Business Law Essentials

Posted on May 20, 2024 in Law & Jurisprudence

Torts

Tort: A civil wrong, leading to liability under civil law. Any individual can file suit, with punishments being fines or equitable relief.

Intentional Torts

  • Emotional Distress
  • Defamation
  • Invasion of Privacy
  • Trespass
  • Conversion
  • Assault (reasonable fear)
  • Battery

Transferred Intent: Liability transfers to whoever is actually harmed, even if not the intended target.

Defenses: Consent and self-defense.

Negligence

  1. Duty of Care: Behave as a reasonably prudent person. This always arises when risk is foreseeable or a special relationship exists. A waiver doesn’t waive the baseline duty of care.
  2. Breach: Failure to act reasonably. Res ipsa loquitur (“the thing speaks for itself”) implies automatic fault.
  3. Causation: Actual (but for/substantial factor) and Proximate (the relationship between the harm and the action is foreseeable).
  4. Damages: Compensation and/or punitive.

Defenses to Negligence

  • Contributory Negligence: Plaintiff cannot recover if they are more than 50% at fault.
  • Comparative Negligence: Damages are adjusted for the proportion of fault.
  • Joint and Several Liability: Multiple parties can be held liable.
  • Assumption of Risk: Knowingly and intelligently accepting a risk.
  • Superseding Cause: If another factor exacerbated the harm, the defendant is liable only for their responsible part.
  • Open and Obvious Danger: No duty to warn of obvious dangers.

Product Liability

Strict Liability

  • Defects: Manufacturing, Design (foreseeable), Warning (reasonable warning).

Warranty

  • Failure to perform as promised (express, implied (ordinary use), implied for a particular purpose (specialized good)).

Defenses to Product Liability

  • Contributory Fault
  • Assumption of Risk
  • Misuse
  • State of the Art

Contracts

A promise to act or not act in a certain way.

Formation

  1. Offer: Intent to make an offer, communication of the offer, material terms set out.
  2. Acceptance: Intent to accept, communication of acceptance, acceptance of the full offer (a counter-offer switches roles). An illusory promise (“might”) is not a valid acceptance.
  3. Consideration: Mutual exchange of something of value, which can be a promise. Past performance is not consideration.

Promissory Estoppel: No formal contract, but it would be unfair if a party doesn’t deliver on a promise. Only enforced when reliance on the promise is the only option.

Types of Contracts

  • Express: Written or oral.
  • Quasi: No formal contract, but benefits are conferred. Used to avoid unjust enrichment (e.g., unconscious patient must pay for treatment).
  • Implied: Legally made but never expressly stated. Acceptance is demonstrated through actions (e.g., ordering food at a restaurant).

Enforceability

Factors that can prevent contract enforcement:

  • Force Majeure: An act of God or unforeseen natural disaster.
  • Statute of Frauds: Contracts that must be written to be enforced (e.g., marriage, land, contracts that can’t be performed within one year, goods over $500).
  • Parol Evidence Rule: Written terms supersede prior written or oral agreements unless clarifying unclear terms.

Capacity: Parties must be able to understand the contract. This includes being over 18, not intoxicated beyond the ability to understand, and mentally competent. Those lacking capacity can enter a contract but can also leave it.

Defenses to Enforcement

  • Lack of Genuine Assent/Agreement: If there is no genuine assent or agreement, the contract is void.
  • Mistake: A material misunderstanding going to the heart of the contract. If mutual, the contract is unenforceable. If unilateral, it is not voidable unless the other party knew or should have known about the mistake. The remedy is restitution.
  • Misrepresentation: A material fact justifiably relied on to the detriment of the other party. Buyer beware applies unless there is fraud (a fact that wouldn’t come up in a reasonable inspection, which the seller must disclose), or intent to deceive that causes damages and is relied upon. Remedies include rescission or the difference between what was promised and what was delivered.
  • Duress: A party is forced to enter a contract they otherwise wouldn’t.
  • Undue Influence: Unfair persuasion used against a weaker party (e.g., elderly or sick). Only the influence needs to be proven.
  • Illegal Contracts: The terms of the contract are illegal.
  • Unconscionability: Terms that “shock the conscience” (substantive) or a lack of meaningful choice in contract formation (procedural).

Performance

Fulfilling contract obligations.

  • Complete Performance: Everything is done as agreed.
  • Substantial Performance: Mostly finished, with the remedy being for minor defects.
  • Material Breach: A serious defect in performance, allowing the non-breaching party to sue for damages.
  • Anticipatory Breach: One party informs the other of an impending breach. The non-breaching party can either wait or sue immediately.

Excuses for Non-Performance

  • Impossibility: It becomes impossible to perform the contract.
  • Impracticability: Performance is possible but unforeseen developments make it excessively expensive.

Remedies

Financial Remedies

  • Compensatory Damages: The difference between what was promised and what was delivered.
  • Consequential Damages: Special, foreseeable losses caused by the breach that can be measured (e.g., loss of business).
  • Liquidated Damages: Parties agree in advance on damages for a breach.
  • Mitigation: The non-breaching party has a duty to minimize damages.

Equitable Remedies

  • Specific Performance: The breaching party is ordered to carry out the terms of the contract.
  • Injunction: A court order stopping someone from doing something.

Agency Law

An agent acts on behalf of a principal, subject to the principal’s control. Independent contractors are not agents (no benefits, no liability).

Fiduciary Duties

What agents owe to principals:

  • Loyalty
  • Care
  • Obedience
  • Confidentiality
  • Disclosure

Contractual Liability

If an agent can sign for a principal, the principal must follow the contract. If the agent acts outside of their authority, the agent is bound, but the principal isn’t, unless the principal benefits from the contract.

Third-Party Inquiry: If someone suspects that an agent is not acting within their authority, they should investigate. If the principal suspects this, they are not bound to the contract terms.

Principal’s Liability for Torts: A principal is liable for torts committed by an agent. Liability is direct if the principal was negligent in hiring the agent, and indirect if the tort is committed within the scope of employment.

Proof of Liability: An agent relationship exists, and the agent was acting within the scope of their authority.

Employment Law

At-Will Employment

Employees can leave or be fired for any reason, with some exceptions.

Discrimination Protections

  • Gender
  • Race/Sex/National Origin
  • Age
  • Disability Status (defenses: undue hardship, business necessity, health hazard, corrective device)
  • Pregnancy

Proving Discrimination

  • Intentional Discrimination: Show the employee is in a protected class, qualified for the job, rejected for the job, and the job went to someone outside the protected class.
  • Unintentional Discrimination: Show the employee is protected and the job requirements have a discriminatory impact on members of their class.

Employer Defenses

  • Business Necessity: The discriminatory practice is necessary for the job (e.g., firefighter fitness test).
  • Bona Fide Occupational Qualification (BFOQ): The discriminatory practice is reasonably necessary for the essence of the business and it’s impossible for anyone except for one type of person to perform the job.

Business Entities

Sole Proprietorship

A business that takes money but is not a full-time job. The owner has unlimited liability.

Partnership

Two or more people running a venture, with profits and liabilities split evenly. Partners have unlimited liability.

Limited Liability Company (LLC) and Corporation

Separate legal entities that can be formed by one or more people. They must file for incorporation and are taxed at lower rates than individuals.

Advantages

  • Tax benefits
  • No personal liability
  • Ability to raise money

Disadvantages

  • More complicated to set up and run
  • More paperwork
  • Must abide by the corporate charter

LLCs and corporations are treated as legal “persons” and can sue, enter contracts, and own property.

Corporate Structure

  • Owners: Individuals, companies, and shareholders.
  • Board of Directors: Responsible for the big picture, strategic decisions, and hiring executives.
  • Officers: Executive leadership who run the day-to-day operations.
  • Employees

Fiduciary duty is owed to the company, not to shareholders.

Fiduciary Duties of Officers and Directors

  • Duty of Care: Act in the best interests of the company.
  • Good Faith: Act honestly and with integrity.
  • Judgment Rule: Shields officers from personal liability for bad decisions, as long as they acted in good faith. Courts won’t second-guess business decisions.
  • Loyalty: Avoid conflicts of interest.

Piercing the Corporate Veil: If shareholders misuse the corporation for an improper purpose, they can be held personally liable.

Insider Trading

Classical Theory

An insider uses non-public material information (NPMI) to trade. Applies to insiders with a fiduciary relationship to the company.

Tipper/Tippee Liability

Both the tipper and the tippee can be liable. The tipper discloses NPMI for personal benefit (money or a strengthened relationship). The tippee knew or should have known about the breach of fiduciary duty and trades on the material information.

Misappropriation Theory

Someone who owes a duty of trust but is not necessarily an agent (e.g., consultant, lawyer) misuses NPMI. This applies if there is a confidentiality agreement or a history of confidentiality, and also extends to NPMI given to family members.

Case Briefs

  • Palsgraf v. Long Island Railroad Co.: An employee pushed a passenger, causing unforeseeable harm. The case established that the duty of care only extends to foreseeable risks.
  • MacPherson v. Buick Motor Co.: Buick assembled a car with a defective wheel. The case established that manufacturers and retailers owe a duty to buyers (first or secondhand) to avoid imminent, foreseeable risks.
  • Danielle v. Ford Motor Co.: A woman attempted suicide by locking herself in a car trunk, got trapped, and changed her mind. The court ruled that manufacturers are not liable for intentional, unforeseeable misuse of products.
  • Lucy v. Zehmer: A “joke” contract to sell land was made, but the other party was serious in accepting. The case established that the outward appearance of intention determines whether actions are offers or acceptances.
  • Hoffman v. Red Owl Stores, Inc.: Plaintiffs were in discussions to open a store and paid expenses, but negotiations fell through. The court granted relief based on promissory estoppel due to the plaintiffs’ detrimental reliance on the promise.
  • Stambovsky v. Ackley: A home seller had a reputation for their house being haunted but didn’t disclose this to the buyer. The court ruled that factors like a reputation for haunting must be disclosed because a reasonably prudent buyer wouldn’t be expected to find it.
  • Vokes v. Arthur Murray, Inc.: A widow paid a massive amount for dance lessons from an instructor who was bad. The case established that statements from a party with superior knowledge in a contract may be regarded as fact, subject to misrepresentation. If an opinion is disclosed, the party is obligated to report truthfully and fully.
  • Jones v. Star Credit Corp.: Plaintiffs on welfare were sold a freezer at a very high price. The court ruled that price is a factor in unconscionability and extreme price gouging is unconscionable.
  • Jacobs & Youngs, Inc. v. Kent: A contractor built a house with the wrong type of pipe, a minor deviation from the contract. The court ruled that minor contract mistakes with minimal impact count as substantial performance, not a breach.
  • Meinhard v. Salmon: This case set a high bar for the fiduciary duty of loyalty in a joint venture. Salmon, a co-lessee, went behind Meinhard’s back and became the sole signer of a new lease for an expanded deal. The court ruled that Meinhard was entitled to a 50% share because Salmon had a duty of loyalty and disclosure.
  • Edgewater Motels, Inc. v. Gatzke: A traveling employee accidentally caused a fire. The court ruled that an employer can be held liable for employee negligence stemming from minor deviations in duties if the employee was otherwise performing their duties.
  • Riviello v. Waldron: A waiter injured a customer while doing knife tricks unrelated to his duties. The court found the employer liable for foreseeable risks created by the employee, in this case, entertainment.
  • Wilson v. Southwest Airlines Co.: A male job applicant was rejected for a flight attendant position. The court ruled that only qualifications essential for the core functions of the job qualify for the BFOQ defense. Business advantage and marketing do not count, as any gender can perform the core functions of a flight attendant.
  • EEOC v. Abercrombie & Fitch Stores, Inc.: A Muslim applicant was rejected because her headscarf violated the dress code. The court ruled that employers have a duty to affirmatively accommodate religion under disparate treatment laws.
  • Geringer v. Wildhorn Ranch, Inc.: A family sued for wrongful death on a lake owned by a corporation. The court found the owner personally liable because he didn’t respect the rules of the corporation and moved money between personal and business accounts.
  • Citizens United v. Federal Election Commission: This landmark case established that corporations have a right to free speech under the First Amendment.