet laws?Get InvolvedFind out which stateshave mandatory helmetlaws. Write your congresspersona lettertelling him or her howyou feel about helmetlegislation for yourstate.HEALTH INSURANCEAlthough health insurance plans vary greatly,all plans should have the same basic features.Would you add anything to this list ofmust haves?Chapter 35: Insurance Protection 759

employees who have been laid off pay their own premiums but can shiftto another group plan upon starting a new job.Who Paysthe Bill?Lizzie is insured by ahealth maintenanceorganization (HMO)that provides a list ofauthorized doctors.While visiting hergrandparents over thesummer, she broke herfoot and was taken tothe emergency roomat a hospital for treatment.Because thedoctor and hospitalwere not part of theHMO, the HMO refusesto pay the hospital bill.Do you think the HMOshould pay all or part ofthe bill? Should an HMObe able to restrict whatdoctors Lizzie can see inan emergency?Individual Plans People who work for a company that does not offerhealth insurance or who are self-employed can buy individual healthinsurance. This insurance is more expensive than group insurancebecause the cost cannot be spread among a large group of people.HMOs and PPOsWhen you sign up for health insurance, you often have a choicebetween enrolling in an HMO and PPO plan.Health Maintenance Organizations Health MaintenanceOrganizations (HMOs) contract with doctors and other healthcare professionalsto provide healthcare services for their members. Memberspay monthly premiums and must choose from a list of doctors providedby the HMO. HMOs encourage their members to have regularcheckups, immunizations, and other forms of early treatment. In thisway, it is hoped that people will be less likely to require more expensivekinds of treatment. Many different kinds of organizations sponsorHMOs, including doctors, community groups, insurance companies,labor unions, and corporations.DISABLEDDisability insurance paysbenefits when thoseinsured are unable to work.What is the differencebetween partial and totaldisability insurancecoverage?760 Unit 7: Planning for the Future

Preferred Provider Organizations A Preferred Provider Organization(PPO) is a group of healthcare providers, such as doctors or hospitals,who provide care for groups of employees at reduced rates. PPOsare usually sponsored as part of an employer’s group health plan.Employees choose among the healthcare providers on the PPO list whenthey need treatment. Choosing a non-PPO provider reduces the benefitspaid to the insured under the plan.Government Health Care PlansPeople over 65 who are covered by social security are eligible forMedicare , a federally funded health insurance program. MedicarePart A helps pay for inpatient hospital care. Medicare Part B pays for80 percent of doctors’ and other medical services. Many people buy theirown medigap insurance to cover the 20 percent not covered by Medicare.Medicaid is a healthcare plan for low-income people. State governmentsadminister Medicaid, which is funded by both state and federalfunds.Disability InsuranceDisability insurance pays you benefits when you can’t work becauseof a disability. It can be purchased from a private insurer. Most often,however, it is paid in whole or in part by the employer. Total, or longterm,disability pays if you can’t perform normal job duties for a yearor longer; partial, or short-term, disability pays for a few months ofbeing disabled.Language ArtsAn HMO is a type ofprepaid medical servicein which members pay afee for all health services,including hospitalization.A health policy analyst,Dr. Paul Ellwood, coinedthe term “health maintenanceorganization” inthe early 1970s. The coststo patients are fixed inadvance, so preventivemedicine is stressed.Research ActivityHMOs were controversialfrom the start, and thedebate continues all theway to the federal legislatorsin Washington, D.C.Research HMOs andprepare a debate on thepros and cons of this typeof health coverage.Reviewing What You Learned1. What are the principal types of lifeinsurance? Briefly describe each one in yourown words.2. What risks are generally not covered byinsurance?3. What benefits are provided by basic healthinsurance? major medical?Legal Skills in ActionCalculating Future Premiums Kim Lee hasdecided to purchase dental and vision insurance.Her agent quoted her a price of $250 per yearbut told her the price will probably increase alittle each year. If it increases three percent peryear every year, what will her premium be10 years from now?Critical Thinking ActivityLife Insurance Who needs life insurance?Explain your answer.Chapter 35: Insurance Protection 761

Property Insurancel How to identify whatkinds of loss arecovered byhomeowner’sinsurance and fireinsurancel How to calculate theamounts recoverableby homeowners undercoinsurance clausesl How to describe thecoverage of marineinsuranceUnderstanding propertyinsurance will help youprotect your property atthe lowest cost.l property insurancel binderl floater policyl homeowner’sinsurancel renter’s insurancel fire insurancel coinsurancel ocean marineinsurancel inland marineinsuranceProperty InsuranceProperty insurance is a contract in which the insurer promises,for a stated premium, to pay you a sum of money if a particular pieceof real or personal property is damaged or destroyed. The policy becomeseffective as soon as the insurer accepts your application, or even soonerif a binder is issued. A binder gives you temporary protection until apolicy is issued.A floater policy is one that insures property that cannot be coveredby specific insurance because it is constantly changing in value orlocation. A personal property floater, for example, can cover a bicycle,portable stereo, or laptop computer, no matter where the items arelocated.Homeowner’sand Renter’sInsuranceMany insurance companiesoffer a combination policyknown as a homeowner’s policy.Homeowner’s insurance protectsagainst most types oflosses and liabilities related tohome ownership, includingfire, windstorm, vandalism,burglary, and injuries sufferedby other persons while on theproperty. See Figure 35.5 for amore complete listing of someof the losses covered by homeowner’sinsurance. With certainlimitations, homeowner’s policiescover your personal propertyanywhere in the world.Renter’s insurance protectsyou against loss of personalproperty, liability for a visitor’sPROPERTY INSURANCEMost private property can be insured toreduce the risk of loss. What are somekinds of protection that are covered byhomeowner’s insurance?762 Unit 7: Planning for the Future

Figure 35.5Losses Covered by Homeowner’s PolicyBasic (HO-1) Basic (HO-2) Comprehensive (HO-5)1. Fire or lightning2. Loss of property removedfrom premises endangeredby fire or other perils3. Windstorm or hail4. Explosion5. Riot or civil commotion6. Aircraft7. Vehicles8. Smoke9. Vandalism and maliciousmischief10. Theft11. Breakage of glassconstituting a part ofthe building12. Falling objects13. Weight of ice, snow, sleet14. Collapse of building(s) or anypart thereof15. Sudden and accidental tearingasunder, cracking, burning, orbulging of a steam or hot waterheating system or of appliancesfor heating water16. Accidental discharge, leakage, oroverflow of water or steam fromwithin a plumbing, heating, orair-conditioning system, ordomestic appliance17. Freezing of plumbing, heating,and air conditioning systems,and domestic appliances18. Sudden and accidental injuryfrom artificially generatedcurrent electrical appliances,devices, fixtures, and wiringAll perilsEXCEPT: earthquake, landslide,flood, surface water, waves,tidal water or tidal wave,the backing up of sewers,seepage, war, and nuclearradiationpersonal injury, and liability for negligent destruction of the rentedpremises.Fire InsuranceFire insurance covers loss resulting directly from an unfriendly orhostile fire. Damages that result from trying to put out a fire, or fromtheft or breakage while attempting to remove insured goods to a safelocation are considered directly related to the fire and are usually coveredby a fire insurance policy. Damage caused by soot, smoke, water, orheat from a nearby burning building is also covered by fire insurancemost of the time.Coinsurance ClausesCoinsurance is a provision in an insurance policy that limits yourrecovery for a loss if the property is not insured for its full replacementvalue. For example, if your insurance policy has an 80 percent coinsuranceclause, your house must be insured for 80 percent of its replacementvalue to receive full reimbursement for a loss (see Figure 35.6).HOMEOWNER’SINSURANCECategories of insurancepolicies are determinedby the number of perilsthey insure against. Canhomeowner’s insurancecover you against all perils?Chapter 35: Insurance Protection 763

The NetherlandsDo people who are incurably ill have the right to die? In a landmark decision,in the first year of the second millennium, the Dutch said yes. The Netherlands hasbecome the world’s first country to legalize euthanasia.Greek for “good death,” euthanasia is defined as the practice of painlesslyending the lives of individuals with incurable or painful diseases or severe handicaps.Although the Dutch “have shut a blind eye” to the practice of euthanasia for manyyears, a bill passed by Parliament’s lower house has made euthanasia legal.The procedural guidelines are strict:1. The attending doctor must be sure that the patient’s request is voluntary, wellthought-out, and that he or she is “facing unremitting and unbearable suffering.”2. The patient and doctor must agree that there is no other acceptable option.3. The doctor must consult with at least one other doctor who has examinedthe patient.4. The procedure must be carried out in a medically acceptable way.Euthanasia is a subject that not many people agree on. Advances in medicalscience that prolong life indefinitely, have made it an issue that’s not going to goaway. Here’s a snapshot of the Netherlands.Geographical area 16,023 sq. mi.Population 16,067,754CapitalAmsterdamLegal systemCivil law systemincorporating Frenchpenal theoryLanguageDutchReligion31% Roman catholic21% Protestant4.4% MuslimLife expectancy 79 yearsCritical Thinking Question Oregon is the only U.S. state that sanctions euthanasiafor terminally ill patients. Euthanasia has never been carried out in this state, however,because of court opposition. List some of the reasons why you think people wouldoppose euthanasia. Then state your opinion about euthanasia. Do you think itshould be legal or illegal? Why? For more information on the Netherlands, visitubpl.glencoe.com or your local library.764 Unit 7: Planning for the Future

Figure 35.6COINSURANCE CLAUSE“The insurance company will pay that part of a loss thatthe insurance carrier bears to 80 percent of the replacementcost of the building.”It would cost $100,000 to replace Zelia’s house. If she insured itfor $60,000, the insurance company would pay only three-fourthsof any loss, computed as follows:$60,000 $60,000 3= =80% of $100,000 $80,000 4A fire partially destroys the building, causing $40,000 worth ofdamage. Because of the coinsurance clause, Zelia would recover$30,000 (3/4 of the loss) from the insurance company.COINSURANCE CLAUSECoinsurance limits theinsurer’s liability for a loss ifthe property is not insuredfor its full replacementvalue. What fraction of anyloss would the insurancecompany pay if the housein this example would cost$150,000 to replace?Marine InsuranceMarine insurance is one of the oldest kinds of insurance coverage,dating back to Venetian traders who sailed the Mediterranean Sea.Ocean marine insurance covers ships at sea. Inland marineinsurance covers goods that are moved by land carriers such as trains,trucks, and airplanes. Inland marine insurance also covers such items asjewelry, fine arts, musical instruments, and wedding presents. Customers’goods in the possession of bailees, such as fur-storage housesand dry cleaners, are also covered by inland marine insurance.Reviewing What You Learned1. What types of losses are covered byhomeowner’s insurance? fire insurance?2. What is a coinsurance clause? What does itmean if your policy has an 80 percentcoinsurance clause?3. Explain marine insurance coverage.Critical Thinking ActivityRenter’s Insurance If you decide to go awayto college, you will probably rent a dorm roomor an apartment. Should you buy renter’sinsurance? Why or why not?Legal Skills in ActionInsurance Coverage Lois and Ed carry homeowner’sand fire insurance. One day, they puta small pizza in their toaster oven and wentoutside to chat with neighbors. They forgotabout the pizza, which caused a fire in thekitchen. The kitchen was destroyed and the restof the house was damaged by smoke and ash.With a partner, debate whether Lois and Ed’sloss will be covered by either policy.Chapter 35: Insurance Protection 765

CHAPTERASSESSMENTSection 35.1 The Insurance Contract● The basic purpose of insurance is to spread thelosses among a greater number of people. Insuranceis a contract under which, for consideration,the insurer, or the insurance company, agrees tocompensate you for a specific loss.● A policy is the written contract between thepolicyholder and the insurance company thatsells it on behalf of the insured, the one whoselife or property is being insured. The beneficiaryis the person named in the policy to receive theproceeds paid by the insurer in the event of aloss. A rider is an attachment to an insurancepolicy that modifies the policy’s terms. Thepremium is the amount of money the policyholderpays to the insurance company forinsurance coverage.Section 35.2 Life and Health Insurance● Straight life insurance requires you to paypremiums throughout your life. Universal lifeinsurance allows you to change the terms of thepolicy as your needs change. Limited paymentlife insurance provides that premiums stop after astated length of time. The proceeds of an endowmentpolicy are paid to the beneficiaries upon theinsured’s death, or to the insured if alive at the endof an agreed period. An annuity is a guaranteedretirement income paid for either by a lump-sumpremium or by periodic payments. Accidentaldeath and dismemberment insurance providesbenefits only when you are killed in an accident,lose the use of one or more limbs, or lose sight inone or both eyes. Term insurance covers you for aparticular time period, usually five or ten years.Term insurance is the least expensive kind of lifeinsurance because it has no cash or loan value.Premiums for term life insurance increase at theend of each term because the insured is older andconsidered a greater risk.●●Insurers are exempt from paying when an insuredis legally executed, or when the beneficiarymurders the insured. Usually beneficiaries canrecover for death caused by suicide under apolicy that’s at least two years old.Basic health insurance coverage covers hospitaland medical expenses. Major medical insurancepays for medical expenses beyond those coveredby a basic plan. Group plans are insurance plansoffered through a place of work. Individual plansare for people whose companies do not offerhealth insurance or for those who are selfemployed.People can also opt for coverage bya Health Maintenance Organization (HMO),which is a group of healthcare professionals.A Preferred Provider Organization (PPO) is agroup of healthcare providers, such as doctorsor hospitals, who provide care for groups ofemployees at reduced rates. Medicare is thefederally funded health insurance program forthose over 65, and Medicaid is a healthcare planfor low-income people.Section 35.3 Property Insurance● Property insurance covers losses to specificproperty for a stated premium. A homeowner’spolicy protects against losses and liabilitiesrelated to home ownership. Fire insurance coversloss resulting directly from an unfriendly orhostile fire.● Coinsurance limits your liability for a loss if theproperty is not insured for its full replacementvalue. If the coinsurance clause provides for80 percent coinsurance, then your house must beinsured for 80 percent of its replacement valueto receive full reimbursement for a loss.● Ocean marine insurance covers ships at sea.Inland marine insurance covers goods that aremoved by carrier.766 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.insurancelimited-payment life insurancepolicyholderbeneficiaryriderinsurable interestpremiumface valuecash valuelife insurancecoinsuranceinland marine insuranceinsureruniversal life insuranceendowment insuranceannuityterm insuranceMedicareMedicaidproperty insurancebinderfloater policyocean marine insuranceSelf-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 35:Insurance Protection—Self-Check Quizzesto prepare for thechapter exam.1. With a partner, create an agenda for an imaginary meeting withan insurance agent. Use as many of the key terms as possible.2. With a partner, role-play a conversation with an insurance agentto discuss your insurance needs.3. Present your discussion to the class.Answer the following questions. Refer to the chapter for additional reinforcement.4. Would it be possible for you to take out an insurance policy on your teacher’s car?Why or why not?5. What is the difference between the face value and the cash value of a lifeinsurance policy?6. Why is it usually less expensive to buy life insurance when you are young?7. Which features should you look for when you purchase term insurance?8. What is the purpose of a binder?Chapter 35: Insurance Protection 767

CHAPTERASSESSMENTParticipating as a Member of a TeamIn small groups, create an imaginary personwith property who will need insurance. Be asrealistic as possible. Negotiate with your teammembers about what kinds of insurance will berequired to protect the person and his or herproperty interests. Next:9. Contact four different insurance agents,and ask for premium quotes on life, health,and property insurance.10. Negotiate with the agents, and review theirquotes to determine which agent made thebest overall offer.Be prepared to answer the agents’ questionsabout the imaginary person and property thatyou created.No Need for Insurance?Arlen is a risk taker. He is a professional stuntmanand loves to jump out of burning buildings,drive fast cars, and live from paycheck to paycheck.Recently, his friend Pam asked Arlenabout the insurance he carries. Arlen justlaughed—he doesn’t believe in insurance. “Itis a waste of money,” he says.Debate11. Explain the importance of life, health, andproperty insurance to Arlen.12. What type of insurance would you recommendthat Arlen purchase first? Explainyour answer.For the following cases, give your decision andstate a legal principle that applies.13. Al Zuni Trading, Inc. purchased a $1 millionlife insurance policy on the life of ThomasMcKee, one of its officers. McKee resignedfrom the company three months later, anddied two years after that. Is Al Zuni Trading,Inc. entitled to the million dollars? Explainyour answer.14. Antoinette Gareau is seriously ill and needsto be hospitalized. A friend recommends acertain hospital that specializes in treatingher illness. An HMO provides Antoinette’shealth insurance. Will it cover services inany hospital that she chooses? Why orwhy not?15. Alphonse Weible purchased a straight lifeinsurance policy on his life. After payingpremiums regularly for six years, he losthis job and stopped making payments. Aftera grace period, the insurance company canceledthe policy. Is Alphonse entitled to arefund of some of the money he paid to theinsurance company? Explain your answer.16. Yang Pak insured his house for $32,000,under a fire insurance policy that containsan 80 percent coinsurance clause. Thehouse is worth $80,000. An accidental firecaused $10,000 of damage to the house.How much money will Yang receive fromthe insurance company?17. Zane Lewis stated in his application for lifeinsurance that he was 22 years old, whenhe was actually 28. After paying premiumsfor five years, Zane died, and the insurancecompany discovered his correct age. Thecompany refused to settle on the policy,claiming material misrepresentation. Willthe insurance company have to pay theclaim? Explain your answer.768 Unit 7: Planning for the Future

In each case that follows, you be the judge.18. Life InsuranceChester Henrikson, Sr. purchased a $10,000 life insurance policy on the life of his son, Chester, Jr.For the first nine years of the policy’s life, Chester, Sr. and his wife were listed as primary beneficiariesof the policy. In the tenth year, Chester, Sr. had his wife’s name removed. Two years later,Chester, Sr. was found guilty of the voluntary manslaughter of Chester, Jr. Is Chester, Sr. entitledto the proceeds of the insurance policy? Why or why not?New York Life Insurance Co. v. Henrikson, 415 N.E.2d 146 (IN).19. Accident InsuranceWilliam Galindo, Jr. suffered a broken neck while playing in a high school football game. Asa result of that injury, Galindo is a quadriplegic. The high school had an accident insurancepolicy that paid the following: $10,000 for the loss of both hands or both arms and $10,000for the loss of both feet or both legs. The policy also contained the following words: “MaximumDismembership Benefit $10,000.” Is Galindo entitled to these insurance proceeds? If so, howmuch? Explain your answer.Galindo v. Guarantee Trust Life Insurance Co., 414 N.E.2d 265 (IL).Life in the Mile High CityDenise has recently graduated from college and isworking in Denver, Colorado. She is renting anapartment. As she is settling in to her new job andlife, she thinks she might need some insurance. Shewould especially like to protect against risks to herhealth, life, and personal belongings.ConnectUsing a variety of search engines, find out:20. What types of insurance Denise can purchaseonline.21. How to obtain quotes for life, health, andrenter’s insurance through a Web site.22. Predict Why do you think people buyinsurance? Why wouldn’t they just savefor a problem that might occur?23. Connect Is there any type of insuranceyou think you should have at your age?Explain.24. Question Insurance companies rely onstatistics to determine the cost theycharge policyholders. Is this fair? Whyor why not?25. Respond Do you think it is the government’sresponsibility to provide healthinsurance for those over 65 years of age?Chapter 35: Insurance Protection 769

CHAPTERRetirement and WillsUnderstanding Businessand Personal LawChapter Overview Visit the UnderstandingBusiness and Personal LawWeb site at ubpl.glencoe.com and clickon Chapter 36: Retirement and Wills—Chapter Overviews to preview thechapter information.

The Opening ScenePatrick is working on his laptop computer as Robinarrives home with her sister, Tatiana.Bright FuturePATRICK: Hi, honey! How was your interview?ROBIN: Wonderful! I got the job!PATRICK: Great! Will you be doing the same kind ofwork you do now?ROBIN: No, even better—I’m starting as a supervisor.It’s a young company, so there should be lots ofroom for advancement. They were impressed withthe fact that I have a college degree.PATRICK: I knew that would make a difference.TATIANA: How’s the pay?ROBIN: My starting salary will be $5,000 more thanwhat I make now! The benefits are good, too. Theyeven have a noncontributory pension plan.TATIANA: Is that important?ROBIN: The one I have now is contributory.PATRICK: You have two years of pension benefitsalready accumulated.ROBIN: Yes, and I hope I don’t lose them by changingjobs. With our social security and my pension, weshould have a long, happy retirement.PATRICK: I hope it won’t be like Mr. Kulak’s. Heworked hard all his life and collapsed a week afterhe retired. It must be hard for his daughter, Martha.I can’t imagine what it must be like to lose yourfather and mother in the same year!TATIANA: She’s the only one left in their family now.Did you know that she was adopted?PATRICK: I hope she doesn’t have trouble inheritingfrom her father’s estate, being adopted. I wonder ifhe had a will.ROBIN: A lady in the grocery store told me that if youdie without a will, the state takes everything. I hopethat doesn’t happen to Martha! Mr. Kulak workedso hard all those years, and his daughter shouldreceive his money.TATIANA: I hope she does.ROBIN: Speaking of wills, Patrick, you and I don’thave wills.PATRICK: I had a will once, before we were married.I have no idea what happened to it. I’ll lookaround for it.ROBIN: You probably left everything to your oldgirlfriend.TATIANA: (Laughing.) Ha! That would be something ifyour old girlfriend inherited everything instead ofRobin.ROBIN: That’s what you think! There’s a lawyer in thebuilding where I work. Maybe I’ll stop in to seeher tomorrow about our wills.PATRICK: That’s a good idea. I hope you don’t havesome old boyfriend in mind to leave things to.ROBIN: No. I’m going to leave everything to you,Patrick. If you’re not alive when I die, everythingwill go to Tatiana.TATIANA: Whenever you’re ready, sis, I’ll be the firstwitness!1. How does a contributory pension plan differ from anoncontributory pension plan?2. May workers transfer pension benefits from one jobto another?3. From whom do adopted children inherit?4. Does the state take the property of a person whodies without a will?5. Is a surviving spouse given any legal protectionwhen omitted from a deceased spouse’s will?Chapter 36: Retirement and Wills 771

Retirement Incomel How to describe themain features of socialsecurityl How to discuss theretirement benefitsoffered by employerpension plansl How to explain thepension rights givento employees underERISAl How to distinguishamong the variouspersonal retirementplansPublic Pension PlansThe federal government administers social security, railroad pensions,military pensions, and civil service pensions. Many state and localgovernments also provide pensions for their employees.Social SecuritySocial security provides income to people when their regular incomestops because of retirement, disability, or the death of someone who hadprovided them with income (see Figure 36.1). You and your dependentsbecome eligible for social security benefits when you work at a job that iscovered by social security. While working at such a job, you receive workcredits—units that stand for a specific amount of money earned during acalendar quarter. A worker can earn four work credits in one year.Example 1. Carlos earned $3,640 during the first quarter (threemonths) of 2001, $790 during the second quarter, $900 during theLearning about differenttypes of retirement planswill help you predict whatyour financial situationand needs will be whenyou retire.l pension planl 401(k) planl vestingl portabilityl Individual RetirementAccount (IRA)l Keogh PlanFigure 36.1Retirement Age to ReceiveSocial Security BenefitsPeople Born inReceive Full Benefits At Age1938 65 and 2 months1939 65 and 4 months1940 65 and 6 months1941 65 and 8 months1942 65 and 10 months1943–54 661955 66 and 2 months1956 66 and 4 months1957 66 and 6 months1958 66 and 8 months1959 66 and 10 months1960 or later 67GETTING SOCIAL SECURITYMost people receive social security benefitswhen they retire. At what age will you be ableto receive full social security benefits?772 Unit 7: Planning for the Future

third quarter, and nothing during the fourth quarter. In 2001,workers covered by social security received one credit for $830of earned income in a calendar quarter. Carlos received two socialsecurity work credits for the year 2001—one for the first quarterand one for the third quarter.With certain exceptions, workers need 40 work credits to becomeeligible for social security benefits. Forty work credits equal ten yearsof contributions to the fund. However, the ten work years do not needto be consecutive. The actual amount to be paid by social security willdepend on your average earnings over a period of years. The more youearn, the more you receive in benefits, up to a certain limit.People born before 1938 can retire at the age of 65 and receive fullbenefits, or they can retire at 62 and receive reduced benefits. The minimumage at which you can retire and still receive full benefits is graduallyincreasing.Workers are entitled to disability benefits under the social securitylaw if they have a physical or mental condition that prevents them fromdoing substantial, gainful work and if the condition has lasted (or isexpected to last) for at least 12 months. Workers are also considereddisabled if they have any condition that is expected to result in death.Employer Retirement PlansSOCIAL SECURITYBENEFITSSocial security is animportant source ofincome for many retiredpeople. How are socialsecurity benefitscalculated?A pension plan is a retirement plan that is funded at least in partby an employer. The company where you work may offer a pension planto supplement social security. If it is financed entirely by the employer,Retired HireDid you ever wonderwhy some elderly individualsare workinginstead of enjoyingtheir retirement? Someenjoy being in thepublic, but others needextra money becausetheir retirement incomeisn’t enough to covertheir expenses. Manyteens think they aretoo young to worryabout retirement.However, according toMerrill Lynch, if youstarted a Roth IRA atage 16 and maximizedyour yearly contributions,when you turned46, you would havean after-tax salary of$25,480 for the next20 years. What doyou think is the bestage to start savingfor retirement?Get involvedGet a part-time job andbegin saving a smallpercentage of yoursalary each month.Investigate otherrelatively risk freemoney market options.Chapter 36: Retirement and Wills 773

Death and TaxesMost people own life insurance at some point in their lives. When a persondies, he or she often leaves the proceeds of a life insurance policy to asurviving spouse as beneficiary. The question then arises whether the proceedsof the life insurance policy are subject to estate taxes.Happily, the answer is no. Life insurance proceeds are not subject to theestate tax, also referred to as the “death” tax. The life insurance policy passesimmediately to the named beneficiary and does not become part of the estate.For this reason, this exemption from estate taxes applies when someone otherthan a surviving spouse is named as beneficiary.Conduct Research Visit the Web site of the Internal Revenue Service(www.irs.gov). Research the rules regarding estate taxation. What property leftto a surviving spouse is subject to the estate tax?774 Unit 7: Planning for the Futureit is called a noncontributory pension plan. Most employer pensionplans, however, are contributory pension plans financed by employeesalone or by the combined contributions of employers and employees.Under a 401(k) plan , employees agree to forgo a bonus or take asalary reduction to invest in a retirement plan. Employers sometimesmatch the amount contributed by employees. A similar plan for employeesof nonprofit organizations is known as a 403(b) plan. Funds in either planare not taxed until the money is withdrawn, but the money cannot be withdrawnwithout penalty before the age of 59 1 /2. Lower income workersare entitled to tax credits when they save for retirement.Defined-Benefit PlansDefined-benefit plans are the most common type of employer pensionplan. Under this type of plan, employees receive a definite, predeterminedamount of money upon retirement or disability. The fixedamount is based on an employee’s years of service; the amount of themonthly benefit is an amount of money fixed in advance for each yearof service. For example, a plan may pay $30 per month for each year ofservice. If you worked 20 years for the company, your pension wouldbe $600 per month. Payments may also be calculated based on a percentageof your wages over the years. The employer must contributenecessary amounts to ensure that benefits will be paid at retirement.

Defined-Contribution PlansIn defined-contribution plans, an employer pays a certain amountinto a pension fund every month (or every year) for each employee. Theamount contributed is usually a fixed percentage of the employee’swages or salary.Employee Retirement Income Security ActThe Employee Retirement Income Security Act (ERISA) placesmany controls on the management of pension funds and gives certainrights to workers. Under the act, employers must place employees’ pensioncontributions into a pension trust, independent of the employer.Workers are guaranteed the right to receive pension benefits regardlessof whether they are working under the plan at the time of retirement.Under ERISA, employees’ contributions vest immediately, and allpension benefits must vest after a worker has been on the job for threeyears. The vesting of retirement benefits is the act of giving a workera guaranteed right to receive a future pension.Workers may transfer benefits from one company’s pension plan tothe plan of another company, from one company’s pension plan to anindividual retirement plan, or from an individual retirement plan to acompany plan. The ability to transfer pension benefits from one job toanother is called portability .It is important to investigate and take advantage of the retirementoptions afforded by your employer, even early in your career. Your willingnessto start early in preparing for retirement can make a significantdifference in your level of future income (see Figure 36.2).Teachers’ Fund Invests in High TechnologyIn 2002, the Teachers’ Retirement System of Louisiana filed a lawsuit againstsoftware maker Siebel Systems, Inc. The lawsuit alleged that the firm’s directorsviolated the company’s rules for granting stock options by exceeding the limitsset on the number of stock options it was allowed to grant and by issuing optionsat below market value without correctly expensing the difference in price. At thetime, Siebel’s stock price had fallen. The Teachers’ Retirement System claimedthat they suffered financial losses because the excessive stock option grantsdiluted the value of their shares and contributed to the fall in price.Connect Visit the Web site of your state’s public employees’ retirement system.See if it mentions whether the fund invests in high-tech companies.Chapter 36: Retirement and Wills 775

START EARLYTax-deferred investments,such as IRAs, can growconsiderably by the timeyou retire if you startinvesting in them early. Inthis figure, which personcontributed more moneyto the retirement plan?Which one earned moreby age 65? Why?Figure 36.2Saver A$2,000/yearfor 9 yearsBenefits of Starting aRetirement Plan Earlyno contributionsContributionsAge 25 35 45 55 65Net earnings*(excludingcontributions)$525,344Saver B no contributions$2,000/year for 30 years$290,427*Assumes 9 percent fixed rate of return, compounded monthly,with no change in the principal.Source: The Franklin Investor (San Mateo, CA: Franklin Distributors, Inc.)Personal Retirement PlansSelf-employed persons and employees who are notcovered by company pension plans have the same retirementneeds as others. However, unlike employeesof a large business, self-employed persons are unableto share the burden of setting up a retirement plan witha group of people. The retirement funds must comefrom their own pockets.Individual Retirement AccountsAn Individual Retirement Account (IRA) is anindividual’s own personal pension plan (see Figure 36.3for a summary of the various types of IRAs). It is asystem of providing for retirement by saving part ofyour earnings every year. The earlier you start saving,the more you will have when you retire. Investing earlyalso allows you to take greater advantage of compoundinterest, which is interest earned on both the principleamount in the account and the interest already earnedon the account, or interest on the interest.ROTH IRAA Roth IRA is an attractive way tosave for retirement. What are someof the benefits of this type of IRA?776 Unit 7: Planning for the Future

Figure 36.3Type of IRARegular IRARoth IRASimplified EmployeePension Plan (SEP-IRA)Simple IRASpousal IRARollover IRACoverdale EducationSavings AccountFeaturesVarious Types of IRAsl Tax-deferred interest and earningsl $3,000* annual limitl Limited eligibility for tax-deductible contributionsl Contributions do not reduce current taxesl Tax-deferred interest and earningsl $3,000* annual limit on individual contributionsl Withdrawals are tax-free in specific casesl Contributions do not reduce current taxesl “Pay yourself first” payroll reduction contributionsl Pre-tax contributionsl Tax-deferred interest and earningsl Contributions by employer and employeel $7,000 ($10,000 by 2005) maximum employee annual contributionl Tax-deferred interest and earningsl Subject to same rules as Regular IRAl Tax-deferred interest and earningl Both working spouse and nonworking spouse can contribute up to$3,000 each yearl Limited eligibility for tax-deductible contributionsl Contributions do not reduce current taxesl Traditional IRA that accepts rollovers of all or a portion of your taxabledistribution from a retirement planl You can rollover to a Roth IRAl Tax-deferred interest and earningl 10% early withdrawal penalty is waived when money is used forhigher-education expensesl $2,000 annual limit on individual contributionsl Contributions do not reduce current taxes*Increases to $4,000 in 2005, $5,000 in 2008, and indexed for inflation thereafter.Traditional IRA Amounts up to $3,000 (increasing to $5,000 by2008) may be set aside annually for retirement under a traditional IRA.Contributions are tax deductible if your income is below a certainamount, and interest is tax deferred until the money is withdrawn. Unlessused for certain home purchases and higher education costs, fundscannot be withdrawn without penalty before you reach the age of 59 1 /2.When you become 70 1 /2 years old, you must begin taking minimumrequired distributions and paying taxes on the money you withdraw.CHOOSING AN IRAIRAs can be a good way tosave money for retirement.What are the features ofthe Coverdale EducationSavings Account?Chapter 36: Retirement and Wills 777

In 1935, Lord Moynihanand R. Killick Millardformed The VoluntaryEuthanasia Society. ThisEnglish organization,now called EXIT,provides informationabout living wills,self-deliverance, andeuthanasia.Roth IRA A Roth IRA is an attractive way to save for retirement.Distributions (withdrawals) are not required during your lifetime. Whentaken after age 59 1 /2, distributions are tax free if you have had the accountfor five years.Coverdale Education Savings Account A Coverdale EducationSavings Account can be established for a child under eighteen by anyonewho wants to save for the child’s college education. The interest onthe savings is tax free and there is no early withdrawal penalty. Theamount saved for each child may not exceed $2,000 a year.Simplified Employee Pension Plan A Simplified Employee PensionPlan (SEP) is an IRA funded by an employer. Money is withheldfrom an employee’s pay and placed in the IRA account. Employers maycontribute up to 25 percent of the employee’s pay or $41,000—whicheveris lower. The money invested in the plan is not taxed until it is withdrawnand cannot be withdrawn without penalty before the age of 59 1 /2.Keogh PlansA Keogh plan is a retirement plan for self-employed people andtheir employees. Contributions to the plan are tax deductible, and the interestearned is tax-deferred until the money is withdrawn. The savingscan build to age 70 1 /2, at which time the retiree must begin to withdrawthe money.Reviewing What You Learned1. What is the purpose of social security?2. Explain the difference between a noncontributoryand a contributory pension plan.3. What are the pension rights given to peopleunder ERISA?4. Describe a traditional IRA, a Roth IRA,a Coverdale Education Savings Account, aSimplified Employee Pension Plan, anda Keogh plan.Critical Thinking ActivityPreparing for Retirement Many Americansbelieve that if they are covered under anemployer’s retirement plan, they will have asatisfactory income after they retire. Explainthe flaw in this reasoning.Legal Skills in ActionEvaluating Retirement Plans As you thinkabout your future career, the retirement planthat a job offers is an important benefit toconsider. Evaluate the different types of plansdiscussed in this section and choose the oneyou think is best for you. With a partner,explain the reasons for your selection.778 Unit 7: Planning for the Future

Estate PlanningMaking a WillA will is a document that is signed during your lifetime that providesfor the distribution of your property upon death. Each state has itsown requirements for making a will. Figure 36.4 shows a sample will.A person who dies with a will is said to die testate and is called atestator (male) or a testatrix (female). A gift of personal property thatis made by will is called a bequest , or legacy. A gift of real propertythat is made by will is called a devise in most states. Some states referto a gift in a will of both real and personal property as a devise. Thosewho receive property by will are referred to as beneficiaries. They arealso known (in most states) as legatees if they receive personal propertyand as devisees if they receive real property under a will. The termheir refers to one who inherits property under a will or from someonedying without a will.Who May Make a WillAny person of sound mind who has reached the age of adulthood(eighteen years) may make a will. You reach eighteen on the day beforeyour eighteenth birthday (see Chapter 7). To be of sound mind, you musthave sufficient mental capacity to do the following:l Understand the nature and extent of your propertyl Know who would be the natural persons to inherit your property,even though you may leave your property to anyone you choosellKnow that you are making a willBe free from delusions that might influence the dispensation ofyour propertyl How to explain whomay make a willl How to list the formalrequirements of a willl How to change orrevoke a willl How to discuss thelegal protectionavailable to the familyof the deceasedl How to describe whathappens when someonedies with andwithout a willl How to outline thelegal procedures thatapply when someonedies owning propertyKnowledge of wills andestates will help youwhen the time comes inyour life.Formal Requirements of a WillTo be valid, a will must conform exactly to the law of the state whereit is made. A will that is legally made in one state will be recognized asvalid in every state.With the exception of nuncupative (oral) wills of personal propertyby soldiers and mariners, a will must be in writing. It must be signed andwitnessed by the number of witnesses required by state law—usuallytwo. A signature can be any mark (such as an X) that is intended by thetestator to be a signature. When a testator is paralyzed and cannot write,someone else can sign in the testator’s presence and with the testator’sl willl testatel bequest/devisel heirl codicill intestatel executor/executrixChapter 36: Retirement and Wills 779

Figure 36.4LAST WILL AND TESTAMENTOFJANET L. SCANLONI, JANET L. SCANLON, of Groveland, County of Essex, Commonwealth of Massachusetts, make this myLast Will and Testament, hereby revoking all earlier wills and codicils.ARTICLE II give, devise, and bequeath all my estate, real, personal, and mixed and wherever situated to my husband,Mathew A. Scanlon, if he is living on the thirtieth day after my death.ARTICLE IIIf my husband, MATHEW A. SCANLON is not living on the thirtieth day after my death, I give and devise allof my property of every kind and wherever located that I own at the time of my death or to which I am then in anyway entitled in equal shares to my children, RYAN M. SCANLON and COREY L. SCANLON, but if either of themshall not be living, his share thereof shall pass to his issue then living by the right of representation, and in defaultof such issue then his share shall pass to the survivor of them.I, the undersigned testator, do hereby declare that I sign and execute this instrument as my last will, that Isign it willingly in the presence of each said witnesses, and that I execute it as my free and voluntary act for thepurposes herein expressed, this 15th day of January 20--.Janet L. ScanlonWe, the undersigned witnesses, each do hereby declare in the presence of the aforesaid testator that thetestator signed and executed this instrument as her last will and in the presence of each of us, that she signed itwillingly, that each of us hereby signs this will as witness in the presence of the testator, and that to the best of ourknowledge the testator is eighteen (18) years of age or over, of sound mind, and under no constraint or undueinfluence.(Witness)(address)(Witness)(address)COMMONWEALTH OF MASSACHUSETTSCOUNTY OF ESSEXSubscribed, sworn to, and acknowledged before me by the said testator and witness this 15th day of January 20--.Carl Pierce, Notary PublicSAMPLE WILLA will must be signed and witnessed by the number ofwitnesses required by state law. In whose presence didthe testatrix and the witnesses sign this will?780 Unit 7: Planning for the Future

consent. In many states, a holographic will, that is, a will written entirelyin the handwriting of the testator, is valid without witnesses.Revoking or Changing a WillIn some states, a will may be revoked by burning, tearing, canceling,or obliterating the will with intent to revoke it; executing a newone; and marrying after the will was created. A divorce usually revokesgifts made under a will to a former spouse. A codicil is a formal documentused to supplement or change an existing will. It must be signedand witnessed just like a will to be valid.Family ProtectionState laws contain provisions designed to protect surviving familymembers when a spouse dies. Some states provide for a familyallowance, or money taken from the decedent’s estate to meet thefamily’s needs while the estate is being settled. Another family protectionis the homestead exemption, which puts the family home beyondthe reach of creditors up to a certain limit. Still another protectivedevice in some states is exempt property, which is certain property of adecedent that passes to the surviving spouse or children and is beyondthe reach of creditors. In some states, for example, $3,500 worth ofpersonal property passes automatically to the surviving spouse, or ifnone exists, to surviving children equally.Protection ofSpousesA surviving spouse whodoesn’t like the provisions ofa deceased spouse’s will maychoose to take a differentportion of the estate set bystate statute. This is known asa surviving spouse’s electiveor forced share.ComputerTechnologyWhere will your life leadyou? You can predict whatyour life might be like inthe next few years, butit is difficult to imaginewhat the future will reallyhold. Technology is similar.It changes so fast andsometimes takes turnswe don’t expect.Research ActivityImagine what your lifewill be like in 20 years.How will technologyaffect your life? Whatimpact will it have onyour career, your livingarrangements, and yourleisure activities? Howwill it change the way youplan for your retirement?Create a computerizedpresentation explainingyour vision for the future.PEACE OF MINDPreparing a will can make thingseasier for your family after yourdeath and ensure that yourestate is distributed according toyour wishes. Although youcannot make a will before youare 18 years old, what wouldhappen if you were to diewithout a will after that age?Chapter 36: Retirement and Wills 781

Legal ColumnistWhen the topic is the First Amendment, lawyers, judges,and legal scholars around the country read and heed theopinions of Charles Levendosky. Levendosky’s newspapercolumns have been published in the Los Angeles Times, theAtlanta Journal-Constitution, the Baltimore Sun, and theInternational Herald-Tribune.In fact, Levendosky has little formal training or education relating to the law.Levendosky majored in physics, math, and secondary education and haspublished almost a dozen books of poetry. He studies the First Amendmentbecause it protects the rights of writers and artists to express their opinions.“Writers shine a little light on the human condition,” says Levendosky, whohas served as Wyoming’s poet-in-residence for over a decade. He becameinterested in free speech issues after two families attempted to censor books inWyoming schools.Levendosky began educating himself by studying every First Amendmentdecision written by the Supreme Court, reading books by First Amendment scholars,and talking with experts. In 1994, the Casper Star-Tribune asked him to write acyber column about First Amendment issues. Once a year, the newspaper, whichwas one of the earliest to expand to the Internet, sends Levendosky to Washington,D.C. to hear oral arguments before the Supreme Court. Seeing the SupremeCourt in action has given Charles Levendosky added perspective on FirstAmendment issues.“I see my role as helping people find answers about their First Amendmentrights, or putting them in touch with the experts who can,” he says from his homeoffice in Casper.SkillsPersonalityEducationAnalytical, communication, computer, willingness to listen tosources you disagree withMust have a passion for what you do; a self-starter, neversatisfied with “just okay”“High school students should start educating themselves byunderstanding the Supreme Court decisions about children’sFirst Amendment rights and how those decisions affect them.It’s important for students to know that even though theirrights are not the same as those of adults, young peoplehave fought for their own rights and changed the law.”For more information on legal columnists, visit ubpl.glencoe.com, or yourpublic library.782 Unit 7: Planning for the Future

FAMILY PROTECTIONState laws haveprovisions to protectsurviving familymembers when aspouse dies. What aresome of the familyprotectiondevices?Protection of ChildrenChildren who can prove that they were mistakenly left out of a parent’swill are protected by the laws of most states. Forgotten childrenwill receive the same share that they would have received if their parenthad died without a will. Children who are intentionally omitted froma parent’s will do not have this protection.Example 2. Edward Morley’s will gave a large sum of money tocharity and provided nothing for his son, Dennis. The will containeda clause stating, “I intentionally omit to provide for myson, Dennis Morley.” Because Edward’s intent was clear, Denniswill receive nothing from his father’s estate.Laid-Off or EarlyRetirementManolo is 55 years old.He has worked for thepast 15 years as a forkliftoperator in a warehouseand hopes towork for several moreyears. However, hiscompany is “downsizing,”and his employertold him that he couldeither take early retirementor be laid off. Bytaking early retirement,Manolo would haveaccess to his retirementfunds and perhaps payhefty taxes on them. Bybeing laid off, Manolo’sretirement would staywith the company, andhe would have verylittle income until hecould find another job,which could be difficultfor a man his age. Inyour opinion, Whatdoes Manolo owe thecompany? What doesthe company oweManolo?Adopted children are treated, in most states, as though they werethe naturally born children of their adoptive parents. They inherit fromtheir adoptive parents rather than from their natural parents.Dying Without a WillA person who dies without a will is said to have died intestate . Thedeceased’s personal property is distributed according to the laws ofintestate succession of the state in which the deceased was domiciled.Chapter 36: Retirement and Wills 783

Figure 36.5 Distribution of Intestate Property Under a Typical State Statute*If you are survived by:Your estate is distributed:1. Spouse and child(ren)One half to spouse, one half to children2. Spouse, no children, but next of kin (includingparents, siblings, niece, nephew, aunt, uncle,cousin, etc.)3. Spouse, no child, no next of kin4. No spouse, one or more children5. No spouse, no child, but next of kin6. No spouse, no child, no next of kinWhere the estate is less than $200,000, all to spouse.If the estate is larger than $200,000, the first $200,000plus one half of everything in excess of $200,000 tospouse. The remainder to next of kin in this order:parents(s), siblings, nieces and nephews, grandparents,uncles and aunts, cousins.All to spouseAll to childrenAll to next of kin, in the order described above in 2.All “escheats” to the state, that is, all turned over tothe state because there are no heirs or beneficiaries.*Massachusetts Law of Descent and Distribution Law of Intestate Succession (G.L. c. 190 §1)INTESTATE SUCCESSIONEach state has its own law of intestatesuccession. What does such a law determine?In contrast, the real property passes according to the law where theproperty is located. Figure 36.5 shows Massachusetts’ laws of intestatesuccession. Dying without a professionally drafted and legally validwill can have serious consequences. Not only are the intentions of thedeceased subject to question and legal challenge, but beneficiaries maybe forced to pay significant administrative fees, legal costs, and estatetaxes. As a result, it is usually wise to have a valid will, especially ifyou are married, have children, or there are others who are dependentupon you for support.In general, the surviving spouse is entitled to one-third or one-halfof the estate. The balance of the estate is usually divided equally amongthe deceased’s children. If any children are deceased, then grandchildrenshare equally in their deceased parent’s share of their grandparent’sestate. If all children are deceased, all grandchildren share equally intheir grandparent’s estate. If there are no children or grandchildren, theproperty goes to the decedent’s parents, if living, and if not, to brothersand sisters of the decedent. The children of any deceased brothersor sisters (nieces and nephews) take their parent’s share of the estate.784 Unit 7: Planning for the Future

If there are no brothers or sisters or nieces or nephews, uncles and auntsinherit the property. If no uncles or aunts survive the decedent, cousinsbecome the heirs. It is only when a person is survived by no bloodrelatives that the property will escheat; that is, become the property ofthe state.Settling an EstateWhen people die owning assets, their estate must be probated; thatis, it must be settled under the supervision of the probate court. The firstjob of the probate court is to establish the validity of the will. If no oneopposes the probating of the will, this can be a simple matter. Sometimes,however, heirs who are left out of a will may contest it.A will usually names a personal representative called an executor(male) or executrix (female) to carry out the terms of the will. If thereis no will, or if the executor or executrix named in the will fails toperform, someone must petition the court to settle the estate. That person,when appointed, is called an administrator or administratrix. Theexecutor or administrator gathers the estate assets, pays the debts andtaxes, and distributes the remainder of the assets according to the termsof the will or state law.Reviewing What You Learned1. Who may make a will?2. What are the formal requirements of a will?3. How can a will be changed or revoked?4. Explain how surviving family members areprotected legally when a spouse dies.5. What happens when a person dies without awill?6. Discuss the legal procedure that must befollowed when someone dies owningproperty.Critical Thinking ActivityPower of Attorney Reconsider what you learnedabout the power of attorney in Chapter 18, andthink about how it relates to what you havelearned about wills in this chapter. Identifymethods of conducting transactions in spite of anincapacity or death, via power of attorney or will.Legal Skills in ActionCalculating Estate Distribution According toDoug’s will, his widow will receive one-halfof his estate and each of his two children willreceive one-third of the remainder. Doug’s bestfriend will receive three-fourths of the balanceof his estate, and his favorite charity willreceive the remainder. Assuming that Doug’sestate totals $300,000, how much will eachparty receive?Chapter 36: Retirement and Wills 785

CHAPTERASSESSMENTSection 36.1 Retirement Income● Social security provides income to people whentheir regular income stops because of retirement,disability, or the death of someone who had providedthem with income. You and your dependentsbecome eligible for social security benefits whenyou work at a job that is covered by social security.● A pension plan is a retirement plan that is fundedat least in part by an employer. If the plan isfinanced entirely by the employer, it is called anoncontributory pension plan. A plan that isfinanced by the combined contributions ofemployers and employees is a contributorypension plan. Most employer pension plans arecontributory, and many employers match theamount contributed by the employee. Under a401(k) plan, an employee invests in a retirementplan, which is not taxed until the money is withdrawn.Under a defined-benefit plan, an employeereceives a predetermined amount of moneyupon retirement or disability. Under a definedcontributionplan, an employer pays a certainamount into a pension fund every month, whichis paid upon retirement or disability.● The Employee Retirement Income Security Act(ERISA) requires that the employer place his orher employees’ pension contributions into apension trust.● Individual retirement accounts (IRAs) allow youto provide for retirement by saving a part of yourearnings every year into an account with favorabletax implications. Funds in a Roth IRA arefree from tax when withdrawn after age 59 1 /2.The interest in an Education IRA is tax free, andthere is no early withdrawal penalty. Contributionsto a Keogh plan are tax deductible and the interestis tax deferred.Section 36.2 Estate Planning● Any person of a sound mind who has reached theage of adulthood may make a will. To be of soundmind means you have sufficient mental capacityto understand the nature and extent of your property,know the natural persons to inherit yourproperty, know that you are making a will, andbe free from delusions.● To be valid, a will must be in writing, signed, andwitnessed.● In some states, wills may be revoked by burning,tearing, canceling, or obliterating the documentwith the intent of revoking it; by executing anew will; and by changing marital status. A willis changed by making a new will or by addinga codicil.● Surviving family members are protected froman unfavorable will by such things as familyallowance, homestead exemption, and exemptproperty. A surviving spouse who does not likethe provisions of a deceased spouse’s will maychoose to take a different portion of the estate,as determined by state law. Children who aremistakenly omitted from a parent’s will mayreceive the share they would have received hadthe parent died without a will.● The personal property of a person who diesintestate goes to that person’s heirs accordingto the law of the state where the decedent wasdomiciled. Real property passes according to thelaw where the property is located. If there are nosurviving blood relatives, the property goes tothe state. The personal property of a personwho dies testate is distributed according to theinstructions in that person’s will.● When someone dies owning assets, the executoror administrator gathers the assets, pays thedebts and taxes, and distributes the remainderaccording to the terms of the will or state law.786 Unit 7: Planning for the Future

Consider the key terms in the list below. Then use these terms tocomplete the following exercises.401(k) planvestingportabilityIndividual RetirementAccount (IRA)Keogh Planwilltestatebequestdeviseheircodicilintestateexecutor/executrix1. Write a letter to a relative, and make recommendations to himor her about saving for retirement and making a will. Use asmany of the key terms as possible in your letter. Make sure toemphasize the benefits of starting a retirement savings plan asearly as possible.2. Exchange letters with a partner and write a response to yourpartner’s letter. Be sure to correct any mistaken or confusing usesof the key terms.3. Save your letter, and share it with your relative.Self-Check Quiz Visitthe UnderstandingBusiness and PersonalLaw Web site atubpl.glencoe.com andclick on Chapter 36:Retirement and Wills—Self-Check Quizzes toprepare for the chapterexam.Answer the following questions. Refer to the chapter for additional reinforcement.4. How do you become eligible for social security benefits?5. Saving for your retirement is extremely important. What might be the advantages ofcontributing to a contributory retirement plan? What might be the disadvantages?6. What are the requirements to be “of sound mind”?7. In general, how much of an estate is a surviving spouse entitled to when his or herspouse dies?8. What is the difference between an executor/executrix and anadministrator/administratrix?Chapter 36: Retirement and Wills 787

CHAPTERASSESSMENTAcquiring and Evaluating InformationEstablishing a plan for your retirement savingsis important.9. Interview someone who has retired.10. Find out how that person prepared forretirement.11. Ask for any advice he or she would offera young person preparing to enter theworkforce.As a class, analyze the advice given and preparea “Top 10” list of the best suggestions.No Need for a Will?Justin is 30 years old and single. He works as anetwork technician for a large company and isvested in his employer’s pension plan. Justinjust bought his first home, drives a red sportscar, and has several thousand dollars in savings.Justin doesn’t have a will; he doesn’t think heneeds one because he isn’t married and onlyhas one nephew.Debate12. Would you recommend Justin make a will?Why or why not?13. What would happen to Justin’s assets anddebts if he were to die without a will?14. At what age do you think someone shouldmake a will?15. When do you plan on making yourfirst will?16. Do your parents have wills? If no,why not?For the following cases, give your decision andstate a legal principle that applies.17. After working for Datatech Corporationfor 10 years, Harry Bailey took a positionwith another company. Datatech Corporationnotified Bailey that his pension benefitsunder the noncontributory pension planterminated when he left. Does Bailey haveany legal rights? Explain your answer.18. Darius Pelzer lived on a small income hehad from property he inherited. After hereached 65 years of age, however, inflationmade it difficult for him to live on thisincome. He applied for social securitybenefits. Will he get the benefits? Why orwhy not?19. After Peter Ramirez’s death, two wills thathe had made were found. One was datedMay 20, 1986, and the other was markedJune 17, 2001. Which should be acceptedby the court? Explain your answer.20. Betsy Addis signs her will and has PaulaCantini, a friend, sign as a witness. Is thiswill valid? Explain your answer.21. Bertha Bogart made her will according tothe laws of her state. Six months later, shedecided to leave a favorite uncle $2,000.She orally notified the executor named inher will, but she did not change her will.May the executor give Bogart’s uncle the$2,000? Why or why not?22. Jean Johnson became angry at her son andtore up the original copy of her will, whichhad included a generous bequest to the son.She made a new will, leaving her son $1.After Johnson’s death the son tried to havethe will set aside in favor of the previouswill, a copy of which was found amongJohnson’s papers. Do you think the sonwill succeed? Why or why not?788 Unit 7: Planning for the Future

In each case that follows, you be the judge.23. Social SecurityCarmen Ciciretti filed his application for retirement benefits under the Social Security Act anddied 10 days later. The Social Security Administration, unaware of his death, sent him a check for$677.60. The executor of Ciciretti’s estate returned the check to the Social SecurityAdministration, asking for a check made payable to him as the executor of the estate. TheAdministration sent a check to Ciciretti’s wife in Italy instead. Was the Social SecurityAdministration correct? Why or why not?Guarino v. Celebrezze, 336 F.2d 336 (3rd Circuit).24. Witness SignaturesJoseph Katz signed his will in the presence of two witnesses. The witnesses, however, printedtheir names in the place provided for signature instead of signing. After Katz’s death, the willwas presented for probate, and the witnesses signed an affidavit stating that they did witnessthe will. The question arose as to whether printing the name at the end of the will qualified assignature. How would you decide this case? Explain your answer.Will of Katz, 494 N.Y.S.2d 629 (NY).History LessonFrancesca has worked for 10 years and contributedeach year to social security. She knows she will beeligible to collect benefits when she retires.Francesca is interested in learning more about thehistory of social security and has asked you to help.Connect25. Using a variety of search engines, research thehistory of social security. What situation gaverise to social security, and why does it remainimportant today? Write a two-page paperexplaining your findings.26. Predict Why do you think there is an agerequirement for collecting social security?27. Connect Will an employer pension plan bea factor when you are looking for a job?Why or why not?28. Question When should you make a will?Is writing a will something that you shoulddo even when you are young? Why or whynot?29. Respond What are some advantages ofhaving a will when you die?Chapter 36: Retirement and Wills 789

UNITLaw Workshop:Using Legal SkillsHow Might a LandlordCreate a Lease for YoungTenants?Young adults don’t always make thebest tenants. Many are in college or areotherwise only temporary tenants. Somecannot afford to pay rent because of lowincome. Others are noisy or do not havesufficiently good credit. Too many peoplesharing a house or indifference to rentedproperty can result in damage to the property.Step A: PreparationProblem: How would you legally represent a landlord who rents to youngadults?Objectives: In this workshop, you will work with a partner to create alease for a landlord who rents to young adults.llResearch types of tenancies and lease agreements.Investigate reasons for legal disputes among tenants and landlords inyour community.l Use technology (e.g.,word processing orspreadsheet applications)to prepare a leaseagreement.l Analyze lease agreementsfor issues that relate totenants in a collegecommunity and addressthe legal issues that pertainespecially to young adulttenants.790 Unit 7: Planning for the Future

Step B: Procedure1. Choose a partner, and review the information on tenancies and leaseagreements in Chapter 33.2. Use newspaper archives or court records to research landlord/tenantdisputes in your area.3. Decide the type oftenancy and the terms ofa lease agreement thatyou would recommendto your client.4. Based on your research,present your lease to theclass, and explain how itaddresses college tenantissues.Step C: Create a Model to Compare Lease AgreementsPrepare a chart that shows how the type of tenancy and the terms of thelease address issues related to having college students as tenants. As aclass, display all of the charts.BriefDescriptionWhat issuedoes thisaddress?Lease Agreement ChartType of General SecurityDecoration Assignment TerminationRenewalsTenancy Covenants Deposit and Repairs and Subletting of the LeaseStep D: Workshop Analysis ReportCompare the information presented on the different charts, and answerthe following questions:1. Many college students do not attend school during summer. How cana lease address this issue?2. Do you think the security deposit should be raised because of the ageof the tenants? If so, why?3. Do you think the lease should contain special decoration and repairterms? Why or why not?Chapter 36: Retirement and Wills 791

UNITJones v. Mayer Co.U.S. Supreme Court392 U.S. 409 (1968)Landmark CaseIssue Does a private company’s refusal to sell a house to an African-Americanman violate 42 U.S.C § 1982, which prohibits racial discrimination in real estatetransactions?Factsacts Joseph Lee Jones, an African-American,filed a complaint alleging that Alfred H. Mayer Co.had refused to sell him a house because of his color.In his complaint, Jones alleged that such actionviolated 42 U.S.C § 1982 (Title 42, Section 1982 ofthe U.S. Code), which provides:All citizens of the United States shall havethe same right, in every State and Territory, as isenjoyed by white citizens thereof to inherit, purchase,lease, sell, hold, and convey real and personalproperty.The trial court granted Mayer Co.’s motion todismiss. The appellate court affirmed the dismissal,concluding that Section 1982 does notapply to private real estate transactions.Opinion In plain and clear language, 42U.S.C § 1982 prohibits racial discrimination byprivate citizens, as well as public authorities. Inciting a previous case, the Court stated, “[A] citizenwho is denied the opportunity to purchasethe home he wants ‘[s]olely because of [his] raceand color’. . . has suffered the kind of injury that1982 was designed to prevent.” The Courtrejected the Mayer Company’s argument thatCongress could not have intended such a literalreading of the statute.792 Unit 7: Planning for the FutureThe Historical ContextThe Court observed that the statute had originallybeen part of the Civil Rights Act of 1866.After reviewing comments of U.S. Senators madeon the floor of the Senate, the Court noted, “Wethink that history leaves no doubt that, if we are togive [the law] the scope that its origins dictate, wemust accord it a sweep as broad as its language.”Comparison to Recent LegislationIn addressing the case, the Court also madeit clear that the case did not involve a comprehensiveopen housing law. Unlike recent legislation,Section 1982 did not address a variety of issuesinvolving discriminatory housing practices. TheCourt compared Section 1982 to the Fair HousingTitle (Title VIII) of the Civil Rights Act of 1968,Pub. L. 90-284, 82 Stat. 81. Section 1982 differedfrom Fair Housing Title in that it dealt only withracial discrimination and did not address discriminationthat might occur as a result of an individual’sreligion or national origin. Section 1982 alsodid not address discrimination with regard toservices or facilities that might accompany thesale or rental of property, nor did section 1982forbid advertising that indicated discriminatorypractices. Unlike the Fair Housing Title Act, section1982 also did not address discrimination in

providing brokerage services or permit the federalgovernment or Attorney General to interveneto assist parties that had been treated unjustly.Finally, the court observed that section 1982 didnot include a provision that authorized a federalcourt to order the payment of damages.Despite the fact that section 1982 did notaddress the majority of the issues included in theapproved Civil Rights Act of 1968, the court feltthat “it would be a serious mistake to supposethat 1982 in any way diminishes the significanceof the law recently enacted by Congress.”Examining PrecedentThe Court also considered relevant previouscases. Hurd v. Hodge, U.S. 24, had given the Courta recent opportunity to examine section 1982.Hurd v. Hodge arose when property owners in theDistrict of Columbia tried to impose restrictivecovenants against the African-American residentsof their block. A federal district court held that thedeeds of the African-American residents werevoid, thus enforcing the restrictive covenants.In rendering a decision onHurd v. Hodge, the Court adopteda broad view of section 1982 andheld that the enforcement of therestrictive covenants would havedenied the African-Americans“the same right as is enjoyed bywhite citizens . . . to inherit, purchase,lease, sell, hold, and conveyreal and personal property.” TheCourt felt that to decide differentlywould be to “reject the plainmeaning of language.” Furthermore,the Court stated that it madeno difference if an African-Americanwere denied the right to rentor purchase property by a privateparty; that African-Americanwould still be unable to enjoy the same rights as awhite citizen, regardless of the source of the discrimination.ConstitutionalityThe Court concluded that the statute is constitutionalin its purpose to enforce the ThirteenthAmendment, which abolished slavery. Section 1of the Amendment states:Neither slavery nor involuntary servitude,except as punishment for crime whereof the partyshall have been duly convicted, shall exist withinthe United States, or any place subject to theirjurisdiction.Section 2 of the Amendment provides that“Congress shall have the power to enforce thisarticle by appropriate legislation.” 42 U.S.C §1982 is just such legislation.Holding The provisions of 42 U.S.C § 1982prohibit all racial discrimination, private as well aspublic, in the sale or rental of property.1. What federal statute prohibits racialdiscrimination in the sale and rental ofreal estate?2. On what basis did the intermediate appellatecourt affirm the trial court’s decision to dismissthe action?3. From what act did this statute originate?4. What process did the Court utilize to assist itin interpreting the meaning of the statute?5. What Amendment to the U.S. Constitution doesthe statute enforce?Go to the Understanding Business and Personal Law Web site at ubpl.glencoe.comfor information about how to access online resources for the Landmark Cases.Chapter 36: Retirement and Wills 793

APPENDIXThe Constitution of theUnited StatesPreambleWe the People of the United States, in Order to form a moreperfect Union, establish Justice, insure domestic Tranquility,provide for the common defence, promote the generalWelfare, and secure the Blessings of Liberty to ourselvesand our Posterity, do ordain and establish this Constitutionfor the United States of America.794

ARTICLE ISection 1 ■ All legislative Powers hereingranted shall be vested in a Congress of theUnited States, which shall consist of a Senateand House of Representatives.Section 2 ■ The House of Representativesshall be composed of Members chosen everysecond Year by the People of the several States,and the Electors in each State shall have theQualifications requisite for Electors of themost numerous Branch of the StateLegislature.No Person shall be a Representative who shallnot have attained to the Age of twenty fiveYears, and been seven Years a Citizen of theUnited States, and who shall not, when elected,be an Inhabitant of that State in which he shallbe chosen.*Representatives and direct Taxes shall beapportioned among the several States whichmay be included within this Union, accordingto their respective Numbers, which shallbe determined by adding to the wholeNumber of free Persons, including thosebound to Service for a Term of Years, andexcluding Indians not taxed, three fifths ofall other Persons. The actual Enumerationshall be made within three Years after thefirst Meeting of the Congress of the UnitedStates, and within every subsequent Term often Years, in such Manner as they shall byLaw direct. The Number of Representativesshall not exceed one for every thirty Thousand,but each State shall have at Least oneRepresentative; and until such enumerationshall be made, the State of New Hampshireshall be entitled to chuse three, Massachusettseight, Rhode-Island and ProvidencePlantations one, Connecticut five,New-York six, New Jersey four, Pennsylvaniaeight, Delaware one, Maryland six,Virginia ten, North Carolina five, SouthCarolina five, and Georgia three.When vacancies happen in the Representationfrom any State, the Executive Authority thereofshall issue Writs of Election to fill suchVacancies.The House of Representatives shall chusetheir Speaker and other Officers; and shallhave the sole Power of Impeachment.Section 3 ■ The Senate of the United Statesshall be composed of two Senators from eachState, chosen by the Legislature thereof, forsix Years; and each Senator shall have oneVote.Immediately after they shall be assembled inConsequence of the first Election, they shallbe divided as equally as may be into threeClasses. The Seats of the Senators of the firstClass shall be vacated at the Expiration of thesecond Year, of the second Class at the Expirationof the fourth Year, and of the third Classat the Expiration of the sixth Year, so that onethird may be chosen every second Year;and if Vacancies happen by Resignation, orotherwise, during the Recess of the Legislatureof any State, the Executive thereof maymake temporary Appointments until the nextMeeting of the Legislature, which shall thenfill such Vacancies.APPENDIX A* Text of the Constitution represented in gray and crossed out indicates that it has been amendedand is no longer in effect.Appendix A 795

APPENDIX ANo Person shall be a Senator who shall nothave attained to the Age of thirty Years, andbeen nine Years a Citizen of the United States,and who shall not, when elected, be an Inhabitantof that State for which he shall be chosen.The Vice President of the United States shallbe President of the Senate, but shall have noVote, unless they be equally divided.The Senate shall chuse their other Officers,and also a President pro tempore, in theAbsence of the Vice President, or when heshall exercise the Office of President of theUnited States.The Senate shall have the sole Power to try allImpeachments. When sitting for that Purpose,they shall be on Oath or Affirmation. Whenthe President of the United States is tried, theChief Justice shall preside: And no Personshall be convicted without the Concurrence oftwo thirds of the Members present.Judgment in Cases of Impeachment shall notextend further than to removal from Office,and disqualification to hold and enjoy any Officeof honor, Trust or Profit under the UnitedStates: but the Party convicted shall neverthelessbe liable and subject to Indictment, Trial,Judgment and Punishment, according to Law.Section 4 ■ The Times, Places and Mannerof holding Elections for Senators and Representatives,shall be prescribed in each State bythe Legislature thereof; but the Congress mayat any time by Law make or alter such Regulations,except as to the Places of chusingSenators.The Congress shall assemble at least once inevery Year, and such Meeting shall be on thefirst Monday in December, unless they shallby Law appoint a different Day.Section 5 ■ Each House shall be the Judgeof the Elections, Returns and Qualifications ofits own Members, and a Majority of each shallconstitute a Quorum to do Business; but asmaller Number may adjourn from day to day,and may be authorized to compel the Attendanceof absent Members, in such Manner,and under such Penalties as each House mayprovide.Each House may determine the Rules of itsProceedings, punish its Members for disorderlyBehaviour, and, with the Concurrence oftwo thirds, expel a Member.Each House shall keep a Journal of its Proceedings,and from time to time publish thesame, excepting such Parts as may in theirJudgment require Secrecy; and the Yeas andNays of the Members of either House on anyquestion shall, at the Desire of one fifth ofthose Present, be entered on the Journal.Neither House, during the Session of Congress,shall, without the Consent of the other,adjourn for more than three days, nor to anyother Place than that in which the two Housesshall be sitting.Section 6 ■ The Senators and Representativesshall receive a Compensation for theirServices, to be ascertained by Law, and paidout of the Treasury of the United States. Theyshall in all Cases, except Treason, Felony andBreach of the Peace, be privileged from Arrestduring their Attendance at the Session of theirrespective Houses, and in going to and returningfrom the same; and for any Speech orDebate in either House, they shall not bequestioned in any other Place.No Senator or Representative shall, during theTime for which he was elected, be appointedto any civil Office under the Authority of the796 Appendix A

United States, which shall have been created,or the Emoluments whereof shall have beenencreased during such time; and no Personholding any Office under the United States,shall be a Member of either House during hisContinuance in Office.Section 7 ■ All Bills for raising Revenueshall originate in the House of Representatives;but the Senate may propose or concurwith Amendments as on other Bills.Every Bill which shall have passed the Houseof Representatives and the Senate, shall,before it become a Law, be presented to thePresident of the United States; If he approvehe shall sign it, but if not he shall return it,with his Objections to that House in which itshall have originated, who shall enter theObjections at large on their Journal, and proceedto reconsider it.If after such Reconsideration two thirds of thatHouse shall agree to pass the Bill, it shall besent, together with the Objections, to the otherHouse, by which it shall likewise be reconsidered,and if approved by two thirds of thatHouse, it shall become a Law. But in all suchCases the Votes of both Houses shall be determinedby yeas and Nays, and the Names of thePersons voting for and against the Bill shall beentered on the Journal of each House respectively.If any Bill shall not be returned by thePresident within ten Days (Sundays excepted)after it shall have been presented to him, theSame shall be a Law, in like Manner as if hehad signed it, unless the Congress by theirAdjournment prevent its Return, in whichCase it shall not be a Law.Every Order, Resolution, or Vote to which theConcurrence of the Senate and House ofRepresentatives may be necessary (except on aquestion of Adjournment) shall be presentedto the President of the United States; andbefore the Same shall take Effect, shall beapproved by him, or being disapproved byhim, shall be repassed by two thirds of theSenate and House of Representatives,according to the Rules and Limitationsprescribed in the Case of a Bill.Section 8 ■ The Congress shall have PowerTo lay and collect Taxes, Duties, Imposts andExcises, to pay the Debts and provide for thecommon Defence and general Welfare of theUnited States; but all Duties, Imposts andExcises shall be uniform throughout theUnited States;To borrow Money on the credit of the UnitedStates;To regulate Commerce with foreign Nations,and among the several States, and with theIndian Tribes;To establish an uniform Rule of Naturalization,and uniform Laws on the subject ofBankruptcies throughout the United States;To coin Money, regulate the Value thereof, andof foreign Coin, and fix the Standard ofWeights and Measures;To provide for the Punishment of counterfeitingthe Securities and current Coin of theUnited States;To establish Post Offices and post Roads;To promote the Progress of Science and usefulArts, by securing for limited Times to Authorsand Inventors the exclusive Right to theirrespective Writings and Discoveries;To constitute Tribunals inferior to the supremeCourt;To define and punish Piracies and Feloniescommitted on the high Seas, and Offencesagainst the Law of Nations;APPENDIX AAppendix A 797

APPENDIX ATo declare War, grant Letters of Marque andReprisal, and make Rules concerning Captureson Land and Water;To raise and support Armies, but no Appropriationof Money to that Use shall be for alonger Term than two Years;To provide and maintain a Navy;To make Rules for the Government andRegulation of the land and naval Forces;To provide for calling forth the Militia to executethe Laws of the Union, suppress Insurrectionsand repel Invasions;To provide for organizing, arming, and disciplining,the Militia, and for governing suchPart of them as may be employed in the Serviceof the United States, reserving to theStates respectively, the Appointment of theOfficers, and the Authority of training theMilitia according to the discipline prescribedby Congress;To exercise exclusive Legislation in all Caseswhatsoever, over such District (not exceedingten Miles square) as may, by Cession of particularStates, and the Acceptance of Congress,become the Seat of the Government ofthe United States, and to exercise like Authorityover all Places purchased by the Consent ofthe Legislature of the State in which the Sameshall be, for the Erection of Forts, Magazines,Arsenals, dock-Yards, and other needfulBuildings; AndTo make all Laws which shall be necessary andproper for carrying into Execution the foregoingPowers, and all other Powers vested by thisConstitution in the Government of the UnitedStates, or in any Department or Officerthereof.Section 9 ■ The Migration or Importation ofsuch Persons as any of the States now existingshall think proper to admit, shall not beprohibited by the Congress prior to the Yearone thousand eight hundred and eight, but aTax or duty may be imposed on such Importation,not exceeding ten dollars for each Person.The Privilege of the Writ of Habeas Corpusshall not be suspended, unless when in Casesof Rebellion or Invasion the public Safety mayrequire it.No Bill of Attainder or ex post facto Law shallbe passed.No Capitation, or other direct, Tax shall belaid, unless in Proportion to the Census orEnumeration herein before directed to betaken.No Tax or Duty shall be laid on Articlesexported from any State.No Preference shall be given by any Regulationof Commerce or Revenue to the Ports ofone State over those of another: nor shallVessels bound to, or from, one State, beobliged to enter, clear, or pay Duties inanother.No Money shall be drawn from the Treasury,but in Consequence of Appropriations madeby Law; and a regular Statement and Accountof the Receipts and Expenditures of all publicMoney shall be published from time to time.No Title of Nobility shall be granted by theUnited States: And no Person holding anyOffice of Profit or Trust under them, shall,without the Consent of the Congress, acceptof any present, Emolument, Office, or Title, ofany kind whatever, from any King, Prince, orforeign State.Section 10 ■ No State shall enter into anyTreaty, Alliance, or Confederation; grantLetters of Marque and Reprisal; coin Money;emit Bills of Credit; make any Thing but goldand silver Coin a Tender in Payment of Debts;pass any Bill of Attainder, ex post facto Law,798 Appendix A

or Law impairing the Obligation of Contracts,or grant any Title of Nobility.No State shall, without the Consent of theCongress, lay any Imposts or Duties onImports or Exports, except what may beabsolutely necessary for executing it’s inspectionLaws: and the net Produce of all Dutiesand Imposts, laid by any State on Imports orExports, shall be for the Use of the Treasuryof the United States; and all such Laws shallbe subject to the Revision and Controul of theCongress.No State shall, without the Consent of Congress,lay any Duty of Tonnage, keep Troops,or Ships of War in time of Peace, enter intoany Agreement or Compact with anotherState, or with a foreign Power, or engage inWar, unless actually invaded, or in such imminentDanger as will not admit of delay.ARTICLE IISection 1 ■ The executive Power shall bevested in a President of the United States ofAmerica. He shall hold his Office during theTerm of four Years, and, together with the VicePresident, chosen for the same Term, beelected, as followsEach State shall appoint, in such Manner asthe Legislature thereof may direct, a Numberof Electors, equal to the whole Number ofSenators and Representatives to which theState may be entitled in the Congress: but noSenator or Representative, or Person holdingan Office of Trust or Profit under the UnitedStates, shall be appointed an Elector.The Electors shall meet in their respectiveStates, and vote by Ballot for two Persons, ofwhom one at least shall not be an Inhabitantof the same State with themselves. And theyshall make a List of all the Persons voted for,and of the Number of Votes for each; whichList they shall sign and certify, and transmitsealed to the Seat of the Government of theUnited States, directed to the President of theSenate. The President of the Senate shall, inthe Presence of the Senate and House ofRepresentatives, open all the Certificates, andthe Votes shall then be counted. The Personhaving the greatest Number of Votes shall bethe President, if such Number be a Majority ofthe whole Number of Electors appointed; andif there be more than one who have suchMajority, and have an equal Number of Votes,then the House of Representatives shall immediatelychuse by Ballot one of them for President;and if no Person have a Majority, thenfrom the five highest on the List the saidHouse shall in like Manner chuse the President.But in chusing the President, the Votes shallbe taken by States, the Representation fromeach State having one Vote; A quorum for thisPurpose shall consist of a Member or Membersfrom two thirds of the States, and a Majorityof all the States shall be necessary to a Choice.In every Case, after the Choice of the President,the Person having the greatest Numberof Votes of the Electors shall be the Vice President.But if there should remain two or morewho have equal Votes, the Senate shall chusefrom them by Ballot the Vice President.The Congress may determine the Time ofchusing the Electors, and the Day on whichthey shall give their Votes; which Day shall bethe same throughout the United States.No Person except a natural born Citizen, or aCitizen of the United States, at the time of theAdoption of this Constitution, shall be eligibleto the Office of President; neither shall anyPerson be eligible to that Office who shall nothave attained to the Age of thirty five Years,and been fourteen Years a Resident within theUnited States.APPENDIX AAppendix A 799

APPENDIX AIn Case of the Removal of the President fromOffice, or of his Death, Resignation, or Inabilityto discharge the Powers and Duties of the saidOffice, the Same shall devolve on the VicePresident, and the Congress may by Lawprovide for the Case of Removal, Death,Resignation or Inability, both of the Presidentand Vice President, declaring what Officershall then act as President, and such Officershall act accordingly, until the Disability beremoved, or a President shall be elected.The President shall, at stated Times, receivefor his Services, a Compensation, which shallneither be encreased nor diminished duringthe Period for which he shall have beenelected, and he shall not receive within thatPeriod any other Emolument from the UnitedStates, or any of them.Before he enter on the Execution of hisOffice, he shall take the following Oath orAffirmation: “I do solemnly swear (or affirm)that I will faithfully execute the Office ofPresident of the United States, and will to thebest of my Ability, preserve, protect and defendthe Constitution of the United States.”Section 2 ■ The President shall be Commanderin Chief of the Army and Navy of theUnited States, and of the Militia of the severalStates, when called into the actual Service ofthe United States; he may require the Opinion,in writing, of the principal Officer in each ofthe executive Departments, upon any Subjectrelating to the Duties of their respectiveOffices, and he shall have Power to grantReprieves and Pardons for Offences againstthe United States, except in Cases ofImpeachment.He shall have Power, by and with the Adviceand Consent of the Senate, to make Treaties,provided two thirds of the Senators presentconcur; and he shall nominate, and by andwith the Advice and Consent of the Senate,shall appoint Ambassadors, other publicMinisters and Consuls, Judges of the supremeCourt, and all other Officers of the UnitedStates, whose Appointments are not hereinotherwise provided for, and which shall beestablished by Law: but the Congress may byLaw vest the Appointment of such inferiorOfficers, as they think proper, in the Presidentalone, in the Courts of Law, or in the Heads ofDepartments. The President shall have Powerto fill up all Vacancies that may happen duringthe Recess of the Senate, by granting Commissionswhich shall expire at the End oftheir next Session.Section 3 ■ He shall from time to time giveto the Congress Information of the State of theUnion, and recommend to their Considerationsuch Measures as he shall judge necessary andexpedient; he may, on extraordinary Occasions,convene both Houses, or either of them,and in Case of Disagreement between them,with Respect to the Time of Adjournment, hemay adjourn them to such Time as he shallthink proper; he shall receive Ambassadorsand other public Ministers; he shall take Carethat the Laws be faithfully executed, and shallCommission all the Officers of the UnitedStates.Section 4 ■ The President, Vice Presidentand all civil Officers of the United States,shall be removed from Office on Impeachmentfor, and Conviction of, Treason, Bribery,or other high Crimes and Misdemeanors.ARTICLE IIISection 1 ■ The judicial Power of the UnitedStates, shall be vested in one supreme Court,and in such inferior Courts as the Congressmay from time to time ordain and establish.The Judges, both of the supreme and inferiorCourts, shall hold their Offices during good800 Appendix A

Behaviour, and shall, at stated Times, receivefor their Services, a Compensation, whichshall not be diminished during theirContinuance in Office.Section 2 ■ The judicial Power shall extendto all Cases, in Law and Equity, arising underthis Constitution, the Laws of the United States,and Treaties made, or which shall be made,under their Authority; to all Cases affectingAmbassadors, other public Ministers andConsuls; to all Cases of admiralty and maritimeJurisdiction;—to Controversies to which theUnited States shall be a Party;—to Controversiesbetween two or more States; between aState and Citizens of another State;—betweenCitizens of different States, between Citizens ofthe same State claiming Lands under Grants ofdifferent States, and between a State, or theCitizens thereof, and foreign States, Citizens orSubjects.In all Cases affecting Ambassadors, otherpublic Ministers and Consuls, and those inwhich a State shall be Party, the supremeCourt shall have original Jurisdiction. In allthe other Cases before mentioned, the supremeCourt shall have appellate Jurisdiction, both asto Law and Fact, with such Exceptions, andunder such Regulations as the Congress shallmake.The Trial of all Crimes, except in Cases ofImpeachment, shall be by Jury; and such Trialshall be held in the State where the saidCrimes shall have been committed; but whennot committed within any State, the Trial shallbe at such Place or Places as the Congressmay by Law have directed.Section 3 ■ Treason against the UnitedStates, shall consist only in levying Waragainst them, or in adhering to their Enemies,giving them Aid and Comfort. No Person shallbe convicted of Treason unless on theTestimony of two Witnesses to the same overtAct, or on Confession in open Court.The Congress shall have Power to declare thePunishment of Treason, but no Attainder ofTreason shall work Corruption of Blood, orForfeiture except during the Life of the Personattainted.ARTICLE IVSection 1 ■ Full Faith and Credit shall begiven in each State to the public Acts,Records, and judicial Proceedings of everyother State. And the Congress may by generalLaws prescribe the Manner in which suchActs, Records and Proceedings shall beproved, and the Effect thereof.Section 2 ■ The Citizens of each State shallbe entitled to all Privileges and Immunities ofCitizens in the several States.A Person charged in any State with Treason,Felony, or other Crime, who shall flee fromJustice, and be found in another State, shall onDemand of the executive Authority of theState from which he fled, be delivered up, tobe removed to the State having Jurisdiction ofthe Crime.No Person held to Service or Labour in oneState, under the Laws thereof, escaping intoanother, shall, in Consequence of any Law orRegulation therein, be discharged from suchService or Labour, but shall be delivered upon Claim of the Party to whom such Serviceor Labour may be due.Section 3 ■ New States may be admitted bythe Congress into this Union; but no new Stateshall be formed or erected within the Jurisdictionof any other State; nor any State beformed by the Junction of two or more States,or Parts of States, without the Consent of theAPPENDIX AAppendix A 801

APPENDIX ALegislatures of the States concerned as well asof the Congress.Clause 2: The Congress shall have Power todispose of and make all needful Rules andRegulations respecting the Territory or otherProperty belonging to the United States; andnothing in this Constitution shall be so construedas to Prejudice any Claims of theUnited States, or of any particular State.Section 4 ■ The United States shall guaranteeto every State in this Union a RepublicanForm of Government, and shall protect each ofthem against Invasion; and on Application ofthe Legislature, or of the Executive (when theLegislature cannot be convened) againstdomestic Violence.ARTICLE VThe Congress, whenever two thirds of bothHouses shall deem it necessary, shall proposeAmendments to this Constitution, or, on theApplication of the Legislatures of two thirdsof the several States, shall call a Conventionfor proposing Amendments, which, in eitherCase, shall be valid to all Intents andPurposes, as Part of this Constitution, whenratified by the Legislatures of three fourths ofthe several States, or by Conventions in threefourths thereof, as the one or the other Modeof Ratification may be proposed by theCongress; Provided that no Amendment whichmay be made prior to the Year One thousandeight hundred and eight shall in any Manneraffect the first and fourth Clauses in the NinthSection of the first Article; and that no State,without its Consent, shall be deprived of itsequal Suffrage in the Senate.ARTICLE VIAll Debts contracted and Engagementsentered into, before the Adoption of thisConstitution, shall be as valid against theUnited States under this Constitution, as underthe Confederation.This Constitution, and the Laws of the UnitedStates which shall be made in Pursuancethereof; and all Treaties made, or which shallbe made, under the Authority of the UnitedStates, shall be the supreme Law of the Land;and the Judges in every State shall be boundthereby, any Thing in the Constitution or Lawsof any State to the Contrary notwithstanding.The Senators and Representatives before mentioned,and the Members of the several StateLegislatures, and all executive and judicialOfficers, both of the United States and of theseveral States, shall be bound by Oath orAffirmation, to support this Constitution; butno religious Test shall ever be required as aQualification to any Office or public Trustunder the United States.ARTICLE VIIThe Ratification of the Conventions of nineStates, shall be sufficient for the Establishmentof this Constitution between the Statesso ratifying the Same.Done in Convention by the UnanimousConsent of the States present the SeventeenthDay of September in the Year of our Lord onethousand seven hundred and Eighty seven andof the Independence of the United States ofAmerica the Twelfth In witness whereof Wehave hereunto subscribed our Names,G. O. Washington—Presidt.and deputy from Virginia[Signed also bythe deputies of twelve States.]802 Appendix A

Amendment ICongress shall make no law respecting anestablishment of religion, or prohibiting thefree exercise thereof; or abridging the freedomof speech, or of the press; or the right of thepeople peaceably to assemble, and to petitionthe Government for a redress of grievances.Amendment IIA well regulated Militia, being necessary tothe security of a free State, the right of thepeople to keep and bear Arms, shall not beinfringed.Amendment IIINo Soldier shall, in time of peace be quarteredin any house, without the consent of theOwner, nor in time of war, but in a manner tobe prescribed by law.Amendment IVThe right of the people to be secure in theirpersons, houses, papers, and effects, againstunreasonable searches and seizures, shall notbe violated, and no Warrants shall issue, butupon probable cause, supported by Oath oraffirmation, and particularly describing theplace to be searched, and the persons or thingsto be seized.Amendment VNo person shall be held to answer for a capital,or otherwise infamous crime, unless on apresentment or indictment of a Grand Jury, exceptin cases arising in the land or navalforces, or in the Militia, when in actual servicein time of War or public danger; nor shall anyperson be subject for the same offence to betwice put in jeopardy of life or limb; nor shallbe compelled in any criminal case to be awitness against himself, nor be deprived oflife, liberty, or property, without due processof law; nor shall private property be taken forpublic use, without just compensation.Amendment VIIn all criminal prosecutions, the accused shallenjoy the right to a speedy and public trial, byan impartial jury of the State and districtwherein the crime shall have been committed,which district shall have been previouslyascertained by law, and to be informed of thenature and cause of the accusation; to be confrontedwith the witnesses against him; tohave compulsory process for obtaining witnessesin his favor, and to have the Assistanceof Counsel for his defence.Amendment VIIIn suits at common law, where the value incontroversy shall exceed twenty dollars, theright of trial by jury shall be preserved, and nofact tried by a jury, shall be otherwise reexaminedin any Court of the United States, thanaccording to the rules of the common law.Amendment VIIIExcessive bail shall not be required, norexcessive fines imposed, nor cruel andunusual punishments inflicted.APPENDIX AAppendix A 803

APPENDIX AAmendment IXThe enumeration in the Constitution, ofcertain rights, shall not be construed to denyor disparage others retained by the people.Amendment XThe powers not delegated to the United Statesby the Constitution, nor prohibited by it to theStates, are reserved to the States respectively,or to the people.Amendment XIThe Judicial power of the United States shallnot be construed to extend to any suit in law orequity, commenced or prosecuted against oneof the United States by Citizens of anotherState, or by Citizens or Subjects of anyForeign State.Amendment XIIThe Electors shall meet in their respectivestates and vote by ballot for President andVice-President, one of whom, at least, shallnot be an inhabitant of the same state withthemselves; they shall name in their ballots theperson voted for as President, and in distinctballots the person voted for as Vice-President,and they shall make distinct lists of all personsvoted for as President, and of all persons votedfor as Vice-President, and of the number ofvotes for each, which lists they shall sign andcertify, and transmit sealed to the seat of thegovernment of the United States, directed tothe President of the Senate; the President ofthe Senate shall, in the presence of the Senateand House of Representatives, open all thecertificates and the votes shall then becounted; The person having the greatest numberof votes for President, shall be the President,if such number be a majority of thewhole number of Electors appointed; and if noperson have such majority, then from the personshaving the highest numbers not exceedingthree on the list of those voted for asPresident, the House of Representatives shallchoose immediately, by ballot, the President.But in choosing the President, the votes shallbe taken by states, the representation from eachstate having one vote; a quorum for this purposeshall consist of a member or membersfrom two-thirds of the states, and a majority ofall the states shall be necessary to a choice.And if the House of Representatives shall notchoose a President whenever the right ofchoice shall devolve upon them, before thefourth day of March next following, then theVice-President shall act as President, as incase of the death or other constitutionaldisability of the President.The person having the greatest number ofvotes as Vice-President, shall be the Vice-President, if such number be a majority of thewhole number of Electors appointed, and if noperson have a majority, then from the twohighest numbers on the list, the Senate shallchoose the Vice-President; a quorum for thepurpose shall consist of two-thirds of thewhole number of Senators, and a majority ofthe whole number shall be necessary to achoice. But no person constitutionally ineligibleto the office of President shall be eligibleto that of Vice-President of the United States.Amendment XIIISection 1 ■ Neither slavery nor involuntaryservitude, except as a punishment for crime804 Appendix A

whereof the party shall have been duly convicted,shall exist within the United States, orany place subject to their jurisdiction.Section 2 ■ Congress shall have power toenforce this article by appropriate legislation.Amendment XIVSection 1 ■ All persons born or naturalizedin the United States, and subject to the jurisdictionthereof, are citizens of the UnitedStates and of the State wherein they reside. NoState shall make or enforce any law whichshall abridge the privileges or immunities ofcitizens of the United States; nor shall anyState deprive any person of life, liberty, orproperty, without due process of law; nor denyto any person within its jurisdiction the equalprotection of the laws.Section 2 ■ Representatives shall be apportionedamong the several States according totheir respective numbers, counting the wholenumber of persons in each State, excludingIndians not taxed. But when the right to voteat any election for the choice of electors forPresident and Vice-President of the UnitedStates, Representatives in Congress, the Executiveand Judicial officers of a State, or themembers of the Legislature thereof, is deniedto any of the male inhabitants of such State,being twenty-one years of age, and citizens ofthe United States, or in any way abridged,except for participation in rebellion, or othercrime, the basis of representation therein shallbe reduced in the proportion which thenumber of such male citizens shall bear to thewhole number of male citizens twenty-oneyears of age in such State.Section 3 ■ No person shall be a Senator orRepresentative in Congress, or elector of Presidentand Vice-President, or hold any office,civil or military, under the United States, orunder any State, who, having previously takenan oath, as a member of Congress, or as anofficer of the United States, or as a member ofany State legislature, or as an executive orjudicial officer of any State, to support theConstitution of the United States, shall haveengaged in insurrection or rebellion againstthe same, or given aid or comfort to theenemies thereof. But Congress may by a voteof two-thirds of each House, remove suchdisability.Section 4 ■ The validity of the publicdebt of the United States, authorized by law,including debts incurred for payment of pensionsand bounties for services in suppressinginsurrection or rebellion, shall not be questioned.But neither the United States nor anyState shall assume or pay any debt or obligationincurred in aid of insurrection or rebellionagainst the United States, or any claim for theloss or emancipation of any slave; but all suchdebts, obligations and claims shall be heldillegal and void.Section 5 ■ The Congress shall have thepower to enforce, by appropriate legislation,the provisions of this article.APPENDIX AAppendix A 805

APPENDIX AAmendment XVSection 1 ■ The right of citizens of theUnited States to vote shall not be denied orabridged by the United States or by any Stateon account of race, color, or previous conditionof servitude.Section 2 ■ The Congress shall have thepower to enforce this article by appropriatelegislation.Amendment XVIThe Congress shall have power to lay andcollect taxes on incomes, from whateversource derived, without apportionment amongthe several States, and without regard to anycensus or enumeration.Amendment XVIIThe Senate of the United States shall becomposed of two Senators from each State,elected by the people thereof, for six years;and each Senator shall have one vote. Theelectors in each State shall have the qualificationsrequisite for electors of the mostnumerous branch of the State legislatures.When vacancies happen in the representationof any State in the Senate, the executiveauthority of such State shall issue writs ofelection to fill such vacancies: Provided, Thatthe legislature of any State may empower theexecutive thereof to make temporary appointmentsuntil the people fill the vacancies byelection as the legislature may direct.This amendment shall not be so construed asto affect the election or term of any Senatorchosen before it becomes valid as part of theConstitution.Amendment XVIIISection 1 ■ After one year from the ratificationof this article the manufacture, sale, ortransportation of intoxicating liquors within,the importation thereof into, or the exportationthereof from the United States and all territorysubject to the jurisdiction thereof for beveragepurposes is hereby prohibited.Section 2 ■ The Congress and the severalStates shall have concurrent power to enforcethis article by appropriate legislation.Section 3 ■ This article shall be inoperativeunless it shall have been ratified as an amendmentto the Constitution by the legislatures ofthe several States, as provided in the Constitution,within seven years from the date ofthe submission hereof to the States by theCongress.Amendment XIXThe right of citizens of the United States tovote shall not be denied or abridged by theUnited States or by any State on account ofsex. Congress shall have power to enforce thisarticle by appropriate legislation.Amendment XXSection 1 ■ The terms of the President andthe Vice President shall end at noon on the20th day of January, and the terms of Senatorsand Representatives at noon on the 3d day ofJanuary, of the years in which such termswould have ended if this article had not beenratified; and the terms of their successors shallthen begin.806 Appendix A

Section 2 ■ The Congress shall assemble atleast once in every year, and such meetingshall begin at noon on the 3d day of January,unless they shall by law appoint a different day.Section 3 ■ If, at the time fixed for the beginningof the term of the President, the Presidentelect shall have died, the Vice Presidentelect shall become President. If a Presidentshall not have been chosen before the timefixed for the beginning of his term, or if thePresident elect shall have failed to qualify,then the Vice President elect shall act as Presidentuntil a President shall have qualified; andthe Congress may by law provide for the casewherein neither a President elect nor a VicePresident shall have qualified, declaring whoshall then act as President, or the manner inwhich one who is to act shall be selected, andsuch person shall act accordingly until a Presidentor Vice President shall have qualified.Section 4 ■ The Congress may by law providefor the case of the death of any of the personsfrom whom the House of Representativesmay choose a President whenever the right ofchoice shall have devolved upon them, and forthe case of the death of any of the personsfrom whom the Senate may choose a VicePresident whenever the right of choice shallhave devolved upon them.Section 5 ■ Sections 1 and 2 shall takeeffect on the 15th day of October followingthe ratification of this article.Section 6 ■ This article shall be inoperativeunless it shall have been ratified as an amendmentto the Constitution by the legislatures ofthree-fourths of the several States within sevenyears from the date of its submission.Amendment XXISection 1 ■ The eighteenth article of amendmentto the Constitution of the United Statesis hereby repealed.Section 2 ■ The transportation or importationinto any State, Territory, or Possession ofthe United States for delivery or use therein ofintoxicating liquors, in violation of the lawsthereof, is hereby prohibited.Section 3 ■ This article shall be inoperativeunless it shall have been ratified as an amendmentto the Constitution by conventions in theseveral States, as provided in the Constitution,within seven years from the date of the submissionhereof to the States by the Congress.Amendment XXIISection 1 ■ No person shall be elected to theoffice of the President more than twice, andno person who has held the office of President,or acted as President, for more than twoyears of a term to which some other personwas elected President shall be elected to theoffice of President more than once. But thisArticle shall not apply to any person holdingthe office of President when this Article wasproposed by Congress, and shall not preventany person who may be holding the office ofPresident, or acting as President, during theterm within which this Article becomes operativefrom holding the office of President oracting as President during the remainder ofsuch term.APPENDIX AAppendix A 807

APPENDIX ASection 2 ■ This article shall be inoperativeunless it shall have been ratified as an amendmentto the Constitution by the legislatures ofthree-fourths of the several States within sevenyears from the date of its submission to theStates by the Congress.Amendment XXIIISection 1 ■ The District constituting theseat of Government of the United States shallappoint in such manner as Congress maydirect:A number of electors of President and VicePresident equal to the whole number of Senatorsand Representatives in Congress to whichthe District would be entitled if it were a State,but in no event more than the least populousState; they shall be in addition to thoseappointed by the States, but they shall be considered,for the purposes of the election ofPresident and Vice President, to be electorsappointed by a State; and they shall meet inthe District and perform such duties as providedby the twelfth article of amendment.Section 2 ■ The Congress shall havepower to enforce this article by appropriatelegislation.Amendment XXIVSection 1 ■ The right of citizens of theUnited States to vote in any primary or otherelection for President or Vice President, forelectors for President or Vice President, or forSenator or Representative in Congress, shallnot be denied or abridged by the United Statesor any State by reason of failure to pay polltax or other tax.Section 2 ■ The Congress shall havepower to enforce this article by appropriatelegislation.Amendment XXVSection 1 ■ In case of the removal of thePresident from office or of his death or resignation,the Vice President shall becomePresident.Section 2 ■ Whenever there is a vacancy inthe office of the Vice President, the Presidentshall nominate a Vice President who shall takeoffice upon confirmation by a majority vote ofboth Houses of Congress.Section 3 ■ Whenever the President transmitsto the President pro tempore of theSenate and the Speaker of the House ofRepresentatives his written declaration thathe is unable to discharge the powers and dutiesof his office, and until he transmits to thema written declaration to the contrary, suchpowers and duties shall be discharged by theVice President as Acting President.Section 4 ■ Whenever the Vice Presidentand a majority of either the principal officersof the executive departments or of such otherbody as Congress may by law provide, transmitto the President pro tempore of the Senateand the Speaker of the House of Representativestheir written declaration that the Presidentis unable to discharge the powers andduties of his office, the Vice President shallimmediately assume the powers and duties ofthe office as Acting President.Thereafter, when the President transmits to thePresident pro tempore of the Senate and theSpeaker of the House of Representatives his808 Appendix A

written declaration that no inability exists, heshall resume the powers and duties of hisoffice unless the Vice President and a majorityof either the principal officers of the executivedepartment or of such other body as Congressmay by law provide, transmit within four daysto the President pro tempore of the Senate andthe Speaker of the House of Representativestheir written declaration that the President isunable to discharge the powers and duties ofhis office. Thereupon Congress shall decidethe issue, assembling within forty-eight hoursfor that purpose if not in session. If the Congress,within twenty-one days after receipt ofthe latter written declaration, or, if Congress isnot in session, within twenty-one days afterCongress is required to assemble, determinesby two-thirds vote of both Houses that thePresident is unable to discharge the powersand duties of his office, the Vice Presidentshall continue to discharge the same as ActingPresident; otherwise, the President shall resumethe powers and duties of his office.Amendment XXVISection 1 ■ The right of citizens of theUnited States, who are eighteen years of ageor older, to vote shall not be denied orabridged by the United States or by any Stateon account of age.Section 2 ■ The Congress shall havepower to enforce this article by appropriatelegislation.Amendment XXVIINo law, varying the compensation for theservices of the Senators and Representatives,shall take effect, until an election of representativesshall have intervened.APPENDIX AAppendix A 809

APPENDIXThe Declaration ofIndependenceIN CONGRESS,JULY 4, 1776. THE UNANIMOUS DECLARATION ofthe thirteen united STATES OF AMERICA.When in the Course of human events, it becomes necessary forone people to dissolve the political bands which have connectedthem with another, and to assume among the powers of the earth,the separate and equal station to which the Laws of Nature and ofNature’s God entitle them, a decent Respect to the Opinions ofMankind requires that they should declare the causes which impelthem to the separation.We hold these truths to be self-evident, that all men are createdequal, that they are endowed by their Creator with certain unalienableRights, that among these are Life, Liberty and the Pursuit ofHappiness. That to secure these rights, Governments are instituted810

among Men, deriving their just powersfrom the consent of the governed, thatwhenever any Form of Governmentbecomes destructive of these Ends, it isthe Right of the People to alter or to abolishit, and to institute new Government,laying its foundation on such principles,and organizing its Powers in such form,as to them shall seem most likely toeffect their Safety and Happiness.Prudence, indeed, will dictate thatGovernments long established should notbe changed for light and transient causes;and accordingly all experience hathshewn, that mankind are more disposedto suffer, while evils are sufferable, thanto right themselves by abolishing theforms to which they are accustomed. Butwhen a long train of abuses and usurpations,pursuing invariably the sameObject, evinces a design to reduce themunder absolute Despotism, it is theirright, it is their duty, to throw off suchGovernment, and to provide new Guardsfor their future security. Such has beenthe patient Sufferance of these Colonies;and such is now the necessity whichconstrains them to alter their formerSystems of Government. The history ofthe present King of Great Britain is ahistory of repeated injuries and usurpations,all having in direct object theEstablishment of an absolute Tyrannyover these States. To prove this, let Factsbe submitted to a candid world.He has refused his Assent to Laws, themost wholesome and necessary for thepublic good.He has forbidden his Governors topass Laws of immediate and pressingimportance, unless suspended in theiroperation till his Assent should beobtained; and when so suspended, he hasutterly neglected to attend to them.He has refused to pass other Laws forthe accommodation of large districts ofpeople, unless those people would relinquishthe right of Representation in theLegislature, a right inestimable to them,and formidable to tyrants only.He has called together legislative bodiesat places unusual, uncomfortable, anddistant from the depository of their publicRecords, for the sole purpose of fatiguingthem into compliance with his measures.He has dissolved Representative Housesrepeatedly, for opposing with manlyfirmness his invasions on the rights ofthe people.He has refused for a long time, aftersuch dissolutions, to cause others to beelected; whereby the Legislative powers,incapable of the Annihilation, havereturned to the People at large for theirexercise; the State remaining in the meantime exposed to all the dangers of invasionfrom without, and the convulsionswithin.He has endeavoured to prevent the populationof these States; for that purposeobstructing the Laws for Naturalizationof Foreigners; refusing to pass others toencourage their migrations hither, andraising the conditions of new Appropriationsof Lands.He has obstructed the Administration ofJustice, by refusing his Assent to Lawsfor establishing Judiciary powers.APPENDIX BAppendix B 811

APPENDIX BHe has made Judges dependent on hisWill alone, for the Tenure of their offices,and the amount and payment of theirsalaries.He has erected a multitude of NewOffices, and sent hither swarms ofOfficers to harrass our people, and eatout their substance.He has kept among us, in times ofpeace, Standing Armies, without theConsent of our Legislatures.He has affected to render the Militaryindependent of and superior to the Civilpower.He has combined with others to subjectus to a jurisdiction foreign to our constitution,and unacknowledged by ourlaws; giving his Assent to their Acts ofpretended Legislation:For quartering large bodies of armedtroops among us:For protecting them, by a mock Trial,from punishment for any Murders whichthey should commit on the Inhabitants ofthese States:For cutting off our Trade with all partsof the world:For imposing Taxes on us without ourConsent:For depriving us, in many Cases, of thebenefits of Trial by Jury:For transporting us beyond Seas to betried for pretended Offences:For abolishing the free System ofEnglish Laws in a neighbouring Province,establishing therein an Arbitrary government,and enlarging its Boundaries so asto render it at once an example and fitinstrument for introducing the sameabsolute rules into these Colonies:For taking away our Charters, abolishingour most valuable Laws, and alteringfundamentally the Forms of ourGovernments:For suspending our own Legislatures,and declaring themselves invested withpower to legislate for us in all caseswhatsoever.He has abdicated Government here, bydeclaring us out of his Protection andwaging War against us.He has plundered our Seas, ravaged ourCoasts, burnt our towns, and destroyedthe lives of our people.He is at this time transporting largeArmies of foreign Mercenaries to compleatthe works of death, desolation, andtyranny, already begun with circumstancesof Cruelty and perfidy scarcelyparalleled in the most barbarous ages,and totally unworthy the Head of acivilized nation.He has constrained our fellow Citizenstaken Captive on the high Seas to bearArms against their Country, to becomethe executioners of their friends andBrethren, or to fall themselves by theirHands.He has excited domestic insurrectionsamongst us, and has endeavoured tobring on the inhabitants of our frontiers,the merciless Indian Savages, whoseknown rule of warfare, is an undistinguisheddestruction, of all ages, sexesand conditions.In every stage of these Oppressions wehave Petitioned for Redress in the mosthumble terms: Our repeated Petitions havebeen answered only by repeated injury. APrince, whose character is thus markedby every act which may define a Tyrant,is unfit to be the ruler of a free people.812 Appendix B

Nor have We been wanting in attentionsto our British brethren. We have warnedthem from time to time of attempts bytheir legislature to extend an unwarrantablejurisdiction over us. We havereminded them of the circumstances ofour emigration and settlement here. Wehave appealed to their native justice andmagnanimity, and we have conjured themby the ties of our common kindred to disavowthese usurpations, which, wouldinevitably interrupt our connections andcorrespondence. They too have been deafto the voice of justice and of consanguinity.We must, therefore, acquiesce in thenecessity, which denounces our Separation,and hold them, as we hold the restof mankind, Enemies in War, in Peace,Friends.We, therefore, the Representatives of theunited States of America, in GeneralCongress, Assembled, appealing to theSupreme Judge of the world for therectitude of our intentions, do, in theName, and by Authority of the goodPeople of these Colonies, solemnly publishand declare, That these UnitedColonies are, and of Right ought to be,Free and Independent States; that theyare absolved from all Allegiance to theBritish Crown, and that all politicalconnection between them and the Stateof Great Britain, is and ought to betotally dissolved; and that as Free andIndependent States, they have full Powerto levy War, conclude Peace, contractAlliances, establish Commerce, and todo all other Acts and Things whichIndependent States may of right do. Andfor the support of this Declaration, with afirm reliance on the protection of divineProvidence, we mutually pledge to eachother our Lives, our Fortunes, and oursacred Honor.APPENDIX BSigned by Order and in Behalf of the Congress,JOHN HANCOCK, President.Attest. CHARLES THOMSON, Secretary.Philadelphia: Printed by JOHN DUNLAP.Appendix B 813

Aabandoned When an emancipated minor gives up theprotection afforded to them as minors. (p. 148)abandoned property Property that has been discardedby the owner without the intent to reclaimownership. (p. 363)acceptance The second party’s unqualified willingnessto go along with the first party’s proposal.(p. 109)acceptor Drawee who has agreed to a draft by acceptingthe written word on a draft and signing his orher name. (p. 509)accord The acceptance by the creditor of less thanwhat has been billed to the debtor. (p. 170)accord and satisfaction Contract is discharged whenone party to an agreement agrees to accept performancefrom the other party that is different fromwhat was agreed upon in the original contract. (p. 230)actual damages Damages directly attributable toanother party’s breach of contract. (p. 251)actual harm The proof that a plaintiff sufferedphysical injuries, property damage, or financialloss. (p. 90)actual notice In terminating an agency relationship,this type of notice is given to third parties when thethird party has given credit to the principal throughthe agent. Notice by certified mail is the best wayto give actual notice. (p. 427)adhesion contract Standard contract used by cardealers. A sentence on the front says that the buyeragrees to terms on the reverse side. The back of theform contains a full page of small-print terms thatfavor the seller. (p. 347)administrative law Rules and procedures that areestablished by regulatory agencies. (p. 21)administrator/administratrix Male or female whois appointed to petition the courts on the behalf ofthose named in the will. (p. 785)adulterated A food or drug that contains any substancethat may make it harmful to the health ofthe consumer; also, a product that contains anysubstance mixed or packed with it to reduce itsquality or strength below the prescribed minimumstandards. (p. 329)adultery Act of having a voluntary sexual relationshipwith someone other than a spouse. (p. 695)adverse possession Title to real property obtained bytaking actual possession of the property openly,notoriously, exclusively, under a claim of right,and continuously for a period of time set by statestatute. (p. 745)affinity Related by marriage. (p. 679)agency by estoppel Agency created when a principalis prevented from claiming that an agent was unauthorized.Such an agency occurs if the principalhas misled a third party into thinking that the agentdid have authority. (p. 405)agency Relationship in which one person representsanother person in some sort of business transactionwith a third party. (p. 392)agent One who represents another person in negotiatingbusiness deals, entering into contracts, and performinga variety of other business tasks for theprincipal. (p. 392)alien Person who is living in this country but owes hisor her allegiance to another country. (p. 157)alimony An allowance or support and maintenancepayment to a divorced person by a former spouse.(p. 702)alternative dispute resolution The process, outsideof the usual system, by which parties may attemptto solve their disputes by using creative settlementtechniques. (p. 34)annual percentage rate (APR) The true interest rateof the loan. (p. 330)annuity Guaranteed retirement that is purchased bypaying either a lump-sum premium or makingperiodic payments to an insurer. (p. 756)annulment Declaration by a court that a marriagewas never effective and was void from thebeginning. (p. 694)answer The defendant’s response to the allegationsfiled by the plaintiff in the complaint. (p. 36)anticipatory breach Parties to a contract notify theother party that they will not go through with thecontract before the time for performance. (p. 250)apparent authority Exists when the principal hassomehow led a third party to believe that a nonagentis an agent, or that an agent has a powerthat he or she does not truly have. (p. 417)appellate courts The United States courts of appeals.(p. 29)814 Glossary

appellate jurisdiction Any party to a suit decided ina federal district court may appeal to the federalcourt of appeals in the circuit where the case wastried. (p. 29)arraignment Procedure in which the accused isbrought to court, is read the indictment containinginformation regarding the crime, and is asked toplead guilty or not guilty. If the person pleads notguilty, the case proceeds to trial. If the person pleadsguilty, the judge may impose sentencing. (p. 45)arrest Action when a person is deprived of his or herfreedom by a police officer. (p. 43)arson The willful and malicious burning of abuilding. (p. 68)articles of incorporation Application for the incorporationof a business; describes a corporation’sorganization, powers, and authority. (p. 610)articles of partnership Statement of agreement of allpartners that is required to form a general partnership;also called a partnership agreement or articlesof copartnership (p. 588)assault The attempt to commit a battery such aspointing or shooting a gun at someone. (p. 64)asset acquisition Occurs when one corporationagrees to purchase the assets or property of a secondcorporation. (p. 655)assignment The transfer of rights under a contract.(pp. 242, 542)assumption of risks Defense in which the defendantshows that the plaintiff knew of the risk involved inan activity and still took the chance of being injured.(p. 92)auction without reserve The auctioneer must sell thegoods to the highest bidder. (p. 273)auction with reserve The auctioneer does not have tosell the goods for the highest bid if it is lower thanthe reserve amount (what the seller wishes to getfor the item). (p. 273)Bbad check Check that is drawn on an account inwhich there are insufficient funds. (p. 526)bail Money or other property that is left with thecourt to assure that a person who has been arrested,but released, will return to trial. (p. 43)bailee One who holds the personal property ofanother for a specific purpose. (p. 368)bailment The transfer of possession and control ofpersonal property to another with the intent that thesame property will be returned later. (p. 368)bailor The person who transfers property. (p. 368)bait and switch Advertising bargains that do not existto lure customers to a store so that they will buymore expensive merchandise. (p. 321)bank draft Check drawn by a bank against funds thebank has on deposit. (p. 513)bankruptcy Legal process by which a debtor canmake a fresh start through the sale of assets to payoff creditors. (p. 496)bankruptcy laws Set procedures for discharging adebtor’s obligations. The obligations still exist, butthe debtor can no longer be imprisoned for failureto pay. (p. 235)bargained-for exchange A promise is made in returnfor another promise, an act, or a promise not to act.(p. 165)battery The unlawful touching of another person thatusually involves the forceful use of a person’s hand,knife, or gun against another. Battery also may becommitted by giving poison or drugs to an unsuspectingvictim, spitting in someone’s face, commandinga dog to attack, or even kissing someonewho does not want to be kissed. (p. 63)bearer paper Instrument that is payable to bearer orcash and may be negotiated by delivery alone withoutan indorsement. (p. 544)beneficiary Person who is named in an insurancepolicy to receive benefits paid by the insured inthe event of a loss. (p. 752)benefit Something that a party was not previouslyentitled to receive. (p. 164)bequest Gift of personal property that is made bya will. (p. 779)best evidence rule The requirement that the originalcopy of a written agreement be submitted intoevidence. (p. 216)bigamy Act of having two spouses at one time.(p. 680)bilateral contract A two-sided contract that containstwo promises. (p. 111)Glossary 815

ilateral mistake Occurs when both parties to acontract are mistaken about some important fact.(p. 135)bill of lading Receipt for shipment of goods givenby a transportation company to a shipper when thecarrier accepts goods for shipment. (p. 281)bill of sale Formal evidence of ownership. (p. 276)binder Offers temporary protection until a policy isissued. (p. 762)blank indorsement Act of signing an order instrumenton the back. By doing so, the payee is ineffect saying that the instrument may be paid toanyone. (p. 546)bodily injury liability Insurance that protects theinsured against claims or lawsuits for death orinjury caused by negligence. (p. 352)bona fide occupational qualification (BFOQ)The defense an employer has against the charge ofdisparate treatment; allows the employer to showthat the qualification in question is a bona fide(good faith) employment qualification that mayjustify discrimination. (p. 468)breach of contract Wrongful failure to perform oneor more promises. (p. 207)breach of duty The failure to use the degree of carethat would have been used by a reasonable person.(p. 88)bulk transfer Transfer of all merchandise and suppliesat once. (p. 274)burglary The breaking into, and entering of, adwelling house or place with the intent to commita felony. (p. 67)business judgment rule Presumes that a board ofdirectors acts with due care. Courts defer to managers’business decisions unless they find instancesof fraud, a clear lack of good faith, an abuse of discretion,or an illegal act. This rule focuses not onwhether a particular decision was right, but on howthe decision was made. (p. 633)business necessity Defense that employers haveagainst a charge of disparate impact; allows thatif an employer can show that the qualification inquestion is required to perform the job, it may bepermitted despite its disparate impact on a protectedclass. (p. 468)Buyer’s Guide Information required by the FTC to beposted on each used vehicle a dealer has for sale;gives warranty protection information. (p. 344)Ccapacity The legal ability to enter a contract.(pp. 109, 147)carrier A transportation company. (pp. 278, 376)cash value Amount of money a person can take byeither borrowing against or cashing in an insurancepolicy. (p. 754)cashier’s check Check drawn by a bank upon itself.(p. 531)caveat emptor Latin phrase meaning “let the buyerbeware.” (p. 316)caveat venditor Latin phrase meaning “let the sellerbeware.” (p. 316)cease and desist orders Legally binding orders tostop a practice that would mislead the public.(p. 320)certificate of deposit (CD) Note provided by abank that is a bank’s written receipt of money andits promise to pay the money back, usually withinterest on the due date. (p. 508)certificate of incorporation Corporation’s officialauthorization to do business in a state. (p. 612)certified check Check that is guaranteed by the bank.(p. 529)check Type of a draft drawn on a bank and payable ondemand. (p. 509)child labor laws Laws that control the work thatchildren are permitted to do and the hours theyare permitted to work. (p. 445)Civil Rights Act The Civil Rights Act of 1964 prohibitsdiscrimination in employment based on race,color, religion sex, sexual preference, or nationalorigin. (p. 465)closed shop Business or company that requires a personto be a member of a union before being hired.(p. 444)closed-end credit Credit that is given for a specificamount of money and that cannot be increased bymaking additional purchases. (p. 484)816 Glossary

codicil Formal document used to supplement orchange an existing will. It must be signed andwitnessed to be valid. (p. 781)coinsurance Provision in an insurance policy thatlimits your recovery for a loss if the property is notinsured for its full replacement value. (p. 763)collateral Something of value you use to obtain asecured loan. The creditor obtains an interest in thisitem and can secure payment with it if you do notpay the loan. (p. 485)collective bargaining agreement Contract negotiationsbetween the employer and representativesof the labor union covering issues related toemployment. (p. 434)collision insurance Insurance that covers damage to avehicle when it is in an accident, regardless of whowas at fault. (p. 353)commerce clause Clause in the U.S. Constitution thatstates that the United States Congress has the powerto regulate commerce “among several states.”(p. 647)common carrier Carrier that is compensated for providingtransportation to the general public. (p. 376)common law Decisions of the early law courts developedin England, based on customs. They are characterizedby the practice of deciding cases onprecedent. (p. 17)common-law marriage Informal type of marriage inwhich the parties agree either in writing or orallythat they are married and live as man and wife.(p. 681)common stock Basic form of corporate ownership.(p. 614)comparative negligence The process by which thenegligence of each party is compared and theamount of the plaintiff’s recovery is reduced bythe percent of his or her negligence. (p. 92)compassion Sympathy towards the difficulties ofothers. (p. 11)competitive bidding The process by which rivalssubmit bids for a project. (p. 197)complaint Formal papers filed with the court by theplaintiff and defendant that express the plaintiff’sallegations, or claims. (p. 36)complete performance When all the terms of a contracthave been carried out properly and completely.(p. 224)comprehensive insurance Insurance that covers damagesto a vehicle from sources other than collision,including fire, theft, lightning, flood, hail, windstorm,riot, and vandalism. (p. 354)computer crime Crimes committed through the useof computers. (p. 71)concealment Occurs when an individual makes afalse representation by choosing not to revealimportant information. (p. 129)conditional indorsement Type of restrictive indorsementthat makes the rights of the indorsee subjectto a specific event or condition. (p. 548)condominium Form of home ownership in whicheach owner has absolute individual interest in anapartment unit and an undivided common interestin the common areas of the building. (p. 735)consanguinity State of being related by blood.(p. 679)consequential damages Losses that do not flowdirectly from an act but only from some of theconsequences or results of the act. (p. 305)consideration The exchange of things of value.(p. 109); The exchange of benefits and detrimentsby parties to an agreement. (p. 164)conspiracy Agreement to commit a crime for a promisedconsideration. (p. 186)Constitution Document that spells out the principlesby which the government operates. (p. 14)constructive eviction Occurs when a landlordbreaches a duty under the lease. (p. 723)consumer Someone who buys or leases goods, realestate, or services for personal, family, or householdpurposes. (p. 316)contract Any agreement enforceable by law. (p. 106)contract to sell Agreement that involves the immediatesale of goods. (p. 268)contributory negligence Behavior by the plaintiffthat helps cause his or her injuries. (p. 91)Glossary 817

cooling-off rule Provision that gives customersthree business days to cancel contracts for mostpurchases made away from the seller’s regularplace of business. (p. 322)cooperation The act of working together toward acommon end. (p. 420)cooperative Form of home ownership in which buyerspurchase shares in the corporation that owns anapartment building and holds the mortgage on it.(p. 735)copyright Right granted to an author, composer, photographer,or artist to exclusively publish and sellan artistic or literary work. (p. 365)corporate opportunity doctrine Directors and officerscannot take a business opportunity for themselvesif they have knowledge that the corporationwould want to take that opportunity for itself.(p. 637)corporation A body formed and authorized by law toact as a single person. (p. 606)cosignature A second person’s act of signing a loancontract, thereby agreeing to pay the loan if necessary.(p. 488)counteroffer Any change in the terms of the offerthat means the offeree has not really accepted theoffer. (p. 117)credit Arrangement through which a person mayreceive cash, goods, or services immediately, andpay for them in the future. (p. 484)creditor Party who sells the goods or lends themoney. (p. 484)crime An offense against the public at large, which istherefore punishable by the government. (p. 80)crime against property Crimes including burglary,robbery, arson, and embezzlement. (p. 66)crimes involving controlled substances Acts inwhich a person commits a crime either under theinfluence of drugs or alcohol, or is involved in theillegal sale of those substances.(p. 71)Ddamages Payment recovered in court by a person whohas suffered an injury. (p. 251)debit card Card used to electronically subtract moneyfrom a bank account to pay for goods or services.(p. 534)debtor Party who buys goods on credit or borrowsmoney. (p. 484)debt ratio Amount of the monthly payments on amortgage compared to the income of the debtor.(p. 731)deed Written instrument that transfers ownership ofreal property. (p. 741)defamation The wrongful act of injuring another person’sreputation by making false statements. (p. 84)defendant The person accused of a crime. (p. 56)definite time paper Instruments that are payable onor before the stated date. (p. 514)delegation The transfer of a duty. (p. 243)delinquent child A minor child under a certain age(generally 16–18) who has committed an adultcrime. (p. 31)demand paper Instrument that is payable on demandwhen it is so stated, or an instrument that is payable“on sight” or “on presentation.” (p. 514)depository bank The first bank to which an item istransferred for collection; the depository bank mayalso be the payor bank. (p. 545)derivative suit Suit brought against a corporation’smanagement by the shareholders on behalf of thecorporation. (p. 631)desertion Unjustified separation of one spouse fromthe other with the intent of not returning. (p. 698)destination contract The place that goods arerequired to be delivered. (p. 279)detention hearing Hearing in which a judge learnswhether there are good reasons to keep the accusedin custody. (p. 47)detriment Any loss suffered from an agreement. (p. 164)devise Gift of real property that is made by a will.(p. 779)direct suit Lawsuit that may be brought against a corporationby stockholders to enforce their rights.(p. 631)directors Persons responsible for seeing that a corporationacts within its powers, and who suggestbusiness policy and oversee a wide variety ofemployee-related policies. (p. 626)disability Any physical or mental impairment thatsubstantially limits one or more of the major lifeactivities. (p. 470)818 Glossary

disability insurance Insurance that pays a personwhen he or she is unable to work because of aphysical or mental disability. (p. 761)discharged When a contract ends. (p. 224)disclaimer A statement holding that, regardless ofany provisions, policies, or oral promises to thecontrary, an employment-at-will situation existsbetween the employee and the employee. (p. 439)discrimination Unequal treatment of individualsbased on sex, sexual preference, age, race, nationality,or religion. (p. 465)dishonored An instrument that a party refuses to payor accept. (p. 570)disparate impact Occurs when an employer has anemployment policy or criteria that appears neutralon the surface but has an unfair impact on themembers of one or more of the protected classes.(p. 468)disparate treatment Occurs when an employer intentionallydiscriminates against an individual or agroup of individuals belonging to one of the protectedclasses. (p. 466)dissolution Legal detachment. (p. 597)diversity of citizenship Cases that involve citizens ofdifferent states and in which the amount of moneyin dispute exceeds $75,000. (p. 28)dividends Profits paid to shareholders based ona corporation’s performance. (p. 614)divorce Declaration of a court that a marriage hascome to an end. (p. 694)domestic violence Any reckless form of physical ormental abuse within a family or household. (p. 64)domicile Principle place of abode; the place to whichyou have the intent of returning when you areabsent. (p. 700)donee Person who receives a gift. (p. 362)donor Person who gives a gift. (p. 362)draft An order to pay money that involves three parties:the drawer, the drawee, and the payee. (p. 509)drawee Party that is ordered by the drawer to paymoney to the payee. (p. 509)drawer Party that orders the drawee to pay money tothe payee. (p. 509)duplicate original Copy of the original writtenagreement. (p. 216)duress Overcoming a person’s will by the use offorce, or by threat of force or bodily harm. (p. 137)duty of care The duty not to violate the rights ofothers. (p. 88)duty to account Obligation of an agent to keep arecord of all the money collected and paid out andto report this to the principal. (p. 419)duty to notify To succeed in a claim for breach ofwarranty, the buyer must satisfy his or her duty tonotify. This duty requires the buyer to notify theseller within a reasonable time after a defect isdiscovered. (p. 308)Eeasement The right to make use of someone else’sland. (p. 742)economic duress Consists of threats to a person’sbusiness or income that cause him or her to entera contract without real consent. (p. 137)electronic commerce The buying and selling ofgoods and services, or the transfer of money, overthe Internet (p. 284)electronic fund transfer (EFT) Banking method thatuses computers and electronic technology as a substitutefor checks and other paper forms of banking.(p. 534)electronic signature Method of signing an electronicmessage that identifies a particular person as thesource of the message. (p. 286)emancipated Minors who are no longer under thecontrol of their parents and are responsible for theirown contract. (p. 148)embezzlement The wrongful taking of another person’sproperty by a person who is entrusted withthat property. (p. 68)eminent domain The right of the government to takeprivate land, with compensation to its owners, forpublic use. (p. 745)employer identification number A number that isassigned to an employer for tax purposes. (p. 585)employment-at-will General rule governing employmentin most states. (p. 434)endowment insurance Provides protection for astated time, generally 20 to 30 years. The face valueof the policy is paid to the insured at the end of theagreed-upon period. (p. 755)Glossary 819

Equal Credit Opportunity Act Ensures that bothbusinesses and consumers are given an equalchance to obtain credit. (p. 493)equal pay rule States that employers engaged ininterstate commerce must pay women the same rateof pay as men; covers hourly workers, executives,administrators, professional employees, andoutside salespeople who receive salaries and/orcommission. (p. 456)equitable distribution laws Allow a judge to distributeproperty fairly between a divorcing husbandand wife, regardless of who has title to the property.(p. 702)equity Difference between the fair market value of ahome and the mortgage. (p. 730)estoppel Restraint on a person to prevent him or herfrom contradicting a previous act. (p. 175)ethics Means for determining what a society’s valuesought to be. (p. 6)eviction Occurs when a landlord deprives a tenant ofthe physical possession of the premises that theyhave been renting. (p. 722)executor/executrix Male or female named in the willto carry out the wishes of the deceased. (p. 785)express authority Includes all of the orders, commands,or directions a principal directly states to anagent when the agency relationship is first created.(p. 415)express contract A contract stated in words that maybe either oral or written. (p. 111)express warranty An oral or written statement, promise,or other representation about the quality, abilityor performance of a product. (p. 294)Fface value Amount of protection stated in a life insurancepolicy, meaning the amount of money a beneficiarywould receive if the insured died. (p. 754)Fair Credit Billing Act Allows consumers to contestcharges on their credit cards within a stated timeframe. (p. 493)Fair Credit Reporting Act Prohibits the abuse of avaluable consumer asset—credit. This act dealswith unfavorable reports issued by credit bureaus.(p. 493)Fair Debt Collection Act Asserts that it is illegal fordebt collectors to threaten consumers with violence,use obscene language, or contact consumers bytelephone at inconvenient times or places. Debtcollectors also are not allowed to impersonate governmentofficials or attorneys, obtain informationunder false pretenses, or collect more than is legallyowed. (p. 494)fairness rule Requirement that an officer or directorprove that a business decision he or she made wasfair to the corporation. (p. 637)fair use doctrine The right to use copyrighted materialwithout permission in certain cases. Theamount and use of the material must be reasonableand not harmful to the copyright owner. (p. 365)false imprisonment When the police arrest someonewithout probable cause or the proper warrant.(p. 83)family farmer One who receives more than one-halfof his or her total income from a farm. (p. 497)featherbedding Requiring an employer, usually by aunion, to keep unneeded employees, to pay employeesfor not working, or to assign more employees toa given job than are needed. (p. 444)federal statutes Laws that are passed by the UnitedStates Congress and signed by the president. (p. 18)Federal Trade Commission (FTC) Federal commissionwhose job it is to prevent businesses from violatingthe Federal Trade Commission Act. (p. 287)felony A major crime punishable by imprisonmentor death. (p. 56)fictitious name Made-up name that a sole proprietoruses. (p. 584)finance charge The cost of a loan in dollars andcents. (p. 338)financial responsibility law Requires vehicle ownersto prove they can pay for damages or injury causedby an automobile accident. (p. 251)fire insurance A type of insurance policy that coversloss resulting directly from an unfriendly or hostilefire. (p. 763)firm offer An irrevocable offer (p. 176); also, a merchant’swritten promise to hold an offer open forthe sale of goods. (p. 270)820 Glossary

fixtures Items of personal property attached to realproperty such as built-in stoves and dishwashers.Unless otherwise stated in the lease, fixturesbecome part of the real property and belong to thelandlord, even when installed and paid for by thetenant. (p. 721)floater policy Policy that insures property that cannotbe covered by specific insurance because it is constantlychanging in value or location. (p. 762)f.o.b. Stands for “free on board,” and means thatgoods will be delivered from the shipping point tothe destination. (p. 278)forbearance Not doing something that you have thelegal right to do. (p. 164)forgery False signature on a check or other document.(p. 527)401(k) plan Retirement plan whose funds are nottaxed until the money is withdrawn, but the moneycannot be withdrawn without penalty before theage of 59. Employees agree to forgo a bonus ortake a salary reduction in order to invest in thisplan. Employers sometimes match the amountcontributed by employees. (p. 774)fraud A deliberate deception intended to secure anunfair or unlawful gain. (p. 128)fraudulent misrepresentation Any statement thatdeceives the buyer. (p. 318)full warranty Promises to fix or replace a defectiveproduct at no charge to the consumer. (p. 295)future goods Crops that are not yet grown, or otheritems that have not yet been manufactured. (p. 278)Ggeneral agent Person who has been given theauthority to perform any act within the scope ofa business. (p. 402)general jurisdiction A general trial court that handlescriminal and civil cases. All cases that involvemajor crimes and large amounts of money mustbegin in one of these courts. (p. 31)general partnership Two or more parties combinetheir money, labor, and skills for the purpose ofcarrying on a lawful business. (p. 588)genuine agreement A valid offer that is met by avalid acceptance. (p. 109)good faith To deal honestly with another party withno intent to seek advantage or to defraud.(pp. 418, 561)goods Moveable items including specially manufactureditems such as furniture, books, livestock, cultivatedcrops, clothing, automobiles, and personaleffects of any kind. (p. 213)gratuitous Free. The law does not enforce freeagreements. (p. 164)gratuitous agreement Free agreement that does notinvolve consideration. The law usually refuses toenforce free agreements. (p. 164)gratuitous bailment Property is transferred toanother person without either party giving or askingfor payment. (p. 369)grievance procedure Establishes a series of steps thatan employee must follow to appeal the decisions ofan employer who may have violated the collectivebargaining agreement. (p. 435)gross negligence Very great negligence. (p. 370)guardian Someone who is appointed to protect therights of a mentally impaired person or a child.(p. 157)Hhate crime Any act that uses symbols, writings, pictures,or spoken words to create fear or anger inpeople solely because of their race, religion, color,sexual preference, or gender. (p. 65)Health Maintenance Organizations (HMOs)Organizations that contract with doctors and otherhealthcare providers to offer healthcare services formembers. Members pay monthly premiums andmust choose from a list of doctors provided by theHMO. (p. 760)heir Person who inherits real or personal property.(p. 779)holder Person who possesses a negotiable instrumentpayable to the order of the person holding it or tothe bearer. (p. 543)holder in due course Holder who takes an instrumentfor value in good faith and without notice. (p. 560)Glossary 821

holographic will Will written entirely in the handwritingof the testator(rix). It is valid withoutwitnesses. (p. 781)homeowner’s insurance A type of insurance policythat protects against most types of losses and liabilitiesrelated to home ownership, including fire,windstorm, vandalism, burglary, and injuriessuffered by other persons while on the property.(p. 762)homestead exemption Debtors filing bankruptcy cankeep a maximum of $16,150 in equity in a personalresidence. (p. 499)honesty Character trait of a person who is open andtruthful in dealing with others. (p. 11)hostile working environment A workplace thathas become a distressing, humiliating, or hostileplace because of a pattern of severe and pervasivesexually demeaning behavior. (p. 469)Iidentified goods Goods that presently exist and havebeen set aside for a contract. (p. 278)illusory promise A contract that appears at firstglance to be a contract, but on further scrutiny isrevealed to be hollow. (p. 177)implied authority Powers that can be understoodfrom the express terms of an agency agreement.(p. 415)implied contract A contract that comes aboutthrough the actions of the parties. (p. 111) Anemployer says, writes, or does something to leadthe employee to the reasonable belief that he or sheis not an at-will employee. (p. 438)implied covenant Exception to employment-at-willdoctrine that holds that in any employment relationship,there is an implied promise that employer andemployee will be fair and honest in their dealingswith one another. (p. 441)implied warranty Guarantee of quality imposed bylaw. (p. 300)impossibility of performance Situation in which it islegally impossible to fulfill the obligations of theagreement. (p. 230)incidental damages Any reasonable expenses, resultingfrom a breach, that have been incurred by thebuyer. (p. 251)indemnification Entitlement to repayment of theamount lost. (p. 420)independent contractor Person who works for, but isnot under the control of, a proprietor. (p. 394)indictment A written accusation to charge an individualthat is issued after the grand jury hears evidenceand testimony of witnesses. This issuance does notmean that the person is guilty, but that the grandjury believes there is enough evidence to show thatthere is a possibility that the person is guilty. (p. 45)Individual Retirement Account (IRA) An individual’sown personal pension plan that is a system ofproviding for retirement. (p. 776)indorsement Act of placing one’s signature on aninstrument, usually on the back, to transfer it toanother. (p. 544)injunction Order a plaintiff seeks to prevent thedefendant from taking action, or to stop an actionthat has already begun. (pp. 41, 255)inland marine insurance Insurance coverage forgoods that are moved by land carriers such astrains, trucks, and airplanes. (p. 765)insider trading An illegal practice in which an officeror director buys or sells shares in a corporationbased on information obtained as a result of his orher position in the company. (p. 637)insurable interest A person’s right to take out insuranceon another person because that person canshow he or she would suffer financial loss or hardshipin the event of the death of the insured or aloss of property. (p. 753)insurance Contract under which, for consideration,the insurance company agrees to compensate theinsured for a specific loss. (p. 752)insured Person whose life or property is insured whomay or may not be the policyholder. (p. 752)insurer Company that agrees, for a consideration, tocompensate the insured for a specific loss. (p. 752)intangible personal property Property that has nosubstance and cannot be touched, such as moneythat is owed. (p. 362)integrity Willingness to do the right thing regardlessof personal consequences. (p. 12)intellectual property An original work fixed in atangible medium of expression. (p. 365)intentional tort Occurs when a person knows anddesires the consequences of his or her act. (p. 81)822 Glossary

interest The fee a borrower pays to the lender forusing the money. (p. 189)intermediate courts The courts between the lowerand higher courts. (p. 29)interstate commerce Business activities that touchmore than one state. (p. 297)intestate The act of dying without a will. (p. 783)intrastate sales Sales that take place within a state.(p. 330)invasion of privacy Interfering with a person’s rightto be left alone, which includes the right to be freefrom unwanted publicity and interference withprivate matters. (p. 86)invitation to negotiate An invitation to deal, trade, ormake an offer. (p. 114)Jjoint custody Divides the rights, duties, and powersof parenting between the parents. Under thisarrangement the children live with each parent atdifferent times. (p. 703)joint liability In the event of a lawsuit, all the partnersmust be sued together. (p. 597)joint tenancy Type of ownership in which two ormore people own an interest in the whole property.(p. 740)judgment The court’s determination or decision in acase. (p. 41)jurisdiction The power and authority given to a courtto hear a case and to make a judgment. (p. 28)justice Ability to treat all people fairly. (p. 11)KKeogh plan Retirement plan for self-employed peopleand their employees. (p. 778)kidnapping The unlawful removal or restraint of aperson against his or her will. (p. 63)Llarceny The unlawful taking and carrying away of thepersonal property of another with the intent todeprive the owner of the property. (p. 68)law System of rules of conduct established by thegovernment of a society to maintain stability andjustice. (p. 12)lease Written agreement between a lessor and a lesseethat creates the landlord-tenant relationship. It providesthe tenant with exclusive possession and controlof the real property of the landlord. (p. 714)legal age The age of majority which, in most states,remains 18. (p. 148)legality The final element of a contract. (p. 109)legal separation A court judgment ending the rightto cohabitation. (p. 694)legal tender U.S. coin or currency. (p. 229)legislature The body of lawmakers of each state thatis responsible for making statutory laws. (p. 19)lemon law Protects consumers when they buy defectivevehicles, either new or used. (p. 348)lessee The tenant of an apartment or house that isowned by another person. (p. 712)lessor The owner of a house or apartment that is forrent or lease. (p. 712)libel False statements in written or printed form thatinjure another’s reputation or reflect negatively onthat person’s character. (p. 84)license A legal document stating that the holder haspermission from the proper authorities to carry on acertain trade or profession. (p. 191)lien A claim that one has against the property ofanother. (p. 304)life insurance Contract that provides monetary compensationfor losses suffered as a result of someone’sdeath. (p. 755)limited jurisdiction Local courts that handle minormatters such as misdemeanors and civil actionsinvolving small amounts of money. (p. 30)limited liability company (LLC) Combines the bestfeatures of a partnership and a corporation. Like acorporation, it offers limited liability to its owners,and the ability to escape double taxation. (p. 616)limited partner Partner or investor who has no controlin managing the partnership and whose namemay not appear in the partnership name. (p. 599)limited partnership Partnership formed by two ormore persons having one or more general partnersand one or more limited partners. (p. 599)Glossary 823

limited-payment life insurance Allows a person tostop paying premiums after a stated length oftime—usually 10, 20, or 30 years. (p. 755)limited warranty Any written warranty that does notmeet the requirements for a full warranty. A limitedwarranty does not promise free repair, and commonlycovers only parts, not labor. (p. 298)line of credit Maximum amount of money madeavailable to the buyer. (p. 484)lottery A game that consists of drawing lots, typicallytickets with different combinations of numbersprinted on them, in which prizes are distributed tothe winners among persons buying a chance.(p. 190)Mmajority Occurs when a person has reached the legalage of adulthood. (p. 148)maker Person agreeing in writing to pay money toanother. (p. 506)manslaughter The unlawful killing of another humanbeing without malice aforethought; can be dividedinto two categories, voluntary or involuntary.(p. 62)marriage license Certificate issued by a governmentoffice that gives permission to two people to marry.It becomes effective after the couple has met thestate’s requirement for a waiting period, and willexpire if the couple does not marry during theprescribed time period. (p. 685)master Person who has the right to control the conductof another who is performing a task for thebenefit of the master. (p. 394)material fact A fact that is important to one of theparties in presenting a case of fraud. (p. 129)Medicaid Healthcare plan for low-income people thatis funded by both state and federal funds andadministered by the state. (p. 761)medical payments insurance Pays for medical andsometimes funeral expenses resulting from bodilyinjury to anyone occupying the policyholder’s car inan accident. (p. 352)Medicare Federally funded health insurance program.(p. 761)memorandum Written evidence of an agreement.(p. 207)merchant Business or person who deals regularly inthe sale of goods or who has a specialized knowledgeof goods. (p. 269)merger Occurs when one company continues its existenceand absorbs another corporation that gives upits corporate identity. (p. 654)minor A person who has not reached the age of legaladulthood. (p. 148)minority Age of a person below the age of majority.(p. 148)mirror image rule States that the acceptance of anoffer must not change the terms of the original offerin any way. (p. 117)misdemeanor A crime less serious than a felony thatis punishable by a fine or a brief imprisonment in acounty or city jail. (p. 56)misrepresentation Occurs when a person makes aninnocent statement that later turns out to be false.(p. 132)mitigation of damages Obligation of the injuredparty to protect the other party from any unnecessarylosses. (p. 253)money order Draft that substitutes for a check andmay be purchased for a fee from banks, postoffices, stores, travel offices, and automobile clubs.Instead of being drawn on an individual’s account, amoney order is drawn on the funds of the organizationthat issues it. (p. 531)morality Values that govern a society’s attitudetoward right and wrong. (p. 6)mortgage A written instrument by which the buyerpledges real property to the lender as security for aloan. (p. 730)motor vehicle violations The breaking of traffic lawsthrough willful acts or ignorance of the law. (p. 70)murder The unlawful killing of another human beingwith malice aforethought, which means the killerhad evil intent. (p. 62)mutual release An agreement between two parties toend an agreement. (p. 230)mutuum Occurs when goods are loaned with theunderstanding that they will be used and replacedwith different identical goods at a later date.(p. 368)824 Glossary

Nnecessaries Food, clothing, shelter, and medical care.(p. 156)neglected or abused child A child who is homeless,destitute, or without adequate parental care. (p. 32)negligence An accidental or unintentional tort, andthe failure to exercise the degree of care that a reasonableperson would have exercised in the samesituation. (p. 88)negotiable instrument Written document givingspecial legal rights to the transferee that may betransferred by endorsement or delivery. (p. 506)negotiation Transfer of an agreement in such a waythe transferee becomes a holder. (p. 542)no-fault divorce Eliminates the need to prove thatone party is to blame for the failure of the marriage.(p. 694)no-fault insurance Regardless of who caused theaccident, all drivers involved collect money fromtheir own insurance companies. (p. 355)note Written promise by one person to pay money toanother person. (p. 506)notice by publication In terminating an agency relationship,this type of notice is given to third partieswhen the third party has given credit to, but alsohas done a cash business with, the agent or knowsthat the other persons have dealt with the principalthrough the agent. Posting a notice in a newspaperis usually sufficient for this type of notice. (p. 427)novation The agreement whereby the original party toa contract is replaced by a new party. (p. 248)nuisance Anything that interferes with the enjoymentof life or property. (p. 83)Oobedience An agent must obey all reasonable ordersand instructions within the scope of the agencyagreement. (p. 417)Occupational Safety and Health Administration(OSHA) The agency within the federal governmentthat sets safety and health standards for manycompanies within the United States. (p. 454)ocean marine insurance Insurance coverage for shipsat sea. (p. 765)offer A personal proposal by one party to anotherintended to create a legally binding agreement. (p. 109)officers Persons who are appointed, and can beremoved by, the corporation’s directors. Officersinclude a president, vice-president(s) and otheragents who are responsible for implementing thepolicies of the directors, and carrying out the dayto-dayoperations of the corporation. (p. 627)online privacy Part of a person’s general right toprivacy. (p. 286)open-end credit Can be increased by the debtor bycontinuing to purchase goods or services on credit,up to a certain limit. (p. 484)operation of law A contract is discharged by a courtbecause it is in the best interest of society. (p. 233)option When an offeree gives consideration to anofferor in exchange for a promise from the offerorto keep an offer open for a specified period of time.(p. 176)order paper Instrument that says something such as“pay to the order of.” (p. 543)ordinary negligence Failing to use the care that areasonable person would use under the same circumstances.(p. 371)original jurisdiction Authority of a court to try acase the first time it is heard. (p. 28)output contract Agreement to buy all of a merchant’sgoods. (p. 272)outstanding checks Checks that have been writtenthat have not yet been returned to the bank. (p. 523)Pparol evidence rule States that evidence of oral statementsmade before signing a written agreement thatcannot be presented in court to change or add to theterms of that written agreement. (p. 215)partnership by estoppel Arrangement in whichsomeone does or says something that leads a thirdparty to believe a partnership exists. (p. 591)partnership by proof of existence A partnership thatforms regardless of the label given to the enterpriseor the intent of the parties involved. (p. 590)Glossary 825

passenger People being legally transported. (p. 378)past consideration Consideration that took place inthe past or that is given for something that hasalready been done. (p. 177)patent Gives an inventor the exclusive rights to make,use, or sell an invention for 17 years. (p. 365)payee Person to whom a maker agrees to make monetarypayment. (p. 507)pension plan Retirement plan established by anemployer or a union that is designed to provideincome to employees after they retire.(pp. 456, 773)performance The parties fulfill the terms of the contractby doing what they had earlier promised.(p. 224)periodic tenancy The right to occupy from year toyear, month to month, or week to week; a tenancythat continues for successive fixed periods. (p. 713)perjury Making a false statement under oath. (p. 207)personal defenses Negotiable instrument defensesthat can be used against a holder, but cannot beused against a holder in due course. (p. 563)personal property Anything that can be owned otherthan real estate. (p. 362)plaintiff The party that accuses a person of a crime.(p. 56)policy Written contract between a person buyinginsurance and the insurance company; states exactlywhat losses will be compensated for, and theamount of compensation. (p. 752)policyholder Individual or group of people who havepurchased insurance. (p. 752)polygamy Act of having more than two spouses atone time. (p. 680)pooling agreement A contract to vote in a certainway on a particular issue. (p. 631)portability Ability to transfer pension benefits fromone job to another. (p. 776)precedent A judge is required to follow an earliercourt decision when deciding a case with similarcircumstances. Also called the doctrine of staredecisis. (p. 17)preexisting duties An existing legal obligation to dosomething. (p. 177)preferred stock Stocks issued by a corporation toowners who have no voting rights but who have theright to receive a fixed dividend. (p. 614)premarital agreement Agreement made betweenprospective spouses in contemplation of marriagethat becomes effective upon marriage. It must be inwriting and signed by both parties and usually pertainsto the rights and obligations of each of theparties with regard to any of the property of eitheror both. (p. 677)premium Amount of money paid to an insurancecompany for insurance coverage. (p. 754)presentment Demand made by a holder to pay oraccept an instrument. (p. 569)price Set amount of money that is to be paid forgoods. (p. 268)price fixing Occurs when competitors agree on certainprice ranges within which they set their prices.(p. 197)primary liability The absolute liability to pay.(p. 568)principal Person who is represented by an agency inthe negotiations of business deals, and the entryinto contracts. The principal is normally legallybound by those agreements. (p. 392)privacy contract Contracting directly with anotherperson. (p. 306)privity of contract Determines who can sue whomover a question of performance required by a contract.(p. 248)product liability law Manufacturers, sellers, and suppliersof goods can be held responsible if a productproves to be unsafe and someone is injured.(p. 327)promissory Containing or consisting of a promise.(p. 175)promissory estoppel Principle that bars a party fromtaking back certain types of promises, such ascharitable subscriptions, on which another partyrelies. (p. 175)promoter Person who carries out the incorporationprocess by taking the initial steps to organize andfinance a business. (p. 608)property damage liability insurance Insurance thatapplies when a person damages the property of others,including such things as another car, a house, atelephone pole, or a tree. (p. 353)property insurance Contract in which the insurerpromises, for a stated premium, to pay a sum ofmoney if a particular piece of real estate is damagedor destroyed. (p. 762)826 Glossary

prosecutor The government attorney who presentsthe case in court against the person accused. (p. 56)prospectus Document containing a detailed view ofthe stock offering for potential investors. (p. 648)proximate cause The legal connection between unreasonableconduct and the resulting harm. (p. 90)proxy Right to vote another shareholder’s stock.(p. 630)proxy marriage Occurs when one or both of the partiescannot be present for the wedding, and an agentacts on their behalf. (p. 687)public policy tort Allows a fired employee to recovercompensatory and punitive damages if he or shecan prove that the firing violated public policy.(p. 440)Qqualified indorsement Indorsement in which wordshave been added to the signature to limit theliability of the indorser. (p. 549)quid pro quo harassment Occurs when one workerdemands sexual favors from another worker inexchange for some employment-related privileges,such as a raise or promotion. (p. 469)quiet enjoyment The right of a tenant to the undisturbedpossession of the property that he or she isrenting. (p. 719)Rratification Occurs if the principal, with full knowledgeof the facts, accepts the benefits of the unauthorizedact. (p. 407)ratify The approval of a contract. (p. 154)real defenses Defenses that can be used against aholder in due course. (p. 566)real property Land and anything permanentlyattached to it. (p. 213)reasonable care The degree of care that a reasonablyprudent person would have used under the samecircumstances and conditions. (p. 371)reasonable time The time that is suitable, fair, andproper to the objective in view. (p. 224)rebuttable presumption The presumption of a person’slegal ability to enter into a contract. (p. 147)registered limited liability partnership (RLLP)Designed to eliminate a disadvantage of a generalpartnership, namely joint and several liability.Under this statute, partners can escape joint andseveral liability for the torts, wrongful acts, negligence,or misconduct of other partners by registeringwith the appropriate state office. (p. 598)registration statement General description of securitiesand of the company that is making the securitiesavailable for sale. (p. 648)reimbursement Repayment by the principal to theagent for money the agent spends from his or herown funds for the principal’s benefit. (p. 420)rejection A refusal of an offer by the offeree, whichbrings the offer to an end. (p. 120)release An agreement not to sue. (p. 168)rent day The day on which rent is due. (p. 713)renter’s insurance Protects a person against loss ofpersonal property, liability for a visitor’s personalinjury, and liability for negligent destruction of therented premises. (p. 762)repossess To take back. (p. 346)requirement contract Occurs when a seller agrees tosupply the needs of a buyer. (p. 272)rescind A person who has been induced to enter intoa contract by fraud may cancel the contract.(p. 128)residence Place where a person actually lives orresides. (p. 701)respondeat superior Latin phrase meaning “let themaster respond”; typically refers to situations inwhich the hired servant has acted in an injuriousmanner, and the master may also be held responsible.(p. 397)restraint of trade An unreasonable limitation on thefull exercise of doing business with others. (p. 195)restrictive covenant A promise not to compete.(p. 197)restrictive indorsement Indorsement in which wordshave been added, in addition to the signature of thetransferor, to limit its use. (p. 548)revocation Taking back of an offer by the offeror.(p. 120)rider Attachment to an insurance policy that modifiesthe policy’s terms. (p. 752)Glossary 827

ight-to-work laws State laws that prohibit unionshops. (p. 444)risk of loss The responsibility for loss or damage togoods. (p. 278)robbery The wrongful taking and carrying away ofthe personal property of another through violenceor threats. (p. 68)Ssale Contract in which ownership of goods is transferred.(p. 268)Sarbanes-Oxley Act of 2002 An important act thatcontains rules regarding the reporting and corporategovernance of publicly traded companies. (p. 651)satisfaction The agreed-to settlement as contained inthe accord. (p. 170)seal A mark or an impression placed on a writtencontract indicating that the instrument was executedand accepted in a formal manner. (p. 173)secondary liability Liability to pay only after certainconditions have been met. (p. 568)secured loan Loan in which creditors obtain an interestin something of value from which they cansecure payment if the debtor does not pay. (p. 485)secured party The lender or seller who holds thesecurity interest. (p. 485)Securities and Exchange Commission (SEC)Independent agency created in 1934 that regulatesthe sales of securities and the brokers, dealers, andbankers who sell them. (p. 648)security Money investment that seeks to make aprofit solely because of another person’s efforts.(p. 648)security interest Interest that is given to creditors.(p. 485)servant Person whose conduct in the performance ofa task is subject to the control of another. (p. 394)severance pay Set amount of money to compensateemployees for being discharged. (p. 435)sex offense Any act in which a victim is sexuallyviolated against his or her will. (p. 64)share A single unit of ownership of a corporation.(p. 606)shareholder Person who buys one or more shares of acorporation. (pp. 606, 626)shareholder proposal A suggestion submitted by ashareholder about a broad company policy or procedure.(p. 631)shelter provision States that a holder who receives aninstrument from a holder in due course acquires therights of the holder in due course, even though heor she does not qualify as a holder in due course.(p. 562)shipment contract A contract under which a sellerturns goods over to a carrier for delivery to a buyer.Both the title and risk of loss pass to the buyerwhen the goods are given to the carrier. (p. 278)shoplifting The act of stealing goods from a store.(p. 69)sight draft Draft that is payable as soon as it is presentedto the drawee for payment. (p. 509)slander A false statement that is made orally to athird party. (p. 85)slight negligence Failure to use the care that personsof extraordinary prudence and foresight use.(p. 371)smart card Data card with a computer chip that canstore a large amount of data. Smart cards can holddebit and credit card balances and identificationinformation. (p. 492)Social Security Act The Social Security Act of 1935and its amendments set up a social insurance programfunded by contributions from both employersand employees. Employers must automaticallydeduct a certain amount from employee’s paychecks,contribute an equal amount, and send bothcontributions to the Internal Revenue Service.(p. 460)sole custody Gives all the parental rights, duties, andpowers to one parent. Under sole custody the childrenlive with one parent, and visitation rights aregiven to the noncustodial parent. (p. 703)sole proprietorship Form of business that is ownedand operated by one person. (p. 584)solemnize Ceremony or rite that formally recognizesan event such as a marriage. (p. 683)special agent Person who is employed to accomplisha specific purpose or to do a particular job. (p. 402)special indorsement Made by writing the words “payto the order of,” or “pay to,” followed by the nameof the person to whom the instrument is to be transferredand the signature of the indorser. (p. 547)828 Glossary

specific performance A judgment in a civil trial inwhich the defendant is asked to comply with theterms he or she promised in a contract with theplaintiff (p. 41); also, if money from a settlement isnot enough to repay a breach of contract, one partymay sue the other by asking the court to order theother party to do specifically what he or she originallyagreed to do. (p. 254)stale check Check that a bank refuses to pay becauseit is more than six months old. (p. 522)statute Law specifically passed by a governing bodythat has been created for a stated purpose. (p. 18)Statute of Frauds State laws requiring that certaincontracts be evidenced in writing. (p. 207)statute of limitations The law that specifies the timewithin which a contract may be legally enforced.(p. 233)stock acquisition Occurs when an individual or acorporation purchases enough shares of stock ina corporation to control it. (p. 659)straight life insurance Requires the payment of premiumsthroughout the insured’s life and pays itsface value to the beneficiary. (p. 755)strict liability An injury caused by an individual’sparticipation in an ultra-hazardous activity (p. 88);also, manufacturers or suppliers are responsible forselling goods that are unreasonably dangerous.(p. 327)sublease Occurs when a person transfers part of theterm of a lease, but not the remainder of it, tosomeone else. (p. 716)substantial performance Slightly less than full performance.Someone has fulfilled the major requirementsof a contract in good faith, leaving onlyminor details incomplete. (p. 224)suitor Company making a tender offer. (p. 656)TTaft-Hartley Act Created to equalize the power oflabor and management. This act provided, amongother things, the provision that the President of theUnited States could postpone a strike for up to 60days if the strike would endanger the nation’s healthor safety. (p. 444)tangible personal property Something that has substanceand can be touched, such as CD players,vehicles, and food. (p. 362)target Corporation that is to be taken over by a suitor.(p. 656)telemarketers People who try to sell products by telephone.(p. 323)tenancy A renter’s right to hold interest in the propertythat is being rented. (p. 712)tenancy at sufferance When a tenant wrongfullyremains in possession of the premises after the tenancyhas expired. (p. 714)tenancy at will An interest in real property that continuesfor an indefinite period of time. (p. 714)tenancy by the entirety Tenancy based on the commonlaw doctrine that held that a husband and wifeare regarded by the law as one. In theory eachspouse owned the entire property, which neithercould transfer without the other’s consent. (p. 741)tenancy for years The right to occupy property for adefinite or fixed period of time. (p. 713)tenancy in common Type of co-ownership in whichtwo or more people own an interest in the wholeproperty. (p. 740)tenancy in partnership Limits the use or transfer ofproperty by partners without the permission of theother partners. (p. 594)tender An offer to do what you have agreed to dounder the terms of a contract. (p. 229)tender offer An offer to buy a number of shares at aspecified price. (p. 656)term insurance Insurance that is issued for a particularperiod, usually five or ten years. It has no cashor loan value, and the premiums increase at the endof each term because the insured is older and isconsidered a greater risk. (p. 757)testate The act of dying with a will. (p. 779)testator(rix) Man or woman who makes a will.(p. 779)third-party beneficiary Person who is not a party toa contract, but still benefits from the contract.(p. 249)time draft Draft that is not payable until the lapseof the particular time period stated on the draft.(p. 509)Glossary 829

title The formal written right of ownership of goods.(p. 276)tort A private wrong committed by one personagainst another involving one person’s interferencewith another person’s rights. (p. 80)tortfeasor Person who commits a tort. (p. 82)tortious bailee Person who wrongfully keeps the lostproperty of another or who knowingly possessesstolen property. (p. 371)trade fixtures Items of personal property brought tothe rented premises by the tenant that are necessaryto carry on the trade or business to which a rentalproperty will be devoted. (p. 722)trademark Distinctive symbol, mark, or slogan usedby a business to identify and distinguish its goodsfrom products sold by others. (p. 365)traveler’s check An instrument that requires thebuyer to pay the full amount of the checks, and theoffering institution guarantees the funds. (p. 531)trespass The wrongful damage to, or interferencewith, the property of another. (p. 82)Uunconscionable An agreement or contract that is consideredcompletely out of line. (p. 166)unconstitutional Any action or law that goes againstthe United States Constitution. (p. 19)underinsured motorist insurance Insurance that protectsthe insured when he or she is involved in anautomobile accident and the other driver does nothave enough insurance to pay for any injuries.(p. 352)undue influence Occurs when a person uses unfairand improper persuasive pressure to force anotherperson to enter into an agreement. (p. 138)unemployment compensation System of governmentpayments to people who are out of work and lookingfor a job. Payments are made from an unemploymentinsurance fund financed by payroll taxesin employers or unemployment insurance premiumspaid by employees. (p. 461)unenforceable A contract that the court will notuphold, generally because of some rule of law, suchas the statute of limitations. (p. 111)unenforceable contract A contract the court will notuphold. (p. 111)unfair and deceptive practices An act that misleadsconsumers. (p. 317)Uniform Commercial Code (UCC) Collection oflaws that govern the various types of business transactions.(p. 268)unilateral contract A contract that contains a promiseby only one person to do something if and whenthe other party performs some act. (p. 112)unilateral mistake An error on the part of one of theparties to the contract. (p. 133)uninsured motorist insurance Insurance that providesprotection when the insured is injured in anautomobile accident that is caused by a driver whohas no insurance. (p. 352)unintentional tort Occurs when a person does nothave the mental determination of the consequencesof his or her acts. (p. 81)union Organization of employees that is formed toprotect the welfare of its members. (p. 434)union shop Business or company in which a workermust join the union within 30 days after beingemployed. (p. 444)universal life insurance Allows policyholders tochange the terms of the policy as their needschange. (p. 755)unlimited liability A business owner is responsiblefor all losses experienced by the business. (p. 587)unruly child A minor who has done something that isinappropriate that is not considered an adult crime.(p. 31)usage of trade Method of dealing commonly used ina particular field. (p. 270); also, an implied warrantyarising from the customary ways in which theparties have dealt in the past. (p. 303)Used Car Rule Requires all used car dealers to placea large sticker in the window of each vehicleexplaining the “as is” warranty and any other specificwarranty protection provided. (p. 344)usury Charging more than the maximum legalinterest rate. (p. 189)uttering Crime that results when an offeror deliberatelysubmits a forged instrument to another.(p. 528)830 Glossary

Vvalid contract A contract that is legally good.(p. 110)value Agreed-upon consideration given or accepted inpayment of a debt. (p. 561)vandalism The willful and or malicious damage toproperty. (p. 69)verdict The decision made by members of a jury afterthey deliberate. (p. 41)vesting Act of giving a worker a guaranteed right toreceive a future pension. (p. 775)voidable contract A contract that a party to it is ableto void or cancel for some legal reason. (p. 110)voidable title If goods are acquired through fraud, amistake, or undue influence, the title may be voidedif the injured party elects to do so. (p. 276)void contract A contract that has no legal effect. (p. 110)voting trust Transfer of voting rights of a shareholderor trustee. (p. 630)WWagner Act First law addressing collective bargaining,established guidelines for determining whichemployment concerns had to be included in thecollective bargaining process. (p. 442)warehouse receipt Document given to a customer bythe warehouse that is storing his or her goods.(p. 281)warrant of merchantability The merchant warrantsthat the goods being sold are merchantable; givenonly when the seller regularly sells goods of thatkind. (p. 302)warranty Another name for a guarantee. (p. 294)warranty of fitness The seller warrants by implicationthat the goods will be fit for the purpose forwhich they are to be used. This warranty existswhether the seller is a merchant or a private party.(p. 301)warranty of title The seller warrants that the titlebeing conveyed is good and that the transfer islawful. (p. 303)waste Substantial damage to rental property that significantlydecreases the value of the property.(p. 720)will Document that is signed during a person’s lifetimethat provides for the distribution of his or herpersonal property upon his or her death. (p. 779)words of negotiability The words to the order of andto bearer on a negotiable instrument. (p. 514)worker’s compensation Insurance program thatprovides income for workers who are injured ordevelop a disability or disease as a result of theirjobs. (p. 464)Zzoning laws Limitations on property use in specifiedareas, as prescribed by cities and towns. (p. 742)Glossary 831

AAmerican Legal Aid, Inc.v. Legal Aid Services,Inc., 623Amstead v. United States, 195Automobile Workersv. Johnson Controls, Inc.,478–479BBagge’s Case, 451Bayer v. TravelersIndemnity, 359Beach v. Ocwen Federal Bank,578–579Bierlein v. Alex’s ContinentalInn, Inc., 335Blackstone v. State Ex. Rel.Blackstone, 259Booker v. Revco, 29Butler v. Lovoll, 221CCentex-Winston v. EdwardHines Lumber Co., 665Cipollone v. Liggett Group,Inc., 100–101Clements v. Wheeler, 749Coleman v. Duncan, 291Com. v. Ashcraft, 25Connor v. Connor, 709Cousineau v. Walker, 143DDenny v. Ford Motor Co.,386–387Doe v. Oceola, 383EEEOC v. The WyomingRetirement System, 475Elliot v. Ohio Department ofRehabilitation andCorrection, 411Everett v. Bucky Warren,Inc., 335Ewing v. Board of Regentsof the University ofMichigan, 25FFazio v. Loweth, 519Florida v. Riley, 53Fleer Corporation v. ToppsChewing Gum, Inc., 203Ford v. JA-SIN, 727GGalindo v. Guarantee TrustLife Insurance Co., 769General Aircraft Corporationv. Lampert, 665Gentile v. MacGregor Mfg.Co., 313Gill v. Shively, 691Guarino v. Celebrezze, 789Gunter v. Gunter, 691HHadley v. Ideus, 749Hall v. Horizon HouseMicrowave, Inc., 221Hanes v. Giambrone, 603Hoddesons v. KoosBrothers, 411Humberto Decorators, Inc. v.Plaza National Bank, 557IInside Radio/Radio Only, Inc.v. Board of Review, 475JJones v. Mayer Co., 792–793Juergens v. Stahl, Klubnik, andAssociates, Inc., 451KKoedding v. N.B. WestContracting Co., Inc., 183LLa Sara Grain v. First NationalBank of Mercedes, 557Leeper v. Pennsylvania HigherEducation AssistanceAgency, 503Lefkowitz v. GreatMinneapolis SurplusStore, 125Leo v. Maro Display, 161Liarkos v. Mello, 359MMarvin v. Marvin, 216Mastrobuono v. ShearsonLehman Hutton, Inc.,262–263Meyers v. Washington TimesCo., 259Miranda v. Arizona, 43Myers v. Forest CityEnterprises, Inc., 29NNational Bank v. RefrigeratedTransp., 575New York Life Insurance Co.v. Henrikson, 769Normat Industries, Inc.v. Carter, 643OOffice of Disciplinary Counselv. Lloyd, 431Olmstead v. United States, 195PParker v. Arthur Murray,Inc., 239Pentecost v. Harward, 727P.P. Inc. v. McGuire, 519QQuinn v. Stuart LakesClub, Inc., 203RR.A.V. v. St. Paul, 77Richardson v. Girner, 575Richmond v. Croson Co., 53Romedy v. Willett Lincoln-Mercury, Inc., 313Rothenbeucherv. Tockstein, 125Russel v. Transamerica Ins.Co., 291SSanchez v. Sanchez, 161Schnell v. Nell, 168Scott v. Purser Truck Sales,Inc., 383Selman v. Manor MortgageCo., 503Siedel v. Public ServiceCompany of NewHampshire, 643Siegel v. New EnglandMerchants NationalBank, 539Simandl v. Simandl, 603Spence v. Huffman, 623Stahl v. LePage, 431State v. Reese, 77TTrisko v. Vignola FurnitureCo., 183Tropea v. Tropea,709VVirginia Bankshares, Inc.v. Sandberg, 668–669WWagner v. State, 143Weaver v. Grafio, 239Will of Katz, 789YYates v. Commercial Bank andTrust Co., 539832 Case Index

Aabandoned property, 363abandonment, 148abusechild, 31–32, 64domestic, 676drug and alcohol, 71substance, 698acceptance, 109, 116–119, 270, 347–348accidental death and dismembermentinsurance, 756–757accord and satisfaction, 170, 230acquisition, 655–656Act for the Prevention of Frauds andPerjuries, 206acts, criminal, 58actual authority, 415actual damages, 251–252actual harm, 90actual notice of agency termination, 427addiction, drug, 698adhesion contracts, 347adjustable-rate mortgage (ARM), 738administrative regulations, 21administrator, 209–211, 785administratrix, 785. See alsoadministratoradmission, requests for, 36adoptions, 31, 319, 783adulterated substances, 329adultery, 695–697adverse possession, 745advertising, 296–297, 320–321affinity, 679affirmative action, 459age, legal, 71, 148, 681Age Discrimination in Employment Act,436, 466, 470agencies, 390–431agent’s duties in, 417–419agent types in, 402–404authority in, 414–417contractual liability in, 396–397creation of, 404–407government agency audit, 474master-servant relationship in, 394partnerships as, 596principal-agent relationship in,392–394principal’s duties in, 419–420proprietor-independent contractorrelationship in, 394–396termination of, 424–428third parties and, 420–424tort liability in, 397–401agency by estoppel, 405agent’s agent, 403aggravated assault, 64aggravated murder, 62agreements. See contractsair rights, 744alcohol abuse, 71, 698aliens, 157alimony, 31, 702alteration, wrongful, 233alter ego theory, 619alternative dispute resolution (ADR),34–36Alzheimer’s disease, 137ambiguity in contracts, 207–208American Federation of Labor-Congressof Industrial Organizations(AFL-CIO), 208American Law Institute (ALI), 60American Savings Education Council,488American Stock Exchange, 614Americans with Disabilities Act, 466,470–471, 527Amnesty International, 65annual percentage rate (APR), 338annuities, 756annulments, 31, 694answers in pleadings, 36Antarctica, 107anticipatory breach, 250antiliability statutes, 634, 659antinuptial agreements, 677–679antitrust laws, 649–651apartheid, 227apparent authority, 405, 417appellate courts, 29, 33arbitration, 35, 399, 639arguments, closing, 41arraignments, 45–46arrests, 43–45arson, 68articles of incorporation, 610–612articles of organization, 616–617articles of partnership, 588assault and battery, 63–64, 81–82assetscorporate acquisition of, 655distribution of, 597–598marital, 702assignment, 242–245, 542, 716assumable mortgage, 738assumption of risk, 92attorney, power of, 405at-will employment, 434, 436–441at-will tenancy, 714auctions, 272–274auction without reserve, 273auction with reserve, 273Australia, 717authorityin agencies, 402–403, 405, 414–417,423in limited liability corporations,638–639authors’ agents, 426automated homes, 735automatic teller machines (ATMs),534–535availability of warranties, 295–296avoiding contracts. See voidablecontractsBbad checks, 526–527baggage, 379bail, 43bailees, 368bailments, 368–379for bailor’s benefit, 369–370common carriers and, 376–379hotel keepers and, 373–376mutual-benefit, 371–372tortious, 372–373Index 833

ailors, 368bait and switch advertising, 321balance, credit card, 496balancing checkbook, 523–524balloon-payment mortgage, 738bank drafts, 531banking, electronic, 534–535bankruptcy, 496–499agencies and, 424contract termination and, 235options, 496–498personal and business, 496–498promises and, 173–174as real defense, 566banns, marriage, 686bargained-for exchange, 164–165bargaining, collective, 435, 442bargain and sale deeds, 742barter agreements, 167–168base prices of vehicles, 341battery, assault and, 63–64, 81–82bearer paper, 544beneficiaries, 249, 752, 758benefitscontractual, 164, 242employee. See employment conditionsbequests, 779best evidence rule, 216Better Business Bureau, 331betting, 109bidding, competitive, 197–198bigamy, 680bilateral contracts, 111–112bilateral mistakes, 135–136bill of exchange, 508–509bill of lading, 281Bill of Rights, 16bill of sale, 276binders, insurance, 762blank indorsement, 546–547blocking, credit card, 376, 492blood tests for marriage, 686–687blue laws, 191, 199board of directors, 612–613, 626–627,633–638bodily injury coverage, 352bona fide occupational qualification, 468borrowing. See creditbounced checks, 513breachof contract, 206, 232, 243, 250–255,563of duty, 88, 90, 198–199of implied employment contract,439–440of marriage contract, 674in renting, 723of warranty, 307, 309breaking and entering, 67bulk transfers, 274–275bumper standards, 348burden of proof, 373burglary, 67–68business judgment rule, 633–636, 659business necessity, 468–469business organizations,required documentation, 585,588–591, 610–611duties and responsibilities, 585–587,593–599, 606–617, 626–639business practices, 12–13Buyer’s Guide, 344–345buyer’s remedies, 283Ccapacity, contractual. See contractualcapacitycapital, limited, 587care, 88–91, 371careers in lawcanine enforcement officer, 530civil process server, 210court reporter, 174corporate attorney, 89criminal court judge, 734district court judge, 135fingerprint expert, 700forensic scientist, 46intellectual property attorney, 307labor union president, 443law editor, 615law librarian, 395legal columnist, 782parole officer, 340professor of philosophy, 565state legislator, 658carriers, 278, 376–379cashier’s checks, 531cash value, insurance, 754caveat emptor, 316caveat venditor, 316cease and desist orders, 320–321ceremonial marriage, 683–685certainty of offers, 115–116certificatesof deposit, 508of incorporation, 612stock, 628certified checks, 529–531changing wills, 781Chapter 7 bankruptcy, 497Chapter 11 bankruptcy, 497Chapter 12 bankruptcy, 497Chapter 13 bankruptcy, 498character, ethical, 11–12charges, formal, 45charities, 169, 306, 617checks, 509–510, 513–514, 520–539balancing, 523–524bank drafts as, 531cashier’s, 531certified, 529–531electronic banking and, 534–535funds availability and, 532–533money orders as, 531opening accounts, 522traveler’s, 531–532writing, 524–528childrenadopted, 31, 319, 783custody of, 703–704endangering, 64forgotten in wills, 783labor laws and, 445–447support of, 31, 704–705welfare agencies for, 48See also minorsChildren’s Online Privacy ProtectionAct of 1998, 287citizenship, 28civil lawsuits, 418834 Index

Civil Rights Act of 1964, 374, 436,465–466, 719Civil Rights Act of 1991, 469civil statutes, 188–189civil trials, 34–42alternative dispute resolution vs.,34–36judgments from, 41–42jury, 38–41remedies from, 41steps in, 34–42claims, 283clauses, ambiguous, 207–208Clayton Act, 650clients, 392closed-end credit, 484–485closed shop, 444closing arguments, 41closing costs, 733closings of plants, 435coagents, 404codicils to wills, 781cohabitation, 216, 694coinsurance clauses, 763–765collateral, 485collection, debt, 494collective bargaining, 435, 442collision insurance, 353comakers of negotiable instruments,506–507commerce, 18commerce clause, 19, 57–58, 647common carriers, 376–379common lawacceptance methods and, 118defined, 17marriage between relatives and, 679“necessaries” under, 156Sunday contracts and, 191tenancy by the entirety and, 741common-law marriage, 681–683common stock, 614community property, 702comparative negligence, 92compassion, 11–12compensation, 419airline bumping, 379unemployment, 460–462workers’, 462–463compensatory damages, 252, 440, 469competition, 197, 418, 650Competitive Banking Act, 532, 545competitive bidding, 197–198complaints in pleadings, 36complete performance of contracts, 224comprehensive insurance, 354computer crime, 25, 71–73Computer Fraud and Abuse Act, 71, 73concealment, 129conditional indorsement, 548condominiums, 735conduct, rules of, 12Conference on Labor Legislation of1934, 445confidentiality, 247, 259conflict of interest, 659conglomerates, 656–657consanguinity, 679consequential damages, 252, 305consideration, 162–183characteristics of, 164–166defined, 109disputes about, 170–172enforceable agreements without,173–176failure of, 563lack of, 563in sales of goods, 268types of, 166–169unenforceable agreements without,176–179Consolidated Omnibus BudgetReconciliation Act (COBRA),759–760consolidations, 654–655conspiracy, 186constitutional law, 14–17construction contracts, 226constructive eviction, 723Consumer Credit Counseling Service,496Consumer Leasing Act, 342Consumer Product Safety Act, 329Consumer Product Safety Commission,330–331consumer protectionassistance for, 330–331basic rights, 304in buying vehicles, 348–350cooling-off rule for, 322exclusion of warranties and, 306false advertising and, 320–321in home buying, 739laws for, 316–317, 328–330negative option rule for, 321–322non-store purchases and, 325–326telemarketing sales rule for, 323–325unfair practices and, 317–320contraband, 45contract, 106–125acceptance of, 116–119with agents, 396–397bilateral or unilateral, 111–112breaches of, 206, 232, 243,250–255, 563to buy vehicles, 347–348communication of, 116definiteness in, 115–116duress and, 137–138elements of, 108–109express or implied, 111fraud and misrepresentation in,128–132implied, 438–440intent in, 114–115mistakes in, 133–136offer termination in, 119–121oral or written, 112–113privity of, 306–308theories of, 106–108undue influence and, 138–139valid, void, voidable or unenforceable,110–111written. See contracts, writtencontractorsindependent, 394, 399mechanic’s lien and, 562contract performance, 223–239discharge by agreement and, 229–230impossibility of, 231–235satisfactory, 226substantial, 226–228tender of, 228–229time requirements of, 224–225Index 835

contracts, written, 205–221best evidence rule of, 216changing, 217elements of, 206–208long-term, 211marriage, 211–213parol evidence rule, 215to pay debts of others, 209–211purpose of, 206for real estate sales, 213for sales of goods, 213–214contract transfers, 241–249of duties, 245–248novation and, 248of rights, 242–245third parties and, 248–249contractual capacity, 109, 144–161convicts and, 157foreigners and, 157intoxication and, 157mental impairment and, 157minors and, 147–150ratification by minors and, 154–156voidable contracts and, 151–153contributions, charitable, 169, 306contributory negligence, 91control, rent, 718controlled substance abuse, 71controlling words, 515conventional mortgages, 737convictions, 12, 699convicts, 157cooling-off rule, 322cooperation in agencies, 420cooperative homes, 735co-ownership of property, 740–741copyrights, 129, 365–366software and hardware, 366, 367corporate opportunity doctrine, 634,637–638corporate raiders, 656corporate veil, 618–619corporations, 604–643advantages of, 606business judgment rule and, 633–636directors of, 626–627disadvantages of, 606–607dissolution of, 659–661by estoppel, 618expansion of, 654–659fairness rule and, 636–638financing, 614–616forming, 608–613limited liability, 616–617, 638–639officers of, 627problems forming, 617–619regulation of. See regulationsshareholders of, 627–632types of, 607–608cosignatures, 488costs, closing, 733co-tenants, 722counseling services, financial, 496counteroffers, 117, 120courts, 26–53civil trials in, 34–42criminal trials in, 42–49decisions of, 20–21dockets of, 36federal, 28–30probate, 31, 785small claims, 399state, 30–33for teens, 59covenant marriage, 685covenants, 197, 441, 714coverage, insurance, 351–355credit, 483–499borrowing on, 485–488credit cards and, 488–492dangers of, 496–499protection laws on, 493–495selling to Internet companies on, 564types of, 484–485credit card blocking, 376, 492credit cards, 488–492, 498, 535credit identity theft, 322creditors, 484credit reports, 488crimes, 54–77against people, 62–66against property, 66–70classifications of, 56controlled substance-related, 71–72defenses to, 59–61elements of, 58–59motor vehicular, 70–71tort law and, 80–81U.S. criminal law and, 56–58criminal statutes, 188–189criminal trials, 42–49arraignments in, 45–46defendants in, 43–45of juveniles, 47–49sentencing in, 47steps in, 43–49cruelty, 697–698cumulative preferred stock, 614custody of children, 703–704cybercourt, 30cybercrime, 63, 71–72Ddamagesactual and incidental, 251as remedy, 41, 250–253consequential, 305discrimination and, 469for breach of contract, 232, 250liquidated, 251–253minimizing, 253money, 232, 251product liability law and, 327public policy tort and, 440punitive, for fraud, 128date rape, 64dates, 515dealers, used car, 344–345dealer sticker price of vehicles, 341dealing, 270deathagencies and, 424contract offers and, 121contract performance and, 231debt payments and, 209–211estate taxes and, 774prenuptial agreements and, 677–679without will, 783–785death penalty, 47, 62“death” taxes, 774debit cards, 534–535debtors, 484debt ratio, 731–732debts, 175, 209–211, 496–499, 655. Seealso creditdeceptive practices, 316–320836 Index

decoration, 715–716deductible clause, 353deductions, tax, 586, 777deeds, 741–742de facto corporations, 618defamation, 84–86defective vehicles, 347–348defects, 327, 329, 348defendants, 43–45, 56defensesto crimes, 59–61disparate impact, 468disparate treatment, 468to negligence, 91defined-benefit retirement plans, 774defined-contribution retirementplans, 775definiteness of offers, 115–116definite-time paper, 514de jure corporations, 617delegation of duties, 245delinquent juveniles, 31delivery, 506demand notes, 507, 513–514demand paper, 514Department of Energy, 651deposit, security, 714–715depositions, 36derivative suits, 631–632desertion, 698design defects, 329destination contracts, 279–280detention hearing, 47detriments, contractual, 164, 242devise, 779digital rights, 426dignity, equal, 405directors, boards of, 612–613, 626–627,633–638direct suits, 631disability benefits, 773. See employmentconditionsdisability insurance, 761disaffirming contracts. See voidablecontractsdischargeof agents, 426in bankruptcy, 173–174of contracts. See contract performancefrom employment, 436–441disclaimers, 439disclosure, 636discovery, 36discrimination, 719. See alsoemployment discriminationdishonor, 570–571dismissal, unjust, 436disparate treatment and impact, 466–468dispositional hearing, 48disputed purchases, 490dispute resolution, alternative (ADR),34–36dispute resolution centers, 49disputes, consideration and, 170–171dissenters, 654–655dissolutionsof corporations, 648, 659–660of limited liability corporations,660–661of marriages. See divorceof partnerships, 597–598distress, emotional, 440–441distributionof drugs, 71equitable, 702district courts, 28diversity of citizenship, 28dividends, 606–607, 614, 628divisible contracts, 186–188divorce, 693–709alimony and, 702child custody and, 703–704child support and, 704–705common-law marriage and, 683domestic relations courts and, 31grounds for, 695–699marital property and, 702no-fault, 694–695prenuptial agreements and, 677–679residence requirements for, 699–701docket, court, 36doctrine of precedent, 17documents, requests for, 36documents of title, 280–281domestic corporations, 607–608domestic relations courts, 31domestic violence, 64, 676domicile requirements for divorce,699–701dormant partners, 591–592double jeopardy, 58down payments, 338, 730–731, 733draft registration, 156drafts, 508–510drag racing, 70drawee of negotiable instruments, 509drawer of negotiable instruments,509, 512drinking age, 71, 148drug abuse, 71drug addiction, 698Drug Enforcement Agency (DEA), 57Drug-Free Workplace Act, 459drunkenness, 157due care, 659duplicate originals, 216duress, 137–138, 566dutyto account, 419breach of, 198–199of care, 88–91, 374–375of due care, 659of employers and employees, 436fiduciary, 393–394, 633, 639of landlords, 719of loyalty, 627, 636–638in marriage, 674–677to notify, 308–309of partners, 594–596preexisting, 177–178of tenants, 719–722transfer of, 245–248Eearly neutral evaluation (ENE), 36early termination of leases, 343easements, 742eavesdropping, 85e-book publishing, 138e-commerce, 83, 284–287, 301economic duress, 137Index 837

education-industry cooperation, 447education IRAs, 778electronic banking, 527, 534–535Electronic Check Acceptance, 514electronic fund transfer (EFT), 534–535Electronic Fund Transfer Act, 535electronic signatures, 286, 552Electronic Signatures in Global andNational Commerce Act, 286e-mail, 444emancipation, 148embezzlement, 68eminent domain, 742–744emotional distress, 440–441empathy, 9Employee Polygraph Protection Act,459–460Employee Retirement Income SecurityAct (ERISA), 775employer identification number, 585employer retirement plans, 773–776employment, 432–451at-will, 434implied covenant of, 441Landrum-Griffin Act and, 444–445of minors, 445–447Taft-Hartley Act and, 443–444unionized, 434–435Wagner Act and, 442–443wrongful discharge from, 436–441employment conditions, 454–464Drug-Free Workplace Act and, 459Employee Polygraph Protection Actand, 459–460Employment Retirement IncomeSecurity Act and, 456Equal Pay Act and, 456Fair Labor Standards Act and, 456Family and Medical Leave Actand, 458Federal Privacy Act and, 459health and safety as, 454–464inspections of, 454–455Social Security Act and, 460spousal benefits as, 676unemployment compensation lawsand, 460–462workers’ compensation laws and,462–463work opportunity laws and, 464employment discrimination, 464–471Age Discrimination in EmploymentAct and, 470Americans with Disabilities Act and,470–471Civil Rights Act of 1964 and, 465–466disparate impact as, 468disparate treatment as, 466–468illegal, 436Pregnancy Discrimination Act and,465, 469–470reverse, 459sexual harassment as, 469Employment Retirement IncomeSecurity Act (ERISA), 456endangering, child, 64ending contracts. See contractperformanceending partnerships, 597–598end of loan term, 343endorsement, 506endowment life insurance, 755–756energy regulation, 651–652enforceable agreements, 173–176enforcement of judgments, 41–42engagement, marriage, 674enjoyment, quiet, 719entrapment, 60Environmental Policy Act, 652–653Environmental Protection Agency (EPA),652–653environmental regulation, 652–653Equal Credit Opportunity Act, 488,493, 494equal dignity, 405Equal Employment OpportunityCommission (EEOC), 466Equal Pay Act, 456equal protection clause, 16equitable distribution laws, 702equitable estoppel, 213equitable remedies, 41, 250, 253–255equity, 730equity theory of contracts, 106estate planning. See willsestates, 209–211, 785estate taxes, 774estoppelagency by, 405corporation by, 618equitable, 213partnership by, 591promissory, 175–176, 436ethics, 4–25changing social attitudes, 13character traits and, 11–12feeling and opinions and, 6–7golden rule and, 8–11greatest good and, 7–8laws and, 12–13European Patent Convention, 373eviction, 713, 722–723evidence, 40, 215–216exceeding authority, 423excess wear in vehicles, 343exchangebargained-for, 164–165stock, 614excise taxes, 329exclusion of warranties, 305–306excusable homicide, 62executor, 209–211, 785executory contracts, 208executrix, 785. See also executorexemptions from risk, 758exempt property, 781expansions, corporateby asset acquisition, 655federal regulation of, 657judicial regulation of, 659by mergers, 654–655state regulation of, 659by stock acquisition, 656Experian, 493expiration of offers, 121express agreements, 405express authority, 415express contracts, 111express warranties, 294–300extended warranties, 302Ffaces of notes, 513face value, insurance, 754838 Index

factsfalse representation of, 129–132in warranties, 294–299failure to act, 58failure of consideration, 563Fair Credit Billing Act, 284, 493–494Fair Credit Reporting Act, 87, 287, 493Fair Debt Collection Practices Act,494–495Fair Labor Standards Act, 167,445–447, 456fair market value, 730fairness rule, 11, 634, 636–638fair trial, right to, 43fair use doctrine, 365false advertising, 320–321false imprisonment, 83–84false representation of fact, 129–132familiesdefense of, 61Family and Medical Leave Actand, 458farms owned by, 497wills and, 781–783featherbedding, 444Federal Bureau of Investigation (FBI), 57Federal Communications Commission(FCC), 21federal courts, 28–30federal criminal law, 57–58, 71–72Federal Energy Regulatory Commission(FERC), 651Federal Housing Administration (FHA)loans, 731Federal Privacy Act of 1974, 86, 459Federal Reserve Board, 532, 545federal statutes, 18Federal Trade Commission (FTC), 9,274, 287, 301, 317, 321–326, 339Federal Trade Commission Act, 650–651Federal Unemployment Tax Act, 461felony conviction, 56, 699fictitious name of business, 584fiduciary duties, 393–394, 633, 63950 percent rule, 92finance charges, 338financial counseling services, 496financial responsibility law, 351financing, 338–341, 614–616fines, 47fire insurance, 763–765firing of agents, 426firm offers, 176, 270first-degree murder, 62fitness for purpose warranty, 300–302fixed-rate mortgage, 738fixed sum of money, 513fixing prices, 197fixtures, 720–722float, 535floater insurance policy, 762Food, Drug, and Cosmetic Act, 329–330forbearance, 164, 168, 175foreign corporations, 607–608foreigners, 154, 157forged indorsements, 550forgery, 511, 524, 527, 553formal charges, 45formalist theory of contracts, 108fraud, 128–132age misrepresentation and, 149agreements inducing, 198–199as federal crime, 71–72Internet and credit card, 498marriage and, 685as real defense, 566fraud in the inducement, 563free on board (f.o.b.), 278free speech, 18frisking, 43full replacement value, 763full warranties, 297funds availability, 532–533future goods, 278future value of vehicles, 343Ggambling statutes, 189–190games, giveaway, 189Gandhi, Mohandas, 11Gates, Bill, 735general agents, 402general partnerships, 588–592General Social Survey, University ofChicago, 703general trial courts, 30–31general warranty deeds, 741–742genuine agreements. See contractsGhana, 8gift certificates, 282gifts, 166, 177, 306, 362, 779giveaway games, 189glasnost, 271golden rule, 8–11good faith, 171, 270, 418, 561, 594goods, sales of. See sales of goodsgoodwill, 197, 639graduated-payment mortgage, 738grand juries, 45grand larceny, 68gratuitous agents, 393, 419gratuitous agreements, 164gratuitous bailments, 369Great Depression, 456greatest good, 7–8Greece, 187grievance procedure, 435gross negligence, 370group health insurance, 759–760guarantees. See warrantiesguardians, 157, 703gun control laws, 364HHaiti, 319harassment, 469hardship, undue, 471harm, actual, 90hate crimes, 64–66hazard insurance, 753hazardous activities, 93H1-B worker status, 154health and safety, 454health insurance, 759–761. See alsoemployment conditionsIndex 839

health maintenance organizations(HMOs), 760hearings, pretrial, 37–38HearingVoices.com, 171high misdemeanors, 56high schools, online, 110hiring, negligent, 401holder, defined, 542–543, 561holder in due course, 528, 560–563holder through a holder in due course,562–563holdover tenants, 714home buying, 729–749advantages of, 730adverse possession and, 745affording, 730–732easements and, 745eminent domain and, 742–744insurance and, 762–763mortgages for, 736–739taking ownership and, 740–742types of, 733–735zoning laws and, 742home inventory, 753homeowner’s insurance, 762–763homestead exemption, 499, 781homicide, 62honesty, 11hostile takeover bids, 656–657hostile working environment, 469hotel keepers, 373–376hours, employee. See employmentconditionsIIceland, 595identification number, employer, 585identified goods, 278identity, mistaken, 134–135identity theft, 317, 322illegal contracts, 184–203agencies and, 425defeating competitive bidding,197–198divisible, 186–188effects of, 199entirely, 186fixing prices, 197inducing fraud, 198–199interfering with marriage, 199noncompete clauses in, 197to obstruct justice, 198performance of, 232–233restraining trade, 196illegality, as real defense, 566illness, 231illusionary promises, 177Immigration Reform and Control Act of1986 (IRCA), 466impact, disparate, 468implied authority, 415–416implied contracts, 111, 438–440implied covenant of employment, 441implied warranties, 300–303, 305,344–345impossibility of performance, 231–235,424–425impounding, 43imprisonment, 47, 83–84incidental damages, 251–252incompatibility, 694incompetency, 157indemnification, 420independent contractors, 394–396, 399India, 684indictments, 45indirect discrimination, 468individual health insurance, 760individual retirement accounts (IRAs),776–778indorsementsblank, 546–547conditional, 548defined, 544forged, 550kinds of, 545–549multiple payees and, 549–550qualified, 549restrictive, 543, 548special, 547indorserscontract of, 553warranties of, 550–553industry-education cooperation, 447infancy, 566influence, undue, 138–139information in arraignments, 45injunctions, 41, 255inland marine insurance, 765innocent misrepresentation, 132in pari delicto contracts, 186–188insanity, 60, 121, 157insider trading rule, 634, 637inspections, 454–455installment notes, 507instructions to jury, 41insurable interest, 753insurance, 375, 751–769health, 759–761life, 755–758motor vehicle, 351–355property, 762–765taxes and, 774terms of, 752–754insured persons, 752intangible personal property, 362integrity, 12intellectual property, 365–367hardware and software,366intent, criminal, 58intentional torts, 81–87assault and battery as, 81–82defamation as, 84–86false imprisonment as, 83–84invasion of privacy as, 86–87nuisance as, 83trespass as, 82–83intent of offers, 114–115interestcredit and, 484defined, 189, 484insurable, 753paid on CD, 508vehicle financing and, 338interference with rights, 80intermediate appellate courts, 33intermediate courts, 29Internal Revenue Service (IRS), 30,585, 586international laws, 8, 65, 107, 147, 187,227, 271, 319, 364, 421, 457, 512,595, 635, 684, 717, 764. See alsoentries for specific countries840 Index

Internetcontracts from, 198, 208credit card security and, 498divorce information on, 704insurance sales on, 404online auctions, 273–274online contracts, 198, 208online courts, 30online high schools, 110privacy and, 83, 286–287purchases on, 301shopping on, 284, 286–287,325–326, 331Internet auctions, 285Internet companies, selling on creditto, 564interrogatories, 36interstate commerce, 18, 297intestate, dying, 783intoxication, 157intrastate sales laws, 330invasion of privacy, 86–87, 286–287investments, tax shelter, 599invoice prices of vehicles, 341involuntary discharge of contracts, 231involuntary dissolutions, 648, 660involuntary manslaughter, 62–63involuntary servitude, 434IOUs, 515irreconcilable differences, 694irretrievable breakdown of marriage, 694irrevocable offer, 176Israel, 551Jjeopardy, double, 58joint custody, 703joint liability, 596joint tenancy, 740–741journalism ethics, 13joyriding, 70judgment, 41–42, 419juries, 29, 36, 38–41, 45, 217jurisdiction, 28–31, 47just cause, 439justice, 11, 198justice of the peace courts, 30justice theory, 619justifiable homicide, 62juvenile courts, 31–33, 48–49KKeogh plans, 778kidnapping, 64King, Martin Luther, Jr., 11Llabeling, 330labor laws, child, 445–447Labor Management Reporting andDisclosure Act of 1959, 444–445Labor-Movement Relations Act of 1947,443–444labor unions. See unionslack of consideration, 563landlords, 719Landmark CasesAutomobile Workers v. JohnsonControls, Inc., 478–479Beach v. Ocwen Federal Bank,578–579Cipollone v. Liggett Group, Inc.,100–101Denny v. Ford Motor Co., 386–387Jones v. Mayer Co., 792–793Mastrobuono v. Shearson LehmanHutton, Inc., 262–263Virginia Bankshares, Inc. v. Sandberg,668–669Landrum-Griffin Act, 444–445larceny, 68lawadministrative regulations and, 21agencies created by, 405–407common, 17–18, 83, 118, 156, 191,679, 681–683, 741constitutional, 14–17contract termination by, 233–235court decisions and, 20–21ethics and, 12–13statutory, 18–19tort vs. criminal, 80–81lawsuits, civil, 418layoffs, 435leasing, 268, 342, 714–718. See alsorentinglegacies, 779legal age, 71, 148legal custody, 703legal entity, 606Legal Immigration and Family EquityAct (LIFE), 685legality, 109, 166, 425. See also illegalcontractslegal separation, 677, 694legal tender, 229legislatures, state, 19lemon laws, 342, 348lenders, mortgage, 736lessee, 712lessor, 712liabilityin agencies, 396–401, 420–424antiliability statutes and, 634, 659coinsurance and, 763–765criminal, 59limited, 616–617of partners, 596–597primary, 568product, 327–331renting and, 723secondary, 568–571stockholder, 606strict, 92–93unlimited, 587vicarious, 400–401See also insurance; limited liabilitycorporationslibel, 84license, marriage, 685–687licenses, 191–193, 742lie detectors, 459–460lien, 376, 742life insurance, 755–758, 774lifetime, limited, 587limited divorce, 694limited jurisdiction, 30, 47limited liability corporations, 616–617,636, 638–639, 660–661limited liability partnerships, registered,598–599Index 841

limited lifetime of soleproprietorships, 587limited partnerships, 591–592limited-payment life insurance, 755limited search, 43limited warranties, 298limits, price, 167Lincoln, Abraham, 11line of credit, 484liquidated damages, 251–253litigation. See trialslive auctions, 272loansmortgage, 730–733, 736–739secured, 485–488student, 118terms of, 343vehicle, 338local trial courts, 30–31location, housing, 733loss, 277–281. See also insurancelost credit cards, 490lost property, 362–363lotteries, 190loyalty, 418luggage, 379Mmagistrate’s courts, 30Magnuson-Moss Warranty Act,297–299, 305–306, 344Mail-and-Telephone Order Rule, 286mail fraud, 71maintenance costs, home, 733majority, age of, 148major medical coverage, 759makers of negotiable instruments,506–507, 512malice aforethought, 62malicious damage, 69manager-managed LLCs, 639managingcorporations, 633–639debts, 496–499partnerships, 594Mandela, Nelson, 227manslaughter, 62–64manufactured homes, 735manufacturer’s suggested retail price(MSRP), 341manufacturing defects, 329marine insurance, 765marital property, 702market value, 730marriage, 199, 673–691age requirements for, 681ceremonial, 683–685common law, 681–683contracts in consideration of, 211–213covenant, 685license for, 685–687names and, 687premarital agreements and, 677–679prohibited, 679–680proxy, 687rights and duties in, 674–677Martindale-Hubble Law Directory, 130master-servant relationship, 394material alteration, 566material facts, 129mayor’s courts, 31mechanic’s lien, 562med-arb, 35mediation, 35, 703Medicaid, 761medical payments insurance, 352Medicare, 761medigap insurance, 761member-managed LLCs, 638–639memorandum, evidence, 206mental impairment, 157mental incompetence, 566merchandise, 152, 320merchantability, 302–303, 305, 344–345merchants, 117, 269, 276–277, 280, 294mergers, 650, 654–655Microsoft Corporation, 464mileage of vehicles, 343mind, state of, 58–59minimum wages, 167, 438minor misdemeanors, 56minors, 147–156age misrepresentation of, 149–150contract ratification and, 154–156contracts of, 232definition of, 148–149employment of, 445–447necessaries contracts and, 156voidable contracts of, 151–153See also childrenMiranda warning, 43mirror image rule, 117misdemeanors, 30, 56misplaced property, 363misrepresentation, 128–132, 318–320mistakes in contracts, 133–136mistrials, 47mitigation of damages, 253M’Naghten Rule, 60mobile homes, 735Model Business Corporation Act(MBCA), 608, 629models, 300modifications, 272moneyas consideration, 167damages as, 232, 251fixed sum of, 513money orders, 531monopolies, 649–651Monroney sticker price (MSRP), 341monthly payments, 343, 733morality, 6, 9mortgages, 730–733, 736–739Mother Theresa, 11motives, criminal, 59Motor Vehicle Information and CostSavings Act, 348motor vehicles. See vehiclesmultifamily homes, 733–735multiple payees, 549–550municipal courts, 31murder, 62, 758mutual-benefit bailments, 371–372, 375mutual mistakes, 135mutual release, 230, 425mutuum, 368842 Index

Nnamescorporate, 610fictitious business, 584in marriage, 687Napster, 372Nasdaq Stock Market, 614National Foundation for ConsumerCredit, 496National Information Infrastructure Actof 1996, 71National Labor Relations Act of 1935,442–443Native Title Act of 1993 (Australia), 717negative option rule, 321–322neglected juveniles, 31–32negligence, 88–92corporate, 633–634gross, 370on the job, 462ordinary, 371slight, 371in vicarious liability, 400–401in writing checks, 524–525negotiable instruments, 504–519collecting, 558–579defenses to, 563–567drafts as, 508–510. See also checkslack of delivery of, 563notes as, 506–508payment of, 563purpose of, 506requirements of, 511–515transferring, 540–557negotiation, 114, 245of bearer paper, 544defined, 542of order paper, 543–544win-win, 561negotiated rule making, 36Netherlands, The, 764New York Alcoholic Beverage ControlLaw, 149New York Stock Exchange, 614900-telephone number rules, 324no-fault divorce, 694–695no-fault insurance, 355nominal damages, 252non-compete promises, 197noncumulative preferred stock, 614noncupative wills, 779nondisclosure, 129nonmerchants, 117nonperformance, 231nonprescription drugs, 329nonprofit corporations, 607–608,617, 619nonstock corporations, 607–608nonsupport, 699NorthPoint Communications, 650notes, 506–508notice of dishonor, 571notificationof defects, 348of partnership dissolutions, 597by publication, 427to third parties, 426–427of warranties, 308–309novation, 248Nuclear Regulatory Commission (NRC),651–652nuisance, 83Oobedience, 417obstruction of justice, 198occupancy, continued, 714occupational qualifications, bonafide, 468ocean marine insurance, 765odometer protection, 349–350offer, 114–121acceptance of, 116–119, 270defined, 109firm, 176requirements of, 114–116tender, 656termination of, 119–121officers, corporate, 627, 633–638off-track betting, 190Older Workers’ Benefits Protection Plan(OWBPA), 466, 470open-end credit, 484opening statements in trials, 40open-price terms, 271operation of law, 233–235, 405–407,424–428opinions and ethics, 6–7“oppressive child labor,” 445options, 176, 718oral contracts, 112oral wills, 779order, unconditional, 513order paper, negotiation of, 543–544ordinary negligence, 371original jurisdiction, 28originals, duplicate, 216output and requirement terms, 271–272outstanding checks, 523overbooked airlines, 379overdraft protection, 527ownership, 343, 740–742Ppackaging, tamper-proof, 330parole officer, 565parol evidence rule, 215partially disclosed principal, 420–422partnerships, 588–599dissolving, 597–598forming, 588–591limited liability, 598–599limited liability corporations vs.,616, 639partners’ duties in, 594–596partners’ liabilities in, 596–597partners’ rights in, 593–594property of, 592–593types of partners in, 591–592passengers, 378–379passive fraud, 129past consideration, 177Patent Cooperation Treaty, 373patents, 365, 373payee of negotiable instruments,506–507payment of checks, stopping, 528peaceful possession, 719penalties, 508Index 843

pension plans, 456. See also retirementincomepeople, crimes against, 62–66performance, 41, 136, 211, 254–255,424–425. See also contractperformanceperiodic tenancy, 713perjury, 206, 217personal defenses, 563–565personal identification number(PIN), 534personal property, 362–367intellectual, 365–367lost, 362–363methods of acquiring, 362–365,368–379misplaced, 363stolen, 363–365Personal Responsibility and WorkOpportunity Act of 1996, 464personal service contracts, 231petit juries, 45petty crimes courts, 30petty larceny, 68petty offenses, 56physical custody, 703physical examination for marriage,686–687plaintiffs, 56, 91plain-view exception, 44plant closings, 435pleadings, 36–37pledges, charitable, 169police courts, 31policy, insurance, 752policy, public, 194–199, 440, 679–680policyholder, insurance, 752polygamy, 680pooling agreements, 631portability of pension plans, 775possession, 71, 714, 719, 745postdating checks, 510power of attorney, 405practices, unfair and deceptive, 316–320precedent, doctrine of, 17preemptive rights, 629preexisting duties, 177–178preferred provider organizations(PPOs), 761preferred stock, 614Pregnancy Discrimination Act, 465,469–470premarital agreements, 677–679premises, maintaining, 719premium, insurance, 754prenuptial agreements, 677–679pre-owned vehicles, 342–347presentment, 569–570pressure, persuasive, 138presumption, rebuttable, 147pretrial hearings, 37–38price fixing, 197prices, 167, 268, 341primary liability, 568principal-agent relationship, 392–394,414, 417–420privacyemployee, 458–460in hotels, 375Internet, 83, 286–287invasion of, 86–87telephone, 85private corporations, 607–608privity of contract, 248, 306–308proactive dispute resolution, 36probable cause, 45, 83probate court, 31, 785probation departments, 48process service, 418product liability, 93, 327–331profits, 585–586, 594prohibited marriages, 679–680prohibition, 330promisesbankruptcy and, 173–174illusionary, 177non-compete, 197not to sue, 168–169promissory estoppel and, 175–176under seal, 173social, 178–179unconditional, 513in warranties, 294–299promissory estoppel, 175–176, 437–438promissory notes, 506promoter, corporate, 608–610proof, burden of, 373proof of existence of partnership, 590propertybequests and devises of, 779as consideration, 167–168crimes against, 66–70of deceased persons, 209–211of hotel guests, 375insurance on, 351–355marital, 702in partnerships, 592–594personal, 362–367. See also bailmentsprenuptial agreements and, 677real, 362sales of, 213proportionate shares of stock, 629proposals, shareholder, 631proprietor-independent contractorrelationship, 394–396proprietorship, sole, 584–587prosecutors, 56prospectus, stock, 648protected classes, 465proximate cause, 90proxy marriage, 687proxy voting, 630publication, notice by, 427public corporations, 607–608public nuisance, 83public policy, 194–199, 440, 679–680publishing rights, 138, 426puffery, sales, 129punitive damages, 128, 252, 440, 469purchases, 213, 490, 718Qqualified indorsement, 549quality, product, 329quid pro quo harassment, 469quiet enjoyment, 719quitclaim deeds, 742Quixote, Don, 11quo warranto action, 660844 Index

Rracing, drag, 70raiders, corporate, 656raised checks, 527rape, 64ratification, 407ratifying contracts, 154–156rating, credit, 490reactive dispute resolution, 35–36reaffirmation of debt, 174real defenses, 566–567real estate sales, 213. See also homebuyingReal Estate Settlement Procedures Act(RESPA), 739real property, 362transfer of ownership, 702–703reasonable care, 371, 372reasonable time, 224rebuttable presumption, 147recalls, 327reciprocity, 20reconciliation of marriage, 695records of purchases, 286registered limited liability partnerships,598–599registration, draft, 156registration statement, 648regulationadministrative, 21antitrust, 649–651Commerce Clause and, 647of corporations, 646–653energy, 651–652environmental, 652–653of securities, 647–649of sole proprietorship, 586Regulation CC, 545rehabilitation, 49reimbursement, 363, 420rejection of offers, 120, 270relatives, marriages between, 679–680releases, 169, 230reliability, product, 329remedies, 41, 250, 253–255renewing leases, 718rental companies, car, 347rent day, 713renting, 711–727eviction and, 722–723insurance and, 762–763landlord’s duties and, 719lease terms in, 714–718liabilities of, 723rent control and, 718tenancy types in, 712–714tenant’s duties and, 719–722repairs, 715–716repossession, 346, 486requests for documents, 36requirement contracts, 271–272rescinding contracts, 128residence requirements for divorce, 701resolution, alternative dispute (ADR),34–36resolution proceeding, 326respect, 12respondeat superior, 397restraint of trade, 196restrictive covenant, 197restrictive indorsement, 543, 548retention, negligent, 401retention of profits, 585–596retirement benefits. See employmentconditionsretirement income, 772–778employer retirement plans as, 773–776individual retirement accounts for,776–778Social Security as, 772–773return of leased vehicles, 343reverse discrimination, 459Revised Model Business CorporationAct, 633Revised Uniform Partnership Act, 598revocation of offers, 120revoking acceptance, 347–348revoking wills, 781rewards, 363riders, insurance, 752rightsin marriage, 674–677of partners, 593–594preemptive, 629publishing, 138, 426transfer of, 242–245Right to Financial Privacy Act, 87, 287right-to-work laws, 444riparian rights, 744risk, 92, 93, 277–281, 758. See alsoinsurancerobbery, 68Robinson-Patman Act, 651Roth IRAs, 778rubber checks, 513rules of conduct, 12SS corporations, 619safety, 454sale of drugs, 71sales agreements, 213sales of goods, 266–291by auction, 272–274breach of contract in, 281–284by bulk transfer, 274–275contracts for, 213–214, 268–272loss risk and, 277–281mirror image rule and, 117online, 286–287title and, 276–277sales puffery, 129samples, 300Sarbanes-Oxley Act of 2002, 651satisfaction, accord and, 170, 230satisfactory contract performance, 226school violence, 45seal, promise under, 173search and seizure, 43–45, 459secondary liability, 568–571secret partners, 591–592secured loans, 485–488secured party, 485Securities Acts of 1933 and 1934,647–648Index 845

Securities and Exchange Commission(SEC), 648securities regulation, 647–649security, credit card, 498security deposit, 714–715security interest, 485self-defense, 60seller’s remedies, 281–282seller take-back mortgage, 738sentencing, 47separation, legal, 677, 694serious intent, 114–115servant-master relationship, 394serviceas consideration, 167–168contracts for, 231contracts for goods and, 269of process, 418servitude, involuntary, 434settlements, divorce, 702–705settlement week, 36severance pay, 435sex offenses, 64sexual harassment, 469shared-appreciation mortgage, 738shareholders, 606, 627–632, 735shares of stock, 628–629shelter provision, 562Sherman Antitrust Act, 649–650shipment contracts, 278–279shoplifting, 69, 84sight draft, 509signature card, 522signatureselectronic, 286of maker or drawer of note, 512unauthorized, 566silent partners, 591–592Simplified Employee Pension Plans(SEPs), 778single family homes, 733–735skill and judgment, 419slamming, 247slander, 84–85slavery, 434slight negligence, 371small claims courts, 30, 399“smart” cards, 490“smart” homes, 735Social Security, 772–773Social Security Act, 460sole custody, 703solemnizing marriages, 683sole proprietorship, 584–587South Africa, 227special agents, 402special indorsement, 547special U.S. courts, 29–30special warranty deeds, 742specific performance, 41, 254–255speculative damages, 252speech, free, 18spouses, 781–783stale checks, 522stare decisis, 17state constitutions, 16state courts, 30–33state criminal law, 56–57, 72statement of fact or promise, 294–299statements, opening, 40state of mind, criminal, 58–59statutesagency creation by, 406–407antiliability, 634, 659contract violations of, 188–193of frauds. See contracts, writtenof limitations, 111, 175, 233–235usury, 189statutory law, 18–19statutory rape, 64stealing, 68stock corporations, 607–608stockholders, corporate, 606, 627–632stocks, 614–616, 656stolen credit cards, 490stolen property, 363–364stopping payment of checks, 528storage, 372straight life insurance, 755strict liability, 92–93, 327–328student loans, 118subagents, 403subcontractor, mechanic’s lien and, 562subject matter of contracts, 231–232subletting, 716subpoena, 40subsidiaries, 619substance abuse, 71, 698substantial contract performance,226–228subterranean rights, 744sufferance, tenancy at, 714sufficient funds, 522suitors, 656suits, 168–169, 631–632, 638summary jury trial, 36sum of money, fixed, 513Sunday statutes, 191support, 677, 704–705supremacy clause, 16supreme courts, state, 33sympathy, 11TTaft-Hartley Act, 444“take it or leave it” contracts, 108takeover bids, 656–657tamper-proof packaging, 330tangible personal property, 362taxes, 329, 586, 774, 777tax shelter investments, 599technologycontracts, 234crimes, 71, 198, 317, 372e-commerce, 514, 552privacy, 83, 317teen courts, 59teen violence, 33telemarketing sales rule, 323–325telephone ordering consumer protection,325–326teller’s checks, 531temporary alimony, 702Temporary Assistance to Needy Families(TANF), 464846 Index

tenancyin common, 740by the entirety, 741in partnership, 594in renting housing, 712–714, 719–722See also rentingtender of contract performance, 228–229tender offer, 656terminationof agencies, 424–428of contracts. See contract performanceof employment, 444of offers, 119–121of partnerships, 597–598term insurance, 757–758testate, 779testator, 779testatrix, 779Texas Workers’ Compensation Program,462Texas Workforce Commission, 462theories of contract law, 106–108third partiesagency liabilities to, 420–424agency termination and, 426–427as beneficiaries, 248–249tickets as contracts, 108timeagency termination and, 425contract offers and, 121payable at, 513–514for performance of contracts, 224–225time draft, 509time note, 507title, 276–281agencies and, 402bailments vs., 368bankruptcy and, 424destination contracts and, 279–280documents of, 280–281passage of, 277–278shipment contracts and, 278–279to stolen goods, 363voidable, 276warranty of, 303–304tobacco labeling, 325tortfeasor, 82tortious bailees, 372–373torts, 78–101, 188agent liability and, 397–401criminal law vs., 80–81intentional, 81–87negligence as, 88–92public policy, 440renting and, 723strict liability as, 92–93unintentional, 88trade, 196, 270, 303, 650trade fixtures, 722trade-in allowance, 341–342trademarks, 365–367software and hardware, 366, 367, 383traditional IRAs, 777traffic courts, 31traffic tickets, 353transfersbulk, 274–275of contracts. See contract transfersof duties, 245–248of stock, 628–629transients, 373traveler’s checks, 531–532treason, 58treasurer’s checks, 531treatment, disparate, 466–468trespass, 72, 82–83trial juries, 45trials, 34–49alternative dispute resolution vs.,34–36arraignments in, 45–46civil, 34–42criminal, 42–49defendants in, 43–45judgments from, 41–42jury, 38–41of juveniles, 47–49pleadings in, 36–38pretrial hearings in, 37–38remedies from, 41sentencing and, 47“Trustmark” seals, 331trusts, 630, 649–651Truth in Lending Act, 189, 485UU.S. Congress, 18, 235, 287U.S. Constitution, 14–16, 57, 194, 235,286–287, 496, 647, 674U.S. Copyright Office, 365U.S. Department of Justice, 63U.S. Immigration and NaturalizationAct, 154U.S. International Postal MoneyOrders, 531U.S. Patent and Trademark Office, 367U.S. Supreme Court, 19, 21, 30, 44, 86,195, 649–650unauthorized signature, 566unconditional acceptance, 117–118unconditional promises, 513unconscionable contracts, 166underinsured motorist insurance, 352undisclosed principal, 422undue hardship, 471undue influence, 138–139unemployment benefits. Seeemployment conditionsunemployment compensation laws,460–463unenforceable contracts, 111, 176–179unfair practices, 316–320Uniform Commercial Code (UCC), 117,213, 268, 272–275Uniform Computer InformationTransaction Act, 198Uniform Electronic Transactions Act(UETA), 286Uniform Interstate Family Support Act(UIFSA), 705Uniform Marriage and Divorce Act, 674,687, 694Uniform Partnership Act (UPSA), 588unilateral contracts, 112unilateral mistakes, 133–135uninsured motorist insurance, 352unintentional torts, 88–93unions, 208, 434–435, 438, 470union shop, 444Index 847

United Nations Commission onInternational Trade Law(UNCITRAL), 563United States Reports, 195universal life insurance, 755University of Chicago, 703unjust dismissal, 436unlimited liability, 596unmarried couples, 216unordered merchandise, 320unreasonable search and seizure, 459unruly juveniles, 31up-front costs of vehicles, 343usage of trade, 270, 303used vehicles, 342–347usury statutes, 189uttering, 528Vvalid contracts, 110valuecash, 754face, 754fair market, 730for holder in due course, 561replacement, 763something of, 165–166values, 6vandalism, 69vegetation, 744vehicles, 336–358buying new, 341–342consumer protection and, 348–350contracts to buy, 347–348financing, 338–341insurance for, 351–355leasing new, 342pre-owned, 342–347repairing, 350violations of motor, 70–71veil, corporate, 618–619verdicts, 41Verizon Communications, 650vesting, 775Veteran Administration (VA) loans,730–731vicarious liability, 400–401Vietnam Era Veterans Readjustment Actof 1972 (VEVRA), 466violence, 33, 45, 64, 676virtual high schools, 110visitation rights, 701, 703voidable contracts, 110–111, 137voidable title, 276void contracts, 110voiding checks, 525voluntary dissolution ofcorporations, 660voting by shareholders, 629–631WWage and Hour Law, 456wages, 167, 438. See also employmentconditionsWagner Act, 442–443waiting period, marriage, 685–686warehouse receipt, 281warnings, 327, 329warrantto make arrest, 83search, 43warranties, 292–313breach of, 309duty to notify in, 308–309exclusion of, 305–306express, 294–300implied, 300–303of indorsers, 550–553privity of contract and, 306–308of title, 303–304for vehicles, 344–345warranty deeds, 741–742waste of premises, 720, 722wedlock, 681welfare, 464willful damage, 69Williams Act, 657wills, 779–785changing, 781dying without, 783–785family protection in, 781–783making, 779–781settling, 785will theory of contracts, 107–108winding up process, 661win-win negotiations, 561wire fraud, 71withdrawal of agents, 426wordscontrolling, 515of negotiability, 514work-at-home schemes, 320Worker Adjustment and RetrainingNotification Act (WARN), 435workers’ compensation, 461–464Texas Workers’ CompensationProgram, 462Texas Workforce Commission, 462worker status, H1-B, 154working abroademployer and employee rights, 457international business operations, 512working environmentaccessible, 454, 651–653hostile, 469safe, 454–455work opportunity laws, 464work permits, 447wraparound mortgage, 738written contracts. See contracts, writtenwrongful alteration, 233wrongful discharge from employment,436–441Zzoning laws, 742848 Index

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