Unit 8

Contract Law

Lecture 2

End of term information

• 1. Make sure you check those grade books and ask Steve or Dave any questions you have concerning your scores

• Kaplan’s incomplete deadline is December 16th. To qualify you must have completed 75% of the outstanding work. Work would be due no later than Jan 3.You must submit your request to your discussion board leader. He will provide you with the necessary form to complete.

• SRenick@kaplan.edu

Plans for this seminar

• Discuss the various options for a business structure

• Examine some of the many consumer protection laws that exist in the United States

• Take a quick look at Bankruptcy

• Catch up with what’s happening with our good friends the Applegates.

Business structure

• There are three basic ways of structuring a business

• 1. sole proprietorship

• 2. partnership

• 3. corporation

Sole proprietorship

• It is the most common form of business organization

• If you want total control, this will give it to you• Advantages of this form is it is easy to start and

end, total control for the owner, all profits are yours, and it is taxed directly to the owner as there is no separate legal identity

• Disadvantages are that all losses are yours, you have all of the risks of a business, you have personal liability for all business losses, contracts and torts

Partnership

• A voluntary agreement between two or more people to carry on a business

• Advantages include having some help to make decisions about a business, the ability to bring different skills to a business, easier to obtain loans since you have more than one person who is responsible, no double taxation

• Disadvantages are you have to share decision making authority, you are still personally liable for the performance of all contracts and for torts, if a partner withdraws or dies you must wind up the business in the absence of good estate planning

Special forms of Partnership

• Limited partnership has one or more general partners who are responsible for managing the business. They are personally responsible just like any other partner. In many of these arrangement the general partner will actually be a corporation.

• There are also limited partners who invest in these businesses. They have no management power but also have no personal liability or risk beyond their investment

Tips for a good partnership

• Put your partnership agreement in writing

• Include provisions for how you will decide if there is disagreement in management

• Include provisions on what you will do if a partner wants to withdraw or dies or if you want to bring in additional partners

• Consider the partnership agreement as the “prenup” for your business

Corporations

• The creation of a new life form ( sort of makes you think of Frankenstein doesn’t it)

• It is a separate legal “person. A corporation has its own tax identity

• Advantages include easier to raise capital, the ability to hire in the necessary skills to grow, limited liability to only your investment into the corporation, lives forever

• Disadvantages are that these are more difficult to set up and maintain, possibility of being taxed at not only the corporate level but again taxed when money is paid to you as a shareholder

Corporate terminology

• Articles of incorporation are documents filed with the state that create the corporation

• Corporate charter grants the corporation its powers and set out the types of stock it will issue

• Stock is the ownership representation in the corporation

• Common stock has the right to vote for directors and officers

• Preferred stockholders have no voting rights but are paid out before common stock holders in the event of dissolution

Corporate structure

• Set by the articles of incorporation but common to have a Board of Directors and Officers

• Corporations can be large or small or anything in between

• Corporations can be formed for any legal purpose

• Corporations can be privately held or publicly traded

Consumer protection

• There are multiple statutes on both the federal and state level designed to protect the consumer

• Some examples given in your text include Federal Food, Drug, and Cosmetic Act passed in 1906 which was the first

• The Federal Trade Commission was created to keep competition fair and promote fair trade.

Consumer Protection

• Truth in Lending as well as fair credit reporting laws are some of the approaches to dealing with financial obligations

• They are designed to protect consumers in common financial transactions

• Magnuson-Moss deals with warranties

Consumer Protection

• Bankruptcy federal law based on power granted to Congress in the Constitution

• Designed to provide debtors with a fresh start and a fair method of distribution of the debtors assets

• Not all debts will go away, for example secured debts, tax obligations, student loans, child support

What are the Applegate’s up to now?

• Things are still not going well for the Applegate family. The whole family is still trying to recover from the trauma of the dog bite. Now John has decided to purchase a motorcycle. He answers an ad in the local paper from Dave Albright. Dave brings the bike over to show John and after a test ride John tells him he will purchase it for $5,000. John goes and gets his checkbook and writes a check to Dave for the amount. After handing Dave the check John notices the mirror on the bike is cracked. He tells Dave he wants that fixed. Dave says “no problem” and that he can take the bike now and return it in an hour or so. John gives his consent. Dave takes off on the bike.

• John goes into the house drops off the checkbook, tells his wife he is heading to work. He doesn’t mention that Dave has the bike to get the mirror fixed. John goes to work and Susan goes out to take a look at the new bike. Of course, it is not there. She assumes Dave has taken off with the bike and the check. She calls the bank and puts a stop pay on the check. Dave in the meantime, on his way to get the mirror fixed, is hit by a drunk driver who runs a stop sign. The bike is completely destroyed and Dave is seriously hurt. The drunk driver had no insurance, and Dave had no insurance on the bike because he had canceled it when he put the bike up for sale.

• Dave tries to cash the check and finds out about the stop pay. He claims there was a contract and that John has to pay him for the bike? In our seminar we will discuss the elements of a contract and look at this case from the views of both Dave and John.

Applegate’s

• To approach this problem in an organized manner we need to decide

• 1. Was there a contract

• 2. What type of contract, bilateral or unilateral

• 3. Was there a breach of contract

• 4. Are there any defenses

Applegate’s

• To have a contract we need to have an• 1. offer• 2. acceptance• 3. consideration• 4. legal capacity • 5. legal purpose• Let’s take these one at a time and see

what we have

Types of contract

• What type of contract is, this a bilateral contract or a unilateral contract?

• Why would might that make a difference in this case?

Applegate’s

• Was there a breach of contract?

• If so what damages would be awarded in this case

Applegate’s

• Defenses to the contract?

• Does there appear to be any fraud, misrepresentation, mistake, impossibility of performance?

Applegate’s

• This part of the Applegate’s case actually happened and resulted in a small claims court decision

• What do you think the court decided and why?

The Rest of the Story

• In real life there was a second contract that came into play in this case.

• Before he headed off for work John asked Susan to call and put an insurance policy on the bike and Susan did so. The agent took some basic information and confirmed coverage. However when Susan found the bike missing, she also called the agent back and cancelled the coverage. This was all within 30 minutes to an hour and it was unknown if this call back to the agent was before or after the accident.

• Dave finds out about the potential coverage and files a claim for the $10,000 uninsured motorist coverage on the bike.

• Was there a contract for insurance in this situation?

Insurance Contract?

• Insurance can only be issued if there is an “insurable interest” in the bike

• If there was no contract or if the contract was unilateral depending on the fixing the mirror there can be no insurance policy because John had no risk of loss at the time of the accident.

• This case was also heard by a court, what do you think was decided and why?

How this ended

• The case went to the District Court in the same state as the small claims case on a declaratory judgment action. The case was decided after the small claims case.

• Deciding exactly opposite of the small claims court, that court concluded there was a contract and therefore the insurance policy had to be paid

• Same facts different result

Next seminar

• We will look at the civil procedures that can affect a case and see how it impacts our Applegate family