SOLUTION MANUAL FOR CENGAGE ADVANTAGE BOOKS FUNDAMENTALS OF BUSINESS LAW SUMMARIZED CASES 9TH EDITION BY MILLER ISBN 1285216407 9781111530624
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CHAPTER 9 CONSIDERATION, CAPACITY, AND LEGALITY
Foryourconvenience,pagereferencesforboththeSummarizedandExcerpted caseversionsof Fundamentals of Business Law areincluded.
SUMMARIZED PAGE: Fundamentals of Business Law: Summarized Cases, NinthEdition
EXCERPTED PAGE: Fundamentals of Business Law: Excerpted Cases, ThirdEdition
ANSWERS TO LEARNING OBJECTIVES/ FOR REVIEW QUESTIONS AT THE BEGINNING AND THE END OF THE CHAPTER
1A. Legal sufficiency
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Considerationisthevalueexchangedforapromise. Tobelegallysufficient,consideration mustbe“somethingoflegalvalue.”Thismayinclude(1)apromisetodosomethingthat onehasnopriorlegaldutytodo,(2)theperformanceofanactthatoneisotherwisenot obligatedtodo,or(3)therefrainingfromanactthatonehasalegalrighttodo.
2A. Promises enforceable without consideration
Under the doctrine of promissory estoppel (or detrimental reliance), a promisor (the offeror)isestoppedfromrevokingapromiseevenintheabsenceofconsideration.There arethreeelements:(1)aclearanddefinitepromise;(2)thepromisee’sjustifiablereliance onthepromise;and(3)relianceofasubstantialanddefinitecharacter.
3A Minors’ contracts & disaffirmance
A minor can enter into any contract that an adult can enter into, except a contract prohibitedbylawforminors. Generally,acontractenteredintobyaminorisvoidableat theminor’soption.Disaffirmanceisthelegalavoidance,orsettingaside,ofacontractual obligation.Theminorcandisaffirmthecontractbyindicatinganintentnotbeboundtoit.
4A Covenant not to compete
If a covenant not to compete is ancillary to an agreement to sell an ongoing business (enablingthesellertosell,andthepurchasertobuy,the“goodwill”and“reputation”ofthe business)oriscontainedinanemployment contract,andisreasonableintermsoftime andgeographicarea,itwillbeenforceable.Acovenantnottocompetethatdoesnotprotect alegitimatebusinessinterestorisgreaterthannecessarytoprotectthatinterestwillbe void,becauseitunreasonablyrestrainstradeandiscontrarytopublicpolicy.
5A. Exculpatory clause
Anexculpatoryclausereleasesapartyfromliabilityintheeventofmonetaryorphysical injury,nomatterwhoisatfault.Anexculpatoryclausemaybeenforcedifapartyseeking itsenforcementisnotinvolvedinabusinessconsideredimportanttothepublicinterest. Anexculpatoryclausewillnotbeenforcedifapartyseekingitsenforcementisinvolvedin abusinessthatisimportanttothepublicinterest.
ANSWERS TO QUESTIONS AT THE ENDS OF THE CASES
CASE 9.1 FOR CRITICAL ANALYSIS
SUMMARIZED PAGE 166
EXCERPTED PAGE 174
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Legal Consideration On remad, the lower court was ordered to determine the appropriate remedy. Should Teresa be awarded specific performance to compel a transfer of the land? Or should she obtain damages? Discuss. Inacaseofpromissory estoppel, the factors that bear onwhether any relief shouldbe granted also bear on the character and the extent of the remedy. If relief is measured by the terms of the Dows’ promise,specificperformancewouldbethemostappropriateremedy.
IfreliefismeasuredbytheextentofTeresa’srelianceratherthanbytheterms of theDows’promise,however,damagesbasedonthevalueofthehouseorthelandmight be more appropriate. Because the Dows have not been unjustly enriched by the constructionofthehouse Teresalivesinit damagesshouldnotputtheirdaughterina better position than specific performance would. Thus, it would not be proper toaward consequential damages, which could be more costly to the Dows than specific performance. The most appropriate measure of damages might be to award Teresa the value of the land. The construction costs saved due to the efforts contributed by Jeffrey mightbefiguredintothemix.
CASE 9.2 FOR CRITICAL ANALYSIS
SUMMARIZED PAGE 169
EXCERPTED PAGE 178
Global Consideration The architectural services at the center of this case were to be performed for a foreign embassy. Should the court have made an exception for such a circumstance? Why or why not? No.Theimpactislocal “Forthesafetyandwellbeingof thosewhoworkinandvisitsuchbuildings,andofneighboringpropertyowners,wewould suppose the District has every reason to insist that the architects who design them and overseetheirconstructionbequalified,andhencelicensed,todoso.”
CASE 9.3 FOR CRITICAL ANALYSIS SUMMARIZED PAGE 172
EXCERPTED PAGE 181
Economic Consideration What did the court mean when it said that GeoEx’s one-sided arbitration scheme “may well guarantee that GeoEx wins even if it loses”? Thecourt wasreferringtoahypotheticaloutcomethatwouldoccurshouldthecasebearbitratedin accordancewiththereleasetermsandGeoExlostinthatproceeding. Supposethatapanel ofarbitratorsfoundthatGeoExwasliableforthemaximumamountofdamages. According totherelease,thissumwouldbethecostofthelandandairfarepaidbytheplaintiffsfor thetrip,whichwas$16,831. Becauseofthetermsoftherelease,GeoExwouldbeoutfew travel expenses for the arbitration forum was in California. Additionally, in accordance withtherelease,GeoExwouldbefullyindemnified,orcompensated,foranycostsincurred bytheproceedings,includingattorneys’fees. Incontrast,ifGeoExlostthecaseinacourt, GeoEx would likely be liable for damages far beyond the $16,831 amount that it would havetopayafterarbitration. Also,giventhattheplaintiffslivedinColorado,GeoExwould
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probablyhavetotraveltoColoradotodefendagainstthelawsuit. Becausealawsuitwould involve more extensive and costly proceedings, GeoEx would also face significant legal fees. Becauselosingbefore an arbitrationpanelwouldbefar lesscostlythan losingthe caseincourt,GeoExessentially“winsevenifitloses”withitsarbitrationscheme.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE AT THE END OF THE CHAPTER
1A. Capacity
Beaver did not have the capacity to enter into a contract whether or not it included an exculpatoryclausebecauseshewasaminor,or,moreaccurately,shecouldenterintothe contractbutshecouldopttodisaffirmit.Herparentswerenotminors,however,andcould be held to their contracts, including the contract at issue in this problem if it otherwise meetsallofthelegalrequirements.
2A. Disaffirmance or ratification
To disaffirm a contract, a minor must express an intent by words or conduct not to be bound.Here,thefilingofasuitwouldcertainlyindicateanintentnottobebound.IfBeaver hadreachedtheageofeighteenareasonabletimebeforeattemptingtodisaffirm,however, shecouldbeheldtohaveimpliedlyratifiedthecontract.
3A. Age of majority
Beaver’s misrepresentation of age would not usually affect her right to disaffirm the contract,butinsomestates,theoppositeistrue shewouldbeboundtotheclause.
4A. Implied contract
Under any circumstance, some exculpatory clauses are not enforced. Typically, those clauses relate to property leases or employment. But exculpatory clauses are otherwise subject to the same rules as other contracts. If Beaver had participated in the race with knowledge of the clause and without indicating that she did not agree to it, she could arguablybeheldtoitsterms.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE AT THE END OF THE CHAPTER
1A In September, Sharyn agrees to work for Totem Productions, Inc., at $500 a week for a year beginning January 1. In October, Sharyn is offered the same work at $600 a week by Umber Shows, Ltd. When Sharyn tells Totem about the other offer,
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they tear up their contract and agree that Sharyn will be paid $575. Is the new contract binding? Explain. Yes.Theoriginalcontractwasexecutory.Thepartiesrescindeditand agreedtoanewcontract.IfSharynhadbrokenthecontracttoacceptacontractwithanotheremployer,shemighthavebeenheldliablefordamagesforthebreach.
2A Sun Airlines, Inc., prints on its tickets that it is not liable for any injury to a passenger caused by the airline’s negligence. If the cause of an accident is found to be the airline’s negligence, can Sun use the clause as a defense to liability? Why or why not? No. Generally, An exculpatory clause (a clause attempting to absolve parties of negligenceorotherwrongs)isnotenforcedifthepartyseekingitsenforcementisinvolved inabusinessthatisimportanttothepublicasamatterofpracticalnecessity,suchasan airline. Because of the essential nature of these services, they have an advantage in bargainingstrengthandcouldinsistthatanyonecontractingfortheirservicesagreenotto holdthemliable.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
9-1A
Contract modification
SUMMARIZED PAGE 163
EXCERPTED PAGE 171
Thegeneralruleisthatapromisetodowhatonealreadyhasalegalorcontractualdutyto do is not legally sufficient consideration, because there is neither a legal benefit to the promisornoralegaldetrimenttothepromisee. Thisiscalledthepreexistingdutyrule. Unlessthereisachangeofduties(consideration),thepromisetopayforthatwhichwas previouslycontractedisunenforceable. AnexceptiontothisruleexistsundertheUCCfor contractsforthesaleofgoods. TheUCCprovidesthatanagreementmodifyingacontract forthesaleofgoodsneedsnoconsiderationtobebinding[UCC2–209(1)]. Therefore,the agreementbyTabortopaytheadditional$10percabinet(agood)maybebinding,even though no consideration (detriment) is given by Martin for the increase in price. (The issue,then,forthecourtstodeterminewillbewhetherMartinistakingunfairadvantage ofTabor.)
9-2A
Intoxication
SUMMARIZED PAGES 167–168
EXCERPTED PAGE 176
KiraisrightandwillprevailoverCharlotteifKiracanprovethatshewasindeedintoxicatedatthetimeshesoldthenecklacetoCharlotte. Mostlikely,Kirawillhavelittledifficulty proving this because no reasonableperson would sell a valuable necklace for only
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onehundreddollars. ThefactthatKiradidsostronglysuggeststhatshewasintoxicated atthetimeandnotawareofthesignificanceofheraction. Becausecontractsmadebyan intoxicated person are voidable at the option of the intoxicated party, Kira has a good chanceofrecoveringthenecklace.
9-3A
Consideration
SUMMARIZED PAGE 163
EXCERPTED PAGE 171
Tuan’s claim that no contract existed because Lewis had given no consideration for Tuan’spromise issupportedbythepreexistingdutyrule. Lewiswasalreadyobligated toBentodohisbesttowintherace,andthesameconsideration(attemptingtowinthe race)couldnotbeusedinasecondcontractwithTuan. BecauseLewishadapreexisting dutytotrytowintherace,amajorityofcourtswouldlikelyholdthatTuanwascorrectin arguingthatnocontractexistedbecauseLewisgavenoconsideration.
9-4A
Substantive unconscionability
SUMMARIZED PAGES 171–172
EXCERPTED PAGES 180–181
The terms of the lease are not unconscionable. The “basic test of unconscionability is whether,inlightofthegeneralcommercialbackgroundandthecommercialneedsofthe particular trade or case, the clauses involved are so one-sided as to be unconscionable underthecircumstancesexistingatthetimeofthemakingofthecontract.”Thecontract clausewasnotunusualanddoesnotviolatenotionsofbasicfairness.Itwasalsonotedthat BishopfailedtoinformthelandlordthatDerekhadvacatedtheapartment,whichwasalso requiredbythetermsofthelease,soasfarasthelandlordknew,Derekwasstillonthe lease.
9–5A CASE PROBLEM WITH SAMPLE ANSWER
Yes, the Sharabianious have a good argument for rescission. The reviewing court concludedthat“Rescissionisintendedtorestorethepartiesasnearlyaspossibletotheir formerpositionsand‘tobringaboutsubstantialjusticebyadjustingtheequitiesbetween theparties’.” Rescissiondoesnot occurifa contractisaffirmed; it meansthecontractis repudiated.Hererescissionisappropriatebecausethecontractingpartiesweremutually mistaken as to the condition of the property. The environmental contamination substantially reduced its value. When an agreement to purchase property is subject to rescission, “the seller must refund all payments received in connection with the sale.” Hence,theawardofdamagestotheBerensteinswasreversedandtheSharabianlouswere refundedtheirdeposit.
9-6A Licensing statutes
SUMMARIZED PAGE 169
EXCERPTED PAGES 177–178
Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the statute. If the purpose is to protect the public from unauthorized practitioners,thenacontractinvolvinganunlicensedpractitionerisgenerallyillegaland unenforceable.Here,theapplicablelicensingstatutewaspresumablyintendedtoprotect the public from unauthorized, unlicensed practitioners. PEMS did not have a broker’s license. Thus, if PEMS was acting as a broker, the unlicensed firm forfeited its right to collect a commission for its services. The statutory definition of a broker includes any person who deals with the sale of a business. It seems clear that this definition encompasses PEMS the firm analyzed Rupp’s operational and financial condition, paid legal fees, carefully managed Rupp’s confidential data, and screened more than a dozen potential buyers. PEMS also provided key data to RIA to enable it to make a successful purchaseofRupp.ThereforePEMSisbarredfrommaintainingasuittocollectanunpaid commission.Intheactualcaseonwhichthisproblemisbased,thecourtdismissedPEMS’s claimonthegroundthattheunlicensedfirmwasactingasabroker.Astateintermediate appellatecourtaffirmedthedecision,agreeingthatPEMSwasactingasa“broker”inthe saleofthebusiness,and,havingnobroker’slicense,itwasbarredfrommaintainingasuit tocollectabroker’scommission.
9-7A
Consideration
SUMMARIZED PAGES 162–166
EXCERPTED PAGES 170–174
No.Astatuteoflimitationrequiresacreditortosuewithinaspecifiedperiodtorecovera debt.Ifthecreditorfailstosueintime,recoveryisbarredbythestatute.Evenifrecovery is barred by the statute, a debtor who promises to pay the debt makes an enforceable promise. This promise does not need new consideration. The promise extends the limitationsperiod,andthecreditorcansuetorecover.Thepromisecanbeimpliedifthe debtoracknowledgesabarreddebtbymakingapartialpayment.Undertheseprinciples, eachtimeadebtormakesapayment,thestatuteoflimitationsbeginstorunanew,evenif aperiodoftimeequaltothestatutoryperiodhaselapsedfromthetimethatthedebtwas incurredorthelast,previouspaymentmade.Inthisproblem,Saltzmansignedthememo inMarch1997andmadepaymentsuntilJuly2005.Anyoneofthepaymentswouldhave triggeredanewten-yearlimitationsperiod.KrantzlerfiledhissuitinJune2007.Thiswas well within the time limit. In the actual case on which this problem is based, the court enteredajudgmentfortheunpaiddebtinKranzler’sfavor,andonSaltzman’sappeal,this judgmentwasaffirmed
9–8A A QUESTION OF ETHICS
1 Theelementsofpromissoryestoppelare(1)aclearanddefinite promise;
(2)anexpectationthatthepromiseewillrelyonthepromise;
(3)reasonablerelianceon
thepromisebyactingorrefrainingfromacting;(4)substantialdetrimentasaresult;and (5)thenecessityofenforcingthepromisetoavoidinjustice.Underatheoryofpromissory estoppel, Aceves’s best strategy is to argue that the bank’s promise to work with her in modifyingtheloanwasenforceable,thatshereliedonthepromisebyforgoingbankruptcy protectionandallowingthecourttolifttheautomaticstay,andthatthebankbreachedits promisebyforeclosingonherhome.
Intheactualcaseonwhichthisproblemisbased,thecourtdismissedthecase,but onAceves’sappeal,astateintermediateappellatecourtconcludedthat(1) Acevescould havereasonablyreliedonthebank’spromisetoworkonaloanmodificationifshedidnot seekreliefinbankruptcy,(2)thepromisewassufficientlyconcretetobeenforceable,and (3) Aceves’s decision to forgo bankruptcy relief was detrimental because it allowed the banktoforecloseontheproperty.Theappellatecourtreversedthedismissalontheclaim forpromissoryestoppelandremandedthecasetoallowAcevestopursuehercase.
Ethics involves right or wrong behavior and the application of moral principles. Ethicsfocusesonthefairnessandjustnessofanaction.Underthedoctrineofpromissory estoppel,acourtmayenforceanotherwiseunenforceablepromisetoavoidtheinjustice that would otherwise result. Like other equitable doctrines, the theory of promissory estoppel seems to have been founded on ethical principles. Both this theory and those principlesareconcernedwithwhatisfairandjust.
2 Thelenderclearlymisrepresenteditwaswillingtoforgoforeclosurewhile expediting foreclosure proceedings. U.S. Bank apparently never intended to work with Aceves to modify her loan. The bank promised to do this only to convince her to forgo bankruptcy proceedings so that the automatic stay would be lifted and the bank could forecloseontheproperty.Theelementsoffraudaresimilartotheelementsofpromissory estoppel, with the additional requirements that a false promise be made and that the promisorknowofthefalsitywhenmakingthepromise.Itiseasytoviewthisconductas unethical.Actsthatsupportclaimsforpromissoryestoppelandfraud,asoccurredinthis case,arepatentlyunethical
Alapseofethicsintheborrower’sconductislessclear.Shemayhaveoverextended herselfintakingonthismortgagetobuythishouse.Thatthemortgagepaymentsbecame unaffordableforherlessthantwoyearsintotheloanindicatesthatshemayhavefooled herselfattheinceptionoftheloanintothinkingthatshecouldafforditatall.Ifthatwas thecircumstance,shemayhavebeenmotivatedbygreedorshemayhavefallenvictimto self-deception,eitherofwhicharearguablyunethical.Shemighthavebeenbettersituated ifshehadpurchasedalessexpensivehomeunderamoreaffordableloan.
9-9A CRITICAL THINKING LEGAL QUESTION
Generally, courts do not question the adequacy of consideration if the consideration is legally sufficient. Under the doctrine of freedom of contract, parties are usually free to bargainastheywish.Ifpeoplecouldsuemerelybecausetheyhadenteredintoanunwise
contract,thecourtswouldbeoverloadedwithfrivoloussuits.Inextremecases,however, a court may look to the amount or value (the adequacy) of the consideration, because apparently inadequate consideration can indicate that fraud, duress, or undue influence wasinvolvedorthatagiftwasmade(ifaparty“sells”a$10,000itemtoanotherpartyfor only$1,forexample).Also,incasesinwhichtheconsiderationisgrosslyinadequate,the courtsmaydeclarethecontractunenforceableonthegroundthatitisunconscionable thatis,soonesidedunderthecircumstancesastobeoverlyunfair.