A contract is an agreement between two or more parties to perform a service, provide a product

or commit to an act and is enforceable by law. There are several types of contracts, and each
have specific terms and conditions.

What Is a Contract?
When a salesperson asks you to sign on the dotted line, it is important to understand the contents
of the agreement you are signing. After all, the agreement you are entering into is a contract!
A contract is a written or expressed agreement between two parties to provide a product or
service. There are essentially six elements of a contract that make it a legal and binding
document.
In order for a contract to be enforceable, it must contain:
1. An offer that specifically details exactly what will be provided
2. Acceptance, which is the agreement by the other party to the offer presented
3. Consideration, money or something of interest being exchanged between the parties
4. Capacity of the parties in terms of age and mental ability
5. The intent of both parties to carry out their promise
6. Legally enforceable terms and conditions, also called object of the contract
In other words, a contract is enforceable when both parties agree to something, back the promise
up with money or something of value, both are in sound mind and intend to carry out their
promise and what they promise to do is within the law.
Most commonly, a contract is written and signed by the parties. However, there are several other
types of contracts that are considered enforceable. There are even some that are not considered
enforceable and serve only as a way for a court to determine the obligation on the part of either
party.

Express Contract
You'll likely be a party to contracts in your everyday routine. Everything from eating at a
restaurant to buying a home includes some form of a contract. The following are some of the
most common contracts that are used.
An express contract is the most common contract type. In this type of contract, all elements are
specifically stated. This can be written or done orally. Either way, offer, acceptance and

consideration must bind the parties together legally. And both parties must clearly understand the
terms and conditions each is agreeing to.
When Josie Aurora decided to rent an apartment from Landlord Whistler, she signed a lease. In
the lease, it stated the amount of the rent, the length of the lease and what amenities are included
in the rent. Josie gave Whistler a down payment equal to one month's rent to secure the
apartment, signed the agreement and Whistler handed over the keys and rights to occupy the
place for a period of time written into the lease agreement. Josie and Whistler entered into an
expressed contract for the rental of an apartment.
An oral contract works the same way. In an oral contract, like negotiating the price of a new car,
the parties agree on a set price, a monthly payment schedule if applicable and any warranties or
guaranties included in the offer. Once acceptance is made and consideration is exchanged, the
contract for the vehicle is binding and enforceable. As long as both parties uphold their promise,
the car cannot be returned at a later date, nor can the salesman request the car back from the new
owner.

Implied In-Fact Contract

Not every contract is as transparent as an expressed contract. An implied in-fact contract binds
parties together through a mutual agreement and intent, but there are no expressed terms of the
agreement. The agreement holds mutual intention based on facts and circumstances and a
reasonable assumption from the circumstances and relations between the parties. For an implied
in-fact contract to be enforceable, there are a few elements that must be present:
1. An unambiguous offer and acceptance
2. Mutuality of both parties to be bound to the contract
3. Consideration
The elements can be determined by the behaviors of the parties. For example, when a guest
orders a steak at a restaurant, it is assumed that the steak will be cooked and served to the guest's
liking and the guest has every intention of paying for the meal.

Implied In-Law Contract

An implied in-law contract, also known as a quasi-contract, works differently. In this type of
contract, the elements are not specifically written or expressed. In fact, this type of contract is
used as a remedy in a situation when one party to the quasi-agreement received unjust
enrichment resulting from not paying for a product or service rendered. This sounds confusing
but it really boils down to this - if a product or service is rendered to a party without paying, it
becomes inequitable for the rendering party.

An example will help to explain how a quasi-contract works. Sandi Brown took her car into the
shop to have her tires rotated. As the mechanic performed the agreed upon service, he noticed
that there were a few questionable lug nuts. If he leaves the existing lug nuts, it could cause a tire
to fall off while Sandi is driving. The mechanic changes the cracked lug nuts for a few new ones
and completes the job. When Sandi returns, she learns that the bill is higher than she originally
agreed upon because of the extra charge for the parts. While Sandi never agreed to the additional
repair, it was necessary and needed to be done at the time of the repair to prevent a driving
disaster.
If Sandi does not pay for the lug nuts, it is unjust enrichment under the law. She is unfairly
receiving a benefit from the repair shop that she did not pay for. This is not equitable for the
repair shop because they paid for the lug nuts in their inventory.
There are certain elements that must be present:

One party was enriched or received a product or service for which they did not pay

One party was impoverished because they provided a product or service and received no
compensation

A connection between the two parties exists

There was no justification for the enrichment

No remedy was provided

Sandi would owe restitution and have to pay for the lug nuts or return them to the repair shop.

Illusory Promise
Finally, an illusory promise is a statement that is not legally enforceable because it is too vague
or even impossible to fulfill. For example, Big Joe was an avid lottery player. Each week, prior
to buying his ticket, he told his co-workers that if he wins the lottery, they would have no
financial woes ever again. Joe finally hit the lottery. He had three of the six lucky numbers
netting him a whopping $7.00 in cash. Joe's promise to provide financial freedom to his coworkers is simply impossible considering his winnings. In the end, Joe would have no liability to
give his co-workers any of his winnings.

Lesson Summary
In summary, contracts are commonly used in business. A contract is a written or expressed
agreement between two parties to provide a product or service. There are essentially six elements
of a contract that make it a legal and binding document.
1. An offer that specifically details exactly what will be provided

2. Acceptance, which is the agreement by the other party to the offer presented
3. Consideration, money or something of interest being exchanged between the parties
4. Capacity of the parties in terms of age and mental ability
5. The intent of both parties to carry out their promise
6. Legally enforceable terms and conditions, also known as object of the contract
There are several types of contracts that are legally binding and some that are not.
An express contract can be written or oral, and all elements are specifically stated.
An implied in-fact contract binds parties together through a mutual agreement and intent, but
there are no expressed terms of the agreement, like ordering and paying for food at a restaurant.
In an implied in-law contract, or quasi-contract, the elements are not specifically written or
expressed but are still enforceable because a product or service was actually provided, like
receiving an additional repair on an automobile that is vital to the outcome of the original
service.
An illusory promise is a statement that is not legally enforceable because it is too vague or even
impossible to fulfill, like offering a share of lottery winnings.

Lesson Outcome
After viewing the lesson, students should be able to:

Explain the purpose of contracts

Recall the six elements necessary for a legal contract

Define the different types of contracts and provide examples of each

There are at least two parties involved in a contract: the promisor, promisee and, sometimes, a
third party beneficiary may be named. Each party has a different obligation to the contract terms.
The beneficiary in a contract generally does not have the same level of responsibility for the
contract's performance.

Contract Party Roles and Relationship

Whether it is buying or selling a home or checking into a hotel, most people will enter into a
legally binding agreement with another party at some point in their lives. This legally binding
agreement is known as a contract, and for a contract to be an enforceable instrument, it must

contain an agreement between two parties, intent to fulfill its promises and consideration. Also,
both parties must have capacity or mental ability, which means being free of mental illness.
A party to a contract is one who holds the obligations and receives the benefits of a legally
binding agreement. When two parties enter into an agreement, there are two distinct roles each
play: the promisor and the promisee. The promisor is the party that makes the promise, while
the promisee is on the receiving end of the promise.
To put this into action, let's say Cathy Smith is planning a family reunion at a local park. Her first
call is to High Hat Catering. Chef Fernando and Cathy carefully choose the culinary creations for
the party. Once they agree on the tasty tidbits and the price, a contract will be formed. The
contract will include the important details about the event, like the date, location and menu
choice. But the information that creates a legally binding agreement includes:

Names of the parties

Price

A clause that expressly states agreement to the terms of the contract

Stated a different way, the agreement between Cathy and High Hat Catering must contain two or
more parties, an offer, agreement and consideration. These elements obligate both parties to the
terms and conditions. The elements also provide the agreed upon benefits, like food and
payment.
The promisor and the promise are not the only parties who benefit from a contract. Sometimes
there are intended and incidental parties. These third party-beneficiaries gain reward from the
terms of a contract.

Third-Party Beneficiaries
Sometimes a contract benefits others who are not party to the agreement. These third-party
beneficiaries receive benefits of a contract, while not owing any obligation. There are two types
of third-party beneficiaries: intentional beneficiaries and incidental beneficiaries.
A person whose benefit is intended is called a intended beneficiary and receives benefits from a
contract and is generally stated or named within the contract.
Let's re-visit Cathy Smith and her family reunion. Cathy wants to surprise her favorite aunt and
matriarch of the family, Phoebe Jones, with a helicopter ride to the event. Cathy contacts Flying
High Helicopter Tours to arrange for transportation for Phoebe from her local airport to the park
where the event is being held. In the contract, Cathy and Flying High decide on a price, a time
and the name of the passenger, Phoebe. Phoebe is the intended beneficiary of a contractual
agreement between Cathy and Flying High. Even though Phoebe is not a party to the contract,

she receives the benefit of the helicopter ride. Phoebe also possesses the right to sue for breach
of contract or non-performance should Flying High forget to pick her up.
Similarly to an intended beneficiary, an incidental beneficiary benefits from a contract
indirectly with the difference being intent. The incidental beneficiary benefits but cannot sue if
the contract performance has not been met.
When Cathy booked the use of the park, she knew that there was limited parking available for
her guests. When guests arrive to the reunion, they will have to either use the valet parking
service or hoof it several blocks to the park. The valet service is not a party to the contract
between Cathy and the parks department. However, the valet service becomes an incidental
beneficiary as a result of Cathy's contract with the city.
Unlike intended beneficiaries, the incidental beneficiary holds no right to the contract. So, if
Cathy's guests decide to use street parking to avoid costly valet fees, the valet has no right to
make demands or sue for breach of contract.
Third-party beneficiaries enjoy the benefits of a contract but are not obligated to the contract in
any way.

Lesson Summary
A contract is a legally binding agreement between two or more parties that involves an offer,
acceptance and consideration. All parties to a contract must also have mental capacity or the
ability to understand the nature and consequences of entering into the contract.
On face value, there are two main parties, the promisor, who makes a promise, and the
promisee, who receives the benefits of a contract. Both parties also hold an obligation to the
contract.
Sometimes, a third-party beneficiary benefits from a contract. A third-party beneficiary is a
person who is not party to a contract but is rewarded in some way as a result of the contract.
There are two types of third-party beneficiaries: an intentional beneficiary and an incidental
beneficiary. An intentional beneficiary receives rewards because they are actually stated in the
contract as a recipient of a benefit, like arranging for transportation for a third party. This type of
beneficiary can also sue for damages should there be a breach of contract. The second type is an
incidental beneficiary who receives benefits indirectly as a result of the terms of a contract but
has no authority to sue for non-performance. A valet service cannot sue people for self-parking to
avoid valet service fees. Either beneficiary enjoys the benefits of a contract but are not obligated
to the contract in any way.

Learning Outcome
Once you have viewed this lesson, you should be able to:

Define what a contract is

Recall what a promisor and promisee is

Describe a third-party beneficiary and whether they are an intentional or incidental

beneficiary

Mutual assent is considered the meeting of the minds between two or more parties that forms the
foundation of a contract. At the time of mutual assent, it can be said that a legally binding
contract exists.

Offer and Acceptance

When two parties enter into an agreement, a couple of things happen. One party, the offeror,
offers something of value in exchange for a promise. The offeree accepts or declines the offer. If
the offer is accepted by the offeree, and all things are legal, there is a mutual agreement. This
agreement is called mutual assent, meaning two parties agreed upon something and are prepared
to enter into a contract.
In other words, both parties agree to the same thing. There is also a mutual understanding of
what each party promises and that the promise can be carried out as agreed. The court will look
at two things, offer and acceptance, when making a decision on whether both parties actually
reached mutual assent. And this must be done objectively. The objective theory of contract
states that an agreement between two parties exists if a reasonable person could judge the acts
and behaviors of the parties enough to objectively construe agreement.
To exemplify this, Rodney was in the market for a new kayak. One of the first things he did was
look at the online classified ads. He noticed that Chappy had a barely used blue kayak for sale in
Rodney's $400 price range. After checking the kayak out for seaworthiness, Rodney and Chappy
negotiated the price to $389.50. All about a good deal, Chappy accepts Rodney's offer and the
two men make arrangements for delivery.
Simply stated, all that is needed for mutual assent is an offer, acceptance of the offer and all other
things being legal, a contract can be formed. Of course, all other things being legal, in this case,
may mean that the kayak actually belonged to Chappy and he is within his rights to sell it. Once
these things are determined, the two men are free to enter into a contract. This sounds pretty
simple, but let's see what happens when mutual assent goes too far!

Lucy V. Zehmer (1954)

Back in December of 1952, the Lucys and Zehmers went to dinner. Over dinner, the conversation
turned to the sale of a small farm Zehmer owned, called the Ferguson Farm, for the sum of
$50,000. Zehmer didn't really want to sell his farm. What he wanted was for Lucy to admit that
he did not have the $50,000 needed to make the purchase. In other words, it was a one-sided joke
on the part of Zehmer.

Unaware of Zehmer's intent, Lucy continued the farm sale conversation with serious intent to
purchase. After several cocktails, Zehmer and his wife drafted an agreement on the restaurant
receipt, which loosely read, 'we agree to sell the Ferguson Farm to Lucy for $50,000,' and signed
this document in witness of the other parties.
After reading the memorandum drafted by Zehmer, Lucy insisted on giving a deposit of five
dollars to secure the land. Zehmer actually refused the deposit stating that the signed agreement
made at the table was good enough for him. After all, during a 40-minute conversation, Zehmer
offered the land for sale at the price of $50,000. He drafted an agreement between the parties and
both parties signed said agreement.
Lucy, believing mutual assent existed, approached his brother for half the cash needed to make
the purchase. After securing that, Lucy arrived the next day to the farm to discuss investigating
the title. Zehmer insisted he had no intention of selling the farm to Lucy, but Lucy refused to
back down. Instead, he hired an attorney. Lucy's contention was that he had a right to specific
performance, or a remedy to force a party to perform specifically what is promised in the
contract's terms.
Under Supreme Court ruling, Lucy won the case on the grounds that mutual assent was
established at the time of the agreement in both actions and in writing. You see, regardless of
whether Zehmer was joking about the sale of the farm, his outward behavior was enough for a
reasonable person to believe he intended to sell it. In other words, a court does not consider the
party's intent.
The court looked at outward behavior and decided that Zehmer's words and actions were enough
to prove mutual assent existed. Zehmer, under specific performance remedy, was forced to sell
the farm to Lucy.

Summary
In summary, mutual assent refers to two parties who agree upon something and are prepared to
enter into a contract. To have mutual assent, an offeror makes an offer and an offeree accepts it.
This is also called offer and acceptance, and is an important element when determining whether
mutual assent is present.
The objective theory of contract states that an agreement between two parties exists if a
reasonable person could judge the acts and behaviors of the parties enough to objectively
construe agreement. This was proven in Lucy v. Zehmer. The outward behavior determined
mutual assent between the parties for the sale of the farm. Intent, like Zehmer's inside joke, does
not.

Learning Outcome
After seeing this video, students should be able to:

Understand what a legal mutual assent is

Summarize the case of Lucy V. Zehmer

Paraphrase the objective theory of contract

In contract law, an offer is a promise in exchange for performance by another party. An offer can
be revoked or terminated under certain conditions. There are also times when an offer can be
negotiated to create a counter-offer.

How Does an Offer Work?

Ronald wanted to purchase a new condo in the city, so he combed the classified ads looking for
the perfect place. He came across an ad for a condo in the perfect neighborhood and at the right
price. The ad was, in fact, an offer by the seller to sell his home to a potential buyer.
Offer is one of the elements that make for a valid contract, and is the main focus of our lesson.
To back it up a bit, there are six elements to a contract. These elements include:

Offer

Acceptance

Consideration

Mutuality

Capacity

Legally acceptable terms

When two parties choose to enter into a contract, the first thing that occurs is an offer. The offer
can be money or another thing of value in exchange for performance by the other party.
The offer can come in the form of a:

Letter

Newspaper

Website

Fax

Email

Behavior

In technical terms, the offer is not really an offer until it is received by the offeree. By listing the
ad for the condo in a newspaper or on a realtor's website where Ronald is able to view it, the
offer is valid.
There are other things to consider when determining the validity of an offer. Some offers have a
specific time limit to be accepted. In the case of a time limit, the offeree must respond with
acceptance of the offer prior to its expiration or the offer is no longer valid.
An offer can also be revoked or taken back by the offeror at any time prior to acceptance. If
Ronald did not act fast enough, it would be within the legal right of the seller to revoke his offer
to sell his condo.
It is also possible to terminate an offer, or take the offer off of the table completely. There are a
few ways this can be done.

Death of either party

Insanity of either party

Death or destruction of the person or the thing required to perform the contract terms

The offer can also be terminated if a counter-offer is made by changing the terms of the original
offer. If Ronald decides to offer a lower price for the condo, the original offer would be
terminated, and the new offer would reflect the new offer for the lower selling price.
As the two parties engage in price haggling, what they are really doing is negotiating a mutually
beneficial agreement for the purchase of the condo.
Once both parties agree on a fair price, the offer will stand.
In our example of the condo sale, the offer was pretty straightforward. The seller placed an ad
with a realtor that offered the condo for sale at a certain price. Ronald could either accept the
condo at the stated price or counter-offer with a lower price. The owner can either accept or
decline the counter-offer. This is all part of the negotiation process.
However, what happens when an offer comes in the form of an advertisement with a mass target
audience, like the local newspaper, and involves consideration? Things can take a different turn.

Carlill v. Carbonic Smoke Ball Company (1893)

Back in 1893, Carbonic Smoke Ball Company placed an ad in a local newspaper claiming that
their smoke balls prevented influenza. In today's advertising, this would be considered 'puffing'
and would mean very little in the context of a contractual offer.
However, in those days, things were different. In fact, the folks at Carbonic Smoke Ball
Company were so confident in their product, they included a strict promise in their
advertisement.
They claimed that their product was so effective on the influenza virus that if a smoke ball user
was to contract the infectious flu while using the smoke balls, or even after their use, the
contagious customer would be entitled to compensation of 100 pounds.
To drive home Carbonic's promise, they went as far as to deposit the sum of 1,000 pounds in a
local bank to demonstrate good faith.
Well, Louisa Elizabeth Carlill made the purchase and put the smoke balls to the test.
Unfortunately, she contracted influenza despite Carbonic's claims that the product was foolproof.
After attempting to contact the company numerous times, Carlill received a letter stating that the
smoke balls do work. The company even requested that she visit their office daily to use the
smoke balls. This would be monitored and tested by a secretary at Carbonic.
Mrs. Carlill refused and brought the case to court. Carbonic claimed that the ad could not be
taken seriously, and no customer should have inferred that there was an actual contract between
them and a customer for a reward sum of 100 pounds for contracting influenza while using the
smoke balls. Carlill prevailed.
Not satisfied with the lower court's opinion, Carbonic took the case to appellate court to have the
decision reversed.
Carbonic claimed:

The advertisement was meant to attract customers through 'puffing' or overestimating the
product's effectiveness

It was impossible to reach as many readers through mail as it would be using the
newspaper

Wording in the ad was vague and not specific to the offer

The consideration was not specific enough to convince a customer that an offer existed

The appellate court weighed in differently. Here's what they believed:

The deposited money showed Carbonic's desire to enter into a contract

The offer and acceptance took place when a reader viewed the ad and purchased the
product

The offer contained a time-specific clause of two weeks

Customers made the purchase based on the claims made in the ad

While Carbonic argued that the advertisement was not meant to enter into a contractual
agreement, the court essentially ruled that the reward was binding upon performance of the
terms: using the smoke balls and contracting the virus. The offer was accepted by performance
alone.
Carlill prevailed in appellate court, forcing Carbonic to pay up. There is an important lesson to
be learned. Carbonic made a clear offer of 100 pounds for any person who purchased and used
the smoke balls and contracted the flu.
Carlill accepted the offer by procuring and using the product. Her performance was based on her
use, and the agreement between the two stood solely on performance. The most significant sign
that a contract existed was the 1,000 pound deposit made by Carbonic to demonstrate good faith
in making good on their reward for performance.

Lesson Summary
In sum, there are essentially six elements to a contract. For a contract to be considered valid,
there must be an offer, acceptance by another party, an exchange of something of value or
consideration, mutually agreed upon terms, both parties must be free of mental illness and the
terms must not break any laws.
Our focus was on the offer, and this can be money or another thing of value in exchange for
performance by the other party.
As we learned from Carlill v. Carbonic, an offer can come in the form of a:

Letter

Newspaper

Website

Fax

Email

Behavior

An offer can be revoked, or taken back, by the offeror at any time prior to acceptance.
It is also possible to terminate an offer, or take the offer off of the table completely. There are a
few ways this can be done. Death, insanity or destruction of the person or the thing required for
performance of the contract terms constitutes reason enough to terminate a contract.
The offer can also be terminated if a counter-offer is made by changing the terms of the original
offer.
The most important thing about an offer is that once communicated to an offeree, it is considered
valid unless certain conditions exist.

Learning Outcome
After viewing the video, you should be able to:

Recognize what an offer is in contracts

Recall where the offer may come from

Understand what can revoke the offer

There are several ways in which a contract can be terminated, including performance,
impossibility of performance and breach of contract. Other ways to end a contractual agreement
are a bit more complicated and involve a prior commitment on the part of one or both of the
parties or even revocation.

Simplest Ways to Terminate a Contract

When two parties enter into a contract, they are entering into a legally binding agreement that
may be very difficult to get out of. They cannot simply change their minds and walk away. One
of the easiest and most desired ways to terminate a contract is performance. Simply put, when
both parties fulfill their promises set out in the contract, the parties have done what they said they
would do and the contract ends.
For example, John, a homeowner, contracts Pete to paint his house for the sum of $100. Pete
arrives on time, paints the house to John's satisfaction and payment is rendered. Done!
Sometimes, it is just difficult to carry out the agreement, causing one or both of the parties to bail
on their commitment. The impossibility of performance means one or more parties to the
contract just cannot fulfill the promises made to the other party.
With all good intentions, Pete loads his truck with ladders, brushes and a well-balanced lunch.
On the way to grab his paint cans, Pete trips over a pebble and breaks his leg. Pete cannot fulfill
the promises made in the contract. This impossibility of performance gives John the right to

terminate the contract and find an able-bodied painter to take on the task. To evaluate
impossibility of performance, the court looks at the conditions of performance based on the
circumstances to determine whether performance cannot be met.
There are three steps:
1. Did a contingency or something unexpected occur?
2. Was the unexpected event intentional?
3. Is it impossible to perform because of the unexpected event?
In other words, as long as Pete can prove he broke his leg and that neither party did anything
intentional to cause the injury, Pete would be off the hook because he cannot paint a house in his
condition.

Slightly More Complicated Ways to Terminate a Contract

A prior agreement can also be a cause to terminate a contract. This allows one party to
terminate a contract if prior plans cause the party to become unable to fulfill the promises and
must be written into the contract. Perhaps John has a job that takes him away from his home for
extended periods of time with little to no notice. John should include a clause in the contract that
allows for termination, should he be called away on a special mission. If John is called away, he
may terminate the contract with Pete and suffer no consequences.
To avoid a situation like this, many contracts, especially employment contracts, have an entire
agreement clause that states either party cannot argue that there were additional or alternate
terms to the contract based on a previous agreement. This means that regardless of anything that
may have been part of a past agreement, the new agreement stands.
In a prior agreement clause, John could state that if he were to be called away for business when
Pete was slated to start painting the house, the contract would be void. In an entire agreement
clause, Pete could state that regardless of any prior agreements made regarding conversations
about John's possible travel schedule, the terms of the contract to paint the house on a particular
day and time stand.
Now, if neither the prior agreement clause nor the entire agreement clause were written into the
contract, and John took flight to a far-away place without telling Pete, this could cause a world of
trouble for John. John would be in a breach of contract for not fulfilling the promises made to
the other party in the agreement, and this could be a cause for Pete to take legal action against
him. There are two types of contract breaches: a material breach and a non-material breach. In a
material breach, one of the parties violated the terms of the contract in a significant way that
affects the outcome of the promises.
If John requested that Pete purchase a specific color of house paint, like cotton candy pink, but
Pete, instead, found a better deal on candy apple red and proceeded to mark the shingles with this

color, John would have a cause to terminate the contract. He would also have another claim
against Pete, and that may be to have the house restored to its original color.
A non-material breach occurs when one of the parties violates the terms of a contract in a minor
way. The contract may state that Pete will paint the shingles first and then the trim. Pete may
decide that he wants to paint the trim first and then the shingles. As long as the final outcome is a
neatly painted house, and there was no damage or injury to the other party as a result, the
contract probably cannot be voided.
Suppose Pete is not really a professional painter, but represented himself as one. John may have
found this out through a background check or a popular review website. John may rescind, or
revoke, the contract because one party misrepresented themselves.
There are other reasons a contract may go into rescission, like:

Both parties mutually consent or agree that the contract should be terminated.

There was a unilateral mistake in the contract terms, and one party may unfairly take
advantage of the other.

If one party has been coerced by fraud or deception to enter into a contract.

Terminating a contract can be tricky. The terminating party always runs the risk of having legal
action taken against him. However, there are times when it is necessary and within the law to
terminate an agreement. When entering into a contract, it is best practice to know the other party
or parties, understand the promises you and the other parties are making and be diligent in
investigating any risks that may present themselves during the contract terms.

Lesson Summary
To sum things up, there are several ways to terminate a contract. Some of the simplest ways to
terminate are performance or impossibility of performance. Performance occurs when both
parties fulfill the promises set out in the contract, and the contract ends. When an unexpected
event occurs, rendering one party unable to perform, the doctrine of impossibility of
performance kicks in, and means one or more parties to the contract just cannot fulfill the
promises made to the other party. The next few cases for contract termination get a bit more
complicated, and involve prior commitment, breach of contract and rescission.
A prior agreement allows one party to terminate a contract if an event occurs that causes the
party to become unable to fulfill the promises, and this clause must be written into the contract.
But to avoid this, some contracts contain an entire agreement clause, so that either party cannot
argue that there were additional or alternate terms to the contract based on a previous agreement.
When one party breaches a contract, it means he does not fulfill the promises made to the other
party in the agreement, and this could be a cause for the other party to take legal action.

There are two types of contract breaches that can occur. A material breach means one of the
parties violated the terms of the contract in a significant way that affects the outcome of the
promises. A non-material breach is less serious and occurs when one of the parties violates the
terms of the contract in a minor way. Terminating contracts can be risky. It's best that all parties
go into the contract agreement with caution, understanding and good faith.

Learning Outcome
When you have finished this lesson, you should:

Recognize how contract terminations may be legal or breaches

See that impossibility of performance possibly has no fault attached

Recall prior agreement could end a contract legally unless an entire agreement clause
exists

Remember that a breach of contract could be material (significant) or non-material

(minor)

There are essentially six elements in a contract. Once an offer is made, the next element is
acceptance. Offer and acceptance combined with consideration make for the glue that creates a
binding contract.

Binding Elements of a Contract

So you are walking down the street and notice a basket full of seven kittens in a pet shop
window, along with a sign that states, 'Kitten Sale - $10 Today Only.' Naturally, you want a few
extra cats, and this is a great deal, so you decide that you're going to take them all home.
You walk in and meet with the shop owner who accepts your $70, and wrangles the felines for
their final journey home. This seems like a simple transaction, but it actually represents the three
elements of a contract that create a binding agreement - offer, acceptance and consideration.
An offer is an open call to anyone wishing to accept the promise of the offeror and generally, is
used for products and services. Acceptance occurs when an offeree agrees to be mutually bound
to the terms of the contract by giving consideration, or something of value like money, to seal
the deal. Keep in mind that acceptance follows the mirror image rule, in that acceptance is valid
if the product or service rendered is exactly what was contained in the offer. We will come back
to that in a moment.
There are a few more elements that are equally important, but deal with the legalese of contract
law, like mutually agreeable terms, meaning the terms of the contract are something both
parties are willing and able to fulfill. There is also capacity, which requires that each party to a
contract be of sound mind (free of mental illness or intoxication) and be of legal age. And there

is also legally acceptable terms. This means the contract cannot have any promises that are
unlawful or illegal to perform.

Ways Acceptance Can Be Conveyed

Generally speaking, acceptance occurs when the offeree expressly accepts the offer made by the
offeror, like paying the asking price for the kittens. This binds both parties to the agreement. You
cannot return the kittens, and he cannot demand them back without getting into some type of
legal tangle. However, there are other means of acceptance in contract law. Let's explore a few
ways in which offer and acceptance occurs sans an expressed agreement: a purchase order and
the mailbox rule.
The Uniform Commercial Code, or UCC, is a body of rules that govern the sale of goods and
other commercial transactions in the United States and looks at the use of a purchase order as
an invitation to accept an offer. To elaborate, when a company issues a purchase order, what they
are really doing is making a written, expressed promise without consideration to purchase
products or services from another company that require prompt shipment. Since consideration is
necessary to make a contract binding, the UCC made a rule that, although consideration is not
exchanged in a purchase order for immediate shipment of goods, it remains acceptance.
An example may help. Jack's Fruit Company received a purchase order from Yummy Plum
Smoothie Shack for the delivery of 100 cases of red plums. Jack has accepted the offer to
purchase based on the purchase order in action, as demonstrated when Jack's farmer picked and
packed the fruit and immediately sent the shipment out to Yummy's. Upon receipt of the plums,
Yummy's accepted the fruit, and it is expected that it will be paid for either on the spot or
according to the terms of the original purchase order.
Here is where the mirror image rule applies. When Yummy's received the plums, they must be
exactly what was ordered. If the shipment contained peaches or avocados, the contract is void,
and Yummy's is not responsible to accept or exchange consideration for the fruit, because it is not
what was expected. On a side note, in some states, merely sending a product to another person
does not constitute offer and acceptance.
Maybe this will make things more clear. Suppose you receive a new cookbook in the mail. Not
sure where the cookbook came from, you further investigate that a culinary magazine you
subscribe to is the sender. You never ordered this book nor do you wish to pay for it. If you live
in California or other states with similar laws, you can keep the book without payment. It is
considered an unconditional gift under the UCC, giving you the right to do with this book what
you please. Re-gifting is always a good idea! Acceptance may also be conveyed to the offeror
through mail or even email. With technology far surpassing laws to protect those who enter into
a contract, the mailbox rule may extend to include such transmissions as email.
Let me explain. The mailbox rule applies when a valid offer is sent by mail, email or fax
machine to the offeree within an established timeline. To simplify this, an offeror can send an
offer to an offeree stating specific terms and conditions. By placing this offer in the mailbox with
appropriate postage, it will be considered a valid offer. The offeree, in turn, may accept the offer

by communicating the acceptance in writing. It is valid once placed in the mailbox for return to
the offeror.
Although the mailbox rule does not fully recognize email as a form of acceptance, it is becoming
more acceptable. There is still much deliberation about whether an email is an instant form of
communication, like a courier or even a telegraph or fax. However, in many cases, it is
considered a way of acceptance.
Using Jack's Fruit Company and Yummy's as an example, let's say that Jack's emailed Yummy's
offering plums at a price of five dollars a case. Once the email is received, according to the
receipt date and time, it is an offer. Yummy's received the email and immediately emailed Jack's
back requesting a large shipment to be sent immediately. Jack's cannot rescind the offer;
acceptance has been made via email. Jack's could say they never received the email; however,
the court will look at a couple of things: the date that Yummy's sent the email accepting the fruit
and the time and date that Jack's received the email, according to the Internet.
Again, the courts are working hard to catch up on technology. This was just an example of how
some courts may view the exchange between Jack's and Yummy's. Since each court works
differently, it is best to understand your local court ruling on the use of the mailbox rule in
acceptance.

Lesson Summary
To end this lesson, the three binding elements of a contract include:

Offer extended by an offeror to an offeree

Acceptance by the offeree

Consideration, like money in exchange for products or services

There are three more elements of a contract that are specific to making the contract legal, like
mutuality, capacity and legally acceptable terms.
Acceptance, in detail, happens when an offeree agrees to be mutually bound to the terms of a
contract. It can be a written acceptance, like a contract for real estate or through a purchase order.
It can even be through the mail.
The mailbox rule applies when a valid offer is sent by mail, email or fax machine to the offeree
within an established timeline. As noted, not all courts recognize email as a form of
communication that conveys offer and acceptance. It is important to check with your local courts
for the rules on this.
When an offer is accepted, it follows the mirror image rule, meaning performance of the
contract must be exactly as the offer stated. There can be no change to the terms, like sending

Yummy's avocados instead of plums. On a final note, accepting a book you receive in the mail
that you did not order does not always constitute acceptance. In some states, it is considered an
unconditional gift.

Learning Outcome
Once you have finished this lesson, you should be able to:

Recognize the elements of contract acceptance: an offer, acceptance, consideration

(money or services),

Remember that acceptance can be written or through a purchase order

Recall the mailbox rule (email may be acceptable)

Define the mirror image rule (no changes in the contract)

The mailbox rule applies to offer and acceptance in contract law. This common law practice, by
default, states that when an offer or acceptance reaches the mailbox, it means a legitimate offer
has been extended or the offer has been accepted.

What Exactly Does Offer and Acceptance Mean?

Sometimes a mailbox is more than just a mailbox. In contract law, the mailbox can represent the
meeting of the minds that binds two parties together in a contractual agreement without ever
meeting in person.
In contract law, this is known as the mailbox rule, or, offer or acceptance is valid once it is
placed in the mailbox. Of course, there are several other elements that must be present for a
contract to be valid:

Offer by the offeror

Acceptance by the offeree

Mutuality, or meeting of the minds

Consideration, or exchange of one thing of value for another

Capacity, or competency of offeror and offeree

Legally accepted contract terms

We will focus on offer and acceptance, or the expressed willingness to enter into an agreement
to perform by the offeror and the acceptance of the performance by the offeree. We will also look
at how this works when the offer and acceptance is done through the mail, fax machine or email.

Mailbox Rule in Action

The mailbox rule applies when a valid offer is sent by mail, email or fax machine to the offeree
within an established timeframe.
To simplify this, an offeror can send an offer to an offeree stating specific terms and conditions.
By placing this offer in the mailbox with appropriate postage, it will be considered a valid offer.
The offeree, in turn, may accept the offer by communicating the acceptance in writing. It is valid
once placed in the mailbox for return to the offeror.
That sounds simple enough. Well, not so fast!
In Adams v. Lindsell (1818), a contract for the sale of wool fleece was at issue. Here is the
timeline:

9/2: Lindsell wrote to Adams offering to sell him wool fleeces. In the letter, Lindsell
required expressed acceptance (by 9/7) in the form of a mailed response.

9/5: Adams received the offer letter, accepted in writing and quickly mailed the offer back
to Lindsell.

9/8: Lindsell did not receive the written acceptance in the mail and decided to sell the
wool to another party.

9/9: Lindsell received Adam's acceptance, but the wool was already sold.

Adam demanded his wool fleeces. After all, he abided by the terms of the offer by signing the
letter and rushing it off to the mailbox that same day! Lindsell saw it differently and argued that
there was never a valid contract because acceptance was not received by the specific date of
September 7th.
Technically, the mailbox rule applied because Adams placed the acceptance letter in the mailbox
by the specified date of September 7th as required in the terms. Lindsell had to make good on his
offer.
Sometimes, there are circumstances when the original terms of the offer are changed, even as the
offer is on its way to the offeree.

Mailbox Rule and Snail Mail

In the fast-moving business world, sending a contract via mail may not be the most efficient way
to deliver.
In a situation where the terms of an offer change or the offer is withdrawn, communication of the
change via mail can take time to arrive. The offeree may not become aware of the change until
after he accepts the original offer.
To better understand this, let's analyze Henthorn v. Fraser (1892) in where a real estate
transaction challenged the mailbox rule.
Henthorn received a letter from Fraser with an offer to purchase real estate. In the offer, it was
stated that a response must be sent within 14 days of receipt. With all intentions to accept the
offer, Henthorn signed and sent the acceptance immediately the next day, well within the 14-day
deadline.
In the meantime, Fraser decided to withdraw the offer. He sent Henthorn a letter of withdrawal
before acceptance was received - but after Henthorn actually placed it in the mail. In other
words, Henthorn sent his acceptance letter prior to Fraser mailing the withdrawal letter.
In this case, crossing in the mail did not factor into the offer. The acceptance letter was mailed
before the withdrawal letter. Therefore, Fraser had no choice but to uphold the terms of the
contract to transfer the real property.
What happens when the mail never arrives? Is the offer and acceptance valid?

Mailbox Rule and the Case of the Missing Mail

Sometimes, the mail simply does not reach the intended recipient. Just how does the mailbox
rule apply to mail that was never received? As we will learn in Household Fire Insurance Co. v.
Grant (1878-79), receipt of mail is not a factor.
Grant sought to purchase shares in Household Fire and Carriage Accident Insurance Company.
Household Fire received the request and allotted him the desired shares.
Grant was advised of the transaction through a mailing sent by Household Fire. Unfortunately,
the letter never made it to Grant.
As time went on, Household Fire filed for bankruptcy and mailed Grant requesting payment for
the allotted shares. Grant refused to pay on the grounds that no contract had ever been formed.
Remember, for a valid contract to be formed, an offer and acceptance must occur. Grant never
received the mail notification that shares had been issued and believed that he owed nothing for
the shares.
Household Fire sued Grant on the grounds that an acceptance letter had been mailed. Although
Grant claimed not to have received it, it was of no consequence. The letter was placed in the

mailbox, and that constituted a valid contract. The mailbox rule applied, and Grant was
responsible to pay for the shares he had requested from Household Fire.

Lesson Summary
To sum things up, there are several elements that must be present for a contract to be valid:

Offer

Acceptance

Mutuality

Consideration

Capacity

Legally accepted contract terms

Our focus was on offer and acceptance, or the expressed willingness to enter into an agreement
to perform by the offeror and the acceptance of performance by the offeree, when an offer or
acceptance is executed through mail, email or fax machine.
The way this is decided is by using the mailbox rule, or, offer or acceptance is valid once it is
placed in the mailbox. In other words, the offeror can send an offer to the offeree stating specific
terms and conditions, and by placing this offer in the mailbox with appropriate postage, it will be
considered a valid offer.
Acceptance works the same way. Once an offeree accepts an offer and places the acceptance in
the mailbox, a valid contract is established.
Several legal cases proved that whether an offer was received in the proper time frame was
irrelevant - dropping the letter in the mailbox determined whether a valid contract existed.

Learning Outcomes
Once you have watched this lesson, you should be prepared to:

Define the mailbox rule and explain what is meant by offer and acceptance

Summarize Adams v. Lindsell (1818), Henthorn v. Fraser (1892) and Household Fire
Insurance Co. v. Grant (1878-79)

Understand how the mailbox rule applied in each of these three cases

There are two sources of contract law: common law, which is based on case rulings, and
statutory law, which is based on federal and state statutes. Contract law uses both common law
and a set of statutory rules known as the Uniform Commercial Code.

Contract Law in General

Contract law controls most agreements between parties, whether oral or written, that involve
goods, services, money, employment contracts and real estate deals. Let's use an example to put
contract law into motion.
Maurice wanted to sell his vintage car, so he placed a classified ad on a popular website offering
the car for a whopping $35,000. Kendall noticed the ad and quickly emailed Maurice requesting
a test drive. After zipping around town, Kendall accepted Maurice's offer of $35,000 without a
single negotiation. The parties have offer and acceptance.
Once this is done, they drafted a contract for the sale of the car. When Kendall coughed up the
$35,000 cash and Maurice handed over the keys, there was an exchange of something of value to
both parties and the element of consideration was met. As long as the remaining elements are
satisfied, the deal is as good as done!
The law recognizes this as a contract, meaning a legal document containing signatures of two or
more parties that is binding and enforceable. Of course, there are certain other elements that must
be present, like:

Mutuality or meeting of the minds, meaning both parties understand and agree with the
terms of the contract

Capacity, meaning both parties are free of mental illness or intoxication and neither is a
minor

Legally accepted terms

However, even when all elements are met, this does not always mean that both parties will
commit to the promises made in the contract. For this, the set of laws or rules were developed
that govern how contracts are written and executed. In short, they ensure that both parties to a
contract adhere to their promises. The law sets some ground rules everyone has to follow, so that
neither party loses out on a promise made to him.
The umbrella of contract law is divided into two areas:

Common law

Uniform Commercial Code (UCC)

Both areas of contract law work in similar ways, but the difference lies in the type of contract.
And both require that certain elements of a contract be present. The most significant difference is
in acceptance, an important element to any contract.

Common Law and Acceptance

Common law contracts require strict adherence to the mirror image rule, while the UCC allows
for minor changes to a contract that do not significantly impact its terms. We will focus on the
elements of acceptance. Common law is like a precedent set by prior court rulings. In other
words, no set-in-stone law applies to common law decisions. And decisions may vary by court or
state.
Next, common law contracts also use the mirror image rule, meaning acceptance must be for
the exact same terms and conditions presented in the offer. Nothing is permitted to change or the
offer is no longer valid. To make this a bit clearer, let's revisit Maurice and Kendall. We know
that Maurice and Kendall were in the midst of working out a deal for the sale of his sports car.
Suppose when Maurice presented Kendall with the contract for $35,000, Kendall slashed through
the $35,000 and returned the signed contract with a price reduction of $2,500 written in pen.
Mirror image rule would say that there is no longer a valid contract. Acceptance of the original
offer of $35,000 stands. Even though Kendall signed the contract, the price was changed. The
element of acceptance has no longer been met and no contract exists. The Uniform Commercial
Code is a bit less restrictive.

Uniform Commercial Code

Unlike common law, the Uniform Commercial Code deals specifically with commercial
contracts. It is actually a set of laws that governs transactions between states and in business
transactions. It was designed to create a uniform set of standards that regulate fairness in
commercial transactions. The Uniform Commercial Code is a comprehensive set of nine articles
or laws and rules. For our purposes, we will focus on Article 2 - Sales.
Article 2 was written so that transactions between businesses would be more elastic than, say, the
mirror image rule, to allow flexibility making contract formation easier to facilitate. This is
because acceptance and consideration work a bit differently. In common law, for a contract to be
binding, one party offers, the other party accepts and something of value is exchanged.
The terms of offer, acceptance and consideration - amongst other elements - are written or
expressed orally in a very specific way. The Uniform Commercial Code does require that
whatever promises each party makes must be fulfilled but not in such strict terms.
Let's say you were a jalapeo farmer. Pico's Tacos buys most of its peppers from your farm. They
do this by emailing your sales department with their order on a weekly basis. Since you have
been selling jalapeos to Pico's for years at the price of $50 a case, there is an assumption that
the peppers will remain $50 a case.

When the peppers arrive, Pico notices that you raised the price to $60 a case. Pico can either
accept the peppers at the higher price, or he can refuse the shipment and send the pepper truck
driver packing. Pico accepted the peppers at the higher price. The important nuance: Acceptance
came after the delivery and the price change.
In common law, the price cannot be changed after an agreement has been made and a contract
signed. By accepting the higher-priced peppers, Pico accepted a change in the terms of the
contract. This type of flexibility makes for smoother and faster commerce. Suppose Pico
recommended you to his friend, Carlos. Carlos calls you and asks if he can pick up 100 pounds
of peppers by tomorrow. You say yes, and tell him the peppers are $1.00 a pound.
When Carlos arrives to pick up his peppers and pays you, a contract now exists. Prior to the
transaction, nothing was written or agreed upon. Carlos inquired whether peppers were available.
You, in turn, stated yes and for a certain price. Simple performance created the basis of the
contract. A few other important things to consider are:

Terms do not have to be written or expressed, like delivery date or location

Payment terms do not have to specifically be written in an agreement

In fact, in many cases, a contract does not even have to be written if under a certain dollar value.
The exception falls under the statute of frauds, which states that a contract for the sale of goods
over $500 is not enforceable unless it is written. Simple performance is not enough. The statute
of frauds also says that if goods were specifically manufactured for the buyer and cannot be used
by another buyer, a contract must be written.
Both common law and Uniform Commercial Code serve to protect contract parties. Common
law offers a higher level of protection in that is has certain requirements that create a binding
agreement. Uniform Commercial Code is more flexible, which allows commerce to move more
swiftly.

Lesson Summary
To sum things up, a contract is a legal document containing signatures of two or more parties
that is binding and enforceable. For a contract to be enforceable, it must contain the elements of
offer, acceptance and consideration, as well as mutuality, capacity and legally accepted terms.
Contract law controls most agreements between parties, whether oral or written, that involve
goods, services, money, employment contracts and real estate deals.
There are two areas of contract law:

Common law

Uniform Commercial Code (UCC)

Common law is like a precedent set by prior court rulings. This area of contract law relies on the
mirror image rule, meaning acceptance must be for the exact same terms, and conditions
presented in the offer must also be followed. Uniform Commercial Code deals specifically with
commercial transactions. It is actually a set of laws that governs transactions between states and
business transactions.
It is more flexible in that it does not require mirror image and, in many cases, a written or oral
agreement. Simple performance of the contract terms is enough to bind parties. A few more
differences also exist:

Terms do not have to be written or expressed, like delivery date or location

Payment terms do not have to specifically be written in the agreement

However, the statute of frauds states that a contract for the sale of goods over $500 is not
enforceable unless it is written. Simple performance is not enough. The statute of frauds also
says that if the goods were specifically manufactured for the buyer and cannot be used by
another buyer, a contract must be written.
There are two types of contracts: a unilateral contract and a bilateral contract. The essential
difference between the two is in the parties. Unilateral contracts involve only promisor while
bilateral contracts involve both a promisor and a promisee.

Unilateral Contracts
While strolling along the beach, you notice a sign tacked to a palm tree that reads, 'Lost wallet,
brown with several hundred dollars in it. Return to owner and receive a $50 reward.' This piques
your interest, and you begin sifting through the sand, turning over seashells, and flipping beach
towels in search of the missing wallet. After all, you could use the 50 clams!
So, you find the wallet under a coconut tree and contact the owner, return the wallet, and collect
on the cash reward. What you really did was enter into a unilateral contract with the owner of
the missing wallet. A unilateral contract requires that only one party make a promise that is open
and available to anyone who performs the required action, like collecting the reward for finding a
lost pet. This sometimes applies to advertisements to an extent.
Advertisements, in general, cannot be construed as an offer to all parties. However, in some
cases, the courts do consider an advertisement an offer when it contains specific language. Like
when Bruto's Tacos runs a special for 50% off tacos between the hours of 4:00PM and 6:00PM,
four-taco limit and until tortillas run out. It's all in the details of the advertisement that creates the
unilateral contract.
Bruto's ad is clear in that it contains language that the message is sent to anyone who happens to
read the ad, but is limited to only a certain amount of people who can actually accept the offer. A
bilateral contract works differently. In this type of contract, two parties enter into an agreement

where both parties promise to do something. However, the elements of either contract remain the
same:

Offer by the promisor

Acceptance by the promisee

Consideration or support for the offer, like money

Of legal capacity, meaning both parties are free from mental illness or addiction and

Lawful terms

Let's focus on the unilateral contract for the moment.

A unilateral contract is a contract in which one party makes a promise to whomever takes action
as prescribed in the offer. In this case, returning the wallet was the action taken by you. To keep
it simple, the owner (promisor) of the missing wallet places an all points bulletin for the safe
return of his property. You (the promisee) found and returned it. You had no obligation to do so,
but once you took action, you became a party to the contract, even without the promisor's
knowledge.
In fact, until you happened upon the palm tree bearing the grim news of the missing wallet, you
were no part of this mess. That is exactly how a unilateral contract works. The promisor makes a
promise to whoever is willing to act on it. There is no promise until the action is complete and
the exchange is made. Unilateral contracts are enforceable.
Using the lost wallet to stress this point, had the owner of the wallet refused to pony up the cash
reward, you could take legal action against him, because the reward was posted as an
advertisement, and you would not have searched for the wallet had you not known it was
missing.
Of course, you would have to prove a couple of things:

A contract existed (reward sign on the tree).

The contract was breached by the promisor (failing to provide the reward).

Promisee suffered a loss as a result (time spent looking for the wallet).

Promisor was responsible for the loss (refusal of payment for returning the wallet).

If all of these things occur, there is a good chance the court will see it your way.

Bilateral Contracts

Typically, a bilateral contract is used when purchasing products or services. A bilateral contract
requires both parties to a contract to perform an action. Just like a unilateral contract, the basic
elements must be present. However, in a bilateral contract, there are two distinct and named
parties to the contract. Each party is aware of their contractual obligations.
These parties are a promisor who makes a promise to perform an action, in exchange for the
promisee to accept the offer in exchange for consideration for something of value, like money.
An example will help. After calling several bakeries, Denise decided on using Cakes by Jacques
to design and bake her wedding cake.
Denise and Jacques decided on chocolate cake and vanilla icing with yellow flowers piped all
over the top. A contract was written, signed, and a deposit was given. The cake would cost $100
with a $5 deposit due upon placing the order. The balance of $95 is due upon delivery.
On Denise's big day, Jacques delivered the tasty tiers and Denise forked over the dough, well,
cash. The bilateral contract, broken down, was nothing more than a promisor, Jacques, promising
to make a cake in exchange for the promisee, Denise, paying for it.
To recap, the most significant difference between a unilateral contract and a bilateral contract has
to do with the parties involved. In a unilateral contract, the promisor makes an open promise to
provide something in exchange for performance. That performance can be satisfied by anyone
who happens upon the offer. In a bilateral contract, both the promisor and the promisee
knowingly enter into an agreement where both parties make a promise, and each is obligated to
fulfill the promise.

Lesson Summary
In sum, a unilateral contract requires that one party make a promise that is open and available
to anyone who performs the required action. This may be a reward for a lost pet or even an
advertisement in some instances.
In a bilateral contract, both the promisor and the promisee knowingly enter into an agreement
where both parties make a promise and each is obligated to fulfill the promise, like the sale of a
car or of a house. The basic elements of a contract remain. Each contract type must present an
offer, acceptance of the offer, consideration, legal capacity of both parties and the terms must be
lawful. Both contracts are enforceable in court; however, not all forms of advertising should be
considered a unilateral contract.

Learning Outcome
After watching this lesson, you should be able to distinguish between a unilateral and bilateral
contract in terms of parties involved.

There are two types of contracts: an expressed contract, which states the promises in clear
language, and an implied contract, which is where behaviors or actions lead parties to believe an
agreement exists.

Expressed Contracts
Miguel wants to purchase his first home. He found the perfect place in Pasadena. The contract
for purchase was signed, and he closed on the home within a month.
The contract Miguel entered into is an expressed contract because the elements are specifically
stated, including offer, acceptance and consideration. To break it down, a contract contains six
elements:

An offer

Acceptance of the offer

Consideration

Mutual assent

Capacity

Legally accepted terms

This is pretty straightforward. Miguel searched for a home, found the perfect place and accepted
the seller's offer to purchase.
Once Miguel did that, he had to come up with the money to purchase the home. Both parties
agreed to the terms, and are of age and mental capacity to enter into the contract, and there was
nothing illegal about the sale. Miguel is now a happy homeowner.
But, not every contract works this way. In fact, some contracts are not written or expressed. They
just happen because of a circumstance. This sounds counter-intuitive, I know.

Implied Contracts
An implied contract works differently. This type of contract evolves when no written contract is
present, but circumstances may cause one person to become unjustly enriched as a result of their
actions or an understanding exists.
There are two types of implied contracts:

Implied in fact

Implied in law

An example of each will help to explain the conditions necessary for each type of contract.
When you arrive at the hair salon for your usual cut, it is expected that you will pay for the
services rendered. That is an implied in fact contract. The common understanding based on the
conduct of the parties serves as a contract to pay for your new 'do!
Now, implied in law contracts work a bit differently. In fact, they are really not contracts at all.
That is why the law gives them a clever name like 'quasi-contracts.' This is because the court
determines whether this type of contract existed after performance or non-performance as a
means to determine whether one party can collect restitution for a service they performed.
An example will help. Suppose you choked on a fish bone at your favorite seafood restaurant.
Lucky for you, there was a doctor in the house. After the doctor performed the Heimlich
maneuver to dislodge the obstruction, he handed you a bill for his services.
You may refuse to pay because you did not solicit his services, but you won't get very far. The
law will look at whether you were unjustly enriched by accepting his services to clear your
throat. And, this occurs when one party receives something of value from another unfairly, like
receiving free medical treatment to save your life.
In this case, the judge would most likely require you to make restitution, or pay the other party
fairly for the services provided to you, even though nothing was written or signed by either of
you.

Lesson Summary
In a nutshell, there are two types of contracts:

Expressed

Implied

An expressed contract requires that the elements are specifically stated, including offer,
acceptance and consideration. There are other elements like mutual assent, capacity and legally
accepted terms. Examples include the sale of real estate, employment contracts and even a
contract to perform a service.
Some contracts are not written. They are implied, and this type of contract happens when no
written contract is present, but circumstances may cause one person to become unjustly enriched
as a result of their actions or an understanding exists.
An implied contract can come in two forms:

Implied in fact

Implied in law

An implied in fact contract results from a common understanding based on the conduct of the
parties and serves as a contract, like paying for your food at a restaurant.
There are times when a contract forms after the fact as a means of restitution, or repayment for
services, when one party becomes unjustly enriched by the performance of another. This means
one person benefits from someone else's actions but does not compensate them for it.
Think about a doctor saving the life of an unconscious person. The court will weigh whether the
person receiving the life-saving medical attention benefited from the services and will probably
require that the benefited party pay for the services.

Learning Outcomes
After reviewing this lesson, you may have the ability to:

Differentiate between expressed and implied contracts

List the elements of an expressed contract

Interpret the two types of implied contracts

Provide examples of expressed and implied contracts

A quasi-contract exists in the absence of a written contract and may be court

ordered to avoid one party gaining at the expense of another party's actions.

Unjust Enrichment and Quasi-Contracts

Have you ever wished a pizza would just show up at your door? How about if that pizza
has mushrooms and pepperoni on it? Better yet, how about if that pizza is free?

By accepting a free pizza that is not intended for you, you have been what the court calls
unjustly enriched, meaning you profited at the expense of another without making an
effort to make restitution.

There are some elements that must exist. The plaintiff must have provided the defendant
with something of value with the expectation of being paid. The defendant accepted or
acknowledged receipt of the thing of value. And the plaintiff must demonstrate that it
would be unjust or unfair for the defendant to receive the item without paying for it mostly financial fairness.

In this case, the pizza shop owner has every right to sue, and if this case were to make it
to a courtroom, the judge would require a quasi-contract. This is also known as an
implied contract and forces the unjustly enriched party to make restitution for the
products or services received, even in the absence of a written contract. The restitution is
called quantum meruit and is determined by the degree to which the defendant was
unjustly enriched.

Paying for a pizza is minimal when compared to mounting medical bills. Let's analyze a
case where medical treatment was provided without an expressed, written contract.

Nursing Care Services, Inc. v. Dobos (1980)

Sometime in 1980, Mary Dobos was rushed to Boca Raton Community Hospital. During
her time in the intensive care unit, Dr. Rosen ordered nursing care around the clock while
in the hospital, along with 48 hours of nursing care once at home, and two-weeks of care
thereafter.

Dobos accepted care from Nursing Care Services, Inc., and the bill exceeded $3,800.
Dobos refused to pay. Dobos claimed that she never contracted these services and did not
understand that she would be responsible to pay. It seemed that Dobos believed her
insurance company would compensate the nursing agency. Unfortunately, this belief does
not pardon her. She is still responsible for paying.

Nursing Care Associates could have, during the course of treatment without
compensation, pulled their services. However, they did not. They continued to provide
Dobos with the level of care prescribed by Rosen.

In the eyes of the court, Nursing Care Associates did, in fact, provide the services
requested and must be compensated. The appeal was remanded in lower court with
instructions to enter a final judgment for the amount of $3,723.90 plus fees and court
costs.

This case demonstrates that a quasi-contract or a contract implied by law is just as

enforceable as an expressed and written contract.

Lesson Summary

A quasi-contract, also known as an implied contract, forces the unjustly enriched party
to make restitution for the products or services received, even in the absence of a written
contract.

The issue surrounding the enforcement of a quasi-contract is in the notion of unjust

enrichment, meaning one party profits at the expense of another without making an
effort to make restitution.

There are some elements that must exist. The plaintiff must have provided the defendant
with something of value with the expectation of being paid. The defendant accepted or
acknowledged receipt of the thing of value. And the plaintiff must demonstrate that it
would be unjust or unfair for the defendant to receive the item without paying for it mostly for financial fairness.

When a person sues for breach of quasi-contract, they receive restitution and it is called
quantum meruit and is determined by the degree to which the defendant was unjustly
enriched.

In our case, Nursing Care Services sued the patient for not paying for the services
rendered and won.

Learning Outcome

After reviewing this video lesson, you should be able to recognize what a quasi-contract
is and how it may apply to unjust enrichments for benefits undeserved.

The main difference between an executed and executory contract is how

quickly the contract's promise must be fulfilled. An executed contract must
be satisfied immediately, while an executor contract has terms that will be
fulfilled later.

Executed v. Executory Contracts

You've been eying that 60-inch television in the appliance store window for weeks.
Finally, it's payday, and you sprint to the store and make the purchase. It's simple. Fork
over the cash and walk away with your very own television. See, the promisor, the
appliance store, promised to give you a spanking new TV for $500, and you, the
promisee, promised to pay for it. Done!

This is an example of an executed contract; a contract in which the promises are made
and completed immediately, like in the purchase of a product or service. On the other
hand, an executory contract means that the promises of the contract are not fully
performed immediately. An example of an executory contract would be an apartment
lease.

When you enter into a lease agreement, you are promising to pay the rent for a period of
time. Until the term expires, the contract promises have not been fulfilled. Put another
way, a landlord generally rents an apartment under a lease contract. This agreement
identifies the name of the person leasing or renting, the name of the landlord, the terms
and conditions, the length of lease and the monthly rental fee for occupying the space.

A lease cannot be fulfilled in one single transaction, like buying a television. Since a
lease is usually written for a period of one year, it is an executory contract, because it is

fulfilled over time. In general, an executed contract is a done deal. On the other hand, an
executory contract isn't fulfilled right away, leaving time for things to go wrong.

McDonald v. Hewett

While the actual date of this case is unavailable, the issue between McDonald and Hewett
demonstrates how confusing an executory contract can be. Listen as the case of the twicesold timber unfolds.

Nelson sold timber to McDonald, to be paid for after the timber was cut, measured and
delivered. Nelson secured the timber and contracted Hewett to move it to New York, have
it measured and delivered to a waiting McDonald. Hewett arrived in New York, but
decided not to measure the timber. Instead, he sold it to a third party.

McDonald, yelling breach of contract, sued Hewett for selling his timber to a stranger.
McDonald contended that he, in fact and law, had an executed contract with Nelson for
the wood. Based on the contract, he believed title for the timber passed to him. Further,
Hewett had no right to broker a deal with someone else.

Remember, the important difference between an executed and an executory contract is in

the time frame for the fulfillment of the promise. Hewett argued that the contract was
executory, because the terms of the contract required several promises be fulfilled at a
later date, like measuring and delivering the timber.

The court ruled that McDonald did not have a remedy against Hewett at all. It was
decided that Nelson held the title for the lumber, until the timber was delivered to
McDonald under the terms and conditions and when payment was collected. That didn't
happen. On a side note, McDonald did have a remedy against Nelson, because none of
the contract terms were performed.

As we witnessed, there is a fine line between whether the promises made in an executory
contract exist. A good way to decide is to ask yourself: 'Was the promise fulfilled in a
transaction, or are there things that need to be done to fulfill the promises?'

In the case of McDonald v. Hewett, for McDonald to take ownership of the timber, a few
things had to happen: Wood needed to be measured and delivered. Since this could not be
done at the time McDonald struck the deal with Nelson, the contract was executory. The
promise relied on those things to happen before the contract promises could be
considered fulfilled.

On the other hand, had McDonald procured the timber directly from Nelson and loaded it
into his truck at Nelson's site and made payment in full, the promise of the contract would
have been executed, because all promises would have been fulfilled at one time. Nothing
more needed to occur to complete the contract.

Lesson Summary

In a nutshell, an executed contract exists when promises are made and completed
immediately, like in the purchase of a television. Conversely, in an executory contract,
the promises of the contract are not fully performed immediately. An example of an
executory contract could be an apartment lease or even a cell phone contract. The main
difference between an executed contract and an executory contract is thus the time frame
for which the promises must be fulfilled.

In McDonald v. Hewett, we learned that even though there was a contract for the sale of
timber, it was not executed until the timber was delivered and paid for. It remained an
executory contract until such time that the timber was measured, delivered and paid for
by McDonald. Think of it this way. If all promises have been fulfilled, it is an executed
contract. If not, it is executory, because more action needs to be taken to fulfill the
promises.

Learning Outcome

After seeing this video, you should be able to compare and contrast executed (immediate)
and executory (time limited) contracts.

The distinct difference between a formal contract and an informal contract is its enforceability in
a court. An enforceable contract is one that contains certain elements, like offer, acceptance, and
consideration, and is in written form. An informal contract does not contain the same elements
and can be oral.

Formal Contracts
After a day's worth of hardball negotiations over the sale of a high-rise condo, Jen and Aldo
finally reached a price. Jen offered Aldo $200,000 for the classy condo and Aldo accepted the
offer.
Quick to the typewriter, Aldo typed up a written agreement, including:

Jen's offer of $200,000

Aldo's acceptance of the offer

The collection of Jen's $200,000, also known as consideration

The actual description, including lot, block, city, state, and anything included in the sale

Date and signature lines, and

Transfer of the title, changing owners from Aldo to Jen

Both Jen and Aldo were, of course, of sound mind (meaning both parties were free of mitigating
factors like mental illness or intoxication), and the contract contained terms that were lawful.
What they had was a formal contract, which is legally binding and enforceable. If Jen changed
her mind and decided not to pay for the condo, Aldo would have a strong breach of contract
case against her for failing to take action on the promises of a contract.
The elements of a legally binding contract include an offer, like the price Jen was willing to pay
for the condo and acceptance of the offer when Aldo agreed to the price. Once this occurs, there
must be consideration. Consideration is the exchange of something of value. In this case, that
was $200,000. Both parties must be of sound mind, and the terms of the contract must not violate
any laws.
The last and most important element of a formal contract is in the recording of the contract. The
sale is officially recorded by the change in title indicating the new owner's name.
A typical formal real estate contract may look like this. Another type of contract is a marriage
license. When two lovebirds make a legal commitment, the marriage license is registered with
the court. Not every contract requires such legal mumbo-jumbo. Some contracts are as simple as
giving one's word and a handshake. Let's explore a few.

Informal Contracts
An informal contract, sometimes called a parol contract, is one that does not require a record
and does not have to be signed, like ordering pork-fried rice at your favorite Chinese delivery
restaurant. To elaborate, when you pick up the phone and call your order in and the order-taker at
the other end agrees to accept the order, what you are really doing is entering into an oral
agreement.
The terms are simple. You want Chinese food in exchange for payment. There is a mutual trust
that both parties will perform as promised in the oral agreement. When the doorbell rings, you
pay for the food, check the order and then you and the delivery guy part ways, contract promises
satisfied.
Now, it is important to note that while you probably won't find yourself in breach of contract if
you fail to answer the door for your pork-fried rice, placing an order is still an informal
agreement between two parties. It's just that easy!
The same theory applies to an informal student behavioral contract. In this type of contract, an
impish student and his teacher make certain promises to each other. The student may promise to
remain seated in class. The teacher may promise to allow the student to pass out papers at certain
times. If the student decides to take a stroll around the classroom, the teacher may enforce
whatever punishment was included in the contract. However, if the student refuses the
punishment, not much will happen.
Now, there are contracts that, although signed, still represent an informal contract. Employment
contracts are one such example. There are no specific laws that govern what must be in a

contract for employment. Nor is there any regulated recording procedures for employment
contracts, like the sale of real estate or a marriage would have.

Lesson Summary
In sum, a formal contract is a written legal instrument that requires signatures of both parties
and is generally recorded with the court, like a marriage license or a contract for the sale of real
estate. A formal contract also contains several elements that must be present, like offer,
acceptance, consideration, legal capacity, mutuality and legally enforceable terms.
An informal contract can be in written or oral form and is not recorded with the court, like the
purchase of food at your favorite restaurant. Both contracts are enforceable; however, a formal
contract is a stronger form of a contract, and is legally enforceable under all conditions.

Learning Outcomes
After seeing the video lesson, you should be able to:

Understand that a formal contract is written and lodged with the court

List the components of a formal contract

Explain how an informal contract differs from a formal contract

The difference between a contract and an option contract is in the options that a buyer has a right
to exercise in the contract, which makes the contract a bit more flexible.

What Is an Option Contract?

Manny visited Speedy's Sports Car Emporium to purchase a shiny new convertible. Manny didn't
do much research, so when he learned that the sports car he liked cost upward of $100,000, he
knew he would have to secure financing to pay for it.
Manny chose his new set of wheels, and after some hard-nosed negotiations, he was able to
convince the calloused car dealer to reduce the price to $99,500. But, he only had $500 to leave
as a down-payment while he worked to secure financing. The dealer drafted an option contract
that allowed Manny a 72-hour period to secure a loan for the remaining balance.
This option contract allows a buyer and seller to enter into a contract for the sale of goods or
real property, but the sale is contingent upon certain terms, like a timeframe or an action. This
may be securing financing or passing a home inspection in a real property sale. As implied by the
terms, it gives one party an opportunity to buy at a later point in time as specified in the contract.
Of course, these terms and other conditions must be written into the contract.

For example, if the buyer does not fulfill his promise to secure the financing by the date specified
in the contract, the dealer may keep his deposit. A clause of this nature would have to be written
in the contract. If the dealer at Speedy's sells the car to another buyer while under contract with
Manny, the dealer may be subject to breach of contract, or not fulfilling the promises of the
contract. It should be noted that option contracts are most typically used in real estate
transactions and contain all of the elements of a regular contract.
To review, a typical contract contains six elements:
1. Offer made by the promisor
2. Acceptance by the promisee
3. Consideration, or an exchange of one thing of value for another
4. Mutuality of the parties
5. Mental or legal capacity to enter into the contract
6. Legally acceptable terms
An option contract contains all of the same, and a few more, elements.

Elements of an Option Contract in Real Estate

For our purposes, we will focus on an option contract for the purchase of real estate. In an option
contract for real estate, the additional elements include:
1. A contract in writing
2. The property location specific to the lot and block, sub-division, city and state
3. A specific timeframe giving the buyer a period of time to exercise his right to purchase
4. A final purchase price
An option contract should not be confused with a letter of intent. A letter of intent merely
identifies the key understandings between two parties. It is non-binding. An option contract is an
enforceable contract and is legally binding.
In a real estate transaction, an option contract benefits the buyer. The seller is obligated to the
contract to sell once the offer to sell is made. However, the buyer can get out of the contract for
certain reasons that are stated in the contract, like securing financing or even news of an
unfavorable home inspection.

To explain in more detail, if a seller offers to sell a home to a buyer for $150,000 and the buyer
needs to secure financing through a mortgage broker, there should be an option in the contract
that reflects that the sale of the property to the specific buyer is contingent upon securing
financing. If the buyer cannot secure adequate financing for the home in the timeframe stated in
the contract, the buyer is no longer obligated to the contract. However, if the seller receives an
offer by another during the time the first buyer is working on securing financing, the seller
cannot rescind the original offer. He must wait out the time stated in the contract.
Now, as with any contract, consideration, or an exchange of something of value, is necessary for
the contract to be enforceable. This means that the buyer must give the seller a deposit, or a
small amount of money, to secure the sale. Sometimes this is called earnest money. It should be
noted that if the buyer is unable to secure financing during the stated timeframe, his deposit, or
earnest money, is lost.

Lesson Summary
An option contract allows a buyer and seller to enter into a contract for the sale of goods or
real property but the sale is contingent upon certain terms like a timeframe or an action. This
type of contract contains the same elements as a regular contract, like:
1. Offer made by the promisor
2. Acceptance by the promisee
3. Consideration, or an exchange of one thing of value for another
4. Mutuality of the parties
5. Mental or legal capacity to enter into the contract
6. Legally acceptable terms
And there are a few more:
1. A contract in writing
2. The property location specific to the lot and block, sub-division, city and state
3. A specific timeframe giving the buyer a period of time to exercise his right to purchase
4. A final purchase price
The option contract benefits a buyer because it gives a buyer the opportunity to take action on
the contract prior to its finalization. As illustrated by our home sale example, the option in the
real estate contract specifies a certain amount of time extended to the buyer to secure financing.
Of course, consideration, or a deposit, must be given to the seller for the option. Should

financing fall through, the seller has the right to end the contract and keep the buyer's deposit. As
with any contract, it is important to specify all terms of the contract like price, option action,
time-frame and any penalties like loss of deposit.

Learning Outcomes
After watching this lesson, you should be able to:

Define option contract

Identify similarities and differences between an option and regular contract

Consideration in contract law is simply the exchange of one thing of value for another. It is one
of the six elements that must be present for a contract to be enforceable. Consideration must be
both legally sufficient and bargained-for by the receiving party.

What Makes a Contract Enforceable?

They say a rose is a rose is a rose. And for the most part, that is true. But in contract law, a
contract is not always a contract. In other words, a contract needs six elements to be considered
enforceable. It must contain:
1. An offer made by the promisor
2. An acceptance of the offer by the promisee
3. Consideration in the form of money or a promise to do or not do something
4. Mutuality between parties to carry out the promises of the contract
5. Capacity of both parties in mind and age
6. Legality of terms and conditions
For this purpose, we will focus on consideration or an exchange of bargained-for promises
between two or more parties.

What's In It for Me?

Consideration, as we learned, is simply something of value exchanged between the parties to a
contract. To qualify consideration, it must be:

Legally sufficient, and

Bargained-for

That is to say, the value the promisor places on the consideration must be of the same value the
promisee places on performance of the contract terms. In other words, both parties want to know,
'What's in it for me?'
To illustrate this, if John (promisor) offers Jamal (promisee) $200.00 to repair his car, and Jamal
accepts, the $200.00 is consideration (the value) for the repair (performance).
There are conditions consideration has to meet to have legally sufficient value. A party cannot
promise to do something where there is already a legal obligation to do so. A police officer
cannot collect a reward for the capture and arrest of an outlaw. The promisee must perform an act
not ordinarily obligated to perform. A police officer cannot contract independent security
services for his neighborhood while he is on duty at his regular job. He has a pre-existing
obligation to secure the neighborhood.
Finally, for consideration to be of legally sufficient value, a party may refrain from exercising a
right that the party is entitled to, like giving up the right to sue someone in exchange for
restitution. For instance, let's say that in fixing the car, Jamal dented John's fender. Jamal
apologizes and tells John that he will fix the dent for free and also give him a 10% discount on
the original repair. If John accepts the deal, he cannot later sue Jamal for denting the car.
Consideration must also be bargained-for, meaning there is an exchange of promise and
something of value where both parties gain a reward and receive a detriment in the contract. It's
real simple! Let's say John and Jamal are now negotiating the sale of a bicycle that was displayed
in the auto repair shop. John wants to take up biking, so he offers $50 to Jamal in exchange for
the product. Jamal will give the bike to John upon receipt of the cash. So both parties bargain and
receive a detriment. John's bank account is reduced by $50.00, but he received some new wheels.
Jamal no longer has his bike, but has an extra $50.00.
Let's examine an interesting case where consideration was in question between an employer and
an employee in a contract for employment.

Labriola V. Pollard Group, Inc. (2004)

In 1997, Pollard Group, Inc. hired Anthony Labriola as a commercial print salesperson. Upon
hiring, Labriola signed an employment agreement. Under this agreement, Labriola agreed to atwill employment, meaning he could be terminated without cause. Also included in the
employment contract was the agreed upon salary and commission structure.
But the most important clause in Labriola's contract was the restrictive covenant that prohibited
him from working for a competitive company for a three-year period. Further, there was no predetermined geographical area mentioned. This meant that Labriola, if separated from Pollard
Group, Inc., would be restricted from working for any commercial printer for a period of three
years regardless of where on the planet the new job is located! That is a restrictive clause,
indeed!

Five years into Labriola's tenure, Pollard Group asked him to sign a Non-Competition and
Confidentiality Agreement requiring Labriola to refrain from accepting employment with a
competitor within a distance of 75 miles from Tacoma, Washington for a period of three years.
The problem with the new non-competitive agreement is that it did not contain legally sufficient
consideration.
Under contract law, consideration must be present and both benefit and cause detriment to both
parties. In this case, only Pollard benefited from the new non-competitive agreement. Labriola
essentially agreed to the same terms of the original contract: salary and commission, at-will
employment and non-competition clause. The employer incurred no new obligations either. In
fact, Pollard added a new clause further obligating Labriola for any attorney fees and costs
should the contract come into dispute.
Some months later, Pollard restructured the way commissions would be paid to salesmen. In the
previous contract, salesmen had to sell a minimum of $25,000 in print orders to receive
commission. In the new contract, the print salesmen were required to sell a minimum of $60,000
in print orders. That increase in the sales quota, if not met, would reduce Labriola's income by
25%. The contract also required that salesmen pay any and all legal fees should legal action
occur over the contract terms. Because of this, Labriola decided to seek employment elsewhere.
Sometime in November of 2002, Pollard Group received word that Labriola was looking to leave
and immediately sent a letter to the potential employer letting them know about the agreement
Labriola signed. Consequently, Labriola was not hired.
Labriola, disenfranchised by Pollard's actions, sought a declaratory judgment against Pollard to
make the new agreement null and void. This type of judgment is used when a legal dispute has
arisen, but before any damages have occurred. He also claimed that Pollard tortuously interfered
with the employee's business. Unfortunately, the court of original jurisdiction ruled against
Labriola.
In a higher court's review, it was agreed that offering only continued at-will employment to
Labriola in exchange for signing a restrictive non-competitive contract was not sufficient
consideration and therefore the contract was unenforceable. Labriola prevailed. Had Pollard
Group offered Labriola something in exchange for the restrictive clause, the court may have saw
it differently.

Lesson Summary
To sum it up: for a contract to be enforceable, six elements must be present:
1. An offer made by the promisor
2. An acceptance of the offer by the promisee
3. Consideration in the form of money or a promise to do or not do something

4. Mutuality between parties to carry out the promises of the contract

5. Capacity of both parties in mind and age
6. Legality of terms and conditions
We focused on consideration or an exchange of bargained-for promises between two or more
parties. To qualify consideration, it must be:

Legally sufficient, and

Bargained-for

For consideration to be legally sufficient, it cannot be something that a party is already obligated
to do, the party must perform an act not ordinarily obligated to perform, or refrain from doing
something one has a legal right to do. We also learned that consideration must be bargained-for.
This means both parties gain reward and experience detriment as a result of the contract. In
Labriola v. Pollard Group, Inc, we witnessed an employee argue that his employee contract was
unenforceable due to insufficient consideration because of the doctrine that consideration must
benefit both parties and not obligate only one party without obligating the other.

Learning Outcomes
Upon completion of this lesson, you should be prepared to:

Name the six elements a contract must have for it to be enforceable

Comprehend the concept of consideration and understand when it is legally sufficient

Indicate what it means for consideration to be bargained-for

Dissect the case of Labriola v. Pollard Group

One of the main elements of a contract is consideration. Lack of consideration in contract law
can make a contract unenforceable when both parties do not receive a benefit from entering into
an agreement.

What Is Consideration?
There are essentially six elements that must be present for a contract to be enforceable. There
must be an offer, acceptance of the offer, consideration, capacity, mutuality and the terms and
conditions must be legal and not in violation of any laws or ordinances. Our focus in this lesson
is on consideration, or the benefit each party to a contract receives by entering into a contract. In

other words, when two parties enter into an agreement, both parties must exchange one thing of
value for another.
Let's take a very simple example to demonstrate how consideration works. If Joe offers to sell his
scooter to Bill for $50, Bill can accept the offer. Once the offer is accepted, Bill must fork up the
50 bucks in order to secure the scooter. Consideration can take on two forms:

A promise to do something one is not legally bound to do otherwise, or

A promise not to do something

A promise to do something one is not legally bound to do is simply performing the acts, or
following through on the promises made in a contract, like the exchange between Joe and Bill in
the scooter sale. On the flip side, if there is a legal obligation to perform an act, one cannot view
performing the act a contract condition. For instance, a reward for information that leads to the
arrest and conviction of a criminal cannot be claimed by a police officer if the criminal is
captured in the line of the officer's duty. After all, it is his obligation to catch a slippery criminal.
A promise not to do something could be a promise not to sue a party after restitution has been
made. Let's revisit Joe and Bill. Once Bill took ownership of the scooter, he attempted to speed
away. Bill did not realize that the scooter was in reverse. As Bill tried to stop the scooter, he ran
into Joe's mailbox, knocking it to the ground. The mangled mailbox was in disrepair. Joe
demanded $100 from Bill in exchange for waiving his right to sue in small claims court. Once
Bill coughed up the cash, Joe could no longer sue for damages. The value of consideration must
be determined objectively. Joe's mailbox has a specific value regardless of how sentimental he
feels toward it. Lack of consideration in contract law means that one party to the contract had
little or no imposing obligation to any terms of the agreement.

Lack of Consideration
Lack of consideration means that one of the parties to a contract is not obligated in any way,
while the other party holds all obligation to act. Generally, courts will not interfere with parties to
a contract. Adequacy of consideration is the doctrine of freedom in cutting a mutually
beneficial deal and means that parties are free to negotiate any way they see fit. A bad
negotiation, like paying too much for a car or hiring an inexperienced housepainter, is of no
consequence. Bottom line: the buyer and seller have full authority to negotiate as they please.
However, there are several instances when a court will declare a contract unenforceable because
consideration was lacking:

When one party is already legally bound to perform,

When consideration is more like a gift,

When consideration is made as a result of a past event, or

When consideration is based on an illusory promise

When a party seeks payment for an act that they are already obligated to perform, the contract is
unenforceable. When Pugsley the Pit Bull went missing, his owners placed 'Reward for Lost
Dog' signs all over the neighborhood. They offered a hefty reward of $45 for the return of their
prodigal pooch. Richard, the local dogcatcher, noticed the sign and remembered picking up a
canine with the same characteristics that very day. He dialed in to announce that he was in
possession of Pugsley and demanded the reward. Although a reward was posted for Pugsley's
safe return, the owners are in no way obligated to pay Richard a dime. It is Richard's primary
responsibility as city dogcatcher to locate and secure stray dogs.
A gift cannot be used as consideration in a contract. Brenda promised to give her sister Betsy her
old necklace when she replaced it. Betsy noticed that Brenda was wearing a sparkly new one
around a week later. When confronted about pitching over the pearls, Brenda refused. Betsy
threatened to take her to court, stating that they had an oral contract. In reality, no agreement had
ever been reached because no consideration was ever decided upon. Brenda was the only acting
party to this agreement. Betsy had made no promise to act in exchange for the necklace. This
agreement would not be enforceable in any court.
Consideration cannot be based on past events either. Greta's cat was caught in a tree. She tried to
lure the finicky feline with her favorite food to no avail. Slim, a local teen, noticed Greta staring
into the tree and quickly sprang to action. Slim shimmied up the spruce, snatched the cautious cat
and returned her to her owner's arms. Greta told Slim that she would give him $5 for his good
deed. When Slim came to collect the cash, Greta refused to pay as promised. Slim had no
recourse but to learn from his lesson. Had Slim and Greta established a dollar amount prior to
Slim's rescue effort, he would have been able to collect handsomely. However, the consideration
came after the rescue; it was a past event.
For consideration to be met, the promise of both parties must be objective and clear. An illusory
promise is unacceptable and makes a contract unenforceable. Dooley's garage doors were in
tatters. He contracted Peppo's Painting Service to restore the doors to their original condition. In
the contract, Dooley states that he will pay Peppo the sum of $100 only if he likes the end result.
Peppo agreed and proceeded to scrape and paint with fury. When he wrapped up the restoration,
Dooley complained that it was not to his liking. Dooley's agreement with Peppo is unenforceable
because consideration was a vague promise where one party would benefit, while the other does
not. Since paying for the paint job was based on whether Dooley liked the finished product,
Peppo could not objectively plan his work to satisfy his client's needs.
In Dooley and Peppo's sticky situation, alternative consideration may have been a better way to
go. Alternative consideration allows for a promise to perform one or more acts, and it takes only
one act to satisfy consideration. Peppo could have added a clause in the contract stating that if
Dooley did not like the restoration, he would owe Peppo only for materials. If he did like the
paint job, Dooley would pay for materials and Peppo's hourly rate of pay. This way, both parties
receive a benefit for their acts. When it comes to contracts, consideration is an important
element. Even though parties are free to wheel and deal as they please, certain conditions apply.

Lesson Summary
One of the elements of a contract is consideration, or the benefit both parties receive for their
acts. Consideration can be made in exchange for a promise to perform or a promise not to
perform. A promise to perform can simply be the exchange of goods for money, like when Bill
bought Joe's scooter. A promise not to act occurred when Joe promised not to sue in exchange for
receiving payment for the mailbox Bill mowed down while riding the scooter.
Lack of consideration occurs when only one party is obligated to act while the other holds no
obligation at all. Generally, the courts do not involve themselves in individual negotiations. The
adequacy of consideration is the freedom to bargain without interference. However, there are
times when a contract is just not enforceable because it lacks consideration. A contract lacks
consideration when:

One party is already legally bound to perform

Consideration is more like a gift

Consideration is made as a result of a past event

Consideration is based on an illusory promise

When entering into a contractual agreement, it is important to objectively state consideration in a

clear way. As we learned, a gift or a vague promise is not proper consideration.

Learning Outcomes
After completing this lesson, you should be prepared to:

Define consideration, adequacy of consideration and lack of consideration

Name and give examples of the four ways a contract can be unenforceable because of
lack of consideration

The doctrine of promissory estoppel allows a party to recover the benefit of a promise made even
if a legal contract does not exist. Use of this doctrine relies on how significant the promisee's loss
is in the absence of the fulfilled promise.

Doctrine of Promissory Estoppel

So, what happens when someone makes you a promise, you rely on this promise, act on the
promise and the person does not come through? In our personal lives, nothing will happen. We
will move on and be more cautious next time. Legally speaking, when one party promises to

perform and the other party relies on that promise, the injured party can sue, even in the absence
of a signed contract.
An example will help. Suppose you are the principal of a small high school. A musician
approaches you to discuss implementing a music program on campus. Excited about the
possibilities this will bring to your students, you begin planning for the program. You order
construction of a new building complete with soundproofing and a stage. Next, new furniture and
fixtures, drums and tubas are delivered. You may even hire staff to manage the new music
program. Then, in one fell swoop, the promise is retracted. The musician simply changes his
mind. You might think that, without a contract, there is no recourse to recover not only the
expenses but the embarrassment of having this promise broken.
Well, the law cannot help you with the embarrassment, but the doctrine of promissory estoppel
can help you to recover your losses. It states that an injured party can recover damages if those
damages were the result of a promise made by a promisor and the promise was significant
enough to move the promisee to act on it. There are specific elements that must be present:

Promisor made a promise significant enough to cause the promisee to act on it

Promisee relied upon the promise

Promisee suffered a significant detriment

Relief can only come in the form of the promisor fulfilling the promise

And, there need not be a contract involved. In fact, when promissory estoppel is used, it is
because a contract did not exist. Now, it may not be as simple as this. The court will look at a
few things. First, the court will decide whether there was detrimental reliance, or a change in
the position of the promisee, who acts based on the promise and becomes damaged as a result.
An interesting court case will help to explain.

McIntosh v. Murphy (1970)

In March of 1964, George Murphy, owner of Murphy's Motors, located in Hawaii, flew to
southern California to recruit for his car dealership. At the time, Dick McIntosh was searching
for work. The two met on two occasions to interview.
In April of the same year, Murphy contacted McIntosh via telephone to inquire about his interest
in a position. McIntosh expressed continued interest in the position, and the parties agreed that
employment would begin within 30 days of the conversation. In the oral agreement, Murphy
offered McIntosh a one-year employment contract. Sometime during April, McIntosh, just to be
sure, sent a telegraph to Murphy advising him that he would be arriving in Honolulu on Sunday,
April 26, 1964. It is important to note that McIntosh did not arrive empty handed. He brought
along personal items, sold other items and rented an apartment.

In the afternoon of Saturday, April 25, Murphy called McIntosh to let him know he could begin
employment as assistant sales manager on the coming Monday. Although he was confused by the
title change, McIntosh accepted the assignment and reported to work. Things seemed like they
were going smoothly when, out of nowhere, everything changed. McIntosh was terminated from
employment on July 16, 1964. Murphy claimed that McIntosh was unable to close deals on cars
and could not train salespeople.
McIntosh sued Murphy for promissory estoppel, arguing that his decision to relocate some 2,200
miles from home was solely based on the promise of a yearlong contract for employment.
Further, even though no written contract had ever been drafted, the promise made by Murphy in
the oral contract was significant enough that McIntosh believed that employment would last for a
period of one year.
In an effort to keep things clear, the Statute of Frauds requires that certain contracts be in
writing. If a contract will endure for longer than one year, it must be expressed in writing or the
contract is unenforceable. The day the contract agreement is made is considered the date to be
used to determine enforceability. At trial, the defense argued that the contract was not
enforceable because, according to the Statute of Frauds, a contract whose terms last more than
one year and is not in writing is, in fact and law, unenforceable. The Statute of Frauds states that
the contractual period must be within one year. On face value, it appears that this oral agreement
will occur within a one-year period of time. But, on closer inspection, it won't. The contract
terms technically exceed one year, making for an unenforceable contract.
This was a clever defense indeed. But, was it enough to sway a judge? In simple terms, no!
Murphy argued that the agreement was in violation of the Statute of Frauds, and the contract
could not be enforced. The judge saw it differently. Considering the agreement was actually
made on a weekend, and weekend days do not count at the beginning and the end of a contract
term, the contract did begin the Monday McIntosh began work. Promissory estoppel was
granted. To end the court drama, McIntosh prevailed, and Murphy was required to restore him
financially for the duration of the contract period, totaling approximately $12,000.

Lesson Summary
In sum, the doctrine of promissory estoppel states that an injured party can recover damages if
those damages were the result of a promise made by a promisor and the promise was significant
enough to move the promisee to act on it. There are several elements that must be present, like:

The promisor made a promise significant enough to cause the promisee to act on it

The promisee relied upon the promise

The promisee suffered a significant detriment and relief can only come in the form of the
promisor fulfilling the promise

Detrimental reliance is a change in the position of the promisee, who acts based on the promise
and becomes damaged as a result. As we followed McIntosh v. Murphy, we learned that an oral
employment agreement was a significant enough promise that once breached, the plaintiff would
be able to exercise promissory estoppel over the defendant for relief. The Statute of Frauds was
instrumental in McIntosh's financial relief.

Learning Outcomes
After you've finished with this lesson, you'll be able to:

Describe the doctrine of promissory estoppel

List the elements that must be present in order to successfully use the doctrine of
promissory estoppel

Explain what detrimental reliance is in terms of pleading promissory estoppel

Summarize the facts and outcome of McIntosh v. Murphy, and describe how the Statute
of Frauds factored into that case

A joint contract involves two or more parties who are jointly obligated to a contract or whom
receive the benefits of the terms and conditions of a contract. There are a few ways a joint
contract can be written. Each type shifts liability in a different way.

Parties in a Joint Contract

When two or more parties jointly obligate themselves in a contract, they enter into a joint
contract. By entering into a joint contract, all parties become equally and wholly responsible for
the obligations of the contract or benefit wholly from the contract in its entirety. This sounds
confusing. Let's use an example to help clear things up.
Jeffrey and Wayne are freshmen attending University of Smartsville. Neither student could afford
their own apartment, so they decided to become roommates. Their landlord, Mr. Rupert,
presented the boys with a lease agreement. In the lease, it stated that both Jeffrey and Wayne
would be wholly responsible for paying the rent. This means that regardless of who coughs up
the cash, the entire rent amount must be paid at month's end. Mr. Rupert doesn't much care how
it happens, as long as it happens.
You see, the lease is worded in such a way that it obligates both Jeffrey and Wayne to the rent
amount. If Wayne withdraws from college, Jeffrey is responsible for the entire rent payment. The
elements of a contract remain the same as any bilateral contract one would enter into:

Offer that specifically details exactly what will be provided

Acceptance is the agreement by the other party to the offer presented

Consideration is the money or something of interest being exchanged between the parties

Capacity of the parties in terms of age and mental ability

Intent or mutuality of both parties to carry out their promise and

Object of the contract is legal and not against public policy or in violation of law

The only difference between a joint contract and a bilateral contract is the parties involved. In a
bilateral contract, there are generally two parties, an offeror and an offeree and both have
specific obligations. In a joint contract, the offeror or offeree can be more than one party, thus
holding both jointly responsible for the contract terms. Joint contracts also have survivorship,
meaning that should one of the jointly obligated parties die, the remaining party remains
obligated to the conditions.
For Jeffrey and Wayne, if one of the students should face an untimely death, the other would
remain responsible for the rent. Sometimes, joint contracts can be written so that they do not
necessarily join two parties wholly. In this case, the contract would be shared in several.

Several Contracts
When a contract involves two parties who are not wholly joined, but joined severally, it takes on
a slightly different liability. In contract law, severally obligates joint contract parties in the same
way but changes the liability. To exemplify this, let's revisit Jeffrey and Wayne's lease agreement
with Mr. Rupert. Jeffrey and Wayne entered into a lease agreement in where they owe $900 per
month.
In a joint contract, if Wayne stopped paying, Jeffrey would have to pay the entire $900 to the
landlord. In severalty, Mr. Rupert can go after Wayne's assets, Jeffrey's assets, or an equal share
of both. This sounds confusing - it's really not!
Think of it this way, if a contract states, 'joint' obligation, think of it as both jointly bound parties
are obligated to the contract terms. If one bails, the other party must pay up. In severalty, both
jointly obligated parties are responsible for the contract terms. However, if one jointly obligated
party jumps, the other party to the contract can take civil action against the defaulted party, the
party remaining in the contract or both. Lastly, a joint contract may be written where jointly
bound parties are responsible for only their share of the contract terms.
Using the lease agreement example, Jeffrey and Wayne may request that Mr. Rupert draft the
lease obligating each of the students separately. This can be done by writing a clause that
obligates Jeffrey for $450 and Wayne for $450. If one of the boys doesn't pay his share of the
rent, the other is not obligated to make up the difference. Notice the shift of liability - it is no

longer on the renters as a joint obligation. Mr. Rupert stands to lose on a lease agreement written
this way. And typically, a savvy landlord will not enter into this type of lease.

Lesson Summary
By entering into a joint contract, all parties become equally and wholly responsible for the
obligations of the contract or benefit wholly from the contract in its entirety. There is a less
obligating form of a joint contract that binds the parties severally, meaning that if one of the
joined parties defaults, the other party to the contract can go after either or both parties.
A joint contract can also be written to where both joined parties hold only their share of
obligation. If one should default, the jointly obligated party is responsible to perform what is
stated in the contract. This shifts liability from both to one of the joined parties. Generally, this is
not in the best interest of all parties, just the joined party.
Remember, just like any bilateral contract, the same elements apply:

Offer that specifically details exactly what will be provided

Acceptance is the agreement by the other party to the offer presented

Consideration is the money or something of interest being exchanged between the parties

Capacity of the parties in terms of age and mental ability

Intent of both parties to carry out their promise and

Object of the contract is legal and not against public policy or in violation of law

It is important to understand the difference between a joint and a several contract before signing.
It can mean the difference between full liability or a share of liability.

Learning Outcomes
Working your way through this lesson should help you accomplish the following:

Define joint contract

Identify and explain ways a joint contract may be written

One of the elements of a contract is capacity. Capacity means that a person is legally able to enter
into a contract. There are several things that make a person legally able to do so including age
and state of mind.

Legal Capacity to Enter Into a Contract

When two people enter into a contract, six elements must be met. Those elements include:

Offer that specifically details exactly what will be provided

Acceptance (the agreement by the other party to the offer presented)

Consideration (the money or something of interest being exchanged between the parties)

Capacity of the parties in terms of age and mental ability

Intent of both parties to carry out their promise

The object of the contract is legal and not against public policy or in violation of law

The element we will focus on is capacity, and it means a person's legal ability to enter into a
contract. To best explain who can enter into a contract, let's use some examples of who is
forbidden to enter into a contract.

Age of Maturity
For one, a person must be of age of maturity, and the law sees this as age 18 or older. However,
there are times when a minor can enter into a contract. This is true if the contract is for housing,
food or things necessary to sustain life.
There are a few other exceptions to this. Let's say Billy, a 17 year old, passes himself off as an
adult and buys a new high-end stereo system on a payment plan. When his mom sees the stereo,
she gets angry and calls the store to demand Billy's deposit back. The store owner has a right to
retain Billy's deposit and hold him to the contract and the payment plan. You see, Billy falsely
identified himself as being of legal age to contract for the stereo purchase.
To take this a step further, suppose Billy bought the stereo system the day before his 18th
birthday. If he does nothing to cancel the contract prior to turning 18, he is obligated to the terms
of the contract simply because he did nothing to cancel while he was still a minor.

Free of Mental Illness

It is also necessary for the parties to be free of mental illness, like schizophrenia or other
conditions that challenge a person's mental state. There is a standard that courts use to determine
whether a person truly understands the promises made in a contract. One test the court may
perform is a cognitive test, and this determines whether meaning was understood by the party in
the areas of reasoning and understanding language. A motivational test may also be used. This

test determines whether a party suffers from delusions or mania. This is an important factor
because this may skew a person's ability to understand the scope of the contract.
Murray suffers from bipolar disorder. When he is on medication, he is able to think and
understand day-to-day events. However, when he is not medicated, his thinking becomes
derailed. One fine day, Murray entered into a contract to purchase a home. The home was well
beyond what he could afford. However, he did have a small nest egg in the local bank. Murray
called the bank to request that the funds be transferred to the seller. A loan was taken out for the
balance.
Murray's family may be able to void this contract because of his state of mind. Of course, there
will be testing and documentation needed to prove his mental state. If proven that Murray lacks
mental capacity, the deal will dissolve.

Not Under the Influence

No party to a contract can be under the influence of alcohol or drugs, meaning intoxicated or
influenced by illicit drugs. This includes both voluntary intoxication and the influence of the
other party to cause or encourage intoxication. This is worth explaining. Both parties to the
contract must be of a sober mind. If one party chooses to drink or take drugs prior to the contract
commitment, the contract can be voided. If one party intentionally influences a person to drink to
the point of intoxication, and this can be proven, the contract can be voided.
This means, if you wake up after a night of heavy drinking to find several new roommates you
do not remember entering into a lease with, there stands a good chance the tenants will be forced
to move out soon. The court will look at how much you drank and whether this influenced your
decision to enter into an agreement to lease your spare rooms.

Lesson Summary
In sum, there are six elements that must be present in a contract:

Offer

Acceptance

Consideration

Capacity

Intent

Legal object

Our focus was on capacity, and it means one's legal ability to enter into a contract. This
includes:

Age of maturity

Mental state

Age of maturity is age 18 or older. There are exceptions. If the contract was for food, housing or
other things that sustain life, a minor can enter into and be held to the contract terms. Also, if the
minor enters into a contract and does nothing to void it until after he turns 18, the contract is
enforceable.
A person must be free of mental illness, like schizophrenia or other conditions that challenge a
person's mental state, to enter into a contract. In cases where mental capacity is questioned, the
court will perform one of two tests. A cognitive test determines whether meaning was
understood by the party in the areas of reasoning and understanding language. Or a motivational
test may be used to determine whether a party suffers from delusions or mania.
Anyone under the influence of alcohol or drugs, meaning intoxicated or influenced by illicit
drugs when entering into a contract, can make the contract unenforceable. This includes both
voluntary intoxication and the influence of the other party to cause or encourage intoxication.
It seems counterintuitive that a minor can enter a contract and be liable for its conditions, but
there are instances when a minor is permitted to enter into a contract and is bound by its terms.

What Constitutes Maturity?

Think about the months leading up to your 18th birthday. Do you remember being excited to
finally be an adult? What were you most excited for: getting to vote? Not having a curfew? How
about the ability to enter into a legal contract? It's likely that contracts aren't on the minds of
most soon-to-be 18-year-olds, but the age of 18 actually makes a difference.
In legal terms, at 18, one has reached the age of maturity, or the end of obligatory parental
support.
While you typically need to be an adult to enter into a contract, there are instances when a minor
is actually permitted to enter into a contract and is legally obligated to the terms and conditions
of the contract.

Kids and Contracts

According to law, a minor is obligated to satisfy the obligations of a contract when the contract
involves:

Tax obligations like filing a tax return

Penalties and fines like parking tickets

Bank regulations like overdraft charges

Military service like joining the Army

Necessities like payment for housing, food or education

Sports or entertainment contract terms (in New York and California)

Misrepresenting a minor's age like using false identification or a false statement

In other words, as long as the minor has capacity, or the mental competency to understand the
agreement, as it relates to the types of contracts above, the minor can willfully jump right in.
This is not to say that a minor can enter into any and all contracts, like buying a car or a new
stereo system. These purchases do not represent necessities and can be voided.

Voidable Contracts
In Bowling v. Sperry (1962), Bowling, a minor, decided to purchase a car. He headed directly to
Sperry Ford Sales, a nearby car dealership, to hammer out a deal on a 1947 Plymouth.
After kicking the tires and checking under the hood, Bowling, accompanied by his aunt and his
grandmother, sealed the deal. With a $140 sale price, a down payment of $50 and a bit of
financial assistance from the ladies, Bowling was cruising in style.
After driving the car for a while, things went sour. The car turned out to be a clunker, and
Bowling was no longer satisfied with his purchase.
Steamed about the confounded car situation, he drove the automobile to Sperry's place and
returned it. Bowling then drafted a strongly-worded letter disaffirming, or denying, that the
contract was valid because he lacked capacity.
Sperry was not going to have the wreck returned and immediately initiated litigation. Sperry
contended that Bowling had capacity to enter into the contract and was obligated to its terms.
In the court of original jurisdiction or the state court in which the case was heard, it was
decided that Sperry could uphold the terms of the contract, and Bowling was obligated to pay for
the malignant motor vehicle.
Dissatisfied with the lower court's decision to uphold the contractual agreement, Bowling
appealed the case on the grounds that the vehicle was not a necessity and therefore did not fall
under the instances in which a contract with a minor can be upheld.

Unfortunately, Sperry was unable to convince the court that the car was something that Bowling
could not sustain life without. Had Sperry been able to prove that the car was a purchase that was
essential to Bowling's life, the outcome may have been different.
The appellate court reversed the decision of the lower court and remanded the case back down
for a new trial.
Bowling's case helps us to understand the terms in which a minor can ratify a contract. Had
Bowling misrepresented his age by showing false identification or expressly stating his age as 18
or above, he would have been liable for all conditions of the contract.
So what happens when a minor enters into a contract and is obligated to the terms and
conditions?

Entertainment Contracts
Most parents believe their baby is cute enough to make it to Hollywood - and some do!
Child actors enter into contracts as any actor would. Of course, the contract is negotiated
between an acting agent and the parent or guardian of the child.
In a couple of states, like California and New York, a contract created for a minor child is valid
and cannot be voided by the minor either before the minor graduates to maturity or after.
Let's say the parents of Curly Sherman, a 3-year-old singing toddler, negotiate a 5-year contract
with a California talent agent for:

$1,000 per show

3 shows per week

30% of all income earned from any source for a period of 15 years

The singing sensation must be available to croon for the contractual period regardless of her
desire to do so. She must also relinquish a hefty portion of her income to the agent.
If little Curly decided, say at age 10, to disaffirm or void the contract, she would be out of luck.
California law clearly obligates her to sing or be sued.
While this seems rather harsh, there is a benefit to the talent agent that must be considered.
Should Curly Sherman become a huge star, the agent who first signed her should be able to profit
from the popular pre-pubescent publicity.
In other words, Curly should not be able to get out of her agreement with her original agent in
order to sign with a new agent.

Lesson Summary
To sum things up, in most cases, a minor can disaffirm, or get out of, a contract and avoid any
liability included within its terms. However, there are instances where a contract is simply not
voidable and the minor remains obligated to hold to its conditions, like:

Tax obligations like filing a tax return

Penalties and fines like parking tickets

Bank regulations like overdraft charges

Military service like joining the Army

Necessities like payment for housing, food or education

Sports or entertainment contract terms (in New York and California)

Misrepresenting a minor's age like using false identification or a false statement

Bowling v. Sperry reminded us that a minor can disaffirm a contract for the right reasons. In this
case, the car was not a necessity, and Sperry was unable to prove differently.
However, Curly Sherman wasn't so lucky. Her contract was drafted in California and involved a
contract for entertainment, so she would be liable for the terms and conditions, and it cannot be
disaffirmed.
Entering into contracts with minors can be risky. If a minor falsely represents him or herself as
an adult through either expressed written words or oral statements, the contract may just be
enforceable. It is always best for the contract parties to carefully evaluate the decision to enter
into a contract with a minor.

Learning Outcomes
After you complete this lesson, you should be able to:

Recognize the elements of a legal contract with a minor

Paraphrase the importance of Bowling v. Sperry as it applies to minors

Explain when a minor can and cannot disaffirm a contract

In contract law, capacity refers to one's legal ability to enter into an agreement. A person who
lacks mental capacity cannot legally enter into a contract, thus making a contract voidable in
most cases.

Who Would Sign This Contract, Anyway?

A contract has to be made up of several elements for it to be considered a legally-binding
agreement. First, there must be offer and acceptance, or two or more parties agreeing to the
terms. Next, both parties must be competent, or free of mental illness. All parties must mutually
agree to the terms of the contract. Finally, there must be consideration, or an exchange of one
thing of value for another.
Our focus is on capacity and how the law views the legality of a contract when one or more of
the parties is mentally ill. In the eyes of the law, a contract is voidable if a person is proven to
have mental incapacity. Mentally ill can take on a few different diagnoses. One is considered
mentally ill if the person suffers from:

Schizophrenia

Senility

Alzheimer's disease

Retardation

Chronic drug or alcohol dependency

In a newsworthy story out of a Fort Wayne, Indiana, newspaper, a mentally-ill man visited a
high-end car dealership with a late-model clunker and returned home with a shiny new car.
His sister, and holder of his power of attorney, Sandra Kay Temple, was shocked and dismayed
that her brother was able to enter into a contract for a Mercedes-Benz sedan. She immediately
demanded that the dealership return the old car and void the contract. Unfortunately, the family
was left with an $82,000 car and a contract. Mercedes offered Temple an opportunity to return
the car immediately in exchange for a voided contract and the old car.
However, Temple was unable to follow through with the demand. It wasn't until days later that
she would return to the dealership. The deal to take back the car was rescinded. It was argued by
the plaintiff that her brother did not have the capacity to enter into such an agreement. He
suffered schizophrenia and post-traumatic stress syndrome, was off his medication, and as a
result, experienced delusions of grandeur, mania, and impulsive thoughts and actions.
The dealership saw it differently. A representative for the dealership testified that the brother was
aware of his purchase, the consequences of entering into the contract, and even asked that the
salesperson confirm the funds to make the purchase with his bank.

In fact, there were no clear indications that Allen was mentally ill at all. When Temple asked
Allen about the purchase, he told a much different story. Temple's brother truly believed that the
salesman at the dealership was merely providing an even exchange - his beat-up Buick for a
shiny Mercedes sedan.
While the case is pending in court and no decision has been made, the significance of this story
leads us to understand the ways in which a court will determine mental incapacity.

How Can One Prove Mental Incapacity?

In order to make a contract voidable using mental incapacity as a ground, the court looks at a few
things:

Did the person understand the nature and consequence of the contract?

Was the weight of the consequences of entering into a contract considered?

Did the other party (or parties) to the contract know of, or at least have an idea, that the
party was mentally ill?

There is, however, a standard for mental capacity involving a couple of tests that are court
ordered in cases where a party or interested party to a contract claims lack of legal ability.
Cognitive or affective testing determines whether meaning was understood by the party in the
areas of reasoning and understanding language. A motivational test can also be performed to
judge one's ability to enter into a contract. This test may indicate conditions like mania or
delusional thoughts and actions as a motivator to enter into an agreement.
Temple's brother gave no outward sign of mental illness. In fact, the most compelling testimony
was that of the salesperson that revealed that the brother actually provided him with pertinent
financial information needed to secure a lofty bank loan. A motivational test may have revealed
the reason for his behavior that day.

Mental Incapacity! Who Knew?

In another case, Hauer v. Union State Bank of Wautoma (Ct. App. 1995), capacity became the
forefront of a case involving a loan and a bad investment.
In Hauer v. Union, Kathy Hauer sued Union to recover the funds she lost as a result of a loan
taken against her investment (mutual) fund. Eilbes, a friend of a friend of Hauer's, convinced her
to take out a $30,000 loan against her mutual fund investment and give him the money to satisfy
his defaulted loan. Hauer's financial representative at Union warned her against using the mutual
fund as collateral because this was the only source of income she had. He further warned her that
if she lost the money, she would not be able to draw the interest she relied on for day-to-day
spending.

Prior to Hauer's involvement with Eilbes and Union, she suffered a brain injury from a
motorcycle accident. This left her unable to make decisions on her own. In fact, she was
appointed a guardian to handle her affairs. At some point before meeting Eilbes, her rights were
restored and she was able to make her own decisions again. Investing in Eilbes proved to be a
losing proposition, leaving Hauer with nothing. Hauer sued on the grounds that she did not fully
understand the terms of the loan. Further, it was Eilbes who orchestrated the loan for her.
The court of original jurisdiction found the contract for the loan to be voidable. Union was
instructed to return her collateral mutual fund to her in whole and Hauer would not have to repay
the loan. Union appealed the decision on the grounds that Hauer was forewarned about the
consequences of using her primary source of income as collateral. In appellate court, it was
determined that the bank was aware of her mental capacity yet entered into a contract for a loan
against collateral anyway. Because of Union's lack of due diligence, Hauer was whole again.

Lesson Summary
To sum things up, capacity is one's legal ability to enter into a contract. In our lesson, mental
capacity was at issue. When a party to a contract suffers from mental illness like schizophrenia,
mania, brain injury or other mentally-debilitating conditions, the contract is voidable.
There are a few questions to consider when determining mental capacity:

Did the person understand the nature and consequences of the contract?

Was the weight of the consequences of entering into a contract considered?

Did the other party (or parties) to the contract know of, or at least have an idea, that the
party was mentally ill?

The court will perform one of two tests to determine whether a party to a contract is capable of
performing the responsibilities of the contract. A cognitive or affective test will reveal the
person's thinking process and their understanding of language. To determine the motive for
behavior, a motivational test can be performed. This test may reveal conditions like mania or
even bipolar disorder.
We explored two cases where mental capacity was challenged. In the case of the costly car, a
judgment has not been rendered. In the case of the bad loan, there was clear enough evidence to
hold the bank liable for entering into an agreement with a person who lacks mental capacity
based on knowing the condition existed prior to processing and approving the loan.

Learning Outcomes
Watching this lesson should teach you to:

Understand when a person is considered mentally ill

Explain the ways a court may determine mental incapacity

Describe two cases that involved mental capacity

Incapacity in contract law generally means a person who is not mentally sound, which can
include being intoxicated. Persons who are intoxicated cannot legally enter into a contract and
intoxication thereby makes the contract voidable.

Mental Incapacity
There are a few reasons a person would not have the capacity to enter into a contract. Minors, the
mentally ill, and persons who are intoxicated or drug-addicted are generally excluded from
entering into legal agreements. Mental incapacity simply means that a person does not have the
competence to enter into a contract. In addition to intoxication, mental incapacity can result from
mental illness, such as schizophrenia, senility, and even bipolar condition.
Most courts look at contracts with persons of mental incapacity as voidable contracts, or
contracts that may be voided by the incapacitated party. But, a person cannot just make a claim
of mental incapacity. There are two tests used to help to determine whether a party to a contract
is incapable of fulfilling its promises: a cognitive or affective test, or a motivational test. The
court will administer a cognitive or affective test to determine whether the person understands
the contract language and consequences of entering into the contract.
Sometimes, the person understands the language and the consequences, so the court will test
motivational reasons for entering into the contract. The test may indicate a condition like mania
or delusional thinking as a motivator. In the case of an intoxicated person, the court looks at
other things as well.

When an Intoxicated Person Enters Into a Contract

When an intoxicated person enters into a contract, the contract can either be enforceable,
meaning held to the fullest extent of the law, or voidable by the intoxicated person. The court
will look at two criteria that need to be present in order to make the contract voidable:
1. The intoxication was severe enough that the person entering into the contract was
incapacitated.
2. The other party was aware of the intoxication at the time.
A voidable contract, in this instance, is one in which the intoxicated party can end the agreement
under certain terms. To expand on the criteria above, in order for the intoxicated person to void
the contract, there needs to be adequate proof that one of the following occurred:

1. The intoxicated person consumed enough alcohol or drugs to cause impairment in

thinking sufficient enough that he could not understand the legal ramifications of entering
into the contract.
2. The other party to the contract knew of the intoxication.
Alcohol or drugs cannot be provided to a party to a contract to entice or persuade them to enter
into a contractual agreement. It should be noted that even if the intoxicated person is able to void
the contract, once sober, the contract can be re-entered by the parties. Let's see what happens
when a seemingly friendly night of drinking turns to a dispute over contractual capacity.

Lucy v. Zehmer (1954)

Back in December of 1952, the Lucy's and Zehmer's enjoyed dinner and a few drinks when the
conversation turned to the sale of the Ferguson Farm. Zehmer propositioned Lucy to purchase it
for the sum of $50,000. Zehmer didn't really want to sell his farm. What he wanted was for Lucy
to admit that he did not have the $50,000 needed to make the purchase. In other words, it was a
one-sided joke, probably fueled by alcohol, on the part of Zehmer.
Lucy was all ears and continued the farm sale conversation with serious intent to purchase. After
several cocktails, Zehmer and his wife drafted an agreement on the restaurant receipt, which
loosely read, 'We agree to sell the Ferguson Farm to Lucy for $50,000', and signed this document
in witness of the other parties. After reading the memorandum drafted by Zehmer, Lucy insisted
on giving a deposit of $5 to secure the land. Zehmer actually refused the deposit, stating that the
signed agreement made at the table was good enough for him.
After all, during a 45-minute conversation, Zehmer offered the land for sale at the price of
$50,000. He drafted an agreement between the parties, and the parties both signed said
agreement. Lucy, believing Zehmer's offer was made while in the right mind, approached his
brother for half the cash needed to make the purchase. Zehmer, again, insisted that he had no
intention of selling the farm to Lucy and that the deal was made during a night of heavy
drinking. But Lucy refused to back down. Instead, he hired an attorney. Lucy's contention was
that he had a right to the promise in the contract terms.
Under a Virginia Supreme Court ruling, Lucy won the case on the grounds that both parties
agreed on the sale of the land in both actions and in writing. You see, regardless of whether
Zehmer was drunk at the time, the court ruled that both parties agreed to the sale of the farm
because Zehmer's outward behavior was sober enough for a reasonable person to believe he
intended to sell it. In other words, enough evidence was not present to prove that Zehmer was
intoxicated to the point where he was unaware of the consequences of signing an agreement.
Zehmer was forced to sell the farm to Lucy.

Lesson Summary

In sum, mental incapacity means that a person does not have the competence to enter into a
contract. This can be a result of mental illness or intoxication. In many cases, courts will render a
contract with a person who is mentally ill or intoxicated as voidable, meaning the contract may
be voided by the incapacitated party.
It is not as simple as making a claim of intoxication; however, the intoxication must be proven
severe enough that the person entering into the contract was incapacitated, and the other party
must also have been aware of the intoxication at the time. The court will also look for evidence
of whether the party was wooed or enticed into signing an agreement by serving him too many
drinks.
Not every claim of intoxication in contract disputes wins. As we learned in Lucy v. Zehmer, the
court did not see sufficient enough evidence that the two gentlemen were severely drunk at the
time of the agreement.

Learning Outcomes
You should feel confident in completing the following tasks after viewing this lesson:

Define mental capacity

Identify two criteria that would make a contract with an intoxicated person voidable

Explain why every dispute related to intoxication in a contract does not end the same

There are two primary parties to a contract, a promisor and a promisee. However, there are times
when a contract actually benefits a third party. These third parties are known as third-party
beneficiaries and can be intentional beneficiaries or incidental beneficiaries.

A Contract Between Two Parties

Generally speaking, there are two parties to a contract. The promisor makes the promise and the
promisee receives benefits from the promise. The contract between the parties becomes an
enforceable instrument when the following six elements are present:
1. An offer
2. Acceptance of the offer
3. Consideration, like money or something else of value to the parties
4. Mutual intent of both parties to fulfill the contract promises
5. Capacity

6. Legally enforceable terms that do not violate law

To make this a bit more clear, let's see what happened when Paulie purchased a pet. Paulie was
looking for a new dog. He happened upon Remy's Pet Shop in hopes of finding a cute canine
companion for his mother, Mabel. Lo and behold, anxiously vying for Paulie's attention was
Lentil, a little Labrador pup. After much negotiation and a few dog licks to Paulie's chin, he and
Remy chiseled out a contract.
Paulie, the promisor, offered to pay Remy $500 for Lentil's safe delivery to his mom Mabel's
home in another city. Remy, benefiting from the promise, accepted the offer and the deal was
done. Paulie paid in cash, both were in sound mind and both intended to do what they promised.
This is a cut-and-dry contractual agreement with only two parties, an offer, acceptance,
consideration, intent, and mutuality all wrapped up in a legal document. Sometimes, there are
third parties to a contract that can make the contract seem a bit more difficult. But it is not
difficult to understand the relationships at all.

Third-Person Beneficiaries to a Contract

Third-party beneficiaries are non-parties to a contract that receive rewards from a contract
either directly or indirectly. There are two kinds of third-party beneficiaries: an intentional
beneficiary and an incidental beneficiary.
When a non-party to a contract receives benefit from the agreement directly, this is known as an
intentional beneficiary. This party's name is generally stated within the contract and has as
much a right to sue for breach of contract as the primary parties.
Mabel was the intentional beneficiary of the contract between Paulie and Remy in the sale of
Lentil. Paulie purchased the pooch but named Mabel as the owner of the dog. Arrangements
were made to have the dog delivered to her home where the dog will reside. If Remy does not
deliver Lentil to Mabel's home in a timely manner as agreed upon, Mabel holds rights to the
contract. Further, if Remy delivers a cat instead, Mabel can sue for breach of contract, or nonperformance of the promise.
When a non-party to a contract receives a benefit from a contract and is not specifically named,
their benefit is considered incidental and they do not hold any rights to the contract. The
incidental beneficiary received a reward simply by serendipity.
Fortunately, Remy delivered little Lentil to Mabel's home safe and as promised. Lentil turned out
to be quite a noisemaker. In fact, every time a leaf blew by the window, Lentil would let out a
ferocious bark that can be heard for blocks. Mabel's neighbor Harriet loved having Lentil around.
She felt safe knowing that such a loud Labrador lived right next door. She no longer worried
about prowlers because Lentil's bark was enough to scare a ghost away!
Harriet was the incidental beneficiary of the contract between Paulie and Remy. To say it in
another way, because Paulie bought Lentil from Remy for Mabel, Harriet benefitted from having
the services of a guard dog in the next yard. If Mabel was to take Lentil on a long vacation and

Harriet could no longer rely on Lentil's brutal bark, Harriet would have no cause of action. In
fact, even if Harriet's home was ransacked in Lentil's absence, she could not sue Paulie, Remy, or
Mabel for anything. Harriet benefitted from Lentil's bark indirectly simply because of Lentil's
proximity to her house. Nothing further is owed to Harriet.
It is equally important to mention that non-parties to a contract, like third-party beneficiaries, do
not have any obligation to the contract terms and conditions. This means that if Paulie uses a bad
check to pay for Lentil, Mabel would not be responsible to pay for the pooch.

Lesson Summary
In summary, there are two parties to a contract, a promisor who makes a promise and a
promisee who benefits from a promise. Both parties are rewarded by and obligated to the
contract as long as six important elements are present. There must be an offer, acceptance of the
offer, consideration in the form of money or something of value, intent to carry out the promise,
capacity, and the contract must be legal and not violate of any laws.
There are others that may benefit from a contract either directly or indirectly. One who benefits
directly from a contract is an intentional beneficiary and benefits from a contract because the
person is specifically stated in the contract, like contracting a pet shop to purchase a dog for your
mom.
There is an indirect benefit to an incidental beneficiary, which states that a person can receive
reward from a contract simply by being at the right place, like living next door to a guard dog.
The relationship between the party to the contract and the incidental beneficiary is not a direct
one. Therefore, this person has no rights to the contract. Should either party to the contract cease
to perform, this beneficiary loses their reward or benefit and can do nothing more about it.
The intentional beneficiary holds more rights and can sue for breach of contract or nonperformance if the contract is not fulfilled. However, neither third-party beneficiary holds any
obligation to the terms of the contract.

Learning Outcome
After seeing this video, you should be able to:

Recognize the elements of a contract

Define a promisor and a promisee in a contract

Describe the difference between an intentional beneficiary and incidental beneficiary

Intentional third-party beneficiaries to a contract are indirect parties but receive a benefit from a
contract because of the promise of a gift or receives a benefit because of a debt owed through
performance by the promisee.

Intentional Third-Party Beneficiaries and Their Rights

Has a flower shop ever delivered you a big bouquet of roses from your sweetheart on Valentine's
day? If so, you were the third-party beneficiary to a contract.
A third-party beneficiary is one who received a benefit from the terms of a contract between
two principle parties. While the third party did not expressly enter into the contract, the
beneficiary becomes part of the contract terms, either incidentally or intentionally.
An incidental beneficiary becomes a party to a contract indirectly but is not intended to be
included in the contract. To make the point, let's say a neighbor contracts a local DJ for a party he
is hosting in his yard. While the music plays into the night, you benefit from listening to the top
tunes. If the DJ changes genre during the set to something that you dislike, there is not much you
can do about it but wear earplugs.
That is because you, the incidental beneficiary may receive an indirect benefit from the contract
but have no cause to sue if the terms of the original contract are not fully executed.
For our purposes, we will focus on the intentional beneficiary who received benefits from a
contract because the principle parties to the contract specifically named the beneficiary as a
party. Unlike the incidental beneficiary, the intentional beneficiary does have rights to the
contract and can sue for breach of contract should the terms change.
Suppose your friend purchased you a Jelly of the Month Club subscription for your birthday.
Your friend contracts the folks at Jelly of the Month Club to have a different flavor of jelly
shipped to your home each month for a period of one year.
As the intended beneficiary to this contract, it is your friend's obligation to exchange
consideration, or payment, for your monthly delivery and Jelly of the Month Club's obligation
to send you a new jar of jelly each month for the term of the contract. Should you not receive
Jelly of the Month in the month of June, you have every right to sue for breach of contract, or
failing to follow through with the agreed-upon terms.
There are two categories of third-party beneficiaries, and each possesses different rights.

Categories of Third-Party Beneficiaries

Third-party beneficiaries possess rights in two different categories: donee beneficiaries and
creditor beneficiaries.
The donee beneficiary benefits indirectly from a contract between two principle parties when
one party, the promisee, attempts to give a gift.
Remember the neighbor having the backyard party? A neighbor promises to donate 100 tee shirts
to give to all of the guests. The neighbor doesn't have 100 tee shirts, so he will have to order

them. The neighbor buys the tee shirts from a third party in order to honor the promise of tee
shirts to the neighbor, the second party.
You see, the tee shirt shop is the donee beneficiary and is not actually part of the agreement to
bring tee shirts to the party but benefits from the tee shirt order.
In contrast, creditor beneficiaries are third parties to a contract and receive benefits when there
is a legal duty for a promise to perform.
An example will help here. Your neighbor wants to hire entertainment for the backyard party. He
contacted a talent agency to hire the DJ. While the talent agency does not actually spin records,
the agency will contact an available DJ to perform for the evening.
So, the neighbor and the talent agency are the principle parties to the contract. The DJ becomes
the creditor beneficiary to the contract. The DJ benefits from the contract between the neighbor
and the talent agency because he is specifically named as a third party and the contract is based
on performance.
When the DJ agreed to take the gig, that was expressing assent, or an expression of approval. If
the neighbor proves to be a deadbeat and not pay the piper, the DJ has a cause of action.
So, how does a third party become vested in a contract?

When Beneficiary's Rights Vest and Claims Are Enforceable

A third-party beneficiary's rights vest, or become an immediate right to present or future
enjoyment, of a benefit when one of the following occurs:

When assent occurs - agreement by the third party to perform

When the third party detrimentally relies on the promise made by the principles in the
original contract

When stated conditions for vesting have been satisfied by the parties in the original
contract

To say it a different way, if a third party agrees to perform, like the DJ hired to spin for the soire
did, he is vested and the contract is enforceable. If a promise made in the contract is so
detrimentally relied upon by the third party that in its absence a terrible loss would occur, the
third party's rights vest. Equally, the rights vest when the promise stated in the contract has been
performed, like the paying out of life insurance benefits due to the death of the policyholder. It's
clear that third party beneficiaries do have a right to enforce the terms of a contract.

The creditor beneficiary may enforce the contract between the promisor and the promisee if the
promisor fails to fulfill his obligation to the contract. The creditor beneficiary may bring action
against the promisee and, in turn, the promisee may bring action against the promisor.
To keep this real, say the neighbor having the party writes a bad check to the talent agency. The
talent agency paid the DJ with the anticipated funds, but the check bounced. The DJ may sue the
talent agency for his pay. The talent agency will go after the neighbor to make good on the
check.
Now, the promise between the neighbor and the party-goer for the 100 tee shirts works a bit
differently. If the party-goer refuses to pay for the tee shirts, the tee shirt maker can go after the
party-goer. However, the neighbor expecting the tee shirts would have no recourse because the
tee shirts were a gift and not a performance.
Whether a creditor beneficiary or a donee beneficiary, both third parties have rights to the terms
of a contract. The relationship between the parties determines the extent of the rights.

Lesson Summary
In summary, there are two types of third-party beneficiaries. A third-party beneficiary is one
who received a benefit from the terms of a contract between two principle parties. An incidental
beneficiary becomes a party to a contract indirectly but is not intended to be included in the
contract.
Our focus was on intentional beneficiaries and included the donee beneficiary, who benefits
indirectly from a contract between two principle parties when one party, the promisee, attempts
to give a gift, and the creditor beneficiaries who receive a benefit when there is a legal duty to
perform.
A third-party beneficiary's rights vest, or become an immediate right to present or future
enjoyment, of a benefit when one of the following occur:

When assent occurs - agreement by the third party to perform

When the third party detrimentally relies on the promise made by the principles in the
original contract

When stated conditions for vesting have been satisfied by the parties in the original
contract

The creditor beneficiary may enforce the contract between the promisor and the promisee if the
promisor fails to fulfill his obligation to the contract. The creditor beneficiary may bring an
action against the promisee and, in turn, the promisee may bring action against the promisor.

Learning Outcomes

Following this lesson, you'll be able to:

Define third-party beneficiary

Differentiate between incidental beneficiary and intentional beneficiary

Identify two types of intentional beneficiaries

Describe when a third-party beneficiary's rights vest

There are two parties to a contract, a promisor and a promisee. Each holds a
responsibility to the contract but in different ways. As each role indicates, one
party makes a promise and the other party benefits from the promises made.

Promisor and Promisee in Contracts

There are two parties to a contract, and each plays a distinct role in the performance, or
actions that complete the terms of a contract. The promisor makes a promise, and the
promisee, in turn, has been promised something.

Let's use an example to simplify this. Suppose Misty was planning her 30th birthday
bash. She may call a caterer to plan the menu. Then, no party is complete without a
dancing gorilla. So she books him too! When Misty called Grody's Dancing Gorillas, Inc.
to book the boogying beast, Grody quoted Misty a price and promises to send his most
talented gorilla, Mongo, to her party.

Grody is the promisor because he promised to send Mongo to dance at the party. Misty is
the promisee because she is on the benefiting end of the promise. That is the simplified
explanation of how two parties become obligated to one another. However, when contract
law uses the terms 'promisor' and 'promisee,' they may also be referring to contracts that
include a third party to which a benefit of the contract is owed.

The Third Party Beneficiary Rights

A third party beneficiary to a contract is one who benefits from a contract, but is not a
named party to the contract. The promisor and the promisee act as the parties to the
contract, but the third party actually receives that which was promised in the contract.

Each party has certain duties and rights to the contract. The promisor has the duty to
provide what he promised in the contract. He also has the right not to be sued by both the
promisee and the third party beneficiary. This means, if the promisor does not follow
through on his promise, one party or the other may sue for performance but not both. It's
sort of like the double jeopardy rule in criminal cases.

The promisee has the duty to perform the promises he made as well, like satisfying the
element of consideration, or exchanging money or other valuable things to the promisor.
The right to sue for non-performance is also a right of the promisee if performance is not
satisfied. A third party beneficiary probably is in the best position in this type of contract.
This party has no duties, but benefits wholly from the terms of the contract and has a
right to sue for non-performance. This party cannot be sued for non-performance of the
promisee either! It's a win-win!

Confused? Don't be! It's fairly simple to understand. Misty's grandfather wants to do
something special for her 30th birthday. So, after researching many different gift ideas,
Granddad Milo came across a neat present. He can name a star after Misty. Milo
contracted with Star Gazers International to have a star named after Misty. He sent the
payment of $30 to the company and waited patiently for the paperwork to be sent to
Misty.

Unable to keep a secret, Granddad Milo spilled the beans about the star. Weeks passed
since the promised arrival of the paperwork. Misty called the company to inquire where
in the sky her star is located. The company denied owing her a star.

Yikes, no star for Misty's birthday was crushing enough! But knowing that Milo paid a
premium for the twinkler, Misty wanted answers and Milo's money back as well. Even
though Misty was not a party to the contract, meaning, she did not negotiate or sign
anything, but because she is named as a party to receive something, she is a third party
and has the right to sue the company for specific performance. This means, Misty can
take Star Gazers to court to demand that the promise in the contract be fulfilled or
restitution be made to recover from the loss.

Conversely, if Star Gazers did send the paperwork for Misty's birthday star but Granddad
Milo's check bounced in the meantime, Star Gazers only has the right to sue Milo, not
Misty, because she was no part of the contract. Remember, the promisee and the third
party beneficiary cannot both sue the promisor. It is one or the other - never both.

Lesson Summary

In a nutshell, the promisor makes a promise, and the promisee, in turn, has been
promised something. This means the promisor must satisfy performance, or actions that
complete the terms of a contract, and the promisee must fork over consideration, or
exchanging money or other valuable thing to the promisor.

There is often a third party beneficiary to a contract, which is the one who benefits
from a contract but is not a named party to the contract. Both the promisor and promisee
have duties and rights to the contract. The promisor must satisfy the promises made in the
contract, and the promisee must pay for the performance. The promisor has the right not

to be sued by both the promisee and the third party beneficiary if something should go
wrong with performance.

The third party beneficiary really stands in the best position in this type of contact. This
party has the right to receive benefits and the right to sue but cannot be sued because he is
not a party to the contract, only a beneficiary to it.

Contract assignment occurs when one party to a contract gives the obligations and benefits of the
contract to another party. Assignment of rights occurs when one party to a contract gives the
benefits of the contract to another party. This lesson explains what an assignment is and what
parties are involved.

Contract Assignment
There are two types of assignments involving contracts. The first is a contract assignment. A
contract assignment means that a party to the contract assigns the entire contract to another party.
This means that the party gives the obligations and benefits of an existing contract to another
party. This situation occurs when a party to a contract wants another party to completely step in
and fulfill the contract.
The ability to assign a contract to another party is a fairly common practice in contracts law. This
type of assignment is common in a wide variety of different contract situations.

Parties to an Assignment
There will generally be at least three parties involved in a contract assignment. First, there will
be at least two original parties to the existing contract. Let's call these parties Pink and Blue.
Then, there will be a third party, who is assigned the contract. Let's call this party Yellow.
Let's say Pink and Blue enter a contract, where Pink is to provide Blue with one pallet of St.
Augustine sod grass. In return, Blue will pay Pink for the grass. Now, let's say Pink is unable to
locate the St. Augustine grass. He can only find Bermuda grass.
Pink's friend, Yellow, owns a gardening center. Yellow has the St. Augustine sod in stock at his
store. So Pink agrees to let Yellow fulfill his contract with Blue. Pink notifies Blue that Yellow
will now be fulfilling the contract. This means that Pink assigns Yellow both the obligations and
the benefits under his contract with Blue.
In this scenario, Pink is the assignor, since he was the original party to the contract with Blue.
Yellow is the assignee, since he now possesses the rights and obligations of the contract with
Blue. Yellow is now obligated to provide Blue with the St. Augustine grass, and Blue is now
obligated to pay Yellow.

Assignment of Rights

There is also a second type of assignment. Sometimes, an assignor will only make an
assignment of rights. This means that the original party remains obligated to fulfill the contract,
but another party receives the contractual benefits.
Let's change our scenario a little bit. This time, Pink has the St. Augustine grass and is perfectly
willing and able to provide the grass to Blue. But Pink and Yellow worked together on another
house, and Pink still owes Yellow for Yellow's work on that project. Pink later asks Blue to
please pay Yellow for the grass, instead of paying Pink. Now Blue has an obligation to pay
Yellow, even though Yellow has no obligation to Blue.
In this scenario, Pink is the assignor, since he was the original party to the contract with Blue.
Yellow is the assignee, since he now possesses the benefit of the contract with Blue.
Pink is still obligated to provide Blue with the St. Augustine grass. Nothing there has changed.
But now there is a new obligation. Blue is now obligated to pay Yellow. This means that Blue is
an obligor, since this contract was written to profit Yellow, and Yellow is an obligee.
An assignment of rights can be made as a gift. When an assignee assigns the benefit of a contract
as a gift, it's known as a donative assignment. Otherwise, as we have in our scenario, the
assignment is an exchange. Yellow previously did work for Pink, so Pink will have Yellow paid
for that work.
Donative assignments can be revoked. This means that the assignor can change his mind and
take back the rights. Generally, assignments aren't revocable, except that the death or bankruptcy
of an assignee will automatically revoke the assignment.

Assignor and Assignee

Let's revisit our scenario and take a closer look at the parties involved. Pink is an original party
to the contract and is the assignor. An assignor can be an individual, a group, or a business.
The assignor is the party that transfers its contractual rights to another party. In a contract
assignment, this means that the party transfers both the contractual obligations and the
contractual benefits. In an assignment of rights, this means that the party transfers just the benefit
of the contract.
In our scenario, the contractual obligation is the obligation to provide Blue with the St.
Augustine sod. The contractual benefit is the benefit to be paid for the sod.
Yellow is the assignee. An assignee can be an individual, a group, or a business.
The assignee is the party that receives the rights and obligations under the contract, but wasn't an
original party to the contract. Usually, an assignee receives the contract rights and obligations
directly from an original party to the contract.

Obligor and Obligee

In our second scenario, when Pink assigns only his rights under the contract, Blue becomes the
obligor. Blue is now obligated to pay Yellow. An obligor is a party that is obligated to do
something under the terms of a contract.
You will sometimes hear the term 'obligor' used to describe a 'borrower' or a 'debtor.' This is
common because many contracts are debt contracts, but it's important to note that obligors can be
required to do something other than repay debt. Obligors can be obligated to perform a particular
task or even to refrain from a particular activity.
Whenever we have an assignment and an obligor, we'll have an obligee. In our second scenario,
Yellow is the obligee. An obligee benefits from the obligor's obligation. Yellow is our obligee
because the assignment was made to profit Yellow, even though Yellow isn't considered to be a
third party beneficiary. Yellow isn't a third party beneficiary because the original contract
wasn't written in order to benefit Yellow.

Restrictions on Assignment
There are many different restrictions on assignments. First, an assignment can only be for present
rights. This means that Pink can only assign his rights to Yellow after Pink has those rights. A
promise to assign future rights is void. So Pink can't assign his rights before his contract with
Blue is made.
Additionally, the assignor has to make a clear statement regarding the intent to assign rights, and
those rights have to be clearly identified. If the assignor's intent isn't clear, or the rights aren't
clearly identified, then the assignment is void.
A rescission clause is another type of restriction. It's a contractual clause that allows the other
party to rescind the contract if an assignment is made. Also, a clause that creates a condition
subsequent rescinds the contract automatically if an assignment is made.

Certain Contracts Not Assignable

The common law supports the freedom to assign a contract, so assignments are usually permitted
unless there's a non-assignment clause. A non-assignment clause prohibits the assignment of
specific rights, or of the entire contract, to another party. However, if an assignment is permitted,
then the assignor can assign the contract without checking with the other party to the contract.
It's important to note, though, that the assignment can't affect the other party's contractual rights
or the assignment will be void.
For instance, in our scenario, Pink's assignment to Yellow can't affect Blue's rights. Blue must
still receive the same grass, in the same quantity and quality.

This rule helps explain why certain contracts can't be assigned at all. This includes contracts that
involve a unique performance. For example, let's say Blue now hires Pink to sing at his birthday
party. Pink can't assign the contract to Yellow because this contract is unique and requires Pink's
presence. If Yellow sings, it's not the same thing as Pink singing. It may be better or worse, but
either way, it's not Pink singing.
Also, certain assignments can't be made if they violate public policy. For instance, rights
obtained through a personal injury suit can't be assigned because this type of assignment might
encourage litigation.
One case example is the Nevada case of Traffic Control Services v. United Rentals Northwest. In
this 2004 case, the state supreme court ruled that an employee's non-compete agreement with one
company couldn't be assigned to another company.
Burkhardt previously worked for NES. As part of his employment contract, Burkhardt signed a
non-compete agreement and was paid $10,000 in return. This agreement said that if Burkhardt
left NES, he wouldn't work for a competitor firm in the area for one year, and he would protect
confidential company information. United Rentals then bought NES, and Burkhardt refused to
sign a new non-compete agreement with United Rentals. Instead, he left to work for Traffic
Control.
United Rentals sued Burkhardt and Traffic Control for violating the non-compete agreement.
Nevada's highest court ruled that an employee's non-compete agreement is personal in nature and
therefore not assignable without the employee's consent or without a clear contract clause that
allows the assignment.

Lesson Summary
Let's review. There are two types of assignment. Contract assignment occurs when one party to
a contract gives the obligations and benefits of the contract to another party. Assignment of
rights occurs when one party to a contract gives the benefits of the contract to another party.
An assignment involves at least three parties. The assignor is the party that gives the contract
rights to another party. The assignee is the party that receives the contract rights from the
assignor. The obligor is the party that didn't participate in the assignment, but is now obligated to
the assignee.
Assignment is a fairly common practice in contracts law, but assignment can be prevented in
certain situations. Assignment won't be allowed if the contract involves personal services or if
there is a non-assignment clause.

Learning Outcome
The lesson above will help you to:

Explain what a contract assignment is

Discuss how many parties are involved in a contract assignment and how they fit in

Recognize what an assignment of rights is

Understand who the assignor and assignee are

Analyze the role of an obligor and an obligee

Point out the restrictions that may be placed on an assignment

Assignments are common in contracts law. There will generally be at least three parties involved
in an assignment. This lesson explains the roles and rights of the assignee, assignor, and obligor.

Assignments
Assignment is a common practice in contracts law, and can be found in a variety of different
contractual situations. Assignment generally means that there is a transfer of property, or of a
right, from one party to another. There are two different types of assignment.
A contract assignment is when one of the original parties to the contract gives the obligations
and benefits of the contract to another party. A party can also assign only the benefits of the
contract, and retain the obligations. This is called an assignment of rights.
Assignments involve at least three parties. These parties are the assignee, the assignor, and the
obligor. For example, let's say that I sell my TV to Red for $2,000. Red doesn't have $2,000
right now, so he executes an agreement to pay me $100 a month for the next 20 months. I owe
Green $1,000, so after the first 10 months I assign this contract to Green. I am the assignor,
Green is the assignee, and Red is the obligor.

Assignee
Let's first look at the role of the assignee. The assignee is the party that receives the rights and
obligations under the contract, but wasn't an original party to the contract. An assignee usually
receives the contract rights and obligations directly from an original party to the contract. An
assignee can be an individual, a group, or a business.
In our scenario, I assign my right to receive benefits to Green. Green is the assignee.
An assignee can be assigned anything. This includes such things as real property, real estate, and
intellectual property. The benefit can be something tangible, like an antique clock, or something
intangible, like life insurance benefits.

Generally, after a valid assignment, all the rights and obligations of the assignor pass to the
assignee. The assignee steps into the shoes of the assignor. The assignee is now responsible for
fulfilling any remaining obligations under the contract, and the assignee will reap the benefits of
the contract. The assignee won't be required to go through the assignor when asserting legal
rights under the contract. This means that the assignee can generally sue the other party to the
contract if that party doesn't fulfill the contract.
For instance, let's say Red stops making payments. Green can sue Red for the payments. Green
doesn't have to ask me first, or ask me to do it for him.

Assignor
Now let's take a look at the assignor's role. An assignor is an original party to the contract. An
assignor can be an individual, a group, or a business. The assignor is the party that transfers its
contractual rights to another party. In a contract assignment, this means that the assignor
transfers both the contractual obligations and the contractual benefits. In an assignment of rights,
this means that the assignor transfers just the contractual benefits. In either situation, the assignor
transfers to the assignee.
In our scenario, I assign my right to receive payments to Green. I am the assignor.
The assignee steps into the shoes of the assignor, but this doesn't mean that the assignor then
walks away with no obligations or liabilities. An assignment doesn't always completely relieve
the assignor. Some contracts include an assurance that the original parties guarantee contract
performance. This means that the original parties will fulfill the terms of the contract. So, if the
assignee fails to perform the contract, the assignor must step back in and do so. Also, remember
that an assignment can be only an assignment of rights. In that case, the assignor retains the
obligations of the contract even though the assignee reaps the benefits.
For example, let's say I haven't delivered the TV to Red yet. I told him he had to pay for it in full
before I'd deliver it. If Red completes his payments to Green, then I still have the obligation to
deliver the TV to Red.

Obligor
Next, let's take a look at the role of obligor. As we've discussed, an assignment is a transfer of
contractual rights from one party to another party. These parties are the assignor and the
assignee. Remember that the assignor was an original party to the contract. The other original
party to the contract is the obligor. In our scenario, Red is the obligor.
An obligor is a party that is obligated to do something under the terms of a contract. An obligor
can be an individual, a group, or a business. You might be familiar with the term 'obligor'
because it's often used to describe a 'borrower' or a 'debtor'. This is because many contracts are
debt contracts. In our scenario, Red is a debtor. But obligors can be obligated to duties other than

repaying debt. Obligors can be obligated to perform a particular task or to refrain from a
particular activity.
Whenever we have an obligor, we will have an obligee. An obligee is the party who will benefit
from the obligor's fulfillment of the contract. If the assignment is made to profit another party,
then that party is the obligee. In our scenario, Green is the obligee. It's common for the obligee to
also be the assignee.
It's important to note that obligees and third party beneficiaries aren't the same thing. If the
contract is written for the benefit of another party, then that person is a third party beneficiary. If
an assignment is made in favor of another party, and that party will benefit from the obligor's
obligation, then that party is the obligee. Green isn't a third party beneficiary because my
contract with Red wasn't written for Green's benefit.
Also note that some assignments require permission from the obligor. In our scenario, I'll
generally be allowed to assign my future rights to Red's payments without Red's permission. But
let's say Red is paying me to paint a mural on his wall. I can't assign Green my contract and have
Green paint the mural for me, unless Red agrees. This is because the contract is for a personal
and unique service.
Also, assignment won't be allowed if it increases the burden to the obligor. Let's say that Green
attempts to charge Red interest, therefore making Red's payments more than $100 per month.
This assignment will be void.

Breaches and Defenses

As you can see, the assignee, assignor, and obligor each have unique responsibilities and rights.
These rights help protect each party in the event another party breaches the contract. These rights
also create defenses, should the party be sued for not fulfilling its contractual duties.
One example is implied warranty. All assignments come with an implied warranty that the
assigned right actually exists and isn't subject to restrictions that the assignee doesn't know
about.
Let's say I've renegotiated the payment terms with Red, and told him he can pay me every other
month. If I assign my first contract to Green, it will be void since Green doesn't know that he
won't be paid every month. This rule protects the assignee.
Note, though, that this isn't a guarantee that Green will be paid. Red might declare bankruptcy or
just refuse to pay Green. Green will have to sue Red, rather than me. I'm not liable if I didn't
know that Red wouldn't pay. I've never guaranteed that Green will actually get paid. This rule
protects the assignor.
Now let's say that the TV never worked. Once Red found out it was broken, he quit making
payments. In the meantime, I assigned the contract to Green. So Green sues Red for the

payments. Red has a defense against me, since the TV never worked. Since Green stands in my
shoes, Red can raise his defense against Green. This rule protects the obligor.

Lesson Summary
Assignment is a common practice in contracts law. It generally means that there is a transfer of
property, or of a right, from one party to another. Assignments involve at least three parties.
These parties are the assignee, the assignor, and the obligor.
The assignee is the party that receives the rights and obligations under the contract, but wasn't
an original party to the contract. The assignor was an original party to the contract and is the
party that transfers its contractual rights to another party. The other original party to the
contract is the obligor. The obligor is the party that is obligated to do something under the terms
of a contract. Each party holds certain rights and defenses against the other parties based on its
role.

Learning Outcome
At the end of the video, you will have a better understanding of how to:

Define what an assignment is in contracts law

List the two types of assignment

Explain the roles and rights of the assignee, the assignor, and the obligor

Differentiate between third party beneficiaries and obligees

Discuss breaches, defenses, and the concept of implied warranty

A contract assignment means that one party transfers contract rights to another party. The type of
the assignment determines if, and how, the assignment can be revoked. This lesson explains
assignment revocability.

Assigments
A contract assignment is a transfer of property, or of a right, from one party to another party. The
party transferring rights will be an original party to the contract. This party is the assignor. The
party receiving rights will not be a party to the original contract. This party is the assignee.
There are two types of assignment. A party to a contract can assign the entire contract to another
party. This means the party assigns both the rights and the obligations of the contract. Or, a party
to a contract can assign only the rights or benefits of the contract.

For example, Green makes a contract with Yellow. Green agrees to clean Yellow's apartment, and
Yellow agrees to pay Green $20. Green then assigns the benefits of the contract to Orange. This
means that once Green cleans Yellow's apartment, Yellow will pay Orange $20. Green is the
assignor and Orange is the assignee. Yellow is the obligor because he's obligated to pay $20.

Donative Assignments
An assignment can, itself, be an enforceable contract. Let's add to our scenario a little bit. Let's
say Orange agrees to wash Green's car, and in exchange, Green assigns Orange the right to be
paid by Yellow. Green and Orange have an agreement with consideration, or an assignment for
value.
An assignment can also be given gratuitously, or as a gift. An effective assignment doesn't
require consideration. This type of assignment is called a donative assignment. Let's say Green
doesn't need Yellow's $20, but he knows that Orange has been working overtime for extra cash.
Green can assign the $20 to Orange as a gift.

Revocability
The revocability of an assignment depends on the type of assignment. Assignments made for
value, or with consideration, are irrevocable. This means that the assignor cannot cancel or take
back the assignment.
Donative assignments, though, are generally revocable. This means that the assignor can cancel
or take back the assignment under certain circumstances.
There are four different ways that the assignor can revoke a donative assignment. First, the
assignor can simply notify the assignee that the assignor revokes the assignment. In our scenario,
Green would simply tell Orange that he's changed his mind.
Second, the assignor can revoke the assignment by directly accepting the obligor's performance.
In our scenario, Green would accept the $20 from Yellow rather than having Yellow pay Orange.
Third, the assignor can make a subsequent assignment of the same right to another party. In our
scenario, this means that after assigning Orange the right to collect $20 from Yellow, Green
would assign Blue the right to collect $20 from Yellow. The subsequent assignment to Blue
automatically revokes the assignment to Orange.
Lastly, the assignment will be automatically revoked as a matter of law if the assignor dies or
declares bankruptcy. In our scenario, let's say that Green declares bankruptcy shortly after
assigning his rights to Orange. If Orange hasn't received the $20 yet, then the assignment will be
automatically revoked.

Exceptions to Revocability

Sometimes a donative assignment can't be revoked. There are four general exceptions to the
revocability of a donative assignment.
First, the assignor can't revoke the assignment if the obligor has already performed the
obligation. In our scenario, this means that Green can't revoke the assignment to Orange if
Yellow has already paid Orange.
Second, the assignor can't revoke the assignment if the assignment is made in writing. In our
scenario, let's say that Green writes a letter to Orange announcing his assignment to Orange.
Green can't then revoke the assignment.
Third, the assignor can't revoke the assignment if the assignee received something in writing that
symbolizes the assignment. For instance, the assignee might have received a writing that is
normally accepted as evidence of the right to collect. Common examples include bonds, stock
certificates, savings account books, and life insurance polices.
In our scenario, let's say that Green cleaned Yellow's apartment, and Yellow gave Green an
I.O.U. for $20. Now let's say Green gave that I.O.U. to Orange. Green can't then revoke the
assignment to Orange.

Promissory Estoppel
The fourth, and last, exception to revocability involves a legal doctrine that is common to
contracts law. It's called promissory estoppel. The assignee can't revoke the assignment if the
assignee relied on the assignment to his or her substantial detriment. Promissory estoppel only
applies when a party significantly changed his or her position by relying on a gratuitous promise.
That party can then enforce the gratuitous promise, even though the promise isn't an enforceable
contract. A gratuitous promise isn't an enforceable contract because there isn't a mutual
obligation and there isn't consideration.
In our scenario, let's say that Orange is in debt. Once Orange learns that he'll be receiving $20,
Orange promises the debt collector that he'll make a $20 payment on Friday. The debt collector
agrees to wait until Friday but tells Orange that he'll start charging interest on Saturday. Green
can't revoke the assignment to Orange because Orange has now relied on the promise and placed
himself in a worse position.

Lesson Summary
Let's review. A party to a contract can assign the entire contract to another party or assign only
the rights under the contract. Assignments can be for value, or consideration, or donative.
Assignments for value aren't usually revocable.
Generally, donative assignments are revocable. An assignor can revoke an assignment by
notifying the assignee of the revocation, by accepting the obligor's performance, or by

subsequently assigning the same right to another party. Also, the death or bankruptcy of the
assignor will automatically revoke the assignment.
But sometimes a donative assignment can't be revoked. It can't be revoked when the obligor has
already performed the obligation, when the assignment is made in writing, when the assignee
received something in writing that symbolizes the assignment, or when the assignee relied on the
assignment to his or her substantial detriment.

Learning Outcome
As you finish the lesson, you may be able to:

Define a contract assignment and how the assignor and assignee are involved

Explain what a donative assignment is

Describe revocability and what assignments may be revocable

Explain some of the exceptions to revocability

Delegation occurs when the responsibility and authority for performing a particular contractual
duty is transferred to another party. This is different than an assignment. This lesson explains
delegation, and the differences between delegation and assignment.

Delegation
Delegation is a common practice in contract law. Delegation occurs when a party to the contract
transfers the responsibility and authority for performing a particular contractual duty to another
party. Delegation doesn't involve the transfer of contractual rights.
Let's say that you hire me to remodel your kitchen. I'm planning to do all of the work myself, but
I'm not a painter. Paint fumes give me a headache. I'm planning to delegate the painting to my
friend, Pam. I'm still responsible for the kitchen remodel, and you'll pay me when I'm finished.
The contract is between you and me. Pam is only responsible for the painting.

Differences in Delegation and Assignment

An assignment occurs when an original party to the contract transfers the rights and duties of
the contract to another party. A party can assign the entire contract, meaning that the party
assigns both the rights and the obligations of the contract. Alternatively, the party can assign only
the rights, or benefits, due under the contract. The party making the assignment is called the
assignor. The party receiving the assignment is the assignee. It's helpful to remember that the
assignee steps into the shoes of the assignor.

Delegation, on the other hand, involves only a portion of the contract. With delegation, a
particular contractual task or activity is transferred. Delegation means that an obligation is
transferred, but no rights are transferred. The party making the delegation is called the delegator.
The party receiving the delegation is the delegatee. The delegatee doesn't assume responsibility
for the entire contract or receive the benefits of the contract. Therefore, the delegatee doesn't step
into the shoes of the delegator. In our scenario, I am the delegator and Pam is the delegatee.
In both assignment and delegation, there is an obligor. The obligor is the other original party to
the contract and is obligated to do something under the terms of the contract. In our scenario, you
are the obligor. You're obligated to pay me once I finish your kitchen.

Contract Rights
The main difference between delegation and assignment relates to contract rights. In an
assignment, the rights, or benefits, of the contract are assigned to another party. If I assign Pam
to remodel your kitchen, then Pam has the right to collect payment from you. If you refuse to pay
Pam, she can sue you for payment. Pam has stepped into my shoes.
On the other hand, in a delegation, the delegator retains the rights, or benefits, of the contract, as
well as the overall obligations of the contract. If I delegate only the duty to paint your kitchen,
I'm still responsible for delivering your completely remodeled kitchen. I also still have the right
to collect payment from you when the entire kitchen is finished. If you refuse to pay, Pam can't
sue you because she never had a contract with you. Pam doesn't step into my shoes. I'll have to
sue you for payment.

Contract Liability
Another important difference between delegation and assignment involves liability. A delegatee
isn't as liable as an assignee. A delegatee isn't liable for the overall performance of the contract or
for any contractual duties she didn't accept. Let's say that I assign the entire kitchen contract to
Pam. Pam is now responsible for the completion of the kitchen remodel. If it doesn't happen, or
there's a problem with it, you can sue Pam.
Now let's say I only delegate the kitchen painting to Pam. Since Pam hasn't assumed the
responsibility for any other duties, she's not responsible or liable for anything other than the
painting. If I install the wrong color sink, Pam isn't liable, but if Pam's painting is sloppy, I can
sue Pam or you can sue Pam. Either one of us can recover the money necessary to re-do her
work.

Delegation Prohibited
Sometimes delegation is prohibited. Let's change our scenario a little bit. Let's say that you've
hired me to remodel your kitchen, and that this remodel includes one of my famous stained glass
windows. I can't delegate the task of creating the window, because this task is personal and

unique to my talents. Additionally, both assignment and delegation will be prohibited if the
contract clearly addresses the possibility and forbids it.

Lesson Summary
Let's review. Delegation is a common practice in contract law. Delegation occurs when a party to
the contract transfers the responsibility and authority for performing a particular contractual
duty to another party. Delegation doesn't involve the transfer of contractual rights. In an
assignment, the rights, or benefits, of the contract are assigned to another party. In a delegation,
the delegator retains the rights, or benefits, of the contract. Another important difference involves
liability. A delegatee isn't liable for the overall performance of the contract or for any contractual
duties that the delegatee didn't accept.

Learning Outcomes
At the end of the lesson, you will have an easier time:

Defining delegation and how it fits into contract law

Distinguishing between delegation and assignment

Discussing contract rights and how it can help you distinguish between delegation and
assignment

Explaining contract liability

A statute of frauds is a state law that applies to certain oral contracts. Generally speaking, a
statute of frauds requires that certain contracts be in writing and signed by the parties. This
lesson explains what these statutes are, what these statutes require and why we have these
statutes.

Statute of Frauds
The statute of frauds originated in 17th century England. Generally speaking, a statute of frauds
requires that certain contracts be in writing and signed by the parties. For the most part, a binding
contract can be oral or written. There are, however, state laws that deem certain types of oral
contracts unenforceable unless there's a writing that evidences the agreement.
It's important to note that the writing doesn't need to be a formal, written contract. The writing
simply serves to prove the agreement between the parties. Any writing will meet the
requirements of the statute, as long as it's sufficient to show a contract between the parties.
Also, it's not necessary for both parties to sign the writing. The agreement needs to be signed by
the party against whom the agreement is enforced.

Every state has some type of statute of frauds, but different jurisdictions have different statutes.
These statutes, though, have the same purpose. A statute of frauds always serves to act as an
assurance for the parties and protection against fraudulent behavior.

Contracts Covered by a Statute of Frauds

A statute of frauds only applies to particular contracts. There are six categories covered by this
type of statute.
Statutes of frauds cover contracts involving the sale of an interest in land, contracts that can't be
performed within one year, contracts in which someone assumes responsibility for someone
else's debt, promises that involve marriage as consideration, contracts for the sale of goods worth
more than $500 and certain promises by executors or administrators.
Some states have also added certain life insurance contracts, contracts to make a will and
contracts to pay a real estate agent's commission.
For example, let's say that I agree to sell you my TV. I'll deliver the TV to you six months from
today. This contract may not need to be in writing, because six months isn't more than a year
away. But we need to know how much you've agreed to pay for the TV. If it's over $500, then the
contract needs to be in writing.

Purpose of a Statute of Frauds

Generally speaking, there are two main reasons for a statute of frauds. Both reasons are based on
public policy.
First, because these statutes somewhat formalize the agreement, the parties will hopefully spend
more time considering the agreement. The statutes purposely cover significant agreements that
sometimes carry serious consequences. Careful advance consideration can prevent later
litigation.
Secondly, the statutes were originally designed to prevent fraudulent conduct by one of the
parties. Again, the statutes purposely cover those categories that can carry serious consequences
for one of the parties. In these situations, there can be a potential for uneven bargaining power
and an incentive for one party to argue the existence of a contract that the other party denies. The
writing requirement can ensure that the parties meant to make the agreement - and that they
understood the details of the agreement.

Effect of a Statute of Frauds

A statute of frauds works as a defense to a breach of contract claim. In most states, a statute of
frauds doesn't make a contract void. These statutes simply make certain contracts voidable. This
means that the contract is valid and enforceable unless one of the parties chooses to void the

contract. So, if all parties agree that they made a contract and are bound by the contract, the
contract will remain enforceable.
A minority of states automatically voids those contracts that don't meet statute of frauds
requirements. For example, the highest Delaware court used the statute of frauds when it
dismissed an employee's claim for breach of an oral contract.
In Aurigemma v. New Castle Care, Dr. Aurigemma sued his employer for breaching an oral
employment agreement. The doctor alleged that he entered an oral agreement with his employer
in early September 2003. Under the agreement, the doctor was to become the new medical
director. He would serve as the medical director for one year, beginning on October 1, 2003. The
employer denied the agreement existed. The employer also said that the contract would be void
anyway because the statute of frauds required that it be in writing.
The Delaware court agreed. The court ruled that the statute of frauds required this contract to be
in writing, since the contract couldn't be performed within one year. Although the doctor
believed he had an agreement for one year, the oral contract wouldn't expire until approximately
13 months after the day it was allegedly made.

Lesson Summary
Every state has some version of a statute of frauds. A statute of frauds is a law that deems
certain types of oral contracts unenforceable unless there's a writing that evidences the
agreement. The writing doesn't need to be a formal, written contract. Any writing will meet the
requirements of the statute, as long as it's sufficient to show a contract between the parties. It's
also not necessary for both parties to sign the writing. The agreement only needs to be signed by
the party against whom the agreement is enforced. Statutes of frauds act as an assurance for the
parties and protection against fraudulent behavior.

Learning Outcome
You should be able to take away from this video how to:

Define the Statute of Frauds and explain where it originated

Explain the types of contracts covered by a Statute of Frauds

Analyze the purpose of a Statute of Frauds

Discuss what makes a contract voidable under the Statute of Frauds

A statute of frauds is a state law that only applies to particular types of oral contracts. In general,
a statute of frauds requires that certain types of oral contracts be written and signed. This lesson
explores the types of contracts that typically fall within a statute of frauds.

Statute of Frauds
A statute of frauds is a state law. Different states have different statutes of frauds, but all of
these statutes are limited. Statutes of frauds only apply to certain types of oral contracts. Usually,
an enforceable contract can be oral or written, but statutes of frauds set two main requirements
for certain oral contracts before those contracts can be enforceable.
First, a contract that falls within a statute of frauds will be unenforceable unless there's a writing
that proves the agreement. The writing doesn't have to be a formal, written contract. Instead, the
writing must simply prove that there was an agreement and set out any material terms of the
agreement. Material terms are significant and important details, such as the parties involved and
the amount to be paid.
Secondly, the writing must be signed. Most of the time, it's not necessary for both parties to sign
the agreement. In order to satisfy a statute of frauds requirement, the agreement must be signed
by the party that disputes the contract. If I'm seeking to enforce an oral contract that I made with
you, then you must have signed the writing.

Certain Oral Contracts

A statute of frauds doesn't apply to most types of contracts. Most contracts can be valid and
enforceable when made through an oral agreement. However, it's important to know what types
of contracts a statute of frauds affects. Jurisdictions vary, but there are six main categories
usually covered by this type of statute.
Statutes of frauds cover:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Some states have also added some life insurance contracts, contracts to make a will, and
contracts to pay a real estate agent's commission. Let's take a look at each of the six categories
usually covered by a statute of frauds.

Marriage as Consideration

The first category includes promises that involve marriage as consideration. For example, let's
say that Mike promises to buy Lucy a new house if Lucy will marry him. Lucy agrees, and so
Mike buys the house and puts the title in Lucy's name. Lucy then refuses to marry Mike. The
marriage was used as consideration for the agreement to buy a new house. Therefore, if Mike
wants to enforce this agreement, the agreement must be proved through something in writing,
and Lucy needed to sign the writing.
Note that a statute of frauds would also cover a prenuptial agreement. In many states, the
marriage itself is the consideration. This makes the agreement fall squarely within a statute of
frauds. Other states don't require consideration but require that the prenuptial agreement be in
written form and signed by both parties.

Contracts for More Than One Year

The second category includes contracts that can't be performed within one year. If it's at all
possible for the contract to be performed within one year, then the contract doesn't fall within a
statute of frauds.
Let's say Mike promises to let Lucy pick free apples from his orchard for the rest of Lucy's life.
In exchange, Lucy promises to water Mike's trees. This is a lifetime contract, but it doesn't fall
under a statute of frauds. This is because Lucy could die within the year and the contract would
be extinguished. Even if Lucy is still alive 20 years later, the contract won't fall under a statute of
frauds. A statute of frauds applies only at the time the contract was made.

Sale of Land
The third category includes contracts involving the sale or transfer of land. This includes any sale
of an interest in land, like a part ownership, mineral rights, or a mortgage.
Let's say Lucy agrees to lease her garage apartment to Mike for the next 18 months. A statute of
frauds typically covers any lease agreement that lasts for more than one year. Therefore, Mike
must sign a writing that proves this contract.

Promises by an Executor or a Guarantor

A statute of frauds also typically covers certain promises made by executors or by guarantors.
Let's start by discussing how a statute of frauds applies to executors.
A statute of frauds usually covers those contracts that involve a promise by an executor to
personally pay a debt that belongs to the estate. An executor, or administrator, is someone who is
appointed to carry out the terms of someone's will. Sometimes, executors promise to personally
answer for a debt of the estate.
For example, Mike dies and his sister Lucy is serving as the executor of his estate. Lucy is
handling the sale of Mike's house. There's a chance the house will sell for less than the mortgage.

Lucy tells Mike's mortgage company that she'll pay the extra if the proceeds of the sale don't
cover the mortgage. This promise needs to be proved in writing and signed by Lucy, or the
mortgage company won't be able to enforce it.
The rule regarding executors is similar to the rule that applies to guarantors. A statute of frauds
typically covers any promise by one person to answer for the debt or default of another person.
When Lucy promises to cover Mike's debt, with Lucy's own money, Lucy becomes a guarantor,
or a surety. A guarantor agreement is a form of a guarantee. These agreements require a promise
to pay for the debt of another person, if that person doesn't pay the debt.
A statute of frauds covers any promise by a guarantor, or surety, to a creditor to pay the debt or
perform the obligation of a principal debtor. A guarantor agreement must be made in a signed
writing, or else the agreement won't be enforceable.
Note that a guarantor agreement doesn't discharge the principal debtor. Let's say that Mike is still
alive. If Lucy buys Mike a new house and promises to pay the mortgage, it's not a guarantor or
surety agreement. Lucy isn't guaranteeing Mike's debt. Instead, Lucy incurs her own debt.

Sales Contracts
Lastly, a statute of frauds covers some contracts that involve the sale of goods. Typically, the sale
of goods worth more than $500 will fall within a statute. Goods are most any tangible item other
than real estate. These contracts require that the quantity, or number of units, be specified in
writing. Most other contract terms aren't required.
For example, Mike owns a t-shirt shop and agrees to sell Lucy 500 purple t-shirts for $10 each.
Mike prints the purple t-shirts, but then Lucy refuses to pick them up or pay for them. When
Mike sues Lucy for the payment, Mike will need to show a writing that proves Lucy ordered 500
t-shirts from him. The quantity needs to be proved, and it needs to be signed by Lucy.
Under the Uniform Commercial Code, or UCC, the value of the goods is increased to $5,000.
The UCC is a set of standardized rules that governs commercial transactions. Each state chooses
whether or not to adopt these rules as their own state law. The majority of states haven't adopted
this amount; instead, states mostly use the $500 amount.

MY LEGS
It's sometimes difficult to remember which contracts a statute of frauds covers. Many law
schools teach these categories using a mnemonic device. A mnemonic is a teaching device used
to aid memory and is usually an acronym.
These six main categories can be remembered by using the mnemonic MY LEGS. This
mnemonic stands for Marriage, Year, Land, Executor, Guarantor, and Sales.

Lesson Summary

Let's review. A statute of frauds is a state law that covers a variety of oral contracts. Different
states have different statutes of frauds, but these statutes typically cover six categories. The
categories can be remembered by using the mnemonic MY LEGS. This mnemonic stands for
Marriage, Year, Land, Executor, Guarantor, and Sales. The statutes usually cover:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500

Learning Outcome
Once you complete this lesson, you should have the ability to:

Define a statute of frauds

List the two requirements set by statutes of frauds for oral contracts to be enforceable

Explain what types of contracts are covered under a statute of frauds

Examine examples of each type of contract covered

Use a mnemonic device to remember the six main types of contracts that a statute of
frauds covers

A statute of frauds is a law that only applies to particular types of oral contracts. In general, a
statute of frauds requires that certain types of oral contracts be written and signed. This lesson
explores one type of contract that is covered by a statute of frauds: contracts that can't be
performed within one year.

Statute of Frauds
A statute of frauds is a state law that only applies to certain oral contracts. Different states have
different statutes of frauds. For the most part, all statutes of frauds set two requirements for
certain types of oral contracts. If a contract doesn't meet these requirements, it won't be
enforceable.

The first requirement involves a written memorandum of the contract. This means that a
contract that falls within a statute of frauds is unenforceable unless there's something in writing
that proves the contract. Note, though, that the memorandum doesn't have to be a formal, written
contract. Instead, the memorandum can be anything in writing that proves that there was a
contract. It can be an order form, an invoice, or even a cocktail napkin with notes of the
agreement.
The memorandum must set out the material terms of the contract. Material terms are significant
and important details, such as the parties involved and the amount to be paid.
The second requirement involves signatures. The memorandum must be signed by at least one
party. Most of the time, it's not necessary for both parties to sign the memorandum. In order to
satisfy this statute of frauds requirement, the agreement must be signed by the party that disputes
the contract. This means that if any party in the agreement doesn't sign the written memorandum,
that contract can't be enforced against him or her. For example, if I'm seeking to enforce an oral
contract that I made with Bill, then Bill must have signed the written memorandum.

Certain Oral Contracts

It's important to remember that a statute of frauds doesn't apply to most types of contracts. Most
contracts can be valid and enforceable even though they were made through an oral agreement.
It's necessary, then, to know what types of contracts fall within a statute of frauds. Jurisdictions
vary, but there are typically six categories covered by this type of statute:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Let's take a closer look at contracts that can't be performed within one year.

Contracts Exceeding One Year

Business law involves many types of contracts. Many business contracts involve performance
that will take place over an extended period of time. Performance means to fulfill the terms of
the contract.

A statute of frauds will cover business contracts that can't be performed, or completed, within
one year. It's important to think theoretically. Sometimes it's not likely for a contract to be
performed within one year, but theoretically, it could be possible. If it's at all possible for the
contract to be performed within one year, then the contract won't fall within a statute of frauds.
It's essential to determine the terms of the contract. This statute of frauds category will only
apply if the contract's own terms prohibit performance within one year.
For example, let's say I hire Bill, who is a magician, to perform at my nightclub every weekend
for the next two years. By its own terms, this oral contract isn't performable within one year and
therefore, this contract will fall within a statute of frauds.
Now let's say I hire Bill to build a replica of Manhattan on my ranch. It seems impossible that
Bill could complete this project within one year. However, if he hired large crews to work around
the clock, it may be feasible. A statute of frauds won't cover this oral contract.

Measuring One Year

When determining whether or not a statute of frauds applies, we look at the date the oral contract
was made. The one-year time period is measured from that date.
For example, let's say that I made an oral contract with Bill. Bill and I met and made our contract
on January 1, 2013. Bill is a magician, and I hired him to perform at my son's tenth birthday
party. My son's party will be on May 1, 2015. Bill forgets and books another appointment for that
date. This would theoretically fall under statute of frauds, but if I seek to enforce this oral
contract against Bill, it won't be enforceable unless it's evidenced in a written memorandum and
signed by Bill.
This is because nearly two and a half years will elapse between the making of the oral contract
and the performance. According to the contract's own terms, it can't be performed within one
year of the making of the contract.

Lifetime Contracts
Sometimes contracts last for a person's lifetime. These contracts seem as though they would fall
within a statute of frauds, but let's take a closer look.
Remember that if there's any possibility that the oral contract can be performed within one year,
the contract won't fall within a statute of frauds. For example, let's say that Bill orally agrees to
clean my house once a week for the rest of his lifetime. In exchange, I let Bill live in my spare
room.
This is a lifetime agreement, and it's a fairly common type of contract. It may be unlikely for
Bill to completely perform the contract within one year. However, there's a remote chance that

Bill will die in the next year. Because it's possible that Bill will perform the contract within one
year, a statute of frauds wouldn't apply.

Exception to One-Year Rule

There is one exception to the one-year rule. A signed, written memorandum isn't necessary if the
oral contract has been fully performed. This is true even if the terms of the oral contract prevent
performance within one year. These oral contracts are enforceable without meeting the
requirements of a statute of frauds.
For example, let's say I hire Bill to perform magic tricks at my nightclub every Friday night for
the next two years. We have an oral contract, but we never signed a written memorandum of our
agreement. After Bill shows up and performs every week for two years, I refuse to pay him
because we don't have a signed contract.
This oral contract doesn't need to meet the requirements of a statute of frauds because Bill fully
performed the contract. I'll have to pay Bill.

Lesson Summary
Let's review. A statute of frauds typically covers six main contract categories:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Businesses often encounter contracts that can't be performed within one year. If it's at all possible
for the contract to be performed within one year, then the contract won't fall within a statute of
frauds. This one-year time period is measured from the date the contract was made. Note that
there's one important exception: if a party already fully performed the oral contract, then a statute
of frauds won't apply, and a written contract isn't necessary to prove the terms of the agreement.

Learning Outcomes
After this lesson, you'll be able to:

Define statute of frauds

List the six categories of contracts that a statute of frauds covers

Explain how the statute of frauds applies to contracts that cannot be performed within one
year

Identify when the one-year time period starts

Summarize an exception to the statute of frauds that relates to when a contract can't be
performed within one year

Some oral contracts aren't enforceable unless the contract is written and signed. These general
requirements are part of a statute of frauds. This lesson explores one type of contract that is
covered by a statute of frauds: contracts that involve the sale or transfer of land.

Statute of Frauds Requirements

A statute of frauds applies to certain categories of oral contracts. Different states have different
statutes of frauds, but all statutes of frauds establish two key requirements. Contracts in these
categories are unenforceable, unless they meet the two requirements.
First, there must be a written memorandum of the contract. A memorandum of the contract is a
writing that proves the agreement. A written memorandum isn't a formal, written contract. A
formal, written contract won't fall under a statute of frauds because the statute only applies to
oral contracts.
Instead, the memorandum can be anything that proves that there was an oral contract. The
memorandum needs to prove the existence of the contract and set out the material terms of the
contract. Material terms vary between contracts, but typically include items such as the parties
involved and the amount due.
Second, the memorandum must be signed by the party that disputes the contract. It's usually not
necessary for both parties to sign the memorandum. For example, if you seek to enforce an oral
contract that you made with me, then I must have signed the memorandum.
For example, let's say that you and I enter an oral contract. I agree to sell a part of my farm to
you for $10,000. I draw a map on a napkin, showing you which portion of the farm I'll sell to
you. I write $10,000 on the napkin, sign it, and hand it to you. If I later decide not to sell you the
portion of my farm, you can use this napkin to enforce our oral contract.

Statute of Frauds Contracts

A statute of frauds only applies to certain types of oral contracts. The states vary, but there are
usually six categories covered by a statute of frauds:
1. Promises that involve marriage as consideration

2. Contracts that can't be performed within one year

3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Businesses often encounter contracts that involve an interest in real property. Let's take a closer
look at contracts that involve the sale or transfer of land.

Contracts Involving the Sale of Land

Typically, a statute of frauds will apply to a contract involving the sale or transfer of land or real
property. This includes any oral contract that creates or transfers any interest in land. It's
important to note how broad this category can be. A statute of frauds applies to any oral contract
that conveys land or an interest in land. This means that the statute covers most contracts
involving real property, such as those that sell land, grant a mortgage, or provide an easement.
A statute of frauds will also cover some leases. A lease is considered to be a transfer of an
interest in land. However, most states don't require leases to be in writing unless the lease is for
one year or more.
For example, let's say I orally agree to lease you a portion of my farm for two years so that you
can hunt on it. You don't own the land, and I'll retain all of the rights to that portion after your
lease expires. Regardless, this is the type of oral contract that will need to be proven through a
signed writing.

Exception
There is an important exception to a statute of frauds involving land. An oral contract for the sale
of real property is enforceable if the buyer took possession and made permanent improvements.
Permanent improvements are lasting changes that enhance the property. The states vary on the
type and extent of the improvements necessary to meet this exception.
This legal doctrine is based on part performance. Part performance is the partial completion of
a contractual obligation. Let's say that you and I enter an oral contract. I agree to sell part of my
farm to you for $10,000. After you pay a down payment of $3,000 and start building a barn, I
decide I'd rather keep the entire farm. This contract will probably be enforceable, even though it's
not in a signed writing, because of the doctrine of part performance.

Lesson Summary

Let's review. A statute of frauds will typically cover six contract categories. These are:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Businesses commonly encounter contracts that involve real property. It's important to remember
that a statute of frauds will likely cover these contracts, since these statutes apply to any oral
contract that conveys land or an interest in land. This includes contracts that sell land, grant a
mortgage, grant a lease for one year or more, or provide an easement.
Note that there's an important exception to a statute of frauds, based on the legal doctrine of part
performance. An oral contract for the sale of real property will be enforceable if the buyer took
possession of the land and made permanent improvements.

Learning Outcomes
When this lesson is done, you should be able to understand a statute of frauds when it comes to
the sale or lease of property.
A statute of frauds will typically cover those oral contracts involving a guarantor. This means
that certain requirements must be met before these contracts can be enforced. This lesson
explores guarantor contracts and the typical statute of frauds.

Guarantor
A guarantor is a party that guarantees another party's debt. A guarantor is sometimes called a
surety. These contracts involve a promise to pay for the debt of another if that person doesn't pay
the debt.
A statute of frauds is a state law that covers certain types of oral contracts. This includes a
promise by a guarantor or surety to a creditor to pay the debt or perform the obligation of a
principal debtor. Note that a guarantor or surety contract doesn't discharge the principal debtor.
For example, let's say that you help me buy a new car. You tell the dealer that you promise to pay
my car payments if I'm unable to pay. That's a guarantor or surety contract. You're the guarantor
on my car loan.

Now let's say that you buy me a new car. You promise the dealer that you'll make the car
payments. This isn't a guarantor or surety contract. You aren't guaranteeing my debt. Instead,
you're incurring your own debt.

Statue of Frauds Requirements

A statute of frauds applies to certain categories of oral contracts, including guarantor contracts.
The states vary, but there are usually six categories covered by a state's statute of frauds:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
All statutes of frauds establish two key requirements for these types of contracts:
1. There must be a written memorandum of the contract. A memorandum of the contract is
a writing that proves the agreement.
2. The memorandum must be signed by the party that disputes the contract.
Guarantor contracts are unenforceable unless they meet these two requirements. Note that it's not
necessary to have a formal, written contract. The memorandum should simply prove that an oral
contract was made and prove any material terms of that contract. Material terms will usually
include items such as the parties to the contract and the amount to be paid.
It's also usually not necessary for both parties to sign the memorandum. For example, after you
orally guarantee my new car loan and I have my new car, I lose my job and you refuse to make
my payments. If I want to enforce this oral contract against you, then you must have signed the
memorandum.

Contracts Involving Guarantors

Businesses often encounter contracts that involve one party guaranteeing the debt of another
party. Let's take a closer look at guarantor or surety contracts.
A guarantor can be a person or a company. Many businesses sell items. These businesses are
highly likely to encounter guarantor contracts. For example, let's say I own a pet grooming

business. I need to buy some new hair dryers for my dog clients. I purchase three dryers, on
credit, from ABC Dryer Company.
My business can't afford to pay cash for the dryers, so the business agrees to make payments. I
also agree that if my business can't make the payments, then I will personally make the
payments. This is a guarantor contract. I've personally guaranteed my business's debt.
Many loan applicants use guarantors. It's a common practice when a loan applicant is unable to
secure a loan on its own, such as when the applicant has poor credit or no credit history. Some
applicants use more than one guarantor. When there are multiple guarantors, each one will
typically be liable for the entire amount of the loan.

Exceptions
There are three important exceptions to a statute of frauds involving guarantors.
First, the contract doesn't have to be in a signed writing if the guarantor makes the promise to the
debtor instead of to the creditor. For example, you help me buy a new car. I'm nervous about the
purchase, so you tell me that you promise to pay my car payments if I'm unable to pay. This
contract won't fall under a statute of frauds because you made the promise to me, the debtor,
rather than to the car dealer, who is the creditor.
Second, the contract doesn't have to be in a signed writing if the guarantor promises to be
primarily responsible for the debt. For example, you help me buy a new car. I'm nervous about
the purchase, so you tell the car dealer that you promise to pay my car payments. This contract
won't fall under a statute of frauds because you are primarily responsible for the debt, rather than
guaranteeing my debt.
Third, the contract doesn't have to be in a signed writing if it falls under the main purpose rule.
This means that a statute of frauds won't apply if the guarantor makes the promise to a creditor
for the guarantor's own benefit. For example, you help me buy a new car. I work for you, and I
need a car to make deliveries for you. I'm nervous about the purchase, so you tell the car dealer
that you promise to pay my car payments if I'm unable to pay. You need me to have a car. This
contract won't fall under a statute of frauds because you guarantee my debt in order to profit
yourself.

Lesson Summary
Let's review. A statute of frauds typically covers six contract categories. These are:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year
3. Contracts that involve the sale or transfer of land

4. Contracts that involve promises by executors to pay estate debts

5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500
Businesses commonly encounter contracts that involve a promise to act as a guarantor or
surety. This means that one party promises to fulfill the obligation of another party. Normally,
this involves one party promising to pay the debt of another should that party not pay the debt.
Note that there are three important exceptions to a statute of frauds involving a guarantor
contract. First, the contract doesn't have to be in a signed writing if the guarantor makes the
promise to the debtor instead of to the creditor. Second, the contract doesn't have to be in a
signed writing if the guarantor promises to be primarily responsible for the debt. Third, the
contract doesn't have to be in a signed writing if it falls under the main purpose rule. This
means that a statute of frauds won't apply if the guarantor makes the promise to a creditor for the
guarantor's own benefit.

Learning Outcomes
When you have completed the lesson, you should be able to tell what makes a contract a statute
of fraud.
A sale of goods worth over $500 is usually covered by a state's statute of frauds. This means that
certain requirements must be met before these contracts can be enforced. This lesson explores
contracts for the sale of goods and a typical statute of frauds.

Statute of Frauds
Let's say that you come into my t-shirt store and order 1,000 printed purple t-shirts for $2 each.
We speak in person and don't write a formal contract. After I print the t-shirts, you refuse to pick
them up and pay for them. You say that you never actually ordered the t-shirts. Instead, you were
just getting a quote. Can I enforce this contract against you?
The answer will depend on the statute of frauds in our state. A statute of frauds is a state law.
Different states have different statutes of frauds, but all statutes of frauds apply only to particular
categories of oral contracts. This includes certain contracts for the sale of goods. Goods are any
tangible thing that is moveable.
There are usually six main categories affected by a state's statute of frauds:
1. Promises that involve marriage as consideration
2. Contracts that can't be performed within one year

3. Contracts that involve the sale or transfer of land

4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500

Statute of Frauds Requirements

A statute of frauds typically means that contracts in these categories are unenforceable unless
they meet these two requirements:
1. There must be a written memorandum of the contract. A memorandum of the oral
contract can be any writing that proves the agreement.
2. The written memorandum must be signed by the party that disputes the contract.
In order to satisfy a statute of frauds, a person must have a written memorandum that proves that
an oral contract was made and proves any material terms of that contract. For a sales contract,
material terms will include items like the quantity sold and the agreed-upon price.
Note that the written memorandum doesn't have to be complete. If the memorandum omits or
incorrectly states a material term, the oral contract can still be enforced. However, the contract
won't be enforced beyond the quantity of goods shown in writing.
For example, let's say that we orally agree that I'll sell you 1,000 t-shirts. I jotted a few notes on a
piece of paper while we were talking, but I only wrote down a quote for you based on 500 tshirts. I can only enforce the contract for 500 t-shirts if that's all I can prove through this
memorandum.
Also note that it's not necessary for both people to sign the memorandum. Only the person that
disputes the contract needs to have signed the memorandum.
If I want to enforce this oral contract against you and collect payment, then I need to prove that
you ordered 1,000 printed purple t-shirts. There must be a written memorandum of our contract,
like an order form or an invoice, and you must have signed the memorandum.

Uniform Commercial Code

The Uniform Commercial Code, or UCC, is a uniform act that covers sales and other
commercial transactions. The UCC is meant to encourage uniformity, or consistency, between
state laws. All 50 states have adopted at least a part of the UCC, although different states use
different versions. This means that the state laws regarding sales aren't exactly uniform, but they
are usually somewhat similar.

The UCC's statute of frauds can be found in section 2-201. The UCC says that 'a contract for the
sale of goods for $5,000 or more is not enforceable...unless there is some writing sufficient to
indicate that a contract for sale has been made between the parties and signed by the party
against whom enforcement is sought...'
Notice that the UCC uses $5,000 for its threshold. This is a new revision to the UCC. Most states
continue to use the $500 amount.

Exceptions
There are three main exceptions to a statute of frauds involving the sale of goods. First, the oral
contract will be enforceable if the buyer received and accepted the goods.
Let's say that you came by my store and picked up your order but later refused to pay the bill.
Our oral contract is enforceable even if I don't have your signature on a written memorandum.
Now let's say you picked up half of your order, or 500 t-shirts. Our oral contract is enforceable as
to those goods that you received and accepted. You will have to pay for half of the t-shirts,
regardless of whether I have your signature on a written memorandum. However, you won't have
to accept or pay for the other half of the t-shirts.
The second exception involves payment. The oral contract will be enforceable if the buyer makes
a partial payment for the goods.
Let's say that you paid for half of the t-shirts. This means you're obligated to accept half of the tshirts. You won't have to accept or pay for the other half of the t-shirts. The oral contract is
enforceable as to those goods for which you've paid.
The third exception involves special orders. The oral contract will be enforceable if the buyer
ordered specialized goods that aren't suitable for sale to others and the seller made a substantial
beginning in producing those goods.
For example, let's say that your printed purple t-shirts were for a huge party. They read, 'Happy
Birthday Bertram!' After we make our oral contract, I start to print the shirts. That's when you
call to tell me that the deal is off. When I try to collect payment, you say the contract isn't
enforceable because it doesn't meet the requirements of a statute of frauds.
Here's why you're wrong: this oral contract is enforceable because it called for the manufacture
of special goods that aren't suitable to others and I made substantial progress in the
manufacturing of the t-shirts.

Goods and Services

Some business contracts involve the sale of goods and services together. In order to know
whether a statute of frauds might apply, you'll need to know the primary goal of the contract.

If the contract is primarily for the sale of goods over $500, then a statute of frauds likely applies.
If the contract is primarily for the sale of services, then a statute of frauds won't apply.
For example, let's say I'm a party planner and you hire me to plan the big birthday party for
Bertram. I'm planning the whole thing, for over 1,000 people, and I'm also selling you the t-shirts
for the party. This oral contract probably isn't covered under a statute of frauds because this
contract is primarily for my services as a party planner.

Lesson Summary
Let's review. A statute of frauds is a state law that applies to certain categories of oral contracts.
The statute requires that these oral contracts be evidenced in a written memorandum and signed
by the party that disputes the contract. Otherwise, these oral contracts are unenforceable.
Generally, a statute of frauds includes those oral contracts for the sale of goods worth more than
$500.
Most states use this $500 amount, however, the Uniform Commercial Code (UCC) suggests
$5,000. There are three main exceptions to a statute of frauds involving the sale of goods. If the
oral contract meets one or more of these exceptions, then it can be enforced without meeting the
requirements of a statute of frauds. First, the oral contract will be enforceable if the buyer
received and accepted the goods. Second, the oral contract will be partially enforceable if the
buyer makes a partial payment for the goods. Third, the oral contract will be enforceable if the
buyer ordered specialized goods that aren't suitable for sale to others and the seller made a
substantial beginning in producing those goods.

Learning Outcomes
After watching this lesson, you should be able to:

Explain the statute of frauds

Discuss the three main exceptions to a statute of frauds with the sale of goods

A statute of frauds is a state law that covers certain types of oral contracts. This means that
certain requirements must be met before these contracts can be enforced. However, there are
some exceptions to a statute of frauds. This lesson explores the typical statute of frauds and some
common exceptions.

Statute of Frauds
A statute of frauds is a state law that applies to particular categories of oral contracts. Different
states have different statutes of frauds, but there are usually six main categories affected:
1. Promises that involve marriage as consideration

2. Contracts that can't be performed within one year

3. Contracts that involve the sale or transfer of land
4. Contracts that involve promises by executors to pay estate debts
5. Contracts that involve a promise to act as a guarantor or surety
6. Contracts that involve the sale of goods worth more than $500

Statute of Fraud Requirements

A statute of frauds typically means that contracts in these categories are unenforceable unless
they meet these two requirements:
1. There must be a written memorandum of the contract. A memorandum of the oral
contract can be any writing that proves the agreement.
2. The written memorandum must be signed by the party that disputes the contract.
In order to satisfy a statute of frauds, a person must have written evidence that proves that an oral
contract was made. The written memorandum can be just about anything. It can be an order
form, an invoice, a receipt, or even a cocktail napkin with written notes. The written
memorandum must prove any material terms of the oral contract. Material terms will include
items like the parties involved and the agreed-upon price.
Note that it's not necessary for both people to sign the memorandum. Only the person that
disputes the contract needs to have signed the memorandum. If any party in the agreement
doesn't sign the written memorandum, the oral contract can't be enforced against him or her.
For example, let's say that you and I make an oral contract. You're going to paint my house next
week, and I'm going to pay you $1,000. You then book another painting job and refuse to paint
my house. If I want to enforce our oral contract against you, I need to have a written
memorandum, signed by you, that proves our contract.

Exceptions
There are several common exceptions to a statute of frauds. Sometimes, even though a contract
falls within a statute of frauds, it can be enforced without meeting the two requirements. These
exceptions are admission, performance, and promissory estoppel. Let's take a closer look at
each of these exceptions.

Admission

An oral contract can be enforced without meeting the requirements of a statute of frauds if the
other party admits under oath that the oral contract was made. This is known as the admissions
exception.
Let's say that you and I made an oral contract. You're going to paint my house next week, and I'm
going to pay you $1,000. You break our contract, and I sue you in order to enforce the contract.
What's your defense going to be? Of course, you'll argue that our contract is unenforceable
because it wasn't written down and you didn't sign it. However, you confess under oath that we
did, in fact, have an oral contract.
Our oral contract is enforceable. This contract doesn't need to meet the requirements of a statute
of frauds. The main purpose of a statute of frauds is to prove the existence of an oral contract. I
no longer have to prove that we had an oral contract because you agree that we did. You can't
now claim that you're relieved of your contract obligations. Admission is an automatic exception
to all of the provisions of a statute of frauds.

Performance
Another exception to the statute of frauds is performance. Performance can be full performance
or partial performance. Performance is most often allowed as an exception in contracts
involving real estate or in contracts for the sale of goods.
Full performance means that one party to the oral contract completed all of his or her duties
under the contract. When one side completes the contract, the courts will infer that an oral
contract really existed. This dismisses any defense that the oral contract didn't meet the
requirements of a statute of frauds.
For example, let's say that you show up next week and you completely paint my house. I can't
then raise a defense that I don't owe you the $1,000. The fact that you painted my house is
evidence enough that our contract existed.
Partial performance can also prove the existence of an oral contract. This means that one party
to the oral contract partially completed his or her duties under the contract.
Let's say that I told you which colors I'd like. You went out and bought all of the paint in the
colors I requested. When you show up to start painting, I cancel our oral contract. You've
partially performed your end of our contract. Since I've accepted your partial performance, I can't
now assert that a statute of frauds invalidates our oral contract.
You've performed part of the contract, and now I'll have to match that performance by paying for
that particular part of the contract. Let's say you paid $200 for the paint, and since it was custom
mixed, the paint store won't take it back. I'll have to reimburse you that $200. However, neither
of us has to complete the rest of the contract.
Now let's say that I provided the paint, but you showed up and started scraping the old paint off
of my house. You worked for five hours, and you usually charge $20 an hour. If I show up and

cancel our contract, I am unjustly enriched. This means that I got a service without giving
anything in exchange. I'll have to pay you for the services you provided me. This is known as
quantum meruit. Quantum meruit allows you to recover the reasonable value of your services,
even though our oral contract is otherwise unenforceable. Quantum meruit is most often allowed
as an exception to the statute of frauds in contracts involving services.

Promissory Estoppel
Promissory estoppel is another exception to a statute of frauds. Promissory estoppel is most often
allowed as an exception to a statute of frauds in contracts involving the sale or transfer of land,
contracts that can't be completed within one year, and contracts that involve a promise to act as a
guarantor or surety.
Promissory estoppel is a legal doctrine that will apply if all three of these criteria are met:
1. The party relied on the oral contract, which resulted in harm to that party.
2. The other party to the oral contract could have reasonably foreseen that the first party
would rely on the oral contract.
3. The only way to avoid committing an injustice is to enforce the contract.
This exception is only used when considerable unfairness would result from releasing one of the
parties from the contract. The party that seeks release from the contract must have known, or
reasonably should have known, that unfairness would result.
For example, after you buy the paint and all of the supplies you need to paint my house and show
up to work for almost a week, I cancel the contract. I tell you that there's nothing you can do
about it, since this oral contract isn't written and signed. You then sue me to enforce the contract.
Promissory estoppel will prevent me from asserting that the contract is unenforceable under a
statute of frauds. Instead, the court might enforce the contract. You may be permitted to finish
your work, and I'll be ordered to pay you.

Lesson Summary
Let's review. A statute of frauds is a state law that applies to particular categories of oral
contracts. Different states have different statutes of frauds, but all statute of frauds set these two
requirements:
1. There must be a written memorandum of the oral contract. A memorandum of the oral
contract can be any writing that proves the agreement.
2. The written memorandum must be signed by the party that disputes the contract.

There are, however, several common exceptions to a statute of frauds. Sometimes, even though a
contract falls within a statute of frauds, it can be enforced without meeting these two
requirements. These exceptions are admission, performance, and promissory estoppel.
Admission means that an oral contract can be enforced without meeting the requirements of a
statute of frauds if the other party admits under oath that the oral contract was made.
Performance can mean full performance or partial performance. Full performance means that
one party to the oral contract completed all of his or her duties under the contract. Partial
performance means that one party to the oral contract partially completed his or her duties under
the contract. If one party is unjustly enriched, then the other party may sue under quantum
meruit. This allows a party to recover the reasonable value of his or her services, even though
the oral contract is otherwise unenforceable.
The third exception is promissory estoppel. This is a legal doctrine that will only apply if all
three of these criteria are met:
1. The party relied on the oral contract, which resulted in harm to that party.
2. The other party to the oral contract could have reasonably foreseen that the first party
would rely on the oral contract.
3. The only way to avoid committing an injustice is to enforce the contract.

Learning Outcomes
After finishing this lesson, you should be able to understand the exceptions to statute of frauds
like admission, full or partial performance and promissory estoppel.
In order to form a legally binding contract, you must first have a valid offer. A valid offer must
contain definite and certain terms. This lesson discusses the key requirements of a valid offer.

Elements of a Contract
Businesses deal with many types of contracts. There are employment contracts, service contracts,
supply contracts, and many other types of contracts. A savvy businessperson will know how to
make and enforce a legally binding contract.
There are six main elements necessary to form a legally binding contract. These are:
1. An offer
2. An acceptance that is identical to the terms of the offer
3. A legal purpose or objective

4. Mutual assent, or a meeting of the minds

5. Consideration
6. Competent parties
Let's take a closer look at the requirements of a valid offer.

Offer
A formal offer is the main, and first, element in a contract. It should contain all of the key factors
of the contract. An offer can be communicated in any way. I can write out my offer, I can
verbally speak my offer, we can meet in person or speak on the telephone. I can even email or
text my offer.
There are countless ways to communicate an offer, but there are certain requirements of a legally
valid offer:
1. It must indicate a clear intent to form a contract.
2. It must contain a definite proposal that is certain in its terms.
3. It must be communicated to the other party.
If any of these elements is missing, there is no offer and no resulting contract. For example, let's
say I make a formal offer to you. I ring your doorbell and tell you that I'm willing to wash all of
the windows in your house next Saturday for $25. I've expressed my clear intent to form a
contract with you. I've sufficiently defined the terms of my offer, since I said I'll do the work on
Saturday, and I've told you how much I charge. I've also communicated the offer to you in such a
manner that you can now accept or reject my offer.

Definite and Certain Terms

In order to form a legally binding contract, the offer must contain definite and certain terms.
This means that terms must be stated so that a reasonable person is capable of readily
understanding the terms. In order for a court to enforce the contract, the court must be able to
determine the terms of the contract. This means that the terms must be stated in such a manner
that the court can determine the intent of the parties. The court must be able to determine what
was promised.
For example, let's say that I ring your doorbell and tell you that I'm willing to wash all of your
windows next Saturday. I tell you that I'm not sure how much I'm going to charge you because I
don't know how long this task will take. However, I do tell you that it will be a reasonable fee. Is
this an offer with definite and certain terms?

No. This promise isn't sufficiently definite. A court can't enforce this payment because we don't
know what the payment is. Also, there can't be a mutual assent, or a meeting of the minds, for a
term that is not defined.
In the Texas Supreme Court case of Fort Worth Independent School District v. the City of Fort
Worth, the court stated that, 'In general, a contract is legally binding only if its terms are
sufficiently definite to enable a court to understand the parties' obligations. The rules regarding
indefiniteness of material terms of a contract are based on the concept that a party cannot accept
an offer so as to form a contract unless the terms of that contract are reasonably certain.' This is a
Texas case, but other states also follow this law.

Essential Terms
All essential terms of a contract must be defined in the offer. When a court determines whether
the terms are definite, it will look at four key elements of the offer. These are:
1. The parties
2. The length of time for performance or the term of service
3. The price
4. The subject matter or scope of services
These four elements must be definite and certain so that a reasonable person can understand the
terms, and a court can enforce the contract. The famous Texas Supreme Court case of T.O.
Stanley Boot Company v. Bank of El Paso tells us that all essential terms of a contract must be
agreed upon before a court can enforce a contract. A court must examine each contract separately
in order to determine that contract's material terms. This is a rule that is similar in all states.
Let's take another look at my offer to you. The parties of this contract are you and I. I've defined
the length of time for performance, because I told you that I'd complete the work on Saturday.
I've defined my price, because I told you I'd charge $25. We also know the scope of services,
because I told you that I'd wash all of the windows of your home. This is a valid offer because
the essential terms of the offer are certain and definite. Once you accept this offer, we have a
legally binding contract.

Lesson Summary
Let's review. A formal offer is the main, and first, element in a contract. It should contain all of
the key factors of the contract. There are certain requirements of a legally valid offer. These are:
1. It must indicate a clear intent to form a contract.
2. It must contain a definite proposal that is certain in its terms.

3. It must be communicated to the other party.

All essential terms of a contract must be defined in the offer. When a court determines whether
the terms are definite, it will look at four key elements of the offer. These are:
1. The parties
2. The length of time for performance or the term of service
3. The price
4. The subject matter or scope of services
These four elements must be definite and certain so that a reasonable person can understand the
terms and a court can enforce the contract.

Learning Outcome
After completing this lesson, you should be able to:

List the six elements needed to form a legally binding contract

Describe the three requirements necessary for a valid offer

Determine whether or not an offer contains definite and certain terms

Name the four essential terms that must be definite and certain in order to make a valid
offer

Sometimes a contract dispute will end up in court. A court must examine and interpret the
contract in order to determine what the parties intended. This lesson explores how courts
determine the parties' intent.

Contract Disputes
There are times when the parties disagree on the terms of the contract, or on how the contract
should be enforced. A breach of contract suit is a fairly common type of civil lawsuit. A breach
of contract is a cause of action that will be brought when one party fails to complete a duty that
is required by the contract.
Whenever a contract dispute ends up in court, the court's primary concern is to determine and to
give effect to the intentions of the parties. The court will examine and interpret the contract
according to certain rules of construction, so that the court can facilitate the wishes of the
parties. Rules of construction are laws and policies that a court uses when resolving a dispute
between the parties of a contract.

For example, let's say that you and I agree that I'll sell you my car. I say that I'll sell you my car
for $100, and you accept. I deliver my 1984 Honda to you. You're angry, because you don't want
this car. You thought I was selling my new, 2013 Cadillac. When you sue me for breach of
contract, the court will follow certain guidelines, or rules of construction, in an attempt to
determine what each of us intended.

Principal Purpose
When a court must step in and interpret a contract, the court will follow several rules of
construction. Let's take a look at each of these rules. First, the court will attempt to determine the
principal purpose of the parties in the making of the contract. The court will look at the contract
itself, as well as the parties' words and conduct.
Let's take a look at the contract we made to sell my car. My principal purpose is to unload my old
car, and hopefully make a little bit of money on it. Your principal purpose was to acquire reliable
transportation for as little money as possible. The court will look at our contract to determine if
our purposes were met. If not, then the court will determine what needs to be accomplished so
that we can each meet our purpose. In our agreement, for the most part, our purposes are met
even if you end up with the Honda.

Contract Construction
The court will also look at the construction of the contract. The contract will be interpreted as a
whole. This means that if the parties disagree on the meaning of one portion of the contract, the
court will look to the other portions of the contract for answers. If the contract is written, the
court will examine the actual contract in its entirety.
Sometimes a contract is constructed of several different writings. When this is the case, the court
will examine and interpret those writings together. The court will consider each part in relation to
the rest of the contract. This is done so that the court can determine the effect of each part on the
other parts.
Let's say that I wrote a letter to you, stating that I'll sell my car to you for $100. I then sent you a
copy of the title to my car. The title clearly states that the car is a 1984 Honda. These two
documents will be read together to show that I intended to sell you the Honda. This contract will
be interpreted to show that we had a valid agreement regarding the Honda.

Interpretation
The court will interpret the language of the contract and assign meaning to the various terms.
Generally, contract language is interpreted according to the most common and prevailing
meaning. Courts sometimes call this the plain, ordinary, and generally accepted meaning.
According to the Texas case of Birnbaum v. Swepi, courts should use the plain meaning unless
the contract shows that the parties used the term in a technical or different sense. This is the law

in most states, because many contracts use technical terms, or terms of art. When a contract is
specific to a specialized area, any technical terms will be interpreted according to that
specialization.
The court will determine whether or not there are any ambiguities in the language of the
contract. An ambiguity is a vague or uncertain term. Note that an ambiguity doesn't necessarily
arise when the parties disagree on an interpretation. An ambiguity exists only when both
interpretations are reasonable. When the court finds an ambiguity, the court will interpret the
term against the party that drafted the contract.
Let's look at our contract again. I said that I'd sell you my car. Is car an ambiguity? I meant one
car, and you thought I meant a different car. We disagree on the interpretation. The court will
need to decide whether or not both interpretations are reasonable, considering the circumstances.
It's likely that both interpretations are reasonable, but if I've specified the Honda by sending you
the title, then you should reasonably know that I intend to sell you the Honda.

Parties' Intent
The court will also need to determine the parties' intent. The court will look at any
demonstrations of a party's intent and interpret those actions in accordance to the terms of the
contract.
Courts use the objective theory when interpreting a party's intent. This means that a party's
intent isn't judged by what the party thought, but by what another person would think. A party's
intent is judged by this test: what would a reasonable person have believed the other party's
intentions to be? It doesn't matter what the other party actually intended.
For example, let's say that I offer to sell you my car for $100. I'm only joking and didn't intend to
make a real offer. You say that you accept, mail me $100, and then sue me for breach of contract
when I refuse to turn the car over to you. How will the court interpret my intent? If you
reasonably believed that I intended to make a valid offer, then you will win. In this scenario,
$100 isn't usually a reasonable amount of money in which to purchase a car. A reasonable person
probably wouldn't believe that I intended to make a valid offer.
Normally, if both parties intend the same thing, then the parties' wishes will be enforced. This
means that if both parties intend and desire that their contract be valid and enforceable, it usually
will be. If both parties want the contract to be unenforceable, then the court will not enforce the
agreement.
Sometimes it's difficult for a court to determine what the parties intended. Sometimes courts
must rely on certain presumptions. A presumption is a conclusion that is taken to be true and
used as the basis for other decisions. For business contracts, a court will presume that the parties
intended their agreement to be legally enforceable. If this isn't true, the parties can present
evidence otherwise.

For example, let's say that I sell copy machines in my store. I tell you that I'll sell you a certain
copy machine for $100. When you try to enforce this agreement, I say I was only joking. The
court will presume that I meant to make a valid offer. You won't have to prove that you
reasonably believed that I was making a valid offer. This is the type of offer that a court might
uphold.
Let's revisit the contract you and I made one more time. A court isn't likely to uphold your intent
to buy my new Cadillac for $100. This price is far too low for a new car, and I've expressed my
intent to sell my old Honda. A court will probably agree that I've sufficiently expressed my intent
to sell the Honda. So, enjoy your new ride!

Lesson Summary
Let's review. Parties sometimes disagree on the terms of a contract, or on how the contract should
be enforced. A breach of contract suit is a fairly common type of civil lawsuit. When a court
must step in and interpret a contract, the court will follow several general rules. First, the court
will attempt to determine the principal purpose of the parties in their making of the contract.
Second, the contract will be interpreted as a whole. Next, the court will interpret the language of
the contract and assign significance to various terms according to the most common and
prevailing meaning.
If the court finds an ambiguity, the court will interpret that term against the party that drafted the
contract. The court will then determine the parties' intent by using the objective theory. This
means that a party's intent isn't judged by what the party thought. Instead, it is judged by what
another reasonable person would think. For business contracts, a court will presume that the
parties' intended their agreement to be legally enforceable.

Learning Outcomes
Upon finishing this lesson, you should be ready to:

Define breach of contract, rules of construction, ambiguities, and presumption

Summarize the rules of construction a court will follow in a breach of contract suit

Describe how a court uses the objective theory to determine the parties' intent

Sometimes a contract dispute will end up in court. A court must examine and interpret the
contract. Often, a court will imply certain terms in order to clarify the contract. This lesson
explores the use of implied terms.

Implied Terms

Business contracts are often very lengthy. A contract drafter normally attempts to cover all of the
terms and provisions of the agreement. Implied terms are words or provisions that a court
assumes were intended to be included in a contract. This means that the terms aren't expressly
stated in the contract.
Generally, the drafter of the contract wants to avoid the use of implied terms. Most parties don't
want to rely on a court's interpretation of the contract terms. However, it's usually not possible to
cover every detail of an agreement. In these cases, the court will assume that some terms are
implied. This allows the court to enforce the contract and follow through with the parties' intent.
It also protects parties from fraud by omission and misrepresentation.

Use of Implied Terms

The use of implied terms is fairly common, because there are several different ways that courts
use implied terms. Each of the uses is based on public policy. For instance, sometimes a court
will imply a term if the court decides that it's necessary in order to enable the intentions of the
contracting parties. Also, terms can be implied by law when there is a statute that directly
addresses the issue. This is true in several areas of the law, including state laws that cover
commercial transactions.
For example, it's common for courts to imply terms in a sales contract. These are contracts that
involve the purchase of goods or services. Sales contracts include an implied warranty of
merchantability. This means that a court will imply usability. In other words, there is an implied
guarantee that the goods or services will serve the reasonable and expected purpose.
An implied warranty of merchantability is used even when there isn't a written or oral sales
contract. Let's say that you come into my garden store and purchase a new lawnmower. We don't
have a written contract. You simply pick out the one you want, pay me, and wheel it out the door.
Once you get home, the lawnmower won't start. You can't mow your lawn. You return to the
store for a refund or replacement.
I refuse to refund your money or replace the lawnmower. I say that I never guaranteed that the
mower would work. We end up in court and the court orders me to refund your money, or replace
your mower with one that works. This is because of the implied warranty of merchantability. I
never guaranteed the mower, but the guarantee is implied.

Defining Implied Terms

Guarantees are not the only type of term to be commonly implied. Many contract terms can be
implied, but the practice of using implied terms is dependent on the court's ability to give the
proper and intended meaning to those terms. The court often assumes that certain terms are
common knowledge, and that both parties understood the definition of those terms without
defining the terms in detail.

For example, if I said the mower was four-wheeled, then the court will imply that the mower has
four wheels on which to travel. I won't be successful in arguing that it's a two-wheeled mower,
but it comes with two extra, or replacement, wheels.
Sometimes a court will have to interpret contract terms that have more than one meaning. In
these cases, courts will imply the term as it is most reasonably used, considering the context. For
example, if I say the mower is suitable for mowing a yard, then the court will imply that I mean a
residential lawn area. My argument that I meant the English measurement of only one yard, as in
three feet, will fail.

Express Terms
Of course, implied terms aren't the only contract terms that courts encounter. Courts must also
explore express terms. Express terms are those words, provisions, and conditions that are
specifically written or defined in the contract.
In fact, sometimes implied terms can trump express terms. For example, an implied warranty
of merchantability is a fairly broad doctrine that applies to all products or services sold by the
merchant of goods. A merchant is legally defined as someone who is in the regular business of
selling these particular goods.
At my garden store, I am in the regular business of selling all sorts of lawn equipment. I am
considered to be a merchant of these goods. But I don't want to be responsible for anything that
happens after the goods are sold. So, let's say that I put a sign on my door that says, 'No returns
or refunds.'
When you buy that broken lawnmower, and we end up in court, I argue that I expressly denied
any guarantee on the lawnmower. Even though I expressly denied the guarantee, I'll lose anyway.
The only way I could have avoided the implied warranty of merchantability is to mark that
particular lawnmower 'as is' or 'defective'. That way you would know there was a chance that
lawnmower wasn't merchantable, or fit for use.

Lesson Summary
Let's review. It's common for a court to examine a contract and give meaning to the terms of a
contract. Contracts are made up of different types of terms. Implied terms are words or
provisions that a court assumes were intended to be included in a contract. This means that the
terms aren't expressly stated in the contract. In a business contract, it's usually not possible to
cover every detail.
A court will often assume that some contract terms are implied. This allows the court to enforce
the contract and follow through with the parties' intent and protect parties from fraud by
omission or misrepresentation. One common example is an implied warranty of
merchantability. This means that there is an implied guarantee that goods or services will serve
the expected purpose. This implied warranty is used in all sales transactions by a merchant of

goods or services. A court will normally use the implied warranty of merchantability against
merchants, even when the merchant used express terms to the contrary.

Learning Outcomes
After viewing this video lesson, you should be able to:

Recognize that contracts can be made up of implied terms

Explain how courts assume the implied terms of contracts

Define implied warranty of merchantability

Often, a court will rule that a written contract represents the entire agreement between the
parties. Other contract evidence won't be permitted or enforced. This is called the parol evidence
rule. This lesson explains the rule and how it works.

Making a Contract
Ideally, when two parties make a contract, the complete and final agreement will be
memorialized in the written document. Contracts don't have to be written, but when they are, the
written contract should fully represent the parties' agreement. The written contract is legally
enforceable. If one party fails to fulfill the terms of the contract, the other party may sue for
compliance, or performance. This type of lawsuit is called a breach of contract.
When a court considers the breach of contract case, the court will look to the written contract.
The written contract is the only evidence the court has in order to determine whether or not the
parties complied with the terms of the agreement. Any extra evidence will complicate the court's
task of enforcing the written contract.

Parol Evidence Rule

The parol evidence rule is a legal rule that applies to written contracts. Parol evidence is
evidence pertaining to the agreement that isn't included in a written contract. Courts generally
don't allow this extra evidence, because the court must determine the parties' intentions. The
written contract is considered to be the best description of the parties' intentions.
The rule works like this:
1. The parol evidence rule applies after the parties put their final agreement in writing.
2. The parties have to intend that the written contract is complete and final.
3. No parol, or extra evidence, will be allowed to contradict or modify the written contract.

For example, let's say that you and I agree that I'm going to build three custom birdhouses for
you, and deliver them to you on March 1. You're going to pay me $50 per birdhouse. We sign and
execute a written contract.
I deliver the birdhouses, but you don't pay me. I take you to court, and ask for my $150, plus I
want an additional $50 penalty fee since you didn't pay me on time. The court will likely grant
me the $150 you owe me, but our agreement didn't mention a penalty fee. Any evidence of a
penalty fee is parol evidence. The court will only enforce the exact terms of our contract.

Four Corners
Courts generally apply the four corners rule. This is also sometimes referred to as the plain
meaning rule. This means that the court will enforce the written contract just as it appears, as
long as the contract appears to be complete and final. All contract terms must appear within the
four corners of the paper on which the contract is written. Otherwise, a court won't enforce those
contract terms.

Merger Clause
Many written contracts include a merger clause. This is a clause that declares that the written
contract is the complete and final representation of the parties' agreement. A merger clause
simply ensures that a court will follow the parol evidence rule.
For example, let's say that you and I execute a written contract that includes a merger agreement.
Our contract actually says 'this agreement constitutes the entire agreement between the parties'.
I'm going to build three custom birdhouses for you, and deliver them to you on March 1. You're
going to pay me $50 per birdhouse.
After we execute this agreement, I realize I can't purchase the wood you want. I'm going to need
a few extra weeks. You say that's fine, and we make a side agreement where we orally decide to
change the terms of the contract. We decide that I'll deliver the birdhouses on March 15. Our side
agreement wasn't included in the original written contract. Because this agreement contradicts
the terms of the written contract, a court won't enforce it. A court will only enforce the exact
terms of our written contract.

Exceptions
There are certain times when a court won't enforce the parol evidence rule. Sometimes a court
will allow extra evidence that pertains to the contract. Some of these exceptions include:
1. When there is evidence of an invalid contract made through fraud, duress, or mistake.
2. When the parties need to clarify an ambiguous contract term.
3. When there was no consideration for the contract.

4. When evidence simply supplements, rather than modifies or contradicts, the written
contract, if the parties didn't intend the contract to be final, and
5. When there is a completely separate, subsequent agreement, made after the contract.
For example, let's say that you and I execute a written contract. I'm going to build three custom
birdhouses for you, and deliver them to you next Tuesday. You're going to pay me $50 per
birdhouse. After we execute this agreement, I fail to build and deliver the birdhouses. You take
me to court. In order to prove that I'm late on the delivery of the birdhouses, you'll have to
explain the term next Tuesday. The court will need to know the delivery date. This is parol
evidence, but the court will allow it.

Lesson Summary
Let's review. Ideally, when two parties make a contract, the complete and final agreement will
be memorialized in a written document. This written contract is legally enforceable. If one party
fails to fulfill the terms of the contract, the other party may sue for performance. The parol
evidence rule applies to written contracts. This rule prohibits courts from considering evidence
pertaining to the agreement that isn't included in a written contract. Instead, courts will generally
apply the four corners rule. This means that, as long as the contract appears to be complete and
final, the court will enforce the written contract just as it appears.
Many written contracts include a merger clause. This clause declares that the written contract is
the complete and final representation of the parties' agreement and ensures that the court follows
the parol evidence rule. However, there are some exceptions. Courts will allow parol evidence in
instances when fraud, duress, or mistake would invalidate a contract, when the parties need to
clarify an ambiguous contract term, or when there is a completely separate, subsequent
agreement, made after the written contract.

Learning Outcomes
Finishing this lesson should prepare you to:

Summarize how the parol evidence rule works

Define four corners rule and merger clause

Explain when a court may accept parol evidence

The conditions of a contract determine the parties' obligations. A condition is an act or an event
that affects the parties' contractual duties. There are three different forms of contract conditions.
This lesson explores each of those conditions.

Contract Conditions

Contracts are common in the business world. A contract is a type of legally binding written or
spoken agreement. A valid contract will create a mutual obligation. This means that each of the
parties is obligated, or required, to perform a duty under the contract.
The contract conditions determine the parties' obligations. A condition is an act or event that
affects a party's contractual duty. It is a qualification that is placed on an obligation. For instance,
let's say that I promise my brother that I'll wash the dog if he'll clean my room. This agreement
has a condition. I'm not obligated to wash the dog unless my brother cleans my room.
There are three different forms of conditions. These conditions are categorized by the point in
time that the condition must occur. There are conditions that must occur:

Before

During, or

After the contractual duty

Let's look at each of these forms of conditions.

Condition Precedent
Sometimes a contract will require that a certain act or event occur before some other act or event.
This form of condition is known as a condition precedent. A condition precedent is something
that must occur before a party is obligated under the contract. The condition precedes the party's
obligation.
This type of condition is common. Contracts often stipulate that a party's obligation occurs once
another act or event occurs. For example, let's take a look at my oral agreement with my brother.
I promise my brother that I'll wash the dog if he'll clean my room. This agreement has a
condition precedent. I'm not obligated to wash the dog unless my brother cleans my room. My
brother must clean my room before I'm obligated to wash the dog. The clean room is a condition
precedent. Once my brother cleans my room, I'm obligated to wash the dog. Until then, I have no
obligation.

Condition Concurrent
The second form of contract condition is one that must occur at the same time as some other act
or event. This is known as a condition concurrent. A condition concurrent is something that
must occur simultaneously with another condition. Each party's obligation acts as a condition
precedent for the other.
When there is a condition concurrent, the parties' obligations are mutually dependent on each
other. Neither party has an obligation until the other party performs his or her obligation. For
example, let's say that I make an oral agreement with my brother. As long as he cleans my room

every week, I'll wash the dog every week. This is a condition concurrent because we are
mutually obligated to one another and our obligations are mutually dependent on each other. As
long as he's cleaning my room, I'm obligated to wash the dog. As long as I'm washing the dog,
he's obligated to clean my room.
This is a common contract condition in the sale of goods or services. When I buy a new shirt in a
store, I'm obligated to pay the storekeeper and she's obligated to give me the shirt. Or, if I
purchase the shirt online, I'm obligated to send payment to the store and the store is obligated to
send me the shirt. The obligations are concurrently contingent on one another.

Condition Subsequent
The third form of contract condition is one that occurs after some other act or event. This is
known as a condition subsequent. A condition subsequent is something that occurs after another
condition. This type of condition terminates the parties' obligations and ends the contract.
Many business contracts contain conditions subsequent. Often, the condition is included in a
contract clause that outlines what happens when, or if, a certain act or event occurs. A condition
subsequent will normally be an act or event that occurs during the duration of the contract.
For example, let's look at my oral agreement with my brother. Let's say that we agree that he'll
clean my room every week, and I'll wash the dog every week, until our mom reassigns our
chores. This is a condition subsequent because our obligations to one another will terminate once
our mom reassigns our chores. If, next month, I'm assigned to wash the dog every week anyway,
then I'm no longer obligated to my brother.
This is a common condition in business contracts, such as supply contracts. For example, say
Bridget's Bread Company agrees to buy all of its flour from Fred's Flour Supply. This contract
contains a clause saying that Fred is no longer obligated to supply flour to Bridget if she closes,
sells, or moves her bread company. This is a condition subsequent and terminates the parties'
obligations to one another.

Lesson Summary
Let's review. Many business contracts contain conditions. The contract conditions determine the
parties' obligations. A condition is an act or event that affects a party's contractual duty. A
condition is a qualification that is placed on an obligation. There are three different forms of
conditions. These are:

Conditions precedent

Conditions concurrent, and

Conditions subsequent

A condition precedent is something that must occur before a party is obligated under the
contract. The condition precedes the party's obligation. A condition concurrent is something
that must occur simultaneously with another condition. Each party's obligation acts as a
condition precedent for the other. A condition subsequent is something that occurs after another
condition. This type of condition terminates the parties' obligations and ends the contract.

Learning Outcome
Upon viewing this lesson, you should be able to paraphrase the three contract conditions.
A contract condition is an act or an event that affects the parties' contractual duties.
A condition determines the parties' obligations, but sometimes a condition can be
excused. This lesson explains the different ways that a contract condition can be
excused.
Contract Conditions

Our business world is filled with contracts. A contract is a written or spoken agreement that is
legally binding. All valid contracts create a mutual obligation. A mutual obligation means that
each of the parties is obligated to perform a duty under the contract.
The contract conditions affect and determine the parties' contractual obligations. A contract
condition is a qualification that is placed on an obligation. It is something that must occur before,
during or after a contractual duty.
For example, let's say that I promise to fix the flat tire on your car if you'll let me borrow your
car tomorrow evening. This is an exchange of obligations, and a valid oral contract. Notice,
though, that this agreement has a condition. I'm not obligated to fix the tire unless you agree to
let me borrow the car.
Excuse of Conditions

Sometimes a condition can be excused. This means that the condition didn't occur, but the other
party is still obligated to perform a contractual duty.
Let's look again at our scenario. I've promised to fix your flat tire if you'll let me borrow the car
tomorrow evening. You have to agree to let me borrow the car before I'm obligated to fix the flat
tire. This is the contract condition. If it's excused, I'm obligated to fix the flat tire even though
you didn't agree to let me borrow the car.
Ways a Condition Can Be Excused

There are many ways in which a contract condition can be excused. These are some of the more
common excuses:

1. Anticipatory repudiation can work to excuse a contract condition when one party renounces
his or her intention to perform that party's contract obligation. Let's look again at our prior
scenario. I promise to fix the flat tire on your car if you'll let me borrow your car tomorrow
evening. These are contract conditions that are dependent on one another. After we agree, you
announce that you have a date tomorrow evening and will be using your car. You've renounced
your intention to let me use your car. I can now assume, or anticipate, that you won't be
performing your condition. My condition, to fix the flat, is now excused.
2. Prevention works to excuse a contract condition when one party wrongfully prevents the
other party from performing his or her condition. Let's say we agree that I'll fix the flat on your
car, and you'll let me borrow the car tomorrow evening. I gather my tools and supplies and go to
the driveway to fix your flat. I'm willing and able to perform my condition; however, you already
fixed it. The condition that I fix the flat can be excused, because you've purposefully and
wrongfully prevented the occurrence of the condition. You'll still have to uphold your contractual
duty to let me borrow the car.
3. Waiver can work to excuse a contract condition when a party waives a contract condition that
is meant to benefit that party. This type of waiver is a voluntary relinquishment of a right. Let's
look at our same scenario again. We agree that I'll fix the flat on your car, and you'll let me
borrow the car tomorrow evening. My fixing your tire is a condition to your letting me borrow
the car. My fixing the tire is a benefit to you. Therefore, you can waive this condition.
Sometimes, a party can withdraw a previous waiver and reinstate the contract condition.
However, a party can't withdraw a waiver if the other party relied on the waiver to his or her
detriment. This means that you can't restore the condition if I relied on your waiver and my
reliance caused a harm or loss to me.
4. Impossibility works to excuse a contract condition when it is objectively impossible to
perform a condition. Let's say that I agree to fix your flat tire and you agree to let me borrow
your car. I try to fix your flat but I find that your tire is shredded and must be replaced. Any
neutral or disinterested party would agree that it's impossible for me to fix the tire. This contract
condition will be excused and you'll still have to let me borrow the car. This excuse is closely
related to impracticability. Impracticability is a subjective, rather than objective, test. It means
that performance of the condition is still possible, but the parties believe it would be too
troublesome or burdensome.
5. Substantial performance works to excuse a contract condition when a party substantially
completed the contractual duty. Let's change our scenario a bit. Let's say that I hire you to paint
my fence. You agree to paint the fence and I agree to pay you $100. You paint the fence, but you
miss several spots. The condition of painting my fence isn't fully performed. So do I still have to
pay you? The answer is probably yes. Since you substantially performed your obligation, the
condition can be excused. I'll have to pay you, but I can deduct the amount that it costs me to
correct your work.

6. Divisibility can work to excuse a contract condition when the contract is divisible or
completion can occur in separate sections. Let's say that I hire you to build me a fence and paint
it. You agree to these duties and I agree to pay you $200. We agree that this will cover $100 for
building the fence, and $100 for painting it. You build the fence, but you never come back to
paint it. The condition of painting my fence isn't performed. Do I still have to pay you? The
answer is probably yes. This contract is divisible, because it's performable in different parts. I'll
have to pay you, but only for the section of the contract that you completed. The condition is
excused for that $100.
Lesson Summary

Let's review. Sometimes a contract condition can be excused. This means that the condition
didn't occur, but the other party is still obligated to perform a contractual duty. There are many
different ways in which a condition can be excused. These are some of the more common
excuses:
1. Anticipatory repudiation is when one party renounces his or her intention to perform that
party's contract obligation.
2. Prevention is when one party wrongfully prevents the other party from performing his or her
condition.
3. Waiver is when a party waives a contract condition that is meant to benefit that party.
4. Impossibility is when it is objectively impossible to perform a condition.
5. Substantial performance is when a party substantially completed the contractual duty.
6. Divisibility is when the contract is divisible or completion can occur in separate sections.
Lesson Outcome

After viewing this video lesson, students should be able to define the types of contract condition
excuses: anticipatory repudiation, prevention, waiver, impossibility, substantial performance, and
divisibility.
A contract is a form of agreement that is legally binding. When one of the contracting parties
fails to hold up his or her end of the deal, a breach of contract results. There are three different
types of breach of contract. This lesson explains partial, material and total breaches.

Breach of Contract
You're getting married in a few weeks. I run a flower shop and agree to supply you with 100
bouquets of a dozen roses each, for only $12 a dozen. This is our contract, which is like others

seen frequently throughout the business world. And just like all contracts, ours has legal
ramifications if all areas of the contract aren't met.
Contracts are usually made in an effort to formalize an agreement and to protect the parties in the
agreement. A contract will place an obligation on each of the contracting parties. An obligation
is a legal duty to do something or to refrain from doing something. In our contract, I'm obligated
to supply you with 100 bouquets of a dozen roses, and you're obligated to pay $12 per dozen.
Often, one party to a contract fails to uphold his or her obligations under the contract. This
results in a breach of contract. Because contracts are legally binding, a breach of contract
results in legal consequences. Once a court decides that a breach has occurred, it will issue a
remedy.
A remedy is when a court enforces a right or satisfies a legal harm or injury through
compensation. The court uses various types of legal remedies to settle legal claims or disputes
between parties. A remedy can be a payment to a party who was wronged by another, or a
remedy can simply enforce the provisions of a contract. The type of legal remedy depends on the
type of breach.
Sometimes a party will breach the entire contract, or sometimes a party will violate only a small
portion of the contract. A breach of contract can be partial, material or total. A savvy
businessperson will know the difference and know the legal remedies that accompany each type.
Let's take a separate look at each type of breach.

Partial Breach of Contract

Sometimes a party will fail to uphold a portion of the contract, but most of the contract can still
be fulfilled. This can result in a partial breach. A partial breach is also sometimes referred to as
an immaterial breach.
This type of breach occurs when one party to the contract fails to fulfill a contract term and that
term is negligible. 'Negligible' means that the contract term is small or unimportant. A partial
breach will be minimal enough that it won't cause the entire contract to fail.
Most of the time, a partial breach will be remedied by a payment, or a credit, to the party who
was wronged. For example, let's look at our contract for your wedding roses. Let's say that I
deliver the roses, and you pay me the full amount, which is $1,200. After I leave, you discover
that one dozen is too wilted for you to use. We argue the matter, and eventually, you sue me in
court for breach of contract. The court agrees with you, and I'm ordered to refund your money
for one dozen roses. Your remedy is a cash payment, from me to you, for $12.
I only breached a portion of the contract. I fulfilled your order for the majority of the contract.
This is a partial breach, and you'll be compensated with a right to damages, or payment, for only
the portion of the contract that I breached.

Material Breach of Contract

Sometimes a party will fail to uphold a significant portion of the contract. The breached portion
is sometimes central to the rest of the contract, affecting the main goal of the contract. This is a
material breach. A material breach occurs when a party fails to fulfill a duty under the contract,
and that duty is significant enough that it causes the rest of the contract to fail.
A material breach is usually remedied by excusing the wronged party from any further
obligations under the contract. That party can also sue for any damages that he or she incurred as
a result of the breach. In any breach of contract case, the court must determine whether or not the
breach is a material breach. There are certain guidelines a court generally uses. The court will
consider these questions:
1. Did the breaching party act intentionally, negligently or make an innocent mistake?
2. To what extent did the breaching party fulfill the obligations of the contract?
3. What is the possibility that the breaching party will complete the rest of his or her
obligations?
4. How much benefit did the other party receive?
5. Can the other party be properly compensated for the breach?
6. What will happen to the breaching party if the other party is excused from further
obligations under the contract?
For example, let's look at our contract again. Let's say that I deliver the roses the morning of your
wedding, but they are all too wilted for you to use. You call another florist and have last minute
roses delivered, and you pay that florist $1,200.
You never paid my bill for $1,200. We argue the matter, and eventually, you sue me in court for
breach of contract. The court agrees with you. The court rules that the wilted roses were unusable
and that I breached the contract by not delivering fresh, usable roses. The court excuses you from
any obligations under the contract. This means you don't have to pay me anything.
I completed my obligation under the contract, but I completed the contract in a faulty manner.
The duty to supply you with usable roses is significant enough that it causes the rest of the
contract to fail. I didn't fulfill the goal of the contract, which was for you to have fresh, usable
roses for your ceremony. I can't now fulfill the contract, because your wedding has passed. You
didn't receive any benefit from our contract. Instead, you had to start over with a new florist. This
is a material breach.

Total Breach of Contract

Sometimes a party will entirely fail to complete the contract. This type of breach is the easiest to
identify. If a party completely fails to fulfill the contract, it is known as a total breach. A total
breach occurs when a party wholly fails to fulfill his or her obligations under the contract.
Like a material breach, a total breach is usually remedied by excusing the wronged party from
any further obligations under the contract. That party can also sue for any damages that the party
incurred due to the breach.
For example, let's look at our contract one more time. I'm supposed to deliver the roses on the
morning of June 1, which is the day of your wedding. Let's say that I never show up. You call
another florist and have last minute roses delivered, and you pay that florist. The new florist
charges you $2,000 because it's a last minute order.
As it turns out, I wrote the date down wrong. I had your roses scheduled for delivery on July 1,
even though our contract clearly says June 1. You sue me in court for breach of contract. The
court rules that I totally breached the contract. I didn't fulfill any of my obligations under the
contract, and the court excuses you from your obligations under the contract. This means you
don't have to pay me. The court also awards you $800 in damages, since you had to pay $800
more to get the last minute roses. I now owe you $800.

Lesson Summary
Let's review. Business deals are regularly made through contracts. A contract will place an
obligation on each of the contracting parties. An obligation is a legal duty to do something or to
refrain from doing something. When a party fails to fulfill his or her contractual duties, it's
known as a breach of contract. Once a court determines that there is a breach of contract, the
court will order an appropriate remedy. A remedy is when a court enforces a right or
compensates a legal harm or injury. The type of legal remedy depends on the type of breach. A
breach of contract can be partial, material or total.
A partial breach is also sometimes referred to as an immaterial breach. This type of breach
occurs when one party to the contract fails to fulfill a contract term, and that term is negligible. A
partial breach will usually be remedied by a payment, or credit, to the party who was wronged.
A material breach occurs when a party fails to fulfill a duty under the contract, and that duty is
significant enough that it causes the rest of the contract to fail. Excusing the wronged party from
any further obligations under the contract and awarding that party any damages that the party
incurred are the usual remedies for this type of breach. These are also the usual remedies for a
total breach. A total breach occurs when a party wholly fails to fulfill his or her obligations
under the contract.

Lesson Outcomes
After viewing the video lesson, a student should be able to:

Define what a contract is

Identify how a contract can be breached

Paraphrase the explanations of how legal remedies can be ordered for partial, material, or
total breaches

A contract is a form of agreement that is legally binding. Sometimes, a contracting party suspects
that the other party will fail to uphold his or her end of the deal. In these cases, there are certain
legal procedures a party can use to better secure the contract. This lesson explains anticipatory
repudiation and demand for assurances.

Breach of Contract
You're hosting a big event in a few months, and you need party favors. We make a business
contract. I'm going to sell you 100 pairs of custom sunglasses. You're going to pay me $20 per
pair for a total of $2,000. I tell you that I have exactly 100 pairs of the special lenses you request.
You make a down payment that is equal to half of your bill, or $1,000, now. You don't get any of
your sunglasses yet, but I promise to fulfill your order within the next 12 weeks. You need the
sunglasses by then in order to have them at your special event, and our contract says this.
This type of contract is a common ingredient in everyday business matters. Contracts serve to
formalize and secure business dealings. Contracts also protect the parties in the agreement,
because the contract obligations are legally binding. This means that, if a party fails to complete
his or her obligations under the contract, legal ramifications will result.
A breach of contract claim is a frequent type of civil lawsuit. A breach of contract occurs when
one party to the contract fails to uphold his or her legal obligations under the contract.
Sometimes, a contracting party will have a reasonable presumption that a breach of contract will
occur. In some instances, a party acts or makes statements that are contrary to his or her
obligations under the contract. Fortunately, the other party doesn't have to wait until the contract
is actually breached.
The party who has intent to complete the contract is commonly called the innocent party. This
party can take certain legal actions to better secure the contract and protect his or her interests.
Let's take a look at the legal action available when an innocent party reasonably expects a breach
of contract.

Anticipatory Repudiation
There are times when an innocent party anticipates that the other party will breach the contract.
This is known as anticipatory repudiation, or anticipatory breach. Anticipatory repudiation
occurs when a party communicates that he or she won't fulfill the contract obligations by the
deadline.

Once the innocent party is notified that a breach is likely, that party can file a civil lawsuit for
damages and terminate the contract. There's no need to wait for the actual breach of contract.
This means that the innocent party can initiate a lawsuit for anticipatory repudiation before the
contract deadline, but that party must be able to prove two things:
1. First, the repudiating party acted without just cause. This means that the repudiating
party didn't have a reasonable basis for repudiating, and didn't act with a sincere
intention.
2. Second, the breach will cause some sort of loss for which the innocent party should be
compensated.
For example, let's look at our contract for your custom sunglasses. Let's say that, one month after
executing our contract, you call me to check on your order. I tell you that I forgot about your
order, and I already used 20 pairs of the special lenses you requested to fulfill another person's
order. This means I only have enough supplies for 80 pairs of sunglasses, and you ordered 100
pairs. I tell you that I won't be able to fulfill your order by the deadline, because now I'll have to
order more lenses from the manufacturer.
This is repudiation, because I've made a statement saying that I can't fulfill the contract by the
deadline. This breach will cause you a loss, because now you have to find someone else who can
fulfill the order by the deadline, and you'll have to pay that person.

Types of Repudiation
As a businessperson, it's helpful to recognize when there are grounds for anticipatory
repudiation. Generally speaking, there are three types of repudiation. Repudiation occurs when:
1. One party clearly tells the other party that he or she can't, or won't, fulfill the obligations
due under the contract.
2. One party acts in a manner that is inconsistent with an intent to fulfill the obligations due
under the contract.
3. One party sells, destroys or otherwise disposes of the property that is the subject of the
contract.
Let's look again at our contract for the custom sunglasses. I clearly told you that I can't fulfill the
obligations due under the contract, because now I don't have the correct supplies available before
the contract deadline. I've also acted in a manner that's inconsistent with the intent to fulfill our
contract, because I used my limited supplies to fulfill another order. I've also sold the property
that was the subject of our contract. My repudiation meets criteria under each of these types.

Retraction

The intent to breach the contract must be plain and obvious. An innocent party can't base an
anticipatory repudiation lawsuit on an ambiguous statement or communication. It's also
important to note that the words of repudiation might not be the repudiating party's last words on
the matter. The repudiation doesn't always automatically trigger grounds for a lawsuit.
The repudiating party can retract, or take back, his or her repudiating statement or
communication. A retraction is a statement that disavows, recants or reverses a previous
statement. In anticipatory repudiation, a retraction acts to reinstate the contract, unless the
repudiation caused damage to the innocent party, or caused the innocent party to make other
arrangements.
Let's take another look at our contract. You called to check on our contract, and I told you that I
couldn't fulfill your order for 100 pairs of custom sunglasses by the contract deadline. I used
some of the needed supplies to complete another order. Now I'll need to order more supplies, and
that will take longer than the contract deadline. A few days later, I call you back to say that I've
located the needed supplies, and will now be able to meet my obligations under our contract.
This is a retraction. Our original contract is reinstated, with all the same terms, unless you've
already sustained a loss, or made other arrangements because of my repudiation. Let's say that
you tried, but couldn't find anyone else to fulfill your order in time. You've wasted some of your
free time and you're irritated with me, but you haven't spent any extra money, and you haven't
been successful in making other arrangements.

Demand for Assurances

When a party repudiates a contract, then retracts his or her repudiation, it's understandably
inconvenient for the innocent party. A contract is meant to formalize and secure an agreement,
but repudiation brings insecurity and distrust.
After a retraction, the innocent party has a right to request a promise, or guarantee, that the
repudiating party truly intends to fulfill the obligations due under the contract. This is called a
demand for assurances, or a request for assurances.
A demand for assurances is a written provision that requests the repudiating party to provide
adequate assurance that he or she will fulfill the obligations due under the contract. In effect, the
repudiating party must provide evidence that he or she intends to fully complete the contract this
time.
Under the law in most states, the assurance must be provided within 30 days of the demand.
Otherwise, the innocent party can terminate the contract and sue for any loss incurred. Also,
while waiting to receive the assurance, the innocent party can usually suspend his or her
obligations due under the contract.
Let's go back to the contract you and I made. After I call you to tell you that I'll fulfill your order
after all, you're not quite sure what to believe. You need the sunglasses in the next six weeks, but
you don't trust me. You send me a letter that requests assurance that I'll fulfill our contract. Now,

I'll have to provide you with evidence that I intend to fully complete the contract. I'll have to
provide this evidence within the next 30 days.
Remember that I still have 80 pairs of the lenses you need. This means that I can produce most of
your order while waiting on the other 20 pairs of lenses to be delivered to me. So, I get busy
constructing your custom sunglasses. Within 30 days, I deliver 50 pairs of custom sunglasses to
you. This is how many you've already prepaid for, and it will be considered a reasonable
assurance that I intend to fulfill our contract.

Lesson Summary
Let's review. Sometimes a contracting party will have a reasonable presumption that a breach of
contract will occur. The party who has intent to complete the contract is commonly called the
innocent party. This party can take certain legal actions to better secure the contract and protect
his or her interests, rather than waiting for the actual breach to occur.
Anticipatory repudiation is when a party communicates that he or she won't, or can't, fulfill the
contract obligations by the deadline. The innocent party can initiate a lawsuit for anticipatory
repudiation before the contract deadline. However, note that the repudiating party can issue a
retraction. This is a statement that disavows, recants or reverses a previous statement. A
retraction acts to reinstate the contract, unless the repudiation caused damage to the innocent
party, or caused the innocent party to make new arrangements.
After a retraction, the innocent party has a right to request a promise that the repudiating party
truly intends to fulfill the obligations due under the contract. This is called a demand for
assurances. The repudiating party usually must provide evidence that he or she intends to
complete the contract within 30 days of the innocent party's demand. Otherwise, the innocent
party can terminate the contract and sue for any loss incurred.

Lesson Outcomes
After watching the video lesson, you should:

Discover that there may be times when one can presume a breach of contract may occur

Understand that a party might break a contract and that they have repudiation options

Recall that a retraction allows an innocent party to take legal action or demand assurances
that a contract can be secured

When a party breaches a contract, a court will often award damages to the other party.
Expectation damages are a common form of legal remedy for a breach of contract. This lesson
explains expectation damages, and the formula for calculating expectation damages.

Damages
Contracts are common in everyday business practice. Unfortunately, many business contracts are
unsuccessful. Frequently, a contracting party fails to fulfill, or completely perform, the contract.
A breach of contract claim is a common type of civil lawsuit. This type of lawsuit will arise
when one contracting party fails to uphold the obligations due under the contract. When one
party breaches the contract, the other party is often referred to as the innocent party. The innocent
party can file a lawsuit and seek a legal remedy. A legal remedy is the method by which the
court attempts to bring justice to, or compensate, the innocent party.
Often, the legal remedy for a breach of contract claim will include an award of damages. A
damage award is money ordered to be paid as compensation for the injury or loss. There are
several different types of money damages, and several different methods that the courts use to
calculate damages.

Expectation Damages
The type of damages awarded in a lawsuit depends on the type of claim. For a breach of contract
claim, the court will normally award expectation damages. These are damages awarded to
compensate the loss of future income. This is a different type of damage award than money that
is awarded for an actual, concrete and definite loss. Expectation damages are awarded to cover
the amount that the innocent party reasonably anticipated under the contract. This amount is
often speculative.
For example, let's say that you and I make a contract. I'm an accountant and you hire me to
conduct an audit of your business finances. I'm scheduled to be in your office, reviewing your
records, for an entire week. You're going to pay me $4,000. We schedule the audit to start next
Monday.
On Monday morning, just as I'm leaving for your office, you call me to cancel. I now have a
breach of contract claim against you. I expected to make $4,000 this week, and now I don't have
any work scheduled for the week. My expectation damages for your breach of contract are,
therefore, $4,000.
My damages are simple to calculate, because we had a contract for a definite fee. I reasonably
anticipated $4,000, but sometimes the damages aren't that easy to calculate.
Let's say that our contract is, instead, for $100 an hour. We don't know for sure how many hours
it will take me to complete the audit. In this case, I could provide expert testimony to determine
my expectation damages. Another accountant will be allowed to testify as an expert, and provide
the court with a reasonable estimation of how long the audit would take and just how much an
accountant like me would normally be paid for the job.

Rule of the Expectancy

Expectation damages are customary in breach of contract cases. Once the court determines that a
breach has occurred, the court will usually determine that expectation damages should be
awarded. Next, the court must determine the proper amount to be awarded to the innocent party.
The court will use the rule of the expectancy to determine the appropriate award. This legal
doctrine states that the innocent party is entitled to damages that will put the innocent party in the
position that party would have been in had the contract not been breached.
In our example, we know that I would have earned $4,000 under our contract. In order to be in
the position I would have been in if the contract hadn't been breached, I should be awarded
$4,000.

Calculation of Damages
The court will use the rule of the expectancy to calculate the innocent party's expectation
damages.
This calculation has three steps:
1. First, the court will determine what the innocent party would have gained had the
contract not been breached.
2. Second, the court will determine where the innocent party now stands. In other words, the
court will determine what the innocent party lost and has not yet regained.
3. Third, the court will calculate what it would now take to bring the innocent party from
where the party now stands, to where that party would be had the contract not been
breached.
In our example, we know that I would have gained $4,000 had the contract not been breached.
Instead, I now stand at zero. It will take the full $4,000 to bring me from where I now stand to
where I would be if the contract hadn't been breached.
Let's change our scenario a little bit. Let's say that I expected to pay $100 in bus fare this week,
because that's how much it would cost me to get to and from your office each day. Since you've
canceled my services, I won't have this expense. Does this change my expectation damages?
Yes. I would have gained $4,000 under our contract, but I would have expenses of $100 that I no
longer have. This means that it will take $3,900 to bring me from where I now stand to where I
would be if the contract hadn't been breached.

Duty to Mitigate
Let's change our scenario again. This time, let's say that after you breach our contract, another
client calls to offer me a job this week. Charlie's Chophouse offers to pay me $3,000 if I'll come

to work immediately and conduct their audit. Can I refuse this offer? What if I already made
plans to sit on my couch and watch my favorite soap opera everyday with my best friend?
No. I have a duty to mitigate. This means that I have to take reasonable efforts to lessen my
damages. As long as the Chophouse job is comparable to the job with you, I'll need to take it. I
can still sue you for breach of contract, but my expectation damages are now different. Since I
covered $3,000 of my anticipated $4,000, my damages are now $1,000.

The Hairy Hand

There's a famous case regarding expectation damages. The New Hampshire Supreme Court
decided Hawkins v. McGee in 1929. McGee had a thin scar across the palm of his hand. He went
to see Dr. Hawkins about the scar. Dr. Hawkins promised McGee that he could fix the scar, and
provide McGee with a perfect hand.
Dr. Hawkins performed a skin graft, using skin from McGee's chest. This surgery left an even
deeper, more noticeable scar on McGee's hand, but even worse, the scar grew hair. McGee was
horribly embarrassed by his hairy hand, and claimed that he had trouble finding employment
because of his disfigurement.
McGee expected a normal hand. In fact, McGee reasonably anticipated a perfect hand because
that is what Dr. Hawkins promised. The New Hampshire court had to calculate McGee's
expectation damages. What's the difference between having a perfect hand, and having a hairy
hand? In 1929, McGee's trial court decided that amount was approximately $3,000.

Lesson Summary
Let's review. When one party breaches a contract, the other party will be known as the innocent
party. The innocent party can file a lawsuit and seek a legal remedy. A legal remedy is the
method by which the court attempts to bring justice to, or compensate, the innocent party. The
legal remedy for a breach of contract claim will normally include an award of damages. A
damage award is the money ordered to be paid to the innocent party as compensation for that
party's injury or loss.
Specifically, for a breach of contract claim, the court will usually award expectation damages.
These are damages awarded to compensate the loss of future income. They are awarded to cover
the amount that the innocent party reasonably anticipated under the contract. The court will use
the rule of the expectancy to calculate the innocent party's expectation damages. This
calculation has three steps:
1. First, the court will determine what the innocent party would have gained had the
contract not been breached.
2. Second, the court will determine where the innocent party now stands. In other words, the
court will determine what the innocent party lost and has not yet regained.

3. Third, the court will calculate what it would take to bring the innocent party from where
that party now stands, to where that party would be had the contract not been breached.
Remember, though, that the innocent party has a duty to mitigate. This means that he or she
must take reasonable efforts to lessen his or her damages.

Learning Outcomes
After viewing this video lesson, you should be able to:

Understand the reason for legal remedy when a contract has been breached

Explain what expectation damages are

Describe the three steps in the rule of expectancy

Illustrate the meaning of duty to mitigate

When a party breaches a contract, a court will usually award money damages
to the innocent party. But there are other types of remedies. Equitable
remedies are different than monetary damages. This lesson explains specific
performance and injunctions, which are equitable remedies.

Equitable Damages

A breach of contract is a common type of civil claim. When a court considers a breach of
contract case, the court will almost always award money damages to the innocent party.
This means that the breaching party is ordered to pay money to the innocent party to
make up for the innocent party's losses caused by the breach.

Money damages are a legal remedy. A remedy is any court order that imposes a penalty
or enforces a right. Though not common, there are remedies other than legal remedies
available for breach of contract.

Equitable remedies are those that are based on what is fair, or seems right, in a particular
situation. These remedies were historically designed so that they don't have to follow
precedent, or established common laws. Instead, they are purposely intended to be a more
flexible option that is used to ensure justice in a particular situation.

These remedies were developed through the old English laws of equity, as used in the
historic courts of equity. These courts exclusively granted equitable remedies, and the
courts of law granted legal remedies. Eventually, these courts were merged, and legal
courts had the authority to grant both types of remedies.

It's helpful to note that equitable remedies are rarely used. These options are only used in
cases where money damages are either too difficult to calculate or are inadequate to
remedy the harm done to the innocent party. Let's take a closer look at the two main
equitable remedies available for breach of contract.

Specific Performance

In a breach of contract case, the court can consider ordering specific performance as
long as the innocent party asks for that remedy. This equitable remedy orders the
breaching party to comply with the terms of the contract. This means that the breaching
party will be required to do whatever the party originally promised to do.

The court will consider this option when money damages won't provide the innocent
party with adequate compensation for the breach. Specific performance is most common
in sales contracts. This remedy is sometimes used when a sales contract involves
something unique, such as a particular tract of land, a rare heirloom, or a priceless art
piece.

Specific performance is best understood by considering an example. Let's say that Arty is
an art dealer. He acquires a rare, ancient Egyptian statue that is thought to have belonged
to Cleopatra. Andrea collects Egyptian art and makes a sizable offer to buy the piece.
Arty agrees, and the two make a valid legal contract.

Arty then decides that he'd rather keep the piece for now. He breaches his contract with
Andrea. Andrea sues Arty for breach of contract. The court decides that the piece is truly
priceless, and Andrea can't acquire another comparable piece no matter how much money
the court awards her. Instead, the court decides that Arty should comply with the terms of
the contract, and sell the piece to Andrea for the price she already agreed to pay. This is
specific performance.

Injunction

Another equitable remedy is injunction, which is a remedy that prohibits a party from a
particular act. Note that specific performance and injunction remedies are similar, but the
key difference is this: specific performance orders a party to do something, and an
injunction orders a party not to do something.

Injunctions can be issued as a remedy at the conclusion of a lawsuit, such as a breach of

contract claim. This type of injunction is a permanent injunction. Permanent injunctions
are issued by a court after hearing a matter, and as a part of the judgment order. A request
for injunction can also be filed as its own separate lawsuit. Sometimes a party will file a
court request for injunctive relief while the rest of the lawsuit is pending. When the court
orders an injunction in this situation, the remedy won't be permanent.

Temporary injunctions are usually enforceable immediately, but last for only a short
period of time. A temporary restraining order, or TRO, is a common type of temporary
injunction. This remedy is used when a party wishes to halt a particular act for a short
period of time, usually while the party prepares a more formal lawsuit. These orders
typically last a week or ten days.

A preliminary injunction is a remedy that is also temporary. These injunctions are

usually enforceable immediately, but last only until the court can fully hear a matter and
make a more permanent decision on the matter. A preliminary injunction lasts longer than
a temporary injunction, and is meant to ensure that a party doesn't act on a matter until a
court makes a final decision on the issue. Therefore, preliminary injunctions typically
only last the duration of a trial or a hearing. Injunctions aren't common, but are used
mostly in breach of contract cases.

Like specific performance, the court will consider this option when money damages
won't provide the innocent party with adequate compensation for the breach, and the
innocent party requests that remedy. Injunctions are used when the object of the contract
might be lost, destroyed, or otherwise made unavailable to the innocent party.

Let's take another look at our contract between Arty and Andrea, and consider how an
injunction might be used. Remember that Arty is an art dealer, and Andrea is a collector
who has made a contract with him to buy a rare, ancient Egyptian statue. However, let's
say that Alfred, another art collector, learns about the piece and contacts Arty. Alfred asks
how much Andrea has offered, and then offers to pay double. Arty agrees and tells
Andrea that their contract is off.

Andrea sues Arty for breach of contract. When she files her claim, she asks the court for a
preliminary injunction that will keep Arty from selling the piece to Alfred for the time
being. The court agrees, and issues an injunction. This court order prohibits Arty from
selling the piece until the court can fully hear the matter and make a final decision on it.

After hearing the matter, the court decides that Arty wrongfully breached the contract
with Andrea, and that the piece is truly priceless. The court agrees that Andrea can't
acquire another comparable piece no matter how much money the court awards her. The
court decides that Arty should comply with the terms of his original contract with Andrea.
The court orders specific performance. This new court order means that the preliminary
injunction will now be lifted, but Arty still can't sell the piece to Alfred, because he is
now court ordered to sell it to Andrea.

Lesson Summary

Let's review. When a court considers a breach of contract case, the court will almost
always award monetary damages to the innocent party. However, there are other remedies
that a court might consider. Equitable remedies are those that are based on what is fair,

or seems right, in a particular situation. These remedies are different than monetary
damage awards, and were historically designed so that they don't have to follow
precedent. Instead, they are purposely intended to be a more flexible option that is used in
order to ensure justice in a particular situation. These options are used only in those cases
where money damages are either too difficult to calculate, or are inadequate to remedy
the harm done to the innocent party.

There are two main equitable remedies available for breach of contract. Specific
performance is a remedy that orders the breaching party to comply with the terms of the
contract. An injunction is a remedy that prohibits a party from a particular act. An
injunction can be temporary, preliminary or permanent. These two remedies are similar.
The main difference is that specific performance orders a party to do something, and an
injunction orders a party not to do something.

Learning Outcome

After watching this lesson, you should be able to define and discuss the two main
equitable remedies for a breach of contract: specific performance and injunction.

When a party breaches a contract, a court will often award damages to the
other party. There are several different types of damages. The type of
damages awarded will depend on the circumstances of the case. This lesson
explains when reliance damages and restitution might be used.

Damages

Stacy is a builder. Sam hires Stacy to build his beautiful new house for $100,000. The
payment is due to Stacy in four installments of $25,000 each. The first installment is due
next month. Stacy purchases $10,000 worth of building supplies and starts building Sam's
house. After she completes the foundation, Sam refuses to make the first payment. He
denies that he has a contract with Stacy.

Stacy sues Sam for breach of contract. If the court agrees with Stacy, it will need to
determine what type of damages to award her. Let's discuss two different options. If the
court awards reliance damages, Sam will have to pay Stacy $10,000. Reliance damages
are money damages that are awarded to an innocent party for the losses suffered due to a
reasonable reliance on a promise.

If the court awards restitution, Sam will have to pay Stacy for the value of her completed
foundation. Restitution damages are money damages that are awarded to an innocent
party to compensate for the benefit that party gave.

Both of these damage awards involve a loss to the innocent party. The key difference
between reliance damages and restitution is that restitution will always involve a loss to

the innocent party that benefits the other party. Reliance involves a loss to the innocent
party that doesn't benefit the other party.

Let's take a closer look at these two types of damage awards and when each might be
used.

Reliance Damages

Stacy's reliance damages are $10,000. We know this because this is the amount of money
Stacy spent. Remember that reliance damages are money damages that are awarded to an
innocent party for the losses suffered due to reasonable reliance on a promise. Let's take a
further look at Stacy's reliance damages.

In our scenario, Sam breached the contract and Stacy is the innocent party. Stacy spent
$10,000 after she reasonably relied on Sam's promise. Stacy believed that she would
complete the house for Sam, and that Sam would pay her in full. Stacy didn't have any
reason to believe that Sam wouldn't fulfill his duties under the contract. By the time she
realized Sam wouldn't comply, she'd already spent $10,000.

Reliance damages are meant to restore the innocent party. The court calculates these
damages by determining what amount of money it would take to re-establish the innocent
party's economic position. This means that Stacy will be awarded damages in order to
place her back in the economic position she held before she reasonably relied on Sam's
promise. Before that time, Stacy had $10,000 that she no longer has.

When Reliance Will Be Used

Usually, when a court rules that a breach of contract occurred, it will award expectation
damages to the innocent party. These are damages awarded to compensate the loss of
future income caused by a breach of contract. We know that Stacy expected to receive
$100,000 for building Sam's house. We don't know the amount of Stacy's anticipated
expenses, if any. If Stacy expected to incur expenses while building the house, this
amount will be subtracted from the $100,000. The court can probably calculate Stacy's
expectation damages without too much trouble, but sometimes future income is
uncertain, making the use of expectation damages impractical.

Let's consider the 1998 case of Hollywood Fantasy Corporation v. Gabor. Hollywood
Fantasy Corporation was a business that provided fantasy vacation camps. The vacation
camps allowed vacationers to make a pretend movie with a real actor or actress. The
corporation planned an event featuring Zsa Zsa Gabor, but Gabor cancelled her
appearance only two weeks before the event, and after tickets were sold to vacationers.
The corporation ended up canceling the entire vacation event, and, shortly afterward,
completely went out of business.

The corporation sued Gabor for breach of contract. The corporation's lost profits were too
vague to allow traditional expectation damages. The court couldn't practically determine
how many more tickets were to be sold, or the exact profits that might be made from the
filmed portions of the event.

However, the corporation was allowed to recover reliance damages. The court ordered
damages to cover the corporation's expenses incurred in reliance on Gabor's promise to
appear at the event. This included the corporation's actual expenses, such as money spent
on printing brochures and advertising the event.

Restitution

Restitution damages are also used when the use of expectation damages isn't practical.
For example, restitution is often used when a contract is determined to be unenforceable,
but the innocent party already conferred a benefit to the other party.

Restitution damages are money damages that are awarded to an innocent party to
compensate for the benefit that party gave. The innocent party will be awarded the value
of the benefit he or she conferred to the other party during the time that the innocent party
reasonably believed there was a valid contract. Unlike reliance, restitution will always
involve a benefit conferred from the innocent party to the other party. Let's take a closer
look at the benefit Stacy conferred to Sam.

In our scenario, Stacy built a foundation for Sam. If Stacy is awarded restitution, she'll be
awarded the value of the foundation because that's the benefit she conferred to Sam. The
court will use comparable statistics to determine a reasonable value for the foundation,
and Sam will be ordered to pay Stacy that amount.

When Restitution Will Be Used

Let's change our scenario a little bit. Let's say that Sam and Stacy still made the same
agreement. However, when Stacy went to build the foundation, she accidentally built the
foundation on the lot next door to Sam's. This lot belongs to Sylvester. Sylvester lives in
the house across the street and was also planning to build a new home on his empty lot.
Sylvester noticed Stacy building on his lot and didn't point out her mistake. After Stacy
built the foundation, Sam comes by to check her work. Sam notices the error and tells
both Stacy and Sylvester. So in this scenario, Stacy conferred a benefit to Sylvester.

Stacy, of course, wants to be compensated for her work. Sylvester, however, doesn't
believe he should have to pay Stacy. He didn't hire her and they never had a contract.
Stacy sues Sylvester. Stacy will likely be awarded restitution damages. Sylvester will be
ordered to pay Stacy for the foundation, since he now owns that benefit. The court will
use comparable statistics to determine the reasonable value of the foundation, and
Sylvester will have to pay Stacy that amount.

Restitution is also sometimes used when there's a valid contract. For example, let's
consider the 1970 case of Osteen v. Johnson. Linda Osteen was an aspiring country music
singer. Osteen hired Johnson to produce and promote two of her records. Osteen paid
Johnson $2,500 when she hired him.

Johnson only made and promoted one record for Osteen. Osteen then sued Johnson for
breach of contract. The court agreed with Osteen, but then the court had to determine the
appropriate damage award. Normally, a court would use expectation damages, but the
court couldn't practically determine how much profit Osteen would have made had the
second record been produced and promoted. Osteen was just beginning her country music
career and no one knew just how successful her records might be.

The court also considered using reliance damages. If the court used reliance, then Osteen
could recover the amount of money she spent in reliance on the promise that Johnson
would produce and promote both records. This amount is $2,500. The court decided it
shouldn't award Osteen this amount because this is the amount Osteen paid for both
records. Johnson made and promoted one of the records. If Osteen was awarded the full
$2,500, then that award is too much, since she already received half of the benefit of what
she paid for.

The court determined that restitution would be the most appropriate damage award in this
case. Osteen's restitution damages are the reasonable value of the benefit conferred on
Johnson. This amount is the $2,500 Osteen paid Johnson, minus the value of Johnson's
services in producing and promoting the first record. The court used comparable statistics
to determine the value of Johnson's services.

Lesson Summary

Let's review. When a party breaches a contract, a court will often award damages to the
other party. There are several different types of damages that a court might award.
Usually, a court will award expectation damages to the innocent party. These damages
are damages awarded to compensate the loss of future income caused by a breach of
contract. But sometimes a court can't accurately determine the amount of future income.

Alternatively, the court will consider using reliance damages or restitution. Reliance
damages are money damages that are awarded to an innocent party for the losses suffered
due to reasonable reliance on the promise. Reliance damages are meant to restore the
innocent party. The court calculates these damages by determining what amount of
money it would take to re-establish the innocent party's economic position. Restitution
damages are also used when the use of expectation damages isn't practical. For example,
restitution is often used when a contract is determined to be unenforceable, but the
innocent party already conferred a benefit to the other party.

Restitution damages are money damages that are awarded to an innocent party to
compensate for the benefit that party gave. The innocent party will be awarded the value
of the benefit he or she conferred to the other party during the time that the innocent party
reasonably believed there was a valid contract. Restitution can be used when there was a
valid contract, or when there wasn't. Both reliance damages and restitution involve a loss
to the innocent party. The key difference between the two is this: restitution will always
involve a loss to the innocent party that benefits the other party, whereas reliance
involves a loss to the innocent party that doesn't benefit the other party.

Learning Outcomes

After seeing this video, students should identify contract beach remedies which can be
reliance damages or restitution involving the original loss plus the benefits the other party
received.

A money damage award is the most common remedy for a breach of contract. However, there are
several limitations on money damage awards. This lesson discusses items that aren't recoverable,
or won't usually be included, in a damage award.

Breach of Contract
Jill is an artist. She makes beautiful collages using old family photos. John recently lost both of
his parents and is emotionally distraught. He spends months gathering and organizing precious
photos of his parents, grandparents and other dear relatives. He then hands the original photos
over to Jill for her to create a unique art piece just for John. John and Jill execute a contract, and
John pays Jill $3,000 in advance. Jill promises to have the collage to John by March 1.
On March 2, John still hasn't heard from Jill. John contacts Jill, only to find out that she lost all
of John's photos and won't be completing John's collage. John then sues Jill for breach of
contract. John knows he'll likely recover his $3,000, but he's worried about the expense of the
lawsuit. Can he also recover those expenses? And, he's devastated. He can't eat or sleep. He was
really looking forward to having the collage and can't believe his photos are lost. He'd like to see
a psychologist but is worried about that expense, too. Shouldn't Jill have to pay for that? What,
exactly, can John recover?
A breach of contract case is a common type of civil lawsuit. Most often, the innocent party will
be granted an award of money damages. This remedy is meant to compensate the innocent party,
and make up for any injury or loss the party experienced or will likely experience due to the
breach. We know that John can likely recover the $3,000 he paid to Jill, because this is John's
actual monetary loss at this time. But are John's other damages recoverable?

Non-Recoverable Damages

An innocent party will want to be aware of the limitations placed on money damage awards. Not
all of an innocent party's expenses are recoverable. Many types of expenses, though related to the
breach of contract, are non-recoverable damages.
This simply means that the innocent party won't be granted a money award for these expenses.
John needs to know what expenses are non-recoverable. Because contract damages are meant to
be compensatory, an innocent party's damages must reflect an established, reasonable loss.
Contract damages can't be approximate. They can't be speculative, remote or contingent.
Generally speaking, the court won't award money damages in an amount that will put the
innocent party in a better position after the breach than the party would be in if the contract was
performed.
Contract damages also can't usually be punitive damages, which means that the damages can't
be geared toward punishing the breaching party. John is hurt and furious with Jill. He'd like to
have her pay a large sum for his loss. He thinks his trouble is worth much more than $3,000.
There are, however, only a few, particular situations in which punitive damages will be awarded
for the breach of contract. These are:
1. The breach of contract involves a claim against an insurance company in which the
company acted in bad faith. Generally, this means that insurance companies are required
to act fairly and in good faith toward policyholders. An insurance company can't
unreasonably deny or delay a claim.
2. The breach of contract involves a violation of fiduciary duty. This means that a party in a
position of trust, such as a director, agent or broker, failed the duty to act solely in the
best interest of his or her employer or principal.
3. The breach of contract also constitutes a tort, and that tort allows for punitive damages.
This is true in breach of contract cases that involve gross negligence or fraud. A tort is a
wrongful act that leads to legal liability for the party that committed the act.
We probably need to know why, or how, Jill lost John's photos. If Jill was grossly negligent in
her handling of John's photos, then John may be able to recover more than $3,000. Gross
negligence would involve a serious mishandling of John's property. Let's say that Jill placed the
photos on the hearth of her fireplace while enjoying a fire. The photos were burned. John will
want to argue that this constitutes gross negligence, and that Jill should be ordered to pay more
than $3,000 as a punitive remedy.

Foreseeability and Special Damages

Keep in mind that all breach of contract damages must be foreseeable. This means that both
contracting parties could have reasonably expected the damages to accompany a breach of
contract at the time they executed the contract. We know that Jill should have reasonably
foreseen that she'd have to repay John's $3,000 if she didn't deliver the collage to him.

But what other damages should Jill have reasonably foreseen? Direct damages are the easiest to
foresee. For this reason, special damages are not usually recoverable. Special damages are
meant to compensate the innocent party for injury or loss that is indirectly related to the breach.
Even special damages must be foreseeable to be recoverable. An innocent party can only recover
a money award for those items that the breaching party knew, or should have known, would flow
from a breach at the time the parties entered the contract. Normally, only those damages that are
directly related may be recovered, because those are the damages that are reasonably foreseeable.
John's $3,000 is directly related to the breach and foreseeable. The court will have to decide
which of John's indirect expenses were also foreseeable. John might have travel expenses, going
back and forth to see Jill and check on the project. Perhaps John incurred expenses to acquire the
photos that Jill then lost. Maybe John planned a party for his family in order to unveil the
collage. These expenses are indirectly related to the breach.

Emotional Distress
Note that there are many different types of special damages. Emotional distress is one type of
claim that is often included in a request for special damages. This is a claim for any mental
anguish, emotional suffering or psychological trauma caused by the breach of contract.
Normally, a court won't allow money damages for emotional distress due to a breach of contract.
There are, however, a few special circumstances in which the court will consider these damages:
1. The breach of contract involved a promise to marry.
2. The breach of contract involved a failure to properly deliver an urgent message
regarding death or serious illness.
3. The breach of contract involved the loss of a treasured and unique item.
In our scenario, Jill's breach of contract involved the loss of John's treasured and unique items. If
Jill should've reasonably foreseen that the breach would cause emotional distress to John, then
she'll likely be ordered to pay any money damages directly related to John's mental anguish.
For instance, let's say that John decides to see a psychologist because he is heartbroken over the
loss of his photos. John told Jill just how important the photos were before the two executed their
contract and John handed the photos over to Jill. In this case, Jill will likely be ordered to pay a
reasonable amount for John's psychologist appointments.

Attorney's Fees
There are many civil action claims that also allow an innocent party to recover reasonable
attorney's fees. This means that the innocent party can sometimes receive a damage award that
includes the reasonable expenses he or she incurred in hiring an attorney to bring the claim.

However, attorney's fees aren't usually recoverable in a breach of contract claim. There are a few,
limited, exceptions. These include:
1. The contract explicitly states that the breaching party will be responsible for the innocent
party's reasonable attorney's fees.
2. The breach of contract claim involves an abuse of the legal system, such as an unfounded
claim or a frivolous defense.
3. Some states have certain laws allowing the recovery of attorney's fees in particular
situations.
Let's say that Jill and John's contract contained an attorney's fees clause, or a prevailing party
clause. This type of clause states that, if the parties are forced to litigate any issue directly related
to the contract, the losing party will be responsible for paying the winning party's reasonable
attorney's fees. Since Jill breached the contract, she'll be responsible for paying John's reasonable
attorney's fees that he incurs in bringing the lawsuit for breach of contract.

Mitigation
It's also important to note that an innocent party can't recover damages that he or she could have
avoided or made no reasonable effort to mitigate. This is known as the duty to mitigate.
Generally speaking, this means that an innocent party must take reasonable steps to minimize his
or her damages. Any damages that the innocent party could have reasonably avoided, or
minimized, are not recoverable.
For example, let's say that John could have easily made copies of his family photos. In fact, Jill
suggested that John make copies and keep the originals for himself. She told John that she could
construct the collage from copies. If Jill loses the copies and is unable to create the collage by
March 1, she'll likely still owe John $3,000 in damages since that's what he paid for the collage.
However, Jill won't likely owe special damages since the photos weren't priceless and they are
replaceable.

Lesson Summary
Let's review. In a breach of contract case, the innocent party will usually be granted an award of
money damages. This remedy is meant to compensate the innocent party, and make up for any
injury or loss the party experienced or will likely experience due to the breach. There are,
however, several limitations on money damage awards. Not all of an innocent party's expenses
are recoverable. Many types of expenses, though related to the breach of contract, are nonrecoverable damages.
Contract damages can't be approximate, speculative, remote or contingent. Generally speaking,
the court won't award money damages in an amount that will put the innocent party in a better
position after the breach than the party would be in if the contract was performed. Contract

damages also can't usually be punitive damages, which means that the damages can't be geared
toward punishing the breaching party.
All breach of contract damages must be foreseeable. This means that both contracting parties
could have reasonably expected the damages to accompany a breach of the contract at the time
they executed the contract. For this reason, special damages are not usually recoverable. Special
damages are meant to compensate the innocent party for injury or loss that is indirectly related to
the breach.
One type of special damage is emotional distress. There are only limited circumstances in which
emotional distress will be considered in a breach of contract case. The same is true for an award
of attorney's fees. These fees aren't usually recoverable in a breach of contract claim. Also
remember that the innocent party has a duty to mitigate. The party won't be allowed to recover
any amount that he or she reasonably should have avoided or minimized.

Learning Outcomes
When the lesson is done, you should be able to:

Define non-recoverable damages

List cases where punitive damages may be awarded for a breach of contract

Explain why special damages are not typically recoverable

When a breach of contract occurs, there are several different types of money damages that might
be awarded to the innocent party. Liquidated damages are a predetermined form of money
damage award. This lesson explains the use of liquidated damages.

Liquidated Damages
I got a new job! Unfortunately, it's in another state and I start next week. So, I make you a sweet
deal on my house, and you agree to buy it from me. We make a contract that says you'll pay
$100,000, and we'll close this deal at the end of the month. You make a down payment of
$10,000. Our contract says that I can keep your $10,000 if you don't end up closing the deal and
buying my house. However, if I prevent the purchase, then you get your $10,000 back.
Wait a minute! You're not so sure about this. Is this term intended to punish you? Is this term
even enforceable? Should you sign the contract as it is, or should you object to this term?
When a party breaches a contract, money damages are usually awarded to the innocent party.
But, there are actually several different types of money damage awards. There's even a type that
can be decided when the contract is made and before the contract is ever breached. Liquidated
damages are a predetermined form of money award. This means that the parties already agreed
on the amount of money that would be awarded should one of the parties breach the contract.

Liquidated damages are an amount estimated to equal, or best approximate, the amount of loss
an innocent party will incur if the contract is breached.
For example, if you breach the contract then I'll have to put my house back on the market. I'll
incur expenses in this process. I may have more mortgage payments due while I try to sell my
house. There will also be costs to clean and maintain my house while I'm showing it, like
mowing my yard or shoveling snow from the sidewalk. Rather than calculating these expenses
exactly and suing you for those damages later, our liquidated damages clause is an attempt to
approximate my anticipated loss now.
This determination is set out as a term of the contract and included in the contract when the
parties execute the contract. That contract term is called a liquidated damages clause. In our
contract, we have a liquidated damages clause for $10,000. It's helpful to note that 10% is a fairly
standard and typically enforceable formula for liquidated damages in a real estate contract. Our
liquidated damages clause is for the standard 10% of the entire contract amount.

Liquidated Damages Clause

A liquidated damages clause isn't a good fit for all contracts. These clauses are most often
included in contracts that involve the exchange of money, an agreement to perform a particular
act, or the sale of real estate. Our contract is a real estate contract, since it involves the sale of my
house. All liquidated damages clauses must meet certain requirements. A court won't enforce a
liquidated damages clause unless:
1. The loss to the innocent party will be either too uncertain or too difficult to calculate.
2. The specified damages amount is reasonable, considering the innocent party's actual and
anticipated loss, the party's difficulty of proving the exact amount of the loss, and the
court's difficulty of applying another, adequate remedy.
3. The damages are intended to function as compensation to the innocent party, rather than
as a penalty to the breaching party.
If the liquidated damages clause sets a damages amount that is disproportionate to the innocent
party's anticipated actual loss, then the court will consider the clause to be a penalty and won't
enforce the clause. The court will pick another, more appropriate remedy. Liquidated damages
aren't intended to serve as a punishment or as a deterrent against a breach of contract.
Let's take another look at our contract. Let's say that we estimate the costs for cleaning and
maintaining my house while it's potentially back on the market and add a few months worth of
mortgage payments. This amount is $5,000. Since this is only half the amount of our liquidated
damages clause, our clause likely won't be enforced. Instead, under this particular scenario, the
court will pick a more appropriate money damages award. Keep in mind that a court will never
enforce a liquidated damages clause that isn't part of a valid, legal contract. If the contract is
unenforceable for any reason, the clause will fail. Our contract appears to be a valid, legal
contract that is typical of other real estate contracts.

Advantages of Liquidated Damages

Though common in real estate contracts, the use of liquidated damages is actually fairly limited.
However, these clauses provide several different advantages when they are used. First, this type
of damage clause allows the parties to accurately predict the costs involved in breaching the
contract. That way, the parties can weigh the cost of performing the contract against the cost of
breaching the contract. Parties can make an informed decision when considering a breach or
even when considering whether or not to enter the contract.
Second, this type of damage clause allows the parties to negotiate damages while drafting the
contract. Since the amount is mutually agreeable, the parties will hopefully avoid the time, effort,
and fees involved in arguing a breach of contract court case. Third, this type of damage clause
allows the parties to have a certain amount of protection and assurance. Liquidated damages
guarantee that the parties won't exit the contract empty-handed. Once the parties execute the
contract, they know that they'll either receive the agreed-upon performance, or they'll receive the
agreed-upon damages.
Let's take another look at our contract and at some of the benefits this clause provides. For you,
the buyer, the liquidated damages clause can serve to limit your damages if you breach the
contract. Let's say that you don't buy my house, and it ends up taking me almost a year to sell it.
That's thousands of dollars in extra mortgage payments.
Also remember that, by next week, I'll live in another state. I'll have the hassle and economic loss
involved with trying to sell a house, plus the added expense for travel back and forth. I'll have to
pay someone local to prepare the house for sale and maintain the property for me, since I won't
be around or available. These are expenses that can add up very quickly. Good thing you'll only
owe $10,000, rather than my actual expenses!
For me, the seller, the liquidated damages clause ensures a preset amount. If you breach the
contract, I already have your $10,000. I don't have to go through a court case to get a damage
award. I can use your $10,000 to immediately start covering my costs. You can see now that our
liquidated damages clause has advantages for both of us. Now that you've carefully considered it,
you probably like having this clause!

Lesson Summary
Let's review. Liquidated damages are a predetermined form of money award that is used in
some breach of contract cases. Liquidated damages are those damages that the parties already
agreed would be awarded should one of the parties breach the contract. Liquidated damages are
an amount estimated to equal, or best approximate, the amount of loss an innocent party will
incur if the contract is breached.
Liquidated damages are set out as a term of the contract and included as a clause in the contract
when the parties execute the contract. The clause is called a liquidated damages clause. A

liquidated damages clause must meet certain requirements or else the court won't enforce the
clause. There are three main criteria:
1. The loss to the innocent party will be either too uncertain or too difficult to calculate.
2. The specified damages amount is reasonable, considering the innocent party's actual or
anticipated loss, the party's difficulty of proving the exact amount of the loss, and the
court's difficulty of applying another, adequate remedy.
3. The damages are intended to function as compensation to the innocent party, rather than a
penalty to the breaching party.
If the liquidated damages clause sets a damages amount that is disproportionate to the innocent
party's anticipated actual loss, then the clause will be considered a penalty and won't be enforced
by a court. Liquidated damages aren't intended to serve as a punishment or as a deterrent against
a breach of contract. Instead, the clauses are meant to protect and benefit both parties.

Learning Outcomes
After watching this lesson, you should be able to:

Define liquidated damages and understand why a liquidated damages clause is used in
certain contracts

List some of the types of contracts that a liquidated damages clause is appropriate for

Identify the three main criteria necessary to enforce a liquidated damages clause

Explain how the clause is beneficial to both parties involved

Contracts must be entered into freely by both of the parties and include mutual assent.
Sometimes mutual assent can be affected by coercion or pressure to enter the contract. Duress
and undue influence are situations that affect mutual assent and make a contract void or voidable.
This lesson explains duress and undue influence in contract formation.

Contract Formation
You're the judge! Here's the case on your docket today: Molly and Mark enter an agreement.
Molly is going to sell all of her stock in ABC House Builders to Mark, and Mark is going to pay
Molly $10,000.
As the judge, you know that there are several requirements that must be met in order to form a
legally binding agreement. One of those requirements is mutual assent. Mutual assent is a
meeting of the minds, or an agreement between the parties.

Sometimes the parties' words or actions imply that they have an agreement, but there wasn't
really mutual assent. If mutual assent was lacking, the contract will be void or voidable. These
concepts are similar, and both affect the enforceability of the contract. A void contract is invalid
and can't be enforced by either party. A voidable contract is binding on one of the parties, while
the other party has the option to withdraw from the contract or to enforce it.
Today, you'll have to determine whether or not Molly and Mark entered their agreement freely,
willfully and with mutual assent. Let's take a look at a couple of situations where mutual assent
will be lacking.

Duress
In your courtroom, you see a lot of contracts. You know that one of the requirements of a valid,
legal contract is that both of the parties freely entered into the contract. A contract can't be
enforced against a person who was forced or coerced into entering the contract.
Duress is a defense to a contract. Duress is wrongful pressure exerted upon a person in order to
coerce that person into a contract that he or she ordinarily wouldn't enter. Duress involves an
intentional use of force or threat of force in order to induce the contract. It can be either physical
or mental coercion, but the coercion must be to the extent that it deprives the other person of free
will or freedom of choice. This means that the person is left with no reasonable alternative other
than to enter the contract.
There are several different types of duress, and as a judge, you've seen them all. The first type
involves a contract made under some sort of compelling physical force. Though rare, this is the
most serious form of duress in contract law. For example, this type of duress includes a contract
made at gunpoint or during a battery. These contracts are void. No mutual assent exists.
Other types of duress make a contract voidable, rather than void. In other words, the party that
was forced into the contract can choose whether or not to enforce the contract. These contracts
still involve an improper or wrongful threat. Some examples include:
1. A party threatens to physically harm another person or that person's family member or
that person's property.
2. A party threatens to disgrace another person or that person's family member.
3. A party threatens to have another person criminally prosecuted or civilly sued, without
grounds for that legal action.
4. A party threatens economic loss to another person, and that person shows that the
improper threat can actually result in his or her economic loss.
For example, let's say that Molly presents evidence that she didn't assent to the contract with
Mark. Molly says that Mark threatened to burn her house down if she didn't agree to sell her
stock in ABC to him. Molly agreed to sell because she felt like she had no choice. If you decide

that Molly was under duress when she made the contract, you'll order that Mark can't enforce the
contract. It's voidable. This means that Molly can refuse to sell, or she can go through with the
transaction. The choice is Molly's.

Undue Influence
In your courtroom, you sometimes see other types of cases that involve a lack of mutual assent.
Duress is sometimes confused with undue influence. Undue influence is also a defense to a
contract and is also a situation that affects mutual assent.
Undue influence is taking advantage of another person, through a position of trust, in the
formation of a contract. Undue influence always involves a relationship between the two parties,
with one party in a superior position over the other. Undue influence doesn't involve a direct
threat, like duress does. Instead, it involves excessive pressure by the party in the dominant
position on the party in the inferior position.
It's important to note that persuasion alone is not undue influence. In order to be undue influence,
the persuasion must amount to excessive pressure that affects a person's freedom of choice.
Undue influence always makes a contract voidable. The person who was wrongfully influenced
into making the contract may choose whether or not to enforce the contract. There are many
situations in which a trusted person can exercise control over another person's free will or
exercise of free choice. Some examples include:
1. An attorney wrongfully influences his client.
2. A husband wrongfully influences his wife, or the wife wrongfully influences the husband.
3. A trustee wrongfully influences a beneficiary.
For example, let's say that Mark is Molly's boss. They work for ABC House Builders. Mark is
trying to become a majority shareholder. Mark doesn't threaten Molly, but she feels like she has
to do what he asks. She really can't afford to lose her job. She felt like she had no choice but to
agree to sell her stock to Mark.
In your courtroom, you see a lot of contested contracts. When a contract benefits the party in the
trusted position to the detriment of the other party, a court will presume that the contract was
made through undue influence. The party in the trusted position will have to prove that the
contract was made with mutual assent and without undue influence, in order to enforce the
contract.
In Molly's case, you'll ask to hear evidence from Mark. Mark will need to prove that this contract
was made without undue influence. If you're not convinced, then you'll rule that the contract is
voidable by Molly.

Lesson Summary
Let's review. There are several requirements that must be met in order to form a legally binding
agreement. One of those requirements is mutual assent. Mutual assent is a meeting of the minds
or an agreement between the parties. There are several situations where mutual assent will be
lacking.
Duress is wrongful pressure exerted upon a person in order to coerce that person into a contract
that he or she ordinarily wouldn't enter. Duress involves an intentional use of force or threat of
force in order to induce the contract. It can be either physical or mental coercion, but the
coercion must be to the extent that it deprives the other person of free will or freedom of choice.
If the duress involves a compelling use of physical force, the contract is void. This means that
the contract is invalid and can't be enforced by either party. Other types of duress make the
contract voidable. This means that the contract is binding on one of the parties, while the other
party has the option to withdraw from the contract or to enforce it.
Undue influence, on the other hand, is taking advantage of another person through a position of
trust in the formation of a contract. Undue influence always involves a relationship between the
two parties, with one party in a superior position over the other. Undue influence doesn't involve
a direct threat like duress does. Instead, it involves excessive pressure by the party in the
dominant position on the party in the inferior position. This makes the contract voidable by the
person in the inferior position.

Learning Outcome
After watching this lesson, you should be able to distinguish between duress and undue influence
in terms of contract formation between parties. You could also be fully capable of comparing and
contrasting terms such as void and voidable.
A contract won't be enforced if it's based on fraud or misrepresentation. These are
civil causes of action regarding the formation of a contract. Both of these causes of
action involve a statement of facts that is untrue. This lesson explains fraud and
misrepresentation in contract formation, and takes a look at a case example.
Krysa v. Payne

There are several civil causes of action regarding the formation of a contract. A contract won't be
enforced if it's based on fraud or misrepresentation. Both of these causes of action involve a
statement of facts that is untrue. Let's take a look at a fairly well known contract law case that
involves fraud and misrepresentation. It's a 2005 case from Missouri. Shelly and Frank Krysa
needed a new car. They were looking for a dependable truck that had room for their whole
family. After several trips to Payne's Car Company, they found a 1991 Ford F-350 pick-up truck.
Interestingly, the truck was parked at the back of the lot and running when they saw it. They
were told the battery was recharging. They also noticed that the hood was a different color than

the rest of the car. They were told not to worry, that the truck was in perfect condition, and that it
was a trade-in vehicle that had only one previous owner. This was all good news for the Krysa
family.
The Krysas bought the truck. They used the truck but quickly noticed several severe problems,
including a smashed radiator, difficulty in starting, and even broken glass under the seats. The
Krysas decided they should get a CARFAX report for the truck. The report showed that the truck
had 13 previous owners, when the Krysas were told there was only one. The Krysas went back to
the dealership to complain, and Payne's admitted there were problems with the truck. Payne's
offered the Krysas a credit toward the purchase of a different Payne's vehicle. The Krysas were
worried about the history and safety of Payne's cars and so they declined Payne's offer.
The Krysas then hired an automotive expert to look at the truck. The expert noticed that the truck
was actually two different vehicles. The two vehicles had been welded together. The expert told
the Krysas that the truck was unsafe and they shouldn't drive it. The Krysas then sued Payne's for
fraud and misrepresentation. So, what are fraud and misrepresentation? And what did the court
think about the Krysa's case?
Fraud

Unfortunately, sometimes a party is purposefully dishonest when making a contract. This

certainly seems to be what happened to the Krysa family. Fraud is any intentional
misrepresentation of a material fact, made knowingly and made with the intent that the other
person will rely on the fact. Contract fraud is a type of fraud where the intentional
misrepresentation of a material fact is made in the formation of the contract. In contract fraud, a
material misrepresentation is a false statement that has substantial effects on the formation of
the contract.
For example, the Krysas had a contract with Payne's for the sale of the truck. The Krysas would
pay Payne's, and Payne's would provide the truck that Payne's described. Payne's told the Krysas
that the truck only had one owner and was in perfect condition. Since the truck actually had 13
owners and was a pieced-together, unsafe vehicle with major damage, this is a material
misrepresentation and will constitute contract fraud.
If, however, Payne's told the Krysas that the truck had one previous owner when in fact it had
two, but the vehicle was still in perfect shape, then that inconsistency likely wouldn't constitute
contract fraud. Contract fraud is a civil cause of action, and can even be a criminal charge in
some states. In the Krysa case, the court found that Payne's was aware of the damage to the
truck, and that Payne's took active steps to mislead the Krysa family. This was a civil case and
the court ordered a civil remedy.
When a court finds contract fraud, it can order one of two different civil remedies. The court can
void the contract and return any money or items back to the parties, so that the parties are in the
positions they were in prior to the contract. Or, the court can award money damages to the

innocent party. The Krysas were awarded $18,449 in compensatory damages. These are damages
meant to compensate the Krysas for any actual loss or money paid. They were also awarded
$500,000 in punitive damages. These are damages meant to penalize Payne's and hopefully keep
them and others from acting in a fraudulent manner. Payne's appealed the award, but they lost.
Misrepresentation

The Krysas also sued for misrepresentation. This cause of action is very similar to fraud, but
there are some key differences. Misrepresentation is any statement or expression by words or
actions that is not in keeping with the facts. Unlike fraud, a misrepresentation doesn't have to be
intentionally misleading or false. A misrepresentation can be made with a reckless disregard for
the truth or a conscious ignorance of the truth. This means that a party can make a
misrepresentation when he or she doesn't know the truth and doesn't bother to find out.
Like fraud, the innocent party must have actually relied on the false statement and suffered a loss
of some sort. With misrepresentation, the speaker must have good reason to know that the
innocent party is relying on the statement. Also, the innocent party's reliance on the statement
must be reasonable and justified.
For example, let's say that the Krysa family asked if the truck had only one previous owner. The
salesperson didn't know the history of the truck, and said, 'Sure. It's only had one owner.' This is
a misrepresentation. The salesperson had a conscious ignorance of the truck's history and made a
statement that isn't in keeping with the facts. The salesperson had good reason to know that the
Krysas would rely on the statement, and the Krysas had good reason to rely on the statement.
It's important to note that nondisclosure of a material or important fact can also constitute
misrepresentation. For example, a salesperson can commit misrepresentation by making untrue
statements about the quality of a product or by withholding important information regarding the
quality of a product. In the Krysa's case, Payne's certainly withheld important information by not
disclosing that the truck had 13 prior owners, and that it was pieced-together from two separate
vehicles, even though the Krysa family didn't specifically ask these questions.
Misrepresentation doesn't, however, include typical salesperson 'puffery.' This means that
statements such as 'The best in town,' or 'This is a great deal' will not constitute
misrepresentation. Like fraud, the court can remedy misrepresentation by voiding the contract
and returning any property or money back to the parties. Misrepresentation can also be remedied
by awarding compensatory money damages to the innocent party. Unlike fraud,
misrepresentation can only lead to a criminal charge in very specific and rare situations.
Lesson Summary

There are several civil causes of action regarding the formation of a contract. A contract won't be
enforced if it's based on fraud or misrepresentation. Both of these causes of action involve a
statement of facts that is untrue. Sometimes a party is purposefully dishonest when making a
contract. This is called contract fraud.

Contract fraud happens when a party makes any intentional misrepresentation of a material fact
knowingly and with the intent that the other person will rely on the fact when making a contract.
In contract fraud, a material misrepresentation is a false statement that has substantial effects
on the formation of the contract.
Misrepresentation also involves a false statement made during contract formation. It is any
statement or expression by words or actions that is not in keeping with the facts. Unlike fraud, a
misrepresentation doesn't have to be intentionally misleading or false. A misrepresentation can be
made with a reckless disregard for the truth or a conscious ignorance.
This means that a party can make a misrepresentation when he or she doesn't know the truth and
fails to find out the truth. In both fraud and misrepresentation, the innocent party must have
relied on the false statement. The innocent party's reliance on the statement must be reasonable
and justified, and the false statement must result in a loss to the innocent party.
Learning Outcome

After watching this lesson, you should be able to explain fraud and misrepresentation, and how it
pertains to contract formation.
A valid and legally enforceable contract requires a meeting of the minds.
Sometimes there isn't a meeting of the minds due to a mistake by one or both
parties. This lesson explains the different types of contract mistakes, and the
remedies available.
Mistake

In order to form a valid and legally enforceable contract, the parties must come to an agreement.
This is also known as a 'meeting of the minds.' There are several reasons why the parties may not
have had a meeting of the minds. The most common is a mistake. A contract mistake is an
unintentional act, omission, or error made in the formation of a contract. When a mistake is
made, one or both parties will enter the contract without a full understanding of the contract
terms, obligations, or results.
There are several different types of mistakes that the parties might make. Sometimes a mistake is
incidental, or trivial to the main parts of the contract. These mistakes won't usually affect the
meeting of the minds or the formation of the contract. A court will usually try to fix the mistake,
but the contract as a whole will remain valid and legally enforceable.
However, a material mistake will pertain to the most basic and significant goals of the contract.
These mistakes will go to the very heart, or the basis, of the agreement. The courts treat material
mistakes differently, depending on who made the mistake.
For example, let's say that you agree to buy my farm. I'm no longer able to keep it running and
producing. We execute a contract. You're going to pay me $50,000, and I'm going to give you the

title to my farm. After we execute our agreement, you have the farm appraised. Unfortunately,
the farm only appraises for $10,000. We both thought it was worth much more. Is this a material
mistake?
No. You might be surprised to learn that this is actually an incidental mistake. The value of the
farm is based on a judgment or an opinion. Neither of us knew exactly what the farm was worth,
and neither of us took the time to find out before we made our contract. We were both willing to
take a chance. The main goal of the contract is for you to acquire a farm and for me to unload my
farm. That goal isn't affected by our mistake. This is a valid and legally enforceable contract.
Unilateral Mistake

In our scenario, we were both mistaken as to the value of the farm. However, sometimes only
one of the contracting parties makes a mistake. This is known as a unilateral mistake. A
unilateral mistake is a one-sided mistake.
When only one party makes a mistake, the contract is usually still valid and legally enforceable.
Generally, the courts won't allow a party to benefit from his or her own mistakes. A party that is
ignorant as to the facts and circumstances of the contract, or careless when contracting, does so
at his or her own risk.
There is, however, one exception. The contract can be rescinded, or canceled, if the other party
knew or should have known about the contract mistake. This is known as a palpable unilateral
mistake.
Let's look at our example again. Let's say that the farm has an oil well on it. The oil well is dry,
and I know it. I know the farm is worth only $10,000 because I had it appraised last year when I
decided to sell it. I decided to ask $50,000 for the farm, and I told you it includes an oil well. You
make the mistake of assuming the farm is worth more because it includes a working oil well.
This is a situation where you might be able to rescind the contract, because I knew about the
mistake but I didn't tell you.
Mutual Mistake

Sometimes both contracting parties make a mistake. When both contracting parties make a
material mistake, it's known as a mutual mistake. A mutual mistake is a two-sided mistake. A
contract won't usually be legally enforceable when both parties make a mistake.
Let's say that you agree to purchase my farm. We execute our contract for $50,000. We both
know that you're purchasing it in order to use it as a working farm. I've used it as a working farm
in the past, and believe it's in working order. However, since I've last used it, the land has been
condemned. Neither of us knew it at the time of the contract, but a local power plant accidentally
contaminated the land and now the land can't be farmed. This is a mutual mistake and a material
mistake. This contract is voidable, meaning it can be rescinded by either one of us.

Mistakes of Fact or of Law

Contract mistakes can also be categorized by subject matter. This means that the court will look
at the nature of the mistaken matter. A mistake of fact occurs when a party believes that a
condition or event exists when it does not. When a party makes a contract based on a mistaken
belief about the facts, the court will usually modify the contract in order to clarify the facts and
follow the parties' intent.
Let's take a moment to review our scenario. I'm selling you my farm. We both know that you're
purchasing it in order to use it as a working farm. I've used it as a working farm in the past, and
believe it's in working order. However, since I've last used it, the land has been condemned.
Neither of us knew it at the time of the contract, but a local power plant accidentally
contaminated the land and now the land can't be farmed. This is a mistake of fact. We thought it
was a usable farm, but it's not.
A mistake of law occurs when a party understands the correct facts, but is mistaken about the
legal consequences. A mistaken understanding of the law by one party won't usually allow that
party to rescind the contract. You've likely heard the adage, 'ignorance of the law is no excuse'.
Now let's change our scenario a little bit. Let's say that I found out the land was condemned, and
I tell you. You decide to purchase the farm anyway, because you only want to grow grass to
make hay for horses. You aren't planning to grow anything for human consumption. However,
you didn't check the laws in our state. Our state's farm act prevents you from growing any crop,
no matter who, or what, might eat it. You've made a mistake of law. Our contract is still valid and
legally enforceable.
Lesson Summary

Let's review. A valid and legally enforceable contract requires a 'meeting of the minds'.
Sometimes the parties won't have a meeting of the minds due to a mistake. A contract mistake is
an unintentional act, omission or error made in the formation of a contract. When a mistake is
made, one or both parties will enter the contract without a full understanding of the contract
terms, obligations, or results.
A contract mistake can be incidental or material. Incidental mistakes won't usually affect the
meeting of the minds or the formation of the contract, but material mistakes usually do. Mistakes
can also be either unilateral or mutual. A unilateral mistake is when only one of the contracting
parties makes a mistake. The contract is usually still valid and legally enforceable, unless the
mistake is a palpable unilateral mistake. This means that the contract can be rescinded, or
canceled, if the other party knew or should have known about the contract mistake.
A mutual mistake is when both contracting parties make a material mistake. A contract won't
usually be legally enforceable when both parties make a mistake. Keep in mind, however, that
courts will usually try to rectify a mistake of fact, but courts won't usually step in when a party
makes a mistake of law.

Learning Outcome

After watching this lesson, you should be able to identify different contract mistakes, including
unilateral and palpable unilateral mistakes, and explain ways to remedy them.
Sometimes a party has a defense to a contract. A contract defense is a valid and legal reason for
why the contract can't be enforced. This lesson explains unconscionability and statute of
limitations. These are both defenses to the enforcement of a contract.

Defenses to Contract Enforcement

You're having a baby! No, really, I mean it! You're having a baby right now, but you're not near a
hospital. A taxi driver offers to help you out. He says that he'll drive you to the nearest hospital
for $300. You know that's way too much, but you're desperate.
You hop in and make it to the hospital just in time. You leave the taxi and head straight into the
hospital without paying the taxi driver. About two-and-a-half years later, you receive notice that
you've been sued for breach of contract. The taxi company wants you to pay $300. Do you have
to pay the bill? What are your options?

Unconscionability
Sometimes a party has a defense to a contract. A contract defense is a valid and legal reason for
why the contract can't be enforced. There are a few defenses to your oral contract with the taxi
driver. Lucky for you, you probably won't have to pay the taxi company. Let's take a look at why.
There are times when a court finds that a contract is so unfair, and so unreasonable, that the court
refuses to enforce the contract. This is known as unconscionability. An unconscionable contract
is one that is unusually harsh and shocking to the conscience. Unconscionable contracts are
grossly one-sided and drafted to benefit the drafting party.
Unconscionability sometimes happens in contracts when the other party was misled, lacked
pertinent information, or had a misunderstanding of the terms, obligations, or results of the
contract. In our case, you didn't necessarily misunderstand the terms of the oral contract, but the
taxi driver had a much more powerful bargaining position than you had. The taxi driver took
advantage of you.
The rules regarding unconscionable contracts are based on public policy. When a court decides
that a contract is unconscionable, it will refuse to allow the perpetrator, or the drafter of the
contract, to benefit from his or her unfair behavior. Instead, the court will choose to not enforce
the entire contract or will choose to not enforce those portions of the contract found to be
unconscionable.
In our case, the court might choose to limit the amount of money the taxi company can collect.
The taxi company likely won't be allowed to collect more than the usual and reasonable fee for

your taxi ride. Let's say that amount is $10. Anything above $10 is unconscionable, and you'll
only have to pay the $10.

Statute of Limitations
Now let's look at another possible defense in your case. Remember that the taxi driver offered to
take you to the nearest hospital for $300, and you accepted. Also, remember that you didn't hear
from the company for two-and-a-half years.
You had an oral contract with the taxi driver, but can he demand money from you after such a
long time? Probably not. Our court system uses laws, or statutes, called statutes of limitations.
These statutes set a deadline for how long a party can wait before bringing a lawsuit. Different
states have different statutes of limitations, and there are different statutes of limitations for
different types of lawsuits.
Let's say you live in California, where the statute of limitations for bringing a breach of oral
contract suit is two years. If the taxi company doesn't file its lawsuit against you within that twoyear period, it might be permanently barred from filing the suit. This legal doctrine is based on
public policy. Ideally, our justice system should move along as swiftly as possible without
infringing on a party's valid legal claim.
The two-year period will be counted from the day the lawsuit arose. That date is the date you
took the taxi to the hospital and didn't pay the taxi driver. To determine whether or not the
lawsuit is barred by the California statute of limitations, you will count from that day to the day
the lawsuit was filed. Note that the parties can negotiate their own time limitation for bringing
suit. Let's say that you hired the taxi driver in advance. You met and signed a written contract.
In the contract, you both agreed that any lawsuit for breach of contract must be brought within
three years of the signing of the contract. This contract term is valid and legally enforceable
because it lengthens the state's statute of limitations. Any contract term that shortens the state's
statute of limitations will be void.

Lesson Summary
Let's review. Sometimes a party has a defense to a contract. A contract defense is a valid and
legal reason for why the contract can't be enforced. There are several different possible defenses
to the enforcement of a contract. One of these defenses is unconscionability. This doctrine says
that a court won't enforce a contract if it's unusually harsh and shocking to the conscience.
Unconscionable contracts are grossly one-sided and drafted to benefit the drafting party. The
courts don't allow the enforcement of unconscionable contracts because enforcement would be
against public policy. A party shouldn't be allowed to benefit from his or her own unfair dealing.
Another possible defense to the enforcement of a contract is a statute of limitations. Different
states have different statutes of limitations, and there are different statutes of limitations for

different causes of action. A statute of limitations sets a deadline for how long a party can wait
before bringing a lawsuit. This legal doctrine is also based on public policy concerns. Ideally, our
justice system will move along as swiftly as possible without infringing on a party's valid legal
claim.

Learning Outcomes
After you've completed this lesson, you'll be able to:

Describe the contract defense of unconscionability

Explain the policy behind the unconscionability defense

Define statute of limitations

Summarize how individuals can agree to a different statute of limitations

For the most part, a contract is discharged or no longer valid once the promises of both parties
have been fulfilled. A contract may be discharged because one party did not fulfill the promises
or both parties agree that it's no longer necessary.

Contract Basics: A Quick Overview

A contract is a legally binding agreement between two or more parties that sets out certain
agreed upon promises in exchange for something of value, like money.
There are six elements that make a contract valid:

An offeror

An offeree

Consideration

Capacity of all parties

Mutuality

Legal object

To simplify this, the offeror is the party that makes the proposal or offer to another person. The
offeree accepts the offer to enter into the contract. Consideration is something of value given up
by both parties as part of the agreement, like money or performance of promises.

Both parties must also have capacity, meaning each party to the contract must be 18 years of age
or older, free of mental illness, intoxication or addiction. Mutuality means both parties agree to
the terms of the contract of their own free will and without duress. And, of course, legal object
of the contract is that terms must be legal and do not break any laws, policies or rules.
That sums up contract basics. Now, let's take a look at a few ways in which a contract ends.

Methods of Contract Discharge

Generally speaking, a contract remains valid until complete performance occurs. This means
until the promises of the contract have been fulfilled.
Say you hired a painter to stain your outdoor deck. You offer him a certain amount of money to
perform the job. He accepts and promises his best work to be completed in a certain amount of
time. Once the deck is stained and you pay the worker, the contract ends. It is discharged.
There are times when the law allows for substantial performance to discharge a contract. This
means most of the promises have been met with only a slight change or variance from the
original terms.
Suppose the painter promised to complete the deck stain by July 15, but it rained for an entire
week, making it impossible to complete the work until the following week. The court would look
at this as substantial performance because although the painter was unable to complete the job on
time due to the weather conditions, he was able to complete the task in a reasonable timeframe.
It's that simple. But not every contract ends in two satisfied parties going their separate ways.
A breach of contract happens when one party fails to adhere to the terms of the contract without
a legal reason to do so. This is the most popular type of case in civil courts. A breach that affects
the entire agreement is a material breach and involves changes in details of the contract that
change the main agreements in the contract. Had the painter never showed up to stain the deck or
showed up and started the work but never completed it, it would represent a material breach
because it had a serious impact on the promise.
Sometimes, the breach is not that complicated. In these instances, it's called a non-material
breach and only involves smaller details of the contract that do not affect the overall contract
between the parties. Generally, a court will force performance on the breaching party.
Say the painter fell on a banana peel the night before starting the job. If he asks his nephew, also
a professional, to step in and stain the deck, the contract promises remain intact. The only change
is the painter.
It is important to know that when there is a breach of contract, the courts have a right to require
specific performance by the breaching party. This means the breaching party will be legally
forced to keep up his end of the promises in the contract exactly as stated in the original
agreement. This is a way to make a non-breaching party whole again without forcing
compensation for the loss.

Sometimes, both parties simply decide that they are no longer interested in the contract terms.
This is called discharge by agreement and occurs when both parties agree to release the other
party from any obligation to the promises made in the original agreement. When the painter fell
on the banana peel, he offered that his nephew would perform the job. At that point, the
homeowner had the choice to either accept the new painter or not. If the painter and the
homeowner agree to just walk away, they discharged by agreement.

Lesson Summary
A contract is a legally binding agreement between two or more parties that sets out certain
agreed upon promises in exchange for something of value, like money.
There are six elements that make a contract valid. An offeror and an offeree commit to certain
promises. They exchange consideration to seal the deal. Both parties have capacity, the terms
must be mutually agreed upon and everything promised in the agreement must be legal.
There are a few ways to discharge or end a contract. Complete performance means until the
promises of the contract have been fulfilled. Substantial performance means most of the
promises have been met with only a slight change or variance from the original terms.
Sometimes, one party simply does not want to do what he promises. This is called a breach of
contract and happens when one party fails to adhere to the terms of the contract without a legal
reason to do so. A material breach means that one of the parties stopped performance of the
contract terms in such a significant way that the other party will receive little to no benefit from
the contract.
A non-material breach only involves smaller details of the contract that do not affect the overall
contract between the parties. Breach of contract is the most common type of case in civil court.
Most times, the court will demand specific performance by the breaching party, and the
breaching party will be legally forced to keep up his end of the promises in the contract exactly
as stated in the original agreement.
Finally, there are times when both parties agree to walk away from the agreement. This
discharge by agreement occurs when both parties agree to release the other party from any
obligation to the promises made in the original agreement.
Sometimes promises made in a contract cannot be performed because of unforeseeable
circumstances that cannot be defined in a clause. In these cases, the law allows changes for
reasons of impracticality, impossibility and frustration of purpose.

Changed Circumstances in Contracts

There are times when no matter how carefully a contract is drafted, issues arise that are simply
unforeseeable. For this, the law allows for changes to be made to the contract to accommodate
the parties. Sometimes, even a breach of contract can occur.

Changed circumstances in contracts is a fancy term that means the terms of the contract
changed because one or both of the parties was no longer able to keep the promises made in the
original agreement due to circumstances that were either beyond his control or unforeseeable.
That is not to say that the contract clauses were poorly written or elements were missing. It
means that the contract did not contain every possibility for voidability.
An example may help. In times of economic hardship, many people found themselves unable to
pay their mortgages. Hardships, like rising interest rates and high unemployment, led to many
people just walking away from their homes.
Rather than bailing on the responsibility of paying the mortgage, banks offered programs that
allow homeowners to stay in their homes and pay either a lower monthly payment or, in some
cases, principle, or loan amount not including interest, taxes or insurance.
In the original mortgage, the bank and the homeowner made promises. Generally, the bank
promised to lend the money at a certain interest rate and for a certain period of time. The
homeowner promised to pay the bank a set amount of money each month for the mortgage
period.
When this obligation can no longer be satisfied due to the loss of a job or some other catastrophe,
the bank made changes to the original contract to allow for a different set of promises.
There are several specific instances that the court considers reasonable for a change in
circumstances in contract law.

Impossibility and Impracticality

Objective impossibility in contract law says a party can remove himself from the obligations in
a contract if the terms of the contract become impossible to perform due to no fault of the
breaching party.
In October 2012, Super Storm Sandy made landfall, and in her path, she destroyed much of the
New Jersey shore area as well as parts of New York City and its suburbs. Prior to the storm,
people went about their daily business. The day after Sandy barreled through the region, all
commerce and industry stopped. Businesses and homes were leveled. Nothing was left.
Suppose a bride had her wedding booked at a Jersey Shore-area catering hall that no longer
stands? It is obvious that the wedding reception can no longer take place in the venue. The court
would look at whether there was a possibility of the caterer performing the promises of the
original contract. If no catering hall stands, the parties are able to breach the contract because the
wedding reception simply cannot happen through no fault of either party.
Sometimes, the events that led up to the breach of contract are of subjective impossibility . This
means that one of the parties to the contract believes that a circumstance or event makes the

promises impossible to perform. The law looks at these situations differently. Simply stating I
cannot perform is not enough. It is too subjective, meaning open to opinion rather than fact.
Let's say that the catering hall was left unscathed in the aftermath of Sandy, but the bride chooses
not to continue with the wedding reception because her family is unable to travel to the area due
to airline cancellations.
The court may find this reason for breach too subjective. The catering hall is able to perform
their promise by providing food and beverage. So, regardless of whether the bride cares to move
on with the reception or not, she would probably have to make good on her promise to pay for
the event.
That is, unless the bride claims impracticality, meaning a circumstance occurred that made
keeping the contract promises impractical, not impossible.
When a party claims the contract terms impractical, the courts look for three things:

An unexpected event happened after the contract had been signed

An assumption on the part of both parties that the unexpected event would not happen

The unexpected event made it impractical to move forward with the contractual
obligations

When Sandy roared through the Northeast region, the winds and rain lasted for several hours. In
the hours and days to follow, major airports remained closed to incoming flights. Highways and
roads were impassible due to serious flooding. Many people returned to find their homes had
washed into the ocean.
Even though the catering hall remained intact and operable, the surrounding areas were
devastated. Traveling to the region was impossible by air and impractical by automobile. In this
case, the courts may look at the contract as impractical under the circumstances. An act of God,
like a major Category 3 hurricane, qualifies as such.

Frustration of Purpose
Similar to impossibility, there are circumstances that make contract promises impossible to
perform, making it possible for the frustrated party to walk away without any obligation to the
original contract.
Frustration of purpose is used in business transactions and allows a buyer to breach a contract
when an unforeseen circumstance occurs that encumbers his purpose for entering into the
contract in the first place and the seller knew of the buyer's purpose for entering into the contract.

An example may help. A real estate investor enters into a contract to purchase several condos in
the same building with the intention of renting the units. In the meantime, the seller is fully
aware that the condo rules do not allow an owner to rent his condo unless he has owned the
condo for a period of one year. Due to these rules, the real estate investor can walk away from
the contract to purchase the condos without any further obligation.
Said a different way, the seller of the condos knew the investor's purpose for buying the condos
yet proceeded with the sales transaction without disclosing the condo rules regarding the rental
policy. If the investor proceeded with the purchase, he would not be able to fulfill his goal of
renting the condos. The buyer is considered the frustrated party and can end the contract for this
reason.

Lesson Summary
In sum, sometimes parties to a contract are allowed by law to change the terms, due to
unforeseen circumstances. This is known as changed circumstances in contracts and means the
terms of the contract changed because one or both of the parties was no longer able to keep the
promises made in the original agreement.
There are a few ways this can be done.
Objective impossibility is one way and means that a party can remove himself from the
obligations in a contract if the terms of the contract become impossible to perform due to no fault
of the breaching party, like canceling a wedding reception because the catering hall burned
down.
Another more difficult way to change a contract is subjective impossibility, which means that
one of the parties to the contract believes that a circumstance or event makes the promises
impossible to perform - and the key word is believes - like a bride canceling her reception
because she did not lose as much weight as she hoped for by the date of the reception. Because
of the subjective nature of such claims, the court will look at a few things:

An unexpected event happened after the contract had been signed

An assumption on the part of both parties that the unexpected event would not happen

The unexpected event made it impractical to move forward with the contractual
obligations

It is highly unlikely that a court will allow for an overweight bride to cancel a wedding reception
because of a few unwanted pounds.
Frustration of purpose can be used in business transactions, and this clause allows a buyer to
breach a contract when an unforeseen circumstance occurs that encumbers his purpose for
entering into the contract in the first place and the seller knew of the buyer's purpose for entering

into the contract, like bailing on the purchase of building that the seller knows will be
condemned by the city in the near future.
In general, a contract is a legally binding agreement in which two or more parties make and
agree to certain promises. Although the parties are bound to the terms, the parties may agree to
discharge the contract through rescission, novation or accord.

What Makes a Contract Legally Binding?

A contract is a legal agreement that binds the parties to certain promises that each makes. There
are a few elements that make this agreement legal and the terms enforceable:

The parties

Mutual consent

Legal object

Consideration

Let's break it down. The parties to a contract must be of legal age, free of mental illness and
addiction, and not under the influence of alcohol or drugs. All parties to a contract must also
express mutual consent, meaning each party agrees to their promises of their own free will. In
other words, a contract is invalid if one or more of the parties entered into the agreement under
duress, as a result of a threat, or did not completely understand the terms.
The object of the contract must contain terms that are legal and do not violate any laws or
statutes or Constitutional rights. For example, one cannot engage in a contract for murder. Lastly,
for a contract to be valid and enforceable, consideration must be given. This is an exchange of
something of value, like money, for performance.
Once all of the binding elements have been met, the contract stands and is enforceable by law.
And getting out of a contract can be difficult, but not impossible! Let's explore a few ways in
which a contract can be broken.

Rescission
To discharge a contract means to legally terminate a contract under specific situations. One way
to discharge a contract is through rescission. This means a contract can be legally terminated by
mutual agreement, by law or court action, or by one party for a reasonable cause. Here are a few
examples where rescission may be the right option:

One or more parties were under duress at the time the contract was written.

All or some of the parties were not of legal age to enter into the contract.

One or more of the parties misrepresented the promises.

The contract contained mistakes.

Contract basics remind us that all parties must be of legal age and of free will to enter into a
legally binding agreement. The agreement must also contain accurate and factual information.
Otherwise, it can be considered fraudulent.
For example, when Captain Jack decided he wanted to sell his fishing boat, he knew there would
be tough competition. Many of the local fishermen were selling similar models. So, Jack thought
long and hard about the best way to market the vessel. In a rare moment of genius, it came to
him! He would post photos of a much larger and more beautiful boat in the online ad. He thought
this would attract more potential buyers.
Sight unseen, Alfredo Romano, a buyer from Italy, made an offer and signed the contract for the
purchase. In the contract, Jack included a description of a completely different boat. In fact, he
increased the size and lowered its age. When the boat arrived in Rome, Alfredo was hotter than a
bowl of his mamma's spicy meatballs. It was half the size and twice the age of the boat featured
in the ad!
In this case, Alfredo had every right to rescind the offer to buy Jack's boat. The contract
contained fraudulent and misleading information, including the size and age of the boat. Once
Alfredo terminates the contract, it's irrevocable. The terminating action cannot be reversed
regardless of whether Jack fesses up or changed the boat description. It was like the contract
never existed.

Novation
Another way to discharge a contract is novation, which simply means substituting the old
contract for a new one with different terms. Novation would be used if a new party takes over the
responsibilities of an original party to the contract. In the case of the fraudulent fishing boat,
Alfredo could have opted to find a person in Italy to assume the obligation of paying for the boat.
In this case, Jack and the new party would create a new contract freeing Alfredo from any further
responsibility to the promises. The novation would include only Jack and the new buyer.

Accord
Alfredo and Jack could have settled on an accord as well. This means the parties agree to settle
the dispute through an agreement to compromise on certain or all terms of the contract, and
create a new contract where the compromise is clearly stated. For example, when the smaller,
older vessel was delivered to Alfredo, both parties could have settled the dispute by agreeing to a
lower, fairer price for the boat. Once Alfredo and Jack agree on a new price, a new contract will

be written and signed. All three discharge options provide parties with ways to get out of an
unsatisfactory agreement.

Lesson Summary
To sum things up, a contract is a legal agreement that binds the parties to certain promises that
each makes. Sometimes, one or more of the parties wants out of the agreement. Since walking
away is illegal, the law allows for a few ways to discharge a contract or legally terminate a
contract under specific situations.
Rescission means a contract can be legally terminated by mutual agreement, by law or court
action, or by one party for a reasonable cause. Rescission may be the right option if:

One or more of the parties was under duress at the time the contract was written.

All or some of the parties were not of legal age to enter into the contract.

One or more of the parties misrepresented the promises.

The contract contained mistakes.

If a new party wants to take over the responsibility of an existing party to a contract, novation
may work; and it simply means substituting the old contract for a new one with different terms.
Both parties may want to remain under contract but wish to compromise on the promises made.
In this case, an accord may be a good idea. This means the parties agree to settle the dispute
through an agreement to compromise on certain or all terms of the contract, and create a new
contract where the compromise is clearly stated.
Contracts, in general, contain six elements that must be present. One such element is legal object.
This means that the terms of a contract must be legal and not against public policy.

Contractual Illegality v. Public Policy

Contracts are legally binding agreements between two or more parties and are made up of six
elements that must be present for a contract to be considered enforceable.
The six elements include:

Offer

Acceptance

Consideration

Capacity of the parties

Intent of both parties

Object of the contract

Our focus is on the sixth element of object of the contract, and it says that a contract cannot
violate law or public policy. Obviously, a contract cannot contain language that binds parties to
perform an illegal act, like murder for hire or the sale of illicit drugs. But a contract also cannot
violate public policy, the set of unwritten societal laws that all citizens are expected to follow.
Said a different way, a contract cannot contain terms that breach law or harm society, like
adultery.
The best way to think about statutory law and public policy is to think of it this way: Public
policy tells us that there are certain things we ought to do for society, and in many instances,
laws are created to ensure that public policy is followed. Let's use a few examples. It is not right
to discriminate against others based on race, gender or sexual preference. In order to enforce
anti-discrimination, the Civil Rights Act of 1964 was enacted to make it unlawful to discriminate
against a protected group in employment, housing and education.
Bringing this back to contract law, sometimes a contract is written based on public policy, yet
there is no law that directly enforces the policy. For example, when a person sells their business,
it is public policy that they don't take their client list and start a new business that is the same as
the one they just sold. This is mostly because if the previous owner takes all of his clients away,
the new owner will no longer have customers. While this is not a law, it generally comes in the
form of a covenant, or binding agreement, written into the business sale contract.
In cases where both the plaintiff and the defendant violated public policy or broke the law, the
doctrine of in pari delicto applies. This doctrine was created to keep the courts from mediating
cases where both parties acted against the law or public policy. It says a plaintiff who acted
wrongfully cannot collect from the defendant. Let's see how the court ruled on an interesting case
in where a covenant in the business sale was violated.

Gann v. Morris, Appellate (1979)

In Gann v. Morris, Alfred and Connie Gann, plaintiff-appellees, purchased a Tucson, Arizona,
silk screening shop from the owner and defendant-appellant, Gerry Morris. When the contract for
purchase of business was written, it included a covenant restricting Morris from entering into the
silk screening business for a period of 10 years and within 100 miles of Gann's shop and seizure
of his client list.
Sometime after the sale of the business, Morris competed with the Ganns for silk screening
business. He also elicited business from past clients - the clients that were part of the covenant
both parties signed. The Ganns cried foul play and sued for breach of contract on the grounds

that Morris violated the covenant by competing with Gann for business and failing to refer
business under the terms of the agreement.
Morris contended that he was in the right to accept the business and that the covenant was
unenforceable under the public policy of the restraint of trade doctrine. This doctrine restricts
competition between parties and contains time and distance clauses by imposing a reasonable
time frame for non-competition as well as a geographical distance restriction for conducting
business. The parties, the type of business and the purpose for the covenant can determine the
issue of what is reasonable.
For example, in an employment contract, a non-compete covenant may restrict an employee
from working in a same or similar business for a period of one year, but it cannot limit an
employee's ability to be gainfully employed. With business sales, the courts want to be sure that
the covenant does not completely restrict business efforts of the seller.
In the case of Gann v. Morris, the covenant was deemed reasonable. Even though the covenant
restricted Morris from entering into the silk screening business, there were time and distance
limitations. In other words, Morris could set up shop in a city that extended past a 100-mile
radius. He may also return to Tucson after the 10-year limitation expires.
In appeal, the court ruled in favor of the Ganns. The justification for the ruling relied on several
things:

The silkscreen shop was a small business

The seller developed a clientele because of a highly specialized service he performed

Reputable small businesses generate goodwill

Transfer of goodwill is necessary in a specialized business

Goodwill is also a factor when considering the purchase of a business. This is the added value of
a business beyond what can be seen, touched or produced. It can include employee skills,
reputation of the brand, logo recognition and customer lists. It is the very character of the
business. This is why courts see goodwill, amongst other things, as a part of a covenant
restricting competition.
At decision, the court upheld the covenant and required Morris to pay the Ganns for lost profit
from any and all business he took from them during the time they claimed Morris violated the
contract terms. And in no way were the plaintiff-appellees in violation of the doctrine of in pari
delicto.

Lesson Summary

In a nutshell, all contracts must have six elements to be enforceable. When deciding whether a
contract is enforceable, one important element is the object of the contract, and it says that the
contract cannot violate law or public policy. Public policy is the set of unwritten societal laws
that all citizens are expected to follow. This means a contract cannot contain terms that breach
law or harm society.
In business dealings, public policy may take the form of a covenant, or binding agreement
written into the business sale contract or even an employee contract. Covenants usually have
time and distance restrictions so that they do not violate the public policy doctrine of restraint of
trade. This doctrine restricts competition between parties and contains time and distance clauses
by imposing a reasonable time frame for non-competition as well as a geographical distance
restriction for conducting business.
Sometimes one party violates a covenant; other times both parties engage in acts against law or
public policy. When this happens, the doctrine of in pari delicto applies. This doctrine was
created to keep the courts from mediating cases where both parties acted against law or public
policy. It says a plaintiff who acted wrongfully cannot collect from the defendant.
In cases where one party violates public policy or law, the other party can sue. As we learned in
Gann v. Morris, Morris violated the non-competition covenant by engaging in silkscreen
business and soliciting past customers for new business. The court saw this as a clear violation of
the contract terms and ruled in favor of the Ganns. The decision was based on a few things.
The business was classified as a small business that dealt in highly specialized products. In the
sale of a small business, the tangible assets are transferred along with intangible assets, like
goodwill. Goodwill is the added value of a business beyond what can be seen, touched or
produced. It can include employee skills, reputation of the brand and logo recognition and
customer lists. It is the very character of the business.
Since Morris had previously owned the shop, it was reasonable to believe that past customers
would be comfortable following him. Because he solicited the customers, he violated the
agreement and was made to reimburse the Ganns for lost profits during the time he was in
violation.
The law states that the terms of a contract must not violate any laws including statutes. Any
contract written that is in violation of statutes or laws is unenforceable.

What Is Statutory Illegality?

Let's start with the basics. A statute is an act proposed and prescribed by legislature that declares
something, like a law. Violating the prescribed law is illegal, or not permissible.
In contract law, there is an element called object of the contract, and this means the terms of the
contract must be legal.

Put all together, it is safe to say statutory illegality, in contract law, means no terms of a contract
can be in violation of statutory law. It can get a bit murky in the interpretation of statutes by
courts or even individuals. However, many times the law is very specific about what can be
considered in violation of statutory law. Let's look at a few examples.

Usury, Licensing, Gambling & Sabbath Day

Usury is the act of charging a higher interest rate than that which is allowed by statute or law.
Statutes regulating interest rates generally apply to credit card companies, banks and lending
institutions that lend to individual consumers.
If a company charges a rate of interest higher than allowed by law, they may be charged with
extortion, or exceeding the amount of interest that can be legally charged, and subjected to fines
and other punishments. This is sometimes called 'loan sharking'.
There are exceptions to this that permit pawnshops and payday loan companies to charge a
higher rate of interest than allowed by law, but this varies by state.
Some professions require that a professional obtain a license, or permit to perform a service.
There are two types of licenses one can obtain:

Regulatory license

Revenue license

A regulatory license is issued to professionals who perform tasks that can affect the health,
welfare and safety of citizens, like plumbers, doctors and lawyers. These professions, amongst
others, require passing a standardized test and paying fees to obtain the license.
Others require a revenue license, which generate revenue for a certain industry or affiliation,
like licensing to distribute flyers to the public or even deliver milk.
Whether a person holds the mandated license makes all the difference when a breach of contract
occurs. For instance, if you were to hire an electrician to install a ceiling fan, it would be a good
idea to confirm that he holds a valid and current license. Should you find out that the electrician
does not have the appropriate licensing to do the job, you may refuse to pay him.
Now, it is not as cut and dry as this. The courts will look at a few things:

Is a license required for the profession?

If so, is there anything written in the statute that bars recovery of payment by someone
who does not hold the required license?

What type of license is required? Is it regulatory or revenue?

In the case of Hydrotech Systems Inc. v. Oasis Water Park, California law was upheld when it
was ruled that the contractor for Hydrotech, who was not properly licensed to be a contractor in
the state, would not recover pay for installing pool wave machines at Oasis Water Park.
In most cases, when a regulatory license is required but not held, recovery for payment of
services is not mandatory. Simply stated, not having the appropriate licensing will hurt a
professional's chances of payment for a job performed.
Gambling contracts, where people enter into a contract that involves a gamble or risk, like a
lottery ticket or a raffle, are also illegal in states that have laws against such wagering.
If two people enter into a contract that involves a gamble or risk, like a lottery ticket or a raffle,
where this type of activity is illegal, neither party to the contract can recover. This is the reason
many raffles or contests state a disclaimer that voids the offer to enter in certain states. If a
person from a state where the offer is void should win, the lucky duck probably will not be
legally entitled to the prize.
Sunday contracts involve agreements entered into on a Sunday (or Sabbath Day). You may not
notice it in your state, but in approximately 31 states in the United States, they are void and in
violation of statutory law in certain jurisdictions.
Perhaps the term blue laws are more familiar to you. Many jurisdictions do not allow commerce
between businesses and consumers to occur on Sunday because it should be considered a day of
rest. As competition increases, businesses rallied to change the law. In fact, most cities allow for
shopping on Sundays. It is actually difficult to imagine not going to the mall on a Sunday, huh?

Lesson Summary
To recap, statutory illegality in contract law means, no terms of a contract can be in violation of
statutory law.
The four examples we learned are usury, gambling contracts, licensing and Sunday (Sabbath)
contracts.
Usury is the act of charging a higher interest rate than that which is allowed by statute or law and
generally involves interest rates on credit cards, bank loans and lending institutions that lend to
individual consumers.
Professions that require a license, or permit to perform a service, are subject to contract law as
well. A regulatory license involves passing a test. Lawyers and doctors require this type of
license. If a person performs the duties of these types of professionals without proper licensing,
they probably will not be able to recover payment for their services.
Less restrictive is a revenue license because these professions usually do not have negative
impact on the health and well-being of a community.

Gambling contracts where people enter into a contract that involves a gamble or risk, like a
lottery ticket or a raffle are also illegal in states that have laws against such wagering.
Finally, Sunday contracts involve agreements entered into on a Sunday (Sabbath Day) and are
void and in violation of statutory law under certain jurisdictions.
There are several kinds of contracts. Some bind parties wholly, while others do not. The terms of
the contract determine whether a contract can be fully executed.

Valid and Void Contracts

A valid contract is a written or expressed agreement between two parties to provide a product or
service. There are essentially six elements of a contract that make it a legal and binding
document. In order for a contract to be enforceable, it must contain:

An offer that specifically details exactly what will be provided

Acceptance, or the agreement by the other party to the offer presented

Consideration, or the money or something of interest being exchanged between the

parties

Capacity of the parties in terms of age and mental ability

Intent of both parties to carry out their promise

Object of a contract is legal and not against public policy or in violation of law

In other words, a contract is enforceable when both parties agree to something, back the promise
up with money or something of value, both are in sound mind and intend to carry out their
promise and what they promise to do is within the law.
So, if Dennis offers to sell a puppy to Jean for the sum of $500 and Jean delivers the cash for the
canine, providing Jean and Dennis are of age, the dog is rightfully Dennis' to sell and there is
nothing illegal about the transaction, the parties have a valid contract. There are contracts that do
not contain all of the elements, and for those contracts, the courts make the determination as to
whether the contract can be enforced.
A void contract is missing an element. In this case, the contract does not have to be terminated in
court. It simply does not have to be executed, and both parties can walk away. Suppose Dennis
offers to sell his neighbor's dog to Jean. This would make the contract between the parties void
because Dennis does not actually own the pooch. This means the sixth element, legal object,
wasn't present. It is illegal to sell another person's personal property without permission.

Voidable and Unenforceable Contracts

A contract that is voidable sort of works the same way, but there is an option for the parties to
enforce the terms even though an element is missing, or some other issue exists with the terms.
The decision to enforce the contract is between the parties. In a voidable contract, one of the
parties is legally bound to honor the contract. So, a voidable contract can be executed, even
though there is an element missing, if the party not legally bound agrees to move forward.
Let's say Jean and Dennis negotiated the dog sale over a few cocktails. This may change things.
Capacity is an element that requires parties to be of mature age, free of mental illness and not
intoxicated. If Jean wakes the next morning to the bark of a dog and doesn't remember making
the purchase, the contract may be voidable. In fact, there are several ways a contract may be
voidable:

One or both of the parties wish to terminate the contract because an element was not
present

One of the parties was coerced into the contract

In this case, Jean may ask Dennis to take the dog back and return her money. Dennis can return
the cash and take the pup, or he can ask the court to decide. A good defense for Dennis may be to
argue that Jean was not intoxicated at the time of the sale. Jean may contend that she was coerced
by Dennis' offer to buy her several cocktails during negotiations.
Some contracts are simply unenforceable. This means when the contract terms are too
confusing, unclear or lack several elements. The Doctrine of Laches may also be used to make a
contract unenforceable. This means the performance of the promises in the contract were
unnecessarily delayed or the damaged party did not file a claim in court in sufficient time.
To clear this up, when Jean realized that she had purchased a dog from Dennis, she scoured her
apartment for any documentation of the sale. She came across a cocktail napkin with a few vague
words. It actually read, 'If you want a dog, you can have him for whatever you can afford, but I
want $10. Pay me whenever. Take him tonight or tomorrow.' The contract also read 'Paid in full.'
The contract terms were vague. In fact, some of the words were misspelled. It would likely be
that the court would rule this contract unenforceable. Jean should be able to return the dog
immediately without consequence.

Lesson Summary
To sum things up, there are several kinds of contracts. The elements of a contract determine
whether the contract is valid, void, voidable or unenforceable.
Contract elements include:

Offer that specifically details exactly what will be provided

Acceptance, or the agreement by the other party to the offer presented

Consideration, or the money or something of interest being exchanged between the

parties

Capacity of the parties in terms of age and mental ability

Intent of both parties to carry out their promise

Object of the contract is legal and not against public policy or in violation of law

A valid contract is a written or expressed agreement between two parties to provide a product or
service. A void contract is missing an element. In a voidable contract, there is an option for the
parties to enforce the terms even though an element is missing, or some other issue exists with
the terms.
When a contract is unenforceable, it means the contract terms are too confusing, unclear or lack
several elements. It may also mean that the Doctrine of Laches was applied. This means when
performance of the promises in the contract were unnecessarily delayed or the damaged party did
not file a claim in court in sufficient time. The most important thing to remember about the
formation of a contract is that each element must be present and satisfied for a contract to be
considered valid.
When one party breaches the terms of a contractual agreement, the court uses any of several
remedies to make the injured party whole. These remedies include compensation, consequences
for breach, punishment, nominal fines, liquidation and mitigation.

Legal Remedies in Contracts

A breach of contract occurs when one party does not follow through with the promises made in
the contract, and the other party is considered injured, or not whole in some way, generally
financially. When this happens, the courts have several ways of making the injured party whole
again.
There are several remedies the court may use to settle the score:

Compensatory damages

Consequential damages

Expectation damages

Punitive damages

Nominal damages

Liquidated damages

Mitigated damages

Let's explore the important factors that determine the type of remedy used in different situations.

Compensatory Damages
In some cases, compensatory remedies are used. These remedies restore a party back to where
they would have been financially had the breach never happened. There are two types of
compensatory remedies the courts can apply:

Consequential damages

Expectation damages

Consequential damages is a remedy that restores the injured party for any loss directly related
to the breach and indirectly related but can be foreseen as damages that may occur as a
consequence of the breach.
Suppose you contract with a plumber to fix a leaky pipe at your restaurant. Because the leak was
located on the main water supply line, you cannot open the restaurant until the leak is fixed. If
the plumber neglects to order the parts needed to fix the leak in a reasonable amount of time, he
cannot repair the pipe. This means your restaurant cannot open until the parts are ordered and the
work is completed. Each day that you are closed, you are losing money.
The court will look at a couple of things:

The restaurant cannot be operated without running water

Certain parts are needed to make the repairs to the water line

The plumber was aware that water is necessary to run a restaurant

A court would look at the restaurant owner's loss of revenue as foreseeable and may require that
the plumber not only restores the restaurant to working order, but that he also may have to pay
for any revenue that would have been made for a reasonable time between the execution of the
contract and the final repair. The reason - the plumber neglected to order the parts quickly
enough to repair the leak. Had he placed the order on the day he signed the contract, the parts
may have arrived sooner, reducing the lost revenue.

Another remedy the court may use is expectation damages. This remedy qualifies the injured
party to the exact loss or market value of loss. In other words, no provisions are made for
foreseeable losses.
Suppose you contract with a bakery to make and deliver your wedding cake. On the way to the
reception, the delivery truck hits a pothole and the cake shifts from the impact and cracks into a
million pieces of crumb. Obviously, the baker cannot serve the cake, but you paid for it. The
court will look at this breach as unforeseeable and probably rule in favor of the bakery returning
the money you paid for the cake and nothing more.

Other Remedies
Sometimes restoring an injured party is not enough. The court may actually punish the breaching
party. This remedy is punitive and is designed to actually settle a breach of contract case with a
very high payout - much more than what is expected or even for foreseeable damages.
Here's an example to help explain this. Suppose you purchased a low-mileage car from a small
car dealer. After a few months of enjoying your car, you take it in for a tune-up. The mechanic
informs you that the car's odometer had actually been tampered with. You thought you purchased
a car with low mileage, but what you really purchased was a car that had a phony odometer
reading, making the actual mileage much higher than you thought.
In this case, the court would probably impose a punitive remedy on the car dealer because the act
of turning back an odometer is illegal and unethical. It is also deceitful and not a very nice thing
to do. In this case, you would most likely get your money back for the car, plus a larger amount
just to send a strong message to the company to deter them from doing this type of thing to
others.
Other times, the court looks to send a subtle message by using a nominal remedy to satisfy the
breach. This generally happens when the breach did not injure the breached party in any
significant way. It is more about warning the breaching party about their actions.
Let's say you open a taco stand at the beach. You contract with Juan, a local farmer, for a delivery
of tomatillos for your secret sauce. Juan forgot to send you tomatillos. You brought him to court
because you lost customers during your opening week. The court will take a careful look at the
circumstances. Unfortunately, you are a new business. It is difficult to foresee how many
customers you lost because you did not have any customers in the past. It is likely that Juan will
have to pay a small penalty for the inconvenience but not much more than that.
Liquidated damages is a remedy that actually states an amount of money written into a contract
as a clause should a breach occur. This is written into the contract where actual damages would
be difficult to determine. A good example of a contract that includes a liquidated damage clause
may be one that involves a company who holds a trade secret, like a secret mix of spices for their
signature dish.

In an employment contract, the company may include a liquidated damages clause stating that if
the trade secret was to be sold or gifted to anyone other than a contracted party, the contract
would be breached, and the breaching party would owe the company a pre-determined amount of
money for revealing the secret. This is done because it would be difficult to determine the scope
of real damages suffered by the injured party that would result from the breach.
Lastly, the courts may look to mitigate damages so that the breached party doesn't receive a
large sum of money. In short, it is done to minimize injury. The court uses mitigation as a way of
reducing the amount of money paid out in a contract breach. The reason for this is to limit large
payouts when things can be done to reduce them. The courts never want to impoverish people.
The courts just want to be sure things end equitably.
Think of it this way. If a cabinetmaker was contracted to build new cabinetry for your kitchen
and you decided to cancel the contract, the carpenter may sue for breach of contract. The court
may want to mitigate, or reduce, the remedy owed by you to the carpenter by looking at a few
things. The judge may require that the materials purchased for your cabinets be used on other
jobs or sold to another carpenter. This would reduce the amount of actual damages incurred
because of the breach. There are several ways in which remedies can be used in a breach of
contract case. Each remedy serves to restore an injured party.

Lesson Summary
A breach of contract occurs when one party does not follow through with the promises made in
the contract. For this, the courts have several remedies they may use to make an injured party
whole:

Compensatory damages

Consequential damages

Expectation damages

Punitive damages

Nominal damages

Liquidated damages

Mitigated damages

Compensatory remedies are used to restore a party back to where they would have been
financially had the breach never happened. This happens in two ways:

Consequential damages

Expectation damages

Consequential damages restores the injured party for any loss directly related to the breach and
indirectly related but can be foreseen as damages that may occur as a consequence of the breach,
while expectation damages qualifies the injured party to the exact loss or market value of the
loss.
Punitive damages are designed to actually settle a breach of contract case with a very high
payout - much more than what is expected or even for foreseeable damages. It's really a
deterrent. When a breach does not seriously injure a party, the court may impose a nominal
remedy to satisfy the breach. This generally happens when the breach did not injure the
breached party in any significant way. It is more about warning the breaching party about their
actions.
Sometimes, the remedy is written directly into the contract as liquidated damages and states an
amount of money written into a contract as a clause should a breach occur. Other times, there is
no way to determine how much of a loss will result from a breach of contract. In this case, the
court may mitigate damages so that the breached party does not receive a large sum of money.
In short, it is done to 'minimize injury.' The court uses mitigation as a way of reducing the
amount of money paid out in a contract breach.
There are several remedies a court can impose on parties in a breach of a contract case:
rescission, restitution, specific performance, injunction, reformation or quasi-contract. Learn
about each of these remedies in this lesson.

What Is a Breach of Contract?

A breach of contract occurs when one party does not perform as promised according to the
terms of the contract. When this happens, the courts decide the best way to make the injured
party, or the party who sustained the breach, whole again. What the courts will do is decide
whether a legal remedy, which is a remedy that restores the breached party financially, will do,
like having a hairdresser refund your money for a really bad haircut.
Then, there is an equitable remedy. This type of remedy is really an action prescribed by the
court to resolve the matter. This type of remedy is often used when there is simply no financial
remedy available. In other words, there is no money to be given to the breached party.

Three Main Equitable Remedies

Let's focus on the three main equitable remedies imposed by courts:

Rescission

Specific performance

Reformation

Rescission happens when a previously existing contract was retracted because it was breached.
The contract can be re-written in a different way so that both parties are satisfied with the terms.
An example will help make this concept clearer.
Marty and Sarah settled on a real estate contract for an oceanfront condo. Marty drafts a contract
that includes the sale price, address and everything included in the price. After thinking about it,
Marty decided he wants to keep a few things included in the price, like his favorite bird feeder, a
shrub and his mailbox.
When Sarah arrived at her new home, she noticed a few things missing. Upset by this, she
contacted Marty and demanded the things be returned or a new contract be made excluding the
items from the price. What actually happened was the original contract was rescinded because
Marty breached it by taking items that were included in the contract for the sale of the condo. No
harm was done. As long as both parties agree to the rescission of the old contract, it's easy to
make a new one.
Sometimes the court will require specific performance from the breaching party, making the
party do everything promised in the contract. In the condo sale between Marty and Sarah, had
Sarah really wanted those sentimental items Marty took, the courts could require that Marty
return them to the home and place them in their original setting. In other words, Marty would
have to specifically perform what he promised to do in the original contract.
Contract reformation is a bit more complicated. It requires that there be an existing contract
that needs to be re-written in a more clear way. A few elements are necessary for a reformation to
occur:

A valid contract exists.

There are grounds for reformation, including a mistake or misrepresentation.

There is no other defense available to the parties.

This is worth further exploration. Contract reform simply means re-doing the contract so that it is
easier to understand. This could happen for a couple of reasons. A mistake or an error in the
terms in the contract, like the wrong address in a real estate contract, is definitely a reason for
reformation. A wrong address could create a world of other problems down the road.
Misrepresentation is a more important issue. This includes deceitful or fraudulent distortion of
terms in the contract. It doesn't have to be intentional either.
When Marty created the contract for the condo sale, he never mentioned that the condo taxes
have not been paid in years. After a title search came back showing $10,000 taxes were due,
Sarah asked to reform the contract to exclude the taxes from her balance due to Marty when they
close on the house.

Don't be confused with a breach of contract. Marty did not neglect to perform a promise. He
neglected to include the back taxes. He actually misrepresented the total cost of buying the home
by not including the past due taxes. A new contract will be written to either include the back
taxes or include a clause stating that Marty must pay them from his profit.
There are a few other equitable remedies a court may use to resolve a contract dispute.

Other Equitable Remedies

Sometimes a court will order an injunction that requires a party to either do something or stop
doing something for a period of time or indefinitely. In other words, the court wants everything
to return to the status quo.
A marina owner may file an injunction against a boat slip renter if the boat or owner poses a
threat to the other boats in the marina. Captain Clay has a boat dock contract with the Municipal
Marina. He docks his boat there each night after fishing. Each night, he cleans his catch and
leaves the bones and skin for the pelicans. This may be a good thing for the seabirds, but a bad
thing for people who stroll along the boardwalk in the evening. Some have even slipped and fell
into the water because of Clay's careless fish cleaning ways.
The marina owner has a right to ask the court to stop the lease agreement with Clay because his
antics are causing chaos on the docks. Once he removes his boat, the marina will be back to the
status quo - a peaceful place to relax.
Restitution is another equitable remedy and involves restoring a breached party back to his
original state, whether it is financially or in action. Remember Marty and Sarah's condo sale?
Once they cut through all of the red tape in the condo sale, Sarah was ready to start her new life
in her home. She contracted Mitch to paint the place. She emailed him the specific paint color,
Toadstool Green, along with the product code.
Mitch forgot to take Sarah's email to the paint store and relied on memory only. He thought she
asked for Moonlight Steel and proceeded to buy the paint and start the job. When Sarah returned
home from work, she was shocked at the color of the walls. This wasn't the green she hoped for.
In fact, it wasn't green at all. But all Sarah could see was red. She was fumed by the painter's
mistake and demanded justice.
A court may impose restitution in this case. By this, the judge may require that Mitch repaint the
walls to the color Sarah requested in the contract at his expense. Sarah will not receive a
financial reward for the error in memory, but having the walls repainted to the color she wanted
or to the original color will restore her.
Lastly, a quasi-contract may be the best equitable remedy when no real contract existed in the
first place, and is meant to force a party who was unjustly enriched, or received a benefit for a
service but did not pay for it. This will help a party who performed a service but was not paid for
it. Let's see if an example will help.

Powell was shopping with his two children, Jake and Marline. Jake began choking on a piece of
candy. Powell doesn't know the Heimlich Maneuver. Lucky for him, Dr. Sims happened to be at
the mall as well. Dr. Sims quickly flipped the child, dislodged the candy and patted him on the
back until he was breathing normal again. Once the dust settled, Sims asked Powell for $100 for
his services. Powell was shocked and refused to pay a dime.
Sims has every right to take Powell to court. You see, being brought back to life by the good
doctor unjustly enriched Powell's kid. Powell should pay for this. If not for Sims, the situation
was grim. Most likely, the court will side with Sims and force Powell to pay up!

Lesson Summary
To sum things up, a breach of contract occurs when one party does not perform as promised
according to the terms of the contract. When this happens, the courts can impose an equitable
remedy on the breaching party. This type of remedy is really an action prescribed by the court to
resolve the matter. There are three main equitable remedies imposed by courts:

Rescission

Specific performance

Reformation

Rescission happens when a previously existing contract was retracted because it was breached.
When a party to a contract does not do what they promised, specific performance from the
breaching party may be required to make the party do everything promised in the contract.
Contract reformation is another remedy and requires that there be an existing contract that
needs to be re-written in a more clear way. A few elements are necessary for a reformation to
occur:

A valid contract exists.

There are grounds for reformation, including a mistake or misrepresentation.

There is no other defense available to the parties.

A mistake or an error in a term in the contract, like the wrong address in a real estate contract, is
definitely a reason for reformation. Another is misrepresentation, and includes deceitful or
fraudulent distortion of terms in the contract. It doesn't have to be intentional either. An
injunction requires a party to either do something or stop doing something for a period of time
or indefinitely.
Restitution is another equitable remedy and involves restoring a breached party back to his
original state, whether it is financially or in action. When a party is unjustly enriched, or
received a benefit for a service but did not pay for it, a quasi-contract may be the best equitable

remedy because no real contract existed in the first place, and it will force a party to pay for a
service another party performed.
Ethical decision making involves making choices based on what is good for all people. The
Golden Rule, public disclosure test and universalization test are three models that consider others
in their application.

Ethical Decision Making

As CEO of a company, your decisions could have far-stretching consequences. Any decision you
make could affect many people. How do you know the right thing to do? We have an app for
that! Not exactly, but there are several decision-making models that can steer your decision
making in the right direction.
Ethical decision making is merely making decisions based on what ought to be done to benefit
the maximum amount of people. It should include society as well as the environment. Three
popular ethical decision-making models include:

The Golden Rule

Public Disclosure Test

Universalization Test

As we learn about the three models, it is important to think about three things. Who are we
considering in the decisions we make? What is the purpose of the decisions we make? And how
will our decisions impact others?

The Golden Rule

The Golden Rule is simple. It asks that you treat people the way you want to be treated. This is
a lesson many of us learned in kindergarten. It involves taking the feelings of others into
consideration when making decisions that affect them. Respect people in all of your exchanges.
Although the concept is simple, applying it to business decisions can be challenging. Not every
business decision can be made with the interest of others in mind.
This brings us to corporate social responsibility, and it means a corporation's responsibility to
be aware of the environment and society when making decisions. Think accountability, integrity
and honesty.
Back in 1968, the Ford Motor Company quickly designed and manufactured the Ford Pinto to
compete with the newly emerging Japanese subcompact cars that were taking over United States
highways. In their haste, an unnoticed problem with the fuel tank was looming that would
eventually lead to 180 deaths, numerous serious burn injuries and thousands of burned cars.

Let's put the pieces together. In Grimshaw v. Ford Motor Company, Lily Gray and Richard
Grimshaw, who was a teenage boy at the time, were traveling in their vehicle when they were hit
from behind. Upon impact, the car burst into flames. Gray was killed instantly, and Grimshaw
was left with debilitating burns. The family sued and was awarded millions in punitive and
compensatory damages.
Within months of this case, the Pinto was in the headlines again. This time, it was discovered that
there was a problem with the fuel tank. The original fuel tank could not withstand a direct hit,
even at low speeds, without bursting into flames. The question of ethics becomes pivotal in the
Pinto case as we learn Ford's response to the deaths and injuries. Ford was made aware of the
vehicle's safety glitch sometime in the mid-70s but refused to make any changes to the design.
You see, Ford did a cost/benefit analysis weighing the benefits of making the changes to the cost
of making the changes. In other words, Ford management asked themselves a crucial question: is
it cheaper to settle on lawsuits than to make the change? In the end, they decided it was not costeffective to make the change. The Golden Rule was not in the forefront of management's mind
when considering the impact the vehicle flaw had on people.

Public Disclosure Test

Similar to the Golden Rule is the public disclosure test. This test asks that a business decision
be something a company would be so proud of that it would not mind if the decision were to be
broadcast on public television for the whole world to see.
Let's look at an example of how one Chinese baby milk producer was not mindful of the public
disclosure test. Sanlu Group, a large milk distributor in China, produced baby milk powder that
they knowingly fortified with melamine, an ingredient commonly used in making plastics.
Human consumption of melamine can cause kidney and liver failure, especially in babies. As a
result, several babies died from drinking the milk.
After an investigation, it was revealed that the company was aware of the added ingredient. It
was claimed that they added melamine to boost the protein count, making the milk more
attractive to mothers. In the end, several key people at Sanlu were arrested along with some
government officials. The cover-up extended far beyond just a few corporate executives. Sanlu
Group is one example of how the public disclosure test may have saved lives.

Universalization Test
Finally, the universalization test prods us to think about how the world would be if everyone
made the same decision. In other words, if a decision you make in business was replicated by
every other business, what would happen? Would it benefit society? Would people get hurt?
How would it affect the economy if companies made universal hiring decisions? Let's look at an
employment discrimination case to get a better idea of how an employment suit could have
devastating consequences if everyone believed in the same principles.

In EEOC v. Rock-Tenn Services Co., a manufacturing company in Atlanta was sued because of
discriminatory practices against several black and African employees. In the lawsuit, it was
alleged that the management of Rock-Tenn created a hostile work environment. This included
using racial slurs and even threats. There were Confederate flags and even nooses used to send
their message of hate. The Equal Employment Opportunity Commission brought suit and won,
costing this company tens of thousands of dollars in damages.
Imagine if all companies mimicked the decisions of Rock-Tenn. What a negative impact this
decision would have on our culture-rich workforce!

Lesson Summary
As you can see, managers face difficult decisions every day. These decisions don't always
balance what is right and the right thing to do. Ethical decision making is merely making
decisions based on what ought to be done to benefit the maximum amount of people. With this
comes corporate social responsibility, and it means a corporation's enterprise to be cognizant of
the environment and society when making decisions.
Three popular ethical decision-making models include the Golden Rule; that is, doing to others
as you'd like have done to you. There is also the public disclosure test, which proposes whether
a decision made by management is worthy to appear on television for all of society to see.
Finally, the universalization test forces us to think about whether a decision we make, if
replicated by everyone else, would benefit society. Each decision-making model really asks the
same question. Are the decisions I make of great benefit to society and the environment?
Legal rights are those rights provided to citizens through the Constitution and other articles of
the US legal system. Natural rights are rooted in the ethical, based on what is right or wrong.
Learn more about ethics in this lesson.

Theory of Ethics
It's difficult to say exactly what ethics is, but we can say that it involves a standard of what is
right and wrong based on what people ought to do. This may include:

Our obligation to society

What benefits society rather than the individual

Being fair to others

This seems rather vague and, quite frankly, it is. This is mostly because there is no specific
definition for each standard that can be considered part of ethics, nor are there specific guidelines
as to what standards even fall under the definition of ethics. We can, however, safely assume that
most people in society think that things like rape, adultery, stealing and murder are wrong and
should not be tolerated. However, people's points of view always differ. For example, some

people may think that killing that happens during war is murder, while others will disagree, and
that's where things get complicated.
So, how are standards set for society? Can every act be covered under what ought to be?

Legal Rights vs. Natural Law

Legal rights are those rights that are provided to us through things like the Constitution and
include things like the right to bear arms or freely practice a chosen religion. These are rights that
are man made and are a set of laws that people in a specific society must follow.
Rights that are innate, that we believe every human should have, are called natural rights. These
are rights given to us at birth that are universal and based on principles like expression, thought,
beliefs, customs and even privacy. Some people believe that these rights are granted by a higher
power, while others believe that these rights are simply an innate part of being a human.
Let's see some examples of the differences between these two types of rights.
Under natural rights, one has a right to expression, yet under man-made law in the U.S., one
cannot commit slander, or verbally defame someone's character by making false statements that
can harm a person's reputation. In order to make sense of this, philosophers, like Locke and
Kant, developed ethical theories to help us find the path to making right decisions.

Ethical Theories
In this section, we will explore several ethical theories. Deontology is about strict adherence to
rules regardless of consequences. For example, people who believe that the death penalty should
always be enforced even though some innocent people are executed might be described as
having a deontological point of view.
The deontologist seems noble in his actions. But there is a negative side to this type of person.
Suppose we meet a deontologist who believes that it his obligation to provide the financial
stability for his family.
If this deontologist were to lose his job, he may no longer be able to provide for his family. Let's
say his children are starving and need some food, and his wife tells him that if he does not rob a
grocery store across the street, the children could die. Our deontologist would never rob that
grocery store because he knows it's illegal. It's against the rules to rob a store, and the
consequence of his children starving is less important to him than the rules.
Consequentialism is another ethical school of thought. Consequentialists believe that actions are
defined as good or bad based on the consequence for their action. In other words, the end result
justifies the means. A consequentialist may believe that the price of gasoline is too high and,
thus, be a proponent of war on countries that control oil. So, if killing a few thousand soldiers is
required in order to get cheaper oil, then the end justifies the means.

Some theorists believe ethical relativism is the right thing to do. This means what is morally
right or wrong depends on the norms in one's culture. This means that there is no one universal
moral code by which all people live.
This theory can be related to the issue of undocumented migrant farm workers in the United
States. It has been common practice amongst some farmers to hire undocumented immigrants to
harvest crops. This is done mostly because these workers are willing to work for very low wages
and no benefits. The problem with this practice is that it affects competition amongst farmers that
hire documented workers and pay a legal and fair wage.
Depending on your relative position on low wages and the immigration debate, you may find it
ethically acceptable and fair for these farmers to pay undocumented workers at a lower-thanlegal wage, or you may find it exploitative and morally reprehensible.
On the other hand, moral absolutism holds that the same standards apply in every situation
regardless of culture or other factors. Let's say you meet a woman from Sweden who thinks it is
morally wrong for the United States to provide no public healthcare for its citizens. Even though
many Americans have value systems that do not emphasize public care programs the way most
Swedish people do, your new friend from Sweden believes that it is morally wrong for the U.S.
to have no public healthcare system. The cultural differences between these two countries do not
make a difference to her in this case. She is seeing the situation through moral absolutism.
Sometimes, it comes down to a person's reputation. Virtue ethics says that it is not a person's
actions that determines whether he is moral or not; it is his character that should be taken into
consideration when making judgment. A person who generally treats people well will be less
likely to be judged as immoral when committing an act against society than someone who
habitually and deliberately hurts others.
Care ethics reminds us that people are relational beings and require care in relationships.
Adherents to this theory believe that there is no set of standards that define what is right or
wrong. It is more about taking another person's feelings into consideration when making moral
decisions.
Assisted suicide may be an example of care ethics. Even if you believe that killing others is
wrong, you might have a different point of view if the person being killed wants to die because
they are suffering. This form of ethics is unlike the others as it is more psychological than
calculated.
Each ethical principle relies on its own standard. This helps to explain why society cannot solely
depend on moral code. Laws must be established as this ensures a true set of standards to which
behavior can be measured.

Lesson Summary
In sum, ethics involves a standard of what is right and wrong based on what people ought to do.
It speaks to our obligation to society, what benefits society and what is fair.

Ethical principles cannot replace law. Natural rights are rights given to us at birth that are
universal and should be granted to every human in every society, like expression, thought,
beliefs, customs and even privacy. Legal rights are a set of laws that people in a specific society
must follow.
We explored several ethical theories. Deontology is the strict adherence to rules regardless of
consequences. Consequentialism is the belief that actions are only as good or bad as the
consequence for the action. Ethical relativism holds that what is morally right or wrong depends
on the norms of one's culture.
Moral absolutism is the belief that the same standards apply in every situation regardless of
culture or other factors. Virtue ethics says that it is not a person's actions that define whether he
is moral or not; it is his character that should be taken into consideration when making judgment.
Care ethics reminds us that people are relational beings and require care in relationships. Again,
these are not replacements for man-made law. They are guiding principles for our lives.
Lawyers play an important part in business, but they must follow model rules
regarding ethics. This lesson addresses legal ethics in business law, including
malpractice, attorney-client privilege and conflicts of interest.
Model Rules

Lawyers play an important part in many business decisions. In the regular course of business,
lawyers are required to observe certain rights and duties. These legal obligations to clients and
others are also generally known as legal ethics.
Lawyers have a code of ethics that provides individual attorneys with the minimum professional,
behavioral and moral standards expected in their business dealings. Many different professions,
especially those requiring a license, have a professional code of ethics. For attorneys, the code is
known as the Model Rules of Professional Conduct and is set out by the American Bar
Association. All states have adopted a form of this code, though different states have adopted
different versions of the rules.
Once a state enacts a rule, that rule becomes enforceable public law. This means that an attorney
can be punished for a violation of the code. A lawyer's ethical violation will result in discipline
by the appropriate bar association. Discipline can include a fine, a suspension of his or her
license to practice law, or even a permanent loss of that license. Let's take a look at some ethical
considerations covered in this code.
Malpractice

Let's start with malpractice. Legal malpractice refers to negligence or misconduct by a lawyer in
the course of his or her professional duties. The code of ethics sets out a minimum standard of
care and conduct that a lawyer must achieve. When a lawyer fails to achieve that standard, the
lawyer commits malpractice. This is most common in the case of negligent errors.

For example, let's say that Caitlyn Client hires Lenny Lawyer to represent her in her divorce.
Caitlyn and her husband are arguing over some land. Caitlyn tells Lenny that she should be
awarded the land because she inherited it from her grandmother, and it's always been in her
family. However, Lenny fails to pull the land deed or title and doesn't present any evidence
regarding Caitlyn's sole ownership. As a result, the land is awarded to Caitlyn's husband.
Lenny failed to act with the legal skill and knowledge that is ordinarily expected of licensed
lawyers, and Caitlyn was harmed as a result. Lenny committed legal malpractice. Caitlyn can file
a complaint against Lenny with the bar association and also ask the judge to re-hear her
argument.
Attorney-Client Privilege

Now let's take a look at the attorney-client privilege. This privilege protects confidential
communications between a client and his or her lawyer. It protects any exclusive
communications made between the parties in the course of their business together. In other
words, anything the client tells the attorney while seeking legal assistance is protected. This
ethical rule promotes open communication and complete disclosure between the parties.
If the client chooses, he or she may waive the privilege and disclose certain information.
However, the attorney may not. Also, keep in mind that courts determine the availability of the
privilege on a case-by-case basis. Clients should know that there's no set rule providing absolute
protection for all communications.
There are numerous exceptions to attorney-client privilege. For example, communications made
in furtherance of a crime, such as fraud, are not protected. If an attorney is accused of
wrongdoing, he or she can disclose communications that would disprove the accusation. This
exception benefits attorneys in malpractice and similar disputes. Also, communications that
aren't exclusive to the attorney and client aren't privileged.
Let's go back to Caitlyn's divorce case. Let's say Caitlyn tells Lenny she's hiding several hundred
thousand dollars from her husband. She says she used fake names and offshore bank accounts to
siphon large portions of their income for her own use. She doesn't want any of this money
awarded to her husband. Lenny cannot misstate Caitlyn's worth without perpetuating a fraud on
the court. Therefore, Caitlyn's disclosure to Lenny isn't protected by the attorney-client privilege.
Conflicts of Interest

Lastly, let's take a look at conflicts of interest. A conflict is a clash between an attorney's
professional obligations and personal interests. It arises when an attorney uses the attorney-client
relationship for his or her personal benefit. The code of ethics forbids this behavior because
attorneys are sworn to uphold the best interests of their clients. An attorney can't properly
perform that duty while also trying to achieve personal gain.

For example, let's say that Lenny advises Caitlyn to sell her vacation home in Barbados in order
to fund her divorce. Caitlyn puts it on the market for half the home's value in order to facilitate a
quick sale, and Lenny quickly purchases it. This is a conflict of interest, and Lenny can be
disciplined for his actions.
Lesson Summary

Let's review. Lawyers have certain legal obligations to clients and others. These duties are
generally known as legal ethics and are set out in the American Bar Association's Model Rules
of Professional Conduct. This code of ethics includes numerous rules, but some of the most
common involve malpractice, the attorney-client privilege and conflicts of interest.
Malpractice means negligence or misconduct by a lawyer in the course of his or her
professional duties. The attorney-client privilege protects confidential communications between
a client and his or her lawyer. A conflict of interest occurs when an attorney uses the attorneyclient relationship for his or her personal benefit.
White collar crimes involve criminal activities committed by people in the regular course of their
business and involve bribery, extortion, fraud and embezzlement. These crimes usually end in
financial gain for the perpetrator.

White Collar Crime

Not every crime involves a smoking gun. Some crimes are committed right under the victim's
nose without a single shot fired! White collar crimes are criminal acts that are performed by
people in the course of business committed for financial gain. These types of crimes can cost
citizens millions of dollars!
These crimes are difficult to prosecute because they often involve sophisticated systems and even
many different people. Frauds typically committed are:

Bribery

Extortion

Fraud

Embezzlement

Cybercrime

Government can prosecute both the individual committing the crime and the corporation for
which he works.

Fraud
Sometimes, not-so-virtuous business people fraud their clients by misrepresenting facts through
words and actions for financial gain. The deceit is intentional and meant to cause the victim to
take action upon the facts. The action usually results in a financial injury.
There are certain elements that must be present in a fraud case:

A false statement of material facts occurred

The defendant was aware that the statements made were false

The defendant meant to make the false statements

The victim relied on the statements to be true

The victim lost something as a result of the false statements

It is important to understand that not every false statement of fact can be considered a fraudulent
act. The statement must be considered a material fact, or a statement that is of such significance
that the fact or facts alone were used by the victim to make an important decision.
Let's say Ramona responded to a classified ad posted by Dwight for an apartment rental. After
touring the new digs, Ramona signed on the dotted line and handed Dwight the sum of $1,000.
That is one month's rent and security deposit.
A few weeks later, Ramona arrived at the new apartment to find that tenants occupy the place.
She discovered that the apartment was never really for rent. Dwight posed as the owner of the
apartment and collected the deposit. As it turned out, he was never a party to the apartment at all.
He happened to have a key to the unit from an old girlfriend. He owned nothing!
Dwight is a swindler, and Ramona is the victim of a fraud. The material facts in this case are
Dwight's actions. By showing Ramona the apartment using a key to access the unit and accepting
her money, he acted like a landlord.
There are several types of crimes that are considered fraud:

Insider trading

False pretense

Forgery

Insider trading is not entirely fraudulent. Companies can buy and sell stock to their partners and
employees as long as the trades are reported to the governing authorities. It becomes illegal when

stocks are bought and sold based on information received in violation of a fiduciary trust,
meaning information was exchanged between parties where one party had a duty to keep the
information private from the public.
Suppose you work for a pharmaceutical company that was working on a cure for cancer. In the
course of your day, you receive an email unintended for your eyes that reads, 'Cure for Cancer to
be Announced Tomorrow.' Armed with this information, you quickly get under your desk and
begin secretly calling friends and family, urging them to buy stock in your company
immediately. Within hours, all of the available stock shares have been bought - there wasn't a
share left for anyone. This is insider trading! You used confidential information that was not
meant for the public for your own financial gain and that of your family and friends.
Another type of fraud is false pretense and involves defrauding someone by using false
statements for financial gain. It generally involves the transfer of personal property. A fraud
recently making news involved the selling of supposedly winning lottery tickets to unsuspecting
victims. To elaborate, the defendant holds what he claims to be a winning lottery ticket in his
possession. He approaches his victim and requests that the victim pay him a portion of the
winning proceeds in exchange for the ticket.
While most people would run from a scammer with a story as full of holes as this, the defendant
explains further that he cannot cash in the ticket because of an immigration issue or a tax lien.
Once he gains the trust of the victim, money is exchanged. All along, the defendant knows the
ticket is worthless. The victim, however, believes differently. By the time the victim reaches the
lottery center to find out the ticket is worthless, the defendant is miles away!
Forgery is a crime in where someone falsely alters or changes a document or creates a document
or signature that is not their own with the intent to fraud another person. This sounds confusing,
but it is really as simple as signing a check with the name of someone else with the intent of
cashing it.

Bribery
We explored several ways to commit non-violent crimes for financial gain. Now we will
investigate some other common ones. Bribery involves using something of value, like money, to
influence the decisions of others, and this is common in deals that offer high stakes, like
contracts for products or services.
To understand this better, suppose a project manager is in charge of making major purchasing
decisions for a building project. The proper procedure may involve soliciting several bids for
parts of the project and choosing the lowest priced bid for services. However, if one bidder offers
the project manager a Caribbean cruise in exchange for the business, he is bribing the project
manager in order to get the business. In most cases, it is illegal to accept such a favor in
exchange for accepting a bid for services. This is especially true of government agencies.

Extortion

In business dealings, it is illegal to take something from another person without their consent.
Extortion is just that. It is the seizing of property of another person by threat of force or even
actual force. Force can be a violent act or even placing a person in fear of something terrible to
come.
Here is an example that may clear things up. Suppose Sonny borrowed a sum of money to pay
off a gambling debt from Bruno, a local loan shark, but refused to pay him back. Bruno wants his
money and knows that the only way he can secure it is to make demands on Sonny. One thing
Bruno may do is threaten to break Sonny's knees. He may also threaten to talk to Sonny's
business partner to discuss the gambling debt and the loan. Either way, Bruno is attempting to
extort Sonny by using violence or a threat of a terrible act to get his money back. And this is
illegal!

Embezzlement
Embezzlement is another way to commit a fraud against another person. This crime involves a
victim's property or money being taken by a person whom the victim trusts. This generally
applies to employers or business partners. If an employee is given the latitude to access bank
accounts, it may be tempting to snag a few frog-skins. Transferring large sums of money from
the corporate savings account into your personal account without permission is embezzlement.

Cybercrime
Another crime that is reaching new lows is cybercrime, and it involves criminal activity over the
Internet, like identity theft, fraud and email scams. Let's face it! Many of us received an email
telling us a deposit for $1,000,000 is waiting to be deposited into our bank account by a Nigerian
national. While it is tempting to send over a bank account number and dream of ways to spend
the financial windfall - it's a scam! It is a cybercrime that involves an intricate string of people
who seek out vulnerable people in an attempt to retain and access bank accounts with the
intention of withdrawing money.
Although most people do not report this type of crime because of shame and embarrassment, one
Internet source explained that approximately 7% of people who are solicited through email
actually respond and provide the scammers with their bank account information. That is pretty
shocking news!

Lesson Summary
White collar crimes are criminal acts that are performed by people in the course of business
committed for financial gain. Crimes include bribery, extortion, fraud, embezzlement and even
cybercrimes. Fraud is the act of misrepresenting facts through words or actions for financial
gain and includes insider trading, false pretense and forgery. Fraud cases generally rely on
material facts, which are statements that are of such significance that the fact or facts alone
were used by the victim to make an important decision.

Insider trading happens when stocks are bought and sold based on information received in
violation of a fiduciary trust. False pretense involves defrauding someone by using false
statements for financial gain and generally involves the transfer of personal property.
The last type of fraud is forgery, and it is a crime in which someone falsely alters or changes a
document or creates a document or signature that is not their own with the intent to fraud another
person. Other types of white collar crimes are bribery, embezzlement and extortion. Bribery
involves using something of value, like money, to influence the decisions of others, and this is
common in deals that offer high stakes, like contracts for products or services.
Extortion is the seizing of property of another person by threat of force or even actual force.
Force can be a violent act or placing a person in fear of something terrible to come.
Embezzlement is another way to commit a fraud against another person. This crime involves a
victim's property or money being taken by a person whom the victim trusts. This generally
applies to employees or business partners.
Corporations, just like individuals, can be tried and convicted of committing crimes if managers,
directors or even ordinary workers commit the crimes. There are two types: strict liability and
vicarious liability.

What Is Corporate Crime?

You may have heard the term 'white collar crime' in the news. Well, corporate crime is just that.
A crime committed by any person through the venue of his employment that benefits the
business. This means that if an employee does something illegal to benefit the organization, the
corporation itself can be held liable for the employee's actions.
That might sound counterintuitive. You may be scratching your head thinking, 'as a manager,
how can I be responsible for the actions of every employee?' Believe it or not, as a business
owner, you are.
Here are a few ways in which an employee can get into a corporate crime pickle:

Bribery

False claims

Embezzlement

Insider trading

Violation of environmental laws

Bribery involves offering to take or taking money from someone to influence them to do
something they would not ordinarily do, like offering a city official money to approve a building
permit.
When a company makes false claims, they are making statements that are not truthful to
customers. These claims are especially damaging in advertising. Imagine ordering a low fat
shake day after day only to find out the company falsely claimed its calories and fat to be much
lower than they really are. Repeated purchase of this product under these false pretenses could
potentially lead to health problems, weight gain or even death.
One of the most devastating corporate criminal acts is embezzlement because it hits the pockets
of innocent people. This is when money or other valuables are converted into personal or
corporate gain by a person whom others trust.
Let's say the purchasing agent at a company accepts kickbacks from a vendor in order to ensure
their continued business. These kickbacks may be in the form of money or gifts, like vacations or
even jewelry. The employee, by accepting the kickbacks, is personally benefiting from the
vendor on the side. This is illegal because assets are being withheld from the company and only
benefiting these two individuals.
Insider trading is a very serious crime. It involves buying and selling stocks based on nonpublic information. This is such a serious crime because those in a position of trust hold
information that the general public does not have access to. With the information, only a certain
few can enter into lucrative stock purchases or sales earlier and stand to gain more.
Our natural surroundings are something most people hold precious. But some companies do not
feel the same way. Violating environmental laws by polluting the air and water or destroying
trees and wildlife holds devastating effects on everyone's health and welfare. A chemical spill
due to negligence in the ocean, for example, can kill seabirds and destroy their natural habitat for
years to come. It should be pretty clear that someone will be in trouble if this sort of thing
happens.
Now that we learned a few ways corporate crime occurs, let's see what liability a corporation
holds to crime.

Corporate Criminal Liability

Corporate liability simply means the extent to which a corporation is responsible for the actions
of its employees. There are two ways in which a corporation can be liable:

Strict liability

Vicarious liability

Strict liability is compulsory when an act causes damage, injury or death, even in the absence of
criminal intent. This is used as a way of forbidding the act from occurring again.

Think about a restaurant serving food that has expired. While the chef may have the owner's best
interest in mind by serving expired food rather than throwing it away, he is potentially subjecting
diners to food-borne illness, sickness or death. The chef did not intend to do anything illegal. But
in the end, if a customer were to fall ill, the owner would be liable for the chef's actions.
Now, vicarious liability is a little different. It means that an employer is responsible for an
employee's actions when the employee acts in negligent ways. For example, if an employee who
imbibes a few Long Island Ice Teas on his delivery route gets into an accident, the employer will
be liable for any damages, injury or death that results from his employee's actions. This is true
even if the employer did not know that his employee was drinking on the job.
Let's see what happened to a well-known food distributor when he left some of his more
negligent employees to handle things.

United States v. Park

In United States v. Park, a CEO and his employees were convicted of storing food in a rodentinfested warehouse. This was in clear violation of state law as it relates to the storage of food that
is moved between states. When the case first broke, Park, the CEO of Acme International, did
not conform to the U.S. Food and Drug Administration's mandate to maintain sanitary conditions
in his food warehouse. He was cited and then re-inspected.
On second inspection, Park had done nothing to fix the problem: the warehouse remained
infested. In court, it was held that Park, as the representative of Acme International, was strictly
liable for the conditions of the warehouse. Furthermore, the court decided that he and the
employees responsible would be convicted with corporate criminal behavior.
It bears mentioning that if the situation could not be remedied, Park probably could have beaten
the rap. However, infestation can be controlled or even eliminated with proper sanitation and a
few well-placed mousetraps. This case demonstrates the extent to which a corporation is liable
for the actions of its employees.

Lesson Summary
To sum it up, corporate crime is a crime committed by any person through the venue of his
employment that benefits the business. There are several ways to commit a corporate crime.
Embezzlement, false claims and bribery are just a few.
Corporate liability is the extent to which a corporation is responsible for the actions of
employees. There are two types: strict liability and vicarious liability. Strict liability is
compulsory when an act causes damage, injury or death, even in the absence of criminal intent,
and vicarious liability means that an employer is responsible for an employee's actions when the
employee acts in negligent ways. As an example, United States v. Park showed us that a CEO is
responsible for his employee's actions even though they were not meant to be criminal acts.

There are three acts that deter corporations from committing crimes that affect customers,
shareholders and employees: RICO Act, False Claims Act and Sarbanes-Oxley Act. Each act
protects against various crimes, but all of the acts hold businesses accountable for their actions.

What Is a Business Crime?

Simply, a business crime, often called white-collar crime, is a crime that is either financial or
economical that is committed by corporations and their employees, like fraud, that has a negative
impact on investors, employees and customers.
There is a long list of business crimes, including:

Embezzlement

Tax evasion

Insider trading

Anti-trust violations

Bribery

Money laundering

To name a few! Because business crimes have far-stretching consequences, legislation created
acts to deter businesses from committing crimes. We will focus on three important acts designed
to discourage corporate leaders from acting in ways that violate investors and others: the RICO
Act, False Claims Act and Sarbanes-Oxley Act.

RICO Act
RICO stands for Racketeer Influenced and Corrupt Organizations and is generally applied in
federal court for crimes committed by individuals and corporations, like mail and wire fraud, but
can include extortion and financial fraud. Actions that violate the RICO Act can be criminal or
civil acts. The RICO Act was originally established to prosecute mafia activities but has been
extended to include corporations.
To better understand the act, let's define racketeering as carrying on a set pattern of illegal
business activities, like extortion or fraud, perpetrated by those who own the business. A pattern
means that at least two criminal activities occurred by the business.
An example may help. In a case reported by the Federal Bureau of Investigation (FBI), owners
Frank Colacurcio, Sr. and Frank Colacurcio, Jr. operated a strip club in Seattle, Washington. In
the course of doing business, the pair also ran a prostitution ring. Violation of the RICO Act was

easy to establish. Prostitution is illegal in most states, including Washington, and the prostitution
business was ongoing. It was established that the Colacurcios set a pattern of moving money
earned by prostitutes through his legitimate business.
Typically, prostitution is a cash-only business. As a result, other crimes go hand-in-hand with
money laundering, like tax evasion and mail fraud. Hiding cash revenue and misleading
authorities about the amount of people served at the strip club further prove the act's violation.
Simply stated, the Colacurcios were able to accept cash for illegal activities, report only a
fraction of income and avoid paying taxes on actual income earned. Tax evasion also violates the
False Claims Act.

False Claims Act

The False Claims Act was established in the 1800s to deter citizens from requesting benefits
from the Army. In recent times, it is used to punish people who file false claims with the
government for the purpose of receiving a benefit that they did not earn or do not deserve.
To establish a violation of the False Claims Act, a few things need to be established:

The defendant has actual knowledge of the false claim.

The defendant deliberately ignored the truth.

Disregard was reckless.

Doctors generally accept both private and government insurance as a means to offset the cost of
a visit. Once the patient leaves the office, there is really no way of knowing what services the
doctor will bill the insurance company for. What we do know is that a doctor can only bill for
services he actually performed.
If an unscrupulous doctor bills a government-issued insurance plan, like Medicaid, for services
he did not perform on a patient, he is committing a crime. The important element in an insurance
fraud case is intent. The doctor must know the information is false yet continue billing the
company. You may have noticed by now that fraud seems to be the common thread amongst
business crimes. Let's take a look at an act that holds corporate executives liable for financial
reporting.

Sarbanes-Oxley Act
The Sarbanes-Oxley Act was established in 2002 to hold corporate executives accountable for
the financial operations of an organization, mostly in the area of financial reporting.
There are 11 sections that comprise the act, but it can be defined as:

Senior management must certify the legitimacy of any and all financial reports.

Internal controls that relate to reporting of accounting and financial data must be
established.

This means a corporate executive, like chief financial officer, must certify financial reporting of
any kind by their company. Once certified, the information contained in the financial report is
said to be accurate. Any inconsistencies become the responsibility of the person who certified the
report. In other words, the certifying party becomes responsible for the reported information,
both professionally and personally.

Lesson Summary
In sum, a business crime is a crime that is either financial or economical that is committed by
corporations and their employees, like fraud, that has a negative impact on investors, employees
and customers, and may include money laundering, tax evasion or fraud. Our focus was on the
RICO Act, False Claims Act and Sarbanes-Oxley Act.
The RICO Act stands for Racketeer Influenced and Corrupt Organizations and is generally
applied in federal court for crimes committed by corporations and individuals. Racketeering
involves carrying on a set pattern of illegal business activities, like extortion or fraud, perpetrated
by those who own the business.
The False Claims Act is used to punish people who file false claims with the government for the
purposes of receiving a benefit that they did not earn or do not deserve. Finally, the SarbanesOxley Act was established to hold corporate executives accountable for the financial operations
of an organization, mostly in the area of financial reporting, and requires senior management to
certify the legitimacy of any and all financial reports, and internal controls that relate to reporting
of accounting and financial data must be established.
The Security Exchange Commission (SEC) requires that publicly traded companies disclose
financial information to their investors. Common registration violations include selling nonexempt securities, untrue statements, misstatements or omissions.

Securities Act of 1933

When businesses need to raise capital for special projects that require big money, they offer
securities for purchase to investors. These are financial instruments that make an investor a
partial owner of a company, and this instrument can be traded in secondary markets.
When a company needs extra cash to expand or make some major extensive changes, it would be
in their best interest to present themselves in the best light. After all, they are asking investors to
fork over money.
One way to do this is to make the company look attractive to investors. A company may do this
based on attributes like low debt, high projected sales, and profits using truthful data.

Or, a not-so-nice company may report financial information that is just not true. So, in order to
be sure that every company that offers the sale of securities is doing the right thing, Congress
enacted the Securities Act of 1933. This act does two things:
1. Requires that companies that sell securities provide full financial disclosure
2. Ensures that information reported is truthful
The end goal of the act is to provide investors with the assurance that the companies they invest
in are providing correct and accurate information. As with many things, some companies don't
do the right thing. Well, the act provides investors with the right to take action against a company
if the company violates any one or number of sections of the act.

Security Act of 1933 Violations and Remedies

There are several provisions, which can be used as the basis for bringing an action against a
company in violation of the Securities Act of 1933. Our focus is on three provisions.
In Section 11, it states that a publicly traded company cannot make untrue statements of material
fact or leave out any information that investors need to make a decision. In other words, a
company is required to fully disclose their financial condition to potential and current investors.
If an investor believes untrue statements were made that directly influenced his decision to
purchase the investment, he may recover. However, it is important to understand the timeline in
making a claim.
Let's say an Initial Public Offering (IPO), or the first time stock is sold by a company, is up for
grabs. The investor may base his decision on information conveyed by the offering company.
Since this is the first time the company is selling securities, the reported information may be
limited. If, after several months, the investor believes that the information stated about the IPO
was wrong, it may be difficult to prove since the company does not have a security sale track
record.
A legal case may help. In Hertzberg v. Dignity Partners, Inc., Hertzberg, the plaintiff, purchased
stock in Dignity Partners based on its initial public offering. Dignity Partners was a company
who purchased life insurance policies on AIDS patients with the intent of cashing in on the
policy when the patient died. Since AIDS patients started living much longer lives than they had
in the past, the company had to pay out premiums for a much longer period of time. This caused
financial disaster for them.
Hertzberg filed suit claiming that under Section 11, the company left out material facts in its
offering. Mostly, the company did not reveal the data on the lifespan of AIDS patients.
Unfortunately, the court ruled in favor of the defendant, Dignity Partners, citing that the claim
had to be made one year after the public offering or three years after registration. This gives the
company time to substantiate the facts they first made and make good on their promises.

Before moving on to the next violation, it is important to understand the difference between an
exempt security and a non-exempt security. An exempt security is a security that does not have
to be registered with the Security Exchange Commission. For example, a treasury bond or a
municipal bond is exempt. The reason a security like this does not have to be registered is
because the government backs it. There is minimal risk on the part of the investor. Non-exempt
securities must be registered because they carry a higher risk. Publicly traded companies, rather
than government, report the financial facts. So, they must be regulated to keep investors safe.
This brings us to a violation of Section 12(a)(1). In this section, it states, an investor can sue a
company if there is a sale of non-exempt security that has not been registered. As long as the
accuser can provide a paper trail, a claim can be made against the company.
Now, similar to Section 11, Section 12(a)(2) states any person selling a security through either a
prospectus or a communication that provides misstated material facts or leaves information out
intentionally is liable for his actions and the securities purchase may be rescinded.
In Sanders v. John Nuveen & Co., Inc., the question of whether misstatements made by a
certified accountant could be used for damage recovery was asked. John Nuveen & Co. was the
underwriter for a securities purchase by Sanders. At some point, it was discovered that the
information disclosed in the prospectus was incorrect. Sanders took Nuveen to court. On appeal,
it was ruled that Nuveen, the underwriter of the securities, could be held liable for the disclosure
statements by the accountant. This case demonstrates the importance of truth in disclosure in
financial statements and prospectus.

Lesson Summary
To sum things up, the Securities Act of 1933 was created to do two things. It requires that
companies that sell securities provide full financial disclosure and ensures that information
reported is truthful. This holds any company that sells securities for purchase to investors
responsible for their actions. Securities are financial instruments that make an investor a partial
owner of a company and this instrument can be traded in secondary markets.
Our focus was on three provisions:
1. In Section 11, it states that a publicly traded company cannot make untrue statements of
material fact or leave out any information that investors need to make a decision.
2. Section 12(a)(1) states that an investor can sue a company if there is a sale of nonexempt security that has not been registered.
3. Similar to Section 11, Section 12(a)(2) states that any person selling a security through
either a prospectus or a communication that provides misstated material facts or leaves
information out intentionally is liable for his actions and the securities purchase may be
rescinded.

Although there are other sections, these three sections demonstrate the importance of truthful
disclosure.
Exempt securities are financial instruments that do not need to be registered with the Securities
Exchange Commission (SEC). They are generally backed by the government and may carry a
lesser risk than securities offered by public companies.

Section 4: Exempt Securities

Securities are financial instruments sold by publicly-traded companies or governments to
investors. The revenue from securities is used as a means of raising capital. Many of these
instruments are non-exempt, so they must be registered with the Securities Exchange
Commission (SEC) and abide by the provisions of the Securities Act of 1933.
In short, the Securities Act of 1933 does a couple of things. It requires that a publicly held
company disclose full financial information and that the information is truthful. Not to confuse
things, but each state may have different rules for registration.
However, not every security must register with the SEC. Exempt securities, under Section 4 of
the Securities Act of 1933, are financial instruments that carry government backing and typically
have a government or tax-exempt status. Let's take a look a few examples to better explain this
type of security:

Government securities

Foreign government securities

Bank or financial institution securities

Insurance

Public utility and railroad securities

Non-profit securities

Employee benefit plans

A careful look at the list will show that each of the exempted securities is related to a government
function. Bonds, CDs and money markets, life insurance and even 401Ks are backed or insured
by the government. These investments are generally not too risky. For the riskier investor,
provisions in Regulation D may be helpful.

Regulation D

The Securities Exchange Commission says that certain securities can be exempt from
registration. Regulation D contains three specific rules that apply to exemptions Rule 504, Rule
505 and Rule 506.
Rule 504 allows a company to sell securities if one of the following conditions is met:
1. The company must register the offering exclusively in a state where registration is
required, and financial disclosure must be provided to investors.
2. The company sells in both a state that requires registration and in one that does not
require registration and provide full financial disclosure.
3. The company sells to accredited investors in a state that permits general solicitation and
advertising.
Said a different way, although exempt securities do not have to be registered with the SEC,
sometimes states require registration if the security is going to be advertised to their residents. In
this case, Rule 504 states that if an exempt security is advertised to a particular state's residents,
there may be a law about registration. In that case, certain securities must abide by that. In some
cases, exempt securities can only be sold to accredited investors. These are investors who have a
great deal of experience and sophistication in investing money. They do not need as much
protection as a less experienced investor.
Rule 505 states that securities are exempt under certain conditions like:
1. The company can only sell up to $5 million in securities over a 12-month time period.
2. The company can sell to as many accredited investors as they wish and are allowed to sell
to up to 35 less experienced investors.
3. The company must advise investors that the securities they purchased cannot be traded
for at least one year from purchase.
4. The company cannot advertise to the general public.
Remember, exempt securities do not require registration with the SEC. This means that there is
no provision that requires full and truthful disclosure of financial information. Rule 505 makes
the exemption possible for a company but it bears mentioning that under this rule, financial
information must be disclosed. Now, this is not to say that it has been tested under the scrutiny of
the SEC but it must be provided to, at minimum, the non-accredited investors.
Rule 506 is really the same as Rule 505, with a small difference. Rule 506 requires that the nonaccredited investors have some level of sophistication in investing. The financial disclosure
requirements remain the same.

It is important to note that Regulation D does require some degree of regulation. Securities
sellers cannot just freely sell without some formal policy. The Antifraud Rule applies to the
selling of all securities, regardless of whether they are exempt or otherwise. This rule states that
sellers must provide financial information that is free from misstatements or false information.

Lesson Summary
In sum, securities are financial instruments sold by publicly-traded companies or government to
investors, and the revenue from securities is used as a means of raising capital. Because there is
risk in investing, the Securities Act of 1933 requires that certain securities be registered. This
does a couple of things. It requires that a publicly held company disclose full financial
information and that the information is truthful.
However, there are exempt securities, under Section 4 of the Securities Act of 1933. These
securities are financial instruments that carry government backing and typically have a
government or tax-exempt status.
That is not to say that nobody is watching. Regulation D contains three specific rules that apply
to exemptions. Rule 504 sets rules on interstate sales of securities, Rule 505 sets parameters for
who can be solicited and limits the dollar amount of securities sold and to whom and Rule 506 is
similar to Rule 505 but requires that the sale of securities be to a savvy investor.
All securities, whether exempt or not must adhere to the Antifraud Rule. It states that all buyers
must be provided financial information that is free from misstatements or false information.
Securities fraud or insider trading is illegally trading stock on the open market using
confidential information. It is usually done to gain an advantage over other traders.
What Is Insider Trading?

Insider trading is the act of using confidential or inside information about a publicly traded
company to one's advantage to buy and sell stock, and it is illegal. You see, when an investor
buys and sells stock, it is sort of like gambling at a casino. The only difference is, at a casino,
there are no guarantees and winning is based mostly on luck.
In the stock market, buying is risky, but there are tools an investor can use to make the exchange
less risky. Financial reports and a company's prospectus contain truthful financial disclosure. An
investor will use this information to decide whether a stock has potential to pay dividends. A
publicly traded company's prospectus is available for all to see. It has to be according to the
Securities and Exchange Commission (SEC). This creates a level playing field for all parties who
wish to invest.
Now, when a few investors have confidential information that the general population is not
aware of, this creates an unfair advantage. This tipping is the process of supplying information
not disclosed to the general public by those with a duty to maintain confidentiality.

The investors, privy to the information, can make stock purchases or dump stocks they own
before any news hits the streets.
Exchange Act Section 10(b)(5)

The Securities Act of 1933 Section 10(b)(5) addresses insider trading by deeming it illegal for
anyone, whether directly or indirectly, in any way:
(a) Intentionally commits a fraud
(b) Makes untrue statements or misrepresent financial information
(c) Operates a fraud against another person when buying securities
This means that it is illegal for any person to buy or sell securities using information obtained
through confidential channels.
So what happens when a person is found guilty of insider trading? Let's see.
Penalties for Insider Trading

When a person is charged with the crime of insider trading, they may face both criminal and civil
liabilities. It really depends on the specifics of the crime.
If a person willfully committed insider trading, the penalty will be much more severe than an act
that may have had minimal, if any, intention.
How does a prison term of up to 25 years and fines of $5 million for individuals and up to $25
million for companies that engage in securities fraud sound? Not so fun, huh? Well, that may be
just what an offender will face in many cases.
There is also a Mandatory Victims Restitution Fund Act of 1966 (MVRA) that orders
restitution be paid to victims of an insider trading crime.
In a civil case, the penalty may be to give up all profits made from the trading frauds. They can
even make the defendant disgorge, or reverse any losses he avoided by fraudulently using the
information. Imagine that?
Let's take a look at a case that hit the tabloids not too long ago.
SEC v. Martha Stewart and Peter Bacanovic

Most of us know Martha Stewart for her tasty cakes and treats. Others may know her for her fun
and interesting crafts. But in federal prison, she was known only for her status as an inmate.

Back in 2001, Martha Stewart and her then stockbroker, Peter Bacanovic, committed securities
fraud by acting on inside information about a company called ImClone. Stewart obtained
information from Bacanovic about ImClone's much anticipated FDA approval of a cancer
treatment drug.
You see, Bacanovic learned that Samuel Waksal, ImClone's CEO, and his daughter had sold their
shares of company stock just prior to the FDA announcement. Once Bacanovic learned this, he
ordered his assistant to sell Stewart's shares as well.
This is the important piece of the puzzle. Bacanovic violated the law when he acted on
information that was not shared with the public. Information like this is valuable to any investor
because it tells a story.
Think about it. The CEO of the company sold all of his shares prior to a major announcement.
Selling his shares can be construed as a warning that the news may not be good. In fact, that was
the case in the end. The FDA did not approve the cancer-fighting drug, making ImClone's stock
less valuable.
In the end, both Stewart and Bacanovic were convicted of violating Section 10(b), amongst other
charges. Their penalties included disgorging, or paying back any gains from illegal trading
activity. Additionally, Stewart is banned from serving as a director of a company that has
registered securities with the SEC. She also served prison time.
In general, there are criminal penalties, like imprisonment, and civil penalties, like repaying any
gains earned from the act.
Lesson Summary

In sum, insider trading is the act of using confidential or inside information about a publicly
traded company to one's advantage to buy and sell stock. It is illegal to share information that has
not been publicly released. When this happens, it is called tipping.
Section 10(b) has clear language when it comes to leaking information. It states that it is illegal
for anyone, whether directly or indirectly, in any way to intentionally commit a fraud, make
untrue statements or misrepresent financial information, or operate a fraud against another
person when buying securities.
If someone was to violate this, penalties can be criminal and/or civil. Jail terms and repayment of
gains are highly likely.
Antitrust laws are statutes developed to protect consumers from rapacious business practices by
making it illegal for businesses to compete in unfair ways.

What Is Antitrust Law?

Antitrust law is a set of statutes developed to regulate competition between companies, mainly
to ensure that businesses are engaging in fair competition. The purpose of these laws is to protect
consumers from greedy business owners.
It all started back in the 1800s with government intervening in what they believed was unfair
competitive practices amongst a handful of business owners. It was thought that if a few
companies were able to control the market share, or the percentage of the total amount of
revenue generated from the sale of a product that is held by one single company, it would impact
competition. Only a few companies would have the highest market share, leaving little to no
room for others to enter into the market.
You see, competition is the struggle between businesses for the same set of consumers. For the
most part, it is fair. Businesses use strategies to entice a consumer to try their products or
services, hoping to gain a long-term customer.
However, there are times when companies conspire to alter competition in their favor. When this
happens, other competing businesses and individual customers are affected. It can be higher
prices, less availability of desired products or services or even create a monopoly, which is a
total market share taken by one single company, making it impossible for other competitors to
make a fair buck.
Other ways businesses can alter competition are:

Market allocation

Bid rigging

Price fixing

Market allocation involves two companies conspiring to divide a market in order for two
businesses to sell similar products at higher prices to drive away competition. For example,
Acme Meat Packing, Inc. and Beefy Meat Packing want to be the only two beef distributors in a
large city.
So, Acme and Beefy agree to split the list of those who purchase beef products and each
company will sell only to the customers on their list. Neither company will sell to businesses on
the other company's list. In fact, they may even quote higher prices to avoid making a sale.
While it may sound crazy to engage in market allocation, it actually makes sense. If two
companies service all of the businesses in a region by maintaining low prices, no other
competition can enter into the market.
Another way companies can skew competition is by engaging in bid rigging. This happens when
two or more companies agree to price bids unfairly.

An example may help. Bill's Plumbing Service, Joe's Plumbing Service and Pepe's Plumbing
Service agree to bid on every plumbing project for the city. Bill and Joe enter a really high bid,
while Pepe comes in low. Naturally, the city chooses Pepe's bid. Next time, Bill will come in low
while Pepe and Joe come in with higher bids. The idea behind this scheme is to make one single
bid look much more attractive. Eventually, all three plumbers will receive an offer.
Sometimes, two companies get together to set prices so that both receive an equal market share.
Price fixing happens when two companies set higher than average prices for a product that is
only available for purchase by the two companies. By setting the same price, customers will not
be motivated to be loyal to one store over another. Now, if both companies set higher than usual
prices for the same product, customers will not have a choice but to make the purchase from one
of the two companies. These actions can prove devastating to small business or, even worse, the
economy as a system. Government intervention is imminent.

Antitrust Acts
One way the government intervened was to create the Sherman Antitrust Act. This act was
written in the 1800s to prohibit manipulation of markets and stop monopolies.
A good example of this happened with Kodak, the camera and film company. The company was
selling both Kodak brand and private label brand cameras and film. This gave Kodak a strong
market share of the industry. This brought about a lawsuit because Kodak became one of the only
(and the largest) seller of these products.
In response to this, Kodak developed Kodacolor film. Only Kodak could develop this film. They
even charged a special fee above the processing fee for developing photos. This was in violation
of the Sherman Antitrust Act because it created a monopoly for the company. Following a
lawsuit, the company was forced to license the equipment to other companies, giving customers
a choice where to develop their photos.
The Clayton Antitrust Act made it illegal to engage in price discrimination or make exclusive
deals and allows for private lawsuits, labor union organization and regulation of mergers. Let's
break it down. Price discrimination refers to charging different prices to customers in the same
area. For example, Tony's Tomato Sauce Company cannot charge a significantly higher price to
certain pizzerias and less to others in the same market.
Exclusive deals are also not permitted. This means a company cannot be the exclusive provider
of complementary products. In other words, a coffee machine company cannot develop a
machine that takes only a certain type of coffee filter. This creates a monopoly. This is a difficult
to thing to prove. Sometimes a company creates an exclusive product because they want to
ensure the quality of the product and complementary products.
The Clayton Antitrust Act allows treble damages for private lawsuits where a private party
sues a business for violation of antitrust violations that had personal effects, like loss of money.
Treble damages are three times the amount a jury specifies.

Labor union boycotts are also protected under this act. Labor unions have the right to strike and
not be considered in violation of a company's right to competition. Finally, mergers, where two
or more companies merge to become one, are regulated under this act. The Federal Trade
Commission must grant permission to merge. This keeps a company from buying competing
companies to create a monopoly.

Lesson Summary
In sum, antitrust law is a set of statutes developed to regulate competition between companies,
mainly to ensure that businesses are engaging in fair competition. The three main areas of
violations are:

Market allocation

Bid rigging

Price fixing

The Sherman Antitrust Act was written to prohibit manipulation of markets and stop
monopolies, while the Clayton Antitrust Act makes it illegal to engage in price discrimination
or make exclusive deals and allows for private lawsuits, labor union organization and regulation
of mergers. The main goal of both acts is to ensure that consumers are protected from greedy
business practices by making it illegal for businesses to compete in unfair ways.
There are two types of restrictions under the Sherman Anti-trust Act. A horizontal agreement
between competing businesses includes price fixing, and a vertical agreement between sellers
and buyers includes engaging in resale price maintenance. Learn about both types of agreements
in this lesson.

Sherman Anti-Trust Act of 1890

The Sherman Anti-Trust Act of 1890 was enacted to disband monopolies and cartels to prevent
unfair competition. The purpose of the act was to ensure that all businesses that engage in
interstate commerce retain their right to fair competition. The Sherman Anti-Trust Act Section 1
states 'no company may engage in interstate commerce with the intention to scheme between
competitors to level the competition or gain market control.' Said a different way, it is illegal to
unreasonably restrain trade amongst competitors, and these agreements can be either horizontal
or vertical.
A horizontal agreement is made between competing businesses to manipulate competition
amongst all competitors in the marketplace. In contrast, a vertical agreement is made between a
seller and a buyer in where a retailer can buy products from one manufacturer but in the
agreement is restricted from buying from a competing manufacturer. Here are some examples of
both types of agreements:

Price fixing

Market allocations

Boycotts

Tying agreements

Monopolies

Price Fixing
Price fixing is a horizontal agreement involving competitors conspiring to raise, decrease, fix or
stabilize prices in a specific market. It sounds confusing, but it is really quite simple. Companies
who intentionally engage in price fixing do so primarily to manipulate prices to cause an unfair
advantage. This price manipulation creates a situation where, in many cases, competitors set
same prices on their products and it negatively affects others in the marketplace.
For example, Stone's Filling Station is located on the eastbound side of Route 1, and Hillbilly
Millie's Gas N' Go is located on the westbound side of the same highway. Both Stone and Millie
may set the same price of $1.68 per gallon. There is nothing illegal about it. However, if one can
prove that the owners made the decision to sell at the exact same price in order to affect the
natural market fluctuation that results from supply and demand, it would be illegal.
Both Stone and Millie know that there is going to be a big concert in town. People will be
traveling from the east and west to arrive at the destination. The destination, coincidentally, only
has two filling stations: one owned by Millie and one by Stone. There is no other place to get gas
for up to at least 100 miles in either direction.
If Millie and Stone conspire to raise gas prices to $3.98 per gallon, they are messing with the
natural ebb and flow of supply and demand. In other words, customers may need to fill up when
they arrive or before they leave the concert. They are given no choice but to pay a gouged, or
unfairly inflated price, for their fuel.

Market Allocations
Market allocations are also horizontal agreements and happen when competing companies
choose specific territories to sell products and neither company sells to the other company's
customers. What makes this arrangement illegal is it creates a monopoly for each territory. Let's
see if we can break this down. Suppose there were only two manufacturers of office copy
machines, Conglom Copier Co. and Comp-U-Copiers, Inc. and both make very similar products.
If the two companies decide to split the country into two, say north and south, with Conglom
selling copiers to the lower states and Comp-U-Copiers selling to the upper states, they will
create a monopoly in where the businesses in their territory have only one choice, which is to

buy from the company that sells exclusively in their location. With this type of illegal agreement
between the two companies, they have the ability to fix prices to whatever they desire because
the businesses that need to buy from them have no choice.

Boycotts
Boycotts are illegal vertical agreements between a group of businesses to stop using a company's
product or services in order to negatively affect their ability to compete in a market. Don't get me
wrong. A business has every right to choose whom to do business with. There is nothing illegal
about making prudent product choices. It becomes illegal when it is a concerted and deliberate
group effort to kick one company to the curb.
Let's say We Care Insurance Company decides to increase their payouts to doctors in a certain
territory only if they accept their insurance exclusively. We Care Insurance may contact all of the
doctors in the area to tell them about the new payment schedule. Since most doctors take several
insurances, there is built-in competition. However, by making an attractive offer to several
hundred doctors in one region, it could wipe out business for all other insurance carriers. On a
side note, it would be awfully inconvenient for patients who do not subscribe to We Care as well.

Tying Agreements
Tying agreements are vertical agreements where a manufacturer sells a product and the
necessary complementary products needed to use the tying product and forces the customer to
buy all complementary products exclusively from the manufacturer. Let's use Conglom Copier
Co. Suppose Conglom sells several hundred copiers to a major law firm. In the agreement to
purchase the copiers at a specific price, they require that the law firm also purchase paper from
Conglom exclusively.
In other words, regardless of whether paper is available at an office supply wholesaler for less
money, the law firm must only purchase paper from Conglom. This creates market domination
for Conglom on the sale of copiers and paper. Competing copy paper sellers cannot sell to those
who purchased copiers from Conglom.

Monopolies
Of the horizontal and vertical agreements we reviewed, monopolies are probably the most
dangerous. They involve one or very few companies who dominate a particular market, leaving
no room for others to compete. This domination could be market-based or even product-based.
Keep in mind, exclusive rights to sell in a specific venue is not really a monopoly. For example,
a ballpark may only sell a certain brand hot dog. Other hot dog companies cannot say that they
are being forced out of a market because a stadium has a right to choose one brand over another.
Where it gets a little sketchy is when only one company has a stranglehold on the market.

Way back before cars, trucks and airplanes were in full swing, stuff was transported far distances
using the railways. Because the railroad was the only way to get things from one place to
another, they held the market share as transportation providers. If a company needed to get their
lumber from Florida to Tennessee, the rail was the only way to make the delivery.
With this kind of control over the transportation of goods, railroad owners, and there were few,
could charge any price they desired. Businesses in need of their services were left with few
options but to pay or to not have their products hauled. As other modes of transportation became
available, this monopoly was disbanded. However, for products that are not easily transported by
other means, like gravel, sand, cars or livestock, it still in a way represents a small monopoly.

The Rule of Reason

The way the courts analyze whether a vertical or horizontal agreement exists is by using the rule
of reason. It is a doctrine that looks at a few things to determine whether the trade restraints have
had or will have a negative effect on competition, like:

Proof of a naked restraint where limitations were or will be placed on competitors

attempting to enter into a market, like price fixing

Proof that the restraints were or will be in place

Proof that the restraints have or will create market domination for one or a few
companies

Once the rule of reason is applied, a court can decide whether the trade restrains actually do
create unfair competition.

Lesson Summary
In sum, the Sherman Anti-Trust Act of 1890 was enacted to disband monopolies and cartels to
prevent unfair competition. Section 1 states 'no company may engage in interstate commerce
with the intention to scheme between competitors to level the competition or gain market
control.'
There are two types of illegal agreements. Horizontal agreement is made between competing
businesses to manipulate competition, and a vertical agreement is made between a seller and a
buyer where a retailer can buy products from a manufacturer, but in the agreement is restricted
from buying from a competing manufacturer. Examples include price fixing, market
allocations, boycotts, tying agreements and monopolies.
The courts use the rule of reason to determine whether the trade restraints have had or will have
a negative effect on competition. The doctrine looks for proof of a naked restraint where
limitations were or will be placed on competitors attempting to enter into a marketplace, like
price fixing, proof that the restraints were or will be in place and proof that the restraints have or

will create market domination for one or a few companies. The analysis of facts will sort out
whether a true violation of the Sherman Anti-Trust Act exists.
Much of business law deals with property. There are actually two different types of property:
personal property and real property. This lesson explains the differences between these two types
of property.

Property
There are two types of property. In legal terms, all property will be classified as either personal
property or real property. This distinction between types of property comes from English
common law, but our modern laws continue to distinguish between the two.
Each type of property is treated differently under the law. There are many different types of laws
that specifically pertain to personal property, and many other types of laws that pertain
specifically to real property.
Personal property is movable property. It's anything that can be subject to ownership, except
land. Real property is immovable property - it's land and anything attached to the land.
Normally, a piece of property can be easily classified as either personal property or real property.
The difference between the two is usually fairly straightforward. However, sometimes it's a little
harder to categorize property. Let's look at one example.
Let's say that I buy lumber and other building supplies, such as a saw, a hammer, and some nails.
These supplies are personal property. They're moveable and they belong to me.
Next, I use these items to build a shed on my land. Is this shed personal property? No. The shed
is real property because it's attached to, and now part of, my land. Any leftover building supplies
are still personal property, like my saw and hammer. But anything that's actually part of the shed
is now real property.

Personal Property
Let's take a closer look at why this is. Let's look at the types of items that are classified as
personal property.
Personal property includes possessions, of really any kind, as long as those possessions are
movable and owned by someone. Personal property isn't affixed to or associated with land. These
moveable items are sometimes known as chattels. The law regarding chattels includes those laws
covering possession, gifts, lost property, abandoned property, and stolen property.
It's helpful to note that personal property includes both tangible and intangible items. A tangible
item is an item that can be felt or touched. For a business, tangible personal property includes
items the business owns such as:

Office furniture

Business equipment

Business vehicles

Business goods

An intangible item is simply an item that can't be felt or touched. For a business, intangible
personal property includes items the business owns such as:

Stocks

Bonds

Intellectual property

Money

Real Property
The key difference between personal property and real property is that real property is fixed
permanently to one location. This includes land and anything that is built on the land. It also
includes anything that's growing on the land or that exists under the face of the land. For a
business, real property includes immovable property that the business owns, such as:

Land

Buildings

Crops

Mineral rights

For example, let's say that I'm in the farming business; I own a large piece of land. On the land, I
have a house, a barn, a grain silo, and a stable. Each of these items is a piece of real property,
because these items are attached to the land.
Since real property includes everything growing on my land, my real property includes my crops.
Once cut, these crops become a moveable good. But while these crops are growing on my land,
they are a part of my real property.
Let's also say that, while digging a freshwater well, I found oil under my land. Is this also my
real property? Yes. My real property includes the rights to anything found under the surface of

my land. This is a common concept when discussing rights to water, oil, or minerals found under
the surface.
Real property also includes any items attached to real property and considered legally part of the
real property. These items are known as fixtures. Fixtures are items that would normally remain
in place when an owner of real property moves. My barn, house, silo, and stable are all fixtures.
But fixtures can also be smaller items. Let's glance into my farmhouse and see what other
fixtures I have. Fixtures are such things as:

Ceiling fans

Chandeliers

Curtains

Appliances

As you can see, sometimes real property rights are complicated. There are many different laws
that pertain specifically to real property. These laws include those that cover types of estates,
types of ownership, easements, conveyances, and leases.

Lesson Summary
Let's review. Much of business law deals with property. There are actually two different types of
property. In legal terms, all property will be classified as either personal property or real
property. Personal property is movable property. It's anything that can be subject to ownership,
except land.
It's helpful to note that personal property includes both tangible and intangible items. A tangible
item is an item that can be felt or touched. An intangible item is simply an item that can't be felt
or touched.
Real property is immovable property. It's land and anything attached to the land. This includes
fixtures. Real property also includes items that grow on, or can be found underneath, the surface
of the land.
There are several different ways a party can own an interest in real property. There are
possessory types of interests and non-possessory types of interests. This lesson explains the main
types of real property ownership.

Possessory Interests
When we talk about ownership interests in real property, we're actually talking about many
different types of ownership. Ownership interests come in various forms and, depending on the
type of interest, a landowner's rights may be limited. Let's start by exploring some of the

possessory interests possible when owning land. A possessory interest is the intent and right of a
party to occupy or exercise control over a particular plot of land. This is the type of ownership
most of us think about when we think about land ownership. There are three main types of
possessory interests: fee simple absolute, life estate, and leasehold. Let's start with the greatest
possible interest in land.

Fee Simple Absolute

A fee simple absolute is an ownership interest that includes all rights in the land. Just as the
name suggests, this type of estate represents absolute ownership of the land. A fee simple
absolute owner may do whatever he or she chooses with the land. The owner can use the land,
destroy the land, give the land to someone else, and take items from the land. The landowner is
limited only by zoning and building codes or other governmental restrictions.
The landowner can deed or will the entire fee simple estate to another person. This means that,
should the landowner die without a will, the fee simple absolute ownership will automatically
pass to the owner's heirs. Sometimes, a fee simple interest isn't absolute. There are times when a
fee simple interest is granted, but the interest comes with certain conditions. These are known as
conditional estates. Let's look at two examples.
A fee simple determinable is an ownership interest that automatically ends when a specified
event occurs. For example, let's say that I grant my farm to a local agricultural college. My deed
says that I grant my land to the university 'as long as it is used for educational purposes.' This
means that, if the university stops using the land for educational purposes, the grant
automatically ceases, and I own the land again. Or, if I'm deceased, my heirs will own the land.
This is similar to a fee simple subject to a condition subsequent. In this type of ownership
interest, a landowner may reclaim the land if a specified event occurs. Notice that, unlike the fee
simple determinable, the ownership interest doesn't automatically terminate. For example, let's
say that I grant my land to the university, but specify that 'if corn ceases to be grown on the land,
I can reclaim the land.' So, if the university decides not to grow corn, I can reclaim the land, or
my heirs may reclaim the land if I'm deceased.

Life Estate
Let's turn to another form of possessory interest. A life estate is a land interest that expires upon
the death of a specified person. For example, let's say that I grant my land as a life estate to my
stepsister Susie. This means that Susie can occupy, possess, and enjoy the property during her
lifetime, just as if it were a fee simple. However, Susie's ownership interest in the land will
automatically stop upon her death. Rather than passing to her heirs, the land will pass back to
me. Or, if I'm deceased, the land will pass to my heirs. Susie can't will the property to another
person.
Life estates aren't common, but this type of interest can be helpful for estate planning purposes.
Let's say that I'm married to Marvin. I want Marvin to be able to live on and enjoy my land after

my death, so I grant him a life estate. However, after Marvin's death, I want my land to go to my
heirs, rather than Marvin's heirs. The life estate assures that the land will revert to me, or to my
heirs, upon Marvin's death. If I granted Marvin a fee simple, then the land would go to Marvin's
heirs upon Marvin's death.

Leasehold
The last type of possessory interest is called a leasehold estate. A leasehold, or lease, is an
interest in real property that grants possession for a particular duration. The lease can last for one
year, can last for many years, can be week-to-week, or can be month-to-month. The duration
doesn't matter, as long as it's specified in some way. A leasehold doesn't grant actual title to the
land. Therefore, the lease owner can't will the property to someone else. Rather than a deed or
title, the lease owner will have a lease agreement that dictates the rights and obligations of both
the lease owner and the property owner. The lease will terminate and the property owner will
regain all rights if one or both parties violate a term of the lease agreement.
Leases are quite common. There are four main types of leases:
1. Estate for years. In this type of lease, the duration of the lease is specified as a certain
period using calendar time. The lease both starts and ends on a particular date, as set out
by the property owner.
2. Periodic tenancy. In this type of lease, the exact duration of the entire lease isn't
specified, though the lease is for a definite period of time that automatically renews.
These leases usually run month-to-month or week-to-week until either the lease owner or
the property owner gives notice of termination.
3. Tenancy at will. In this type of lease, either party can terminate the lease at any time and
for any reason, though most states require that notice of termination be given to the other
party. The lease start date is specified but the end date is indeterminate.
4. Tenancy at sufferance. In this type of lease, a specified lease date has expired, but the
tenant remains on the property. This type of leasehold begins as an estate for years, but
then converts into a periodic tenancy. For example, I lease an apartment through January
1, but I fail to find another apartment by January 2. So, I remain in my current apartment
and my lease converts to a month-to-month until I either sign a new lease with my current
landlord or I terminate the lease by giving notice and moving out.

Future Interest
Now, let's take a look at a non-possessory interest. A non-possessory interest is an interest in
real estate that doesn't include a current right to possess the land. There are several different
types of non-possessory interests in real property.

One type of non-possessory interest is known as a future interest. As the name suggests, this
type of interest is a legal right to receive full ownership of a property at some point in the future.
The future interest becomes a current interest on a particular date or upon the occurrence of some
event. For example, let's say that my will leaves my land to my stepsister Susie, but only after the
death of my husband, Marvin. Susie holds a future interest in my land. She'll receive full
ownership, but doesn't hold a current right to possess my land.
Sometimes, people use future interests for tax reasons. For example, let's say that I donate my
land to the university, but with the condition that I'll continue to use the land for the rest of my
life. I have a life estate in the land, and I can now claim a charitable tax deduction for my
donation of the land, even though the university won't possess the land until my death.

Non-Possessory Estates
There are several other types of non-possessory interests in real property. Remember that a nonpossessory interest is an interest in real property that doesn't include a current right to possess the
land. Instead, a non-possessory interest includes the right of one person to use land that belongs
to another person. A non-possessory interest holder doesn't have title to the land. The true
property owner continues to fully own the land. There are three main types of non-possessory
interests:

The first is an easement. This type of interest means that one party has the limited right to
use another party's land. For example, my neighbor might have an easement to use my
private road, which runs across my land, in order to access her parcel of land.

The second is a profit. This type of interest means that one party has a possessory interest
in some aspect of another party's land. For example, let's say that my neighbor is a profit
holder of the corn crops on my land. She may access my land and take the corn, even
though she doesn't have title to my land.

The third is a license. This type of interest means that one party has the right to access
another party's land for a specific purpose. For example, let's say that my brother has a
hunting license on my land. This means that he can access my land and hunt on it, even
though he doesn't have title to my land.

Lesson Summary
Let's review. When we talk about ownership interests in real property, we're actually talking
about many different types of ownership. Ownership interests can be possessory or nonpossessory interests. A possessory interest is the intent and right of a party to occupy or exercise
control over a particular plot of land. A non-possessory interest doesn't include a current right to
possess the land. Some common possessory interests include fee simple absolute, life estate, and
leasehold. Some common non-possessory interests include future interests, easements, profits,

and licenses. It's important to know which type of ownership interest a party has because the type
of ownership interest dictates the rights of the owner.

Learning Outcomes
At the end of this lesson, you'll have the ability to:

Differentiate between possessory interests and non-possessory interests

Describe the three types of possessory interests

Compare and contrast fee simple absolute, fee simple determinable, and fee simple
subject to a condition subsequent ownership interests

Explain the four types of leases

Define future interest

Summarize the three main types of non-possessory interests

A conveyance happens when a property owner transfers property to a new owner. This is known
as a voluntary property transfer, or title by deed. This lesson explains voluntary property
transfers and title by deed.

Voluntary Property Transfers

Today, you're a real estate attorney! Mary Mulligan and her three sisters are selling their family
home. It's been in their family for almost a century and changed hands within their family many
times. They've hired you to help them because this will be the first time it will be owned by
someone outside of the Mulligan family, and there's a lot involved to make sure this conveyance,
or property transfer, goes smoothly.
The sale of real estate is one form of voluntary property transfer, or property conveyance.
Property is also voluntarily transferred when it's gifted or left through a will. Voluntary
transactions may seem straightforward, since they're transactions that are purposeful and
intended by both parties. But, the act of transferring real property can sometimes be complicated.
This is because there are several different legal steps that must be achieved before a property is
considered to be properly, and therefore legally, transferred. As the attorney, this will be your job.
You will determine which steps the family must take, and then help the family take those steps in
order to secure a legal transfer of the property. You'll oversee the signing, sealing and delivery of
this entire legal process for Mary and her sisters. Let's take a look at the process.

What Is a Deed?

You'll want to start by discussing the deed with Mary and her sisters. A voluntary property
transfer is also known as a title by deed. This is because title is defined by who holds the deed. A
deed is the legal document that transfers ownership of the real property from one party to
another. Title is simply another word for ownership. Let's say that Mary and her sisters sell the
Mulligan house to Max. They'll execute a deed that transfers ownership, or title, of the house to
Max. Max will have title by deed.
Mary and her sisters will need to put together a deed for the new owner, but the deed won't be
quite that simple. As the attorney, you need to make sure that the deed contains certain legal
details. By law, the deed must be drafted so that it meets particular execution, or procedural
requirements.
In order to be legally executed, or finalized, a deed must:

Identify the buyer

Identify the seller

Identify the property using the legal description

Be signed by the person transferring the property and

That signature must be properly notarized

The legal description of the property is a description of the property using the U.S. Public
Land Survey system rather than a numbered street address system. This legal description is
required in all instruments of conveyance, but remember that the Mulligan family has owned this
home since it was first built.
There's a possibility that this property has never had a survey done or that one was done but it's
been lost. You'll need to research this issue. If there's no recent legal description of this property,
then you'll need to order a survey of this property so that an accurate legal description can be
added to the new deed.

Two Types of Deeds

Generally speaking, there are two main types of deeds used in voluntary real property transfers.
You need to decide which one would be best for Mary and her sisters to use. The first is a
warranty deed. This is the most common type of deed. This type of deed transfers ownership
and promises, or warrants, that the seller is transferring a good and legally valid title to the
property.
You'll use this type of deed if your title research shows that Mary's family holds a clear, legal
title to the house. The Mulligan family's warranty deed to Max, then, might say, 'We promise that
we own the house that we're selling you, and the title to it is legally valid and good.'

The second type is a quitclaim deed. This type of deed transfers the ownership interest the seller
has in the property, but doesn't promise, warrant or guarantee that interest. Remember that the
Mulligan house has changed hands many times throughout the generations. Mary tells you that
it's been mortgaged several times and that it was maybe even foreclosed on. Several years ago,
Mary and her sisters even remember hearing a story that Great Uncle Samuel lost the house in a
bet back in the 1920s.
This is all concerning! If your research shows that Mary and her sisters may not have good or
full title to transfer, then perhaps you'll want to suggest that they use a quitclaim deed. The
Mulligan family's quitclaim deed might include language that says something like, 'We fully
transfer to you the entire interest that we own in the house, whatever that interest might be.
However, we don't warrant that interest or guarantee our title that we're selling you, and we don't
hereby guarantee that we own any particular interest in the property.'

Delivery and Acceptance

Once you've decided what type of deed would be best, you know you'll need to draft and execute
that deed. Once the deed is executed, the next step is delivery and acceptance of the deed. These
steps involve the participation of the buyer.
Delivery and acceptance means that the executed deed must be delivered to, and accepted by,
the buyer of the property. If the property is being gifted, rather than sold, then delivery and
acceptance will involve the person to whom the property is being transferred. Delivery and
acceptance might seem trivial, but it must take place in order to have a legal conveyance of the
property. For this reason, the delivery and acceptance are normally handled in an official and
more formal manner.
For example, as the attorney, you won't want to send your assistant Skip over to leave the
executed deed on Max's front porch. This isn't an official delivery, and Max didn't, as far as we
know, accept the deed. We won't know if Max ever actually got the deed. It would, however, be
acceptable to mail the deed to Max using certified mail, so that Max has to sign for the deed
when he receives it. That way, we know the deed was delivered and that Max accepted it.
If the buyer is in the possession of the deed, then it's assumed that the deed was properly
delivered and accepted. For example, if Max shows up at the courthouse to record his new deed
to the Mulligan house, then it will be assumed that the deed was properly delivered to him and
that he accepted the delivery of the deed. Delivery and acceptance doesn't have to be proven in
any particular way. It also doesn't have to be accomplished in any particular formal or official
manner, as long as it can be shown.

Recording the Deed

The reason delivery and acceptance are so important is because the buyer can't record the deed if
he or she doesn't possess the executed deed. Recording simply means publicly filing the deed

with the county land office where the property is located. This is the last step in the voluntary
property transfer process.
Once the deed is properly recorded, the property will have officially changed hands. Recording is
the process that allows others to know that the buyer now owns the property. It puts others on
notice that he or she is now the owner, and, by doing so, protects the new owner's property
interests. Simply put, the sooner Max records his deed, the sooner he can prevent anyone else
from falsely claiming title.
Let's say that someone else files a claim to the land, like a judgment, before Max records his
deed. Max says he didn't have his deed, and so he couldn't record it. He blames you. This is why
delivery and acceptance is an official step that must be legally accomplished. You will need to
show that the deed was delivered to and accepted by Max in order to show that it was his fault
that he didn't properly act to secure his interests.
It's important to note, though, that in most real property sales like this one, the escrow closing
agent would record Max's deed the same day that the Mulligan sisters and Max close the sale of
the home. Max wouldn't usually have to record the deed himself, and you wouldn't have to
deliver the deed to Max.

Lesson Summary
Let's review. The sale of real estate is one form of voluntary property transfer, or property
conveyance. Property is also voluntarily transferred when it's gifted or left through a will. All of
these voluntary property transfers are also known as title by deed. This is because title is defined
by who holds the deed. A deed is the legal document that transfers ownership of the real property
from one party to another. Title is simply another word for ownership.
Generally speaking, there are two main types of deeds used in voluntary real property transfers.
The first is a warranty deed. This is the most common type of deed. This type of deed transfers
ownership and promises, or warrants, that the seller is transferring a good and legally valid title
to the property.
The second type is a quitclaim deed. This type of deed transfers the ownership interest the seller
has in the property, but doesn't promise, warrant or guarantee that interest.
Both of these types of deeds must be drafted so that they meet particular execution, or
procedural requirements. In order to be legally executed, or finalized, a deed must:

Identify the buyer

Identify the seller

Identify the property using the legal description

Be signed by the person transferring the property and

That signature must be properly notarized

The next step in the transfer is delivery and acceptance. This means that the executed deed must
be delivered to, and accepted by, the buyer of the property. Delivery and acceptance is important
because the deed can't be recorded if the buyer doesn't possess the deed.
Recording simply means publicly filing the deed with the county land office where the property
is located. This is the last step in the voluntary property transfer process. Once the deed is
properly recorded, the property will have officially changed hands.

Learning Outcomes
After you've completed this lesson, you'll be able to:

List the types of voluntary property transfer

Remember the definitions of deed and title

Compare a warranty deed and a quitclaim deed

Outline the steps that must be completed in order for a deed to be legally executed

Note the importance of delivery and acceptance as well as recording

Sometimes title to property transfers from one party to another without one party's consent. This
is known as an involuntary property transfer. One type of involuntary property transfer is known
as condemnation. The federal government has the power to condemn properties through its
power of eminent domain. This lesson looks at a fairly recent Supreme Court case involving
condemnation through eminent domain.

Kelo v. City of New London

Once upon a time, there was a little pink house where the Thames River met the Long Island
Sound. This was in the neighborhood of Fort Trumbull and in the City of New London. A fairhaired maiden named Susette purchased and restored the cottage with the waterfront views. She
loved living in such a vibrant, historical and established area of the city. Her neighbors, the Dery
family, for instance, had lived in Fort Trumbull since 1895.
Susette and her neighbors took great care in revitalizing their neighborhood and restoring their
houses. Never did they dream that their houses could be taken from them, but that is how this
tale turned into the United States Supreme Court case of Kelo v. City of New London.

Sometimes property ownership transfers from one party to another without one party's consent.
This is known as an involuntary property transfer. There are many different types of
involuntary property transfers, like foreclosures or when property is transferred in divorce
proceedings. In general, these types of property transfers aren't unusual, but the Kelo case was.
Susette Kelo bought her home in 1997. Shortly after that, Pfizer pharmaceutical company built a
plant next to Fort Trumbull. Pfizer was interested in developing the property around the plant as
well. A private corporation, known as the City of New London Development Corporation, or
NLDC, was established to help Pfizer develop its plan and to promote new economic
development in the Fort Trumbull area.
The NLDC recommended the redevelopment of the entire 70-acre Fort Trumbull neighborhood.
The plan included a hotel, restaurant, conference center, athletic center, office park, residences
and, of course, the new Pfizer building.

Eminent Domain and Condemnation

So, the NLDC needed a plan to acquire the land. New London, like all cities, has the Fifth
Amendment's power of eminent domain. It is the government's ability to take private property
for public use after fairly compensating the private property owner. The process of taking
through eminent domain is called condemnation and results in an involuntary transfer of
property.
When condemnation occurs, the local, state or federal government seizes the private property
and justly compensates the owner. The property owner won't be required to approve the sale of
the property, though the owner is constitutionally entitled to a fair payment. This is what
happened in Kelo's case. New London appraised the Fort Trumbull neighborhood properties and
made sound offers to all the residents. Some owners refused the offers.
These owners simply didn't want to move from the homes and the neighbors they loved. Kelo
wouldn't voluntarily transfer her property rights. The city then exercised its right of eminent
domain and the condemnation process against Kelo's little pink house began. The city had two
items to prove:
1. Its offer to Kelo was reasonable
2. Her property was being taken for public use
Condemnation hearings are often heated. Many property owners believe their homes are worth
more than they've been offered. However, that's not the issue that took Kelo all the way to the
Supreme Court. Kelo and her neighbors fought the City of New London over the term 'public
use.'
They didn't like it, but they knew the city could take their property if the city felt they needed the
property for the benefit of the city. But, this taking seemed to be for private use, or the benefit of
Pfizer. This seemed to be unconstitutional under the Fifth Amendment and a private taking.

Unfortunately, the Supreme Court disagreed. In 2005, the Court reached a controversial 5 to 4
decision against Kelo. The Court held that economic development, even when it's recommended
to the city by a private entity or corporation and appears to largely favor that particular private
entity or corporation, is still a 'public use.'

After Kelo
In her dissenting opinion, Justice Sandra Day O'Connor wrote that there would no longer be a
distinction between a taking for public use and one for private use and that the decision
effectively deletes the words 'for public use' from the Fifth Amendment.
Many people agreed with O'Connor and thought the Supreme Court simply got it wrong. For
instance, one legal reporter pointed out that the Court had historically defined 'public use' to limit
the government's property takings to true public projects like parks, roads and bridges. Now, she
said, the Court had decided that 'public use' could mean anything that the government wanted to
do. After this broad interpretation of 'public use' became law, 8 state supreme courts and 43 state
legislatures reacted by strengthening laws regarding homeowner and small business property
rights.
Here's the moral to this little tale, or at least what happened next! Our fair-haired maiden was
able to save her little pink house after all. Though the NLDC project ended up with her land,
Kelo's little pink house was picked up and moved. It now sits at a new location in downtown
New London and is still pink. The NLDC project wasn't so lucky. Though nearly 80 million
dollars in taxpayer money was spent on the project, the Fort Trumbull neighborhood now sits as
an empty field and even Pfizer has turned the page. The company moved.

Lesson Summary
Let's review. Sometimes property ownership transfers from one party to another without one
party's consent. This is known as an involuntary property transfer. The Fifth Amendment
provides the government with the power of eminent domain. This is the ability to take private
property for public use after fairly compensating the private property owner. The process of
taking is called condemnation.
This was the subject of the Kelo v. City of New London case. New London sought to condemn
Kelo's property, and Kelo fought the condemnation proceedings. The city had two items to
prove:
1. Its offer to Kelo was reasonable
2. Her property was being taken for public use
Kelo disagreed that her property was being taken for public use, or for the benefit of the city.
She argued that this taking was for private use and unconstitutional. This particular issue took
this case all the way to the United States Supreme Court. In a controversial decision, the Court

held that economic development, even when it's recommended to the city by a private entity or a
corporation and appears to largely favor that entity, is still a type of 'public use.'

Learning Outcomes
Following this lesson, you'll be able to:

Define involuntary property transfer, eminent domain and condemnation

Explain the facts of Kelo v. City of New London

Summarize Justice O'Connor's dissent in the Kelo case

Identify the actions taken by many state supreme courts and legislatures in response to
the Kelo decision

Intellectual property is a broad term that applies to many different types of original creations.
Businesses use intellectual property law to protect innovative and marketable works created in
someone's mind. This lesson explains this special type of property law.

Intellectual Property
Let's take a look at a special type of property that all businesses own, and the laws that protect
that property. Every business has some form of intellectual property. The term intellectual
property actually refers to many different types of property. However, this category of property
is unique. Intellectual property is original property created in someone's mind. It can be a play, a
novel, a product invention, a marketing plan, a logo or many other things. But, note that not
every idea will be classified as intellectual property. To be intellectual property, the idea must be
marketable and valuable in some manner.
Though there are many different types, all intellectual property is innovative, developed through
a creative process, and intangible. These are the characteristics that set intellectual property apart
from other types of property. However, intellectual property is handled in the same way as
tangible personal property or real property. It can be owned, sold, leased, or gifted much like all
other property.
Our intellectual property laws protect this unique type of property by sheltering the rights of
those who create the property. There are many federal laws and state tort claims that work to
provide certain protections for products that were created out of a person's own mental process,
and establish ownership for marketable ideas. These laws and protections are designed to help
the creator feel secure in his or her rights to the property, and provide exclusive benefit to the
creator, while hopefully encouraging new inventions and technologies.

Intellectual Property Law and Businesses

Let's look at my business and all of the ways I use intellectual property and the laws that protect
intellectual property. I own Barks and Bubbles. At my pet-grooming salon, I use a special
shampoo that I designed myself. It cleans dog hair, while preventing fleas and ticks, and also
smells like orange blossoms. This is my special concoction and one of the main things that
makes my salon special and unique.
Let's say that a new pet-grooming business opens next door to mine. This business uses a very
similar pink logo, and is called Wash and Woof. This business advertises that it uses a special
dog shampoo that smells like citrus. I'm furious and think that I'm losing customers to this new
business. Can they copy me like this? I'm headed to see my lawyer and find out.
My lawyer explains that there are many different types of intellectual property that businesses
own and use, and that I may have some protections provided by intellectual property laws. Here
are a few examples of intellectual property rights that I might own:

Patents

Trademarks

Service marks

Copyrights

Trade secrets

Types of Intellectual Property

I need to figure out which types of intellectual property I use, and what steps I've taken to protect
my business ideas. Then I'll know if I have a cause of action against the new business.
Intellectual property laws work by protecting my property interests, but in most cases I need to
take proactive steps to protect my work.
Let's start with patents. Patents are used to protect new, and sometimes improved, products.
Patents guard inventions. The owner of a patent has the exclusive right to make, sell, or
otherwise use and profit from a tangible item for a certain period of time. A business or
individual must apply for a patent through our government's United States Patent and
Trademark Office in order to obtain one.
Luckily, when I invented my new dog shampoo years ago, my lawyer helped me apply for and
obtain a patent. My special shampoo is protected. The other salon can say they use a similar
shampoo, but they can't use my exact recipe without infringing on my patent. If they infringe on
my patent, I can sue for money damages. Infringement is a civil cause of action based on one
party misusing another party's right.

Now let's look at trademarks. Trademarks are used to protect logos or brands. Trademarks help
distinguish businesses from one another. The right to a trademark is automatically assumed once
a business starts using a unique and particular name or logo. Note that a business doesn't have to
file an application to own the rights to the work and to keep others from using the same work,
though a trademark can be registered with the United States Patent and Trademark Office.
Similarly, service marks are a type of trademark. Service marks are used to protect new or
innovative services. Service marks help distinguish businesses that provide services from one
another. Service marks work the same as trademarks, but are exclusively used by businesses that
are service providers. Lawyers, doctors, landscapers and hairstylists are just a few examples of
service providers.
I'm a service provider and I registered my pink logo and the name Barks and Bubbles. The new
business can't infringe on my service mark. They can use something similar, but they can't use
my exact name and logo, or a name and logo that are so similar to mine that a customer might be
confused. If they do, I can sue for service mark infringement and possibly collect money
damages.
What about copyrights? Copyrights are used to protect original written works, including
software and databases. Copyrights protect expressions, or the written work that comes out of a
creative idea. Copyrights don't protect the actual idea. A copyright gives the owner exclusive
rights to reproduce, display, perform, and otherwise use the creative work. The copyright owner
also has exclusive rights to benefit financially from the work. A business or individual must
apply for a copyright through our government's United States Copyright Office in order to obtain
one.
I don't have a copyright, but my lawyer suggests that I look into one. I usually provide a detailed
instruction list to my customers. It contains my own special ideas on how to best care for a dog's
hair after my grooming. This is a brochure that's based on my own creative and innovative
thoughts. The other business could obtain this brochure and use it as their own if I don't
copyright it. Once copyrighted, no one else can copy it or reprint it without my permission.
Otherwise, I could sue for copyright infringement.
Finally, let's look at trade secrets. Trade secrets can't be officially registered, but are often
included in, and protected through, employment contracts and other agreements. For example,
non-disclosure and non-compete contract clauses are often designed so that a party won't
disclose business strategies or other confidential information to competitors. A trade secret is any
confidential formula, pattern, idea, or information that provides a competitive advantage to the
business. This includes recipes, client lists, manufacturing techniques, and marketing strategies.
I use several different trade secrets in my business. There's my special recipe for shampoo, and
several techniques I use to keep the dogs calm and happy while they're being groomed. These are
my confidential ideas, so I've been careful to protect this information. All of my employees have
to sign a contract that they won't disclose my secrets. If one of my former employees disclosed
my ideas to the new business, then I can sue that employee for breach of contract and probably

collect money damages. I'll have to do some investigating to see if any of my former employees
has a connection to the new business!

Lesson Summary
Let's review. All businesses own and use some sort of intellectual property. The term intellectual
property actually refers to many different types of property. Intellectual property is original
property created in someone's mind. It can be a play, a novel, a product invention, a marketing
plan or a logo. It can be any idea that is marketable and valuable in some manner. Some
intellectual property protections commonly used in businesses include:

Patents

Trademarks

Service marks

Copyrights

Trade secrets

Though there are many different types, all intellectual property is innovative, developed through
a creative process and intangible. However, intellectual property is largely handled and protected
in the same way as tangible personal property or real property. It can be owned, sold, leased, or
gifted. There are various federal laws and state tort claims that protect intellectual property. Most
of these laws require that the owner take positive steps to register or otherwise protect his or her
property interests. Once protected, a party can be sued for infringement if that party uses the
property without the owner's permission.

Learning Outcomes
After watching this lesson, you should be able to:

Define intellectual property

Identify and explain different types of intellectual property protections

Explain what infringement is

Trademark infringement occurs when someone uses another's trademark without permission
from that trademark's owner. There are various state and federal laws that protect trademarks.
This lesson explains trademark infringement and the laws that cover trademark infringement.

Trademarks

Welcome to Barks and Bubbles! I use a particular logo for my pet-grooming business. It's
something I designed myself and is unique to my business. My clients recognize my business
and my pet products through my use of this exclusive logo. I use my logo as a trademark.
A trademark is any word, letter, name, design, or symbol that is used to identify a particular
business, particular goods, or particular services. A business can claim a trademark simply by
using the logo, or the mark. This is known as an unregistered trademark and is symbolized
with the 'TM' designation. Sometimes, a trademark is used only to identify services. This type of
trademark is known as a service mark. A service mark is symbolized with the 'SM' designation.
Because my logo is distinctive to my business, and I want to protect its use, I went to the trouble
to hire an attorney and register my logo. This is known as a registered trademark. A registered
mark is symbolized with the 'circle R' designation. Trademarks are registered through the United
States Patent and Trademark Office, or the USPTO. Before a trademark can be registered, a
party must formally apply for registration. This application process includes a trademark search
through the USPTO database. The search must confirm that no one else has registered the same,
or strikingly similar, trademark.
There's no requirement that a trademark be registered, though registration affords more
protection for the trademark. A business with a registered trademark has the exclusive right to
use that mark for 20 years and can sue a party for the unauthorized use of that mark. This is why
I registered my trademark with the USPTO and with my state trademark office when I first
started using the logo. I've used my registered trademark for two years now on all of my signs, in
all of my advertisement pieces, and on all of my pet products.

Trademark Infringement
So, you can imagine my surprise when I learned that a new pet-grooming business is opening
right next door to mine. This business put up a new sign, and the sign uses a very similar pink
logo to mine. The new business is called Wash and Woof. I'm afraid I might lose clients to this
new business, and I'm concerned that people might confuse my business identity with that of the
new business. I immediately contact my attorney because I think I might have a trademark
infringement cause of action.
Trademark infringement is a civil cause of action. It's the violation of rights held by a
trademark without authorization from the owner or licensee of that trademark. Trademark
infringement laws vary from state to state. I need to find out what elements my state requires for
this type of claim.
My business is in a small town in Florida. Like most states, Florida has a trademark statute that
will allow me to recover damages and lost profits if I can show that the new business knowingly
used a reproduction of my registered trademark, and that use is likely to cause confusion or
mistake. This means that I won't have to prove that Wash and Woof used my identical logo. I'll
just have to show that their logo is similar enough to mine that there is a strong enough
likelihood of confusion. This Florida statute is similar to those found in most other states.

My attorney explains that I might also have a federal cause of action because there are federal
laws that protect my trademark, too. State laws used to provide the most protection for
trademarks, but Congress changed that with the Lanham Act. This act is a well-known set of
federal statutes geared toward protecting trademark rights. The Lanham Act was enacted in 1946
and has since been amended and expanded many times. As a result, federal law generally
provides the most extensive protection for both registered and unregistered marks. To prove
federal trademark infringement using the Lanham Act, I'll have to prove that:

I have a valid and legally protected mark

I own the mark

Wash and Woof's use of the mark to identify goods or services causes a likelihood of
confusion

These criteria were established through the famous 2000 federal case of A&H Sportswear Co. v.
Victoria's Secret Stores, Inc. A&H uses a trademark to identify its MIRACLESUIT swimsuits.
Victoria's Secret uses a trademark to identify THE MIRACLE BRA, which it uses for lingerie
and also swimsuits. A&H filed a lawsuit for trademark infringement, claiming that the use of
THE MIRACLE BRA to identify swimsuits would likely confuse consumers wishing to purchase
MIRACLESUIT swimsuits. The federal court ruled that use of THE MIRACLE BRA didn't
create direct confusion with the MIRACLESUIT, but was similar enough to warrant a disclaimer
stating that Victoria's Secret swimsuits weren't affiliated with MIRACLESUIT. This disclaimer
would appear anywhere that THE MIRACLE BRA was used to identify Victoria's Secret
swimwear.

Trademark Confusion
Confusion is an important element in any trademark infringement case and difficult to prove. To
show confusion, the trademark owner must prove that customers are likely to mistake the
trademark owning business for the infringing business. To help clarify this element, some courts
consider certain standards when determining whether trademark infringement has occurred. The
Ninth Circuit Court of Appeals, which includes California, established this widely used set of
standards in 1979:

The strength, or length of use, of the mark

The proximity of the two businesses or goods

The similarity to the protected mark

Any evidence of real consumer confusion

The marketing channels used by each business

The types of goods and how much care a consumer is likely to take in selecting the goods

The intent of the infringing party

The likelihood that the product lines or businesses will be expanded

My business is relatively small, and I have only one storefront. I'll likely have to prove confusion
and trademark infringement using evidence that fits these standards or standards very similar to
this.
Let's take a look at the likelihood of confusion. Wash and Woof is also a pet-grooming business,
so it directly competes with my established business. The two stores are physically located right
next to each other and will likely market to the same customer base using the same marketing
channels and methods. I don't know if Wash and Woof purposely copied my logo, and I don't yet
know if my customers will actually be confused. But, if the court finds that their logo is
sufficiently similar to mine, the court will likely find trademark infringement based on these
elements.
I can show a likelihood of confusion, but some businesses don't have to prove this element.
There are some brands that are so well-known that trademark infringement will be implied if any
business uses the same or similar mark. This is known as trademark dilution. Very large brands,
such as Coca-Cola or Nike, can claim that any use of their trademark weakens the value of their
trademark. Trademark dilution, therefore, is a form of trademark infringement.

Remedies
I have a pretty good case for trademark infringement. The court will likely find in my favor and
order a remedy on my behalf. Therefore, I need to decide what remedy I'm going to request. Let's
consider the most common remedies for trademark infringement.
I might ask for an injunction, which is a court order prohibiting the defendant's use of the
protected mark. I can also ask for money damages if I can prove the amount of lost profits due
to the defendant's use of my mark. I may even be able to recover treble damages if I can show
that Wash and Woof purposely copied my mark and did so with the intent to steal business from
me. Treble damages are a money award equal to three times my actual loss. Treble damages are
rare and work as punitive damages.

Lesson Summary
Let's review. A trademark is any word, letter, name, design, or symbol that is used to identify a
particular business, particular goods, or particular services. Trademark infringement occurs
when a party violates the rights held by a trademark without authorization from the owner or
licensee of that trademark. Trademark infringement laws vary from state to state, but generally
require that the defendant knowingly used a reproduction of the registered trademark, and that
use is likely to cause confusion or mistake.

State laws used to provide the most protection for trademarks, but federal trademark laws,
established through the Lanham Act, now offer the most protection for both registered and
unregistered marks. To prove federal trademark infringement using the Lanham Act, a plaintiff
must prove that:

He or she has a valid and legally protected mark

He or she owns the mark

The defendant's use of the mark to identify goods or services causes a likelihood of
confusion

Confusion is the most difficult element to prove. Many courts use certain criteria in order to
determine the likelihood of confusion. Some well-known brands don't have to prove confusion at
all if they can, instead, show trademark dilution. There are several remedies available to a
trademark infringement plaintiff. The options include injunction, money damages, and
sometimes, treble damages. Treble damages will only be awarded in serious cases of purposeful
infringement.

Learning Outcomes
After this lesson has been completed, you may be able to:

Underscore the contrasts between trademark, trademark infringement, registered

trademark, trademark dilution and treble damages

Recollect the elements required to prove federal trademark infringement under the
Lanham Act

List some of the standards that courts look at in cases involving trademark confusion

Discuss some likely remedies for trademark infringement

Patent infringement is a complicated civil cause of action. There are many, various components
to patent infringement. Generally, it's the use of a patented object without the patent owner's
permission. This lesson explains patent infringement.

Patents
When someone invents or improves a tangible and functional object, that person will usually
want to apply for a patent with the United States Patent and Trademark Office, or USPTO. A
patent is a legal document that protects a party's intellectual property rights in an invention.

A patent application is a complicated process involving many detailed steps. Once filed with the
USPTO, an application is numbered. Applications are reviewed in the order they were received.
It often takes two years or more for an application to be reviewed. This is why we commonly see
the patent pending designation. This designation means that an application has been filed, but
the patent has not yet been granted or denied. During this waiting period, the inventor can
sometimes enjoy certain limited legal protections for his or her invention.
Once the USPTO grants a patent, that patent serves as the property right in the invention. This
right means that the patent owner can exclude others from making, using, offering for sale, or
selling the patented item in the U.S., or importing the item into the U.S. To do so is patent
infringement. Patent infringement is a federal, civil cause of action alleging that one person
used another person's patented item without the patent owner's permission.
For example, let's say that I invent a negative ion pet hair dryer for use in my pet-grooming
salon, Barks and Bubbles. It's shaped like a bubble, so that the entire dog can be encased in the
dryer. The dryer produces negative ions to speed drying time, reduce static, and leave the dog
hair smooth and silky.
I hire an attorney and file a utility patent application for my pet hair dryer. This is, by far, the
most common type of patent. It's used for new and useful processes, machines and articles for
manufacture. A patent can also be a design patent, which is used for new, original, and
ornamental designs for an article of manufacture. Or, a patent can be a plant patent, which is
used exclusively for new and distinct, invented, or discovered plants.
I'm granted the patent and, like other utility patents, I'll own this patent for 20 years from the date
of my application. However, just a few months after receiving my patent, I run into trouble. I
learn that a competing pet-grooming business, Wash and Woof, is advertising the use of a new
and innovative negative ion pet hair dryer. Wash and Woof hasn't contacted me or asked my
permission to use the special dryer. I contact my attorney because I think I have a patent
infringement case against Wash and Woof.

Patent Infringement
My patent attorney explains to me that there are several different ways patent infringement can
occur. Generally, patent infringement occurs when someone:

Makes

Uses

Offers for sale or

Sells any patented item without the patent owner's permission

Notice that patent infringement doesn't require the stealing of the patented item, or an illegal
acquiring of the patented idea for the item. I think Wash and Woof purposely infringed my patent
in order to steal my customers, but I won't have to prove malicious intent on their part in order to
prove patent infringement.
For example, let's say that ABC Company in California patents a formula for a new multivitamin
that removes skin wrinkles. Company XYZ in New York has been working on the same formula,
independently, for many years and finally perfects it. Company XYZ cannot legally sell its
vitamins with the new formula after ABC Company patents the formula because ABC Company
now owns the patent for the formula. In ABC Company's lawsuit for patent infringement, ABC
Company only has to prove that Company XYZ's formula is essentially the same as their
patented formula. If ABC Company proves this, then ABC Company will win their patent
infringement suit against Company XYZ.
I'm filing a federal lawsuit against Wash and Woof for patent infringement. I'm alleging that
Wash and Woof made and is using my patented item without my authorization. Like most patent
infringement suits, I'm asking the court for an injunction. This is a court order preventing the
defendant from continuing to use my patented item. My injunction will order Wash and Woof to
immediately stop using the special pet hair dryers.
I'm also asking the court for an award of damages. This is a common request in patent
infringement cases and is a money award meant to compensate the patent owner for any loss
incurred due to the defendant's patent infringement. My damages award should grant me money
for any business I lost to Wash and Woof due to their use of my patent. This award should also
grant me the profits Wash and Woof made due to their unauthorized use of my patent.

Patent Claims
When determining whether patent infringement has occurred, the court will largely rely on the
claims of the patent. Claims are found on the patent application and are the parts of the patent
that define specific patent protection by explaining the scope and innovation of the invention.
This language puts others on notice of what will, and what will not, infringe on a patent based on
what the patent owner asserts. These patent claims describe the important and unique elements of
the invention and serve as the legal basis for any future patent infringement lawsuits.
In my case, my patent claims will be compared to Wash and Woof's advertisement claims. If their
claims don't fall within the language of my patent claims, then there's no literal patent
infringement. However, it's important to note that the claims don't have to be an exact match in
order to constitute patent infringement. Sometimes the patent claims and the defendant's claims
are essentially the same or sufficiently equivalent. This is usually enough for a finding of patent
infringement.
For example, my patent claims include that my dryer is a bubble shape and that the entire dog is
encased in the dryer. Wash and Woof doesn't use a bubble. Instead, their dryer hooks to the
grooming table, and the dog is moved through the dryer in much the same way that a car moves

through an automatic car wash. This is different than my invention and may even be considered
an improvement to my invention.
However, I've also claimed that my dryer is a negative ion dryer that produces faster and more
desirable results than traditional dryers. Wash and Woof advertises the same thing for their new
dryer. Wash and Woof's dryer is most likely an infringement on my dryer because it uses the
same elements as those claimed in my dryer. Also, the way it works and the end result are the
substantial equivalent to my dryer. Wash and Woof probably won't be able to provide sufficient
legal evidence to prove that their dryer is unique and different and not covered by the claims of
my patent.

Patent Litigation
If the court finds that Wash and Woof purposely infringed my patented item, then the court can
triple my monetary damages award. This is known as treble damages and recently gained
attention in the landmark intellectual property case involving Apple and Samsung.
In the 2012 federal jury trial of Apple, Inc. v. Samsung Electronics Co., jurors found that
Samsung infringed six different Apple patents and awarded Apple $1.05 billion in damages.
Apple's case cited infringement in 28 separate Samsung products. The jury's decision finding
infringement included three Apple patents covering the unique shape of the iPhone and its
distinct on-screen icons. However, the jury rejected Apple's claim that Samsung infringed the
rectangular shape of the iPad tablet. Presumably, the jurors didn't find the shape to be exclusive
enough to deserve patent protection.
The jurors found that Samsung purposely infringed many of Apple's patents. This finding gained
a lot of media attention because it meant that the judge could triple the already staggering
damages award. So far, no treble damages have been awarded because the litigation between
Apple and Samsung is ongoing. The companies have litigated or are litigating approximately 20
cases in 10 different countries, with each company claiming some court victories. This extensive
litigation is commonly referred to as the 'mobile device patent wars.'

Lesson Summary
Let's review. A patent protects a party's intellectual property rights in a tangible and functional
invention. An inventor can obtain a patent by applying with the United States Patent and
Trademark Office. There are three main types of patents: utility, design, and plant.
If granted, a patent serves as the inventor's property right in the invention. This means that the
inventor can exclude others from making, using, offering for sale or selling the patented item in
the U.S., or importing the item into the U.S. during the time that the inventor owns the patent. To
do so is patent infringement.
Patent infringement is a federal, civil cause of action alleging that one person used another
person's patented item without the patent owner's permission. Patent infringement doesn't require

the stealing of the patented item, or an illegal acquiring of the patented idea for the item. Instead,
the court will simply examine the claims of the patent in comparison to the defendant's claims.
Patent claims are found in the patent application and are the parts of the patent that define
specific patent protection by explaining the scope of the invention. This language puts others on
notice of what will, and what will not, infringe on a patent based on what the patent owner
asserts.
In a patent infringement case, the patent owner will typically ask for an injunction preventing
the defendant from further use of the patented item. The patent owner will also usually ask for
money damages related to the defendant's unauthorized use of the patented item. If the
defendant purposely infringed the patent, then the owner may also be awarded treble damages.

Learning Outcomes
After watching this lesson, you should be able to:

Define patent infringement

Identify different ways patent infringement can occur

Explain what happens in a patent infringement case

Copyright is a type of intellectual property right that protects certain original works. Copyright
laws work to provide authors with exclusive rights to their works. Any unauthorized use could
amount to copyright infringement. This lesson explains copyright law and copyright
infringement.

The Copyrighted Tattoo

The Hangover Part II provided an unexpected lesson in copyright law. In this Warner Bros.
movie, the characters engage in a night of hard drinking in Bangkok. Stu wakes up surprised to
find a tribal-inspired tattoo on his face. The unusual tattoo is identical to that of famous boxer
Mike Tyson's. This connection is most likely purposeful, since Tyson appeared in the original
The Hangover movie. But, at least one person didn't think the resemblance was funny. Though
Tyson's tattoo was eight years old at the time, Tyson's tattoo artist registered a copyright for the
artwork only a few weeks before the movie's official opening. He then filed a lawsuit against
Warner Bros. for copyright infringement, saying he never authorized the use of his design in the
movie or in advertisements.
Copyright infringement is a federal, civil cause of action. It occurs when a copyrighted work is
reproduced, distributed, performed, publicly displayed, or made into a derivative work without
the permission of the copyright owner. Warner Bros. argued that they didn't need the tattoo
artist's permission to display his work because the use of the tattoo was a parody. A parody is a
work that ridicules another, usually well-known, work by imitating it in a comic way. A federal

judge refused to issue an injunction that would delay the movie's release, but ruled that the tattoo
artist had a valid cause of action that should be heard. Instead, the parties settled the dispute
about a month after the movie opened.

Copyrights
A tattoo is one type of an original work of authorship, and can, therefore, be copyrighted. A
copyright is a form of legal protection automatically provided to the authors or creators of
original works. Copyright protection is vast and very inclusive. It applies to items such as
original literary, dramatic, musical, choreographic, photographic, architectural, and artistic
works.
It's important to note, though, that ideas can't be copyrighted. Copyright protection only applies
to tangible forms of expression. For example, let's say that I have an idea for a song. I've been
working on the lyrics in my head. These lyrics aren't copyrighted. Then, late one night I jot down
a few verses of the song on a notepad. These verses are automatically copyrighted because
they're an original and creative work that's now been expressed in a tangible form. I don't have to
actually publish this work in order to have copyright protection. Also, note that the copyright
belongs to me, since I'm the author or creator. But, let's say that I write songs as a part of my job,
and I'm writing this song in the capacity of my employment. In this case, my employer will
automatically own the copyright.
Copyright protection automatically attaches once an original work is expressed in tangible form.
This is known as an unregistered copyright and is represented by the circle c designation. An
unregistered copyright allows an author the exclusive right to reproduce, sell and perform his or
her copyrighted work. This means that an author or creator could sue for an injunction to
prohibit, or cease, the unauthorized use of the material. Mike Tyson's tattoo artist asked for, but
was denied, an injunction. He wanted to stop the movie from being shown since it featured his
copyrighted work without his permission.

Copyright Infringement
In order to bring a lawsuit for copyright infringement, the author or creator must first register his
or her copyright with the U.S. Copyright Office. This requires filing an application and paying a
fee. A registered copyright is designated with a circle r symbol. Generally, it allows the author
or creator the exclusive right to control the use of the material for his or her entire lifetime. A
registered copyright won't expire for another 70 years after the author's death. The author can
designate the owner of the copyright through his or her will, just like any other property right.
Like an unregistered copyright, these rights include:

The right to reproduce, copy, or distribute the original work;

The right to create new works based on the original work;

The right to perform the work; and

The right to publicly display the work.

The registered, copyrighted material becomes an official government record. Once a copyright is
registered, the author is protected under the Federal Copyright Act. This is the main set of laws
that govern copyright infringement. Copyright infringement is a federal tort. A registered
copyright holder can bring a lawsuit for copyright infringement and ask for an injunction, money
damages and attorney's fees should any of the author's copyright privileges be violated. This is
considered to be an added level of protection over that afforded for an unregistered copyright, as
these are additional remedies provided to an author holding a registered copyright. For these
reasons, registration is recommended.

Exceptions to Infringement
It's important to note that not all unauthorized uses of copyrighted material will amount to
copyright infringement. A party can use copyrighted material without the author's authorization if
the material is used for fair use. Fair use is any copying of copyrighted material done for a
limited and transformative purpose, such as to comment upon, criticize, or parody the
copyrighted work. This legal definition is purposely vague. It's meant to allow an open
interpretation for the judges who must apply it to particular situations. Generally, the doctrine of
fair use allows the legal use of copyrighted material in such things as commentary, criticism,
parody, search engines, news reporting, research, and teaching.
Remember Warner Bros. claimed that their use of the replicated Tyson tattoo was a parody.
Parodies are covered under the fair use doctrine. Normally, a fairly obvious use of the
copyrighted work is permitted in a parody, in order to allow a successful comedic moment. This
case settled before this issue could be heard in court, but what do you think? You've seen many
works of parody such as this one. Did Warner Bros. commit copyright infringement?
Another exception to copyright infringement is public domain. When a copyright expires, the
work then becomes a part of the public domain. Works in the public domain may be used by
anyone and for any reason. The public has free and unlimited access. For example, the novel
Moby Dick is famously a part of the public domain. You may copy it, perform it, share it, or
make a movie from it without first obtaining any permission from anyone.
A third exception is licensing. Licensing is when a copyright owner gives permission to a
particular party to use the copyrighted work for a specific reason. For example, an author might
give a theater company permission to reproduce and perform his work. Or, the creator of a song
might give an advertising agency permission to use parts of her song in a television commercial.

Lesson Summary
Let's review. Copyrights protect original work of authorship. This includes such things as
literary, dramatic, musical, choreographic, photographic, architectural, and artistic works.

Unregistered copyright protection automatically attaches once an original and creative work is
expressed in tangible form.
This protection allows an author the exclusive right:

To reproduce, copy or distribute the original work;

To create new works based on the original work;

To perform the work; and

To publicly display the work.

An author can sue for an injunction if the party uses his or her work in any of these ways, and
without the author's authorization. However, an author can sue for copyright infringement if the
author has registered his or her copyright with the U.S. Copyright Office. Copyright
infringement is the unauthorized use, in any of these same ways, of a registered copyright. An
author can register a copyright by simply filing an application and paying a small fee.
Registration generally allows an author the exclusive right to the work for his or her lifetime plus
70 years. A copyright infringement case allows the author to ask for an injunction, money
damages and attorney's fees.
Keep in mind that there are some exceptions to copyright infringement. If the copyrighted
material is used in a commentary, criticism or parody, it may fall into the fair use doctrine. If
the copyright has expired, the material will belong in the public domain. If the copyright owner
gives permission for the material to be used for a specific purpose, then that material may have
been licensed.

Learning Outcomes
After watching this lesson, you should be able to:

Define copyright

Identify an author's copyright rights

Distinguish between unregistered and registered copyright protections

Define injunction

Explain exceptions to copyright infringement

A business must decide how to best protect its intellectual property. Sometimes that decision
comes down to deciding between using trade secret or patent protection. This lesson explains the
key differences between these two intellectual property protections.

Protecting Business Secrets

I'm furious! My very best employee, Wilma, quit! She quit to go to my biggest competitor, the
Wash and Woof. I own Barks and Bubbles, the biggest dog groomer in town. But, Wash and
Woof recently moved in next door. They're stealing my employees and clients! Now, Wilma is
working at Wash and Woof, and I hear that right before she left, she sent letters to all my Barks
and Bubbles clients. She told them she was leaving and encouraged them to come see her at
Wash and Woof. I may learn the hard way the importance of protecting proprietary
information, or business secrets and intellectual property.
That was my client list. It was in the Barks and Bubbles front desk computer. Only Wilma and I
had access to that computer. We had to sign-on with a secret password and Wilma knew it was
secret. I can't believe this! What if she shares other proprietary information with Wash and
Woof? She has all kinds of secret information about my products and services! I'm going to see
my business attorney right away. I need to find out what I need to do to protect my information,
or if it's just too late.

What Is a Patent?
My business and Wash and Woof are both pet grooming businesses. Therefore, we use the same
type of equipment and the same type of products. However, I've spent a lot of time developing
my own unique line of products. I've even invented a key piece of equipment that's in use at my
shop. My attorney reminds me that, as a result, I own several patents. Patents offer one of the
very highest levels of protection for proprietary information, so this is good news for me.
A patent is a legal document issued by the government. It protects a party's intellectual property
rights in an invention. The invention must be unique and original, and not previously disclosed to
the public. A person receives a patent by applying with the United States Patent and Trademark
Office, or USPTO. Patents are only issued for inventions or improvements to a tangible and
functional object.

How Are Patents Protected?

I own patents on the recipes for my citrus-scented dog hair care products and also on a negative
ion dog hair dryer. These patents serve as my property rights in the inventions. Like all patent
owners, I'll own my rights for 20 years.
Patent rights mean that the patent owner can exclude others from making, using, offering for
sale, or selling the patented item in the U.S. or importing the item into the U.S. To do so is
patent infringement. Patent infringement is a federal, civil cause of action alleging that one
person used another person's patented item without the patent owner's permission. In other
words, I can sue Wilma, or Wash and Woof, if they use my items. In a lawsuit, I can ask the court
for an injunction. This is a court order preventing the defendant from continuing to use the
patented item. I can also ask the court for an award of damages. This is a money award meant to
compensate the patent owner for any loss incurred due to the defendant's patent infringement.

What Is a Trade Secret?

Now, let's get back to that client list Wilma took. My attorney explains that this list is a trade
secret. Trade secrets are probably the most common form of intellectual property because this
category is the broadest. Generally speaking, a trade secret is any confidential business
information that provides the business with a competitive edge. This includes things like sales
methods, distribution methods, marketing methods, research methods, consumer profiles,
advertising strategies, suppliers list, client lists, firm software and manufacturing processes.
You'll notice that many of these items don't meet the necessary criteria to be patentable.
There are only a few standard conditions that must be met in order for information to be
considered a trade secret. These requirements come from the Agreement on Trade-Related
Aspects of Intellectual Property Rights, or TRIPS. This is an agreement, administered by the
World Trade Organization, which sets internationally applicable minimum standards for many
different forms of intellectual property regulation. For trade secrets, TRIPS simply requires that:

The information is a secret. This means that the information isn't generally known to, or
accessible to, people that normally deal with this kind of information.

The information has commercial value because it's a secret. In other words, if the
information was made public, its value would decrease.

The owner of the secret has taken reasonable steps to protect the secret. This simply
means that the rightful holder of the information has tried to keep the information
confidential.

Notice that trade secret information is meant to be confidential forever. This is different than
patent information. Once a patent application is filed, it becomes a government document and a
matter of public record.

How Are Trade Secrets Protected?

Now, let's take a look at how trade secrets can be protected. Most businesses have many types of
trade secrets, though many businesses don't take precautions to protect their trade secrets. Many
business owners may not realize that trade secrets are easily protected. Unlike patents, trade
secrets don't require registration. Therefore, they can be protected for free, for an unlimited
amount of time, and protection has an immediate effect.
There's not a particular or standardized way that trade secrets have to be protected. The Uniform
Trade Secrets Act is a model act regarding trade secrets and adopted as law in 47 states. This act
says that the law protects a trade secret only when the owner has made efforts that are reasonable
under the circumstances to maintain its secrecy. For most business owners, this means taking
measures, such as:

Stamping documents CONFIDENTIAL

Password protecting certain files

Limiting physical access to certain areas

Using confidentiality, or non-disclosure, agreements

Once the trade secret is properly protected, any unauthorized use of the confidential information
will be considered an unfair business practice and the misappropriation of a trade secret. This is
a business tort and a civil cause of action. The business owner can sue in state court. Common
remedies include injunctions and money damages. Notice that this isn't a federal cause of action,
like a patent infringement case.
Sounds like I might have a state cause of action against Wilma for her misappropriation of my
client list. I'm so glad I protected this information and made it obvious that it was a secret. My
attorney's calling Wash and Woof right now.

Lesson Summary
Let's review. A patent is a legal document issued by the government. It protects a party's
intellectual property rights in an invention. The invention must be unique and original and not
previously disclosed to the public. A person receives a patent by applying with the United States
Patent and Trademark Office, or USPTO. Patents are only issued for inventions or improvements
to a tangible and functional object. These rights last for 20 years.
Patent rights mean that the patent owner can exclude others from making, using, offering for
sale, or selling the patented item in the U.S. or importing the item into the U.S. To do so is
patent infringement. Patent infringement is a federal, civil cause of action alleging that one
person used another person's patented item without the patent owner's permission.
Trade secrets, on the other hand, are probably the most common form of intellectual property.
Generally speaking, a trade secret is any confidential business information that provides the
business with a competitive edge. This broad category includes things like sales methods,
marketing methods, consumer profiles, advertising strategies and client lists. Many trade secrets
don't meet the criteria necessary to be patentable.
Unlike patents, trade secrets don't require registration. Therefore, they can be protected for free,
for an unlimited amount of time, and protection has an immediate effect. There's not a particular
or standardized way that trade secrets have to be protected. Generally, an owner must simply
make efforts that are reasonable under the circumstances. Any unauthorized use of a trade secret
will be considered an unfair business practice. This is a business tort and a civil cause of action.
The business owner can sue in state court.

Learning Outcomes
Following this lesson, you'll be able to:

Define patent and trade secrets

Identify the elements required for something to be considered a trade secret

Explain what is required to patent something

List ways that business owners can maintain the secrecy of documents or information

Differentiate between patent infringement lawsuits and unfair business practice lawsuits

Business law is a broad area of law that covers many different topics. One
important topic concerns creditors' rights. This lesson generally explains the
role of creditors, and creditors' rights, in terms of business law.

Creditors and Debtors

I'm opening my own business! It will be a pet grooming business. There's a lot to do
before I can get started. First off, I need the money and supplies to get the business off
the ground. I'll take out a business loan in order to fund these tasks.

My bank has agreed to lend me a small business loan. The bank is my creditor. This
means the bank extends credit to someone else by loaning money. I'll be required to pay
the bank back by making monthly payments with interest. This makes me the debtor. I'm
the individual who owes money to a creditor. Since I'm borrowing money, I'm also
referred to as the borrower.

Creditors can be either personal creditors or real creditors. A personal creditor is someone
who loans money to friends or family. The bank is a real creditor. A real creditor is a
creditor who's in the regular business of loaning money and has a legal contract with the
borrower.

The failure to pay a real creditor is a type of breach of contract. In exchange for the loan,
the contract normally allows a real creditor the right to seize the debtor's assets. We'll
discuss this a bit further in a moment, but know that a real creditor can take property,
such as a car or home, in order to satisfy the loan if the debtor fails to make loan
payments.

Secured and Unsecured Debt

As I'm setting up my new business, I'll acquire several different kinds of debt. My small
business loan from the bank is an example of secured debt. This means the debt is
secured, or guaranteed, by a particular piece of property. This gives the secured creditor
certain rights above and beyond other types of creditors.

For example, let's say I buy a building to house my new business. I'll take out a mortgage
on the building. A mortgage is a type of secured loan because it's guaranteed by the piece
of property for which the debtor obtains the loan. If I fail to make my mortgage
payments, the bank will likely foreclose on my building.

I'll also acquire unsecured debt. This is debt that's not guaranteed by a particular item or
piece of property. Credit card debt is a type of unsecured debt.

As a new business, I'll be obtaining a business credit card. I'll use this credit card to make
purchases for my business, like supplies and inventory. If I fail to make my credit card
payments, the creditor can initiate debt collection proceedings against me. However,
unlike secured debt, the creditor doesn't have a legal right to any specific piece of my
property. The creditor cannot repossess the supplies and inventory I purchased while
using the credit card.

Security Interests and Collateral

Secured debts are differentiated from unsecured debts by the use of collateral. Collateral
is property pledged by the debtor to his or her creditor in order to ensure the debtor's
payment of the debt.

When my business buys the building, the building will serve as the collateral for that
mortgage loan. If I fail to make my mortgage payments, the bank can exercise its right to
the collateral. The bank may be permitted to foreclose on the building and resell it to
cover the amount of my mortgage debt.

When I pledge the building to the bank, I'll be granting the bank a security interest. This
is an interest in the debtor's property given to the creditor in order to ensure the debtor's
payment of the debt. A security interest is a legal claim to the collateral and also
sometimes called a lien. If the bank owns a security interest in the building, then the bank
owns a legal claim to the building. The bank can then exercise this interest if I fail to
make my payments.

Lesson Summary

Let's review. If I borrow money from my bank, the bank is my creditor. A creditor
extends credit to someone else by loaning money. I'm the borrower, or debtor. I'm the
individual who owes money to a creditor.

In setting up a new business, I'll likely acquire secured debt. This means the debt is
secured, or guaranteed, by a particular piece of property. A secured creditor has certain
rights to particular property that are above and beyond the rights of other creditors. A
mortgage is an example of secured debt.

I'll likely also acquire unsecured debt. This is debt that's not guaranteed by a particular
item or piece of property. Credit card debt is an example of unsecured debt.

Secured debts are secured through the use of collateral. Collateral is property pledged by
the debtor to his or her creditor in order to ensure the debtor's payment of the debt. In a
mortgage, the collateral is the piece of property for which the debtor obtains the loan. For
my business mortgage, the collateral is my building.

Because the building is collateral, the bank has a security interest in the building. A
security interest is an interest in the debtor's property given to the creditor in order to
ensure the debtor's payment of the debt. The interest serves as a legal claim to the
collateral.

When a debtor fails to make payments on a secured loan, the creditor can
usually reclaim the collateral. This lesson explains when a creditor has a right
to repossession or foreclosure.

Secured Loans

I'm opening my own business! It will be a pet grooming business. I'm going to have a
storefront for grooming and selling pet supplies. I'm also going to have a specially
equipped van so that I can provide mobile pet grooming services. Therefore, I'm buying a
building and a van. I'm taking loans in order to buy these items.

Buildings and vehicles are normally purchased using a secured loan. A secured loan is
debt that is secured, or guaranteed, by collateral. Collateral is property pledged by the
debtor to his or her creditor in order to ensure the debtor's payment of the debt.

Many times, the item being purchased is used as the collateral for the secured loan. When
I buy my building, I'll use the building as collateral for my mortgage loan. When I buy
my van, I'll use the van as collateral for my car loan. Each of those lending institutions
will then hold a lien on my items.

If I fail to make payments on the building, the lender can seize the building in order to
pay off the mortgage loan. If I fail to make payments on the van, the lender can seize it in
order to pay off my car loan. Let's take a look at each of these types of property seizure.

Repossession

If I fail to make payments on the van, the lender can seize the van in order to pay off my
car loan. This type of seizure is called repossession. Repossession occurs when a creditor
claims an asset from a debtor who has failed to make his or her loan payments.

When I purchase my business van, I'm going to purchase it using a car loan from my
bank. My bank is the creditor, and I'm the debtor. The van will serve as collateral for my

secured loan. I'll make monthly loan payments on the van. Though I have the right to
possess and use the van, the van doesn't fully belong to me until I've completely paid for
it. In the meantime, the bank holds a lien on my van and will possess the title to my van.

If I fail to make my monthly payments, it's known as a default, and the bank then has the
legal right to repossess my van. I can be considered to be in default even if I've only
missed one payment. The bank can send a representative to take the van from me, though
not while I'm in it. Repossession can legally take place anywhere the collateral is out in
the open. The repossession team can take the van from my private property but can't
commit a burglary to repossess the van. This means the team can't break and enter my
locked garage.

Once the creditor repossesses the collateral, the creditor will normally resell the item in
order to recover the amount still owed on the loan. The proceeds of the sale will be
credited toward the amount I still owe. However, I'll still be responsible for any
remaining amount as well as any fees associated with the repossession and sale. For
example, let's say I owe $10,000 on the van when I default on the loan. The bank
repossesses and sells the van but for $6,000. I still owe the bank $4,000 for the van, plus
the cost of the repossession.

Foreclosure

Now, let's take a look at my loan for the building. This loan is a mortgage because it's a
loan for real property that's secured by the real property for which I'm taking the loan.
When I purchase my building, I'm going to purchase it using a mortgage loan from my
bank. My bank is the creditor, and I'm the debtor. The building will serve as collateral for
this secured loan. I'll make monthly mortgage payments on the building.

If I fail to make payments on the building, the lender can seize the building in order to
pay off my mortgage. This type of seizure is called foreclosure. Foreclosure occurs when
a creditor claims property from a debtor who has failed to make his or her mortgage
payments. Foreclosure proceedings are normally initiated once a debtor is three to four
months late making payments.

The creditor can seize the building and resell it in order to cover the amount of my
outstanding mortgage. If the building doesn't sell or the amount recovered is less than
what I owe, then the bank can additionally pursue a deficiency judgment against me. If
granted, this is a court order requiring me to pay the rest of what I owe on the mortgage.
For example, let's say I owe $50,000 for the building when I default on the mortgage. The
bank forecloses on my building and sells it but for $30,000. I still owe the bank $20,000
for my building debt.

Lesson Summary

Let's review. Large purchases, like buildings and vehicles, are normally purchased using a
secured loan. A secured loan is debt that is secured, or guaranteed, by collateral.
Collateral is property pledged by the debtor to his or her creditor in order to ensure the
debtor's payment of the debt. Many times, the item being purchased is used as the
collateral for the secured loan.

When a debtor fails to make payments on a secured loan, the creditor can usually reclaim
the collateral. For example, when I buy my van, I'll use the van as collateral for my car
loan. The creditor will hold a lien on the van. If I fail to make payments on the van, the
lender can seize it in order to pay off my car loan. This is called repossession.

Seizure of property can also take place through foreclosure. When I buy my building, I'll
use the building as collateral for my mortgage loan. A mortgage is a loan for real
property with the real property used as collateral. If I fail to make payments on the
building, the lender can seize the building in order to pay off the mortgage loan. If this
amount doesn't cover what I owe, I can be forced to pay the rest through a deficiency
judgment.

Bankruptcy is governed by federal law and allows a debtor the legal right to reorganize, and
sometimes discharge, his or her debts. This lesson explains the three main types of bankruptcy
proceedings.

Bankruptcy
I own a small pet grooming business, but it's not doing well. I'm not making much money. I'm
behind on both my business and personal bills as a result. I think it may be time to sell or close
the business, but I still probably won't have enough money to pay off my debts. I'm headed to see
a bankruptcy attorney, so I can explore my options.
Bankruptcy is a method for settling debts that is governed by federal law. It's used by
individuals or business entities that are unable to pay debts as they become due. The process is
meant to benefit both debtors and creditors. Debtors are able to restructure or relieve debts they
can't pay, while creditors are allowed to collect some of what they're owed.
Our federal Bankruptcy Code is found in Title 11 of the United States Code. Because this is
federal law, bankruptcy generally works the same from state to state. Occasionally, different
states have slightly different laws regarding what types of property can be exempt from
bankruptcy proceedings.
There are three main types of bankruptcy proceedings. The types are commonly referred to by
their Bankruptcy Code chapter number. I'm not sure which type of bankruptcy I need to file or
even if I need to file at all. So let's take a closer look at each type.

Chapter 7 Bankruptcy

Let's start by looking at Chapter 7 bankruptcy. This type is a liquidation proceeding used for
individuals. It's the most common type of bankruptcy proceeding. I'll consider this type if I
decide to file for bankruptcy as an individual rather than as a business. To qualify for a Chapter 7
bankruptcy, I'll have to prove that my income is insufficient to pay my debts.
Let's take a look at how it works. First, the bankruptcy court will appoint a trustee for the
debtor's estate. The trustee will then liquidate the estate. A liquidation means that the debtor's
non-exempt assets are sold and the proceeds are distributed to the debtor's creditors. Exempt
assets are those assets that the debtor gets to keep, even after filing for bankruptcy. These assets
aren't part of the bankruptcy estate. Exemptions typically include items like your household
goods and your car.
The creditors will be paid in a particular order, or priority, as listed in the Bankruptcy Code. This
means that some creditors may be paid in full and some may not be paid at all, depending on the
debtor's assets. For example, domestic support obligations and tax bills must be paid before
credit card bills are paid.
A debtor can expect to receive a Chapter 7 discharge of debts around four to six months after
filing the bankruptcy proceeding. Keep in mind, though, that not all debts are discharged through
bankruptcy. Some debts, like child support and student loans, must still be paid.
Also, note that a business can sometimes use Chapter 7, but the discharge of debts only applies to
individuals. This means that the business remains liable for old debts. The business must be fully
liquidated and cannot later re-open and acquire new assets.

Chapter 13 Bankruptcy
Let's take a look at another option for individual bankruptcy. I might also want to hear about
Chapter 13 bankruptcy. This type is less common and is a repayment plan used for individuals
with a regular source of income. If you earn more than the median income in your state, you may
be declared ineligible for Chapter 7. These debtors may be required to use Chapter 13 instead.
Chapter 13 has strict requirements. If I want to use Chapter 13, I'll have to prove that my
unsecured debt, like credit cards and medical bills, is less than $383,175. I'll have to prove that
my secured debt, like houses and cars, is less than $1,149,525. Note that these numbers are
adjusted every few years for inflation, and these particular figures are current as of 2013.
Chapter 13 proceedings are appealing because the debtor gets to keep all of his or her property.
This bankruptcy proceeding requires the debtor to formulate a viable plan for repaying most of
the debt. The bankruptcy court must approve the plan.
In accordance with the Chapter 13 plan, the debtor makes regular payments to the bankruptcy
trustee in order to pay the debtor's creditors. The debtor must fully repay all secured creditors.
This can help save these items from repossession. The debtor must also fully repay priority debts,
like tax bills and child support, but can arrange to repay only a portion of the amount owed to
unsecured creditors.

The debtor should plan to make bankruptcy payments for three to five years. At the end of the
repayment plan, all qualifying bankruptcy debts are discharged, giving the debtor a fresh start.

Chapter 11 Bankruptcy
Now let's take a look at a third type of bankruptcy proceeding. If I decide to file bankruptcy as a
business, then I'll consider a Chapter 11 proceeding. This type is a reorganization of debt for
businesses. It's used for businesses that owe more than they are worth and want to restructure
their debt but remain in operation. Some famous companies, like Six Flags and General Motors,
have restructured through Chapter 11.
Before restructuring, the bankruptcy trustee must conduct an investigation and file a
restructuring plan with the bankruptcy court. The plan must be approved by the bankruptcy judge
and also typically by a creditor's committee. This is a committee appointed to represent the
claims of the debtor's creditors. Under the plan, each creditor must receive at least as much as the
creditor would receive in a Chapter 7 bankruptcy.
A restructuring means that the business can reduce and modify its debt obligations. The plan
should help the business recover profitability and move forward as a successful enterprise. Under
Chapter 11, a debtor can downsize if necessary by selling some or all of its assets.

Lesson Summary
Let's review. Bankruptcy law is federal law and found in the Bankruptcy Code. This is located in
Title 11 of the United States Code. Bankruptcy is a legal method for settling debts. The goal is
for debtors to restructure or relieve debts they can't pay, while allowing creditors to collect at
least a portion of the payment they're owed.
There are three main types of bankruptcy proceedings:

Chapter 7 is a liquidation proceeding used mostly for individuals and the most common
type of bankruptcy proceeding.

Chapter 13 is less common and is a repayment plan used for individuals with a regular
source of income who make too much to qualify for Chapter 7 but don't have too much
debt.

Chapter 11 is a reorganization of debt for insolvent businesses that want to remain in

operation.

Consumer protection refers to the laws and other forms of government regulation designed to
protect consumers. One form of consumer protection is product liability. This lesson explains
consumer protection and product liability.

What Is Consumer Protection?

America is known for its consumerism. Good or bad, many argue that our culture places a high
value on material possessions and encourages people to consume more than they need. But
consumerism has more than one definition. In business and economy, it means to promote the
rights and safety of consumers.
Our current consumer protection efforts grew out of this business definition of consumerism.
Simply put, consumers are people. They are people who buy things. Consumer protection,
therefore, refers to laws and other forms of government regulation designed to protect the rights
of consumers. The Federal Trade Commission, or FTC, serves as our nation's consumer
protection agency and administers many different consumer protection laws, like the
Telemarketing Sales Rule and the Equal Credit Opportunity Act.
Consumer protection is based on consumer rights, or the idea that consumers have an inherent
right to basic health and safety. The FTC protects these rights by:

Enforcing product safety

Distributing consumer-related information

Preventing deceptive marketing

What Is Product Liability?

Consumer protection is often achieved through the legal doctrine of product liability. Generally
speaking, this is the legal responsibility imposed on a business for the manufacturing or selling
of defective goods. Product liability laws are state laws, and therefore vary by state. However,
the laws share a common goal. The laws are built on the principle that manufacturers and
vendors have more knowledge about the products than the consumers do. Therefore, these
businesses bear the responsibility when things go wrong, even when consumers are somewhat at
fault.
Product liability cases can result in large civil lawsuits and lucrative monetary judgments for the
plaintiffs. This can be harmful to small businesses and manufacturers and has been an argument
for tort reform. But keep in mind that, on the other hand, many of the product safeguards
consumers now enjoy are the result of previous lawsuits.
There are three main types of product liability. Businesses will be found liable to consumers
when a court finds:

Design flaws

Manufacturing defects

A failure to warn consumers of a possible danger

Example Case
Let's take a look at how consumer protection and product liability laws work in the real world.
One famous case comes out of California back in 1944 and is known as the 'Exploding CocaCola Case,' or Escola v. Coca-Cola Bottling Co.
Escola was a waitress in a restaurant. She was putting away glass Coca-Cola bottles when a
bottle exploded in her hand for no apparent reason. She suffered a severe, five-inch wound to her
palm and thumb. The top portion of the bottle, including the bottle cap, remained in her hand
while the bottom portion of the bottle smashed to the floor. She suffered severed muscles, nerves
and blood vessels. At trial, a Coca-Cola representative admitted to seeing other similarly
exploded bottles in the warehouse, though he didn't know how they might have exploded.
The main issue in this product liability case involved possible negligence in the bottle's design.
When the case went to trial, Escola's attorneys wanted to prove Coca-Cola's liability by simply
presenting evidence of the shattered bottle. Coca-Cola argued that the bottle was out of its
exclusive care and control when the accident occurred, and therefore really anything could've
happened to compromise the condition of the bottle.
However, the court sided with Escola. After considering the evidence, the court decided that
there was really no reasonable evidence to show that the bottle had been mishandled once it
arrived at the restaurant. Since a Coca-Cola delivery truck delivered the bottle, it was the
responsibility of Coca-Cola to deliver the bottle free of defects and in a manner that wouldn't
explode. Coca-Cola was therefore liable. Escola was awarded money damages for her medical
bills and to compensate for her severe injuries.
One concurring justice noted that it didn't really matter whether or not Coca-Cola acted
negligently since product liability cases based on a manufacturer's defect should be subject to a
strict liability standard. This means that a manufacturer will be held liable if the manufacturer's
defective product causes injury, regardless of fault. This wasn't the law in 1944, but it is today in
many jurisdictions.

Lesson Summary
Let's review. Consumer protection is a broad concept. Generally, it refers to all of the laws and
other forms of government regulation designed to protect the rights of consumers. These laws
and regulations are administered by the Federal Trade Commission, or FTC.
Consumer protection comes from our idea that consumers have an inherent right to basic health
and safety that must be protected. These are known as consumer rights. The FTC protects these
rights by:

Enforcing product safety

Distributing consumer-related information

Preventing deceptive marketing

One form of consumer protection is product liability, which is the legal responsibility imposed
on a business for the manufacturing or selling of defective goods. These laws vary state-to-state,
but all seek to protect consumers by holding manufacturers and vendors responsible when things
go wrong with their products. This is accomplished through three main types of product liability:

Design flaws

Manufacturing defects

Failure to warn consumers of a possible danger

The 'Exploding Coca-Cola Case' is an example of a manufacturing defect based on Coca-Cola's

negligence. But one justice suggested that a strict liability standard be used. This would mean
that Coca-Cola would be liable if the defective product causes injury, regardless of fault. This
standard is used today in many jurisdictions.
Businesses are held responsible when their products are defective. There are three types of
possible product liability defects. This lesson explains the three possible types of defects for
which businesses can be liable.

Product Liability
Products are simply goods, or things that we buy or have bought. Product liability is the legal
responsibility imposed on a business for the manufacturing or selling of defective goods. It's a
form of consumer protection. In other words, it's a way that our society protects those of us who
buy goods. We have an inherent right to basic health and safety, and our society imposes certain
laws and regulations so that our goods don't harm us.
There are no federal product liability laws. All product liability laws are state laws, and therefore
vary by state. However, there are some commonalities in all jurisdictions regarding product
liability defect cases:

The business is assumed to have more knowledge about the product than the consumer.

The consumer must prove that the product is defective.

The business bears responsibility when things go wrong with the product, even if the
consumer is somewhat at fault.

Product liability cases are popular with consumers, but unpopular with businesses. This type of
civil lawsuit can often result in large monetary judgments, recalls and sometimes business

bankruptcies. A product defect is considered to be a strict liability offense, and that's especially
rough for businesses. This means that it doesn't matter how careful the business was; if there's a
defect in the product that causes harm, the business is liable.
Note though, that these lawsuits often result in important changes. These suits spawn innovation
and bring about product safeguards. This results in safer environments for the consumers.

Three Types of Defects

There are three main types of product liability based on a product defect. If a consumer has been
injured or suffered other damages because of a product he or she used, that consumer may have a
defective product liability claim. The business will be found liable to the consumer if the court
finds a:

Design flaw

Manufacturing defect

Failure to warn the consumer of a possible danger

There are a few things to keep in mind about these defects. Design flaws are inherent
deficiencies that exist before the product is manufactured. This means that the product is planned
in a way that is already flawed. In other words, all of the items produced will have the same
defect. Manufacturing defects are errors that occur during the production of the item. This
means that some sort of mistake occurred and only a certain few out of the many items produced
have the defect. Failure to warn is also sometimes referred to as a marketing defect. This means
that the manufacturer failed to include proper instructions or to warn consumers of potential
dangers related to the product. The three types of defects are best explained by looking at
individual examples, so let's take a look at each one separately.

Design Flaws
Remember that design flaws cause all of the items to have the same defect. The products are
inherently dangerous and defective even though the products were made according to the
manufacturer's specifications. For example, let's say that I buy a new, small model car. On the
first day, it flips over while I'm turning a corner. I was going a reasonable speed in my
neighborhood. I was injured and so I consult an attorney.
During litigation we find out that many people have had the same problem with this small car.
This particular model has a tendency to flip over. The car's center of gravity is simply too high.
It's a design flaw. Since there's a defect and that defect caused an injury to me, the car
manufacturer is liable.

Manufacturing Defects

Manufacturing defects and design flaws are often confused. However, manufacturing defects
aren't common to an entire product model. Instead, some mistake occurred that resulted in a
defect to a particular item or to a few items. For example, let's say that I buy a new car. On the
first day of driving it, the entire wheel falls off. I was going a reasonable speed in my
neighborhood. I was injured, and I consult an attorney.
During litigation, we find out that the manufacturer did not properly secure the lug nuts on my
wheel. The machine at the factory was accidentally calibrated to a different size wheel when my
car came down the line. Since there's a defect and that defect caused an injury to me, the car
manufacturer is liable.

Failure to Warn
Lastly, let's look at product liability cases where a business has failed to warn consumers of a
possible danger, or failed to provide adequate instructions regarding the product's proper use. In
these cases, the product isn't usually inherently dangerous when used properly and for the
product's intended use. However, the product can be dangerous when the consumer fails to
follow a specific instruction, or when the product is used in a way that's not obviously cautioned
against. For example, let's say that I buy a new car. On the first day of driving it, the check
engine light comes on. I hop out and go to the front of the car to open the hood, but when I put
my hand on the hood I'm badly burned.
Since I was injured, I consult an attorney. During litigation we find out that, on this model car,
the hood release is on the dashboard and no one should touch the hood. If the car overheats, the
hood will get very hot, very fast and can cause severe burns if touched. However, there's no
obvious warning posted anywhere. Since there's a marketing defect and that defect resulted in an
injury to me, the car manufacturer is liable.

Lesson Summary
Let's review. Businesses are held responsible when their products are defective. This is called
Product liability and is the legal responsibility imposed on a business for the manufacturing or
selling of defective goods. We have this legal doctrine because it serves as a form of consumer
protection. There are actually three different types of possible product liability defects. They are:

Design flaws

Manufacturing defects

Failures to warn consumers of possible dangers

Design flaws are inherent deficiencies that exist before the product is manufactured. This means
that the product is planned in a way that is already flawed. Manufacturing defects are errors
that occur during the production of the item. This means that some sort of mistake occurred and
only a certain few out of the many items produced have a defect. Failure to warn consumers is

the same thing as a marketing defect, and means that the manufacturer failed to include proper
instructions or to warn consumers of potential dangers related to the product. Keep in mind that
the business will be found liable to the consumer if the court finds any of these three defects.
Since product defect is a strict liability offense, it doesn't matter how careful the business was; if
there's a defect in the product that causes harm, the business is liable.

Learning Outcome
After watching this lesson, you should be able to identify and explain the three types of defects
associated with product liability.
Businesses are held responsible when their products are defective, known as product liability.
Liability can be based on one or more of three theories: Breach of warranty, negligence, and
strict liability. This lesson explains these three theories.

Product Liability
Many businesses sell or manufacture goods. Product liability is the legal responsibility imposed
on a business for the manufacturing or selling of defective goods. This is one way our society
enforces consumer protection, or the idea that consumers shouldn't be harmed by the products we
buy. When a consumer is harmed by a product, that consumer can usually file a civil lawsuit in
state court. All product liability laws are state laws, and therefore vary by state.
But in any jurisdiction, the consumer will need to choose a theory of liability under which to sue.
This simply means that the consumer, or plaintiff, must base his or her cause of action on a
recognized legal rule that would hold the business legally responsible.
In most jurisdictions, a plaintiff's cause of action must be based on one or more of these three
different theories:

Breach of warranty

Negligence

Strict liability

Let's take a look at each of these theories individually.

Breach of Warranty
The first theory of product liability is breach of warranty. This theory concerns the seller's
failure to fulfill the terms of a promise, claim, guarantee, or representation made about the
product. This theory isn't used very often because it's based in contract law and assumes that a
contract exists between the consumer and the seller. Therefore, the consumer must prove the

existence of a contract or the existence of an agreement. This theory applies specifically to

agreements made between a consumer and a seller.
There are three different types of warranties. The first type of warranty is an express warranty.
This means the seller stated, or communicated, some sort of guarantee. For example, 'greener
grass in 30 days' is an express warranty, whether or not the word 'guaranteed' is actually used.
The second type of warranty is an implied warranty of merchantability. This is an unwritten
and unspoken guarantee that the product is fit for the ordinary purpose for which it's intended.
For example, a lawnmower is normally used for cutting grass. If the lawnmower doesn't come
with a blade or the blade is too dull, then the lawnmower won't be fit for its ordinary purpose.
The third type of warranty is an implied warranty of fitness. This is a guarantee that the product
is fit for a particular, non-ordinary purpose. For example, let's say that Kay works at a pet store.
Some customers come in looking for kitty litter to help clean up an oil spill at a local garage. Kay
recommends several bags of kitty litter to soak up the oil and tells the customers that the litter
will work. Once Kay makes this recommendation, she's made an implied warranty of fitness.

Negligence
The second theory of product liability is negligence. This is the failure to exercise reasonable
care. Under a theory of negligence, the business either failed to do something they should've
done or did something they shouldn't have done. The negligent party can be anyone within the
business, including the designer, manufacturer, distributor, or seller.
Everyone in this chain of distribution has a duty to exercise reasonable care. The care must be
shown toward anyone who is likely to be injured by the product. This includes the purchaser, his
or her family members, any bystanders, and anyone who leases or holds the product. Notice that
this is unlike breach of warranty, as that theory is limited to the relationship between consumers
and sellers only.
Let's take a look at a real life example of product liability negligence. You may have heard of the
'McDonald's hot coffee case.' This case is entitled Liebeck v. McDonald's Restaurants.
Stella Liebeck was 79 years old and a passenger in her grandson's car when she purchased a cup
of coffee at a McDonald's drive-through. After they parked so she could add cream and sugar,
Liebeck placed the Styrofoam cup of coffee between her legs and removed the lid. When she did,
she accidentally spilled the entire cup of coffee in her lap.
Within minutes, she'd suffered third-degree burns. She spent eight days in the hospital and
underwent numerous skin-graft surgeries to her thighs and groin area. Research showed that
McDonald's served its coffee at a much higher temperature than many other establishments and
had received hundreds of injury reports. Many of these reports even involved children.
Liebeck initially asked McDonald's to pay only her actual and anticipated medical bills. This was
a relatively reasonable $20,000. But McDonald's refused to pay more than $800. At a jury trial,

McDonald's was found liable based on a theory of negligence. Liebeck was originally awarded
$160,000 to cover her expenses and another $2.7 million in punitive damages.
The judge then reduced this award to $640,000. Both parties appealed and later settled out-ofcourt for an undisclosed amount, though it's the multi-million dollar award that Liebeck never
saw, and never asked for, that many people remember.
In this case, McDonald's both made and sold the product. But keep in mind that negligence can
apply to any of the parties in the chain of distribution, as long as the negligent party and the
negligent act can be identified.

Strict Liability
Now let's take a look at a third theory of product liability. It's strict liability. This means that a
business will be held liable if its defective product causes injury, regardless of fault.
In most jurisdictions, strict liability generally requires the plaintiff to prove these elements:

The product was defective

The product was therefore unreasonably dangerous

The defect caused the plaintiff's injury

Strict liability is an easier theory for plaintiffs to use. Unlike negligence, the consumer isn't
required to prove who failed their duty or who, exactly, caused the plaintiff's injury. Strict
liability can be imposed on manufacturers, distributors, or retailers for their defective products.
For example, let's look at a real life case involving a defective seat belt. A jury ordered
Mitsubishi Motors Corporation to pay a Florida family almost $11 million in damages after their
25-year-old son was killed in a 2004 automobile accident. The Laliberte family's product liability
lawsuit was based on a strict liability theory.
Scott Laliberte was a front-seat passenger, properly wearing his seat belt, in a Mitsubishi Sport
Nativa when the SUV was involved in a rollover accident. The seat belt was purposely designed
with a 'breakaway loop,' meaning that an extra 10 inches of slack would release during an
accident.
Laliberte's seat belt operated as designed, but his seat back unexpectedly collapsed.
Consequently, he was partially ejected through the back seat window. The family alleged that the
seat belt and possibly a faulty seat back caused this to happen. While Laliberte suffered fatal
injuries, the driver of the SUV suffered only a scratch. The driver's seat belt, notably, did not
have a breakaway loop.

The Laliberte family wasn't required to prove who at Mitsubishi was at fault. It didn't matter if it
was the defective design or a defective production. If either the seat belt or seat back was
defective and that caused the injuries to their son, then Mitsubishi would be found strictly liable
for Laliberte's death, and the jury found that they were.

Lesson Summary
Let's review. Product liability is the legal responsibility imposed on a business for the
manufacturing or selling of defective goods. When a consumer wishes to bring a civil cause of
action against a business for product liability, that consumer must choose one or more theories of
liability.
Generally, there are three different theories:

Breach of warranty

Negligence

Strict liability

Breach of warranty is the seller's failure to fulfill the terms of a promise, claim, guarantee, or
representation made about the product. This theory is based in contract law and assumes that a
contract exists between the consumer and the seller. There are three different types of warranties:

An express warranty means the seller stated, or communicated, some sort of guarantee.

An implied warranty of merchantability is an unwritten and unspoken guarantee that

the product is fit for the ordinary purpose for which it's intended.

An implied warranty of fitness is a guarantee that the product is fit for a particular, nonordinary purpose.

The second theory is negligence. This is the failure to exercise reasonable care. Remember that
everyone in the chain of distribution has a duty to exercise reasonable care, and the care must be
shown toward anyone who is likely to be injured by the product.
The third theory is strict liability and means that a business will be held liable if its defective
product causes injury, regardless of fault. Unlike negligence, the consumer isn't required to prove
who failed their duty or who, exactly, caused the plaintiff's injury. If the product is defective and
caused the plaintiff's injury, then the business will be held strictly liable.
Credit protection is a form of consumer protection that is designed to help preserve credit health
for both individuals and businesses. This lesson discusses the laws and services involved in
credit protection as well as the FTC's role.

Credit Protection
According to a 2012 poll, approximately 40% of Americans carried credit card debt from month
to month. The average American adult carried nearly $5,000 in traditional credit card debt, not
counting zero-balance or store-issued cards.
Are you one of these debtors? Are you any other type of debtor? Do you have a mortgage or a
car loan? If so, you'll be pleased to know that there are many laws and regulations in place for
your protection. This is Creed, and he's going to teach us about the laws and services involved in
credit protection.
Credit protection is just one of the many forms of consumer protection. It's a collection of laws,
regulations, and services designed to help preserve credit health for both individuals and
businesses. The protections are geared toward both those who seek credit and those who are
already debtors. The credit protection efforts mostly work to shield consumers from any practice
that might harm a consumer's ability to obtain future credit, typically by preventing practices that
might unfairly result in an adverse impact to the consumer's credit score.
A credit score generally reflects the creditworthiness of the entity. Individuals, if they've applied
for or ever received credit, will usually have a credit score. Small businesses will also usually
have a credit score. Other businesses will generally have a business credit profile. The profile
will reflect the credit history and creditworthiness of the business.

Bureau of Consumer Protection

Our federal consumer protections, and therefore our federal credit protections, are regulated
through the Federal Trade Commission (FTC). The FTC calls itself our nation's consumer
protection agency. There are several different offices and bureaus within the FTC. One of these is
the Bureau of Consumer Protection, or BCP. According to the FTC, this bureau works for the
consumer to prevent fraud, deception, and unfair business practices in the marketplace.
The bureau has several main functions. The BCP:

Enforces consumer protection laws and regulations

Conducts investigations and litigation regarding fraudulent, unfair, or deceptive business

practices

Develops rules and regulations as well as suggests laws to Congress

Educates individuals and businesses on their consumer and credit rights

The BCP contains seven different divisions, each with its own specialty. Several of these are
involved specifically with credit protection services, such as:

The financial practices division works to protect consumers from unfair or deceptive
financial practices. This includes mortgage fraud, debt relief scams, harmful debt
collection, and many other illegal practices.

The privacy and identity protection division works to prevent identity theft. It suggests
laws and regulations for the credit reporting industry in order to secure better credit
protection. Results include the Fair Credit Reporting Act, which we'll talk about in a
moment.

The enforcement division litigates all FTC civil and administrative actions in order to
enforce consumer protection issues, including all FTC cases involving credit.

Credit Protection Laws

The FTC's BCP regulates our federal credit protection laws. There are numerous federal credit
protection statutes that have been developed and enacted throughout the years. Let's take a look
at some of the federal laws specifically meant to protect our credit rights.
The Truth in Lending Act - It was enacted in 1968 and requires these lenders to disclose all credit
terms, including finance charges. The goal is for borrowers to efficiently and accurately calculate
the true cost of borrowing money.
The Fair Credit Billing Act - It's an amendment to the Truth in Lending Act enacted in 1974. It
instituted several provisions that speak directly to credit protection. For example, it requires
credit card companies to promptly credit accounts and correct billing errors.
The Fair Debt Collection Practices Act was enacted in 1977. It prohibits various abusive debt
collection practices. For example, it prohibits debt collectors from calling you before 8:00 a.m.
or after 9:00 p.m. in your time zone.
The Fair Credit Reporting Act - This is part of the Truth in Lending Act, enacted in 1970. It
allows consumers access to their credit reports and sets out the procedures consumers can follow
to correct any reporting errors or dispute any reported information.
The Fair Credit and Charge Card Disclosure Act is an amendment to the Truth in Lending Act,
enacted in 1988. It brought about a fuller disclosure of the terms and conditions contained in
credit card applications, such as interest rates and annual fees.
The Equal Credit Opportunity Act was enacted in 1976. It prohibits creditors from discriminating
against applicants with respect to any credit decision. Discrimination can't be based on race,
color, religion, national origin, gender, marital status, age, the fact that the applicant receives
public assistance, or because the applicant exercised rights under the Consumer Credit Protection
Act.

The Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, became
effective in 2010. It places several different prohibitions on credit card companies. For example,
companies can no longer issue credit cards to people under age 21 without proof the person can
pay the debt or without a parent or guardian co-signing the application.

Lesson Summary
Let's review. Credit protection is a form of consumer protection geared toward preserving a
consumer's credit score. It's a collection of laws, regulations, and services designed to help
preserve credit health for both individuals and businesses. Our federal credit protections are
regulated through the Federal Trade Commission (FTC).
The FTC is made up of several different offices and bureaus. Credit protection is specifically
addressed through the FTC's Bureau of Consumer Protection, or BCP. The BCP works for the
consumer to prevent fraud, deception, and unfair business practices in the marketplace.
The FTC's BCP regulates our federal credit protection laws. There are numerous laws that have
been enacted over the years in order to better protect consumers' credit. Some of these important
laws are:

The Truth in Lending Act required lenders to more fully disclose loan terms.

The Fair Credit Billing Act required companies to more closely protect consumers by
promptly posting credits and correcting errors.

The Fair Debt Collection Practices Act prohibited various abusive debt collection
practices.

The Fair Credit Reporting Act allowed consumers better access to their credit reports.

The Fair Credit and Charge Card Disclosure Act required a fuller disclosure of the terms
and conditions contained in credit card applications.

The Equal Credit Opportunity Act prohibited discrimination against credit applicants.

The Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act,
strengthened restrictions on companies regarding several items, including issuing cards to
minors.

Financial privacy protection is a form of consumer protection. It's designed to protect consumer
information held by financial institutions. This lesson discusses financial privacy protection and
the Gramm-Leach-Bliley Act.

Financial Privacy Protection

Think about your checking account for a moment. What type of private information does that
account involve? Certainly your birth date, Social Security number, account routing number, and
the amount of money you make monthly. If I had complete access to your account, I would likely
also know things like:

Where you shop

How much debt you owe

Account numbers on your credit cards and utility accounts

Where you buy your groceries

Where you get your hair done

Where you buy your gas

Where your kids go to school

You leave a financial trail wherever you go. Financial privacy protection is a form of consumer
protection. It's a collection of laws and regulations designed to protect the privacy of consumer
information held by financial institutions, like banks and brokerage firms.

Gramm-Leach-Bliley Act
The main law governing financial privacy protection is the Gramm-Leach-Bliley Act, or
GLBA. This federal law was enacted in 1999 and is named for the three congressional
cosponsors of the act. The act is extensive and complicated with lengthy provisions. Generally
speaking, though, it specifies how financial institutions must handle consumers' private
information.
The GLBA opened channels to allow the flow of financial information between different
financial institutions. However, the act also placed strict guidelines on the use of this information
in order to safeguard the privacy of the financial information. Under the act:

Information must be securely stored.

Consumers must be well-informed about the use of their information.

Consumers must be allowed to opt-out of certain information sharing.

The act applies to all U.S. financial institutions. This means it applies to companies that offer any
type of financial product or service, such as loans, investment advice, or even insurance. But
note that the act only requires these companies to protect non-public personal information they

collect about individuals. The act doesn't limit most information collected through commercial
activity or business transactions, but it limits things that aren't publicly available, like a retailer's
list of its credit card customers. The act has three main sections:

The financial privacy rule

The safeguards rule

The pretexting provisions

Let's take a quick look at each of these sections.

The Financial Privacy Rule

The GLBA's financial privacy rule requires companies to give individuals privacy notices and
the right to opt-out of some information sharing. You may recall receiving this type of privacy
notice from your credit card company or bank. The privacy notices must clearly explain the
company's policies on information sharing. The company must tell the individual what type of
non-public financial information they collect and explain how they use and share that
information.
How often you receive a privacy statement depends on your relationship with the company. If
you're a customer, then that means you have an on-going relationship with the financial
institution. In that case, they must automatically send you an annual privacy notice as long as
you remain a customer.
The privacy notice must explain how individuals can opt-out of information sharing for
information that's largely immaterial to other financial institutions. For example, you might not
want your non-public financial information, such as account numbers, payment history, or
balances, shared with a third-party. Unless a financial institution is buying your loan, they likely
don't need this type of information. The company must offer a practical way for individuals to
opt-out, such as a toll-free telephone number.

The Safeguards Rule

The second section is the safeguards rule. This rule basically requires financial institutions to
develop and implement an information security plan. The plan must include both physical and
technical safeguards for consumer information. The rule is purposely designed to be flexible, so
that each company can execute a security plan that's appropriate for the size and nature of the
particular business. Keep in mind, however, that the Federal Trade Commission commonly
brings enforcement actions against financial institutions that fail to provide reasonable security
measures.

The Pretexting Provisions

The third section contains the pretexting provisions. Unlike the other two sections, these
provisions don't apply to financial institutions. The provisions basically prohibit individuals and
companies from obtaining customer information from financial institutions under false pretenses.
This means the individual or company intentionally misrepresents a fact in order to gain access
to the financial information. For example, the Federal Trade Commission has brought
enforcement actions against information brokers for engaging in pretexting.

Lesson Summary
Let's review. There are many different types of consumer protection. One of those is financial
privacy protection. This is a collection of laws and regulations designed to protect the privacy
of consumer information held by financial institutions, like your bank or your mortgage lender.
There's one main law that governs financial privacy protection. This is the Gramm-LeachBliley Act, or GLBA. The act strictly governs how financial institutions must handle consumers'
private information, even though it opened channels to allow the flow of financial information
between different financial institutions. The act has three main sections:

The financial privacy rule requires companies to give individuals privacy notices and
the right to opt-out of some information sharing.

The safeguards rule requires financial institutions to develop and implement an

information security plan.

The pretexting provisions prohibit individuals and companies from obtaining customer
information from financial institutions under false pretenses.

Unfair competition refers to several different types of intentional torts that cause economic injury
to another person's business. These torts are various forms of deceptive business practices. This
lesson explains unfair competition.

Unfair Competition
Welcome to Barks and Bubbles! I spent years building my pet grooming and pet supply business.
I was shocked and disappointed to hear that my ex-employee, Wilma, opened a very similar
business across town. She even used my same pink logo that I designed myself. I'm headed off to
see my attorney because I think Wilma's purposely trying to steal business away from me.
Unfair competition refers to several different types of intentional torts that cause economic
injury to another person's business. The torts are many various forms of deceptive or wrongful
business practices that will allow a civil cause of action and damages for the plaintiff if the
plaintiff is successful. Some forms of unfair competition can also be accomplished through a
crime, like stealing a client list.
These torts are sometimes broken into two broad categories:

The term 'unfair competition' can refer only to those torts involving an attempt to pass off
goods or services as if they belonged to another business.

The term 'unfair trade practices' can be used to refer to all other torts falling under unfair
competition.

I think Wilma's committed both categories. Let's take a look at what I've discovered.

Types of Unfair Competition

The first thing I noticed about Wilma's business was her logo. It's too much like mine! She has it
on her sign, her marketing information, her website, and her products. I think she wants people to
confuse her business for mine.
I'm pretty sure this is a case of trademark infringement and a form of unfair competition.
Trademark infringement is using a trademark without authorization from the owner or
licensee, thereby causing a violation of trademark rights. I never gave Wilma permission to use
my logo. Since Wilma used to work for me, I know she copied my logo on purpose.
I next noticed Wilma's marketing list. It seems that all of my customers received invitations to
her grand opening. Now they're receiving her unsolicited coupons emailed to their personal email
addresses. I think Wilma misappropriated my trade secrets when she left.
Generally speaking, a trade secret is any confidential business information that provides the
business with a competitive edge. This includes things like sales methods, distribution methods,
marketing methods, research methods, consumer profiles, advertising strategies, suppliers lists,
client lists, firm software, and manufacturing processes. I never gave Wilma my client list, but
she had access to it as an employee in my store. It looks like she took a copy of it when she left
and is now using it to target my customers! This will be unfair competition and may even be a
crime.

Deceptive Advertising
The third thing I noticed about Wilma's business concerns an advertisement. She placed an ad in
our local paper last Sunday. In it, she lists several pet products that she knows I sell. The
products appear to be knock-offs of my line of homemade, organic pet hair care products. She
lists several products, and then lists a 'Barks and Bubbles' price that is much higher than what I
actually charge. She then lists her price, which is, of course, much lower. The ad isn't true! This
is deceptive advertising and unfair competition because Wilma is using an inaccurate
advertisement to make a false statement about quality or price in comparison to another's
product.
Deceptive advertising can be accomplished in many other ways too, such as through bait and
switch schemes. This is when a business advertises a low cost item to bait a customer into a
store, and then switches the item for something higher priced. This scheme is illegal if the

business refuses to show the low cost item to the customer, doesn't have enough of the low cost
item on hand or try to make appropriate concessions, or if the business discourages salespeople
from selling the low cost item.

Laws Governing Unfair Competition

Bait and switch schemes, as well as deceptive comparisons and other deceptive advertisements,
are made illegal under most state laws. Some states have adopted a form of the Uniform
Deceptive Trade Practices Act, which simply makes a private civil remedy available to
plaintiffs due to any misleading advertising, false disparagement, trade symbol infringement, or
other deceptive trade practice. The plaintiff can be a consumer or a competing business.
Federal law also governs unfair competition. The Lanham Act devotes an entire section to
unfair competition between businesses. Section 43(a) allows businesses to sue other businesses
for a wide-range of false, misleading, confusing, or deceptive statements or practices.
The Federal Trade Commission, or FTC, is the federal agency in charge of preventing business
practices that are anti-competitive, deceptive, or unfair to consumers. As a part of this goal, the
FTC regulates the Lanham Act and also has its own set of unfair competition regulations. These
can be found in Title 16 of the Code of Federal Regulations. Though the FTC concentrates on
consumer protection, businesses also sometimes benefit from general FTC protections.

Lesson Summary
Let's review. Unfair competition actually refers to several different types of intentional torts. It
includes various forms of deceptive business practices. These civil causes of action cause
intentional, economic injury to another person's business. Sometimes a crime can be involved as
well. For example, consider these examples of torts that will qualify as unfair competition:

Trademark infringement

Misappropriation of trade secrets

Deceptive advertising

Also keep in mind that unfair competition can refer to either one, or both, of two broad
categories:

The term 'unfair competition' sometimes refers only to those torts involving an attempt to
pass off goods or services as if they belonged to another business.

The term 'unfair trade practices' is sometimes used to refer to all other torts falling under
unfair competition.

Torts are usually state law, and therefore vary by state. Some states have enacted a form of the
Uniform Deceptive Trade Practices Act, making any misleading advertising, false
disparagement, trade symbol infringement, or other deceptive trade practices a civil cause of
action. Otherwise, some federal laws address unfair competition, such as The Lanham Act and
Title 16 of the Code of Federal Regulations. These are both regulated by the Federal Trade
Commission in its consumer protection goal to prevent anti-competitive, deceptive, and unfair
business practices.
A tort is simply a civil wrong. There are three general types of torts that may cause injury to
another person. In civil law, torts are grounds for lawsuits to compensate a grieving party for any
damages or injuries suffered.

Tort Law: Three Types of Torts

Torts are wrongdoings that are done by one party against another. As a result of the wrongdoing,
the injured person may take civil action against the other party. To simplify this, let's say while
walking down the aisle of a grocery store, you slip on a banana that had fallen from a shelf. You
become the plaintiff, or injured party, and the grocery store is considered the tortfeasor or
defendant, the negligent party.
Simply said, you would probably take civil action against the grocery store to recoup
compensation for pain, suffering, medical bills and expenses incurred as a result of the fall.
Negligence is just one tort category. There are three general categories of torts. Regardless of the
tort action, three elements must be present:

Tortfeasor, or defendant, had a duty to act or behave in a certain way.

Plaintiff must prove that the behavior demonstrated by the tortfeasor did not conform to
the duty owed to the plaintiff.

The plaintiff suffered an injury or loss as a result.

Because torts are a civil action involving private parties, punishment does not include a fine or
incarceration. The punishment for tortious acts usually involves restoring the injured party
monetarily. Sometimes a court order may force the tortfeasor to either do or not do something.
Think trespassing, defamation or slander. Let's explore the three types of torts:

Intentional torts

Negligence torts

Strict liability torts

Intentional Torts

An intentional tort is an act that is intentionally committed against another person with the aim
of causing harm. There are several intentional torts that fall into this category, like assault,
battery, conversion, fraud, false imprisonment, trespassing and invasion of privacy. Not every
injury-producing action is cause for an intentional tort lawsuit. The court will look at the conduct
of the defendant to determine whether the actions were, in fact, intentional or just mere willful
and wanton behavior not specifically meant to cause fear or injury, but is considered reckless.
Betty Geeslin, a personal representative of Bill Geeslin in Bill Geeslin v. Kobe Bryant, is one of
those cases. Back in November of 2005, Geeslin and a friend attended a Lakers/Grizzlies game.
The fans held courtside seats for the event. At some point during the game, famous basketball
player Bryant ran to retrieve an out-of-bounds ball. As he reached for the ball, he lost his footing
and fell atop Geeslin, leaving him with injury to his chest and lungs. After several days, Geeslin,
now home, began experiencing uncomfortable pain in his chest severe enough to visit an
emergency room. Once examined, it was diagnosed that he suffered a bruising and a crushed
lung. He was prescribed several pain medications and a breathing machine and sent home.
After a few weeks of home treatment, Geeslin decided to sue Bryant for assault, battery and
infliction of emotional distress. Geeslin claimed that when Kobe attempted to remove himself
from Geeslin's chest, he used extreme force to push away, causing injury. Geeslin also claimed
that he could no longer sleep at night, suffered anxiety and felt embarrassed by the incident in
general.
When the court analyzed the case, it felt that the elements for tortious behavior were not present.
Specifically, Geeslin assumed the risk of injury by choosing courtside seats. Bryant in no way
intended to cause injury to Geeslin at the time of the initial fall or as he attempted to return to the
court, and a reasonable person would not conclude that the incident was so seriously traumatic
that Geeslin suffered emotional distress to the degree he claimed. In a motion for defendant's
summary judgment, the court ruled in favor of Bryant.
On a side note, Geeslin died prior to final judgment and a personal representative maintained the
claim against Bryant until time of final judgment. However, Bryant settled with the estate out of
court for the sum of $75,000 to put a rest to any further appeals or complaints against him. Our
next torts deal with actions that cause injury that do not have intentional characteristics.

Negligence Torts
Negligence occurs when a party fails to demonstrate the kind of care a prudent person would
take in the same situation and an injury results from the action or inaction. There are five
elements necessary to prove a negligence case:

Defendant owed a duty of reasonable care.

Defendant did not behave in a reasonable manner to demonstrate care.

Plaintiff suffered an injury as a result of the defendant's actions or inactions.

The injury caused actual damages.

Proximate cause: defendant's actions or inactions were the cause of injury.

While these elements seem repetitive, they are necessary for a negligence case. Let's see what
happens in a comical case involving negligence.
In Byrne v. Boadle (1863), Byrne was walking down the street when a barrel full of flour fell out
of a window and landed upon him, causing the plaintiff injury. In this case, the flour shop owed
anyone walking on the sidewalk below the window a duty of care. In other words, a flour barrel
should not be in a window where it could fall. The defendant should have used reasonable care
that the flour barrels are stored in an area of the shop where injury to a passer-by could not
possibly happen. Byrne was injured because of the flour shop's negligence in storing flour barrels
appropriately, leaving the flour shop solely responsible for this injury. Needless to say, this was a
prima facie case because the evidence was strong enough on face value to convince a court to
rule in favor of the plaintiff.

Strict Liability Torts

Cases involving strict liability are similar to negligence. In these instances, the defendant may
be responsible for damages even if the defendant was not negligent. This may seem counterintuitive, but it makes sense. Let's take the dog bite law as an example.
In many states, a dog owner is responsible for any injury resulting from the dog biting another
person. If the defendant's dog has a predisposition to snap or act aggressively toward people, or
has been known to attack without provocation and bites a person, the owner can be strictly liable
for the actions of the dog. Strict liability applies whether the owner took all precautions, like a
leash or a fenced-in pen, or not. By simply owning the dog, the owner takes responsibility for its
behavior.
There are a few conditions that the owner may not assume the responsibility. If a trespasser
enters the home, a dog may bite the person. A dog may even nip his veterinarian without owner
liability. If a person provokes the dog to the point of angering the pooch, the owner may not be
liable. Finally, there is no liability if the dog is aiding a police or military officer during official
duty. Of course, there is no federal law governing strict liability and dog bites. It is always best to
check with your state for further information.

Lesson Summary
To sum things up, a tort is a wrongdoing that is done by one party against another and, as a
result of the wrongdoing, the injured person may take civil action against the other party. There
are two parties in a civil action involving a tort claim: the plaintiff, or injured party, and the
tortfeasor or defendant, the negligent party. Elements of a tort action state that the tortfeasor or
defendant had a duty to act or behave in a certain way. The plaintiff must prove that the behavior

demonstrated by the tortfeasor did not conform to the duty owed to the plaintiff, and the plaintiff
suffered an injury or loss as a result.
We learned about the three major torts:

Intentional torts

Negligence torts

Strict liability torts

An intentional tort is an act that is intentionally committed against another person with the aim
of causing harm and includes fraud, assault, battery, conversion and others.
Negligence occurs when a party fails to demonstrate the kind of care a prudent person would
take in the same situation and an injury results from the action or inaction and requires five
elements to prove a case:

Defendant owed a duty of reasonable care.

Defendant did not behave in a reasonable manner to demonstrate care.

Plaintiff suffered an injury as a result of the defendant's actions or inactions.

The injury caused actual damages.

Proximate cause: defendant's actions or inactions were the cause of injury.

Finally, cases of strict liability are similar to negligence. In these instances, the defendant may
be responsible for damages even if the defendant was not negligent. This is generally used for
product liability or even the dog bite law. Again, check with your state for more information on
strict liability and pets.

Learning Outcomes
After you've completed this lesson, you'll be able to:

Describe what constitutes a tort and list three types of torts

Provide examples of intentional torts

List the elements required to prove negligence

Explain what strict liability is and some factors that may negate a finding of strict liability

The tort of battery occurs when a person intentionally inflicts bodily harm to another. While it
generally involves some form of offensive contact that results in injury, the tort elements
expanded to include contact that does not result in any physical harm.

Elements of Battery
A pretty brunette sits alone at the bar. A lonely gentleman approaches her and asks, 'What brings
you here, lovely lady?' Before the woman could utter a word, the man is picked up by his shirt
collar and sent sliding across the bar. Sounds like the makings of a crime story.
Well, it is, sort of, anyway. The woman's jealous husband, angry over the flirtation, committed
battery upon an innocent man.
Battery occurs when one person inflicts physical harm on another. There are several elements
that need be present to prove battery:

An act by the person or defendant inflicting harm

There was intent to cause harm to the other individual or plaintiff

Harmful or offensive conduct occurred as a result

Let's break down each element for better understanding.

The act itself may come in one of two forms of contact: actual physical harm that causes injury,
like throwing a person across a room, or where the contact is not so much physical, but is
insulting.
Suppose the pretty woman threw her drink in the stranger's face. That can be construed as
battery. While no physical harm was actually done except to the suitor's ego, the act remains
offensive and insulting.
Intent means that the defendant meant to commit the act and can be either specific or general in
nature.
When intent is specific, the defendant performed an act that he knew would cause injury, like
punching someone in the gut.
Whereas, general intent broadens the element to mean that the defendant is aware that his
actions will result in something happening; the outcome itself may not have been intended.
This is worth explaining. An impish high schooler sneaked behind the desk of his mean spirited
English teacher and sat a sharp tack on her chair. When the teacher sat on the pushpin, she
jumped from her seat. This set off a chain of events that ended with the teacher on the floor with
several broken ribs.

The student did not set out to specifically break his teacher's ribs, but he intentionally placed a
tack in the chair knowing that something would happen. This hilarious prank is battery.
The final element of battery is harmful or offensive conduct against another person, and the
conduct does not even have to be direct with the plaintiff.
We know that committing an act like pushing another person is battery. However, did you know
that even if the act was not meant to cause harm, yet did, it is still considered battery?
To prove this, suppose a beach lifeguard notices a school of ferocious man-eating sharks just off
the shore and fails to warn swimmers. Should a swimmer be injured as a result of the lifeguard's
failure to act, it can be battery.
You see, a lifeguard has a duty to keep swimmers informed of changes in swimming conditions
like rough seas, rip current and especially hungry sharks.
Violence that causes grave harm to another person is even more serious.

Aggravated Battery
Using the elements of battery as the basis for the more serious tort of aggravated battery, this
type of intentional harm relies on the use of near deadly force. Most often, the use of a gun or
other dangerous weapon with intention to injure or kill another person, along with the former
elements, satisfies the charge.
A car can even be considered a weapon in some instances. Let's look at a case in which a jealous
wife and an angry husband play a game of tag with an SUV.
In Kansas v. Whittington (1996), Whittington had a Fourth of July party with friends at his home.
When his wife Judy returned home, she found several young girls in attendance that she didn't
know.
Angry with her husband over the presence of the girls, she began arguing. He entered his SUV.
As he sat in the vehicle, Judy approached the driver's side window and smashed a beer mug
against the side of the truck.
After some more arguing, she moved toward the front of the vehicle. At that time, Whittington
put the car in gear, hit the gas and ran Judy down, causing injury to her wrist.
After lengthy deliberation, there was evidence sufficient enough to prove that Whittington used
his vehicle as a deadly weapon with intent to cause his wife, Judy, harm.

Lesson Summary

To sum it up, the tort of battery occurs when one person inflicts physical harm on another, and
there are several elements that need be present to prove battery.
There must be an act by the person or defendant inflicting harm, intent to cause harm to the other
individual or plaintiff and harmful or offensive conduct occurred as a result.
Intent can come in two forms: specific and general. Specific intent occurs when a defendant
performs an act that he knew would cause injury. General intent means a defendant is aware
that his actions will result in something happening; the outcome itself may not have been
intended.
The most heinous battery, aggravated battery involves the use of a dangerous weapon to exact
harm upon another person.
In our case analysis, we learned that even a vehicle can be considered a dangerous weapon when
used to intentionally cause harm to another person.

Learning Outcomes
After this lesson, you'll be able to:

List the elements required to prove battery

Differentiate between specific and general intent

Identify the additional element required to prove aggravated battery

Assault is a tort and occurs when one person intentionally places anther in a state of fear. There
are three types of assault: simple assault, assault and battery and aggravated assault. Each type of
assault is intended to instill fear and may even involve physical pain against another person.

Tort Law on Assault

Two men walk outside the bar... this may sound like the beginning of a funny joke, but if this
leads to one of the men pulling a sucker punch on the other, it is no laughing matter. It is assault.
The interesting thing about assault is that it does not have to lead to physical harm. It can be
instilling eminent fear of physical harm against another person.
Assault is a tort, and means, in common law, that someone did wrong to another person. Under
tort law, it is a civil action but is also considered a criminal act. For our purposes, we will focus
on the tort of assault. Under tort law, there is a plaintiff, who is the injured party, and a
tortfeasor, who essentially is the defendant in the action.

A plaintiff in a tort of assault case can sue for pecuniary damages, like money or compensation
for injury and any loss suffered as a result of the injury. Time lost from work because of medical
treatment and court appearances may also qualify as damages.
Let's go back to the gentlemen at the bar. If the two men exchanged a few off-color words, an
assault did not take place. Merely exchanging choice words without one person feeling fearful of
physical violence is not enough to prove intent to harm. However, if those choice words included
direct threats, like 'I'm going to kick your butt,' or 'You're going to eat a knuckle sandwich,' this
may qualify as assault.
Certain elements must be present to prove an assault occurred:

The plaintiff perceived immediate physical contact with the defendant

Plaintiff had suspicion that he was in eminent danger

The actions of the defendant, or tortfeasor, were intentional, not accidental

In other words, the plaintiff must prove that tortious conduct occurred and that the conduct was
exacted against him and resulted in some type of damage.
Now keep in mind, an important element of assault is intent. It must be demonstrated that the
tortfeasor acted in a purposeful way to cause harm to another person. We will rely on a classic
example to demonstrate intent. If a person was to pull a knife on another person, regardless of
whether the knife was made of clay or steel, this action is considered an assault, even in the
absence of threatening words.
Conversely, if a person yells, 'I'm going to stab you,' and no knife is present, this may not be
considered assault because without a knife, there can be no real intent to cause harm at that
moment. Sometimes a simple assault can lead to a more heinous action, like physical violence.

Assault and Battery

What happens when a threat turns to a violent act? We know that assault is the lesser crime
because no physical action took place. However, when assault is coupled with physical harm,
like a punch or a kick, the offense is considered not one, but two torts.
Assault and battery is the combining of both threats and physical action together, which places
another person in eminent fear and then in physical contact with the assailing person. The
elements for assault and battery are the same with the addition of a few more that involve:

Physical touch that was harmful and offensive

The touch was intentional

The touch caused fear and physical harm

The touch was uninvited

When we last visited the bar, the two men were only exchanging threats. If things heat up,
leaving one guy standing and the other with a black eye and a bloody nose, this would be
considered assault and battery. It would be reasonable to believe that the elements of assault were
present. Any time a man punches another guy in the face, one would experience eminent fear,
believe the threat to be serious and perceive the action to be intentional.
Taking it through the added elements of battery, the act of physical contact caused injury, the
knockout was intentionally meant for the victim and it would be reasonable to believe that being
pummeled was not a welcomed event for the victim. To take this one step further, what if this
square off between two bar patrons ends in something even more violent, like a stabbing or a
shooting?

Aggravated Assault
Similar to assault and battery, aggravated assault involves a violent physical act against another
person, but with the intent to cause serious intentional physical harm. This act is purposeful and
reckless in nature and demonstrates indifference to human life. This could be murder, rape or
even driving under the influence in some cases. There are elements that are required to prove
aggravated assault:

Plaintiff felt eminent fear

The act was committed with force (a deadly weapon) that would cause serious bodily
injury

Defendant had the ability to apply deadly force enough to cause serious injury

A deadly weapon does not always have to be a gun or a knife. It can be any object, including
hands and feet, that can cause serious injury to another person. Interestingly enough, in Alfred
Hitchcock's 1958 classic, 'Lamb to the Slaughter,' a wife, upset that her husband wanted a
divorce, used a frozen leg of lamb as a deadly weapon.
After he professed his love for another woman, she ran to the kitchen to retrieve the lamb leg and
laid into him with a full swing to the back of the head, killing him. This once humble piece of
meat became the weapon used to kill a man. In a funny twist, the wife cooked and served the leg
of lamb to the police officers who investigated the murder.

Lesson Summary
Assault is a tort, and means, in common law, that someone did wrong to another person. Under
tort law, it is a civil action, but is also considered a criminal act. For our purposes, we will focus

on the tort of assault. There are two parties to an assault, the plaintiff, who is the injured party,
and the defendant, or tortfeasor, who committed the assault.
To prove the civil action of an assault, the plaintiff would have had to perceive immediate
physical contact with the defendant, had a suspicion that he was in eminent danger and the
actions of the defendant, or tortfeasor, were intentional, not accidental.
A more severe assault involves battery as well. Assault and battery is the combining of both
threats and physical action together. This can be done using fists or feet and involves a few more
elements, like physical touch that was harmful and offensive, intentional, caused fear and
physical harm and was uninvited.
The most heinous of assault torts is aggravated assault, and this uses deadly force. There are a
couple more elements required for this action. The plaintiff felt eminent fear, the act was
committed with force using a deadly weapon that can cause serious bodily injury and the
defendant had the ability to apply deadly force enough to cause serious injury.
All three assaults in a civil action are subject to pecuniary damages, like money or
compensation for injury, and any loss suffered as a result of the injury. Time lost from work
because of medical treatment and court appearances may qualify as damages.

Learning Outcomes
When you have finished this lesson, you should be able to:

Define tort and assault

List and describe the three types of assault

Understand that under tort law, there is a plaintiff and a tortfeasor, or defendant, involved

Define pecuniary damages

Identify the three elements that must be present to prove that an assault, or tortious
conduct, occurred

List the additional three elements that must be present in order to prove aggravated
assault

Determine whether or not an event qualifies as assault

Transferred intent is a shift from an intended action against one party to an action against
another, and there does not need to be intent. It applies to any of the intentional torts, including
trespass to land, trespass to chattel, assault, battery and false imprisonment.

Transferred Intent
Suppose your neighbor's dog barks all night. At wit's end, you crawl out of bed, grab a rock and
throw it in the dog's direction. Fortunately, for the dog, you do not have a very good aim. You
bypassed the barking pooch, but the rock hits your neighbor instead.
You might say that you did not mean to hit the neighbor and refuse to pay for his injuries.
However, the law will see it differently.
By tossing the rock toward the dog, you committed trespass to chattels. This means you
attempted to interfere with another person's enjoyment of their personal property, the dog.
However, by missing the dog but hitting the neighbor instead, transferred intent occurred, and
the liability shifted from the trespass to chattels - attempting to strike the dog - to battery against
your neighbor.
If the following occurred, transferred intent is probably present:

A tort would have been committed if contact with the original party occurred

A tort was committed to an unintended party, resulting in damages

In a legal brief of high importance, we will learn that the law does not recognize intent when
ruling on cases where an innocent victim becomes the target of assault and battery.

Talmage v. Smith (Mich. 1894)

Although this case took place quite a long time ago, it substantially explains the doctrine of
transferred intent.
Smith owned property in Michigan. On his property were several sheds. The sheds were a
temptation to the local children.
Fed up with noise coming from the kids playing on the shed roofs, Smith confronted several of
them and asked that they leave his property. A few left, and a few others remained.
Not satisfied, Smith returned to the area of his property where the sheds stood. He picked up a
large stick and threw it at one of the boys - the first boy he saw, to be exact. As the first boy
ducked from the projectile, another boy, named Talmage, was struck in the eye. The blow
blinded him permanently.
In this case, the court saw the act of throwing the stick as an act of battery. Mostly because of the
force it carried. The court also looked at the two criteria. Let us review:

Smith intended to hit one of the boys with the stick (battery)

Smith's intention to commit battery affected a bystander (battery)

To say it a simpler way, Smith intended to commit a battery upon one of the boys occupying his
roof. The force he used to throw the stick proved this. He missed his intended target, which was
determined to be the first child he saw. He did, in fact, hit an unintended target, causing severe
injury and blindness.
The court ruled in favor of Talmage. Smith was liable for the injuries the boy sustained.

Lesson Summary
To sum things up, transferred liability occurs when one of the five torts was committed against
an intended party but actually occurs to another party, like throwing a rock at your victim but it
actually hitting an innocent bystander.
When this occurs, the law looks at a couple of things:

A tort would have been committed if contact with the original party occurred

A tort was committed to an unintended party resulting in damages

If both statements can be proven true, liability can also be proven.

In our landmark case, Talmage v. Smith, the defendant was held liable for his actions, even
though it was not his intention to injure a third party.

Learning Outcomes
After you've completed this lesson, you'll be able to:

Define transferred liability and transferred intent

List the factors that must be met in order to find liability using transferred intent

Summarize the facts and ruling of the case Talmage v. Smith

When one party does something so harmful to another that it causes severe emotional trauma and
the act was intentional and reckless, the injured party may have a tort action for intentional
infliction of emotional distress.

Intentional Infliction of Emotional Distress

Many people have a fear of spiders, or arachnophobia. In fact, about 30% of people bug out
when they see an eight-legged terrorist. Okay, placing a spider in the desk drawer of an

arachnophobic may seem like a funny prank. But if it causes the victim severe panic, you just
may be liable for emotional distress. In fact, intentional infliction of emotional distress can be
described as an intentional act performed by a defendant that is so reckless that it causes
emotional distress to the victim. The court will look at a few things:

The conduct of the defendant was outrageous.

The conduct was reckless and intentional.

A causal relationship must exist.

Emotional stress resulted from the actions.

Perhaps a case analysis will help to map out the elements. In Rothwell v. Nine Mile Falls School
District (2009), Rothwell served as a custodian for a local Washington state high school. When
she arrived to work in April of 2009, the principal requested that she clean up the main entrance
area. This would have been a routine job. Except on this day, a student had shot himself. What
made matters worse: Rothwell knew the student personally.
For the sake of brevity, we will focus only on the arduous task at hand. Rothwell was summoned
to clean up a crime scene to which she had a relationship with the victim. This task included
cleaning blood, shattered bone fragments and brain matter. There were also things the emergency
crew left behind, like needles and plastic gloves. Distraught over the suicide and the cleanup,
Rothwell was sent home for a few hours. She returned to clean for several hours. She was told by
her principal to make the area look as if nothing happened.
As the days pressed on, the community set up a makeshift memorial with candles and other
things to commemorate the student's death. She was requested to remove and dump everything
placed at the shrine each night. Over several days, Rothwell began to experience post-traumatic
stress syndrome. This is generally severe stress caused by experiencing something terrifying.
Rothwell sued her employer in state court. The court applied the elements and decided that the
principal's orders to clean up a suicide scene and dismantle a memorial were outrageous. Further,
the acts were intentional and resulted in emotional distress. However, the emotional distress
claim allowable by law also had specific criteria to which the case did not meet, like the timing
of the claim and whether one single instance may have caused it.
We learned that while emotional distress may seem like a cut and dry claim, not all actions that
cause stress are cause for tort litigation. There are necessary stressors that people must endure as
part of their everyday lives, like being cut off on the freeway or losing a great parking spot to a
driver with a keen eye.

Not Every Outrageous Act Qualifies

In Russo v. White (1991), Russo and White went on a date. After the first date, White began
calling the plaintiff over and over again, sometimes several times in a row. Annoyed by White's
behavior, she filed suit alleging that she suffered emotional distress over the calls. Although there
was no presence of physical evidence, it annoyed her.
The courts looked at the elements. Yes, the relentless phone calls were intentional and there was
a causal relationship, meaning the two parties were aware of each other. As for the other two
elements, they were not as easily proven. Russo could not produce enough evidence to prove that
White's phone calls were so outrageous and stressing that it caused substantial injury. The most
important thing to remember about this tort is the degree of emotional distress weighed against
the extreme nature of the defendant's behavior.

Lesson Summary
Intentional infliction of emotional distress results from an intentional act performed by a
defendant that is so reckless that it causes emotional distress to the victim. When courts decide
on these cases, they look at whether the conduct of the defendant was outrageous, reckless and
intentional. They also look at the relationship between the parties.
The most important element is the degree of emotional stress that resulted from the actions. Not
every outrageous act warrants a trial. Some acts seem reckless, but are just part of everyday life,
like speeders on the freeway or prank phone calls in the middle of the night.
Economic relations torts affect three categories of interference or injury that result in monetary
loss. They are injurious falsehood, interference with contractual relations and interference with
prospective advantage.

Intentional Torts Of Economic Relation

Today's economy drives people to be very competitive. Businesses scan the environment looking
for innovative ways to keep ahead of their competition. Some businesses develop new products
and services that outperform their competition. Some business may engage in intentional
interference with economic relations that cause financial harm to others, like stealing a valued
employee, publishing false information or even interfering with a business' future economic
gains.
Let's break it down. The three types of tortuous behaviors that can affect another party's business
conditions are:

Injurious Falsehood

Interference with Contractual Relations

Interference with Prospective Advantage

All three talk about different behaviors but share one common thing; they all cause economic
losses.

Injurious Falsehood
When a party publishes or states an injurious falsehood, what they are really doing is making a
widespread statement that defames or tarnishes another person's reputation. The statements must
be so damaging that in itself causes another economic loss. Before we review an example, it is
important to know that certain conditions must be present and proven by the plaintiff:

The defendant actually made a false statement about another party's business.

Someone other than the plaintiff was made aware of the statement.

It can be proven that the statement was made intentionally and to cause harm.

An economic loss by the plaintiff can be proven.

In Harwood Pharmacal Co. v. National Broadcasting Company (1961), the plaintiff, Harwood
Pharmacal, alleged that the defendant, National Broadcasting Company (NBC), broadcasted a
television show in which the defendant contended that a product manufactured by Harwood was
dangerous. A sleep aid, called Snooze, manufactured by Harwood came under fire during an
NBC broadcast. During the broadcast, it was said that Snooze was addicting and contained so
many different types of drugs, one would need to go to a hospital to kick the habit.
The outcome of the broadcast - Harwood's sales decreased, causing an economic loss. Harwood
argued that the comments made during the broadcast were defamatory, malicious and intentional.
The defendant, on the other hand, stated that they never meant harm. The court maintained that
the language used in the broadcast was enough to damage one's reputation and ruled in favor of
the plaintiff.

Interference with Contractual Relations

Another economic relations tort deals with interference with contract relations. Sometimes called
tortuous interference, interference with contractual relations occurs when a third party
intentionally interferes with the contractual relationship of two other parties. A case may help
explain. First, let's review the elements needed to make this allegation:

The plaintiff had a contract with another party.

The defendant had knowledge of the contract.

The defendant intentionally enticed the contract party to breach the original contract.

There was no justification for the breach.

The plaintiff suffered damages because of the breach.

In appeal, White Plains Coat and Apron Co., Inc. v. Cintas (2007) taught us a lesson about
competition and the application of elements for tortuous interference. In this case, White Plains
Coat and Apron and Cintas Corporation competed for the same customers. In the course of
business, it was customary to advertise through mailings and other means to attract new business.
White Plains Coat contended that Cintas lured their customers to breach contracts for services
and join Cintas in contractual relations for the same or similar products. White Plains contacted
Cintas with a list of customers that they felt breached and ordered Cintas to stop advertising to its
customers. When Cintas refused, White Plains filed suit, first in state court and then in appeals
court. This was to no avail.
State court believed that Cintas was merely advertising to customers via proper channels and
with no intention of interfering with any existing contractual agreements. What had not been
established was a pre-existing relationship between Cintas and breaching customers prior to the
breach. In layman's terms, the court did not see that Cintas knew specifically of a contractual
agreement between any specific parties when they launched their advertising campaigns. So the
question is whether Cintas's interest in generating more business can be viewed as interference
with White Plains Apron's contracts with its customers? Both state and appellate court ruled no,
it did not.
Interference with prospective advantage works a little different than this tort. Although
interference remains the same, the next tort deals with a third party causing future economic
damage to another.

Intentional Interference with Prospective Advantage

In the tort of intentional interference with prospective advantage, the defendant intentionally
interferes with the plaintiff's economic future. To say it a different way, if a defendant takes
purposeful action against the plaintiff that places the plaintiff's future income or revenue at risk,
this may be interference with prospective advantage. A case example may help.
In Tarleton v. M'Gawley (1793), M'Gawley and Tarleton were both traders on the Cameroon
coast. During a trading trip, M'Gawley shot at natives to scare them off. He did this, Tarleton
alleges, to interfere with the trading between Tarleton and the natives. M'Gawley claimed he did
this because he had an exclusive agreement with the natives of Cameroon. However, a court
ruled that shooting at the natives interfered with Tarleton's ability to trade, which would cause a
future economic hardship. And a careful look at the elements will help to explain the decision:

The plaintiff had an economic relationship with a third party.

The defendant knew of this relationship.

The defendant disrupted the relationship in some manner.

Disruption or interference can be proven.

The interference caused economic damage to the plaintiff.

In Tarleton v. M'Gawley, all elements exist. He knew about Tarleton's relationship with the
natives and shot bullets at natives as they attempted to make trades with Tarleton. Unable to
trade, Tarleton's revenues were affected.

Lesson Summary
As we learned, all three torts involve purposeful behavior that affects another's economic gains.
To sum things up, intentional interference with economic relations is tortuous action that
causes financial harm to others. The three types of tortuous behavior are:

Injurious Falsehood

Interference with Contractual Relations

Interference with Prospective Advantage

When a defendant states an injurious falsehood, he is making a widespread statement that

defames or tarnishes another person's reputation, like saying your competition's products are
dangerous or defective, even if they are not. Certain elements must be present to prove a claim,
like the defendant made a false statement about another party's business, someone other than the
plaintiff was made aware of the statement, it can be proven that the statement was made
intentionally and to cause harm and an economic loss by the plaintiff can be proven.
Next, interference with contractual relations occurs when a third party intentionally interferes
with the contractual relationship of two other parties, like stealing your competition's customers
by encouraging them to break contracts with your competition. Certain elements must be met,
like the plaintiff had a contract with another party, the defendant had knowledge of the contract,
the defendant intentionally enticed the contract party to breach the original contract, there was no
justification for the breach and the plaintiff suffered damages because of the breach.
Finally, for intentional interference with prospective advantage, the defendant intentionally
interferes with the plaintiff's economic future, like damaging a farmer's fruits so he cannot sell
them. He would have to prove the following: the plaintiff had an economic relationship with the
third party, the defendant knew of this relationship, the defendant disrupted the relationship in
some manner, disruption or interference can be proven and the interference caused economic
damage to the plaintiff.

Trespass, conversion and nuisance refer to three intentional torts that deal with the taking of, use
or interference of one's rights to hold and keep one's property or things. These are purposeful acts
and considered tortious behavior.

Trespass to Land and Chattel

Imagine the horror of returning home from a hard day's work only to find a stranger sitting on
your comfy patio chair, reading your favorite magazine while sipping on a freshly made glass of
lemonade. When you ask this person to leave, they refuse!
Hopefully, this will never happen to you. But if it does, know that this action, in the eyes of the
law, is an intentional tort of trespass to land and involves three important elements:

The person entered your property without permission

The person has no legal right to be there

The person refuses to vacate

In order to prove this, one must demonstrate that there was intent, or purposeful action, to enter
and remain on the premises. In our example, it wouldn't be difficult to show that the lemonadeswigging stranger intended to be in your backyard because it is your backyard, not theirs. You
did not invite the person nor did you request that the person remain in your chair.
Now, to put a twist on it, what if this person unwittingly walked into your yard, sat down, picked
up a magazine and relaxed, thinking all along it was their friend's home? Well, if the stranger
looked as shocked as you did when you both discovered each other's presence, immediately
apologized and ran off of your property - it was probably not trespass. You see, trespass requires
that a person be in possession of the land. When a person takes intentional possession of one's
personal property, it is called trespass to chattel.
Going back to our example, trespass to chattel means that a person intended to possess and use
personal property, not real estate, like your magazine and your lemonade. So, if the person ran
off and took your stuff, this may qualify as intentional trespass to chattel.

Conversion
Conversion is different. It requires intentional interference and damage. All set out for an
afternoon of boating, you drive to the marina, only to find that your boat is missing. The police
did a bit of investigating and turns out that your boat was stolen and had considerable damage to
the hull.
What actually happened was conversion. This means illegal possession or use of another's
property, passing it off as his own property, whether intentional or otherwise. In other words, it is
a fancy word for stealing.

Check it out! The definition states that the possession or use can be either intentional or
unintentional. Simply put, it doesn't much matter whether the person who stole your boat meant
to outright steal it or he thought it was just his own boat. Simply taking it is enough to prove
conversion. And, this person would have to pay for the damages or loss of the boat based on its
value.
Conversion can be tricky. Suppose you found a great deal on a used cell phone from one of those
free online classified advertisement websites. It's the perfect phone at the right price. After much
negotiation, you settle on a price and a place to make the purchase.
About a month later, the police come knocking at your door and demand the phone, and
suddenly, you are cuffed and taken downtown for questioning. 'What just happened?' you ask.
Here's what may have happened. If the phone you legitimately purchased was previously stolen
and sold to you by the culprit, you were in possession of stolen property. Even though you did
not steal the phone, you are, in fact, in possession of it, and that is conversion.

Nuisance: Private and Public

Nuisance is another instance of interference with another person's enjoyment of land, and it
involves both public and private intrusion. Different than trespass, nuisance does not require that
a person actually intrude on another's property. Simply interference with another's enjoyment of
space is enough to prove nuisance.
And, there are two ways in which this can happen:

Private nuisance

Public nuisance

In a private nuisance, one would have to interfere with another person's enjoyment of private
property, like making loud noises. So, your new neighbors consider themselves gourmands. They
love to cook. But, whenever they cook, it leaves a pungent, downright stinky aroma that lingers
throughout the hallway! The stench of their souffl seeps into your apartment. These careless
chefs may be liable for nuisance.
A public nuisance works a little differently. This involves far-stretching intrusion of enjoyment
that affects an entire community. In fact, it affects the welfare of the public, like polluting a creek
or pond that is used for local fishing or providing dental repairs at a local free clinic without a
license. Both tort actions can cause widespread injury or illness affecting the community at large.
Unlike conversion, a few things need to be proven to slap tort action against an individual for
private or public nuisance:

The person committing the act must have intentionally done so and continually done so
and caused harm in some way

The interference must be substantial, so much, that it had a significant negative impact on
those affected

The harm of the actions must outweigh the benefit of the actions in the judgment of a
reasonable person

An example may help. If a main water line was to burst in front of your house, emergency crews
may block the street for a few hours. Noise levels may be higher than usual at unexpected hours.
Your water may even be turned off for a while. This cannot be considered a nuisance because it
was an unexpected event that must be dealt with immediately because without the inconvenience
of a closed road and workmen on the job, water could not be restored in a timely way.

Lesson Summary
To sum it up, we discussed three intentional torts: trespass, conversion and nuisance.
Trespass is broken down into two types: trespass to land and trespass to chattel. Trespass to
land occurs when a person enters your property without permission, the person has no legal right
to be there and the person refuses to vacate.
Whereas, trespass to chattel means that a person intends to possess and use personal property,
not real estate. Both require that the trespassing party be purposeful and with intention.
Conversion means illegal possession or use of another's property, passing it off as his own
property, whether intentional or otherwise. It is just like stealing.
Nuisance involves interference with enjoyment, either public or private. In private nuisance,
one would have to interfere with another person's enjoyment of private property, like a relentless
barking dog, while a public nuisance works a little differently.
This involves far-stretching intrusion of enjoyment that affects an entire community, like
dumping poisonous chemicals on land intended for farming. In order to prove nuisance, one must
prove intent as well as that any resulting damages and harm significantly outweighs benefits of
the actions. Unexpected events, like cleanup efforts after a hurricane, cannot be considered a
nuisance because the benefits outweigh any inconvenience.

Learning Outcomes
You'll have the ability to do the following after this lesson:

List the elements of trespass, conversion and nuisance

Identify the two types of trespass

Explain the differences in public and private nuisance

An intentional tort is committed when a defendant interferes with another person's rights. There
are times when a defendant can successfully mitigate liability by using one of several affirmative
defenses.

Defenses to Intentional Torts to Avoid Liability

Let's say you are walking down a dark street and you suddenly feel the presence of a stranger
following you. Then, without warning, he places his hand on your shoulder. Lock and load - you
pull out your pepper spray and give him a long blast to the face and eyes.
The stranger may cry battery, but that won't get him very far. Battery means that there is an
intent to cause bodily injury, and perhaps the pepper spray did cause injury.
Does this make you completely liable for battery? Not really! The law also states that there are
several defenses used to defend intentional torts and reduce liability:

Self defense and defense of others

Defense of property

Consent

Necessity

The law allows a person to act in self defense or defense of others if the person believes they
are in imminent danger of physical harm and the physical defense must be reasonably necessary
and not excessive. In the case of the stranger following you, the court would likely find pepper
spray a reasonable defense against the stranger's touch.
Defense of property also allows for the use of reasonable force to stop a person from stealing or
using private property. The courts do not favor the use of deadly force in property protection.
You will notice in each type of defense, reasonable force is permitted. Generally, this means
force necessary to take back property or defend oneself without unreasonable measures, like
taking a life.
However, there are times when the court will allow for deadly force. There are a few elements to
consider:

The violation to person or property was committed using violent force

The retaliating force is necessary to stop a felony

So, if an armed person unknown to you enters your home through a window and you kill or
seriously injure him, the court will look at the nature of the break-in and whether it was

reasonable for you to fear for your own safety and the safety of others in the house. In this case,
you would probably be justified in your actions.

Consent and Necessity Defenses

Unlike self defense and defense of property, two defenses that can be used to reduce risk do not
involve violence.
Consent means permission was given by one person to another to do something that may
ordinarily be considered illegal or wrong.
This may help. Suppose a stranger approaches you with what they claim to be a winning lottery
ticket with $500. The stranger asks you to give him $100 for the ticket and you may keep the rest
upon cashing it in. It sounds like a great deal, and you proceed with the transaction.
When you get to the lottery redemption center, you find that the ticket is actually not a winner
and you are out $100 to the less-than-honest stranger. What makes this even more unfortunate
than losing a bunch of cash is that the court may look at this as a consensual transaction!
Necessity can be used as a defense when a defendant takes control of another person's property,
because taking the property served a greater benefit to the defendant, community or the
defendant's property.
Two categories that may help to explain this defense:

Public necessity

Private necessity

In a public necessity defense, the defendant may claim his actions were justified because it
served the community as a whole.
Think about a burning kitchen in an apartment building. The fire department may cut through the
front door and use excessive force on walls and cabinetry to control the flames. They may also
spray down walls with water, causing stains and even damage.
The owner of the apartment may not be able to recover for damage sustained to personal
property or the apartment itself because it was a public necessity to control and extinguish the
fire. After all, the fire could have spread to other units, causing a major disaster for the
community.
A private necessity is similar in theory. The difference lies in the completeness of the defense.
To say it a different way, in a public necessity defense, a defendant may claim that using a
private person's property was necessary to avoid further damage to his own.

To make sense of this, let's use an example.

If a driver traveling on a two-lane highway notices a car headed straight toward him, he may
decide to swerve. If the quick maneuver lands him skidding across private property, tearing up
tulips and grass, the driver may claim that in order to avert disaster to his own property, he
needed to swerve out of the way of the oncoming car. Driving on the manicured lawn may have
been the only move he could make.
The court may consider this a private necessity. The driver will not get away scot-free. He will be
responsible to pay for the damage to property. However, he probably will get away with any
punitive damages for the mess he caused.

Summary
In a nutshell, there are four defenses one can use to avoid the liability of intentional tort claims:

Self defense and defense of others

Defense of property

Consent

Necessity

One can claim self defense or defense of others if the person believes they are in imminent
danger of physical harm and the physical defense must be reasonably necessary and not
excessive.
If property is involved, a defendant can plead _defense of property, and this allows for the use
of reasonable force to stop a person from stealing or using private property.
The defendant shouldn't shoot or kill or commit any act that may end in loss of life, because the
courts do not favor the use of deadly force in property protection.
However, reasonable force is permitted, and this means force necessary to take back property or
defend oneself without unreasonable measures, like taking of a life.
Another type of defense that may be used is consent, and it means permission was given by one
person to another to do something that may ordinarily be considered illegal or wrong, like sitting
on the clay at a tennis tournament. If a fan was hit in the noggin by a not-so-well-served ball, the
tennis player may claim consent on the part of the fan because he chose a seat where it is highly
likely he will be struck by a stray serve.
Finally, there are times when it is just necessary to use someone else's property, whether public
or private.

A defendant may use a public necessity defense, if the defendant claims his actions were
justified because it served the community as a whole. This may apply to trapping and destroying
a rabid dog. A rabid dog presents danger to an entire community, thus destroying it benefits all.
Private necessity works the same way and when used, it generally serves a smaller group, like
private owners of property. An example is breaking someone's car window to release a
suffocating child. It couldn't be argued that saving a child is of lesser importance than the
integrity of the window. The defendant may still be liable for the actual damage to the car but
would not be punished for his actions.
Negligence is an unintentional tort wherein one party is injured as a result of the actions of
another. There are several elements that must be present to prove this tort.

Unintentional Tort of Negligence

Your hair stylist suggests that you need a new look. Excited about the possibilities, you consent
to allow her to use a new brand of hair color. After several minutes under the dryer, you smell a
strong odor. Yikes, the smell is coming from your hair! The new treatment caused your hair to
burn at the roots. Your hairdresser never read the warning on the package. It states that the
product was not to be used with heat.
Left with your curly locks lying on the salon floor, you cry foul play! Well, it wasn't exactly that,
it was negligence. You see, your hair stylist's actions were less than the expected standard of
behavior by a person, and the actions caused damage. In order to prove negligence, the court will
look at the elements:

The defendant's duty to the plaintiff

The breach of that duty

A cause in fact

Proximate cause

Damages

Let's break each element down for better understanding. Duty refers to one person's obligation to
another to act in responsible ways. The hair stylist should have read the instructions and
warnings prior to applying the product to your hair. Where there is a breach of duty, it simply
means that the defendant did not act in a responsible way, and the actions do not have to be
intentional. It could be an oversight or a mistake.
A cause in fact is established when a connection between the defendant's actions and the
plaintiff's loss is established. Under normal conditions, your hair would not burn under a
standard hair dryer. If not for the treatment, you would not have suffered damage.

Different than cause in fact, proximate cause is the direct cause for injury. It does not have to be
the closest act in time - it just has to be the most significant act. Think of it as the scope of
liability. Just how responsible was the hair stylist in causing the damages? To say it a different
way, cause in fact is the connection between the negligent party's actions and the loss. In that
instance, not reading the warning label proved to be neglectful. Proximate cause is the actual act
of placing the product on your head and was really the initial act that caused the chain of events
that caused you to lose your hair.
The but for test may help to explain this. Think of this as if the action did not occur, then injury
would not have occurred. That establishes a causal relationship. Had the hairdresser read the
label, she would have known not to use a dryer in conjunction with the treatment. Had she not
used the dryer with the treatment, your hair wouldn't have burned. That is the chain of events that
demonstrate proximate cause.
Damages are restitution for the loss suffered by the plaintiff. In some cases, it may be money as
compensation for a loss. In other cases, it may include money for pain and suffering, loss of
enjoyment of life, or even future wages. In a case involving fireworks, an explosion and an
injured passenger, let's see how the law applied the elements of negligence to reveal a very
interesting outcome.

Palsgraf V. Long Island Railroad Co. (1928)

There are a few twists in this case, so follow closely. The plaintiff, Palsgraf, was purchasing a
train ticket when, at the same time, two men ran across the platform. As the men hopped aboard
the already moving train, one nearly fell to the ground when a couple of guards helped him to
stay steady on his feet. As this happened, his package, which contained fireworks, also fell and
hit the tracks. This caused an explosion.
The explosion caused weight scales to fall on the other end of the platform. These scales hit
Palsgraf, causing injury. She sued Long Island Railroad Company (LIRR). While the defendant,
LIRR, does owe a duty of care to its passengers, it only extends to foreseeable dangers or
unreasonable failure to protect. Since Palsgraf was far enough away from the explosion, it would
be difficult to foresee that the weight scales would be affected by the blast.
In turn, cause in fact could not be proven. Remember, there needs to be a causal relationship
between the defendant's actions and the injury. The but for test would have to pan out. Since the
railroad worker had no knowledge of the contents of the package, it would be difficult to prove a
foreseeable but for action. Further, although the chain of events stacked up, Palsgraf was far
enough away to be directly affected by the blast.
In State court, the decision was in favor of the plaintiff. However, on appeal, the final judgment
was in favor of the defendant. The court dismissed the complaint against LIRR because it could
not be proven with certainty that the explosion, per se, caused the chain of events that resulted in
Palsgraf's injuries. Proving negligence can be tricky. In Palsgraf, we learned that proximate
cause is an important element. And it makes sense. The duty one party owes to another is in the
degrees, not the absolute.

Lesson Summary
In a nutshell, negligence applies to a person's actions that were less than the expected standard of
behavior by a person, and the actions caused damage. Several elements must be met to prove
negligence tort:

The defendant's duty to the plaintiff

The breach of that duty

A cause in fact

Proximate cause

Damages

To simplify the elements, ask yourself, what duty does the defendant have to the plaintiff? Look
at the actions of the defendant to determine whether he breached that duty. Then, analyze
whether it was a cause of action by performing the but for test. But for this action, would that
damage have happened? If not, then proximate cause must be weighed. This asks to what degree
is the defendant liable? Were the defendant's actions the direct cause? If not, how proximate were
the actions? Finally, to what end is the defendant responsible to pay and what will be paid to the
plaintiff?
Negligence cases are the most common lawsuits. These cases can be difficult to dissect,
especially when a chain of events occurs with a loose common thread. In Palsgraf, we learned
that although the blast occurred in close time to the weight scales falling, it was difficult to
connect the events as a proximate cause for injuries.

Learning Outcome
After watching this lesson, you should be able to define negligence and explain the different
elements to prove it in a lawsuit.
Negligence per se and res ipsa loquitur are two types of special negligence doctrines that do not
require the reasonable person test. Both doctrines assume liability for the fact that negligent acts
caused damages.

Special Negligence Doctrines

In ordinary negligence cases, the court weighs whether a person acted in ways less than a
reasonable person would act, like neglecting to shovel snow after a storm that makes for a
slippery walking surface. This is sometimes called the reasonable persons test, and it simply
measures an act against what a reasonable person would do. There are several defenses available

to the defendant for those types of negligent acts. However, in some cases, special negligence
defenses can be used to protect a defendant against allegations of negligence. These defenses
are:

Negligence Per Se

Res Ipsa Loquitur

Negligence per se involves negligent acts that violate a public policy, like speed limits or other
statutes that protect citizens. What makes this type of negligence different from ordinary
negligence is that the court measures the defendant's actions against the policy, not that of a
reasonable person. Four elements that make for a case are:

The defendant acted in a less than dutiful way.

The violation was of a public policy.

The creation of the public policy was to prevent the type of injury sustained by the
plaintiff.

The plaintiff was a member of the group protected by the policy.

Let's put this to the test. Sometime in 1889, Ms. Osborne did some shopping at McMasters Drug
Store. One specific item she purchased was an unlabeled bottle. Not knowing what was in the
bottle, she drank it and died. It was poison! Her estate claimed that McMasters had a duty to
label their products. In fact, public policy required product labeling. The clerk in charge of
labeling products neglected to do so. Because of his negligence, Osborne was poisoned.
In this case, the defendant had a duty to adhere to public policy that required him to label
products. He did not do so. When used, this policy will avoid this type of injury, and Osborne
was part of the group protected by the public policy: she was a consumer. Judgment favored the
plaintiff. McMasters appealed the decision, but lost. The court decided that McMasters had a
duty to label products, and because he failed that duty, a serious injury, well, death actually,
occurred.

Res Ipsa Loquitur

Res ipsa loquitur works a little differently. Res ipsa loquitur translates to 'the thing speaks for
itself,' and means a defendant is considered liable for injury if he controlled the very thing that
caused the injury, even if he was not negligent. However, carelessness counts toward liability.
Three elements need to be present to prove a case:

The injury was caused by something the defendant had within his control.

A careless act caused the injury.

Plaintiff's actions did not cause the injury.

Perhaps an example will help. In Byrne v. Boadle (1863), plaintiff Byrne was strolling down a
Scotland street when, unexpectedly, a barrel of flour fell upon his head, causing serious injury to
the plaintiff. The courts applied the elements and favored on behalf of the plaintiff, Byrne. They
looked at each element on its face. The flour barrels were within the control of the defendant.
Flour barrels were carelessly stored on windowsills where they have the potential to fall. Finally,
the plaintiff in no way contributed to the injury.

Lesson Summary
In a nutshell, negligence cases involve the court weighing whether a person acted in ways less
than a reasonable person would act, like forgetting to put your car in park before you turn off the
engine. When courts try to sort out negligence matters, they sometimes apply the reasonable
persons test, and it simply measures an act against what a reasonable person would do. Special
negligence defenses employ two defenses to protect a defendant against allegations of
negligence. These defenses are negligence per se and res ipsa loquitur.
Negligence per se involves negligent acts that violate a public policy, like speed limits or other
statutes that protect citizens. The elements needed to prove this type of case are:

The defendant acted in a less than dutiful way.

The violation was of a public policy.

The creation of the public policy was to prevent the type of injury sustained by the
plaintiff.

The plaintiff was a member of the group protected by the policy.

On the other hand, res ipsa loquitur says that a defendant is considered liable for injury if he
controlled the very thing that caused the injury, even if he was not negligent. However,
carelessness counts toward liability. This defense requires that these elements are present:

The injury was caused by something the defendant had within his control.

A careless act caused the injury.

Plaintiff's actions did not cause the injury.

In either defense, special defenses for negligence allow for plaintiff recovery, even without
proving specific defendant negligence.

Negligence simply means a person is not acting as responsibly as they should. There are defenses
that can be used to mitigate the degree of responsibility a defendant must assume, with each
defense having its own unique elements that reduce liability.

Negligence
Negligence is an action taken by a defendant that causes foreseeable danger or injury to another,
like intentionally throwing a banana peel on the floor of the office cafeteria. Someone is bound to
slip and fall.
The elements are pretty simple:

The defendant had a duty to the injured party

The defendant failed to act on his duty

The negligent act caused direct injury

The injury should have been reasonably foreseeable

Once the elements have been satisfied, a defendant can be held liable for injuries sustained by
the plaintiff. But is every injury sustained at the hands of another party a cause for a negligence
lawsuit?
Maybe the banana peel tossing pest doesn't have very good aim? Should he be held fully liable if
a co-workers slips? Well - maybe! But not every action is cause for litigation. There are several
defenses that can be used to reduce a defendant's liability or shift a portion of the liability onto
the plaintiff.

Negligence Defenses
You had a few too many cocktails during Happy Hour, but somehow you remembered to stop off
at the market to pick up cat food. On your way down the pet food aisle, you trip, slip, and slide
on your bottom from one end of the store to the other. Ouch!
When help arrives, it was witnessed that no slip hazard existed. No spills, no sticky stuff,
nothing! But everything, from your bum to your ego, is sore, and you want justice. Well, not so
fast - the law may see it a different way.
Although mostly abolished by the courts in modern times, contributory negligence may save
the market from a costly lawsuit. This defense holds the plaintiff responsible for their injury if
the plaintiff was in any way responsible for it - even if the defendant was more responsible for
the injury than the plaintiff.

In other words, if you arrived at the market after a night of heavy drinking, that may have been
the contributing cause for your fall. Had you not been drinking, it is possible, even probable, that
you would have remained upright.
The more recognized defense is comparative negligence. In this defense, the court will apply a
percentage of negligence to both parties, depending on the degree of responsibility each has
toward the injury.
So, in the case of the grocery store slip, the court will want to know a few things:

How much alcohol did the plaintiff consume prior to shopping?

What type of shoes was the plaintiff wearing at the time of the fall?

Was the floor clean and dry at the moments prior to the fall?

Was the fall foreseeable?

There are three categories of comparative negligence: pure, modified, and slight-gross.
Pure comparative negligence awards the plaintiff damages based on the percentage the
defendant is responsible for injury. Let's say you order a hot bowl of soup at a restaurant. When
the server arrives, he warns you that the contents may be hot and to be careful when eating the
soup. If you dive right in and take a big spoonful and burn your tongue, the restaurant is not
liable for the burn. You were warned about the soup's temperature prior to consuming it. Now,
had the waiter failed to warn you that the soup may be hot, you may just have a case.
In modified comparative negligence, the plaintiff's negligence must be equal to or less than the
defendant's negligence. A good example would be two drivers who ignore a four-way stop and
collide.
Finally, slight-gross comparative negligence holds the defendant more liable than the plaintiff
if the defendant's negligence was much greater than that of the plaintiff. This may help: If you
were crossing a set of train tracks and were struck by an oncoming train because the warning
lights and guard rail were not in proper working order, you would definitely be able to sue for
negligence. It is mandatory that warning lights and guard rails are in working order.
Back to the slip and fall in the grocery store. Once the questions have been answered, the court
will decide on a percentage of liability for both parties. In this instance, the courts may rule that
you are 75% at fault because you had been drinking prior to arrival, and the store was 25% liable
for your injuries because they did not notice that you were intoxicated.
Sometimes the plaintiff's actions carry an assumption of risk, and this can be used to mitigate
liability. It means when an action is so dangerous that the plaintiff assumes the risk of the
activity, and in many cases is unable to recover for damages. Just look at the back of any sports
event ticket.

You will see an assumption of risk disclaimer barring recovery for any injuries that may result
from simply attending the game. So, if you were to catch a line drive between your upper and
lower lip, you, in essence, assumed the risk of injury by sitting in an unprotected area of the
stadium. In fact, anywhere you sit is considered an injury risk. If you receive an injury, you are
probably going to have to pay your own medical bills!

Lesson Summary
In a nutshell, negligence is an action taken by a defendant that causes foreseeable danger or
injury to another.
The elements are fairly cut and dry:

The defendant had a duty to the injured party

The defendant failed to act on his duty

The negligent act caused direct injury

The injury should have been reasonably foreseeable

The liability a defendant is responsible for can be mitigated using a few common defenses, like
contributory negligence, comparative negligence and assumption of risk.
Although contributory negligence is not used in most jurisdictions, it bears defining. This
doctrine sides with the defendant in that it does not award the plaintiff any damages if the
plaintiff was in any way responsible for the injury.
Comparative negligence works differently. This defense allows a plaintiff to recover a
percentage of damages based on their role in the injury, and there are three categories to consider.
Pure comparative negligence awards the plaintiff damages based on the percentage the
defendant is responsible for the injury, like tripping over a clearly marked hazard sign.
In modified comparative negligence, the plaintiff's negligence must be equal to or less than the
defendant's negligence, like drinking old milk that remained on the shelf days after it expired.
Finally, slight-gross comparative negligence holds the defendant more liable than the plaintiff
if the defendant's negligence was much greater than that of the plaintiff, like being hit by a drunk
driver.
Lastly, assumption of risk can be used to mitigate liability, which is when an action is so
dangerous that the plaintiff assumes the risk of the activity, and in many cases is unable to
recover for damages. You may find a disclaimer on the back of an amusement park entrance
ticket or even a ski lift.

Learning Outcomes
After watching this lesson, you should be able to:

Define negligence

Identify and discuss the different types of negligence

Explain assumption of risk

Sometimes a party causes a tort based on negligence, but can invoke a defense to negligence.
This lesson explores several negligence claims and defenses, including the rescue doctrine, the
Good Samaritan Act, the fireman's rule, and Dram Shop Acts.

Torts
Much of our civil law focuses on torts. Torts are civil causes of action based on someone's
negligence. For example, it's a tort when a distracted driver rear-ends another, or when a dog
owner lets his dog run leash-free and the dog bites a jogger. This means that one party acted
negligently, or failed to act when he or she should have. This party is known as the tortfeasor.
When a tortfeasor harms another party, that party can usually sue the tortfeasor for money
damages.
Sometimes, however, a tortfeasor can use a defense to negligence. A defense to negligence
essentially admits that the supposed tortfeasor harmed someone, but the harmed party can't
recover damages from the tortfeasor due to a specific law that prevents recovery in that particular
situation. Let's take a look at a few scenarios.

Rescue Doctrine
Let's first examine a situation where an alleged tortfeasor, or the person who caused harm, won't
be held liable for his or her actions. Instead, the harmed party can be held liable for his or her
original negligence. This rule is known as the rescue doctrine, and is also commonly known as
'danger invites rescue.'
This legal principle generally means that a person who acts negligently can be held liable for
harm that results from an attempted rescue of that person. In other words, if your negligent
actions endanger the safety of someone who attempts to rescue you, or causes other damage, you
are then responsible for any resulting injuries or damage. Your injured rescuer can sue you and
recover damages as long as you caused the dangerous situation and the rescuer acted reasonably
considering the circumstances.
For example, let's say that Henry decides to skydive off his roof and into his backyard. Henry's
parachute snags power lines, and he ends up dangling from those lines. Trent is an electrical

worker who is called to the scene. When Trent attempts to untangle Henry's parachute, Trent
accidentally causes both parties to be mildly electrocuted.
Henry was harmed by Trent's actions, and would like to sue Trent for money damages to cover
Henry's medical bills. Trent caused the harm and would normally be considered to be a
tortfeasor. However, since Henry's original act of negligence, jumping off his roof, caused Trent's
attempted rescue, Henry can't recover from Trent. Instead, Trent can recover his medical bills
from Henry.

Good Samaritan Act

Next, let's take a look at the counterpart to the rescue doctrine, known as the Good Samaritan
Act. The act is actually a series of individual state laws based on a legal principle that protects
rescuers from negligence claims. The rule is a defense that protects a person who chooses to
assist another injured or ill person. The rule specifically applies to those who volunteer to help,
rather than those who are legally obligated to help or expect payment for their services, such as
on-duty emergency or medical personnel.
The doctrine is based on a historical biblical parable. A traveler from Samaria stopped to aid a
badly injured traveler from a different religious and ethnic background. The Samaritan aided the
traveler with great risk to his own safety. Sometimes a bystander is hesitant to get involved in
this type of emergency situation. The act is intended to encourage participation at the scene by
reducing a bystander's hesitation to assist. If the bystander unintentionally causes further injury
or death, that bystander cannot be held legally liable for his or her reasonable actions.
Remember that the rescue doctrine involves the rescue of a person who caused his or her own
danger, and places liability on that person. Under the Good Samaritan Act, the injured person
didn't necessarily cause the danger. The doctrine protects the rescuer from liability without
placing liability on the injured person.
For example, let's say that Henry was cleaning his gutters when he fell off his roof and became
tangled in the power lines. Trent is Henry's neighbor, and hears Henry calling for help. When
Trent attempts to free Henry, he accidentally electrocutes Henry. Trent is a tortfeasor because his
acts caused injury to another, but Henry can't recover damages from Trent.

Fireman's Rule
Now let's turn to another negligence doctrine that allows protection, or a defense, for a tortfeasor.
This legal doctrine is known as the fireman's rule, and protects people who negligently cause
fires in most states. The rule states that a firefighter can't sue a person who negligently causes a
fire that injures a responding firefighter. Keep in mind, however, that the rule doesn't apply to
protect a party who intentionally causes a fire.
Some states extend the rule to cover police officers and other public safety officials. The rule is
based on an assumption of the risk. In other words, emergency responders knowingly and

voluntarily place themselves in danger on behalf of the public, and therefore can't recover
damages for injuries that directly result from their duties.
Like the Good Samaritan Act, this legal doctrine is intended to encourage participation. When a
person accidentally causes a fire, that person should call for professional help without fear of
being sued by those who respond. For example, let's say Trent, our tortfeasor, accidentally starts
a fire in his kitchen. Henry is a firefighter and receives the emergency call. Henry burns his hand
while putting out Trent's fire. Henry would like to sue Trent for money damages, in order to
recover his medical bills. However, under the fireman's rule, he cannot.

Dram Shop Acts

Lastly, let's take a look at a rule that's a little different from these. This rule imposes liability for
negligence in most states, but on someone other than the tortfeasor. The Dram Shop Acts are a
series of state laws that place liability on parties who serve alcohol to a person, and that person
injures another as a result of his or her intoxication.
A dram shop is a business that sells liquor to be consumed there on those premises, such as a bar
or a restaurant. However, note that these laws can hold either businesses or individuals liable for
serving intoxicants. A person who is harmed by the intoxicated guest can of course sue that
tortfeasor. However, these laws also allow the harmed party to sue the server or seller.
For example, let's say that Trent celebrates his birthday at Tom's Toddy's, which is a local bar.
Tom serves Trent several drinks. Trent leaves the bar in his own car, and has an accident that
injures Henry. Trent caused the damage to Henry, and so Trent is a tortfeasor and can be sued.
However, Tom is also a tortfeasor and can also be sued by Henry.

Lesson Summary
Let's review. Torts are civil causes of action based on someone's negligence. The party who
acted negligently, or failed to act when he or she should have is known as the tortfeasor. There
are several defenses to negligence torts:

The first rule is known as the rescue doctrine, or 'danger invites rescue.' This means that
a person who acts negligently can be held liable for harm that results from an attempted
rescue of that person.

The second is the Good Samaritan Act. This rule protects a person who chooses to assist
another injured or ill person from damages resulting from the rescue.

The third is the fireman's rule. This rule states that a firefighter can't sue a person who
negligently causes a fire that injures a responding firefighter.

The last is known as the Dram Shop Acts. These state laws place liability on parties who
serve alcohol to a person, and that person injures another as a result of his or her
intoxication.

To avoid a negligence claim, some parties must show others a high duty of care. Even in these
cases, there are available defenses to negligence. This lesson explores landowners, common
carriers, innkeepers and social hosts.

Negligence
Much of our civil law focuses on negligence torts. These torts are civil causes of action based on
someone's negligence. Negligence is the failure to exercise a reasonable standard of care toward
another person. In other words, courts examine how a reasonable person would have acted in the
same or similar situation. Would a reasonable person juggle fire near a known gas leak? Or
would a reasonable person drive while working on a laptop and also eating a steak dinner? These
are examples of negligent behavior. If someone is hurt by this behavior, that person can sue for
money damages.
Some parties are held to an even higher standard than that of a reasonable person. Because of
their positions, certain parties are held to a heightened standard of care to others. Let's take a
look at negligence and possible defenses for landowners, common carriers, innkeepers and social
hosts.

Landowners
Let's start with landowners. A landowner is simply the party who owns the land on which the
tort occurred. Let's say I'm at Ned's house. I'm in the backyard, and I accidentally fall into a large
hole. I'm injured and would like to sue Ned. What standard of care did Ned owe me, and did he
fail to fulfill that duty?
This answer depends on my legal status or why I was in Ned's yard. Let's say I'm a trespasser. I
was in Ned's yard without Ned's permission. Generally speaking, this means that Ned doesn't
owe me a duty of care. If I sue Ned, he can use this defense.
Now, let's say I'm a licensee. This means I was in Ned's yard with Ned's permission. Let's say
Ned invited me to a backyard barbecue at his house. In this case, Ned has a duty to warn me
about the hole or fix the hole but only if he knows about the hole. If Ned didn't know about it,
then he can use that lack of knowledge as a defense.
Lastly, let's say I'm an invitee. This means I was in Ned's yard with Ned's permission and for a
business purpose connected to the land. Let's say Ned hired me to fix the fence in his backyard.
This time, Ned has a duty to warn me about the hole or to fix the hole. Ned has a duty to inspect
the yard for any dangerous conditions. His lack of knowledge won't be a defense to negligence.

Common Carriers

Now let's take a look at common carriers. A common carrier is a business available to the public
for the transportation of goods or passengers. This includes transportation services like airlines
and taxi companies.
Common carriers owe their passengers the highest duty of care to provide safe transportation.
This means that they must act with as much care as is reasonably possible considering the type of
vehicle used and other practical aspects of the business operation. A failure to meet this duty is
considered to be negligence.
For example, let's say Ned is a bus driver. I'm a passenger on Ned's bus. While I'm riding to work
one day, Ned suddenly slams on the brakes, and I fall into the aisle. I'm injured and want to sue
Ned and the bus company. I'll have to prove that Ned was negligent. If Ned was trying to find a
song on the radio and almost rear-ended another vehicle, then Ned likely acted negligently. This
is true even though a normal driver in his or her own car playing with the radio probably
wouldn't be found negligent due to the short stop.
However, if a bicyclist suddenly turned in front of Ned, then Ned likely didn't act negligently. He
can use the reasonableness of his actions, considering the circumstances, as a defense. For
instance, Ned might offer evidence showing that buses typically take a longer amount of time to
come to stop, thus making it necessary for him to slam on the brakes to avoid hitting the
bicyclist.

Innkeepers
Let's turn to innkeepers. An innkeeper is a person who provides accommodations to guests as a
business. Innkeepers, like common carriers, owe guests a higher duty of care. An innkeeper acts
negligently if he or she fails to reasonably protect a guest from foreseeable harm. This means the
innkeeper either knew, or should have known, of the danger.
Let's say that Ned owns a bed and breakfast, and I'm his guest. I trip on a broken stair and am
injured. I want to sue Ned. Ned used that staircase and saw the broken stair earlier that morning.
As an innkeeper, he had a duty to immediately fix the stair or to warn me. However, if Ned just
used that staircase and the stair was fine, then he likely didn't act negligently. He can use his
reasonable lack of knowledge as a defense.
Consider the Massachusetts case of Addis v. Steele. Addis was a guest at The Red Inn owned by
Steele. A fire broke out, and Addis was unable to find a safe way out of the building. Instead, she
jumped from a second-story window and was injured. She sued Steele for negligence, because he
failed to provide fire exits or another safe means out of the building. Steele defended, saying that
the fire was arson and not something he could have reasonably foreseen. However, the court
ended up being in favor of Addis, saying that Steele had a heightened duty of care and must
protect his guests against all fires.

Social Host

Lastly, let's examine social hosts. A social host is someone who supplies alcohol to a minor but
isn't in the business of selling alcohol. This law holds social hosts liable for any damage caused
by an intoxicated minor. The damage can be to another person or to the minor.
For example, let's say Ned hosts a backyard barbecue where he serves beer. Nan, who is only 17,
attends the party and drinks several beers. Nan leaves the party in her car and runs a stop sign,
hitting and injuring me. I want to sue Nan and Ned. Because Ned served alcohol to a minor, he
now has a heightened duty of care to those who might be injured by Nan.
If Ned knew that Nan was a minor and that she was drinking beer, then Ned is negligent. Ned is
also likely negligent if he failed to inquire about Nan's age.
Let's say Ned asked Nan's age, and she presented a fake identification showing she is 21. Or, Ned
asked Nan's parents and friends, and they all said she was 21. In this case, Ned likely won't be
found liable. Ned can use his inquiries as a defense.
Now, let's say that Ned asked Nan to stop drinking, and she wouldn't, so he called the police. A
request for police assistance can also be used as a defense.

Lesson Summary
Let's review. Negligence torts are civil causes of action based on someone's negligence.
Negligence is the failure to exercise a reasonable standard of care toward another person. Some
parties are held to an even higher standard of care due to their positions. This includes
landowners, common carriers, innkeepers and social hosts.

A landowner doesn't owe a duty of care to a trespasser but must warn licensees about
known dangers. A landowner has a duty to inspect and warn an invitee of any dangers.
The landowner can use the other party's legal status as a defense.

Common carriers owe their passengers the highest duty of care to provide safe
transportation. The reasonableness of the carrier's actions can be used as a defense.

Innkeepers owe guests a higher duty of care and must reasonably protect guests from
foreseeable harm. If an innkeeper didn't know or shouldn't have known about the danger,
it's a defense.

Lastly, a social host is liable for any damage caused by an intoxicated minor. It's a
defense if the social host had no reason to believe the person was a minor or asked the
police for assistance.

Strict liability applies when a defendant places another person in danger, even in the absence of
negligence, simply because he is in possession of a dangerous product, animal or weapon. The
plaintiff need not prove negligence.

Types of Strict Liability Torts

There are instances when a person becomes responsible for things that may go wrong even if the
person did not intend for the wrong to occur. In other words, some actions hold a person strictly
liable regardless of the circumstances. Say you owned an exotic Python. If the snake creeps out
of the house and bites your neighbor, you will be held responsible even though you did not let
the snake out. Ownership is enough to hold you responsible.
In other words, strict liability tort means a defendant is held fully liable for any injury sustained
by another party regardless of whether the injury was intended. Dangerous animals are just one
of three major strict liability categories. Strict liability categories include:

Animals, owned or possessed

Abnormally dangerous acts

Product liability

Animals, Owned or Possessed

The owner or person in possession of certain types of animals is liable for injuries if the animal
causes injury to another person or animal. This may include livestock, like cows, horses, bulls or
goats. Abnormally dangerous animals also fall under this category and may include snakes,
tigers, monkeys or bears. You may think wild animals are not included because, well, they live
in the wild. But that is not true. If a person is in possession of a wild animal or has wild animals
on their land, like animals that are housed at a zoo, and the animal causes injury, liability is
assumed.
Livestock and domestic animal ownership is fairly easy to prove. Livestock is generally branded,
and domestic animals require registration in their place of residence. Wild animals, on the other
hand, are more difficult to track. In an interesting case that remains in litigation as of late
summer of 2013, the question of possession and ownership of suspect wild animal remains
unanswered.
Arizona-Sonora Desert Museum is located in a remote area of Tucson, Pima County. It is a place
where tourists can experience Arizona's indigenous landscape. Back in 2009, a Dutch tourist and
plaintiff, Zegerius, was brutally attacked by a wild javelina while touring the grounds. The victim
sustained extensive damage, including torn muscles and severed veins and arteries to his calf and
hand. So much damage was done that he was hospitalized for over a week.
As a side note, javelinas are a member of the peccary family. Although they are not particularly
aggressive, they will attack if cornered. Javelinas were commonly seen on the trails within the
museum. Although the museum did not own the animals, they were part of the scenery in a
wildlife attraction. The question remained: who was in possession of this peccary? This is where
it gets a little muddy.

The museum operators claim that this particular javelina was not one of the commonly seen
animals on their property. They performed blood tests on the javelina in their possession, and it
turned out that no match could be determined. In fact, the javelina that attacked Zegerius was
never found. But the looming question of strict liability was still left unanswered. At last report,
the plaintiff's attorneys filed further action claiming that, regardless of the ownership, possession
is all the law requires.
Javelinas are wild animals. No provisions were made to corral the owned javelinas; therefore,
other javelinas can come and go freely across the boundaries. While, as of late summer of 2013,
no verdict had been rendered yet, this case proves that strict liability may be applied to cases
where ownership does not have to be established.

Abnormally Dangerous Acts

Another form of strict liability comes with engaging in abnormally dangerous acts. An
abnormally dangerous act can be defined as an act that carries a substantial risk to oneself and
others' personal property and physical being. That's plenty of legal mumbo jumbo, think
pyrotechnics, nuclear power plants and blasting rock with dynamite.
In Miller v. Civil Constructors, Inc., a bullet fired from a nearby quarry struck a person. The
quarry, owned by Civil Constructors, was used for police target practice. The case seems rather
cut and dry. Remember, in strict liability cases, negligence does not have to be proven. What
does have to pan out is whether using a quarry to discharge a firearm is considered abnormally
dangerous. Here is what the court will consider:

The activity is highly risky and could cause harm to a person, chattel or property.

It is highly likely that harm will result from the activity.

The risk could not be mitigated easily even if reasonable care is taken.

The act is not one that is commonly recognized.

It is inappropriate to be carried out in the location.

Whether its value to the community outweighs the risk involved.

It does not take all conditions for an act to be considered dangerous. One or more elements are
enough.
So, how did the court rule? Interestingly enough, the court deemed that target practice for police
officers outweighed the dangers involved in the actual practice. It was also noted that while guns
can be dangerous, misuse of guns holds the higher risk. The officers were previously trained and
used the practice to merely sharpen their skills. Finally, risk can be reduced or even non-existent
with reasonable care. In other words, the court ruled in favor of the defendant.

Product Liability
Our last strict liability tort deals with defective products. Product liability occurs when a
product is considered unsafe by design, instructions or warning. The manufacturer must know
the defect at the time it left the manufacturing plant.
One of the most newsworthy product liability cases in recent history was between Stella Leibeck
and McDonald's Restaurants. The case came about because Leibeck spilled a piping hot cup of
coffee on her lap causing severe third degree burns that required multiple skin grafts. Leibeck
purchased her morning coffee from a drive-thru McDonald's location in Albuquerque, New
Mexico. After the purchase, she placed the beverage between her thighs and opened the lid to
add cream and sugar. At that moment, the coffee spilled.
Because McDonald's Restaurants received over 700 complaints in the past about the temperature
of their coffee, it means that the company was aware of problems with the coffee temperature.
This was enough to warrant a warning label or to lower the temperature of the beverage from
180-190 degrees to 130-140 degrees, similar to other establishments. Since McDonald's did not
take the precaution after receiving complaints, it was agreed that the coffee was defective in that
it was too hot, no warning or instructions were provided for its safe use and consumption and it
caused serious injury.
Since this incident, McDonald's settled with Leibeck for an undisclosed amount of money. The
coffee cups also now contain a warning. In this case, it was clearly a failure to warn customers of
the danger of spilling hot coffee.

Lesson Summary
In sum, a strict liability tort simply means a defendant is held fully liable for any injury
sustained by another party regardless of whether the injury was intended. There are three main
categories of torts covered under strict liability:

Animals, owned or possessed

Abnormally dangerous acts

Product liability

Owners or possessors of animals, whether livestock or dangerous animals that cause injury, are
liable for damage. This includes wild animals that are commonly found in a particular location,
like a museum or attraction, such as the javelinas in New Mexico. People who engage in
abnormally dangerous acts, like pyrotechnics or blasting, may also be liable for injuries
sustained by others. Of course, the court uses specific criteria to determine liability. Finally,
when a product is defective in design, instructions or warning, the manufacturer may be liable
for any injury that results from the defect. The manufacturer must be aware of the defect in
advance.

Learning Outcomes
Upon finishing this lesson, you should understand the definition of liability torts. In addition, you
should be able to recognize and cite some examples of the three categories of liability: animals,
dangerous acts and product liability.
The law recognizes a few ways in which a plaintiff's reputation and economic interests can be
harmed: defamation, libel and slander. All three have a similar outcome, but require different
elements be met.

Defamation, Libel and Slander

Hermie's Grocery Store recently had several big winners in the state lottery game. Excited about
drawing new customers to this propitious proprietor, the manager began telling customers. Soon,
word got out. Unfortunately, by the time the story hit the press, it had a whole new twist. The
news read, 'Several of Hermie's Customers Got Sick.' The headline should have read, 'Several of
Hermie's Customers Got Rich.'
When Hermie saw the news, he was furious. He thought: 'Sue everyone - from the newspaper to
the editor, everyone will pay!' Before we decide on Hermie's case, let's set out exactly what
harm to reputation looks like. This tort, formally known as defamation, is a statement
communicated to a third party that harms a person. There are two ways in which this can happen:
libel and slander.
In a libel claim, the harmful statement is written, like in a newspaper or a billboard. Slander, on
the other hand, is an oral statement made to a third party that disparages another person. In a per
se case, the facts are on face value. In a defamation suit, it means that the written or spoken word
was so obviously damaging that it would be difficult to recover from their far-stretching effects,
like saying a person is a rapist or a deranged criminal. And the burden of proof is generally on
the plaintiff, or the target of the defamatory statements.
The court will not recognize every typo as an attempt to destroy lives. What they are looking for
is whether malice was a motive. This means, the defendant meant to do evil or harm to another
person either by intentionally reporting false statements or disregarding whether statements are
really true. This is especially true when a public figure is on the business end of the false
statements.
In Hermie's ordeal, did malice occur? Not so much! The editor didn't mean to cause harm or
injury to the store's reputation. He merely neglected to check the facts. A statement like the one
made about the customers falling ill can easily be retracted. And that is probably what the
newspaper will do. In other words, the newspaper will take back their statement and replace it
with one that reads correctly, which may look something like this:

'Correction: Hermie's customers did not get sick. Our headline should have read that Hermie's
customers got rich because several of his customers purchased winning lottery tickets. We regret
our mistake.'
In some cases, it is not an error in fact, and slander or libel is deliberate. This is where it can get a
little muddy. The First Amendment of the Constitution allows for freedom of speech of the
press. Four important things need to be established:

Defamatory statements were published or broadcast to a wide audience.

The statements are untrue.

The false information caused injury to the plaintiff.

The information is not privileged or private.

So, just how can someone prove a defamation suit? Let's review a case involving a celebrity and
a misinformed informant.

Carol Burnett V. National Enquirer, Inc.

Everyone loves juicy celebrity gossip. In fact, publications like the National Enquirer tease us
with chinwag about some of our favorite stars everywhere from the checkout counter to the
newsstands. But how much of what we read is true? We will see. In Carol Burnett v. National
Enquirer, Inc., we will learn that although a detour from the facts was not intended, the truth
must be told.
Sometime in March, 1976, Carol Burnett, a famous actress and advocate against alcoholism, was
dining at a Washington, D.C. restaurant. During dessert, a couple seated near her party inquired
about Burnett's souffl. Burnett gathered plates and began dishing out a small serving for the
curious couple to enjoy. Another couple, curious about the star's generosity, asked to share as
well. So, Burnett obliged.
Once finished, Burnett and a friend happened upon Henry Kissinger at another table. The friend
made an introduction, and Burnett and Kissinger engaged in a pleasant conversation. An
unwitting Burnett did not know that she was being watched by a National Enquirer informant. In
the days to follow, the publication printed a headline that read, 'Carol Burnett and Henry K. in a
Row,' and suggested that Burnett and Kissinger argued at the restaurant. Not only that, the story
reports that Burnett consumed alcohol, was tipsy and pranced around the restaurant sharing
dessert, spilling drinks and otherwise disrupting fellow diners.
As truth would have it, Burnett only consumed two or three glasses of wine. She did share
dessert, but did not walk around the dining room disturbing guests. And, she did speak with
Kissinger, but in a mild and friendly tone.

Burnett was horrified by the article and in a quest to clear her name, she demanded a retraction.
She had plenty to lose. The credibility of her appearances on a number of television shows and
speaking events against the abuse of alcohol could have been challenged by suggesting she had
been drinking and carrying on at the restaurant. Although the Enquirer retracted the article and
published a retraction of the story, Burnett wasn't satisfied. She initiated a libel suit in Los
Angeles County Court.
Here are the facts. A freelance tipster working for the National Enquirer was paid to gather any
celebrity news and report the findings back to the newspaper's editor. From there, the
information should be verified for truth. In this case, the only fact verified was that Burnett
shared dessert. The rest remained unverified. Brian Walker, the article's author, went with the
information given and published the disparaging article.
After careful consideration, the element of malice was proven. Not in that the article or its author
intended to ruin Burnett's reputation, but because the publication either had knowledge that the
facts were false or that there was no regard for whether the facts were true or false. Burnett
prevailed.
This brings us to harm to economic interest, where defamation can affect the economic or
financial interest because of its disparaging statement. Carol Burnett's reputation was harmed.
But suppose those statements were not retracted? This could have affected her ability to generate
a profit from her speaking events. After all, she does speak on the subject of alcoholism. If
Burnett was banned from future speaking events, or even worse, could no longer be cast in
movies or on television, she would lose her livelihood. It could prove disastrous for her. In that
case, she could have good cause for a harm to economic interest suit as well.

Lesson Summary
In summary, defamation is a statement communicated to a third party that harms a person. It can
happen in two ways: libel and slander. Libel involves a harmful statement that is written, like in
a newspaper or on a billboard. Slander is an oral statement made to a third party that disparages
another person. Generally speaking, a per se case, or one that is on face value, can be fairly easy
to prove using the following elements:

Defamatory statements were published or broadcast to a wide audience.

The statements were untrue.

The false information caused injury to the plaintiff.

The information is not privileged or private.

Malice often needs to be proven by the plaintiff. This means convincing a court that the
statements were meant to intentionally harm the plaintiff or there was a disregard for the truth in
reporting information. Defamation can negatively affect both reputation and economic interest.

In the case of a high profile person, like a celebrity or a political figure, it can sway the public's
opinion. The plaintiff may lose fans or even standing in the community. In some cases, the
disparaging remarks can mean loss of livelihood.

Learning Outcomes
After completion of the video lesson, you should be able to:

Explain defamation, libel and slander

Recall that malice must be proven by the plaintiff in a defamation case

List the elements that can be used to prove a per se case

Agency relationships always involve an agent and a principal, though the

agency relationship can arise in various ways. This lesson explains agency
relationships.

Principal and Agent

Wilma works for me at my pet grooming business, Barks and Bubbles. I'm the owner and
in the process of restocking my inventory in my pet supply department, so I send Wilma
to order some products for my store.

This means Wilma is an agent, or a party who is legally authorized to act on behalf of
another party in business transactions. I, on the other hand, am a principal. A principal is
a party who gives legal authority to another to act on his or her behalf in business
transactions. Both principals and agents can be individuals or can be business entities.

Wilma and I have an agency relationship. This is a business relationship where a

principal gives legal authority to an agent to act on the principal's behalf when dealing
with a third party. When Wilma places orders for my store, I am the principal and Wilma
is working as my agent.

Agency

All agency relationships are fiduciary relationships. This means the relationship involves
a certain level of trust and confidence. The agent is obligated to act in the best interests of
the principal because the agent's actions will create legal obligations for the principal.
The agency relationship allows the agent to work on behalf of the principal as if the
principal was present and acting alone.

For example, let's say Wilma contracts with Rusty's Rawhide to buy 500 rawhide bones.
Rusty's delivers the bones, but Barks and Bubbles fails to pay the bill. As the principal,
I'm legally responsible for Rusty's bill even though I never personally made this business

deal. If Rusty's decides to sue for collection of the bill, they'll likely sue Barks and
Bubbles and me, rather than Wilma. As long as Wilma was properly acting as my agent
when she made this deal, she's not legally responsible.

Express and Implied Agency

Wilma and I have an express agreement, which means that both the principal and agent
agreed to the agency relationship through a written or oral agreement. I asked Wilma to
purchase supplies on my behalf, and Wilma agreed to do so. All agency agreements are
created through the intent of the parties, and we clearly intend to act in an agency
relationship.

However, not all agency agreements are express agreements. Agency can also be created
through an implied agreement. This means that the conduct of both parties expresses an
intent to create an agency relationship. The agent works on the principal's behalf through
implied authority, rather than a stated agreement.

For example, let's say that I always do the inventory buying for Barks and Bubbles.
However, I'm out of the country when our supply of rawhide bones runs out. I left Wilma
in charge of the store but never told her to purchase inventory. Wilma places an order for
more bones through Rusty's Rawhide even though I didn't specifically tell her to do so.
This is an implied agency because Wilma is acting with my implied authority as the
person in charge of the store.

Estoppel and Ratification

Agency relationships can also be based on apparent authority. This type of agency is
neither express nor implied. Instead, apparent authority is when a third party reasonably
assumes that the principal granted authority to the agent. Apparent authority is assumed
to exist by the third party through observing the principal's conduct. If the principal acts
as though he or she has an agency relationship with the agent, then the principal will be
legally bound by the agent's actions.

For example, let's say that I'm in town and in charge of my store. While at work one day,
Wilma orders 500 rawhide bones from Rusty's Rawhide. I haven't authorized Wilma to
make orders. Rusty's produces and delivers the bones, and I accept them. I can't refuse to
pay for the order since I've acted as if Wilma had the authority to place the order for me.

Apparent authority protects Rusty's from losing money on the business deal as long as
Rusty's has good reason to believe that Wilma is my agent. In this particular scenario, I've
ratified Wilma's act of agency. This means that the principal accepted and recognized an
invalid act of agency. An act of ratification by the principal makes the invalid act of
agency become legally valid.

Invalid acts of agency can also become valid through the doctrine of estoppel. This
means that there was an invalid act of agency, but the principal didn't take proper action
to deny the agency relationship. For example, let's say that Rusty stopped by my store to
give a sales pitch for his rawhide bones. I didn't have time to listen to him, so I had
Wilma take care of it. Wilma's not authorized to place orders for my store, but Rusty
doesn't know this, and I didn't tell him.

Wilma has apparent authority, and I'll be 'estopped' from denying the legality of any deal
she makes with Rusty. These two legal doctrines are similar, and both are dependent on
the principal's conduct. Note that the main difference between ratification and estoppel is
this: Ratification occurs after the agent's invalid act, and estoppel arises before the agent's
act.

Lesson Summary

Let's review. An agent is a party who is legally authorized to act on behalf of another
party in business transactions. A principal is a party who gives legal authority to another
to act on his or her behalf in business transactions. Note that both principals and agents
can be individuals or can be business entities.

The principal and agent create an agency relationship. This is a business relationship
where a principal gives legal authority to an agent to act on the principal's behalf when
dealing with a third party. An agency relationship is a fiduciary relationship. This means
the agent is obligated to act in the best interests of the principal because the agent's
actions will create legal obligations for the principal.

Agency relationships can be made through an express agreement, which means that both
the principal and agent agreed to the agency relationship through a written or oral
agreement. Agency relationships can also be made through an implied agreement. This
means that the conduct of both parties expresses an intent to create an agency relationship
without a stated agreement.

An agency relationship can additionally arise from apparent authority. This is when a
third party reasonably assumes that the principal granted authority to the agent. Apparent
authority is created when a third party reasonably assumes an agency relationship to exist
based on the principal's conduct.

Apparent authority can be ratified by the principal. This means the principal accepted
and recognized an invalid act of agency, thereby making it a valid agency. Invalid acts of
agency can also become valid through estoppel. This means there was an invalid act of
agency, but the principal didn't take proper action to deny the agency relationship.

Many business transactions are conducted through the use of agency

relationships. This means an agent conducts business on behalf of a principal.

This lesson discusses the liability of a principal for contracts made by an

agent.

Agency

Many business transactions are conducted through the use of an agency relationship.
This means two parties have a business relationship where one party acts on behalf of the
other party. An agency relationship requires a principal. This is the party who gives legal
authority to another to act on his or her behalf in a business transaction.

An agency relationship also requires an agent. This is the party who is legally authorized
to act on behalf of the principal when dealing with a third party. All agency relationships
involve these two parties.

Contractual Liability

An agent works as an extension of the principal. As long as the agent acts within the
scope of authority granted by the principal, the agent's actions obligate the principal as if
the principal was present and acted alone. So if the agent makes business contracts with a
third party, then the principal will usually be obligated to fulfill those contracts.

The principal will be obligated, or bound, if the agent acts with authority to make the
contract. This means that the agent must generally act with the approval of the principal.
Acts committed with the approval of the principal are known as 'authorized acts.' The
principal will be bound to the contract if the agent acts with either actual authority or
apparent authority. Let's take a look at each of these types of authority.

Actual Authority

If an agent acts with actual authority, then that agent acts with the principal's definite
permission. However, note that actual authority can be either express or implied.

Express authority is actual authority based on the principal's oral or written statement to
the agent. Let's say Penny owns Penny's Pretty Papers, a stationery store. Penny hires
Albert to manage the store. Penny specifically tells Albert that it's his job to negotiate and
make purchases with the store's paper suppliers. Albert is Penny's agent, and therefore has
express authority to make contracts on behalf of Penny, the principal.

Actual authority can also be implied authority. This is actual authority based on the
agent's common sense fulfillment of the principal's business. For example, let's say Penny
hires Albert to manage Penny's Pretty Papers. As part of Albert's duties, Penny tells him
to keep the store well stocked. Ordering paper from the store's suppliers is reasonably
necessary to fulfill this duty. Therefore, Albert has implied authority to make contracts
with the store's suppliers.

Apparent Authority

The principal will also be bound to the contract if the agent acts with apparent authority.
Apparent authority is when a third party reasonably assumes that the principal granted
contractual authority to the agent. An agent has apparent authority when a third party
reasonably assumes that the principal authorized the agent to make contracts on the
principal's behalf, based on the principal's conduct.

Note that apparent authority can exist even when the principal expressly directs the agent
not to make contracts on his or her behalf. In this sense, apparent authority can defeat the
unauthorized acts of the agent.

For example, let's say Penny hires Albert to work at Penny's Pretty Papers. Albert is the
only employee of the store and is left alone to manage the store each day. Penny gives
Albert an office in the store and a nametag that says 'Manager.' However, Penny
considers herself to be the real manager of the store and told Albert he's not to make any
major decisions on behalf of the store.

Carl, a paper supplier, visits the store during the day and reasonably assumes that Albert
is in charge. Carl assumes Albert has the authority to purchase paper on behalf of the
store and sells several boxes of stationery to Albert. Penny will be bound by this contract
to buy Carl's paper because Carl reasonably assumed Albert had contractual authority.
Carl's assumptions are based on Penny's treatment of Carl.

Lesson Summary

Let's review. Many business transactions are conducted through the use of an agency
relationship. This means two parties have a business relationship where one party acts
on behalf of the other party. The principal is the party who gives legal authority to
another to act on his or her behalf, and the agent is the party who is legally authorized to
act on behalf of the principal when dealing with a third party.

The principal will be obligated, or bound, by the agent's contracts if the agent acted with
the principal's authority to make the contract. Authority can be actual or apparent. Actual
authority means that the agent acts with the principal's definite permission.

There are two main types of actual authority. It can be either express or implied. Express
authority is actual authority based on the principal's oral or written statement to the
agent. Implied authority is actual authority based on the agent's common sense
fulfillment of the principal's business.

The principal will also be bound by the agent's apparent authority to make contracts on
his or her behalf. Apparent authority is when a third party reasonably assumes that the
principal granted contractual authority to the agent based on the principal's conduct.

An agent with authority normally can't be held personally liable for a contract
made on behalf of a principal. This lesson explains those special
circumstances when an agent may be held liable for a contract.

Agency

Business transactions are often conducted through the use of an agency relationship.
This means two parties have a business relationship where one party acts on behalf of the
other party. The first party is a principal and is the party who gives legal authority to
another to act on his or her behalf. The second party is an agent and is the party who is
legally authorized to act on behalf of the principal when dealing with a third party.

The principal will be obligated, or bound, by any contracts the agent makes on his or her
behalf as long as the agent acts with the principal's authority to make the contract. This
means that the agent must generally act with the approval of the principal. If the agent
makes authorized business contracts with a third party, the principal will be obligated to
fulfill those contracts, but the agent won't be.

Generally speaking, the agent's liability for a contract depends on whether or not the
principal's identity is revealed to the third party. A principal can be disclosed, partially
disclosed or undisclosed. Let's take a look at how the principal's status affects an agent's
liability for authorized contracts.

Disclosed Principal

Most contracts made through an agency relationship disclose both the fact of the agency
and the identity of the principal. An agent won't have personal liability for contracts made
on behalf of a disclosed principal. A principal is considered to be disclosed if the third
party knows or reasonably should know that the agent acts on behalf of a principal and
also knows the identity of that principal.

For example, let's say that Patricia hires Angelo to act as her agent. Angelo negotiates a
contract between Patricia and Tyler, a third party. Patricia will deliver 100 of her special
peach pies to Tyler. Angelo executes the contract and signs Patricia's name with the words
'by Angelo.' Patricia is a disclosed principal. Tyler knows about Angelo's agency and
knows that his contract is with Patricia, the principal.

Patricia is a disclosed agent even if Angelo signs the contract with his own name. In this
case, Angelo's signature must be accompanied by sufficient words of agency in order for
him to avoid liability. For instance, Angelo can sign his name with the words 'for
Patricia.' Or he can sign his name with his official title showing agency, such as 'Angelo,
Sales Representative for Patricia's Peach Pies.'

Partially Disclosed Principal

Sometimes a business contract is made using a partially disclosed principal. This means
that the third party knows the agent is acting on behalf of a principal but doesn't know the
identity of the principal. An agent is personally liable for contracts made using a partially
disclosed principal. If the third party can uncover the identity of the principal, then the
principal can also be held liable for the contract. Keep in mind that the third party must
usually decide which of the two he or she will sue. The third party won't be permitted to
recover damages from both parties.

For example, let's say Patricia is also a well-known real estate investor. She builds large
shopping malls, which sometimes isn't popular with residential neighbors and smaller
businesses. She sends her employee, Angelo, to negotiate the purchase of several homes
that have recently been rezoned, so she can acquire a large tract of land for her next mall.
Patricia suspects that the neighbors won't sell to her, so she instructs Angelo not to
identify her. Angelo discloses the fact that he's an agent for a real estate developer but
doesn't say who it is. Patricia is, therefore, a partially disclosed principal.

Undisclosed Principal

An agent is also personally liable for a contract made using an undisclosed principal.
This means that the third party doesn't know there's an agency and doesn't know the
principal's identity. In this case, the third party is led to believe that the agent works
alone. Therefore, the third party believes the agent is the only other party to the contract.

If there's a breach of contract, the third party will seek recovery only from the agent. The
agent may then seek recovery from the principal. Or, if the third party later discovers the
fact of the agency and the principal's identity, then the third party can choose to seek
recovery directly from the principal.

For example, let's say Patricia is an avid philanthropist. She makes large donations to
several charities a year but prefers to work anonymously. She sends her employee,
Angelo, to research and interview several different local charities, so that she can decide
who she'd like to donate to next. Angelo meets with the charities and tells them he's
researching a viable candidate for a large donation but never tells them he's representing
someone else or that the gift won't be from him. Patricia is, therefore, an undisclosed
principal.

Lesson Summary

Let's review. It's common for business transactions to be conducted through the use of
agency relationships. An agency is when two parties have a business relationship where
one party acts on behalf of the other party. The first party is a principal and is the party
who gives legal authority to another to act on his or her behalf. The second party is an
agent and is the party who is legally authorized to act on behalf of the principal when
dealing with a third party.

As long as the agent acts with the principal's authority to make the contract, the principal
will be bound by that contract. Sometimes the agent is also bound by the contract. The
agent's liability for a contract depends on whether or not the principal's identity is
revealed to the third party. A principal can be disclosed, partially disclosed or
undisclosed. A disclosed principal is one where the third party knows or reasonably
should know that the agent acts on behalf of a principal and also knows the identity of
that principal. An agent won't have personal liability for contracts made on behalf of a
disclosed principal.

A partially disclosed principal is one where the third party knows the agent is acting on
behalf of a principal but doesn't know the identity of the principal. An agent is personally
liable for contracts made using a partially disclosed principal. An undisclosed principal
is one where the third party knows neither the fact of the agency nor the identity of the
principal. An agent is personally liable for a contract made using an undisclosed principal
since the third party will believe the agent acts alone.

In certain circumstances, a principal will be held liable for his or her agent's torts. This lesson
explains the liability of a principal for an agent's torts, including the doctrine of respondeat
superior.

Principal's Direct Liability

Most organizations conduct business through the use of agency relationships. This type of
relationship requires both a principal and an agent. A principal is someone who gives legal
authority to another to act on his or her behalf in a business relationship. An agent is someone
who is legally authorized to act on behalf of the principal when dealing with a third party in a
business transaction.
An agent works as an extension of the principal, just as if the principal was present and acting
alone. Therefore, the principle can be held directly liable for the agent's torts, or wrongful acts
giving rise to a civil cause of action.
A principal can be held liable when:

The principal gave faulty instructions to the agent

The principal negligently hired the agent

The principal failed to properly supervise the agent

In each of these instances, the principal has acted negligently in his or her handling of the agent.
Any tort that arises as a direct result of the principal's negligence will therefore be imputed
directly to the principal.

For example, let's say Pete runs a plumbing company. He hires Andy as a plumber without
conducting research on Andy's experience. As it turns out, Andy isn't a licensed plumber. Andy
has a long criminal history and spent the last few years in and out of prison for burglary and
theft.
As Andy visits Pete's clients, he steals from the homes rather than completing plumbing jobs. As
the principal, Pete can be held directly liable for his clients' damages. This is because Pete failed
to properly investigate Andy before hiring him and sent Andy into homes without any
supervision.

Respondeat Superior
Principals can also be held indirectly responsible for an agent's torts through the doctrine of
respondeat superior. This is a Latin term, meaning 'let the superior respond.' In practice, this
doctrine allows a principal to be held liable for his or her agent's acts committed while in the
scope of the agent's authority.
This means that, in general, the principal can only be held liable for the agent's acts when all four
of these factors are met:

The agent was employed to perform that particular type of act

The agent's act occurred at an authorized place and during an authorized time of
employment

The agent's act was inspired by an intent to assist the principal

The agent's method could have been anticipated by the principal

For example, let's say Pete's Plumbing hires Andy as a plumber. This time Andy is licensed, and
Pete conducted the proper background checks. Andy is sent to fix a gas leak in a client's home
but accidentally fixes the wrong line. The house later explodes. Pete is indirectly liable under the
doctrine of respondeat superior because all four factors are met.

No Liability for Principal

Now, let's take a look at an example where a principal isn't liable for an agent's torts. Let's look at
the Florida case entitled Iglesia Cristiana La Casa Del Seor, Inc., etc. v. L.M., etc.
L.M. and her family sued former pastor Ali Pacheco, the church he worked for, the district
council for that church and the general council for that church. They accused Pacheco of sexually
assaulting L.M. while she was a minor. While the district and general councils settled with L.M.
and her family, the church and Pacheco proceeded as defendants to a jury trial.

The church was accused of direct liability due to the negligent supervision of Pacheco. The
church was also accused of indirect liability for the sexual assault based on respondeat superior.
Let's take a closer look at the doctrine of respondeat superior and how it fits with this case.
Trial evidence showed that Pacheco engaged in acts of grooming L.M., both by privately visiting
her at her home and school and by sending her gifts. Pacheco then picked her up from work one
day and took her to a hotel room where he assaulted her. Pacheco defended his actions by
alleging that the acts were consensual.
The trial jury found Pacheco and the church liable to L.M. and her family. The church was found
directly liable due to negligent supervision of Pacheco and indirectly liable on the basis of
respondeat superior. However, the appellate court found that the church couldn't be held liable
after all.
Several witnesses testified that it was the district's responsibility, not the church's, to screen and
hire pastors. The record also showed that there were no viable warning signs to indicate Pacheco
might commit the act. Therefore, the church wasn't liable for negligent supervision.
The appellate court pointed out that an employer can't be held liable for an employee's torts or
crimes using respondeat superior, unless the acts were committed during the course of the
employment and to further a purpose or interest, however excessive or misguided, of the
employer.
The sexual assault occurred on Pacheco's own time away from the church and in direct
opposition to church policies. The appellate court found that the assault was committed in order
to further Pacheco's own interests, rather than those of the church. Therefore, respondeat
superior could not apply.

Lesson Summary
Let's review. In certain circumstances, a principal will be held liable for his or her agent's torts.
The principal can be held directly liable or indirectly liable.
A principal can be held directly liable for an agent's torts when:

The principal gave faulty instructions to the agent

The principal negligently hired the agent

The principal failed to properly supervise the agent

A principal can be held indirectly responsible using respondeat superior. This legal doctrine
allows a principal to be held liable for an agent's acts committed while in the scope of the agent's
authority. The courts use a four-pronged test to determine whether or not an agent acted within

the scope of the agent's authority. The principal can only be held liable when all four of these
factors are met:

The agent was employed to perform that particular type of act

The agent's act occurred at an authorized place and during an authorized time of
employment

The agent's act was inspired by an intent to assist the principal

The agent's method could have been anticipated by the principal

The Uniform Commercial Code's Article 2 covers contracts for the sale of goods, including the
necessary requirements to form a contract. This lesson explains offer and acceptance under the
UCC.

UCC Article 2
Meet Polly. Polly is a seamstress. Polly makes and sells all kinds of pillows. For a business like
Polly's, it's helpful to be familiar with the Uniform Commercial Code, or UCC. The UCC is a
uniform act that covers sales and other commercial transactions.
The UCC isn't law. Instead, it's a model. It's a guide meant to encourage uniformity and
consistency between state laws. While all 50 states have enacted at least portions of the UCC,
state laws regarding commercial contracts still aren't exactly uniform. This is because different
states have adopted different parts and sometimes even different versions.
The UCC is vast, so there's no practical way for Polly to know every provision. Instead, Polly
will mostly want to be familiar with the UCC's Article 2. This article is, itself, extensive. It's
entitled simply 'Sales' and specifically addresses contracts for the sale of goods, like Polly's
pillows.
Generally, a sales contract is formed once a party makes an offer and another party accepts that
offer. The UCC's rules are fairly lax because Article 2 is meant to facilitate, rather than impede,
commercial contracts. Article 2 actually states that a contract for sale of goods may be made in
any manner sufficient to show agreement. For example, let's say Polly offers a particular purple
pillow for $20, and Parker accepts that offer by purchasing the pillow. This constitutes a simple
sales contract, even if Polly and Parker never spoke.
In reality, the majority of business agreements are made without the use of a written and signed
contract. For example, oral contracts and purchase orders are commonplace. Among many other
things, Article 2 covers the rules regarding the different ways offer and acceptance can be
achieved in contracts for the sale of goods. Let's take a closer look.

Offer

Let's start by examining what constitutes an offer under Article 2. The UCC doesn't specifically
define offer. Instead, the UCC follows common law and general contract principles that tell us an
offer is a proposal intended to create a contract if the other party agrees to that proposal.
Let's say that Polly has a storefront where she sells her pillows. The purple pillow is at the store
and has a price tag for $20. This is an offer to sell the pillow. An offer can be any sign of
willingness to enter into an agreement, as long as another person would justifiably believe that he
or she is invited to agree to the offer.
When Polly offers to sell the pillow for $20, the power to create the contract is placed in the
hands of Parker. Once Parker accepts Polly's offer, the two have a legally binding contract. Polly
can't take back her offer once Parker has accepted, though Parker can choose to reject her offer.
If Parker rejects her offer, then Polly isn't obligated to sell the pillow for $20 or at all.
Let's say Parker walks out of the store without buying the pillow. Polly can change the price on
the pillow to $30, making a new offer to sell the pillow. She's no longer obligated to sell the
pillow for $20.

Acceptance
Now let's take a look at what constitutes acceptance under the UCC's Article 2. Like offers, the
UCC treats acceptance very liberally. A party can accept an offer in any manner and by any
medium reasonable in the circumstances. Let's say that Polly operates a website and sells her
pillows online. Parker contacts Polly and offers to buy the purple pillow for $20. If Polly
promptly ships the pillow to Parker, then Polly has accepted Parker's offer.
Under general contract principles, a valid acceptance must mirror, or specifically agree to the
same terms as the offer. This isn't true under the UCC. Let's say Parker offers to buy the pillow
and be billed for it at the end of the month. Polly ships the pillow with an invoice that requires
payment within ten days. Though the terms don't mirror one another, the UCC still treats Polly's
shipment as an acceptance of Parker's offer. Let's take a look at what happens when an
acceptance contains additional or different terms.

Additional or Different Terms

A common scenario involves two merchants, or people who are in the same business. In our
case, a merchant is someone who's in the pillow business. If the parties aren't merchants, then
any additional or different terms are treated as proposals. They don't become part of the contract
unless the other party specifically agrees to those terms.
However, if both parties are merchants, additional or different terms in the second document
normally become a part of the contract. Under the UCC, these terms become a part of the
contract unless:

The offer specifically prohibits additional or different terms.

The additional or different terms materially alter the offer.

A party notifies the other that he or she objects to the additional or different terms.

Let's say that Parker owns a pillow superstore, and wants to stock his store with Polly's pillows.
Parker emails Polly a purchase order for 100 purple pillows. Parker's company uses a standard
purchase order that contains boilerplate language. This is the typical small print contained in a
commercial document. Parker's purchase order says that his company agrees to pay within 30
days of receiving the complete shipment. In response, Polly emails an acknowledgment of
Parker's order. However, her boilerplate language says payment is due in full within 10 days.
Under the common law, Polly's email represents a rejection of Parker's offer to buy the pillows
because her email contains different terms. Instead, Polly's email represents a new offer for
Parker to buy the pillows using Polly's payment terms. If Parker accepts Polly's shipment of
pillows, then Parker has agreed to Polly's offer and Polly's payment terms will govern.
However, under the UCC, the parties' exchange of documents constitutes a legally binding
contract as long as the documents demonstrate that both Polly and Parker intend to create a
contract. The payment terms don't materially alter the offer the way red pillows or only 20
pillows would.
When Polly emails her order acknowledgment, it serves as an acceptance of Parker's offer to buy
the 100 purple pillows, even if her acknowledgement contains additional or different terms.
Parker needs to immediately notify Polly if he objects to the new payment terms. Otherwise, her
terms will apply.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, is a uniform act that covers sales and
other commercial transactions. The UCC's Article 2 covers contracts for the sale of goods. This
includes what constitutes an offer and an acceptance.
The UCC doesn't specifically define offer, so we use general contract principles to know that an
offer is a proposal intended to create a contract if the other party agrees to the proposal. Article 2
tells us that acceptance can be achieved in any manner and by any medium reasonable in the
circumstances.
Under the UCC, a valid acceptance doesn't have to mirror the offer. If the parties are merchants,
any additional or different terms contained in the acceptance will become a part of the contract
unless:

The offer specifically prohibits additional or different terms.

The additional or different terms materially alter the offer.

A party notifies the other that he or she objects to the additional or different terms.

If the parties aren't both merchants, then any additional or different terms are proposals. These
terms don't become a part of the contract unless the other party specifically agrees to those terms.
The Uniform Commercial Code's Article 2 covers contracts for the sale of goods, including what
constitutes a buyer's acceptance. This lesson explains acceptance by the buyer as defined by the
UCC.

UCC Article 2
Many businesses involve the sale of goods, or movable property. Selling goods often involves
the use of sales contracts. Take, for example, Shelly. Shelly loves her job as a shoe salesperson!
Because Shelly is in sales, it's helpful for her to be familiar with the Uniform Commercial
Code, or UCC. The UCC is a uniform act that covers sales and other commercial transactions.
Keep in mind that the UCC isn't law. It's a model, or guide, meant to encourage uniformity and
consistency between state laws. All 50 states have enacted at least portions of the UCC, but
different states have adopted different parts and even different versions. This means that state
laws regarding commercial contracts are similar, but they aren't exactly uniform.
Shelly doesn't need to know the entire UCC. For the most part, she'll want to be familiar with the
UCC's Article 2. This article is entitled 'Sales' and addresses contracts for the sale of goods, like
shoes.

Contracts for the Sale of Goods

Under Article 2, it's easy to form a sales contract. Article 2 states that a contract for sale of goods
may be made in any manner sufficient to show agreement. Generally, this means that one party
must make an offer and another party must accept that offer. However, the means for making or
accepting an offer can vary.
For example, let's say that Shelly is in charge of ordering stock for the shoe store. She wants to
buy 50 pairs of a particular type of sneaker. Seth is a supplier and offers to sell Shelly 50 pairs of
sneakers for $20 a pair. Shelly accepts Seth's offer. This is a sales contract. Seth is now obligated
to supply Shelly with the sneakers, and Shelly is obligated to pay Seth $1,000, even if the two
never spoke in person or signed a written contract.
This is a common scenario. The majority of business agreements are made without the use of a
written and signed contract. Many businesses rely on oral contracts, purchase orders and
electronic communications. Article 2 contemplates the many different ways offer and acceptance
can be achieved in contracts for the sale of goods.

Acceptance

Let's take a closer look at what constitutes acceptance under the UCC's Article 2. Article 2 states
that a party can accept an offer in any manner and by any medium reasonable in the
circumstances. Courts define 'reasonable' in a lot of different ways. It's a broad definition that's
determined by the type of contract and the parties' circumstances.
In general, acceptance can occur in a variety of ways. However, acceptance must fall under at
least one of these categories:

The buyer signifies that the goods are conforming after a reasonable opportunity to
inspect them

The buyer signifies that he or she will retain the goods even if they are nonconforming

The buyer has a reasonable opportunity to inspect the goods and fails to reject the goods

The buyer treats the goods in a way that is inconsistent with the seller's ownership

Note that, in each of these categories, acceptance of any part of a commercial unit constitutes
acceptance of that entire unit. In other words, the buyer must accept or reject the entire order. If a
buyer accepts part of the order, then the buyer has accepted the entire order.
Let's explore each of these categories.

Conforming v. Nonconforming
Let's say that Shelly orders 50 pairs of sneakers from Seth. She orders 25 pairs of blue sneakers
and 25 pairs of red sneakers. Seth ships the sneakers to Shelly. A week later, Seth calls Shelly to
confirm she received the shipment and that she likes the shoes. She tells Seth she received the
sneakers and can't wait to put them out on the shelves.
Shelly had a reasonable amount of time to open the boxes and inspect the shoes. Her
conversation with Seth signified that she's pleased with the goods and that they conform to her
order. Shelly therefore accepted the goods and is obligated to pay Seth.
Now let's say Shelly opens the boxes and discovers that the sneakers are all blue. That's not what
Shelly ordered. When Seth calls a week later, Shelly tells him about the mistake but tells him
she's still excited about the sneakers. She says she'll still put them out on her shelves.
Shelly had a reasonable amount of time to open the boxes and inspect the shoes. Her
conversation with Seth signified that the sneakers don't conform to her order. However, she
signified that she'll keep them anyway. Shelly therefore accepted the goods and is obligated to
pay Seth.

Rejection and Treatment

Let's look at another scenario. Let's say Shelly receives her shipment, and again, the sneakers are
all blue. Shelly pushes the boxes to the back of her storeroom until she decides what to do with
the sneakers. A month later, Seth sends Shelly a bill for $1,000.
Shelly had a reasonable amount of time to open the boxes and inspect the shoes. Though the
goods don't conform to Shelly's order, she failed to notify Seth and reject the shoes. Shelly
therefore accepted the goods and is obligated to pay Seth.
Lastly, let's say Shelly receives her shipment, and again, the sneakers are all blue. Shelly doesn't
contact Seth. Instead, she puts all of the sneakers out on her shelves.
Though the goods don't conform to Shelly's order, she treated the shoes as if she owned them.
Her actions are inconsistent with Seth's ownership of the shoes. Shelly therefore accepted the
goods and is obligated to pay Seth.
Keep in mind, however, that this last scenario has an exception. If Shelly acts as if she owns the
shoes, and this act is wrongful or unjustified, then Shelly hasn't legally accepted the goods. For
example, let's say Shelly orders 50 pairs of sneakers, but Seth accidentally mixes up his orders.
Seth, instead, sends Shelly 50 pairs of very expensive dress shoes. Shelly can't put the shoes on
her shelves and assume she's properly accepted the goods.
However, if Seth learns of the mistake and doesn't act to correct the mistake, then Shelly can
treat the goods as if they are hers. Seth can ratify Shelly's actions. Seth's ratification allows
Shelly to keep the goods.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, is a uniform act that covers sales and
other commercial transactions. The UCC's Article 2 is entitled 'Sales' and addresses contracts for
the sale of goods. This includes what constitutes a buyer's acceptance.
Under Article 2, acceptance can occur in any manner and by any medium reasonable in the
circumstances. Acceptance can occur in a variety of ways but must fall under at least one of these
categories:

The buyer signifies that the goods are conforming after a reasonable opportunity to
inspect them

The buyer signifies that he or she will retain the goods even if they are nonconforming

The buyer has a reasonable opportunity to inspect the goods and fails to reject the goods

The buyer treats the goods in a way that is inconsistent with the seller's ownership

The Uniform Commercial Code's Article 2 covers contracts for the sale of goods, including the
buyer's obligations. This lesson explains how and when a buyer may reject goods.

UCC Article 2
Meet Morty. Morty owns Morty's Market, a small grocery store. Morty's business involves
buying goods in order to stock his store and selling goods to customers. Many businesses, like
Morty's, involve the sale of goods, or movable property. For businesses like Morty's, it's helpful
to be familiar with the Uniform Commercial Code, or UCC. The UCC is a uniform act that
covers sales and other commercial transactions.
The UCC is a guide. It's a set of model laws meant to encourage uniformity and consistency
between state laws. All 50 states have enacted at least portions of the UCC. This means that state
laws regarding commercial contracts aren't exactly alike, but they are similar.
Morty will mostly want to be familiar with the UCC's Article 2, entitled Sales. This article is
extensive, and addresses contracts for the sale of goods. Morty needs a general knowledge of the
provisions since his business buys and sells goods.

Perfect Tender Rule

Among many other things, Article 2 addresses how and when a buyer may reject goods. Let's say
that Morty orders 100 prepared meatloaves from Mark, his meat supplier. Morty orders twopound meatloaves, but the meatloaves Mark delivers are three-pound loaves.
Using general contract law principles, Mark substantially performed his agreement with Morty
because he supplied usable meatloaves in a timely manner. Though not exactly what Morty asked
for, the meatloaves fit his needs and he can use them just as well. Mark hasn't breached the
contract.
However, Article 2 treats this situation differently. For contracts involving the sale of goods,
Mark must follow the perfect tender rule. This means that Mark must deliver goods that
precisely meet the terms of the contract. The goods must be perfect, or exact, to what Morty
ordered. Let's take a look at Morty's options.

Buyer's Rejection
Under Article 2, if the goods 'fail in any respect to conform to the contract' then the buyer can
reject the goods. Rejection simply means that the buyer refuses, or doesn't keep, the goods.
There are four general rules regarding rejection:

A rejection must occur within a reasonable time after the delivery of the goods.

The buyer must promptly notify the seller of the rejection.

The buyer must give the seller an opportunity to correct the problem with the goods.

The rejection must occur before the buyer accepts the goods.

Under the UCC, we know that Morty can't reject the meatloaves if he already accepted them.
Morty, therefore, needs to know what constitutes acceptance. Article 2 defines acceptance very
broadly, stating that a party can accept an offer in 'any manner and by any medium reasonable in
the circumstances.'
What constitutes acceptance varies by state, by the type of contract, and by the parties'
circumstances. Acceptance can occur in many different ways, but will fall under at least one of
these general categories:

The buyer signifies that the goods are conforming after a reasonable opportunity to
inspect them.

The buyer signifies that he or she will retain the goods, even if they are nonconforming.

The buyer has a reasonable opportunity to inspect the goods and fails to reject the goods.

The buyer treats the goods in a way that is inconsistent with the seller's ownership.

Let's say that Mark delivers the three-pound meatloaves to Morty. Morty opens one of the boxes
that same day, and notices the meatloaves are not what he ordered. Morty doesn't remove the
packaging from the meatloaves or stock them in his market. Instead, he calls Mark to tell him.
Mark tells Morty that he cannot get two-pound meatloaves and that's why he sent the threepound loaves. Morty hasn't accepted Mark's delivery, and followed all of the UCC rules for
rejecting the goods. Morty may now choose whether to accept or reject the three-pound loaves.

Installment Contracts
Now let's take a look at a different scenario. Let's say that Morty orders 100 meatloaves from
Mark, but this time the meatloaves will be delivered in installments. Mark will deliver 20
meatloaves a week, for the next five weeks. Morty will pay $5 per meatloaf, or $100 per week
upon delivery of the goods.
This is an installment contract. An installment contract is based on periodic performances over
a specific length of time. In an installment contract for the sale of goods, deliveries are made as a
series rather than all at once.
A buyer's right of rejection works differently in an installment contract, because the perfect
tender rule doesn't apply to installment contracts. Let's say Mark delivers an installment of 20
meatloaves, but the meatloaves are three-pounds rather than two-pounds.

Morty can reject the installment, but only if the delivery substantially impairs the value of that
installment, and if Mark can't correct the problem with the goods. If the nonconformity is not
substantial, or can be fixed by Mark, then Morty must accept the nonconforming installment.
However, Morty can sue Mark to recover any money damages he sustains as a result of the
nonconforming installment.
Here, Morty can use the three-pound meatloaves because they are in good condition and the type
his customers enjoy. The value of the installment is not impaired. In fact, the value of the
installment may be increased due to the larger size of the meatloaves.
Keep in mind that one nonconforming delivery won't constitute a breach of the agreement. A
buyer can only cancel an installment contract if there's a breach, or multiple breaches, that
substantially impair the value of the entire contract.
Let's say that Morty ordered the meatloaves without onions, but Mark continues to send
shipments with onions. These meatloaves are no good to Morty, since his customers won't buy
them. If Mark can't replace the items with what Morty ordered, in a timely manner, then Morty
can cancel the contract and sue Mark for any damages Morty incurred.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, is a uniform act that covers sales and
other commercial transactions. The UCC's Article 2 addresses contracts for the sale of goods,
including how and when a buyer may reject goods.
Under Article 2, sellers must follow the perfect tender rule. This means the seller must deliver
goods that precisely meet the terms of the contract. Otherwise the buyer can reject the goods.
There are four general rules regarding rejection:

A rejection must occur within a reasonable time after the delivery of the goods.

The buyer must promptly notify the seller of the rejection.

The buyer must give the seller an opportunity to correct the problem with the goods.

The rejection must occur before the buyer accepts the goods.

Rejection in an installment contract works a bit differently. An installment contract is based on

periodic performances over a specific length of time. A buyer can't reject an installment unless it
substantially impairs the value of that installment, and the seller can't correct the problem. A
buyer can't cancel an installment contract unless there's a breach, or multiple breaches, that
substantially impair the value of the entire contract.

The Uniform Commercial Code's Article 2 covers contracts for the sale of goods. This includes
the seller's right to cure, or correct, a delivery. This lesson explains when and why a seller has the
right to cure nonconforming goods.

UCC Article 2
Gordon owns and runs Gordon's Green Thumb. It's a nursery that sells a wide variety of plants.
Gordon purchases plants from various suppliers, and then sells the plants to his customers. This
means that Gordon is involved in the sale of goods, or movable property.
There are many different types of businesses involved in the sale of goods. For businesses like
Gordon's, it's helpful to be familiar with the Uniform Commercial Code, or UCC. The UCC is a
uniform act that covers sales and other commercial transactions.
The UCC is not law. It's a set of model laws meant to be used as a guide in order to encourage
uniformity and consistency between state laws. All 50 states have enacted at least portions of the
UCC, though different states have enacted different portions. This means that state laws
regarding commercial contracts aren't exactly alike, but they are similar.
For Gordon, it's most helpful for him to be familiar with the UCC's Article 2, entitled 'Sales'.
This article addresses contracts for the sale of goods. Gordon needs a general knowledge of the
provisions, so he doesn't run into any legal problems when he's buying and selling his plants.

Seller's Right to Cure

Let's say that Gordon contacts Tammy's Tulips and enters a contract with Tammy. Gordon orders
1,000 orange tulip bulbs to be delivered on or before November 15. On November 1, Gordon
receives a delivery from Tammy's Tulips. When Gordon opens the boxes to inspect the tulips, he
discovers that they are yellow, rather than orange, tulips. Gordon contacts Tammy's Tulips to let
Tammy know he is rejecting this shipment of yellow tulips. The tulips aren't what Gordon
ordered, and are therefore nonconforming goods. Under Article 2, a seller must provide exactly
what the buyer ordered. This is known as the perfect tender rule.
So, what can Tammy's Tulips do about this problem? Does Tammy have any right to correct, or
cure the problem? Or is the contract simply over due to Tammy's breach of the agreement?
Generally speaking, Gordon and Tammy's deal won't be lost. Tammy has an opportunity to fix
the problem and save the contract. This is known as the seller's right to cure. The UCC allows a
right to cure in certain situations because the UCC was created to promote and salvage
commercial agreements, rather than discourage or impede. The right to cure allows the seller a
reasonable amount of time to repair the contract without causing undue damage to the buyer.
Let's take a closer look at when a seller has a right to cure.

Time for Delivery

Remember that Tammy delivered the yellow tulip bulbs on November 1. The general rule is that
the seller may cure any nonconformity before the time for performance has expired.
Gordon and Tammy's contract allowed the orange tulip bulbs to be delivered on or before
November 15. This means that Tammy automatically has a right to cure. She has 14 days left to
fulfill her end of the agreement. However, Tammy must let Gordon know that she still intends to
fulfill the contract, and she must make delivery of the orange tulip bulbs by November 15.
Let's say Gordon contacts Tammy to let her know he's rejecting the shipment of yellow tulips.
Tammy apologizes and tells Gordon she'll deliver orange tulips, but she can't get them until
November 18. Gordon now has the option to agree to an extension of time, or he can cancel the
contract.

Reasonable Grounds to Expect Acceptance

Now let's say that Gordon and Tammy have a lengthy business relationship. Gordon has ordered
from Tammy on many occasions. In the past, when Tammy couldn't deliver specifically what
Gordon ordered, she sent a close alternative. Gordon has always accepted the alternative.
Here, the general rule is that the seller may cure any nonconformity if he or she reasonably
believed the goods would be accepted. This right to cure is meant to avoid surprise or injustice to
the seller and allow an opportunity to salvage the agreement.
Since Tammy sent nonconforming goods reasonably believing Gordon would accept those
goods, she now has additional time to deliver conforming goods. However, Tammy must let
Gordon know that she intends to deliver conforming goods, and she only has a reasonable
amount of time to do so. This rule holds true even if Tammy gave Gordon a money allowance,
such as sending the yellow tulips and a 20% discount on the order due to the alternate items.
Note that jurisdictions vary on the definition of a 'reasonable amount of time'. Courts define
'reasonableness' depending on the nature of the contract and the parties' circumstances. For
example, Tammy can't deliver the orange tulips after tulip planting season is over. She must
make the delivery in time to give Gordon an opportunity to sell the tulips to his customers while
tulips are in demand.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, is a uniform act that covers sales and
other commercial transactions. The UCC's Article 2 is entitled 'Sales', and addresses contracts
for the sale of goods. Article 2 outlines a seller's right to cure, or correct, a delivery of
nonconforming goods. Nonconforming goods are those that don't meet the perfect tender rule.
Generally, a seller has a right to cure in two situations:

The seller may cure any nonconformity before the time for performance has expired

The seller may cure any nonconformity if he or she reasonably believed the goods would
be accepted.

The Uniform Commercial Code's Article 2 covers contracts for the sale of goods. This includes
revocation of acceptance. This lesson explains when and how a buyer can revoke acceptance of
goods.

UCC Article 2
Many businesses are involved in the sale of goods, or movable property. For businesses that sell
goods, it's helpful to be familiar with the Uniform Commercial Code, or UCC. The UCC is a
uniform act that covers sales and other commercial transactions.
The UCC is a guide and not law. It's a manual of model laws meant to encourage uniformity and
consistency between state laws. The UCC is fairly reflective of state laws regarding commercial
contracts because all 50 states have enacted at least portions of the UCC.
For businesses that sell goods, it's most helpful to be familiar with the UCC's Article 2. This
article is entitled 'Sales' and addresses contracts for the sale of goods. One important rule
contained in Article 2 is known as the perfect tender rule. This rule requires sellers to provide
buyers exactly what they ordered.
So, if a buyer ordered 50 basketballs and the seller provided 50 footballs, the seller provided
nonconforming goods and violated the perfect tender rule. The buyer can choose to accept the
nonconforming goods, but acceptance means that the buyer is obligated to pay the purchase
price. Instead, the buyer can reject the goods.
An interesting scenario occurs when a buyer accepts nonconforming goods and then decides he
or she should have rejected the goods. The buyer then needs to know if he or she can revoke
acceptance. Let's take a closer look at this issue.

Revocation of Acceptance
Let's say that Billy runs a youth basketball camp. He contacts Shawn, a sporting goods supplier,
and orders 50 youth-sized basketballs for his upcoming camp. When the basketballs are
delivered, Billy accepts them. He opens the boxes to quickly inspect the delivery and sees that
the boxes contain basketballs.
However, when it's time for the camp one week later, Billy unloads the basketballs and notices
they are the wrong size. They are full-sized adult basketballs, and he ordered youth-sized
basketballs.
Under the UCC, Billy can revoke, or take back his acceptance, because the basketballs are
nonconforming. Revocation is only available when the goods are nonconforming and the

nonconformity substantially impairs the value to the buyer. Here, Billy has no use for the large
basketballs, and so the nonconformity substantially impairs the value of the basketballs to Billy.

Reasonable Time
Keep in mind that Billy must notify Shawn that he's revoking his acceptance. Note that a buyer
can't revoke acceptance if the buyer knew or should have known of the nonconformity at the
time of acceptance. Otherwise, the buyer must notify the seller within a reasonable amount of
time after he discovers or should have discovered the nonconformity. A 'reasonable time' is
defined differently depending on the type of contract and the parties' circumstances. Here, one
week is likely a reasonable amount of time.
Now let's say that Billy notifies Shawn of the nonconformity, and Shawn promises to cure, or fix,
the problem by shipping new basketballs to Billy within the next month. Billy, therefore, delays
revoking his acceptance for over one month, while he waits for Shawn to cure the
nonconformity. However, Shawn's shipment doesn't come within one month, and Billy can no
longer use the basketballs because his camps are over.
Billy delayed revocation because he had a reasonable assumption that the nonconformity would
be cured. Under the UCC, Billy can still revoke his acceptance at this time. This is because
Shawn didn't cure the nonconformity seasonably, or within a reasonable amount of time
considering the circumstances. This is true even though Billy's revocation comes later than
would normally be allowed under the UCC.

Buyer's Remedy
Had Billy rejected, or refused, to accept the nonconforming basketballs, he would have a right to
certain remedies. Fortunately for Billy, revocation of acceptance under the UCC offers the same
remedies. Once a buyer effectively revokes acceptance, the goods are returned to the seller and
the purchase price is refunded to the buyer. This means that Billy can:

Cancel the contract

Recover anything he paid

Make no further payments

Recover damages for his cost to replace the goods

Recover damages caused by not having the goods

Note that, in order to claim one or more of these remedies, Billy can't exercise ownership rights
over the basketballs. This means Billy can't act like he owns the basketballs and can't use them.
Billy must properly care for and hold the basketballs until Shawn can take them back.

Lesson Summary
Let's review. For businesses that sell goods, it's helpful to be familiar with the Uniform
Commercial Code, or UCC. The UCC is a uniform act that covers sales and other commercial
transactions. The UCC's Article 2 addresses contracts for the sale of goods. Article 2 includes
the perfect tender rule, which requires sellers to provide buyers exactly what they ordered.
If goods are nonconforming, then the buyer can choose to accept the nonconforming goods
anyway, but acceptance means that the buyer is obligated to pay the purchase price.
Alternatively, the buyer can reject the goods.
Or sometimes a buyer can accept nonconforming goods and then later revoke his or her
acceptance. There are a few things to keep in mind:

Revocation is only available when the goods are nonconforming and the nonconformity
substantially impairs the value to the buyer

A buyer can't revoke acceptance if the buyer knew or should have known of the
nonconformity at the time of acceptance

The buyer must notify the seller within a reasonable time after he or she discovers or
should have discovered the nonconformity

Once a buyer effectively revokes acceptance, the goods are returned to the seller and the
purchase price is refunded to the buyer. Other possible remedies mirror those available when a
buyer properly rejects nonconforming goods.
The Uniform Commercial Code, or UCC, allows a sales contract to exist even when the parties'
contract terms differ. This lesson explains how additional or different terms are treated in UCC
contracts, including the difference between merchant and non-merchant contracts.

Contracts for the Sale of Goods

Oliver runs an online store called Outrageous Orange. He sells clothing and home furnishings, all
of which are the color orange. Oliver sells goods because his items are movable property. For
businesses like Oliver's, it's helpful to be familiar with the Uniform Commercial Code, or
UCC.
The UCC is a uniform act that covers sales and other commercial transactions. Note that
different portions of the UCC have been enacted as law in different states. This means that laws
regarding sales differ slightly from state to state, but the UCC is a good representation of the law
regarding commercial transactions in most states.
In particular, Oliver will want to be familiar with the UCC's Article 2. This article is entitled
Sales and addresses contracts for the sale of goods. Oliver may not think he uses contracts

because he does all of his business electronically through online sales. However, a sales contract
is created every time goods are bought and sold. The buyer offers to pay for the goods, and the
seller agrees to sell the goods for that price. In an effort to facilitate sales, the UCC allows most
sales contracts to be oral, unwritten, and unsigned.
These days, business transactions like Oliver's are common. Many buyers purchase goods
electronically, orally, or through the use of purchase orders. In these cases, there won't be a
signed sales contract.

Battle of the Forms

Sometimes the lack of a written and signed contract can cause difficulties. Let's say that Olivia
owns and runs Olivia's Ottomans. She sees an orange ottoman for sale through Oliver's store and
decides to buy five to sell in her own store. The ottoman is $100, so Olivia emails a purchase
order to Oliver requesting to buy five orange ottomans for $500.
Olivia uses a standard purchase order form that she uses for all the purchases she makes for her
store. Like most business forms, her purchase order contains several standard terms printed at the
bottom of the document. These are typically known as boilerplate language. According to
Olivia's boilerplate language, she'll pay for the order within 30 days of receiving the goods.
Oliver receives Olivia's purchase order and emails her an acknowledgement. He also ships the
five ottomans to Olivia. Oliver uses his own standard form that contains his own boilerplate
language. According to Oliver's boilerplate language, Olivia must pay in full within 10 days of
his shipment.
Here's where things can get complicated. Under general contract principles, a valid acceptance
must mirror or specifically agree to the same terms as the offer. This is known as the common
law mirror image rule. Using this rule, Oliver's acknowledgement contains different term, so
it's treated as a rejection of Olivia's offer. Oliver's acknowledgement is, instead, treated as a
counteroffer to buy the ottomans using Oliver's payment terms. Olivia may choose to accept or
reject the new offer, but if she accepts Oliver's shipment of the ottomans, then she has accepted
his offer. Oliver's payment terms will govern.
However, this isn't true under the UCC. Though the terms of these two forms don't mirror one
another, the UCC still treats Oliver's acknowledgement and shipment as an acceptance of Olivia's
offer to buy the five ottomans. This scenario is known as a battle of the forms. The battle occurs
when the UCC treats the agreement as a contract but the parties differ on the terms.

Merchants v. Non-Merchants
A common battle of the forms scenario involves two merchants, like Oliver and Olivia.
Merchants are people who are in the same business. Oliver and Olivia are merchants because
they both own and run stores that sell home furnishings.

If both parties aren't merchants, then any additional or different terms are treated as proposals.
They don't become part of the sales contract unless the other party specifically agrees to those
terms. This rule applies to sales between two non-merchants or between a merchant and a nonmerchant. However, when both parties are merchants, additional or different terms in the second
document normally become part of the contract. Under the UCC, these terms become a part of
the sales contract unless:

The offer specifically prohibits additional or different terms.

The additional or different terms materially alter the offer.

A party notifies the other that he or she objects to the additional or different terms.

Under the UCC, Oliver and Olivia's exchange of documents constitutes a legally binding
contract as long as the documents demonstrate that both Oliver and Olivia intended to enter a
sales agreement. Oliver's payment terms don't materially alter Olivia's offer the way blue
ottomans or orange chairs would affect Olivia.
When Oliver emails the order acknowledgment, it serves as an acceptance of Olivia's offer to
buy the five ottomans. This is true even though his acknowledgement contains additional or
different terms. Olivia must immediately notify Oliver if she objects to the new payment terms.
Otherwise, Oliver's payment terms will apply to this sales contract.
Note, however, that many business forms contain boilerplate language that specifically prohibits
additional or different terms. It wouldn't be uncommon for Olivia's form to say that her offer is
only good using her terms and that 'no additional terms will apply.' In that case, Oliver's different
payment terms contained in his form are ignored. If Oliver ships the ottomans, then he has
accepted Olivia's offer by performing, and her payment terms will apply.

Lesson Summary
Let's review. Goods are movable property. The sale of goods is covered under the Uniform
Commercial Code, or UCC's, Article 2. This article allows a sales contract to be created every
time goods are bought and sold. Sales contracts can generally be oral, unwritten, and unsigned.
Article 2 addresses the parties' use of additional or differing terms in a sales contract. Under
general contract principles, a valid acceptance must mirror or specifically agree to the same
terms as the offer. This is known as the common law mirror image rule. However, under the
UCC, the terms of the offer and acceptance don't have to mirror one another. The UCC treats the
agreement as a contract as long as the parties appear to have intended a contract. The additional
or differing terms create what is known as a battle of the forms.
If both parties aren't merchants, then any additional or different terms are treated as proposals.
They don't become part of the sales contract unless the other party specifically agrees to those
terms. However, when both parties are merchants, additional or different terms in the second

document normally become part of the contract. Under the UCC, these terms become part of the
sales contract unless:

The offer specifically prohibits additional or different terms.

The additional or different terms materially alter the offer.

A party notifies the other that he or she objects to the additional or different terms.

A statute of frauds is a state law that applies to certain oral contracts. The Uniform Commercial
Code includes a model statute of frauds requiring written contracts in only a few situations. This
lesson explains the UCC's statute of frauds.

UCC Statute of Frauds

Many contracts are made orally, or between parties without memorializing the agreement in
writing. Oral contracts have long been considered to be valid and enforceable. This even includes
most commercial or business contracts.
The Uniform Commercial Code, or UCC, is a uniform act that covers sales and other
commercial transactions. Keep in mind that the UCC is a model, or guide. This means that the
UCC only becomes law when a state enacts a particular provision.
The UCC includes a model statute of frauds. A statute of frauds is a state law that generally
requires certain contracts to be in writing and signed by the parties in order to be enforceable.
Though every state has a statute of frauds, different states have enacted different versions of the
law.
The UCC's statute of frauds is quite limited. The UCC suggests that most commercial
agreements can be enforceable even when unwritten. However, the UCC requires contracts to be
in writing in these limited situations:

Contracts for the sale of goods worth $500 or more

Leases for goods worth $1,000 or more

Agreements that create a security interest in goods and the goods aren't in the possession
of the creditor

Let's take a closer look at these provisions.

Sale of Goods

The UCC's statute of frauds includes contracts for the sale of goods worth $500 or more. For
example, let's say Henry owns Henry's Hammers. Harold owns Harold's Hardware. Harold
contacts Henry because Harold wants to purchase 500 hammers to be sold in his hardware store.
Henry's hammers are priced at $2 apiece. This means the agreement will be for 500 hammers, at
a total cost of $1,000. Under the UCC, this commercial contract will need to be in writing since
the goods have a price of $500 or more.
Note that it's not necessary for both parties to sign the contract. The contract needs to be signed
by the party against whom the contract is enforced. Let's say that Henry provides the hammers,
but Harold refuses to pay Henry. Henry will seek enforcement of the contract against Harold.
The contract won't be enforceable against Harold unless Harold signed the contract.
Also, note that the written contract doesn't have to be complete and detailed. Let's say that Henry
draws up the contract but fails to include a delivery date or the price per hammer. Under the
UCC, missing terms will be inferred. This means that courts will enforce the contract and add
dates or amounts that are reasonable considering the circumstances.
Lastly, note that this provision has an important exception regarding specially manufactured
goods. If Henry manufactures custom hammers for Harold's store, and those hammers aren't
suitable to be sold to another store, then Harold will be obligated to pay for the hammers even if
the contract isn't in writing or signed by Harold.

Leases for Goods

Next, the UCC's statute of frauds includes leases for goods worth $1,000 or more. Note this
provision applies to goods, rather than real estate. Common commercial lease contracts include
those for office equipment or machinery.
Let's say Henry's business also manufactures construction equipment. Harold wants to rent a
large table saw to keep at his hardware store. Henry agrees to lease the saw to Harold for one
year, with payment of $200 per month. Since the lease requires total payments of more than
$1,000, this contract must be in writing.
Like the UCC's statute of frauds regarding the sale of goods, UCC lease contracts are enforceable
even when missing certain terms. For example, the leased goods must be reasonably identified,
but don't have to be described with detail.

Agreements Creating a Security Interest

The UCC's statute of frauds also includes agreements that create a security interest in goods, if
the goods aren't in the possession of the creditor.
Let's say Henry's Hammers just finalized a deal to be the exclusive hammer supplier to Home
Depot. Since this requires more output than Henry's used to, Henry needs new equipment and a

large inventory of raw materials. Henry's Hammers needs a business loan to purchase these
supplies.
The creditor requires Henry's Hammers to secure the business loan using the new equipment and
inventory as collateral. The creditor, or bank, therefore has a security interest in these goods,
even though the goods will be in the possession of the debtor, Henry's Hammers. If Henry's
Hammers defaults on its loan payments, the creditor can't seize the collateral unless the contract
is in writing and signed by Henry.

Modifications
It's also helpful to understand how the UCC treats contract modifications, or changes to the
contract. If a contract, as modified, would need to be in writing according to the UCC's statute of
frauds, then the modification also needs to be in writing.
For example, let's say Henry's Hammers contracts to sell 100 hammers, at a price of $2 each, to
Harold's Hardware. Since this agreement is for less than $500, the UCC doesn't require it to be in
writing.
But before Henry supplies the hammers, Harold changes his order to 500 hammers. Since the
contract is now modified to represent more than $500, the modification must be in writing in
order to be enforceable.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, is a uniform act that covers sales and
other commercial transactions. It's a model, meaning it isn't law unless a state chooses to enact a
particular provision.
The UCC includes a statute of frauds, which is a state law that generally requires certain
contracts to be in writing and signed by the parties in order to be enforceable. The UCC requires
contracts to be in writing in these limited situations:

Contracts for the sale of goods worth $500 or more

Leases for goods worth $1,000 or more

Agreements that create a security interest in goods and the goods aren't in the possession
of the creditor

The UCC also requires that any contract modifications be in writing if the contract, as modified,
would fall under the UCC's statute of frauds.

The Uniform Commercial Code's Article 2 covers contracts for the sale of goods. Article 2
contains warranties included as part of the sale of goods. This lesson explains the difference
between express warranties and implied warranties.

UCC Article 2
Many businesses are involved in the sale of goods, or movable property. Goods are things like
furniture, clothing or cars. For businesses that sell goods, it's helpful to be familiar with the
Uniform Commercial Code, or UCC. The UCC is a uniform act that covers sales and other
commercial transactions.
Note that the UCC is a guide and not law. It's a manual of model laws meant to encourage
uniformity and consistency between state laws. When a state enacts a particular portion of the
UCC, then that portion becomes law in that state. The UCC is fairly reflective of state laws
regarding commercial contracts because all 50 states have enacted at least portions of the UCC.
For businesses that sell goods, it's most helpful to be familiar with the UCC's Article 2. This
article is entitled 'Sales' and addresses contracts for the sale of goods. A sales contract is created
every time goods are bought and sold. The buyer offers to pay for the goods, and the seller
agrees to sell the goods for that price. Unlike many other types of agreements, the UCC allows
sales contracts to be oral and unwritten.
Part of Article 2 addresses warranties. Warranties are guarantees included in a sale of goods. A
warranty is a promise, made by the person who makes or sells the goods, that he or she stands
behind those goods. The UCC places certain responsibilities on sellers through the use of
warranties. If a salesperson or manufacturer breaks a warranty, that person has breached the sales
contract. Let's take a closer look at the two main categories of UCC warranties.

Express Warranties
When a salesperson discusses a warranty, he or she is usually referring to an express warranty.
An express warranty is an affirmative promise about the quality or features of the goods. This
type of warranty can appear in an advertisement, a certificate or even be an oral statement.
For example, if a car salesman tells me that a particular car has eight airbags, then he's promising
me the car has eight airbags. He's made an express warranty regarding the features of the car.
Specific statements, like 'this car has a V6 engine,' or 'this car can fly,' are also express
warranties.
Note that the use of the word 'warrant' or 'guarantee' is not necessary to create a warranty.
Though note that general statements, like 'this is the best car,' or 'this car will last forever,' are not
express warranties. These general statements are instead considered to be typical salesperson
'puffing.'

Note that express warranties also include descriptions of the goods and samples shown to the
buyer. For example, let's say the salesperson shows me a shiny new red car parked on the
showroom floor. This is the same type of car I want to buy. The sample on the showroom floor
serves as an express warranty. It's a guarantee that the car sold to me will be that same type and
that same quality.

Implied Warranties
The second type of UCC warranty is an implied warranty. An implied warranty is a guarantee
made without being specifically mentioned. Note that these warranties automatically exist any
time goods are sold. A salesperson doesn't have to make a specific promise or affirmation. These
warranties allow buyers to purchase goods that meet certain minimum standards, without
securing guarantees on each individual standard.
There are two types of implied warranties. They are:

Warranty of merchantability

Warranty of fitness for a particular purpose

Let's take a look at each of these implied warranties.

Warranty of Merchantability
Let's first explore the UCC's warranty of merchantability. This implied warranty means that
the goods must be fit for the ordinary purpose they are intended to serve. In other words, the
goods must be of average quality or better and able to be used as expected. The goods must also
be packaged and labeled properly.
This implied warranty only applies to people who normally sell goods of that kind. For example,
my new car must be average quality or better, as compared to other cars of the same type and in
the same price range. The car salesperson warrants that the car is capable of starting and
traveling in a safe manner since that's what cars are usually used for.
Remember that this is an implied warranty, so the salesperson doesn't have to make this
guarantee to me. He's already obligated to follow these standards.
Note, though, that the car salesperson isn't held to this same standard for the matching coffee cup
I also buy at the dealership since he doesn't normally sell goods of that same kind.
Remember that the implied warranty of merchantability also applies to labeling and packaging.
This means my new car can't be labeled 'Cadillac' if it isn't a Cadillac. Any mislabeling will be
considered a breach of the warranty and a breach of the sales contract.

Warranty of Fitness

Now let's take a look at the UCC's warranty of fitness. This implied warranty means that a
seller guarantees that the goods are suitable for a particular purpose. It only applies when a seller
knows or has reason to know that the buyer will be using the goods for a particular purpose that
isn't the ordinary purpose of the goods. In such a case, the seller guarantees that the goods can
successfully be used for the particular purpose.
For example, let's say I don't intend to drive my new car. Instead, I'm buying it so that I can use
the parts to refurbish an older model car. I tell the salesperson that I intend to strip the car and
use the parts on a 1960s model Cadillac. However, when I get the new car to my garage, I realize
the parts on the new model won't fit the older model. The salesperson violated the implied
warranty of fitness and breached our sales contract.
The implied warranty of fitness exists because buyers rely on sellers' skills and knowledge when
selecting goods. The UCC places an extra burden on sellers to help buyers select what they need,
rather than simply 'make sales' regardless of the buyers' needs.

Lesson Summary
Let's review. The Uniform Commercial Code's, or UCC's, Article 2 addresses contracts for the
sale of goods. Part of Article 2 addresses warranties. Warranties are guarantees included in a
sale of goods. A warranty is a promise made by the person who makes or sells the goods that he
or she stands behind those goods.
There are two main categories of UCC warranties. The first is an express warranty. An express
warranty is an affirmative promise about the quality or features of the goods. The second is an
implied warranty. An implied warranty is a guarantee made without being specifically
mentioned.
There are two types of implied warranties. The UCC's warranty of merchantability means that
the goods must be fit for the ordinary purpose they are intended to serve. The UCC's warranty
of fitness, on the other hand, means that a seller guarantees that the goods are suitable for a
particular purpose.
When a seller breaches a sales contract, the buyer will be entitled to certain remedies as outlined
in the Uniform Commercial Code. This lesson explains a buyer's remedies under the UCC,
including specific performance.

Contracts for the Sale of Goods

Many businesses sell goods. Goods are movable property, like food, furniture or clothing. For
businesses that sell goods, it's helpful to be familiar with the Uniform Commercial Code, or
UCC. The UCC is a uniform act that covers sales and other commercial transactions.
Note that the UCC isn't law. Instead, it's a guide meant to encourage uniformity in state laws.
Different portions of the UCC have been enacted as law in different states. Therefore, laws

regarding sales differ slightly from state to state. However, the UCC is a good representation of
the law in most states.
The UCC's Article 2 specifically addresses contracts for the sale of goods. Keep in mind that a
sales contract is created every time goods are bought and sold. The buyer offers to pay for the
goods, and the seller agrees to sell the goods for that price. Most of these agreements are
considered to be sales contracts under the UCC, even when they are unwritten and unsigned.
Let's take a look at what happens when, after an agreement is made, one of the parties fails to
perform his or her obligations under the contract. This is known as a breach of the sales contract.
Either the buyer or the seller can breach the sales contract. A seller breaches a sales contract
when the seller:

Fails to deliver the goods according to the contract

Delivers goods that don't conform to the contract

Expresses that he or she can't or won't fulfill the contract

When a seller breaches a sales contract, the UCC allows the buyer several different remedies. A
remedy is a legal relief meant to compensate a party for any harm caused. Each UCC remedy is a
different attempt to make the buyer whole. This simply means that the remedies are meant to put
the buyer back into the position he or she would've been in had the seller fulfilled the contract.

Buyer's Remedies
The Uniform Commercial Code outlines a buyer's remedies in several different sections of
Article 2. There are numerous remedies that can apply when a seller breaches a sales contract.
We'll discuss some of the most common. Depending on the circumstances, the buyer may:

Cancel the contract

Recover the price paid for undelivered goods

Cover, or buy replacement goods

Recover damages for the difference in price

Recover damages based on current market price

Obtain specific performance for unique goods

For example, let's say that Bonnie, the buyer, owns a bicycle repair shop. Bonnie orders 50
bicycle chains from Saul, the seller. Saul owns and runs a bicycle supply store. Bonnie

specifically orders chains that will fit youth-sized mountain bikes. In her order, she states that she
must have the chains by September 1. Bonnie pays the full contract price of $500, or $10 per
chain, to Saul.
However, on September 1 Saul delivers 50 chains that will only fit adult-sized bikes. The goods
are nonconforming because the chains aren't what Bonnie ordered. Since she needs the chains
that same day, there's no time to fix the order. Saul breached the sales contract.

Buyer Cancels and Covers

Bonnie's first option is to simply cancel the contract. Once she informs Saul that she's canceling
the contract, she's entitled to recover the $500 she paid for the youth-sized chains that weren't
delivered. She's also obligated to return the adult-sized chains she didn't order. Both parties are
returned to the positions they were in prior to the contract. Bonnie has her $500 and Saul has his
chains.
Bonnie's next option is to cover, or purchase reasonable replacement goods. If Bonnie is able to,
she can contact another supplier and order the chains to be delivered that same day. Just
remember that the new deal must be somewhat comparable and reasonable in comparison to the
breached contract. In other words, Bonnie can't use this opportunity to purchase much more
expensive chains. Let's say Bonnie finds the same chains she needs from Sally, another bicycle
parts supplier. However, Sally charges $12 per chain, or $600 for the order. Additionally, Sally
charges $50 for same-day delivery.
Bonnie can cover with Sally's chains and recover money damages from Saul. Bonnie's damages
will be calculated using the cost to cover, plus any incidental or consequential damages she
reasonably incurred. Incidental damages include expenses due to the inspection, receipt, delivery
or storage of the goods. Sally's $50 rush charge is an incidental expense. Consequential damages,
on the other hand, are other expenses caused by the breach, such as loss of profits or loss of
goodwill.
In our scenario, Saul owes Bonnie:

$500 in damages for the goods she paid for but didn't receive

$100 for the additional cost of replacing those goods

$50 in incidental damages

Bonnie's total damages are $650.

Buyer Does Not Cover

Now let's say Bonnie rejects Saul's delivery of the adult-sized chains but doesn't cover by
purchasing the chains she needs. Can Bonnie still receive money damages due to Saul's breach of

the sales contract? The answer is yes. Bonnie's damages will be calculated using the current
market price for the chains she ordered, as reflected on the day she learned of the breach. Bonnie
can also receive incidental and consequential damages.
For example, let's say that on September 1, the youth-sized chains had an average market rate of
$11 per chain. This is the average price for which other retailers were selling the chains on the
date of the breach. If Bonnie chooses not to cover, she can still recover damages in the amount of
$1 per chain, or $50, plus any incidental or consequential damages she suffered.
Lastly, there are certain cases when a buyer simply can't find comparable goods in order to cover.
If so, the buyer might have a right to specific performance, or a court order requiring a party to
fulfill the contract. This remedy is rare and only used when no other legal remedy will suffice.
If Bonnie's bicycle chains are truly unique, and she can't replace the chains in another reasonable
manner, then Saul might be ordered to fulfill the contract by supplying the chains. Specific
performance likely wouldn't be granted in our case, but it might be granted if Bonnie ordered a
one-of-a-kind, custom-designed bicycle from Saul.

Lesson Summary
Let's review. The UCC's Article 2 addresses contracts for the sale of goods. This includes what
happens when a party breaches, or fails to perform his or her obligations under the sales
contract.
Either the buyer or the seller can breach the sales contract. A seller breaches a sales contract
when the seller:

Fails to deliver the goods according to the contract

Delivers goods that don't conform to the contract

Expresses that he or she can't or won't fulfill the contract

When a seller breaches a sales contract, the UCC allows the buyer several different remedies, or
legal relief meant to compensate a party for any harm caused. The UCC remedies are meant to
make the buyer whole. These remedies include:

Canceling the contract

Recovering the price paid for undelivered goods

Covering, or buying replacement goods

Recovering damages for the difference in price

Recovering damages based on current market price

Obtaining specific performance for unique goods

When a buyer breaches a sales contract, the seller will be entitled to certain remedies as outlined
in the Uniform Commercial Code. This lesson explains a seller's remedies under the UCC,
including a seller's withholding and reclaiming rights.

Contracts for the Sale of Goods

This is Sam. Sam owns and runs a small business called Sam's Sailboats. Sam designs and builds
several different types of sailboats. The sailboats are goods. Many businesses, like Sam's, sell
goods. Goods are simply movable property like food, furniture or clothing.
Every time Sam sells a sailboat, he's a party to a contract for the sale of goods. A sales contract is
created every time goods are bought and sold. The buyer offers to pay for the goods, and the
seller agrees to sell the goods for that price. This is true even when the contract is unwritten and
unsigned.
The Uniform Commercial Code, or UCC, governs sales contracts. The UCC is a uniform act
that covers sales and other commercial transactions. The UCC recognizes and will enforce most
sales contracts, even when those contracts stem from oral or casual agreements. This is because
the UCC is designed to promote commercial transactions, rather than hinder these agreements.
However, note that the UCC isn't law. Instead, it's a guide meant to encourage uniformity in state
laws. Because different portions of the UCC have been enacted as law in different states, state
laws regarding sales slightly differ. However, the UCC is a good representation of sales law in
most states.

Breach of Sales Contract

The UCC's Article 2 is a lengthy section that addresses contracts for the sale of goods. This
includes what happens when one of the parties fails to perform his or her obligations under the
contract. This is known as a breach of the sales contract.
Either the buyer or the seller can breach the contract. A buyer breaches a sales contract when the
buyer:

Wrongfully refuses to accept the goods

Wrongfully returns the goods

Fails to pay for the goods according to the contract

Expresses that he or she can't or won't fulfill the contract

When a buyer breaches a sales contract, the UCC allows the seller several different remedies. A
remedy is a legal relief meant to compensate a party for any harm caused. Each UCC remedy is a
different attempt to make the seller whole. This means that the remedies are meant to put the
seller back into the position he or she would've been in had the contract been fulfilled. Just keep
in mind that a remedy is never meant to give a party a windfall or give that party an extra
financial edge.

Seller's Remedies
For example, let's say that Bill orders a specially designed sailboat from Sam. Sam, the seller,
will build Bill a 4-person cutter sailboat, using a complicated plan designed particularly for Bill's
needs. Bill, the buyer, will pay Sam $10,000 and Sam will deliver the sailboat to Bill by May 1.
The two execute a written sales contract using these terms, and Bill pays $3,000 toward the total
cost of the sailboat.
Around the end of April, Sam calls Bill to tell him his sailboat is ready and will be trucked to
Bill. However, Bill tells Sam he no longer wants the sailboat. Bill refuses to accept the boat or
pay the rest of what he owes under the contract. Bill breached the sales contract. Sam now needs
to know what remedies are available to him.
When a buyer breaches a sales contract, the UCC's Article 2 allows several different seller's
remedies. Depending on the circumstances, the seller may:

Cancel the contract

Withhold or not deliver the goods

Reclaim the goods

Resell the goods and recover damages for the difference in price

Recover damages based on the current market price

Let's take a look at some of the most common scenarios.

Withholding and Reclaiming

Because Bill refuses to accept or finish paying for the sailboat, Sam may cancel the contract.
This simply means that the parties withdraw the agreement. A cancellation puts the parties back
where they started. In other words, Sam keeps the sailboat and Bill keeps his money.

However, in our scenario, Bill already paid part of the payment. Though the contract can't easily
be canceled, Sam still has the right to withhold the sailboat due to Bill's breach. This means Sam
can keep the goods and not deliver the goods.
Now, let's say Sam sent the sailboat to Bill before he got word that Bill didn't want it. The
sailboat is already on a truck, on its way to Bill. Sam has the right to reclaim the sailboat. This
means a seller can stop transit and have the goods sent back to the seller. Sometimes a seller even
has a right to reclaim goods after the goods were delivered to the buyer. If Bill accepts the
sailboat but refuses to pay Sam, then Sam likely has a right to reclaim the sailboat.

Reselling and Recovering

In each of our scenarios, Sam ends up with the sailboat. But Sam didn't want the sailboat! Sam
needs to know how he can be compensated for his trouble.
Sam's first option is to resell the sailboat. The UCC encourages this remedy first. A resell means
the seller can make a good faith and commercially reasonable offer for the goods. Keep in mind
that Sam can't unreasonably discount the sailboat and still expect to be awarded money damages.
Let's say Sam resells the sailboat to another customer for $4,000. Sam can now collect the
difference between the resale price and the contract price, minus anything that he's already
received. Sam was supposed to collect $10,000 but resold the sailboat for only $4,000. This
leaves $6,000 in damages, but Sam already received $3,000 from Bill. So Sam's remaining
money damages are $3,000.
Secondly, Sam may be able to keep the sailboat and recover damages. If a seller can't resell, he
or she can alternatively claim money damages caused by the buyer's breach. This remedy is
appropriate when there's no longer a viable market for the goods. Sam can recover the difference
between the contract price and the current market price of the sailboat. We know the contract
price is $10,000. Let's say the current market price is only $2,000. Sam's money damages are the
difference, or $8,000. However, as with resell, Sam must deduct the $3,000 he has already been
paid. This leaves Sam with the sailboat and $5,000 in damages.
Lastly, in rare circumstances a seller may be able to obtain specific performance. This remedy is
a court order requiring a party to fulfill the contract. If the sailboat is very highly personalized,
making it too unique to resell or to have market value, then Bill may be forced to pay the full
contract price and accept the sailboat.

Lesson Summary
Let's review. The Uniform Commercial Code, or UCC, governs sales contracts. The UCC is a
uniform act that covers sales and other commercial transactions. Specifically, the UCC's Article
2 addresses contracts for the sale of goods including what happens when a party fails to perform
his or her obligations under the contract. This is known as a breach of the sales contract.

A buyer breaches a sales contract when the buyer:

Wrongfully refuses to accept the goods

Wrongfully returns the goods

Fails to pay for the goods according to the contract

Expresses that he or she can't or won't fulfill the contract

A buyer's breach will lead to one or more UCC remedies for the seller. A remedy is a legal relief
meant to compensate a party for any harm caused.
A seller's legal remedies include:

Canceling the contract

Withholding or not delivering the goods

Reclaiming the goods

Reselling the goods and recovering damages for the difference in price

Recovering damages based on the current market price

Our modern American law system is based on centuries of English principles regarding right and
wrong. This English common law system combines with U.S. case decisions and statutes to form
what we know as law. This lesson examines the origins and definitions associated with the
American law system.

Law Defined
What is law? As students of the law, when we want to define a particular legal term there are a
few sources we can legitimately look to. As with other subjects, let's start with the dictionary.
When we want to define a legal term, we will look to Black's Law Dictionary. This is an
important tool for attorneys and law students. This dictionary serves as the leading standard
authority for defining legal terms and has been published since 1891. Black's defines law as 'that
which is laid down, ordained, or established.'
It's important to note that although Black's Law Dictionary is a helpful tool, it is not, itself, law.
The United States Supreme Court plays the final controlling role in defining legal terms.
Through the case of United States Fidelity and Guaranty Co. v. Guenther, the Supreme Court
states that: 'Law, in its generic sense, is a body of rules of action or conduct prescribed by
controlling authority, and having binding legal force.'

This is a reliable and thorough definition of law, but there are many accepted definitions for what
constitutes law. Generally speaking, laws are rules that the people in a society believe are
important enough for the society to enforce. Law comes from an organized government, but our
laws are designed so that they typically reflect what the majority of the people feel is just or
right.
People make law, and it is made to reflect how the people feel about certain actions or conduct,
such as murder, stealing or cheating on taxes. There is a purposeful and strong connection
between law and that society's morality. This is a theme you will see often in business law and
also throughout all other areas of the law.

The Origin of Law

So where does law come from? In America, our law system came from Great Britain. The
settlers of the original thirteen colonies came from Europe, and they brought with them their own
set of rules and principles to be used in their new society.
The English common law was the system of law in England at that time and was quickly
adopted throughout the colonies. The English common law is rooted in centuries of English
history. Much of the common law was formed in the years between the Norman Conquest of
England in the early 11th century and the settlement of the American colonies in the early 17th
century.

The English Common Law

The English common law is based on a cultural system of settling disputes through local custom.
The early tribes of England each held their own set of customs, but this system became
increasingly formalized as those early tribal peoples came together and organized. These ancient
customs are the basic principles that eventually became part of the American system of justice.
Under English common law, disputes between two parties were handled on a case-by-case basis.
However, the decision-maker did not act without guidance. The decision-maker was required to
look to similar, previously decided cases and use those established guidelines and traditions. The
customs of England were built upon and expanded for centuries, all through court decisions. By
carrying forward and preserving these customs, the courts assured that the law was truly
'common' to all.
For example, imagine that Smith and Jones own land adjacent to one another. Smith intends to
build a barn on his own land, near his border with Jones. However, Smith inadvertently builds
his barn on Jones's land. Jones claims ownership of the barn, and the two end up arguing their
positions in court.
Let's say the court decides that Smith owns the barn that he built, and now also owns that small
portion of land that the barn occupies. This is now the rule to be applied for those cases coming
after Smith and Jones. From that moment forward, all landowners must be careful not to allow

others to build permanent fixtures on their land. Otherwise, the rule now states they could lose
ownership of that portion of their land. Scenarios like this created a gradual development of an
extensive system of laws, even though these rules were mostly unwritten at that time.

Blackstone's Contribution
Shortly before the American Revolution in the last half of the 18th century, Sir William
Blackstone published Commentaries on the Laws of England as a complete overview of the
English common law. This publication spanned four volumes!
Blackstone described the English common law as an ancient collection of unwritten maxims and
customs upon which English judicial decisions were made. Judicial decisions are decisions made
by a court and are also known as case law. Therefore, Blackstone defined the English common
law at that time as a large collection of cases.
Blackstone's Commentaries were crucial during the formation of the United States of America.
Our Founding Fathers were looking to establish a government, and they had no other viable
reference to written law. The U.S. adopted this system of common law, and it is still used today.
A common law system is essentially a legal system that follows the rules set in previous cases.
This is the current legal structure of the United States, England and many other territories. But
this is not to say that our common law exists exactly as it did in Blackstone's time. Our law is
ever-changing. The American common law system began with the adoption of Blackstone's
English common law, but today, it includes centuries of subsequent American law.

Development of the American Law System

In the United States, we have several different types of laws that make up our American common
law system. Many of our laws are made through judicial decisions. This judge-made, or courtmade, law is case law.
A legislative body, such as Congress or a state's legislature, can also make laws. This enactment
of laws creates statutory law, or statutes. New law is constantly created through these two main
methods, but there are also other sources of law in the United States. Sources of law also include
administrative regulations, local ordinances and treaties.
As we've discussed, our system of law has deep historical roots. The U.S. system of law grows
upon English common law and inherited all of those established rules.

United States Supreme Court

Blackstone's Commentaries and the English common law remain an important part of our current
U.S. law system. The framers of our Constitution created the United States Supreme Court
through Article III.

They felt there needed to be one court with final authority to determine cases that had not
previously been settled. The Supreme Court has the final, or 'supreme,' say. This court's rulings
are the last and final word. The Supreme Court settles disputes involving new law and also rules
on the constitutionality of laws.
Early Supreme Court decisions cited the Commentaries often, because there were many new
cases that did not exactly fit previous U.S. cases. But even in today's times, our modern Supreme
Court often looks to the Commentaries for guidance in making new decisions. These new case
law decisions then become a part of our American common law system.

Lawmakers
Congress and state legislatures also add to our system of laws. Legislative bodies may generally
enact new statutes that modify or build on our existing laws. For example, the United States
Congress was created by Article I, Section 1 of our U.S. Constitution. This legislative body is
made up of the Senate and the House of Representatives. They may make new statutes as long as
those new laws do not conflict with the U.S. Constitution. These statutes are codified, or written
down, and organized into codes, such as the U.S. Code, which contains all the laws made by the
U.S. Congress.

Lesson Summary
Let's review. The English common law system was developed over centuries and is based on the
principles of right and wrong originally established by ancient tribal peoples. Decision-makers
issued decisions based on these customs, and future disputes were bound by these decisions. Our
early colonists adopted this common law system, which was unwritten. Around the time of the
American Revolution, Sir William Blackstone published his Commentaries as a thorough
compilation of the English common law. This publication continues to shape our American law
system. Our framers established our Supreme Court and our Congress. Together, these two
federal entities make and interpret new laws. These newer laws build on Blackstone's work and
American case law to form what we know as our modern American common law system.

Learning Outcomes
After you have watched this lesson, you should be able to:

Define law and identify the origins of the American law system

Explain what is meant by 'common law'

Describe how Sir William Blackstone influenced American law

Understand how American law continues to develop

Business law is a broad area of law. It covers many different types of laws and many different
topics. This lesson explains generally what business law is and how it's used.

Definition of Business Law

Business law encompasses all of the laws that dictate how to form and run a business. This
includes all of the laws that govern how to start, buy, manage and close or sell any type of
business. Business laws establish the rules that all businesses should follow. A savvy
businessperson will be generally familiar with business laws and know when to seek the advice
of a licensed attorney. Business law includes state and federal laws, as well as administrative
regulations. Let's take a look at some of the areas included under the umbrella of business law.

Starting a Business
Much of business law addresses the different types of business organizations. There are laws
regarding how to properly form and run each type. This includes laws about entities such as
corporations, partnerships and limited liability companies. For example, let's say I decide to start
my own pet grooming business. I need to decide what type of business I want to be. Will this be
a partnership? Will it be a sole proprietorship? What papers do I need to file in order to start this
business? These questions fall under the laws that govern business entities, which are state laws.
The type of entity I pick will also affect how I pay my federal income taxes. These, of course,
are federal laws.
Next, what will my business be called? Let's say I decide on Barks & Bubbles as a name for my
dog grooming company. Now I need to know if anyone else already has that name. This is a
trademark question. Patents, copyrights and trademarks are part of intellectual property law.
The federal law governs most intellectual property law. Then I need to know if I'll require any
special type of license for this business. Do groomers need a license? Am I allowed to have
animals on my property, or do I need some sort of special permit? I'll need to check my local and
state laws to find out. How will I advertise my business? Am I allowed to say that I'm the 'best in
town?' This question falls under consumer protection law, which can be federal or state law.
Wow. That's a lot of business law, and I'm not even open for business yet!

Buying a Business
Now let's say I decide to buy a business instead. I'm going to buy Patty's Pampered Pooches from
my Aunt Patty. There are many business laws that govern how to buy a business. If I buy Patty's
business, do I now own the actual store? This is a real estate law question. Do I own the pet
grooming equipment in the store? This is a property law question. Both of these fall under state
law. Am I now the boss of Patty's employees? This is an employment law question.
Can I start hiring my own employees and ordering supplies? This will involve contract law,
since I'll be making new agreements with people regarding my business and determining which
of Patty's agreements I need to uphold. Contracts are legally binding agreements made by two or
more persons, enforceable by the courts. Businesses are involved in many different types of

contracts, and as a result, there are many interesting cases involving breach of contract. A
breach of contract is when one party doesn't hold up his or her end of the bargain. It's common
for parties to dispute the terms of a business agreement or disagree on how the agreement should
be performed.
For instance, consider the famous case of Locke v. Warner Bros., Inc. Sondra Locke was a
longtime girlfriend of Clint Eastwood. When the two broke up, Locke sued Eastwood for
support. As a part of their settlement, Eastwood negotiated a contract for Locke with Warner
Bros. Locke was given a director's contract, where Warner Bros. would pay Locke for any
projects she directed or produced. Locke proposed more than 30 projects, but Warner Bros. never
hired her. She sued Warner Bros. for breach of contract, saying that Warner Bros. never intended
to hire her in the first place. After a court ruled that Locke had enough evidence to proceed with
her case, the parties settled.
This case demonstrates the importance of making good contracts. A wise businessperson will be
sure to enter contracts with a good understanding of the content and a good faith interest in
upholding the contract.

Managing a Business
There are many laws that concern managing a business because there are many aspects involved
in managing. As you can already see, running a business will involve a lot of employment law
and contract law. For my new business, I'll need to know how to hire, what my contracts should
look like, what kind of benefits I have to provide, how to pay employee insurance and taxes and
even how to properly fire an employee. Many of these employment and benefit laws are federal
laws and regulated by government agencies. For example, the Equal Employment Opportunity
Commission is a federal agency that enforces employment discrimination laws.
If I also decide to sell things as part of my pet grooming business, like dog collars or dog treats,
then I'll need to be familiar with the laws on sales. For businesses that conduct sales, it's
especially helpful to be familiar with the Uniform Commercial Code, or UCC. This publication
governs sales and commercial paper and has been adopted in some form by almost all states.
What happens if I provide services but have trouble getting paid? Let's say I groom several dogs
for Victor's Vet, but he won't pay my bill. Can I demand payment or report him to the credit
reporting agencies? This is a debt collection law question. Debt collection laws are mostly
federal laws. For instance, many of our debt collection laws are found in the Fair Debt Collection
Practices Act, or the FDCPA, which is enforced by the Federal Trade Commission.
What happens if Victor just didn't like my services? Let's say Victor accuses me of purposely
sabotaging his chances at a national dog show by giving his poodle a bad haircut. Can Victor sue
me? And, if so, will his lawsuit be against me personally, or will it be against my Barks &
Bubbles business entity? This scenario falls under tort law. Torts are private, civil actions for
wrongful deeds. Tort law is usually state law. This is an extensive area of the law and includes
things like work injuries and negligence claims.

For example, product liability cases are tort claims. Product liability is the legal responsibility a
business incurs when it manufactures, produces or sells a faulty product. Let's consider the
famous McDonald's hot coffee case. This case is titled Liebeck v. McDonald's Restaurants.
Seventy-nine-year-old Stella Liebeck purchased a cup of coffee at a McDonald's drive-through.
After parking to add cream and sugar, she accidentally spilled the entire cup of coffee in her lap.
She suffered third-degree burns and spent eight days in the hospital. Research showed that
McDonald's served its coffee at a much higher temperature than many other establishments and
that it had received hundreds of injury reports.
Liebeck initially asked McDonald's to pay only her actual and anticipated bills. This was
$20,000, but McDonald's refused to pay any more than $800. At a trial, McDonald's was found
negligent, and Liebeck was awarded $640,000. Both parties appealed and later settled out of
court for an undisclosed amount. This case demonstrates the importance of providing safe,
reliable and competent products and services. McDonald's didn't purposefully harm anyone, but
this business could have been more careful to consider possible scenarios and ensure that no one
was harmed. It's certainly not unusual that customers might spill coffee on themselves.
Experienced businesspersons are forward thinking and take preventive measures while using the
law as a guide.

Closing a Business
Business law also covers the proper procedures for selling or closing a business. Let's say that
my pet grooming business isn't making money. I have more bills than I can cover. Can I shut it
down? Do I need to tell my customers? Do I need to cancel my licenses? Do I still have to pay
my taxes and my business debts? These are things I'll need to research in my state laws.
I may want to consider filing for bankruptcy. Many businesses go bankrupt. Bankruptcy is an
important area of business law and is covered under the federal law. Bankruptcy is a legal term
and means that a court has determined that a person or organization cannot repay the debts it
owes. The court will govern the repayment of debts and perhaps discharge some of the debts.
Bankruptcy laws can be complicated. For instance, there are four different types of bankruptcies,
but only two of those are appropriate for businesses. If I want to file for bankruptcy on behalf of
Barks & Bubbles, I'll need to know whether a Chapter 7 or a Chapter 11 bankruptcy would be
best.

Lesson Summary
Business law is a wide-ranging area of the law. When we talk about business law, we're talking
about the laws that cover every aspect of starting, running and closing a business. This area of
law includes contracts, employment law, intellectual property, real estate, bankruptcy and
many other areas of the law. Business laws can be federal laws, state laws or administrative
regulations. Effective businesspersons don't need to know every area of the business law because
it is expansive. Instead, they need to recognize which areas are covered by business laws and
know how to find out more before proceeding.

Lesson Outcome
After finishing the lesson video, students should be able to:

Define business law

Recognize the many different types of business law, as well as the variety of jurisdictions
involved

The doctrines of stare decisis and precedent are the foundations of our American common law
system. This lesson explains what these doctrines are and how they are used.

Difference in Precedent and Stare Decisis

Stare decisis is a Latin term. It means 'to stand by things decided.' Stare decisis is a doctrine
used in all court cases and with all legal issues. A doctrine is simply a principle, or an instruction,
but it's not necessarily a rule that cannot ever be broken.
The doctrine of stare decisis means that courts look to past, similar issues to guide their
decisions. The past decisions are known as precedent. Precedent is a legal principle or rule that
is created by a court decision. This decision becomes an example, or authority, for judges
deciding similar issues later. Stare decisis is the doctrine that obligates courts to look to
precedent when making their decisions. These two principles allow American law to build caseby-case, and make our legal system a common law system.
For example, let's say that Blue borrows Red's lawnmower while Red is on vacation. Blue
doesn't ask Red for permission. Blue accidentally breaks Red's lawnmower, but he doesn't tell
Red. He simply places the lawnmower back in Red's garage. When Red returns home and
discovers the broken lawnmower, he demands that Blue buy him a new one. The two end up in
court, and the court decides that Blue does owe Red the money required for Red to fix his
lawnmower; however, Blue does not have to buy Red a new lawnmower.
This decision becomes precedent. From now on, lower courts in the same jurisdiction are
expected to follow this new rule: When a borrower breaks a borrowee's item and was using the
borrowee's item without permission in the first place, the borrower must pay to have the item
fixed. Lower courts will follow this new precedent because the doctrine of stare decisis tells
them they should.

Citing Precedent
So, stare decisis is essentially 'the rule of precedent.' Courts cite precedent when a court has
already considered a particular legal issue and the court has already issued a ruling.
For example, now let's say Green borrows Yellow's car. Yellow left the car at Green's house the
night before and left the keys in it. He told Green he could move it if he needed to, but he did not

give Green any permission to drive the car anywhere. Green gets up to go to work and finds that
his own car will not start. Because he's already late, he borrows Yellow's car. Then, on his way to
work, Green accidentally runs over a curb and damages Yellow's car. When Yellow sues Green
for the amount of his insurance deductible, the court will cite to the case of Red v. Blue.

State Courts and Precedent

Under the doctrine of stare decisis, courts are expected to follow their own previous rulings and
also the rulings from higher courts within the same court system. This means that the Texas state
appellate courts will follow their own precedent, and that of the Texas Supreme Court, and also
that of the United States Supreme Court. But the district courts in Texas are not obligated to
follow rulings from the appellate courts of South Carolina.
All courts are obligated to follow the rulings of the United States Supreme Court, because this
is the highest court in the nation, and it has the final say. If the case of Red v. Blue was decided
by the U.S. Supreme Court, then the courts in Texas and the courts in South Carolina must
follow that precedent. If the case of Red v. Blue was decided by the Texas Supreme Court, the
South Carolina Supreme Court is under no obligation to follow it. However, South Carolina may
look at the Texas rule for guidance when setting its own precedent.
Think of it this way: When I make a rule in my house, I will try to make all future rules to be in
keeping with that rule. For instance, if I decide my kids cannot watch TV after 6:00 P.M., then I
will not make a follow-up rule that the kids must watch the news at 9:00 P.M.
I am expected to keep my rules, and my kids are expected to follow my rules. But the Smith kids,
who live across the street, do not have to follow my rules. Mrs. Smith might look at my rules and
decide they are a good idea for her family, too, but that, of course, is her decision.

The U.S. Supreme Court and Precedent

The U.S. Supreme Court generally follows its own previous rulings, though this is not always
true. In one landmark Supreme Court ruling, the justices declined to follow the precedent set in
the famous Roe v. Wade case involving a woman's right to abortion.
Roe v. Wade was decided in 1973 by the U.S. Supreme Court, and was based on a woman's
constitutional right to privacy. In 1992, the Supreme Court considered similar issues in Planned
Parenthood of Southeastern Pennsylvania v. Casey. The Court agreed with its previous ruling
that a state may not ban most abortions. However, this time the Court ruled that states may
prevent abortions under certain circumstances in an effort to protect the mother's health or the
fetus' life.
Let's look at another famous case where the Supreme Court declined to follow its own precedent.
Brown v. Board of Education is a famous United States Supreme Court case decided in 1954.

The Brown case ruled that the segregation of black students from white students in public school
systems was unconstitutional. This case was an important cornerstone and impetus to the civil
rights movement that followed in the 1950s and 1960s.
But had the Supreme Court followed its own precedent, as set forth in Plessy v. Ferguson in
1896, the Brown case would have been decided differently. The Plessy case expressly ruled that
people could be segregated based on race, and that states could constitutionally require the use of
'separate, but equal' facilities based on race.
These cases show us that precedent can be abandoned when it is decided that the former ruling
can no longer be justified, or if it no longer reflects the majority views of the society.

Lesson Summary
Let's review. Precedent and stare decisis are legal principles that help build our American
common law system. Stare decisis is a doctrine, or an instruction, used in all court cases and
with all legal issues.
Stare decisis means that courts look to past, similar issues to guide their decisions. These past
decisions are known as precedent. Precedent is a legal principle, or a rule, that is created by a
higher court decision. This decision becomes an example, or authority, for judges deciding
similar issues later, either in the same court or in a lower court of the same jurisdiction.
Precedent should be used in most cases, but there are occasions when a court decides to overrule
a prior decision. These cases normally involve a change in societal views.
Stare decisis and precedent work together, but the difference between stare decisis and precedent
is this: Stare decisis is the doctrine that obligates courts to look to precedent when making their
decisions. The use of precedent and stare decisis is what makes our American law system a
common law system.

Learning Outcomes
After finishing this lesson, you should be ready to:

Describe the doctrine of stare decisis and define precedent

Discuss how stare decisis and precedent are used in state court systems

Identify and paraphrase two cases in which the U.S. Supreme Court did not follow
precedent

In 1787, leaders from each of the states gathered to write the United States Constitution. The
Constitution sets out how our nation is governed and creates a system that separates powers
between different branches. This lesson explores the three branches of our federal government.

Constitutional Convention
In 1787, 11 years after state representatives signed the Declaration of Independence,
representatives once again met at the State House in Philadelphia. Fifty-five representatives met
over the course of four months in order to draft our United States Constitution. The framers
drafted the Constitution to purposely divide governing powers between several
administrative branches. This way, no one branch holds too much power, and each branch
holds checks and balances over the others. The framers instituted this system of government
with hopes that it would last into 'remote futurity.' It worked, as we continue to use this
system of government today.

Three Branches of Government

It's helpful to remember that many original colonists came from England during a time of
tyranny and dictatorship in that country. In forming a new government, it was of primary
importance to divide powers so that no person or group of people held the majority of authority.
The state leaders sought to form a powerful, yet fair federal government that protected individual
liberties. This is accomplished through the system of checks and balances. This simply means
that the governmental powers are divided between separate and independent structures. Each of
these structures can check the work of the other structures. In doing so, the power is balanced
between all of the structures. Through the first three Articles of the Constitution, the framers
divided the new government into three parts. These three parts are known as the three branches
of government. They are the legislative branch, the executive branch and the judicial branch.
Each branch is independent from the others, but each holds a similar amount of authority.

The Legislative Branch

Article I of the United States Constitution created and empowered our legislative branch of
government. The United States Congress leads the legislative branch. Congress includes both the
House of Representatives and the Senate. Generally speaking, Congress makes our laws. Laws
are discussed, drafted and enacted through Congress. Together, the two houses of Congress have
various important powers. Congress passes legislation, approves treaties, originates spending
bills, impeaches federal officials, approves presidential nominations and appointments to federal
positions, regulates trade and money and declares war.
Our Congress is made up of delegates from each state. The U.S. Senate consists of two senators
from each state. These senators serve six-year terms. The U.S. House of Representatives consists
of 435 representatives. Each state has at least one representative. A state's population determines
the number of representatives per state. For example, Delaware has one representative, while
California has 53. Representatives are elected through public election, but only those registered
voters who reside in a candidate's district may vote for that candidate. Representatives serve twoyear terms.
The U.S. vice president serves as the head of the Senate but doesn't vote unless there is a tie. This
is one example of how the executive branch can 'check' congressional powers. But Congress can

check the president, too. For example, the Senate must approve presidential nominations to
federal posts and must ratify all treaties by a two-thirds vote.

The Executive Branch

Article II of the United States Constitution created and empowered our executive branch of
government. The United States president leads the executive branch, which also includes the
president's advisors, the 15-member cabinet and all federal agencies. Our president serves as our
chief executive, or commander-in-chief.
This branch is responsible for carrying out laws. Among other significant duties, the executive
branch enforces and recommends federal laws, proposes a federal budget, directs our foreign
policy, commands the Armed Forces and nominates and appoints federal government officials.
The president may veto or approve legislation, which serves as a check on Congress' authority.
The president may also grant pardons and amnesty, which serves as a check on the judicial
branch. The president is elected through a national public election. Presidential elections are held
every four years. The president may serve up to two terms of four years each.

The Judicial Branch

Article III of the United States Constitution created and empowered our judicial branch of
government. The United States Supreme Court leads the judicial branch, which also includes all
lower federal courts. The U.S. Supreme Court serves as the highest court in the nation and has
the final, or supreme, say. Judicial powers include interpreting federal laws and the U.S.
Constitution, deciding cases on appeal from lower federal or state courts and deciding cases
involving a state-vs.-state issue or a branch-vs.-branch issue.
But the Supreme Court's most significant power is that of judicial review. This authority doesn't
come directly from the Constitution. Instead, the power of judicial review comes from the 1803
Supreme Court case of Marbury v. Madison. Judicial review allows the Supreme Court to check
and balance the other two branches by reviewing their actions and determining whether or not
they are lawful. Through judicial review, the Supreme Court reviews federal legislation to
determine if the laws passed by Congress are in keeping with the Constitution. Judicial review
also allows the Court to review the making and enforcing of laws by the states and to review the
actions of the president. The Supreme Court includes nine justices: eight associate justices and
one chief justice. Once appointed, justices may serve for life. The justices are nominated by the
president but must be approved by the Senate. This is another example of a check on powers.

Lesson Summary
Let's review. The United States Constitution forms our federal government. The framers of our
Constitution purposely divided our government into three branches. Each branch is separate
and independent from the others. The branches are designed to hold checks and balances over
one another. The three branches are the legislative branch, the executive branch and the
judicial branch.

The United States Congress heads our legislative branch. This branch serves mainly to make
laws. The United States president heads our executive branch. This branch serves mainly to carry
out laws. The United States Supreme Court heads our judicial branch. This branch serves mainly
to uphold the Constitution.

Learning Outcome
At the end of the video, you should have the ability to:

Summarize the events of the Constitutional Convention

Name the three branches of government

Explain the importance of checks and balances

Describe the functions of the legislative branch

Describe the functions of the executive branch

Describe the functions of the judicial branch

Constitutional law deals with the understanding and use of the United States Constitution. This
lesson will define and discuss constitutional law, while examining several famous constitutional
law cases.

The U.S. Constitution

When we talk about constitutional law, we are talking about many different types of laws that
cover many different topics. Our United States Constitution is the basis of our law system. This
document sets out how our government operates and also what laws may or may not be enforced.
This may sound fairly straightforward, but the provisions of our Constitution are often
interpreted in many different ways. Much of constitutional law has to do with the interpretation
of the Constitution.
Specifically, constitutional law deals with the basic relationships between the different entities in
our society. These relationships include those between the states, the states and the federal
government, the three branches of the federal government, the federal government and foreign
nations, individuals and state government, and individuals and the federal government.
More than any other relationship, constitutional law is thought to govern the relationship
between individuals and the federal government. Therefore, much of constitutional law involves
interpreting the Constitution as it relates to the individual rights and freedoms of U.S. citizens.

Establishing Our Federal Government

The U.S. Constitution establishes three branches of the federal government: the executive
branch, the judiciary branch, and the legislative branch. Through the Constitution, each
branch is created and its powers are 'enumerated.' (Enumerated simply means that the powers are
specifically set out.)
Article I establishes our legislative branch, which is Congress. The U.S. Congress is made up of
the House of Representatives and the Senate. The Constitution gives congressional powers to
each. This power means that Congress makes our federal laws.
Article II establishes our executive branch, which is the U.S. President. Generally speaking, the
President may suggest legislation and may also veto laws.
The United States Supreme Court is established through Article III of the Constitution. The
Supreme Court uses its power of judicial review to interpret the Constitution and determine
which laws are in keeping with the Constitution. The Supreme Court therefore 'checks and
balances' the laws of Congress.

Judicial Review
Because much of constitutional law deals with judicial review, the study of constitutional law
focuses on Supreme Court rulings.
The Supreme Court established the duty of judicial review in 1803. In Marbury v. Madison,
Chief Justice John Marshall wrote that 'a law repugnant to the Constitution is void.' This famous
constitutional law case established the Supreme Court's power to review the acts of other
government branches, and other courts, in order to determine constitutionality.

The Supremacy Clause

Article VI of the Constitution states that the 'Constitution, and the Laws of the United States
which shall be made in Pursuance thereof...shall be the Supreme Law of the Land.' This is known
as the supremacy clause.
The supremacy clause prohibits state governments from passing laws that conflict with federal
laws. This doctrine was developed through constitutional law in 1824, via the Supreme Court
decision in Gibbons v. Ogden.
For example, if the federal government declares that it's illegal to display red balloons, then the
state of Maine may not enforce a law that requires all homeowners to display a red balloon.

The Bill of Rights

Article V allows the Constitution to be amended. The Constitution has been amended 27 times,
though over 10,000 amendments have actually been proposed. The most famous amendments

include the Bill of Rights. The Bill of Rights is the first 10 amendments to the Constitution and
contains some of the most fundamental individual rights.
For example, the First Amendment protects an individual's right to free speech. This doesn't
mean that citizens always have the right to free speech. A constitutional right simply means that
the government may not infringe this right.
So, if I make a rule that no one may express a personal opinion while in my home, I have not
infringed this right. But, let's say the state of Nevada makes a law that no one may express
personal opinions while in that state. Then Nevada has infringed this right.
Constitutional rights, however, are not necessarily absolute. The Supreme Court may decide
when a right can be limited. In another famous constitutional law case, Schenck v. United States,
the Supreme Court held that the First Amendment does not protect all speech. If the government
has a compelling state interest or a very good justification for controlling the speech, then the
government may do so. Through this case, the Court ruled that the First Amendment does not
protect speech that presents a 'clear and present danger' to others.

Constitutional Rights and the States

Most of the early constitutional law cases dealt with the federal government's infringement of
individual rights. However, later Supreme Court cases selectively applied many constitutional
rights to cases involving state action.
Mapp v. Ohio, decided in 1961, was such a case. The Fourth Amendment protects citizens
against 'unreasonable searches and seizures.' At the time, this doctrine applied only to the actions
of the federal government. But the federal government is not who prosecuted Dolly Mapp.
Mapp's local police entered her home and illegally seized materials without a warrant, leading to
her arrest and state prosecution.

Equal Protection and Due Process

The Fourteenth Amendment prohibits states from abridging 'the rights and immunities' of any
citizen without due process of law. The Supreme Court interpreted this due process clause as
providing citizens protection from state infringements of most rights afforded through the Bill of
Rights.
In Mapp v. Ohio, the Supreme Court used the Fourteenth Amendment's due process clause to rule
that illegally obtained evidence - whether seized by local, state or federal governments - cannot
be used against a defendant in court.
State due process rights were further expanded in 1963, with Gideon v. Wainwright. Gideon was
charged with a felony burglary by the state of Florida, but could not afford to hire an attorney.
Though federal felony defendants had a right to free counsel under the Sixth Amendment, state
defendants did not.

Through this landmark constitutional law case, the Supreme Court used the Fourteenth
Amendment to extend a right to free counsel to state defendants accused of a felony.

Lesson Summary
Let's review. Constitutional law is the study, practice, interpretation, and administration of laws
based on the United States Constitution. Constitutional law encompasses many different types of
laws that cover many different topics. The majority of constitutional law involves the United
States Supreme Court's interpretation of the Constitution.
There are many important doctrines set forth through constitutional law. For instance, the
Supreme Court has the power of judicial review, as set out in Marbury v. Madison. When a state
law conflicts with a federal law, the federal law will rule, as is set out in Gibbons v. Ogden.
There are also numerous landmark constitutional law cases involving the relationship between
individual freedoms and the government. These include restrictions on free speech as shown
through Schenck v. United States. Other examples include Fourth Amendment protections, such
as that in Mapp v. Ohio, and Sixth Amendment protections, such as that in Gideon v. Wainwright.
Constitutional law is the channel, or vehicle, for our constitutional rights.

Learning Outcomes
Watching this lesson should give you the ability to:

Define constitutional law, judicial review, and the supremacy clause

Explain how the Constitution set up the federal government and the Bill of Rights

Summarize how constitutional law was applied in Schenck v. United States, Mapp v.
Ohio, and Gideon v. Wainwright

The U.S. Constitution is one of the most important documents in history. It

establishes the government of the United States, and its first ten
amendments, the Bill of Rights, assures every U.S. citizen the rights we have
all come to hold dear.

The Preamble

'We the People of the United States, in order to form a more perfect Union, establish
Justice, insure domestic Tranquility, provide for the common defense, promote the
general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do
ordain and establish this Constitution for the United States of America.'

Unless you are in the fourth grade, you will probably never be asked to recite this again,
but it is important for people to understand the stated purpose of the Constitution.

Lesson Overview

In this lesson, we will go over the original seven articles of the U.S. Constitution and the
Bill of Rights. This is a great deal of information. For the sake of student sanity, we will
mainly focus on a clear and simple understanding of the first three articles, which form
the three branches of the U.S. government: the legislative, executive, and the judicial.
Then we'll more quickly cover the rest.

Article I

Article I of the Constitution establishes the legislative branch of our government. This is
the Congress. The Constitution establishes two houses for the Congress: the House of
Representatives and the Senate. The primary purpose of the Congress is to make laws.

In the House, representatives are elected every two years, and must be at least 25 years
old, have been a U.S. citizen for seven years, and must reside in the state from which
they are chosen. The House has the sole power of impeachment - this means that the
House can put the president on trial for breaking the law.

In the Senate, senators are elected every six years, must be at least 30 years old, have
been a U.S. citizen for nine years, and must reside in the state from which they are
chosen. The vice president of the United States is the president of the Senate, but the VP
has no vote unless there's a tie that needs to be broken.

The Senate holds the trial if the House chooses to impeach the president. The punishment
can only go as far as throwing the president out of office, and barring them from holding
other government offices. According to Article I, it is also Congress' job to raise money,
so that means tax, and pay U.S. debts, and it is Congress' job to provide for defense,
which means maintain the military.

Article II

Article II of the Constitution establishes the executive branch of the government - that
means the president. The president's job is to enforce the laws established by Congress.
The president is elected for a four year term and must be a natural born U.S. citizen as
outlined under Section 1, Clause 5. However, it is important to note that there is a statute
built into the Constitution that allows for foreign born Americans to run for president.
The following must be true: the individual must be born to at least one parent who was
born on U.S. soil, and the individual had to be born within a possession of the United
States.

A great example was Arizona Senator John McCain who ran for president in 2008.
McCain was born in Panama. Fortunately, he was born on an American air base inside of
the Panama Canal Zone, which just happened to be an American possession at the time of
his birth.

Additionally, to be president, a person also has to be at least 35 years old, and must have
been residing in the U.S. for a period 14 years. The Constitution is very vague as to
whether the 14 years must be consecutive or in general. The president is the Commander
in Chief of the military, has power to make treaties (with the consent of the Senate), has
the power to pardon, and appoint ambassadors, judges, and other officials, but these
appointments must be approved by Congress.

Article III

The judicial branch of the government is established by the third article of the
Constitution. The job of the judicial branch of the government is to interpret the law. The
judicial branch of the government is made up of the Supreme Court and the lower federal
courts. The Supreme Court deals with cases involving Constitutional law, treaties,
ambassadors, and cases outside of state jurisdiction, like maritime cases, cases between
states, or cases between individuals and another state. Judges appointed to the Supreme
Court serve for life.

Review Articles I - III

So, the first three articles of the constitution establish the branches of the U.S.
government: the legislature, the executive, and the judiciary. This brilliant system is
designed to divide the powers of the government so that each branch keeps the others in
check. The Congress makes laws, but the president can veto those laws, and if the
president does sign those laws, the Courts can find those laws unconstitutional and render
them void. Congress can override a presidential veto, but the courts can still knock them
down. If the courts keep rendering laws void, the Congress can amend the constitution
under Article V, which we will address shortly.

Articles IV - VII

We will now take a look at articles four through seven:

Article IV (relationship of the states and admitting new states) establishes the
relationship between states and the federal government. It says that states have to honor
the laws of other states. As an example, if a couple is married in New York, their
marriage is also recognized in Virginia. It also outlines the rules for admitting new states
to the Union.

Article V (amending the Constitution) establishes the amending process for the
constitution. Article V states that the proposal of an amendment can be done by a 2/3
majority vote in both the House and the Senate. This is the most common method of
drafting an amendment. Interestingly, it can also be done with 2/3 vote by the state
legislatures. This would then require Congress to hold a constitutional convention to
address the state proposed amendments. For ratification, the amendment needs to be
approved by 3/4 majority of the state legislatures.

Article VI (highest law of the land) says that the Constitution is the highest law of the
land. Federal and state officers and judges must uphold the Constitution.

Article VII (just names) is just all the guys who signed the constitution. It just confirms
the ratification of the Constitution.

The Bill of Rights

The Bill of Rights is very important. Every American, whether able to recite them or not,
enjoys the protections laid out by the founders, and the Constitution would never have
been signed without these first amendments. There were originally 12 amendments, but it
was the right-assuring list of ten that made it into the Constitution.

The Constitution Recap

This is one of the most important documents in history, and we just covered it in less than
ten minutes. Most importantly, it establishes the three branches of government: Article
I establishes the legislature, Article II establishes the executive, or the office of the
president, and Article III establishes the judiciary. Then, equally important, was the
addition of the Bill of Rights, which all citizens should familiarize themselves with.
Many founders fought to assure that these rights would be guaranteed to all U.S. citizens!

The Bill of Rights was pivotal in getting the U.S. Constitution ratified. More
importantly, the Bill of Rights guarantees the rights of every citizen of the
United States in a way that is nearly unequaled.

The Bill of Rights

The Bill of Rights is very important. Every American, whether able to recite them or not,
enjoys the protections laid out by the founders, and the Constitution would never have
been signed without the first ten Amendments. There were originally 12 amendments, but
it was the right-assuring list of ten that made it into the Constitution. There is no need to
memorize each one, but I suggest you familiarize yourself with each. The following is
simply a list of a summary of the first ten amendments. Knowing what each guarantees is
important!

Amendment I

This guarantees the freedom of religion, speech, press, and peaceable assembly.

Amendment II

This guarantees the right to bear arms. This doesn't mean tickets to the gun show. Well,
not that gun show, anyway. The meaning of the second amendment today is one of the
most debated issues in the country. Some say that it only gives the right to bear arms to
maintain a militia. Today, that would be handled by the military and police forces. Others

say it means that, for hunting and defense, all Americans are given the right to own
whatever guns they want. It is best if you read the exact text and make an informed
decision for yourself:

Amendment II: A well regulated Militia, being necessary to the security of a free
State, the right of the people to keep and bear Arms, shall not be infringed.

Amendment III

This guarantees no quartering of soldiers, without the consent of the home owner.
The third amendment is hard for us to understand today because of the rights we all
enjoy. No one has ever made an American in the 21st century put up a soldier for the
night, but housing the military was something colonials had to do before and during the
revolution. This amendment guarantees you will not have to feed and house soldiers
against your will. Imagine if we didn't have the third amendment. A group of soldiers
could just show up at midnight and demand to get your kids' beds for the night!

Amendment IV

This amendment guarantees the freedom from unreasonable searches and seizure. The
fourth amendment is pretty direct. If the police or another government agency wants to
search you, your possessions, or your property, or take your stuff, they need a warrant.
Now, if an officer has obvious reason, they can search an individual. But if they want to
go through your home or stuff, generally speaking, the fourth amendment means
authorities will have to go to a judge and convince them they have good reason and that
the search is reasonable.

Amendment V

The right to due process of law, freedom from self-incrimination, double Jeopardy.
This means you can't be tried twice for the same crime. The fifth amendment is
sometimes misinterpreted by people. Double jeopardy is simple, and due process makes
sense. But sometimes you'll hear someone say, 'I plead the fifth' when they don't want to
answer a question. This only applies if the answer implicates you in a crime. If you saw
your friend steal a candy bar, by law you have to answer a question about that. Otherwise
you could get in trouble for obstruction of justice or conspiracy or something. If you stole
the candy bar with your friend, you can refuse to answer the question because it could
incriminate you.

Amendment VI

The rights of those accused of a crime, such as the right to a speedy and public trial and
the right to have an attorney. If you like cop shows, or have some experience with being
arrested, you are familiar with some of these rights. The sixth amendment says they can't
make you sit in jail for ten years awaiting trial. As you should know from those cop

shows, you can and should always ask for an attorney. Under the sixth amendment you
aren't guaranteed a good lawyer, but at least they should know the law better than most.

Amendment VII

This is the right of trial by jury in civil cases. Realize that civil cases aren't the same as
criminal cases. Civil cases are when people sue each other. If a civil case is over a lot of
money, the seventh amendment says it is to be tried by a jury. For example, O.J. Simpson
was found not guilty for the murder of his wife in the criminal case, but he was found
guilty in the wrongful death suit filed by his wife's family. Civil court can't send you to
jail, but they can make you pay. It only takes a majority decision to be found in the wrong
for civil cases. In Simpson's case, he had to pay his wife's family millions of dollars.

Amendment VIII

The freedom from excessive bail, cruel and unusual punishments. The eighth
amendment is simple. If you stole that candy bar, they can't say you have a 50,000,000dollar bail or else you stay in jail until you are found not guilty. Also, if you are found
guilty, they cannot torture you.

Amendment IX

Rights not listed may exist, and just because they are not listed doesn't mean they
can be violated. The ninth amendment says that any right that a person obviously has
cannot be denied just because it isn't in this list. As an example, the bill of rights does not
explicitly state you have the right to eat a candy bar, but the ninth amendment basically
guarantees you that right.

Amendment X

The powers not given to the federal government by the Constitution are retained by
the states. Remember, the states were very nervous about giving away their power to the
federal government. The tenth amendment states that everything that isn't expressly stated
as controlled by the federal government is still handled by the states. Today, this works
very well when politicians in the national government want to wash their hands of a
political issue. Because of the tenth amendment, several hot-button issues are decided by
the states.

Lesson Summary

To recap the Bill of Rights: the Constitution is one of the most important documents in
history, and this Bill of Rights is important because the Constitution never would have
been signed without it. Not only did the Bill of Rights get the Constitution ratified, it
guaranteed the rights of U.S. citizens in a way that had never been done before! The
rights of U.S. citizens are still protected as much or more than anywhere else on Earth.

Learning Outcome

After watching this lesson, you should be able to understand the importance of the Bill of
Rights and summarize each of the first ten amendments.

Our United States Constitution is known as the 'Supreme Law of the Land.' The United States
Supreme Court determines when other laws are in conflict with the Constitution. This lesson
explains the concepts of supremacy and judicial review.

United States Constitution

Though the Articles of Confederation served as our nation's first constitution, this document
was limited. It mostly set out the way Congress had already been operating for several years, and
it allowed the states to continue working as individual units. A revised system of government was
introduced through the United States Constitution. This document was drafted in 1787. This
was several years before the end of the Revolutionary War and Britain's recognition of the United
States as an independent country.
The Constitution was specifically designed to limit the power of government while ensuring
basic personal rights for American citizens. The Constitution created our federal government so
it would operate much as we know it today. It's the basis of our current federal law system. It sets
out how our government runs and outlines which laws may or may not be enforced.

The Supremacy Clause

Article VI of the Constitution states that the 'Constitution, and the Laws of the United States
which shall be made in Pursuance thereof...shall be the Supreme Law of the Land.' This is known
as the Supremacy Clause. The Supremacy Clause prohibits state governments from passing
laws that conflict with federal laws, and it prohibits any entity from enforcing laws that are in
conflict with the Constitution. Under the Articles of Confederation, the federal government was
purposefully weak. So this clause was new and unique to the United States, and it established a
different way of thinking about the federal government.
For example, suppose the state of Kentucky decides it can save millions of dollars by requiring
citizens to pay for their own criminal trials. The state then tells all criminal defendants that they
may have a jury trial, but they must first pay the state a $5,000 fee. Because this law is contrary
to the due process and equal protection clauses of the Constitution, it can't legally be enforced.

United States Supreme Court

The framers of our Constitution intentionally created a strong federal government made from
three branches: the executive, the legislative and the judicial. The United States Supreme Court
serves as the judicial branch and was created through Article III. The Supreme Court serves as
the highest court in the nation and has the final, or supreme, say. The Supreme Court settles
disputes involving new laws and rules on the constitutionality of laws. This means that the Court

can invalidate a law if it determines that the law doesn't match with the Constitution, even
though this power isn't expressly explained in the Constitution.

Judicial Review
The Court uses its power of judicial review to interpret the Constitution and determine which
laws keep with the Constitution. For example, imagine that Kentucky did pass that law requiring
criminal defendants to pay for their own criminal trials. Who will tell Kentucky that they can't do
this? The federal court will review the law and interpret the Constitution to determine if
Kentucky's law goes against Constitutional rights.
The Supreme Court established the duty of judicial review in 1803 through the case of Marbury
v. Madison. In the Marbury case, Chief Justice John Marshall wrote that 'A law repugnant to the
Constitution is void.' This is simply a description of the Supremacy Clause. But this famous case
went on to establish the power of federal courts to void acts of Congress that are determined to
be in conflict with the Constitution. In effect, the Supreme Court declared itself the final
arbitrator in determining what can, and can't, be law.
The idea of judicial review wasn't new. The practice had already been used by the individual
states to strike down state laws that conflicted with state constitutions. This power was assumed
to exist prior to Marbury v. Madison, but because judicial review isn't directly addressed in the
Constitution, the Marbury case served to formally announce the rule for the first time.

Marbury v. Madison
Let's take a closer look at the Marbury v. Madison case to explore how the Supreme Court uses
judicial review.
During the final hours of his presidency, John Adams appointed William Marbury as a justice of
the peace. James Madison served as the newly elected Thomas Jefferson's secretary of state.
Madison, as instructed by Jefferson, refused to deliver Marbury's commission. Marbury and
three other appointees then petitioned the United States Supreme Court for a writ of mandamus.
This writ would have forced the delivery of the commissions. However, the Court denied the
petition and refused to issue the writ. The Court decided that Marbury and the other appointees
were entitled to their commissions, but that the Constitution didn't give the Court the power to
issue writs of mandamus. Although the Judiciary Act of 1789 provided for the writs, the Court
held that this section didn't keep with the Constitution, and therefore it wasn't valid.
The Court ruled that Congress had exceeded its authority through the Judiciary Act. Chief Justice
John Marshall wrote that when a congressional act conflicts with the Constitution, that act is
invalid. Marshall declared that the Court must uphold the Constitution because it is, as affirmed
by the Constitution itself, the 'Supreme Law of the Land.' The Marbury v. Madison decision
stands today, and this case remains one of the most important in the history of the United States.
The decision's immediate effect was to deny power to the Court based on the Supremacy Clause.

But its long-term effect was to enhance the Court's power by establishing judicial review, and to
place the judiciary branch in equal power to the executive and legislative branches.

Lesson Summary
The United States Constitution declares itself the 'Supreme Law of the Land.' The United
States Supreme Court gives itself the power to void those laws that aren't in keeping with the
Constitution. This power is called judicial review, and it isn't expressly stated in the
Constitution. Though judicial review was thought to already exist, this power was first stated in
the Supreme Court case of Marbury v. Madison. Judicial review is the cornerstone of the
Supreme Court's power. This power places the judiciary branch in similar power to that of the
executive and legislative branches.

Learning Outcomes
Upon completion of this lesson, you should be ready to:

Describe the Supremacy Clause and how the U.S. Supreme Court upholds this clause

Summarize the case of Marbury v. Madison and how it established the Supreme Court's
power of judicial review

The United States Constitution includes several important provisions that empower the United
States Congress to make particular laws. This lesson explores the necessary and proper clause
and the commerce clause.

The Necessary and Proper Clause

Article I, Section 3 of the United States Constitution contains the necessary and proper
clause. This is one of the most powerful clauses in the Constitution. Generally speaking, this
clause allows Congress to make any law it deems essential and appropriate.
This clause is often called the 'elastic clause' because it expands the powers of Congress beyond
the powers already enumerated in the Constitution. Enumerated powers are those that are
specifically set out in the Constitution and are defined in the clause as 'foregoing powers.' The
elastic clause can be stretched to include many different types of laws covering many different
issues.
This clause states that Congress can 'make all laws which shall be necessary and proper for
carrying into execution the foregoing powers, and all other powers vested by this Constitution.' It
works as a 'catch-all.' There are many powers already given to Congress in Article I. The
necessary and proper clause tells Congress that it can additionally make any law it believes it
needs to make in order to carry out those powers.

For example, through the necessary and proper clause, Congress established the federal judicial
system and enacted a large body of federal crimes, though neither one of these duties is
enumerated through the Constitution.

McCulloch v. Maryland
Though the necessary and proper clause is set out in the Constitution, it was defined and placed
into common usage through the famous 1819 Supreme Court case of McCulloch v. Maryland.
Here, Chief Justice Marshall stated, 'Let the end be legitimate, let it be within the scope of the
Constitution, and all means which are appropriate, which are plainly adapted to that end, which
are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.'
The opinion in the McCulloch case established a 'means to an end' test. This means that Congress
can legislate an area as long as the end result is constitutional and within Congress' enumerated
powers.
For example, there are federal laws that establish record-keeping requirements for prescription
drug transactions. These requirements allow the federal government to police these transactions.
This is not an enumerated power. But because the requirements also aid the enforcement of
federal taxes, the requirements are constitutional. The federal taxing power is an enumerated
power.
Note, though, that the necessary and proper clause doesn't authorize Congress to enact any law it
wishes to enact. The laws must be 'appropriate,' which means the laws must be designed to
further Congress' enumerated powers.

The Commerce Clause

The commerce clause is also found in Article I, Section 3 of the Constitution. The commerce
clause is an example of an enumerated power.
The commerce clause gives Congress the power 'to regulate commerce with foreign nations, and
among the several states.' Generally speaking, this means that Congress controls interstate
commerce and commerce between the U.S. and other countries. Commerce is the commercial
trade, business, or movement of goods or money. Interstate commerce commonly refers to the
commerce that involves transportation across state lines.
For example, let's say I own an internet-based business where I sell t-shirts. If I live and work in
Oregon, but sell a t-shirt to a customer in New York, that is an example of interstate commerce.
The customer must send money to me in Oregon, and I must send the t-shirt to New York.

The Clauses Working Together

The necessary and proper clause works together with Congress' enumerated powers. For
example, this clause sometimes works together with the commerce clause.

In the 1911 Supreme Court case of Southern Railway Co. v. United States, the Court upheld an
amendment to the Safety Appliance Act. This amendment required safety equipment for railroad
cars used only within a state. But because the amendment also increased safety for cars traveling
between states, the amendment was found to be constitutional under the necessary and proper
clause. This is because it furthered the proper regulation of interstate commerce, as is allowed by
the commerce clause.

The Scope of the Commerce Clause

As was true in the Southern Railway case, the commerce clause has been used to validate federal
laws that do not seem to involve interstate commerce.
Many people don't realize that the Civil Rights Act of 1964 was passed under the commerce
clause. The act outlawed segregation and prohibited discrimination against African Americans,
and it allowed the federal government to charge private businesses with equal protection
violations.
For example, the Supreme Court case of Katzenbach v. McClung ruled that the act could be used
to regulate Ollie's Barbeque, which was a family-owned restaurant in Birmingham, Alabama.
The Court said that although most of Ollie's customers were from Alabama, the restaurant served
food that had previously crossed state lines.
However, in 1995, the Court rejected the use of the commerce clause in United States v. Lopez.
The defendant was charged with carrying a handgun to school in violation of the federal Gun
Free School Zones Act of 1990. The Court ruled that the federal government had no authority to
regulate firearms near local schools, and the act was unconstitutional, since the local possession
of a firearm did not affect interstate commerce.

The Dormant Commerce Clause

The dormant commerce clause means that states may not impede or discourage interstate
commerce.
In the 2005 landmark case of Granholm v. Heald, the plaintiffs challenged a Michigan law that
allowed Michigan wineries to complete Internet sales to Michigan citizens - but the same law
prevented out-of-state wineries from doing the same. The Court ruled that the Michigan law
discriminated against out-of-state wineries and therefore violated the dormant commerce clause.

Lesson Summary
Let's review. The necessary and proper clause allows Congress to make laws that it believes are
necessary to carrying out Congress' enumerated powers. The commerce clause is an example of
one of these enumerated powers. The commerce clause allows Congress the exclusive right to
regulate interstate commerce and commerce between the U.S. and other countries.

While these clauses may seem fairly straightforward, both clauses are interpreted fairly broadly.
Many things that don't seem to affect interstate commerce can be federally regulated through this
clause. The dormant commerce clause, on the other hand, prevents states from discouraging
interstate commerce.

Learning Outcomes
After watching this lesson, you should have the ability to:

Differentiate between Congress' enumerated powers and powers granted by the necessary
and proper clause

Understand the significance of McCulloch v. Maryland regarding the necessary and

proper clause

Describe the commerce clause as well as the dormant commerce clause

Discuss how Congress uses the commerce clause in conjunction with the necessary and
proper clause

The United States Constitution includes two privileges and immunities clauses. These clauses
protect citizens' fundamental rights and prevent states from discriminating against out-of-state
citizens. This lesson explores the use of the privileges and immunities clauses, including how
these clauses are used in business relations.

Article IV
The first privileges and immunities clause is found in Article IV of the United States
Constitution. This clause says that 'The citizens of each state shall be entitled to all privileges and
immunities of citizens in the several states.' The framers added this clause in hopes of
encouraging travel between the states. They wanted U.S. citizens to feel secure in their travels
between states and know that they would be guaranteed the same general rights everywhere in
the U.S.
Throughout history, the Supreme Court has narrowly interpreted which rights are provided
through Article IV. Some of the rights that are protected include the right to acquire and possess
property, the right to bring and defend actions in a court of law, and the right to receive the same
tax treatment as the citizens of the taxing state. For example, the State of Georgia can charge a
sales tax on all groceries, but Georgia can't charge one tax rate for its citizens and another for
non-citizens. But this doesn't mean that states can't ever charge a higher rate for non-residents.
The Supreme Court ruled that state universities could charge out-of-state residents a higher
tuition rate.

The Fourteenth Amendment

There's a second privileges and immunities clause found in the Fourteenth Amendment to the
Constitution. This clause says that 'No state shall make or enforce any law which shall abridge
the privileges or immunities of citizens of the United States.' This clause was added after the
abolition of slavery and as a part of the Fourteenth Amendment's equal protection guarantees.
Though slaves were now free under the federal law, Congress wanted to ensure that the states
respected the new rights and freedoms of the former slaves. It's helpful to remember that not all
states were in favor of abolishing slavery.

Privileges and Immunities Clause in Business

The two clauses work together to guard the fundamental constitutional rights of individual
United States citizens. They also prevent state governments from discriminating against out-ofstate citizens or from favoring their own citizens over the citizens of other states. Generally, this
means that a state can't deny rights to people simply because they aren't citizens of that state.
However, it's helpful to note that the privileges and immunities clauses don't often apply to
business activity. One reason is because corporations and companies aren't citizens, and the
clauses only grant rights to citizens.
Another reason is because the clauses only grant rights based on U.S. citizenship. The famous
and controversial 1873 Slaughterhouse Cases demonstrate this point. The Slaughterhouse Cases
combined three separate federal cases - originally involving hundreds of plaintiffs - all about the
same Louisiana statute. The statute gave one New Orleans corporation the exclusive right to
butcher area livestock. All other meatpacking companies were required to pay a fee for using the
slaughterhouses. The Louisiana statute was an attempt to regulate public health and prevent the
contamination of the water supply because butchering practices at that time were unsanitary.
The Supreme Court upheld the statute, saying that the privileges and immunities clause applied
only to newly freed slaves and granted individual rights based on U.S. citizenship, rather than
state citizenship. This meant that Louisiana could use its police power to govern public health if
it wanted to, since Louisiana wasn't infringing a right granted to the butchers by the United
States. The Slaughterhouse Cases came to the Supreme Court just five years after the Fourteenth
Amendment was enacted.
Notably, the Supreme Court has always narrowly construed the privileges and immunities clause
of the Fourteenth Amendment, often ruling that the clause doesn't prevent business
discrimination. In fact, the privileges and immunities clauses actually allow differential treatment
as long as that treatment advances a legitimate state interest. For example, many states require
heightened standards for out-of-state doctors, lawyers, and other licensed professionals in order
to ensure the competency of out-of-state professionals. The Court has held that this is a
legitimate state interest.

Fundamental Rights
The privileges and immunities clauses don't protect many business rights. They only protect
fundamental rights. With respect to business, a fundamental right is a right to a 'lawful' or

'common' calling. The Supreme Court has declared a number of things to be lawful callings, such
as the practice of law and construction work, but not recreational hunting. Even lawful callings
are not fully protected by the privileges and immunities clauses. Callings can be regulated
through state legislation. For instance, a state law can require safety inspections or special testing
without violating privileges and immunities.
This is not to say that the privileges and immunities clauses never protect business rights. In at
least one case, the Court held that U.S. citizens have a fundamental right to be included in certain
hiring processes. Consider the Supreme Court case of Hicklin v. Orbeck. The Court struck down
an Alaska statute that required certain employers to give hiring preferences to residents of Alaska
because it violated the privileges and immunities clause as applied to job applicants from other
states.

Lesson Summary
Let's review. There are two separate privileges and immunities clauses. One is found in Article
IV of the Constitution, and the other is found in the Fourteenth Amendment. These clauses
work together to guard the fundamental constitutional rights of individual United States citizens.
They also prevent state governments from discriminating against out-of-state citizens or from
favoring their own citizens over the citizens of other states. The privileges and immunities
clauses don't often apply to business activity. One reason is because corporations and companies
are not citizens, and the clauses only grant rights to citizens. The privileges and immunities
clauses don't protect many business rights, but they do protect certain fundamental rights that
are linked to occupations.

Learning Outcomes
After completing this lesson, you should be prepared to:

Paraphrase the privileges and immunities clauses in Article IV and Amendment Fourteen
of the Constitution

Discuss how the privileges and immunities clauses are applied between states

Summarize how the privileges and immunities clauses were applied in the
Slaughterhouse Cases

Understand what business rights are and are not protected under the privileges and
immunities clauses

The Full Faith and Credit Clause was a key addition to the United States Constitution because it
helped to unify the independent states. This lesson explains the Constitution's Full Faith and
Credit Clause.

Origin and Purpose of Full Faith and Credit

The Full Faith and Credit Clause can be found in Article IV, Section 1 of the United States
Constitution. This clause was originally included in the Articles of Confederation, which was
our nation's first constitution. The United States Constitution replaced the Articles of
Confederation, and, for the most part, the clause was carried over. The clause reads:
'Full faith and credit shall be given in each state to the public acts, records and judicial
proceedings of every other state. And the Congress may by general laws prescribe the manner in
which such acts, records and proceedings shall be proved, and the effect thereof.'
The Full Faith and Credit Clause ensures that states honor the court judgments of other states.
For example, let's say I'm involved in a car accident in New Mexico. As a result, a New Mexico
court grants me $1,000 in damages. But the defendant - the person who ran into me - lives in
Florida and refuses to pay me. The State of Florida will enforce the judgment from New Mexico
and help me collect my money. This is obviously an important practice because otherwise, I'm
forced to retry my case in Florida in order to receive a money judgment that can be enforced in
that state. This was an even more important practice in colonial times because the states
purposely operated separately and independently. The clause helped ensure unity and respect for
authority between the states. Although at the time the Constitution was drafted, the framers
mostly hoped to prevent debtors from escaping their debts by fleeing to another state.

The Supreme Court and Full Faith and Credit

The United States Supreme Court serves as our judicial branch and is responsible for
interpreting the United States Constitution. The Full Faith and Credit Clause is part of the
Constitution's text and was enacted in 1787. The Court first interpreted the clause in the 1813
case Mills v. Duryee. Currently, the Court has heard numerous cases involving the Full Faith and
Credit Clause. The Court says that the clause can be used in three different ways. First, the clause
can command a state to take jurisdiction, or control, over a claim that started in another state.
Second, the clause can determine which state's law should be applied when a case involves more
than one state. And lastly, the clause directs states to acknowledge and enforce court judgments
from other states. This last use is the example we've just discussed about my car accident in New
Mexico.

Commanding Jurisdiction
The Supreme Court has used the Full Faith and Credit Clause to command a court to take
jurisdiction over a case. This means that the Court forces a state court to hear a case that
originated in another state. Under our example, the Court can tell Florida that it must hear my
case if I choose to sue the defendant in Florida. This wouldn't be true if neither the defendant nor
I had any connection to Florida, since the accident didn't happen there. If there is no connection
to the state, the clause doesn't apply. But if it's more convenient for me and I choose to sue there,
Florida can't refuse the case since the defendant lives there.

Determining State Law

The Supreme Court has used the Full Faith and Credit Clause to determine which state's law
should be applied when a case involves more than one state. This means that a state can't
automatically apply its own laws to a case that involves more than one state. A state can usually
apply its own procedural laws. These are the laws that tell us how a lawsuit should proceed.
This includes things like how the lawsuit should be filed and what evidence can be presented.
There are certain rules that govern which state's substantive laws should be applied. Substantive
laws are the laws that tell us the rights, duties and obligations that the parties have to one another.
In other words, the substantive laws will tell us whether or not the car accident was the
defendant's fault and whether or not he owes me money because of it. Generally speaking, the
substantive law of New Mexico would be applied to my case, since the accident happened in
New Mexico. This is usually true even if I choose to bring my lawsuit in Florida. Florida
procedural rules would apply, but New Mexico's substantive rules would apply.

Acknowledging Other States' Judgments

The Supreme Court has used the Full Faith and Credit Clause to direct states to acknowledge and
enforce court judgments from other states. This means that if I've already sued the defendant in
New Mexico and received a money judgment, I can have that judgment enforced against the
defendant in Florida. The defendant can't refuse to pay my judgment just because he lives in a
different state. The Florida state courts will enforce my judgment as long as I've met the other
requirements for my lawsuit. For example, the Florida court might refuse to enforce my
judgment if the defendant never knew about the lawsuit in New Mexico and didn't have a chance
to defend himself.
The Full Faith and Credit Clause can also operate to prevent lawsuits. In the 1935 Supreme
Court case of Milwaukee County v. M.E. White Co., the Court ruled that the parties couldn't have
a state court rehear an issue that another state had already decided for them. Let's say I sued the
Florida defendant for $5,000, but the New Mexico court only awarded me $1,000. I can't then go
to Florida and sue on the same issue again. The New Mexico court already heard my claim and
issued a judgment.

Lesson Summary
Let's review. The Full Faith and Credit Clause is an important element of the United States
Constitution. This clause makes sure that each state acknowledges and respects the court actions
of the other states. This is a valuable practice and was even more crucial in colonial times
because the states operated separately and independently. The clause helped unify the legal
system of the new United States while still allowing the states to operate individually.

Learning Outcomes

Completing this lesson should enable you to:

Describe the Full Faith and Credit Clause and identify the three ways that it can be used

Define procedural laws and substantive laws

Give an example of a case the Full Faith and Credit Clause would apply to

The United States Constitution's Obligations of Contracts Clause was drafted in order to keep
states from interfering with private contracts. This lesson explains the use of the Contracts
Clause in business and how the interpretation of the Contracts Clause has changed over time.

The Obligation of Contracts Clause

The Obligation of Contracts Clause is commonly referred to as simply the Contracts Clause.
The clause is found in Article I of the United States Constitution. Generally speaking, this
clause was added to the Constitution in order to prohibit states from interfering with private
contracts. The clause states that, 'No State shall...pass any...Law impairing the Obligation of
Contracts...'
The clause can be applied to protect all sorts of everyday business dealings. Though, at the time,
the framers mostly sought to protect contracts between debtors and creditors. Under the Articles
of Confederation, it was common for a state to pass legislation that granted debt relief to a
particular individual. The framers sought to prevent this when they drafted the Constitution.
They based the Contracts Clause on a similar provision from the Northwest Ordinance that was
already in effect at the time the Constitution was drafted.
The Contracts Clause is in a section of our Constitution that lists certain prohibitions on the
states. These prohibitions are meant to protect individuals from intrusion by state governments
and to keep the states from intruding on the Federal government's duties. Among other things,
this section of the Constitution prohibits states from issuing their own paper money and from
regulating economic affairs.

Application of the Contracts Clause

The Contracts Clause applies to ordinary contracts made between private citizens or entities,
including partnerships and corporations. This includes a variety of business contracts, such as
vendor contracts and lease contracts. For the most part, a state can't enact a law that retroactively
obstructs a private individual's contract rights. This means that a state law can't hinder a legally
binding contract that has already been made between two or more private parties.
The clause applies only to state legislation. It doesn't apply to court decisions. Let's say I make a
contract with Bobby. Later, I decide I don't like the terms of the contract, and I don't want to
perform the contract. I sue Bobby to get my money back. A state court can decide that my

contract shouldn't be enforced and can order Bobby to return my money. This affects Bobby's
rights under the contract, but it doesn't violate the Constitution's Contracts Clause.
Also notable, the clause doesn't keep a state from making laws that set requirements for contracts
that aren't yet made. For example, the state of Kansas can make a law that says all plumbing
contracts must be written in blue pen. My contract with my plumber is a private contract between
two private parties - the plumber and me. The Contracts Clause may keep Kansas from
interfering with our contract once a legally binding contract is made, but it won't keep Kansas
from setting the requirements for the contract before it's made.

Early Interpretation of the Contracts Clause

The Obligation of Contracts Clause has been interpreted differently throughout history.
Originally, the clause prohibited states from meddling with contracts made between private
parties. This served to competently protect and preserve private business dealings.
For example, Fletcher v. Peck is a landmark Supreme Court case from 1810. This case marked
the first time a state law was declared unconstitutional. Georgia's state legislature granted land,
resulting in ownership by several different companies. But the following year, Georgia sought to
rescind the land contracts and the companies' land ownership rights. Peck obtained land that was
part of the original Georgia grant and then sold that land to Fletcher. Fletcher later sued, arguing
that since the original sale of the land had been rescinded, Peck had no legal right to sell the land
to Fletcher. The Supreme Court decided that the contract between Peck and Fletcher was valid.
Because of the Contracts Clause, Georgia's legislature couldn't invalidate their contract or take
Fletcher's land.
In early cases like this one, the Contracts Clause was broadly interpreted, and the states were
often prohibited from interfering. By 1934, however, the Court seemed to narrow its
interpretation of the clause. In the case of Home Building & Loan Ass'n v. Blaisdell, the Court
upheld a Minnesota law that temporarily restricted foreclosures. Minnesota wanted to prevent
mass foreclosures during the Depression era. The Supreme Court, in upholding Minnesota's law,
essentially declared that the Contracts Clause doesn't necessarily prohibit a state from interfering
or affecting a private contract.

Later Interpretation of the Contracts Clause

Later cases allow states to interfere in private contracts if three criteria are met:
1. The state can't substantially impair contract rights.
2. The state law must have a significant and legitimate purpose.
3. The state law must be reasonable and appropriately tailored to its purpose.

Many legal scholars believe the Contracts Clause serves no real function in modern times, since
it so rarely prevents a state from interfering. In fact, Justice John Paul Stevens wrote in 1987, 'It
is well-settled that the prohibition against impairing the obligation of contracts is not to be read
literally.'

Exceptions to the Contracts Clause

Over time, some major exceptions to the Contracts Clause developed, and the clause was more
narrowly applied. The first exception to the Contracts Clause concerns eminent domain. This is
when a state 'takes' private property for its own use, like building a highway or a public park.
Under the Fifth Amendment, states must offer the parties compensation, but they don't have to
ask the parties for permission. Let's say the state decides to build a highway through my land.
The state interferes with my ownership rights and the private contract I have with my mortgage
company but doesn't ask either one of us for permission. Because this is a case of eminent
domain, it doesn't violate the Contracts Clause.
The second exception concerns a state's police power. Police power is a government's basic right
to make laws and regulations for the benefit of its community. Using police power, a state can
make or affect contracts when those contracts concern issues such as public safety or the public's
general welfare.
For example, in the 1983 Supreme Court case of Exxon Corp. v. Eagerton, the Court said a
'broad societal interest' justified an Alabama law that affected Exxon's private contracts. Exxon
faced increased severance taxes and wanted to pass on these increases to its consumers. Even
though Exxon's contracts allowed it to pass on the tax increases, the Alabama law prohibited it,
because it felt the increases were not in the public's best interests. The Supreme Court agreed
with Alabama and allowed Alabama to interfere with Exxon's contracts.

Lesson Summary
Let's review. The Constitution's Obligation of Contracts Clause was drafted to help protect
everyday business dealings through private contracts. In early cases, the Supreme Court used the
clause to keep states from interfering in private contracts that were already made. Later cases,
however, allow exceptions to the clause and interpret the clause very narrowly. Many legal
scholars now believe the Contracts Clause is essentially useless in modern-day business dealings.

Lesson Outcome
Upon finishing this lesson, you should be able to:

Explain why the Contracts Clause was added to the Constitution

Understand the applications of the Contracts Clause

Describe the changes in interpretation of the Contracts Clause that have taken place over
time, citing example cases

List the three criteria that allow states to interfere in private contracts today

Name two exceptions to the Contracts Clause

The United States is a federalist government, where the citizens are subject to the powers of
several governmental units. Our United States Constitution tells us that the federal government is
the highest, or supreme, governmental power. This lesson explores the concept of federalism and
the supremacy clause.

Federalism
Federalism is a method that allows two or more governments to share control over the same
geographic region. In a federalist government, the power is divided between the national
government and other governmental units.
This is different from a unitary government, where one unit holds the power. It is also different
from a confederation, which is an association of independent governmental units. The Articles of
Confederation originally established the United States as a confederation, where each of the
states operated separately and independently from one another.
Since the adoption of the United States Constitution, the American people have been under the
control of several different governmental powers. For example, if I am a citizen of Dallas, Texas,
I am subject to federal laws, the laws of the state of Texas, and the local ordinances of the city of
Dallas.

The United States Constitution

The Constitution set up our federal government and replaced the Articles of Confederation. After
almost a decade operating under the Articles of Confederation, the framers of our Constitution
realized that the states had too much power.
The framers wished to create a strong federal government. The result was a balance of powers
between the states and the federal government, with the federal government clearly in charge.
The Constitution expressly granted broad powers to the federal government, but not to the states.
For instance, the Constitution includes the necessary and proper clause, which allows Congress
to make any law Congress deems appropriate to fulfill its duties.
Instead of granting much power, the Constitution stressed what the states couldn't do. The
addition of the Bill of Rights, including the Tenth Amendment, helped to correct some of this
imbalance. The Tenth Amendment reserved to the states or the people all powers either not
specifically delegated to the national government or specifically denied to the states.

For example, Article I, Section 8 grants Congress certain powers such as coining money,
regulating interstate commerce, and declaring war. The following section prohibits the states
from such things as coining money and declaring war.

The Supremacy Clause

The supremacy clause is the section of the Constitution stating that the Constitution and federal
laws made in furtherance of the Constitution are the supreme law of the land. The framers,
recognizing the weak federal government established by the Articles of Confederation, wished to
guarantee that no laws interfered with the goals of the Constitution.
The supremacy clause is found in Article VI, Section 2, where the Constitution specifies which
powers the federal government has, and which powers the federal government does not have.
When a state law conflicts with a federal law, the supremacy clause operates to invalidate the
state law in favor of the federal one as long as the federal law is found to be in pursuance of the
Constitution.
The supremacy clause also means that states can't regulate, interfere with, or control federal
issues. This principle comes from the famous 1819 Supreme Court case of McCulloch v.
Maryland. Here, the Court held that Maryland could not constitutionally tax the operations of the
Bank of the United States, since that was a federal power.
More recently, the 1990 Supreme Court case of North Dakota v. United States slightly narrows
this rule. The North Dakota case says that state regulation is invalid only if it regulates the
United States directly or discriminates against the Federal Government or those with whom it
deals.

Battle for Power

It may seem as though the supremacy clause and Tenth Amendment work together to draw a
clear line between state and federal powers, but sometimes a state and the federal government
will battle for power in a certain area.
The supremacy clause tells us that federal law trumps state law, but we don't always know
whether or not a state has a duty to enforce federal laws. The United States Supreme Court
settles these types of disputes.
One example is the 2000 Supreme Court case of Reno v. Condon, where United States Attorney
General Janet Reno sued South Carolina Attorney General Charlie Condon. Reno wanted South
Carolina to enforce the Driver's Privacy Protection Act of 1994, which set certain federal
regulations on driver information. These regulations prevented states from disclosing a driver's
personal information without the driver's consent. South Carolina laws allowed the state to sell
this type of information.

Condon refused to enforce the Act, arguing that the Tenth Amendment reserved the regulation of
drivers to the states. Condon argued that the Act violated principles of federalism since the
regulation of drivers is not mentioned in the Constitution. The Court, however, sided with the
federal government.
The Court said that Congress could regulate this area, since Congress is responsible for
regulating interstate commerce and driver information was an article of interstate commerce.

Lesson Summary
Let's review. Federalism means that both the federal government and state governments have
powers over the citizens of the United States. However, the Constitution's supremacy clause
tells us that federal laws will usually supersede any state laws or local ordinances. Our
constitutional framers recognized that the Articles of Confederation made the states too strong
and the federal government too weak. They purposely created a federalist government through
the United States Constitution. The Constitution's supremacy clause ensures that the
Constitution is the highest, or supreme, law. The Tenth Amendment gives some power back to
the states, though only those powers that were not already granted to the federal government.

Learning Outcomes
After competing this lesson, you should be prepared to:

Differentiate between a federalist government, a unitary government, and a confederation

Explain the supremacy clause

Describe how the U.S. Constitution set up a federalist government

Summarize the case of Reno v. Condon

In the United States, people are subject to the powers of several governmental units. Citizens
must comply with federal, state and local laws - all at the same time. This lesson explores the
definitions and differences between federal, state and local laws.

Federalism
The United States legislative system uses the doctrine of federalism. Federalism means that
citizens and visitors are subject to several governmental powers. In the U.S., federal, state and
local governments all make laws. Generally speaking, each system of government has different
responsibilities, though each system is working at the same time.
Our federal legislature, known as the United States Congress, makes federal laws. The federal
laws are uniform in that they apply to all citizens and visitors of the United States, no matter

which city or state that person is in. Everyone in the U.S. must follow the federal laws at all
times. This works differently than state laws. State governments make laws so that they can
manage the citizens and visitors of that particular state. Citizens, residents and visitors must
follow these laws. Visitors must follow the laws of a particular state, but only while visiting that
state. Local governments, such as counties and cities, also make laws so that they can manage
the citizens and visitors of those particular areas. Citizens, residents and visitors must follow
these laws. Visitors must follow the laws of a particular city, but only while visiting that city.
For example, the Oklahoma legislature has the power to make laws to govern the citizens and
residents of Oklahoma. The laws of Oklahoma also apply to visitors while they are in Oklahoma,
but these laws don't apply to citizens and residents of Arkansas if those people are not visiting
Oklahoma. Let's say I'm a resident of Tulsa, OK. I'm subject to the laws of Tulsa, of Oklahoma
and of the United States - all at the same time. I'm required to pay taxes to all three governments.

Supremacy Clause
Keep in mind that Oklahoma can't enforce laws that conflict with the United States
Constitution or any federal laws made in furtherance of the Constitution. The Constitution's
supremacy clause tells us that federal laws take priority over state laws as long as the federal
laws are made in pursuance of the Constitution. When the two conflict, the federal law will
trump the state law. Most state constitutions also include a supremacy clause, so that state laws
will take priority over city ordinances. A hierarchy is formed, with federal laws sitting at the top
of the hierarchy and local laws sitting at the bottom of the hierarchy.

Federal Laws and Regulations

Federal laws are rules that are passed by the federal government and enforced by the United
States governmental agencies. These laws include constitutional issues, federal statutes and
federal regulations. Our United States Congress makes and passes federal laws. These federal
laws are known as statutes. Statutes are laws that are enacted by a legislative body. Federal laws
are somewhat limited, though they may be civil or criminal. The U.S. government can only
regulate certain areas, as specified in Article I of the United States Constitution. Other issues are
left to state or local regulation.
Federal civil laws regulate national and international issues and issues between the states. These
laws govern things like immigration, the armed forces and our federal courts. Federal criminal
laws include issues like counterfeiting, bank robbery, tax evasion and trafficking controlled
substances across state lines. Federal courts have the exclusive right to manage federal laws. For
example, let's say John files for bankruptcy. Even though John is a resident of Kansas, his
bankruptcy case will be heard in a federal bankruptcy court because bankruptcy is a federal
issue.
Federal regulations are a form of federal law. Regulations are rules that are enacted by
Congress. Regulations are enforceable laws, just like statutes. Regulations are often contained
within a legislative act, like the Clean Air Act or the Civil Rights Act. Our federal government is

made up of numerous regulatory agencies, such as the Environmental Protection Agency,

known as the EPA, and the Securities and Exchange Commission, known as the SEC. The
agencies are each authorized to enforce certain regulations. Agencies can penalize people or
companies that violate regulations. Penalties can include fines, sanctions and even jail time.
Agency decisions can sometimes make new federal law by narrowing the interpretation of a
regulation or by expanding the meaning of a term.

State Laws
State laws are rules that are passed and enforced by a particular state. Each state has its own state
legislature, system of laws and court system. State governments can legislate any area that is not
strictly reserved to the federal government through Article I of the Constitution. This means that
statutes made by state governments usually cover a broader range of issues. State laws include
both civil and criminal issues. For example, family law is usually a state civil law issue. This
includes marriage, divorce and adoption. State criminal cases include crimes like robbery, assault
and possession of a controlled substance. State court systems administer their own state laws. For
example, let's say Bert violates a Montana statute by leaving a restaurant without paying his bill.
Bert will be charged with a crime by the State of Montana, and his criminal case will be heard in
a Montana state court.

Local Ordinances
Counties and municipalities, like cities and towns, are responsible for making local laws so that
they can manage their local areas. Local laws are generally known as ordinances. Ordinances
normally include things like parking regulations and housing codes. City court systems
administer their own city laws. For example, let's say Cindy leaves her barking dog outside all
night long at her home in Colorado Springs. Her neighbors complain, and Cindy receives a ticket
from a Colorado Springs police officer. Cindy will be required to appear in a Colorado Springs
court to address the ticket.

Lesson Summary
Let's review. In the U.S., people are subject to a variety of laws made by city, county, state and
federal governments. Different types of law are administered by different systems of law. These
laws are part of a hierarchy. Federal laws are rules that apply to everyone throughout the United
States and exist at the top of the hierarchy. State laws apply to people who are citizens, residents
or visitors to that particular state. Local ordinances apply to people who are citizens, residents
or visitors to that particular county or city. Local ordinances exist at the bottom of the hierarchy.
All three types of laws, all at the same time, govern people in the U.S.

Learning Outcomes
Upon completion of this lesson, you should be ready to:

Define federalism and the supremacy clause

Explain the differences between federal, state and local laws

Understand how the hierarchy of laws applies to citizens

Administrative laws are those laws that govern the formation and operation of administrative
agencies and the rulings made by administrative agencies. This type of law is sometimes called
regulatory law. This lesson explores administrative law and administrative agencies.

Administrative Law
Administrative laws are laws pertaining to administrative agencies. These laws govern the
formation and operation of administrative agencies.
Administrative law is also sometimes called regulatory law. This is a broad area of the law. It
covers many different types of issues, legal procedures, and regulations. Administrative law is a
type of public law.
Generally speaking, there are two types of administrative law. The first type includes rules and
regulations. Rules and regulations are policies that dictate how a law is to be used.
Congress and state legislatures enact laws, but they don't usually specify how laws should be
used. Our government uses special agencies in order to administer the law. These agencies use
rules and regulations to determine how a law will be applied and enforced. These rules and
regulations are a type of law.
The second type of administrative law includes administrative decisions. Government agencies
issue their own decisions regarding the application and enforcement of rules and regulations. A
government agency has the power to conduct its own hearings and render its own opinions and
orders. Rulings are made by administrative law judges. These decisions are also a type of law.

Administrative Agencies
All administrative law is run through government agencies. Our government is made up of
numerous administrative agencies. These agencies are also sometimes called regulatory
agencies. Agencies can be federal, state, city, or county entities.
These agencies administer laws and manage public programs through the use of rules and
regulations. Each agency is responsible for administering a particular set of laws, or often, a
particular legislative act. A legislative act contains a set of laws. Agencies often possess the
power to grant licenses and permits, investigate complaints, and punish infractions, as well as
many other duties related to a particular set of laws.

For example, the National Do-Not-Call Registry was created by the Do-Not-Call Implementation
Act of 2003. It's enforced by the Federal Trade Commission (known as the FTC) and the Federal
Communications Commission (known as the FCC). These are both federal administrative
agencies. These agencies take complaints, investigate violations, and issue punishments related
to the Do-Not-Call Registry.
Most administrative agencies are created in order to protect a public interest, such as privacy,
civil rights, or disease prevention. For example, the Clean Air Act is a set of federal laws aimed
at preventing pollution. The Environmental Protection Agency (known as the EPA) is a federal
agency charged with administering the Clean Air Act. If I have a pollution complaint, I can
directly contact the EPA. The EPA can investigate, conduct hearings, and issue fines based on
what it discovers.
Federal agencies are created and empowered by the United States Congress. These agencies
mostly act as an arm of the executive branch of government, but some federal agencies are
independent.
State agencies are created and empowered by that state's legislature. For example, the Arkansas
State Bank Department was created by the Arkansas state legislature.
The Federal Administrative Procedure Act (FAPA) directs federal administrative agency law.
This act governs federal administrative agencies in proposing and establishing regulations. FAPA
also directs the process that allows federal courts to review agency decisions. States have their
own versions of the FAPA.

Further Examples
There are hundreds of federal administrative agencies, including the examples already
mentioned.
Another well-known example is the Equal Employment Opportunity Commission (EEOC). This
agency is responsible for enforcing federal laws that make it illegal to discriminate against a job
applicant or an employee. The EEOC investigates complaints of job discrimination based on
race, color, religion, sexual orientation, national origin, disability, and age.
Another example is the Consumer Product Safety Commission (CPSC). The CPSC was created
by the Consumer Product Safety Act of 1972. It's an independent agency that oversees the safety
of products sold in the United States.
The Federal Labor Relations Authority (FLRA) is another example of an independent federal
administrative agency. It was created by the Civil Service Reform Act of 1978. The FLRA
governs labor relations between the federal government and its employees.

Administrative Law Cases and Federal Courts

There are many famous Supreme Court cases involving administrative law. Administrative
agencies interpret laws and issue opinions. A federal court may then review those interpretations
and opinions, but for the most part, the court will defer to an agency's ruling.
Take, for example, the 1944 Supreme Court case of Skidmore v. Swift & Company. A group of
firefighters sued for violations of the Fair Labor Standards Act (FLSA). The firefighters were
employed by a packing plant and sued for back pay. They claimed that they should be paid for
the time they spent on call and at the plant. The administrative agency agreed that the firefighters
should be paid for time spent at the plant - except for time spent eating or sleeping. The Supreme
Court agreed, and found that agency interpretations of laws were entitled to 'respect,' as long as
the agency showed care and effort in the interpretation.
The 1984 Supreme Court case of Chevron U.S.A. Inc. v. Natural Resources Defense Council took
this rule even further. Congress passed a law that required any source of air pollution, such as oil
refineries or power plants, to secure a new EPA permit any time there was a new equipment
upgrade. The EPA interpreted the law and decided a plant could upgrade its pollution-emitting
equipment without obtaining a new permit for the entire plant, as long as the entire plant didn't
produce more pollution as a result of the upgrade. An environmental lobbying group, known as
the National Resources Defense Council, opposed the EPA's interpretation. Chevron supported
the interpretation.
The Supreme Court said that the EPA had the authority to interpret the law and decided that the
EPA's interpretation was reasonable. A new, broader rule resulted. If Congress leaves room for
agency interpretation, and the agency's interpretation is reasonable, then the Court will defer to
the agency's interpretation.

Lesson Summary
Let's review. Administrative laws are laws pertaining to administrative agencies. These laws
govern the formation and operation of administrative agencies. Administrative law is also
sometimes called regulatory law. This is a broad area of the law. There are two types of
administrative law. The first type includes rules and regulations. Rules and regulations are
policies that dictate how a law is to be used.
The second type of administrative law includes administrative decisions. Our federal
government consists of hundreds of administrative agencies. These agencies administer laws and
issue their own decisions regarding the application and enforcement of rules and regulations.
Federal courts can review these decisions, but courts will usually defer to agency decisions.

Lesson Outcome
After viewing this lesson, you should be able to:

Explain what administrative, or regulatory, law is

List and define the two types of administrative law

Provide examples of administrative agencies and understand their functions

Examine examples of Supreme Court cases involving administrative law

Rule of law takes on several meanings. On one hand, it means that no person or government is
above the law. In another, it means that no government or its officials can enforce laws that are
unfair or unjust.

Rule of Law Defined

Imagine you're walking down the street when suddenly the police come upon you, slap cuffs on
and haul you downtown for no apparent reason. To your horror, you are charged with not having
a specific destination! The police tell you that you are a vagrant and define this as a person who
moves from place to place without a specific destination or monetary means. You plead that you
were just taking a walk. Yet you find yourself in a world of trouble that seems to have no clear
path of escape.
Scary, huh? Well, to avoid incidents like this, the rule of law comes in pretty handy. It states that
no person, government official or government entity is above the law. It also states that no law
can be written that is either outside the law, violates a higher law or doesn't conform with
fairness.
Said a different way, laws and those who enforce them or are obligated by them must adhere to
their meaning in the most impartial way. Laws and statutes must be clear enough that a
reasonable person would be able to assess his own behavior to determine whether he is in
violation of law.
A very important case in Florida helped change the way courts look at laws that are either too
vague or do not conform to what is fair. In fact, the case went on to be the pivotal move toward
changing the face of vagrancy laws completely. Let's take a look at it.

Johnson v. State (1967)

In Johnson v. State, two men, one of whom was Harvey Johnson, were arrested for vagrancy. At
the time, vagrancy was considered a crime. To roam without a destination within Dade County,
Florida, was considered vagrancy. (The example before doesn't seem so hard to imagine now,
does it?)
Here are the facts of the case:

At approximately 4:30 AM, Harvey Johnson and a companion were sitting at a bus stop
in a mixed residential/business neighborhood of Miami.

The officers questioned both parties' whereabouts during the evening in question.

Both parties were able to recant that they had been at a movie theater and Harvey's
girlfriend's house.

When questioned about their next destination, neither party was able to give details, but
Harvey claimed to be waiting for a cab.

Police asked whether either party had sufficient funds; between both parties they were
able to produce around eighty cents.

Police arrested the parties for vagrancy.

And the statute reads like this:

|856.02 Vagrants. -- Rogues and vagabonds, idle or dissolute persons who go about begging,
common gamblers, persons who use juggling, or unlawful games or plays, common pipers and
fiddlers, common drunkards, common night walkers, thieves, pilferers, traders in stolen property,
lewd, wanton and lascivious persons, keepers of gambling places, common railers and brawlers,
persons who neglect their calling or employment, or are without reasonably continuous
employment or regular income and who have not sufficient property to sustain them, and
misspend what they earn without providing for themselves or the support of their families,
persons wandering or strolling around from place to place without any lawful purpose or object,
habitual loafers, idle and disorderly persons, persons neglecting all lawful business and
habitually spending their time by frequenting houses of ill fame, gaming houses or tippling
shops, persons able to work but habitually living upon the earnings of their wives or minor
children, and all able bodied male persons over the age of eighteen years who are without means
of support and remain in idleness, shall be deemed vagrants, and upon conviction shall be
subject to the penalty provided in 856.03.
In a nutshell, Florida Statute, 856.02 Vagrants, states that any person who is a habitual loafer,
with no means of support, or is idle amongst other things is considered a vagrant and therefore
subject to arrest.
The problem with this arrest was twofold:

The statute is vague.

There is a question of whether the statute violates a person's rights.

Let's break it down. Johnson and his companion committed no crime, per se. They were merely
sitting at a bus stop. It was not clear in the statute or even based on a reasonable person's
judgment that sitting at the bust stop was in violation of the law.

Furthermore, the question of due process also comes into play. According to the Fifth
Amendment, no citizen will be denied life, liberty and the pursuit of happiness without due
process, and this means, in part, laws must be written in a clear way so that any person being
charged with a crime understands the behaviors that led to the arrest.
In Johnson's case, the police never questioned whether he was employed or had means of
support. The question asked by police only referred to the sum of money he had with him at the
time of the questioning.
Furthermore, although Johnson was sitting on a bench in the middle of the night without a plan
for his destination, it's vague as to whether this set a pattern of idleness or wandering. It could be
that this was Johnson's first incidence of sitting on a bench in the middle of the night.
In the end, the appellate court judges determined that the language of the statute was vague and
difficult to apply based on the evidence and testimony of both the plaintiff and the officer.
You see, the rule of law in this case can be used to refute the charges. The statute as it related to
the evidence in the case was not on point. The statute was vague. A reasonable person would not
have known in advance that the behavior would be considered illegal. The fact of the matter is
that people walk around without cash or without a specific destination. But not all of them are
vagrants.

Summary
To recap, rule of law states that no person, government official or government entity is above the
law. It also states that no law can be written that is either outside the law, violates a higher law or
doesn't conform with fairness.
This means laws and those who enforce them or are obligated by them must adhere to their
meaning in the most impartial way. Laws and statutes must be also clear and on point, enough so
that a reasonable person would know that he or she is breaking the law.
The First Amendment of the Constitution states that all citizens are free to practice their
preferred religion, speak freely and to assemble. Learn how and why businesses are less
protected and are held to a higher scrutiny in this lesson.

1st Amendment Defined

The Constitution of the United States sets forth 27 Amendments that do two important things:
establishes limited power to the government and protects citizens' rights. Of the 27 Amendments,
the first 10 make up the Bill of Rights and include:

1st Amendment - Freedom of speech, religion and press

2nd Amendment - Right to bear arms for lawful purposes

3rd Amendment - Prohibits government from forcing citizens to house soldiers during
peaceful times

4th Amendment - Protection against unwanted search and seizure

5th Amendment - Protects against double jeopardy, self-incrimination and abuse by

courts

6th Amendment - Right to a fair and impartial jury and a right to an attorney

7th Amendment - Right to a trial by jury in civil cases

8th Amendment - Protection against cruel and unusual punishment and unreasonable bail

9th Amendment - Right to retain rights that are not enumerated in the Constitution

10th Amendment - Provides states with individual power where federal government
power does not exist

The First Amendment states all citizens have the freedom to religion, speech, press, to assemble
and petition the government. It applies to commerce as well as individual citizens. In this
instance, businesses have certain rights under this amendment but with much less government
protection.

Commercial Speech, Strict Scrutiny and More

Where private citizens have a right to freedom of speech, businesses fall under commercial
speech because it reaches a larger audience like customers. This includes advertisements which
are printed, online, or on television or radio. This mainly speaks to false advertising. However,
there are other circumstances where the government will step in, especially when there is a
substantial interest in doing so.
A good example of government interference occurred in Florida. The Supreme Court decided
that Florida lawyers were not permitted to solicit victims by mail or otherwise within the first
thirty days of an accident because it cast the profession in a negative light. While businesses are
permitted to solicit business through mail advertisements, this form of advertisement made
attorneys look like ambulance chasers and could be considered offensive to the victims and their
families.
False advertising is another example of a situation in which the government can interfere. This
means that businesses' rights are limited from full First Amendment protection. In other words, a
business cannot deliberately provide false or inaccurate information to customers and claim
freedom of speech as a defense. When Warner-Lambert, makers of Listerine mouthwash,
advertised that their product prevented colds, the government stepped in and forced the company

to cease and desist, or stop the advertisements. Not only that, the company was also forced to
change the ad to say that the product did not prevent colds.
Now, this is not to say that all advertising must be absolute truth; businesses are allowed to
exaggerate a bit. This is called puffery and is a very common practice in advertising. It is simply
an over-exaggeration of facts, like showing a dog actually asking for a bacon-flavored treat.
Everyone knows that dogs cannot talk or even recognize the flavor of bacon. So, saying dogs ask
for the treat by name is not false advertising; it's an exaggeration of a dog's reaction to a taste and
smell that attracts a canine's attention.
Some ads may even come with a disclaimer explaining that the results may be exaggerated or
unlikely. Think about some of the dangerous stunts performed by professional drivers used to sell
cars. In fine print, you may see something that reads, 'Closed road, professional driver,
performance not typical.' This protects the company from any allegations of false advertising.
The government also imposes content-neutral restrictions, also known as time, place and
manner restrictions, on businesses. These restrictions are imposed when government has an
interest in the communication being conveyed. Time restrictions regulate the time information
is being conveyed. While businesses can advertise or send information to actual or potential
customers, there are restrictions on the time the information can be sent. Place restrictions
regulate the place information can be placed to ensure that the viewing audience is ripe for the
type of information that is disseminated.
Some information meant to communicate a message comes in the form of symbols, images and
graphics. Thus, manner restrictions need to be in place so that the symbols or images in ads
remain appropriate for the audience. To tie this together, think about advertisements for products
intended for an adult audience, like those for the Victoria's Secret Fashion Show. The
infomercials show provocative, scantily-clad models wearing only undergarments. Its eyepopping content may not be suitable for a younger audience, so the show airs well after primetime television ends.
These measures are determined by government through the process of strict scrutiny, which
means that the government analyzed a policy and decided that their interference is necessary to
protect the citizens. In order to apply strict scrutiny to the First Amendment rights of businesses,
the government must deem that the interference is needed to protect the interests of others. Ads
for products like alcohol and cigarettes often fall under scrutiny as well.

Bad Frog Brewery v. NY State Liquor Authority

In an interesting case, Bad Frog Brewery sought to distribute their beer in the State of New York.
Because alcohol distribution is a highly regulated industry, there is an approval process. When
Bad Frog contacted the state through a distributor to sell their beer in liquor stores, they were
immediately denied the right to distribute. The reason for the government's interference had less
to do with the product and everything to do with the labeling.

You see, Bad Frog Brewery used an image of a frog with its middle finger pointed in the upright
direction. Coupled with the frog's image, the wording on the label exacerbated the situation.
Labeling included phrases like, 'He just don't care,' 'An amphibian with an attitude' and 'He's
mean, green and obscene,' and were considered offensive and in bad judgment. The latter phrase
was eliminated from the company's campaigns, but the former two remained.
Government weighed in on this form of labeling because it was believed that it was offensive
and can impact the morals of minors who come in contact with the product. After appeals, it was
finally determined that the labeling or the frog's image and symbolism were not enough to be
considered a strong influence on children when compared to the many images children are
already exposed to. Simply stated, the claims of inappropriateness did not pass the strict scrutiny
test. Bad Frog Brewery won the case and was able to distribute and sell their brand of beer in
New York State.

Lesson Summary
In sum, the First Amendment states that all citizens have the freedom to religion, speech, press,
to assemble and petition the government. The First Amendment applies to commerce as well as
individual citizens. Businesses have less protection under this amendment. Where citizens are
able to express themselves freely, business communication is considered commercial speech
because it reaches a wider audience and includes advertisements which are printed, online or
over the air.
Businesses cannot engage in false advertising, meaning a business cannot deliberately provide
false or inaccurate information to consumers. However, they are allowed to practice puffery, an
over-exaggeration of a product's performance or usefulness. Usually with puffery, businesses will
have to provide a disclaimer explaining that the results may be exaggerated or unlikely. This
protects them from making claims that are not true.
The government also imposes content-neutral restrictions on businesses. This means the
government can mandate that a business communicate information only at specific times, places
and in a certain manner. The government also has a right to impose restrictions if the restrictions
adhere to strict scrutiny and the government can prove that a policy is necessary to protect
citizens.
One of our rights according to the Bill of Rights and the U.S. Constitution is the
Fourth Amendment, and it protects citizens from illegal search and seizure of person
or property with proper warrants stating probable cause.
Fourth Amendment Rights

The Fourth Amendment is part of the Bill of Rights and the United States Constitution. This
amendment protects citizens from illegal search and seizure of person or property without a
warrant or probable cause. This simply means that the government cannot enter one's home,
search one's belongings or take any possessions without the proper procedures taken. You see,
citizens are afforded an expectation of privacy in their daily lives.

An expectation of privacy means a citizen expects privacy and the expected privacy is a
universal norm, like keeping the contents of your wallet or your dresser drawers to yourself. The
question of expected privacy comes into play when the very thing a citizen expects to be private
is actually public. Let's set the record straight here.
If a person is pulled over by the police and it is noticed that there is a bag of marijuana and a
handgun in plain view, there is no expectation of privacy. Because evidence is left in the open
for anyone to see, it's considered incriminating on face value and requires no warrant.
It works the same way with a stop and frisk. In this instance, the police are authorized to
administer a light pat-down of a suspect if there is reasonable suspicion, meaning they believe a
crime either took place, is taking place or is about to take place. The pat down can only be done
over outer garments. It cannot be invasive in any way or require a suspect to remove any article
of clothing.
Let's get back to the example of the motor vehicle stop. If the marijuana and handgun are hidden
under the car seat and there is no justifiable reason to search the car, a search cannot be done.
The driver of the car, albeit carrying on illegal activities, is owed privacy.
This is where probable cause comes into play. This means that the facts are apparent and
obvious to a reasonable person, and if those facts are apparent, a search may be conducted. An
example of an apparent fact might be marijuana smoke floating around the inside of the car. It
doesn't even need to be that obvious. The mere smell of marijuana or even a box of ammunition
may be enough to prompt police to have a look-see.
Once probable cause has been determined, a warrant is issued. This is simply a writ ordering or
allowing the police to take action by searching or seizing persons or property. This can be in the
form of an arrest warrant, a document from a judge that states, upon probable cause, a person
can be taken into custody. In other words, this means a person can be taken to jail!
A search warrant allows the police or investigators to search for a specific location for
evidence. Without this, police cannot initiate a search of property. A case may help to explain
this.
Kyllo v. U.S.

Kyllo v. U.S. demonstrates how the government violated the Fourth Amendment right against
illegal search and seizure. The big question here is whether using surveillance used outside the
home is considered unreasonable.
Let's break this down. The police suspected Kyllo's home was a marijuana grow-house. In order
to obtain enough evidence to produce an arrest, the police would need proof that there was
marijuana growing within the home.

Sometime in 1992, a National Guardsman pointed an infrared device at Kyllo's home. He also
pointed it at the adjoining homes on either side. The device detected a higher rate of heat coming
from Kyllo's home. This, along with other evidence like unusually high electric bills, gave way
to the belief that there was marijuana growing in the home. This lead to probable cause and a
warrant was issued to search the home. As suspected, marijuana was found, and Kyllo was
arrested, tried and convicted.
During the appeal, Kyllo defended himself using the Fourth Amendment right against illegal
search and seizure, contending that the infrared device used to detect the possible marijuana
plants was performed illegally. You see, normally, this type of technology is used by companies
to detect heat loss from windows and doors or to test the insulation effectiveness in a home. It is
not intended to be used as a surveillance tool.
The appellate court granted an appeal because there was sufficient evidence that Kyllo's Fourth
Amendment rights had been violated. On appeal, Kyllo asked that the evidence collected during
the illegal search be removed from the record, and he only be tried on evidence that was not in
violation.
Unfortunately, the appellate court did not see it Kyllo's way, and the original trial court's decision
stood. However, the important lesson in this case remains that the Fourth Amendment protects
citizens from illegal search and seizure of person and property. Surveillance from outside the
home used to determine if evidence remains inside the house is illegal and is considered
unreasonable in the eyes of the court.
Lesson Summary

To sum things up, the Fourth Amendment protects citizens from illegal search and seizure of
property and person without a warrant or probable cause. Citizens are afforded an expectation of
privacy, and this means a citizen expects privacy and the expected privacy is a universal norm.
If evidence is in plain view, or where a reasonable person can see it, there is no longer an
expectation of privacy. This may warrant a stop and frisk, where the police may pat a person
down over the outer layer of clothing. If nothing is in plain view, the police need probable cause
to request a search. This means facts are apparent and obvious to a reasonable person.
Once police determine there is probable cause, they may request a warrant, or a writ ordering or
allowing the police to take action. It can be an arrest warrant, or a document from a judge that
states, upon probable cause, a person can be taken into custody. A search warrant allows police
or investigators to search for a specific location for evidence.
Finally, it's important to note that as technology advances, the Fourth Amendment protection
against unjustified search and seizure gets more complicated, and the courts must look at many
factors to determine whether a violation occurred.

There are only two amendments that stand for the same rights: the 5th Amendment and 14th
Amendment. In this lesson, we will learn how both amendments speak to the rights of life,
liberty and property with government protection and due process.

Due Process
Due process simply means all legal proceedings will be fair. The government cannot interfere
with a citizen's right to life, liberty or property as guaranteed in the 5th and the 14th
Amendments. It also means every citizen has a right to adequate warning of legal proceedings
and a right to a speedy trial or to be heard before a court. There are two types of due process:

Procedural due process

Substantive due process

Procedural due process states that any proceedings brought on against a citizen must be in
accordance with the rules of law. In other words, governing bodies must follow the procedures in
place to bring about any type of legal action. In procedural due process, the government cannot
act in violation of a citizen's right to life, liberty or property. In short, this type of due process
ensures fairness.
Perhaps a case will help clear things up. Goldberg v. Kelly (1970) is a landmark appeal court case
that demonstrates how procedural due process works as it relates to the violation of one of the
three key rights extended under the 5th and the 14th Amendments. Kelly, along with other New
York City welfare recipients, sued Goldberg, head of the welfare payment department, for
violating procedural due process when their benefits were cut without warning. On appeal, the
court ruled that welfare benefits were a property right and required a hearing prior to the
termination of aid.
Substantive due process, on the other hand, deals with the government's right to protect
citizens' fundamental rights to life, liberty or property. Roe v. Wade (1973) explains substantive
due process clearly. In this historic case, Roe, an unmarried Texas woman, wanted to abort her
unborn child. Under Texas law, abortion was a felony unless the abortion was a medical
necessity and only in cases where the mother's life was in jeopardy.
Roe sued Wade, then district attorney, claiming that the law was in violation of her 14th
Amendment right to liberty. In other words, Roe believed that she had a right to abort her child.
Roe prevailed and the Supreme Court reversed any state law that prohibited abortion in early
pregnancy.
While substantive and procedural due process sound quite similar, think of it in this way:
procedural due process deals with the way things are done, like protecting citizens from having
benefits they are entitled to terminated without notice. Substantive due process, on the other
hand, applies to the basic rights of citizens under the Amendments, like prohibiting government
involvement in a woman's right to choose abortion.

The 5th and 14th Amendments

Unlike other amendments, the 5th and the 14th Amendments contain very similar language as it
relates to a citizen's right to due process. However, there are differences. Let's take a look at each
amendment separately. The 5th Amendment guarantees:

No citizen can be forced to answer to a crime without formal charges.

No citizen can be charged with the same crime twice.

No citizen can be forced to self-incriminate.

No citizen can be deprived of life, liberty or the pursuit of happiness without due process.

No citizen shall have his private property taken for public use.

Basically, if a person was to commit a crime, he must be formally charged and has a right to
answer to the charges. Once convicted of a crime, one cannot be re-tried for the crime. During
the process of arrest or trial, no citizen can be forced to testify against himself. Due process is
mandatory and must be extended to all people.
For example, the police cannot imprison a person without formal charges, an indictment or a
conviction. The indictment or conviction is the due process. Lastly, the government cannot take a
person's possessions at will and for no reason without paying him back.
The 14th Amendment guarantees:

Any person born in the United States has a right to citizenship.

No citizen can be deprived of life, liberty and property without due process.

All citizens are guaranteed equal protection.

The 14th Amendment is similar in that it too has a due process clause. Just like in the 5th
Amendment, due process means that no person can be held against their own will, be stripped of
their rights to enjoy life and possessions or be discriminated against.

Lesson Summary
In sum, due process simply means all legal proceedings will be fair. For that, every citizen has a
right to adequate warning of legal proceedings and a right to a speedy trial or to be heard before
a court, and there are two ways this happens. Procedural due process states that any
proceedings brought against a citizen must be in accordance with the rules of law. Substantive
due process, on the other hand, deals with the government's right to protect citizens' fundamental

rights to life, liberty or property. The 5th and 14th Amendments both contain a due process
clause. The 5th Amendment guarantees:

No citizen can be forced to answer to a crime without formal charges.

No citizen can be charged with the same crime twice.

No citizen can be forced to self-incriminate.

No citizen can be deprived of life, liberty or the pursuit of happiness without due process.

No citizen shall have his private property taken for public use.

The 14th Amendment guarantees:

Any person born in the United States has a right to citizenship.

No citizen can be deprived of life, liberty and property without due process.

All citizens are guaranteed equal protection.

Both amendments guarantee a citizen the right to life, liberty and property.
Both the 5th Amendment and the 14th Amendment of the US Constitution provide
all citizens with equal protection of their right to life, liberty and property. The main
difference being the 5th Amendment provides it under the Due Process clause.
5th Amendment and Equal Protection

The 5th Amendment of the United States Constitution states:

'No person shall be held to answer for a capital, or otherwise infamous crime, unless on a
presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or
in the militia, when in actual service in time of war or public danger; nor shall any person be
subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in
any criminal case to be a witness against himself, nor be deprived of life, liberty, or property,
without due process of law; nor shall private property be taken for public use, without just
compensation'.
What this means, in short, is that no person can be detained in jail for a felony crime (unless
directed by a grand jury), tried for the same crime twice or forced to testify against oneself.
Equal protection comes into play where the amendment states that no person can be deprived of
life, liberty, or property without due process. Due process is an assurance that all legal
proceedings will be fair and reasonable.

We know that a person cannot be taken away to jail without warning. That would interfere with
one's right to liberty. So, to be sure that no procedural error occurs, Miranda rights are generally
read.
These are rights read to a person when they are placed under arrest that inform the arrestee that
he has a right to remain silent, anything said may be used against him and provides for a right to
an attorney. Miranda rights mostly protect against self-incrimination, but it is a procedure that
protects a person's right to liberty or freedom. It serves as an equal protection clause.
14th Amendment and Equal Protection

The 14th Amendment also affords equal protection. Under the 14th Amendment, 'all persons
born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the
United States and of the state wherein they reside. No state shall make or enforce any law which
shall abridge the privileges or immunities of citizens of the United States; nor shall any state
deprive any person of life, liberty, or property, without due process of law; nor deny to any
person within its jurisdiction the equal protection of the laws'.
This amendment is worded similarly to the 5th Amendment and offers generally the same
protection. The real difference is the procedure for due process.
It's pretty simple. Due process in the 5th Amendment happens by a court. In the 14th
Amendment, it is a given right to limit the power of the government to interfere with people's
affairs, like freedom of speech or property ownership, unless their actions are illegal.
So, to contrast the two, the 5th Amendment protects the rights of someone who is suspected of a
crime and the 14th Amendment protects a citizen from unreasonable control by the government.
Discriminatory laws protect all citizens against discrimination and grants that all citizens will
be treated equal.
Because there are laws that forbid discrimination, the government will be subject to strict
scrutiny if they act in discriminatory ways against a suspect classification or a group of people
that are classified by certain characteristics, like race or religion. This means that any
government entity that falls under strict scrutiny will answer to the charges before a review board
to determine whether constitutional rights have been violated.
Sometimes the discriminatory actions are taken against those that do not fall under suspect
classification. Discrimination against these quasi-suspects is subject to the same review. The
rational basis test is a review that determines whether the government had a legitimate right to
make a law that may seem to violate a constitutional right.
Perhaps an example will help. We learned that the 14th Amendment provides citizens with the
right to liberty. So, we can define liberty as the freedom to do the things we like to do.

Suppose one of the things a person likes to do is perform surgery on others. Here is where
government power must take control. You see, even though an ordinary person may want to take
a scalpel to another person, the law says that the person must have completed medical school and
pass a licensing test.
Therefore, the right to liberty can be tested on the basis of rationale. And in the case of the cuthappy citizen, the freedom to perform surgery without proper training and licensing must be
taken away.
Lesson Summary

In sum, the 5th Amendment states that no person can be detained in jail for a felony crime
unless directed by a grand jury, tried for the same crime twice or forced to testify against oneself.
Due process is simply an assurance that all legal proceedings will be fair and reasonable.
The 14th Amendment offers pretty much the same rights with the only difference being that the
5th Amendment protects the rights of someone who is suspected of a crime, while the 14th
Amendment protects a citizen from unreasonable control by the government.
The 14th Amendment also applies to discriminatory laws that protect all citizens against
discrimination and grants that all citizens will be treated equal. The discrimination can be a
suspect classification based on race or religion or a quasi-suspect classification, like women or
illegitimates.
When a person believes their rights have been violated, the courts will scrutinize the claim for
validity.
In cases where there is a violation of one's 14th Amendment rights, the courts will apply a
rational basis test to determine whether there was justification to rescind a particular right.
The purpose of the Ninth Amendment is to protect the citizens' rights that aren't necessarily
mentioned elsewhere in the Constitution, like the right to privacy or the right to marry. It also
prevents the violation of those rights by the government.

Ninth Amendment of the Constitution

As a starting point, the Constitution of the United States is made up of 27 amendments that set
forth the rights of citizens and the role of government. Of that, the first 10 amendments make up
the Bill of Rights.
The Bill of Rights sets forth the rights of every citizen of the United States and the limitations on
government to violate those rights. For example, the Second Amendment states that all citizens
have a right to bear arms or own guns. Government cannot set limitations on this right if the gun

was purchased legally, the owner applied and was extended a license and the gun is stored and/or
carried according to the laws of the state.
Let's look at the Bill of Rights in a nutshell:

First Amendment - Freedom of speech, religion and press

Second Amendment - Right to bear arms for lawful purposes

Third Amendment - Prohibits government from forcing citizens to house soldiers during
peaceful times

Fourth Amendment - Protection against unwanted search and seizure

Fifth Amendment - Protection against double jeopardy, self-incrimination and abuse by

courts

Sixth Amendment - Right to a fair and impartial jury and right to an attorney

Seventh Amendment - Right to a trial by jury in civil cases

Eighth Amendment - Protection against cruel and unusual punishment and unreasonable
bail

Ninth Amendment - Right to retain rights that are not enumerated in the Constitution

Tenth Amendment - Provides states with individual power where federal government
power does not exist

If we take a closer look at the Bill of Rights, it becomes obvious that the first eight amendments
are specific. Whether it is a right to bear arms or a right to a fair trial, the language is specific.
The Ninth Amendment of the Constitution differs from other rights in that it does not
specifically express rights of the people. Rather, it guarantees that rights that are not specifically
written in the Constitution may be retained by the people, like the right to marry or the right to
choose one's own career. Think of the Ninth Amendment as a security blanket that provides
citizens rights not specifically listed elsewhere and that cannot be violated by the government.
Perhaps a case analysis will help.

Griswold v. Connecticut (1965)

In a law that dated back to 1879, the state of Connecticut criminalized the use of contraceptives
to avoid pregnancy amongst married women. In fact, it was considered a criminal act if a doctor
even suggested that a married woman use a medical treatment to avoid conception.

Sometime around 1965, Estelle Griswold, director of Planned Parenthood, along with Dr.
Buxton, who also worked for Planned Parenthood, were arrested and convicted for providing
counseling and contraceptives to a married woman. Both were fined for the offense.
Unaccepting of the conviction, the parties appealed to the Supreme Court to review the decision
based on what was believed to be a violation of their Ninth Amendment right. To refresh, the
Ninth Amendment guarantees rights not listed within the Constitution. In the case of Griswold v.
Connecticut, the parties argued that there is an unenumerated right to privacy between husband
and wife as well as between doctor and patient.
This case demonstrates that even though there is no specific amendment within the Bill of Rights
or the Constitution that speaks directly to the right to privacy within marriage, the Ninth
Amendment provides rights to citizens and limitations on government power.

Lesson Summary
In summary, the Constitution of the United States is made up of 27 amendments that set forth
the rights of citizens and the role of government. The first 10 amendments make up the Bill of
Rights, which sets forth the rights of every citizen of the United States and the limitation on
government to violate those rights, like the right to own a gun.
The first eight amendments are specific. However, the Ninth Amendment differs from other
rights in that it does not express specific rights of the people. Rather, it guarantees that rights that
are not specifically written in the Constitution may be retained by the people. Think of the Ninth
Amendment as a security blanket that provides citizens other rights not listed but cannot be
violated.
The simple difference between public and private law is in those that each affects. Public law
affects society as a whole, while private law affects individuals, families, businesses and small
groups.

Public Law vs. Private Law

If you saw a man run from a convenience store with a few pilfered products under his arm, he is
violating public law. He committed the crime of theft, and that affects everyone.
On the other hand, if your neighbor filed suit against you because your barbeque smoke traveled
to his yard, you may be violating private law. You infringed on your neighbor's right to peaceful
enjoyment of his property.
Essentially, the difference between public law and private law is whether the act or acts affect
society as a whole or is an issue between two or more people.

Public Law Explained

To simplify things, public law deals with issues that affect the general public or state - society as
a whole. Some of the laws that its wide scope covers are:

Administrative law - laws that govern government agencies, like the Department of
Education and the Equal Employment Opportunity Commission

Constitutional laws are laws that protect citizens' rights as afforded in the Constitution

Criminal laws are laws that relate to crime

Municipal laws are ordinances, regulations and by-laws that govern a city or town

International laws are laws that oversee relations between nations

Let's use Brown v. Board of Education, 347 U.S. 483 (1954) to better understand public law as it
relates to an administrative agency.
In Brown v. Board of Education, Linda Brown, the plaintiff (brought about by her father, Oliver),
contended that his daughter was not being protected under the Constitution. Since Brown was
suing the Board of Education, this falls under constitutional law, but an administrative agency
was sued for the violation.
Linda had to walk several blocks to the school bus stop even though a closer whites-only school
existed within a few blocks from her home. Brown's parents believed that Linda's 14th
Amendment rights were violated when she was banned from a white school closer to home
because of her race.
The case was won because the U.S. Supreme Court declared segregation a violation of Brown's
constitutional rights. This falls under public law because issues of segregation and discrimination
affect society as a whole, not just this particular child.
Private law is different. Private law help citizens resolve issues between themselves.

Private Law Explained

Private law affects the rights and obligations of individuals, families, businesses and small
groups and exists to assist citizens in disputes that involve private matters. Its scope is more
specific than public law and covers:

Contract law - governs the rights and obligations of those entering into contracts

Tort law - rights, obligations and remedies provided to someone who has been wronged
by another individual

Property law - governs forms of property ownership, transfer and tenant issues

Succession law - governs the transfer of an estate between parties

Family law - governs family-related and domestic-related issues

In the case of Carvajal v. Hillstone Restaurant Group, Inc. (No. 10-57757), Carvajal ordered and
consumed a grilled artichoke at a local Houston restaurant. It was his first time consuming this
vegetable. Unaware of the proper way to scrape the flesh against ones teeth, he chewed and
swallowed the entire artichoke including all the leaves.
Hours later, he experienced severe gastrointestinal pain and required emergency medical
attention. He sought compensation from Hillstone Restaurant Group, Inc. in the amount of
$15,000 for his pain and suffering.
Carvajal contended that he was not instructed by the server on how to eat an artichoke.
Therefore, the restaurant was negligent in serving a dish that was potentially dangerous to a
novice diner.
This is an example of tort law, or laws that deal with the wrongdoings between private citizens
that usually end in monetary settlement but never jail time.
The tort here involved Carvajal suing the restaurant for a wrong he felt was levied against him by
serving him a dish that he did not know how to eat. He wanted compensation for the agony he
suffered.

Lesson Summary
The main difference between public and private law is in the parties that each affects.
Public law affects society as a whole and includes administrative law, constitutional law,
criminal law, municipal law and international law. In the landmark case of Brown v. Board of
Education, it clearly demonstrates the way public law works. In Brown v. Board of Education, a
small child's rights were violated by an administrative agency. The family brought suit upon the
agency and won.
Private law, on the other hand, affects individuals, families, businesses and small groups. Its
scope is not as wide as public law and includes contract law, tort law, property law, succession
law and family law. In Carvajal v. Hillstone Restaurant Group, Inc., we learned that the plaintiff,
Carvajal, was harmed as a result of eating a whole artichoke. He claims the server did not inform
or instruct him on the proper way to consume the vegetable. Carvajal became ill as a result and
sought compensation for his pain and suffering as a matter of tort law.
The main difference between public and private law boils down to whether the issue affects all of
society or just a few people.

Lesson Outcome

After you have seen the video lesson, you should be able to:

Recognize the differences between public and private law

List different types of laws and determine whether they fall under public or private law

Provide examples of public and private law cases

There are two main classifications of law. Criminal laws regulate crimes, or
wrongs committed against the government. Civil laws regulate disputes
between private parties. This lesson explains the main differences between
criminal and civil law.

Criminal Law vs. Civil Law

Are you familiar with the O.J. Simpson case? O.J. was prosecuted for two counts of
murder after the stabbing deaths of his ex-wife and her friend. That was a criminal case,
meaning the case involved the government's prosecution of a crime. O.J. was famously
acquitted of the murders. That means he was found not guilty.

But that was not the end of the story! The victims' families then sued O.J. in a wrongful
death lawsuit. That was a civil case, meaning the case involved a legal dispute between
private parties. O.J. was held civilly liable, meaning he was found to be legally
responsible for the damage done to the other party. As a result, O.J. was ultimately
ordered to pay over $30 million to the victims' families.

How can there be two cases for the same crime? Criminal and civil law are not mutually
exclusive; both can be used for a single event. Although these two cases involved the
same act and the same parties, the cases were handled very differently and had
contrasting results.

Let's take a closer look at the differences between the criminal law and the civil law.

Cause of Action

Let's start by examining the two different causes of action. A cause of action is the legal
basis, or claim, allowing one party to seek a court judgment against another.

O.J.'s first case was based on criminal law, which refers to a set of rules and regulations
describing behaviors prohibited by the government. If you commit one of the behaviors,
you risk prosecution. A prosecution is simply a legal cause of action in which someone is
charged with a crime. Generally speaking, crimes are wrongs for which the government
prescribes a legal punishment. We'll talk more about punishment in a little bit. Some
well-known crimes, besides murder, include robbery, burglary, assault, and arson.

O.J.'s second case was based on civil law. When someone refers to a lawsuit, that person
is talking about civil law. This type of law deals with private rights and remedies by
governing disputes between individuals, groups, and organizations.

Some well-known civil claims include contract disputes, personal injury claims, property
disputes, civil rights violations, and class action matters.

Parties

Criminal and civil cases have different parties. The parties are the people, or entities,
involved in the court case.

O.J.'s criminal case is entitled People of the State of California v. Orenthal James
Simpson. California is a party and initiated the prosecution. Note that the government
prosecutes crimes. The crime victim is not a party to the criminal case because crimes are
considered to be wrongs committed against society as a whole. For example, murder puts
the community in fear and undermines public confidence. It's therefore in society's best
interest to prevent violence and punish wrongdoers in order to promote overall peace.

The person charged with the crime is known as the defendant. In a civil case, the person
being sued is also known as the defendant. But that's where the similarities end. The party
initiating a civil case is known as the plaintiff. O.J.'s civil case is entitled Fredric
Goldman and Kimberly Erin Goldman v. Orenthal James Simpson. The Goldmans are the
plaintiffs.

Burden of Proof

Criminal and civil cases also differ in the burden of proof. A burden of proof is the
minimum duty the initiating party must meet in proving his or her case. It's the obligation
to substantiate the case.

In a criminal case, the prosecution's burden of proof is beyond a reasonable doubt. In

order to secure a guilty verdict for the defendant, the government must prove its case to
the judge or jury beyond a reasonable doubt. This generally means a real doubt, based
upon reason and common sense, after careful and impartial consideration of all the
evidence. Though this does not mean 'beyond a shadow of a doubt,' it is meant to be the
highest burden of proof in the U.S. legal system.

The civil law burden of proof for a plaintiff is much lower. It's a preponderance of the
evidence, which means more than 50% of the evidence supports that party's legal
assertion. So, the Goldmans simply had to show that it was more likely than not that O.J.
wrongfully caused the death of their family member.

Remedy

Lastly, let's take a look at the differing legal remedies. A legal remedy refers to the result
of the court case, summed up through a legal declaration.

In criminal cases, the remedy comes in the form of a prescribed penalty. For example,
California has a law dictating the penalty for capital murder. Had O.J. been convicted,
meaning found guilty of the crime, then he would have been sentenced to either life in
prison without the possibility of parole or the death penalty. If a defendant is convicted of
a crime, that defendant is given a punishment. Criminal punishments usually range from
a small fine to long periods of incarceration, depending on the severity of the crime and
the defendant's background.

In civil cases, the remedy comes through the enforcement or satisfaction of some legal
right. Rather than being 'convicted' and punished, the defendant is found 'liable' and
ordered to comply with a judgment. Often, as in the Goldman case, the harm is 'satisfied'
through a judgment for damages. This is money awarded to compensate for a loss or
injury. However, civil remedies include other things, such as orders to stop doing an act
and orders to give an item back to its rightful owner.

Lesson Summary

Let's review. There are many differences between criminal law and civil law.

Criminal law involves the government's prosecution of a defendant, who is accused of a

crime. The government must prove its case beyond a reasonable doubt, meaning a real
doubt, based upon reason and common sense, after careful and impartial consideration of
all the evidence. If the defendant is convicted, or found guilty, he or she will receive a
punishment.

Civil law involves a plaintiff's lawsuit against a defendant. This type of law deals with
private rights and remedies by governing disputes between individuals, groups, and
organizations. The plaintiff must prove his or her lawsuit by a preponderance of the
evidence, which means more than 50% of the evidence supports that party's legal
assertion. If the defendant is found liable, the plaintiff will likely receive a judgment for
damages, which is money awarded to compensate for a loss or injury.

Substantive law and procedural law work together to ensure that in a criminal or civil case, the
appropriate laws are applied and the proper procedures are followed to bring a case to trial. In
this lesson, we'll discuss the differences between the two and how they relate to the legal system
as a whole.

Substantive Law Explained

Substantive law consists of written statutory rules passed by legislature that govern how people
behave. These rules, or laws, define crimes and set forth punishment. They also define our rights

and responsibilities as citizens. There are elements of substantive law in both criminal and civil
law.
Civil law differs from criminal law in that it applies to interactions between citizens. Rather than
dealing with crime, civil law deals with tort, or actions that aren't necessarily illegal but can be
proven to be damaging in some way. For example, if you sue a neighbor for cutting down a tree
and letting it land on your house, that would be a civil case dealing with tort rather than a
criminal case dealing with crime.
Substantive law is used to determine whether a crime or tort has been committed, define what
charges may apply and decide whether the evidence supports the charges. Let's say a person is
caught drunk driving. Substantive law says that it is a crime punishable by a term in prison.
The substance of charges, or elements of a crime or tort, must be carefully evaluated to
determine whether a crime or tort really exists. In other words, specific facts need to be proven
true in order to convict somebody of a crime or a tort.
In the case of a person caught driving while intoxicated, a few things would have to be proven:

The person was driving the vehicle

The person acted in ways that gave the police a reason to believe he or she was
intoxicated

The person was over the legal limit per a field sobriety and/or Breathalyzer test

Once these things are proven, the person can be taken into custody. Next, procedural law will
determine the steps the case must take.

Procedural Law Explained

Procedural law governs the mechanics of how a legal case flows, including steps to process a
case. Procedural law adheres to due process, which is a right granted to U.S. citizens by the 14th
Amendment.
Due process refers to the legal rights owed to a person in criminal and civil actions. It is one of
our 14th Amendment rights and guarantees the right to life, liberty and the pursuit of happiness.
In the case of an arrest, the 14th Amendment applies to the degree that one can be charged with a
crime but still has rights to a speedy, fair and impartial trial. Charges must be filed with the court
within a specific time frame. The exact amount of time varies by jurisdiction, but 72 hours is
usually the maximum time a citizen can be held without being formally charged with a crime. In
some places, though, the maximum is 48 hours.

For example, in our drunk driving case, substantive law proved that the person was drunk while
driving a vehicle. The police were within their rights to make the arrest, but due process requires
that the person must be aware of all charges within 72 hours of his or her arrest.

Procedural Law Process

While substantive law maps out the charges, procedural law is the process a case will move
through from arrest to conviction. This is a hypothetical set of procedural steps a case could
move through:

Arrest is made based on probable cause (a reasonable amount of suspicion)

The prosecutor files charges with the court

Legal counsel is appointed for or hired by the arrestee

Bond, which is an amount of money set by a judge that allows the arrestee to leave jail, is
set. Bond also ensures that the arrestee will return for all court dates

Notice to appear in court is generated and served

A plea or an answer to the charges is made or a trial begins. Possible options for pleas
include guilty, not guilty and no contest.

A no contest plea means the arrestee is pleading neither guilty nor not guilty to the crime. The
courts like to look at a no contest plea as a guilty plea with wiggle room to plead to lesser
charges. When a no contest plea is made, it generally means the arrestee is willing to enter into a
plea bargain.
A plea bargain means an arrestee is willing to do something in exchange for lesser charges
rather than plead guilty to the original charges. Plea bargains can include something like pleading
guilty to a lesser charge in exchange for testifying against an accomplice. If a plea of not guilty is
entered, the arrestee will then go to trial, becoming a defendant in a criminal case.

Lesson Summary
In summary, substantive law is based on statutory or written laws passed by legislature.
Procedural law sets the steps in place through due process.
Due process refers to the legal rights owed to a person in criminal and civil actions and is
supported by the 14th Amendment's right to life, liberty and the pursuit of happiness. Formal
charges must be made in a specific time frame, typically within 48 or 72 hours of an arrest.

Procedural process involves an arrest and prosecution for the charges. The arrestee has the right
to legal counsel either appointed by the court or private counsel. A judge sets bond.
The arrestee may post bond and will be given a notice to appear for future court dates. Upon
appearing for the first court date, the arrestee will enter a plea of guilty, not guilty or no contest.

Learning Outcomes
Once you have watched this lesson, you should be prepared to:

Differentiate between substantive and procedural law as well as between civil and
criminal law

Define substance of charges, due process, no contest plea and plea bargain

Summarize the procedural process

There are three separate levels of courts in our legal system, each serving a different function.
Trial courts settle disputes as the first court of instance, appellate courts review cases moved up
from trial courts and supreme courts hear cases of national importance or those appealed in the
court of appeals.

Three Levels of Courts

Have you ever had a beef with another person and wanted to settle the mess in court? Deciding
on the court is simple. Trial courts settle cases between two parties seeking remedy for the very
first time. Appellate courts oversee cases where one of the parties does not like the trial court
outcome. And supreme courts reside over the highest level of case or those cases appealed in
appellate court.

Trial Court Function

When something happens, whether it is a criminal action or a civil disagreement between
neighbors, the case is taken to the trial court. The trial court is the initial court a case moves
through based on jurisdiction. You've likely heard the term jurisdiction before. In the court
system, jurisdiction is the power that a court holds to oversee a trial or other legal orders. It can
be based on several things:

Jurisdiction over the person involved in the civil or criminal activity

Jurisdiction over the subject matter

Jurisdiction to render a particular judgment sought (limits over court power; e.g., small
claims court can hear cases under a certain dollar value)

Trial courts oversee two types of legal actions: criminal actions and civil actions. Criminal
actions are trials in which a person is found either innocent or guilty of a crime. Criminal trials
generally unfold like this:

An arrest is made.

The arrested party makes an initial appearance where the party learns the charges.

A preliminary hearing is set, and the judge will listen to any testimony from witnesses to
determine whether there is actually a case.

An arraignment is held where the arrested person enters a plea of guilty or not guilty.

The arrested person stands trial before a judge and jury where both the state and the
defendant present evidence and a judgment is made.

If either party is not satisfied, an appeal can be filed with a higher court to review the
existing evidence.

Civil actions are trials brought on by one party (the plaintiff) suing another party (the
defendant). Civil trials work a little differently. When a plaintiff brings about a civil lawsuit, the
process is as follows:

The plaintiff initiates a complaint with the court for the wrongdoing.

Complaint is delivered to the defendant; the defendant has a certain period of time to
respond or the case is forfeited to the benefit of the plaintiff.

Plaintiff and defendant (generally through their attorneys) exchange facts about the case.
This is called discovery.

A trial is presented to a judge.

The judge or jury makes a decision based on the facts of the case.

Either party may file an appeal.

Although criminal and civil trials differ in the way they are presented to a jury or judge, both
have the right to an appeal, or a review of the evidence, of the outcome of the lower court.

Appellate Court Function

The appellate court reviews evidence and outcomes of cases that have been settled in a lower
court when one party was not satisfied with the decision. Once a case is brought to appellate

court, the plaintiff is named appellant and the defendant appellee. When a party brings their case
to appellate court, the evidence is presented in a much different way. Unlike lower courts, there
is no trial. It is a review of the evidence and the outcome.
A panel of three judges conducts the appellate review. The judges review all documents and
transcripts from the original trial. The main function of the panel is to determine whether a lower
court followed the correct law when originally deciding on the case.
The judges' ruling can be:

To affirm or agree with the lower court

To rescind or go against lower court judgment

To remand or move the case back to lower court for a new trial or other action

The decision is based on a two out of three majority vote by the panel of judges. If either party is
not satisfied with the decision of the panel, the case may move to the highest court, the Supreme
Court.

Supreme Court Function

The Supreme Court is the highest court in a state or in the United States and generally only
deals with matters of state or national importance or appeals from appellate court. This court will
take cases from appellate court only if there was an issue with the interpretation of the law or
constitutional rights. It is the last step in the appeals process.
Supreme Court cases work similarly to the appeals court process with a few differences:

A request or writ of certiorari is presented to the Supreme Court

The panel of justices takes a vote on whether the case will be heard

The documents from lower court are reviewed

Both parties present arguments

The justices vote on their positions

A decision is presented

Once a decision has been made, there is no appeals process if either party is not satisfied with
that decision.

Lesson Summary
There are three separate levels court systems in our legal system. Trial courts settle disputes as
the first court of instance based on jurisdiction. Jurisdiction can be based on the person, the
subject matter or to render a particular judgment. There are two types of trial courts: a criminal
court and a civil court. Criminal court tries cases involving persons accused of a crime, while
civil court oversees cases between two parties that result from a wrongdoing.
If either party is not satisfied with the outcome of the judgment, their cases may be filed in
appellate court. The appellate court hears cases when parties do not agree. A panel of judges
decides whether a case is affirmed and no further action is taken; rescinded, meaning the lower
court judgment is wrong; or remanded back to the lower court for re-trial or other action.
The Supreme Court reviews cases moved up from appellate courts when either party contends
that a lower court has violated their constitutional rights or the law was not properly applied. A
panel of justices reviews the case documents, listens to testimony and votes on a decision. There
is no higher court to appeal the decision.

Lesson Outcome
Upon finishing the video, a student should be able to:

Understand the different functions and processes of the three levels of court in our legal
system

Define jurisdiction

Describe the differences in the processes for criminal and civil trials

The federal court system has three main levels: U.S. District Court, U.S. Circuit Court of
Appeals and the U.S. Supreme Court. Each level of court serves a different legal function for
both civil and criminal cases.

Historical Overview
Let's take an historical journey back in time to learn how the federal court system began. Many
years ago, state courts heard legal matters of its citizens. Jurisdiction was defined geographically.
The U.S. Supreme Court heard cases of national attention, and that was only after one of the
parties involved in a case felt that their rights had been violated as a matter of law in the state
court. In other words, the Supreme Court was considered an appellate court.
As time went on and a young country began to develop and expand, cases involving matters
outside of states (and even between states) required a more impartial system of trying a case.

In 1789, a new congress assembled to debate the need for a separate court - a higher court, whose
purpose would be to try cases that test constitutional rights. Up for debate was Senate Bill 1
(1789) that posed the question: Should federal claims be first tried in state court? The answer
was: yes and no.
Opinions argued by some believed that federal law should be arbitrated in state court first and
only move to Supreme Court in cases of appeal. Others argued, out of fear, that litigants from out
of state (or even the nation) would not receive a fair trial, and therefore they wanted to create a
lower federal court. Two lower courts were then formed, creating three levels of federal court.

U.S. District Court

The U.S. District Court has jurisdiction over cases involving both civil and criminal actions.
Civil actions must arise out of a violation of one's constitutional rights, a violation of law or
treaties of the United States or if the United States is party to the suit. Civil maritime cases and
cases involving citizens of different states are also heard in district courts.
In criminal cases, jurisdiction to hear a case occurs only if the Unites States if party to the suit or
when prosecution is brought on by the United States. Whether it is a civil or a criminal case, a
judge determines issues of law and a jury (or a judge) determines findings of facts.
There are 94 U.S. District Courts, with at least one in every state. Each contains 2-28 judges.
There is no appellate jurisdiction, meaning this court has no power to hear an appeal from a
lower court.

United States v. Jose Hernandez

Let's analyze an example of a case brought to U.S. District Court. U.S. v. Jose Hernandez was
tried in the U.S. District Court for the Southern District of Florida, in Miami, Florida because the
United States was a party to the suit. The United States claimed that Hernandez borrowed several
thousands of dollars in educational loans and did not repay the debts.
The United States filed a motion for summary judgment, meaning a summarized version of a
case heard by a judge based only on the merit of a case or a discrete fact.
The United States sought to recover monies owed to the Department of Education and federal
Treasury as a result of Hernandez's default on several federally-funded student loans.
The motion was granted to the plaintiff, the United States, making the defendant Hernandez
liable to repay the monies borrowed with interest.

U.S. Circuit Court of Appeals

The U.S. Circuit Court of Appeals resides over cases in where one or both parties are
dissatisfied with the judgment in U.S. District Court. The lower court ruling is reviewed by a

panel of three judges to determine whether there was an issue with the application of law. The
U.S. Circuit Court of Appeals hears both civil and criminal cases.
There are 13 U.S. Circuit Court of Appeals in the United States and is considered one of the most
powerful courts. In the country, there are 179 full-time circuit judges in all, but only three judges
hear a single case. Because this court hears appeals from the lower court, the judges' decisions
often set legal precedent.

Bette Midler v. Ford Motor Company

Let's analyze a case brought up from U.S. District Court for appeal.
In Bette Midler v. Ford Motor Company, Midler originally sued Ford Motor Company in the
U.S. District Court, alleging that Ford Motor Company used a 'sound-alike' to sing one of her
popular songs for an ad campaign aimed at attracting nostalgic baby boomers to identify with the
song and thereby purchase a Ford vehicle.
In the lower court, it was decided that the media was protected under First Amendment rights.
Further, the use of the voice likeness is the issue. If the voice likeness was used as informational
or for cultural value, it is permissible. If it is for a different purpose, it is not.
Midler appealed the decision of the lower court, arguing that Ford Motor Company used her
voice likeness as a means to profit from auto sales. While no new evidence is brought to light in
appellate court, a closer look at the application of law and constitutional rights are reviewed.
In the case of Midler v. Ford Motor Company, the lower court's decision was remanded and sent
back for re-trial. This means Midler won her case in appellate court, and it was returned to the
lower court to be re-tried.

U.S. Supreme Court

The U.S. Supreme Court is the highest court in a state or in the United States and generally only
deals with matters of state or national importance or appeals from the appellate court. This court
will take cases from appellate court only if there is an issue with the interpretation of the law or
with a constitutional right. It is also the last step in the appeals process. There is no appeals
process if either party is not satisfied with the decision.
There are nine judges or justices that decide on cases. In order to have a case brought to the U.S.
Supreme Court, one must file a writ of certiorari requesting the court to hear a case. The court
generally hears between 100-150 cases of the 7,000 requests made per year. Let's analyze a case
brought up from the U.S. Court of Appeals to the U.S. Supreme Court for judgment.

Miranda v. Arizona (1966)

In the original jurisdiction case of Miranda v. Arizona, Ernesto Miranda was picked out of a
lineup and arrested for kidnapping and rape. He spent hours in a cell awaiting his charges. He
was not read his Fifth Amendment right against self-incrimination or his Sixth Amendment right
to an attorney.
After a long and tiresome interrogation, he confessed to the crimes. In the written confession, he
eluded that he was aware of his Fifth Amendment right. He was subsequently sentenced to 20-30
years in prison for each count.
In an appeal to a higher state court, the defendant's attorneys argued that Miranda did not, in fact,
know of his rights, nor was he informed of his rights at the time of arrest.
Arizona argued that Miranda had been in trouble with the law before and assumed that he was
aware of his rights based on past arrests. Arizona won and Miranda's conviction was upheld.
The case was taken to the U.S. Supreme Court and heard again. The panel of justices overturned
Arizona's state ruling citing that Miranda's constitutional rights had been violated. His conviction
was rescinded. As a result of this case, we now have established Miranda rights, the standard
warning given to criminal suspects before they are questioned.
Once Miranda rights are read to a suspect, any statements they make may be used against them
in criminal proceedings.

Lesson Summary
In summary, before 1789, the U.S. Supreme Court was available for only high-profile cases.
Congress met and debated the need for a lower U.S. court to reside over cases that were beyond
the jurisdiction or scope of the state court. The debate ended with the addition of two lower
courts. This is known as the federal court system.
There are three main levels of federal court system. Each level of court serves a different legal
function for both civil and criminal cases.
The U.S. District Court has jurisdiction over cases involving both civil and criminal actions. In
this court, civil actions must arise out of a violation of one's constitutional rights, a violation of
law or treaties of the United States or if the United States is party to the suit. Criminal cases arise
only when the United States is party to the suit.
U.S. Circuit Court of Appeals resides over cases in where one or both parties are dissatisfied with
the judgment in the U.S. District Court. The cases are brought up from the lower U.S. District
Court.
U.S. Supreme Court is the highest court in a state (or in the United States) and generally only
deals with matters of state or national importance or appeals from appellate court.

Learning Outcomes
After finishing this lesson, you should be ready to:

Understand why the United States established the three federal court levels

Explain the jurisdictions of the U.S. District Court, the U.S. Circuit Court of Appeals and
the U.S. Supreme Court

Summarize the cases of United States v. Jose Hernandez, Bette Midler v. Ford Motor
Company and Miranda v. Arizona

The U.S. Supreme Court justices reside over cases involving original jurisdiction under certain
circumstances and appellate jurisdiction when a decision from a lower court involving
constitutional law is at issue. Appellate cases require a writ of certiorari requesting permission to
address this court.

U.S. Supreme Court Function

The U.S. Supreme Court is the highest court in the United States and resides over cases of
national importance.
Created in 1789 by vote of Senate Bill 1 (1789) in an effort to have a court system of a higher
level than the state court, it hears cases that involve:

Interstate disputes

Diversity disputes

Disputes involving foreign nationals

Disputes that arise under treaties

Cases where the United States is a party

Cases appealed from lower courts where Constitutional law is at issue

There are two types of jurisdiction, or authority to hear a case, that the U.S. Supreme Court has
a right to exercise:

Original jurisdiction

Appellate jurisdiction

When the U.S. Supreme Court exercises original jurisdiction it is exercising its right to hear a
case based on subject matter. This means the very subject of the case is enough to have the case
heard.
The vast majority of cases heard by this court fall under appellate jurisdiction and involves
cases moved from a lower court to be reviewed for disputes in the application of Constitutional
law. Not all cases are granted a review in U.S. Supreme Court. There is a process that one must
precisely follow, and the request for re-evaluation must be granted by a panel of justices.

Justices
The U.S. Supreme Court is resided over by nine justices, including one Chief Justice and eight
Associate Justices. The justices are nominated by the President of the United States and
appointed by the Senate. They serve a lifetime term with the exception of retirement, resignation
or impeachment.
When a case review is requested by a party, the justices return a grant or denial to re-evaluate
appellate cases. For original jurisdiction cases, it is a matter of subject matter and the case is
heard as a matter of law.
In order for a case to be considered by the U.S. Supreme Court, one must follow the strict
guidelines for appeal including submitting a writ of certiorari requesting permission to have a
case heard. Once the writ is granted, the case must follow a protocol.

Filing a Writ of Certiorari

In order to have a case reviewed by the U.S. Supreme Court, the losing party must file a writ of
certiorari, or a request for permission to review the case. It is important to understand that
having a case heard in the U.S. Supreme Court is not a right; it is granted only to those parties
who have significant evidence that their lower court judgment was in violation of Constitutional
law.
And even at that, the decision is final only when four of the nine justices vote to grant the writ.
Of the thousands of writs the court receives, only about 150 cases are ever heard in this court. In
a death penalty review, a vote of five out of nine justices must be returned.
Filing the writ is pretty simple. Within 90 days of the lower court's final judgment, the writ must
be filed with the court. Included with the writ are:

List of the names involved in the case

Facts of the case

Legal questions prepared for the justices regarding specific issues of Constitutional law

Arguments in favor of the writ to be considered by the justices

A check for $300.00 along with 10-12 copies of all documents to be reviewed by the
justices is also required

Once a writ of certiorari is denied, the decision cannot be appealed. This does not mean that the
U.S. Supreme Court is affirming or disaffirming the decision of the lower court. It simply means
that there wasn't sufficient enough evidence based on the information provided that a
wrongdoing occurred as a matter of the application of Constitutional law.

Lesson Summary
The U.S. Supreme Court is the highest court in the United States and resides over cases of
national importance. It is presided over by nine justices, including one Chief Justice and eight
Associate Justices. Each justice is nominated by the President of the United States and appointed
by Senate. The justices are given a lifetime term and can end only by resignation, retirement or
impeachment. There are two types of cases heard by the justices: subject-matter cases and
appeals from lower courts.
Subject-matter cases generally involve disputes between two states, diversity cases where each
party resides in different states and the dispute exceeds $75,000, disputes with foreign nationals,
treaty issues or cases where the United States is party to the case. Appeals are heard only when
there has been a violation of Constitutional law in the decision of a lower court. In order to have
a case heard, a writ of certiorari must be granted in a 4 of 9 votes by the justices. In a death
penalty case, the vote must render a 5 of 9 ratio. If granted, the case will be reviewed based on
the facts and the decision.
Chances are, the writ will be denied as these judges hear only a small percentage of cases - 150
of the thousands requested per year. If the case is denied, there is no further action. The case is
considered closed. This does not imply agreement with the lower court decision by this court. It
simply means there was not enough evidence to convince the panel of justices that a wrongdoing
occurred.

Learning Outcomes
After you have completed this lesson, you should be ready to:

Explain the circumstances in which the U.S. Supreme Court has original jurisdiction and
appellate jurisdiction

Describe how the Supreme Court Justices are chosen

Summarize the requirements of a writ of certiorari

There is no uniform structure to the State Court System. Each state has its own system but most
states operate similarly to the Federal Court System in that there are several levels of courts
including trial courts, intermediate appellate courts and supreme courts.

State Court System Compared to Federal Court System

To better understand the state court system and its similarities to the federal court system, let's
take a brief look at the federal court system. In the federal court system, there are three distinct
courts. Each of the federal courts levies judgment on different types of cases.
The U.S. District Court hears cases that involve:

Issues between states

Issues between parties who reside in different states and the remedy is over $75,000

Issues of national attention

Issues where the United States is a party

Whereas, the U.S. Court of Appeals hears cases that involve:

Appeals from a lower court, like state court

Appeals from administrative courts

Appeals from specialized courts, like patent court

Finally, the U.S. Supreme Court deals with cases that move up from a lower federal court and
involve a violation of constitutional law. However, this court considers a limited number of
cases.
The state court system works in a similar way in that there are, in most states, three distinct and
separate courts that decide on different cases. The main difference between the state and federal
court systems is in the kind of cases that are heard.
This is known as jurisdiction or the power a court has over a case. State courts have a broad
jurisdiction over cases.

State Court System and Jurisdiction

State courts have jurisdiction to hear just about any case. For example, state court cases may
involve:

Criminal cases

Contract proceedings

Tort issues

Family disputes

Probate or estate law

The three primary courts in the state court system are superior court, intermediate court of
appeals and state supreme court.
Superior court deals with serious cases and most cases are heard in this court. There are also
special courts under this umbrella, like family court and juvenile court.
Once a case is heard by superior court, either party to the case may appeal the decision of the
court to the intermediate court of appeals in the forum state. The intermediate appellate court
works similarly to the U.S. Appellate Court in that it has jurisdiction to hear a case from a lower
court. But it does not consider the facts of the case in order to make a judgment. Only the
application of law is considered. This means that if a case is brought to appellate court, the
litigants cannot introduce evidence about the specific case. It can only challenge the judgment of
the lower court based on whether the state law had been properly applied when rendering a
judgment.
State supreme court is similar to U.S. Supreme Court in that it hears cases that question the
application of law. This court hears cases where state law may be improperly applied, and the
judgment is considered final. Unfortunately, the buck stops here as there is no higher state court
to appeal to and is considered the court of last resort as it applies to questioning state law
violations.

State Court Systems Do Not Operate the Same Way

We mapped out the similarities between the federal court system and the state court system.
However, it is important to note that although there is a generic system in place for a trial, an
appeal and a judicial review of the application of law, each state has the power to exercise
jurisdiction over specific types of cases as they see fit. For example, if a married couple were to
get divorced in Hawaii, the proceedings would be held in family court, while a couple seeking
the same dissolution of marriage in New York would duke it out in superior court.
There are also different criteria for a divorce in each state. The state of Hawaii requires no reason
for the divorce, and parties did not have to be married in the state. The only requirement is that
one of the parties must have been a resident at least six months prior to the filing date.

The state of New York requires that the parties had been married in the state, one or both parties
be residents of the state and that at least one of the following criteria be met by one of the parties:

Cruel and unusual treatment to the other party

Abandonment

Was imprisoned for an extended period of time

Committed adultery

Couple lived apart for a period of more than one year

Irreconcilable differences for a period of at least six months

It is important to review the specific state court system in which one resides to better understand
the court procedures.

Lesson Summary
To sum things up, the state and federal court system operate in similar ways. Both have a lower
court, an appellate court and a court of last resort. In the federal court system, this court is called
the U.S. Supreme Court. In the state court system, it is the state supreme court.
Federal court has limited jurisdiction over cases with very specific criteria that must be met.
State courts have broad jurisdiction and can try most cases, like criminal, contract, family and
juvenile trials.
State superior courts have jurisdiction over most cases. When a party is dissatisfied with the
decision of the lower court, he has the right to request an appeal from the intermediate court of
appeals in that state. Similarly to the federal court of appeals, the case is heard based on a
question of law and not on facts.
When all else fails, the disgruntled party may bring the case to state supreme court to have a
decision from appeals court re-considered. This court is considered the court of last resort and is
the final step in the state appeals process.
The specific operations of the courts differ between states. This means that from state to state, a
different court may hear a case. We learned that in Hawaii, family court is the right venue for a
divorce, while superior court is the place to dissolve a marriage in New York. This is why it is
important to understand the specific operations of your state's court system.

Learning Outcomes

After finishing this lesson, you should be prepared to:

Compare and contrast the federal and state court systems

Name the three main courts in the state system and the jurisdiction of each

Understand that the state court system varies in different states

Long arm statute refers to the jurisdiction a court has over out-of-state defendant corporations.
International Shoe v. Washington was a landmark case that set precedent for establishing the
right for government to use the long arm statute to bring an action against a defendant
corporation.

Long Arm Statute Defined

If a corporation is located in one state, does business in another state and employs people in yet
another state, they just may fall under the long arm statute. This sounds confusing, but it really
boils down to this: long arm statute allows a state to exercise jurisdiction over out-of-state
defendants, provided that the government can prove that the defendant has at least minimum
contacts in the forum state.
This means if a corporation was to be sued in a state that they do not actually do business in but
have a connection to the state - say, by employing people within that state, and the employees
receive regular compensation for their work - the corporation is considered to have minimum
contact sufficient enough to be sued within the forum state.

Minimum Contact Rule

Just what makes for minimum contact? Minimum contact rule establishes that so long as a
corporation had a degree of contact within the state bringing suit, they are subject to the laws of
the state and can be sued by and within the forum state in court.
This is not exactly black and white. The law says minimal, or very few contacts, are enough to
establish contact. But there is also a right to fair play and substantial justice, which sets three
distinct factors needed to extend long arm statute jurisdiction to bring a defendant corporation to
court:

Closeness of the relationship between the claim and the contact

Convenience of bringing the defendant corporation to the forum state

State has an interest in protecting the rights of its citizens

To put this all together, minimum contact rule may apply so long as it does not interfere with fair
play and substantial justice. Let's use a precedent setting case to demonstrate how long arm
statute and minimum contact rule applied in a civil suit filed by a large company against the State
of Washington to appeal a lower court's decision in favor of the State of Washington.

Int'l Shoe Co. v. State of Washington

International Shoe Company was a Delaware shoe manufacturer with its principle place of
business in Missouri. The State of Washington brought suit against International Shoe for unpaid
unemployment taxes for employees who resided and worked for the company from their
Washington residences. Even though International Shoe did not conduct official business in
Washington, the state sought to collect taxes from the company by reason of minimum contact.
To better understand this complex case, let's set out the facts:

International Shoe employed several salespeople who resided and worked within the
state.

These employees earned a collective $31,000 in commissions per year, establishing

systematic and continuous sales from the Washington agents.

The employees were reimbursed for expenses.

The employees had no authority to set prices, negotiate contracts, reject orders or to make
collections.

All decisions regarding the price and sale of shoes were mandated through the Missouri
office.

Both agent (or salesperson) in Washington and an agent in Missouri were served with the
suit.

In the court of first instance, International Shoe lost the case and appealed to a higher court to
have the decision rescinded, claiming that long arm statute did not apply. International Shoe
further argued their 14th Amendment right to due process and personal jurisdiction. Their
rationale for the decision relied on the question of what exactly established minimum contact and
whether long arm statute applied.
Here is how the appellate court saw it:

Due process was established based on the quality and nature of the activity with respect
to the claim of non-payment of taxes.

International Shoe benefited from the laws of the State of Washington and thereby, was
obligated to the laws.

International Shoe benefited from the business in Washington.

There was an impact on the local economy.

International Shoe saw it differently. They saw it as a casual relationship with the state, not
continual and systematic. Salesmen merely showed samples of shoes to potential customers.
Shoe orders were sent to Delaware and manufactured in Missouri - where the customer was also
billed for the shoes.
To offset International Shoe's claim of a casual relationship, the State of Washington was able to
prove that shoe salesmen did not only show samples of shoes, many set up permanent
showrooms where customers can shop and place orders. Upon final ruling in U.S. Supreme
Court, State of Washington prevailed over International Shoe. By appellate vote, the court
affirmed the ruling of the lower court.

Lesson Summary
We learned that International Shoe v. Washington was a landmark case that set precedent for
establishing the right for government to use the long arm statute to bring an action against a
defendant corporation. In order for the government to bring about a lawsuit against International
Shoe, it first had to establish jurisdiction over the corporation. They used the long arm statute to
do this. Long arm statute refers to the jurisdiction a court has over out-of-state defendant
corporations.
In order for a court to establish jurisdiction, it is necessary that the defendant corporation has a
business relationship in a consistent and systematic way in the forum state. This is known as
minimum contact. Minimum contact rule establishes that so long as a corporation had a degree
of contact in the state bringing suit, they are subject to the laws of the state and can be sued by
and within the forum state.
Corporations do have a right to fair play and substantial justice, which sets three distinct factors
necessary to extend long arm statute jurisdiction needed to bring a defendant corporation to
court:

Closeness of the relationship between the claim and the contact

Convenience of bringing the defendant corporation to the forum state

State has an interest in protecting the rights of its citizens

However, enough of a relationship existed (minimal contact rule) to determine that International
Shoe did, in fact, have established roots in Washington. The appellate court affirmed the decision
of the lower court and found International Shoe guilty of failure to pay taxes.

Learning Outcomes

Completing this lesson should prepare you to:

Define long arm statute and minimum contact rule

List the three factors needed to apply long arm statute jurisdiction

Summarize the case of International Shoe Company v. State of Washington

Discuss how the long arm statute and minimum contact rule were used in the case

Courts exercise two types of jurisdiction over cases: original jurisdiction and appellate
jurisdiction for cases previously heard in a lower court. Judges have the option, when hearing an
appeals case, to reverse or remand a decision based on a violation of law like abuse of discretion.

What Is the Court's Function in General?

Whether it is dealing with two neighbors squawking over an overgrown shrub or sentencing a
murderer to many years in prison, a court's function is essentially to keep the peace. A court,
whether municipal, state or federal, is made up of an unbiased group of judges who hear
testimony, weigh evidence and rule on the outcome of a civil or criminal trial.
There are three levels of courts: municipal courts, state courts and federal courts. Each level of
court exercises jurisdiction, or its authority to hear a case, based on a few factors. With attention
to jurisdiction, we will study original and appellate jurisdiction in state and federal courts.

Original Jurisdiction
Keep in mind that no one state court behaves exactly as another, meaning state courts have
different procedures and rules. As we learn about jurisdiction, we will focus on a general rule not
specific to any one state.
Again, jurisdiction is a court's authority to hear a case. There are two types of jurisdiction:
jurisdiction over property and people, and subject matter jurisdiction.
To keep things simple, jurisdiction over property is used to seize a valuable asset needed to
make restitution to an injured party or to entice a defendant to appear in court. On the other hand,
jurisdiction over people is decided based on whether a party to the suit lives in the forum state
or the state in which the tort or criminal act took place.
Subject matter jurisdiction is used based on the nature of the case. For instance, a murder trial
will be heard in criminal court while divorce proceedings will be heard in family court
(depending on the state).

Sometimes, a defendant to a case lives outside of the forum state, or state to which the case is
being tried. When this happens, long-arm statute is used to bring an out-of-state defendant to
trial in the forum state.
Bringing an out-of-state defendant to trial in another state is not cut and dry. Minimum contact
with the forum state needs to be established. To say it a different way, to exercise jurisdiction
over a defendant in a different state, the court must prove that this defendant has minimum
contact in the forum state either by residence or business dealings.
As an illustration, in International Shoe v. State of Washington (1945), International Shoe
Company was a shoe manufacturer with its headquarters in Delaware and its manufacturing plant
in Missouri. The state of Washington brought suit against International Shoe, a Delaware
company with manufacturing done in yet another state, for unpaid employment tax for
employees who resided in Washington State and worked for the company.
Even though International Shoe did not conduct official business, like having official storefronts,
in Washington, the state sought to collect taxes from the company by reason of minimum
contact.
In the end, minimum contact was established based on a few factors:

International Shoe salesmen who resided in Washington made regular wages

Salesmen set up mock stores where samples could be tried and orders were taken

The company benefited from the laws of Washington

In sum, original jurisdiction can be extended over property and people as well as subject matter.
Broad jurisdiction is typical of state courts. Appellate courts exercise a more limited jurisdiction
over cases.

Appellate Jurisdiction
Appellate courts hear cases moved up from a lower court when one or more parties to a case is
not satisfied with the lower court's ruling. Both federal and state appellate courts work in mostly
the same way. Once a lower court has made a ruling, one or more of the parties may request that
a higher court hear the case.
Once the disgruntled party or parties files an appeal, this higher court will hear the case only if
the issue for appeal stems from an issue of the application of law or where there was a violation
of one's rights under the Constitution. No new evidence can be presented nor will a new trial, per
se, take place.
The judges or justices will review the ruling and rationale for the lower court judgment and make
a decision to affirm, remand or reverse the ruling.

Decisions, Decisions
If a decision is affirmed, the higher court is simply confirming the decision of the lower court
and no further action can be taken. A case is remanded when it is sent back to lower court for
further action based on the judge's review and advice.
In Gideon v. Wainwright (1963), a young, homeless Clarence Earl Gideon was tried and
convicted of a misdemeanor crime in the state of Florida. At the time, Florida held that in
exception of one's Sixth Amendment right to counsel, a misdemeanor crime did not qualify.
As a result, Gideon unsuccessfully represented himself and was found guilty of petty larceny and
burglary. While serving his prison term, Gideon began studying the law and discovered that his
Sixth Amendment right was, in fact, violated.
For that, Gideon filed a writ of habeas corpus, or a claim of false imprisonment, with the U.S.
Superior Court on the basis of a violation of his constitutional rights. It was found that Gideon's
right to counsel was violated.
Gideon's case was remanded back to lower court where he was appointed an attorney to
represent his rights. He was found not guilty.
There are times when an appellate court actually reverses the decision of a lower court ruling by
annulling the judgment made in a previous trial because there was a violation of law or
constitution. Specifically, in Lochner v. State of New York (1905), the state of New York
restricted the number of hours a bakery employee could work to less than 60 hours a week.
Lochner, a baker out of Utica, New York, argued that the law restricted the products he could
produce, thereby violating his Fourteenth Amendment to right to life, liberty or property without
due process. The state of New York claimed that having workers exceed 60 hours was dangerous,
and they required ample rest between shifts.
The court reversed the decision on the grounds that limiting work hours limited free market
opportunities and affected his right to freely operate a business. This landmark case helped shape
future human resource law like overtime pay.
As we learned, there are several decision types in appellate court. A decision to remand can be
decided because a case needs further action. Reversal of a lower court judge's decision occurs
when there is a violation of law or constitution.
There is another instance that can cause a judge or justice to remand or reverse a decision. Abuse
of discretion is the failure to consider the law and facts of a case.
This is a tricky accusation to levy against a court. It requires burden of proof by the appellant.
This can be done using what the court calls a reasonable person test that measures the
behaviors of the accused against what a reasonable person would do. This means, if most people

would see a situation the same way, it is reasonable that the accused did too. If not, then it may
just be abuse of discretion.
To clear this up a bit, let's review People of Illinois v. Meeks (2013). In March 2010, Meeks
visited a local Walmart. While in the store, it was noticed that he allegedly shoplifted. A guard
attempted to stop Meeks, but Meeks got away, fleeing in his car. Witnesses to the crime were
able to jot down his vehicle tag, and he was located a short time later.
Meeks pleaded guilty to the crime. But he asked for a reduced sentence stating that he was the
sole supporter of his family. The judge, insensitive to Meeks' motion to reduce sentencing, based
his maximum sentence on Meeks' prior actions.
Although Meeks' character witnesses painted a very positive picture, Meeks didn't always live a
clean life. It seems that in the past, he had committed several other crimes for which he served
time. The judge based the sentencing decision on a rule that qualified Meeks for a longer prison
term because the past crimes were committed within a 10-year period prior to the Walmart heist.
The judge also stated that his intent in his sentencing decision was to deter Meeks and others
from making a mockery of the court system. He was given a maximum sentence. Meeks cried
abuse of discretion to a higher court because the judge did not factor in Meeks' new lifestyle:
married, educated, sole-provider of a wife and children and the many character statements
received from friends and family. He merely looked at the rap sheet and a faceless felon.
While the judge's comments and perceived bias does leave a sour after note, Meeks' argument for
abuse did not fare well with the higher court. It was decided that a useful citizen does not commit
crimes. Meeks' committed several crimes over a 10-year period of time, for which he served time
in either prison or through a probation program.
With this in mind, it was determined that Meeks did not learn from his past. The court decided
that no abuse occurred and the ruling from the original court was affirmed.

Lesson Summary
To summarize, a court's function is to keep the peace. There are two types of courts that serve
this purpose: original court and appellate court.
Original court holds broad jurisdiction, or right to hear a case, while appellate court hears
specific cases that violate one's constitutional rights. The proper venue for a court case to be
heard is based on two types of jurisdiction: property or personal jurisdiction and subject matter
jurisdiction.
When a court exercises jurisdiction over property, it can seize property from a defendant to
entice him to appear in court or use property to settle a claim against him. Personal jurisdiction
is determined by the parties' residence or where a crime is committed. A court's authority to hear
a case is also determined by the type of action. Subject matter jurisdiction is determined by the
type of case like a divorce or a murder.

When a defendant engages in business in one state but the company is located in another, the
court can use a long-arm statute to exercise jurisdiction over the defendant based on minimum
contact with the forum state.
As we learned, appellate courts have limited jurisdiction to hear cases. When a case is brought to
appellate court, the judges or justices make a few different types of decisions.
A lower court's decision can be affirmed, and no further action is taken. It can also be
remanded, or sent back to lower court. A judge may even reverse an action and declare the
decision of a lower court to be annulled. This can either lead to the clearing of all changes or
remand the case back to a lower court for further action.
In some cases, a judge will reverse or remand a case back to lower court if allegations of abuse
of discretion are founded, meaning a lower court judge failed to properly apply facts and law.
Remember, every state operates their court system differently. It is important to understand the
laws and the court system of the state in question.

Learning Outcomes
Finishing this lesson should prepare you to:

Understand the function of a court and differentiate between original and appellate
jurisdiction

Identify the two types of original jurisdiction and define long arm statute

Summarize the cases of Gideon v. Wainwright (1963) and Lochner v. State of New York
(1905)

Define abuse of discretion and explain its significance regarding the case People of
Illinois v. Meeks (2013)

One of the ways a court determines whether a case will be heard is based on subject matter
jurisdiction. We will explore several factors that determine subject matter jurisdiction in state and
federal courts, including concurrent subject matter jurisdiction.

State Court Subject Matter Jurisdiction

There are two types of jurisdiction a court must have in order to hear a case. The first is personal
jurisdiction, or the power to hear a case based on the person or persons involved in the issue.
The court must also have subject matter jurisdiction, or the court's power to hear a case based
on the subject of the dispute. In other words, both personal jurisdiction and subject matter
jurisdiction must be assigned for a court to hear a case. If a husband strikes his wife, the case
would be heard in family court. A shoplifter would be tried in criminal court.

For example, Sammy lent his lawn mower to Pete. Pete cut his grass and returned the mower. A
few days later, John noticed that the blades on the mower were not spinning. Since he had not
used the mower since Pete returned it a few days ago, he could only assume Pete did something
negligent to cause the blades to stop working. Sammy confronted Pete about the issue, but Pete
had no answer. He insisted that he did nothing to cause damage to the mower and dismissed the
argument immediately.
Seething over the non-working lawn mower, Sammy decided he would sue Pete for the value of
the mower. Unsure in which court to file suit, he did a bit of research. Sammy learned that small
claims court has subject matter jurisdiction over claims that are less than five thousand dollars,
depending on the state. He and Pete live in Florida where the threshold for a claim in this court is
exactly $5,000 (not including attorney or court fees).
In this case, the jurisdiction of the case was based on the monetary damages Sammy sought for
the cost of replacing the mangled mower. If for some reason, Sammy or Pete wanted to see this
case tried in a different court, it wouldn't be possible. Subject matter jurisdiction cannot be
waived.
In some cases, state courts do not have subject matter jurisdiction over a case. To demonstrate
this, let's see what happened when Betsy filed for bankruptcy.
Betsy was down on her luck and really needed to get the bill collectors off her back. With the
phone ringing day and night, she made one of the most important decisions of her life - to
declare bankruptcy. Upon filing her case, Betsy was informed that under subject matter
jurisdiction, a bankruptcy case could only be filed and heard in a federal bankruptcy court.

Federal Court Subject Matter Jurisdiction

In federal courts, there are two types of subject matter jurisdiction: diversity jurisdiction and
federal question jurisdiction. Under diversity jurisdiction, the claim must be between two
parties who live in different states and be for an amount of money to exceed $75,000.
For example, Murray, a resident of Florida, was injured while riding on a jet ski manufactured by
Fast Toys, Inc., whose primary place of business and manufacturing is located in California.
Murray broke a leg and wanted $100,000 in compensation.
In order for the federal court to determine diversity jurisdiction, it would have to test the
residency of both parties. By determining how many jet skis are made by Fast Toys and sold in
Florida, the court would be able to prove Fast Toys' residency in that state. If a substantial
amount of its revenues were generated in Florida, it would establish that Fast Toys has residency
in the state, and the case would be moved to state court. Diversity jurisdiction would apply and
the case would be heard in federal court, if it is determined that few Fast Toys jet skis are sold in
the state.
This is not to say that Murray could not take this case to state court. Under concurrent
jurisdiction, civil cases that fall under diversity jurisdiction can be heard in both state and

federal court. The decision to use concurrent jurisdiction rests on whether a favorable outcome is
more likely in one court over the other. Murray may choose to have his case heard in a Florida
state court to gain a more satisfactory judgment.

Federal Question Jurisdiction

The federal court system also tests federal question jurisdiction, and this refers to an action that
results from a violation of one's constitutional rights or United States law.
When Wendell applied for housing at Happy Acres Rental Community, he was denied
acceptance. He asked the rental agent, Pam, why his application was rejected and she offered
him a response that did not sit well with him. Pam told Wendell that he would not fit into the
community because most residents were of a different race. She also told him the decision was
for his own peace as he would not be welcomed or accepted by neighbors.
Wendell sued Happy Acres because their words and actions were in violation of the Fair Housing
Act of 1968 that prohibits discrimination in housing based on race, religion, national origin, age,
gender or disability. This case would be heard in a federal court because the Fair Housing Act is
a federal act.

Lesson Summary
One of the ways a court determines whether a case will be heard is based on subject matter
jurisdiction.
Personal jurisdiction must also be established. In other words, the court must have power over
a person involved in the issue.
Subject matter jurisdiction is the court's power to hear a case based on the subject of the
dispute. For state court cases, subject matter jurisdiction simply means the case is heard in the
court that deals with a particular issue, such as small claims court or family court.
There are cases where state or federal court have concurrent jurisdiction over a case, meaning
either court can hear the case. This is called concurrent jurisdiction and is used mostly to
benefit the plaintiff.
Federal courts look at two types of subject matter jurisdiction. Diversity jurisdiction requires
that the claim be between two parties who live in different states and be for an amount of money
to exceed $75,000, and federal question jurisdiction states that an action that results from a
violation of one's constitutional rights or United States law can be heard in federal court.

Learning Outcomes
Watching this lesson should prepare you to:

Define personal jurisdiction, subject matter jurisdiction and concurrent jurisdiction

Explain when federal courts may have diversity jurisdiction and federal question
jurisdiction

Give examples of how subject matter jurisdiction is applied in state and federal courts

In rem and quasi in rem jurisdiction give a court power over property. The court's power over the
property can be used as leverage or as a means of satisfying a civil action against a defendant.
The conditions that are required determine the court's ability to exercise both types of
jurisdiction of property.

Jurisdiction over Property

It may seem unreasonable that a court can assert power over a person's property as a means of
compelling a litigant to action, but it is perfectly legal. There are two types of jurisdiction over
property, or power to control property, that a court can exercise. In rem jurisdiction gives the
court power to control property when the court does not possess in personam, or personal,
jurisdiction. Similar to in rem jurisdiction, quasi in rem jurisdiction gives power to a court to
exercise control over a person's property as a means to force a litigant to appear in court. Either
way, both types of jurisdiction over property allow a court to take control of personal property to
satisfy a court case.

In Rem Jurisdiction and Shaffer v. Heitner

In rem jurisdiction allows a court to take control over property in cases where it would not
normally have this type of jurisdiction. To better understand this type of property jurisdiction,
let's review Shaffer v. Heitner (1977) as it relates to in rem jurisdiction and the control of stock.
Heitner, a shareholder of Greyhound Corporation stock, sued the company and 28 of its officials.
In the motion to sequester, or take something that is in controversy and surrender it to an
unbiased party, Heitner asked the court to seize the parties' property, including stock in the
company. The court of original jurisdiction decided against the defendant on the basis that in rem
jurisdiction did not apply because the corporation and its officials did not have sufficient enough
contact with the state. In order to enforce in rem jurisdiction, five conditions must be met:

The property must be valuable.

The property must be located within the jurisdiction of the court.

The court must have actual possession of or solely control the property.

Procedural due process or adequate notice of the action

Substantive due process

In Shaffer v. Heitner, property jurisdiction could not be established. Using International Shoe v.
State of Washington and minimum contact rule, it was decided that Greyhound or its officials did
not have a relationship with the State of Delaware sufficient enough to be considered under the
forum state's jurisdiction. Not satisfied with the court's decision, Heitner moved the case to U.S.
Appellate Court. In appeal, the lower court's decision to rule for the plaintiff was upheld. In
effect, in rem jurisdiction was not applicable to the Delaware court because contact by the
officials with the forum state could not be determined. Further, the suit was against the officials
with Greyhound Corporation being party as a matter of the affiliation and not as a party to the
suit. The suit had less to do with Greyhound as a company and more to do with Heitner's issues
with the officials. The officials did not satisfy minimum contact with the forum state. For that,
Greyhound could not be considered an affective property, and its location in Delaware could not
be considered minimum contact. Therefore, power through the use of in rem jurisdiction could
not be justified.
In this case, we learned that in order to exercise power over property, the court must have
jurisdiction over the property. There are cases when the court does not have jurisdiction over
property. In the case of quasi in rem jurisdiction, a court is permitted to exercise power over
property in certain instances.

Quasi in Rem Jurisdiction and Court Appearances

Quasi in rem jurisdiction is the court's power to control property in an attempt to have a litigant
appear in court. What happens when two parties are involved in a boating accident in the State of
Florida? The plaintiff is a resident of Florida, while the defendant is a resident of Georgia. The
State of Florida would have no personal jurisdiction over the defendant, making it very difficult
to bring the defendant to court. However, if the defendant owns a winter home in Florida, the
state can exercise quasi in rem jurisdiction on the property to satisfy the lawsuit brought against
him by the plaintiff. This is possible when the following six conditions are met:

Property must be of value

Property must be within the state

Litigant must own the property

Court must control the property

Procedural due process

Substantive due process

Unlike in rem jurisdiction, where the state has an interest in the property, substantial due
process in quasi in rem means there must be a degree of contact between the litigant and the

state as defined by the International Shoe v. State of Washington minimum contact rule. In our
example, owning a home in Florida established a relationship between the defendant and the
forum state. The defendant could lose his property if he does not appear in court to answer to the
civil action against him.

Lesson Summary
To sum things up, there are two types of property jurisdiction a state has power to exercise over
property: in rem jurisdiction and quasi in rem jurisdiction. In rem jurisdiction gives the court
power to control property when the court does not possess in personam, or personal, jurisdiction.
Quasi in rem jurisdiction is the court's power to control property in an attempt to have a litigant
appear in court.
In our first case, Shaffer v. Heitner, we learned that in rem jurisdiction required that the
defendant parties have minimum contact with the state in order to control property. We also
learned that having a corporate headquarters is not sufficient enough to establish contact if the
suit is not related to the company but rather its employees.

Learning Outcomes
Watching this lesson should give you the ability to:

Differentiate between in rem and quasi in rem jurisdiction

List the conditions necessary for in rem and quasi in rem jurisdiction

Understand why the court did not have in rem jurisdiction in Shaffer v. Heitner

The U.S. Supreme Court exercises a right to preside over specific cases and is considered the
court of original jurisdiction based on subject-matter jurisdiction. It is considered an appellate
court for cases involving constitutional law under certain circumstances.

Limitations on Jurisdiction
When there is a dispute between two states, the only fair way to seek justice is to have the case
heard by a non-biased party, like the U.S. Supreme Court.
The U.S. Supreme Court is the highest court in the United States and has limited jurisdiction, or
power to decide a case, based on certain criteria.
Under original jurisdiction, or the first court to hear the case, some of the cases the United
States Supreme Court can hear are:

Disputes between two states

Disputes where the United States is a party to the case

Disputes between individuals who do not share a common state

A dispute or crime that arises under a violation of federal law

Habeas Corpus (or false imprisonment)

Bankruptcy

International trade disputes

Under appellate jurisdiction, the United States Supreme Court can hold a limited review of a
case from a lower court if the appeal involves a question of law or constitutional rights
violations.
This means if one or both parties are dissatisfied with the decision of a lower court, the case may
be moved up to the U.S. Supreme Court if the issue involves the interpretation of constitutional
law. Even under this circumstance, the U.S. Supreme Court can deny the case.
In fact, thousands of cases are sent up to the U.S. Supreme Court, and barely 150 cases ever
receive attention. There must be a substantial federal question of the application of law at issue.

Original Jurisdiction
The U.S. Supreme Court has the right to reside over certain cases involving states, dignitaries,
diversity of parties and bankruptcy. This is because the cases generally involve a violation of
federal or constitutional law or require an unbiased party.
In New Jersey v. Delaware (2008), it was imperative that an unbiased court hear the case. After
all, if the case was heard in the respective state courts, it would be difficult to determine whether
fairness prevailed. In this case, the state of New Jersey filed suit against Delaware over a dispute
involving the placement of a gas pipeline.
New Jersey and Delaware are separated by the Delaware River. It was New Jersey's intention to
team up with BP to build a gas pipeline. Normally, this would not be an issue because bodies of
water between states are generally divided right down the middle.
So, the river would have been measured from one state's shore to the other and divided - and so
the boundary is set. This wasn't the case with the border between these two states. It seems that
in 1681, King Charles II extended Delaware's border all the way to the New Jersey coastline,
making it impossible for New Jersey to build the pipeline anywhere off its riverbank.

The U.S. Supreme Court decided that Delaware did own the land, and without permission, no
pipeline construction could take place. Original jurisdiction was determined because this case
involved a dispute between two states.
But what happens when a dispute between two people in a lower court ends with one or more
dissatisfied parties? The U.S. Supreme Court can review these cases too. However, unlike
original jurisdiction where a trial actually takes place, there is a limited review of the case.

Limited Review
In cases where an appeal is requested by a party based on the decision of a lower court, the U.S.
Supreme Court decides to hear a case if there has been a violation of constitutional law.
In Gregg v. Georgia, the issue involved the death penalty and the question of whether it was
considered cruel and unusual punishment. Death row inmate Troy Leon Gregg believed his death
sentence was a violation of his Eighth Amendment right to human dignity.
Gregg was originally tried in state court for the murder and robbery of two men. Once convicted,
the jury was asked to decide on his sentencing and was given the criteria for a death sentence. It
was decided that Gregg met two of the ten criteria, and they subsequently made their decision to
execute the convicted killer.
Gregg appealed this decision on the basis that he has a given right to human dignity, and putting
him to death was in violation of this right. The U.S. Supreme Court agreed to review the facts
and the law to determine if Gregg's right to human dignity had been violated. Based on the facts
of the case and the criteria for the death penalty sentence, the decision to put Gregg to death was
upheld.
Although Gregg believed he had a strong case against the state of Georgia, it was ultimately
decided that there was no violation of constitutional rights or law.

Lesson Summary
The U.S. Supreme Court exercises a right to preside over specific cases. This court holds original
jurisdiction, or the right to hear a case based on the subject matter, like bankruptcy, federal law
violation or disputes between states. It also holds jurisdiction over cases that move up from a
lower court because of a possible issue with the application of constitutional law.
The difference between original jurisdiction and appellate jurisdiction is mainly in the way a
court handles the case. In original jurisdiction, a case is tried similarly to lower courts. Evidence
is presented and a decision is made based on law.
In appeals, the court reviews the original evidence and the decision made by the lower court. The
judges look for violations of constitutional rights or a misapplication of law.

Learning Outcomes
Upon completion of this lesson, you should be able to:

Name the circumstances in which the U.S. Supreme Court has original or appellate
jurisdiction

Differentiate between how the U.S. Supreme Court handles original and appellate
jurisdiction cases

Summarize New Jersey v. Delaware (2008) and Gregg v. Georgia

Venue is the location where a civil or criminal case is decided. The venue is decided similarly in
civil and criminal trials. However, the venue is decided differently in state and federal courts.

Venue in State Court

Venue is the location a civil or criminal case is heard. The venue is decided using several factors:

Where the plaintiff or defendant lives

Where the plaintiff and/or defendant conducts business

Where the court is located

However, in a criminal case, venue is decided based on:

Where the crime took place

Where the body is found

In real property cases, or cases that involve the transfer of property, like buying or selling a
home, the court located in the county where the property is situated is the proper venue. To
simplify, the venue is the court where a civil or criminal case will be heard. It is located closest
to where the dispute or crime occurred. There are exceptions to this rule. In the case of a highprofile criminal or civil case, it may be necessary for the venue to be changed from the location
closest to the dispute or crime. There are several reasons the venue may change:

The defendant may not have access to an impartial trial

Witnesses may not be conveniently located to the original venue

Pretrial publicity may create a biased jury

A contract clause may dictate the court's venue (if applicable)

Sometimes, even though the fairness of a trial may be jeopardized because of the media's
influence, a venue change may still be denied for other reasons.

Gonzalez v. Casey Marie Anthony

In State of Florida v. Casey Marie Anthony, a young mother from Orange County, FL, specifically, Orlando - was accused of using chloroform and duct tape to suffocate and eventually
kill her young daughter, Caylee. Anthony was arrested and charged with first-degree murder. She
was also charged with several other crimes, including aggravated child abuse and misleading
police in an investigation. In an effort to remove suspicion from herself, Anthony accused a
nanny, Zenaida Gonzalez, of kidnapping Caylee. As a result of this accusation and subsequent
media coverage, Gonzalez was harassed, threatened both physically and emotionally and denied
her right to privacy. She was also terminated from employment. Gonzalez wanted to initiate a
civil action against Anthony but was denied until after Anthony's murder trial was decided.
Eventually, the trial ended in an acquittal for Anthony.
Gonzalez went through with her plans to sue Anthony in a civil action in Orange County, where
the dispute took place. Anthony's lawyers did not feel that Anthony would benefit from a trial in
Orange County and requested a motion to change venue. It was argued that Anthony would not
receive a fair trial due to the negative publicity surrounding her murder trial. The judge denied
the motion based on the burden of costs to the taxpayers for a change in venue. While the case of
Gonzales v. Anthony did not have a change of venue, there are cases that warranted a change in
venue because circumstances surrounding the case are just so sensitive, a fair trial is worth the
price.

People v. Johannes Mehserle

People v. Johannes Mehserle was an extraordinary case in which venue was moved from the
location closest to the crime to a location much further away because of the media frenzy and
jury selection issues. Johannes Mehserle, a Bay Area Rapid Transit officer, shot and killed Oscar
Grant, a 22-year-old, on the platform of the station. Mehserle claimed that he meant to pull his
TASER but instead pulled his gun. Mehserle was charged with involuntary manslaughter. In the
time before the trial, the case caught the media's attention, and racial tensions escalated in the
area.
It was decided that the nature of the crime and Mehserle's position as a police officer could sway
a jury. There was even mention of a lack of qualified jurors in the proper venue of Oakland, CA,
and that Los Angeles would produce a more substantially mixed pool of jurors. In this case, the
judge granted the change in venue from Oakland, CA, to Los Angeles based on the availability of
jurors and fairness to the police officer. Even with a venue change, Mehserle was sentenced to
two years in prison, but the sentence may have been more severe had he been tried in the same
location where the crime was committed.

Had the cases above been federal court cases, venue would work differently.

Venue in Federal Court

In federal court cases, venue is determined by different criteria than state court cases. Venue is
based on the specific level of court.
U.S. District Court is the proper venue in cases where federal law is at issue or defendants to
the action do not reside in the state where the action was filed. This means, if a civil or criminal
case holds the United States as a party to the case, the venue for this case would be a U.S.
District Court. There is at least one of this level of court in every state. In a case that involves a
crime against the United States, like racketeering, the proximity of the crime scene has nothing
to do with the location of the court that hears the case.

U.S. v. Gotti
John Gotti and several other men were indicted, or formally accused, of crimes of the RICO Act,
a federal crime. RICO stands for Racketeering Influenced and Corrupt Organizations and
includes acts and threats of murder, illegal trafficking of contraband, robbery and extortion,
amongst other charges. Because racketeering is a federal crime, the trial was held in U.S. District
Court. During the trial, the jury could not reach a decision on two of the three racketeering
charges. A mistrial was declared, and Gotti would be re-tried.
A mistrial, in this case, occurred because the jury could not reach a unanimous decision based
on evidence presented to the court. Gotti and his crew appealed the lower court's decision of a
mistrial. The case was sent up to the U.S. Court of Appeals for reconsideration. This court hears
cases tried in the lower court only if the appellant believes that the decision was in error based on
the application of law. Gotti believed there was an error in the counts of racketeering the jury had
to consider. The law states that an established pattern of racketeering under RICO must present at
least two acts. Since the jury only considered one count, it was a violation of law. Simply put, the
jury was undecided on two of the three acts, leaving just one act at issue. No pattern of RICO
activity could be established. Gotti requested that the appellate court acquit, or free him of all
charges, under the double jeopardy rule, meaning a person cannot be tried for the same crime
twice. In the appeal, the mistrial decision was affirmed, and no new trial was allowed. In other
words, the saga ended with Gotti a free man.
Venue in U.S. Supreme Court is different. In order to have a case heard by this court, a Writ of
Certiorari, or a written request to have a case heard, is either granted or denied. Since there is
only one Supreme Court, venue is not an issue.

Lesson Summary
Venue is the location where a civil or criminal case is decided. In state courts, venue is decided
by where the plaintiff or defendant lives or does business. It can also be decided based on the
location of witnesses or even the court. In a criminal trial, it is based on the location of the crime

or where a body is found. In real estate law, venue is decided by the location of the property at
issue.
In federal court, venue is decided a bit differently. In federal courts, venue is decided based on
the type of case rather than the location of the civil action or crime. In cases where the
application of law is at issue, the case will be heard in one of the federal courts.

Learning Outcomes
Once you have watched this lesson, you should be able to:

Define venue and describe how it is decided at the state and federal level

Understand the circumstances in which the venue may change

Explain why the venue was or was not changed in the cases Gonzalez v. Casey Marie
Anthony and People v. Johannes Mehserle

Summarize the ruling made by the U.S. Court of Appeals in U.S. v. Gotti

There are two parties to a lawsuit: the plaintiff, who initiates the lawsuit, and the defendant, who
defends against the allegations waged against him. A lawsuit is a process that involves several
steps beginning with the filing of a complaint and ending with a judge's or jury's decision.

Parties to a Lawsuit
Have you ever watched a really exciting courtroom drama and wondered who's who in the
courtroom?
Let's make sense out of the parties:

A plaintiff is a party who initiates a lawsuit or who yields allegations against another
party

A defendant is on the receiving end of the allegations

A lawyer is a professional who represents a party in a court of law

A judge is a professional who oversees and makes decisions in court cases

Now that we understand who's who in a courtroom, just how does a person initiate a lawsuit?

Beginning Steps in a Lawsuit

To simplify the process, let's look at the steps that are taken to initiate a lawsuit:
1. The plaintiff files a complaint with the court and a summons is delivered to the defendant
2. The defendant answers the complaint and may counterclaim against the plaintiff
3. Discovery of testimony through interrogatories and depositions take place
4. A judge or jury hears the case, and a judgment is made
5. If either party is not satisfied with the outcome, an appeal may be filed with a higher
court
Let's add details to the process. Once a person believes they have been wronged and wants to
sue, the first thing done is the filing of a complaint, a written statement containing claims of
damages one suffered as a result of another person. This is the plaintiff.
Each wrongful act is considered a separate cause of action in the complaint. And, there can be
several causes of action in only one complaint. These are the legal grounds and the facts of the
case. The complaint serves to let the defendant know that impending legal action is coming his
way.
Once a complaint has been filed, the defendant is notified by way of a summons, or an official
notice from the court that an action is being taken against the defendant. It also states where the
defendant must appear.
The defendant has 20-30 days to file an answer with the court. The answer contains the
defendant's response to the claims against him. If the defendant neglects to answer to the claims
against him, a default judgment will be granted in favor of the plaintiff. In other words, the
plaintiff wins by default. Sometimes, the defendant may decide to file a counterclaim against
the plaintiff. This is similar to the original complaint, but accuses the plaintiff of an action.
To set this into motion, Jim was driving east on a dark road. He neglected to turn his headlights
on. Dennis was driving west on the same dark road. Dennis crashed into Jim causing major
damage to Jim's car.
Jim filed a lawsuit against Dennis for negligence. Fair enough, Dennis should have been more
careful when driving on a dark road. However, Dennis was not completely convinced that he was
100% at fault. After all, Jim was driving without headlights.
Dennis can file a counterclaim stating that the accident was not totally his fault. Had Jim's
headlights been on, he would have seen Jim barreling down the road and avoided careening into
his car.

Information about the case must be presented. This information is mined through discovery and
is the opportunity to gain information and evidence from the other party. This is done in a couple
of ways.
Interrogatories and depositions provide information based on testimony. There is a difference
between interrogatories and depositions. Interrogatories are written answers to specific
questions posed by the other party. Depositions are oral arguments in response to questions
asked by the other party. Once all of the evidence and testimony is gathered, the case goes before
a judge.

Trial Steps in a Lawsuit

When the case is ready for court, an important decision must be made. Should there be a jury
trial or a bench trial? A jury trial simply means that evidence and testimony will be presented to
the court, and a jury of 12 members will decide the outcome.
The party or parties may opt out of a jury trial. In this case, there will be a bench trial, where
evidence and testimony is heard by a judge only. Either way, once a judgment or decision has
been rendered, it stands.
Well, at least for now. Either party has a right to appeal the decision by asking a higher court to
review the decision of the case for any violations of law or constitutional rights. If an appeal is
granted, the appeal process involves moving the case to a higher court. In appeals court, a panel
of judges reviews only the decision and the applicable law for violations. No new evidence or
testimony is allowed.

Lesson Summary
To sum it up, there are a few key players in a courtroom trial:

A plaintiff is the party who initiates a lawsuit or who yields allegations against another
party

A defendant is on the receiving end of the allegations

A lawyer is a professional who represents a party in a court of law

A judge is a professional who oversees and makes decisions in court cases

To sum up each party's role, once wronged, the plaintiff files a complaint with the court. This
complaint lists the causes of action and where and when the defendant must appear in court. The
defendant will answer the complaint by admitting or denying the actions and may even
counterclaim against the plaintiff by accusing him of contributing to the causes of action.

If the defendant does not answer the complaint, a default judgment is given to the plaintiff for
all damages. In other words, the plaintiff wins. Each party has the right to question the other
about issues through either a written response to questions, or interrogatories, or oral statements
in a deposition.
The testimony along with other facts and evidence is presented to a judge or a jury depending on
the type of trial preferred by the parties. A judgment, or decision, is rendered and stands. Of
course, the parties have a right to appeal the decision, but this must be done in writing to a higher
court.

Learning Outcomes
After you've completed this lesson, you'll be able to:

Identify the parties to a lawsuit and explain their roles

List the steps involved in a lawsuit, from filing of the complaint to appeal

Describe two types of discovery: interrogatories and depositions

Explain what a default judgment is

Differentiate between a bench and a jury trial

Threshold requirements are conditions that a plaintiff must meet in order to take another person
or entity to court. There are threshold requirements for standing, case and controversy and
ripeness. With all three, the court will require answers to specific questions to determine whether
legal action can be taken against a party.

Standing Doctrine
Standing threshold questions whether the party bringing on legal action is actually a real party
to the case. In other words, the suing party must have suffered an injury as a result of another's
action that is personal to the plaintiff.
To determine this, the plaintiff must prove injury in fact. This means the plaintiff suffered
specifically injuries stated or foresees an imminent injury as a result of someone's actions. The
injury cannot be shared by a vast majority of people.
A case analysis will help. In Frothingham v. Mellon (1923), a taxpayer insisted that allocating
taxes, in part, collected to fund the Maternity Act to assist unborn child and maternal mortality
rates, was in violation of her Fourteenth Amendment right against the seizure of property without
due process.

Frothingham contended that using tax dollars to fund what she believed was a corrupt system
would increase her yearly taxes. This tax hike, in her mind, was akin to taking her money, or
property, without due process. Unfortunately, the court did not agree with her allegation and
ruled that she did not have standing to bring on a lawsuit against the Department of Treasury.
The ruling was based on the fact that Frothingham was not solely injured by the collection of
taxes. She shared that burden with millions of other citizens. Further, there were too many
unforeseen circumstances to determine the effect the Maternity Act and the tax hike would have
on one individual within society. The court held that this case did not meet the threshold for
standing. In other words, the case was without merit. Another question of whether a lawsuit has
merit is in the facts and details of the case itself.

Case and Controversy Doctrine

There are situations where a plaintiff believes that they have been wronged in the past, but the
case in the present is moot, meaning it no longer has merit. Case and controversy limitations
refer to the power the court has to determine whether to hear a case based on whether the injured
party has a justifiable case against the defendant. In layman's terms, the court must find a
plaintiff-defendant relationship between the parties. This is important because some lawsuits
have multiple plaintiffs and defendants.
In Arizonans for Official English Language v. Arizona (1997), plaintiff Maria Kelly F. Yniguez
named the State of Arizona, Governor, Attorney General and Director of the Department of
Administration as defendants in a lawsuit alleging a violation of her First Amendment right to
free speech. Under Arizona State Constitution, Article XXVIII, English would be the official
language and the only language used in the state.
Yniguez was a state employee and a native Spanish speaker. In the course of her employment,
she often interloped between the two languages. Since our interest is solely on the plaintiffdefendant relationship, we will focus only on the parties and not the outcome of this complex
case.
Based on immunity righted by the Eleventh Amendment, the State was dismissed from the case.
The State Attorney General was also dismissed, because it was not within his power to enforce
the state amendment in question. Because the Director of the Department of Administration did
not exercise any action against Yniguez for speaking Spanish during her employment, she was
also dismissed from the case.
The important point being, once the lawsuit was evaluated by the court, it was determined that
although several parties were named as defendants, only the Governor, for his part in approving
the amendment, could be named as a defendant. Finally, a legal dispute must be substantial
enough or fully developed to be considered a case worth trying.

Ripeness Doctrine

Let's take a step back to the standing doctrine. We learned that a case must have merit and the
plaintiff must have suffered a real injury as a result of the defendant. Ripeness works in a similar
way. Ripeness requires that a case have significant enough controversy to warrant being heard
before the court.
Ripeness was the issue in an interesting healthcare controversy. In Franciscan University of
Steubenville, et al. v. Sebelius, et al., the university sought to bring action against the head of the
U.S. Department of Health and Human Services and others, alleging that current healthcare
legislation would force the university's healthcare provider to offer such health-related services
like the abortion pill, birth control and sterilization procedures to its students under their current
healthcare policy.
The university stated that it is in moral violation to offer such services, and such services are in
direct conflict with the religious beliefs of the school and its administration. The court, while
sympathetic, threw the case out on the grounds that the plaintiff had not sustained an injury as of
yet. In other words, the case was not ripe for consideration by the court.

Lesson Summary
To reflect back, the court has three ways in which to determine the viability of a lawsuit. Each
doctrine requires specific criteria. If the criteria have not been met, the case will be thrown out of
court. Standing threshold questions whether the party bringing on legal action is actually a real
party to the case. Frothingham v. Mellon demonstrated that the plaintiff must be a real, injured
party to a lawsuit in order to bring a defendant to court.
When the courts consider case and controversy limitations, they are referring to the power the
court has to decide whether to hear a case based on whether the injured party has a justifiable
case against the defendant. In Arizonans, Yniguez named several defendants in her lawsuit.
However, on closer court inspection, there was really only one defendant who could be named.
This decision was based on the plaintiff-defendant relationship.
Ripeness, like standing, uses case merit as criteria. The difference is that ripeness requires that a
case have significant enough controversy to warrant being heard before the court, rather than
severity of injury.

Learning Outcomes
After you've finished with this lesson, you will be able to:

Define threshold requirements and name the three types

Use the facts and holding in Frothingham v. Mellon to explain the standing threshold

Describe the case and controversy limitation and summarize a case that applied this
limitation

Explain what ripeness is and why it is a requirement to bring a lawsuit using an example
case

Before a trial begins, there are several pleadings a plaintiff and defendant must file with the court
to set a lawsuit into motion and this is known as the pretrial stage of a trial. Some common
pleadings include a complaint, summons, motion to dismiss and motion for judgment.

The Pretrial Stage of a Lawsuit

There are four main stages a trial moves through before it is finally over and final judgment has
been rendered. Each stage requires different pleadings, or a request of the court to grant relief to
a party. Relief, in layman's terms, means a legal remedy to a situation, and can come in the form
of a quick judgment or even a dismissal of the case. Although our main focus in this lesson is on
the pretrial pleadings, it is important to understand the entire process of a trial by reviewing the
four main steps:
1. Pretrial pleadings are filed with the court
2. Pretrial discovery is performed to uncover testimony and evidence to help both sides
3. Trial begins with jury selection, presentation of testimony and a final decision
4. Post trial appeals can be made with a higher court
Let's talk about some of the most common pretrial pleadings filed with a court.

Common Pretrial Pleadings

A lawsuit begins with a cause of action or even several causes of action. In other words, someone
did someone wrong and the wronged person wants justice. To exemplify the pretrial stage of a
lawsuit, we will use a classic slip and fall accident.
Several times a day, the staff at Mac Daddy's Burgers is required to mop the floors of the dining
area. There is a particular system to mopping floors to avoid a slip hazard. Gritty Donohue was
asked to mop the dining room and pay careful attention to the area at and around the soda
machine. Everyone knows that Gritty detests mopping and tries to rush the job when the boss
isn't looking.
On this particular day, Gritty not only rushed the mop job, he also forgot to place the yellow
caution signs over the wet area. Millie Foster, an older woman in her 80s, stopped in to Mac
Daddy's for a burger. While fetching her frosty drink, she slipped and sailed clear across the
dining room. She let out quite a yelp and for good reason! Millie broke her hip, her leg and a few
neatly polished nails. During her painful recovery, Millie decided to sue Mac Daddy's and Gritty
Donohue for negligence.

Here's what she did. Millie, who now becomes the plaintiff, or initiating party to a lawsuit, filed
a complaint, or a legal document that sets forth causes of action or claims of wrongdoing against
both parties. In the complaint, Gritty and Mac Daddy's were mentioned as parties to the
negligence that caused her broken bones. In the complaint, Millie will include:

Names of parties

Causes of action

Where and when to appear in court

Once filed, a summons will be sent to both the owner of Mac Daddy's, Mackentyre Mills, and
Gritty Donohue. The summons will contain information about the case and where and when to
appear in court. Summons are generally delivered by process servers, or a messenger appointed
by the court, to inform, in a legal document, that impending legal action is being taken against
the person served.
Once the summons has been served, the parties have a certain number of days to respond to the
complaint, depending on the court. Remember, not all state courts work in the same way. If the
defendant, or the party to which the legal action is directed, does not answer to the summons,
there may be a default judgment in favor of the plaintiff. This means the plaintiff wins by
default.
Suppose Mac Daddy and Gritty believed they did nothing wrong? They can file a motion to
dismiss the case. This motion will request that the court dismiss or end the case because Millie's
spill was of no fault of the parties. Another way Mills and Gritty can approach the impending
litigation is to file a motion for judgment in where the defending parties request that the judge
makes a decision based solely on the facts as presented in the original complaint.
Sometimes this works. The complaint may be cut and dry in its request for relief. Millie may ask
only a new manicure. Mills may be able to accommodate. In this case, both parties agree.
However, something tells me that Millie will not consent to a motion for judgment for a new
manicure. Something else tells me that Mills and Gritty won't settle for paying for Millie's
medical bills, pain and suffering.
Let's not rule out informal negotiations. Informal negotiations involve the parties sitting before
a mediator to discuss options for settlement before a case ever reaches a courtroom. If this were
to occur, Millie would set forth her desired remedy. It may be full payment of medical bills and a
new manicure. Mills and Gritty would have to agree to pay for both. If agreement is made, both
parties walk away. If not, the case would go to trial. It would be a good guess that this case will
probably go to trial.

Lesson Summary

In sum, there are several types of pleadings, or requests for the court to take action filed prior to
a trial. The most common pleading is a complaint that sets forth the causes of action against the
defendant. A summons is a legal document served to the defendant that states the causes of
action, and where and when to appear in court. If the defendant does not respond within the time
frame of the specific court, a default judgment in favor of the plaintiff will prevail.
The parties may also file a motion to dismiss that asks the court to end the lawsuit immediately.
A motion for judgment asks the court to make a judgment based on the facts in the complaint
solely. Parties are also free to engage in informal negotiations, where they attempt to come to a
decision without legal assistance

Learning Outcome
Upon finishing this video, you should be able to repeat the various pleadings that may be served
to the court before a trial begins.
Once a plaintiff initiates a civil lawsuit, the defendant must respond within a certain period of
time depending on the particular state's requirements. The defendant responds by answering the
complaint or filing a motion with the court.

Who Exactly Is Involved in a Civil Trial?

Before we delve into the complexities of a civil trial, let's take a quick look at the players in any
civil trial. There is a plaintiff, or the one who initiates the lawsuit, and a defendant, or the
person to which a court action is against.
To set this in motion, let's say Jenny sold Barry her used car. Barry was happy with the car until
he reached about a block away from Jenny's home. This is when smoke began billowing out of
the engine and all four tires popped. Barry urgently called Jenny and demanded his hard earned
cash back in return for the confounded clunker. When Jenny refused, Barry took the car
conundrum to court. As the plaintiff, Barry initiated the civil action for the return of his money.
Jenny, the defendant, answered to the allegations against her. While this seems pretty simple,
there are a few steps along the way worth exploring.

Pre-Trial Motions
We know that Barry purchased Jenny's clunker. The car broke down within only a few blocks
from Jenny's house. Barry initiated a lawsuit, and Jenny answered.
Let's focus on Jenny as she defends herself against Barry's lawsuit. The first thing Jenny will do
is answer the complaint by providing the court with a written statement where she will either
accept the claims against her or deny them. Jenny does not have much time to respond to Barry's
allegations. Most states recognize that a defendant has 21 days to answer. In the answer, the
defendant accepts or denies the facts of the case and will try to convince the court why the
plaintiff should not win.

The defendant can plead affirmative defenses, or the defendant's response to charges and
reasons why the plaintiff should not sue. Some affirmative defenses that Jenny may use are:

Statute of limitations, or the amount of time one has to file a lawsuit, may have expired

Contributory negligence, or the percentage of negligence the plaintiff contributed, to the

ailing automobile

Let's take a quick look at how each of the above may work in Jenny's favor. If Barry waits too
long to file his lawsuit with the state using the date of the incident as the date at issue, he may
lose his right to sue.
An equally compelling defense may be that the plaintiff contributed to the car's demise. Jenny
may try to prove that Barry drove over nails, causing the tires to pop. Jenny can even file a
counterclaim against Barry. The counterclaim asks for damages from the plaintiff. Since the car
is in disrepair, Jenny may have a cause of action to sue Barry for leaving her without a salable
vehicle.
The next step the defendant takes is filing a motion, or a written request to the court to take
specific action. Rule 12(b) allows for the defendant to file pre-trial motions requesting the court
to take action on the case prior to the trial. There are several pre-trial motions that a defendant
can file. Here are a few common motions:

Motion to dismiss

Motion for summary judgment

Demurrer

Motion for discovery

Motion for a pre-trial conference

A motion to dismiss is a written request by the defendant asking the court to throw out the
claims against him and is usually granted in cases where the evidence in the complaint is enough
to make the decision. If the complaint requires further investigation or discovery, the motion
probably will not be granted. There are several instances where a motion to dismiss is granted:

The complaint was not filed in the proper court

The court does not have proper jurisdiction over the case

The complaint was improperly served

There are other parties to the suit that may have not been properly named

If a motion to dismiss is not granted by the court, the defendant may file a motion for summary
judgment, a written request of the court to settle all or part of a case without further evidence or
trial. A defendant can also file a demurrer requesting that the court dismiss any or all parts of
the case because there is no legal base for a lawsuit.
Jenny may file a demurrer with the court claiming that the car was sold as-is, and even though
the malignant motor vehicle did not make it more than a few blocks, Barry was made aware that
he was buying a car at his own risk.
If Barry files a motion for discovery, what he is doing is requesting that the court or the
opposing party provide material or information relevant to the case. Barry may request a copy of
the purchase contract to determine whether there, in fact, was an as-is clause written in the
document. He may also request any and all repair records to determine whether Jenny was
negligent about servicing the vehicle.
Contrary, Jenny may request Barry's driving and accident record, information on past car
purchases and even a road condition report from the scene of the incident to determine whether
Barry is a safe driver, has sued others for a similar action, or if the roads were damaged, causing
the tires to pop.
In some cases, a motion for a pre-trial conference takes place. This is a request that the parties
along with their attorneys and a judge discuss the case. A pre-trial conference is useful for
several reasons:

To expedite or move the case forward faster

To manage the case more effectively

To avoid unnecessary and time-consuming pre-trial activities like motions and counterclaims

To mitigate any frivolous allegations

To facilitate a settlement without wasting court time

Motions During a Civil Trial

Unfortunately, some cases move to trial. When a case moves to trial, motions can be filed during
that time as well. Jenny may choose to file one or both of the following motions: a motion to
strike or a motion for a more definitive statement.
A motion to strike is a written request, either prior to a trial or during a trial requesting that any
and all causes of action in the complaint be removed from the record. This is done to avoid
having an action or actions that may not favor the moving party heard in court or appear in the
complaint.

When a complaint is so vague or ambiguous that it is impossible for the respondent to respond, a
motion for a more definitive statement is requested, asking the court to request that the filing
party re-write the complaint in terms that are clear.

Lesson Summary
To wrap it up, a defendant in a court case is the party to which an action is levied against. Once
a defendant receives a complaint, he is required to respond within 21 days in most states.
The defendant can do a few things at this time. He can set forth affirmative defenses explaining
to the court why the plaintiff should not be permitted to sue. He can also counterclaim against
the plaintiff by filing a document with the court that sets forth allegations against the plaintiff in
the case.
There are several pre-trial motions that a defendant can file. Here are a few common motions:

Motion to dismiss asks the judge to throw the case out of court.

Motion for summary judgment requests that a judgment be made based on the facts of
the case in the absence of a trial.

Demurrer explains to the court that regardless of whether allegations are true, there is no
legitimate lawsuit.

Motion for discovery burdens either party to provide factual information or evidence
relevant to the case.

Motion for a pre-trial conference gathers all parties to suit to discuss the case and
remedies like settlement options.

Once a case goes to trial, the defendant may file other motions like motion to strike or motion
for a more definitive statement. If the defendant is not pleased with a piece of evidence or
testimony, he is permitted to request that the judge strike or clear the record. Finally, there are
times when the information included in the complaint or in motions is so convoluted that the
defendant may request a clearer statement by motioning for a more definitive statement.

Learning Outcome
After you've completed this lesson, you'll be able to:

Explain the steps that a defendant proceeds through after being served with a lawsuit

List some affirmative defenses that a defendant can claim

Describe some motions that a defendant can file, both before trial and during trial

Identify some reasons why a judge might grant a motion to dismiss or hold a pre-trial
conference

When a civil action leads to a trial, a jury is selected. The selection process general involves the
parties or attorneys for the parties to question potential jurors from a pool of jury candidates.
Once a jury is selected, the jury trial moves through various steps ending in a final decision.

How Is a Jury Selected?

It's only a matter of time when a jury summons appears in your mailbox requesting you to serve
on a jury in either a civil or criminal trial. Potential jurors, or citizens who listen to testimony
and review evidence and render a decision on a case, are selected randomly from those who hold
a valid driver's license, or who are registered voters. But only about 20% of potential jurors
summonsed to serve are chosen to actually serve on a jury. Regardless of the low percentage, it is
one's duty and obligation by law to respond when summonsed to serve.
While state courts may have different penalties for not responding to a jury summons, it is
required that any person who is summonsed to serve on a jury do so. A few exceptions or
exclusions are made. For instance, in the state of New York, a summonsed juror who does not
respond is subject to civil or criminal penalties. In the state of California, a jury dodger is subject
to fines and can even be placed in custody. Some states incentivize serving as a juror by offering
free parking or discounted meals at local restaurants. Lastly, the law specifically prohibits an
employer from punishing an employee who is summonsed to serve on jury duty.

Once a Juror Responds, What Happens Next?

There are a few things to know about a jury before we explore what happens next:

Most civil courts require a jury of twelve people with two alternate jurors at the ready.

Criminal trial of a serious nature requires twelve jurors.

Trials for misdemeanor charges can be fewer than twelve people.

Most courts do not require a unanimous vote; it can be either a 3/4th or 5/6th vote
depending on the court.

To assemble the petit jury of twelve jurors chosen to examine the facts and render a decision,
parties to the case or their attorneys will conduct voir dire, which involves the questioning of all
potential jurors. This is done to detect any biases (like familiarity) with either party or attorneys
in the case, knowledge of case facts, prejudices, occupation, or even personal views on a related
issue.

Once a jury is selected, the plaintiff and the defendant have the right to a certain number of
peremptory challenges in where either party may dismiss a selected juror without providing a
reason for dismissal. This differs from a challenge for cause. In this challenge, either party must
set forth a justified and accepted reason for the juror dismissal, like bias or potential impartiality.
In either challenge, a potential juror cannot be dismissed solely on race or gender.
On a side note, in J.E.B. v. Alabama (1994), a paternity and child support case, the attorney for
the respondent in the suit used 9 out of 10 challenges to remove all males from the jury in hopes
of assembling a more sympathetic jury. It was upheld that these challenges were unlawful, and it
is illegal to discriminate against a juror solely based on race or gender.
Once all challenges have been made, the jury will remain together for the duration of the trial.
Some attorneys hire a shadow jury, which is a mock jury assigned to act as a real jury by
listening to the case as it unfolds, analyzing the evidence and rendering a decision to a jury
consultant. This jury matches the demographic of the real jury but sits in the spectator area each
day of the trial. On a daily basis, this jury reports back to the consultant who shares the
information with the hiring attorney.
This common practice helps the attorney better plan strategies to win cases. Some information a
shadow jury might notice is how the plaintiff or defendant appears in court, his behaviors, and
actions. In other words, the shadow jury works as the eyes and ears of the hiring attorney.

Steps in a Civil Trial

Now that the jury has been selected, the civil trial will move through several steps:
1. Opening statements
2. Examination of witnesses
3. Presentation of evidence
4. Closing arguments
5. Jury instructions
Opening statements are given by both parties and state the reason the parties are in court. No
evidence or witness testimony is given yet. These statements are merely an account of the actions
and the roles of each party in incurring or causing damage, always keeping in mind that the
plaintiff has the burden of proof for any allegations against the defendant.
Next, each party conducts an examination of witnesses by questioning any and all witnesses to
the action. Witnesses are called to the stand and sworn in to tell the truth. A couple of things
happen when witnesses are called to testify. Each party questions their own witnesses. When this
questioning is over, the parties can cross-examine the other party's witnesses.

This is done to look for holes in the story or to detect missing or false information. Once
completed, the side that originally called the witness can redirect examination, or ask further
questions of the witness in order to clear up any misunderstandings.
Presentation of evidence is next and involves presenting the jury with evidence in the case.
Evidence can be photos, products, video, or other tangible items that help to prove or disprove
the action.
Once the witnesses have been questioned and evidence has been presented, both parties make
closing arguments, which are statements that summarize the case for the jury. Persuasive in
nature, closing arguments serve to solidify each party's position.
Finally, the judge will provide jury instructions by defining legal standards and principles. This
includes instructing the jury on legal findings necessary to decide on the outcome.
Rarely is there a hung jury, or a jury that cannot come to a decision, because the burden of proof
is generally lower in these types of trials and is based on how compelling or convincing the
evidence is, not the amount or quantity of the evidence presented. If a jury is deadlocked and
cannot reach a verdict, the judge will declare a mistrial and a new trial will take place.
In sum, it is a brief overview on the specific laws related to the case and how to apply them.
From there, the jury deliberates, or decides, and renders a verdict. The verdict is first
communicated to the judge, and the judge then relays the verdict to the parties.

Lesson Summary
Let's take a moment to recap.
A juror is chosen randomly from a list of those possessing a driver's license or those that are
registered to vote. Once summonsed to serve, a potential juror must show up to court or will be
considered a jury dodger. Jury dodgers, depending on the state, may have fines or even jail time
as a penalty. Additionally, no employer shall penalize an employee who serves on jury duty.
All potential jurors will be assembled in a room to prepare for voir dire. Attorneys for the parties
or even the parties themselves can question jurors to rule out those who have biases, like
familiarity with the case or an unpopular opinion regarding the issues of the case.
Parties to the case have the right to peremptory challenges by dismissing potential jurors for no
stated reason. Jurors can also be dismissed for reasons of impartiality. However, a juror cannot be
dismissed solely based on race or gender. The petit jury of twelve people chosen to serve will
remain together for the duration of the trial.
Sometimes a shadow jury is hired by one of the attorneys to act as a watchdog. These mock
jurors sit as spectators but act like the real jury. Each day they share information about the trial
with the attorney. This feedback is used to develop strategies for the rest of the trial.

Now that the jury is chosen, the civil litigation process begins. Here is the process. Both parties
begin with opening statements. This involves telling the jury the details of the case. Next, each
party examines and cross-examines any and all witnesses, and then evidence is presented.
Once all witnesses have been questioned and all evidence has been analyzed, both parties make
their closing arguments. This is the final opportunity for the parties to persuade the jury. The
judge gives the jury instructions on legal principles, and after deliberation, a verdict is rendered.
The judge always has the final say in the verdict.

Learning Outcome
After watching this lesson, you should be able to identify and describe a juror's role in civil
litigation, and the steps involved in the selection of jurors as well as the stages of a civil trial.
In any court case, the end result is a verdict. However, there are several roads that lead to the
verdict, including motion to dismiss, directed verdict, special verdict and judgment
notwithstanding the verdict.

Just How Does a Civil Case End?

Have you ever gone to the hair salon only for it to end in a horrible hair experience? Penelope
experienced just that! After doing some online research about the best salons in her area,
Penelope decided on Looking Good Salon for her new permanent wave.
Serena the hairdresser seemed competent enough. So, in a frenzy of curls and whirls, Penelope's
hair was wrapped and ready for the treatment. Everything seemed okay until Penelope noticed a
foul odor emitting from her locks...like the smell of burnt hair! Serena quickly doused Penelope's
head with water and assessed the damage. You guessed it - Penelope lost most of her hair to a
violent chemical reaction.
Penelope waged a civil lawsuit against Looking Good Salon, specifically Serena, for negligence
by irreparable damage to her hair. In a civil trial like this, Penelope is the plaintiff, the person
initiating the lawsuit, and she hopes for a jury to decide in her favor. Serena is the defendant, the
one who allegations have been levied against.
At the end of the civil trial, a decision will be made either for or against the plaintiff, Penelope.
The decision, whether made by a jury or a judge, is called a verdict and is nothing more than a
formal decision on the case. It is fairly cut and dry in most cases. But when a jury or a judge
considers the outcome in a civil case, there are a couple of things that come into play: evidence
presented by either party and properly applying the law.
Evidence is presented and may include testimony, or an account of facts about the case,
documentation or objects related to the case, that serve as grounds to prove or disprove
something. The jury or judge must also properly apply the law to the case. This means that the
jury must understand the allegations and how the law views the same.

Perhaps Serena does not hold a hairdressing license and was taking matters into her own hands.
The law will most likely side with the plaintiff because a license is necessary to work with hair.
There are a few types of verdicts used in a civil trial. Let's explore a few to better understand
their purpose.

Types of Verdicts
There are several types of verdicts that are imposed in a civil trial:

General Verdict

Special Verdict

Directed Verdict

Judgment Notwithstanding the Verdict

The most common type of verdict is the general verdict. This will quite possibly be the verdict
used in Penelope's case. This verdict comes down from the jury in favor of either the plaintiff or
the defendant. Liability is determined and an amount of damages is decided.
Another verdict type is the special verdict and is saved for more complex questions of fact. With
this type of verdict, a judge will provide jurors with very specific questions regarding the case.
Once the jury answers the questions, the judge will review and decide on the verdict. The
purpose of a special verdict is to decide on smaller issues within a larger court case.
To say it a different way, suppose Penelope accused Serena of several different things, making
the case more complex. It may be necessary to break the case down into smaller parts and have a
jury answer questions specifically about each and every component of the case.
A directed verdict is given when a judge, after listening to the plaintiff, decides that no legal
case exists and rules in favor of the defendant because there was not sufficient evidence to prove
the case. If Serena followed the product directions, possessed a license to perform the treatment,
and violated no laws in doing so, Penelope would have a difficult time providing enough
evidence that Serena was at fault.
After all, the burden of proof, or the duty to prove or dispute the facts of the case, is always
placed on the plaintiff. In legalese, it is called preponderance of evidence and can be
remembered as the standard of proof needed for the plaintiff to actually win the case. The
evidence must be enough to convince a jury that the allegations are more likely true than false.
Sadly, not every civil trial ends in a clean verdict. There are times when the jury simply cannot
make a clear choice. This hung jury is unable to reach a decision. When this occurs, a mistrial is
declared and a new trial must begin.

This is different than a motion to dismiss in where the defendant may ask the court, either pretrial or during trial, to dismiss the case totally - throw it out of the court. This may be granted if
the plaintiff filed in the wrong court, failed to make a claim for damages in the complaint, or
even if the process of serving the complaint was incorrect.
There are also times when the jury does not make the appropriate decision and a judgment
notwithstanding the verdict is made by the judge. This means the judge reverses the jury's
decision and is generally done when the law was violated or when the facts just don't add up.

Lesson Summary
To sum things up, there are several types of verdicts that a court will use to end a case. A jury
usually decides cases in favor of either party, but there are circumstances that require a judge's
intervention. There are several types of verdicts that are imposed in a civil trial:

General verdict will be in favor of either party and will set forth liability and the amount
of damages.

Special verdict uses answers obtained from jury members to help the judge make a
decision.

Directed verdict is one given to the jury by a judge because the case lacks merit.

Judgment notwithstanding the verdict is a reversal of a jury's verdict because of an

issue with proving the facts or the decision was in violation of law.

In all civil cases, there is a burden of proof, or duty to prove or disprove allegations, that is
assumed by the plaintiff. The law requires that the preponderance of evidence, or the standard
proof one needs to win a case, be enough to prove that the allegations occurred more likely than
not.
Not every trial ends smoothly. A hung jury may have a difference of opinion so strong that they
cannot come to agreement in a case. Other times, issues with the mechanics of the complaint,
like not filing in the proper court, can cause a mistrial, or an end to the original trial and the start
of a new one.

Learning Outcomes
After watching this lesson, you should be able to:

Recall the different types of verdicts that may be given in a court case

Understand what is meant by burden of proof, hung jury, mistrial, and preponderance of
evidence

The civil appeals process allows for a losing party to a lawsuit to request a higher court to review
the decision to determine whether legal errors were made during the original trial.

The Civil Appeals Process

Let's face it; some court cases end with one party feeling as though the decision made by the
court just wasn't fair. One of the great things about the court system is that it allows a losing
party to have their case reviewed by a higher court.
This is known as an appeal and is a request to a higher court, generally federal court, to review
the decision made in a lower court to determine whether any legal errors were made during the
original trial. The appellant is the party filing the appeal, regardless of whether they were the
plaintiff or the defendant in the original trial. The first thing the appellant must do is file an
appeal with the higher court.
This is done by writing a brief, or an argument expressing the legal errors he felt were made in
the original trial. Appeals are not always granted. The brief is actually reviewed by a panel of
three judges. The appellee, or the party who prevailed in the original trial, also submits a brief to
persuade the judges that the original decision should stand. Most appeals are not decided solely
on the contents of each brief. The judges usually request that both parties convene to discuss the
case.
These oral arguments are presented by both sides and generally last about 15 minutes each. The
judges do not hear evidence or even re-try the case based on case facts; they simply decide
whether the lower court's decision has legal merit.
It is important to note that an appellate court decision is final unless one of two things happen:

The case is remanded back to lower court for re-trial

The decision of the appellate court is appealed in U.S. Supreme Court

A case that is moved to U.S. Supreme Court must accompany a writ of certiorari, or a written
request to the highest court to review the appeals court decision. There are few cases where a
writ of certiorari is granted. For the writ to be granted, the legal error must be so gross that it
requires serious consideration.
Let's review a landmark case to further demonstrate the civil appeals process.

Sweatt v. Painter (1950)

In the original case, Herman Marion Sweatt, a black man from Texas, sought admission to the
University of Texas School of Law. His application was denied based on an antiquated law that
barred admission to the law school based on skin color. In fact, at the time, no Texas school
would admit prospective black students.

Unaccepting of this decision, Sweatt filed a civil lawsuit against the then university president,
Theophilus Painter, in state court. The state court judge ruled in favor of Painter and the
University of Texas, leaving Sweatt with little recourse.
Let's keep in mind that the Civil Rights Act of 1964 was not in existence yet. Sweatt was using
the 'separate but equal' doctrine that was set by Plessy v. Ferguson in 1896. Sweatt continued his
argument against the university and its president for months. During that time, a new law school
opened that allowed for the admission of black students.
The problem with the new school is that it didn't offer nearly the same programs or support for
students. In fact, it wasn't even accredited. No accreditation means that graduating students
would not be able to sit for the state-recognized licensing exam known as the bar exam.
In other words, the new law school, Texas State University for Negros, would not serve to make
licensed lawyers out of any of its black students. Sweatt filed an appeal with the U.S. Court of
Appeals requesting a review of the lower court's decision but was denied.
In the appeal process, Sweatt would file a brief stating the reason he believed the lower court
made legal errors that significantly affected the outcome of the case. Painter and the University
of Texas Law School would also have the same opportunity.
Sweatt, together with the NAACP, or National Association for the Advancement of Colored
People, filed and was granted a writ of certiorari with the U.S. Supreme Court. The lower court's
decision was reversed on the grounds that the new school lacks the same services, like adequate
qualified faculty, library resources, and networking opportunities, to blacks as were offered to
white students at the University of Texas Law School.
In fact, the courthouse was later named the Herman Marion Sweatt Travis County Courthouse in
honor of his fight.

Lesson Summary
Keep these points in mind. The civil appeals process starts with a losing party in a civil trial. The
losing party, or the appellant, files an appeal with a higher court, generally federal court.
The other party, the appellee, is notified and both parties prepare a brief, or a written statement
of the decision. The intention of the brief is to persuade the higher court to make a favoring
decision. The appellant seeks to have the case reviewed for legal errors. The appellee wants to
see the lower court's decision stand.
Once the judges in higher court make their ruling, the decision is final. Three things can happen.
The decision stands, the case is remanded, or moved to a lower court for retrial, or the losing
party files a writ of certiorari with the U.S. Supreme for further review. Generally, few writs are
granted and only a serious violation of law would warrant a review by this court.

Learning Outcome
After watching this lesson, you should be able to:

Define appeal, appellant, appellee, and brief

Summarize the civil appeals process

List the two events that would render an appellate court decision not final

Explain what a writ of certiorari is and when it would be granted

Summarize the 1950 case of Sweatt v. Painter, and describe the processes Sweatt went
through to reverse the court's decision

Ch 1. History of American Law

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Lesson 1 - American Law: History & Origins from English Common Law
Lesson 2 - What Is Business Law? - Definition & Overview
Lesson 3 - Stare Decisis Doctrine: Definition & Example Cases
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Practice Chapter Exam - History of American Law
Ch 2. Sources of Law
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Lesson 1 - The 3 Branches of Government: Executive, Legislative, Judicial
Lesson 2 - What Is Constitutional Law? - Definition & Example
Lesson 3 - The US Constitution: Preamble, Articles and Amendments
Lesson 4 - The Bill of Rights: The Constitution's First 10 Amendments
Lesson 5 - U.S. Constitution: Definition and the Judicial Review of Marbury v.
Madison
Lesson 6 - 'Necessary & Proper' and Interstate Commerce Clauses
Lesson 7 - Privileges & Immunities Clause: Definition & Examples
Lesson 8 - Full Faith & Credit Clause: Definition & Examples
Lesson 9 - Contracts Clause: Examples & Definition
Lesson 10 - Federalism & the Supremacy Clause: Definition & Example
Lesson 11 - Local, State & Federal Ordinances: Definitions and Differences
Lesson 12 - Administrative/Regulatory Law: Definition & Example Cases
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Ch 3. Constitutional Law

Viewed
Lesson 1 - What Is the Rule of Law? - Definition & Principle
Lesson 2 - The First Amendment: Commercial Speech, Scrutiny & Restrictions
Lesson 3 - The Fourth Amendment: Search & Seizure
Lesson 4 - Due Process & Taking the Fifth & Fourteenth Amendments
Lesson 5 - The Equal Protection Clause in the Fifth and Fourteenth Amendments
Lesson 6 - Ninth Amendment: Rights Retained by People
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Ch 4. American Legal Systems
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Lesson 1 - Public Law vs. Private Law: Definitions and Differences
Lesson 2 - Criminal Law vs. Civil Law: Definitions and Differences
Lesson 3 - Substantive Law vs. Procedural Law: Definitions and Differences
Lesson 4 - The Court System: Trial, Appellate & Supreme Court
Lesson 5 - The 3 Levels of the Federal Court System: Structure and Organization
Lesson 6 - Overview of the US Supreme Court
Lesson 7 - State Court System: Structure & Overview
Lesson 8 - Long Arm Statute: Definition & Example
Lesson 9 - Court Functions: Original and Appellate Jurisdiction
Lesson 10 - Subject Matter Jurisdiction: Federal, State and Concurrent
Lesson 11 - Jurisdiction over Property: Definition & Types
Lesson 12 - What is the Jurisdiction of the Supreme Court?
Lesson 13 - How Venue is Determined for a Court Case
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Ch 5. Legal Procedures
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Lesson 1 - Starting a Lawsuit: Parties & Beginning Process
Lesson 2 - Threshold Requirements: Standing, Case or Controversy & Ripeness
Lesson 3 - Pretrial Pleadings & Service of Process in Civil Litigation
Lesson 4 - Defendant's Response & Motions in Civil Litigation
Lesson 5 - Jury Trial and Selection in Civil Litigation
Lesson 6 - Delivering a Verdict in Civil Litigation
Lesson 7 - Civil Appeals Process: Parties, Briefs & Oral Arguments
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Ch 6. Contract Law Basics

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Lesson 1 - Contract Law Terms: Definitions & Contract Types

Lesson 2 - Parties to a Contract: Promisor, Promisee & Beneficiary
Lesson 3 - Mutual Assent & Objective Standard in Contract Law: Definitions &
Examples
Lesson 4 - What Is an Offer in Contract Law?
Lesson 5 - Termination of an Offer in Contract Law: Methods & Examples
Lesson 6 - What Is Acceptance in Contract Law? - Definition, Rules & Examples
Lesson 7 - The Mailbox Rule and Contract Law
Lesson 8 - Sources of Contract Law: Common Law & Uniform Commercial Code
Lesson 9 - Unilateral and Bilateral Contracts: Examples & Differences
Lesson 10 - Expressed vs. Implied Contracts: Differences & Examples
Lesson 11 - Quasi-Contract: Definition & Examples
Lesson 12 - Executed vs. Executory Contracts: Definitions & Differences
Lesson 13 - Informal vs. Formal Contracts: Examples, Differences & Definitions
Lesson 14 - What Is an Option Contract? - Example & Definition
Lesson 15 - Rules of Consideration in Contract Law: Elements & Case Examples
Lesson 16 - Lack of Consideration in Contract Law
Lesson 17 - Doctrine of Promissory Estoppel: Definition, Examples & Elements
Lesson 18 - Joint Obligation Contracts: Obligations and Promises of Parties
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Ch 7. Capacity in Contract Law
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Lesson 1 - Legal Capacity to Enter a Contract: Definition & Examples
Lesson 2 - About Contracts with Minors
Lesson 3 - Mental Incapacity & Contracts: Definition & Examples
Lesson 4 - Incapacity & Contracts: Contracts with Intoxicated Persons
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Ch 8. Contract Law and Third Party Beneficiaries
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Lesson 1 - Third-Party Beneficiaries & Contracts: Definition & Parties
Lesson 2 - Rights of a Beneficiary: Vesting & Enforceable Claims
Lesson 3 - Rights of Promisors and Promisees in Contracts
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Ch 9. Contracts: Assignment and Delegation

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Lesson 1 - Contract Assignment: Definition and Involved Parties
Lesson 2 - Parties in an Assignment: Rights of the Assignee, Assignor & Obligor
Lesson 3 - Revocability of Assignment: Definition & Explanation
Lesson 4 - What is Delegation? - Definition, Parties & Duties
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Ch 10. Contracts: Statute of Frauds
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Lesson 1 - Statute of Frauds Contracts: Definition & Purpose
Lesson 2 - Contracts that Fall Within the Statute of Frauds
Lesson 3 - Statute of Frauds: One Year Contracts
Lesson 4 - Statute of Frauds Contracts: Contracts for the Sale of Land
Lesson 5 - Statute of Frauds Contracts: Guarantors
Lesson 6 - Contracts for Sale of Goods: Definition & Explanation
Lesson 7 - Exceptions to Statute of Frauds
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Ch 11. Contracts: Scopes and Meanings
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Lesson 1 - Certainty of Terms: Definition and Terminology
Lesson 2 - Rules of Construction and Interpretation in Law
Lesson 3 - Implied Terms in a Contract: Definition & Explanation
Lesson 4 - Parol Evidence Rule: Definition, Examples & Purpose
Lesson 5 - Conditions in Contracts: Definition & Forms
Lesson 6 - How Contract Conditions are Excused
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Ch 12. Contracts: Breach of Contract
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Lesson 1 - Types of Contract Breach: Partial, Material, & Total
Lesson 2 - Circumstances of Contract Breach: Anticipatory Repudiation & Demand
for Assurances
Lesson 3 - Remedies for Breach of Contract: Formula for Expectation Damages
Lesson 4 - Specific Performance and Injunctions: Remedies for Breach of Contract
Lesson 5 - Contract Breach Remedies: Reliance & Restitution
Lesson 6 - Non-Recoverable Damages: Damages Due to Breach of Contract
Lesson 7 - Liquidated Damages: Damages Due to Breach of Contract
Lesson 8 - Duress and Undue Influence in Contract Enforcement
Lesson 9 - Contract Enforcement: Misrepresentation & Fraud
Lesson 10 - Defenses to Contract Enforcement: Mistakes
Lesson 11 - Defenses to Contract Enforcement: Unconscionability & Statute of

Viewed
Limitations
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Ch 13. Contracts: Discharge of Contracts
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Lesson 1 - Methods of Discharging Contracts: Conditions, Breach & Agreement
Lesson 2 - Changed Circumstances in Contracts: Possibility, Practicality & Effects
Lesson 3 - Other Contract Discharge Options: Recission, Novation & Accord
Lesson 4 - Contractual Illegality & Public Policy: Definition, Examples & Issues
Lesson 5 - Statutory Illegality in Contracts: Legislation, Liability & Examples
Lesson 6 - Valid, Void, Voidable, and Unenforceable Contracts
Lesson 7 - Legal Remedies in Contracts: Definition & Acts
Lesson 8 - Equitable Remedies in Contracts: Definition & Examples
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Ch 14. The Legal Environment
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Lesson 1 - Legal Ethical Decision Making: Models, Steps & Framework
Lesson 2 - Theories of Ethics: Rights & Natural Laws
Lesson 3 - Attorney Professional and Ethical Conduct in Business
Lesson 4 - What Is White Collar Crime? - Definition, Statistics & Examples
Lesson 5 - Corporate Criminal Liability: Definition & Examples
Lesson 6 - Deterring Business Crime: RICO, False Claims Act, & Sarbanes-Oxley Act
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Ch 15. Securities and Antitrust Law
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Lesson 1 - Violations of Registration Process: Types & Remedies
Lesson 2 - What Are Exempt Securities and Transactions? - Definition &
Types
Lesson 3 - Securities Fraud & Insider Trading: Definition, Regulations & Penalty
Lesson 4 - Antitrust Law: Definition, Types & Outline
Lesson 5 - Horizontal and Vertical Agreements that Violate the Sherman Act
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Ch 16. Property Law
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Lesson 1 - Real Property and Personal Property: Definition and Differences
Lesson 2 - Interest in Real Property: Types of Estates
Lesson 3 - What is Voluntary Property Transfer? - Defining Title by Deed
Lesson 4 - Involuntary Property Transfer Case Study: Condemnation & Eminent

Viewed
Domain
Lesson 5 - What is Intellectual Property Law? - Definition and Rights
Lesson 6 - Trademark Infringement: Laws and Penalties
Lesson 7 - Patent Infringements: Definition and Cases
Lesson 8 - What is Copyright Infringement? - Understanding Copyright Law
Lesson 9 - Trade Secrets and Patent Protection: Protecting Intellectual Property
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Ch 17. Creditors Rights
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Lesson 1 - Creditors' Rights and Business Law
Lesson 2 - Debt Collection and Repossession Rights
Lesson 3 - Creditor Rights in Bankruptcy
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Ch 18. Product Liability and Consumer Protection
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Lesson 1 - What Is Consumer Protection? - Product Liability, Laws & Rights
Lesson 2 - Defective Products Liability
Lesson 3 - What Is Product Liability? - Definition & Laws
Lesson 4 - What Is Credit Protection? - Laws & Services
Lesson 5 - What Is Privacy Protection? - Laws & Rights
Lesson 6 - Unfair Competition: Methods, Elements & Laws
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Ch 19. Torts in Business Law
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Lesson 1 - What Is Tort Law? - Definition and Examples
Lesson 2 - Battery: The Elements of an Intentional Tort
Lesson 3 - What Is Assault? - Definition of an Intentional Tort
Lesson 4 - Transferred Intent for Assault and Battery
Lesson 5 - Intentional Infliction of Emotional Distress: Definition and Examples
Lesson 6 - Intentional Torts of Economic Relations: Definition and Elements
Lesson 7 - Trespass, Conversion and Nuisance: Definition and Examples
Lesson 8 - Defenses to Intentional Torts to Avoid Liability
Lesson 9 - Negligence Torts: Definition and Cases
Lesson 10 - Special Negligence Doctrines: Examples Cases
Lesson 11 - Defenses for Negligence: Definition and Examples
Lesson 12 - Other Defenses to Negligence
Lesson 13 - Defenses for Landowners, Common Carriers, Innkeepers and Social Host
Negligence

Viewed
Lesson 14 - Strict Liability Torts: Definition and Examples
Lesson 15 - Harm to Reputation or Economic Interests: Defamation, Libel, & Slander
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Ch 20. The Role of Agency in Business Law
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Lesson 1 - Agency Relationship: Definition, Principles & Problems
Lesson 2 - Contractual Liability & Authority of a Principal
Lesson 3 - Contractual Liability of an Agent
Lesson 4 - Tort Liability in Agency Relationships: Definition & Law
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Ch 21. Sales & the Law
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Lesson 1 - UCC Contract Law: Requirements
Lesson 2 - Buyer Acceptance Under the Uniform Commercial Code
Lesson 3 - Buyer Rejection Under the Uniform Commercial Code
Lesson 4 - Seller's Right to Cure Under the Uniform Commercial Code
Lesson 5 - Revocation of Acceptance Under the Uniform Commercial Code
Lesson 6 - Meanings of UCC Contracts
Lesson 7 - Statute of Frauds Under the UCC: Definition, Exceptions & Examples
Lesson 8 - Warranties Under the Uniform Commercial Code
Lesson 9 - Buyer's Remedies Under the Uniform Commercial Code
Lesson 10 - Seller's Remedies Under the Uniform Commercial Code